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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, 1998
[ ] 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, $1.00 par New York Stock Exchange, Inc.
value (1,840,000 shares outstanding
at March 31, 1999).
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 1999, to be filed with the Commission, are incorporated by reference as
specified.
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. [ ]
The aggregate market value of voting stock held by non-affiliates (consisting
solely of Series B Convertible Preferred Shares) at the closing price of $35.125
on March 31, 1999 was approximately $64.6 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 763,525 ounces during 1998, and its share of proven
and probable reserves, as of December 31, 1998, in all its properties totaled
approximately 201 million tons of ore reserves with an average grade of 0.028
ounces of gold per ton, or 5.7 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. In the merger, each
outstanding share of the Company's Common Stock (the 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. 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. 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. For additional information regarding the merger, refer to an
Information Statement/Prospectus dated April 23, 1998 filed with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934, as
amended.
The Company's operating properties consist of a 100 % interest in the Fort Knox
mine near Fairbanks, Alaska; a 53% 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
1999 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. Kinam holds its interests 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 at 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, 1998. 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, net of credits for silver by-product and exclude reclamation costs.
All of the Company's operating properties are open pit mines. Except for mining
equipment owned by contract miners at Refugio and mobile mining equipment leased
by the Company at Fort Knox, 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
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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.
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.
[A map of the world showing the location of the
Company's various operating and development properties]
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 400,000 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 estimated future gold prices the Company
recorded a $140.3 million dollar write-down on the Fort Knox Mine. See Note 6 of
the Consolidated Financial Statements for further discussion.
The following table presents operating data for the Fort Knox mine for the year
ended December 31, 1998 and for the period from the commencement of commercial
production on March 1, 1997, through December 31, 1997.
Fort Knox Mine
1998 1997
----------- -----------
Tons mined 33,293,950 27,536,150
Tons of ore milled 13,741,610 10,584,156
Average mill head grade (oz. per ton) 0.029 0.034
Mill recovery rate (%) 90 89
Ounces of gold produced 359,973 320,522
Ounces of silver produced 20,900 15,958
Cost per ounce of gold produced:
Total cash costs $ 186 $ 170
Reclamation 3 3
Depreciation and depletion 156 169
----------- -----------
Total production costs $ 345 $ 342
=========== ===========
Property Position. The Fort Knox mine covers approximately 47,000 acres and
consists of two state mining leases, approximately 1,400 state mining claims,
seven patented federal mining claims, and the mineral rights to 38 patented
federal mining claims. The current reserve is located on approximately 1,150
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 three
percent royalty payable to the State of Alaska Mental Health Trust based on net
income. Claims surrounding the current reserve are subject to net smelter return
royalties ranging from
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three percent to six percent on the state mining claims, and both a one percent
net smelter return royalty and a ten percent overriding net profits interest on
certain of the patented federal mining claims.
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, 1998
Gold Gold
Tons Avg. Grade Content
(000) (oz./ton) (000 oz.)
------- ---------- ---------
Mill ore 156,628 0.024 3,745
The December 31, 1998 Fort Knox reserves were calculated by the Company.
Reserves are calculated using a gold price of $325 per ounce and a gold cut-off
grade of 0.0125 ounces per ton. Changes from the 1997 reserves reflect the
production of gold during 1998, net of additions due to the infill drilling
program and losses due to a lower price assumption used in computing the 1998
reserves. The Company estimates that mill recovery will continue to be
approximately 90%.
In addition to proven and probable reserves, the Company has estimated 67.1
million tons of mineralized material at an average grade of 0.022 per ton.
KUBAKA MINE
The Company indirectly owns a 53 % interest in Omolon Gold Mining Company
(Omolon), 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 three percent 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 three percent interest in
Omolon for approximately $7.5 million. See Notes 6 and 7 to the Consolidated
Financial Statements for further discussion of 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 1,900 tons per day (approximately 700,000 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 which 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 53 %.
The following table presents operating data for the Kubaka mine for the year
ended December 31, 1998 and for the period from the commencement of commercial
production on June 1, 1997, through December 31, 1997.
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Kubaka Mine
Operating Data
(Kinam Gold 50% Share)*
1998 1997
---------- ----------
Tons mined 5,901,403 3,288,724
Tons of ore milled 356,326 186,092
Average mill head grade (oz. per ton) 0.716 0.725
Mill recovery rate (%) 98 97
Ounces of gold produced 250,572 129,970
Ounces of silver produced 253,434 127,090
Cost per ounce of gold produced
Total cash costs $ 157 $ 175
Reclamation 3 --
Depreciation and depletion 107 100
---------- ----------
Total production costs $ 267 $ 275
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* 53% after acquisition of additional three percent in December 1998.
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 four percent 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 December 31,
1998. This requirement has been extended to June 1999.
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.
Kubaka Mine
Proven and Probable Ore Reserves
As of December 31, 1998
Gold Content
(000 oz.)
Gold ----------------------
Tons Avg. Grade The Company's
(000) (oz./ton) Total 53% Share
------ ----------- ----- -------------
Mill ore 3,467 0.470 1,626 862
The December 31, 1998 Kubaka reserves were calculated by the Company. Reserves
are calculated using a gold price of $325 per ounce and a gold cut-off grade of
0.093 ounces per ton. Changes in reserves from 1997 primarily relate to
production. The Company estimates that mill recovery will continue to be
approximately 97%.
In addition to proven and probable reserves, the Company has estimated its
share of other mineralized material to be 2.1 million tons at an average grade
of 0.194 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 33,000 tons of ore per
day, or 11.5 million tons per year. Production commenced in April 1996; however,
start-up was delayed due to
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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. Full production levels are expected to be achieved
during 1999. CMM has been using a mining contractor to drill, blast, load and
transport all ore and waste. CMM is changing from contract mining to self mining
to lower mining costs and allow greater flexibility to adapt to changing
conditions. An alternative crushing system is being tested which is capable of
producing a smaller crushed product which would increase production and lower
cash costs. Facilities include a permanent camp with access to the site from
Copiapo provided by 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, estimated recoverable ounces and estimated future
gold prices the Company recorded a $53.1 million write-down. See Note 6 of the
Consolidated Financial Statements for further discussion.
The following table presents operating data for the Refugio mine for the years
ended December 31, 1997 and December 31, 1998, and for the period from
commencement of commercial production on October 1, 1996, through December 31,
1996.
Refugio Mine
Operating Data
(Kinam Gold 50% Share)
1998 1997 1996
------------ ---------- ----------
Tons mined 10,856,489 9,336,697 3,297,800
Tons of ore to heap leach 4,541,159 4,491,853 1,720,875
Average grade to heap leach (oz. per ton) 0.027 0.030 0.031
Heap leach recovery rate (%) 60 55 58
Ounces of gold produced 80,526 73,543 30,612
Ounces of silver produced 13,130 10,366 2,620
Cost per ounce of gold produced:
Total cash costs $ 318 $ 341 $ 242
Reclamation 5 2 --
Depreciation and depletion 103 95 95
------------ ---------- ----------
Total production costs $ 426 $ 438 $ 337
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Property Position. The Refugio property comprises approximately 14,500 acres,
consisting of mineral rights, surface rights and water rights 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 one-half percent 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 five percent 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.
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Refugio Mine
Proven and Probable Ore Reserves in the Verde Deposit
As of December 31, 1998
Gold Content
(000 oz.)
Gold ----------------------
Tons Avg. Grade The Company's
(000) (oz./ton) Total 50% Share
------ ---------- ----- -------------
Heap leach ore 84,406 0.026 2,208 1,104
The December 31, 1998 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 $325 per ounce gold price and costs
and recoveries which vary by rock type and alteration. Changes in reserves from
1997 relate to production and a decrease of approximately 175,000 contained
ounces due to the lower gold price. The Company expects the average ultimate
recovery rate for the reserve to be approximately 66%.
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 1999.
The following table presents operating data for the Hayden Hill mine for the
years indicated.
Hayden Hill Mine
Operating Data
1998 1997 1996
-------- ---------- ----------
Tons mined -- 8,727,325 8,275,944
Tons of ore to heap leach -- 6,194,712 5,505,849
Average grade to heap leach (oz. per ton) -- 0.031 0.028
Heap leach recovery rate (%) -- 59 68
Ounces of gold produced 39,688 112,202 103,502
Ounces of silver produced 104,042 325,494 320,574
Cost per ounce of gold produced:
Total cash costs $ 101 $ 186 $ 229
Reclamation 186 41 30
Depreciation and depletion -- 52 87
-------- ---------- ----------
Total production costs $ 287 $ 279 $ 346
======== ========== ==========
Property Position. The Company controls approximately 6,300 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 two percent.
In addition to proven and probable reserves, the Company has estimated its
share of other mineralized material to be 134 million tons at an average grade
of 0.024 ounces per ton.
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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 and residual leaching is expected to continue
during 1999. Based on a detailed study of the continuity of ore, costs and
production rates, a $35.5 million pre-tax write-down was recorded during the
fourth quarter of 1996. See Note 6 of the Consolidated Financial Statements for
further discussion.
The following table presents operating data for the Guanaco mine for the years
indicated.
