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, 1998
( ) 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 7, 1998 was
211,183,900.
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,
1998 1997
--------------- -----------------
ASSETS
Current assets
Cash and equivalents $ 134,219 $ 124,083
Short-term investments 149,699 141,221
Receivables 48,711 43,529
Inventories:
Finished products 22,283 33,019
Ore and in process 29,999 37,811
Supplies 31,149 33,095
Deferred income and mining taxes 26,465 19,372
Other 7,669 13,154
--------------- -----------------
Total current assets 450,194 445,284
--------------- -----------------
Property, plant and equipment - at cost 2,204,344 2,222,465
Accumulated depreciation, depletion and amortization (1,271,610) (1,201,318)
--------------- -----------------
Property, plant and equipment - net 932,734 1,021,147
--------------- -----------------
Investments and other assets
Noncurrent investments 33,054 41,094
Other assets 89,479 102,009
--------------- -----------------
Total investments and other assets 122,533 143,103
--------------- -----------------
Total Assets $ 1,505,461 $ 1,609,534
=============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 47,015 $ 59,930
Accrued liabilities:
Payroll and other compensation 27,761 23,898
Unrealized loss on foreign currency exchange contracts 28,921 20,416
Reclamation and closure costs 12,166 11,818
Other 17,151 12,509
Income and other taxes payable 9,422 277
--------------- -----------------
Total current liabilities 142,436 128,848
--------------- -----------------
Long-term liabilities
Long-term debt 356,069 374,593
Other long-term obligations 143,871 152,610
--------------- -----------------
Total long-term liabilities 499,940 527,203
--------------- -----------------
Deferred income and mining taxes 146,105 161,862
Minority interests in consolidated subsidiaries 112,232 108,116
Shareholders' equity
Capital stock, $1 par value per share:
Preferred - 10,000 shares authorized; no shares outstanding
Common - 250,000 shares authorized; shares outstanding:
1998 - 211,162; 1997 - 210,696 211,162 210,696
Other shareholders' equity 393,586 472,809
--------------- -----------------
Total shareholders' equity 604,748 683,505
--------------- -----------------
Total Liabilities and Shareholders' Equity $ 1,505,461 $ 1,609,534
=============== =================
See notes to the 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,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Revenues
Gold and ore sales $ 210,687 $ 214,393 $ 405,026 $ 442,218
Sulfur and oil sales 5,665 6,842 11,798 13,794
Interest income 5,218 4,797 9,477 9,106
Gain on termination of Santa Fe merger 62,925
Other income (26,285) 28 (14,799) 15,355
-------------- -------------- -------------- --------------
195,285 226,060 411,502 543,398
-------------- -------------- -------------- --------------
Costs and Expenses
Production costs 142,749 154,831 278,306 319,721
Depreciation, depletion and amortization 37,402 34,047 73,492 73,590
Administrative and general expense 11,272 12,029 23,837 21,821
Exploration expense 11,509 18,138 21,806 30,073
Interest expense 5,216 5,413 10,328 10,281
Write-downs and other unusual charges 2,905 65,115 11,784 65,115
Business combination and integration costs 17,934 20,710
Other expense 419 2,785 798 3,427
-------------- -------------- -------------- --------------
229,406 292,358 441,061 524,028
-------------- -------------- -------------- --------------
Income (Loss) Before Taxes and Minority Interests (34,121) (66,298) (29,559) 19,370
Income and Mining Taxes 4,878 3,858 (2,342) (31,047)
Minority Interests (1,688) (2,417) (5,616) (4,924)
-------------- -------------- -------------- --------------
Net Loss $ (30,931) $ (64,857) $ (37,517) $ (16,601)
============== ============== ============== ==============
Net Loss Per Share - Basic and Diluted $ (0.15) $ (0.31) $ (0.18) $ (0.08)
============== ============== ============== ==============
Average Shares Used in the Computation 211,060 210,567 210,860 210,534
============== ============== ============== ==============
Dividends Paid Per Common Share $ 0.05 $ 0.05 $ 0.05 $ 0.10
============== ============== ============== ==============
See notes to the 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,
1998 1997
----------------- ------------------
Cash Flows from Operations
Net loss $ (37,517) $ (16,601)
Reconciliation to net cash provided by operations:
Depreciation, depletion and amortization 73,492 73,590
Write-downs 2,905 65,115
Deferred taxes, minority interests and other (21,575) 11,332
Gains on asset disposals (1,844) (17,884)
Effect of changes in operating working capital items 48,311 (5,798)
----------------- ------------------
Net cash provided by operations 63,772 109,754
----------------- ------------------
Investment Activities
Increase in short-term investments (11,308) (33,630)
Capital additions (33,894) (101,897)
Proceeds from asset sales 7,841 15,451
Other 113 (2,603)
----------------- ------------------
Net cash used in investment activities (37,248) (122,679)
----------------- ------------------
Financing Activities
Borrowings 27,917
Debt repayments (8,024)
Dividends paid - Homestake (7,339) (14,670)
- Plutonic (3,554) (9,768)
- Prime minority interests (1,040) (1,085)
Common shares issued 1,038 808
Other 2,531 2,655
----------------- ------------------
Net cash provided by (used in) financing activities (16,388) 5,857
----------------- ------------------
Net increase (decrease) in cash and equivalents 10,136 (7,068)
Cash and equivalents, January 1 124,083 104,657
----------------- ------------------
Cash and equivalents, June 30 $ 134,219 $ 97,589
================= ==================
See notes to the 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, for
the year ended December 31, 1997. Year end financial statements for the
Company, restated to include Plutonic on a pooling-of-interests basis
(see note 2 below), have been filed with the Securities and Exchange
Commission on Form 8-K dated June 22, 1998.
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 6, 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. On April 30, 1998 Homestake completed the acquisition of Plutonic
Resources Limited ("Plutonic"), a publicly-traded Australian gold
producer, by an exchange of common stock for common stock. Homestake
issued 64.4 million common shares to acquire Plutonic, including 63.9
million shares in exchange for all of the Plutonic fully paid ordinary
shares outstanding based on an exchange ratio of 0.34 Homestake common
shares for each Plutonic fully paid ordinary share, and 0.5 million
Homestake common shares for the Plutonic partly-paid shares and options
outstanding.
