-----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, R6+UuQc/zxqqt3D3tTk5YX+maKNLg17xT5Q9jer7EIfsEm6iZ9yebj3STZekwQ1W btScCGq49GBeMh2zMXH7dA== 0000824590-96-000003.txt : 19961115 0000824590-96-000003.hdr.sgml : 19961115 ACCESSION NUMBER: 0000824590-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: GETCHELL GOLD CORP CENTRAL INDEX KEY: 0000824590 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 640748908 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11847 FILM NUMBER: 96660572 BUSINESS ADDRESS: STREET 1: 5460 S QUEBEC ST STE 240 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3037719000 FORMER COMPANY: FORMER CONFORMED NAME: FIRSTMISS GOLD INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 0-16484 Getchell Gold Corporation (Exact name of Registrant as specified in its charter) Delaware 64-0748908 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5460 South Quebec Street Suite 240 Englewood, Colorado 80111 (Address of principal executive offices) (Zip code) (303) 771-9000 (Registrant's telephone number including area code) Not applicable (Former name,former address,and former fiscal year,if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: 1 Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ____ No ____ (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Title Outstanding Common Stock, par value $0.0001 25,763,812 on November 11, 1996 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GETCHELL GOLD CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands of Dollars)
September 30, December 31, 1996 1995 ---------- ---------- ASSETS Current assets: Cash and cash equivalents ........................... $ 81,212 $ 114,633 Trade accounts receivable ........................... 3,176 3,812 Inventories: Ore and ore in process ......................... 2,528 2,088 Materials and supplies ......................... 7,152 7,662 --------- --------- Total inventories ......................... 9,680 9,750 --------- --------- Prepaid expenses and other current assets ........... 789 1,408 Deferred hedging gains, net ......................... 280 1,046 --------- --------- Total current assets ...................... 95,137 130,649 Property, plant and equipment, net ....................... 117,647 79,844 --------- --------- Total assets .............................. $ 212,784 $ 210,493 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................... $ 7,245 $ 4,953 Current portion of capital lease obligation ......... 1,928 844 Other accrued expenses .............................. 614 702 --------- --------- Total current liabilities ................. 9,787 6,499 Long-term interest payable ............................... 1,381 -- Long-term debt ........................................... 23,814 23,783 Capital lease obligations, less current installments ..... 9,259 4,387 Deferred income taxes .................................... 7,742 8,611 Other long-term liabilities .............................. 3,616 2,949 --------- --------- Total liabilities ......................... 55,599 46,229 --------- --------- Stockholders' equity : Common stock ........................................ 3 257 Contributed and paid-in capital ..................... 172,862 171,722 Accumulated deficit ................................. (15,680) (7,708) Unearned compensation ............................... -- (7) --------- --------- Total stockholders' equity ................ 157,185 164,264 --------- --------- Total liabilities and stockholders' equity $ 212,784 $ 210,493 ========= =========
See accompanying notes to consolidated financial statements. 3 GETCHELL GOLD CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In Thousands of Dollars, Except Per Share Amounts)
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Net sales ......................................................... $ 17,020 $ 17,605 $ 48,868 $ 51,064 Cost of sales ..................................................... 20,592 16,939 55,606 50,955 -------- -------- -------- -------- Gross loss (profit) .......................................... 3,572 (666) 6,738 (109) Selling, general and administrative expenses ...................... 870 1,078 3,310 2,555 Exploration expenses .............................................. 606 366 2,189 1,844 Abandonment and impairment of mineral properties .................. -- -- -- 11,531 -------- -------- -------- -------- Loss from operations ......................................... 5,048 778 12,237 15,821 Interest expense, net of capitalized interest ..................... 436 961 970 2,007 Interest and other income ......................................... (1,266) (80) (4,365) (125) -------- -------- -------- -------- Loss before income taxes .................................... 4,218 1,659 8,842 17,703 Income tax expense (benefit) ...................................... -- (425) (870) 568 -------- -------- -------- -------- Net loss ..................................................... $ 4,218 $ 1,234 $ 7,972 $ 18,271 ======== ======== ======== ======== Loss per common share ........................................ $ 0.16 $ 0.07 $ 0.31 $ 1.01 ======== ======== ======== ======== Average number of shares outstanding ......................... 25,743 18,183 25,718 18,167 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 4 GETCHELL GOLD CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands of Dollars)
