SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1998
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 ____
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 30,786,351 on April 28, 1998
Page 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,
---------------------
1998 1997
------- -------
Net sales $10,803 $14,862
Cost of sales 15,033 19,811
------- -------
Gross margin (4,230) (4,949)
General and administrative expenses 921 3,120
Exploration expenses 98 572
------- -------
Loss from operations (5,249) (8,641)
Interest expense, net of capitalized interest (192) (221)
Interest and other income 535 883
------- -------
Net loss $(4,906) $(7,979)
======= =======
Basic loss per common share $ (0.18) $ (0.31)
======= =======
Weighted average number of shares outstanding 27,901 25,935
======== =======
The accompanying notes are an integral part of these statements.
Page 2
GETCHELL GOLD CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
March 31, December 31,
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 80,960 $ 34,247
Accounts receivable:
Trade 2,158 1,790
Employee 233 182
Other 306 261
-------- --------
Total accounts receivable 2,697 2,233
-------- --------
Inventories:
Ore and ore in process 1,475 1,873
Materials and supplies 10,381 10,873
-------- --------
Total inventories 11,856 12,746
-------- --------
Prepaid expenses 852 808
-------- --------
Total current assets 96,365 50,034
Property, plant and equipment, net 207,665 188,242
Other 125 211
-------- --------
Total assets $304,155 $238,487
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,984 $ 13,506
Accrued expenses 2,368 2,258
Current portion of capital lease obligations 2,820 2,248
Stock appreciation rights 963 1,238
Other 171 198
-------- --------
Total current liabilities 16,306 19,448
Long-term debt, principally ChemFirst Inc. 27,057 27,057
Capital lease obligations, less current portion 10,000 6,685
Deferred income taxes 1,809 1,809
Reclamation liabilities 2,739 2,701
Other liabilities 1,480 892
-------- --------
Total liabilities 59,391 58,592
-------- --------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $0.0001 par value; 10,000,000
shares authorized; none issued - -
Common stock, $0.0001 par value; 50,000,000
shares authorized; issued and outstanding
30,786,351 at March 31, 1998 and 26,784,351
at December 31, 1997 3 3
Contributed and paid-in capital 290,755 220,979
Accumulated deficit (45,994) (41,087)
-------- --------
Total stockholders' equity 244,764 179,895
-------- --------
Total liabilities and stockholders' equity $304,155 $238,487
======== ========
The accompanying notes are an integral part of these statements.
Page 3
GETCHELL GOLD CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
----------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net loss $ (4,906) $ (7,979)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 2,596 2,356
Unrealized hedging (loss) gain, net (27) 362
Change in stock appreciation rights (275) 2,463
Other - 161
Net change in operating assets and liabilities:
Accounts receivable (464) (256)
Inventories 890 (4)
Prepaid expenses (44) 400
Accounts payable (3,147) (2,650)
Accrued expenses 110 459
Other liabilities 626 607
-------- --------
Cash used in operating activities (4,641) (4,081)
-------- --------
Cash flows used in investing activities:
Additions to property, plant and equipment (17,990) (10,803)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 69,774 47,679
Principal payments under capital lease obligation (516) (464)
Other 86 -
-------- --------
Cash provided by financing activities 69,344 47,215
-------- --------
Net increase in cash and cash equivalents 46,713 32,331
Cash and cash equivalents at beginning of period 34,247 64,130
-------- --------
Cash and cash equivalents at end of period $ 80,960 $ 96,461
======== ========
The accompanying notes are an integral part of these statements.
Page 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, 1997.
(2) $73 MILLION PUBLIC EQUITY OFFERING
In March 1998, the Company completed an equity offering of 4,002,000
common shares which resulted in net proceeds to the Company of $69.8 million
after offering costs and expenses of $3.2 million. Net proceeds of the offering
will be used for the completion of the Company's Turquoise Ridge mine, for an
increase in mill capacity, for exploration on its Getchell property and for
general corporate purposes.
(3) HEDGING AND OTHER PRECIOUS METAL CONTRACT COMMITMENTS
Precious metal contracts consist of spot deferred, forward sales, call
option and lease rate swap contracts. The Company currently uses spot deferred
and forward sales contracts to mitigate the impact on earnings and cash flows of
decreases in gold prices. Risk of loss on the spot deferred and forward sales
contracts arises from the possible inability of a counterparty to fulfill its
obligations under the contracts and from the Company's potential inability to
deliver gold, although non-performance by the counterparty to the contracts is
not anticipated.
