Exhibit 4.1
This short form prospectus constitutes a public offering of these securities
only in those jurisdictions where they may be lawfully offered for sale and
therein only by persons permitted to sell such securities. No securities
commission or any similar authority in Canada has in any way passed upon the
merits of the securities offered hereunder and any representation to the
contrary is an offence.
Information has been incorporated by reference in this short form prospectus
from documents filed with securities commissions or similar authorities in
Canada. Copies of the documents incorporated herein by reference may be
obtained on request, without charge, from the Vice-President, Investor Relations
of Royal Oak Mines Inc., 5501 Lakeview Drive, Kirkland, Washington 98033-7314
U.S.A., Telephone: (425) 822-8992, Fax: (425) 822-3552.
ADDITIONAL ISSUE August 31, 1998
ROYAL OAK MINES INC.
$5,334,761
4,103,663 COMMON SHARES
(TO BE ISSUED ON THE EXERCISE OF 4,103,663 SPECIAL WARRANTS)
This short form prospectus is being filed in respect of 4,103,663 common
shares ("Common Shares") of Royal Oak Mines Inc. ("Royal Oak" or the
"Corporation") which are issuable, without payment of additional consideration,
upon the exercise of 4,103,663 special warrants (the "Special Warrants") issued
by Royal Oak on June 24, 1998. Each Special Warrant entitles the holder thereof
to acquire one Common Share, without payment of additional consideration, at any
time prior to 2:00 p.m. (Vancouver time) on the earlier of: (i) the sixth
business day after a receipt for this short form prospectus has been issued by
the securities regulatory authority in each of Alberta, British Columbia,
Newfoundland and Ontario; and (ii) December 31, 1998 (the "Expiry Date"). All
Special Warrants remaining unexercised on the Expiry Date will be automatically
exercised on the Expiry Date. If the securities regulatory authority in each of
Alberta, British Columbia, Newfoundland and Ontario has not issued a receipt for
this short form prospectus on or before 2:00 p.m. (Vancouver time) on September
21, 1998, the holders of Special Warrants shall be entitled to deliver their
Special Warrant certificates to Montreal Trust Company of Canada at its
principal offices in Toronto, Ontario at 151 Front Street West, 8th Floor,
Toronto, Ontario, M5J 2N1 or Vancouver, British Columbia at 4th Floor, 510
Burrard Street, Vancouver, British Columbia, V6C 3B9, and to receive 1.1 Common
Shares, without payment of additional consideration, for each Special Warrant
held. See "Details of the Offering".
The issue price of $1.30 per Special Warrant was established by the
Corporation. The outstanding Common Shares of Royal Oak are listed on The
Toronto Stock Exchange and the American Stock Exchange. On August 31, 1998, the
closing price of the Common Shares on The Toronto Stock Exchange was Cdn$0.60
and on the American Stock Exchange was US$0.438.
Proceeds to
Price to Public the Corporation(1)
--------------- ------------------
Per Special Warrant $1.30 $1.30
Total Offering $5,334,761 $5,259,761
(1) Before deducting the expenses of the offering of Special Warrants estimated
to be $75,000.
An investment in the securities offered hereby is subject to certain risks
related to the nature of the Corporation's business. See "Rick Factors".
Certificates for the Common Shares issuable on exercise of the Special Warrants
will be available for delivery upon exercise of the Special Warrants.
2
EXCHANGE RATE DATA
The Corporation publishes its consolidated financial statements in Canadian
dollars. ALL DOLLAR AMOUNTS SET FORTH IN THIS SHORT FORM PROSPECTUS ARE IN
CANADIAN DOLLARS, EXCEPT WHERE OTHERWISE INDICATED. The following table sets
forth certain exchange rates based on the noon buying rate in the City of New
York for cable transfers, in Canadian dollars, as certified for customs purposes
by the Federal Reserve Bank of New York (the "Noon Buying Rate"). Such rates
are set forth as United States dollars per $1.00 and are the inverse of rates
quoted by the Federal Reserve Bank of New York for Canadian dollars per US$1.00.
On August 31, 1998, the inverse of the Noon Buying Rate was $1.00 equals
US$0.6361.
EIGHT MONTHS ENDED
YEAR ENDED DECEMBER 31, AUGUST 31,
------------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1998
------- ------ ------ ------ ------ ------
High........... 0.8046 0.7632 0.7527 0.7513 0.7489 0.7105
Low............ 0.7439 0.7105 0.7023 0.7235 0.6947 0.6343
Average (1).... 0.7751 0.7321 0.7305 0.7332 0.7222 0.6835
Period End..... 0.7544 0.7129 0.7323 0.7301 0.7034 0.6361
Note:
(1) The average of the exchange rates on the last day of each month during the
period indicated.
TABLE OF CONTENTS
Page Page
Exchange Rate Data....................... 2 Share Capital............................. 16
Documents Incorporated by Reference...... 2 Price Range and Trading Volume of Royal
Royal Oak Mines Inc...................... 4 Oak Common Shares....................... 17
General................................ 4 Legal Proceedings......................... 19
Selected Financial Data................ 4 Legal Matters............................. 21
Recent Developments.................... 6 Auditors, Transfer Agent and Registrars... 21
Risk Factors............................. 9 Purchasers' Statutory Rights.............. 21
Use of Proceeds.......................... 15 Contractual Right of Rescission........... 22
Details of the Offering.................. 15 Certificate of the Corporation............ 23
DOCUMENTS INCORPORATED BY REFERENCE
The following documents of the Corporation, filed with the securities
commissions or similar authorities in the provinces of Canada and with the
United States Securities and Exchange Commission, are specifically
incorporated by reference in and form an integral part of this short form
prospectus:
(a) the Form 10-K of the Corporation dated April 14, 1998;
(b) the comparative audited consolidated financial statements of the
Corporation and the notes thereto for the year ended December 31,
1997, together with the auditors' report thereon, included at pages
60-100 of the Corporation's Form 10-K;
3
(c) "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included at pages 47-57 of the Corporation's
Form 10-K;
(d) the Form 10-Q of the Corporation dated May 15, 1998;
(e) the Form 10-Q of the Corporation dated August 14, 1998;
(f) the Management Information Circular (Proxy Statement) dated
May 21, 1998 prepared in connection with the Corporation's annual
and special meeting of shareholders held on June 26, 1998;
(g) a material change report dated January 12, 1998 with respect to the
Corporation's US$44 million senior secured debenture financing;
(h) a material change report dated February 26, 1998 with respect to the
adoption of a shareholder rights plan by the board of directors;
(i) a material change report dated March 13, 1998 with respect to the
capital cost of the Kemess gold-copper project;
(j) a material change report dated March 18, 1998 with respect to a
default under the Corporation's senior secured debentures due
January 30, 2003;
(k) a material change report dated March 19, 1998 with respect to
liquidity issues and status of construction of the Kemess South mine;
(l) a material change report dated March 26, 1998 with respect to the
Trilon Financial Corporation senior secured debenture financing; and
(m) a material change report dated June 24, 1998 with respect to the
completion of the senior secured debenture financing with Trilon
Financial Corporation.
Material change reports (excluding confidential reports), comparative
interim financial statements and information circulars filed by the
Corporation with the various provincial securities commissions or any similar
regulatory authorities in Canada or the United States after the date of this
short form prospectus and prior to the termination of this offering will be
deemed to be incorporated by reference into this short form prospectus.
ANY STATEMENT CONTAINED IN A DOCUMENT INCORPORATED OR DEEMED TO BE
INCORPORATED BY REFERENCE IN THIS SHORT FORM PROSPECTUS WILL BE DEEMED TO BE
MODIFIED OR SUPERSEDED, FOR THE PURPOSES OF THIS SHORT FORM PROSPECTUS, TO THE
EXTENT THAT A STATEMENT CONTAINED HEREIN OR IN ANY SUBSEQUENTLY FILED DOCUMENT
WHICH ALSO IS OR IS DEEMED TO BE INCORPORATED BY REFERENCE HEREIN MODIFIES OR
SUPERSEDES THAT STATEMENT. ANY STATEMENTS SO MODIFIED OR SUPERSEDED WILL NOT BE
DEEMED, EXCEPT AS SO MODIFIED OR SUPERSEDED, TO CONSTITUTE A PART OF THIS SHORT
FORM PROSPECTUS. THE MAKING OF A MODIFYING OR SUPERSEDING STATEMENT SHALL NOT
BE DEEMED AN ADMISSION FOR ANY PURPOSES THAT THE MODIFIED OR SUPERSEDED
STATEMENT, WHEN MADE, CONSTITUTED A MISREPRESENTATION, AN UNTRUE STATEMENT OF A
MATERIAL FACT OR AN OMISSION TO STATE A MATERIAL FACT THAT IS REQUIRED TO BE
STATED OR THAT IS NECESSARY TO MAKE A STATEMENT NOT MISLEADING IN LIGHT OF THE
CIRCUMSTANCES IN WHICH IT WAS MADE.
