EXHIBIT 13
Index to Exhibit 13:
Selected information from the 1998 Annual Report to Shareholders is incorporated
by reference in the Form 10-K and such information is herewith filed
electronically as Exhibit 13. Such selected information is listed below. Noted
page references correspond to pagination in the 1998 Annual Report to
Shareholders.
Annual Report Page
Management's Discussion and Analysis 28-35
Consolidated Financial Statements 36-40
Notes to Consolidated Financial Statements 41-56
Report of Independent Auditors 57
Management's Responsibility for Financial Reporting 57
Quarterly Selected Data 58
Five-Year Selected Data 59
Common Stock Price Range 59
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Unless specifically stated otherwise, the following information relates to
amounts included in the consolidated financial statements, without reduction for
minority interests. Homestake reports per ounce production costs in accordance
with the "Gold Institute Production Cost Standard.")
On April 30, 1998 Homestake Mining Company ("Homestake" or the "Company")
acquired 100% of Plutonic Resources Limited ("Plutonic"), a publicly-traded
Australian gold producer, by issuing 64.4 million Homestake common shares. This
business combination was accounted for as a pooling of interests, and
accordingly, the Company's consolidated financial statements include Plutonic
for all periods.
On December 3, 1998 Homestake acquired the 49.4% of Prime Resources
Group Inc. ("Prime") it did not already own by issuing 16.7 million Homestake
common shares and 11.1 million Homestake Canada Inc. ("HCI") exchangeable
shares. Each HCI exchangeable share is exchangeable for one Homestake common
share at any time at the option of the holder and has essentially the same
voting, dividend (payable in Canadian dollars), and other rights as one
Homestake common share. As a result of this transaction, which was accounted for
as a purchase, Homestake owns 100% of Prime.
RESULTS OF OPERATIONS
Homestake recorded a net loss of $218.3 million or $1.02 per share during 1998
compared to a net loss of $230.6 million or $1.10 per share during 1997 and net
income of $45.8 million or $0.22 per share during 1996. The 1998 loss includes
write-downs and unusual items amounting to $195 million or $0.91 per share
compared to write-downs and unusual items amounting to $159.2 million or $0.76
per share in 1997 and net nonrecurring income of $18.3 million or $0.08 per
share in 1996.
Excluding the effect of the write-downs and unusual items, Homestake
incurred a net loss of $23.3 million or $0.11 per share in 1998 compared to a
net loss of $71.4 million or $0.34 per share in 1997 and net earnings of $27.5
million or $0.14 per share in 1996. The reduced 1998 loss compared to 1997 was
due to significantly lower per ounce cash costs, lower depreciation and
exploration expenses and lower income taxes, partially offset by lower gold
prices. The 1997 loss compared to net income in 1996 primarily was due to
significantly lower gold prices, partially offset by higher gold production and
lower per ounce cash costs.
A summary of significant write-downs and unusual items in 1998, 1997 and
1996 follows:
Significant Write-downs and Unusual Items
(after tax in millions of dollars) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Resource asset write-downs $(120.6) $(60.1)
Increase in the estimated accrual for remediation
and reclamation expenditures (36.0) (21.5)
Plutonic business combination and
integration costs (16.7)
Homestake mine restructuring charges (5.9)
Write-down of Homestake's investment
in the Main Pass 299 sulfur mine (84.9)
Gain on termination of Santa Fe merger 47.2
Reduction in accrual of prior year income taxes $24.0
Write-downs of noncurrent investments (7.6) (45.7) (8.3)
Other (8.2) 5.8 2.6
- -----------------------------------------------------------------------------------------------------------
$(195.0) $(159.2) $18.3
===========================================================================================================
Gold Operations: The results of the Company's operations are affected
significantly by the market price of gold. Gold prices are influenced by
numerous factors over which the Company has no control. Homestake's current
hedging policy provides for the use of forward sales contracts to hedge up to
30% of each of the following ten year's expected annual gold production, and up
to 30% of each of the following five year's expected annual silver production,
at prices in excess of certain targeted prices. The policy also provides for the
use of combinations of put and call option contracts to establish minimum floor
prices.
During 1998, 1997 and 1996 the Company delivered or financially settled
358,000, 656,000 and 508,400 ounces of gold at average prices of $359, $421 and
$474 per ounce, respectively, under forward sales contracts and delivered in
1998 an additional 900,000 ounces of gold at a price of $325 per ounce under
option contracts. During 1998, the Company also closed out and financially
settled one million ounces of its Australian dollar-denominated forward gold
contracts. The $5 million gain realized on this transaction has been deferred
and will be recorded in income as the originally designated production is sold.
The Company's hedging activities increased revenues by approximately
28
$47 million, $25 million and $43 million in 1998, 1997 and 1996, respectively.
The estimated fair value of the Company's gold and silver hedging position at
December 31, 1998 was approximately $81 million.
A significant portion of the Company's operations are located in
Australia and Canada. The Company's profitability is impacted by fluctuations in
these countries' currency 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. The average Canadian/U.S. dollar exchange rate decreased from
$0.7331 in 1996 to $0.7224 in 1997 and to $0.6748 in 1998, and the average
Australian/U.S. dollar exchange rate decreased from $0.7834 in 1996 to $0.7442
in 1997 and to $0.6297 in 1998. As a result, the Company recorded foreign
currency losses of $34.3 million and $28.5 million during 1998 and 1997,
respectively, under this program compared to a foreign currency gain of $1.6
million during 1996. At December 31, 1998 the Company had net unrealized losses
of $24 million on open contracts under this program.
See notes 2 and 20 to the consolidated financial statements for
additional information regarding the Company's hedging programs and the future
adoption of Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities".
Revenues from gold, ore and concentrate sales totaled $782.2 million
during 1998 compared to revenues of $863.6 million in 1997 and $921.7 million in
1996. The decrease in revenues in 1998 from 1997 primarily is due to lower gold
prices. The decrease in revenues in 1997 from 1996 is due to lower gold prices,
partially offset by higher production. During 1998, the Company realized an
average price of $312 per gold equivalent ounce compared to $353 per gold
equivalent ounce in 1997 and $406 per gold equivalent ounce in 1996. Gold
equivalent production totaled 2,531,700 ounces during 1998 compared to 2,528,900
ounces during 1997 and 2,417,900 ounces during 1996.
Consolidated Production Costs per Ounce
(per ounce of gold) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Direct mining costs $185 $222 $244
Deferred stripping adjustments 1 5 1
Costs of third-party smelters 12 14 14
Other 1 (4)
- ------------------------------------------------------------------------------------------------------------
Cash Operating Costs 198 242 255
Royalties 3 3 4
Production taxes 1 1 2
- ------------------------------------------------------------------------------------------------------------
Total Cash Costs 202 246 261
Depreciation and amortizaton 50 54 57
Reclamation 6 3 5
- ------------------------------------------------------------------------------------------------------------
Total Production Costs $258 $303 $323
============================================================================================================
Homestake's reported consolidated cash cost per gold equivalent
ounce was $202 during 1998 compared to $246 and $261 during 1997 and 1996,
respectively. The lower cash cost per ounce in 1998 reflects the effect of the
Company's cost containment efforts, weaker Australian and Canadian currencies,
the impact of initial production at the low-cost Ruby Hill mine, higher
production at the low-cost Eskay Creek mine and a decrease in production at the
high-cost Homestake mine. Cash costs per ounce decreased during 1997 compared to
1996 primarily due to a weaker Australian dollar, higher production at the
Kalgoorlie, Plutonic and Lawlers operations, higher shipments and higher grades
at the Eskay Creek mine and higher production at the Round Mountain mine,
partially offset by lower grades at the Williams and David Bell mines.
Homestake's total noncash cost per equivalent ounce was $56 during 1998
compared to $57 and $62 per ounce during 1997 and 1996, respectively. The
decrease in noncash costs in 1997 from 1996 primarily was due to reserve
expansions at the Eskay Creek and Snip mines. In 1999, noncash costs per ounce
are expected to remain at current levels as the additional depreciation charges
resulting from the acquisition of the Prime minority interests will be offset by
reduced depreciation charges following the resource asset write-downs recorded
at September 30, 1998.
Reconciliation of Total Cash Costs per Ounce to Financial Statements
(millions of dollars, except per ounce amounts) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Production Costs per Financial Statements $537.3 $627.6 $615.5
Costs not included in Homestake's
production costs:
Costs of third-party smelters (a) 32.4 34.5 33.1
Production costs of consolidated joint ventures (4.6) (3.3)
Production costs of equity-accounted investments 1.9 1.9 12.9
Sulfur and oil production costs (24.2) (25.4) (23.2)
Reclamation accruals (13.4) (9.0) (11.3)
By-product silver revenues (3.1) (2.6) (3.1)
Inventory movements and other (13.8) (6.4) 6.8
- -------------------------------------------------------------------------------------------------------------
Production Costs for Per Ounce Calculation $ 512.5 $ 617.3 $630.7
- -------------------------------------------------------------------------------------------------------------
Ounces Produced during the Year (in thousands) 2,532 2,529 (b) 2,418
- -------------------------------------------------------------------------------------------------------------
Total Cash Costs Per Ounce $ 202 $ 246 $ 261
=============================================================================================================
<FN>
a. Eskay Creek sells ore and concentrates containing gold and silver directly
to third-party smelters. For comparison purposes, cash operating costs per
ounce include estimated third-party costs incurred by smelters and others
to produce marketable gold and silver.
b. Includes 16,600 ounces produced at the Ruby Hill mine during 1997, prior to
commercial production, which are excluded from the cost per ounce
calculation.
</FN>
29
United States
United States gold production of 691,500 ounces at a cash cost of $221 per ounce
during 1998 compares to production of 702,800 ounces at a cash cost of $286 per
ounce during 1997 and 732,100 ounces at a cash cost of $283 per ounce during
1996. The slight decrease in production and significant decrease in costs during
1998 primarily reflects lower production at the Homestake mine in South Dakota
and initial production from the new Ruby Hill mine in Nevada.
In January 1998, the Company began a major restructuring of underground
operations at the Homestake mine to reduce operating costs. The new mine plan,
which involved a workforce reduction of 450 employees, is designed to improve
the grade of ore recovered through the increased use of mechanized cut-and-fill
mining methods. Following an additional capital investment of approximately $30
million, the new plan contemplates annual gold production from the underground
operations of 150,000 to 180,000 ounces of gold at a cash cost of $280 per
ounce. The decision to proceed with the capital expenditure program will be made
during the first half of 1999. Homestake mine production decreased to 277,400
ounces at a cash cost of $249 per ounce in 1998 from 397,300 ounces at a cash
cost of $310 per ounce during 1997 and 407,300 ounces at a cash cost of $304
during 1996. The lower production and decrease in cash costs during 1998
reflects a decrease in the production levels in the higher-cost, higher-grade
underground operations and an increase in the rate of processing the lower-cost,
lower-grade Open Cut ore. Mining at the Open Cut was completed in September 1998
and the processing of remaining stockpiled ore will be completed during the
second quarter of 1999.
The Ruby Hill mine, which commenced commercial production effective
January 1, 1998, produced 116,500 ounces of gold in 1998 at a cash cost of $122
per ounce. Production from the mine exceeded expectations in 1998 due to higher
ore grades.
Production at the McLaughlin mine in northern California totaled
128,700 ounces in 1998 compared to 118,500 ounces during 1997 and 185,500 ounces
during 1996. In June 1996, mining operations were completed and the autoclaves
were shut down as the orebody was depleted. Through 2002, lower-grade stockpiled
ore will be processed through a conventional carbon-in-pulp circuit. Cash costs
during 1998 were $219 per ounce compared to $254 per ounce during 1997 and $250
per ounce in 1996. The decrease in cash costs per ounce during 1998 is due to
higher grades and cost containment measures. Production is expected to decrease
and cash costs per ounce are expected to increase during 1999, as the
higher-grade portion of the remaining stockpiles will be consumed by mid-1999.
Canada
Canadian gold production of 890,400 equivalent ounces at a cash cost of $166 per
ounce during 1998 compares to production of 835,400 equivalent ounces at a cash
cost of $186 per ounce during 1997 and 858,900 equivalent ounces at a cash cost
of $200 per ounce during 1996. The increase in production and decrease in costs
during 1998 primarily reflects higher production at the Eskay Creek mine in
British Columbia and a weaker Canadian dollar, partially offset by lower
production at the Hemlo mining camp in Ontario and at the Snip mine in British
Columbia.
Production at the Eskay Creek mine, consisting of payable gold and
silver in ore and concentrates sold, increased to 504,800 equivalent ounces of
gold during 1998 from 417,300 and 372,300 equivalent ounces in 1997 and 1996,
respectively. Cash costs per equivalent ounce, including third-party smelter
costs, decreased to $133 during 1998 from $157 per equivalent ounce during 1997
and $170 per equivalent ounce during 1996. The increase in 1998 production
primarily is due to the new gravity/flotation mill commissioned in December
1997, which produced concentrates containing 107,300 equivalent ounces of gold,
and the effect of a lower gold/silver equivalency. Eskay Creek silver production
is converted to gold equivalent production using the ratio of the gold market
price to the silver market price. During 1998, the Company converted silver to
gold using an equivalency factor of 52.6 ounces of silver equals one ounce of
gold production compared to equivalency factors of 68.2 ounces and 74.9 ounces
of silver equals one ounce of gold production in 1997 and 1996, respectively.
Cash costs per equivalent ounce declined in 1998 due to the lower-cost
production from the mill and the weaker Canadian dollar. The lower 1997 costs
per ounce compared to 1996 primarily were a result of increased ore sales,
higher gold grades, productivity improvements, and a decrease in the gold/silver
equivalency ratio, partially offset by lower silver grades.
The Company's share of gold production from the Williams mine in the
Hemlo mining camp amounted to 195,200 ounces at a cash cost of $217 per ounce
during 1998 compared to 201,100 ounces at a cash cost of $229 per ounce during
1997 and 205,500 ounces at a cash cost of $222 per ounce during 1996. The
production decreases in 1998 and 1997 were due to declines in ore grades,
partially offset by increased throughput. The Company's share of production at
the David Bell mine, also in the Hemlo mining camp, amounted to 79,800 ounces at
a cash cost of $200 per ounce during 1998 compared to production of 90,000
ounces at a cash cost of $194 per ounce during 1997 and 97,700 ounces at a cash
cost of $172 per ounce during 1996. The decline in production in 1998 is due to
lower ore grades as the grade of ore mined more closely approximates the
remaining average reserve grade. The decrease in production during 1997 from
1996 was due to lower ore grades, partially offset by higher throughput.