Guanaco Mine
Operating Data
1998 1997 1996
-------- ---------- -----------
Tons mined -- 5,406,411 13,332,872
Tons of ore to heap leach -- 2,883,422 2,479,645
Average grade to heap leach (oz. per ton) -- 0.059 0.070
Heap leach recovery rate (%) -- 55 55
Ounces of gold produced 32,766 93,594 96,018
Ounces of silver produced 100,975 306,552 359,869
Cost per ounce of gold produced:
Total cash costs $ 162 $ 229 $ 290
Reclamation -- 18 4
Depreciation and depletion -- 102 156
-------- ---------- -----------
Total production costs $ 162 $ 349 $ 450
======== ========== ===========
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 additional
five-year terms thereafter. The lease is subject to royalties varying with the
level of production, with the royalty on gold ranging from a seven percent gross
royalty to a three percent gross royalty plus a two percent net profits royalty;
there is a gross royalty of two percent for all other metals. The property
remains subject to a one and one-tenth percent net smelter return royalty to the
minority owners for metals other than gold. The Company is in discussions with
ENAMI regarding continuation of the lease following cessation of production.
SLEEPER MINE
The Sleeper mine is located in Humboldt County, Nevada, approximately 28 miles
north of Winnemucca.
Operations. Operations at Sleeper were completed at the end of the third quarter
of 1996 and there was no reported production during 1997 and 1998. Production at
Sleeper during 1996 was 38,199 ounces at a cash cost of $247 per ounce.
Reclamation activities have commenced and are expected to be substantially
completed by the end of 2000. The operation included an open pit mine, mill,
heap leach pads and tailings disposal facilities. Access to the mine is provided
by a gravel road that connects to a paved public highway. Power is purchased
from the local rural electric association. Water is provided by a well system
that is currently being used to fill the pits, and potable water is supplied by
truck.
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Property Position. Current facilities occupy 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 percent interest in the claims. Subsequent to year-end the
Company entered into an agreement granting the same third party the right to
earn the remaining 50% interest in the Sleeper mine.
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. On March 23, 1999, the Company acquired
Piedmont's 37.5 % interest and settled all disputes between the Company and
Piedmont. See "Item 3. Legal Proceedings." The Company has not made a decision
to develop the Haile property and is considering various options with respect to
its interest in Haile. As at December 31, 1998 the Company has capitalized
approximately $14.5 million of costs related to the Haile property.
Property Position. The Haile property covers approximately 3,600 acres and
consists entirely of fee property that is either owned by the venture
participants, leased from third parties under leases that can be extended to
2001 or controlled by purchase agreements. The leased property is subject to a
four percent net smelter return royalty.
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. Following
an evaluation of the Haile property based on a $325 per ounce gold price, the
Company has reclassified the reserve from proven and probable to other
mineralization.
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 preapproved by the Russian agency responsible for exploration in the Magadan
region.
Exploration expenditures were $3.9 million in 1998, $5.5 million in 1997 and
$3.5 million in 1996. Exploration expenditures for 1999 are expected to be
approximately $3.0 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 and other bullion dealers. Substantially all of the
Company's 1998, 1997 and 1996 sales were made in Europe. The Company's sales to
major customers that exceeded ten percent of total sales were $169 million to
three customers during 1998, $138 million to three customers in 1997 and $95
million to four customers in 1996. 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.
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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.
Year High Low
---- ------ ------
(dollars per ounce)
1994 398.00 370.60
1995 395.40 372.20
1996 414.70 368.00
1997 365.70 282.80
1998 314.50 275.60
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,
1998 was $325 per ounce of gold. The market price was $288 per ounce of gold at
December 31, 1998, which was below the price at which Kinam Gold has estimated
its reserves. However, Kinam Gold has historically realized prices that are
approximately $35 per ounce above the market price of gold since the inception
of its hedging program 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
write-downs of its investment in its mining properties.
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 1998, 1997 and 1996 the Company's hedging efforts
resulted in average realized prices of $344 per ounce, $360 per ounce and $412
per ounce, respectively, compared with the average COMEX price of $294 per ounce
in 1998, $331 per ounce in 1997 and $388 per ounce in 1996. Subsequent to the
merger with Kinross, 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 wholly-owned subsidary 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 subsidary of Kinross,
which is currently the sole common shareholder of the Company.
Pursuant to the merger, 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 addition, 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.
AGREEMENTS WITH CYPRUS AMAX
Kinam Gold has entered into the following agreements with Cyprus Amax:
Financing agreements with Cyprus Amax:
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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 guaranteed the loan and the Company pays a one and three-quarters
percent interest differential to Cyprus Amax. The Company and Kinross have
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. See Note 7 to the Consolidated
Financial Statements for further discussion of the terms of the loan.
During December 1997, the Company completed a $40 million credit facility.
Cyprus Amax had guaranteed the loan which was repaid subsequent to the Kinross
merger as part of the $255.8 million advanced by Kinross in June 1998.
Pursuant to a financing arrangement with Cyprus Amax, approved by the Company's
stockholders in September 1996, Cyprus Amax had guaranteed the Company's $250
million Fort Knox loan until economic completion of the Company's Fort Knox mine
In connection with the merger with Kinross in June 1998 the balance of the
Fort Knox loan ($208.3 million) was repaid as part of the $255.8 million
advanced by Kinross in June 1998.
Prior to the Kinross merger the Company had a revolving credit agreement, a
stock issuance agreement, and an employee transfer agreement with Cyprus Amax.
Subsequent to the merger these agreements were all terminated.
Acquisition Agreement:
Pursuant to the Amended and Restated Agreement and Plan of Merger and
Reorganization, dated as of October 9, 1996 (the Acquisition Agreement), the
Company acquired Cyprus Amax's indirect 50 % interest in the Kubaka mine in May
1997. The Company issued 15.4 million shares of Common Stock as payment and had
an obligation to make a contingent payment in shares of Common Stock (a) equal
to $10 per gold equivalent ounce (up to a maximum of $45 million) of the
Company's pro rata share of proven and probable reserves which the Company
acquired the right to mine in the Russian Federation, excluding properties
covered by the Kubaka License or acquired by the Company's joint venture with
Cyprus Amax, on or before June 30, 2004, and (b) valued at the then current
ten-day average stock price. Subsequent to the merger this agreement was
cancelled.
NOL Agreement:
An agreement to monetize a portion of the Company's foreign tax net operating
losses was entered into with Cyprus Amax in February 1998. In connection with
the transaction, the Company recorded a gain of $6.7 million as other income.
Services Agreement:
Pursuant to the Services Agreement, the Company and Cyprus Amax provide a
variety of managerial and other services to each other on a full
cost-reimbursement basis. The Company paid Cyprus Amax approximately $2.3
million for 1998 services, including insurance coverage, compared with $4.1
million in 1997and Cyprus Amax paid the Company $1.3 million, primarily for
services for the Kubaka mine prior to closing of the Kubaka acquisition.
EMPLOYEES
At December 31, 1998, the Company and its consolidated subsidiaries employed 958
persons in addition to 171 contract miners at its Refugio mine. 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 1999. 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.
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
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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
are 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 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
write down or to discontinue development or production. 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.
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Proven and probable reserves at the Company's mines and development projects
were calculated based upon a gold price of $325 per ounce of gold. Recently,
gold prices have been significantly below these levels. Prolonged declines in
the market price of gold may render reserves containing relatively lower grades
of gold mineralization, uneconomic to exploit (unless the utilization of forward
sales or other hedging techniques is sufficient to offset such declines) and
could reduce materially the Company's reserves. Should such reductions occur,
material write downs 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 conducts 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, licences 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 rubles at then current London gold prices. If expenses
denominated in rubles are less than payments in rubles, 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 a portion of
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
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circumstances. There can be no guarantee that the Company will be able to obtain
or maintain all necessary licences and permits that 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 title 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.
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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.
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 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.
On February 13, 1998, a purported class action was filed in the Court of
Chancery of Delaware by two Company stockholders entitled Joseph Ratzerdorfer
and Victoria Shaev, IRA v. Milton H. Ward, et al. C.A. No. 16189-NC, against
Cyprus Amax, the Company's directors, and the Company as a nominal defendant.
The complaint alleges, among other things, that the defendants breached their
fiduciary duties of loyalty and due care in connection with the Company's entry
into the Kinross merger agreement. The complaint seeks, among other things, an
order rescinding the transaction and/or awarding damages in an unspecified
amount. The Company believes that the complaint is without merit and intends to
defend the matter vigorously.
The Company has been named in a complaint filed in the United States District
Court for the District of South Carolina, Rock Hill Division, by Kershaw Gold
Company, Inc. (Kershaw), a subsidiary of Piedmont Mining Company (Piedmont) that
owns 37.5% of the Haile project in which the Company is participating. The
complaint alleges that the Company tortiously interfered with the performance by
its subsidiaries, Lancaster Mining Company Inc. (Lancaster) and Haile Mining
Company (Haile), of their obligations under certain agreements. The Company was
awarded judgment notwithstanding the $9 million jury verdict in the case. The
plaintiff appealed the decision to the U.S. Court of Appeals for the Fourth
Circuit. The litigation is part of the lawsuit filed originally in South
Carolina Circuit Court in March 1995 by Piedmont and Kershaw against the
Company, Lancaster and Haile, alleging breach of contract, fraud and tortious
interference with contract rights. In response to motions filed by the
defendants, all claims of Piedmont and Kershaw were dismissed on the grounds
that jurisdiction was to be determined by arbitration, except the claim of
Kershaw against the Company described above. Piedmont and Lancaster have
appealed the April 1998 order of the South Carolina Circuit Court denying their
motion for reconsideration of dismissal of certain claims against the Company
and certain subsidiaries.