Nine Months Ended September 30, -------------------------- 1996 1995 ---------- ---------- Cash flows from operating activities: Net loss ........................................................... $ (7,972) $ (18,271) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and depletion .................................... 6,729 7,620 Deferred income taxes ......................................... (870) 1,334 Loss on disposal or abandonment and impairment ................ 5 11,553 Deferred compensation ......................................... 7 18 Deferred hedging gain, net .................................... 767 (748) Net change in operating assets and liabilities: Trade accounts receivable ................................ 636 (392) Inventories .............................................. 70 980 Prepaid expenses and other current assets ................ 620 416 Accounts payable ......................................... 932 (677) Other accrued expenses ................................... (98) 599 Interest payable ......................................... 1,381 1,488 Income taxes payable ..................................... -- (842) Other long-term liabilities .............................. 666 16 --------- --------- Cash provided by operating activities ............... 2,873 3,094 --------- --------- Cash flows from investing activities: Capital expenditures ............................................... (36,076) (17,020) Proceeds from sale of property ..................................... 9 202 Deferred stripping costs ........................................... -- (96) --------- --------- Cash used by investing activities ................... (36,067) (16,914) --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock ............................. 893 285 Proceeds from long-term debt ....................................... 31 12,900 Principal payments under capital lease obligation .................. (1,151) -- --------- --------- Cash provided by (used in) financing activities ..... (227) 13,185 --------- --------- Net decrease in cash and cash equivalents ............................... (33,421) (635) Cash and cash equivalents at beginning of period ........................ 114,633 635 --------- --------- Cash and cash equivalents at end of period .............................. $ 81,212 $ -- ========= ========= 5 Supplemental disclosures: Interest paid, net of amounts capitalized ............................... $ 732 $ 129 ========= ========= Income taxes paid ....................................................... $ -- $ 100 ========= =========
Supplemental noncash financing activities (in thousands): In the nine months ended September 30, 1996 and 1995, $0 and $1,329 respectively, of interest payable to First Mississippi Corporation was transferred to the principal balance of notes payable to First Mississippi Corporation. Capital lease obligations of $7,107 were incurred to acquire equipment during the nine month period ended September 30, 1996. See accompanying notes to consolidated financial statements. 6 GETCHELL GOLD CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - General The financial statements included herein are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments of a normal and recurring nature which are necessary to present fairly the financial position, results of operations and cash flows for the interim periods. These financial statements should be read in conjunction with the Report of FirstMiss Gold Inc. on Form 10-K for the six month period ended December 31, 1995. Certain prior year amounts have been reclassified to conform with the current year presentation. Note 2 - Change in Par Value of Common Stock Effective June 25, 1996, FirstMiss Gold Inc. changed its name to Getchell Gold Corporation (the "Company") and changed its state of incorporation from Nevada to Delaware. The primary purpose of this reincorporation was to allow the Company to benefit from Delaware's well-developed corporate law. In conjunction with the change in state of incorporation, the par value of the Company's 50,000,000 authorized shares of common stock is $0.0001, a change from FirstMiss Gold Inc.'s par value of $0.01 for its 50,000,000 authorized shares of common stock. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"), and is subject to the safe harbor created by that section. Factors that realistically could cause results to differ materially from those projected in the forward-looking statements are set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors." Effective June 25, 1996, FirstMiss Gold Inc. changed its name to Getchell Gold Corporation (the "Company") and changed its state of incorporation from Nevada to Delaware. The primary purpose of this reincorporation was to allow the Company to benefit from Delaware's well-developed corporate law. RESULTS OF OPERATIONS Results for the quarter ended September 30, 1996 were a loss of $4.2 million, or $0.16 per share, versus a loss of $1.2 million, or $0.07 per share, for the same period in 1995. Results for the nine months ended September 30, 1996, were a loss of $8.0 million, or $0.31 per share, compared with a loss of $18.3 million, or $1.01 per share, in the nine months of 1995. The 1995 results for the nine month period include $11.5 million of non-cash impairment and abandonment charges, consisting of a $2.4 million write-off of an inactive silver exploration property and a $9.1 million write-down of assets associated with termination of mining in the Main Pit at the Getchell property. Continued use of lower grade stockpile ores to meet mill feed requirements was responsible for less favorable gross results for the third quarter of 1996 as compared with the third quarter of 1995. In addition to the continued use of lower grade stockpile ores, increased costs associated with the conversion from open-pit mining to underground mining were responsible for less favorable gross results for the nine months of 1996 as compared with the same period of 1995. Results in both the quarter and nine month periods of 1996 benefited from higher interest income in comparison to the corresponding 1995 periods. The following table highlights sales and production information for the three and nine month periods ended September 30, 1996 and 1995: 8 Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1996 1995 1996 1995 ---- ---- ---- ---- Ounces sold ........................ 