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, 2001
[ ] 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.
(Exact name of registrant as specified in its charter)
NEVADA 06-1199974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
802 E. WINCHESTER, SUITE 100 84107
MURRAY, UTAH (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (801) 290-1101
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 value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ X ]
As of March 25, 2002, there were 1,840,000 shares of the registrant's Series B
Convertible Preferred Stock outstanding. The aggregate market value of voting
stock held by non-affiliates (consisting solely of Series B Convertible
Preferred Shares), at the closing price of $16.02 on March 25, 2002 was
approximately $14.3 million.
DOCUMENTS INCORPORATED BY REFERENCE
None
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 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" 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 719,199 ounces during 2001, and as of December 31,
2001, its share of proven and probable reserves totaled approximately 141
million tons of ore reserves with an average grade of 0.029 ounces of gold per
ton, or 4.1 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 re-incorporated in Nevada
on May 29, 2001. On June 1, 1998, the Company completed a merger with Kinross
Gold Corporation ("Kinross") providing for a combination of their businesses. In
the merger, the former holders of common stock of the Company received common
stock of Kinross and the Company issued to Kinross 92.2 million shares of the
Company's common stock, representing all of the issued and outstanding common
shares of the Company. Kinross subsequently transferred ownership of such shares
to Kinross Gold U.S.A., Inc., a wholly-owned subsidiary of Kinross, which is
currently the sole common shareholder of the Company. On September 18, 1998, the
Company adopted an amendment to its certificate of incorporation to change its
name to Kinam Gold Inc.
The Company's operating properties consist of a 100% interest in the Fort Knox
mine near Fairbanks, Alaska, a 54.7% interest in the Kubaka mine in the Magadan
Oblast situated in Far East Russia and a 50% interest in the Refugio mine in
Chile. The Company also owns the Hayden Hill mine in Lassen County, California,
and a 90% interest in the Guanaco mine in Chile. Residual leaching at Hayden
Hill and Guanaco was completed during 2001 and the properties are now in
reclamation. In addition the Company owns the Haile property in Lancaster
County, South Carolina, and the Wind Mountain mine in Washoe County, Nevada, all
of which are also in reclamation. During 1999, the Company acquired a 65%
interest in the True North property. The remaining 35% of the True North
property and the Ryan Lode property were acquired from Kinross Gold USA, Inc.,
the parent company of Kinam on January 1, 2001. Kinam holds its interest in each
of these properties in accordance with industry standards. The locations of the
Company's properties are shown on the map on page 3 and descriptions are set
forth below. Data relating to the Company's domestic and foreign operations
reportable segments, assets and export sales are included in Note 12 to the
Consolidated Financial Statements of the Company.
All reserve information is given as of December 31, 2001. 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.
Gold equivalent production represents gold production plus silver production
computed into gold ounces using market price ratios. The silver to gold price
ratio was 62.00 : 1 in 2001, 56.33 : 1 in 2000 and 53.40 : 1 in 1999. 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, and exclude reclamation costs.
All of the Company's operating properties are open pit mines. Except for mobile
mining equipment leased by the Company at Fort Knox, the Company owns its mining
and processing equipment, which is maintained in good operating condition. Ore
is processed by milling or heap leaching. Milling is the traditional process for
recovering gold from ore. After ore is crushed, the gold and silver are
concentrated and then smelted into dore, which is shipped to refiners for
further processing. The milling process is typically used to achieve higher
recovery from oxide and sulfide ores.
Heap leaching is a lower cost processing method applied principally to oxidized
ores. The heap leach recovery rate is generally lower than for milling. In the
heap leaching process, crushed and/or run-of-mine ore is loaded onto leach pads.
The ore is irrigated with a weak cyanide solution that penetrates the ore,
dissolving the gold and silver.
2
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 and the Company when used herein refer collectively to Kinam
Gold Inc. and its subsidiaries and affiliates or to one or more of them
depending on the context.
KINAM ASSET LOCATIONS
o Ryan Lode
o True North
o Fort Knox
o Haile
o Sleeper
o Hayden Hill
o Wind Mountain
o Guanaco (90%)
o Refugio (50%)
o Kubaka (54.7%)
[Graphic showing the approximate geographical location of the mines in which
Kinam holds an interest on a worldwide map.]
Fort Knox Mine
The Fort Knox mine is located in the Fairbanks Mining District, 15 air miles
northeast of Fairbanks, Alaska.
Operations. Fort Knox achieved commercial production on March 1, 1997.
Construction of the mine was completed at a capital cost of approximately $373
million, which included approximately $28 million in capitalized interest. The
operation includes an open-pit mine, a mill and process plant with a nominal
capacity of 41,000 tons per day (15 million tons per year), 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 from Fairbanks is by 21 miles of paved highway and five miles of
unpaved road. The mine and plant are designed to operate year round. There were
approximately 365 employees as at December 31, 2001. In 1999, following a
comprehensive evaluation of the property using estimated future net cash flows,
estimated recoverable ounces and an estimated future gold price of $300 per
ounce, the Company recorded a $72.9 million writedown of the Fort Knox mine. In
1998, based on an estimated future gold price of $325 per ounce, the Company
recorded a $140.3 million writedown. See Note 5 of the Consolidated Financial
Statements for further discussion of the writedowns.
3
The following table presents operating data for the Fort Knox mine for the years
indicated.
Fort Knox Mine
Operating Data
2001 2000 1999
---- ---- ----
Tons mined 34,406,300 35,606,900 30,349,900
Tons of ore milled 15,662,800 14,994,900 13,816,100
Average mill head grade (oz. per ton) 0.030 0.027 0.028
Mill recovery rate (%) 86 89 90
Equivalent ounces of gold produced 411,221 362,959 351,120
Cost per ounce of gold produced:
Total cash costs $207 $203 $194
Reclamation 2 3 3
Depreciation and depletion 118 104 110
---- ---- ----
Total production costs $327 $310 $307
==== ==== ====
The mill operated seven days per week in 2001 and averaged 42,900 tons of ore
processed per operating day. 2001 data includes nine months of True North mine
production.
Property Position. The Fort Knox claim block covers approximately 48,700 acres
and consists of two state mining leases, approximately 1,600 state mining
claims, 1,100 acres of patented federal mining claims, and two unpatented
federal mining claims. The current reserve is located on approximately 1,300
acres of land held under a state mining lease that expires in 2014. This may be
renewed for a period not to exceed 55 years. The state lease is subject to a 3%
Alaska production royalty based on taxable income. All production from state
claims is subject to the State of Alaska Mine License Tax following a three year
tax grace period after production commences. The mine licence tax rate is
graduated from 3% to 7% of taxable income. A 1% net smelter return royalty and a
10% overriding net profits interest is payable on certain of the patented
federal mining claims. There were no royalties paid during 2001, 2000 and 1999.
The Fort Knox property has been pledged as security against the syndicated
credit facility which supports $49.0 million of industrial revenue bonds issued
to finance construction of the Fort Knox solid waste disposal facility.
Geology and 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. 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 RESERVES
AT DECEMBER 31,
2001 2000
------------------------------------------------ --------------------------------------------------
AVERAGE GRADE GOLD CONTENT AVERAGE GRADE GOLD CONTENT
TONS (OZ PER TON) (000'S OZ) TONS (OZ PER TON) (000'S OZ)
(000'S) (000'S)
------------------------------------------------ --------------------------------------------------
Proven 64,682 0.024 1,562 115,560 0.023 2,678
Probable 36,272 0.022 805 7,579 0.023 172
------- ----- ------- -----
Total 100,954 0.023 2,367 123,139 0.023 2,850
======= ===== ======= =====
4
The December 31, 2001 Fort Knox reserves were calculated by the Company in
accordance with definitions and guidelines provided by The Society for Mining,
Metallurgy and Exploration ("SMME"). The reserves were calculated using a gold
price assumption of $300 per ounce and a gold cut-off grade of 0.013 ounces per
ton. The Company estimates that mill recovery will be approximately 86%. Proven
and probable reserves decreased by 483,000 ounces of gold in 2001. While 357,000
ounces were consumed by production, 126,000 ounces were re-classified as other
than proven and probable, in accordance with SEC guidelines, due to changes in
pit design due to mining experience.
The property position at the Fort Knox mine was enhanced by the acquisition of a
65% ownership share in the nearby True North property during 1999. The remaining
35% of the True North property and the Ryan Lode property were acquired from
Kinross Gold USA, Inc., the parent company of Kinam, on January 1, 2001. The
acquisition of the True North and Ryan Lode deposits will allow the Company to
increase annual production at the Fort Knox operations to approximately 450,000
ounces per annum as ore mned at these satellite deposits will be processed at
the Fort Knox mill and processing plant. The Company received all of the
required permits to develop the Hindenburg and East pit of the True North
deposit effective January 24, 2001. Details of the True North and Ryan Lode
property position, geology and ore reserves are set forth below :
True North Property
Property Position: The True North Property covers approximately 6,600 acres and
consists of 255 State of Alaska mining claims and one State of Alaska mill site
lease. The State lease and state mining claims surrounding the current reserves
are subject to a 3% Alaska production royalty based on net income. The state
lease and state claims are also subject to the State of Alaska Mine License Tax
following a three year tax grace period after production commences. The mine
license tax is graduated from 3 to 7 % of taxable income. In addition the claims
are subject to net smelter royalties ranging from 3.5 to 5%, based on the gold
price less any advanced royalties paid, payable to the claim owners. The
property is located 11 miles from the Fort Knox mill, and is accessible by an
all weather road to transport ore to the Fort Knox mill. Production commenced in
March of 2001. The True North property has been pledged as security against the
syndicated credit facility which supports inter alia $49.0 million of industrial
revenue bonds issued to finance construction of the Fort Knox solid waste
disposal facility.
Geology and Reserves: The True North property is hosted by metamorphic rock of
the Chatanika Terane, including quartz-mica schist, quartzite, eclogite,
amphibolite, marble and argillite. Some units are graphitic. Gold occurs in
nearly flat-lying to moderately dipping shear zones and along faulted contacts.
These zones horsetail and are typically 27 to 45 feet thick. The deposit was
originally identified as occurring in three zones, the Hindenburg, Central, and
Shepard. They now all appear to be part of a single zone with a continuous
strike length of roughly 5,000 feet. Average gold grades are 0.050 ounces of
gold per ton, although higher grades in excess of 1 ounce per ton occur locally.
The following table sets forth the proven and probable reserves for the True
North property.
TRUE NORTH MINE
PROVEN AND PROBABLE RESERVES
AT DECEMBER 31,
2001 2000
---------------------------------------------- -----------------------------------------------
TONS AVERAGE GRADE GOLD CONTENT TONS AVERAGE GRADE GOLD CONTENT
---- ------------- ------------ ---- ------------- ------------
(000'S) (OZ PER TON) (000'S OZ) (000'S) (OZ PER TON) (000'S OZ)
Proven 586 0.022 13 - - -
Probable 10,468 0.046 478 12,259 0.050 611
------ --- ------ ---
Total 11,054 0.044 491 12,259 0.050 611
====== === ====== ===
The December 31, 2001 True North reserves were calculated by the Company in
accordance with definitions and guidelines provided by SMME. The reserves were
calculated using a gold price assumption of $300 per ounce and a gold cut-off
grade of 0.021ounces per ton. Proven and probable reserves decreased by 120,000
ounces in 2001 due to production during the year. The Company estimates the mill
recovery of the True North deposit will be approximately 86%.
5
Ryan Lode Property
Property Position. The Ryan Lode Property is located on the southeast flank of
Ester Dome, approximately 8 miles west of Fairbanks, Alaska. The property is
comprised of 15 federal claims, and 50 State of Alaska mining claims which cover
an area of approximately 1,275 acres and are held under a lease agreement which
calls for a 5% gross mineral value royalty on production and annual royalty
payments, currently $150,000 per year. A 3% net smelter return royalty is
payable on the surrounding Bar and St. Patrick claims comprising a total of 284
acres. The state claims are subject to a 3% State of Alaska production royalty
based on net income and the State of Alaska Mine License Tax, following a three
year tax grace period after production commences. The mine license tax is
graduated from 3 to 7 % of taxable income. The property is located 40 miles from
the Fort Knox mill and is accessible by 33 miles of paved highway and 7 miles of
gravel road. The Ryan Lode property has been pledged as security against the
syndicated credit facility which supports inter alia $49.0 million of industrial
revenue bonds issued to finance construction of the Fort Knox solid waste
disposal facility.
Geology and Reserves. The principal rock unit in the Ryan Lode area is the
Cleary Sequence member of the Fairbanks Schist, consisting of varied rock types,
including quartz mica schist and quartzite, along with marble, calcareous
quartz- mica schist, and carbonaceous units. Granite intrusions are found near
and within the Curlew deposit, south of the Ryan Shear. The gold in both the
Ryan and Curlew ore bodies occurs in mineralized quartz veins, breccias, and
gouge zones within broad shear zones. The gold occurs with sulfide minerals
including pyrite, arsenopyrite, and local stibnite. Higher-grade gold
mineralization typically occurs next to the hanging wall of the shear, with
lower grade mineralization below this. The Ryan Shear, which reaches 150 feet in
thickness in places, has been traced by drilling for over one half mile and is
contained in metasedimentary and metavolcanic rocks of the Fairbanks Schist. The
Curlew Shear, which may be an offset, southern continuation of the Ryan Shear,
ranges up to 180 feet in thickness. Mineralization is typically oxidized to
depths of 200 to 300 feet. The oxidized zone demonstrates good gold recoveries
by leaching while rates of gold recovery by leaching decrease at increasing
depths below the oxidized zone.
The following table sets forth the proven and probable reserves for the Ryan
Lode property.
RYAN LODE PROPERTY
PROVEN AND PROBABLE RESERVES
AT DECEMBER 31,
2001 2000
------------------------------------------------- ------------------------------------------------
TONS AVERAGE GRADE GOLD CONTENT TONS AVERAGE GRADE GOLD CONTENT
---- ------------- ------------ ---- ------------- -------------
(000'S) (OZ PER TON) (000'S OZ) (000'S) (OZ PER TON) (000'S OZ)
Proven - - - - - -
Probable 2,541 0.089 225 2,541 0.089 225
----- --- ----- ---
Total 2,541 0.089 225 2,541 0.089 225
===== === ===== ===
The December 31, 2001 Ryan Lode reserves were calculated by the Company in
accordance with definitions and guidelines adopted by the SMME. The reserves
were calculated using a gold price assumption of $300 per ounce and a gold
cut-off grade of 0.044 ounces per ton. The Company estimates the mill recovery
of the Ryan Lode deposit to be approximately 79%.
Kubaka Mine
The Company indirectly owns a 54.7% interest in Omolon Gold Mining Company
("Omolon"), a Russian joint stock company, which 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
completed the acquisition of 50% of Kubaka from Cyprus Amax during May 1997. On
December 16, 1998, the Company acquired an additional 3% of Omolon from a
Russian partner in consideration for settling obligations of the Russian partner
for $3.8 million. Repayment of the $3.8 million owing to the Company by the
Russian partner will be made from the Russian partner's share of dividends from
Omolon, provided the Russian partner has first repaid their obligation to the
Magadan administration. The Russian partner has the right to reacquire the 3%
interest in Omolon for approximately $7.5 million. On December 31, 1999 the
Company acquired a further 1.7% of Omolon for $0.3 million. The remaining 45.3%
interest in Omolon is owned by Russian parties. See Notes 5 and 6 to the
Consolidated Financial Statements for further information relating to the
acquisition and financing of the mine.
6
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 mill and process plant with a nominal capacity of 2,500 tons per day
(925,000 tons per year), a tailings storage facility and a reclaim water
retention facility to supply process water. On-site diesel generators provide
power. 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. There were approximately 475
employees at December 31, 2001.
The following table presents operating data for the Kubaka mine for the years
indicated.
Kubaka Mine
Operating Data
2001 2000 1999
---- ---- ----
Tons mined (1) 10,954,600 12,688,700 10,439,800
Tons of ore milled (1) 979,900 944,500 879,200
Average mill head grade (oz. per ton) 0.446 0.475 0.547
Mill recovery rate (%) 98 98 98
Equivalent ounces of gold produced (2) 237,162 244,641 254,625
Cost per ounce of gold produced
Total cash costs 140 139 $143
Reclamation 2 3 3
Depreciation and depletion 107 133 135
----- ----- -----
Total production costs $ 249 $ 275 $ 281
===== ===== =====
(1) Figures represent 100% of tons mined and milled.
(2) Reflects the Company's 54.7 % share in 2001 and 2000, 53% share in 1999
The mill operated seven days per week in 2001 and averaged 2,680 tons of ore per
operating day. The Kubaka mine and mill operations have worked in excess of 2.7
million man hours without a lost time accident.
Property Position. Omolon holds the license from the Russian government to
operate the Kubaka mine (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 owned entity in Omolon to a maximum of 56 %. The Kubaka
License establishes certain production requirements for Kubaka, requires the
payment of a 3% royalty on the total value of gold extracted and requires Omolon
to complete exploration activities, a feasibility study and its assessment of
the reserves at Evenskoye prior to June 1999, which was met. In addition, the
Kubaka mine is subject to additional royalty based taxes of 11.8%. Royalty
payments were $6.9 million in 2001, $7.0 million in 2000 and $12.1 million in
1999.
Geology and 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.
7
KUBAKA MINE
PROVEN AND PROBABLE RESERVES
AT DECEMBER 31,
2001 2000
--------------------------------------------------------- ---------------------------------------------------
GOLD CONTENT GOLD CONTENT
------------ ------------
(000'S OZ) (000'S OZ)
----------------------------- ------------------------
TONS AVERAGE GRADE THE COMPANY'S TONS AVERAGE GRADE THE COMPANY'S
(000'S) (OZ PER TON) TOTAL 54.7% SHARE (000'S) (OZ PER TON) TOTAL 54.7% SHARE
-------- ------------ ----- ----------- -------- ------------ ----- -----------
Proven 1,234 0.286 353 193 1,580 0.317 501 274
Probable 494 0.581 287 157 1,004 0.457 459 251
----- --- --- ----- --- ---
Total 1,728 0.370 640 350 2,584 0.372 960 525
===== === === ===== === ===
The December 31, 2001 Kubaka reserves were calculated by the Company in
accordance with definitions and guidelines provided by SMME. The reserves were
calculated using a gold price assumption of $300 per ounce and a gold cut-off
grade of 0.093 ounces per ton. The Company's share of proven and probable
reserves decreased by 175,000 ounces in 2001, of which 240,000 ounces were
consumed by production and exploration activities added 65,000 ounces. The
Company estimates that mill recovery will continue to be approximately 98%.
