SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to ___________
Commission file number 1-9620
KINAM GOLD INC.
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(Exact name of registrant as specified in its charter)
Nevada 06-1199974
- --------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
802 E. WINCHESTER AVE., SUITE 100, MURRAY, UT 84107
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(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (801) 290-1101
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Common Stock, $0.01 par value,outstanding as of November 12 , 2001 - 92,213,928
shares
1
Part 1 - Financial Information
Item 1. Financial Statements
KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions except par value of stock)
(Unaudited)
September 30 December 31
2001 2000
--------------- ----------------
ASSETS
Current
Cash and equivalents $ 17.7 $ 23.3
Inventories 36.9 51.6
Receivables 13.6 13.7
Other 4.6 4.2
-------- --------
Current assets 72.8 92.8
Property, plant and equipment, net 271.8 266.7
Other 13.4 13.3
-------- --------
$ 358.0 $ 372.8
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current
Demand loan $ 73.6 $ 73.6
Current maturities of long-term debt 39.1 30.5
Accounts payable, trade 11.2 14.0
Accrued and other current liabilities 12.9 16.6
Reclamation reserve, current portion 2.1 3.6
-------- --------
Current liabilities 138.9 138.3
Advance from parent 234.8 219.9
Long-term debt 27.8 77.2
Reclamation reserve, non-current portion 31.0 30.0
Other 6.8 11.5
-------- --------
439.3 476.9
-------- --------
Commitments and contingencies
Shareholders' equity (capital deficiency):
Preferred stock, par value $1.00 per share, authorized 10,000,000
shares, 2,000,000 shares designated as $2.25 Series A Convertible
Preferred Stock, no shares issued and outstanding: and 1,840,000
shares designated as $3.75 Series B Convertible Preferred Stock,
issued and outstanding 1,840,000 shares 1.8 1.8
Common stock, par value $.01 per share, authorized 200,000,000
shares, issued and outstanding 92,213,928 shares 0.9 0.9
Paid-in capital 453.6 412.9
Accumulated deficit (537.6) (519.7)
-------- --------
Total shareholders' equity (capital deficiency) (81.3) (104.1)
-------- --------
Total liabilities and shareholders' equity (capital deficiency) $ 358.0 $ 372.8
======== ========
The accompanying notes are an integral part of these statements
2
KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2001 2000 2001 2000
------------- ------------- ------------- ------------
Revenues $ 46.4 $ 44.7 $ 147.3 $ 149.3
------------- ------------- ------------- ------------
Costs and operating expenses :
Cost of sales 32.2 31.2 101.9 107.8
Depreciation and depletion 20.3 15.4 52.8 51.7
General and administrative 0.1 0.4 0.8 0.8
Exploration 0.7 0.6 2.3 2.1
------------- ------------- ------------- ------------
Total costs and operating expenses 53.3 47.6 157.8 162.4
------------- ------------- ------------- ------------
Loss from operations (6.9) (2.9) (10.5) (13.1)
Interest expense (1.2) (2.3) (4.3) (7.9)
Interest income 0.2 0.4 1.1 2.1
Other income 1.1 1.4 3.7 4.1
------------- ------------- ------------- ------------
Loss before income taxes (6.8) (3.4) (10.0) (14.8)
Income tax expense (1.3) (1.6) (2.8) (3.4)
------------- ------------- ------------- ------------
Net loss (8.1) (5.0) (12.8) (18.2)
Preferred stock dividends (1.7) (1.7) (5.1) (5.1)
------------- ------------- ------------- ------------
Loss attributable to common shares $ (9.8) $ (6.7) $ (17.9) $ (23.3)
============= ============= ============= ============
Per common share:
Net basic and diluted loss $ (0.11) $ (0.07) $ (0.19) $ (0.25)
Weighted average number of common shares outstanding 92.2 92.2 92.2 92.2
The accompanying notes are an integral part of these financial statements.