42,423 43,845 123,442 129,412 Average realized price $ / ounce ... $ 401 $ 402 $ 396 $ 395 Average market price $ / ounce ..... $ 385 $ 383 $ 391 $ 384 Ounces Produced: Mill ...................... 39,993 42,262 117,903 120,367 Heap leach ................ 2,430 1,583 5,539 9,045 Cash cost $ / ounce Mill ...................... $ 437 $ 349 $ 402 $ 344 Heap leach ................ $ 263 $ 137 $ 239 $ 362 Combined .................. $ 427 $ 341 $ 395 $ 345 Total cost $ / ounce Mill ...................... $ 498 $ 395 $ 460 $ 395 Heap leach ................ $ 272 $ 149 $ 251 $ 372 Combined .................. $ 485 $ 386 $ 450 $ 394 SALES. Sales in the 1996 periods were adversely affected by lower mill throughput due primarily to mechanical problems at the mill, which have been resolved, resulting in a loss of nine days of production in the third quarter. Sales in the third quarter of 1996 of $17.0 million were down 3 percent from $17.6 million in the same period of 1995. Gold output totaled 42,423 ounces and 43,845 ounces in the 1996 and 1995 third quarters, respectively. Sales in the first nine months of 1996 were $48.9 million compared with $51.1 million in the same period of 1995, reflecting production of 123,442 ounces and 129,412 ounces for the respective periods, a 5 percent decrease for the 1996 period. In addition to the lower mill throughput, the decrease in production in the 1996 nine months compared with the 1995 nine months was due to lower heap leach output resulting from lower ore grades and slower recovery rates. Mill feed in the 1996 periods came from the Getchell Underground Mine and stockpiled ores, whereas production in the 1995 periods came primarily from the Getchell Main Pit and stockpiled ore. Market gold prices averaged $385 and $391 per ounce in the quarter and nine months ended September 30, 1996, respectively, compared with $383 and $384 in the same periods of 1995, respectively. Hedging contributed $16 and $5 per ounce to the realized price in the quarter and nine months ended September 30, 1996, compared with $19 and $11 per ounce in the same periods a year ago, respectively. At September 30, 1996, the Company had spot deferred contracts on 100,000 ounces of gold of which 40,000 are scheduled to be delivered during the fourth quarter of 1996 at prices ranging between $405 and $407 per ounce and 60,000 ounces scheduled for delivery in the first six months of 1997 at prices currently ranging between $391 and $418 per ounce. Based on the market price of gold at September 30, 1996, the unrealized gain on the contracts is $2.2 million. The Company's accounting treatment for spot deferred contracts is outlined in Notes 1 and 7 to the Consolidated Financial Statements as found in the Company's Report on Form 10-K for the six-month period ended December 31, 1995. 9 COST OF SALES. Cost of sales for the 1996 third quarter of $20.6 million were $3.7 million higher than the 1995 period due to higher mining, mine site administrative and depreciation costs. Cost of sales of $55.6 million for the nine months ended September 30, 1996 reflect a $4.7 million increase from the same period a year earlier primarily due to higher mining and mine site administrative costs. With the increase in cost of sales and the lower production in the 1996 periods compared with the 1995 periods, cash costs per ounce rose to $427 from $341 in the third quarter and to $395 from $345 in the nine months. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs were $0.9 million and $3.3 million in the 1996 third quarter and first nine months, respectively, compared with $1.1 million and $2.6 million in the same respective periods of a year ago. These costs were higher in the 1996 nine month period due to increased corporate activity following the spin off from First Mississippi Corporation in October 1995. Various corporate administrative costs, including stockholder communications, investor relations, professional services, salaries, travel and insurance costs have risen for the 1996 nine month period compared with the same period in 1995. EXPLORATION. Exploration expenses for the quarter and nine months ended September 30, 1996 of $0.6 million and $2.2 million, respectively, were higher than the same periods in the prior year, reflecting increased drilling activity. Capitalized drilling expenditures were $0.8 million and $2.1 million for the quarter and nine months ended September 30, 1996, respectively, and are expected to increase during the remainder of the year as discussed in "Planned Activities." INTEREST EXPENSE. Interest expense was lower by $0.5 million and $1.0 million in the third quarter and first nine months of 1996, respectively, compared with the same periods of 1995 due to lower debt balances owed to First Mississippi Corporation and increased amounts of capitalized interest in the current periods related to the Company's current development projects. INTEREST AND OTHER INCOME. The increase in 1996 interest and other income over 1995 of $1.2 million for the third quarter and $4.2 million for the nine months reflects higher interest earnings on higher cash balances following the equity offering in late 1995 as discussed in "Liquidity and Capital Resources." INCOME TAXES. A $0.9 million tax benefit was recognized on the pretax loss in the first quarter of 1996 with no additional benefits being recognized in subsequent quarters. In the second quarter of 1995, the Company recognized