ITEM 3. LEGAL PROCEEDINGS
In August 1998, the U.S. Environmental Protection Agency served Kinam with a Unilateral Administrative Order ("UAO") as a Potentially Responsible Party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and Solid Waste Disposal Act ("SWDA"), requiring that Kinam, along with other PRPs, remove certain contaminated materials from the PRC Patterson Inc. site ("the Site") in Patterson, California. Kinam shipped waste oil to the Site from 1994 to 1996. Subsequent to that order Kinam joined with certain other PRPs to form the Patterson Environmental Response Trust, an entity which was created for the purpose of conducting the removal actions required by EPA. It is currently intended that all materials will be removed and disposed by the Trust by the end of the year 2000. Kinam's share in removal cost, nominally estimated at 5% of the total costs incurred, will ultimately be determined once confirmation of the actual barrels of used oil is completed. The Company does not anticipate that this matter will have a material effect on the Company's financial position or results of operations.
In October 1996, an alleged shareholder derivative action was filed in the Court of Chancery of Delaware on behalf of a stockholder of the Company, entitled Harry Lewis v. Milton H. Ward, et al., C.A. No. 15255-NC, against Cyprus Amax, the directors of the Company and the Company as a nominal defendant. The complaint alleges, among other things, that the defendants engaged in self-dealing in connection with the Company's entry in March 1996 into a demand loan facility provided by Cyprus Amax. The complaint seeks, among other things, a declaration that the demand loan facility is not entirely fair to the Company and damages in an unspecified amount. The Company believes that the complaint is without merit and intends to defend the matter vigorously.
In March 1994, the U.S. Forest Service notified the Company that it considers the Company to be a PRP under CERCLA, jointly and severally liable with other PRP's for damages attributable to alleged releases of hazardous substances from the Siskon Mine, located in the Klamath National Forest in Siskiyou County, California. The Company conducted a limited exploration drilling program in the summer of 1991 on property at the Siskon mine site which the Company believes is not involved in the alleged releases. Based on facts currently known to management, the Company does not anticipate that this matter will have a material effect on the Company's financial condition or results of operations.
The Company is also involved in legal proceedings and claims which arise in the ordinary course of its business. The Company believes these claims are without merit and is vigorously defending them. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON AND PREFERRED EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the Kinross merger, the Common Stock was listed on the New York Stock Exchange (AU) and the Toronto Stock Exchange (AXG). Subsequent to the merger, all of the outstanding shares of Common Stock were converted into Kinross Common Stock. Immediately following the merger the Company issued 92,213,928 shares of Common Stock to Kinross. Following the completion of the Kinross merger, the Company terminated its registration of the Common Stock under the Exchange Act and its listing of the Common Stock on the New York Stock Exchange. There is currently no public market for the Common Stock.
The Series B Convertible Preferred Stock of the Company is listed on the New York Exchange (KPRB) and the number of stockholders of record as of March 24, 2000 was 79.
The following table sets forth for the periods indicated the high and the low sale prices per share of the Common Stock and Series B Convertible Preferred Stock as reported on the New York Stock Exchange Composite Tape and the dividends paid on such stock.
Stock Prices and Dividends Per Share
(1) Reflects sales through May 31, 1998, the last date upon which the Common Stock was traded on the New York Stock Exchange.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
KINAM GOLD INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA (IN MILLIONS EXCEPT PER SHARE AMOUNTS, PERCENTAGES, PRODUCTION AND SALES OUNCES AND AMOUNTS PER OUNCE) YEARS ENDED DECEMBER 31
(1) During the first quarter of 1997, Kinam Gold elected to change its method of accounting for inventory from the last-in, first-out (LIFO) method to a three-month rolling average method. In accordance with generally accepted accounting principles when changing from the LIFO method, prior years' results have been restated to reflect the effect of this change in policy. The effect of this restatement on the years ended December 31, 1996 and 1995 was to increase the previously reported net loss by $5.0 million and $2.5 million, or $.06 and $.02 per share, respectively. Additionally, as of January 1, 1997, the Company changed its accounting policy to include depreciation and depletion in inventory, which has the effect of recording depreciation and depletion expense in the statement of operations as gold is sold rather than as it is produced. The cumulative effect of this accounting change is a $4.5 million reduction of the net loss as of January 1, 1997.
(2) In the fourth quarter of 1999, the Company recorded a $72.9 million pre-tax writedown of the Fort Knox mine, a $10.1 million pre-tax writedown of the Refugio mine and a $16.5 million pre-tax writedown of the Haile property. These special items increased the net loss by $99.5 million, or $1.08 per common share.
In the fourth quarter of 1998, the Company recorded a $53.1 million pre-tax writedown of the Refugio Mine and a $140.3 million pre-tax writedown of the Fort Knox Mine. In the second quarter of 1998, the Company recorded an $11.5 million dollar loss on the early extinguishment of debt. These special items increased the net loss by $204.9 million, or $2.01 per common share.
In the fourth quarter of 1996, the Company recorded a $35.5 million pre- tax writedown 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 common share.
(3) Average costs weighted by ounces of gold produced at each mine.
(4) 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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported a 1999 net loss of $112.7 million, or $1.30 per share after preferred dividends, on revenues of $214.1 million, compared with a 1998 net loss of $202.3 million, or $2.05 per share after preferred dividends, on revenues of $268.1 million and a 1997 net loss of $33.4 million, or $0.37 per share after preferred dividends, on revenues of $259.5 million. The 1999 results included a $10.1 million writedown of the Refugio mine, a $72.9 million writedown of the Fort Knox mine and a $16.5 million writedown of the Haile property. The 1998 results included a $53.1 million writedown of the Refugio Mine, a $140.3 million writedown of the Fort Knox Mine and an $11.5 million loss on the early extinguishment of debt. The 1997 results included a $4.5 million benefit for a first quarter inventory accounting change. Excluding special items, the 1999 net loss would be $13.2 million or $0.22 per share after preferred dividends, compared with 1998 net income of $2.6 million, or a loss of $0.04 per share after preferred dividends and a 1997 net loss of $37.9 million, or $0.41 per share after preferred dividends. See Note 5 to the Consolidated Financial Statements for further discussion of the changes in accounting policies during the first quarter of 1997. See Note 6 to the Consolidated Financial Statements for further discussion of the writedowns.
