ECHO BAY MINES LTD.
(a wholly-owned subsidiary of Kinross Gold Corporation)
2003 Second Quarter Report
Based on Canadian GAAP
All amounts are expressed in U.S. dollars
Unless otherwise stated
SECOND QUARTER 2003
FOR THE PERIOD ENDED JUNE 30, 2003
THE "COMPANY" OR "ECHO BAY" REFERS TO ECHO BAY MINES LTD. AND ITS SUBSIDIARIES.
THE COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ARE PRESENTED IN
ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN CANADA. ALL DOLLAR
AMOUNTS ARE EXPRESSED IN U.S. DOLLARS UNLESS SPECIFIED OTHERWISE.
BUSINESS COMBINATION
On June 10, 2002, the Company, Kinross Gold Corporation ("Kinross") and TVX Gold
Inc. ("TVX") entered into a combination agreement, for the purpose of combining
the ownership of their respective businesses. In a concurrent transaction, TVX
agreed to acquire from Newmont Mining Corporation ("Newmont") the interest in
the TVX Newmont Americas joint venture that it did not already own. The purchase
from Newmont was completed and the combination was effected by way of a plan of
arrangement under the Canada Business Corporation Act ("CBCA") on January 31,
2003.
Shareholders of Echo Bay (other than Kinross) received 0.1733 of a Kinross
common share for each Echo Bay common share. The exchange ratio reflects the
three for one consolidation of Kinross' common shares that was completed on
January 31, 2003 prior to the arrangement. As a result, the Company and its
subsidiaries are now wholly-owned subsidiaries of Kinross.
SECOND QUARTER CONSOLIDATED RESULTS
SECOND QUARTER RESULTS
The net loss for the second quarter of 2003 was $2.0 million, not measurable on
a per share basis, compared to a net loss of $1.5 million, or $0.01 per share in
the second quarter of 2002. The 2003 results, compared to 2002 were positively
impacted by a 6% increase in gold sales volume, $2.6 million in gains on
Canadian dollar currency hedges reducing Lupin's operating costs, a $1.3 million
reduction in general and administrative costs due to the severance of Echo Bay
staff in the first quarter of 2003 and the closure of the Echo Bay offices and
no costs associated with the capital securities which were retired in the second
quarter of 2002. The 2003 results, compared to 2002 were negatively impacted by
a lower realized gold price of $343 per ounce compared to $375 per ounce in
2002, despite higher spot prices, due to the accounting treatment of certain
hedge items and an $8.6 million write-off of net hedging losses associated with
Lupin that had been deferred for accounting purposes.
Gold production increased 7% to 138,821 ounces in the second quarter of 2003
compared to 129,642 ounces in the second quarter of 2002. A 19% increase in
production at the Round Mountain mine more than offset the effects of the
cessation of operations at the McCoy/Cove complex on March 31, 2002 and at the
Kettle River mine in October 2002. There was no silver production in the second
quarter of 2003 or 2002, as all the silver had come from McCoy/Cove.
The Company's profitability and cash flow is determined in large part by the
price of gold. The market price of gold is determined by factors beyond the
Company's control. The Company received $347 per ounce of gold sold in the
second quarter of 2003 compared to $311 per ounce in 2002.
Total cash costs were $213 per ounce of gold in the second quarter of 2003,
versus $242 in the second quarter of 2002. The per ounce decrease was primarily
due to a 19% increase in production at Round Mountain over 2002. Total
production costs were $275 per ounce in the second quarter of 2003, versus $321
per ounce in the second quarter of 2002.
Cash flow provided from operating activities in the second quarter of 2003 was
$5.2 million, compared to $5.5 million provided from operating activities in
2002.
2
FIRST HALF RESULTS
The net loss for the first half of 2003 was $12.1 million, or $0.02 per share
compared to net earnings of $4.0 million, or $0.01 per share in the first half
of 2002. The 2003 results, compared to 2002, reflect 2% lower gold sales volume
and no silver sales, a $8.8 million increase in general and administrative costs
which included severances and other merger related costs arising from the
business combination, a $3.0 million increase in exploration costs resulting
from exploration work being carried out at the Emanual Creek project adjacent to
the Kettle River mine and an $8.6 million write-off of net hedging losses
associated with the Lupin mine that had been deferred for accounting purposes.
These items were partially offset by a $4.1 million reduction in depreciation
and amortization associated with the closure of Kettle River and McCoy/Cove in
2002 and no expenses relating to the capital securities compared to a loss of
$5.5 million on their retirement in the second quarter of 2002.
Gold production decreased 5% to 265,269 ounces in the first half of 2003
compared to 278,918 ounces in the first half of 2002. The decrease in production
resulted from the cessation of operations at the McCoy/Cove complex on March 31,
2002 and at the Kettle River mine in October 2002. There was no silver
production in 2003 compared with 1.5 million ounces in 2002, as all the silver
had come from McCoy/Cove.
The Company's profitability and cash flow is determined in large part by the
price of gold. The market price of gold is determined by factors beyond the
Company's control. The Company received $350 per ounce of gold sold in the first
half of 2003 compared to $302 per ounce in 2002.
Total cash costs were $227 per ounce of gold in the first half of 2003, versus
$231 in the first half of 2002. The per ounce decrease was primarily due to an
11% increase in Round Mountain production during the first half of 2003
partially offset by increases in royalties and production taxes on the Company's
share of production at the Round Mountain mine due to higher gold prices in the
first half of 2003 compared to 2002. Total production costs were $290 per ounce
in the first half of 2003, versus $301 per ounce in the first half of 2002.
Cash flow used in operating activities in the first half of 2003 was $0.2
million, compared to $5.2 million provided from operating activities in 2002.
SALE OF MCCOY/COVE
Following the completion of the business combination with Kinross on January 31,
2003, the McCoy/Cove assets were subsequently conveyed to Newmont on February 7,
2003. In consideration, Newmont has agreed to assume all liabilities and
obligations relating to the reclamation or remediation required for the
McCoy/Cove complex. For further discussion, refer to the disclosure under the
heading "Operations - Individual Mine Disclosure".
SUSPENSION OF OPERATIONS AT LUPIN
On May 12, 2003, Kinross announced a restructuring plan for Lupin that included
the elimination of 75 positions. Changes to mill operating schedules and shift
rotations and the diligent efforts of employees achieved planned cost
improvements. However, as of the end of the quarter, the Company is no longer
hedged against its Canadian dollar costs. As a result, the strengthening
Canadian dollar will negate these cost efficiencies when expressed in U.S.
dollars, the currency that the gold output is sold in.
Therefore, on August 13, 2003, Kinross announced the immediate suspension of
operations at Lupin due to poor economic performance of the operation over a
protracted period of time. The Company will continue reviewing future
alternatives for the property including the development of a mine plan to
extract the shaft and crown pillars. Recovery of these pillars through 2004 has
the potential for the operation to produce a comparable amount of gold to that
originally planned for 2004, but at a higher grade and, consequently, at lower
total cash costs per ounce. Notwithstanding the potential for the future
extraction of the pillars, mining and milling operations have been suspended.
The plant and equipment has been placed on care and maintenance pending the
results of the review of future alternatives for the property. This decision
ultimately affects 235 permanent
3
and 70 contract employees. A small core of personnel will continue with the
environmental management programs to ensure compliance with all regulatory
requirements. For further discussion, refer to the disclosure under the heading
"Operations - Individual Mine Disclosure".
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
REVENUES - GOLD AND SILVER SALES
SECOND QUARTER RESULTS
The Company's primary source of revenue is from the sale of its gold production.
Echo Bay sold 146,094 ounces of gold in the second quarter of 2003, compared to
137,601 ounces in 2002. Revenue from gold sales was $50.1 million in the second
quarter of 2003 compared to revenue from gold and silver sales in 2002 of $54.6
million.
In the second quarter of 2003, Echo Bay realized $343 per ounce of gold,
compared to $375 in 2002. The Company received an average of $347 per ounce of
gold sold in the second quarter, compared to $311 in 2002. The average spot
price for gold in the second quarter of 2003 was $347 per ounce compared to $312
in 2002.
FIRST HALF RESULTS
Echo Bay sold 274,098 ounces of gold in the first half of 2003, compared to
279,030 ounces in 2002. Revenue from gold sales was $94.7 million in the first
half of 2003 compared to revenue from gold and silver sales in 2002 of $109.8
million. Revenue from gold and silver sales decreased in 2003 due to lower gold
production and no silver production resulting from the cessation of operations
at the McCoy/Cove and Kettle River mines in 2002.
In the first half of 2003, Echo Bay realized $345 per ounce of gold, compared to
$360 in 2002. The Company received an average of $350 per ounce of gold sold in
the first half of 2003, compared to $302 in the first half of 2002, which was
offset slightly by the amortization of net deferred losses on the modification
of hedging contracts relating to Lupin production. The average spot price for
gold in the first half of 2003 was $350 per ounce compared to $301 in 2002.
Statistics for gold and silver ounces sold and other revenue data are set out
below.