a valuation allowance relating to an Amended Tax Sharing Agreement with First Mississippi Corporation. This valuation allowance, offset by tax benefits relating to pretax losses for the period, resulted in income tax expense of $0.6 million for the nine months ended September 30, 1995. LIQUIDITY AND CAPITAL RESOURCES The Company is presently financing its operations and capital development projects from internally generated cash and from cash proceeds of an equity offering completed in late 1995, which provided a net $137.5 million. At September 30, 1996, the Company's cash and cash equivalents totaled $81.2 million. This cash, along with cash generated by operations, will be used for the development of the Turquoise Ridge Mine and to meet other capital and operating needs over the next two years (see discussion in "Risk Factors"). If such funds are not sufficient to meet these needs, the Company may raise additional funds through borrowings or additional equity offerings. During the nine month period ended September 30, 1996, the Company spent cash of $36.1 million on capital expenditures. Of these capital expenditures, the Company spent $19.1 million on the development of the Turquoise Ridge ore body, $8.4 million for equipment and underground development costs at the Getchell Underground Mine, $4.9 million for mill facility improvements, $2.1 million for development drilling and $1.6 million on other capital items. 10 PLANNED ACTIVITIES The major focus of the Company during the next twelve months will be the sinking of two shafts at the Turquoise Ridge deposit. Initial production of development ore at Turquoise Ridge is not expected before the end of 1997. Through the nine months ended September 30, 1996, twenty-three core holes have been drilled in the "shaft zone," contiguous and to the southeast of the existing reserves at Turquoise Ridge. The purpose of this drilling is to assist in mine planning and to convert previously declared mineralizations to reserves. In addition, a program to delineate the size and orientation of the Turquoise Ridge deposit is underway with three core drill rigs engaged in step-out drilling on the deposit. The Company expanded its 1996 exploration drilling program by approximately $2.5 million to allow for these two programs. Drilling continues on other targets on the Getchell Property located outside the known mineralization areas. The Company plans to continue processing sulfide ores from the Getchell Underground ore body, supplemented by stockpiled ores as needed to keep the mill operating at full capacity. There can be no assurance that any of the foregoing plans or goals will be achieved. RISK FACTORS GOLD PRICE VOLATILITY The Company's profitability is significantly affected by changes in the market price of gold. Gold prices fluctuate widely and are affected by numerous industry factors, such as demand for precious metals, forward selling by producers, central bank sales and purchases of gold, and production and cost levels in major gold-producing regions such as South Africa and the former Soviet Union. Moreover, gold prices are also affected by macro-economic factors such as expectations for inflation, interest rates, currency exchange rates, and global or regional political and economic situations. The current demand for and supply of gold affect gold prices, but not necessarily in the same manner as current demand and supply affect the prices of other commodities. The potential supply of gold consists of new mine production plus existing stocks of bullion and fabricated gold held by governments, financial institutions, industrial organizations and individuals. Since mine production in any single year constitutes a very small portion of the total potential supply of gold, normal variations in current production do not necessarily have a significant effect on the supply of gold or on its price. If the Company's cash costs of production exceeds gold prices for any sustained period or if gold prices should decline below the Company's cash costs of production and remain at such levels for any sustained period, the Company could determine that it is not economically feasible to continue commercial production. 11 The volatility of gold prices is illustrated in the following table of the annual high, low and average London P.M. Fix: Calendar Year Price Per Ounce High Low Average 1984 ........................... $406 $308 $360 1985 ........................... 341 294 317 1986 ........................... 438 326 368 1987 ........................... 500 390 446 1988 ........................... 484 395 437 1989 ........................... 416 356 381 1990 ........................... 424 346 383 1991 ........................... 403 344 362 1992 ........................... 360 330 344 1993 ........................... 406 326 360 1994 ........................... 395 378 384 1995 ........................... 