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 designed to process 33,000 tons of ore per
day, or 12.1 million tons per year. Commercial production commenced on October
1, 1996. Facilities include a permanent camp with access to the site from
Copiapo provided by gravel road. Power is supplied by on-site diesel powered
generators. Water extraction rights expected to be sufficient to supply the mine
are owned by CMM. In light of the continued weakness in spot gold prices a
decision was made to suspend mining activities and place the operations on care
and maintenance in 2001. Open pit mining activities were suspended on June 1,
2001 when the last mined ore was placed on the leach pad and the Refugio
operations commenced residual leaching of the two leach pads. All leased mining
equipment was disposed of in 2001, eliminating any further financial obligations
under the leases. Heap leaching operations continue and the balance of the
Chilean summer will be spent reviewing the water balance and the estimated gold
inventory on the leach pad to determine the best time to suspend residual
leaching. The Refugio mine will remain on care and maintenance until spot gold
prices improve substantially. There were 58 employees as at December 31, 2001.
In 2000, following a comprehensive evaluation of the property using estimated
future net cash flows, estimated recoverable ounces and an estimated future gold
price of $300 per ounce the Company recorded a $26.8 million writedown. In 1999,
based on an estimated future gold price of $300 per ounce, the Company recorded
a $10.1 million writedown and in 1998, based on an estimated future gold price
of $325 per ounce, the Company recorded a writedown of $53.1 million. See Note 5
of the Consolidated Financial Statements for further discussion.
8
The following table presents operating data for the Refugio mine for the years
indicated.
Refugio Mine
Operating Data
2001 2000 1999
---- ---- ----
Tons mined (1) 5,397,800 12,811,300 12,701,200
Tons of ore to heap leach (1) 4,643,900 9,702,000 9,850,600
Average grade to heap leach (oz. per ton) 0.030 0.027 0.029
Heap leach recovery rate (%) 64 64 64
Equivalent ounces of gold produced (2) 67,211 85,184 90,008
Cost per ounce of gold produced:
Total cash costs $242 $300 $ 277
Reclamation - 4 5
Depreciation and depletion - 54 66
---- ---- ------
Total production costs $242 $358 $ 348
==== ==== ======
(1) Figures represent 100% of tons mined and processed.
(2) Reflects the Company's 50% share.
Property Position. The Refugio property consists of approximately 14,500 acres,
and includes 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 2006 and may be extended for an additional five years.
The Company, through its 50% ownership of CMM, is responsible for payment of a
net smelter return royalty to the former owners of the Refugio property that is
expected to average 2.5% of total production from the currently defined ore
reserves. An additional sliding scale net smelter return related to net profits
and ranging from 2.5 to 5% is payable on the Company's share of any production
in excess of current reserves. Royalty payments were $0.9 million in 2001 and
$1.2 million in 2000 and 1999.
Geology and Reserves. The Refugio property encompasses the Verde, Pancho, and
Guanaco gold deposits, which are disseminated porphyry gold 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 four identified alteration 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.
9
REFUGIO MINE
VERDE DEPOSIT
PROVEN AND PROBABLE RESERVES
AT DECEMBER 31,
2001 2000
------------------------------------------------------- ----------------------------------------------------
GOLD CONTENT GOLD CONTENT
------------ ------------
(000'S OZ) (000'S OZ)
--------------------------- -------------------------
TONS AVERAGE GRADE THE COMPANY'S TONS AVERAGE GRADE THE COMPANY'S
(000'S) (OZ PER TON) TOTAL 50% SHARE (000'S) (OZ PER TON) TOTAL 50% SHARE
-------- ------------ ----- --------- -------- ------------ ----- ---------
Proven 24,856 0.028 694 347 32,954 0.028 918 459
Probable 27,072 0.027 718 359 35,432 0.027 960 480
------ ----- --- ------ ----- ---
Total 51,928 0.027 1,412 706 68,386 0.027 1,878 939
====== ===== === ====== ===== ===
The December 31, 2001 Refugio reserves were calculated by the Company in
accordance with definitions and guidelines provided by SMME. The reserves were
confined to the Verde Pit Zone. The variable cut-off grades for pit design and
reserve summary were calculated using a gold price assumption of $300 per ounce
and costs and recoveries that vary by rock type and alteration. The Company
estimates the average ultimate recovery for these reserves will be approximately
64%. The Company's share of proven and probable reserves decreased by 175,000
ounces in 2001, of which 105,000 ounces were consumed by production and 70,000
ounces were re-classified as other than proven and probable, in accordance with
SEC guidelines, due to changes in pit design due to mining experience.
Hayden Hill Mine
The Hayden Hill mine in Lassen County, California, is located approximately 120
miles northwest of Reno, Nevada.
Operations. Mining was completed in late 1997 and residual leaching was
completed in 2001. A significant portion of the final reclamation work has been
completed and reclamation work will continue in 2002. In 2000, following a
thorough review of the Hayden Hill property and the ultimate costs of closure,
the remaining carrying value, and the current environment for surplus mining
equipment and facilities, the Company recorded a $2.9 million writedown.
The following table presents operating data for the Hayden Hill mine for the
years indicated.
Hayden Hill Mine
Operating Data
2001 2000 1999
---- ---- ----
Tons mined - - -
Tons of ore to heap leach - - -
Average grade to heap leach (oz. per ton) - - -
Heap leach recovery rate (%) - - -
Equivalent ounces of gold produced 1,887 9,582 17,020
Cost per ounce of gold produced:
Total cash costs $277 $240 $194
Reclamation - - -
Depreciation and depletion - - -
---- ---- ----
Total production costs $277 $240 $194
==== ==== ====
Property Position. The Hayden Hill mineral property holdings consist of 1,532
acres of 77 unpatented lode claims. Approximately 75% of the production is
subject to a gross receipts net smelter return royalty of 5%.
10
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.
Mining was completed in July 1997. Recovery of residual gold from the existing
leach pad was completed in 2001. Reclamation activities will continue in 2002.
In 2000, following a thorough review of the Guanaco property and the ultimate
costs of closure, the remaining carrying value and the current environment for
surplus mining equipment and facilities, the Company recorded a $2.1 million
writedown of this property.
The following table presents operating data for the Guanaco mine for the years
indicated.
Guanaco Mine
Operating Data
2001 2000 1999
---- ---- ----
Tons mined - -
-
Tons of ore to heap leach - -
-
Average grade to heap leach (oz. per ton) - -
-
Heap leach recovery rate (%) - -
-
Equivalent ounces of gold produced 1,718 16,029 23,690
Cost per ounce of gold produced:
Total cash costs $436 $ 278 $ 198
Reclamation - - -
Depreciation and depletion - - -
---- ---- -----
Total production costs $436 $278 $ 198
==== ==== =====
Property Position. The Guanaco mineral property holdings consist of
approximately 25,000 acres of mineral claims leased from Empresa Nacional de
Mineria (ENAMI), an entity of the Chilean government. The lease expires in 2006
and may be extended by the Company for an additional five-year term thereafter.
Sleeper Mine
The Sleeper mine is located in Humboldt County, Nevada, approximately 28 miles
north of the town of Winnemucca.
The Sleeper mineral property holdings consist of approximately 10,200 acres of
496 unpatented mining claims. The Company has entered into an agreement with a
third party for further exploration of the Sleeper property. Currently, the
third party has earned a 50% interest in the claims and during 1999 the Company
entered into an agreement granting the same third party the right to earn the
remaining 50% interest in the Sleeper mine. The third party exercised this right
on February 29, 2000. The Company will continue to proceed with the reclamation
of the property in the interim. The third party will fund reclamation activities
and is actively pursuing the replacement of the closure bonds.
Operations. Operations at Sleeper were completed at the end of the third quarter
of 1996. Reclamation activities will continue during 2002. In 2000, following a
thorough review of the Sleeper property and the ultimate costs of closure, the
remaining carrying value, and the current environment for surplus mining
equipment and facilities, the Company recorded a $2.9 million writedown.
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 and on March 23, 1999, the Company
acquired Piedmont's 37.5% interest and settled all disputes between the Company
and Piedmont. In 1999, following a comprehensive study of the Haile property,
the Company recorded a writedown of the $16.5 million previously capitalized.
See Note 5 of the Consolidated Financial Statements for further discussion.
11
The Haile mineral property holdings cover approximately 900 acres and consist
entirely of fee property that is either owned by the Company or leased from
third parties under leases that can be extended or controlled by purchase
agreements.
A closure study was completed in 1999 and the Company will continue to proceed
with reclamation activities in 2002.
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 property.
In 1999 the Company began an extensive drilling program looking for alternative
mill feed for the Kubaka operations beyond the then known mine life. In 2000,
these activities identified the Birkachan project located 18 miles north of the
Kubaka processing plant. Additional exploration drilling continued during 2001.
Current plans for 2002 are to continue the exploration activities at Birkachan,
and to commence the process of converting the current exploration license to a
mining license. The Company will focus its exploration activities to identify
resources that can be quickly converted into reserves and provide mill tonnage
for the Kubaka processing plant in 2003 or 2004.
Exploration expenditures were $2.7 million in 2001, $3.3 million in 2000 and
$1.8 million in 1999. Exploration expenditures for 2002 are expected to be
approximately $2.0 million.
Gold Market and Prices
Gold has two principal uses: product fabrication and bullion investment.
Fabricated gold has a wide variety of end uses, including jewelry manufacture
(the largest fabrication component), electronics, dentistry, industrial and
decorative uses, medals, medallions and official coins. The Company sells all of
its refined gold to banks, bullion dealers, and refiners. The Company's sales to
major customers that exceeded 10% of total sales were $116 million to 4
customers during 2001, $114 million to four customers in 2000 and $137 million
to three customers in 1999. The Company believes that the loss of any of these
customers would have no material adverse impact on the Company because of the
active worldwide market for gold.
The profitability of the Company's operations is significantly affected by the
market price of gold. The price of gold has fluctuated widely and is affected by
numerous factors, including international economic trends, currency exchange
fluctuations, expectations for inflation, consumption patterns (such as
purchases of gold jewelry and the development of gold coin programs), sales of
gold bullion holdings by central banks or other large gold bullion holders or
dealers and global and regional political events, particularly in the Middle
East and Asia and major gold-producing countries such as South Africa and the
Commonwealth of Independent States (the former Soviet Union). Gold prices also
are affected by worldwide production levels and on occasion have been subject to
rapid short-term changes because of market speculation.
The following table sets forth for the years indicated the high and low closing
prices of gold, first position, as provided by the Commodity Exchange, Inc.
(COMEX) in New York.
HIGH LOW
YEAR ------- --------
---- (DOLLARS PER OUNCE)
1997 365.70 282.80
1998 314.50 275.60
1999 327.50 253.20
2000 317.40 263.90
2001 293.30 255.60
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's ore reserves at December 31, 2000
was $300 per ounce of gold. The market price was $276 per ounce of gold at
December 31, 2001, which was below the price at which Kinam has estimated its
reserves. If Kinam 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 for its gold were to decline substantially below the price at
which ore reserves were calculated for a sustained period of time, Kinam
potentially could experience material writedowns of its investment in its mining
properties.
12
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 has 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 2001, 2000, and 1999 the Company's hedging efforts
resulted in average realized prices of $278 per ounce, $292 per ounce, and $289
per ounce, respectively, compared with the average COMEX price of $271 per ounce
in 2001, $279 per ounce in 2000 and 1999. See Note 7 of the Consolidated
Financial Statements for further discussion.
Agreements with Kinross
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 majority owned subsidiary of
Kinross. Immediately following the effective time of the merger, the Company, as
the surviving entity of the combination with Kinross Merger, issued to Kinross
92.2 million shares of the Company's common stock, representing all of the
issued and outstanding common shares. Kinross subsequently transferred ownership
of such shares to Kinross Gold U.S.A., Inc., a wholly-owned subsidiary of
Kinross, which is currently the sole common shareholder of the Company. In July
2001, Kinross completed the acquisition of 945,400 shares, approximately 51.4%,
of our outstanding $3.75 Series B Preferred Stock. These shares were also
transferred to Kinross Gold U.S.A. On February 20, 2002, Kinross commenced a
tender offer for all of our outstanding Series B Preferred Stock that it did not
then own. This tender offer closed March 28, 2002, with 652,992 shares tendered.
This will result in Kinross holding approximately 86.9% of our outstanding
preferred stock. The Company anticipates that it will take the steps necessary
to delist its Series B Preferred Stock from the Amercian Stock Exchange and
deregister the preferred stock under the Securities and Exchange Act of 1934, as
amended, thereby terminating its reporting obligations.
In connection with the 1998 merger, Kinross advanced $225.8 million to Kinam for
repayment of Kinam's outstanding third-party bank debt. During the balance of
1998, Kinam repaid $41.6 million of this obligation. In 1999, Kinross advanced
an additional $16.6 million to Kinam to permit it to purchase assets related to
the True North property in Alaska. An additional $6.7 million was advanced by
Kinross in 2000, and approximately $14.9 million in the first nine months of
2001, primarily for True North property development and to repay third-party
long-term debt obligations of Kinam. Kinam has repaid a portion of the original
advance of $255.8 million, and the additional advances, with the result that the
balance of this obligation was $216.8 million as of December 31, 2001. These
advances are non-interest bearing, are due on demand, and have no fixed terms of
repayment.
Pursuant to the 1998 merger, Kinross acquired a demand loan in the principal
amount of $92.3 million from Cyprus Amax Minerals Company, the former parent of
Kinam, that was an obligation of Kinam. Kinross has not charged Kinam interest
on this loan. Subsequent partial repayments reduced this demand loan payable to
$73.6 million at December 31, 2000, and it has remained unchanged through
December 31, 2001. The demand loan is non-interest bearing, due on demand, and
does not have any fixed terms of repayment.
Kinross has arranged for the issuance of letters of credit under the syndicated
credit facility to guarantee the obligations of the Company under the Fort Knox
industrial revenue bonds, totaling $49.9 million as of December 31, 2001. The
Company's assets associated with Fort Knox are pledged to secure this syndicated
credit facility. In addition, Kinross has guaranteed surety bonds for the
Company on various projects in the aggregate principal amount of $40.0 million.
On December 31, 2000, the Board of Directors gave approval for the Company to
enter into an agreement with Kinross Gold U.S.A. Inc. to acquire all of the
outstanding shares of La Teko Resources Inc., a wholly owned subsidiary of
Kinross. Consideration was 100 common shares of Kinam Gold Inc. with the
effective date of the transaction January 1, 2001. Since this is a related party
transaction which did not result in a substantial change in ownership, this
transition was recorded at the carrying value of La Teko's assets which was
approximately $36.0 million. The assets of La Teko include the property rights
to the Ryan Lode project, which is in the advanced exploration stage, and 35% of
the property rights to the True North project, which commenced production in
early 2001. The ore from the True North project is being processed through the
Fort Knox mill.
13
Employees
At December 31, 2001, the Company and its consolidated subsidiaries employed 914
persons. The hourly employees at the Guanaco mine are represented by the
Sociedad Contractual Minera Guanaco labor union and are covered by a labor
contract that expires at the end of May 2002. 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 May
2003. None of the Company's employees in the United States and Russia are
members of a labor union and the Company considers its employee relations to be
good. The Company receives all of its corporate and administrative services from
Kinross.
Risk Factors
NATURE OF MINERAL EXPLORATION AND MINING
The exploration and development of mineral deposits involves significant
financial and other risks over an extended 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 expenditures are required to establish reserves by drilling and to
construct mining and processing facilities at a site. It is impossible to ensure
that the current or proposed exploration programs on properties in which the
Company has an interest will result in profitable commercial mining operations.
The operations of the Company are subject to the hazards and risks normally
incident to exploration, development and production of gold, any of which could
result in damage to life or property, environmental damage and possible legal
liability for such damage. The activities of the Company may be subject to
prolonged disruptions due to weather conditions depending on the location of
operations in which the Company has interests. Hazards, such as unusual or
unexpected formations, rock bursts, pressures, cave-ins, flooding or other
conditions may be encountered in the drilling and removal of material. While the
Company may obtain insurance against certain risks, the nature of these risks is
such that liabilities could exceed policy limits or could be excluded from
coverage. There are also risks against which the Company cannot insure or
against which it may elect not to insure. The potential costs which could be
associated with any liabilities not covered by insurance or in excess of
insurance coverage or compliance with applicable laws and regulations may cause
substantial delays and require significant capital outlays, adversely affecting
the future earnings and competitive position of the Company and, potentially,
its financial position.
Whether a gold deposit will be commercially viable depends on a number of
factors, some of which are the particular attributes of the deposit, such as its
size and grade, costs and efficiency of the recovery methods that can be
employed, 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 its 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, labor 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, like many other extractive natural resource industries, is subject to
potential risks and liabilities associated with pollution of the environment and
the disposal of waste products occurring as a result of mineral exploration and
production. Environmental liability may also result from mining activities
conducted by others prior to the Company's ownership of a property. To the
extent the
14
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 the mining of ore reserves uneconomical and require the
Company to take a writedown 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.
Proven and probable reserves at the Company's mines and development projects
were calculated based upon a gold price of $300 per ounce of gold. Recently,
gold prices have been 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 writedowns of the Company's investment in mining properties or the
discontinuation of development or production might be required, and there could
be material delays in the development of new projects, increased net losses and
reduced cash flow.
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 document 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 has mining operations in Russia and Chile and is conducting certain
of its exploration and development activities in Russia. The Company believes
that the governments of these countries generally 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 these
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 for which it has obtained exploration,
development and operating rights to date. The possibility that a future
government of these countries may adopt substantially different policies, which
might extend to expropriation of assets, cannot be ruled out.
The Company is subject to the consideration and risks of operating in Russia.
The economy of the Russian Federation continues to display characteristics of an
emerging market. These characteristics include, but are not limited to, the
existence of a currency that is not freely convertible outside of the country,
extensive currency controls, the developing nature of the legal system and high
inflation. The prospects for future economic stability in the Russian Federation
are largely dependent upon the effectiveness of economic measures undertaken by
the government, together with legal, regulatory and political developments.
Russian laws, licenses and permits have been in a state of change and new laws
maybe given retroactive effect. In addition, Russian tax legislation is subject
to varying interpretations and constant change. Further, the interpretation of
tax legislation by tax authorities as applied to the transactions and activities
of the Company's Russian operations (Omolon) may not coincide with that of
management.
15
As a result, transactions may be challenged by tax authorities and the Company's
Russian operations may be assessed additional taxes, penalties and interest,
which could be significant. The periods remain open to review by the tax
authorities for three years.
Of particular significance in Russia is the right of Russian authorities to
purchase gold produced from Omolon, with payment 50% in U.S. dollars and 50% in
Russian rubles at then current London gold prices. Under the terms of Omolon's
purchase and sale agreement, all dore must be initially offered to "Gokhran
Russia", an entity responsible for precious metals and precious stones
established by the Ministry of Finance of the Russian Federation. Payment for
dore purchased by Gokhran Russia is made in Russian rubles (50 percent) and US
dollars (50 percent). Dore rejected by Gokhran Russian may be sold domestically
to licensed purchasers or exported by Omolon, subject to authorization by
Russian customs and the payment of a five-percent export duty. During 2001, the
Central Bank of Russia required that Omolon, under a grandfathered clause,
repatriate back to Russia 50 percent of export receipts be converted into
Russian rubles. During the year ending December 31, 2001, Omolon sold all of its
gold domestically and subsequent to December 31, 2001, the five-percent export
duty was cancelled.
