-----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, JdeKGCXTjId9l5DEjrbYtWgjHbxT428DN4KAMBlSnqFpHG0m/1aX07YZ/TcodPhR 8NmankG4Q90XPfUMSzrKhg== 0000743872-97-000020.txt : 19971117 0000743872-97-000020.hdr.sgml : 19971117 ACCESSION NUMBER: 0000743872-97-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOMESTAKE MINING CO /DE/ CENTRAL INDEX KEY: 0000743872 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 942934609 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08736 FILM NUMBER: 97720205 BUSINESS ADDRESS: STREET 1: 650 CALIFORNIA ST-9TH FL STREET 2: 9TH FL CITY: SAN FRANCISCO STATE: CA ZIP: 94108-2788 BUSINESS PHONE: 4159818150 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 September 30, 1997 ( ) 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 1-8736 HOMESTAKE MINING COMPANY A Delaware Corporation IRS Employer Identification No. 94-2934609 650 California Street San Francisco, California 94108-2788 Telephone: (415) 981-8150 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ The number of shares of common stock outstanding as of October 31, 1997 was 146,735,000. Page 1 HOMESTAKE MINING COMPANY AND SUBSIDIARIES PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements A. Condensed Consolidated Balance Sheets (unaudited) (In thousands, except per share amount)
September 30, December 31, 1997 1996 ----------------- ---------------- ASSETS Current assets Cash and equivalents $ 61,080 $ 89,599 Short-term investments 168,882 130,158 Receivables 32,903 47,650 Inventories: Finished products 20,328 21,132 Ore and in process 40,408 39,980 Supplies 28,630 30,015 Deferred income and mining taxes 12,263 12,263 Other 6,802 8,551 ----------------- ---------------- Total current assets 371,296 379,348 ----------------- ---------------- Property, plant and equipment - at cost 2,002,307 1,970,300 Accumulated depreciation, depletion and amortization (1,146,077) (963,270) ----------------- ---------------- Property, plant and equipment - net 856,230 1,007,030 ----------------- ---------------- Investments and other assets Noncurrent investments 25,285 39,606 Other assets 81,659 56,124 ----------------- ---------------- Total investments and other assets 106,944 95,730 ----------------- ---------------- Total Assets $ 1,334,470 $ 1,482,108 ================= ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 37,924 $ 36,171 Accrued liabilities: Payroll and other compensation 23,653 23,085 Reclamation 14,307 10,055 Other 25,889 9,034 Income and other taxes payable 13,731 38,386 ----------------- ---------------- Total current liabilities 115,504 116,731 ----------------- ---------------- Long-term liabilities Long-term debt 222,183 185,000 Other long-term obligations 145,218 114,168 Deferred income and mining taxes 152,699 201,454 ----------------- ---------------- Total long-term liabilities 520,100 500,622 ----------------- ---------------- Minority interests in consolidated subsidiaries 104,622 96,203 Shareholders' equity Capital stock, $1 par value per share: Preferred - 10,000 shares authorized; no shares outstanding Common - 250,000 shares authorized; shares outstanding: 1997 - 146,744; 1996 - 146,672 146,744 146,672 Other shareholders' equity 447,500 621,880 ----------------- ---------------- Total shareholders' equity 594,244 768,552 ----------------- ---------------- Total Liabilities and Shareholders' Equity $ 1,334,470 $ 1,482,108 ================= ================
See notes to condensed consolidated financial statements. 2 HOMESTAKE MINING COMPANY AND SUBSIDIARIES B. Condensed Statements of Consolidated Operations (unaudited) (In thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 -------------- -------------- -------------- -------------- Revenues Gold and ore sales $ 152,994 $ 171,468 $ 477,660 $ 541,691 Sulfur and oil sales 6,332 7,212 20,126 23,005 Interest income 3,280 3,317 10,488 11,246 Gain on termination of Santa Fe merger - - 62,925 - Other income (4,382) 1,686 5,871 12,041 -------------- -------------- -------------- -------------- 158,224 183,683 577,070 587,983 -------------- -------------- -------------- -------------- Costs and Expenses Production costs 115,069 113,548 354,305 361,504 Depreciation, depletion and amortization 29,297 28,178 85,509 83,539 Administrative and general expense 10,810 8,841 30,304 27,804 Exploration expense 14,646 11,951 36,659 29,527 Interest expense 2,226 2,682 7,659 7,974 Write-downs and other unusual charges 183,646 - 183,646 - Other expense 1,452 285 4,879 1,304 -------------- -------------- -------------- -------------- 357,146 165,485 702,961 511,652 -------------- -------------- -------------- -------------- Income (Loss) Before Taxes and Minority Interests (198,922) 18,198 (125,891) 76,331 Income and Mining Taxes 37,204 (9,104) 3,960 (37,709) Minority Interests (1,964) (1,667) (8,113) (10,766) -------------- -------------- -------------- -------------- Net Income (Loss) $ (163,682) $ 7,427 $ (130,044) $ 27,856 ============== ============== ============== ============== Net Income (Loss) Per Share $ (1.12) $ 0.05 $ (0.89) $ 0.19 ============== ============== ============== ============== Average Shares Used in the Computation 146,731 146,672 146,714 146,190 ============== ============== ============== ============== Dividends Paid Per Common Share $ - $ 0.05 $ 0.10 $ 0.15 ============== ============== ============== ==============
See notes to condensed consolidated financial statements. 3 HOMESTAKE MINING COMPANY AND SUBSIDIARIES C. Condensed Statements of Consolidated Cash Flows (unaudited) (In thousands)
Nine Months Ended September 30, 1997 1996 ----------------- ------------------ Cash Flows from Operations Net income (loss) $ (130,044) $ 27,856 Reconciliation to net cash provided by operations: Write-downs and other unusual charges 183,646 - Depreciation, depletion and amortization 85,509 83,539 Gains on asset disposals (15,140) (3,260) Deferred taxes, minority interests and other (26,467) 33,523 Effect of changes in operating working capital items (388) 9,895 ----------------- ------------------ Net cash provided by operations 97,116 151,553 ----------------- ------------------ Investment Activities Increase in short-term investments (38,724) (98,041) Additions to property, plant and equipment (106,712) (85,759) Proceeds from asset sales 12,619 14,918 Increase in restricted cash (18,488) - Purchase of HGAL minority interests - (6,435) Purchase of interest in Snip mine - (39,279) Other 488 2,547 ----------------- ------------------ Net cash used in investment activities (150,817) (212,049) ----------------- ------------------ Financing Activities Borrowings 55,430 - Debt repayments (18,000) - Common shares issued 852 2,355 Dividends paid - Homestake (14,670) (22,008) - Prime minority interests (1,085) (1,099) Other 2,655 - ----------------- ------------------ Net cash provided by (used in) financing activities 25,182 (20,752) ----------------- ------------------ Net decrease in cash and equivalents (28,519) (81,248) Cash and equivalents, January 1 89,599 145,957 ----------------- ------------------ Cash and equivalents, September 30 $ 61,080 $ 64,709 ================= ==================
See notes to condensed consolidated financial statements. 4 HOMESTAKE MINING COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) 1. The condensed consolidated financial statements included herein should be read in conjunction with the financial statements and notes thereto, which include information as to significant accounting policies, in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. The information furnished in this report reflects all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the interim periods. Except as described in notes 2 through 6, such adjustments consist of items of a normal recurring nature. Results of operations for interim periods are not necessarily indicative of results for the full year. All dollar amounts are in United States dollars unless otherwise indicated. 2. During the third quarter of 1997, Homestake recorded pretax write-downs and other unusual charges of $183.6 million ($145.1 million after tax) as follows (in millions):
