--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--- ---
Commission File Number 1-8542
--------
ECHO BAY MINES LTD.
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Incorporated under the laws
of Canada None
-------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 540, 6400 S. Fiddlers Green Circle
Englewood, CO 80111-4957
-------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 714-8600
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Title of Class Shares Outstanding as of
-------------------------------- August 1, 2001
Common Shares ------------------------------
without nominal or par value 140,607,145
--------------------------------------------------------------------------------
ECHO BAY MINES LTD.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements (Unaudited)................................................................1
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................11
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings........................................................................................25
ITEM 4. Submission of Matters to a Vote of the Security Holders..................................................25
ITEM 6. Exhibits and Reports on Form 8-K.........................................................................25
SIGNATURE................................................................................................................26
ECHO BAY MINES LTD.
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED BALANCE SHEET June 30 December 31
thousands of U.S. dollars 2001 2000
---------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,957 $ 14,269
Short-term investments 2,058 2,186
Interest and accounts receivable 2,599 3,022
Inventories (note 2) 40,780 39,443
Prepaid expenses and other assets 6,068 14,031
---------------------------------------------------------------------------------------------------------------
61,462 72,951
Plant and equipment (note 3) 133,719 138,527
Mining properties (note 3) 54,033 63,499
Long-term investments and other assets 20,703 20,868
---------------------------------------------------------------------------------------------------------------
$ 269,917 $ 295,845
===============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 24,091 $ 26,073
Income and mining taxes payable 3,701 5,780
Debt and other financings (notes 1 and 4) 19,000 26,500
Deferred income (note 5) 4,888 9,651
---------------------------------------------------------------------------------------------------------------
51,680 68,004
Debt and other financings (note 4) 6,364 6,032
Deferred income (note 5) 38,693 50,698
Other long-term obligations 50,950 49,632
Deferred income taxes 2,936 4,694
Commitments and contingencies (notes 1, 10 and 11)
Common shareholders' equity:
Common shares, no par value, unlimited number authorized;
140,607,145 shares issued and outstanding 713,343 713,343
Capital securities (note 6) 148,766 140,076
Deficit (716,946) (711,680)
Foreign currency translation (25,869) (24,954)
---------------------------------------------------------------------------------------------------------------
119,294 116,785
---------------------------------------------------------------------------------------------------------------
$ 269,917 $ 295,845
===============================================================================================================
See accompanying notes to interim consolidated financial statements.
1
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF OPERATIONS Three months ended Six months ended
thousands of U.S. dollars, June 30 June 30
except for per share data 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Revenue $ 63,652 $ 84,293 $ 128,113 $ 136,090
-----------------------------------------------------------------------------------------------------------------------------
Expenses:
Operating costs 46,521 48,880 91,144 79,089
Royalties 2,383 2,440 3,686 4,002
Production taxes 158 807 271 1,332
Depreciation and amortization 11,371 14,231 22,269 25,929
Reclamation and mine closure 1,622 2,979 3,265 5,248
General and administrative 1,237 2,043 2,840 3,629
Exploration and development 1,161 1,407 2,012 7,430
Interest and other (note 7) 542 1,613 832 3,636
-----------------------------------------------------------------------------------------------------------------------------
64,995 74,400 126,319 130,295
-----------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (1,343) 9,893 1,794 5,795
-----------------------------------------------------------------------------------------------------------------------------
Income tax expense (recovery):
Current (101) 25 83 100
Deferred (839) (300) (1,679) (1,800)
-----------------------------------------------------------------------------------------------------------------------------
(940) (275) (1,596) (1,700)
-----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (403) $ 10,168 $ 3,390 $ 7,495
=============================================================================================================================
Net earnings (loss) attributable to common
shareholders (note 6) $ (4,729) $ 6,320 $ (5,266) $ 22
=============================================================================================================================
Earnings (loss) per share $ (0.03) $ 0.04 $ (0.04) $ --
=============================================================================================================================
Weighted average number of shares outstanding (thousands) 140,607 140,607 140,607 140,607
=============================================================================================================================
CONSOLIDATED STATEMENT Three months ended Six months ended
OF DEFICIT June 30 June 30
thousands of U.S. dollars 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ (712,217) $ (721,142) $ (711,680) $ (714,844)
Net earnings (loss) (403) 10,168 3,390 7,495
Interest on capital securities, net of nil tax effect (note 6) (4,326) (3,848) (8,656) (7,473)
-----------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ (716,946) $ (714,822) $ (716,946) $ (714,822)
=============================================================================================================================
See accompanying notes to interim consolidated financial statements.