The Company currently has political risk insurance coverage from the United
States Overseas Private Investment Corporation ("OPIC") and Multilateral
Investment Guarantee Agency ("MIGA") covering a portion of its investment in
Omolon. However, there is no guarantee that the Company will continue to qualify
for such insurance.
In addition, the economies of the countries 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.
LICENSES AND PERMITS
The operations of the Company require licenses and permits from various
governmental authorities. The Company believes that it holds all necessary
licenses and permits under applicable laws and regulations and believes it is
presently complying in all material respects with the terms of such licenses and
permits. However, such licenses and permits are subject to change in various
circumstances. There can be no guarantee that the Company will be able to obtain
or maintain all necessary licenses 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 operation 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 supply and demand for gold, the level of
interest rates, the rate of inflation, investment decisions by large holders of
gold, including governmental reserves 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 to cover costs of production and capital
expenditures. 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.
HISTORY OF LOSSES
The Company had net losses of $16.4 million, $53.2 million and $112.7 million
for 2001, 2000 and 1999, respectively. The Company's ability to operate
profitably in the future will depend on the success of its two principal mines,
Fort Knox and Kubaka, and on the price of gold. There can be no assurance that
the Company will be profitable.
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 the
Company's title, 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
16
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. The
General Mining Law of the United States, which governs mining claims and related
activities on U.S. federal public lands, includes provisions for obtaining a
patent, which is essentially equivalent to fee title, for an unpatented mining
claim upon compliance with certain statutory requirements (including the
discovery of a valuable mineral deposit).
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.
INSURANCE/SURETY
In accordance with standard industry practice, the Company seeks to obtain
bonding and other insurance in respect of its liability for costs associated
with the reclamation of mine, mill and other sites used in its operations and
against other environmental liabilities, including liabilities imposed by
statute. Due to recent developments which have affected the insurance and
bonding markets worldwide, such bonding and/or insurance may be difficult or
impossible to obtain in the future or may only be available at significant
additional cost. In the event that such bonding and/or insurance cannot be
obtained by the Company or is obtainable only at significant additional cost,
the Company may become subject to financial liabilities which may adversely
affect its financial resources.
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 ruble and Chilean
peso are currently convertible into United States dollars, there is no guarantee
that they will continue to be so convertible.
JOINT VENTURES
Some of the mines in which the Company owns interests are operated through joint
ventures with other mining companies. Any failure of such other companies to
meet their obligations to the Company or to third parties could have a material
adverse effect on the joint ventures. In addition, the Company may be unable to
exert influence over strategic decisions made in respect of such properties.
ROYALTIES
The Company's mining properties are subject to various royalty and land payment
agreements. Failure by the Company to meet its payment obligations under these
agreements could result in the loss of related property interests.
HEDGING
The Company has historically reduced its exposure to gold and silver price
fluctuations by engaging in hedging activities. There can be no assurance that
the Company will continue the hedging techniques successfully used, or any other
hedging techniques, or that, if they are continued, the Company will be able to
achieve in the future realized prices for gold produced in excess of average
COMEX prices as a result of its hedging activities.
17
DIVIDEND POLICY
For the foreseeable future, it is anticipated that the Company will use
earnings, if any, to finance its growth and that dividends will not be paid to
shareholders. In August 2000, cumulative dividends on the Series B Preferred
Shares were suspended in the absence of earnings. There were no dividends paid
in 2001 on the Series B Preferred Shares.
Item 3. Legal Proceedings
The Company conducts business in Russia through its subsidiary, Omolon, which is
owned 45.3% by Russian shareholders. One of the Russian shareholders has
asserted that the original issuance of shares to the shareholder was flawed due
to failure to follow certain registration procedures. As a result the
shareholder claims the share issuance was null and void and therefore it should
have its money returned with compound interest. The total claim is for
approximately $43.0 million. The Company has been advised by its counsel that
Omolon has good defences available to it on the merits and that such counsel is
confident that Omolon will successfully defend the lawsuit. However, the
interpretation and application of the laws of the Russian Republic may be
subject to policy changes reflecting domestic political changes or other
considerations. Moreover, because of the developing nature of the Russian legal
system and the fact that the interpretation and application of many laws are
untested, it is difficult to predict with certainty how they may be interpreted
and applied in a particular case. As a consequence, other or additional
penalties or remedies may be imposed. These remedies may, in addition to
imposing financial obligations, otherwise adversely affect the operations or
status of Omolon including a possible order that none of the issued shares of
Omolon are valid.
The Company's 50% owned Chilean contractual mining company, CMM, has entered
into arbitration proceedings in Chile with the contractor that designed and
built the Refugio mine. CMM contends that the contractor was negligent in both
the design and the construction of the facility, and should be held responsible
for the cost of repairs as well as lost profits. As part of the same
proceedings, the contractor is seeking to recover costs that they allegedly
incurred while building the mine and which, they claim, were outside their scope
of work and responsibility. Although the outcome of the arbitration proceedings
cannot be determined at the current time, management is of the opinion that the
outcome will not materially affect the financial position, results of operations
or cash flows of the Company.
In August 1998, the U.S. Environmental Protection Agency served Kinam with a
Unilateral Administrative Order ("UAO") as a Potentially Responsible Party
("PRP") under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") and Solid Waste Disposal Act ("SWDA"), requiring that
Kinam, along with other PRP's, remove certain contaminated materials from the
PRC Patterson Inc. site ("the Site") in Patterson, California. Kinam shipped
waste oil to the Site from 1994 to 1996. Subsequent to that order Kinam joined
with certain other PRP's to form the Patterson Environmental Response Trust, an
entity which was created for the purpose of conducting the removal actions
required by EPA. All materials had been removed and disposed of by the Trust by
the end of the year 2000. Kinam's share in removal costs, nominally estimated at
5% of the total costs incurred, will ultimately be determined once confirmation
of the actual barrels of used oil is completed. An Administrative Order of
Consent ("AOC") has fully been executed by the U.S. EPA for the Patterson
Superfund Site. The site has been fully remediated and all provisions of the AOC
have been met. The Company no longer has any liability associated with the PRC
Patterson Superfund Site.
In October 1996, a shareholder derivative action was filed in the Court
of Chancery of Delaware by a stockholder of the Company, entitled
HARRY LEWIS V. MILTON H. WARD, ET AL., C.A. No. 15255-NC, against Cyprus Amax,
the directors of the Company and the Company as a nominal defendant. The
complaint alleges, among other things, that the defendants engaged in
self-dealing in connection with the Company's entry in March 1996 into a demand
loan facility provided by Cyprus Amax. The complaint seeks, among other things,
a declaration that the demand loan facility is not entirely fair to the Company
and damages in an unspecified amount. The Company believes that the complaint is
without merit and intends to defend the matter vigorously.
In March 1994, the U.S. Forest Service notified the Company that it considers
the Company to be a PRP under CERCLA, jointly and severally liable with other
PRP's for damages attributable to alleged releases of hazardous substances from
the Siskon Mine, located in the Klamath National Forest in Siskiyou County,
California. The Company conducted a limited exploration drilling program in the
summer of 1991 on property at the Siskon mine site which the Company believes is
not involved in the alleged releases. Based on facts currently known to
management, the Company does not anticipate that this matter will have a
material effect on the Company's financial condition or results of operations.
The Company is also involved in legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate
18
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 2001.
PART II
Item 5. Market For Registrant's Common And Preferred Equity And
Related Stockholder Matters
There is currently no public market for the common stock of the Company. The
Series B Convertible Preferred Stock of the Company is listed on the American
Stock Exchange (KGC^B) and the number of stockholders of record as of March 25,
2002 was 47. Prior to August 1, 2001, the Series B Convertible Preferred Stock
was listed on the New York Stock Exchange. In the absence of earnings, the Board
of Directors has suspended the quarterly dividends on the Series B Convertible
Preferred Stock beginning with the dividend payable in August 2000. The decision
was taken by the Board as a cash conservation measure due to continuing low gold
prices and lack of earnings. No dividends were paid in 2001.
The following table sets forth for the periods indicated the high and the low
sale prices per share of the Series B Convertible Preferred Stock as reported by
the New York Stock Exchange and the dividends paid on such stock.
Stock Prices and Dividends Per Share
SERIES B CONVERTIBLE
PREFERRED STOCK
-------------------------------
QUARTER HIGH LOW
------- ---- ---
2001
----
First 8.40 6.25
Second 12.20 5.75
Third 11.75 9.75
Fourth 11.41 7.26
2000
----
First 30.50 25.69
Second 26.75 22.50
Third 24.44 7.44
Fourth 8.81 7.00
19
Item 6. Selected Financial Data
KINAM GOLD INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS EXCEPT PER SHARE AMOUNTS AND PERCENTAGES,
PRODUCTION AND SALES OUNCES, AND AMOUNTS PER OUNCE)
2001 2000 1999 1998 1997
-------- --------- -------- -------- --------
FOR THE YEAR:
Revenues $ 199.3 $ 210.8 $ 214.1 $ 268.1 $ 259.5
Earnings (loss) from operations/(1) (13.0) (49.9) (107.5) (180.4) 1.9
Loss before cumulative effect of accounting
changes, net/(1) (16.4) (53.2) (112.7) (190.8) (37.9)
Loss before extraordinary item/(1) (16.4) (53.2) (112.7) (190.8) (33.4)
Net loss/(1) (16.4) (53.2) (112.7) (202.3) (33.4)
Per common share:
Loss before cumulative effect of acccounting
changes, net/(1) $ (0.25) $ (0.65) $ (1.30) $ (1.94) $ (0.41)
Loss before extraordinary item/(1) $ (0.25) $ (0.65) $ (1.30) $ (1.94) $ (0.37)
Net loss/(1) $ (0.25) $ (0.65) $ (1.30) $ (2.05) $ (0.37)
Weighted average common shares outstanding 92.2 92.2 92.2 101.7 108.2
Capital expenditures 20.6 16.7 16.9 15.4 30.8
Cash dividends to common shareholders -- -- -- -- --
Dividends declared per common share -- -- -- -- --
Cash dividends to preferred shareholders -- 3.5 6.9 6.9 6.9
Dividends declared per preferred share $- $ 1.875 $ 3.75 $ 3.75 $ 3.75
AT YEAR-END:
Current assets 65.3 92.8 98.3 107.2 129.7
Total assets 326.8 372.8 463.9 602.0 870.6
Current liabilities 135.6 138.3 143.0 153.8 226.0
Long-term debt (excluding current portion) 27.7 77.2 110.6 123.0 345.7
Shareholders' equity (capital deficiency) (82.9) (104.1) (47.5) 72.1 273.8
Working capital deficit (70.3) (45.5) (44.7) (46.6) (96.3)
KEY OPERATING FACTORS FOR THE YEAR:
Total ounces of gold equivalent produced 719,199 718,395 736,463 781,497 729,831
Total ounces of gold sold 716,476 720,738 741,087 778,559 720,889
Average realized price per ounce sold $ 278 $ 292 $ 289 $ 344 $ 360
Average cost per ounce produced/(2):
Total cash costs/(3) $ 191 $ 192 $ 186 $ 185 $ 198
Reclamation costs 2 3 3 13 10
Depreciation, depletion and amortization 100 103 108 119 123
-------- --------- -------- -------- --------
Total production costs per ounce $ 293 $ 298 $ 297 $ 317 $ 331
======== ========= ======== ======== ========
20
(1) In the fourth quarter of 2000, following a comprehensive evaluation of
its mining properties based on an assumed gold price of $300, the Company
determined that the net recoverable amounts of the Refugio mine were less
than the net book value. As a result of this review the Company recorded
a $26.7 million pre-tax writedown of the Refugio mine. In addition, after
a thorough review of various closure costs, the remaining carrying value
and the current environment for surplus mining equipment and facilities,
the remaining book value of the Hayden Hill mine, the Guanaco mine, the
Haile property and other non-core properties, principally the Sleeper and
Wind Mountain mines were written off. These items increased the net loss
by $37.7 million or $0.41 per common share.
In the fourth quarter of 1999, the Company recorded a $72.9 million
pre-tax writedown of the Fort Knox mine, a $10.1 million pre-tax
writedown of the Refugio mine and a $16.5 million pre-tax writedown of
the Haile property. These items increased the net loss by $99.5 million,
or $1.08 per common share.
In the fourth quarter of 1998, the Company recorded a $53.1 million
pre-tax writedown of the Refugio mine and a $140.3 million pre-tax
writedown of the Fort Knox mine. In the second quarter of 1998, the
Company recorded an $11.5 million loss on the early extinguishment of
debt. These items increased the net loss by $204.9 million, or $2.01 per
common share.
(2) Average costs weighted by ounces of gold produced at each mine.
(3) The Company follows the Gold Production Cost Standard developed by the
Gold Institute in order to facilitate comparisons among companies in the
gold industry. Total cash costs include royalties and production taxes,
but exclude reclamation costs.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
THE COMPANY
Kinam Gold Inc. (the "Company") is 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, Chile, and Russia. The Company's
products are gold and silver produced in the form of dore that is shipped to
refineries for final processing.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are more fully described in Note 1
to the consolidated financial statements. Certain accounting policies require
the application of significant judgment by management in selecting the
appropriate assumptions for calculating financial estimates. By their nature,
these judgments are subject to an inherent degree of uncertainty. These
judgements are based on historical experience, terms of existing contracts,
observance of trends in the industry, information provided by customers and
information available from other outside sources, as appropriate. The Company's
significant accounting policies include:
Revenue Recognition
The Company recognizes revenue for the gold and silver production upon shipment
to the customer and the transfer to title. The Company sells all of its refined
gold to banks, bullion dealers and refiners. The Company is paid for the refined
gold upon transfer of title. The Company has never been required to provide for
allowances for doubtful accounts on its gold and silver sales.
Carrying Value Assessments of Mining Assets
The Company reviews the carrying value of its long-lived mining assets by
comparing the estimated undiscounted future net cash flow with its carrying
value. When the future net cash flows are less than the carrying value, the
future net cash flow is discounted and a write-down is recorded. Included in
these future net cash flows are certain estimates. These estimates include
future production, future production costs, future capital expenditures, future
closure cost estimates, future gold prices and current proven and probable
reserve estimates. Actual results may differ from estimates and if they result
in a lower actual net cash flow than planned a write-down of the carrying value
of the long-lived mining assets may be required.
21
Pension
Pension assets and liabilities are determined on an actuarial basis and are
affected by the estimated market value of plan assets; estimates of the expected
return on plan assets and discount rates. Actual changes in the fair market
value of plan assets and differences between the actual return on plan assets
and the expected return on plan assets will affect the amount of pension expense
ultimately recognized. The postretirement benefits other than pension liability
are also determined on an actuarial basis and are affected by assumptions
including the discount rate and expected trends in health care costs. Changes in
the discount rate and differences between actual and expected health care cost
will affect the recorded amount of postretirement benefits expense.
Taxes
The Corporation has recorded a valuation allowance to reduce its deferred tax
assets based on an evaluation of the amount of deferred tax assets that
management believes are more likely than not, to be ultimately realized in the
foreseeable future. An adjustment to income could be required in the future if
the Corporation determines it could realize additional deferred tax assets in
excess of the net recorded amount or it would not be able to realize all or part
of its net deferred tax assets.
CONSOLIDATED RESULTS
The Company reported a 2001 net loss of $16.4 million, or $0.25 per share
attributable to common shares after the accrual of preferred dividends, on
revenues of $199.3 million, compared with a 2000 net loss of $53.2 million, or
$0.65 per share attributable to common shares after the accrual of preferred
dividends, on revenues of $210.8 million, and a 1999 net loss of $112.7 million
or $1.30 per share attributable to common shares after preferred dividends, on
revenues of $214.1 million. The 2000 results included a $26.7 million writedown
of the Refugio mine the accrual of and an $11.0 million writedown of other
properties in various stages of closure. The 1999 results included a $10.1
million writedown of the Refugio mine, a $72.9 million writedown of the Ft Knox
mine and a $16.5 million writedown of the Haile property. Excluding these items
the 2000 net loss would be $15.5 million, or $0.24 per share attributable to
common shares after the accrual of preferred dividends, compared with a 1999
loss of $13.2 million, or $0.22 per share attributable to common shares after
preferred dividends. See note 5 of the Consolidated Financial Statements for
further discussion on the writedowns.
The Company's operating loss (excluding the writedown of mineral properties) was
$13.0 million in 2001 compared with an operating loss of $12.2 million in 2000
and an operating loss of $8.0 million in 1999. Continued low gold prices
contributed to the 2001 loss. Cash flow provided from operating activities
increased to $62.1 million in 2001 compared with $39.8 million in 2000 due to
working capital decreases and slightly lower production costs offset by lower
realized gold price. In 1999 cash flow provided from operating activities was
$72.1 million.
REVENUES
The Company's primary source of revenue is from the sale of its gold production.
The Company sold 716,476 ounces of gold in 2001 compared with 720,738 ounces in
2000 and 741,087 ounces in 1999. Revenue from gold sales decreased to $199.3
million in 2001 compared with $210.8 million in 2000 and $214.1 million in 1999
due to lower ounces of gold sold and lower realized prices.
Realized prices of $278 per ounces in 2001, $292 per ounce in 2000, and $289 per
ounces in 1999 compared with average spot prices of $271 per ounce in 2001 and
$279 per ounce in 2000 and 1999. The Company's realized price exceeded the spot
price due to the positive impact of hedging activities. See Note 7 to the
consolidated financial statements for further discussion on hedging activities.
PRODUCTION
The Company's share of attributable production was 719,199 gold equivalent
ounces in 2001, a slight increase when compared with 2000 production of 718,395
equivalent gold ounces and a nominal decrease when compared with 1999 production
of 736,463 equivalent gold ounces. Average total cash costs per gold equivalent
ounce were $191 in 2001 compared with $192 in 2000 and $186 in 1999.
22
The Company's share of equivalent gold production for the years indicated from
the various mines in which it holds an interest was as follows:
Gold equivalent ounces 2001 2000 1999
------- ------- -------
Fort Knox 411,221 362,959 351,120
Kubaka 237,162 244,641 254,625
Refugio 67,211 85,184 90,008
Hayden Hill 1,887 9,582 17,020
Guanaco 1,718 16,029 23,690
------- ------- -------
Consolidated total equivalent ounces 719,199 718,395 736,463
======= ======= =======
Production for Hayden Hill and Guanaco decreased dramatically as residual
leaching ceased at Guanaco in March 2001 and at Hayden Hill in June 2001.
Included in gold equivalent production is silver production of 294,808 ounces in
2001, 402,637 ounces in 2000, and 448,315 ounces in 1999, converted to gold
production using a ratio of the average spot market prices for the three
comparitive years. The resulting ratios are 62.00:1 in 2001, 56.33:1 in 2000 and
53.40:1 in 1999.