Pursuant to certain agreements among Piedmont, Kershaw and the Company, Piedmont
and Kershaw indemnified the Company from all environmental and other liabilities
arising from Piedmont's operations or other conditions existing on the Haile
property prior to July 1, 1992. Following Piedmont's and Kershaw's continued
refusal to pay environmental costs that the Company believes were covered by the
indemnity, the Company submitted to arbitration its claim for $1.4 million, the
amount of such costs incurred through August 1995. The Company prevailed in the
matter and has received the $1.4 million arbitration award, including accrued
interest. In November 1997, the Company submitted to arbitration its claim for
$1.7 million, the amount of environmental costs from August 1995 through October
1997, which the Company believes are covered by the indemnity and cash
contributions to property maintenance and operations which the Company has made
on behalf of Kershaw.
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On March 23, 1999, the parties finalized an agreement whereby the Company
purchased all of the shares of Kershaw from Piedmont for $2.0 million and all of
the parties to the various lawsuits and arbitrations noted above mutually
released each other from any obligations they may have had to one another. The
various lawsuits and arbitrations were dismissed. See Note 16 to the
Consolidated Financial Statements for further discussion.
In March 1994, the U.S. Forest Service notified the Company that it considers
the Company to be a Potentially Responsible Party (PRP) under the Comprehensive
Environmental Response, Compensation, and Liability Act (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 1998.
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 April 1,
1999 is 83.
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.
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Stock Prices and Dividends Per Share
Series B Convertible
Common Stock Preferred Stock
---------------------- ----------------------
Quarter High Low High Low Dividends
- ------- -------- -------- ------- ------- ---------
1998
First $ 3 5/16 $ 2 1/8 $46 1/4 $35 3/4 $.9375
Second(1) 3 13/16 3 1/16 49 43 5/8 .9375
Third -- -- 44 1/8 38 1/4 .9375
Fourth -- -- 43 1/2 35 1/2 .9375
1997
First $ 7 7/8 5 7/8 $56 3/8 $51 1/2 $.9375
Second 6 7/8 5 5/8 54 51 1/4 .9375
Third 6 15/16 5 9/16 54 3/4 51 1/2 .9375
Fourth 6 7/8 1 15/16 55 1/2 34 .9375
(1) Reflects prices 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)
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
FOR THE YEAR:
Revenues $ 268.1 $ 259.5 $ 108.2 $ 96.6 $ 94.6
Earnings (loss) from operations/(1)(2)(3) (173.8) 1.9 (42.9) (19.7) (39.5)
Loss before cumulative effect of
accounting changes, net/(1)(2)(3) (190.8) (37.9) (39.2) (26.4) (38.6)
Loss before extraordinary item/(1)(2)(3) (190.8) (33.4) (39.2) (26.4) (31.1)
Net loss/(1)(2)(3) (202.3) (33.4) (39.2) (26.4) (31.1)
Per common share:
Loss before cumulative effect
of accounting changes/(1)(2)(3) (1.94) (.41) (.48) (.38) (.51)
Loss before extraordinary item/(1)(2)(3) (1.94) (.37) (.48) (.38) (.42)
Net basic and diluted loss/(1)(2)(3) (2.05) (.37) (.48) (.38) (.42)
Weighted average common shares outstanding 101.7 108.2 96.9 86.5 79.3
Capital expenditures 15.4 30.8 187.7 206.2 23.0
Cash dividends to common stockholders -- -- -- -- --
Dividends declared per common share -- -- -- -- --
Cash dividends to preferred stockholders 6.9 6.9 6.9 6.9 1.8
Dividends declared per preferred share/(4) 3.75 3.75 3.75 3.75 .9791
AT YEAR-END:
Current assets 107.2 129.7 60.7 67.1 77.1
Total assets 602.0 870.6 762.2 613.0 407.6
Current liabilities 153.8 226.0 212.3 42.8 45.6
Long-term debt 123.0 345.7 272.6 238.2 83.2
Note payable to parent -- -- -- 5.0 --
Shareholders' equity 72.1 273.8 259.4 298.2 249.9
Working capital (deficit) (46.6) (96.3) (151.6) 24.3 31.5
Long-term debt to total capitalization 63% 56% 51% 44% 25%
KEY OPERATING FACTORS FOR THE YEAR:
Total ounces of gold produced 763,525 729,831 268,331 238,255 240,885
Total ounces of gold sold 778,559 720,889 262,975 238,094 235,664
Average realized price per ounce sold $ 344 $ 360 $ 412 $ 406 $ 401
Average cost per ounce produced/(5):
Total cash costs/(6) $ 185 $ 198 $ 255 $ 313 $ 329
Reclamation costs 13 10 16 13 11
Depreciation, depletion and amortization 119 123 110 91 105
-------- -------- -------- -------- --------
Total production costs per ounce $ 317 $ 331 $ 381 $ 417 $ 445
======== ======== ======== ======== ========
- ------------
(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. The effect of this
restatement on the year ended December 31, 1994 was to decrease the
previously reported net loss by $4.4 million or $.06 per share.
Additionally, as of January 1, 1997, the Company changed its accounting
policy to include depreciation and depletion in inventory, which has the
effect of
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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 1998, the Company recorded a $53.1 million
pre-tax write-down of the Refugio Mine and a $140.3 million pre-tax
write-down 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 write-down 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 share.
In 1994, the Company recorded an $18.6 million pre-tax ($14.4 million
after-tax) writedown of the Hayden Hill mill to its estimated salvage
value and a $2.5 million pre-tax ($2.1 million after-tax) writedown of
other assets that increased the net loss by $16.5 million, or $0.21 per
share.
(3) Effective January 1, 1994, the Company changed its method of accounting
for the cost of ore loaded on heap leach pads to record such costs as
work-in-process inventory. The 1994 net loss was reduced by a $7.5
million, or $.09 per common share, after-tax benefit relating to the
cumulative effect of this accounting change.
(4) The Company issued 1.8 million preferred shares in August 1994. Preferred
share dividends were $1.8 million during the fourth quarter of 1994.
(5) Average costs weighted by ounces of gold produced at each mine.
(6) 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 1998 net loss of $202.3 million, or $2.05 per share, on
revenues of $268.1 million, compared with a 1997 net loss of $33.4 million, or
$.37 per share, on revenues of $259.5 million and a 1996 net loss of $39.2
million, or $.48 per share, on revenues of $108.2 million. The 1998 results
included a $53.1 million write-down of the Refugio Mine, a $140.3 million
write-down 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 while the 1996 results included a
$35.5 million write-down of the Guanaco mine and an unrelated $10 million
deferred tax benefit. Excluding special items, 1998 net income would be $2.6
million or a loss of $0.04 per share after preferred dividends, compared with a
1997 net loss of $37.9 million, or $.41 per share and a 1996 net loss of $13.7
million or $0.21 per share. See Note 5 to the Consolidated Financial Statements
for further discussion of the changes in accounting policies during the first
quarter of 1997.
The Company's operating income of $19.6 million for 1998, compared with
operating income of $1.9 million in 1997 and operating losses of $7.4 million in
1996, excluding special items and write-downs. The improved operating results
for 1998 were attributable to lower cash costs and higher production, partially
offset by lower realized gold prices.
Revenues increased to $268.1 million in 1998, compared with $259.5 million in
1997 and $108.2 million in 1996. The improvement was primarily a result of
higher gold sales of 778,559 ounces in 1998 due to a full year of production at
Fort Knox and Kubaka, offset by lower production at Hayden Hill and Guanaco due
to continued residual leaching. Gold sales were 720,889 ounces in 1997 and
262,975 ounces in 1996. The increased sales volume was partially offset by a
lower 1998 average realized price of $344 per ounce, compared with $360 per
ounce for 1997 and $412 per ounce for 1996. These realized prices compare with
average spot gold prices of $294 per ounce in 1998, $331 per ounce in 1997 and
$388 per ounce in 1996. The Company's average realized price exceeded the
average spot price in each year due to the positive impact of hedging
activities.
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Gold production in 1998 was a record 763,525 ounces, compared with 729,831
ounces in 1997 and 268,331 ounces in 1996. Fort Knox, Kubaka and Refugio
contributed a total of 691,071 ounces, or more than 90 % of 1998 production. For
1999, these three mines are expected to continue to contribute more than 90 % of
the Company's total production as Hayden Hill and Guanaco complete residual
leaching. In 1998, Fort Knox production was 359,973 ounces. Commercial
production was achieved at Fort Knox on March 1, 1997, resulting in 320,522
ounces of production during 1997. In 1998, the Company's share of Kubaka
production was 250,572 ounces. Commercial production commenced on June 1, 1997,
and 129,970 ounces were produced for the Company's account. The Company's 50 %
share of 1998 production at Refugio was 80,526 ounces, compared with 73,543
ounces for 1997. Production at Refugio is expected to improve during 1999 as
operating inefficiencies continue to be addressed. Mining was completed at
Guanaco during July 1997, which resulted in the decrease in production to 32,766
ounces in 1998, compared with 93,594 ounces in 1997. Production at Guanaco will
decline substantially during 1999 as residual leaching continues. Hayden Hill
completed mining in December 1997 and production declined to 39,688 ounces in
1998, compared with 112,202 ounces in 1997 as residual leaching continued.
During 1999, consolidated production is expected to be approximately 710,000
ounces.