The Company's operating loss (excluding the writedown of mineral properties) was $2.0 million for 1999 compared with 1998 operating income of $19.6 million and 1997 operating income of $1.9 million, excluding special items and writedowns. The operating income decrease was attributable to lower realized gold prices, partially offset by lower depreciation rates due to the 1998 writedown.
Revenues decreased to $214.1 million in 1999, compared with $268.1 million in 1998 and $259.5 million in 1997. The decrease was a result of lower gold sales of 741,087 ounces in 1999 compared with 778,559 ounces in 1998 and 720,889 ounces in 1997. In addition, the average realized price for gold was $289 per ounce compared with $344 in 1998 and $360 in 1997. These realized prices compare with average spot gold prices of $279 per ounce in 1999, $294 in 1998 and $331 in 1997. The Company's average realized price exceeded the average spot price in each year due to the positive impact of hedging activities.
Gold production in 1999 was 723,012 ounces compared with 763,525 ounces in 1998 and 729,831 ounces in 1997. Fort Knox production was 345,219 ounces compared with 359,973 in 1998. Commercial production at Fort Knox was achieved March 1, 1997, resulting in production of 320,522 ounces in 1997. The Company's 53% share of Kubaka production was 250,264 ounces compard with 250,072 in 1998 when the Company's share was 50%. Commercial production at Kubaka was achieved June 1, 1997, resulting in production of 129,970 ounces in 1997. The Company's 50% share of 1999 production at Refugio was 89,713 ounces compared with 80,526 in 1998 and 73,543 in 1997. Mining was completed at Guanaco during July 1997, which resulted in the decrease in production to 21,974 ounces in 1999 compared with 32,766 ounces in 1998 and 93,594 ounces in 1997 as residual leaching continued. Hayden Hill completed mining in December 1997 and production declined to 15,842 ounces in 1999 compared with 39,688 ounces in 1998 and 112,202 in 1997 as residual leaching continued. During 2000, consolidated production is expected to be approximately 725,000 ounces.
The Company's cost of sales as a percentage of revenue increased to 66% in 1999, compared with 59% in 1998 and 61% in 1997, reflecting lower average realized gold prices. Consolidated total cash costs of $186 per ounce in 1999 compared with $185 per ounce in 1998 and $198 per ounce in 1997. Fort Knox total cash costs were $197 per ounce in 1999 compared with $186 per ounce in 1998 and $170 per ounce in 1997 as a result of lower grades and extremely cold weather in the first quarter of 1999, which resulted in a 30% reduction in gold production. As a result of higher mill throughput, Kubaka's 1999 total cash costs decreased to $140 per ounce compared with $157 in 1998 and $175 in 1997. Refugio's 1999 total cash costs of $273 per ounce, compared with $318 in 1998 and $341 in 1997, were lower primarily due to the installation of the tertiary crushers and the commencement of self-mining. Total cash costs increased at both Guanaco and Hayden Hill during 1999 as residual leaching continued. Total cash costs at Guanaco were $189 compared with $162 in 1998 and $229 in 1997 and at Hayden Hill were $177 compared with $101 in 1998 and $186 in 1997.
Depreciation and depletion expense fell to $77.8 million in 1999 compared with $91.1 million in 1998 and $88.4 million in 1997 and the consolidated rate per ounce decreased to $108 compared with $119 in 1998 and $123 in 1997 primarily as a result of the 1998 writedowns. Reducing the gold price used to calculate ore reserves to $300 per ounce at December 31, 1999 from $325 per ounce at December 31, 1998 did not have a significant impact on Kubaka or Refugio reserves but reserves at Fort Knox decreased by approximately 417,000 contained ounces. The consolidated depreciation and depletion rate for the Company is expected to decrease in 2000 due to the 1999 writedowns, as more fully described in Note 6, of the consolidated financial statements.
General and administrative income was $4.5 million in 1999 compared with $3.7 million in 1998 and expense of $6.4 million in 1997. The income increase in 1999 was primarily due to the Company earning a management fee when it became operator of the Refugio mine during the year. Management fees earned at both Refugio and Kubaka are recorded as an offset to normal general and administrative expenses. In 1999 and 1998, general and administrative income included a full year of management fees earned for operating the Kubaka project. The 1997 expense was further reduced in 1998 on the reduction of corporate staff subsequent to the Kinross merger.
Exploration expense was $1.8 million in 1999, compared with $3.9 million in 1998 and $5.5 million in 1997.
Interest expense in 1999 was $10.0 million, compared with $23.4 million in 1998 and $42.5 million in 1997. The decrease in 1999 was attributable to lower average debt balances as a result of debt repaid subsequent to the Kinross merger and the absence of an interest charge on the demand loan made to the Company by Kinross. In 1999 and 1998, no interest was capitalized, compared with $4.2 million in 1997. Interest income was $1.5 million in 1999, compared with $1.6 million in 1998 and $1.9 million in 1997.
Other income was $0.2 million in 1999, compared with income of $5.3 million in 1998 and expense of $3.0 million in 1997. Other income in 1998 was due primarily to a $6.7 million gain on the sale of foreign tax loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's 1999 cash flow provided from operating activities of $72.1 million compares with $109.8 million in 1998 and $68.0 million in 1997. The decrease in 1999 was due to lower gold prices and the fact that 1998 results included the close-out of the Company's hedge position for $45.9 million. Due to low gold prices, the Company is continuing its policy of tightened spending in all areas in order to conserve cash.