2
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT Three months ended Six months ended
OF CASH FLOW June 30 June 30
thousands of U.S. dollars 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED FROM (USED IN):
OPERATING ACTIVITIES
Net cash flows provided from operating activities $ 176 $ 18,613 $ 10,670 $ 14,480
-----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Mining properties, plant and equipment (986) (3,113) (7,730) (7,775)
Long-term investments and other assets 3 (150) 13 (545)
Proceeds on the sale of plant and equipment 152 291 368 335
Other (207) 41 (133) 1,308
-----------------------------------------------------------------------------------------------------------------------------
(1,038) (2,931) (7,482) (6,677)
-----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Currency borrowings -- 2,000 -- 12,000
Debt repayments (3,750) (9,125) (7,500) (12,250)
-----------------------------------------------------------------------------------------------------------------------------
(3,750) (7,125) (7,500) (250)
-----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,612) 8,557 (4,312) 7,553
Cash and cash equivalents, beginning of period 14,569 2,397 14,269 3,401
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 9,957 $ 10,954 $ 9,957 $ 10,954
=============================================================================================================================
See accompanying notes to interim consolidated financial statements.
3
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
1. GENERAL
In the opinion of management, the accompanying unaudited consolidated balance
sheet, consolidated statement of operations, consolidated statement of deficit,
and consolidated statement of cash flow contain all adjustments, consisting only
of normal recurring accruals, necessary to present fairly in all material
respects the consolidated financial position of Echo Bay Mines Ltd. (the
Company) as of June 30, 2001 and December 31, 2000 and the consolidated results
of operations and cash flow for the three and six months ended June 30, 2001 and
2000. For further information, refer to the financial statements and related
footnotes included in the Company's annual report on Form 10-K for the year
ended December 31, 2000.
Basis of Presentation
The Company is in discussions with lenders to arrange a new borrowing facility
but has not yet entered into a final agreement. The Company's ability to borrow
is constrained by conditions in the gold mining industry and its recent and
currently expected future operating results. Should the Company be unable to
arrange a new borrowing facility to replace its maturing facility, it is
unlikely that the Company would be able to settle its existing loan with cash
from operations or other sources and there would be substantial doubt about the
Company's ability to continue its operations in the normal course of business.
These financial statements are prepared on a going concern basis, which assumes
that the Company will continue to realize its assets and discharge its
liabilities in the normal course of business for the foreseeable future.
Consequently, they do not include any adjustments to the carrying amounts and
classifications of assets and liabilities, which may be necessary should the
Company not be able to continue to operate in the normal course of business. The
Company's current revolving credit facility has been extended from August 9,
2001 to September 5, 2001. The Company expects to finalize terms and have
agreements to a refinancing with the current bank syndicate on or before that
date.