The Company's cost of sales as a percentage of revenue declined to 59 % in 1998
compared with 61 % in 1997 and 68 % in 1996, reflecting lower average total cash
costs. Consolidated total cash costs fell $13 an ounce in 1998. Total cash costs
were $185 per ounce for 1998 compared to $198 per ounce in 1997 and $255 per
ounce in 1996. Fort Knox's cash costs were $186 per ounce for 1998, compared to
$170 per ounce in 1997 as a result of lower grades. As a result of higher mill
throughput and lower than planned spending, Kubaka's 1998 total cash costs of
$157 per ounce, compared with 1997 total cash costs of $175 per ounce, were
lower than anticipated. Refugio's 1998 total cash costs of $318 per ounce,
compared with $341 per ounce for 1997, were lower primarily due to improvements
to the reliability of the overland conveyance system. Total cash costs at
Refugio are expected to improve significantly during 1999. Total cash costs
continued to decline at Guanaco during 1998 to $162 per ounce, compared with
$229 per ounce in 1997 and $290 per ounce in 1996, as residual leaching
continued. Total cash costs at Hayden Hill improved to $101 per ounce in 1998
compared with $186 per ounce and $229 per ounce in 1997 and 1996, respectively,
as residual leaching continued. Consolidated average total cash costs for 1999
are anticipated to decline further in 1999. Depreciation and depletion increased
to $91.1 million in 1998, compared with $88.4 million in 1997, primarily as a
result of increased production and sales. The Company's consolidated
depreciation and depletion rate decreased to $119 per ounce in 1998, compared
with $123 per ounce in 1997. Lowering the gold price used to calculate ore
reserves to $325 per ounce at December 31, 1998, from $375 per ounce at December
31, 1997, did not have a significant impact on Kubaka or Fort Knox reserves,
however, reserves at Refugio decreased by approximately 175,000 contained ounces
due to the lower gold price assumption. The consolidated depreciation and
depletion rate for the Company is expected to decrease significantly during 1998
due to the write-downs at Refugio and Fort Knox, offset partially by the
decrease in Refugio reserves.
General and administrative income was $3.7 million in 1998, compared with
expense of $6.4 million in 1997 and $8.3 million in 1996. The change in 1998 was
mainly attributable to the inclusion of a full year of management fees the
Company earns for operating the Kubaka project, which is recorded as an offset
to general and administrative expenses, and the reduction of corporate staff
subsequent to the Kinross merger.
Exploration expense was $3.9 million in 1998, compared with $5.5 million in 1997
and $3.5 million in 1996. During 1999, the Company expects to reduce its
exploration costs to about $3.0 million due to lower gold prices.
Interest expense in 1998 was $23.4 million, compared with $42.5 million in 1997
and $29.7 million in 1996. The decrease in 1998 was attributable to lower
average debt balances, mainly due to debt repaid subsequent to the Kinross
merger. In 1998, no interest was capitalized, compared with $4.2 million in 1997
and $22.8 million in 1996. Interest income was $1.6 million in 1998, compared
with $1.9 million in 1997 and $1.6 million in 1996.
Other income was $5.3 million in 1998, due mainly to the $6.7 million gain on
the sale of foreign tax loss carryforwards to Cyprus Amax, compared with expense
of $3.0 million in 1997 and $1.0 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's 1998 cash flow provided from operating activities of $109.8
million was significantly higher than 1997 cash flow of $68 million and 1996
cash flow of $16.5 million, primarily as a result of lower cash costs, higher
production and the close-out of the Company's hedge position for $45.9 million.
Due to lower gold prices, the Company has tightened spending in all areas in
order to preserve cash. Working capital was negative for the 1998 and 1997 year
ends due in part to the classification of the amount due under the demand loan
facility as a current liability.
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Capital expenditures declined to $15.4 million in 1998, from $30.8 million in
1997 as only sustaining capital projects were undertaken due to low gold prices.
Capital spending at Fort Knox was $12.3 million in 1998, primarily for the
expansion of the tailings dam and the pebble crusher installation. This compared
with $14 million in 1997, excluding capitalized interest. In 1998, Kubaka
capital spending totaled $0.7 million. The Kubaka acquisition was completed in
May 1997, and capital spending following the purchase, excluding capitalized
interest, was about $12 million. At Refugio, the Company's share of capital
spending totaled $2.4 million in 1998, compared with $5.0 million in 1997,
excluding capitalized interest. Most capital spent at Refugio during 1998
related to operational inefficiencies that were addressed and are expected to be
remedied in the first part of 1999. Capital spending is expected to remain the
same in 1999 as only sustaining capital projects will be undertaken.
During 1998, the Company received an additional $17.0 million from the demand
loan with its parent (which was transferred from Cyprus Amax to Kinross at the
time of the merger) and $255.8 million in advances from Kinross at the time of
the merger, primarily to pay down debt. Debt repayments from the advance
included $208.3 million for the Fort Knox project financing and $40.0 million of
loans for the Refugio project. The balance of repayments in the year included
scheduled payments on the Fort Knox loan prior to the merger of $14.0 million,
payments of $19.0 million of Kubaka debt and lease payments of $2.0 million.
Kinross advance repayments of $59.0 million were made from cash flow provided
from operating activities.
During 1999, 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 Company is participating in a Year 2000 Program established by Kinross to
oversee and coordinate Year 2000 conversion. The program includes involvement
from site and corporate personnel and communication with customers, suppliers
and financial institutions to address Year 2000 compliance. Projects are
underway to identify, evaluate and implement Year 2000 compliance solutions.
The Company's principal uses of computer technology are the management of
financial data and the control of milling processes. Year 2000 date processing
has potential implications to the Company's business applications and automated
mine operations, such as process controllers and other electronic measuring
devices. The Company has focused on:
1. Business systems including information technology hardware and software
including interfaces with systems of third parties:
2. Embedded technologies, including equipment that controls, supports or
monitors mining equipment, mills, environmental, transportation and
communications; and
3. Third party business relationships with suppliers and customers.
The effort is organized into three major phases:
1. Assessment, including the review of each operation and identification of
all systems and third parties, which might cause Year 2000 failures.
2. Impact analysis, including the review of the systems, technologies and
third parties identified in the assessment phase and classification of the
risk potential. Decisions are made as to which risks can adversely affect
the Company. Remediation plans are formulated, and contingency planning is
begun.
3. Implementation of the remediation plans and continuation of the
contingency planning based on the results of remediation and latest
information from third parties.
The Company has completed 75% of the assessment phase with respect to the
business systems and embedded technology.
All internal business systems software consists of purchased products which are
Year 2000 compliant, and which will be put into operation by September 1999.
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A detailed review of embedded technologies, concentrating on mill process
control systems, will be completed by May 1999 and to date, no major issues in
process control technologies have been found. At two key operations (the Fort
Knox mine and the Kubaka mine), the review has been completed or is near
completion with only minor remediation work identified.
Goods and services that are deemed critical to each operation have been
identified and the Company is working with the vendors of those goods and
services to ensure that no interruption will occur that will affect the
operations. Depending on the results and interpretation of these findings, the
Company will modify its contingency plans accordingly.
Impact analysis and implementation is being performed as non-compliant items are
discovered and will be ongoing through the end of 1999; however the majority of
work will be completed by the end of the third quarter of 1999.
The Company has assigned the responsibility for overseeing its Year 2000
initiatives to the Treasurer, who reports to the Audit Committee of the Board of
Directors. The project is managed by the Director of Information Technology, who
works with a coordinator assigned at each site to coordinate activities among
mine site personnel and to ensure that reviews and remediation are completed as
planned. In certain cases, the Company has engaged third parties to assist in
the Year 2000 efforts.
Costs
The Company has estimated the costs to prepare for Year 2000 at approximately
$0.5 million, of which approximately $0.1 million has been spent to date. All
project costs are funded by cash flow from operations.
The Company's policy is to expense its Year 2000 costs as incurred.
Risks and Contingency Plans
Examples follow of the types of risks the Company could face as a result of
failures of its information systems, milling systems, or the failure of one of
the major third party suppliers.
1. Business systems risks could include disruptions to business data
processing such as payroll, accounts payable, purchasing, and other
information systems until the systems can be corrected;
2. Mining operations risks could include disruptions to mining processes and
facilities with delays in delivery of gold until the process system could
be corrected;
3. Major supplier risks could include disruptions in the provision of goods
and services that could cause interruptions of mining and processing
activities and delays in delivery;
4. Major customers risks could include disruptions in sales, revenue and cash
inflow as a major customer may not be Year 2000 compliant, impacting their
ability to order or pay for products.
Considerable attention has been given to the potential problems Russia may incur
with regards to Y2K preparedness. The Kubaka Mine, due to its remoteness, is
isolated from most of the potential problems. The site generates its own
electrical power, and off-site communication is provided by a satellite system
linked into the North American public phone network. Normal inventories carried
on-site at that time of year are sufficient for the facility to operate for 12
months. Transportation to the site is provided by dedicated charter aircraft.
Potential risks for this operation are the ability of the refinery to process
product.
To minimize the risks associated with the Year 2000 issue, the Company has in
its plan: to identify scenarios involving possible Year 2000 failures focusing
on critical systems and critical third party vendors and to develop contingency
plans for mitigating the impact of such scenarios. These plans will be the focus
of the Company's Year 2000 efforts in the second quarter of 1999. The Company
believes that its largest potential risks involve third parties since the
Company cannot control their Year 2000 efforts. Although there are many areas of
potential risk, at present the Company believes that the highest potential risks
are the provision of power to its operations, and transportation related
problems, any of which could have an adverse impact on the Company's operations
and financial results. The Company expects to have contingency plans in place by
the third quarter of 1999.