4
ROYAL OAK MINES INC.
GENERAL
Royal Oak Mines Inc. ("Royal Oak" or the "Corporation") was formed from the
amalgamation on July 23, 1991 of Giant Yellowknife Mines Limited, Pamour Inc.,
Pamorex Minerals Inc., Royal Oak Resources Ltd. and Akaitcho Yellowknife Gold
Mines Limited. On January 1, 1992 Royal Oak amalgamated with its wholly-owned
subsidiary Supercrest Mines Limited and on December 29, 1997 the Corporation
amalgamated with its wholly-owned subsidiary Kemess Mines Inc. The head office
and principal place of business of the Corporation is 5501 Lakeview Drive,
Kirkland, Washington 98033-7314.
Royal Oak is a major North American gold mining company that has produced
in excess of 50 million ounces of gold over a 60-year period. In 1997, the
Corporation owned and operated five producing gold mines. The Corporation
commenced limited production at its new Kemess gold-copper mine located in
British Columbia on May 19, 1998. See "Recent Developments - Kemess Project".
The Corporation has several projects (Matachewan, Duport, Red Mountain and the
Pamour expansion) at various stages of development. Work on these projects was
postponed in 1997 due to low gold prices and the need to conserve cash to
complete construction of the Kemess South mine. The Corporation has extensive
land positions in Canada covering approximately 566,000 acres, as well as
179,000 acres in Fiji, which provide it with the opportunity to expand its
reserves through focused exploration and development. As of the fiscal year
ended December 31, 1997, Royal Oak reported approximately 7.0 million ounces of
gold in mineable ore reserves, net of reserve additions through exploration and
gold production for the fiscal year, and produced 351,349 ounces of gold.
The Corporation's five producing gold mines in 1997 consisted of the
Colomac and Giant mines in the Northwest Territories, the Pamour and Nighthawk
mines in Ontario and the Hope Brook mine in Newfoundland. In September 1997,
the Corporation closed the Hope Brook mine after depletion of ore reserves and
in December 1997, the Corporation closed the high cost Colomac mine for economic
reasons. Both mines have been placed on care and maintenance. Through
acquisitions, exploration and the implementation of more advanced and efficient
mining methods, the Corporation has increased its annual production from 194,952
ounces of gold in 1991 to 351,349 ounces of gold in 1997, with record gold
production of 389,203 ounces recorded in 1996. The Corporation conducts a
focused exploration program to develop additional mineable ore reserves in close
proximity to its existing mines in order to maximize the utilization of its
processing facilities and to increase processing efficiencies. The reduction of
approximately 2.9 million ounces, or 29%, from the 9.9 million ounces reported
at December 31, 1996, mainly reflects the estimation of ore reserves at a gold
price of $495 per ounce (US$350 per ounce) at December 31, 1997 compared with
$527 per ounce (US$390 per ounce) at the end of 1996.
SELECTED FINANCIAL DATA
The selected financial data in the table below has been derived from the
consolidated financial statements of Royal Oak as at and for the six months
ended June 30, 1998 and 1997 and for the years ended December 31, 1997, 1996 and
1995. The information has been prepared both on the basis of accounting
principles generally accepted in Canada ("Canadian GAAP") and accounting
principles generally accepted in the United States ("U.S. GAAP").
5
SIX MONTHS ENDED YEARS ENDED
JUNE 30 DECEMBER 31
1998 1997 1997 1996 1995
(thousands of dollars except per share amounts)
CANADIAN GAAP
INCOME STATEMENT DATA
Revenue ..................................................... 45,050 106,846 191,167 255,168 208,311
Operating income (loss) ..................................... (13,869) (21,057) (62,848) 29,541 4,933
Net income (loss) ........................................... (32,742) (60,202) (135,215) (5,985) 23,169
Net cash provided by (used in) operating
activities ................................................ (78,751) (71,859) 67,251 57,259 31,760
BALANCE SHEET DATA
Total assets ................................................ 903,876 763,876 843,386 821,630 428,963
Long-term debt .............................................. 426,764 241,728 250,338 239,680 --
Shareholders' equity ........................................ 301,971 391,340 316,378 451,366 340,495
PER SHARE DATA
Earnings (loss) ............................................. (0.24) (0.43) (0.97) (0.04) 0.20
Net cash provided by (used in) operating
activities ................................................ (0.57) (0.52) 0.48 0.42 0.27
U.S. GAAP
INCOME STATEMENT DATA
Net revenue ................................................. 45,050 106,846 191,167 255,168 208,311
Operating income (loss) ..................................... (23,083) (18,702) (70,396) 24,842 (1,059)
Net income (loss) ........................................... (48,592) (57,847) (153,057) (10,684) 17,177
Net cash provided by (used in) operating
activities ............................................... (78,751) (71,859) 66,628 57,066 31,401
BALANCE SHEET DATA
Total assets ................................................ 874,354 752,700 829,350 825,800 416,810
Long-term debt .............................................. 426,764 241,728 250,338 239,680 --
Shareholders' equity ........................................ 253,072 378,488 289,337 436,159 328,342
6
PER SHARE DATA
Earnings (loss) ............................................. (0.35) (0.42) (1.10) (0.08) 0.15
Net cash provided by (used in) operating
activities ................................................ (0.57) (0.52) (0.48) 0.42 0.27
PRODUCTION DATA
Recovered gold and equivalent (ounces) ...................... 91,289 189,925 351,349 389,203 371,151
Average spot gold price (US$ per ounce) ..................... 297 347 331 388 384
Cash cost (US$ per ounce) ................................... 268 358 330 343 358
Total cost (US$ per ounce) .................................. 422 448 426 425 410
RECENT DEVELOPMENTS
KEMESS PROJECT
The Corporation commenced limited production at the Kemess South mine on
May 19, 1998 when hypogene ore was conveyed to line "A", one of two parallel
circuits in the concentrator. On June 14, 1998, line "B" was commissioned.
Commissioning and operations at the Kemess South mine are proceeding as planned.
During the pre-production stripping phase of the project, which commenced
in July of 1997, over 9.0 million tons of overburden and waste were removed to
expose ore in the open pit of the Kemess South mine. From the commencement of
operations in mid-May to August 17, 1998, approximately 3.0 million tons of
hypogene ore at a grade of 0.218% copper and 0.016 ounces of gold per ton has
been mined from the open pit of the Kemess South mine. The strip ratio for the
project is estimated to be approximately 1.18 to 1 over the estimated 16-year
life of the Kemess South mine. The availability of the fleet of mobile
equipment in the open pit has exceeded 90%.
The concentrator has processed approximately 2.6 million tons of hypogene
ore at a head grade of 0.206% copper and 0.016 ounces of gold per ton during the
period from start-up to August 17. Design throughput was reached after
approximately two months of operation. A sustainable milling rate of between
50,000 and 60,000 tons per day has been achieved, depending on the hardness of
the ore. Approximately 11,000 tons of concentrate containing between 25% and
26% copper and between 1.3 ounces and 1.7 ounces of gold per ton have been
produced. The concentrate is transported to the Far East for smelting and
refining to recover metal values. On August 18, 1998, the mill commenced a
campaign processing supergene ore.
The Corporation is making design modifications to the flotation circuit in
the concentrator to optimize gold and copper recoveries and estimates that 1998
projected recoveries of 78% copper and 71% gold will be achieved by the end of
September 1998. The average life-of-mine recoveries are estimated to be 82%
copper and 78% gold.
The Kemess South mine is substantially in compliance with environmental
regulations. The impoundment of tailings from the concentrator is operating
successfully as a zero discharge system. Measures adopted to control sediment
in local streams have been successfully implemented, and the re-vegetation of
areas disturbed during construction has begun.
The Corporation anticipates that commercial production will be achieved on
or about September 30, 1998. The final cost of the Kemess South mine is
expected to be approximately $480 million which is an increase of approximately
11.6% over the previously announced cost estimate. The increase is attributed
to a number of unforeseen construction-related factors, the most significant of
which related to additional costs for the tailings dam construction and the
tailings pipeline system. These additional costs accounted for approximately
one-half of the
7
cost overrun. The design of the tailings dam was substantially altered due
to geotechnical considerations related to bedrock and soil conditions. At
the Corporation's request, the tailings pipeline design was changed to
increase the number of tailings lines from one to two, in order to decrease
the operating risk, adding additional costs to the previous estimates. In the
dam and pipeline areas, the previously estimated budgets had not adequately
allowed for the added difficulties in the handling of materials, nor for the
control of sediments resulting from the earthworks program, nor for the
substantial increase in the volumes of materials to be moved as a consequence
of redesign. Additional costs were incurred in power line clearing,
government-assessed stumpage costs, project expenses associated with
increased costs resulting primarily from staff requirements, site
accommodations, travel, freight and fuel. The remaining overrun amounts were
associated with redesign requirements during the mechanical, piping, and
electrical stage of the project construction, and bulk construction material
quantity reconciliations. Delays in completing the senior secured debenture
financing of the Corporation in June 1998 also contributed to cost overruns.