Operation of the David Bell mill is expected to be discontinued
30
in the third quarter of 1999 and ore from both the Williams and David Bell mines
will be processed at the lower-cost Williams mill.
Production from the Snip mine decreased to 99,300 ounces at a cash cost
of $205 per ounce during 1998 from 115,600 ounces at a cash cost of $213 per
ounce during 1997 and 101,800 ounces at a cash cost of $190 per ounce during
1996. Production in 1998 decreased primarily due to lower grade. Production
increased in 1997 compared to 1996 due to Homestake's April 1996 purchase of an
additional 60% interest in the mine, partially offset by a decrease in total
tonnage milled. This operation is expected to complete mining of the existing
ore reserves and commence decommissioning and final reclamation in the second
quarter of 1999.
Australia
Western Australian gold production of 925,700 ounces at a cash cost of $224 per
ounce during 1998 compares to production of 974,300 ounces at a cash cost of
$269 per ounce during 1997 and 818,600 ounces at a cash cost of $305 per ounce
during 1996. The decrease in production during 1998 primarily reflects lower
production at the Kalgoorlie and Plutonic operations, partially offset by higher
production at the Lawlers and Darlot mines. The increase in production during
1997 from 1996 primarily reflects higher production at the Kalgoorlie, Plutonic
and Lawlers operations. The decreases in cash costs per ounce during 1998 and
1997 primarily are due to the weaker Australian dollar and productivity
improvements.
Homestake's share of production from the Kalgoorlie operations totaled
390,200 ounces at a cash cost of $229 per ounce during 1998 compared to 425,900
ounces at a cash cost of $259 per ounce during 1997 and 368,800 ounces at a cash
cost of $291 per ounce during 1996. The decrease in production in 1998 primarily
is due to lower Fimiston mill throughput and a decrease in production at the Mt
Charlotte mine. The increase in production during 1997 from 1996 reflects higher
mill throughput, ore grades and recoveries. The decrease in cash costs in 1998
primarily reflects the weaker Australian dollar. The decrease in cash costs in
1997 from 1996 reflects higher production, the installation of a recycle crusher
at the Fimiston mill, and a weakening of the Australian dollar.
In June 1998, structural cracks were detected in the SAG mill ring gear
of the Fimiston mill. Temporary repairs were made and operation of the SAG mill
currently is being limited to 90% of rated power in order to minimize stress on
the gear. A temporary replacement gear was fabricated and will be available for
use as an emergency spare. A permanent replacement is expected to be available
in May 1999. The underwriters of Homestake's property and business interruption
insurance policies have acknowledged liability and the extent of the ultimate
recovery is now being determined. Homestake recorded a reduction of $0.6 million
in 1998 operating costs for its share of insurance proceeds pertaining to
business interruption coverage related to 1998 operations. Further business
interruption insurance proceeds related to 1999 operations are expected and will
be offset against 1999 operating costs. In January 1999, Homestake and its 50%
joint venture partner Normandy Mining Ltd. ("Normandy") announced that they had
reached agreement with the current open-pit mining contractor to progressively
transfer mining operations to Kalgoorlie Consolidated Gold Mines Pty Ltd over
the next 12 months. Homestake's share of the total cost of the conversion
project including the mining fleet acquisition is estimated to be $33.6 million.
Once full conversion to owner mining is completed, Homestake expects Super Pit
cash costs to be reduced by approximately $26 per ounce.
During 1998, Homestake and Normandy announced a revised operating plan
at the Mt Charlotte mine. The mine has experienced a downturn in economic
performance and an increased level of ground movement. The new plan provides for
a restricted level of mining activity in low-risk areas of the mine until
approximately the fourth quarter of 1999. Performance of the mine will be
monitored to determine whether the operation will continue beyond that period.
Production at the Plutonic mine totaled 255,500 ounces in 1998 compared
to 274,600 ounces in 1997 and 183,700 ounces in 1996. The decrease in production
in 1998 from 1997 primarily is due to lower ore grades and lower mill throughput
as the mine changes from an open pit to an underground mining operation. The
increase in 1997 production primarily is due to an increase in throughput
following an expansion of the mill in late 1996. During 1998, ore sourced from
the underground operations provided 41% of total production compared to 26% in
1997 and 22% in 1996. Cash costs of $226 per ounce in 1998 compare to $234 per
ounce in 1997 and $276 per ounce during 1996. Cash costs in 1998 decreased due
to the weakening of the Australian dollar. In Australian dollars, cash costs per
ounce increased by 5% in 1998 due to the lower production.
Production at the Darlot mine increased to 77,500 ounces in 1998
compared to 65,200 ounces in 1997 and 62,800 ounces in 1996. The increase in
production in 1998 was due to higher throughput and initial mining in the new
higher-grade Centenary underground orebody. Cash costs of $250 per ounce in 1998
compare to $320 per ounce in 1997 and $345 per ounce during 1996. The lower cash
costs per ounce primarily are due to the higher production and the weakening of
the Australian dollar. Production from the higher-grade Centenary orebody is
expected to increase through 1999 while in-fill drilling and ore block
development continues.
Production at the Lawlers mine increased to 126,400 ounces in 1998 from
87,500 and 50,600 ounces during 1997 and 1996, respectively. The increase in
production in 1998 was due to higher grades and increased throughput, primarily
from the New Holland and Fairyland deposits. Production increased in 1997 from
1996 primarily due to
31
higher-grade ore sourced from the New Holland pit. The weaker Australian dollar
and higher production in conjunction with successful cost reduction efforts
reduced cash costs to $181 per ounce in 1998 from $260 per ounce in 1997 and
$417 per ounce in 1996. Open-pit mining was completed in October 1998. All
production in 1999 is expected to be from the underground operations.
During 1998, mining operations were completed at the 80%-owned Mt
Morgans mine and at the 66.7%-owned Peak Hill mine. Processing of lower-grade
stockpiles continued at the Mt Morgans mine until November 1998 and is expected
to continue at the Peak Hill mine until October 1999. During 1998, the Company's
share of production at the Mt Morgans mine decreased to 52,400 ounces at a cash
cost of $213 per ounce, and the Company's share of production at the Peak Hill
mine decreased to 23,800 ounces at a cash cost of $280 per ounce. Homestake is
continuing active exploration in the vicinity of these properties.
Main Pass 299: The Company has a 16.7% undivided interest in the Main Pass 299
sulfur mine and oil recovery operations in the Gulf of Mexico. During 1998,
lower sales prices, reduced sales volumes and higher operating costs for both
sulfur and oil operations resulted in Homestake recording a Main Pass 299
operating loss of $5.3 million compared to an operating loss of $3.6 million
during 1997 and an operating profit of $1.3 million in 1996. In late September
1998, all Main Pass 299 drilling and production operations were shut down for
three days in response to adverse weather conditions caused by a hurricane. The
shutdown caused nine previously producing sulfur wells to require redrilling. As
a result, production levels were lower and unit production costs increased
during the fourth quarter of 1998 and are expected to continue to be higher in
the first half of 1999.
During 1997, due to a prolonged period of low sulfur prices and
Homestake's assessment of estimated future cash flows from sulfur operations,
the Company recorded a write-down of $107.8 million in its investment in Main
Pass 299. As a result of this write-down, the Company's carrying value of the
Main Pass 299 sulfur property, plant and equipment was reduced to zero at
September 30, 1997.
Other income (loss) of $(24.7) million in 1998 compares to $63.6 million in 1997
and $25.6 million in 1996. Other income in 1998 and 1997 includes foreign
currency exchange losses of $40 million and $34.1 million, respectively,
reflecting significant weakening of both the Canadian and Australian currencies
in relation to the United States dollar. Other income in 1998 also includes
gains on sales of investments of $5.3 million. Other income in 1997 also
includes a gain of $62.9 million related to the fee received on termination of
the merger with Santa Fe Pacific Gold Corporation ("Santa Fe"), income of $10.4
million related to an agreement to sell a right to cancel the Company's option
to acquire shares of Great Central Mines Limited ("Great Central"), and a gain
of $13.5 million from the sale of the George Lake and Back River joint venture
interests. Other income in 1996 includes a gain of $7.9 million on the sale of
an investment in Eagle Mining Corporation NL ("Eagle Mining"), income of $4.7
million on the execution of the agreement to cancel the Company's option to
acquire shares of Great Central, and $8.9 million of foreign exchange losses,
primarily on Canadian dollar denominated advances to HCI.
Depreciation, depletion and amortization of $139.4 million during 1998 compares
to $162.8 million during 1997 and $151.9 million during 1996. Depreciation
expense decreased in 1998 from 1997 following the asset write-downs recorded in
1997 and 1998. The increase in depreciation in 1997 from 1996 reflects higher
production, partially offset by reserve expansions at the Eskay Creek and Snip
mines.
Exploration expense of $55.3 million in 1998 compares to $65.2 million in 1997
and $67.4 million in 1996. During 1998, the Company continued to concentrate its
exploration efforts in and around its existing operations. Significant
expenditures were made in Western Australia around the operations acquired as
part of the Plutonic acquisition and resulted in the discovery of additional
reserves and mineralized zones at the Lawlers mine. In addition, mineralized
zones have been identified at the Just-In-Case prospect near the Mt Morgans mine
and at the Mt Goode nickel prospect owned by Lachlan Resources NL ("Lachlan"),
an 81%-owned subsidiary of the Company acquired as part of the Plutonic
acquisition. Significant expenditures also were made at the Eskay Creek and Ruby
Hill mines, the Pinson mine in Nevada and at the Jeronimo project in Chile. The
Company currently plans to spend approximately $45 million on exploration
activities during 1999.
Resource asset write-downs: During 1998, due to the continuing low-gold price
environment, the Company reviewed the carrying values of its gold mining
operations using a $325 per ounce gold price. As a result of this review, the
Company determined that impairment existed and that write-downs were required to
reduce the carrying values of several of its assets or operations. Based on
estimated future cash flows, the Company did not expect to recover its remaining
investments in property, plant and equipment at the Homestake and Mt Charlotte
mines. Accordingly, the Company recorded write-downs of $76.1 million and $38.4
million reducing the remaining carrying values of property, plant and equipment
at the Homestake and Mt Charlotte mines, respectively, to zero. The Company also
recorded write-downs of $26.9 million related to other mineral properties,
including $19.4 million related to mineral properties owned by Lachlan.
In 1997, the Company reviewed the carrying values of its gold mining
operations using a $350 per ounce gold price at its long-lived operations and
$325 per ounce gold
32
price at its short-lived operations. As a result of that review, the Company
determined that impairment existed and that write-downs were required to reduce
the carrying values of several of its assets or operations with short remaining
lives, including the Mt Morgans and Peak Hill mines, the Pinson mine, the
Homestake mine's Open Cut, low-grade stockpiled ore and exploration properties
at certain locations in Western Australia and redundant mining equipment at the
Kalgoorlie operations.
Environmental: During 1998, the Company recorded a provision for estimated
additional remediation and related reclamation costs at the Homestake mine of
$35 million. The recognition of this liability was caused by the findings of an
environmental audit and changes in the operation's mining plans.
The Company's estimates of its remediation and reclamation obligations
are based on currently available facts, existing technology and presently
enacted laws and regulations. The Company regularly reviews these obligations.
However, it is reasonably possible that as reclamation plans and associated cost
estimates change, the Company's remediation and reclamation liability could
change significantly.
Income and mining taxes: Homestake's income and mining tax rate was 5.7% during
1998 compared to 7.9% and 27.4% during 1997 and 1996, respectively. The
geographic mix of pretax income and losses dramatically impacts the overall
effective tax rate. During 1998, the Company had pretax income of $38.1 million
in Canada, and pretax losses of $163.4 million and $94.9 million in the United
States and Australia, respectively. In addition, the Company had pretax losses
of $8 million in foreign jurisdictions other than Canada and Australia ("Other
Foreign"). Homestake incurred a tax expense of $15.8 million on Canadian income,
and a tax benefit of $28.9 million on Australian losses resulting in a net
consolidated tax benefit of $13.1 million. In 1998, no tax benefit was
recognized on losses incurred in the United States and Other Foreign
jurisdictions due to the uncertainty of their realization.
The Canadian statutory tax rate, including federal and provincial
income tax and mining tax is approximately 49.2%. The Company's effective
Canadian tax rate in 1998 was 41.7%, primarily reflecting the realization of a
reduction in prior years' income tax accruals for certain contingencies that
were favorably resolved. The Company's effective Australian tax rate was 30.5%
in 1998 versus the statutory rate of 36% due to nondeductible expenses, which
reduced the loss for tax purposes. The statutory tax rate in the United States
is 35%. However, when the Company does pay tax, it is generally subject to the
20% Alternative Minimum Tax. The effective U.S. tax rate was zero in 1998
reflecting the increase in valuation allowances discussed below. In addition, no
tax benefit was recorded for Other Foreign losses, due to the uncertainty of
their realization.
At December 31, 1998 and 1997 the Company had valuation allowances
related to its deferred tax assets of $207.2 million and $107.9 million,
respectively. Based on current projections of taxable income in United States
and Other Foreign jurisdictions, Homestake does not expect to realize a benefit
from these tax assets. In addition, there currently is not a strategy that would
result in the realization of the Australian deferred tax assets. While
circumstances could occur which would permit the Company to realize these
benefits in the future, the Company's current projections indicate that it is
more likely than not that these deferred tax assets will not be realized.
