-----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, EtoCvJEaM+hBSLk4Kq/T9kew1aa5iwvedfKf/AV14DXEE+Jv0gjki6HW39OU+KqI tPQKc3yiMqOHXU5w24Hixw== 0000950134-95-002724.txt : 19951109 0000950134-95-002724.hdr.sgml : 19951109 ACCESSION NUMBER: 0000950134-95-002724 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951108 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: 95588173 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 FOR QUARTER ENDED SEPTEMBER 30, 1995 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES 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 For the Quarter Ended September 30, 1995 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 (IRS Employer ID No.) incorporation or organization) 5460 SOUTH QUEBEC ST., SUITE 240, 80111 ENGLEWOOD, COLORADO (Zip Code) (Address of principal executive offices) Registrant's telephone number, including Area Code: 303/771-9000 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 OCTOBER 31, 1995 - ------------------------------ ------------------------------- Common Stock, $.01 Par Value.................... 18,182,600
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FIRSTMISS GOLD INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS) ASSETS
SEPTEMBER 30 JUNE 30 1995 1995 ------------- -------- Current assets: Cash and cash equivalents.......................................... $ -- $ 595 Trade accounts receivable.......................................... 2,158 1,709 Inventories: Ore and in process.............................................. 2,329 2,459 Materials and supplies.......................................... 7,723 7,095 ------- -------- Total inventories.......................................... 10,052 9,554 ------- -------- Prepaid expenses and other current assets.......................... 722 728 Deferred hedging gains............................................. 748 -- Deferred income taxes due from First Mississippi................... 2,581 2,581 ------- -------- Total current assets....................................... 16,261 15,167 ------- -------- Property, plant and equipment, net................................... 69,179 67,689 ------- -------- Deferred income taxes due from First Mississippi..................... 2,264 2,264 ------- -------- Total assets............................................... $87,704 $ 85,120 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................... $ 3,743 $ 6,595 Payable to First Mississippi....................................... 2,945 1,943 Income taxes payable to First Mississippi.......................... -- 402 Other accrued expenses............................................. 696 505 ------- -------- Total current liabilities.................................. 7,384 9,445 ------- -------- Notes payable to First Mississippi................................... 46,750 40,900 Other long-term liabilities.......................................... 3,061 3,031 Stockholders' equity: Common stock....................................................... 182 182 Contributed and paid-in capital.................................... 34,285 34,285 Accumulated deficit................................................ (3,916) (2,681) Unearned compensation.............................................. (42) (42) ------- -------- Total stockholders' equity................................. 30,509 31,744 ------- -------- Total liabilities and stockholders' equity................. $87,704 $ 85,120 ======= ========
The accompanying notes are an integral part of these financial statements. 2 3 FIRSTMISS GOLD INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30 ------------------- 1995 1994 ------- ------- Net sales................................................................ $17,605 $21,509 Cost of sales............................................................ 16,939 17,893 ------- ------- Gross profit................................................... 666 3,616 Exploration expenses..................................................... 366 1,712 Selling, general and administrative expenses............................. 1,078 658 ------- ------- Earnings (loss) from operations................................ (778) 1,246 Interest expense, net.................................................... (961) (416) Other income............................................................. 80 52 ------- ------- Earnings (loss) before income taxes............................ (1,659) 882 Income tax expense (benefit) payable to (due from) First Mississippi..... (425) 375 ------- ------- Net earnings (loss)............................................ $(1,234) $ 507 ======= ======= Net earnings (loss) per common share..................................... $ (0.07) $ 0.03 ======= ======= Average shares and equivalents outstanding............................... 18,183 18,146 ======= =======