See "Recent Developments - Senior Secured Debentures".
SENIOR SECURED DEBENTURES
The Corporation entered into a securities purchase agreement with Trilon
Financial Corporation ("Trilon") on April 17, 1998 providing for the issuance by
the Corporation to Trilon and Northgate Exploration Limited of senior secured
debentures in the aggregate principal amount of US$120 million (the "Senior
Debentures"). The initial draw-down of US$115 million under the Senior
Debentures occurred on June 24, 1998 and $4.75 million was drawn down on August
18, 1998. The balance of $0.25 million may be drawn down subject to the
fulfillment of certain conditions. The Senior Debentures mature June 22, 2000
and bear interest at a rate of 30 day LIBOR plus 6% per annum. Interest
payments commenced July 31, 1998 and are payable monthly thereafter.
The Corporation issued the Senior Debentures for the following purposes:
(i) to repurchase and retire the senior secured debentures issued by the
Corporation in January 1998 in the principal amounts of $19.5 million and
US$30.7 million and pay accrued interest thereon; (ii) to pay the Corporation's
past due accounts payable attributable to construction of the Kemess South mine;
and (iii) to provide the Corporation with working capital.
The Senior Debentures are secured by a first fixed and floating charge on
all of the present and after acquired property and assets of the Corporation and
certain of its subsidiaries, subject to mutually agreed permitted encumbrances
and are redeemable, in whole or in part, in aggregate minimum amounts of US$5
million at any time at 101% of the principal amount being repaid plus interest
and all other amounts owing thereon. Under the terms of the Senior Debentures,
the holders of the Senior Debentures (the "Debentureholders") can require the
Corporation to transfer ownership of the Kemess South mine to a wholly-owned
subsidiary of the Corporation. The Corporation received a formal request from
the Debentureholders in early July 1998 requiring the transfer of the Kemess
South mine to a wholly-owned subsidiary of the Corporation. The Corporation has
identified certain potentially adverse tax consequences which may arise from
such a transfer. Consequently, the Corporation has asked the Debentureholders
to reconsider their request and discussions between the Corporation and the
Debentureholders are continuing.
The fees payable by the Corporation to the Debentureholders consist of the
following:
(1) a non-refundable up-front fee of US$2.4 million, which was paid on
closing;
(2) a non-refundable fee equal to 2% of the outstanding principal and
accrued interest payable to the Debentureholders which exceeds the
following threshold levels as at the following dates, being (a) US$80
million on February 15, 1999, and (b) US$50 million on October 15,
1999; and
(3) a royalty payable to Trilon of up to a maximum of 1.62% (the
"Royalty") of the gross revenues of the Kemess South mine to be
accrued but unpaid for two years and thereafter payable quarterly.
The accrued Royalty will bear compound interest at the three-month
LIBOR rate plus 1% per annum. The Royalty is to be prorated in the
event that the Senior Debentures are redeemed prior to maturity based
on the amount redeemed and the timing of such redemption. The
Corporation may acquire the Royalty on June 22, 2003 at the then fair
market value, payable in cash on such closing.
8
HEDGING ARRANGEMENTS
The Corporation entered into a number of agreements with Bankers Trust
Company ("Bankers"), Macquarie Bank Limited ("Macquarie") and The Bank of Nova
Scotia ("BNS") (collectively, the "Hedging Parties"), each dated June 22, 1998.
As at June 30, 1998, the Corporation was indebted to Bankers and BNS, pursuant
to repayment agreements (the "Repayment Agreements"), in the aggregate amount of
approximately US$25 million, including accrued interest. The Corporation agreed
to pay to Bankers and BNS US$500,000 and US$100,000, respectively, on December
1, 1998 and agreed to pay the balance, together with interest at the rate of 12%
per annum, in twelve monthly payments commencing in January 1999.
The Corporation also entered into an agreement with Macquarie (the
"Macquarie Agreement") pursuant to which the Corporation agreed to secure the
payment of certain present and future indebtedness under hedging contracts
between the Corporation and Macquarie to the extent that any such indebtedness
becomes due.
In connection with the Repayment Agreements and the Macquarie Agreement,
the Corporation entered into a trust indenture (the "Hedging Indenture") dated
as of June 22, 1998 with Montreal Trust Company of Canada (the "Hedging
Trustee"), pursuant to which the Corporation and certain subsidiaries granted,
and may in the future grant, security in the assets, property and undertaking of
the Corporation and such subsidiaries to the Hedging Trustee up to a maximum
amount of US$50 million for the benefit of the Hedging Parties and, subject to
certain conditions, other providers of credit in respect to hedging and related
activities of the Corporation. The security constituted by the Hedging
Indenture ranks junior in priority to the security held by the Debentureholders.
The Hedging Indenture provides for the issuance and pledging of three bonds (the
"Bonds") by the Corporation in favour of the Hedging Parties as security for the
indebtedness owed, and, in the case of Macquarie, certain indebtedness which
may become owing by the Corporation, to the Hedging Parties. The Bonds issued
to Bankers, BNS and Macquarie, each dated June 22, 1998, are in the principal
amounts of US$21 million, US$5 million and US$15 million, respectively. The
Corporation may in the future issue bonds under the Hedging Indenture to secure
any future indebtedness under agreements which may be entered into by the
Corporation in respect to hedging and related activities of the Corporation,
subject to the maximum amount specified above.
SUBORDINATED NOTES
In order to obtain the required consent to the issuance of the Senior
Debentures, the Corporation and the holders (the "Noteholders") of the
Corporation's US$175 million senior subordinated notes due 2006 (the "Notes")
agreed to certain amendments and supplements to the Indenture dated as of August
12, 1996 among the Corporation, Kemess Mines Inc. and Mellon Bank, F.S.B., as
trustee, as amended by the First Supplemental Indenture dated as of December 31,
1997 and the Second Supplemental Indenture dated as of January 31, 1998 between
the Corporation and Chase Manhattan Trust Company, National Association
("Chase"), as successor trustee to Mellon Bank, F.S.B. (as so supplemented and
amended, the "Indenture"). The Indenture was amended and supplemented by:
(1) the Third Supplemental Indenture dated as of May 19, 1998, which
reduces the length of time required to set a record date for
determining the Noteholders who are entitled to consent to any
amendment or supplement of the Indenture or any waiver pursuant
thereto from 30 days to 3 days prior to the first solicitation of such
consent;
(2) the Fourth Supplemental Indenture dated as of June 22, 1998, which has
the effect of: (i) increasing the interest rate payable on the Notes
by 175 basis points to 12.75% per annum effective May 30, 1998; (ii)
increasing the limits on aggregate Permitted Indebtedness (as defined
in the Indenture) to US$120 million (to permit the issuance of the
Senior Debentures) and, to the extent the Senior Debentures are
repaid, establishing a working capital facility; (iii) allowing the
transfer in the future of the Kemess South mine to a new wholly-owned
Subsidiary (as defined in the Indenture); (iv) allowing such
Subsidiary to guarantee repayment of certain Senior Indebtedness (as
defined in the Indenture) and the Notes; (v) providing for the
granting of collateral security by the Corporation and its
subsidiaries to secure the Notes; and (vi) allowing
9
the Corporation to redeem the Notes at a purchase price of 105.5%
of the principal amount of the Notes plus all accrued and unpaid
interest at any time before August 15, 2001; and
(3) the Fifth Supplemental Indenture dated as of June 22, 1998, which
provides that in the event of certain bankruptcy or other similar
proceedings in which the Debentureholders and the Noteholders may be
placed in the same class of creditors, Noteholders who consent to the
Fifth Supplemental Indenture have agreed for the benefit of themselves
and their assignees to: (i) take all steps reasonably within their
control or power to place the Noteholders in a different class of
creditors than the Debentureholders; and (ii) assign to the
Debentureholders their voting rights in any such proceedings to enable
the Debentureholders to vote against and defeat any restructuring plan
presented to any class of creditors which includes both the
Debentureholders and the Noteholders.
Pursuant to the Fourth Supplemental Indenture the Corporation and certain
of its subsidiaries granted and may in the future grant security in favour of
Chase, as trustee, and CIBC Mellon Trust Company ("CIBC Mellon"), as collateral
agent, in the assets, properties and undertaking of the Corporation and such
subsidiaries to secure repayment of principal and interest owing on the Notes
and all other present and future amounts owing under the Indenture. The Fourth
Supplemental Indenture included an Inter-Creditor Agreement between, among
others, the Debentureholders, Chase, as trustee, and CIBC Mellon, as collateral
agent, pursuant to which the security of the Debentureholders was confirmed as
having priority over and ranking senior to the security held by Chase and CIBC
Mellon on behalf of the Noteholders. Pursuant to the Fourth Supplemental
Indenture, Chase, as trustee, and CIBC Mellon, as collateral agent, acknowledged
to the Corporation, the Hedging Trustee and the Hedging Parties that the
security constituted by the Hedging Indenture ranks in priority to the security
held by Chase and CIBC Mellon on behalf of the Noteholders.