3
KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2001 2000 2001 2000
------------ ------------- ------------- -------------
Cash flows from operating activities
Net loss $ (8.1) $ (5.0) $ (12.8) $ (18.2)
Adjustments to reconcile net loss to cash
flow provided from operations:
Depreciation and depletion 20.3 15.4 52.8 51.7
Decrease in reclamation reserve (0.2) (0.7) (0.5) (0.3)
Decrease (increase) in working capital items
Accounts receivable (1.0) 1.8 0.4 2.0
Inventories 3.6 - 8.3 3.9
Other assets (1.1) (0.8) (0.4) (1.7)
Accounts payable and accrued liabilities (3.2) 5.7 (6.5) (3.6)
Other (1.7) (2.1) (4.8) (6.5)
------------ ------------- ------------- -------------
Cash flow provided from operating activities 8.6 14.3 36.5 27.3
------------ ------------- ------------- -------------
Cash flows used in investing activities:
Capital expenditures (6.7) (6.6) (17.3) (13.1)
------------ ------------- ------------- -------------
Cash flow used in investing activities (6.7) (6.6) (17.3) (13.1)
------------ ------------- ------------- -------------
Cash flow provided from (used in) financing activities
Repayments of financings (5.4) (2.3) (41.4) (18.5)
Proceeds from financings from parent 5.2 0.5 14.9 1.8
Proceeds from financings 1.7 - 1.7 -
Preferred dividends paid - - - (3.4)
------------ ------------- ------------- -------------
Cash flow provided from (used in) financing activities 1.5 (1.8) (24.8) (20.1)
------------ ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 3.4 5.9 (5.6) (5.9)
Cash and cash equivalents at beginning of period 14.3 13.3 23.3 25.1
------------ ------------- ------------- -------------
Cash and cash equivalents at end of period $ 17.7 $ 19.2 $ 17.7 $ 19.2
============ ============= ============= =============
Supplementary disclosure of cash flow information:
Cash paid for : Interest $ 1.3 $ 1.7 $ 5.1 $ 7.9
Income taxes $ 0.7 $ 1.7 $ 2.8 $ 4.4
The accompanying notes are an integral part of these statements
4
Condensed notes to consolidated financial statements
1. Basis Of Presentation
The accompanying interim unaudited consolidated financial statements include all
adjustments that are, in the opinion of management, necessary for a fair
presentation. Results for any interim period are not necessarily indicative of
the results that may be achieved in future periods. The financial information as
of this interim date should be read in conjunction with the audited financial
statements and notes thereto contained in the Company's annual report on Form
10-K for the year ended December 31, 2000.
On June 1, 1998, Kinam Gold, Inc. ("the Company") completed a merger agreement
with Kinross Gold Corporation ("Kinross") providing for a combination of their
businesses. Kinross currently owns 100% of the Company's outstanding common
stock and on July 12, 2001 acquired 51.4 % of the Company's outstanding
preferred stock.
2. Economic Dependence
The Company relies solely on Kinross for funding the portion of operating costs,
capital expenditures, general corporate expenditures and debt and interest
payments not funded by cash flow provided from operating activities. Assuming
the price of gold remains at current levels the Company anticipates additional
borrowings from its parent. While Kinross has funded these obligations in the
past it is under no obligation to do so, and there can be no assurance that the
Company may not have to seek funding from other sources in the future. Kinross
has agreed to continue to support the Company for the remainder of 2001. Kinross
also provides substantially all administrative and management services to the
Company at no cost. Accordingly the financial statements do not reflect a charge
for these services.
3. Inventories
Inventories consist of the following (in millions):
September 30 December 31
2001 2000
------------- -------------
Gold
Finished goods $ 10.8 $ 16.8
Work in progress 0.7 2.2
Materials and supplies 25.4 32.6
------------- -------------
$ 36.9 $ 51.6
============= =============
5
4. Long-Term Debt
Long-term debt repayments during the first nine months of 2001 totaled $41.4
million. Debt repayments were comprised of $2.9 million of capital lease
repayments at Fort Knox, $0.4 million of capital lease repayments at Refugio,
$10.4 million of project-financing debt repayments at Kubaka, $5.7 million of
subordinated debt repayments at Kubaka and $22.0 million of debt repayments on
the Alaska Industrial Revenue bonds.
5. Hedge Contracts
Forward sales contracts, generally on a spot deferred basis are entered into
from time to time to protect the Company from the effect of price changes on
precious metals sales. As of September 30, the Company had no outstanding hedge
contracts.
During July 1998, the Company liquidated its hedge position and received
approximately $45.9 million in cash. In connection with this transaction the
Company recognized a gain of $41.7 million, net of costs previously incurred.