2. INVENTORIES
June 30 December 31
2001 2000
----------------------------------------------------------------------------------------------------------------------------
Precious metals -- bullion $ 13,097 $ 18,357
-- in-process 9,323 8,293
Materials and supplies 18,360 12,793
----------------------------------------------------------------------------------------------------------------------------
$ 40,780 $ 39,443
============================================================================================================================
3. PROPERTY, PLANT AND EQUIPMENT
Plant and equipment June 30 December 31
2001 2000
----------------------------------------------------------------------------------------------------------------------------
Cost $ 658,886 $ 653,653
Less accumulated depreciation 525,167 515,126
----------------------------------------------------------------------------------------------------------------------------
$ 133,719 $ 138,527
============================================================================================================================
Mining properties June 30 December 31
2001 2000
----------------------------------------------------------------------------------------------------------------------------
Producing mines' acquisition and development costs $ 278,795 $ 276,951
Less accumulated amortization 254,319 248,792
----------------------------------------------------------------------------------------------------------------------------
24,476 28,159
Development properties' acquisition and development costs 13,376 13,532
Deferred mining costs 16,181 21,808
----------------------------------------------------------------------------------------------------------------------------
$ 54,033 $ 63,499
============================================================================================================================
4
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
4. DEBT AND OTHER FINANCINGS
June 30 December 31
2001 2000
----------------------------------------------------------------------------------------------------------------------------
Currency loans $ 19,000 $ 26,500
Capital securities (note 6) 6,364 6,032
----------------------------------------------------------------------------------------------------------------------------
25,364 32,532
Less current portion 19,000 26,500
----------------------------------------------------------------------------------------------------------------------------
$ 6,364 $ 6,032
============================================================================================================================
5. DEFERRED INCOME
June 30 December 31
2001 2000
----------------------------------------------------------------------------------------------------------------------------
Modification of hedging contracts $ 28,748 $ 39,336
Premiums received on gold and silver option contracts 14,833 20,310
Other -- 703
----------------------------------------------------------------------------------------------------------------------------
43,581 60,349
Less current portion 4,888 9,651
----------------------------------------------------------------------------------------------------------------------------
$ 38,693 $ 50,698
============================================================================================================================
6. CAPITAL SECURITIES
In 1997, the Company issued $100.0 million of 11% capital securities due in
April 2027. The Company has the right to defer interest payments on the capital
securities for a period not to exceed 10 consecutive semi-annual periods. During
a period of interest deferral, interest accrues at a rate of 12% per annum,
compounded semi-annually, on the full principal amount and deferred interest.
The Company, at its option, may satisfy its deferred interest obligation by
delivering common shares to the indenture trustee for the capital securities.
The trustee would sell the Company's shares and remit the proceeds to the
holders of the securities in payment of the deferred interest obligation.
Deferred interest obligations not settled with proceeds from the sale of shares
remain an unsecured liability of the Company. Since April 1998, the Company has
exercised its right to defer its interest payments to holders of the capital
securities. Interest deferred to date amounts to $52.1 million at June 30, 2001
and is payable no later than April 1, 2003 together with any additional
compounded or deferred interest up to that date. Although the Company has the
contractual right to issue shares in settlement of this obligation, market
conditions in 2003 will determine the Company's ability to settle through the
delivery and sale of common shares.
7. INTEREST AND OTHER
Three months ended Six months ended
June 30 June 30
2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Interest income $ (141) $ (154) $ (499) $ (386)
Interest expense 616 1,546 1,411 2,954
Unrealized loss on share investments 102 -- 102 --
Other (35) 221 (182) 1,068
-----------------------------------------------------------------------------------------------------------------------------
$ 542 $ 1,613 $ 832 $ 3,636
=============================================================================================================================
8. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
U.S. GAAP financial statements
The Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in Canada. These differ in some
respects from those in the United States, as described below and in the
footnotes to the financial statements included in the Company's annual report on
Form 10-K for the year ended December 31, 2000.
5
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
The effects of the GAAP differences on the consolidated statement of operations
would have been as follows.
Three months ended Six months ended
June 30 June 30
2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) under Canadian GAAP $ (403) $ 10,168 $ 3,390 $ 7,495
Unrealized loss on share investments 102 -- 102 --
Change in market value of foreign exchange contracts (461) (919) (1,940) (633)
Change in market value of option contracts 217 (636) (791) (639)
Transition adjustment on adoption of FAS 133 -- -- (3,090) --
Additional interest expense on capital securities (4,326) (3,848) (8,656) (7,473)
Amortization of deferred financing on capital securities (159) (159) (317) (317)
-----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) under U.S. GAAP $ (5,030) $ 4,606 $ (11,302) $ (1,567)
=============================================================================================================================
Earnings (loss) per share under U.S. GAAP $ (0.04) $ 0.03 $ (0.08) $ (0.01)
=============================================================================================================================
The effects of the GAAP differences on the consolidated balance sheet would have
been as follows.
Canadian Capital Derivative U.S.