Noteholders who executed consents to the Third, Fourth and Fifth
Supplemental Indentures were entitled to receive, PRO RATA based on the
percentage of principal amount of Notes held, a consent fee equal to an
aggregate of 10 million Common Shares of the Corporation on a private placement
basis at a deemed issue price of US$1.125 per common share. The Third and
Fourth Supplemental Indentures are binding on all Noteholders while the Fifth
Supplemental Indenture is binding only on the Noteholders who provided their
consent to such supplemental indenture. Approximately 99% of Noteholders
consented to the Fifth Supplemental Indenture.
RISK FACTORS
Prospective purchasers of Common Shares should carefully consider all the
information set forth or incorporated by reference herein and in particular
should consider the following risk factors.
ADVERSE CONSEQUENCES OF FINANCIAL LEVERAGE
As at August 31, 1998, the Corporation has outstanding long-term secured
debt in the principal amount of US$321.1 million (approximately Cdn.$497 million
based on the exchange rate as of the date hereof). Such amount does not include
capital leases of approximately $24.6 million. Such secured indebtedness and
capital leases in the aggregate represent approximately 64% of total
capitalization. The Corporation's average annual interest expense in respect of
such secured indebtedness and capital leases is approximately US$40.5 million
(approximately Cdn.$62.7 million based on the exchange rate as of the date
hereof).
The degree of the Corporation's leverage has important consequences to the
Corporation including: (i) requiring a significant portion of the Corporation's
cash flow from operations to be dedicated to debt service requirements, thereby
reducing the funds available for operations and future business opportunities;
and (ii) increasing the Corporation's vulnerability to adverse economic and
industry conditions. In addition, under the various agreements which govern the
Corporation's outstanding secured indebtedness, the Corporation is prohibited
from incurring any additional material indebtedness. Such prohibition restricts
the Corporation's ability to fund its operating working capital and future
business opportunities by incurring additional indebtedness.
10
The ability of the Corporation to make scheduled repayments of its present
indebtedness will depend on, among other things, future gold and copper price
volatility (see below), the future operating performance of the Corporation
including the ability of the Kemess South mine to operate at anticipated levels
and costs of production and the Corporation's ability to refinance its
indebtedness when necessary. Each of these factors is to a large extent subject
to economic, financial, competitive and other factors beyond the Corporation's
control.
GOLD AND COPPER PRICE VOLATILITY
The Corporation's profitability is significantly affected by changes in the
market prices of gold and copper. Gold prices may fluctuate dramatically and
are affected by numerous industry factors, such as demand for precious metals,
forward selling by producers, central bank sales and purchases of gold and
production and cost levels in major gold-producing regions such as North
America, South Africa and the former Soviet Union. Moreover, gold prices are
also affected by macro economic factors such as expectations for inflation,
interest rates, currency exchange rates, and global prices, but not necessarily
in the same manner as current demand and supply affects the prices of other
commodities. The potential supply of gold consists of new gold mine production
plus existing stocks of bullion, scrap and fabricated gold held by governments,
central banks, financial institutions, industrial organizations and individuals.
The establishment of a single central bank authority for the European Union may
result in sales of gold currently held by the central banks of member nations.
Since mine production in any single year constitutes a very small portion of the
total potential supply of gold, normal variations in current production do not
necessarily have a significant effect on the supply of gold or on its price.
Copper prices may also fluctuate dramatically and are affected by numerous
factors beyond the Corporation's control, including expectations of inflation,
speculative activities, the relative exchange rate of the United States dollar
with other currencies, global and regional demand, production and production
costs in major producing regions. For example, between January 1, 1997 and
August 31, 1998, the price per pound of copper fluctuated between a high of
US$0.8555 and a low of US$0.7109. The aggregate effect of these factors, all of
which are beyond the Corporation's control, is impossible to predict.
If gold and/or copper prices should decline below the Corporation's cash
costs of production and remain at such levels for any sustained period, the
Corporation could determine that it is not economically feasible to continue
commercial production at any or all of its mines. The Corporation has recently
undertaken a preliminary analysis of the carrying value of its assets to
determine recoverability of its investments. Should spot prices for gold and
copper continue at the current levels, the Corporation will be required to make
a provision for the revaluation of the carrying value of some of its assets to
their estimated realizable value. The Corporation anticipates that a writedown
of the carrying value of any such assets would be reflected as a non-cash charge
in the consolidated financial statements for the period ending September 30,
1998. The amount of such writedown in carrying value may be material to the
Corporation. The Corporation enters into hedging programs, from time to time, to
reduce certain of the risks associated with gold and/or copper price volatility.
However, there can be no assurance that such hedging strategies will be
successful. See "Risk Factors - Hedging Activities". The aggregate effect of
these factors, all of which are beyond the Corporation's control, is impossible
to predict.
The volatility of gold and copper prices is illustrated in the following
table which sets forth the average of the daily closing prices in United States
dollars of gold and copper for 1980, 1985, 1990 and each year thereafter until
1998:
1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998(3)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gold(1) (per ounce) $614.32 $317.22 $383.64 $362.23 $343.94 $359.86 $384.15 $384.08 $391.59 $331.29 $294.86
Copper(2) $0.990 $0.643 $1.208 $1.059 $1.305 $0.866 $1.049 $1.331 $1.060 $1.032 $0.769
(per pound)
- ------------------------
(1) London Bullion Market.
(2) London Metal Exchange.
(3) Through August 31, 1998.
11
As of August 31, 1998, the closing price for gold was US$273.40 per ounce
and the closing price for copper was US$0.750 per pound.
At the current world market price for gold, the Corporation's Giant, Pamour
and Nighthawk mines are, effectively, breaking even on a cash basis. Revenues
from gold produced at such mines are offsetting the current cash costs of
operations at such mines but are not sufficient to cover the total costs of
operations of such mines. Accordingly, if the current world market price of
gold continues for a sustained period, it is likely that operations may be
temporarily suspended, or one or all of such mines may be closed and placed on
care and maintenance. In the event of any such closures, the ability of the
Corporation to make the interest payments and scheduled principal repayments
respecting its secured indebtedness is doubtful and may result in one or more
defaults under the agreements which govern such secured indebtedness.
At current world market prices of gold and copper and provided that the
Corporation's operating mines achieve their forecast production and cost targets
for 1998, the Corporation currently expects to have sufficient cash to meet
interest payments arising during the balance of 1998. However, at such price
levels, the Corporation's ability to meet interest payments and scheduled
principal repayments of secured indebtedness occurring after 1998 will depend
upon the Corporation's ability to maintain its costs of production at or below
current levels, the performance of the Corporation's operating mines at or above
forecast production, and its ability to refinance principal repayments as they
fall due.
Under the terms of the agreements which govern the Corporation's currently
existing secured indebtedness, a default under any of such agreements may lead
to a cross default under all of such agreements, with the result that if there
is a default under any such agreements, all long-term secured debt together with
interest accrued but unpaid thereon may thereupon become due and payable.
HEDGING ACTIVITIES
In the normal course of its business, the Corporation uses gold spot
deferred contracts, gold forward sales commitments and gold call option
contracts to manage its exposure to fluctuations in the price of gold.
Contracted prices on spot deferred and forward sales contracts are recognized in
revenue when production is delivered against the commitment. If actual delivery
is not made against a particular spot deferred contract at the time of maturity,
gains or losses, if any, are recognized at the time. In addition, the
Corporation uses foreign exchange contracts to minimize the impact of
fluctuations in foreign currency prices. Contract positions are designed to
ensure that the Corporation will receive a defined minimum price for certain
quantities of its production. The related costs paid on premiums received for
option contracts which hedge the sales prices of commodities are deferred and
included in income as part of the hedged transaction. Revenues for the
aforementioned contracts are recognized at the time contracts expire or are
closed out by either delivery of the underlying commodity or settlement of the
net position in cash. The Corporation is exposed to certain losses on forward
sales contracts, generally the amount by which the contract price exceeds the
spot price of the commodity, in the event of non-performance by the
counterparties to these agreements. The Corporation believes that it has
minimized credit risk relating to its hedging activities by dealing with large
credit-worthy institutions and by limiting its credit exposure to such
institutions. Due to the significant decline in gold and copper prices over the
last eighteen months and the decline in the value of the Canadian dollar
relative to other currencies in the last six months, the Corporation has
recently realized significant hedging losses.
COMMODITY HEDGING
As of June 30, 1998, the Corporation had contractual arrangements, in both
United States and Canadian dollars, for 820,000 ounces of gold call options
written with expiry dates between 1998 and 2002 at strike prices of US$311 to
$391 per ounce.
For the fiscal year ended December 31, 1997 and for the six month period
ended June 30, 1998, the Corporation suffered a $22.5 million loss and $6.1
million gain, respectively, on commodity hedging activities.
