================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________ Form 10-K/A (Amendment No. 3) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1999 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 No. 1-9666 BATTLE MOUNTAIN GOLD COMPANY (Exact name of Registrant as specified in its charter) Nevada 76-0151431 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 333 Clay Street, 42nd Floor, Houston, Texas 77002 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 650-6400 Securities registered pursuant to Section 12(b) of the Act: Name of each Exchange Title of each class on which registered ------------------- ------------------- Common Stock New York Stock Exchange $3.25 Convertible Preferred Stock New York Stock Exchange Rights to Purchase Preferred Stock New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO __ - Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ______ The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $271 million as of April 30, 2000, based on the closing sales price of the registrant's common stock as reported on the New York Stock Exchange Composite Tape on such date. As of such date, the aggregate market value of the common stock and the Exchangeable Shares of the registrant's wholly-owned subsidiary, Battle Mountain Canada Ltd., together, held by non- affiliates was approximately $338 million. For purposes of the foregoing sentence only, all directors and officers of the registrant are assumed to be affiliates. The number of shares outstanding of the registrant's common stock as of April 30, 2000 is 131,526,469, not including 98,859,948 shares of Exchangeable Shares of the registrant's wholly-owned subsidiary, Battle Mountain Canada Ltd., that entitle holders to economically equivalent rights as the registrant's common stock and are exchangeable at any time into such common stock on a one- for-one basis. DOCUMENTS INCORPORATED BY REFERENCE: List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated: None. ================================================================================ TABLE OF CONTENTS ----------------- PART I Items 1 and 2. Business and Properties.................................................................................. 1 Item 3. Legal Proceedings.............................................................................................. 30 Item 4. Submission of Matters to a Vote of Security Holders............................................................ 30 PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.......................................... 32 Item 6. Selected Financial Data........................................................................................ 34 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................................... 46 Item 8. Financial Statements and Supplementary Data.................................................................... 47 Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure............................ 76 PART III Item 10. Directors and Executive Officers of the Registrant.............................................................118 Item 11. Executive Compensation.........................................................................................119 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................125 Item 13. Certain Relationships and Related Transactions.................................................................126 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................127 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS The U.S. securities laws provide a "safe harbor" for certain forward- looking statements. This annual report contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected in such forward-looking statements. Statements regarding the expected commencement dates of mining operations, projected quantities of future production, capital costs, production rates, costs and expenditures, and other operating and financial data are based on expectations that the Company believes are reasonable, but can give no assurance that such expectations will prove to have been correct. Factors that could cause actual results to differ materially include, among others: risks and uncertainties relating to general domestic and international economic and political conditions, the cyclical and volatile prices of gold and silver, political and economic risks associated with foreign operations, unanticipated ground and water conditions, unanticipated grade and geological problems, metallurgical and other processing problems, availability of materials and equipment, the delays in the receipt of or failure to receive necessary governmental permits, the inability to maintain or put in place necessary environmental or reclamation financial assurances, appeals of agency decisions or other litigation, changes in laws or regulations or the interpretation and enforcement thereof, the occurrence of unusual weather or operating conditions, force majeure events, the failure of equipment or processes to operate in accordance with specifications or expectations, labor relations, accidents, delays in anticipated start-up dates, environmental risks and the results of financing efforts and financial market conditions. These and other risk factors are discussed in more detail herein. 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 obligations to update these forward-looking statements, whether as a result of new information, future events or otherwise. Restatement - ----------- After issuing Battle Mountain's 1999 financial statements and filing two amendments to the Form 10-K with the Securities and Exchange Commission (SEC), following extensive discussion with the SEC, management determined it was necessary to revise the financial statement presentation of Battle Mountain's cash and cash equivalents and its recorded equity in income of Lihir. Cash and cash equivalents were reclassified to remove gold bullion and bullion settlements from this line item and include them in accounts receivable to more appropriately present the nature of these items. Management also determined that the amounts of its recorded equity in income of Lihir had been incorrectly based on financial statements of Lihir that were not prepared in accordance with U.S. generally accepted accounting principles (GAAP), but rather, orginally were based on International accounting standards. The Company's equity in income of Lihir has been revised to reflect its equity on a U.S. GAAP basis. Also, a part of a review of the financial statements of Lihir by the SEC, Lihir's management determined that its U.S. GAAP reconciliation needed to be revised. For the purpose of this Form 10-K/A, Battle Mountain Gold has amended and restated in its entirety the 1999 Form 10-K/A filed on May 15, 2000. In order to preserve the nature and character of the disclosures as of March 23, 2000, the date on which the original 1999 Form 10-K was filed, no attempt has been made in this Form 10-K/A to modify or update such disclosures except as required to reflect the effects of the restatement. PART I Items 1 and 2. Business and Properties - --------------------------------------- BUSINESS AND PROPERTIES OF THE COMPANY Introduction - ------------ Battle Mountain Gold Company was incorporated in Nevada in 1985. We are engaged, directly or through our subsidiaries, in the gold mining business in the United States, Canada, Bolivia and Australia, and in the exploration and evaluation of precious metals properties primarily in Latin America, Australia, Canada and the United States. Battle Mountain Gold Company is headquartered in Houston, Texas, and our common stock is traded principally on the New York Stock Exchange. Battle Mountain Gold Company (together with its subsidiaries, unless the context otherwise requires), is referred to as "Battle Mountain" or "the Company". On July 19, 1996, Battle Mountain combined with Hemlo Gold Mines Inc., an Ontario corporation ("Hemlo Gold"). The combination was accounted for under the pooling of interests method. Under the terms of the combination agreement, each Hemlo Gold share was exchanged for 1.48 shares of a newly issued class of exchangeable shares of Battle Mountain Canada Ltd., the new name for the former Hemlo Gold ("Battle Mountain Canada"), and Battle Mountain acquired all of the common shares of Battle Mountain Canada. The Battle Mountain Canada exchangeable shares entitle holders to dividends and other rights economically equivalent to Battle Mountain common stock, including the right to vote through a voting trust at Battle Mountain stockholder meetings, and are exchangeable at the option of holders into Battle Mountain Gold common stock on a one-for-one basis. See "Description of Exchangeable Shares of Battle Mountain Canada Ltd." under Item 5. At December 31, 1999, we had four operating mines in three countries and on three continents: the Golden Giant mine in Ontario, Canada; the Holloway mine (in which Battle Mountain Gold has an 84.65% attributable interest) in Ontario, Canada; the Kori Kollo mine (88% attributable interest) in Oruro, Chuquina, Bolivia; and the Vera/Nancy mine (50% attributable interest) in Queensland, Australia. Additionally, we are developing the Phoenix project at the Battle Mountain Complex near Battle Mountain, Nevada. We also are carrying out an international exploration and acquisition program in order to expand reserves. Production from our Reona heap leach facility at the Battle Mountain Complex continued throughout 1999, although it was placed on care and maintenance effective January 1, 1999. 1 The Company's attributable gold production was 770,000 ounces in 1999 as compared with 889,000 ounces in 1998; however, our attributable gold production in 1998 included a total of 64,000 ounces attributable to the Company's interest in Lihir and San Cristobal mines. Our attributable percentage of mine production in the Lihir and San Cristobal mines is not included in the 770,000 ounces of gold produced in 1999 as the Company had made the decision to dispose of its investment in Niugini Mining effective January 1, 1999. See "-Niugini Mining- Lihir Gold Limited". See Note 13 of Notes to Consolidated Financial Statements under Item 8 for information on the Company's revenues, operating income and assets by geographic segment. Aggregate Operating Data - ------------------------ The following table provides aggregate operating data for all operating mines for 1999 and 1998. Although production from residual heap leaching continued throughout 1999, production data for the Reona mine at the Battle Mountain Complex is not presented for 1999 because it was placed on care and maintenance effective January 1, 1999. Data for the Lihir and San Cristobal mines are not included in 1999 as the Company had made the decision to dispose of its investment in Niugini Mining effective January 1, 1999. 1999 1998 ------------------------- ------------------------- Company Company Net/1/ 100%/2/ Net/1/ 100%/3/ Aggregate Operating Data ------------- ------- -------- ------- - ------------------------ Gold production (000s oz)...................................... 770 806 889 992 Gold sales (000s oz)........................................... 771 806 884 987 Average realized gold price per oz............................. $278 $278 $303 $306 Silver production (000s oz).................................... 759 852 1,034 1,187 Silver sales (000s oz)......................................... 759 853 1,032 1,186 Average realized silver price per oz........................... $5.22 $5.22 $5.50 $5.50 Weighted average cost per gold ounce produced/4/: Cash production costs....................................... $164 $165 $160 $166 Depreciation, depletion and amortization.................... 79 79 94 91 Reclamation and mine closure costs.......................... 8 8 5 5 ----- ------ ------ ------ Total operating costs................................ $251 $252 $259 $262 ===== ====== ====== ====== - --------------------------------------------------------------- (1) Represents the Company's attributable interest. (2) Includes 100% of the Kori Kollo mine plus Battle Mountain's interest in proportionately consolidated joint ventures. (3) Includes 100% of the Kori Kollo and San Cristobal mines, Niugini Mining's share of the Lihir mine, and Battle Mountain's interest in proportionately consolidated joint ventures. (4) Effective January 1, 1999, current and prior period production costs are presented on an ounces-produced basis, versus and ounces-sold basis as previously reported. Cash production costs are presented in accordance with guidelines established by The Gold Institute. Royalties paid to the Bolivian government for the Kori Kollo mine are treated as income tax for per ounce cost calculations and are therefore not included in these cost calculations. 2 Gold Price Volatility - --------------------- The Company's profitability is significantly affected, both positively and negatively, by changes in the market price of gold. Gold prices can fluctuate and are affected by numerous factors such as demand, central bank sales, purchases and lending, currency valuations, production levels, the expectation of inflation, forward selling by producers, investor sentiment and global or regional political and economic events. The aggregate effect of these factors, all of which are beyond our control, is impossible for management of the Company to predict. While we are a low cost gold producer, a sustained period of low gold prices would have a material adverse affect on our financial position and results of operations. If revenue from gold sales were to decline to a point below our cash production costs and remain below that level for any substantial period, we could determine that it is not economically feasible to continue commercial production at some or all of our operations or to continue the development of some or all of our projects. See "-- Certain Factors Affecting Reserves, Foreign Investments and Properties." The volatility of gold prices is illustrated by the following table of the annual high, low and average afternoon fixing prices of gold per ounce on the London Bullion Market for each of the last five years. 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- High........................... $326 $313 $367 $415 $397 Low........................... $253 $273 $283 $367 $374 Average.......................... $279 $294 $331 $388 $384 The Company has implemented a limited number of hedges. See "-- Sales and Hedging Activities" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Also see Note 15 of Notes to Consolidated Financial Statements under Item 8. Operations, Costs and Reserve Data - ---------------------------------- The following tables contain a summary of our operations, costs and reserve data for gold, silver and copper. The data for 1998 and 1999 gold reserves were calculated using a gold price of $325. The estimated tonnages and grades in the data for 1998 and 1999 gold reserves were determined by the Company's Senior Vice President - Operations and Exploration together with several of our geologists. The estimation of reserves and future mining operations can be affected by numerous factors. See "Certain Factors Affecting Reserves, Foreign Investments and Properties." 3 PRODUCTION, COSTS AND RESERVES DATA FOR GOLD MINE OR PROJECT PRODUCTION AND COST DATA (1) - ---------------------------------------------------------------------------------------------------------------------------- Attributable % Gold ounces Percent of Total of mine recovered total BMG Cash production operating production Year (000s) production costs ($/oz) costs - ---------------------------------------------------------------------------------------------------------------------------- Golden Giant 100% 1999 356 46 145 215 ------------------------------------------------------------------------------------------------------- 1998 366 42 122 192 - ---------------------------------------------------------------------------------------------------------------------------- Kori Kollo 88% 1999 256 33 190 294 ------------------------------------------------------------------------------------------------------- 1998 295 33 165 303 - ---------------------------------------------------------------------------------------------------------------------------- Holloway 84.65% 1999 91 12 198 331 ------------------------------------------------------------------------------------------------------- 1998 80 9 216 332 - ---------------------------------------------------------------------------------------------------------------------------- Vera/Nancy 50% 1999 67 9 124 168 ------------------------------------------------------------------------------------------------------- 1998 47 5 135 168 - ---------------------------------------------------------------------------------------------------------------------------- Other (2) 1999 ------------------------------------------------------------------------------------------------------- 1998 101 11 253 356 - ---------------------------------------------------------------------------------------------------------------------------- Totals 1999 770 100 164 251 ---------------------------------------------------------------------------------------------------------- 1998 889 100 160 259 - ---------------------------------------------------------------------------------------------------------------------------- MINE OR PROJECT PROVEN AND PROBABLE RESERVES DATA - ------------------------------------------------------------------------------------------------------------------------------ Metal- Attributable Average Contained lurgical Percent of % of mine Reserves grade ounces Recovery total BMG reserves Year (000s tons) (oz/ton) (000s) factor (%) reserves - ------------------------------------------------------------------------------------------------------------------------------ Golden Giant 100% 1999 6,157 0.281 1,725 96 17 ------------------------------------------------------------------------------------------------- 1998 7,647 0.278 2,130 96 23 - ------------------------------------------------------------------------------------------------------------------------------ Kori Kollo 88% 1999 28,603 0.046 1,330 63 14 ------------------------------------------------------------------------------------------------- 1998 28,849 0.049 1,410 63 16 - ------------------------------------------------------------------------------------------------------------------------------ Holloway 84.65% 1999 4,040 0.190 765 95 8 ------------------------------------------------------------------------------------------------- 1998 4,180 0.197 825 95 9 - ------------------------------------------------------------------------------------------------------------------------------ Battle Mountain 100% 1999 150,707 0.038 5,680 82 57 Complex (3) ------------------------------------------------------------------------------------------------- 1998 81,737 0.043 3,515 85 39 - ------------------------------------------------------------------------------------------------------------------------------ Vera/Nancy 50% 1999 1,151 0.382 440 96 4 ------------------------------------------------------------------------------------------------- 1998 1,021 0.394 400 96 4 - ------------------------------------------------------------------------------------------------------------------------------ Other (4) 1999 ------------------------------------------------------------------------------------------------- 1998 825 9 - ------------------------------------------------------------------------------------------------------------------------------ Totals 1999 9,940 100 ------------------------------------------------------------------------------------------------------ 1998 9,105 100 - ------------------------------------------------------------------------------------------------------------------------------ (1) Effective January 1, 1999, current and prior period production costs are presented on an ounces-produced basis, versus an ounces-sold basis as previously reported. Cash production costs are presented in accordance with guidelines established by The Gold Institute. Royalties paid to the Bolivian government for the Kori Kollo mine are treated as income tax for per ounce cost calculations and therefore are not included in these cost calculations. (2) Includes the Reona, Lihir and San Cristobal mines. Production data for the Reona mine at the Battle Mountain Complex is not presented for 1999 because it was placed on care and maintenance effective January 1, 1999. Data for the Lihir and San Cristobal mines are not included in the table in 1999 as Battle Mountain had made the decision to dispose of its investment in Niugini Mining effective January 1, 1999. Battle Mountain's share of production from the San Cristobal and Lihir mines was 54,000 ounces in 1999. (3) Includes the Phoenix project and assumes permitting and approvals of that project. (4) No proven and probable reserves are attributed to the Crown Jewel project for 1999 due to an adverse ruling by an administrative tribunal relating to certain permits required for the project as proposed and uncertainties arising therefrom. Battle Mountain's share of proven and probable reserves from the Lihir mine totaled 7.7 million tons grading .11 oz/ton or 840,000 ounces at December 31, 1999. 4 PRODUCTION AND RESERVES DATA FOR SILVER AND COPPER MINE OR PROJECT PRODUCTION DATA - --------------------------------------------------------------------------------------------- Attributable % of mine Silver ounces production Year recovered (000s) - --------------------------------------------------------------------------------------------- Golden Giant 100% 1999 22 -------------------------------------------------------- 1998 26 - --------------------------------------------------------------------------------------------- Kori Kollo 88% 1999 687 -------------------------------------------------------- 1998 852 - --------------------------------------------------------------------------------------------- Vera/Nancy 50% 1999 50 -------------------------------------------------------- 1998 40 - --------------------------------------------------------------------------------------------- Other (1) 1999 -------------------------------------------------------- 1998 117 - --------------------------------------------------------------------------------------------- Totals (2) 1999 759 -------------------------------------------------------- 1998 1,035 - --------------------------------------------------------------------------------------------- MINE OR PROJECT RESERVES DATA - ----------------------------------------------------------------------------------------------------------------------- Attributable % of mine Silver contained Copper contained Reserves Year ounces (000s) pounds (000s) - ----------------------------------------------------------------------------------------------------------------------- Kori Kollo 88% 1999 6,850 na ----------------------------------------------------------------------------------- 1998 7,555 na - ----------------------------------------------------------------------------------------------------------------------- Battle Mountain 100% 1999 42,723 426,728 Complex (2) ------------------------------------------------------------------------------------ 1998 22,605 182,592 - ----------------------------------------------------------------------------------------------------------------------- Vera/Nancy 50% 1999 377 na ------------------------------------------------------------------------------------ 1998 400 na - ----------------------------------------------------------------------------------------------------------------------- Other (3) 1999 ------------------------------------------------------------------------------------ 1998 420 na - ----------------------------------------------------------------------------------------------------------------------- Totals 1999 49,950 426,728 ------------------------------------------------------------------------------------ 1998 30,980 182,592 - ----------------------------------------------------------------------------------------------------------------------- (1) Includes the Reona and San Cristobal mines. Production data for the Reona mine at the Battle Mountain Complex is not presented for 1999 because it was placed on care and maintenance effective January 1, 1999. Data for the San Cristobal mine is not included in the table in 1999 as Battle Mountain had made the decision to dispose of its investment in Niugini Mining effective January 1, 1999. Battle Mountain's share of production from the San Cristobal mine was 18,000 ounces in 1999. There was no silver production from the Lihir mine in 1999. (2) Includes the Phoenix project and assumes permitting and approvals of that project. (3) No proven and probable reserves are attributed to the Crown Jewel project for 1999 due to an adverse ruling by an administrative tribunal relating to certain permits required for the project as proposed and uncertainties arising therefrom. 5 Map to be inserted ------------------ 6 Map to be inserted ------------------ Certain Factors Affecting Reserves, Foreign Investments and Properties - ---------------------------------------------------------------------- The ore reserve figures presented herein are estimates, and no assurance can be given that the indicated levels of recovery of gold and silver will be realized. The ore reserve figures for 1999 presented herein were calculated using a gold price of $325 per ounce. We have reviewed and generally 7 estimated the effects of using a $275, $300 and $350 per ounce gold price on Battle Mountain's reserves. Based on these estimates, the Company's total reserves would be reduced by approximately 4% using a gold price of $300 per ounce and 9% using a gold price of $275 per ounce, and would be increased by approximately 4% using a gold price of $350 per ounce. Such estimates should not be relied upon as being indicative of estimates of the Company's total reserves at other gold prices. Changes in the various assumptions on which the reserve estimates are based, such as the cutoff grade, may result in increases or decreases in the reserve estimates from year to year. Reserve estimates for properties that have not yet commenced production may require revision based on actual production experience. Also, sustained market price fluctuations of gold and silver, as well as increased production costs or reduced recovery rates, may ultimately result in an adjustment of ore reserves. Moreover, many factors relating to each mine, such as the design of the mine plan, unexpected operating and processing problems, problems with ground stability, increases in the stripping ratio and the complexity of the metallurgy of an ore body, may adversely affect production and operating costs of a project. Neither reserves nor projections of future operations should be interpreted as assurances of the economic life or profitability of future operations. Our production in 1999 was attributable to non-U.S. operations. Foreign operations, which include significant operations in Canada, Latin America and Australia, are subject to the risks normally associated with conducting business in foreign countries. Such risks include foreign exchange controls and currency fluctuations, limitations on the repatriation of earnings, changes in domestic and foreign taxation, labor disputes, and uncertain political and economic environments as well as risks of war and civil disturbances or other risks which may limit or disrupt production and markets, restrict the movement of funds or result in the deprivation of contract rights or the taking of property by nationalization or appropriation without fair compensation. Although the Company has not experienced any significant problems in foreign countries arising from such risks, there can be no assurance that such problems will not arise in the future. A significant portion of the Company's reserves comes from the Phoenix project in Nevada. Risks associated with conducting business in the United States, including risks relating to permitting and land tenure, are therefore significant to the Company. See "--Environmental Matters" and "--Property Interests". The Company holds a 9.74% equity interest in Lihir Gold Limited, the owner of the Lihir gold mine located on Lihir Island in Papua New Guinea. The Papua New Guinea government maintains a policy favoring direct foreign investment. The Papua New Guinea Constitution and major statutes governing foreign investment also provide significant safeguards for investors and lenders. The Investment Promotion Act assures investors the right to remit after-tax profits and make debt service and supplier payments. The Investment Promotion Act also provides that expropriation will not occur without adequate compensation. It has been the practice of the Papua New Guinea government to acquire direct ownership interests in large natural resource projects. Most such projects have experienced some level of civil unrest. The Company does not expect acts of civil unrest from the inhabitants of Lihir Island; however, should such acts occur, there can be no assurance that such acts would not have a material adverse effect on the Company's investment. Furthermore, a deterioration in Papua New Guinea's political stability or an adverse change in the Papua New Guinea government's policy towards foreign-owned companies in Papua New Guinea could adversely affect the Lihir mine and the Company's financial condition. Foreign operations and investments may also be adversely affected by laws and policies of the United States affecting foreign trade, investment and taxation which could affect the conduct or profitability of these operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Foreign Operations." Offices - ------- 8 Battle Mountain's corporate office is located in Houston, Texas. Battle Mountain Canada's corporate office is located in Marathon, Ontario, Canada. Battle Mountain's exploration program is managed from its office in Houston, Texas. Other exploration offices are located in Reno, Nevada; Manitouwadge and Timmins, Ontario, Canada; Torreon, Mexico; San Juan, Argentina; and Lima, Peru. Empresa Minera Inti Raymi S.A., in which the Company owns an 88% interest, maintains corporate and exploration offices in La Paz, Bolivia. Operating Mines - --------------- Golden Giant The Golden Giant mine is owned by Battle Mountain Canada and is located in the Hemlo gold district approximately 35 miles east of the town of Marathon in Ontario, Canada. The main access to the Golden Giant mine is by a 1.2 mile road from the Trans-Canada Highway. The shaft and some of the surface facilities of the Golden Giant mine are located on approximately one-quarter of a mining claim and other related surface rights acquired from the owners of the adjacent David Bell mine. The Golden Giant ore deposits were discovered in 1982. Construction of the mine began in 1983, the first gold bullion was poured in April, 1985, and the Golden Giant mine reached the design rate of approximately 3,300 tons of ore per day during the fourth quarter of 1988. The Golden Giant mine produced approximately 356,000 ounces of gold in 1999 and 366,000 ounces of gold in 1998. Around the Golden Giant mine, Battle Mountain Canada holds a land position consisting of an area of 6,155 acres under eight standard mining leases between Battle Mountain Canada and the Crown and four freehold patents. The mine property consists of approximately 64 acres. The mine and most facilities are located on the freehold patents. The leases end in 2004 and 2005, and are renewable in favor of Battle Mountain Canada for a further term of 21 years upon application to the appropriate Ministry and the payment of the prescribed fees. See "-- Property Interests -- Canada." Limited exploration continues at the Golden Giant mine and in the surrounding area. The total cost of the property and its associated plant and equipment is $333.7 million, with a net book value of $88.4 million at December 31, 1999. Geology. The Golden Giant ore body consists of a main zone and a lower ------- zone. The main ore zone has an indicated strike length of 500 meters at an azimuth of 115 (degrees), a dip to the northeast of 60 (degrees) to 70 (degrees) and an average thickness of about 20 meters. The gold mineralization occurs along the contact between metasedimentary and felsic metavolcanic rocks. The ore zone is pyrite-rich and occasionally barite-rich. The main zone is tabular in nature and is characterized by its regularity and consistent gold values. The main zone is cut by several diabase dykes. The gold occurs primarily as finely- disseminated native gold with minor quantities of silver in pyritiferous schists. The lower zone lies 30 to 80 meters stratigraphically below the main zone. It is similar to the main zone, is narrower and less continuous, and for the most part is below the lowest current mining level. Mining, Processing and Environmental Compliance. The Golden Giant ----------------------------------------------- reserves are mined using underground mining methods. After being fed to an underground primary jaw crusher, ore is hoisted to the surface and conveyed to another crushing facility, a ball mill grinding circuit and finally a cyanide carbon-in-pulp circuit. The mine is subject to the environmental laws of Canada and the Province of Ontario. See "-- Environmental Matters -- Canada." Kori Kollo Battle Mountain owns 88% of Empresa Minera Inti Raymi S.A., a Bolivian company that owns and operates the Kori Kollo mine. The remaining 12% is owned by Zeland Mines, S.A. The Kori Kollo 9 mine, Inti Raymi's principal asset, is located on the altiplano, or high plain, near Oruro in western Bolivia on government mining concessions issued to Inti Raymi covering approximately 43.7 square miles. See "-- Property Interests -- Bolivia." Access to the mine site is by way of a 27-mile dirt and gravel road connected to a national highway. Production from the milling facility at the Kori Kollo mine commenced in February 1993. A portion of the cost of constructing the milling facility was project financed. The Company's attributable gold production decreased in 1999 to 256,000 ounces compared with 295,000 ounces in 1998 due to lower head grades. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The total cost of the property and its associated plant and equipment is $229.3 million, with a net book value of $51.1 million at December 31, 1999. Geology. The project is in the Andean tectonic belt of western Bolivia ------- between the Cordillera Occidental and the Cordillera Real, and within an area of lacustrine deposits on the altiplano. Deformed Paleozoic sediments and a Tertiary volcanic sequence underlie the lacustrine deposits. Locally these rocks form topographic highs, reflecting block-faulting. Irregular masses of biotite-hornblende dacite porphyry intrude the Paleozoic sediments. The deposit is contained within two varieties of dacite porphyry intrusions. Both varieties of dacite have been pervasively quartz-sericite altered throughout the deposit. The most important structural controls of mineralization are fault systems which trend in two directions and contain auriferous sulfide veins and veinlets. Some veins contain minor quantities of stibnite, tetrahedrite, galena, sphalerite and realgar. Mining, Processing and Environmental Compliance. Inti Raymi utilizes ----------------------------------------------- conventional open pit mining methods at Kori Kollo. Ore from the Kori Kollo mine is processed at the mill in a cyanide carbon-in-pulp circuit. The mill processes an average of approximately 21,000 tons of ore per day. The Kori Kollo operations are subject to Bolivian environmental laws and regulations. See "-- Environmental Matters -- Bolivia." Holloway The Holloway mine, in which Battle Mountain Canada has an 84.65% interest through a joint venture (the "Holloway Joint Venture"), is located approximately 35 miles east of Matheson in Ontario, Canada. The remaining 15.3% interest in the Holloway Joint Venture is held by Teddy Bear Valley Mines, Limited. The Holloway Joint Venture was formed in 1992, with Battle Mountain Canada as the operator. The three separate claims within the mine are subject to net profits royalty interests. As of December 31, 1999, Battle Mountain Canada also had a 5.3% equity interest in Teddy Bear Valley Mines, giving it an 85.5% combined direct and indirect interest in the mine. Construction of the Holloway mine began in 1994 and start-up commenced in the fourth quarter of 1996. Access to the Holloway mine is by way of a driveway-type exit off of a provincial highway. The Holloway mine produced approximately 91,000 attributable ounces of gold for 1999 compared with 80,000 attributable ounces in 1998. The increase in production by almost 14% in 1999 was due to higher ore grades and a 5% increase in the mining rate. The Company's joint venture share of the total cost of the property and its associated plant and equipment is $99.4 million, with a net book value of $71.0 million at December 31, 1999. Geology. The various claim blocks contain a gold deposit called the ------- Lightning Zone. The Lightning Zone gold deposit occurs at the contact between altered mafic volcanic rocks and underlying ultramafic rocks. The deposit occurs adjacent to the Destor-Porcupine Fault Zone which runs east-west from Timmins, Ontario to Destor, Quebec, through Harker and Holloway Townships. The Destor- Porcupine Fault Zone is a regional structural feature which is closely associated with many gold deposits in the area. The deposit strikes east and west for 2,600 feet and dips an average 50 (degrees) to 70 (degrees) to the south. 10 The deposit starts at 660 feet below the surface and extends to 2,600 feet below the surface. The deposit is open at depth. The average thickness of the deposit is 26 feet. The Lightning Zone exhibits variability in width, grade, dip and continuity, notably in the central part of the zone. Most commonly, gold values occur within massive grey silicified and albitised zones containing 5-10% disseminated fine pyrite. Mining, Processing and Environmental Compliance. Battle Mountain Canada ----------------------------------------------- conducts its operations at Holloway using underground mining methods, and the ore is custom milled at two nearby operations. The mine is subject to Canadian and provincial environmental laws. See "-- Environmental Matters -- Canada." Battle Mountain Complex The Battle Mountain Complex is owned by Battle Mountain and is located near the town of Battle Mountain in north central Nevada. The complex covers approximately 50 square miles and includes the Reona heap leach operations as well as the proposed Phoenix project (discussed below under "Development Projects"). Access to the Complex is by way of a two-mile paved road that connects to a state highway. Mining operations at the Reona heap leach facility ceased during the first quarter of 1998 and Reona was placed on care and maintenance effective January 1, 1999. Sales resulting from residual gold recoveries from the Reona mine are netted against production costs for financial statement purposes. Battle Mountain holds title to the Battle Mountain property in the form of fee land, unpatented lode, placer and millsite claims and leased claim acreage. See "-- Property Interests -- United States." The total cost of the property and its associated plant and equipment is $63.0 million, with a net book value of $52.1 million at December 31, 1999. Geology. The mines at the Battle Mountain Complex are located in the ------- Battle Mountain Range. The range consists of predominantly faulted and folded paleozoic rocks which have been locally intruded by plutonic masses. Marginal to and associated with the plutons, sulfide mineralization containing base and precious metals has formed locally. Economic concentrations of gold and silver are typically associated with carbonate sediments that have been converted to skarn through the process of contact metamorphism. Economic mineralization is also associated with faulting and shearing which formed contemporaneously with the intrusive events. Mill grade gold and silver mineralization has been mined from several areas within the district where strong sulfide mineralization was deposited. Natural weathering has altered areas of sulfide mineralization to form iron oxides and other secondary minerals that are generally favorable for heap leach recovery of precious metals. Mining, Processing and Environmental Compliance. Battle Mountain ----------------------------------------------- conducted its operations at the Battle Mountain Complex utilizing conventional open pit mining methods. Reona was placed on care and maintenance effective January 1, 1999. The Battle Mountain Complex is subject to federal and state environmental laws and regulations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Government Regulation" and "-- Environmental Matters -- United States -- Battle Mountain Complex." Vera/Nancy The Vera/Nancy mine at the Pajingo Complex is located on a 10.5 square mile state-issued mining lease, 44 miles southeast of Charters Towers and 120 miles southwest of Townsville in Queensland, Australia. Access to the Vera/Nancy mine is by way of a 13-mile paved road, which connects to a state highway. Production from the state-issued mining lease is subject to an annual royalty payable to the State of Queensland. See "-- Property Interests -- Australia" and "-- Taxes -- Australia." 11 The Pajingo mine at the Complex commenced production in 1987 and ceased in 1993, with the processing of stockpiled ore continuing into 1995. Open pit mining of the Cindy deposit at the Pajingo Complex began in 1993 and ceased in 1994. Underground mining of the Cindy deposit began in 1995 and processing ceased in October 1996 upon the depletion of reserves. The Company owns a 50% interest in the Vera/Nancy mine and the Pajingo Complex. Normandy Mining Limited, an Australian gold mining company, owns the other 50% interest and is the operator of the Vera/Nancy mine. Full production from the underground Vera/Nancy ore body commenced during the third quarter of 1997, and additional exploration and final reserve definition are being carried out as underground mining progresses. Milling facilities were expanded in 1999 and production nearly doubled by the end of the fourth quarter in 1999. The Company's attributable production in 1999 was approximately 67,000 ounces, as compared with 47,000 ounces in 1998. The Company's joint venture interest share of the total cost of the property and its associated plant and equipment is $36.4 million, with a net book value of $31.4 million at December 31, 1999. Geology. The Vera/Nancy ore body is located in rocks of paleozoic age in ------- the Drummond Basin. The host rocks are volcanic pyroclastic and lava rocks intermixed with sandstone and siltstone sedimentary rocks. The gold ores occur as quartz veins emplaced in steeply dipping fractures in the host rocks. Mining, Processing and Environmental Compliance. Mining of the ----------------------------------------------- Vera/Nancy ore body utilizes underground methods. Ore from the Vera/Nancy deposit is transported by truck over a 1 mile road and processed at the Pajingo mill in a carbon-in-pulp cyanide leach circuit. The Pajingo Complex is subject to environmental laws and regulations including reclamation requirements under Queensland legislation. See "-- Environmental Matters -- Australia." Reclamation Activities at Non-Operating Mines - --------------------------------------------- San Luis The San Luis property is located approximately three miles northeast of San Luis in southern Colorado. The mine was closed in November 1996, and all chemicals and chemical waste products have been removed from the site. Most required reclamation work has been completed. In 1999, the Colorado Department of Public Health and the Environment issued a Notice of Violation and Cease and Desist Order to Battle Mountain, alleging discharges at the San Luis mine to waters not permitted under the Colorado Water Quality Control Act. See "-- Environmental Matters --United States--San Luis." Battle Mountain accrued $9.5 million in the third quarter of 1999 to address long-term water-quality issues at the San Luis property. It is reasonably possible that this estimate may change in future reporting periods as further information becomes available. The total cost of the property and its associated plant and equipment was $55.4 million, with a net book value of $2.1 million at December 31, 1999. Mining, Processing and Environmental Compliance. Mining operations at ----------------------------------------------- San Luis were conducted utilizing conventional open pit mining methods. Ore was processed at a mill in a carbon-in-pulp cyanide leach circuit. Closure and reclamation activities at San Luis are subject to federal and state environmental laws and regulations. See "-- Environmental Matters -- United States -- San Luis." New World Battle Mountain Canada owns 60% of the outstanding stock of Crown Butte Resources Ltd., a Canadian public company listed on The Toronto Stock Exchange. Crown Butte Resources, through a wholly-owned subsidiary (together with Crown Butte Resources "Crown"), owned the New World project in Montana. In 1998, Crown disposed of its interest in the New World project in a series of 12 transactions in accordance with the terms of a Consent Decree and Settlement Agreement. Crown obtained releases from the parties to the Consent Decree and Settlement Agreement with respect to further environmental liabilities related to the New World property and Crown was paid $65 million. Of this amount, $22.5 million was surrendered for the completion of reclamation and restoration programs in the New World District. In 1999, the shareholders of Crown Butte Resources voted in favor of the voluntary liquidation and dissolution of the corporation and an initial distribution was made. Pursuant to such distribution, Battle Mountain Canada received $16.5 million. Crown Butte Resources anticipates that a further small distribution will follow upon the winding up of the Company. Development Projects - -------------------- Battle Mountain Complex-Phoenix At the Battle Mountain Complex in Nevada, work on the Phoenix project advanced significantly in 1999 resulting in improved reserves and economics. Additional reserve delineation work conducted by the Company at Phoenix during 1999 resulted in an increase in estimated gold reserves of approximately 2,165,000 contained ounces. As a result, total estimated proven and probable Phoenix gold reserves now stand at 5,680,000 contained ounces. Additional drilling is planned in 2000 in an effort to further expand the reserves. The Company is preparing a feasibility study and currently expects future capital costs, excluding capitalized interest, to be in the range of $160 million to $170 million. Approximately $42.7 million had been spent through December 31, 1999. The Phoenix project reserves are included in the data for the Battle Mountain Complex. See "Operations, Costs and Reserve Data for Gold Mines" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." We are proceeding with permitting of the Phoenix project. It is anticipated that a draft Environmental Impact Statement will be released in mid- 2000. It is difficult to predict the timing of completion of permitting and potential start-up dates for the mine; however, the earliest feasible start-up date for Phoenix currently appears to be in the year 2002. See "-- Environmental Matters -- United States -- Battle Mountain Complex." The project is located in north-central Nevada on lands consisting of patented lands and unpatented claims. See "Property Interests-- United States." Llallagua Battle Mountain conducted small scale benchmark tests in 1998 of a bio- oxidation heap leach process at the Llallagua sulfide resource near our 88%- owned Kori Kollo mine in Bolivia that consistently returned recoveries exceeding 70%. As a result, the Company initiated in the first quarter of 1999 a year- long 200,000 ton pilot plant test. The test is designed to determine the feasibility and economics of a full operation. Crown Jewel The Company has been working toward permitting the Crown Jewel project near Oroville, Washington for almost ten years. In January 2000, the Washington Pollution Control Hearings Board reversed prior favorable decisions by the Department of Ecology on water rights and 401 Certification. The water rights and 401 Certification are necessary for the project as proposed. The Company is currently evaluating its options with respect to the Crown Jewel project. The Crown Jewel Joint Venture Agreement grants Battle Mountain an option to earn from Crown Resources Corporation a 54% joint venture interest in the Crown Jewel project by constructing and equipping at its sole cost a mine and mill having a capacity of at least 3,000 tons per day and achieving commercial production therefrom. The Joint Venture provides that at such time as the joint venture may produce 1.6 million ounces of gold, our joint venture interest would be reduced to 51%. In 1998, the Company wrote off $40.3 million of the amount capitalized to reflect the fair value of the asset 13 based upon the then current gold price environment and the cumulative cost of an unexpectedly long permitting process. At the end of 1999, the Company wrote off the remaining $35.9 million due to uncertainties surrounding the project. See "-- Environmental Matters --United States." "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Certain permits have been obtained for the Crown Jewel project. However, additional permits and approvals would be required to commence operations. Furthermore, as previously set forth, the Washington Pollution Control Hearings Board has reversed the Reports of Examination for the water rights and vacated the 401 Certification which had previously been issued by the Washington Department of Ecology and are necessary for the project as proposed. See "-- Environmental Matters --United States." Additionally, a number of appeals with respect to the project have been filed by certain individuals and groups. See "--Environmental Matters --United States." There can be no assurance as to favorable outcome or timing with respect to the permits, required approvals or appeals and the Company is currently evaluating its options with respect to the project. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for a discussion of a $35.9 million non-cash write-off of the Crown Jewel assets. The project is located in northeastern Washington State on lands consisting of patented lands, unpatented mining claims, unpatented millsite claims and state lands. See "-- Property Interests -- United States." Federal Public Law 106-31, enacted on May 21, 1999, mandated the reinstatement of the Record of Decision for the Crown Jewel project and the approval of the Company's Plan of Operations. Shortly after the enactment of the law, the Departments of the Interior and Agriculture reinstated the project's Record of Decision, and the United States Forest Service and Bureau of Land Management approved the Company's Plan of Operations. The approval of the Plan of Operations has been appealed by project opponents. Niugini Mining-Lihir Gold Limited - --------------------------------- Battle Mountain Canada owned approximately 50.45% of Niugini Mining Limited, hereinafter referred to as "Niugini Mining", a Papua New Guinea company publicly traded on the Australian Stock Exchange. Niugini Mining in turn owned and operated the San Cristobal mine where gold continued to be recovered as a result of residual heap leaching and the Red Dome mine where reclamation activities were nearing completion. Niugini Mining also owned a 14.91% interest in Lihir Gold Limited, hereinafter referred to as "Lihir", which owns the Lihir mine in Papua New Guinea. The Lihir mine is located on the east coast of Lihir Island, 375 miles northeast of mainland Papua New Guinea. See "-- Certain Factors Affecting Reserves, Foreign Investments and Properties." At January 1, 1999 Battle Mountain had made the decision to dispose of its investment in Niugini Mining. On October 6, 1999 Niugini Mining and Lihir announced a plan to merge the two companies by way of a scheme of arrangement in accordance with the laws of Papua New Guinea. In anticipation of the completion of the transaction with Lihir, Niugini Mining sold its interests in the San Cristobal mine and the Red Dome mine. The merger with Lihir Gold was effective February 2, 2000, the result of which is that Battle Mountain Canada now owns a direct 9.74% equity interest in Lihir. Battle Mountain Canada has agreed not to sell its shares in Lihir Gold on market for a period of three months from February 2, 2000. Asset write-downs in 1999 related to the decrease in the value of Niugini Mining's investment in Lihir totaled $76.2 million ($46.8 million net of minority interest). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Exploration - ----------- 14 The Company, through branches, subsidiaries and joint ventures, currently conducts exploration and evaluation activities in search of precious metals in the United States, Canada, Mexico, Argentina, Bolivia, Peru and Australia. Our primary objective is to develop high-quality ore deposits with low operating costs per ounce. We seek to do this through exploration for extensions of ore zones at operating properties, exploration in areas proximate to other gold production and through frontier exploration. For additional information concerning the Company's exploration expenditures, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Certain Factors Affecting Reserves, Foreign Investments and Properties." Sales and Hedging Activities - ---------------------------- Sales. The Company primarily produces dore, an unrefined alloy of gold, silver and other impurities, at its mines, which it sells under sales and/or refining agreements. Three buyers of production from the Company each accounted for more than 10% of the Company's total 1999 sales. Substantially all of Battle Mountain's current operating mines contributed to sales to those customers. Because of the availability of several alternative buyers, the Company believes that it would suffer no material adverse effect should it cease to market its gold and silver through its present buyers. Hedging. The results of the Company's operations are affected significantly by the market price of gold. Gold prices are influenced by numerous factors over which the Company has no control, including expectations with respect to the rate of inflation, the relative strength of the United States dollar, interest rates, global or regional political or economic crises, demand for gold jewelry and industrial products, and sales by holders and producers of gold in response to these factors. During the third quarter of 1999, Battle Mountain modified its hedging policy. The purpose of this revised policy is to reduce exposure to fluctuating gold prices. Battle Mountain's strategy is to balance the assurance of cash flows with exposure to changes in the gold price. Battle Mountain's hedging policy limits the amount of hedges to 50% of the next five years planned production from operating mines. Prior to 1999 the Company did not engage in any significant gold hedging activities. The Company does not engage in trading hedging instruments for speculative purposes. At year-end 1999, the Company had hedged 450,000 ounces of gold, which is less than 15% of the next four years production and 5% of gold reserves. These hedges were at zero out of pocket cost and had no margin requirements. In 1999, 1998 and 1997 no contracts were either physically delivered into or financially settled as prior to the third quarter of 1999, the Company had no significant hedging activities. Gold contracts outstanding at December 31, 1999 were as follows: Total or 2000 2001 2002 2003 Average ---- ---- ---- ---- ------- Written call options: Ounces 87,500 87,500 87,500 87,500 350,000 Average price per ounce $349 $349 $349 $349 $349 Purchased put options: Ounces 87,500 87,500 87,500 87,500 350,000 Average price per ounce $293 $293 $293 $293 $293 Flat Forwards: Ounces 25,000 25,000 25,000 25,000 100,000 Average price per ounce $312 $312 $312 $312 $312 Forwards: Ounces 198,000 - - - 198,000 Average price per ounce $279 - - - $279 15 Given higher, lower or current market prices, the Company will realize on average $312 per ounce on its flat forward contracts. Should the Company exercise all the puts it will realize on average $293 per ounce. If the counterparties exercise all the calls, the Company will sell the gold for $349. The estimated fair values of the purchased put options and written call options outstanding at December 31, 1999, were $3.2 million and $(3.5) million, respectively. The written call options and the purchased put options are two components of an integrated contract. The estimated fair value of the flat forwards outstanding at December 31, 1999 was $(0.5) million. The estimated fair value of the forwards outstanding at December 31, 1999 was $(2.8) million. The following table reflects the estimated fair market value of the existing contracts at December 31, 1999 given assumed changes in the spot selling price: Purchased Puts Written Calls Flat Forwards Forwards -------------- ------------- ------------- -------- Spot Price plus 10% $1.6 million $(7.2) million $(3.2) million $(8.6) million Spot Price less 10% $6.7 million $(1.7) million $ 1.8 million $ 2.3 million The forwards are part of the Company's overall financial planning.These contracts cover gold that was on deposit at a refinery or leased to third parties. All the contracts mature by March 31, 2000. Battle Mountain, at times, is a party to lease transactions and will sell the leased gold into the spot market. Whenever a spot sale is made, a forward purchase contract is entered into to assure delivery of the gold at the end of the lease. Battle Mountain Canada had outstanding lease contracts with Battle Mountain for 108,000 ounces of gold at December 31, 1999. The counterparties to hedged agreements may expose Battle Mountain to certain credit-related losses in the event of nonperformance, generally by the amount by which the contract price exceeds the spot price of a commodity. Attempts to minimize credit exposure are made by limiting counterparties to major financial institutions that meet specific credit rating standards. Collateral is not required from counterparties. Management believes that the risk of incurring significant credit-related losses is remote. Lihir Lihir may and has sought to mitigate gold price risk, in part, through hedging strategies. The policy of Lihir is to seek where appropriate to protect operating costs and debt servicing through hedging activities. This may include periodic purchases or sales of put or call options, spot deferred sales, and forward sales covering a portion of its gold production at fixed future prices. Lihir intends to regularly evaluate the portion of its production that will be hedged. Lihir does not engage in speculative transactions and does not intend to trade hedged positions. In order to prevent a fall in gold prices from affecting Lihir's ability to make loan payments, the Loan Agreement requires that Lihir hedge a portion of its anticipated gold production. It is a condition of borrowings under the Loan Agreement thereunder that Lihir has entered into hedging transactions which ensure that for each of the first 20 fiscal quarters of production it will receive a specified aggregate minimum dollar amount of revenues from sales of gold during each quarter from a specified maximum amount of the gold produced during the quarter. The hedging program required under the terms of the loan agreement was put in place during 1996, primarily in the form of put options. It also included forward sales with associated call options. The total cost of this hedging program was $20.5 million, which was paid in 1996. Lihir may engage in further hedging transactions in addition to those required under the Loan Agreement up to a combined maximum of 100% of projected production for each year. For this purpose it is assumed that the spot deferred forwards will be rolled forward for delivery in the following year with the agreement of the counterparty to the extent necessary to meet this objective. The intended effect of hedging transactions would be to lock in a minimum sales price at the time of the transactions, thereby reducing the impact on Lihir of a future fall in gold prices. However, no assurances can be given as to whether, when or at what prices or cost Lihir will be able to enter into hedging transactions. It should also be noted that the effect of 16 some hedging transactions will be to eliminate or limit to some extent revenues Lihir would otherwise receive as a result of rises in the price of gold. A forward sale, for example, would mean Lihir would not realize any additional revenues above the gold price specified in the contract. Other hedging techniques can be used to enable Lihir to share in some portion of rises in gold prices. Lihir's profitability could be adversely affected if for any reason its production of gold is unexpectedly interrupted and as a result it is unable to produce sufficient gold to cover any forward sales commitments it may have made. At year end 1999 Lihir had hedged 2,285,000 ounces of gold, which represents 81% of the next five years scheduled production and 20% of reserves. The Company does not enter into hedging transactions that have provisions for margin calls. The following tables summarize the hedging program as at December 31, 1999: Beyond Total or 2000 2001 2002 2003 2004 2004 Average ---- ---- ---- ---- ---- ---- ------- Written Call Options: Ounces 128,738 51,375 50,137 - 40,000 160,000 430,250 Average price per ounce $390 $516 $530 - $385 $385 $419 Purchased Put Options: Ounces 261,213 154,125 150,413 - 40,000 160,000 765,751 Average price per ounce $408 $466 $480 - $335 $335 $415 Purchased Call Options: Ounces 107,478 102,755 100,273 - - - 310,506 Average price per ounce $521 $535 $549 - - - $535 Fixed Rate Forwards: Ounces 53,740 51,380 50,136 - - - 155,256 Average price per ounce $453 $466 $480 - - - $466 Spot Deferred Forwards: Ounces 1,364,326 - - - - - 1,364,326 Average price per ounce $287 - - - - - $287 For put options bought by Lihir, the option would be exercised when the prevailing spot price at the exercise date is below the put option strike price. For call options bought by Lihir, the option would be exercised and the resulting ounces sold at the prevailing spot price only if the spot price were to be greater than the call strike price. For call options sold by Lihir, Lihir will be obliged to deliver gold at the strike price if required to do so by the counterparty. This is only likely to occur if the spot price is greater than the call strike price. In the case of Fixed Rate Forwards, Lihir is obliged to sell the relevant number of ounces at the specified strike price on the value date, and the Revenue shown above is that which will actually be received. For spot deferred forwards, the Company has the option to roll the contract forward to a later delivery, assuming the counterparty allows it, at the price on the original maturity date of the contract plus future contango with no additional cash outlay. Since the end of 1999 approximately 760,000 ounces of spot deferred sales have been restructured into forward contracts. The profile at the end of 1999, revised to reflect this change was: Beyond Total or 2000 2001 2002 2003 2004 2004 Average ---- ---- ---- ---- ---- ------ -------- Fixed Rate Forwards: Ounces 243,740 351,380 329,611 - - - 924,731 Average price per ounce $321 $320 $343 - - - $328 Spot Deferred Forwards: 17 Ounces 594,850 - - - - - 594,850 Average price per ounce $297 - - - - - $ 297 The written call options are components of integrated contracts in combination with purchased call options and/or purchased put options. The estimated fair value of the hedge program at December 31, 1999 was $85.9 million. The following table reflects the estimated fair market value of the existing contracts at December 31, 1999 given assumed changes in the spot selling price: Written Purchased Purchased Fixed Rate Spot Total Calls Puts Calls Forwards Deferreds ----- Spot price plus 10% $(10.1)million $58 million $.1 million $25.3 million $(49.7)million $23.6 million Spot price $(5.9) million $72.5 million $0 $31.4 million $(11) million $87 million Spot price minus 10% $(3.1) million $88 million $0 $37.4 million $25.8 million $148.1 million Property Interests - ------------------ United States Mineral interests in the United States are owned by federal and state governments and private parties. In addition to the acquisition of mineral rights held by states or private parties, the Company also may acquire rights to explore for and mine minerals on federally owned lands that are open to location. This acquisition is accomplished through the location of unpatented mining claims upon unappropriated federal land pursuant to procedures established by the General Mining Law of 1872, the Federal Land Policy and Management Act of 1976 and various state laws (or the acquisition of previously located mining claims from a private party). These laws generally provide that a citizen of the United States, including a corporation, may acquire a possessory right to explore for and mine valuable mineral deposits discovered upon unappropriated federal lands, provided that such lands have not been withdrawn from mineral location. These laws also provide that proprietors of valid mining claims may obtain possessory rights to nonwithdrawn, unappropriated nonmineral federal lands for mining or milling purposes through the location of unpatented millsite claims. Significant portions of the proposed Crown Jewel and Phoenix mines and related facilities are located upon unpatented claims. The location of a valid unpatented mining claim on federal lands requires the discovery of valuable minerals and compliance with certain procedures, while the location of a valid unpatented millsite claim requires use or occupancy and compliance with certain procedures. Failure to follow the required procedures may render the mining or millsite claim void. Upon compliance with the statutes and regulations for the location of a mining claim, the locator obtains a possessory property interest and the right to explore, develop and produce minerals from the claim. Upon compliance with the statutes and regulations for the location of a millsite claim, the locator obtains a possessory property interest and the right to use the millsite for mining and milling purposes. Such property rights can be freely transferred and are protected against appropriation by the government without just compensation. Historically, the claim locator could also make application to obtain a patent (or deed) conveying fee title to his claim from the federal government upon payment of fees and compliance with certain additional procedures. However, a legislative moratorium currently precludes the acceptance of new patent applications. Under some circumstances, it may be possible to acquire the right to use lands owned by the federal government for mining operations by way of special use permits, leases, land exchanges or other means. The interests represented by unpatented mining claims and millsite claims possess certain unique risks not associated with other types of property interests. For example, in order to maintain each unpatented claim, the claimant must pay fees to the United States Department of the Interior. Failure to make the required payments constitutes abandonment of the claim. Further, because claims are often located with less than sophisticated surveying techniques, difficulty may arise in determining the validity 18 and ownership of specific claims. Moreover, under applicable regulations and court decisions, in order for an unpatented mining claim to be valid against a governmental challenge, the claimant must be able to prove that the minerals on which the claim is based can be mined at a profit. Thus, it is conceivable that, during times of declining metal prices, claims that were valid when located could be later invalidated by the federal government. The validity of unpatented mining and millsite claims is often uncertain and may be contested by the federal government and third parties. Although the Company attempts to acquire satisfactory title to its undeveloped properties, the Company, in accordance with mining industry practice, does not generally obtain title opinions or title insurance, if at all, until a decision is made to develop a property, and some title, particularly titles to undeveloped properties, may be defective. In November of 1997, the Solicitor of the Department of the Interior issued an opinion, which was concurred with by the Secretary of the Interior, which stated, among other things, that the Bureau of Land Management should not approve plans of operations which rely on a greater number of millsite claims than the number of mining claims being developed unless the use of the additional lands is obtained through means other than millsite claims. Federal Public Law 106-31, enacted on May 21, 1999, mandated the reinstatement of the Record of Decision for the Crown Jewel project and the approval of the project's Plan of Operations, which had respectively been revoked and denied based upon the Solicitor's Opinion. Shortly after the enactment of the law, the Departments of the Interior and Agriculture reinstated the project's Record of Decision, and the United States Forest Service and Bureau of Land Management approved our Plan of Operations. The approval of the Plan of Operations has been appealed by project opponents. Federal Public Law 106-113, enacted on November 29, 1999 exempts some operations from the limitation alleged in the Solicitor's Opinion for a period of two years. It is possible that the General Mining Law of 1872, under which we hold claims on federal lands, could be legislatively amended. Among other things, such legislation could impose a royalty or tax. Valid existing claims, or claims with respect to which a certain portion of the patenting process has been completed, might be exempted from such a royalty or tax. The extent to which existing law might change is not known. The Company cannot predict what impact any possible amendment to the General Mining Laws will have on its U.S. activities. However, the passage of legislation that can be reasonably anticipated is not expected to render uneconomic any of the Company's existing operating mines or development projects, assuming currently projected gold prices. A portion of the Phoenix project reserves and approximately 80% of the Crown Jewel mineralization are on federal lands. A patent covering the unpatented portion of the Crown Jewel mineralization was applied for in 1992 and a First Half-Mineral Entry Final Certificate was received in 1995. Mineral surveys and official plats have been completed for certain of the claims constituting the unpatented portions of the Phoenix reserves, but no patent applications can be made unless the legislative moratorium on the acceptance of new patent applications is lifted. Canada Certain of the Company's mineral rights are held on provincial "Crown Lands" (i.e. public lands) in Canada. Operations in Canada are currently being conducted in the Province of Ontario. In Ontario, mineral rights on public land are initially reserved to the Crown. An individual or company who is the holder of a prospector's license issued by the Crown may stake a mining claim on public land to the exclusion of third parties provided that the individual has complied with applicable requirements of the Mining Act (Ontario). Upon performance of the prescribed assessment work, the holder of the claim may make application for a lease from the Crown of the mining and/or surface rights of the lands comprising the area staked. Each lease is granted for an initial term of 21 years and the lessee, upon application to the appropriate Ministry and the payment of the prescribed fees, may apply for renewal of the lease for a further term of 21 years. Such renewal is subject to the provision of evidence of mineral production occurring continuously on the lands subject to such lease for more than one year since issuance or last renewal of such lease, or the lessee having demonstrated a reasonable effort to bring the lands into production. 19 Under the provisions of the predecessor legislation to the current Mining Act (Ontario) (i.e. prior to June 1991), a holder of a Crown lease was entitled to a fee simple patent of the lands or mining rights subject to such lease, upon producing satisfactory evidence to the Crown that substantial quantities of minerals had been produced from such lands continuously for more than one year. The current Mining Act (Ontario) eliminated such rights to a fee simple patent; however, fee simple patents in good standing issued pursuant to an application made under the provisions of the predecessor legislation remain in full force and effect. The rental, lease or concession fees payable to the Crown are nominal and the holder of a mining claim, mining lease or mining concession may obtain a lease of the surface rights of the lands subject thereto from the Crown if the lands are public lands and, subject to payment of adequate compensation to the surface rights holder, rights of access to the surface rights of the lands in question for the purpose of prospecting, developing and mining if the surface rights are on private lands. The use of the surface rights is limited to purposes of the mining industry. In some instances, for example in option agreements, it is common that mineral rights are held by third parties and, by agreement, a person may acquire all or a percentage interest therein upon performing work on the property or by making payments to the third party, or both, and it is common for such agreements to provide for a residual royalty interest for the third party. Bolivia Mineral interests in Bolivia are under the domain of the federal government. Concessions for exploration and mining are issued pursuant to the Bolivian Mining Code (as revised by law in the first half of 1997). Inti Raymi owns a group of concessions which includes the Kori Kollo mine and operating facilities. A concession constitutes a right other than that of ownership of the land where the concession is located. The payment of patents (fees) is now the essential requirement to keep concessions in good standing. A valid concession gives the concessionaire the exclusive right to explore for and exploit minerals subject to the concession from the area covered by the concession. Australia The High Court of Australia recognized "native title" in relation to land for the first time in 1992 in Mabo v. Queensland. Native title is the name for ------------------ the bundle of rights held by an Aboriginal group to use land in accordance with their traditional laws and customs for traditional purposes, such as subsistence or ceremonial worship. Native title will survive in respect of portions of land where the traditional landholders have maintained an ongoing connection with this land, and there has been no inconsistent grant of tenure made by the Government. Native title may co-exist with other titles such as mining leases or pastoral leases; however, where the rights of the native titleholders and the lessee cannot practically co-exist, native title is extinguished to the extent of the inconsistency. Federal and state governments have formulated a complementary legislative response to the recognition of native title. The Federal Government's Native Title Act 1993 (as amended): (1) recognizes ---------------- native title rights and sets down some basic principles in relation to native title in Australia; (2) provides for the validation of titles that may be invalid because of the existence of native title, and confirms the extinguishment of native title in some circumstances; (3) provides a regime in which native title rights are protected and conditions imposed on future acts affecting native title land and waters, and grants procedural and compensation rights in such circumstances; and (4) provides a process by which claims for native title and compensation can be determined. The Company's exploration and mining property in Australia is located in Queensland. Much of this land is Crown land held under pastoral leases by third parties. The Company holds its interest in the lands under mining leases, authorities to prospect and exploration licenses. The Vera/Nancy mine and 20 associated operating facilities are on lands held pursuant to mining leases in the State of Queensland. The Company believes that the existence of native title will not have a materially adverse effect on the Company's Vera/Nancy mine or on the Company's exploration properties in Australia. However, the Native ------ Title Act 1993 will mean that the Company may have to negotiate with native - --------- titleholders (including with respect to compensation) prior to the grant of future mining titles. Environmental Matters - --------------------- Set forth below is a summary description of various environmental matters affecting the Company, including various domestic and foreign, national, state and local legislation and regulations governing, among other things, mineral exploration, development, production and refining. Environmental laws and regulations in most countries allow the imposition of civil and criminal penalties for violations. Except as discussed below, the Company believes it is in substantial compliance with all material aspects of such applicable laws and regulations and the Company is not aware of any material environmental constraint affecting its existing mines or development properties that would preclude the economic development or operation of any of the Company's mines or projects. United States General. The Company is required to obtain a full range of environmental ------- permits and approvals to develop properties and to maintain such permits and approvals for ongoing operations, reclamation, closure, and post-closure activities. There can be no assurance as to whether or when all requisite permits and approvals may be obtained or maintained for any given project. Existing and possible future legislation and regulations, or changes in interpretation or enforcement thereof, could cause additional expense, capital expenditures, restrictions and delays in the development, operation and closure of the Company's properties, the extent and consequences of which cannot be predicted by management of the Company. The Company expects environmental constraints to become increasingly strict and that the cost of compliance will continue to grow. In the context of environmental permitting, the Company must comply with standards and regulations that may entail greater or lesser costs and delays depending on the nature of the activity to be permitted and how stringently the regulations are implemented by the permitting authority. It is possible that the costs and delays associated with either obtaining required permits and approvals or compliance with applicable standards and regulations could become such that the Company would not proceed with the development or operation of a mine. Such outcomes could have material adverse financial effects on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Various laws require that financial assurances be in place for certain environmental and reclamation obligations and potential liabilities. Battle Mountain Gold has in place certain environmental and reclamation financial assurances and will be required to put additional financial assurances in place in the future. There can be no guarantee that the Company will be able to maintain and/or put in place the necessary assurances. This could cause the Company to not proceed with the development or operation of a mine and could have material adverse financial effects on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Each of the Company's mining properties has many environmental control facilities. The principal environmental control facilities at the Company's heap leaching operations include engineered heap leach facilities to contain process fluids. The principal environmental control facilities at the Company's past milling operations consisted of tailings treatment circuits that process plant effluent and tailings facilities designed to hold the processed tailings. These facilities were constructed as an integral part of processing facilities. Environmental controls also exist for potential air and water pollutants, spill containment and the storage and disposal of hazardous and solid wastes. The Company will also incur ongoing closure and reclamation expenditures as reserves at existing mines are exhausted and the facilities are closed. The Company is making accruals for estimated reclamation expenditures over the lives of the respective mines. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 14, "Commitments and Contingencies." 21 Laws and Regulations. We are subject to federal, state and local laws and -------------------- regulations relating to the protection of the environment. At the federal level, these laws include, among others, the Resource Conservation and Recovery Act ("RCRA"), the Clean Water Act ("CWA"), the Clean Air Act ("CAA"), the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the National Environmental Policy Act of 1969 ("NEPA"), the Water Pollution Control Act ("WPCA"), the Toxic Substance Control Act ("TSCA"), and the Endangered Species Act of 1973 ("ESA"). In the various states in which the Company operates or has projects, laws and regulations have been promulgated that are at least as stringent as RCRA, CWA and CAA and the regulations promulgated thereunder. Such states have assumed authority from the Environmental Protection Agency ("EPA") for permitting and enforcement of these federal laws and regulations. Should the EPA promulgate more stringent regulations, the states must conform their regulations or risk having permitting and enforcement authority revert to the EPA. In addition to the requirements of the WPCA, the various states in which the Company operates also have groundwater protection statutes and regulatory programs that typically require site discharge permits, spill notification and corrective action measures, and impose civil and criminal penalties for violations. Changes in the aforementioned federal and state environmental laws and regulations, the enactment or promulgation of new laws and regulations or the imposition of new requirements pursuant to such laws or regulations could require additional capital expenditures, increases in operating costs and delays or interruptions of operations. Changes could render certain mining operations uneconomical and could prevent or delay the development of new operations. Battle Mountain Complex. Battle Mountain has been issued two water ----------------------- pollution control permits for the Battle Mountain Complex project facilities by the Nevada Division of Environmental Protection. One permit covers the activities of the Surprise Heap Leach operations and the second covers the remaining facilities at the Complex. The second permit was amended in 1994 to include the Reona operations. The Battle Mountain Complex also has been included in a stormwater discharge general permit issued by the State of Nevada. In March 1993, Battle Mountain filed an application for a reclamation permit covering the Battle Mountain Complex area. This application for the entire Complex is under review, but reclamation permits have been issued for specific projects and activities at the Complex. Because of this, much of the original application has been superseded, and at the request of the state agency, Battle Mountain is preparing a revised reclamation plan to cover the entire Complex, which the Company anticipates it will submit in the first quarter of 2000. The Company has investigated the infiltration of liquids from the tailings facility at the Battle Mountain Complex into the groundwater. This facility is of an earthen design and construction, which was in keeping with accepted engineering and environmental control practices at the time it was constructed. Pursuant to the state-issued water pollution control permit, the Company has conducted a groundwater investigation regarding the tailings area and based upon the investigation has prepared and submitted an evaluation of mitigation alternatives for the groundwater. The Company currently expects to utilize the affected groundwater in connection with its proposed Phoenix operations. In the interim, the Company has implemented a state approved groundwater pump-back system. Also, pursuant to work plans developed under the state issued water pollution control permit covering the site, the Company has investigated certain low quality stormwater run-off in adjacent highly mineralized areas, and based upon these investigations, the Company designed and obtained state approvals to install a system to collect and use, evaporate or treat this water. Residual localized contamination in the groundwater in these areas will be addressed pursuant to groundwater site characterization and closure activities discussed immediately below. We are currently conducting further site characterization studies for the Battle Mountain Complex area and are communicating with the Nevada Division of Environmental Protection to determine the ultimate reclamation and closure requirements. Site characterization results or the 22 imposition by regulatory authorities of unanticipated reclamation and closure standards could substantially increase future reclamation and closure requirements and expenditures. Battle Mountain is proceeding with permitting of the Phoenix project. It is anticipated that a draft Environmental Impact Statement will be completed by mid-2000. The variables inherent in the permitting process and outside of the Company's control make it difficult to determine the timing for completion of permitting and commencement of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Government Regulation." We have in place certain environmental and reclamation financial assurances related to the Battle Mountain Complex and it is anticipated that additional financial assurances will be required in the future. There can be no guarantee that we will be able to maintain and/or put in place the necessary assurances. See "Management's Discussion and Analysis of Financial Condition and results of Operations-Liquidity and Capital Resources." Crown Jewel Project. The State of Washington, site of the proposed Crown ------------------- Jewel mine, has a comprehensive regulatory regime controlling the development and operation of new mining operations. Numerous environmental permits and approvals must be obtained from federal, state and local agencies before a mine can be put into operation in Washington. Certain permits have been obtained for the Crown Jewel project. However, additional permits and approvals would be required to commence operations. Furthermore, the Washington Pollution Control Hearings Board has reversed the Reports of Examination for the water rights and vacated the 401 Certification which had previously been issued by the Washington Department of Ecology and are necessary for the project as proposed. Additionally, a number of appeals with respect to the project have been filed by certain individuals and groups. Battle Mountain has in place certain environmental and reclamation financial assurances related to the Crown Jewel project and it is anticipated that additional financial assurances would be required to commence construction. There can be no guarantee that the Company would be able to maintain and/or put in place the necessary assurances. There can be no assurance of favorable outcome or timing with respect to permits, required approvals or appeals and the Company is currently evaluating its options with respect to the project. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" for a discussion of a $35.9 million non-cash write-off of the Crown Jewel assets. San Luis. The San Luis mine ceased operations in November 1996, and --------- subsequent site activities have addressed closure and reclamation requirements. The mine and associated gold production facilities were decommissioned and all chemicals and chemical waste products were removed from the site and managed in accordance with applicable regulations. A substantial portion of the reclamation earth work has been completed including partial backfilling of the west pit, regrading and topsoiling of waste rock facilities and a portion of the tailings disposal area. Revegetation work has been undertaken on all regraded and topsoiled areas. The remaining reclamation work will include the mill area, one waste rock disposal facility and certain on-site roadways. In addition, the remainder of the tailings area will require regrading, topsoiling and revegetation along with the construction of the final drainage features and spillway. In the course of implementing the approved reclamation plan, the Company voluntarily partially backfilled the San Luis West Pit. As water percolates through the oxidized backfilled rock, the water contacts and solubilizes certain naturally occurring oxidation by-products which have been identified at elevated levels at monitoring sites located within and downgradient of the West Pit. An Independent Ecological Risk Assessment has been conducted which indicates that the elevated levels of these constituents do not pose a risk to human health or the environment. In 1998, we provided notice to the requisite regulatory agencies and undertook implementation of a response plan triggered by the identification of elevated levels of naturally occurring constituents detected in a monitoring well located downgradient from the West Pit. The response plan involves the investigation and characterization of the geohydrology and geochemistry pertinent to the immediate area and the subsequent development of a long-term response strategy to address the elevated constituent levels. The Colorado Mined Land Reclamation Board held a formal public hearing to consider the 23 matter on January 26, 1999, and determined that no violation had occurred and ordered the Company to implement the response plan. The Company has made all of the submittals required by the Board, has implemented those measures which have been approved, and is awaiting final approval for permanent response measures set forth in a technical revision to the facility's permit. By letter dated August 10, 1999, the United States Environmental Protection Agency (the "EPA") advised the Colorado Department of Public Health and Environment and the Company that the EPA believed that discharges of pollutants without a permit have occurred near the West Pit in violation of the Clean Water Act. The letter notified the Company and the Department of Public Health and the Environment (the "Department of Public Health") that the EPA would take direct action if the Department of Public Health failed to take action and secure appropriate injunctive relief and penalty. On August 20, 1999, the Department of Public Health and Environment issued a Notice of Violation and Cease and Desist Order to the Company, alleging discharges to waters not permitted under the Colorado Water Quality Control Act. We have filed an Answer to the Notice denying that such a violation has occurred. The Notice requires the Company to take a number of steps that the Department of Public Health and Environment asserts to be necessary to attain compliance with the Water Quality Control Act. These steps include the submittal of a permit application, a monitoring plan and a response plan. We have made all submittals required by the Notice and have commenced extensive response activities. On October 8, 1999, the Department of Public Health issued an Amendment to the Notice. The Amendment authorized the operation of a water treatment facility and the discharge of treated water. The Company has commenced treatment and discharge operations. On October 4, 1999, the Colorado Division of Minerals and Geology sent the Company a letter stating that the Division had reason to believe that there might be a reasonable potential for degradation of groundwater quality in certain portions of the aquifer near the West Pit. The letter requires the Company to modify its permit to protect the quality of groundwater in the uncontaminated portion of the aquifer. It is not possible to predict the nature or scope of any further action that might be taken by regulatory authorities, which actions could include seeking injunctive relief, mandating the posting of financial assurance, requiring further on-site response actions and the imposition of monetary penalties. Battle Mountain has in place certain environmental and reclamation financial assurances related to the San Luis property and it is possible that additional financial assurances will be required in the future. There can be no guarantee that we will be able to maintain and/or put in place the necessary assurances. See "Management's Discussion and Analysis of Financial Condition and Results of Operation-Liquidity and Capital Resources." An environmental remediation charge of $9.5 million was recorded in the third quarter of 1999 based upon Battle Mountain's current best estimate of costs to address technical long-term water quality issues at the San Luis property. It is reasonably possible that this estimate may change in future reporting periods as further information becomes available. Canada The mining industry in Canada is subject to legislation at both the federal and provincial levels related to protection of the environment. We are required to obtain and maintain compliance with a full range of permits and approvals for various activities during exploration, development, production and closure and reclamation. Existing and possible future legislation could cause additional expense and capital expenditures, restrictions and delays in the development, operation and closure of the Company's properties, the extent of which cannot be predicted by management of the Company. We expect the continued proliferation and tightening of environmental standards and requirements over the long term. The Company may incur greater or lesser costs and delays depending on the nature of the activity and the standards and requirements that are applied. It is possible that the costs and delays associated with meeting such standards and requirements could become such that we would not proceed with the further development or operation of a mine. 24 Each of the Company's Canadian mining properties has an extensive array of environmental controls installed to meet regulatory requirements. All of the environmental controls and pollution prevention projects are designed to minimize the release of any substances that may be potentially harmful to the environment. The principal controls include treatment facilities for final effluent discharges, tailings disposal facilities, dust recovery on material transfer operations and spill containment facilities for storage vessels and along tailings pipeline corridors. With respect to pollution prevention, the Company has implemented one or more of the following programs at its Canadian mining sites: hazardous and non-hazardous waste separation and recycling, waste water recycling, freshwater use minimization, power conservation, product substitutions, new materials review/approval program, re-usable product shipping containers and other process changes benefiting the environment. Certain Canadian federal and provincial environmental requirements include requirements for treatment of water prior to discharge to achieve certain effluent water quality limits. The Holloway mine has at certain limited times had difficulties meeting sediment compliance limits. However, we have constructed a new sediment control system and implemented underground controls and the Holloway Mine has met the effluent sediment limits at all times subsequent to February of 1999. In August 1997, the Holloway mine became subject to toxicity compliance limits for effluent discharges. A limited number of samples from the Holloway Mine have not achieved the toxicity limits. This indicates that additional controls may be required. In 1999, approval was obtained to expand the tailings facility at Golden Giant to a capacity sufficient to handle anticipated tailings deposition for the presently anticipated mine life. Full compliance with effluent discharge requirements was attained for the Golden Giant mine in 1999. The Certificate of Approval for the Golden Giant mine does not currently contain an ammonia limit. However, the Certificates of Approval for the Golden Giant mine are being consolidated through a renewal process and an un-ionized ammonia limit is being proposed. Results in 1999 indicate that the proposed un-ionized ammonia limit can be achieved, although additional controls may be required if full compliance is not achieved in the future. The Company will also incur reclamation expenditures as reserves at existing mines are exhausted and the facilities are closed. We are making accruals for estimated reclamation expenditures over the lives of the respective mines. New and existing mines are required to submit reclamation/closure plans to the provincial government for review and approval by the various regulatory authorities. As part of the submissions, estimates of costs to implement the plans and financial assurance to cover the implementation of the plans are required, with the financial assurance required in a form and amount acceptable to the government. Both of the Company's operations in Canada have submitted their respective reclamation/closure plans to the appropriate provincial agency and had these plans accepted and approved and the Company has given such financial assurances under its closure plans as required by law. Bolivia Bolivia first enacted federal environmental legislation in 1992 and the promulgation of general environmental regulations followed in December 1995. The regulations require obtaining environmental licenses for both existing and new operations, establish air and water quality discharge standards, establish standards for the management of solid and hazardous wastes, provide procedures and schedules for existing operations to come into compliance and require the preparation of environmental impact studies in some instances. Pursuant to these regulations, Inti Raymi prepared an Environmental Statement as an application for an environmental license for the Kori Kollo mine and submitted such to the government in July 1997. The Company received final approval of the environmental license for the Kori Kollo mine in March 1999. In August 1997, new regulations, the Environmental Regulations for Mining Activities, were promulgated in Bolivia. These regulations contain a set of general technical and regulatory standards and norms for environmental management within the mining industry. In addition, the government is 25 continuing to develop specific technical standards for the mining industry. Under the transitory provisions of the Environmental Regulations for Mining Activities, we have eighteen (18) months from the date of approval of the environmental license for the Kori Kollo mine to submit a document which reflects compliance with the new regulations. Australia The mining industry in Australia is regulated primarily by state authorities and secondarily by federal authorities. This regulation deals with general environmental matters such as the licensing of industrial activities, the setting of standards and the establishment of a range of enforcement mechanisms. In addition, mines in Queensland (Vera/Nancy) are also regulated by legislation which specifically deals with the major environmental impacts of mining. Such legislation requires each miner to develop an Environmental Management Overview Strategy (hereinafter referred to as "EMOS") which sets out the life of mine strategies for dealing with these impacts. In addition, a plan of operations is required which sets out in detail what environmental management measures will be undertaken over a stated period. The plan of operations must be independently audited to ensure that it complies with the overarching strategies of the EMOS. These planning measures are complemented by a requirement for the operator to lodge a security deposit calculated by taking the real cost of rehabilitation for the maximum area of disturbance and allowing a discount for proven environmental performance. Prior to a mine closing, a final rehabilitation report must be prepared and approved which addresses final land form and land use and how the strategies of the EMOS with respect to rehabilitation and remediation have been implemented. Under the provisions of a memorandum of understanding between the Department of Environment and the Department of Mines and Energy, mines in Queensland are also required to hold licenses for industrial processes which are specified in the Environmental Protection Act. However, the major environmental impacts which are associated with mining and stockpiling continue to be dealt with by virtue of the specific mining legislation. Accordingly, there are only minor ancillary activities which now require licensing under the Environmental Protection Act. A process to consolidate these two environmental legislative schemes into one approval and regulatory system has been informally adopted and is expected to be finalized in the near future. Finally, there is a range of both state and federal legislation targeted at specific areas of the environment. Examples include dealing with environmentally sensitive areas, aboriginal cultural heritage, preservation of rare and endangered flora and fauna and the implementation of international agreements. By focusing on specific areas or parts of the broader environment, these legislative provisions do not automatically affect all mining projects but may be triggered by specific circumstances of an individual operation. In addition to complying with various environmental protection statutes, the Vera/Nancy mine in Queensland was required to obtain plan of operations approvals from the Minister of Mines pursuant to the Mineral Resources Act. The plan of operations at the Pajingo Complex has been approved, including an approved EMOS, which covered environmental protection and rehabilitation requirements. When approved, the plans of operations became part of the conditions of the mining lease issued by the state. The Vera/Nancy ore deposit at the Pajingo Complex was added to its plan of operations and the EMOS document in 1996. In December 1997, the Contaminated Land Act 1991 (Qld) was integrated into the Environmental Protection Act 1994 removing previous exemptions for existing sites not required to be placed on the register. Also late in 1997, the Environmental Protection Policy for noise and water was introduced. This development has proved significant in developing operative conditions for new projects and will potentially lead to a review of existing operating conditions for current projects. 