Three and Nine Months Ended September 30, 1997 Pretax After Tax ---------------------- --------------------- Write-down of investment in the Main Pass 299 sulfur mine (a) $ 107.8 $ 84.9 Reduction in carrying values of short-lived mining properties (b) 24.3 18.2 Increase in estimated accrual for future reclamation expenditures (c) 29.1 21.5 Write-down of certain investments (d) 16.5 14.7 Other charges, primarily foreign exchange losses on intercompany redeemable preferred stock 5.9 5.8 ====================== ===================== $ 183.6 $ 145.1 ====================== ===================== (a) Homestake owns a 16.7% undivided interest in the Main Pass 299 sulfur mine located in the Gulf of Mexico. Planned write-downs by Homestake's joint venture partners caused the Company to reexamine the carrying value of its investment in Main Pass 299. Due to a prolonged period of low sulfur prices and Homestake's current assessment of estimated future cash flows from the Main Pass 299 sulfur mine, the Company recorded a write-down of $107.8 million in its investment in Main Pass 299. As a result of this write-down, the Company's carrying value of the Main Pass 299 sulfur property, plant and equipment was reduced to zero at September 30, 1997. (b) As a result of lower gold prices, the Company reviewed the carrying values of its gold mining operations using a $325 per ounce gold price for its short-lived operations and a $350 per ounce gold price for its operations with longer lives. The Company determined that impairment write-downs were required to reduce the carrying value of several of its assets or operations with short remaining lives, including the Pinson mine in Nevada, the Homestake mine's Open Cut in South Dakota, and low- grade stockpiled ore and certain redundant mining equipment at the Kalgoorlie operations in Western Australia. The Company determined that no adjustments to the carrying values of its longer-lived operations were required. 5 HOMESTAKE MINING COMPANY AND SUBSIDIARIES (c) As a result of a review of the Company's reclamation liabilities, the Company determined that it was necessary to increase the reclamation accruals at certain of its nonoperating properties including the Santa Fe mine in Nevada, the Nickel Plate mine in Canada and the Grants uranium complex in New Mexico to reflect revised estimates, changed conditions and more stringent future reclamation requirements. (d) Low gold prices and lower market valuations for junior mining companies have caused the value of certain of the Company's investments in other companies to decline significantly. The Company reduced the carrying values of certain of its mining investments to reflect reductions in value that it deemed to be other than temporary.
3. Other income for the three and nine months ended September 30 is as follows (in millions):
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- --------------------------- 1997 1996 1997 1996 ------------- ------------- ------------ ------------ Gains on asset disposals $ 0.8 $ 0.5 $ 15.1 $ 3.3 Royalty income 0.6 0.7 1.8 2.1 Foreign currency contract gains (losses) (4.2) 0.1 (8.0) 1.4 Foreign currency exchange losses on intercompany advances (1.7) - (4.5) (0.3) Other foreign currency gains (losses) - 0.1 (0.3) 0.3 Litigation recovery - - - 2.9 Other 0.1 0.2 1.8 2.3 ------------- ------------- ------------ ------------ $ (4.4) $ 1.6 $ 5.9 $ 12.0 ============= ============= ============ ============
In February 1997, Homestake completed the sale of its interests in the George Lake and Back River joint ventures in Canada to Arauco Resources Corporation ("Arauco") for $9.3 million in cash and 3.6 million shares of Arauco common stock. As a result of this transaction, the Company recorded a pretax gain of $13.5 million ($8.1 million after tax) during the first quarter of 1997. Arauco subsequently changed its name to Kit Resources ("Kit"). The write-down of investments recorded at September 30, 1997 (see note 2(d)) included a pretax write-down of $4.6 million ($3.1 million after tax) related to the Company's investment in Kit. 4. In March 1997, Santa Fe Pacific Gold Corporation terminated its previously announced merger agreement with Homestake and paid Homestake a $65 million termination fee. As a result, the Company recorded a pretax gain of $62.9 million ($47.2 million after tax), net of merger-related expenses of $2.1 million incurred in 1997. 5. In April 1996, the Company's 50.6%-owned subsidiary, Prime Resources Group Inc. ("Prime"), purchased Cominco Ltd.'s ("Cominco") 60% interest in the Snip mine in British Columbia for $39.3 million in cash. The purchase price included Cominco's share of the mine's working capital. Prime now owns 100% of the Snip mine. 6. In 1995, Homestake offered to acquire the 18.5% of Homestake Gold of Australia Limited ("HGAL") it did not already own by offering .089 of a Homestake share or A$1.90 in cash for each of the 109.6 million HGAL shares owned by the public. Through December 31, 6 HOMESTAKE MINING COMPANY AND SUBSIDIARIES 1995 a total of 38.9 million HGAL shares were acquired at a cost of $59.1 million. At December 31, 1995 Homestake owned 88.1% of the shares of HGAL. The acquisition was completed in the first quarter of 1996 when the remaining 70.7 million publicly held HGAL shares were acquired at a cost of $105.8 million, including $99.3 million for 6 million shares of the Company, $5 million in cash and $1.5 million of transaction expenses. The total purchase price to acquire all of the 18.5% of HGAL held by minority shareholders was $164.9 million, including $141.7 million for 8.5 million shares of the Company, $19.5 million in cash and $3.7 million of transaction expenses. The acquisition of the HGAL minority interests was accounted for as a purchase. 7. Long-term debt is as follows (in millions):
September 30, December 31, 1997 1996 ----------------------------------------- Convertible subordinated notes (due 2000) $ 150.0 $ 150.0 Pollution control bonds Lawrence County, South Dakota (due 2032) 48.0 - Lawrence County, South Dakota (due 2003) - 18.0 State of California (due 2004) 17.0 17.0 Borrowings under credit agreeement (due 2001) 7.2 - ----------------------------------------- $ 222.2 $ 185.0 =========================================
South Dakota Pollution Control Bonds: In July 1997, Lawrence County, South Dakota issued $30 million of South Dakota Solid Waste Disposal Revenue Bonds and $18 million of South Dakota Pollution Control Refunding Revenue Bonds, both of which are due in 2032. Proceeds from the Solid Waste Disposal Revenue Bonds were relent to the Company and proceeds from the Pollution Control Refunding Revenue Bonds were used to redeem outstanding South Dakota pollution control bonds. The Company is responsible for funding principal and interest payments on these bonds. Proceeds from the Solid Waste Disposal Revenue Bonds are being used for construction of a new tailings dam lift and other qualifying expenditures at the Homestake mine. Qualifying expenditures of $11.5 million had been incurred through September 30, 1997 and the remaining $18.5 million is held in a trustee account committed for the construction of the new tailings dam lift and other qualifying expenditures. This $18.5 million of restricted cash is included in other assets in the accompanying balance sheet at September 30, 1997. The Company pays interest monthly on its pollution control bonds based on variable short-term, tax-exempt obligation rates. At September 30, 1997 the interest rate was 4.1%. 8. Under the Company's foreign currency protection program, the Company enters into a series of foreign currency option contracts which establish trading ranges within which the United States dollar may be exchanged for foreign currencies by setting minimum and maximum exchange rates. The contracts are marked to market at each balance sheet date and the resulting changes in market value are included in the determination of net income or loss. Net unrealized losses on contracts outstanding at September 30, 1997 totaled $5.1 million. 7 HOMESTAKE MINING COMPANY AND SUBSIDIARIES At September 30, 1997 the Company had forward currency contracts outstanding as follows (dollar amounts in millions):
Weighted-Average Exchange Rates to U.S. Dollars Amount Covered ----------------------------------- Expiration Currency (U.S. Dollars) Put Options Call Options Dates - ------------------------------------------------------------------------------------------------- Canadian $ 52.7 0.72 0.76 1997 Canadian 152.2 0.72 0.76 1998 Canadian 7.0 0.72 0.75 1999 Australian 27.6 0.77 0.80 1997 Australian 93.5 0.75 0.78 1998 Australian 6.5 0.72 0.75 1999 ------------- $ 339.5 =============
