ITEM 3. LEGAL PROCEEDINGS
In 1995, an Agency of the State of Nevada Department of Taxation filed an assessment claiming sales taxes due relating to the sale-leaseback in 1994 of NGC's refractory ore treatment plant. This assessment, including interest, totaled approximately $30 million. NGC filed a Petition for Redetermination and a hearing was held by the Agency that issued the assessment in October 1995. The hearing officer reaffirmed the Agency's determination. NGC appealed this determination to the State Tax Commission which found in favor of NGC. An appeal by the State of Nevada to the Supreme Court of the State of Nevada was dismissed in November 1996. This matter is now closed with no liability to NGC.
In December 1983, the State of Colorado filed a lawsuit in the U.S. District Court for the District of Colorado under the Comprehensive Environmental Response Compensation and Liability Act of 1980 ("CERCLA"), 42 U.S.C. 9601 et seq., seeking clean-up and damages for alleged injury to natural resources due to releases of hazardous substances into the environment. This case, State of Colorado v. ASARCO, Inc., et al. (Civil Action No. 83-C-2388), was consolidated with another action, United States of America v. Apache Energy & Minerals, et al. (Civil Action No. 86-C-1676), which was filed in August 1986. Both cases involve allegations of environmental impairment in the vicinity of Leadville, Colorado, including the area of the operations and property of the Res-ASARCO Joint Venture which owns the Black Cloud Mine, the Yak Tunnel, and adjacent property, and seek remedial actions and damages from a number of defendants, including NMC and Resurrection Mining Company ("Resurrection") which is an equal partner with ASARCO Incorporated in the Res-ASARCO Joint Venture. In August 1994, the Court entered a Partial Consent Decree between and among the U.S., NMC, Resurrection and certain defendants. The Partial Consent Decree obligates Resurrection to pay for and perform the cleanup of sources of contamination in various areas, pursuant to the CERCLA administrative process. During 1995 and 1996, Resurrection implemented and completed remedial action at selected locations. Additional remedial activities are planned for 1997. The precise nature of the final remedial activities is subject to EPA and State of Colorado review and selection and public comment. At this time, the precise remedy and cost have not been fixed. The proposed settlement also requires Resurrection to reimburse the EPA and the State of Colorado for their response costs. Further, Resurrection's cleanup and reimbursement obligations are subject to certain sharing percentages with at least one other defendant. The Partial Consent Decree does not resolve certain other potential liabilities, including liability for any natural resource damage and any groundwater or surface water contamination. See also page 62.
In September 1995, Southern Peru Copper Corporation ("SPCC"), previously 10% owned by NGC, was served with a lawsuit, which was filed in the state court of Nueces County, Texas, naming as defendants SPCC, its present and former stockholders including NGC, and certain other defendants. The lawsuit seeks unspecified compensatory and punitive damages for alleged personal injuries to approximately 700 persons resident in Peru and property damages arising from alleged releases into the environment from SPCC operations in Peru. In September 1995, the action was removed from Texas state court to the U.S. District Court for the Southern District of Texas, Corpus Christi Division. In October 1995, SPCC and other
defendants filed a motion to dismiss the action on a number of grounds, including that it would be unreasonable for a U.S. court to exercise extraterritorial jurisdiction, lack of personal jurisdiction and forum non conveniens. In January 1996 the Court entered an order dismissing the complaint on the grounds that under U.S. and international law the subject matter of the lawsuit should be adjudicated before Peruvian courts. In February 1996, plaintiffs filed a notice of appeal from the order of the U.S. District Court dismissing the complaint and from an earlier order of that Court denying plaintiffs' motion to remand the case to the Texas state court. The U.S. Court of Appeals for the Fifth Circuit heard argument on the appeal in December 1996. A decision is expected in 1997.
For a description of the litigation involving NGC's ownership interest in Minera Yanacocha, see page six.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
NGC's executive officers as of March 26, 1997 were:
There are no family relationships by blood, marriage or adoption among any of the above executive officers of NGC. All executive officers are elected annually by the Board of Directors of NCG to serve for one year or until their respective successors are elected and qualify. There is no arrangement or understanding between any of the above executive officers and any other person pursuant to which he or she was selected as an officer.
Mr. Cambre was elected Chairman of NCG on November 16, 1994 (effective January 1, 1995), President on June 1, 1994 and Chief Executive Officer on September 23, 1993 (effective November 1, 1993). He served as Vice Chairman of NCG from November 1, 1993 through December 31, 1994. Previously, he served as Vice President and Senior Technical Advisor to the office of the Chairman of Freeport-McMoRan Inc., a natural resources company, from June 1988 to September 1993. He is also Chairman, President and Chief Executive Officer of NMC.
Mr. Murdy was elected Executive Vice President of NGC on July 24, 1996 and designated Chief Financial Officer effective December 31, 1992. He served as a Senior Vice President of NGC from December 31, 1992 to July 23, 1996. Previously, he served as Senior Vice President and Chief Financial Officer of Apache Corporation, an oil and gas exploration and production company, since May 1991. He is also Executive Vice President and Chief Financial Officer of NMC.
Mr. Dow was elected Senior Vice President, Exploration of NGC on July 24, 1996. He served as Vice President of NGC from May 18, 1994 to May 16, 1995 and served as Vice President and Regional Director, Indonesia and Southeast Asia from May 17, 1995 to July 23, 1996. Previously he held various senior exploration positions with NGC, NMC and its subsidiaries for more than five years. He is also Senior Vice President, Exploration of NMC.
Mr. Kurlander was elected Senior Vice President, Administration of NGC on March 16, 1994 (effective April 1, 1994). Previously, he served as Senior Vice President, Public Affairs and Government Affairs, for Nabisco International Inc. of RJR Nabisco, Inc., a consumer products company, since 1992. Prior to that he managed worldwide communications, state government affairs and worldwide security functions for American Express Company, a financial services company. He is also Senior Vice President, Administration of NMC.
Mr. Baker was elected Vice President, Environmental Affairs of NGC on April 24, 1991 (effective March 11, 1991). Previously, he served as Director, Environmental Affairs for NGC and various other senior positions with NGC.
Mr. Conte was elected Vice President, Human Resources of NGC on April 3, 1995. Previously, he served as Vice President, Human Resources of Echo Bay Mines Ltd., a natural resources company, since January 1988.
Ms. Donnelly was elected Vice President, Government Relations of NGC on June 12, 1990.
Mr. Eppler was elected Vice President, Business Development and Planning of NGC on May 17, 1995. Previously, he served as Managing Director of Chemical Securities, Inc., an affiliate of Chemical Bank, for more than five years.
Mr. Farmar was elected a Vice President of NGC on December 16, 1992 and Controller on October 30, 1991. He is also Vice President and Controller of NMC.
Ms. Flanagan was elected a Vice President of NGC on March 15, 1995 and elected Treasurer on December 16, 1992. Previously, she served as an Assistant Treasurer. She was appointed Assistant Secretary on June 24, 1992. She is also Vice President, Treasurer and Assistant Secretary of NMC.
Mr. Francisco was elected Vice President, International Operations of NGC on July 19, 1995 (effective July 10, 1995). Previously, he served as Executive Vice President and General Manager of P.T. Freeport Indonesia Co., a natural resources company, from August 1992 to May 1995 and as Senior Vice President and Chief Administrative Officer from May 1991 to August 1992.
Mr. Hamer was elected Vice President and Senior Project Executive, Batu Hijau of NGC on May 13, 1996. Previously he served as Vice President, North American Operations of NGC from July 12, 1995 to May 12, 1996, as Vice President, Indonesian Projects, from January 1, 1994 to July 11, 1995 and as Vice President, Project Development from January 1, 1993 through December 31, 1993. He also served as Vice President and General Manager of NGC's Carlin operations from October 30, 1991 to December 31, 1992.
Ms. Hansen was elected a Vice President of NGC on March 15, 1995 and was designated General Counsel of NGC on July 24, 1996. She served as Associate General Counsel of NGC from March 1992 to July 23, 1994. Previously, she was a partner in the law firm of Holland & Hart specializing in natural resources law. She is also Vice President and General Counsel of NMC.
Mr. Karras has served as Vice President, Taxes of NGC since November 9, 1992. Previously, he served as Director of Taxes of Kennecott Corporation, a natural resources company, for four years. He is also Vice President, Taxes of NMC.
Mr. Krol has served as Vice President, Exploration of NGC since September 14, 1994. Previously, he served as Director of Foreign Exploration since May 1992. Prior to that he served as Director of Metallurgical Services since 1990.
Mr. Moran was elected Vice President, Engineering Services of NGC on December 15, 1993 (effective January 17, 1994). Previously, he was employed by BHP Minerals International Inc., a natural resources company, for more than five years where he was responsible for the development and management of major construction projects.
Mr. Morris was elected Vice President, Corporate Relations of NGC on March 16, 1994 (effective April 1, 1994). Previously, he served as Director of Investor Relations and Corporate Communications for Inland Steel Industries, a steel producer, from 1990 to 1993.
Mr. Mullin was elected Vice President, North American Operations of NGC on May 13, 1996. Previously, he served as Vice President and Regional Director, Nevada Operations of NGC from May 14, 1994 to May 12, 1996, and prior thereto served as Vice President and General Manager from December 15, 1993 to May 13, 1994. He also served as Acting General Manager from January 1, 1993 to December 14, 1993. Prior to that he held various senior operating positions with NGC.
Mr. Rendu was designated Vice President, Technical Services of NGC on January 19, 1995. Previously, he served as Vice President, Information Systems of NGC since November 26, 1991 and Vice President, Mine Engineering of NGC since March 11, 1991.
Mr. Schmitt was elected a Vice President of NGC on December 17, 1986 and was elected Secretary on May 25, 1988. He was designated Assistant General Counsel on October 30, 1991. He is also Vice President, Secretary and Assistant General Counsel of NMC.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NGC's common stock is traded on the New York Stock Exchange (under the symbol "NGC"). The following table sets forth, for the periods indicated, the high and low sales prices per share of NGC's common stock as reported on the New York Stock Exchange Composite Tape.
On March 26, 1997, there were 945 stockholders of record of NGC's common stock.