Capital expenditures increased slightly to $16.9 million in 1999 from $15.4 million in 1998 but were reduced substantially from $30.8 million in 1997 as only sustaining capital projects were undertaken due to low gold prices. Capital spending at Fort Knox was $7.8 million in 1999 including preliminary development of the True North property, compared with $12.3 million in 1998 and $14 million in 1997, excluding capitalized interest. In 1999, Kubaka capital spending totaled $1.1 compared with $0.7 million in 1998. The
Kubaka acquisition was completed in May 1997, and capital spending following the purchase, excluding capitalized interest, was about $12 million. At Refugio, capital spending totaled $8.0 million in 1999, primarily for three tertiary crushers and mobile fleet additions compared with $2.4 million in 1998 and $2.5 million in 1997, excluding capitalized interest.
During 1999, the Company acquired 65% of the True North property for $28.1 million, the remaining 37.5% interest in the Haile property for $2.0 million and a further 1.7% of Omolon for $0.3 million.
During 1999, the Company received an additional $16.6 million advance from Kinross to complete the acquisition of the True North property. In addition Kubaka borrowed $1.8 million on subordinated working capital debt and Refugio entered into $5.2 million of capital leases for new mining equipment. The Company repaid $16.7 on the demand loan from Kinross. The balance of repayments in the year included $14.4 million of Kubaka debt and lease payments of $4.8 million. All repayments were from cash flow provided from operating activities. See Note 7 to the Consolidated Financial Statements for further discussion of long-term debt.
During 2000, the Company expects to generate sufficient cash flow from operating activities for general corporate purposes, capital expenditures and debt and interest payments.
YEAR 2000
The change to Year 2000 has occurred, without any interruption in production, power or the supply of materials and consumables to the Company's various operating locations throughout the world. Although it is not possible to conclude that all aspects of the Year 2000 issue have been fully resolved, nothing has come to the Company's attention nor is anything anticipated that would materially affect the results of operations and cash flows in 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
With the exception of historical matters, the matters discussed in this report are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. Such forward-looking statements include statements regarding expected dates for gold sales, reserve additions, projected quantities of future gold production, estimated reserves and recovery rates, anticipated production rates, costs and expenditures, prices realized by the Company and expected to be realized, expected future cash flows, anticipated financing needs, growth plans and sources of financing and repayment alternatives and possible business combinations. 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, unanticipated ground and water conditions, unanticipated grade and geological problems, metallurgical and other processing problems, availability of materials and equipment, the timing of receipt of necessary governmental permits and approvals, the occurrence of unusual weather or operating conditions, force majeure events, lower than expected ore grades, the failure of equipment or processes to operate in accordance with environmental risks, the results of financing efforts and financial market conditions and other risk factors detailed in the Company's filings with the Securities and Exchange Commission. Many of such factors are beyond the Company's ability to control or predict. Readers are cautioned not to put undue reliance on forward-looking statements. The Company disclaims any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Commodity Price Risks
The Company's revenues are derived primarily from the sale of gold production. The Company's net income can vary significantly with fluctuations in the market prices of gold. At various times, in response to market conditions, the Company has entered into gold forward sales contracts for some portion of expected future production to mitigate the risk of adverse price fluctuations. The significant decline in spot gold prices in 1998 increased the value of the Company's forward sales contracts. The Company closed out these contracts in 1998 for $45.9 million in cash. At December 31, 1999 the Company had no gold forward sales contracts. Based on the Company's projected 2000 sales volumes, each $10 per ounce change in the average realized price on gold sales would have an approximate $7.25 million impact on revenues and pre-tax earnings. For further details of the remaining deferred revenue and the period it will be recorded in revenue see Note 8 of the Consolidated Financial Statements.
Foreign Currency Exchange Risk
The Company conducts the majority of its operations in the U.S., Russia, and Chile. Currency fluctuations affect the cash flow that the Company will realize from its operations as gold is sold in U.S. dollars, while production costs are incurred in Russian rubles, Chilean pesos and U.S. dollars. The Company's results are positively affected when the U.S. dollar strengthens against these foreign currencies and adversely affected when the U.S. dollar weakens against these foreign currencies. The Company's cash and cash equivalent balances are held in U.S. dollars. Holdings denominated in other currencies are relatively insignificant.
In the last half of 1998, the Russian ruble weakened against the U.S. dollar and the Company benefited primarily through lower Russian labour and materials costs. The temporal method is used to consolidate the results of operations in Russia. The major currency -related exposure at any balance sheet date is on ruble denominated cash balances and working capital. Because the bullion inventory is denominated in U.S. dollars, there are no related foreign exchange risks. The foreign exchange exposure on the balance of the working capital items is nominal. Gold sales during 1999 were primarily denominated 50% in U.S. dollars and 50% in rubles. The U.S. dollars received are used to service the U.S. dollar denominated debt and the foreign supplies inventory purchases, while the rubles received from the gold sales are used to pay local operating costs. The Company has and will continue to convert any excess rubles into U.S. dollars to repay U.S. denominated third party and inter-corporate debt obligations. Assuming estimated 2000 ruble payments of 880 million rubles at an exchange rate of 30 rubles to one U.S. dollar, each 2 ruble change to the U.S. dollar could result in an approximate $1.8 million change in the Company's pre-tax earnings.
In Chile, the currency of measurement is the U.S. dollar as the majority of transactions are denominated in U.S. dollars. Local expenditures are recorded based on the prevailing exchange rate at the time and bullion settlement receivables are denominated in U.S. dollars. Assuming the Company's share of estimated 2000 peso payments of 3.2 billion pesos at an exchange rate of 515 pesos to one U.S. dollar, each 15 pesos change to the U.S. dollar could result in an approximately $0.2 million change in the Company's pre-tax earnings.