At March 31, 1998, the Company's outstanding spot deferred contracts
were for 250,000 ounces at a projected average price of $323 per ounce. Of these
contracts, 90,000 ounces were for delivery in 1998 at a projected weighted
average price of $336 per ounce, 130,000 ounces were for delivery in 1999 at a
projected weighted average price of $313 per ounce and 30,000 ounces were for
delivery in 2000 at a projected weighted average price of $323 per ounce. Based
on the market price of gold at March 31, 1998, the unrealized gains on the spot
deferred contracts were $5.5 million.
Additionally, in November 1997, the Company entered into a forward
sales contract covering the sale of 250,000 ounces of gold with an option by the
counterparty to purchase up to an additional 225,000 ounces of gold, if the gold
price equals or exceeds certain price increments. The agreement calls for the
Company to deliver 50,000 gold ounces on December 31
Page 5
GETCHELL GOLD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in each of the years 1998 through 2002 and up to an additional 75,000
ounces of gold in each of the years 2000 to 2002. Deliveries in 1998 and 1999
will be at approximately $355 per gold ounce, while deliveries in 2000 through
2002 will be at approximately $343 per ounce. These forward selling prices
assume a constant future gold lease rate of 2%. The actual forward prices under
the contract are adjusted up or down based on the actual future gold lease rate.
The option feature of the contract is similar to a written call option. The
premium related to the option feature is included in the forward sales price of
the 250,000 ounces of gold. For accounting purposes, the contract sales price of
the 250,000 ounces of gold will be allocated between the forward sales component
of the contract and the premium for the embedded option. The revenue associated
with the forward sales component of the contract will be recognized when the
gold is delivered. The option premium portion of the forward sales price is
deferred, adjusted for changes in market value of the option, and recognized in
earnings when the option expires or is exercised. This transaction is further
detailed in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
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, 1998, the Company had outstanding European call
option contracts for 10,000 ounces of gold at a price of $310 per ounce which
expire in 1998 and contracts for 60,000 ounces of gold at a price of $400 per
ounce which expire in 1999. Risk of loss on European call option contracts
exists if the Company is unable to deliver the required quantity of gold and the
market price were to exceed the exercise price of the option on the date
designated in the contract.
(4) PROPERTY, PLANT AND EQUIPMENT (In thousands)
At At
March 31, December 31,
1998 1997
-------- --------
Land and land improvements $ 14,215 $ 14,214
Buildings and equipment 125,318 124,249
Mine development 57,385 54,929
Construction-in-progress 107,267 88,742
-------- --------
Total property, plant and equipment 304,185 282,134
Accumulated depreciation, depletion and amortization (96,520) (93,892)
-------- --------
Net property, plant and equipment $207,665 $188,242
======== ========
Page 6
GETCHELL GOLD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalized mine development and construction-in-progress at March 31,
1998 and December 31, 1997 are comprised of the following (in thousands):
At At
March 31, December 31,
Project 1998 1997
-------- --------
Mine Development:
Getchell Underground mine $ 47,159 $ 45,043
Turquoise Ridge mine 4,402 4,079
Other projects 5,824 5,807
-------- --------
$ 57,385 $ 54,929
======== ========
Construction in Progress:
Getchell Underground mine $ 1,294 $ 1,486
Turquoise Ridge mine 89,492 72,075
Mill improvements 16,455 15,015
Other projects 26 166
-------- --------
$107,267 $ 88,742
======== ========
Depletion of mine development and construction costs related to the
Turquoise Ridge mine and other projects will begin once commercial production
has been achieved. Depreciation and depletion expense was $2.6 million and $2.4
million for the three months ended March 31, 1998 and 1997, respectively.
Capitalized interest was $0.4 million for both the three months ended March
31, 1998 and 1997.