A dividend of $0.12 per share of common stock outstanding was declared in each quarter of 1996 and 1995, or a total of $0.48 per share in each such year. The determination of the amount of future dividends, however, will be made by NGC's Board of Directors from time to time and will depend on NGC's future earnings, capital requirements, financial condition and other relevant factors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
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(1) As discussed in Note 2 of Item 8 -- "Financial Statements and Supplementary Data," effective January 1, 1994, Newmont Gold Company acquired essentially all of the assets and liabilities of its parent, Newmont Mining Corporation. This transaction contributed to the increase in total assets and long-term debt and decrease in stockholders' equity at December 31, 1994 compared to December 31, 1993.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of Newmont Gold Company ("NGC") and its subsidiaries' (collectively, the "Company") consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. Newmont Mining Corporation ("NMC") owns approximately 91% of NGC's common stock. All of NMC's operations are held through NGC.
The discussion and analysis, as well as the notes to such financial statements, contain "forward-looking statements" within the meaning of Section 27A of the Securities Exchange Act of 1934, as amended. Such forward looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially, as discussed in "Forward-Looking Statements" below.
SUMMARY
Over the past two years, the Company's earnings per share, on a comparable basis, have increased on average approximately 10% annually. The Company earned $94.0 million ($0.86 per share) in 1996, compared with $90.0 million ($0.81 per share) in 1995, before considering certain gains and charges, and $83.4 million ($0.70 per share) in 1994. Additionally in 1995, there was a gain on the sale of an investment and the write-off of two exploration properties. The Company sold its 10.7% interest in Southern Peru Copper Corporation ("SPCC") for $116.4 million, resulting in a pre-tax gain of $113.2 million, or $72 million after-tax ($0.74 per share). The write-off of the Grassy Mountain and Ivanhoe exploration properties resulted in a pre-tax charge of $57.1 million, or $37.1 million after-tax ($0.38 per share). Including these items, net income in 1995 was $124.9 million ($1.17 per share).
The Company's total equity gold production increased 23% in 1996 to 2,284,200 ounces from 1,862,800 ounces in 1995. Equity production in 1995 increased 11% from 1994's equity production of 1,671,000 ounces. Weighted average total cash costs per ounce of equity production were $220, $210 and $202 for 1996, 1995 and 1994, respectively.
RESULTS OF OPERATIONS
Consolidated sales revenues have increased primarily from gold production of 1,970,200 ounces, 1,653,000 ounces and 1,555,300 ounces in 1996, 1995 and 1994, respectively. (Such production does not include the Company's share of gold production from Minera Yanacocha S.A. ("Minera Yanacocha") which was accounted for on the equity method during these periods but commencing in 1997 will be consolidated in the Company's financial statements as discussed below.) The average annual gold price per ounce received on such production was $390, $385 and $384 in 1996, 1995 and 1994, respectively.
The profitability of the Company's operations is significantly affected by the market price of gold. Gold prices can fluctuate widely and are affected by numerous factors beyond the Company's control. During the beginning of 1997, the market price of gold declined from 1996 levels. The Company has forward sales contracts that began in January 1996 and continue through December 2000 for production from its Minahasa property, located in Indonesia. These contracts provide for forward sales of 125,000 ounces per year at an average price of $454 an ounce, plus 40% of the amount by which the market price exceeds the forward sales price. No production was hedged in 1995 or 1994.
The effects of the changes in the average annual gold price received and annual consolidated production levels on sales revenues between years are reflected in the following table (in thousands):
The Company's North American operations are located on the geological feature known as the Carlin Trend, hereafter, referred to as "Carlin." Carlin gold production has increased approximately 5% in each of the last two years, from 1,555,300 ounces in 1994 to 1,634,500 in 1995 to 1,700,000 ounces in 1996. Improved operating rates at the refractory ore treatment plant in conjunction with increased amounts of high grade underground ore processed were the primary reasons for the increase in gold production between 1995 and 1996. The refractory ore treatment plant, which began operations in mid-1994, operated at reduced rates in 1994 and 1995 due primarily to a crack in a weld of a riding ring in the double rotator mill in August 1994 and a fire in an electrostatic precipitator in November 1994. As the plant operated at steadily increasing rates during 1995 and production from high grade underground ores increased, production also increased from 1994 to 1995.
Carlin's ore production is shifting from open-pit oxide ore to refractory ore coming from both open-pits and underground operations. The refractory ore treatment plant, which processes most of the refractory ore, is expected to account for approximately 40% of Carlin's gold production in 1997, up from approximately 30% in 1996 and 20% in 1995. Carlin's production is expected to continue to increase approximately 5% annually in 1997 and 1998 with the mining of higher grade ores from the Post deposit. This deposit is mined by Barrick Goldstrike Mines, Inc. ("Barrick") under a joint mining agreement, as discussed below.
The Company's international operations include the Zarafshan-Newmont Joint Venture ("Zarafshan-Newmont"), a 50%-50% joint venture between a subsidiary of the Company and two Uzbekistan governmental entities. Zarafshan-Newmont, which began production in September 1995, produces gold by crushing and leaching low grade oxide ore from existing stockpiles at the government owned Muruntau mine in Uzbekistan. Production was 326,500 ounces (163,200 equity ounces) for 1996 and 37,000 ounces (18,500 equity ounces) for 1995. Although problems were encountered in the startup of the leach facility in 1995, gradual improvements were made throughout 1996. In 1997, production is expected to be approximately 400,000 ounces with 50% attributable to the Company's interest.
In Indonesia, the Company began production in 1996 at NGC's 80% owned Minahasa ("Minahasa") property. Revenue production was 107,000 ounces. In addition, 5,700 ounces were produced before commercial operations commenced, and the revenue from these ounces was credited against the capitalized costs of the project. Although the Company has an 80% interest in this project, it is entitled to 100% of the gold production until its investment has been recovered, since it funded 100% of the construction costs. Production is expected to reach approximately 150,000 ounces in 1997, with higher levels expected in future years.
The Company has also had a 38% interest in Minera Yanacocha, a Peruvian entity which is managed by a subsidiary of the Company. Minera Yanacocha has increased its production 166% over the past two years. Production totaled 811,400 ounces (308,300 equity ounces), 552,000 ounces (209,800 equity ounces) and 304,600 ounces (115,700 equity ounces) in 1996, 1995 and 1994, respectively, at total cash costs of $107, $119, and $135 per ounce produced, respectively. The increased production in 1996 was primarily due to production beginning at a third mine. In 1995, production began at a second mine, resulting in increased production levels over 1994. Production is expected to increase at least 5% in 1997 and future production levels are expected to be consistent with those of 1997. Total cash costs are expected to increase slightly in 1997 and 1998, due primarily to higher mining costs.
As discussed in Note 17 of Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Newmont Gold Company:
We have audited the accompanying consolidated balance sheets of Newmont Gold Company (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related statements of consolidated income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Newmont Gold Company and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP
Denver, Colorado, January 28, 1997, except for Note 17 as to which the date is March 10, 1997.
NEWMONT GOLD COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (IN THOUSANDS, EXCEPT PER SHARE)
The accompanying notes are an integral part of these statements.
NEWMONT GOLD COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE)
The accompanying notes are an integral part of these statements.
NEWMONT GOLD COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE)
The accompanying notes are an integral part of these statements.
NEWMONT GOLD COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (IN THOUSANDS)
See Note 14 for supplemental cash flow information.
The accompanying notes are an integral part of these statements.
NEWMONT GOLD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Newmont Gold Company ("NGC") and its more-than-50% owned subsidiaries (collectively, the "Company"). The Company also includes its pro-rata share of assets, liabilities and operations for joint ventures in which it has an interest. All significant intercompany balances and transactions have been eliminated. At December 31, 1996, Newmont Mining Corporation ("NMC") owned approximately 91% of the Company. The functional currency for all subsidiaries is the U.S. dollar.
NATURE OF OPERATIONS
The Company is a worldwide company engaged in gold production, exploration for gold and acquisition of gold properties. Substantially all of the Company's consolidated sales and operating profit in 1995 and 1994 related to its gold mining activities in the United States. In 1996, the Company's consolidated sales resulted from operations in the United States, Uzbekistan and Indonesia. See geographic information in Note 15. Although most of the Company's consolidated identifiable assets relate to domestic activities, 19% of its assets as of December 31, 1996 related to foreign operations. The Minahasa project in Indonesia began production in early 1996, operations commenced in Uzbekistan in 1995 and the Company has a nonconsolidated equity interest in a property in Peru that went into production in 1993. The Company carries political risk insurance on its investments in all three countries. The Company also conducts exploration for gold deposits worldwide.
Gold mining requires the use of specialized facilities and technology. The Company relies heavily on such facilities to maintain its production levels.
Also, the profitability of the Company's current operations is significantly affected by the market price of gold. Market gold prices can fluctuate widely and are affected by numerous factors beyond the Company's control.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all cash balances and highly liquid investments with an original maturity of three months or less. Because of the short maturity of these investments, the carrying amounts approximate their fair value. Excess cash balances are primarily invested in United States Treasury bills, with lesser amounts invested in high-quality commercial paper and time deposits.
INVESTMENTS
Short-term investments are carried at cost, which approximates market, and include Eurodollar government and corporate obligations rated AA or higher. At December 31, 1996 and 1995, $8.7 million and $7.9 million, respectively, of such investments secured letters of credit.
NEWMONT GOLD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investments in companies in which the Company's ownership is 20% to 50% are accounted for by the equity method of accounting and are included in other long-term assets. Included in such investments is the Company's 38% equity investment in Minera Yanacocha S.A. (See Note 17). Summarized financial information for Minera Yanacocha S.A. follows (in millions):
As a result of the contemplated ownership structure discussed in Note 16, the Batu Hijau project in Indonesia is being accounted for as an equity investment effective July 1996. The Company's investment at December 31, 1996 was $46.6 million.
Investments in companies owned less than 20% are recorded at the lower of cost or net realizable value. Income from such investments is recorded when dividends are paid. The Company held no such investments at December 31, 1996 or 1995.
INVENTORIES
Ore and in-process inventories and materials and supplies are stated at the lower of average cost or net realizable value. Precious metals are stated at market value.
Non-current inventories are stated at the lower of average cost or net realizable value and represent ore-in-stockpiles from which no material is expected to be processed for more than one year after the balance sheet date.
PROPERTY, PLANT AND MINE DEVELOPMENT
Expenditures for new facilities or expenditures which extend the useful lives of existing facilities are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated productive lives of such facilities. Productive lives range from 2 to 21 years.