396 372 384 The London P.M. Fix on November 11, 1996, was $381 per ounce. LOSSES The Company reported net losses of $8.0 million for the nine months ended September 30, 1996, $5.0 million for the six months ended December 31, 1995 and $18.4 million for the fiscal year ended June 30, 1995. The Company expects to continue to experience losses until its low grade stockpile ores are replaced by higher grade ore from new sources, which could include sources presently being explored or developed by the Company. There can be no assurance that such higher grade replacement ores will be obtained by the Company. DEPENDENCE ON A SINGLE MINE All of the Company's revenues are derived from its mining and milling operations at the Getchell Property. If the operations at the Getchell Underground Mine or at any of the Company's processing facilities were to be reduced, interrupted or curtailed, the Company's ability to generate revenues and profits in the future would be materially adversely affected. (See "Results of Operations-Sales" above.) RESERVES The ore reserves reported by the Company are, in large part, estimates made by the Company and confirmed by independent mining consultants. The reserves confirmed by Mine Development Associates, a consulting firm which reviewed the Company's reserve estimates, are subject to certain risks and assumptions, including those discussed in "Certain Turquoise Ridge Mine Risks" below. Additionally, no assurance can be given that the indicated level of recovery of gold will be realized or that the assumed gold price of $400 per ounce will be obtained. Reserve estimates may require revision based on actual production experience. Market price fluctuations of gold, as well as increased production costs or reduced recovery rates, may render ore reserves containing relatively lower grades of mineralization uneconomic and may ultimately result in a restatement of reserves. Moreover, short-term operating factors relating to the ore reserves, such as the need for sequential development of ore bodies and the processing of new or different ore grades, may adversely affect the Company's profitability in any particular accounting period. Declines in the market price of gold may also render ore reserves containing relatively lower grades of gold mineralization uneconomic to exploit unless the utilization of forward sales contracts or other hedging techniques is sufficient to offset the effects of a drop in the market price of the gold expected to be mined from such reserves. If the Company's realized price per ounce of gold, including hedging benefits, were to decline substantially below the levels set for calculation of reserves for an extended 12 period, there could be material delays in the development of new projects, increased net losses, reduced cash flow, reductions in reserves and asset impairments. CERTAIN TURQUOISE RIDGE MINE RISKS The Turquoise Ridge Mine involves numerous risks. These include the following: RESERVES. The resource and reserve estimates were prepared using geological and engineering judgment based on available data. In the absence of underground development, such estimates must be regarded as imprecise and some of the assumptions made may later prove to be incorrect or unreliable. The grade distribution at Turquoise Ridge is fairly narrow, with most stopping blocks having grades between 0.2 to 0.4 ounces per ton. This means that small changes in cutoff grade can cause large shifts in the reserves. If dilution and/or mining costs related to bad ground are higher than expected, the reserves could be substantially reduced, resulting in a shortening of mine life and a reduced or negative cash flow. There can be no assurance that the probable reserves set forth in the September 1995 pre- feasibility study conducted by Mineral Resources Development Inc. (MRDI) will actually be mined and milled on an economic basis, if at all. The MRDI Study is based upon many assumptions, some or all of which may not prove to be accurate. The failure of any such assumptions to prove accurate may alter the conclusions of the MRDI Study and may have a material adverse effect on the Company. The Turquoise Ridge project has transitioned from the pre-feasibility study level of project development to the construction phase of development. The expenditures required to advance the project to the point of a production test is large, particularly since the Company has decided to proceed with shaft systems capable of being used in full-scale production to save time and money, if trial mining is confirmed as viable. Thus, to a large extent, expenditures which would usually be supported by a feasibility study will depend on the data in-hand and assumptions made in the MRDI Study with an attendant higher level of uncertainty. DILUTION. The tonnage and grade of the mill feed material were estimated by applying dilution factors to certain resource data. The dilution agents are backfill, waste from the back of over-cut crosscuts and drifts, and from the walls. In the case of the latter two, MRDI assumed that there would be an average of one foot of back and wall dilution. If this dilution increases, there will be corresponding negative effects on the tonnage and grade to mill. This risk is related to the irregular configuration of the ore body which, even with the tight cut-and-fill stopping method used, could make achievement of a dilution thickness of one foot impossible to achieve in practice. NO. 1 SHAFT COMPLETION. MRDI believes a two-year assumed construction period for No. 1 Shaft, which will become the main production shaft, is an aggressive schedule. Delay in construction would necessitate removing ore through the No. 2 Shaft, which is basically designed for waste and the limited ore from early production. Additionally, the availability of the final ventilation circuit required for mining depends upon the completion of No. 1 Shaft. As of September 30, 1996, sinking of the ventilation shaft progressed to a depth of 400 feet and the first station had been installed. The production shaft surface plant is nearing completion and shaft sinking in the production shaft is planned to begin in the fourth quarter of 1996. The project continues to be on schedule. MINING COST. As part of the project risk assessment, sensitivities were run on various mining costs. Due to uncertainties about actual ground conditions and productivities, these costs are only predictable within a broad range and the predictions may not be valid. Therefore, actual mining costs may have a material adverse effect on the viability of the Turquoise Ridge project and on the Company. 