The gain is being included in revenue over the period the underlying hedge
contracts were originally scheduled to expire. The Company realized $2.4 million
in revenue for the first nine months of 2001 relating to the amortization of
these hedge gains.
6. Commitments and Contingencies
Site restoration and closure costs are accrued on a units-of-production basis
using estimates based upon current federal, state and applicable foreign laws
and regulations governing the protection of the environment. These laws and
regulations are continually changing and are generally becoming more
restrictive. Any changes in these laws and regulations could impact future
estimated site restoration costs. Total site restoration costs for the Company
at the end of current operating mine lives are estimated to be approximately
$36.0 million.
7. Transactions with Affiliates
On January 1, 2001, the Company entered into an agreement with a wholly owned
subsidiary of Kinross to acquire all of the outstanding shares of La Teko
Resources Inc. Since this was a related party transaction which did not result
in a substantive change in ownership, the transaction was recorded at the
carrying value of La Teko's assets which was approximately $36.0 million at
December 31, 2000. The assets of La Teko included the Ryan Lode project and 35%
of the True North project which commenced production in early 2001. The ore from
the True North project is being processed through the Fort Knox mill.
On July 12, 2001 Kinross acquired 945,400 of the 1,840,000 issued and
outstanding preferred shares of Kinam.
8. Presentation
Certain of the financial information for fiscal 2000 has been reclassified to be
consistant with the current year presentation.
6
Production Results
The following table sets forth the Company's ounces of gold equivalent
production, production costs, ounces of gold sold and average realized prices
for the three months and nine months ended September 30, 2001and 2000.
Three Months Ended Nine Months Ended
September 30 September 30
2001 2000 2001 2000
------------------ ------------- ------------- ------------
Gold equivalent production (ounces)
Fort Knox 101,610 88,838 306,700 250,214
Kubaka 68,272 61,629 174,747 182,268
Refugio 8,455 16,469 57,081 64,151
Hayden Hill - 2,459 1,887 7,847
Guanaco - 3,431 1,718 13,399
------------------ ------------- ------------- ------------
Consolidated gold production 178,337 172,826 542,133 517,879
================== ============= ============= ============
Cash operating costs ($ per ounce of gold
equivalent produced)
Fort Knox 212 206 197 219
Kubaka 108 105 121 113
Refugio 288 305 238 275
Hayden Hill - 191 267 208
Guanaco - 279 413 236
------------------ ------------- ------------- ------------
Consolidated cash operating costs 176 181 178 189
================== ============= ============= ============
Total cash costs ($ per ounce of gold
equivalent produced)(1)
Fort Knox 212 206 197 219
Kubaka 133 135 142 148
Refugio 304 320 251 289
Hayden Hill - 198 277 220
Guanaco - 304 436 257
------------------ ------------- ------------- ------------
Consolidated total cash costs 186 193 186 204
================== ============= ============= ============
Total production costs ($ per ounce of gold
equivalent produced)(2)
Fort Knox 326 313 314 330
Kubaka 237 247 244 288
Refugio 304 326 251 351
Hayden Hill - 198 277 220
Guanaco - 304 436 257
------------------ ------------- ------------- ------------
Consolidated total production costs 291 289 285 314
================== ============= ============= ============
Ounces of gold sold 167,346 150,968 539,688 509,256
Average realized price per ounce of gold $ 277 $ 296 $ 273 $ 293
(1) Total cash costs include cash operating costs plus royalties and applicable
production taxes.
(2) Total production costs include total cash costs plus reclamation and
depreciation and depletion.
7
Consolidated Results
Third Quarter
The Company reported a third quarter 2001 net loss of $8.1 million, or $.11 per
share attributable to common shares after preferred dividends, compared with a
2000 third quarter net loss of $5.0 million, or $.07 per share attributable to
common shares after preferred dividends. The Company's share of attributable
gold equivalent production of 178,337 ounces at a total cash cost of $186 per
ounce during the third quarter of 2001 compared with 172,826 ounces at a total
cash cost of $193 per ounce in the third quarter of 2000. Increased depreciation
rates related to the True North project resulted in an increase in the loss from
operations to $6.9 million in the third quarter of 2001, despite increased
production at a lower total cash cost per ounce, compared with $2.9 million in
the third quarter of 2000. Cash flow provided from operating activities
decreased to $8.6 million in the third quarter of 2001 compared with $14.3
million in the third quarter of 2000, due to changes in working capital.