Mineral exploration costs are expensed as incurred. When it has been determined that a mineral property can be economically developed, the costs incurred to develop such property, including costs to further delineate the ore body and remove overburden to initially expose the ore body, are capitalized. Such costs, and
NEWMONT GOLD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated future development costs, are amortized using a unit-of-production method over the estimated life of the ore body. On-going development expenditures to maintain production are generally charged to operations as incurred.
Significant payments related to the acquisition of exploration interests are capitalized. If a mineable ore body is discovered, such costs are amortized using a unit-of-production method. If no mineable ore body is discovered, such costs are expensed in the period in which it is determined the property has no future economic value.
Interest expense allocable to the cost of developing mining properties and to constructing new facilities is capitalized until operations commence.
Gains or losses from normal sales or retirements of assets are included in other income or expense.
REVENUE RECOGNITION
Gold sales are recognized when gold is produced.
MINING COSTS
In general, mining costs are charged to operations as incurred. However, certain of the Company's deposits have diverse grade and waste-to-ore ratios over the mine's life. Mining costs for these deposits, to the extent they do not relate to current gold production, are capitalized and then charged to operations when the applicable gold is produced.
RECLAMATION AND REMEDIATION COSTS
Estimated future reclamation and remediation costs are based principally on legal and regulatory requirements. Such costs related to active mines are accrued and charged over the expected operating lives of the mines using a unit-of-production method. Future reclamation and remediation costs for inactive mines are accrued based upon management's best estimate at the end of each period of the undiscounted costs expected to be incurred at a site. Such cost estimates include where applicable, ongoing care, maintenance and monitoring costs. Changes in estimates are charged to earnings in the period an estimate is revised.
INCOME TAXES
The Company accounts for income taxes using Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under the liability method of SFAS 109, the Company recognizes certain temporary differences between the financial reporting basis of the Company's liabilities and assets and the related income tax basis for such liabilities and assets. This generates a net deferred income tax liability or net deferred income tax asset for the Company as of the end of the year, as measured by the statutory tax rates in effect as enacted. The Company derives its deferred income tax charge or benefit by recording the change in the net deferred income tax liability or net deferred income tax asset balance for the year.
The Company's deferred income tax assets include certain future tax benefits such as net operating losses or tax credit carryforwards. The Company must record a valuation allowance against any portion of those deferred income tax assets which it believes it will more likely than not fail to realize.
GOLD HEDGING ACTIVITIES
The Company may enter into gold loans, options contracts and forward sales contracts to hedge the effect of price changes on the gold it produces. Gains and losses realized on such instruments, as well as any cost or revenue associated therewith, are recognized in sales when the related gold is produced.
NEWMONT GOLD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER COMMON SHARE
The treasury stock method is used in computing earnings per common and common equivalent share. Earnings per common and common equivalent share are based on the sum of the weighted average number of common shares outstanding during each period and the assumed exercise of stock options having exercise prices less than the average market prices of the common stock. The convertible preferred shares outstanding until conversion, as discussed in Note 8, were not common stock equivalents as they were anti-dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to the 1996 presentation.
(2) ACQUISITION OF NMC'S OPERATIONS
Effective January 1, 1994, NGC acquired all of the operations of NMC. The transaction included the following: (i) the transfer by NMC to NGC of 8,649,899 shares of the 94,500,000 shares of common stock of NGC then held by NMC; (ii) the transfer by NMC of all of its other assets to NGC; (iii) the assumption by NGC of all the liabilities (contingent or otherwise) of NMC (including NGC's $159.6 million of advances to NMC as of December 31, 1993), but not NMC's obligations with respect to its then $5.50 convertible preferred stock (the "NMC preferred stock") (except for accrued and unpaid dividends as of December 31, 1993) and its employee stock options exercisable for NMC's common stock; (iv) the issuance by NGC to NMC of 2,875,000 shares of $5.50 convertible preferred stock with a par value of $5.00 per share, and having terms identical to the NMC preferred stock (except that upon conversion, NMC was entitled to receive shares of NGC's common stock instead of NMC's common stock); and (v) the issuance by NGC to NMC of stock options exercisable for shares of NGC's common stock having terms identical to NMC's employee stock options (except upon exercise, NGC's common stock is issued instead of NMC's common stock).
NGC accounted for the transaction as a transfer of assets and liabilities between entities under common control. As a result, the transferred assets and liabilities were recorded by NGC at NMC's historical cost with the difference charged to retained earnings. The 8,649,899 shares of common stock of NGC transferred by NMC to NGC were recorded as treasury stock at the book value of those shares on December 31, 1993. NGC's convertible preferred stock was recorded at its par value.
The terms of the transaction intended that the preferred stock and stock options issued by NGC to NMC be exercised to the extent NMC preferred stock and outstanding NMC stock options are exercised and NGC grants to NMC additional stock options to the extent additional stock options are granted by NMC. As a result of the transaction and giving effect to the subsequent conversion of preferred stock and issuance of common stock (see Note 8), stock option exercises by NMC and additional stock option grants by NGC, NMC's only assets at December 31, 1996 are (i) 99,522,308 shares of common stock of NGC which approximates 90.5% of the NGC's common stock outstanding and (ii) stock options to purchase 2,450,351 shares of NGC.
NEWMONT GOLD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVENTORIES
(4) PROPERTY, PLANT AND MINE DEVELOPMENT
(5) OTHER ACCRUED LIABILITIES
NEWMONT GOLD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
Components of the Company's consolidated deferred income tax liabilities and assets are as follows (in thousands):
As of December 31, 1996, the Company had approximately $23.2 million of nonexpiring alternative minimum tax credit carryforwards and approximately $12.5 million of foreign tax credit carryforwards. Of these foreign tax credit carryforwards, $1.3 million expire in 2000 and $11.2 million expire in 2001.
Based primarily upon estimates of future operations, the Company, more likely than not, will utilize $162.2 million of the $176.2 million of deferred income tax assets at December 31, 1996. This estimate reflects a valuation allowance of $14.0 million, which is an increase of $4.2 million from December 31, 1995's valuation allowance.
The Company, however, gives no assurance that it will generate sufficient taxable income to fully realize the $162.2 million of deferred income tax assets at December 31, 1996. The Company's future levels of taxable income will depend, in part, upon gold prices, general economic conditions and other factors beyond the Company's control.
NEWMONT GOLD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's pre-tax financial statement income (loss) consists of (in thousands):
The Company's benefit (provision) for income taxes consists of (in thousands):
The Company's resulting benefit (provision) for income taxes differ from the amounts computed by applying the United States corporate income tax statutory rate for the following reasons (in thousands):
NEWMONT GOLD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) DEBT
LONG-TERM DEBT
Long-term debt consists of (in thousands):
Scheduled minimum long-term debt repayments are $19.3 million in 1997, $25.0 million in 1998, $33.5 million in 1999, $14.4 million in 2000, $11.9 million in 2001 and $500.2 million thereafter. Actual payments may be greater in any one year due to actual operating cash flows realized. The Company is in compliance with all covenants associated with its debt.
Sale-Leaseback of the Refractory Ore Treatment Plant
In September 1994, the Company entered into a sale and leaseback agreement for its refractory ore treatment plant located in Carlin, Nevada for $349.1 million. The transaction was accounted for as debt for financial statement purposes, with the cost of the refractory ore treatment plant recognized as an asset and depreciated. The lease is for 21 years and the aggregate future minimum lease payments, which include interest, as of December 31, 1996 and 1995 were $638.2 million and $667.9 million, respectively. Payments began in January 1996 and are $29.7 million annually through 2000. Principal payments are included in these amounts beginning in 1998. The lease has purchase options during and at the end of the lease at predetermined prices. The interest rate on this sale-leaseback transaction is 6.36%. Because of the uniqueness of this transaction, the Company determined that it is not practicable to estimate the fair value of this debt.
In connection with this transaction, the Company entered into certain interest rate contracts to hedge the interest cost of the financing. These contracts were settled for a gain of $11 million which is being recognized as a reduction of interest expense over the term of the lease. As a result of this gain, the effective interest rate on this sale and leaseback transaction is 6.15%.
8 5/8% Notes
Unsecured notes with a principal amount of $150 million due April 1, 2002 bearing an annual interest rate of 8 5/8% were outstanding at December 31, 1996 and 1995. Interest is payable semi-annually in April and October and the notes are not redeemable prior to maturity. Using interest rates prevailing on similar instruments at December 31, 1996 and 1995, this debt was estimated to have a fair value of $165.7 million and $169.5 million, respectively.
Medium-Term Notes
Notes totalling $42 million, with a weighted average interest rate of 7.7%, maturing on various dates ranging from mid-1999 to late 2004, were outstanding as of December 31, 1996 and 1995. Interest is payable semi-annually in March and September and the notes are not redeemable prior to maturity. Using the interest
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rates prevailing on similar instruments at December 31, 1996 and 1995, this debt was estimated to have a fair value of $44.4 million and $44.9 million, respectively.
Project Financing Facility
The Company, through a wholly-owned subsidiary, is a 50% participant in Zarafshan-Newmont Joint Venture ("Zarafshan-Newmont") in the Republic of Uzbekistan. The other 50% participants are two entities of the Uzbekistan government.
As of December 31, 1996, Zarafshan-Newmont had $126.25 million outstanding on a project financing loan secured by the assets of the project. The loan is to be repaid in semi-annual installments until 2001. Starting in 1997, the average interest rate is between 3.9 and 4.25 percentage points over the three-month London Interbank Offered Rate. The carrying amount of the loan is estimated to approximate its fair market value. The weighted average interest rates for 1996 and 1995 were 8.2% and 8.4%, respectively, and the interest rates at December 31, 1996 and 1995 were 9.4% and 8.2%, respectively.
Until defined completion tests have been satisfied, the Company has guaranteed the payment of certain amounts due under the loan which totaled $58.75 million at December 31, 1996. The 50% Uzbek partner has guaranteed the repayment of the remaining amount due under the loan until such completion tests have been satisfied. After satisfaction of the completion tests, the loan becomes non-recourse to the Zarafshan-Newmont partners. The lenders have agreed to extend the date by which the completion tests must be met to October 1998.