26 In July 2000, the Environmental Protection and Biodiversity Conservation Act will become effective. This Act requires Commonwealth government approvals for new projects and extensions of existing projects. It is triggered by having a significant impact on a matter of national environmental significance. The details as to how this trigger will work have not been developed at the present time. It is therefore not clear whether it would apply to any future extension of the Australian operations. Taxes - ----- United States The Company is subject to federal income tax by the United States on its worldwide earnings, although earnings of the Company's foreign subsidiaries are not generally subject to current tax until repatriated to the United States. While the United States allows credits for foreign income taxes paid, the limitations on such credits may substantially reduce or eliminate the benefit of credits. The top marginal U.S. statutory corporate rates are presently 35% for regular tax and 20% for alternative minimum tax. Alternative minimum taxes paid are available as credits against regular tax in subsequent years. At December 31, 1999, the Company had approximately $105.8 million of regular net operating losses and $49.7 million of alternative minimum tax net operating loss carryforwards, expiring beginning in 2007 and 2009, respectively, available to offset future U.S. federal income tax, and approximately $0.8 million of alternative minimum tax credits available on an indefinite carryforward basis. These amounts are subject to possible adjustment upon audit by the Internal Revenue Service. We are also subject to state and local taxes in jurisdictions in which we are engaged in business operations. Canada The Company's Canadian operations are conducted by Battle Mountain Canada and are subject to Canadian federal and provincial income taxes, as well as provincial mining taxes and duties. The Golden Giant and Holloway mines are located in Ontario. Federal income tax is levied under the Federal Income Tax Act. The basic federal rate on mining income is 28%, but a resource allowance (equal to 25% of "resource profits," as defined) is deductible each year in computing taxable income. Ontario administers its own income and capital tax regimes under separate provincial statutes. Ontario offers certain resource incentives. The Ontario income tax rate on mining operations is 13.5%. The capital tax rate for Ontario is 0.3%. The Ontario Mining Tax is a mineral royalty or duty paid to the province under unique statutes and is levied at 20% of the operator's profits from Ontario mining operations, as defined. Bolivia Prior to 1997, Inti Raymi operated pursuant to certain provisions under the Bolivian Mining Code and tax legislation which exempted it, on an interim basis, from income tax. Under these provisions, until September 1999, at which time the exemption was to terminate, Inti Raymi was subject to a 5% royalty assessed on gold sales. Legislation was passed in March 1997, however, which terminated this exemption and subjected Inti Raymi, effective April 1, 1997, to a 25% income tax as well as a sliding royalty on gold sales. The royalty ranges from 4% to 7%, depending on the price of gold; however, any royalty paid is creditable against the income tax imposed on operations. See "-- Certain Factors Affecting Reserves, Foreign Investments and Properties" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Government Regulation." Dividends, interest and other remittances paid by Inti Raymi to Battle Mountain and other non-Bolivian third parties are subject to a 12.5% Bolivian withholding tax. Inti Raymi pays import duties and Bolivian Value Added Tax on all purchases. Inti Raymi subsequently claims refunds from the Bolivian government for the import duties and the Value Added Tax by means of tax certificates used to 27 pay taxes due on its activities. Those certificates can be converted into cash in the local finance market at a discount. Inti Raymi is also subject to transaction taxes on domestic transactions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --Liquidity and Capital Resources." Australia Battle Mountain (Australia) Inc., a Delaware corporation and a wholly-owned subsidiary of Battle Mountain, is subject to tax on income derived from 1999 exploration and mining operations. However, no taxes are expected to be paid for 1999 due to existing loss carryforwards of approximately $16.5 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." The Company's Australian operations are also subject to various state and local taxes and the payment of certain gold and silver royalties. Under each of the mining leases, the Company pays to the State of Queensland an annual royalty equal to the greater of 2% of gross sales after deducting A$30,000 or 5% of the operating income that exceeds A$30,000. Insurance - --------- We carry insurance against property damage risks, business interruption and third party liability. The Company is also insured against losses from certain dishonesty, including limited losses from the theft of gold, as well as losses of other goods in transit. From time to time, we review and modify insurance coverage and may obtain additional policies, cancel existing policies or self-insure as deemed appropriate. The Company is not insured against most environmental risks. Insurance against most environmental risks (including potential liability for pollution or other hazards as a result of the disposal of waste products occurring from exploration and production) is not generally available to the Company or to other companies within the industry at acceptable premium levels. We periodically evaluate the cost and coverage of the insurance against certain environmental risks that is available to determine if it would be appropriate to obtain such insurance. Without such insurance, if the Company becomes subject to environmental liabilities, then the payment of such environmental liabilities would reduce the funds available to the Company. Should we be unable to fully fund the remedial cost of an environmental problem, the Company might be required to enter into interim compliance measures pending completion of the required remedy. Furthermore, if we were to become subject to significant environmental liabilities, the results could have a material adverse effect on the results of operations, cash flows and financial condition of the Company. Employees - --------- The number of full-time employees of the Company (including employees of majority-owned subsidiaries other than Niugini Mining) at December 31, 1999 was 1,282. The non-supervisory employees at some of our mines are represented by labor unions. The current labor agreements with the Operating Engineers at the Battle Mountain Complex and the United Steelworkers of America at the Golden Giant Mine would respectively expire April 30, 2000 and July 31, 2000 unless extended by mutual consent. Competition - ----------- The Company competes with other mining companies in connection with the acquisition of precious metal mining interests and in the recruitment and retention of qualified employees. There is significant and increasing competition for the limited number of gold acquisition opportunities in the United States, Canada, Australia and other countries. As a result of this competition, the Company may 28 be unable to acquire attractive gold mining properties on terms it considers acceptable. In the pursuit of such acquisition opportunities, the Company competes with many United States and international companies that have substantially greater financial resources than the Company. There is a world market for gold, silver and copper. The Company believes that no single company has sufficient market power to affect the price or supply of gold, silver and copper in the world market. See "-- Gold Price Volatility." Explanatory Note Regarding Exchange Rates - ----------------------------------------- In this report, references to "dollar," "US$" and "$" are to United States dollars. References to "A$" are to Australian dollars and references to "C$" are to Canadian dollars. On March 8, 2000, the foreign exchange spot purchase rates for U.S. dollars, as quoted in the Wall Street Journal, were A$1.00 equals US$0.6095 and C$1.00 equals US$0.6868. Glossary of Mining Terms - ------------------------ carbon-in-leach--milling process for the recovery of gold from slurried ore in a dilute sodium cyanide solution, whereby the gold is dissolved and adsorbed onto coarse carbon particles. carbon-in-pulp--milling process for the recovery of precious metals by adsorption onto activated carbon. The precious metals are recovered from the enriched carbon by elution and electrolysis. cutoff grade--the lowest grade of mineralized rock that qualifies as ore grade in a given deposit, or the grade below which the mineralized rock currently cannot be economically mined. Cutoff grades vary between deposits depending upon the amenability of ore to gold extraction, costs of production and assumed gold prices. dore--an unrefined alloy of gold, silver and other impurities normally in the form of bars or buttons. leach--to dissolve minerals or metals out of ore with chemicals. mining claim--that portion of public mineral lands which a party has staked or marked out in accordance with federal, provincial or state mining laws to acquire the right to explore for and exploit the minerals under the surface. ore--material that can be economically mined and processed. ore body--a deposit of economically recoverable minerals, the extent and grade of which has been defined through exploration and development work. ore reserve--that part of a mineral deposit which at the time of the reserve determination could be economically and legally extracted or produced. ounce or oz--a troy ounce. patented mining claim--those claims, either lode or placer, for which patents have been issued. probable ore reserves--reserves for which quantity and grade and/or quality are computed from information similar to that used for proven ore reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven ore reserves, is high enough to assume continuity between points of observation. 29 proven ore reserves--reserves for which (a) the quantity of ore is computed from dimensions revealed in outcrops, trenches, workings or drill holes and grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurements are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established. reclamation--the process of restoring mined land to a condition which allows future beneficial use. Reclamation standards vary widely from jurisdiction to jurisdiction but usually address ground and surface water, topsoil, final slope gradients, waste handling and revegetation issues. refractory ore--ore that is difficult or expensive to treat for recovery of its valuable substances. sulfide--a mineral compound characterized by the presence of sulfur. tailing--processed ore after the recoverable minerals have been extracted. tailings facility --a natural or man-made area suitable for depositing ground processed rock resulting from the milling and/or processing of ore. Suitability of the location and design of the facility are determined by environmental impact studies. ton--a short ton of 2,000 pounds, dry weight basis. unpatented mining claim--those claims, either lode or placer, for which no patent has been issued. The claim owner has the right to exclusive possession of the locatable minerals in the area claimed. Such property rights are subject to the paramount title of the U.S. federal government until a patent is obtained. Item 3. Legal Proceedings - ------- ----------------- On August 20, 1999, the Colorado Department of Public Health and the Environment issued a Notice of Violation and Cease and Desist Order to Battle Mountain, alleging discharges at the San Luis mine to waters not permitted under the Colorado Water Quality Control Act. Battle Mountain filed an Answer to the Notice denying that such a violation had occurred. See Note 14 of Notes to Consolidated Financial Statements under Item 8. Battle Mountain also is a party to a number of legal actions arising in the ordinary course of business. While the final outcome of these actions cannot be predicted with certainty, it is the opinion of management that none of these actions when resolved will have a material adverse effect on the results of operations, financial condition or cash flows of Battle Mountain. Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of 1999. Executive Officers of the Registrant - ------------------------------------ Listed below are the names and ages as of March 2, 2000, of each of the present executive officers of the Company as well as the individual who has assumed the duties of Chief Executive Officer as of July 1999, together with principal occupations held by each during the past five years. Executive officers are appointed annually to serve for the ensuing year or until their successors have been appointed. None of the listed individuals are related to any other by blood, marriage or adoption. No arrangement or understanding exists between any officer and any other person under which any officer was elected. Karl E. Elers (61) - Acting Chief Executive Officer 30 John A. Keyes (56) - President and Chief Operating Officer Ian Atkinson (50) - Senior Vice President - Operations and Exploration Phillips S. Baker, Jr. (40) - Vice President and Chief Financial Officer Thomas P. Bausch (52) - Treasurer Joseph J. Baylis (43) - Senior Vice President - Corporate Development Greg V. Etter (41) - Vice President, General Counsel and Secretary Stanford M. Haley (56) - Vice President - Human Resources Jeffrey L. Powers (47) - Vice President and Controller Mr. Elers assumed the duties of Chief Executive Officer in July 1999 pursuant to the terms of a consulting agreement when Ian D. Bayer retired from the position of President and Chief Executive Officer. Mr. Elers is working with the Company's Board of Directors to select a Chief Executive Officer. Mr. Elers also continues to serve as the Company's non-executive Chairman of the Board, a position he has held since February 28, 1997, when he retired from the executive officer positions as Chairman of the Board and Co-Chief Executive Officer. Prior to that date, Mr. Elers had served as the Company's Chairman since April 1990 and as the Company's Chief Executive Officer from April 1990 to July 1996. Mr. Keyes was appointed President and Chief Operating Officer of Battle Mountain in July 1999. Previously, Mr. Keyes had been Senior Vice President- Operations since July 1996 following the combination with Hemlo Gold. He joined Hemlo Gold in March 1992 as the mine manager of the Golden Giant mine and in October 1995 became Vice President, Operations of Hemlo Gold. Mr. Atkinson was appointed Senior Vice President-Operations and Exploration of Battle Mountain in August 1999. Previously, Mr. Atkinson had been Senior Vice President-Exploration of Battle Mountain since July 1996. Prior to joining Battle Mountain, Mr. Atkinson had been Senior Vice President of Hemlo Gold since February 1996. Prior to that, Mr. Atkinson was Vice President, Exploration for Hemlo Gold. Mr. Baker joined Battle Mountain in March 1998 as Vice President and Chief Financial Officer. Mr. Baker most recently served as Vice President, Finance and Chief Financial Officer of Pegasus Gold Inc. Prior to joining Pegasus in 1994, Mr. Baker worked for approximately eight years in various positions with Battle Mountain, culminating as Treasurer. Mr. Bausch joined Battle Mountain in September 1996 as Treasurer. Mr. Bausch was previously employed by Tenneco Inc. as its Assistant Treasurer from 1993 to 1996. Mr. Baylis joined Battle Mountain in July 1996 following the combination with Hemlo Gold, where he was previously Vice President-Investor Relations and General Counsel. He also served as President and Chief Executive Officer of Niugini Mining from November 1996 until February 2000. Mr. Etter joined Battle Mountain as Corporate Attorney in 1993 and was appointed General Counsel and Corporate Secretary in February 1997. In April 1998, he was appointed Vice President in addition to his then current position. Mr. Haley joined Battle Mountain in January 1997. Prior to that, he was the managing partner at Chairmans' Counsel, Inc., an organization development consulting firm. Mr. Powers joined Battle Mountain in August 1992 as Manager of Corporate Accounting. He was appointed Controller in January 1994 and to his current position in February 1997. 31 Messrs. Atkinson, Baker, Baylis, Bausch, Etter, Keyes and Powers also serve as executive officers of Battle Mountain Canada. Mr. Keyes serves as President and Chief Executive Officer, and each of Messrs. Atkinson and Baylis serves as Vice President. Mr. Baker serves as Vice President and Chief Financial Officer. Mr. Etter serves as Vice President and Corporate Secretary and Mr. Powers serves as Vice President and Controller. Mr. Bausch serves as Treasurer. PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters - ------------------------------------------------------------------------------ PRICE RANGE OF COMMON STOCK Battle Mountain's common stock, par value $0.10 per share (the "BMG Common Stock"), is traded on the New York Stock Exchange (the "NYSE"), the Australian Stock Exchange Limited, the Swiss Stock Exchanges and the Frankfurt Stock Exchange. The ticker symbol for the BMG Common Stock on the exchanges is "BMG." Battle Mountain Canada exchangeable shares, which have no denominated par value (the "Exchangeable Shares"), entitle holders to dividends and other rights economically equivalent to BMG Common Stock and are exchangeable at the option of holders into BMG Common Stock on a one-for-one basis. The Exchangeable Shares are traded on The Toronto Stock Exchange under the ticker symbol "BMC." The following table sets forth for the periods indicated the high and low sales prices for the BMG Common Stock as reported on the NYSE Composite Tape. 1999 High Low -------- ------- First Quarter $ 4 11/16 $ 2 5/8 Second Quarter $ 3 3/8 $ 2 3/16 Third Quarter $ 3 5/8 $ 1 3/4 Fourth Quarter $ 3 13/16 $ 2 1/16 1998 High Low -------- -------- First Quarter $ 6 11/16 $ 4 13/16 Second Quarter $ 7 1/2 $ 4 13/16 Third Quarter $ 6 7/16 $ 3 1/16 Fourth Quarter $ 6 3/4 $ 3 7/8 As of March 8, 2000, the Company had 13,983 record holders of BMG Common Stock and 623 record holders of Exchangeable Shares. In February 1999, the Company suspended its semi-annual common stock dividends. Any determination to pay future dividends and the amount thereof will be made by the Company's Board of Directors and will depend on the Company's future earnings, capital requirements, financial condition and other relevant factors. Description of Exchangeable Shares of Battle Mountain Canada Ltd. - ----------------------------------------------------------------- The Exchangeable Shares are exchangeable, at any time at the option of the holder, on a one-for-one basis for shares of BMG Common Stock. Holders of Exchangeable Shares are entitled at any time, upon delivery of the Exchangeable Shares certificate and duly executed retraction request, to require Battle Mountain Canada to redeem such Exchangeable Shares in exchange for an equivalent number of shares of BMG Common Stock. Battle Mountain and a designated subsidiary have the right to purchase the Exchangeable Shares that are the subject of the request for redemption in exchange for an equivalent 32 number of shares of BMG Common Stock. On or after July 31, 2003 (subject to acceleration in certain circumstances), Battle Mountain Canada has the right, but not the obligation, to purchase such Exchangeable Shares in exchange for an equivalent number of shares of BMG Common Stock. Battle Mountain and such designated subsidiary have the right, but not the obligation, to purchase such Exchangeable Shares in exchange for an equivalent number of shares of BMG Common Stock at which time Battle Mountain Canada's right to redeem such Exchangeable Share would terminate. The shares of outstanding Exchangeable Shares, other than shares held by Battle Mountain and certain of its subsidiaries, are entitled to vote at Battle Mountain stockholder meetings through the exercise by The CIBC Mellon Trust Company, a Canadian trust company (the "Trustee"), of certain voting rights under a Voting, Support and Exchange Trust Agreement dated July 19, 1996 (the "Voting Agreement"). The Trustee, as the holder of the one share of Special Voting Stock of Battle Mountain (the "Special Voting Stock"), is entitled to a number of votes on all matters on which holders of BMG Common Stock are entitled to vote equal to the number of Exchangeable Shares outstanding as of the Record Date for each meeting of holders of BMG Common Stock, excluding the number of Exchangeable Shares held by the Company and certain of its subsidiaries (those subsidiaries precluded from voting any Common Stock under applicable Nevada law). Pursuant to the Voting Agreement, each holder of Exchangeable Shares is entitled to instruct the Trustee as to the voting of the number of votes attached to the Special Voting Stock represented by such holder's Exchangeable Shares. The Trustee will exercise each vote attached to the Special Voting Stock only as directed by the relevant holder, and in the absence of instructions from a holder as to voting will not exercise such votes. A holder may instruct the Trustee to give a proxy to such holder entitling the holder to vote personally such holder's relevant number of votes or to grant to the Company's management a proxy to vote such votes. The BMG Common Stock and the Special Voting Stock vote together as a single class. As to each matter presented to a vote of stockholders of Battle Mountain, each share of BMG Common Stock is entitled to one vote and the share of Special Voting Stock is entitled to a number of votes equal to the number of Exchangeable Shares outstanding as of the Record Date for each meeting of holders of BMG Common Stock, excluding the number of Exchangeable Shares held by the Company and certain of its subsidiaries (those subsidiaries precluded from voting any Common Stock under applicable Nevada law). Holders of Exchangeable Shares are also entitled to receive dividends economically equivalent to any dividends paid on the BMG Common Stock. The Voting Agreement restricts Battle Mountain from paying dividends on the BMG Common Stock unless equivalent dividends are paid on the Exchangeable Shares. Holders of Exchangeable Shares are also entitled to participate in any liquidation of Battle Mountain on the same basis as holders of BMG Common Stock. Each Exchangeable Share has an associated right (hereinafter referred to as an "Exchangeable Share Right") entitling the holder of such Exchangeable Share Right to acquire additional Exchangeable Shares on terms substantially the same as the terms and conditions upon which the stock rights attached to each share of BMG common stock entitle a holder of such right to acquire either a one one-hundredth of a share of the Series A Junior Participating Preferred Stock of Battle Mountain (essentially the economic equivalent of a share of BMG Common Stock) or, in certain circumstances, shares of BMG Common Stock (with the definitions of beneficial ownership, the calculation of percentage ownership and the number of shares outstanding and related provisions applying, as appropriate, to BMG Common Stock and Exchangeable Shares as though they were the same security). The Exchangeable Share Rights are intended to have characteristics essentially equivalent in economic effect to the stock rights attached to each share of BMG Common Stock. See Note 9, "Shareholders' Equity," of Notes to Consolidated Financial Statements under Item 8. 33 Item 6. Selected Financial Data - -------------------------------- The following table sets forth certain consolidated financial data for the respective periods presented and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and the Consolidated Financial Statements and related notes thereto in Item 8. Years Ended December 31 Millions, except per share amounts 1999 (1,6) 1998 (2,6) 1997 (3) 1996 (4) 1995 - ---------------------------------- ------------ ------------- ------------ ----------- ---------- (as restated) (as restated) Income Statement: Sales $ 228 $ 277 $ 345 $ 424 $ 401 ========= ========= ======= ======= ====== Operating income (loss) $ (63) $ (110) $ (3) $ (43) $ 44 ========= ========= ======= ======= ====== Income (loss) before cumulative effect of accounting change $ (119) $ (241) $ (5) $ (74) $ 30 Cumulative effect of accounting change, net - - (4) - - (5) --------- --------- ------- ------- ------ Net income (loss) (119) (241) (9) (74) 30 Preferred dividends 8 8 8 8 8 --------- --------- ------- ------- ------ Net income (loss) to common shares $ (127) $ (249) $ (17) $ (82) $ 22 ========= ========= ======= ======= ====== Per common share Earnings (loss) - basic and diluted $(.55) $ (1.08) $ (.07) $ (.36) $ .10 ========= ========= ======= ======= ====== Cash dividends $ - $ .05 $ .05 $ .07 $ .08 ========= ========= ======= ======= ====== December 31 1999 (6) 1998 (6) 1997 1996 1995 --------- --------- ------- ------- ------ Balance Sheet: Total assets $ 569 $ 787 $ 1,093 $ 1,037 $1,142 ========= ========= ======= ======= ====== Long-term debt, less current maturities $ 177 $ 204 $ 241 $ 139 $ 169 ========= ========= ======= ======= ====== Shareholders' equity $ 119 $ 248 $ 506 $ 538 $ 629 ========= ========= ======= ======= ====== (1) Includes a $76.2 million impairment loss ($46.8 million net of minority interest) related to an investment in Lihir, a $35.9 million write-off of Crown Jewel assets, a $9.5 million environmental remediation charge at San Luis and a $7.7 million net charge related to deferred tax assets. (2) Includes the following impairment write-downs: Lihir, $90.0 million; Kori Kollo, $49.9 million; Crown Jewel, $40.3 million; and Reona, $10.8 million. (3) Includes a $16.4 million income tax benefit representing a release of certain deferred tax asset valuation allowances and certain withholding tax liabilities, and an additional tax benefit of $7.2 million due to revised projections of future taxable income at certain subsidiaries, which resulted in the recognition of the tax benefit of net operating loss carryforwards at these subsidiaries. (4) In 1996, the carrying values of the Reona and San Cristobal mines were written down by $17.5 million and $17.6 million, respectively, both gross and net of income taxes. Also in 1996, $22.7 million in merger expenses were incurred related to the combination of Battle Mountain and Hemlo Gold. (5) Reflects the cumulative effects of Inti Raymi changing its method of calculating depreciation, depletion and amortization and Battle Mountain changing its method of amortizing the premium associated with its investment in Inti Raymi to the same new basis (see Note 2 of Notes to Consolidated Financial Statements in Item 8). (6) The financial data as of and for the years ended December 31, 1999 and 1998 has been restated as described in Note 19 of Notes to Consolidated Financial Statements in Item 8. 34 Item 7. Management's Discussion and Analysis of Financial Condition and - -------------------------------------------------------------------------- Results of Operations - --------------------- Battle Mountain's operations are related to gold mining and related activities. Accordingly, Golden Giant, Kori Kollo, Holloway and Vera/Nancy (Pajingo) are the operating mines, and the Battle Mountain Complex is the significant development project, that are considered segments for financial reporting purposes. Restatement After issuing Battle Mountain's 1999 financial statements and filing the Form 10-K with the Securities and Exchange Commission, following extensive discussion with its independent accountants, management determined it was necessary to revise the financial statement presentation of Battle Mountain's former interest in Niugini Mining Limited. In 1998, Battle Mountain resolved to dispose of its 50.45% equity interest in Niugini Mining Limited and deconsolidated the subsidiary, classifying it as an asset held for sale. However, in accordance with provisions of Statement of Financial Accounting Standards No. 94, "Consolidation of all Majority-Owned Subsidiaries," Battle Mountain's 1999 and 1998 financial statements and related disclosures are restated from amounts previously reported to properly reflect the full consolidation of Battle Mountain's interest in Niugini Mining. After issuing Battle Mountain's 1999 financial statements and filing two amendments to the Form 10-K with the Securities and Exchange Commission (SEC), following extensive discussion with the SEC, management determined it was necessary to revise the financial statements presentation of Battle Mountain's cash and cash equivalents and its recorded equity in income of Lihir. Cash and cash equivalents were reclassified to remove gold bullion and bullion settlements from this line item and include then in accounts receivables to more appropriately present the nature of these items. Management also determined that the amounts of its recorded equity in income of Lihir had been incorrectly based on financial statements of Lihir that were not prepared in accordance with U.S. generally accepted accounting principles (GAAP), but rather, originally were based on International accounting standards. The Company's equity in income of Lihir has been revised to reflect its equity on a U.S. GAAP basis. Also, a part of a review of the financial statements of Lihir by the SEC, Lihir's management determined that its U.S. GAAP reconciliation needed to be revised. Overview Lower gold prices and fewer ounces of attributable gold production decreased cash flows from operating activities compared with 1998. A $76.2 million impairment loss ($46.8 million after minority interest) related to the market value of the investment in Lihir, a $35.9 million non-cash write-off of the Crown Jewel project and a $9.5 million environmental remediation charge contributed significantly to a $126.9 million, or $0.55 per share, net loss to common shares. This compares with a $248.1 million, or $1.08 per share, net loss in 1998 and a $16.9 million, or $.07 per share, net loss in 1997. Liquidity and Capital Resources Cash and cash equivalents at December 31, 1999 totaled $67.5 million consisting of $ 8.3 million of cash in banks and $59.2 million of short-term investments. Niugini Mining held $54.7 million of the $67.5 million at December 31, 1999. An additional $40.0 million was held by Battle Mountain Gold Company for a loan facility and classified as restricted cash. Cash and cash equivalents totaled $156.9 million at December 31, 1998 consisting of $2.3 million of cash in banks and $154.6 million of short term investments. Niugini Mining held $49.6 million of the $156.9 million at December 31, 1998. Operating Activities Cash flows of $49.3 million, $77.7 million and $55.0 million were generated from operating activities in 1999, 1998 and 1997, respectively. Lower gold prices and production and higher tax payments, partially offset by lower exploration and production costs, decreased cash flows in 1999. The increase in cash flows in 1998 compared with 1997 was primarily the result of higher production, lower operating costs and decreased accounts receivable. Investing Activities Cash used in investing activities increased to $48.5 million in 1999 compared with $24.5 million in 1998. Capital expenditures totaled $49.3 million in 1999 compared with $46.5 million in 1998. Approximately $12.8 million was invested at the Battle Mountain Complex, primarily on the Phoenix project, $10.2 million at the Vera/Nancy mine, $9.7 million at Golden Giant, $7.0 million at Kori Kollo and $3.9 million at Holloway. In addition, an $11.0 million liquidating dividend, related to the 1998 sale of the New World project, was paid to Crown Butte Resources Ltd. minority shareholders in 1999 and $11.9 million was received from the sales of assets, primarily a $10.2 million sale of the investment in First Toronto Investments Limited. 35 Cash used in investing activities totaled $24.5 million in 1998 compared with $63.0 million in 1997. Capital expenditures were $46.5 million in 1998 compared with $62.4 million in 1997. Approximately $8.7 million was invested in 1998 at Golden Giant, $8.2 million on the Vera/Nancy mine, $8.2 million at Crown Jewel, $7.7 million at the Battle Mountain Complex, primarily on the Phoenix project, $3.6 million at Holloway and $3.3 million at Kori Kollo. In addition, in conjunction with contributions made by certain other equity investors of Lihir, in May 1998, Niugini Mining increased its investment in Lihir by $11.5 million and maintained a 17.15% interest. In addition, the sale of the New World project closed and cash proceeds, net of related disbursements, of $34.9 million were received. Cash used for investing activities totaled $63.0 million in 1997. Approximately $16.6 million was spent on the Pajingo Joint Venture, $7.4 million on Kori Kollo, $10.3 million at Golden Giant, $8.2 million at Crown Jewel, $9.1 million at the Battle Mountain Complex and $3.7 million at Holloway. Battle Mountain expects to invest approximately $49.2 million in capital expenditures in 2000. Major capital expenditures by site are: Golden Giant, $16.1 million; Phoenix, $15.1 million; Kori Kollo, $8.5 million, including Llallagua; Pajingo, $5.2 million; and Holloway, $4.3 million. Phoenix Project. The Phoenix project is located in the Copper Canyon area of the Battle Mountain Complex. Permitting of the Phoenix project is proceeding. It is anticipated that a draft Environmental Impact Statement will be completed by mid-2000. It is difficult to predict the timing of completion of permitting and potential start-up dates for the mine; however, the earliest feasible start-up date for Phoenix currently appears to be 2002. Battle Mountain is preparing a feasibility study and currently expects future capital costs, excluding capitalized interest, to be in the range of $160 million to $170 million. Approximately $42.7 million had been spent on the project through December 31, 1999. Battle Mountain has in place certain environmental and reclamation financial assurances related to the Battle Mountain Complex and it is anticipated that additional financial assurances will be required in the future. The State of Nevada notified Battle Mountain on May 25, 2000 that it no longer met the qualifications required to utilize corporate guarantees as a part of the required financial assurance for current permits. Arrangements have been made for Newmont Mining Corporation ("Newmont") to provide a guarantee acceptable to the state for Battle Mountain. Crown Jewel Project. Battle Mountain has been working toward permitting the Crown Jewel project near Oroville, Washington for almost 10 years. The Crown Jewel joint venture agreement grants Battle Mountain an option to earn from Crown Resources Corporation a 54% joint venture interest in the Crown Jewel project by constructing and equipping at its sole cost a mine and mill having a capacity of at least 3,000 tons per day and achieving commercial production therefrom. Certain permits have been obtained for the Crown Jewel project. However, additional permits and approvals would be required to commence operations. In January 2000, the Washington Pollution Control Hearings Board reversed prior favorable decisions by the Department of Ecology on water rights and 401 Certification. The water rights and 401 Certification are necessary for the project as proposed. There can be no assurance as to a favorable outcome or the timing with respect to the permits, required approvals or appeals. Battle Mountain is currently evaluating its options with respect to the project. A non-cash asset write-down of $35.9 million was recorded in the fourth quarter of 1999 representing the remaining carrying value of the Crown Jewel project. This write-down was recorded as a result of the Washington Pollution Control Hearings Board decision previously mentioned. A $40.3 million impairment write-down in the carrying value of the Crown Jewel project was recorded in the fourth quarter of 1998 to reflect the fair value of the assets in the low gold price environment and the cost of an unexpectedly lengthy permitting process. Lihir. Battle Mountain held an indirect interest in the Lihir mine in Papua New Guinea through its 50.45% ownership of Niugini Mining, which in turn owned 14.91% of Lihir at December 31, 1999 and 17.15% at both December 31, 1998 and 1997. Commercial production at Lihir commenced in October 36 1997. In December 1998, Battle Mountain decided to pursue options for disposing of its interest in Niugini Mining. On October 6, 1999, Lihir and Niugini Mining announced a proposed scheme of arrangement under which Lihir would merge with Niugini Mining. The merger was effective February 2, 2000. Niugini Mining shareholders received one share of Lihir for each share of Lihir held, together with one additional share of Lihir for each A$1.45 of Niugini Mining's net cash balance of $54.6 million at the effective date of the transaction. As a result, Battle Mountain, which held a 50.45% interest in Niugini Mining prior to the merger, received 111.3 million shares of Lihir, representing a 9.74% equity interest in Lihir. Battle Mountain has agreed to not sell on market the Lihir shares for a 90-day period and will classify them as current marketable securities in the consolidated balance sheet. Battle Mountain, through its investment in Niugini Mining, held a 7.52% and an 8.65% equity interest in Lihir at December 31, 1999 and 1998, respectively. Financing Activities Debt payments of $31.2 million were made during 1999, compared with $44.3 million and $24.5 million in 1998 and 1997, respectively. In 1997, Battle Mountain sold its interest in Niugini Mining to Battle Mountain Canada, facilitated primarily by a $145 million bank borrowing by Battle Mountain Canada. Total restricted cash increased $31.0 million in 1999, primarily the result of a $40.0 million cash collateral account established in connection with a restructuring of a Battle Mountain Canada loan facility in October 1999 discussed below. Partially offsetting the increase in restricted cash due to this debt restructuring was the release of funds previously held in connection with Inti Raymi debt that was retired in 1999. Restricted cash decreased $10.2 million net in 1998, primarily the result of the release of escrow funds to Niugini Mining. The Canadian Imperial Bank of Commerce loan agreement was restructured effective October 1, 1999. Under the terms of the new agreement, the loan is segregated into three "tranches": a $40.0 million tranche due December 31, 2003 which will be repaid with the $40.0 million cash collateral account; a $30.0 million tranche due the earlier of the date of the receipt of cash from the sale of Battle Mountain's investment in Lihir or December 31, 2003; and a $34.4 million tranche payable in 14 equal quarterly installments beginning September 30, 2000. The restructuring of this loan agreement significantly improved Battle Mountain's scheduled debt service. The loan agreement requires Battle Mountain Canada to meet certain financial covenants which include maintenance covenants relating to the market value of the Lihir shares held by Battle Mountain, gold reserves and the present value of future cash flows from the Battle Mountain Canada mines, as well as certain restrictions on, among other things, cash transfers, expenditures, additional debt, liens and the disposition of assets. In March 2000, $10.0 million of the $30.0 million tranche was repaid because the market value of the Lihir shares declined to less than two times the Lihir-related tranche as required by loan agreement. The market value of the Lihir shares could continue to decline, requiring additional principal payments in the near future. Battle Mountain Canada has a C$5.0 million letter of credit line and a C$5.0 million operating credit line with a Canadian bank. At December 31, 1999, C$4.8 million was outstanding under the letter of credit line. Battle Mountain and Battle Mountain (Australia) Inc., a wholly owned subsidiary of Battle Mountain, entered into a $5 million promissory note with a bank on May 10, 2000. This promissory note required Battle Mountain and its subsidiary to, among other things, meet certain financial tests including: tangible net worth, debt to total assets, interest coverage and current ratio. This note was fully drawn by Battle Mountain at signing. On July 11, 2000, the promissory note was converted into a $10 million, 364-day revolving credit facility containing substantially the same terms. In the determination of the amount of any dividends to be paid to common shareholders, the Board of Directors regularly considers factors such as projected operating results, cash flows, capital requirements and financial position. In 1999, the semi-annual dividends on common stock were suspended; however, the Board, at their discretion, may reinstate dividends in the future. Dividends of $11.5 million, or $0.05 per share, were paid to common shareholders in 1998 and 1997. Battle Mountain has an effective registration statement on file with the Securities and Exchange Commission (the "SEC") for the issuance of up to $150.0 million of debt and/or equity securities. As of the date of this report, no securities have been issued nor are there any current plans to issue any securities 37 under this registration statement. Battle Mountain also has registration statements on file with the SEC and regulatory authorities in Canada which qualify for sale the 65.2 million shares of Battle Mountain common stock effectively held by Noranda Inc. Battle Mountain will not receive proceeds from the sales of any shares that may be sold under the registration statements covering the shares held by Noranda. Conclusion. Battle Mountain believes cash requirements over the next twelve months will be funded through a combination of current cash, future cash flows from operations, proceeds from potential asset sales and/or future debt or equity security issuances. Significant additional capital will be required in the foreseeable future in order to continue the development of current and future mining projects, including the Phoenix project. Battle Mountain's ability to raise capital is highly dependent upon the commercial viability of its projects and the associated price of gold. Because of the recent volatility of gold prices and how it effects Battle Mountain's financial condition, a deterioration of gold prices may negatively impact short-term liquidity and our ability to raise additional capital for long-term development projects. In the event that cash balances decline to a level that cannot support the operations of the Company, management will defer planned capital and exploration expenditures as needed to conserve cash for operations. Results of Operations Segment Information Millions 1999 1998 1997 - ------- ------ ---- ---- Operating income (loss) Golden Giant $ 20.1 $ 38.3 $ 46.6 Kori Kollo (8.8) (58.7) 0.3 Holloway (6.1) (3.7) (6.6) Battle Mountain Complex 0.4 (12.1) (2.2) Vera/Nancy 7.3 6.2 1.9 Corporate and other (75.9) (80.1) (43.3) ------- ------ ------ Total operating loss (63.0) (110.1) (3.3) Other expense, net (49.0) (116.7) (13.1) ------- ------- ------ Loss before income taxes $(112.0) $(226.8) $(16.4) ======= ======= ====== Sales Sales decreased in 1999 compared with 1998 as a result of decreased gold production and lower realized gold prices. Excluding Battle Mountain's share of Lihir gold sales in 1998, gold production decreased 97,000 ounces. The placing of the Battle Mountain Complex Reona mine and the Niugini Mining San Cristobal mine in care and maintenance effective January 1, 1999 was the primary reason for decreased gold production. Sales of production at these mines were netted against production costs for financial statement presentation purposes. Also contributing to the decrease in production were lower head grades at the Golden Giant and Kori Kollo mines. Average realized prices for gold decreased as a result of lower spot gold prices. Sales decreased in 1998 compared with 1997 as a result of lower average realized gold prices, partially offset by slightly higher gold production. Average realized prices for gold decreased as a result of lower spot gold prices. Average realized gold prices in 1998 were slightly higher than the average London PM fix price due to gains recognized from forward sales. Increased production at the Holloway, Pajingo and Kori Kollo mines partially offset the effects of ceasing production at the Red Dome mine in the second half of 1997 and the ceasing of mining operations at the San Cristobal mine in the first quarter of 1998. Decreased ounces recovered from the Reona mine also partially offset increased production from the other mines. Golden Giant's increased production during the first half of 1998 from higher ore grades mined as a result of a change in the mining sequence partially offset their decreased production during the latter half of the year due to that change in the mining sequence and labor problems that have since been resolved. 38 Gold Data 1999 1998 1997 ---- ---- ---- Gold sales (000 oz.) - 100% 806 987 976 Gold revenue realized per ounce - 100% $ 278 $ 306 $ 342 Average London PM fix per ounce $ 279 $ 294 $ 331 Costs and Expenses Total production costs decreased in 1999 primarily due to lower production. Consolidated per ounce cash costs increased slightly in 1999 compared with 1998. Higher per ounce cash costs at Golden Giant and Kori Kollo were partially offset by decreases at Holloway and Vera/Nancy and the exclusion of Lihir from 1999 calculations. The cost per ounce increase at Golden Giant was primarily attributable to reduced stope sizes, increased ground support costs and Block 5 test mining, while the Kori Kollo per ounce increase was primarily the result of lower production. Total production costs decreased 30% in 1998 compared with 1997, while production increased slightly. Lower operating costs resulting from weakened foreign currencies and the closures of the Red Dome and Silidor mines in 1997 contributed to the overall decrease. Partially offsetting this decrease was $4.7 million of additional reclamation charges accrued in the fourth quarter of 1998, primarily at the Battle Mountain Complex, and a full year of production from the Vera/Nancy mine. Consolidated per ounce cash costs decreased $42 in 1998 compared with 1997. All of the mines, except the residual heap leach operations at Reona, experienced per ounce cash cost reductions in 1998. Golden Giant and Kori Kollo's cash costs per ounce both decreased 9%, primarily a result of higher ore grades mined and lower overall costs, respectively. Aggregate Attributable Production Costs per Ounce of Gold Produced 1999 1998 1997 ---- ---- ---- Direct mining costs $ 166 $ 161 $ 200 Deferred stripping adjustments - 1 - Third party smelting, refining and transportation costs 2 2 5 By-product credits included in sales (7) (7) (12) ----- ----- ----- Cash operating costs 161 157 193 Royalties 3 3 4 ----- ----- ----- Total cash costs 164 160 197 Depreciation, depletion and amortization 79 94 80 Reclamation and mine closure costs 8 5 14 ----- ----- ----- Total production costs $ 251 $ 259 $ 291 ===== ===== ===== Reconciliation of Aggregate Attributable Cash Costs per Ounce Produced to Consolidated Financial Statements Millions, except ounces produced and per ounce amounts 1999 1998 1997 - ------------------------------------------------------ ---- ---- ----- Production costs per financial statements $149.7 $163.3 $234.3 Lihir production costs - 12.3 2.2 Minority interest portion of production cost (7.1) (10.5) (8.0) By-product credits included in sales (3.9) (5.8) (16.2) Reclamation and mine closure costs (6.4) (4.7) (12.7) Inventory change and other (5.7) (12.0) (27.0) ------ ------ ------ Production costs for per ounce calculation purposes $126.6 $142.6 $172.6 ====== ====== ====== Gold ounces produced, thousands 770 889 876 ====== ====== ====== Total cash costs per gold ounce produced $ 164 $ 160 $ 197 ====== ====== ====== 39 Cash production costs are presented in accordance with guidelines established by The Gold Institute. Royalties paid to the Bolivian government for the Kori Kollo mine are treated as income tax for per ounce cost calculations and are therefore not included in these cost calculations. Depreciation, depletion and amortization ("DD&A") decreased in total and on a cost per gold ounce produced basis in 1999 compared with 1998. These decreases were attributable to lower production and lower asset carrying values resulting from asset write-downs taken at the end of 1998. DD&A increased in total and on a cost per ounce basis in 1998 compared with 1997. The increase in total DD&A in 1998 was primarily a result of higher production while DD&A from the Lihir mine, which commenced commercial operations in the fourth quarter of 1997, contributed to the cost per ounce increase. Exploration, evaluation and other lease costs, net totaled $16.7 million in 1999 compared with $24.8 million in both 1998 and 1997 as exploration expenditures were reduced due to continued low gold prices. Exploration costs were net of exploration project sales of $0.5 million, $0.4 million and $4.0 million in 1999, 1998 and 1997, respectively. It is expected that approximately $11.0 million will be invested in exploration programs in 2000 in search of potential additional mineral deposits. A majority of these exploration funds have been allocated to five priority projects. Actual exploration expenditures may vary as a result of the acquisition of new properties and the success at existing properties. An environmental remediation charge of $9.5 million was recorded in the third quarter of 1999 based upon Battle Mountain's current best estimate of costs to address technical long-term water quality issues at the San Luis property. See "Other Information" below for further discussion. Asset write-downs of $35.9 million were recorded in the fourth quarter of 1999 representing the remaining carrying value of the Crown Jewel project. The write-downs were recorded due to current permitting uncertainties resulting from a January 19, 2000 Washington Pollution Control Hearings Board decision that reversed Crown Jewel's water rights permits and vacated its Clean Water Act certification. In the fourth quarter of 1998, as a result of continued low gold prices, $104.9 million of asset write-downs were recorded, including: Kori Kollo, $49.9 million; Crown Jewel, $40.3 million; and Reona, $10.8 million. Discounted future net cash flows were determined to be the appropriate measurement of fair value of the mine assets mentioned above. In the cash flows projections prepared by management used for the impairment analysis, management assumed a gold price of $300 per ounce for 2000, $325 per ounce for 2001 and $350 per ounce for each year thereafter. Estimates for operating costs, capital expenditures and reclamation and closure costs were made by Battle Mountain management and engineering personnel based on a detailed analysis of current and historical costs and cost trends. The projected cash flows were discounted using a discount rate of 5%. The $49.9 million write-down of the Kori Kollo mine was applied directly to the acquisition cost of the mine. The write-down will reduce future DD&A of the Kori Kollo mine by approximately $57 per ounce assuming no additional reserves are discovered at the mine. This write-down had no effect on the scope of the Kori Kollo operation. Of the $10.8 million write-down of the Reona mine, $7.5 was applied to deferred mining costs and $3.1 million was applied to mine development costs and machinery and equipment. The write-down will reduce future DD&A by $104 per ounce. Subsequent to the write-down the Reona property was placed on care and maintenance. Interest expense decreased in 1999 compared with 1998 due to lower average levels of outstanding debt. Interest expense increased in 1998 compared with 1997 primarily as a result of a full year of borrowing under the $145 million bank borrowing by Battle Mountain Canada in September 1997 and the expensing of interest on convertible debentures which were related to the Lihir project. 