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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[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
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 1-9620
KINAM GOLD INC.
(Formerly Amax Gold Inc.)
(Exact name of registrant as specified in its charter)
DELAWARE 06-1199974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
185 SOUTH STATE ST., SUITE 820 84111
SALT LAKE CITY, UTAH (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (801) 363-9152
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
---------------------------------------------- -----------------------------------------
$3.75 Series B Convertible Preferred Stock, New York Stock Exchange
$1.00 par value (1,840,000 shares outstanding
at March 24, 2000).
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 [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's information statement to be distributed in
connection with the registrant's annual meeting of shareholders to be held
during 2000 are incorporated by reference in Part III of this report.
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X ]
The aggregate market value of voting stock held by non-affiliates (consisting
solely of Series B Convertible Preferred Shares), at the closing price of
$27.375 on March 24, 2000 was approximately $50.4 million.
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This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that involve risks and uncertainties. The reader
is cautioned that the actual results of Kinam Gold Inc. will differ (and may
differ materially) from the results discussed in such forward-looking
statements. Factors that could cause or contribute to such differences include
those factors discussed herein under "Items 1, and 2, Business and Properties -
Risk Factors," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Report generally.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
Kinam Gold Inc. ("Kinam Gold" or the "Company") and its subsidiaries are engaged
in the mining and processing of gold and silver ore and in the exploration for,
and acquisition and development of, gold-bearing properties, principally in the
Americas, Russia, and Chile. The Company's share of production from its
operating properties totaled 723,012 ounces during 1999, and its share of proven
and probable reserves, as of December 31, 1999, in all its properties totaled
approximately 171 million tons of ore reserves with an average grade of 0.029
ounces of gold per ton, or 5.0 million contained ounces of gold. Except as
otherwise expressly indicated in this report, all monetary amounts are expressed
in United States dollars.
The Company was incorporated in Delaware in 1987 and reincorporated in 1995. On
June 1, 1998, the Company completed a merger with Kinross Gold Corporation
("Kinross") providing for a combination of their businesses. Immediately
following the effective time of the merger, the Company, as the surviving entity
of the combination with Kinross, issued to Kinross 92.2 million shares of the
Company's common stock (the "Common Stock"), representing all of the issued and
outstanding common shares of the Company. Kinross subsequently transferred
ownership of such shares to Kinross Gold U.S.A., Inc., a wholly-owned subsidiary
of Kinross, which is currently the sole common shareholder of the Company. Prior
to the merger, the Company was approximately 59% owned by Cyprus Amax Minerals
Company ("Cyprus Amax"). On September 18, 1998, the Company adopted an amendment
to change its name to Kinam Gold Inc.
The Company's operating properties consist of a 100% interest in the Fort Knox
mine near Fairbanks, Alaska, a 54.7% interest in the Kubaka mine in the Magadan
Oblast situated in Far East Russia and a 50% interest in the Refugio mine in
Chile. The Company also owns the Hayden Hill mine in Lassen County, California,
and a 90% interest in the Guanaco mine in Chile. Mining at Hayden Hill and
Guanaco was completed during 1997 and residual leaching will continue during
2000 at both mines. In addition the Company owns the Haile property in Lancaster
County, South Carolina: The Company also owns a 50% interest in the Sleeper mine
in Humboldt County, Nevada, and the Wind Mountain mine in Washoe County, Nevada,
which are in reclamation. During 1999, the Company acquired a 65% interest in
the True North property located near the Fort Knox mine. Kinam holds its
interest in each of these properties in accordance with industry standards. The
locations of the Company's properties are shown on the map on page 3 and
descriptions are set forth below. Data relating to the Company's domestic and
foreign operations reportable segments, assets and export sales are included in
Note 12 to the Consolidated Financial Statements of the Company.
Unless otherwise indicated, reserves represent proven and probable reserves, and
all reserve information is given as of December 31, 1999. Other mineralized
material represents a mineralized body with established geology continuity that
requires additional work to qualify as reserves. Except as otherwise noted,
references to tons and ounces are to short tons of 2,000 pounds and to troy
ounces of 31.103 grams, respectively. Production is defined as gold or silver
produced in the form of dore plus any inventory in mill carbon circuits. Tons
mined include removal of waste required to access ore. Total cash costs include
all operating costs at the mine site, including overhead, proceeds taxes and
royalties, credits for silver by-product and exclude reclamation costs.
All of the Company's operating properties are open pit mines. Except for mobile
mining equipment leased by the Company at Fort Knox and Refugio, the Company
owns its mining and processing equipment, which is maintained in good operating
condition. Ore is processed by milling or heap leaching. Milling is the
traditional process for recovering gold from ore. After ore is crushed, the gold
and silver are concentrated and then smelted into dore, which is shipped to
refiners for further processing. The milling process is typically used to
achieve higher recovery from oxide and sulfide ores.
Heap leaching is a lower cost processing method applied principally to oxidized
ores. The heap leach recovery rate is generally lower than for milling. In the
heap leaching process, crushed and/or run-of-mine ore is loaded onto leach pads.
The ore is irrigated with a weak cyanide solution that penetrates the ore,
dissolving the gold and silver. The pregnant solution is collected and pumped
through
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activated carbon or a Merrill Crowe zinc precipitation plant to remove the
metals from the solution. After the gold and silver is stripped from the carbon
or processed from the zinc precipitate, it is smelted into dore, which is
shipped to refiners for further processing.
The terms Kinam Gold and the Company when used herein may refer collectively to
Kinam Gold Inc. and its subsidiaries and affiliates or to one or more of them
depending on the context.
[MAP]
FORT KNOX MINE
The Fort Knox mine is located in the Fairbanks Mining District, 15 air miles
northeast of Fairbanks, Alaska.
Operations. Fort Knox achieved commercial production on March 1, 1997.
Construction of the mine was completed at a capital cost of approximately $373
million, which included about $28 million in capitalized interest. The operation
includes an open pit mine, a conventional 42,000 tons per day (15.3 million tons
per year) mill and process plant, a tailings storage facility and a fresh water
reservoir to supply process water. The process facilities are designed as a zero
discharge system. Power is supplied by the public utility serving the area over
a distribution line paid for by the Company. Access is provided by paved highway
for 21 miles from Fairbanks and then for five miles by unpaved road. The mine
and plant are designed to operate year-round and to produce approximately
300,000 to 500,000 ounces of gold per year, depending on the ore grade
processed, with the higher grades expected during the early years. Following a
comprehensive evaluation of the property using estimated future net cash flows,
estimated recoverable ounces and an estimated future gold price of $300 per
ounce, the Company recorded a $72.9 million dollar writedown of the Fort Knox
Mine. In 1998, based on an estimated future gold price of $325 per ounce, the
Company recorded a $140.3 million writedown. See Note 6 of the Consolidated
Financial Statements for further discussion.
The following table presents operating data for the Fort Knox mine for the years
ended December 31, 1999 and 1998 and for the period from the commencement of
commercial production on March 1, 1997, through December 31, 1997.
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Fort Knox Mine
1999 1998 1997(1)
---------- ---------- ----------
Tons mined 30,349,900 33,293,900 27,536,100
Tons of ore milled 13,816,100 13,741,600 10,584,200
Average mill head grade (oz. per ton) .028 0.029 0.034
Mill recovery rate (%) 90 90 89
Ounces of gold produced 345,219 359,973 320,522
Ounces of silver produced 20,425 20,900 15,958
Cost per ounce of gold produced:
Total cash costs $197 $186 $170
Reclamation 3 3 3
Depreciation and depletion 110 156 169
---------- ---------- ----------
Total production costs $310 $345 $342
========== ========== ==========
(1) Reflects operating data for the period from the commencement of commercial
production (March 1, 1997) through December 31, 1997.
Property Position. The Fort Knox claim block covers approximately 51,000 acres
and consists of two state mining leases, approximately 1,600 state mining
claims, 1,100 acres of patented federal mining claims, and two unpatented
federal mining claims. The current reserve is located on approximately 1,300
acres of land held under a state mining lease that expires in 2014 and may be
renewed for a period not to exceed 55 years. This lease is subject to a 3%
royalty payable to the State of Alaska based on net income. Claims surrounding
the current reserve are subject to the State of Alaska Mining License Tax
ranging from 3% to 7% on all mining claims, a production royalty of 3% on the
state mining claims, payable to the State of Alaska Mental Health Trust based on
net income, and both a 1% net smelter return royalty and a 10% overriding net
profits interest on certain of the patented federal mining claims. There were no
royalties paid during 1999 and 1998.
Geology and Ore Reserves. The Fort Knox gold deposit occurs as porphyry-style
mineralization of the type usually associated with copper and molybdenum ore
bodies. The ore is hosted within the upper margins of a granitic intrusion in a
stockwork of small quartz veins and shear zones. The veins and shears are
fractions of an inch to ten inches wide with erratic and widely-spaced
distribution. The gold occurs as fine grains of free gold disseminated within
and along the margins of the veins and shears. In plan view, the deposit has a
dimension of about 5,000 by 2,500 feet, elongated in an east-west direction and
extending to depths of 1,000 feet. The geology is relatively simple and the
rocks are weakly altered. Grade is usually related to the degree of fracturing
and veining of the rocks. Because of the low grade and erratic distribution of
gold, the Company is mining on a bulk tonnage basis. The following table sets
forth the proven and probable reserves for the Fort Knox mine.
Fort Knox Mine
Proven and Probable Ore Reserves
As of December 31, 1999
GOLD GOLD
TONS AVG. GRADE CONTENT
(000) (OZ./TON) (000 OZ.)
----- --------- ---------
Mill ore 123,308 0.024 2,968
(1) Reflects operating data for the period from the commencement of commercial
production (March 1, 1997) through December 31, 1997.
The December 31, 1999 Fort Knox reserves were calculated by the Company.
Reserves are calculated using a gold price of $300 per ounce and a gold cut-off
grade of 0.013 ounces per ton. The Company estimates that mill recovery will
continue to be approximately 90%. Proven and probable reserves decreased from
reserves at December 31, 1998 by 777,000 ounces of which 372,000 were due to
using a future gold price of $300 per ounce ($325 per ounce in 1998) and the
balance were consumed by production.
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In addition to proven and probable reserves, the Company has estimated the Fort
Knox Mine has 71.5 million tons of mineralized material at an average grade of
0.023 ounces per ton.
The property position at the Fort Knox mine was enhanced by the acquisition of
the nearby True North property during 1999. The Company acquired 65% of the True
North property (located 11 miles northwest of the Fort Knox mill) on June 28,
1999 for $28.1 million in cash. In addition, the remaining 35% of the True North
property and the Ryan Lode property were acquired by Kinross Gold USA, Inc., the
parent company of Kinam Gold Inc. The Company intents to process the ore from
these properties using the current facilities available at the Fort Knox
operation. The Company believes the acquisition of the True North and Ryan Lode
properties will allow Fort Knox to increase its annual production to
approximately 500,000 ounces per annum. Permitting activities are proceeding
according to plan, and production from these satellite deposits is expected in
early 2001. Details of the True North property position, geology and ore
reserves are as follows:
True North Property
Property Position. The True North property covers approximately 17,700 acres and
consists of 65 federal claims, 410 state of Alaska mining claims and one state
lease. The claims surrounding the current reserve are subject to a 3% to 7%
State of Alaska Mining License Tax, after a three year exemption after
production commences and the 3% production royalty payable to the State of
Alaska based on net income. In addition the claims are subject to net smelter
royalties of 3.5% to 5%, based on the gold price less any advanced royalties
paid, payable to the claim owners. The property is located 11 miles northwest of
the Fort Knox mill and is accessible by a gravel road which the Company intends
to upgrade in order to ship ore to the Fort Knox mill.
Geology and Ore Reserves: The True North property is hosted by metamorphic rock
of the Chatanika Terane, including quartz-mica schist, quartzite, eclogite,
amphibolite, marble and argillite. Some units are graphitic. Gold occurs in
nearly flat-lying to moderately dipping shear zones and along faulted contacts.
These zones horsetail and are typically nine to fifteen meters thick. The three
originally defined Hindenburg, Central and Shepard zones now all appear to be
part of a single zone with a continuous strike length of roughly 5,000 feet.
Average gold grades are 0.07 - 0.09 ounces of gold per ton, although higher
grades in excess of 1 ounce per ton occur locally. The following table sets
forth the proven and probable reserves for the True North property.
True North Property
Proven and Probable Ore Reserves
As of December 31, 1999
GOLD CONTENT
GOLD (000 OUNCES)
------------------------
TONS AVG. GRADE THE COMPANY'S
(000) (OZ./TON) TOTAL 65% SHARE
----- --------- ----- ---------
Mill ore 7,242 0.063 459 298
In addition to proven and probable reserves, the Company has estimated its 65%
share of the True North Property mineralized material to be 5.8 million tons at
an average grade of 0.072 ounces per ton.
Proven and probable reserves of the Ryan Lode property plus the balance of the
True North property are 4.9 million tons at .076 ounces per ton containing
375,000 ounces of gold. In addition the Company has estimated its share of
mineralized material of these properties to be 5.0 million tons at an average
grade of 0.075 ounces per ton.
KUBAKA MINE
The Company indirectly owns a 54.7% interest in Omolon Gold Mining Company
("Omolon"), a Russian joint stock company, which owns and operates the Kubaka
mine. Kubaka is located in the Russian Far East, approximately 200 miles south
of the Arctic Circle and 600 miles northeast of the major port city of Magadan.
Kinam Gold completed the acquisition of 50% of Kubaka from Cyprus Amax during
May 1997. On December 16, 1998, the Company acquired an additional 3% of Omolon
from a Russian partner in consideration for settling obligations of the Russian
partner for $3.8 million. Repayment of the $3.8 million owing to the Company by
the Russian partner will be made from the Russian partner's share of dividends
from Omolon. The Russian partner has the right to reacquire the 3% interest in
Omolon for approximately $7.5 million. On December 31, 1999 the Company acquired
a further 1.7% of
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Omolon for cash of $0.3 million. The remaining 45.3% interest in Omolon is owned
by Russian parties See Notes 6 and 7 to the Consolidated Financial Statements
for further information relating to the acquisition and financing of the mine.
Operations. Commercial production was achieved at Kubaka on June 1, 1997.
Construction of the mine was completed at a total capital cost of approximately
$242 million. This amount includes certain financing costs, working capital and
about $14 million in capitalized interest. The operation consists of an open pit
mine, a conventional 2,400 tons per day (approximately 880,000 tons per year)
mill and process plant, a tailings storage facility and a reclaim water
retention facility to supply process water. Power is supplied by on-site diesel
generators. Facilities include a permanent camp with access from Magadan
provided by fixed wing aircraft, helicopter and a winter road that is generally
open from January through April. The Kubaka mine's remote location in the
sub-Arctic region requires the Company to plan for operations in extreme cold
and to provide all services and facilities on-site. The mine and plant are
designed to produce approximately 400,000 to 450,000 ounces of gold per year, of
which the Company's share is 54.7%.
The following table presents operating data for the Kubaka mine for the years
ended December 31, 1999 and 1998 and for the period from the commencement of
commercial production on June 1, 1997, through December 31, 1997.
Kubaka Mine
Operating Data
(Kinam Gold Share)(1)
1999 1998 1997(2)
---------- ---------- ----------
Tons mined 5,533,100 5,901,40 3,288,700
Tons of ore milled 466,000 356,300 186,100
Average mill head grade (oz. per ton) 0.547 0.716 .725
Mill recovery rate (%) 98 98 97
Ounces of gold produced 250,264 250,572 129,970
Ounces of silver produced 249,218 253,434 127,090
Cost per ounce of gold produced
Total cash costs $ 140 $ 157 $ 175
Reclamation 3 3 --
Depreciation and depletion 135 107 100
---------- ---------- ----------
Total production costs $ 278 $ 267 $ 275
========== ========== ==========
(1) 53% in 1999 after acquisition of additional 3% in December, 1998, 50% for
1998 and 1997.
(2) Reflects operating data for the period from the commencement of commercial
production (June 1, 1997) through December 31, 1997.
Property Position. Omolon holds the license from the Russian government to
operate the Kubaka mine and to explore and develop the Evenskoye property, also
in the Magadan region (the Kubaka License). The Kubaka License terminates in
2011, subject to extension of up to an additional two years, and limits the
ownership of a foreign party (i.e. the Company) in Omolon to a maximum of 56 %.
The Kubaka License establishes certain production requirements for Kubaka,
requires the payment of a 4% royalty on the total value of gold extracted and
requires Omolon to complete exploration activities, a feasibility study and its
assessment of the reserves at Evenskoye prior to June 1999. This requirement was
met.
