UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-8736
HOMESTAKE MINING COMPANY
(Exact name of registrant as specified in its charter)
Delaware 94-2934609
(State of Incorporation) (I.R.S. Employer
Identification No.)
650 California Street
San Francisco, California 94108-2788
(Address of principal executive office) (Zip Code)
(415) 981-8150 http://www.homestake.com
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $1.00 par value New York Stock Exchange, Inc.
Rights to Purchase Series A Participating
Cumulative Preferred Stock New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
5 1/2% Convertible Subordinated Notes Due June 23, 2000
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
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $2,273,000,000 as of March 11, 1997.
The number of shares of common stock outstanding as of March 11, 1997 was
146,672,425.
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
PART I
ITEM - 1 BUSINESS
INTRODUCTION
Homestake is a Delaware corporation organized in 1983 as the parent
holding company to a California corporation organized in 1877. In this report,
the terms "Homestake" and "Company" refer to Homestake Mining Company and its
subsidiaries.
Homestake is engaged in gold mining and related activities, including
exploration, extraction, processing, refining and reclamation. Gold bullion, the
Company's principal product, is produced in the United States, Canada,
Australia, and Chile. Ore and concentrates containing gold and silver from the
Eskay Creek and Snip mines in Canada are sold directly to smelters.
The results of the Company's operations are affected significantly by
the market price of gold and, to a lesser extent, silver. Gold prices are
influenced by numerous factors over which the Company has no control, including
expectations with respect to the rate of inflation, the relative strength of the
United States dollar and certain other currencies, interest rates, global or
regional political or economic crises, demand for gold for jewelry and
industrial products, and sales by holders and producers of gold in response to
these factors. The supply of gold consists of a combination of new mine
production and sales from existing stocks of bullion and fabricated gold held by
governments, public and private financial institutions, and individuals. (See
"Risks of Gold and Silver Price Fluctuations and Hedging Activities" on page
94).
The Company's general policy currently is to sell its production at
current prices and not enter into forward sales, derivatives or other hedging
arrangements which establish a price for the sale of its future gold production.
As a result, the Company's profitability is exposed to fluctuations in the
current price of gold in world markets. However, in certain circumstances, the
Company will enter into forward sales commitments for portions of its gold
production. This general policy is subject to review and could change (See
"Risks of Gold and Silver Price Fluctuations and Hedging Activities" on page
94).
In the fourth quarter of 1996, the Company sold for future delivery, at
an average price of $426 per ounce, 680,100 ounces of the gold it expects to
produce from the McLaughlin mine stockpiles through 2003. In 1994, the Company
sold for future delivery 183,200 ounces of gold it expected to produce at the
Nickel Plate mine during 1995 and 1996. During 1996 and 1995, contracts for
70,000 ounces and 113,200 ounces, respectively, were financially settled under
the Nickel Plate program. The purpose of both of these forward sales programs
was to help assure recovery of the Company's remaining investment in these
operations and to provide for estimated remaining unaccrued reclamation costs.
Homestake also owns a 16.7% co-tenancy interest in the Main Pass
299 offshore sulfur mine and oil deposit in the Gulf of Mexico.
Dollar amounts in this report are in U.S. dollars unless otherwise
indicated.
See note 23 to the "CONSOLIDATED FINANCIAL STATEMENTS" on page
80 for geographic and segment information.
2
See "FORWARD LOOKING STATEMENTS" on page 91 and "RISK FACTORS" on page
93 for a discussion of factors and assumptions on which forward looking
statements in this report may be based or which could cause actual results to
differ materially from those expressed in the forward looking statements.
SIGNIFICANT 1997 AND 1996 DEVELOPMENTS
In February 1997, Homestake received the final permit for the Ruby Hill
mine near Eureka, Nevada. Construction has commenced and production of gold is
expected to begin in the fourth quarter of 1997. Production is estimated at an
annual rate of 105,000 - 110,000 ounces per year at a total cash cost of $140
per ounce and a total production cost of $258 per ounce.
In February 1997, development work began at Homestake Gold of Australia
Limited's ("HGAL") Kalgoorlie operations in Western Australia on a 1.6 mile
decline from surface at the northern end of the Super Pit to access from
underground the upper level remnants of the Mt. Charlotte orebody and the
recently delineated northern orebody. The decline is expected to be completed in
the first quarter of 1998. Homestake's share of the decline's cost is estimated
to be $3 million.
In February 1997, Prime Resources Group Inc. ("Prime") announced its
intention to construct a gravity/flotation mill facility at the Eskay Creek mine
site in British Columbia, Canada. This mill, estimated to cost $12 million, will
improve the profitability of certain Eskay Creek ore that would otherwise be
directly shipped to third-party smelters and upgrade other material that
currently is not economic. Construction, which is dependent on securing
regulatory approval, is expected by July 1997, and the mill is expected to
commence operation in the fourth quarter of 1997.
Also in February 1997, Homestake completed the previously announced
sale of its interest in the George Lake and Back River ventures in Canada to
Arauco Resources Corporation ("Arauco") for $10 million in cash and 3.6 million
shares of Arauco common stock. As a result of this transaction, Homestake will
realize an after-tax gain of approximately $8 million in the first quarter of
1997.
On December 9, 1996, Homestake and Santa Fe Pacific Gold Corporation
("Santa Fe") announced that they had entered into a definitive agreement whereby
Homestake would acquire Santa Fe by an exchange of common stock for common
stock. On March 10, 1997, the Company announced that Santa Fe had terminated the
agreement and, in accordance with the terms of the merger agreement, had paid
Homestake a $65 million termination fee. As a result, in the first quarter of
1997 the Company will record a pretax gain of approximately $63 million ($49
million after tax), net of merger related expenses of approximately $2 million
incurred in 1997.
In December 1996, Homestake increased its interest in the Pinson Mining
Company partnership ("Pinson Partnership") to 50% and became the operator of the
Pinson mine. The Pinson Partnership holds property rights in approximately
23,000 acres approximately 30 miles northeast of Winnemucca, Nevada. Homestake
and Barrick Gold Corporation ("Barrick"), the other 50% partner, have announced
plans to conduct an extensive deep drilling exploration program on the Pinson
properties.
In August 1996, the United States Environmental Protection Agency
("EPA") deleted the Whitewood Creek site in the Black Hills of South Dakota from
the National Priorities List ("NPL").
3
In July 1996, Homestake and Corporacion Nacional del Cobre Chile
("Codelco"), a state-owned mining company in Chile, formed a new company, Agua
de la Falda S.A. ("La Falda") to conduct exploration and mining activities near
Homestake's former El Hueso mine in northern Chile. Homestake owns 51% of the
corporation and Codelco owns 49%. Codelco and Homestake have contributed
property interests in the area to the new company. In addition, Codelco
contributed the existing El Hueso plant, which had been under lease to
Homestake. Homestake also contributed $5.1 million for exploration and
development, including $3.7 million of exploration and development expenditures
incurred prior to the formation of La Falda. La Falda is developing the Agua de
la Falda mine, which contains 187,000 ounces of oxide reserves. Construction
commenced in late 1996, mining began in January 1997, and initial production is
expected in April 1997. La Falda will continue drilling and metallurgical
testing of the much larger Jeronimo deposit where, to date, approximately 3.1
million tons of mineralized material, at an average grade of 0.158 ounces of
gold per ton, have been outlined.
In June 1996, the Company paid $51.4 million to Gold Mines of
Kalgoorlie Limited ("GMK"), a subsidiary of Normandy Mining Limited, to purchase
all rights and entitlements under the disproportionate sharing arrangement
covering gold production from a portion of the Super Pit operation in
Kalgoorlie, Western Australia. The Company now shares equally with GMK in all
gold produced at the Kalgoorlie operations.
In April 1996, Prime purchased Cominco Ltd.'s ("Cominco") 60% interest
in the Snip mine in British Columbia for $39.3 million in cash. The purchase
price included Cominco's share of the mine's working capital. Prime now owns
100% of the Snip mine.
In March 1996, Homestake exercised its option which will permit it to
acquire from Navan Resources plc ("Navan") up to a 50% interest in Navan
Bulgarian Mining BV ("Navan BV"), which in turn owns 68% of Bimak AD, the owner
of the Chelopech gold/copper operations in Bulgaria, by investing an additional
$48 million. Homestake acquired the option in 1995 in connection with its
investment of $24 million to purchase a 10% interest of Navan, an Irish public
company with diverse mineral interests in Europe. To date, pending satisfaction
of certain conditions, no amounts have been advanced in respect of this option.
Homestake's initial $12 million investment in Navan BV is conditioned upon
receipt of all necessary permits for construction of a roaster and an increase
in mining rate at Chelopech from 500,000 to 750,000 metric tons per year,
approval of the project by the Boards of Directors of both companies and
agreement on a suitable project management team. Investment of the remaining $36
million in Navan BV is conditioned on subsequent approval by the Bulgarian
government, Navan and Homestake of a further mine and mill expansion and the
securing of expansion financing. Homestake has not made a final determination
whether to invest the additional $48 million in the project and continues to
evaluate the potential investment in light of the current political situation in
Bulgaria and the potential project economics. During the fourth quarter of 1996,
Homestake reduced the carrying value of its investment in Navan to market, which
resulted in a $7.2 million charge to 1996 earnings.
In late 1995 and early 1996, the Company acquired the 18.5% of HGAL it
did not already own. Homestake offered 0.089 of a Homestake share or A$1.90 in
cash for each of the 109.6 million HGAL shares owned by the public. The total
purchase price to acquire all of the 18.5% of HGAL held by the minority
shareholders was $164.9 million, including $141.7 million for 8.5 million newly
issued shares of the Company, $19.5 million in cash and $3.7 million of
transaction expenses. See note 3 to the "CONSOLIDATED FINANCIAL STATEMENTS" on
page 64 for further details of this transaction.
4
GLOSSARY OF TERMS
See "GLOSSARY AND INFORMATION ON RESERVES" on page 32 for definitions
of terms used in the following discussion.
GOLD OPERATIONS
UNITED STATES
Homestake conducts operations at the Homestake mine in the Black Hills
of South Dakota and at the McLaughlin mine in northern California. Homestake
also has a 100% interest in the Ruby Hill mine in Nevada, which is expected to
commence production in the fourth quarter of 1997. In addition, Homestake owns a
25% interest in the Round Mountain mine in central Nevada and has an interest in
two smaller mines in Nevada: the Pinson mine (50%) and the Marigold mine
(33.3%). The Company has an exploration office in Reno, Nevada.
Homestake Mine
The 120-year old Homestake gold mine is located in Lawrence County in
and near Lead, South Dakota. Homestake owns 100% of the operation. Paved public
roads provide access to the operation.
The Homestake mine properties cover approximately 11,700 acres, of
which approximately 8,200 acres are owned in fee and the remainder are held as
unpatented mining claims. All mining is conducted on owned property.
The Homestake mine is comprised of underground and open-pit (the "Open
Cut") mining operations, an ore processing plant, final product refinery, a
waste-water treatment plant, and tailings disposal facilities. The underground
mine is serviced by two 5,000-foot vertical shafts from the surface connecting
with internal shafts which provide hoisting and services to the 8,000-foot
level. Ore from underground is hoisted to the surface, crushed and transported
to the nearby processing plant. Open Cut ore is crushed and transported more
than a mile to the processing plant by an enclosed conveyor. The 7,400
tons-per-day ("TPD") capacity processing plant recovers gold through a
combination of gravity, carbon-in-pulp ("CIP") and vat leaching processes.
Recycled process water is pumped through a carbon-in-leach ("CIL") circuit, also
contributing to production. The refinery produces 0.997 fine gold bullion.
Process tails are used for underground fill or are deposited in a tailings
impoundment facility three miles from the plant. The first phase of a major
tailing lift expansion commenced in the fourth quarter of 1996. Construction of
an interim raise of ten feet was completed in 1996 for use in early 1997, and
construction of the full 50-foot raise will be completed in 1999. The expansion
will provide an additional 26 million tons tailings storage capacity, which
should be sufficient for projected mining activity through the year 2010, and
additional flood storage capacity. Facilities and equipment at this operation
continue to be upgraded for technological advances and generally are in good
operating condition.
Untreated water for use in the mine's facilities is obtained from local
watersheds under Homestake mine water rights and potable water is purchased from
the Lead/Deadwood sanitation district. Approximately 80% of the electric power
consumption is purchased under contract from Black Hills Corporation and the
remainder is provided by Homestake-owned hydroelectric facilities.
As mining has progressed into the lower levels of the Homestake mine,
the remaining higher-grade ore deposits have become narrower, less continuous
and more difficult to mine. The operation continues to
5
develop new mining methods, including narrow vein mining, uphole mining and
bench mining which have allowed profitable recovery of some previously
subeconomic material. The new mining methods have increased productivity.
Despite increasingly difficult orebodies, the operation has maintained its
current cost structure.
Open Cut mining currently is scheduled to be completed in 1998. Open
Cut ore stockpiles will continue to be processed, although at a lower rate,
through 2000. On completion of Open Cut mining, underground production is
expected to increase which will partially offset the decline in production from
the Open Cut. However, Homestake mine total cash costs per ounce are expected to
increase reflecting the increase in production from the higher cost underground
operations.
Hourly employees at the Homestake mine are represented by the United
Steelworkers of America. The current labor contract was ratified in March 1995
covering the period through May 1998.
The Homestake mine has received no notices of violation and is under no
regulatory orders of any kind mandating specific environmental expenditures.
During 1996, the mine operated in compliance with its environmental permits.
No royalties are payable on production from the Homestake mine. The
State of South Dakota currently imposes a severance tax of 10% of net profits
from the sale of gold produced in the state, plus $4 per ounce of gold sold when
the price of gold is $499 per ounce or less, increasing by $1 per ounce for each
$100 increment or part thereof in excess of $499 per ounce.
Geology
The Homestake mine is the largest known iron formation hosted gold
deposit. In its 120-year life, the mine has produced in excess of 38 million
ounces of gold. The Homestake gold deposit is Proterozoic in age (approximately
1.9 billion years). Mineralization is generally stratabound within the Homestake
Formation, which is a quartz-veined, sulfide-rich sedimentary sequence that has
been complexly deformed by tight folding, faulting and shearing. Ten
southeast-plunging fold structures, locally called ledges, have produced gold
ore over a vertical extent of more than 8,000 feet.
Year-end Proven and Probable Ore Reserves
1996 1995
---------------- ---------------
Underground:
Tons of ore (000) 19,764 20,886
Ounces of gold per ton 0.220 0.218
Contained ounces of gold (000) 4,345 4,551
Open Cut:
Tons of ore (000) 3,990 5,117
Ounces of gold per ton 0.079 0.111
Contained ounces of gold (000) 317 568
6
Total:
Tons of ore (000) 23,754 26,003
Ounces of gold per ton 0.196 0.197
Contained ounces of gold (000) 4,662 5,119
Operating Data
1996 1995
---------------- ---------------
Production Statistics:
Tons of ore mined (000):
Underground 1,376 1,461
Open Cut 1,683 1,217
Ore grade mined (oz. gold/ton):
Underground 0.211 0.219
Open Cut 0.115 0.093
Open Cut stripping ratio (waste:ore) 4.9:1 7.3:1
Tons of ore milled (000) 2,566 2,460
Mill feed ore grade (oz. gold/ton) 0.166 0.171
Mill recovery (%) 95 96
Gold recovered (000 ozs.) 407 403
Cost per Ounce of Gold Produced:
Cash operating costs $293 $292
Other cash costs 11 11
Noncash costs 35 32
---------------- ---------------
Total production costs $339 $335
McLaughlin Mine
The McLaughlin gold mine is located at the junction of Lake, Napa and
Yolo Counties in northern California. The McLaughlin mine has been in operation
since 1985 and is 100% owned by Homestake. Access to the property is by paved
road.
The McLaughlin mine properties cover approximately 16,200 acres.
Approximately 15,100 acres are owned and approximately 950 acres are leased. The
Company holds seven unpatented mining claims and six millsite claims covering
the remaining 160 acres.
Mining was completed in June 1996 and ore is now sourced exclusively
from lower-grade stockpiles which were built over the life of the mine. The
autoclave and flotation circuits were decommissioned following the completion of
mining due to the absence of high-grade ores. Modifications have been made to
convert the plant into a direct-cyanidation circuit utilizing cyanide leaching
followed by CIP circuits, pressure stripping and electrowinning. Total mill
capacity has been increased to approximately 7,300 TPD. In 1996, the embankment
at the tailings impoundment was raised, increasing the impoundment's capacity to
allow for the treatment of all but the lowest-grade ore remaining in the
stockpiles. A final tailings dam lift, currently scheduled to be added in 1999
at an estimated cost of
7
$2.4 million, will allow for the processing of the then remaining ore.
Facilities are modern and in good operating condition.
The majority of process water is recycled from the tailings pond.
Additional water is obtained from the Company's reservoir in Yolo County, which
has approximately four years of storage capacity. Electric power is purchased
under interruptible tariff from Pacific Gas and Electric Company.
Gold production, which is expected to continue for approximately seven
years, has declined significantly due to the completion of mining. Processing
costs also have declined significantly due to the shutdown of the higher cost
autoclave and flotation circuits allowing economic treatment of the lower-grade
stockpiled ore.
See page 2 for a discussion of hedging contracts for the sale of
estimated future production from McLaughlin.
During 1996, the mine operated in compliance with its environmental
permits.
McLaughlin mine royalties are equivalent to approximately 2% of
revenues.
Year-end Proven and Probable Ore Reserves
1996 1995
---------------- ---------------
Open Pit:
Tons of ore (000) - 1,411
Ounces of gold per ton - 0.103
Contained ounces of gold (000) - 145
Stockpiled:
Tons of ore (000) 16,627 17,931
Ounces of gold per ton 0.063 0.065
Contained ounces of gold (000) 1,048 1,170
Total:
Tons of ore (000) 16,627 19,342
Ounces of gold per ton 0.063 0.068
Contained ounces of gold (000) 1,048 1,315
Operating Data
1996 1995
---------------- ---------------
Production Statistics:
Tons of ore mined (000) 826 2,056
Stripping ratio (waste:ore) 4.0:1 5.9:1
Tons of ore milled (000) 2,485 2,296
Mill feed ore grade (oz. gold/ton) 0.096 0.120
Mill recovery (%) 77 88
Gold recovered (000 ozs.) 185 242
8
Cost per Ounce of Gold Produced:
Cash operating costs $242 $234
Other cash costs 8 8
Noncash costs 123 111
---------------- ---------------
Total production costs $373 $353
Round Mountain Mine
The Round Mountain gold mine is an open-pit mine located in Nye County,
Nevada, about 60 miles north of Tonopah. Homestake owns a 25% interest in the
mine. Echo Bay Mines Ltd. owns a 50% interest and is the operator. The remaining
25% interest is owned by Case, Pomeroy & Company, Inc. The mine has been in
operation since 1977. Paved public roads provide access to the operations.
The Round Mountain properties cover approximately 24,968 acres of
private property and public domain land, some of which are under patent
application and the remainder of which are unpatented mining claims. Of the
total reserves, 76% are located on the privately-owned land.
Ore from the mine is leached using two methods. The higher-grade ore is
crushed and processed on reusable heap-leach pads and the lower-grade ore is
leached on a dedicated pad. During 1996, total ore processed averaged 115,000
TPD. The reusable heap-leach pads processed 28,000 TPD and the balance was
processed on the dedicated pad. The average ore and waste mining rate was
164,000 TPD. The reusable pad processing facilities consist of a gyratory
crusher, an intermediate ore storage and reclaim system, secondary and tertiary
cone crushers and screens, and a conveyor system used to transport ore to two
asphalt leach pads. The reusable pads have a total capacity of approximately
three million tons. A separate 16.4 million square foot dedicated heap-leach pad
to process uncrushed run-of-mine ore and to reprocess previously leached
reusable pad material has a total capacity of 131 million tons. Construction of
an 8 million square foot dedicated pad expansion and a solution pumping system,
which should be sufficient for mining activity through 1998, is expected to
commence in 1997 at an estimated cost of $14 million (Homestake's share - $3.5
million). Facilities are in good condition.
Construction of an 8,000 tons-per-day gravity mill to process
higher-grade sulfide ores commenced in mid-1996, and mill start-up is expected
in late 1997. Completion of the $68 million mill (Homestake's share - $17
million) will result in higher gold recoveries than otherwise would be obtained
by crushing and leaching the higher-grade sulfide ores on the reusable pad.
Water is supplied from wells on the property and power is purchased
under contract from Sierra Pacific Power Company.
Homestake's share of total 1996 gold production from the Round Mountain
mine was 102,744 ounces compared to 86,109 ounces in 1995. The higher 1996
production is a result of higher throughput and grades on the reusable pads and
an increase in dedicated pad leaching capacity, partially offset by a lower
grade of ore on the dedicated pad. Gold production from gravity treatment of
high-grade ores amounted to 3,137 ounces (Homestake's share) in 1996 compared to
3,061 in 1995.
Round Mountain ore reserves decreased by 244,000 ounces (100% basis) in
1996, net of 1996 production, primarily due to additional drilling information.
During 1996, the mine operated in compliance with its permits.
9
All Round Mountain mine production is subject to a royalty determined
by a complex formula based on the price of gold. The royalties range from
approximately 3.5% of gold revenues at prices of $320 per ounce of gold or less
to approximately 6.4% of gold revenues at prices of $440 per ounce of gold or
more. During 1996, the royalties averaged 5.1% of revenues.
Geology
The Round Mountain ore body straddles the margin of a volcanic caldera
complex. Gold-bearing hydrothermal fluids were transported along major
structural conduits created by the volcano's collapse and associated faulting.
These ascending fluids deposited gold in permeable zones along a broad northwest
trend. Primary gold mineralization at Round Mountain occurs as electrum, a
natural gold/silver alloy, in association with quartz, adularia and pyrite.
Narrow fractures in shear zones host higher-grade mineralization while porous
sites within the volcanic rocks host the disseminated mineralization. Economic
gold mineralization is found in both the volcanic and surrounding sedimentary
rocks as well as overlying alluvial placers. The oblong open-pit mine is well
over a mile at its longest dimension and currently more than 1,000 feet from the
highest working level to the bottom of the pit.
Homestake has a 25% share of the following amounts:
Year-end Proven and Probable Ore Reserves
(100% Basis)
1996 1995
---------------- ---------------
Tons of ore (000) 476,509 508,820
Ounces of gold per ton 0.019 0.020
Contained ounces of gold (000) 9,050 10,000
Operating Data (100% Basis)
1996 1995
---------------- ---------------
Production Statistics:
Tons of ore mined (000) 31,947 32,723
Stripping ratio (waste:ore) 0.8:1 0.8:1
Tons of ore crushed (000) 9,894 7,711
Tons of ore processed (000) 40,867 31,395
Weighted average ore grade
placed on the pads (oz. gold/ton) 0.017 0.018
Leach recovery - reusable pads (%) 66 71
Gold recovered (000 ozs.) 411 344
Homestake's Cost per Ounce of Gold Produced:
Cash operating costs $230 $231
Other cash costs 26 23
Noncash costs 61 74
---------------- ---------------
Total production costs $317 $328
10
Ruby Hill Mine
The Ruby Hill mine is located one mile northwest of Eureka, Nevada.
Homestake acquired a 100% interest in the property in 1992. Access to the
property is by a 1.5 mile gravel road from Nevada State Highway 50.
The Ruby Hill properties consist of approximately 24,831 acres, of
which 23,386 acres are unpatented mining claims and 1,445 acres are patented
mining claims and fee lands.
Exploration activities have resulted in the discovery of several
mineralized zones. A positive feasibility study on the West Archimedes deposit
was completed during the fourth quarter of 1995. This study indicates that the
mine will produce an average of 105,000 ounces of gold per year over its
six-year life at a total cash cost of approximately $140 per ounce. Capital
requirements, including the pre-stripping of the overlying alluvium, are
estimated to be $65 million.
The operation will utilize conventional open-pit mining methods.
High-grade ore will be ground in a ball mill and combined with the crushed
low-grade ore in a rotating agglomeration drum prior to being placed on the
leach pad.
In February 1997, Homestake received the final permit for the Ruby Hill
mine. Construction has commenced and production of gold is expected to begin in
the fourth quarter of 1997. In March 1997, the Northern Nevada Building Trades
Council filed a notice of appeal and request for a stay of the Bureau of Land
Management's approvals for the project. Homestake expects to prevail in respect
of the appeal and is continuing with construction.
Water is available from on-site wells and power is available from Mount
Wheeler Power Company.
A production royalty of 3% of net smelter returns is payable on
production over 500,000 ounces of gold.
Geology
The West Archimedes gold mineralization is hosted primarily within
brecciated jasperoid and decalcified limestones of the uppermost Goodwin and
Antelope Valley units of the Ordivician Pogonip Group. The micron-size gold is
finely disseminated and the ore body is entirely oxidized. Exploration and
delineation drilling are continuing in the nearby East Archimedes and Achilles
zones and at depth below the West Archimedes deposit.
Year-end Proven and Probable Ore Reserves
1996
---------------
Tons of ore (000) 7,616
Ounces of gold per ton 0.099
Contained ounces of gold (000) 755
11
Pinson Mine
The Pinson gold mine is located approximately 30 miles northeast of
Winnemucca, Nevada. In December 1996, Homestake increased its interest in the
Pinson Partnership to 50% and became the operator of the Pinson mine. Barrick
owns the remaining interest. The mine has operated since 1981. Access to the
property is by paved and gravel roads.
The Pinson properties consist of approximately 22,826 acres of which
11,583 acres are held under leases, the terms of which are sufficient to allow
for the mining of all known reserves. The remaining land is comprised of 7,780
acres of unpatented mining claims and 3,463 acres of primarily fee lands.
Homestake and Barrick have announced plans to conduct an extensive deep drilling
exploration program on the Pinson properties.
Mining is conducted by conventional open-pit methods in several
different areas. Ore is processed by both heap-leaching and conventional milling
methods. Total material mined averaged approximately 33,000 TPD in 1996. The
mill has a capacity of 1,500 TPD using both CIP and CIL methods. In 1996, 76% of
total gold production was from ore milled. Low-grade ore is treated by
heap-leaching methods. The facilities are in good condition.
Water is supplied from on-site wells and power is purchased from Sierra
Pacific Power Company.
During 1996, the mine operated in compliance with all of its
environmental permits.
Production royalties of 2.2% of net smelter returns are payable on the
principal producing areas of the property. Overall, the underlying property
ownership is complex, requiring special arrangements with respect to the
commingling of ore from various locations.
Homestake's share of production from the Pinson mine was 12,098
ounces of gold in 1996 compared to 12,587 ounces in 1995.
Geology
The Pinson deposit includes more than six zones of mineralization
largely hosted in carbonate rocks and calcareous siltstones of the Ordovician
Comus formation. Ore bodies consist of disseminations of micron-size gold
peripheral to faults in favorable stratigraphy. High-grade stringer zones have
been identified and are the subject of continuing investigations.
Homestake had a 50% share and a 26.25% share of the following 1996 and
1995 year-end reserves, respectively.
Year-end Proven and Probable Ore Reserves
(100% Basis)
1996 1995
---------------- ---------------
Tons of ore (000) 2,563 4,074
Ounces of gold per ton 0.072 0.073
Contained ounces of gold (000) 184 297
12
Operating data is presented below on a 100% basis. In December 1996,
Homestake increased its interest to 50%. Prior to December 1996, Homestake had a
26.25% share of the following amounts:
Operating Data (100% Basis)
1996 1995
---------------- ---------------
Production Statistics:
Tons of ore mined (000) 1,257 1,164
Stripping ratio (waste:ore) 6.1:1 6.0:1
Tons of ore milled (000) 549 559
Ore grade milled (oz. gold/ton) 0.077 0.088
Mill recovery (%) 79 79
Tons of ore leached (000) 669 574
Ore grade leached (oz. gold/ton) 0.030 0.027
Gold recovered (000 ozs.) 42 48
Homestake's Cost per Ounce of Gold Produced:
Cash operating costs $355 $307
Other cash costs 14 15
Noncash costs 63 51
---------------- ---------------
Total production costs $432 $373
Marigold Mine
The Marigold gold mine is located approximately 40 miles southeast of
Winnemucca, Nevada. Homestake owns a 33.3% interest in the Marigold partnership.
Rayrock Mines, Inc. ("Rayrock") owns the remaining interest and is the operator.
The mine has operated since 1989. Access to the property is via a five-mile long
gravel road.
