SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-16484
Getchell Gold Corporation
(Exact name of Registrant as specified in its charter)
Delaware 64-0748908
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5460 South Quebec Street
Suite 240
Englewood, Colorado 80111
(Address of principal executive offices) (Zip code)
(303) 771-9000
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title Outstanding
Common Stock, par value $0.0001 26,771,871 on April 28, 1997
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GETCHELL GOLD CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended
March 31,
--------------------
1997 1996
------- -------
Net sales $14,862 $14,655
Cost of sales 19,811 16,578
------- -------
Gross loss 4,949 1,923
General and administrative expenses 3,120 1,218
Exploration expenses 572 852
------- -------
Loss from operations 8,641 3,993
Interest expense, net of capitalized interest (221) (233)
Interest and other income 883 1,623
------- -------
Loss before income taxes 7,979 2,603
Income tax benefit - (870)
------- -------
Net loss $ 7,979 $ 1,733
======= =======
Loss per common share $ 0.31 $ 0.07
======= =======
Weighted average number of shares outstanding 25,935 25,679
======= =======
The accompanying notes are an integral part of these statements.
2
GETCHELL GOLD CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
March December
31, 1997 31, 1996
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 96,461 $ 64,130
Accounts receivable:
Trade 3,019 2,478
Employee 177 171
Other 24 315
-------- --------
Total accounts receivable 3,220 2,964
-------- --------
Inventories:
Ore and ore in process 2,564 1,816
Materials and supplies 7,932 8,676
-------- --------
Total inventories 10,496 10,492
-------- --------
Deferred hedging gains, net - 362
Prepaid expenses 698 1,098
-------- --------
Total current assets 110,875 79,046
Property, plant and equipment, net 137,997 129,762
-------- --------
Total assets $248,872 $208,808
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,516 $ 8,378
Accrued expenses 2,199 1,740
Deferred revenues 161 -
Current portion of capital lease obligations 1,847 1,753
Stock Appreciation Rights liability 2,463 -
-------- --------
Total current liabilities 12,186 11,871
Long-term debt, principally ChemFirst Inc. 25,324 25,336
Capital lease obligations, less current installments 8,534 9,092
Deferred income taxes 7,741 7,741
Reclamation liabilities 2,747 2,694
Other liabilities 1,406 852
-------- --------
Total liabilities 57,938 57,586
-------- --------
Stockholders' equity :
Preferred stock, par value $0.0001;
10,000,000 shares authorized; none issued - -
Common stock, par value $0.0001;
50,000,000 shares authorized; issued and
outstanding 26,771,871 at March 31, 1997
and 25,765,871 at December 31, 1996 3 3
Contributed and paid-in capital 220,571 172,879
Accumulated deficit (29,640) (21,660)
-------- --------
Total stockholders' equity 190,934 151,222
-------- --------
Total liabilities and
stockholders' equity $248,872 $208,808
======== ========
The accompanying notes are an integral part of these statements.
3
GETCHELL GOLD CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
--------------------
1997 1996
------- --------
Cash flows from operating activities:
Net loss $(7,979) $ (1,733)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 2,356 1,720
Deferred income taxes - (870)
Deferred hedging gain, net 362 478
Deferred revenues 161 -
Other - 7
Net change in operating assets and liabilities:
Accounts receivable (256) 572
Inventories (4) (712)
Prepaid expenses 400 168
Accounts payable (2,650) (1,385)
Accrued expenses 459 (446)
Stock Appreciation Rights liability 2,463 -
Other liabilities 607 52
-------- --------
Cash used in operating activities (4,081) (2,149)
-------- --------
Cash flows from investing activities- -------- --------
Additions to property, plant and mine development (10,803) (8,812)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 47,679 320
Proceeds from long-term debt - 31
Principal payments under capital lease obligation (464) (139)
-------- --------
Cash provided by financing activities 47,215 212
-------- --------
Net increase (decrease) in cash and cash equivalents 32,331 (10,749)
Cash and cash equivalents at beginning of period 64,130 114,633
-------- --------
Cash and cash equivalents at end of period $ 96,461 $103,884
======== ========
The accompanying notes are an integral part of these statements.
4
GETCHELL GOLD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the financial statements reflect all
adjustments of a normal and recurring nature which are necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods. These financial statements should be read in conjunction with
the Annual Report of Getchell Gold Corporation (the "Company") on Form 10-K for
the year ended December 31, 1996.
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) $50 MILLION PUBLIC EQUITY OFFERING
On March 17, 1997, the Company completed an equity offering of 1,000,000
common shares which resulted in net proceeds to the Company of $47.7 million
after offering costs and expenses of $2.3 million. Net proceeds of the offering
will be used for the continued development of the Turquoise Ridge mine, for
exploration on the Getchell property and for general corporate purposes.
(3) HEDGING ACTIVITIES AND COMMITMENTS
Precious metals contracts consist of spot deferred and call option
contracts. The Company uses these contracts to protect earnings and cash flows
from the impact of short-term drops in gold price. Risk of loss arises from the
possible inability of the counterparty to fulfill its obligations under the
contracts and from changes in the Company's potential ability to deliver gold,
although nonperformance by any party to the contract is not anticipated.
At March 31, 1997, the Company's outstanding spot deferred contracts were
for 110,000 ounces at an average price of $392 per ounce. Of these contracts,
50,000 ounces were for delivery in 1997 at a weighted average price of $399 and
60,000 ounces were for delivery in
5
1998 at a weighted average price of $385. Based on the market price of gold at
March 31, 1997, the unrealized gains on the spot deferred contracts were $1.9
million.