The business combination with Plutonic has been accounted for as a
pooling of interests and, accordingly, Homestake's consolidated
financial statements have been restated to include Plutonic for all
periods. Combined and separate preacquisition results for Homestake and
Plutonic for the three months ended March 31, 1998 and for the three
and six months ended June 30, 1997 are as follows (in thousands):
Homestake Plutonic
Historical Historical a Adjustments b Combined
-------------------------------------------------------------
Three months ended March 31, 1998
Revenues $ 174,343 $ 43,624 $ (1,750) $ 216,217
Net loss (4,611) (76) (1,899) (6,586)
Three months ended June 30, 1997
Revenues $ 168,659 $ 64,427 $ (7,026) $ 226,060
Net loss (16,222) (39,633) (9,002) (64,857)
Six months ended June 30, 1997
Revenues $ 418,846 $ 121,035 $ 3,517 $ 543,398
Net income (loss) 33,638 (34,541) (15,698) (16,601)
<FN>
a) The Plutonic historical results of operations have been adjusted to
reflect i) presentation of Plutonic's results of operations in
accordance with United States generally accepted accounting principles
and the format and classifications utilized by Homestake, and ii)
translation into U.S. dollars using the average exchange rate for each
period.
5
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
b) In combining the historical results of Homestake and Plutonic,
certain adjustments were made to conform Plutonic's accounting policies
to Homestake's accounting policies. The effect of these adjustments on
combined net income (loss) is as follows (in thousands):
</FN>
Three months ended Three months ended Six months ended
March 31, June 30, June 30,
Increase (Decrease) 1998 1997 1997
----------------------------------------------------------------------
Revenue recognition $ (1,293) $ (3,142) $ (1,848)
Reclamation expense 474 (61) 710
Depreciation, depletion
and amortization 1,141 2,102 4,204
Income taxes (1,009) 3,819 8,936
----------------------------------------------------------------------
$ (1,899) $ (9,002) $ (15,698)
======================================================================
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,
------------------------------- ------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- -------------
Gains on asset disposals $1.6 $2.5 $1.8 $17.9
Gain on sales of Rabbi
Trust investments 0.3 - 4.3 -
Royalty income 0.6 0.6 1.2 1.2
Foreign currency contract
gains (losses) (26.5) (2.8) (22.4) (3.8)
Foreign currency exchange
losses on intercompany
advances (4.4) (2.4) (3.5) (2.8)
Other foreign currency
gains (losses) 0.4 - 0.5 (0.3)
Other 1.7 2.1 3.3 3.2
-------------- ------------- -------------- -------------
($26.3) $ - ($14.8) $15.4
============== ============= ============== =============
4. In January 1998, the Company began a major restructuring of operations
at the Homestake mine in order to reduce operating costs. The Company
suspended underground mining for approximately 60 days while it
completed the final details of the new operating plan and readied the
underground mine to begin operating on the restructured basis. Open Cut
ore stockpiles continued to be processed through the mill at an
accelerated rate while the underground operations were suspended. The
new mine plan specifically is designed to improve the grade of ore
recovered through the increased use of mechanized cut-and-fill mining
methods. When fully implemented, the plan will reflect a complete
reorganization of underground activities, a significant reduction in
the mine's work force and a reduction in future gold production.
Write-downs and other unusual expenses during the six months ended June
30, 1998 include $8.9 million ($5.9 million after tax) of costs
associated with the temporary suspension of operations and the
reduction of 450 employees in the work force. These costs primarily
represent wage payments to the work force during the temporary shutdown
6
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
and severance payments and benefit costs for the severed employees, and
are net of approximately $9.3 million of pension and benefit plan
curtailment gains.
5. 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.
6. In February 1997, Homestake sold its interests in the George Lake and
Back River joint ventures in Canada to Kit Resources Corporation
("Kit") for $9.3 million in cash and 3.6 million shares of Kit common
stock. As a result of this transaction, the Company recorded a pretax
gain of $13.5 million ($8.1 million after tax) in the first quarter of
1997, which is included in other income.
7. In June 1998, Plutonic repaid $8 million of its debt outstanding under
its syndicated credit facility. Borrowings outstanding at June 30, 1998
included borrowings of $95.5 million by Plutonic and $45.6 million by
HGAL under the Company's then-existing credit facilities.
In July 1998, the Company entered into a new United
States/Canadian/Australian cross-border credit facility providing a
total availability of $430 million. The new facility replaces the
Company's $275 million cross-border credit facility and Plutonic's
A$400 million syndicated credit facility, each of which were cancelled.
Borrowings by Plutonic and HGAL under the prior credit facilities were
repaid using the new facility. The new facility is available through
July 14, 2003 and provides for borrowings in United States, Canadian,
or Australian dollars, or gold, or a combination of these. Under the
new facility, the Company pays a commitment fee ranging from 0.15% to
0.35% per annum, depending upon rating agencies' ratings for the
Company's senior debt, on the unused portion of this facility. The new
credit agreement requires a minimum consolidated net worth of $500
million. Interest on the HGAL and Plutonic Australian dollar borrowings
under the new facility is payable quarterly and is based on the
Australian Bank Bill Swap Rate plus a margin of up to 1.125%. At July
31, 1998 the interest rate was 6.22%.
8. 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, 1998 the Company had forward currency contracts outstanding
as follows (dollar amounts in thousands):
Weighted-Average Exchange
Amount Covered Rates to U.S. Dollars Expiration
Currency (U.S. Dollars) Put Options Call Options Dates
- ------------------------------------------------------------------------------------------------------
Canadian $ 96,800 0.72 0.75 1998
Canadian 123,300 0.70 0.73 1999
Canadian 89,200 0.69 0.72 2000
Canadian 16,500 0.68 0.71 2001
Australian 50,800 0.73 0.76 1998
Australian 84,000 0.67 0.70 1999
Australian 62,600 0.65 0.68 2000
Australian 17,000 0.62 0.65 2001
-----------------
$ 540,200
=================
7
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
The Company delivered or financially settled during the three and six
months ended June 30, 1998, 30,000 and 60,000 ounces of its North
American gold production at an average price of $398 and $396 per
ounce, respectively. This compares to settlements of 30,000 and 60,000
ounces at an average price of $380 and $381 per ounce during the three
and six months ended June 30, 1997, respectively.
The Company delivered or financially settled during the three and six
months ended June 30, 1998, 55,900 and 178,900 ounces of its Australian
gold production at an average price of $372 and $339 per ounce,
respectively. This compares to settlements of 124,300 and 265,150
ounces at an average price for both periods of $429 per ounce during
the three and six months ended June 30, 1997. During June 1998,
Homestake closed out one million ounces of the Australian
dollar-denominated forward gold contracts which Plutonic had entered
into prior to its acquisition by Homestake. The pretax gain of $5
million realized as a result of this action was deferred and will be
recorded into income as the originally designated production is sold.