Three months ended Six months ended
June 30 June 30
REVENUE DATA 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Gold
- ----
Ounces produced 138,821 129,642 265,269 278,918
Ounces sold 146,094 137,601 274,098 279,030
Average price realized/ounce - revenue basis $ 343 $ 375 $ 345 $ 360
Average price realized/ounce - cash basis (1) $ 347 $ 311 $ 350 $ 302
Average market price/ounce $ 347 $ 312 $ 350 $ 301
Revenue (millions of U.S. $) $ 50.1 $ 51.7 $ 94.7 $ 100.5
Percentage of total revenue 100% 95% 100% 92%
Silver
- ------
Ounces produced -- -- -- 1,470,094
Ounces sold -- 663,305 -- 2,118,181
Average price realized/ounce - revenue basis $ -- $ 4.39 $ -- $ 4.36
Average price realized/ounce - cash basis (1) $ -- $ 4.39 $ -- $ 4.36
Average market price/ounce $ 4.59 $ 4.75 $ 4.63 $ 4.63
Revenue (millions of U.S. $) $ -- $ 2.9 $ -- $ 9.2
Percentage of total revenue 0% 5% 0% 8%
- -------------------------------------------------------------------------------------------------------------------------
Total revenue (millions of U.S. dollars) $ 50.1 $ 54.6 $ 94.7 $ 109.8
=========================================================================================================================
(1) Excludes non-cash items affecting gold and silver revenues, such as the
recognition of deferred income or deferral of revenue to future periods for
hedge accounting purposes.
The above non-GAAP measure of average realized price per ounce of gold sold has
been calculated on a consistent basis in each period. The calculation of average
price per ounce of gold sold might not be comparable to similarly titled
measures of other companies. Management uses average realized price per ounce of
gold sold to assess profitability and cash flow of individual operations as well
as to compare with other precious metal producers.
5
The effects of changes in sales prices and volume were as follows.
REVENUE VARIANCE ANALYSIS
2003 VS. 2002 Three months ended Six months ended
(millions of U.S. dollars) June 30 June 30
- -----------------------------------------------------------------------------------------------------------------------
Lower realized gold prices $ (4.8) $ (4.1)
Increase (decrease) in gold ounces sold 3.2 (1.8)
Decrease in silver ounces sold (2.9) (9.2)
- -----------------------------------------------------------------------------------------------------------------------
Decrease in revenue $ (4.5) $ (15.1)
=======================================================================================================================
COSTS AND EXPENSES
OPERATIONS - SUMMARY
SECOND QUARTER RESULTS
Gold production in the second quarter of 2003 increased by 7% when compared to
2002 production, while operating costs decreased by 18%. Consolidated operating
costs were $28.1 million in the second quarter of 2003 compared to $34.3 million
in 2002. Total cash operating costs per ounce and cash operating costs per ounce
vary with the quantity of gold and silver sold and with the cost of operations.
Total cash costs per ounce of gold produced were $213 in the second quarter of
2003 compared to $242 per ounce of gold in 2002. Total cash costs per ounce of
gold in the second quarter were lower than planned, primarily due to higher
production from the Round Mountain mine as a result of better than planned gold
recoveries, see discussion in the section entitled "Operations - Individual Mine
Disclosure".
FIRST HALF RESULTS
Gold production in the first half of 2003 decreased by 5% when compared to 2002
production, while operating costs decreased by 18%. Consolidated operating costs
were $56.9 million in the first half of 2003 compared to $69.4 million in 2002.
Total cash costs per ounce of gold produced were $227 in the first half of 2003
compared to $231 per ounce of gold equivalent in 2002.
Three months ended Six months ended
CONSOLIDATED PRODUCTION COSTS PER June 30 June 30
OUNCE OF GOLD PRODUCED 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Direct mining expense $ 176 $ 231 $ 196 $ 220
Deferred stripping and mine development costs 15 5 9 3
Inventory movements and other 1 (12) 1 (4)
- -------------------------------------------------------------------------------------------------------------------------
Cash operating costs 192 224 206 219
Royalties 17 16 17 12
Production taxes 4 2 4 --
- -------------------------------------------------------------------------------------------------------------------------
Total cash costs 213 242 227 231
Depreciation 41 54 43 48
Amortization 11 16 10 14
Reclamation and mine closure 10 9 10 8
- -------------------------------------------------------------------------------------------------------------------------
Total production costs $ 275 $ 321 $ 290 $ 301
=========================================================================================================================
The following table provides a reconciliation of operating costs per the
consolidated financial statements to operating costs for per ounce calculation
of total cash costs pursuant to gold industry guidelines.
6
RECONCILIATION OF CASH AND TOTAL CASH OPERATING
COSTS PER OUNCE TO FINANCIAL STATEMENTS Three months ended Six months ended
(thousands of U.S. dollars except production in ounces June 30 June 30
and per ounce amounts) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
Operating costs per financial statements $ 28,094 $ 34,320 $ 56,906 $ 69,416
Change in finished goods inventory and other (1,413) (5,332) (2,301) (3,257)
- ------------------------------------------------------------------------------------------------------------------------------
Cash operating costs 26,681 28,988 54,605 66,159
Royalties 2,314 2,082 4,490 3,706
Production taxes 529 295 1,037 84
- ------------------------------------------------------------------------------------------------------------------------------
Total cash costs $ 29,524 $ 31,365 $ 60,132 $ 69,949
==============================================================================================================================
Gold ounces produced 138,821 129,642 265,269 278,918
Silver ounces produced -- -- -- 1,470,094
Average gold-to-silver price ratio -- -- -- 64.4
Gold equivalent ounces produced 138,821 129,642 265,269 301,675
Cash operating costs per ounce $ 192 $ 224 $ 206 $ 219
Total cash operating costs per ounce $ 213 $ 242 $ 227 $ 232
==============================================================================================================================
The above non-GAAP measures of cash and total cash operating costs per ounce
have been calculated on a consistent basis in each period. For reasons of
comparability, total cash costs do not include certain items such as property
write-downs, which do not occur in all periods but are included under GAAP in
the determination of net earnings or loss. Cash and total cash operating costs
per ounce are calculated in accordance with gold industry guidelines. These per
ounce measures may not be comparable to similarly titled measures of other
companies. Cash and total cash costs per ounce information is used by management
to assess profitability and cash flow of individual operations, as well as to
compare with other precious metal producers. Total cash costs per ounce of gold
equivalent decreased by 12% during the second quarter of 2003 and decreased 2%
in the first half of 2003. Details of the individual mine performance are
discussed in the following sections.
The item total cash cost per ounce is furnished to provide additional
information and is a non-GAAP measure. This measure should not be considered in
isolation as a substitute for a measure of performance prepared in accordance
with generally accepted accounting principles and is not necessarily indicative
of operating profit or cost from operations as determined under generally
accepted accounting principles.
Production costs per ounce are derived from amounts included in the consolidated
statements of operations and include mine site operating costs such as mining,
processing, administration, transportation, royalties, production taxes,
depreciation, amortization and reclamation costs, but exclude financing,
capital, development and exploration costs. These costs are then divided by gold
equivalent ounces produced to arrive at the total production costs per ounce.
Production costs per ounce are furnished to provide additional information and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
The term ounce as used in this quarterly report means "troy ounce".
7
OPERATIONS REVIEW
Operating data by mine is set out below.
Three months ended Six months ended
June 30 June 30
OPERATING DATA BY MINE 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Gold production (ounces)
(a) Round Mountain (50%) 113,310 95,499 209,126 189,070
(b) Lupin (100%) 25,511 24,643 56,143 53,360
(c) Kettle River (100%) -- 9,500 -- 19,987
(d) McCoy/Cove (100%) -- -- -- 16,501
- ---------------------------------------------------------------------------------------------------------------------
Total gold 138,821 129,642 265,269 278,918
=====================================================================================================================
Silver production (ounces)
(d) McCoy/Cove (100%) -- -- -- 1,470,094
- ---------------------------------------------------------------------------------------------------------------------
Total silver -- -- -- 1,470,094
=====================================================================================================================
Gold production increased 7% to 138,821 ounces in the second quarter of 2003
compared to 129,642 ounces in the second quarter of 2002. This resulted in a
decrease of 5% in first half production of 265,269 ounces compared to 278,918
ounces in the first half of 2002. The increase in second quarter production
resulted from a 19% increase in second quarter production at Round Mountain
primarily due to higher grades and better recoveries as a result of side slope
leaching. Production for the first half of 2003 remained lower than the first
half of 2002 due to the completion of operations at McCoy/Cove on March 31, 2002
and at Kettle River in October 2002. The Company has no silver production in
2003 as all of 2002 production came from McCoy/Cove.