The property consists of approximately 3,920 acres of unpatented mining
claims and 14,920 acres held under leases which remain in effect as long as the
mine continues production.
Mining is conducted by conventional open-pit methods. Ore is processed
by heap-leaching and milling methods. Mill-grade ore is stockpiled and
periodically processed through the mill to maximize gold recovery. Milling
operations were intermittent during 1996. Mine facilities are in good condition.
Water is supplied from on-site wells and power is purchased from Sierra
Pacific Power Company.
The 1996 exploration program increased the reserves in the area of the
known deposits.
During 1996, the mine operated in compliance with all its environmental
permits.
Production royalties are paid to two lease holders in amounts of 5%
of net smelter returns and 3.5% of net profits.
Homestake's share of production from the Marigold mine was 24,485
ounces of gold in 1996 compared to 23,288 ounces in 1995.
13
Geology
Gold resources at the Marigold mine are hosted largely in the Permian
Antler formation and the Ordovician Valmy formation, and are associated with
broad bands of silicification and local decalcification. Both stratigraphy and
structure control the geometry of the mineralized zones. The ore bodies are
sediment-hosted, disseminated deposits of micron-size gold, and are entirely
oxidized.
Homestake has a 33.3% share of the following amounts:
Year-end Proven and Probable Ore Reserves
(100% Basis)
1996 1995
---------------- ---------------
Tons of ore (000) 18,068 14,585
Ounces of gold per ton 0.034 0.036
Contained ounces of gold (000) 610 527
Operating Data (100% Basis)
1996 1995
---------------- ---------------
Production Statistics:
Tons of ore mined (000) 2,882 3,412
Stripping ratio (waste:ore) 2.9:1 2.2:1
Tons of ore milled (000) 428 440
Ore grade milled (oz. gold/ton) 0.086 0.071
Mill recovery (%) 93 92
Tons of ore leached (000) 2,491 2,969
Ore grade leached (oz. gold/ton) 0.019 0.022
Gold recovered (000 ozs.) 73 70
Homestake's Cost per Ounce of Gold Produced:
Cash operating costs $231 $225
Other cash costs 36 29
Noncash costs 46 59
---------------- ---------------
Total production costs $313 $313
CANADA
Homestake has a 50% interest in the Williams and David Bell mines in
the Hemlo mining district in Ontario and a 25% net profits interest in the
Quarter Claim (adjacent to the David Bell mine). Homestake also has a 50.6%
interest in Prime, which owns the Eskay Creek and Snip mines in northwestern
British Columbia. Prime has no employees and has contracted with Homestake to
provide all necessary professional, managerial, operational and administrative
services in connection with exploration, development and operation of the Eskay
Creek and Snip mines. During 1996, mining was completed at Homestake's Nickel
Plate mine in south central British Columbia.
14
The Company conducts exploration and investigates mineral acquisition
and development opportunities throughout Canada. Canadian activities are managed
from an office in Vancouver, British Columbia.
Eskay Creek Mine
Prime owns 100% of the Eskay Creek gold/silver mine located in
northwestern British Columbia. Through its interest in Prime, the Company has a
50.6% interest in the mine. Access is by 38 miles of single-lane gravel road.
The Eskay Creek property consists of five mining leases and various
other mineral and surface rights comprising approximately 3,477 acres located 51
air miles north of Stewart, British Columbia. The leases have remaining terms of
approximately 24 to 28 years, subject to renewal rights. Road maintenance and
snow removal are provided under contract by a local company.
The Eskay Creek mine commenced commercial production in January 1995.
The mine is an underground operation accessible through three surface portals.
Mining is conducted by a mining contractor. The mine utilizes a drift-and-fill
mining method with cemented rock backfill. Ore is crushed and blended in a
facility located at the minesite prior to shipment and sale to third-party
smelters for final processing. There are no tailings produced at the minesite.
Mine waste-rock, which is potentially acid-generating, is disposed of underwater
in a nearby barren lake. Workers are on a two-week work schedule followed by two
weeks off.
Two long-term ore sale contracts with smelters in Japan and Quebec
provide for combined minimum annual sales of 100,000 tons, with options to
increase sales to 130,000 tons, subject to mutual agreement with the smelters.
During 1996, spot ore sales totaling 14,000 tons were made to two other
smelters. Ore is trucked by a contractor 164 miles to Stewart for shipment to
Japan and 224 miles to Kitwanga, British Columbia for shipment to Quebec. A
dedicated loading facility for ships at Stewart handles ore shipments destined
for Japan and a loading facility is utilized at the railhead in Kitwanga for
shipments to Quebec. Prime has a five-year contract with Canadian National
Railway to transport ore to Quebec.
Water is supplied from the Eskay and Argillite creeks and power is
produced on-site by diesel generators.
The mine produced approximately 310 TPD in 1996. Based on existing
reserves and current production rates, the mine has a projected life of
approximately 10 years.
During 1996, a ramp at the north end of the mine was extended 1,260
feet to commence underground exploration drilling of the NEX and Hangingwall
zones which had been identified in 1995. In addition, exploration drilling on
the surface extended the boundaries of these zones, which contain high-grade
gold and silver mineralization. This year's drilling upgraded 418,000 gold
equivalent ounces from the mineralized material category to proven and probable
reserves in the NEX and Hangingwall zones. In addition, drilling in the main 21B
and 109 zones added 499,000 gold equivalent ounces to proven and probable
reserves before considering production in 1996 (see "MINERAL EXPLORATION AND
DEVELOPMENT" on page 31). Additional exploration drilling for the NEX,
Hangingwall and 21B zones and in the area surrounding the Eskay Creek mine is
planned in 1997.
15
Metallurgical testing of mineralized material from the NEX and 109
zones indicate that the ore is amenable to gravity and flotation processing. The
NEX and 109 zone material has lower gold and silver grades than the main 21B ore
zone but it also contains significantly reduced levels of mercury and antimony,
both of which result in higher smelter penalties. Production of a high-grade
gold and silver concentrate would lead to substantial savings in transportation
and treatment charges for this material.
In February 1997, Prime announced its intention to construct a
gravity/flotation mill at the Eskay Creek mine site. This mill, estimated to
cost $12 million, will improve the profitability of certain Eskay Creek ore that
would otherwise be directly shipped to third-party smelters and upgrade other
material that currently is not economic. Construction, which is dependent on
securing regulatory approval, is expected by July 1997, and the mill is expected
to commence operation in the fourth quarter of 1997.
During 1996, the mine operated in compliance with all of its
environmental permits.
The mine is subject to a 1% net smelter royalty, with the exception of
a small portion of the ore body, which is subject to a 2% net smelter royalty.
Geology
The Eskay Creek ore body is a precious metal-enriched volcanogenic
massive sulfide deposit that occurs in association with volcanics of the
Jurassic-aged (141 to 195 million years) Hazelton Group. Eskay Creek
mineralization is generally stratabound and occurs in a contact mudstone and
breccia bounded below by a rhyolite flow-dome complex and overlain by volcanic
rocks in the west limb of a north-plunging fold. Sphalerite, pyrite, galena and
tetrahedrite are the most abundant ore minerals. Native gold occurs as mostly
microscopic particles located between sulfide grains or in fractures within
sulfide grains, some of which are locked in pyrite. Gold also occurs in volcanic
rocks beneath the contact mudstone with visible gold, coarse grained sphalerite,
pyrite and galena disseminated in quartz veins or stockworks.
Year-end Proven and Probable Ore Reserves
(100% Basis)
1996 1995
---------------- ---------------
Tons of ore (000) 1,397 1,124
Ore grade (ozs. gold/ton) 1.732 1.875
Contained ounces of gold (000) 2,418 2,108
Ore grade (ozs. silver/ton) 79.3 83.4
Contained ounces of silver (000) 110,810 93,752
Contained gold equivalent ounces (1)(000) 3,857 3,326
Operating Data (100% Basis)
1996 1995
---------------- ---------------
Production Statistics:
Tons of ore shipped (000) 116 104
Ore grade (ozs. gold/ton) 1.922 1.989
Ore grade (ozs. silver/ton) 106.6 100.9
Ounces of payable gold (000) 211 197
Ounces of payable silver (000) 12,054 9,945
Total gold equivalent ounces (1)(000 ozs.) 372 331
16
Homestake's Production Cost per Ounce of Gold Equivalent:
Cash operating costs (2) $167 $182
Other cash costs 3 3
Noncash costs 43 45
---------------- ---------------
Total production costs $213 $230
<FN>
(1) Gold and silver are accounted for as co-products at Eskay Creek. Silver
production is converted into gold equivalent, using the ratio of the
average gold market price to the average silver market price. The ratio
was 74.9 ounces and 73.5 ounces of silver equals one ounce of gold
equivalent for production calculations for the years ended December 31,
1996 and 1995, respectively, and 77 ounces of silver equals one ounce of
gold equivalent for reserve calculations at December 31, 1996 and 1995.
(2) For comparison purposes, cash operating costs per ounce include
estimated third-party costs incurred by smelter owners and others to
produce marketable gold and silver.
Williams Mine
The Williams gold mine is located in the Hemlo Gold Camp 217 miles east
of Thunder Bay, Ontario, adjacent to the TransCanada Highway. The mine is
operated by Williams Operating Corporation ("WOC") with its own personnel.
Homestake and Teck Corporation ("Teck") each own a 50% interest in WOC. The mine
commenced operations in 1985.
The property consists of 11 patented mining claims covering
approximately 400 acres and one Crown mining lease. Homestake and Teck are
required to provide funds equally to WOC for all costs incurred to operate the
mine. Homestake and Teck have mutual rights of first refusal over each other's
interest in the Williams mine and shares of WOC.
The Williams mine is an underground operation which is accessible by a
4,300-foot shaft. The mine utilizes the longhole, open-stope mining method with
cemented rock backfill. In addition, 550-650 TPD of lower-grade ore is recovered
from a nearby open pit. Waste rock from the open pit is used for backfill in the
underground operations. The mine has a 7,000-TPD capacity mill which operated at
7,057 TPD during 1996. The Williams and David Bell mines share one tailings
basin facility located approximately two miles from the mill. Cyanidation and
the CIP process are used to recover gold. Water from the tailings basin is
treated during the summer months in an effluent treatment plant prior to
discharge. Both mines recycle mill make-up water from the tailings pond. The
facilities and equipment are modern and in good condition.
Fresh water for the property is supplied from Cedar Creek and power is
purchased from Ontario Hydro via a long-term contract. Propane for heating mine
air and surface facilities is purchased under contract.
During 1996, ore was mined primarily from the Block 3 and Block 4
zones. Definition drilling of the C-zone reserves below the pit was completed
and preliminary development of production areas started. Approximately 24% of
the ounces mined in 1996 were replaced by additions to ore reserves, at a lower
grade than the ore mined.
During 1996, an agreement was reached with Franco Nevada Ltd.
("Franco") in which Franco will have access to its adjacent property to carry
out an exploration program via the underground workings of
17
the Williams mine. The agreement gives WOC a right of first proposal for any
mineralization which Franco may discover during its exploration activity.
The mine will continue to operate at the average ore reserve grade for
the remaining life of the operation.
During 1996, the mine operated in compliance with all of its
environmental permits.
The 11 patented mining claims are subject to three net smelter
royalties totaling a net effective rate of 2.08% and the Crown mining lease is
subject to a net smelter royalty of .75%.
Homestake's share of production was 205,519 ounces in 1996 compared to
202,561 ounces in 1995.
Geology
The Hemlo Gold Camp occurs within the east-west striking Heron Bay belt
of metamorphosed Archean aged rocks (3.5 billion years). The steeply dipping ore
bodies lie along the contact between overlying metasedimentary rocks and
underlying volcanic rocks. Gold mineralization is hosted primarily by a
fine-grained feldspar porphyry unit associated with pyrite, barite and
molybdenite.
Homestake has a 50% share of the following amounts:
Year-end Proven and Probable Ore Reserves
(100% Basis)
1996 1995
---------------- ---------------
Tons of ore (000) 35,449 36,765
Ounces of gold per ton 0.146 0.150
Contained ounces of gold (000) 5,169 5,497
Operating Data (100% Basis)
1996 1995
---------------- ---------------
Production Statistics:
Tons of ore milled (000) 2,583 2,608
Mill feed ore grade (oz. gold/ton) 0.167 0.163
Mill recovery (%) 95 95
Gold recovered (000 ozs.) 411 405
Homestake's Cost per Ounce of Gold Produced:
Cash operating costs $214 $214
Other cash costs 8 8
Noncash costs 39 38
---------------- ---------------
Total production costs $261 $ 260
18
David Bell Mine
The David Bell gold mine is located in the Hemlo Gold Camp. The mine is
operated by the Teck-Corona Operating Corporation ("TCOC") with its own
personnel. Homestake and Teck each own a 50% interest in TCOC. The mine
commenced operations in 1985.
The mine is located on the same ore trend as the Williams mine. The
property consists of approximately 650 acres held under two freehold patents.
Homestake and Teck are required to provide funds equally to TCOC for all costs
incurred to operate the mine. Homestake and Teck have mutual rights of first
refusal over each other's interest in the David Bell mine and shares of TCOC.
The David Bell mine is an underground operation which is accessible by
a 3,819-foot shaft. Production is from stopes using longhole mining methods,
with cement, tailings, sand and waste rock utilized as backfill. Mill throughput
was approximately 1,166 TPD in 1996. Cyanidation and CIP processes are used to
recover gold. The facilities and equipment are modern and in good condition.
Water and power supplies are the same as those at the Williams mine.
Treated reclaimed process water is used to service the underground operations.
The average width of ore at the David Bell mine is decreasing as mining
progresses away from the central core of the ore body. In an effort to optimize
ore extraction and to minimize development costs, stoping of narrow-width ore by
longitudinal longhole retreat continued during the year. Gold production
increased in 1996 as a result of higher ore grades and recoveries, partially
offset by reduced mill throughput caused by mining in the deeper parts of the
mine where difficult ground conditions exist.
Approximately 72% of the ounces mined in 1996 were replaced through
reserve additions. Homestake and Teck each have a 50% interest in efforts to
explore and develop mineral properties within approximately two miles of the
David Bell property.
A new collective bargaining agreement with the United Steel Workers of
America was signed on April 1, 1996 and is in effect through October 1998.
During 1996, the mine operated in compliance with all of its
environmental permits.
The property is subject to a 3% net smelter return royalty.
Homestake's share of production at the David Bell mine was 97,736
ounces in 1996 compared with 79,383 ounces in 1995.
Geology
See "Williams Mine - Geology."
19
Homestake has a 50% share of the following amounts:
Year-end Proven and Probable Ore Reserves
(100% Basis)
1996 1995
---------------- ---------------
Tons of ore (000) 5,574 5,424
Ounces of gold per ton 0.291 0.309
Contained ounces of gold (000) 1,621 1,677
Operating Data (100% Basis)
1996 1995
---------------- ---------------
Production Statistics:
Tons of ore milled (000) 427 487
Mill feed ore grade (oz. gold/ton) 0.476 0.347
Mill recovery (%) 96 94
Gold recovered (000 ozs.) 195 159
Homestake's Cost per Ounce of Gold Produced:
Cash operating costs $161 $192
Other cash costs 11 11
Noncash costs 45 48
---------------- ---------------
Total production costs $217 $ 251
Quarter Claim
The Quarter Claim constitutes approximately one-fourth of a mining
claim, which was originally part of the David Bell property, and was optioned to
and subsequently acquired by Hemlo Gold Mines Inc. ("Hemlo Gold") in 1982. Hemlo
Gold developed a shaft on the Quarter Claim and reserved hoisting and milling
capacity of 500 TPD at its mill to process any ore found on the Quarter Claim.
Homestake has a 25% net profits interest in all ore recovered from the Quarter
Claim. In 1995, the net profits interest agreement was amended. The amended net
profits interest is based on a deemed production rate, deemed production costs
and the market price of gold. The deemed production rate is based upon committed
throughput of 500 TPD multiplied by: (a) the average ore grade of the remaining
Quarter Claim reserves; (b) a recovery factor and; (c) 95%.
Homestake's share of production at the Quarter Claim was 11,362
ounces in 1996 compared with 7,140 ounces in 1995.
Geology
See "Williams Mine - Geology."
20
Homestake has a 25% share of the following amounts:
Year-end Proven and Probable Ore Reserves
(100% Basis)
1996 1995
---------------- ---------------
Tons of ore (000) 930 1,113
Ounces of gold per ton 0.258 0.258
Contained ounces of gold (000) 240 287
Operating Data (100% Basis)
1996 1995
---------------- ---------------
Production Statistics:
Tons of ore milled (000) 183 115
Mill feed ore grade (oz. gold/ton) 0.257 0.257
Mill recovery (%) 96 96
Gold recovered (000 ozs.) 45 29
Homestake's Cost per Ounce of Gold Produced:
Cash operating costs $156 $155
Other cash costs 12 12
Noncash costs 1 1
---------------- ---------------
Total production costs $169 $168
Snip Mine
The Snip gold mine is located at the junction of Bronson Creek and the
Iskut River, 56 air miles north of Stewart in northwestern British Columbia. In
April, Prime purchased Cominco's 60% interest in the Snip mine for $39.3 million
in cash. The purchase price included Cominco's share of the mine's working
capital. Prime now owns 100% of the Snip mine. Through its interest in Prime,
the Company has a 50.6% interest in the mine. The mine commenced operations in
1991.
The property consists of a mining lease with a term of 30 years
together with three mineral claims covering approximately 3,637 acres.
The mine is serviced by aircraft which utilize a 4,500-foot long
landing strip at the minesite. The hovercraft operation which was used to
transport mine concentrates, fuel and other supplies along the Iskut and Stikine
rivers between the mine and Wrangell, Alaska was discontinued in July 1996.
Additional aircraft have been contracted and an all air-freight transportation
system is employed currently.
The Snip mine is an underground operation serviced by three adits and a
haulageway at the 400-foot level. Mining is carried out through a combination of
shrinkage, conventional and mechanized cut and fill. Backfill consists of mill
tailings and crushed waste, which are pumped to the mine, and underground waste
rock. The mill has a capacity of 500 TPD. Approximately 92% of the gold
contained in the ore is recovered. A gravity circuit recovers about 34% of the
gold and the remaining gold is recovered in flotation concentrates containing
approximately ten ounces of gold per ton. The concentrates formerly were sold
under a long-term contract to a third-party facility located near Stewart for
final gold
21
recovery. In September 1996, this processing facility was closed prior to the
expiration of the contract. An alternative long-term contract with a Japanese
smelter was finalized in November 1996 and shipments of Snip mine concentrate
resumed in December 1996. Mill tailings are deposited in a tailings facility
located adjacent to the mine and reclaimed water is pumped back to the mill. The
facilities and equipment are modern and in good condition. Workers are on a
three-week work schedule followed by three weeks off.
Water is supplied from Bronson Creek and power is produced on site by
diesel generators.
The 1996 exploration program was successful in converting almost all of
the mineralized material previously reported into proven and probable reserves
(101,000 ounces of gold). Based on current milling rates and existing reserves,
the mine has a projected remaining life of 2.5 years.
In 1996, a private lawsuit was filed claiming operation of the
hovercraft was harmful to fish and fish habitat. The government subsequently
assumed control of the litigation. Studies previously conducted by Cominco and
Prime failed to identify any significant environmental impact from the
hovercraft. The mine discontinued use of the hovercraft in July 1996, and Prime
was later advised that the government has decided not to pursue this matter.
During 1996, the Snip mine had four occasions when nitrate levels in
discharge water exceeded permit levels. The incidents were timely reported and
remedied. No citations have been issued and none are expected. With these
exceptions, the mine operated in compliance with all environmental permits.
Homestake's share of gold production in 1996 was 101,827 ounces
compared to 51,310 ounces in 1995.
Geology
The main Twin Zone ore body at the Snip mine is a 1.5 foot to 50-foot
thick quartz-carbonate-sulfide-filled shear structure within a Triassic
sedimentary unit. Gold primarily occurs as finely disseminated grains along
pyrite grain boundaries. Other sulfides within the Twin Zone include pyrrhotite,
chalcopyrite and sphalerite, with trace arsenopyrite. The vein structure has
been traced over a strike length of 3,300 feet and has a known vertical extent
to 1,650 feet.
Year-end Proven and Probable Ore Reserves
1996 1995
---------------- ---------------
Tons of ore (000) 369 383
Ounces of gold per ton 0.722 0.776
Contained ounces of gold (000) 267 297
Operating Data
1996 1995
---------------- ---------------
Production Statistics:
Tons of ore milled (000) 171 187
Mill feed ore grade (oz. gold/ton) 0.787 0.751
Mill recovery (%) 92 91
Gold recovered (1)(000 ozs.) 124 128
22
Homestake's Cost per Ounce of Gold Produced:
Cash operating costs $190 $176
Noncash costs 151 56
---------------- ---------------
Total production costs $341 $232
<FN>
(1) Includes recoverable gold contained in dore and in concentrates.
Nickel Plate Mine
Mining and ore processing at the Nickel Plate mine, located near
Hedley, British Columbia, was completed in 1996. Reclamation of the property, in
accordance with a plan filed with British Columbia's regulatory agencies, is in
progress. At the end of 1996, approximately 70% of the total land affected by
mining activities had been reclaimed. Reclamation work includes sloping,
covering with soil, and seeding all rock dumps. It will also include treating
all water in the tailings impoundment prior to release into the environment.
When the water treatment is complete, the plant will be removed and the
approximate 80 acre plant site area will be reclaimed.
During 1996, the property operated in compliance with all of its
environmental permits.
Year-end Proven and Probable Ore Reserves
1996 1995
---------------- ---------------
Tons of ore (000) - 940
Ounces of gold per ton - 0.079
Contained ounces of gold (000) - 74
Operating Data
1996 1995
---------------- ---------------
Production Statistics (1):
Tons of ore milled (000) 1,113 1,464
Mill feed ore grade (oz. gold/ton) 0.078 0.077
Mill recovery (%) 81 81
Gold recovered (000 ozs.) 70 91
Cost per Ounce of Gold Produced:
Cash operating costs $347 $379
Noncash costs 46 56
---------------- ---------------
Total production costs $393 $435
<FN>
(1) Production ceased on October 9, 1996.
23
AUSTRALIA
In late 1995 and early 1996, Homestake acquired the 18.5% of HGAL that
it did not already own and now owns 100% of HGAL (See "SIGNIFICANT 1997 AND 1996
DEVELOPMENTS" on page 3). HGAL is a gold mining and exploration company whose
principal asset is a 50% ownership in Australia's largest gold mining operation,
the consolidated surface and underground gold operations at Kalgoorlie, Western
Australia.
HGAL explores for gold in Australia and has offices in Perth and
Kalgoorlie, Western Australia, Bendigo, Victoria and Orange, New South Wales.
Kalgoorlie Operations
The Kalgoorlie operations are located 340 miles northeast of Perth,
Western Australia on 164 state leases and licenses covering approximately 30,000
acres adjacent to the town of Kalgoorlie. The mineral leases are renewable on an
annual basis for a fee to the state. Homestake acquired its interest in the
original Kalgoorlie Mining Associates joint venture in 1976. Mining operations
in the Kalgoorlie region date back to 1893. Access to the operations is by paved
road.
HGAL owns a 50% interest in three joint ventures in the Kalgoorlie
district: the Fimiston/Paringa Venture ("FPV"), the Mt Percy Venture and the
Kalgoorlie Mining Associates Venture. Subsidiaries of Normandy Mining Limited
("Normandy") own the other 50% interest. HGAL and Normandy jointly own and
control Kalgoorlie Consolidated Gold Mines Pty Ltd ("KCGM"), which manages all
of the operations on a consolidated basis under the direction of a joint
management committee.
Mines operated by KCGM include the Super Pit open-pit gold mine and the
Mt. Charlotte underground gold mine. Ore from both of these operations is
treated at the Fimiston mill, the primary milling facility at Kalgoorlie. In
addition, ore also is processed at two smaller facilities, the Mt Percy and
Croesus mills. Sulfide concentrates produced at the Fimiston and Croesus mills
are roasted at the Gidji roaster, located 12 miles north of the main Kalgoorlie
operations, prior to final processing at the Fimiston mill. The facilities and
equipment at the Kalgoorlie operations generally are in good condition.
In June 1996, the Company paid $51.4 million to Normandy to purchase
all rights and entitlements under the Disproportionate Sharing Arrangement
("DSA"). In accordance with the DSA, HGAL had paid for 50% of the costs, but
under certain circumstances did not receive 50% of gold production out of the
first 35.8 million tons of ore mined by open-pit methods from the FPV area of
the Super Pit. The Company now shares equally with Normandy in all gold produced
at the Kalgoorlie operations.
Contractors are employed to conduct the open pit mining operations, ore
and concentrate haulage and some specialized services. Fresh water is supplied
under allocation from the state water system and is piped 340 miles from Perth.
Salt water is taken from bores and underground mines. Until September 1996,
power was purchased under a number of agreements with the state power authority.
A new power supply agreement has been entered into with Normandy Power Pty Ltd,
a company associated with Normandy.
During 1996, the Kalgoorlie operations had a solutions spill from one
of its tailings ponds. The spill was timely reported and remediated. No citation
has been issued and none is expected. With this exception, the mine operated in
compliance with all environmental permits.
24
No royalties are payable on production.
Super Pit
This large open-pit mine is located along the "Golden Mile" ore bodies
previously mined from underground.
In 1996, 78.5 million tons of material were mined containing 11.8
million tons of ore, compared to 70.4 million tons mined containing 8.7 million
tons in 1995. HGAL's share of Super Pit gold production, net of ounces paid to
Normandy under the DSA, was 305,837 ounces in 1996 and 262,570 ounces in 1995.
The increase in production in 1996 primarily was due to higher mill capacity and
improved mill efficiencies as a result of the prior year's Fimiston mill
expansion program and was achieved despite several power outages during 1996
which halted operations.
Mt. Charlotte
This underground mine uses bulk mining methods and large conventional
diesel powered loaders and trucks. The main production level is 3,200 feet below
surface. Longhole mass-blast mining techniques are employed. Ore is crushed
underground with primary crushers before being hoisted to the surface and
conveyed to the Fimiston mill.
Mill throughput increased by 19% at Mt. Charlotte during 1996 as
production returned to more normal levels of operation. The prior year's
production had been hampered by difficulties following a choked mass-blast of a
stope pillar in the lower levels of the mine in late 1994.
In 1996, 1.7 million tons of ore were mined from Mt. Charlotte compared
to 1.4 million tons of ore mined in 1995. HGAL's share of gold production was
61,024 ounces in 1996 and 47,496 ounces in 1995.
In February 1997, development work began on a 1.6 mile decline from
surface at the northern end of the Super Pit to access from underground the
upper level remnants of the Mt. Charlotte orebody and the recently delineated
northern orebody. The decline is expected to be completed in the first quarter
of 1998. Homestake's share of the decline's cost is estimated to be $3 million.
Mt Percy
The Mt Percy open cuts were mined to their planned economic depth in
July 1992, at which time mining ceased. Previously stockpiled low-grade Mt Percy
ore is blended with non-refractory ore from the Super Pit.
HGAL's share of gold production was 1,955 ounces in 1996 and 1,350
ounces in 1995.
Mills
Fimiston - a 32,000-TPD mill with CIP leaching and refractory sulfide
flotation circuits that processes Super Pit and Mt. Charlotte ore. Approximately
$90 million (100% basis) was spent during 1995 and 1994 on an expansion program
at the Fimiston mill, including a 5,000-TPD free-milling sulfide circuit to
treat Mt. Charlotte ore. The increase in capacity has improved the mill's
efficiency and replaced the capacity of the Oroya mill which was dismantled in
1995 to allow for further planned expansion of the Super Pit.
25
Croesus - a 3,000-TPD mill with CIP and refractory sulfide flotation
circuits that processes ore from the Super Pit.
Mt Percy - a 2,500-TPD mill with a CIP circuit that processes ore from
Mt Percy, the Super Pit and Mt. Charlotte.
Gidji - a roaster complex which comprises two roasters and a CIP
circuit to process all sulfide concentrates.
The combined mills processed 12.8 million tons of ore in 1996 and 10.7
million tons in 1995.
Cash operating costs per ounce were lower in 1996 primarily due to
increased mill throughput resulting from the increased milling capacity and
efficiencies following completion of the Fimiston mill expansion. Cash operating
costs per ounce declined by 9% in Australian dollars. However, due to an
increase in exchange rates, the decline in cash operating costs per ounce in
U.S. dollars was only 2%. The mining rate at the Super Pit continued to increase
in 1996 as extensive pit cutbacks were made.