(5) SUPPLEMENTAL CASH FLOW INFORMATION
Net cash provided by operating activities includes the following cash
payments (in thousands):
Three Months Ended
March 31,
---------------------------
1998 1997
----------- -----------
Interest, net of amounts capitalized $ (261) $ (163)
Income taxes paid $ - $ -
Capital lease obligations of $4.4 million were incurred to acquire
equipment during the quarter ended March 31, 1998.
Page 7
GETCHELL GOLD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) 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 September 1997 and October 1996, the Internal Revenue Service
("IRS") filed notices of deficiencies, stating that the IRS is proceeding
against ChemFirst for income taxes associated with ChemFirst's consolidated
income tax returns filed in 1989, 1990, 1991 and 1992. The Company's share of
the asserted deficiency for 1989 through 1994, including interest, totals
approximately $5.5 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 provided for any liabilities that may result from the outcome
of this 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 a termination fee if the contract is
terminated prior to January 2004. The termination fee is $2.4 million in 1998
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
are recorded as operating costs, except for royalties on ounces produced in the
development phase of the Turquoise Ridge mine, in which case such royalties are
offset against the revenue on these ounces. Royalties amounted to $0.2 million
and $0.1 million for the quarters ended March 31, 1998 and 1997, respectively.
Letter of Credit
At March 31, 1998, a $4.5 million unsecured letter of credit was
outstanding for bonding of a reclamation plan.
Page 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
The Company reported a net loss of $4.9 million, or $0.18 per share,
for the quarter ended March 31, 1998 compared with a net loss of $8.0 million,
or $0.31 per share, for the quarter ended March 31, 1997. Lower operating,
general and administrative ("G&A") and exploration expenses more than offset
lower sales revenue for the first quarter of 1998. Lower sales revenues resulted
from lower gold prices and the Company's December 1997 decision to suspend the
processing of low grade stockpile ore.
Sales revenues of $10.8 million in the first quarter of 1998 were down
from $14.9 million in the first quarter of 1997. A lower average realized price
per ounce of gold sold and lower ounces of gold sold resulted in $1.7 and $2.4
million of lower sales revenue, respectively, for the first quarter of 1998
compared to the first quarter of 1997.
Quarter Ended
March 31,
-------------------------
1998 1997
----------- -----------
Ounces of gold sold 31,021* 37,217
Average realized price per ounce $348 $394
Average market price per ounce $297 $349
* Does not include 1,551 ounces of gold sold from the development of
Turquoise Ridge for which the revenues, net of production expenses, were offset
against the capital costs of the project.
The Company hedged a portion of its production, which resulted in
higher realized prices than the average market prices. At March 31, 1998, the
Company's outstanding spot deferred contracts were for 250,000 ounces at a
projected average price of $323 per ounce. Of these contracts, 90,000 ounces
were for delivery in 1998 at a projected weighted average price of $336
Page 9
per ounce, 130,000 ounces were for delivery in 1999 at a projected weighted
average price of $313 per ounce and 30,000 ounces were for delivery in 2000 at a
projected weighted average price of $323 per ounce.
Additionally, in November 1997, the Company entered into a forward sales
contract covering the sale of 250,000 ounces of gold with an option by the
counterparty to purchase up to an additional 225,000 ounces of gold, if the gold
price equals or exceeds certain price increments. For accounting purposes, the
contract sales price of the 250,000 ounces of gold will be allocated between the
forward sales component of the contract and the premium for the embedded option.
The revenue associated with the forward sales component of the contract will be
recognized when the gold is delivered. The option premium portion of the forward
sales price is deferred, adjusted for changes in market value of the option, and
recognized in earnings when the option expires or is exercised. This transaction
is further detailed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
Mill feed for the first quarter of 1997 consisted of approximately 62%
low-grade stockpile ore. A fine-grind plant was added to the mill in December
1997 improving throughput and recovery. Operating results at the mill, including
the processing of development ore from the Turquoise Ridge mine during the first
quarter of 1998, are as follows:
Quarter Ended
March 31,
-------------------------
1998 1997
----------- ----------
Ore milled (dry tons) 100,083 270,245
Average grade of ore milled (ounces per ton) 0.352 0.158
Average gold recovery 90.7% 86.6%
Page 10
Ore production from the Getchell Underground mine decreased in the
first quarter of 1998 compared to the first quarter of 1997 due to the December
1997 decision to focus production at the Getchell Underground mine on the higher
grade Northwest ore zones; however, the average grade of ore mined increased.