Interest Rate Risk
As at December 31, 1998, the Company had interest rate swaps to fix interest rates on a portion of its floating rate debt. The costs associated with these contracts were amortized to interest expense over the terms of the agreements. For details on the interest rate swap agreements outstanding as at December 31, 1998, see Note 8 to the Consolidated Financial Statements. There are no outstanding interest rate swaps at December 31, 1999.
As at December 31, 1999, the Company had $117.7 million (1998 - $128.9 million) of variable rate debt, all denominated in U.S. dollars. Interest expense would change by approximately $1.2 million for every 1% change in interest rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The management of the Company is responsible for the integrity and objectivity of the financial statements and other financial information contained in this Annual Report. The financial statements were prepared in accordance with generally accepted accounting principles and include estimates that are based on management's best judgment.
The Company maintains an internal control system which includes formal policies and procedures designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with management's authorization.
Kinam Gold's financial statements have been audited by independent accountants, whose appointment is ratified yearly by the shareholders at the annual shareholders' meeting. The independent accountants conducted their audits in accordance with 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 the Company's financial statements.
The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with representatives of management and the independent accountants to review their work and ensure that they are properly discharging their responsibilities.
Arthur H. Ditto
Brian W. Penny
Bob Schafer
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Kinam Gold Inc.
We have audited the accompanying consolidated balance sheets of Kinam Gold Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity (capital deficiency) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Omolon Gold Mining Company, a 54.7% owned subsidiary, which statements reflect total assets and revenues constituting 25% and 34%, respectively, for 1999, and 27% and 33% respectively, for 1998 of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Omolon Gold Mining Company, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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. Our audits of the 1999 and 1998 financial statements also included an examination of the segmented information for 1997 presented in Note 12 of the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kinam Gold Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP Toronto, Ontario March 24, 2000
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Omolon Gold Mining Company
In our opinion, the accompanying balance sheets and the related statements of operations, cash flows and changes in shareholders' equity present fairly, in all material respects, the financial position of Omolon Gold Mining Company at December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 11 to the financial statements, the Company changed its method of revenue recognition in 1998.
As discussed in Note 12 to the financial statements, the operations of the Company, and those of similar enterprises operating in the Russian Federation, have been affected, and may continue to be affected for the foreseeable future, by the continuing regulatory, political and economic uncertainties existing for enterprises operating in the Russian Federation.
/s/ PricewaterhouseCoopers
Moscow, Russia March 1, 2000
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Kinam Gold Inc. (formerly Amax Gold Inc.)
In our opinion, the accompanying consolidated statements of operations, of shareholders' equity and of cash flows for the year ended December 31, 1997 present fairly, in all material respects, the results of operations and cash flows of Kinam Gold Inc. (formerly Amax Gold Inc.) for the year ended December 31, 1997, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed above.
As discussed in Note 5 to the consolidated financial statements, the Company changed its method of accounting for inventory in 1997.
PricewaterhouseCoopers LLP Denver, Colorado February 9, 1998
KINAM GOLD INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31 (Dollars in millions except per share amounts)
The accompanying notes are an integral part of these statements
KINAM GOLD INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As at December 31 (Dollars in millions except per share amounts)
The accompanying notes are an integral part of these statements
KINAM GOLD INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31 (Dollars in millions except share amounts)
The accompanying notes are an integral part of these statements
* 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 $3.9 million had been amortized through May 31, 1998. In June 1998, upon repayment of debt, the balance of $6.1 million was expensed as part of the $11.5 extraordinary loss on early extinguishment of debt.
Cash paid for interest (including interest capitalized) was $9.9 million, $28.9 million and $35.0 million in 1999, 1998 and 1997, respectively. Cash paid for income taxes was $2.9 million in 1999. There were no income taxes paid during 1998 or 1997.
KINAM GOLD INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY) For the years ended December 31 (In millions)
The accompanying notes are an integral part of these statements
KINAM 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
Kinam Gold Inc. (the "Company") and its subsidiaries 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, and Chile. 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 100% owned by Kinross Gold U.S.A., Inc., a wholly owned subsidiary of Kinross Gold Company ("Kinross").
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's operating properties consist of a 100% interest in the Fort Knox mine near Fairbanks, Alaska; a 54.7% interest in Omolon Gold Company, which owns and operates the Kubaka mine in the Russian Federation; and a 50% interest in the Refugio mine in Chile. The Company owns the Hayden Hill mine in Lassen County, California, and a 90% interest in the Guanaco mine in Chile. Mining was completed at Hayden Hill and Guanaco during 1997 and residual leaching will continue during 2000 at both mines. In addition, the Company owns the Haile property in Lancaster County, South Carolina, a 50% interest in the Sleeper mine in Humboldt County, Nevada, and the Wind Mountain mine in Washoe County, Nevada, all of which are in reclamation. During 1999, the Company acquired a 65% interest in the True North Property located near the Fort Knox mine.
In the milling process, ore is crushed and the gold and silver are concentrated and then smelted into dore, which is shipped to refiners for further processing. In the heap leach process, crushed and/or run-of-mine ore is loaded onto leach pads. The ore is irrigated with a weak cyanide solution that penetrates the ore, dissolving the gold and silver. The pregnant solution is collected and pumped through activated carbon or a Merrill Crowe zinc precipitation plant to remove the metals from the solution. After the gold and silver is stripped from the carbon or processed from the zinc precipitate, it is smelted into dore, which is shipped to refiners for further processing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and the related entities that it controls. 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.
EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", was issued in February 1997. SFAS No. 128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share. It requires a reconciliation of the numerators and denominators of the basic and diluted earnings per share computation. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. For the years ended December 31, 1999, 1998 and 1997, basic and diluted loss per share were the same as primary earnings per share. Outstanding Company stock options were not considered in the diluted earnings per share calculation as these were antidilutive.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments with an original maturity of three months or less. The Company invests cash in time deposits maintained in high credit quality financial institutions.