Geology and Ore Reserves. The Kubaka ore deposit is an epithermal quartz-
adularia vein system hosted by volcanic rocks and their sedimentary derivatives.
Kubaka is older than, but otherwise very similar to, volcanic hosted epithermal
gold deposits found in the North American Western Cordillera. The following
table sets forth the proven and probable reserves for the Kubaka mine.
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Kubaka Mine
Proven and Probable Ore Reserves
As of December 31, 1999
GOLD CONTENT
GOLD (000 OZ.)
------------------------------
TONS AVG. GRADE THE COMPANY'S
(000) (OZ./TON) TOTAL 54.7% SHARE
----- --------- ----- -----------
Mill ore 3,190 0.368 1,174 643
The December 31, 1999 Kubaka reserves were calculated by the Company. Reserves
are calculated using a gold price of $300 per ounce and a gold cut-off grade of
0.093 ounces per ton. Proven and probable reserves decreased by 219,000 ounces
which was consumed by production. The Company estimates that mill recovery will
continue to be approximately 98%
In addition to proven and probable reserves, the Company has estimated its share
of other mineralized material to be 364,000 tons at an average grade of 0.44
ounces per ton.
REFUGIO MINE
The Company owns a 50% interest in the Refugio mine, located in the Maricunga
Mining District in central Chile, approximately 75 miles east of Copiapo. The
property, situated between 13,800 feet and 14,800 feet above sea level, is held
by Compania Minera Maricunga ("CMM"), a Chilean contractual mining company
indirectly owned 50% by the Company and 50% by Bema Gold Corporation ("Bema"), a
publicly traded Company based in Vancouver, British Columbia.
Operations. The Refugio mine consists of an open pit mine and a three-stage
crushing and heap leach operation capable of processing 39,000 tons of ore per
day, or 13.0 million tons per year. The mine and plant are designed to produce
an estimated 200,000 to 250,000 ounces of gold per year, of which Kinam's share
is 50%. Production commenced in April 1996; however, start-up was delayed due to
mechanical problems with the secondary and tertiary crushers and the collapse of
fill underlying the fine ore storage bin. As a result, commercial production
commenced on October 1, 1996. During the second and third quarters of 1997,
abnormally severe winter weather resulted in the suspension of mining and
crushing operations for nearly three months, which caused lower production and
higher cash costs. During the third quarter of 1998, mechanical failures
associated with the overland conveyance system resulted in lower production and
abnormally higher cash costs. During the fourth quarter of 1999, lower
production and higher cash costs were due to abnormal failures of the electrical
generation plant. These necessary repairs were made and full production levels
are expected to be achieved during 2000.
CMM changed from contract mining to self-mining in 1999 in order to lower
mining costs and allow greater flexibility to adapt to changing conditions. In
addition, three of four tertiary crushers were installed which are capable of
producing a smaller crushed product which will increase production and lower
total cash costs per ounce. Facilities include a permanent camp with access to
the site from Copiapo provided by gravel road. Power is supplied by on-site
diesel powered generators. Water extraction rights expected to be sufficient to
supply the mine are owned by CMM. Following a comprehensive evaluation of the
property using estimated future net cash flows, estimated recoverable ounces and
an estimated future gold price of $300 per ounce the Company recorded a $10.1
million writedown. In 1998, based on an estimated future gold price of $325 per
ounce, the Company recorded a writedown of $53.1 million. See Note 6 of the
Consolidated Financial Statements for further discussion.
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The following table presents operating data for the Refugio mine for the years
indicated.
Refugio Mine
Operating Data
(Kinam Gold 50% Share)
1999 1998 1997
---------- ---------- ----------
Tons 12,775,000 10,856,500 9,336,700
mined
Tons of ore to heap leach 4,925,300 4,541,200 4,491,900
Average grade to heap leach (oz. per ton) 0.029 0.027 0.030
Heap leach recovery rate (%) 64 60 55
Ounces of gold produced 89,713 80,526 73,543
Ounces of silver produced 14,715 13,130 10,366
Cost per ounce of gold produced:
Total cash costs $ 273 $ 318 $ 341
Reclamation 5 5 2
Depreciation and depletion 66 103 95
---------- ---------- ----------
Total production costs $ 344 $ 426 $ 438
========== ========== ==========
Property Position. The Refugio property comprises approximately 14,500 acres,
consisting of mineral rights, surface rights and water rights currently expected
to be sufficient for the mine. The principal ore deposit is situated on mining
claims that are owned by CMM. Essentially all of the mineral rights surrounding
the claims are held by a joint venture formed by Bema and the former owner of
the Refugio claims. CMM has agreements in place with this joint venture that
will allow CMM to mine any extensions of its major ore deposits extending onto
surrounding mineral rights and to use the surrounding areas for project needs.
CMM owns or controls surface rights covering the known mineralization and the
currently anticipated mining operation under two leases from the Chilean Army,
which expire in 2001 and 2005 and may be extended for an additional ten years.
The Company, through its 50% ownership of CMM, is responsible for payment of a
net smelter return to the former owners of the Refugio property that is expected
to average two and 1 1/2% of total production from the currently defined ore
reserves. An additional sliding scale net smelter return related to net profits
and ranging from two and one-half to 5% is payable on the Company's share of any
production in excess of current reserves.
Geology and Ore Reserves. The Refugio property encompasses the Verde, Pancho and
Guanaco gold deposits, which are disseminated gold porphyry deposits containing
minor amounts of copper. Gold mineralization is contained within a strong
stockwork system hosted by silicified intrusive rocks. The Verde deposit
contains all the current reserves and consists of oxide, mixed and unoxidized
ore types and it is open at depth. Additional exploration potential also exists
in the Guanaco and Pancho deposits. The Refugio property lies at the southern
end of a 90-mile-long belt of Miocene-aged volcanic rocks that contains a number
of large disseminated gold-silver deposits. The following table sets forth the
proven and probable reserves in the Verde deposit.
Refugio Mine
Proven and Probable Ore Reserves in the Verde Deposit
As of December 31, 1999
GOLD CONTENT
GOLD (000 OZ.)
--------------------------
TONS AVG. GRADE THE COMPANY'S
(000) (OZ./TON) TOTAL 50% SHARE
----- --------- ----- ---------
Heap leach ore 82,186 0.026 2,168 1,084
The December 31, 1999 Refugio reserves were calculated by the Company. The
reserves are confined to the Verde pit zone. The variable cut-off grades for pit
design and reserve summary were based on a $300 per ounce gold price and costs
and recoveries which vary by rock type and alteration. The Company currently
expects the average ultimate recovery rate for the reserve to be approximately
66%.
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In addition to proven and probable reserves, the Company has estimated its share
of other mineralized material to be 154 million tons at an average grade of
0.021 ounces per ton.
HAYDEN HILL MINE
The Hayden Hill mine in Lassen County, California, is located approximately 120
miles northwest of Reno, Nevada.
Operations. The Hayden Hill operation is an open pit mine with two pits and heap
leach pads. Access to the mine is provided by a county road that connects to a
state highway. Power for operations is purchased from the local rural electric
association. Water for mining and processing operations is provided by two wells
located in close proximity to the mine. Potable water is supplied by truck.
Mining was completed in late 1997 and residual leaching is expected to continue
during 2000 as the inventory on the leach pad is drawn down. A large portion of
the final reclamation work has been completed and reclamation work will continue
in 2000.
The following table presents operating data for the Hayden Hill mine for the
years indicated.
Hayden Hill Mine
Operating Data
1999 1998 1997
---------- ---------- ----------
Tons mined -- -- 8,727,300
Tons of ore to heap leach -- -- 6,194,700
Average grade to heap leach (oz. per ton) -- -- 0.031
Heap leach recovery rate (%) -- -- 59
Ounces of gold produced 15,842 39,688 112,202
Ounces of silver produced 59,231 104,042 325,494
Cost per ounce of gold produced:
Total cash costs $ 177 $ 101 $ 186
Reclamation -- 186 41
Depreciation and depletion -- -- 52
---------- ---------- ----------
Total production costs $ 177 $ 287 $ 279
========== ========== ==========
Property Position. The Company controls approximately 4,300 acres through
ownership of federal patented and unpatented mining claims and fee lands, and a
long-term lease of federal unpatented mining claims, which has an indefinite
term. Approximately 75% of the production is subject to a gross receipts net
smelter return royalty of 5%.
GUANACO MINE
The Company owns a 90% interest in and operates the Guanaco mine, located in the
Guanaco Mining District in northern Chile, approximately 145 miles southeast of
Antofagasta, Chile.
Operations. The operation consists of an open pit mine, heap leach facilities
capable of processing approximately 2.4 million tons of ore per year and
permanent camp facilities. The facility includes three stages of crushing,
permanent pad heap leaching and Merrill Crowe zinc precipitation of gold. Access
to the mine from Antofagasta is provided by the Pan American Highway
(approximately 120 miles south) and a gravel surface road (approximately 25
miles east). Power is supplied by an on-site power plant. The water supply for
mine operations comes primarily from nearby wells and from nearby surface
springs, which also provide potable water.
Mining was completed in July 1997. Recovery of gold will continue into 2000 as
the inventory on the leach pad is drawn down. The Company is currently
conducting an exploration program on site. A significant portion of the final
reclamation work has been completed.
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The following table presents operating data for the Guanaco mine for the years
indicated.
Guanaco Mine
Operating Data
1999 1998 1997
---------- ---------- ----------
Tons mined -- -- 5,406,400
Tons of ore to heap leach -- -- 2,883,400
Average grade to heap leach (oz. per ton) -- -- 0.059
Heap leach recovery rate (%) -- -- 55
Ounces of gold produced 21,974 32,766 93,594
Ounces of silver produced 95,415 100,975 306,552
Cost per ounce of gold produced:
Total cash costs $ 189 $ 162 $ 229
Reclamation -- -- 18
Depreciation and depletion -- -- 102
---------- ---------- ----------
Total production costs $ 189 $ 162 $ 349
========== ========== ==========
Property Position. The Guanaco property position consists of approximately
25,000 acres consisting of mineral claims leased from Empresa Nacional de
Mineria (ENAMI), an entity of the Chilean government, and certain other mineral
rights. Nearly all of the production was mined from land covered by the ENAMI
lease, which expires in 2006 and may be extended by the Company for an
additional five-year term thereafter. The lease is subject to royalties varying
with the level of production, with the royalty on gold ranging from a 7% gross
royalty to a 3% gross royalty plus a 2% net profits royalty; there is a gross
royalty of 2% for all other metals. The property remains subject to a one and
1/10% net smelter return royalty to the minority owners for metals other than
gold. In 1999, a lease modification and purchase option agreement was reached
with ENAMI. These agreements provide for more latitude in the mining and
management of the property as well as allowing for the eventual purchase of the
property and the lowering of the royalty rates under predefined terms.
SLEEPER MINE
The Sleeper mine is located in Humboldt County, Nevada, approximately 28 miles
north of Winnemucca.
The Sleeper mineral property holdings consist of approximately 2,000 acres of
unpatented mining claims. The Company has entered into an agreement with a third
party for further exploration of the Sleeper property. Currently, the third
party has earned a 50% interest in the claims and during 1999 the Company
entered into an agreement granting the same third party the right to earn the
remaining 50% interest in the Sleeper mine. The third party exercised this right
on February 29, 2000. The Company will continue to proceed with the reclamation
of the property in the interim. The third party will fund reclamation activities
and is actively pursuing the replacement of the closure bonds.
Operations. Operations at Sleeper were completed at the end of the third quarter
of 1996. Reclamation activities will continue during 2000.
HAILE PROPERTY
At December 31, 1998, the Company owned a 62.5% venture interest in the Haile
property in Lancaster County, South Carolina. The remaining 37.5% interest was
owned by Kershaw Gold Company, Inc., a wholly-owned subsidiary of Piedmont
Mining Company, Inc. ("Piedmont"). The Company was involved in a dispute with
Piedmont regarding certain agreements but on March 23, 1999, the Company
acquired Piedmont's 37.5% interest and settled all disputes between the Company
and Piedmont. Following a comprehensive study of the Haile property the Company
recorded a writedown of the $16.5 million previously capitalized. See Note 6 of
the Consolidated Financial Statements for further discussion. Reclamation
activities will continue in 2000 with the capping of the second and final leach
pad and the reclamation of the Champion open pit.
Property Position. The Haile property covers approximately 1,400 acres and
consists entirely of fee property that is either owned by the Company, leased
from third parties under leases that can be extended or controlled by purchase
agreements. The leased property is subject to a 4% net smelter return royalty.
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Geology and Ore Reserves. Mineralization on the Haile property is generally
hosted within silicified and pyritized fine grained metasedimentary rocks near
the folded and faulted contact with overlying volcaniclastic and metavolcanic
rocks. Current mineralization is contained in four separate deposits.
EXPLORATION
The Company's primary exploration objective continues to be the acquisition and
evaluation of near-surface gold deposits that can be mined by open pit methods.
The Company is continuing exploration activity on the Fort Knox and Refugio
properties and in the area of the Guanaco mine. The Company increased its
exploration activities in the Russian Federation following the acquisition of
the Kubaka property. In connection with a reserve replenishment tax levied on
Kubaka gold sales, the Company can offset certain exploration expenditures that
are pre-approved by the Russian agency responsible for exploration in the
Magadan region.
Exploration expenditures were $1.8 million in 1999, $3.9 million in 1998, and
$5.5 million in 1997. Exploration expenditures for 2000 are expected to be
approximately $2.0 million.
GOLD MARKET AND PRICES
Gold has two principal uses: product fabrication and bullion investment.
Fabricated gold has a wide variety of end uses, including jewelry manufacture
(the largest fabrication component), electronics, dentistry, industrial and
decorative uses, medals, medallions and official coins. The Company sells all of
its refined gold to banks, bullion dealers, and refiners. The Company's sales to
major customers that exceeded 10% of total sales were $137 million to four
customers during 1999, $169 million to three customers in 1998 and $138 million
to three customers in 1997. The Company believes that the loss of any of these
customers would have no material adverse impact on the Company because of the
active worldwide market for gold.
The profitability of the Company's operations is significantly affected by the
market price of gold. The price of gold has fluctuated widely and is affected by
numerous factors, including international economic trends, currency exchange
fluctuations, expectations for inflation, consumption patterns (such as
purchases of gold jewelry and the development of gold coin programs), sales of
gold bullion holdings by central banks or other large gold bullion holders or
dealers and global and regional political events, particularly in the Middle
East and Asia and major gold-producing countries such as South Africa and the
Commonwealth of Independent States (the former Soviet Union). Gold prices also
are affected by worldwide production levels and on occasion have been subject to
rapid short-term changes because of market speculation.
The following table sets forth for the years indicated the high and low closing
prices of gold, first position, as provided by the Commodity Exchange, Inc.
(COMEX) in New York.
HIGH LOW
---- ---
YEAR (DOLLARS PER OUNCE)
- -----
1995 395.40 372.20
1996 414.70 368.00
1997 365.70 282.80
1998 314.50 275.60
1999 327.50 253.20
Declines in the market price of gold and related precious metals also may render
reserves containing relatively lower grades of mineralization uneconomic to
exploit. The price used in estimating Kinam Gold's ore reserves at December 31,
1999 was $300 per ounce of gold. The market price was $290 per ounce of gold at
December 31, 1999, which was below the price at which Kinam Gold has estimated
its reserves. However, Kinam Gold has historically realized prices that are
above the market price of gold as a result of the Company's hedging program
where was initiated in 1988. If Kinam Gold were to determine that its reserves
and future cash flows should be calculated at a significantly lower gold price,
there would likely be a material reduction in the amount of gold reserves. In
addition, if the price realized by Kinam Gold for its gold were to decline
substantially below the price at which ore reserves were calculated for a
sustained period of time, Kinam Gold potentially could experience material
writedowns of its investment in its mining properties.
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REFINING AND HEDGING ACTIVITIES
Refining arrangements are in place with third parties for the Company's
production. Because of the availability of refiners other than those with whom
such arrangements have been made, the Company believes that no adverse effect
would result if any of these arrangements were terminated.
Historically, the Company employed a number of hedging techniques with the
objective of mitigating the impact of downturns in the gold market and providing
adequate cash flow for operations while maintaining significant upside potential
in a market upswing. During 1999, 1998 and 1997 the Company's hedging efforts
resulted in average realized prices of $289 per ounce, $344 per ounce and $360
per ounce, respectively, compared with the average COMEX price of $279 per ounce
in 1999, $294 per ounce in 1998 and $331 per ounce in 1997. Subsequent to the
merger with Kinross in 1998, the commodity derivative contract portfolio held by
the Company prior to the merger was closed out. See Note 8 of the Consolidated
Financial Statements for further discussion.
