Item 3. Legal Proceedings
In October 1996, a purported derivative action was filed in the Court of Chancery of Delaware on behalf of a purported stockholder of the Company titled
Harry Lewis v. Milton H. Ward, et al., C.A. No. 15255-NC, against Cyprus Amax, - ------------------------------------- the directors of the Company, and the Company as a nominal defendant. The complaint alleges, among other things, that the defendants engaged in self- dealing in connection with the Company's entry in March 1996 into the demand loan facility provided by Cyprus Amax, that Cyprus Amax controls the Company's Board of Directors and management, that the terms of the transaction were not negotiated by persons independent of Cyprus Amax, that the timing of the transaction precluded the Company from seeking financing in the commercial or public debt markets and prevented the Special Committee of the Board of Directors of the Company that approved entry into the transaction from seeking alternatives to the transaction. The complaint seeks, among other things, a declaration that the demand loan facility is not entirely fair to the Company and damages in an unspecified amount. The Company believes that the complaint is without merit and intends to defend the matter vigorously.
In October 1995, a purported derivative action was filed in the Court of Chancery of Delaware on behalf of a purported stockholder of the Company titled Harbor Finance Partners v. Allen Born, et al. and v. Amax Gold, Inc., as nominal - -------------------------------------------------------------------------------- defendant, C.A. No. 14637, with respect to the proposed Kubaka transaction. The - --------- complaint alleges that the individual defendants have breached their fiduciary duty in connection with the sale of Cyprus Magadan to the Company, that the price to be paid for Cyprus Magadan substantially exceeds its fair market value in an arms-length transaction, and that by agreeing to the transaction, defendants have wrongfully enabled Cyprus Amax to increase its control over the Company and have caused the Company to waste its assets. The complaint seeks, among other things, rescission of the proposed transaction and damages in an unspecified amount. The Company believes that the complaint is without merit and intends to defend the matter vigorously.
There is presently pending in United States District Court for the District of South Carolina, Rock Hill Division, litigation filed by Kershaw Gold Company, Inc., Piedmont Mining Company's subsidiary that owns 37.5 percent of the Haile project, against the Company alleging that the Company tortiously interfered with the performance by its subsidiaries, Lancaster Mining Company Inc. and Haile Mining Company, of their obligations under certain agreements. Kershaw alleges that, among other things, Amax Gold caused Lancaster to fail to complete the exploration expenditures authorized in the 1994 venture budget and initiated attempts to sell its interest in the Haile property without informing Kershaw. Kershaw claims that damages of $38 to $60 million resulted from the alleged breaches. Discovery is almost completed. The Company believes that the complaint is without merit and intends to defend the matter vigorously.
The litigation described above is part of a lawsuit filed originally in South Carolina Circuit Court in March 1995 by Piedmont Mining Company and Kershaw Gold Company, Inc. against Amax Gold, Lancaster and Haile, alleging breach of contract, fraud and tortious interference with contract rights. Pursuant to motions filed by the defendants, all claims of Piedmont and Kershaw were dismissed on the grounds that jurisdiction was to be determined by arbitration, except the claim of Kershaw against the Company described above. The plaintiff's motion for reconsideration is pending.
Pursuant to certain agreements between Piedmont, Kershaw and the Company, Piedmont and Kershaw indemnified the Company from all environmental and other liabilities arising from Piedmont's operations or other conditions existing on the Haile property prior to July 1, 1992. Following Piedmont's and Kershaw's continued refusal to pay environmental costs that the Company believed were covered by the indemnity, the Company submitted to arbitration its claim for $1.4 million, the amount of such costs incurred through August 1995. The Company prevailed in this matter and the $1.4 million arbitration award, including accrued interest, has been paid. Piedmont's and Kershaw's appeals of the arbitration award are pending in the Fourth Circuit Court of Appeals.
TMB Associates (TMB), a Nevada general partnership that is the lessor under a 1987 lease of unpatented federal mining claims (as amended, the Lease) that comprise a substantial part of the Wind Mountain mine property, initiated arbitration in 1994 against the Company asserting claims related to the formation and performance of, and alleged breach of duties with respect to, the Lease. The Company prevailed in this matter, which was concluded in early 1997.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
The consent of the Company's stockholders was solicited in connection with the approval of the Company's acquisition of an interest in the Kubaka gold mine from Cyprus Amax. See "Agreements with Cyprus Amax - Acquisition Agreement." Stockholder approval was received on December 23, 1996, with 18,550,729 votes in favor (excluding Cyprus Amax's 49,361,557 votes in favor), 2,124,684 votes against, 352,062 votes abstaining and 16,221,235 broker non-votes.
Part II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information required by this item is incorporated by reference from "Stock Market Information" on page 27 of the 1996 Annual Report.
The information required by Items 6 through 8 is incorporated by reference from the pages of the Company's 1996 Annual Report as set forth below.
Applicable Pages in 1996 Form 10-K Item Number Annual Report --------------------- ----------------
Item 6.
Item 6. Selected Financial Data..................................... 5
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 6 - 8
Item 8.
Item 8. Financial Statements and Supplementary Data................. 9 - 26
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information required by this item appears in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed within 120 days after the end of the fiscal year.* Information about Executive Officers of the Company required by this item appears in Part I of this Annual Report on Form 10-K.
Item 11.
Item 11. Executive Compensation
The information required by this item appears in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed within 120 days after the end of the fiscal year.*
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item appears in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed within 120 days after the end of the fiscal year.*
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this item appears in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed within 120 days after the end of the fiscal year.*
- -------------------- * References in this Annual Report on Form 10-K to material contained in Amax Gold's Proxy Statement for the 1997 Annual Meeting to be filed within 120 days after the fiscal year incorporate such material into this Report 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:
Pages in 1996 Annual Report -------------
1. Financial Statements Included in the 1996 Annual Report And Incorporated by Reference:
Report of Independent Accountants 9 Consolidated Statement of Operations for each of the three years in the period ended December 31, 1996 10 Consolidated Balance Sheet at December 31, 1996 and 1995 11 Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 1996 12 Consolidated Statement of Shareholders' Equity for each of the three years in the period ended December 31, 1996 13 Notes to Consolidated Financial Statements 14 - 26
2. Financial Statement Schedules
Financial statement schedules are not included in this Annual Report on Form 10-K because they are not applicable.
With the exception of the aforementioned financial statements and the information incorporated in Items 1 and 2 and Items 5 through 8, the 1996 Annual Report is not deemed to be filed as part of this Annual Report on Form 10-K.
3. Exhibits
Exhibit Number Exhibit - ------ -------
3(i) Certificate of Incorporation, dated April 13, 1995, and filed with the Secretary of State of the State of Delaware on April 26, 1995, filed as Appendix F to the Company's Proxy Statement for the 1995 Annual Meeting of Stockholders, dated April 27, 1995, and incorporated herein by reference.
3(ii) By-Laws, dated April 27, 1995, adopted on April 26, 1995, as amended and restated effective June 21, 1995, filed as Exhibit 3(ii) to the Company's Registration Statement on Form 8-B filed June 21, 1995 and incorporated herein by reference.
4.1 Certificate of Designations for the $2.25 Series A Convertible Preferred Stock, filed as Exhibit 4.1 to the Company's Registration Statement on Form 8-B filed June 21, 1995 and incorporated herein by reference.
4.2 Certificate of Designations for the $3.75 Series B Convertible Preferred Stock, filed as Exhibit 4.2 to the Company's Form 8-B filed June 21, 1995 and incorporated herein by reference.