Minority interests: Income allocable to minority interests in consolidated
subsidiaries amounted to $3.2 million in 1998 compared to $4 million in 1997 and
$13.3 million in 1996. The decrease in income allocable to minority interests in
1998 from 1997 primarily is attributable to the minority interests' share of the
Lachlan mineral property write-downs. The decrease in income allocable to
minority interests in 1997 from 1996 is due to reduced earnings from the Eskay
Creek and Snip mines, and increases in exploration expenditures incurred by
Lachlan and the Company's 51%-owned subsidiary, Agua de la Falda S.A.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, Homestake's cash and equivalents and short-term investment balances
increased by $34.1 million to $299.4 million. Net cash provided by operations in
1998 amounted to $119.9 million compared to $160 million and $182.2 million in
1997 and 1996, respectively. The decrease in cash provided by operations during
1998 primarily is due to lower gold prices and the inclusion in 1997 of the $65
million fee received on termination of the merger with Santa Fe.
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 replaced the Company's $275
million cross-border credit facility and Plutonic's A$400 million syndicated
credit 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. At December 31, 1998 Australian
dollar-denominated borrowings of $142.4 million (A$233 million) were
outstanding. Under the new facility, the Company pays a commitment fee on the
unused portion of this facility ranging from 0.15% to 0.35% per annum, depending
upon rating agencies' ratings for the Company's senior debt. The new credit
agreement requires, amongst other provisions, a minimum consolidated net worth,
as defined in the agreement
33
(primarily shareholders' equity plus the amount of all noncash write-downs made
after December 31, 1997), of $500 million. Interest on the Australian dollar
borrowings under the new facility is payable quarterly based on the Australian
Bank Bill Swap Rate plus a margin of up to 1.125%. At December 31, 1998 this
interest rate was 5.95%.
The Company has $150 million of 5.5% convertible subordinated notes
outstanding which mature on June 23, 2000. Interest on the notes is payable
semiannually in June and December. The notes are convertible into the Company's
common shares at a rate of $23.06 per common share and are redeemable by the
Company in whole at any time. The Company expects to refinance these notes prior
to their maturity.
In July 1997, Lawrence County, South Dakota issued $30 million of South
Dakota Solid Waste Disposal Revenue Bonds ("Waste Disposal Bonds") and $18
million of South Dakota Pollution Control Refunding Revenue Bonds, both of which
are due in 2032. The Company is responsible for funding principal and interest
payments on these bonds. Due to a reduction in the size of the Homestake mine
tailings project, the Company has notified the trustee that it will redeem $10
million of the Waste Disposal Bonds in March 1999 out of the funds held in
trust. See note 13 to the Consolidated Financial Statements for further
information on the Company's long-term debt.
The acquisition of the Prime minority interests was accounted for as a
purchase. Based upon the total purchase price of $321.8 million (including $4
million of capitalized direct acquisition costs), the excess of the purchase
price paid over the net book value of the minority interests acquired was $224
million of which $174 million ($259.6 million including an increase related to
deferred taxes) was allocated to the Eskay Creek mine's ore reserves and $50
million ($74.6 million including an increase related to deferred taxes) was
allocated to the Eskay Creek exploration properties.
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.
In November 1997, Homestake purchased a 20% interest in Navan Bulgarian
Mining BV ("Navan BV"), a wholly-owned subsidiary of Navan Resources plc, for
$12 million. In September 1998, Homestake completed its evaluation of Navan BV's
Chelopech project and concluded that the project did not warrant Homestake's
participation and therefore terminated its participation in Navan BV. Navan BV
returned approximately $11 million of Homestake's investment.
In 1996, the Company paid $51.4 million to purchase the
disproportionate sharing arrangement covering gold production from a portion of
the Super Pit and now shares equally with Normandy in all gold produced at the
Kalgoorlie operations.
In 1996, Lachlan acquired 90.7% of Archaean Gold NL ("Archaean") for
$36.8 million. In 1997, Lachlan acquired the remaining interest in Archaean.
This acquisition, which was accounted for as a purchase, was funded by a $33.2
million (A$50.9 million) loan from the Company to Lachlan. In May 1998, Lachlan
repaid this loan by issuing additional shares to the Company, which increased
the Company's interest in Lachlan from 62.1% to 81.2%.
In 1995, the Company provided Edensor Nominees Pty, Ltd. ("Edensor")
with a loan facility for up to $37 million (A$50 million) and was granted an
option to acquire 19.9% of the issued capital of Great Central in consideration
for this loan. In 1996, the Company sold a right to cancel this option. The
Company received $4.7 million in 1996 and $10.4 million in 1997 in respect to
the cancellation of the Company's option. Borrowings by Edensor under the loan
facility were repaid to the Company in 1997 and the loan facility was cancelled.
During the fourth quarter of 1995 and the first quarter of 1996,
Homestake acquired the 18.5% of HGAL it did not already own. The total purchase
price was $164.9 million, including $141.7 million for 8.5 million newly issued
shares of the Company, $19.5 million in cash and $3.7 million of transaction
expenses.
In October 1995, the Company acquired most of Dominion Mining Limited's
("Dominion") gold assets. As part of its agreement with Dominion, the Company
offered Dominion shareholders the opportunity to subscribe for shares of the
Company instead of receiving a return of Dominion capital. As a result, 2.3
million shares of the Company were issued to Dominion shareholders in January
1996 for consideration of $32.1 million.
Capital expenditures of $73.3 million in 1998 include $11.2 million and
$8 million at the Plutonic and Darlot mines, respectively, primarily for
underground development work, $6 million at the Round Mountain mine for
construction of new shops and other facilities, $12.7 million at the Homestake
mine for underground operations, $7.3 million at the Kalgoorlie operations
primarily to increase the flotation capacity at the Fimiston mill and complete a
decline from surface and a ventilation raise at the Mt Charlotte mine. The
remaining expenditures primarily were for replacement capital to maintain
existing production capacity.
In addition to sustaining capital, planned capital expenditures of
approximately $124 million during 1999 include $46 million at the Super Pit
primarily to purchase equipment for owner mining and to upgrade the Fimiston
mill flotation circuit, $20 million, $16 million and $9 million at the Darlot,
Plutonic, and Lawlers mines, respectively, primarily for underground
development, and $11 million at the Homestake mine related to the restructuring
of the underground operations.
34
During 1997, Homestake reduced its dividend rate to semiannual payments
of $0.05 each.
The Company paid cash income and mining taxes (net of tax refunds) of
$22.6 million in 1998 compared to $66.2 million and $15.9 million in 1997 and
1996, respectively. The 1998 net payments include $9 million of net refunds for
1997 and earlier years and $31.6 million of Canadian estimated payments for the
1998 tax year. The decrease in net cash tax payments is due to refunds of prior
years' tax payments in the United States. In addition, Canadian cash tax
payments were lower in 1998 compared to 1997 due to the timing of estimated tax
payments.
Year 2000 Compliance
The Company has completed a review of its computer-based information systems and
has developed a plan to ensure that all of these systems will be Year 2000
compliant. With the exception of certain of the financial systems the Company
acquired as part of the recent acquisition of Plutonic, Year 2000 compliant
upgrades for the Company's core financial systems have been installed and
tested. The non-compliant Plutonic financial systems and all other Company
information systems hardware and software will be brought into compliance by
mid-1999.
The Company currently is in the process of identifying all
microprocessor-controlled devices, including process-monitoring systems, in use
at its operating locations to determine whether they are Year 2000 compliant.
The identification phase is due to be completed by April 1999. The Company will
upgrade systems and/or develop contingency plans based on this review. In
addition, the Company is monitoring similar Year 2000 related activities at its
joint venture operations where it is not the operator. A Year 2000 related
microprocessor problem that is not identified or remedied at an operating
location potentially could result in a production disruption at that location.
The Company's total expenditures for the above Year 2000 activities are
expected to be approximately $1.5 million and should not adversely impact other
information system initiatives. Year 2000 expenditures during 1998 were
approximately $0.8 million.
The Company currently is surveying all major suppliers and customers to
assess their Year 2000 compliance and, where practical, will make specific
contingency plans based on the results of this survey. The greatest risk to the
Company in this regard would be interruption in the supply of power, fuel and/or
water to certain of its operating locations. A disruption in the supply of any
of these utilities could significantly hamper or curtail production at an
operating location until service is restored. A disruption in the supply of
other services or supplies at an operating location potentially could result in
a production disruption at that location.
The Company's principal customers are major financial institutions.
Because of government mandated Year 2000 compliance programs in that industry,
the Company expects that their core financial operating systems will be Year
2000 compliant, and that there will be no significant disruption in the
Company's ability to sell its gold production.
Homestake will develop contingency plans if and when determined
necessary based on its compliance efforts.
The foregoing Year 2000 disclosures are based on Homestake's current
expectations, estimates and projections. Because of uncertainties, the actual
effects of the Year 2000 issues on Homestake may be different from the Company's
current assessment. Factors, many of which are outside the control of the
Company, that could affect Homestake's ability to be Year 2000 compliant by the
end of 1999 include the failure of customers, suppliers, governmental entities
and others to achieve compliance, and Homestake's inability or failure to
identify all critical Year 2000 issues or to develop appropriate contingency
plans for all Year 2000 issues that ultimately may arise.
Cautionary Statement Under the Private Securities Litigation Reform Act
This report contains forward-looking statements that are based on management's
expectations and assumptions. They include statements preceded by the words
"believe," "estimate," "expect," "intend," "will," and similar expressions, and
estimates of reserves, future production and mine life, costs per ounce,
reclamation and remediation costs, dates of construction completion, costs of
capital projects and commencement of operations, exploration costs and taxes.
Actual results may differ materially from expectations.
Among the important factors that could cause actual results to differ
materially are the following. Reserve estimation is an interpretive process
based on drilling results and past experience as well as estimates of ore
characteristics and mining dilution, prices, costs of mining and processing,
capital expenditures and many other factors. Actual quality and characteristics
of ore deposits cannot be known until ore is actually mined. Reserves change
over time to reflect actual experience. Grades of ore processed at any time also
may vary from reserve estimates due to geologic variations within areas mined.
Production and mine lives may vary from estimates for particular properties and
for the Company as a whole because of changes in reserves, variation in ore
mined from estimated grade and metallurgical characteristics, unexpected ground
conditions, mining dilution, labor actions, and government restrictions. Cash
costs may vary due to changes from reserve and production estimates, unexpected
mining conditions, and changes in estimated costs of equipment, supplies,
utilities, labor costs and exchange rates. Noncash costs estimates, based on
total capital costs and reserve estimates, change based on actual amounts of
unamortized capital, changes in estimates of final reclamation, and changes in
reserves. Reclamation and remediation cost estimates are based on existing and
expected legal requirements, past experience, cost estimates by the Company and
others, and expectations regarding government action and time for government
agencies to act, all of which change over time and require periodic
reevaluation. Capital cost estimates are based on operating experience, expected
production, estimates by and contract terms with third-party suppliers, expected
legal requirements, feasibility reports by Company personnel and others, and
other factors. Factors involved in estimated time for completion of projects
include the Company's experience in completing capital projects, estimates by
and contract terms with contractors, engineers, suppliers and others involved in
design and construction of projects, and estimated time for the government to
process applications, issue permits and take other actions. Changes in any
factor may cause costs and time for completion to vary significantly from
estimates. There is a greater likelihood of variation for properties and
facilities not yet in production due to lack of actual experience. Exploration
cost estimates are based on past experience, estimated levels of future activity
and assumptions regarding results on a particular property and change based on
actual exploration results (increasing or decreasing expenditures), changed
conditions and property acquisitions and dispositions. Tax estimates reflect
expectations regarding geographic sources of income, locations of expenditures
and expected tax rates in each jurisdiction, and change as the mix of income,
expenditures and tax rates change.
35
Homestake Mining Company and Subsidiaries
Statements of Consolidated Operations
(In thousands, except per share amounts)
For the years ended December 31, 1998, 1997 and 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Revenues
Gold and ore sales $ 782,159 $ 863,628 $ 921,685
Sulfur and oil sales 20,975 26,821 30,749
Interest income 19,383 17,320 20,392
Other income (loss) (note 4) (24,740) 63,646 25,620
- ---------------------------------------------------------------------------------------------------------------------------
797,777 971,415 998,446
- ---------------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Production costs 537,291 627,639 615,491
Depreciation, depletion and amortization 139,371 162,781 151,852
Administrative and general expense 46,214 48,905 48,664
Exploration expense 55,345 65,238 67,363
Interest expense 20,884 20,756 19,140
Business combination and integration costs (note 3) 19,077
Write-downs and other unusual charges (note 5) 203,657 285,315 8,983
Other expense 4,165 6,836 5,592
- ---------------------------------------------------------------------------------------------------------------------------
1,026,004 1,217,470 917,085
- ---------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Taxes and Minority Interests (228,227) (246,055) 81,361
Income and Mining Taxes (note 6) 13,087 19,458 (22,328)
Minority Interests (3,185) (4,009) (13,268)
- ---------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (218,325) $ (230,606) $ 45,765
===========================================================================================================================
Net Income (Loss) Per Share (Basic and Diluted) $ (1.02) $ (1.10) $ 0.22
===========================================================================================================================
Average Shares Used in the Computation 213,354 210,537 210,027
===========================================================================================================================
The accompanying notes are an integral part of these financial statements.
36
Homestake Mining Company and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amount)
December 31, 1998 and 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and equivalents $ 145,069 $ 124,083
Short-term investments 154,346 141,221
Receivables (note 7) 45,891 43,529
Inventories (note 8) 78,906 103,925
Deferred income and mining taxes (note 6) 22,792 19,372
Other 5,102 13,154
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 452,106 445,284
Property, Plant and Equipment - Net (note 9) 1,100,864 1,021,147
Investments and Other Assets
Noncurrent investments (note 10) 12,945 41,094
Other assets (note 11) 81,616 102,009
- ---------------------------------------------------------------------------------------------------------------------------
Total investments and other assets 94,561 143,103
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $1,647,531 $1,609,534
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 42,580 $ 59,930
Accrued liabilities (note 12) 101,988 68,641
Income and other taxes payable 3,151 277
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 147,719 128,848
Long-term Liabilities
Long-term debt (note 13) 357,410 374,593
Other long-term obligations (note 14) 168,178 152,610
- ---------------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 525,588 527,203
Deferred Income and Mining Taxes (note 6) 230,567 161,862
Minority Interests in Consolidated Subsidiaries 7,825 108,116
Shareholders' Equity (note 17)
Capital stock, $1 par value per preferred and common share:
Authorized - Preferred: 10,000 shares; no shares outstanding
- Common: 1998 - 450,000; 1997 - 250,000
Outstanding - HCI exchangeable shares: 1998 - 11,139
- Common: 1998 - 228,012; 1997 - 210,696 228,012 210,696
Additional paid-in capital 904,567 601,916
Deficit (337,332) (97,553)
Accumulated other comprehensive loss (59,415) (31,554)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 735,832 683,505
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $1,647,531 $1,609,534
===========================================================================================================================
Commitments and Contingencies - see notes 19 and 20.