AGREEMENTS WITH KINROSS
On June 1, 1998, the Company completed a merger with Kinross providing for a
combination of their businesses. In the merger, each outstanding share of the
Company's Common Stock was converted into 0.8004 of a share of Kinross Common
Stock. Kinross Merger Corporation, a wholly owned subsidiary of Kinross, was
merged into the Company, which became a subsidiary of Kinross. In connection
with the merger, the Company, as the surviving entity of the combination with
Kinross Merger Corporation, issued to Kinross 92,213,928 shares of the Company's
Common Stock, representing all of the issued and outstanding Common Stock after
the merger. Kinross subsequently transferred ownership of such shares to Kinross
Gold U.S.A. Inc., a wholly-owned subsidiary of Kinross, which is currently the
sole common shareholder of the Company.
Pursuant to the merger in 1998, Kinross advanced $255.8 million to the Company
for repayment of outstanding debt. $196.6 million of the advances were
outstanding at December 31, 1998. In 1999, Kinross advanced an additional $16.6
million to the Company for the purchase of the assets related to the True North
property in Alaska. $213.2 million of the advances were outstanding at December
31, 1999.
Kinross issued 23.4 million common shares to Cyprus Amax in exchange for $90.3
million of demand loan debt owed by Kinam to Cyprus Amax. The Company repaid
$16.7 million of the demand loan to Kinross in 1999 leaving a balance of $73.6
million at December 31, 1999.
AGREEMENTS WITH CYPRUS AMAX
Kinam Gold has entered into the following agreements with Cyprus Amax:
Financing agreements with Cyprus Amax:
In May 1997, the Company completed a $71 million tax-exempt industrial revenue
bond for construction of the solid waste disposal facility at the Ft. Knox Mine.
Cyprus Amax has guaranteed the loan and the Company pays a one and 3/4% interest
differential to Cyprus Amax. The Company has also agreed to reimburse Cyprus
Amax for any payments made under the guaranties. Kinross has agreed to use all
reasonable efforts to cause itself to be substituted for Cyprus Amax in the
guaranties. See Note 7 to the Consolidated Financial Statements for further
discussion of the terms of the loan.
EMPLOYEES
At December 31, 1999, the Company and its consolidated subsidiaries employed
1,222 persons. The hourly employees at the Guanaco mine are represented by the
Sociedad Contractual Minera Guanaco labor union and are covered by a labor
contract that expires at the end of May 2000. The hourly employees at Refugio
are represented by the Sindicato de Trabajadores de Compania Minera Maricunga
labor union and are covered by a labor contract that expires at the end of
February 2001. None of the Company's employees in the United States are members
of a labor union and the Company considers its employee relations to be good.
The Company obtains certain administrative and other services from Kinross.
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RISK FACTORS
Nature of Mineral Exploration and Mining
The exploration and development of mineral deposits involves significant
financial risks over a significant period of time, which even a combination of
careful evaluation, experience and knowledge may not eliminate. While discovery
of a gold-bearing structure may result in substantial rewards, few properties
which are explored are ultimately developed into producing mines. Major expenses
may be required to establish reserves by drilling and to construct mining and
processing facilities at a site. It is impossible to ensure that the current or
proposed exploration programs on properties in which the Company has an interest
will result in profitable commercial mining operations.
The operations of the Company are subject to the hazards and risks normally
incident to exploration, development and production of gold, any of which could
result in damage to life or property, environmental damage and possible legal
liability for such damage. The activities of the Company may be subject to
prolonged disruptions due to weather conditions depending on the location of
operations in which the Company has interests. Hazards, such as unusual or
unexpected formations, rock bursts, pressures, cave-ins, flooding or other
conditions may be encountered in the drilling and removal of material. While the
Company may obtain insurance against certain risks, the nature of these risks is
such that liabilities could exceed policy limits or could be excluded from
coverage. There are also risks against which the Company cannot insure or
against which it may elect not to insure. The potential costs which could be
associated with any liabilities not covered by insurance or in excess of
insurance coverage or compliance with applicable laws and regulations may cause
substantial delays and require significant capital outlays, adversely affecting
the future earnings and competitive position of the Company and, potentially,
its financial position.
Whether a gold deposit will be commercially viable depends on a number of
factors, some of which are the particular attributes of the deposit, such as its
size and grade, proximity to infrastructure, financing costs and governmental
regulations, including regulations relating to prices, taxes, royalties,
infrastructure, land use, importing and exporting of gold and environmental
protection. The effect of these factors cannot be accurately predicted, but the
combination of these factors may result in the Company not receiving an adequate
return on invested capital.
Environmental Risks
The Company's mining and processing operations and exploration activities in the
Americas, Russia, Chile and other countries are subject to various laws and
regulations governing the protection of the environment, exploration,
development, production, exports, taxes, labour standards, occupational health,
waste disposal, toxic substances, mine safety and other matters. New laws and
regulations, amendments to existing laws and regulations, or more stringent
implementation of existing laws and regulations could have a material adverse
impact on the Company, increase costs, cause a reduction in levels of production
and/or delay or prevent the development of new mining properties. The Company is
currently in compliance in all material respects with all applicable
environmental laws and regulations. Such compliance requires significant
expenditures and increases the Company's mine development and operating costs.
In all jurisdictions, permits from various governmental authorities are
necessary in order to engage in mining operations. Such permits relate to many
aspects of mining operations, including maintenance of air, water and soil
quality standards. In most jurisdictions, the requisite permits cannot be
obtained prior to completion of an environmental impact statement and, in some
cases, public consultation. Further, the Company may be required to submit for
government approval a reclamation plan and to pay for the reclamation of the
mine site upon the completion of mining activities.
Mining is subject to potential risks and liabilities associated with pollution
of the environment and the disposal of waste products occurring as a result of
mineral exploration and production. Environmental liability may also result from
mining activities conducted by others prior to the Company's ownership of a
property. To the extent the Company is subject to uninsured environmental
liabilities, the payment of such liabilities would reduce funds otherwise
available to the Company and could have a material adverse effect on the
Company. Should the Company be unable to fund fully the cost of remedying an
environmental problem, the Company might be required to suspend operations or
enter into interim compliance measures pending completion of the required
remedy, which could have a material adverse effect on the Company.
Reserve Estimates
The figures for reserves presented herein are estimates, and no assurance can be
given that the anticipated tonnages and grades will be achieved or that the
indicated level of recovery will be realized. Market fluctuations in the price
of gold may render ore reserves uneconomical and require the Company to take a
writedown or to discontinue development or production. Moreover, short-term
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operating factors relating to the reserves, such as the need for orderly
development of the ore body or the processing of new or different ore grades,
may cause a mining operation to be unprofitable in any particular accounting
period.
Proven and probable reserves at the Company's mines and development projects
were calculated based upon a gold price of $300 per ounce of gold. Recently,
gold prices have been below these levels. Prolonged declines in the market price
of gold may render reserves containing relatively lower grades of gold
mineralization uneconomic to exploit and could reduce materially the Company's
reserves. Should such reductions occur, material writedowns of the Company's
investment in mining properties or the discontinuation of development or
production might be required, and there could be material delays in the
development of new projects, increased net losses and reduced cash flow.
Moreover, short-term operating factors relating to the reserves, such as the
need for orderly development of the ore body or the processing of new or
different ore grades, may cause a mining operation to be unprofitable in any
particular accounting period.
The estimates of proven and probable gold reserves attributable to a specific
property of the Company are based on accepted engineering and evaluation
principles. The amount of proven and probable gold does not necessarily
represent an estimate of a fair market value of the evaluated properties.
There are numerous uncertainties inherent in estimating quantities of proven and
probable gold reserves. The estimates in this Report are based on various
assumptions relating to gold prices during the expected life of production, and
the results of additional planned development work. Actual future production
rates and amounts, revenues, taxes, operating expenses, environmental and
regulatory compliance expenditures, development expenditures and recovery rates
may vary substantially from those assumed in the estimates. Any significant
change in these assumptions, including changes that result from variances
between projected and actual results, could result in material downward or
upward revision of current estimates.
Operations Outside of North America
The Company currently contracts mining operations and certain exploration and
development activities in Russia and Chile. The Company believes that the
governments of these countries support the development of their natural
resources by foreign operators. There is no assurance that future political and
economic conditions in these countries will not result in their governments
adopting different policies respecting foreign development and ownership of
mineral resources. Any such changes in policy may result in changes in laws
affecting ownership of assets, taxation, rates of exchange, gold sales,
environmental protection, labor relations, repatriation of income and return of
capital, which may affect both the ability of the Company to undertake
exploration and development activities in respect of future properties in the
manner currently contemplated, as well as its ability to continue to explore,
develop and operate those properties in respect of which it has obtained
exploration, development and operating rights to date. The possibility that a
future government of Russia may adopt substantially different policies, which
might extend to expropriation of assets, cannot be ruled out.
Russian laws, licenses and permits have been in a state of change and new laws
may have a retroactive effect. In addition, tax periods remain open to review by
the tax authorities for six years.
Of particular significance in Russia is the right of Russian authorities to
purchase gold produced from the Kubaka Mine, with payment 50% in U.S. dollars
and 50% in Russian roubles at then current London gold prices. If expenses
denominated in roubles are less than payments in roubles, the Company may be
exposed to currency exchange risks and the risk that viable and adequate
currency exchange mechanisms may not be available. In addition, although the
Company has an agreement stating that any gold that the Russian authorities
elect not to purchase may be exported from Russia and sold to third parties, and
the Company has exported gold on several occasions, there can be no assurance
that the Company will be able to export gold in the event Russian authorities
elect not to purchase gold and do not honor the agreement to permit the Company
to export gold. The Company currently has political risk insurance coverage from
the U.S. Overseas Private Investment Corporation (OPIC) covering its investment
in the Kubaka Mine. However, there is no guarantee that Kinross will continue to
qualify for such insurance.
In addition, the economies of Russia and Chile differ significantly from the
economy of the United States. Growth rates, inflation rates and interest rates
of developing nations have been and are expected to be more volatile than those
of western industrial countries.
Licences and Permits
The operations of the Company require licences and permits from various
governmental authorities. The Company believes that it holds all necessary
licences and permits under applicable laws and regulations and believes it is
presently complying in all material respects with the terms of such licences and
permits. However, such licences and permits are subject to change in various
circumstances. There can be no guarantee that the Company will be able to obtain
or maintain all necessary licences and permits that
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may be required to explore and develop its properties, commence construction or
operation of mining facilities and properties under exploration or development
or to maintain continued operations that economically justify the cost.
Gold Prices
The profitability of any gold mining operations in which the Company has an
interest will be significantly affected by changes in the market price of gold.
Gold prices fluctuate on a daily basis and are affected by numerous factors
beyond the control of the Company. The level of interest rates, the rate of
inflation, world supply of gold and stability of exchange rates can all cause
significant fluctuations in gold prices. Such external economic factors are in
turn influenced by changes in international investment patterns and monetary
systems and political developments. The price of gold has fluctuated widely and
future serious price declines could cause continued commercial production to be
impractical. Depending on the price of gold, cash flow from mining operations
may not be sufficient. If, as a result of a decline in gold prices, revenues
from metal sales were to fall below cash operating costs, production might be
discontinued.
Title to Properties
The validity of mining claims which constitute most of the Company's property
holdings in the United States, Russia and Chile, may, in certain cases, be
uncertain and is subject to being contested. Although the Company has attempted
to acquire satisfactory title to its properties, some risk exists that some
titles, particularly titles to undeveloped properties, may be defective.
Certain of the Company's United States mineral rights consist of unpatented lode
mining claims. Unpatented mining claims may be located on U.S. federal public
lands open to appropriation, and may be either lode claims or placer claims
depending upon the nature of the deposit within the claim. In addition,
unpatented millsite claims, which may be used for processing operations or other
activities ancillary to mining operations, may be located on federal public
lands that are non-mineral in character. Unpatented mining claims and millsites
are unique property interests, and are generally considered to be subject to
greater title risk than other real property interests because the validity of
unpatented mining claims is often uncertain and is always subject to challenges
of third parties or contests by the federal government of the United States. The
validity of an unpatented mining claim, in terms of both its location and its
maintenance, is dependent on strict compliance with a complex body of U.S.
federal and state statutory and decisional law. In addition, there are few
public records that definitively control the issues of validity and ownership of
unpatented mining claims.
Competition
The mineral exploration and mining business is competitive in all of its phases.
The Company competes with numerous other companies and individuals, including
competitors with greater financial, technical and other resources than the
Company, in the search for and the acquisition of attractive mineral properties.
The ability of the Company to acquire properties in the future will depend not
only on its ability to develop its present properties, but also on its ability
to select and acquire suitable producing properties or prospects for mineral
exploration. There is no assurance that the Company will continue to be able to
compete successfully with its competitors in acquiring such properties or
prospects.
Currency Risk
Currency fluctuations may affect the revenues which the Company will realize
from its operations as gold is sold in the world market in United States
dollars. The costs of the Company are incurred principally in United States
dollars, Russian rubles and Chilean pesos. While the Russian rubles and Chilean
pesos are currently convertible into United States dollars, there is no
guarantee that they will continue to be so convertible.
Joint Ventures
Some of the mines in which the Company owns interests are operated through joint
ventures with other mining companies. Any failure of such other companies to
meet their obligations to the Company or to third parties could have a material
adverse effect on the joint ventures. In addition, the Company may be unable to
exert influence over strategic decisions made in respect of such properties.
Royalties
The Company's mining properties are subject to various royalty and land payment
agreements. Failure by the Company to meet its payment obligations under these
agreements could result in the loss of related property interests.
Hedging
The Company has historically reduced its exposure to gold and silver price
fluctuations by engaging in hedging activities. There can be no assurance that
the Company will continue the hedging techniques successfully used, or any other
hedging techniques, or that, if they are continued, the Company will be able to
achieve in the future realized prices for gold produced in excess of average
COMEX prices as a result of its hedging activities.
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Dividend Policy
For the foreseeable future, it is anticipated that the Company will use
earnings, if any, to finance growth. Dividends are payable to the holders of
Kinam Series B Preferred Shares in accordance with the terms thereof.
ITEM 3. LEGAL PROCEEDINGS
In August 1998, the U.S. Environmental Protection Agency served Kinam with a
Unilateral Administrative Order ("UAO") as a Potentially Responsible Party
("PRP") under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") and Solid Waste Disposal Act ("SWDA"), requiring that
Kinam, along with other PRPs, remove certain contaminated materials from the PRC
Patterson Inc. site ("the Site") in Patterson, California. Kinam shipped waste
oil to the Site from 1994 to 1996. Subsequent to that order Kinam joined with
certain other PRPs to form the Patterson Environmental Response Trust, an entity
which was created for the purpose of conducting the removal actions required by
EPA. It is currently intended that all materials will be removed and disposed by
the Trust by the end of the year 2000. Kinam's share in removal cost, nominally
estimated at 5% of the total costs incurred, will ultimately be determined once
confirmation of the actual barrels of used oil is completed. The Company does
not anticipate that this matter will have a material effect on the Company's
financial position or results of operations.
In October 1996, an alleged shareholder derivative action was filed in the Court
of Chancery of Delaware on behalf of a stockholder of the Company, entitled
Harry Lewis v. Milton H. Ward, et al., C.A. No. 15255-NC, against Cyprus Amax,
the directors of the Company and the Company as a nominal defendant. The
complaint alleges, among other things, that the defendants engaged in
self-dealing in connection with the Company's entry in March 1996 into a demand
loan facility provided by Cyprus Amax. The complaint seeks, among other things,
a declaration that the demand loan facility is not entirely fair to the Company
and damages in an unspecified amount. The Company believes that the complaint is
without merit and intends to defend the matter vigorously.
In March 1994, the U.S. Forest Service notified the Company that it considers
the Company to be a PRP under CERCLA, jointly and severally liable with other
PRP's for damages attributable to alleged releases of hazardous substances from
the Siskon Mine, located in the Klamath National Forest in Siskiyou County,
California. The Company conducted a limited exploration drilling program in the
summer of 1991 on property at the Siskon mine site which the Company believes is
not involved in the alleged releases. Based on facts currently known to
management, the Company does not anticipate that this matter will have a
material effect on the Company's financial condition or results of operations.