12
FOREIGN EXCHANGE
Currency fluctuations may affect the cash flow which the Corporation will
realize from its operations as gold and copper are sold in world markets in
United States dollars and the Corporation's costs are incurred primarily in
Canadian dollars. The Corporation reports its financial statements in Canadian
dollars. From time to time, the Corporation enters into hedging programs to
reduce certain risks associated with foreign exchange exposure, although there
can be no assurance that such hedging strategies will be successful. As of June
30, 1998, the Corporation had contractual arrangements to sell an aggregate of
approximately US$48.2 million during 1998 at an exchange rate of $1.3450 to
$1.3581/US$1.00. For the fiscal year ended December 31, 1997 and for the six
month period ended June 30, 1998, the Corporation suffered a $23.8 million loss
and $9.6 million loss, respectively, on currency hedging activities.
ORE RESERVE ESTIMATES; MINERAL INVENTORY
The ore reserves presented herein are estimates and no assurance can be
given that the indicated amount of gold or other minerals may be economically
recovered. Ore reserve estimates may require revisions based on actual
production experience and metal prices. Only certain of the Corporation's
reserves have been reviewed and confirmed by independent sources. Reserves are
typically calculated using current geological and calculation methods which
might not detect fraudulent activities such as the introduction into ore samples
of gold or other precious or base metals from unrelated sources. The ore grade
actually recovered by the Corporation may differ from the estimated grade of
reserves. The Corporation's reserve estimates are revised at each year end
based on the results of the year's exploration activities, metal production and
metal prices. Many factors relating to each mine, such as the design of the
mine plan, unexpected operating and processing problems, increase in the
stripping ratio in open pit mines, unforeseen geotechnical conditions which may
result in increased ground support or dilution in underground operations, and
the complexity of the mineralogy and metallurgy of an ore body, may adversely
affect cash costs. Moreover, fluctuations in the market price of gold, copper
or other minerals, as well as increased production costs or reduced recovery
rates, may render reserves containing relatively lower grades of mineralization
uneconomic to recover and may ultimately result in a reduction of reserves and
mineral inventory.
GOVERNMENTAL PERMITS AND PAYMENTS
In the ordinary course of business, mining companies are required to seek
governmental permits for expansion of existing operations or for the
commencement of new operations. Obtaining the necessary governmental permits is
a complex and time-consuming process involving numerous jurisdictions and often
involving public hearings and costly undertakings on the part of the
Corporation. The duration and success of permitting efforts are contingent upon
many variables not within the Corporation's control. Environmental protection
permitting, including the approval of reclamation plans, may significantly
increase costs and cause delays depending on the nature of the activity to be
permitted and the interpretation of applicable requirements implemented by the
permitting authority. There can be no assurance that all necessary permits will
be obtained and, if obtained, that the costs involved will not exceed those
previously estimated by the Corporation. It is possible that the costs and
delays associated with the compliance with such standards and regulations could
become such that the Corporation would not proceed with the development or
continued operation of a mine or mines.
The Corporation commenced limited production at the Kemess South mine on
May 19, 1998. Commissioning is expected to be completed and commercial
production is expected to commence on or about September 30, 1998. The
development of the Kemess South mine was facilitated by approximately $162
million of compensation, economic assistance and investment from the British
Columbia provincial government.
REGULATIONS AND MINING LAW
The Corporation's mining operations and exploration activities are subject
to extensive federal, provincial, state and local laws and regulations governing
exploration, development, production, exports, taxes, labour standards,
occupational health and safety, waste disposal, monitoring, protection and
remediation of the environment, reclamation, mine safety, toxic substances and
other matters. Compliance with such laws and regulations increases the costs of
exploring, planning, designing, drilling, developing, constructing, operating
and
13
closing mines and other facilities. It is possible that the costs and delays
associated with compliance with such laws and regulations could become such
that the Corporation would not proceed with the development or continue the
operation of a mine or mines.
The Corporation has expended significant resources, both financial and
managerial, to comply with environmental protection laws, regulations and
permitting requirements and the Corporation anticipates that it will continue to
do so in the future. Although the Corporation believes that its operations and
facilities comply in all material respects with applicable environmental
protection requirements, there can be no assurance that additional significant
costs and liabilities will not be incurred to comply with current and future
requirements. In July 1997, the combination of inordinately wet weather and
fine particulate soil conditions resulted in a Pollution Abatement Order being
issued against Kemess Mines Inc., a predecessor of the Corporation, for the
release of sedimentation into water courses around the Kemess South mine
construction site. The Corporation has worked closely with the federal and
provincial governments to improve its control measures and ensure compliance
with the above Order and applicable legislation. Moreover, it is possible that
future developments, such as increasingly strict environmental protection laws,
regulations and enforcement policies thereunder, and claims for damages to
natural resources, property and persons resulting from or alleged to result from
the Corporation's operations, could result in substantial costs and liabilities
in the future. See "Legal Proceedings".
MINING RISKS AND INSURANCE
The business of mining for gold and other metals is generally subject to a
number of risks and hazards, including environmental hazards, industrial
accidents, labour disputes, aboriginal land claims, native blockades,
encountering unusual or unexpected geological conditions, stope failures,
changes in the regulatory environment and natural phenomena such as inclement
weather conditions, floods, blizzards and earthquakes. Such occurrences could
result in damage to, or destruction of, mineral properties or production
facilities, personal injury or death, environmental damage, delays in mining,
monetary losses and possible legal liability. The Corporation maintains
insurance against risks that are typical in the mining industry, but which may
not provide adequate coverage in certain circumstances. Moreover, insurance
against certain risks (including certain liabilities for environmental pollution
or other hazards as a result of exploration and production) is not generally
available to companies within the industry. Without such insurance, if the
Corporation becomes subject to environmental liabilities, the payment of such
liabilities would reduce its available funds.
EXPLORATION AND ORE RESERVE GROWTH
Exploration for gold and other precious metals is highly speculative in
nature, involves many risks and is frequently unsuccessful. There can be no
assurance that exploration efforts will result in the discovery of gold
mineralization or that any mineralization discovered will result in an increase
of ore reserves. If ore reserves are developed, it may take a number of years
and substantial expenditures from the initial phases of drilling until
production is possible, during which time the economic feasibility of production
may change substantially. No assurance can be given that exploration programs
will result in the replacement of current production with new reserves or that
development programs will be able to extend the life of existing mines or locate
new mines. In the event that new reserves are not developed, the Corporation
may not be able to sustain its current level of gold production. In 1997, the
Corporation ceased operations at its Hope Brook, Newfoundland and Colomac,
Northwest Territories mines as a result of the high operating costs relative to
the price of gold and, in the case of the Hope Brook mine, the depletion of ore
reserves.
DEVELOPMENT PROJECTS
GENERAL - The Corporation from time to time engages in the development of
new ore bodies, both at newly acquired properties and currently existing mining
operations. The Corporation's ability to sustain or increase its present level
of gold production is dependent in part on the successful development of such
new ore bodies and/or expansion of existing mining operations. The economic
feasibility of any individual development project and all such projects
collectively is based upon, among other things, estimates of ore reserves,
metallurgical recoveries, production rates and capital and operating costs of
such development projects and future metal prices. Development projects are
also subject to the completion of favorable feasibility studies, the issuance of
all required governmental
approvals and permits, the settlement of any claims made against the
Corporation or otherwise affecting the Corporation and its development
projects and the receipt of adequate financing. Development projects may
have no operating history upon which to base estimates of future operating
costs and capital requirements. Particularly for development projects,
estimates of ore reserves, metal recoveries and cash operating costs are to a
large extent based upon the interpretation of geological data obtained from
drill holes and other sampling techniques, metallurgical test work and
feasibility studies which derive estimates of cash operating costs based upon
anticipated tonnage and grades of ore to be mined and processed, the
configuration of the ore body, expected recovery rates of metal from the ore,
comparable facility and equipment costs, anticipated climate changes,
availability of appropriate supplies of water and power and other factors.
As a result, actual cash operating costs and economic returns of any and all
development projects may differ significantly from the costs and returns
currently estimated. Development and construction costs may increase
significantly from those anticipated in feasibility studies as a result of
circumstances not foreseeable at the time of preparation of such studies,
delays in obtaining necessary permits, settlement of claims, increases in
taxes, rates and other charges and other events.
PENDING PROJECTS - The development and construction cost requirements for
the Corporation's development projects are significant and are subject to the
completion of favorable feasibility studies, receipt of adequate financing and
all required governmental approvals and permits and other events. Work on these
projects other than the Kemess South mine was postponed in 1997 due to low gold
prices and the need to conserve cash to complete construction of the Kemess
South mine. The Corporation plans to update feasibility studies and prioritize
the development of its other projects when the price of gold recovers above the
US$360 per ounce level for a sustained period. At the current world market
price of gold such projects are uneconomic and, if such price continues, it is
unlikely these projects will be completed. The Corporation is limited in its
ability to develop projects pursuant to restrictive covenants contained in
existing indentures and credit agreements.