OPERATING COSTS
Consolidated cost of sales decreased to $136.9 million in 2001 compared with
$144.5 million in 2000 and $141.0 million in 1999 due to lower ounces of gold
sold. Total cash costs per ounce of gold equivalent produced were $191 in 2001
compared with $192 in 2000 and $186 in 1999. The Company's cost of sales as a
percentage of revenue remained at 69% in 2001, the same as in 2000, and compared
with 66% in 1999 due to continued low gold prices.
The Company's total cash cost per gold equivalent ounce produced for the years
indicated from the various mines in which it holds an interest was as follows:
2001 2000 1999
---- ---- ----
Fort Knox $207 $203 194
Kubaka 140 139 143
Refugio 242 300 277
Hayden Hill 277 240 194
Guanaco 436 278 198
---- ---- ----
Consolidated weighted average total cash cost $191 $192 $186
==== ==== ====
PRIMARY OPERATIONS
FORT KNOX MINE
Gold equivalent production in 2001 was 411,221 ounces compared with 362,959
ounces in 2000 and 351,120 in 1999. In 2001 total cash costs were $207 per ounce
of gold equivalent compared with $203 in 2000 and $194 in 1999. The Fort Knox
mine 2001 business plan called for 450,000 ounces of gold equivalent production
at total cash costs of $196 per ounce of gold equivalent. The plan was
predicated on production from the Fort Knox open pit and supplemental feed from
the recently acquired True North deposit early in 2001.
For 2001, cash production costs were $2.8 million lower than planned.
Unfortunately, the reduced spending did not compensate for the delays in
achieving commercial production at the True North open pit, due to a prolonged
permitting process, unacceptable performance of the haulage contractor during
the third quarter of 2001 and lower than anticipated ore grade in the upper
benches at the True North open pit during the third quarter of 2001. The fourth
quarter of 2001 results were on plan as the Company acquired the haulage fleet
and is managing the ore haulage operations from the True North open pit to the
Fort Knox mill. In addition, the grade of the ore mined during the fourth
quarter of 2001 at the True North open pit was as planned. Estimated gold
equivalent production for 2002 is 440,000 ounces at total cash costs of
approximately $210 per ounce.
23
KUBAKA MINE (54.7% OWNERSHIP INTEREST IN 2001 AND 2000, 53% IN 1999)
The Company's share of gold equivalent production in 2001 was 237,162 ounces
compared with 244,641 ounces in 2000 and 254,625 in 1999. In 2001 total cash
costs were $140 per gold equivalent ounce compared with $139 in 2000 and $143 in
1999. The Kubaka mine continues to perform exceptionally well, having achieved
the lowest total cash costs per ounce of the Company's primary operations. Cash
production costs were on plan during 2001, unchanged from 2000. Mill throughput
increased by 4%, which helped to compensate for the 6% decrease in the grade of
ore processed. Estimated gold equivalent production for the Company's ownership
interest in 2002 is 230,000 ounces at total cash costs of approximately $130 per
equivalent ounce.
In 1999 the Company began an extensive drilling program looking for alternative
mill feed for the Kubaka operations beyond the then known mine life. In 2000,
these activities identified the Birkachan project located 18 miles north of the
Kubaka processing plant. Additional exploration drilling continued during 2001.
Current plans for 2002 are to continue the exploration activities at Birkachan,
and commence the process converting the current exploration license to a mining
license. The Company will focus its exploration activities to identify resources
that can be quickly converted into reserves and provide mill tonnage for the
Kubaka processing plant, in 2003 or 2004.
REFUGIO MINE (50% OWNERSHIP INTEREST)
The Company's share of gold equivalent production in 2001 was 67,211 ounces
compared with 85,184 ounces in 2000 and 90,008 in 1999. In 2001, total cash
costs were $242 per ounce of gold equivalent compared with $300 in 2000 and $277
in 1999. In light of the continued weakness in spot gold prices a decision was
made to suspend mining activities and place the operations on care and
maintenance in 2001. Open pit mining activities were suspended on June 1, 2001
and the last mined ore was placed on the leach pad and the Refugio operations
commenced residual leaching of the two leach pads. All of the leased equipment
was disposed of in 2001, eliminating any further financial obligations under the
leases. Heap leaching operations continue and the balance of the Chilean summer
will be spent reviewing the water balance and the estimated gold inventory on
the leach pad to determine the best time to suspend residual leaching. The
Company estimates its share of residual production will be approximately 9,000
gold equivalent ounces during the first half of 2002 after which the Refugio
mine will remain in care and maintenance until spot gold prices improve
substantially.
OTHER OPERATIONS
Residual leaching ceased at Guanaco in March 2001 and at Hayden Hill in June
2001. Both of these operations will have no further commercial production and
are now focused on mine closure and reclamation.
SITE RESTORATION COSTS
Although the ultimate amount of reclamation and closure costs is uncertain, the
Company estimates its closure obligation at $40.8 million based on information
currently available including preliminary closure plans and applicable
regulations. As at December 31, 2001, the Company has accrued $32.6 million of
this liability. The Company will continue to accrue this liability on a unit-of
production basis over the remaining reserves. In addition the Company plans
reclamation spending of approximately $7.1 million in 2002 as part of its
aggressive plan to get as many projects compete as possible to post closure
monitoring by the end of 2004.
ADMINISTRATION
General and administrative expenses were $1.0 million in 2001 compared with $1.0
million in 2000 and $1.5 million in 1999. Substantially all management and
administrative expenses are provided by Kinross to the Company at no cost.
Administrative expenses in 2002 are expected to remain near 2001 levels.
EXPLORATION
Exploration expenses were $2.7 million in 2001 compared with $3.3 million in
2000 and $1.8 million in 1999. The Company continues to focus its exploration
activities near existing processing plants, primarily Fort Knox and Kubaka. In
2002 exploration expenditures are expected to be $2.0 million.
24
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization totaled $71.7 million in 2001 compared
with $74.2 million in 2000 and $77.8 million in 1999. Depreciation, depletion
and amortization have decreased per equivalent ounce of gold to $100 in 2001,
compared with $103 In 2000, and $108 in 1999. The 2001 decrease per equivalent
ounce was primarily due to increased year-end 2000 proven and probable reserves
at the Kubaka mine. Depreciation, depletion and amortization on a per ounce
basis are expected to remain near current levels in 2002.
INTEREST EXPENSE
Interest expense totaled $4.9 million in 2001 compared with $9.9 million in 2000
and $10.0 million in 1999. The lower 2001 interest expense is due to lower debt
balances primarily due to the partial early debt repayment of the Alaska
industrial revenue bonds in April 2001, repayments of the Kubaka loans and lower
interest rates on the variable rate debt. For further discussion on the
Company's long term debt see Note 6 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash flow from operating activities were $62.1 million in 2001 compared with
$39.8 million in 2000 and $72.1 million in 1999. The 2001 cash flow from
operations was positively affected by lower production costs, lower interest
expense and decreased working capital. The 2001 cash flow from operating
activities was used to help finance capital expenditures and help service
existing debt.
INVESTING ACTIVITIES
Capital expenditures in 2001 were $20.6 million compared with $16.7 million in
2000 and $16.9 million in 1999. Capital spending at Fort Knox totaled $20.2
million in 2001 compared with $12.8 million in 2000 and $7.8 million in 1999,
primarily to purchase nine haulage trucks for the True North ore haulage,
complete the access road from the True North open pit to the Fort Knox mill and
for site infrastructure at the True North open pit. The Company's share of
capital expenditures at Kubaka in 2001 was $0.4 million compared with $0.1
million in 2000 and $1.1 million in 1999. Capital spending at Refugio was $3.2
million in 2000, primarily on a leachpad expansion, compared with $8.0 million
in 1999. In 2000, capital spending at Guanaco totaled $0.6 million for a land
purchase.
FINANCING ACTIVITIES
There were no dividends paid in 2001 as the Board of Directors suspended the
quarterly dividends on the $3.75 Series B Convertible Preferred Stock beginning
with the dividend payable in August 2000. Included in paid-in-capital is a $10.3
million accrual representing the cumulative unpaid dividends.
Paid-in-capital increased $42.5 million in 2001. $35.6 million was due to an
additional investment by Kinross representing the carrying value of the assets
transferred to the Company. The assets transferred to the Company included the
Ryan Lode property and 35% of the True North property thereby increasing the
Company's share of the True North property to 100%. The balance is the accrual
of the preferred dividends.
Long-term debt repayments totaled $47.5 million in 2002. Debt repayments
consisted of a $22.0 million early repayment of the Alaska industrial revenue
bonds, $21.5 million of Kubaka debt repayments and $4.0 million in capital lease
repayments. As at December 31, 2001, the Company's long-term debt consists of
$4.2 million relating to the Kubaka project financing, $49.0 million of Fort
Knox industrial revenue bonds and various capital leases of $7.6 million. For
details of the various components of long-term debt, see Note 6 to the
Consolidated Financial Statements.
In connection with the 1998 merger, Kinross advanced $255.8 million to Kinam for
repayment of Kinam's outstanding third-party bank debt. During the balance of
1998, Kinam repaid $41.6 million of this obligation. In 1999, Kinross advanced
an additional $16.6 million to Kinam to permit it to purchase assets related to
the True North property in Alaska. An additional $6.7 million was advanced by
Kinross in 2000, and approximately $14.9 million in the first nine months of
2001, primarily for True North property development and to repay third-party
long-term obligations of Kinam. Kinam has repaid a portion of the original
advance of $255.8 million, and the
25
additional advances, with the result that the balance of this obligation was
$216.8 million as of December 31, 2001. These advances are non-interest bearing,
are due on demand, and have no fixed terms of repayment.
Pursuant to the 1998 merger, Kinross acquired a demand loan in the principal
amount of $92.3 million from Cyprus Amax Minerals Company, the former parent of
Kinam, that was an obligation of Kinam. Kinross has not charged Kinam interest
on this loan. Subsequent partial repayments reduced this demand loan payable to
$73.6 million at December 31, 2000, and it has remained unchanged through
December 31, 2001. The demand loan is non-interest bearing, due on demand, and
does not have any fixed terms of repayment.
As at December 31, 2001, Kinross had a $70.0 million operating line of credit in
place with a bank syndicate, which is utilized for letter of credit purposes.
The operating line was reduced to $50.0 million on January 2, 2002.
Kinross has arranged for the issuance of letters of credit under this syndicated
credit facility to guarantee the obligations of the Company under the Fort Knox
industrial revenue bonds, totaling $49.9 million as of December 31, 2001. The
Company's assets associated with Fort Knox are pledged to secure this syndicated
credit facility this credit facility matures in January 2003 and Kinross intends
to re-market this credit facility in early 2002. In addition, Kinross has
guaranteed surety bonds for the Company on various projects in the aggregate
principal amount of $40.0 million.
Management has budgeted $17.5 million for capital spending in 2002, of which
$16.0 million is Fort Knox sustaining capital. In addition, the Company
anticipates that it will require approximately $33.1 million for debt reduction
during 2002. To the extent that funds are not available to meet these planned
expenditures from operations, the Company will be dependent on advances from its
corporate parent, Kinross.
The Company relies solely on Kinross for funding the portion of operating costs,
capital expenditures, general corporate expenditures and debt and interest
payments not funded by cash flow from operating activities. The Company
continues to conserve cash whenever possible including approving only capital
expenditures necessary to sustain operations, continued low exploration
expenditures, suspending the payment of preferred stock dividends and
continually monitoring operating costs at all its operations. Assuming the price
of gold remains at current levels the Company anticipates additional borrowings
from Kinross in 2002 to fund current debt repayment requirements and planned
capital expenditures. While Kinross has funded these obligations in the past it
is under no obligation to do so, and there can be no assurance that the Company
may not have to seek funding from other sources in the future.
CONTINGENCIES AND RELATED COMMITMENTS
The Company is subject to the considerations and risks of operating in Russia as
a result of its 54.7% ownership of the Kubaka mine located in eastern Russia.
The economy of the Russian Federation continues to display characteristics of an
emerging market. These characteristics include, but are not limited to, the
existence of a currency that is not freely convertible outside of the country,
extensive currency controls and high inflation. The prospects for future
economic stability in the Russian Federation are largely dependent upon the
effectiveness of economic measures undertaken by the government, together with
legal, regulatory, and political developments. Russian tax legislation is
subject to varying interpretations and frequent changes. Further, the
interpretation of tax legislation by tax authorities as applied to the
transactions and activities 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. The fiscal periods remain open to review for three years by the
tax and customs authorities with respect to tax liabilities.
The Company conducts business in Russia through its subsidiary, Omolon, which is
owned 45.3% by Russian shareholders. One of the Russian shareholders has
asserted that the original issuance of shares to the shareholder was flawed due
to failure to follow certain registration procedures. As a result the
shareholder claims the share issuance was null and void and therefore it should
have its money returned with compound interest. The total claim is for
approximately $43.0 million. The Company has been advised by its counsel that
Omolon has good defences available to it on the merits and that such counsel is
confident that Omolon will successfully defend the lawsuit. However, the
interpretation and application of the laws of the Russian Republic may be
subject to policy changes reflecting domestic political changes or other
considerations. Moreover, because of the developing nature of the Russian legal
system and the fact that the interpretation and application of many laws are
untested, it is difficult to predict with certainty how they may be interpreted
and applied in a particular case. As a consequence, other or additional
penalties or remedies may be imposed. These remedies may, in addition to
imposing financial obligations, otherwise adversely affect the operations or
status of Omolon including a possible order that none of the issued shares of
Omolon are valid.
26
The Company's 50% owned Chilean contractual mining company CMM has entered into
arbitration proceedings in Chile with the contractor that designed and built the
mine. CMM contends that the contractor was negligent in both the design and the
construction of the facility, and should be held responsible for the cost of
repairs as well as lost profits. As part of the same proceedings, the contractor
is seeking to recover costs that they allegedly incurred while building the mine
and which, they claim, were outside their scope of work and responsibility.
Although the outcome of the arbitration proceedings cannot be determined at the
current time, management is of the opinion that the outcome will not materially
affect the financial position, results of operations or cash flows of the
Company.
The Company's 90% owned Chilean mining company, Compania Minera Kinam Guanaco
has received a tax re-assessment from the Chilean IRS. The re-assessment is for
$6.7 million disallowing certain deductions utilized by a third party. The
Company believes this re-assessment will be resolved with no material adverse
affect to the financial position, results of operations or cash flows of the
Company. In addition, the Company has been in idemnified by the third party for
an amount in excess of the claim.
In accordance with standard industry practice, the Company seeks to obtain
bonding and other insurance in respect of its liability for costs associated
with the reclamation of mine, mill and other sites used in its operations and
against other environmental liabilities, including liabilities imposed by
statute. Due to recent developments which have affected the insurance and
bonding markets worldwide, such bonding and/or insurance may be difficult or
impossible to obtain in the future or may only be available at significant
additional cost. In the event that such bonding and/or insurance cannot be
obtained by the Company or is obtainable only at significant additional cost,
the Company may become subject to financial liabilities which may affect its
financial resources.
On March 7, 2002, we received a letter from Reginald H. Howe, which stated that
he represents two holders of our preferred stock who hold a total of 6,500
shares. In his letter, Mr. Howe states that his clients intend to pursue legal
action with respect to Kinross' tender offer if Kinross does not amend the Offer
to Purchase and make certain material changes to its terms, including the
offering price. Mr. Howe's letter sets forth various potential legal arguments
with respect to Kinross' tender offer for our preferred stock and Kinross'
purchase of our preferred stock from these shareholders in July of 2001. On
March 22, 2002, a subsequent letter was received from Mr. Howe reiterating
certain legal arguments with respect to Kinross' tender offer.
We do not believe that Mr. Howe states any grounds on which his clients would be
entitled to relief and we intend to vigorously defend any legal action that may
be brought by Mr. Howe, if and when such legal action is filed. As of the date
hereof, Mr. Howe has not commenced any legal action. We anticipate that any
legal action that may be filed may not be resolved for a significant period of
time.
The Company is also involved in legal proceedings and claims which arise in the
ordinary course of its business. 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.
The Company's mining and exploration activities are subject to various federal,
provincial and state laws and regulations governing the protection of the
environment. These laws and regulations are continualty changing and generally
becoming more restrictive. The Company conducts its operations so as to protect
public health and the environment and believes its operations are materially in
compliance with all applicable laws and regulations. The Company has made, and
expects to make in the future, expenditures to comply with such laws and
regulations.
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
commencement of commercial operations, reserve additions, projected quantities
of future gold production, estimated reserves and recovery rates, anticipated
production rates, costs and expenditures, prices realized by the Company and
expected to be realized, expected future cash flows, anticipated financing
needs, growth plans and sources of financing and repayment alternatives. Factors
that could cause actual results to differ materially 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, currency fluctuations,
governmental regulation of investment and withdrawal of funds, decisions by
significant holders of gold reserves, competition in gold production and
competition in uses for gold, 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.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
COMMODITY PRICE RISKS
The Company's revenues are derived primarily from the sale of gold production.
The Company's net income can vary significantly with fluctuations in the market
prices of gold. At various times, in response to market conditions, the Company
has entered into gold forward sales contracts for some portion of expected
future production to mitigate the risk of adverse price fluctuations. The
significant decline in spot gold prices in 1998 increased the value of the
Company's forward sales contracts. The Company closed out these contracts in
1998 for $45.9 million in cash. This gain is being included in revenue over the
period the underlying hedge contacts were originally scheduled to expire. As of
December 31, 2001, $1.3 million of this gain was included in accumulated other
comprehensive income. For further details of the remaining deferred revenue and
the period it will be recorded in revenue, see Note 7 of the Consolidated
Financial Statements. At December 31, 2001 the Company had no gold forward sales
contracts. Based on the Company's projected 2002 sales volumes, each $10 per
ounce change in the average realized price on gold sales would have an
approximate $6.75 million impact on revenues and pre-tax earnings.
FOREIGN CURRENCY EXCHANGE RISK
The Company conducts the majority of its operations in the U.S., Russia, and
Chile. Currency fluctuations affect the cash flow that the Company will realize
from its operations as gold is sold in U.S. dollars, while production costs are
incurred in Russian rubles, Chilean pesos and U.S. dollars. The Company's
results are positively affected when the U.S. dollar strengthens against these
foreign currencies and adversely affected when the U.S. dollar weakens against
these foreign currencies. The Company's cash and cash equivalent balances are
held in U.S. dollars. Holdings denominated in other currencies are relatively
insignificant.
Since 1998, the Russian ruble has weakened against the U.S. dollar and the
Company has benefited primarily through lower Russian labour and materials
costs. The temporal method is use to consolidate the financial results of
operations in Russia. The major currency related exposure at any balance sheet
date is on ruble denominated cash balances and working capital. The bullion
inventory is denominated in U.S. dollars thus there are no related foreign
exchange risks. The foreign exchange exposure on the balance of the working
capital items is nominal. Gold sales during 2001 were primarily denominated in
rubles. Any excess rubles were quickly converted into U.S. dollars minimizing
any foreign exchange risk on cash balances. 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 the extent permissable to repay U.S. denominated
third-party and inter-corporate debt obligations. Assuming the Company's share
of estimated 2002 ruble payments of 560 million rubles at an exchange rate of 30
rubles to one U.S. dollar, each 3 ruble change to the U.S. dollar could result
in an approximate $1.7 million change in the Company's pre-tax earnings.