The Company is also involved in legal proceedings and claims which arise in the
ordinary course of its business. The Company believes these claims are without
merit and is vigorously defending them. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially affect
the financial position, results of operations or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON AND PREFERRED EQUITY AND
RELATED STOCKHOLDER MATTERS
Prior to the Kinross merger, the Common Stock was listed on the New York Stock
Exchange (AU) and the Toronto Stock Exchange (AXG). Subsequent to the merger,
all of the outstanding shares of Common Stock were converted into Kinross Common
Stock. Immediately following the merger the Company issued 92,213,928 shares of
Common Stock to Kinross. Following the completion of the Kinross merger, the
Company terminated its registration of the Common Stock under the Exchange Act
and its listing of the Common Stock on the New York Stock Exchange. There is
currently no public market for the Common Stock.
The Series B Convertible Preferred Stock of the Company is listed on the New
York Exchange (KPRB) and the number of stockholders of record as of March 24,
2000 was 79.
The following table sets forth for the periods indicated the high and the low
sale prices per share of the Common Stock and Series B Convertible Preferred
Stock as reported on the New York Stock Exchange Composite Tape and the
dividends paid on such stock.
Stock Prices and Dividends Per Share
SERIES B CONVERTIBLE
COMMON STOCK PREFERRED STOCK
--------------------- ---------------------------------
QUARTER HIGH LOW HIGH LOW DIVIDENDS
- --------------- ------------ ------- --------- -------- ------------
1999
First -- -- $36 5/16 $34 $.9375
Second -- -- 36 3/4 32 3/8 .9375
Third -- -- 35 1/2 30 .9375
Fourth -- -- 35 7/8 25 7/8 .9375
1998
First $ 3 5/16 $2 1/8 $46 1/4 $35 3/4 $.9375
Second(1) 31 3/16 3 1/16 49 43 5/8 .9375
Third -- -- 44 1/8 38 1/4 .9375
Fourth -- -- 43 1/2 35 1/2 .9375
(1) Reflects sales through May 31, 1998, the last date upon which the Common
Stock was traded on the New York Stock Exchange.
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ITEM 6. SELECTED FINANCIAL DATA
KINAM GOLD INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN MILLIONS EXCEPT PER SHARE AMOUNTS, PERCENTAGES,
PRODUCTION AND SALES OUNCES AND AMOUNTS PER OUNCE)
YEARS ENDED DECEMBER 31
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
FOR THE YEAR:
Revenues $ 214.1 $ 268.1 $ 259.5 $ 108.2 $ 96.6
Earnings (loss) from operations/(1)(2) (101.5) (173.8) 1.9 (42.9) (19.7)
Loss before cumulative effect of accounting changes, net/(1)(2) (112.7) (190.8) (37.9) (39.2) (26.4)
Loss before extraordinary item/(1)(2) (112.7) (190.8) (33.4) (39.2) (26.4)
Net loss/(1)(2) (112.7) (202.3) (33.4) (39.2) (26.4)
Per common share
Loss before cumulative effect of accounting changes, net/(1)(2) (1.30) (1.94) (0.41) (0.48) (0.38)
Loss before extraordinary item/(1)(2) (1.30) (1.94) (0.37) (0.48) (0.38)
Net basic and diluted loss/(1)(2) (1.30) (2.05) (0.37) (0.48) (0.38)
Weighted average common shares outstanding 92.2 101.7 108.2 96.9 86.5
Capital expenditures 16.9 15.4 30.8 187.7 206.2
Cash dividends to common shareholders -- -- -- -- --
Dividends declared per common share -- -- -- -- --
Cash dividends to preferred shareholders 6.9 6.9 6.9 6.9 6.9
Dividends declared per preferred share 3.75 3.75 3.75 3.75 3.75
AT YEAR-END
Current assets 98.3 107.2 129.7 60.7 67.1
Total assets 463.9 602.0 870.6 762.2 613.0
Current liabilities 143.0 153.8 226.0 212.3 42.8
Long-term debt 110.6 123.0 345.7 272.6 238.2
Note payable to parent -- -- -- -- 5.0
Shareholders' equity (47.5) 72.1 273.8 259.4 298.2
Working capital (deficit) (44.7) (46.6) (96.3) (151.6) 24.3
KEY OPERATING FACTORS FOR THE YEAR:
Total ounces of gold produced 723,012 763,525 729,831 268,331 238,255
Total ounces of gold sold 741,087 778,559 720,889 262,975 238,094
Average realized price per ounce sold $ 289 $ 344 $ 360 $ 412 $ 406
Average cost per ounce produced/(3):
Total cash costs/(4) $ 186 $ 185 $ 198 $ 255 $ 313
Reclamation costs 3 13 10 16 13
Depreciation, depletion and amortization 108 119 123 110 91
-------- -------- -------- -------- --------
Total production costs per ounce $ 297 $ 317 $ 331 $ 381 $ 417
======== ======== ======== ======== ========
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(1) During the first quarter of 1997, Kinam Gold elected to change its method
of accounting for inventory from the last-in, first-out (LIFO) method to a
three-month rolling average method. In accordance with generally accepted
accounting principles when changing from the LIFO method, prior years'
results have been restated to reflect the effect of this change in policy.
The effect of this restatement on the years ended December 31, 1996 and
1995 was to increase the previously reported net loss by $5.0 million and
$2.5 million, or $.06 and $.02 per share, respectively. Additionally, as
of January 1, 1997, the Company changed its accounting policy to include
depreciation and depletion in inventory, which has the effect of recording
depreciation and depletion expense in the statement of operations as gold
is sold rather than as it is produced. The cumulative effect of this
accounting change is a $4.5 million reduction of the net loss as of
January 1, 1997.
(2) In the fourth quarter of 1999, the Company recorded a $72.9 million
pre-tax writedown of the Fort Knox mine, a $10.1 million pre-tax writedown
of the Refugio mine and a $16.5 million pre-tax writedown of the Haile
property. These special items increased the net loss by $99.5 million, or
$1.08 per common share.
In the fourth quarter of 1998, the Company recorded a $53.1 million
pre-tax writedown of the Refugio Mine and a $140.3 million pre-tax
writedown of the Fort Knox Mine. In the second quarter of 1998, the
Company recorded an $11.5 million dollar loss on the early extinguishment
of debt. These special items increased the net loss by $204.9 million, or
$2.01 per common share.
In the fourth quarter of 1996, the Company recorded a $35.5 million pre-
tax writedown of the Guanaco mine and an unrelated $10 million deferred
tax benefit. These special items increased the net loss by $25.5 million,
or $.26 per common share.
(3) Average costs weighted by ounces of gold produced at each mine.
(4) Effective January 1, 1996, the Company adopted the Gold Production Cost
Standard developed by the Gold Institute in order to facilitate
comparisons among companies in the gold industry. Cash production costs
reported in prior periods have been restated as cash operating costs and
total cash costs in accordance with the new standard. Cash operating costs
calculated under the new standard include all operating costs (including
overhead) at the mine sites, but exclude royalties, production taxes and
reclamation. Total cash costs include royalties and production taxes, but
exclude reclamation. Total production costs remain unchanged and include
reclamation and depreciation, depletion and amortization. Total cash costs
in 1996 exclude the impact of the write- down of heap leach inventories at
Guanaco.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company reported a 1999 net loss of $112.7 million, or $1.30 per share after
preferred dividends, on revenues of $214.1 million, compared with a 1998 net
loss of $202.3 million, or $2.05 per share after preferred dividends, on
revenues of $268.1 million and a 1997 net loss of $33.4 million, or $0.37 per
share after preferred dividends, on revenues of $259.5 million. The 1999 results
included a $10.1 million writedown of the Refugio mine, a $72.9 million
writedown of the Fort Knox mine and a $16.5 million writedown of the Haile
property. The 1998 results included a $53.1 million writedown of the Refugio
Mine, a $140.3 million writedown of the Fort Knox Mine and an $11.5 million loss
on the early extinguishment of debt. The 1997 results included a $4.5 million
benefit for a first quarter inventory accounting change. Excluding special
items, the 1999 net loss would be $13.2 million or $0.22 per share after
preferred dividends, compared with 1998 net income of $2.6 million, or a loss of
$0.04 per share after preferred dividends and a 1997 net loss of $37.9 million,
or $0.41 per share after preferred dividends. See Note 5 to the Consolidated
Financial Statements for further discussion of the changes in accounting
policies during the first quarter of 1997. See Note 6 to the Consolidated
Financial Statements for further discussion of the writedowns.
The Company's operating loss (excluding the writedown of mineral properties) was
$2.0 million for 1999 compared with 1998 operating income of $19.6 million and
1997 operating income of $1.9 million, excluding special items and writedowns.
The operating income decrease was attributable to lower realized gold prices,
partially offset by lower depreciation rates due to the 1998 writedown.
Revenues decreased to $214.1 million in 1999, compared with $268.1 million in
1998 and $259.5 million in 1997. The decrease was a result of lower gold sales
of 741,087 ounces in 1999 compared with 778,559 ounces in 1998 and 720,889
ounces in 1997. In addition, the average realized price for gold was $289 per
ounce compared with $344 in 1998 and $360 in 1997. These realized prices compare
with average spot gold prices of $279 per ounce in 1999, $294 in 1998 and $331
in 1997. The Company's average realized price exceeded the average spot price in
each year due to the positive impact of hedging activities.
19
20
Gold production in 1999 was 723,012 ounces compared with 763,525 ounces in 1998
and 729,831 ounces in 1997. Fort Knox production was 345,219 ounces compared
with 359,973 in 1998. Commercial production at Fort Knox was achieved March 1,
1997, resulting in production of 320,522 ounces in 1997. The Company's 53% share
of Kubaka production was 250,264 ounces compard with 250,072 in 1998 when the
Company's share was 50%. Commercial production at Kubaka was achieved June 1,
1997, resulting in production of 129,970 ounces in 1997. The Company's 50% share
of 1999 production at Refugio was 89,713 ounces compared with 80,526 in 1998 and
73,543 in 1997. Mining was completed at Guanaco during July 1997, which resulted
in the decrease in production to 21,974 ounces in 1999 compared with 32,766
ounces in 1998 and 93,594 ounces in 1997 as residual leaching continued. Hayden
Hill completed mining in December 1997 and production declined to 15,842 ounces
in 1999 compared with 39,688 ounces in 1998 and 112,202 in 1997 as residual
leaching continued. During 2000, consolidated production is expected to be
approximately 725,000 ounces.
The Company's cost of sales as a percentage of revenue increased to 66% in 1999,
compared with 59% in 1998 and 61% in 1997, reflecting lower average realized
gold prices. Consolidated total cash costs of $186 per ounce in 1999 compared
with $185 per ounce in 1998 and $198 per ounce in 1997. Fort Knox total cash
costs were $197 per ounce in 1999 compared with $186 per ounce in 1998 and $170
per ounce in 1997 as a result of lower grades and extremely cold weather in the
first quarter of 1999, which resulted in a 30% reduction in gold production. As
a result of higher mill throughput, Kubaka's 1999 total cash costs decreased to
$140 per ounce compared with $157 in 1998 and $175 in 1997. Refugio's 1999 total
cash costs of $273 per ounce, compared with $318 in 1998 and $341 in 1997, were
lower primarily due to the installation of the tertiary crushers and the
commencement of self-mining. Total cash costs increased at both Guanaco and
Hayden Hill during 1999 as residual leaching continued. Total cash costs at
Guanaco were $189 compared with $162 in 1998 and $229 in 1997 and at Hayden Hill
were $177 compared with $101 in 1998 and $186 in 1997.
Depreciation and depletion expense fell to $77.8 million in 1999 compared with
$91.1 million in 1998 and $88.4 million in 1997 and the consolidated rate per
ounce decreased to $108 compared with $119 in 1998 and $123 in 1997 primarily as
a result of the 1998 writedowns. Reducing the gold price used to calculate ore
reserves to $300 per ounce at December 31, 1999 from $325 per ounce at December
31, 1998 did not have a significant impact on Kubaka or Refugio reserves but
reserves at Fort Knox decreased by approximately 417,000 contained ounces. The
consolidated depreciation and depletion rate for the Company is expected to
decrease in 2000 due to the 1999 writedowns, as more fully described in Note 6,
of the consolidated financial statements.
General and administrative income was $4.5 million in 1999 compared with $3.7
million in 1998 and expense of $6.4 million in 1997. The income increase in 1999
was primarily due to the Company earning a management fee when it became
operator of the Refugio mine during the year. Management fees earned at both
Refugio and Kubaka are recorded as an offset to normal general and
administrative expenses. In 1999 and 1998, general and administrative income
included a full year of management fees earned for operating the Kubaka project.
The 1997 expense was further reduced in 1998 on the reduction of corporate staff
subsequent to the Kinross merger.
Exploration expense was $1.8 million in 1999, compared with $3.9 million in 1998
and $5.5 million in 1997.
Interest expense in 1999 was $10.0 million, compared with $23.4 million in 1998
and $42.5 million in 1997. The decrease in 1999 was attributable to lower
average debt balances as a result of debt repaid subsequent to the Kinross
merger and the absence of an interest charge on the demand loan made to the
Company by Kinross. In 1999 and 1998, no interest was capitalized, compared with
$4.2 million in 1997. Interest income was $1.5 million in 1999, compared with
$1.6 million in 1998 and $1.9 million in 1997.
Other income was $0.2 million in 1999, compared with income of $5.3 million in
1998 and expense of $3.0 million in 1997. Other income in 1998 was due primarily
to a $6.7 million gain on the sale of foreign tax loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's 1999 cash flow provided from operating activities of $72.1 million
compares with $109.8 million in 1998 and $68.0 million in 1997. The decrease in
1999 was due to lower gold prices and the fact that 1998 results included the
close-out of the Company's hedge position for $45.9 million. Due to low gold
prices, the Company is continuing its policy of tightened spending in all areas
in order to conserve cash.
Capital expenditures increased slightly to $16.9 million in 1999 from $15.4
million in 1998 but were reduced substantially from $30.8 million in 1997 as
only sustaining capital projects were undertaken due to low gold prices. Capital
spending at Fort Knox was $7.8 million in 1999 including preliminary development
of the True North property, compared with $12.3 million in 1998 and $14 million
in 1997, excluding capitalized interest. In 1999, Kubaka capital spending
totaled $1.1 compared with $0.7 million in 1998. The
20
21
Kubaka acquisition was completed in May 1997, and capital spending following the
purchase, excluding capitalized interest, was about $12 million. At Refugio,
capital spending totaled $8.0 million in 1999, primarily for three tertiary
crushers and mobile fleet additions compared with $2.4 million in 1998 and $2.5
million in 1997, excluding capitalized interest.
During 1999, the Company acquired 65% of the True North property for $28.1
million, the remaining 37.5% interest in the Haile property for $2.0 million and
a further 1.7% of Omolon for $0.3 million.
During 1999, the Company received an additional $16.6 million advance from
Kinross to complete the acquisition of the True North property. In addition
Kubaka borrowed $1.8 million on subordinated working capital debt and Refugio
entered into $5.2 million of capital leases for new mining equipment. The
Company repaid $16.7 on the demand loan from Kinross. The balance of repayments
in the year included $14.4 million of Kubaka debt and lease payments of $4.8
million. All repayments were from cash flow provided from operating activities.
See Note 7 to the Consolidated Financial Statements for further discussion of
long-term debt.
During 2000, the Company expects to generate sufficient cash flow from operating
activities for general corporate purposes, capital expenditures and debt and
interest payments.
YEAR 2000
The change to Year 2000 has occurred, without any interruption in production,
power or the supply of materials and consumables to the Company's various
operating locations throughout the world. Although it is not possible to
conclude that all aspects of the Year 2000 issue have been fully resolved,
nothing has come to the Company's attention nor is anything anticipated that
would materially affect the results of operations and cash flows in 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
With the exception of historical matters, the matters discussed in this report
are forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially from projected results. Such
forward-looking statements include statements regarding expected dates for gold
sales, reserve additions, projected quantities of future gold production,
estimated reserves and recovery rates, anticipated production rates, costs and
expenditures, prices realized by the Company and expected to be realized,
expected future cash flows, anticipated financing needs, growth plans and
sources of financing and repayment alternatives and possible business
combinations. 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 price
of gold, the political and economic risks associated with foreign operations,
cost overruns, unanticipated ground and water conditions, unanticipated grade
and geological problems, metallurgical and other processing problems,
availability of materials and equipment, the timing of receipt of necessary
governmental permits and approvals, the occurrence of unusual weather or
operating conditions, force majeure events, lower than expected ore grades, the
failure of equipment or processes to operate in accordance with environmental
risks, the results of financing efforts and financial market conditions and
other risk factors detailed in the Company's filings with the Securities and
Exchange Commission. Many of such factors are beyond the Company's ability to
control or predict. Readers are cautioned not to put undue reliance on
forward-looking statements. The Company disclaims any intent or obligation to
update publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Commodity Price Risks
The Company's revenues are derived primarily from the sale of gold production.