40 Interest income decreased in 1999 compared with 1998 as a result of lower average levels of cash invested, while interest income increased in 1998 compared with 1997 due to higher average levels of cash invested. Net foreign currency exchange gains totaled $8.2 million in 1999, mostly on U.S. dollar-denominated debt of subsidiaries, primarily Battle Mountain Canada. This compares with net foreign currency exchange losses of $12.4 million in 1998 and $7.8 million in 1997. Equity in losses and impairment charges of Lihir totaled $80.9 million in 1999 and $96.6 million in 1998, compared with equity in losses of $1.0 million in 1997. A $76.2 million impairment charge related to Niugini Mining's investment in Lihir was recorded in 1999 ($52.8 million in the fourth quarter) and a $90 million charge was recorded in 1998 (in the fourth quarter) as a result of decreases in the market value of the Lihir stock held by Niugini Mining. These decreases in value were considered to be other than temporary. The estimated fair value of the investment in Lihir at December 31, 1999 was determined to be the quoted market price of the Lihir shares to be held by Battle Mountain upon the effective date of the merger of Lihir and Niugini Mining, less the other net assets of Niugini Mining at December 31, 1999. The estimated fair value at December 31, 1998 was determined to be the quoted market price of the Lihir shares held by Niugini Mining at that time. Lihir commenced commercial production in October 1997. Minority interest in net loss was $31.7 million in 1999 compared with minority interest in net income of $1.1 million in 1998 and 1.7 million in 1997. Minority interest in 1999 included the effect of the impairment charges to Niugini Mining's investment in Lihir. Capitalized interest on the convertible debentures which were related to Lihir totaled $4.5 million in 1997. All interest incurred on the debentures subsequent to October 1997 was expensed. Income tax expense remained relatively constant in 1999 compared with 1998. An increase in the valuation allowance in 1999 included an $11.0 million increase associated with tax assets existing at December 31, 1998. This was partially offset by the release of a portion of the valuation allowance previously placed on Australian and Canadian deferred tax assets, specifically Australian net operating loss carryforwards and Canadian foreign currency exchange losses. Net of these items, however, an increase in the valuation allowance on deferred tax assets of $42.0 million was recorded in 1999. As a result, no tax benefits were recorded in 1999 for operating losses or asset write-downs. Income tax expense increased in 1998 compared with 1997 due to an $84.6 million increase in the valuation allowance on U.S. and Canadian deferred tax assets. The increases in the valuation allowance in both 1999 and 1998 resulted from Battle Mountain's assessments that we would not be able to realize the increases in deferred tax assets during those years because adequate amounts of future net income and capital gains were not assured under the "more likely than not" criteria. Battle Mountain changed its policy in 1999 regarding the permanent reinvestment of earnings of Battle Mountain Canada and decided that it would repatriate unremitted earnings from Battle Mountain Canada to the extent that funds were not required to meet Battle Mountain Canada's needs. No deferred taxes were recorded at December 31, 1999 as a result of this policy change. In 1997, certain events caused a revision in Battle Mountain's policy related to the unremitted earnings of Battle Mountain Canada. Battle Mountain sold the interest in Niugini Mining to Battle Mountain Canada in 1997 and the proceeds from the sale were expected to be sufficient to meet the operating needs in the U.S. in the near future. Accordingly, management no longer expected to remit to the U.S. any accumulated or future Canadian earnings generated by Battle Mountain Canada. The income expected to be derived from the reinvestment of the sale proceeds from the Niugini Mining sale into U.S. projects led management in 1997 to project U.S. taxable income in future years sufficient to recognize a portion of net operating loss carryforwards in the United States. 41 As a result of the above, a $16.4 million income tax benefit was recorded in 1997, representing the release of $11.0 million of deferred tax asset valuation allowances related to U.S. net operating losses and $5.4 million of Canadian withholding tax liabilities previously recorded. Battle Mountain also recognized the tax benefit of net operating loss carryforwards in the amount of $7.2 million in 1997 because of revised projections of future taxable income at certain subsidiaries. Mining income taxes decreased each year as a result of lower levels of Canadian mining income. Net operating loss carryforwards will expire beginning 2007 as follows: $13.9 million, $23.4 million, $16.9 million and $7.3 million in the years 2007 through 2010, respectively, $19.2 million in 2012, $8.5 million in 2018 and $16.7 million in 2019. Other Market Risk. Battle Mountain's profitability is significantly affected by changes in the market price of gold. Gold prices can fluctuate widely and are affected by numerous factors, such as demand, forward selling by producers, central bank gold sales, purchases and lending, currency valuations, investor sentiment and production levels. While Battle Mountain is a low-cost gold producer, a sustained period of low gold prices would have a material adverse effect on results of operations, financial position and cash flows. Foreign Currency Risk. Battle Mountain has operations in Canada, Bolivia, Australia and the United States. Gold produced at these operations is sold in the international markets for U.S. dollars. The cost structures of the Canadian and Australian operations are primarily Canadian and Australian dollar denominated, and accordingly, these affiliates' functional currencies are the Canadian dollar and the Australian dollar, respectively. As such, Battle Mountain is exposed to foreign currency risk at those locations to the extent that there are fluctuations in local currency exchange rates against the U.S. dollar. The potential foreign currency exchange gain or loss in earnings from a hypothetical 10% change in the 1999 year-end exchange rates of the Canadian and Australian dollar is approximately $11.8 million in the aggregate. Similar exchange rate gains or losses of other subsidiaries are immaterial since those companies' functional currencies are the U.S. dollar and immaterial balances are maintained in local currencies. The Canadian and Australian subsidiaries also have U.S. dollar denominated intercompany debt that totaled $85.4 million in the aggregate at December 31, 1999. While these intercompany balances are eliminated in consolidation, exchange rate changes do affect consolidated earnings. The potential foreign currency exchange gain or loss in non-cash earnings from a hypothetical 10% change in each of the respective December 31, 1999 exchange rates on these intercompany balances is $8.3 million in the aggregate. At December 31, 1999, Battle Mountain Canada also had outstanding $104.4 million of U.S. dollar denominated bank borrowings. The potential foreign currency translation gain or loss in non-cash earnings from a hypothetical 10% change in the December 31, 1999 Canadian dollar exchange rate is approximately $10.2 million. The investment in Lihir, effective with the merger of Lihir and Niugini Mining, will be classified as marketable securities available for sale. The carrying value of this asset will be adjusted for any impacts resulting from changes in the market value of Lihir common stock and Australian currency exchange rates. The potential non-cash effect on comprehensive income from a hypothetical 10% change in the exchange rate used in the December 31, 1999 valuation of this asset is approximately $6.3 million. Interest Rate Risk. Approximately $104.4 million of long-term debt outstanding at December 31, 1999, including current portions, is variable interest rate based. The potential increase or decrease in interest expense from a hypothetical one percent change in the December 31, 1999 interest rates in effect for this debt is approximately $1.0 million. Equity Risk. The potential non-cash effect on comprehensive income from a hypothetical 10% change in the market value of the Lihir common stock at December 31, 1999 is approximately $6.3 million. 42 Derivative Financial Instruments. During the third quarter of 1999, Battle Mountain modified its hedging policy. The purpose of this revised policy is to reduce exposure to fluctuating gold prices. The hedging policy allows the use of various derivative financial instruments, including forward sales contracts and options. Battle Mountain does not use derivative financial instruments for trading or speculative purposes. Prior to 1999 the Company did not engage in any significant gold hedging activities. Gold contracts outstanding at December 31, 1999 were as follows: Total or 2000 2001 2002 2003 Average ------ ---- ---- ---- ------- Written call options: Ounces 87,500 87,500 87,500 87,500 350,000 Average price per ounce $349 $349 $349 $349 $349 Purchased put options: Ounces 87,500 87,500 87,500 87,500 350,000 Average price per ounce $293 $293 $293 $293 $293 Flat Forwards Ounces 25,000 25,000 25,000 25,000 100,000 Average price per ounce $312 $312 $312 $312 $312 Forwards: Ounces 198,000 - - - 198,000 Average price per ource $279 - - - $279 The counterparties to hedged agreements may expose Given higher, lower or current Market prices, the Company will realize on average $312 per ounce on its flat forward contracts. Should the Company excercise all the puts it will realize on average $293 per ounce. If the counterparties exercise all the calls, the Company will sell the gold for $349. The estimated fair values of the purchased put options and written call options outstanding at December 31, 1999 were $3.2 million and $ (3.5) million, respectively. The written call options and the purchased put options are two components of an intergrated contract. The estimated fair value of the flat forwards outstanding at December 31, 1999 was $(0.5) milion. The estimated fair value of the forwards outstanding at December 31, 1999 was $ (2.8) million. These estimated fair values were determined from a third party model. The forwards are part of the company's overall financial planning. These contracts cover gold that was on deposit at a refinery or leased to third parties. All the contracts mature by March 31, 2000. Battle Mountain, at times, is a party to lease transactions and will sell the leased gold into the spot market. Whenever a spot sale is made, a forward purchase contract is entered into to assure delivery of the gold at the end of the lease. Battle Mountain Canada had outstanding lease contracts with Battle Mountain for 108,000 ounces of gold at December 31, 1999. The counterparties to hedged agreements may expose Battle Mountain to certain credit-related losses in the event of nonperformance, generally by the amount by which the contract price exceeds the spot price of a commodity. Attempts to minimize credit exposure are made by limiting counterparties to major financial institutions that meet specific credit rating standards. Collateral is not required from counterparties. Management believes that the risk of incurring significant credit-related losses is remote. Inflation and Changing Prices. Gold production costs and corporate expenses are subject to normal inflationary pressures, which to date have not had a significant impact on results of operations. Foreign Operations. All revenues generated during 1999 were from mining operations outside the United States, while assets attributable to those operations were approximately $308.6 million at December 31, 1999. As a result, Battle Mountain is exposed to risks normally associated with operations located outside the United States, including political, economic, social and labor instabilities, as well as foreign exchange controls, currency fluctuations and taxation changes. Foreign operations and investments may also be subject to laws and policies of the United States affecting foreign trade, investment and taxation that could affect the conduct or profitability of those operations. 43 Environmental Matters. All of Battle Mountain's mining and processing operations are subject to reclamation and closure requirements. Such requirements are monitored and cost estimates are prepared to meet the legal and regulatory requirements of the various jurisdictions in which business is conducted are periodically revised. Where possible, plans for ongoing operations and future mine development are implemented in a manner that contributes to the fulfillment of reclamation and closure obligations in a cost effective manner through the conduct of ongoing operating activities. Costs estimated to be incurred in future periods which cannot be addressed in this manner are charged to operations through provisions based on the units-of- production method such that the estimated cost of the ultimate reclamation and closure of the mine is fully provided for by the time mineral reserves are depleted. The timing of actual cash expenditures for reclamation may be accelerated or deferred, depending on cost and other determinations which may make such decisions prudent in the circumstances. Battle Mountain believes that these policies and practices adequately address reclamation obligations and provide a systematic and rational method of charging such costs to operations consistent with industry practice. Although the ultimate amount of the above mentioned obligations to be incurred is uncertain, these future costs, including severance costs and remediation costs, are estimated to be approximately $53.9 million, of which $35.8 million had been accrued at December 31, 1999. Approximately $6.3 million of these costs are recorded as current liabilities. As part of closure and reclamation efforts with respect to the San Luis mine in Colorado, which ceased operations in November 1996, Battle Mountain voluntarily partially backfilled the San Luis West Pit. As water percolates through the oxidized backfilled rock, the water contacts and solubilizes certain naturally occurring oxidation by-products which have been identified at elevated levels at monitoring sites located within and downgradient of the West Pit. An Independent Ecological Risk Assessment has been performed which indicates that the elevated levels of these constituents do not pose a risk to human health or the environment. On August 20, 1999 the Colorado Department of Public Health and the Environment issued a Notice of Violation and Cease and Desist Order to Battle Mountain, alleging discharges at the San Luis mine to waters not permitted under the Colorado Water Quality Control Act. Battle Mountain filed an Answer to the Notice denying that such a violation has occurred. The Notice requires Battle Mountain to take a number of steps that the Department of Public Health asserts to be necessary to attain compliance with the Water Quality Control Act. These steps include the submittal of a permit application, a monitoring plan and a response plan. Battle Mountain has made all submittals required by the Notice and has commenced extensive response activities. On October 8, 1999, the Department of Public Health issued an Amendment to the Notice. The Amendment authorized the operation of a water treatment facility and the discharge of treated water. Battle Mountain has commenced treatment and discharge operations. It is not possible to predict the nature or scope of any further action that might be taken by regulatory authorities regarding the San Luis property. These actions could include seeking injunctive relief, mandating the posting of financial assurance, requiring further on-site response actions and/or the imposition of monetary penalties. An environmental remediation charge of $9.5 million was recorded in the third quarter of 1999 to address technical long-term water quality issues at the San Luis property. It is reasonably possible that this estimate may change in future reporting periods as further information becomes available. Battle Mountain has investigated the infiltration of liquids from the tailings facility at the Battle Mountain Complex into the groundwater. This facility is of an earthen design and construction, which was in keeping with accepted engineering and environmental control practices at the time it was constructed. Pursuant to the state-issued water pollution control permit, Battle Mountain has conducted a groundwater investigation regarding the tailings area and based upon the investigation has prepared and submitted an evaluation of mitigation alternatives for the groundwater. It is expected that the affected groundwater will be utilized in connection with Battle Mountain's proposed Phoenix operations. In the interim, a state approved groundwater pump- back system has been implemented. Also, pursuant to work plans developed under the state issued water pollution control permit covering the site, Battle Mountain has investigated certain low quality stormwater run-off in adjacent highly mineralized areas, and based upon these 44 investigations, has designed and obtained state approvals to install a system to collect and use, evaporate or treat this water. Residual localized contamination in the groundwater in these areas will be addressed pursuant to groundwater site characterization and closure activities discussed immediately below. Battle Mountain is currently conducting further site characterization studies for the Battle Mountain Complex area and is communicating with the Nevada Division of Environmental Protection to determine the ultimate reclamation and closure requirements. Site characterization results or the imposition by regulatory authorities of unanticipated reclamation and closure standards could substantially increase future reclamation and closure requirements and expenditures. Bolivia first enacted federal environmental legislation in 1992 and the promulgation of general environmental regulations followed in December 1995. The regulations require obtaining environmental licenses for both existing and new operations, establish air and water quality discharge standards, establish standards for the management of solid and hazardous wastes, provide procedures and schedules for existing operations to come into compliance, and require the preparation of environmental impact studies in some instances. Pursuant to these regulations, Inti Raymi prepared an Environmental Statement as an application for an environmental license for the Kori Kollo mine and submitted such to the government in July 1997. Battle Mountain received final approval of the environmental license for the Kori Kollo mine in March 1999. In August 1997, new regulations, the Environmental Regulations for Mining Activities, were promulgated. These regulations contain a set of general technical and regulatory standards and norms for environmental management within the mining industry. In addition, the government is continuing to develop specific technical standards for the mining industry. Under the transitory provisions of the Environmental Regulations for Mining Activities, we will have eighteen (18) months from the date of approval of its environmental license to submit a document which reflects compliance with the new regulations. The regulations promulgated in 1995 and 1997 contain environmental standards and requirements applicable to the Kori Kollo mine which, depending on how the regulations are implemented and interpreted, could require expenditures and changes in operations, resulting in a material adverse effect on financial condition, cash flows or results of operations. However, based on the evaluation of the data collected to date, and assuming reasonable interpretation and implementation of existing regulations and the reasonableness of the adoption of additional specific technical standards, Battle Mountain does not anticipate that compliance will have a material adverse effect on results of operations, financial condition or cash flows. Pending Accounting Standards. In June 1998, Financial Accounting Standards Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. This standard was amended by Accounting Standard No. 137, which deferred the effective date of implementation to the first quarter of fiscal years beginning after June 15, 2000. Accounting Standard No. 133 requires companies to record derivative financial instruments on the balance sheet as assets or liabilities, as appropriate, at fair value. Gains or losses resulting from changes in the fair values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Battle Mountain is evaluating the impact that implementation of this standard may have on its consolidated results of operations, financial position and liquidity. Year 2000. The change from 1999 to the Year 2000 had no effect on Battle Mountain's ability to conduct business. No disruptions that were attributable to the Year 2000 occurred at any location nor did the date change have any visible affect on Battle Mountain's vendors and suppliers. Even though the date change has passed, monitoring of suppliers and systems will continue. While there were no interruptions immediately following the change to Year 2000, there is still the possibility of problems that may arise as a result of unused vendors or suppliers, infrequently used parts of the business system or periodic business processes not yet executed. Although no assurance can be given, Battle Mountain does not anticipate any material adverse effect regarding Year 2000 compliance on consolidated results of operations, financial position or cash flows. 45 Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------- See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Other." 46 Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- I. Battle Mountain Gold Company Report of Independent Accountants............................... 47 Consolidated Statement of Operations............................ 48 Consolidated Balance Sheet...................................... 49 Consolidated Statement of Shareholders' Equity.................. 50 Consolidated Statement of Cash Flows............................ 51 Notes to Consolidated Financial Statements...................... 52 Supplemental Financial Information (Unaudited).................. 75 47 Report of Independent Accountants To the Board of Directors and Shareholders of Battle Mountain Gold Company: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Battle Mountain Gold Company and its subsidiaries at December 31, 1999 and December 31, 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of Battle Mountain'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. As described in Note 19(a), Battle Mountain revised its December 31, 1999 and 1998 consolidated financial statements to present its 50.45% interest in Niugini Mining Limited as a consolidated subsidiary. As described in note 19(b), Battle Mountain revised its December 31, 1999 and 1998 consolidated financial statements to reclassify bullion and bullion settlements from cash and cash equivalents to accounts receivable and revised its December 31, 1998 and 1997 financial statements as a result of a change to its recorded equity in the earnings of a significant investee. As discussed in Note 2, effective January 1, 1997, Battle Mountain changed its method of accounting for computing depreciation, depletion, and amortization related to its Bolivian subsidiary. PricewaterhouseCoopers LLP Houston, Texas February 18, 2000, except for Note 19(a), as to which the date is May 12, 2000 and Note 19 (b) which the date is November 21, 2000. 48 BATTLE MOUNTAIN GOLD COMPANY CONSOLIDATED STATEMENT OF OPERATIONS Years Ended December 31 1999 1998 1997 ---- ---- ---- Millions, except per share amounts (as restated) (as restated) (as restated) - ---------------------------------- Sales (Note 13) $ 228.2 $ 276.6 $ 344.9 ------- ------- ------- Costs and Expenses Production costs 149.7 163.3 234.3 Depreciation, depletion and amortization 64.2 79.6 72.8 Exploration, evaluation and other lease costs, net 16.7 24.8 24.8 Environmental remediation charge (Note 14) 9.5 - - Asset write-downs (Note 7) 35.9 104.9 - Merger expense (Note 3) - - 2.7 General and administrative expenses 15.2 14.1 13.6 ------- ------- ------- Total costs and expenses 291.2 386.7 348.2 ------- ------- ------- Operating Loss (63.0) (110.1) (3.3) Interest expense (15.1) (17.8) (13.9) Interest income 6.7 10.7 6.0 Foreign currency exchange gain (loss), net 8.2 (12.4) (7.8) Equity in losses and impairment charges of Lihir (Note 4) (80.9) (96.6) (1.0) Minority interest in net loss (income) 31.7 (1.1) (1.7) Capitalized interest (Note 4) - - 4.5 Other income, net 0.4 0.5 0.8 ------- ------- ------- Loss Before Income Taxes (112.0) (226.8) (16.4) Income tax benefit (expense) (Note 10) (7.6) (7.8) 17.4 Mining income tax benefit (expense) (Note 10) 0.2 (6.0) (6.7) ------- ------- ------- Loss Before Cumulative Effect of Accounting Change (119.4) (240.6) (5.7) Cumulative effect of accounting change, net (Note 2) - - (3.7) ------- ------- ------- Net Loss (119.4) (240.6) (9.4) Preferred dividends (Note 9) 7.5 7.5 7.5 ------- ------- ------- Net Loss to Common Shares $(126.9) $(248.1) $(16.9) ======= ======= ======= Basic and Diluted Loss per Common Share Before cumulative effect of accounting change $ (0.55) $ (1.08) $ (.05) Accounting change - - (.02) ------- ------- ------- Total $ (0.55) $ (1.08) $ (.07) ======= ======= ======= Dividends per Common Share $ - $ .05 $ .05 Average Common Shares Outstanding for Basic and Diluted Loss per Share Purposes 229.9 229.8 229.7 The accompanying notes are an integral part of these financial statements. 49 BATTLE MOUNTAIN GOLD COMPANY CONSOLIDATED BALANCE SHEET December 31 Millions except per share amounts 1999 1998 - --------------------------------- ---- ---- (as restated) (as restated) ASSETS Current assets Cash and cash equivalents $ 67.5 $ 156.9 Restricted cash - 7.7 Accounts and notes receivable, net (Note 1) 36.7 55.1 Product inventories 8.7 8.9 Materials and supplies, net (Note 1) 22.4 23.6 Other current assets 7.9 2.7 ------- ------- Total current assets 143.2 254.9 Investments (Note 5) 79.0 168.7 Restricted cash (Note 8) 40.0 0.7 Property, plant and equipment, net (Notes 6 and 7) 299.6 341.9 Other assets (Note 10) 6.7 20.4 ------- ------- Total Assets $ 568.5 $ 786.6 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings (Note 8) $ - $ 14.9 Current maturities of long-term debt (Note 8) 2.6 37.5 Debt due upon disposal of Lihir (Note 8) 30.0 - Accounts payable 16.0 14.5 Income and mining income taxes payable (Note 10) 16.7 23.9 Interest payable 6.4 1.5 Salaries, wages and benefits payable 6.1 3.7 Other current liabilities (Note 14) 11.1 9.7 ------- ------- Total current liabilities 88.9 105.7 Long-term debt (Note 8) 176.8 203.6 Deferred income and mining income taxes (Note 10) 64.5 72.0 Deferred mine reclamation and closure costs (Note 14) 29.5 25.3 Other liabilities 25.0 25.0 ------- ------- Total Liabilities 384.7 431.6 ------- ------- Minority interest 65.0 107.2 ------- ------- Commitments and contingencies (Note 14) - - Shareholders' equity (Note 9) Convertible preferred stock, $1.00 par value: Authorized - 50.0 million shares; issued and outstanding - 2.3 million shares (1999 and 1998) 110.6 110.6 Common stock, $.10 par value: Authorized - 500.0 million shares; issued and outstanding - 229.9 million shares (1999) and 229.8 million shares (1998) 13.2 12.9 Additional paid-in capital 343.8 344.0 Accumulated deficit (327.3) (200.4) Accumulated other comprehensive loss (21.5) (19.3) ------- ------- Total Shareholders' Equity 118.8 247.8 ------- ------- Total Liabilities and Shareholders' Equity $ 568.5 $ 786.6 ======= ======= The accompanying notes are an integral part of these financial statements. 50 BATTLE MOUNTAIN GOLD COMPANY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Retained Accumulated Additional Earnings Other Total Preferred Common Paid-in (Accumulated Comprehensive Shareholders' Stock Stock Capital Deficit) Income (Loss) Equity ----- ----- -------- ------- ------------ ------------------ Millions - -------- December 31, 1996 $110.6 $11.3 $344.2 $ 87.6 $ (15.4) $ 538.3 Net loss - - - (9.4) - (9.4) Currency translation - - - - (5.6) (5.6) adjustments ------- Total comprehensive loss (15.0) Shares issued - - 1.1 - - 1.1 Shares exchanged - 1.0 (1.0) - - - Common stock dividends - - - (11.5) - (11.5) Preferred stock dividends - - - (7.5) - (7.5) ------------------------------------------------------------------------------------------------- December 31, 1997 110.6 12.3 344.3 59.2 (21.0) 505.4 Net loss - - - (240.6) - (240.6) Currency translation - - - - 1.7 1.7 adjustments ------- Total comprehensive loss (238.9) Shares issued - - 0.3 - - 0.3 Shares exchanged - 0.6 (0.6) - - - Common stock dividends - - - (11.5) - (11.5) Preferred stock dividends - - - (7.5) - (7.5) ------------------------------------------------------------------------------------------------- December 31, 1998 110.6 12.9 344.0 (200.4) (19.3) 247.8 Net loss - - - (119.4) - (119.4) Currency translation - - - - (2.2) (2.2) adjustments ------- Total comprehensive loss (121.6) Shares issued - - 0.1 - - 0.1 Shares exchanged - 0.3 (0.3) - - - Preferred stock dividends - - - (7.5) - (7.5) ------------------------------------------------------------------------------------------------- December 31, 1999 $110.6 $13.2 $343.8 $(327.3) $(21.5) $ 118.8 ================================================================================================= The accompanying notes are an integral part of these financial statements. 51 BATTLE MOUNTAIN GOLD COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS Years Ended December 31 Millions 1999 1998 1997 - -------- ---- ------ ---- (as restated) (as restated) (as restated) CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(119.4) $(240.6) $ (9.4) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation, depletion and amortization 64.2 79.6 72.8 Environmental remediation charges 9.5 - - Asset write-downs 35.9 104.9 - Deferred income and mining income taxes 2.1 (7.1) (33.8) Foreign currency exchange loss (gain), net (8.2) 12.4 7.8 Equity in losses (income) and impairment charges of Lihir 80.9 96.6 1.0 Minority interest in net income (loss) (31.7) 1.1 1.7 Cumulative effect of accounting change, net - - 3.7 Increase (decrease) in accrued reclamation costs (3.2) 0.6 4.6 Change in working capital accounts, net (Note 16) 19.9 16.3 1.4 Decrease in deferred mining costs - 11.2 2.2 Other, net (0.7) 2.7 3.0 ------- ------- ------ Net Cash Flows Provided by Operating Activities 49.3 77.7 55.0 ------- ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (49.3) (46.5) (62.4) Crown Butte liquidating dividend to minority shareholders (11.0) - - Proceeds from sales of assets 11.9 2.0 4.7 New World settlement, net - 34.9 - Investment in Lihir Gold Limited - (11.5) - Decrease (increase) in other assets 0.6 2.3 (0.6) Increase in advances to affiliates - (4.7) (3.4) Other, net (0.7) (1.0) (1.3) ------- ------- ------ Net Cash Flows Used in Investing Activities (48.5) (24.5) (63.0) ------- ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES Cash proceeds from borrowings - - 156.7 Debt repayments (31.2) (44.3) (24.5) Increase (decrease) in short-term borrowings (14.9) 9.9 (16.9) Cash dividend payments (7.5) (19.0) (18.9) Decrease (increase) in restricted cash (31.0) 10.2 (3.3) Other, net 0.2 (0.5) 0.7 ------- ------- ------ Net Cash Flows Provided by (Used in) Financing Activities (84.4) (43.7) 93.8 ------- ------- ------ Effect of Exchange Rate Changes on Cash (5.8) (2.4) (1.0) ------- ------- ------ Net Increase (Decrease) in Cash and Cash Equivalents (89.4) 7.1 84.8 Cash and cash equivalents at beginning of year 156.9 149.8 65.0 ------- ------- ------ Cash and Cash Equivalents at End of Year $ 67.5 $ 156.9 149.8 ======= ======= ====== The accompanying notes are an integral part of these financial statements. 52 BATTLE MOUNTAIN GOLD COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Index 1. Accounting Policies Summary.................................. 52 2. Change in Accounting Method.................................. 55 3. Merger....................................................... 56 4. Niugini Mining and Lihir Gold Limited........................ 56 5. Investments.................................................. 57 6. Property, Plant and Equipment................................ 57 7. Asset Write-downs............................................ 57 8. Debt......................................................... 58 9. Shareholders' Equity......................................... 59 10. Income and Mining Income Taxes............................... 60 11. Common Stock and Stock Options............................... 62 12. Benefit Plans................................................ 63 13. Geographic and Segment Information........................... 66 14. Commitments and Contingencies................................ 67 15. Derivative Financial Instruments............................. 69 16. Supplemental Cash Flow Information........................... 70 17. Fair Value of Financial Instruments.......................... 70 18. Summarized Financial Information............................. 71 19. Restatement.................................................. 72 Note 1. Accounting Policies Summary --------------------------- Nature of Operations. Battle Mountain Gold Company and its subsidiaries (collectively "Battle Mountain") are engaged in the gold mining business in the United States, Canada, Bolivia and Australia, and in the exploration and evaluation of precious metals properties, primarily in Latin America, Australia, Canada and the United States. Battle Mountain Gold Company was incorporated in Nevada in 1985. Basis of Presentation and Restatement. The accompanying consolidated financial statements include the accounts of Battle Mountain Gold Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany investments, accounts and transactions have been eliminated in consolidation. Consistent with accepted mining industry practices, interests in unincorporated mining joint ventures are reported using the proportionate consolidation method whereby Battle Mountain reports its proportionate share of assets, liabilities, revenue and expenses. Certain amounts for prior years have been reclassified in the consolidated financial statements to conform with the current presentation. After issuing Battle Mountain's 1999 financial statements and filing the Form 10-K with the Securities and Exchange Commission, following extensive discussion with its independent accountants, management determined it was necessary to revise the financial statement presentation of Battle Mountain's former interest in Niugini Mining Limited. In 1998, Battle Mountain resolved to dispose of its 50.45% equity interest in Niugini Mining Limited and deconsolidated the subsidiary, classifying it as an asset held for sale. However, in accordance with provisions of Statement of Financial Accounting Standards No. 94, "Consolidation of all Majority-Owned Subsidiaries," Battle Mountain's 1999 and 1998 financial statements and related disclosures are restated from amounts previously reported to properly reflect the full consolidation of Battle Mountain's interest in Niugini Mining. See Note 19 for further discussion. After issuing Battle Mountain's 1999 financial statements and filing two amendments to the Form 10-K with the Securities and Exchange Commission (SEC), following extensive discussion with the SEC, Management determined it was necessary to revise the financial statement presentation of Battle Mountain's cash and cash equivalents and its recorded equity in income of Lihir. Cash and cash equivalents were reclassified to remove gold bullion and bullion settlements from this line item and include them in accounts receivable to more appropriately present the nature of these items. Management also determined that the amounts of its recorded equity in income of Lihir had been incorrectly based on financial statements of Lihir that were not prepared in accordance with U.S. generally accepted accounting principles (GAAP), but rather, originally were based on International accounting standards. The Company's equity in income of Lihir has been revised to reflect its equity on a U.S. GAAP basis. Also, a part of a review of the financial statements of Lihir, by the SEC, Lihir's management determined that its U.S. GAAP reconciliation needed to be revised. Estimates, Risks and Uncertainties. The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts in the financial statements. The more significant areas requiring the use 53 of estimates relate to mineral reserves, reclamation and environmental obligations, postretirement and other employee benefit liabilities, valuation allowances for deferred tax assets, fair values of financial instruments and recoverability of long-lived assets. While management believes that the estimates used are reasonable, actual results could differ from these estimates. Realization of Battle Mountain's assets is subject to various risks including permitting of Battle Mountain's new mines, reserves estimation, gold prices and environmental factors. Cash and Cash Equivalents. All highly liquid instruments purchased with an original maturity of three months or less are considered to be cash equivalents. Revenue Recognition. The Company's revenue recognition policies are common practice in the mining industry and unlike most other industries. Revenue is recognized when gold and silver in the form of dore (a combination of gold and silver) or concentrate is produced at mines whose product has a high gold content (in excess of 70%) and for which the additional costs of refining and marketing are minimal (less than 1% of the value). The only condition for recognition of revenue in this instance is the production of the gold dore or concentrate. In order to get the product to the dore stage the gold-bearing ore must be mined, transported to a mill or heap leaching pad where the ore is ground and/or crushed. The ground and/or crushed ore is then chemically treated to extract the gold into a solution. This solution is then subjected to various processes to precipitate a gold-bearing material that can be melted and poured into a mold. At this point the product is not interchangeable and in salable form. Approximately 39% of the Company's revenue was recognized when products were produced for the three years ended December 31, 1999. The remaining 61% of revenue for the three years ended December 31, 1999 was recognized when gold and silver in the form of dore or concentrate was shipped from the mine site at mines whose product has a high content of metals other than gold (e.g. silver and/or copper). Further refining and marketing costs are minimal (less than 1% of the value). The only conditions for recognition of revenue in this instance are the shipment of the gold dore or concentrate and the passing of the risk of loss to a third party. Risk of loss passes contractually to the transporter when the product is picked up at the mine and then to the refiner upon receipt at the refinery, however title does not pass at this time. In the event that a loss occurs to the product prior to delivery to the final purchaser the amount of the loss would be determined based on the number of ounces indicated on the bill of lading which is an estimate based on assays performed at the mine and an agreed to price. At all of the Company's locations, revenue estimates for essentially all of the gold produced or shipped are made based on sales prices determined via sales contracts which are entered into upon production or up to ten days after production. Revenue estimates are based on spot gold prices for minimal amounts of gold not covered by sales contracts. Estimated smelter losses and transportation and refining costs are also included in these revenue estimates. Net revenues are adjusted in future periods for any difference between the actual amount received and the estimate. The maximum net revenue adjustment for any given shipment attributable to quantity alone was plus or minus approximately 1.6% and the maximum net revenue adjustment for any given shipment attributable to price was plus or minus approximately 1.7% in 1997, 1998 and 1999. At all locations the risk of loss transfers from the Company at the time of shipment. The maximum amount of time between initial revenue recognition and final delivery of the Company's products and transfer of risk of loss to a purchaser under a firm agreement providing a fixed or determinable price for any given sale during 1997, 1998 and 1999 was four, five and seven months, respectively. The amount of time between initial revenue recognition and final delivery has increased over the past three years for cash management purposes. The average time between production of dore or concentrate and the completion of the refining process which produces 99% pure gold and silver is approximately 30 days. The time between the completion of the refining process and delivery to the final purchaser exceeds 30 days at the Golden Giant mine on a regular basis for cash management purposes. Realization of the value of the Company's inventories of gold and silver for which revenue has been recognized is subject to the risk that the counterparty (purchaser) will not have the ability to make payment upon final delivery which would require the Company to sell to another purchaser at a different price. All purchasers' credit ratings were investment grade and the Company has never experienced a default on the part of a purchaser. The Company is also subject to the risk that the refiner will not be able to make delivery to the customer which can occur if the refiner is unable to complete the refining process, the product is lost due to theft or bankruptcy or for some other reason. The Company mitigates this risk by dealing only with reputable refiners. The Company has never experienced a loss resulting from a refiner's inability to make delivery. Realization of the value of those inventories maintained by locations whose functional currency is other than the U.S. dollar are subject to risks associated with foreign currency exchange rate changes. At operations on care and maintenance, revenues from gold recoveries are credited against production costs. During the year ended December 31, 1999, $7.1 million of revenue was credited against production costs for the San Cristobal and Reona mines because these mines were placed on care and maintenance effective January 1, 1999. There were no revenues credited against production costs for the years ended December 31, 1998 and 1997 because no operations were on care and maintenance during those periods. Accounts Receivable. Accounts receivable at December 31, 1999 and 1998 included other receivables of approximately $3.7 million and $7.2 million, respectively, relating to Value Added Tax credits and import duty receivables. The December 31, 1999 balance is net of a $1.1 million allowance for non- recoverable amounts that was established in 1999. 54 Inventories. Generally, product inventories, consisting of gold and silver, are reported at the lower of cost or net realizable value using the first-in, first-out method. Gold produced by Battle Mountain's Golden Giant mine is valued at estimated net realizable value when it reaches a saleable form because it is readily marketable at quoted market prices and its price is fixed through forward sales contracts with no further substantial costs of marketing. Inventories of materials and supplies are valued at the lower of average cost or estimated net realizable value. The December 31, 1999 amount presented is net of reserves for obsolescence of $2.8 million that were established in 1999. Property, Plant and Equipment. Property, plant and equipment is stated at cost. Expenditures for the development of new mines and major development expenditures at existing mines, which are expected to benefit future periods, are capitalized after proven and probable reserves are established. Exploration and development costs expended to maintain production at operating mines are expensed as incurred. In certain cases, mining costs associated with waste rock removal are deferred as development costs and charged to operations on the basis of the average stripping ratio over the life of the mine. When such mining costs are deferred, deferral begins upon the commencement of mining and only after a proven and probable reserve has been established. Other property, plant and equipment includes capitalized lease costs and mine development costs for projects in progress. Depreciation, depletion and amortization ("DD&A") of mining properties and related assets is calculated using the units-of-production method based upon estimated recoverable proven and probable reserves that will be produced prior to the expiration of existing mining licenses. Assets having an estimated life less than the estimated life of the associated proven and probable reserves are depreciated on a straight-line basis over the expected remaining life of the asset as follows: Heavy vehicles 3 to 8 years Machinery and equipment 3 to 10 years Light vehicles 3 to 5 years Computer equipment 3 years Impairment of Long-lived Assets. An impairment loss is recognized in the event facts and circumstances indicate the carrying amount of an asset may not be recoverable. Battle Mountain reviews asset carrying values for impairment by estimating future undiscounted cash flows to be derived from the assets use at the lowest level (mining property) at which identifiable cash flows are generated. Estimated undiscounted future net cash flows from each mine and non- operating property are calculated from reserves, production (that is estimated to occur prior to the expiration of existing mining licenses), sales prices (considering historical and current prices, price trends and related factors), operating capital and costs and reclamation costs. The amount of impairment loss recorded is the difference between the fair value and the carrying value of the impaired asset. Fair value is determined based on the future cash flows from each mine and non-operating property discounted at a rate commensurate with the risks. Battle Mountain's estimates of future cash flows are subject to risks and uncertainties. It is reasonably possible that changes in estimates could occur which may affect the expected recoverability of Battle Mountain's investment in its mineral properties. Investments. Investments in which Battle Mountain owns a 20% to 50% interest or has the ability to exercise significant influence are accounted for using the equity method. Other investments in non-marketable securities of companies in which Battle Mountain owns less than a 20% interest and does not have the ability to exercise significant influence are recorded at cost. Investments in equity securities that have readily determinable fair values are classified as available for sale. Unrealized gains and losses on these investments are recorded in accumulated other comprehensive income. For all investments, unrealized losses that are other than temporary are recognized in net income. Realized gains and losses are determined on the specific identification method and are included in net income. 55 Exploration and Evaluation Expenditures. All exploration and pre- development evaluation expenditures are expensed as incurred. Capitalization of Interest. Interest costs incurred to finance projects are capitalized until those projects commence commercial production. Reclamation and Closure Costs. Estimated expenditures for future reclamation, remediation and closure costs of operating sites are accrued on a units-of-production method based upon estimated recoverable production from proven and probable mineral reserves that will be produced prior to the expiration of existing mining licenses. Remediation Costs. Remediation liabilities are expensed upon the determination that a liability has been incurred and where the minimum cost or reasonable estimate of the cost can be determined. Remediation cost estimates are made under several likely scenarios. The most likely scenario is used for accrual purposes. The cost estimates are prepared on an undiscounted basis. Income and Mining Income Taxes. Battle Mountain follows the asset and liability method of accounting for income taxes. The provision for income taxes includes federal, state, and foreign income taxes currently payable and deferred based on current tax laws. Deferred income taxes are established for the tax consequences of differences between the financial statement and tax bases of assets and liabilities. Mining income taxes represent taxes levied primarily by the Canadian province of Ontario on defined profits from mining activities performed in the province. Since these taxes are based on a percentage of mining profits they are considered to be an income tax and therefore have been presented as income taxes in the consolidated statements of operations. Deferred income taxes have been provided on a portion of the undistributed earnings of foreign subsidiaries and joint ventures, with the exception of Niugini Mining, which is in a cumulative loss position. With respect to Battle Mountain Canada, the Company's policy is to remit earnings to the extent that funds are not required to meet Battle Mountain Canada's needs. It is not practical to estimate the amount of taxes that might be payable on the eventual remittance of such earnings. On remittance, certain countries impose withholding taxes that, subject to limitations, could generate tax credits that would reduce any U.S. tax. Battle Mountain pays royalties to the Bolivian government that are based on the greater of a royalty calculated as a percentage of gold and silver sales or a complementary tax based on net income. Since the royalty typically exceeds the complementary tax the amounts incurred are included in production costs in the statement of operations. Stock-Based Compensation. Employee stock-based compensation costs are accounted for using the intrinsic value method. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," is followed in accounting for non-employee stock-based compensation. Currency Translation. Amounts in foreign currencies are translated into U.S. dollars using the translation procedures specified in Accounting Standard No. 52, "Foreign Currency Translation." When local functional currency is translated to U.S. dollars, the effects of remeasurement are recorded as other comprehensive income in the consolidated statement of shareholders' equity. For foreign subsidiaries with U.S. dollar functional currency, the effects of remeasurement are included in income. Exchange rate related gains and losses arising from transactions denominated in a foreign currency are translated at average exchange rates and are included in income. Earnings per Share. Basic earnings per share is calculated by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding, including the Battle Mountain Canada Ltd. Exchangeable Shares. Diluted earnings per share also gives effect to the impact convertible securities, such as preferred stock and common stock options, if dilutive, would have on net income/loss and the average common shares outstanding if converted at the beginning of the year. 56 Battle Mountain's outstanding common stock options (see Note 11), convertible debentures (see Note 8) and convertible preferred stock (see Note 9) were anti- dilutive and therefore were not included in the calculations of basic and diluted loss per share amounts in 1999, 1998 and 1997. Issuance of Stock by Subsidiaries. The issuance of stock by subsidiaries is accounted for as a capital transaction in the consolidated financial statements. Derivative Financial Instruments. In the normal course of business, derivative financial instruments may be used to reduce commodity price, foreign currency exchange rate, interest rate and other economic risks. Derivative financial instruments are not held or issued for trading purposes. Gains, losses and expenses related to contracts for the sales of produced metals are netted against revenue when the hedged production is sold. Put and call options may also be purchased and/or sold. Currently, call options do not qualify for deferral accounting and, accordingly, are marked to market. Battle Mountain may also enter into offsetting written call options and purchased put options ("collars") which do qualify for deferral accounting. Accordingly, the premiums paid or received related to collars are netted against or added to revenue in the period of expiry. Premiums paid for purchased interest rate caps are amortized as interest expense over the terms of the interest rate cap agreement. Unamortized premiums are included in other assets in the consolidated balance sheet. Gains and losses under cap agreements are recorded as a reduction of or increase in interest expense. Gains and losses on transactions involving foreign exchange contracts designated as hedges of existing assets and liabilities are deferred as exchange rates change and are recognized in income as foreign currency exchange gains and losses when the underlying transactions are realized. Gains and losses on contracts designated as hedges of net investments in foreign subsidiaries are deferred as exchange rates change and are recognized in shareholders' equity as other comprehensive income when the underlying transactions are realized. Amortization of the discount or premium on such contracts is recognized in shareholders' equity as other comprehensive income over the life of the contract. Accounting Standards and Statements. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-5, "Reporting on the Cost of Start-up Activities". This statement requires that costs of start-up activities be expensed as incurred, and also requires retroactive application of the statement. Battle Mountain adopted this statement as required on January 1, 1999. The adoption of this statement had no impact on results of operations, financial position or cash flows. In June 1998, Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. This standard was amended by Accounting Standard No. 137, which deferred the effective date of implementation to the first quarter of fiscal years beginning after June 15, 2000. Accounting Standard No. 133 requires companies to record derivative financial instruments on the balance sheet as assets or liabilities, as appropriate, at fair value. Gains or losses resulting from changes in the fair values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Battle Mountain is evaluating the impact that implementation of this standard may have on consolidated results of operations, financial position and liquidity. Note 2. Change in Accounting Method --------------------------- Effective January 1, 1997, Empresa Minera Inti Raymi S.A., an 88%-owned Bolivian gold mining subsidiary, changed its method of calculating DD&A of mining properties and certain related assets at the Kori Kollo mine. Under the newly adopted method, Inti Raymi calculates units-of-production DD&A on an ounces-produced basis and applies such DD&A rate to the total estimated development costs to be incurred throughout the mine life of Kori Kollo. Battle Mountain correspondingly changed its method of amortizing the premium associated with its investment in Inti 57 Raymi to an ounces-sold basis. Previously, both such DD&A calculations were based on a tonnes-milled rate applied to the capital costs incurred to date. Both DD&A methods are acceptable accounting practice. However, management considers the current method preferable because, in their opinion, it more accurately matches mining revenues with associated expenses and it conforms to more prevalent industry practice. The cumulative effect of this accounting change, net of minority interests of $0.5 million and income tax of $0.5 million, for periods ending prior to January 1, 1997, was a decrease in net income of $3.7 million, or $.02 per common share, which was recognized in the first quarter of 1997. Note 3. Merger ------ Battle Mountain combined with Hemlo Gold Mines, Inc., now known as Battle Mountain Canada Ltd., through a merger in 1996 which resulted in Battle Mountain Canada becoming a wholly-owned subsidiary. Pursuant to the combination agreement, each holder of Hemlo Gold common shares received 1.48 Exchangeable Shares of Battle Mountain Canada for each share held (see Note 9). The combination was accounted for under the pooling of interests method. Merger- related costs of $2.7 million were expensed in 1997. Note 4. Niugini Mining and Lihir Gold Limited --------------------------------------- On October 6, 1999, Niugini Mining and Lihir Gold Limited announced a proposed scheme of arrangement under which Lihir would merge with Niugini Mining. The merger was effective February 2, 2000. Lihir owns and operates a mine in Papua New Guinea. Niugini Mining shareholders received one share of Lihir for each share of Lihir held, together with one additional share of Lihir for each A$1.45 of Niugini Mining's net cash balance of $54.6 million at the effective date of the transaction. As a result, Battle Mountain, which held a 50.45% interest in Niugini Mining prior to the merger, received 111.3 million shares of Lihir, representing a 9.74% equity interest in Lihir. Battle Mountain has agreed to not sell on market the Lihir shares for a 90-day period and will classify them as current marketable securities in the consolidated balance sheet. Battle Mountain, through its investment in Niugini Mining, held a 7.52% and an 8.65% equity interest in Lihir at December 31, 1999 and 1998, respectively. In conjunction with contributions made by certain other equity investors of Lihir, in May 1998, Niugini Mining increased its investment in Lihir by $11.5 million. In December 1998, Battle Mountain decided to pursue options for disposing of its interest in Niugini Mining. Niugini Mining's interest in Lihir was accounted for using the equity method of accounting in 1999, 1998 and 1997 due to its ability to exercise significant influence. Battle Mountain recorded a $76.2 million impairment loss ($46.8 million net of minority interest) in 1999, of which $52.8 million ($26.6 million net of minority interest) was recorded in the fourth quarter of 1999, and a $90.0 million impairment loss in the fourth quarter of 1998, related to Niugini Mining's investment in Lihir as a result of decreases in the market value of the Lihir stock. These decreases in value were considered to be other than temporary decreases. The estimated fair value of the investment in Niugini Mining at December 31, 1999 was determined to be the quoted market price of the Lihir shares to be held by Battle Mountain upon the effective date of the merger less the other net assets of Niugini Mining at December 31, 1999. The estimated fair value at December 31, 1998 was determined to be the quoted market price of the Lihir shares held by Niugini Mining at that time. The carrying value, net of accumulated amortization, attributed to Battle Mountain's proportionate share of Niugini Mining's investment in Lihir exceeded its proportionate share of Niugini Mining's historical cost basis in Lihir by $54.0 million and $139.1 million at December 31, 1998 and 1997, respectively. No excess cost remained at December 31, 1999. Such excess was being amortized against Battle Mountain's share of earnings of Lihir using the units-sold method based on the estimated recoverable ounces attributable to the Lihir mine. Amortization of this excess cost totaled $3.2 million, 58 $6.7 million and $1.9 million in 1999, 1998 and 1997, respectively. Interest costs of $4.5 million were capitalized in 1997 in connection with Battle Mountain's investment in Lihir. No interest costs were capitalized in 1999 or 1998. Note 5. Investments ----------- Battle Mountain's long-term investments as of December 31 included the following: Millions 1999 1998 - -------- ----- ---- Lihir Gold Limited $68.4 $149.3 First Toronto Investments Limited - 9.8 Cash surrender value of life insurance, net 8.3 7.6 Other 2.3 2.0 ----- ------ Total $79.0 $168.7 ===== ====== See Note 4 for a discussion of Lihir Gold Limited. Battle Mountain sold, at book value, its investment in First Toronto Investments Limited for $10.2 million in the third quarter of 1999. First Toronto is associated with Noranda, Inc., a Canadian natural resource company which owns approximately 28% of Battle Mountain's outstanding common shares. Battle Mountain's investment in First Toronto represented approximately 2% of First Toronto shares. In August 1998, Battle Mountain closed the sale of the New World project and received cash proceeds, net of related disbursements, of $34.9 million. Battle Mountain recorded an estimated $0.8 million loss on the sale of the New World project in 1997. Note 6. Property, Plant and Equipment ----------------------------- Property, plant and equipment as of December 31 consisted of the following: Millions 1999 1998 - --------- ---- ---- Mining, milling and other equipment $ 441.2 $ 454.8 Leasehold and mine development 440.2 431.1 Other 22.0 22.9 ------- ------- Gross property, plant and equipment 903.4 908.8 Accumulated depreciation, depletion and amortization (603.8) (566.9) ------- ------- Net property, plant and equipment $ 299.6 $ 341.9 ======= ======= See Note 7 for a discussion of 1999 and 1998 impairment write-downs of property, plant and equipment. Prior to 1999, Battle Mountain's proportionate share of the Inti Raymi Kori Kollo and Llallagua gold deposits exceeded Inti Raymi's historical cost basis in these deposits. This excess was capitalized to property, plant and equipment and was being amortized using the units-sold method based on the deposits' estimated recoverable reserves. Amortization of the excess cost amounted to $13.6 million in 1998 and $13.0 million in 1997. In December 1998, the remaining $45.6 million unamortized balance was written off as a result of an impairment write-down. Note 7. Asset Write-Downs ----------------- Battle Mountain's liquidity and cash flows from operations are highly sensitive to the price of gold. In assessing the recoverability of long-lived assets, management has used a gold price of $300 per ounce for 2000 and 2001, and $325 per ounce thereafter. Because of the recent volatility of gold prices and how it effects Battle Mountain's financial condition, a deterioration of gold prices may negatively impact short-term liquidity, the ability to recover the investments in long-lived assets, resulting in possible further asset write- downs, and impact our ability to raise additional capital for long-term development projects. 59 Asset write-downs of $35.9 million were recorded in the fourth quarter of 1999 representing the remaining carrying value of the Crown Jewel project. The write-downs were recorded due to current permitting uncertainties resulting from a January 19, 2000 Washington Pollution Control Hearings Board decision that reversed Crown Jewel's water rights permits and vacated its Clean Water Act certification. The following impairment write-downs were recorded in the fourth quarter of 1998 as a result of continued low gold prices: Kori Kollo, $49.9 million; Crown Jewel, $40.3 million; and Reona, $10.8 million. In addition, $3.9 million of write-downs were recorded related to certain other plant assets, uncollectable receivables and capitalized land and lease costs. Discounted net cash flows were used to measure the fair value of the mine assets mentioned above. Note 8. Debt ---- Battle Mountain had the following long-term debt outstanding as of December 31: Millions 1999 1998 - -------- ---- ----- Canadian Imperial Bank of Commerce loan, due 2003, variable rate $104.4 $121.8 Convertible subordinated debentures, due 2005, 6% 100.0 100.0 Inti Raymi Kori Kollo project financing loans, variable rates in 1998 5.0 18.4 Other - - 0.9 ------ ------ Total 209.4 241.1 Less current portion of long-term debt (2.6) (37.5) Less debt due upon disposal of Lihir (30.0) - - ------ ------ Total long-term debt $176.8 $203.6 ====== ====== Canadian Imperial Bank of Commerce. The Canadian Imperial Bank of Commerce loan agreement was restructured effective October 1, 1999. Under the terms of the new agreement, the loan is segregated into three "tranches": a $40.0 million tranche due December 31, 2003 which will be repaid with the $40.0 million cash collateral account; a $30.0 million tranche due the earlier of the date of the receipt of cash from the sale of Battle Mountain's investment in Lihir or December 31, 2003; and a $34.4 million tranche payable in 14 equal quarterly installments beginning September 30, 2000. The weighted average interest rate for this loan was 7.1% at December 31, 1999. Under the terms of the agreement, a $40.0 million restricted cash collateral account was established and security interests in all current and future Battle Mountain Canada assets were granted. The loan agreement also requires Battle Mountain Canada to meet certain financial covenants which include maintenance covenants relating to the market value of the Lihir shares held by Battle Mountain, gold reserves and the present value of future cash flows from the Battle Mountain Canada mines, as well as certain restrictions on, among other things, cash transfers, expenditures, additional debt, liens and the disposition of assets. In March 2000, $10.0 million of the $30.0 million tranche was repaid because the market value of the Lihir shares declined to less than two times the Lihir-related tranche as required by the loan agreement. The market value of the Lihir shares could continue to decline, requiring additional principal payments in the near future. Other. The convertible subordinated debentures are convertible into shares of Battle Mountain common stock at a conversion price of $20.625 per share, subject to an anti-dilution adjustment in certain circumstances. There are 4.8 million shares of common stock reserved for issuance upon conversion of these debentures. The debentures are redeemable at Battle Mountain's option at any time at par value plus accrued interest. There are no sinking fund requirements and interest is payable annually. In 1992, Inti Raymi established separate but coordinated term credit facilities with various international lending institutions for the development of its Kori Kollo mine in Bolivia. As of December 31, 1999, one credit facility remained outstanding. This $5.0 million, 11% interest-bearing convertible loan is payable on March 1, 2002 and is convertible at any time at the holder's option into a 3.98% ownership interest in Inti Raymi. 60 Battle Mountain Canada established a C$5.0 million letter of credit line and a C$5.0 million operating credit line with a Canadian bank in 1999. At December 31, 1999, C$4.8 million was outstanding under the letter of credit line. Also in 1999, Battle Mountain canceled a $15.0 million uncommitted revolving credit facility with a European bank. There was $14.9 million outstanding under this facility at December 31, 1998. Interest rates were variable and the weighted average interest rate for borrowings under this facility was 7.8% in 1998 and 6.3% in 1997. Scheduled maturities of long-term debt for the years 2000 through 2003 are $2.6 million, $9.8 million, $14.8 million and $82.2 million, respectively, of which $40.0 million will be repaid with restricted cash. The $100.0 million subordinated debentures are due in a lump-sum payment in 2005. Note 9. Shareholders' Equity -------------------- See Note 8 for information regarding the number of shares of common stock reserved for issuance upon the conversion of Battle Mountain's outstanding convertible subordinated debentures. The Board of Directors is authorized to divide Battle Mountain's preferred stock into series. With respect to each series, the Board may determine the dividend rights, dividend rates, conversion rights and voting rights (which may be greater or less than the voting rights of the common stock). The Board may also determine the redemption rights and terms, liquidation preferences, sinking fund rights and terms, the number of shares constituting the series and the designation of each series. Two million shares of preferred stock are designated as Series A Junior Participating Preferred Stock for possible issuance upon the exercise of stock rights as described below. Convertible Preferred Stock. At December 31, 1999, 2.3 million shares of convertible preferred stock were outstanding with a liquidation preference of $50 per share, plus any accrued and unpaid dividends. Each share of preferred stock pays annual cumulative dividends of $3.25, is convertible at any time at the option of the holder into 4.762 shares of common stock and is redeemable at the option of Battle Mountain solely for shares of common stock. There are 11.0 million shares of common stock reserved for issuance upon conversion of the preferred stock. Exchangeable Shares. In connection with the combination with Hemlo Gold, each holder of Hemlo Gold common stock received 1.48 Exchangeable Shares of Battle Mountain Canada in exchange for each share held. The Exchangeable Shares are exchangeable, at the option of the holder, for Battle Mountain common stock on a share-for-share basis. The Exchangeable Shares remain securities of Battle Mountain Canada and entitle their holders to dividend and other rights economically equivalent to that of Battle Mountain common stock and, through a voting trust, to vote at meetings of stockholders of Battle Mountain. Stock Rights. Each outstanding share of common stock, including the Exchangeable Shares, carries a right that entitles the holder to purchase 1/100 of a share of Series A Junior Participating Preferred Stock, par value $1.00 per share, at an exercise price of $60, subject to adjustment. The stock rights are not exercisable or transferable apart from the common stock until such time as a person or group acquires 20% of Battle Mountain or initiates a tender offer that will result in ownership of 30% of Battle Mountain; however, such exercise rights are not triggered solely by the acquisition by a single person of 20% or more of Battle Mountain common stock from Noranda or from the first person to whom Noranda sells such a block. In the event that Battle Mountain is merged and its common stock is exchanged or converted, the rights will entitle the holders to buy shares of the acquiror's common stock at a 50% discount. Under certain other circumstances, the rights can become rights to purchase Battle Mountain's common stock at a 50% discount. The rights may be redeemed by Battle Mountain for one 61 cent per right at any time until 10 days following the first public announcement of a 20% acquisition of beneficial ownership of Battle Mountain common stock. Note 10. Income and Mining Income Taxes ------------------------------ Federal and foreign income and mining income tax expense (benefit) consisted of the following: Millions 1999 1998 1997 - -------- ---- ---- ---- Current Canada $(3.4) $19.1 $ 21.8 Other foreign 6.5 0.2 0.9 ----- ----- ------ Total current 3.1 19.3 22.7 ----- ----- ------ Deferred United States - federal 13.3 1.9 (14.6) Canada 0.8 (6.5) (17.9) Other foreign (9.8) (0.9) (0.9) ----- ----- ------ Total deferred 4.3 (5.5) (33.4) ----- ----- ------ Total income and mining income tax expense (benefit) $ 7.4 $13.8 $(10.7) ===== ===== ====== Consolidated income before income taxes included losses from foreign operations of $51.7 million in 1999, $108.8 million in 1998 and income from foreign operations of $13.4 million in 1997. Deferred income tax assets and liabilities as of December 31, 1999 and 1998 related to the following: Millions 1999 1998 - -------- ---- ---- Deferred tax assets Net operating loss carryforward $ 40.7 $ 38.2 Alternative minimum tax credit carryforward 0.8 0.8 Employee compensation and benefits accrued 6.9 6.8 Foreign currency exchange rate losses 2.1 5.5 Property, plant and equipment 85.9 69.2 Accrued reclamation 6.3 4.2 Other 25.4 16.8 ------- ------- Gross deferred income tax assets 168.1 141.5 Valuation allowance (143.4) (101.4) ------- ------- Net deferred income tax assets 24.7 40.1 ------- ------- Deferred tax liabilities Property, plant and equipment 62.2 71.8 Undistributed earnings of subsidiaries 21.4 21.2 Other 2.0 5.8 ------- ------- Net deferred income tax liabilities 85.6 98.8 ------- ------- Net deferred tax liability $ (60.9) $ (58.7) ======= ======= The net deferred tax liability at December 31, 1999 consisted of a net U.S. and Canadian deferred tax liability of $64.5 million and U.S. and other foreign tax assets of $3.6 million (included in other current assets). The net deferred tax liability of $58.7 million at December 31, 1998 consisted of net U.S. deferred tax assets of $13.3 million (included in other assets), a Canadian net deferred tax liability of $65.9 million and other foreign deferred withholding tax liabilities of $6.1 million. The net U.S. deferred tax asset at December 31, 1998 was the result of net operating loss carryforwards which management expected to realize as an offset against future taxable income. 62 A reconciliation of income tax at the U.S. statutory rate to income tax expense follows: Millions 1999 1998 1997 - -------- ---- ---- ---- Income tax benefit based on statutory rate of 35% $(39.2) $(79.4) $ (5.7) Increases (decreases) resulting from Foreign withholding tax, net (0.3) (1.0) (5.4) Canadian mining income taxes 2.2 5.5 6.7 Change in filing position regarding foreign tax credits - - 46.7 Undistributed losses (earnings) of foreign subsidiaries not subject to income tax (0.7) 0.9 0.6 Change in valuation allowance 42.0 84.6 (52.7) Foreign tax rate differential (2.7) (4.7) 2.0 Change in alternative minimum tax credits - - 3.8 Adjustments to prior year accruals 5.3 8.5 (8.1) Other, net 0.8 (0.6) 1.4 ------ ------ ------ Income and mining income tax expense (benefit) $ 7.4 $ 13.8 $(10.7) ====== ====== ====== During 1999, Battle Mountain increased its valuation allowance by $42.0 million. The increase resulted from Battle Mountain's assessment in 1999 that it would not be able to realize the increase in its deferred tax assets because adequate amounts of future net income and capital gains were not assured under the "more likely than not" criteria. As a result, there were no tax benefits recorded for the 1999 losses. The $143.4 million valuation allowance recorded at December 31, 1999 reduced gross deferred tax assets to management's best estimate of the assets that will ultimately be recognized. However, it is possible that the valuation allowance could be adjusted in the future as a result of changes in projected future taxable income in the United States, based on revised management assumptions and business plans. U.S. taxes have been provided on a portion of the undistributed earnings of foreign subsidiaries and joint ventures, with the exception of Niugini Mining, which is in a cumulative loss position It is not practical to estimate the amount of taxes that might be payable on the eventual remittance of the unremitted portion of the earnings. Battle Mountain changed its policy in 1999 regarding the permanent reinvestment of earnings of Battle Mountain Canada and decided that it would repatriate unremitted earnings from Battle Mountain Canada to the extent that funds were not required to meet Battle Mountain Canada's needs. No deferred taxes were recorded at December 31, 1999 as a result of this policy change. Effective in the third quarter of 1997, certain events caused Battle Mountain to revise its policy related to the unremitted earnings of Battle Mountain Canada. In the third quarter of 1997, Battle Mountain sold its interest in Niugini Mining to Battle Mountain Canada. Proceeds from the sale were expected to be sufficient to meet future operating needs in the U.S. Accordingly, management no longer expected to remit to the U.S. any accumulated or future Canadian earnings generated by Battle Mountain Canada. The income expected to be derived from the reinvestment of the sale proceeds from the Niugini Mining sale to Battle Mountain Canada into U.S. projects led management in 1997 to project U.S. taxable income in future years sufficient to recognize a portion of net operating loss carryforwards in the United States. As a result of the above, a $16.4 million income tax benefit was recorded in the third quarter of 1997, representing a release of $11.0 million of deferred tax asset valuation allowances related to U.S. net operating losses and $5.4 million of Canadian withholding tax liabilities previously recorded. 63 The tax benefit of net operating loss carryforwards in the amount of $7.2 million was also recognized in 1997 because of revised projections of future taxable income at certain subsidiaries. At December 31, 1999, Battle Mountain had approximately $105.8 million of regular net operating loss carryforwards and $49.7 million of alternative minimum tax net operating loss carryforwards, expiring beginning in 2007 and 2009, respectively, available to offset future U.S. federal income tax, and approximately $0.8 million of alternative minimum tax credits available on an indefinite carryforward basis. It is anticipated that change-in-ownership limitations under the Internal Revenue Code will not significantly restrict the future utilization of the net operating loss carryforwards. In addition, at December 31, 1999, approximately $9.3 million of net operating loss carryforwards were available to offset future Australian federal income taxes. Note 11. Common Stock and Stock Options ------------------------------ Stock Options. Under the 1994 Long-Term Incentive Plan, 10.0 million shares of common stock were reserved for issuance as of December 31, 1999. This share reserve includes the reserve for the Battle Mountain Canada Long-Term Incentive Plan (see below). Of these shares, 4.8 million shares were available at December 31, 1999 for future grants of stock options, restricted stock, performance shares and other stock awards. Options to employees residing in Canada are issued under the Battle Mountain Canada 1997 Long-Term Incentive Plan. Under this plan, 2.5 million shares were reserved for issuance as of December 31, 1999. Of these shares, 1.8 million shares were available for future grants of stock options, restricted stock, performance shares and other stock awards. Share issuances under this plan also affect the number of shares available for issuance under Battle Mountain's 1994 Long-Term Incentive Plan. Options granted under the above plans are exercisable under the terms of the respective option agreements at the market price of the common stock on the date of grant, subject to anti-dilution adjustments in certain circumstances. Under a deferred income stock option plan for officers and directors, which became effective January 1, 2000 and replaced an existing plan that expired during 1998, each participant may elect to receive a non-qualified stock option in lieu of a portion of compensation. A maximum of 2.0 million shares of common stock is issuable and available for future grants at December 31, 1999. Options granted pursuant to the plan become exercisable the later of six months after grant date or the beginning of the calendar year immediately following the year in which the option was granted. The options expire no later than 10 years after the date of grant. The amount of deferred compensation is accrued as compensation expense during the period earned. Changes in options outstanding for the combined plans were as follows: Weighted Average Options in millions Options Exercise Price - ------------------- ------- ------------- Outstanding at December 31, 1996 5.2 Granted 0.9 $ 5.27 Exercised (0.1) $ 5.37 Forfeited (1.0) $10.21 ---- Outstanding at December 31, 1997 5.0 $ 8.49 Granted 1.1 $ 5.56 Exercised - - Forfeited (0.3) $12.29 ---- Outstanding at December 31, 1998 5.8 $ 7.57 Granted 1.8 $ 2.88 Exercised - - 64 Forfeited (0.3) $ 9.10 ---- Outstanding at December 31, 1999 7.3 $ 6.42 ==== At December 31, 1999, expiration dates for the outstanding options ranged from 2000 to 2009. Significant ranges of outstanding and exercisable options at December 31, 1999 were as follows (options in millions): Options Outstanding Options Exercisable -------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Option Price Options Exercise Price Remaining Life Options Exercise Price ------------ ------- -------------- -------------- ------- -------------- $ 1.88 to $ 3.54 1.8 $ 2.88 9.8 years - $ - $ 4.46 to $ 5.89 2.1 5.42 7.4 years 1.2 4.96 $ 6.00 to $ 7.63 0.9 6.88 3.8 years 0.9 6.88 $ 8.00 to $ 9.85 1.2 8.49 5.7 years 1.1 8.40 $ 10.42 to $ 11.38 1.3 10.62 6.4 years 0.3 11.32 --- --- $ 1.88 to $ 11.38 7.3 6.42 7.1 years 3.5 7.42 === === Had compensation expense for stock-based compensation been determined based on the fair values of the options at the grant dates, 1999 net loss to common shares would have been $131.0 million, or $.57 per common share, 1998 net loss would have been $252.4 million, or $1.10 per share, and 1997 net loss would have been $19.1 million, or $0.08 per share. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option model pricing. Significant assumptions used were as follows: 1999 1998 1997 ---- ---- ---- Expected dividend yield - 1.9% 0.8% Expected stock price volatility 67.1% 51.0% 35.7% Risk-free interest rate 6.1% 5.2% 5.6% Expected life of options 10 years 10 years 10 years The weighted average fair values of options granted during 1999, 1998 and 1997 was $2.28, $3.05 and $2.66 per share, respectively. Registration Statements. Battle Mountain has an effective registration statement on file with the Securities and Exchange Commission (the "SEC") for the issuance of up to $150.0 million of debt and/or equity securities. As of the date of this report, no securities have been issued nor are there any immediate plans to issue any securities under this registration statement. Battle Mountain also has registration statements on file with the SEC and regulatory authorities in Canada which qualify for sale the 65.2 million shares of BMG's common stock effectively held by Noranda. Battle Mountain will not receive proceeds from the sales of any shares that may be sold under the registration statements covering the shares held by Noranda. Note 12. Benefit Plans ------------- Pension and Other Postretirement Health Care and Life Insurance Benefits. Canadian salaried and substantially all U.S. employees of Battle Mountain are covered by non-contributory pension plans. In addition, substantially all of Battle Mountain's U.S. employees may become eligible for certain unfunded health care and life insurance benefits when they reach retirement age while working for Battle Mountain. Net periodic benefit costs for these plans included the following components: 65 Pension Benefits Other Benefits ------------------------------------- ------------------------------------- Millions 1999 1998 1997 1999 1998 1997 - -------- ----------- ----------- ----------- ------------ ----------- ---------- Service cost $ 0.8 $ 1.7 $ 1.7 $ 0.3 $ 0.2 $ 0.3 Interest cost 3.7 3.7 3.8 0.6 0.5 0.6 Expected return on plan assets (4.5) (4.0) (3.8) - - - Amortization of prior service costs 0.6 0.7 0.8 - 0.1 0.1 Amortization of transitional asset (0.1) (0.1) (0.1) - - - Net actuarial gain (0.2) (0.3) (0.1) (0.2) (0.1) - ----- ----- ----- ----- ----- ----- Net periodic benefit cost $ 0.3 $ 1.7 $ 2.3 $ 0.7 $ 0.7 $ 1.0 ===== ===== ===== ===== ===== ===== The following sets forth the plans' funded status and related amounts as of December 31: Pension Benefits Other Benefits ---------------------------- ---------------------------- Millions 1999 1998 1999 1998 - -------- ------------- ------------- ------------- ------------- Change in benefit obligation - ----------------------------- Benefit obligation at beginning of year $ 56.5 $54.0 $ 8.7 $ 9.1 Service cost 0.8 1.6 0.3 0.3 Interest cost 3.6 3.7 0.6 0.6 Transition obligation - - - 1.2 Actuarial loss (gain) (5.6) 1.1 (2.1) (2.0) Curtailment gain - (0.2) - - Foreign currency exchange loss (gain) 0.9 (1.0) 0.1 - Benefits paid (2.9) (2.7) (0.5) (0.5) ------ ----- ------ ------ Benefit obligation at end of year 53.3 56.5 7.1 8.7 ------ ----- ------ ------ Change in plan assets - --------------------- Fair value of plan assets at beginning of 53.3 49.8 - - year Actual return on plan assets 6.9 6.3 - - Administrative expenses (0.2) (0.2) - - Employer contributions 0.7 1.2 - - Foreign currency exchange gain (loss) 1.0 (1.1) - - Benefits paid (2.9) (2.7) - - ------ ----- ------ ------ Fair value of plan at end of year 58.8 53.3 - - ------ ----- ------ ------ Funded status of plans 5.5 (3.2) (7.1) (8.7) Unrecognized net actuarial gain (13.7) (6.2) (5.1) (3.1) Unrecognized prior service cost 5.0 6.8 - 0.4 Unrecognized transition obligation (0.3) (0.4) 0.4 - ------ ----- ------ ------ Accrued benefit cost $ (3.5) $(3.0) $(11.8) $(11.4) ====== ===== ====== ====== Included in the pension plans described above is an unfunded supplemental retirement plan covering certain executives. The benefit obligation associated with this plan was $7.5 million and $5.8 million at December 31, 1999 and 1998, respectively. Weighted average rate assumptions used in determining estimated benefit obligations were as follows: Pension Benefits Other Benefits ------------------------ ---------------------- Percent 1999 1998 1999 1998 - ------- ---------- ------------ --------- ----------- Discount rate U.S. plans 7.8 6.8 7.8 6.8 66 Canadian plans 7.8 6.5 7.8 7.0 Expected return on plan assets U.S. plans 9.5 9.0 N/A N/A Canadian plans 7.8 6.5 N/A N/A Rate of increase in compensation levels U.S. plans 4.8 4.8 N/A N/A Canadian plans N/A 4.5 3.0 3.0 The service and interest cost components of the other postretirement benefits obligation were computed based on an assumed 6.5% annual rate of increase in the per capita cost of covered health care benefits in the year 2000. This rate was assumed to decrease gradually to 5% in 2002 and remain level thereafter. An increase or decrease of 1% in the assumed health care cost trend rate does not have a material effect on the computations. Contribution Plans. Battle Mountain has defined contribution plans available for most of its employees. Contributions to the plans are expensed and funded currently. The cost of such contributions to the plans was $1.5 million, $1.0 million and $1.4 million in 1999, 1998 and 1997, respectively. Note 13. Geographic and Segment Information ---------------------------------- Battle Mountain's operations are related to gold mining and related activities. Accordingly, operational mines and significant development projects are considered segments for financial reporting purposes. The Golden Giant and Holloway mines are located in Canada, Kori Kollo is located in Bolivia, the Battle Mountain Complex is located in the United States and the Vera/Nancy mine is located in Australia. Financial information by segment follows: Golden Kori Battle Vera / Corp & Total Giant Kollo Holloway Mountain Nancy Other Millions ---- ----- ----- -------- -------- ----- ----- - -------- 1999 - --- Gross revenues $ 228.2 $ 99.0 $ 84.9 $25.8 $ - $18.5 $ - Production costs 149.7 55.7 68.1 19.7 (0.4) 8.4 (1.8) Deprec., deplet. & amort. 64.2 23.2 25.6 12.2 - 2.8 0.4 Environmental remediation 9.5 - - - - - 9.5 Asset write-downs 35.9 - - - - - 35.9 Other expenses 31.9 - - - - - 31.9 -------- ------ ------ ----- ------ ----- ------ Operating income (loss) (63.0) 20.1 (8.8) (6.1) 0.4 7.3 (75.9) ====== ====== ===== ====== ===== ====== Equity in losses and impairment charge of (80.9) Lihir Minority interest in net 31.7 losses Interest & other income 0.2 -------- Loss before income taxes (112.0) Property, plant & equip., 299.6 88.4 51.1 71.0 52.1 31.4 5.6 net ======== ====== ====== ===== ====== ===== ====== Total assets 568.5 118.1 78.4 76.1 54.3 36.0 205.6 ======== ====== ====== ===== ====== ===== ====== Capital expenditures 49.3 9.7 7.0 3.9 12.8 10.2 5.7 ======== ====== ====== ===== ====== ===== ====== 1998 - ---- Gross revenues 276.6 109.4 103.9 22.5 14.0 14.4 12.4 Production costs 163.3 46.2 71.9 17.2 13.7 6.7 7.6 Deprec., deplet. & amort. 79.6 24.1 40.8 9.0 1.4 1.5 2.8 Asset write-downs 104.9 0.8 49.9 - 11.0 - 43.2 Other expenses 38.9 - - - - - 38.9 -------- ------ ------ ----- ------ ----- ------ Operating income (loss) (110.1) 38.3 (58.7) (3.7) (12.1) 6.2 (80.1) ======== ====== ====== ===== ====== ===== ====== Equity in losses and impairment charge of (96.6) Lihir Interest & other expense (20.1) -------- 67 Loss before income taxes (226.8) ======== Property, plant & equip., 341.9 96.8 70.0 74.7 39.3 22.6 38.5 net ======== ====== ====== ===== ====== ===== ====== Total assets 786.6 144.6 107.9 79.8 42.4 24.8 387.1 ======== ====== ====== ===== ====== ===== ====== Capital expenditures 46.5 8.7 3.3 3.6 7.7 8.2 15.0 ======== ====== ====== ===== ====== ===== ====== 1997 - ---- Gross revenues 344.9 119.4 109.6 16.3 31.8 6.3 61.5 Production costs 234.3 50.0 73.2 16.7 31.1 3.8 59.5 Deprec., deplet. & amort. 72.8 22.8 36.1 6.2 2.9 0.6 4.2 Other expenses 41.1 - - - - - 41.1 -------- ------ ------ ----- ------ ----- ------ Operating income (loss) (3.3) 46.6 0.3 (6.6) (2.2) 1.9 (43.3) ====== ====== ===== ====== ===== ====== Equity in loss of Lihir (1.0) Interest & other income (12.1) -------- Loss before income taxes (16.4) ======== Property, plant & equip., 489.3 120.9 157.7 84.5 37.1 14.2 74.9 net ======== ====== ====== ===== ====== ===== ====== Total assets 1,093.2 161.8 200.0 90.5 47.0 17.2 576.7 ======== ====== ====== ===== ====== ===== ====== Capital expenditures 62.4 10.3 7.4 3.7 9.1 16.6 15.3 ======== ====== ====== ===== ====== ===== ====== "Corporate and Other" includes, among other things, the Crown Jewel project and the investment in Lihir. The $3.7 million cumulative effect of the accounting method change discussed in Note 2 is attributable to the Kori Kollo mine. Sales to customers that accounted for 10% or more of Battle Mountain's consolidated revenues in 1999, 1998 or 1997 follows: sales to one customer totaled $81 million (1999), $106 million (1998) and $81 million (1997), sales to a second customer totaled $41 million (1999), $32 million (1998) and $153 million (1997), and sales to a third customer totaled $40 million (1999). Substantially all of Battle Mountain's current operating mines contributed to sales to those customers during the years. There were no export sales in 1999 or 1998 and $31.5 million in 1997. Since all sales are made to precious metals smelters, refiners or traders, the precious metals industry has substantial influence over the market for Battle Mountain's products. However, because of the active worldwide market for gold, management believes that the loss of any of these customers would not have a material adverse effect on results of operations, financial position or cash flows. Note 14. Commitments and Contingencies ----------------------------- Battle Mountain believes cash requirements over the next twelve months will be funded through a combination of current cash, future cash flows from operations, proceeds from potential asset sales and/or future debt or equity security issuances. Significant additional capital will be required in the foreseeable future in order to continue the development of current and future mining projects, including the Phoenix project. Battle Mountain's ability to raise capital is highly dependent upon the commercial viability of its projects and the associated price of gold. Because of the recent volatility of gold prices and how it effects Battle Mountain's financial condition, a deterioration of gold prices may negatively impact short-term liquidity and our ability to raise additional capital for long-term development projects. In the event that cash balances decline to a level that cannot support the operations of the Company, management will defer planned capital and exploration expenditures as needed to conserve cash for operations. Total operating lease rental expenses, exclusive of mineral leases, were $2.6 million, $3.0 million and $3.4 million in 1999, 1998 and 1997, respectively. Aggregate minimum rentals, exclusive of mineral leases, under non-cancelable leases for the years 2000 through 2003 were $1.6 million, $1.4 million, $1.0 million and $0.8 million, respectively. There were no significant lease commitments beyond 2003. As part of closure and reclamation efforts with respect to the San Luis mine in Colorado, which ceased operations in November 1996, Battle Mountain voluntarily partially backfilled the San Luis West Pit. As water percolates through the oxidized backfilled rock, the water contacts and solubilizes certain naturally occurring oxidation by-products which have been identified at elevated levels at monitoring 68 sites located within and downgradient of the West Pit. An Independent Ecological Risk Assessment has been performed which indicates that the elevated levels of these constituents do not pose a risk to human health or the environment. On August 20, 1999 the Colorado Department of Public Health and the Environment issued a Notice of Violation and Cease and Desist Order to Battle Mountain, alleging discharges at the San Luis mine to waters not permitted under the Colorado Water Quality Control Act. Battle Mountain filed an Answer to the Notice denying that such a violation has occurred. The Notice requires Battle Mountain to take a number of steps that the Department of Public Health asserts to be necessary to attain compliance with the Water Quality Control Act. These steps include the submittal of a permit application, a monitoring plan and a response plan. Battle Mountain has made all submittals required by the Notice and has commenced extensive response activities. On October 8, 1999, the Department of Public Health issued an Amendment to the Notice. The Amendment authorized the operation of a water treatment facility and the discharge of treated water. Battle Mountain has commenced treatment and discharge operations. It is not possible to predict the nature or scope of any further action that might be taken by regulatory authorities regarding the San Luis property. These actions could include seeking injunctive relief, mandating the posting of financial assurance, requiring further on-site response actions and/or the imposition of monetary penalties. An environmental remediation charge of $9.5 million was recorded in the third quarter of 1999 based upon Battle Mountain's current best estimate of costs to address technical long-term water quality issues at the San Luis property. It is reasonably possible that this estimate may change in future reporting periods as further information becomes available. An additional $4.7 million and $5.2 million was recorded in the fourth quarters of 1998 and 1997, respectively, for estimated reclamation and environmental liabilities, respectively, primarily at the Battle Mountain Complex. Mining and processing operations are subject to reclamation and closure requirements. Battle Mountain monitors such requirements and periodically revises its cost estimates to meet the legal and regulatory requirements of the various jurisdictions in which it conducts business. Where possible, plans for ongoing operations and future mine development are implemented in a manner that contributes to the fulfillment of reclamation and closure obligations in a cost effective manner through the conduct of ongoing operating activities. Costs estimated to be incurred in future periods which cannot be addressed in this manner are charged to operations through provisions based on the units-of- production method such that the estimated cost of the ultimate reclamation and closure of the mine is fully provided for by the time mineral reserves are depleted. The timing of actual cash expenditures for reclamation may be accelerated or deferred, depending on cost and other determinations which may make such decisions prudent in the circumstances. Battle Mountain believes that these policies and practices adequately address its reclamation obligations and provide a systematic and rational method of charging such costs to operations consistent with industry practice. Battle Mountain estimated these undiscounted future costs, including severance costs and remediation costs, to be approximately $53.9 million, of which $35.8 million had been accrued at December 31, 1999. Approximately $6.3 million of these costs are recorded as current liabilities. Based on current environmental regulations and known reclamation requirements, Battle Mountain believes it has included the best estimate of costs of these obligations in its reclamation and environmental accruals. However, it is reasonably possible that Battle Mountain's estimate of its ultimate reclamation and environmental liability could increase in the near term as a result of prospective changes in laws and regulations, changes in site characteristics and changes in cost estimates. 69 Various laws require that financial assurances be in place for certain environmental and reclamation obligations and potential liabilities. Battle Mountain has certain environmental and reclamation financial assurances in place and will be required to put additional financial assurances in place in the future. There can be no guarantee that Battle Mountain will be able to maintain and/or put in place the necessary assurances. The Golden Giant mine property includes the Quarter Claim acquired from Teck Corporation and Homestake Canada Inc. Battle Mountain is obligated to pay a net profits royalty of 50% to Teck and Homestake on a deemed production rate of 500 tons per day, and to pay a 3% net smelter return royalty to the original Quarter Claim prospectors. Battle Mountain is party to a number of other legal actions arising in the ordinary course of business. While the final outcome of these other actions cannot be predicted with certainty, it is the opinion of management that none of these actions when resolved will have a material adverse effect on results of operations, financial position or cash flows. Note 15. Derivative Financial Instruments -------------------------------- Battle Mountain's results of operations are affected significantly by the market price of gold. During the third quarter of 1999, Battle Mountain modified its hedging policy. The purpose of this revised policy is to reduce exposure to fluctuating gold prices. The hedging policy allows the use of various derivative financial instruments, including forward sales contracts and options. Battle Mountain does not use derivative financial investments for trading or speculative purposes. Prior to 1999 the Company did not engage in any significant gold hedging activities. Gold contracts outstanding at December 31, 1999 were as follows: Total or 2000 2001 2002 2003 Average ------- ------- ------- ------- ------- Written call options: Ounces 87,500 87,500 87,500 87,500 350,000 Average price per ounce $349 $349 $349 $349 $349 Purchased put options: Ounces 87,500 87,500 87,500 87,500 350,000 Average price per ounce $293 $293 $293 $293 $293 Flat Forwards: Ounces 25,000 25,000 25,000 25,000 100,000 Average price per ounce $312 $312 $312 $312 $312 Forwards: Ounces 198,000 - - - 198,000 Average price per ounce $279 - - - $279 Given higher, lower or current market prices, the Company will realize on average $312 per ounce on its flat forward contracts. Should the Company exercise all the puts it will realize on average $293 per ounce. If the counterparties' exercise all calls, the Company will sell the gold for $349 per ounce. The forwards are part of the Company's overall financial planning. These contacts cover gold that was on deposit at a refinery or leased to third parties. All the contracts mature by March 31, 2000. Battle Mountain, at times, is a party to lease transactions and will sell the leased gold into the spot market. Whenever a spot sale is made, a forward purchase contract is entered into to assure delivery of the gold at the end of the lease. Battle Mountain Canada had outstanding lease contracts with Battle Mountain for 108,000 ounces of gold at December 31, 1999. 