INTEREST RATE RISK
As at December 31, 1998, the Company held interest rate swaps to fix interest
rates on a portion of its floating rate debt. The costs associated with these
contracts were amortized to interest expense over the terms of the agreements.
For details on the interest rate swap agreements outstanding as at December 31,
1998, see Note 7 to the Consolidated Financial Statements. There were no
outstanding interest rate swaps at December 31, 1999, 2000 or 2001.
As at December 31, 2001, the Company had $53.7 million (2000 - $96.7 million) of
variable rate debt, all denominated in U.S. dollars. Interest expense would
change by approximately $0.5 million for every 1% change in interest rates.
28
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
accounting principles generally accepted in the United States 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 auditing standards generally accepted in the United States.
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
President
/s/ Brian W. Penny
-------------------------
Brian W. Penny
Treasurer
29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Kinam Gold Inc.
We have audited the accompanying consolidated balance sheets of Kinam Gold Inc.
and subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity (capital deficiency) and cash
flows for each of the years in the three year period ended December 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of Omolon Gold Mining
Company, a 54.7% owned subsidiary, which statements reflect total assets and
revenues constituting 22% and 34%, respectively for 2001, and 32% and 32%,
respectively, for 2000, of the related consolidated totals. Those statements
were audited by other auditors whose report dated February 28, 2002 has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Omolon Gold Mining Company, is based solely on the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America and Canada. Those standards require that we plan
and perform the audits 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports 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, 2001 and 2000, and the results of their operations and their
cash flows for each of the years in the three year period ended December 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, the Company changed its
revenue recognition policy effective January 1, 2001.
/s/ Deloitte & Touche LLP
- --------------------------
Deloitte & Touche LLP
Toronto, Ontario
March 7, 2002
30
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, 2001 and 2000, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 11 to the financial statements, the Company changed its
revenue recognition policy effective January 1, 2001.
PricewaterhouseCoopers
Moscow, Russia
February 28, 2002
31
KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
2001 2000 1999
-------- -------- --------
Revenues $ 199.3 $ 210.8 $ 214.1
-------- -------- --------
Costs and operating expenses
Cost of sales 136.9 144.5 141.0
Depreciation, depletion and amortization 71.7 74.2 77.8
Writedown of property, plant and equipment -- 37.7 99.5
General and administrative 1.0 1.0 1.5
Exploration 2.7 3.3 1.8
-------- -------- --------
212.3 260.7 321.6
-------- -------- --------
Loss from operations (13.0) (49.9) (107.5)
Interest expense (4.9) (9.9) (10.0)
Interest income 1.0 2.4 1.5
Other income 4.8 8.3 6.2
-------- -------- --------
Loss before income taxes (12.1) (49.1) (109.8)
Income tax expense (4.3) (4.1) (2.9)
-------- -------- --------
Net loss (16.4) (53.2) (112.7)
Preferred stock dividends (6.9) (6.9) (6.9)
-------- -------- --------
Loss attributable to common shares $ (23.3) $ (60.1) $ (119.6)
======== ======== ========
Per common share:
Net basic and diluted loss ($0.25) ($0.65) ($1.30)
Weighted average number of common shares outstanding 92.2 92.2 92.2
The accompanying notes are an integral part of these financial statements
32
KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
2001 2000
------- -------
ASSETS
Current
Cash and cash equivalents $ 15.9 $ 23.3
Marketable securities 0.7 --
Inventories (Note 4) 36.0 51.6
Receivables 7.6 13.7
Other 5.1 4.2
------- -------
Current assets 65.3 92.8
Property, plant and equipment, net (Note 5) 255.6 266.7
Other 5.9 13.3
------- -------
$ 326.8 $ 372.8
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current
Demand loan (Note 3) $ 73.6 $ 73.6
Current portion of long-term debt (Note 6) 33.1 30.5
Accounts payable, trade 10.4 14.0
Accrued and other current liabilities 11.4 16.6
Current portion of site restoration cost accruals 7.1 3.6
------- -------
Current liabilities 135.6 138.3
Advance from parent (Note 3) 216.8 219.9
Long-term debt (Note 6) 27.7 77.2
Site restoration cost accruals 25.5 30.0
Other 4.1 11.5
------- -------
409.7 476.9
------- -------
Commitments and contingencies (Note 13)
Shareholders' equity (capital deficiency):
Preferred stock, par value $1.00 per share, authorized 10,000,000 shares,
2,000,000 shares designated as $2.25 Series A Convertible Preferred Stock, no
shares issued and outstanding: and 1,840,000 shares designated as $3.75 Series B
Convertible Preferred Stock, issued and outstanding 1,840,000 shares 1.8 1.8
Common stock, par value $.01 per share, authorized 200,000,000
shares, issued and outstanding 92,213,928 shares in 2001
and 2000 (Note 11) 0.9 0.9
Paid-in capital 455.4 412.9
Accumulated deficit (543.0) (519.7)
Accumulated other comprehensive income 2.0 --
------- -------
Total shareholders' equity (capital deficiency) (82.9) (104.1)
------- -------
Total liabilities and shareholders' equity (capital deficiency) $ 326.8 $ 372.8
======= =======
33
KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
2001 2000 1999
------- ------- -------
Cash flows from operating activities
Net loss $ (16.4) $ (53.2) $(112.7)
Adjustments to reconcile net loss to cash flow provided from operations:
Depreciation, depletion and amortization 71.7 74.2 77.8
Writedown of property, plant and equipment -- 37.7 99.5
Decrease in site restoration cost accruals (1.0) (2.6) (0.7)
Amortization of financing costs 0.6 0.6 0.6
Deferred revenue realized (5.5) (7.8) (8.2)
Decrease (increase) in non-cash items working capital
Receivables 12.3 1.1 11.3
Inventories 3.9 0.8 2.2
Other assets (0.9) (2.0) (0.2)
Accounts payable, trade (3.6) (8.7) (3.6)
Accrued and other current liabilities (5.2) 1.4 4.0
Other, net 6.2 (1.7) 2.1
------- ------- -------
Cash flow provided from operating activities 62.1 39.8 72.1
Investing:
Capital expenditures (20.6) (16.7) (16.9)
Business acquisitions, net of cash acquired -- -- (30.4)
Decrease in restricted cash -- -- 0.5
------- ------- -------
Cash flow used in investing activities (20.6) (16.7) (46.8)
------- ------- -------
Financing:
Repayment of demand loan -- -- (16.7)
Advance from parent (3.1) 6.7 16.6
Proceeds from financings 1.7 -- 7.0
Repayments of financings (47.5) (28.2) (19.2)
Cash acquired in connection with purchase of Kubaka investment -- -- 0.5
Preferred dividends paid -- (3.4) (6.9)
------- ------- -------
Cash flow used in financing activities (48.9) (24.9) (18.7)
------- ------- -------
Net (decrease) increase in cash and cash equivalents (7.4) (1.8) 6.6
Cash and cash equivalents at January 1 23.3 25.1 18.5
------- ------- -------
Cash and cash equivalents at December 31 $ 15.9 $ 23.3 $ 25.1
======= ======= =======
Supplementary disclosure of cash flow information:
Cash paid for: Interest $ 6.1 $ 10.2 $ 9.9
Income taxes $ 5.5 $ 4.1 $ 2.9
The accompanying notes are an integral part of these statements
34
KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)
ACCUMULATED
PREFERRED STOCK COMMON STOCK OTHER
--------------- ---------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME
------ ------ ------ ------ ------- ------- -------------
Balance at December 31, 1998 1.8 $1.8 92.2 $0.9 $409.4 $(340.0) $ --
Net loss -- -- -- -- -- (112.7) --
Preferred stock dividends -- -- -- -- -- (6.9) --
------ ------ ------ ------ ------- -------- ------
Balance at December 31, 1999 1.8 1.8 92.2 0.9 409.4 (459.6) --
Net loss -- -- -- -- -- (53.2) --
Preferred stock dividends -- -- -- -- 3.5 (6.9) --
------ ------ ------ ------ ------- -------- ------
Balance at December 31, 2000 1.8 1.8 92.2 0.9 412.9 (519.7) --
Net loss -- -- -- -- -- (16.4) --
Unrealized gain on marketable securities -- -- -- -- -- -- (0.7)
Adoption of FSAS 133 -- -- -- -- -- -- 1.3
La Teko acquisition -- -- -- -- 35.6 -- --
Preferred stock dividends -- -- -- -- 6.9 (6.9) --
------ ------ ------ ------ ------- -------- ------
Balance at December 31, 2001 1.8 $1.8 92.2 $0.9 $455.4 $(543.0) $2.0
====== ====== ====== ====== ======= ======== ======
The accompanying notes are an integral part of these statements
35
KINAM GOLD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)
2001 2000 1999
------- ------- -------
Net loss $ (15.1) $ (53.2) $(112.7)
Unrealized gain on marketable securities 0.7 -- --
Adoption of FSAS 133 1.3 -- --
------- ------- -------
Comprehensive loss $ (13.1) $ (53.2) $(112.7)
======= ======= =======
The accompanying notes are an integral part of these statements
36
Kinam Gold Inc. and Subsidiaries
Notes To Consolidated Financial Statements
(All tabular dollar amounts are in millions of
U.S. dollars except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Kinam Gold Inc. ("Kinam" or the
"Company") are expressed in U.S. dollars and have been prepared in accordance
with accounting principles generally accepted in the United States. Kinross Gold
U.S.A., Inc., a wholly-owned subsidiary of Kinross Gold Corporation ("Kinross"),
owns 100% of the common shares of the Company.
NATURE OF OPERATIONS
The Company is 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 and Russia. The Company's products are gold and silver produced in
the form of dore which is shipped to refineries for final processing.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
the more-than-50%-owned subsidiaries that it controls. The Company also includes
its proportionate share of assets, liabilities, revenues and expenses of jointly
controlled companies and joint ventures in which it has an interest.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
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 and useful lives used to compute depreciation, depletion and
amortization. Actual results could differ from those estimates.
TRANSLATION OF FOREIGN CURRENCIES
Domestic and foreign operations
The Company reports its financial statements in U.S. dollars, while the currency
of measurement for the Company's operations varies depending upon location.
The currency of measurement for the Company's self-sustaining operations in the
U.S. and Chile is the U.S. dollar. Although the operation in Russia is
self-sustaining, the temporal method is used to translate local currency amounts
into U.S. dollars due to the highly inflationary economy in that country. Under
the temporal method, all non-monetary items are translated at historical rates.
Monetary assets and liabilities are translated at actual exchange rates in
effect at the balance sheet date, revenues and expenses are translated at
average rates for the year and gains and losses on translation are included in
income.
Foreign currency transactions
Monetary assets and liabilities are translated at the rate of exchange
prevailing at the balance sheet date. Non-monetary assets and liabilities are
translated at historical rates. Revenue and expenses are translated at the
average rate of exchange for the year. Exchange gains and losses are included in
income.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments with an
original maturity of three months or less. The Company invests cash in time
deposits maintained in high credit quality financial institutions.
INVENTORIES
Gold inventory is valued at the lower of aggregate cost, computed using a
three-month rolling average method, or market. Materials and supplies are valued
at average cost less reserves for obsolescence.
37
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Costs associated with
properties which are in the development stage are deferred, on a project basis,
until the economic viability of the project is determined. Once commercial
production is reached, the deferred costs of the project are amortized over
their economic lives, on the basis described below.
Where the mine operating plan calls for production from well-defined ore
reserves, the unit-of-production method of amortization is applied based on
recoverable proven and probable reserves.
Plant and equipment that have useful lives shorter than the mine life are
depreciated on a straight-line basis over their estimated useful lives of up to
five years.
PROPERTY EVALUATIONS
Annually, or more frequently as circumstances require, the Company reviews the
carrying values of its portfolio of mining properties and advanced stage
exploration properties. The impairment analysis is performed on an undiscounted
basis in order to determine whether an impairment exists. If the undiscounted
cash flow is less than the carrying value of the related mines, the Company uses
a discounted cash flow analysis to determine the amount of the writedown. The
estimated future net cash flows from each property are calculated using
estimated recoverable ounces of gold based on proven and probable reserves,
estimated future gold price realization (considering historical and current
prices, price trends and related factors), and operating, capital and
reclamation costs. Estimates of future cash flows are subject to risks and
uncertainties. It is possible that changes could occur which may affect the
recoverability of property, plant and equipment.
LONG-TERM INVESTMENTS
Long-term investments in shares of investee companies, over which the Company
has the ability to exercise significant influence, are accounted for using the
equity method. The cost method is used for entities in which the Company owns
less than 20% or cannot exercise significant influence. The Company periodically
reviews the carrying value of its investments. When a decline in the value of an
investment is other than temporary, the investment is written down accordingly.
FINANCIAL INSTRUMENTS
The Company may enter into derivative financial instrument contracts to manage
certain market risks which result from the underlying nature of its business.
The Company uses spot deferred contracts and fixed forward contracts to hedge
exposure to commodity price risk for gold and silver; foreign exchange forward
contracts to hedge exposure to fluctuations in foreign currency denominated
revenues; and interest rate swaps to hedge exposure to changes in interest
rates. The Company uses written gold call options to economically hedge exposure
to commodity price risk for gold. Non-option derivative financial instruments
are accounted for using the accrual method as management views the contracts as
effective hedges and has designated the contracts as hedges of specific
exposures. Hedge effectiveness is assessed based on the degree to which the cash
flows on the derivative contracts are expected to offset the cash flows of the
underlying position or transaction being hedged.
Realized gains or losses on derivative contracts that qualify for hedge
accounting are deferred and recorded in income when the underlying hedged
transaction is recognized. The premiums received at the inception of written
call options are recorded as a liability. Changes in the fair value of the
liability are recognized currently in earnings. Gains or losses (realized or
unrealized) for derivative contracts which no longer qualify as hedges for
accounting purposes or which relate to a hedged transaction that has been sold
or terminated are recorded in income.
Gains on the early settlement of gold hedging contracts are recorded as
accumulated other comprehensive income on the balance sheet and included in
income over the original delivery schedule of the hedged production.
PENSION, POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
Pension expense, based on management assumptions, consists of the actuarially
computed costs of pension benefits in respect of the current year's service;
imputed interest on plan assets and pension obligations; and straight-line
amortization of experience gains and losses; assumption changes and plan
amendments over the expected average remaining service life of the employee
group.
The expected costs of post-retirement and post-employment benefits, other than
pensions, to active employees are accrued for in the financial statements during
the years employees provide service to the Company.
38
REVENUE RECOGNITION
The Company changed its accounting policy for revenue recognition effective
January 1, 2001 such that revenue is recognized upon shipment to third-party
gold refineries and title has passed to the customer. Previously, revenue was
recognized when the production process was completed or when gold was poured in
dore form at the mine. The Company retroactively adopted this new accounting
policy. The net adjustment would not have a material impact on the reported
amounts.
SITE RESTORATION COSTS
Estimated costs of site restoration are accrued and expensed over the estimated
life of the mine on a unit-of-production basis. Ongoing environmental protection
expenditures are expensed as incurred. Estimates of the ultimate site
restoration costs are based on current laws and regulations and expected costs
to be incurred, all of which are subject to possible changes thereby impacting
current determinations.
MINERAL EXPLORATION
Mineral exploration expenditures are charged to income as incurred. Property
acquisition costs relating to exploration properties and expenditures incurred
on properties identified as having development potential are deferred on a
project basis until the viability of the project is determined. Costs associated
with economically viable projects are capitalized and depreciated and amortized
in accordance with the policies described above. If a project is not viable, the
accumulated project costs are charged to income in the year in which that
determination is made.
INCOME AND MINING TAXES
The provisions for income and mining taxes are based on the liability method.
Deferred income taxes arise from the recognition of the tax consequences of
temporary differences by applying statutory tax rates applicable to future years
to differences between the financial statements carrying amounts and the tax
bases of certain assets and liabilities. The Company records a valuation
allowance against any portion of those deferred income tax assets that it
believes will, more likely than not, fail to be realized. On business
acquisitions, where differences between assigned values and tax bases of assets
acquired and liabilities assumed exist, the Company recognizes the deferred
income tax assets and liabilities for the tax effects of such differences.
Future withholding taxes are provided on the unremitted net earnings of foreign
subsidiaries and associates to the extent that dividends or other repatriations
are anticipated in the future and will be subject to such taxes. The income
statement effect is derived from current taxes payable and changes in deferred
income taxes on the balance sheet.
PER SHARE INFORMATION
Basic loss per common share has been calculated using the weighted average
number of common shares outstanding during the year.
NEW PRONOUNCEMENTS
In June 2001, the FASB issued Statement No. 141, "Business Combinations" (SFAS
141), which supersedes APB Opinion No. 16, Business Combinations, and SFAS 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises.
Concurrently, the Accounting Standards Board in Canada issued Handbook Section
1581, "Business Combinations", which is consistent with SFAS 141. Those
Statements will change the accounting for business combinations and goodwill.
SFAS 141 and CICA Handbook Section 1581 require that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method is not longer permitted. These Statements
also establish criteria for separate recognition of intangible assets acquired
in a purchase business combination. These Statements also apply to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001, or later.
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142), which supersedes APB Opinion No. 17, Intangible Assets.
Concurrently, the Accounting Standards Board in Canada issued Handbook Section
3062, "Goodwill and Other Intangible Assets", which is consistent with SFAS 142.
These Statements require that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. The Statements are effective for fiscal
years beginning after December 15, 2001, and are required to be applied at the
beginning of an entity's fiscal year and to be applied to all goodwill and other
intangible assets recognized in its financial statements at that date.
Impairment losses for goodwill and indefinite-lived intangible assets that arise
due to the initial applicable of these Statements (resulting from a transitional
impairment test) are to be reported as resulting from a change in accounting
principle. Under an exception to the date at which these Statements become
effective: goodwill and intangible assets acquired after June 30, 2001, will be
subject immediately to the non-amortization and amortization provisions of these
Statements. The Company has not yet determined the impact, if any, of these
Statements on its financial statements.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143), which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset
39
retirement costs. It applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. SFAS 143 amends SFAS 19, "Financial Accounting and
Reporting by Oil and Gas Producing Companies", and requires entities to record
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred. When the liability is initially recorded, an entity
capitalizes the cost by increasing the carrying amount of the related long-lived
assets. Over time, the liability is accreted to its present value each period,
and the capitalized cost is amortized over the useful life of the related asset.
Upon settlement of the liability, an entity either settles the obligation for
its recorded amount or incurs a gain or loss upon settlement. SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002 with earlier application encouraged. The Company has not yet determined
the impact of this Statement on its financial statements.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment on Disposal of Long-lived Assets" (SFAS 144), which supersedes SFAS
121, Accounting for the impairment of Long-lived Assets and for Long-lived Asets
to be Disposed of. SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends APB Opinion No. 30, Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business. SFAS 144 requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less cost to sell.