Deferred revenue includes premiums received for call options sold. The
deferred amounts are recognized in income when the option expires or the related
transaction occurs. At March 31, 1997, the Company's outstanding call option
contracts were for 75,000 ounces of gold at a weighted average price of $375 per
ounce and 100,000 ounces of silver at a weighted average price of $5.50 per
ounce. All call option contracts expire prior to November 1997.
(4) PROPERTY, PLANT AND EQUIPMENT (In thousands)
At At
March December
31, 1997 31, 1996
-------- --------
Land and land improvements $ 9,524 $ 9,524
Buildings and equipment 117,174 115,550
Mine development 42,429 38,757
Construction-in-progress 54,211 48,916
-------- --------
Total property, plant and equipment 223,338 212,747
Accumulated depreciation, depletion and amortization (85,341) (82,985)
-------- --------
Net property, plant and equipment $137,997 $129,762
======== ========
Depreciation and depletion expense was $2.4 million and $1.7 million for
the three months ended March 31, 1997 and 1996, respectively.
Capitalized interest was $0.4 million and $0.2 million for the three months
ended March 31, 1997 and 1996, respectively.
(5) EMPLOYEE BENEFITS
On February 14, 1997, the Compensation, Human Resource and Director Affairs
Committee of the Board of Directors of the Company granted stock appreciation
rights ("SARS") under the Company's 1996 Long Term Equity Incentive Plan with
respect to 75,983 shares at a weighted average option price of $8.32 per share
to certain executives and other
6
employees of the Company. Compensation with respect to SARS is accounted for on
a variable basis and is "marked to market" at the end of each fiscal quarter
based on the market price of the Company's Common Stock. Based on the $40.625
market price of the Company's Common Stock at March 31, 1997, the Company
recognized compensation expense of $2.5 million, or $0.10 per share, in the
first quarter 1997. Of the $2.5 million, $1.6 million was charged to general and
administrative costs, $0.6 million was charged to cost of sales and $0.3 million
was charged to exploration. The Company's future quarterly results will reflect
only compensation expense or income with respect to these SARS based on the
change in the market price of the Common Stock as compared to the market price
at the end of the preceding quarter.
(6) SUPPLEMENTAL CASH FLOW INFORMATION
Net cash provided by operating activities includes the following cash
payments (in thousands):
Three Months Ended
March 31,
---------------------------
1997 1996
----------- -----------
Interest, net of amounts capitalized $ (163) $ (74)
Income taxes paid $ - $ -
(7) COMMITMENTS AND CONTINGENCIES
Environmental Obligations
The Company's mining and exploration activities are subject to various
federal and state laws and regulations governing the protection of the
environment. These laws and regulations are continually changing and are
generally becoming more restrictive. The Company conducts its operations so as
to protect the public health and environment and believes its operations are in
compliance with all applicable laws and regulations. The Company has made, and
expects to make in the future, expenditures to comply with such laws and
regulations. The Company cannot predict such future expenditures.
Internal Revenue Service Tax Claim
In October 1996, the Internal Revenue Service ("IRS") filed a notice of
deficiency, stating that the IRS is proceeding against the Company's former
Parent Company, ChemFirst Inc. ("ChemFirst") and, thus the Company (see Note 7
to Item 8 - "Financial Statements and Supplementary Data" as found in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996
regarding the Amended Tax Sharing Agreement between ChemFirst
7
and the Company), for income taxes associated with ChemFirst's consolidated
income tax returns filed in 1989 and 1990. The Company's share of the asserted
deficiency, including interest, totals approximately $4.5 million. In response,
ChemFirst and the Company filed a petition with the United States Tax Court in
December 1996. The Company believes it has adequately reserved for this tax
matter.
Major Contracts
The Company has an agreement with an independent contractor who provides
oxygen for the autoclave process in the mill. The agreement requires, among
other things, that the Company must pay the independent contractor at a rate
(subject to future adjustments for inflation) of approximately $0.2 million a
month. The Company is also obligated to pay a termination fee if the contract
were to be terminated prior to January 2004. The termination fee is $2.8 million
in 1997 and decreases each year until reaching $0.4 million in 2004.
Royalties
The Company is obligated to pay a 2% royalty on net smelter returns of the
current mineral production from certain of its mining properties. Royalties,
recorded as operating costs, amounted to $0.1 million and $0.4 million in the
three months ended March 31, 1997 and 1996, respectively.
Letter of Credit
At December 31, 1996, a $1.0 million unsecured letter of credit was
outstanding for bonding of a reclamation plan. In January 1997, this letter of
credit was increased to $4.5 million. This letter of credit reflects fair value
as a condition of its underlying purpose and is subject to fees competitively
determined in the market place.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The information set forth in this discussion and analysis includes both
historical information and "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and is subject
to the safe harbor created by that section. To the extent that this report
contains forward-looking statements regarding the financial condition, operating
results, business prospects or any other operations of the Company, the
Company's actual financial condition, operating results and business prospects
may differ materially from that projected or estimated by the Company in
forward-looking statements. Factors that realistically could cause results to
differ materially from those projected in the forward-looking statements are set
forth in "Risk Factors" below.