At June 30, 1998 the Company's gold forward sales commitments were as
follows:
US $ Denominated Australian $ Denominated
-------------------------------------- --------------------------------------
Average Price of Average Price of
Forward Sales Forward Sales Forward Sales Forward Sales
Year (ounces) (per ounce) (ounces) (US$ per ounce)
- ------------- -------------------------------------- --------------------------------------
1998 60,000 $403 60,000 $320
1999 109,900 415
2000 85,100 430 24,800 320
2001 95,000 441 24,800 320
2002 95,000 457 24,800 320
Thereafter 75,000 481 75,600 320
--------------- ---------------
520,000 210,000
=============== ===============
To provide protection against a decrease in gold prices, during the
third quarter of 1997 the Company entered into a series of put and call
option contracts to provide a floor price of $325 per ounce for 900,000
ounces of Homestake's expected 1998 gold production. Gold sales during
the second quarter of 1998 include 225,000 ounces at an average price
$325 per ounce and year-to-date revenues in 1998 include 450,000 ounces
at $325 per ounce under this program. At June 30, 1998 the Company
owned put options for 450,000 ounces of gold exercisable during 1998 at
a price of $325 per ounce. The Company also had written call options
outstanding for 450,000 ounces of gold exercisable during 1998 at a
price of $325 per ounce and owned call options for 450,000 ounces of
gold exercisable during 1998 at a price of $336 per ounce.
At June 30, 1998 the Company also owned put options for 30,000 ounces
of gold exercisable during 2000 at a price of $350 per ounce and had
written call options outstanding for 15,000 ounces of gold exercisable
during 2000 at an average price of $395 per ounce.
In February 1998, Prime Resources Group Inc. ("Prime"), a 50.6%-owned
subsidiary of the Company, adopted a gold and silver hedging policy
which provides for the use of forward sales contracts for up to 40% of
each of the following five year's expected annual gold and silver
production at prices in excess of certain targeted prices. At June 30,
1998 Prime had forward sales outstanding for approximately 7.2 million
ounces of silver during the period 1999 through 2001 at an average
price of $6.28 per ounce.
8
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
9. Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 establishes standards for the reporting and display
of comprehensive income. 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 shareholders in their capacity as
shareholders. SFAS 130 requires that the components of comprehensive
income be displayed in annual financial statements with the same
prominence as other financial statements and that the total amount of
comprehensive income be reported in interim periods. Homestake's
comprehensive income (loss) for the three and six months ended June
30, 1998 and 1997 was as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---------------------------------------------------------------
Net Loss $ (30,931) $ (64,857) $ (37,517) $ (16,601)
Other Comprehensive Income (Loss)
Currency translation adjustments (32,603) (28,105) (26,686) (38,383)
Unrealized losses on securities (1,154) (10,298) (3,448) (15,569)
---------------------------------------------------------------
Comprehensive Loss $ (64,688) $ (103,260) $ (67,651) $ (70,553)
===============================================================
In February 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 132 ("SFAS
132"), "Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS 132 revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement
or recognition of those plans. SFAS 132 standardizes the disclosure
requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures. SFAS 132 will
be effective for the Company's financial statements for the year ended
December 31, 1998.
In June 1998, FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133 requires that all derivatives be
recognized as assets or liabilities and be measured at fair value.
Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the
derivatives and whether they qualify for hedge accounting as either a
fair value hedge or a cash flow hedge. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows of the hedging
instruments and the hedged items. SFAS 133 is effective for fiscal
years beginning after June 15, 1999 but earlier adoption is permitted.
The Company currently is evaluating the impact that this requirement
will have on reported operating results and financial position and has
not yet determined when SFAS 133 will be adopted.
10. On May 25, 1998 Homestake announced that it had proposed to the Board
of Directors of Prime, the acquisition by Homestake of the 49.4% of
Prime held by the public and not already owned by Homestake. Under the
terms of the offer, Prime shareholders would receive 0.675 Homestake
common shares or 0.675 Homestake Canada Inc. ("HCI") Exchangeable
Shares for each Prime share held by them. Each HCI Exchangeable Share
would be exchangeable for one Homestake common share at any time at the
option of the holder.
The arrangement, which is subject to the approval of the shareholders
of both Homestake and Prime, would result in the issuance of a total of
25.4 million Homestake common and
9
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
HCI Exchangeable Shares in exchange for the 37.6 million Prime shares
held by the minority shareholders of Prime.
11. 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.
Grants: Homestake'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. Homestake 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 $17.5 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,
1998, Homestake had received $26 million from the DOE and the
accompanying balance sheet at June 30, 1998 includes an additional
receivable of $6.3 million for the DOE's share of reclamation
expenditures made by Homestake through that date. Homestake believes
that its share of the estimated remaining cost of reclaiming the Grants
facility is fully provided in the financial statements at June 30,
1998.
In 1983, the state of New Mexico made a claim against Homestake for
unspecified natural resource damages resulting from the Grants
tailings. New Mexico has taken no action to enforce its claim.
Whitewood Creek: Whitewood Creek was a site where mining companies
operating in the Black Hills of South Dakota, including Homestake,
placed mine tailings (ground rock) beginning in the nineteenth century.
Some tailings placed in Whitewood Creek eventually flowed into the
Belle Fourche River, the Cheyenne River and Lake Oahe. Placement of
mine tailings into Whitewood Creek was authorized by the laws of the
United States, the Dakota territory and the State of South Dakota, and
Whitewood Creek was later specifically designated by the State of South
Dakota as a disposal stream for mine tailings and for the disposal of
raw sewage and other municipal waste. In response to changes in legal
requirements, Homestake ceased the placement of mine tailings into
Whitewood Creek and for many years the Homestake mine has impounded all
mine tailings that are not redeposited in the mine.
Deposits of tailings along an 18-mile stretch of Whitewood Creek
formerly constituted a site on the NPL. The EPA asserted that
discharges of tailings by mining companies, including Homestake,
contaminated the soil and streambed. Homestake signed a Consent Decree
with the EPA and carried out remedial work. The site was deleted from
the NPL on August 13, 1996. In the deletion notice, the EPA stated that
"EPA, in
10
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
consultation with the State of South Dakota, have determined that the
Site poses no significant threat to public health or the environment."
In September, 1997 the State of South Dakota filed an action against
Homestake, alleging that Homestake's disposal of mine tailings in
Whitewood Creek resulted in injuries to natural resources in Whitewood
Creek, the Belle Fourche River, the Cheyenne River and Lake Oahe
(collectively the "NRD Site"). The complaint also alleges that the
tailings constitute a continuing public nuisance. The complaint asks
for abatement of the nuisance, response costs, damages in an
unspecified amounts, litigation costs and interest. In November 1997,
the United States government and the Cheyenne River Sioux Tribe (the
"federal trustees") filed a similar action alleging injuries to natural
resources and seeking response costs, damages in unspecified amounts,
litigation costs and attorneys fees.