13 HYDROLOGY. Drainage of the ore body and surrounding rock will be critical to the achievement of the mining efficiencies and costs estimated for the study. If the deposit is not drained and water remains in this clay-rich environment, mining conditions could worsen, and support costs will increase. If, due to the presence of fine clays, the deposit drains slowly, the start of production may be delayed, and the build-up to full production may be of longer duration. Additionally, depending upon the quantity and quality of water encountered, the water treatment/disposal options presently available to the Company may be insufficient to meet estimated amounts needed to treat water pumped from Turquoise Ridge during de-watering. GEOTECHNICAL CONSIDERATIONS The Turquoise Ridge ore zones contain areas of poor ground conditions due to a high percentage of the ground being comprised of low rock mass rating rock and clay. As a result, additional ground support may be required. PROJECT DEVELOPMENT RISKS The Company from time to time engages in the development of new ore bodies. The Company's ability to sustain or increase its present level of gold production is dependent in part on the successful development of such new ore bodies and/or expansion of existing mining operations. The economic feasibility of any such development project, and all such projects collectively, is based upon, among other things, estimate of reserves, metallurgic recoveries, capital and operating costs of such projects and future gold prices. Development projects are also subject to the successful completion of feasibility studies, issuance of necessary permits and receipt of adequate financing. Development projects have no operating history upon which to base estimates of future cash operating costs and capital requirements. In particular, estimates of reserves, metal recoveries and cash operating costs are to a large extent based upon the interpretation of geologic data obtained from drill holes and other sampling techniques and feasibility studies which derive estimates of cash operating costs based upon anticipated tonnage and grades of ore to be mined and processed, the configuration of the ore body, expected recovery rates of metals from the ore, comparable facility and equipment costs, anticipated climate conditions and other factors. As a result, it is possible that actual cash operating costs and economic returns of any and all development projects may materially differ from the costs and returns initially estimated. EXPLORATION Mineral exploration, particularly for gold, is highly speculative in nature, involves many risks and frequently is unsuccessful. The Company currently is seeking to expand its reserves only through exploration and development at the Getchell Property. There can be no assurance that the Company's exploration efforts will result in the discovery of any additional gold mineralization or that any mineralization discovered will result in an increase of the Company's reserves. If reserves are developed, it may take a number of years and substantial expenditures from the initial phases of drilling until production is possible, during which time the economic feasibility of production may change. No assurance can be given that the Company's exploration programs will result in the replacement of current production with new reserves or that the Company's development program will be able to extend the life of the Company's existing mines. HEDGING ACTIVITIES The Company currently uses spot deferred contracts in its hedging program to protect earnings and cash flows from the impact of short-term drops in gold price. These transactions have been designated as hedges of the price of future production and are accounted for as such. Spot deferred contracts are agreements between a seller and a counter party whereby the seller commits to deliver a set quantity of gold, at an established date in the future and at an agreed upon price. The established forward price is equal to the current spot gold price on the day the agreement is signed plus "contango." Contango is equal to the difference between the prevailing market rate for cash deposits less the gold lease rate, for 14 comparable periods. The contango rate ranged from 3.4% to 3.55% for 1 month to 12 month periods at September 30, 1996. At the scheduled future delivery date, the seller may deliver gold and thereby fulfill the contract or defer delivery to a future date. In practice this generally allows the seller to maximize the price realized. If the spot price on the delivery date is greater than the contract price, delivery on the contract may be deferred to a new forward date and the gold is sold at the higher spot price. If the spot price is lower than the contract price, the delivery may be made against the contract and the higher contract price is realized. Each time a seller defers delivery, the forward sales price is increased by the then prevailing contango (assuming it is positive) for the next period out to the newly established forward delivery date. Generally, the counter party will allow the seller to continue to defer contract deliveries providing that there is sufficient scheduled production from proven and probable reserves to fulfill the commitment. During both the third quarter and first nine months ended September 30, 1996, the Company deferred delivery on contracts representing 100,000 ounces. At September 30, 1996, the Company had spot deferred contracts on 100,000 ounces of gold of which 40,000 are scheduled to be delivered during 1996 at prices ranging between $405 and $407 per ounce and 60,000 ounces scheduled for delivery in 1997 at prices currently ranging between $391 and $418 per