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With respect to potential power interruptions, all operations are equipped with
standby power generating facilities, and additional generating capacity is
located at a shutdown property. Part of the contingency planning will be to
relocate these additional generators to the sites felt to be most vulnerable to
power interruption or where the effects of an interruption would be most severe.
The Company believes it is taking the necessary steps to resolve Year 2000
issues; however there can be no assurance that any one or more such failures
would not have a material adverse effect on the Company. Actual outcomes and
results could be affected by future factors including, but not limited to,
availability of skilled personnel, ability to locate software problems, ability
of critical suppliers and subcontractors to meet commitments, and timely actions
by customers and suppliers.
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. 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. Based on the Company's projected 1999 sales
volume, each $10 per ounce change in the average realized price on gold sales
would have an approximate $7.1 million impact on revenues and pre-tax earnings.
For further details of the remaining deferred revenue see Note 8 of the
Consolidated Financial Statements.
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 and U.S. dollars. The Company's results are
positively affected when the U.S. dollar strengthens against foreign currencies
and adversely affected when the U.S. dollar weakens against 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. In Russia, the temporal method is used to consolidate the financial
results. 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 1998 were 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 1999 ruble payments of 350
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million rubles at an exchange rate of 20 rubles to one U.S. dollar, each 2 ruble
change to the U.S. dollar could result in an approximate $1.0 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. The vast majority of expenditures
are denominated in U.S. dollars resulting in little peso-related exposure.
Interest Rate Risks
The Company has interest rate swaps to fix interest rates on a portion of its
floating rate debt. The costs associated with these contracts are 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. As at December 31, 1998, the Company carries
$128.9 million of variable rate debt, all denominated in U.S. dollars. Interest
expense would change by approximately $1.0 million for every one percent change
in interest rates.
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 W. Schafer
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INDEPENDENT AUDITORS' REPORT
To the Shareholders of Kinam Gold Inc.
We have audited the consolidated balance sheet of Kinam Gold Inc. and
subsidiaries as of December 31, 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year 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 53 percent owned subsidiary, which statements reflect total assets
and revenues constituting 56 percent and 44 percent, respectively, 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 audit in accordance with generally accepted auditing standards.
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 audit of the 1998
financial statements also included an examination of the segmented information
for 1997 and 1996 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 audit and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audit 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, 1998, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Toronto, Ontario
April 9, 1999
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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, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles that are
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 companies in the Russian Federation, have been
significantly affected, and will continue to be affected for the foreseeable
future, by the Country's unstable economy caused in part by the currency
volatility in the Russian Federation.
PricewaterhouseCoopers
Moscow, Russia
February 28, 1999
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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 balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Kinam Gold
Inc. (formerly Amax Gold Inc.) and its subsidiaries at December 31, 1997 and
the results of their operations and their cash flows for each of the two years
in the period 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 audits. We conducted our audits 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 audits provide 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
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KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
(In millions except per share amounts)
1998 1997 1996
-------- -------- --------
Revenues $ 268.1 $ 259.5 $ 108.2
Costs and operating expenses:
Cost of sales 157.2 157.3 74.0
Depreciation and depletion 91.1 88.4 29.8
Asset write-downs (Note 6) 193.4 -- 35.5
General and administrative (3.7) 6.4 8.3
Exploration 3.9 5.5 3.5
-------- -------- --------
Total costs and operating expenses 441.9 257.6 151.1
-------- -------- --------
(Loss) income from operations (173.8) 1.9 (42.9)
Interest expense (23.4) (42.5) (29.7)
Capitalized interest -- 4.2 22.8
Interest income 1.6 1.9 1.6
Other 5.3 (3.0) (1.0)
-------- -------- --------
Loss before income taxes and cumulative
effect of accounting change (190.3) (37.5) (49.2)
Income tax (expense) benefit (Note 4) (0.5) (0.4) 10.0
-------- -------- --------
Loss before cumulative effect of
accounting change (190.8) (37.9) (39.2)
Cumulative effect of accounting change -- 4.5 --
-------- -------- --------
Loss before extraordinary item (190.8) (33.4) (39.2)
Extraordinary item - loss on early extinguishment of debt (11.5) -- --
-------- -------- --------
Net loss (202.3) (33.4) (39.2)
Preferred stock dividends (Note 10) (6.9) (6.9) (6.9)
-------- -------- --------
Loss attributable to common shares $ (209.2) $ (40.3) $ (46.1)
======== ======== ========
Per common share:
Loss before cumulative effect of accounting change and
extraordinary item $ (1.94) $ (.41) $ (.48)
Cumulative effect of accounting change -- .04 --
-------- -------- --------
Loss before extraordinary item (1.94) (.37) (.48)
Extraordinary item (.11) -- --
-------- -------- --------
Net basic and diluted loss per share $ (2.05) $ (.37) $ (.48)
======== ======== ========
Weighted average common shares outstanding 101.7 108.2 96.9
The accompanying notes are an integral part of these statements.
28
29
KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As at December 31,
(In millions except share amounts)
1998 1997
------- -------
ASSETS
Cash and cash equivalents $ 18.5 $ 16.0
Restricted cash 0.5 3.5
Inventories (Note 5) 52.5 57.1
Receivables 33.7 32.9
Other 2.0 20.2
------- -------
Current assets 107.2 129.7
Mineral properties, plant and equipment, net (Note 6) 480.0 723.3
Other 14.8 17.6
------- -------
Total assets $ 602.0 $ 870.6
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand loan (Note 2) $ 90.3 $ 73.3
Current maturities of long-term debt (Note 7) 23.7 81.4
Accounts payable, trade 18.4 24.2
Accrued and other current liabilities 18.8 39.1
Reclamation reserve, current portion 2.6 8.0
------- -------
Current liabilities 153.8 226.0
Advance from parent (Note 2) 196.6 --
Long-term debt (Note 8) 123.0 345.7
Reclamation reserve, non-current portion 28.8 13.8
Other 27.7 11.3
------- -------
Total liabilities 529.9 596.8
Commitments and contingencies (Notes 8 and 13)
Shareholders' equity:
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 1998 and 114,850,103 shares in 1997 (Note 11) 0.9 1.1
Paid-in capital 409.4 408.6
Accumulated deficit (340.0) (130.8)
Unearned equity - financing costs -- (6.9)
------- -------
Total shareholders' equity 72.1 273.8
======= =======
Total liabilities and shareholders' equity $ 602.0 $ 870.6
======= =======
The accompanying notes are an integral part of these statements.
29
30
KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(In millions)
1998 1997 1996
------- ------- -------
Cash flows from operating activities:
Net loss $(202.3) $ (33.4) $ (39.2)
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Depreciation and depletion 91.1 88.4 29.8
Asset write-downs 193.4 -- 35.5
Increase (decrease) in reclamation reserve 9.5 6.1 (0.2)
Cumulative effect of accounting change -- (4.5) --
Non-cash interest* -- -- 5.2
Amortization of financing costs* 2.1 5.8 4.0
Extraordinary loss 11.5 -- --
Increase (decrease) in deferred taxes -- 0.4 (10.0)
Deferred revenue realized (27.4) -- --
Deferred hedging costs -- 9.8 0.5
Other, net (1.6) 6.4 0.5
------- ------- -------
Cash flow provided from operations 76.3 79.0 26.1
------- ------- -------
Deferred revenue - hedging gains 45.9 -- --
Decrease (increase) in working capital, net of
businesses acquired:
Receivables (3.7) (8.5) (0.5)
Accrued and other current liabilities (16.1) 10.3 (0.1)
Inventories 5.7 5.9 (8.5)
Other assets 8.6 5.7 (0.7)
Accounts payable, trade (6.9) (24.4) 0.2
------- ------- -------
Cash flow provided from operating activities 109.8 68.0 16.5
------- ------- -------
Cash flows from investing activities:
Capital expenditures (15.4) (30.8) (187.7)
Merger costs (14.8) -- --
Business acquisitions, net of cash acquired (3.8) -- --
Net loans to joint venture partners -- -- (2.0)
Capitalized interest -- (4.2) (22.8)
Decrease (increase) in restricted cash 3.0 (3.5) --
------- ------- -------
Net cash used in investing activities (31.0) (38.5) (212.5)
------- ------- -------
Cash flows from financing activities:
Proceeds from financings 272.8 160.5 204.3
Repayments of financings (342.9) (181.5) (13.1)
Cash acquired in connection with purchase of
Kubaka investment 0.7 7.0 --
Deferred financing costs -- (3.7) (2.8)
Preferred dividends paid (6.9) (6.9) (6.9)
------- ------- -------
Net cash (used in) provided by financing activities (76.3) (24.6) 181.5
------- ------- -------
Net increase (decrease) in cash and cash equivalents 2.5 4.9 (14.5)
Cash and cash equivalents at January 1 16.0 11.1 25.6
------- ------- -------
Cash and cash equivalents at December 31 $ 18.5 $ 16.0 $ 11.1
======= ======= =======
Non-cash transaction:
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) $ --
======= ======= =======
30
31
* 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 guarantee and financing fee. The guarantee 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 $28.9 million,
$35.0 million and $17.9 million in 1998, 1997 and 1996, respectively.
There were no income taxes paid during 1998, 1997 or 1996.
The accompanying notes are an integral part of these statements.