Nine Months
For the first nine months of 2001 the Company reported a net loss of $12.8
million, or $.19 per share attributable to common shares after preferred
dividends, compared with a net loss of $18.2 million, or $.25 per share
attributable to common shares after preferred dividends in the first nine months
of 2000. The Company's share of gold equivalent production increased 5% to
542,133 ounces and total cash costs decreased by 9% to $186 per ounce compared
with 517,879 ounces at a total cash cost of $204 per ounce in the first nine
months of 2000. Cash flow provided from operating activites increased to $36.5
million in the first nine months of 2001 compared with $27.3 million in the
first nine months of 2000. Increased production at a significantly lower total
cash cost coupled with lower interest expense offset a $20 per ounce decrease in
the realized price resulting in a lower net loss and increased cash flow from
operating activities in the first nine months of 2001.
Revenues
Gold Sales
The Company's share of gold sales was 167,346 ounces in the third quarter of
2001 compared with 150,968 ounces in the third quarter of 2000. Revenue from
gold sales was $46.4 million in the third quarter of 2001 compared with $44.7
million in the third quarter of 2000. Revenue in 2001 increased due to higher
gold sales partially offset by lower average realized prices per ounce sold.
During the third quarter of 2001, the Company realized $277 per ounce compared
with $296 per ounce in 2000. The average spot price for gold during the third
quarter of 2001 was $274 per ounce compared with $277 per ounce in 2000. The
realized price exceeded the spot price due to the amortization of the gain
realized when a significant hedge position was closed in 1998.
The Company's share of gold sales was 539,688 ounces in the first nine months of
2001 compared with 509,256 ounces in the first nine months of 2000. Revenue from
gold sales was $147.3 million in the first nine months of 2001 compared with
$149.3 million in the first nine months of 2000. Revenue in 2001 decreased as
higher gold sales failed to offset lower average realized prices per ounce sold.
During the first nine months of 2001, the company realized $273 per ounce of
gold compared with $293 per ounce of gold in the first nine months of 2000. The
average spot price for gold during the first nine months of 2001 was $269 per
ounce compared with $282 per ounce in 2000. The realized price exceeded the spot
price due to the amortization of the gain realized when a significant hedge
position was closed in 1998.
8
Interest and other income
Interest income decreased to $0.2 million in the third quarter of 2001 from $0.4
million in the third quarter of 2000. For the first nine months of 2001 interest
income was $1.1 million in 2001 compared with $2.1 million in the first nine
months of 2000. Interest income declined due to lower interest rates.
Other income in the third quarter of 2001 was $1.1 million compared with $1.4
million in the third quarter of 2000. In the first nine months of 2001 other
income was $3.7 million compared with $4.1 million in 2000. The management fees
earned from the Kubaka and Refugio operations are included in other income.
Operating Performance and Costs
Total cost of sales was $32.2 million in the third quarter of 2001 compared with
$31.2 million in the third quarter of 2000. Total cash costs of $186 per gold
equivalent ounce in the third quarter of 2001 compared with $193 per gold
equivalent ounce in the third quarter of 2000. Total cost of sales decreased at
Refugio due to the suspension of operations, which was offset by increased
spending in Alaska with the True North operations achieving full production
during the quarter.
For the first nine months of 2001 cost of sales decreased to $101.9 million from
$107.8 million in the first nine months of 2000. Total cash costs of $186 per
gold equivalent ounce in the first nine months of 2001 compared with $204 per
gold equivalent ounce in 2000. Due to lower total cash costs per ounce, total
cost of sales decreased despite significantly higher sales due to higher
production.
Primary Operations
Fort Knox Mine
Gold equivalent production during the third quarter of 2001 was 101,610 ounces
compared with 88,838 in 2000. Total cash costs for the third quarter were $212
per ounce of gold equivalent compared with $206 in 2000. Although lower than
anticipated grade from the upper benches of the True North open pit resulted in
lower than planned production and, consequently higher total cash costs per
ounce during the third quarter, improvements at this new operation are
anticipated. For the first nine months of 2001 gold equivalent production was
306,700 ounces compared with 250,214 in 2000. Total cash costs for the first
nine months were $197 per ounce of gold equivalent compared with $219 in 2000.