The Company's net income can vary significantly with fluctuations in the market
prices of gold. At various times, in response to market conditions, the Company
has entered into gold forward sales contracts for some portion of expected
future production to mitigate the risk of adverse price fluctuations. The
significant decline in spot gold prices in 1998 increased the value of the
Company's forward sales contracts. The Company closed out these contracts in
1998 for $45.9 million in cash. At December 31, 1999 the Company had no gold
forward sales contracts. Based on the Company's projected 2000 sales volumes,
each $10 per ounce change in the average realized price on gold sales would have
an approximate $7.25 million impact on revenues and pre-tax earnings. For
further details of the remaining deferred revenue and the period it will be
recorded in revenue see Note 8 of the Consolidated Financial Statements.
21
22
Foreign Currency Exchange Risk
The Company conducts the majority of its operations in the U.S., Russia, and
Chile. Currency fluctuations affect the cash flow that the Company will realize
from its operations as gold is sold in U.S. dollars, while production costs are
incurred in Russian rubles, Chilean pesos and U.S. dollars. The Company's
results are positively affected when the U.S. dollar strengthens against these
foreign currencies and adversely affected when the U.S. dollar weakens against
these foreign currencies. The Company's cash and cash equivalent balances are
held in U.S. dollars. Holdings denominated in other currencies are relatively
insignificant.
In the last half of 1998, the Russian ruble weakened against the U.S. dollar and
the Company benefited primarily through lower Russian labour and materials
costs. The temporal method is used to consolidate the results of operations in
Russia. The major currency -related exposure at any balance sheet date is on
ruble denominated cash balances and working capital. Because the bullion
inventory is denominated in U.S. dollars, there are no related foreign exchange
risks. The foreign exchange exposure on the balance of the working capital items
is nominal. Gold sales during 1999 were primarily denominated 50% in U.S.
dollars and 50% in rubles. The U.S. dollars received are used to service the
U.S. dollar denominated debt and the foreign supplies inventory purchases, while
the rubles received from the gold sales are used to pay local operating costs.
The Company has and will continue to convert any excess rubles into U.S. dollars
to repay U.S. denominated third party and inter-corporate debt obligations.
Assuming estimated 2000 ruble payments of 880 million rubles at an exchange rate
of 30 rubles to one U.S. dollar, each 2 ruble change to the U.S. dollar could
result in an approximate $1.8 million change in the Company's pre-tax earnings.
In Chile, the currency of measurement is the U.S. dollar as the majority of
transactions are denominated in U.S. dollars. Local expenditures are recorded
based on the prevailing exchange rate at the time and bullion settlement
receivables are denominated in U.S. dollars. Assuming the Company's share of
estimated 2000 peso payments of 3.2 billion pesos at an exchange rate of 515
pesos to one U.S. dollar, each 15 pesos change to the U.S. dollar could result
in an approximately $0.2 million change in the Company's pre-tax earnings.
Interest Rate Risk
As at December 31, 1998, the Company had interest rate swaps to fix interest
rates on a portion of its floating rate debt. The costs associated with these
contracts were amortized to interest expense over the terms of the agreements.
For details on the interest rate swap agreements outstanding as at December 31,
1998, see Note 8 to the Consolidated Financial Statements. There are no
outstanding interest rate swaps at December 31, 1999.
As at December 31, 1999, the Company had $117.7 million (1998 - $128.9 million)
of variable rate debt, all denominated in U.S. dollars. Interest expense would
change by approximately $1.2 million for every 1% change in interest rates.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The management of the Company is responsible for the integrity and objectivity
of the financial statements and other financial information contained in this
Annual Report. The financial statements were prepared in accordance with
generally accepted accounting principles and include estimates that are based on
management's best judgment.
The Company maintains an internal control system which includes formal policies
and procedures designed to provide reasonable assurance that assets are
safeguarded and transactions are properly recorded and executed in accordance
with management's authorization.
Kinam Gold's financial statements have been audited by independent accountants,
whose appointment is ratified yearly by the shareholders at the annual
shareholders' meeting. The independent accountants conducted their audits in
accordance with generally accepted auditing standards. These standards include
an evaluation of the internal accounting controls in establishing the scope of
audit testing necessary to allow them to render an independent professional
opinion on the fairness of the Company's financial statements.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with representatives of management and the
independent accountants to review their work and ensure that they are properly
discharging their responsibilities.
Arthur H. Ditto
Brian W. Penny
Bob Schafer
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Kinam Gold Inc.
We have audited the accompanying consolidated balance sheets of Kinam Gold Inc.
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity (capital deficiency) and cash
flows for the years then ended. 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 did not audit the
financial statements of Omolon Gold Mining Company, a 54.7% owned subsidiary,
which statements reflect total assets and revenues constituting 25% and 34%,
respectively, for 1999, and 27% and 33% respectively, for 1998 of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Omolon Gold Mining Company, is based solely on the report
of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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. Our audits of the 1999 and 1998 financial statements also included
an examination of the segmented information for 1997 presented in Note 12 of the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits and the
report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Kinam Gold Inc. and subsidiaries as
of December 31, 1999 and 1998, and the results of their operations and their
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Toronto, Ontario
March 24, 2000
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Omolon Gold Mining Company
In our opinion, the accompanying balance sheets and the related statements of
operations, cash flows and changes in shareholders' equity present fairly, in
all material respects, the financial position of Omolon Gold Mining Company at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America 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 discussed in Note 11 to the financial statements, the Company changed its
method of revenue recognition in 1998.
As discussed in Note 12 to the financial statements, the operations of the
Company, and those of similar enterprises operating in the Russian Federation,
have been affected, and may continue to be affected for the foreseeable future,
by the continuing regulatory, political and economic uncertainties existing for
enterprises operating in the Russian Federation.
/s/ PricewaterhouseCoopers
Moscow, Russia
March 1, 2000
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Kinam Gold Inc. (formerly Amax Gold Inc.)
In our opinion, the accompanying consolidated statements of operations, of
shareholders' equity and of cash flows for the year ended December 31, 1997
present fairly, in all material respects, the results of operations and cash
flows of Kinam Gold Inc. (formerly Amax Gold Inc.) for the year ended December
31, 1997, in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards 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 audit provides a reasonable basis for the opinion expressed
above.
As discussed in Note 5 to the consolidated financial statements, the Company
changed its method of accounting for inventory in 1997.
PricewaterhouseCoopers LLP
Denver, Colorado
February 9, 1998
26
27
KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31
(Dollars in millions except per share amounts)
1999 1998 1997
--------- --------- ---------
Revenues $ 214.1 $ 268.1 $ 259.5
--------- --------- ---------
Costs and operating expenses
Cost of sales 141.0 157.2 157.3
Depreciation and depletion 77.8 91.1 88.4
Writedown of mineral properties 99.5 193.4 --
General and administrative (4.5) (3.7) 6.4
Exploration 1.8 3.9 5.5
--------- --------- ---------
Total costs and operating expenses 315.6 441.9 257.6
--------- --------- ---------
Income (loss) from operations (101.5) (173.8) 1.9
Interest expense (10.0) (23.4) (42.5)
Capitalized interest -- -- 4.2
Interest income 1.5 1.6 1.9
Other 0.2 5.3 (3.0)
--------- --------- ---------
Loss before income taxes and cumulative effect of accounting change (109.8) (190.3) (37.5)
Income tax expense (2.9) (0.5) (0.4)
--------- --------- ---------
Loss before cumulative effect of accounting change (112.7) (190.8) (37.9)
Cumulative effect of accounting change -- -- 4.5
--------- --------- ---------
Net loss before extraordinary item (112.7) (190.8) (33.4)
Extraordinary item - loss on early extinguishment of debt -- (11.5) --
--------- --------- ---------
Net loss (112.7) (202.3) (33.4)
Preferred stock dividends (6.9) (6.9) (6.9)
--------- --------- ---------
Loss attributable to common shares $ (119.6) $ (209.2) $ (40.3)
========= ========= =========
Per common share:
Loss before cumulative effect of accounting change and extraordinary item $ (1.30) $ (1.94) $ (0.41)
Cumulative effect of accounting change -- -- 0.04
--------- --------- ---------
Loss before extraordinary item (1.30) (1.94) (0.37)
Extraordinary item -- (0.11) --
--------- --------- ---------
Net basic and diluted loss $ (1.30) $ (2.05) $ (0.37)
========= ========= =========
Weighted average common shares outstanding (in millions) 92.2 101.7 108.2
The accompanying notes are an integral part of these statements
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KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As at December 31
(Dollars in millions except per share amounts)
1999 1998
------- -------
ASSETS
Current
Cash and cash equivalents $ 25.1 $ 18.5
Restricted cash -- 0.5
Inventories (Note 5) 49.2 52.5
Receivables 21.8 33.7
Other 2.2 2.0
------- -------
Current assets 98.3 107.2
Property, plant and equipment, net (Note 6) 351.0 480.0
Other 14.6 14.8
------- -------
$ 463.9 $ 602.0
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current
Demand loan (Note 3) $ 73.6 $ 90.3
Current maturities of long-term debt (Note 7) 25.3 23.7
Accounts payable, trade 22.7 18.4
Accrued and other current liabilities 15.2 18.8
Reclamation reserve, current portion 6.2 2.6
------- -------
Current liabilities 143.0 153.8
Advance from parent (Note 3) 213.2 196.6
Long-term debt (Note 7) 110.6 123.0
Reclamation reserve, non-current portion 24.6 28.8
Other 20.0 27.7
------- -------
511.4 529.9
------- -------
Commitments and contingencies (Notes 8 and 13)
Shareholders' equity (capital deficiency):
Preferred stock, par value $1.00 per share, authorized 10,000,000
shares, 2,000,000 shares designated as $2.25 Series A Convertible
Preferred Stock, no shares issued and outstanding: and 1,840,000
shares designated as $3.75 Series B Convertible Preferred Stock,
issued and outstanding 1,840,000 shares (Note 10) 1.8 1.8
Common stock, par value $.01 per share, authorized 200,000,000
shares, issued and outstanding 92,213,928 shares in 1999 and
1998 (Note 11) 0.9 0.9
Paid-in capital 409.4 409.4
Accumulated deficit (459.6) (340.0)
------- -------
Total shareholders' equity (capital deficiency) (47.5) 72.1
------- -------
$ 463.9 $ 602.0
======= =======
The accompanying notes are an integral part of these statements
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29
KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31
(Dollars in millions except share amounts)
1999 1998 1997
------- ------- -------
Cash flows from operating activities
Net loss $(112.7) $(202.3) $ (33.4)
Adjustments to reconcile net loss to cash flow provided from operations:
Depreciation and depletion 77.8 91.1 88.4
Writedown of mineral properties 99.5 193.4 --
Increase (decrease) in reclamation reserve (0.7) 9.5 6.1
Cumulative effect of accounting change -- -- (4.5)
Amortization of financing cost* 0.6 2.1 5.8
Extraordinary loss -- 11.5 --
Increase in deferred taxes -- -- 0.4
Deferred revenue realized (8.2) (27.4) --
Deferred hedging costs -- -- 9.8
Other, net 2.1 (1.6) 6.4
------- ------- -------
Cash flow provided from operations 58.4 76.3 79.0
Deferred revenue - hedging gains -- 45.9 --
Decrease (increase) in working capital, net of businesses acquired
Receivables 11.3 (3.7) (8.5)
Inventories 2.2 5.7 5.9
Other assets (0.2) 8.6 5.7
Accounts payable, trade (3.6) (6.9) (24.4)
Accrued and other current liabilities 4.0 (16.1) 10.3
------- ------- -------
Cash flow provided from operating activities 72.1 109.8 68.0
------- ------- -------
Investing:
Capital expenditures (16.9) (15.4) (30.8)
Merger costs -- (14.8) --
Business acquisitions (30.4) (3.8) --
Capitalized interest -- -- (4.2)
Decrease (increase) in restricted cash 0.5 3.0 (3.5)
------- ------- -------
Cash flow used in investing activities (46.8) (31.0) (38.5)
------- ------- -------
Financing:
Proceeds from financings 23.6 272.8 160.5
Repayments of financings (35.9) (342.9) (181.5)
Cash acquired in connection with purchase of Kubaka investment 0.5 0.7 7.0
Deferred financing costs -- -- (3.7)
Preferred dividends paid (6.9) (6.9) (6.9)
------- ------- -------
Cash flow used in financing activities (18.7) (76.3) (24.6)
------- ------- -------
Net increase in cash and cash equivalents 6.6 2.5 4.9
Cash and cash equivalents at January 1 18.5 16.0 11.1
------- ------- -------
Cash and cash equivalents at December 31 $ 25.1 $ 18.5 $ 16.0
======= ======= =======
Non-cash transactions:
Issuance of common stock for purchase of Kubaka, net of cash acquired:
Working capital other than cash $ -- $ -- $ (10.3)
Mineral properties, plant and equipment -- -- (114.2)
Debt -- -- 79.5
------- ------- -------
$ -- $ -- $ (45.0)
======= ======= =======
The accompanying notes are an integral part of these statements
29
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* During the fourth quarter of 1996, the Company issued $15.2 million in stock
to Cyprus Amax in payment of $5.2 million in interest and a $10 million
guaranty and financing fee. The guaranty and financing fee was recorded as
unearned equity and $3.9 million had been amortized through May 31, 1998. In
June 1998, upon repayment of debt, the balance of $6.1 million was expensed
as part of the $11.5 extraordinary loss on early extinguishment of debt.
Cash paid for interest (including interest capitalized) was $9.9 million,
$28.9 million and $35.0 million in 1999, 1998 and 1997, respectively. Cash
paid for income taxes was $2.9 million in 1999. There were no income taxes
paid during 1998 or 1997.
KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
For the years ended December 31
(In millions)
PREFERRED STOCK COMMON STOCK
---------------- ------------------ PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------ ------ ------- ------- ------
Balance at December 31, 1996 1.8 $ 1.8 99.3 $ 1.0 $355.7 $(90.5) $ (8.6)
Net loss -- -- -- -- -- (33.4) --
Issuance of common shares
Employee and Director plans -- -- 0.2 -- 1.0 -- --
Kubaka acquisition -- -- 15.4 0.1 51.9 -- --
Amortization of financing costs -- -- -- -- -- -- 1.7
Preferred stock dividends -- -- -- -- -- (6.9) --
------ ------ ------ ------ ------- ------- ------
Balance at December 31, 1997 1.8 1.8 114.9 1.1 408.6 (130.8) (6.9)
Net loss -- -- -- -- -- (202.3) --
Issuance of common shares
Employee and Director plans -- -- 0.3 -- 0.8 -- --
Kinross merger -- -- (23.0) (0.2) -- -- --
Amortization of financing costs -- -- -- -- -- -- 0.8
Early extinguishment of debt -- -- -- -- -- -- 6.1
Preferred stock dividends -- -- -- -- -- (6.9) --
------ ------ ------ ------ ------- ------- ------
Balance at December 31, 1998 1.8 1.8 92.2 0.9 409.4 (340.0) --
Net loss -- -- -- -- -- (112.7) --
Preferred stock dividends -- -- -- -- -- (6.9) --
------ ------ ------ ------ ------- ------- ------
Balance at December 31, 1999 1.8 $ 1.8 92.2 $ 0.9 $409.4 $(459.6) $ --
====== ====== ====== ====== ======= ======= ======
The accompanying notes are an integral part of these statements
30
31
KINAM GOLD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions unless otherwise indicated and
except per share amounts and amounts per ounce)
1. NATURE OF OPERATIONS
Kinam Gold Inc. (the "Company") and its subsidiaries are engaged in the mining
and processing of gold and silver ore and the exploration for, and acquisition
of, gold-bearing properties, principally in the Americas, Russia, and Chile. The
Company's primary products are gold and silver produced in the form of dore and
then shipped to refiners for final processing. The Company is currently 100%
owned by Kinross Gold U.S.A., Inc., a wholly owned subsidiary of Kinross Gold
Company ("Kinross").
The Company produces gold and silver using both the traditional milling process
and heap leaching. All of the Company's operating properties are open pit mines.