ounce. Based on the market price of gold at September 30, 1996, the unrealized gain on the contracts is $2.2 million. The Company's accounting treatment for spot deferred contracts is outlined in Notes 1 and 7 to the Consolidated Financial Statements as found in the Company's Report on Form 10-K for the six-month period ended December 31, 1995. Risk of loss from these forward sales and purchases agreements arises from the possible inability of a counter party to honor contracts and from changes in the Company's potential ability to deliver gold, although nonperformance by any party to the financial instruments is not anticipated. DEPENDENCE ON KEY PERSONNEL The Company is dependent on the services of certain key officers and employees, including its Chief Executive Officer, its Chief Financial Officer and its Chief Operating Officer. Competition in the mining industry for qualified individuals is intense, and the loss of any of these key officers or employees if not replaced could have a material adverse effect on the Company's business and its operations. The Company currently does not have key person insurance. REGULATION OF MINING ACTIVITY The mining operations of the Company are subject to inspection and regulation by the Mine Safety and Health Administration of the Department of Labor ("MSHA") under provisions of the Federal Mine Safety and Health Act of 1977. The Occupation and Safety Health Administration ("OSHA") also has jurisdiction over safety and health standards not covered by MSHA. All of the Company's exploration, development and production activities are subject to regulation under one or more of the various environmental laws. These laws address emissions to the air, discharges to water, management of wastes, management of hazardous substances, protection of natural resources, protection of antiquities and reclamation of lands which are disturbed. Many of the regulations also require permits to be obtained for the Company's activities; these permits normally are subject to public review processes resulting in public approval of the activity. It is possible that future changes in these laws or regulations could have a significant impact on some portion of the Company's business, causing those activities to be economically reevaluated at that time. During the past three years, the United States Congress considered a number of proposed amendments to the General Mining Law of 1872, as amended (the "General Mining Law"), which governs mining claims and related activities on federal lands. In 1992, a holding fee of $100 per claim was 15 imposed upon unpatented mining claims located on federal lands. In October 1994, a one-year moratorium on processing of new patent applications was approved. This moratorium subsequently was renewed and now has been extended through September 30, 1997. In addition, over the past several years a variety of legislation has been proposed before the United States Congress to amend further the General Mining Law. The proposed legislation would, among other things, change the current patenting procedures, impose royalties, and enact new reclamation, environmental controls and restoration requirements. The royalty proposals range from a 2% royalty on "net profits" from mining claims to an 8% royalty on modified gross income/net smelter returns. The extent of any such changes is not presently known and the potential impact on the Company as a result of future congressional action is difficult to predict. Although a majority of the Company's existing mining operations occur on private or patented property, the proposed changes to the General Mining Law could adversely affect the Company's ability to economically develop mineral resources on federal lands. ENVIRONMENTAL REGULATIONS Mining is subject to potential risks and liabilities associated with pollution of the environment and the disposal of waste products occurring as a result of mineral exploration and production. Environmental liability may result from mining activities conducted by others prior to the Company's ownership of a property. Insurance for environmental risks (including potential liability for pollution or other hazards as a result of the disposal of waste products occurring from exploration and production) is not generally available at a reasonable price to the Company or to other companies within the industry. To the extent the Company is subject to environmental liabilities, the payment of such liabilities would reduce funds otherwise available to the Company and could have a material adverse effect on the Company. In the context of environmental compliance and permitting, including the approval of reclamation plans, the Company must comply with federal, state and local standards, laws and regulations which may entail greater or lesser costs and delays depending on the nature of the activity to be permitted, constructed and operated and how stringently the regulations are implementing by the permitting authority. It is possible that the costs and delays associated with compliance with such laws, regulations and permits could become such that the Company would not proceed with the development of a project or the operation or further development of a mine. Laws, regulations and regulatory policies involving the protection and remediation of the environment are constantly changing at all levels of government and are generally becoming more restrictive, and the costs imposed on the development and operation of mineral properties are increasing as a result of such changes. The Company has made, and expects to make in the future, significant expenditures to comply with such laws and regulations. Pending bills which affect environmental laws applicable to mining include versions which