The accompanying notes are an integral part of these financial statements. 3 4 FIRSTMISS GOLD INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30 ------------------- 1995 1994 ------- ------- Cash flows from operating activities: Net earnings (loss).................................................... $(1,234) $ 507 Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Depreciation and depletion and amortization......................... 1,939 4,958 Loss (gain) on sale of property, plant and equipment................ (1) 1 Net change in operating assets and liabilities, net of noncash activities: Trade accounts receivable......................................... (449) 422 Inventories....................................................... (498) (286) Deferred income taxes............................................. -- 518 Prepaid expenses and other current assets......................... 6 (644) Accounts payable.................................................. (2,852) 790 Payable to First Mississippi...................................... 1,002 796 Other accrued expenses............................................ 191 (197) Income taxes payable to First Mississippi......................... (402) (143) Deferred hedge gains.............................................. (748) -- Other long-term liabilities....................................... 30 29 ------- ------- Cash provided (used) by operating activities................... (3,016) 6,751 ------- ------- Cash flows from investing activities: Capital expenditures................................................... (3,429) (4,588) Deferred stripping costs............................................... -- (38) Proceeds from sale of property, plant and equipment.................... -- 1 ------- ------- Cash used by investing activities.............................. (3,429) (4,625) ------- ------- Cash flows from financing activities: Proceeds from notes payable to First Mississippi....................... 5,850 -- Repayment of notes payable to First Mississippi........................ -- (1,469) ------- ------- Cash provided (used) by financing activities................... 5,850 (1,469) ------- ------- Net increase (decrease) in cash and cash equivalents........... (595) 657 Cash and cash equivalents at beginning of period......................... 595 1,979 ------- ------- Cash and cash equivalents at end of period............................... $ -- $ 2,636 ======= ======= Supplemental disclosures: Interest paid during the quarter, net of amounts capitalized........... $ 129 $ 47 ======= ======= Income taxes paid to First Mississippi................................. $ 100 $ -- ======= =======
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES: For the three months ended September 30, 1995 and 1994, nil and $322, respectively, of interest expense payable to First Mississippi was added to the principal balance of notes payable to First Mississippi. The accompanying notes are an integral part of these financial statements. 4 5 FIRSTMISS GOLD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 fiscal year ended June 30, 1995. NOTE 2 -- FORWARD SALES AGREEMENTS At September 30, 1995, the Company had commitments for 127,100 ounces under spot deferred sales contracts for the delivery of gold as follows:
PRICE RANGE DELIVERY DATE PER OUNCE OUNCES - ------------------ ------------ ------ 10/01/95-12/31/95 $391 - $397 59,000 01/01/96-03/31/96 $403 - $408 46,000 04/01/96-05/31/96 $409 - $421 22,100
Based on the market price of gold on September 30, 1995, the unrealized gain on these contracts approximates $1.7 million. During the quarter, the Company recognized hedging gains of $0.8 million on spot deferred contracts covering 33,000 ounces. These gains have been included as a component of net sales. A deferred asset of $0.7 million has been established on contracts for which delivery has been deferred into future periods. 5 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION In February 1995, the Company hired Mineral Resources Development, Inc. ("MRDI") to prepare a pre-feasibility study (the "MRDI Study") with respect to a geological resource along the Turquoise Ridge Fault. In September 1995, MRDI issued an executive summary of its pre-feasibility study. The pre-feasibility study concludes that the Turquoise Ridge area contains probable reserves of 1.254 million contained ounces of gold. On October 20, 1995, the Company's former parent, First Mississippi Corporation ("First Mississippi"), distributed its 81% interest in the Company to First Mississippi shareholders. In connection with this spin-off, the Company entered into several agreements with First Mississippi including a loan agreement covering the Company's $52.5 million of outstanding borrowings from First Mississippi at October 20, 1995, an agreement to undertake a public offering of the Company's common stock with gross proceeds of at least $50 million prior to April 28, 1996, and an agreement to settle certain tax sharing arrangements. The Company also entered into a $20 million credit facility with The Toronto-Dominion Bank. See "Liquidity and Capital Resources." RESULTS OF OPERATIONS Three months ended September 30, 1995, compared to three months ended September 30, 1994. Overview The Company incurred a loss of $1.2 million ($0.07 per share) for the three months ended September 30, 1995 compared to earnings of $0.5 million ($0.03 per share) for the three months ended September 30, 1994. Lower sales revenues, which resulted from reduced grades at the mill and lower output from the heap leach operation, were primarily responsible for the lower earnings. The following table highlights certain sales and production information:
THREE MONTHS ENDED ------------------- 9/30/95 9/30/94 ------- ------- Ounces sold....................................................... 43,845 55,724 * Average Realized Price per Ounce.................................. $ 402 $ 386 Average Market Price per Ounce.................................... $ 383 $ 386 Ounces Produced: Mill......................................................... 42,262 50,402 * Heap Leach................................................... 1,583 5,322 Cash Cost per Ounce: Mill......................................................... $ 348 $ 275 Heap Leach................................................... $ 137 $ 241 Combined..................................................... $ 341 $ 272 Total Cost per Ounce: Mill......................................................... $ 395 $ 328 Heap Leach................................................... $ 149 $ 254 Combined..................................................... $ 386 $ 321