31
32
KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31
(In millions)
PREFERRED STOCK COMMON STOCK
------------------ -------------------- PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------ ------ ------- ------------ --------
Balance at December 31, 1995 1.8 $1.8 96.4 $1.0 $339.8 $(44.4) $ --
Net loss -- -- -- -- -- (39.2) --
Issuance of common shares:
Employee and director plans -- -- 0.1 -- 0.7 -- --
Repayment of fees and
interest to Cyprus Amax -- -- 2.8 -- 15.2 -- (10.0)
Amortization of financing costs -- -- -- -- -- -- 1.4
Preferred stock dividends -- -- -- -- -- (6.9) --
--- ---- ----- ---- ------ ------ -----
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) $ --
=== ==== ===== ==== ====== ====== =====
The accompanying notes are an integral part of these statements.
32
33
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
percent owned by Kinross Gold Corporation (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 percent interest in the Fort
Knox mine near Fairbanks, Alaska; a 53 percent interest in the Kubaka mine in
the Russian Federation; and a 50 percent interest in the Refugio mine in Chile.
The Company owns the Hayden Hill mine in Lassen County, California, and a 90
percent interest in the Guanaco mine in Chile. Mining was completed at Hayden
Hill and Guanaco during 1997 and residual leaching will continue during 1999 at
both mines. In addition, the Company owns a 62.5 percent venture interest in 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, both of which are in reclamation.
In the milling process, ore is crushed and the gold and silver are concentrated
and then smelted into ore, 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. 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 Corporation, issued
to Kinross 92,213,928 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. Prior
to the merger, the Company was approximately 59% owned by Cyprus Amax Minerals
Company (Cyprus Amax).
FINANCING ARRANGEMENTS
Pursuant to the merger, Kinross advanced $255.8 million to the Company for
repayment of outstanding debt. $196.6 of the advances were still outstanding at
December 31, 1998. The advances are non-interest bearing and have no fixed terms
of repayment. Kinross has agreed not to seek repayment of these advances during
1999.
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 percent 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 $71.0 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 percent interest
differential to Cyprus Amax as a guarantee fee. The Company and Kinross have
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.
33
34
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, 1997, the Company had borrowed $73.3 million under a demand
loan with Cyprus Amax at an average rate of 8.1 percent. During the second
quarter of 1998, the Company borrowed an additional $17 million from Cyprus Amax
under the demand loan. In connection with the Kinross Merger, the $90.3 million
outstanding under the demand loan was transferred to Kinross. Kinross does not
charge the Company interest on the demand loan.
In April 1994, Cyprus Amax provided the Company with a $100.0 million
convertible line of credit. Subsequent to the Kinross Merger this line of credit
was terminated.
OTHER AGREEMENTS
A services agreement governs the provision of and payment for general
administrative services between Cyprus Amax and the Company. For the years ended
December 31, 1998, 1997 and 1996, insurance, management and other services were
supplied to the Company on a full cost reimbursement basis. The Company was
charged $2.3 million, $4.1 million and $3.4 million for the years ended December
31, 1998, 1997 and 1996, respectively, for reimbursable costs. As of December
31, 1998 and 1997, the Company had outstanding amounts due to Cyprus Amax of
$0.2 million and $0.5 million, respectively, relating to such services.
The Company also had an agreement to monetize a portion of the Company's foreign
tax net operating losses was entered into with Cyprus Amax in February 1998. In
connection with the transaction, the Company recorded a gain of approximately
$6.7 million which is included in other income.
3. 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 companies over which the
Company can exercise significant influence but not control are accounted for
using the equity method. The cost method is used for entities in which the
Company owns less than 20%. Investments in joint ventures (Kubaka, Refugio, and
Guanaco mines) are accounted for using proportionate consolidation, consistent
with accepted mining industry practice. All material intercompany balances and
transactions have been eliminated. Certain 1996 amounts were reclassified in
1997 to conform to the 1997 presentation.
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,
1998 and 1997, basic and diluted earnings 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.
34
35
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.
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 from proven and probable
reserves 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
write-down of the Fort Knox and Refugio mines recorded in the fourth quarter of
1998 and the Guanaco mine recorded in the fourth quarter of 1996, in accordance
with SFAS No. 121.
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, 1998,
translation losses were $0.3 million compared with $1.0 million for the year
ended December 31, 1997. Translation losses were insignificant in 1996.
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.
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.
35
36
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.
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, 1998, there are no plans that require
the issuance of Kinam 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," which is
required to be adopted for fiscal years beginning after June 15, 1999. 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 as required for the fiscal year commencing January 1, 2000.
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, 1998,
1997 and 1996.
36
37
4. INCOME TAXES
Income (loss) before income taxes consists of the following:
1998 1997 1996
------ ------ ------
Domestic (153.1) $(13.7) $ 3.5
Foreign (48.7) (19.3) (52.7)
------ ------ ------
(201.8) $(33.0) $(49.2)
====== ====== ======
The income tax (benefit) expense consists of the following:
1998 1997 1996
---- ---- ------
Current:
Federal $0.2 $ -- $ --
State -- -- --
Foreign -- -- --
---- ---- ------
0.2 -- --
---- ---- ------
Deferred:
Federal -- -- --
State -- -- (10.0)
Foreign 0.3 0.4 --
---- ---- ------
0.3 0.4 (10.0)
---- ---- ------
$0.5 $0.4 $(10.0)
==== ==== ======
The components of deferred tax (assets) liabilities are as follows:
1998 1997 1996
------ ------ ------
Deferred tax assets:
Reclamation liabilities $ (6.1) $ (6.1) $ (5.8)
Net operating loss carryforwards (68.1) (62.4) (53.4)
Minimum tax credit carryforwards (5.1) (5.1) (2.8)
Other (7.9) (8.0) (10.5)
------ ------ ------
Total deferred tax assets (87.2) (81.6) (72.5)
Valuation allowance 62.6 28.8 18.1
------ ------ ------
Net deferred tax assets (24.6) (52.8) (54.4)
Deferred tax liabilities:
Other 5.1 -- --
Properties 19.5 53.2 54.4
------ ------ ------
Net deferred tax liabilities $ -- $ 0.4 $ --
====== ====== ======
37
38
The following is a reconciliation between the amount determined by applying the
federal statutory rate of 34 percent to the loss before taxes and the income tax
(benefit) expense:
1998 1997 1996
------ ------ ------
Income taxes at statutory rate $(68.8) $(11.2) $(16.7)
Increases (decreases) resulting from:
Losses with no expected tax benefit 68.8 13.5 16.7
State income taxes, net of federal benefit -- -- (10.0)
Percentage depletion -- (2.3) --
------ ------ ------
Income tax (benefit) expense -- -- (10.0)
Foreign losses with no expected tax benefit -- 0.4 --
Other 0.5 --
------ ------ ------
$ 0.5 $ 0.4 $(10.0)
====== ====== ======
The valuation allowance increased $34.0 million in 1998 due to uncertainties of
realizing loss carryforwards in the future.
At December 31, 1998, the Company had federal tax net operating loss
carryforwards of $138.0 million and alternative minimum tax net operating loss
carryforwards of $84.0 million expiring in the years 2004 through 2018 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,
1998, the Company also had Chilean tax net operating loss carryforwards of $45.0
million, which do not expire.
5. INVENTORIES
Inventories at December 31, 1998 and 1997, consisted of the following:
1998 1997
------ ------
Gold:
Finished goods $ 18.9 $ 23.3
Work-in-process 2.8 3.6
Materials and supplies 30.8 30.2
------ ------
$ 52.5 $ 57.1
====== ======
During the first quarter of 1997, the Company 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 year's results have been
restated to reflect the effect of this change in policy. The effect of this
restatement on the year ended December 31, 1996 was to increase the previously
reported net loss by $5.0 million or $0.06 per share. 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. On a
pro forma basis this change would have reduced the 1996 net loss by $2.3
million. Both accounting changes were made in order to better match current
costs with revenues and to conform with prevailing gold industry practice.
38
39
6. MINERAL PROPERTIES, PLANT AND EQUIPMENT AND WRITE-DOWNS
The components of mineral properties, plant and equipment at December 31, 1998
and 1997, were as follows:
1998 1997
-------- --------
Mining plant and equipment $ 700.9 $ 698.6
Mining properties 424.6 405.9
Development properties and construction-in-progress 25.5 20.4
-------- --------
1,151.0 1,124.9
Less accumulated depreciation, depletion
and write-downs (671.0) (401.6)
-------- --------
$ 480.0 $ 723.3
======== ========
ACQUISITION OF KUBAKA
During May 1997, the Company completed the acquisition of a Cyprus Amax
subsidiary that owns 50 percent of Omolon Gold Mining Company (Omolon). Omolon
owns and operates the Kubaka gold mine, located in Far East Russia. Kubaka
poured its first gold in February 1997 and achieved commercial production
effective June 1, 1997. The project was completed at a capital cost of
approximately $228 million, excluding about $14 million in capitalized interest.
In December 1998, the Company acquired an additional 3 percent 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.
ASSET WRITE-DOWNS
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.
1998 1997 1996
------ ---- ------
Fort Knox Mine $140.3 $ -- $ --
Refugio Mine 53.1 -- --
Guanaco Mine -- -- 35.5
------ ---- ------
$193.4 $ -- $ 35.5
====== ==== ======
The impairment analysis is performed on an undiscounted basis in order to
determine whether an impairment existed. 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 write-down.
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.
39
40
In the fourth quarter of 1998, following a comprehensive evaluation as described
above 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 write-down of the Fort Knox
mine and a $53.1 million write-down of the Refugio mine.