HGAL's share of gold production (net of DSA) from the consolidated
Kalgoorlie operations was 368,816 ounces in 1996 compared to 311,416 ounces in
1995.
Geology
The ore deposits mined in the Kalgoorlie Goldfields occur within an
intensely mineralized shear zone system in dolerite host rocks, within the
Norseman-Wiluna Greenstone Belt which is part of the Yilgarn Block of Western
Australia. The rocks are of Archaen age. The favorable structural metamorphic
and lithologic setting in conjunction with hydrothermal activity controlled gold
mineralization. During its history of operations since 1893, in excess of 40
million ounces of gold have been produced from the Kalgoorlie properties at
depths of up to 4,000 feet from high-grade lodes and adjacent disseminated
mineralization in the Golden Mile Dolerite, and from the large stockwork
mineralization which characterizes the Mt. Charlotte and Reward (underground)
ore bodies.
HGAL has a 50% share (subject to the DSA prior to June, 1996) of the
following amounts (Homestake's ownership interest in HGAL at December 31, 1996
and 1995 was 100% and 88.1%, respectively. See "SIGNIFICANT 1997 AND 1996
DEVELOPMENTS" on page 3.):
Year-end Proven and Probable Ore Reserves
(100% Basis)
1996 1995
--------------- ----------------
Tons of ore (000) 196,589 184,136
Ounces of gold per ton 0.066 0.072
Contained ounces of gold (000) 12,892 13,180
26
Operating Data (100% Basis)
1996 1995
--------------- ----------------
Production Statistics:
Super Pit:
Tons of ore mined (000) 11,836 8,670
Stripping ratio (waste:ore) 5.6:1 7.1:1
Tons of ore milled (000) 10,926 9,186
Mill feed ore grade (oz. gold/ton) 0.065 0.067
Mill recovery (%) 87 88
Gold recovered (000 ozs.) 612 551
Mt. Percy:
Tons of stockpiled ore milled (000) 200 125
Mill feed ore grade (oz. gold/ton) 0.025 0.026
Mill recovery (%) 83 85
Gold recovered (000 ozs.) 4 3
Mt. Charlotte:
Tons of ore mined (000) 1,694 1,440
Tons of ore milled (000) 1,707 1,429
Mill feed ore grade (oz. gold/ton) 0.079 0.076
Mill recovery (%) 91 88
Gold recovered (000 ozs.) 122 95
Combined Production Statistics:
Tons of ore mined (000) 13,530 10,110
Tons of ore milled (000) 12,833 10,740
Mill feed ore grade (oz. gold/ton) 0.067 0.068
Mill recovery (%) 88 88
Gold recovered (000 ozs.) 738 649
Homestake's Consolidated Cost per Ounce of Gold
Produced:
Cash operating costs $291 $296
Noncash costs 60 46
--------------- ----------------
Total production costs $351 $342
CHILE
In July 1996, Homestake and Corporacion Nacional del Cobre Chile
("Codelco"), a state-owned mining company in Chile, formed a new company, Agua
de la Falda S.A. ("La Falda") to explore near Homestake's former El Hueso mine
in northern Chile. Homestake and Codelco contributed property interests in the
area to the new company. In addition, Codelco contributed the existing El Hueso
plant which had been under lease to Homestake. Homestake owns 51% of the
corporation and Codelco owns the remaining 49% interest. Homestake also conducts
separate exploration programs throughout Chile. Homestake's office is in
Santiago, Chile.
27
La Falda holds mining properties covering approximately 8,336 acres. La
Falda is developing the Agua de la Falda mine which contains 187,000 ounces of
oxide reserves, and will continue drilling and metallurgical testing of the much
larger Jeronimo deposit, where, to date, approximately 3.1 million tons of
mineralized material, at an average grade of 0.158 ounces per ton, have been
outlined. The Agua de la Falda mine is located approximately three miles
northeast of the former El Hueso mine, in the Maricunga District of Chile about
600 miles north of Santiago at an elevation of approximately 12,500 feet. Access
to the property is by 14 miles of dirt road.
Construction of facilities and underground mine development for the
Agua de la Falda mine commenced in late 1996. Mining commenced in January 1997
and initial production is expected in April 1997. The operations will utilize
both room-and-pillar and bench-and-fill underground mining methods. The existing
El Hueso facility will be used to heap leach the Agua de la Falda ore using the
Merrill Crowe process. Production is estimated at 27,000 ounces during 1997 and
is expected to average 40,000 to 45,000 ounces annually from 1998 through 2000.
Water and power is purchased from Codelco.
No royalties will be paid on the production from the current Agua de la
Falda reserves. However, any ores which may be extracted from the northern area
of the property are subject to royalty payment of 1.5% of net smelter returns on
production of over one million ounces.
In February 1995, the El Hueso mine closed as reserves were depleted
and the 6,000 TPD crushing plant was shut down. Leaching of stockpiles continued
through 1996. Reclamation of the El Hueso mine site is under way and will
continue during 1997. There is little flora or fauna present in the Maricunga
District, and no water sources are located nearby. Nonetheless, continued
environmental monitoring will be carried out for a period of time.
La Falda Geology
The La Falda property is located within the Potrerillos porphyry copper
district and comprises Mesozoic marine sediments that have been overlain by
Tertiary volcanics and intruded by Tertiary porphyries. Gold mineralization has
been mined historically in sediments and volcanics but the new Jeronimo deposit
is hosted largely by a single, permeable, gently dipping carbonate unit. The
near surface portion of the new deposit is oxidized and is the basis for the new
Agua de la Falda mining operation. The deeper and larger segment of the deposit
is sulphidic and open and part of the zone has been drilled out to mineralized
material status.
Homestake has a 51% share of the following amounts:
La Falda Year-end Proven and Probable Ore Reserves
(100% Basis)
1996
--------------
Tons of ore (000) 1,032
Ounces of gold per ton 0.181
Contained ounces of gold (000) 187
28
SULFUR
Homestake owns an undivided 16.7% interest in the Main Pass 299 sulfur
deposit, which at December 31, 1996 contained proven recoverable reserves of
approximately 66 million long tons of sulfur. Freeport McMoRan Resource
Partners, Limited Partnership ("FRP") owns a 58.3% interest in the deposit and
is the operator under a joint operating agreement. IMC Fertilizer Inc. owns the
remaining 25%.
The sulfur deposit is located in the Gulf of Mexico approximately 36
miles east of Venice, Louisiana in water approximately 210 feet deep. The
deposit is approximately 1,500 feet below the sea floor. A royalty of 12.5% of
the wellhead value is payable under the terms of the federal sulfur leases.
The operating agreement provides that each participant pay its share of
capital and operating costs, and has the right to take its share of production
in kind in proportion to its undivided interest.
The sulfur deposit is being mined using the Frasch process, a method of
extraction which injects steam to liquefy the sulfur, which is then pumped to
surface. Initial sulfur production commenced in 1992 and full sulfur production
levels of 5,500 TPD were reached in December 1993. Sulfur production averaged
5,500 TPD during 1996. Based on current reserve estimates, projected costs and
prices, annual production is expected to average two million long tons over a
remaining reserve life currently in excess of 30 years.
FRP filters, blends, markets and delivers Homestake's share of sulfur
production under an agreement having an initial term of ten years from
commencement of production in 1992. Homestake can terminate the agreement by
giving FRP two years notice.
In response to a weakening sulfur market, Main Pass 299 operations have
temporarily reduced production and sales volumes. Homestake's realized sales
price for sulfur is a blend of various market prices, including the Tampa
market, and is net of a 2.625% marketing fee.
At December 31, 1996 the Company's investment in the Main Pass 299
sulfur mine was approximately $110 million. In accordance with the Company's
accounting policy for reviewing the recoverability of its investment in
operating mines, the Company has estimated future Main Pass undiscounted net
cash flows based on its share of proven reserves, estimated future sales prices
(considering historical and current prices, price trends and related factors),
production, capital and reclamation costs.
In estimating its future undiscounted net cash flows, the Company has
assumed an average future sales price for sulfur of approximately $70 per ton
over the expected remaining 30 year life of the mine. The current market for
sulfur is depressed. However, during the past 10 years the market for sulfur has
been cyclical with prices (Tampa market) ranging between $50 and $142 per ton
and averaging over $99 per ton. During the years ended December 31, 1996 and
1995, the Company realized prices of $60 and $68 per ton, respectively. Although
the Company does not expect significant improvement in sulfur prices during
1997, the Company believes that future prices over the life of this mine will be
sufficient to recover its investment. This view is based on the historical
volatility of sulfur prices and on the low operating cost structure of the Main
Pass mine.
Estimates of future cash flows are subject to risks and uncertainties
and it is possible that changes could occur in the near term, which may affect
the recoverability of the Company's investment in the Main Pass operations. If
the sulfur market remains depressed for a period of time, the Company may not be
29
able to recover all of its investment in the Main Pass mine and future
write-downs of up to $110 million may be required.
During sulfur exploration, oil and gas were discovered overlying the
sulfur deposit. In 1990, the participants acquired the oil and gas rights from
Chevron USA Inc.
The federal oil and gas lease requires a 16.7% royalty payment based on
wellhead value. In addition, Chevron retained the right to share in the proceeds
of future production should the price or volume realized exceed those which were
used by the parties as the basis for determining the purchase price.
Oil and gas production, which peaked during 1992, is expected to
continue to decline over the next few years. Oil production (100% basis) totaled
3.9 million barrels in 1996 compared to 4.5 million barrels in 1995. Homestake's
share of remaining recoverable oil reserves at December 31, 1996 is estimated to
be 1.5 million barrels after adjusting for the federal royalty and future
production due to Chevron. The remaining carrying value of Homestake's
investment in the Main Pass 299 oil and gas property is $5.7 million at December
31, 1996.
Homestake has a 16.7% share of the following amounts:
Year-end Proven and Recoverable Reserves
(100% Basis)
1996 1995
--------------- ----------------
Tons of sulfur (000) 66,182 68,130
Barrels of oil (000) 12,751 15,873
Production Statistics (100% Basis)
1996 1995
--------------- ----------------
Tons of sulfur (000) 1,950 2,190
Barrels of oil (000) 3,900 4,535
Homestake's Per Unit Data
1996 1995
--------------- ----------------
Average Sales Realization:
Per ton of sulfur $60 $68
Per barrel of oil 19 16
Production Costs:
Sulfur cash operating costs per ton $57 $55
Sulfur noncash costs per ton 11 11
--------------- ----------------
Total production costs $68 $66
Oil cash operating costs per barrel $ 5 $ 5
Oil noncash costs per barrel 7 8
--------------- ----------------
Total production costs $12 $13
30
MINERAL EXPLORATION AND DEVELOPMENT
Total exploration expenses, including in-mine grass roots exploration
at Homestake's operating mines, amounted to $45.4 million in 1996 and $27.5
million in 1995. The current level of exploration spending is expected to
continue in 1997. Expenses related to the in-mine definition drilling at
Homestake's operating mines totaled an additional $5.0 million in 1996 and $7.2
million in 1995. In-mine definition drilling expenses are included in the
individual mine property operating expenses and cost per ounce calculations.
United States
United States exploration expenses totaled $11.9 million in 1996 and
$12.8 million in 1995. Domestic exploration expenses in 1997 are expected to be
$13.3 million, including $2 million at the equity-accounted Pinson Partnership.
Exploration at the Ruby Hill Project expanded into several areas
surrounding the West Archimedes deposit during 1996. Drilling beneath the West
Archimedes oxide deposit encountered deep, thick intercepts of disseminated gold
mineralization. The mineralization is hosted by several carbonate units and is
sulfide bearing. There are sections of higher-grade material present and
follow-up drilling is underway. Exploration expenditures totaled approximately
$2.9 million during the year and $1.8 million of exploration expenditures are
planned for 1997. Permitting for mining the West Archimedes oxide deposit
proceeded as scheduled and construction began in February, 1997. Once in full
operation, Ruby Hill will produce approximately 105,000 ounces of gold annually
at an estimated total cash cost of approximately $140 per ounce.
Exploration drilling was conducted on several other Nevada prospects
during the year including the White Pine and Mountain View projects but the
results did not warrant further work by Homestake.
At the Pinson Partnership, Homestake and Barrick have committed to a
substantial exploration program over the next several years to test the deeper
potential of the 24,500 acre property. Homestake has budgeted $2 million for its
share of 1997 expenditures.
During 1996, exploration drilling continued at the Homestake mine in
the vicinity of the Open Cut. The program is now complete and resulted in
defining additional mineralized material. The operation currently is in the
process of evaluating various mining alternatives to access this material.
Expenditures totaled $.8 million in 1996. Homestake is budgeting $.7 million in
1997 for exploration in and around the Homestake mine.
International
Homestake also investigates and evaluates gold exploration and
acquisition opportunities internationally. International exploration expenses
totaled $33.5 million in 1996.
Homestake explores for gold reserves throughout Canada. Under a
three-year agreement entered into in 1995, Homestake and Prime jointly fund and
participate (51% Homestake and 49% Prime) in the Canadian exploration program.
All of Homestake's Canadian exploration activities, with the exception of the
areas surrounding current operating mines and certain previously active
exploration properties, are conducted in accordance with this agreement.
31
At Eskay Creek, surface exploration drilling north of the mine during
1996 discovered additional ore-grade mineralization in both the NEX and
Hangingwall zones. Further drilling is planned for 1997, both on the surface and
underground to test the down-dip extensions of the NEX and Hangingwall zones
which have now been intersected over 900 feet north of the previously identified
ore zones. The 1996 exploration programs totaled $3.8 million, and $1.9 million
is budgeted for 1997.
Several phases of drilling were completed during 1996 by Minvita
Enterprises (7% owned by Homestake and Prime) and Teuton Resources (6% owned by
Homestake and Prime) on Teuton and Minvita's jointly owned Clone property in
British Columbia. Results from the drilling programs were insufficient to
justify further investment by Homestake for additional exploration in 1997. The
carrying values of the investments in Teuton and Minvita were reduced to market
at December 31, 1996 resulting in a $1.5 million charge to 1996 pretax earnings.
At the Agua de la Falda property in Chile, Homestake has continued its
exploration of the Jeronimo zone and has completed a feasibility study and is
developing the oxide portion of this deposit in conjunction with Codelco (see
"CHILE" on page 27). The majority of the mineralization in the Jeronimo zone is
accompanied by pyrite and other sulfides. To date, approximately 3.1 million
tons of mineralized material, at an average grade of 0.158 ounces per ton, have
been outlined at the Jeronimo discovery, and drilling is continuing. Exploration
expenditures totaled $5.5 million during 1996 and $2.5 million is budgeted for
1997.
At the El Foco project in Bolivar State, Venezuela, Homestake
drill-tested several gold-in-soil targets at the northern end of the property.
Ore grade intercepts in both bedrock and overlying saprolite were discovered in
the A-8 target area but, to date, the exploration has not delineated a
commercially viable deposit. Exploration expenditures on this property totaled
$3.3 million in 1996 and $2 million is budgeted for 1997.
During 1996, Homestake and Franc-Or Resources Ltd entered into an
agreement whereby Homestake can earn up to a 70% interest in the St. Pierre
Project in French Guiana. Homestake is the operator. During the year, Homestake
enlarged the gold-in-soil target area and drill testing commenced. Expenditures
amounted to $1.3 million in 1996 and $2 million is budgeted for 1997.
During 1996, Homestake managed twelve projects throughout Australia,
including Junction Reefs in New South Wales, and participated in four other
Australian joint ventures. Homestake's share of expenditures amounted to $7.9
million in 1996 and $7.6 million is budgeted for 1997, including $2.2 million
for in-mine grass roots exploration at Kalgoorlie. Total in-mine grass roots
exploration at Kalgoorlie totaled $2.7 million in 1996.
GLOSSARY AND INFORMATION ON RESERVES
GLOSSARY
The following terms used in the preceding discussion mean:
"Cash operating costs" are costs directly related to the physical
activities of producing gold, and include mining, processing and other plant
costs, deferred mining adjustments, third-party refining and smelting costs,
marketing expenses, on-site general and administrative costs, in-mine drilling
expenditures that are related to production and other direct costs, but exclude
depreciation, depletion and amortization,
32
corporate general and administrative expense, mineral exploration expense,
royalties, federal and state income and production taxes, Canadian mining taxes,
financing costs and accruals for final reclamation.
"Other cash costs" are costs that are not related to, but may result
from, gold production activities, and include royalties and federal and state
production taxes, but excludes Canadian mining taxes.
"Total cash costs" are the sum of cash operating costs and other cash
costs.
"Noncash costs" are costs that are typically accounted for ratably over
the life of an operation and include depreciation, depletion and amortization of
capital assets, accruals for the costs of final reclamation and long-term
monitoring and care that are usually incurred at the end of mine life, and the
amortization of the economic cost of property acquisitions, but exclude
amortization of deferred tax purchase adjustments relating to property
acquisitions established in accordance with Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes."
"Total production costs" is the sum of cash operating costs, other cash
costs and noncash costs.
"In-situ deposit" refers to reserves still in the ground. This does not
include previously mined stockpiled reserves that are being stored for future
processing.
"Mineral deposit" and/or "Mineralized material" is gold-bearing
material that has been physically delineated by one or more of a number of
methods including drilling, underground work, surface trenching and other types
of sampling. This material has been found to contain a sufficient amount of
mineralization of an average grade of metal or metals to have economic potential
that warrants further exploration evaluation. While this material is not
currently or may never be classified as reserves, it is reported as mineralized
material only if the potential exists for reclassification into the reserves
category. This material has established geologic continuity, but cannot be
classified in the reserves category until final technical, economic and legal
factors have been determined and the project containing the material has been
approved for development. Under United States Securities and Exchange Commission
standards, a mineral deposit does not qualify as a reserve unless the recoveries
from the deposit are expected to be sufficient to recover total cash and noncash
costs for the mine and related facilities.
"Run-of-mine ore" is mined ore which has not been subjected to any
pretreatment, such as washing, sorting or crushing, prior to processing.
"Stripping ratio" is the ratio of the number of tons of waste to the
number of tons of ore extracted at an open-pit mine.
"Tonnage" and "grade" refer, respectively, to the quantity of reserves
and mineralized material and the amount of gold (or other products) contained
therein and include, in the case of reserves, estimates for mining dilution but
not for other processing losses.
"Tons" means short tons (2,000 pounds) unless otherwise specified.
"Adit" or "Portal" is a tunnel driven into a mountainside providing
access to an ore deposit.
33
INFORMATION ON RESERVES
Gold
The proven and probable gold ore reserves stated in this report reflect
estimated quantities and grades of gold in in-situ deposits and in stockpiles of
mined material that Homestake believes can be recovered and sold at prices
sufficient to recover the estimated future cash costs of production and
remaining investment. The estimates of cash costs of production are based on
current and projected costs. Estimated mining dilution has been factored into
the reserve calculation. The Company used a spot price of $375 per ounce of gold
in its mine-by-mine evaluation of mining properties and investments at December
31, 1996.
Silver
The proven and probable silver ore reserves have been calculated on the
same basis as gold ore reserves and were based on a spot price of $5 per ounce
of silver.
Sulfur
Homestake's proved sulfur reserves represent the quantity of sulfur in
the Main Pass 299 deposit for which geological, engineering and marketing data
give reasonable assurance of recovery and sale under projected economic and
operating conditions at prices sufficient to cover the estimated future cash
costs of production and the remaining investment.
Oil
Homestake's proved oil reserves at Main Pass 299 are the estimated
quantity of crude oil and condensate which geological and engineering data give
reasonable assurance of recovery and sale under projected operating conditions
at prices sufficient to cover the estimated future cash costs of production and
the remaining investment. The estimate is based on limited reservoir and
engineering data.
Estimation of Reserves
Gold and silver reserves are estimated for each of the properties
operated by Homestake based upon factors relevant to each deposit. Gold ore
reserves for those properties not operated by Homestake are based on reserve
information provided to Homestake by the operator. Homestake has reviewed but
has not independently confirmed the information provided by these operators.
The sulfur and oil reserves at Main Pass 299 are based on information
provided by the operator. Homestake reviewed the initial reserve data with
independent consultants. Homestake has reviewed subsequent adjustments to these
reserves but has not independently confirmed the reserve adjustments provided by
the operator.
Other Information
Ore reserves are reported as general indicators of the life of mineral
deposits. Changes in reserves generally reflect (i) efforts to develop
additional reserves; (ii) depletion of existing reserves through production;
(iii) actual mining experience; and (iv) price forecasts. Grades of ore actually
processed from time to time may be different from stated reserve grades because
of geologic variation in different areas
34
mined, mining dilution, losses in processing and other factors. Recovery rates
vary with the metallurgical and other characteristics and grade of ore
processed.
Neither reserves nor projections of future operations should be
interpreted as assurances of the economic life of mineral deposits or of the
profitability of future operations.
ENVIRONMENTAL MATTERS
General
Homestake has made significant capital expenditures to minimize the
effects of its operations on the environment. Capital expenditures primarily are
for the purchase or development of environmental monitoring equipment and
containment of waste. In 1996, these expenditures totaled approximately $7
million compared to $4 million in 1995. Homestake estimates that during 1997,
capital expenditures for such purposes will be approximately $12 million and
that during the five years ending December 31, 2001, such capital expenditures
will be approximately $30 million.
Homestake also incurs significant operating costs in order to protect
the environment. Operating costs include current reclamation costs, costs for
environmental monitoring and studies to identify and quantify environmental
impacts, if any, and accruals for future reclamation expenditures. Such
additional costs totaled approximately $17 million in 1996, compared with
approximately $15 million in 1995, not including related depreciation expense of
$3 million and $5 million, respectively. Homestake estimates that environmental
and related operating and depreciation costs in 1997 will approximate the 1996
amounts. The above amounts exclude expenditures related to the Company's
discontinued uranium operations.
Under applicable law and the terms of permits under which Homestake
operates, Homestake is required to reclaim land disturbed by its operations. In
the mining industry, most reclamation work takes place generally after mining
and related operations terminate. Homestake charges reclamation costs incurred
in connection with its exploration activities as expenses in the year in which
incurred. For mining operations, Homestake provides for final reclamation on a
units-of-production basis over the individual operating mine lives. In addition,
Homestake has adopted a policy of conducting reclamation concurrently with
mining operations where practical. As a result, an increasing amount of
reclamation is being conducted simultaneously with mining. At December 31, 1996
and 1995, Homestake had accrued a total of $55.4 million and $56.4 million,
respectively, for future reclamation and related costs.
Homestake's operations are conducted under permits issued by regulatory
agencies. Many permits require periodic renewal or review of their conditions.
Homestake cannot predict whether it will be able to renew such permits or
whether material changes in permit conditions will be imposed.
RCRA
The EPA has not yet issued final regulations for management of mining
wastes under the Resource Conservation and Recovery Act ("RCRA"). The ultimate
effects and costs of compliance with RCRA cannot be estimated at this time.
35
CERCLA
The United States Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA"), requires the EPA to list known or
threatened releases of hazardous substances, pollutants or contaminants. In
1983, the EPA began publishing the NPL. The listing of a site does not
constitute a determination that any remedial action is required, nor that any
person is liable for any remedial action or environmental damage. CERCLA imposes
heavy liabilities on any person who is responsible for an actual or threatened
release of any hazardous substance, including liability for oversight costs
incurred by the EPA. Legislative proposals and congressional hearings for CERCLA
reauthorization have occurred in 1994 through 1996. CERCLA reauthorization is
expected to be enacted in 1997.
Whitewood Creek
Deposits of mine rock tailings on lands along an 18-mile stretch of
Whitewood Creek in western South Dakota formerly constituted a site on the NPL.
The EPA asserted that discharges of tailings by mining companies, including
Homestake, beginning in the nineteenth century, contaminated the soil and stream
bed.
In August 1990, Homestake signed a consent decree with the EPA in
United States of America v. Homestake Mining Company of California, (U.S.
District Court, W.D., S.D., Civil Action 90-5101). The consent decree required
Homestake to carry out remedial work and monitoring of the site at Homestake's
expense and to reimburse the EPA for oversight costs. The decree also provided
for the three counties in which the property is located to enact institutional
controls which would limit the future use of the properties included within the
area of the site. Remedial field work was completed in 1993. Institutional
control ordinances prepared with the assistance of the Company were adopted in
all three of the affected counties. The consent decree was terminated by the
Court on January 10, 1996 and the site was deleted from the NPL on August 13,
1996.
In connection with the program to implement institutional controls, the
Company decided to offer to purchase all properties along Whitewood Creek that
were affected by the institutional controls. Approximately $2 million has been
spent to acquire property at the site from 11 landowners. Negotiations are
continuing to acquire more of the site. The Company estimates that the total
cost for purchasing all of the affected property would be approximately $6
million. These costs are expensed as and when incurred.
In 1983, the State of South Dakota filed claims against Homestake for
natural resources damages resulting from the release of tailings into the
Whitewood Creek site. The State has taken no action to pursue the claims.
Grants Tailings
Homestake's closed uranium mill site near Grants, New Mexico is listed
on the NPL. The EPA asserted that leachate from the tailings contaminated a
shallow aquifer used by some of the residents in adjacent residential
subdivisions. Homestake paid the cost of extending the municipal water supply to
the subdivisions. Homestake also has operated a water injection and collection
system since 1976 that has significantly improved the quality of the aquifer.
The estimated costs of continued remediation are included in the accrued
reclamation liability. Homestake has settled with the EPA concerning its
oversight costs for this site and no additional oversight costs are accruing.
Homestake signed a Consent Decree with the EPA related to the ground water
issues and an Administrative Order on Consent ("AOC") for radon studies of
36
the adjacent subdivisions. The work required by the Consent Decree and AOC has
been completed and both have been terminated.
Under Nuclear Regulatory Commission ("NRC") regulations, the
decommissioning of the uranium mill tailings facilities is in accordance with
the provisions of the facility's license. The facility license sets the closure
of the two tailings impoundments as 1996 and 2001, subject to extension under
certain circumstances. An extension has been requested for a final closure date
to allow for dewatering of the tailings prior to final closure. No difficulties
are anticipated in obtaining the extension. The NRC and EPA signed a Memorandum
of Understanding in 1993 which has established the NRC as the oversight and
enforcement agency for decommissioning and reclamation of the site. Mill
decommissioning was completed in 1994 and final closure of the Grants large
tailings site is scheduled for completion in 2003. During 1996, the Company
incurred approximately $3.5 million of reclamation expenditures at the Grant's
facility and an additional $4.1 million is planned to be expended during 1997.
Title X of the Energy Policy Act of 1992 (the "Act") and subsequent
amendments to the Act authorized appropriations of $335 million to cover the
Federal Government's share of certain costs of reclamation, decommissioning and
remedial action for by-product material (primarily tailings) generated by
certain licensees as an incident of uranium sales to the Federal Government.
Reimbursement is subject to compliance with regulations of the Department of
Energy ("DOE"), which were issued in 1994. Pursuant to the Act, the DOE is
responsible for 51.2% of the past and future costs of reclaiming the Grants site
in accordance with Nuclear Regulatory Commission license requirements. Through
December 31, 1996 the Company has received $14.2 million from the DOE and the
accompanying balance sheet at December 31, 1996 includes an additional
receivable of $16.2 million for the DOE's share of reclamation expenditures made
by the Company through 1996. The Company believes that its share of the
estimated remaining cost of reclaiming the Grants facility, net of estimated
proceeds from the ultimate disposals of related assets, is fully provided in the
financial statements at December 31, 1996.
In 1983, the State of New Mexico filed claims against Homestake for
natural resource damages resulting from the Grants site. The State has taken no
action to pursue the claims.
Lead
Prior to May 1986, Homestake Lead Company of Missouri ("HLCM"), a
wholly-owned subsidiary of the Company, was a joint venturer and partner with
subsidiaries of AMAX, Inc. ("AMAX") in the production of lead metal and lead
concentrates in Missouri. In May 1986, HLCM acquired AMAX's interest in the
Missouri facilities and operations and agreed to assume certain limited
liabilities of AMAX in connection with the Missouri facilities. In November
1986, HLCM entered into a partnership, The Doe Run Company ("Doe Run"), with
subsidiaries of Fluor Corporation ("Fluor"), under which HLCM and the Fluor
subsidiaries combined their existing United States lead businesses. In May 1990,
HLCM sold its interest in Doe Run to Fluor.