9. In the fourth quarter of 1996, the Company entered into forward sales commitments for 680,100 ounces of gold expected to be produced from the McLaughlin mine stockpiles from 1997 through 2003. In addition, during the second quarter of 1997 the Company entered into forward sales commitments for 20,000 ounces of gold to be produced in 2001 and 2002. Gold sales for the three and nine months ended September 30, 1997 include sales of 30,000 ounces and 90,000 ounces at average prices of $387 per ounce and $383 per ounce, respectively. Gold sales for the three and nine months ended September 30, 1996 include sales under the now-completed Nickel Plate mine forward sales program of 24,900 ounces and 70,000 ounces at average prices of $427 per ounce and $421 per ounce, respectively. At September 30, 1997 the Company's gold forward sales commitments were as follows:
Average Price of Forward Sales Forward Sales Year (ounces) (per ounce) - ----------------------------------------------------------------------------------- 1997 30,100 $391 1998 120,000 399 1999 109,900 415 2000 85,100 430 2001 95,000 441 2002 95,000 457 2003 75,000 481 ------------- 610,100
To provide protection against a decrease in gold prices, the Company entered into a series of put and call option contracts during the 1997 third quarter which will provide a floor price of $325 per ounce for 900,000 ounces of Homestake's 1998 gold production. The Company purchased put options for 900,000 ounces of gold exercisable during 1998 at a price of $325 per ounce. The Company also sold call options for 900,000 ounces of gold exercisable during 1998 at a price of $325 per ounce and purchased call options for 900,000 ounces of gold exercisable during 1998 at $336 per ounce. These option contracts were established at no net cost to the Company. The Company also purchased put options for 30,000 ounces of gold exercisable during 2000 at a price of $350 per ounce and sold call options for 15,000 ounces of gold exercisable during 2000 at an average price of $395 per ounce. 8 HOMESTAKE MINING COMPANY AND SUBSIDIARIES 10. In September 1997, the Company's Board of Directors authorized the amendment of certain terms of the Rights Agreement (effective - October 1997). A summary of the amended Rights Agreement is as follows: Each share of common stock includes and trades with a right. Rights are not exercisable currently. Rights will become exercisable on a date designated by the Board of Directors following the commencement of, or announcement of an intent to commence, a tender offer by any person, entity or group for 15% or more of the Company's common stock. When so exercisable, each right initially entitles the owner to purchase from the Company one one-hundredth of a share of Series A Participating Preferred Stock, par value $1 per share, at a price of $75 per share (the "Purchase Price"). In addition, if any person, entity or group (an "Acquiring Person") acquires 15% or more of the Company's common stock, each right (whether or not previously exercisable) thereafter entitles the owner (other than an Acquiring Person or its affiliates and associates) to purchase for the Purchase Price the number of one one-hundredth of a share of Series A Preferred Stock equal to the Purchase Price divided by one-half of the market price of the Company's common stock. In lieu of the rights holder exercising such right, the Board of Directors has the option to issue, in exchange for each right, one-half of the number of shares of preferred stock (or common stock having a value equal to the Purchase Price) that would be issuable on exercise of the right. If the Board of Directors has not exchanged shares for the rights and the Company engages in a business combination with an Acquiring Person (or affiliate or associate thereof), the holder of rights will be entitled to purchase for the Purchase Price (i) common stock of the surviving company or its publicly held affiliate having a market value equal to twice the Purchase Price, or (ii) common stock of the surviving company having a book value equal to twice the Purchase Price if the surviving company and its affiliates are not publicly held. The numbers of shares and the Purchase Price are subject to adjustment for stock dividends, stock splits and other changes in capitalization. The rights expire on October 15, 2007. 11. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. ("SFAS") 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS 131 specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. SFAS 131 is effective for fiscal years beginning after December 15, 1997. Adoption of SFAS 131 will not have a material impact on Homestake's current geographic and segment disclosures. In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses). The purpose of reporting comprehensive income is to present a measure of all changes in shareholders' equity that result from recognized transactions and other economic events of the period, other than transactions with owners in their capacity as owners. SFAS 130 is effective for financial statements issued for periods ending after December 15, 1997. Adoption of SFAS 130 will result in additional disclosures in Homestake's financial statements but will not impact the Company's reported net income or net income per share. In February 1997, the FASB issued SFAS 128, "Earnings Per Share." SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997. Adoption of SFAS 128 will not have a material impact on Homestake's previously reported earnings per share. 12. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") imposes heavy liabilities on persons who discharge hazardous substances. 9 HOMESTAKE MINING COMPANY AND SUBSIDIARIES The Environmental Protection Agency ("EPA") publishes a National Priorities List ("NPL") of known or threatened releases of such substances. Grants The Company's former uranium millsite near Grants, New Mexico is listed on the NPL. The EPA asserted that leachate from the tailings contaminated a shallow aquifer used by adjacent residential subdivisions. The Company paid the costs of extending the municipal water supply to the affected homes and continues to operate a water injection and collection system that has significantly improved the quality of the aquifer. The Company has decommissioned and disposed of the mills and has covered the tailings impoundments at the site. The total future cost for reclamation, remediation, monitoring and maintaining compliance at the Grants site is estimated to be approximately $19 million. Title X of the Energy Policy Act of 1992 (the "Act") and subsequent amendments to the Act authorized appropriations of $335 million to cover the Federal Government's share of certain costs of reclamation, decommissioning and remedial action for by-product material (primarily tailings) generated by certain licensees as an incident of uranium sales to the Federal Government. Reimbursement is subject to compliance with regulations of the Department of Energy ("DOE"), which were issued in 1994. Pursuant to the Act, the DOE is responsible for 51.2% of past and future costs of reclaiming the Grants site in accordance with Nuclear Regulatory Commission license requirements. Through September 30, 1997 the Company had received $17.1 million from the DOE and the accompanying balance sheet at September 30, 1997 includes an additional receivable of $13.2 million for the DOE's share of reclamation expenditures made by the Company through 1996. The Company believes that its share of the estimated remaining cost of reclaiming the Grants facility is fully provided in the financial statements at September 30, 1997. In 1983, the state of New Mexico made a claim against the Company for unspecified natural resource damages resulting from the Grants tailings. New Mexico has taken no action to enforce its claim. Whitewood Creek Deposits of tailings (ground rock) along an 18-mile stretch of Whitewood Creek in western South Dakota formerly constituted a site on the NPL. The EPA asserted that discharges of tailings beginning in the nineteenth century by mining companies, including Homestake, contaminated the