UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (x) Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. For the Quarterly Period Ended June 30, 1997 ( ) Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _______ to ________ Commission File Number 1-8736 HOMESTAKE MINING COMPANY A Delaware Corporation IRS Employer Identification No. 94-2934609 650 California Street San Francisco, California 94108-2788 Telephone: (415) 981-8150 http://www.homestake.com Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ ----------- The number of shares of common stock outstanding as of August 8, 1997 was 146,732,000. Page 1 HOMESTAKE MINING COMPANY AND SUBSIDIARIES PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements A. Condensed Consolidated Balance Sheets (unaudited) (In thousands, except per share amount) June 30, December 31, 1997 1996 --------------- ----------------- ASSETS Current assets Cash and equivalents $ 87,840 $ 89,599 Short-term investments 163,788 130,158 Receivables 37,789 47,650 Inventories: Finished products 21,690 21,132 Ore and in process 38,012 39,980 Supplies 28,877 30,015 Deferred income and mining taxes 12,263 12,263 Other 5,442 8,551 --------------- ----------------- Total current assets 395,701 379,348 --------------- ----------------- Property, plant and equipment - at cost 2,016,633 1,970,300 Accumulated depreciation, depletion and amortization (1,022,514) (963,270) --------------- ----------------- Property, plant and equipment - net 994,119 1,007,030 --------------- ----------------- Investments and other assets Noncurrent investments 26,154 39,606 Other assets 56,014 56,124 --------------- ----------------- Total investments and other assets 82,168 95,730 --------------- ----------------- Total Assets $ 1,471,988 $ 1,482,108 =============== ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 36,161 $ 36,171 Accrued liabilities: Payroll and other compensation 26,181 23,085 Reclamation 10,010 10,055 Other 12,764 9,034 Income and other taxes payable 18,619 38,386 --------------- ----------------- Total current liabilities 103,735 116,731 --------------- ----------------- Long-term liabilities Long-term debt 188,730 185,000 Other long-term obligations 121,987 114,168 Deferred income and mining taxes 193,828 201,454 --------------- ----------------- Total long-term liabilities 504,545 500,622 --------------- ----------------- Minority interests in consolidated subsidiaries 102,715 96,203 Shareholders' equity Capital stock, $1 par value per share: Preferred - 10,000 shares authorized; no shares outstanding Common - 250,000 shares authorized; shares outstanding: 1997 - 146,728; 1996 - 146,672 146,728 146,672 Other shareholders' equity 614,265 621,880 --------------- ----------------- Total shareholders' equity 760,993 768,552 --------------- ----------------- Total Liabilities and Shareholders' Equity $ 1,471,988 $ 1,482,108 =============== ================= See notes to condensed consolidated financial statements. 2 HOMESTAKE MINING COMPANY AND SUBSIDIARIES B. Condensed Statements of Consolidated Operations (unaudited) (In thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 -------------- -------------- -------------- ------------ Revenues Gold and ore sales $ 160,453 $ 186,723 $ 324,666 $ 370,223 Sulfur and oil sales 6,842 7,370 13,794 15,793 Interest income 3,879 3,833 7,208 7,929 Gain on termination of Santa Fe merger - - 62,925 - Other income (2,515) 3,566 10,253 10,355 -------------- -------------- -------------- ------------ 168,659 201,492 418,846 404,300 -------------- -------------- -------------- ------------ Costs and Expenses Production costs 121,122 122,704 239,236 247,956 Depreciation, depletion and amortization 28,057 29,032 56,212 55,361 Administrative and general expense 9,933 9,249 19,494 18,963 Exploration expense 13,678 11,535 22,013 17,576 Interest expense 2,851 2,645 5,433 5,292 Other expense 2,785 786 3,427 1,019 -------------- -------------- -------------- ------------ 178,426 175,951 345,815 346,167 -------------- -------------- -------------- ------------ Income (Loss) Before Taxes and Minority Interests (9,767) 25,541 73,031 58,133 Income and Mining Taxes (3,465) (14,745) (33,244) (28,605) Minority Interests (2,990) (4,020) (6,149) (9,099) -------------- -------------- -------------- ------------ Net Income (Loss) $ (16,222) $ 6,776 $ 33,638 $ 20,429 ============== ============== ============== ============ Net Income (Loss) Per Share $ (0.11) $ 0.05 $ 0.23 $ 0.14 ============== ============== ============== ============ Average Shares Used in the Computation 146,728 146,662 146,705 145,949 ============== ============== ============== ============ Dividends Paid Per Common Share $ 0.05 $ 0.05 $ 0.10 $ 0.10 ============== ============== ============== ============ See notes to condensed consolidated financial statements. 3 HOMESTAKE MINING COMPANY AND SUBSIDIARIES C. Condensed Statements of Consolidated Cash Flows (unaudited) (In thousands) Six Months Ended June 30, 1997 1996 ----------------- ------------------ Cash Flows from Operations Net income $ 33,638 $ 20,429 Reconciliation to net cash provided by operations: Depreciation, depletion and amortization 56,212 55,361 Gains on asset disposals (14,256) (2,750) Deferred taxes, minority interests and other 14,898 23,799 Effect of changes in operating working capital items 1,087 12,481 ----------------- ------------------ Net cash provided by operations 91,579 109,320 ----------------- ------------------ Investment Activities Decrease (increase) in short-term investments (33,630) 2,557 Additions to property, plant and equipment (63,056) (69,475) Proceeds from asset sales 10,213 13,572 Purchase of HGAL minority interests - (6,435) Purchase of interest in Snip mine - (39,279) Other 1,707 1,692 ----------------- ------------------ Net cash used in investment activities (84,766) (97,368) ----------------- ------------------ Financing Activities Borrowings 3,730 - Common shares issued 798 2,349 Dividends paid - Homestake (14,670) (14,674) - Prime minority interests (1,085) (1,099) Other 2,655 - ----------------- ------------------ Net cash used in financing activities (8,572) (13,424) ----------------- ------------------ Net decrease in cash and equivalents (1,759) (1,472) Cash and equivalents, January 1 89,599 145,957 ----------------- ------------------ Cash and equivalents, June 30 $ 87,840 $ 144,485 ================= ================== See notes to condensed consolidated financial statements. 