The accompanying notes are an integral part of these financial statements.
37
Homestake Mining Company and Subsidiaries
Statements of Consolidated Shareholders' Equity
(In thousands)
Accumulated Other
Comprehensive Income
---------------------------
Additional Retained Accumulated Unrealized
For the years ended Common Paid-in Earnings Translation Securities
December 31, 1998, 1997 and 1996 Stock Capital (Deficit) Adjustments Gains(Losses) Total
- -----------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 $ 201,883 $ 472,889 $162,350 $ 12,819 $ (1,301) $848,640
Comprehensive income:
Net income 45,765 45,765
Other comprehensive income (loss) 45,445 (7,082) 38,363
Dividends paid (43,278) (43,278)
Exercise of stock options 299 2,726 3,025
Stock issued for purchase of assets
of Dominion (note 3) 2,273 29,815 32,088
Stock issued for purchase of HGAL
minority interests (note 3) 5,976 93,370 99,346
Other (12) (112) (124)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 210,419 598,688 164,837 58,264 (8,383) 1,023,825
Comprehensive income:
Net loss (230,606) (230,606)
Other comprehensive income (loss) (91,645) 10,210 (81,435)
Dividends paid (31,784) (31,784)
Exercise of stock options 277 1,012 1,289
Other 2,216 2,216
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 210,696 601,916 (97,553) (33,381) 1,827 683,505
Comprehensive income:
Net loss (218,325) (218,325)
Other comprehensive income (loss) (31,798) 3,937 (27,861)
Dividends paid (21,454) (21,454)
Stock issued to employee savings plan 148 1,416 1,564
Stock issued for acquisition of Plutonic
options and partly-paid shares (note 3) 503 (503) -
Stock issued for purchase of Prime
minority interests (note 3):
Homestake common shares 16,672 173,843 190,515
HCI exchangeable shares 127,285 127,285
Other (7) 610 603
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1998 $ 228,012 $ 904,567 $ (337,332) $ (65,179) $ 5,764 $735,832
============================================================================================================================
The accompanying notes are an integral part of these financial statements.
38
Homestake Mining Company and Subsidiaries
Statements of Consolidated Cash Flows
(In thousands)
For the years ended December 31, 1998, 1997 and 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows From Operations
Net income (loss) $ (218,325) $ (230,606) $ 45,765
Reconciliation to net cash provided by operations:
Depreciation, depletion and amortization 139,371 162,781 151,852
Write-downs and other unusual charges (note 5) 194,778 285,315 8,983
Foreign currency exchange losses on intercompany debt (note 4) 5,671 5,657 8,943
Gains on asset disposals (3,651) (16,926) (12,305)
Deferred income and mining taxes (note 6) (39,436) (56,318) (19,620)
Minority interests 3,185 4,009 13,268
Reclamation - net 1,404 2,970 (20)
Other items - net (12,477) 11,345 (2,498)
Effect of changes in operating working capital items:
Receivables (6,890) (372) 12,337
Inventories 43,815 2,932 (44,947)
Accounts payable (15,912) 9,582 4,808
Accrued liabilities and taxes payable 26,756 (18,720) 24,183
Other 1,634 (1,625) (8,572)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 119,923 160,024 182,177
- ----------------------------------------------------------------------------------------------------------------------
Investment Activities
Increase in short-term investments (19,307) (11,063) (63,742)
Proceeds from asset sales 15,566 33,494 49,221
Additions to property, plant and equipment (73,323) (204,629) (169,950)
Decrease (increase) in restricted cash 2,429 (15,990)
Investments in mining companies 11,088 (22,950) (65,006)
Receipt from (advance to) Edensor 37,210 (6,599)
Purchase of interest in Snip mine (note 3) (39,279)
Other (2,430) (3,171)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investment activities (63,547) (186,358) (298,526)
- ----------------------------------------------------------------------------------------------------------------------
Financing Activities
Borrowings 97,676 126,457 56,775
Debt repayments (105,236) (49,629) (9,788)
Dividends paid on common shares - Homestake (21,454) (31,784) (43,278)
- Prime minority interests (1,040) (2,151) (2,205)
Common shares issued 1,289 35,113
Other 1,795 4,234
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (28,259) 48,416 36,617
- ----------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Equivalents (7,131) (2,656) 2,541
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Equivalents 20,986 19,426 (77,191)
Cash and Equivalents, January 1 124,083 104,657 181,848
- ----------------------------------------------------------------------------------------------------------------------
Cash and Equivalents, December 31 $ 145,069 $ 124,083 $ 104,657
======================================================================================================================
The accompanying notes are an integral part of these financial statements.
39
Homestake Mining Company and Subsidiaries
Statements of Consolidated Comprehensive Income (Loss)
(In thousands)
For the years ended December 31, 1998, 1997 and 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (218,325) $ (230,606) $ 45,765
- -------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss)
Changes in unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 1,213 (32,128) (15,161)
Less: Reclassification adjustments for gains and losses
included in net income (loss) (1,620) (43,403) (8,211)
- -------------------------------------------------------------------------------------------------------------------------------
2,833 11,275 (6,950)
Income taxes 1,104 (1,065) (132)
- -------------------------------------------------------------------------------------------------------------------------------
3,937 10,210 (7,082)
Foreign currency translation adjustments (before and
after tax) (31,798) (91,645) 45,445
- ------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) (27,861) (81,435) 38,363
- ------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ (246,186) $ (312,041) $ 84,128
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
40
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Note 1: Nature of Operations
Homestake Mining Company ("Homestake" or the "Company") is engaged in gold
mining and related activities including exploration, extraction,
processing, refining and reclamation. Gold bullion, the Company's principal
product, is produced and sold in the United States, Canada, Australia and
Chile. Ore and concentrates containing gold and silver from the Eskay Creek
and Snip mines in Canada are sold directly to smelters.
Note 2: Significant Accounting Policies
Basis of presentation: The consolidated financial statements include
Homestake and its majority-owned subsidiaries, and their undivided
interests in joint ventures after elimination of intercompany amounts.
Undivided interests in gold mining operations (the Round Mountain, Pinson
and Marigold mines in Nevada; Homestake Gold of Australia Limited's
("HGAL") interest in the Kalgoorlie operations in Western Australia;
Plutonic Resources Limited's ("Plutonic") interests in the Mt Morgans and
Peak Hill mines in Western Australia; and Homestake Canada Inc.'s ("HCI")
interests in the Williams and David Bell mines in Canada) and in the sulfur
and oil recovery operations at Main Pass 299 in the Gulf of Mexico are
reported using pro rata consolidation whereby the Company reports its
proportionate share of assets, liabilities, income and expenses.
Use of estimates: The preparation of financial statements in conformity
with United States generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and equivalents include all highly-liquid investments with a maturity
of three months or less at the date of purchase. The Company minimizes its
credit risk by investing its cash and equivalents with major international
banks and financial institutions located principally in the United States,
Canada and Australia. The Company believes that no concentration of credit
risk exists with respect to investment of its cash and equivalents.
Short-term investments principally consist of highly-liquid United States
and foreign government and corporate securities with original maturities in
excess of three months. The Company classifies all short-term investments
as available-for-sale securities. Unrealized gains and losses on these
investments are recorded in accumulated other comprehensive income as a
separate component of shareholders' equity, except that declines in market
value judged to be other than temporary are recognized in determining net
income.
Inventories, which include finished products, ore in process, stockpiled
ore, ore in transit, and supplies, are stated at the lower of cost or net
realizable value. The cost of gold produced by certain United States
operations is determined principally by the last-in, first-out method. The
cost of other inventories is determined primarily by averaging methods.
Exploration costs are expensed as incurred. All costs related to property
acquisitions are capitalized.
Development costs: Following completion of a favorable feasibility study,
development costs incurred to place new mines into production and to
complete major development projects at operating mines are capitalized.
Ongoing costs to maintain production are expensed as incurred.
Depreciation, depletion and amortization of mining properties, mine
development costs and major plant facilities is computed principally by the
units-of-production method based on estimated quantities of ore which can
be recovered economically in the future from known mineral deposits. Such
estimates are based on current and projected costs and prices. Other
equipment and plant facilities are depreciated using straight-line or
accelerated methods principally over estimated useful lives of three to ten
years.
Property evaluations: Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If deemed impaired, an
impairment loss is measured and recorded based on the fair value of the
asset, which generally will be computed using discounted cash flows.
Estimated future net cash flows from each mine are calculated using
estimates of production, future sales prices (considering historical and
current prices, price trends and related factors), production costs,
capital and reclamation costs. (See note 5.) The Company's estimates of
future cash flows are subject to risks and uncertainties. Therefore, it is
possible that changes could occur which may affect the recoverability of
the Company's investments in mineral properties and other assets.
41
Undeveloped properties upon which the Company has not performed
sufficient exploration work to determine whether significant mineralization
exists are carried at original acquisition cost. If it is determined that
significant mineralization does not exist, the property would be written
down to estimated net realizable value at the time of such determination.
Reclamation and remediation: Reclamation costs (undiscounted) and related
liabilities, which are based on the Company's interpretation of current
environmental and regulatory requirements, are accrued and expensed
principally by the units-of-production method based on estimated quantities
of ore which can be recovered economically in the future from known mineral
deposits. Remediation liabilities, including estimated governmental
oversight costs, are expensed upon determination that a liability has been
incurred and where a minimum cost or reasonable estimate of the cost can be
determined. (See notes 5 and 19.) Amounts to be received from the Federal
Government for its 51.2% share of the cost of future reclamation activities
at the Grants, New Mexico uranium facility are offset against the remaining
estimated Grants reclamation liabilities and are recorded in the period
that such expenditures are made.
Based on current environmental regulations and known reclamation
requirements, the Company has included its best estimates of these
obligations in its reclamation accruals. The Company updates these
estimates regularly, however, the Company's estimates of its ultimate
reclamation liabilities could change significantly as a result of changes
in regulations or cost estimates.
Investments and other assets: Investments in mining securities that have
readily determinable fair values and assets held in trust to fund employee
benefits are classified as available-for-sale investments. Unrealized gains
and losses on these investments are recorded in accumulated other
comprehensive income as a separate component of shareholders' equity,
except that declines in market value judged to be other than temporary are
recognized in determining net income. Realized gains and losses on these
investments are included in determining net income.
Product sales are recognized when title passes at the shipment or delivery
point.
Derivative financial instruments: The Company uses derivative financial
instruments as part of an overall risk-management strategy. These
instruments are used as a means of hedging exposure to precious metals
prices and foreign currency exchange rates. The Company does not hold or
issue derivative financial instruments for trading purposes. The Company's
accounting for derivative financial instruments is in accordance with the
concepts established in Statement of Financial Accounting Standards
("SFAS") No. 80, "Accounting for Futures Contracts," SFAS No. 52, "Foreign
Currency Translation," American Institute of Certified Public Accountants
Statement of Positions 86-2, "Accounting for Options," and various Emerging
Issues Task Force ("EITF") pronouncements.
The Company uses forward sales contracts and combinations of put and
call options to hedge its exposure to precious metals prices. The
underlying hedged production is designated at the inception of the hedge.
Deferral accounting is applied only if the derivatives continue to reduce
the price risk associated with the underlying hedged production. Contracted
prices on forward sales contracts and options are recognized in product
sales as the designated production is delivered or sold. In the event of
early settlement of hedge contracts, gains and losses are deferred and
recognized in income at the originally designated delivery date.
The Company uses combinations of put and call options to hedge its
exposure to foreign currency exchange rates. Currently, these options do
not qualify for deferral accounting and, accordingly, are marked to market
at each balance sheet date. Realized and unrealized gains and losses on
these options are recognized in other income.
In June 1998, the Financial Accounting Standards Board issued 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 believes that under SFAS 133, changes in unrealized gains and
losses on Homestake's foreign currency contracts will qualify for hedge
accounting and accordingly will be recorded in other comprehensive income.
However, there are many complexities to this new standard and the Company
currently is evaluating the impact that SFAS 133 will have on reported
operating results and financial position and has not yet determined whether
it will adopt SFAS 133 earlier than January 1, 2000.
Income taxes: The Company follows the liability method of accounting for
income taxes whereby deferred income taxes are recognized for the tax
consequences of temporary differences by applying statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of certain assets and liabilities.
Changes in deferred tax assets and liabilities include the impact of any
tax rate changes enacted during the year. Mining taxes represent Canadian
provincial taxes levied on mining operations.
42
Foreign currency: Substantially all assets and liabilities of foreign
subsidiaries are translated at exchange rates in effect at the end of each
period. Revenues and expenses are translated at the average exchange rate
for the period. Accumulated currency translation adjustments are included
in accumulated other comprehensive income as a separate component of
shareholders' equity. Foreign currency transaction gains and losses are
included in the determination of net income.
Pension plans and other postretirement benefits: Pension costs related to
United States employees are determined using the projected unit credit
actuarial method. The Company's funding policy for defined benefit pension
plans is to fund the plans annually to the extent allowed by the applicable
regulations. In addition, the Company provides medical and life insurance
benefits for certain retired employees and accrues the cost of such
benefits over the period in which active employees become eligible for the
benefits. The costs of the postretirement medical and life insurance
benefits are paid at the time such benefits are provided.
Net income or loss per share is computed by dividing net income or loss by
the weighted average number of common shares outstanding, including the HCI
exchangeable shares (see notes 3 and 17). The Company's basic and diluted
net income or loss per share are the same since the exercise of stock
options and the conversion of the 5.5% convertible subordinated notes would
produce anti-dilutive results.
Preparation of financial statements: Certain 1997 and 1996 amounts have
been reclassified to conform to the current year's presentation. All dollar
amounts are expressed in United States dollars unless otherwise indicated.