Results of Operations
Results for the quarter ended March 31, 1997 were a loss of $8.0 million or
$0.31 per share versus a loss of $1.7 million or $0.07 per share for the quarter
ended March 31, 1996. The 1997 results reflected higher costs of sales related
to an increased scope of operations, a new benefit plan expense and production
problems at the Getchell Underground mine, including a fatality and flooding.
Also, higher corporate general and administrative costs along with lower
interest income and tax benefit compounded this higher loss for the 1997
quarter. The following table highlights sales and production information for the
quarters ended March 31, 1997 and 1996:
Three Months Ended
March 31,
---------------------------------
1997 1996
------------- --------------
Ounces sold 37,729 37,217
Average realized price per ounce $394 $394
Average market price per ounce $349 $403
Cash cost per ounce $462 $398
Total cost per ounce $525 $445
Ore milled 270,245 268,225
Underground ore milled 104,162 88,611
Sales revenues for the 1997 first quarter were essentially unchanged from
the 1996 first quarter. During the first quarter of 1997 gold sales were 37,729
ounces compared to 37,217 ounces in the first quarter of 1996, both at an
average realized price of $394 per ounce. The Company hedged a portion of its
production which resulted in a higher realized price than the
9
average market price of $349 per ounce in the 1997 first quarter and a
lower realized price than the average market price of $403 per ounce in the 1996
first quarter. Initial revenue from the Turquoise Ridge mine development ore,
expected no earlier than the fourth quarter of 1997, will be offset against the
capital costs of the Turquoise Ridge project until the Turquoise Ridge mine is
declared to be in commercial production, which is expected no earlier than the
second half of 1998.
On February 14, 1997, the Compensation, Human Resource and Director Affairs
Committee of the Board of Directors of the Company granted stock appreciation
rights ("SARS") under the Company's 1996 Long Term Equity Incentive Plan with
respect to 75,983 shares at a weighted average option price of $8.32 per share
to certain executives and other employees of the Company. Compensation with
respect to SARS is accounted for on a variable basis and is "marked to market"
at the end of each fiscal quarter based on the market price of the Company's
Common Stock. Based on the $40.625 market price of the Company's Common Stock at
March 31, 1997, the Company recognized compensation expense of $2.5 million, or
$0.10 per share, in the first quarter 1997. Of the $2.5 million, $1.6 million
was charged to general and administrative costs, $0.6 million was charged to
minesite administrative costs included in cost of sales and $0.3 million was
charged to exploration. The Company's future quarterly results will reflect only
compensation expense or income with respect to these SARS based on the change in
the market price of the Common Stock as compared to the market price at the end
of the preceding quarter.
Cost of sales was $19.8 million in the 1997 first quarter, up from $16.6
million in the 1996 first quarter and cash costs per ounce produced were $462
and $398 for the 1997 and 1996 first quarters, respectively. The increases in
the cost of sales and the cash costs per ounce in the 1997 first quarter over
the 1996 first quarter were fundamentally due to the increased scope of mining
activities at the Getchell Property although there was no related increase in
gold production. Production was hampered in the first quarter of 1997 due to
rain induced flooding around the Getchell Underground minesite in January and
productivity was reduced in January and February due to a fatality. Higher
mining, milling and minesite administrative costs contributed to the higher cash
cost of sales in the first quarter of 1997 as compared to the same quarter a
year ago. Increases of $0.8 million in mining costs related primarily to
increases in productive capacity while $0.9 million in higher milling costs were
primarily due to higher reagent costs. Higher minesite administrative cost of
$1.3 million were primarily due to the costs associated with the SARS as well as
higher payroll costs due to an increase in the number of administrative
employees required to support the expansion of the Getchell Underground mine and
construction of the Turquoise Ridge mine. Higher depreciation expense of $0.5
million in the first quarter of 1997 compared to the first quarter of 1996
reflected the addition of assets throughout 1996.
General and administrative costs were $3.1 million in the first quarter of
1997 versus $1.2 million in the first quarter of 1996. The increase in the 1997
first quarter expense over the expense in the first quarter of 1996 was
primarily due to the SARS expense for certain corporate executives and
employees.
10
Exploration expenses totaled $0.6 million in the first quarter of 1997,
down from $0.9 million in the first quarter of 1996. The lower exploration
expenses in the 1997 period reflect the Company's exploration focus on the
Turquoise Ridge project for which drilling expenditures are capitalized.
Net interest expense was $0.2 million in the both the first quarter of 1997
and 1996. With higher capitalized expenditures relating to the Turquoise Ridge
project during the 1997 first quarter, capitalized interest was $0.4 million in
the first quarter of 1997 compared to $0.2 million in the first quarter of 1996.
Interest and other income of $0.9 million in the first quarter of 1997 was
lower than the $1.6 million in the first quarter of 1996 due to lower cash and
cash equivalent balances throughout the first quarter of 1997.
A $0.9 million tax benefit was recognized on the pretax loss in the first
quarter of 1996 with no additional benefits taken subsequent to the first
quarter of 1996. Based upon tax planning strategies and estimates of future
operations, the Company anticipates being subject to the alternative minimum tax
in the future. As such, it is more likely than not that the Company will be
unable to realize the benefit of Federal net operating loss carryforwards.