Three months ended Six months ended
June 30 June 30
OPERATING DATA BY MINE 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Cash operating costs (per ounce of gold)
(a) Round Mountain $ 165 $ 176 $ 171 $ 181
(b) Lupin 310 384 336 330
(c) Kettle River -- 282 -- 270
(d) McCoy/Cove -- -- -- 225
- ---------------------------------------------------------------------------------------------------------------------
Company average $ 192 $ 224 $ 206 $ 219
=====================================================================================================================
Total cash costs (per ounce of gold)
(a) Round Mountain $ 190 $ 201 $ 197 $ 203
(b) Lupin 310 384 336 330
(c) Kettle River -- 285 -- 276
(d) McCoy/Cove -- -- -- 214
- ---------------------------------------------------------------------------------------------------------------------
Company average $ 213 $ 242 $ 227 $ 231
=====================================================================================================================
Cash operating costs were $192 per ounce of gold in the second quarter and $206
in the first half of 2003 compared to $224 in the second quarter of and $219 in
the first half of 2002. The decrease was primarily the result of higher
production at the Round Mountain mine due to better than expected grades and
recoveries as a result of side slope leaching.
Total cash costs were $213 per ounce of gold in the second quarter and $227 in
the first half of 2002 compared to $242 in the second quarter and $231 in the
first half of 2002. The increase over cash operating costs was primarily due to
higher royalties and production taxes at Round Mountain resulting from an
average gold price of $347 per ounce during the second quarter and $350 during
the first half of 2003 compared with $312 per ounce during the second quarter
and $301 per ounce during the first half of 2002.
8
OPERATIONS - INDIVIDUAL MINE DISCLOSURE
(a) Round Mountain, Nevada (50% owned) Three months ended Six months ended
June 30 June 30
OPERATING DATA 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Gold produced (ounces) (the Company's 50% share):
Heap leached - reusable pad 41,801 35,701 81,342 73,713
Heap leached - dedicated pad 52,735 40,747 92,988 79,683
Milled 17,919 19,051 33,941 35,674
Other (1) 855 -- 855 --
--------- --------- --------- ---------
Total 113,310 95,499 209,126 189,070
Mining cost/ton of ore and waste $ 0.89 $ 0.79 $ 0.92 $ 0.79
Heap leaching cost/ton of ore $ 0.83 $ 0.80 $ 0.82 $ 0.78
Milling cost/ton of ore $ 3.13 $ 3.13 $ 3.31 $ 3.06
Production cost per ounce of gold produced:
Direct mining expense $ 144 $ 176 $ 156 $ 174
Deferred stripping costs 20 12 14 13
Inventory movements and other 1 (12) 1 (6)
--------- ---------- --------- ----------
Cash operating costs 165 176 171 181
Royalties 20 22 21 19
Production taxes 5 3 5 3
--------- --------- --------- ---------
Total cash costs 190 201 197 203
Depreciation 37 43 42 43
Amortization 11 15 11 15
Reclamation and mine closure 9 9 9 9
--------- --------- --------- ---------
Total production costs $ 247 $ 268 $ 259 $ 270
--------- --------- --------- ---------
Heap leached - reusable pad:
Ore processed (tons/day) 28,031 31,130 27,836 31,282
Total ore processed (000 tons) 2,551 2,833 5,150 5,693
Grade (ounce/ton) 0.043 0.047 0.049 0.046
Recovery rate (%) 74.3 61.5 74.5 63.6
Heap leached - dedicated pad:
Ore processed (tons/day) 126,418 139,692 124,130 139,736
Total ore processed (000 tons) 11,504 12,712 22,964 25,432
Grade (ounce/ton) 0.012 0.012 0.012 0.011
Recovery rate (2)
Milled:
Ore processed (tons/day) 10,077 9,768 9,650 9,775
Total ore processed (000 tons) 917 889 1,785 1,779
Grade (ounce/ton) 0.049 0.055 0.049 0.050
Recovery rate (%) 83.4 86.3 85.0 85.0
- ----------------------------------------------------------------------------------------------------------------------------
(1) A high-grade occurrence was discovered in April 1992. A small gravity plant
was constructed to recover these ounces.
(1) Recovery rates on dedicated pads can only be estimated, as actual
recoveries will not be known until leaching is complete. At the Round
Mountain mine, the gold recovery rate on the dedicated heap leach pad is
estimated at 50%.
The Company has a 50% ownership interest in, and is the operator of, the Round
Mountain mine in Nevada. Round Mountain is an open pit mine capable of mining
and processing 170,000 tonnes of ore per day. The Company's share of mine
production was 113,310 ounces of gold for the second quarter of 2003 compared
with 95,499 ounces in 2002. The higher production results primarily from better
than planned gold recoveries due to the installation of new carbon columns and
the implementation of side slope leaching of the historic dedicated leach pad.
The success of side slope leaching has the potential to significantly improve
ultimate heap leach recoveries. Cash operating costs for the quarter were $165
per ounce, compared to $176 per ounce in the previous year reflecting the higher
production. Total cash costs for the quarter were $190 per ounce, compared to
$201 in the 2002.
9
RECONCILIATION OF THE ROUND MOUNTAIN MINE
CASH AND TOTAL CASH OPERATING COSTS PER OUNCE Three months ended Six months ended
TO FINANCIAL STATEMENTS June 30 June 30
(thousands of U.S. dollars except production in ounces
and per ounce amounts) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Operating costs per financial statements $ 19,583 $ 17,731 $ 37,725 $ 33,121
Change in finished goods inventory and other (791) (888) (1,987) 1,187
- ----------------------------------------------------------------------------------------------------------------------------
Cash operating costs 18,792 16,843 35,738 34,308
Royalties 2,314 2,062 4,490 3,594
Production taxes 529 280 1,037 535
- ----------------------------------------------------------------------------------------------------------------------------
Total cash costs $ 21,635 $ 19,185 $ 41,265 $ 38,437
============================================================================================================================
Gold ounces produced 113,310 95,499 209,126 189,070
Cash operating costs per ounce $ 165 $ 176 $ 171 $ 181
Total cash costs per ounce $ 190 $ 201 $ 197 $ 203
============================================================================================================================
Cash and total cash costs per ounce are non-GAAP measures. For further
information on these non-GAAP measures, refer to the disclosure under the
heading "Costs and Expenses - Operations Summary".
The Company's share of capital expenditures at the Round Mountain mine in the
second quarter of 2003 was $0.8 million. Echo Bay estimates its share of capital
expenditures to be approximately $7.8 million for 2003. These capital
expenditures will be primarily incurred on the expansion of the dedicated leach
pad, pit dewatering, and mobile equipment.
Metallurgical test work is currently in progress on mineralization from the
nearby Gold Hill deposit and a resources model is being generated. During the
quarter, a Plan of Operations to develop a mine at Gold Hill was filed with the
Nevada Bureau of Land Management.
Exploration drilling continued to focus on the high-grade underground vein
targets along the margins of the caldera that hosts the Round Mountain open pit.
One reverse circulation drill hole returned 70.6 grams per tonne gold over a
width of 16.8 metres on the deep northwest vein. A diamond drill hole, drilled
to confirm the high-grade results, cut numerous sections with visible gold and
assays are pending. Considering the continued encouraging drill results, a
preliminary feasibility study for the underground mining of the high-grade vein
system has been initiated.
10
(b) Lupin, Nunavut, Canada (100% owned) Three months ended Six months ended
June 30 June 30
OPERATING DATA 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Gold produced (ounces) 25,511 24,643 56,143 53,360
Mining cost/ton of ore C $ 56.01 C $ 64.53 C $ 57.47 C $ 57.96
Milling cost/ton of ore C $ 16.00 C $ 13.88 C $ 15.74 C $ 14.10
Production cost per ounce of gold produced:
Canadian dollars:
Direct mining expense C $ 584 C $ 666 C $ 581 C $ 583
Deferred mine development costs C $ (9) C $ (43) C $ (12) C $ (51)
Inventory movements and other C $ -- C $ 3 C $ 1 C $ 1
--------- --------- --------- ---------
Cash operating costs C $ 575 C $ 626 C $ 570 C $ 533
U.S. dollars
Cash operating costs US$ 310 US$ 384 US$ 336 US$ 330
Royalties -- -- -- --
Production taxes -- -- -- --
--------- --------- --------- ---------
Total cash costs 310 384 336 330
Depreciation 55 46 48 40
Amortization 9 6 8 6
Reclamation and mine closure 17 15 16 15
--------- --------- --------- ---------
Total production costs US$ 391 US$ 451 US$ 408 US$ 391
--------- --------- --------- ---------
Milled:
Ore processed (tons/day) 1,612 1,623 1,739 1,640
Total ore processed (000 tons) 147 148 315 298
Grade (ounce/ton) 0.188 0.181 0.193 0.193
Recovery rate (%) 92.4 92.2 92.5 92.5
- ----------------------------------------------------------------------------------------------------------------------------
Lupin is an underground mine, capable of mining and processing 2,000
tonnes or ore per day. Gold production for the quarter was 25,511 ounces
compared with 24,643 ounces in 2002, as an increase in grade more than offset a
reduction in tons milled. Total cash costs were $310 per ounce compared to $384
per ounce in the second quarter of 2002. Operating costs were positively
impacted in the quarter through aggressive cost containment implemented at the
mine in the second quarter and by $2.6 million of gains on Canadian dollar
hedges of Lupin operating costs.