- --------------- * Excludes 1,120 development ounces from the Getchell Main Underground Mine. Net Sales Net sales of $17.6 million for the three months ended September 30, 1995 (which includes $0.8 million of hedging gains), decreased from $21.5 million for the three months ended September 30, 1994 as sales volume fell to 43,845 ounces from 55,724 ounces. Mill feed grades for the three months ended September 30, 1995 dropped to 0.165 ounces per ton from 0.214 ounces per ton in the same period in the prior year, primarily due to increased milling of lower grade stockpile ores to replace Main Pit ores. Underground ore grades were 6 7 lower than expected due to mining in lower grade stope areas while the higher grade stopes await backfill to continue mining. The production backfill shortfalls are due primarily to a backfill plant which does not provide the needed flexibility to mine sequentially and efficiently in higher grade stope production areas. A new 2,000 ton per day backfill plant is under construction and is expected to be operational in the first quarter of calendar year 1996. Realized gold prices which averaged $402 per ounce (which included $18 per ounce of hedging gains) were significantly higher than the $386 per ounce realized in the same period in the prior year. There were no material hedging gains or losses in the three months ended September 30, 1994. Heap leach gold output was significantly lower during the three months ended September 30, 1995 at 1,583 ounces compared to 5,322 ounces in the three months ended September 30, 1994. No ore has been added to the leach pads since June 1995 when the Turquoise Ridge Oxide Pit came to the end of its scheduled productive life. Leaching of existing pads will continue as long as residual gold can be economically extracted. Leach pad gold output will be substantially lower than in the past and will likely decrease over time. As of September 30, 1995, 127,100 ounces of gold had been sold for delivery over the next eight months using spot deferred contracts at prices ranging between $391 and $421 per ounce. Cost of Sales Total cost of sales for the three months ended September 30, 1995 were $16.9 million, down $1 million from the same period in the prior year, primarily due to lower costs at the heap leach operation following cessation of oxide mining. Depreciation expense for the mill decreased in the three months ended September 30, 1995 by $0.7 million due to an increase in millable reserves at Turquoise Ridge based on the MRDI Study. This decrease was off-set by higher operating costs. As a result, cost of sales at the mill was unchanged from the same period in the prior year. Significantly lower gold output due to lower grade ore during the three months ended September 30, 1995 yielded a cash cost of $341 per ounce, versus $272 per ounce for the same period last year, but cash cost per ton milled was essentially unchanged. Mill output averaged 3,194 tons per day for the quarter, up from 3,076 tons per day in the three months ended September 30, 1994. Exploration Expenses Exploration expenses in the three months ended September 30, 1995 of $0.4 million were down from $1.7 million in the three months ended September 30, 1994. Commencing October 1, 1994, the Company determined that Turquoise Ridge was a development project rather than an exploration site and capitalized subsequent expenditures at Turquoise Ridge, including $0.5 million of drilling costs in the quarter ended September 30, 1995. The remainder of the decrease in exploration expenses was due to the Company's decision temporarily to scale back drilling activity pending review of exploration targets. Selling, General and Administrative Expenses Selling, General & Administrative expenses during the three months ended September 30, 1995 were up $0.4 million from the same period in the prior year due to corporate office relocation costs, increased personnel, and legal and accounting costs related to the spin-off and financing activities. Interest Expense, Net Interest expense was up $0.5 million in the three months ended September 30, 1995 from the same period of the prior year due to increases in the principal balances on the First Mississippi note needed to cover shortfalls in operating cash flow and capital spending. See "Liquidity and Capital Resources." LIQUIDITY AND CAPITAL RESOURCES Cash used by operating activities was $3.0 million during the three months ended September 30, 1995 compared to cash flows provided by operations of $6.8 million in the same period of the prior year. This shift 7 8 was primarily due to lower sales revenues, reduction of amounts owed vendors and use of cash to increase supplies and materials inventories required to support the increase in underground mining operations. Capital investing activities required $3.4 million of cash during the three months ended September 30, 1995. These investment activities were primarily related to the costs of the MRDI Study and associated drilling at Turquoise Ridge. During the three months ended September 30, 1995, $5.9 million of cash was borrowed from First Mississippi to fund operations and investment activities, bringing the total note due to First Mississippi to $46.8 million. In connection with the spin-off