Liquidity and Capital Resources
During the first quarter of 1997, the Company consumed $4.1 million of cash
in operations and $10.8 million in capital expenditures. These capital
expenditures included $5.9 million on the Turquoise Ridge mine development, $3.2
million on the Getchell Underground mine, $0.7 million on the mill, $0.7 million
on development drilling and $0.3 million on other items. On the Turquoise Ridge
mine construction, sinking of the ventilation shaft had progressed at March 31,
1997 to a depth of 1,116 feet. The production hoist and head frame were
completed during the fourth quarter of 1996 at the production shaft, and shaft
sinking had reached a depth of 395 feet by March 31, 1997. All surface hoisting
and support facilities are completed. Total expenditures on the Turquoise Ridge
mine construction through March 31, 1997 are $39 million, with an estimated $50
million more to be spent to complete, although there can be no assurance that
actual expenditures will not differ materially from this amount.
In March 1997, the Company completed an equity offering of 1,000,000 shares
of Common Stock which resulted in net proceeds to the Company of $47.7 million.
As of March 31, 1997, cash and cash equivalents were $96.5 million.
Approximately $70 million is expected to be spent on capital projects in
1997, including the Turquoise Ridge mine as discussed, modifications to the
mill, the Getchell Underground mine development, equipment and development
drilling, although there can be no assurance that actual expenditures will not
differ materially from this amount. The Company plans on financing these capital
development projects and its operations from the existing cash and cash
equivalents. Any shortfalls in funds required to meet these needs may be
supplemented by additional funds raised through borrowings or securities
offerings. The recoverability of the
11
Turquoise Ridge assets and completion of the underground mine is dependent on
the Company's ability to raise sufficient funds to complete the construction.
There can be no assurance that funding will be available on favorable terms, if
at all.
The principal balance of the Company's promissory note with ChemFirst was
$25.3 million at March 31, 1997. The promissory note is due September 22, 2000
or upon a change in control of the Company and may be prepaid without penalty.
The interest rate on the loan is the London Interbank Offered Rate for a period
selected by the Company, plus an applicable margin based on the Company's
leverage ratio. The interest rate was 6-5/32% at March 31, 1997. Since the
inception of the promissory note, interest has been capitalized to the note at
the end of each interest period.
Risk Factors
Readers should carefully consider the risk factors set forth below, as well
as all information included in this document and the Annual Report of the
Company on Form 10-K for the year ended December 31, 1996 and the documents
incorporated by reference therein.
Gold Price Volatility
The Company's profitability is significantly affected by changes in the
price of gold. Gold prices may fluctuate widely and are affected by numerous
industry factors, such as demand for precious metals, forward selling by
producers, central bank sales and purchases of gold and production and cost
levels in major gold-producing regions. Moreover, gold prices are also affected
by macro-economic factors such as expectations for inflation, interest rates,
currency exchange rates and global or regional political and economic
situations. The current demand for and supply of gold affects gold prices, but
not necessarily in the same manner as current demand and supply affect the
prices of other commodities. The potential supply of gold consists of new mine
production plus existing stocks of bullion and fabricated gold held by
governments, financial institutions, industrial organizations and individuals.
Since mine production in any single year constitutes a very small portion of the
total potential supply of gold, normal variations in current production do not
necessarily have a significant effect on the supply of gold or on its price. If
gold prices should decline below the Company's expected cash costs of production
and remain at such levels for any sustained period, the Company could determine
that it is not economically feasible to continue commercial production.
12
The volatility of gold prices is illustrated in the following table of the
annual high, low and average London P.M. Fix:
Price Per Ounce
------------------------------------
Calendar Year High Low Average
- ---------------------------------------- --------- -------- -------------
1987.................................... $ 500 $ 390 $ 446
1988.................................... $ 484 $ 395 $ 437
1989.................................... $ 416 $ 356 $ 381
1990.................................... $ 424 $ 346 $ 383
1991.................................... $ 403 $ 344 $ 362
1992.................................... $ 360 $ 330 $ 344
1993.................................... $ 406 $ 326 $ 360
1994.................................... $ 396 $ 370 $ 384
1995.................................... $ 396 $ 372 $ 384
1996.................................... $ 415 $ 367 $ 387
1997 (through April 28)................. $ 367 $ 338 $ 350
The London P.M. Fix on April 28, 1997, was $340 per ounce.
Continuing Losses
The Company reported a net loss of $8.0 million for the three months ended
March 31, 1997, $14.0 million for the year ended December 31, 1996, $5.0 million
for the six months ended December 31, 1995 and $18.4 million for the fiscal year
ended June 30, 1995. The Company expects to continue to experience losses until
higher grade ore from Turquoise Ridge or other sources is produced. There can be
no assurance that such higher grade ores will be obtained by the Company.
Funds Needed for Development of Turquoise Ridge
If there are any shortfalls in funds required to meet the needs for the
development of Turquoise Ridge, they may be supplemented by additional funds
raised through borrowings or securities offerings. The recoverability of the
Turquoise Ridge assets and completion of the underground mine at Turquoise Ridge
is dependent on the Company's ability to raise sufficient funds to complete the
construction. There can be no assurance that funding will be available on
favorable terms, if at all.
Reserves
The ore reserves described by the Company are, in large part, estimates
made by the Company and confirmed by independent mining consultants known as
Mine Development Associates ("MDA") and Mineral Resource Development, Inc.