Revolving Credit Facility
The Company has a $400 million revolving credit facility with a consortium of banks that expires in April 1998. No amounts were outstanding under the facility as of December 31, 1996 and 1995. Interest rates are variable and adjust subject to changes in the Company's long-term debt ratings and to usage of the facility in terms of borrowings as a percentage of commitments. Currently, the Company's interest rate is the lenders' base rate plus 0.25%. The Company has the option to fix the rate for up to six months. There is an annual facility fee which will also adjust subject to the Company's debt ratings. This fee is currently 0.15% of the lenders' total commitment.
The credit agreement contains covenants that limit consolidated indebtedness, as defined, to 67% of total capitalization; require minimum net worth, as defined, of $300 million and $275 million in 1996 and 1995, respectively, which then increases to $325 million in 1997; and require an interest coverage ratio, as defined, of not less than 2.5 to 1.
SHORT-TERM DEBT
All short-term debt at December 31, 1996 and 1995 consisted of bank debt. The Company had unsecured demand bank lines of credit aggregating $70 million and $39 million at December 31, 1996 and 1995, respectively, of which $46.0 million and $29.2 million were outstanding at the same respective periods. These facilities bear interest at customary short-term rates for borrowers with similar credit ratings. The carrying value of this debt is assumed to approximate its fair value. The weighted average interest rates for 1996 and 1995 were 6.9% and 8.8%, respectively, and the interest rates at December 31, 1996 and 1995 were 8.25% and 8.5%, respectively.
CAPITALIZED INTEREST
Capitalized interest was $5.4 million, $11.6 million and $19.7 million in 1996, 1995 and 1994, respectively.
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(8) STOCKHOLDERS' EQUITY
COMMON STOCK OFFERING
In January 1996, NMC issued 4.65 million shares of common stock for $51.87 per share under an existing "shelf" registration statement with the Securities and Exchange Commission. Proceeds of the issue netted $241.3 million and were used to purchase an equal number of shares of common stock of NGC. Such proceeds were used by NGC to fund its operations. This transaction increased NMC's ownership of NGC to 90.5%.
STOCK OPTIONS
As part of the transaction with NMC discussed in Note 2, NGC issued options to NMC to purchase shares of NGC's common stock. NGC issued options in the same number and with the same exercise prices as all of the NMC employee stock options then outstanding. Additional options have been and will continue to be issued by NGC to NMC to match the terms of additional NMC employee stock options granted. NMC has exercised and will continue to exercise the stock options issued to it by NGC to the extent the corresponding NMC stock options have been or will be exercised.
Substantially all of the NMC options have been granted to participants under NMC's 1982 Key Employees Stock Option Plan, 1987 Key Employees Stock Option Plan, 1992 Key Employees Stock Plan and 1996 Employees Stock Plan (collectively, the "plans"). NMC continues to grant NMC options to eligible participants under its 1987 Key Employees Stock Option Plan, 1992 Key Employees Stock Plan and 1996 Employees Stock Plan.
Under NMC's stock option plans, options to purchase shares of NMC are granted to key employees generally at the fair market value of such shares on the date of grant. NMC options under these plans generally vest over a two year period and are exercisable over a period not exceeding ten years. At December 31, 1996, 2,831,003 shares were available for future grants under NMC's plans.
In 1994, 1993 and 1992 certain key executives were granted NMC options that, although the exercise price is generally equal to the fair market value on the date of grant, cannot be exercised when otherwise vested unless the market price of NMC's common stock is a defined amount above the NMC option exercise price. In addition, the same executives were granted NMC options in 1994, 1993 and 1992 having exercise prices in excess of the fair market value on the date of grant. Generally, these key executive NMC options vest over a period of one to five years and are exercisable over a ten year period. At December 31, 1996, 605,989 of these NMC options were outstanding.
The following table summarizes annual total stock option activity for each of the three years ended December 31:
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The following table summarizes information about stock options outstanding at December 31, 1996 with exercise prices equal to the fair market value on the date of grant and no restrictions on exercisability after vesting:
Information about all other stock options outstanding at December 31, 1996 is summarized below:
The Company applies APB Opinion 25 and related interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized for its stock options. Had compensation cost for the options been determined based upon their fair value at their grant dates in 1995 and 1996, consistent with the methodology prescribed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," the Company's net income (in thousands) and earnings per share would have been the pro forma amounts indicated below:
For purposes of determining the pro forma amounts, the fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions for 1996 and 1995, respectively: weighted-average risk-free interest rates of 6.1% and 5.8%, dividend yield of 1% for both years, expected lives of 5 years for both periods and volatility of 35% and 39%, respectively.
Compensation costs included in the pro forma amounts above only reflect fair values associated with options granted after January 1, 1995. These amounts may not be indicative of future amounts that will apply to all future outstanding nonvested awards or future grants.
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PREFERRED STOCK
Effective January 1, 1994, as a result of the transaction discussed in Note 2, NGC issued to NMC 2.875 million shares of $5.00 par value convertible preferred stock at a value of $100 per share. As discussed in Note 2, the terms of the preferred stock mirrored the terms of the NMC preferred stock (except that upon conversion, NMC was entitled to receive shares of NGC's common stock instead of NMC's common stock). Through NGC's preferred stock, NGC facilitated NMC's compliance of its continuing obligations on the NMC preferred stock. Dividends paid by the Company to NMC for the NGC preferred stock were in turn paid by NMC to the holders of the NMC preferred stock. The NGC annual preferred stock dividend was $5.50 per share which was cumulative from January 1, 1994 and was payable quarterly.
NMC called all of the outstanding 2.875 million shares of $5.50 convertible preferred stock, $5.00 par value, for redemption on December 14, 1995 at a redemption price of $105.21 per share. NGC, exercising its redemption right under its preferred stock, called all of its 2.875 million shares of $5.00 par value convertible preferred stock for redemption on the same date and at the same price. For both companies, each share of preferred stock was convertible at the option of the shareholder into shares of common stock at a conversion price of $36.395 per share of common stock (equivalent to a conversion rate of 2.7476 shares of common stock for each whole share of convertible preferred stock). Essentially all of the NMC preferred stock was converted prior to the redemption date. As a result, NMC converted the same number of NGC preferred shares as those of converted NMC preferred shares. This ensured that NMC's holding of outstanding shares of NGC's common stock was equal to the outstanding shares of NMC stock. In total, 7.9 million shares of NGC common stock were issued to NMC.
(9) EMPLOYEE BENEFIT PLANS
PENSION BENEFITS
The Company has two qualified non-contributory defined benefit pension plans, one which covers salaried employees and the other which covers substantially all hourly employees. The Company also has a non-qualified supplemental pension plan for salaried employees whose benefits under the qualified plan are limited by federal legislation. The vesting period is five years of service for each plan. The plans' benefit formulas are based on an employee's years of credited service and either such employee's last five years average pay (salaried plans) or a flat dollar amount adjusted by a service-weighted multiplier (hourly plan).
Pension costs are determined annually by independent actuaries and pension contributions to the qualified plans are made based on funding standards established under the Employee Retirement Income Security Act of 1974 ("ERISA").
The components of pension expense for these three plans, in the aggregate, consist of (in thousands):
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The following tables set forth the funded status of the Company's pension plans and the amounts recognized in the Company's consolidated balance sheets at December 31, 1996 and 1995, respectively (in thousands):
In October 1996, an amendment was made to increase the benefit multiplier of the benefits under the Hourly Pension Plan. The effect of this amendment was to increase the accumulated benefit obligation by
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $0.5 million, the projected benefit obligation and prior service cost by $1.2 million and to increase the annual pension cost by $0.3 million.
In accordance with the provisions of Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," an adjustment was required to reflect a minimum liability for the supplemental pension plan in 1996, 1995 and 1994. Such adjustment resulted in recording an intangible asset and, to the extent the minimum liability adjustment exceeded the unrecognized net transition liability, a reduction of $2.2 million, $2.3 million and $2.8 million in stockholders' equity, which is net of related deferred income tax benefits, for 1996, 1995 and 1994, respectively.
In measuring the projected benefit obligation for the plans, the following actuarial assumptions were used:
The weighted average expected long-term rate of return on plan assets was assumed to be 8.75% for 1996, 9.00% for 1995 and 8.25% for 1994.
The Company maintains a trust for the purpose of funding the supplemental pension plan as well as death benefits for officers of the Company. This trust is funded at the discretion of the Company and had a balance, which approximated market value, of $2 million, at both December 31, 1996 and December 31, 1995. Although the trust's assets can be used to pay benefits for the supplemental pension plan, they cannot be used in determining the net pension liability for the supplemental pension plan. The qualified plans' assets consist of stocks, bonds and cash.
RETIREE BENEFITS OTHER THAN PENSIONS
The Company provides defined medical benefits to qualified retirees who were salaried employees and to their eligible dependents, and it provides defined life insurance benefits to qualified retirees who were salaried employees. In general, participants become eligible for these benefits upon retirement directly from the Company if they are at least 55 years old and the combination of their age and years of service with the Company equals 75 or more.
The defined medical benefits cover most of the reasonable and customary charges for hospital, surgical, diagnostic and physician services and prescription drugs. Life insurance benefits are based on a percentage of final base annual salary and decline over time after retirement commences.
The Company accounts for these postretirement benefits other than pensions under Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"). The statement requires that postretirement benefits other than pensions be accrued during an employee's service to the Company.
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The components of expense for postretirement benefits other than pensions are shown in the table below (in thousands):
The following table sets forth the components of the liability for the Company's plans for postretirement benefits other than pensions recognized in its balance sheet (in thousands):
At December 31, 1996 and 1995, $2.6 million of assets, with a market value of approximately the same amount, was designated in a trust to pay postretirement benefits other than pensions. Since these assets could be used to pay other employee benefits, they cannot be used for the postretirement benefit calculations. The Company has no formal policy for funding postretirement benefit obligations.
Weighted average discount rates of 7.5% and 7.0% were used in calculating the APBO at December 31, 1996 and 1995, respectively. The assumed health care cost trend rates to measure the expected cost of benefits at December 31, 1996 start at an 8% annual increase for coverage before the age of 65 and a 7% annual increase for coverage after the age of 64. The assumed health care cost trend rates to measure the expected cost of benefits at December 31, 1995 start at a 9% annual increase for coverage before the age of 65 and an 8% annual increase for coverage after the age of 64. These rates were assumed to decrease one percentage point each year until a 5% annual rate of increase was reached, at which point a 5% annual rate of increase was assumed thereafter. The effect of a one percentage point annual increase in the assumed cost trend rates would increase the aggregate of service and interest costs by approximately 19% in 1996 and the APBO at December 31, 1996 by approximately 15%. The effect of a one percentage point annual increase in the assumed cost trend rates would increase the aggregate of service and interest costs in 1995 by approximately 23% and the APBO at December 31, 1995 by approximately 19%.