Exhibit Number Exhibit - ------ -------
10.1 Agreement regarding issuance of stock dated September 29, 1995 between the Company and Cyprus Amax, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference.
10.2 Directors' Deferred Compensation Plan for Members of the Board of Directors of Amax Gold Inc. filed as Exhibit 10.14.2 to the Company's Registration Statement No. 33-22645 and incorporated herein by reference.
10.3 Amax Gold Inc. Excess Benefit Plan, filed as Exhibit EX-10(g) to the Company's Annual Report on Form 10-K for the year-ended December 31, 1993 and incorporated herein by reference.
10.4 Amax Gold Inc. Deferred Compensation Plan, filed as Exhibit EX-10(h) to the Company's Annual Report on Form 10-K for the year-ended December 31, 1993 and incorporated herein by reference.
10.5 Amax Gold Inc. 1992 Stock Option Plan, filed as Exhibit A to the Company's Proxy Statement for the 1993 Annual Meeting of Stockholders and incorporated herein by reference.
10.6 Amax Gold Inc. Key Executive Long-Term Incentive Plan (formerly the Amax Gold Performance Share Plan), filed as Exhibit B to the Company's Proxy Statement for the 1993 Annual Meeting of Stockholders and incorporated herein by reference.
10.7 Term Loan Agreement, dated October 31, 1995, between Amax Gold Inc., Fairbanks Mining, Inc., Guanaco Mining Company, Inc., Lassen Gold Mining, Inc., Melba Creek Mining Inc., Nevada Gold Mining, Inc. and a group of banks, filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference; Amendment to Term Loan Agreement dated December 7, 1995; Amendment to Term Loan Agreement dated March 19, 1996; and Cyprus Amax Guaranty, dated as of March 19, 1996 by Cyprus Amax, in favor of the administrative agent for the group of banks, filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference.
10.8 Exploration Joint Venture Agreement, effective January 1, 1994, between the Company and Cyprus Amax, filed as Exhibit 10.1 to the Company's Registration Statement on Form S-3 (Registration No. 33-53963) and incorporated herein by reference; and Amendment to Exploration Joint Venture Agreement, dated December 29, 1995, between the Company and Cyprus Amax, filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference.
10.9 Revolving Credit Agreement, dated as of April 15, 1994 between the Company and Cyprus Amax, filed as Appendix A to the Company's Proxy Statement for the July 26, 1994 Special Meeting of Stockholders and incorporated herein by reference; and Amendment to Revolving Credit Agreement, dated as of March 10, 1994, between the Company and Cyprus Amax, filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year-ended December 31, 1994 and incorporated herein by reference.
10.10 Loan Agreement, dated as of November 23, 1994, amended February 7 and 14, 1995, among Compania Minera Maricunga, as borrower, Amax Gold Inc. and Bema Gold Corporation, as guarantors, and certain banks, and related documents, as amended, filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year-ended December 31, 1994 and incorporated herein by reference; as amended by Letter Agreement, dated as of November 1, 1996, and Letter Agreement, dated as of December 19, 1996.
Exhibit Number Exhibit - ------ -------
10.11 Credit Agreement, dated as of March 19, 1996, between the Company and Cyprus Amax; Guaranty Fee Agreement, dated as of March 19, 1996, between the Company and Cyprus Amax; and Reimbursement Agreement, dated as of March 19, 1996, between the Company and Cyprus Amax filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year-ended December 31, 1995 and incorporated herein by reference; Amendment Agreement dated October 31, 1996, amending the Credit Agreement dated March 19, 1996 between the Company and Cyprus Amax, filed as Exhibit (10b) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference.
10.12 Services Agreement, dated as of January 1, 1994, between the Company and Cyprus Amax, filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year-ended December 31, 1995 and incorporated herein by reference.
10.13 Amended and Restated Agreement and Plan of Merger and Reorganization, dated as of October 9, 1996 among the Company, Amax Russia Corporation, Cyprus Amax, Cyprus Gold Company and Cyprus Magadan Gold Company, filed as Exhibit (10a) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference.
21 Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Mineral Resources Development, Inc.
23.3 Consent of Derry, Michner, Booth & Wahl.
27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of 1996.
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.
AMAX GOLD INC.
Date: March 12, 1997 By /s/ S. Scott Shellhaas ------------------------------------------- S. Scott Shellhaas President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 12, 1997.
Signature Title - -------------------------------------- --------------------------------------
/s/ Milton H. Ward Chairman of the Board, Chief - -------------------------------------- Executive Officer (principal Milton H. Ward executive officer) and Director
/s/ David L. Mueller Vice President, Controller and - -------------------------------------- Assistant Secretary (principal David L. Mueller financial and accounting officer)
/s/ Richard H. Block Director - -------------------------------------- Richard H. Block
/s/ Allen Born Director - -------------------------------------- Allen Born
/s/ Gerald J. Malys Director - -------------------------------------- Gerald J. Malys
/s/ Vernon F. Taylor, Jr. Director - -------------------------------------- Vernon F. Taylor, Jr.
/s/ Russell L. Wood Director - -------------------------------------- Russell L. Wood
AMAX GOLD INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA (In millions except per share amounts, percentages, production and sales ounces and amounts per ounce) Year Ended December 31,
/(1)/ In the fourth quarter of 1996, the Company recorded a $35.5 million pre- tax write-down of the Guanaco mine and an unrelated $10 million deferred tax benefit. These special items increased the net loss by $25.5 million, or $.26 per share. In 1994, the Company recorded an $18.6 million pre-tax ($14.4 million after-tax) write-down of the Hayden Hill mill to its estimated salvage value and a $2.5 million pre-tax ($2.1 million after- tax) write-down of other assets that increased the net loss by $16.5 million, or $.21 per common share. In 1993, the Company recognized a $64.1 million pre-tax ($41.9 million after-tax) write-down of Hayden Hill and a $23.6 million pre-tax ($15.6 million after-tax) write-down of Sleeper, which increased the 1993 net loss by $57.5 million, or $.74 per common share. /(2)/ Effective January 1, 1994, the Company changed its method of accounting for the cost of ore loaded on heap leach pads to record such costs as work-in-process inventory. The 1994 net loss is reduced by a $7.5 million, or $.09 per common share, after-tax benefit relating to the cumulative effect of this accounting change. Effective January 1, 1993, Amax Gold changed its exploration accounting policy such that prior period exploration expenses would no longer be capitalized and restored to
earnings when a property became exploitable. The 1993 net loss includes a $13.4 million, or $.17 per common share, after-tax charge relating to the cumulative effect of this accounting change. The 1992 net earnings include $8.9 million, or $.12 per common share, of after-tax income related to prior year exploration expenditures on the Haile and Guanaco projects that were capitalized and restored to earnings.
/(3)/ The 1993 net loss includes a $1.8 million, or $.03 per common share, after-tax cumulative effect of the January 1, 1993, adoption of Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits." Net earnings for 1992 include a $1.5 million, or $.02 per common share, after-tax cumulative effect of the January 1, 1992, adoption of SFAS No. 106, "Postretirement Benefits Other Than Pensions."
/(4)/ The Company issued 1.8 million preferred shares in August 1994. Preferred share dividends were $1.8 million during the fourth quarter of 1994.
/(5)/ Average costs weighted by ounces of gold produced at each mine.