INVENTORIES
Gold inventory is valued at the lower of aggregate cost, computed using a three-month rolling average method, or market. See Note 5 for discussion of the change in inventory accounting method during 1997. Materials and supplies are valued at average cost less reserves for obsolescence.
MINERAL PROPERTIES, PLANT AND EQUIPMENT
Mineral properties, 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.
The Company follows 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 undiscounted cash flows is less than the carrying amount of the asset, an impairment loss will be recognized. The impairment is measured based on an estimate of future discounted cash flows. See Note 6 for discussion of the writedowns of the Fort Knox and Refugio mines recorded in the fourth quarters of 1999 and 1998 and the Haile property in 1999.
EXPLORATION
Exploration expenditures are charged against earnings in the period incurred.
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 statements of operations. For the year ended December 31, 1999, translation losses were $0.2 million compared with $0.3 million for the year ended December 31, 1998 and $1.0 million for the year ended December 31, 1997.
FINANCIAL INSTRUMENTS
Forward sale and purchase contracts, generally on a spot deferred basis, put and call option contracts and compound options are entered into to manage 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. Gains and losses on derivative contracts that do not qualify as hedges are recognized currently. Changes in the market value of written call options are recognized immediately in income as market values change.
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
The Company adopted SFAS No. 123 "Accounting for Stock-Based Compensation," in 1996 and has elected to continue to measure compensation cost using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Pursuant to the Kinross merger, all plans to purchase common stock of Kinam were cancelled and all stock options were adjusted to reflect the exchange ratio of 0.8004. Substitute Kinross options were issued. As at December 31, 1999 and 1998, there were no plans that require the issuance of Kinam Gold stock.
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 current taxes payable and changes in deferred income taxes on the balance sheet.
USE OF ESTIMATES
The preparation of the Company'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.
PENDING ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This standard requires companies to record derivative financial instruments on the balance sheet as assets or liabilities, as appropriate, at fair value. Gains or losses resulting from changes in the fair values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Management has not yet evaluated the effects of this statement on its financial position or results of operations. The Company will adopt SFAS No. 133 for the fiscal year commencing January 1, 2001.
STATEMENTS OF COMPREHENSIVE INCOME
There are no differences between comprehensive loss and net loss as reported in the Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.
3. TRANSACTIONS WITH AFFILIATES
On June 1, 1998, the Company completed a merger agreement with Kinross providing for a combination of their businesses. In the merger, each outstanding share of the Company's common stock was converted into 0.8004 of a share of Kinross common stock. Kinross Merger Corporation, a wholly-owned subsidiary of Kinross was merged with and into the Company which became a wholly-owned subsidiary of Kinross. Immediately following the effective time of the merger, the Company, as the surviving entity of the combination with Kinross Merger, issued to Kinross 92.2 million shares of the Company's common stock, representing all of the issued and outstanding common shares. Kinross subsequently transferred ownership of such shares to Kinross Gold U.S.A., Inc., a wholly-owned subsidiary of Kinross, which is currently the sole common shareholder of the Company. Kinross is currently the sole
common shareholder of the Company. Prior to the merger, the Company was approximately 59% owned by Cyprus Amax Minerals Company (Cyprus Amax).
FINANCING ARRANGEMENTS
Pursuant to the merger in 1998, Kinross advanced $255.8 million to the Company for repayment of outstanding debt. Additionally, $16.6 million was advanced in 1999 to purchase the assets related to the True North property in Alaska. $213.2 was still outstanding at December 31, 1999. The advances are non-interest bearing and have no fixed terms of repayment. Kinross has agreed not to seek repayment of these advances during 2000.
During December 1997, the Company completed a $40.0 million credit facility which was used to refinance the existing Refugio gold loan and for working capital and debt service requirements. Cyprus Amax had guaranteed the loan and the Company paid Cyprus Amax a 0.75% interest differential on the loan as a guarantee fee. In connection with the Kinross Merger the $40.0 million credit facility was repaid on June 1, 1998.
In May 1997, the Company completed a $71 million tax-exempt industrial revenue financing for the solid waste disposal facility at the Fort Knox Mine. Cyprus Amax has guaranteed the loan and the Company pays a 1.75% interest differential to Cyprus Amax as a guarantee fee. The Company also agreed to reimburse Cyprus Amax for any payments made under the guarantee. Kinross has agreed to use all reasonable efforts to cause itself to be substituted for Cyprus Amax in the guarantee.
Pursuant to a financing arrangement with Cyprus Amax, approved by the Company's shareholders in September 1996, Cyprus Amax had guaranteed the Company's $250.0 million Fort Knox loan until economic completion of the Company's Fort Knox mine. In connection with the Kinross Merger, the balance of the $250.0 million loan was repaid on June 1, 1998. Upon repayment, the Company expensed $11.5 million in unamortized financing costs.
As of December 31, 1998, the Company had borrowed $90.3 million under a demand loan with Kinross. During 1999, the Company repaid $16.7 million leaving a balance of $73.6 million outstanding at December 31, 1999. Kinross does not charge the Company interest on the demand loan.
OTHER AGREEMENTS
A service agreement governs the provision of and payment for general administrative services between Cyprus Amax and the Company. For the years ended December 31, 1999, 1998 and 1997, insurance, management and other services were supplied to the Company on a full cost reimbursement basis. The Company was charged $0.4 million, $2.3 million and $4.1 million for the years ended December 31, 1999, 1998 and 1997, respectively, for reimbursable costs. As of December 31, 1999 and 1998, the Company had outstanding amounts due to Cyprus Amax of $0.1 million and $0.2 million, respectively, relating to such services.
4. INCOME TAXES
Loss before income taxes consists of the following:
The income tax expense consists of the following:
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% to the loss before taxes and the income tax expense:
The valuation allowance increased $19.7 million in 1999 due to uncertainties of realizing loss carryforwards in the future.
