Exhibit 13
Index to Exhibit 13:
Selected information from the 1999 Annual Report to Shareholders is incorporated
by reference in the Form 10-K and such information is herewith filed
electronically as Exhibit 13. Such selected information is listed below. Noted
page references correspond to pagination in the 1999 Annual Report to
Shareholders.
Annual Report Page
Management's Discussion and Analysis 24-33
Consolidated Financial Statements 34-38
Notes to Consolidated Financial Statements 39-55
Report of Independent Accountants 56
Management's Responsibility for Financial Reporting 56
Quarterly Selected Data 57
Common Stock Price Range 57
Five-Year Selected Data 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
(Unless otherwise stated, the following information relates to amounts included
in the consolidated financial statements, without reduction for minority
interests. Homestake reports per ounce production costs in accordance with the
"Gold Institute Production Cost Standard".)
On April 29, 1999, Homestake completed the acquisition of Argentina Gold
Corp. ("Argentina Gold"), a publicly-traded Canadian gold exploration company.
Homestake issued 20.9 million common shares to acquire all of the shares of
Argentina Gold. The transaction has been accounted for as a pooling of
interests and accordingly, Homestake's consolidated financial statements include
Argentina Gold for all periods presented. Argentina Gold's principal asset is
its 60% interest in the Veladero property located in northwest Argentina along
the El Indio gold belt.
RESULTS OF OPERATIONS
Summary
Homestake recorded net income of $4.9 million or $0.02 per share in 1999
compared to net losses of $233.8 million or $1.01 per share and $233.4 million
or $1.02 per share in 1998 and 1997, respectively. The 1999 net income includes
write-downs and unusual items amounting to $20.5 million or $0.08 per share
compared to write-downs and unusual items amounting to $205.5 million or $0.89
per share in 1998 and $159.2 million or $0.70 per share in 1997.
Excluding the effect of the write-downs and unusual items, Homestake
recorded net income of $25.4 million or $0.10 per share in 1999 compared to net
losses of $28.3 million or $0.12 per share in 1998 and $74.2 million or $0.32
per share in 1997. The improvement in 1999 results compared to 1998 primarily
was due to lower operating costs, lower exploration expense, mark-to-market
foreign currency exchange gains and lower minority interest charges, partially
offset by lower gold prices. The lower 1998 loss compared to 1997 was due to
lower operating costs, lower depreciation and exploration expenses and lower
income taxes, partially offset by lower gold prices and mark-to-market foreign
exchange losses.
A summary of significant write-downs and unusual items in 1999, 1998 and 1997
follows:
Significant Write-downs and Unusual Items
(after tax in millions of dollars) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Resource asset write-downs $ (8.9) $(130.8) $ (60.1)
Increase in the estimated accrual for remediation
and reclamation expenditures (3.3) (36.0) (21.5)
Write-downs of noncurrent investments (3.5) (7.6) (45.7)
Business combination and
integration costs (4.8) (17.0)
Homestake mine restructuring charges (5.9)
Write-down of Homestake's investment
in the Main Pass 299 sulfur mine (84.9)
Gain on termination of Santa Fe merger 47.2
Other (8.2) 5.8
- -----------------------------------------------------------------------------------------------------
$(20.5) $(205.5) $(159.2)
- -----------------------------------------------------------------------------------------------------
Gold Operations
Summary
1999 1998 1997
- ----------------------------------------------------------------------------------------
Revenues (millions of dollars) $671.6 $782.2 $863.6
Gold equivalent sales (thousands of ounces) 2,417 2,602 2,549
Gold equivalent production (thousands of ounces)
Consolidated 2,390 2,532 2,529
Attributable 2,390 2,258 2,266
Average realized price ($ per ounce) $ 290 $ 312 $ 353
Average spot price ($ per ounce) 279 294 331
Consolidated production costs ($ per ounce)
Total cash cost $ 192 $ 202 $ 246
Total production cost 246 258 303
- ----------------------------------------------------------------------------------------
Revenues from gold, ore and concentrate sales decreased 14% to $671.6
million during 1999 from 1998 reflecting a 7% decline in the averaged realized
gold price and a 7% reduction in sales volumes. The lower sales volumes in 1999
were attributable to a 6% decline in consolidated gold equivalent production
reflecting lower production in the United States and Australia,
24
partially offset by higher production in Canada. The 9% decrease in revenues in
1998 from 1997 was due to a 12% decline in average realized gold prices,
partially offset by a 2% increase in sales volumes. Lower realized prices in
1999 compared to 1998, and in 1998 compared to 1997, primarily were due to lower
average spot gold prices, which declined by 5% and 11%, respectively, during
these periods. The Company's hedging activities increased revenues by
approximately $28 million, $47 million and $25 million in 1999, 1998 and 1997,
respectively.
The 6% decline in consolidated gold production in 1999 reflects 10% lower
production in the United Sates and Australia, offset by a 2% increase in
production in Canada. Lower production from United States operations primarily
reflects reduced production from the Open Cut at the Homestake mine. Lower
production in Australia reflects reduced throughput rates for a portion of 1999
at the Kalgoorlie operations and the absence of production from the Mt Morgans
mine, which ceased operation in November 1998. Higher production from Canadian
operations reflects increased ore and concentrate shipments at the Eskay Creek
mine and increased production from the Hemlo operations, partially offset by
reduced production from the Snip mine, which ceased operation in June 1999.
Attributable production increased by 6% during 1999 reflecting Homestake's
December 1998 acquisition of the minority interests in Prime Resources Group
Inc. ("Prime").
Consolidated Production Costs per Ounce
(per ounce of gold) 1999 1998 1997
- -----------------------------------------------------------------------------------
Direct mining costs $ 176 $ 185 $ 222
Deferred stripping adjustments (3) 1 5
Costs of third-party smelters 14 12 14
Other 1
- -----------------------------------------------------------------------------------
Cash Operating Costs 187 198 242
Royalties 4 3 3
Production taxes 1 1 1
- -----------------------------------------------------------------------------------
Total Cash Costs 192 202 246
Depreciation and amortization 48 50 54
Reclamation 6 6 3
- -----------------------------------------------------------------------------------
Total Production Costs $ 246 $ 258 $ 303
- -----------------------------------------------------------------------------------
Total cash costs per ounce in 1999 decreased by 5% compared to 1998 due to
continued cost reduction efforts, increased production at the low-cost Eskay
Creek mine and a decrease in production at the higher-cost Homestake mine,
partially offset by higher average Australian exchange rates. The 18% reduction
in total cash costs per ounce in 1998 compared to 1997 reflects cost reduction
efforts, weaker Australian and Canadian currencies, the impact of initial
production at the low-cost Ruby Hill mine, higher production at the low-cost
Eskay Creek mine and a decrease in production at the higher-cost Homestake mine.
Homestake's total noncash cost per equivalent ounce was $54 during 1999
compared to $56 and $57 per ounce during 1998 and 1997, respectively. Noncash
costs per ounce decreased slightly in 1999 primarily due to asset write-downs in
1998 and the absence of depreciation and reclamation charges at the Snip mine,
which was closed in 1999, partially offset by additional depreciation charges
relating to the Prime acquisition.
Consolidated total cash costs per equivalent ounce have been derived from
amounts included in revenues and production costs in the Statements of
Consolidated Operations as follows:
Reconciliation of Total Cash Costs per Ounce to Financial Statements
(millions of dollars, except per ounce amounts) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Production Costs per Financial Statements $473.8 $537.3 $627.6
Costs not included in Homestake's
production costs:
Costs of third-party smelters/a/ 35.0 32.4 34.5
Production costs of consolidated joint ventures (4.5) (4.6) (3.3)
Production costs of equity-accounted investments 1.9 1.9 1.9
Sulfur and oil production costs (23.1) (24.2) (25.4)
Reclamation accruals (14.7) (13.4) (9.0)
By-product silver revenues (2.7) (3.1) (2.6)
Inventory movements and other (7.6) (13.8) (6.4)
- -------------------------------------------------------------------------------------------------------
Production Costs for Per Ounce Calculation $458.1 $512.5 $617.3
- -------------------------------------------------------------------------------------------------------
Ounces Produced During the Year (in thousands) 2,390 2,532 2,529/b/
- -------------------------------------------------------------------------------------------------------
Total Cash Costs Per Ounce $ 192 $ 202 $ 246
- -------------------------------------------------------------------------------------------------------
a. Eskay Creek sells ore and concentrates containing gold and silver directly to
third-party smelters. For comparison purposes, cash operating costs per
ounce include estimated third-party costs incurred by smelters and others to
produce marketable gold and silver.
b. Includes 16,600 ounces produced at the Ruby Hill mine during 1997, prior to
commercial production, which are excluded from the cost per ounce
calculation.
25
United States
United States operations produced 624,200 ounces of gold at a total cash
cost of $207 per ounce during 1999 compared to production of 691,500 ounces at a
cash cost of $221 per ounce during 1998 and 702,800 ounces at a cash cost of
$286 per ounce during 1997.
At the Homestake mine in South Dakota, production in 1999 decreased to
212,700 ounces at a cash cost of $261 per ounce from 277,400 ounces at a cash
cost of $249 per ounce in 1998 and 397,300 ounces at a cash cost of $310 per
ounce in 1997. The lower production and higher cash costs during 1999 reflect
significantly lower production from the lower-cost Open Cut. Mining at the Open
Cut was completed in September 1998 and open-cut production since that time has
been derived from processing lower-grade residual stockpiles, which were
depleted in December 1999. In 1998, the underground operations at the Homestake
mine were restructured, and as a result, the workforce was reduced by 450
employees, parts of the mine were closed and mining was concentrated on
substantially fewer production levels. Lower production and cash costs during
1998 compared to 1997 reflect the restructuring of the underground operations
and an increase in the rate of processing the lower-cost, lower-grade Open Cut
ore. The Homestake mine is expected to produce approximately 200,000 ounces in
2000 solely from the underground operations.
At the Ruby Hill mine in Nevada, which commenced commercial production
January 1, 1998, gold production in 1999 increased to 123,800 ounces at a cash
cost of $104 per ounce compared to 116,500 ounces in 1998 at a cash cost of $122
per ounce. Higher production and lower cash costs primarily reflect higher ore
grades, partially offset by fewer tons processed.
Production at the McLaughlin mine in northern California totaled 121,500
ounces at a cash cost of $223 per ounce in 1999 compared to 128,700 ounces at a
cash cost of $219 per ounce during 1998 and 118,500 ounces at a cash cost of
$254 per ounce during 1997. Mining operations at the McLaughlin mine were
completed in 1996 and since that time the operation has processed stockpiled ore
through a conventional carbon-in-pulp circuit. The lower production and higher
cost per ounce in 1999 is due to lower ore grades as the higher-grade stockpiles
were depleted in the third quarter of 1999. The decrease in cash costs per
ounce during 1998 compared to 1997 is due to higher grades and cost containment
measures. Production in 2000 is expected to decrease slightly and cash costs to
increase due to a decline in the grade of the ore to be processed. At currently
anticipated production rates, the stockpiles are expected to be depleted in
2002.
Homestake's 25% share of 1999 gold production from the Round Mountain mine
in Nevada was 135,500 ounces at a cash cost of $198 per ounce, compared to
127,600 ounces at a cash cost of $220 per ounce in 1998 and 120,000 ounces at a
cash cost of $226 per ounce in 1997. The increase in production and decrease in
costs during 1999 is due to an increase in the tonnage and grade of ore placed
on the dedicated leach pad and a significantly higher average grade of ore
processed through the mill. The higher production and lower cash costs per
ounce in 1998 resulted from increases in mill ore grades, recovery and the
amount of course gold encountered during milling operations, partially offset by
lower tonnage leached on the reusable pad.
Canada
Canadian gold production increased to 905,900 equivalent ounces at a total
cash cost of $157 per ounce during 1999 compared to production of 890,400
equivalent ounces at a cash cost of $166 per ounce during 1998 and 835,400
equivalent ounces at a cash cost of $186 per ounce during 1997.
Production at the Eskay Creek mine, consisting of payable gold and silver
in ore and concentrates sold, increased to 558,400 equivalent ounces of gold
during 1999 from 504,800 and 417,300 equivalent ounces in 1998 and 1997,
respectively. Cash costs per equivalent ounce, including third-party smelter
costs, decreased slightly to $131 during 1999 from $133 per equivalent ounce
during 1998 and $157 per equivalent ounce during 1997. The increase in 1999
production primarily is due to increased ore and concentrate shipments,
partially offset by lower ore grades mined. The increase in 1998 production
primarily was due to production from the gravity/flotation mill, which was
commissioned in December 1997, and the effect of a lower gold/silver equivalency
ratio. Eskay Creek silver production is converted to gold equivalent production
using the ratio of the gold market price to the silver market price. During
1999, the Company converted silver to gold using an equivalency factor of 52.7
ounces of silver equals one ounce of gold compared to equivalency factors of
52.6 ounces and 68.2 ounces of silver equals one ounce of gold in 1998 and 1997,
respectively. Cash costs per equivalent ounce declined in 1998 compared to 1997
due to the lower-cost production from the mill and the weaker Canadian dollar.
Homestake's share of production from the Hemlo mining camp in Ontario,
which encompasses the Williams and David Bell mines and the Quarter Claim
royalty interest, amounted to 305,200 ounces at a cash cost of $197 per ounce in
1999 compared to 286,300 ounces at a cash cost of $210 per ounce in 1998 and
302,500 ounces at a cash cost of $216 per ounce in 1997. In mid-1999, the David
Bell mill was decommissioned and, since that time, both David Bell and Williams
ore have been processed at the lower-cost Williams mill. Production from the
Hemlo mines in 1999 increased 7% and cash costs per ounce decreased 6% from the
prior year primarily due to higher ore
26
grades at the Williams mine and the recovery of 4,700 ounces from the clean up
of the David Bell mill following closure, partially offset by lower ore grades
at the David Bell mine. The lower production from the Hemlo mines in 1998
compared to 1997 primarily was attributable to lower ore grades, partially
offset by increased throughput at the Williams mine.
During 1999, production from the Snip mine located in British Columbia was
42,300 ounces at a cash cost of $208 per ounce compared to 99,300 ounces at a
cash cost of $205 per ounce during 1998 and 115,600 ounces at a cash cost of
$213 per ounce during 1997. All mining and milling activities at the Snip mine
were completed during the second quarter of 1999 as the mine's reserves were
depleted. All active reclamation activities were completed early in the fourth
quarter of 1999.