/(6)/ Effective January 1, 1996, the Company adopted the Gold Production Cost Standard developed by the Gold Institute in order to facilitate comparisons among companies in the gold industry. Cash production costs reported in prior periods have been restated as cash operating costs and total cash costs in accordance with the new standard. Cash operating costs calculated under the new standard include all operating costs (including overhead) at the mine sites, but exclude royalties, production taxes and reclamation. Total cash costs include royalties and production taxes, but exclude reclamation. Total production costs remain unchanged and include reclamation and depreciation, depletion and amortization. Total cash costs in 1996 exclude the impact of the write-down of heap leach inventories at Guanaco.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Amax Gold reported a 1996 net loss of $34.2 million, or $.42 per share, compared with a 1995 net loss of $23.9 million, or $.36 per share, and a 1994 net loss of $35.5 million, or $.47 per share. The 1996 results included a $35.5 million after-tax write-down of the Guanaco mine in Chile, partially offset by an unrelated $10 million deferred tax benefit. Included in the 1994 results was a $16.5 million after-tax asset write-down, primarily for the Hayden Hill mill, partially offset by a $7.5 million cumulative after-tax benefit from a change in accounting for heap leach inventory.
Excluding the write-downs and special items, the 1996 net loss was $8.7 million, or $.16 per share, compared with a 1995 net loss of $23.9 million, or $.36 per share, and a 1994 net loss of $26.5 million, or $.36 per share. The Company's operating loss before write-downs was $2.4 million in 1996 compared with losses from operations before write-downs of $17.2 million and $22.8 million in 1995 and 1994, respectively. Lower cash production costs and higher gold production and sales were the primary reasons for the improved trend.
Revenue improved to $108.2 million in 1996 from $96.6 million in 1995 and $94.6 million in 1994. The increases were a result of higher gold sales and higher average realized prices. Gold sales in 1996 were 262,975 ounces, compared with 238,094 ounces in 1995 and 235,664 ounces in 1994. The increase primarily resulted from the commencement of commercial production as of October 1, 1996 at the Refugio mine in Chile, partially offset by the completion of operating activities at the Company's Sleeper mine in Nevada. Increases in production at the Hayden Hill and Guanaco mines also contributed to increased gold sales in both 1996 and 1995. Amax Gold's average realized price was $412 per ounce in 1996, $406 per ounce in 1995 and $401 per ounce in 1994 compared with average COMEX gold prices of $388 per ounce for 1996 and $384 per ounce in 1995 and 1994. Amax Gold's average realized price exceeded the average COMEX price each year due to the positive impact of hedging activities.
Gold production was 268,331 ounces in 1996, a 13 percent increase over 1995 gold production of 238,255 ounces. Gold production in 1994 was 240,885 ounces, slightly higher than 1995. The commencement of commercial production at Refugio resulted in 30,612 ounces of production for Amax Gold's account in the fourth quarter. Guanaco and Hayden Hill both set production records during 1996. Guanaco produced 96,018 ounces during 1996, an increase of nearly 36 percent from 1995 production of 70,850 ounces. Improved crusher efficiency and higher grades were the main factors in achieving the record. Hayden Hill's 1996 production increased more than 29 percent to 103,502 ounces from 1995 production of 80,031 ounces due to higher grades as well as improved recovery. In 1994, Guanaco and Hayden Hill produced 57,675 and 65,785 ounces of gold, respectively. Mining is expected to be completed in mid-1997 at Guanaco and in late 1997 at Hayden Hill with residual leaching continuing into 1998 at both mines. Sleeper's production declined to 38,199 ounces in 1996 compared with 82,062 ounces in 1995 and 106,912 ounces in 1994. Operations were completed at Sleeper during the third quarter of 1996 and lower grades and recoveries at the end of the mine life resulted in reduced production. Consolidated production is expected to increase significantly during 1997 as the Company's new mines reach full production levels.
The Company's cost of sales declined for the fourth year in a row, reflecting a trend of lower average cash costs and drawing down low-cost Sleeper inventory from an early LIFO layer. Consolidated cash costs were reduced to $255 per ounce for 1996 compared with $313 per ounce for 1995 and $329 per ounce for 1994. Refugio's 1996 cash costs were $242 per ounce, which is in line with expectations. Guanaco lowered its 1996 cash costs excluding the impact of the write-down of heap leach inventories by nearly 23 percent to $290 per ounce. The reduction in cash costs primarily resulted from the
significant increase in production at Guanaco during 1996 as well as lower mining costs resulting from a renegotiated arrangement with the contract miner. Hayden Hill's 1996 cash costs decreased by $24 per ounce to $229 per ounce compared with 1995, also primarily due to higher production. At Sleeper, cash costs were reduced during 1996 by $78 per ounce to $247 per ounce, despite significantly lower production, due to the processing of previously stockpiled ore and residual recovery of gold with low associated mining costs. The decrease in consolidated cash costs from 1995 to 1994 was attributed to increased production at Hayden Hill and Guanaco, which lowered cash costs, partially offset by higher cash costs at Sleeper due to reduced production. Cash costs are expected to continue to decline during 1997 due to the impact of Refugio, Fort Knox and Kubaka, assuming start-up, operations and the acquisition of Kubaka proceed as expected.
During the fourth quarter, the Company recorded a $35.5 million write-down of the Guanaco mine as a result of a detailed study of the continuity of ore, costs and production rates. The write-down was partially offset by an unrelated $10 million tax benefit resulting from the reversal of deferred income taxes, which are no longer anticipated due to revised mine economics.
Depreciation and depletion increased to $29.8 million during 1996 mainly as a result of higher depreciation and depletion rates at Guanaco and Sleeper, as well as the increased percentage of total production from Guanaco, which has a significantly higher depletion rate, and commercial production at Refugio. Guanaco's rate increased in 1996 due to a revised mine plan, which lowered estimated future production, while at Sleeper the rate increased due to higher than anticipated capital spending during 1995. The consolidated depreciation and depletion rate was $110 per ounce during 1996 compared with $91 per ounce during 1995.
General and administrative costs increased slightly in 1996 to $8.3 million as a result of severance expenses related to management changes recorded during the first half of the year, partially offset by cost reductions from a second quarter corporate reorganization.
Reduced exploration activities during 1996 resulted in exploration spending of $3.5 million, which was approximately 41 percent lower than 1995 spending of $5.9 million. During 1995 the Company spent approximately $2.3 million on two projects which subsequently were discontinued. During 1997, exploration costs are expected to be approximately $10 million, reflecting increased activities in Russia, assuming the acquisition of Kubaka is completed, and at the Company's existing properties.
Interest expense was $29.7 million in 1996 compared with $13.3 million in 1995. The increase is attributed to higher average debt balances which were necessary to fund the Company's capital spending on its construction projects. Capitalized interest of $22.8 million in 1996 was nearly four times higher than in 1995 due to increased capital spending at Fort Knox, the delay in start-up at Refugio and a higher weighted average interest rate. Interest income declined to $1.6 million in 1996 from $3.0 million in 1995 as a result of reduced funds available for investment.
Other expense of $1.0 million was $1.3 million lower than 1995 due to the receipt of $1.4 million in payment of a previously reserved environmental arbitration award related to the Company's Haile property.
Liquidity and Capital Resources
Amax Gold's operating cash flow improved to $16.5 million in 1996 from $2.6 million in 1995. The major reason for the improved cash flow was lower cash costs at the Company's operating mines. Working capital was negative for the 1996 year-end primarily due to the classification of the amount due under the Cyprus Amax demand loan as a current liability.