by First Mississippi of its shares of the Company on October 20, 1995, all loan amounts due First Mississippi were consolidated into a new loan agreement covering the Company's $52.5 million of borrowings from First Mississippi at that date. Amounts borrowed under the new loan agreement are payable in September 2000. Interest accrues at a LIBOR-based rate and is payable based on the LIBOR period selected by the Company (one month, three month, six month or one year). The loan agreement permits prepayments at any time at the Company's option and requires $15.0 million in principal of the loan to be repaid following the consummation of any public offering of the Company's securities after the date of the loan agreement as well as full prepayment upon a change in control of the Company. The Company also signed a loan agreement with The Toronto-Dominion Bank for an interim credit facility of up to $20 million to provide financing for the development of the Company's mining properties and for general working capital purposes. Borrowings under the credit facility bear interest at 3% over the LIBOR rate for each one month period during which advances are outstanding. In addition, the Company will pay Toronto Dominion a drawdown fee of 1% of the amount of each advance of funds to the Company under the credit facility . All advances of funds under the credit facility must be repaid by the Company on October 31, 1996. The Company is obligated to prepay amounts advanced under the credit facility from the net proceeds of any financing or issuance of securities of the Company. The Company has also granted Toronto Dominion an equity participation right which provides that the Company will pay Toronto Dominion, either in cash or shares of common stock, an amount not to exceed (i) $1,000,000 if all advances under the credit facility are paid in full within six months of the date of the facility and (ii) $1,500,000 if such advances are paid in full after such six month period but before the Due Date (as defined therein). At any time prior to November 30, 1995, the Company may satisfy the participation right in full by paying $500,000 (in cash or securities of equivalent value). On October 23, 1995 the Company drew $5.5 million against this credit facility. First Mississippi has agreed to pay the Company approximately $14 million in settlement of amounts owed under terms of a Tax Sharing Agreement in force while the Company was a subsidiary of First Mississippi. The amounts owed by First Mississippi represent the tax benefit received by the affiliated group of which First Mississippi is the common parent corporation from its use of the Company's losses, deductions, credits and allowances in pre-spin off periods. The settlement provides that these funds will first be provided to the Company as a standby line of credit available to the Company in the event the Toronto Dominion credit facility is fully drawn. At such time as the Company secures permanent capital, the settlement amount will be credited against the debt owed by the Company to First Mississippi. The Company has accounted for this settlement by reclassifying certain deferred tax assets, totaling approximately $14 million, to a receivable from First Mississippi, and reflecting approximately $9 million as deferred tax liabilities. Capital expenditures for the 12 months ending June 30, 1996 are estimated to be $22.7 million, primarily due to the anticipated development of Turquoise Ridge. The MRDI Study estimates that the capital required to bring the initial phase of the Turquoise Ridge underground mine into commercial production will be approximately $85 million. Operating cash flow is not anticipated to be sufficient to meet these capital requirements. In order to undertake planned development activities, the Company will need additional financing. Under terms of the Tax Ruling Agreement entered into with First Mississippi in connection with the spin-off, the Company has agreed to undertake a public offering of common stock with gross proceeds of at least $50 million prior to April 28, 1996. There can be no assurance that the Company will be able to obtain financing on satisfactory terms, if at all. 8 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 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:
PRICE PER OUNCE --------------------------- CALENDAR YEAR HIGH LOW AVERAGE ------------- ----- ----- ------- 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 (through November 7, 1995)........................ 396 372 384
The London P.M. Fix on November 7, 1995, was $384.80 per ounce. LOSSES The Company reported a net loss of $1.2 million for the quarter ended September 30, 1995. The Company also reported a net loss of $18.4 million for the fiscal year ended June 30, 1995. The Company expects to continue to experience losses until its low grade stockpiled ore 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 any such replacement higher grade ore will be obtained by the Company. RESERVES The Company's ore reserves are, in large part, estimates made by the Company and confirmed by independent mining consultants. 