At December 31, 1999, the Company had federal tax net operating loss carryforwards of $193.3 million and alternative minimum tax net operating loss carryforwards of $118.5 million expiring in the years 2004 through 2019 and minimum tax credit carryforwards of $5.0 million, which do not expire. The use of the federal and alternative minimum tax loss carryforwards will be limited in any given year as a result of a previous changes in ownership. At December 31, 1999 the Company also had Chilean tax net operating loss carryforwards of $143 million, which do not expire.
5. INVENTORIES
Inventories at December 31, 1999 and 1998, consisted of the following:
As of January 1, 1997, the Company changed its accounting policy to include depreciation and depletion in inventory, which has the effect of recording depreciation and depletion expense in the statement of operations as gold is sold rather than as it is produced. The cumulative effect of this accounting change is a $4.5 million reduction of the net loss as of January 1, 1997. The accounting change was made in order to better match current costs with revenues and to conform with prevailing gold industry practice.
6. MINERAL PROPERTIES, PLANT AND EQUIPMENT AND WRITEDOWN
The components of mineral properties, plant and equipment at December 31, 1999 and 1998, were as follows:
ACQUISITIONS
On March 1, 1999, the Company acquired 100% of Kershaw Gold Company, Inc. ("Kershaw") for $2.0 million, thereby increasing its ownership interest in the Haile property from 62.5% to 100%.
On June 28, 1999, the Company acquired a 65% interest in the True North property in Alaska for cash of $28.1 million.
On December 31, 1999, the Company acquired a further 1.7% of Omolon Gold Mining Company for cash of $0.3 million.
In December 1998, the Company acquired an additional 3% of Omolon in consideration for settling obligations of the Russian partner for $3.8 million. Repayment of the $3.8 million owing to the Company by the Russian partner will be made from the Russian partner's share of dividends from Omolon. The Russian partner has the right to reacquire the 3% interest in Omolon for approximately $7.5 million.
WRITEDOWN OF MINERAL PROPERTIES
Annually, the Company reviews the carrying values of its portfolio of mining properties and advanced stage exploration properties. Through this process the Company determined that the following assets had suffered a permanent impairment in value and therefore have been written down to their estimated recoverable amounts.
The impairment analysis is performed on an undiscounted basis in order to determine whether an impairment exists. Because the undiscounted cash flow was less than the carrying value of the related mines, the Company used a discounted cash flow analysis to determine the amount of the writedown.
The estimated future net cash flows from each property are calculated using estimated recoverable ounces of gold (considering current proven and probable reserves and mineralization expected to be classified as reserves); estimated future gold price realization (considering historical and current prices, price trends and related factors); and operating, capital and reclamation costs.
Estimated future cash flows are subject to risks and uncertainties. It is possible that changes could occur which may affect the recoverability of mineral properties, plant and equipment.
In the fourth quarter of 1999, following a comprehensive evaluation of its mining properties based on an assumed gold price of $300, the Company determined that the net recoverable amounts of the Fort Knox and Refugio mines and the Haile property were less than
the net book value of the related assets. As a result of this review the Company recorded a $72.9 million pre-tax writedown of the Fort Knox mine, a $10.1 million pre-tax writedown of the Refugio mine and a $16.5 million pre-tax writedown of the Haile property.
In the fourth quarter of 1998, following a comprehensive evaluation of its mining properties based on an assumed gold price of $325, the Company determined that the net recoverable amounts of the Fort Knox and Refugio mines were less than the net book value of the related assets. As a result of this review the Company recorded a $140.3 million writedown of the Fort Knox mine and a $53.1 million writedown of the Refugio mine.
7. LONG-TERM DEBT
Scheduled debt maturities as of December 31, 1999, (in millions) were $25.3, $30.4, $7.4, $1.3, $0.3 and $0.2 for the years 2000 through 2005 and $71.0 million in 2009.
A bank licensed to do business in Russia has provided subordinated working capital debt for the Kubaka mine operations to a maximum of $10.0 million. As at December 31, 1999, $3.3 million was outstanding. The Company's 54.7% proportionate share of this obligation is $1.8 million. Interest on the subordinated working capital debt is variable based upon LIBOR and as at December 31, 1999 is approximately 12% per annum. The subordinated working capital debt is supported by a letter of credit from Kinross.
The European Bank of Reconstruction and Development ("EBRD") and the US Overseas Private Investment Corporation ("OPIC") provided project-financing debt on the Kubaka mine, of which 92.5 million remained outstanding as at December 31, 1998. During 1999, Kubaka repaid $25 million of these obligations, leaving $67.5 million outstanding as at December 31, 1999. The Company's 54.7% proportionate share of these obligations is $36.9 million. Interest on the project-financing debt is variable based upon LIBOR and as at December 31, 1999 is approximately 10.5% per annum. The project financing debt has become recourse solely to Kubaka after completion tests were passed in late 1999.
A bank licensed to do business in Russia has provided subordinated debt to finance the Kubaka mine. As at December 31, 1999, $14.6 million remains outstanding on this debt. The Company's 54.7% proportionate share of these obligations is $8.0 million. Interest on the project-financing debt is variable based upon LIBOR and as at December 31, 1999 is approximately 12% per annum. The subordinated debt is repayable in semi-annual payments through June 15, 2003. The subordinated debt is supported by a letter of credit from Kinross.
During the second quarter of 1997, the Company completed a $71 million tax-exempt industrial revenue bond financing for the solid waste disposal facility at the Fort Knox mine. The 12-year variable rate bonds were issued by the Alaska Industrial Development and Export Authority and are backed by a letter of credit guaranteed by Cyprus Amax. The Company's interest rate on the bonds is currently approximately 4.5% and an additional 1.75% interest differential is paid to Cyprus Amax as a guaranty fee. The Company and Kinross have agreed to reimburse Cyprus Amax for any payments made or costs incurred under the guaranty. Kinross is currently finalizing a credit facility with a banking syndicate, which will provide the ability to issue a letter of credit to cover the guarantee and remove Cyprus Amax as Guarantor.