4 HOMESTAKE MINING COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) 1. The condensed consolidated financial statements included herein should be read in conjunction with the financial statements and notes thereto, which include information as to significant accounting policies, in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. The information furnished in this report reflects all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the interim periods. Except as described in notes 2 through 5, such adjustments consist of items of a normal recurring nature. Results of operations for interim periods are not necessarily indicative of results for the full year. All dollar amounts are in United States dollars unless otherwise indicated. 2. In March 1997, Santa Fe Pacific Gold Corporation terminated its previously announced merger agreement with Homestake and paid Homestake a $65 million termination fee. As a result, the Company recorded a pretax gain of $62.9 million ($47.2 million after tax), net of merger-related expenses of $2.1 million incurred in 1997. 3. Other income for the three and six months ended June 30 is as follows (in millions): Three Months Ended Six Months Ended June 30, June 30, ----------------------------- --------------------------- 1997 1996 1997 1996 ------------- ------------- ------------ ------------ Gains on asset disposals $0.7 $2.0 $14.3 $2.8 Royalty income 0.6 0.8 1.2 1.4 Foreign currency contract gains (losses) (2.8) 0.2 (3.8) 1.3 Foreign currency exchange losses on intercompany advances (2.4) (0.3) (2.8) (0.3) Other foreign currency gains (losses) - 0.3 (0.3) 0.2 Litigation settlement - - - 2.9 Other 1.4 0.6 1.7 2.1 ------------- ------------- ------------ ------------ ($2.5) $3.6 $10.3 $10.4 ============= ============= ============ ============ In February 1997, Homestake completed the sale of its interests in the George Lake and Back River joint ventures in Canada to Arauco Resources Corporation ("Arauco") for $9.3 million in cash and 3.6 million shares of Arauco common stock. As a result of this transaction, the Company recorded a pretax gain of $13.5 million ($8.1 million after tax). 4. In April 1996, the Company's 50.6%-owned subsidiary, Prime Resources Group Inc. ("Prime") purchased Cominco Ltd.'s ("Cominco") 60% interest in the Snip mine in British Columbia for approximately $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. 5. In 1995, Homestake offered to acquire the 18.5% of Homestake Gold of Australia Limited ("HGAL") it did not already own by offering .089 of a Homestake share or A$1.90 in cash for each of the 109.6 million HGAL shares owned by the public. Through December 31, 1995 a total of 38.9 million HGAL shares were acquired at a cost of $59.1 million. At December 31, 1995 Homestake owned 88.1% of the shares of HGAL. The acquisition was completed in the first quarter of 1996 when the remaining 70.7 million publicly held HGAL shares were acquired at a cost of $105.8 million, including $99.3 million for 6 million shares of the 5 HOMESTAKE MINING COMPANY AND SUBSIDIARIES Company, $5 million in cash and $1.5 million of transaction expenses. The total purchase price to acquire all of the 18.5% of HGAL held by minority shareholders was $164.9 million, including $141.7 million for 8.5 million shares of the Company, $19.5 million in cash and $3.7 million of transaction expenses. The acquisition of the HGAL minority interests was accounted for as a purchase. 6. 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 foreign currencies by setting minimum and maximum exchange rates. At June 30, 1997 the Company had forward currency contracts outstanding as follows: Weighted-Average Exchange Rates to U.S. Dollars Amount Covered ----------------------------------- Expiration Currency (U.S. Dollars) Put Options Call Options Dates - ------------------------------------------------------------------------------------------------- Canadian $ 98,580 0.72 0.77 1997 Canadian 94,700 0.73 0.77 1998 Australian 55,860 0.77 0.80 1997 Australian 66,500 0.75 0.79 1998 ------------- $315,640 7. In the fourth quarter of 1996, the Company entered into forward sales commitments for 680,100 ounces expected to be produced from the McLaughlin mine stockpiles from 1997 through 2003. In addition, during the second quarter of 1997 the Company entered into forward sales commitments for 20,000 ounces of gold to be produced in 2001 and 2002. Gold sales for the three and six months ended June 30, 1997 include sales of 30,000 ounces and 60,000 ounces at average prices of $383 per ounce and $381 per ounce, respectively. Gold sales for the three and six months ended June 30, 1996 include sales under the now-completed Nickel Plate mine forward sales program of 23,200 and 45,100 ounces at average prices of $421 per ounce and $418 per ounce, respectively. At June 30, 1997 the Company's forward sales commitments were as follows: Average Price of Forward Sales Forward Sales Year (ounces) (per ounce) - ----------------------------------------------------------------------------------- 1997 60,100 $389 1998 120,000 399 1999 109,900 415 2000 85,100 430 2001 95,000 441 2002 95,000 457 2003 75,000 481 ------------- 640,100 8. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. ("SFAS") 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS 131 specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. SFAS 131 is effective for fiscal years beginning after December 15, 1997. Adoption of SFAS 131 will not have a material impact on Homestake's current geographic and segment disclosures. 6 HOMESTAKE MINING COMPANY AND SUBSIDIARIES In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses). The purpose of reporting comprehensive income is to present a measure of all changes in shareholders' equity that result from recognized transactions and other economic events of the period, other than transactions with owners in their capacity as owners. SFAS 130 is effective for financial statements issued for periods ending after December 15, 1997. Adoption of SFAS 130 will result in additional disclosures in Homestake's financial statements but will not impact the Company's reported net income or net income per share. In February 1997, the FASB issued SFAS 128, "Earnings Per Share." SFAS 128 specifies the computation, presentation, and disclosure requirements for earnings per share. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997. Adoption of SFAS 128 will not have a material impact on Homestake's previously reported earnings per share. 9. 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. 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 June 30, 1997 the Company had received $17.1 million from the DOE and the accompanying balance sheet at June 30, 1997 includes an additional receivable of $13.3 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 June 30, 1997. In 1983, the state of New Mexico made a claim against the Company for unspecified natural resource damages resulting from the Grants tailings. 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. On July 23, 1997 the Company received a letter from the Mountain-Prairie Region of the United States Fish and Wildlife Service stating that the "Department [of the Interior] intends to file suit, subject to final approval by the Department of Justice, against your company to recover natural resource damages and assessment costs" in respect of Whitewood Creek, South Dakota, under CERCLA, the Clean Water Act and other applicable laws. The letter stated that other federal agencies may participate in such litigation and also stated that the 7 HOMESTAKE MINING COMPANY AND SUBSIDIARIES Cheyenne River Sioux Tribe intended to file such an action. The letter invited Homestake to participate in discussions with the Department of the Interior and the Tribe over the next 60 days and indicated that absent an agreement, "the Department intends to request that the Department of Justice file a lawsuit for natural resource damages against Homestake upon the expiration of the 60-day notice period." (See Part II, Item 1- Legal Proceedings of this Form 10-Q.) 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. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations (Unless specifically stated otherwise, the following information relates to amounts included in the consolidated financial statements without reduction for minority interests.) RESULTS OF OPERATIONS Homestake Mining Company ("Homestake" or the "Company") recorded a net loss of $16.2 million or $0.11 per share during the second quarter of 1997 compared to net income of $6.8 million or $0.05 per share during the second quarter of 1996. The decrease in second quarter earnings primarily reflects a significantly lower average realized gold price, decreased production, slightly higher total cash costs, mark-to-market losses on foreign currency exchange contracts and intercompany advances, and increased exploration expenditures. Year-to-date 1997 net income of $33.6 million or $0.23 per share compares to year-to-date 1996 net income of $20.4 million or $0.14 per share. The increased 1997 year-to-date earnings primarily are attributable to after-tax gains of $47.2 million ($62.9 million pretax) or $0.32 per share from the termination fee received from Santa Fe Pacific Gold Corporation ("Santa Fe") upon termination of Homestake's merger agreement with Santa Fe, and $8.1 million ($13.5 million pretax) or $0.06 per share from the sale of the George Lake and Back River joint venture interests in the Northwest Territories of Canada to Arauco Resources Corporation ("Arauco"). Results for the 1996 year-to-date period included an after-tax gain of $4.9 million ($5.5 million pretax) from a litigation recovery. Excluding the effect of the nonrecurring items, the Company incurred a net loss of $21.7 million or $0.15 per share during the first half of 1997 compared to net income of $15.5 million or $0.11 per share during the first half of 1996. The lower 1997 earnings primarily are due to a $47 per ounce decline in the average realized gold price, slightly lower production, and higher exploration expenses. Gold production during the second quarter of 1997 decreased to 488,500 ounces compared to 505,900 ounces produced during the second quarter of 1996. The absence of 25,100 ounces of production from the Nickel Plate mine in Canada, which is in final reclamation, was the principal reason for the lower gold production in 1997. Production declines from the Company's domestic operations were offset by net increases in production at the Company's other foreign operations. Revenues from gold and ore sales totaled $160.5 million during the second quarter of 1997 compared to $186.7 million during the prior year's second quarter. During the 1997 second quarter, the Company sold 491,200 ounces at an average realized price of $344 per ounce compared to 512,100 ounces sold at an average realized price of $389 per ounce during the 1996 second quarter. Domestic production decreased to 174,600 ounces during the second quarter of 1997 compared to 201,200 ounces produced during the second quarter of 1996, primarily reflecting production declines at the Homestake mine in South Dakota and the McLaughlin mine in northern California, partially offset by increased production at