soil and streambed. Homestake signed a Consent Decree with the EPA and carried out remedial work, and the site was deleted form the NPL on August 13, 1996. On July 23, 1997 the Company received a letter from the Mountain-Prairie Region of the United States Fish and Wildlife Service stating that the "Department [of the Interior] intends to file suit, subject to final approval by the Department of Justice, against your company to recover natural resource damages and assessment costs" in respect of tailings placed in Whitewood Creek, South Dakota, under CERCLA, the Clean Water Act and other applicable laws. The letter stated that other federal agencies may participate in such litigation and also stated that the Cheyenne River Sioux Tribe intended to file such an action. The letter invited Homestake to participate in discussions with the Department of the Interior and the Tribe over the next 60 days and indicated that absent an agreement, "the Department intends to request that the Department of Justice file a lawsuit for natural resource damages against Homestake upon the expiration of the 60-day notice period." The Company agreed to a limited waiver of statutes of limitations until November 24, 1997, and discussions with the federal trustees and the Cheyenne River Sioux Tribe regarding this matter have continued. 10 HOMESTAKE MINING COMPANY AND SUBSIDIARIES In 1983, the state of South Dakota made a claim for unspecified natural resource damages in respect of the placement of tailings in Whitewood Creek. On September 25, 1997 the state filed an action pursuant to CERCLA and a pendent state claim for damages to natural resources in a quantity yet to be ascertained. Homestake has filed an answer denying the allegation and counterclaiming against the State of South Dakota. The Company believes that the ultimate resolution of the above matters will not have a material adverse impact on its financial condition or results of operations. See Part II, Item 1- Legal Proceedings of this Form 10-Q for more details regarding this matter. 13. In October 1997, Homestake Canada Inc. ("HCI"), a wholly-owned subsidiary of the Company, agreed to purchase a 51% interest in the Troilus gold mine in Quebec from Inmet Mining Corporation for approximately $56 million in cash. Prime will purchase the remaining 49% of the mine for approximately $54 million in cash. HCI and Prime also will purchase their proportionate share of the Troilus mine's working capital. The Troilus mine has proven and probable reserves of almost 1.8 million ounces of gold and 128 million pounds of copper contained in 53 million tons of ore. The transaction is scheduled to close on December 17, 1997. HCI will be the operator of the Troilus open-pit mine which commenced production in January 1997. The mine is expected to produce an average of 130,000 ounces of gold and 9.7 million pounds of copper annually over its remaining 12-year mine life. Assets purchased also include a newly constructed processing facility and an 18,500-acre land package adjacent to the mine site. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations (Unless specifically stated otherwise, the following information relates to amounts included in the consolidated financial statements without reduction for minority interests.) Results of Operations Homestake recorded a net loss of $163.7 million or $1.12 per share during the third quarter of 1997 compared to net income of $7.4 million or $0.05 per share during the third quarter of 1996. The 1997 third quarter net loss included after tax write-downs and other unusual charges of $145.1 million ($183.6 million pretax) or $0.99 per share. Details of these noncash charges are as follows: - - $84.9 million ($107.8 million pretax) write-down of Homestake's investment in the Main Pass 299 sulfur mine: Homestake owns a 16.7% undivided interest in the Main Pass 299 sulfur mine located in the Gulf of Mexico. Planned write-downs by Homestake's joint venture partners caused the Company to reexamine the carrying value of its investment in Main Pass 299. Due to a prolonged period of low sulfur prices and Homestake's current assessment of estimated future cash flows from the Main Pass 299 sulfur mine, the Company recorded a write-down of $107.8 million in its investment in Main Pass 299. As a result of this write-down, the Company's carrying value of the Main Pass 299 sulfur property, plant and equipment was reduced to zero at September 30, 1997. - - $18.2 million ($24.3 million pretax) reduction in the carrying values of short-lived mining properties: As a result of lower gold prices, the Company reviewed the carrying values of its gold mining operations using a $325 per ounce gold price for its short-lived operations and a 11 HOMESTAKE MINING COMPANY AND SUBSIDIARIES $350 per ounce gold price for its operations with longer lives. The Company determined that impairment write-downs were required to reduce the carrying value of several of its assets or operations with short remaining lives, including the Pinson mine in Nevada, the Homestake mine's Open Cut in South Dakota, and low-grade stockpiled ore and certain redundant mining equipment at the Kalgoorlie operations in Western Australia. The Company determined that no adjustments to the carrying values of its longer-lived operations were required. - - $21.5 million ($29.1 million pretax) increase in the estimated accrual for future reclamation expenditures: As a result of a review of the Company's reclamation liabilities, the Company determined that it was necessary to increase the reclamation accruals at certain of its nonoperating properties including the Santa Fe mine in Nevada, the Nickel Plate mine in Canada and the Grants uranium complex in New Mexico to reflect revised estimates, changed conditions and more stringent future reclamation requirements. - - $14.7 million ($16.5 million pretax) write-down of certain investments: Low gold prices and lower market valuations for junior mining companies have caused the value of certain of the Company's investments in other companies to decline significantly. The Company reduced the carrying values of certain of its mining investments to reflect reductions in value that it deemed to be other than temporary. - - $5.8 million ($5.9 million pretax) in other charges, primarily foreign exchange losses on intercompany redeemable preferred stock. Excluding the effect of the write-downs and other unusual charges, Homestake incurred a net loss of $18.6 million or $0.13 per share, primarily reflecting a significantly lower average realized gold price, higher exploration expenditures and increased administrative and general expenses. Year to date, Homestake recorded a net loss of $130 million or $0.89 per share compared to 1996 year-to-date earnings of $27.9 million or $0.19 per share. The decreased 1997 year-to-date earnings reflect the write-downs and other unusual charges mentioned above, partially offset by after-tax gains of $47.2 million ($62.9 million pretax) or $0.32 per share from the fee received from Santa Fe Pacific Gold Corporation ("Santa Fe") upon termination of Homestake's merger agreement with Santa Fe, and $8.1 million ($13.5 million pretax) or $0.06 per share from the sale of the George Lake and Back River joint venture interests in the Northwest Territories of Canada to Arauco Resources Corporation ("Arauco"). Results for the 1996 year-to-date period included an after-tax gain of $4.9 million ($5.5 million pretax) from a litigation recovery. Excluding the effects of the nonrecurring items, the Company incurred a net loss of $40.2 million or $0.27 per share during the first nine months of 1997 compared to net income of $23 million or $0.16 per share for the first nine months of 1996. Gold production during the third quarter of 1997 increased to 491,900 ounces from 484,100 ounces produced during the third quarter of 1996. Revenues from gold and ore sales for the 1997 third quarter decreased by 11% to $153 million from $171.5 million during the 1996 third quarter, primarily reflecting lower gold prices. During the third quarter of 1997, 496,900 ounces were sold at an average realized price of $328 per ounce compared to 472,600 ounces sold at an average realized price of $388 per ounce during the third quarter of 1996. Finished gold inventories decreased by 5,000 