RECONCILIATION OF THE LUPIN MINE
CASH AND TOTAL CASH OPERATING COSTS PER OUNCE Three months ended Three months ended
TO FINANCIAL STATEMENTS June 30 June 30
(thousands of U.S. dollars except production in
ounces and per ounce amounts) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Operating costs per financial statements $ 8,511 $ 10,392 $ 19,181 $ 18,271
Change in finished goods inventory and other (622) (922) (314) (677)
- ----------------------------------------------------------------------------------------------------------------------------
Cash and total cash costs $ 7,889 $ 9,470 $ 18,867 $ 17,594
============================================================================================================================
Gold ounces produced 25,511 24,643 56,143 53,360
Cash and total cash costs per ounce $ 310 $ 384 $ 336 $ 330
============================================================================================================================
Cash and total cash costs per ounce are non-GAAP measures. For further
information on these non-GAAP measures, refer to the disclosure under the
heading "Costs and Expenses - Operations Summary".
During the quarter, a $2.6 million ($101 per ounce) benefit was realized from
gains on Canadian dollar contracts used to hedge Lupin expenditures. Hedge
contracts were in place only until the end of the second quarter. All Canadian
dollar expenditures at Lupin are currently unhedged.
The Company incurred $0.4 million of capital expenditures at the Lupin mine in
the second quarter of 2003 and $1.6 million in the first half of 2003.
11
On May 12, 2003, Kinross announced a restructuring plan for Lupin that included
the elimination of 75 positions. Changes to mill operating schedules and shift
rotations and the diligent efforts of employees achieved planned cost
improvements. However, as of the end of the quarter, the Company is no longer
hedged against its Canadian dollar costs. As a result, the strengthening
Canadian dollar will negate these cost efficiencies when expressed in U.S.
dollars, the currency that the gold output is sold in.
On August 13, 2003, Kinross announced the immediate suspension of operations at
Lupin due to poor economic performance of the operation over a protracted period
of time. A small group of personnel will continue reviewing future alternatives
for the property including the development of a mine plan to extract the shaft
and crown pillars. These pillars and other remnant mining are expected to
contain almost 110,000 ounces of gold (approximately 400,000 tonnes at an
average grade of about 8.5 grams of gold per tonne). Recovery of these pillars
through 2004 has the potential for the operation to produce a comparable amount
of gold to that originally planned for 2004, but at a higher grade and,
consequently, at lower total cash costs per ounce. Notwithstanding the potential
for the future extraction of the pillars, mining and milling operations have
been suspended. The plant and equipment has been placed on care and maintenance
pending the results of the review of future alternatives for the property. As
such, management is currently unable to assess the impact, if any, on the
carrying value of the Lupin mine assets. This will be completed along with the
assessment of alternatives for the property. This decision ultimately affects
235 permanent and 70 contract employees. Severance costs associated with the
layoffs are estimated to be approximately $4.3 million at current exchange rates
and will be booked in the third quarter. A small core of personnel will continue
with the environmental management programs to ensure compliance with all
regulatory requirements. The ongoing costs of care and maintenance and
environmental monitoring will be expensed as incurred.
The Lupin deposit, located on the west shore of Contwoyto Lake, 80 kilometres
south of the Arctic Circle, is a banded iron formation that was discovered in
1960. The mine began commercial production in 1982 and pioneered the use of
supporting a mining operation by aircraft for the rotation of employees,
transporting perishables and shipping of dore to market and the transport of
consumables for the operation over a winter road. This development scenario that
was refined at Lupin has become the model for the development of the new diamond
mines in the Northwest Territories and Kinross' Kubaka mine in the Russian Far
East. With the exception of a period of suspension from 1998 to 2000, due to low
gold prices, the Lupin mine has operated from 1982 and produced approximately
three million ounces of gold and has been a significant contributor to the
economy of northern Canada.
12
(c) Kettle River , Washington (100% owned) Three months ended Six months ended
June 30 June 30
OPERATING DATA 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Gold produced (ounces) -- 9,500 -- 19,987
Mining cost/ton of ore $ -- $ 22.70 $ -- $ 22.31
Milling cost/ton of ore $ -- $ 10.52 $ -- $ 10.81
Production cost per ounce of gold produced:
Direct mining expense $ -- $ 270 $ -- $ 259
Deferred mine development costs -- -- -- --
Inventory movements and other -- 12 -- 11
--------- --------- --------- ---------
Cash operating costs -- 282 -- 270
Royalties -- 1 -- 4
Production taxes -- 2 -- 2
--------- --------- --------- ---------
Total cash costs -- 285 -- 276
Depreciation -- -- -- --
Amortization -- 50 -- 50
Reclamation and mine closure -- -- -- --
--------- --------- --------- ---------
Total production costs $ -- $ 335 $ -- $ 326
--------- --------- --------- ---------
Milled:
Ore processed (tons/day) -- 727 -- 733
Total ore processed (000 tons) -- 66 -- 133
Grade (ounce/ton) -- 0.174 -- 0.179
Recovery rate (%) -- 82.8 -- 83.6
- ----------------------------------------------------------------------------------------------------------------------------
Gold production was nil in 2003, down from 9,500 ounces in the second quarter of
2002 and 19,987 ounces in the first half of 2002, as operations at the Kettle
River mine were completed in October 2002.
RECONCILIATION OF THE KETTLE RIVER MINE
CASH AND TOTAL CASH OPERATING COSTS PER OUNCE Three months ended Six months ended
TO FINANCIAL STATEMENTS June 30 June 30
(thousands of U.S. dollars except production in
ounces and per ounce amounts) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Operating costs per financial statements $ -- $ 2,565 $ -- $ 4,571
Change in finished goods inventory and other -- 110 -- 831
- ----------------------------------------------------------------------------------------------------------------------------
Cash operating costs -- 2,675 -- 5,402
Royalties -- 14 -- 71
Production taxes -- 15 -- 30
- ----------------------------------------------------------------------------------------------------------------------------
Total cash costs $ -- $ 2,704 $ -- $ 5,503
============================================================================================================================
Gold ounces produced -- 9,500 -- 19,987
Cash operating costs per ounce $ -- $ 282 $ -- $ 270
Total cash costs per ounce $ -- $ 285 $ -- $ 276
============================================================================================================================
Cash and total cash costs per ounce are non-GAAP measures. For further
information on these non-GAAP measures, refer to the disclosure under the
heading "Costs and Expenses - Operations Summary".
At Kettle River, a crosscut from the exploration drift was developed through the
Emanuel Creek ore body to provide future mining access. Approximately 300 metres
north and along trend of the Emanuel Creek deposit, a new zone of the gold
mineralization, the North Emanuel Creek zone, was intersected by five diamond
drill holes over a strike length of approximately 200 metres. Results from the
five holes were as follows: 60.4 metres grading 31.0 grams per tonne gold; 71.3
metres grading 2.4 grams per tonne gold; 7.4 metres grading 14.7 grams per tonne
gold; 16.4 metres grading 10.7 grams per tonne gold; and 6.7 metres grading 9.1
grams per tonne gold. Further work is being planned to define the extent and
geometry of the mineralized body. A map of the results can be viewed in the
operations section of the Kinross website at WWW.KINROSS.COM. During the
quarter, the Company spent approximately $3.4 million in exploration and
development at Kettle River, of which $2.4 million was capitalized.
13
(d) McCoy/Cove, Nevada (100% owned) (1) Three months ended
March 31
OPERATING DATA 2003 2002
- ----------------------------------------------------------------------------------------------------------
Gold produced (ounces):
Milled -- 9,906
Heap leached -- 6,595
--------- ---------
Total gold -- 16,501
Silver produced (ounces):
Milled -- 1,410,594
Heap leached -- 59,500
--------- ---------
Total silver -- 1,470,094
Milling cost/ton of ore $ -- $ 10.49
Production cost per ounce of gold produced:
Direct mining expense $ -- $ 216
Deferred stripping costs -- --
Inventory movements and other -- 9
--------- ---------
Cash operating costs -- 225
Royalties -- 1
Production taxes -- (12)
--------- ----------
Total cash costs -- 214
Depreciation -- 51
Amortization -- --
Reclamation and mine closure -- --
--------- ---------
Total production costs $ -- $ 265
--------- ---------
Average gold-to-silver price ratio (2) -- 64.6:1
Milled:
Ore processed (tons/day) -- 6,451
Total ore processed (000 tons) -- 587
Gold grade (ounce/ton) -- 0.034
Silver grade (ounce/ton) -- 3.46
Gold recovery rate (%) -- 43.3
Silver recovery rate (%) -- 64.0
- ----------------------------------------------------------------------------------------------------------
(1) Property sold to Newmont February 7, 2003.
(2) To convert costs per ounce of gold into comparable costs per ounce of
co-product silver, divide the production cost per ounce of gold by the
period's average gold-to-silver price ratio.