The Company's operating properties consist of a 100% interest in the Fort Knox
mine near Fairbanks, Alaska; a 54.7% interest in Omolon Gold Company, which owns
and operates the Kubaka mine in the Russian Federation; and a 50% interest in
the Refugio mine in Chile. The Company owns the Hayden Hill mine in Lassen
County, California, and a 90% interest in the Guanaco mine in Chile. Mining was
completed at Hayden Hill and Guanaco during 1997 and residual leaching will
continue during 2000 at both mines. In addition, the Company owns the Haile
property in Lancaster County, South Carolina, a 50% interest in the Sleeper mine
in Humboldt County, Nevada, and the Wind Mountain mine in Washoe County, Nevada,
all of which are in reclamation. During 1999, the Company acquired a 65%
interest in the True North Property located near the Fort Knox mine.
In the milling process, ore is crushed and the gold and silver are concentrated
and then smelted into dore, which is shipped to refiners for further processing.
In the heap leach process, crushed and/or run-of-mine ore is loaded onto leach
pads. The ore is irrigated with a weak cyanide solution that penetrates the ore,
dissolving the gold and silver. The pregnant solution is collected and pumped
through activated carbon or a Merrill Crowe zinc precipitation plant to remove
the metals from the solution. After the gold and silver is stripped from the
carbon or processed from the zinc precipitate, it is smelted into dore, which is
shipped to refiners for further processing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
the related entities that it controls. Investments in joint ventures are
accounted for using proportionate consolidation, consistent with accepted mining
industry practice. All material intercompany balances and transactions have been
eliminated.
EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", was issued in February 1997. SFAS No. 128 replaces the presentation of
primary earnings per share with a presentation of basic earnings per share. It
requires a reconciliation of the numerators and denominators of the basic and
diluted earnings per share computation. Basic earnings per share is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. For the years ended December 31,
1999, 1998 and 1997, basic and diluted loss per share were the same as primary
earnings per share. Outstanding Company stock options were not considered in the
diluted earnings per share calculation as these were antidilutive.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments with an
original maturity of three months or less. The Company invests cash in time
deposits maintained in high credit quality financial institutions.
INVENTORIES
Gold inventory is valued at the lower of aggregate cost, computed using a
three-month rolling average method, or market. See Note 5 for discussion of the
change in inventory accounting method during 1997. Materials and supplies are
valued at average cost less reserves for obsolescence.
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MINERAL PROPERTIES, PLANT AND EQUIPMENT
Mineral properties, plant and equipment, including development expenditures and
capitalized interest, are carried at cost. Expenditures for major improvements
are capitalized. Gains and losses on retirements are included in earnings.
Depreciation and depletion are computed using the units-of-production method
based on the estimated ounces of gold to be recovered and estimated salvage
values. Mobile equipment and assets that have useful lives shorter than the mine
life are depreciated on a straight-line basis over estimated useful lives of one
to five years.
The Company follows Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." In the event that facts and circumstances indicate that the
carrying amount of an asset may not be recoverable and an estimate of future
undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss will be recognized. The impairment is measured based on an
estimate of future discounted cash flows. See Note 6 for discussion of the
writedowns of the Fort Knox and Refugio mines recorded in the fourth quarters of
1999 and 1998 and the Haile property in 1999.
EXPLORATION
Exploration expenditures are charged against earnings in the period incurred.
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is the functional currency of all of the Company's foreign
subsidiaries. The financial statements of foreign subsidiaries are remeasured in
U.S. dollars based on a combination of both current and historical exchange
rates; gains and losses due to this remeasurement are reflected in the
consolidated statements of operations. For the year ended December 31, 1999,
translation losses were $0.2 million compared with $0.3 million for the year
ended December 31, 1998 and $1.0 million for the year ended December 31, 1997.
FINANCIAL INSTRUMENTS
Forward sale and purchase contracts, generally on a spot deferred basis, put and
call option contracts and compound options are entered into to manage the effect
of price changes on the Company's precious metals that are produced and sold.
Premiums paid for purchased options and premiums earned on sold options are
deferred and recognized in income over the term of the related option. The
results of gold hedging activities are included in revenues at the time the
hedged production is sold. Silver hedging results are reflected as a by-product
credit. Gains and losses on derivative contracts that do not qualify as hedges
are recognized currently. Changes in the market value of written call options
are recognized immediately in income as market values change.
Interest rate swap options are entered into as a hedge against interest rate
exposure on the Company's floating rate financing facilities in order to fix the
Company's interest costs. The differences to be paid or received on swap options
are included in interest expense as incurred.
POSTRETIREMENT BENEFITS
Postretirement benefits other than pensions are calculated in accordance with
the provisions set forth in SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," which requires the expected cost
of postretirement benefits other than pensions to be accrued during the years
the employee renders service.
POSTEMPLOYMENT BENEFITS
Postemployment benefits are calculated in accordance with the provisions set
forth in SFAS No. 112, "Employers' Accounting for Postemployment Benefits." SFAS
No. 112 requires the Company to expense postemployment benefits as they are
earned by the employee for services rendered, rather than as they are paid.
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STOCK-BASED COMPENSATION
The Company adopted SFAS No. 123 "Accounting for Stock-Based Compensation," in
1996 and has elected to continue to measure compensation cost using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Pursuant to the Kinross merger, all
plans to purchase common stock of Kinam were cancelled and all stock options
were adjusted to reflect the exchange ratio of 0.8004. Substitute Kinross
options were issued. As at December 31, 1999 and 1998, there were no plans that
require the issuance of Kinam Gold stock.
RECLAMATION
Reclamation, site restoration and closure costs for each producing mine are
estimated based primarily on environmental and regulatory requirements and are
accrued over the expected life of each mine using the units-of-production
method. Ongoing environmental and reclamation expenditures are expensed as
incurred.
INCOME TAXES
Income taxes are calculated in accordance with the provisions set forth in SFAS
No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income
taxes are determined using an asset and liability approach. This method gives
consideration to the future tax consequences associated with differences between
the financial accounting and tax basis of assets and liabilities and gives
immediate effect to changes in income tax laws. The income statement effect is
derived from current taxes payable and changes in deferred income taxes on the
balance sheet.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Management's estimates are made in accordance
with mining industry practice. Significant areas requiring the use of management
estimates relate to the determination of mineral reserves, reclamation and
environmental obligations, impairment of assets, postretirement and other
employee benefits, useful lives for depreciation, depletion and amortization,
and valuation allowances for deferred tax assets. Actual results could differ
from those estimates.
PENDING ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This standard
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. Management has not yet evaluated the effects of this statement on
its financial position or results of operations. The Company will adopt SFAS No.
133 for the fiscal year commencing January 1, 2001.
STATEMENTS OF COMPREHENSIVE INCOME
There are no differences between comprehensive loss and net loss as reported in
the Consolidated Statements of Operations for the years ended December 31, 1999,
1998 and 1997.
3. TRANSACTIONS WITH AFFILIATES
On June 1, 1998, the Company completed a merger agreement with Kinross providing
for a combination of their businesses. In the merger, each outstanding share of
the Company's common stock was converted into 0.8004 of a share of Kinross
common stock. Kinross Merger Corporation, a wholly-owned subsidiary of Kinross
was merged with and into the Company which became a wholly-owned subsidiary of
Kinross. Immediately following the effective time of the merger, the Company, as
the surviving entity of the combination with Kinross Merger, issued to Kinross
92.2 million shares of the Company's common stock, representing all of the
issued and outstanding common shares. Kinross subsequently transferred ownership
of such shares to Kinross Gold U.S.A., Inc., a wholly-owned subsidiary of
Kinross, which is currently the sole common shareholder of the Company. Kinross
is currently the sole
33
34
common shareholder of the Company. Prior to the merger, the Company was
approximately 59% owned by Cyprus Amax Minerals Company (Cyprus Amax).
FINANCING ARRANGEMENTS
Pursuant to the merger in 1998, Kinross advanced $255.8 million to the Company
for repayment of outstanding debt. Additionally, $16.6 million was advanced in
1999 to purchase the assets related to the True North property in Alaska. $213.2
was still outstanding at December 31, 1999. The advances are non-interest
bearing and have no fixed terms of repayment. Kinross has agreed not to seek
repayment of these advances during 2000.
During December 1997, the Company completed a $40.0 million credit facility
which was used to refinance the existing Refugio gold loan and for working
capital and debt service requirements. Cyprus Amax had guaranteed the loan and
the Company paid Cyprus Amax a 0.75% interest differential on the loan as a
guarantee fee. In connection with the Kinross Merger the $40.0 million credit
facility was repaid on June 1, 1998.
In May 1997, the Company completed a $71 million tax-exempt industrial revenue
financing for the solid waste disposal facility at the Fort Knox Mine. Cyprus
Amax has guaranteed the loan and the Company pays a 1.75% interest differential
to Cyprus Amax as a guarantee fee. The Company also agreed to reimburse Cyprus
Amax for any payments made under the guarantee. Kinross has agreed to use all
reasonable efforts to cause itself to be substituted for Cyprus Amax in the
guarantee.
Pursuant to a financing arrangement with Cyprus Amax, approved by the Company's
shareholders in September 1996, Cyprus Amax had guaranteed the Company's $250.0
million Fort Knox loan until economic completion of the Company's Fort Knox
mine. In connection with the Kinross Merger, the balance of the $250.0 million
loan was repaid on June 1, 1998. Upon repayment, the Company expensed $11.5
million in unamortized financing costs.
As of December 31, 1998, the Company had borrowed $90.3 million under a demand
loan with Kinross. During 1999, the Company repaid $16.7 million leaving a
balance of $73.6 million outstanding at December 31, 1999. Kinross does not
charge the Company interest on the demand loan.
OTHER AGREEMENTS
A service agreement governs the provision of and payment for general
administrative services between Cyprus Amax and the Company. For the years ended
December 31, 1999, 1998 and 1997, insurance, management and other services were
supplied to the Company on a full cost reimbursement basis. The Company was
charged $0.4 million, $2.3 million and $4.1 million for the years ended December
31, 1999, 1998 and 1997, respectively, for reimbursable costs. As of December
31, 1999 and 1998, the Company had outstanding amounts due to Cyprus Amax of
$0.1 million and $0.2 million, respectively, relating to such services.
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4. INCOME TAXES
Loss before income taxes consists of the following:
1999 1998 1997
-------- -------- --------
Domestic $ (98.1) $(153.1) $ (13.7)
Foreign (11.7) (48.7) (19.3)
-------- -------- --------
$(109.8) $(201.8) $ (33.0)
======== ======== ========
The income tax expense consists of the following:
Current:
Federal $ -- $0.2 $ --
State -- -- --
Foreign 2.9 -- --
-------- -------- --------
2.9 0.2 --
-------- -------- --------
Deferred:
Federal -- -- --
State -- -- --
Foreign -- 0.3 0.4
-------- -------- --------
-- 0.3 0.4
-------- -------- --------
Income tax expense $2.9 $0.5 $0.4
======== ======== ========
The components of deferred tax (assets) liabilities are as follows:
Deferred tax assets
Reclamation liabilities $ (9.3) $ (6.1) $ (6.1)
Net operating loss carryforwards (106.0) (68.1) (62.4)
Minimum tax credit carryforwards (5.1) (5.1) (5.1)
Other -- (7.9) (8.0)
-------- -------- --------
Total deferred tax assets (120.4) (87.2) (81.6)
Valuation allowance 82.3 62.6 28.8
-------- -------- --------
Net deferred tax assets (38.1) (24.6) (52.8)
Deferred tax liabilities
Other 0.1 5.1 --
Properties 38.0 19.5 53.2
-------- -------- --------
$ -- $ -- $ 0.4
======== ======== ========
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The following is a reconciliation between the amount determined by applying the
federal statutory rate of 34% to the loss before taxes and the income tax
expense:
1999 1998 1997
-------- -------- --------
Income taxes at statutory rate $(38.4) $(68.8) $(11.2)
Increases (decreases) resulting from:
Losses with no expected tax benefit 38.4 68.8 13.5
State income taxes, net of federal benefit -- -- --
Percentage depletion -- -- (2.3)
------- ------- -------
Income tax expense -- -- --
Foreign losses with no expected tax benefit -- -- 0.4
Other 2.9 0.5 --
------- ------- -------
Income tax expense $ 2.9 $ 0.5 $ 0.4
======= ======= =======
The valuation allowance increased $19.7 million in 1999 due to uncertainties of
realizing loss carryforwards in the future.
At December 31, 1999, the Company had federal tax net operating loss
carryforwards of $193.3 million and alternative minimum tax net operating loss
carryforwards of $118.5 million expiring in the years 2004 through 2019 and
minimum tax credit carryforwards of $5.0 million, which do not expire. The use
of the federal and alternative minimum tax loss carryforwards will be limited in
any given year as a result of a previous changes in ownership. At December 31,
1999 the Company also had Chilean tax net operating loss carryforwards of $143
million, which do not expire.
5. INVENTORIES
Inventories at December 31, 1999 and 1998, consisted of the following:
1999 1998
-------- --------
Gold:
Finished goods $ 14.4 $ 18.9
Work-in-process 2.7 2.8
Materials and supplies 32.1 30.8
-------- --------
$ 49.2 $ 52.5
======== ========
As of January 1, 1997, the Company changed its accounting policy to include
depreciation and depletion in inventory, which has the effect of recording
depreciation and depletion expense in the statement of operations as gold is
sold rather than as it is produced. The cumulative effect of this accounting
change is a $4.5 million reduction of the net loss as of January 1, 1997. The
accounting change was made in order to better match current costs with revenues
and to conform with prevailing gold industry practice.
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6. MINERAL PROPERTIES, PLANT AND EQUIPMENT AND WRITEDOWN
The components of mineral properties, plant and equipment at December 31, 1999
and 1998, were as follows:
1999 1998
-------- --------
Plant and equipment $ 719.5 $ 700.9
Mineral properties 452.1 424.6
Development properties and construction-in-progress 18.8 25.5
-------- --------
1,190.4 1,151.0
Less accumulated depreciation, depletion
and writedowns (839.4) (671.0)
-------- --------
$ 351.0 $ 480.0
======== ========
ACQUISITIONS
1999
On March 1, 1999, the Company acquired 100% of Kershaw Gold Company, Inc.
("Kershaw") for $2.0 million, thereby increasing its ownership interest in the
Haile property from 62.5% to 100%.
On June 28, 1999, the Company acquired a 65% interest in the True North property
in Alaska for cash of $28.1 million.
On December 31, 1999, the Company acquired a further 1.7% of Omolon Gold Mining
Company for cash of $0.3 million.
1998
In December 1998, the Company acquired an additional 3% of Omolon in
consideration for settling obligations of the Russian partner for $3.8 million.
Repayment of the $3.8 million owing to the Company by the Russian partner will
be made from the Russian partner's share of dividends from Omolon. The Russian
partner has the right to reacquire the 3% interest in Omolon for approximately
$7.5 million.
WRITEDOWN OF MINERAL PROPERTIES
Annually, the Company reviews the carrying values of its portfolio of mining
properties and advanced stage exploration properties. Through this process the
Company determined that the following assets had suffered a permanent impairment
in value and therefore have been written down to their estimated recoverable
amounts.
1999 1998 1997
------- ------- -------
Fort Knox Mine $ 72.9 $ 140.3 $ --
Refugio Mine 10.1 53.1 --
Haile Property 16.5 -- --
------- ------- -------
$ 99.5 $ 193.4 $ --
======= ======= =======
The impairment analysis is performed on an undiscounted basis in order to
determine whether an impairment exists. Because the undiscounted cash flow was
less than the carrying value of the related mines, the Company used a discounted
cash flow analysis to determine the amount of the writedown.
The estimated future net cash flows from each property are calculated using
estimated recoverable ounces of gold (considering current proven and probable
reserves and mineralization expected to be classified as reserves); estimated
future gold price realization (considering historical and current prices, price
trends and related factors); and operating, capital and reclamation costs.
Estimated future cash flows are subject to risks and uncertainties. It is
possible that changes could occur which may affect the recoverability of mineral
properties, plant and equipment.
In the fourth quarter of 1999, following a comprehensive evaluation of its
mining properties based on an assumed gold price of $300, the Company determined
that the net recoverable amounts of the Fort Knox and Refugio mines and the
Haile property were less than
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38
the net book value of the related assets. As a result of this review the Company
recorded a $72.9 million pre-tax writedown of the Fort Knox mine, a $10.1
million pre-tax writedown of the Refugio mine and a $16.5 million pre-tax
writedown of the Haile property.
In the fourth quarter of 1998, following a comprehensive evaluation of its
mining properties based on an assumed gold price of $325, the Company determined
that the net recoverable amounts of the Fort Knox and Refugio mines were less
than the net book value of the related assets. As a result of this review the
Company recorded a $140.3 million writedown of the Fort Knox mine and a $53.1
million writedown of the Refugio mine.