That requirement eliminates APB 30's requirement that discontinued operations be
measured at net realizable value or that entities include under "discontinued
operations" in the financial statements amounts for operating losses that have
not yet occurred. Additionally, SFAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and, generally, its provisions are to be applied
prospectively. The Company has not yet determined the impact of this Statement
on its financial statements.
2000 AND 1999 FIGURES
Certain of the 2000 and 1999 figures have been reclassified to conform to the
2001 presentation.
2. ECONOMIC DEPENDENCE
The Company relies solely on Kinross for funding the portion of operating costs,
capital expenditures, general corporate expenditures and debt and interest
payments not funded by cash flow from operations. Assuming the gold price
remains at current levels the Company anticipates additional borrowing from
Kinross in 2001. While Kinross has funded these obligations in the past it is
under no obligation to do so, and there can be no assurance that the Company may
not have to seek funding from other sources in the future. Kinross has agreed to
continue to support the Company for the next twelve months.
3. TRANSACTIONS WITH AFFILIATES
On June 1, 1998, the Company completed a merger agreement with Kinross providing
for a combination of their businesses. In the merger, each outstanding share of
the Company's common stock was converted into 0.8004 of a share of Kinross
common stock. Kinross Merger Corporation ("Kinross Merger"), a wholly-owned
subsidiary of Kinross was merged with and into the Company which became a
wholly-owned subsidiary of Kinross. Immediately following the effective time of
the merger, the Company, as the surviving entity of the combination with Kinross
Merger, issued to Kinross 92.2 million shares of the Company's common stock,
representing all of the issued and outstanding common shares. Kinross
subsequently transferred ownership of such shares to Kinross Gold U.S.A., Inc.,
a wholly-owned subsidiary of Kinross, which is currently the sole common
shareholder of the Company. Kinross is currently the sole common shareholder of
the Company. Prior to the merger, the Company was approximately 59% owned by
Cyprus Amax Minerals Company (Cyprus Amax).
In connection with the 1998 merger, Kinross advanced $255.8 million to Kinam for
repayment of Kinam's outstanding third-party bank debt. During the balance of
1998, Kinam repaid $41.6 million of this obligation. In 1999, Kinross advanced
an additional $16.6 million to Kinam to permit it to purchase assets related to
the True North property in Alaska. An additional $6.7 million was advanced by
Kinross in 2000, and approximately $14.9 million in the first nine months of
2001, primarily for True North property development and to repay third-party
long-term obligations of Kinam. Kinam has repaid a portion of the original
advance of $255.8 million, and the additional advances, with the result that the
balance of this obligation was $216.8 million as of December 31, 2001. These
advances are non-interest bearing, are due on demand, and have no fixed terms of
repayment.
Pursuant to the 1998 merger, Kinross acquired a demand loan in the principal
amount of $92.3 million from Cyprus Amax Minerals Company, the former parent of
Kinam, that was an obligation of Kinam. Kinross has not charged Kinam interest
on this loan. Subsequent partial repayments reduced this demand loan payable to
$73.6 million at December 31, 2000, and it has remained
40
unchanged through December 31, 2001. The demand loan is non-interest bearing,
due on demand, and does not have any fixed terms of repayment.
Kinross has arranged for the issuance of letters of credit under the syndicated
credit facility to guarantee the obligations of the Company under the Fort Knox
industrial revenue bonds, totaling $49.9 million as of December 31, 2001. The
Company's assets associated with Fort Knox are pledged to secure this syndicated
credit facility. In addition, Kinross has guaranteed surety bonds for the
Company on various projects in the aggregate principal amount of $40.0 million.
On January 1, 2001, the Company entered into an agreement with a wholly owned
subsidiary of Kinross to acquire all of the outstanding shares of La Teko
Resources Inc., the company owning the property rights to the True North and
Ryan Lode deposits. Since this was a related party transaction which did not
result in a substantive change in ownership, the transaction was recorded at the
carrying value of La Teko's assets which was approximately $36.0 million at
January 1, 2001. The assets of La Teko included the Ryan Lode project and 35% of
the True North project which commenced production in early 2001. The ore from
the True North project is being processed through the Fort Knox mill.
On July 12, 2001 Kinross acquired 945,400 of the 1,840,000 issued and
outstanding preferred shares of Kinam.
4. INVENTORIES
Inventories at December 31, 2001 and 2000, consisted of the following:
2001 2000
---- ----
Gold:
Finished goods $ 11.7 $ 16.8
Work-in -process -- 2.2
Materials and supplies 24.3 32.6
------ ------
$ 36.0 $ 51.6
====== ======
5. PROPERTY, PLANT AND EQUIPMENT AND WRITEDOWNS
The components of property, plant and equipment at December 31, 2001 and 2000,
were as follows:
2001 2000
-------- --------
Plant and equipment $ 741.5 $ 720.9
Mineral properties 493.7 456.4
Development properties and construction-in-progress 17.0 22.0
-------- --------
1,252.2 1,199.3
Less accumulated depreciation, depletion
and writedowns (996.6) (932.6)
-------- --------
$ 255.6 $ 266.7
======== ========
Acquisitions
On January 1, 2001, the Company entered into an agreement with a wholly owned
subsidiary of Kinross to acquire all of the outstanding shares of La Teko
Resources Inc., the company owning the property rights to the True North and
Ryan Lode deposits. Since this was a related party transaction which did not
result in a substantive change in ownership, the transaction was recorded at the
carrying value of La Teko's assets which was approximately $36.0 million at
December 31, 2000. The assets of La Teko included the Ryan Lode project and 35%
of the True North project which commenced production in early 2001. The ore from
the True North project is being processed through the Fort Knox mill.
2000
There were no business acquisitions during the year.
1999
On March 1, 1999, the Company acquired 100% of Kershaw Gold Company, Inc.
("Kershaw") for $2.0 million, thereby increasing its ownership interest in the
Haile property from 62.5% to 100%.
On June 28, 1999, the Company acquired a 65% interest in the True North property
in Alaska for cash of $28.1 million.
41
On December 31, 1999, the Company acquired a further 1.7% of Omolon Gold Mining
Company ("Omolon") for cash of $0.3 million.
Writedown of Property, Plant and Equipment
Annually, or more frequently if evidence of an impairment exists, 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. The impairment
analysis is performed on an undiscounted basis in order to determine whether an
impairment exists. Because the undiscounted cash flow was less than the carrying
value of the related mines, the Company used a discounted cash flow analysis to
determine the amount of the writedown. The estimated future net cash flows from
each property are calculated using estimated recoverable ounces of gold,
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 property, plant and equipment.
2001 2000 1999
------- ------- -------
Fort Knox mine $ -- $ -- $ 72.9
Refugio mine -- 26.7 10.1
Haile property -- -- 16.5
Hayden Hill mine -- 2.9 --
Guanaco mine -- 2.1 --
Other non-core properties -- 6.0 --
------- ------- -------
$ -- $ 37.7 $ 99.5
======= ======= =======
There were no writedowns in 2001.
In the fourth quarter of 2000, following a comprehensive evaluation of its
mining properties based on an assumed gold price of $300, the Company determined
that the net recoverable amounts of the Refugio mine were less than the net book
value. As a result of this review the Company recorded a $26.7 million pre-tax
writedown of the Refugio mine. In addition, after a through review of various
closure properties, the remaining carrying value and the current environment for
surplus mining equipment and facilities, the remaining book value of the Hayden
Hill mine, the Guanaco mine, the Haile property and other non-core properties,
principally the Sleeper and Wind Mountain mines were written off.
In the fourth quarter of 1999, following a comprehensive evaluation of its
mining properties based on an assumed gold price of $300, the Company determined
that the net recoverable amounts of the Fort Knox and Refugio mines and the
Haile property were less than the net book value of the related assets. As a
result of this review the Company recorded a $72.9 million pre-tax writedown of
the Fort Knox mine, a $10.1 million pre-tax writedown of the Refugio mine and a
$16.5 million pre-tax writedown of the Haile property.
42
6. LONG - TERM DEBT
PRINCIPAL REPAYMENT
SCHEDULE AS AT
DECEMBER 31, 2001
Interest -----------------------
rates 2000 2001 2002 2003 2004
-------- ---- ---- ---- ---- ----
Kubaka project-financing debt Variable $ 20.0 $ 4.2 $ 4.2 $ -- $ --
Kubaka subordinated debt Variable 5.7 -- -- -- --
Fort Knox industrial revenue bonds Variable 71.0 49.0 23.0 26.0 --
Capital leases 8.0%-9.5% 11.0 7.6 5.9 0.8 0.9
------ ----- ----- ----- ----
107.7 60.8 $33.1 $26.8 $0.9
===== ===== ====
Less current portion 30.5 33.1
------ -----
$ 77.2 $27.7
====== =====
The European Bank of Reconstruction and Development ("EBRD") and the U.S.
Overseas Private Investment Corporation ("OPIC") provided project-financing debt
on the Kubaka mine. As at December 31, 1999 this debt was $67.5 million. In
2000, Omolon repaid $30.9 million of these obligations, and in 2001 repaid $28.9
million leaving $7.75 million outstanding to EBRD as at December 31, 2001
(December 31, 2000 - $36.6 million). The Company's 54.7% proportionate share of
these obligations is $4.2 million as at December 31, 2001 (December 31, 2000 -
$20.0 million). Interest on the project-financing debt is variable based upon
LIBOR and as at December 31, 2001 is approximately 6.2% per annum (December 31,
2000 - 11.8%). The project-financing debt has become recourse solely to Omolon
after completion tests were passed in late 1999. The project financing debt was
originally scheduled to be repaid by December 15, 2001. However, the project
financing debt loan has been extended until December 15, 2002, and EBRD has the
right to extend the project financing debt an additional 12 months to December
15, 2003.
A bank licensed to do business in Russia has provided subordinated debt to
finance the Kubaka mine. This loan was secured by a letter of credit issued
pursuant to the syndicated credit facility. During 2001, the Company repaid $5.7
million to fully satisfy the remaining balance of the loan and the guarantees
and letters of credit were released.
The solid waste disposal facility at the Fort Knox mine was financed by $71.0
million of tax-exempt industrial revenue bonds. The variable rate bonds,
maturing in May 2009, were issued by the Alaska Industrial Development and
Export Authority and are supported by a letter of credit issued by Kinross
pursuant to the syndicated credit facility. The floating interest rate on the
bonds was approximately 1.9% as at December 31, 2001 (December 31, 2000 - 4.5%).
On April 4, 2001, the Company repaid $22.0 million of principal leaving a
balance of $49.0 million outstanding. On January 2, 2002, the Company repaid
$9.0 million of principal leaving a balance outstanding of $40.0 million.
The Company has capital leases for certain production equipment at Fort Knox.
Interest on there leases ranges from 8.0% - 9.5% per annum.
In March 2000, Kinross arranged a syndicated credit facility for $110 million.
The primary purpose of this facility is to provide credit support that enables
Kinross to issue letters of credit on the Fort Knox industrial revenue bonds.
This facility matures in January 2003 and as a result, the debt supported by
these letters of credit has been shown as maturing at the same time as the
facility. Kinross will aggressively remarket this facility and expects to extend
the maturity date of the $30.0 million final balance. During the life of the
credit facility the Company must either reduce its letters of credit according
to an agreed upon amortization schedule or post cash in order to defease the
debt. The assets of the Fort Knox mine have been pledged as collateral under
this credit facility.
43
Loan Amortization Schedule
Date Amortization Credit Facility Balance
---- ------------ -----------------------
December 2000 $ -- $ 90.0
February 2001 20.0 70.0
January 2002 20.0 50.0
June 2002 20.0 30.0
January 2003 Facility expires --
As at December 31, 2001, the loan facility had been reduced to $59.0 million.
The letters of credit issued on behalf of the Company under the Kinross
syndicated facility at December 31, 2001 were as follows:
Amount Purpose
-------- -------
$49.9 Credit Support for Fort Knox industrial revenue bonds
9.1 Other
-----
$59.0
=====
On January 2, 2002, the Company repaid $9.0 million of principal against the
industrial revenue bonds. Consequently, the letter of credit supporting those
bonds was reduced by $9.2 million bringing the total letters of credit
outstanding down to $49.8 million.
7. DERIVATIVE CONTRACTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company manages its exposure to fluctuations in commodity prices, foreign
exchange rates and interest rates by entering into derivative financial
instrument contracts in accordance with the formal risk management policy
approved by the Company's Board of Directors. The Company does not hold or issue
derivative contracts for speculative or trading purposes.
(A) Commodity risk management
The profitability of the Company is directly related to the market price of gold
and silver. The Company uses spot deferred contracts, fixed forward contracts
and option contracts to hedge against the unfavorable changes in commodity
prices for a portion of its forecasted gold and silver production. Spot deferred
contracts are forward sale contracts with flexible delivery dates that enable
management to choose to deliver into the contract on a specific date or defer
delivery until a future date. If delivery is postponed, a new contract price is
established based on the old contract price plus a premium (referred to as
"contango"). Use of these instruments has resulted in a realized price per ounce
of gold $278 in 2001 as compared with $292 in 2000 and $289 in 1999. These
realized prices compare with average spot gold prices of $271 per ounce in 2001,
$279 per ounce in 2000 and in 1999.
On June 1, 1998, the commodity derivative contract portfolio held by Kinam had a
fair value of $45.9 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, 2001, $1.3 million (December 31, 2000 - $4.7 million) of this
gain is included in accumulated other comprehensive income. There were no
outstanding hedge contracts as at December 31, 2001 or 2000.
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 was taken into income over the schedule set out in the loan
agreement. The deferred portion of this gain at December 31, 2000 amounted to
$1.4 million and was recognized in income in 2001.
On June 1, 1998, the Company repaid the gold loan portion of the Fort Knox
project financing realizing a gain of $3.6 million. The gain was taken into
income over the original delivery schedule set out in the loan payments. The
deferred portion of this gain at December 31, 2000 amounted to $1.0 million and
was recognized in income in 2001.
(B) Interest rate risk management
The Company is exposed to interest rate risk as a result of its issuance of
variable rate debt. There are no interest rate hedging transactions outstanding
as at December 31, 2001.
44
(C) Credit risk management
Credit risk relates to bullion settlements and other accounts receivable and
derivative contracts and arises from the possibility that a counterparty to an
instrument in which the Company has an unrealized gain fails to perform. The
Company only transacts with high-rated counterparties and a limit on contingent
exposure has been established for each counterparty based on the counterparty's
credit rating. At December 31, 2001, the Company's credit exposure was limited
to accounts receivable of $7.6 million (2000 - $13.7 million).
(D) Foreign currency risk management
All sales revenues for the Company are denominated in U.S. dollars. The Company
is exposed to currency fluctuations on expenditures which are denominated in
Russian rubles and Chilean pesos. These potential currency fluctuations could
have a significant impact on the cost of producing gold and the profitability of
the Company. This risk is reduced, from time to time, through the use of foreign
exchange forward contracts to lock in the exchange rates on firmly committed
future operating costs.
There were no outstanding foreign exchange forward contracts at December 31,
2001 or 2000.
(E) Fair values of financial instruments
Carrying values for primary financial instruments, including cash and cash
equivalents, receivables, demand loan, accounts payable, accrued and other
current liabilities, approximate fair values due to their short-term maturities.
The carrying value for long-term debt approximates fair value primarily due to
the floating rate nature of the debt instruments.
The fair value of the advance from parent cannot be readily determined as there
is no available market data for these instruments due to the unique nature of
these related party amounts.
The fair value of the outstanding preferred shares at December 31, 2001 was
$15.5 million (2000 - $13.8 million).
45
2001 2000 1999
------- ------- -------
Domestic $ (3.4) $ (0.8) $ (98.1)
Foreign (8.7) (48.3) (11.7)
------- ------- -------
$ (12.1) $ (49.1) $(109.8)
======= ======= =======
The income tax expense consists of the following:
Current $ -- $ -- $ --
Federal -- -- --
State 4.3 4.1 2.9
------- ------- -------
4.3 4.1 2.9
------- ------- -------
Deferred
Federal -- -- --
State -- -- --
Foreign -- -- --
------- ------- -------
-- -- --
------- ------- -------
$ 4.3 $ 4.1 $ 2.9
======= ======= =======
The components of deferred tax (assets) liabilities are as follows:
Deferred tax assets
Site restoration costs accruals (7.9) (8.9) (9.3)
Net operating loss carry forwards (102.8) (111.4) (106.0)
Minimum tax credit carry forwards (5.1) (5.1) (5.1)
Other (0.4) (2.9) --
------- ------- -------
Total deferred tax assets (116.2) (128.3) (120.4)
Valuation allowance 48.1 76.3 82.3
------- ------- -------
Net deferred tax assets (68.1) (52.0) (38.1)
Deferred tax liabilities
Other -- -- 0.1
Property, plant and equipment 68.1 52.0 38.0
------- ------- -------
$ -- $ -- $ --
======= ======= =======
46
The following is a reconciliation between the amount determined by
applying the federal statutory rate of 35% in 2001 (2000 and 1999 - 35%)
to the loss before taxes and the income tax expense:
2001 2000 1999
------- ------- -------
Income taxes at statutory rate $ (4.2) $ (17.2) $ (38.2)
Increases (decreases) resulting from:
Losses with no expected tax benefit 4.2 17.2 38.4
State income taxes, net of federal benefit -- -- --
Percentage depletion -- -- --
------- ------- -------
Income tax expense -- -- --
Foreign losses with no expected tax benefit -- -- --
Other 4.3 4.1 2.9
------- ------- -------
Income tax expense $ 4.3 $ 4.1 $ 2.9
======= ======= =======
The valuation allowance is recorded due to uncertainties of realizing the
benefit of all deductible temporary differences, loss carry forwards and income
tax reductions in the future.
At December 31, 2001, the Company has federal tax net operating loss carry
forwards of approximately $208.7 million and alternative minimum tax net
operating loss carry forwards of approximately $138.8 million expiring in the
years 2004 through 2021 and minimum tax credit carry forwards of $5.1 million,
which do not expire. The use of the federal and alternative minimum tax loss
carry forwards will be limited in any given year as a result of a previous
change in ownership. At December 31, 2001, the Company has Chilean tax net
operating loss carry forwards of $131.8 million, which do not expire.
9. EMPLOYEE PENSION AND RETIREMENT PLANS
Defined Contribution Pension and Retirement Plans
The Company has several defined contribution pension plans covering
substantially all employees in the United States and certain foreign countries.
Under these plans the Company either contributes a set percentage of the
employees salary or matches a percentage of the employees contributions. The
employees are able to direct the contributions into a variety of investment
funds offered by the plans. Company contributions to these plans amounted to
$1.2 million in 2001, $1.2 million in 2000, and $0.8 million in 1999.
Defined Benefit Pension Plans
Prior to the Kinross merger all employees in the United States were covered by a
non-contributory defined benefit pension plan. Benefits are based generally on
years of service and compensation levels prior to retirement. The plan was
frozen on June 1,1998 and all active employees were transferred into the Kinross
defined contribution pension plan. The Company makes contributions to the plan
in accordance with the requirements of the Employee Retirement Income Security
Act of 1974 (ERISA). Plan assets are invested in a balanced fund and small
market equity fund.