In its answers, Homestake denies that there has been any continuing
damage to natural resources or nuisance as a result of the placement of
tailings in Whitewood Creek. Among other defenses, it is also the
position of Homestake that as a result of the State of South Dakota's
ownership of Whitewood Creek and state and federal designation of
Whitewood Creek as an authorized disposal site, the State of South
Dakota and the federal government are responsible for all past and
future damages. Homestake has also counterclaimed against the State of
South Dakota and the federal trustees seeking cost recoupment,
contribution and indemnity.
In the opinion of Homestake, there is no basis for the claims by the
State of South Dakota or by the federal trustees. Homestake is also of
the opinion that Homestake has valid defenses and counterclaims against
the State of South Dakota and the federal trustees, and cross-claims
for recovery, contribution and indemnity against other government
entities and other persons who participated in ownership and/or
operation of Whitewood Creek as a waste disposal site or who disposed
of waste in the NRD Site.
Homestake, the State of South Dakota and the Federal Trustees are
engaged in settlement discussions with respect to the actions. If
settlement is not achieved, Homestake intends to vigorously defend this
action and to seek recovery, contribution and indemnity from the State
of South Dakota and the federal trustees for past and future
expenditures. Homestake also expects to seek recovery, contribution and
indemnity from other government entities and other persons who
participated in ownership and/or operation of Whitewood Creek as a
waste disposal site or who disposed of waste in the NRD Site.
Homestake does not believe that resolution of these matters will have a
material effect on the business or financial condition or results of
operations of Homestake.
11
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
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. Information for prior periods has been restated to include
Plutonic which was acquired on April 30, 1998. Homestake reports per ounce
production costs in accordance with the "Gold Institute Production Cost
Standard.")
On April 30, 1998 Homestake completed the acquisition of Plutonic Resources
Limited ("Plutonic"), an Australian gold producer, by issuing 64.4 million
shares with a market value of approximately $770 million. Homestake issued 63.9
million shares in exchange for all Plutonic fully paid ordinary shares
outstanding based on an exchange ratio of 0.34 Homestake common shares for each
Plutonic fully paid ordinary share, and 0.5 million Homestake common shares for
the Plutonic partly paid shares and options outstanding. The business
combination has been accounted for as a pooling of interests, and accordingly,
the Company's consolidated financial statements have been restated to include
Plutonic for all prior periods.
RESULTS OF OPERATIONS
Homestake recorded a net loss of $30.9 million or $0.15 per share during the
second quarter of 1998 compared to a net loss of $64.9 million or $0.31 per
share during the second quarter of 1997. The 1998 second quarter loss includes
charges of $15 million ($17.9 million pretax) or $0.07 per share for business
combination and integration costs related to the Plutonic acquisition and $2.6
million ($2.9 million pretax) or $0.02 per share for write-downs of exploration
properties. Results for the 1997 second quarter include write-downs of $50
million ($65.1 million pretax) or $0.24 per share taken primarily at the Mt
Morgans mine and the Meekatharra exploration property.
Excluding the effect of nonrecurring items, the Company incurred a net loss of
$13.3 million or $0.06 per share in the 1998 second quarter compared to a net
loss of $14.9 million or $0.07 per share in the 1997 second quarter. The
improved results reflect a substantial decline in cash costs, higher production
and reduced exploration expenditures. These factors were offset in part by a
significant decline in the gold price, higher mark-to-market losses on foreign
currency exchange contracts, and increased depreciation, depletion and
amortization expenses primarily due to higher sales volumes.
Gold production in the second quarter of 1998 was 656,600 ounces compared to
626,700 ounces produced in the second quarter of 1997. During the second quarter
of 1998, sales of equivalent ounces of gold increased by 14% to 693,800 ounces
compared to 610,900 ounces in the second quarter of 1997. However, gold and ore
sales revenue decreased to $210.7 million during the three months ended June 30,
1998 from $214.4 million in the corresponding prior year period due to a decline
in the average price of gold. The Company's average realized price declined to
$316 per equivalent ounce of gold in the second quarter of 1998 from $362 per
equivalent ounce realized in the comparative 1997 period.
In January 1998, the Company began a major restructuring of operations at the
Homestake mine in order to reduce operating costs. The Company suspended
underground mining for approximately 60 days while it completed the final
details of the new operating plan and readied the underground mine to begin
operating on the restructured basis. Open Cut ore stockpiles continued to be
processed through the mill at an accelerated rate while the underground
operations were suspended. The new mine plan specifically is designed to improve
the grade of ore recovered through the increased use of mechanized cut-and-fill
mining methods. When fully implemented, the plan will reflect a reorganization
of underground activities and a significant
12
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
reduction in work force that will generate considerable cost savings and will
increase the mine's future total earnings and cash flow. Homestake expects to
invest up to $30 million by the end of 1999 in the restructuring process to
purchase equipment, and upgrade facilities and infrastructure. Once the new
operating plan is fully implemented by the end of 1999, annual gold production
is expected to be between 150,000 and 180,000 ounces. Total cash costs for the
underground operations are projected to decline to $280 per ounce from the 1997
levels of approximately $335 per ounce. Underground crews returned to work on a
limited basis on March 26, 1998, and the remaining underground work force, about
one-half of the size of the pre-shutdown force, returned on a phased basis
through April 1998. Substantial development work is ongoing to prepare the mine
to operate under the new operating plan, and production is increasing each
month.
Domestic gold production increased slightly to 182,600 ounces during the second
quarter of 1998 from 174,600 ounces during the second quarter of 1997. The
increase primarily is due to the commencement of production at the new Ruby Hill
mine in Nevada, offset by the temporary suspension of mining in the underground
operations at the Homestake mine. The Ruby Hill mine, which commenced commercial
production effective January 1, 1998, produced 30,400 ounces of gold at a cash
cost $123 per ounce during the second quarter of 1998. The mine continues to
exceed initial projections due to processing 12% more tons than planned and to a
higher gold recovery rate. At the Homestake mine, gold production during the
second quarter of 1998 declined by 28% to 70,400 ounces compared to 97,900
ounces during the second quarter of 1997. During the temporary shut down, the
mill processed an increased volume of lower-grade ore from the lower-cost Open
Cut operations. The increased volume of Open Cut ore reduced the mine's average
cash costs to $256 per ounce during the 1998 second quarter from $330 per ounce
in the 1997 second quarter. At the McLaughlin mine, production increased to
34,800 ounces during the second quarter of 1998 from 30,900 ounces during the
prior year's second quarter due to a combination of higher ore grades and an
increase in mill throughput. These factors together with lower unit operating
and maintenance costs resulted in a significant reduction in cash costs to $201
per ounce in 1998 from $254 per ounce in the second quarter of 1997. Homestake's
share of production at the Round Mountain mine increased by 4,000 ounces to
36,500 ounces during the second quarter of 1998 from 32,500 ounces produced
during the second quarter of 1997. The higher production primarily is due to
production from the new 8,000 tons-per-day mill which was commissioned in late
1997. The new mill, which was constructed to process higher-grade ores, produced
6,200 ounces (Homestake's share) during the quarter. Cash costs at Round
Mountain declined to $194 per ounce in the 1998 second quarter from $204 per
ounce in the 1997 second quarter due to cost savings associated with the new
mining plan instituted in 1997. The new pit design has led to a lower stripping
ratio that has reduced unit costs and capital requirements, substantially
improving earnings and cash flow over the life of the operation.