70 The counterparties to hedged agreements may expose Battle Mountain to certain credit-related losses in the event of nonperformance, generally by the amount which the contract price exceeds the spot price of a commodity. Attempts to minimize credit exposure are made by limiting counterparties to major financial institutions that meet specific credit rating standards. Collateral is not required from counterparties. Management believes that the risk of incurring significant credit-related losses is remote. Note 16. Supplemental Cash Flow Information ---------------------------------- Supplemental cash flow information follows: Millions 1999 1998 1997 - -------- ---- ---- ---- Changes in working capital accounts Decrease in accounts receivable $17.5 $ 9.6 $10.7 Decrease (increase) in product inventories 1.5 (4.2) 1.9 Decrease in materials and supplies inventories 1.2 2.0 3.5 Decrease (increase) in other current assets (2.0) 0.6 3.0 Increase (decrease) in income and mining income taxes payable (7.2) 13.8 (8.0) Increase (decrease) in interest payable 4.9 (4.3) (1.1) Increase (decrease) in salaries, wages and benefits payable 2.4 (2.8) (4.4) Increase (decrease) in accounts payable and other current liabilities 1.6 1.6 (4.2) ----- ----- ----- Change in working capital accounts, net $19.9 $16.3 $ 1.4 ===== ===== ===== Cash paid during the year for: Income, mining and withholding taxes, net of tax refunds $17.1 $ 4.6 $30.7 Interest, net of amounts capitalized 10.2 21.8 8.2 Note 17. Fair Value of Financial Instruments ----------------------------------- The following presents the carrying amounts and estimated fair values of financial instruments at December 31: 1999 1998 ---- ---- Carrying Fair Carrying Fair Millions Amount Value Amount Value - -------- ------ ----- ----- ----- Long-term debt, including current portion $209.4 $168.4 $241.1 $216.9 The fair value of the convertible subordinated debentures is based on the quoted market price of the debentures at the reporting date. Due to the variable interest rate features of the Inti Raymi Kori Kollo project financing and Canadian Imperial Bank loans, the carrying amounts approximate the fair values. The carrying values of cash and cash equivalents, restricted cash, trade receivables and trade payables approximate their estimated fair values. The estimated fair value of the purchased put options and written call options outstanding at December 31, 1999, were $3.2 million and $(3.5) million, respectively. The written call options and the purchased put options are two components of an integrated contract. The estimated fair value of the flat forwards outstanding at December 31, 1999 was $(0.5) million. The estimated fair value of the forwards outstanding at December 31, 1999 was $(2.8) million. These estimated fair values were determined from a third-party model. Battle Mountain had corporate guarantees outstanding totaling $5.2 million and $4.4 million at December 31, 1999 and 1998, respectively, to ensure that the reclamation of the Battle Mountain Complex will be performed as specified in the operating permits issued. In addition, Battle Mountain had corporate guarantees outstanding totaling $68.4 million and $68.7 million at December 31, 1999 and 71 1998, respectively, as collateral for surety bonds provided as security for various reclamation obligations. The carrying values of these financial instruments approximate their fair values. Note 18. Summarized Financial Information -------------------------------- The following summarized financial information of Battle Mountain Canada is presented in accordance with the Securities Exchange Commission's reporting requirements as they pertain to the Battle Mountain Canada Exchangeable Shares: December 31 -------------- Millions 1999 1998 - -------- ---- ---- Current assets $149.1 $162.5 Non-current assets 232.8 338.2 ------ ------ Total assets $381.9 $500.7 ====== ====== Current liabilities $ 54.8 $ 59.0 Non-current liabilities 148.7 173.9 ------ ------ Total liabilities 203.5 232.9 Minority interests 59.7 100.1 Shareholder's equity 118.7 167.7 ------ ------ Total liabilities and $381.9 $500.7 shareholder's equity ====== ====== Years ended December 31 Millions 1999 1998 1997 - -------- ------ ------ ------ Sales $124.7 $144.3 $197.1 Costs and expenses 125.8 96.0 174.6 ------ ------ ------ Operating income (loss) $ (1.1) $ 48.3 $ 22.5 ====== ====== ====== Net income (loss) $(45.8) $(76.4) $ 14.7 ====== ====== ====== Summarized financial information of Lihir Gold Limited follows: December 31 ----------- Millions 1999 1998 - -------- ---- ----- Current assets $ 99.1 $124.5 Non-current assets 791.9 768.1 ------ ------ Total assets $891.0 $892.6 ====== ====== Current liabilities $ 78.1 $ 74.1 Non-current liabilities 140.9 277.7 ------ ------ Total liabilities 219.0 351.8 Shareholder's equity 672.0 540.8 ------ ------ Total liabilities and $891.0 $892.6 shareholder's equity ====== ====== Years ended December 31 Millions 1999 1998 1997 - --------- ------ ------ ----- Sales $206.6 $184.7 $57.0 Costs and expenses 180.3 154.1 43.4 ------ ------ ----- Operating income $ 26.3 $ 30.6 $13.6 ====== ====== ===== 72 Net income (loss) $ (0.2) $ (5.0) $ 4.6 ====== ====== ===== Note 19. Restatement ----------- (a) After issuing Battle Mountain's 1999 financial statements and filing the Form 10-K with the Securities and Exchange Commission, following extensive discussion with its independent accountants, management determined it was necessary to revise the financial statement presentation of Battle Mountain's former interest in Niugini Mining Limited. In 1998, Battle Mountain resolved to dispose of its 50.45% equity interest in Niugini Mining Limited and deconsolidated the subsidiary, classifying it as an asset held for sale. However, in accordance with provisions of Statement of Financial Accounting Standards No. 94, "Consolidation of all Majority-Owned Subsidiaries," Battle Mountain's 1999 and 1998 financial statements and related disclosures are restated from amounts previously reported to properly reflect the full consolidation of Battle Mountain's interest in Niugini Mining. (b) After issuing Battle Mountain's 1999 financial statements and filing two amendments to the Form 10-K with the Securities and Exchange Commission (SEC), following extensive discussion with the SEC, management determined it was necessary to revise the financial statement presentation of Battle Mountain's cash and cash equivalents and its recorded equity in income of Lihir. Cash and cash equivalents were reclassified to remove gold bullion and bullion settlements from this line item and include them in accounts receivable to more appropriately present the nature of these items. Management also determined that the amounts of its recorded equity in income of Lihir had been incorrectly based on financial statements of Lihir that were not prepared in accordance with U.S. generally accepted accounting principles (GAAP), but rather, orginally were based on International accounting standards. The Company's equity in income of Lihir has been revised to reflect its equity on a U.S. GAAP basis. Also, a part of a review of the financial statements of Lihir by the SEC, Lihir's management determined that its U.S. GAAP reconciliation needed to be revised. The following sets forth the effects of the restatements on Battle Mountain's accompanying consolidated statement of operations, balance sheet and statement of cash flows: 73 CONSOLIDATED STATEMENT OF OPERATIONS Year ended December 31, 1999 ---------------------------- As Millions, except per share amounts As --- As Previously - ---------------------------------- Restated (b) Restated(a) Reported ------------ ----------- -------- Sales $ 228.2 $ 228.2 $ 228.2 ------- ------- ------- Costs and Expenses Production costs 149.7 149.7 151.5 Depreciation, depletion and amortization 64.2 64.2 64.2 Exploration, evaluation and other lease costs, net 16.7 16.7 16.7 Environmental remediation charge 9.5 9.5 9.5 Asset write-downs 35.9 35.9 35.9 Loss related to assets held for sale - - 46.6 General and administrative expenses 15.2 15.2 14.1 ------- ------- ------- Total costs and expenses 291.2 291.2 338.5 ------- ------- ------- Operating Loss (63.0) (63.0) (110.3) Interest expense (15.1) (15.1) (15.1) Interest income 6.7 6.7 4.1 Foreign currency exchange gain (loss), net 8.2 8.2 8.2 Equity in losses and impairment charges of (80.9) (80.9) - Lihir Minority interest in net loss (income) 31.7 31.7 1.5 Other income, net 0.4 0.4 (0.4) ------- ------- ------- Loss Before Income Taxes (112.0) (112.0) (112.0) Income tax benefit (expense) (7.6) (7.6) (7.6) Mining income tax benefit (expense) 0.2 0.2 0.2 ------- ------- ------- Net Loss (119.4) (119.4) (119.4) Preferred dividends 7.5 7.5 7.5 ------- ------- ------- Net Loss to Common Shares $(126.9) $(126.9) $(126.9) ======= ======= ======= Basic and Diluted Loss per Common Share Before cumulative effect of Accounting change $ (0.55) $ (0.55) $ (0.55) Accounting change - - - ------- ------- ------- Total $ (0.55) $ (0.55) $ (0.55) ======= ======= ======= Dividends per Common Share $ - $ - $ - Average Common Shares Outstanding for Basic and Diluted Loss per Share Purposes 229.9 229.9 229.9 CONSOLIDATED STATEMENT Year ended December 31, 1998 OF OPERATIONS ---------------------------- As As Millions, except per share amounts -- --- As Previously - ---------------------------------- Restated (b) Restated(a) Reported ---------------- ------------------ ---------------- Sales $ 276.6 $ 276.6 $ 276.6 ------- ------- ------- Costs and Expenses Production costs 163.3 163.3 163.3 Depreciation, depletion and amortization 79.6 79.6 79.6 Exploration, evaluation and other lease costs, net 24.8 24.8 24.8 Asset write-downs 104.9 104.9 194.9 General and administrative expenses 14.1 14.1 14.1 ------- ------- ------- Total costs and expenses 386.7 386.7 476.7 ------- ------- ------- Operating Loss (110.1) (110.1) (200.1) Interest expense (17.8) (17.8) (17.8) Interest income 10.7 10.7 10.7 Foreign currency exchange gain (loss), net (12.4) (12.4) (12.4) Equity in losses and impairment charges of Lihir (96.6) (97.9) (7.9) Minority interest in net loss (income) (1.1) (0.5) (0.5) Other income, net 0.5 0.5 0.5 ------- ------- ------- Loss Before Income Taxes (226.8) (227.5) (227.5) Income tax benefit (expense) (7.8) (7.8) (7.8) Mining income tax benefit (expense) (6.0) (6.0) (6.0) ------- ------- ------- Net Loss (240.6) (241.3) (241.3) Preferred dividends 7.5 7.5 7.5 ------- ------- ------- Net Loss to Common Shares $(248.1) $(248.8) $(248.8) ======= ======= ======= Basic and Diluted Loss per Common Share Before cumulative effect of Accounting change $ (1.08) $ (1.08) $ (1.08) Accounting change - - - ------- ------- ------- Total $ (1.08) $ (1.08) $ (1.08) ======= ======= ======= Dividends per Common Share $ .05 $ .05 $ .05 Average Common Shares Outstanding for Basic and Diluted Loss per Share Purposes 229.8 229.8 229.8 75 CONSOLIDATED STATEMENT Year ended December 31, 1997 OF OPERATIONS ---------------------------- As As Millions, except per share amounts -- --- As Previously - ---------------------------------- Restated (b) Restated(a) Reported ---------------- ------------------ ---------------- Sales $344.9 $344.9 $344.9 ------ ------ ------ Costs and Expenses Production costs 234.3 234.3 234.3 Depreciation, depletion and amortization 72.8 72.8 72.8 Exploration, evaluation and other lease costs, net 24.8 24.8 24.8 Merger expenses 2.7 2.7 2.7 General and administrative expenses 13.6 13.6 13.6 ------ ------ ------ Total costs and expenses 348.2 348.2 348.2 ------ ------ ------ Operating Loss (3.3) (3.3) (3.3) Interest expense (13.9) (13.9) (13.9) Interest income 6.0 6.0 6.0 Foreign currency exchange gain(loss), net (7.8) (7.8) (7.8) Equity in losses(income) and impairment charges of Lihir (1.0) .2 .2 Minority interest in net loss (income) (1.7) (2.3) (2.3) Capitalized interest 4.5 4.5 4.5 Other income, net 0.8 0.8 0.8 ------ ------ ------ Loss Before Income Taxes (16.4) (15.8) (15.8) Income tax benefit (expense) 17.4 17.4 17.4 Mining income tax benefit (expense) (6.7) (6.7) (6.7) ------ ------ ------ Loss Before Cumulative Effect of Accounting Change (5.7) (5.1) (5.1) Cumulative effect of Accounting Change (3.7) (3.7) (3.7) ------ ------ ------ Net Loss (9.4) (8.8) (8.8) Preferred dividends 7.5 7.5 7.5 ------ ------ ------ Net Loss to Common Shares $(16.9) $(16.3) $(16.3) ====== ====== ====== Basic and Diluted Loss per Common Share Before cumulative effect of Accounting change $ (.05) $ (.05) $ (.05) Accounting change (.02) (.02) (.02) ------ ------ ------ Total $ (.07) $ (.07) $ (.07) ====== ====== ====== Dividends per Common Share $ .05 $ .05 $ .05 Average Common Shares Outstanding for Basic and Diluted Loss per Share Purposes 229.7 229.7 229.7 76 CONSOLIDATED STATEMENT Year ended December 31, 1999 OF OPERATIONS ---------------------------- As As Millions -- --- As Previously - -------- - Restated (b) Restated(a) Reported ---------------- ------------- -------- ASSETS Current assets Cash and cash equivalents $ 67.5 $ 91.0 $ 36.3 Accounts and notes receivable, net 36.7 13.2 12.9 Product inventories 8.7 8.7 8.6 Materials and supplies, net 22.4 22.4 22.3 Assets held for sale - - 61.7 Other current assets 7.9 7.9 7.9 ------- ------- ------- Total current assets 143.2 143.2 149.7 Investments 79.0 79.0 10.6 Restricted cash 40.0 40.0 40.0 Property, plant and equipment, net 299.6 299.6 299.6 Other assets 6.7 6.7 6.7 ------- ------- ------- Total Assets $ 568.5 $ 568.5 $ 506.6 ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ 2.6 $ 2.6 $ 2.6 Debt due upon disposal of Lihir 30.0 30.0 30.0 Accounts payable 16.0 16.0 15.9 Income and Mining Income Taxes payable 16.7 16.7 16.6 Interest payable 6.4 6.4 6.4 Salaries, wages and benefits payable 6.1 6.1 5.4 Other current liabilities 11.1 11.1 9.2 ------- ------- ------- Total current liabilities 88.9 88.9 86.1 Long-term debt 176.8 176.8 176.8 Deferred income and Mining Income Taxes 64.5 64.5 64.5 Deferred mine reclamation and closure costs 29.5 29.5 29.5 Other liabilities 25.0 25.0 25.0 ------- ------- ------- Total Liabilities 384.7 384.7 381.9 ------- ------- ------- Minority interest 65.0 65.1 6.0 ------- ------- ------- Commitments and contingencies - - - Shareholders' equity Convertible preferred stock 110.6 110.6 110.6 Common stock, $.10 par value: 13.2 13.2 13.2 Additional paid-in capital 343.8 343.8 343.8 Accumulated deficit (327.3) (327.4) (327.4) Accumulated other comprehensive loss (21.5) (21.5) (21.5) ------- ------- ------- Total Shareholders' Equity 118.8 118.7 118.7 ------- ------- ------- Total Liabilities and Shareholders' Equity $ 568.5 $ 568.5 $ 506.6 ======= ======= ======= 77 CONSOLIDATED BALANCE SHEET December 31, 1998 ----------------- As Previously Millions As Restated(b) As Restated (a) Reported - -------- ------------- ------------- -------- ASSETS Current assets Cash and cash equivalents $ 156.9 $ 197.2 $ 147.6 Restricted cash 7.7 7.7 7.7 Accounts and notes receivable, net 55.1 14.8 13.8 Product inventories 8.9 8.9 8.9 Materials and supplies, net 23.6 23.6 23.4 Assets held for sale - - 108.3 Other current assets 2.7 2.7 2.7 ------- ------- ------- Total current assets 254.9 254.9 312.4 Investments 168.7 168.7 19.4 Restricted cash 0.7 0.7 - Property, plant and equipment, net 341.9 341.9 341.9 Other assets 20.4 20.4 20.4 ------- ------- ------- Total Assets $ 786.6 $ 786.6 $ 694.1 ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings $ 14.9 $ 14.9 $ 14.9 Current maturities of long-term debt 37.5 37.5 37.0 Debt due upon disposal of Lihir - - - Accounts payable 14.5 14.5 14.3 Income and Mining Income Taxes payable 23.9 23.9 23.9 Interest payable 1.5 1.5 1.5 Salaries, wages and benefits payable 3.7 3.7 3.1 Other current liabilities 9.7 9.7 8.3 ------- ------- ------- Total current liabilities 105.7 105.7 103.0 Long-term debt 203.6 203.6 203.6 Deferred income and Mining Income Taxes 72.0 72.0 72.0 Deferred mine reclamation and closure costs 25.3 25.3 25.3 Other liabilities 25.0 25.0 24.8 ------- ------- ------- Total Liabilities 431.6 431.6 428.7 ------- ------- ------- Minority interest 107.2 107.3 17.7 ------- ------- ------- Commitments and contingencies - - - Shareholders' equity Convertible preferred stock 110.6 110.6 110.6 Common stock, $.10 par value: 12.9 12.9 12.9 Additional paid-in capital 344.0 344.0 344.0 Accumulated deficit (200.4) (200.5) (200.5) Accumulated other comprehensive loss (19.3) (19.3) (19.3) ------- ------- ------- Total Shareholders' Equity 247.8 247.7 247.7 ------- ------- ------- Total Liabilities and Shareholders' Equity $ 786.6 $ 786.6 $ 694.1 ======= ======= ======= 78 CONSOLIDATED STATEMENT OF CASH FLOWS Year ended December 31, 1999 ---------------------------- As Previously As Restated (b) As Restated (a) Reported Millions ---------------- ---------------- ---------------- - -------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(119.4) $(119.4) $(119.4) Adjustments to reconcile net loss to net cash flows From operating activities: Depreciation, depletion and amortization 64.2 64.2 64.2 Environmental remediation charges 9.5 9.5 9.5 Asset write-downs 35.9 35.9 35.9 Loss related to assets held for sale - - 46.6 Deferred income and Mining Income Taxes 2.1 2.1 2.1 Foreign currency exchange loss (gain), net (8.2) (8.2) (8.2) Equity in losses and impairment charges of Lihir 80.9 80.9 - Minority interest in net income (loss) (31.7) (31.7) (1.5) Increase (decrease) in accrued reclamation costs (3.2) (3.2) (2.5) Change in working capital accounts, net 19.9 3.1 2.1 Other, net (0.7) (0.7) (0.7) ------- ------- ------- Net Cash Flows Provided by Operating Activities 49.3 32.5 28.1 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (49.3) (49.3) (49.3) Crown Butte liquidating dividend to minority shareholders (11.0) (11.0) (11.0) Proceeds from sales of assets 11.9 11.9 11.9 Decrease (increase) in other assets 0.6 0.6 0.6 Other, net (0.7) (0.7) (0.7) ------- ------- ------- Net Cash Flows Used in Investing Activities (48.5) (48.5) (48.5) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Debt repayments (31.2) (31.2) (31.2) Increase (decrease) in short-term borrowings (14.9) (14.9) (14.9) Cash dividend payments (7.5) (7.5) (7.5) Decrease (increase) in restricted cash (31.0) (31.0) (31.7) Other, net 0.2 0.2 0.2 ------- ------- ------- Net Cash Flows Used in Financing Activities (84.4) (84.4) (85.1) ------- ------- ------- Effect of Exchange Rate Changes on Cash (5.8) (5.8) (5.8) ------- ------- ------- Net Increase (Decrease) in Cash and Cash Equivalents (89.4) (106.2) (111.3) Cash and cash equivalents at beginning of year 156.9 197.2 147.6 ------- ------- ------- Cash and Cash Equivalents at End of Year $ 67.5 $ 91.0 $ 36.3 ======= ======= ======= 79 CONSOLIDATED STATEMENT OF CASH FLOWS Year ended December 31, 1998 ---------------------------- As Previously As Restated (b) As Restated (a) Reported Millions ---------------- ---------------- ---------------- - -------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(240.6) $(241.3) $(241.3) Adjustments to reconcile net loss to net cash flows From operating activities: Depreciation, depletion and amortization 79.6 79.6 79.6 Asset write-downs 104.9 104.9 194.9 Deferred income and mining income taxes (7.1) (7.1) (7.1) Foreign currency exchange loss (gain), net 12.4 12.4 12.4 Equity in losses and impairment charges of Lihir 96.6 97.9 7.9 Minority interest in net income (loss) 1.1 0.5 0.5 Increase (decrease) in accrued reclamation costs 0.6 0.6 0.6 Change in working capital accounts, net 16.3 21.4 21.4 Decrease in deferred mining costs 11.2 11.2 11.2 Other, net 2.7 13.9 13.9 ------- ------- ------- Net Cash Flows Provided by Operating Activities 77.7 82.8 82.8 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (46.5) (46.5) (46.5) Proceeds from sales of assets 2.0 2.0 2.0 New World settlement, net 34.9 34.9 34.9 Investment in Lihir Gold Limited (11.5) (11.5) (11.5) Effects on cash of deconsolidation of Niugini Mining - - (49.6) Decrease (increase) in other assets 2.3 2.3 2.3 Increase in advances to affiliate (4.7) (4.7) (4.7) Other, net (1.0) (1.0) (1.0) ------- ------- ------- Net Cash Flows Used in Investing Activities (24.5) (24.5) (74.1) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Debt repayments (44.3) (44.3) (44.3) Increase (decrease) in short-term borrowings 9.9 9.9 9.9 Cash dividend payments (19.0) (19.0) (19.0) Decrease (increase) in restricted cash 10.2 10.2 10.2 Other, net (0.5) (0.5) (0.5) ------- ------- ------- Net Cash Flows Used in Financing Activities (43.7) (43.7) (43.7) ------- ------- ------- Effect of Exchange Rate Changes on Cash (2.4) (2.4) (2.4) ------- ------- ------- Net Increase (Decrease) in Cash and Cash Equivalents 7.1 12.2 (37.4) Cash and cash equivalents at beginning of year 149.8 185.0 185.0 ------- ------- ------- Cash and Cash Equivalents at End of Year $ 156.9 $ 197.2 $ 147.6 ======= ======= ======= CONSOLIDATED STATEMENT OF CASH FLOWS Year ended December 31, 1997 ---------------------------- As Previously As Restated (b) As Restated (a) Reported Millions ---------------- ---------------- ---------------- - -------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (9.4) $ (8.8) $ (8.8) Adjustments to reconcile net loss to net cash flows From operating activities: Depreciation, depletion and amortization 72.8 72.8 72.8 Deferred income and mining income taxes (33.8) (33.8) (33.8) Foreign currency exchange loss (gain), net 7.8 7.8 7.8 Equity in income of Lihir 1.0 (.2) (.2) Minority interest in net income (loss) 1.7 2.3 2.3 Cumulative effect of accounting change 3.7 3.7 3.7 Increase (decrease) in accrued reclamation costs 4.6 4.6 4.6 Change in working capital accounts, net 1.4 7.6 7.6 Decrease in deferred mining costs 2.2 2.2 2.2 Other, net 3.0 3.0 3.0 ------ ------ ------ Net Cash Flows Provided by Operating Activities 55.0 61.2 61.2 ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (62.4) (62.4) (62.4) Proceeds from sales of assets 4.7 4.7 4.7 Decrease (increase) in other assets (0.6) (0.6) (0.6) Increase in advances to affiliates (3.4) (3.4) (3.4) Other, net (1.3) (1.3) (1.3) ------ ------ ------ Net Cash Flows Used in Investing Activities (63.0) (63.0) (63.0) ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Cash proceeds from borrowings 156.7 156.7 156.7 Debt repayments (24.5) (24.5) (24.5) Increase (decrease) in short-term borrowings (16.9) (16.9) (16.9) Cash dividend payments (18.9) (18.9) (18.9) Decrease (increase) in restricted cash (3.3) (3.3) (3.3) Other, net 0.7 0.7 0.7 ------ ------ ------ Net Cash Flows Used in Financing Activities 93.8 93.8 93.8 ------ ------ ------ Effect of Exchange Rate Changes on Cash (1.0) (1.0) (1.0) ------ ------ ------ Net Increase (Decrease) in Cash and Cash Equivalents 84.8 91.0 91.0 Cash and cash equivalents at beginning of year 65.0 94.0 94.0 ------ ------ ------ Cash and Cash Equivalents at End of Year $149.8 $185.0 $185.0 ====== ====== ====== 81 SUPPLEMENTAL FINANCIAL INFORMATION (Unaudited) QUARTERLY RESULTS Foreign Equity in Currency Income Opearating Exchange (Loss) and Basic and Dividends per Share Millions except Income Gain Impairment Diluted Loss ------------------- Per share amounts Sales (Loss) (Loss) of Lihir Net Loss per Share Common Preferred - ----------------------------- ------- ---- ---- -------- -------- --------- ------ -------- 1999 (as restated)(b) - --------------------- First quarter $ 53.8 $ (3.8) $ 3.1 $(12.2) $ (12.6) $ (.06) $ - $0.8125 Second quarter 53.4 (7.4) 3.7 (14.2) (15.4) (.07) - 0.8125 Third quarter (1) 54.6 (15.7) 0.1 0.2 (18.1) (.09) - 0.8125 Fourth quarter (2) 66.4 (36.1) 1.3 (54.7) (73.3) (.33) - 0.8125 ------ ------- ------ ------ ------- ------- Total year $228.2 $ (63.0) $ 8.2 $(80.9) $(119.4) (.55) - $3.2500 ====== ======= ====== ====== ======= ======= 1998 (as restated)(b) - ----------------------------- First quarter $ 78.9 $ 3.3 $ 0.5 $ (1.4) $ (1.6) $ (.02) $0.025 $0.8125 Second quarter 68.3 (2.2) (5.9) (1.3) (9.3) (.05) - 0.8125 Third quarter 70.0 3.7 (7.2) (1.8) (7.7) (.04) 0.025 0.8125 Fourth quarter (3) 59.4 (114.9) 0.2 (92.1) (222.0) (.98) - 0.8125 ------ ------- ------ ------ ------- ------ ------- Total year $276.6 $(110.1) $(12.4) $(96.6) $(240.6) (1.08) $0.050 $3.2500 ====== ======= ====== ====== ======= ====== ======= Foreign Equity in Currency Income Opearating Exchange (Loss) and Basic and Dividends per Share Millions except Income Gain Impairment Diluted Loss ------------------- Per share amounts Sales (Loss) (Loss) of Lihir Net Loss per Share Common Preferred - ----------------------------- ------- ---- ---- -------- -------- --------- ------ -------- 1999 (as restated)(a) - --------------------- First quarter $ 53.8 $ (3.8) $ 3.1 $(12.2) $ (12.6) $ (.06) $ - $0.8125 Second quarter 53.4 (7.4) 3.7 (14.2) (15.4) (.07) - 0.8125 Third quarter (1) 54.6 (15.7) 0.1 0.2 (18.1) (.09) - 0.8125 Fourth quarter (2) 66.4 (36.1) 1.3 (54.7) (73.3) (.33) - 0.8125 ------ ------- ------ ------ ------- ------- Total year $228.2 $ (63.0) $ 8.2 $(80.9) $(119.4) (.55) - $3.2500 ====== ======= ====== ====== ======= ======= 1998 (as restated)(a) - -------------------- First quarter $ 78.9 $ 3.3 $ 0.5 $ (1.4) $ (1.6) $ (.02) $0.025 $0.8125 Second quarter 68.3 (2.2) (5.9) (1.3) (9.3) (.05) - 0.8125 Third quarter 70.0 3.7 (7.2) (1.8) (7.7) (.04) 0.025 0.8125 Fourth quarter (3) 59.4 (114.9) 0.2 (93.4) (222.7) (.98) - 0.8125 ------ ------- ------ ------ ------- ------ ------- Total year $276.6 $(110.1) $(12.4) $(97.9) $(241.3) (1.08) $0.050 $3.2500 ====== ======= ====== ====== ======= ====== ======= 82 SUPPLEMENTAL FINANCIAL INFORMATION (Unaudited) QUARTERLY RESULTS Gain (Loss) Foreign Basic and on Assets Operating Currency Diluted Millions except Held for Income Exchange Gain Net Loss Dividends per Share per share amounts Sales Sale (Loss) (Loss) Loss Per Share Common Preferred - ----------------- ---- ---- ------ ------ ---- --------- ------ --------- 1999 (as previously - ------------------- reported) - --------- First quarter $ 53.8 $(10.4) $ (14.8) $ 3.1 $ (11.9) $ (.06) $ - $0.8125 Second quarter 53.4 (9.5) (17.2) 3.7 (15.4) (.07) - 0.8125 Third quarter (1) 54.6 6.6 (9.2) 0.1 (12.1) (.06) - 0.8125 Fourth quarter (2) 66.4 (33.3) (69.1) 1.3 (80.0) (.36) - 0.8125 ------ ------ ------- ------ ------- ------- Total year $228.2 $(46.6) $(110.3) $ 8.2 $(119.4) (.55) - $3.2500 ====== ====== ======= ====== ======= ======= 1998 (as previously - ------------------- reported) - --------- First quarter $ 78.9 $ - $ 3.3 $ 0.5 $ (1.6) $ (.02) $0.025 $0.8125 Second quarter 68.3 - (2.2) (5.9) (9.3) (.05) - 0.8125 Third quarter 70.0 - 3.7 (7.2) (7.7) (.04) 0.025 0.8125 Fourth quarter (4) 59.4 - (204.9) 0.2 (222.7) (.98) - 0.8125 ------ ------- ------ ------- -------- ------- Total year $276.6 - $(200.1) $(12.4) $(241.3) (1.08) $0.050 $3.2500 ====== ======= ====== ======= ======== ======= (1) Includes a $9.5 million environmental remediation charge related to the San Luis property (see Note 14). (2) Includes a $35.9 million write-off of the investment in Crown Jewel (see Note 7) and a $7.7 million net charge related to deferred tax assets (see Note 10). (3) Includes before and after-tax charges of $104.9 million for asset write- downs (see Note 7). (4) Includes before and after-tax charges of $194.9 million for asset write- downs. INDEX TO FINANCIAL STATEMENTS II. LIHIR GOLD LIMITED Report of the independent accountants 85 Profit and loss accounts for the years ended December 31, 1999, 1998 and 1997......... 86 Balance sheets as at December 31, 1999, 1998 and 1997................................. 87 Statements of changes in equity for the years ended December 31, 1999, 1998 and 1997.. 88 Statements of cash flows for the years ended December 31, 1999, 1998 and 1997......... 89 Notes to the financial statements..................................................... 90 84 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF LIHIR GOLD LIMITED In our opinion, the accompanying balance sheets and the related profit and loss accounts, statements of changes in equity and cash flows present fairly, in all material respects, the financial position of Lihir Gold Limited at December 31, 1999, 1998 and 1997, and the results of its operations and its cash flows for the years then ended, in conformity with International Accounting Standards. 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 generally accepted auditing standards in the United States and International Standards on Auditing. Those standards 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. International Accounting Standards vary in certain significant respects from accounting principles generally accepted in the United States. The application of the latter would have affected the determination of operating profit after income tax for the years ended December 31, 1999, 1998 and 1997, and the determination of shareholders' equity and financial position at December 31, 1999, 1998 and 1997, to the extent summarised in Note 28 to the financial statements. /s/ PricewaterhouseCoopers - -------------------------- PricewaterhouseCoopers Port Moresby, Papua New Guinea 12 May, 2000 85 LIHIR GOLD LIMITED PROFIT AND LOSS ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 NOTE 1999 1998 1997 US$ 000 US$ 000 US$ 000 Sales Revenue 206,574 184,718 56,966 ----------------------------------------------------------------- Costs and expenses Mining expenses (70,703) (62,261) (15,562) Processing costs (37,594) (30,339) (5,609) Power generation costs (13,570) (11,097) (3,264) Impairment of low grade stockpile inventory - (9,370) - Refining, royalty and management fees 5 (8,046) (7,548) (2,042) Deferred costs transferred to inventories 25,593 15,258 11,588 Depreciation and amortisation 5 (54,153) (46,123) (8,918) General and administrative costs 5 (32,351) (19,726) (8,427) ----------------------------------------------------------------- Total costs and expenses (190,824) (171,206) (32,234) PROFIT FROM OPERATING ACTIVITIES 15,750 13,512 24,732 Interest income 3,202 3,654 633 Finance costs (29,322) (32,624) (7,226) ----------------------------------------------------------------- PROFIT/(LOSS) BEFORE INCOME TAX 5 (10,370) (15,458) 18,139 Income tax benefit/(expense) 14 2,989 5,186 (6,338) ----------------------------------------------------------------- NET PROFIT/(LOSS) FOR THE YEAR (7,381) (10,272) 11,801 Accumulated profits at the beginning of the year 1,529 11,801 - ----------------------------------------------------------------- Total available for appropriation (5,852) 1,529 11,801 ----------------------------------------------------------------- ACCUMULATED PROFITS/(LOSSES) AT THE END OF THE YEAR (5,852) 1,529 11,801 ----------------------------------------------------------------- Earnings per share (US$ per share) - - Basic and diluted 26 (0.01) (0.01) 0.01 The accompanying notes form part of these financial statements. 86 LIHIR GOLD LIMITED BALANCE SHEETS AS AT DECEMBER 31, 1999, 1998, AND 1997 1999 1998 1997 NOTE US$ 000 US$ 000 US$ 000 ASSETS CURRENT ASSETS Cash and cash equivalents 6 46,875 82,459 30,640 Inventories 8 31,883 22,054 21,953 Receivables 9 9,832 3,739 3,313 Prepayments 4,824 3,410 2,969 Deferred mining costs 1,298 8,376 3,049 Other financial assets 10 4,424 4,469 3,246 -------------------------------------------- Total current assets 99,136 124,507 65,170 NON-CURRENT ASSETS Inventories 8 16,228 6,804 4,262 Receivables 5 5 5 Prepayments - - 413 Deferred mining costs 40,962 20,494 9,443 Mine properties 11 862,593 882,983 889,049 Deferred tax asset 8,417 1,153 64 Other financial assets 10 8,345 12,781 17,250 -------------------------------------------- Total Non-current assets 936,550 924,220 920,486 -------------------------------------------- TOTAL ASSETS 1,035,686 1,048,727 985,656 ============================================ LIABLITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable 12 26,300 27,442 19,459 Provisions 13 5,234 1,508 579 Borrowings 22 43,009 44,430 26,623 Deferred hedging income 23 3,592 684 - Retentions - - 421 -------------------------------------------- Total current liabilities 78,135 74,064 47,082 NON-CURRENT LIABILITIES Provisions 13 8,418 8,719 262 Borrowings 22 115,552 273,869 299,328 Deferred hedging income 23 14,406 684 - Deferred tax liability 5,802 1,549 5,869 -------------------------------------------- Total non-current liabilities 144,178 284,821 305,459 -------------------------------------------- TOTAL LIABILITIES 222,313 358,885 352,541 -------------------------------------------- SHAREHOLDERS' EQUITY 1,083,205,726 fully paid issued ordinary shares 18 819,225 688,313 621,314 Accumulated profits/(losses) (5,852) 1,529 11,801 -------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 813,373 689,842 633,115 -------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,035,686 1,048,727 985,656 ============================================ COMMITMENTS 20 CONTINGENT LIABILITIES 21 The accompanying notes form part of these financial statements. 87 LIHIR GOLD LIMITED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 SHARE RETAINED CAPITAL EARNINGS TOTAL NOTE US$ 000 US$ 000 US$ 000 Balance at 1 January 1997 621,314 - 621,314 ---------------------------------------------- Net profit/(loss) for the year - 11,801 11,801 ---------------------------------------------- Balance at December 31, 1997 621,314 11,801 633,115 ---------------------------------------------- Net profit/(loss) for the year - (10,272) (10,272) Issue of share capital 66,999 - 66,999 ---------------------------------------------- Balance at December 31, 1998 18 688,313 1,529 689,842 ---------------------------------------------- Net profit/(loss) for the year - (7,381) (7,381) Issue of share capital 130,912 - 130,912 ---------------------------------------------- Balance at December 31, 1999 18 819,225 (5,852) 813,373 ---------------------------------------------- The accompanying notes form part of these financial statements. 88 LIHIR GOLD LIMITED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 1999 1998 1997 US$ 000 US$ 000 US$ 000 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from operating activities 206,574 184,718 56,966 Payments arising from operating activities (172,184) (132,049) (50,466) -------------------------------------------- 34,390 52,669 6,500 Interest income 3,202 3,654 633 Interest paid to third parties (29,322) (32,624) (6,135) Income taxes paid - - - -------------------------------------------- NET CASH FLOWS FROM OPERATING ACTIVITIES 8,270 23,699 998 -------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property plant and equipment (33,378) (32,518) (263,612) Interest paid and capitalised on qualifying assets - - (12,275) Proceeds from sale of fixed assets 28 - - -------------------------------------------- NET CASH FLOWS FROM INVESTING ACTIVITIES (33,350) (32,518) (275,887) -------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings - 4,900 261,527 Restructure of hedge book 20,586 - - Repayment of term debt (162,002) (11,262) - Proceeds from issue of shares 130,912 67,000 - -------------------------------------------- NET CASH FLOWS FROM FINANCING ACTIVITIES (10,504) 60,638 261,527 -------------------------------------------- -------------------------------------------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (35,584) 51,819 (13,362) -------------------------------------------- Cash and cash equivalent balance at beginning of year 82,459 30,640 44,002 Cash and cash equivalent balance at end of year 46,875 82,459 30,640 -------------------------------------------- (35,584) 51,819 (13,362) -------------------------------------------- The accompanying notes form part of these financial statements. 89 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES These financial statements are presented in accordance with the Papua New Guinea Companies Act 1997, and comply with applicable financial reporting standards and other mandatory professional reporting requirements approved for use in Papua New Guinea by the Accounting Standards Board (ASB). The ASB has adopted International Accounting Standards and Interpretations issued by the Standing Interpretations Committee as the applicable financial reporting framework. The financial statements have also been prepared on the basis of historical costs and do not take into account changing money values. Cost is based on the fair values of the consideration given in exchange for assets. The accounting policies have been consistently applied, unless otherwise stated. The following is a summary of the significant accounting policies adopted by the Company in the preparation of the financial statements. (a) EXPLORATION AND EVALUATION EXPENDITURE Exploration and evaluation expenditure is accumulated separately for each area of interest. Exploration expenditure is fully written off in the financial year in which it is incurred, unless recoupment from revenue to be derived from the relevant area of interest or mineral resource, or from the sale of that area of interest, is reasonably assured. Evaluation expenditure is capitalised, to the extent to which its recoupment out of revenue to be derived from the relevant area of interest/mineral resource, or from sale of that area of interest, is reasonably assured. Exploration or evaluation expenditure written off, or provided against, is reinstated when recoupment out of revenue to be derived from the relevant area of interest or mineral resource, or from sale of that area of interest, is reasonably assured. For the periods presented, exploration or evaluation expenditure written off have not been re-instated. (b) DEVELOPMENT PROPERTIES A property is classified as a development property when a mine plan has been prepared, proved and probable resources have been established, and the Company has decided to commercially develop the property. Development expenditure is accumulated separately for each area of interest in which economically recoverable mineral reserves have been identified and are reasonably assured. Once a development decision has been taken, all past and future exploration and evaluation expenditure in respect of the area of interest is aggregated with the costs of development and classified under non-current assets as "Development Properties". All expenditure incurred prior to the commencement of commercial levels of production from each development property is carried forward to the extent to which recoupment out of revenue to be derived from the sale of production from the relevant development property, or from sale of that property, is reasonably assured. During the three years ended December 31, 1999, the Company has had no properties in the development stage. No exploration, evaluation or development expenditures are currently being incurred or capitalised. 90 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS No amortisation is provided in respect of development properties until they are reclassified as "Mine Properties", following the commencement of commercial production. (c) MINE PROPERTIES Mine properties represent the accumulation of all exploration, evaluation, and development expenditure incurred by or on behalf of the Company in relation to areas of interest in which mining of a mineral resource has commenced. When future economic benefits are established by further development expenditure in respect of a mine property after the commencement of production, such expenditure is carried forward as part of the cost of that mine property. Otherwise such expenditure is classified as part of the cost of production. Amortisation of costs is provided on the unit-of-production method, separate calculations being made for each mineral resource. The unit-of- production basis results in an amortisation charge proportional to the depletion of estimated recoverable gold ounces contained in proved and probable ore reserves. Where a change in estimated recoverable gold ounces containing proved and probable ore reserves is made, depreciation and amortisation of mine properties is accounted for in the current accounting period. (d) CAPITALISATION OF FINANCING COSTS Interest and other financing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset is determined as the actual borrowing costs incurred on that borrowing during the period. Capitalisation of borrowing costs ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. Interest earned on the temporary investment of borrowed funds and funds received in connection with the sale of equity securities prior to the expenditure being made is deducted from interest paid on the borrowed funds in arriving at the amounts so capitalised. Prior to the commencement of commercial production in 1997, the amount of interest costs eligible for capitalisation was based on the actual interest costs incurred because the borrowings were incurred to fund development of the mine property. Capitalisation of borrowing costs ceased following the commissioning of the assets upon commencement of commercial production. These are amortised using the unit-of-production method based on recoverable gold ounces. For the years ended December 31, 1999, 1998 and 1997, interest costs of $ Nil million, $Nil million and $12.275 million, respectively, were capitalised. (e) MINE BUILDINGS, MACHINERY AND EQUIPMENT The cost of each item of buildings, machinery and equipment is depreciated over its expected useful life. For the majority of assets this is accomplished using the unit-of-production method based on recoverable gold ounces, although some assets are depreciated using a percentage based on time. Each item's economic life has due regard to both physical life limitations and to present assessments of economically recoverable reserves of the mine property (where appropriate) and to possible future variations in those assessments. Estimates of remaining useful lives are made on a regular basis for all assets, with annual reassessments for major items. 91 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS The total net carrying values of mine building, machinery and equipment at each mine property are reviewed regularly and, to the extent to which these values exceed their recoverable amounts, that excess is fully provided against in the financial year in which this is determined. Major spares purchased specifically for particular plant are included in the cost of plant and are depreciated over the expected useful life of the item of plant. Approximately 99% of all fixed assets are depreciated according to the units-of-use method, using recoverable ounces of gold as the determinant. These assets have a remaining useful life of approximately 21 years. Those assets depreciated on a straight line basis are done so predominantly over a life of 5 years. FIXED ASSET CLASSIFICATION PERCENTAGE PERCENTAGE DEPRECIATED DEPRECIATED AS AS STRAIGHT LINE UNITS-OF-USE Deferred Expenditure 100% - Exploration 100% - Land & Buildings 100% - Plant & Equipment 98% 2% Grand Total 99% 1% The classification of "Land and Buildings" does not include freehold land as depreciable assets. The Company does not own any freehold land, and only occupies land by leasehold tenure. All lease costs are expensed as incurred. (f) REMAINING MINE LIVES In estimating the remaining life of the mine at each mine property for the purpose of amortisation and depreciation calculations, due regard is given, not only to the amount of remaining recoverable gold ounces, but also to limitations which could arise from the potential for changes in technology, demand, product substitution and other issues which are inherently difficult to estimate over a lengthy time frame. (g) IMPAIRMENT OF ASSETS The Company has adopted IAS 36 "Impairment of Assets" in fiscal 1998. Impairments of assets are recognised whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is measured as the higher of net selling price and value in use. Value in use for individual assets is calculated by discounting future cash flows using a risk adjusted pre-tax discount rate. As there were no impairment losses in the year ended 31 December 1998, no transitional adjustments were necessary. (h) RESTORATION, REHABILITATION AND ENVIRONMENTAL EXPENDITURE In accordance with IAS 37 "Provisions, Contingent Liabilities and Contingent Assets", a provision is raised for anticipated expenditure to be made on restoration and rehabilitation to be undertaken after mine closure. These costs may include the costs of dismantling and demolition of infrastructure or decommissioning, the removal of residual material and the remediation of disturbed areas. The provision is only raised in respect of damage incurred up to balance date. The amount of any provision recognised is the full amount that has been estimated based on 92 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS current costs to be required to settle present obligations, discounted using a pre-tax risk-free interest rate of 2.5%. Estimates of future costs are reassessed annually. A corresponding asset, which represents future economic benefits, is raised and subsequently amortised using the units of production method. The Company's restoration, rehabilitation and environmental expenditure policy identifies the environmental, social and engineering issues to be considered and the procedures to be followed when providing for costs associated with the site closure. Site rehabilitation and closure involves the dismantling and demolition of infrastructure not intended for subsequent community use, the removal of residual materials and the remediation of disturbed areas. Community requirements and long term land use objectives are also taken into account. The adoption of IAS 37 has not resulted in a material adjustment and therefore the comparatives and opening retained earnings have not been restated. (i) INVENTORIES Inventories of ore and metal are physically measured or estimated and valued at the lower of cost and net realisable value. Cost comprises direct material, direct labour and transportation expenditure in getting such inventories to their existing location and condition, together with an appropriate portion of fixed and variable overhead expenditure and depreciation and amortisation, based on weighted average costs incurred during the period in which such inventories are produced. Net realisable value is the amount estimated to be obtained from sale of the item of inventory in the normal course of business, less any anticipated costs to be incurred prior to its sale. Inventories of consumable supplies and spare parts expected to be used in production are valued at the lower of weighted average cost, which includes the cost of purchase as well as transportation and statutory charges, and net realisable value. (j) DEFERRED MINING COSTS Direct expenditure on mining is brought to account for each phase of the mine's development based on the estimated ratio of waste to ore for that phase. During the mining period the actual ratio of waste to ore removed for each phase varies from year to year. In periods where more than the average amount of waste is removed the surplus is transferred to the deferred mining cost account. It is subsequently expensed during periods where the waste to ore ratio is less than the average. The average amount of waste to be removed is assessed according to each mining phase, and not over the entire life of the mine. The current portion of the deferred mining costs represent the unamortised costs that are expected to be recouped within 12 months as mining is completed for that phase. (k) REVENUE RECOGNITION Sales are recognised as revenue only when there has been a passing of risk to the customer, and: n the product is in a form suitable for delivery and no further processing is required by, or on behalf of, the Company; 93 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS n the quantity and quality (grade) of the product can be determined with reasonable accuracy; n the product has been despatched to the customer and is no longer under the physical control of the Company (or property in the product has earlier passed to the customer); n the selling price can be measured reliably; n it is probable that the economic benefits associated with the transaction will flow to the Company; and n the costs incurred or to be incurred in respect of the transaction can be measured reliably. Sales revenue represents the gross proceeds receivable from the customer. Revenue received from sale/disposal of product, materials or services during the exploration, expenditure or development phases of operations is offset against expenditure in respect of the area of interest/mineral resource concerned. (l) GOLD HEDGING Hedging is undertaken to ensure a minimum level of income, and not for speculative purposes. Any costs incurred in purchasing options, forward contracts and other derivative instruments are capitalised, and charged to profit when the position expires, either through delivery of the underlying gold or through the passage of time. Where a hedged transaction is terminated prior to its maturity date and the underlying sale is still expected to occur, it is the Company's policy to defer any gains and losses that arise from the early termination, and to bring them to account over the periods when the hedged transaction was expected to take place. All unrealised gains and losses are brought to account upon expiry, and not progressively through time. The Company does not trade derivative financial instruments. (m) EMPLOYEE ENTITLEMENTS (i) Wages and Salaries A liability for wages and salaries is recognised, and measured as the amount unpaid at balance date at current pay rates in respect of employees' services up to that date. (ii) Annual and Long Service Leave & Other Accrued Benefits A liability for annual and long service leave is recognised and measured with reference to existing entitlements and salary and measured as the amount unpaid at balance date at current pay rates in respect of employees services up to that date. 94 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (n) FOREIGN CURRENCY TRANSLATION As the Company's turnover is denominated in US dollars and the majority of its fixed asset purchases and costs are in US dollars or currencies related to US dollars, the Company's Directors have adopted the US dollar as the Company's functional and management reporting currency. Foreign currency transactions (other than US dollars) are initially translated into US currency at the rate of exchange at the date of the transaction. At the date of the balance sheet, amounts payable and receivable in foreign currencies are translated to US dollars at rates of exchange current at that date. Resulting exchange differences are brought to account in determining the profit or loss for the year. The Company's Kina figures are translated from US Dollars at the rate prevailing at December 31, 1999 of PGK 1.00 = USD 0.375 (1998: PGK 1.00 = USD 0.475). Movements in the share capital account are accounted for as a capital reserve. (o) INCOME TAX Tax effect accounting procedures are followed using the liability method for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Income tax on temporary differences is set aside to the deferred tax liability and deferred tax asset accounts at current rates. Deferred tax assets relating to deductible temporary differences and tax losses is only carried forward as an asset to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences and tax losses can be utilised. (p) LEASES Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses in the periods in which they are incurred. (q) CASH AND CASH EQUIVALENTS For the purpose of the statement of cash flows and balance sheet, cash includes: (i) cash on hand and at call deposits with banks or financial institution, net of bank overdrafts; and (ii) investments in money market instruments with less than 90 days to maturity from the date of acquisition. (r) COMPARATIVE FIGURES Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. (s) ROUNDING OF AMOUNTS The financial statements and directors' report have been rounded to the nearest thousand dollars. 