Australia
Western Australia gold production of 835,500 ounces at a total cash cost of
$219 per ounce during 1999 compares to production of 925,700 ounces at a cash
cost of $224 per ounce during 1998 and 974,300 ounces at a cash cost of $269 per
ounce during 1997.
Homestake's 50% share of production from the Kalgoorlie operations totaled
360,100 ounces at a cash cost of $235 per ounce during 1999 compared to 390,200
ounces at a cash cost of $229 per ounce during 1998 and 425,900 ounces at a cash
cost of $259 per ounce during 1997. The decreases in production in 1999 and
1998 primarily are due to lower throughput as a result of mechanical
difficulties encountered at the Fimiston SAG mill. From June 1998, until a
permanent replacement gear was installed in May 1999, structural cracks in the
mill's ring gear required that the mill be operated at a reduced rotation speed
to minimize stress on the gears, which limited capacity. During 1999, the
Company received insurance proceeds of $4.8 million related to the ring gear
failure. Further, as yet undetermined, recoveries are expected in 2000. Cash
costs per ounce in 1999 increased as a result of a slightly stronger Australian
dollar and a temporary increase in mining costs associated with an interim
mining agreement with the contract miner, partially offset by the ring gear
insurance proceeds. Production in 1998 also was lower than in the previous year
due to a decrease in production at the Mt Charlotte mine. The decrease in cash
costs in 1998 from 1997 primarily reflects a weakening of the Australian dollar.
During the third quarter of 1999, Homestake and its 50% joint venture partner
Normandy Mining Ltd. ("Normandy") began progressively transferring Super Pit
mining operations from a mining contractor to owner mining. Once conversion to
owner mining is completed in the first quarter of 2000, Homestake expects Super
Pit cash operating costs to be significantly reduced.
In July 1999, development was suspended and a 40-person reduction in
workforce at the Mt Charlotte underground mine was announced. Mining activities
since that time have concentrated on previously developed ore blocks. The
current mine plan extends to August 2000, but performance of the mine will be
monitored to determine whether the operation will continue until that date.
Gold production at the Yilgarn operations, which consist of the Plutonic,
Lawlers and Darlot mines, was 453,900 ounces at a cash cost of $208 per ounce in
1999 compared to 459,400 ounces at a cash cost of $218 per ounce in 1998 and
427,300 ounces at a cash cost of $252 per ounce in 1997. Production at the
Plutonic mine totaled 236,500 ounces at a cash cost of $221 per ounce in 1999
compared to 255,500 ounces at a cash cost of $226 per ounce in 1998 and 274,600
ounces at a cash cost of $234 per ounce in 1997. Production decreased in 1999
compared to 1998 primarily due to a lower average ore grade milled, and in 1998
compared to 1997 primarily due to lower ore grades and lower mill throughput as
the mine began its conversion from an open pit to an underground mining
operation following depletion of the Main Pit at the end of 1997. During 1999
and 1998, the processing of underground ore was supplemented with ore from lower
grade open-pit stockpiles, which enabled the mill to operate at full capacity.
During 1999, ore sourced from the underground operations comprised 65% of total
production compared to 41% and 26% in 1998 and 1997, respectively.
Production at the Darlot mine continued to increase and cash costs per
ounce continued to decrease in 1999 as a result of the commencement of mining in
the higher-grade Centenary underground orebody in late 1998. Darlot production
in 1999 amounted to 113,100 ounces at a cash cost of $198 per ounce compared to
production of 77,500 ounces at a cash cost of $250 per ounce in 1998 and 65,200
ounces at a cash cost of $320 per ounce in 1997. Production in 1999 also
benefited from the completion of a mill upgrade, which has improved recoveries.
Production at the Lawlers mine totaled 104,300 ounces in 1999 compared to
126,400 and 87,500 ounces in 1998 and 1997, respectively. The Lawlers mine now
is exclusively an underground operation. Production in 1999 decreased 17% as a
result of the completion of open-pit mining in October 1998 and reduced ore
grades resulting from difficulties associated with developing high-grade ore
sources in the second half of the year. Production in 1998 increased 44% from
1997 due to higher grades and increased throughput, primarily from the New
Holland and Fairyland deposits. Cash costs per ounce increased 4% to $189 per
ounce in 1999 as the effect of lower production and higher average exchange
rates largely were offset by lower operating costs and improved operating
efficiencies. Cash costs per ounce declined to $181 per ounce in 1998 compared
to
27
$260 per ounce in 1997 as a result of lower costs in conjunction with higher
production.
During 1998, mining operations were completed at the then 80%-owned Mt
Morgans mine and at the 66.7%-owned Peak Hill mine. Processing of lower-grade
stockpiles continued at the Mt Morgans mine until November 1998 and at the Peak
Hill mine until November 1999. Homestake is continuing active exploration in
the vicinity of these properties.
Main Pass 299
The Company has a 16.7% undivided interest in the Main Pass 299 sulfur mine
and oil recovery operations in the Gulf of Mexico. Homestake recorded Main Pass
299 operating losses of $3.8 million in 1999 compared to operating losses of
$5.3 million during 1998 and $3.6 million in 1997. The lower 1999 loss in
comparison to 1998 reflects higher sales prices, partially offset by lower sales
volumes, for both sulfur and oil, and lower depreciation charges as the oil
assets were fully depreciated at the end of 1998. Results in 1998 compared to
1997 reflect lower sales prices and volumes, and higher per unit operating
costs.
During 1997, due to a prolonged period of low sulfur prices and Homestake's
assessment of estimated future cash flows from sulfur operations, the Company
wrote-down to zero its then carrying value of $107.8 million of the Main Pass
299 sulfur fixed assets.
The Main Pass 299 sulfur operating agreement provides that each participant
pays its share of capital and operating costs, and has the right to take its
share of production in kind in proportion to its undivided interest. In certain
circumstances, Homestake can make an annual election to not take its share of
the following year's production and not pay for the operating costs related to
that year's production.
In the fall of 1999, Homestake exercised its right under the sulfur joint
operating agreement to not take and not pay for its share of the sulfur
production in the year 2000. In December 1999, Freeport-McMoRan Sulphur LLC
("FMS") denied that Homestake had the right to make the election or that
Homestake had made the election on a timely basis. Homestake filled suit in
Delaware seeking a declaratory judgement affirming that it had the right to make
the election and that it had made the election on a timely basis. Subsequently,
FMS has refused to pay to Homestake amounts due to it, including amounts due
under the oil and gas operating agreement, contending that it has a right to
offset those amounts against amounts it claims to be due under the sulfur
operating agreement. Homestake has amended its complaint in Delaware seeking
damages against FMS for failing to pay the amounts due. FMS has filed its
answer disputing Homestake's contention and also seeking declaratory relief and
damages.
In January 2000, FMS announced that it had reduced its proved sulfur
reserves at year end 1999 to 13.7 million long tons, compared to 52.4 million
long tons at December 31, 1998. In its announcement, FMS stated that "Although
our estimate of physically producible sulfur has not changed, we have reduced
our estimates of commercially recoverable reserves primarily based on our
expectations of decreased production rates at the mine, partially offset by
anticipated decreases in costs. These factors have also caused us to reduce the
expected useful life if the mine from 30 years to 10 years, which will result in
an increase in abandonment and reclamation accruals by approximately $3.0
million per year. The price of sulfur is a critical factor in the determination
of commercially recoverable reserves. A future increase in sulfur prices could
result in a restoration of the reserves being reduced at year-end 1999."
Based on the foregoing announcement, Homestake has reduced its share of
reserves at the mine to 2.3 million tons as of December 31, 1999. Homestake's
total estimated reclamation liability with the respect to its 16.7% of the
sulfur interest is $9.5 million, of which $1.7 million was accrued at December
31, 1999.
Other income (loss) of $40.8 million in 1999 compares to $(24.7) million in 1998
and $63.7 million in 1997. Other income includes pretax unrealized foreign
currency gains of $26.7 million in 1999, primarily with respect to foreign
currency option contracts and intercompany advances, compared to losses of $38.7
million and $33.8 million during 1998 and 1997, respectively. Other income in
1998 also includes gains on sales of investments of $5.3 million. In 1997,
other income also includes gains of $62.9 million related to the fee received on
termination of the merger with Santa Fe Pacific Gold Corporation ("Santa Fe"),
$10.4 million related to an agreement to sell a right to cancel the Company's
option to acquire shares of Great Central Mines Limited, and $13.5 million from
the sale of the George Lake and Back River joint venture interests.
Depreciation, depletion and amortization declined to $134.5 million during 1999
from $139.4 million during 1998 and $162.8 million during 1997. Depreciation
expense decreased in 1999 and 1998 following the asset write-downs recorded in
1998 and 1997.
28
Administrative and general expense declined to $42.0 million during 1999 from
$46.8 million during 1998 and $49.5 million during 1997. Reduced administrative
and general expenses in 1999 are the result of continuing cost reduction
efforts. In July 1999, the Company announced its intent to reduce overhead
costs by an additional 10%, which together with reduced exploration spending, is
expected to reduce costs by up to $30 million annually.
Exploration expense decreased to $39.5 million in 1999 compared to $59.9 million
in 1998 and $67.6 million in 1997. Expenditures in 1999 include $2.6 million of
exploration expenses incurred by Argentina Gold on the Veladero joint venture
property prior to Homestake's acquisition, $3.2 million incurred by Homestake
subsequent to the acquisition and $1.1 million for metallurgical studies on the
Jeronimo deposit at the Agua de la Falda property in northern Chile. Expenses
related to in-mine definition drilling at Homestake's operating mines are
included in the individual mine operating expenses and cost per ounce
calculations. The reduced exploration spending levels reflect general gold
industry trends and an increased exploration focus following the acquisitions of
Plutonic in 1998 and Argentina Gold in 1999. Homestake has withdrawn from
northern Latin America and Eastern Europe and is concentrating its exploration
resources on existing major projects and on the extensive land packages in prime
gold belts associated with these acquisitions. The Company currently plans to
spend approximately $30 million on exploration activities during 2000, primarily
around existing operations and on advanced exploration projects that have the
greatest prospect of creating commercially viable mines. In addition, the
Company expects to spend approximately $14.2 million on resource development at
the Veladero and Jeronimo projects in 2000.
Resource asset write-downs: During 1999, the Company reviewed the carrying
values of its gold mining operations using $325 per ounce gold price. Based on
this review, the Company determined that none of its mining operations was
impaired. However, the Company recorded resource asset write-downs of $11.7
million including $10 million to write-off certain exploration properties
acquired as part of the Plutonic acquisition and $1.7 million to reduce the
carrying value of redundant equipment at the Kalgoorlie operations in Australia.
In addition, the Company recorded a $3.5 million write-down related to an
investment in an exploration joint venture in Eastern Europe following a
decision to exit the venture.
During 1998, the Company reviewed the carrying values of its gold mining
operations also using a $325 per ounce gold price. As a result of that review,
the Company determined that certain assets were impaired and that write-downs
were required to reduce the carrying values of those assets. Based on estimated
future cash flows, the Company did not expect to recover its remaining
investments in property, plant and equipment at the Homestake and Mt Charlotte
mines. Accordingly, the Company recorded write-downs of $76.1 million and $38.4
million reducing the remaining carrying values of property, plant and equipment
at the Homestake and Mt Charlotte mines, respectively, to zero. The Company
also recorded write-downs of $37.1 million related to other mineral properties,
including $22.3 million and $10.2 million related to mineral properties acquired
as part of the Plutonic and Argentina Gold acquisitions.
In 1997, the Company reviewed the carrying values of its gold mining
operations and determined that impairment existed and that write-downs were
required to reduce the carrying values of several of its assets with short
remaining lives. As a result, write-downs were recorded related to the Mt
Morgans and Peak Hill mines, the Pinson mine, the Homestake mine's Open Cut,
low-grade stockpiled ore and exploration properties at certain locations in
Western Australia and redundant mining equipment at the Kalgoorlie operations.
Environmental: During 1999, following an environmental audit, the Company
recorded a provision of $5.2 million for additional reclamation costs at certain
non-operating properties in Australia acquired as a result of the Plutonic
acquisition.
During 1998, the Company recorded a provision for estimated additional
remediation and related reclamation costs at the Homestake mine of $35 million.
The recognition of this liability was caused by the findings of an environmental
audit and changes in the operation's mining plans.
During 1997, the Company increased reclamation accruals for certain of its
non-operating properties by $29.2 million, including the Santa Fe and Nickel
Plate mines and the Grants uranium complex to reflect revised estimates, changed
conditions and more stringent future reclamation requirements.
Income and mining taxes: Homestake's consolidated income and mining tax expense
was $7.4 million in 1999, compared to tax benefits of $13.1 million and $19.5
million in 1998 and 1997, respectively. Homestake's effective income and mining
tax rate was 68.1% on 1999 pretax income compared to 5.7% and 7.9% on 1998 and
1997 pretax losses, respectively. The geographic mix of pretax income and
losses dramatically impacts the overall effective tax rate. During 1999, the
Company had pretax income of $34.7 million in the United States and $12.3
million in Canada, and pretax losses of $22.1 million and $14.0 million in
Australia and South American jurisdictions, respectively. Homestake recorded
tax expense of $4.7 million on United States income and $10.0 million on
Canadian income, and a tax benefit of $7.3 million on Australian losses. In
1999, no
29
tax benefit was recognized on losses incurred in South American jurisdictions
due to the uncertainty of their realization.
The statutory tax rate in the United States is 35%. However, while the
Company has sufficient tax attributes to shelter regular United States income
taxes, it is subject to the 20% Alternative Minimum Tax ("AMT"), which can be
reduced by 90% through the use of foreign tax credits. The Company's effective
United States tax rate was 13.5% in 1999 reflecting foreign withholding taxes on
intercompany interest income and AMT on intercompany dividends from Canada
following the Prime acquisition. The Canadian statutory tax rate, including
federal and provincial income tax and mining tax is approximately 49.1%. The
Company's effective Canadian tax rate in 1999 was 81.5%, primarily due to
depreciation expense recorded in the financial statements that is not deductible
for tax purposes and a valuation allowance established for Argentina Gold's
Canadian losses due to the uncertainty of their realization. These adjustments
were partially offset by a reduction in prior years' tax accruals for certain
contingencies that were resolved favorably. The Australian statutory tax rate
is 36%. The Company's effective Australian tax rate was 33%, reflecting
expenses recorded in the financial statements that are not deductible for tax
purposes, offset by a tax benefit from a change in corporate tax rates. In
December 1999, the Australian government reduced corporate tax rates to 34% for
the fiscal year beginning July 1, 2000 and to 30% thereafter.
