-----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, Cc3vIfYqCwI4sBN/4t6BJu3mWjLknZIEDOuJcVdz0J2UHq52hqSI0xY/wmUwQMYr kaO2IT1C+ZdpqIr6stmpeg== 0000912057-96-009834.txt : 19960517 0000912057-96-009834.hdr.sgml : 19960517 ACCESSION NUMBER: 0000912057-96-009834 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTMISS GOLD INC CENTRAL INDEX KEY: 0000824590 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 640748908 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16484 FILM NUMBER: 96565932 BUSINESS ADDRESS: STREET 1: 6025 SOUTH QUEBEC STREET STE 310 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3037719000 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 FIRSTMISS GOLD INC. (Exact name of registrant as specified in its charter) NEVADA 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 (Zip Code) executive offices) Registrant's telephone number, including area code: (303) 771-9000 Securities registered pursuant to Section 12(g) of the Act: 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_____ Class Outstanding at May 9, 1996 ----- -------------------------- Common Stock, $0.01 Par Value.............. 25,704,600 ___________ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 1 ITEM 1. FINANCIAL STATEMENTS FIRSTMISS GOLD INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS) ASSETS
MARCH 31, DECEMBER 31, 1996 1995 --------- ------------ Current assets: Cash and cash equivalents. . . . . . . . . . . . . . $103,884 $114,633 Trade accounts receivable. . . . . . . . . . . . . . 3,256 3,812 Inventories: Ore and ore in process . . . . . . . . . . . . . . 2,218 2,088 Materials and supplies . . . . . . . . . . . . . . 8,245 7,662 -------- -------- Total inventories. . . . . . . . . . . . . . . . 10,463 9,750 Prepaid expenses and other current assets. . . . . . . 1,224 1,408 Deferred hedging gains, net. . . . . . . . . . . . . . 568 1,046 -------- -------- Total current assets . . . . . . . . . . . . . . 119,395 130,649 Property, plant and equipment, net . . . . . . . . . . 86,941 79,844 -------- -------- Total assets . . . . . . . . . . . . . . . . . . $206,336 $210,493 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . $2,736 $4,711 Payable to First Mississippi . . . . . . . . . . . . . 837 242 Current portion of capital lease obligation. . . . . . 856 844 Other accrued expenses . . . . . . . . . . . . . . . . 262 702 -------- -------- Total current liabilities. . . . . . . . . . . . . . . 4,691 6,499 Long term debt . . . . . . . . . . . . . . . . . . . . 23,814 23,783 Capital lease obligations, less current installments . 4,236 4,387 Accrued reclamation costs. . . . . . . . . . . . . . . 3,003 2,949 Deferred income tax liability. . . . . . . . . . . . . 7,741 8,611 -------- -------- Total liabilities. . . . . . . . . . . . . . . . 43,485 46,229 -------- -------- Stockholders' equity: Common stock . . . . . . . . . . . . . . . . . . . . 257 257 Contributed and paid-in capital. . . . . . . . . . . 172,036 171,722 Retained earnings (accumulated deficit). . . . . . . (9,442) (7,708) Unearned compensation. . . . . . . . . . . . . . . . - (7) -------- -------- Total stockholders' equity . . . . . . . . . . . 162,851 164,264 -------- -------- Total liabilities and stockholders' equity . . . $206,336 $210,493 -------- -------- -------- --------
2 FIRSTMISS GOLD INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED ------------------------- MARCH 31, MARCH 31, 1996 1995 --------- --------- Net sales. . . . . . . . . . . . . . . . . . . . . . . $ 14,655 $ 15,786 Cost of sales. . . . . . . . . . . . . . . . . . . . . 16,578 14,149 -------- -------- Gross margin . . . . . . . . . . . . . . . . . . . (1,923) 1,637 Exploration expenses . . . . . . . . . . . . . . . . . 852 797 Selling, general and administrative expenses . . . . . 1,218 494 -------- -------- Earnings (loss) from operations. . . . . . . . . . (3,993) 346 Interest expense, net of capitalized interest. . . . . (233) (384) Interest and other income (expense). . . . . . . . . . 1,623 (1) -------- -------- Loss before income taxes . . . . . . . . . . . . . (2,603) (39) Income tax expense (benefit) . . . . . . . . . . . . . (870) 415 -------- -------- Net loss . . . . . . . . . . . . . . . . . . . . . $ (1,733) $ (454) -------- -------- -------- -------- Loss per common share: $ (0.07) $ (0.03) -------- -------- -------- --------
See accompanying notes to consolidated financial statements. 3 FIRSTMISS GOLD INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS OF DOLLARS)
THREE MONTHS ENDED ------------------------- MARCH 31, MARCH 31, 1996 1995 ---------- --------- Cash flows from operating activities: Net loss . . . . . . . . . . . . . . . . . . . . . . $ (1,733) $ (454) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and depletion . . . . . . . . . . . . 1,720 2,799 Deferred income taxes. . . . . . . . . . . . . . . (843) 59 Loss on disposal or write-down of assets . . . . . -- 23 Deferred compensation. . . . . . . . . . . . . . . 7 -- Deferred hedging gain, net . . . . . . . . . . . . 478 -- Net change in operating assets and liabilities, net of noncash activity: Trade accounts receivable. . . . . . . . . . . . 557 417 Inventories. . . . . . . . . . . . . . . . . . . (713) (235) Prepaid expenses and other current assets. . . . 184 238 Accounts payable . . . . . . . . . . . . . . . . (1,976) (76) Payable to First Mississippi . . . . . . . . . . 595 398 Income taxes payable to First Mississippi. . . . - 357 Other accrued expenses . . . . . . . . . . . . . (477) 249 Accrued reclamation costs. . . . . . . . . . . . 