COMPETITION
Because mines have limited lives based on proven and probable ore reserves,
the Corporation is continually seeking to replace and expand its ore reserves.
The Corporation encounters competition from other mining companies in connection
with the acquisition of properties producing or capable of producing gold and in
the recruitment and retention of qualified employees. As a result of this
competition, some of which is with companies having significantly greater
financial resources, the Corporation may be unable to acquire attractive mining
properties on terms it considers acceptable. In addition, there are a number of
uncertainties inherent in any program relating to the location of economic ore
reserves, the development of appropriate metallurgical processes, the receipt of
necessary governmental permits and the construction of mining and processing
facilities and the appropriate financing thereof. Accordingly, there can be no
assurance that the Corporation's programs will yield new ore reserves to replace
mined reserves and expand current reserves. The Corporation is limited in its
ability to acquire additional properties pursuant to restrictive covenants
contained in existing indentures and credit agreements. See "Risk Factors -
Adverse Consequences of Financial Leverage".
ABORIGINAL LAND CLAIMS
Historically, aboriginal groups have asserted rights over land located
within their "traditional territory." In order to pursue a claim under
established treaty processes, an aboriginal group was required to notify the
responsible federal, provincial or territorial government having jurisdiction
over the land in question. Each jurisdiction has one or more procedures in
place to review and resolve any such claim, after which judicial review becomes
available. On December 11, 1997, the Supreme Court of Canada rendered judgment
in the case of DELGAMUUKW ET AL V. HER MAJESTY THE QUEEN IN RIGHT OF THE
PROVINCE OF BRITISH COLUMBIA, THE ATTORNEY GENERAL OF CANADA AND THE FIRST
NATIONS SUMMIT ET AL. The impact of the DELGAMUUKW decision is far from certain
and will likely require many years of litigation and possible government
intervention before being finally determined. However, the DELGAMUUKW decision
may ultimately result in a significant change in the land claims process in
Canada by providing a legal basis for the assertion that "aboriginal title"
takes precedence over "Crown title" and by placing into dispute the Crown's
right to grant alienation of such lands without the consultation or consent of
any affected aboriginal group. The decision may result in aboriginal groups
seeking judicial relief as an alternative to the slower, more complex treaty
process. Prior to the DELGAMUUKW decision, it had been the policy of the
British Columbia government to exclude lands leased by third parties from
ongoing treaty negotiations with the various
15
aboriginal groups in the Province. The most significant of the mineral claims
that make up the Kemess South mine are under lease by the Corporation from
the British Columbia government. The DELGAMUUKW decision has created
uncertainty as to the Crown's right to grant such alienation in the absence
of consulting with or obtaining the consent of aboriginal groups claiming
territorial rights. Because the future impact of the DELGAMUUKW decision has
yet to be determined, there can be no assurance that future claims,
negotiations or judgments will not affect the Corporation's properties,
including its Kemess South mine. If the Corporation's properties are
included in any future negotiated settlements or court awards, there can also
be no assurance that the Corporation would receive adequate compensation. To
advance their respective interests, some aboriginal groups may take action
which will limit or prevent operations at the Kemess South mine, such as,
among other things, road blockades and the interruption of power supply.
CHANGE OF CONTROL
The Indenture in respect of the Notes and the Senior Debentures provide
that, upon the occurrence of any "Change of Control Triggering Event" or "Change
of Control of the Corporation", as the case may be, the Corporation will be
required to make an offer to the Noteholders to prepay the Notes and may be
required by the Debentureholders to prepay the Senior Debentures at 101% of
principal amount thereof plus accrued and unpaid interest thereon to the date of
prepayment. There can be no assurance that the Corporation would be able to
obtain financing on commercially reasonable terms or at all at such time, and
consequently no assurance can be given that the Corporation would be able to
prepay the Notes and the Senior Debentures, as the case may be, pursuant to such
an offer to holders of Notes or requirement of holders of Senior Debentures.
Clause (i) of the definition of "Change of Control Trigger Event" in the
Indenture in respect of the Notes and the definition of "Change of Control of
the Corporation" in the Senior Debentures includes a sale, lease, exchange or
other transfer of "all or substantially all" of the assets of the Corporation to
a person or group of persons. There is little case law interpreting the phrase
"all or substantially all" in this context. Because there is no precise
established definition of this phrase, the ability of the lenders to require the
Corporation to prepay the Notes and the Senior Debentures, as the case may be,
as a result of a sale, lease, exchange or other transfer of all or substantially
all of the Corporation's assets to a person or group of persons may be
uncertain.
CREDIT RATINGS
On March 18, 1998, both Standard & Poor's ("S&P") and Moody's Investors
Service ("Moody's") downgraded Royal Oak's credit rating. S&P lowered Royal
Oak's corporate credit rating from single 'B' to double 'C' and lowered its
rating of the Notes from triple 'C' to single 'C'. Moody's lowered its rating
of the Notes from B3 to Caa2. On March 27, 1998, S&P raised its corporate
credit rating for the Corporation to single 'B' minus from double 'C' and its
rating on the Notes to triple 'C' from single 'C'.
USE OF PROCEEDS
The net proceeds to the Corporation from the sale of the Special Warrants
and Common Shares offered hereby, after deducting estimated expenses of this
offering, will be approximately $5,259,761, all of which will reduce the
Corporation's outstanding accounts payable. No cash proceeds will be received
directly by the Corporation.
DETAILS OF THE OFFERING
On June 24, 1998, the Corporation issued and sold to certain investors by
way of private placement an aggregate of 4,103,663 Special Warrants convertible
into an aggregate of 4,103,663 Common Shares for aggregate consideration of
$5,334,761. The Special Warrants were sold pursuant to prospectus exemptions
under applicable legislation. The 4,103,663 Special Warrants were issued to
certain creditors of the Corporation in full payment and satisfaction of an
aggregate $5,334,761 of indebtedness (the "Indebtedness") of the Corporation in
favor of such creditors. The Indebtedness related principally to overdue
accounts payable in connection with the construction of the Kemess South mine.
16
The Special Warrants were issued under the terms of a trust indenture (the
"Warrant Indenture") dated as of June 24, 1998 between the Corporation and
Montreal Trust Company of Canada, as trustee (the "Trustee"). Each Special
Warrant entitles the holder thereof to acquire one Common Share, without payment
of additional consideration, prior to 2:00 p.m. (Vancouver time) on the earlier
of (i) the sixth business day after a receipt for this short form prospectus is
issued by the securities regulatory authority in each of Alberta, British
Columbia, Newfoundland and Ontario; and (ii) December 31, 1998 (the "Expiry
Date"). Any Special Warrants which remain unexercised at the Expiry Date will
be automatically exercised on the Expiry Date. If the securities regulatory
authority in each of Alberta, British Columbia, Newfoundland and Ontario has not
issued a receipt for this short form prospectus on or before 2:00 p.m.
(Vancouver time) on September 21, 1998, the holders of Special Warrants shall be
entitled to deliver their Special Warrant certificates to the Trustee at its
principal office in Toronto, Ontario at 151 Front Street West, 8th Floor,
Toronto, Ontario, M5J 2N1 or Vancouver, British Columbia at 4th Floor, 810
Burrard Street, Vancouver, British Columbia, V6C 3B9, and to receive 1.1 Common
Shares, without payment of additional consideration, for each Special Warrant
held.
Holders of Special Warrants who wish to exercise the Special Warrants held
by them in order to acquire Common Shares hereunder must complete the exercise
forms attached to the Special Warrant certificates and deliver the certificates
and the executed forms to the Trustee at its principal office in Toronto,
Ontario or Vancouver, British Columbia. All of the Common Shares to be issued
upon exercise of the Special Warrants will be fully paid and non-assessable.
SHARE CAPITAL
SHARE CAPITAL
The authorized capital of Royal Oak consists of an unlimited number of
Common Shares and an unlimited number of special shares, issuable in series, of
which, as of August 31, 1998, 150,865,080 Common Shares (including 1,924,816
Common Shares held by Witteck Development Inc., a wholly-owned subsidiary of the
Corporation, which shares may not be voted) and no special shares were issued
and outstanding.
COMMON SHARES
Holders of Common Shares are entitled to one vote for each share held on
all votes taken at meetings of the shareholders of Royal Oak (other than
meetings at which only holders of another class or series of shares will be
entitled to vote). Subject to the rights of holders of the special shares and
other shares of Royal Oak ranking prior to the Common Shares, holders of Common
Shares participate ratably in any dividend declared by the directors of Royal
Oak on the Common Shares and the Common Shares carry the right to receive a
proportionate share of the assets of Royal Oak available for distribution to the
holders of Common Shares in the event of the liquidation, dissolution or winding
up of Royal Oak.