7. LONG-TERM DEBT
AT DECEMBER 31
1999 1998
------- -------
Kubaka subordinated working capital debt, 12% for 1999, due 2000 $ 1.8 $ 0.0
Kubaka project financing, 10.5% for 1999, due 2000 - 2001 36.9 49.0
Kubaka subordinated debt, 12.0% for 1999, due 2000 - 2003 8.0 8.9
Industrial Revenue Bond, 6.2% for 1999, due 2009 71.0 71.0
Refugio capital leases, 8.5% for 1999, due 2000 - 2005 3.6 --
Fort Knox sale-leaseback, 8.5% for 1999, due 2000 - 2004 14.6 17.8
------- -------
135.9 146.7
Less current portion 25.3 23.7
------- -------
$ 110.6 $ 123.0
======= =======
Scheduled debt maturities as of December 31, 1999, (in millions) were $25.3,
$30.4, $7.4, $1.3, $0.3 and $0.2 for the years 2000 through 2005 and $71.0
million in 2009.
A bank licensed to do business in Russia has provided subordinated working
capital debt for the Kubaka mine operations to a maximum of $10.0 million. As at
December 31, 1999, $3.3 million was outstanding. The Company's 54.7%
proportionate share of this obligation is $1.8 million. Interest on the
subordinated working capital debt is variable based upon LIBOR and as at
December 31, 1999 is approximately 12% per annum. The subordinated working
capital debt is supported by a letter of credit from Kinross.
The European Bank of Reconstruction and Development ("EBRD") and the US Overseas
Private Investment Corporation ("OPIC") provided project-financing debt on the
Kubaka mine, of which 92.5 million remained outstanding as at December 31, 1998.
During 1999, Kubaka repaid $25 million of these obligations, leaving $67.5
million outstanding as at December 31, 1999. The Company's 54.7% proportionate
share of these obligations is $36.9 million. Interest on the project-financing
debt is variable based upon LIBOR and as at December 31, 1999 is approximately
10.5% per annum. The project financing debt has become recourse solely to Kubaka
after completion tests were passed in late 1999.
A bank licensed to do business in Russia has provided subordinated debt to
finance the Kubaka mine. As at December 31, 1999, $14.6 million remains
outstanding on this debt. The Company's 54.7% proportionate share of these
obligations is $8.0 million. Interest on the project-financing debt is variable
based upon LIBOR and as at December 31, 1999 is approximately 12% per annum. The
subordinated debt is repayable in semi-annual payments through June 15, 2003.
The subordinated debt is supported by a letter of credit from Kinross.
During the second quarter of 1997, the Company completed a $71 million
tax-exempt industrial revenue bond financing for the solid waste disposal
facility at the Fort Knox mine. The 12-year variable rate bonds were issued by
the Alaska Industrial Development and Export Authority and are backed by a
letter of credit guaranteed by Cyprus Amax. The Company's interest rate on the
bonds is currently approximately 4.5% and an additional 1.75% interest
differential is paid to Cyprus Amax as a guaranty fee. The Company and Kinross
have agreed to reimburse Cyprus Amax for any payments made or costs incurred
under the guaranty. Kinross is currently finalizing a credit facility with a
banking syndicate, which will provide the ability to issue a letter of credit to
cover the guarantee and remove Cyprus Amax as Guarantor.
In August 1996, the Company completed a sale-leaseback of Fort Knox mobile
mining equipment for proceeds of $24.3 million, which were used primarily to
fund construction of the Fort Knox mine. Lease payments are due quarterly with
maturity in 2004. Interest rates on the equipment leases range from 7.7% to
8.7%.
During 1999, upon commencement of self-mining, Refugio entered into capital
leases of $10.4 million for mining equipment. Lease payments in 1999 totalled
$3.2 million, leaving a balance outstanding of $7.2 million at December 31,
1999. The
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39
Company's 50% proportionate share of these obligations is $3.6 million. Interest
rates on the equipment leases range from 8% to 9.5% with variable maturities to
2005.
During October 1995, the Company completed a term loan agreement for $250
million to be used for construction of the Fort Knox mine and repayment of
certain existing debt obligations. At December 31, 1997, the Company owed $23.1
million in gold at $381 per ounce and $199.1 million in currency. Subsequent to
the Kinross merger the loan was repaid on June 1, 1998. As a result of a decline
in gold prices since the gold was borrowed in 1995, the Company realized a $3.6
million gain which is being amortized over the original life of the loan.
In December 1997, the Company refinanced a Refugio gold loan with approximately
$28 million borrowed under a new $40 million credit facility resulting in a gain
of approximately $6 million, which is being amortized, net of approximately $2
million in deferred financing costs, over the four remaining years of the
original loan life. Pursuant to the merger with Kinross on June 1, 1998 the $40
million credit facility was repaid.
8. DERIVATIVE CONTRACTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company manages its exposure to fluctuations in commodity prices, foreign
exchange rates and interest rates by entering into derivative financial
instrument contracts in accordance with the formal risk management policy
approved by the Company's Board of Directors. The Company does not hold or issue
derivative contracts for speculative or trading purposes.
(a) Commodity risk management
The profitability of the Company is directly related to the market price of gold
and silver. The Company uses spot deferred contracts, fixed forward contracts
and option contracts to hedge against the unfavourable changes in commodity
prices for a portion of its forecasted gold and silver production. Spot deferred
contracts are forward sale contracts with flexible delivery dates that enable
management to choose to deliver into the contract on a specific date or defer
delivery until a future date. If delivery is postponed, a new contract price is
established based on the old contract price plus a premium (referred to as
contango). Use of these instruments has resulted in a realized price per ounce
of gold of $289 in 1999 as compared with $344 in 1998 and $360 in 1997. These
realized prices compare with average spot gold prices of $279 per ounce in 1999,
$294 per ounce in 1998 and $331 per ounce in 1997.
On June 1, 1998, the commodity derivative contract portfolio held by Kinam had a
fair value of $45 million. Subsequent to the Kinross merger the Company closed
out the contracts and realized approximately $45.9 million in cash. Net of costs
previously incurred, the $41.7 million gain is being included in revenue over
the period the underlying hedge contracts were originally scheduled to expire.
As at December 31, 1999, $10.2 million (December 31, 1998 - $16.1 million) of
this gain is included in other long-term liabilities. There were no outstanding
hedge contracts as at December 31, 1999 or December 31, 1998.
In December, 1997, the Company refinanced the Refugio gold loan realizing a gain
of $6.0 million. This gain, net of approximately $2.0 million in deferred
financing costs is being taken into income over the schedule set out in the loan
agreement. The deferred portion of this gain at December 31, 1999 amounted to
$2.5 million and will be recognized in income over the next two years.
On June 1, 1998, the Company repaid the gold loan portion of the Fort Knox
project financing realizing a gain of $3.6 million. The gain is being taken into
income over the original delivery schedule set out in the loan payments. The
deferred portion of this gain at December 31, 1999 amounted to $2.0 million and
will be recognized in income over the next two years.
(b) Interest rate risk management
The Company manages the risk associated with the floating rate debt portfolio by
entering into pay fixed, receive floating, interest rate swaps. The total amount
of interest rate swaps outstanding as at December 31, 1998 was $35 million
(December 31, 1997 - $205 million) at an average effective fixed rate of 5.92%.
The maturity dates for these swaps ranged from March 1999 to June 1999.
There were no outstanding interest rate swaps outstanding at December 31, 1999.
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(c) Fair values of financial instruments
Carrying values for primary financial instruments, including cash and cash
equivalents, bullion settlements and other accounts receivable, marketable
securities, demand loan, accounts payable and accrued liabilities, approximate
fair values due to their short-term maturities. The carrying value for long-term
debt approximates fair value primarily due to the floating rate nature of the
debt instruments.
The fair value of the advance from Kinross cannot be readily determined, as
there is no market data available for these instruments, due to the unique
nature of these related party amounts.
The fair value of the outstanding preferred shares at December 31, 1999 was
$48.5 million.
(d) Credit risk
The Company is exposed to credit losses in the event of non-performance by
counterparties to financial instruments, but does not expect any counterparties
to fail to meet their obligations.
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9. EMPLOYEE BENEFITS
PENSION PLAN
Prior to the Kinross Merger, all employees in the United States were covered by
a non-contributory defined pension plan. The plan was frozen on June 1, 1998 and
all employees were transferred into the Kinross plan. Benefits are based
generally on years of service and compensation levels prior to retirement. The
Company makes annual contributions to the plan in accordance with the
requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
Plan assets are invested in a balanced fund and small capital equity fund.
Net annual pension cost including the following components:
1999 1998 1997
------- ------- -------
Service cost $ -- $ 0.2 $ 0.5
Interest cost 0.3 0.4 0.3
Expected return on assets (0.3) (0.3) (0.2)
Curtailment credit -- (0.5) --
Net amortization of prior service cost and losses -- 0.1 --
------- ------- -------
Net periodic expense $ -- $ (0.1) $ 0.6
======= ======= =======
The following table summarizes the change in benefit obligations:
1999 1998
------- -------
Benefit obligation, beginning of year $ 5.3 $ 4.3
Service cost -- 0.3
Interest cost 0.3 0.4
Actuarial (gain) loss (1.3) 1.2
Curtailments -- (0.5)
Benefits paid (0.1) (0.4)
------- -------
Benefit obligation, end of year $ 4.2 $ 5.3
======= =======
The following table summarizes the funded status of the plan and related amounts
recognized in the Company's financial statements at December 31:
1999 1998
------- -------
Actuarial present value of accumulated benefit obligation, including
vested benefits of $2.9 million in 1999 and $3.0 million in 1998 $ 5.3 $ 4.6
======= =======
Projected benefit obligation $ (4.2) $ (5.3)
Plan assets at fair value 3.3 2.9
------- -------
Plan assets less than projected benefit obligation (0.9) (2.4)
Estimated additional liability 0.7 (0.3)
Unrecognized net loss (0.7) 0.3
------- -------
Accrued pension cost $ (0.9) $ (2.4)
======= =======
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The following table summarizes the change in fair value of plan assets:
1999 1998
------- -------
Fair value of plan assets, beginning of year $ 2.9 $ 3.0
Actual return -- (0.2)
Employer contributions 0.5 0.5
Benefits paid (0.1) (0.4)
------- -------
$ 3.3 $ 2.9
======= =======
The following assumptions were used in calculating the funded status of the plan
at December 31 and the pension cost for the subsequent year:
1999 1998
------- -------
Expected long-term rate of return on assets 9.0% 9.0%
Discount rate 8.0% 7.0%
In addition, pursuant to the Kinross Merger, all employees of the Company were
transferred into the Kinross defined contribution pension plan. In 1999, the
Company contributed $0.8 million into the Kinross plan on behalf of the Kinam
employees. From June 1 through December 31, 1998, the Company contributed $0.3
million into the plan on behalf of the Kinam employees.
POST RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company also provides certain health care and life insurance benefits for
retired employees in the United States. The postretirement health care plans are
contributory in certain cases based upon years of service, age and retirement
date. The Company currently does not fund postretirement benefits and may modify
plan provisions at its discretion. Net periodic post retirement costs for the
years ended December 31, 1999, 1998 and 1997, were insignificant.
The following table sets forth the status of the plan and the related amounts
recognized in the Company's financial statements at December 31:
1999 1998
------- -------
Accumulated postretirement benefit obligation:
Retirees $ 1.5 $ 1.7
Active plan participants -- --
------- -------
Total accumulated postretirement benefit obligation 1.5 1.7
Plan assets at fair value -- --
------- -------
Accumulated postretirement benefit obligation in
excess of plan assets (1.5) (1.7)
Unrecognized prior service cost -- --
Unrecognized net (gain) loss (0.1) 0.1
------- -------
Accrued postretirement benefit cost $ (1.6) $ (1.6)
======= =======
The accumulated postretirement benefit obligation was determined using a
weighted average annual discount rate of 8% in 1999 and 7% in 1998. The assumed
health care cost trend rate for 2000 is 8%, declining gradually to 4.25% for
2007 and thereafter when Company costs associated with the plan are capped. A 1%
increase in the health care cost trend rate used would have resulted in an
insignificant increase in the 1999 post retirement benefit cost and the
accumulated postretirement benefit obligation at December 31, 1999.
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POSTEMPLOYMENT BENEFITS
The Company also has a number of postemployment plans covering severance,
disability income, and continuation of health and life insurance for disabled
employees. At December 31, 1999 and 1998, the Company's liability for
postemployment benefits totaled $2.3 million and $2.1 million, respectively, and
is included in other liabilities.
10. PREFERRED STOCK
In August 1994, the Company sold publicly 1.8 million shares of $3.75 Series B
Convertible Preferred Stock (Preferred Stock) for net proceeds of $88.3 million.
Subsequent to the merger with Kinross, the Kinam preferred shares became
convertible into Kinross common shares at a conversion price of $10.3073 per
share (equivalent to a conversion rate of 4.8512 shares of Common Stock for each
share of Preferred Stock), subject to adjustment in certain events.
The Preferred Stock is redeemable at the option of the Company at any time on or
after August 15, 1997, in whole or in part, for cash, initially at a redemption
price of $52.625 per share declining ratably annually to $50.00 per share on or
after August 15, 2004, plus accrued and unpaid dividends.
Annual cumulative dividends of $3.75 per share are payable quarterly on each
November 15, February 15, May 15 and August 15, as and if declared by the Board
of Directors.
11. COMMON STOCK
On June 1, 1998, the Company completed the merger with Kinross whereby Kinross
acquired 100% of the issued and outstanding common shares of the Company. As a
result of the merger all plans to purchase common stock of Kinam were cancelled
and all stock options were adjusted to reflect the exchange ratio of .8004.
Substitute Kinross options were issued. As at December 31, 1999 and 1998, there
are no plans that require the issuance of the Company's stock.
12. SEGMENTED INFORMATION
The Company operates five gold mines: Fort Knox, located in Alaska; Kubaka,
located in Russia; Refugio, located in Chile; Hayden Hill, located in
California; and Guanaco, located in Chile. In addition to its producing gold
mines, the Company has several other gold mining assets in various stages of
reclamation, closure, care and maintenance, and development. The accounting
policies used by these segments are the same as those described in the Summary
of Significant Accounting Policies (see Note 2).
As the products and services in each of the reportable segments, except for the
corporate activities, are essentially the same, the reportable segments have
been determined at the level where decisions are made on the allocation of
resources and capital, and where complete internal financial statements are
available.
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REPORTABLE OPERATING SEGMENTS
(IN MILLIONS)
HAYDEN CORPORATE
FORT KNOX KUBAKA REFUGIO HILL GUANACO AND OTHER(b) TOTAL
--------- ------ ------- ---- ------- ------------ ------
1999
Mining revenue $ 97.0 $ 73.5 $ 26.6 $ 4.6 $ 6.5 $ 5.9 $ 214.1
Interest revenue 0.3 0.8 0.1 -- 0.1 0.2 1.5
Interest expense 5.7 3.2 1.1 -- -- -- 10.0
Amortization of capital assets 38.0 33.9 5.9 -- -- -- 77.8
Writedown of mineral properties 72.9 -- 10.1 -- -- 16.5 99.5
Segment profit (loss)(a) (88.8) 1.2 (16.5) 12.1 3.6 (21.4) (109.8)
Segment assets 258.3 147.6 40.5 3.4 7.8 6.3 463.9
Capital expenditures 7.8 1.1 8.0 -- -- -- 16.9
1998
Mining revenue 117.2 72.7 25.5 17.0 10.0 25.7 268.1
Interest revenue -- 0.3 0.1 -- 0.1 1.1 1.6
Interest expense 15.7 5.0 1.7 -- 1.0 -- 23.4
Amortization of capital assets 56.2 26.6 8.3 -- -- -- 91.1
Writedown of mineral properties 140.3 -- 53.1 -- -- -- 193.4
Segment profit (loss)(a) (162.4) 4.5 (63.0) 2.1 9.8 18.7 (190.3)
Segment assets 335.5 199.4 45.1 6.9 8.9 6.2 602.0
Capital expenditures 12.3 0.7 2.4 -- -- -- 15.4
1997
Mining revenue 115.6 40.0 28.8 36.7 35.1 3.3 259.5
Interest revenue -- 0.1 -- -- 0.1 1.7 1.9
Interest expense(d) 29.3 4.5 3.7 -- 0.8 -- 38.3
Amortization of capital assets 53.5 12.2 7.1 5.6 9.9 0.1 88.4
Segment profit (loss)(a) (23.5) (1.8) (9.7) 7.9 (0.4) (10.0) (37.5)
Segment assets 528.3 174.0 111.4 11.2 7.0 38.7 870.6
Capital expenditures(c) 15.7 14.6 4.5 -- 0.2 -- 35.0
(a) Segment profit (loss) includes writedown of mineral properties.