52 30 --------- -------- Cash provided by (used in) operating activities. . . . . . . . . . . . . . . . . . (2,149) 3,805 --------- -------- Cash flows from investing activities: Capital expenditures . . . . . . . . . . . . . . . . (8,812) (5,219) Proceeds from sale of property . . . . . . . . . . . -- 202 Deferred stripping costs . . . . . . . . . . . . . . -- (98) --------- -------- Cash used by investing activities. . . . . . . (8,812) (5,115) --------- -------- Cash flows from financing activities: Proceeds from issuance of common stock . . . . . . . 320 66 Proceeds from long-term debt . . . . . . . . . . . . 31 2,250 Principal payments under capital lease obligation. . (139) -- --------- -------- Cash provided by financing activities. . . . . 212 2,316 --------- -------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . (10,749) 1,006 Cash and cash equivalents at beginning of the quarter. 114,633 635 --------- -------- Cash and cash equivalents at March 31. . . . . . . . . $ 103,884 $ 1,641
4 --------- -------- --------- -------- Supplemental disclosures: Interest paid during the quarter, net of amounts capitalized . . . . . . . . . . . . . . . . . . . . . $0 $48 --------- -------- --------- -------- Income taxes paid. . . . . . . . . . . . . . . . . . . $0 $0 --------- -------- --------- --------
Supplemental noncash financing activities: In the three months ended March 31, 1996 and 1995, $0 and $1,330,000 respectively, of interest payable to First Mississippi was transferred to the principal balance of notes payable to First Mississippi. 5 FIRSTMISS GOLD INC. 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 Annual Report of the Company on Form 10-K for the six month period ended December 31, 1995. 6 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 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." THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995 RESULTS OF OPERATIONS. Results for the three-month period ended March 31, 1996, were a net loss of $1.7 million ($0.07 per share) compared to a net loss of $0.5 million ($0.03 per share) in the three-month period ended March 31, 1995. Continued use of lower grade stockpile ores to meet mill feed requirements, along with increased costs associated with the conversion from open-pit mining to underground mining, were responsible for the less favorable results as compared to a year ago. Low grade stockpile ores will be required until the Turquoise Ridge mine comes on line which is expected no earlier than the end of 1997. THREE MONTHS ENDED ----------------------- 03/31/96 03/31/95 -------- -------- OUNCES SOLD 37,217 40,469 AVERAGE REALIZED PRICE $/OZ. 394 390 AVERAGE MARKET PRICE $/OZ. 403 379 OUNCES PRODUCED: MILL 36,179 36,176 HEAP LEACH 1,038 4,293 CASH COST $/OZ. MILL 405 297 HEAP LEACH 127 349 COMBINED 398 303 TOTAL COST $/OZ. MILL 454 349 HEAP LEACH 151 357 COMBINED 445 350 SALES. Sales were $14.7 million in the quarter ended March 31, 1996 compared to $15.8 million in the same three month period ended in 1995. Lower gold output during the current quarter of 37,217 ounces versus 40,496 ounces in the same quarter of the prior year was responsible for the lower sales. Gold output fell in response to lower Heap Leach output which dropped to 1,038 ounces in the quarter from 7 4,293 in the same period last year reflecting the fact that no new ores have been added to the heap piles since July 1995 when known oxide ores were exhausted. Heap Leach output is scheduled to increase in the second quarter as ore from the new Valmy Hill oxide pit is stacked and leached beginning in the second quarter of the current year. The Valmy Hill oxide ore body contains approximately 834,000 tons of ore grading 0.020 ounces per ton. Mining on the Valmy Hill ore body is expected to be completed by late 1996. Market gold prices averaged $403 per ounce in the quarter ended March 31, 1996, up from $379 per ounce in the same period a year earlier. While the Company received full cash benefit of the gold price improvement during the quarter, decreases in the carrying value of the hedge positions closed during the quarter and upon which non-cash hedge gains had been recognized in earlier periods, reduced the realized price to $394 per ounce from $390 per ounce in the same quarter a year ago. At March 31, 1995, the Company had spot deferred contracts on 138,100 gold ounces of which 88,100 are scheduled to be delivered during 1996 at prices ranging between $396 and $423 per ounce and 60,000 ounces scheduled for delivery in 1997 at prices currently ranging between $390 and $394 per ounce. The Company intends to continue to defer delivery into future periods when the spot market price is higher than the spot deferred contract price. Based on the market price of gold at March 31, 1996, the unrealized gain on the contracts is $0.7 million. COST OF SALES. Cost of sales during the quarter ended March 31, 1996 were $16.6 million compared to $14.1 million in the same quarter a year earlier. Higher sulfide mining and milling costs, both the result of a greater proportion of underground ore milled in the current period versus a year ago, were responsible for the increase. Lower Heap Leach operating costs in the current period partially offset the increase in sulfide mining and milling costs. Heap leach costs were down from a year ago reflecting the fact that there were no oxide ore mining costs incurred in the current quarter. Cash costs per ounce for the three months ended March 31 were $398 and $303 in 1996 and 1995, respectively. Total cost per ounce for the three months was $445 versus $350 in the corresponding period