June 30, 2001 GAAP Securities Contracts Other GAAP
----------------------------------------------------------------------------------------------------------------------------
Short-term investments $ 2,058 $ -- $ -- $ 1,088 $ 3,146
Long-term investments and other assets 20,703 475 (13,258) -- 7,920
Debt and other financings 25,364 96,636 -- -- 122,000
Deferred income 43,581 -- (43,581) -- --
Other long-term obligations 50,950 52,130 1,326 -- 104,406
Common shares 713,343 -- -- 36,428 749,771
Capital securities 148,766 (148,766) -- -- --
Deficit 716,946 (475) 2,442 36,298 755,211
Shareholders' equity 119,294 (148,291) 28,997 1,088 1,088
----------------------------------------------------------------------------------------------------------------------------
The following statement of comprehensive income (loss) would be disclosed in
accordance with U.S. GAAP.
Three months ended Six months ended
June 30 June 30
2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) under U.S. GAAP $ (5,030) $ 4,606 $ (11,302) $ (1,567)
Other comprehensive income (loss), after a nil income tax effect:
Unrealized gain on share investments arising during period 67 -- 356 --
Modification of derivative contracts realized in net income (5,497) -- (7,794) --
Foreign currency translation adjustments 2,502 (1,539) (915) (1,835)
Transition adjustment on adoption of FAS 133 -- -- 39,234 --
-----------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (2,928) (1,539) 30,881 (1,835)
-----------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (7,958) $ 3,067 $ 19,579 $ (3,402)
=============================================================================================================================
Additionally, under U.S. GAAP, the equity section of the balance sheet would
present a subtotal for accumulated other comprehensive income (loss), as
follows.
June 30 December 31
2001 2000
----------------------------------------------------------------------------------------------------------------------------
Unrealized gain on share investments $ 958 $ 732
Modification of derivative contracts 31,439 --
Foreign currency translation (25,869) (24,954)
----------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) $ 6,528 $ (24,222)
============================================================================================================================
6
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
Derivative instruments and hedging activities
On January 1, 2001, the Company implemented FASB Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and Statement No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
The Company has designated its gold forward contracts as normal sales as defined
by Statement No. 138 and are therefore excluded from the scope of Statement No.
133. Foreign exchange contracts and gold put and call options have not been
designated as hedges for U.S. GAAP purposes and are recognized at fair value on
the balance sheet with changes in fair value recorded in earnings. Gains and
losses on the early termination or other restructuring of gold, silver and
foreign currency hedging contracts are deferred in accumulated other
comprehensive income until the formerly hedged items are recorded in earnings.
The transition adjustment recorded under U.S. GAAP at January 1, 2001 decreased
assets by $18.3 million, liabilities by $54.4 million, net earnings by $3.1
million and increased accumulated other comprehensive income by $39.2 million.
9. SEGMENT INFORMATION
The Company's management regularly evaluates the performance of the Company by
reviewing operating results on a minesite by minesite basis. As such, the
Company considers each producing minesite to be an operating segment. The
Company has four operating mines: Round Mountain in Nevada, USA; McCoy/Cove in
Nevada, USA; Kettle River in Washington, USA; and Lupin in the Nunavut Territory
of Canada. All of the Company's mines are 100% owned except for Round Mountain,
which is 50% owned.
In making operating decisions and allocating resources, the Company's management
specifically focuses on the production levels and cash operating costs generated
by each operating segment, as summarized in the following tables.