In June 1991, HLCM and AMAX were notified of a potential claim by the
Jackson County, Mississippi Port Authority for contamination of soil and water
alleged to have resulted from storage and shipment of lead dross at the Port of
Pascagoula prior to the formation of Doe Run; since that time, a number of other
lead producers and former lead producers have also been so notified. Homestake
and other companies are working with the Port of Pascagoula to address the
potential lead contamination situated on certain property held by the Port
Authority. The Port of Pascagoula is taking primary responsibility for
conducting an investigation of the site, but the Port of Pascagoula also has
made claims for reimbursement against customers whose material was stored at and
shipped through the site. As a result of subsequent
37
investigations conducted by the Company and others, the Company believes that
most of the material at the Pascagoula site, as well as the material primarily
responsible for any contamination, is lead concentrate. Based on a review of
shipping records to date, less than half of the lead concentrate shipped through
the Port of Pascagoula was produced and sold for the account of the Company. The
State of Mississippi Department of Environmental Quality is, through regulatory
oversight, reviewing the investigation efforts and remediation plans that are
being developed by the Port Authority. Based on information currently available,
the Company believes the remediation costs should not exceed $1 million. The
Company's position is that the Port is primarily responsible for the cost of
remediation as owner of the property and as lessor with the ability to control
the activities of the stevedoring company, and also because the Port contributed
to the contamination by moving stored material. The Company believes that any
future costs it may incur in connection with this matter will not be material.
Foreign Operations
Homestake believes that its foreign operations comply with applicable
laws, regulations and permit conditions and has no knowledge of any significant
environmental liability or contingent liability resulting from its foreign
operations. Homestake expects that environmental constraints in foreign
countries will become increasingly strict.
CUSTOMERS
Sales to individual customers exceeding 10% of Homestake's consolidated
revenues are stated below. Homestake believes that the loss of any of these
customers would not have a material adverse impact on Homestake because of the
active worldwide market for gold.
1996 1995
---------------- ----------------
($ in Thousands)
Customer A $ 129,000 $ 92,000
B 117,000 102,000
C 77,000
D 77,000
E 101,000
F 91,000
CREDIT FACILITIES
See note 13 "Long-term Debt" on page 71 in the Notes to the
Consolidated Financial Statements for details of the Company's credit
facilities.
38
EMPLOYEES
The number of full-time employees at December 31, 1996 of Homestake and
its subsidiaries was:
Homestake mine (1) 957
McLaughlin mine 128
Ruby Hill mine 9
Nickel Plate mine 20
Eskay Creek mine 72
Snip mine 178
Agua de la Falda mine (1) 29
United States corporate staff and other 75
Canada exploration and corporate staff 31
HGAL exploration and corporate staff 25
United States exploration 21
Santa Fe mine 2
Uranium 7
Chile exploration and corporate staff 14
-----------
Total 1,568
The number of full-time employees at December 31, 1996 in jointly-owned
operations in which Homestake participates was:
Kalgoorlie Consolidated Gold Mines Pty Ltd (1) 1,022
Williams Operating Corporation 616
Round Mountain mine 588
Teck-Corona Operating Corporation (1) 245
Pinson Mining Company 98
Marigold Mining Company 103
Main Pass 299 193
-------------
Total 2,865
<FN>
(1) Operations where a portion of the employees are represented by a
labor union.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages at December 31, 1996,
their business experience and principal occupations during the past five years
and their business backgrounds are:
Jack E. Thompson - President and Chief Executive Officer since May
1996, age 46. He was President and Chief Operating Officer of the Company from
August 1994 until May 1996, and from August 1994 to June 1995, he was also
Chairman of Prime. He was Executive Vice President, Canada of the Company and
President of Prime from 1992 through August 1994. He also was President of North
American Metals Corp. from 1988 until 1993. He is a mining engineer with over 26
years of experience in mining and mine management.
39
Gene G. Elam - Vice President, Finance and Chief Financial Officer
since September 1990, age 57. Before joining Homestake, he was Senior Vice
President, Administrative Services of Pacific Gas and Electric Company from
April 1989 through August 1990 and was Vice President and Controller from
January 1987 through March 1989. He was President and Chief Executive Officer of
The Pacific Lumber Company from 1982 to 1986, President in 1980 and 1981, and
Chief Financial Officer from 1972 until 1980. He is a certified public
accountant with over 35 years of experience in accounting and finance.
Lee A. Graber - Vice President, Corporate Development since 1983, age
48. From 1980 to 1983, he was Manager, Corporate Development and Planning. He
has over 26 years of experience in finance and corporate development.
Wayne Kirk - Vice President, General Counsel and Secretary since
September 1992, age 53. He was a partner in Thelen, Marrin, Johnson & Bridges
from 1976 to 1992. He has practiced law for more than 27 years.
Gregory A. Lang - Vice President, Development since March 1997, age 41.
He was the Vice President of Homestake International Minerals Limited from June
1996 until March 1997, and was General Manager, Project Development from January
1996 until June 1996 as well as General Manager of the Ruby Hill project from
October 1994 through June 1996, and was General Manager of the Nickel Plate mine
from 1993 until October 1994. He joined Homestake in 1992 as Resident Manager of
the Santa Fe mine, a positon he had held with International Corona Corporation
since 1988. He is a mining engineer with over 19 years of experience in mining
and mine management.
Gillyeard J. Leathley - Vice President, Operations since May 1995, age
59. He joined Homestake in 1992 as Vice President, Canadian Operations. Prior to
joining Homestake, he was Senior Vice President, Operations for International
Corona Corporation from 1986 to September 1992. He has over 39 years of
experience in mining and mine management.
Donald W. T. Lewis - Vice President, Evaluations since March 1997, age
39. He was Director, North American Exploration/Evaluations from January 1996
until March 1997. He joined Homestake in 1992 as Director, Project Generation.
Prior to joining Homestake he was Exploration Manager - Western Canada for
International Corona Corporation from 1989 until 1992. He is a geologist with
more than 17 years of professional experience.
William F. Lindqvist - Vice President, Exploration since August 1995,
age 54. He rejoined Homestake from Newcrest Mining Company, where he was
Executive General Manager, Exploration. He was Vice President, Exploration at
Homestake from 1990 through 1992. He is a geologist with more than 26 years of
professional experience.
Stephen A. Orr - Vice President, U.S. Operations since December 1996,
age 41. He was the General Manager of the Homestake mine from January 1995 until
December 1996, and was Operations Manager from 1993 to 1995 and Manager, Mine
Engineering from 1992 to 1993. He was a Financial Analyst in the Corporate
Finance Department from 1990 to 1992. He has been with Homestake since 1981 and
has over 19 years of experience in mining and mine management.
Ronald D. Parker - Vice President Canada and President, Homestake
Canada Inc. since August 1994, age 46. He also has been President and Chief
Executive Officer of Prime since August 1994. He was the Resident General
Manager of the McLaughlin mine from 1988 until August 1994. He is an engineer
with over 25 years of experience in mining and mine management.
40
David W. Peat - Vice President and Controller since December 1995, age
44. He was Controller of the Company from 1992 through November 1995. Prior to
joining Homestake in 1992, he was Vice President, Controller for International
Corona Corporation. He is a chartered accountant with over 20 years of
accounting and finance experience.
Richard A. Tastula - Vice President, Australia since August 1995, age
53. He has been Managing Director of Homestake Gold of Australia Limited since
1993, and was Director of Operations from 1991 to 1993. For 23 years prior to
that time, he held various positions with Western Mining Corporation, Limited.
He has over 31 years of experience in mining and mine management.
Jan P. Berger - Treasurer since August 1992, age 41. He has been with
Homestake since 1989, first as Senior Financial Analyst and from 1991 to 1992 he
was Manager, Internal Audit. Prior to joining Homestake, he was an analyst for
Bechtel Financing Services Inc. Before Bechtel, he worked as an engineering and
exploration geologist in the consulting and petroleum industries. He has over 16
years of experience in exploration and finance.
No officer is related to any other officer by blood, marriage or
adoption.
Officers are elected to serve until the next annual meeting of the
Board of Directors at which officers are elected or until their successors are
chosen.
No arrangement or understanding exists between any officer and any
other person under which any officer was elected.
ITEM 2 - PROPERTIES
See Item 1 - Business.
ITEM 3 - LEGAL PROCEEDINGS
Certain environmental proceedings in which the Company is or may become
a party are discussed on pages 35 through 38 under the caption "ENVIRONMENTAL
MATTERS."
The Company and its subsidiaries are defendants in various legal
actions in the ordinary course of business. In the opinion of management, such
matters will be resolved without material affect on the Company's financial
condition.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
41
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
a. The common stock of Homestake Mining Company is registered and traded
principally on the New York Stock Exchange under the symbol "HM." It is
also listed and traded on the Australian Stock Exchange and in
Switzerland on the Basel, Geneva and Zurich stock exchanges under the
same symbol.
b. The number of holders of common stock of record as of March 11, 1997
was 22,806.
c. Information about the range of sales prices for the common stock and
the frequency and amount of dividends declared during the past two
years appears in the tables on pages 86 included under Item 8 -
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Information about certain
restrictive covenants under the Company's line of credit appears in
note 13 entitled "Long-term Debt" on page 71 in the Notes to
Consolidated Financial Statements included under Item 8 - FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
d. Reference is hereby made to the note 19 entitled "Shareholders' Equity"
on page 77 in the Notes to Consolidated Financial Statements included
under Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
e. The Registrant did not sell any securities during 1996 that were not
registered under the Securities Act of 1933.
42
ITEM 6- SELECTED FINANCIAL DATA
Five-Year Selected Data
(Dollar amounts in thousands, except per share and per ounce amounts)
1996 1995 1994 1993 1992
------------- -------------- -------------- -------------- -------------
Operations
- ----------
Revenues $ 766,936 $ 746,365 $ 705,487 $ 722,228 $ 683,520
------------- -------------- -------------- -------------- -------------
Production costs 475,333 481,886 447,129 454,623 470,374
Depreciation, depletion and amortization 112,353 99,602 76,171 103,377 117,483
Administrative and general expense 36,965 37,283 38,159 40,553 48,514
Exploration expense 45,382 27,541 21,347 17,457 27,798
Interest and other expense 25,219 14,587 16,868 13,639 19,114
Write-downs and restructuring costs 24,183 178,732
Income and mining tax expense (credit) 26,333 39,141 18,880 12,775 (2,889)
Minority interests 15,070 15,998 8,917 3,127 230
------------- -------------- -------------- -------------- -------------
736,655 716,038 627,471 669,734 859,356
------------- -------------- -------------- -------------- -------------
Net income (loss) $ 30,281 (1) $ 30,327 $ 78,016 (2) $ 52,494 (3) ($175,836)(4)
============= ============== ============== ============== =============
Per Share
- ---------
Net income (loss) $ 0.21 (1) $ 0.22 $ 0.57 (2) $ 0.38 (3) $ (1.31)(4)
============= ============== ============== ============== =============
Dividends paid $ 0.20 $ 0.20 $ 0.18 $ 0.10 $ 0.20
============= ============== ============== ============== =============
Financial Position
- ------------------
Cash and short-term investments $ 219,757 $ 212,373 $ 205,180 $ 134,719 $ 71,064
Other current assets 159,591 156,344 137,619 103,491 108,288
Property, plant and equipment - net 1,007,030 846,776 808,221 830,228 911,588
Other long-term assets 95,730 106,140 50,948 52,812 54,229
------------- -------------- -------------- -------------- -------------
Total assets $1,482,108 $ 1,321,633 $ 1,201,968 $1,121,250 $1,145,169
============= ============== ============== ============== =============
Current liabilities $ 116,731 $ 98,421 $ 96,895 $ 104,350 $ 155,894
Long-term debt 185,000 185,000 185,000 189,191 205,174
Other long-term obligations 114,168 120,418 110,719 93,674 88,002
Deferred income and mining taxes 201,454 189,925 136,274 164,030 162,587
Minority interests 96,203 92,012 84,310 54,761 68,074
Shareholders' equity 768,552 635,857 588,770 515,244 465,438
------------- -------------- -------------- -------------- -------------
Total liabilities and shareholders'
equity $1,482,108 $ 1,321,633 $1,201,968 $1,121,250 $1,145,169
============= ============== ============== ============== =============
Ratios
- ------
Debt to equity 24% 29% 31% 37% 53%
Return on shareholders' equity 4% 5% 14% 11% (31)%
Capital Expenditures $ 105,923 $ 80,979 $ 88,654 $ 57,825 $ 63,453
- --------------------
Operating Statistics
- --------------------
Gold production (thousands of ounces) 1,968 1,877 1,696 1,918 1,912
Average gold price realized per ounce $389 $386 $384 $359 $348
Total cash costs per ounce $248 $257 $252 $229 $246
Reserves
- --------
Gold (millions of ounces) 20.4 21.5 17.9 18.4 17.3
Eskay Creek silver (millions of ounces) 56.1 47.4 51.5 55.1
Sulfur (millions of long tons) 11.0 11.4 11.7 11.0 11.2
43
<FN>
(1) Includes income of $24 million or $0.16 per share from a reduction in
the Company's accrual for prior year income taxes, a foreign currency
exchange loss on intercompany advances of $7.4 million ($8.9 million
pretax) or $0.05 per share primarily related to the Company's
Canadian-dollar denominated advances to HCI, write-downs of $8.3 million
($9 million pretax) or $0.06 per share in the carrying value of
investments in mining company securities, costs of $2.8 million ($3.4
million pretax) or $0.02 per share related to the now terminated
proposed merger with Santa Fe, and proceeds of $4.9 million ($5.5
million pretax) or $0.03 per share from a litigation recovery.
(2) Includes a gain of $12.6 million ($15.7 million pretax) or $0.09 per
share on the sale of the Company's interest in the Dee mine and a gain of
$11.2 million (no tax expense) or $0.08 per share on dilution of the
Company's interest in Prime.
(3) Includes expense of $12.8 million ($16 million pretax) or $0.09 per share
for the write-down of oil assets at Main Pass 299 and expense of $6.8
million ($8.2 million pretax) or $0.05 per share for restructuring and
business combination costs.
(4) Includes expense of $117.7 million ($130.3 million pretax) or $0.87 per
share for write-downs of certain mining properties and investments and
expense of $32.3 million ($48.4 million pretax) or $0.24 per share for
restructuring and business combination costs.
44
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unless specifically stated otherwise, the following information relates to
amounts included in the consolidated financial statements, without reduction for
minority interests, and includes the Company's interests in mining partnerships
accounted for using the equity method. Effective January 1, 1996 Homestake
adopted the "Gold Institute Production Cost Standard" for reporting of per ounce
production costs. All per ounce production costs in this Form 10-K are presented
on this basis.)
RESULTS OF OPERATIONS
Homestake Mining Company ("Homestake" or the "Company") recorded net income of
$30.3 million or $0.21 per share during 1996 compared to net income of $30.3
million or $0.22 per share during 1995 and $78 million or $0.57 per share during
1994. After adjusting for one-time nonrecurring items of $10.4 million or $0.07
per share, the 1996 earnings reflect higher gold production and sales volumes,
higher gold prices and lower per ounce total cash costs, offset by higher
depreciation charges, substantially increased exploration expenditures and lower
returns from the Main Pass 299 sulfur operations. Nonrecurring items in 1996
included a $24 million reduction in the Company's accrual for prior year income
taxes, $5.5 million ($4.9 million after tax) of proceeds from a litigation
recovery, foreign exchange losses of $8.9 million ($7.4 million after tax)
primarily on advances to Homestake's wholly-owned subsidiary, Homestake Canada
Inc. ("HCI"), the write-down of mining investments by $9 million ($8.3 million
after tax), and expenses of $3.4 million ($2.8 million after tax) related to
Homestake's now terminated proposed combination with Santa Fe Pacific Gold
Corporation ("Santa Fe"). The decrease in net income in 1995 from 1994 reflects
nonrecurring gains in 1994 of $23.8 million or $0.17 per share compared to
nonrecurring gains in 1995 of $6.7 million or $0.05 per share, and a higher
effective income and mining tax rate in 1995. Nonrecurring items in 1995
included a gain of $5.4 million ($4.2 million after tax) on the sale of the
Company's remaining uranium inventory. Nonrecurring items in 1994 included a
gain of $15.7 million ($12.6 million after tax) on the sale of the Company's
interest in the Dee mine, a gain of $11.2 million ($11.2 million after tax) on
the dilution of the Company's interest in Prime Resources Group Inc. ("Prime")
following Prime's sale of additional shares to the public, a $7.8 million tax
benefit resulting from a reorganization of Canadian exploration assets, and a
foreign exchange loss of $6 million ($4.7 million after tax) on advances to HCI.
Gold Operations: The results of the Company's operations are affected
significantly by the market price of gold. Gold prices are influenced by
numerous factors over which the Company has no control, including expectations
with respect to the rate of inflation, the relative strength of the United
States dollar and certain other currencies, interest rates, global or regional
political or economic crises, demand for gold for jewelry and industrial
products, and sales by holders and producers of gold in response to these
factors.
The Company's general policy is to sell its production at current prices.
However, in certain circumstances, the Company will enter into forward sales
commitments. In the fourth quarter of 1996, the Company sold for future
delivery, at an average price of $426 per ounce, 680,100 ounces of the gold it
expects to produce from the McLaughlin mine stockpiles through 2003. In 1994,
the Company sold for future delivery 183,200 ounces of the gold it expected to
produce at the Nickel Plate mine during 1995 and 1996. During 1996 and 1995,
contracts for 70,000 ounces and 113,200 ounces, respectively, were financially
settled under the Nickel Plate program. The purpose of both of these forward
sales programs was to help assure recovery of the Company's remaining investment
in these operations and to provide for remaining unaccrued reclamation costs. At
December 31, 1996 all sales and obligations under the Nickel Plate mine forward
sales program had been completed. See note 22 to the consolidated financial
statements for further information and details of these forward sales programs.
The Company's general forward sales policy is subject to review and could
change.
45
A significant portion of the Company's operating expenses is incurred in
Australian and Canadian currencies. The Company's profitability is impacted by
fluctuations in these currencies' exchange rates relative to the United States
dollar. Under the Company's foreign currency protection program, the Company has
entered into a series of foreign currency option contracts which establish
trading ranges within which the United States dollar may be exchanged for
Australian and Canadian dollars. See note 22 to the consolidated financial
statements for additional information regarding this program.
Revenues from gold and ore sales totaled $712.2 million during 1996 compared to
revenues of $675.2 million in 1995 and $629.2 million in 1994. The revenue
increases in 1996 and 1995 reflect higher sales volumes and higher gold prices.
During 1996, the Company sold 1,952,400 equivalent ounces of gold at an average
price of $389 per equivalent ounce compared to 1,873,500 equivalent ounces sold
at an average price of $386 per equivalent ounce during 1995 and 1,692,800
ounces sold at an average price of $384 per ounce during 1994.
Total gold production increased to 1,968,100 equivalent ounces during 1996
compared to 1,877,300 equivalent ounces produced during 1995 and 1,696,400
ounces produced during 1994. The higher 1996 production primarily is due to
production increases at the Kalgoorlie, Eskay Creek, David Bell and Round
Mountain operations and the purchase of an additional 60% interest in the Snip
mine, partially offset by lower production following the completion of mining
operations at the McLaughlin and Nickel Plate mines. The increase in production
in 1995 from 1994 primarily is due to the commencement of production at the
Eskay Creek mine, partially offset by production declines at certain other
locations.
At the Homestake mine in South Dakota, production increased slightly to 407,300
ounces during 1996 from 402,900 ounces during 1995 and 393,900 ounces during
1994. The increase in production in 1996 primarily is a result of an increase in
production from the Open Cut, partially offset by lower production from the
underground operations. During 1995, harder than normal ore from the Open Cut
had reduced mill throughput. The increase in 1995 production from 1994 is due to
higher ore grades, partially offset by the lower Open Cut mill throughput. Total
cash costs of $304 per ounce during 1996 compare to total cash costs of $303 per
ounce during 1995 and $291 per ounce during 1994.
Open Cut mining currently is scheduled to be completed in 1998. Open Cut ore
stockpiles will continue to be processed, although at a lower rate, through
2000. On completion of Open Cut mining, underground production is expected to
increase, which will partially offset the decline in production from the Open
Cut. However, Homestake mine cash costs per ounce are expected to increase,
reflecting the increase in production from the higher cost underground
operations.
Production at the McLaughlin mine in northern California decreased to 185,500
ounces during 1996 from 241,800 ounces during 1995 and 250,500 ounces during
1994. In June 1996, mining operations were completed and the autoclaves were
shut down as the orebody has now been mined out. For the next seven years,
lower-grade stockpiled ore will be processed through a conventional
carbon-in-pulp circuit. The decline in production was offset by reduced
operating costs and resulted in only a small change in total cash costs per
ounce in 1996. Total cash costs in 1996 were $250 per ounce compared to $242 per
ounce in 1995 and $249 per ounce in 1994. Gold production in 1997 is projected
at 122,000 ounces and total cash costs per ounce are expected to remain similar
to 1996 costs.
The Company's share of production from the Round Mountain mine in Nevada totaled
102,700 ounces in 1996 compared to production of 86,100 ounces in 1995 and
105,900 ounces in 1994. The higher 1996 production is a result of higher
throughput and grades on the reusable pad and an increase in dedicated pad
leaching capacity, partially offset by a lower grade of ore on the dedicated
pad. The increase in dedicated
46
pad capacity has allowed the processing of lower-grade stockpiled ore and
previously leached lower-grade material which resulted in a lower overall 1996
dedicated pad ore grade in comparison to 1995 and 1994. Total cash costs of $256
per ounce are similar to 1995 costs of $254 per ounce, and reflect the higher
1996 production offset by the effect of the lower dedicated pad ore grade. The
lower production in 1995, in comparison to 1994, was due in part to lower grades
and volumes of ore placed on both the reusable and dedicated pads early in the
year and lower high-grade production. Production from the high-grade vein
amounted to 3,100 ounces in both 1996 and 1995 compared to 8,300 ounces in 1994.
In addition, in the latter part of 1995, the rate of placement of ore on the
dedicated pad was increased. Due to the length of time between the initial
loading of ore onto the dedicated pad and the commencement of leaching, a
significant portion of the gold contained in the dedicated pad ore was not
recovered until 1996. As a result, total cash costs increased to $254 per ounce
during 1995 from $182 per ounce during 1994. Construction of the $68 million
(Homestake's share - $17 million) 8,000 tons-per-day gravity mill to process
higher-grade sulfide ores commenced in 1996 and mill start-up is expected in
late 1997.
In January 1995, commercial production began at the Eskay Creek mine in British
Columbia, Canada. During 1996, Eskay Creek sold 115,900 tons of ore containing
211,300 ounces of gold and 12.1 million ounces of silver, equivalent to
approximately 372,300 ounces of gold compared to 104,100 tons of ore sold during
1995 containing 196,500 ounces of gold and 9.9 million ounces of silver,
equivalent to approximately 331,300 ounces of gold. The higher 1996 shipments
include 14,000 tons of spot ore sales to two additional smelters. Total cash
costs, including third-party smelter costs, decreased to $170 per equivalent
ounce during 1996 from $185 per equivalent ounce during 1995. The lower 1996
costs per ounce primarily are a result of lower development costs, higher gold
and silver ore grades and productivity improvements. Following a successful 1996
exploration program, Eskay Creek proven and probable ore reserves increased by
28% or 903,000 equivalent ounces at December 31, 1996, after adjusting for 1996
production. Tons sold and gold and silver production in 1997 are expected to
approximate the results achieved in 1996. In February 1997, Prime announced its
intention to construct a gravity/flotation mill facility at the Eskay Creek mine
site. This mill, estimated to cost $12 million, will improve the profitability
of certain Eskay Creek ore that would otherwise be directly shipped to
third-party smelters and upgrade other material that currently is not economic.
Construction, which is dependent on securing regulatory approval, is expected by
July 1997 and the mill is expected to commence operation in the fourth quarter
of 1997.
The Company's share of gold production from the Williams mine in the Hemlo
mining camp in Canada amounted to 205,500 ounces at a total cash cost of $222
per ounce during 1996 compared to 202,600 ounces produced at a total cash cost
of $222 per ounce during 1995 and 222,700 ounces produced at a cost of $203 per
ounce during 1994. The decreases in production and increases in total cash costs
during 1996 and 1995 compared to 1994 primarily are due to the higher grade of
ore processed in 1994. Production at the Williams mine is expected to remain at
current levels for the next few years.
The Company's share of production at the David Bell mine, also in the Hemlo
mining camp, amounted to 97,700 ounces during 1996 compared to production of
79,400 ounces during 1995 and 96,100 ounces during 1994. During 1996, mining in
the higher-grade areas of the mine offset production difficulties that reduced
throughput. An accelerated development program has commenced to provide access
to more mining areas, which should increase throughput. Production also had been
reduced during 1995 as only two areas were available for mining for most of the
year which reduced mining flexibility and resulted in lower mill throughput and
a lower grade of ore processed. In addition, ground stability problems in 1995
near the adjacent Golden Giant mine shaft restricted mining to available
lower-grade stopes. Total cash costs were $172 per ounce during 1996 compared to
$203 per ounce during 1995 and $167 per ounce during 1994. Production is
expected to decline in 1997 as the grade of ore to be mined approaches the
remaining life of mine reserve grade.
47
Production from the Nickel Plate mine in Canada totaled 70,200 ounces during
1996 compared to 91,400 ounces during 1995 and 82,100 ounces during 1994. Mining
activities at the Nickel Plate mine ceased in July 1996 as the ore reserves were
fully depleted. The processing of stockpiled ore continued through October 1996.
Total cash costs were $347 per ounce during 1996 compared to $379 per ounce
during 1995 and $349 per ounce during 1994.
On April 30, 1996 Prime, a 50.6%-owned subsidiary of Homestake, became the sole
owner of the Snip mine in Canada when it purchased Cominco Ltd.'s ("Cominco")
60% interest in the mine for $39.3 million. Homestake's share of production from
the Snip mine increased to 101,800 ounces during 1996 from 51,300 ounces during
1995 and 51,600 ounces during 1994. Excluding the effects of the purchase of the
additional interest, production at the Snip mine decreased by 3% during 1996.
The lower production primarily is due to an increase in more labor-intensive
conventional mining, partially offset by higher ore grades. Total cash costs
increased to $190 per ounce during 1996 from $176 per ounce during 1995 and $173
per ounce during 1994. Production in 1997 is expected to be derived primarily
from conventional mining areas. As a result, total cash costs are expected to
increase, while production should remain relatively constant.
Homestake Gold of Australia Limited's ("HGAL") share of production from the
Kalgoorlie operations in Western Australia totaled 368,800 ounces during 1996
compared to 311,400 ounces during 1995 and 352,100 ounces during 1994. The
increase in production during 1996 primarily is a result of an increase in mill
throughput and the purchase of the disproportionate sharing arrangement from
HGAL's joint venture partner, Gold Mines of Kalgoorlie Limited ("GMK") (see
"Liquidity and Capital Resources" section below). During 1995 and 1994, HGAL
paid 13,000 ounces and 15,800 ounces, respectively, to GMK under the
disproportionate sharing arrangement. In addition, the lower 1995 production
reflects a temporary decline in production while the new Fimiston mill additions
were integrated with the existing complex, and lower production at the Mt.
Charlotte mine due to operational difficulties which hampered production early
in the year. Total cash costs at the Kalgoorlie operations decreased to $291 per
ounce in 1996 from $296 per ounce in 1995. The decrease in total cash costs
during 1996 reflects higher production, partially offset by the effects of a
stronger Australian dollar, which increased total cash costs by $16 per ounce.
The increase in total cash costs per ounce during 1995 to $296 per ounce from
$257 per ounce in 1994 is primarily due to the lower production.