("MRDI"). The reserves confirmed by MDA and MRDI are subject to certain risks
and assumptions, including those discussed in "Certain Turquoise Ridge Mine
Risks" below. Additionally, no assurance can be given that the indicated level
of recovery of gold will be realized or that the assumed gold price of $400 per
ounce will be obtained. Reserve estimates may require revision based on actual
production experience. Market price fluctuations of gold, as well as increased
production costs or reduced recovery rates, may render ore reserves containing
relatively lower grades of mineralization uneconomic and may ultimately result
in a restatement of reserves. Moreover,
13
short-term operating factors relating to the ore reserves, such as the need for
sequential development of ore bodies and the processing of new or different ore
grades, may adversely affect the Company's profitability in any particular
period.
Declines in the market price of gold may also render ore reserves
containing relatively lower grades of gold mineralization uneconomic to exploit
unless the utilization of forward sales contracts or other hedging techniques is
sufficient to offset the effects of a drop in the market price of the gold
expected to be mined from such reserves. If the Company's realized price per
ounce of gold, including hedging benefits, were to decline substantially below
the levels set for calculation of reserves for an extended period, there could
be material delays in the development of new projects, increased net losses,
reduced cash flow, reductions in reserves and asset impairments.
Project Development Risks
The Company from time to time engages in the development of new ore bodies.
Specific risks associated with the Company's development of the Turquoise Ridge
mine are discussed below. The Company's ability to sustain or increase its
present level of gold production is dependent in part on the successful
development of such new ore bodies and/or expansion of existing mining
operations. The economic feasibility of any such development project, and all
such projects collectively, is based upon, among other things, estimates of
reserves, metallurgic recoveries, capital and operating costs of such projects
and future gold prices. Development projects are also subject to the successful
completion of feasibility studies, issuance of necessary permits and receipt of
adequate financing.
Development projects have no operating history upon which to base estimates
of future cash operating costs and capital requirements. In particular,
estimates of reserves, metal recoveries and cash operating costs are to a large
extent based upon the interpretation of geologic data obtained from drill holes
and other sampling techniques and feasibility studies which derive estimates of
cash operating costs based upon anticipated tonnage and grades of ore to be
mined and processed, the configuration of the ore body, expected recovery rates
of metals from the ore, comparable facility and equipment costs, anticipated
climate conditions and other factors. As a result, it is possible that actual
cash operating costs and economic returns of any and all development projects
may materially differ from the costs and returns initially estimated.
Certain Turquoise Ridge Mine Risks
The Turquoise Ridge mine involves numerous risks. These include the
following:
Capital Requirements. Expenditures required to advance the Turquoise Ridge mine
to the point of a production test are large, particularly since the Company has
decided to proceed with shaft systems capable of being used in full-scale
production in order to save time and money should trial mining be confirmed as
viable. Thus, to a large extent, expenditures which would usually be supported
by a feasibility study will depend on the data in-hand and assumptions made in
the Company's mine plans with an attendant higher level of uncertainty. See
"-Funds Needed for Development of Turquoise Ridge."
14
Reserves. There can be no assurance that the probable reserves set forth in
reserve reports by MRDI and MDA for Turquoise Ridge and Shaft Zone will actually
be mined and milled on an economic basis, if at all. The MDA and MRDI reports
are based upon many assumptions, some or all of which may not prove to be
accurate. The failure of any such assumptions to prove accurate may alter the
conclusions of MDA's and/or MRDI's report on reserves and may have a material
adverse affect on the Company. The resource and reserve estimates were prepared
using geological and engineering judgment based on available data. In the
absence of underground development, such estimates must be regarded as imprecise
and some of the assumptions made may later prove to be incorrect or unreliable.
The grade distribution at Turquoise Ridge is between 0.2 to 0.6 ounces per ton.
Small changes in cutoff grade can cause large shifts in the reserves. If
dilution and/or mining costs related to poor ground conditions are higher than
expected, the reserves could be substantially reduced, resulting in a shortening
of mine life and a reduced or negative cash flow.
Dilution. The tonnage and grade of the mill feed material was estimated by
applying dilution factors to certain resource data. The dilution agents are
backfill, waste from the back of overcut crosscuts and drifts, and from the
walls. In the case of the latter two, MRDI assumed that there would be an
average of one foot of back and wall dilution. MDA used approximately 15%
dilution and 95% recovery of the mineable reserve. If this dilution increases,
there will be corresponding negative effects on the tonnage and grade to mill.
This risk is related to the irregular configuration of the ore body which, even
with the tight cut-and-fill stoping method used, could make achievement of the
assumed dilution impossible to achieve in practice.
Production Shaft Completion. The two-year assumed construction period for the
Production Shaft, which was started in the fourth quarter of 1996, is an
aggressive schedule. Delay in construction would necessitate removing ore
through the Ventilation Shaft, which is basically designed for waste and the
limited ore from early production. Additionally, the availability of the final
ventilation circuit required for mining depends upon the completion of the
Production Shaft.
Mining Costs. As part of the project risk assessment, sensitivities were run on
various mining costs. Due to uncertainties about actual ground conditions and
productivities, these costs are only predictable within a broad range and the
predictions may not be valid. Therefore, actual mining costs may have a material
adverse effect on the viability of the Turquoise Ridge project and on the
Company.
Hydrology. Drainage of the ore body and surrounding rock will be critical to the
achievement of the mining efficiencies and costs estimated for the study. If the
deposit is not drained and water remains in this clay-rich environment, mining
conditions could worsen, and ground support costs will increase. If, due to the
presence of fine clays, the deposit drains slowly, the start of production may
be delayed, and the build-up to full production may be of longer duration.