Following are the operating results from the Getchell Underground mine.
Quarter Ended
March 31,
--------------------------
1998 1997
------------ -----------
Ore mined (dry tons) 87,607 105,578
Ore mined per operating day (dry tons) 996 1,200
Average grade of ore mined (ounces per ton) 0.372 0.282
Contained ounces (before recoveries) 32,609 29,814
Underground mining costs per ton $51.53 $53.65
Cost of sales was $15.0 million in the first quarter of 1998, down from
$19.8 million in the first quarter of 1997. Milling, mine site G&A and
underground mining costs were lower in the 1998 quarter as compared to the same
period in 1997. The decrease in the milling costs was primarily due to the lower
volume of ore processed. Mine site G&A costs decreased primarily due to
adjustments for Stock Appreciation Rights ("SARS") as discussed below. The
decrease in mine site G&A as well as the underground mining costs also reflect
the negative effects the 1997 operating disruptions had on these costs in the
1997 quarter.
Cash costs per ounce were $400 and $462 for the first quarter of 1998
and 1997, respectively. Milling and mine site G&A cash costs per ounce were
lower in 1998 due to lower total costs, partially offset by higher underground
mining cash costs per ounce in 1998 due to the lower ounces produced in 1998.
The decreases in corporate and mine site G&A and exploration costs in the
first quarter of 1998 as compared to the first quarter of 1997 were primarily
due to non-cash adjustments associated with the grant in February 1997 of SARS
for certain corporate executives and key employees. As a result of a decrease in
the market price of the Company's Common Stock from December 31, 1997 to March
31, 1998, a $0.3 million reduction in compensation expense related to the SARS
was recorded in the first quarter of 1998, of which $0.2 million was allocated
to corporate G&A and $0.1 million was allocated approximately equally between
mine site G&A and exploration. This compared to $2.5 million recorded as
compensation expense the first quarter of 1997 for the issuance of the SARS, of
which $1.6 million, $0.6 million and $0.3 million were allocated to corporate
G&A, mine site G&A and exploration, respectively.
Page 11
Interest and other income of $0.5 million in the first quarter of 1998
was lower than the $0.9 million in the first quarter of 1997 due to lower cash
and cash equivalent balances throughout the first quarter of 1998.
Liquidity and Capital Resources
During the first quarter of 1998, the Company consumed $4.6 million of
cash in operations and $18.0 million in capital expenditures. The capital
expenditures included $12.8 million on the Turquoise Ridge mine development,
$2.2 million on the Getchell Underground mine, $2.2 million on the mill, $0.3
million on development drilling and $0.5 million on other items. Total
expenditures on the Turquoise Ridge mine construction through March 31, 1998
were $68.8 million with an additional $4.4 million of mobile equipment leased.
An estimated $23 million is expected to be spent to complete the construction of
the mine, although there can be no assurances that actual expenditures will not
differ materially from this amount.
In March 1998, the Company completed an equity offering of 4,002,000
common shares at $18.25 per share which resulted in net proceeds to the Company
of $69.8 million after offering costs and expenses of $3.2 million. As of March
31, 1998, cash and cash equivalents were $81.0 million.
The Company does not expect positive cash flow from operating activities
earlier than the third quarter of 1998, although there can be no assurance that
there will be cash flow from operations at that time. Approximately $55 million
is expected to be spent on capital projects in 1998, 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. If there are any
shortfalls in funds required to meet these needs such funds may be supplemented
by additional funds raised through borrowings or securities offerings. There can
be no assurance that additional funding will be available on favorable terms, if
at all.
The principal balance of the Company's promissory note with ChemFirst
was $26.9 million at March 31, 1998. 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 6-22/32% at March 31, 1998.
Since the inception of the promissory note, interest has been capitalized to the
note at the end of each interest period.
Page 12
Risk Factors
Readers should carefully consider the risk factors set forth below, as
well as all of the other information in this document and the Annual Report of
the Company on Form 10-K for the year ended December 31, 1997.
Gold Price Volatility
The Company's profitability is significantly affected by changes in the
price of gold. Gold prices may fluctuate widely. In January 1998, the market
price of gold declined to levels that were the lowest in over eighteen years.