Total foreign gold production during the three months ended June 30, 1998
increased 21,900 ounces or 5% to 474,000 equivalent ounces over the comparable
period for the prior year. This increase in production primarily is due to a
significant increase in production at the Eskay Creek and Williams mines in
Canada and at the Lawlers mine in Australia.
Production at the Eskay Creek mine increased to 130,000 gold equivalent ounces
during the second quarter of 1998 from 100,900 gold equivalent ounces during the
second quarter of 1997. Although the gold grade has been consistently above
projections this year, most of the production increase can be attributed to a
lower silver/gold equivalency ratio and the excellent performance from the
gravity/flotation mill installed in December 1997 to process lower-grade ore.
Cash costs (including third-party smelter costs) were $134 per equivalent ounce
in the 1998 second quarter compared to $157 per equivalent ounce in the 1997
second quarter. The Williams mine produced 50,900 ounces of gold at a cash cost
of $209 per ounce during the second quarter of 1998 compared to 42,800 ounces
produced at a cash cost of $272 per ounce during the second quarter of 1997. The
higher production was attributable to an increase in tons milled and an
13
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
increase in the ore grade. The significant decline in cash cost resulted from
increased production, improved ground conditions and lower underground
development costs. The David Bell mine produced 22,900 ounces at a cash cost of
$180 per ounce during the second quarter of 1998 compared to 20,800 ounces
produced at a cash cost of $213 per ounce during the second quarter of 1997 due
to an increase in tons milled. Homestake's share of production at the Snip mine
decreased to 26,800 ounces in the 1998 second quarter from 31,300 ounces in the
1997 second quarter. The decline in production reflect the mining of lower-grade
ore. However, costs still declined as the impact of the lower ore grade was more
than offset by lower mining and service costs. Overall Canadian operations cash
cost also benefited from a four percent decline in the average Canadian/U.S.
dollar exchange rate between the second quarters of 1998 and 1997.
HGAL's share of production at the Kalgoorlie operations in Western Australia
totaled 104,800 ounces in the second quarter of 1998 compared to 107,000 ounces
in the second quarter of 1997. A small decline in mill throughput due to a
planned relining of the SAG mill and an unscheduled shutdown to inspect and
repair damage to the mill girth gear was offset by the mining of higher-grade
ore from the Super Pit. Cash costs in 1998 declined to $219 per ounce from $279
per ounce in 1997, attributable to lower costs and the decline in value of the
Australian dollar in relation to the U.S. dollar.
In the second quarter of 1998, gold production at the Plutonic mine dropped to
55,700 ounces at a cash cost of $247 per ounce compared to 73,900 ounces at a
cash cost of $218 per ounce in the prior year's second quarter. Plutonic is
mainly an underground operation as the open pit was mined out in 1997. Mill feed
from underground operations was somewhat below expectations in the last quarter
as lode structures in the NW Extension were flatter and less continuous than
anticipated, making mining more difficult. However, current drilling already has
succeeded in defining higher-grade lode structures in areas where production
will commence in the third quarter.
Gold production for the latest quarter at the Darlot/Centenary mine declined to
14,700 ounces in 1998 from 16,100 ounces in the 1997 quarter as ore was sourced
predominantly from the lower-grade Darlot orebody. Consequently, cash costs
increased to $289 per ounce in 1998 from $271 per ounce in 1997. Development of
the low-cost, high-grade Centenary deposit has been delayed somewhat as a result
of a change in mining contractors. Initial production from the Centenary deposit
is expected to take place by the end of the third quarter.
For the second quarter of 1998, production from the Lawlers mine increased to
30,800 ounces compared to 18,500 ounces in the comparable period of the previous
year. Ore grades, particularly from the New Holland South underground zone, and
the recovery rate from the gravity circuit both have been higher than
anticipated. As a result, cash costs declined to $203 per ounce compared to $232
per ounce in 1997. Work has commenced on a second decline to access the deeper
lode structures of the New Holland South zone.
Homestake's 80% share of gold production from the Mt Morgans mine was 15,100
ounces in the latest quarter at a cash cost of $222 per ounce compared to 16,500
ounces at a cost of $411 per ounce in the comparable 1997 quarter. Cash costs
declined substantially despite the drop in production due to higher than
expected ore grades and recoveries from stockpiled ore. The Mt Morgans mine is
scheduled to cease operations in September 1998. However, recent exploration
results have been very promising, and could result in extending the life of the
mine if additional ore is located.
Overall Australian operations cash costs per ounce also benefited from an
eighteen percent decline in the average Australian/U.S. dollar exchange rate
between the second quarters of 1998 and 1997.
14
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
At the La Falda mine in Chile, second quarter 1998 gold production increased to
12,700 ounces compared to 8,300 ounces in 1997 primarily due to higher
recoveries. Cash costs declined to $191 per ounce from $203 per ounce. At
present, oxide ore is being mined and heap leached while metallurgical work
continues on the much larger, predominantly unoxidized Jeronimo orebody. Recent
tests of bio-oxidation techniques have been encouraging and testing to determine
the best method for extracting gold from the ore will continue. A decline is
being developed to access the deeper sulfide ore so that a large sample of this
ore can be obtained for metallurgical testing.
The Company's consolidated total cash costs per ounce decreased 26 percent to
$201 in the 1998 second quarter compared to $254 in the 1997 second quarter.
Approximately $21 per ounce of this decline is attributable to the lower
Australian and Canadian dollar exchange rates.
For the six months ended June 30, 1998, the Company recorded a net loss of $37.5
million or $0.18 per share compared to a net loss of $16.6 million or $0.08 per
share in 1997. The net loss for the first half of the 1998 includes $17.7
million ($20.7 million pretax) or $0.08 per share for business combination and
integration costs related to the acquisition of Plutonic, $5.9 million ($8.9
million pretax) or $0.03 per share in restructuring costs relating to the
Homestake mine, and $2.6 million ($2.9 million pretax) or $0.02 per share for
write-downs of exploration properties. The net loss for the first six months of
1997 includes gains of $47.2 million ($62.9 million pretax) or $0.22 per share
from the break-up 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 $0.04 per share from the sale of joint venture
interests in two mining properties in the Northwest Territories of Canada, and
an after-tax loss of $50 million ($65.1 million pretax) or $0.24 per share
primarily related to the write-downs at the Mt Morgans mine and the Meekatharra
exploration property.