Additionally, depending upon the quantity and quality of water encountered, the
water treatment/disposal options presently available to the Company may be
insufficient to meet estimated amounts needed to treat water pumped from
Turquoise Ridge during dewatering.
15
Geotechnical Considerations. The Turquoise Ridge ore zones contain areas of poor
ground conditions due to a high percentage of the ground being comprised of low
rock mass rating rock and clay. As a result, additional ground support may be
required.
Dependence on a Single Property
All of the Company's revenues are derived from its mining and milling
operations at the Getchell Property. If the operations at the Getchell
Underground mine or at any of the Company's processing facilities were to be
reduced, interrupted or curtailed, the Company's ability to generate revenues
and profits in the future would be materially adversely affected.
Exploration
Mineral exploration, particularly for gold, is highly speculative in
nature, involves many risks and frequently is unsuccessful. The Company is
seeking to expand its reserves only through exploration and development at the
Getchell Property. There can be no assurance that the Company's exploration
efforts will result in the discovery of any additional gold mineralization or
that any mineralization discovered will result in an increase of the Company's
reserves. If reserves are developed, it may take a number of years and
substantial expenditures from the initial phases of drilling until production is
possible, during which time the economic feasibility of production may change.
No assurance can be given that the Company's exploration programs will result in
the replacement of current production with new reserves or that the Company's
development program will be able to extend the life of the Company's existing
mines.
Hedging Activities
The Company currently uses spot deferred contracts to protect earnings and
cash flows from the impact of short-term drops in gold prices. These
transactions have been designated as hedges of the price of future production
and are accounted for as such.
Spot deferred contracts are agreements between a seller and a counterparty
whereby the seller commits to deliver a set quantity of gold, on an established
future date and at an agreed upon price. The established forward price is equal
to the current spot gold price on the day the agreement is signed plus
"contango." Contango is equal to the difference between the prevailing market
interest rate for cash deposits less the gold lease rate, for comparable
periods. The contango rate was 4.5% per annum for one-month to twelve-month
periods at March 31, 1997.
On the scheduled future delivery date, the seller may deliver gold and
thereby fulfill the contract or defer delivery to a future date. If the spot
price on the delivery date is greater than the contract price, delivery on the
contract may be deferred to a new future date and the gold is sold at the higher
spot price. If the spot price is lower than the contract price, the delivery may
be made against the contract and the higher contract price is realized. In
practice, this generally allows the seller to maximize the price realized. Each
time a seller defers delivery, the forward sales price is increased by the then
prevailing contango (assuming it is positive) for the next period out to the
newly established future delivery date. Generally, the counterparty will allow
the seller to continue to defer contract deliveries providing that there is
sufficient scheduled production from proven and probable reserves to fulfill the
commitment.
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At March 31, 1997, the Company's outstanding hedge contracts were for
110,000 ounces at an average price of $392 per ounce. Of these contracts, 50,000
ounces are for delivery in 1997 at an average price of $399 and 60,000 ounces
are for delivery in 1998 at an average price of $385. Risk of loss from these
forward sales agreements arises from the possible inability of a counterparty to
honor contracts and from changes in the Company's potential ability to deliver
gold.
The Company's accounting treatment for hedging is outlined in Notes 2 and 3
to Item 8 - "Financial Statements and Supplementary Data" as found in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
Dependence on Key Personnel
The Company is dependent on the services of certain key officers and
employees, including its Chief Executive Officer, its Chief Financial Officer,
its Chief Operating Officer and its Chief Administrative Officer. Competition in
the mining industry for qualified individuals is intense, and the loss of any of
these key officers or employees, if not replaced, could have a material adverse
effect on the Company's business and its operations. The Company currently does
not have key person insurance. The Company has entered into Termination
Agreements with its Chief Executive Officer, Chief Financial Officer, Chief
Operating Officer and Chief Administrative Officer which provide for certain
payments upon termination or resignation resulting from a change of control (as
defined in such agreements).
In connection with the development of Turquoise Ridge, the Company
expects that it will require a significant number of additional skilled
employees. The Company faces intense competition from other mining companies in
connection with the recruitment and retention of such employees. Additionally,
although the Company does not currently have any unionized employees, there can
be no assurance that unionization will not occur in the future.
Government Regulation
Safety. The mining operations of the Company are subject to inspection and
regulation by the Mine Safety and Health Administration of the United States
Department of Labor ("MSHA") under the provisions of the Mine Safety and Health
Act of 1977. The Occupational Safety and Health Administration ("OSHA") also has
jurisdiction over safety and health standards not covered by MSHA.
On January 15, 1997, a mine site accident involving a mining vehicle
resulted in the death of a Company employee. As required by Federal law, MSHA
officials have investigated the nature and cause of the accident. MSHA has
notified the Company that as a result of the investigation, the Company will
likely be subject to maximum civil penalties of $350,000 and a further MSHA
investigation, which is scheduled for May 1997. The ultimate outcome of the May
1997 MSHA investigation is uncertain and the Company is unable to estimate if
further penalties will result. While management of the Company believes that the
results of the investigation will not have a materially adverse impact on the
financial position, operating results or liquidity of the Company, no assurance
can be given that this investigation will not have such effects.