RECONCILIATION OF THE MCCOY/COVE MINE
CASH AND TOTAL CASH OPERATING Three months ended
COSTS PER OUNCE TO FINANCIAL STATEMENTS March 31
(thousands of U.S. dollars except production in ounces
and per ounce amounts) 2003 2002
- ----------------------------------------------------------------------------------------------------------
Operating costs per financial statements $ -- $ 9,821
Change in finished goods inventory and other -- (966)
- ----------------------------------------------------------------------------------------------------------
Cash operating costs -- 8,855
Royalties -- 35
Production taxes -- (481)
- ----------------------------------------------------------------------------------------------------------
Total cash costs $ -- $ 8,409
==========================================================================================================
Gold ounces produced -- 16,501
Silver ounces produced -- 1,470,094
Average gold-to-silver price ratio -- 64.4
Gold equivalent ounces produced -- 39,329
Cash operating costs per ounce $ -- $ 225
Total cash costs per ounce $ -- $ 214
==========================================================================================================
Cash and total cash costs per ounce are non-GAAP measures. For further
information on these non-GAAP measures, refer to the disclosure under the
heading "Costs and Expenses - Operations Summary".
14
On June 9, 2002, the Company entered into an agreement, amended November 19,
2002, with Newmont, providing for the sale to Newmont of the entire McCoy/Cove
complex in Nevada, U.S.A. The agreement replaced a letter agreement dated
February 13, 2002 related to the conveyance of the McCoy/Cove complex, which
called for a payment to the Company of $6 million and the assumption by Newmont
of all reclamation and closure obligations. Under the February 13, 2002 letter
agreement, Newmont had no obligation to complete the transaction. Newmont
indicated it was willing to proceed with the conveyance of the McCoy/Cove
complex only if the business combination with Kinross and TVX was completed and
the cash payment was eliminated. Accordingly, a new agreement was reached
expressly containing these two conditions. The closing of the transaction was
subject to, among other conditions, the completion of the business combination.
The combination was completed January 31, 2003 and the McCoy/Cove assets were
subsequently conveyed to Newmont on February 7, 2003. In consideration, Newmont
has agreed to assume all liabilities and obligations relating to the reclamation
or remediation required for the McCoy/Cove complex. Operations at McCoy/Cove
ended March 31, 2002, after which time, the Company continued with reclamation
and remediation activities until the conveyance to Newmont on February 7, 2003.
There was no gain or loss on the sale.
15
DEPRECIATION AND AMORTIZATION
Depreciation and amortization totaled $7.7 million in the second quarter and
$15.6 million in the first half of 2003 compared to $9.9 million in the second
quarter and $19.7 million in the first half of 2002. The decrease is the result
of no depreciation and amortization in 2003 relating to the McCoy/Cove and
Kettle River assets compared to $2.6 million in the second quarter and $6.0
million in the first half of 2002 on these assets, offset by slightly higher
depreciation and amortization at the Round Mountain and Lupin mines.
GENERAL AND ADMINISTRATIVE
During the second quarter and first half of 2002, general and administrative
costs primarily included corporate office expenses related to the overall
management of the business which are not part of direct mine operating costs.
These corporate office costs were cut substantially, immediately following the
business combination on January 31, 2003. General and administrative costs
totaled $0.3 million in the second quarter and $11.7 million in the first half
of 2003 compared to $1.6 million in the second quarter and $2.9 million in the
first half of 2002. The decrease in the second quarter is the result of the
elimination of staff and offices following the merger. The increase in the first
half is the result of one time severance and merger related costs of $10.7
million incurred in January 2003 that will not be recurring in the remaining
quarters.
EXPLORATION AND DEVELOPMENT
Exploration and development totaled $2.3 million in the second quarter and $5.2
million in the first half of 2003 compared to $1.6 million in the second quarter
and $2.2 million in the first half of 2002. The increase is primarily related to
$1.0 million expensed in the second quarter and $3.2 million in the first half
of 2003 on exploration and development of the Emanuel Creek project adjacent to
the Kettle River mine. A further $2.4 million of development costs on Emanuel
Creek were capitalized during the quarter. For further information on
exploration and development, refer to the disclosure under the heading
"Operations - Individual Mine Disclosure". Exploration costs are expensed as
incurred while costs specifically identified as development are capitalized.
The Company continues to defer a construction decision on the 100% owned
Aquarius gold development project in Ontario, Canada. Development holding costs
are expensed as incurred.
LIQUIDITY AND FINANCIAL RESOURCES
At June 30, 2003, the Company had $33.7 million in cash and cash equivalents,
$5.2 million in restricted cash and $0.2 million in short-term investments
recorded at the lower of cost or fair value. The fair value of the short-term
investments at June 30, 2003 was $1.2 million. The restricted cash is primarily
represented by $4.0 million currently cash collateralizing the previous HSBC
credit facility and reclamation deposits, all of which are expected to be
released as they are replaced with letters of credit issued under the new
syndicated credit facility entered into by a subsidiary of Echo Bay along with
Kinross and two of its wholly-owned subsidiaries. These amounts were included in
long-term investments and other assets at December 31, 2002.
OPERATING ACTIVITIES
Net cash flow provided from operating activities was $5.2 million for the second
quarter and $0.2 million used in operating activities for the first half of 2003
compared to net cash flow provided from operating activities of $5.5 million for
the first quarter and $5.3 million for the first half of 2002. The decrease in
2003 cash flow primarily reflects the payment of severances and merger related
costs.
INVESTING ACTIVITIES
Net cash provided by investing activities was $7.4 million in the second quarter
and $10.9 million in the first half of 2003, compared with net cash used in
investing activities of $4.2 million in the second quarter and $6.5
16
million in the first half of 2002. The increase in the quarter was impacted by
the release of $5.0 million of deposits by regulatory authorities, which were
replaced with letters of credit. In addition, the Company sold short-term
investments and other assets having a net carrying value of $0.2 million for net
proceeds of approximately $1.4 million. The increase in the first half of 2003
was also impacted by the maturity of $5.0 million in short-term investments in
the first quarter.
CAPITAL EXPENDITURES
The Company incurred $3.6 million of capital and deferred development
expenditures in the second quarter and $5.1 million in the first half of 2003,
funded by its operating cash flow. The Company will rely on its operating cash
flow to fund the remainder of its planned 2003 capital expenditures. The Company
monitors its discretionary spending in view of the cost structure of its
operating mines and the availability of additional credit, and will modify or
reduce its discretionary spending where necessary.
FINANCING ACTIVITIES
At June 30, 2003, the Company's had no debt outstanding and no cash was provided
by or used in financing activities in the first half of 2003. This compares with
net cash provided from financing activities in the second quarter and first half
of 2002 of $5.6 million as the Company raised funds from a unit offering, offset
by the payment of all of its long-term debt and the retirement of its capital
securities.
The Company had a $4.0 million letter of credit facility with HSBC Bank USA
which was established in October 2001. The facility is currently cash
collateralized. This credit facility, which expired in September 2002, was
extended to March 27, 2003. This facility and cash collateralization was
necessary in connection with financial assurance required by regulatory
authorities for future reclamation activities. The Company has cancelled this
facility and is in the process of having the cash deposit released in connection
with steps undertaken by Kinross, the Company's parent, to issue letters of
credit for reclamation security under the new syndicated credit facility
described below.
On February 27, 2003, Round Mountain Gold Corporation, a wholly-owned subsidiary
of the Company along with Kinross and two of its wholly-owned subsidiaries ("the
Borrowers"), entered into a new syndicated credit facility. The new syndicated
credit facility has a maturity date of December 31, 2005 and a total committed
amount of $125.0 million. The primary purpose of the credit facility is to
enable the Borrowers to issue letters of credit to various regulatory agencies
to satisfy financial assurance requirements. Shares of Round Mountain Gold
Corporation along with various other assets of Kinross are pledged as collateral
for this facility.
As a result of the consummation of the plan of arrangement on January 31, 2003,
the Company became a wholly-owned subsidiary of Kinross and its common shares no
longer trade. Prior to that time, the common shares traded primarily on the
Toronto Stock Exchange and the American Stock Exchange. The warrants issued by
the Company, which now represent the right to acquire common shares of Kinross,
will continue to trade on the Toronto and American Stock Exchanges until their
expiry on November 14, 2003. They are exercisable at a price of U.S. $0.90 into
0.1733 of a post-consolidated Kinross common share.
RESERVE ESTIMATES
Mineral reserves at December 31, 2002 were estimated based on a price of $300
per ounce of gold. The market price for gold had for more than four years
traded, on average, below the level used in estimating reserves at December 31,
2001. However, during 2002 the market price of gold traded at an average of $310
per ounce and ended the year at $343 per ounce. During the first half of 2003,
the market price of gold continued to increase to a high of $382 per ounce on
February 5, 2003 before falling back to $346 per ounce on June 30, 2003. The
price has averaged $347 per ounce during the second quarter and $350 per ounce
during the first half of 2003 compared to $312 per ounce during the second
quarter and $301 per ounce during the first half of 2002. If the market price
for gold were to have remained depressed and the Company determined that its
reserves should be estimated at a significantly lower gold price than that used,
there would be a reduction in the amount of gold reserves. In the
17
event that significant reductions in reserves occur, material write-downs of the
Company's investment in mining properties and/or increased amortization,
reclamation and closure charges may be required.