Capital expenditures declined from 1995 levels due to the completion of construction at Refugio during 1996, partially offset by increased spending at Fort Knox. Commercial production was achieved at the Refugio mine in Chile as of October 1, 1996, where capital spending, excluding capitalized interest, totaled approximately $12 million for 1996 compared with about $50 million in 1995. During December 1996, the first gold was poured at the Fort Knox mine near Fairbanks, Alaska, and commercial production is expected in early 1997. Capital spending, excluding capitalized interest, at Fort Knox was approximately $173 million during 1996 compared with approximately $150 million in 1995. Amax Gold received shareholder approval to acquire Cyprus Amax's 50 percent interest in the Kubaka mine in late December 1996. The transaction should be completed in early 1997. The first gold was poured at Kubaka during February 1997 and
commercial production is expected by mid-1997. Capital spending should decrease substantially in 1997 with the completion of the construction of the Company's new mines.
Net financing activities in 1996 generated $181.5 million in cash. As a result of projected cost increases in completing the Fort Knox mine and other projected cash needs, the Company renegotiated the $250 million Fort Knox loan, which Cyprus Amax has guaranteed until economic completion. The remaining $50 million of the Fort Knox financing was drawn during the first quarter of 1996. Also during the first quarter of 1996, Cyprus Amax made available to Amax Gold a demand loan facility to be used to fund additional capital costs at Fort Knox and for general corporate purposes. The Company borrowed $130 million under this facility during 1996 and an additional $9.7 million through February 1997. Funding is provided solely at the discretion of Cyprus Amax. As a condition of the Fort Knox refinancing, Amax Gold repaid $5 million to Cyprus Amax borrowed under the $100 million convertible line of credit and agreed not to make additional draws without the consent of Cyprus Amax. In August 1996, the Company completed a sale-leaseback of Fort Knox mobile mine equipment for proceeds of $24.3 million.
During 1997, Amax Gold's capital spending will be reduced significantly to approximately $40 million, excluding Kubaka. Assuming start-up and operations at the Company's mines proceed as expected, cash flow from operations should be sufficient to satisfy the Company's remaining cash needs, including scheduled third-party debt service. Although the Company does not anticipate requiring significant additional funding from Cyprus Amax for the remainder of the year, the Company expects that Cyprus Amax would make additional financing available if necessary. The Company anticipates that repayments, if any, of the Cyprus Amax demand loan could be funded through additional external financing. Amax Gold is considering various options to restructure its debt and capital, which could include accessing public debt and equity markets.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
With the exception of historical matters, the matters discussed in this report are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. Such forward- looking statements include statements regarding expected dates for commencement of mining, gold production and commercial production, projected quantities of future gold production, estimated reserves and recovery rates, anticipated production rates, costs and expenditures, prices realized by the Company, growth plans and sources of financing and repayment alternatives. Factors that could cause actual results to differ materially include, among others: risks and uncertainties relating to general domestic and international economic and political conditions, the cyclical and volatile price of gold, the political and economic risks associated with foreign operations, cost overruns, construction delays, unanticipated ground and water conditions, unanticipated grade and geological problems, metallurgical and other processing problems, availability of materials and equipment, the timing of receipt of necessary governmental permits, the occurrence of unusual weather or operating conditions, force majeure events, lower than expected ore grades, the failure of equipment or processes to operate in accordance with specifications or expectations, labor relations, accidents, delays in anticipated start-up dates, environmental risks, the results of financing efforts and financial market conditions and other risk factors detailed in the Company's Securities and Exchange Commission filings. Many of such factors are beyond the Company's ability to control or predict. Readers are cautioned not to put undue reliance on forward-looking statements. The Company disclaims any intent or obligation to update publicly these forward- looking statements, whether as a result of new information, future events or otherwise.
REPORT OF MANAGEMENT
The management of Amax Gold Inc. is responsible for the integrity and objectivity of the financial statements and other financial information contained in this Annual Report. The financial statements were prepared in accordance with generally accepted accounting principles and include estimates that are based on management's best judgment.
Amax Gold maintains an internal control system which includes formal policies and procedures designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with management's authorization. Amax Gold's internal audit function audits compliance with the internal control system and issues reports to Amax Gold's management and the Audit Committee of the Board of Directors.
Amax Gold's financial statements have been audited by independent accountants, whose appointment is ratified yearly by the shareholders at the annual shareholders' meeting. The independent accountants conducted their audits in accordance with generally accepted auditing standards. These standards include an evaluation of the internal accounting controls in establishing the scope of audit testing necessary to allow them to render an independent professional opinion on the fairness of Amax Gold's financial statements.
The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with representatives of management and the independent accountants to review their work and ensure that they are properly discharging their responsibilities.
Milton H. Ward Chairman and Chief Executive Officer
S. Scott Shellhaas President and Chief Operating Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Amax Gold Inc.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Amax Gold Inc. and its subsidiaries at 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. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Denver, Colorado
February 12, 1997
AMAX GOLD INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Year-ended December 31, (In millions except per share amounts)
The accompanying notes are an integral part of these statements.
AMAX GOLD INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, (In millions except share amounts)
The accompanying notes are an integral part of these statements.
AMAX GOLD INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Year-ended December 31, (In millions)
*During the fourth quarter of 1996, the Company issued $15.2 million in stock to Cyprus Amax in payment of $5.2 million in interest and a $10 million guaranty and financing fee. The guaranty and financing fee was recorded as unearned equity and $1.4 million was amortized during 1996.
Cash paid for interest (including interest capitalized) was $17.9 million, $9.2 million and $8.2 million in 1996, 1995 and 1994, respectively. There were no income taxes paid during 1996, 1995 or 1994.
The accompanying notes are an integral part of these statements.
AMAX GOLD INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (In millions)
The accompanying notes are an integral part of these statements.
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
1. NATURE OF OPERATIONS
Amax Gold Inc. and its subsidiaries (Amax Gold or the Company) are engaged in the mining and processing of gold and silver ore and the exploration for, and acquisition of, gold-bearing properties, principally in the Americas, Russia, Australia and Africa. The Company's primary products are gold and silver produced in the form of dore and then shipped to refiners for final processing. The Company is currently 52.5 percent owned by Cyprus Amax Minerals Company (Cyprus Amax).
The Company produces gold and silver using both the traditional milling process and heap leaching. All of the Company's operating properties are open pit mines. The Company owns the Fort Knox mine near Fairbanks, Alaska, which was essentially completed in early 1997 and is nearing commencement of commercial production. The Company's operating properties consist of a 50 percent interest in the Refugio mine in Chile; the Hayden Hill mine in Lassen County, California; and a 90 percent interest in the Guanaco mine in Chile. The Company also owns the Sleeper mine in Humboldt County, Nevada, and the Wind Mountain mine in Washoe County, Nevada, which are in reclamation. In addition the Company owns a 62.5 percent joint venture interest in the Haile property in Lancaster County, South Carolina. The Company expects to acquire a 50 percent interest in the Kubaka mine, which is currently under construction in the Russian Federation, from Cyprus Amax in early 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Amax Gold and the related entities that it controls. Investments in companies over which the Company can exercise significant influence but not control are accounted for using the equity method. Investments in joint ventures are accounted for using proportionate consolidation, consistent with accepted mining industry practice. All material intercompany balances and transactions have been eliminated. Certain 1995 and 1994 amounts have been reclassified to conform to the 1996 presentation.
Earnings Per Share
Earnings per common share have been calculated on the basis of the average common shares outstanding. Outstanding Company stock options were not considered in the earnings per share calculation as these were antidilutive.