Consolidated Production Costs per Ounce:
(per ounce of gold) 1996 1995 1994
- --------------------------------------------------------------------------------------------
Direct mining costs $222 $233 $250
Deferred stripping adjustments 7 2 (1)
Costs of third-party smelters 17 16 -
Other (5) (1) (4)
- --------------------------------------------------------------------------------------------
Cash Operating Costs 241 250 245
Royalties 4 4 5
Production taxes 3 3 2
- --------------------------------------------------------------------------------------------
Total Cash Costs 248 257 252
Depreciation and amortizaton 53 46 41
Reclamation 5 5 7
- --------------------------------------------------------------------------------------------
Total Production Costs $306 $308 $300
============================================================================================
48
Homestake's consolidated total cash cost per equivalent ounce amounted to $248
during 1996 compared to $257 and $252 during 1995 and 1994, respectively. The
lower 1996 per ounce costs reflect the higher silver grades at the Eskay Creek
mine, higher production at the Kalgoorlie and David Bell operations, an increase
in ownership at the low-cost Snip mine and purchase of the disproportionate
sharing arrangement, partially offset by lower production at the McLaughlin mine
and the effects of a stronger Australian dollar. The increase in total cash
costs per ounce during 1995 from 1994 primarily reflects the temporary
production declines at the Round Mountain, David Bell and Kalgoorlie operations
and higher costs at the Homestake mine, partially offset by production from the
low-cost Eskay Creek mine. Homestake's total noncash cost per equivalent ounce
increased to $58 during 1996 from $51 during 1995 and $48 during 1994. The
higher 1996 noncash costs reflect additional depreciation and amortization
charges resulting from the purchases of the HGAL minority interests, the
disproportionate sharing arrangement and the additional interest in the Snip
mine. The increase in noncash costs during 1995 primarily was a result of the
commencement of production at the Eskay Creek mine which has relatively high per
unit depreciation and amortization charges.
Reconciliation of Total Cash Costs per Ounce to Financial Statements:
(thousands of dollars, except per ounce amounts) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Production Costs per Financial Statements $ 475,333 $ 481,886 $ 447,129
Costs not included in Homestake's
production costs:
Costs of third-party smelters 33,098 29,214 464
Production costs of equity-accounted investments 12,907 11,752 15,683
Sulfur and oil production costs (23,208) (26,917) (19,210)
Reclamation accruals (9,579) (8,754) (12,112)
By-product silver revenues (3,059) (2,334) (2,326)
Inventory movements and other 2,993 (2,659) (1,298)
- ----------------------------------------------------------------------------------------------------------------------------
Production Costs for Per Ounce Calculation Purposes $ 488,485 $ 482,188 $ 428,330
============================================================================================================================
Ounces Produced During the Year 1,968,119 1,877,329 1,696,389
Total Cash Costs Per Ounce $ 248 $ 257 $ 252
Main Pass 299: The Company has a 16.7% undivided interest in the Main Pass 299
sulfur mine and oil recovery operations in the Gulf of Mexico. At December 31,
1996 the Main Pass 299 sulfur mine had proven recoverable reserves of
approximately 66 million long tons of sulfur. Main Pass 299 oil production,
which peaked in 1992, is expected to continue to decline over the next few
years. During 1996, lower sulfur prices were partially offset by higher oil
prices, and the combined operations recorded an operating profit of $1.3 million
compared to an operating profit of $5.7 million during 1995 and an operating
loss of $0.2 million during 1994.
The sulfur operations incurred an operating loss of $3.1 million in 1996
compared to operating earnings of $3.7 million in 1995 and an operating loss of
$2.9 million in 1994. In response to a weakening sulfur market, Main Pass 299
operations have temporarily reduced production levels. The Company's share of
sulfur revenues totaled $20.1 million during 1996 compared to $30.5 million
during 1995 and $16.9 million during 1994. During 1996, the Company sold 333,300
tons of sulfur at an average price of $60 per ton compared to 445,600 tons at an
average price of $68 per ton during 1995 and 317,700 tons at an average price of
$53 per ton during 1994. The Company's share of production was 325,000 tons in
1996 compared to 365,100 tons in 1995 and 376,600 tons in 1994.
49
At December 31, 1996 the carrying value of the Company's investment in the Main
Pass 299 sulfur mine was $110 million. In accordance with the Company's
accounting policy for reviewing the recoverability of its investments in
operating mines, the Company has estimated future Main Pass undiscounted net
cash flows based on its share of proven reserves, estimated future sales prices
(considering historical and current prices, price trends and related factors),
production costs and operating capital and reclamation costs. In estimating its
future undiscounted net cash flows, the Company has assumed an average future
sales price for sulfur of approximately $70 per ton over the expected remaining
30 year life of the mine. Although the current market for sulfur is depressed,
during the past 10 years the market for sulfur has been cyclical with prices
ranging between $55 and $142 per ton and averaging over $96 per ton (Tampa
market). During the years ended December 31, 1996 and 1995, the Company realized
prices of $60 and $68 per ton, respectively. The Company does not expect
significant improvement in sulfur prices during 1997. However, the Company
believes that future prices over the life of the mine will be sufficient to
recover its investment. This view is based on the historical volatility of
sulfur prices and on the Main Pass mine's low operating cost structure.
Estimates of future cash flows are subject to risks and uncertainties and it is
possible that changes could occur in the near term which may affect the
recoverability of the Company's investment in the Main Pass operations. If the
sulfur market remains depressed for a period of time, the Company may not be
able to recover all of its investment in the Main Pass mine and future
write-downs of up to $110 million may be required.
The Company's share of oil revenues amounted to $10.7 million in 1996 compared
to $10.1 million and $10 million in 1995 and 1994, respectively. Operating
earnings from oil operations totaled $4.4 million in 1996 compared to operating
earnings of $2.1 million in 1995 and $2.7 million in 1994. The improved 1996
results primarily are due to higher oil prices and lower operating costs,
partially offset by a decline in production. The decrease in operating earnings
during 1995 reflects lower sales volumes and increased costs, partially offset
by rising oil prices.
Interest and other income: Interest income of $15.1 million in 1996 compares to
$16.7 million in 1995 and $9.8 million in 1994. The decrease in interest income
during 1996 primarily is due to slightly lower interest rates. The increase in
interest income in 1995 reflects higher cash and equivalents and short-term
investments balances and a rise in interest rates during the year. Other income
of $7.4 million in 1996 compares to $11.6 million in 1995 and $25.6 million in
1994. Other income in 1996 includes a $2.9 million gain from the litigation
recovery and $8.9 million of foreign exchange losses, primarily on advances to
HCI which are denominated in Canadian dollars. Repayment in December 1996 and
January 1997 of a portion of these advances, and an assumption that the
remaining advances will be repaid in the future, has necessitated marking to
market the remaining advances. Prior to these repayments, the advances to HCI
had been considered permanent in nature. The decrease in other income in 1995
from 1994 primarily is due to the pretax gain in 1994 of $15.7 million on the
sale of the Company's interest in the Dee mine in Nevada, partially offset by a
foreign exchange loss of $6 million in 1994 on advances to HCI.
Depreciation, depletion and amortization: Depreciation, depletion and
amortization increased to $112.4 million during 1996 from $99.6 million during
1995 and $76.2 million during 1994. The increase in 1996 from 1995 primarily is
due to higher production, and additional depreciation charges resulting from the
purchases of the HGAL minority interests, the disproportionate sharing
arrangement and the additional interest in the Snip mine. The 1995 increase is a
result of additional depreciation charges related to the Eskay Creek mine,
partially offset by reserve expansions at certain locations and lower production
at other locations.
50
Exploration expense: Exploration expense, excluding capitalized costs associated
with development stage projects, increased to $45.4 million during 1996 from
$27.5 million in 1995 and $21.3 million in 1994. The increase in exploration
expense in 1996 primarily is due to increased activity as the Company pursues
numerous prospective exploration targets and prospects. During 1996, advanced
exploration continued at the Jeronimo project near Homestake's El Hueso mine in
Chile, at the El Foco concession in Venezuela and at the Ruby Hill property in
Nevada. In addition, exploration activities were conducted at and around the
Open Cut, Eskay Creek, Snip and Kalgoorlie operations. The increase in
exploration expense in 1995 from 1994 reflects increased activity at Ruby Hill
and continued work in Chile and on the El Foco concession. The increased level
of exploration activity in 1996 is expected to continue in 1997.
Interest expense: Interest expense of $10.6 million in 1996 compares to $11.3
million in 1995 and $10.1 million in 1994. Interest expense decreased in 1996
from 1995 primarily as a result of lower interest rates on the pollution control
bonds. Interest expense increased in 1995 primarily due to $0.7 million of
interest which was capitalized in 1994. The Company's average rate of interest
on its long-term debt was 5.1% in 1996 compared to 5.5% in 1995 and 1994,
respectively.
Other expense: Other expense of $14.6 million in 1996 compares to $3.3 million
in 1995 and $6.7 million in 1994. The current year's other expense includes the
write-downs of investments in mining securities totaling $9 million and $3.4
million of costs related to Homestake's now terminated proposed acquisition of
Santa Fe.
Income and mining taxes: The Company's income and mining tax rate was 37% during
1996 compared to 46% during 1995 and 18% during 1994. Income and mining tax
expense in 1996 includes a $24 million decrease in the consolidated tax
provision and a $2.6 million gain relating to the tax portion of the litigation
recovery, partially offset by the effect of incurring approximately $14 million
of exploration expenses, primarily in South America, which are not deductible
for United States income tax purposes and for which a foreign income tax benefit
cannot be recognized currently. The $24 million decrease in the consolidated tax
provision principally results from a reduction in prior years' income tax
accruals for certain contingencies which have now been resolved. The 1994 income
and mining rate was low due to the availability of certain tax benefits. The
higher effective tax rates experienced in 1996 (after adjusting for the $26.6
million in credits noted above) and 1995 will continue as the major portion of
the Company's current earnings are in jurisdictions with higher income and
mining tax rates. The Company's consolidated effective income and mining tax
rate will fluctuate depending on the geographical mix of its pretax income.
At December 31, 1996 and 1995 the Company had tax valuation allowances of $72.2
million and $59.6 million, respectively. While circumstances could occur which
would permit the Company to reduce its deferred tax valuation allowances in
future years, based on the Company's current projections it does not expect
significant future reductions. Events that would allow the Company to reduce
such allowances in the future would include (i) generating substantial taxable
income in Chile, (ii) an acceleration of the payment of the Company's
postretirement benefit obligation accrual and (iii) an acceleration of the
disposal of certain non-amortizable United States and Australia land and mineral
properties which are located either on, or in proximity to, the Company's
existing operating minesites.
Minority interests: Income allocable to minority interests in consolidated
subsidiaries was $15 million in 1996 compared to $16 million in 1995 and $8.9
million in 1994. The decrease in 1996 reflects higher earnings from the Eskay
Creek mine, offset by Corporacion Nacional del Cobre Chile's ("Codelco")
interest in exploration expenses of the Company's newly-formed, 51%-owned
subsidiary, Agua de la Falda S.A. (see "Liquidity and Capital Resources" section
below) and the purchase of the HGAL minority interests. The increase in 1995
primarily is due to the income from the Eskay Creek mine.
51
LIQUIDITY AND CAPITAL RESOURCES
During 1996, Homestake's cash and equivalents and short-term investments
balances increased by $7.4 million to $219.8 million as a result of strong cash
flows from the Company's operations, partially offset by capital expenditures of
$105.9 million and the purchase of Cominco's interest in the Snip mine for $39.3
million. Net cash provided by operations was $180.4 million in 1996 compared to
$153.5 million in 1995 and $133.7 million in 1994. In addition, $16.1 million
was realized on the sale of assets in 1996 compared to $13.3 million and $24.5
million in 1995 and 1994, respectively.
In 1995, Homestake made an unconditional offer to acquire the 18.5% of Homestake
Gold of Australia Limited ("HGAL") it did not already own. Homestake offered
0.089 of a Homestake share or A$1.90 in cash for each of the 109.6 million HGAL
shares owned by the public. Through December 31, 1995 a total of 38.9 million
HGAL shares were acquired at a cost of $59.1 million, including $42.4 million
for 2.6 million newly issued shares of the Company, $14.5 million in cash and
$2.2 million of transaction expenses. At December 31, 1995 Homestake owned 88.1%
of the shares of HGAL. The acquisition was completed in the first quarter of
1996 when the remaining 70.7 million publicly held HGAL shares were acquired at
a cost of $105.8 million, including $99.3 million for 6.0 million newly issued
shares of the Company, $5.0 million in cash and $1.5 million of transaction
expenses. The total purchase price to acquire all of the 18.5% of HGAL held by
minority shareholders was $164.9 million, including $141.7 million for 8.5
million newly issued shares of the Company, $19.5 million in cash and $3.7
million of transaction expenses. See note 3 to the consolidated financial
statements for further information.
In June 1996, the Company paid $51.4 million to GMK to purchase past and all
future rights and entitlements under the disproportionate sharing arrangement
("DSA") covering gold production from a portion of the Super Pit operation in
Kalgoorlie, Western Australia. The Company now shares equally with GMK in all
gold produced at the Kalgoorlie operations. The amount paid to GMK includes $4
million previously accrued and expensed by HGAL for prior 1995 and 1996 amounts
due under the DSA, and $47.4 million for the acquisition of future DSA rights.
The $47.4 million purchase price for the acquisition of the future DSA rights
has been included in 1996 capital additions and is being depreciated over the
remaining life of the operation.
In April 1996, Prime purchased Cominco's 60% interest in the Snip mine for $39.3
million in cash. The purchase price included Cominco's share of the mine's
working capital. Prime now owns 100% of the Snip mine.
In July 1996, Homestake and Codelco, a state-owned mining company in Chile,
formed a new company, Agua de la Falda S.A. ("La Falda"). La Falda is developing
the Agua de la Falda mine, which is located near Homestake's El Hueso mine in
northern Chile and contains 187,000 ounces of oxide reserves. The Agua de la
Falda mine is scheduled to commence production in April 1997 and produce
approximately 27,000 ounces at a total cash cost of $250 per ounce during 1997.
Production is expected to average 40,000 to 45,000 ounces annually from 1998
through 2000 at a total cash cost of approximately $220 per ounce. In addition,
La Falda will continue drilling and metallurgical testing of the adjacent much
larger Jeronimo deposit, where 6.1 million tons of mineralized material at a
grade of .158 ounces of gold per ton have been outlined to date. Homestake owns
51% of the corporation and Codelco owns the remaining 49%. Codelco and Homestake
have contributed property interests in the area to the new company. In addition,
Codelco contributed the existing El Hueso plant, which had been under lease to
Homestake. Homestake also has contributed $5.1 million for exploration and
development, including $3.7 million of exploration and development expenditures
incurred prior to the formation of La Falda.
52
In 1995, Homestake acquired for $24 million a 10% interest in Navan Resources
plc ("Navan"), an Irish public company with diverse mineral interests in Europe.
The purchase price included an option which will permit Homestake to acquire
from Navan up to a 50% interest in Navan Bulgarian Mining BV ("Navan BV"), which
in turn owns 68% of Bimak AD, the owner of the Chelopech gold/copper operations
in Bulgaria, by investing an additional $48 million. Homestake's initial $12
million investment in Navan BV is conditioned upon receipt of all necessary
permits for construction of a roaster and an increase in the mining rate at
Chelopech from 500,000 to 750,000 metric tons per year, approval of the project
by the Boards of Directors of both companies and agreement on a suitable project
management team. Investment of the remaining $36 million in Navan BV is
conditioned on subsequent approval by the Bulgarian government, Navan and
Homestake of a further mine and mill expansion and the securing of expansion
financing. In March 1996, Homestake exercised its option to acquire up to a 50%
interest in Navan BV. However, pending satisfaction of certain conditions, to
date no amounts have been advanced in respect of this option.
In December 1996, Homestake in consultation with Navan, determined that due to
the deteriorating political and economic situation in Bulgaria, it was likely
that further development of the Chelopech project would be delayed
substantially. In light of the uncertainty surrounding the project, Homestake
considered it had an other than temporary impairment of its investment and
reduced the carrying value of the investment in Navan, including the option to
acquire the 50% interest in Navan BV, to the quoted market value of the Navan
securities. The resulting charge of $7.2 million was recorded in the fourth
quarter of 1996.
In February 1997, Homestake received the final permit for the Ruby Hill mine
near Eureka, Nevada. Construction has commenced and production is expected to
begin in the fourth quarter of 1997. Production is estimated at an annual rate
of 105,000-110,000 ounces per year at a total cash cost of $140 per ounce and a
total production cost of $258 per ounce.
Additions to property, plant and equipment in 1996 totaled $105.9 million
compared to $81 million and $88.7 million in 1995 and 1994, respectively.
Capital additions in 1996 included $57.6 million at the Kalgoorlie operations,
primarily for the purchase of all rights and entitlements under the
disproportionate sharing arrangement, $7.7 million at the Round Mountain mine
primarily for the new gravity mill project, $15.9 million at the Homestake mine,
primarily for numerous projects related to improving the efficiency of the mine,
and $8.2 million at the Ruby Hill mine. The remaining expenditures primarily
were for replacement capital to maintain existing production capacity.
In addition to sustaining capital at existing operations, planned capital
expenditures of approximately $150 million during 1997 include $58 million for
construction and development work at the Ruby Hill mine, $27 million at the
Kalgoorlie operations primarily for Fimiston mill upgrades and a decline from
surface at the Mt. Charlotte mine, $20 million for a tailings dam lift at the
Homestake mine, which will be financed through the issuance of tax-exempt
pollution control bonds, and other projects related to improving the mine's
efficiency, $16 million at the Round Mountain mine primarily for completion of
the new mill to process the higher-grade sulfide material, and $12 million to
construct a gravity/flotation mill facility at the Eskay Creek mine site.
In May and November 1996, Prime paid semi-annual dividends of $0.04 per share.
Total common share dividends paid by Prime to minority shareholders amounted to
$2.2 million during 1996. Total common share dividends paid by the Company,
including dividends paid by Prime to minority shareholders, were $31.5 million
during 1996 compared to $27.6 million during 1995 and $24.1 million during 1994.
In May 1994, the Company increased its regular quarterly dividend from $0.025 to
$0.05 per share.
53
Cash income and mining taxes paid by the Company (net of tax refunds) were $17.1
million, $22.7 million and $10.7 million in 1996, 1995 and 1994, respectively.
Beginning in 1997, cash income and mining taxes are expected to be substantially
higher, as the majority of the Company's Canadian income and mining tax pools
were exhausted during 1996.
In September 1996, the Company replaced its credit agreement with a new United
States/Canadian/Australian cross-border credit facility providing a total
availability of $275 million. The Company pays a commitment fee of 0.15% per
annum on the unused portion of this facility. The credit facility is available
through September 2001 and provides for borrowings in United States, Canadian,
or Australian dollars, or gold, or a combination of these. The credit agreement
requires a minimum consolidated net worth of $500 million. No amounts have been
borrowed under this credit agreement.
The Company incurred $3.8 million of reclamation-related expenditures during
1996 at its discontinued uranium facility at Grants, New Mexico. In accordance
with the Energy Policy Act of 1992, the United States Department of Energy
("DOE") is responsible for 51.2% of all past and future reclamation expenditures
at this facility. The Company has received $14.2 million to date from the DOE
and the accompanying balance sheet at December 31, 1996 includes a receivable of
$16.2 million for the DOE's share of reclamation expenditures made by the
Company through 1996. The total future cost for reclamation, remediation,
monitoring and maintaining compliance at the Grants site is estimated to be
$20.4 million. The Company believes that its share of the estimated remaining
cost of reclaiming the Grants facility, net of estimated proceeds on the
ultimate disposals of related assets, is fully provided in the financial
statements at December 31, 1996.
The Company evaluates its accruals for remediation, reclamation and site
restoration regularly. With respect to nonoperating properties, the Company
believes it has fully provided for all remediation liabilities and for estimated
reclamation and site restoration costs. With respect to operating properties,
the Company is providing for estimated ultimate reclamation relating to ongoing
and end-of-mine life restoration and closure costs over the lives of its
individual operations using the units-of-production method. See note 21 to the
consolidated financial statements for discussion of certain environmental
matters.
Homestake has made significant capital expenditures to minimize the effects of
its operations on the environment. Capital expenditures primarily are for the
purchase or development of environmental monitoring equipment and containment of
waste. In 1996, these expenditures totaled approximately $7 million compared to
$4 million in 1995. Homestake estimates that during 1997, capital expenditures
for such purposes will be approximately $12 million and that during the five
years ending December 31, 2001, such capital expenditures will be approximately
$30 million.
Homestake also incurs significant operating costs in order to protect the
environment. Operating costs include current reclamation costs, costs for
environmental monitoring and studies to identify and quantify environmental
impacts, if any, and accruals for future reclamation expenditures. Such
additional costs totaled approximately $17 million in 1996, compared with
approximately $15 million in 1995, not including related depreciation expense of
$3 million and $5 million, respectively. Homestake estimates that environmental
and related operating and depreciation costs in 1997 will approximate the 1996
amounts. The above amounts exclude expenditures related to the Company's
discontinued uranium operations.
Future results will be impacted by such factors as the market price of gold,
silver and sulfur, the Company's ability to expand its ore reserves and the
fluctuations of foreign currency exchange rates. The Company believes that the
combination of cash, short-term investments, available lines of credit and
future
54
cash flows from operations will be sufficient to meet normal operating
requirements, planned capital expenditures, and anticipated dividends.
On December 9, 1996, Homestake and Santa Fe Pacific Gold Corporation ("Santa
Fe") announced that they had entered into a definitive agreement whereby
Homestake would acquire Santa Fe by an exchange of common stock for common
stock. On March 10, 1997, the Company announced that Santa Fe had terminated the
agreement and, in accordance with the terms of the merger agreement, had paid
Homestake a $65 million termination fee. As a result, in the first quarter of
1997 the Company will record a pretax gain of approximately $63 million ($49
million after tax), net of merger related expenses of approximately $2 million
incurred in 1997.
55
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Page
Statements of Consolidated Income.....................................................57
Consolidated Balance Sheets...........................................................58
Statements of Consolidated Shareholders' Equity.......................................59
Statements of Consolidated Cash Flows.................................................60
Notes to Consolidated Financial Statements.........................................61-83
Report of Independent Auditors........................................................84
Management's Responsibility for Financial Reporting...................................85
Quarterly Selected Data...............................................................86
Common Stock Price Range..............................................................86
56
Homestake Mining Company and Subsidiaries
Statements of Consolidated Income
(In thousands, except per share amounts)
For the years ended December 31, 1996, 1995 and 1994 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Revenues
Gold and ore sales $ 712,186 $ 675,222 $ 629,174
Sulfur and oil sales 30,749 40,620 26,882
Interest income 15,054 16,737 9,762
Equity earnings 1,588 2,155 2,857
Gain on issuance of stock by subsidiary (note 4) 11,224
Other income (note 15) 7,359 11,631 25,588
- -----------------------------------------------------------------------------------------------------------------------------
766,936 746,365 705,487
- -----------------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Production costs 475,333 481,886 447,129
Depreciation, depletion and amortization 112,353 99,602 76,171
Administrative and general expense 36,965 37,283 38,159
Exploration expense 45,382 27,541 21,347
Interest expense 10,644 11,297 10,124
Other expense (note 16) 14,575 3,290 6,744
- -----------------------------------------------------------------------------------------------------------------------------
695,252 660,899 599,674
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Taxes and Minority Interests 71,684 85,466 105,813
Income and Mining Taxes (note 6) (26,333) (39,141) (18,880)
Minority Interests (15,070) (15,998) (8,917)
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 30,281 $ 30,327 $ 78,016
=============================================================================================================================
Net Income Per Share $ 0.21 $ 0.22 $ 0.57
=============================================================================================================================
Average Shares Used in the Computation 146,311 138,117 137,733
=============================================================================================================================
See notes to consolidated financial statements.
57
Homestake Mining Company and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amount)
December 31, 1996 and 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and equivalents $ 89,599 $ 145,957
Short-term investments 130,158 66,416
Receivables (note 7) 47,650 58,046
Inventories (note 8) 91,127 69,979
Deferred income and mining taxes (note 6) 12,263 20,521
Other 8,551 7,798
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 379,348 368,717
Property, Plant and Equipment - net (notes 3 and 9) 1,007,030 846,776
Investments and Other Assets
Noncurrent investments (note 10) 39,606 46,188
Other assets (note 11) 56,124 59,952
- --------------------------------------------------------------------------------------------------------------------------------
Total investments and other assets 95,730 106,140
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,482,108 $ 1,321,633
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 36,171 $ 35,170
Accrued liabilities (note 12) 42,174 53,937
Income and other taxes payable 38,386 9,314
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 116,731 98,421
Long-term Liabilities
Long-term debt (note 13) 185,000 185,000
Other long-term obligations (note 14) 114,168 120,418
- --------------------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 299,168 305,418
Deferred Income and Mining Taxes (note 6) 201,454 189,925
Minority Interests in Consolidated Subsidiaries 96,203 92,012
Shareholders' Equity (note 19)
Capital stock, $1 par value per share:
Preferred - 10,000 shares authorized; no shares outstanding
Common - 250,000 shares authorized; shares outstanding:
1996 - 146,672; 1995 - 140,541 146,672 140,541
Additional paid-in capital 477,880 382,314
Retained earnings 110,085 109,145
Accumulated currency translation adjustments 37,753 7,828
Other (3,838) (3,971)
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 768,552 635,857
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 1,482,108 $ 1,321,633
================================================================================================================================
Commitments and Contingencies - see notes 21 and 22.
See notes to consolidated financial statements.
58
Homestake Mining Company and Subsidiaries
Statements of Consolidated Shareholders' Equity
(In thousands)
Accumulated
Additional Currency
For the years ended Common Paid-in Retained Translation
December 31, 1996, 1995 and 1994 Stock Capital Earnings Adjustments Other Total
- ------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1993 $ 137,494 $334,737 $ 52,495 $ (5,620) $ (3,862) $ 515,244
Net income 78,016 78,016
Dividends paid (24,106) (24,106)
Exercise of stock options 291 5,048 5,339
Currency translation adjustments 14,489 14,489
Unrealized loss on investments (382) (382)
Other 170 170
- ------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1994 137,785 339,785 106,405 8,869 (4,074) 588,770
Net income 30,327 30,327
Dividends paid (27,587) (27,587)
Exercise of stock options 206 2,680 2,886
Stock issued for purchase of HGAL
minority interests (note 3) 2,550 39,849 42,399
Currency translation adjustments (1,041) (1,041)
Change in unrealized loss on
investments 162 162
Other (59) (59)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 140,541 382,314 109,145 7,828 (3,971) 635,857
Net income 30,281 30,281
Dividends paid (29,341) (29,341)
Exercise of stock options 167 2,431 2,598
Stock issued for purchase of HGAL
minority interests (note 3) 5,976 93,370 99,346
Currency translation adjustments 29,925 29,925
Change in unrealized loss on
investments 10 10
Other (12) (235) 123 (124)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 $ 146,672 $477,880 $110,085 $ 37,753 $ (3,838) $768,552
==============================================================================================================================
See notes to consolidated financial statements.
59
Homestake Mining Company and Subsidiaries
Statements of Consolidated Cash Flows
(In thousands)
For the years ended December 31, 1996, 1995 and 1994 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operations
Net income $ 30,281 $ 30,327 $ 78,016
Reconciliation to net cash provided by operations:
Depreciation, depletion and amortization 112,353 99,602 76,171
Write-downs of investments in mining securities (note 16) 8,983
Foreign currency exchange losses on intercompany
debt (note 15) 8,943 883 5,959
Gains on asset disposals (3,836) (1,969) (19,521)
Gain on issuance of stock by subsidiary (note 4) (11,224)
Deferred income and mining taxes (note 6) (15,615) 19,475 (3,665)
Minority interests 15,070 15,998 8,917
Reclamation - net (1,472) (6,044) 3,986
Other noncash items - net 6,984 2,579 21,263
Effect of changes in operating working capital items:
Receivables 13,754 821 (8,824)
Inventories (15,851) 1,324 (14,045)
Accounts payable (450) (852) 2,484
Accrued liabilities and taxes payable 21,451 (7,456) (6,938)
Other (217) (1,231) 1,138
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 180,378 153,457 133,717
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Decrease (increase) in short-term investments (63,742) 33,063 (99,479)
Proceeds from asset sales 16,141 13,295 24,542
Additions to property, plant and equipment (105,923) (80,979) (88,654)
Investments in mining companies (12,224) (37,314)
Purchase of HGAL minority interests (note 3) (6,435) (16,714)
Purchase of interest in Snip mine (note 3) (39,279)
Other 3,264 3,296 (8,033)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investment activities (208,198) (85,353) (171,624)
- ----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Debt repayments (8,352)
Dividends paid on common shares - Homestake (29,341) (27,587) (24,106)
- Prime minority interests (2,205)
Common shares issued 2,599 2,886 5,339
Stock issued by subsidiary (note 4) 31,870
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (28,947) (24,701) 4,751
- ----------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Equivalents 409 (3,147) 4,138
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Equivalents (56,358) 40,256 (29,018)
Cash and Equivalents, January 1 145,957 105,701 134,719
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and Equivalents, December 31 $ 89,599 $ 145,957 $ 105,701
==================================================================================================================================
See notes to consolidated financial statements.