Year-to-date revenues from gold and ore sales totaled $405 million during the
first six months of 1998 compared to $442.2 million during the first six months
of 1997, reflecting significantly lower average realized prices partially offset
by increased sales volumes. During the first half of 1998, 1,332,500 equivalent
ounces of gold were sold at an average realized price of $316 per ounce compared
to sales of 1,231,900 equivalent ounces of gold sold at an average realized
price of $364 per ounce during the first half of 1997. The increased sales
volumes primarily are due to increases in production.
The Company's share of revenues from the Main Pass 299 operation in the Gulf of
Mexico declined to $5.7 million during the second quarter of 1998 from $6.8
million in the second quarter of 1997, and operating losses were $1 million
during the second quarter compared to losses of $0.4 million during the 1997
second quarter. Sulfur sales increased to 77,900 long tons during the 1998
second quarter from 76,700 long tons during the 1997 second quarter. However,
the average realized sulfur price declined to $58 per ton during the 1998 second
quarter compared to $60 per ton during the second quarter of the previous year.
Oil sales also declined due to a 29% decrease in production and a 31% decrease
in the average oil price per barrel. Year-to-date 1998 revenues from the Main
Pass 299 operations decreased to $11.8 million compared to year-to-date 1997
revenues of $13.8 million, and year-to-date 1998 operating losses were $1.7
million compared to losses of $1 million for the year-to-date 1997 period. The
1998 results reflect lower oil prices and sales volumes, offset by lower
depreciation charges following the write down of the sulfur assets at September
30, 1997.
Homestake's gold hedging policy provides for the use of forward sales contracts
for up to 30% of each of the following ten year's expected annual gold
production at prices in excess of certain targeted prices, and the use of
combinations of put and call option contracts to establish minimum floor prices
while allowing participation in future increases in the price of gold. In 1997,
Homestake entered into a series of put and call options which provide a floor
price of $325 per
15
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
ounce for 900,000 ounces of 1998 production while allowing for full
participation in any increase in the price of gold above $336 per ounce. Gold
sales for the three and six months ended June 30, 1998 includes 225,000 and
450,000 ounces, respectively, at an average price of $325 per ounce under this
program. At June 30, 1998 the Company owned put options for 450,000 ounces of
gold exercisable during 1998 at a price of $325 per ounce. The Company also had
written call options outstanding for 450,000 ounces of gold exercisable during
1998 at a price of $325 per ounce and owned call options for 450,000 ounces of
gold exercisable during 1998 at a price of $336 per ounce.
During the three and six months ended June 30, 1998 the Company delivered or
financially settled 55,900 and 178,900 ounces of its Australian gold production
into Australian dollar denominated forward gold contracts at average prices of
$372 and $339 per ounce, respectively. During the three and six months ended
June 30, 1997 the Company delivered 124,300 and 265,150 ounces of its Australian
gold production into Australian dollar denominated forward gold contracts at
average prices for both periods of $429 per ounce. During June 1998, the Company
closed out and financially settled one million ounces of its Australian
dollar-denominated forward gold contracts. The gain of $5 million realized on
this arrangement was deferred and will be recorded in income as the originally
designated production is delivered. At June 30, 1998 the Company had remaining
commitments for 210,000 ounces of its future Australian dollar denominated
forward gold contracts at an average price of $320 (A$526) per ounce.
During the three and six months ended June 30, 1998 the Company delivered or
financially settled 30,000 and 60,000 ounces of its North American gold
production at average prices of $398 and $396 per ounce, respectively, and
during the three and six months ended June 30, 1997 the Company delivered or
financially settled 30,000 and 60,000 ounces of its North American gold
production at average prices of $383 and $381 per ounce, respectively. At June
30, 1998 the Company had committed 520,000 ounces of its future North American
gold production for sale through the year 2003 at an average price of $438 per
ounce under forward sales contracts. The Company also owned put options for
30,000 ounces of gold exercisable during 2000 at a price of $350 per ounce and
had written call options outstanding for 15,000 ounces of gold exercisable
during 2000 at an average price of $395 per ounce.
The Company's hedging activities increased revenues by approximately $13 million
and $27 million in the three and six months ended June 30, 1998, respectively,
and by approximately $14 million and $29 million in the three and six months
ended June 30, 1997, respectively. The estimated liquidation value of the
Company's hedging position at June 30, 1998 was approximately $56.9 million.
In February 1998, Prime adopted a gold and silver hedging policy which provides
for the use of forward sales contracts for up to 40% of each of the following
five year's expected annual gold and silver production at prices in excess of
certain targeted prices. At June 30, 1998 Prime had forward sales outstanding
for approximately 7.2 million ounces of silver during the period 1999 through
2001 at an average price of $6.28 per ounce.
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, 1998 the Company had a recorded net
unrealized loss of $28.9 million on open contracts under this program.
Other income for the six months ended June 30, 1998 includes foreign currency
exchange losses of $25.4 million and gains on sales of Rabbi Trust investments
of $4.3 million. Other
16
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
income in 1997 includes a $13.5 million gain on sale of the George Lake/Back
River joint venture interests and a net foreign currency exchange losses of $6.9
million.
Depreciation, depletion and amortization expense increased to $37.4 million in
the second quarter of 1998 compared to $34 million during the 1997 second
quarter reflecting the higher gold production, offset by reduced depreciation
charges following the asset write-downs during 1997.
Exploration expense for the three and six months ended June 30, 1998 was $11.5
million and $21.8 million, respectively, compared to $18.1 million and $30.1
million of the respective three and six months periods ended June 30, 1997. The
Company expects to spend approximately $58 million during 1998 on exploration
projects, of which 50% is expected to be spent in Australia and 30% in North
America.
Income and mining tax expense for the six months ended June 30, 1998 was $2.3
million compared to $31 million for the six months ended June 30, 1997. The
decrease in tax expense primarily reflects taxes of $15.7 million provided
during 1997 on the break-up fee received from Santa Fe upon termination of
Homestake's merger agreement with Santa Fe. For the first half of 1998, the
consolidated effective tax rate was a negative 8%, reflecting the geographic mix
of pretax income and losses. The tax benefits related to losses incurred in the
United States and Australia were more than offset by a tax expense recorded with
respect to the Canadian earnings. 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 increased during
the first six months of 1998 to $5.6 million from $4.9 million during the first
six months of 1997. The increase in minority interests primarily is attributable
to higher earnings at the Eskay Creek mine which is owned by Prime Resources
Group Inc., a 50.6%-owned subsidiary of the Company.