Cash and Equivalents
Cash and equivalents include cash and highly liquid investments with an original maturity of three months or less. The Company invests cash in time deposits maintained in high credit quality financial institutions.
Inventories
Gold inventory is valued at the lower of aggregate cost, computed on a last-in, first-out (LIFO) basis, or market. Materials and supplies are valued at average cost less reserves for obsolescence.
Property, Plant and Equipment
Property, plant and equipment, including development expenditures and capitalized interest, are carried at cost. Expenditures for major improvements are capitalized. Gains and losses on retirements are included in earnings. Depreciation and depletion are computed using the units-of-production method based on the estimated ounces of gold to be recovered and estimated salvage values. Mobile equipment and assets that have useful lives shorter than the mine life are depreciated on a straight-line basis over estimated useful lives of one to five years.
In the third quarter of 1995, Amax Gold adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of." In the event that facts and circumstances indicate that the carrying amount of an asset may not be recoverable and an estimate of future
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
undiscounted cash flows is less than the carrying amount of the asset, an impairment loss will be recognized. See Note 6 for discussion of the write-down of the Guanaco mine recorded in the fourth quarter of 1996 in accordance with SFAS No. 121. Adoption of SFAS No. 121 had no effect on the Company's results of operations for the year-ended December 31, 1995.
Exploration Exploration expenditures are charged against earnings in the period incurred.
Gold and Currency Financings
The Company uses various gold and currency financings to fund its mining activities. To finance investments with gold loans the Company borrows gold from banks and sells the gold on the open market. Gold loans are recorded on the balance sheet at the price received when the borrowed gold is sold. The banks are repaid from future gold production, at which time revenues are recorded. Gold loans bear relatively low interest rates, result in a hedge against future gold price fluctuations and limit realized prices to the amounts received when the borrowed gold is sold.
Currency financings represent borrowings in hard currency, typically U.S. dollars. The terms, including interest rates, are negotiated with lenders based on market conditions at the time the financing is arranged.
Foreign Currency Translation
The U.S. dollar is the functional currency of all of the Company's foreign subsidiaries. The financial statements of foreign subsidiaries are remeasured in U.S. dollars based on a combination of both current and historical exchange rates; gains and losses due to this remeasurement are reflected in the consolidated statement of operations. For the years ended December 31, 1996, 1995 and 1994, translation losses were insignificant.
Hedging Activities
Forward sale contracts, generally on a spot deferred basis, put and call option contracts and compound options are entered into to hedge the effect of price changes on the Company's precious metals that are produced and sold. Premiums paid for purchased options and premiums earned on sold options are deferred and recognized in income over the term of the related option. The results of gold hedging activities are included in revenues at the time the hedged production is sold. Silver hedging results are reflected as a by-product credit.
Interest rate swap options are entered into as a hedge against interest rate exposure on the Company's floating rate financing facilities in order to fix the Company's interest costs. The differences to be paid or received on swap options are included in interest expense as incurred.
Postretirement Benefits
Postretirement benefits other than pensions are calculated in accordance with the provisions set forth in SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires the expected cost of postretirement benefits other than pensions to be accrued during the years the employee renders service.
Postemployment Benefits
Postemployment benefits are calculated in accordance with the provisions set forth in SFAS No. 112, "Employers' Accounting for Postemployment Benefits." SFAS No. 112 requires the Company to expense postemployment benefits as they are earned by the employee for services rendered, rather than as they are paid.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in 1995 and is effective for fiscal years beginning after December 15, 1995. Amax Gold adopted SFAS No. 123 in 1996 and has elected to continue to measure compensation
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
cost using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 12 for further discussion of net income and earnings per share as if the fair value based method of accounting as defined in SFAS No. 123 had been applied.
Reclamation
Reclamation, site restoration and closure costs for each producing mine are estimated based primarily on environmental and regulatory requirements and are accrued over the expected life of each mine using the units-of-production method. Ongoing environmental and reclamation expenditures are expensed as incurred.
Income Taxes
Income taxes are calculated in accordance with the provisions set forth in SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income taxes are determined using an asset and liability approach. This method gives consideration to the future tax consequences associated with differences between the financial accounting and tax basis of assets and liabilities and gives immediate effect to changes in income tax laws. The income statement effect is derived from changes in deferred income taxes on the balance sheet.
Use of Estimates
The preparation of Amax Gold's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Management's estimates are made in accordance with mining industry practice. Significant areas requiring the use of management estimates relate to the determination of mineral reserves, reclamation and environmental obligations, impairment of assets, postretirement and other employee benefits, useful lives for depreciation, depletion and amortization, and valuation allowances for deferred tax assets. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
As of December 31, 1996, Cyprus Amax owned approximately 52 million Common Shares, or approximately 52.5 percent, of the Company's outstanding Common Stock. As discussed below, the increase in Cyprus Amax's ownership resulted from various financial transactions with Cyprus Amax. See also Note 6 for discussions related to the Kubaka acquisition agreement.
Financing Arrangements
Pursuant to a financing arrangement with Cyprus Amax, approved by the Company's shareholders in September 1996, Cyprus Amax has guaranteed the Company's $250 million Fort Knox loan until economic completion of the Company's Fort Knox mine and has provided the Company with a $250 million demand loan facility, in exchange for which the Company has agreed to (i) pay Cyprus Amax a financing and guaranty fee of $10 million, (ii) pay Cyprus Amax 1.75 percent annually on amounts outstanding under the Fort Knox loan, (iii) reimburse Cyprus Amax for any payments made or costs incurred under the Cyprus Amax guaranty, (iv) make no additional borrowing under the $100 million convertible line of credit without the prior consent of Cyprus Amax, and (v) grant Cyprus Amax a first priority security interest in the collateral for the Fort Knox loan, and if requested, security interests in certain additional assets to the extent available. All of these obligations to Cyprus Amax are payable in cash or, at the election of Cyprus Amax, in shares of Common Stock, valued at the time of issuance of the shares.
On November 1, 1996, Cyprus Amax elected to receive payment in shares of Common Stock of an aggregate of $15.2 million for all accrued interest on the demand loan and interest differential payments due through October 31, 1996, as well as the $10 million financing and guaranty fee. On November 12, 1996, the Company issued 2.8 million shares of Common Stock to Cyprus Amax as payment for such obligations. As of December 31, 1996, the Company had borrowed $130 million under the demand loan at an average rate of 8.1 percent. Interest and interest differential expense accrued as of
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
December 31, 1996 totaled $2.3 million. Funding is provided solely at the discretion of Cyprus Amax. Although the Company does not anticipate requiring significant additional funding from Cyprus Amax for the remainder of the year, the Company expects that Cyprus Amax would make additional financing available if necessary. The $10 million guaranty and financing fee was recorded as unearned equity and is being amortized over the expected period of the demand loan and Cyprus Amax guaranty. During 1996, $1.4 million was amortized.
In April 1994, Cyprus Amax provided the Company with a $100 million convertible line of credit. Outstanding amounts under the credit line bear interest at LIBOR plus 0.3 percent and may be repaid through the issuance of up to two million shares of $2.25 Series A Convertible Preferred Stock. Amax Gold may redeem the Convertible Preferred Stock by issuing up to 12,099,213 shares of Common Stock at a maximum price of $8.265 per share and a minimum price of $5.854 per share. Cyprus Amax may convert the line of credit, any outstanding indebtedness and/or Convertible Preferred Stock to 12,099,213 shares of Amax Gold Common Stock valued at $8.265 per share. At December 31, 1995, $5.0 million was outstanding under this arrangement which was repaid in April 1996. The average annualized interest rate on this borrowing was 6.5 percent for the year-ended December 31, 1995.