As a result of a detailed study of the continuity of ore, costs and production
rates at the Company's Guanaco mine, the Company recorded a $35.5 million
write-down during the fourth quarter of 1996. Included in the write-down were
$9.4 million of heap leach inventories, which were impaired due to lower actual
and expected future recovery rates. Mining was completed at Guanaco in July 1997
with residual leaching continuing into 1999.
7. LONG-TERM DEBT
At December 31
------------------
1998 1997
------ ------
Fort Knox project financing, 8.5% for 1998 $ -- $222.2
Kubaka project financing, 9.0% for 1998, due 1999 - 2001 49.0 58.8
Kubaka subordinated debt, 12.0% for 1998, due 1999 - 2000 8.9 7.0
Kubaka working capital line of credit, 12.0% for 1998 -- 7.5
Industrial Revenue Bond, 6.25% for 1998 due 2009 71.0 71.0
Credit facility, 7.5% for 1998 -- 40.0
Sale-leaseback 8.5% for 1998 due 1999 - 2004 17.8 20.6
------ ------
146.7 427.1
Less current portion 23.7 81.4
------ ------
$123.0 $345.7
====== ======
Scheduled debt maturities as of December 31, 1998, were $23.7, $21.7, $27.3,
$2.5, $0.3 and $0.2 for the years 1999 through 2004 and $71.0 million in 2009.
In December 1997, the Company refinanced a Refugio gold loan with approximately
$28.0 million borrowed under a new $40.0 million credit facility resulting in a
gain of approximately $6.0 million, which is being amortized, net of
approximately $2.0 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 $40.0 million credit facility was repaid.
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 percent and an additional 1.75 percent
interest differential is paid to Cyprus Amax as a guarantee fee. The Company and
Kinross have agreed to reimburse Cyprus Amax for any payments made or costs
incurred under the guarantee. Kinross has agreed to use all reasonable efforts
to cause itself to be substituted for Cyprus Amax in the guarantee.
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 $117.5 million remained outstanding as at December 31,
1997. During 1998, Kubaka repaid $25 million of these obligations, leaving $92.5
million outstanding as at December 31, 1998. The Company's 53% proportionate
share of these obligations is $49 million. Interest on the project-financing
debt is variable based upon LIBOR and as at December 31, 1998 is approximately
9% per annum. The project financing debt becomes recourse solely to Kubaka after
completion tests, as defined, are passed. Cyprus Amax, the former parent of the
Company, has guaranteed the project-financing debt and Kinross and the Company
have agreed to reimburse Cyprus Amax for guarantee payments. The Company is
currently pursuing finalization of the completion tests in order to eliminate
the guarantees.
A bank licensed to do business in Russia has provided subordinated debt to
finance the Kubaka mine. As at December 31, 1998, $16.8 million remains
outstanding on this debt. The Company's 53% proportionate share of these
obligations is $8.9 million. Interest on the project-financing debt is variable
based upon LIBOR and as at December 31, 1998 is approximately 12% per annum. The
subordinated debt has no terms of repayment until the completion tests under the
EBRD and OPIC project financing are achieved. Once completion tests are
achieved, the loan is repayable over nine quarterly payments. The subordinated
debt is supported by a letter of credit from Kinross.
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41
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 percent
to 8.7 percent.
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.
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. The Company's average
realized price per ounce of gold was $344 in 1998 as compared with $360 in 1997
and $412 in 1996. These realized prices compare with average spot gold prices of
$294 per ounce in 1998, $331 per ounce in 1997 and $388 per ounce in 1996.
(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).
On June 1, 1998, the commodity derivative contract portfolio held by Kinam had a
fair value of $45.0 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, 1998, $16.1 million of this gain is included in
other long-term liabilities. There are no outstanding hedge contracts as at
December 31, 1998.
As at December 31,1997, the Company's outstanding hedge contracts were as
follows:
Average
Realized Price
Gold Ounces Per Ounce Period
----------- -------------- ------
Forward sales (1) 326,000 $399 Jan. 1998 - Dec. 2002
Purchased put options 126,000 $419 Jan. 1998 - Dec. 2000
(1) Primarily on a spot deferred forward basis which allows for deferral of
the delivery of gold ounces to a later date at a renegotiated gold price.
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42
As of December 31, 1997, the Company's outstanding commodity derivative
contracts which are marked to market are as follows:
Average
Realized Price
Gold Ounces Per Ounce Period
----------- --------------- ------
Forward purchases 514,000 $327 Jan. 1998 - Dec. 1998
Purchased put options 448,000 $364 Jan. 1998 - Dec. 1998
Purchased compound put options 625,000 $325 Sept. 1998 - Dec. 2000
Sold put options 412,000 $337 Jan. 1998 - June 1998
Purchased call options 3,000 $315 Jan. 1998
Purchased compound call options 300,000 $333 Sept. 1998 - Dec. 1998
Sold call options 199,000 $314 Jan. 1998 - June 1998
The market value of the Company's forward contracts and put and call options at
December 31, 1997, was approximately $51.0 million.
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 portionof this gain which is included in other long-term
liabilities at December 31, 1998 amounted to $3.0 million and will be recognized
in income over the next four years
On June 1, 1998, the Company repaid the gold loan portion of the Fort Knox
project financing as part of the acquisition of Kinam realizing a gain of $3.6
million. The gain is being taken into income over the original delivery schedule
set out in the loan agreement. The deferred portion, which is included in other
long-term liabilities of this gain at December 31, 1998 amounted to $3.0 million
and will be recognized in income over the next three 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 range from March 1999 to June 1999.
(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, 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 outstanding preferred shares at December 31, 1998 was
$65.4 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.
9. EMPLOYEE BENEFITS
PENSION PLAN
Subsequent to the Kinross Merger, all employees of the Company were transferred
into the Kinross defined contribution pension plan. From June 1 through December
31, 1998, the Company contributed $0.3 million into the plan on behalf of the
Kinam employees.
Prior to the Kinross Merger, all employees in the United States were covered by
a non-contributory defined benefit 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
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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 includes the following components:
1998 1997 1996
------ ------ ------
Service cost $ 0.2 $ 0.5 $ 0.6
Interest cost 0.4 0.3 0.3
Actual return on assets (0.3) (0.2) (0.3)
Deferred gain -- -- 0.1
Curtailment credit (0.5) -- --
Net amortization of prior service
Cost and losses 0.1 -- (0.1)
------ ------ ------
Net periodic expense $ (0.1) $ 0.6 $ 0.6
====== ====== ======
The following table summaries the change in benefit obligations:
1998 1997
Benefit obligation, beginning of year $ 4.3 $ 4.1
Service cost 0.3 0.5
Interest cost 0.4 0.3
Actuarial loss 1.2 0.2
Curtailments (0.5) --
Benefits paid (0.4) (0.8)
----- -----
Benefit obligation, end of year $ 5.3 $ 4.3
===== =====
The following table summarizes the funded status of the plan and the related
amounts recognized in the Company's financial statements at December 31:
1998 1997
------ ------
Actuarial present value of accumulated
benefit obligation, including vested
benefits of $3.0 million in 1998 and 1997 $ 4.6 $ 4.1
------ ------
Projected benefit obligation $ (5.3) $ (4.3)
Plan assets at fair value 2.9 3.0
------ ------
Plan assets less than projected benefit obligation (2.4) (1.3)
Unrecognized prior service cost 0.0 (0.6)
Estimated additional liability (0.3) (0.4)
Unrecognized net loss 0.3 1.3
------ ------
Accrued pension cost $ (2.4) $ (1.0)
====== ======
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The following table summarizes the change in fair value of plan assets
1998 1997
------ ------
Fair value of plan assets, beginning of year $ 3.0 $ 2.3
Actual return (0.2) 0.3
Employer contributions 0.5 1.2
Benefits paid (0.4) (0.8)
------ ------
$ 2.9 $ 3.0
====== ======
The following assumptions were used in calculating the funded status of the plan
at December 31 and the pension cost for the subsequent year:
1998 1997
---- ------
Expected long-term rate of return on assets 9.0% 9.0%
Discount rate 7.0% 7.25%
Rate of increase in compensation levels N/A 5.0%
POSTRETIREMENT 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 postretirement benefit costs for
the years ended December 31, 1998, 1997 and 1996, 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:
1998 1997
------ ------
Accumulated postretirement benefit obligation:
Retirees $ 1.7 $ 0.9
Active plan participants -- 0.7
------ ------
Total accumulated postretirement benefit obligation 1.6
Plan assets at fair value -- --
------ ------
Accumulated postretirement benefit obligation
in excess of plan assets (1.7) (1.6)
Unrecognized prior service cost -- (1.6)
Unrecognized net loss 0.1 0.3
------ ------
Accrued postretirement benefit cost $ (1.6) $ (2.9)
====== ======
The accumulated postretirement benefit obligation was determined using a
weighted average annual discount rate of 7.00 percent in 1998 and 7.25 percent
in 1997. The assumed health care cost trend rate for 1999 is 8.00 percent,
declining gradually to 4.25% for 2007 and thereafter when Company costs
associated with the plan are capped. A one percent increase in the health care
cost trend rate used would have resulted in an insignificant increase in the
1998 postretirement benefit cost and the accumulated postretirement benefit
obligation at December 31, 1998.
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, 1998 and 1997, the Company's liability for
postemployment benefits totaled $2.1 million and $2.7 million, respectively, and
is included in other liabilities.
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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 are
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, 1998, there are no
plans that require the issuance of Kinam stock.
12. SEGMENTED INFORMATION
The Company operates five gold mines: Fort Knox, located in Alaska; Kubaka (53%
ownership), located in Russia; Refugio (50%), 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 3).