SAVINGS PLAN
The Company has two qualified defined contribution savings plans, one which covers salaried employees and the other which covers substantially all hourly employees. In addition, the Company has a non-qualified supplemental savings plan for salaried employees whose benefits under the qualified plan are limited by federal regulations.
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Upon the employee meeting eligibility requirements, the Company matches 100% of employee contributions of up to 6% and 4% of base salary for the salaried and hourly plans, respectively.
The Company's matching contributions to such plans were $4.6 million, $3.7 million and $3.3 million in 1996, 1995 and 1994, respectively.
(10) WRITE-OFF OF EXPLORATION PROPERTIES
In 1995, the Company recorded write-offs of two exploration properties totaling $52.5 million. The Ivanhoe property was purchased in June 1992. Over the next three years, extensive drilling, environmental studies and mine models were developed to determine the economics of extracting gold from the property. A feasibility report was issued in June 1995 that reflected high levels of environmental and mining costs that resulted in financial returns much lower than the Company's threshold for development. Accordingly, the decision was made not to develop the property and $18.8 million of capitalized costs associated with the property were written off in June 1995. An additional charge of $4.6 million was taken as other expense for estimated costs to reclaim areas disturbed by previous mining and exploration activity on the property.
The Grassy Mountain property was purchased in September 1992. At the time of the purchase, certain reliance was placed upon geological models prepared by the seller. Work performed by the Company in 1993 demonstrated that the gold was not distributed as modeled by the seller. In 1994, the Company created new detailed models of the deposit based on its revised geologic interpretation. These models resulted in fewer high grade ounces, which led to the reclassification of 996,000 ounces of reserves to mineralized material at the end of 1994. However, additional drilling and modeling was required to determine whether there was an impairment of the asset based on the work performed through that date. Based on economic information at that time and the use of undiscounted cash flows, no write-down was considered necessary as of December 31, 1994. Throughout 1995, further refinement of geological and economic models continued with open-pit, underground and price hedging scenarios all resulting in deposit sizes and economic returns smaller than the Company's threshold for development. Based on these results, capitalized costs of $33.8 million relating to the Grassy Mountain property were written off in December 1995.
(11) GAIN ON SALE OF INVESTMENTS
In May 1995, the Company sold its 10.7% interest in Southern Peru Copper Corporation for $116.4 million, which resulted in a gain of $113.2 million.
(12) DIVIDEND, INTEREST AND OTHER INCOME
Included in dividends, interest and other income are $3.1 million, $28.3 million and $9.2 million for 1996, 1995 and 1994, respectively, for business interruption insurance that was received for problems associated with the refractory ore treatment plant at the Carlin, Nevada operations.
(13) MAJOR CUSTOMERS
The Company is not economically dependent on a limited number of customers for the sale of its product because gold commodity markets are well-established worldwide. In 1996, sales to three customers accounted for $213.3 million, $108.5 million and $107.2 million of total sales, each of which represented more than 10% of total sales and together accounted for 56% of the annual sales. During 1995, four such customers accounted for $109 million, $85.7 million, $82.2 million and $73.1 million of total sales, or 55% of the annual sales. In 1994, sales to three such major customers accounted for $125.2 million, $99.6 million and $88.5 million, or 52% of total sales.
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(14) SUPPLEMENTAL CASH FLOW INFORMATION
Net cash provided by operating activities includes the following cash payments (in thousands):
Excluded from the statements of consolidated cash flows are the effects of certain non-cash transactions. In July 1996, NGC began accounting for the Batu Hijau project as an equity investment (See Note 16). The adjustments that were made to the Company's balance sheet are as follows (in thousands):
In 1996, the Company retired mostly fully depreciated property, plant and equipment with an original cost of $77.0 million, which is not reflected in the statements of consolidated cash flows.
In 1996 and 1994, the Company recognized income tax benefits of $6.0 million and $16.2 million, respectively, resulting from the resolution of certain tax issues associated with prior years.
In 1995, as discussed in Note 8, NGC called for redemption of all of its 2.875 million shares of convertible preferred stock. Substantially all of the convertible preferred stock was converted into common stock of NGC. This transaction resulted in a non-cash decrease to preferred stock offset by a non-cash decrease to treasury stock and a non-cash increase to capital in excess of par value.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following reflects the non-cash adjustments made to the Company's balance sheet effective as of January 1, 1994 for the transaction with NMC discussed in Note 2 (in thousands):
(15) GEOGRAPHIC INFORMATION
The Company operates predominantly in a single industry as a worldwide company engaged in gold production, exploration for gold and acquisition of gold properties. The Company has consolidated operations in the United States, Indonesia and Uzbekistan. In computing earnings from operations, no allocations of general corporate expenses, exploration and research, interest or income taxes have been made.
Identifiable assets by country represent those assets related to the operations in those countries. Information by geographic location for the year ended December 31, 1996 is as follows (in thousands):
Included in the United States sales are $647.2 million of export sales. In 1995 and 1994, export sales from the United States were $629.1 million and $497.2 million, respectively.
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Prior to 1996, substantially all operations were in the United States.
The above geographic information does not include NGC's equity investment in Minera Yanacocha in Peru. NGC's equity in Minera Yanacocha's 1996 sales, earnings from operations and exploration was $119.3 million, $76.9 million and $6.6 million, respectively. NGC's equity in Minera Yanacocha's total assets at December 31, 1996 was $73.5 million. See Notes 1 and 17.
(16) COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL OBLIGATIONS
The Company's mining and exploration activities are subject to various federal and state laws and regulations governing the protection of the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company conducts its operations so as to protect the public health and environment and believes its operations are 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. The Company cannot predict such future expenditures.
Estimated future reclamation and remediation costs are based principally on legal and regulatory requirements. At December 31, 1996 and 1995, $20.8 million and $19.0 million, respectively, were accrued for reclamation and remediation costs relating to currently producing mineral properties.
In addition, the Company is involved in several matters concerning environmental obligations associated with former mining activities. Generally, these matters concern developing and implementing remediation plans at the various sites involved. The Company believes that the related environmental obligations associated with these sites are similar in nature with respect to the development of remediation plans, their risk profile and the compliance required to meet general environmental standards. Based upon the Company's best estimate of its liability for these matters, $49.8 million and $55.8 million were accrued for such obligations at December 31, 1996 and 1995, respectively. These amounts are included in other current liabilities and reclamation and remediation liabilities. Depending upon the ultimate resolution of these matters, the Company believes that it is reasonably possible that the liability for these matters could be as much as 100% greater or 40% lower than the amount accrued at December 31, 1996. The amounts accrued for these matters are reviewed periodically based upon facts and circumstances available at the time. Changes in estimates are charged to other expense in the period estimates are revised. Charges related to these matters were $6.6 million, $3.0 million and $16.1 million in the years ended December 31, 1996, 1995 and 1994, respectively.
Details about certain of the more significant sites involved are discussed below.
Idarado Mining Company ("Idarado") -- 80.1% owned by NGC
In July 1992, NMC and Idarado signed a consent decree with the State of Colorado ("State") which was agreed to by the U.S. District Court of Colorado to settle a lawsuit brought by the State under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), generally referred to as the "Superfund Act." Idarado settled natural resources damages and past and future response costs and provided habitat enhancement work. In addition, Idarado agreed in the consent decree to undertake specified remediation work at its former mining site in the Telluride/Ouray area of Colorado. The Company expects to complete the remediation work at this property by the end of 1997. If the remediation work does not meet specific technical criteria specified in the consent decree, the State and the court reserve the right to require Idarado to perform other remediation work. Idarado and the Company have obtained a $16.3 million letter of credit to secure their obligations under the consent decree.
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Resurrection Mining Company ("Resurrection") -- 100% owned by NGC
In 1983, the State of Colorado filed a lawsuit under the Superfund Act which involves a Resurrection Mining Company and Asarco Incorporated ("Asarco") joint venture mining operation near Leadville, Colorado. This action was subsequently consolidated with a lawsuit filed by the U.S. Environmental Protection Agency ("EPA") in 1986, with the EPA taking the lead role. The proceedings seek to compel the defendants to remediate the impacts of pre-existing, historic mining activities that date back to the mid-1800's which the government agencies claim are causing substantial environmental problems in the area. The lawsuits have named NMC, Resurrection, the joint venture and Asarco as defendants in the proceedings. The EPA is also proceeding against other companies with interests in the area.
The EPA divided the remedial work into two phases. Phase I addresses the Yak Tunnel, a drainage and access tunnel owned by the joint venture. Phase II addresses the remainder of the site.
In 1988 and 1989, the EPA issued administrative orders with respect to Phase I work for the Yak Tunnel. The joint venture, Asarco, Resurrection and NMC have collectively implemented those orders by constructing a water treatment plant which was placed in operation in early 1992. The joint venture is in negotiations regarding remaining remedial work for Phase I, which primarily consists of environmental monitoring and operating and maintenance activities.
The parties have entered into a consent decree with respect to Phase II which apportions liabilities and responsibilities for the site among the various parties. The EPA has approved remedial actions for selected components of Resurrection's portion of the site, which were initiated in 1995. However, the EPA has not yet selected the final remedy for the site. Accordingly, the Company cannot yet determine the full extent or cost of its share of the remedial action which will be required under Phase II. The government agencies may also seek to recover for damages to natural resources.
Dawn Mining Company ("Dawn") -- 51% owned by NGC
Dawn leased a currently inactive open-pit uranium mine on the Spokane Indian Reservation in the State of Washington. The mine is subject to regulation by agencies of the U.S. Department of Interior, the Bureau of Indian Affairs and the Bureau of Land Management, as well as the EPA. Dawn also owns a nearby uranium millsite facility.
In 1991, Dawn's lease was terminated. As a result, Dawn was required to file a formal mine closure and reclamation plan. The Department of Interior has commenced an Environmental Impact Study to analyze Dawn's proposed plan and to consider alternate closure and reclamation plans for the mine. Dawn cannot predict at this time what type of mine reclamation plan may be selected by the Department of Interior. Dawn does not have sufficient funds to pay for the reclamation plan it proposed, for any alternate plan, or for the closure of its mill.