the Round Mountain mine in Nevada. At the 8 HOMESTAKE MINING COMPANY AND SUBSIDIARIES Homestake mine, production declined by 5,300 ounces to 97,900 ounces during the 1997 second quarter compared to 103,200 ounces during the 1996 second quarter primarily due to lower underground ore grades caused by higher dilution. Total cash costs increased to $330 per ounce during the second quarter of 1997 from $300 per ounce during the prior year's second quarter as a result of the lower production and stockpiled ore valuation adjustments made as a result of the lower gold prices. The McLaughlin mine produced 30,900 ounces during the 1997 second quarter compared to 60,700 ounces produced during the 1996 second quarter. Mining operations ceased at the end of June last year and lower-grade stockpiled ore will be processed over the next six years. Total cash costs increased to $254 per ounce during the second quarter of 1997 compared to $200 per ounce during the second quarter of 1996 as a result of lower ore grades and recoveries associated with the treatment of the stockpiled material. Homestake's 25% share of production from the Round Mountain mine increased to 32,500 ounces during the 1997 second quarter from 28,800 ounces during the 1996 second quarter, primarily due to an increase in the tons loaded on the dedicated heap leach pads. As a result, total cash costs declined to $204 per ounce during the second quarter of 1997 from $230 per ounce in the second quarter of 1996. Construction of an 8,000 ton-per-day gravity mill to treat higher-grade ore was completed in July 1997, and the mill should be in full operation by the end of the third quarter of 1997. Total foreign gold production during the second quarter of 1997 increased by 3% to 313,900 equivalent ounces over the comparable period for the prior year, primarily due to production increases at the Eskay Creek and Snip mines in Canada, at the Kalgoorlie operations in Western Australia, and the initial production from the Agua de la Falda mine in Chile. These increases partially were offset by declines in production at the Williams and David Bell mines in Canada and the absence of production at the Nickel Plate mine. Production at the Eskay Creek mine increased to 100,900 gold equivalent ounces at a total cash cost (including third-party smelter charges) of $157 per ounce during the second quarter of 1997 compared to 94,800 equivalent ounces produced at a total cash cost of $173 per ounce during the second quarter of 1996. The improved results reflect an increase in the grade of ore shipped and higher productivity. Construction of a small gravity and flotation mill has commenced at Eskay Creek and is scheduled for completion by year end. The mill will improve profit margins on ore currently directly shipped to third-party smelters and allow for the treatment of some lower-grade ores that otherwise could not be processed economically. The capital cost of the mill is estimated to be $12 million. The mill will add approximately 30,000 ounces to Eskay Creek's annual production. Prime Resources Group Inc. ("Prime"), Homestake's 50.6%-owned subsidiary, became the sole owner of the Snip mine on April 30, 1996 when it purchased Cominco Ltd.'s 60% interest in this mine for $39.3 million. Prime's share of Snip production during the second quarter of 1997 was 31,300 ounces compared to 21,200 ounces produced during the second quarter of 1996. Total cash costs increased to $216 per ounce during the 1997 second quarter from $192 per ounce during the 1996 second quarter, due to additional transportation charges to reduce the level of on-site concentrate inventory and to increased utilization of conventional mining rather than lower cost mechanized mining due to the configuration of the remaining stopes to be mined. Homestake's share of production from the Williams mine totaled 42,800 ounces during the second quarter of 1997 compared to 51,400 ounces produced during the second quarter of 1996. The decline in production is attributable to ground control problems that restricted access to higher-grade stopes, resulting in the processing of additional lower-grade ore. As a result, total cash costs increased to $272 per ounce during the 1997 second quarter compared to $225 per ounce in the prior year's second quarter. Homestake's share of production at the David Bell mine was 20,800 ounces during the second quarter of 1997 compared to 29,700 ounces produced during the second quarter of 1996, primarily reflecting an expected reduction in ore grades. Total cash costs increased to $213 per ounce during the 1997 second quarter from $134 per ounce during the 1996 second quarter. Homestake Gold of Australia Limited's ("HGAL") share of gold production at the Kalgoorlie operations totaled 107,000 ounces during the second quarter of 1997 at a total cash cost of $279 9 HOMESTAKE MINING COMPANY AND SUBSIDIARIES per ounce compared to 77,200 ounces produced during the second quarter of 1996 at a total cash cost of $344 per ounce. The improved results primarily reflect a 21% increase in the ore grade and a 12% increase in tons milled. Construction of a 1.6 mile decline from the northern end of the Super Pit to the Mt. Charlotte mine has begun. This decline will provide access to ore in the upper levels of the Mt. Charlotte orebody and should further improve the economics of the mine. Homestake's 50% share of the cost is estimated to be $6 million. Completion of the decline is scheduled for the first quarter of 1998. The new Agua de la Falda mine (51% owned by Homestake, 49% by Codelco) commenced mining operations late in 1996 and the first gold was poured in April 1997. Gold production during the 1997 second quarter was 8,300 ounces. Both the average ore grade and mine production to date have been higher than expected. As a result, total cash costs of $203 per ounce for the second quarter of 1997 were well below projections. Estimated gold