Capital expenditures in Alaska were $6.6 million during the quarter and $16.9
million for the first nine months of 2001. The majority of the capital
expenditures for the quarter were required to purchase nine haulage trucks for
the True North ore haulage, development drilling and the construction of
maintenance facilities at True North. The slower than planned optimization of
the new True North operation has reduced expected production for 2001 at Fort
Knox to approximately 415,000 gold equivalent ounces at a total cash cost of
slightly over $200 per ounce. The objective at Fort Knox remains to continue to
grow annual gold production towards 450,000 ounces of gold equivalent in 2002.
9
Kubaka Mine (54.7% ownership interest)
Kinam's share of gold equivalent production during the third quarter of 2001 was
68,272 ounces compared with 61,629 in 2000. Total cash costs for the third
quarter were $133 per ounce of gold equivalent compared with $135 in 2000. The
throughput at the Kubaka processing plant continues to exceed plan. The higher
tonnage throughput to date has had no material impact on recoveries as
recoveries continue to exceed 97%. For the first nine months of 2001 Kinam's
share of gold equivalent procuction was 174,747 ounces compared with 182,268 in
2000. Total cash costs for the first nine months were $142 per ounce of gold
equivalent compared with $148 in 2000. These exceptional total cash costs per
ounce at Kubaka included in excess of $20 per ounce of royalty based taxes. The
Kubaka operations continues to exceed plan in 2001. Therefore, Kinam's share of
estimated gold equivalent production for 2001 has increased by an additional
6,000 ounces to approximately 231,000 ounces while total cash costs per ounce
for 2001 are now estimated to be $145 per ounce, 3% lower than previous
estimates. Current gold equivalent production expectations for 2002 at Kubaka
are 415,000 ounces (100% basis), comparable to production planned in 2001.
Refugio Mine (50% ownership interest)
Kinam's share of gold equivalent production during the third quarter of 2001 was
8,455 ounces compared with 16,469 in 2000. Total cash costs for the third
quarter were $304 per ounce compared with $320 per ounce in 2000. The Refugio
operations commenced residual leaching and the open pit mining activites were
suspended June 1, 2001. For the first nine months of 2001 Kinam's share of gold
equivalent production was 57,081 ounces compared with 64,151 in 2000. Total cash
costs for the first nine months were $251 per ounce of gold equivalent compared
with $289 in 2000. All of the leased mining equipment has been disposed of
eliminating further financial obligations under these leases. Leaching
operations continue and the Chilean summer will be spent reviewing the water
balance and the estimated gold inventory on the leachpad to determine the best
time to suspend residual leaching. Estimated gold equivalent production and
total cash costs per ounce for 2001 at the Refugio operations remain unchanged
from previous estimates.
Other Expenses
The Company's third quarter depreciation and depletion expense increased to
$20.3 million in 2001 compared with $15.4 million in the third quarter of 2000.
The increase was due to higher sales and higher depreciation rates associated
with the True North ore offset by the effect of the writedown of the Refugio
property in December of 2000. For the first nine months depreciation and
depletion expense increased to $52.8 million compared with $51.7 million in the
first nine months of 2000.
General and administrative expense of $0.1 million in the third quarter of 2001
compared with $0.4 million in the third quarter of 2000. For the first nine
months of 2001 general and administrative expense was $0.8 million compared with
$0.8 million in the first nine months of 2000. Substantially all management and
administrative services are provided by Kinross to the Company at no cost.
Exploration expense increased to $0.7 million in the third quarter of 2001
compared with $0.6 million in the third quarter of 2000. In the first nine
months of 2001 exploration expense was $2.3 million compared with $2.1 million
in the first nine months of 2000. The Company focused its exploration efforts
near existing processing plants.
Interest expense decreased to $1.2 million in the third quarter of 2001 from
$2.3 million in the third quarter of 2000 due to lower debt balances primarily
due to the early partial repayment of the Alaska Industrial Revenue Bonds.
Interest expense was $4.3 million in the first nine months of 2001 compared with
$7.9 million in the first nine months of 2000. Interest expense decreased due to
lower interest rates and lower debt balances compared to 2000.