The following chart details Homestake's gold production and total cash costs per
ounce by location, and consolidated revenue and production costs per ounce.
17
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
Production
(Ounces in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
Mine (Percentage interest) 1998 1997 1998 1997
- -------------------------- -------------------------------- --------------------------------
Homestake (100) 70.4 97.9 146.4 204.3
Ruby Hill (100) 30.4 - 61.0 -
McLaughlin (100) 34.8 30.9 64.9 62.5
Round Mountain (25) 36.5 32.5 69.5 60.6
Pinson (50) 4.5 6.2 10.9 12.6
Marigold (33) 6.0 7.1 12.2 14.3
-------------- -------------- -------------- --------------
Total United States 182.6 174.6 364.9 354.3
Eskay Creek (100) (1) 130.0 100.9 271.1 195.5
Williams (50) 50.9 42.8 95.6 94.2
David Bell (50) 22.9 20.8 41.1 43.8
Quarter Claim (25) 2.8 2.8 5.6 5.6
Snip (100) (2) 26.8 31.3 50.5 59.5
-------------- -------------- -------------- --------------
Total Canada 233.4 198.6 463.9 398.6
Kalgoorlie (50) 104.8 107.0 198.9 215.3
Plutonic (100) 55.7 73.9 112.0 135.0
Darlot/Centenary (100) 14.7 16.1 30.3 29.5
Lawlers (100) 30.8 18.5 62.4 28.2
Mt Morgans (80) 15.1 16.5 34.6 36.6
Peak Hill (67) 6.8 9.0 12.6 18.4
-------------- -------------- -------------- --------------
Total Australia 227.9 241.0 450.8 463.0
Agua de la Falda, Chile (100) 12.7 8.3 23.7 8.3
-------------- -------------- --------------------------------
Total Production (4) 656.6 626.7 1,303.3 1,237.2
Less Minority Interests (83.7) (69.5) (170.5) (130.1)
-------------- -------------- -------------- --------------
Homestake's Share 572.9 557.2 1,132.8 1,107.1
============== ============== ============== ==============
18
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
Total Cash Costs
(Dollars per ounce)
Three Months Ended Six Months Ended
June 30, June 30,
Mine (Percentage interest) 1998 1997 1998 1997
- -------------------------- -------------------------------- --------------------------------
United States
Homestake (100) $256 $330 $250 $323
Ruby Hill (100) 123 - 126 -
McLaughlin (100) 201 254 216 249
Round Mountain (25) 194 204 200 219
Pinson (50) 447 372 374 342
Marigold (33) 261 257 253 243
Canada
Eskay Creek (100) (3) 134 157 127 161
Williams (50) 209 272 226 251
David Bell (50) 180 213 206 203
Quarter Claim (25) 169 172 170 174
Snip (100) (3) 203 216 213 210
Australia
Kalgoorlie (50) 219 279 239 276
Plutonic (100) 247 218 256 243
Darlot/Centenary (100) 289 271 312 322
Lawlers (100) 203 232 195 238
Mt Morgans (80) 222 411 227 386
Peak Hill (67) 253 251 278 245
Chile
Agua de la Falda (100) 191 203 202 203
Weighted Average $201 $254 $207 $256
19
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
Three Months Ended Six Months Ended
June 30, June 30,
Per Ounce of Gold 1998 1997 1998 1997
-------------------------------- --------------------------------
Revenue $316 $362 $316 $364
================================ ================================
Per Ounce Costs
Cash Operating Costs (5) $197 $250 $204 $252
Other Cash Costs (6) 4 4 3 4
-------------------------------- --------------------------------
Total Cash Costs 201 254 207 256
Noncash Costs (7) 56 58 56 59
-------------------------------- --------------------------------
Total Production Costs $257 $312 $263 $315
================================ ================================
<FN>
(1) Ounces produced are expressed on a gold equivalent basis. Silver is
converted to gold equivalent using the ratio of the silver market price to
the gold market price. Eskay Creek production includes 70,000 (56,500 in
1997) ounces of gold and 3.1 million (3.2 million in 1997) ounces of silver
contained in ore and concentrates sold to smelters in the second quarter,
and 143,400 (110,900 in 1997) ounces of gold and 6.3 million (6 million in
1997) ounces of silver contained in ore and concentrates sold to smelters
in the year-to-date period.
(2) Includes ounces of gold contained in dore and concentrates.
(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 4,200 ounces and 12,500 ounces of gold produced at the Bellevue
project in Western Australia during the 1997 second quarter and
year-to-date periods, respectively, and 500 ounces produced at the El Hueso
mine in Chile during the 1997 year-to-date period.
(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. Noncash costs do not include amortization of additions to
property resulting from SFAS 109 deferred tax purchase accounting
adjustments, as these additions did not involve any economic resources of
the Company.
</FN>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $63.8 million during the first six months of
1998 compared to $109.8 million during the first six months of 1997. Cash
provided by operations during the 1997 six-month period includes the termination
fee received from Santa Fe upon termination of Homestake's merger agreement with
Santa Fe, partially offset by $50 million in payments for income and mining
taxes, primarily payments made in the first quarter of 1997 related to Prime's
1996 taxable income. Payments for income and mining taxes of $11.4 million (net)
were made during the first six months of 1998. Working capital at June 30, 1998
amounted to $308 million, including $284 million in cash and equivalents and
short-term investments.
20
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
Capital additions of $33.9 million for the first half of 1998 compare to
additions of $101.9 million for the first half of 1997. Capital additions during
1998 include $7 million and $6.7 million primarily for underground development
work at the Plutonic and Darlot/Centenary mines, respectively, with the balance
primarily related to productivity improvement projects and sustaining capital at
the Company's other operating mines. Capital additions in 1997 include $30.9
million for construction and development work at the Ruby Hill mine, $22.7
million primarily for underground development and expenditures for a new
gas-fired power station at the Plutonic mine, $8.3 million at the Round Mountain
mine primarily for a new mill to process the higher-grade sulfide ore, $8.1
million for development work at the Darlot/Centenary mine, $7.3 million
primarily for a tailings dam lift and improvements in the underground operations
at the Homestake mine, and $6.3 million at the 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.
In February 1997, Homestake completed the sale of its interests in the George
Lake and Back River joint ventures in Canada to Kit Resources Corporation
("Kit") for $9.3 million in cash and 3.6 million shares of Kit 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.
In June 1998, Plutonic repaid $8 million of its debt outstanding under its
syndicated credit facility. Borrowings outstanding at June 30, 1998 include
borrowings of $95.5 million by Plutonic and $45.6 million by HGAL under the
Company's then-existing credit facilities.