production for the Agua de la Falda mine in 1997 is 27,000 ounces. The Company's consolidated total cash cost per ounce increased slightly to $249 during the 1997 second quarter compared to $246 during the 1996 second quarter. Year-to-date revenues from gold and ore sales totaled $324.7 million during the first six months of 1997 compared to $370.2 million during the first six months of 1996, reflecting significantly lower average realized prices and slightly lower sales volumes. During the first half of 1997, 975,900 equivalent ounces of gold were sold at an average realized price of $348 per ounce compared to 998,100 equivalent ounces of gold sold at an average realized price of $395 per ounce during the first half of 1996. The lower sales volumes primarily are due to lower production following the cessation of mining operations at the McLaughlin and Nickel Plate mines. Total cash costs per ounce decreased to $247 during the first six months of 1997 from $252 during the comparable period for the previous year. The Company's share of revenues from the Main Pass 299 operations in the Gulf of Mexico declined to $6.8 million during the second quarter of 1997 from $7.4 million in the second quarter of 1996, and operating losses were $0.4 million during the 1997 second quarter compared to operating earnings of $0.8 million during the 1996 second quarter. Sulfur sales increased to 76,700 long tons during the 1997 second quarter from 71,500 long tons in the prior year's second quarter. However, the average realized sulfur price declined to $60 per ton during the second quarter compared to $64 per ton during the second quarter of 1996. Oil sales also declined due to reduced production and lower prices. Year-to-date 1997 revenues from Main Pass 299 totaled $13.8 million compared to year-to-date 1996 revenues of $15.8 million, and year-to-date 1997 operating losses were $1 million compared to operating earnings of $1.1 million for the 1996 year-to-date period. At June 30, 1997 the carrying value of the Company's investment in the Main Pass 299 sulfur mine was $109 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 six months ended June 30, 1997, the Company realized a price of $59 per ton, and for 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 the remainder of 1997. However, the Company believes that future prices over the life of the mine will 10 HOMESTAKE MINING COMPANY AND SUBSIDIARIES 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 $109 million may be required. In the past, the Company's general policy has been to sell its gold production at current prices and not to hedge its gold production except in special circumstances, such as the Nickel Plate and McLaughlin mine programs entered into in prior years. These programs were entered into in recognition that both mining operations were near the end of their economic life. Recently, the Board of Directors authorized the Company to implement strategies to provide a floor price for a portion of annual production and enter into forward sales arrangements if deemed appropriate. Homestake now has the flexibility to hedge a significant portion of its gold production if it chooses to do so. In the fourth quarter of 1996, the Company entered into forward sales commitments for 680,100 ounces expected to be produced from the McLaughlin mine stockpiles from 1997 through 2003. In addition, during the second quarter of 1997 the Company entered into forward sales commitments for 20,000 ounces of gold to be produced in 2001 and 2002. Gold sales for the three and six months ended June 30, 1997 include sales of 30,000 ounces and 60,000 ounces at average prices of $383 per ounce and $381 per ounce, respectively. At June 30, 1997 forward sales for 640,100 ounces at an average price of $430 per ounce remain outstanding. 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. At June 30, 1997 the Company had a net unrealized loss of $2.6 million on open contracts under this program. Exploration expense for the three and six months ended June 30, 1997 was $13.7 million and $22 million, respectively, compared to exploration expense for the three and six months periods ended June 30, 1996 of $11.5 million and $17.6 million, respectively. The higher exploration expenses reflect increased activity as the Company pursues numerous prospective exploration targets and prospects. The Company expects to spend over $40 million for exploration in 1997. Income and mining tax expense for the six months ended June 30, 1997 was $33.2 million compared to $28.6 million for the six months ended June 30, 1996. The increase reflects taxes of $15.7 million provided on the termination fee received from Santa Fe upon Santa Fe's termination of the merger agreement with Homestake. In addition, a $2.6 million credit was recorded during the first half of 1996 with respect to a litigation recovery relating to previously paid income taxes. The Company's income and mining tax rate was 46% in the 1997 first half compared to 49% in the 1996 first half. The Company's consolidated effective income and mining tax rate will fluctuate depending on the geographical mix of pretax income. Minority interests in the income of consolidated subsidiaries decreased to $6.1 million during the first six months of 1997 from $9.1 million during the first six months of 1996. The decrease is primarily attributable to lower income due to lower gold prices realized by Prime and higher exploration expenses incurred during the first half by the Company's 51%-owned subsidiary, Agua de la Falda S.A., which was formed in July 1996. 