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 9 10 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 PROJECT RISKS The Turquoise Ridge Project involves numerous risks. These include the following: There can be no assurances that the probable reserves set forth in the MRDI pre-feasibility study will actually be able to be mined and milled on an economical basis, if at all. The MRDI study is based upon many assumptions, any, 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 is at the pre-feasibility study level of project 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 this pre-feasibility study with 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 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. MINING 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 overcut 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 10 11 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 country rocks 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, estimates 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. DEPENDENCE ON A SINGLE MINE All of the Company's revenues are currently derived from its mining and milling operations at the Getchell Property. If the operations at the Getchell Main 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 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. 11 12 UNCERTAINTY OF FUTURE FINANCING The Company has historically been largely dependent upon First Mississippi for the continued financing of its operations. The Company's operating cash flow is not anticipated to be sufficient to meet the Company's capital requirements. In order to undertake planned development activities, the Company will need additional financing. There can be no assurance that the Company's cash flow and available financings will be sufficient to cover the Company's capital requirements, including the estimated $85 million needed to bring the initial phase of the Turquoise Ridge underground mine into commercial production of 2,000 tons of ore per day. HEDGING ACTIVITIES The Company currently uses spot deferred contracts in its hedging program to protect earnings and cash flows from the impact of gold price fluctuations. 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 counterparty whereby the seller commits to deliver a set quantity of gold, at an established date in the future and at agreed to prices. The established price is equal to the spot price for gold plus "contango." Contango is equal to the difference between the prevailing market rate for cash borrowings less the gold lease rate, for comparable periods, and represents compensation to the seller for holding gold until a future date. Contango rates ranged from approximately 4 1/2% to 6 1/2% during fiscal 1995. At the scheduled future delivery date, the seller may, at the option of the counterparty, deliver into the contract or defer the delivery to a future date. This option allows the seller to maximize the price realized by selling at the spot market price if such price at that time were to be higher than the forward contract price. Each time a seller defers delivery, the forward sales price is increased by the then prevailing contango for the next period. Generally, the counterparty 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 fiscal 1995 and 1994, the Company deferred delivery on contracts representing 70,100 and 244,000 ounces, respectively. At September 30, 1995, the Company had spot deferred contracts on 127,100 gold ounces which are scheduled to be delivered through May 1996 at prices ranging from $391 to $421 per gold 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 September 30, 1995, the unrealized gain on the contracts was approximately $1.7 million. The Company's accounting treatment for spot deferred contracts is outlined in Notes 1 and 6 to the Consolidated Financial Statements to the Company's Form 10-K for the fiscal year ended June 30, 1995. Risk of loss with these spot deferred contracts arises from the possible inability of a counterparty to honor contracts and from changes in the Company's anticipated production of gold. However, nonperformance by any party to the financial instruments in not anticipated. The Company is required by the counterparty to maintain a $12 million margin account 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 12 13 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 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 13 14 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 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 RISKS 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. 14 15 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 -- Financial Data Schedule (b) Reports on Form 8-K Registrant filed a current report on Form 8-K, dated September 24, 1995 as amended by Form 8-K/A and Form 8-K/A-2. Reported were the results of the pre-feasibility study on the Turquoise Ridge project, including establishment of gold reserves, and an announcement that First Mississippi's board of directors approved the spin-off of First Mississippi's stock in the Company to First Mississippi's shareholders on October 20, 1995. 15 16 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. FIRSTMISS GOLD INC. 11/7/95 /s/ G. W. THOMPSON - ----------------------------------- ------------------------------------------ Date G. W. Thompson President and Chief Executive Officer 11/7/95 /s/ DONALD S. ROBSON - ----------------------------------- ------------------------------------------ Date Donald S. Robson Vice President and Chief Financial Officer 16 17 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE - --------- ------------------------------------------------------- ------------ 27 -- Financial Data Schedule
EX-27 2 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUN-30-1995 JUL-1-1995 SEP-30-1995 0 0 2,158 0 10,052 16,261 140,279 71,100 87,704 7,384 0 182 0 0 30,327 87,704 17,605 17,605 16,939 16,939 1,444 0 961 (1,659) (425) (1,234) 0 0 0 (1,234) (0.07) (0.07)
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