COMMODITY PRICE RISKS
The Company periodically enters into gold forward sales contracts, spot deferred
forward sales contracts and written call options for some portion of expected
future production to mitigate the risk of adverse price fluctuations. Echo Bay
does not hold these financial instruments for speculative or trading purposes.
The Company is not subject to margin requirements on any of its hedging lines.
As at June 30, 2003, the Company has no outstanding commitments relating to
precious metals or currencies.
COMMITMENTS AND CONTINGENCIES
See note 12 to the interim consolidated financial statements, "Other Commitments
and Contingencies".
OUTLOOK
As at June 30, 2003, the Company has $33.7 million of unrestricted cash and $5.2
million of restricted cash that should become unrestricted during the third
quarter. Kinross will continue to focus on improving operational profitability
at Round Mountain and reviewing alternatives for the Lupin property aimed at
maximizing cashflow. Development work is progressing at the Emanuel Creek
project. The Company's production estimate for 2003 remains unchanged except for
a revision to reflect the suspension of operations at the Lupin mine.
This document includes certain "Forward-Looking Statements" within the meaning
of Section 21(e) of the United States Securities Exchange Act of 1934, as
amended. All statements, other than statements of historical fact, included
herein, including without limitation, statements regarding potential
mineralization and reserves, exploration results and future plans and objectives
of Echo Bay Mines Ltd. or Kinross Gold Corporation, are forward-looking
statements that involve various risks and uncertainties. There can be no
assurance that such statements will prove to be accurate and actual results and
future events could differ materially from those anticipated in such statements.
Important factors that could cause actual results to differ materially from the
Company's expectations are disclosed under the heading "Risk Factors" and
elsewhere in Echo Bay documents filed from time to time with the Toronto Stock
Exchange, the United States Securities and Exchange Commission and other
regulatory authorities, including but not limited to the Company's Annual Report
on Form 10-K for 2002 filed under Section 13 or 15(d) of the United States
Securities Exchange Act of 1934, as amended.
18
ECHO BAY MINES LTD.
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars) June 30 December 31
(unaudited) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 33,679 $ 22,967
Restricted cash 5,188 --
Short-term investments 165 7,183
Interest and accounts receivable 3,645 4,177
Inventories (note 3) 27,616 20,834
Prepaid expenses and other assets 1,043 1,954
- ---------------------------------------------------------------------------------------------------------------------
71,336 57,115
Plant and equipment (note 4) 88,978 100,576
Mining properties (note 4) 32,279 29,017
Long-term investments and other assets (note 5) 12,274 36,982
- ---------------------------------------------------------------------------------------------------------------------
$ 204,867 $ 223,690
=====================================================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 18,613 $ 24,813
Income and mining taxes payable 3,285 3,793
Reclamation and mine closure liabilities 2,736 4,560
- ---------------------------------------------------------------------------------------------------------------------
24,634 33,166
Deferred income (note 7) 2,565 6,393
Reclamation and mine closure liabilities 42,051 46,512
Future income taxes 1,056 945
Commitments and contingencies (notes 11 and 12)
Shareholder's equity:
Common shares, no par value, unlimited number authorized;
541,272,675 shares issued and outstanding 1,042,571 1,042,571
Deficit (891,365) (879,238)
Foreign currency translation (16,645) (26,659)
- ---------------------------------------------------------------------------------------------------------------------
134,561 136,674
- ---------------------------------------------------------------------------------------------------------------------
$ 204,867 $ 223,690
=====================================================================================================================
See accompanying notes to interim consolidated financial statements.
1
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Six months ended
(in thousands of U.S. dollars, except per share data) June June
(unaudited) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
Revenue $ 50,075 $ 54,578 $ 94,653 $ 109,754
- ------------------------------------------------------------------------------------------------------------------------------
Expenses:
Operating costs 28,094 34,320 56,906 69,416
Royalties 2,314 2,082 4,490 3,706
Production taxes 529 295 1,037 84
Depreciation and amortization 7,678 9,883 15,576 19,723
Reclamation and mine closure 1,445 1,224 2,777 2,480
General and administrative 266 1,578 11,691 2,891
Exploration and development 2,246 1,607 5,155 2,169
Loss on retirement of capital securities -- 5,461 -- 5,461
Interest and other (note 9) 9,164 (385) 8,839 (163)
- ------------------------------------------------------------------------------------------------------------------------------
51,736 56,065 106,471 105,767
- ------------------------------------------------------------------------------------------------------------------------------
(Loss) earnings before income taxes (1,661) (1,487) (11,818) 3,987
- ------------------------------------------------------------------------------------------------------------------------------
Income tax expense (recovery):
Current 309 -- 309 --
Deferred -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
-- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net (loss) earnings $ (1,970) $ (1,487) $ (12,127) $ 3,987
==============================================================================================================================
Net loss attributable to common shareholders
after interest on capital securities, net of nil tax effect $ (1,970) $ (133,789) $ (12,127) $ (132,896)
==============================================================================================================================
Loss per share - basic and fully diluted $ 0.00 $ (0.27) $ (0.02) $ (0.42)
==============================================================================================================================
Weighted average number of shares outstanding (thousands)
- basic and fully diluted 541,273 495,983 541,273 318,295
==============================================================================================================================
CONSOLIDATED STATEMENTS OF DEFICIT Three months ended Six months ended
(in thousands of U.S. dollars) June 30 June 30
(unaudited) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ (889,395) $ (733,772) $ (879,238) $ (734,665)
Net (loss) earnings (1,970) (1,487) (12,127) 3,987
Loss on retirement of capital securities,
Net of nil tax effect -- (132,302) -- (132,302)
Interest on capital securities, net of nil tax effect -- -- -- (4,581)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ (891,365) $ (867,561) $ (891,365) $ (867,561)
==============================================================================================================================
See accompanying notes to interim consolidated financial statements.
2
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOW Three months ended Six months ended
(in thousands of U.S. dollars) June 30 June 30
(unaudited) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED FROM (USED IN):
OPERATING ACTIVITIES
Net (loss) income $ (1,970) $ (1,487) $ (12,127) $ 3,987
Add (deduct):
Depreciation and amortization 7,678 9,883 15,576 19,723
Amortization of mining costs 2,330 498 2,876 634
Deferred loss (income) included in revenue 658 (9,256) 1,316 (17,173)
Loss on retirement of capital securities -- 5,461 -- 5,461
Gain on sale of plant and equipment (1,540) (1,009) (1,554) (1,085)
Provision for deferred gains and losses on modified
hedge contracts (note 9) 8,583 -- 8,583 --
Other -- -- -- 200
Change in operating assets and liabilities:
Interest and accounts receivable 1,986 (1,296) 718 (1,655)
Inventories (3,607) 3,423 (9,153) (2,456)
Prepaid expenses and other assets 817 3,245 1,235 1,008
Accounts payable and accrued liabilities (8,652) (4,040) (6,948) (2,323)
Income and mining taxes payable (1,068) 64 (709) (1,072)
- ------------------------------------------------------------------------------------------------------------------------------
5,215 5,486 (187) 5,249
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Mining properties, plant and equipment (3,559) (6,544) (5,125) (8,864)
Short-term investments -- -- 5,000 --
Long-term investments and other assets 5,016 107 5,464 79
Proceeds on the sale of plant and equipment 1,710 1,516 1,710 1,692
Other 4,196 691 3,850 544
- ------------------------------------------------------------------------------------------------------------------------------
7,363 (4,230) 10,899 (6,549)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Debt repayments -- (17,000) -- (17,000)
Units offering, net of issuance costs -- 25,513 -- 25,513
Costs of capital securities retirement -- (2,952) -- (2,952)
- ------------------------------------------------------------------------------------------------------------------------------
-- 5,561 -- 5,561
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 12,578 6,817 10,712 4,261
Cash and cash equivalents, beginning of period 21,101 9,795 22,967 12,351
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 33,679 $ 16,612 $ 33,679 $ 16,612
==============================================================================================================================
Supplementary disclosure of cash flow information:
Cash paid for: Interest $ -- $ 289 $ -- $ 542
Income taxes $ 353 $ 41 $ 397 $ 82
See accompanying notes to interim consolidated financial statements.
3
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
1. BASIS OF PRESENTATION
GENERAL
The consolidated financial statements of Echo Bay Mines Ltd. (the "Company") are
prepared in accordance Canadian generally accepted accounting principles ("CDN
GAAP") and are expressed in U.S. dollars. The accompanying interim unaudited
financial statements have been prepared in accordance with CDN GAAP for the
preparation of interim financial information. Accordingly, they do not include
all of the information and disclosures required by CDN GAAP for annual
consolidated financial statements. The accounting policies and methods of
application used in the preparation of the accompanying interim unaudited
financial statements are the same as those disclosed in the consolidated
financial statements and the notes thereto for the three years ended December
31, 2002.