In March 1995, Cyprus Amax provided the Company with an additional $80 million convertible line of credit. During 1995, the full amount was borrowed by the Company and subsequently converted by Cyprus Amax to 14,919,806 shares of Amax Gold Common Stock at $5.362 per share.
Other Agreements
In September 1995, the Company and Cyprus Amax entered into an agreement regarding stock issuance pursuant to which obligations owing from the Company to Cyprus Amax under existing or future contractual arrangements may be paid in shares of Common Stock with the consent of both parties. The stock will be valued based on the most recent 30-day average closing price, and the maximum number of shares of Common Stock that may be issued is 879,500 shares. In September 1995, 128,042 shares of such Common Stock were issued to Cyprus Amax as payment for $835,473 due under the $80 million convertible line of credit.
The Company has entered into several additional agreements with Cyprus Amax. Under an exploration joint venture agreement the two companies pool efforts to discover and develop new gold properties, with Cyprus Amax providing 75 percent and the Company providing 25 percent of initial funding. Amax Gold was charged $2.5 million, $3.1 million and $1.1 million under this agreement for the years ended December 31, 1996, 1995 and 1994, respectively.
A services agreement governs the provision of and payment for general administrative services between Cyprus Amax and the Company. For the years ended December 31, 1996, 1995 and 1994, insurance, management and other services were supplied to the Company on a full cost reimbursement basis. The Company was charged $3.4 million, $4.3 million and $4.8 million for the years ended December 31, 1996, 1995 and 1994, respectively, for reimbursable costs. As of December 31, 1996 and 1995, the Company had outstanding amounts due to Cyprus Amax of $0.3 million and $0.5 million, respectively, relating to such services. Pursuant to an employee transfer agreement, the Company and Cyprus Amax have amended their respective benefit plans to allow employees to transfer from the Company to Cyprus Amax or from Cyprus Amax to the Company with minimal effect on an employee's benefits.
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
4. INCOME TAXES
Income (loss) before income taxes consists of the following:
The income tax benefit consists of the following:
The total income tax benefit is included in the financial statements as follows:
The components of deferred tax (assets) liabilities are as follows:
The following is a reconciliation between the amount determined by applying the federal statutory rate of 34 percent to the loss before taxes and the income tax benefit:
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
The valuation allowance increased $6.7 million in 1996 due to uncertainties of realizing loss carryforwards in the future.
At December 31, 1996, the Company had federal tax net operating loss carryforwards of $99 million and alternative minimum tax net operating loss carryforwards of $82 million expiring in the years 2004 through 2011 and minimum tax credit carryforwards of $3 million, which do not expire. At December 31, 1996, the Company also had Chilean tax net operating loss carryforwards of $99 million, which do not expire.
During 1996, $10 million of deferred income taxes were reversed due to revised mine economics.
The Company will file certain state income tax returns for 1996 on a combined basis with Cyprus Amax. State tax expense and related liabilities have been determined as if the Company filed separate income tax returns. The Company is not included in the Cyprus Amax federal income tax return.
5. INVENTORIES
Inventories at December 31, 1996 and 1995, consisted of the following:
The LIFO basis of product inventory at December 31, 1996 and 1995, approximated its replacement cost. During 1996, the Company reduced certain inventory quantities that were valued at lower LIFO costs prevailing in prior years. The effect of this reduction was to increase net income by approximately $2.4 million.
Effective January 1, 1994, the Company changed its method of accounting for the costs of ore loaded on heap leach pads to record such costs as work-in-process inventory. Previously, the Company had expensed these costs as incurred. The cumulative after-tax effect of the change in accounting for inventory for periods prior to 1994 was a decrease in the net
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
loss of $7.5 million or $.09 per common share. The effect of the accounting change in 1994 was a reduction in cost of sales of $0.3 million.
6. PROPERTY, PLANT AND EQUIPMENT AND WRITE-DOWNS
The components of property, plant and equipment at December 31, 1996 and 1995, were as follows:
Acquisition of Kubaka
The Company has agreed to acquire, subject to certain conditions, from Cyprus Amax its indirect 50 percent interest in the Kubaka mine, located in the Magadan Oblast of the Russian Federation. The remaining 50 percent interest is held by five Russian shareholders. The Kubaka mine has proven and probable reserves of approximately 2.66 million ounces of gold, of which the Company's share would be 1.33 million ounces. Additional gold and silver deposits, not classified as reserves, are included in the acquisition.
The purchase price is payable in shares of the Company's Common Stock, with approximately 11.8 million shares payable at closing and 4.2 million shares paid upon commencement of commercial production, valued at $5.9375 per share, the average closing price for the ten trading days preceding the public announcement of the acquisition. In addition, the Company would make a contingent payment of $10 per gold equivalent ounce, not to exceed $45 million in the aggregate, of the Company's pro rata share of proven and probable reserves established on new properties in the Russian Federation which the Company acquires the rights to mine on or before June 30, 2004.
The first gold was poured at the Kubaka mine in February 1997 and commercial production is expected by mid-1997. Capital costs are expected to be $228 million, which exceeds the original estimate of $180 million by $48 million. The increase reflects a delayed start-up, higher logistics and freight costs, higher than anticipated labor costs and taxes and some design changes.
As of December 31, 1996, Kubaka has been funded with $86 million in equity contributions by Cyprus Amax and the Russian partners, $100 million in project financing provided by the European Bank for Reconstruction and Development (EBRD) and the Overseas Private Investment Corporation (OPIC) and $14 million in subordinated debt from a bank licensed to do business in Russia to fund part of the increased capital costs. An additional $30 million in project financing was provided by EBRD and OPIC in February 1997. Cyprus Amax has provided a guaranty of the financing, which will remain in place until the project meets certain completion tests. Amax Gold expects to complete the acquisition of the Kubaka mine in early 1997.
Asset Write-Downs
As a result of a detailed study of the continuity of ore, costs and production rates at the Company's Guanaco mine, the Company recorded a $35.5 million pre- tax write-down during the fourth quarter of 1996. Included in the write-down were $9.4 million of heap leach inventories which were impaired due to lower actual and expected future recovery rates. Mining is expected to be completed at Guanaco during the second quarter of 1997 with residual leaching continuing into 1998.
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
The Company recognized an $18.6 million pre-tax write-down of Hayden Hill assets during the fourth quarter of 1994 as a result of its determination that a mill operation would not be economic. The Company also wrote down $2.5 million pre- tax of other assets in 1994.
7. LONG-TERM DEBT
Scheduled debt maturities as of December 31, 1996 (in millions) were $39.3, $67.4, $67.7, $68.8 and $62.8 for the years 1997 through 2001, respectively.
In August 1996, the Company completed a sale-leaseback of Fort Knox mobile mining equipment for proceeds of $24.3 million, which were used primarily to fund construction of the Fort Knox mine. Lease payments are due quarterly with maturity in 2004. Interest rates on the equipment leases range from 7.7 percent to 8.7 percent with approximately 73 percent of the equipment leases at 8.4 percent, maturing in 2001.