of the prior year. The increase from prior year reflects higher cost of sales in the current period as well as the lower gold output. The Company is seeking improvements in costs per ounce in 1996 at the Getchell Underground mine by accessing higher grade ore zones, and increasing underground output. The Company is also seeking to reduce costs by constructing a second portal into the Getchell Underground mine and from other improvements in underground support facilities. No assurance can be given that the Company's effort to reduce unit costs per ounce will be successful. EXPLORATION. Exploration expenses for the quarter ended March 31, 1996 were approximately the same as in the same period in the prior year. Capitalized drilling expenditures are expected to increase during the remainder of the year (see Planned Activities section below). SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs were higher than the same quarter a year ago due to increased corporate activity following the spin off from First Mississippi in October 1995 and subsequent equity offering. As a result of these transactions various corporate administrative costs, including shareholder communications, investor relations, professional services, salaries, travel and insurance costs have risen from a year ago. 8 INTEREST AND OTHER INCOME. The increase in Interest and Other Income reflects higher interest earnings on higher cash balances following the equity offering in November (see "Liquidity and Capital Resources" below). INTEREST EXPENSE. Interest expense was lower than in the same period of the prior year due to lower balances on the First Mississippi notes and increased amounts of interest capitalization in the current period on the Company's current development projects. 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 March 31, 1996 the Company's cash and cash equivalents totaled $103.9 million. It is anticipated that this cash, along with cash generated by operations, will be sufficient to complete the construction of the Turquoise Ridge mine and to meet other capital and operating needs over the next two years. During the three month period ended March 31, 1996, the Company's cash outlays included $8.8 million in capital expenditures and $2.1 million to fund operating activities. Of the capital expenditures, the Company spent $4.8 million on the development of the Turquoise Ridge ore body, $2.5 million for equipment and underground development costs at the Getchell underground mine and $1.5 million for other improvements, primarily at the mill facility. Cash used by operations was principally related to reductions in accounts payable. PLANNED ACTIVITIES The major focus of the Company during the next 18 months will be shaft sinking and construction of surface support facilities for the Turquoise Ridge mine. Initial production of development ore at Turquoise Ridge is expected no earlier than the end of 1997. The Company presently plans to focus 1996 exploration drilling on the evaluation of numerous targets on the Getchell Property located outside of the known reserve areas. Additional drilling is planned to investigate potential extensions of the Getchell Underground reserves and to evaluate the structure and mineralization potential of areas surrounding the Turquoise Ridge ore body. During the quarter ended March 31, 1996, drilling in an area 1,000 feet due south of the Turquoise Ridge ore body encountered a previously unknown mineralized zone. Drilling to date suggests gold mineralization exists at a depth between 1,200 and 2,500 feet below the surface. The Company intends to expand its 1996 exploration drilling program by approximately $2.0 million to allow additional drilling in this new zone and other areas surrounding the known Turquoise Ridge ore body. This new program is intended to provide a better understanding of the overall structure and mineralization around the Turquoise Ridge ore body, as well as provide information for short and medium-term mine planning purposes. The Company presently plans to continue processing sulfide ores from the Getchell Underground ore body, supplemented by stockpile ores as needed to keep the mill operating at full capacity. The Company is seeking to improve Getchell Underground grades and output, and the Company's mining rate goal is to achieve an output of 1,500 tons per day by the end of 1996. There can be no assurance that any of the foregoing plans or goals will be achieved. 9 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 the 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 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. The volatility of gold prices is illustrated in the following table of the annual high, low and average London P.M. Fix: CALENDAR YEAR HIGH LOW AVERAGE - ------------- ---- --- ------- PRICE PER OUNCE 1984 . . . . . . . . . . . $406 $308 $360 1985 . . . . . . . . . . . 341 294 317 1986 . . . . . . . . . . . 438 326 368 1987 . . . . . . . . . . . 500 390 446 1988 . . . . . . . . . . . 495 395 437 1989 . . . . . . . . . . . 416 356 381 1990 . . . . . . . . . . . 474 346 383 1991 . . . . . . . . . . . 403 344 362 1992 . . . . . . . . . . . 374 330 344 1993 . . . . . . . . . . . 406 326 360 1994 . . . . . . . . . . . 396 370 384 1995 . . . . . . . . . . . 