Note 3: Acquisitions and Divestitures
Plutonic Resources Limited: On April 30, 1998 Homestake completed the
acquisition of 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 was accounted for as a pooling of
interests and accordingly, Homestake's consolidated financial statements
include Plutonic for all periods. Combined and separate results for
Homestake and Plutonic for the three months ended March 31, 1998 and for
the years ended December 31, 1997 and 1996 are as follows:
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)
Shareholders' equity at March 31 522,925 184,379 (37,291) 670,013
Year ended December 31, 1997:
Revenues 723,834 248,519 (938) 971,415
Net loss (168,879) (33,998) (27,729) (230,606)
Shareholders' equity at December 31 531,750 186,577 (34,822) 683,505
Year ended December 31, 1996:
Revenues 766,936 238,065 (6,555) 998,446
Net income (loss) 30,281 18,984 (3,500) 45,765
Shareholders' equity at December 31 768,552 268,168 (12,895) 1,023,825
<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. Shareholders' equity has been
translated into U.S. dollars using the end-of-period exchange
rates.
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:
</FN>
Three months ended Year ended December 31,
March 31, 1998 1997 1996
---------------------------------------------------------
Revenue recognition $ (1,293) $ 377 $ (3,318)
Reclamation expense (474) (1,215) (1,430)
Depreciation, depletion and amortization (1,141) (6,958)
Income taxes 1,009 (19,933) 1,248
--------------------------------------------------------
$ (1,899) $ (27,729) $ (3,500)
=========================================================
Business combination and integration costs of $19.1 million were
incurred including transaction costs related to the merger of $12.4 million
and post-combination severance, lease termination, and other costs of $6.7
million.
Prime Resources Group Inc. On December 3, 1998 Homestake acquired the 49.4%
of Prime Resources Group Inc. ("Prime") it did not already own. Prime
shareholders (other than Homestake) received 0.74 of a Homestake common
share or 0.74 of an HCI exchangeable share for each share of Prime. Each
HCI exchangeable share is
43
exchangeable for one Homestake common share at any time at the option of
the holder and has essentially the same voting, dividend (payable in
Canadian dollars) and other rights as one Homestake common share. Homestake
issued 16.7 million Homestake shares and 11.1 million HCI exchangeable
shares valued in total at $317.8 million. The acquisition of the Prime
minority interests was accounted for as a purchase. Based upon the total
purchase price of $321.8 million (including $4 million of capitalized
direct acquisition costs), the excess of the purchase price paid over the
net book value of the minority interests acquired was $224 million of which
$174 million ($259.6 million including an increase related to deferred
taxes in accordance with SFAS 109) was allocated to the Eskay Creek mine's
ore reserves and $50 million ($74.6 million including an increase related
to deferred taxes in accordance with SFAS 109) was allocated to the Eskay
Creek exploration properties.
On a pro forma basis, assuming that the acquisition of the Prime
minority interests occurred on January 1, 1998, revenues, net loss and net
loss per share for the year ended December 31, 1998 have been estimated at
$797.6 million, $227.2 million and $0.95 per share, respectively, and,
assuming that the acquisition of the Prime minority interests occurred on
January 1, 1997, revenues, net loss and net loss per share for the year
ended December 31, 1997 have been estimated at $971.2 million, $236.9
million and $0.99 per share, respectively. This pro forma information
includes adjustments which are based on certain assumptions that the
Company believes are reasonable in the circumstances. The pro forma
information is unaudited and does not purport to represent what the results
of operations actually would have been had the acquisition of the Prime
minority interests occurred at the beginning of each year presented or to
project the results of operations for any future date or period.
Homestake Gold of Australia Limited: During the fourth quarter of 1995 and
the first quarter of 1996, Homestake acquired the 18.5% of HGAL it did not
already own. The total purchase price was $164.9 million, including $141.7
million for 8.5 million newly issued shares of the Company, $19.5 million
in cash and $3.7 million of transaction expenses. The acquisition of the
HGAL minority interests was accounted for as a purchase.
Mt Morgans Mine: In October 1995, the Company acquired most of Dominion
Mining Limited's ("Dominion") gold assets, including an 80% interest in the
Mt Morgans mine. The net purchase price after working capital adjustments
was $39.1 million. As part of its agreement with Dominion, the Company
offered Dominion shareholders the opportunity to subscribe for shares of
the Company instead of receiving a return of Dominion capital. As a result,
2.3 million shares of the Company were issued to Dominion shareholders on
January 29, 1996 for consideration of $32.1 million.
Snip Mine: In April 1996, Prime purchased Cominco Ltd.'s 60% interest in
the Snip mine in British Columbia, Canada for $39.3 million in cash. As a
result of this purchase, Prime became the sole owner of the Snip mine.
Archaean Gold NL: In July 1996, Lachlan Resources NL ("Lachlan"), acquired
90.7% of Archaean Gold NL ("Archaean") for $36.8 million. In April 1997,
Lachlan acquired the remaining interest in Archaean. This acquisition,
which was accounted for as a purchase, was funded by a $33.2 million
(A$50.9 million) loan from the Company to Lachlan. In May 1998, Lachlan
repaid this loan by issuing additional shares to the Company which
increased the Company's interest in Lachlan from 62.1% to 81.2%.
George Lake and Back River Joint Ventures: 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 in the first quarter of 1997, which
was included in other income.
Note 4: Other Income (Loss)
1998 1997 1996
-----------------------------------------------------------
Gains on asset disposals $ 3,651 $ 16,926 $ 12,305
Foreign currency contract gains
(losses) (34,332) (28,453) 1,632
Foreign currency exchange losses on
intercompany advances (5,671) (5,657) (8,943)
Gain on sale of Great Central option 10,419 4,699
Gain on termination of Santa Fe merger 62,925
Other 11,612 7,486 15,927
-----------------------------------------------------------
$ (24,740) $ 63,646 $ 25,620
===========================================================
In March 1997, Santa Fe Pacific Gold Corporation terminated its merger
agreement with Homestake and paid Homestake a $65 million termination fee.
As a result, in 1997 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. Other expense for the year ended December 31, 1996
included $3.4 million of expenses related to this proposed merger.
44
Note 5: Write-downs and Other Unusual Charges
1998 1997 1996
-------------------------------------------------
Reduction in the carrying values
of resource assets (a) $ 141,425 $ 84,655
Increase in the estimated accrual for remediation
and reclamation expenditures (b) 36,000 29,156
Homestake mine restructuring charges (c) 8,879
Write-down of Homestake's investment
in the Main Pass 299 sulfur mine (d) 107,761
Write-downs of noncurrent investments (e) 8,213 47,932 $8,983
Other 9,140 15,811
------------------------------------------------
$ 203,657 $ 285,315 $8,983
=================================================
<FN>
a) During 1998, due to the continuing low-gold price environment, the Company
reviewed the carrying values of its gold mining operations using a $325 per
ounce gold price. As a result of this review, the Company determined that
impairment write-downs were required to reduce the carrying values of
several of its assets or operations as follows:
i. Based on estimated future cash flows, the Company does not expect
to recover its remaining investment in property, plant and
equipment at the Homestake mine in South Dakota. The total amount
of the write-down was $76.1 million, thereby reducing the carrying
value of the mine to zero.
ii. Based on estimated future cash flows, the Company recorded a
write-down of property at the Mt Charlotte mine in Western
Australia of $34.5 million and recorded severance and other
charges of $3.9 million.
iii. Based on its evaluations of the recoverability of the carrying
values of other mineral properties, the Company also recorded
write-downs of $26.9 million, including $22.3 million related to
mineral properties acquired as part of the acquisition of
Plutonic.
In 1997, the Company reviewed the carrying values of its gold mining
operations using a $350 per ounce gold price at its long-lived operations
and $325 per ounce gold price at its short-lived operations. As a result of
this review, the Company determined that impairment write-downs were
required to reduce the carrying values of several of its assets or
operations with short remaining lives, including the Mt Morgans and Peak
Hill mines, the Pinson mine, the Homestake mine's Open Cut, low-grade
stockpiled ore and exploration properties at certain locations in Western
Australia and redundant mining equipment at the Kalgoorlie operations.
b) In 1998, following an environmental audit at the Homestake mine and a
change in that operation's mining plans, the Company recorded a provision
for estimated additional remediation and related reclamation costs of $35
million. In addition, a $1 million increase in the provision for
reclamation at closed operations was recorded in 1998. In 1997, as a result
of a review of the Company's reclamation liabilities, the Company
determined that it was necessary to increase reclamation accruals for
certain of its nonoperating properties including the Santa Fe mine in
Nevada, the Nickel Plate mine in Canada and the Grants uranium complex in
New Mexico to reflect revised estimates, changed conditions and more
stringent future reclamation requirements.
c) In January 1998, the Company commenced a restructuring of underground
operations at the Homestake mine, including a significant reduction in that
mine's workforce. As a result of the restructuring, the Company recorded
severance and other costs of $8.9 million, net of pension and other
postretirement curtailment and settlement gains of $9.3 million.
d) Homestake owns a 16.7% undivided interest in the Main Pass 299 sulfur mine.
Due to a prolonged period of low sulfur prices and Homestake's assessment
of estimated future cash flows from the Main Pass 299 sulfur mine, in 1997
the Company wrote-off its remaining investment in the Main Pass 299 sulfur
property, plant and equipment.
e) During 1998 and 1997, the Company recorded in income the reductions in the
carrying values of certain marketable securities and other investments that
it deemed to be other than temporary.
</FN>
Note 6: Income Taxes
The provision for income and mining taxes consists of the following:
1998 1997 1996
-------------------------------------------------------------
Current
Income taxes
Federal $(11,248) $ 1,023 $ (1,999)
State (84)
Canadian 22,576 26,048 28,367
Other 421 (8) 616
-------------------------------------------------------------
11,665 27,063 26,984
Canadian mining taxes 14,684 9,797 14,964
-------------------------------------------------------------
Total current taxes 26,349 36,860 41,948
-------------------------------------------------------------
Deferred
Income taxes
Federal 9,964 (29,203) (3,879)
State 947 2,026 (1,300)
Canadian (19,286) (7,039) (14,588)
Australian (28,947) (22,282) (2,024)
-------------------------------------------------------------
(37,322) (56,498) (21,791)
Canadian mining taxes (2,114) 180 2,171
-------------------------------------------------------------
Total deferred taxes (39,436) (56,318) (19,620)
-------------------------------------------------------------
Total income and mining taxes $(13,087) $(19,458) $ 22,328
=============================================================
45
The provision for income taxes is based on pretax income (loss) before
minority interests as follows:
1998 1997 1996
---------------------------------------------------------------
United States $(163,374) $ (167,570) $(14,003)
Canada 38,058 50,592 95,548
Australia (94,903) (115,323) 7,840
Other foreign (8,008) (13,754) (8,024)
---------------------------------------------------------------
$(228,227) $ (246,055) $ 81,361
===============================================================
Deferred tax liabilities and assets as of December 31, 1998 and 1997 relate
to the following:
December 31,
1998 1997
-----------------------
Deferred Tax Liabilities
Depreciation and other resource
property differences
United States $ 18,598
Canada - Federal $ 78,647 29,906
Canada - Provincial 114,754 61,509
Australia 62,473 112,356
-----------------------
255,874 222,369
Other 47,176 31,697
-----------------------
Gross deferred tax liabilities 303,050 254,066
-----------------------
Deferred Tax Assets
Tax loss carry-forwards
United States 15,364
Australia 27,614 52,868
Chile 25,230 23,943
Other 2,943 2,512
-----------------------
71,151 79,323
Reclamation costs
United States 30,050 16,827
Other 13,832 13,393
-----------------------
43,882 30,220
Employee benefit costs 28,234 28,716
Alternative minimum tax credit
carry-forwards 31,677 10,200
Depreciation, land and other resource
property 61,855 18,750
Inventory 12,804 23,149
Foreign tax credit carry-forwards 12,007 5,857
Unrealized foreign exchange losses 15,305 9,157
Write-downs of noncurrent investments 11,567 9,619
Other 13,968 4,505
-----------------------
Gross deferred tax assets 302,450 219,496
Deferred tax asset valuation allowances (207,175) (107,920)
-----------------------
Net deferred tax assets 95,275 111,576
-----------------------
Net deferred tax liability $ 207,775 $ 142,490
=======================
Net deferred tax liability consists of
Current deferred tax assets $(22,792) $ (19,372)
Long-term deferred tax liability 230,567 161,862
-----------------------
Net deferred tax liability $207,775 $ 142,490
=======================
The classification of deferred tax assets and liabilities as current or
long term is based on the related asset or liability creating the deferred
tax. Deferred taxes not related to a specific asset or liability are
classified based on the estimated period of reversal. The $207.2 million
deferred tax valuation allowance at December 31, 1998 represents the
portion of the Company's consolidated deferred tax assets which, based on
projections at December 31, 1998, the Company does not believe realization
is "more likely than not." The deferred tax valuation allowance consists of
United States, South America, Australia and Canada unrealized deferred tax
assets of $150.6 million, $28.2 million, $27.7 million, and $0.7 million,
respectively. The 1998 net increase in the valuation allowance for United
States deferred tax assets of $94.1 million is comprised of the following
increases: $51.1 million for future tax deductions, $5.4 million for the
1998 net operating loss, $10 million for the 1997 net operating loss, $21.5
million for alternative minimum tax credits, and $6.1 million for foreign
tax credits. Valuation allowances increased for South America, Australia
and Canada by $1 million, $3.8 million and $0.4 million, respectively.
The Company has United States foreign tax credit carry-forwards of
approximately $12 million, which are due to expire at various times through
the year 2003. In addition, the Company has a U.S. net operating loss
carry-forward of approximately $43.9 million which may be used to offset
future regular taxable income. These loss carry-forwards will expire in the
years 2017 and 2018.