At December 31, 1999 and 1998 the Company had valuation allowances related to
its deferred tax assets of $309.1 million and $217.5 million, respectively.
Future tax benefits for United States and South America have not been recognized
because realization of these benefits is uncertain. In addition, there
currently is not a strategy that would result in the realization of certain
Australian and Canadian deferred tax assets.
Minority interests: Losses allocable to minority interests in consolidated
subsidiaries amounted to $1.4 million in 1999 compared to income allocable to
minority interests of $3.2 million in 1998 and $4 million in 1997. The
reduction in income allocable to minority interests in 1999 from 1998 is due to
the December 1999 acquisition of the Prime minority interests. The decrease in
income allocable to minority interests in 1998 from 1997 primarily is
attributable to the minority interests' share of the Lachlan mineral property
write-downs during 1998. Minority interests share of net assets increased
during 1999 as a result of additional assets contributed to Agua de La Falda
joint venture ("Agua") by Agua's 49% shareholder, Codelco, partially offset by
the allocation of losses allocable to minority interests, primarily exploration
and prefeasibility expenditures in excess of joint venture operating earnings.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short term investments totaled $266.6 million at the end of 1999
compared with $301.9 million at the end of 1998 a decrease of $35.3 million.
Net cash provided by operations in 1999 amounted to $117.3 million compared to
$115.1 million and $157.9 million in 1998 and 1997, respectively. The increase
in cash provided by operations during 1999 from 1998 reflects improved operating
performance and $35 million of proceeds related to the early close out of
forward sales contracts, partially offset by the effect of lower gold prices.
The decrease in cash flow from operations in 1998 from 1997 primarily is due to
lower gold prices and the inclusion in 1997 cash flows of the $65 million fee
received on termination of the merger with Santa Fe.
Total debt outstanding, including capital lease obligations, was $315.7
million at December 31, 1999 compared to $357.4 million at the prior year end.
The Company has a cross-border credit facility ("Credit Facility") providing a
total availability of $430 million. The Credit Facility is available through
July 14, 2003 and provides for borrowings in United States, Canadian, or
Australian dollars, or gold, or a combination of these. Australian dollar-
denominated borrowings outstanding at December 31, 1998 under the credit
facility were repaid in 1999. At December 31, 1999, borrowings outstanding
under the Credit Facility consisted of Canadian dollar-denominated borrowings of
$102.7 million (C$148.2 million). The Company pays a commitment fee on the
unused portion of this facility ranging from 0.15% to 0.35% per annum, depending
upon rating agencies' ratings for the Company's senior debt. The credit
agreement requires, among other provisions, a minimum consolidated net worth, as
defined in the agreement (primarily shareholders' equity plus the amount of all
noncash write-downs made after December 31, 1997), of $500 million. Interest on
the Canadian dollar borrowings is payable quarterly based on the Bankers'
Acceptance discount rate plus a stamping fee. At December 31, 1999 this rate
was 6.17%.
During 1999 the Company entered into capital leases to finance its portion
of the purchase of mining equipment at the Kalgoorlie operations. Leased assets
of $23 million are included in property, plant and equipment at December 31,
1999.
In July 1997, Lawrence County, South Dakota issued $30 million of Solid
Waste Disposal Revenue Bonds ("Waste Disposal Bonds") and $18 million of
Pollution Control Refunding Revenue Bonds, both of which are due in 2032. The
Company is responsible for funding principal and interest payments on these
bonds. Due to a reduction in the size of the Homestake mine tailings project,
the Company repaid $10 million of the Waste Disposal Bonds in March 1999 out of
the funds held in trust.
During 1999, the Company repurchased $15 million of the 5.5% Convertible
Notes ("Convertible Notes"), which mature on
30
June 23, 2000. At December 31, 1999, the Company has classified $100 million of
Convertible Notes as long-term debt since the Company intends to refinance that
portion of these obligations under the Credit Facility for a period longer than
one year from December 31, 1999. The remaining $35 million of Convertible Notes
have been classified as current as the Company expects to retire this debt using
cash and equivalent balances. Interest on the notes is payable semiannually in
June and December. The notes are convertible into the Company's common shares
at a rate of $23.06 per common share. See note 12 to the Consolidated Financial
Statements for further information on the Company's long-term debt.
Long-term debt repayments, net of borrowings, amounted to $51.5 million in
1999, compared to $8.1 million in 1998 and net borrowings of $76.7 million in
1997. Net debt repayments in 1999 include the repurchase of $15 million of the
Convertible Notes, repayment of all Australian dollar-denominated borrowings
under the Credit Facility from existing cash and short-term investment balances,
repayment of $10 million of the Waste Disposal Bonds, borrowings of $23 million
(A$35.2 million) under the capital leases and $99.8 million (C$148.2 million) of
Canadian dollar-denominated borrowings under the Credit Facility.
In December 1998, Homestake purchased the Prime minority interests for
stock. Total acquisition cost was $321.8 million (including $4 million of
capitalized direct acquisition costs). The excess of the purchase price paid
over the net book value of the minority interests acquired was $224 million of
which $174 million ($259.6 million including an increase related to deferred
taxes) was allocated to the Eskay Creek mine's ore reserves and $50 million
($74.6 million including an increase related to deferred taxes) was allocated to
the Eskay Creek exploration properties.
In February 1997, Homestake sold its interests in the George Lake and Back
River joint ventures in Canada to Kit Resources Corporation ("Kit") for $9.3
million in cash and 3.6 million shares of Kit common stock. This transaction
resulted in a pretax gain of $13.5 million.
In November 1997, Homestake purchased a 20% interest in Navan Bulgarian
Mining BV ("Navan BV") for $12 million. In September 1998, Homestake completed
its evaluation of Navan BV's Chelopech project and concluded that the project
did not warrant Homestake's participation and therefore terminated its
participation in Navan BV. Navan BV returned approximately $11 million of
Homestake's investment.
In 1997, the Company received $37.1 million (A$50 million) upon repayment
of Edensor Nominees Pty, Ltd. debt owed to the Company.
Capital expenditures of $104.9 million in 1999 include $39.7 million at the
Yilgarn operations primarily for underground development work, $33.5 million at
the Kalgoorlie operations primarily to acquire equipment for owner mining and
$11.2 million at the Homestake mine primarily for underground mobile mining
equipment and a raise on the tailings dam. The remaining expenditures primarily
were for replacement capital to maintain existing production capacity.
In addition to sustaining capital, planned capital expenditures of
approximately $70 million during 2000 include $12 million at the Super Pit
primarily to complete the purchase of owner mining equipment and to upgrade the
Fimiston mill flotation circuit, a total of $20 million at the Yilgarn
operations primarily for underground development, $8 million at the Homestake
mine related to the Ross Shaft upgrade and restructuring of the underground
operations and $3 million at the Eskay Creek mine primarily for a mill expansion
project.
During 1999, Homestake paid dividends of $.05 per share and $.025 per share
in the second and fourth quarters, respectively. At the time the fourth quarter
dividend was declared, the Company also announced that under current economic
conditions the Board of Directors would consider future payments of dividends
once a year during the second half of the year.
The Company paid cash income and mining taxes of $33.3 million in 1999,
consisting primarily of Canadian taxes.
Future results will be impacted by such factors as the market price of gold
and, to a lesser extent silver, the Company's ability to expand its ore
reserves, and fluctuations of foreign currency exchange rates. The Company
believes that the combination of cash, short-term investments, available lines
of credit and future cash flows from operations will be sufficient to meet
normal operating requirements, planned capital expenditures, and anticipated
dividends.
Foreign currency, gold and other commitments
Homestake's precious metals hedging policy provides for the use of forward
sales contracts to hedge up to 30% of each of the following ten year's expected
annual gold production, and up to 30% of each of the following five year's
expected annual silver production, at prices in excess of certain targeted
prices. The policy also provides for the use of combinations of put and call
option contracts to establish minimum floor prices. Homestake does not hold or
issue financial instruments or derivative financial instruments for trading
purposes or to create hedge positions in excess of forecast identifiable
exposures.
During 1999, 1998 and 1997 the Company delivered or financially settled
449,980, 1,258,000 and 656,000 ounces of gold at average prices of $327, $335
and $421 per ounce, respectively, under maturing forward sales and option
contracts. In 1999, the Company also delivered or financially settled option
contracts for 3,095,000 ounces of silver at an average price of $6.35 per ounce.
In July 1999, the Company closed out and financially settled US dollar
denominated forward sales gold
31
contracts covering 245,000 ounces maturing in the years 2001, 2002 and 2003.
The pretax gain of $35 million realized as a result of this transaction has been
deferred and will be recorded in income as the originally designated production
is sold. The estimated fair value of the Company's remaining gold and silver
hedging position at December 31, 1999 was approximately $30 million. At
December 31, 1999, Homestake's gold hedging program covered approximately 5% of
its proven and probable reserves and contained no exposure to floating lease
rates or margin call requirements.
Under the Company's foreign currency protection program, the Company has
entered into foreign currency option contracts to minimize the effects of a
strengthening of either the Canadian or Australian currencies in relation to the
United States dollar. Realized and unrealized gains and losses on this program
are recorded in other income. At December 31,1999 the Company had net
unrealized gains of $3.4 million on open contracts under this program.
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 requires that all derivatives be recognized as assets or
liabilities and be measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivatives and whether they qualify for hedge accounting as
either a fair value hedge or a cash flow hedge. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows of the hedging
instruments and the hedged items. The Company believes that under SFAS 133,
changes in unrealized gains and losses on Homestake's foreign currency contracts
will qualify for hedge accounting and be deferred in other comprehensive income.
The Company also believes that contracts under its precious metals hedging
program will qualify as cash flow hedges under SFAS 133. However, there are
many complexities to this new standard. The Company currently is evaluating the
impact that SFAS 133 will have on reported operating results and financial
position. The Company expects to adopt SFAS 133 effective January 1, 2001.
See notes 2 and 18 to the consolidated financial statements for additional
information regarding the Company's hedging programs.
Risks and uncertainties
Homestake's operations are affected by the quantity of metals produced,
market prices of gold, and to a lesser extent silver, operating costs, interest
rates on borrowings and investments, and exploration spending levels. The
market price for gold is a worldwide market. Gold prices are subject to
volatile price movements over short periods of time and are influenced by
numerous factors over which Homestake has no control, including expectations
with respect to rates of inflation, the relative strength of the United States
dollar, and certain other currencies, interest rates, global or regional
political or economic crises, demand for jewelry and industrial products
containing gold, speculation, and sales by holders and producers of gold in
response to these factors. In addition, because Homestake operates
internationally, exposure also exists with respect to fluctuations in currency
exchange rates, political risk and levels of taxation. Homestake attempts to
manage its exposures to these risks through currency and commodity hedging
programs and by maintaining appropriate levels of liquidity and leverage.
The Company competes with other mining companies for exploration
properties, mining claims, joint-venture agreements and for the acquisition of
gold mining assets. Such competition could increase the difficulty of acquiring
assets on terms acceptable to Homestake.
Homestake's estimates of its remediation and reclamation obligations are
based on currently available facts, existing technology and presently enacted
laws and regulations. Environmental laws and regulations continually are
changing in all of the regions in which Homestake operates. It is not possible
to determine the impact of future changes in environmental laws and regulations
on its future financial position because of uncertainty surrounding the form
such changes may take. The Company regularly reviews these obligations.
However, it is reasonably possible that as reclamation plans and associated cost
estimates change, the Company's remediation and reclamation liability could
change significantly.
32
Year 2000
The Year 2000 ("Y2K") issue is the result of computerized systems using two
digits rather than four to identify an applicable year. Date-sensitive systems
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculation causing disruptions of
business operations. In 1999, the Company completed a review of its computer-
based information systems and developed a plan to ensure that all of these
systems would be Year 2000 compliant. Year 2000 compliant upgrades for the
Company's core financial systems were installed and tested. To date, no
significant Y2K problems have been encountered during the year 2000 and none are
expected. However, factors may exist that could cause Y2K related problems in
the future. Homestake's management information systems and operations staff
will again monitor critical operations during the December 31, 2000 - January 1,
2001 Y2K rollover dates.
The Company has not established systems to track Y2K related costs
directly. Total Y2K program expenditures, which are composed primarily of
internal payroll costs and external consulting fees, totaled approximately $1.5
million.
33
Homestake Mining Company and Subsidiaries
Statements of Consolidated Operations
(In thousands, except per share amounts)
For the years ended December 31, 1999, 1998 and 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues
Gold and ore sales $ 671,572 $ 782,159 $ 863,628
Sulfur and oil sales 19,376 20,975 26,821
Interest income 16,366 19,501 17,435
Other income (loss) (note 4) 40,811 (24,745) 63,682
- ------------------------------------------------------------------------------------------------------------------------------------
748,125 797,890 971,566
- -----------------------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Production costs 473,775 537,291 627,639
Depreciation, depletion and amortization 134,478 139,371 162,781
Administrative and general expense 42,045 46,832 49,455
Exploration expense 39,511 59,865 67,587
Interest expense 17,827 20,884 20,756
Business combination and integration costs (note 3) 4,764 19,351 -
Write-downs and other unusual charges (note 5) 20,415 213,813 285,315
Other expense 4,453 4,165 6,836
- ------------------------------------------------------------------------------------------------------------------------------------
737,268 1,041,572 1,220,369
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Taxes and Minority Interests 10,857 (243,682) (248,803)
Income and Mining Taxes (note 6) (7,388) 13,087 19,458
Minority Interests 1,395 (3,185) (4,009)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 4,864 $ (233,780) $ (233,354)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Per Share (Basic and Diluted) $ 0.02 $ (1.01) $ (1.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Average Shares Used in the Computation 259,964 231,747 228,584
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
34
Homestake Mining Company and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amount)
December 31, 1999 and 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and equivalents $ 130,273 $ 147,519
Short-term investments 136,362 154,346
Receivables (note 7) 44,988 45,929
Inventories (note 8) 63,337 78,906
Deferred income and mining taxes (note 6) 14,663 22,792
Other 7,479 5,105
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 397,102 454,597
Property, Plant and Equipment - net (note 9) 1,132,846 1,102,739
Investments and Other Assets
Noncurrent investments 10,473 12,945
Other assets (note 10) 94,048 90,325
- --------------------------------------------------------------------------------------------------------------------------------
Total investments and other assets 104,521 103,270
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,634,469 $ 1,660,606
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 34,873 $ 43,457
Accrued liabilities (note 11) 64,460 102,113
Income and other taxes payable 3,469 3,151
Current portion of long-term debt (note 12) 37,206 -
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 140,008 148,721
Long-term Liabilities
Long-term debt (note 12) 278,494 357,410
Other long-term obligations (note 13) 184,893 176,887
- --------------------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 463,387 534,297
Deferred Gain on Close-out of Forward Sales Contracts (note 18) 34,956 -
Deferred Income and Mining Taxes (note 6) 216,958 230,567
Minority Interests in Consolidated Subsidiaries 13,800 7,825
Shareholders' Equity (note 16)
Capital stock, $1 par value per preferred and common share:
Authorized - Preferred: 10,000 shares; no shares outstanding
- Common: 450,000 shares
Outstanding - HCI exchangeable shares: 1999 - 6,657; 1998 - 11,139
- Common: 1999 - 253,808; 1998 - 247,483 253,808 247,483
Additional paid-in capital 923,091 920,816
Deficit (382,271) (368,648)
Accumulated other comprehensive loss (29,268) (60,455)
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 765,360 739,196
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 1,634,469 $ 1,660,606
- --------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies - see note 18.