The Department of Interior previously notified Dawn that when the lease was terminated, it would seek to hold Dawn and NMC (as Dawn's then 51% owner) liable for any costs incurred as a result of Dawn's failure to comply with the lease and applicable regulations. If asserted, the Company will vigorously contest any such claims. The Company cannot reasonably predict the likelihood or outcome of any future action against Dawn or the Company arising from this matter.
Dawn has received a license for a mill closure plan which would generate funds to close and reclaim both the mine and the mill. The license is being challenged by third parties.
Insurance Receivables
The Company carried insurance policies for which it filed claims for the costs of certain of its remediation activities. The Company recorded receivables for claims under such policies when management believed the
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likelihood of recovery was probable. Prior to 1993, three of the insurance companies commenced actions against NMC seeking judgments that they had no liability. In the fall of 1993, NMC instituted a comprehensive lawsuit against its carriers.
Based on the views of prior lead counsel, the Company had believed that significant progress in certain settlement discussions would have been achieved by mid-summer 1994, but that expectation was not realized. The absence of such anticipated progress in settlement discussions, as well as the Company's discussions with new lead counsel for the insurance recovery actions regarding its review of such actions, caused the Company in the second quarter of 1994 to provide a $20.0 million valuation allowance on its insurance receivables, which was recorded as other expense, resulting in a net balance of $16.7 million outstanding at December 31, 1994.
In the first quarter of 1995, settlement in certain of the insurance litigation was reached enabling the Company to realize the receivable outstanding at December 31, 1994. Settlement discussions continue with respect to additional insurance litigation. Trial of this litigation has been scheduled for late 1997. The Company intends to vigorously pursue its claims with respect to the remaining litigation and believes that it is reasonably possible that additional amounts will be recovered, although no such amounts are accrued.
BATU HIJAU
In July 1996, the Company and Sumitomo Corporation ("Sumitomo") entered into a definitive partnership agreement to develop and operate the Batu Hijau copper/gold deposit in Indonesia. The estimated cost for development of the open pit mine, mill, and infrastructure including employee housing, a port, electrical generation facilities, interest during construction, cost escalations and working capital is expected to approximate $1.9 billion. Batu Hijau contains proven and probable reserves of 12.1 million ounces (5.4 million equity ounces) of gold and 10.6 billion pounds (4.8 billion equity pounds) of copper. Production is expected to begin around the turn of the century, with a projected mine life in excess of 20 years.
Under the terms of the agreement with Sumitomo, the Company will contribute its interest in the company that owns the project and Sumitomo will contribute an agreed upon amount of cash, expected to be approximately $235 million. After the contributions are made, the Company will retain a 45% interest in the company that owns the project and Sumitomo will have a 35% interest. The remaining 20% will be held by an unrelated Indonesian company. The parties' obligations to make their contributions to the partnership are subject to the receipt of certain approvals from the Indonesian government. Until such approvals are received, Sumitomo has agreed to fund up to $100 million of costs through non-interest bearing loans ($20.2 million of which were outstanding at December 31, 1996), which the Company has effectively guaranteed. Effectively, any amounts outstanding under such loans will go towards meeting Sumitomo's cash contribution of the previously mentioned $235 million. If such approvals are not received by March 31, 1997, either party has the right to terminate the agreement and the loans would become due. After the Sumitomo contributions are made, additional contributions required by the parties will be contributed 56.25% by the Company and 43.75% by Sumitomo. Project financing for development of the property is expected to be approximately $1 billion and will be guaranteed by the Company and Sumitomo, 56.25% and 43.75%, respectively, until project completion tests are met. The source of the Company's future contributions will be operating cash flow, bank credit lines or other third party financing as needed.
As a result of the contemplated ownership structure, the Company is accounting for its investment in Batu Hijau as an equity investment effective July 1996. The Company's investment at December 31, 1996, which is included in other long-term assets, was $46.6 million.
In anticipation of Indonesian government approvals related to the Batu Hijau project, the entity owning the project has entered into a construction contract for approximately $1 billion.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTEE OF THIRD PARTY INDEBTEDNESS
The Company guaranteed a former NMC subsidiary's $35.7 million Pollution Control Revenue Bonds, due 2009. NMC's former subsidiary is BHP Copper Inc., formerly known as Magma Copper Company. It is expected that the Company will be required to remain liable on this guarantee as long as the bonds remain outstanding, however, the Company has not been required to pay any of these amounts, nor does it expect to have to pay any in the future.
GOLD PRICE HEDGING CONTRACTS
The Company has entered into hedging transactions, that began maturing in January 1996 and continue through December 2000, for production from its Minahasa property, located in Indonesia. These transactions consist of forward sales of 125,000 ounces of gold per year at an average price of $454 an ounce, plus 40% of the amount by which the market price exceeds the forward sales price. No production was hedged in 1995 or 1994.
OTHER COMMITMENTS AND CONTINGENCIES
Under a 1992 agreement with Barrick Goldstrike Mines, Inc. ("Barrick"), Barrick is mining the Company's Carlin, Nevada Post deposit which extends beyond the Company's property boundaries onto Barrick's property. The Company and Barrick share the costs so that each ounce of gold mined bears the same mining cost. The Company is obligated to pay Barrick for such costs as Barrick mines the deposit. In addition, the Company is obligated to share dewatering costs which are associated with the deposit. The Company incurred $63.7 million, $62.5 million and $39.0 million of such mining and dewatering costs in 1996, 1995 and 1994, respectively, and NGC expects to incur approximately $15 million of such costs in 1997.
The Company has minimum royalty obligations on one of its producing mines for the life of the mine. The amount to be paid to meet the royalty obligations is based upon a defined average market gold price. Any amounts paid due to the minimum royalty obligation not being met in any year are recoverable in future years when the minimum royalty obligation is exceeded. Although the minimum royalty requirement may not be met in any certain year, the Company expects the mine's gold production over its life will meet the minimum royalty requirements.
At December 31, 1996, there were $100.2 million of outstanding letters of credit that were primarily for bonding reclamation plans and electric supply and reinsurance agreements. The Company has provided investment collateral for $8.7 million of these letters of credit. The remaining $91.5 million represents unsecured letters of credit. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the market place.
The Company is from time to time involved in various legal proceedings of a character normally incident to its business. It does not believe that adverse decisions in any pending or threatened proceedings or any amounts which it may be required to pay by reason thereof will have a material adverse effect on its financial condition or results of operations.
(17) SUBSEQUENT EVENTS
PROPOSED MERGER WITH SANTA FE PACIFIC GOLD CORPORATION
In March 1997, NMC announced it had entered into a merger agreement with Santa Fe Pacific Gold Corporation ("Santa Fe") under which each outstanding share of Santa Fe common stock would be exchanged for 0.43 of a share of NMC common stock. A condition of the merger is that it would be accounted for as a pooling of interests by NMC. The merger is also subject to the approval of the shareholders of both companies and other customary conditions. It is expected to be consummated during the second quarter of
NEWMONT GOLD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997. If NMC is successful in acquiring Santa Fe, Santa Fe would become a wholly-owned subsidiary of NGC. NGC would issue shares of common stock to NMC equal to the number of common shares NMC issues to acquire Santa Fe (estimated to be approximately 56.5 million). Santa Fe reported 1996 sales of $337.2 million and net income of $21.1 million with total assets at December 31, 1996 of $1.3 billion, long-term debt of $454.9 million and net worth of $570.0 million as of the same date.
ADDITIONAL INTEREST IN MINERA YANACOCHA
In November 1993, the French government announced its intention to privatize the mining assets of Bureau de Recherches Geologiques et Minieres, the geological and mining bureau of the French government ("BRGM"). In September 1994, BRGM announced its intention to transfer its 24.7% interest in Minera Yanacocha to another entity. The Company and Compania de Minas Buenaventura, S.A. ("Buenaventura"), then 38.0% and 32.3% owners of Minera Yanacocha, respectively, filed suit in Peru to seek enforcement of a provision in the bylaws of Minera Yanacocha giving shareholders preemptive rights on the proposed sale or transfer of any shareholder's interest. In February 1995, an appellate court in Peru issued a preliminary ruling in favor of the Company and Buenaventura, both of whom elected to exercise their preemptive rights to acquire their proportionate share of the 24.7% interest. In accordance with the court ruling, Minera Yanacocha canceled the BRGM shares and issued shares representing interests in Minera Yanacocha of 13.35% to the Company and 11.35% to Buenaventura. The Company deposited $48.6 million for its additional interest, together with the additional shares, with a Peruvian bank pending the final resolution of the case. The Company borrowed the $48.6 million from the same Peruvian bank with the right of set off against the deposit, and accordingly, these amounts have been netted in the accompanying balance sheet. Through December 31, 1996, the Company had received $18.6 million of dividends on the additional shares. In September 1996, a court ruling provided that the Company and Buenaventura had the right to acquire the 24.7% interest for a purchase price of $109.3 million, $59.1 million attributable to the 13.35% interest of the Company. As established by such ruling, the preemptive rights were triggered in November 1993 and thus the valuation of the shares held in escrow were calculated as of such date. BRGM and other defendants filed an appeal to the Superior Court of Lima challenging the court's determination that the preemptive rights were triggered and the date and amount of the valuation. In February 1997, the Superior Court upheld the decision of the trial court. Therefore, beginning in 1997, the Company will consider the additional interest to have been acquired and will consolidate Minera Yanacocha in its financial statements to reflect the increase in its ownership from 38% to 51.35%. BRGM and other defendants have filed a request for review of the resolution by the Superior Court of Peru. Peruvian counsel has advised the Company that decisions of the Superior Court can be modified by the Supreme Court only in very limited instances and that it is not likely that any further review will be granted.
The following pro forma income statement assumes the acquisition of the additional interest occurred on January 1, 1996 and the pro forma balance sheet assumes the acquisition occurred on December 31, 1996. The pro forma financial statements are presented for illustrative purposes only and are not necessarily indicative of the consolidated financial position or results of operations which would have been realized had the acquisition of the additional interest been considered to occur as of the dates for which the pro forma financial statements are presented. The pro forma financial statements also are not necessarily indicative of the consolidated position or results of operations in the future.
NEWMONT GOLD COMPANY AND MINERA YANACOCHA
PRO FORMA CONSOLIDATED INCOME STATEMENT -- UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE) FOR THE YEAR ENDED DECEMBER 31, 1996
- ---------------
(A) To eliminate royalties paid by Minera Yanacocha to an equity affiliate of the Company.