may substantially alter the Clean Water Act, Safe Drinking Water Act, Endangered Species Act and a bill which will introduce additional protection of wetlands (Wetlands Protection and Management Act). Adverse developments and operating requirements in these acts could impair the ability of the Company as well as others to develop mineral resources. Revisions to current versions of these bills could occur prior to passage. The Environmental Protection Agency ("EPA") continues the development of a solid waste regulatory program specific to mining operations under the Resource Conservation and Recovery Act ("RCRA"). Of particular concern to the mining industry is a proposal by the EPA titled "Recommendation for a Regulatory Program for Mining Waste and Materials Under Subtitle D of the Resource Conservation and Recovery Act" ("Strawman II") which, if implemented, would create a system of comprehensive federal regulation of the entire mine site. Many of these requirements would be duplicative of existing state regulations. Strawman II as currently proposed would regulate not only mine and mill wastes but also numerous production facilities and processes which could limit internal flexibility in operating a mine. To implement Strawman II as proposed, the EPA must seek additional statutory authority, which is expected to be requested in connection with Congress' reauthorization of RCRA. 16 The Company is also subject to regulations under (I) the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA" or Superfund) which regulates and establishes liability for the release of hazardous substances and (ii) the Endangered Species Act ("ESA") which identifies endangered species of plants and animals and regulates activities to protect these species and their habitats. Revisions to CERCLA and ESA are being considered by Congress; the impact on the Company of these revisions is not clear at this time. Environmental laws and regulations may also have an indirect impact on the Company, such as increased cost for electricity due to acid rain provisions of the Clean Air Act Amendments of 1990. Charges by refiners to which the Company sells its metallic concentrates and products have substantially increased over the past several years because of requirements that refiners meet revised environmental quality standards. The Company has no control over the refiners' operations or their compliance with environmental laws and regulations. If the refining capacity of the United States is significantly further reduced because of environmental requirements, it is possible that the Company's operations could be adversely affected. MINING RISK AND INSURANCE The gold ore located on the Getchell Property and the existing tailings ponds and waste dumps located on the Getchell Property contain relatively high levels of arsenic, and the milling of such ore involves the use of other toxic substances, including sodium cyanide, sodium hydroxide, sulfuric acid and nitric acid. In addition, the business of gold mining is generally subject to a number of risks and hazards, including environmental hazards, industrial accidents, labor disputes, the encounter of unusual or unexpected geological conditions, slope failures, changes in the regulatory environment and natural phenomena such as inclement weather conditions, floods, blizzards and earthquakes. Such occurrences could result in damage to, or destruction of, mineral properties or production facilities, personal injury or death, environmental damage, delays in mining, monetary losses and possible legal liability. The Company maintains insurance against risks that are typical in the gold mining industry and in amounts that the Company believes to be reasonable, but which may not provide adequate coverage in certain unforeseen circumstances. Additionally, insurance against certain risks (including certain liabilities for environmental pollution or other hazards as a result of exploration and production) is not generally available to the Company or to other companies within the industry. TITLE TO PROPERTIES Certain of the Company's mineral rights consist of unpatented mining claims. Unpatented mining claims are unique property interests that are generally considered to be subject to greater title risk than other real property interests. The greater title risk results from unpatented mining claims being dependent on strict compliance with a complex body of federal and state statutory and decisional law, much of which compliance involves physical activities on the land, and from the lack of public records which definitively control the issues of validity and ownership. The Company's unpatented mining claims also could be adversely affected by the imposition of federal royalties or other burdens or restriction if certain forms of proposed legislation to amend the General Mining Law of 1872 are passed by the United States Congress. See the Discussion above in "Regulation of Mining Activity". 17 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27. - Financial Data Schedule. 18 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. Getchell Gold Corporation November 13, 1996 By:/s/ G. W. Thompson ------------------------------------------ Date G. W. Thompson, President, Chief Executive Officer and Director November 13, 1996 By:/s/ D. S. Robson ------------------------------------------ Date Donald S. Robson, Vice President and Chief Financial Officer (Principal Financial Officer) 19 EX-27 2 EXHIBIT 27 (FDS)
5 1000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 81212 0 3176 0 9680 95137 197591 79944 212784 9787 43 0 0 3 157182 212784 48307 48868 55606 55606 1134 0 970 (8842) (870) (7972) 0 0 0 (7972) (0.31) (0.31)
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