The accompanying notes are an integral part of these financial statements.
35
Homestake Mining Company and Subsidiaries
Statements of Consolidated Shareholders' Equity
(In thousands)
Accumulated Other
Comprehensive Income
---------------------------------
Additional Retained Accumulated Unrealized
For the years ended Common Paid-in Earnings Translation Securities
December 31, 1999, 1998 and 1997 Stock Capital (Deficit) Adjustments Gains (Losses) Total
- ---------------------------------------------- ------------- ------------ -------------- ----------------- ----------
BALANCES, DECEMBER 31, 1996 $ 228,466 $613,102 $ 151,724 $ 58,468 $ (8,383) $ 1,043,377
Comprehensive income:
Net Loss (233,354) (233,354)
Other comprehensive income (loss) (92,163) 10,210 (81,953)
Dividends paid (31,784) (31,784)
Exercise of stock options 277 1,012 1,289
Other 2,216 2,216
---------- --------- --------- --------- --------- -----------
BALANCES, DECEMBER 31, 1997 228,743 616,330 (113,414) (33,695) 1,827 699,791
Comprehensive income:
Net loss (233,780) (233,780)
Other comprehensive income (loss) (32,524) 3,937 (28,587)
Dividends paid (21,454) (21,454)
Stock issued to employee savings plan 148 1,416 1,564
Stock issued for acquisition of Plutonic
options and partly-paid shares (note 3) 503 (503) -
Stock issued in private placement 1,390 1,845 3,235
Exercise of stock options 34 (10) 24
Stock issued for purchase of Prime
minority interests (note 3):
Homestake common shares 16,672 173,843 190,515
HCI exchangeable shares 127,285 127,285
Other (7) 610 603
---------- --------- --------- --------- --------- -----------
BALANCES, DECEMBER 31, 1998 247,483 920,816 (368,648) (66,219) 5,764 739,196
Comprehensive income:
Net income 4,864 4,864
Other comprehensive income 28,595 2,592 31,187
Dividends paid (18,487) (18,487)
Stock issued to employee savings plan 167 1,285 1,452
Stock issued in exchange for
HCI exchangeable shares 4,482 (4,482) -
Stock issued in private placement 1,090 5,199 6,289
Exercise of stock options 499 (121) 378
Other 87 394 481
---------- --------- --------- --------- --------- -----------
BALANCES, DECEMBER 31, 1999 $ 253,808 $923,091 $(382,271) $ (37,624) $ 8,356 $ 765,360
=========== ========= ========= ========= ========= ===========
The accompanying notes are an integral part of these financial statements.
36
Homestake Mining Company and Subsidiaries
Statements of Consolidated Cash Flows
(In thousands)
For the years ended December 31, 1999, 1998 and 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operations
Net income (loss) $ 4,864 $ (233,780) $ (233,354)
Reconciliation to net cash provided by operations:
Depreciation, depletion and amortization 134,478 139,371 162,781
Deferred gains on close-out of forward sales contracts 34,956 - -
Write-downs and other unusual charges (note 5) 20,415 204,934 285,315
Foreign currency exchange (gains) losses on intercompany debt (note 4) (9,975) 5,671 5,657
Gains on asset disposals (3,400) (3,664) (16,933)
Deferred income and mining taxes (note 6) (17,824) (39,436) (56,318)
Minority interests (1,395) 3,185 4,009
Reclamation - net (2,755) 1,404 2,970
Other items - net (64) (12,423) 11,433
Effect of changes in operating working capital items:
Receivables 3,239 (6,889) (370)
Inventories 12,729 43,815 2,932
Accounts payable (9,837) (15,109) 9,602
Accrued liabilities and taxes payable (34,183) 26,215 (18,199)
Other (13,909) 1,760 (1,585)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 117,339 115,054 157,940
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Decrease (increase) in short-term investments 19,069 (19,307) (11,063)
Additions to property, plant and equipment (104,927) (73,323) (204,629)
Proceeds from sale-leaseback of equipment (note 18) 23,044 - -
Proceeds from asset sales 6,309 15,606 33,536
Decrease (increase) in restricted cash 11,772 2,429 (15,990)
Investments in mining companies - 11,088 (22,950)
Decrease in note receivable - - 37,210
Other - (135) (1,376)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investment activities (44,733) (63,642) (185,262)
- -----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Borrowings 99,791 97,697 126,847
Debt repayments (174,287) (105,747) (50,133)
Dividends paid (18,487) (22,494) (33,935)
Common shares issued 6,707 3,399 1,289
Other - 1,795 4,234
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (86,276) (25,350) 48,302
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Equivalents (3,576) (7,433) (2,844)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Equivalents (17,246) 18,629 18,136
Cash and Equivalents, January 1 147,519 128,890 110,754
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Equivalents, December 31 $ 130,273 $ 147,519 $ 128,890
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
Homestake Mining Company and Subsidiaries
Statements of Consolidated Comprehensive Income (Loss)
(In thousands)
For the years ended December 31, 1999, 1998 and 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 4,864 $ (233,780) $ (233,354)
- -------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss)
Changes in unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 4,012 1,213 (32,128)
Less: Reclassification adjustments for gains and losses
included in net income (loss) 1,033 (1,620) (43,403)
- -------------------------------------------------------------------------------------------------------------------------------
2,979 2,833 11,275
Income taxes (387) 1,104 (1,065)
- -------------------------------------------------------------------------------------------------------------------------------
2,592 3,937 10,210
Foreign currency translation adjustments (before and
after tax) 28,595 (32,524) (92,163)
- -------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 31,187 (28,587) (81,953)
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ 36,051 $ (262,367) $ (315,307)
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
38
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Note 1: Nature of Operations
Homestake Mining Company ("Homestake" or the "Company") is engaged in gold
mining and related activities including exploration, extraction, processing,
refining and reclamation. Gold bullion, the Company's principal product, is
produced and sold in the United States, Canada, Australia and Chile. Ore and
concentrates containing gold and silver from the Eskay Creek mine in Canada
are sold directly to smelters.
Note 2: Significant Accounting Policies
Basis of presentation: The consolidated financial statements include
Homestake and its majority-owned subsidiaries, and their undivided interests
in joint ventures after elimination of intercompany amounts. Undivided
interests in gold mining operations and development projects (the Round
Mountain, Pinson and Marigold mines in Nevada; the Kalgoorlie operations and
the Peak Hill mine in Western Australia; the Williams and David Bell mines in
Canada; and the Veladero project in Argentina) and in the sulfur and oil
recovery operations at Main Pass 299 in the Gulf of Mexico are reported using
pro rata consolidation whereby the Company reports its proportionate share of
assets, liabilities, income and expenses.
Use of estimates: The preparation of financial statements in conformity with
United States generally accepted accounting principles requires the Company's
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and the related notes thereto.
Actual results could differ from those estimates.
Cash and equivalents include all highly-liquid investments with original
maturities of three months or less at the date of purchase. The Company
minimizes its credit risk by investing its cash and equivalents with major
international banks and financial institutions located principally in the
United States, Canada and Australia. The Company believes that no
concentration of credit risk exists with respect to the investment of its cash
and equivalents.
Short-term investments principally consist of highly-liquid United States and
foreign government and corporate securities with original maturities in excess
of three months. The Company classifies all short-term investments as
available-for-sale. Unrealized gains and losses on these investments are
recorded in accumulated other comprehensive income, a separate component of
shareholders' equity, except that declines in market value judged to be other
than temporary are recognized in determining net income.
Inventories, which include finished products, ore in process, stockpiled ore,
ore in transit, and supplies, are stated at the lower of cost or net
realizable value. The cost of gold produced by certain United States
operations is determined principally by the last-in, first-out method. The
cost of other inventories is determined primarily by averaging methods.
Exploration costs are expensed as incurred. All costs related to property
acquisitions are capitalized.
Development costs: Following completion of a favorable feasibility study,
development costs incurred to place new mines into production and to complete
major development projects at operating mines are capitalized. Ongoing costs
to maintain production are expensed as incurred.
Depreciation, depletion and amortization of mining properties, mine
development costs and major plant facilities is computed principally by the
units-of-production method based on estimated quantities of ore which can be
recovered economically in the future from known mineral deposits. Such
estimates are based on current and projected costs and prices. Other
equipment and plant facilities are depreciated using straight-line or
accelerated methods principally over estimated useful lives of three to ten
years.
Property evaluations: Long-lived assets are reviewed for impairment annually
and when events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If deemed impaired, an impairment loss is
measured and recorded based on the fair value of the asset, which generally
will be computed using discounted cash flows. Estimated future net cash flows
from each mine are calculated using estimates of production, future sales
prices (considering historical and current prices, price trends and related
factors), production costs, capital and reclamation costs. During 1999, 1998
and 1997, the Company estimated future net cash flows from its gold operations
using gold prices of $325, $325 and $350 per ounce, respectively, to perform
impairment reviews. The Company's estimates of future cash flows are subject
to risks and uncertainties. Therefore, it is possible that changes could
occur which may affect the recoverability of the Company's investments in
mineral properties and other assets.
Undeveloped properties upon which the Company has not performed
sufficient exploration work to determine whether sig-
39
nificant mineralization exists are carried at original acquisition cost. If
it is determined that significant mineralization does not exist, the property
is written down to estimated net realizable value at the time of such
determination.
Reclamation and remediation: Reclamation costs (undiscounted) and related
liabilities, which are based on the Company's interpretation of current
environmental and regulatory requirements, are accrued and expensed
principally by the units-of-production method based on estimated quantities of
ore which can be recovered economically in the future from known mineral
deposits. Remediation liabilities, including estimated governmental oversight
costs, are expensed upon determination that a liability has been incurred and
where a minimum cost or reasonable estimate of the cost can be determined.
Amounts to be received from the Federal Government for its share of the cost
of future reclamation activities are offset against estimated remaining
reclamation liabilities and are recorded in the period that such expenditures
are made.
Based on current environmental regulations and known reclamation
requirements, the Company has included its best estimates of these obligations
in its reclamation accruals. The Company updates these estimates regularly,
however, the Company's estimates of its ultimate reclamation liabilities could
change significantly as a result of changes in regulations or cost estimates.
Investments: Investments in mining securities that have readily determinable
fair values and assets held in trust to fund employee benefits are classified
as available-for-sale investments. Unrealized gains and losses on these
investments are recorded in accumulated other comprehensive income, except
that declines in market value judged to be other than temporary are recognized
in determining net income. Realized gains and losses on these investments are
included in determining net income.
Product sales are recognized when title passes at the shipment or delivery
point.
Derivative financial instruments: The Company uses derivative financial
instruments as part of an overall risk-management strategy. These instruments
are used as a means of hedging exposure to precious metals prices and foreign
currency exchange rates. The Company does not hold or issue derivative
financial instruments for trading purposes.
The Company uses forward sales contracts and combinations of put and call
options to hedge its exposure to precious metals prices. The underlying
hedged production is designated at the inception of the hedge. Deferral
accounting is applied only if the derivatives continue to reduce the price
risk associated with the underlying hedged production. Contracted prices on
forward sales contracts and options are recognized in product sales as the
designated production is delivered or sold. In the event of early settlement
of hedge contracts, gains and losses are deferred and recognized in income at
the originally designated delivery date.
The Company uses combinations of put and call options to hedge its exposure
to foreign currency exchange rates. Currently, these options do not qualify
for deferral accounting and, accordingly, are marked to market at each balance
sheet date. Realized and unrealized gains and losses on these options are
recognized in other income.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires that all derivatives
be recognized as assets or liabilities and be measured at fair value. Gains
or losses resulting from changes in the values of derivatives are to be
accounted for depending on the use of the derivatives and whether the
derivatives qualify for hedge accounting as either a fair value hedge or a
cash flow hedge. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows of the hedging instruments and the hedged items. SFAS 133
is effective for fiscal years beginning after June 15, 2000, but earlier
adoption is permitted. The Company believes that under SFAS 133, changes in
unrealized gains and losses on Homestake's foreign currency derivatives will
qualify for hedge accounting and be deferred in accumulated other
comprehensive income. The Company also believes that contracts under its
precious metals hedging program will qualify as cash flow hedges under SFAS
133. However, there are many complexities to this new standard and the
Company continues to evaluate the impact that SFAS 133 will have on reported
operating results and financial position. The Company expects to adopt SFAS
133 effective January 1, 2001.
Income taxes: The Company follows the liability method of accounting for
income taxes whereby deferred income taxes are recognized for the tax
consequences of temporary differences by applying statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of certain assets and liabilities. Changes
in deferred tax assets and liabilities include the impact of any tax rate
changes enacted during the year. Mining taxes represent Canadian provincial
taxes levied on mining operations. Foreign withholding taxes represent
Canadian and Australian withholding taxes on intercompany interest.
40
Foreign currency: Substantially all assets and liabilities of foreign
subsidiaries are translated at exchange rates in effect at the end of each
period. Revenues and expenses are translated at the average exchange rate for
the period. Accumulated currency translation adjustments are included in
accumulated other comprehensive income. Foreign currency transaction gains
and losses are included in the determination of net income.