(B) To eliminate management fees paid by Minera Yanacocha to a subsidiary of the Company.
(C) Estimated additional amortization of excess purchase price over book value of net assets acquired.
(D) Reclassification of the Company's share (38%) of management fees charged to Minera Yanacocha.
(E) Elimination of equity income recognized for Minera Yanacocha to reflect consolidation.
(F) Additional adjustment to taxes required for consolidation of Minera Yanacocha.
(G) Minority interest (48.65%) in income of Minera Yanacocha.
NEWMONT GOLD COMPANY AND MINERA YANACOCHA
PRO FORMA CONSOLIDATED BALANCE SHEET -- UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE) DECEMBER 31, 1996
- ---------------
(A) To record acquisition of additional 13.35% interest.
(B) Elimination of 13.35% of Minera Yanacocha's net book value.
(C) Elimination of the Company's investment in Minera Yanacocha to reflect consolidation.
(D) To reflect minority interest in Minera Yanacocha.
(18) UNAUDITED SUPPLEMENTARY DATA
QUARTERLY DATA
The following is a summary of selected quarterly financial information (amounts in millions except per share amounts):
- ---------------------
(1) Sales less costs applicable to sales and depreciation, depletion and amortization.
(2) In January 1996, 4.65 million shares of common stock were issued to NMC coincident with NMC's offering a like amount of shares under an existing shelf registration statement (see Note 8).
(3) Includes an after-tax gain of $72 million, or $0.75 per share for the quarter and $0.74 per share for the year, from the sale of the Company's interest in Southern Peru Copper Corporation and an after-tax charge of $15.1 million, or $0.16 per share, for the write-off of the investment and additional reclamation provision of the Ivanhoe exploration property (see Notes 10 and 11).
(4) Includes an after-tax charge of $22 million, or $0.22 per share, for the quarter and $0.23 per share for the year, for the write-off of the investment in the Grassy Mountain property (see Note 10).
(5) Substantially all of the convertible preferred stock was converted into common stock in December 1995 (see Note 8).
RATIO OF EARNINGS TO FIXED CHARGES
As a result of the transaction with NMC discussed in Note 2, the Company's capital structure became essentially the same as NMC's. In that the Company's financial results had been fully consolidated into NMC's and the Company's capital structure became essentially that of NMC's, management believes that NMC's historical consolidated ratio of earnings to fixed charges for the two years ended December 31, 1993 is more relevant than the Company's. They represent essentially what the Company's ratios would have been had it acquired NMC's assets and assumed its liabilities at the beginning of 1992. The Company had no significant fixed charges in 1992 or 1993.
The ratio of earnings to fixed charges for the Company was 2.1, 3.6 and 1.7 for the years ended December 31, 1996, 1995 and 1994, respectively. The ratio of earnings to fixed charges for NMC was 6.3 and 6.5 for the years ended December 31, 1993 and 1992, respectively.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with Arthur Andersen LLP, NGC's independent public accountants, regarding any matter of accounting principles or practices or financial statement disclosure.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning NGC's directors will be contained in NGC's definitive Proxy Statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 for the 1997 annual meeting of stockholders and is incorporated herein by reference. Information concerning NGC's executive officers is set forth under Part I of this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning this item will be contained in NGC's definitive Proxy Statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 for the 1997 annual meeting of stockholders and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning this item will be contained in NGC's definitive Proxy Statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 for the 1997 annual meeting of stockholders and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning this item will be contained in NGC's definitive Proxy Statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 for the 1997 annual meeting of stockholders and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements
2. Financial Statement Schedules
All schedules have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes.
3. Exhibits
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the quarter ended December 31, 1996.
(This page intentionally left blank)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Minera Yanacocha S. A.:
We have audited the accompanying balance sheets of Minera Yanacocha S. A. (a Peruvian Corporation, "The Company") as of December 31, 1996 and 1995, and the related statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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 in accordance with auditing standards generally accepted in Peru which are substantially equivalent to those applied in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Minera Yanacocha S. A. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles followed in the United States of America.
Countersigned by:
/s/ Marco Antonio Zaldivar ------------------------------------ Marco Antonio Zaldivar C.P.C. Register No. 12477
Lima, Peru January 22, 1997.
MY-1
MINERA YANACOCHA S. A.
STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these statements.
MY-2
MINERA YANACOCHA S. A.
BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The accompanying notes are an integral part of these statements.
MY-3
MINERA YANACOCHA S. A.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these statements.
MY-4
MINERA YANACOCHA S. A.
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these statements.
MY-5
MINERA YANACOCHA S. A.
NOTES TO THE FINANCIAL STATEMENTS (ALL MONETARY AMOUNTS ARE IN THOUSANDS OF U.S. DOLLARS)
1. BUSINESS ACTIVITY
Minera Yanacocha S. A. ("the Company") was established on January 14, 1992 and started production activities in August 1993. The Company is engaged in exploration and exploitation of gold under the mining concessions owned by S.M.R.L. Chaupiloma Dos de Cajamarca ("Chaupiloma"). The majority shareholders or affiliates of the Company also own the majority interests in Chaupiloma.
In accordance with a mining lease amended effective January 1, 1994, the Company pays Chaupiloma a 3 percent royalty on the monthly production at current prices, after deducting refinery and transport costs. The royalty agreement expires in the year 2012.
The Company's operation consists of three open pit mines, the Carachugo, San Jose and Maqui Maqui mines located in the Cajamarca district of Peru, from which gold-bearing ores are delivered to two separate leach pads for gold recovery using conventional heap leaching cyanidation, followed by Merrill-Crowe zinc precipitation and smelting to provide a final dore product. The dore is then shipped offsite for further refining before being sold in the world gold markets. A fourth mine, Yanacocha, is expected to go into production by the end of 1997.
Gold mining requires the use of specialized facilities and technology. The Company relies heavily on such facilities to maintain production levels. Also, the profitability of the Company's current operations is significantly affected by the market price of gold. Market gold prices can fluctuate widely and are affected by numerous factors beyond the Company's control.
2. BASIS OF PRESENTATION
Up to December 31, 1994, the Peruvian statutory accounting records were kept in Peruvian nuevos soles. Effective January 1, 1995, the Company began maintaining its accounting records in U.S. dollars, its functional currency, as prescribed in the tax stability agreements signed with the Peruvian Government, explained in Note 8. The accompanying financial statements were prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and are stated in thousands of U.S. dollars.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies were used in preparing the accompanying U.S. GAAP financial statements:
Cash and cash equivalents
Cash and cash equivalents consist of cash balances and highly liquid investments with an original maturity of three months or less, carried at cost, which approximates market value.
Inventories
Precious metals are stated at market value. Ore in process is determined using the first-in, first-out method and is stated at the lower of cost or net realizable value. Materials, supplies and spare parts inventories are stated at average cost.
Property, plant and equipment
Property, plant and equipment is stated at cost. Depreciation is computed using the straight-line method with the rates indicated in Note 6. Maintenance and minor renewals are charged to expenses as incurred. Significant repairs and modifications which extend the useful life of the existing facilities are capitalized and depreciated.
MY-6
MINERA YANACOCHA S. A.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Exploration and mine development costs
Mineral exploration costs are expensed as incurred. When it has been determined that a mineral property can be economically developed, the costs incurred to develop such property, including the costs to further delineate the ore body and remove overburden to initially expose the ore body, are capitalized. Such costs are amortized using a units-of-production method over the estimated life of the ore body. Until 1994 these costs were amortized using the straight-line method with an annual rate of 20 percent. The cumulative effect of the change is immaterial. On-going mine development expenditures to maintain production are generally charged to operations as incurred.
Interest capitalization
Interest expense allocable to the costs of constructing new facilities is capitalized until operations commence. Capitalized interest is expensed over the depreciable lives of the assets for which it relates.
Reclamation and mine closure costs
Estimated future reclamation and mine closure costs are based principally on legal and regulatory requirements and are accrued and charged to the statements of income on a units-of-production basis.
Debt issuance costs
Debt issuance costs are deferred and amortized over the term of the related debt.
Revenue recognition
Gold sales are recognized when dore bars are produced.
Income tax
The Company accounts for income taxes using the liability method prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under the liability method of SFAS 109, the Company recognizes certain temporary differences between the financial reporting basis of the Company's liabilities and assets and the related income tax basis for such liabilities and assets. This generates a net deferred income tax liability or net deferred income tax asset for the Company as of the end of the year, as measured by the statutory tax rate in effect as enacted. The Company derives its deferred income tax charge or benefit by recording the change in the net deferred income tax liability or net deferred income tax asset balance for the year.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles of the United States requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates.
4. FOREIGN CURRENCY TRANSACTIONS
Monetary assets and liabilities are principally denominated in U.S. dollars, the functional currency. No significant assets or liabilities are denominated in Peruvian currency.
A loan from Deutsche Investitions-und Entwicklungsgesellschaft MBH-DEG ("DEG") denoted as the Carachugo loan as well as its related accrued interest are denominated in Deutsche Marks. As of
MY-7
MINERA YANACOCHA S. A.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996 and 1995 the total amount outstanding was DM 6.3 million ($4,088) and the accrued interest DM 675 thousands (US $438) and DM 8.1 million ($5,641) and the accrued interest DM 825 thousands ($575), respectively (see Note 9).
5. INVENTORIES
6. PROPERTY, PLANT, EQUIPMENT AND MINE DEVELOPMENT
Certain fixed assets secure loans from the International Finance Corporation ("IFC") and DEG (see Note 9).
7. INCOME TAX AND PROFIT SHARING PAYABLE
In accordance with the Peruvian legislation, the Company's employees are entitled to receive a profit sharing of 8% of the taxable income. 50% of the total profit sharing is distributed to each employee based on the number of days that each of them worked during the preceding year and the remaining 50% is distributed in proportion to their annual salary levels.
Effective January 1, 1997, the annual payment to each employee under the profit sharing plan is limited to eighteen times such employee's monthly salary, but the rate for the Company remains 8% of taxable income.
8. INCOME TAX
As explained in Note 3, income tax is accounted for under the provisions of SFAS 109.
MY-8
MINERA YANACOCHA S. A.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Under SFAS 109, the Company accounts for deferred income tax liabilities and deferred income tax assets when temporary differences arise between the financial and the income tax reporting of its liabilities and assets. The measurement of the deferred income tax liabilities and assets is based upon the Peruvian tax rates and tax law provisions as enacted.