In the opinion of management, all adjustments necessary for fair presentation of
results for the periods presented have been reflected in these financial
statements. Operating results for the period ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2003. These unaudited interim consolidated financial
statements should be read in conjunction with the audited annual financial
statements and the notes thereto for the three years ended December 31, 2002.
BUSINESS COMBINATION
On June 10, 2002, the Company, Kinross Gold Corporation ("Kinross") and TVX Gold
Inc. ("TVX") entered into a combination agreement, for the purpose of combining
the ownership of their respective businesses. In a concurrent transaction, TVX
agreed to acquire from Newmont Mining Corporation ("Newmont") the interest in
the TVX Newmont Americas joint venture that it did not already own. The purchase
from Newmont was completed and the combination was effected by way of a plan of
arrangement under the Canada Business Corporation Act on January 31, 2003.
Shareholders of Echo Bay (other than Kinross) received 0.1733 of a Kinross
common share for each Echo Bay common share. The exchange ratio reflects the
three-for-one consolidation of Kinross' common shares that was completed on
January 31, 2003 immediately prior to the combination. As a result, the Company
and its subsidiaries are now wholly-owned subsidiaries of Kinross and no common
shares of the Company have been issued since December 31,2002.
SALE OF MCCOY/COVE
On June 9, 2002, the Company entered into an agreement, amended November 19,
2002, with Newmont, providing for the sale to Newmont of the entire McCoy/Cove
complex in Nevada, U.S.A. The agreement replaced a letter agreement dated
February 13, 2002 related to the conveyance of the McCoy/Cove complex, which
called for a payment to the Company of $6 million and the assumption by Newmont
of all reclamation and closure obligations. Under the February 13, 2002 letter
agreement, Newmont had no obligation to complete the transaction.
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
Newmont indicated it was willing to proceed with the conveyance of the
McCoy/Cove complex only if the business combination with Kinross and TVX was
completed and the cash payment was eliminated. Accordingly, a new agreement was
reached expressly containing these two conditions. The closing of the
transaction was subject to, among other conditions, the completion of the
business combination. The combination was completed January 31, 2003 and the
McCoy/Cove assets were subsequently conveyed to Newmont on February 7, 2003. In
consideration, Newmont has agreed to assume all liabilities and obligations
relating to the reclamation or remediation required for the McCoy/Cove complex.
Certain of the comparative figures have been restated to conform to the current
year's presentation.
2. NEW PRONOUNCEMENTS
In 2003, the Accounting Standards Board of the CICA issued Accounting Guideline
No. 14 - Disclosure of Guarantees, which is effective for financial periods
ending after December 15, 2002. The guideline requires the disclosure of
guarantees including indemnification pursuant to contractual arrangement. The
Company has determined that it has no material guarantees requiring disclosure
under the accounting standard.
3. INVENTORIES
June 30 December 31
2003 2002
- ---------------------------------------------------------------------------------------------------------
Precious metals bullion $ 2,891 $ 5,239
In-process 3,720 4,332
Materials and supplies 21,005 11,263
- ---------------------------------------------------------------------------------------------------------
$ 27,616 $ 20,834
=========================================================================================================
.. MINING PROPERTIES, PLANT AND EQUIPMENT PLANT AND EQUIPMENT June 30 December 31
2003 2002
- ---------------------------------------------------------------------------------------------------------
Cost $ 474,282 $ 654,821
Less accumulated depreciation 385,304 554,245
- ---------------------------------------------------------------------------------------------------------
$ 88,978 $ 100,576
=========================================================================================================
MINING PROPERTIES June 30 December 31
2003 2002
- ---------------------------------------------------------------------------------------------------------
Producing mines' acquisition and development costs $ 96,782 $ 283,641
Less accumulated amortization 79,481 267,567
- ---------------------------------------------------------------------------------------------------------
17,301 16,074
Development properties' acquisition and development costs 14,978 12,943
- ---------------------------------------------------------------------------------------------------------
$ 32,279 $ 29,017
=========================================================================================================
5
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
5. LONG-TERM INVESTMENTS AND OTHER ASSETS
June 30 December 31
2003 2002
- ---------------------------------------------------------------------------------------------------------
Deferred losses on modification of hedging contracts $ -- $ 16,291
Deferred mining costs 7,495 10,362
Reclamation and other deposits -- 10,144
Receivable on sale of pyrite 2,565 --
Investment in Minefinders Corporation Ltd. 2,206 --
Other 8 185
- ---------------------------------------------------------------------------------------------------------
$ 12,274 $ 36,982
=========================================================================================================
MODIFICATION OF HEDGING CONTRACTS
Losses on the early termination or other restructuring of precious metal hedging
contracts are deferred until the formerly hedged items are recognized in
earnings to the extent that future mine production is available to meet the
original hedge commitments. Refer to note 7 for a discussion of the deferral of
gains on the modification of hedging contracts and note 9 for a discussion on
the provision for deferred losses previously relating to 2003 and 2004.
The Company holds an interest of approximately 13.6% in Minefinders Corporation
Ltd., which was classified as a short-term investment as at December 31, 2002.
Subsequent to the business combination, management determined the investment to
be long-term in nature and reclassified it accordingly.
6. DEBT AND OTHER FINANCINGS
NEW CREDIT FACILITY
On February 27, 2003, Round Mountain Gold Corporation, a wholly-owned subsidiary
of the Company along with Kinross and two of its wholly-owned subsidiaries ("the
Borrowers"), entered into a new syndicated credit facility. The new syndicated
credit facility has a maturity date of December 31, 2005 and a total committed
amount of $125.0 million. The primary purpose of the credit facility is to
enable the Borrowers to issue letters of credit to various regulatory agencies
to satisfy financial assurance requirements. Shares of Round Mountain Gold
Corporation along with various other assets of Kinross are pledged as collateral
for this facility.
7. DEFERRED INCOME
June 30 December 31
2003 2002
- ---------------------------------------------------------------------------------------------------------
Deferred gains on modification of hedging contracts $ -- $ 6,393
Deferred income on sale of pyrite 2,565 --
- ---------------------------------------------------------------------------------------------------------
$ 2,565 $ 6,393
=========================================================================================================
6
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
MODIFICATION OF HEDGING CONTRACTS
Gains on the early termination or other restructuring of precious metal hedging
contracts are deferred until the formerly hedged items are recognized in
earnings to the extent that future mine production is available to meet the
original hedge commitments. Refer to note 5 for a discussion of the deferral of
losses on the modification of hedging contracts and note 9 for a discussion on
the provision for deferred gains previously relating to 2003 and 2004.
8. EMPLOYEE STOCK-BASED COMPENSATION
The Company's stock option plan is described in note 12 of the consolidated
financial statements for the year ended December 31, 2002. The Company has
elected not to use the fair value method of accounting for stock options. As a
result, it does not recognize compensation expense based on the fair value of
options granted. However, the Company did not grant stock options in 2003, 2002,
2001 or 2000 and will not make any more grants under the plan. As a result, no
compensation expense would have been recorded using the fair value method of
accounting for awards granted on or after January 1, 2002 for the periods
presented and income (loss) per share would remain unchanged.
9. INTEREST AND OTHER
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Interest income $ (64) $ (58) $ (116) $ (218)
Interest expense 15 136 15 54
Gain on sale of assets (1,556) (1,022) (1,589) (1,099)
Reclamation provision -- -- 833 --
Provision for deferred gains and losses
on modified hedge contracts 8,583 -- 8,583 --
Other 2,186 559 1,113 612
- -----------------------------------------------------------------------------------------------------------------
$ 9,164 $ (385) $ 8,839 $ (163)
=================================================================================================================
PROVISION FOR DEFERRED GAINS AND LOSSES ON MODIFIED HEDGE CONTRACTS Gains and
losses on the early termination or other restructuring of gold hedging contracts
are deferred until the formerly hedged items are recognized in earnings to the
extent that future mine production is available to meet the original hedge
commitments. Should circumstances change such that formerly hedged anticipated
future production is no longer considered likely to occur, the related deferred
gains and losses are recognized in the period in which this determination is
made. On August 13, 2003, Kinross announced the immediate suspension of
operations at its Lupin mine due to poor economic performance over a protracted
period of time. As a result, deferred losses of $2.6 million and $11.1 million
relating to 2003 and 2004 respectively, and deferred gains of $1.2 million and
$3.9 million relating to 2003 and 2004 respectively, have been recognized in
interest and other income in 2003 with respect to the Lupin mine. Deferred
losses of $2.6 million and deferred gains of $1.3 million for the six month
period ended June 30, 2003 have been included in revenue.