Pension plans and other postretirement benefits: Pension costs related to
United States employees are determined using the projected unit credit
actuarial method. The Company's funding policy for defined benefit pension
plans is to fund the plans annually to the extent allowed by the applicable
regulations. In addition, the Company provides medical and life insurance
benefits for certain retired employees and accrues the cost of such benefits
over the period in which active employees become eligible for the benefits.
The costs of the postretirement medical and life insurance benefits are paid
at the time such benefits are provided.
Net income or loss per share is computed by dividing net income or loss by the
weighted average number of common shares outstanding, including the Homestake
Canada Inc. ("HCI") exchangeable shares. The Company's basic and diluted net
income or loss per share are the same since the exercise of stock options and
the conversion of the 5.5% convertible subordinated notes would produce anti-
dilutive results.
Statement of Position 98-5: In April 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"),
"Reporting on the Cost of Start-up Activities". SOP 98-5 provides guidance on
the financial reporting of start-up costs and requires that costs of start-up
activities be expensed as incurred, as well as the recognition of a cumulative
effect of a change in an accounting principle for retroactive application of
the standard. Homestake adopted SOP 98-5 as required on January 1, 1999 and
adoption of the standard had no financial statement impact.
Preparation of financial statements: Certain 1998 and 1997 amounts have been
reclassified to conform to the current year's presentation. All dollar
amounts are expressed in United States dollars unless otherwise indicated.
Note 3: Acquisitions and Divestitures
Agua de la Falda: In October 1999, the Company and Corporacion Nacional del
Cobre Chile ("Codelco") contributed additional capital of $14.9 million to
Agua de La Falda ("ADLF") in proportion to their ownership interests
(Homestake 51% and Codelco 49%). The Company's subscribed capital
contribution primarily was in the form of cash. Codelco contributed property,
subject to a retained royalty.
Argentina Gold Corp: On April 29, 1999, Homestake completed the acquisition
of Argentina Gold Corp. ("Argentina Gold"), a publicly-traded Canadian gold
exploration company. Homestake issued 20.9 million common shares to acquire
all of the shares of Argentina Gold. The business combination with Argentina
Gold has been accounted for as a pooling of interests and accordingly,
Homestake's consolidated financial statements include Argentina Gold for all
periods presented. Argentina Gold's principal asset is its 60% interest in
the Veladero property located in northwest Argentina along the El Indio gold
belt.
In 1999, the Company recorded business combination expenses of $4.8 million
related to this transaction. Combined and separate preacquisition results for
Homestake and Argentina Gold for the three months ended March 31, 1999 and for
the years ended December 31, 1998 and 1997 are as follows:
Homestake Argentina Gold
Historical Historical (a) Combined
---------------------------------------------------------------
Three months ended March 31, 1999:
Revenues $ 178,533 $ 81 $ 178,614
Net income (loss) 2,198 (3,147) (949)
Shareholders' equity at March 31 737,843 6,526 744,369
Year ended December 31, 1998:
Revenues 797,777 113 797,890
Net loss (218,325) (15,455) (233,780)
Shareholders' equity at December 31 735,832 3,364 739,196
Year ended December 31, 1997:
Revenues 971,415 151 971,566
Net loss (230,606) (2,748) (233,354)
Shareholders' equity at December 31 683,505 16,287 699,792
41
(a) Argentina Gold's historical results have been adjusted to reflect i) United
States generally accepted accounting principles and the format,
classifications and accounting policies utilized by Homestake, and ii)
translation into US dollars using the average exchange rate for each
period. Shareholders' equity has been translated into US dollars using the
end-of-period exchange rates.
Plutonic Resources Limited: In April 1998, Homestake acquired Plutonic
Resources Limited ("Plutonic"), a publicly-traded Australian gold producer.
Homestake issued 64.4 million common shares in exchange for all of the
Plutonic fully-paid ordinary shares, partly-paid shares and options
outstanding. The business combination was accounted for as a pooling of
interests and accordingly, Homestake's consolidated financial statements
include Plutonic for all periods presented. Business combination and
integration costs of $19.1 million were incurred in 1998 related to this
merger.
Prime Resources Group Inc.: In December 1998, Homestake acquired the 49.4% of
Prime Resources Group Inc. ("Prime") it did not already own. The Prime
minority shareholders received Homestake common shares or HCI exchangeable
shares. Each HCI exchangeable share is exchangeable for one Homestake common
share at any time at the option of the holder and has essentially the same
voting, dividend (payable in Canadian dollars) and other rights as one
Homestake common share. Homestake issued 16.7 million Homestake shares and
11.1 million HCI exchangeable shares with a total value of $317.8 million.
The acquisition of the Prime minority interests was accounted for as a
purchase.
Lachlan Resources NL: In April 1997, Lachlan Resources NL ("Lachlan")
acquired the 9.3% interest in Archaean Gold NL it did not already own. This
acquisition was funded by a $33.2 million (A$50.9 million) loan from the
Company to Lachlan. In May 1998, Lachlan repaid this loan by issuing
additional shares to the Company which increased the Company's interest in
Lachlan from 62.1% to 81.2%.
George Lake and Back River Joint Ventures: In February 1997, Homestake sold
its interests in the George Lake and Back River joint ventures in Canada to
Kit Resources Corporation ("Kit") for $9.3 million in cash and 3.6 million
shares of Kit common stock. As a result of this transaction, the Company
recorded a pretax gain of $13.5 million, which was included in other income.
Note 4: Other Income (Loss)
1999 1998 1997
-------------------------------------------------------
Gains on asset disposals $ 3,304 $ 3,651 $ 16,926
Foreign currency contract gains (losses) 15,814 (34,332) (28,453)
Foreign currency exchange gains (losses)
on intercompany advances and other 10,913 (4,400) (5,357)
Gain on sale of Great Central option - - 10,419
Gain on termination of Santa Fe merger - - 62,925
Other 10,780 10,336 7,222
-------------------------------------------------------
$40,811 $(24,745) $ 63,682
=======================================================
In March 1997, Santa Fe Pacific Gold Corporation terminated its merger
agreement with Homestake and paid Homestake a $65 million termination fee. As
a result, in 1997 the Company recorded a pretax gain of $62.9 million ($47.2
million after tax), net of merger related expenses of $2.1 million.
Note 5: Write-downs and Other Unusual Charges
1999 1998 1997
------------------------------------------------
Reduction in the carrying values
of resource assets (a) $11,730 $151,581 $ 84,655
Increase in the estimated accrual for remediation
and reclamation expenditures (b) 5,185 36,000 29,156
Homestake mine restructuring charges (c) - 8,879 -
Write-down of Homestake's investment
in the Main Pass 299 sulfur mine (d) - - 107,761
Write-downs of noncurrent investments (e) 3,500 8,213 47,932
Other - 9,140 15,811
------------------------------------------------
$20,415 $213,813 $285,315
================================================
a) The Company reviews the carrying values of its long-lived assets annually
and when events or changes in circumstances indicate an asset may be
impaired. As a result of these reviews and other circumstances:
i. During 1999, the Company recorded charges of $10 million to write-off
an exploration property acquired as part of the Plutonic acquisition
and $1.7 million to write down certain redundant equipment at the
Kalgoorlie operations in Western Australia.
ii. In 1998, the Company recorded a $76.1 million write-down of property,
plant and equipment at the Homestake
42
mine in South Dakota and a $34.5 million write-down of property and
$3.9 million for severance and other charges at the Mt Charlotte mine
in Western Australia.
Also in 1998, based on evaluation of the recoverability of the
carrying values of other mineral properties, the Company recorded
write-downs of $37.1 million, including $22.3 million and $10.2
million related to mineral properties of Plutonic and Argentina Gold,
respectively.
iii. In 1997, the Company recorded write-downs to reduce the carrying
values of several of its assets or operations with short remaining
lives, including the Mt Morgans and Peak Hill mines, the Pinson mine,
the Homestake mine's Open Cut, low-grade stockpiled ore and
exploration properties at certain locations in Western Australia, and
redundant mining equipment at the Kalgoorlie operations.
b) During 1999, following an environmental audit, the Company recorded a
charge of $5.2 million to increase the estimated reclamation liability for
certain non-operating properties acquired as a result of the Plutonic
acquisition in 1998.
In 1998, following an environmental audit at the Homestake mine and a
change in that operation's mining plans, the Company recorded a provision
for estimated additional remediation and related reclamation costs of $35
million. In addition, a $1 million increase in the provision for
reclamation at closed operations was recorded in 1998.
In 1997, as a result of a review of the Company's reclamation
liabilities, the Company determined that it was necessary to increase
reclamation accruals for certain of its non-operating properties, including
the Santa Fe mine in Nevada, the Nickel Plate mine in Canada and the Grants
uranium complex in New Mexico, to reflect revised estimates, changed
conditions and more stringent future reclamation requirements.
c) In January 1998, the Company commenced a restructuring of underground
operations at the Homestake mine, including a significant reduction in that
mine's workforce. As a result of the restructuring, the Company recorded
severance and other costs of $8.9 million, net of pension and other
postretirement curtailment and settlement gains of $9.3 million.
d) Homestake owns a 16.7% undivided interest in the Main Pass 299 sulfur mine.
Due to a prolonged period of low sulfur prices and Homestake's assessment
of estimated future cash flows from the Main Pass 299 sulfur mine, in 1997
the Company wrote-off its remaining investment in the Main Pass 299 sulfur
property, plant and equipment.
e) In 1999, 1998 and 1997, the Company recorded in income the reductions in
the carrying values of certain marketable securities and other investments
that it deemed to be other than temporary.
Note 6: Income Taxes
The provision for income and mining taxes consists of the following:
1999 1998 1997
-------------------------------------------------------------
Current
Income taxes
United States $ 3,400 $(11,332) $ 654
Canada 6,275 22,576 25,945
Foreign withholding taxes 2,848 421 464
Mining taxes - Canada 12,689 14,684 9,797
--------------------------------------------------------------
Total current taxes 25,212 26,349 36,860
--------------------------------------------------------------
Deferred
Income taxes
United States (1,579) 10,911 (27,177)
Canada (3,453) (19,286) (7,039)
Australia (7,297) (28,947) (22,282)
Mining taxes - Canada (5,495) (2,114) 180
--------------------------------------------------------------
Total deferred taxes (17,824) (39,436) (56,318)
--------------------------------------------------------------
Total income and mining taxes $ 7,388 $(13,087) $(19,458)
==============================================================
The provision for income taxes is based on pretax income (loss) before
minority interests as follows:
1999 1998 1997
-------------------------------------------------------------------------
United States $ 34,667 $(163,374) $(167,570)
Canada 12,298 38,058 50,592
Australia (22,115) (94,903) (115,323)
South America and other foreign (13,993) (23,463) (16,502)
-------------------------------------------------------------------------
$ 10,857 $(243,682) $(248,803)
=========================================================================
In December 1999, the Australian government enacted certain significant
changes to the structure of taxation in Australia. These changes included a
reduction of the statutory corporate tax rate from 36% to 34% for the Australian
fiscal year beginning July 1, 2000 and a further reduction to 30% for subsequent
years. As a result, the 1999 deferred tax provision includes a tax benefit of
$1.8 million reflecting the impact of these reduced rates on the Company's net
Australian deferred tax liabilities. Further changes to the structure of
taxation, the impact of which currently cannot be estimated, are expected to be
enacted during 2000.
43
Deferred tax liabilities and assets as of December 31, 1999 and 1998 relate to
the following:
December 31,
1999 1998
---------------------------------------------------
Deferred Tax Liabilities
Depreciation and other resource property differences $ 238,000 $ 255,874
Other 60,952 47,176
---------------------------------------------------
Gross deferred tax liabilities 298,952 303,050
---------------------------------------------------
Deferred Tax Assets
Tax loss carry-forwards 107,415 84,418
Reclamation costs 45,141 43,882
Depreciation, land and other resource property 35,039 61,855
Employee benefit costs 23,244 28,234
Alternative minimum tax credit carry-forwards 35,955 31,677
Foreign tax credit carry-forwards 111,469 12,007
Unrealized foreign exchange losses - 12,366
Deferred gain on close-out of forward sales contracts 12,724 -
Write-downs of noncurrent investments 3,046 11,567
Inventory 9,306 12,804
Other 22,457 13,968
---------------------------------------------------
Gross deferred tax assets 405,796 312,778
Valuation allowance (309,139) (217,503)
---------------------------------------------------
Net deferred tax assets 96,657 95,275
---------------------------------------------------
Net deferred tax liability $ 202,295 $ 207,775
===================================================
Net deferred tax liability consists of
Current deferred tax assets $ (14,663) $ (22,792)
Long-term deferred tax liability 216,958 230,567
---------------------------------------------------
Net deferred tax liability $ 202,295 $ 207,775
===================================================
The classification of deferred tax assets and liabilities as current or
long term is based on the related asset or liability creating the deferred tax.
Deferred taxes not related to a specific asset or liability are classified based
on the estimated period of reversal.
The valuation allowance represents the portion of the Company's
consolidated deferred tax assets as to which, based on projections at December
31, 1999, the Company does not believe realization is "more likely than not".
The valuation allowance primarily relates to a full valuation allowance against
United States and South American net deferred tax assets of $235.5 million and
$42.7 million, respectively. The remaining valuation allowance primarily relates
to certain restricted Australian tax loss carry-forwards and Argentina Gold
Canadian loss carry-forwards of $19.9 million and $5.1 million, respectively.
The Company had a significant increase in United States foreign tax credit
carry-forwards as a result of Canadian dividends paid by HCI to its parent
company following the Prime acquisition, on which a full valuation allowance has
been recorded. The foreign tax credit carry-forwards are due to expire at
various times through the year 2004. Argentina tax loss carry-forwards expire if
not utilized within five taxable years following the loss year. Australian and
Chilean loss carry-forwards can be carried forward indefinitely.