ounces during the 1997 third quarter compared to an increase of 11,500 ounces during the prior year's third quarter. Domestic production during the third quarter of 1997 decreased slightly to 170,300 ounces compared to 173,100 ounces produced during the third quarter of 1996, primarily due to lower production at the McLaughlin mine in northern California. Production at the McLaughlin mine decreased by 7,300 ounces to 31,200 ounces during the 1997 third quarter compared to 38,500 12 HOMESTAKE MINING COMPANY AND SUBSIDIARIES ounces produced during the 1996 third quarter, reflecting a 9% decrease in ore grades. Mining operations ceased at the end of June 1996 and lower grade stockpiled ore will be processed over the next six years. Total cash costs remained unchanged at $243 per ounce for the 1997 third quarter compared to the 1996 third quarter. Homestake's share of production at the Round Mountain mine in Nevada increased to 31,400 ounces during the third quarter of 1997 from 29,700 ounces produced during the third quarter of 1996. Total cash costs decreased by 6% to $237 per ounce during the 1997 third quarter from $252 per ounce during the 1996 third quarter, primarily due to the increased production. Construction of an 8,000 tons-per-day gravity mill to treat higher grade ore was completed in July 1997, and the mill is scheduled to begin commercial production in November 1997. During the 1997 third quarter, Round Mountain approved a new mining plan that is expected to increase cash flow and profitability and reduce total cash costs. At the Homestake mine in Lead, South Dakota, production was 97,000 ounces during the third quarter of 1997 compared to 98,000 ounces during the third quarter of 1996. Total cash costs were $307 per ounce during the 1997 third quarter compared to $305 per ounce during the comparable quarter for the prior year. Total foreign gold production increased by 3% to 321,600 ounces from the prior year's third quarter, primarily due to production increases at the Eskay Creek mine in Canada and the Kalgoorlie operations in Western Australia, as well as production at the new Agua de la Falda mine in Chile, which poured its first gold in April 1997. These increases were partially offset by a production decline at the Snip mine in Canada and the absence of production at the Nickel Plate mine. Production at the Eskay Creek mine increased to 105,400 ounces at a total cash cost (including third-party smelter charges) of $163 per ounce during the third quarter of 1997 from 87,500 ounces produced at a total cash cost of $176 per ounce during the third quarter of 1996. The improved results reflect higher grades and an increase in tons of ore shipped. Construction of a new gravity/flotation mill at Eskay Creek commenced in July 1997 and is scheduled for completion by the end of 1997. The mill will improve profit margins on ore currently directly shipped to third-party smelters and allow for the treatment of some lower grade ores that otherwise could not be processed economically. The capital cost of the mill is estimated to be $12 million. The mill will add approximately 30,000 ounces to Eskay Creek's average annual production over its remaining life. Prime Resources Group, Inc. ("Prime"), Homestake's 50.6%-owned subsidiary, became the sole owner of the Snip mine when it purchased Cominco Ltd.'s 60% interest in this mine for $39.3 million. Production at the Snip mine was 31,200 ounces during the 1997 third quarter compared to 36,800 ounces produced during the 1996 third quarter, reflecting a 10% decrease in ore grades and a 4% decrease in tons milled. As a result, total cash costs increased to $210 per ounce during the third quarter of 1997 compared to $163 per ounce during the third quarter of 1996. Homestake's share of production at the Williams mine in Canada totaled 51,200 ounces during the 1997 third quarter compared to 54,300 ounces produced during the prior year's third quarter. Total cash costs increased to $218 per ounce during the third quarter of 1997 from $197 per ounce during the third quarter of 1996. The slightly lower production and corresponding increase in total cash costs primarily are due to ground control problems that temporarily have limited access to higher-grade stopes. Homestake's share of production at the David Bell mine in Canada was 17,700 ounces during the 1997 third quarter compared to 19,700 ounces produced during the 1996 third quarter. Total cash costs increased to $241 per ounce during the 1997 third quarter from $203 per ounce during the 1996 third quarter. The lower production and corresponding increase in total cash costs results from lower ore grades, the mining of narrower and smaller stopes, and ground control difficulties during the 1997 third quarter. Homestake's share of production at the Kalgoorlie operations totaled 102,500 ounces at a total cash cost of $242 per ounce during the third quarter of 1997 compared to 91,900 ounces 13 HOMESTAKE MINING COMPANY AND SUBSIDIARIES produced at a total cash cost of $282 per ounce during the third quarter of 1996. The improved results reflect a 4% increase in recovery and a draw down of in-process inventories (Homestake's share - 5,600 ounces), partially offset by decreased throughput. The decrease in total cash costs primarily is due to higher production and the installation of a recycle crusher at the Fimiston mill earlier this year. The new Agua de la Falda mine (51% owned by Homestake, 49% by Codelco) commenced mining operations late in 1996 and the first gold was poured in April 1997. The mine produced 10,700 ounces of gold during the 1997 third quarter. Both the average ore grade and ore production rates have been higher than expected. As a result, total cash costs of $231 per ounce are well below projections. Estimated gold production for the Agua de la Falda mine in 1997 is 28,000 ounces. The Company's consolidated total cash cost per ounce decreased by 4% to $234 during the third quarter of 1997 from $245 during the third quarter of 1996. Year-to-date 1997 revenues from gold and ore sales totaled $477.7 million compared to gold and ore sales of $541.7 million during the comparable period for 1996. The decrease in revenues is due to a $52 decrease in the average realized gold price. During the first nine months of 1997, 1,472,800 ounces were sold at an average realized price of $341 per ounce compared to sales of 1,470,700 ounces sold at an average realized price of $393 per ounce during the first nine months of 1996. Total cash costs during the first nine months of 1997 decreased to $243 per ounce from $249 per ounce during the first nine months of 1996. The Company's share of revenues at the Main Pass 299 operations in the Gulf of Mexico totaled $6.3 million during the third quarter of 1997 compared to revenues of $7.2 million during the third quarter of 1996, and operating losses declined to $.4 million during the 1997 third quarter compared to operating earnings of $.4 million during the 1996 third quarter. The results primarily reflect lower oil prices and an anticipated decline in oil sales volumes, partially offset by a slight increase in sulfur prices. As discussed above, at September 30, 1997 the Company recorded a write-down of $107.8 million in its investment in the Main Pass 299 sulfur mine. To provide protection against a decrease in gold prices, the Company entered into a series of put and call option contracts during the 1997 third quarter which will provide a floor price of $325 per ounce for 900,000 ounces of Homestake's 1998 gold production. The Company purchased put options for 900,000 ounces of gold exercisable during 1998 at a price of $325 per ounce. The Company also sold call options for 900,000 ounces of gold exercisable during 1998 at a price of $325 per ounce and purchased call options for 900,000 ounces of gold exercisable during 1998 at $336 per ounce. These option contracts were established at no net cost to the Company. The Company also purchased put options for 30,000 ounces of gold exercisable during 2000 at a price of $350 per ounce and sold call options for 15,000 ounces of gold exercisable during 2000 at an average price of $395 per ounce. In the fourth quarter of 1996, the Company entered into forward sales commitments for 680,100 ounces expected to be produced from the McLaughlin mine stockpiles from 1997 through 2003. In addition, during the second quarter of 1997 the Company entered into forward sales commitments for 20,000 ounces of gold to be produced in 2001 and 2002. Gold sales for the three and nine months ended September 30, 1997 include sales of 30,000 ounces and 90,000 ounces at average prices of $387 per ounce and $383 per ounce, respectively. Gold sales for the three and nine months ended September 30, 1996 include sales under the now-completed Nickel Plate mine forward sales program of 24,900 ounces and 70,000 ounces at average prices of $427 per ounce and $421 per ounce, respectively. At September 30, 1997 forward sales for 610,100 ounces at an average price of $432 per ounce remain outstanding. 