10
Liquidity And Capital Resources
Operating Activities
Cash flow provided from operating activities for the third quarter of 2001 was
$8.6 million compared with $14.3 million in 2000. For the first nine months of
2001 cash flow provided from operating activities was $36.5 million compared
with $27.3 million in 2000. Increased gold equivalent production and lower total
cash costs per ounce positively affected the cash flow provided from operating
activities for the first nine months of 2001.
Investing Activities
Capital expenditures during the third quarter of 2001 were $6.7 million compared
with $6.6 million in 2000. Capital spending at Fort Knox totaled $6.6 million in
the third quarter, primarily for the purchase of nine haul trucks for the True
North ore haulage, development drilling, and the construction of maintenance
facilities at True North. Capital spending at Kubaka was $0.1 million. Capital
spending was financed by cash flow provided from operating activities and
additional capital leases of $1.7 million.
Financing Activities
There were no dividends paid in the third quarter of 2001 as the Board of
Directors suspended the quarterly dividend on the $3.75 Series B Convertible
Preferred Stock beginning with the dividend that was payable in August 2000.
Included in paid-in capital is a $8.6 million accrual representing the
cumulative unpaid dividends.
Paid - in capital increased by $1.7 million in the third quarter of 2001 due to
the accrual of the preferred dividend. For the first nine months of 2001 paid-in
capital increased by $40.7 million. $35.6 million was due to an additional
investment by Kinross representing the carrying value of the assets transferred
to the Company. The assets transferred to the Company included the Ryan Lode
property and 35% of the True North property thereby increasing the Company's
share of the True North property to 100%. The balance is the accrual of the
preferred dividend.
Long-term debt repayments during the third quarter of 2001 totaled $5.4 million.
Debt repayments for the third quarter of 2001 were primarily comprised of a full
repayment of the Kubaka subordinated debt, which allowed Kinross to remove the
letter of credit issued to the bank as support of this debt. An agreement in
principal has been reached to extend payment of the balance of the project
financing debt at Kubaka, which is currently $7.8 million, until December 2002.
Kinam's share of this debt is currently $4.2 million Debt repayments at Kubaka
were made from cash flow provided from operating activites in Russia.
During the first nine months of 2001 the Company borrowed $14.9 million from
Kinross to partially fund the early repayment of the Alaska Industrial Revenue
Bond and capital expenditures at True North.
11
The Company relies solely on Kinross for funding the portion of operating costs,
capital expenditures, general corporate expenditures and debt and interest
payments not funded by cash flow provided from operating activities. The Company
continues to conserve cash whenever possible including approving only capital
expenditures necessary to sustain operations, continued low exploration
expenditures, suspending the payment of preferred stock dividends and
continually monitoring operating costs at all its operations. Assuming the price
of gold remains at current levels the Company anticipates additional borrowing
from Kinross in 2001 to fund the current debt repayment requirements and planned
capital expenditures, primarily on the True North project. While Kinross has
funded these obligations in the past it is under no obligation to do so after
2001, and there can be no assurance that the Company may not have to seek
funding from other sources in the future.
Cautionary Statement For Purposes Of The Safe Harbor Provisions Of The Private
Securities Litigation Reform Act Of 1995
With the exception of historical matters, the matters discussed in this report
are forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially from projected results. Such
forward-looking statements include statements regarding expected gold sales,
reserve additions, projected quantities of future gold production, estimated
reserves and recovery rates, anticipated production rates, costs and
expenditures, prices realized by the Company and expected to be realized,
expected future cash flows, anticipated financing needs, growth plans and
sources of financing and repayment alternatives. Factors that could cause actual
results to differ materially from such forward-looking statements include, among
others: the cyclical and volatile price of gold, risks and uncertainties
relating to general domestic and international economic and political
conditions, the political and economic risks associated with foreign operations,
cost overruns, unanticipated ground and water conditions,discovering of
additional information that could affect reserve estimates or preliminary
indication of recoverability, unanticipated grade and geological problems,
metallurgical and other processing problems, availability of materials and
equipment, the timing of receipt of necessary governmental permits and
approvals, the occurrence of unusual weather or operating conditions, force
majeure events, lower than expected ore grades, the failure of equipment or
processes to operate in accordance with specifications or expectations, labor
relations, accidents, environmental risks, the results of financing efforts and
financial market conditions and other risk factors detailed in the Company's
Securities and Exchange Commission filings. Refer to the Risk Factors on pages
14 to 17 of the Company's Annual Report on Form 10K dated December 31, 2000 as
filed with the Securities and Exchange Commission, for a more detailed
discussion of risks. Many of such factors are beyond the Company's ability to
control or predict. Readers are cautioned not to put undue reliance on
forward-looking statements. The Company disclaims any intent or obligation to
update publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk
1. Commodity Price Risks
The Company's revenues are derived primarily from the sale of gold production.