During October 1995, the Company completed a term loan agreement for $250 million to be used for construction of the Fort Knox mine and repayment of certain existing debt obligations. The loan has a six-year term with repayments beginning in 1997. As of December 31, 1996, the Company had borrowed $37 million in gold at $381 per ounce and the remaining $213 million in currency. Interest on the loan is calculated at LIBOR for the dollar portion and at the bank's lease rate for the gold portion, plus 2.25 or 2.0 percent at certain intervals of construction or plus 1.75 percent after completion tests are passed. Collateral for the loan includes the assets and production of the Fort Knox and Hayden Hill mines and the stock of the subsidiaries owning the Sleeper and Guanaco mines. The loan agreement places restrictions on proceeds of future equity offerings and borrowings, restricts dividends and requires certain net worth and cash ratios be maintained. Interest rate protection agreements must be in place for at least 50 percent of any dollar portion of the borrowing. In addition, Amax Gold must maintain gold reserve minimums and hedge a portion of future production in order to obtain specified minimum cash flows.
In March 1996, as a result of projected higher capital costs to complete the Fort Knox mine and other cash needs anticipated in 1996, the Company renegotiated the Fort Knox loan and entered into certain other financial arrangements with Cyprus Amax. See "Financing Arrangements" in Note 3 for further discussion. Cyprus Amax has guaranteed the loan until economic completion of the Fort Knox mine, as defined in the loan agreement, and the Company has agreed not to borrow without the consent of Cyprus Amax under the $100 million credit line previously provided by Cyprus Amax, which forms part of the guaranty.
In February 1995, Compania Minera Maricunga (CMM), a 50 percent owned joint venture of Amax Gold, obtained $85 million in financing to build the Refugio mine in Chile. The loan was drawn in 223,684 ounces of gold, which were sold for $380 per ounce. The Company and the other 50 percent owner are guarantors on a several basis in proportion to their respective ownership interests until completion tests are passed, at which time the loan becomes non-recourse to the Company. The loan is a five-year amortizing term loan that can be transferred between gold and U.S. dollars. Interest
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
on the loan is calculated at LIBOR for any U.S. dollar portion and at the bank's gold lease rate for any gold portion, plus 1.75 percent during the construction phase and 2.5 percent after completion tests are passed.
8. HEDGE CONTRACTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Hedge Contracts
Precious metal hedge contracts include forward sales contracts, spot deferred forward sales, put and call options and compound options and are entered into by the Company to hedge the effect of price changes on the Company's precious metals that are produced and sold. Realization under these contracts is dependent upon the counterparties performing in accordance with the terms of the contracts. The Company does not anticipate non-performance by the counterparties.
Forward sales contracts require the future delivery of gold at a specified price. Forward sales contracts that are made on a spot deferred basis allow the Company to defer the delivery of gold under a forward sales contract to a later date at a renegotiated market price. Various factors influence the decision to close a spot deferred forward sales contract or to roll the contract forward to a later date. A put option gives the put buyer the right, but not the obligation, to sell gold to the put seller at a predetermined price on or before a predetermined date. A call option gives the call buyer the right, but not the obligation, to buy gold from the call seller at a predetermined price on or before a predetermined date. The Company also uses compound options to protect against decreases in gold prices and to reduce the initial cash outlay needed to provide this protection. The call portion of a compound option allows the Company to purchase a put. The Company's risk in purchasing compound options is limited to the premium paid.
As of December 31, 1996, the Company's outstanding hedge contracts were as follows:
/(1)/ Represents the net forward sales position, which was made primarily on a spot deferred forward basis, and which allows for deferral of the delivery of gold ounces to a later date at a renegotiated gold price.
The market value of the Company's forward contracts and put and call options at December 31, 1996 and 1995, was approximately $25.1 million and $22.6 million. Future market valuations for these contracts are dependent on gold market prices, option volatility and interest rates, which can vary significantly. These contracts will be utilized in the future to hedge against declines in gold market prices for the Company's future gold production while maintaining benefits in the event of higher gold market prices.
Interest Rate Protection Agreements
As a requirement of the Fort Knox loan, the Company has entered into interest rate swap option agreements to reduce the impact of changes in interest rates. At December 31, 1996, the Company had interest rate swaps and swap option sales contracts that if exercised between February 1997 and April 1998 would obligate the Company to pay a fixed rate of 5.7 percent over an average term of 1.6 years on a principal amount of $190 million. Swap options that expired January 1997 were sold to offset $20 million of swap contracts that if exercised would reduce the Company's obligation to paying a fixed
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
rate of 5.6 percent on a principal amount of $170 million. The Company also purchased swap options with the right to pay 6.7 percent over an average term of 2.0 years on a principal amount of $150 million. Gains or losses realized on these contracts will be amortized over the term of the loan. Amax Gold would break even if required to terminate these interest rate swap agreements, given market interest rates at December 31, 1996. Due to the requirements placed on the Company as a condition of its Fort Knox borrowings, the Company does not expect to close these contracts.
Credit Risk
Amax Gold is exposed to credit losses in the event of non-performance by counterparties to financial instruments, but does not expect any counterparties to fail to meet their obligations. The Company generally does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of counterparties.
The estimated fair values for financial instruments under SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair values of the Company's financial instruments, as measured on December 31, 1996 and 1995, are as follows:
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and Equivalents The carrying amounts approximate fair value because of the short maturity of these instruments.
Long-Term Receivables The fair value is estimated based on expected discounted future cash flows, including applicable interest.
Long-Term Debt The fair value is estimated based on the quoted market prices for the same or similar issues offered to the Company for debt of similar maturities.
Hedge Contracts
The fair value of options is estimated based on market prices, volatilities and interest rates, while the fair value of forward sales is estimated based on the quoted market price for the contracts at December 31, 1996 and 1995. The net asset of $9.6 million and $10.1 million recorded on the financial statements as of December 31, 1996 and 1995 is comprised of $10.6 million and $5.4 million in prepaid option costs, $6.3 million and $7.8 million in deferred option costs and net of $7.3 million and $3.1 million in current deferred premiums, respectively.
Interest Rate Protection Agreements
The fair value of interest rate protection agreements is estimated by obtaining quotes from financial institutions and represents the cost to buy out the swaps and options at December 31, 1996 and 1995. The Company does not expect to buy out these agreements.
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
9. EMPLOYEE BENEFITS
Pension Plan
Substantially all employees in the United States are covered by a non- contributory defined benefit pension plan. Benefits are based generally on years of service and compensation levels prior to retirement. The Company makes annual contributions to the plan in accordance with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). Effective July 1, 1994, the Company amended its plan to a career average plan from a final pay plan. The change had the effect of reducing the projected benefit obligation and annual pension expense. Plan assets are invested in a balanced fund and small capital equity fund.
Net annual pension cost includes the following components:
The following table summarizes the funded status of the plan and the related amounts recognized in the Company's financial statements at December 31:
The following assumptions were used in calculating the funded status of the plan at December 31 and the pension cost for the subsequent year:
Postretirement Benefits Other than Pensions
The Company also provides certain health care and life insurance benefits for retired employees in the United States. The postretirement health care plans are contributory in certain cases based upon years of service, age and retirement date.
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
The Company currently does not fund postretirement benefits and may modify plan provisions at its discretion. Net periodic postretirement benefit costs for the years ended December 31, 1996, 1995 and 1994, were insignificant.
The following table sets forth the status of the plan and the related amounts recognized in the Company's financial statements at December 31:
The accumulated postretirement benefit obligation was determined using a weighted average annual discount rate of 7.75 percent in 1996 and 7.25 percent in 1995. The assumed health care cost trend rate for 1997 is 9 percent, declining gradually by one-half percent per year to 4.25 percent by 2010 and thereafter. A one percent increase in the health care cost trend rate used would have resulted in an insignificant increase in the 1996 postretirement benefit cost and the accumulated postretirement benefit obligation at December 31, 1996.