11 HOMESTAKE MINING COMPANY AND SUBSIDIARIES The following chart details Homestake's gold production and total cash costs per ounce by location, and consolidated revenue and production costs per ounce. Production (Ounces in thousands) Three Months Ended Six Months Ended June 30, June 30, Mine (Percentage interest) 1997 1996 1997 1996 - -------------------------- ------------------------------ ------------------------------ Homestake (100) 97.9 103.2 204.3 208.5 McLaughlin (100) 30.9 60.7 62.5 114.8 Round Mountain (25) 32.5 28.8 60.6 48.7 Pinson (50) (1) 6.2 2.6 12.6 4.8 Marigold (33) 7.1 5.9 14.3 12.8 ------------- ------------- ------------- ------------- Total United States 174.6 201.2 354.3 389.6 Eskay Creek (100) (2,3) 100.9 94.8 195.5 194.2 Williams (50) 42.8 51.4 94.2 95.0 David Bell (50) 20.8 29.7 43.8 52.5 Quarter Claim (25) 2.8 2.8 5.6 5.6 Snip (100) (3,4) 31.3 21.2 59.5 33.0 Nickel Plate (100) - 25.1 - 51.8 ------------- ------------- ------------- ------------- Total Canada 198.6 225.0 398.6 432.1 Kalgoorlie, Australia (50) 107.0 77.2 215.3 167.4 Agua de la Falda (100) 8.3 - 8.3 - El Hueso (100) - 2.5 0.5 4.9 ------------- ------------- ------------- ------------- Total Chile 8.3 2.5 8.8 4.9 ------------- ------------- ------------- ------------- Total Production 488.5 505.9 977.0 994.0 Less Minority Interests (69.4) (57.3) (130.0) (112.2) ------------- ------------- ------------- ------------- Homestake's Share 419.1 448.6 847.0 881.8 ============= ============= ============= ============= Total Cash Costs (Dollars per ounce) Three Months Ended Six Months Ended June 30, June 30, Mine (Percentage interest) 1997 1996 1997 1996 - -------------------------- ------------------------------ ------------------------------ United States Homestake (100) $330 $300 $323 $296 McLaughlin (100) 254 200 249 237 Round Mountain (25) 204 230 219 254 Pinson (50) (1) 372 370 342 419 Marigold (33) 257 288 243 263 Canada Eskay Creek (100) (2,3) 157 173 161 167 Williams (50) 272 225 251 246 David Bell (50) 213 134 203 158 Quarter Claim (25) 172 167 174 167 Snip (100) (3,4) 216 192 210 190 Nickel Plate (100) - 329 - 329 Kalgoorlie, Australia (50) 279 344 276 322 Chile Agua de la Falda (100) 203 - 203 - El Hueso (100) - 222 310 231 Weighted Average $249 $246 $247 $252 12 HOMESTAKE MINING COMPANY AND SUBSIDIARIES Three Months Ended Six Months Ended June 30, June 30, Per Ounce of Gold 1997 1996 1997 1996 - ----------------- ------------------------------ ------------------------------ Revenue $344 $389 $348 $395 ============================== ============================== Per Ounce Costs Cash Operating Costs (5) $245 $238 $242 $244 Other Cash Costs (6) 4 8 5 8 ------------------------------ ------------------------------ Total Cash Costs 249 246 247 252 Noncash Costs (7) 54 57 54 55 ------------------------------ ------------------------------ Total Production Costs $303 $303 $301 $307 ============================== ============================== <FN> (1) Homestake increased its interest in the Pinson mine from 26.3% to 50% in December 1996. (2) Gold and silver are accounted for as co-products at Eskay Creek. Silver is converted to gold equivalent using the ratio of the silver market price to the gold market price. These ratios were 72 ounces and 74 ounces of silver equals one ounce of gold for the three months ended June 30, 1997 and 1996, respectively, and 71 and 73 ounces of silver equals one ounce of gold for the six months ended June 30, 1997 and 1996, respectively. Eskay Creek production includes 56,500 (51,700 in 1996) ounces of gold and 3.2 million (3.2 million in 1996) ounces of silver contained in ore sold to smelters in the second quarter and 110,900 (111,700 in 1996) ounces of gold and 6 million (6 million in 1996) ounces of silver contained in ore sold to smelters in the year-to-date period. (3) For comparison purposes, total cash costs per ounce include estimated third-party costs incurred by smelter owners and others to produce marketable gold and silver. (4) Includes ounces of gold contained in dore and concentrates. Prime's ownership percentage in the Snip mine increased from 40% to 100% effective April 30, 1996. (5) Cash operating costs are costs directly related to the physical activities of producing gold; includes mining, milling, third-party smelting and in-mine drilling expenditures that are related to production. (6) Other cash costs are costs that are not directly related to, but may result from, gold production; includes production taxes and royalties. (7) Noncash costs are costs that typically are accounted for ratably over the life of an operation; includes depreciation, depletion, accruals for final reclamation and the amortization of the economic cost of property acquisitions, but excludes amortization of SFAS 109 deferred tax purchase adjustments relating to property acquisitions. </FN> LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations totaled $91.6 million during the first six months of 1997 compared to $109.3 million during the first six months of 1996. Working capital at June 30, 1997 amounted to $292 million, including $251.6 in cash and equivalents and short-term investments. Capital additions of $63.1 million for the first half of 1997 include $30.9 million for construction and development work at the Ruby Hill mine, $8.3 million at the Round Mountain mine primarily for a new mill to process the higher-grade sulfide material, $7.3 million at the Homestake mine primarily for a tailings dam lift and improvements at the underground operations, and $6.3 million at the 13 HOMESTAKE MINING COMPANY AND SUBSIDIARIES Kalgoorlie operations primarily for a decline from surface and a ventilation raise at the Mt. Charlotte mine. On March 10, 1997 Santa Fe terminated its previously announced merger agreement with Homestake and paid Homestake a $65 million termination fee. As a result, the Company recorded a pretax gain of $62.9 million ($47.2 million after tax), net of merger-related expenses of $2.1 million incurred in 1997. Construction of the Ruby Hill mine near Eureka, Nevada, commenced immediately after final permits were received in February of this year. Production is scheduled to begin in the fourth quarter of 1997. Homestake estimates that Ruby Hill production will