47
2001 2000 1999
---- ---- ----
Service cost $ -- $ -- $ --
Interest cost 0.4 0.4 0.3
Expected return on assets (0.4) (0.4) (0.3)
----- ----- -----
Net periodic expense $ -- $ -- $ --
===== ===== =====
Net annual pension expense includes the following components:
2001 2000
----- -----
Benefit obligation beginning of year $ 5.0 $ 4.2
Service cost -- --
Interest cost 0.4 0.4
Actuarial (gain) loss 0.9 0.5
Benefits paid (0.2) (0.1)
----- -----
Benefit obligation, end of year $ 6.1 $ 5.0
===== =====
The following table summarizes the funded status of the plan and related amounts
recognized in the Company's financial statements at December 31:
2001 2000
----- -----
Projected benefit obligations $(6.1) $(5.0)
Plan assets at fair value 4.5 4.0
----- -----
Plan assets less than projected benefit obligations (1.6) (1.0)
Unrecognized net loss 1.5 0.1
----- -----
Accrued pension cost $(0.1) $(0.9)
===== =====
2001 2000
----- -----
Fair value of plan assets,beginning of year $ 4.0 $ 3.3
Actual return (0.1) 0.1
Employer contributions 0.8 0.7
Benefits paid (0.2) (0.1)
----- -----
Fair value of plan assets, end of year $ 4.5 $ 4.0
===== =====
48
2001 2000
---- ----
Expected long-term rate of return on assets 7.75% 9.00%
Discount rate 7.25% 7.75%
Post-retirement benefits other than pensions
The Company also provides certain health care and life insurance benefits to
retired employees in the United States. The post-retirement health care plans
are contributory in certain cases based upon years of service, age, and
retirement date. The Company does not fund post-retirement benefits and may
modify plan provisions at its discretion. Net periodic post-retirement costs for
the years ended December 31, 2001, 2000, and 1999 were insignificant.
2001 2000
---- ----
Accumulated post-retirement benefit obligation:
Retirees $ 1.8 $ 1.6
Active plan participants -- --
----- -----
Total accumulated post-retirement benefit obligation 1.8 1.6
Plan assets at fair value -- --
----- -----
Accumulated post-retirement benefit obligation in
excess of plan assets (1.8) (1.6)
Unrecognized prior service cost -- --
Unrecognized net gain 0.2 --
----- -----
Accrued post-retirement benefit cost $(1.6) $(1.6)
===== =====
The accumulated post-retirement benefit obligation was determined using a
discount rate of 7.0% in 2001 and 7.75% on 2000. The assumed health care cost
trend rate for 2002 is 10.65%, declining gradually to 5.5% in 2017 when Company
costs associated with the plan are capped. A 1% increase in the health care cost
trend rate used would have resulted in an insignificant increase in the 2001
post-retirement benefit cost and the accumulated post-retirement benefit
obligation at December 31, 2001.
Post-employment benefits
The Company has a number of post-employment plans covering severance, disability
income, and continuation of health and life insurance for disabled employees. At
December 31, 2001 and 2000, the Company's liability for post-employment benefits
totaled $1.4 million and $2.3 million, respectively, and is included in other
liabilities.
10. PREFERRED STOCK
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. The
Board of Directors has suspended the quarterly dividends on the $3.75 Series B
Convertible Preferred Stock effective August 2000. The decision has been taken
by the Board as a cash conservation measure due to the persistence of low gold
prices. No dividends were paid in 2001.
On July 12, 2001 Kinross acquired 945,400 of the 1,840,000 issued and
outstanding preferred shares of Kinam.
49
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, 2001 and 2000 there
are no plans that require the issuance of the Company's stock.
12. SEGMENTED INFORMATION
The Company operates five gold mines: Fort Knox, located in Alaska; Kubaka,
located in Russia; Refugio, located in Chile, Hayden Hill, located in
California; and Guanaco, located in Chile. In addition to its producing gold
mines, the Company has several other gold mining assets in various stages of
reclamation, closure, care and maintenance, and development. The accounting
policies used by these segments are the same as those described in the Summary
of Significant Accounting Policies (see Note 2).
As the products and services in each of the reportable segments, except for the
corporate activities, are essentially the same, the reportable segments have
been determined at the level where decisions are made on the allocation of
resources and capital, and where complete internal financial statements are
available.
50
Hayden Corporate
Fort Knox Kubuka Refugio Hill Guanaco and other Total
--------- ------ ------- ---- ------- --------- -----
Reportable operating segment
(in millions)
2001
Mining revenue $ 108.8 $ 66.9 $ 19.6 $ 0.5 $ 0.3 $ 3.2 $ 199.3
Interest income -- 0.9 0.1 -- -- -- 1.0
Interest expense 3.6 0.7 0.6 -- -- -- 4.9
Depreciation, depletion and
amortization 46.2 25.5 -- -- -- -- 71.7
Segment (loss) profit (a) (24.2) 7.3 2.6 (0.2) (1.4) 3.8 (12.1)
Segment assets 247.8 67.8 7.6 0.1 2.7 0.8 326.8
Capital expenditures 20.2 0.4 -- -- -- -- 20.6
2000
Mining revenue $ 104.1 $ 68.4 $ 25.8 $ 2.8 $ 4.1 $ 5.6 $ 210.8
Interest income -- 2.1 -- -- 0.1 0.2 2.4
Interest expense 5.7 3.5 0.7 -- -- -- 9.9
Depreciation, depletion and
amortization 37.6 32.0 4.6 -- -- -- 74.2
Writedown of mineral properties -- -- 26.7 2.9 2.1 6.0 37.7
Segment (loss) profit (a) (13.7) 0.7 (30.5) (2.3) (2.6) (0.7) (49.1)
Segment assets 236.7 118.9 11.4 1.1 4.5 0.2 372.8
Capital expenditures 12.8 0.1 3.2 -- 0.6 -- 16.7
1999
Mining revenue $ 97.0 $ 73.5 $ 26.6 $ 4.6 $ 6.5 $ 5.9 $ 214.1
Interest income 0.3 0.8 0.1 -- 0.1 0.2 1.5
Interest expense 5.7 0.8 0.1 -- -- -- 10.0
Depreciation, depletion and
amortization 38.0 33.9 5.9 -- -- -- 77.8
Writedown of mineral properties 72.9 -- 10.1 -- -- 16.5 99.5
Segment (loss) profit (a) (88.8) 1.2 (16.5) 12.1 3.6 (21.4) (109.8)
Segment assets 258.3 147.6 40.5 3.4 7.8 6.3 463.9
Capital expenditures 7.8 1.1 8.0 -- -- -- 16.9
(a) Segment profit (loss) includes writedown of mineral properties
51
Reconciliation of reportable operating segment loss to net loss for the year:
2001 2000 1999
------- ------- -------
Segment loss ($ 15.9) ($ 48.4) $ (88.4)
Add (deduct) items not included in segment loss:
Corporate and other 3.8 (0.7) (21.4)
------- ------- -------
(12.1) (49.1) (109.8)
Income tax expense (4.3) (4.1) (2.9)
Dividends on convertible preferred stock (6.9) (6.9) (6.9)
------- ------- -------
Net loss for the year $ (23.3) $ (60.1) $(119.6)
======= ======= =======
Geographic information:
PROPERTY, PLANT
REVENUE AND EQUIPMENT
--------------------------- -----------------
2001 2000 1999 2001 2000
------- ------- ------- ------- -------
Russia $ 66.9 $ 68.4 $ 73.5 $ 28.7 $ 50.2
Chile 19.9 29.9 33.1 -- --
------- ------- ------- ------- -------
Total foreign 86.8 98.3 106.6 28.7 50.2
United States 112.5 112.5 107.5 226.9 216.5
------- ------- ------- ------- -------
Total $ 199.3 $ 210.8 $ 214.1 $ 255.6 $ 266.7
======= ======= ======= ======= =======
13. CONTINGENCIES AND RELATED COMMITMENTS
The Company is subject to the considerations and risks of operating in Russia as
a result of its 54.7% ownership of the Kubaka mine located in eastern Russia.
The economy of the Russian Federation continues to display characteristics of an
emerging market. These characteristics include, but are not limited to, the
existence of a currency that is not freely convertible outside of the country,
extensive currency controls and high inflation. The prospects for future
economic stability in the Russian Federation are largely dependent upon the
effectiveness of economic measures undertaken by the government, together with
legal, regulatory, and political developments. Russian tax legislation is
subject to varying interpretations and frequent changes. Further, the
interpretation of tax legislation by tax authorities as applied to the
transactions and activities 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. The fiscal periods remain open to review for three years by the
tax and customs authorities with respect to tax liabilities.
The Company conducts business in Russia through its subsidiary, Omolon which is
owned 45.3% by Russian shareholders. One of the Russian shareholders has
asserted that the original issuance of shares to the shareholder was flawed due
to failure to follow certain registration procedures. As a result the
shareholder claims the share issuance was null and void and therefore it should
have its money returned with compound interest. The total claim is for
approximately $43.0 million. The Company has been advised by its counsel that
Omolon has good defences available to it on the merits and that such counsel is
confident that Omolon will successfully defend the lawsuit. However, the
interpretation and application of the laws of the Russian Republic may be
subject to policy changes reflecting domestic political changes or other
considerations. Moreover, because of the developing nature of the Russian legal
system and the fact that the interpretation and application of many laws are
untested, it is difficult to predict with certainty how they may be interpreted
and applied in a particular case. As a consequence, other or additional
penalties or remedies may be imposed. These remedies may, in addition to
imposing financial obligations, otherwise adversely affect the operations or
status of Omolon including a possible order that none of the issued shares of
Omolon are valid.
52
The Company's 50% owned Chilean contractual mining company CMM has entered into
arbitration proceedings in Chile with the contractor that designed and built the
mine. CMM contends that the contractor was negligent in both the design and the
construction of the facility, and should be held responsible for the cost of
repairs as well as lost profits. As part of the same proceedings, the contractor
is seeking to recover costs that they allegedly incurred while building the mine
and which, they claim, were outside their scope of work and responsibility.
Although the outcome of the arbitration proceedings cannot be determined at the
current time, management is of the opinion that the outcome will not materially
affect the financial position, results of operations or cash flows of the
Company.
The Company's 90% owned Chilean mining company, Compania Minera Kinam Guanaco
has received a tax re-assessment from the Chilean IRS. The re-assessment is for
$6.7 million disallowing certain deductions utilized by a third party. The
Company believes this re-assessment will be resolved with no material adverse
affect to the financial position, results of operations or cash flows of the
Company. In addition, the Company has been or idemnified by the third party for
an amount in excess of the claim.
In accordance with standard industry practice, the Company seeks to obtain
bonding and other insurance in respect of its liability for costs associated
with the reclamation of mine, mill and other sites used in its operations and
against other environmental liabilities, including liabilities imposed by
statute. Due to recent developments which have affected the insurance and
bonding markets worldwide, such bonding and/or insurance may be difficult or
impossible to obtain in the future or may only be available at significant
additional cost. In the event that such bonding and/or insurance cannot be
obtained by the Company or is obtainable only at significant additional cost,
the Company may become subject to financial liabilities which may affect its
financial resources.
On March 7, 2002, we received a letter from Reginald H. Howe, which stated that
he represents two holders of our preferred stock who hold a total of 6,500
shares. In his letter, Mr. Howe states that his clients intend to pursue legal
action with respect to Kinross' tender offer if Kinross does not amend the Offer
to Purchase and make certain material changes to its terms, including the
offering price. Mr. Howe's letter sets forth various potential legal arguments
with respect to Kinross' tender offer for our preferred stock and Kinross'
purchase of our preferred stock from these shareholders in July of 2001. On
March 22, 2002, a subsequent letter was received from Mr. Howe reiterating
certain legal arguments with respect to Kinross' tender offer.
We do not believe that Mr. Howe states any grounds on which his clients would be
entitled to relief and we intend to vigorously defend any legal action that may
be brought by Mr. Howe, if and when such legal action is filed. As of the date
hereof, Mr. Howe has not commenced any legal action. We anticipate that any
legal action that may be filed may not be resolved for a significant period of
time.
The Company is also involved in legal proceedings and claims which arise in the
ordinary course of its business. 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.
The Company's mining and exploration activities are subject to various federal,
provincial and state laws and regulations governing the protection of the
environment. These laws and regulations are continualty changing and generally
becoming more restrictive. The Company conducts its operations so as to protect
public health and the environment and believes its operations are materially in
compliance with all applicable laws and regulations. The Company has made, and
expects to make in the future, expenditures to comply with such laws and
regulations.
53
14. SUBSEQUENT EVENT
On February 20, 2002, Kinross commenced a tender offer for all of our
outstanding Series B Preferred Stock that it did not then own. This tender offer
closed March 28, 2002, with 652,992 shares tendered. This will result in Kinross
holding approximately 86.9% of our outstanding preferred stock. The Company
anticipates that it will take the steps necessary to delist its Series B
Preferred Stock from the Amercian Stock Exchange and deregister the preferred
stock under the Securities and Exchange Act of 1934, as amended, thereby
terminating its reporting obligations.
Item 8 (a) Supplementary Financial Data
1. QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- -------
2001 QUARTERS
Revenue $ 48.4 $ 52.5 $ 46.4 $ 52.0 $ 199.3
Income (loss) from operations (1.4) (2.2) (6.9) (2.5) (13.0)
Net loss (1.8) (2.9) (8.1) (3.6) (16.4)
Loss attributable to common shares (3.5) (4.6) (9.8) (5.4) (23.3)
Per common share:
Net basic and fully diluted $ (0.04) $ (0.05) $ (0.11) $ (0.05) $ (0.25)
2000 QUARTERS
Revenue $ 55.9 $ 48.7 $ 44.7 $ 61.5 $ 210.8
Income (loss) from operations (4.1) (3.4) (1.4) (41.0) (49.9)
Net loss (6.5) (6.7) (5.0) (35.0) (53.2)
Loss attributable to common shares (8.2) (8.4) (6.7) (36.8) (60.1)
Per common share:
Net basic and fully diluted $ (0.09) $ (0.09) $ (0.07) $ (0.40) $ (0.65)
Fourth quarter 2000 results included a $26.7 million pre-tax charge due to the
writedown of the Refugio mine, a $2.9 million pre-tax charge due to the
writedown of the Hayden Hill mine, a $2.1 million pre-tax charge due to the
writedown of the Guanaco mine and a $6.0 million pretax charge due to the
writedown of other non-core assets.
54
PROVEN PROBABLE TOTAL
------------------------------- -------------------------------- --------------------------------
Contained Contained Contained
Kinam Tons Grade ounces Tons Grade ounces Tons Grade ounces
Property share (%) (000) (opt) (000) (000) (opt) (000) (000) (opt) (000)
----------- --------- ------- ------------- --------- ------- -------------- --------- ------- --------------
Gold
Producing mines
Fort Knox 100.0% 64,682 0.024 1,562 36,272 0.022 805 100,954 0.023 2,367
Kubaka 54.7% 675 0.286 193 270 0.581 157 945 0.370 350
Refugio 50.0% 12,428 0.028 347 13,536 0.027 359 25,964 0.027 706
True North 100.0% 586 0.022 13 10,468 0.046 478 11,054 0.044 491
--------- ------------- --------- -------------- --------- --------------
78,371 0.027 2,115 60,546 0.030 1,799 138,917 0.028 3,914
--------- ------------- --------- -------------- --------- --------------
Development properties
Ryan Lode 100.0% -- -- -- 2,541 0.089 255 2,541 0.089 225
Silver
Kubaka 54.7% 675 0.459 310 270 0.704 190 945 0.529 500
- -------------------------------------------------------------------------------------------------------------------------------
RESERVE NOTES
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 by competent persons using a $300 per ounce
gold price at all properties.
PROVEN RESERVES. Reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes; grade
and/or quality are computed from the results of detailed sampling and (b)
the sites for inspection, sampling and measurement are spaced so closely
and the geologic character is so well defined that size, shape, depth and
mineral content of reserves are well established.
PROBABLE RESERVES. Reserves for which quantity and grade and/or quality
are computed from information similar to that used for proven reserves,
but the sites for inspection, sampling and measurement are farther apart
or are otherwise less adequately spaced. The degree of assurance, although
lower than that for proven reserves, is high enough to assume continuity
between points of observation.
These definitions comply with definitions used in the Society for Mining,
Metallurgy and Exploration Inc.'s Guide for Reporting Exploration
Information, Mineral Resources and Mineral Reserves dated March 1, 1999.
2. Reserves are based on an assumed long-term price per ounce of US $300 for
gold and US $5.00 for silver.
3. Each property has a unique cutoff grade(s) that is calculated using
industry standard practices.
4. The impact of a $25/oz. reduction in the long-term gold price to $275/oz.
would result in an estimated 8% decrease in reserve gold ounces.
Alternately, the impact of a $25/oz. rise in the long-term gold price to
$325/oz. results in an estimated 6% increase in reserve gold ounces.
55
3. VALUATION AND QUALIFYING ACCOUNTS
Site restoration costs: Estimated costs of site restoration are expensed and
accrued over the estimated life of each property on a unit of production basis.
Details of the site restoration accrual are as follows:
Balance Balance
December 31, Annual Cash December 31,
2000 expense expenditures 2001
--------------- ----------- --------------- -----------------
Site restoration cost accruals $33.6 $1.4 $(2.4) $32.6
=============== =========== =============== =================
Item 9. Changes In and Disagreements With Accountants On
Accounting and Financial Disclosure
NONE
PART III
Item 10. Directors and Executive Officers of the Registrant
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
JOHN A. BROUGH has served as a director of the Company since June 1998. Mr.
Brough has been Executive Vice-President of Wittington Investments Limited and
President of Torwest Inc. since February 1998, prior to which he was Executive
Vice-President and Chief Financial Officer of iStar Internet Inc. From February
1996 to February 1998, Mr. Brough was Senior Vice-President and Chief Financial
Officer of Markborough Properties Inc. Mr. Brough has been a director of
Kinross, the corporate parent of the Company, since January 1994. Mr. Brough is
a director of Torwest Inc. and Windsor Properties Inc. Mr. Brough resides in
Vero Beach, Florida.
ARTHUR H. DITTO has served as a director of the Company since June 1998. Mr.
Ditto has been the President and Chief Operating Officer of Kinross, the
corporate parent of the Company, since May 1993. Mr. Ditto is also a director of
E-Crete Products, Inc. and Montana Tech Foundation. Mr. Ditto resides in North
York, Ontario.
MR. CAMERON A. MINGAY has served as a director of the Company since March 2001.
Mr. Mingay has been a partner of Cassels, Brock and Blackwell LLP since June,
1999. Mr. Mingay has been a director of Kinross Gold Corporation, the corporate
parent of the Company, since January, 2001. Mr. Mingay resides in Toronto,
Ontario.
JOHN M.H. HUXLEY has served as a director of the Company since June 1998. Mr.