95 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (t) SIGNIFICANT RISKS AND UNCERTAINIES The reserve estimates presented are estimates based on a gold price of $350 per ounce for the cut off grade of 2.2g Au/t using the end 1998 mine life cost estimates and within a mine pit designed at $350 per ounce. As of December 31, 1999 the Company's estimated proved and probable reserves stood at 11.2 million contained ounces. The Company believes that $350 per ounce is the appropriate long-term gold price to estimate the value of these reserves. If the long-term gold price were to fall to $300 per ounce, the Company's proved and probable reserves would be reduced to 9.9 million ounces. The Lihir operation is also subject to the provisions of the PNG Mining Act 1992 which governs the granting of mining rights and the conditions upon which those rights may be terminated. In particular, the Company is party to a mining development contract, dated March 17, 1995 (the "Mining Development Contract"), with the PNG Government which sets forth the terms upon which the Company may exercise its rights under the Special Mining Lease which governs the Lihir operation. Under certain limited circumstances, the PNG Government may terminate the Mining Development Contract and therefore, the Special Mining Lease. Any such termination would prohibit the continued operation of the Lihir operation. (u) USE OF ESTIMATES The preparation of financial statements in accordance with International Accounting Standards requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant estimates and assumptions relate to the long-term gold price, mineral reserves and remaining mine lives, provision for restoration and rehabilitation obligations, valuation allowance for deferred tax assets, recoverability of long-lived assets (including ore stock piles) and depreciation. Actual results could differ from those estimates and may affect amounts reported in future periods. Management believes that the estimates are reasonable. (v) RECENTLY ISSUED ACCOUNTING STANDARDS IAS 10 (revised) - Events After the Balance Sheet Date: This standard will be operative for periods beginning on or after 1 January 2000 and will be adopted by the Company from the operative date. The standard will impact on the treatment of events depending on whether the occurrence of such events provide additional evidence of conditions which existed at the balance sheet date or not. Material events for which conditions existed at the balance sheet date will be required to be adjusted. The nature and estimated financial effect of all other material events which occur after the balance sheet date will be required to be disclosed. IAS 22 - Business Combinations: This standard will apply to accounting for business combinations. It is operative for periods beginning on or after 1 July 1999 and will be adopted by the Company from 1 January 2000 to account for its acquisition of Niugini Mining Limited which occurred in February 2000. In adopting this standard, the Niugini Mining Limited acquisition will be accounted for using the purchase accounting method. IAS 22 was revised to be consistent with IAS 36 Impairment of Assets, IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IAS 38 Intangible Assets. The major change is that negative goodwill is recognised on the balance sheet in certain circumstances and there is now a rebuttable presumption that the useful life of goodwill will not exceed twenty years from initial recognition and it will be amortised on a systematic basis over its useful life. 96 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS IAS 39 - Financial Instruments: Recognition and Measurement: This standard establishes accounting and reporting standards for derivative instruments and hedging activity. IAS 39 is effective for all periods beginning after 1 January 2001. IAS 39 requires recognition of all financial instruments on the balance sheet as either assets or liabilities and measurement at fair value. Changes in the financial instrument's fair value will be recognised in earnings unless specific hedge accounting criteria are met. Gains and losses on hedging instruments must be recorded in the statement of recognised gains and losses/ other comprehensive income and recycled to the income statement. The Company plans to adopt the statement on January 1, 2001. The Company envisages that the main impact on its financial statements upon adoption of this standard, will be the first time recognition in the balance sheet of its derivative financial instruments at their fair values. " NOTE 2: SPECIAL MINING LEASE The Special Mining Lease was issued on 17 March, 1995 and has a term of 40 years. Under the Mining Act it may be renewed for subsequent 20 year periods at the discretion of the PNG Government. NOTE 3: REQUIREMENTS REGARDING CASH RESERVES The Papua New Guinea Central Banking (Foreign Exchange and Gold) Regulations generally require PNG companies to hold all cash reserves in Kina. Prior approval of the Bank of Papua New Guinea is required to convert funds from Kina into other currencies. Under the Mining Development Contract, however, the Company has permission to retain funds in foreign currencies to meet its obligations. NOTE 4: DIVIDEND RESTRICTIONS The Loan Agreement permits the payment of dividends only on the quarterly payment dates and only if certain conditions are met, including a condition that after payment of such dividends and all other payments required under the Loan Agreement the company has a specified minimum cash balance in an offshore account and a Debt Cover ratio (as defined in the Loan Agreement) of not less than 1.25:1. 97 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS NOTE 5: OPERATING PROFIT US$ 000 1999 1998 1997 Operating loss before taxation has been determined after crediting / (charging): Refining, royalty and management fees Refining costs (661) (525) (162) Royalties on sales (4,074) (3,792) (1,077) Management fees (3,311) (3,231) (803) --------------------------------------------------- (8,046) (7,548) (2,042) Depreciation and amortisation Amortisation of hedging gains 3,956 - - Amortisation of hedging costs (4,481) (3,246) - Depreciation and amortisation costs on mine properties (53,129) (43,051) (8,918) Other (499) 174 - --------------------------------------------------- (54,153) (46,123) (8,918) General and administrative costs Net foreign exchange gains/(losses) (589) 2,096 30 Provisions for employee benefits (2,225) (2,614) (207) Provision for stores stock obsolescence (1,000) - - Provision for doubtful debts (195) - - Donations and community assistance (235) (60) (3) Staff costs (14,879) (13,450) (3,862) Operating lease rentals (902) (1,368) (290) Other costs (12,326) (4,330) (4,095) --------------------------------------------------- (32,351) (19,726) (8,427) NOTE 6: CASH AND CASH EQUIVALENTS US$ 000 1999 1998 1997 Cash at bank and on hand 20,537 39,245 5,364 Short term deposits with financial institutions 26,338 43,214 25,276 --------------------------------------------------- 46,875 82,459 30,640 --------------------------------------------------- 98 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS NOTE 7: STATEMENT OF CASH FLOWS US$ 000 1999 1998 1997 Reconciliation of cash flow from operating activities to operating profit after tax Operating profit/(loss) after tax (7,381) (10,272) 11,801 Depreciation and amortisation 54,153 46,123 8,918 Loss on disposal of assets 243 170 (17) Impairment of low grade stockpiles - 9,370 - (Increase)/Decrease in debtors (7,507) (454) (4,665) (Increase)/Decrease in inventories (19,253) (12,013) (11,442) (Increase)/Decrease in future income tax benefit (7,264) (1,089) (64) (Increase)/Decrease in other assets (13,390) (16,378) (9,642) (Decrease)/Increase in creditors 1,112 7,983 548 (Decrease)/Increase in deferred tax 4,253 (4,320) 5,869 (Decrease)/Increase in rehabilitation 1,079 600 - (Decrease)/Increase in other provisions 2,225 3,979 (308) --------------------------------------------------- Net cash flow from operating activities 8,270 23,699 998 -------------------------------------------------------- NOTE 8: INVENTORIES US$ 000 1999 1998 1997 CURRENT Stores 26,167 18,117 14,354 Less: Provision for obsolescence 1,000 - - --------------------------------------------------- 25,167 18,117 14,354 Production work in progress 1,658 1,556 4,811 Finished goods 1,979 1,053 - Ore stockpiles 3,079 1,328 2,788 --------------------------------------------------- Total current inventories 31,883 22,054 21,953 NON-CURRENT Ore stockpiles 16,228 6,804 4,262 --------------------------------------------------- Total inventories 48,111 28,858 26,215 --------------------------------------------------- Current stockpiled ore mainly relates to Run-Of-Mine ("ROM") stockpile and crushed ore stocks ready for processing into finished goods in the current period. These are valued at cost which includes mining costs, costs of conversion (crushing and conveying costs) and an allocation of fixed and variable production overheads based on their contained gold. Non-current stockpiles are expected to be processed over the remaining life of mine commencing in 2011. Finished goods at December 31, 1999 included 9,597 ounces of gold ore on hand in the bullion room on site. The cost of finished goods inventory is stated at the lower or cost or net realizable value. 99 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS NOTE 9: RECEIVABLES US$ 000 1999 1998 1997 CURRENT Insurance claims receivable - - 805 Other amounts receivable from: - - third parties 10,027 3,739 2,508 Less: Provision for doubtful debts 195 - - --------------------------------------------------- 9,832 3,739 3,313 --------------------------------------------------- NOTE 10: OTHER FINANCIAL ASSETS US$ 000 1999 1998 1997 CURRENT Hedging costs 4,424 4,469 3,246 NON-CURRENT Hedging costs 8,345 12,781 17,250 --------------------------------------------------- Total Other Financial Assets 12,769 17,250 20,469 --------------------------------------------------- NOTE 11: MINE PROPERTIES US$ 000 1999 1998 1997 PLANT AND EQUIPMENT Cost brought forward 416,458 412,024 - Transfers from capital works in progress 44,037 4,562 412,225 Transfer to other mine properties (1,831) (26) - Acquisitions and disposals (499) (102) (201) Cost carried forward 458,165 416,458 412,024 Depreciation brought forward (25,647) (4,549) - Charge for the year (26,483) (21,107) (4,566) Transfer to other mine properties 756 - - Disposals 228 9 17 --------------------------------------------------- Depreciation carried forward (51,146) (25,647) (4,549) --------------------------------------------------- Net book value 407,019 390,811 407,475 ----------------------------------------------------- 100 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS US$ 000 1999 1998 1997 LAND AND BUILDINGS Cost brought forward 71,596 71,496 - Transfers from capital works in progress 5,274 74 71,496 Transfers from other mine properties - 26 - --------------------------------------------------- Cost carried forward 76,870 71,596 71,496 Depreciation brought forward (3,906) (643) - Charge for the year (4,038) (3,262) (643) Transfers from other mine properties (1) (1) - --------------------------------------------------- Depreciation carried forward (7,945) (3,906) (643) --------------------------------------------------- Net book value 68,925 67,690 70,853 ----------------------------------------------------- CAPITALISED EXPLORATION Cost brought forward 146,374 146,374 - Transfers from capital works in progress - - 146,374 Acquisitions and disposals - - - --------------------------------------------------- Cost carried forward 146,374 146,374 146,374 Depreciation brought forward (7,998) (1,317) - Charge for the year (8,053) (6,681) (1,317) Disposals - - - --------------------------------------------------- Depreciation carried forward (16,051) (7,998) (1,317) --------------------------------------------------- Net book value 130,323 138,376 145,057 ----------------------------------------------------- DEFERRED EXPENDITURE Cost brought forward 263,285 264,484 - Transfers from capital works in progress 523 443 264,484 Transfer from other mine properties 1,831 - - Acquisitions and disposals - (1,642) - --------------------------------------------------- Cost carried forward 265,639 263,285 264,484 Depreciation brought forward (14,393) (2,392) - Charge for the year (14,555) (12,001) (2,392) Transfers from other mine properties (755) - - --------------------------------------------------- Depreciation carried forward (29,703) (14,393) (2,392) --------------------------------------------------- Net book value 235,936 248,892 262,092 ----------------------------------------------------- 101 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS US$ 000 1999 1998 1997 SUBTOTAL Cost brought forward 897,713 894,378 - Transfers from capital works in progress 49,834 5,079 894,579 Acquisitions and disposals (499) (1,744) (201) --------------------------------------------------- Cost carried forward 947,048 897,713 894,378 Depreciation brought forward (51,944) (8,901) - Charge for the year (53,129) (43,051) (8,918) Disposals 228 8 17 ----------------------------------------------------- Depreciation carried forward (104,845) (51,944) (8,901) ----------------------------------------------------- Net book value 842,203 845,769 885,477 ----------------------------------------------------- CAPITAL WORKS IN PROGRESS Cost brought forward 30,939 3,572 670,412 Acquisitions and disposals 33,378 32,446 227,739 Transfers to mine properties (49,834) (5,079) (894,579) Costs carried forward 14,483 30,939 3,572 REHABILITATION Cost brought forward 6,775 - - Acquisitions and disposals 121 6,775 - ----------------------------------------------------- Cost carried forward 6,896 6,775 - Amortisation brought forward (500) - - Charge for the year (489) (500) - Disposals - - - ----------------------------------------------------- Amortisation carried forward (989) (500) - ----------------------------------------------------- ----------------------------------------------------- Net book value 5,907 6,275 - ----------------------------------------------------- ----------------------------------------------------- TOTAL MINE PROPERTIES 862,593 882,983 889,049 ----------------------------------------------------- NOTE 12: ACCOUNTS PAYABLE US$ 000 1999 1998 1997 CURRENT Trade creditors and accruals 23,898 24,056 17,510 Amounts payable to related bodies 2,402 3,386 1,949 --------------------------------------------------- 26,300 27,442 19,459 --------------------------------------------------- 102 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS NOTE 13: PROVISIONS US$ 000 1999 1998 1997 CURRENT Employee provisions - current 5,234 1,508 579 NON CURRENT Employee provisions - non current 443 1,944 262 Rehabilitation provision 7,975 6,775 - ------------------------------------------- 8,418 8,719 262 ------------------------------------------- Total provisions 13,652 10,227 841 ------------------------------------------- Employee entitlements include provisions for annual leave, superannuation and service bonus. Current employee provisions relate to the following short-term benefits which are payable within 12 months: US$ `000 ------------------ Annual leave 594 Rio Superannuation 1,458 Service bonus 3,182 ------------------ Total 5,234 ------------------ The Rio Superannuation are contributions which are due and payable by the Company to an independent superannuation fund. The service bonus is a Company scheme whereby employees contribute 10% of their gross fortnight/monthly salary to the Company and are entitled to receive back their contributions plus a further 10% from the Company to be paid out in March 2000. All non-current employee provisions relate to long-service leave entitlements and are determined in accordance with the requirements for other long-term employee benefits. 103 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS NOTE 14: INCOME TAX INCOME TAX (BENEFIT)/EXPENSE HAS BEEN CALCULATED AS FOLLOWS: US$ 000 1999 1998 1997 PROFIT/(LOSS) FOR THE YEAR (10,370) (15,458) 18,139 Prima facie income tax credit on operating loss at 35% (3,629) (5,410) 6,348 Tax effect of exempt and non-deductible items - - non-deductible entertainment 1 5 - - - non-deductible superannuation 174 180 - - - non-deductible rehabilitation 384 13 - - - exempt interest income - (59) (10) ----------------------------------------------------- INCOME TAX ADJUSTED FOR PERMANENT DIFFERENCES (3,070) (5,271) 6,338 Under provision in previous years 81 85 - ----------------------------------------------------- INCOME TAX (BENEFIT)/EXPENSE ATTRIBUTABLE TO OPERATING PROFIT (2,989) (5,186) 6,338 ----------------------------------------------------- DEFERRED TAX PROVISION Balance carried forward (5,802) (1,549) (5,869) This balance comprises the tax effects of: Depreciation (4,693) (666) (5,033) Prepayments (710) (883) (836) Other (399) - - ----------------------------------------------------- (5,802) (1,549) (5,869) ----------------------------------------------------- FUTURE INCOME TAX BENEFIT Balance carried forward 8,417 1,153 64 This balance comprises the tax effects of: Provisions 2,097 890 39 Deferred hedging income 6,299 - - Other 21 263 25 ----------------------------------------------------- 8,417 1,153 64 ----------------------------------------------------- 104 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS NOTE 15: REMUNERATION AND RETIREMENT BENEFITS (a) Directors' remuneration, including the value of benefits received during the year: US$ 000 1999 1998 1997 Baker, Phillips - - - Baylis, Joseph - - - Garnaut, Ross 68 71 69 Leslie, Jonathan - - - Ives, Glenn (Retired 20/01/00) - - - Louden, Geoff - - - Merton, Michael 423 445 - O'Reilly, John - 383 354 Siaguru, Anthony 27 28 23 Soipang, Mark 3 2 4 Taylor, Meg (Retired 30/06/99) 17 25 24 Telfer, Ian (Retired 02/03/00) - - - Vickerman, Andrew - 52 253 In addition, during the year the Company paid a premium of US$113,000 for Directors and Officers Liability Insurance. 105 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (b) The number of employees, not including directors, whose remuneration and benefits exceeded K100,000 fall into the following bands: NUMBER OF EMPLOYEES 1999 1998 1997 US$ $37,501 - $41,250 9 2 7 $41,251 - $45,000 8 2 4 $45,001 - $48,750 5 3 18 $48,751 - $52,500 3 5 6 $52,501 - $56,250 4 18 9 $56,251 - $60,000 4 7 4 $60,001 - $63,750 3 7 6 $63,751 - $67,500 3 5 - $67,501 - $71,250 3 6 - $71,251 - $75,000 1 2 4 $75,001 - $78,750 2 2 - $78,751 - $82,500 6 - 1 $82,501 - $86,250 - 2 - $86,251 - $90,000 1 1 1 $90,001 - $93,750 6 - - $93,751 - $97,500 9 - - $97,501 - $101,250 4 2 - $101,251 - $105,000 3 - - $105,001 - $108,750 5 - - $108,750 - $112,500 3 - 1 $112,501 - $116,250 2 1 - $116,251 - $120,000 3 - - $120,001 - $123,750 3 - - $123,751 - $127,500 1 - - $131,251 - $135,000 1 - - $135,001 - $138,750 1 - - $153,750 - $157,500 1 - - $172,501 - $176,250 2 - - $183,751 - $187,500 1 - - $202,501 - $206,250 1 - - NOTE 16: RETIREMENT BENEFITS Senior employees of the Company participate in a retirement benefit plan, and contributions are made to the plan by the Company based on a fixed percentage of the employee's base salary. Employer contributions during the year were $497,000 (1998 $515,000). The Company also participates in the National Provident Fund of Papua New Guinea in respect of its Papua New Guinean employees. Employer contributions during the year amounted to $393,000 (1998 $216,000). For both funds the Company has a defined contribution obligation. 106 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS IAS 19 "Employee Benefits" was adopted on 1 January, 2000. The transitional effect of this standard was immaterial. No adjustments were required. NOTE 17: AUDITORS' REMUNERATION Fees received by the Company's auditors for: 1999 1998 1997 - - auditing the accounts 85 85 110 - - other services 54 70 51 NOTE 18: SHARE CAPITAL US$ 000 1999 1998 1997 (a) Issued and paid up capital Opening balance 688,313 621,314 621,314 Shares issued 130,912 66,999 - --------------------------------------------------- Closing balance 819,225 688,313 621,314 --------------------------------------------------- No. of shares 000 1999 1998 1997 (b) Issued and paid up capital Opening balance 941,919 900,000 900,000 Shares issued 141,287 41,919 - --------------------------------------------------- Closing balance 1,083,206 941,919 900,000 --------------------------------------------------- All shares in the Company are ordinary shares, all being of the same class, having equal participation and voting rights. In accordance with the Papua New Guinea Companies Act, there is no requirement for the company to have authorised capital, or a par value for issued shares. In 1995 the Company granted to Sponsors, options on 7,200,000 shares at a price 15% above the final institutional price of US$1.19 in consideration for their agreement to underwrite the over-allotment options under the Company's Global Offering. Of these, 2.6 million options lapsed in February 2000 as a result of the merger with Niugini Mining Limited, and the remainder expire in August 2000. In October 1999 the Company granted 12,531,170 options to Mineral Resources Lihir Limited, exercisable in whole or part at any time up to and including 31 January 2000 at market price less a discount of 13.17%. The options were not exercised and lapsed on 31/1/2000. NOTE 19: RESERVES In accordance with the Papua New Guinea Companies Act (as amended in 1997) (the "Act") share premium reserves that existed prior the provisions in the amended Act, must now form part of the Company's paid-up capital and must not be treated as a separate reserve. Prior to the operation of the amended Act, share premium reserve amounted to 107 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS US$553,228,530. This balance applies to all periods presented as there have been no movements in the share premium reserve, other than the transfer in 1998 to paid-up capital. There were no other reserve balances included in paid-up capital. NOTE 20: CAPITAL AND LEASING COMMITMENTS (a) Operating Lease Commitments US$ 000 Non-cancellable operating leases contracted for but not capitalised in the accounts 1999 1998 1997 Payable - not later than one year 472 534 426 - later than one year but not later than 2 years 351 472 296 - later than two years but not later than 5 years 115 466 374 --------------------------------------------------- 938 1,472 1,096 --------------------------------------------------- (b) Capital Expenditure Commitments US$ 000 1999 1998 1997 Capital expenditure commitments contracted for: Capital expenditure projects 17,900 48,074 9,212 Payable - not later than one year 17,900 48,074 9,212 None of these leases contain contingent rent payments, purchase options, escalation formulae, or any restrictions on the Company's ability to pay dividends, engage in further leasing activity, or assume additional debt. NOTE 21: CONTINGENT LIABILITIES Guarantees As part of the Company's support of Lihirian owned businesses, the Company has provided a number of guarantees to various financiers in favour of Lihirian companies. These guarantees total approximately US$5 million. The Company has also arranged the supply of various bank guarantees to companies with which the Company conducts business. The Company would be obliged to meet any amounts called under these guarantees, which total approximately US$10 million. Claims There are no outstanding claims against the company. 108 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS NOTE 22: FINANCE FACILITIES The Company's loan facilities are all denominated in United States dollars. The major facilities are summarised as follows: (a) PROJECT FINANCING FACILITY The Limited Recourse Project Financing Facility is syndicated between 26 banks, and is scheduled to be repaid by June 2003. Interest payments under the facility are based on LIBOR plus a margin which varies over time. Mandatory prepayments are required under the Loan Agreement under certain conditions. The Company has provided a range of covenants and warranties in relation to the facility, as follows: Covenants of the Company The Company has agreed that during the term of the Loan Agreement it will, among other things: (a) not engage in any business other than the Lihir operation or any business related to other exploration licenses granted by the PNG government (such other businesses to be funded through shareholder equity, proceeds from subordinated debt or funds from the Expansion Account); (b) with certain exceptions, not sell, lease or otherwise dispose of any of the Lihir operation assets except for the production of the Lihir operation; (c) construct and operate the Lihir operation substantially in accordance with the Approved Proposal for Development and good international mining practice; (d) use its best efforts to procure Completion by December 31, 1999; (e) not incur indebtedness for borrowed money in addition to the Loan except certain subordinated loans and certain permitted senior unsecured working capital facilities; (f) incur no liens or encumbrances upon any Lihir operation assets, except permitted encumbrances; (g) use the Loan proceeds solely for purposes of the Lihir operation; (h) enter into hedging agreements as required by the Loan Agreement to protect itself and the Banks against fluctuations in the price of gold; (i) not terminate the Management Agreement or appoint a successor Manager not wholly owned and controlled by Rio Tinto, or amend the Management Agreement in any material respect adverse to the Banks or the Company; and (j) indemnify the Banks against certain liabilities they may incur arising out of use or disposal by the Company of hazardous substances or failure by the Company to comply with PNG environmental laws. The Loan Agreement specifies a number of "Events of Default". These events are generally conditions that may adversely affect the ability of the company to meet its obligations under the Loan Agreement and may comprise of factors which are controlled or uncontrolled by the Company. Where default has occurred, the agent for the Banks may take control of the Kina and non-Kina accounts of the Company and apply it in accordance with the Loan Agreement, but in a manner that does not prevent the Company from remedying the Default. At 31 December 1999, there was no default under the Loan Agreement. During the year the Company made a voluntary pre-payment of USD115,500,000. (b) LOAN FACILITY EUROPEAN INVESTMENT BANK ("EIB")/ MINERAL RESOURCES DEVELOPMENT COMPANY LTD ("MRDC") The Company entered into an Agreement with EIB and MRDC whereby the European Investment Bank has loaned funds to MRDC who then on lent those funds to the Company. The amount of the loan was US$26.5 million when drawn down. The funds are provided to MRDC at a concessionary rate of interest. The interest rate payable by the Company is 8.42%. The loan principal is repayable in 16 semi-annual instalments commencing four years after loan signature. The payment of interest under the loan has been deferred during the construction and early 109 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS operating period, and will begin when permitted under the Limited Recourse Financing Facility. The loan is unsecured. The following table details the profile of debt repayments: Repayment Maturity Limited Recourse EIB Facility Total Facility ($ 000) ($ 000) ($ 000) - ------------------------------------------------------------------------------- Less Than One Year 36,182 6,827 43,009 - ------------------------------------------------------------------------------- 36,182 3,773 39,955 Between one and two years - ------------------------------------------------------------------------------- Between two and three years 36,182 3,773 39,955 - ------------------------------------------------------------------------------- In excess of three years 18,091 17,551 35,642 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Total 126,637 31,924 158,561 - ------------------------------------------------------------------------------- Interest accrued at December 31, 1999 was $1,431,000 (1998: $3,413,000), and is included in Accounts Payable. Principal repayments due in less than one year and accrued interest are included in Current Liabilities in the Balance Sheet. NOTE 23: HEDGING INSTRUMENTS The Company has entered into a series of agreements with financial institutions in relation to future sales of gold. The purpose of these transactions is to protect the level of income in future years, and it is not Company policy to engage in speculative hedging activities. The following tables summarise the hedging program as at December 31, 1999: Forward Sales Put Options Spot Deferred Sales Total - ---------------------------------------------------------------------------------------------- Maturity Ounces Committed Ounces Minimum Ounces Minimum Ounces Minimum Price Price Price Price 0-3 months 13,868 447.81 66,603 405.47 1,364,326 286.98 1,444,797 293.98 - ---------------------------------------------------------------------------------------------- 3-6 months 13,880 451.19 66,640 407.60 - - 80,520 415.11 - ---------------------------------------------------------------------------------------------- 6-9 months 12,996 454.41 63,985 407.75 - - 76,981 415.63 - ---------------------------------------------------------------------------------------------- 9-12 months 12,996 457.87 63,985 409.86 - - 76,981 417.97 - ---------------------------------------------------------------------------------------------- 2001 51,380 466.23 154,125 466.23 - - 205,505 466.23 - ---------------------------------------------------------------------------------------------- 2002 50,136 480.33 150,413 480.33 - - 200,549 480.33 - ---------------------------------------------------------------------------------------------- 2003 - - - - - - - - - ---------------------------------------------------------------------------------------------- 2004 - - 40,000 335.00 - - 40,000 335.00 - ---------------------------------------------------------------------------------------------- 2005 - - 40,000 335.00 - - 40,000 335.00 - ---------------------------------------------------------------------------------------------- 2006 - - 40,000 335.00 - - 40,000 335.00 - ---------------------------------------------------------------------------------------------- 2007 - - 40,000 335.00 - - 40,000 335.00 - ---------------------------------------------------------------------------------------------- 2008 - - 40,000 335.00 - - 40,000 335.00 - ---------------------------------------------------------------------------------------------- Total 155,256 466.10 765,751 414.74 1,364,326 286.98 2,285,333 341.96 - ---------------=============================================================================== Forward sales are transactions against which the Company will be obliged to deliver when they fall due. The price therefore represents a fixed and guaranteed amount of revenue. Put options are transactions that will occur at the discretion of the 110 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS Company. Should the spot price exceed the strike price of the option at the date on which the option expires, the Company will allow the option to expire and will sell the equivalent amount of gold on the spot market. Conversely, if the strike price is higher than the spot price on that date, the option will be exercised. Spot deferred sales are transactions into which the Company has entered, but which do not have a fixed delivery date. The strike price eventually received will depend on the contango applied during the intervening time. The Company does not enter into hedging transactions that have provisions for margin calls. Structures that have a term of greater than 3 years have a right to break clause in the agreements, which gives either party the right to close out the transaction at the 3 year point. This would entail a settlement in cash for the market value of the transaction at that point in time. Since the end of 1999 approximately 760,000 spot deferred sales have been restructured into forward contracts. The profile at the end of 1999, revised to reflect this change was: Forward Sales Put Options Spot Deferred Sales Total - ---------------------------------------------------------------------------------------------- Maturity Ounces Committed Ounces Minimum Ounces Minimum Ounces Minimum Price Price Price Price - ---------------------------------------------------------------------------------------------- 0-3 months 28,868 359.04 66,603 405.47 594,850 296.54 690,321 309.66 - ---------------------------------------------------------------------------------------------- 3-6 months 63,880 317.41 66,640 407.60 - - 130,520 363.46 - ---------------------------------------------------------------------------------------------- 6-9 months 72,996 313.45 63,985 407.75 - - 136,981 357.50 - ---------------------------------------------------------------------------------------------- 9-12 months 77,996 317.26 63,985 409.86 - - 141,981 358.99 - ---------------------------------------------------------------------------------------------- 2001 351,380 319.99 154,125 466.23 - - 505,505 364.58 - ---------------------------------------------------------------------------------------------- 2002 329,611 342.90 150,413 480.33 - - 480,024 385.96 - ---------------------------------------------------------------------------------------------- 2003 - - - - - - - - - ---------------------------------------------------------------------------------------------- 2004 - - 40,000 335.00 - - 40,000 335.00 - ---------------------------------------------------------------------------------------------- 2005 - - 40,000 335.00 - - 40,000 335.00 - ---------------------------------------------------------------------------------------------- 2006 - - 40,000 335.00 - - 40,000 335.00 - ---------------------------------------------------------------------------------------------- 2007 - - 40,000 335.00 - - 40,000 335.00 - ---------------------------------------------------------------------------------------------- 2008 - - 40,000 335.00 - - 40,000 335.00 - ---------------------------------------------------------------------------------------------- Total 924,731 328.45 765,751 414.74 594,850 296.54 2,285,333 349.06 - ---------------=============================================================================== The minimum total revenue generated from these programs will be US$797 million. Revenue generated from the same number of ounces at the prevailing spot price at December 31, 1999 of US$290.25 per ounce would be US$663 million. Unrealised gains in the value of the hedge book have not been brought to account in the profit for the year. On December 31, 1999 the estimated fair value of the total hedge program as determined by an independent organisation was US$85.9 million. The fair value of commodity contracts is estimated based on quotes from the market makers of these instruments and represents the estimated amounts that the Company would expect to receive or pay to terminate the agreements at the reporting date. Fair value of put options is an estimate based on relevant market information such as: volatility of similar options, futures prices and the contracted strike price. All counterparties to these transactions are recognised financial institutions with a minimum credit rating of Aa3. The Company's risk in the event of any of the counterparties defaulting on their contractual obligations is limited to any revenue that may be foregone in the case where the defaulted contract's strike price exceeds the prevailing spot price at the value date. The Company does not expect any counterparty to fail to meet its obligations under any program. 111 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS The maximum credit risk at any point in time will be the difference between the agreed strike price in the contract, and the prevailing spot price. At the ruling spot price on the 31 December 1999 of $290.25 this would have amounted to $118.2 million on an undiscounted basis, based on the assumption that all counterparties failed to meet their obligations. The transactions are spread between five major bullion trading banks, and there is no significant concentration of risk amongst those parties. The accounting treatment of any option premiums or other costs incurred to enter into hedging structures is to defer the full amount, and then to subsequently charge to Profit and Loss at each value date the cost of those options or other committed sales that expire on that date. The amount deferred and carried in the Balance Sheet was $13 million. The Company has adopted the principles of the Australian Urgent Issues Group Consensus (UIG) 18, whereby any gains and losses arising from the early closure of hedge structures are deferred, and only transferred to the Profit and Loss account when the underlying transaction actually takes place. Total income deferred amounted to $18 million. The Company does not use financial instruments to hedge future interest rates or foreign exchange transactions. At the end of 1999 the Company had 11.2 million ounces of proved and probable reserves and 2.285 million ounces of gold sales that were either committed as forward sales, or were subject to put option contracts. Therefore, reserves either committed for sale or subject to options represent 20.4% of total reserves. NOTE 24: SEGMENT REPORTING The Company produces gold in Papua New Guinea. NOTE 25: RELATED PARTY TRANSACTIONS MANAGEMENT AGREEMENT Lihir Management Company Pty Ltd (LMC), a wholly owned subsidiary of Rio Tinto Plc, manages the Company pursuant to a Management Agreement dated 17 March 1995. LMC receives a management fee for according to the terms of this agreement. There are two directors who are on the Board of the Company and LMC. US$ 000 RELATED COMPANIES 1999 1998 1997 The Rio Tinto Group supplies labour on a secondment basis and bears expenses on behalf of the Company which are subsequently recharged to the Company 810 2,196 1,943 LMC Management fee 3,311 3,231 2,815 112 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS NOTE 26: EARNINGS PER SHARE The number of ordinary shares has been based on the weighted average number of ordinary shares on issue during the year. The diluted earnings per share takes account of the future exercise of the options. US$ 000 1999 1998 1997 Net profit/(loss) attributable to ordinary shareholders (7,381) (10,272) 11,801 Weighted average number of ordinary shares (in thousands) 974,821 924,642 900,000 Basic EPS (US$ per share) (0.01) (0.01) 0.01 Conversion of options into ordinary shares (in thousands) 19,731 7,200 7,200 Diluted number of ordinary shares (in thousands) 977,759 931,842 907,200 Diluted EPS (US$ per share) (0.01) (0.01) 0.01 NOTE 27: POST BALANCE DATE EVENT MERGER WITH NIUGINI MINING LIMITED On October 6, 1999 the Company announced its agreement with Niugini Mining Limited, subject to various conditions, to merge by Scheme of Arrangement under Papua New Guinea Law. The basis of the merger was set out in the notice of special meeting forwarded to shareholders on November 27, 1999. Shareholders on December 15, 1999 approved the required resolutions to progress the merger. Niugini Mining shareholders also approved the required resolutions in early January 2000 and final approval from the National Court of Papua New Guinea was obtained by Niugini Mining on February 1, 2000. The merger was effective on February 2, 2000 with the transfer of all Niugini Mining shares to the Company and the issue by the Company of new ordinary shares to Niugini Mining shareholders taking place on February 14, 2000. The total number of shares issued to Niugini Mining shareholders was one Lihir share for each share in the Company held by Niugini Mining, plus shares in the Company equal in value to Niugini Mining Limited's net assets. The price of the Company's shares for this purpose was A$1.45, which was the price at which the institutional placement on October 7, 1999 was made. Niugini Mining's net assets were US$54.6 million which, based on the applicable exchange rate of A$/US$ 0.6371, resulted in 59,128,489 million Lihir shares being issued. With the one for one consideration for Niugini Mining's holding of 161,527,405 shares in the Company, the total number of shares issued to Niugini Mining shareholders was 220,655,894 shares. As a result of the merger, Niugini Mining became a subsidiary of the Company on 14 February 2000. Niugini Mining continues to hold 161,527,405 ordinary shares in the company and ways of cancelling these shares as soon as possible are being examined. The acquisition of Niugini Mining Limited will be accounted for in the 31 December 2000 IAS financial statements as an acquisition. For US GAAP, the transaction will be accounted for as a purchase. 113 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS NOTE 28: RECONCILIATION TO US GAAP The basis of preparation of these financial statements is set out in Note 1. These accounting policies vary in certain important respects from the accounting principles generally accepted in the United States ("US GAAP"). The material differences affecting the profit and loss account and shareholders' equity between generally accepted accounting principles followed by the Company and those generally accepted in the US are summarised below. (i) Rehabilitation, restoration and environmental provisions: Under IAS, site closure, removal and rehabilitation costs are accounted for using the full liability method under which the liability is recognised at the present value of the expected cash outflows when the obligation is incurred with a corresponding asset that is capitalised as a mine property. For the purposes of US GAAP, the total (undiscounted) liability is accrued incrementally over the life of the mine. Also, under IAS, the Company records an asset for these costs under the full liability method. Under US GAAP, no asset would be recorded under the incremental method. (ii) Mine properties: The following items that were capitalised as mine properties for IAS are expensed for US GAAP purposes: (a) Exploration and evaluation: The Company's management determined that a commercial mineral deposit existed in 1992. For IAS purposes, the Company capitalised exploration and evaluation costs incurred prior to the determination of commercial feasibility as part of mine properties. Under US GAAP, such costs were expensed as incurred. (b) General and administrative costs: For IAS purposes, the Company capitalised general and administrative costs incurred during the development stage as a part of mine properties. Such costs are expensed as incurred for US GAAP purposes. Since the Company ceased to be a development stage enterprise in October 1997, general and administrative costs incurred between the determination of commercial feasibility and that date (including $12.6 million in 1997) were capitalised as part of mine properties. (c) Interest capitalization: Under IAS, only interest directly attributable to acquiring a qualifying asset is capitalized whereas under US GAAP, the amount of interest capitalized is based on an available interest concept, which results in additional interest being capitalized under US GAAP. (iii) Depreciation of mine properties: Depreciation expense under US GAAP is lower than that under IAS due to the difference in the basis for mine properties under the two bases of accounting. (iv) Share options: The Company granted stock options in December 1999 to a shareholder, Mineral Resources Lihir Limited. IAS does not require the recognition of the fair value of stock options in the financial statements. Under US GAAP, the options would be valued at their fair value and would be accounted for as a dividend reducing retained earnings and a corresponding increase in paid up capital. As a result, the grant of options would have no net effect on shareholders' equity under US GAAP. The fair value of the options at the date of grant was estimated to be US$1,694,289. The Black-Scholes model was used to estimate the fair value of the options utilising the following assumptions: risk-free interest rate of 6 per cent; dividends yield of nil per cent; expected stock market price volatility factor of 80 per cent; and an expected life of the options of 1.5 months. There is no income tax effect on the fair value of the options. (v) Impairment: Due to the weakness of the spot gold price over the past two years, the mine properties were evaluated for impairment under IAS and US GAAP. Under IAS 36, the impairment test for determining the recoverable amount of non- 114 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS current assets is the higher of net selling price and value in use. At December 31, 1999, the Company has applied a net selling price test based on the current share price of Lihir Gold and on this basis no write-down was deemed necessary. Under US GAAP, the mine property assets were evaluated for impairment on an undiscounted basis and, because the sum of expected (undiscounted) future cash flows exceeded the asset's carrying amount, no impairment loss was recognized. (vi) Restatement: Previously, the Company did not account for differences between US GAAP and IAS in the treatment of rehabilitation, restoration and environmental provisions and interest capitalization, as described in items (i) and (ii)(c), respectively, of this note. The Company has restated the reconciliation of shareholders' equity and net income (loss) under IAS to US GAAP, as of and for the years ended December 31, 1999 and 1998, to reflect these differences. Net income (loss) under US GAAP was increased by $1,691 from the previously reported amount of ($1,453) to $238 in fiscal 1999 and was increased by $345 from the previously reported amount of ($5,361) to ($5,016) in fiscal 1998. Shareholders' equity was increased by $2,036 from the previously reported amount of $669,979 to $672,015 in fiscal 1999 and was increased by $345 from the previously reported amount of $540,520 to $540,865 in fiscal 1998. RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES US$ 000 1999 1998 1997 SHAREHOLDERS' EQUITY IN ACCORDANCE WITH IAS GAAP 813,373 689,842 633,115 Adjusted as follows: Rehabilitation, restoration and environmental (i) - n Provisions 6,438 6,096 - n Capitalized rehabilitation costs (See Note 11) (5,907) (6,275) - Mine properties (ii) (157,990) (159,191) (159,600) Depreciation of mine properties (iii) 19,161 9,351 1,494 Deferred tax effect of US GAAP differences (3,060) 1,042 3,873 -------------------------------- ACCUMULATED ADJUSTMENTS UNDER US GAAP (141,358) (148,977) (154,233) -------------------------------- SHAREHOLDERS' EQUITY UNDER US GAAP 672,015 540,865 478,882 ================================ US$ 000 1999 1998 1997 NET INCOME/(LOSS) IN ACCORDANCE WITH IAS GAAP (7,381) (10,272) 11,801 Adjusted as follows: Rehabilitation, restoration and environmental provisions (i) 710 (179) - Mine properties (ii) 1,202 409 (12,559) Depreciation of mine properties (iii) 9,809 7,857 1,494 Income tax expense (4,102) (2,831) 3,873 -------------------------------- NET INCOME/(LOSS) UNDER US GAAP 238 (5,016) 4,609 ================================ 115 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS STATEMENT OF CHANGES IN EQUITY UNDER US GAAP US$ 000 1999 1998 1997 Retained Earnings/(Accumulated Losses) Balance at 1 January (147,448) (142,432) (147,041) Net income/(loss) 238 (5,016) 4,609 Dividend - stock options (1,694) - - -------------------------------- Balance at 31 December (148,904) (147,448) (142,432) Paid up capital Balance at 1 January 688,313 621,314 621,314 Shares issued 130,912 66,999 - Additional paid up capital - stock options 1,694 - - -------------------------------- Balance at 31 December 820,919 688,313 621,314 -------------------------------- 672,015 540,865 478,882 ================================ There were no items of other comprehensive income for the periods presented. US$ 000 EPS UNDER US GAAP 1999 1998 1997 Net Earnings 238 (5,016) 4,609 Net Earnings Per Common Share - Basic (US$ per share) (0.000) (0.005) 0.005 Net Earnings Per Common Share - Diluted (US$ per share) (0.000) (0.005) 0.005 Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted average number of common shares (the denominator) for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. In loss making periods basic and diluted earnings per share are identical. Diluted earnings per share also give effect to the impact common stock options would have on the average common shares outstanding if converted at the beginning of the year. Stock options are anti-dilutive and therefore were not included in the calculation of basic and diluted loss per share in 1998 and 1999. The numerator in calculating both basic and diluted earnings per share for each year is the reported net income determined above for US GAAP purposes. The denominator is based on the following weighted average number of common shares: (in thousands) 1999 1998 1997 Basic 974,821 924,642 900,000 Diluted 974,821 924,642 907,200 Recently issued accounting standards Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments and hedging activity. SFAS No. 133 is 116 LIHIR GOLD LIMITED NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS effective for all periods in fiscal years beginning after June 15, 2000. SFAS No. 133 requires recognition of all derivative instruments on the balance sheet as either assets or liabilities and measurement at fair market value. Changes in the derivative's fair value will be recognised in earnings unless specific hedge accounting criteria are met. Gains and losses on derivative hedging instruments must be recorded in either other comprehensive income or current earnings, depending on the nature of the instrument. The Company plans to adopt the statement on January 1, 2001. 