The Company's revenues and net income or loss can vary significantly with
fluctuations in the market prices of gold. Based on the Company's projected 2001
sales volume, each $10 per ounce change in the average realized price of gold
sales would have an approximate $7.25 million impact on revenues and pre-tax
earnings.
At various times, in response to market conditions, the Company has entered into
gold forward sales contracts for some portion of expected future production to
mitigate the risk of adverse price fluctuations. The significant decline in spot
gold prices in 1998 increased the value of the Company's forward sales contracts
held at that time. The Company closed out these contracts in 1998 for $45.9
million in cash. The Company does not currently hold any forward sales
contracts.
2. Foreign Currency Exchange Risk
The Company conducts the majority of its operations in the U.S., Russia, and
Chile. Currency fluctuations affect the cash flow that the Company will realize
from its operations as gold is sold primarily in U.S. dollars, while production
costs are incurred in Russian rubles, Chilean pesos and U.S. dollars. The
Company's results are positively affected when the U.S. dollar strengthens
against these foreign currencies and adversely affected when the U.S. dollar
weakens against these foreign currencies. The Company's cash and cash equivalent
balances are held in U.S. dollars. Holdings denominated in other currencies are
relatively insignificant.
The temporal method is used to consolidate results of operations in Russia. The
major currency-related exposure at any balance sheet date is on
ruble-denominated cash balances and working capital. Because the bullion
inventory is denominated in U.S. dollars, there are no related foreign exchange
risks. The foreign exchange exposure on the balance of the Company's working
capital items is nominal. Gold sales are primarily denominated 50% in U.S.
dollars and 50% in rubles. The U.S. dollars received are used to service the
U.S. dollar denominated debt and the foreign supplies inventory purchases, while
the rubles received from the gold sales are used to pay local operating costs.
The Company has and will continue to convert any excess rubles into U.S. dollars
to repay U.S. denominated third party and inter-corporate debt obligations.
Assuming estimated 2001 ruble payments of 615 million rubles at an exchange rate
of 30 rubles to one U.S. dollar, each 3 rubles change to the U.S. dollar could
result in an approximate $2.0 million change in the Company's pre-tax earnings.
In Chile, the currency measurement is the U.S. dollar as the majority of
transactions are denominated in U.S. dollars. Local expenditures are recorded
based on the prevailing exchange rate at the time and bullion settlement
receivables are denominated in U.S. dollars. Assuming the Company's share of
estimated 2001 pesos payments of 3.4 billon pesos at an exchange rate of 560
pesos to one U.S. dollar, each 50 pesos change to the U.S. dollar could result
in an approximately $0.6 million change in the Company's pre-tax earnings.
13
3. Interest Rate Risks
As at September 30, 2001 the Company carried $58.6 million of variable rate
debt, all denominated in U.S. dollars. Interest expense would change by
approximately $0.6 million per year for every one percent change in interest
rates.
Part II - Other Information
Item 1. Legal Proceedings
A lawsuit has been filed against Omolon Gold Mining Company, the owner and
operator of the Kubaka mine, in which Kinam indirectly owns 54.7 % of the issued
and outstanding common stock. The lawsuit was brought in the Magadan region,
Russia, by a minority shareholder of Omolon. Omolon's counsel has advised that
Omolon has good defenses available to it on the merits and they are highly
confident that Omolon will successfully defend this lawsuit.
The Company is involved in legal proceedings and claims which arise in the
ordinary course of its business. The Company believes these claims are without
merit and is vigorously defending them. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially affect
the financial position, results of operations or cash flows of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are included as part of this report:
Exhibit of Number See Reference Number Title of Document
----------------- -------------------- -----------------
1 3 Articles of Incorporation
2 3 By Laws
(b) Reports on Form 8-K - None
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KINAM GOLD INC.
By /s/ Brian W. Penny
------------------------------
Treasurer and Director
(principal financial officer)
Dated: November 12 , 2001