17
Current Environmental Laws and Regulations. The Company must comply with
standards, laws and regulations which may entail greater or lessor costs and
delays depending on the nature of the regulated activity and how stringently the
regulations are implemented by the regulatory authority. It is possible that the
costs and delays associated with compliance with such laws, regulations and
permits could become such that the Company would not proceed with the
development of a project or the operation or further development of a mine. Laws
and regulations involving the protection and remediation of the environment and
the governmental policies for implementation of such laws and regulations are
constantly changing and are generally becoming more restrictive. The Company has
made, and expects to make in the future, significant expenditures to comply with
such laws and regulations. These requirements include regulations under: (i) the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA" or "Superfund") which regulates and establishes liability for the
release of hazardous substances; (ii) the Endangered Species Act ("ESA") which
identifies endangered species of plants and animals and regulates activities to
protect these species and their habitats; (iii) the Clean Water Act; (iv) the
Clean Air Act; (v) the Resource Conservation and Recovery Act for disposal of
hazardous waste; (vi) the Migratory Bird Treaty Act; (vii) the Safe Drinking
Water Act; (viii) the Federal Land Policy and Management Act; (ix) the National
Environmental Policy Act; (x) the National Historic Preservation Act; and many
other state and federal laws and regulations.
The United States Environmental Protection Agency ("EPA") continues the
development of a solid waste regulatory program specific to mining operations
under the Resource Conservation and Recovery Act ("RCRA"). EPA is currently
evaluating a Draft Hardrock Mining Framework which, if ultimately implemented,
could create a system of federal regulation of the entire mine site focused on
water quality and waste management. The requirements being considered by the EPA
are very similar to the existing Nevada regulations concerning environmental
controls at mine sites. Many of the requirements being considered by EPA could
be duplicative of existing Nevada regulations. The effect of compliance with a
new EPA program would depend on the extent to which the substantive or
procedural requirements of such new federal regulations would exceed the
existing requirements of the Nevada regulations.
Environmental laws and regulations may also have an indirect impact on
the Company, such as increased cost for electricity due to acid rain provisions
of the Clean Air Act Amendments of 1990. Charges by refiners to which the
Company sells its metallic concentrates and products have substantially
increased over the past several years because of requirements that refiners meet
revised environmental quality standards. The Company has no control over the
refiners' operations or their compliance with environmental laws and
regulations.
Potential Legislation. Several recent legislative developments have affected or
may in the future affect the cost of and the ability of mining claimants to use
the Mining Law of 1872, as amended (the "General Mining Law"), to acquire and
use federal lands for mining operations. Since October 1994, a moratorium has
been imposed on processing new patent applications for mining claims. This
moratorium should not affect the status of the patent applications made by the
Company under the General Mining Law before the moratorium was imposed. Also,
since
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1993, a rental or maintenance annual fee of $100 per claim has been imposed by
the Federal government on unpatented mining claims in lieu of the prior
requirement for annual assessment work. During the last several Congressional
sessions, bills have been repeatedly introduced in the U.S. Congress which would
supplant or radically alter the General Mining Law. As of March 31, 1997, no
such bills have been passed. Such bills have proposed, among other things, to
permanently eliminate or greatly limit the right to a mineral patent, impose
royalties, and impose new Federal reclamation, environmental control and other
restoration requirements. Royalty proposals have ranged from a 2% royalty on
"net profits" from mining claims to an 8% royalty on modified gross income/net
smelter returns. It is anticipated that similar legislation will again be
introduced in 1997. If enacted, such legislation could substantially impair the
ability of companies to economically develop mineral resources on federal lands.
The extent of the changes, if any, which may be made by Congress to the General
Mining Law is not presently known, and the potential impact on the Company as a
result of future Congressional action is difficult or impossible to predict.
Although a majority of the Company's existing mining operations occur on private
or patented property, the proposed changes to the General Mining Law could
adversely affect the Company's ability to economically develop mineral resources
on federal lands. Disposal of overburden and mineral processing wastes by the
Company occur on both private and federal lands. Exploration activities occur on
both private and federal lands. Other legislative initiatives regarding
environmental laws potentially applicable to mining include proposals to
substantially alter CERCLA, the Clean Water Act, Safe Drinking Water Act,
Endangered Species Act and bills which introduce additional protection of
wetlands. Adverse developments and operating requirements in these acts could
impair the ability of the Company as well as others to develop mineral
resources. Revisions to current versions of these bills could occur prior to
passage. Thus, the potential impact on the Company of such legislative
initiatives is not clear at this time.
Environmental Matters and Safety
Environmental Liability. Mining is subject to potential risks and liabilities
associated with pollution of the environment and the disposal of waste products
that could occur as a result of the Company's mineral exploration, development
and production. Environmental liability also may result from mining activities
conducted by others prior to the Company's ownership of a property. Historic
mining disturbances, facilities, waste materials and other discrete areas of
potential contamination associated with gold, tungsten, and molybdenum
production between 1937 and 1969 by previous owners and operators are
encompassed within the area of the Company's Getchell Property operations.
Restoration of certain areas of historic disturbance and contamination has been
undertaken in conjunction with current mining operations and has been
incorporated into the Company's state permits in coordination with the federal
land management agency.
Pollution Insurance. Insurance for environmental risks (including potential
liability for pollution or other hazards as a result of the disposal of waste
products occurring from exploration and production) has not been purchased by
the Company as it is not generally available at a reasonable price to the
Company or to other companies within the industry. To the extent the Company is
subject to environmental liabilities, the payment of such liabilities or the
costs which must be incurred to remedy environmental pollution would reduce
funds otherwise available to
19
the Company and could have a material adverse effect on the Company. Should the
Company be unable to fully remedy an environmental problem, the Company might be
required to suspend operations or enter into interim compliance measures pending
completion of the required remedy. The potential exposure may be significant and
could have a material adverse effect on the Company.