117 Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure - -------------------- None. PART III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ In addition to the information set forth below, see also "Executive Officers of the Registrant" appearing in Part I of this Annual Report. The following sets forth information concerning the four Class III directors whose terms are due to expire this year, including information as to each director's age as of March 2, 2000, position with Battle Mountain and business experience during the past five years. Douglas J. Bourne was Chairman of the Board and Chief Executive Officer of Battle Mountain until his retirement in April 1990. Mr. Bourne serves as Chairman of Battle Mountain's Executive Committee and is a member of Battle Mountain's Environmental, Safety and Health Committee and Battle Mountain's Corporate Governance and Nominating Committee. Mr. Bourne has been a director of Battle Mountain since 1985 when Battle Mountain was incorporated. He is also a director of Potash Corporation of Saskatchewan, Inc. (mining and processing of potash and manufacture of fertilizers). He is 77 years old. David L. Bumstead joined Noranda Inc. (an integrated natural resources company and Battle Mountain's largest stockholder, "Noranda") in 1963 and assumed his current position as Executive Vice President of Noranda in 1995. Prior to that, he served as Executive Vice President, Marketing and Finance of Noranda Minerals Inc. Mr. Bumstead also serves asa director of Noranda and Falconbridge Limited. Mr. Bumstead became a director of Battle Mountain in July 1996. Mr. Bumstead is Chairman of Battle Mountain's Audit Committee. He is 58 years old. Delo H. Caspary has been engaged for more than five years in managing his personal investments. He became a director of Battle Mountain in 1985, and he currently serves as Chairman of Battle Mountain's Environmental, Safety and Health Committee, and is a member of Battle Mountain's Audit Committee. He is 74 years old. Terrence A. Lyons has served as President and Managing Partner of B.C. Pacific Capital Corporation since May 1988. Mr. Lyons was appointed to the Board of Directors in July 1999, and serves as a member of the Audit Committee. He is 50 years old. The following sets forth information concerning the six directors of Battle Mountain whose present terms will continue until 2001 for Class I directors or 2002 for Class II directors, including information as to each director's age as of March 2, 2000, position with Battle Mountain and business experience during the past five years. Ian D. Bayer served as the President and Chief Executive Officer of Battle Mountain from February 1997 to July 1999 following the combination of Hemlo Gold with Battle Mountain (as described in Items 1 and 2). Mr. Bayer had served as President and Co-Chief Executive Officer from July 1996 until his appointment as President and Chief Executive Officer in February 1997. He serves on the Executive Committee. Prior to joining Battle Mountain, at the time of the combination, Mr. Bayer had served as Director and President and Chief Executive Officer of Hemlo Gold since July 1991. Mr. Bayer became a director of Battle Mountain in July 1996 and his present term expires in 2002 (Class I). He is 60 years old. 118 Charles E. Childers has served as Chairman of the Board of Potash Corporation of Saskatchewan, Inc. (mining and processing of potash and manufacture of fertilizers) since July 1999. Prior to that Mr. Childers had served as Chairman, President and Chief Executive Officer of Potash Corporation since 1990. He became a director of Battle Mountain in 1993 and his present term expires in 2002 (Class II). Mr. Childers serves on Battle Mountain's Compensation and Stock Option Committee and on Battle Mountain's Corporate Governance and Nominating Committee. He is 67 years old. Karl E. Elers has served as the non-executive Chairman of the Board of Battle Mountain since February 1997. Mr. Elers has assumed the duties of Chief Executive Officer of Battle Mountain since July 1999 on an interim basis pursuant to the terms of a consulting agreement. Mr. Elers retired from his executive officer position of Chairman of the Board and Co-Chief Executive Officer at the end of February 1997, a position he assumed in July 1996. From April 1990 through July 1996, he was Chairman of the Board and Chief Executive Officer of Battle Mountain, and from April 1988 until April 1990, he was President and Chief Operating Officer of Battle Mountain. Mr. Elers became a director in 1987 and his present term expires in 2002 (Class II). Mr. Elers serves on Battle Mountain's Executive Committee, and on Battle Mountain's Environmental, Safety and Health Committee. He is 61 years old. David W. Kerr has served as Chief Executive Officer of Noranda since 1990 and as its President since November 1997. From April 1995 until November 1997, he also served as Chairman of the Board of Noranda. Mr. Kerr became a director of Battle Mountain in July 1996 and his present term expires in 2001 (Class I). He serves on Battle Mountain's Compensation and Stock Option Committee and on Battle Mountain's Corporate Governance and Nominating Committee. Mr. Kerr is also a director of Noranda and EdperBrascan Corporation. He is 56 years old. Mary Mogford is co-owner of Mogford Campbell Associates, a business and financial consulting firm in Ontario. She was formerly Ontario's Deputy Minister of Treasury and Economics (Finance) and Deputy Minister of Natural Resources. Ms. Mogford became a director in July 1996, and her present term expires in 2001 (Class I). She serves as Chairman of Battle Mountain's Corporate Governance and Nominating Committee and as a member of Battle Mountain's Compensation and Stock Option Committee. She is 55 years old. William A. Wise has served as President and Chief Executive Officer of El Paso Energy Corporation (an integrated energy company) since January 1990 and as its Chairman of the Board since January 1994. Mr. Wise has been a director of Battle Mountain since 1994, and his present term expires in 2001 (Class I). He currently serves as Chairman of Battle Mountain's Compensation and Stock Option Committee. He is 54 years old. Section 16(a) Beneficial Ownership Reporting Compliance Based solely upon a review of Forms 3, 4 and 5 submitted to Battle Mountain during and with respect to 1999 and written representations from certain reporting persons that no Forms 5 were required from such persons, Battle Mountain believes that all of the directors and officers of Battle Mountain have timely filed their respective Forms 3, 4 or 5 required by Section 16(a) of the Securities Exchange Act during 1999, except that Mr. Lyons' Form 3 was filed 2 days following the filing deadline, and the Forms 5 required to be filed by Messrs. Bayer, Elers, Bourne, Bumstead, Childers, Kerr and Wise and Ms. Mogford for 1998 were filed late. Item 11. Executive Compensation - -------------------------------- Compensation of Directors Effective October 27, 1998, each director, other than those who are regularly employed officers of Battle Mountain or its subsidiaries, receives a director's fee of $20,000 per annum and an additional fee of $1,000 per day for attendance at meetings of the Board or its committees. Directors are also reimbursed for their 119 travel and other expenses involved in attendance at Board and committee meetings. Under Battle Mountain's Nonqualified Stock Option Plan for Outside Directors, as amended effective December 2, 1997, and further amended effective February 2, 1999, individuals who become nonemployee directors of Battle Mountain are automatically granted an initial option to purchase 10,000 shares of Common Stock on the date they become nonemployee directors. On the date of the annual meeting of each year following the grant of the initial option, each incumbent nonemployee director is granted an additional option to purchase 5,000 shares of Common Stock. Each option granted pursuant to the Nonqualified Stock Option Plan for Outside Directors has an exercise price per share equal to the then current market value of a share of Common Stock on the date the option is granted, and such options are not exercisable until one year from the date of grant. Directors who are not also executive officers are not eligible to participate in any other benefit plans of Battle Mountain. In 1999, Mr. Elers received a fee of $3,333 per month for his service as the non- executive Chairman of the Board and commencing in August 1999, an additional fee of $20,000 per month for carrying out the duties of Acting Chief Executive Officer of Battle Mountain pursuant to a consulting agreement. Board Organization and Committees Battle Mountain's Executive Committee is composed of Messrs. Bourne (Chairman), Bayer and Elers. The Executive Committee may exercise the powers of the Board of Directors at times when the Board is not in session. The Audit Committee of the Board is composed of Messrs. Bumstead (Chairman), Caspary and Lyons, none of whom is an employee of Battle Mountain. The Audit Committee provides oversight of Battle Mountain's performance in fulfilling its responsibility to maintain an organization which is capable of conducting the financial business of Battle Mountain and to maintain an internal control environment necessary to conduct and properly report Battle Mountain's business. The Audit Committee also recommends the appointment of independent public accountants to conduct audits of Battle Mountain's financial statements, reviews with the independent accountants the plan and results of the auditing engagement and evaluates the independence of the accountants. The Compensation and Stock Option Committee of the Board is composed of Messrs. Wise (Chairman), Childers and Kerr and Ms. Mogford, none of whom is an employee of Battle Mountain. The Compensation and Stock Option Committee approves, or in some cases recommends to the Board, remuneration arrangements and compensation plans involving Battle Mountain's outside directors, executive officers and other key employees. The Environmental, Safety and Health Committee of the Board is composed of Messrs. Caspary (Chairman), Bourne and Elers. The Environmental, Safety and Health Committee oversees Battle Mountain's health, safety and environmental policies and compliance programs. The Corporate Governance and Nominating Committee of the Board is composed of Ms. Mogford (Chairman) and Messrs. Bourne, Childers and Kerr. The Corporate Governance and Nominating Committee addresses issues related to the composition of the Board and assists the Chairman of the Board in overseeing the operation of the Board in discharging its mandate and responsibilities. During 1999, the Board of Directors held five meetings, the Environmental, Safety and Health Committee met on five occasions, the Compensation and Stock Option Committee met on three occasions, the Audit Committee met on two occasions, the Corporate Governance and Nominating Committee met on two occasions and the Executive Committee met on one occasion. All directors attended in excess of 95 percent of the aggregate number of meetings of the Board of Directors and the committees on which they served. Executive Compensation Summary Compensation Table -- The table set forth below contains information regarding compensation for services in all capacities to Battle Mountain for 1999, 1998, and 1997 of (i) the individuals who served as, or had the duties of, the chief executive officer of Battle Mountain during 1999 and (ii) the other four most highly compensated executive officers of Battle Mountain at December 31, 1999. The format and the information presented are as prescribed in rules of the Securities and Exchange Commission. 120 SUMMARY COMPENSATION TABLE Annual Compensation Long-Term Compensation ------------------------------------- -------------------------------------- Awards Payouts ------------------------- ----------- Restricted Securities LTIP All Other Name and Principal Other Annual Stock Underlying Payouts Compensation Position Year Salary Bonus Compensation Awards Options (1) (2) - ---------------------------- ---- ------------- -------- ------------ ------------- ---------- -------- -------------- Karl E. Elers (3) 1999 -- -- $144,966 5,000 -- -- Acting Chief Executive 1998 -- -- 25,000 1,500 -- -- Officer 1997 $112,088 $ 69,287 200,000 1,500 -- $1,692,019 Ian D. Bayer (4) (5) 1999 295,266 81,198 38,799 -- 0 -- 782,462 President and Chief 1998 369,615 120,125 4,420 -- 139,700 -- 53,711 Executive Officer (retired 1997 353,884 123,859 -- -- 97,000 -- 47,104 in July 1999) John A. Keyes(5) 1999 241,238 53,072 9,674 -- 257,100 -- 24,428 President and Chief 1998 210,614 54,759 5,420 -- 66,900 -- 33,401 Operating Officer 1997 202,330 56,652 -- -- 45,600 -- 27,137 Ian Atkinson(5) 1999 238,746 52,280 3,000 -- 148,500 -- 22,480 Senior Vice President - 1998 221,768 59,761 5,920 -- 66,900 -- 29,651 Operations and Exploration 1997 212,330 59,452 -- -- 45,600 -- 21,723 Joseph J. Baylis(5) 1999 195,230 42,600 4,450 -- 148,500 -- 18,042 Senior Vice President - 1998 188,460 49,000 3,420 -- 66,900 -- 26,289 Corporate Development 1997 161,315 45,168 -- -- 45,600 -- 39,291 Phillips S. Baker, Jr. (6) 1999 181,078 38,870 51,934 -- 102,200 -- 6,512 Vice President and Chief 1998 140,538 35,976 63,933 -- 43,500 -- 3,646 Financial Officer - ------------------ (1) The long term incentive plan awards granted during 1997 to the executive officers named in the Summary Compensation Table pursuant to Battle Mountain's Amended and Restated 1994 Long Term Incentive Plan were for a performance period that matured on December 31, 1999 and no payments were made under the plan. (2) The amounts shown for 1999 consist of (a) Battle Mountain's contributions (vested and unvested) under Battle Mountain's Savings Plan and a related contribution equalization plan of $4,800 (vested) and $7,662 (unvested) for Mr. Bayer; $4,800 (vested) and $4,155 (unvested) for Mr. Atkinson; $4,800 (vested) and $2,527 (unvested) for Mr. Baylis; $4,800 (vested) and $4,080 (unvested) for Mr. Keyes; and $4,800 (vested) and $1,712 (unvested) for Mr. Baker; (b) the benefit to the executive officer of the premiums paid by Battle Mountain during 1999 under Battle Mountain's split-dollar life insurance program of $6,974 for Mr. Atkinson, $8,124 for Mr. Baylis, $9,661 for Mr. Keyes, and no benefit for Messrs. Bayer (retired) and Baker (nonparticipant); (c) Battle Mountain's payment of premiums on long-term disability insurance policies of $4,882 for Mr. Atkinson, $2,591 for Mr. Baylis, $5,887 for Mr. Keyes, and no payment of premiums for Messrs. Bayer and Baker; (d) a subsidy of $1,669 for Mr. Atkinson representing interest owing and outstanding on a mortgage; and (e) a severance payment of $770,000 made in connection with Mr. Bayer's retirement. (3) Mr. Elers retired from executive officer positions as Chairman of the Board and Co-Chief Executive Officer effective February 1997. He continues to serve Battle Mountain as the non-executive Chairman of the Board of Directors. After the retirement of Mr. Bayer effective August 1, 1999, Mr. Elers became Acting Chief Executive Officer under a consulting agreement between Mr. Elers and Battle Mountain for $20,000 per month. The options which Mr. Elers received during 1997, 1998 and 1999 were pursuant to Battle Mountain's Nonqualified Stock Option Plan for Outside Directors. The amounts shown under Other Annual Compensation are consulting fees. (4) Effective August 1, 1999, Mr. Bayer retired from his executive officer positions and began to receive retirement benefits of $1,994 monthly compensation under Battle Mountain's qualified pension plan, and $15,748 monthly compensation under Battle Mountain's nonqualified pension plan, totaling $88,710 in 1999. (5) Dollar amounts for 1997 consist of a combination of U.S. and Canadian dollar amounts. Dollar amounts for 1997 are represented in U.S. dollars using the exchange rate on December 31, 1997 of US$1.00 = C$1.4293. (6) Mr. Baker joined Battle Mountain in March 1998, and during that year he received a housing allowance during his transition to Houston in the amount of $23,020, airfare in the amount of $20,964, and a moving allowance in the amount of $23,310. In addition, in connection with Mr. Baker's transition to Houston during 1999, he received airfare in the amount of $13,358, a mortgage subsidy of $14,660 and the Company paid taxes on Mr. Baker's imputed income in the amount of $16,310. 121 Option Grants Table -- The following table shows, as to the executive officers named in the Summary Compensation Table, information regarding stock options granted pursuant to Battle Mountain's Amended and Restated 1994 Long-Term Incentive Plan during 1999. All of such options have an exercise price at least equal to the market price on the date of grant. Individual Grants ------------------------------------------------------------------------ Number of Percent of Securities Total Options Grant Date Underlying Granted to Exercise Present Options Employees in Price Per Expiration Value Name Granted(1) 1999 Share Date (2) ---- ----------- ----------- ----------- ----------- ----------- John A. Keyes............................. 257,100 15.0% $2.875 10/26/09 $586,188 Ian Atkinson.............................. 148,500 8.0 2.875 10/26/09 338,580 Joseph J. Baylis.......................... 148,500 8.0 2.875 10/26/09 338,580 Phillips S. Baker, Jr..................... 102,200 5.8 2.875 10/26/09 233,016 - ------------------ (1) On October 26, 1999, officers and certain key employees received options to purchase a specified number of shares at $2.875 (the closing price of the Common Stock on October 26, 1999). The options vest 50% on October 26, 2000 and the remaining 50% on October 26, 2001. (2) Based on the Black-Scholes option pricing model adapted for use in valuing executive stock options. The actual value, if any, an executive may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised. There is no assurance the value realized by an executive will be at or near the value estimated by the Black-Scholes model. The assumptions used under that model include a volatility of 67.5 percent based on two-year historical volatility of the Common Stock prior to the grant date, a risk-free rate of return of 6.2 percent based on the ten-year zero coupon treasury bond yield at the time of grant, a dividend yield of 0.0 percent based on the 1999 dividend rate and an option term equal to the full ten-year stated option term. The estimated grant date value does not reflect any discount on account of vesting or forfeiture provisions or prohibitions on transfer. Option Exercises and Year-End Value Table -- The table set forth below contains information with respect to (i) the unexercised options to purchase Common Stock or in some cases Exchangeable Shares granted in 1999 and prior years under Battle Mountain's Amended and Restated 1994 Long-Term Incentive Plan and a Hemlo Gold stock option plan to the executive officers named in the Summary Compensation Table and held by them at December 31, 1999, and (ii) the aggregate number of shares acquired by such executive officers upon the exercise during 1999 of options to purchase Common Stock or, in some cases, Exchangeable Shares. Shares Number of Securities Underlying Value of Unexercised Acquired Unexercised Options Held at In-the-Money Options at on Value December 31, 1999 December 31, 1999 (1) ------------------------------ ------------------------------ Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - -------------------------------- ------------ -------- --------------- ------------- -------------- ------------- Karl E. Elers................... 0 $0 388,300 241,000 $0 $0 Ian D. Bayer.................... 0 0 327,250 305,850 0 0 John A. Keyes................... 0 0 160,530 399,550 0 0 Ian Atkinson.................... 0 0 162,750 290,950 0 0 Joseph J. Baylis................ 0 0 150,530 247,950 0 0 Phillips S. Baker, Jr........... 0 0 81,750 123,950 0 0 - ---------------- (1) Based on the closing price of the Common Stock on the New York Stock Exchange Composite Tape on December 31, 1999 ($2.0625). 122 Retirement Plan and Supplemental Agreements -- Battle Mountain maintains a non-contributory tax-qualified retirement plan generally available to U.S. salaried employees (the "Retirement Plan"). The Retirement Plan is a defined benefit plan under which employer contributions are actuarially determined each year and is administered by an Administrative Committee appointed by the Board of Directors. The amount of an employee's retirement benefit is based on final average compensation (as defined below) and is computed as follows: 1.1 percent of final average compensation for each year of service, plus 0.6 percent of final average compensation in excess of $10,000 per year for each year of service up to a maximum of 35 years. The following table shows the estimated annual retirement benefits under the Retirement Plan under the formula described above for eligible employees (including officers) who retire at age 65 (normal retirement age) and have the average compensation levels and years of service specified in the table. The amounts listed in the table are payable for the life of the employee and are not subject to any reduction for Social Security benefits or other offsetting amounts. Projected Retirement Plan Benefit at Age 65 with Service of -------------------------------------------------------------------- Final Average Compensation(1) 15 Years 20 Years 25 Years 30 Years 35 Years - --------------- -------- -------- -------- -------- -------- 150,000 $ 37,350 $ 49,800 $ 62,250 $ 74,700 $ 87,150 175,000 43,725 58,300 72,875 87,450 102,025 200,000 50,100 66,800 83,500 100,200 116,900 225,000 56,475 75,300 94,125 112,950 131,755 250,000 62,850 83,800 104,750 125,700 146,650 (2) 300,000 75,600 100,800 126,000 151,200 (2) 176,400 (2) 350,000 88,350 117,800 147,250 (2) 176,700 (2) 206,150 (2) 400,000 101,100 134,800 168,500 (2) 202,200 (2) 235,900 (2) 450,000 113,850 151,800 (2) 189,750 (2) 227,700 (2) 265,650 (2) 500,000 126,600 168,800 (2) 211,000 (2) 253,200 (2) 295,400 (2) 600,000 152,100 (2) 202,800 (2) 253,500 (2) 304,200 (2) 354,900 (2) 700,000 177,600 (2) 236,800 (2) 296,000 (2) 355,200 (2) 414,400 (2) 800,000 203,100 (2) 270,800 (2) 338,500 (2) 406,200 (2) 473,900 (2) 900,000 228,600 (2) 304,800 (2) 381,000 (2) 457,200 (2) 533,400 (2) 1,000,000 254,100 (2) 338,800 (2) 423,500 (2) 508,200 (2) 592,900 (2) - ----------------- (1) Final average compensation means the average of covered remuneration for the five consecutive years, out of the ten years immediately preceding retirement, in which the participant's covered remuneration was the highest. Covered compensation includes salary, bonus and most other compensation paid or deferred in the year (including performance unit payments under Battle Mountain's 1988 Long-Term Performance Unit Plan and Amended and Restated 1994 Long-Term Incentive Plan but excluding amounts realized from restricted stock and stock options). However, Section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code") limits the annual compensation taken into account for an employee under the Retirement Plan. The compensation limit imposed by Section 401(a)(17) is $170,000 for 2000. (2) Annual benefits under the Retirement Plan are limited to $135,000 for 2000 by Section 415 of the Code. Battle Mountain has established the Supplemental Executive Retirement Plan ("SERP") for all of its executive officers, including those named in the Summary Compensation Table. For all current executive officers who have not resigned or retired, the SERP provides the benefit the executive would have received under the Retirement Plan in the absence of Code limits, less the amount of the participant's benefit under the Retirement Plan. The SERP credits prior service with Noranda and its affiliates. For active employees, participation in the SERP is contingent upon receipt by Battle Mountain of a waiver and release from each participant with regard to any other supplemental unfunded pension benefits such participant might have with Battle Mountain. Messrs. Bayer, Atkinson, Baylis and Keyes had 29, 17, 13 and 24 years of credited service with Noranda and its affiliates, respectively. The SERP benefit for Messrs. Bayer, Atkinson, Baylis and Keyes will be reduced by the benefit payable under Noranda's supplemental retirement plan (the "Noranda Plan"), such that the sum of the two benefits equal the SERP benefit. In 1995, Battle Mountain established a split-dollar life insurance program covering certain executive officers, including those named in the Summary Compensation Table. This program provides for life insurance coverage with a death benefit of $1,500,000 for Mr. Bayer, and $750,000 each for Messrs. 123 Atkinson, Baylis and Keyes; with the executive to pay the term insurance portion of the premium during a specified period of at least 10 years and Battle Mountain to pay the balance as long as 10 years or until the executive reaches age 65. Mr. Baker did not participate in this program during 1999 and Mr. Bayer purchased his policy upon his retirement. Except in the event of a change-in- control, Battle Mountain retains the right to terminate premium payments under any executive officer's policy prior to the end of the specified period in case of termination of employment, or otherwise upon six months' notice. Upon death or other termination as to any executive officer, Battle Mountain will be refunded the aggregate amount of the premium payments made by it in respect of that officer's policy. Change-in-Control Arrangements -- Battle Mountain's change-in-control severance plan applicable to its executive officers provides that, in the event employment terminates (under the terms set forth below) as a result of a change- in-control of Battle Mountain, each such executive officer would receive a cash payment equal to two times his annual compensation. The covered officers under the plan would receive the payment as a result of involuntary termination (other than for "cause") or for resignation due to "good reason" within a period commencing 120 days prior to the change-in-control and ending three years after the change-in-control. In order to be eligible to receive a severance payment under the plan during the 120-day period prior to the change-in-control, Battle Mountain must be contemplating such change-in-control at the time of the executive officer's termination of employment. The plan also provides for continuation of group life, medical and dental insurance benefits (or equivalent thereof) for a period of 24 months after termination on the same contributory basis as such benefits are provided to active employees of Battle Mountain. Participation in this plan is contingent upon receipt by Battle Mountain of a waiver and release from each executive officer with regard to any other agreements such officer might have with Battle Mountain in connection with change-in-control severance payments and benefits. In addition, under the Amended and Restated 1994 Long-Term Incentive Plan, outstanding performance units which have not vested would become immediately payable at the target value of $1.00 per unit pro-rated for the portion of the performance period up to the date of the change-in-control. For outstanding performance units that have vested but for which payment has not been made, payment would be accelerated in the event of a change-in-control. The vesting of stock options granted to executive officers under the Amended and Restated 1994 Long-Term Incentive Plan would also accelerate in the event of a change-in- control. After a change-in-control, Battle Mountain would be required to continue making premium payments until the executive officer reaches age 65 under the split-dollar life insurance program. In addition, such executive officers would become fully vested under the SERP as a result of a change-in-control. In connection with the foregoing change-in-control severance plan and other change-in-control plans, programs and provisions, a "change-in-control" will occur upon (i) any person except Noranda becoming the beneficial owner of Company Securities representing 30 percent or more of the combined voting power of the then outstanding Company Securities; (ii) the first purchase of Company Securities pursuant to a tender or exchange offer (other than a tender or exchange offer made by Battle Mountain); (iii) the approval by the holders of Company Securities of a reorganization, merger, combination or consolidation, a sale or disposition of all or substantially all of Battle Mountain's assets or a plan of liquidation or dissolution of Battle Mountain, unless in each case following the consummation of such transaction more than 70 percent of the combined voting power of Company Securities outstanding prior to such consummation will continue (as Company Securities or as securities of a successor entity) to be beneficially owned by all or substantially all of the persons who were beneficial owners immediately prior thereto in substantially the same proportion; or (iv) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, provided that any new director whose election or nomination for election by the holders of Company Securities was approved in advance by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period shall be considered as though such person were a director at the beginning of the period. "Company Securities" shall mean the Common Stock of Battle Mountain and the Exchangeable Shares of Battle Mountain Canada taken together. 124 The severance plan and other change-in-control plans, programs and agreements include provisions for a reduction in payment to avoid payments that are not deductible to Battle Mountain under Section 280G of the Internal Revenue Code (the "Code") or are subject to an excise tax under Section 4999 of the Code. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ Set forth in the table below is the total number of shares of Common Stock beneficially owned as of March 2, 2000, by each of Battle Mountain's directors and nominees, each of the executive officers named in the Summary Compensation Table below, holders of more than 5 percent of the shares and all directors and executive officers as a group. Except as otherwise indicated, all such shares are owned directly, and the indicated owner has sole voting and investment power with respect to such shares. Number of Percentage Name Shares of Class(+) - ---- --------------- ---------------- Ian Atkinson........................................................... 142,316 (1) * Phillips S. Baker, Jr ................................................. 92,028 (10) * Ian D. Bayer........................................................... 289,716 (2) * Joseph J. Baylis....................................................... 131,269 (3) * Douglas J. Bourne...................................................... 154,790 (4) * David L. Bumstead...................................................... 65,255,526 (6)(7) 28.4% Delo H. Caspary........................................................ 65,500 (5) * Charles E. Childers.................................................... 21,500 (8) * Karl E. Elers.......................................................... 470,053 (9) * David W. Kerr.......................................................... 65,257,006 (7)(13) 28.4% John A. Keyes.......................................................... 138,041 (12) * Terrence A. Lyons...................................................... 10,000 (6) * Mary Mogford........................................................... 15,000 (11) * William A. Wise........................................................ 96,250 (6) * All directors and executive officers as a group (20 persons)........................................................ 66,896,469 (14) 29.1% Noranda Inc............................................................ 65,242,526 (15) 28.4% - ----------------- (+) Includes Common Stock and Exchangeable Shares (which are convertible into Common Stock on a one-for-one basis). * Less than 1% (1) Includes 2,244 Exchangeable Shares held directly through a savings plan; 3,222 Common Shares held indirectly through a savings plan; 14,800 shares of Common Stock or Exchangeable Shares issuable upon the exercise of stock options acquired under a Battle Mountain Canada option plan; and 122,050 shares of Common Stock issuable upon the exercise of stock options acquired under Battle Mountain's option plans. (2) Includes 3,406 of Exchangeable Shares held directly through a savings plan; 3,460 Common Shares held indirectly though a savings plan; 37,000 shares of Common Stock or Exchangeable Shares issuable upon the exercise of stock options acquired under a Battle Mountain Canada option plan; and 245,850 shares of Common Stock issuable upon the exercise of stock options acquired under Battle Mountain's option plans. (3) Includes 2,028 Exchangeable Shares directly owned by Mr. Baylis; 1,324 Exchangeable Shares held directly through a savings plan; 3,287 Common Shares held indirectly through a savings plan; 12,580 shares of Common Stock or Exchangeable Shares issuable upon the exercise of stock options acquired under a Battle Mountain Canada option plan; and 112,050 shares of Common Stock issuable upon the exercise of stock options acquired under Battle Mountain's option plans. (4) Includes 133,450 shares of Common Stock directly owned by Mr. Bourne, 750 shares of Common Stock jointly owned by Mr. Bourne and his wife, and 20,500 shares of Common Stock issuable upon the exercise of stock options acquired under Battle Mountain's option plans. (5) Includes 45,000 shares of Common Stock directly owned by Mr. Caspary and 20,500 shares of Common Stock issuable upon the exercise of stock options acquired under Battle Mountain's option plans. (6) Direct holdings consist of shares of Common Stock issuable upon the exercise of stock options acquired under Battle Mountain's option plans. 125 (7) Includes 65,241,526 shares of Exchangeable Shares and 1,000 shares of Common Stock (or approximately 28% of the shares) beneficially owned by Noranda Inc. Although the director is an executive officer, director or both of Noranda and may be deemed to be a beneficial owner of these shares, the director disclaims such beneficial ownership. (8) Includes 2,500 Common Shares directly owned by Mr. Childers and 19,000 shares of Common Stock issuable upon the exercise of stock options acquired under Battle Mountain's option plans. (9) Includes 76,753 Common Shares directly owned by Mr. Elers and 393,300 shares of Common Stock issuable upon the exercise of stock options acquired under Battle Mountain's option plans. (10) Includes 7,684 Common Shares owned directly by Mr. Baker; 2,594 Common Shares held indirectly through a savings plan; and 81,750 shares of Common Stock issuable upon the exercise of stock options acquired under Battle Mountain's option plans. (11) Includes 2,000 of Exchangeable Shares owned directly by Ms. Mogford and 13,000 shares of Common Stock issuable upon the exercise of stock options acquired under Battle Mountain's option plans. (12) Includes 162 Exchangeable Shares held directly through a savings plan; 3,249 Common Shares held indirectly through a savings plan; 12,580 shares of Common Stock or Exchangeable Shares issuable upon the exercise of stock options acquired under a Battle Mountain Canada option plan; and 122,050 shares of Common Stock issuable upon the exercise of stock options acquired under Battle Mountain's option plans. (13) Includes 1,480 shares of Exchangeable Shares owned directly by Mr. Kerr and 13,000 shares of Common Stock issuable upon the exercise of stock options acquired under Battle Mountain's option plans. (14) Includes 5,812 of Exchangeable Shares held indirectly through a savings plan; 1,282,300 shares of Common Stock issuable upon the exercise of stock options acquired under Battle Mountain's option plans; 76,960 shares of Common Stock or Exchangeable Shares issuable upon the exercise of stock options acquired under a Battle Mountain Canada option plan and 65,241,526 Exchangeable Shares beneficially owned by Noranda and 1,000 shares of Common Stock beneficially owned by Noranda. If the Shares owned by Noranda, as to which beneficial ownership is disclaimed, were excluded, then the total number of Shares beneficially owned by the group would be 1,653,943 (or 0.7%). (15) Consists of Exchangeable Shares and Common Stock. The address of the holder is BCE Place, 181 Bay Street, Suite 4100, Toronto, Ontario M5J 2T3. These shares are owned directly by Noranda Inc., which has filed a Schedule 13D with several other reporting persons: Kerr Addison Mines Limited (its direct and indirect 100 percent subsidiary), Brenda Mines Ltd., EdperBrascan Corporation, and Partners Limited. All of these entities have the address shown above, except for Kerr Addison Mines and Brenda Mines, whose address is One Adelaide Street East, Suite 2700, Toronto, Ontario M5C 2Z6. The Exchangeable Shares vote through the Voting, Support and Exchange Trust Agreement, dated July 19, 1996 (whose Trustee is CIBC Mellon Trust Company, 320 Bay Street, P.O. Box 1, Toronto, Ontario M5H 4A6) covering the one share of Special Voting Stock, par value $0.10 per share of Battle Mountain that is entitled to a number of votes at meetings of holders of Common Stock equal to the number of Exchangeable Shares outstanding as of the Record Date for each such meeting held by persons other than Battle Mountain and those subsidiaries of Battle Mountain precluded from voting any Common Stock under applicable Nevada law. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- John A. Keyes, Battle Mountain's President and Chief Operating Officer, received an interest-free loan on his principal residence from Hemlo Gold in November 1995. The loan was subsequently replaced with an interest-free loan with Battle Mountain in November 1996. The largest amount outstanding under the loan during 1999 was $81,387, and as of February 29, 2000, $68,052 was outstanding. Noranda beneficially owned approximately 44 percent of Hemlo Gold's outstanding common stock prior to the consummation of the combination of Hemlo Gold with Battle Mountain (described in Items 1 and 2 of Part I hereof). As a result of such combination, Noranda became Battle Mountain's largest stockholder. As of March 2, 2000, Noranda owned 65,241,526 Exchangeable Shares and 1,000 shares of Common Stock, or approximately 28.4 percent of the aggregate outstanding shares of Common Stock and Exchangeable Shares. 126 In connection with the combination of Hemlo Gold with Battle Mountain (as described in Items 1 and 2 of Part I hereof), Battle Mountain agreed to provide Noranda and Kerr Addison Mines Limited with registration rights under U.S. law and secondary cooperation rights under Canadian law with respect to its Exchangeable Shares and the Common Stock issuable in exchange therefor. These rights include up to five "demand" and an unlimited number of "piggyback" registrations. Noranda pays all of its underwriting discounts and commissions and fees of separate legal counsel. Battle Mountain pays all other expenses for the first demand registration and for any piggyback registrations that are not completed, with Noranda paying its pro rata share of expenses in other cases. Battle Mountain holds investments in affiliated companies of Noranda that at December 31, 1999 were carried on Battle Mountain's books at their cost of $1.6 million. Battle Mountain received dividends on these investments in the aggregate amount of $229,000 in 1999. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------- (a)(1) Financial Statements: As to financial statements and supplementary information, reference is made to "Index to Consolidated Financial Statements" on page 47 of this Annual Report on Form 10-K/A. (a)(2) Financial Statement Schedules: All schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto. (a)(3) Exhibits: See attached exhibit index, page E-1, which also includes the management contracts or compensatory plans or arrangements required to be filed as exhibits to this Annual Report by Item 601(10)(iii) of Regulation S-K. (b) Reports on Form 8-K: Two reports on Form 8-K were filed during the fourth quarter of 1999. The report on Form 8-K dated October 12, 1999 described (1) an amendment to the Credit Agreement by and between Battle Mountain and the Canadian Imperial Bank of Commerce and (2) the Scheme of Arrangement between Lihir Gold Limited. and Nuigini Mining Limited. The report on Form 8-K dated November 1, 1999 was submitted as Battle Mountain's third quarter earnings release. 127 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. BATTLE MOUNTAIN GOLD COMPANY By: /s/ John A. Keyes ----------------- John A. Keyes President and Chief Operating Officer Date: November 22, 2000 128 INDEX OF EXHIBITS Exhibit No. Document - ----------- -------- *2(a) -- Plan of Arrangement of Hemlo Gold Mines Inc. under Section 182 of the Business Corporations Act (Ontario) (Annex D to Exhibit 20(a), Joint Management Information Circular and Proxy Statement, to the Company's Current Report on Form 8-K dated June 11, 1996; File No. 1-9666). *2(b) -- Combination Agreement effective as of March 11, 1996 by and between the Company and Hemlo Gold Mines Inc. (Annex C to Exhibit 20(a), Joint Management Information Circular and Proxy Statement, to the Company's Current Report on Form 8-K dated June 11, 1996; File No. 1-9666). *3(a) -- Restated Articles of Incorporation of the Company, as amended and restated through July 19, 1996 (Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996; File No. 1-9666). *3(b) -- Certificate of Resolution Establishing Designation, Preferences and Rights of $3.25 Convertible Preferred Stock (Exhibit 4(b) to the Company's Current Report on Form 8-K dated July 19, 1996; File No. 1-9666). *3(c) -- Certificate of Amendment of Certificate of Resolution Establishing Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (Exhibit 4(c) to the Company's Current Report on Form 8-K dated July 19, 1996; File No. 1-9666). *3(d) -- Bylaws of the Company, as amended through March 21, 1997 (Exhibit 3(d) to the Company's Annual Report on Form 10-K/A for the year ended December 31, 1996; File No. 1-9666). *4(a)(1) -- Rights Agreement, dated November 10, 1988, as amended and restated as of July 19, 1996, between the Company and The Bank of New York, as Rights Agent (Exhibit 4(e) to the Company's Current Report on Form 8-K dated July 19, 1996; File No. 1-9666). *4(a)(2) -- Third Amendment to Rights Agreement, dated and effective as of November 10, 1998, between the Company and The Bank of New York, as Rights Agent (Exhibit 4(a)(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998; File No. 1-9666). *4(b) -- Voting, Support and Exchange Trust Agreement dated as of July 19, 1996 between the Company, Hemlo Gold Mines Inc. and CIBC Mellon Trust Company (as successor to The R-M Trust Company) (Annex E to Exhibit 20(a), Joint Management Information Circular and Proxy Statement, to the Company's Current Report on Form 8-K dated June 11, 1996; File No. 1-9666). *4(c) -- Specimen Stock Certificate for the Common Stock of the Company (Exhibit 4(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988; File No. 1-9666). E-1 *4(d) -- Fiscal and Paying Agency Agreement, dated as of January 4, 1990, between the Company and Citibank, N.A., Fiscal Agent (Exhibit 4(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989; File No. 1-9666). +*10(a)(1) -- Battle Mountain Gold Company 2000 Deferred Income Stock Option Plan (Exhibit 10(a)(1) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999; File No. 1-9666). +*10(b)(1) -- 1985 Stock Option Plan of the Company, as amended and restated effective April 7, 1993 (Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993; File No. 1-9666). +*10(b)(2) -- First Amendment to 1985 Stock Option Plan of the Company, effective May 12, 1995 (Exhibit 10(b)(1) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; File No. 1-9666). +.*10(c)(1) -- Specimen of Waiver and Release Agreements dated July 19, 1999 between the Company and certain executive officers regarding certain benefits payable in the event of a change in control of the Company (Exhibit 10(c)(1) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999; File No. 1-9666). +*10(c)(2) -- Battle Mountain Gold Company Change In Control Severance Plan, effective December 2, 1997 (Exhibit 10(c)(2) to the Company's Annual Report on Form -K for the year ended December 31, 1997; File No. 1-9666). 10(c)(3) -- Employment Termination and Non-Competition Agreement dated as of July 20, 2000 between the Company and John A. Keyes. 10(c)(4) -- Employment Termination and Non-Competition Agreement dated as of July 20, 2000 between the Company and Ian Atkinson. 10(c)(5) -- Employment Termination and Non-Competition Agreement dated as of July 20, 2000 between the Company and Joseph P. Baylis. 10(c)(6) -- Employment Termination and Non-Competition Agreement dated as of July 20, 2000 between the Company and Greg V. Etter. 10(c)(7) -- Employment Termination and Non-Competition Agreement dated as of July 20, 2000 between the Company and Jeffrey L. Powers. 10(c)(8) -- Employment Termination and Non-Competition Agreement dated as of July 20, 2000 between the Company and Stanford M. Haley. 10(c)(9) -- Employment Termination and Non-Competition Agreement dated as of July 20, 2000 between the Company and Thomas P. Bausch. +*10(d) -- Battle Mountain Gold Company Contribution Equalization Plan, as amended and restated effective as of November 10, 1988 (Exhibit 10(h) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666). +*10(e)(1) -- Battle Mountain Gold Company Executive Productivity Bonus Plan, as amended and restated effective January 1, 1994 (Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993; File No. 1-9666). E-2 +*10(e)(2) -- Battle Mountain Gold Company 1997 Incentive Bonus Plan (Exhibit 10(e)(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997; File No. 1-9666). *10(f)(1) -- Battle Mountain Gold Company Non-Qualified Stock Option Plan for Outside Directors (Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991; File No. 1-9666). *10(f)(2) -- Amendment to Battle Mountain Gold Company Non-Qualified Stock Option Plan for Outside Directors effective January 1, 1995 (Exhibit 10(j)(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994; File No. 1-9666). +*10(f)(3) -- Second Amendment to Battle Mountain Gold Company's Non-Qualified Stock Option Plan for Outside Directors effective December 2, 1997 (Exhibit 10(f)(3) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999; File No. 1-9666). +*10(f)(4) -- Third Amendment to Battle Mountain Gold Company's Non-Qualified Stock Option Plan for Outside Directors effective February 2, 1999 (Exhibit 10(f)(4) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999; File No. 1-9666). *10(g) -- Heads of Agreement, dated March 23, 1989, among the Company, Niugini Mining Limited and the individuals listed on the signature page thereto (Exhibit 10(k) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988; File No. 1-9666). +*10(h)(1) -- Amended and Restated 1994 Long-Term Incentive Plan of Battle Mountain Gold Company, as of January 1, 1997 (Appendix B to the Company's definitive Proxy Statement dated March 28, 1997 and filed with the Commission on March 28, 1997; File No. 1-9666). +*10(h)(2) -- Specimen of the Company's 1994 Long-Term Incentive Plan Non- Qualified Stock Option Agreement (Exhibit 10(c)(1) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; File No. 1-9666). +*10(h)(3) -- Specimen of the Company's 1994 Long-Term Incentive Plan Incentive Stock Option Agreement (Exhibit 10(c)(2) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; File No. 1-9666). +*10(h)(4) -- Specimen of the Company's 1994 Long-Term Incentive Plan Restricted Stock Agreement (Exhibit 10(a)(4) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994; File No. 1-9666). +*10(h)(5) -- Specimen of the Company's 1994 Long-Term Incentive Plan Performance Unit Agreement (Exhibit 10(n)(5) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994; File No. 1-9666). +*10(i)(1) -- Specimen Split-Dollar Agreement (Individual) (Exhibit 10(o)(1) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994; File No. 1-9666). E-3 +*10(i)(2) -- Specimen Amendment to Split-Dollar Agreement (Individual) (Exhibit 10(o)(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994; File No. 1-9666). +*10(i)(3) -- Specimen Split-Dollar Agreement (Trustee) (Exhibit 10(o)(3) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994; File No. 1-9666). +*10(i)(4) -- Specimen Amendment to Split-Dollar Agreement (Trustee) (Exhibit 10(o)(4) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994; File No. 1-9666). +*10(j)(1) -- Battle Mountain Gold Company Supplemental Executive Retirement Plan As Amended and Restated December 2, 1997 (Exhibit 10(j)(1) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998; File No. 1-9666). +.*10(j)(2) -- Specimen of the Company's Supplemental Executive Retirement Plan Agreement (Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995; File No. 1-9666). *10(k) -- Registration Rights Agreement, dated as of July 19, 1996, between Noranda Inc., Kerr Addison Mines Limited and the Company (Exhibit 10(a) to the Company's Current Report on Form 8-K dated July 19, 1996; File No. 1-9666). +*10(l) -- Agreement for Consulting Services effective as of May 1, 1999 between the Company and Karl E. Elers, and a letter extending the term of the agreement (Exhibit 10(L) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999; File No. 1-9666). *10(m)(1) -- Investment Agreement, dated May 22, 1992, between Empresa Minera Inti Raymi S.A. and International Finance Corporation (Exhibit 4(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666). *10(m)(2) -- Amendment to Investment Agreement and Waiver, effective as of December 31, 1994, between Empresa Minera Inti Raymi S.A. and International Finance Corporation (Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995; File No. 1-9666). *10(n)(1) -- Finance Agreement, dated as of September 14, 1992, between Empresa Minera Inti Raymi S.A. and Overseas Private Investment Corporation (Exhibit 4(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666). *10(n)(2) -- First Amendment to Finance Agreement and Limited Waiver, effective as of December 31, 1994, between Empresa Minera Inti Raymi S.A. and Overseas Private Investment Corporation (Exhibit 4(f)(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994; File No. 1-9666). *10(n)(3) -- Letter Agreement dated December 31, 1994, among Overseas Private Investment Corporation, Battle Mountain Gold Company, Kori Kollo Corporation and Zeland Mines, S.A. (Exhibit 4(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995; File No. 1-9666). E-4 *10(o)(1) -- Loan Agreement, dated June 29, 1992, between Empresa Minera Inti Raymi S.A. and Corporacion Andina de Fomento (English translation) (Exhibit 4(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666). *10(o)(2) -- Amendment to Loan Agreement, effective as of December 31, 1994, between Empresa Minera Inti Raymi S.A. and Corporacion Andina de Fomento (English translation) (Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995; File No. 1-9666). *10(p)(1) -- Credit Agreement, including pertinent supporting exhibits thereof, dated October 1, 1999, between Canadian Imperial Bank of Commerce and Battle Mountain Canada Ltd. (Exhibit 10 to the Company's Current Report on Form 8-K dated October 11, 1999). *11 -- Computation of Earnings Per Common Share (Exhibit 11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999; File No. 1-9666). *21 -- Subsidiaries of the Company (Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999; File No. 1-9666). 23(a) -- Consent of PricewaterhouseCoopers LLP (Battle Mountain Gold Company). 23(b) -- Consent of PricewaterhouseCoopers (Lihir Gold Limited). =27 -- Financial Data Schedule. - ------------------------ * Incorporated by reference as indicated. = Previously filed. + Represent management contracts or compensatory plans or arrangements required to be filed as exhibits to this Annual Report by Item 601(10)(iii) of Regulation S-K. . Pursuant to Instruction 2 accompanying paragraph (a) and the Instruction accompanying paragraph (b)(10)(iii)(B)(6) of Item 601 of Regulation S-K, the registrant has not filed each executive officer's individual agreement with the Company as an exhibit hereto. The registrant has agreements substantially identical to Exhibit 10(l) above with each of Messrs. Bayer, Atkinson, Baylis and Keyes. E-5