14 HOMESTAKE MINING COMPANY AND SUBSIDIARIES A significant portion of the Company's operating expenses is incurred in Australian and Canadian currencies. The Company's profitability is impacted by fluctuations in these currencies' exchange rates relative to the United States dollar. Under the Company's foreign currency protection program, the Company enters into a series of foreign currency option contracts which establish trading ranges within which the United States dollar may be exchanged for Australian and Canadian dollars. At September 30, 1997 the Company has recorded a net unrealized loss of $5.1 million on open contracts under this program. Administrative and general expense of $10.8 million for the 1997 third quarter compares to $8.8 million for the 1996 third quarter. The increase primarily reflects employee relocations to the new Agua de la Falda and Ruby Hill mines and higher investment banking fees. Exploration expense for the three and nine months ended September 30, 1997 was $14.6 million and $36.7 million, respectively, compared to exploration expense of $12 million and $29.5 million for the three and nine months ended September 30, 1996, respectively. The higher exploration expenses reflect increased activity as the Company pursues numerous exploration targets and prospects. Income and mining tax credits for the three and nine months ended September 30, 1997 were $37.2 million and $4 million, respectively, compared to income and mining tax expense of $9.1 million and $37.7 million for the three and nine months ended September 30, 1996, respectively. Tax credits totaling $38.5 million with respect to the write-downs and other unusual charges were recorded in the third quarter of 1997. In addition, the year-to-date period includes $15.7 million of expense associated with the termination fee received from Santa Fe and $5.4 million of expense related to the gain on sale of the George Lake and Back River joint venture interests. During the first nine months of 1996, a $2.6 million credit was recorded with respect to a litigation recovery relating to previously paid income taxes. The Company's consolidated effective income and mining tax rate will fluctuate depending on the geographical mix of pretax income. Minority interests in the income of consolidated subsidiaries decreased to $8.1 million during the first nine months of 1997 from $10.8 million during the first nine months of 1996. The decrease primarily is attributable to lower income due to lower gold prices realized by Prime and higher exploration expenses incurred during the first nine months of 1997 by the Company's 51%-owned subsidiary, Agua de la Falda S.A., which was formed in July 1996. The following charts detail Homestake's gold production and total cash costs per ounce by location, and consolidated revenue and production costs per ounce. 15 HOMESTAKE MINING COMPANY AND SUBSIDIARIES
Production (Ounces in thousands) Three Months Ended Nine Months Ended September 30, September 30, Mine (Percentage interest) 1997 1996 1997 1996 ------------------------------ ------------------------------ Homestake (100) 97.0 98.0 301.3 306.5 McLaughlin (100) 31.2 38.5 93.7 153.3 Round Mountain (25) 31.4 29.7 92.0 78.4 Pinson (50) (1) 6.3 2.9 18.9 7.7 Marigold (33) 4.4 4.0 18.7 16.8 ------------- ------------- ------------- ------------- Total United States 170.3 173.1 524.6 562.7 Eskay Creek (100) (2,3) 105.4 87.5 300.9 281.7 Williams (50) 51.2 54.3 145.4 149.3 David Bell (50) 17.7 19.7 61.5 72.2 Quarter Claim (25) 2.9 2.9 8.5 8.5 Snip (100) (3,4) 31.2 36.8 90.7 69.8 Nickel Plate (100) - 16.1 - 67.9 ------------- ------------- ------------- ------------- Total Canada 208.4 217.3 607.0 649.4 Kalgoorlie, Australia (50) 102.5 91.9 317.8 259.3 Agua de la Falda (100) 10.7 - 19.0 - El Hueso (100) - 1.8 0.5 6.7 ------------- ------------- ------------- ------------- Total Chile 10.7 1.8 19.5 6.7 ------------- ------------- ------------- ------------- Total Production 491.9 484.1 1,468.9 1,478.1 Less Minority Interests (72.7) (61.5) (202.7) (173.7) ------------- ------------- ------------- ------------- Homestake's Share 419.2 422.6 1,266.2 1,304.4 ============= ============= ============= =============
Total Cash Costs (Dollars per ounce) Three Months Ended Nine Months Ended September 30, September 30, Mine (Percentage interest) 1997 1996 1997 1996 ------------------------------ ------------------------------ United States Homestake (100) $307 $305 $318 $298 McLaughlin (100) 243 243 247 239 Round Mountain (25) 237 252 225 253 Pinson (50) (1) 344 347 343 392 Marigold (33) 316 343 260 282 Canada Eskay Creek (100) (2,3) 163 176 162 170 Williams (50) 218 197 240 228 David Bell (50) 241 203 214 170 Quarter Claim (25) 172 166 173 167 Snip (100) (3,4) 210 163 210 175 Nickel Plate (100) - 383 - 342 Kalgoorlie, Australia (50) 242 282 265 309 Chile Agua de la Falda (100) 231 - 219 - El Hueso (100) - 375 310 270 Weighted Average $234 $245 $243 $249
16 HOMESTAKE MINING COMPANY AND SUBSIDIARIES
Three Months Ended Nine Months Ended September 30, September 30, Per Ounce of Gold 1997 1996 1997 1996 - ----------------- ------------------------------ ------------------------------ Revenue $328 $388 $341 $393 ============================== ============================== Per Ounce Costs Cash Operating Costs (5) $230 $238 $238 $242 Other Cash Costs (6) 4 7 5 7 ------------------------------ ------------------------------ Total Cash Costs 234 245 243 249 Noncash Costs (7) 57 60 55 58 ------------------------------ ------------------------------ Total Production Costs $291 $305 $298 $307 ============================== ============================== (1) Homestake increased its ownership percentage in the Pinson mine from 26.3% to 50% in December 1996. (2) Gold and silver are accounted for as co-products at Eskay Creek. Silver is converted to gold equivalent, using the ratio of the silver market price to the gold market price. These ratios were 72 ounces and 76 ounces of silver equals one ounce of gold for the three months ended September 30, 1997 and 1996, respectively, and 71 ounces and 74 ounces of silver equals one ounce of gold for the nine months ended September 30, 1997 and 1996, respectively. Eskay Creek production includes 63,100 (48,400 in 1996) payable ounces of gold and 3.1 million (3 million in 1996) payable ounces of silver contained in ore sold to smelters in the third quarter, and 174,000 (160,100 in 1996) payable ounces of gold and 9.1 million (9 million in 1996) payable ounces of silver contained in ore sold to smelters in the year-to-date period. (3) For comparison purposes, total cash costs per ounce include estimated third-party costs incurred by smelter owners and others to produce marketable gold and silver. (4) Includes ounces of gold contained in dore and concentrates. Prime's ownership percentage in the Snip mine increased from 40% to 100% effective April 30, 1996. (5) Cash operating costs are costs directly related to the physical activities of producing gold; includes mining, milling, third-party smelting and in-mine drilling expenditures that are related to production. (6) Other cash costs are costs that are not directly related to, but may result from, gold production; includes production taxes and royalties. (7) Noncash costs are costs that typically are accounted for ratably over the life of an operation; includes depreciation, depletion, accruals for final reclamation and the amortization of the economic cost of property acquisitions, but excludes amortization of SFAS 109 deferred tax purchase adjustments relating to property acquisitions.