be approximately 14,000 ounces in 1997, increasing to between 105,000 and 110,000 ounces in 1998 at an estimated total cash cost of $140 per ounce. In February 1997, Homestake completed the sale of its interests in the George Lake and Back River joint ventures in Canada to Arauco for $9.3 million in cash and 3.6 million shares of Arauco common stock. As a result of this transaction, the Company recorded a pretax gain of $13.5 million ($8.1 million after tax), which is included in other income. The Company has a United States/Canadian/Australian cross-border credit facility providing a total availability of $275 million. The Company pays a commitment fee of 0.15% per annum on the unused portion of this facility. The credit facility is available through September 2001 and provides for borrowings in United States, Canadian, or Australian dollars, or gold, or a combination of these. The credit agreement requires a minimum consolidated net worth of $500 million. In June 1997, HGAL borrowed $3.7 million under this agreement. In February 1997, the Company paid a cash dividend of 5 cents per share. In March 1997, the Company reduced its annual dividend rate to 10 cents per share from 20 cents per share and declared a semi-annual dividend of 5 cents per share which was paid in May 1997. In April 1997, the Company filed a shelf registration statement (effective date - - April 21, 1997) with the Securities and Exchange Commission for the potential sale of up to 20 million shares of Homestake common stock. The proceeds from any such offering would be available for general corporate purposes, which could include capital expenditures, repayment of debt and future acquisitions which have the potential to add to the Company's gold reserves and future gold production. Future results will be impacted by such factors as the market price of gold, silver and sulfur, the Company's ability to expand its ore reserves and the fluctuations of foreign currency exchange rates. The Company believes that the combination of cash, short-term investments, available lines of credit and future cash flows from operations will be sufficient to meet normal operating requirements, planned capital expenditures, and anticipated dividends. 14 HOMESTAKE MINING COMPANY AND SUBSIDIARIES Part II - OTHER INFORMATION Item 1 - Legal Proceedings On July 23, 1997, the Company received a letter from the Mountain-Prairie Region of the United States Fish and Wildlife Service stating that the "Department [of the Interior] intends to file suit, subject to final approval by the Department of Justice, against your company to recover natural resource damages and assessment costs" in respect of Whitewood Creek, South Dakota, under the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Water Act and other applicable laws. The letter stated that other federal agencies may participate in such litigation and also stated that the Cheyenne River Sioux Tribe intended to file such an action. The letter invited Homestake to participate in discussions with the Department of the Interior and the Tribe over the next 60 days and indicated that absent an agreement, "the Department intends to request that the Department of Justice file a lawsuit for natural resource damages against Homestake upon the expiration of the 60-day notice period." Whitewood Creek was a site where mining companies operating in the Black Hills of South Dakota, including Homestake, discharged mining tailings beginning in the nineteenth century. The stream was legally designated as a disposal stream for mine tailings and for disposal of raw sewage and other municipal waste. In response to changes in legal requirements, Homestake ceased discharging mine tailings into Whitewood Creek and for many years the Homestake mine has impounded all mine tailings that are not redeposited in the mine. As previously reported in the Company's Form 10-K Annual Reports, an 18-mile stretch of land along Whitewood Creek on which tailings were deposited was designated as a superfund site and placed on the National Priorities List ("NPL") in 1983. During the period from 1982 through 1990 extensive studies of the superfund site were conducted to identify any public health and environmental issues related to the site and appropriate remedial action. In August 1990, Homestake Mining Company of California ("HMCC") signed a consent decree with the United States Environmental Protection Agency ("EPA") in United States of America v. Homestake Mining Company of California, U.S. Dist. Ct., W.D.S.D., Civ. Action No. 90-5101. Under the Consent Decree, HMCC conducted remedial work at its expense and also reimbursed the EPA for its oversight costs. Remedial field work was completed in 1993. The decree also provided for the three counties in which the property is located to enact institutional controls which would limit the future use of the property included within the area of the superfund site. Institutional controls were adopted in all three counties. In addition, HMCC offered to purchase all properties along Whitewood Creek that were affected by the institutional controls. Approximately $3 million has been spent to date to acquire property along Whitewood Creek and the Company estimates that the total cost for purchasing all of the remaining affected property would be an additional $3 million. The Consent Decree was terminated by the Court on January 10, 1996. The Whitewood Creek site was deleted from the NPL on August 13, 1996. In the deletion notice, the EPA stated that "EPA, in consultation with the State of South Dakota, have determined that the Site poses no significant threat to public health or the environment." In the opinion of management, there is no basis for a natural resource damage claim against HMCC, and the Company does not believe that resolution of the above matters will have a material effect on the business or financial condition or results of operations of the Company. 