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% to 8.7%.
During 1999, upon commencement of self-mining, Refugio entered into capital leases of $10.4 million for mining equipment. Lease payments in 1999 totalled $3.2 million, leaving a balance outstanding of $7.2 million at December 31, 1999. The
Company's 50% proportionate share of these obligations is $3.6 million. Interest rates on the equipment leases range from 8% to 9.5% with variable maturities to 2005.
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. At December 31, 1997, the Company owed $23.1 million in gold at $381 per ounce and $199.1 million in currency. Subsequent to the Kinross merger the loan was repaid on June 1, 1998. As a result of a decline in gold prices since the gold was borrowed in 1995, the Company realized a $3.6 million gain which is being amortized over the original life of the loan.
In December 1997, the Company refinanced a Refugio gold loan with approximately $28 million borrowed under a new $40 million credit facility resulting in a gain of approximately $6 million, which is being amortized, net of approximately $2 million in deferred financing costs, over the four remaining years of the original loan life. Pursuant to the merger with Kinross on June 1, 1998 the $40 million credit facility was repaid.
8. DERIVATIVE CONTRACTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company manages its exposure to fluctuations in commodity prices, foreign exchange rates and interest rates by entering into derivative financial instrument contracts in accordance with the formal risk management policy approved by the Company's Board of Directors. The Company does not hold or issue derivative contracts for speculative or trading purposes.
(a) Commodity risk management The profitability of the Company is directly related to the market price of gold and silver. The Company uses spot deferred contracts, fixed forward contracts and option contracts to hedge against the unfavourable changes in commodity prices for a portion of its forecasted gold and silver production. Spot deferred contracts are forward sale contracts with flexible delivery dates that enable management to choose to deliver into the contract on a specific date or defer delivery until a future date. If delivery is postponed, a new contract price is established based on the old contract price plus a premium (referred to as contango). Use of these instruments has resulted in a realized price per ounce of gold of $289 in 1999 as compared with $344 in 1998 and $360 in 1997. These realized prices compare with average spot gold prices of $279 per ounce in 1999, $294 per ounce in 1998 and $331 per ounce in 1997.
On June 1, 1998, the commodity derivative contract portfolio held by Kinam had a fair value of $45 million. Subsequent to the Kinross merger the Company closed out the contracts and realized approximately $45.9 million in cash. Net of costs previously incurred, the $41.7 million gain is being included in revenue over the period the underlying hedge contracts were originally scheduled to expire. As at December 31, 1999, $10.2 million (December 31, 1998 - $16.1 million) of this gain is included in other long-term liabilities. There were no outstanding hedge contracts as at December 31, 1999 or December 31, 1998.
In December, 1997, the Company refinanced the Refugio gold loan realizing a gain of $6.0 million. This gain, net of approximately $2.0 million in deferred financing costs is being taken into income over the schedule set out in the loan agreement. The deferred portion of this gain at December 31, 1999 amounted to $2.5 million and will be recognized in income over the next two years.
On June 1, 1998, the Company repaid the gold loan portion of the Fort Knox project financing realizing a gain of $3.6 million. The gain is being taken into income over the original delivery schedule set out in the loan payments. The deferred portion of this gain at December 31, 1999 amounted to $2.0 million and will be recognized in income over the next two years.
(b) Interest rate risk management The Company manages the risk associated with the floating rate debt portfolio by entering into pay fixed, receive floating, interest rate swaps. The total amount of interest rate swaps outstanding as at December 31, 1998 was $35 million (December 31, 1997 - $205 million) at an average effective fixed rate of 5.92%. The maturity dates for these swaps ranged from March 1999 to June 1999.
There were no outstanding interest rate swaps outstanding at December 31, 1999.
(c) Fair values of financial instruments
Carrying values for primary financial instruments, including cash and cash equivalents, bullion settlements and other accounts receivable, marketable securities, demand loan, accounts payable and accrued liabilities, approximate fair values due to their short-term maturities. The carrying value for long-term debt approximates fair value primarily due to the floating rate nature of the debt instruments.
The fair value of the advance from Kinross cannot be readily determined, as there is no market data available for these instruments, due to the unique nature of these related party amounts.
The fair value of the outstanding preferred shares at December 31, 1999 was $48.5 million.
(d) Credit risk
The Company 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.
9. EMPLOYEE BENEFITS
PENSION PLAN
Prior to the Kinross Merger, all employees in the United States were covered by a non-contributory defined pension plan. The plan was frozen on June 1, 1998 and all employees were transferred into the Kinross 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). Plan assets are invested in a balanced fund and small capital equity fund.
Net annual pension cost including the following components:
The following table summarizes the change in benefit obligations:
The following table summarizes the funded status of the plan and related amounts recognized in the Company's financial statements at December 31:
The following table summarizes the change in fair value of plan assets:
The following assumptions were used in calculating the funded status of the plan at December 31 and the pension cost for the subsequent year:
In addition, pursuant to the Kinross Merger, all employees of the Company were transferred into the Kinross defined contribution pension plan. In 1999, the Company contributed $0.8 million into the Kinross plan on behalf of the Kinam employees. From June 1 through December 31, 1998, the Company contributed $0.3 million into the plan on behalf of the Kinam employees.
POST RETIREMENT 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. The Company currently does not fund postretirement benefits and may modify plan provisions at its discretion. Net periodic post retirement costs for the years ended December 31, 1999, 1998 and 1997, 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 8% in 1999 and 7% in 1998. The assumed health care cost trend rate for 2000 is 8%, declining gradually to 4.25% for 2007 and thereafter when Company costs associated with the plan are capped. A 1% increase in the health care cost trend rate used would have resulted in an insignificant increase in the 1999 post retirement benefit cost and the accumulated postretirement benefit obligation at December 31, 1999.