Liquidity and Capital Resources Cash provided by operations totaled $97.1 million during the first nine months of 1997 compared to $151.6 million during the first nine months of 1996. Working capital at September 30, 1997 amounted to $255.8 million, including $230 million of cash and short-term investments. 17 HOMESTAKE MINING COMPANY AND SUBSIDIARIES Capital additions of $106.7 million for the first nine months of 1997 include $50.7 million for construction and development work at the Ruby Hill mine, $12.5 million at the Round Mountain mine primarily for a new mill to process higher-grade sulfide ore, $11.7 million at the Kalgoorlie operations primarily for a decline from surface and a ventilation raise at the Mt. Charlotte mine, $10.8 million at the Eskay Creek mine primarily for the construction of a new gravity/flotation mill, and $10.2 million at the Homestake mine primarily for a new tailings dam lift and improvements in the underground operations. In July 1997, Lawrence County, South Dakota issued $30 million of South Dakota Solid Waste Disposal Revenue Bonds and $18 million of South Dakota Pollution Control Refunding Revenue Bonds, both of which are due in 2032. Proceeds from the Solid Waste Disposal Revenue Bonds were relent to the Company and proceeds from the Pollution Control Refunding Revenue Bonds were used to redeem outstanding South Dakota pollution control bonds. The Company is responsible for funding principal and interest payments on these bonds. Proceeds from the Solid Waste Disposal Revenue Bonds are being used for construction of a new tailings dam lift and other qualifying expenditures at the Homestake mine. Qualifying expenditures of $11.5 million had been incurred through September 30, 1997 and the remaining $18.5 million is held in a trustee account committed for the construction of the new tailings dam lift and other qualifying expenditures. This $18.5 million of restricted cash is included in other assets in the accompanying balance sheet at September 30, 1997. The Company has a United States/Canadian/Australian cross-border credit facility providing a total availability of $275 million. The Company pays a commitment fee of 0.15% per annum on the unused portion of this facility. The credit facility is available through September 2001 and provides for borrowings in United States, Canadian, or Australian dollars, or gold, or a combination of these. The credit agreement requires a minimum consolidated net worth of $500 million. At September 30, 1997 Homestake Gold of Australia Limited ("HGAL") had $7.2 million of borrowings outstanding under this agreement. In October 1997, HGAL borrowed an additional $46.8 million under this agreement to repay intercompany advances. In October 1997, Homestake Canada Inc. ("HCI"), a wholly-owned subsidiary of the Company, agreed to purchase a 51% interest in the Troilus gold mine in Quebec from Inmet Mining Corporation for approximately $56 million in cash. Prime will purchase the remaining 49% of the mine for approximately $54 million in cash. HCI and Prime also will purchase their proportionate share of the Troilus mine's working capital. The Troilus mine has proven and probable reserves of almost 1.8 million ounces of gold and 128 million pounds of copper contained in 53 million tons of ore. The transaction is scheduled to close on December 17, 1997. HCI will be the operator of the Troilus open-pit mine which commenced production in January 1997. The mine is expected to produce an average of 130,000 ounces of gold and 9.7 million pounds of copper annually over its remaining 12-year mine life. Assets purchased also include a newly constructed processing facility and an 18,500-acre land package adjacent to the mine site. On November 6, 1997 the Company's new Ruby Hill mine in Nevada poured its first gold. The mine is now processing ore at the design capacity of 3,500 tons per day and gold production for 1997 likely will exceed initial projections. Starting in 1998, Ruby Hill will produce between 105,000 and 110,000 ounces of gold annually at an estimated total cash cost of approximately $140 per ounce. In March 1997, Santa Fe terminated its previously announced merger agreement with Homestake and paid Homestake a $65 million termination fee. As a result, the Company recorded a pretax gain of $62.9 million ($47.2 million after tax), net of merger-related expenses of $2.1 million incurred in 1997. 18 HOMESTAKE MINING COMPANY AND SUBSIDIARIES In February 1997, Homestake completed the sale of its interests in the George Lake and Back River joint ventures in Canada to Arauco for $9.3 million in cash and 3.6 million shares of Arauco common stock. As a result of this transaction, the Company recorded a pretax gain of $13.5 million ($8.1 million after tax), which is included in other income. In February 1997, the Company paid a cash dividend of 5 cents per share. In March 1997, the Company reduced its annual dividend rate to 10 cents per share from 20 cents per share and declared a semi-annual dividend of 5 cents per share which was paid in May 1997. In September 1997, the Company declared a semi-annual dividend of 5 cents per share payable in November 1997. In April 1997, the Company filed a shelf registration with the Securities and Exchange Commission for the potential sale of up to 20 million shares of Homestake common stock. The proceeds from any such offering would be available for general corporate purposes, which could include capital expenditures, repayment of debt and future acquisitions which have the potential to add to the Company's gold reserves and future gold production. Future results will be impacted by such factors as the market price of gold, silver and sulfur, the Company's ability to expand its ore reserves and the fluctuations of foreign currency exchange rates. The Company believes that the combination of cash, short-term investments, available lines of credit and future cash flows from operations will be sufficient to meet normal operating requirements, planned capital expenditures, and anticipated dividends. Part II - OTHER INFORMATION Item 1 - Legal Proceedings Reference is made to Part II - Other Information: Item 1 - Legal Proceedings, of the Company's Form 10-Q Report for the quarter ended June 30, 1997. In that report, the Company disclosed that it had received a letter from the United States Fish and Wildlife Service stating that the Department of the Interior intended to file suit, subject to final approval of the Department of Justice, against the Company's wholly-owned subsidiary, Homestake Mining Company of California ("HMCC") to recover alleged natural resource damages and assessment costs under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to alleged releases of hazardous substances at Whitewood Creek in South Dakota. HMCC agreed to a limited waiver of statutes of limitations until November 24, 1997, and discussions with the federal trustees and the Cheyenne River Sioux Tribe regarding this matter have continued. On September 25, 1997 the State of South Dakota filed an action against HMCC, State of South Dakota v. Homestake Mining Company of California, U.S. Dist. Ct., W.D.S.D., Civ. Action No. 97-5078. The action relates to the same general matter which is the subject of the above referenced letter - placement of mine tailings in Whitewood Creek. In the complaint, the State of South Dakota alleges that HMCC disposed of mine tailings in Whitewood Creek and that such disposal resulted in injuries to natural resources in Whitewood Creek and downstream in the Belle Fourche River, the Cheyenne River and Lake Oahe on the Missouri River. The complaint also alleges that the State of South Dakota incurred assessment costs. The State of South Dakota claims that it is a trustee authorized under CERCLA to bring such action. The complaint also contains a pendent state law claim, alleging that the tailings placed in Whitewood Creek constitute a continuing public nuisance in and around the Belle Fourche River, the Cheyenne River and Lake Oahe. The complaint asks for abatement of the nuisance, damages in an unascertained amount, costs and interest. 19 HOMESTAKE MINING COMPANY AND SUBSIDIARIES Whitewood Creek was a site where mining companies operating in the Black Hills of South Dakota, including HMCC, placed mine tailings beginning in the nineteenth century. Whitewood Creek is a tributary to the Belle Fourche River, which is a tributary to the Cheyenne River and Lake Oahe. As a consequence, some tailings placed in Whitewood Creek eventually flowed into the Belle Fourche River and downstream therefrom. Placement of mine tailings into Whitewood Creek was authorized by the laws of the United States, the Dakota territory and the State of South Dakota, and Whitewood Creek was later specifically designated by the State of South Dakota as a disposal stream for mine tailings and for the disposal of raw sewage and other municipal waste. Consequently, all mine tailings placed by HMCC in Whitewood Creek were placed there with the consent and encouragement of the State of South Dakota and the United States government and in compliance with applicable laws. In response to changes in legal requirements, HMCC ceased the placement of mine tailings into Whitewood Creek and for many years the Homestake mine has impounded all mine tailings that are not redeposited in the mine. In its answer, HMCC denies that there has been any continuing damage to natural resources or nuisance caused by HMCC as a result of the placement of tailings in Whitewood Creek. Among other defenses, it is also the position of HMCC that as a result of the State of South Dakota's ownership of Whitewood Creek and designation of Whitewood Creek as an authorized disposal site under state authority, the State of South Dakota was and is the owner and operator of the Whitewood Creek waste disposal site and is responsible for all past and future damages and any continuing nuisance resulting therefrom. HMCC has also counterclaimed against the State of South Dakota seeking cost recovery, contribution and indemnity from the State of South Dakota, in its capacity as an owner and operator of a disposal facility, for expenses previously incurred and to be incurred in the future with respect to Whitewood Creek and downstream areas. HMCC intends to vigorously defend this action and to