SPECIAL SHARES
The special shares may be issued from time to time in one or more series
with such rights, privileges, restrictions, conditions and designations attached
thereto as are fixed by resolution of the board of directors of Royal Oak. Each
series of special shares will rank on a parity with the special shares of every
other series. The special shares as a class rank prior to the Common Shares and
any other shares ranking junior to the special shares with respect to the
payment of dividends and the distribution of assets in the event of the
liquidation, dissolution or winding up of Royal Oak. Except in limited
circumstances, holders of the special shares will not be entitled to receive
notice of any meeting of the shareholders of Royal Oak (except a meeting called
for the purpose of authorizing the dissolution of Royal Oak or the sale of all
or a substantial part of its undertaking) or to attend or vote thereat.
17
OUTSTANDING SHARE COMMITMENTS
As of August 31, 1998, the Corporation had outstanding stock options to
purchase a total of 5,891,499 Common Shares issued to directors, executive
officers and employees at prices ranging from $0.90 to $6.38 and expiring
between September 17, 1998 and August 19, 2005.
By resolution dated March 20, 1998, the Board of Directors approved a
resolution to amend the terms of options to purchase 5,994,500 Common Shares of
the Corporation, being substantially all of the Corporation's then outstanding
stock options (the "Prior Options") so as to reduce the exercise price on such
options to $1.10 per share and this amendment was approved by shareholders of
the Corporation, excluding the votes of shares owned by the directors and senior
officers of the Corporation and their respective associates, at a meeting held
on June 26, 1998. The closing price of the Corporation's Common Shares on The
Toronto Stock Exchange on the last trading day prior to the date of the approval
of the Board of Directors of the amendment to the Prior Options was $1.10. All
other terms and conditions of the Prior Options remain unchanged. The Prior
Options had been previously granted to directors, officers and employees of the
Corporation with exercise prices ranging from $1.50 to $6.25. The Corporation
also has an option outstanding to purchase 34,999 Common Shares at a price of
$6.38 per share, options outstanding to purchase 400,000 Common Shares at a
price of $1.55 per share and an option outstanding to purchase 50,000 Common
Shares at a price of $0.90 per share.
PRICE RANGE AND TRADING VOLUME OF
ROYAL OAK COMMON SHARES
TRADING ON THE TORONTO STOCK EXCHANGE
The volume of trading and price ranges of the Common Shares on the TSE are
set forth in the following table for the periods indicated:
PERIOD HIGH LOW VOLUME
- ------ ---- ----- ----------
1997
First Quarter................ 5.00 3.77 15,972,645
Second Quarter............... 4.34 3.00 8,505,353
Third Quarter................ 3.93 2.25 13,158,220
Fourth Quarter............... 4.15 1.37 23,944,681
18
1998
First Quarter................ 2.30 0.85 19,091,759
Second Quarter............... 1.73 1.16 5,693,737
July......................... 1.32 0.91 1,291,104
August....................... 1.00 0.60 1,206,971
The closing price of the Common Shares on the TSE on August 31, 1998 was
$0.60.
TRADING ON THE AMERICAN STOCK EXCHANGE
The volume of trading and price ranges in United States dollars of the
Common Shares on the AMEX are set forth in the following table for the periods
indicated:
PERIOD HIGH LOW VOLUME
- ------ ---- ----- ----------
1997
First Quarter................ 3.625 2.813 24,437,500
Second Quarter............... 3.125 2.188 20,441,100
Third Quarter................ 2.875 1.625 30,072,400
Fourth Quarter............... 3.000 0.938 65,651,200
1998
First Quarter................ 1.625 0.625 57,559,000
Second Quarter............... 1.188 0.750 26,560,100
July......................... 0.875 0.625 6,223,000
August....................... 0.688 0.375 9,192,500
The closing price of the Common Shares on the AMEX on August 31, 1998 was
US$0.438.
19
LEGAL PROCEEDINGS
The Corporation is from time to time involved in various claims, legal
proceedings and complaints arising in the ordinary course of business. The
Corporation is also subject to proceedings, lawsuits and other claims, including
proceedings under laws and regulations related to environmental and other
matters. No assurance can be given as to the ultimate outcome with respect to
such claims and litigation. The resolution of such claims and litigation could
be material to the Corporation's operating results of any particular period,
depending upon the level of income for such period. In addition, the
Corporation is subject to reassessment for income and mining taxes for certain
years. It does not believe that adverse decisions in any potential tax
reassessments or any amount which it may be required to pay by reason thereof
will have a material adverse effect on the financial condition or future results
of operations of the Corporation.
MACK LAKE MINING CORP. V. GIANT YELLOWKNIFE MINES LIMITED, ET AL, (October
1983), begun in the Supreme Court of Ontario where the action has since been
stayed, and in the Northwest Territories as action no. 7031/83(NWT) alleging,
INTER ALIA, title to the Salmita mineral claims, an accounting of profits made,
and damages in the sum of $10 million. The Corporation is one of nine named
defendants (including the original title holders) and has defended, INTER ALIA,
on the basis of being a "bona fide purchaser for value without notice."
Pleadings and productions are complete, however pretrial discovery remains
incomplete.
FULLOWKA ET AL V. ROYAL OAK MINES INC. ET AL, (September 1994; served July
1995), begun by widows and dependents of nine miners killed during the 1992
strike at the Giant mine in the Supreme Court of the NWT as action no. CV 05408
alleging, INTER ALIA, negligence on the part of the Corporation and two named
directors/officers (along with 23 other named defendants). Roger Warren, a
member of the Union, was charged and subsequently convicted of causing the
deaths by explosion. The claim against the Corporation and all named defendants
but one totals approximately $10.8 million plus taxes, interest and costs. The
claim against the two directors/officers and all defendants, excluding the
Corporation, totals approximately $33.65 million plus taxes, interest and costs.
The Corporation has denied any negligence on its part. Pleadings and
productions are complete; pretrial discovery has recently commenced and is
scheduled to continue through the summer of 1998. A second action (action no.
CV 06964) has been commenced recently by the widows against the "John Does" in
the original action; two of whom have served notices of third-party claims
against, INTER ALIA, the Corporation and the two directors/officers aforesaid.
Defendants have moved the court to strike the second action as being untimely.
The Northwest Territories Workers' Compensation Board has rendered a decision
that the immunity provisions of the WORKERS' COMPENSATION ACT do not apply to
one of the named directors/officers, and application has been made for judicial
review of this decision.
JAMES A. O'NEIL V. MARGARET K. WITTE ET AL V. ROYAL OAK MINES INC. (April 28,
1997; January 28, 1998 third party claim), begun in the Supreme Court of the
Northwest Territories as action no. CV 07028 seeking damages of $2 million plus
interest and costs and alleging post-traumatic stress in connection with the
factual events referred to in the preceding claim.
FALCONBRIDGE LIMITED AND WINDY CRAGGY EXPLORATION LIMITED V. KEMESS MINES INC.
AND ROYAL OAK MINES INC. ET AL, (June 1996), begun in the Supreme Court of
British Columbia as action no. C962983 alleging, INTER ALIA, breach of contract,
breach of the duty of good faith, breach of fiduciary duty and unjust enrichment
arising from and related to agreements entered into in 1983 and 1984 between the
plaintiffs and Geddes Resources Limited providing for a 22.5% royalty on the
Windy Craggy claims; and the impact on same of the British Columbia government's
appropriation of the claims for park purposes in 1993 and its subsequent
resolution of Geddes' claim for compensation under the 1995 Heads of Agreement.
Pleadings are largely complete and pretrial discovery is continuing. The trial
is scheduled to commence in 1999.
TSAY KEY DENE AND TAKLA INDIAN BANDS V. KEMESS MINES INC. ET AL, (February
1997), begun in the Supreme Court of British Columbia as action no. 97 0723
seeking injunctive relief and an order setting aside the Certificate of
Approval, License of Occupation and Permits to Cut for the Kemess South mine and
its power line for, amongst other causes, alleged failure on the part of the
British Columbia government to adequately consult with the Bands before granting
the documents in issue and for alleged bias on the part of the Government
related to the Heads of Agreement entered into between the British Columbia
government and the Corporation in August 1995 in, INTER
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ALIA, settlement of the Windy Craggy compensation claim. Interim and
interlocutory injunction applications were denied by two separate judges of
the British Columbia Supreme Court and have not been appealed by the
plaintiffs. Hearing on the merits of the plaintiffs' claims was scheduled to
commence in September 1997 but was adjourned at the plaintiffs' request to
accommodate a court supervised mediation process between the British Columbia
government and the plaintiffs, which began in August 1997, continued into
December 1997 and was adjourned in January 1998 upon the withdrawal by one of
the plaintiffs following pronouncement of the DELGAMUUKW decision by the
Supreme Court of Canada. See "Risk Factors -Aboriginal Land Claims". In May
1998, the Takla Indian Band discontinued the proceeding against the
Defendants. Also in May 1998, the other plaintiff, the Tsay Key Dene, and
the Provincial Government agreed to mediation, and the scheduled proceedings
will be adjourned pending results of the mediation.