Major items causing the Company's income tax provision to differ from
the federal statutory rate of 35% were as follows:
1998 1997 1996
----------------------------------------------
Income tax expense (benefit) based on statutory rate $ (79,879) $(86,120) $ 28,476
Percentage depletion (1,806) (900) (7,611)
Earnings in foreign jurisdictions
at different rates (2,143) 273 (2,009)
Reduction of prior year accruals (15,953) (24,048)
Other nondeductible losses 7,934 37,770 2,875
Change in valuation allowance 61,700 13,800 3,141
Other - net 4,490 5,742 4,369
----------------------------------------------
Total income taxes (25,657) (29,435) 5,193
Canadian mining taxes 12,570 9,977 17,135
----------------------------------------------
Total income and mining taxes $ (13,087) $(19,458) $ 22,328
==============================================
46
Note 7: Receivables
December 31,
1998 1997
------------------------------------------
Trade accounts $ 29,548 $ 24,612
U.S. Government receivable (see note 19) 4,500 5,500
Interest and other 11,843 13,417
------------------------------------------
$ 45,891 $ 43,529
==========================================
Note 8: Inventories
December 31,
1998 1997
----------------------------------------------
Finished products $ 13,312 $ 33,019
Ore and in-process 39,465 37,811
Supplies 26,129 33,095
----------------------------------------------
$ 78,906 $103,925
==============================================
Note 9: Property, Plant and Equipment
December 31,
1998 1997
------------------------------------------
Mining properties and development costs $ 1,434,503 $ 1,108,192
Plant and equipment 1,081,680 1,091,814
Construction and mine development in progress 7,534 22,459
------------------------------------------
2,523,717 2,222,465
Accumulated depreciation, depletion and
amortization (1,422,853) (1,201,318)
------------------------------------------
$ 1,100,864 $ 1,021,147
==========================================
Note 10: Noncurrent Investments
December 31,
1998 1997
----------------------------------------
Navan Resources plc $ 3,891 $ 6,685
Navan Bulgarian Mining BV 12,000
Other investments 9,054 22,409
----------------------------------------
$ 12,945 $ 41,094
========================================
In 1995, Homestake acquired a 10% interest in Navan Resources plc
("Navan"), an Irish public company with diverse mineral interests in
Europe. In November 1997, Homestake purchased a 20% interest in Navan
Bulgarian Mining BV ("Navan BV"), a wholly-owned subsidiary of Navan, for
$12 million. Navan BV owns 68% of Bimak AD, a Bulgarian company that owns
and operates the surface facilities at the Chelopech copper-gold mine near
Sofia, Bulgaria. In September 1998, Homestake completed its evaluation of
the Chelopech mine and concluded that the project did not warrant
Homestake's participation under current economic conditions. As a result
Navan BV returned to Homestake approximately $11 million of Homestake's
investment that had not been expended prior to termination of Homestake's
participation.
Note 11: Other Assets
December 31,
1998 1997
---------------------------------------
Assets held in trust (see note 15) $ 44,756 $ 38,975
Restricted cash (see note 13) 13,561 15,990
Ore stockpiles 9,807 32,125
U.S. Government receivable (see note 19) 3,681 5,362
Other 9,811 9,557
---------------------------------------
$ 81,616 $ 102,009
=======================================
Note 12: Accrued Liabilities
December 31,
1998 1997
---------------------------------------
Accrued payroll and other compensation $ 31,587 $ 23,898
Accrued reclamation and closure costs 23,206 11,818
Unrealized loss on foreign currency exchange contracts 24,003 20,416
Other 23,192 12,509
---------------------------------------
$101,988 $ 68,641
=======================================
47
Note 13: Long-term Debt
December 31,
1998 1997
---------------------------------------
Convertible subordinated notes (due 2000) $150,000 $ 150,000
Pollution control bonds
Lawrence County, South Dakota (due 2032) 48,000 48,000
State of California (due 2004) 17,000 17,000
Cross-border credit facility (due 2003) 142,410 48,855
Plutonic syndicated credit facility 110,738
---------------------------------------
$357,410 $ 374,593
=======================================
Convertible subordinated notes: The Company's 5.5% convertible subordinated
notes, which mature on June 23, 2000, are convertible into common shares at
a price of $23.06 per common share and are redeemable by the Company in
whole at any time. Interest on the notes is payable semiannually in June
and December. Issuance costs of $3.9 million were capitalized and are being
amortized over the life of the notes.
Pollution control bonds: In July 1997, Lawrence County, South Dakota issued
$30 million of South Dakota Solid Waste Disposal Revenue Bonds ("Waste
Disposal Bonds") and $17 million of South Dakota Pollution Control
Refunding Revenue Bonds ("Pollution Control Bonds"), both of which are due
in 2032. The Company is responsible for funding principal and interest
payments on these bonds. Proceeds from the Waste Disposal Bonds are being
used for construction of a new tailings dam lift and other qualifying
expenditures at the Homestake mine. Qualifying expenditures of $17 million
had been incurred through December 31, 1998. The remaining $13.6 million,
which is held in a trustee account, is included in other assets at December
31, 1998. Homestake has reduced the projected size of the tailings dam
project and accordingly notified holders of the Waste Disposal Bonds in
January 1999 that it would redeem within 60 days $10 million of bonds from
the funds held in the trustee account.
The Company pays interest monthly on the pollution control bonds based
on variable short-term, tax-exempt obligation rates. Interest rates at
December 31, 1998 and 1997 were 4.8% and 4.6%, respectively. No principal
payments are required until cancellation, redemption or maturity.
Cross-border credit facility: 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 replaced the Company's
$275 million cross-border credit facility and Plutonic's A$400 million
syndicated credit facility, both of which were cancelled. Borrowings 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. At December 31, 1998 borrowings under the Australian dollar
credit facility of $142.4 million (A$233 million) were outstanding. Under
the new facility, the Company pays a commitment fee on the unused portion
of this facility ranging from 0.15% to 0.35% per annum, depending upon
rating agencies' ratings for the Company's senior debt. The new credit
agreement requires, amongst other provisions, a minimum consolidated net
worth, as defined in the agreement (primarily shareholders' equity plus the
amount of all noncash write-downs made after December 31, 1997), of $500
million. Interest on the Australian dollar borrowings under the new
facility is payable quarterly based on the Australian Bank Bill Swap Rate
plus a margin of up to 1.125%. At December 31, 1998 this interest rate was
5.95%.
Note 14: Other Long-term Obligations
December 31,
1998 1997
---------------------------------------------
Accrued reclamation and closure costs $ 107,370 $ 80,428
Accrued pension and other postretirement
benefit obligations (see note 15) 50,569 60,942
Other 10,239 11,240
---------------------------------------------
$ 168,178 $ 152,610
=============================================
While the ultimate amount of reclamation and site restoration costs to
be incurred in the future is uncertain, the Company has estimated that the
aggregate amount of these costs for operating properties, plus previously
accrued reclamation and remediation liabilities for nonoperating
properties, will be approximately $220 million. This figure includes
approximately $7 million of reclamation costs at the Grants uranium
facility which will be funded by the United States Federal Government. At
December 31, 1998 the Company had accrued $130.6 million for estimated
ultimate reclamation and site restoration costs and remediation liabilities
(see notes 12 and 19).
48
Note 15: Employee Benefit Plans
Pension and other postretirement benefit plans: The Company has pension
plans covering substantially all United States employees. Pension plans
covering salaried and other nonunion employees provide benefits based on
years of service and the employee's highest compensation during any 60
consecutive months prior to retirement. Pension plans covering union
employees provide defined benefits for each year of service. The Company
also has other postretirement plans which provide medical and life
insurance benefits for certain retired employees, primarily retirees of the
Homestake mine. The following table provides a reconciliation of benefit
obligations, plan assets and the funded status of the plans:
Other Postretirement
Pension Benefits Benefits
------------------------------ ------------------------------
1998 1997 1998 1997
------------------------------ ------------------------------
Change in benefit obligations
Benefit obligation, January 1 $237,351 $229,906 $ 37,000 $ 37,000
Service cost 4,215 4,308 188 610
Interest cost 16,969 15,958 2,406 2,939
Plan amendments and special terminations 6,222 (6,450)
Actuarial (gains) losses 22,859 7,272 (1,646)
Benefits paid (23,696) (12,821) (2,373) (1,903)
Curtailments (7,246) (3,293)
-------------- -------------- -------------- -------------
Benefit obligation, December 31 $256,674 $237,351 $ 34,750 $ 37,000
============== ============== ============== =============
Change in plan assets
Fair value of plan assets, January 1 $257,147 $224,064
Actual return on plan assets 24,816 43,955
Company contributions 1,104 1,037 $ 2,373 $ 1,903
Benefits paid (23,696) (11,909) (2,373) (1,903)
-------------- -------------- -------------- -------------
Fair value of plan assets, December 31 $259,371 $257,147 $ - $ -
============== ============== ============== =============
Plan assets in excess of (less than)
projected benefit obligations $ 2,697 $ 19,796 $(34,750) $(37,000)
Unrecognized net actuarial (gains) losses (24,927) (47,626) 2,488 (4,995)
Unrecognized prior service cost 8,527 7,622 (5,914) 557
Unrecognized net transition asset (1,567) (2,445)
-------------- -------------- -------------- -------------
Accrued pension and postretirement
benefit obligations $(15,270) $(22,653) $(38,176) $(41,438)
============== ============== ============== =============
The liabilities for pension and postretirement benefits recognized in
the consolidated balance sheets consist of the following:
Other Postretirement
Pension Benefits Benefits
--------------------------- -------------------------
1998 1997 1998 1997
--------------------------- -------------------------
Prepaid benefit cost $ (8,709) $ (677)
Accrued benefit liability 23,979 23,330 $ 38,176 $ 41,438
------------- ------------ ------------ ------------
15,270 22,653 38,176 41,438
Additional minimum liability (offset by an
intangible asset included in other assets) 523 251
------------- ------------ ------------ ------------
Accrued pension and postretirement
benefit obligations 15,793 22,904 38,176 41,438
Less current portion 1,200 1,200 2,200 2,200
------------- ------------ ------------ ------------
Long-term accrued pension and post-
retirement benefit obligations (see note 14) $ 14,593 $ 21,704 $ 35,976 $ 39,238
============= ============ ============ ============
The weighted-average actuarial assumptions as of December 31 were as
follows:
Other Postretirement
Pension Benefits Benefits
------------------------------- ------------------------------
1998 1997 1996 1998 1997 1996
------------------------------- ------------------------------
Discount rate 6.5% 7.0% 7.0% 6.5% 7.0% 7.0%
Expected return on plan assets 8.5% 8.5% 8.5%
Rate of compensation increase 5.0% 5.0% 5.0%
The Company has assumed a health care cost trend rate of 8.5% for 1999,
decreasing ratability to 5.0% in 2006 and thereafter.
49
Net periodic pension and other postretirement benefit costs include the
following components:
Pension Benefits
----------------------------------------------------
1998 1997 1996
----------------------------------------------------
Service cost $ 4,215 $ 4,308 $ 4,519
Interest cost 16,969 15,958 15,319
Expected return on assets (21,346) (18,596) (16,562)
Amortization of:
Transition asset (370) (370) (370)
Prior service costs 1,005 1,534 1,534
Actuarial gains (898) (467)
----------------------------------------------------
Net periodic benefit cost (425) 2,834 3,973
Additional charges (credits):
Special termination charges 3,922
Curtailment credits (7,246) (1,868)
Settlement credits (2,531)
----------------------------------------------------
Total net benefit cost (credit) $ (6,280) $ 2,834 $ 2,105
====================================================
Other Postretirement
Benefits
----------------------------------------------------
1998 1997 1996
----------------------------------------------------
Service cost $ 188 $ 568 $ 456
Interest cost 2,406 2,631 2,573
Amortization of:
Prior service costs (850) 60 60
Actuarial (gains) losses 60 (660)
----------------------------------------------------
Net periodic benefit cost 1,804 2,599 3,089
Additional charges (credits):
Special termination charges 600
Curtailment credits (3,293)
---------------------------------------------------
Total net benefit cost (credit) $ (889) $ 2,599 $ 3,089
====================================================
The projected benefit obligation and accumulated benefit obligation for
pension plans with accumulated benefit obligations in excess of plan assets
were $32.4 million and $24.1 million, respectively, at December 31, 1998
and $27.2 million and $20 million, respectively, at December 31, 1997.
These amounts pertain to a nonqualified supplemental pension plan covering
certain employees and a nonqualified pension plan covering directors of the
Company. These plans are unfunded. The Company has established a grantor
trust, consisting of money market funds, mutual funds and corporate-owned
life insurance policies, to provide funding for the benefits payable under
these nonqualified plans and certain other deferred compensation plans. The
grantor trust, which is included in other assets, amounted to $44.8 million
and $39 million at December 31, 1998 and 1997, respectively.
Health care benefits are contributory and were restricted to employees
at the Homestake mine whose combined years of age and years of service
exceeded 65 as of January 1, 1999.
The assumed health care cost trend rate has a significant effect on the
amounts reported. A one percentage point change in the assumed health care
cost trend rate would have had the following effects on 1998 service and
interest costs and the accumulated postretirement benefit obligation at
December 31, 1998:
One percentage point change Increase Decrease
Effect on service and interest
components of net periodic cost $ 145 $ (135)
Effect on accumulated postretirement
benefit obligation $1,912 $(1,806)
Certain of the Company's foreign operations participate in pension
plans. The Company's share of contributions to these plans was $2.5 million
in 1998, $2.3 million in 1997, and $2.1 million in 1996.
Stock option and share rights plan: The Company's 1996 Stock Option and
Share Rights Plan ("1996 Plan") provides for grants of up to 6 million
common shares. At December 31, 1998 and 1997, 3 million and 5 million
shares, respectively, were available for future grants. At December 31,
1998, stock options and share rights for 2.6 million shares were
outstanding under the 1996 Plan and stock options for 2.1 million shares
were outstanding under prior plans.