In July 1998, the Company entered into a new United States/Canadian/Australian
cross-border credit facility providing a total availability of $430 million. The
new facility replaces the Company's $275 million cross-border credit facility
and Plutonic's A$400 million syndicated credit facility, both of which were
cancelled. Borrowings by Plutonic and HGAL under the prior credit facilities
were repaid using the new facility. The new facility is available through July
14, 2003 and provides for borrowings in United States, Canadian, or Australian
dollars, or gold, or a combination of these. Under the new facility, the Company
pays a commitment fee ranging from 0.15% to 0.35% per annum, depending upon
rating agencies' ratings for the Company's senior debt, on the unused portion of
this facility. The new credit agreement requires a minimum consolidated net
worth of $500 million. Interest on the HGAL and Plutonic Australian dollar
borrowings under the new facility is payable quarterly and is based on the
Australian Bank Bill Swap Rate plus a margin of up to 1.125%. At July 31, 1998
the interest rate was 6.22%.
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 May 1998, the Company paid a semi-annual
dividend of 5 cents per share.
In April 1997, the Company filed with the Securities and Exchange Commission a
shelf registration statement for the potential sale of up to 20 million shares
of 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.
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 132 ("SFAS 132"), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS 132 revises
employers' disclosures about pension and
21
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
other postretirement benefit plans. It does not change the measurement or
recognition of those plans. SFAS 132 standardizes the disclosure requirements
for pensions and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and eliminates
certain disclosures. SFAS 132 will be effective for the Company's financial
statements for the year ended December 31, 1998.
In June 1998, FASB issued Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 requires that all derivatives be recognized as assets or liabilities
and be measured at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivatives and whether they qualify for hedge accounting as either a fair value
hedge or a cash flow hedge. The key criterion for hedge accounting is that the
hedging relationship must be highly effective in achieving offsetting changes in
fair value or cash flows of the hedging instruments and the hedged items. SFAS
133 is effective for fiscal years beginning after June 15, 1999 but earlier
adoption is permitted. The Company currently is evaluating the impact that this
requirement will have on reported operating results and financial position and
has not yet determined when SFAS 133 will be adopted.
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.
Prime Resources Group Inc.
On May 25, 1998 Homestake announced that it had proposed to the Board of
Directors of Prime, the acquisition by Homestake of the 49.4% of Prime held by
the public and not already owned by Homestake. Under the terms of the offer,
Prime shareholders would receive 0.675 Homestake common shares or 0.675
Homestake Canada Inc. ("HCI") exchangeable shares for each Prime share held by
them. Each HCI exchangeable share would be exchangeable for one Homestake common
share at any time at the option of the holder.
The arrangement, which is subject to the approval of the shareholders of both
Homestake and Prime, would result in the issuance of a total of 25.4 million
Homestake common and HCI exchangeable shares in exchange for the 37.6 million
Prime shares held by the minority shareholders of Prime.
22
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
Part II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
1) As previously reported on the Registrant's Form 8-K filed on May 12, 1998,
on April 30, 1998 Registrant consummated the acquisition of Plutonic
Resources Limited ("Plutonic"), a publicly-traded Australian gold producer,
by an exchange of common stock for common stock.
Shareholders of Registrant voted on and approved the acquisition of
Plutonic at a Special Meeting of Shareholders held on April 29, 1998.
Shareholder votes were as follows:
Votes For Votes Against Abstentions
--------- ------------- -----------
79,505,401 1,040,836 603,751
2) At the Annual Meeting of Shareholders held on July 24, 1998, shareholders
voted on and approved (i) the election of four Class II directors to serve
until the 2001 Annual Meeting, and (ii) the appointment of
PricewaterhouseCoopers L.L.P. as independent auditors for 1998. Shareholder
votes were as follows:
(i) Election of four Class II Directors: Votes For Votes Withheld
---------------------------------------- --------- --------------
Paul McClintock 127,697,608 1,127,052
John Neerhout, Jr. 127,584,370 1,240,290
Stuart Peeler 127,631,766 1,192,894
Jack Thompson 127,667,534 1,157,126
In addition to the aforementioned directors, the following directors
continued in office: M. Norman Anderson, Robert H. Clark, Jr., Douglas
W. Fuerstenau, Jeffrey L. Zelms, Richard R. Burt, G. Robert Durham,
Peter J. Neff and Carol A. Rae.
On July 24, 1998 Harry M. Conger and Henry G. Grundstedt retired as
directors. The Board of Directors has elected Jack E. Thompson to
replace Mr. Conger as Chairman of the Board. Mr. Thompson will retain
his responsibilities as President and Chief Executive Officer of the
Company.
(ii) Approval of PricewaterhouseCoopers L.L.P. as independent auditors:
Votes For Votes Against Abstain
--------- ------------- --------
127,844,464 538,992 441,204
Item 5. - Other Information
(a) Amendment to Bylaws
On July 24, 1998 the Bylaws were amended to reduce the number of
directors from 13 to 12. A copy of the Bylaws, as amended is attached
as Exhibit 3.4.
23
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
(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 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 total capital costs and reserve
estimates, change 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,
1997, Part IV, "RISK FACTORS" and "CAUTIONARY STATEMENTS," for a more
detailed discussion of factors that may impact on expected future
results.
24
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
Item 6.
(a) Exhibits Method of Filing
-------- ----------------
3.4 Bylaws, as amended through July 24, 1998 Filed herewith
electronically
10.1 Amended and Restated Credit Agreement, dated as of Filed herewith
July 14, 1998 electronically
11 Computation of Earnings Per Share Filed herewith
electronically
27.1 Financial Data Schedule - June 30, 1998 Filed herewith
electronically
27.2 Financial Data Schedule - March 31, 1998 Filed herewith
(restated for pooling of interests) electronically
27.3 Financial Data Schedule - periods ended March 31, June 30 Filed herewith
and September 30, 1997 (restated for pooling of interests) electronically
(b) Reports on Form 8-K
Three reports on Form 8-K were filed during the quarter ended June 30,
1998.
The report on Form 8-K dated May 11, 1998 was submitted in order to
file a press release announcing that the Registrant had completed the
acquisition of Plutonic Resources Limited.
The report on Form 8-K dated June 5, 1998 was submitted in order to
file the following: (a) a press release announcing the Registrant's
offer to acquire the Prime Resources Group Inc. minority interests and
(b) the results of the special meeting regarding the acquisition of
Plutonic.
The report on Form 8-K dated June 22, 1998 was submitted in order to
file the following: (a) a press release reporting the interim results
following the acquisition of Plutonic and (b) the consolidated
financial statements and supplementary data (restated to include
Plutonic) for the years ended December 31, 1997, 1996 and 1995.
25
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HOMESTAKE MINING COMPANY
Date: August 13, 1998 By: /s/ Gene G. Elam
--------------- ----------------
Gene G. Elam
Vice President, Finance and
Chief Financial Officer
26