60
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Note 1: Nature of Operations
Homestake Mining Company ("Homestake" or the "Company") is engaged in gold
mining and related activities including exploration, extraction,
processing, refining and reclamation. Gold bullion, the Company's principal
product, is produced and sold in the United States, Canada, Australia and
Chile. Ore and concentrates, containing gold and silver, from the Eskay
Creek and Snip mines in Canada are sold directly to smelters. Through its
investment in Main Pass 299, the Company also produces and sells sulfur and
oil.
Note 2: Significant Accounting Policies
The consolidated financial statements include Homestake and its
majority-owned subsidiaries and their undivided interests in joint ventures
after elimination of intercompany amounts. At December 31, 1996 the Company
owned 50.6% of Prime Resources Group Inc. ("Prime") and 51% of Agua de la
Falda S.A. with the remaining interests reflected as minority interests in
the consolidated financial statements. Undivided interests in gold mining
operations (the Round Mountain mine in the United States; Homestake Gold of
Australia Limited's ("HGAL") interest in the gold mining operations in
Kalgoorlie, Western Australia; and Homestake Canada Inc.'s ("HCI")
interests in the Williams and David Bell mines in Canada) and in the sulfur
and oil recovery operations at Main Pass 299 in the Gulf of Mexico are
reported using pro rata consolidation whereby the Company reports its
proportionate share of assets, liabilities, income and expenses.
Use of estimates: The preparation of financial statements in conformity
with United States generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and equivalents include all highly-liquid investments with a maturity
of three months or less at the date of purchase. The Company minimizes its
credit risk by investing its cash and equivalents with major international
banks and financial institutions located principally in the United States,
Canada and Australia. The Company believes that no concentration of credit
risk exists with respect to investment of its cash and equivalents.
Short-term investments principally consist of highly-liquid United States
and foreign government and corporate securities with original maturities in
excess of three months. The Company classifies all short-term investments
as available-for-sale securities. Unrealized gains and losses on these
investments are recorded as a separate component of shareholders' equity,
except that declines in market value judged to be other than temporary are
recognized in determining net income.
Inventories, which include finished products, ore in process, stockpiled
ore, ore in transit, and supplies, are stated at the lower of cost or net
realizable value. The cost of gold produced by certain United States
operations is determined principally by the last-in, first-out method
("LIFO"). The cost of other inventories is determined primarily by
averaging methods.
Exploration costs are expensed as incurred. All costs related to property
acquisitions are capitalized.
61
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Development costs: Following completion of a favorable feasibility study,
development costs incurred to place new mines into production and to
complete major development projects at operating mines are capitalized.
Ongoing costs to maintain production are expensed as incurred.
Depreciation, depletion and amortization of mining properties, mine
development costs and major plant facilities is computed principally by the
units-of-production method based on estimated proven and probable ore
reserves. Proven and probable ore reserves reflect estimated quantities of
ore which can be recovered economically in the future from known mineral
deposits. Such estimates are based on current and projected costs and
prices. Other equipment and plant facilities are depreciated using
straight-line or accelerated methods principally over estimated useful
lives of three to ten years.
Property evaluations: Effective January 1, 1996 the Company adopted
Statement of Financial Accounting Standards No. ("SFAS") 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." SFAS 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable, and, if deemed impaired, measurement and recording of
an impairment loss be based on the fair value of the asset, which generally
will be computed using discounted cash flows. Based on the carrying values
and estimated future undiscounted cash flows of the Company's long-lived
assets at January 1, 1996, the Company did not record a cumulative effect
upon adopting SFAS 121.
Estimated future net cash flows from each mine and nonoperating
property are calculated using estimates of proven and probable ore reserves
for operating properties and estimated contained mineralization expected to
be classified as proven and probable reserves based on geological
delineation to date for nonoperating properties, estimated future sales
prices (considering historical and current prices, price trends and related
factors), production costs, capital and reclamation costs. Homestake used
gold and silver market prices of $375 and $5 per ounce, respectively, and a
sulfur price of $70 per long ton in preparing its estimates of future cash
flows at December 31, 1996 (see note 9).
The Company's estimates of future cash flows are subject to risks and
uncertainties. Therefore, it is possible that changes could occur which may
affect the recoverability of the Company's investments in mineral
properties and other assets.
Undeveloped properties upon which the Company has not performed
sufficient exploration work to determine whether significant mineralization
exists are carried at original acquisition cost.
Reclamation and remediation: Reclamation costs and related accrued
liabilities, which are based on the Company's interpretation of current
environmental and regulatory requirements, are accrued and expensed,
principally by the units-of-production method based on estimated proven and
probable ore reserves. Remediation liabilities, including estimated
governmental oversight costs, are expensed upon determination that a
liability has been incurred and where a minimum cost or reasonable estimate
of the cost can be determined.
The Company provides for all costs of reclamation, including long-term
care and monitoring and maintenance costs. The Company uses undiscounted
current costs in preparing its estimates of future reclamation costs. The
Company regularly updates its estimates of reclamation costs. Amounts to be
62
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
received from the United States Federal Government for its 51.2% share of
the cost of future reclamation activities at the Grants, New Mexico uranium
facility are offset against the remaining estimated Grants reclamation
liabilities. Receivables are recorded for the United States Federal
Government's share of reclamation expenditures at the Grants uranium
facility in the period that such expenditures are made.
Based on current environmental regulations and known reclamation
requirements, the Company has included its best estimates of these
obligations in its reclamation accruals. However, the Company's estimates
of its ultimate reclamation liabilities could change as a result of changes
in regulations or cost estimates.
Noncurrent investments include equity investments, mining securities and
assets held in trust to fund employee benefits.
Investments in gold mining partnerships over which the Company
exercises significant influence are reported using the equity method.
Equity investments are carried at the lower of cost or market.
Investments in mining securities and assets held in trust to fund
employee benefits are classified as available-for-sale investments.
Unrealized gains and losses on these investments are recorded as a separate
component of shareholders' equity, except that declines in market value
judged to be other than temporary are recognized in determining net income.
Realized gains and losses on these investments are included in determining
net income.
Product sales are recognized when title passes at the shipment or delivery
point.
Income taxes: The Company follows the liability method of accounting for
income taxes whereby deferred income taxes are recognized for the tax
consequences of temporary differences by applying statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of certain assets and liabilities.
Changes in deferred tax assets and liabilities include the impact of any
tax rate changes enacted during the year. Mining taxes represent Canadian
provincial taxes levied on mining operations.
Foreign currency: Substantially all assets and liabilities of foreign
subsidiaries are translated at exchange rates in effect at the end of each
period. Revenues and expenses are translated at the average exchange rate
for the period. Accumulated currency translation adjustments are included
as a separate component of shareholders' equity. Foreign currency
transaction gains and losses are included in the determination of net
income.
Pension plans and other postretirement benefits: Pension costs related to
United States employees are determined using the projected unit credit
actuarial method. Pension plans are funded through annual contributions. In
addition, the Company provides medical and life insurance benefits for
certain retired employees and accrues the cost of such benefits over the
period in which active employees become eligible for the benefits. The
costs of the postretirement medical and life insurance benefits are paid at
the time such benefits are provided.
63
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Net income per share is computed by dividing net income by the weighted
average number of common shares and common share equivalents outstanding
during the year. Fully diluted net income per share is not presented since
the exercise of stock options would not result in a material dilution of
earnings per share and the conversion of the 5.5% convertible subordinated
notes would produce anti-dilutive results.
Preparation of financial statements: Certain amounts for 1995 and 1994 have
been reclassified to conform to the current year's presentation. All dollar
amounts are expressed in United States dollars unless otherwise indicated.
Note 3: Acquisitions
Homestake Gold of Australia Limited
In 1995, the Company made an unconditional offer to acquire the 18.5% of
HGAL it did not already own. Homestake offered .089 of a Homestake share or
A$1.90 in cash for each of the 109.6 million HGAL shares owned by the
public. Through December 31, 1995 a total of 38.9 million HGAL shares were
acquired at a cost of $59.1 million, including $42.4 million for 2.6
million newly issued shares of the Company, $14.5 million in cash and $2.2
million of transaction expenses. At December 31, 1995 Homestake owned 88.1%
of the shares of HGAL. The acquisition was completed in the first quarter
of 1996 when the remaining 70.7 million publicly held HGAL shares were
acquired at a cost of $105.8 million, including $99.3 million for 6 million
newly issued shares of the Company, $5 million in cash and $1.5 million of
transaction expenses. The total purchase price to acquire all of the 18.5%
of HGAL held by the minority shareholders was $164.9 million, including
$141.7 million for 8.5 million newly issued shares of the Company, $19.5
million in cash and $3.7 million of transaction expenses.
The acquisition of the HGAL minority interests was accounted for as a
purchase. For accounting purposes, the HGAL shares acquired in the fourth
quarter of 1995 and in the first quarter of 1996 are assumed to have been
acquired effective as of December 31, 1995 and January 1, 1996,
respectively. Based upon the total purchase price of $164.9 million, the
excess of the purchase price paid over the net book value of the minority
interests acquired was $140.7 million. Substantially all of the excess
purchase price is attributable to mineral property interests at Kalgoorlie.
The Company used discounted cash flow analysis to determine the allocation
of the purchase price between reserves and other mineralized material. This
analysis indicated that approximately 62% of the purchase price allocated
to mineral properties was attributable to reserves and the remainder was
attributable to other mineralized material and mineral properties.
On a pro forma basis, assuming that the acquisition of the HGAL
minority interests occurred on January 1, 1995, revenues, net income and
net income per share for the year ended December 31, 1995 have been
estimated at $745 million, $25.6 million and $.17 per share, respectively.
This pro forma information includes adjustments which are based on
available information and certain assumptions that the Company believes are
reasonable in the circumstances. The pro forma information is unaudited and
does not purport to represent what the results of operations actually would
have been had the acquisition of the HGAL minority interests occurred on
January 1, 1995 or to project the results of operations for any future date
or period.
64
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Snip Mine
On April 30, 1996 Prime purchased Cominco Ltd.'s ("Cominco") 60% interest
in the Snip mine in British Columbia, Canada for $39.3 million in cash. The
purchase price included Cominco's share of the mine's working capital.
Prime now owns 100% of the Snip mine.
Agua de la Falda S.A.
In July 1996, Homestake and Corporacion Nacional del Cobre Chile
("Codelco"), a state-owned mining company in Chile, formed a new company,
Agua de la Falda S.A. ("La Falda") to conduct exploration and mining
activities near Homestake's former El Hueso mine in northern Chile.
Homestake owns 51% of the corporation and Codelco owns 49%. Codelco and
Homestake have contributed property interests in the area to the new
company. In addition, Codelco contributed the existing El Hueso plant,
which had been under lease to Homestake. Homestake also contributed $5.1
million for exploration and development, including $3.7 million of
exploration and development expenditures incurred prior to the formation of
La Falda. La Falda is developing the Agua de la Falda mine, which contains
187,000 ounces of oxide reserves, and will continue drilling and
metallurgical testing of the much larger Jeronimo deposit where 6.1 million
tons of mineralized material at a grade of .158 ounces of gold per ton have
been outlined to date.
Pinson Mining Company
In December 1996, Homestake increased its interest in the Pinson Mining
Company partnership ("Pinson Partnership") from 26.25% to 50% and became
the operator of the Pinson mine. Barrick Gold Corporation ("Barrick") owns
the remaining 50% interest. The purchase price for the additional 23.75%
partnership interest consisted of $4.4 million in cash, a net smelter
royalty on certain future Pinson Partnership production and assumption of a
proportionate increase of the Pinson Partnership's liabilities, including
reclamation.
Note 4: Prime Resources Group Inc.
In 1994, Prime sold 5 million common shares at approximately $6.70 per
share to the public. Net proceeds of approximately $31.9 million from this
issue were used to fund a portion of the construction and development costs
of the Eskay Creek mine. This transaction resulted in a reduction of the
Company's interest in Prime from 54.2% to 50.6%. It is the Company's policy
to include any gains or losses on the issuances of stock of the Company's
subsidiaries in the determination of net income. The Company recorded a
gain of $11.2 million on the transaction in recognition of the net increase
in the book value of the Company's investment in Prime. Deferred income
taxes were not provided on this gain since the Company's tax basis in Prime
substantially exceeds its carrying value.
Note 5: Sales of Mining Operations
Torres mining complex: In 1995, the Company sold its 28% equity interest in
the Torres silver mining complex in Mexico for $6 million. This sale
resulted in a pretax gain of $2.7 million, which was included in other
income.
65
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Dee mine: In 1994, the Company sold its 44% interest in the Dee gold mine
in Nevada to Rayrock Mines, Inc. ("Rayrock") for $16.5 million. Rayrock
assumed responsibility for and indemnified Homestake against all related
environmental and reclamation matters. This sale resulted in a pretax gain
of $15.7 million, which was included in other income.
Note 6: Income Taxes
The provision for income and mining taxes consists of the following:
1996 1995 1994
---------------------------------------------
Current
Income taxes
Federal $ (1,999) $ 7,375 $ 7,560
State 211 (61) 1,258
Canadian 28,367 1,928 2,258
Other foreign 405 176 206
---------------------------------------------
26,984 9,418 11,282
Canadian mining taxes 14,964 10,248 9,741
---------------------------------------------
Total current taxes 41,948 19,666 21,023
---------------------------------------------
Deferred
Income taxes
Federal (3,879) (3,743) 6,867
State (1,300) 436 (1,086)
Canadian (14,588) 25,347 (13,796)
Other foreign 1,981 (2,041) 4,438
---------------------------------------------
(17,786) 19,999 (3,577)
Canadian mining taxes 2,171 (524) 1,434
---------------------------------------------
Total deferred taxes (15,615) 19,475 (2,143)
---------------------------------------------
Total income and mining taxes $26,333 $39,141 $18,880
=============================================
The provision for income taxes is based on pretax income before
minority interests as follows:
1996 1995 1994
--------------------------------------------
United States $(14,003) $ 17,607 $ 28,415
Canada 95,548 71,333 49,690
Other foreign (9,861) (3,474) 27,708
--------------------------------------------
$ 71,684 $ 85,466 $105,813
============================================
66
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Deferred tax liabilities and assets as of December 31, 1996 and 1995
relate to the following:
December 31,
1996 1995
--------------------------------------
Deferred tax liabilities
Depreciation and other resource property differences
United States $ 64,855 $ 65,763
Canada - Federal 32,395 52,068
Canada - Provincial 69,069 76,792
Australia 74,869 29,921
--------------------------------------
241,188 224,544
Inventory - Australia 3,590 859
Other 11,752 11,738
--------------------------------------
Gross deferred tax liabilities 256,530 237,141
--------------------------------------
Deferred tax assets
Tax loss carry-forwards
United States 162 2,533
Canada - Federal 2,001 8,073
Australia 16,680 7,681
Chile 19,929 18,344
--------------------------------------
38,772 36,631
Reclamation costs
United States 6,783 8,502
Other 6,226 5,314
--------------------------------------
13,009 13,816
Employee benefit costs 26,959 28,573
Alternative minimum tax credit carry-forwards 14,215 13,922
Land and other resource property 15,225 12,759
Deductible mining taxes 1,059 3,257
Foreign tax credit carry-forwards 12,725 4,600
Reorganization costs 286 1,038
Other 17,241 12,752
--------------------------------------
Gross deferred tax assets 139,491 127,348
Deferred tax asset valuation allowances (72,152) (59,611)
--------------------------------------
Net deferred tax assets 67,339 67,737
--------------------------------------
Net deferred tax liability $ 189,191 $ 169,404
======================================
Net deferred tax liability consists of
Current deferred tax assets $ (12,263) $ (20,521)
Long-term deferred tax liability 201,454 189,925
--------------------------------------
Net deferred tax liability $ 189,191 $ 169,404
======================================
The classification of deferred tax assets and liabilities is based on
the related asset or liability creating the deferred tax. Deferred taxes
not related to a specific asset or liability are classified based on the
estimated period of reversal. The change in the valuation allowance for
deferred tax assets has increased by $12.5 million in 1996, of which $8.1
million relates to an increase in the Company's foreign tax credit
carryover. For income tax purposes, the Company has United States foreign
tax credit carry-forwards of approximately $12.7 million which are due to
expire at various times through
67
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
the year 2002. The $72.2 million deferred tax valuation allowance at
December 31, 1996 represents the portion of the Company's consolidated
deferred tax assets which, based on projections at December 31, 1996, the
Company does not believe that realization is "more likely than not." Such
$72.2 million of deferred tax valuation allowance consists of United
States, Chile and Australia unrealized deferred tax assets of $45.5
million, $20.8 million and $5.9 million, respectively.
The largest portion of the $72.2 million of unrealized deferred tax
assets is comprised of $38.6 million of future United States ($32.7
million) and Australia ($5.9 million) tax benefits relating to expenses
that the Company projects will not be deductible for tax return purposes
until after the year 2010. In projecting United States source income beyond
this period, the Company currently does not meet the SFAS 109 "more likely
than not" criteria required to recognize the United States tax benefits. In
addition, there currently is not a tax strategy which would result in the
realization of the Australian tax benefit. The remaining $33.6 million
principally is comprised of future Chilean tax benefits and United States
foreign tax credit carry-forwards that the Company projects it will be
unable to realize.
Major items causing the Company's income tax provision to differ from
the federal statutory rate of 35% were as follows:
1996 1995 1994
---------------------------------------------------------
Income tax based on statutory rate $ 25,089 $ 29,913 $ 37,035
Percentage depletion (7,611) (9,879) (11,106)
Earnings in foreign jurisdictions
at different rates (1,899) (1,019) (6,175)
State income taxes,
net of federal benefit 333 340 1,614
Australian investment allowance (2,097)
Tax relating to reorganizations 7,682
Unrealized minimum tax credits 5,645 4,790 1,753
Nontaxable income (287) (777) (4,784)
Reduction of prior year accruals (24,048)
Other nondeductible losses 13,340 6,231 9,401
Deferred tax assets not recognized in
prior years (2,504) (1,262) (27,697)
Foreign taxes withheld 1,430 1,965 2,089
Litigation recovery (2,629)
Other - net 2,339 1,212 (2,107)
---------------------------------------------------------
Total income taxes 9,198 29,417 7,705
Canadian mining taxes 17,135 9,724 11,175
---------------------------------------------------------
Total income and mining taxes $ 26,333 $ 39,141 $ 18,880
=========================================================
The Company's 1996 income tax expense includes a $24 million benefit
relating to a reduction of prior years' income tax accruals for certain
contingencies which have now been resolved and a $2.6 million benefit
relating to the tax portion of litigation recovery proceeds.
68
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Deferred tax assets not recognized in prior years include (i) reversals
of prior year valuation allowances of $2.5 million in 1996, $1.3 million in
1995 and $12.4 million in 1994, and (ii) realization of additional deferred
tax assets that could not be recognized in prior years of $15.3 million in
1994.
Note 7: Receivables
December 31,
1996 1995
-------------------------------------
Trade accounts $ 24,485 $ 37,907
U.S. Government receivable (see note 21) 5,500 5,500
Interest and other 17,665 14,639
-------------------------------------
$ 47,650 $ 58,046
=====================================
Note 8: Inventories
December 31,
1996 1995
-------------------------------------
Finished products $ 21,132 $ 13,498
Ore and in-process 39,980 26,027
Supplies 30,015 30,454
-------------------------------------
$ 91,127 $ 69,979
=====================================
At December 31, 1996 and 1995, the cost of certain finished gold
inventories in the United States stated on the LIFO cost basis totaled $2.1
million and $2 million, respectively. Such inventories would have
approximated $3.7 million and $3.6 million, respectively, if stated at the
lower of market or current year average production costs.
At December 31, 1996 and 1995, ore stockpiles in the amounts of $10.9
million and $11.1 million, respectively, not expected to be processed
within the 12 months following the end of each year are included in other
noncurrent assets (see note 11).
Note 9: Property, Plant and Equipment
December 31,
1996 1995
----------------------------------------
Mining properties and development costs $1,013,309 $ 790,335
Plant and equipment 932,826 891,277
Land and royalty interests 3,905 3,843
Construction and mine development in progress 20,260 12,282
----------------------------------------
1,970,300 1,697,737
Accumulated depreciation, depletion and
amortization (963,270) (850,961)
----------------------------------------
$1,007,030 $ 846,776
========================================
69
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Included in property, plant and equipment above is the Company's $110
million investment in its 16.7% undivided interest in the Main Pass 299
sulfur mine which contained proven recoverable reserves of approximately 66
million long tons of sulfur at December 31, 1996. In accordance with the
Company's accounting policy for reviewing the recoverability of its
investment in operating mines, the Company has estimated future Main Pass
undiscounted net cash flows based on its share of proven reserves,
estimated future sales prices (considering historical and current prices,
price trends and related factors), production costs, capital and
reclamation costs.
In estimating its future undiscounted net cash flows, the Company has
assumed an average future sales price for sulfur of approximately $70 per
ton over the expected remaining 30 year life of the mine. The current
market for sulfur is depressed. However, during the past 10 years the
market for sulfur has been cyclical with prices ranging between $50 and
$142 per ton and averaging over $99 per ton. During the years ended
December 31, 1996 and 1995, the Company realized prices of $60 and $68 per
ton, respectively. Although the Company does not expect significant
improvement in sulfur prices during 1997, the Company believes that future
prices over the life of this mine will be sufficient to recover its
investment. This view is based on the historical volatility of sulfur
prices and on the low operating cost structure of the Main Pass mine.
Estimates of future cash flows are subject to risks and uncertainties
and it is possible that changes could occur in the near term which may
affect the recoverability of the Company's investment in the Main Pass
operations. If the sulfur market remains depressed for a period of time,
the Company may not be able to recover all of its investment in the Main
Pass mine and future write-downs of up to $110 million may be required.
Note 10: Noncurrent Investments
December 31,
1996 1995
-------------------------------------
Equity investments
Pinson (50%) and Marigold (33%)
mines (see note 3) $ 8,640 $ 4,121
Other equity investments 1,956 1,963
Navan Resources plc 16,800 24,000
Other investments 12,210 16,104
-------------------------------------
$ 39,606 $ 46,188
=====================================
In 1995, Homestake acquired for $24 million a 10% interest in Navan
Resources plc ("Navan"), an Irish public company with diverse mineral
interests in Europe. The purchase price included an option which will
permit Homestake to acquire from Navan up to a 50% interest in Navan
Bulgarian Mining BV ("Navan BV"), which in turn owns 68% of Bimak AD, the
owner of the Chelopech gold/copper operations in Bulgaria, by investing an
additional $48 million. Homestake's initial $12 million investment in Navan
BV is conditioned upon receipt of all necessary permits for construction of
a roaster and an increase in mining rate at Chelopech from 500,000 to
750,000 metric tons per year, approval of the project by the Boards of
Directors of both companies and agreement on a suitable project management
team. Investment of the remaining $36 million in Navan BV is conditioned on
subsequent approval by the Bulgarian government, Navan and Homestake of a
70
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
further mine and mill expansion and the securing of expansion financing. In
March 1996, Homestake exercised its option to acquire up to a 50% interest
in Navan BV. However, pending satisfaction of certain conditions, to date
no amunts have been advanced in respect to this option.
In December 1996, Homestake in consultation with Navan, determined
that due to the deteriorating political and economic situation in Bulgaria,
it was likely that further development of the Chelopech project would be
delayed substantially. In light of the uncertainty surrounding the project,
Homestake considered it had an other than temporary impairment of its
investment and reduced the carrying value of the investment in Navan,
including its option to acquire up to a 50% interest in Navan BV, to the
quoted market value of the Navan securities. The resulting charge of $7.2
million was recorded in the fourth quarter of 1996.
Other investments at December 31, 1995 included $10 million related to
a 1995 investment in Orion Resources NL ("Orion"). In January 1996, after
further evaluation of the investment opportunity, the Company sold its
investment in Orion and recorded a gain of $.2 million.
Note 11: Other Assets
December 31,
1996 1995
-------------------------------------
Assets held in trust (see note 17) $ 25,252 $ 23,741
Ore stockpiles 10,946 11,118
U.S. Government receivable (see note 21) 10,663 13,166
Other 9,263 11,927
-------------------------------------
$ 56,124 $ 59,952
=====================================
Note 12: Accrued Liabilities
December 31,
1996 1995
-------------------------------------
Accrued payroll and other compensation $ 23,085 $ 26,925
Accrued reclamation and closure costs 10,055 12,383
Other 9,034 14,629
-------------------------------------
$ 42,174 $ 53,937
=====================================
Note 13: Long-term Debt
December 31,
1996 1995
--------------------------------------
Convertible subordinated notes (due 2000) $ 150,000 $ 150,000
Pollution control bonds
Lawrence County, South Dakota (due 2003) 18,000 18,000
State of California (due 2004) 17,000 17,000
--------------------------------------
$ 185,000 $ 185,000
======================================
71
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Convertible subordinated notes: The Company's 5.5% convertible subordinated
notes, which mature on June 23, 2000, are convertible into common shares at
a price of $23.06 per common share and are redeemable by the Company in
whole at any time. Interest on the notes is payable semi-annually in June
and December. Issuance costs of $3.9 million were capitalized and are being
amortized over the life of the notes.
Pollution control bonds: The Company pays interest monthly on the pollution
control bonds based on variable short-term, tax-exempt obligation rates.
Interest rates at December 31, 1996 and 1995 were 4.3% and 5%,
respectively. No principal payments are required until cancellation,
redemption or maturity. Bondholders have the right to tender the bonds for
payment at any time on seven days notice. The Company has arrangements with
underwriters to remarket any tendered bonds and also with a bank to provide
liquidity and credit support to the Company and to purchase and hold for up
to 15 months any tendered bonds that the underwriters are unable to
remarket.
Lines of credit: In September 1996, the Company replaced its credit
agreement with a new United States/Canadian/Australian cross-border credit
facility providing a total availability of $275 million. The Company pays a
commitment fee of .15% per annum on the unused portion of this facility.
The credit facility is available through September 20, 2001 and provides
for borrowings in United States, Canadian or Australian dollars, or gold or
a combination of these. The credit agreement requires a minimum
consolidated net worth of $500 million. In addition, Prime has a $11
million credit facility. At December 31 1996 and 1995, no amounts had been
borrowed under these credit agreements.
Note 14: Other Long-term Obligations
December 31,
1996 1995
-------------------------------------
Accrued reclamation and closure costs $ 45,388 $ 44,051
Accrued pension and other postretirement
benefit obligations (see note 17) 59,273 63,092
Other 9,507 13,275
-------------------------------------
$ 114,168 $ 120,418
=====================================
While the ultimate amount of reclamation and site restoration costs to be
incurred in the future is uncertain, the Company has estimated that the
aggregate amount of these costs for operating properties, plus previously
accrued reclamation and remediation liabilities for nonoperating
properties, will be approximately $110 million. This figure includes
approximately $10.6 million of reclamation costs at the Grants uranium
facility which will be funded by the United States Federal Government. At
December 31, 1996 the Company had accrued $55.4 million for estimated
ultimate reclamation and site restoration costs and remediation liabilities
(see notes 12 and 21).
72
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Note 15: Other Income
1996 1995 1994
------------------------------------------------------------
Gain on asset disposals $ 3,836 $ 5,024 $ 19,521
Royalty income 2,888 2,252 3,061
Foreign currency contract gains
(losses) 1,632 (151) 4,569
Foreign currency exchange losses on
intercompany advances (8,943) (883) (5,959)
Other foreign currency gains (losses) 595 249 (658)
Pension curtailment gain 1,868
Other 5,483 5,140 5,054
------------------------------------------------------------
$ 7,359 $ 11,631 $ 25,588
============================================================
Note 16: Other Expense
1996 1995 1994
-----------------------------------------------------------
Write-downs of investments in
mining securities (see note 10) $ 8,983
Expenses related to proposed
merger (see note 24) 3,424
Other 2,168 $ 3,290 $ 6,744
-----------------------------------------------------------
$ 14,575 $ 3,290 $ 6,744
===========================================================
Note 17: Employee Benefit Plans
Pension plans: The Company has pension plans covering substantially all
United States employees. Plans covering salaried and other nonunion
employees provide pension benefits based on years of service and the
employee's highest compensation during any 60 consecutive months prior to
retirement. Plans covering union employees provide defined benefits for
each year of service.