Gold prices 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 the Company's realized price should
decline below the Company's expected cash costs of production and remain at such
levels for any sustained period, there could be material delays in the
development of new projects, increased net losses, reduced cash flow, reductions
in reserves, asset impairments or cessation of production.
The volatility of gold prices is illustrated in the following table of the
annual high, low and average London P.M. Fix:
Calendar Year Price Per Ounce
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....................................... $367 $283 $331
1998 (Through April 28).................... $313 $279 $297
The London P.M. Fix on April 28, 1998, was $308 per ounce.
Page 13
Continuing Losses
The Company reported net losses of $4.9 for the quarter ended March 31,
1998, and $19.4 million and $14.0 million for the years ended December 31, 1997
and 1996, respectively, $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, which other sources could include sources presently
being explored or developed by the Company. There can be no assurance that
sources of higher grade ores will be developed by the Company.
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") or Mineral Resource Development, Inc.
("MRDI"). The reserves confirmed by MDA or 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 $350 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, 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.
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
Page 14
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 commercial production were estimated to be $23 million at March
31, 1998. The Company intends to finance the completion of the Turquoise Ridge
mine with its existing cash and cash equivalents. There can be no assurance that
the cash and cash equivalents required to advance the Turquoise Ridge mine to
commercial production will be available. If there are any shortfalls in funds
required to meet these needs such funds may be supplemented by additional funds
raised through borrowings or securities offerings. There can be no assurance
that additional funding will be available on favorable terms, if at all.
Reserves. There can be no assurance that the probable reserves set forth in
MRDI and MDA's reserve reports for Turquoise Ridge and the 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 0.75 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 minable 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 a
dilution thickness of one foot impossible to achieve in practice.
Production Shaft Completion. Completion of the production shaft, which is
expected no earlier than the third quarter of 1998, is an aggressive schedule.
Delay in this construction would
Page 15
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 Cost. 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. Increased 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 by 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. Currently, the infiltration
basins are accepting and disposing of all water delivered from both the Getchell
Underground and the Turquoise Ridge mines, although there can be no assurance
that these conditions will continue.
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, the Company may be required to
make expenditures on additional ground support.
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 or Turquoise Ridge mines, or at any of the Company's processing
facilities, were to be reduced, interrupted or curtailed, the Company's ability
to generate future revenues and profits could be materially adversely affected.
Exploration
Mineral exploration, particularly for gold, is highly speculative in
nature, involves many risks and is frequently 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
Page 16
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 and Other Precious Metal Contract Commitments
Precious metals contracts between the Company and various
counterparties involve the requirement that the Company deliver gold to the
counterparty at agreed-upon prices. Should the counterparty be unable to fulfill
its purchase obligations, there is no guarantee that the Company will be able to
receive the agreed-upon sales price in the open market. Should Getchell be
unable to produce sufficient gold to meet its hedging contract obligations, the
Company may be obligated to purchase such gold at the then market price. There
can be no assurance that the Company will have the funds necessary to purchase
such gold or that it will be able to do so without causing a material adverse
effect on the Company.
The Company's accounting treatment for hedging and other precious metal
contract commitments is outlined in Notes 2 and 3 to the Company's consolidated
financial statements included in Item 8 "-Financial Statements and Supplementary
Data" of the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
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, its Chief Administrative Officer and its Vice
President of Exploration. 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, Chief Administrative
Officer and Vice President of Exploration 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. It is the
Company's policy to comply with applicable directives and regulations of MSHA
and OSHA.
Page 17
On January 15, 1997, a mine site accident involving a loader resulted in
the death of a Company employee. As required by federal law, MSHA officials
investigated the accident. MSHA issued seven enforcement actions, one of which
was subsequently vacated. Civil penalties for which the Company has been
assessed as the result of such actions were $120,817. A contest of the penalties
and underlying violations was filed on March 12, 1998. The Company is awaiting
the civil penalty petition to file formal answers. The case will then be
forwarded to the Office of Administrative Law Judges of the Federal Mine Safety
and Health Review Commission for a hearing. The Commission Administrative Law
Judge may vacate the penalties, reduce them, or increase them, but in no case
will the maximum exceed $0.3 million. MSHA is also conducting a special
investigation to determine whether knowing and/or willful violations on the part
of the Company or any agent, officer or director of the Company occurred. The
result of that investigation is unknown, but could result in criminal penalties
for the Company and/or civil or criminal penalties for agents, officers, or
directors of the Company. While management of the Company believes that the
results of the investigation will not have a material adverse effect on the
Company, no assurance can be given that the outcome of this investigation will
not have such an effect.
Current Environmental Laws and Regulations. The Company must comply with
environmental standards, laws and regulations which may entail greater or lesser
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 and
regulations 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 (xi)
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
such as the Company's, whose mineral extraction and beneficiation wastes are not
regulated as hazardous wastes under the Resource Conservation and Recovery Act
("RCRA"). In September 1997, the EPA issued its National Hardrock Mining
Framework. The Framework focuses on the EPA's use of its existing authorities
other than RCRA to address environmental concerns posed by hardrock mining. The
Page 18
Company does not anticipate that the Framework will have a material adverse
effect on the Company.
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 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
April 28, 1998, 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. 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 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 also occur on both private and federal lands. Other
legislative initiatives relating to environmental laws potentially applicable to
mining include proposals to substantially alter CERCLA, the Clean Water Act,
Safe Drinking Water Act, and the ESA, bills which introduce additional
protection of wetlands and various initiatives to increase the regulatory
control over exploration and mining activities. Adverse developments and
operating requirements resulting from these initiatives could substantially
impair the economic ability of the Company, as well as others, to develop
mineral resources. Because none of these bills have passed and because revisions
to current versions of these bills could occur prior to passage, the potential
impact on the Company of such legislative initiatives is not known at this time.
Page 19
Environmental Matters
Environmental Liability. The Company 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.
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, but not limited to, sodium cyanide, sodium hydroxide,
sulfuric acid and nitric acid.
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. Under
CERCLA and other federal, state and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property or other property to which such substances may
have migrated. Such laws may impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. In connection with its current or prior ownership or operation
of property or facilities, the Company may be potentially liable for any such
costs or liabilities. Although the Company is currently not aware of any
material environmental claims pending or threatened against it, no assurance can
be given that a material environmental claim will not be asserted against the
Company.
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. Such restoration will not necessarily result in removal
of all hazardous substances located on the Getchell Property nor will it relieve
the Company of all potential liability for such substances under CERCLA or
similar laws.
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 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. 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.
Page 20
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. It is possible that future changes in applicable laws,
regulations and permits or changes in their enforcement or regulatory
interpretation 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 expenses 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 mining 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 facilities or
surface disturbances, and the potential for recognition in the future of
additional activities needed for restoration. The technologies for restoration
are evolving. Periodic review of the activities and costs for restoration, and
consequent adjustments to the ongoing accrual, are conducted. The Company has
programs of evaluating various restoration technologies during mining and
milling operations. The Company has begun restoration of the Getchell property,
conducts concurrent restoration and anticipates an ongoing program of concurrent
restoration over the productive life of the mining operations. Restoration
activities have included regrading, fertilizing, mulching, seeding, live
planting, monitoring and restoration research.
In accordance with applicable State and Federal laws, the Company has
posted a reclamation bond of $4.5 million to cover the costs for reclamation of
the Getchell property. Current submittals to expand the existing tailing
facility are expected to increase the bond requirements to approximately $9.0
million. As of March 31, 1998, the total estimated restoration costs for the
Getchell Property were $8.7 million, of which the Company had accrued $2.7
million. The amount of total estimated restoration costs has increased over time
due to
Page 21
expanded mining activities, requirements for restoring expanded tailing disposal
areas, and more stringent regulatory requirements. Additional increases may
occur in the future for the same reasons.
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 at a
reasonable price 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.
Page 22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27. - Financial Data Schedule.
Reports on Form 8-K
A report on Form 8-K was filed by the registrant on March 12, 1998,
regarding the completion of the Company's underwritten offering of common stock.
Page 23
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 30, 1998 By: /s/ G. W. Thompson
Date G.W. Thompson, President, Chief Executive Officer and Director
April 30, 1998 By: /s/ Donald S. Robson
Date Donald S. Robson, Vice President and Chief Financial Officer
(Principal Financial Officer)
Page 24