396 370 384 The London P.M. Fix on May 8, 1996, was $394.80 per ounce. LOSSES The Company reported net losses of $1.7 million for the quarter ended March 31, 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 is replaced by higher grade ore from new sources, which new sources 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. RESERVES 10 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 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: 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 affect on the Company. The Turquoise Ridge mine is now transitioning from the pre-feasibility study level of project development to the construction phase of development. The expenditure 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, should trial mining be 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. 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 stoping 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. 11 DILUTION. The tonnage and grade of the mill feed material was 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. 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. 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 form the costs and returns initially estimated. 12 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. EXPLORATION Mineral exploration, particularly for gold, is highly speculative in nature, involves many risks and frequently is unsuccessful. The Company 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 prices. 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 comparable periods. The contango rate was approximately 4.3% at March 31, 1996. At the scheduled future delivery date, the seller may, at the option of the counter party, 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 is 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 is 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 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 the quarter ended March 31, 1996 the Company deferred delivery on contracts representing 200,000 ounces. At March 31, 1995, the Company had spot deferred contracts on 138,100 gold ounces of which 88,100 are scheduled to be delivered during 1996 at prices ranging between $396 and $423 per ounce and 60,000 ounces scheduled for delivery in 1997 at prices currently ranging between $390 and $394 per ounce. The Company intends to continue to defer delivery into future periods when the spot market price is higher than the spot deferred contract price. Based on the market price of gold at March 31, 1996, the unrealized gain on the contracts is $0.7 million. The Company's accounting treatment for spot deferred 13 contracts is outlined in Notes 1 and 7 to the Consolidated Financial Statements as found in the Company's Form 10-K for the period ended December 31, 1995. Risk of loss with 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 inability to deliver gold. However, nonperformance by any party to the financial instruments in not anticipated. The Company is required by the counter party to maintain a $12 million line of credit which is guaranteed by First Mississippi. Should the cumulative liquidation cost of the Company's spot deferred positions exceed the cumulative value of such positions by an amount in excess of the margin account, the Company could be subject to a margin call. The liquidation cost is what the Company would have to pay on the liquidation date to purchase fixed forward delivery contracts to meet its spot deferred deliveries. The cost of fixed forward delivery contracts is based upon the spot price on the liquidation date plus contango through the deliver date. 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. The Company has entered into Termination Agreements with its Chief Executive Officer, Chief Financial Officer and Chief Operating Officer which provide for certain payments upon termination or resignation resulting from a change of control (as defined in such agreements). 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 imposed upon unpatented mining claims located on federal lands. In October 1994, a one-year moratorium on processing of new patent applications was approved. In addition, a variety of legislation is now pending 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 14 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 permitting, including the approval of reclamation plans, the Company must comply with standards, laws and regulations which may entail greater or lesser costs and delays depending on the nature of the activity to be permitted 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 and regulations involving the protection and remediation of the environment are constantly changing and are generally becoming more restrictive. 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. 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 15 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. However, 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. 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS The following exhibits are filed herewith and are referred to and incorporated herein by reference to such filings. 27. -- Financial Data Schedule. REPORTS ON FORM 8-K During the three months ended March 31, 1996 there were no reports filed on Form 8-K. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ G. W. THOMPSON - -------------------------- President, Chief Executive Officer G. W. Thompson and Director May 14, 1996 /s/ DONALD S. ROBSON - -------------------------- Vice President and Chief Financial Donald S. Robson Officer (Principal Financial Officer) May 14, 1996 18 EX-27 2 EXHIBIT 27 (FDS)
5 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 103,884 0 3,256 0 10,463 119,395 161,901 74,960 206,336 4,691 43 0 0 257 162,594 206,336 14,996 14,655 16,578 16,578 447 0 233 (2,603) (870) (1,733) 0 0 0 (1,733) (0.07) (0.07)
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