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 AND
FORT KNOX KUBAKA REFUGIO HILL GUANACO OTHER(b) TOTAL
--------- ------ ------- ------ ------- -------------- -------
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(d) 15.7 5.0 1.7 -- 1.0 -- 23.4
Amortization of capital assets 56.2 26.6 8.3 -- -- -- 91.1
Write-down 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(c) 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
1996
Mining revenue -- -- 12.1 42.9 33.3 19.9 108.2
Interest revenue -- -- 0.1 -- -- 1.5 1.6
Interest expense 2.9 -- 2.9 -- 0.6 0.5 6.9
Amortization of capital assets -- -- 3.4 9.0 14.5 2.9 29.8
Write-down of mineral properties -- -- -- -- 35.5 -- 35.5
Segment profit(loss)(a) (2.9) -- (2.0) 7.5 (46.7) (5.1) (49.2)
Segment assets 555.0 -- 120.2 16.6 19.1 51.3 762.2
Capital expenditures 192.4 -- 15.7 0.5 1.9 -- 210.5
(a) Segment profit (loss) includes write-down 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:
1998 1997 1996
------- ------ ------
Segment loss: $(209.0) $(27.5) $(44.1)
Add (deduct) items not included in segment loss
Corporate and other 18.7 (10.0) (5.1)
------- ------ ------
Sub-total (190.3) (37.5) (49.2)
Income tax (expense) benefit (0.5) (0.4) 10.0
Cumulative effect of accounting change -- 4.5 --
Extraordinary item - loss on early extinguishment of debt (11.5) -- --
Dividends of convertible preferred stock (6.9) (6.9) (6.9)
------- ------ ------
Net loss attributable to common shares for the year $(209.2) $ (40.3) (46.1)
======= ====== ======
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Enterprise - wide disclosure:
Geographic information:
MINERAL PROPERTIES
MINING REVENUE PLANT AND EQUIPMENT
---------------------------------- --------------------
1998 1997 1996 1998 1997
------ ------ ------ ------ ------
Russia $ 72.7 $ 40.0 $ -- $124.6 $114.0
Chile 35.5 63.9 45.4 33.5 88.8
------ ------ ------ ------ ------
Total foreign 108.2 103.9 45.4 158.1 202.8
United States 159.9 155.6 62.8 321.9 520.5
------ ------ ------ ------ ------
Total $268.1 $259.5 $108.2 $480.0 $723.3
====== ====== ====== ====== ======
13. COMMITMENTS AND CONTINGENCIES
The Company estimates future reclamation and closure costs for properties
operated by the Company to be approximately $50 million based on currently
applicable federal, state and foreign laws and regulations. At December 31,
1998, $31.4 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 $325 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 53% ownership of the Kubaka Mine located in eastern Russia.
During 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, a moratorium on foreign debt repayments, 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 six years.
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.
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14. QUARTERLY DATA (UNAUDITED)
Quarterly earnings data for the years ended December 31, 1998 and 1997, follow:
FIRST SECOND THIRD FOURTH
------ ------- ------ -------
1998 QUARTERS
Revenues $ 62.7 $ 74.5 $ 54.2 $ 76.7
Income (loss) from operations 1.1 1.4 7.3 (183.6)
Income (loss) before extraordinary item (3.0) (7.7) 5.8 (185.9)
Net income (loss) (3.0) (19.2) 5.8 (185.9)
Income (loss) attributable to common shares (4.7) (20.9) 4.1 (187.7)
------ ------- ------ -------
Per common share:
Income (loss) before extraordinary item (0.04) (0.09) 0.04 (1.85)
Extraordinary item 0.00 (0.11) 0.00 0.00
Net basic and diluted income (loss) (0.04) (0.20) 0.04 (1.85)
1997 QUARTERS
Revenues $ 38.4 $ 73.3 $ 79.6 $ 68.2
Income (loss) from operations (0.9) 1.5 2.5 (1.2)
Loss before cumulative effect of accounting change (6.1) (9.20) (9.3) (13.3)
Net loss (1.6) (9.20) (9.3) (13.3)
Loss attributable to common shares (3.3) (10.90) (11.0) (15.1)
------ ------- ------ -------
Per common share:
Loss before cumulative effect of accounting change (.08) (.11) (.10) (.13)
Cumulative effect of accounting change .05 -- -- --
------ ------- ------ -------
Net basic and diluted loss $ (.03) $ (.11) $ (.10) $ (.13)
====== ======= ====== =======
Fourth quarter 1998 results included a $140.3 million charge due to the
write-down of the Fort Knox mine and a $53.1 million pre-tax charge due to the
write-down 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)
1998 1997 1996
---------------------------------------------- ----------- ---------
CONTAINED CONTAINED
AVERAGE OUNCES CONTAINED OUNCES
GRADE CONTAINED (THE OUNCES (THE (THE
(OUNCES OUNCES COMPANY'S COMPANY'S COMPANY'S
TONS PER TON) (100%) SHARE) SHARE) SHARE)
------- --------- --------- ---------- ----------- ---------
GOLD
Producing mines:
Fort Knox(2) 156,628 0.024 3,745 3,745 4,099 4,079
Kubaka(3) 3,467 0.470 1,626 862 1,098 1,332
Refugio(4) 84,406 0.026 2,208 1,104 1,460 1,558
Guanaco(5) -- -- -- -- -- 119
Hayden Hill -- -- -- -- -- 164
----- ----- ----- -----
Total producing mines 7,579 5,711 6,657 7,252
----- ----- ----- -----
Other properties:
Haile(6) -- -- 488 488
----- ---- ----- -----
Total gold 7,579 5,711 7,145 7,740
===== ===== ===== =====
(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 $325 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.
(5) The Company owns a 90 percent interest in the Guanaco mine and under
existing shareholder arrangements receives 100 percent of production
until certain conditions are met. Based on management's belief that those
conditions would not be met, 100 percent of Guanaco's reserves were
included in the Company's reserve table for 1996.
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(6) Due to current economic conditions the Company has reclassified the Haile
Reserves to other mineralized material. The Company has not yet reached a
decision regarding whether to proceed with development of the property.
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 1998 were as follows:
HEAP
LEACH MILL
----- ----
Refugio 60% N/A
Fort Knox N/A 90%
Kubaka N/A 98%
16. SUBSEQUENT EVENT
At December 31, 1998, the Company owned a 62.5 percent venture interest in the
Haile property in Lancaster County, South Carolina. The remaining 37.5 percent
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. On March 23, 1999, the parties
entered into an agreement whereby the Company purchased all of the shares of
Kershaw for $2.0 million from Piedmont and all of the parties to the various
lawsuits and arbitrations noted above mutually released each other from any
obligations they may have had to one another. The various lawsuits and
arbitrations were dismissed.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEMS 10, 11 & 12.
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 1999. The definitive information statement will be filed with
the Commission not later than 120 days after December 31, 1998, pursuant to
Regulation 14C of the Securities Exchange Act of 1934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Items 1 and 2. Business and Properties - Agreements with Kinross.
- Agreements with Cyprus Amax."
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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 Independent Accountants 25
Consolidated Statement of Operations for
each of the three years in the period ended
December 31, 1997 28
Consolidated Balance Sheet at December 31, 1997
and 1996 29
Consolidated Statement of Cash Flows for each
of the three years in the period ended
December 31, 1997 30
Consolidated Statement of Shareholders'
Equity for each of the three years in the
period ended December 31, 1997 32
Notes to Consolidated Financial Statements 33 - 51
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, filed with the Secretary of State of the
State of Delaware on September 18, 1998. *
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. *
10.1 Credit 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.
10.2 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.
10.3 Amended and Restated Agreement and Plan of Merger and
Reorganization, dated as of October 9, 1996 among the Company,
Kinam Russia Corporation, Cyprus Amax, Cyprus Gold Company and
Cyprus Magadan Gold Company, filed as Exhibit (10a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference.
10.4 Loan Agreement, dated as of May 1, 1997, between Alaska
Development Export Authority and Fairbanks Gold
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Mining, Inc.; Reimbursement Agreement, dated as of May 1, 1997,
between Fairbanks Gold Mining, Inc. And Union Bank of Switzerland,
New York Branch; Guarantee, 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.
10.6 Loan Agreement, dated as of June 30, 1995, between Omolon and
European Bank for 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 Guarantee Agreement, dated as of August 30, 1995, among Cyprus
Amax, EBRD and OPIC; and Amendment Agreement to Cyprus Amax
Guarantee, dated January 30, 1997, among Cyprus Amax, EBRD and
OPIC, amending the Guarantee 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.; 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.;, 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 Kinross Merger Corporation, and
Kinam, dated February 9, 1998.
10.12 Stockholder Agreement dated as of February 9, 1998, among Kinross,
Kinross Merger Corporation, Cyprus Amax and each of the other
persons identified on Exhibit A.
21 Subsidiaries of the Company. *
23.1 Consent of Deloitte & Touche LLP *
23.2 Consent of PricewaterhouseCoopers LLP *
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 1998.
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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: April 13, 1999 By /s/ Arthur H. Ditto
----------------------------------
Arthur H. Ditto, President
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 April 13, 1999.
/s/ Arthur H. Ditto President and Director
- -------------------------- (Principal Executive Officer)
Arthur H. Ditto
/s/ Robert W. Schafer Vice President
- --------------------------
Robert W. Schafer
/s/ Brian W. Penny Treasurer and Director
- -------------------------- (Principal Financial Officer)
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
54