(b) Includes corporate and other non-core mining operations.
(c) Capital expenditures include capitalized interest.
(d) Interest expense is net of capitalized interest.
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RECONCILIATION OF REPORTABLE OPERATING SEGMENT LOSS TO NET LOSS FOR THE YEAR:
1999 1998 1997
-------- -------- --------
Segment loss $ (88.4) $(209.0) $ (27.5)
Add (deduct) items not included in segment loss
Corporate and other (21.4) 18.7 (10.0)
-------- -------- --------
(109.8) (190.3) (37.5)
Income tax expense (2.9) (0.5) (0.4)
Cumulative effect of accounting change -- -- 4.5
Extraordinary item - loss on early extinguishment of debt -- (11.5) --
Dividends on convertible preferred stock (6.9) (6.9) (6.9)
-------- -------- --------
Net loss for the year $(119.6) $(209.2) $ (40.3)
======== ======== ========
Enterprise-wide disclosure:
Geographic information:
MINERAL PROPERTIES
MINING REVENUE PLANT AND EQUIPMENT
----------------------------------- ---------------------
1999 1998 1997 1999 1998
------- ------- ------- ------- -------
Russia $ 73.5 $ 72.7 $ 40.0 $ 79.3 $ 124.6
Chile 33.1 35.5 63.9 25.7 33.5
------- ------- ------- ------- -------
Total foreign 106.6 108.2 103.9 105.0 158.1
United States 107.5 159.9 155.6 246.0 321.9
------- ------- ------- ------- -------
Total $ 214.1 $ 268.1 $ 259.5 $ 351.0 $ 480.0
======= ======= ======= ======= =======
13. COMMITMENTS AND CONTINGENCIES
The Company estimates future reclamation and closure costs for properties
operated by the Company to be approximately $45.7 million based on currently
applicable federal, state and foreign laws and regulations. At December 31,
1999, $30.8 million has been accrued. Changes in applicable laws and regulations
could have a significant impact on estimates of future costs.
The Company used a gold price of $300 per ounce for 1999 and beyond to evaluate
any impairment of long lived assets. Management's estimate of long-term gold
prices may change if the gold price remains at the current low level, which
could result in an asset impairment.
The Company is subject to the consideration and risks of operating in Russia as
a result of its 54.7% ownership of the Kubaka Mine located in eastern Russia.
Beginning in 1998, the economy of the Russian Federation entered a period of
financial difficulty, the impact of which includes, but is not limited to, a
steep decline in prices of domestic debt and equity securities, a severe
devaluation of the currency, an increasing rate of inflation and increasing
rates of interest on government and corporate borrowings. The Company's
operations in Russia have been affected, and may continue to be affected for the
foreseeable future by Russia's financial difficulties.
Russian tax legislation is subject to varying interpretations and constant
changes, which may be retroactive. Further, the interpretation of tax
legislation by tax authorities as applied to the transactions and activity of
the Company may not coincide with that of management. As a result, transactions
may be challenged by tax authorities and the Company may be assessed additional
taxes, penalties and interest, which can be significant. Tax periods remain open
to review by the tax authorities for three years.
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46
The Company is also involved in legal proceedings and claims which arise in the
normal course of its business. The Company believes these claims are without
merit and is vigorously defending them. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially affect
the financial position, results of operations or cash flows of the Company.
14. QUARTERLY DATA (UNAUDITED)
Quarterly data for the years ended December 31, 1999 and 1998, follow:
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- -------
1999 QUARTERS
Revenues $ 57.7 $ 53.9 $ 45.8 $ 56.7 $ 214.1
Income (loss) from operations 0.5 (1.0) (3.1) (97.9) (101.5)
Net loss (1.8) (4.2) (7.2) (99.5) (112.7)
Loss attributable to common shares (3.5) (5.9) (8.9) (101.3) (119.6)
Per common share:
Net basic and diluted loss $ (0.04) $ (0.06) $ (0.10) $ (1.10) $ (1.30)
1998 QUARTERS
Revenues $ 62.7 $ 74.5 $ 54.2 $ 76.7 $ 268.1
Income (loss) from operations 1.1 1.4 7.3 (183.6) (173.8)
Income (loss) before extraordinary items (3.0) (7.7) 5.8 (185.9) (190.8)
Net income (loss) (3.0) (19.2) 5.8 (185.9) (202.3)
Income (loss) attributable to common shares (4.7) (20.9) 4.1 (187.7) (209.2)
Per common share:
Income (loss) before extraordinary item $ (0.04) $ (0.09) $ 0.04 $ (1.85) $ (1.94)
Extraordinary item - loss on early extinguishment of debt -- (0.11) -- -- (0.11)
Net basic and diluted loss $ (0.04) $ (0.20) $ 0.04 $ (1.85) $ (2.05)
Fourth quarter 1999 results included a $72.9 million pre-tax charge due to the
writedown of the Fort Knox mine, a $10.1 million pre-tax charge due to the
writedown of the Refugio mine and a $16.5 million pre-tax charge due to the
writedown of the Haile property.
Fourth quarter 1998 results included a $140.3 million pre-tax charge due to the
writedown of the Fort Knox mine and a $53.1 million pre-tax charge due to the
writedown of the Refugio mine.
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15. RESERVE DATA (UNAUDITED)
The following table presents proven and probable ore reserves by property at
December 31. Ore reserves are calculated by the Company.
Ore Reserves(1) (thousands, except average grades)
1999
------------------------------------------------- 1998 1997
AVERAGE CONTAINED CONTAINED CONTAINED
GRADE CONTAINED OUNCES OUNCES OUNCES
(OUNCES OUNCES (COMPANY (COMPANY (COMPANY
TONS PER TON) (100%) SHARE) SHARE) SHARE)
------- -------- --------- --------- --------- ---------
GOLD
Producing mines
Fort Knox(2) 123,308 0.024 2,968 2,968 3,745 4,099
Kubaka(3) 3,190 0.368 1,174 643 862 1,098
Refugio(4) 82,186 0.026 2,168 1,084 1,104 1,460
------- ------- ------ ------
Total producing mines 6,310 4,695 5,711 6,657
Other properties
Haile -- -- -- -- -- 488
True North 7,242 0.063 459 298 -- --
------- ------- ------ ------
6,769 4,993 5,711 7,145
======= ======= ====== ======
(1) RESERVES. That part of a mineral deposit that could be economically and
legally extracted or produced at the time of the reserve determination.
Reserves have been calculated using a $300 per ounce gold price at all
properties.
PROVEN RESERVES. Reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes; grade
and/or quality are computed from the results of detailed sampling and (b)
the sites for inspection, sampling and measurement are spaced so closely
and the geologic character is so well defined that size, shape, depth and
mineral content of reserves are well established.
PROBABLE RESERVES. Reserves for which quantity and grade and/or quality
are computed from information similar to that used for proven 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 reserves, is high enough to assume continuity
between points of observation.
These definitions comply with those issued by the Securities and Exchange
Commission, which are based on definitions used by the United States
Bureau of Mines and the United States Geological Survey.
(2) Commercial production at the Fort Knox mine commenced on March 1, 1997.
(3) The Company acquired the Kubaka mine from Cyprus Amax in May 1997.
Commercial production at the Kubaka mine commenced on June 1, 1997.
(4) Commercial production at the Refugio mine commenced on October 1, 1996.
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(5) Due to current economic conditions the Company has reclassified the Haile
Reserves to other mineralized material.
(6) The Company acquired 65% of the True North property in Alaska in 1999.
The Company reports extractable (mineable) ore reserves. Reserves do not reflect
losses in the milling or heap leaching processes, but do include allowance for
ore dilution in the mining process.
Recovery rates for 1999 were as follows:
HEAP
LEACH MILL
----- ----
Refugio 64% -%
Fort Knox -% 90%
Kubaka -% 98%
16. YEAR 2000
The change to Year 2000 has occurred, without any interruption in production,
power and the supply of materials and consumables to the various operating
locations throughout the world. Although it is not possible to conclude that all
aspects of the Year 2000 issue have been fully resolved, nothing has come to the
Company's attention nor is anything anticipated that would materially affect the
results of operations and cash flows in 2000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 and 13
These items are incorporated by reference to the Company's definitive
information statement relating to the Company's annual meeting of shareholders
to be held during 2000. The definitive information statement will be filed with
the Commission not later than 120 days after December 31, 1999, pursuant to
Regulation 14C of the Securities Exchange Act of 1934, as amended.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
10-K
PAGE
1. Financial Statements
Report of Management 23
Independent Auditors Report - Deloitte & Touche LLP 24
Report of Independent Accountants - PricewaterhouseCoopers 25
Report of Independent Accountants - PricewaterhouseCoopers LLP 26
Consolidated Statements of Operations for
each of the three years in the period ended
December 31, 1999 27
Consolidated Balance Sheets at December 31, 1998
and 1998 28
Consolidated Statements of Cash Flows for each
of the three years in the period ended
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29
December 31, 1999
Consolidated Statements of Shareholders'
Equity for each of the three years in the
period ended December 31, 1999 30
Notes to Consolidated Financial Statements 31 - 46
2. Financial Statement Schedules
Financial statement schedules are not included in this Annual Report on Form
10-K because they are not applicable.
3. Exhibits
3.1 Certificate of Incorporation, dated April 13, 1995, and filed
with the Secretary of State of the State of Delaware on April
26, 1995, filed as Appendix F to the Company's Proxy Statement
for the 1995 Annual Meeting of Stockholders, dated April 27,
1995, and incorporated herein by this reference.
3.2 Certificate of Amendment to the Certificate of Incorporation,
dated September 17, 1998, and filed with the Secretary of State
of the State of Delaware on September 18, 1998 filed as Exhibit
3.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference.
3.3 By-Laws, filed as Exhibit 3(ii) to the Company's Registration
Statement on Form 8-B filed June 21, 1995 and incorporated
herein by this reference.
4.1 Certificate of Designations for the $2.25 Series A Convertible
Preferred Stock, filed as Exhibit 4.1 to the Company's
Registration Statement on Form 8-B filed June 21, 1995 and
incorporated herein by reference.
4.2 Certificate of Designations for the $3.75 Series B Convertible
Preferred Stock, filed as Exhibit 4.2 to the Company's Form 8-B
filed June 21, 1995 and incorporated herein by reference.
4.3 Certificate of Amendment of Certificate of Designations of $3.75
Series B Convertible Preferred Stock, filed as Exhibit 4.3 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference.
10.1 The Company's 1992 Stock Option Plan, filed as Exhibit A to the
Company's Proxy Statement for the 1993 Annual Meeting of
Stockholders and incorporated herein by reference. First
Amendment to the Kinam Gold Inc. 1992 Stock Option Plan, filed
as Exhibit (10)(c) to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997, and incorporated
herein by reference.
10.2 Credit Agreement, dated as of March 19, 1996, between the
Company and Cyprus Amax; Guaranty Fee Agreement, dated as of
March 19, 1996, between the Company and Cyprus Amax; and
Reimbursement Agreement, dated as of March 19, 1996, between the
Company and Cyprus Amax filed as Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the year-ended December 31, 1995
and incorporated herein by reference; Amendment Agreement dated
October 31, 1996, amending the Credit Agreement dated March 19,
1996 between the Company and Cyprus Amax, filed as Exhibit (10b)
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996 and incorporated herein by reference.
10.3 Services Agreement, dated as of January 1, 1994, between the
Company and Cyprus Amax, filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year-ended December 31, 1995
and incorporated herein by reference.
10.4 Loan Agreement, dated as of May 1, 1997, between Alaska
Development Export Authority and Fairbanks Gold Mining, Inc.;
Reimbursement Agreement, dated as of May 1, 1997, between
Fairbanks Gold Mining, Inc. And Union Bank of Switzerland, New
York Branch; Guaranty, dated May 22, 1997, of Cyprus Amax in
favor of Union Bank of Switzerland, New York Branch; and
Reimbursement Agreement, dated May 22, 1997, of the Company in
favor of Cyprus Amax, filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997, and incorporated herein by reference.
10.5 Finance Agreement, dated as of June 30, 1995, between Omolon and
Overseas Private Investment Corporation ("OPIC"); First
Amendment to Finance Agreement, dated as of April 22, 1996,
between Omolon Gold Mining Company and OPIC, amending the
Finance Agreement dated June 30, 1995 between Omolon and OPIC;
and Second Amendment to Finance Agreement, dated as of January
28, 1997, between Omolon and OPIC, amending the Finance
Agreement dated June 30, 1995 between Omolon and OPIC, filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, and incorporated herein by
reference.
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50
10.6 Loan Agreement, dated as of June 30, 1995, between Omolon and
European Bank for 10.6 Reconstruction and Development ("EBRD");
Amendment Agreement to Loan Agreement, dated November 7, 1995,
between Omolon and EBRD, amending the Loan Agreement dated June
30, 1995 between Omolon and EBRD; Second Amendment Agreement to
Loan Agreement, dated April 22, 1996, between Omolon and EBRD,
amending the Loan Agreement dated June 30, 1995 between Omolon
and EBRD; and Third Amendment to Loan Agreement, dated November
20, 1996, between Omolon and EBRD, amending the Loan Agreement
dated as of June 30, 1995 between Omolon and EBRD, filed as
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, and incorporated herein by
reference.
10.7 Support Agreement, dated as of August 30, 1995, among Omolon,
Cyprus Amax, Cyprus Magadan Gold Corporation, EBRD and OPIC; and
Amendment Agreement to Support Agreement, dated as of January
28, 1997 among Omolon, Cyprus Amax, Cyprus Magadan Gold
Corporation and EBRD, amending the Support Agreement dated as of
August 30, 1995 among the parties, filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, and incorporated herein by reference.
10.8 Guaranty Agreement, dated as of August 30, 1995, among Cyprus
Amax, EBRD and OPIC; and Amendment Agreement to Cyprus Amax
Guaranty, dated January 30, 1997, among Cyprus Amax, EBRD and
OPIC, amending the Guaranty Agreement dated as of August 30,
1995 among the parties, filed as Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997, and incorporated herein by reference.
10.9 Loan Agreement, dated as of November 29, 1996, between Omolon
and ABN Amro Bank (Moscow) Ltd.; and Guaranty and Indemnity
Agreement, dated as of November 26, 1996, by Cyprus Amax in
favor of ABN Amro Bank NV, filed as Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, and incorporated herein by reference.
10.10 Loan Agreement, dated April 8, 1997, between Omolon Gold Mining
Company and ABN Amro Bank (Moscow) Ltd.; and Guaranty and
Indemnity Agreement, dated as of April 1, 1997, by Cyprus Amax
in favor of ABN Amro Bank NV, filed as Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, and incorporated herein by reference.
10.11 Merger Agreement among Kinross Gold Corporation, Kinross Merger
Corporation, and Kinam Gold Inc., dated February 9, 1998. Filed
as Exhibit 10.25 to the Company A.R. 10-K, etc. 1998. Filed as
Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference.
10.12 Stockholder Agreement dated as of February 9, 1998, among
Kinross Gold Corporation, Kinross Merger Corporation, Cyprus
Amax Minerals Company and each of the other persons identified
on Exhibit A. Filed as Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference.
10.13 Agreement for sale of stock among Piedmont Mining Company, Inc.,
seller, Kershaw Gold Company Inc., company, and Lancaster Mining
Company, Inc., buyer, dated as of March 1, 1999. (December 28,
1998)*
21 Subsidiaries of the Company.*
23.1 Consent of Deloitte & Touche LLP*
23.2 Consent of PricewaterhouseCoopers*
23.3 Consent of PricewaterhouseCoopers LLP*
27 Financial Data Schedule.*
*Filed herewith
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of 1999.
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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.
KINAM GOLD INC.
Date: March 29, 2000 By /s/ Arthur H. Ditto
-------------------------------------
Arthur H. Ditto
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 29, 2000.
/s/ Arthur H. Ditto President
Arthur H. Ditto
/s/ Robert H. Schafer Vice President
Robert H. Schafer
/s/ Brian W. Penny Treasurer
Brian W. Penny
/s/ Shelley M. Riley Secretary
Shelley M. Riley
/s/ John A. Brough Director
John A. Brough
/s/ John M.H. Huxley Director
John M.H. Huxley
/s/ John W. Ivany Director
John W. Ivany
51