Huxley has been a Principal of Algonquin Power Corporation Inc. since January
1990. Mr. Huxley has been a director of Kinross, the corporate parent of the
Company, since May 1993. Mr. Huxley resides in Toronto, Ontario.
BRIAN W. PENNY has served as a director of the Company since June 1998. Mr.
Penny has been the Vice-President, Finance and Chief Financial Officer of
Kinross, the corporate parent of the Company, since May 1993. Mr. Penny resides
in Markham, Ontario.
EXECUTIVE OFFICERS
Subsequent to the merger with Kinross, the corporate parent of the Company on
June 1, 1998, the following officers were appointed for an indefinite term.
56
The names, ages and position of all executive officers of the Company are as
follows:
NAME AGE OFFICE
---------------------- -------- ------------------
Arthur H. Ditto 60 President
John W. Ivany 58 Vice President
Brian W. Penny 39 Treasurer
Shelley M. Riley 45 Secretary
ARTHUR H. DITTO has been the President of the Company since June 1998. Since May
1993, Mr. Ditto has been the President and Chief Operating Officer of Kinross,
the corporate parent of the Company. Prior to joining Kinross, Mr. Ditto was the
President and Chief Executive Officer of Plexus Resources Corporation. Mr. Ditto
is also a director of E-Crete Products, Inc. and Montana Tech Foundation.
JOHN W. IVANY has been Vice President of the Company since March 2001. Mr. Ivany
also served as a director of the Company from June 1998 to March 2001. Mr Ivany
has been Executive Vice President of Kinross, the corporate parent of the
Company, since July 1995. Mr. Ivany resides in Toronto, Ontario.
BRIAN W. PENNY has been the Treasurer of the Company since June 1998. Since May
1993, Mr. Penny has been the Vice-President, Finance and Chief Financial Officer
of Kinross, the corporate parent of the Company.
SHELLEY M. RILEY has been the Secretary of the Company since June 1998. Since
June 1993, Ms. Riley has been the Corporate Secretary of Kinross, the corporate
parent of the Company.
Item 11. Executive Compensation
The Board of Directors of the Company receives no compensation for acting as
directors of the Company. Each of the directors, other than Mr. Penny, is also a
director of Kinross, which pays each Kinross director who is not a salaried
employee of Kinross, Cdn. $15,000 per annum for his services as a director.
Directors of Kinross are also entitled to a fee of Cdn. $1,250 for attendance at
meetings of the Board of Directors of Kinross. In addition, directors are
reimbursed for their expenses. Additionally, members of Kinross' Audit
Compensation, Corporate Governance, and Environmental Committees receive a fee
of Cdn. $1,250 per meeting and the Chairman of each of these committees receives
Cdn. $2,000 for acting in this capacity.
Each Kinross director who is not a salaried employee of Kinross also receives
stock options under Kinross Stock Option Plan, the number of such options being
determined by the Board of Directors of Kinross. During the year ended December
31, 2001, there were no options issued to the directors of Kinross. The
compensation of directors by Kinross is for the services rendered to Kinross and
its subsidiaries, including the Company.
EXECUTIVE COMPENSATION
The Company does not compensate its executive officers. Each of the officers of
the Company is also an officer of Kinross, the ultimate corporate parent of the
Company. The compensation of each of these individuals is set by Kinross and is
paid for all services rendered to Kinross and its subsidiaries, including the
Company.
The following table sets forth all annual and long-term compensation for
services in all capacities paid by Kinross, the corporate parent, for the three
fiscal years ended December 31, 2001, in respect of each of the individuals who
were, at December 31, 2001, the Company's Chief Executive Officer and the senior
executive officers whose total salary exceeded Cdn. $100,000 (the "Named
Executive Officers").
57
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
-------------------------------------------------
SECURITIES
NAME AND PRINCIPAL RESTRICTED UNDERLYING
- ------------------ FISCAL STOCK OPTIONS/ ALL OTHER
POSITION YEAR SALARY BONUS AWARDS SARS (#) COMPENSATION
- -------- ------------------------------------------------------------------
Arthur H. Ditto 2001 228,421 32,900 -- 125,000 23,398
President 2000 232,183 -- -- 435,000 43,380
1999 232,164 92,160 -- 250,000 44,457
John W. Ivany 2001 193,680 64,560 -- 80,000 22,055
Vice President 2000 185,135 -- -- 280,000 21,933
1999 185,098 57,212 -- 250,000 20,584
Brian W. Penny 2001 159,592 47,904 -- 70,000 30,613(1)
Treasurer 2000 161,573 16,830 28,000 110,000 13,775
1999 161,540 29,616 -- 100,000 15,186
Robert W. Schafer 2001 129,669 19,432 -- 70,000 15,688
Vice President 2000 131,273 12,118 10,000 125,000 12,676
1999 131,251 22,885 -- 75,000 12,305
(1) included in all other compensation is the value of the common stock
received under the restricted share rights granted in 2000.
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
The Company does not grant options to purchase its equity securities to
employees or directors.
The following table sets forth stock options granted by Kinross under its Stock
Option Plan during the year ended December 31, 2001, to the Named Executive
Officers of the Company. The options are to acquire Kinross common stock and are
exercisable with respect to Mr. Ditto 33 1/3% on each of the first, second and
third anniversary of the date of grant and 50% on the first and second
anniversary of the date of grant with respect to Messrs. Ivany, Penny and
Schafer. The exercise price is the market value, determined in accordance with
Kinross' Stock Option Plan, of the Kinross common stock as of the date of grant.
OPTION GRANTS IN LAST FISCAL YEAR
Average Market Value
Exercise Price on Grant Date of
Name Number % (Cdn.$/Share) (Cdn. $/Share) Expiry
- -------------------- ------------ ---------- ---------------- ---------------- -------------
Arthur H. Ditto 125,000 8.77% $1.53 $1.53 20/09/06
John W. Ivany 80,000 5.61% $1.53 $1.53 20/09/06
Brian W. Penny 70,000 4.91% $1.53 $1.53 20/09/06
Robert W. Schafer 70,000 4.91% $1.53 $1.53 20/09/06
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
There are no outstanding options or other rights to acquire equity stock of the
Company.
The following table sets forth details of options, to acquire Kinross common
stock that were exercised during the year ended December 31, 2001, and that are
held as of December 31, 2001, by each of the Named Executive Officers, including
the fiscal year end value of unexercised options on an aggregate basis.
58
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
Common Value of Unexercised
Shares Unexercised at Fiscal In-the-Money Options
Acquired Aggregate Value Year End at Fiscal Year End ($)(2)
Name on Exercise Realized($)(1) Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------- -------------- ------------------- ------------------------- -------------------------
Arthur H. Ditto -- -- 1,151,666/208,334 39,150/0
John W. Ivany -- -- 646,666/163,334 25,000/0
Brian W. Penny -- -- 376,667/103,333 9,900/0
Robert W. Schafer -- -- 375,000/95,000 11,250/0
- ----------
(1) Calculated using the closing price for a board lot of Common Shares of
Kinross on the Toronto Stock Exchange.
(2) Value of unexercised-in-the-money options calculated using the closing
price of Cdn. $1.19 of the Common Shares of Kinross on the Toronto Stock
Exchange on December 31, 2001, less the exercise price of in-the-money
stock options.
PENSION PLANS
CANADA. In 1997, Kinross, the corporate parent of the Company, established a
deferred profit sharing plan and a registered retirement savings plan covering
all of the Canadian non-unionized employees of Kinross and its subsidiaries. The
deferred profit sharing plan provides for basic contributions by Kinross (which
cannot be less than 4% of the member's compensation). In addition, there is an
annual profit sharing contribution based on Kinross' financial performance.
Kinross contributed an aggregate of $34,866.76 to the deferred profit
sharing plan on behalf of the Named Executive Officers of the Company during the
year ended December 31, 2001.
The registered retirement savings plan is available to all non-unionized
Canadian employees and allows for the minimum contribution of Cdn. $60 per month
with Kinross matching 100% of this amount with any additional contributions
being matched by 50% up to a maximum of Cdn. $30. Kinross contributed $2,091.25
to the registered retirement savings plan on behalf of each of Messrs. Ditto,
Schafer, and Penny during the year ended December 31, 2001.
UNITED STATES. Kinross' subsidiary, Kinross Gold U.S.A., Inc., has various
pension plans in which one executive officer is eligible to participate. Kinross
is required to make certain contributions to the pension plans on behalf of
Arthur H. Ditto.
Employees are allowed to make contributions to the 401(k) Savings Plan from
salary deductions each year subject to certain limitations. Kinross has in past
years made matching contributions of 50% of each employee's contributions, but
subject to a maximum contribution of 3% of the employee's annual compensation.
Employees are always fully vested in their own salary deferral contributions and
become fully vested (in 33-1/3% increments) in any contribution by Kinross after
three years. Participants are allowed to direct the investment of their account
within a group of designated investment funds. Kinross contributed $4,576
to the 401(k) Savings Plan on behalf of Arthur H. Ditto during the year ended
December 31, 2001.
Kinross established a defined contribution money purchase plan (the "Money
Purchase Plan") in which substantially all of the employees in the United States
participate. The Money Purchase Plan is funded entirely by Kinross. Kinross
contributed 5% of the employees' annual wages to this plan. Kinross is required
to make contributions to this plan such that no unfunded pension benefit
obligations exist. Participants are allowed to direct the investment of the
pension plan account balances. Kinross contributed $8,676 to the Money
Purchase Plan on behalf of Arthur H. Ditto during the year ended December 31,
2001.
EMPLOYMENT CONTRACTS
Kinross has entered into a severance agreement with each of the Named Executive
Officers. Each of the severance agreements provides for a severance payment
equal to 2 (in the case of Messrs. Schafer and Penny) or 2.5 (in the case of Mr.
Ditto multiplied by the sum of the Named Executive Officer's annual compensation
(annual base salary and benefits) and target bonus. In the case of Mr. Ditto,
the severance payment is paid to the Named Executive Officer following a change
of control of Kinross, at the option of the Named Executive Officer. In the case
of Messrs. Ivany, Schafer, and Penny, the severance is paid to the Named
Executive Officer if a triggering event occurs following a change of control. A
triggering event includes: (i) an adverse change in the employment terms of the
executive; (ii) a diminution of the title of the executive; (iii) a change in
the person to whom the executive reports (subject to certain exceptions); and
(iv) a change in the location at which the executive is required to work
(subject to certain exceptions). The
59
severance amount is payable at the option of Messrs. Ivany, Schafer and Penny
provided the exercise of such option occurs within 18 months following the
change of control and within 6 months of the triggering event.
Other than as described above, Kinross (and its subsidiaries) have no employment
contracts in place with the Named Executive Officers and no compensatory plans
or arrangements with respect to the Named Executive Officers that results or
will result from the resignation, retirement, or any other termination of
employment of such officers' employment with Kinross (and its subsidiaries),
from a change of control of Kinross (and its subsidiaries) or a change in the
Named Executive Officers' responsibilities following a change of control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company presently does not have a Compensation Committee.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
The Securities and Exchange Commission's ("SEC") rules addressing disclosure of
executive compensation in Annual Reports on Form 10-K require the compensation
committee of the board of directors of the Company to include in this Annual
Report on Form 10-K a report from such committee addressing, with respect to the
most recently completed fiscal year, (a) the Company's policies regarding
executive compensation generally, (b) the factors and criteria considered in
setting the compensation of each of the Company's Chief Executive Officer during
such fiscal year, Arthur H. Ditto, and (c) any relationship between such
compensation and the Company's performance, or where no compensation committee
of the board of directors exists, as has been the case with the Company since
June 1, 1999, the rules require that such report come from the entire board of
directors.
Prior to June 1, 1998, the Company's executive compensation program was
administered by the Compensation Committee of the Board of Directors, which was
responsible for establishing the policies governing the Company's compensation
program and the amount of compensation for each of the Company's independent
directors and had oversight responsibility for all executive compensation and
executive benefit programs of the Company.
CURRENT POLICY
As of June 1, 1998, the Company ceased paying all forms of compensation and
reimbursement of compensation paid by third parties, including the accrual of
benefits and the granting of awards under employee benefit plans maintained by
the Company, to its executive officers, including the Company's Chief Executive
Officer. The compensation of the Company's officers is fixed by its corporate
parent, Kinross, and is paid to the officers by Kinross for all services they
render to Kinross and its subsidiaries, including those services rendered to the
Company. The Board of Directors does not currently anticipate a change in this
policy.
Respectfully submitted,
JOHN A. BROUGH
ARTHUR H. DITTO
JOHN M.H. HUXLEY
CAMERON A. MINGAY
BRIAN W. PENNY
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of December 31, 2001, the following table sets forth the amount of all equity
securities of the Company that are beneficially owned by each director of the
Company, each of the executive officers named in the Summary Compensation Table
above, and all directors and executive officers of the Company as a group. The
table segregates shares held from those beneficially owned through ownership of
options to purchase shares of Common Stock. A person is considered to
"beneficially own" any shares (i) over which such person exercises sole or
shared voting or investment power or (ii) of which such person has the right to
acquire beneficial ownership at any time within 60 days (e.g., through the
exercise of stock options). Unless otherwise indicated, each person has sole
voting and investment power with respect to the shares set forth opposite his or
her name.
60
NUMBER OF SHARES NUMBER OF SHARES
OF THE COMPANY OF THE COMPANY
DIRECTORS COMMON STOCK(1)(2) SERIES B PREFERRED STOCK
---------------------------- --------------------- -------------------------
Arthur H. Ditto NIL NIL
Brian W. Penny NIL NIL
John M.H. Huxley NIL NIL
Cameron A. Mingay NIL NIL
John A. Brough NIL NIL
NAMED EXECUTIVE OFFICERS
Arthur H. Ditto NIL NIL
John W. Ivany NIL NIL
Robert W. Schafer NIL NIL
Brian W. Penny NIL NIL
All directors, executive
officers as a group (7 NIL NIL
persons)(1)
All are directors or officers of Kinross Gold Corporation whose subsidiary,
Kinross Gold U.S.A. Inc. holds 100% of the 92,213,988 outstanding common shares
of the Company and 1,598,392 of the Company's 1,840,000 Series B Preferred
Shares.
Item 13. Security Ownership of Certain Beneficial Owners
As of December 31, 2001, the following is, to the knowledge of the Company, the
only person (including any "group" as that term is used in Section 13(d)(3) of
the Securities Exchange Act of 1934) who is a beneficial owner of more than five
percent of the stock of the Company registered under the Securities Exchange Act
of 1934, as amended, and publicly traded, which is the $3.75 Series B
Convertible Preferred Stock:
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
TITLE OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
- ---------------- --------------------------------- -------------------------- --------------
Preferred Kinross Gold U.S.A., Inc. 945,400 51.4%
802 E. Winchester, Suite 100,
Murray, UT 84107
61
Item 14. Exhibits, Financial Statement Schedules and Reports On Form 8-K
(a) The following documents are filed as a part of this report:
10-K PAGE
1. Financial Statements
Report of Management 29
Independent Auditors Report - Deloitte & Touche LLP 30
Report of Independent Accountants - Pricewaterhouse Coopers 31
Consolidated Statements of Operations for
each of the three years in the period ended
December 31, 2001 32
Consolidated Balance Sheets at December 31, 2001
and 2000 33
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 2001 34
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended December 31, 2001 35
Consolidated Statements of Comprehensive Loss for each of the three
years in the period ended December 31, 2001 36
Notes to Consolidated Financial Statements 37 -54
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 May 29, 2001, and filed
with the Secretary of State of the State of Nevada on May 30,
2001.*
3.2 By-Laws, dated and adopted May 17, 2001.*
10.1 The Company's 1992 Stock Option Plan, filed as Exhibit A to
the Company's Proxy Statement for the 1993 Annual Meeting of
Stockholders and incorporated herein by reference. First
Amendment to the Kinam Gold Inc. 1992 Stock Option Plan, filed
as Exhibit (10)(c) to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997, and incorporated
herein by reference.
10.2 Loan Agreement, dated as of May 1, 1997, between Alaska
Development Export Authority and Fairbanks Gold Mining, Inc.;
Reimbursement Agreement, dated as of May 1, 1997, between
Fairbanks Gold Mining, Inc. And Union Bank of Switzerland, New
York Branch; Guaranty, dated May 22, 1997, of Cyprus Amax in
favor of Union Bank of Switzerland, New York Branch; and
Reimbursement Agreement, dated May 22, 1997, of the Company in
favor of Cyprus Amax, filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997, and incorporated herein by reference.
10.3 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.
10.4 Fourth Amendment to Loan Agreement, dated November 6, 2001
between Omolon and EBRD amending the Loan Agreement dated as
of June 30, 1995 between Omolon and EBRD.*
10.5 Credit Agreement, dated as of March 8, 2000 between The Bank of
Nova Scotia as Administrative Agent, and the
62
Bank of Nova Scotia and other financial institutions as
Lenders, and Kinross Gold Corporation, Kinross Gold U.S.A., Inc.
and Fairbanks Gold Mining, Inc. as Borrowers; First Amending
Agreement to Credit Agreement dated March 8, 2000 amending the
Credit Agreement dated March 8, 2000 between The Bank of Nova
Scotia as Administrative Agent, and the Bank of Nova Scotia and
other financial institutions as Lenders, and Kinross Gold
Corporation, Kinross Gold U.S.A., Inc. and Fairbanks Gold
Mining, Inc. as Borrowers; and Second Amending Agreement dated
February 7, 2001 amending the Credit Agreement dated March 8,
2000 between The Bank of Nova Scotia as Administrative Agent,
and the Bank of Nova Scotia and other financial institutions as
Lenders, and Kinross Gold Corporation, Kinross Gold U.S.A., Inc.
and Fairbanks Gold Mining, Inc. as Borrowers. Filed as Exhibit
10.9 to the Company's Annual Report on Form 10K for the year
ended December 31, 2000 and incorporated herein by reference.
10.6 Consent of the Directors of Kinam Gold Inc. to acquire all of
the outstanding common shares of La Teko Resources Inc. from
Kinross effective January 1, 2001.
21 Subsidiaries of the Company.*
23.1 Consent of Deloitte & Touche LLP*
23.2 Consent of PricewaterhouseCoopers*
*Filed herewith
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of 2001.
63
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 1, 2002 By /s/ Arthur H. Ditto
-------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on April 1, 2002.
/s/ Arthur H. Ditto President
- -----------------------------------
Arthur H. Ditto
/s/ Robert W. Schafer Vice President
- -----------------------------------
Robert W. Schafer
/s/ Brian W. Penny Treasurer
- -----------------------------------
Brian W. Penny
/s/ Shelley M. Riley Secretary
- -----------------------------------
Shelley M. Riley
/s/ John A. Brough Director
- -----------------------------------
John A. Brough
/s/ John M.H. Huxley Director
- -----------------------------------
John M.H. Huxley
/s/ John W. Ivany Vice President
- -----------------------------------
John W. Ivany
/s/ Cam Mingay Director
- -----------------------------------
Cam Mingay
64