Pension costs for 1996, 1995 and 1994 for Company-sponsored United
States employee plans included the following components:
1996 1995 1994
------------------------------------------------------------
Service cost - benefits earned
during the year $ 4,519 $ 3,573 $ 3,928
Interest cost on projected
benefit obligations 15,319 14,476 13,497
Actual net return on assets (34,693) (44,788) (1,828)
Net amortization (deferral) 20,696 32,405 (11,202)
Pension curtailment gain (1,868)
------------------------------------------------------------
$ 3,973 $ 5,666 $ 4,395
============================================================
73
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Assumptions used in determining net periodic pension cost for 1996,
1995 and 1994 include discount rates of 7%, 8%, and 7%, respectively, an
assumed rate of increase in compensation of 5% for each year and an assumed
long-term rate of return on assets of 8.5% for each year. Assumptions used
in determining the projected benefit obligations at December 31, 1996 and
1995 include discount rates of 7% and an assumed rate of increase in
compensation of 5%.
The funded status and amounts recognized for pension plans in the
consolidated balance sheets are as follows:
December 31, 1996 December 31, 1995
Plans Where Plans Where
----------------------------------------------------------------------------------
Accumulated Accumulated
Assets Exceed Benefits Assets Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------------------------------------------------------------------------------
Actuarial present value
of benefit obligations
Vested benefits $ (162,100) $ (17,700) $ (159,400) $ (16,300)
==================================================================================
Accumulated benefits $ (180,800) $ (18,900) $ (175,400) $ (17,500)
==================================================================================
Projected benefits $ (202,200) $ (21,000) $ (195,300) $ (19,800)
Plan assets at fair value (1) 224,064 192,565
----------------------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation 21,864 (21,000) (2,735) (19,800)
Unrecognized net loss (gain) (22,467) 51 (7,285) 114
Unrecognized net transition
obligation (asset) amortized
over 15 years (3,364) 547 (3,916) 792
Unrecognized prior service
cost (benefit) 141 2,459 680 3,081
Additional minimum liability (957) (1,687)
----------------------------------------------------------------------------------
Pension liability recognized
in the consolidated balance
sheets $ (3,826) $ (18,900) $ (13,256) $ (17,500)
==================================================================================
<FN>
(1) Approximately 98% and 93% of the plan assets were invested in listed
stocks and bonds and the balance was invested in fixed-rate insurance
contracts at December 31, 1996 and 1995, respectively.
Amounts shown under "plans where accumulated benefits exceed assets" at
December 31, 1996 and 1995 consist of liabilities for a nonqualified
supplemental pension plan covering certain employees and a nonqualified
pension plan covering directors of the Company. These plans are unfunded.
In 1995, the Company established a grantor trust, consisting of a money
market fund, mutual funds and corporate-owned life insurance policies, to
provide funding for the benefits payable under these nonqualified plans and
certain other deferred compensation plans. The grantor trust, which is
included in other assets, amounted to $25.3 million at December 31, 1996
and $23.7 million at December 31, 1995.
74
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Certain of the Company's foreign operations participate in pension
plans. The Company's share of contributions to these plans was $1.4 million
in 1996, $1.1 million in 1995, and $0.8 million in 1994.
Postretirement benefits other than pensions: The Company provides medical
and life insurance benefits for certain retired employees, primarily
retirees of the Homestake mine. Retirees generally are eligible for
benefits upon retirement if they are at least age 55 and have completed
five years of service. Net periodic postretirement benefit costs were $3.1
million in 1996 and $3.5 million in 1995 and 1994.
The actuarial assumptions used in determining net periodic
postretirement benefit costs include discount rates of 7% for 1996, 8% for
1995, and 7% for 1994, an initial health care trend rate of 10% grading
down to an ultimate health care cost trend rate of 5% for 1996, and an
initial health care cost trend rate of 9.5% grading down to an ultimate
health care cost trend rate of 5% for 1997. The ultimate trend rate is
expected to be achieved by 2006. The actuarial assumptions used in
determining the Company's accumulated postretirement benefit obligation at
December 31, 1996 and 1995 include a discount rate of 7%. A one
percentage-point increase in the assumed health care cost trend rate would
result in an increase of approximately $5 million in the accumulated
postretirement benefit obligation at December 31, 1996 and an increase of
approximately $.5 million in net periodic postretirement benefit costs for
1996.
The following table sets forth amounts recorded in the Company's
consolidated balance sheets at December 31, 1996 and 1995. The Company has
not funded any of its estimated future obligation.
December 31,
1996 1995
--------------------------------------
Accumulated postretirement benefit obligation
Retirees $(29,000) $(27,000)
Fully-eligible active plan participants (1,000) (1,000)
Other active plan participants (7,000) (7,000)
--------------------------------------
(37,000) (35,000)
Unrecognized net gain (4,364) (5,412)
Unrecognized prior service cost 617 677
--------------------------------------
Accumulated postretirement benefit obligation
liability recognized in the consolidated
balance sheets $(40,747) $(39,735)
======================================
Stock option plans: The Company may grant stock options for up to 6 million
common shares under its 1996 stock option plan. The exercise price of each
option granted under the 1996 and prior plans is equal to the market price
of the Company's stock on the date of grant and an option's maximum term is
ten years. Options usually vest over a four-year period.
75
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
A summary of the status of the Company's stock option plans as of
December 31, 1996, 1995 and 1994 and changes during the years ending on
those dates is presented below:
1996 1995 1994
-----------------------------------------------------------------------------
Number Average Number Average Number Average
of Price Per of Price Per of Price Per
Shares Share Shares Share Shares Share
-----------------------------------------------------------------------------
Balance at January 1 2,309 2,301 2,600
Granted 466 $19.19 361 $15.58 268 $20.50
Exercised (168) 19.71 (206) 13.90 (293) 15.98
Expired (4) 19.38 (147) 16.92 (274) 15.86
---------- ---------- ----------
Balance at December 31 2,603 2,309 2,301
========== ========== ==========
Options exercisable at
December 31 1,854 1,500 1,481
Fair value of options granted
during the year $5.84 $5.06
The fair value of each stock option is estimated on the date of grant
using a Black-Scholes option-pricing model with the following
weighted-average assumptions: an expected life of 1.8 years from the vest
date (with incremental vesting over four years) for 1996 and 1995, expected
volatility of 31.7% and 33.3% for 1996 and 1995, a dividend yield of 1% and
1.3% for 1996 and 1995, respectively, and a risk-free interest rate of 5.4%
and 6.9% in 1996 and 1995, respectively.
The following table summarizes information about stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
---------------------------------------------------------- --------------------------------------
Range of Weighted-Average Weighted-Average Weighted-Average
Exercise Prices Number Remaining Exercise Price Number Exercise Price
Per Share Outstanding Contractual Life Per Share Exercisable Per Share
--------------------- --------------- ------------------ ------------------ -------------- ---------------------
$12.18 to $15.38 881 5.9 years $13.76 637 $13.51
15.43 to 19.13 1,111 6.6 years 17.65 691 16.84
19.70 to 42.77 611 4.0 years 27.98 526 29.18
--------------- --------------
2,603 1,854
=============== ==============
An additional 6 million and .6 million shares were available for future
grants at December 31, 1996 and 1995, respectively.
The Financial Accounting Standards Board issued SFAS 123, "Accounting
for Stock-Based Compensation," which is effective for periods beginning
after December 15, 1995, requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value, or provide pro forma disclosure of the
effect of the grants on net income and earnings per share in the notes to
the financial statements as if such compensation expense had been
recognized. The Company has elected to use the pro forma disclosure
provisions of SFAS 123 in 1996 and has applied Accounting Principles Board
Opinion 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for the Company's
stock option plans. Had compensation expense for the Company's stock-based
compensation plans
76
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
been determined based on the fair value of options at the grant dates as
calculated in accordance with SFAS 123, the Company's net income and
earnings per share for the years ended December 31, 1996 and 1995 would
have been as follows:
1996 1995
---------------------------- -------------------------------
Earnings Earnings
Net income per share Net income per share
----------- ---------- -------------- -----------
As reported $ 30,281 $ 0.21 $ 30,327 $ 0.22
Pro forma 28,913 0.20 29,773 0.22
During the initial phase-in period of SFAS 123, disclosures are not
likely to be representative of the pro forma effects on reported net income
for future years, as the disclosures only include the pro forma effects of
options granted on or after January 1, 1995.
Other plans: Substantially all full-time United States employees of the
Company are eligible to participate in the Company's defined contribution
savings plans. The Company's matching contribution was approximately $2.2
million in 1996, $1.6 million in 1995 and $1.1 million in 1994.
Note 18: Fair Value of Financial Instruments
At December 31, 1996 and 1995 the carrying values of the Company's cash and
equivalents and short-term investments, noncurrent investments, long-term
debt and foreign currency options approximated their estimated fair values.
Note 19: Shareholders' Equity
Other equity includes deductions of $3.5 million and $3.7 million at
December 31, 1996 and 1995, respectively, for loans made to certain former
HCI employees and directors for the purchase of HCI common shares. The
loans are non-interest bearing, are secured by a pledge of shares, and are
not required to be paid until the securities purchased are equal to or
greater than the value of the respective loans.
Each share of common stock includes and trades with a right. Rights are
not exercisable currently but become exercisable on the 10th business day
after any person, entity or group ("the Acquiring Person") acquires 20% or
more of the Company's common stock or announces a tender or exchange offer
which would result in such entity acquiring 20% or more of the Company's
common stock. When exercisable, each right entitles its holder to purchase
from the Company one one-hundredth of a share of Series A Participating
Cumulative Preferred Stock, par value $1 per share, at a share price of
$75. If the Acquiring Person acquires 30% or more of the Company's common
stock other than pursuant to a cash tender offer for all of the Company's
stock or engages in certain self-dealing transactions, each right will
entitle its holder to purchase Company common stock at one-half the market
price therefor. If the Company is subsequently involved in a merger or
other business combination involving the Acquiring Person, each right will
entitle its holder to purchase certain securities of the surviving company
at one-half the market price therefor. The rights expire on November 2,
1997.
77
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Note 20: Additional Cash Flow Information
Cash paid for interest and for income and mining taxes is as follows:
1996 1995 1994
---------------------------------------------------------
Interest, net of amounts capitalized $ 10,643 $ 11,292 $ 10,110
Income and mining taxes 17,163 22,650 10,670
Certain investing and financing activities of the Company affected its
financial position but did not affect its cash flows. See note 3 for a
discussion of the noncash acquisitions of the additional interests in HGAL.
Note 21: Contingencies
Environmental Contingencies
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") imposes heavy liabilities on persons who discharge hazardous
substances. The Environmental Protection Agency ("EPA") publishes a
National Priorities List ("NPL") of known or threatened releases of such
substances.
Whitewood Creek: An 18-mile stretch of Whitewood Creek in the Black Hills
of South Dakota formerly was a site on the NPL. The EPA asserted that
discharges of tailings by mining companies, including the Company,
contaminated soil and water for more than 100 years. In 1990, the Company
signed a consent decree with the EPA requiring that the Company perform
remedial work on the site and continue long-term monitoring. The on-site
remedial work has been completed and the consent decree was terminated on
January 10, 1996. At December 31, 1996 the Company had accrued
approximately $1 million as its estimate of the total remaining cost of
long-term monitoring at the Whitewood Creek site. The EPA deleted the site
from the NPL on August 13, 1996.
Grants: The Company's former uranium millsite near Grants, New Mexico is
listed on the NPL. The EPA asserted that leachate from the tailings
contaminated a shallow aquifer used by adjacent residential subdivisions.
The Company paid the costs of extending the municipal water supply to the
affected homes and continues to operate a water injection and collection
system that has significantly improved the quality of the aquifer. The
Company has decommissioned and disposed of the mills and has covered the
tailings impoundments at the site. The total future cost for reclamation,
remediation, monitoring and maintaining compliance at the Grants site is
estimated to be $20.4 million.
Title X of the Energy Policy Act of 1992 (the "Act") and subsequent
amendments to the Act authorized appropriations of $335 million to cover
the Federal Government's share of certain costs of reclamation,
decommissioning and remedial action for by-product material (primarily
tailings) generated by certain licensees as an incident of uranium sales to
the Federal Government. Reimbursement is subject to compliance with
regulations of the Department of Energy ("DOE"), which were issued in 1994.
Pursuant to the Act, the DOE is responsible for 51.2% of past and future
costs of reclaiming the Grants site in accordance with Nuclear Regulatory
Commission license requirements. Through December 31, 1996, the Company had
received $14.2 million from the DOE and the accompanying balance sheet at
December 31, 1996 includes an additional receivable of $16.2 million
78
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
(see notes 7 and 11) for the DOE's share of reclamation expenditures made
by the Company through 1996. The Company believes that its share of the
estimated remaining cost of reclaiming the Grants facility, net of
estimated proceeds from the ultimate disposals of related assets, is fully
provided in the financial statements at December 31, 1996.
In 1983, the state of New Mexico made a claim against the Company for
unspecified natural resource damages resulting from the Grants tailings.
The state of South Dakota made a similar claim in 1983 as to the Whitewood
Creek tailings. The Company denies all liability for damages at the two
CERCLA sites. The two states have taken no action to enforce the 1983
claims.
The Company believes that the ultimate resolution of the above matters
will not have a material adverse impact on its financial condition or
results of operations.
Other Contingencies
In addition to the above, the Company is party to legal actions and
administrative proceedings and is subject to claims arising in the ordinary
course of business. The Company believes the disposition of these matters
will not have a material adverse effect on its financial position or
results of operations.
Note 22: Foreign Currency and Other Commitments
Under the Company's foreign currency protection program, the Company has
entered into a series of foreign currency option contracts which
established trading ranges within which the United States dollar may be
exchanged for foreign currencies by setting minimum and maximum exchange
rates. The Company does not require or place collateral for these
contracts. However, the Company minimizes its credit risk by dealing with
only major international banks and financial institutions. The contracts
are marked to market at each balance sheet date. Net unrealized gains on
contracts outstanding at December 31, 1996 and 1995 totaled $.3 million.
Other income for the years ended December 31, 1996, 1995 and 1994 included
income (loss) of $1.6 million, $(.2) million, and $4.6 million,
respectively, related to the foreign currency protection program. At
December 31, 1996 the Company had outstanding foreign currency contracts as
follows:
Weighted-Average Exchange
Amount Covered Rates to U.S. Dollars Expiration
Currency (U.S. Dollars) Put Options Call Options Dates
- -------------------------------------------------------------------------------------------------------
Canadian $149,120 0.71 0.77 1997
Canadian 29,000 0.73 0.77 1998
Australian 94,400 0.77 0.80 1997
Australian 6,000 0.77 0.80 1998
--------------
$278,520
In addition to amounts related to the foreign currency option
contracts, the Company realized foreign currency transaction losses of $8.3
million in 1996, $.6 million in 1995, and $6.6 million in 1994 which were
included in other income. The 1996 net foreign currency transaction loss
includes the recognition of an $8.9 million foreign exchange loss primarily
related to the Company's Canadian-dollar denominated advances to HCI.
79
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
In the fourth quarter of 1996, the Company entered into forward sales
commitments for 680,100 ounces expected to be produced from the McLaughlin
mine stockpiles from 1997 through 2003. The Company does not require or
place collateral for these contracts. At December 31, 1996 the Company's
forward sales commitments were as follows:
Average Price of
Forward Sales Forward Sales
Year (ounces) (per ounce)
- -----------------------------------------------------------------------------------------
1997 120,100 $385
1998 120,000 399
1999 109,900 415
2000 85,100 430
2001 85,000 446
2002 85,000 463
2003 75,000 481
--------------
680,100
During 1994, the Company entered into forward sales for 183,200 ounces
of gold it expected to produce at the Nickel Plate mine during 1995 and
1996. In October 1995, the Company closed out forward sales covering 24,400
ounces at an average price of $435 per ounce for delivery in 1996,
realizing a gain of $.8 million. Gold sales for 1996 and 1995 included
70,000 ounces and 88,800 ounces sold under this program at an average price
of $421 per ounce and $398 per ounce, respectively. At December 31, 1996
all sales and obligations under this forward sales program had been
completed.
The purpose of both of the above forward sales programs was to help
assure recovery of the Company's remaining investment in the mines and
provide for remaining unaccrued reclamation costs.
The Company has entered into various commitments during the ordinary
course of its business, which include commitments to perform assessment
work and other obligations necessary to maintain or protect its interests
in mining properties, financing and other obligations to joint ventures and
partners under venture and partnership agreements, and commitments under
federal and state environmental health and safety permits.
Note 23: Geographic and Segment Information
The Company primarily is engaged in gold mining and related activities.
Interests in joint ventures are included in segment operations and
identifiable assets. Operating earnings, which are defined as operating
revenues less operating costs and exploration expenses, exclude corporate
income and expenses, and income and mining taxes. Identifiable assets
represent those assets used in a segment's operations. Corporate assets are
principally cash and equivalents, short-term investments and assets related
to operations not significant enough to require classification as a
business segment.
80
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
GEOGRAPHIC INFORMATION
1996 1995 1994
-------------------------------------------------------
Revenues
United States (1) $ 310,881 $ 349,461 $ 346,629
Canada (2) 304,530 264,548 192,363
Australia 147,241 120,898 143,944
Latin America (3) 4,284 11,458 22,551
-------------------------------------------------------
$ 766,936 $ 746,365 $ 705,487
=======================================================
Exploration Expense
United States $ 11,861 $ 12,750 $ 11,841
Canada 9,751 2,797 2,445
Australia 7,863 4,745 4,008
Latin America and other 15,907 7,249 3,053
-------------------------------------------------------
$ 45,382 $ 27,541 $ 21,347
=======================================================
Operating Earnings
United States (1,4) $ 23,124 $ 32,623 $ 60,538
Canada 103,640 86,662 53,359
Australia 1,914 4,516 25,018
Latin America and other (3) (14,606) (6,544) (4,412)
-------------------------------------------------------
$ 114,072 $ 117,257 $ 134,503
=======================================================
Identifiable Assets as of December 31
United States $ 522,565 $ 618,267 $ 598,059
Canada 494,083 432,087 382,575
Australia 451,973 264,238 207,837
Latin America and other 13,487 7,041 13,497
-------------------------------------------------------
$ 1,482,108 $ 1,321,633 $ 1,201,968
=======================================================
<FN>
(1) Includes a foreign currency exchange loss of $8.9 million in 1996
primarily related to the Company's Canadian-dollar denominated
advances to HCI and a gain of $15.7 million in 1994 on the sale of the
Company's interest in the Dee mine.
(2) Includes a gain of $11.2 million in 1994 on the dilution of the
Company's interest in Prime.
(3) Includes a gain of $2.7 million in 1995 on the sale of the Company's
interest in the Torres mining complex.
(4) Includes, in 1996, write-downs of $9 million in the carrying value of
investments in mining company securities and costs of $3.4 million
related to Homestake's now terminated proposed merger with Santa Fe.
81
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
SEGMENT INFORMATION
1996 1995 1994
-------------------------------------------------------
Revenues
Gold $ 713,774 $ 677,377 $ 632,031
Sulfur and oil 30,749 40,620 26,882
Interest and other (1,2) 22,413 28,368 46,574
-------------------------------------------------------
$ 766,936 $ 746,365 $ 705,487
======================================================
Operating Earnings
Gold (1) $ 112,800 $ 111,564 $ 134,695
Sulfur and oil 1,272 5,693 (192)
------------------------------------------------------
Operating earnings 114,072 117,257 134,503
Net corporate expense (2,3) (42,388) (31,791) (28,690)
------------------------------------------------------
Income Before Taxes and Minority Interests $ 71,684 $ 85,466 $ 105,813
======================================================
Depreciation, Depletion and Amortization
Gold $ 105,020 $ 90,237 $ 66,857
Sulfur and oil 6,302 8,055 7,861
Corporate 1,031 1,310 1,453
------------------------------------------------------
$ 112,353 $ 99,602 $ 76,171
======================================================
Exploration Expense
Gold $ 45,382 $ 27,541 $ 21,318
Sulfur and oil - - 29
------------------------------------------------------
$ 45,382 $ 27,541 $ 21,347
======================================================
Additions to Property, Plant and Equipment
Gold (4) $ 262,235 $ 147,549 $ 83,597
Sulfur and oil 1,541 1,604 3,039
Corporate 440 483 2,018
------------------------------------------------------
$ 264,216 $ 149,636 $ 88,654
======================================================
Identifiable Assets as of December 31
Gold $ 1,038,156 $ 870,512 $ 796,016
Sulfur and oil 126,499 134,990 143,742
Corporate:
Cash and equivalents and short-term
investments 219,757 212,373 205,180
Other 97,696 103,758 57,030
------------------------------------------------------
$ 1,482,108 $ 1,321,633 $ 1,201,968
======================================================
<FN>
(1) Includes a gain of $2.7 million in 1995 on the sale of the Company's
interest in the Torres mining complex and a gain of $15.7 million in
1994 on the sale of the Company's interest in the Dee mine.
(2) Includes a foreign currency exchange loss of $8.9 million in 1996
primarily related to the Company's Canadian-dollar denominated
advances to HCI and a gain of $11.2 million in 1994 on the dilution of
the Company's interest in Prime.
82
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
(3) Includes, in 1996, write-downs of $9 million in the carrying value of
investments in mining company securities and costs of $3.4 million
related to Homestake's now terminated proposed merger with Santa Fe.
(4) Includes additions to property, plant and equipment of $35.6 million
in 1996 related to the purchase of Cominco's 60% interest in the Snip
mine and additions of $122.6 million and $68.7 million in 1996 and
1995, respectively, related to the acquisition of the 18.5% of HGAL
the Company did not already own (including deferred tax purchase
adjustments of $32.5 million and $18.2 million, respectively).
Sales to individual customers exceeding 10% of the Company's
consolidated revenues were as follows:
1996 1995 1994
-------------------------------------------------------
Customer A $ 129,000 $ 92,000 $ 129,000
B 117,000 102,000
C 77,000
D 77,000
E 101,000 118,000
F 91,000 100,000
Because of the active worldwide market for gold, Homestake believes
that the loss of any of these customers would not have a material adverse
impact on the Company.
Note 24: Subsequent Events
On March 10, 1997, the Company announced that Santa Fe Pacific Gold
Corporation had terminated its previously announced merger agreement with
Homestake and, in accordance with the terms of the merger agreement, had
paid Homestake a $65 million termination fee. As a result, in the first
quarter of 1997 the Company will record a pretax gain of approximately $63
million ($49 million after tax), net of merger related expenses of
approximately $2 million incurred in 1997.
In February 1997, Homestake completed the previously announced sale of
its interests in the George Lake and Back River ventures in Canada to
Arauco Resources Corporation ("Arauco") for $10 million in cash and 3.6
million shares of Arauco common stock. As a result of this transaction, the
Company will record a pretax gain of approximately $14 million ($8 million
after tax) in the first quarter of 1997.
83
REPORT OF INDEPENDENT AUDITORS
The Shareholders and
Board of Directors of
Homestake Mining Company:
We have audited the consolidated balance sheets of Homestake Mining Company and
Subsidiaries as of December 31, 1996 and 1995, and the related statements of
consolidated income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Homestake Mining
Company and Subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
- ---------------------------
San Francisco, California February 7, 1997, except for
Note 24 as to which the date is
March 10, 1997.
84
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Homestake Mining Company
and Subsidiaries are prepared by the Company's management in conformity with
generally accepted accounting principles. Management is responsible for the
fairness of the financial statements, which include estimates based on
judgments.
The Company maintains accounting and other control systems which management
believes provide reasonable assurance that financial records are reliable for
the purposes of preparing financial statements and that assets are properly
safeguarded and accounted for. Underlying the concept of reasonable assurance is
the premise that the cost of controls should not be disproportionate to the
benefits expected to be derived from such controls. The Company's internal
control structure is reviewed by its internal auditors and to the extent
necessary by the external auditors in connection with their independent audit of
the Company's consolidated financial statements.
The external auditors conduct an independent audit of the consolidated
financial statements in accordance with generally accepted auditing standards in
order to express their opinion on these financial statements. These standards
require that the external auditors plan and perform the audit to obtain
reasonable assurance that the financial statements are free of material
misstatement.
The Audit Committee of the Board of Directors, composed entirely of outside
directors, meets periodically with management, internal auditors and the
external auditors to discuss the annual audit, internal control, internal
auditing and financial reporting matters. The external auditors and the internal
auditors have direct access to the Audit Committee.
/s/ Jack E. Thompson
- --------------------
Jack E. Thompson
President and Chief Executive Officer
/s/ Gene G. Elam
- ----------------
Gene G. Elam
Vice President, Finance and Chief Financial Officer March 10, 1997
85
Quarterly Selected Data
(In thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
----------------------------------------------------------------------------------------------------
1996:
Revenues $ 202,808 $ 201,492 $ 183,683 $ 178,953 $ 766,936
Net income 13,653 (1) 6,776 7,427 (2) 2,425 (2,3,4) 30,281 (1,2,3,4)
Per common share:
Net income $ 0.09 (1) $ 0.05 $ 0.05 (2) $ 0.02 (2,3,4) $ 0.21 (1,2,3,4)
Dividends paid 0.05 0.05 0.05 0.05 0.20
1995:
Revenues $ 179,932 $ 195,590 $ 181,428 $ 189,415 $ 746,365
Net income 6,560 11,179 4,945 7,643 30,327
Per common share:
Net income $ 0.05 $ 0.08 $ 0.04 $ 0.05 $ 0.22
Dividends paid 0.05 0.05 0.05 0.05 0.20
<FN>
(1) Includes income of $4.9 million ($5.5 million pretax) or $0.03 per share
from a litigation recovery.
(2) Includes $2.7 million or $0.02 per share and $21.3 million or $0.14 per
share in the third and fourth quarters, respectively, for reductions in
the Company's accrual for prior year income taxes.
(3) Includes foreign currency exchange losses on intercompany advances of
$7.2 million ($8.7 million pretax) or $0.05 per share and $7.4 million
($8.9 million pretax) or $0.05 per share in the 1996 fourth quarter and
year-to-date periods, respectively, primarily related to the Company's
Canadian-dollar denominated advances to HCI.
(4) Includes write-downs of $8.3 million ($9 million pretax) or $0.06 per
share in the carrying value of investments in mining company securities,
and costs of $2.8 million ($3.4 million pretax) or $0.02 per share
related to Homestake's now terminated proposed merger with Santa Fe.
Common Stock Price Range
(Prices as quoted on the New York Stock Exchange)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------------------------------------------------------------------------------------------
1996: High $20.63 $20.88 $18.00 $16.63 $20.88
Low 15.75 16.88 14.25 13.63 13.63
1995: High $19.13 $19.13 $18.13 $17.38 $19.13
Low 14.75 15.63 16.13 15.13 14.75
86
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEMS 10, 11, 12 AND 13
In accordance with General Instruction G(3), Items 10, 11, 12 and 13
(with the exception of certain information pertaining to executive officers,
which is included in Part I hereof) have been omitted from this report as that
information will be provided by amendment.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORMS 8-K
(a) 1. Financial Statements:
Refer to Part II, Item 8.
2. Financial Statement Schedules:
Schedules for the years ended December 31, 1996, 1995, and
1994 -
II Valuation and Qualifying Accounts
Report of Independent Auditors
Schedules not listed are omitted because they are not required
or because the required information is included elsewhere in
this report.
3. Exhibits
3.1 Restated Certificate of Incorporation of Homestake Mining
Company (incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement No. 33-48526 on Form S-4
filed on June 10, 1992 (the "1992 S-4 Registration
Statement")).
3.2 Amendment to Restated Certificate of Incorporation of
Homestake Mining Company dated June 3, 1991 (incorporated by
reference to Exhibit 3.2 to the 1992 S-4 Registration
Statement).
3.3 Certificate of Correction of the Restated Certificate of
Incorporation of Homestake Mining Company dated February 10,
1992 (incorporated by reference to Exhibit 3.3 to the 1992 S-4
Registration Statement).
3.4 Bylaws (as amended through May 9, 1993) of Homestake Mining
Company (incorporated by reference to Exhibit 3.4 to the
Registrant's Form 10-Q for the quarter ended March 31, 1995).
87
3.5 Rights Agreement dated October 16, 1987 (incorporated by
reference to Exhibit 1 to the Registrant's Registration
Statement on Form 8-A dated October 16, 1987).