Environmental Permits. All of the Company's exploration, development and
production activities are subject to regulation under one or more of the various
state and federal environmental laws and regulations. These laws address
emissions to the air, discharges to water, management of wastes, management of
hazardous substances, protection of natural resources, protection of antiquities
and restoration of lands which are disturbed by mining. Many of the regulations
require permits to be obtained for the Company's activities. The Company
maintains permits required for its facilities and operations which provide for
ongoing compliance and monitoring. Some of the permits include Bureau of Land
Management Plan of Operations No. N24-87-003P; EPA Hazardous Waste Facility No.
NVD986774735; Nevada water pollution control permits NEV86014 (for mining and
mineral processing) and NEV95113 (for excess mine water disposal); Nevada
reclamation permit 0105; and Nevada air quality permit AP1041-0292. These
permits must be updated and reviewed from time to time, and normally are subject
to environmental impact analyses and public review processes prior to approval
of the activity. For example, the Company has applied for air permits required
by Title V of the 1990 Amendments to the Clean Air Act to maintain compliance
with applicable requirements for air emissions sources of the types utilized by
the Company in its operations. It is possible that future changes in applicable
laws, regulations and permits could have a significant impact on some portion of
the Company's business, causing those activities to be economically re-evaluated
at that time.
Restoration. The Company accrues funds over the productive life of its mine for
anticipated costs associated with restoration of the mine site. Activities which
result in restoration costs include the permanent closure of the mining and
mineral processing operations and the reclamation of the disturbed land to a
productive use. This includes restoration of historic and current mining and
mineral processing operations and associated land disturbances. Restoration
takes place concurrent with and after the productive life of the operations.
Activities which result in restoration costs after permanent closure and
reclamation primarily relate to monitoring and other post mining management
activities.
The uncertainties related to future restoration costs result from
unknown future additional regulatory requirements, significant new surface
disturbances or additional mineral processing facilities and the potential for
recognition in the future of additional activities needed for restoration. The
technologies for restoration are evolving during the life of the operations.
Periodic review of the activities and costs for restoration, and consequent
adjustments to the ongoing accrual, are conducted. The Company conducts
concurrent restoration of mining disturbances and anticipates an ongoing program
of restoration over the productive life of the operations. Activities have
included regrading, seeding and planting, monitoring, and restoration research.
20
In accordance with the State of Nevada Division of Environmental
Protection ("NDEP"), the Company has posted a bond of $4.5 million to cover the
costs for reclamation of the Getchell Property. As of March 31, 1997, the total
estimated restoration costs for the Getchell Property were $5.5 million, of
which the Company had accrued $2.7 million. The amount of total estimated
restoration costs has increased over time due to more stringent regulation
requirements and expanded mining activities and additional increases may occur
in the future for the same reasons. The Company has begun reclamation of surface
mining disturbances and anticipates an ongoing program of reclamation over the
next several years. Activities have included regrading, revegetation and soil
stabilization. This includes restoration activities for which bonding must be
provided and other restoration costs not included in bonding calculations.
Mining Risk and Insurance
The gold ore located on the Getchell Property and the existing tailings
ponds and waste dumps located on the Getchell Property contain relatively high
levels of arsenic, and the milling of such ore involves the use of other toxic
substances, including sodium cyanide, sodium hydroxide, sulfuric acid and nitric
acid. In addition, the business of gold mining is generally subject to a number
of risks and hazards, including environmental hazards, industrial accidents,
labor disputes, the encounter of unusual or unexpected geological conditions,
slope failures, changes in the regulatory environment and natural phenomena such
as inclement weather conditions, floods, blizzards and earthquakes. Such
occurrences could result in damage to, or destruction of, mineral properties or
production facilities, personal injury or death, environmental damage, delays in
mining, monetary losses and possible legal liability. The Company maintains
insurance against risks that are typical in the gold mining industry and in
amounts that the Company believes to be reasonable, but which may not provide
adequate coverage in certain unforeseen circumstances. However, insurance
against certain risks (including certain liabilities for environmental pollution
or other hazards as a result of exploration and production) has not been
purchased by the Company as such coverage is not generally available to it or to
other companies within the industry.
Title to Properties
Certain of the Company's mineral rights consist of unpatented mining
claims. Unpatented mining claims are unique property interests that are
generally considered to be subject to greater title risk than other real
property interests. The greater title risk results from unpatented mining claims
being dependent on strict compliance with a complex body of federal and state
statutory and decisional law, much of which compliance involves physical
activities on the land, and from the lack of public records which definitively
control the issues of validity and ownership. See "Potential Legislation" under
"Government Regulations" above.
21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. 27. - Financial Data Schedule.
No reports on Form 8-K were filed by the registrant during the quarter
ended March 31, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Getchell Gold Corporation
April 28, 1997 By: /s/ G. W. Thompson
-------------- -------------------
Date G. W. Thompson, President, Chief Executive Officer and Director
April 28, 1997 By: /s/ Donald S. Robson
-------------- ---------------------
Date Donald S. Robson, Vice President and Chief Financial Officer
(Principal Financial Officer)
23