15 HOMESTAKE MINING COMPANY AND SUBSIDIARIES Item 4 - Submission of Matters to a Vote of Security Holders At the Annual Meeting of Shareholders held on July 25, 1997, shareholders voted on and approved (i) the election of four Class I directors to serve until the 2000 Annual Meeting and one Class III director to serve until the 1999 Annual Meeting, and (ii) the appointment of Coopers & Lybrand L.L.P. as independent auditors for 1997. Shareholder votes were as follows: (i) Election of four Class I directors and one Class III director: Votes For Votes Withheld --------- -------------- Class I Directors ----------------- M. Norman Anderson 109,134,376 2,025,323 Robert H. Clark, Jr. 109,162,654 1,997,045 Douglas W. Fuerstenau 109,114,076 2,045,623 Jeffrey L. Zelms 109,072,062 2,087,637 Class III Director ------------------ Richard R. Burt 108,645,047 2,514,652 In addition to the aforementioned directors, the following directors continued in office: Harry M. Conger, G. Robert Durham, Henry G. Grundstedt, John Neerhout, Jr., Stuart T. Peeler, Carol A. Rae, and Jack E. Thompson. On July 25, 1997, William A. Humphrey, Robert K. Jaedicke and Berne A. Schepman retired as directors. (ii) Approval of the appointment of Coopers & Lybrand L.L.P. as independent auditors: Votes For Votes Against Abstain --------- ------------- ------- 110,078,888 368,502 712,309 Item 5 - Other Information (a) Amendment to Bylaws On July 24, 1997 the Board of Directors reduced the number of directors from 13 to 12. See Exhibit 3.4 filed herewith. (b) CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained in this Form 10-Q that are not statements of historical facts are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on beliefs of management, as well as assumptions made by and information currently available to management. Forward looking statements include those preceded by the words "believe," "estimate," "expect," "intend," "will," and similar expressions, and include estimates of future production, costs per ounce, dates of construction completion, costs of capital projects and commencement of operations. Forward looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from expected results. Some important factors and assumptions that could cause actual results to differ materially from expected results are discussed below. Those listed are not exclusive. Estimates of future production for particular properties and for the Company as a whole are derived from annual mine plans that have been developed based on mining experience, reserve estimates, assumptions regarding ground conditions and physical characteristics of ore (such as hardness and metallurgical characteristics), expected rates 16 HOMESTAKE MINING COMPANY AND SUBSIDIARIES and costs of production, and estimated future sales prices. Actual production may vary for a variety of reasons, such as the factors described above, ore mined varying from estimates of grade and metallurgical and other characteristics, mining dilution, actions by labor, and government imposed restrictions. Estimates of production from properties and facilities not yet in production are based on similar factors but there is a greater likelihood that actual results will vary from estimates due to a lack of actual experience. Cash cost estimates are based on such things as past experience, reserve and production estimates, anticipated mining conditions, estimated costs of materials, supplies and utilities, and estimated exchange rates. Noncash cost estimates are based on capital costs and reserve estimates, changes based on actual amounts of unamortized capital, changes in reserve estimates, and changes in estimates of final reclamation. Estimates of future capital costs are based on a variety of factors and include past operating experience, estimated levels of future production, estimates by and contract terms with third-party suppliers, expectations as to government and legal requirements, feasibility reports by Company personnel and outside consultants, and other factors. Capital cost estimates for new projects are subject to greater uncertainties than additional capital costs for existing operations. Estimated time for completion of capital projects is based on such factors as the Company's experience in completing capital projects, and estimates provided by and contract terms with contractors, engineers, suppliers and others involved in design and construction of projects. Estimates reflect assumptions about factors beyond the Company's control, such as the time government agencies take in processing applications, issuing permits and otherwise completing processes required under applicable laws and regulations. Actual time to completion can vary significantly from estimates. See the Company's Form 10-K Report for the year ended December 31, 1996, Part IV, "FORWARD LOOKING STATEMENTS" and "RISK FACTORS," for a more detailed discussion of factors that may impact expected future results. Item 6. (a) Exhibits Method of Filing -------- ---------------- 3.4 - Bylaws (as amended through July 24, 1997), Filed herewith reducing the number of directors from electronically 13 to 12. 11 - Computation of Earnings Per Share Filed herewith electronically 27 - Financial Data Schedule Filed herewith electronically (b) Reports on Form 8-K Two reports on Form 8-K were filed during the quarter ended June 30, 1997. The report on Form 8-K dated May 21, 1997 was submitted in order to file the Registrant's Bylaws (as amended through May 13, 1997). The report on Form 8-K dated June 18, 1997 was submitted in order to file to file the First Amendment and Waiver to Credit Agreement dated as of April 3, 1997. 17 HOMESTAKE MINING COMPANY AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HOMESTAKE MINING COMPANY Date: August 13, 1997 By /s/David W. Peat --------------- ------------------ David W. Peat Vice President and Controller (Chief Accounting Officer) 18