50
The exercise price of each stock option granted under these plans is
equal to or greater than the market price of the Company's stock on the
date of grant and an option's maximum term is ten years. Options usually
vest over a four-year period. A summary of the status of the Company's
stock options as of December 31, 1998, 1997 and 1996 and changes during the
years ending on those dates is presented below:
1998 1997 1996
-----------------------------------------------------------------------------
Number Average Number Average Number Average
of Price Per of Price Per of Price Per
Shares Share Shares Share Shares Share
-----------------------------------------------------------------------------
Balance at January 1 4,321 3,738 3,053
Granted 1,588 $ 9.50 794 $15.11 1,435 $19.32
Exercised (63) 13.99 (743) 6.24
Plutonic options retired
(see note 3) (1,033) 15.52
Expired (435) 23.38 (148) 22.04 (7) 16.43
--------- --------- ---------
Balance at December 31 4,441 4,321 3,738
========= ========= =========
Options exercisable at
December 31 2,136 2,248 1,933
Fair value of options granted
during the year $ 3.03 $ 4.95 $4.35
The fair value of each stock option is estimated on the date of grant
using a Black-Scholes option-pricing model with the following
weighted-average assumptions: an expected life of 1.2, 1.7 and 1.8 years
from the vesting date (with incremental vesting over four years) for 1998,
1997 and 1996, respectively, expected volatility of 31%, 30.9% and 31.7%
for 1998, 1997 and 1996, respectively, a dividend yield of 1% in each year,
and a risk-free interest rate of 5.7%, 6.6% and 5.4% in 1998, 1997 and
1996, respectively.
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------------------- ------------------------------------
Range of Weighted-Average Weighted-Average Weighted-Average
Exercise Prices Number Remaining Exercise Price Number Exercise Price
Per Share Outstanding Contractual Life Per Share Exercisable Per Share
------------------ --------------- --------------------- ------------------ ------------- ------------------
$ 9.37 to $9.37 1,421 9.2 years $ 9.37
9.55 to 15.23 1,352 6.4 years 13.96 718 $13.45
15.78 to 19.13 1,191 5.3 years 17.14 947 16.92
19.70 to 39.79 477 3.1 years 23.70 471 23.75
-------------- -------------
4,441 2,136
============== =============
At December 31, 1998 there were 0.3 million share rights (1997:0.2
million) outstanding under the 1996 plan. Share rights are converted into
common stock when certain performance measurement or vesting criteria are
met. During 1998, 91,000 shares valued at $0.8 million were converted into
common stock.
The Company elected to use the pro forma disclosure provisions of SFAS
123, "Accounting for Stock-Based Compensation," and has applied Accounting
Principles Board Opinion 25 and related interpretations in accounting for
its stock options. Accordingly, no compensation cost has been recognized
for the Company's stock options. The compensation cost for share rights is
being recognized based on the fair value of the Company's stock over the
period that the performance measurement and vesting criteria are estimated
to be met. Had compensation expense for the Company's stock options been
determined based on the fair value of options at the grant dates as
calculated in accordance with SFAS 123, the Company's net income and
earnings per share for the years ended December 31, 1998, 1997 and 1996
would have been as follows:
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
Loss Loss Earnings
Net Loss Per Share Net Loss Per Share Net Income Per Share
------------------------------- ------------------------------- -------------------------------
As reported $ (218,325) $ (1.02) $(230,606) $ (1.10) $ 45,765 $ 0.22
Pro forma (221,637) (1.04) (233,317) (1.11) 43,637 0.21
51
Other plans: Substantially all full-time United States employees of the
Company are eligible to participate in the Company's defined contribution
savings plans. The Company's matching contribution was approximately $1.9
million in 1998, $2.6 million in 1997 and $2.2 million in 1996.
Note 16: Fair Value of Financial Instruments
At December 31, 1998 and 1997 the carrying values of the Company's cash and
equivalents, short-term investments, noncurrent investments, long-term debt
and foreign currency options approximated their estimated fair values.
Note 17: Shareholders' Equity
On December 1, 1998 at a Special Meeting of Stockholders, Homestake Mining
Company stockholders approved a restated Certificate of Incorporation. The
restated certificate has increased the number of authorized shares of
Homestake common stock from 250 million to 450 million, increased the
number of authorized shares of Series A preferred stock from 2.5 million to
4.5 million, created one share of special voting stock and made certain
technical changes, primarily to reflect the existence of the special voting
stock.
HCI exchangeable shares: In connection with the 1998 acquisition of the
minority interests in Prime (see note 3), HCI issued 11.1 million HCI
exchangeable shares. Each HCI exchangeable share is exchangeable for one
Homestake common share at any time at the option of the holder and has
essentially the same voting, dividend (payable in Canadian dollars), and
other rights as one Homestake common share. The share of special voting
stock, which was issued to the transfer agent in trust for the holders of
the HCI exchangeable shares, provides the mechanism for holders of the HCI
exchangeable shares to receive their voting rights. At December 31, 1998
the Company had reserved 11.1 million shares of common stock for issuance
on exchange of the HCI exchangeable shares outstanding at that date.
Stock rights: Each share of common stock includes and trades with a right
which will become exercisable on a date designated by the Board of
Directors following the commencement of, or announcement of an intent to
commence, a tender offer by any person, entity or group for 15% or more of
the Company's common stock and the HCI exchangeable shares, considered as a
single class. When so exercisable, each right initially entitles the owner
to purchase from the Company one one-hundredth of a share of Series A
Participating Preferred Stock, par value $1 per share, at a price of $75
per share (the "Purchase Price"). Each one one-hundredth of a share of
Series A Preferred Stock is equivalent to one Homestake common share with
respect to voting and is entitled, on a quarterly basis, to the greater of
a ten cent cash dividend or the dividend payable on one Homestake common
share. In addition, if any person, entity or group (an "Acquiring Person")
acquires 15% or more of the Company's common stock and the HCI exchangeable
shares, considered as a single class, each right (whether or not previously
exercisable) thereafter entitles the owner (other than an Acquiring Person
or its affiliates and associates) to purchase for the Purchase Price the
number of one one-hundredth of a share of Series A Preferred Stock equal to
the Purchase Price divided by one-half of the market price of the Company's
common stock. In lieu of the rights holder exercising such right, the Board
of Directors has the option to issue, in exchange for each right, one-half
of the number of shares of preferred stock (or common stock having a value
equal to the Purchase Price) that would be issuable on exercise of the
right. If the Board of Directors has not exchanged shares for the rights
and the Company engages in a business combination with an Acquiring Person
(or affiliate or associate thereof), the holder of rights will be entitled
to purchase for the Purchase Price (i) common stock of the surviving
company or its publicly-held affiliate having a market value equal to twice
the Purchase Price, or (ii) common stock of the surviving company having a
book value equal to twice the Purchase Price if the surviving company and
its affiliates are not publicly held. The numbers of shares and the
Purchase Price are subject to adjustment for stock dividends, stock splits
and other changes in capitalization. The rights expire on October 15, 2007.
Each HCI exchangeable share trades with an HCI right issued under the
HCI rights agreement. The HCI rights entitle the holders to acquire
additional HCI exchangeable shares at the same price and in the same
amounts and circumstances in which holders of Company rights are entitled
to acquire Company common stock.
52
Note 18: Additional Cash Flow Information
Cash paid for interest and for income and mining taxes is as follows:
1998 1997 1996
--------------------------------------------------------
Interest, net of amount capitalized $20,236 $ 19,506 $ 18,785
Income and mining taxes, net of refunds 22,620 66,227 15,896
Certain investing and financing activities of the Company affected its
financial position but did not affect its cash flows. See note 3 for
discussions of the noncash acquisitions of the interests in Prime,
Plutonic, HGAL and the Mt Morgans mine.
Note 19: Contingencies
Environmental Contingencies
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") imposes heavy liabilities on persons who discharge hazardous
substances. The Environmental Protection Agency ("EPA") publishes a
National Priorities List ("NPL") of known or threatened releases of such
substances.
Grants: Homestake's former uranium millsite near Grants, New Mexico is
listed on the NPL. The total future cost for reclamation, remediation,
monitoring and maintaining compliance at the Grants site is estimated to be
$14 million.
Pursuant to the Energy Policy Act of 1992, the United States Department
of Energy ("DOE") is responsible for 51.2% of past and future costs of
reclaiming the Grants site in accordance with Nuclear Regulatory Commission
license requirements. Through December 31, 1998, Homestake had received
$25.6 million from the DOE and the accompanying balance sheet at December
31, 1998 includes an additional receivable of $8.2 million (see notes 7 and
11) for the DOE's share of reclamation expenditures made by Homestake
through 1998. Homestake believes that its share of the estimated remaining
cost of reclaiming the Grants facility is fully provided in the financial
statements at December 31, 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: Deposits of tailings along an 18-mile stretch of Whitewood
Creek formerly constituted a site on the NPL. Whitewood Creek was a site
where mining companies operating in the Black Hills of South Dakota,
including Homestake, placed mine tailings beginning in the nineteenth
century. Some tailings placed in Whitewood Creek eventually flowed into the
Belle Fourche River, the Cheyenne River and Lake Oahe. Homestake ceased the
placement of mine tailings into Whitewood Creek in 1977 and for more than
21 years the Homestake mine has impounded all mine tailings that are not
redeposited in the mine. The site was deleted from the NPL in 1996.
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. The complaint also
contained a pendent state law claim, alleging that the tailings constitute
a continuing public nuisance. The complaint asks for abatement of the
nuisance, damages in an unascertained amount, 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. Homestake has also counterclaimed against the State of South Dakota
and the Federal Trustees seeking cost recoupment, contribution and
indemnity.
Homestake, the State of South Dakota and the Federal Trustees are
engaged in settlement discussions with respect to these actions. If
settlement is not achieved, Homestake intends to vigorously defend these
actions and to seek cost recoupment, 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.
Other Contingencies
In addition to the above, the Company is party to legal actions and
administrative proceedings and is subject to claims arising in the ordinary
course of business. The Company believes the disposition of these matters
will not have a material adverse effect on its financial position or
results of operations.
53
Note 20: Foreign Currency, Gold and Other Commitments
Foreign Currency Contracts
Under the Company's foreign currency protection program, the Company has
entered into a series of foreign currency option contracts which
established trading ranges within which the United States dollar may be
exchanged for foreign currencies by setting minimum and maximum exchange
rates. Net unrealized losses on contracts outstanding at December 31, 1998
and 1997 were $24 million and $20.4 million, respectively. Other income for
the years ended December 31, 1998, 1997 and 1996 includes income (losses)
of $(34.3) million, $(28.5) million, and $1.6 million, respectively,
related to this program. At December 31, 1998 the Company had foreign
currency contracts outstanding as follows:
Amount Covered Rates to U.S. Dollars
-------------------------------------- Expiration
Currency (U.S. Dollars) Put Options Call Options Dates
- -----------------------------------------------------------------------------------
Canadian $138,000 0.69 0.72 1999
Canadian 89,420 0.69 0.72 2000
Canadian 59,110 0.66 0.69 2001
Australian 92,000 0.66 0.69 1999
Australian 68,620 0.64 0.67 2000
Australian 23,000 0.60 0.63 2001
-------------
$470,150
=============
In addition to amounts related to the foreign currency option
contracts, the Company recorded mark-to-market foreign currency losses on
intercompany debt of $5.7 million in 1998, $5.7 million in 1997, and $8.9
million in 1996 which also were included in other income. These foreign
currency exchange losses are related to the Company's Canadian and
Australian dollar denominated advances to its foreign subsidiaries.
Gold and Silver Contracts
Homestake's current hedging policy provides for the use of forward sales
contracts to hedge up to 30% of each of the following ten year's expected
annual gold production, and up to 30% of each of the following five year's
expected annual silver production, at prices in excess of certain targeted
prices. The policy also provides for the use of combinations of put and
call option contracts to establish minimum floor prices.
During 1998, 1997 and 1996, the Company delivered or financially
settled 358,000, 656,000 and 508,400 ounces of its gold production into
forward gold contracts at average prices of $359, $421 and $474 per ounce,
respectively, and delivered 900,000 ounces of gold at a price of $325 per
ounce under options contracts. During 1998, the Company also closed out and
financially settled one million ounces of its Australian dollar-denominated
forward gold contracts. The gain of $5 million realized on this transaction
has been deferred and will be recorded in income as the originally
designated production is sold. At December 31, 1998 the Company had
committed 610,000 ounces of its future gold production for sale through the
year 2005 under forward sales contracts as follows:
US $ Denominated Australian $ Denominated
-------------------------------------------- ---------------------------------------------
Average Price Average Price
Year (ounces) (US$ per ounce) (ounces) (US$ per ounce)*
- ----------------------------------------------------------------------------------------------------------------
1999 109,920 $415
2000 85,080 430 24,800 $322
2001 95,000 441 24,800 322
2002 95,000 457 24,800 322
2003 75,000 481 24,800 322
2004 24,800 322
2005 26,000 322
------------------ ------------------
460,000 150,000
================== ==================
* Exchange rate of A$ = US$ 0.6112
At December 31, 1998 the Company was a party to the following gold
option contracts.
Put Options Owned Call Options Written
--------------------------------- ------------------------------------
Currency Average Price Average Price Exercisable
Denomination (ounces) (US$ per ounce)* (ounces) (US$ per ounce) During
- -------------------------------------------------------------------------------------------------------------
United States 100,000 $293 100,000 $304 1999
United States 30,000 350 15,000 395 2000
Australian 120,000 309 1999
Australian 120,000 318 2000
Australian 120,000 327 2001
------------- -------------
490,000 115,000
============= =============
* Exchange rate of A$ = US$ 0.6112
At December 31, 1998 the Company also had forward sales contracts
outstanding for approximately 7.2 million ounces of silver for delivery
during 1999 through 2001 at an average price of $6.28 per ounce.
The Company does not require or place collateral for its foreign
currency and gold hedging derivatives. However, the Company minimizes its
credit risk by dealing with only major international banks and financial
institutions.
The Company has entered into various commitments during the ordinary
course of its business, which include commitments to perform assessment
work and other obligations necessary to maintain or protect its interests
in mining properties, financing and other obligations to joint ventures and
partners under venture and partnership agreements, and commitments under
federal and state environmental health and safety permits.
54
Note 21: Segment Information
In 1998, the Company adopted SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company primarily is engaged in
gold mining and related activities. Gold operations are managed and
internally reported based on the following geographic areas: United States,
Australia and Canada. The Company also has gold operations in Chile, other
foreign exploration activities and a sulfur operation in the Gulf of Mexico
which are included in "Corporate and All Other". Within each geographic
segment, operations are managed on a mine-by-mine basis. However, due to
each mine having similar characteristics, the Company has adopted the
aggregation approach available under SFAS 131.