Major items causing the Company's income tax provision to differ from the
federal statutory rate of 35% were as follows:
1999 1998 1997
-------------------------------------------------------
Income tax expense (benefit) based on statutory rate $ 3,800 $(79,879) $(86,120)
Percentage depletion (1,835) (1,806) (900)
Earnings in foreign jurisdictions
at different rates (3,912) (2,143) 273
Canadian mining taxes 7,217 12,570 9,977
Change in prior year accruals (5,050) (15,953) -
Nondeductible expenses 5,537 7,934 37,770
Foreign income less tax credits utilized 4,462 - -
Foreign tax credits generated and not utilized (99,462) - -
Change in valuation allowance 91,636 61,700 13,800
Other - net 4,995 4,490 5,742
-------------------------------------------------------
Total income and mining taxes $ 7,388 $(13,087) $(19,458)
=======================================================
Note 7: Receivables
December 31,
1999 1998
--------------------------------------
Trade accounts $28,096 $29,548
US Government receivable (see note 13) 2,000 4,500
Interest and other 14,892 11,881
--------------------------------------
$44,988 $45,929
======================================
Note 8: Inventories
December 31,
1999 1998
-----------------------------------------
Finished products $ 7,452 $13,312
Ore and in-process 30,591 39,465
Supplies 25,294 26,129
-----------------------------------------
$63,337 $78,906
=========================================
44
Note 9: Property, Plant and Equipment
December 31,
1999 1998
---------------------------------------------
Mining properties and development costs $ 1,562,040 $ 1,436,213
Plant and equipment 1,141,650 1,082,046
Construction and mine development in progress 16,224 7,534
---------------------------------------------
2,719,914 2,525,793
Accumulated depreciation, depletion and
amortization (1,587,068) (1,423,054)
---------------------------------------------
$ 1,132,846 $ 1,102,739
=============================================
Note 10: Other Assets
December 31,
1999 1998
-------------------------------------------------
Assets held in trust (see note 14) $47,918 $44,756
Restricted cash (see note 12) 1,789 13,561
Ore stockpiles 15,971 9,807
U.S. Government receivable (see note 13) 6,063 3,681
Prepaid pension assets (see note 14) 12,747 8,709
Other 9,560 9,811
-------------------------------------------------
$94,048 $90,325
=================================================
Note 11: Accrued Liabilities
December 31,
1999 1998
-------------------------------------------------
Accrued payroll and other compensation $21,730 $ 31,587
Accrued reclamation and closure costs 20,092 23,206
Unrealized loss on foreign currency exchange contracts - 24,003
Other 22,638 23,317
-------------------------------------------------
$64,460 $102,113
=================================================
At December 31, 1999 the Company had an unrealized gain on foreign currency
exchange contracts of $3.4 million, which is included in other current assets.
Note 12: Long-term Debt
December 31,
1999 1998
----------------------------------------
Convertible subordinated notes (due 2000) $134,990 $150,000
Pollution control bonds
Lawrence County, South Dakota (due 2032) 38,000 48,000
State of California (due 2004) 17,000 17,000
Cross-border credit facility (due 2003)
Canadian dollar denominated borrowings 102,666 -
Australian dollar denominated borrowings - 142,410
Capital leases (see note 18) 23,044 -
----------------------------------------
315,700 357,410
Less current portion 37,206 -
-----------------------------------------
$278,494 $357,410
========================================
Convertible subordinated notes: The Company's 5.5% convertible subordinated
notes ("Convertible Notes"), which mature on June 23, 2000, are convertible
into common shares at a price of $23.06 per common share and are redeemable by
the Company in whole at any time. Interest on the notes is payable
semiannually in June and December. Issuance costs of $3.9 million were
capitalized and are being amortized over the life of the notes.
During 1999, the Company repurchased Convertible Notes having a principal
amount of $15 million. The Company has classified $100 million of Convertible
Notes outstanding at December 31, 1999 as long-term debt since the Company
intends to refinance $100 million of these notes for a period longer than one
year from December 31, 1999 with funds drawn down on the cross-border credit
facility. The remaining $35 million of Convertible Notes have been classified
as current as the Company expects to retire this debt using cash and
equivalent balances.
Pollution control bonds: In July 1997, Lawrence County, South Dakota issued
$30 million of South Dakota Solid Waste Disposal Revenue Bonds ("Waste
Disposal Bonds") and $18 million of South Dakota Pollution Control Refunding
Revenue Bonds, both of which are due in 2032. The Company is responsible for
funding principal and interest payments on these bonds. Proceeds from the
Waste Disposal Bonds were placed in a trustee account and are being used for
construction of a new tailings dam lift and other qualifying expenditures at
the Homestake mine. During 1999, Homestake reduced the projected size of the
tailings dam project and redeemed $10 million of the Waste Disposal Bonds from
funds held in the trustee account.
45
The Company pays interest monthly on the pollution control bonds based on
variable short-term, tax-exempt obligation rates. Interest rates at December
31, 1999 and 1998 were 5.1% and 4.8%, respectively. No principal payments are
required until cancellation, redemption or maturity.
Cross-border credit facility: The Company has a credit facility ("Credit
Facility") providing a total borrowing availability of $430 million. This
facility is available through July 14, 2003 and provides for borrowings in
United States, Canadian, or Australian dollars, or gold, or a combination of
these. Australian dollar-denominated borrowings outstanding at December 31,
1998 under the Credit Facility were repaid in 1999. At December 31, 1999
Canadian dollar-denominated borrowings under the Credit Facility of $102.7
million (C$148.2 million) were outstanding. The Company pays a commitment fee
on the unused portion of this facility ranging from 0.15% to 0.35% per annum,
depending upon credit ratings for the Company's senior debt. The credit
agreement requires, among other provisions, a minimum consolidated net worth,
as defined in the agreement (primarily shareholders' equity plus the amount of
all noncash write-downs made after December 31, 1997), of $500 million.
Interest on the Canadian dollar borrowings is payable quarterly based on the
Bankers' Acceptance discount rate plus a stamping fee. At December 31, 1999
this rate was 6.17%
Note 13: Other Long-term Obligations
December 31,
1999 1998
--------------------------------------
Accrued reclamation and closure costs $116,580 $107,370
Accrued pension and other postretirement
benefit obligations (see note 14) 58,299 59,278
Other 10,014 10,239
--------------------------------------
$184,893 $176,887
======================================
While the ultimate amount of reclamation and site restoration costs to be
incurred in the future is uncertain, the Company has estimated that the
aggregate amount of these costs for operating properties, plus previously
accrued reclamation and remediation liabilities for nonoperating properties,
will be approximately $210 million. At December 31, 1999 the Company had
accrued $136.7 million for estimated ultimate reclamation and site restoration
costs and remediation liabilities (see note 11).
Grants: The Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") imposes heavy liabilities on persons who discharge hazardous
substances. The Environmental Protection Agency ("EPA") publishes a National
Priorities List ("NPL") of known or threatened releases of such substances.
Homestake's former uranium millsite near Grants, New Mexico is listed on the
NPL.
Pursuant to the Energy Policy Act of 1992, the United States Department of
Energy ("DOE") is responsible for 51.2% of past and future costs of reclaiming
the Grants site in accordance with Nuclear Regulatory Commission license
requirements. Through December 31, 1999, Homestake had received $27.7 million
from the DOE and the accompanying balance sheet at December 31, 1999 includes
an additional receivable of $8.1 million (see notes 7 and 10) for the DOE's
share of reclamation expenditures made by Homestake through 1999.
Note 14: Employee Benefit Plans
United States pension and other postretirement benefit plans: The Company has
pension plans covering substantially all United States employees. Pension
plans covering salaried and other nonunion employees provide benefits based on
years of service and the employee's highest compensation for a period prior to
retirement. Pension plans covering union employees provide defined benefits
for each year of service. The Company also has other postretirement plans
which provide medical and life insurance benefits for certain retired
employees, primarily retirees of the Homestake mine.
46
The following table provides a reconciliation of benefit obligations, plan
assets and the funded status of the plans:
Other Postretirement
Pension Benefits Benefits
----------------------------------- -------------------------------------
1999 1998 1999 1998
----------------------------------- -------------------------------------
Change in benefit obligations
Benefit obligations, January 1 $256,674 $237,351 $ 34,750 $ 37,000
Service cost 4,752 4,215 19 188
Interest cost 16,784 16,969 1,931 2,406
Plan amendments and special terminations 3,222 6,222 - (6,450)
Actuarial (gains) losses (23,672) 22,859 (7,132) 7,272
Benefits paid (31,880) (23,696) (1,761) (2,373)
Curtailments - (7,246) - (3,293)
--------------- --------------- ----------------- ---------------
Benefit obligations, December 31 $225,880 $256,674 $ 27,807 $ 34,750
=============== =============== ================= ===============
Change in plan assets
Fair value of plan assets, January 1 $259,371 $257,147
Actual return on plan assets 16,834 24,816
Company contributions 4,583 1,104 $ 1,761 $ 2,373
Benefits paid (31,880) (23,696) (1,761) (2,373)
--------------- --------------- ----------------- ---------------
Fair value of plan assets, December 31 $248,908 $259,371 $ - $ -
=============== =============== ================= ===============
Plan assets in excess of (less than)
projected benefit obligations $ 23,028 $ 2,697 $(27,807) $(34,750)
Unrecognized net actuarial (gains) losses (43,741) (24,927) (4,353) 2,488
Unrecognized prior service cost 10,309 8,527 (5,064) (5,914)
Unrecognized net transition asset (1,324) (1,567) - -
--------------- --------------- ----------------- ---------------
Accrued pension and postretirement
benefit obligations $(11,728) $(15,270) $(37,224) $(38,176)
=============== =============== ================= ===============
Amounts for pension and postretirement benefits recognized in the
consolidated balance sheets consist of the following:
Other Postretirement
Pension Benefits Benefits
----------------------------------------- ---------------------------------------
1999 1998 1999 1998
----------------------------------------- ---------------------------------------
Prepaid pension asset $ 12,747 $ 8,709
Intangible asset - 523
Accrued benefit liability - current (1,200) (1,200) $ (2,200) $ (2,200)
Accrued benefit liability - long-term (23,275) (23,302) (35,024) (35,976)
-------------------- ---------------- ----------------- -----------------
$(11,728) $(15,270) $(37,224) $(38,176)
==================== ================ ================= =================
The weighted-average actuarial assumptions as of December 31 were as follows:
Other Postretirement
Pension Benefits Benefits
-------------------------------------- ----------------------------------------------
1999 1998 1997 1999 1998 1997
-------------------------------------- ----------------------------------------------
Discount rate 7.75% 6.50% 7.00% 7.75% 6.50% 7.00%
Expected return on plan assets 8.50% 8.50% 8.50%
Rate of compensation increase 5.00% 5.00% 5.00%
The Company has assumed a health care cost trend rate of 8.5% for 1999,
decreasing ratability to 5.0% in 2006 and thereafter.
47
Net periodic pension and other postretirement benefit costs include the
following components:
Pension Benefits
------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------
Service cost $ 4,752 $ 4,215 $ 4,308
Interest cost 16,784 16,969 15,958
Expected return on assets (21,496) (21,346) (18,596)
Amortization of:
Transition asset (242) (370) (370)
Prior service costs 1,440 1,005 1,534
Actuarial gains (196) (898) -
-------- -------- --------
Net periodic benefit cost 1,042 (425) 2,834
Additional charges (credits):
Special termination charges - 3,922 -
Curtailment credits - (7,246) -
Settlement credits - (2,531) -
-------- -------- --------
Total net benefit cost (credit) $ 1,042 $ (6,280) $ 2,834
======== ======== ========
Other Postretirement Benefits
------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------
Service cost $ 19 $ 188 $ 568
Interest cost 1,931 2,406 2,631
Amortization of:
Prior service costs (850) (850) 60
Actuarial (gains) losses (291) 60 (660)
-------- -------- --------
Net periodic benefit cost 809 1,804 2,599
Additional charges (credits):
Special termination charges - 600 -
Curtailment credits - (3,293) -
-------- -------- --------
Total net benefit cost (credit) $ 809 $ (889) $ 2,599
======== ======== ========
The projected benefit obligations and accumulated benefit obligations for
pension plans with accumulated benefit obligations in excess of plan assets were
$30.9 million and $22.9 million, respectively, at December 31, 1999 and $32.4
million and $24.1 million, respectively, at December 31, 1998. These amounts
pertain to a nonqualified supplemental pension plan covering certain employees
and a nonqualified pension plan covering directors of the Company. These plans
are unfunded. The Company has established a grantor trust, consisting of money
market funds, mutual funds and corporate-owned life insurance policies, to
provide funding for the benefits payable under these nonqualified plans and
certain other deferred compensation plans. The grantor trust, which is included
in other assets, amounted to $47.9 million and $44.8 million at December 31,
1999 and 1998, respectively.
Health care benefits are contributory and were restricted to employees at
the Homestake mine whose combined years of age and years of service exceeded
65 as of January 1, 1999.
The assumed health care cost trend rate has a significant effect on the
amounts reported. A one percentage point change in the assumed health care cost
trend rate would have had the following effects on 1999 service and interest
costs and the accumulated postretirement benefit obligation at December 31,
1999:
One percentage point change Increase Decrease
--------------------------- -------- ---------
Effect on service and interest
components of net periodic cost $ 223 $ (199)
Effect on accumulated postretirement
benefit obligation 2,781 (2,258)
Foreign pension plans: Certain of the Company's foreign operations also
participate in pension plans. The Company's share of contributions to these
plans was $2.2 million in 1999, $2.5 million in 1998, and $2.3 million in 1997.
Stock option and share rights plan: The Company's 1996 Stock Option and Share
Rights Plan ("1996 Plan") provides for grants of up to 6 million common shares.
At December 31, 1999 and 1998, 1.6 million and 3 million shares, respectively,
were available for future grants. At December 31, 1999 stock options and share
rights for 4 million shares were outstanding under the 1996 Plan and stock
options for 2 million shares were outstanding under prior plans.
The exercise price of each stock option granted under these plans is equal
to or greater than the market price of the Company's stock on the date of grant
and an option's maximum term is ten years. Options usually vest over a four-year
period.
48
A summary of the status of the Company's stock options as of December 31,
1999, 1998 and 1997 and changes during the years ending on those dates is
presented below:
1999 1998 1997
--------------------------------------------------------------------------------------------
Number Average Number Average Number Average
of Price Per of Price Per of Price Per
Shares Share Shares Share Shares Share
--------------------------------------------------------------------------------------------
Balance at January 1 4,947 4,873 4,692
Granted 1,600 $ 9.40 2,129 $ 7.28 902 $13.62
Exercised (500) 0.74 (35) 0.74 (63) 13.99
Plutonic options retired
(see note 3) (1,033) 15.52
Expired (394) 16.27 (987) 11.86 (658) 7.53
---------- ---------- ----------
Balance at December 31 5,653 4,947 4,873
========== ========== ==========
Options exercisable at
December 31 2,916 2,136 2,248
Fair value of options granted
during the year $ 2.69 $ 3.03 $ 4.95
Note: The above table includes stock option activity of Argentina Gold and
Plutonic prior to their acquisition by Homestake in April 1999 and
April 1998, respectively.