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, 1999 and 1998, the Company's liability for postemployment benefits totaled $2.3 million and $2.1 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. Subsequent to the merger with Kinross, the Kinam preferred shares became convertible into Kinross common shares at a conversion price of $10.3073 per share (equivalent to a conversion rate of 4.8512 shares of Common Stock for each share of Preferred Stock), subject to adjustment in certain events.
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.
11. COMMON STOCK
On June 1, 1998, the Company completed the merger with Kinross whereby Kinross acquired 100% of the issued and outstanding common shares of the Company. As a result of the merger all plans to purchase common stock of Kinam were cancelled and all stock options were adjusted to reflect the exchange ratio of .8004. Substitute Kinross options were issued. As at December 31, 1999 and 1998, there are no plans that require the issuance of the Company's stock.
12. SEGMENTED INFORMATION
The Company operates five gold mines: Fort Knox, located in Alaska; Kubaka, located in Russia; Refugio, located in Chile; Hayden Hill, located in California; and Guanaco, located in Chile. In addition to its producing gold mines, the Company has several other gold mining assets in various stages of reclamation, closure, care and maintenance, and development. The accounting policies used by these segments are the same as those described in the Summary of Significant Accounting Policies (see Note 2).
As the products and services in each of the reportable segments, except for the corporate activities, are essentially the same, the reportable segments have been determined at the level where decisions are made on the allocation of resources and capital, and where complete internal financial statements are available.
REPORTABLE OPERATING SEGMENTS (IN MILLIONS)
(a) Segment profit (loss) includes writedown of mineral properties. (b) Includes corporate and other non-core mining operations. (c) Capital expenditures include capitalized interest. (d) Interest expense is net of capitalized interest.
RECONCILIATION OF REPORTABLE OPERATING SEGMENT LOSS TO NET LOSS FOR THE YEAR:
Enterprise-wide disclosure: Geographic information:
13. COMMITMENTS AND CONTINGENCIES
The Company estimates future reclamation and closure costs for properties operated by the Company to be approximately $45.7 million based on currently applicable federal, state and foreign laws and regulations. At December 31, 1999, $30.8 million has been accrued. Changes in applicable laws and regulations could have a significant impact on estimates of future costs.
The Company used a gold price of $300 per ounce for 1999 and beyond to evaluate any impairment of long lived assets. Management's estimate of long-term gold prices may change if the gold price remains at the current low level, which could result in an asset impairment.
The Company is subject to the consideration and risks of operating in Russia as a result of its 54.7% ownership of the Kubaka Mine located in eastern Russia. Beginning in 1998, the economy of the Russian Federation entered a period of financial difficulty, the impact of which includes, but is not limited to, a steep decline in prices of domestic debt and equity securities, a severe devaluation of the currency, an increasing rate of inflation and increasing rates of interest on government and corporate borrowings. The Company's operations in Russia have been affected, and may continue to be affected for the foreseeable future by Russia's financial difficulties.
Russian tax legislation is subject to varying interpretations and constant changes, which may be retroactive. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activity of the Company may not coincide with that of management. As a result, transactions may be challenged by tax authorities and the Company may be assessed additional taxes, penalties and interest, which can be significant. Tax periods remain open to review by the tax authorities for three years.
The Company is also involved in legal proceedings and claims which arise in the normal course of its business. The Company believes these claims are without merit and is vigorously defending them. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company.
14. QUARTERLY DATA (UNAUDITED)
Quarterly data for the years ended December 31, 1999 and 1998, follow:
Fourth quarter 1999 results included a $72.9 million pre-tax charge due to the writedown of the Fort Knox mine, a $10.1 million pre-tax charge due to the writedown of the Refugio mine and a $16.5 million pre-tax charge due to the writedown of the Haile property.
Fourth quarter 1998 results included a $140.3 million pre-tax charge due to the writedown of the Fort Knox mine and a $53.1 million pre-tax charge due to the writedown of the Refugio mine.
15. 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)
(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 $300 per ounce gold price at all properties.
PROVEN RESERVES. Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established.
PROBABLE RESERVES. Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
These definitions comply with 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.
(2) Commercial production at the Fort Knox mine commenced on March 1, 1997.
(3) The Company acquired the Kubaka mine from Cyprus Amax in May 1997. Commercial production at the Kubaka mine commenced on June 1, 1997.
(4) Commercial production at the Refugio mine commenced on October 1, 1996.
(5) Due to current economic conditions the Company has reclassified the Haile Reserves to other mineralized material.
(6) The Company acquired 65% of the True North property in Alaska in 1999.
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 1999 were as follows:
16. YEAR 2000
The change to Year 2000 has occurred, without any interruption in production, power and the supply of materials and consumables to the various operating locations throughout the world. Although it is not possible to conclude that all aspects of the Year 2000 issue have been fully resolved, nothing has come to the Company's attention nor is anything anticipated that would materially affect the results of operations and cash flows in 2000.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. PART III
ITEMS 10, 11, 12 and 13
These items are incorporated by reference to the Company's definitive information statement relating to the Company's annual meeting of shareholders to be held during 2000. The definitive information statement will be filed with the Commission not later than 120 days after December 31, 1999, pursuant to Regulation 14C of the Securities Exchange Act of 1934, as amended.
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:
2. Financial Statement Schedules
Financial statement schedules are not included in this Annual Report on Form 10-K because they are not applicable.
3. Exhibits
*Filed herewith (b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
KINAM GOLD INC.
Date: March 29, 2000 By /s/ Arthur H. Ditto ------------------------------------- Arthur H. Ditto
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 29, 2000.
/s/ Arthur H. Ditto President
Arthur H. Ditto
/s/ Robert H. Schafer Vice President
Robert H. Schafer
/s/ Brian W. Penny Treasurer
Brian W. Penny
/s/ Shelley M. Riley Secretary
Shelley M. Riley
/s/ John A. Brough Director
John A. Brough
/s/ John M.H. Huxley Director
John M.H. Huxley
/s/ John W. Ivany Director
John W. Ivany