TSAY KEY DENE INDIAN BAND AND GRAND CHIEF V. THE ATTORNEY GENERAL OF CANADA, HER
MAJESTY THE QUEEN IN THE RIGHT OF CANADA AND HER MAJESTY THE QUEEN IN THE RIGHT
OF B.C. ET AL, (January 1998), begun in the Supreme Court of British Columbia as
action no. 98 0232. Even though the Corporation is NOT a party to this
proceeding, the relief claimed could adversely impact the Kemess South mine and
as a result the Corporation may seek intervenor status. The plaintiff, relying
on the DELGAMUUKW decision, asserts that federal and provincial approval of the
Kemess South mine constituted an infringement of the plaintiff's aboriginal
rights and title to the land on which the Kemess South mine is located and
further constituted a breach by both governments of their fiduciary and
constitutional obligations. The plaintiff seeks declarations of statutory
invalidity rendering all licenses and permits granted thereunder
unconstitutional, void and unenforceable; damages from the named Provincial
Ministries and departments, and injunctive relief designed to prevent the Kemess
South mine from proceeding.
TAKLA LAKE INDIAN BAND V. THE ATTORNEY GENERAL OF CANADA, HER MAJESTY THE QUEEN
IN THE RIGHT OF B.C. AND ROYAL OAK MINES INC., (February 1998), begun in the
Supreme Court of British Columbia as action no. 03742 seeking declarations of
statutory invalidity and negation of all licenses, permits and decisions
regarding the Kemess South mine made thereunder; and damages and injunctive
relief. As with the preceding action, this action appears to be founded on the
DELGAMUUKW decision and claims aboriginal use of and title to the lands on which
the Kemess South mine is located. Outside counsel has been retained and the
Corporation intends to vigorously respond and defend.
GOLDEN HILL VENTURES LTD. V. KEMESS MINES INC., (September 1997), begun in
support of Golden Hill's Builder's Lien in the Supreme Court of British Columbia
as action no. 10023 (Smithers) and relocated as action no. 4146 (Prince George)
alleging, INTER ALIA, pre-tender and contractual misrepresentations relied on to
Golden Hill's detriment, breach of contract, quantum meruit, unjust enrichment
and an "extras" claim for work and materials in a sum that doubles the original
contract amount. The amount claimed is for the holdback under the contract,
less outstanding room and board owed by the plaintiff (being the amount of
$309,507.00), plus extras in the amount of $6,153,395.00. The Corporation is
disputing the alleged misrepresentations and challenging the extras claimed as
being related to and arising from alleged deficiencies in the plaintiff's
performance of the contract and is asserting a counterclaim for losses arising
from delay in the plaintiff's performance including the work of subsequent
contractors. Pretrial discovery is expected to proceed in the fall of 1998.
ROYAL OAK MINES INC. V. TERCON CONTRACTORS LTD. (arbitration; January 1998 and
heard March-May 1998, ongoing) TERCON CONTRACTORS LTD. V. ROYAL OAK MINES INC.
(builders lien proceeding) (May 1998) ROYAL OAK MINES INC. V. TERCON CONTRACTORS
INC. (BCSC May 1998) claiming damages for breach of contract of approximately
$6.8 million, including interest and legal costs, for failure to pay for
equipment used to perform a contract at the Kemess South mine. On March 20,
1998, the arbitrator entered an award finding against the Corporation generally
and directed that the parties attempt to agree as to actual amounts owing,
absent which agreement the arbitrator would retain jurisdiction over the matter
for the purpose of determining the amount of a final monetary award against the
Corporation. On May 5, 1998, the arbitrator made a partial award in the amount
of $6,453,105.28. A court order that the award could be enforced as a judgment
was made on May 7, 1998. On May 13, 1998, Tercon obtained a writ of seizure and
sale of the Kemess South mine lease and claims. The Corporation challenged the
same and on June 4, 1998, the court ordered the return of the mine lease and
claims, stayed any execution against the same under this proceeding and under
the builders lien proceeding commenced by Tercon. The court ordered the
Corporation to pay $3,500,000 to Tercon from the proceeds of the Trilon
financing (which amount has been paid) and invited the Corporation to make
application for payment terms as to the balance before October 15, 1998. In
addition, in May 1998, Royal Oak commenced proceedings against Tercon for
misrepresentation in connection with the subject
21
contracts. This proceeding is in very early stages. Tercon is also
proceeding with its builders lien action which is scheduled to be heard
August 14, 1998 in Vancouver.
ADDITIONAL BUILDERS' LIENS AND CLAIMS. The Corporation has also received notice
of and is in the process of responding to builders' liens filed against the
Kemess South mine and/or claims arising out of work performed at the Kemess
South mine by various contractors.
One of the claimants, Focus Industrial Contractors Inc. commenced an action in
the Supreme Court of British Columbia in May 1998 as action 0982755 against the
Corporation and certain of its employees, its subcontractor, Great West Electric
Co. Ltd., and its employee, claiming $914,604 for conversion. The Corporation
is defending the action and has agreed to indemnify the other defendants.
POLLUTION ABATEMENT ORDER: On July 16, 1997, the Corporation was served with a
Pollution Abatement Order by the Province of British Columbia under section 31
of its WASTE MANAGEMENT ACT, respecting the Kemess South mine. The basis for
the order was the release of total suspended solids into Kemess Creek and
associated tributary water courses asserted to be at potentially deleterious
levels. The release related to soil, dust, and mud that entered the creek
system during very heavy rains encountered during the earth-moving construction
work at the mine site. The Corporation has cooperated with both the British
Columbia and federal ministries since issuance of the order and implemented a
plan that dealt with sediment control techniques and structures during the 1998
Spring runoff. A joint government investigation into the sedimentation issue
and the likely impact of same on fish in the Kemess creeks began in March 1998.
LEGAL MATTERS
Certain legal matters relating to the offering will be passed upon for the
Corporation by Lang Michener, Toronto. Partners and associates of Lang Michener
own beneficially, directly or indirectly, 5,000 Common Shares and options to
acquire 115,000 Common Shares. A partner of Lang Michener is a director and
Secretary of the Corporation.
AUDITORS, TRANSFER AGENT AND REGISTRARS
The auditors of the Corporation are Arthur Andersen & Co., 401 West Georgia
Street, Suite 2000, Vancouver, British Columbia, V6B 5A1.
The transfer agents and registrars for the Common Shares are Montreal Trust
Company of Canada at its principal offices in Vancouver and Toronto, and Bank of
Nova Scotia Trust Company of New York at its office in New York, New York.
PURCHASERS' STATUTORY RIGHTS
Securities legislation in certain of the provinces of Canada provides
purchasers with the right to withdraw from an agreement to purchase securities
within two business days after receipt or deemed receipt of a prospectus and any
amendment. In several of the provinces of Canada, securities legislation
further provides a purchaser with remedies for rescission or, in some
jurisdictions, damages where the prospectus and any amendment contains a
misrepresentation or is not delivered to the purchaser, but such remedies must
be exercised by the purchaser within the time limit prescribed by the securities
legislation of the relevant province. The purchaser should refer to any
applicable provisions of the securities legislation of the purchaser's province
for the particulars of these rights or consult with a legal advisor.
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CONTRACTUAL RIGHT OF RESCISSION
In the event that a holder of a Special Warrant, who acquires Common Shares
of the Corporation upon the exercise of a Special Warrant as provided for in
this short form prospectus, is or becomes entitled under applicable legislation
to the remedy of rescission by reason of this short form prospectus or any
amendment hereto containing a misrepresentation, the holder shall be entitled to
rescission not only of the holder's exercise of its Special Warrant but also of
the private placement transaction pursuant to which the Special Warrant was
initially acquired, and shall be entitled, in connection with such rescission,
to a full refund of all consideration paid to the Corporation on the acquisition
of the Special Warrant. In the event the holder is a permitted assignee of the
interest of the original Special Warrant subscriber, that permitted assignee
shall be entitled to exercise the rights of rescission and refund granted
hereunder as if the permitted assignee was the original subscriber. The
foregoing is in addition to any other right or remedy available to a holder of
the Special Warrant under Section 130 of the SECURITIES ACT (Ontario) or
applicable provisions of the Securities Acts of Alberta, British Columbia and
Newfoundland or otherwise at law.
23
CERTIFICATE OF THE CORPORATION
Dated: August 31, 1998
The foregoing, together with the documents incorporated herein by
reference, constitutes full, true and plain disclosure of all material facts
relating to the securities offered by this short form prospectus as required
by the securities laws of Alberta, British Columbia, Newfoundland and Ontario.
/s/ "Margaret K. Witte" /s/ "James H. Wood"
----------------------------- -----------------------
(Signed) MARGARET K. WITTE (Signed) JAMES H. WOOD
President and Chief Executive Chief Financial Officer
Officer
On behalf of the Board of Directors
/s/ "William J.V. Sheridan" /s/ "Ross F. Burns"
------------------------------ ------------------------
(Signed) WILLIAM J.V. SHERIDAN (Signed) ROSS F. BURNS
Director Director