The fair value of each stock option is estimated on the date of grant using
a Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of 0.8, 1.2 and 1.7 years from the vesting date
(with incremental vesting over four years) for 1999, 1998 and 1997,
respectively; expected volatility of 35%, 31% and 31% for 1999, 1998 and 1997,
respectively; a dividend yield of 1% in each year; and a risk-free interest rate
of 5.0%, 5.7% and 6.6% in 1999, 1998 and 1997, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
---------------------------------------------------------------- ---------------------------------------
Range of Weighted-Average Weighted-Average Weighted-Average
Exercise Prices Number Remaining Exercise Price Number Exercise Price
Per Share Outstanding Contractual Life Per Share Exercisable Per Share
---------------- --------------- --------------------- ------------------- --------------- -------------------
$7.85 to $9.41 2,761 8.7 years $ 9.37 534 $9.37
9.74 to 16.25 1,927 5.2 years 14.29 1,487 14.47
16.78 to 39.02 965 4.0 years 19.81 895 19.86
------------ ------------
5,653 2,916
============ ============
At December 31, 1999 there were 0.4 million share rights (1998: 0.3
million) outstanding under the 1996 plan. Share rights are converted into common
stock when certain performance measurement or vesting criteria are met. During
1999, 75,000 shares valued at $0.7 million were converted into common stock.
The Company elected to use the pro forma disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation," and has applied Accounting Principles
Board Opinion 25 and related interpretations in accounting for its stock
options. Accordingly, no compensation cost has been recognized for the Company's
stock options. The compensation cost for share rights is being recognized based
on the fair value of the Company's stock over the period that the performance
measurement and vesting criteria are estimated to be met. Had compensation
expense for the Company's stock options been determined based on the fair value
of options at the grant dates as calculated in accordance with SFAS 123, the
Company's net income and earnings per share for the years ended December 31,
1999, 1998 and 1997 would have been as follows:
1999 1998 1997
------------------------------- ----------------------------- ----------------------------
Earnings Loss Loss
Net Earnings Per Share Net Loss Per Share Net Loss Per Share
------------------------------- ----------------------------- ----------------------------
As reported $4,864 $0.02 $(233,780) $(1.01) $(233,354) $(1.02)
Pro forma 1,526 0.01 (237,092) (1.02) (236,065) (1.03)
Other plans: Substantially all full-time United States employees of the Company
are eligible to participate in the Company's defined contribution savings plans.
The Company's matching contribution was approximately $1.8 million in 1999, $1.9
million in 1998 and $2.6 million in 1997. The Company's 1999 and 1998
contributions primarily were in the form of Homestake stock.
49
Note 15: Fair Value of Financial Instruments
At December 31, 1999 and 1998 the carrying values of the Company's cash and
equivalents, short-term investments, noncurrent investments, long-term debt
and foreign currency options approximated their estimated fair values.
Note 16: Shareholders' Equity
HCI exchangeable shares: In connection with the 1998 acquisition of the
minority interests in Prime (see note 3), HCI issued 11.1 million HCI
exchangeable shares. Each HCI exchangeable share is exchangeable for one
Homestake common share at any time at the option of the holder and has
essentially the same voting, dividend (payable in Canadian dollars), and other
rights as one Homestake common share. A share of special voting stock, which
was issued to the Transfer Agent in trust for the holders of the HCI
exchangeable shares, provides the mechanism for holders of the HCI
exchangeable shares to receive their voting rights. During 1999, 4.5 million
HCI exchangeable shares were exchanged for an equivalent number of Homestake
common shares. At December 31, 1999 the Company had reserved 6.7 million
shares of common stock for issuance on exchange of the HCI exchangeable shares
outstanding.
Stock rights: Each share of common stock includes and trades with a right
which will become exercisable on a date designated by the Board of Directors
following the commencement of, or announcement of an intent to commence, a
tender offer by any person, entity or group for 15% or more of the Company's
common stock and the HCI exchangeable shares, considered as a single class.
When exercisable, each right initially entitles the owner to purchase from the
Company one one-hundredth of a share of Series A Participating Preferred
Stock, par value $1 per share, at a price of $75 per share (the "Purchase
Price"). Each one one-hundredth of a share of Series A Preferred Stock is
equivalent to one Homestake common share with respect to voting and is
entitled, on a quarterly basis, to the greater of a ten cent cash dividend or
the dividend payable on one Homestake common share. In addition, if any
person, entity or group (an "Acquiring Person") acquires 15% or more of the
Company's common stock and the HCI exchangeable shares, considered as a single
class, each right (whether or not previously exercisable) thereafter entitles
the owner (other than an Acquiring Person or its affiliates and associates) to
purchase for the Purchase Price the number of one one-hundredth of a share of
Series A Preferred Stock equal to the Purchase Price divided by one-half of
the market price of the Company's common stock. In lieu of the rights holder
exercising such right, the Board of Directors has the option to issue, in
exchange for each right, one-half of the number of shares of preferred stock
(or common stock having a value equal to the Purchase Price) that would be
issuable on the exercise of the right. If the Board of Directors has not
exchanged shares for the rights and the Company engages in a business
combination with an Acquiring Person (or affiliate or associate thereof), the
holder of rights will be entitled to purchase for the Purchase Price (i)
common stock of the surviving company or its publicly-held affiliate having a
market value equal to twice the Purchase Price, or (ii) common stock of the
surviving company having a book value equal to twice the Purchase Price if the
surviving company and its affiliates are not publicly held. The numbers of
shares and the Purchase Price are subject to adjustment for stock dividends,
stock splits and other changes in capitalization. The rights expire on
October 15, 2007.
Each HCI exchangeable share trades with an HCI right issued under the HCI
rights agreement. The HCI rights entitle the holders to acquire additional
HCI exchangeable shares at the same price and in the same amounts and
circumstances in which holders of Company rights are entitled to acquire
Company common stock.
Note 17: Additional Cash Flow Information
Cash paid for interest and for income and mining taxes is as follows:
1999 1998 1997
---------------------------------------------------
Interest $18,377 $20,236 $19,506
Income and mining taxes, net of refunds 33,292 22,620 66,227
Certain investing and financing activities of the Company affected its
financial position but did not affect its cash flows. See note 3 for
discussions of the noncash acquisitions of the interests in Argentina Gold,
Plutonic and Prime and additions to property at ADLF.
50
Note 18: Commitments and Contingencies
Foreign Currency Contracts
Under the Company's foreign currency protection program, the Company has
entered into a series of foreign currency option contracts to minimize the
effects of a strengthening of either the Canadian or Australian currencies in
relation to the United States dollar. At December 31, 1999 net unrealized
gains of $3.4 million were outstanding on these contracts compared to net
unrealized losses of $24 million at December 31, 1998. Other income for the
years ended December 31, 1999, 1998 and 1997 includes income (losses) of $15.8
million, $(34.3) million and $(28.5) million, respectively, related to this
program. At December 31, 1999 the Company had foreign currency contracts
outstanding as follows:
Expected Maturity or Transaction Date
Total or
US$ in millions 2000 2001 2002 Average
----------- ----------- ---------- -----------
Canadian $ / US $ option contracts:
- -----------------------------------
US $ covered $105.4 $62.1 - $167.5
Written puts, average exchange rate (1) 0.69 0.66 - 0.68
US $ covered $105.4 $66.1 - $171.5
Purchased calls, average exchange rate (2) 0.72 0.69 - 0.71
US $ covered $105.4 $38.3 - $143.7
Purchased puts, average exchange rate (3) 0.65 0.65 - 0.65
Australian $ / US $ option contracts:
- ------------------------------------
US $ covered $129.5 $63.3 $26.0 $218.8
Written puts, average exchange rate (1) 0.66 0.65 0.69 0.66
US $ covered $129.5 $63.3 $26.0 $218.8
Purchased calls, average exchange rate (2) 0.68 0.66 0.69 0.67
US $ covered $118.6 $52.3 $26.0 $196.9
Purchased puts, average exchange rate (3) 0.63 0.64 0.66 0.64
(1) Assuming exercise by the counter-party at the expiration date, the Company
would exchange US dollars for Canadian or Australian dollars at the put
exchange rate. The counter-party would be expected to exercise the option
if the spot exchange rate was below the put exchange rate.
(2) Assuming exercise by the Company at the expiration date, the Company would
exchange US dollars for Canadian or Australian dollars at the call exchange
rate. The Company would exercise the option if the spot exchange rate was
above the call exchange rate.
(3) Assuming exercise by the Company at the expiration date, the Company would
exchange Canadian or Australian dollars for US dollars at the put exchange
rate. The Company would exercise the option if the spot exchange rate was
below the put exchange rate.
In addition to amounts related to the foreign currency option contracts,
the Company recorded foreign currency gains (losses) on intercompany debt and
other of $10.9 million in 1999, $(4.4) million in 1998 and $(5.4) million in
1997 that also were included in other income. These foreign currency
exchange gains and losses primarily are mark to market adjustments related to
the Company's Canadian and Australian dollar denominated advances to its
foreign subsidiaries.
Gold and Silver Contracts
Homestake's hedging policy provides for the use of forward sales contracts to
hedge up to 30% of each of the following ten year's expected annual gold
production, and up to 30% of each of the following five year's expected annual
silver production, at prices in excess of certain targeted prices. The policy
also provides for the use of combinations of put and call option contracts to
establish minimum floor prices.
During 1999, 1998 and 1997, the Company delivered or financially settled
gold and silver production under maturing forward sales and option contracts
as follows:
1999 1998 1997
--------------------------------------------------
Gold
- ----
Forward sales contracts
Ounces 109,900 358,000 656,000
Average price (US$ per oz.) $ 415 $ 359 $ 421
Option contracts
Ounces 340,000 900,000 -
Average price (US$ per oz.) $ 298 $ 325 -
Silver
- ------
Option contracts
Ounces 3,095,000 - -
Average price (US$ per oz.) $6.35 - -
51
In 1999, the Company closed out and financially settled US dollar
denominated forward sales contracts covering 245,000 ounces of gold maturing
in the years 2001, 2002 and 2003. The pretax gain of $35 million realized as
a result of this transaction has been deferred and will be recorded in income
as the originally designated production is sold.
At December 31, 1999 the Company had gold forward sales and option
contracts outstanding as follows:
Expected Maturity or Transaction Date
------------------------------------------------------------------------
There- Total or
2000 2001 2002 2003 2004 after Average
-----------------------------------------------------------------------------------------
GOLD
US $ denominated contracts:
- --------------------------
Forward sales contracts:
Ounces 85,080 10,000 10,000 - - 409,200 514,280
Average price ($ per oz.) $ 430 $ 400 $ 403 - - $ 408 $ 411
Put options owned:
Ounces 110,000 80,000 - - - - 190,000
Average price ($ per oz.) $ 279 $ 253 - - - - $ 268
Call options written:
Ounces 95,000 80,000 - - - - 175,000
Average price ($ per oz.) $ 275 $ 253 - - - - $ 265
Call options purchased:
Ounces 80,000 80,000 - - - - 160,000
Average price ($ per oz.) $ 268 $ 268 - - - - $ 268
Australian $ denominated contracts: /(1)/
- ------------------------------------------
Forward sales contracts:
Ounces - - 24,800 24,800 24,800 26,000 100,400
Average price (US$ per oz.) - - $ 344 $ 344 $ 344 $ 344 $ 344
Put options owned:
Ounces 120,000 120,000 - - - - 240,000
Average price (US$ per oz.) $ 340 $ 350 - - - - $ 345
SILVER
US $ denominated contracts:
- --------------------------
Forward sales contracts:
Ounces 3,020,000 1,200,000 - - - - 4,220,000
Average price ($ per oz.) $ 6.33 $ 6.00 - - - - $ 6.24
(1) Expressed in US dollars at an exchange rate of A$ = US$ 0.6539
52
The Company does not require or place collateral for its foreign currency
and gold hedging derivatives. However, the Company minimizes its credit risk
by dealing with only major international banks and financial institutions.
Lease Commitments
During 1999 the Company entered into capital leases to finance its portion of
the purchase of mining equipment at the Kalgoorlie operations. Leased assets
of $23 million are included in property, plant and equipment at December 31,
1999. The Company also leases certain office facilities and equipment under
various noncancellable operating leases. Rental expense for 1999, 1998 and
1997 relating to these operating leases was approximately $2.4 million, $2.6
million and $3.5 million, respectively.
Future minimum annual payments under noncancellable leases at December 31,
1999 are as follows:
Operating Capital
Leases Leases
---------------------------------------
2000 $ 2,581 $ 3,700
2001 2,669 3,702
2002 2,503 3,715
2003 2,210 3,730
2004 834 3,746
Thereafter 1,742 10,750
--------------- -------------
Total minimum lease payment $12,539 29,343
===============
Less: estimated amount representing interest (6,299)
-------------
Present value of net minimum capital lease payments 23,044
Less: current portion (2,216)
-------------
Long-term capital lease obligation at December 31, 1999 $20,828
=============
The Company has entered into various commitments during the ordinary course
of business including commitments to perform assessment work and other
obligations necessary to maintain or protect its interests in mining
properties, financing and other obligations to joint ventures and partners
under venture and partnership agreements, and commitments under federal and
state environmental health and safety permits.
The Company is party to legal actions and administrative proceedings and is
subject to claims arising in the ordinary course of business. The Company
believes the disposition of these matters will not have a material adverse
effect on its financial position or results of operations.
53
Note 19: Segment Information
The Company primarily is engaged in gold mining and related activities.
Gold operations are managed and internally reported based on the following
geographic areas: North America (United States and Canada), Australia and
South America. The Company also has other foreign exploration activities and
a sulfur and oil recovery operation in the Gulf of Mexico which are included
in "Corporate and All Other". Within each geographic segment, operations are
managed on a mine-by-mine basis. However, because each mine has similar
characteristics, the Company has geographically aggregated its operations.