REPORTABLE SEGMENTS
Corporate
United and All Reconciling
States Australia Canada Other Items Total
--------------------------------------------------------------------------------
1998
Revenues $253,082 $ 292,808 $ 219,671 $ 37,887 $ (5,671)(a) $797,777
Depreciation expense 43,512 44,126 44,563 7,170 139,371
Operating earnings (loss) 41,423 27,544 61,572 (3,753) (5,671)(a) 121,115
Exploration expense 11,512 23,316 4,983 15,534 55,345
Write-downs and unusual items 123,641 65,736 3,835 10,445 203,657
Capital expenditures 23,412 40,095 8,925 891 73,323
Property, plant and equipment 129,671 426,710 533,013 11,470 1,100,864
Total assets 169,678 540,323 683,828 587,427 (333,725)(a) 1,647,531
Production (equivalent ounces of gold) 691,472 925,700 890,450 24,119 2,531,741
1997
Revenues $246,401 $ 368,368 $ 261,167 $ 100,860(b) $ (5,381)(a) $971,415
Depreciation expense 36,541 76,107 41,639 8,494 162,781
Operating earnings (loss) 10,608 27,059 87,922 60,787 (5,381)(a) 180,995
Exploration expense 13,902 25,623 8,406 17,307 65,238
Write-downs and unusual items 38,872 92,603 19,536 134,304(c) 285,315
Capital expenditures 89,664 88,878 19,983 6,104 204,629
Property, plant and equipment 227,988 523,447 259,343 10,369 1,021,147
Total assets 281,089 658,690 427,388 293,476 (51,109)(a) 1,609,534
Production (equivalent ounces of gold) 702,754 974,289 835,358 16,530 2,528,931
1996
Revenues $291,900 $ 378,751 $ 304,530 $ 35,489 $(12,224)(a) $998,446
Depreciation expense 35,707 62,992 45,894 7,259 151,852
Operating earnings (loss) 53,427 66,526 122,737 637 (12,224)(a) 231,103
Exploration expense 11,861 29,844 9,751 15,907 67,363
Write-downs and unusual items 8,983 8,983
Capital expenditures 37,351 121,627 5,964 5,008 169,950
Property, plant and equipment 191,078 670,663 295,307 118,991 1,276,039
Total assets 215,392 909,195 494,083 453,384 (132,724)(a) 1,939,330
Production (equivalent ounces of gold) 732,107 818,627 858,922 8,274 2,417,930
<FN>
a) Primarily intercompany financing.
b) Includes Santa Fe merger termination fee of $62.9 million.
c) Includes write-down of Homestake's investment in the Main Pass 299
sulfur mine of $107.8 million.
</FN>
Sales to individual customers exceeding 10% of the Company's 1998
consolidated revenues were as follows:
1998 1997 1996
-------------------------------------------------------
Customer A $ 120,100
B 108,000 $ 100,000 $ 129,000
C 99,200 143,000 117,000
D 75,600 77,000
Because of the active worldwide market for gold, Homestake believes
that the loss of any of these customers would not have a material adverse
impact on the Company.
55
Note 22: Homestake Canada Inc.
Homestake owns all of HCI's common shares outstanding. At December 31,
1998, HCI had 11.1 million HCI exchangeable shares outstanding all of which
were held by the public (see notes 3 and 17). Summarized financial
information for HCI is as follows:
December 31,
1998 1997
----------------------------------------------
Current assets $ 149,102 $ 160,966
Noncurrent assets 524,588 260,278
------------------ --------------------
Total assets $ 673,690 $ 421,244
================== ====================
Notes payable to the Company $ 144,002 $ 23,459
Other current liabilities 40,837 27,768
Long-term liabilities 15,882 24,893
Deferred income and mining taxes 193,074 101,090
Minority interests 96,877
Redeemable preferred stock
held by the Company 36,167 49,929
Shareholders' equity 243,728 97,228
------------------ --------------------
Total liabilities and
shareholders' equity $ 673,690 $ 421,244
================== ====================
Year ended December 31,
------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------
Total revenues $ 218,978 $ 261,167 $ 317,821
Costs and expenses 180,920 210,575 206,731
----------------- ------------------ -----------------
Income before taxes and
minority interests $ 38,058 $ 50,592 $ 111,090
================= ================== =================
Net income $ 13,213 $ 9,953 $ 63,705
================= ================== =================
56
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors of
Homestake Mining Company:
In our opinion, the accompanying consolidated balance sheets and the related
statements of consolidated operations, shareholders' equity, comprehensive
income (loss) and of cash flows present fairly, in all material respects, the
financial position of Homestake Mining Company and its subsidiaries at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ---------------------------------
PricewaterhouseCoopers LLP
San Francisco, California
February 1, 1999
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Homestake Mining Company
and Subsidiaries are prepared by the Company's management in conformity with
generally accepted accounting principles. Management is responsible for the
fairness of the financial statements, which include estimates based on
judgments.
The Company maintains accounting and other control systems which management
believes provide reasonable assurance that financial records are reliable for
the purpose of preparing financial statements and that assets are properly
safeguarded and accounted for. Underlying the concept of reasonable assurance is
the premise that the cost of controls should not be disproportionate to the
benefits expected to be derived from such controls. The Company's internal
control structure is reviewed by its internal auditors and to the extent
necessary by the external auditors in connection with their independent audit of
the Company's consolidated financial statements.
The external auditors conduct an independent audit of the consolidated
financial statements in accordance with generally accepted auditing standards in
order to express their opinion on these financial statements. These standards
require that the external auditors plan and perform the audit to obtain
reasonable assurance that the financial statements are free of material
misstatement.
The Audit Committee of the Board of Directors, composed entirely of outside
directors, meets periodically with management, internal auditors and the
external auditors to discuss the annual audit, internal control, internal
auditing and financial reporting matters. The external auditors and the internal
auditors have direct access to the Audit Committee.
/s/ Jack E. Thompson
- --------------------
Jack E. Thompson
Chairman, President and Chief Executive Officer
/s/ David W. Peat
- -----------------
David W. Peat
Vice President and Controller
(Chief Accounting Officer)
February 1, 1999
57
Quarterly Selected Data
(In thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------------------------------------------
1998:
Revenues $216,217 $195,285 $ 183,429 $ 202,846 $ 797,777
Net income (loss) (6,586)(1) (30,931)(2) (182,226)(3) 1,418 (4) (218,325)(1-4)
Per common share:
Net income (loss)(9) $ (0.03)(1) $ (0.15)(2) $ (0.86)(3) $ 0.01 (4) $ (1.02)(1-4)
Dividends paid (10) 0.05 0.05 0.10
1997:
Revenues $317,338 $226,060 $ 217,737 $ 210,280 $ 971,415
Net income (loss) 48,256 (5) (64,857)(6) (155,561)(7) (58,444)(8) (230,606)(5-8)
Per common share:
Net income (loss) (9) $ 0.23 (5) $ (0.31)(6) $ (0.74)(7) $ (0.28)(8) $ (1.10)(5-8)
Dividends paid (10) 0.05 0.05 0.05 0.15
<FN>
1. Includes business combination and integration costs of $2.7 million ($2.8
million pretax) or $0.01 per share and charges of $5.9 million ($8.9
million pretax) or $0.03 per share related to the restructuring of the
Homestake mine.
2. Includes business combination and integration costs of $15 million ($17.9
million pretax) or $0.07 per share and reductions in the carrying values of
resource assets of $2.6 million ($2.9 million pretax) or $0.02 per share.
3. Includes write-downs and unusual charges of $165.9 million ($187.9 million
pretax) or $0.78 per share including (i) reductions of $115.4 million
($135.9 million pretax) in the carrying values of resource assets, (ii) an
increase of $35 million ($35 million pretax) in estimated accruals for
remediation and reclamation expenditures, (iii) write-downs of $7.3 million
($7.9 million pretax) of noncurrent investments, and (iv) other charges of
$8.2 million ($9.1 million pretax).
4. Includes a reduction in business combination and integration costs of $1
million ($1.6 million pretax) and write-downs and unusual charges of $3.9
million ($3.9 million pretax) or $0.01 per share including (i) reductions
of $2.6 million ($2.6 million pretax) in the carrying values of resource
assets, (ii) an increase of $1 million ($1 million pretax) in estimated
accruals for reclamation expenditures, and (iii) write-downs of $0.3
million ($0.3 million pretax) in noncurrent investments.
5. Includes a gain of $47.2 million ($62.9 million pretax) or $0.22 per share
on the fee received upon termination of Homestake's merger agreement with
Santa Fe Pacific Gold Corporation and a gain of $8.1 million ($13.5 million
pretax) or $0.04 per share on the sale of the George Lake and Back River
joint venture interests in the Northwest Territories of Canada.
6. Includes write-downs and unusual charges of $50 million ($65.1 million
pretax) or $0.24 per share including (i) a reduction of $31.9 million ($45
million pretax) in the carrying value of resource assets, (ii) write-downs
of $14.5 million ($14.5 million pretax) of certain mining investments, and
(iii) other charges of $3.6 million ($5.6 million pretax).
7. Includes write-downs and unusual charges of $145.1 million ($183.6 million
pretax) or $0.69 per share including (i) a write-down of $84.9 million
($107.8 million pretax) in Homestake's investment in the Main Pass 299
sulfur mine, (ii) a reduction of $18.2 million ($24.3 million pretax) in
the carrying values of resource assets, (iii) an increase of $21.5 million
($29.1 million pretax) in the estimated accrual for future reclamation
expenditures, (iv) write-downs of $14.7 million ($16.5 million pretax) of
certain mining investments, and (v) other charges of $5.8 million ($5.9
million pretax) primarily related to foreign exchange losses on
intercompany redeemable preferred stock.
8. Includes write-downs and unusual charges of $29.8 million ($36.6 million
pretax) or $0.14 per share including (i) a reduction of $10 million ($15.4
million pretax) in the carrying values of resource assets, (ii) write-downs
of $16.4 million ($16.9 million pretax) of certain mining investments, and
(iii) other charges of $3.3 million ($4.3 million pretax) primarily losses
on an intercompany gold loan.
9. Basic and diluted earnings per share.
10. Homestake only.
</FN>
58
Five-Year Selected Data (1)
(In thousands, except per share amounts)
1998 1997 1996 1995 1994
----------------------------------------------------------------------------------
Revenues $ 797,777 $ 971,415 $ 998,446 $ 949,251 $ 829,935
Net income (loss) (218,325)(2) (230,606)(3) 45,765(4) 49,942 93,631(5)
Net income (loss) per share (6) (1.02)(2) (1.10)(3) 0.22(4) 0.25 0.47(5)
Total assets 1,647,531 1,609,534 1,939,330 1,673,390 1,460,968
Long-term debt 357,410 374,593 254,668 274,292 188,085
Other long-term obligations 168,178 152,610 123,475 127,558 111,065
Deferred income
and mining taxes 230,567 161,862 218,379 202,607 147,278
Minority interests 7,825 108,116 103,960 100,380 94,140
Shareholders' equity 735,832 683,505 1,023,825 848,640 799,376
Dividends per share (7) 0.10 0.15 0.20 0.20 0.175
<FN>
1. Five-year selected financial data reflects the 1998 combination of
Homestake and Plutonic on a pooling-of-interests basis, accordingly all
periods include the results of Plutonic.
2. Includes business combination and integration costs of $16.7 million ($19.1
million pretax) or $0.08 per share and write-downs and other unusual
charges of $178.3 million ($203.6 million pretax) or $0.83 per share
including (i) a reduction in the carrying values of resource assets of
$120.6 million ($141.4 million pretax), (ii) an increase in the estimated
accrual for remediation and reclamation expenditures of $36 million ($36
million pretax), (iii) Homestake mine restructuring charges of $5.9 million
($8.9 million pretax), (iv) write-downs of investments of $7.6 million
($8.2 million pretax), and (v) other charges of $8.2 million ($9.1 million
pretax).
3. Includes a gain of $47.2 million ($62.9 million pretax) or $0.22 per share
on the fee received upon termination of Homestake's merger agreement with
Santa Fe Pacific Gold Corporation, a gain of $10.4 million ($10.4 million
pretax) or $0.05 per share with respect to the cancellation of an option to
acquire Great Central Mines Limited, and a gain of $8.1 million ($13.5
million pretax) or $0.04 per share on the sale of the George Lake and Back
River joint venture interests in the Northwest Territories of Canada, and
write-downs and unusual charges of $224.9 million ($285.3 million pretax)
or $1.07 per share including (i) a write-down of $84.9 million ($107.8
million pretax) in Homestake's investment in the Main Pass 299 sulfur mine,
(ii) a reduction of $60.1 million ($84.7 million pretax) in the carrying
values of resource assets, (iii) write-downs of $45.7 million ($47.9
million pretax) of certain investments, (iv) an increase of $21.5 million
($29.1 million pretax) in the accrual for estimated future reclamation
expenditures, and (v) other charges of $12.7 million ($15.8 million pretax)
consisting primarily of foreign exchange losses on intercompany redeemable
preferred stock and losses on an intercompany gold loan.
4. Includes income of $24 million or $0.11 per share from a reduction in the
Company's accrual for prior year income taxes, a gain of $7.9 million ($7.9
million pretax) or $0.04 per share from the sale of the investment in Eagle
Mining Corporation NL, a foreign currency exchange loss on intercompany
advances of $7.4 million ($8.9 million pretax) or $0.04 per share primarily
related to the Company's Canadian-dollar denominated advances to HCI,
write-downs of $8.3 million ($9 million pretax) or $0.04 per share in the
carrying values of investments in mining company securities, and proceeds
of $4.9 million ($5.5 million pretax) or $0.02 per share from a litigation
recovery.
5. Includes a gain of $12.6 million ($15.7 million pretax) or $0.06 per share
on the sale of the Company's interest in the Dee mine and a gain of $11.2
million ($11.2 million pretax) or $0.06 per share on dilution of the
Company's interest in Prime.
6. Basic and diluted earnings per share.
7. Homestake only.
</FN>
Common Stock Price Range
(Prices as quoted on the New York Stock Exchange)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------------------------------
1998: High $11.19 $13.13 $12.69 $15.00 $15.00
Low 7.69 9.31 8.69 8.38 7.69
1997: High $16.63 $15.25 $15.38 $15.56 $16.63
Low 13.13 12.75 12.31 8.31 8.31
59