Postemployment Benefits
The Company also has a number of postemployment plans covering severance, disability income, and continuation of health and life insurance for disabled employees. At December 31, 1996 and 1995, the Company's liability for postemployment benefits totaled $3.9 million and $4.4 million, respectively, and is included in other liabilities.
10. PREFERRED STOCK
In August 1994, the Company sold publicly 1.8 million shares of $3.75 Series B Convertible Preferred Stock (Preferred Stock) for net proceeds of $88.3 million. The Preferred Stock is convertible at the option of the holder at any time at an initial conversion price of $8.25 per share (equivalent to a conversion rate of 6.061 shares of Common Stock for each share of Preferred Stock), subject to adjustment in certain events. If all of the Preferred Stock were to be converted, an additional 11.2 million Common Shares would be issued.
The Preferred Stock is redeemable at the option of the Company at any time on or after August 15, 1997, in whole or in part, for cash, initially at a redemption price of $52.625 per share declining ratably annually to $50.00 per share on or after August 15, 2004, plus accrued and unpaid dividends.
Annual cumulative dividends of $3.75 per share are payable quarterly on each November 15, February 15, May 15 and August 15, as and if declared by the Board of Directors.
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
11. COMMON STOCK
In February 1992, the Company's Board of Directors approved a Dividend Reinvestment Plan whereby shareholders of the Company may elect to reinvest any future Common Stock dividend payments in additional shares of the Company's Common Stock. Three million shares of the Company's Common Stock are reserved for issuance pursuant to this plan.
In 1994, the Company's shareholders approved a plan to grant Common Shares to non-employee directors, under which 100,000 shares of Common Stock were reserved for issuance. In each of May 1996, June 1995 and August 1994, 7,500 shares were issued.
During 1995, Amax Gold was reincorporated in Delaware and elected not to be governed by Section 203 of the Delaware General Corporation Law, permitting the Company to engage in business transactions with Cyprus Amax without requiring the approval of 66 2/3 percent of all shareholders excluding Cyprus Amax and its affiliates and associates. As a result of the reincorporation, Amax Gold's treasury stock was cancelled.
12. STOCK-BASED COMPENSATION PLANS
At December 31, 1996, the Company has two stock-based compensation plans, which are described below. The Company applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan. The compensation cost that has been charged against income for its long-term incentive plan was insignificant for 1996 and 1995. Had compensation cost for the Company's two stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the difference in the Company's net income and earnings per share would have been immaterial.
The Company maintains a fixed stock option plan for officers and salaried employees to purchase Common Shares. Options are exercisable at prices equal to the market value on the date of grant. Options vest in two years and remain exercisable until ten years from date of grant. As of December 31, 1996, 2.0 million Common Shares are reserved for future grants.
A summary of the status of the Company's fixed stock option plan as of December 31, 1996 and 1995 and changes during the years ending on those dates is presented below:
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
During 1993, Amax Gold implemented a long-term incentive plan. Under this plan, officers of the Company may receive restricted stock awards based on the rate of return received by investors in the Company's Common Stock, compared with that of its peers in the gold industry. Such awards may be deferred, accelerated or otherwise adjusted based upon a strategic and comparative performance assessment. Effective January 1, 1996 and 1995, 52,550 shares and 35,400 shares were granted at grant prices of $7.75 and $5.63, respectively. As of December 31, 1996, 762,050 shares were reserved for issuance. The valuation of the shares issued under the performance share plan as calculated under SFAS No. 123 approximates the amounts already recorded as compensation expense by the Company and is insignificant for the years ended December 31, 1996 and 1995.
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
13. DOMESTIC AND FOREIGN OPERATIONS
The Company's foreign operations consist of the Guanaco and Refugio mines in Chile. The components of the Company's domestic and foreign operations were as follows:
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
Substantially all of the Company's 1996, 1995 and 1994 sales were made in Europe through a wholly owned subsidiary of the Company. The Company's sales to major customers that exceeded 10 percent of total sales were $95 million to four customers during 1996, $58 million to two customers in 1995 and $65 million to four customers in 1994. The Company believes that the loss of any of these customers would have no material adverse impact on the Company because of the active worldwide market for gold.
14. COMMITMENTS AND CONTINGENCIES
The Company currently accrues reclamation liabilities for the following operations:
The anticipated reclamation costs for the Company's mines are estimates based on current federal, state and Chilean laws and regulations. Changes in the federal, state and Chilean laws and regulations could impact these anticipated reclamation costs.
15. QUARTERLY DATA (UNAUDITED)
Quarterly earnings data for the years ended December 31, 1996 and 1995, follow:
Fourth quarter 1996 results included a pre-tax charge of $35.5 million due to the write-down of the Guanaco mine and an unrelated $10 million deferred tax benefit.
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
16. RESERVE DATA (UNAUDITED)
The following table presents proven and probable ore reserves by property at December 31. Ore reserves are calculated by the Company.
Ore Reserves/(1)/ (thousands, except average grades)
The following table presents other mineralized material for the Company's three new mines as of December 31, 1996, as calculated by the Company.
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
/(1)/ Reserves. That part of a mineral deposit that could be economically and legally extracted or produced at the time of the reserve determination. Reserves have been calculated using a $400 per ounce gold price for all mines except Refugio, for which a $375 per ounce gold price was used.
Proven Reserves. Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established.
Probable Reserves. Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
These definitions comply with those issued by the Securities and Exchange Commission, which are based on definitions used by the United States Bureau of Mines and the United States Geological Survey.
Other Mineralized Material. A mineralized body that has been physically delineated by drilling, underground work, surface trenching, etc., and found to contain a sufficient amount of mineralized material with an average grade of metal or metals to warrant further exploration expenditures. The Company's reported mineralized material must be defined by a conceptual mine plan and have established geologic continuity but does not qualify as a commercially mineable ore body until final legal, technical and economic factors have been resolved.
/(2)/ The Company owns a 90 percent interest in the Guanaco mine and under existing shareholder arrangements receives 100 percent of production until certain conditions are met. Management currently does not believe those conditions will be met; therefore, 100 percent of Guanaco's reserves have been included in the Company's reserve table for 1996.
/(3)/ Commercial production at the Refugio mine commenced on October 1, 1996.
/(4)/ The Company expects to complete the acquisition of the Kubaka property from Cyprus Amax early in 1997.
/(5)/ The Company has not yet reached a decision regarding whether to proceed with development of the property.
The Company reports extractable (mineable) ore reserves. Reserves do not reflect losses in the milling or heap leaching processes, but do include allowance for ore dilution in the mining process.
Recovery rates for 1996 were as follows:
AMAX GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions unless otherwise indicated and except per share amounts and amounts per ounce)
Based on completed feasibility studies and the processes contemplated therein, the estimated average gold recovery rates at the Company's properties under construction and development properties are approximately 97 percent at Kubaka, 90 percent at Fort Knox and 65 to 85 percent at Haile.
EXHIBIT INDEX -------------
Exhibit No. Exhibit - ----------- -------
10.11 Letter Agreement, dated November 1, 1996 and Letter Agreement, dated December 19, 1996, amending Loan Agreement, dated as of November 23, 1994.
21 Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Mineral Resources Development, Inc.
23.3 Consent of Derry, Michner, Booth & Wahl.
27 Financial Data Schedule.