7
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
10. SEGMENT INFORMATION
The Company's management regularly evaluates the performance of the Company by
reviewing operating results on a minesite by minesite basis. As such, the
Company considers each producing minesite to be an operating segment. As at June
30, 2003, the Company has two operating mines: Round Mountain in Nevada, United
States and Lupin in Nunavut Territory, Canada. The Company suspended operations
at Lupin on August 13, 2003 and is currently evaluating future alternatives for
the property as described in Note 13. The Company ceased mining operations at
its Kettle River mine in Washington, United States in October 2002 and at its
McCoy/Cove mine in Nevada, United States on March 31, 2002. McCoy/Cove was
subsequently sold to Newmont on February 7, 2003. All are 100% owned except for
Round Mountain, which is 50% owned.
The Company's management generally monitors revenue on a consolidated basis.
Information regarding the Company's consolidated revenue is provided below.
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------
Gold revenue $ 50,075 $ 51,665 $ 94,653 $ 100,525
Silver revenue -- 2,913 -- 9,229
- ------------------------------------------------------------------------------------------------------------
Total gold and silver revenue $ 50,075 $ 54,578 $ 94,653 $ 109,754
Average gold price realized per ounce $ 343 $ 375 $ 345 $ 360
Average silver price realized per ounce $ -- $ 4.39 $ -- $ 4.36
- ------------------------------------------------------------------------------------------------------------
In making operating decisions and allocating resources, the Company's management
specifically focuses on the production levels and cash operating costs generated
by each operating segment, as summarized in the following tables.
Three months ended Six months ended
June 30 June 30
Production (ounces) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------
Gold
Round Mountain (50%) 113,310 95,499 209,126 189,070
Lupin 25,511 24,643 56,143 53,360
Kettle River -- 9,500 -- 19,987
McCoy/Cove -- -- -- 16,501
- ------------------------------------------------------------------------------------------------------------
Total gold 138,821 129,642 265,269 278,918
============================================================================================================
Silver - all from McCoy/Cove -- -- -- 1,470,094
============================================================================================================
8
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
Three months ended Six months ended
June 30 June 30
Operating costs 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------
Round Mountain (50%) $ 19,583 $ 17,731 $ 37,725 $ 33,121
Lupin 8,511 10,392 19,181 18,271
Kettle River -- 2,565 -- 4,571
McCoy/Cove -- 3,632 -- 13,453
- ------------------------------------------------------------------------------------------------------------
Total per financial statements $ 28,094 $ 34,320 $ 56,906 $ 69,416
============================================================================================================
Royalties
- ------------------------------------------------------------------------------------------------------------
Round Mountain (50%) $ 2,314 $ 2,062 $ 4,490 $ 3,594
Kettle River -- 14 -- 71
McCoy/Cove -- 6 -- 41
- ------------------------------------------------------------------------------------------------------------
Total per financial statements $ 2,314 $ 2,082 $ 4,490 $ 3,706
============================================================================================================
Production taxes
- ------------------------------------------------------------------------------------------------------------
Round Mountain (50%) $ 529 $ 280 $ 1,037 $ 535
Kettle River -- 15 -- 30
McCoy/Cove -- -- -- (481)
- ------------------------------------------------------------------------------------------------------------
Total per financial statements $ 529 $ 295 $ 1,037 $ 84
============================================================================================================
Reclamation and mine closure
- ------------------------------------------------------------------------------------------------------------
Round Mountain (50%) $ 1,020 $ 859 $ 1,886 $ 1,701
Lupin 425 365 891 779
- ------------------------------------------------------------------------------------------------------------
Total per financial statements $ 1,445 $ 1,224 $ 2,777 $ 2,480
============================================================================================================
Asset information Three months ended Six months ended
June 30 June 30
Depreciation and amortization 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------
Round Mountain (50%) $ 5,720 $ 5,792 $ 11,746 $ 10,729
Lupin 1,507 1,070 2,964 2,200
Kettle River -- 473 -- 1,634
McCoy/Cove -- 2,153 -- 4,384
Depreciation of non-minesite assets 451 395 866 776
- ------------------------------------------------------------------------------------------------------------
Total per financial statements $ 7,678 $ 9,883 $ 15,576 $ 19,723
============================================================================================================
Capital expenditures
Round Mountain (50%) $ 789 $ 2,907 $ 1,126 $ 3,259
Lupin 383 502 1,612 1,610
McCoy/Cove -- -- -- 13
Kettle River 2,387 730 2,387 1,575
Non-minesite assets -- 2,405 -- 2,407
- ------------------------------------------------------------------------------------------------------------
Total per financial statements $ 3,559 $ 6,544 $ 5,125 $ 8,864
============================================================================================================
9
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
Three months ended Six months ended
June 30 June 30
Reconciliation of segment income to 2003 2002 2003 2002
enterprise net (loss) income
- ------------------------------------------------------------------------------------------------------------
Segment total $ 10,015 $ 6,774 $ 13,867 $ 14,345
General and administrative (266) (1,578) (11,691) (2,891)
Exploration and development (2,246) (1,607) (5,155) (2,169)
Loss on retirement of capital securities -- (5,461) -- (5,461)
Interest and other (9,164) 385 (8,839) 163
Income tax expense (309) -- (309) --
- ------------------------------------------------------------------------------------------------------------
Net (loss) income per financial statements $ (1,970) $ (1,487) $ (12,127) $ 3,987
============================================================================================================
11. HEDGING ACTIVITIES AND COMMITMENTS
GOLD COMMITMENTS
As at June 30, 2003, the Company has no outstanding commitments relating to
precious metals.
CURRENCY POSITION
As at June 30, 2003, the Company has no outstanding commitments relating to
foreign currency.
Shown below are the carrying amounts and estimated fair values of the Company's
hedging instruments at June 30, 2003 and December 31, 2002.
June 30, 2003 December 31, 2002
---------------------------------- ------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Foreign currency contracts $ -- $ -- $ -- $ 100
===========================================================================================================
Fair values are estimated based upon market quotations of various input
variables. These variables were used in valuation models that estimate the fair
market value.
12. OTHER COMMITMENTS AND CONTINGENCIES
SUMMA
See note 17 to the audited December 31, 2002 consolidated financial statements.
HANDY & HARMAN
See note 17 to the audited December 31, 2002 consolidated financial statements.
OTHER
In November 2001, two former employees of the Corporation brought a claim for
damages for wrongful dismissal against the Company pursuant to the CLASS
PROCEEDINGS ACT (British Columbia) as a result of the temporary suspension of
operations at the Company's Lupin mine in
10
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
the spring of 1998 and the layoff of employees at that time. On August 12, 2002,
the Supreme Court of British Columbia dismissed Echo Bay's application for a
declaration that British Columbia did not have jurisdiction in connection with
this claim or in the alternative that the Court should decline jurisdiction. The
Company successfully appealed the decision. On April 4, 2003, the appeal was
heard by the Court of Appeal for British Columbia. On May 16, 2003, in a
unanimous decision, the Court of Appeal allowed the Company's appeal and
dismissed the action on the basis that British Columbia does not have
jurisdiction in connection with this claim. On August 18, 2003, counsel for the
former employees filed an application for leave to appeal to the Supreme Court
of Canada. Although the outcome cannot be predicted, the Company and their
counsel believe that the Company will prevail.
SECURITY FOR RECLAMATION
A wholly-owned subsidiary of the Company has provided a corporate guarantee and
other forms of security to regulatory authorities in connection with future
reclamation activities in respect of the Round Mountain mine. Early in 2001,
regulators in Nevada called upon the subsidiary to provide other security to
replace corporate guarantee. The regulatory request, relevant to operations at
Round Mountain, seeks replacement security of $15.9 million to bring the total
to $21.3 million, the Company's 50% share. On July 17, 2003 the Company entered
into an agreement with the Nevada regulatory authorities whereby the Company
agrees to replace its corporate guarantee with letters of credit. In addition to
the $5.4 million already posted, $4.0 million is to be posted within 60 days of
entering into this agreement with further amounts of $4.0 million to be posted
on each of July 17, 2004, 2005 and 2006 respectively. The Company will post the
required security by issuing letters of credit under its credit facility.
13. SUBSEQUENT EVENT
On August 13, 2003, Kinross, the Company's parent, announced the immediate
suspension of operations at its Lupin mine in Nunavut Territory, Canada due to
poor economic performance of the operation over a protracted period of time. A
small group of personnel will continue reviewing future alternatives for the
property including the development of a mine plan to extract the shaft and crown
pillars. Mining and milling operations have been suspended. The plant and
equipment has been placed on care and maintenance pending the results of the
review of future alternatives for the property. As such, management is currently
unable to assess the impact, if any, on the carrying value of the Lupin mine
assets. This will be completed along with the assessment of alternatives for the
property. This decision ultimately affects 235 permanent and 70 contract
employees. These interim consolidated financial statements do not include any
severance costs associated with the layoffs. A small core of personnel will
continue with the environmental management programs to ensure compliance with
all regulatory requirements. The ongoing costs of care and maintenance and
environmental monitoring will be expensed as incurred.
11