REPORTABLE SEGMENTS Corporate
North South and All Reconciling
America Australia America Other Items Total
--------------------------------------------------------------------------------------
1999
Product sales $ 413,887 $244,223 $13,462 $ 19,376 $ - $ 690,948
Other revenues 16,896 13,614 276 33,596 (7,205) /a/ 57,177
Total revenues 430,783 257,837 13,738 52,972 (7,205) 748,125
Depreciation expense 96,446 33,240 4,227 565 - 134,478
Operating earnings 81,856 35,515 438 29,268 (7,205) /a/ 139,872
Exploration expense 10,305 15,169 13,471 566 - 39,511
Write-downs and unusual items - 16,915 - 3,500 - 20,415
Capital expenditures 24,801 78,939 745 442 - 104,927
Property, plant and equipment 625,596 492,912 11,945 2,393 - 1,132,846
Total assets 706,461 632,893 28,076 267,039 - 1,634,469
Production (equivalent oz. of gold) 1,530,057 835,494 24,409 - - 2,389,960
1998
Product sales $ 468,396 $299,909 $13,854 $ 20,975 $ - $ 803,134
Other revenues (10,345) (7,100) 1,345 13,065 (2,209) /a/ (5,244)
Total revenues 458,051 292,809 15,199 34,040 (2,209) 797,890
Depreciation expense 88,132 44,069 4,199 2,971 - 139,371
Operating earnings 60,828 26,678 1,590 34,341 (2,209) /a/ 121,228
Exploration expense 16,495 23,316 15,579 4,475 - 59,865
Write-downs and unusual items 127,476 65,736 10,156 10,445 - 213,813
Capital expenditures 32,337 40,095 141 750 - 73,323
Property, plant and equipment 662,475 426,919 8,776 4,569 - 1,102,739
Total assets 853,906 530,463 22,204 254,033 - 1,660,606
Production (equivalent oz. of gold) 1,581,922 925,700 24,119 - - 2,531,741
1997
Product sales $ 481,541 $371,810 $10,277 $ 26,821 $ - $ 890,449
Other revenues 12,218 (2,190) 927 75,068 /b/ (4,906) /a/ 81,117
Total revenues 493,759 369,620 11,204 101,889 (4,906) 971,566
Depreciation expense 78,180 76,107 2,570 5,924 - 162,781
Operating earnings 85,615 28,313 1,701 70,423 (4,906) /a/ 181,146
Exploration expense 22,308 25,623 18,396 1,260 - 67,587
Write-downs and unusual items 58,408 92,603 - 134,304 /c/ - 285,315
Capital expenditures 109,647 88,878 4,460 1,644 - 204,629
Property, plant and equipment 480,218 523,029 22,995 7,532 - 1,033,774
Total assets 670,975 658,900 33,221 264,048 - 1,627,144
Production (equivalent oz. of gold) 1,538,112 974,289 16,530 - - 2,528,931
a) Primarily intercompany financing.
b) Includes Santa Fe merger termination fee of $62.9 million.
c) Includes write-down of Homestake's investment in the Main Pass 299 sulfur
mine of $107.8 million.
54
Amounts related to United States operations were as follows:
1999 1998 1997
---------------------------------------------------------------
Product sales $211,814 $259,044 $260,102
Property, plant and equipment 117,690 131,121 228,616
Sales to individual customers exceeding 10% of the Company's consolidated
revenues were as follows:
1999 1998 1997
-----------------------------------------------------------------
Customer A $ 142,000 $ - $ -
B 99,000 75,600 -
C 96,000 - -
D 77,800 - -
E 76,700 108,000 100,000
F - 120,100 -
G - 99,200 143,000
Because of the active worldwide market for gold, Homestake believes that
the loss of any of these customers would not have a material adverse impact on
the Company.
Note 20: Homestake Canada Inc.
Homestake, through a wholly-owned subsidiary, owns all of HCI's common shares
outstanding. At December 31, 1999, HCI had 6.7 million HCI exchangeable
shares outstanding, which were held by the public (see notes 3 and 16).
Following the 1999 business combination with Argentina Gold, Homestake's
investment in Argentina Gold was transferred to HCI in exchange for a Canadian
dollar-denominated intercompany note payable by HCI to its parent company of
approximately C$282 million (US$191 million). In accordance with United
States generally accepted accounting principles, the assets, liabilities and
shareholders' equity of Argentina Gold have been recorded in HCI's financial
statements at the historical cost basis to the parent company. The difference
between the historical cost basis of Argentina Gold shareholders' equity and
its fair value at the date of transfer has been recorded as a reduction to
HCI's shareholders' equity. Summarized financial information for HCI is as
follows:
December 31,
1999 1998
------------------------------------------------
Current assets $ 43,666 $151,593
Noncurrent assets 498,567 526,463
------------------ ------------------
Total assets $ 542,233 $678,056
================== ==================
Notes payable to the Company $ 329,105 $144,002
Other current liabilities 19,521 41,839
Long-term debt 102,666 -
Other long-term liabilities 10,843 15,882
Deferred income and mining taxes 199,979 193,074
Redeemable preferred stock
held by the Company - 36,167
Shareholders' equity:
HCI's shareholders' equity 70,991 247,092
Adjustment to conform to the
Company's accounting basis (190,872) -
------------------ ------------------
Total liabilities and
shareholders' equity $ 542,233 $678,056
================== ==================
Year ended December 31,
------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------
Total revenues $234,708 $219,091 $261,318
Costs and expenses 229,084 196,488 213,474
------------------ ------------------ ------------------
Income before taxes and
minority interests $ 5,624 $ 22,603 $ 47,844
================== ================== ==================
Net income (loss) $ (4,875) $ (2,242) $ 7,205
================== ================== ==================
55
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Board of Directors of
Homestake Mining Company:
In our opinion, the accompanying consolidated balance sheets and the related
statements of consolidated operations, shareholders' equity, comprehensive
income (loss) and of cash flows present fairly, in all material respects, the
financial position of Homestake Mining Company and its subsidiaries at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
San Francisco, California
February 3, 2000
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Homestake Mining Company
and Subsidiaries are prepared by the Company's management in conformity with
generally accepted accounting principles. Management is responsible for the
fairness of the financial statements, which include estimates based on
judgments.
The Company maintains accounting and other control systems which management
believes provide reasonable assurance that financial records are reliable for
the purpose of preparing financial statements and that assets are properly
safeguarded and accounted for. Underlying the concept of reasonable assurance
is the premise that the cost of controls should not be disproportionate to the
benefits expected to be derived from such controls. The Company's internal
control structure is reviewed by its internal auditors and to the extent
necessary by the external auditors in connection with their independent audit of
the Company's consolidated financial statements.
The external auditors conduct an independent audit of the consolidated
financial statements in accordance with generally accepted auditing standards in
order to express their opinion on these financial statements. These standards
require that the external auditors plan and perform the audit to obtain
reasonable assurance that the financial statements are free of material
misstatement.
The Audit Committee of the Board of Directors, composed entirely of outside
directors, meets periodically with management, internal auditors and the
external auditors to discuss the annual audit, internal control, internal
auditing and financial reporting matters. The external auditors and the
internal auditors have direct access to the Audit Committee.
/s/ Jack E. Thompson
- --------------------
Jack E. Thompson
Chairman and Chief Executive Officer
/s/ David W. Peat
- -----------------
David W. Peat
Vice President, Finance and
Chief Financial Officer
February 3, 2000
56
Quarterly Selected Data
(In thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
--------------------------------------------------------------------------------------
1999:
Revenues $178,614 $199,340 $ 175,968 $194,203 $ 748,125
Net income (loss) (949) /1/ 116 /2/ 1,747 /3/ 3,950 /4/ 4,864 /1-4/
Per common share:
Net income (loss) /9/ $ - /1/ $ - /2/ $ 0.01 /3/ $ 0.02 /4/ $ 0.02 /1-4/
Dividends paid /10/ - 0.05 - 0.025 0.075
1998:
Revenues $216,242 $195,350 $ 183,418 $202,880 $ 797,890
Net loss (7,602) /5/ (43,149) /6/ (182,833) /7/ (196) /8/ (233,780) /5-8/
Per common share:
Net loss /9/ $ (0.03) /5/ $ (0.19) /6/ $ (0.80) /7/ $ - /8/ $ (1.01) /5-8/
Dividends paid /10/ - 0.05 - 0.05 0.10
1. Includes business combination and integration costs of $1.3 million ($1.3
million pretax) or $0.01 per share.
2. Includes business combination and integration costs of $3.5 million ($3.5
million pretax) or $0.01 per share and write-down of investment of $3.5
million ($3.5 million pretax) or $0.01 per share.
3. Includes write-downs and unusual charges of $4.4 million ($6.9 million
pretax) or $0.02 per share including (i) reductions of $1.1 million ($1.7
million pretax) in the carrying values of resource assets and (ii) an
increase of $3.3 million ($5.2 million pretax) in the estimated accrual for
remediation and reclamation.
4. Includes write-downs and unusual charges of $7.8 million ($10 million
pretax) or $0.03 per share to reduce the carrying values of certain resource
assets.
5. Includes business combination and integration costs of $2.7 million ($2.8
million pretax) or $0.01 per share and charges of $5.9 million ($8.9 million
pretax) or $0.03 per share related to the restructuring of the Homestake
mine.
6. Includes business combination and integration costs of $15 million ($17.9
million pretax) or $0.06 per share and reductions in the carrying values of
resource assets of $12.8 million ($13.1 million pretax) or $0.06 per share.
7. Includes write-downs and unusual charges of $165.9 million ($187.9 million
pretax) or $0.72 per share including (i) reductions of $115.4 million
($135.9 million pretax) in the carrying values of resource assets, (ii) an
increase of $35 million ($35 million pretax) in estimated accruals for
remediation and reclamation expenditures, (iii) write-downs of $7.3 million
($7.9 million pretax) of noncurrent investments, and (iv) other charges of
$8.2 million ($9.1 million pretax).
8. Includes a reduction in business combination and integration costs of $0.7
million ($1.3 million pretax) and write-downs and unusual charges of $3.9
million ($3.9 million pretax) or $0.01 per share including (i) reductions of
$2.6 million ($2.6 million pretax) in the carrying values of resource
assets, (ii) an increase of $1 million ($1 million pretax) in estimated
accruals for reclamation expenditures, and (iii) write-downs of $0.3 million
($0.3 million pretax) in noncurrent investments.
9. Basic and diluted earnings per share.
10. Homestake only.
Common Stock Price Range
(Prices as quoted on the New York Stock Exchange)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------------------------------------------------------------------------------------------------
1999: High $11.44 $10.75 $10.88 $10.13 $11.44
Low 8.13 7.50 7.19 7.50 7.19
1998: High $11.19 $13.13 $12.69 $15.00 $15.00
Low 7.69 9.31 8.69 8.38 7.69
57
Five-Year Selected Data/1/
(In thousands, except per share amounts)
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------
Revenues $ 748,125 $ 797,890 $ 971,566 $ 998,793 $ 949,143
Net income (loss) 4,864 /2/ (233,780) /3/ (233,354) /4/ 42,361 /5/ 44,722
Net income (loss) per share /6/ 0.02 /2/ (1.01) /3/ (1.02) /4/ 0.19 /5/ 0.21
Total assets 1,634,469 1,660,606 1,627,144 1,959,778 1,688,368
Long-term debt 278,494 357,410 374,593 255,170 274,942
Other long-term obligations 219,849 /7/ 176,887 152,610 123,475 127,558
Deferred income
and mining taxes 216,958 230,567 161,862 218,379 202,607
Minority interests 13,800 7,825 108,116 103,960 100,380
Shareholders' equity 765,360 739,196 699,791 1,043,377 862,078
Dividends per share /8/ 0.075 0.10 0.15 0.20 0.20
1. Five-year selected financial data reflects the 1999 combination of Homestake
and Argentina Gold and the 1998 combination of Homestake and Plutonic, both
on a pooling-of-interests basis. Accordingly, all periods presented include
the results and financial position of Argentina Gold and Plutonic.
2. Includes business combination and integration costs of $4.8 million ($4.8
million pretax) or $0.02 per share and write-downs and other unusual charges
of $15.7 million ($20.4 million pretax) or $0.06 per share including (i)
reductions in the carrying values of resource assets of $8.9 million ($11.7
million pretax), (ii) an increase in the estimated accrual for remediation
and reclamation expenditures of $3.3 million ($5.2 million pretax) and (iii)
a write-down of $3.5 million ($3.5 million pretax) for an exploration joint
venture.
3. Includes business combination and integration costs of $17 million ($19.4
million pretax) or $0.07 per share and write-downs and other unusual charges
of $188.5 million ($213.8 million pretax) or $0.82 per share including (i) a
reduction in the carrying values of resource assets of $130.8 million ($151.6
million pretax), (ii) an increase in the estimated accrual for remediation
and reclamation expenditures of $36 million ($36 million pretax), (iii)
Homestake mine restructuring charges of $5.9 million ($8.9 million pretax),
(iv) write-downs of investments of $7.6 million ($8.2 million pretax), and
(v) other charges of $8.2 million ($9.1 million pretax).
4. Includes a gain of $47.2 million ($62.9 million pretax) or $0.21 per share on
the fee received upon termination of Homestake's merger agreement with Santa
Fe Pacific Gold Corporation, a gain of $10.4 million ($10.4 million pretax)
or $0.04 per share with respect to the cancellation of an option to acquire
Great Central Mines Limited, and a gain of $8.1 million ($13.5 million
pretax) or $0.03 per share on the sale of the George Lake and Back River
joint venture interests in the Northwest Territories of Canada, and write-
downs and unusual charges of $224.9 million ($285.3 million pretax) or $0.98
per share including (i) a write-down of $84.9 million ($107.8 million pretax)
in Homestake's investment in the Main Pass 299 sulfur mine, (ii) a reduction
of $60.1 million ($84.7 million pretax) in the carrying values of resource
assets, (iii) write-downs of $45.7 million ($47.9 million pretax) of certain
investments, (iv) an increase of $21.5 million ($29.1 million pretax) in the
accrual for estimated future reclamation expenditures, and (v) other charges
of $12.7 million ($15.8 million pretax) consisting primarily of foreign
exchange losses on intercompany redeemable preferred stock and losses on an
intercompany gold loan.
5. Includes income of $24 million or $0.10 per share from a reduction in the
Company's accrual for prior year income taxes, a gain of $7.9 million ($7.9
million pretax) or $0.03 per share from the sale of the investment in Eagle
Mining Corporation NL, write-downs of $8.3 million ($9 million pretax) or
$0.03 per share in the carrying values of investments in mining company
securities, and proceeds of $4.9 million ($5.5 million pretax) or $0.02 per
share from a litigation recovery.
6. Basic and diluted earnings per share.
7. Includes a deferred gain of $35 million on the early close-out of forward
sales contracts.
8. Homestake only.
58