3.6 Certificate of Designation of Series A Participating
Cumulative Preferred Stock of Homestake Mining Company
(incorporated by reference to Exhibit 2 to the Registrant's
Registration Statement on Form 8-A dated October 16, 1987).
3.7 Amendment to Certificate of Designation of Series A
Participating Cumulative Preferred Stock of Homestake Mining
Company (incorporated by reference to Exhibit 3.6 to the
Registrant's Report on Form 8-K dated November 20, 1996).
4.1 Indenture dated as of January 23, 1993 between Homestake
Mining Company, Issuer and The Chase Manhattan Bank, N.A.,
Trustee, with respect to U.S. $150,000,000 principal amount of
5 1/2% Convertible Subordinated Notes due January 23, 2000
(incorporated by reference to Exhibit 4.2 to the Registrant's
Form 8-K Report dated as of June 23, 1993).
10.1 Credit Agreement dated as of September 20, 1996 between the
Registrant, the Lenders, The Chase Manhattan Bank of Canada as
Canadian Administrative Agent for Lenders, Chase Securities
Australia Limited, ACN 002 888 011, as Australian
Administrative Agent for Lenders, Chase Securities Inc., as
Arranger, The Chase Manhattan Bank, as Administrative Agent
for Lenders, and Canadian Imperial Bank of Commerce, as
Documentation Agent for Lenders (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 8-K dated as of
September 20, 1996).
10.2 Agreement dated July 4, 1995 between Noranda Exploration
Company Limited, Teck Corporation and International Corona
Resources Limited (a subsidiary of International Corona
Corporation, now Homestake Canada Inc. and a subsidiary of
Registrant), relating to development of the Quarter Claim mine
(incorporated by reference to Exhibit 10.1 to the Registrant's
Form 10-K Report for the year ended December 31, 1995).
* 10.3 Form of Change of Control Severance Plan of Registrant
(incorporated by reference to Exhibit 10.2 to the Registrant's
Form 10-K Report for the year ended December 31, 1995).
* 10.4 Deferred Compensation Plan of Homestake Mining Company
effective October 1, 1995 (incorporated by reference to
Exhibit 10.3 to the Registrant's Form 10-K Report for the year
ended December 31, 1995).
* 10.5 Amended and Restated Executive Supplemental Retirement
Plan of Homestake Mining Company effective August 1, 1995
(incorporated by reference to Exhibit 10.4 to the Registrant's
Form 10-K Report for the year ended December 31, 1995).
* 10.6 Supplemental Retirement Plan of Homestake Mining Company,
amended and restated effective as of January 1, 1990
(including November 29, 1990 modification) (incorporated by
reference to Exhibit 10.5 to the Registrant's Form 10-K Report
for the year ended December 31, 1995).
* 10.7 Master Trust under the Homestake Mining Company Deferred
Compensation Plans as of December 5, 1995 (incorporated by
reference to Exhibit 10.6 to the Registrant's Form 10-K Report
for the year ended December 31, 1995).
* 10.8 Retirement plan for outside directors of the Registrant
dated as of July 21, 1994 (incorporated by reference to
Exhibit 10.2 to the Registrant's Form 8-K dated March 20,
1995).
10.9 [Reserved]
10.10 Agreement dated October 9, 1991 between the Registrant and
Chevron Minerals Ltd. (incorporated by reference to Exhibit
10(b) to the Registrant's Form 10-K for the year ended
December 31, 1991).
88
10.11 Guarantee dated December 18, 1991 between the Registrant and
Chevron Minerals Ltd. (incorporated by reference to Exhibit
10(c) to the Registrant's Form 10-K for the year ended
December 31, 1991).
10.12 Agreement dated May 4, 1990 for the sale of the Registrant's
42.5% partnership interest in The Doe Run Company
(incorporated by reference to Exhibit 28(a) to the
Registrant's Form 8-K dated May 18, 1990).
10.13 Purchase and sale agreement dated January 15, 1989 between the
Registrant's subsidiary, Homestake Gold of Australia Limited,
and North Kalgoorlie Mines Limited (and Group Companies) and
Kalgoorlie Lake View Pty. Ltd. (incorporated by reference to
Exhibit 10(g) to the Registrant's Form 10-K for the year ended
December 31, 1989).
10.14 Agreement Amending Joint Venture Agreement made 19 June 1996
between Homestake Gold of Australia Limited, North Kalgoorlie
Mines Pty Ltd. and Kalgoorlie Consolidated Gold Mines Pty Ltd.
10.15 Joint Operating Agreement dated May 1, 1988 between
Freeport-McMoRan Resources Partners, IMC Fertilizer, Inc. and
Felmont Oil Corporation (a subsidiary of Registrant, now named
Homestake Sulphur Company) relating to the Main Pass Block 299
sulfur project (incorporated by reference to Exhibit 10.16 to
the Registrant's Form 10-K for the year ended December 31,
1992).
10.16 Amendment No. 1 dated July 1, 1993 to Joint Operating
Agreement between Freeport McMoRan Resources Partners, IMC
Fertilizer, Inc. and Homestake Sulphur Company (incorporated
by reference to Exhibit 10.8 to the Registrant's Form 10-K for
the year ended December 31, 1993).
10.17 Amendment No. 2 dated November 30, 1993 to Joint Operating
Agreement between Freeport McMoRan Resources Partners, IMC
Fertilizer, Inc. and Homestake Sulphur Company (incorporated
by reference to Exhibit 10.9 to the Registrant's Form 10-K for
the year ended December 31, 1993).
10.18 Letter dated June 17, 1996, amending Amendment No. 1 to Joint
Operating Agreement between Freeport McMoran Resource
Partners, IMC Fertilizer Inc. and Homestake Sulphur Company.
10.19 Amended and Restated Project Agreement (David Bell Mine) dated
as of April 1, 1986 among Teck Corporation, International
Corona Resources Ltd. (a subsidiary of International Corona
Corporation, now Homestake Canada Inc. and a subsidiary of
Registrant), Teck-Hemlo Inc., Corona-Hemlo Inc. (a subsidiary
of International Corona Corporation, now Homestake Canada Inc.
and a subsidiary of Registrant) (incorporated by reference to
Exhibit 10.17 to the Registrant's Form 10-K for the year ended
December 31, 1992).
10.20 Amended and Restated Operating Agreement (David Bell Mine)
among Teck Corporation, International Corona Resources Ltd. (a
subsidiary of International Corona Corporation, now Homestake
Canada Inc. and a subsidiary of Registrant), Teck Mining Group
Limited, Teck-Corona Operating Corporation, Teck-Hemlo Inc.
and Corona-Hemlo Inc. (a subsidiary of International Corona
Corporation, now Homestake Canada Inc. and a subsidiary of
Registrant) (incorporated by reference to Exhibit 10.18 to the
Registrant's Form 10-K for the year ended December 31, 1992).
10.21 Project Agreement (Williams Mine) dated August 11, 1989 among
Teck Corporation, Corona Corporation (now Homestake Canada
Inc. and a subsidiary of Registrant) and Williams Operating
Corporation (incorporated by reference to Exhibit 10.19 to the
Registrant's Form 10-K for the year ended December 31, 1992).
89
10.22 Operating Agreement (Williams Mine) dated August 11, 1989
among Teck Corporation, Corona Corporation (now Homestake
Canada Inc. and a subsidiary of Registrant), Teck Mining Group
Limited and Williams Operating Corporation (incorporated by
reference to Exhibit 10.20 to the Registrant's Form 10-K for
the year ended December 31, 1992).
10.23 Shareholders' Agreement dated August 11, 1989 among Corona
Corporation (now Homestake Canada Inc. and a subsidiary of
Registrant), Teck Corporation and Williams Operating
Corporation (incorporated by reference to Exhibit 10.21 to the
Registrant's Form 10-K for the year ended December 31, 1992).
* 10.24 Agreement dated July 16, 1982, as amended November 3,
1987 and February 23, 1990, between the Registrant and H. M.
Conger (incorporated by reference to Exhibit 10(a) to the
Registrant's Form 10-K for the year ended December 31, 1989).
* 10.25 Share Incentive Plan effective July 1, 1988 of International
Corona Corporation (now Homestake Canada Inc. and subsidiary
of Registrant), as amended October 22, 1991 (incorporated by
reference to Exhibit 10.32 to the Registrant's Form 10-K for
the year ended December 31, 1992).
10.26 Shareholder Agreement dated January 1, 1989 among Homestake
Mining Company, Case, Pomeroy & Company, Inc. and Hadley Case
(incorporated by reference to Exhibit 10(a) to the
Registrant's Form 10-K for the year ended December 31, 1988).
10.27 Amendment dated March 27, 1992 to Shareholder Agreement dated
January 1, 1989 among Homestake Mining Company, Case, Pomeroy
& Company, Inc., and Hadley Case (incorporated by reference to
Exhibit 10.14 to the 1992 S-4 Registration Statement).
* 10.28 Consulting Agreement dated July 24, 1992, between Stuart T.
Peeler and the Registrant (incorporated by reference to
Exhibit 10.36 to the Registrant's Form 10-K for the year ended
December 31, 1992).
* 10.29 Consulting agreement dated March 1, 1993 between William A.
Humphrey and the Registrant (incorporated by reference to
Exhibit 10.27 to the Registrant's Form 10-K for the year ended
December 31, 1993).
* 10.30 Consulting agreement dated as of May 15, 1996 between Harry M.
Conger and the Registrant.
* 10.31 Employees Non-Qualified Stock Option Plan--1978 (incorporated
by reference to Exhibit 10(a) to the Registrant's Form 10-K
for the year ended December 31, 1984, Commission File Number
1-1235 and to Post Effective Amendment No. 3 to the
Registrant's Registration Statement on Form S-8 dated March
11, 1988).
* 10.32 1981 Incentive Stock Option Plan (incorporated by reference to
Exhibit 10(b) to the Registrant's Form 10-K for the year ended
December 31, 1984, Commission File Number 1-1235 and to Post
Effective Amendment No. 3 to the Registrant's Registration
Statement on Form S-8 dated March 11, 1988).
* 10.33 Long Term Incentive Plan of 1983 of Homestake Mining Company
(incorporated by reference to Exhibit 10(g) to the
Registrant's Registration Statement on Form S-14 dated May 16,
1984).
* 10.34 Employees' Stock Option and Share Rights Plan--1988
(incorporated by reference to Exhibit 10(n) to the
Registrant's Form 10-K for the year ended December 31, 1987).
* 10.35 1996 Stock Option and Share Rights Agreement (incorporated by
reference to Exhibit A to the Registrant's Proxy Statement
for the 1996 Annual Meeting of Shareholders).
11 Computation of Earnings Per Share.
21 Subsidiaries of the Registrant.
23 Consent of Coopers & Lybrand L.L.P., Independent Auditors.
27 Financial Data Schedule.
* Compensatory plan or management contract.
90
(b) Reports Filed on Form 8-K
Three reports on Form 8-K were filed during the fourth quarter of 1996.
The report on Form 8-K dated November 20, 1996 was submitted in order
to file the Amendment to Certificate of Designation of Series A
Participating Cumulative Preferred Stock of Homestake Mining Company.
The report on Form 8-K dated December 9, 1996 was submitted in order to
file the slide presentation given to Homestake and Santa Fe Pacific
Gold Corporation shareholders with respect to the proposed merger
between the Registrant and Santa Fe Pacific Gold Corporation.
The report on Form 8-K dated December 12, 1996 announced the proposed
business combination of the Registrant and Santa Fe Pacific Gold
Corporation and filed the Agreement and Plan of Merger dated December
8, 1996 among the Registrant and Santa Fe Pacific Gold Corporation.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this report, including the exhibits, contain forward
looking statements and information relating to the Company that is based on the
beliefs of management, as well as assumptions made by and information currently
available to management. Forward looking statements include statements preceded
by the words "anticipate," "believe," "estimate," "expect," "indicate,"
"intend," "will," and similar expressions. Estimates of reserves, future
production, and future costs per ounce are forward looking statements. Estimates
of reserves, future production and future costs per ounce of gold-equivalent
production are also forward-looking statements.
The purpose of this cautionary statement is to identify certain
important factors and assumptions on which such forward looking statements may
be based or which could cause actual results to differ materially from those
expressed in the forward looking statements. The important factors and
assumptions set forth below should be read in conjunction with "RISK FACTORS" on
page 93.
Reserves. Reserves reported by Homestake reflect estimated quantities
and grades of gold and silver in deposits and in stockpiles of mined material
that Homestake believes can be mined, processed and sold at prices sufficient to
recover the estimated future cash costs of production, remaining investment and
anticipated additional capital expenditures. Estimates of cost of production are
based on current and projected costs taking into account past experience and
expectations as to the future. Estimated mining dilution is factored into
reserve calculations.
Reserves are reported as general indicators of the life of mineral
deposits. Reserves should not be interpreted as assurances of mine lives or of
the profitability of current or future operations. Reserves are estimated for
each property based upon factors relevant to each deposit. Reserves are
estimates based on drilling results, past experience with property, experience
of the person making the reserve estimates and many other factors. Reserve
estimation is an interpretive process based upon available data, and the actual
quality and characteristics of ore deposits cannot be known until mining has
taken place.
91
Changes in reserves over time generally reflect (i) efforts to develop
additional reserves, (ii) depletion of existing reserves through production,
(iii) actual mining experience, (iv) continued testing and development of
additional information, and (v) price forecasts. Grades of ore actually
processed may be different from the stated reserve grades because of geologic
variations in different areas mined, mining dilution, losses in processing and
other factors. Recovery rates vary with the metallurgical characteristics and
grade of ore processed.
Gold and silver reserve calculations for properties operated by
Homestake are prepared by the Company. Gold and silver ore reserve calculations
for properties not operated by Homestake are based on information provided to
Homestake by the operator. Homestake periodically reviews such information but
does not independently confirm the information provided by these operators.
Homestake used a price of US$375 per ounce of gold and US$5 per ounce of silver
in its preparation of reserve estimates at December 31, 1995 and 1996.
For a discussion of sulfur reserves see page 29.
Estimates of Production. Estimates of future production and mine life
for particular properties and production estimates are derived from annual
mining plans that have been developed based on, among other things, mining
experience, reserve estimates, assumptions regarding ground conditions and
physical characteristics of ores (such as hardness and presence or absence of
certain metallurgical characteristics), and estimated rates and costs of
production. Actual production may vary from estimates for a variety of reasons,
including risks and hazards of the types discussed above, actual ore mined
varying from estimates of grade and metallurgical and other characteristics,
mining dilution, strikes and other actions by labor at unionized locations,
restrictions imposed by government agencies and other factors. Estimates of
production from properties not yet in production or from operations that are to
be expanded are based on similar factors (including, in some instances,
feasibility reports prepared by company personnel and/or outside consultants)
but, as such estimates do not have the benefit of actual experience, there is a
greater likelihood that actual results will vary from the estimates.
Estimates of Operating Costs and Capital Costs; Capital Projects.
Estimates of cash costs for mining operations are developed based on past
experience, reserve and production estimates, anticipated mining and ground
conditions, estimated costs of materials, supplies and utilities, exchange rates
and other items. Estimates of amortization of noncash costs are based on total
capital costs and reserve estimates and may change at least annually based on
actual amounts of unamortized capital and changes in reserve estimates. If the
net book value of mining operations exceeds the fair value, usually determined
based on the estimated future undiscounted cash flows from that mine, then an
impairment loss based on the discounted cash flows would be recognized as an
expense in the period such evaluation is made.
Estimates for reclamation and environmental remediation costs are
developed based on existing and expected legal requirements, past reclamation
experience, cost estimates provided by company employees and third parties and
other factors. Estimates also reflect assumptions with respect to actions of
government agencies, including exercise of discretion and the amount of time
government agencies may take in completing processes required under applicable
laws and regulations. As a result, final costs may vary significantly from
estimates. Homestake periodically reevaluates its reclamation cost estimates and
reclamation reserves to take account of such factors.
Estimates of future capital costs are based on a variety of factors and
may include past operating experience, estimated levels of future production,
estimates by and contract terms with third-party suppliers, expectations as to
government and legal requirements, feasibility reports (which may be prepared
92
by company personnel and/or outside consultants) and other factors. Capital cost
estimates for new projects under development generally are subject to greater
uncertainties than additional capital costs for existing operations.
Estimated periods for completion of capital projects are based on many
factors, including Homestake's experience in completing capital projects, and
estimates provided by and contract terms with contractors, engineers, suppliers
and others involved in design and construction of projects. Estimates also
reflect assumptions with respect to factors beyond the Company's control,
including, but not limited to, the time government agencies may take in
processing applications, issuing permits and otherwise completing processes
required under applicable laws and regulations. Actual time to completion may
vary significantly from estimates.
Estimates of exploration costs are based upon many factors such as past
exploration costs, estimates of the level and cost of future activities, and
assumptions regarding anticipated results on each property. Actual costs may
vary during the year as a result of such factors as actual exploration results
(which could result in increasing or decreasing expenditures for particular
properties), changed conditions, and acquisitions and dispositions of property.
Taxes. Homestake's operations are conducted in a number of
jurisdictions, with differing rates of taxation. Homestake's income and mining
taxes were higher in 1996 (before nonrecurring items) and 1995, and can be
expected to continue to be higher in the future, as compared with prior years,
in part because a substantial part of the Company's income is earned in Canada,
which has a combined income tax and mining tax rate which is significantly
higher than income tax rates in the United States and Australia. Also, under
current circumstances, there is only limited ability to utilize foreign tax
credits in calculating Homestake's United States income taxes. Finally, foreign
exploration expenses are not deductible expenses for United States income tax
purposes. No future income tax benefits can be recognized in the absence of
taxable income in the jurisdictions where such expenditures are incurred.
RISK FACTORS
The risk factors identified below should be considered in conjunction
with the information contained in "CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE
HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995" on
page 91.
Risks of Gold Mining. The business of gold exploration, development and
production by its nature involves significant risks. Among other things, the
business depends on successful location of mineable reserves and skillful
management. Gold exploration is highly speculative in nature, involves many
risks and frequently is non-productive. Once mineralization is discovered and
determined to be economically recoverable, it usually takes a number of years
from the initial phases of exploration until production commences, during which
time the economic feasibility of production may change. Substantial expenditures
are required to establish reserves through drilling, to determine means of
production and metallurgical processes to extract the metal from ore, and, in
the case of new properties, to construct mining and processing facilities.
Mining is subject to a variety of risks and hazards, including rock
falls and slides, cave-ins, flooding and other weather conditions, and other
acts of God. Homestake maintains property and liability insurance consistent
with industry practice, but such insurance contains exclusions and limitations
on coverage. For example, coverage for environmental liability generally is
limited and may be totally unavailable. There can be no assurances that
insurance will continue to be available at economically
93
acceptable premiums. Production costs also can be affected by unforeseen changes
in ore grades and recoveries, permitting requirements, environmental factors,
work interruptions, operating circumstances, unexpected changes in the quantity
or quality of reserves, unstable or unexpected ground conditions, and technical
issues.
Homestake conducts mining operations and exploration in a number of
countries. Some countries have higher levels of political and economic risk than
others, including potential for such factors as government instability,
uncertainty of laws and legal enforcement and compliance, defects in or
uncertainty as to title to mining property, expropriation of property,
restrictions on production, export controls, currency non-convertibility,
fluctuations in currency exchange rates against the United States dollar,
inflation and other general economic and political uncertainties.
Risk Associated with Reserve Realization. Reserves reported by
Homestake reflect estimated quantities and grades of gold and silver in deposits
and in stockpiles of mined material that Homestake believes can be mined,
processed and sold at prices sufficient to recover the estimated future cash
costs of production, remaining investment and anticipated additional capital
expenditures. Reserves are estimates based on drilling results, past experience
with property, experience of the person making the reserve estimates and many
other factors. Reserve estimation is an interpretive process based upon
available data. The actual quality and characteristics of ore deposits cannot be
known until mining has taken place. Further, reserves are valued based on
estimates of future prices ($375 in the case of Homestake's gold reserves).
Actual quality and characteristic of ore deposits and gold prices will differ
from the assumptions used to develop reserves. Such differences may be
significant.
Risks of Gold and Silver Price Fluctuations and Hedging Activities. The
results of Homestake's operations are affected significantly by the market price
of gold. The results of Homestake's operations are also affected, to a lesser
extent, by the market price of silver. The markets for gold and silver are
worldwide markets. Gold and silver prices are subject to volatile price
movements over short periods of time and are influenced by numerous factors over
which Homestake has no control, including expectations with respect to the rate
of inflation, the relative strength of the United States dollar and certain
other currencies (principally Canadian and Australian dollars), interest rates,
global or regional political or economic crises, demand for jewelry and
industrial products containing gold and silver, speculation, and sales by
central banks and other holders and producers of gold and silver in response to
these factors. The supply of gold and silver consists of a combination of new
mine production, recycling of industrial products containing gold and silver,
and sales from existing stocks of bullion and fabricated gold and silver held by
governments, public and private financial institutions, and individuals.
Homestake's general policy is to sell its production at current prices
and not to enter into forward sales, derivatives or other hedging arrangements
that establish a price for the sale of future gold and silver production. As a
result, in general, Homestake's profitability is fully exposed to fluctuations
in the current price of gold and silver in world markets. Homestake's average
realized selling prices of gold and silver were $389 and $5 per ounce,
respectively, in 1996 and $386 and $5 per ounce, respectively, in 1995. In
certain circumstances, Homestake will enter into forward sales commitments for
portions of its production. In the fourth quarter of 1996, Homestake entered
into forward sales commitments on a fixed basis through 2003 at an average price
per ounce of $426 per ounce for 680,100 ounces of the gold expected to be
produced from the McLaughlin mine stockpiles. These forward sales were made to
ensure recovery of cash production costs and remaining capital costs and
reclamation expenses.
Homestake's results are also affected to a lesser degree by the market
prices for sulfur and for crude oil. Sulfur prices are affected principally by
the demand for fertilizer and the availability of
94
by-product sulfur recovered during the refining and processing of oil and
natural gas. Crude oil prices are affected principally by supply and demand for
gasoline and fuel oil as well as global or regional political or economic
crises.
Risk of Currency Fluctuations. Gold is sold throughout the world
principally based on the United States dollar price, but operating expenses for
gold mining companies are incurred principally in local currencies. Homestake's
operations principally are based in the United States, Canada and Australia.
Homestake's Canadian and Australian subsidiaries engage in currency hedging
programs in Canadian and Australian dollars to protect against significant
currency fluctuations relative to the United States dollar.
Risk of Government Regulation of Mining Activities. Homestake's mining
operations and exploration activities are subject to extensive regulation
governing development, production, labor standards, occupational health, waste
disposal, use of toxic substances, environmental regulations, mine safety, and
other matters in all jurisdictions in which they operate. Changes in regulations
can have material impacts on anticipated levels of production, costs and
profitability. There can be no assurance that all required permits and
government approvals can be secured and maintained on an economic basis.
The Mining Law of 1872 (the "Mining Law") has been the subject of
substantial debate and proposals for change for several years. While changes in
the Mining Law may occur, Homestake cannot predict when or if changes will
occur, or the extent to which any new legislation will exempt or otherwise
"grandfather" existing mining operations, unpatented mining claims on which
commercial discoveries have been made or unpatented mining claims for which
first-half final certificates have been obtained. Under current law, persons
staking unpatented mining claims on United States federal government property
open to exploration (unpatented mining claims), upon the making and documenting
of a discovery of gold or silver in commercial quantities, are entitled to mine
the property without payment of royalties and to secure title to the property
(patented mining claims) at nominal cost. Under proposals made in recent years
to amend the Mining Law, the United States government would be entitled to
receive royalties based on either the gross or net value of production from
government-owned property. This would have only minimal impact on Homestake's
current operations, as substantially all of Homestake's current operations in
the United States are conducted on privately held land. However, the Ruby Hill
mine currently under development is located on unpatented mining claims without
first-half final certificates. Although Homestake believes it has vested rights
on the unpatented Ruby Hill mining claims free from the imposition of royalty
charges, it is possible that Homestake may be required to pay royalties on
production from that property when it is placed into production, which would
increase the production cost over current estimates, but the amount of the
increase, if any, is not predictable. Expansion at the Round Mountain mine also
may occur on government-owned property, as to which royalties similarly might be
payable. Should the Mining Law be so amended, it could reduce the amount of
future exploration and development activity conducted by Homestake on federal
government-owned property in the United States.
95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HOMESTAKE MINING COMPANY
Date March 27, 1997 By: /s/ J. E. Thompson
--------------- ---------------------
J. E. Thompson
President and
Chief Executive Officer
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 Capacity Date
--------- -------- -----
/s/ G. G. Elam Vice President,Finance March 27, 1997
- -------------- and Chief Financial Officer
G. G. Elam (Principal Financial Officer)
/s/ D. W. Peat Vice President and Controller March 27, 1997
- -------------- (Principal Accounting Officer)
D. W. Peat
(Signatures continued on following page.)
96
Signature Capacity Date
- --------- -------- ----
/s/ Harry M. Conger Chairman of the Board March 27, 1997
- ------------------- and Director
Harry M. Conger
/s/ Jack E. Thompson President, Chief Executive March 27, 1997
- --------------------- Officer and Director
Jack E. Thompson
/s/ M. Norman Anderson Director March 27, 1997
- ----------------------
M. Norman Anderson
/s/ Robert H. Clark, Jr. Director March 27, 1997
- ------------------------
Robert H. Clark, Jr.
/s/ G. Robert Durham Director March 27, 1997
- --------------------
G. Robert Durham
/s/ Douglas W. Fuerstenau Director March 27, 1997
- -------------------------
Douglas W. Fuerstenau
/s/ Henry G. Grundstedt Director March 27, 1997
- -----------------------
Henry G. Grundstedt
/s/ William A. Humphrey Director March 27, 1997
- -----------------------
William A. Humphrey
/s/ Robert K. Jaedicke Director March 27, 1997
- ----------------------
Robert K. Jaedicke
/s/ John Neerhout, Jr. Director March 27, 1997
- ----------------------
John Neerhout, Jr.
/s/ Stuart T. Peeler Director March 27, 1997
- --------------------
Stuart T. Peeler
/s/ Carol A. Rae Director March 27, 1997
- ----------------
Carol A. Rae
/s/ Berne A. Schepman Director March 27, 1997
- ----------------------
Berne A. Schepman
97
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT BALANCE
BEGINNING AT END OF
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS PERIOD
- ------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSET VALUATION ALLOWANCES (1)
Year ended December 31, 1996 $ 59,611 $ 17,551 $ 5,010 (2) $ 72,152
Year ended December 31, 1995 $ 49,839 $ 11,034 $ 1,262 (2) $ 59,611
Year ended December 31, 1994 $ 52,066 $ 10,210 $12,437 (3) $ 49,839
<FN>
(1)For further information see Note 6, Income Taxes, in the Notes to the
Consolidated Financial Statements.
(2)Deductions in 1996 and 1995 relate to the realization of certain United
States deferred tax assets.
(3)Deductions in 1994 relate to the reversals of Canadian and Australian tax
loss carry-forwards.
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Board of Directors
Homestake Mining Company
We have audited the consolidated financial statements of Homestake Mining
Company and subsidiaries as of December 31, 1996 and 1995, and for each of the
three years in the period ended December 31, 1996, which financial statements
are included on pages 57 through 83 of this Form 10K. We have also audited the
financial statement schedules listed in Item 14(a)(2) of this Form 10-K. These
financial statements and financial statement schedules are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Homestake Mining
Company and subsidiaries as of December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedules referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
San Francisco, California
February 7, 1997, except for Note 24, as to
which date is March 10, 1997
EXHIBIT INDEX
Exhibit Method of Filing
- ------- ----------------
10.14 Agreement Amending Joint Venture Agreement made 19 June 1996
between Homestake Gold of Australia Limited, North Kalgoorlie
Mines Pty Ltd. (incorporated by reference to Exhibit 10(g) to the
Registrants Form 10-K for the year ended December 31, 1989). Filed herewith electronically
10.18 Letter dated June 17, 1996, amending Amendment No. 1 to Joint
Operating Agreement between Freeport McMoran Resources Partners,
IMC Fertilizers, Inc. and Homestake Sulphur Company Filed herewith electronically
10.30 Consulting Agreement dated as of May 15, 1996 between Harry M.
Conger and the Registrant. Filed herewith electronically
11 Computation of Earnings Per Share Filed herewith electronically
21 Subsidiaries of Registrant Filed herewith electronically
23 Consent of Coopers & Lybrand L.L.P., Independent Auditors Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically