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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
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
FIRSTMISS GOLD INC.
(Exact name of registrant as specified in its charter)
NEVADA 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 (Zip Code)
executive offices)
Registrant's telephone number, including area code: (303) 771-9000
Securities registered pursuant to Section 12(g) of the Act:
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_____
Class Outstanding at May 9, 1996
----- --------------------------
Common Stock, $0.01 Par Value.............. 25,704,600
___________
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1
ITEM 1. FINANCIAL STATEMENTS
FIRSTMISS GOLD INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
ASSETS
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . $103,884 $114,633
Trade accounts receivable. . . . . . . . . . . . . . 3,256 3,812
Inventories:
Ore and ore in process . . . . . . . . . . . . . . 2,218 2,088
Materials and supplies . . . . . . . . . . . . . . 8,245 7,662
-------- --------
Total inventories. . . . . . . . . . . . . . . . 10,463 9,750
Prepaid expenses and other current assets. . . . . . . 1,224 1,408
Deferred hedging gains, net. . . . . . . . . . . . . . 568 1,046
-------- --------
Total current assets . . . . . . . . . . . . . . 119,395 130,649
Property, plant and equipment, net . . . . . . . . . . 86,941 79,844
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $206,336 $210,493
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . $2,736 $4,711
Payable to First Mississippi . . . . . . . . . . . . . 837 242
Current portion of capital lease obligation. . . . . . 856 844
Other accrued expenses . . . . . . . . . . . . . . . . 262 702
-------- --------
Total current liabilities. . . . . . . . . . . . . . . 4,691 6,499
Long term debt . . . . . . . . . . . . . . . . . . . . 23,814 23,783
Capital lease obligations, less current installments . 4,236 4,387
Accrued reclamation costs. . . . . . . . . . . . . . . 3,003 2,949
Deferred income tax liability. . . . . . . . . . . . . 7,741 8,611
-------- --------
Total liabilities. . . . . . . . . . . . . . . . 43,485 46,229
-------- --------
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . . 257 257
Contributed and paid-in capital. . . . . . . . . . . 172,036 171,722
Retained earnings (accumulated deficit). . . . . . . (9,442) (7,708)
Unearned compensation. . . . . . . . . . . . . . . . - (7)
-------- --------
Total stockholders' equity . . . . . . . . . . . 162,851 164,264
-------- --------
Total liabilities and stockholders' equity . . . $206,336 $210,493
-------- --------
-------- --------
2
FIRSTMISS GOLD INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 31,
1996 1995
--------- ---------
Net sales. . . . . . . . . . . . . . . . . . . . . . . $ 14,655 $ 15,786
Cost of sales. . . . . . . . . . . . . . . . . . . . . 16,578 14,149
-------- --------
Gross margin . . . . . . . . . . . . . . . . . . . (1,923) 1,637
Exploration expenses . . . . . . . . . . . . . . . . . 852 797
Selling, general and administrative expenses . . . . . 1,218 494
-------- --------
Earnings (loss) from operations. . . . . . . . . . (3,993) 346
Interest expense, net of capitalized interest. . . . . (233) (384)
Interest and other income (expense). . . . . . . . . . 1,623 (1)
-------- --------
Loss before income taxes . . . . . . . . . . . . . (2,603) (39)
Income tax expense (benefit) . . . . . . . . . . . . . (870) 415
-------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . $ (1,733) $ (454)
-------- --------
-------- --------
Loss per common share: $ (0.07) $ (0.03)
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
3
FIRSTMISS GOLD INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 31,
1996 1995
---------- ---------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (1,733) $ (454)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and depletion . . . . . . . . . . . . 1,720 2,799
Deferred income taxes. . . . . . . . . . . . . . . (843) 59
Loss on disposal or write-down of assets . . . . . -- 23
Deferred compensation. . . . . . . . . . . . . . . 7 --
Deferred hedging gain, net . . . . . . . . . . . . 478 --
Net change in operating assets and liabilities,
net of noncash activity:
Trade accounts receivable. . . . . . . . . . . . 557 417
Inventories. . . . . . . . . . . . . . . . . . . (713) (235)
Prepaid expenses and other current assets. . . . 184 238
Accounts payable . . . . . . . . . . . . . . . . (1,976) (76)
Payable to First Mississippi . . . . . . . . . . 595 398
Income taxes payable to First Mississippi. . . . - 357
Other accrued expenses . . . . . . . . . . . . . (477) 249
Accrued reclamation costs. . . . . . . . . . . . 52 30
--------- --------
Cash provided by (used in) operating
activities. . . . . . . . . . . . . . . . . . (2,149) 3,805
--------- --------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . (8,812) (5,219)
Proceeds from sale of property . . . . . . . . . . . -- 202
Deferred stripping costs . . . . . . . . . . . . . . -- (98)
--------- --------
Cash used by investing activities. . . . . . . (8,812) (5,115)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock . . . . . . . 320 66
Proceeds from long-term debt . . . . . . . . . . . . 31 2,250
Principal payments under capital lease obligation. . (139) --
--------- --------
Cash provided by financing activities. . . . . 212 2,316
--------- --------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . (10,749) 1,006
Cash and cash equivalents at beginning of the quarter. 114,633 635
--------- --------
Cash and cash equivalents at March 31. . . . . . . . . $ 103,884 $ 1,641
4
--------- --------
--------- --------
Supplemental disclosures:
Interest paid during the quarter, net of amounts
capitalized . . . . . . . . . . . . . . . . . . . . . $0 $48
--------- --------
--------- --------
Income taxes paid. . . . . . . . . . . . . . . . . . . $0 $0
--------- --------
--------- --------
Supplemental noncash financing activities:
In the three months ended March 31, 1996 and 1995, $0 and $1,330,000
respectively, of interest payable to First Mississippi was transferred to the
principal balance of notes payable to First Mississippi.
5
FIRSTMISS GOLD INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 the Company on Form 10-K for the six
month period ended December 31, 1995.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" includes "forward looking
statements" within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended (the "Securities Act"), and is subject to the safe harbor
created by that section. Factors that realistically could cause results to
differ materially from those projected in the forward looking statements are
set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors."
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1995
RESULTS OF OPERATIONS. Results for the three-month period ended March
31, 1996, were a net loss of $1.7 million ($0.07 per share) compared to a net
loss of $0.5 million ($0.03 per share) in the three-month period ended March
31, 1995. Continued use of lower grade stockpile ores to meet mill feed
requirements, along with increased costs associated with the conversion from
open-pit mining to underground mining, were responsible for the less
favorable results as compared to a year ago. Low grade stockpile ores will be
required until the Turquoise Ridge mine comes on line which is expected no
earlier than the end of 1997.
THREE MONTHS ENDED
-----------------------
03/31/96 03/31/95
-------- --------
OUNCES SOLD 37,217 40,469
AVERAGE REALIZED PRICE $/OZ. 394 390
AVERAGE MARKET PRICE $/OZ. 403 379
OUNCES PRODUCED:
MILL 36,179 36,176
HEAP LEACH 1,038 4,293
CASH COST $/OZ.
MILL 405 297
HEAP LEACH 127 349
COMBINED 398 303
TOTAL COST $/OZ.
MILL 454 349
HEAP LEACH 151 357
COMBINED 445 350
SALES. Sales were $14.7 million in the quarter ended March 31, 1996 compared
to $15.8 million in the same three month period ended in 1995. Lower gold
output during the current quarter of 37,217 ounces versus 40,496 ounces in
the same quarter of the prior year was responsible for the lower sales. Gold
output fell in response to lower Heap Leach output which dropped to 1,038
ounces in the quarter from
7
4,293 in the same period last year reflecting the fact that no new ores have
been added to the heap piles since July 1995 when known oxide ores were
exhausted.
Heap Leach output is scheduled to increase in the second quarter as ore
from the new Valmy Hill oxide pit is stacked and leached beginning in the
second quarter of the current year. The Valmy Hill oxide ore body contains
approximately 834,000 tons of ore grading 0.020 ounces per ton. Mining on
the Valmy Hill ore body is expected to be completed by late 1996.
Market gold prices averaged $403 per ounce in the quarter ended March
31, 1996, up from $379 per ounce in the same period a year earlier. While the
Company received full cash benefit of the gold price improvement during the
quarter, decreases in the carrying value of the hedge positions closed during
the quarter and upon which non-cash hedge gains had been recognized in
earlier periods, reduced the realized price to $394 per ounce from $390 per
ounce in the same quarter a year ago.
At March 31, 1995, the Company had spot deferred contracts on 138,100
gold ounces of which 88,100 are scheduled to be delivered during 1996 at
prices ranging between $396 and $423 per ounce and 60,000 ounces scheduled
for delivery in 1997 at prices currently ranging between $390 and $394 per
ounce. The Company intends to continue to defer delivery into future periods
when the spot market price is higher than the spot deferred contract price.
Based on the market price of gold at March 31, 1996, the unrealized gain on
the contracts is $0.7 million.
COST OF SALES. Cost of sales during the quarter ended March 31, 1996 were
$16.6 million compared to $14.1 million in the same quarter a year earlier.
Higher sulfide mining and milling costs, both the result of a greater
proportion of underground ore milled in the current period versus a year ago,
were responsible for the increase. Lower Heap Leach operating costs in the
current period partially offset the increase in sulfide mining and milling
costs. Heap leach costs were down from a year ago reflecting the fact that
there were no oxide ore mining costs incurred in the current quarter.
Cash costs per ounce for the three months ended March 31 were $398 and
$303 in 1996 and 1995, respectively. Total cost per ounce for the three
months was $445 versus $350 in the corresponding period of the prior year.
The increase from prior year reflects higher cost of sales in the current
period as well as the lower gold output.
The Company is seeking improvements in costs per ounce in 1996 at the
Getchell Underground mine by accessing higher grade ore zones, and increasing
underground output. The Company is also seeking to reduce costs by
constructing a second portal into the Getchell Underground mine and from
other improvements in underground support facilities. No assurance can be
given that the Company's effort to reduce unit costs per ounce will be
successful.
EXPLORATION. Exploration expenses for the quarter ended March 31, 1996
were approximately the same as in the same period in the prior year.
Capitalized drilling expenditures are expected to increase during the
remainder of the year (see Planned Activities section below).
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
costs were higher than the same quarter a year ago due to increased
corporate activity following the spin off from First Mississippi in October
1995 and subsequent equity offering. As a result of these transactions
various corporate administrative costs, including shareholder communications,
investor relations, professional services, salaries, travel and insurance
costs have risen from a year ago.
8
INTEREST AND OTHER INCOME. The increase in Interest and Other Income
reflects higher interest earnings on higher cash balances following the
equity offering in November (see "Liquidity and Capital Resources" below).
INTEREST EXPENSE. Interest expense was lower than in the same period of the
prior year due to lower balances on the First Mississippi notes and increased
amounts of interest capitalization in the current period on the Company's
current development projects.
LIQUIDITY AND CAPITAL RESOURCES
The Company is presently financing its operations and capital
development projects from internally generated cash and from cash proceeds of
an equity offering completed in late 1995 which provided a net $137.5
million. At March 31, 1996 the Company's cash and cash equivalents totaled
$103.9 million. It is anticipated that this cash, along with cash generated
by operations, will be sufficient to complete the construction of the
Turquoise Ridge mine and to meet other capital and operating needs over the
next two years.
During the three month period ended March 31, 1996, the Company's cash
outlays included $8.8 million in capital expenditures and $2.1 million to
fund operating activities. Of the capital expenditures, the Company spent
$4.8 million on the development of the Turquoise Ridge ore body, $2.5 million
for equipment and underground development costs at the Getchell underground
mine and $1.5 million for other improvements, primarily at the mill facility.
Cash used by operations was principally related to reductions in accounts
payable.
PLANNED ACTIVITIES
The major focus of the Company during the next 18 months will be shaft
sinking and construction of surface support facilities for the Turquoise
Ridge mine. Initial production of development ore at Turquoise Ridge is
expected no earlier than the end of 1997.
The Company presently plans to focus 1996 exploration drilling on the
evaluation of numerous targets on the Getchell Property located outside of
the known reserve areas. Additional drilling is planned to investigate
potential extensions of the Getchell Underground reserves and to evaluate the
structure and mineralization potential of areas surrounding the Turquoise
Ridge ore body. During the quarter ended March 31, 1996, drilling in an area
1,000 feet due south of the Turquoise Ridge ore body encountered a previously
unknown mineralized zone. Drilling to date suggests gold mineralization
exists at a depth between 1,200 and 2,500 feet below the surface. The
Company intends to expand its 1996 exploration drilling program by
approximately $2.0 million to allow additional drilling in this new zone and
other areas surrounding the known Turquoise Ridge ore body. This new program
is intended to provide a better understanding of the overall structure and
mineralization around the Turquoise Ridge ore body, as well as provide
information for short and medium-term mine planning purposes.
The Company presently plans to continue processing sulfide ores from the
Getchell Underground ore body, supplemented by stockpile ores as needed to
keep the mill operating at full capacity. The Company is seeking to improve
Getchell Underground grades and output, and the Company's mining rate goal is
to achieve an output of 1,500 tons per day by the end of 1996. There can be
no assurance that any of the foregoing plans or goals will be achieved.
9
RISK FACTORS
GOLD PRICE VOLATILITY
The Company's profitability is significantly affected by changes in the
market price of gold. Gold prices 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 such as South
Africa and the former Soviet Union. 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 affect gold prices, but
not necessarily in the same manner as current demand and supply affect the
prices of the 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
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.
The volatility of gold prices is illustrated in the following table of
the annual high, low and average London P.M. Fix:
CALENDAR YEAR HIGH LOW AVERAGE
- ------------- ---- --- -------
PRICE PER OUNCE
1984 . . . . . . . . . . . $406 $308 $360
1985 . . . . . . . . . . . 341 294 317
1986 . . . . . . . . . . . 438 326 368
1987 . . . . . . . . . . . 500 390 446
1988 . . . . . . . . . . . 495 395 437
1989 . . . . . . . . . . . 416 356 381
1990 . . . . . . . . . . . 474 346 383
1991 . . . . . . . . . . . 403 344 362
1992 . . . . . . . . . . . 374 330 344
1993 . . . . . . . . . . . 406 326 360
1994 . . . . . . . . . . . 396 370 384
1995 . . . . . . . . . . . 396 370 384
The London P.M. Fix on May 8, 1996, was $394.80 per ounce.
LOSSES
The Company reported net losses of $1.7 million for the quarter ended
March 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 its low grade stockpile ores is replaced
by higher grade ore from new sources, which new sources could include sources
presently being explored or developed by the Company. There can be no
assurance that such higher grade replacement ores will be obtained by the
Company.
RESERVES
10
The ore reserves reported by the Company are, in large part, estimates
made by the Company and confirmed by independent mining consultants. The
reserves confirmed by Mine Development Associates, a consulting firm which
reviewed the Company's reserve estimates, 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, 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 accounting 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.
CERTAIN TURQUOISE RIDGE MINE RISKS
The Turquoise Ridge Mine involves numerous risks. These include the
following:
There can be no assurance that the probable reserves set forth in the
September 1995 pre-feasibility study conducted by Mineral Resources
Development Inc. (MRDI) will actually be mined and milled on an economic
basis, if at all. The MRDI Study is 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 the MRDI Study and may have a
material adverse affect on the Company.
The Turquoise Ridge mine is now transitioning from the pre-feasibility
study level of project development to the construction phase of development.
The expenditure required to advance the project to the point of a production
test is large, particularly since the Company has decided to proceed with
shaft systems capable of being used in full-scale production 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 MRDI Study with an
attendant higher level of uncertainty.
RESERVES. 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 fairly narrow, with most
stoping blocks having grades between 0.2 to 0.4 ounces per ton. This means
that small changes in cutoff grade can cause large shifts in the reserves. If
dilution and/or mining costs related to bad ground are higher than expected,
the reserves could be substantially reduced, resulting in a shortening of
mine life and a reduced or negative cash flow.
11
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 over-cut 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. 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 stopping method used, could make
achievement of a dilution thickness of one foot impossible to achieve in
practice.
NO. 1 SHAFT COMPLETION. MRDI believes a two-year assumed construction period
for No. 1 Shaft, which will become the main production shaft, is an
aggressive schedule. Delay in construction would necessitate removing ore
through the No. 2 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
No. 1 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. 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 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 de-watering.
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.
PROJECT DEVELOPMENT RISKS
The Company from time to time engages in the development of new ore
bodies. 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, estimate 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 form the costs and
returns initially estimated.
12
DEPENDENCE ON A SINGLE MINE
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 in its hedging
program to protect earnings and cash flows from the impact of short term
drops in gold price. 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 counter party whereby the
seller commits to deliver a set quantity of gold, at an established date in
the future and at an agreed upon prices. 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
rate for cash deposits less the gold lease rate, for comparable periods. The
contango rate was approximately 4.3% at March 31, 1996.
At the scheduled future delivery date, the seller may, at the option of
the counter party, deliver gold and thereby fulfill the contract or defer
delivery to a future date. In practice this generally allows the seller to
maximize the price realized. If the spot price on the delivery date is
greater than the contract price, delivery on the contract is deferred to a
new forward date and the gold is sold at the higher spot price. If the spot
price is lower than the contract price, the delivery is made against the
contract and the higher contract price is realized.
Each time a seller defers delivery, the forward sales price is increased
by the then prevailing contango for the next period out to the newly
established forward delivery date. Generally, the counter party 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. During the quarter ended March 31, 1996 the Company deferred
delivery on contracts representing 200,000 ounces.
At March 31, 1995, the Company had spot deferred contracts on 138,100
gold ounces of which 88,100 are scheduled to be delivered during 1996 at
prices ranging between $396 and $423 per ounce and 60,000 ounces scheduled
for delivery in 1997 at prices currently ranging between $390 and $394 per
ounce. The Company intends to continue to defer delivery into future periods
when the spot market price is higher than the spot deferred contract price.
Based on the market price of gold at March 31, 1996, the unrealized gain on
the contracts is $0.7 million. The Company's accounting treatment for spot
deferred
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contracts is outlined in Notes 1 and 7 to the Consolidated Financial
Statements as found in the Company's Form 10-K for the period ended December
31, 1995.
Risk of loss with these forward sales and purchases agreements arises
from the possible inability of a counter party to honor contracts and from
changes in the Company's potential inability to deliver gold. However,
nonperformance by any party to the financial instruments in not anticipated.
The Company is required by the counter party to maintain a $12 million
line of credit which is guaranteed by First Mississippi. Should the
cumulative liquidation cost of the Company's spot deferred positions exceed
the cumulative value of such positions by an amount in excess of the margin
account, the Company could be subject to a margin call. The liquidation cost
is what the Company would have to pay on the liquidation date to purchase
fixed forward delivery contracts to meet its spot deferred deliveries. The
cost of fixed forward delivery contracts is based upon the spot price on the
liquidation date plus contango through the deliver date.
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
and its Chief Operating 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 and Chief Operating
Officer which provide for certain payments upon termination or resignation
resulting from a change of control (as defined in such agreements).
REGULATION OF MINING ACTIVITY
The mining operations of the Company are subject to inspection and
regulation by the Mine Safety and Health Administration of the Department of
Labor ("MSHA") under provisions of the Federal Mine Safety and Health Act of
1977. The Occupation and Safety Health Administration ("OSHA") also has
jurisdiction over safety and health standards not covered by MSHA.
All of the Company's exploration, development and production activities
are subject to regulation under one or more of the various environmental
laws. 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 reclamation of lands which
are disturbed. Many of the regulations also require permits to be obtained
for the Company's activities; these permits normally are subject to public
review processes resulting in public approval of the activity. It is possible
that future changes in these laws or regulations could have a significant
impact on some portion of the Company's business, causing those activities to
be economically reevaluated at that time.
During the past three years, the United States Congress considered a
number of proposed amendments to the General Mining Law of 1872, as amended
(the "General Mining Law"), which governs mining claims and related
activities on federal lands. In 1992, a holding fee of $100 per claim was
imposed upon unpatented mining claims located on federal lands. In October
1994, a one-year moratorium on processing of new patent applications was
approved. In addition, a variety of legislation is now pending before the
United States Congress to amend further the General Mining Law. The proposed
legislation would, among other things, change the current patenting
procedures, impose royalties, and enact new reclamation, environmental
controls and restoration requirements. The royalty
14
proposals range from a 2% royalty on "net profits" from mining claims to an
8% royalty on modified gross income/net smelter returns. The extent of any
such changes is not presently known and the potential impact on the Company
as a result of future congressional action is difficult 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.
ENVIRONMENTAL REGULATIONS
Mining is subject to potential risks and liabilities associated with
pollution of the environment and the disposal of waste products occurring as
a result of mineral exploration and production. Environmental liability may
result from mining activities conducted by others prior to the Company's
ownership of a property. 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) 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 would reduce funds
otherwise available to the Company and could have a material adverse effect
on the Company.
In the context of environmental permitting, including the approval of
reclamation plans, the Company must comply with standards, laws and
regulations which may entail greater or lesser costs and delays depending on
the nature of the activity to be permitted and how stringently the
regulations are implementing by the permitting 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 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.
Pending bills which affect environmental laws applicable to mining
include versions which may substantially alter the Clean Water Act, Safe
Drinking Water Act, Endangered Species Act and a bill which will introduce
additional protection of wetlands (Wetlands Protection and Management Act).
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.
The 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"). Of particular concern to the
mining industry is a proposal by the EPA titled "Recommendation for a
Regulatory Program for Mining Waste and Materials Under Subtitle D of the
Resource Conservation and Recovery Act" ("Strawman II") which, if
implemented, would create a system of comprehensive federal regulation of the
entire mine site. Many of these requirements would be duplicative of existing
state regulations. Strawman II as currently proposed would regulate not only
mine and mill wastes but also numerous production facilities and processes
which could limit internal flexibility in operating a mine. To implement
Strawman II as proposed, the EPA must seek additional statutory authority,
which is expected to be requested in connection with Congress'
reauthorization of RCRA.
The Company is also subject to 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 and (ii) the Endangered Species Act ("ESA") which
identifies endangered species of plants and animals and regulates activities
to protect these species and
15
their habitats. Revisions to CERCLA and ESA are being considered by Congress;
the impact on the Company of these revisions is not clear at this time.
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. If the refining capacity of the United
States is significantly further reduced because of environmental
requirements, it is possible that the Company's operations could be adversely
affected.
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) is not generally available to the Company 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The following exhibits are filed herewith and are referred to and
incorporated herein by reference to such filings.
27. -- Financial Data Schedule.
REPORTS ON FORM 8-K
During the three months ended March 31, 1996 there were no reports filed
on Form 8-K.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ G. W. THOMPSON
- -------------------------- President, Chief Executive Officer
G. W. Thompson and Director May 14, 1996
/s/ DONALD S. ROBSON
- -------------------------- Vice President and Chief Financial
Donald S. Robson Officer (Principal Financial Officer) May 14, 1996
18