The provisions for income tax consist of:
The total provision approximates the Peruvian statutory rate applied to the taxable income for all years.
The components of the deferred income tax liabilities and assets are as follows:
The income tax returns of 1993 through 1994 prepared in Peruvian nuevos soles, and 1995 through 1996 prepared in U.S. dollars, are pending review by the tax authorities. Additional taxes and surcharges from future tax assessments, if any, would be charged to expense in the years in which they are settled.
In May 1994 the Company signed two tax stabilization agreements with the Peruvian Government which guarantee the Company the use of tax rulings of the tax regimes in force at December 31, 1992 for Carachugo and at December 31, 1994 for Maqui Maqui for 15 years from the dates that the agreements become effective. Under such agreements the Company is permitted to keep its accounting records in U.S. dollars. The properties were under the then current tax regimes until the agreements became effective. The Carachugo tax stabilization agreement became effective January 1, 1995. The Company expects the Maqui Maqui tax stabilization agreement to become effective in 1997.
MY-9
MINERA YANACOCHA S. A.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
9. LONG-TERM DEBT
Long-term debt consists of loans from the IFC and DEG to finance the Carachugo and Maqui Maqui projects. The maturities due pursuant to the financing arrangements as of December 31, 1996 are as follows:
Of the outstanding loan balance at December 31, 1996, $4.1 million is denominated in Deutsche Marks and translated to US dollars at the balance sheet date. (See Note 4).
Interest on $26,012 of the debt outstanding at December 31, 1996 is calculated at interest rates ranging from 3 1/8% to 3 1/2% over the London Interbank Offering Rate ("LIBOR"). The weighted average interest rates for this debt were 8.98%, 9.63% and 7.65% for 1996, 1995 and 1994, respectively. The weighted average interest rates at December 31, 1996 and 1995 were 8.9% and 9.08%, respectively. Interest on $8,400 of debt outstanding at December 31, 1996 is calculated at 2 7/8% over LIBOR plus a rate (not to exceed 2 1/2%) applied on the amount that the average price of gold per ounce is above $370. When the prior six month average gold price is between $370 and $410 an ounce the interest rate is 2 7/8% over LIBOR plus 1/8% for each $10 the gold price is over $370 per ounce. When the six month average gold price is between $410 and $490 per ounce the interest rate is 3 3/8% over LIBOR plus 1/4% for each $10 the gold price is over $410 per ounce. The weighted average interest rates for this debt were 8.54%, 8.59% and 7.25% for 1996, 1995 and 1994, respectively. The interest rates at December 31, 1996 and December 31, 1995 were 8.375% and 8.8125%, respectively. Interest on $4,088 of the outstanding loan balance at December 31, 1996 is calculated at a fixed annual rate of 9.3%.
Interest rates prevailing on similar debts at the balance sheet dates were essentially the same as the interest rates on these debts. Therefore, the fair value of the debt approximates the reported value.
Substantially all of the Company's property, plant and equipment, as well as restricted funds of $8,927 at December 31, 1996, secure the outstanding loans.
The loan agreements contain certain covenants which limit indebtedness and payment of dividends to shareholders. In addition, the Company must maintain certain financial ratios as provided in the loan agreements. At December 31, 1996 and 1995 the Company was in compliance with the covenants.
The IFC loan requires the Company to maintain an escrow account representing the next interest and principal installment due. Amounts totaling $8,927 and $8,647 as of December 31, 1996 and 1995, respectively, reflect the March 15, 1997 and 1996 interest and principal payments and, accordingly, have been reported as restricted funds on the balance sheets.
10. SHAREHOLDERS' EQUITY
The capital stock is represented by 4,600,104 common shares with a par value of one Peruvian nuevo sol each, fully subscribed and paid. This amount includes 2,592,159 shares owned by non-Peruvian investors.
Under current Peruvian regulations, there is no restriction on remittance of dividends or repatriation of foreign investment, except for a creation of a legal reserve discussed in the next paragraph. Furthermore, under current Peruvian regulations, dividend distribution is tax free beginning January 1, 1994. However, dividends
MY-10
MINERA YANACOCHA S. A.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
paid to a non-domiciled shareholder who had executed an Investment Agreement with the Peruvian Government is still subject to a 10% withholding income tax on dividends paid on capital stock issued pursuant to that agreement.
According to the Peruvian General Law on Corporations, when the net income exceeds 7 percent of capital stock in the financial statements prepared following Peruvian generally accepted accounting principles, the Company must create a reserve ("the legal reserve") of at least 20% of its capital stock by annual appropriations of at least 10% of net income. The legal reserve must be used only to offset losses, and can not be distributed as dividends, except in case of the closing of a business activity. The legal reserve was satisfied in 1994 and therefore no appropriations were necessary in 1995 or 1996.
At a shareholders' meeting held on January 22, 1997, a cash dividend of $30,000 was approved.
11. RELATED PARTY TRANSACTIONS
In years prior to 1994, the Company had obtained loans from its shareholders amounting to $46,478 to finance the construction of facilities. These loans and the related accrued interest were repaid in 1994. Interest on the loans was calculated at an annual rate of 10% and amounted to $1,838 in 1994.
Management, exploration, mine development, engineering and employment services are provided pursuant to contracts with affiliated companies. The corresponding charges amounted to $4,847 in 1996, $4,617 in 1995 and $3,065 in 1994, and the corresponding outstanding accounts payable amounts to $324 and $1,313 at December 31, 1996 and 1995, respectively.
As mentioned in Note 1, the Company pays Chaupiloma a 3% royalty on the monthly production at current prices, after deducting refinery and transport costs. The royalty expense amounted to $9,524 in 1996, $6,233 in 1995 and $3,501 in 1994, and the outstanding accounts payable amounts to $2,493 and $2,132 at December 31, 1996 and 1995, respectively.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Net cash provided by operating activities includes the following cash payments:
13. MAJOR CUSTOMERS AND EXPORT SALES
The Company is not economically dependent on a limited number of customers for the sale of its product because gold commodity markets are well-established worldwide. During 1996, four customers accounted for $113 million, $85 million, $40 million and $33 million of total sales, each of which represented more than 10% of total sales and together accounted for 86% of the annual sales. In 1995, sales to three customers accounted for $75 million, $22 million and $21 million, each of which represented more than 10% of total sales and together accounted for 55% of total sales. In 1994, sales to one customer accounted for $102 million, or 87% of total sales.
All sales were made abroad.
MY-11
MINERA YANACOCHA S. A.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES
Claim initiated by Compagnie Miniere International Or S.A.
In May 1996, Compagnie Miniere International Or S.A. (Mine Or) initiated a claim against the Company because it did not remit the 1994 dividends, approved by the General Extraordinary Shareholders' meeting held on February 1, 1995, to Mine Or. The Company paid such dividends to Compania Minera Condesa S.A. and Newmont Second Capital in compliance with a preliminary action dictated by the Superior Court on February 23, 1995. This action suspended the rights of Mine Or as a shareholder until the main claim initiated by Compania Minera Condesa S.A. and Newmont Second Capital to exercise their preferential rights for buying the Company's shares owned by Mine Or could be resolved.
The claim initiated by Mine Or amounts to approximately $2,145 at December 31, 1996 and is still pending to be resolved by the First Instance Court.
The Company's management and its outside legal counsels believe this claim will be resolved in favor of the Company.
Environmental and natural resources code
The Company's mining and exploration activities are subject to Legislative Decree 613 published on September 8, 1990 which is regulated by Supreme Decrees No 016-93-EM and No 059-93-EM dated April 28 and December 10, 1993, respectively. These legal rules govern the protection of the environment. The Company conducts its operations so as to protect the public health and environment and believes it operates in compliance with all applicable legal rulings. The Company accrues for its expected future reclamation and closure liabilities on a units-of-production basis and such liability amounted to $4,310 and $1,876 at December 31, 1996 and 1995, respectively.
Mining contract
The Company signed a contract with Zublin Chile Ingenieria y Construcciones Ltda., Sucursal del Peru for the loading and hauling of mineral and waste of Carachugo and Maqui Maqui.
The contract has a term of 5 years, effective January 1, 1996.
MY-12
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.
NEWMONT GOLD COMPANY
By /s/ TIMOTHY J. SCHMITT ----------------------------------- Timothy J. Schmitt Vice President, Secretary and Assistant General Counsel March 31, 1997
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 and on the date indicated.
Appendix I
The following is a narrative description of certain maps in image form which have been included in the paper version of the Form 10-K but which have been excluded from the EDGAR version of the Form 10-K.
1. Map of location of the Carlin Trend Operations in Nevada -- Page 3 of the Form 10-K.
On Page 3 of the Form 10-K, the registrant has included a map of Nevada with an enlargement of the geographical location of its operations on the Carlin Trend discussed on Pages 1 through 5 of the Form 10-K. The map also includes a chart indicating the location of various deposits with proven and probable reserves.
2. Map of location of the Minera Yanacocha Operations in Peru -- Page 8 of the Form 10-K.
On Page 8 of the form 10-K, the registrant has included a map of the country of Peru showing the geographical location of the Minera Yanacocha Operations discussed on pages 6 and 7 of the Form 10-K. The map also includes a notation that Minera Yanacocha S.A., is 51.35% owned by the registrant. The map also shows the location of various deposits with proven and probable reserves.
3. Map of location of the Zarafshan-Newmont joint venture in Uzbekistan -- Page 10 of the Form 10-K.
On Page 10 of the Form 10-K, the registrant has included a map of the Republic of Uzbekistan showing the geographical location of the Zarafshan- Newmont joint venture and the Angren project discussed on Page 9 of the form 10-K. The map also includes notation that the Zarafshan-Newmont joint venture, which owns the project, is 50% owned by the Newmont Gold and the Angren joint venture is 40% owned by Newmont Gold.
4. Map of locations of the Minahasa Project and the Batu Hijau Project in Indonesia -- Page 13 of the Form 10-K.
On Page 13 of the Form 10-K, the registrant has included a map of the Republic of Indonesia showing the geographical location of the Minahasa project and the Batu Hijau project, each of which is discussed on Pages 11, 12 and 13 of the Form 10-K. The map also includes a notation that each of the Indonesian companies that own the Minahasa project and the Batu Hijau project is 80% owned by the Newmont Gold.
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