seek recovery, contribution and indemnity from the State of South Dakota for past and future expenditures with respect to Whitewood Creek and its downstream receiving water. HMCC also expects, as appropriate, to seek recovery, contribution and indemnity from other government entities and other persons who participated in ownership and/or operation of Whitewood Creek as a waste disposal site or who disposed of waste in the site. In the opinion of the Company, there is no basis for the claims by the State of South Dakota or by the federal trustees. The Company is also of the opinion that HMCC has valid defenses and counterclaims against the State of South Dakota, and cross-claims for recovery, contribution and indemnity against other government entities and other persons who participated in ownership and/or operation of Whitewood Creek as a waste disposal site or who disposed of waste in the site. The Company does not believe that resolution of these matters will have a material effect on the business or financial condition or results of operations of the Company. As previously reported in the Company's Form 10-K Annual Reports, an 18-mile stretch of land along Whitewood Creek on which tailings were deposited was designated as a superfund site and placed on the National Priorities List ("NPL") in 1983. During the period from 1982 through 1990 extensive studies of the superfund site were conducted to identify any public health and environmental issues related to the site and appropriate remedial action. In August 1990, HMCC signed a consent decree with the United States Environmental Protection Agency ("EPA") in United States of America v. Homestake Mining Company of California, U.S. Dist. Ct., W.D.S.D., Civ. Action No. 90-5101. Under the Consent Decree, HMCC conducted remedial work at its expense and also reimbursed the EPA for its oversight costs. Remedial field work was completed in 1993. The decree also provided for the three counties in which the property is located to enact institutional controls which would limit the future use of the property included within the area of the superfund site. Institutional controls were adopted in all three counties. In 20 HOMESTAKE MINING COMPANY AND SUBSIDIARIES addition, HMCC offered to purchase all properties along Whitewood Creek that were affected by the institutional controls. Approximately $3 million has been spent to date to acquire property along Whitewood Creek and the Company estimates that the total cost for purchasing all of the remaining affected property would be an additional $3 million. The Consent Decree was terminated by the Court on January 10, 1996. The Whitewood Creek site was deleted from the NPL on August 13, 1996. In the deletion notice, the EPA stated that "EPA, in consultation with the State of South Dakota, have determined that the Site poses no significant threat to public health or the environment." Item 5. - Other Information CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained in this Form 10-Q that are not statements of historical facts are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on beliefs of management, as well as assumptions made by and information currently available to management. Forward looking statements include those preceded by the words "believe," "estimate," "expect," "intend," "will," and similar expressions, and include estimates of future production, costs per ounce, dates of construction completion, costs of capital projects and commencement of operations. Forward looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from expected results. Some important factors and assumptions that could cause actual results to differ materially from expected results are discussed below. Those listed are not exclusive. Estimates of future production for particular properties and for the Company as a whole are derived from annual mine plans that have been developed based on mining experience, reserve estimates, assumptions regarding ground conditions and physical characteristics of ore (such as hardness and metallurgical characteristics), expected rates and costs of production, and estimated future sales prices. Actual production may vary for a variety of reasons, such as the factors described above, ore mined varying from estimates of grade and metallurgical and other characteristics, mining dilution, actions by labor, and government imposed restrictions. Estimates of production from properties and facilities not yet in production are based on similar factors but there is a greater likelihood that actual results will vary from estimates due to a lack of actual experience. Cash cost estimates are based on such things as past experience, reserve and production estimates, anticipated mining conditions, estimated costs of materials, supplies and utilities, and estimated exchange rates. Noncash cost estimates are based on capital costs and reserve estimates, changes based on actual amounts of unamortized capital, changes in reserve estimates, and changes in estimates of final reclamation. Estimates of future capital costs are based on a variety of factors and include past operating experience, estimated levels of future production, estimates by and contract terms with third-party suppliers, expectations as to government and legal requirements, feasibility reports by Company personnel and outside consultants, and other factors. Capital cost estimates for new projects are subject to greater uncertainties than additional capital costs for existing operations. Estimated time for completion of capital projects is based on such factors as the Company's experience in completing capital projects, and estimates provided by and contract terms with contractors, engineers, suppliers and others involved in design and construction of projects. Estimates reflect assumptions about factors beyond the Company's control, such as the time government agencies take in processing applications, issuing permits and otherwise completing processes required under applicable laws and regulations. Actual time to completion can vary significantly from estimates. 21 HOMESTAKE MINING COMPANY AND SUBSIDIARIES See the Company's Form 10-K Report for the year ended December 31, 1996, Part IV, "FORWARD LOOKING STATEMENTS" and "RISK FACTORS," for a more detailed discussion of factors that may impact expected future results. Item 6 - Exhibits and Reports on Form 8-K Exhibits 4 - Amendment No. 1 dated as of October 15, 1997, to the Rights Agreement dated as of October 16, 1987, between Homestake Mining Company and BankBoston N.A., as successor to Bank of America National Trust and Savings Association, as Rights Agent (incorporated by reference to Exhibit 4 to the Registrant's Form 8-A/A filed on October 16, 1997). 11 - Computation of Earnings Per Share (filed herewith electronically) 27 - Financial Data Schedule (filed herewith electronically) (b) Reports on Form 8-K One report on Form 8-K was filed during the quarter ended September 30, 1997. The report, dated August 26, 1997, was submitted in order to file the Second and Third Amendments to the Credit Agreement. 22 HOMESTAKE MINING COMPANY AND SUBSIDIARIES 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. HOMESTAKE MINING COMPANY Date: November 13, 1997 By /s/ Gene G. Elam ---------------- Gene G. Elam Vice President, Finance and Chief Financial Officer Date: November 13, 1997 By /s/ David W. Peat ----------------- David W. Peat Vice President and Controller (Chief Accounting Officer) 23 EX-11 2 EARNINGS PER SHARE EXHIBIT 11 HOMESTAKE MINING COMPANY AND SUBSIDIARIES Computation of Earnings Per Share (unaudited) (In thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, PRIMARY 1997 1996 1997 1996 ------------- ------------- ------------- ------------- Earnings: Net income (loss) applicable to primary earnings per share calculation $ (163,682) $ 7,427 $ (130,044) $ 27,856 ============= ============= ============= ============= Weighted average number of shares outstanding 146,731 146,672 146,714 146,190 ============= ============= ============= ============= Net income (loss) per share - primary $ (1.12) $ 0.05 $ (0.89) $ 0.19 ============= ============= ============= ============= FULLY DILUTED Earnings: Net income (loss) $ (163,682) $ 7,427 $ (130,044) $ 27,856 Add: Interest relating to 5.5% convertible subordinated notes, net of tax 1,629 1,629 4,888 4,888 Amortization of issuance costs relating to 5.5% convertible subordinated notes, net of tax 111 111 332 332 ------------- ------------- ------------- ------------- Net income (loss) applicable to fully diluted earnings per share calculation $ (161,942) $ 9,167 $ (124,824) $ 33,076 ============= ============= ============= ============= Weighted average number of shares outstanding: Common shares 146,731 146,672 146,714 146,190 Additional shares relating to conversion of 5.5% convertible subordinated notes 6,505 6,505 6,505 6,505 ------------- ------------- ------------- ------------- 153,236 153,177 153,219 152,695 ============= ============= ============= ============= Net income (loss) per share - fully diluted (a) $ (1.06) $ 0.06 $ (0.81) $ 0.22 ============= ============= ============= ============= (a) This calculation is submitted in accordance with Regulation S-K item 601 (b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result.
EX-27 3
5 This schedule contains summary financial information extracted from the Condensed Consolidated Balance Sheet at September 30, 1997 and the related Condensed Statement of Consolidated Operations for the nine months ended September 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 9-mos DEC-31-1997 SEP-30-1997 61,080 168,882 32,903 0 89,366 371,296 2,002,307 1,146,077 1,334,470 115,504 222,183 0 0 146,744 447,500 1,334,470 497,786 577,070 439,814 470,118 225,184 0 7,659 (125,891) (3,960) (130,044) 0 0 0 (130,044) (0.89) 0 (1) Includes Produciton costs and Depreciation, depletion and amortization from Condensed Statement of Consolidated Operations. (2) Includes Production costs and Depreciation, depletion and amortization and Administrative and general expense from Condensed Statement of Consolidated Operations. (3) Includes Exploration expense, Write-downs and other unusual charges and Other expense from Condensed Statement of Consolidated Operations.
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