Three months ended Six months ended
June 30 June 30
Gold Production (ounces) 2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------------------------
Round Mountain (50%) 97,770 76,408 198,138 148,362
McCoy/Cove 27,385 49,448 49,688 92,594
Lupin 34,756 38,359 72,710 38,359
Kettle River 16,373 24,260 29,218 49,330
------------------------------------------------------------------------------------------------------------------------------
Total gold 176,284 188,475 349,754 328,645
==============================================================================================================================
Silver Production (ounces) - all from McCoy/Cove 1,738,056 3,581,898 3,296,585 7,424,844
==============================================================================================================================
Three months ended Six months ended
June 30 June 30
Cash Operating Costs per Ounce of Gold Produced 2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------------------------
Round Mountain $ 194 $ 202 $ 190 $ 194
McCoy/Cove 234 163 245 156
Lupin 230 213 223 213
Kettle River 274 201 260 214
------------------------------------------------------------------------------------------------------------------------------
Company consolidated weighted average $ 218 $ 186 $ 215 $ 179
==============================================================================================================================
7
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
Three months ended Six months ended
Reconciliation of Cash Operating June 30 June 30
Costs per Ounce to Financial Statements 2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------------------------
Operating costs by minesite:
Round Mountain $ 20,025 $ 15,074 $ 38,260 $ 26,560
McCoy/Cove 13,956 23,218 28,974 37,179
Lupin 8,035 5,441 15,854 5,441
Kettle River 4,505 5,147 8,056 9,909
------------------------------------------------------------------------------------------------------------------------------
Total operating costs per financial statements 46,521 48,880 91,144 79,089
Change in finished goods inventories and other (1,434) (3,214) (2,365) 656
Co-product cost of silver produced (6,657) (10,602) (13,582) (20,864)
------------------------------------------------------------------------------------------------------------------------------
Cash operating costs $ 38,430 $ 35,064 $ 75,197 $ 58,881
==============================================================================================================================
Gold ounces produced 176,284 188,475 349,754 328,645
==============================================================================================================================
Cash operating costs per ounce $ 218 $ 186 $ 215 $ 179
==============================================================================================================================
The Company's management generally monitors revenue on a consolidated basis.
Information regarding the Company's consolidated revenue is provided below.
Three months ended Six months ended
June 30 June 30
2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------------------------
Total gold and silver revenues $ 63,652 $ 84,293 $ 128,113 $ 136,090
Average gold price realized per ounce $ 298 $ 322 $ 304 $ 321
Average silver price realized per ounce $ 4.52 $ 5.23 $ 4.93 $ 5.42
------------------------------------------------------------------------------------------------------------------------------
10. HEDGING ACTIVITIES AND COMMITMENTS
Gold commitments
The Company's gold forward sales positions at June 30, 2001 were as follows.
Forward Price of
Sales Forward Sale
(ounces) (per ounce)
--------------------------------------------------------------------------
Remainder of 2001 30,000 $ 302
2002 60,000 302
2003 60,000 302
2004 60,000 302
2005 15,000 302
--------------------------------------------------------------------------
225,000 $ 302
==========================================================================
The Company's gold option positions at June 30, 2001 were as follows.
Call Options Purchased Call Options Sold
-------------------------- ---------------------------
Strike Price Strike Price
Ounces per Ounce Ounces per Ounce
----------------------------------------------------------------------------
Remainder of 2001 30,000 $ 360 -- $ --
2002 60,000 360 -- --
2003 60,000 360 -- --
2004 60,000 360 -- --
2005 120,000 395 105,000 340
----------------------------------------------------------------------------
330,000 $ 373 105,000 $ 340
============================================================================
8
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
Currency position
At June 30, 2001, the Company had an obligation under foreign currency exchange
contracts to purchase C$6 million in the remainder of 2001 at an exchange rate
of C$1.46 to U.S.$1.00.
Shown below are the carrying amounts and estimated fair values of the Company's
hedging instruments at June 30, 2001 and December 31, 2000.
June 30, 2001 December 31, 2000
---------------------------------------- --------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------------------------------------------------------------------------------
Gold forward sales $ -- $ 4,600 $ -- $ 5,700
Silver forward sales -- -- -- 1,800
Gold options - puts purchased -- -- -- --
- calls sold (3,000) (1,200) (3,000) (2,200)
- puts sold -- -- -- --
- calls purchased 6,000 1,000 6,800 2,400
Silver options - puts purchased -- -- 1,200 1,400
- puts sold -- -- (1,300) (400)
- calls purchased -- -- 700 --
Foreign currency contracts -- (200) -- (300)
---------------------------------------------------------------------------------------------------------------------------
$ 4,200 $ 8,400
===========================================================================================================================
Fair values are estimated based upon market quotations of various input
variables. These variables were used in valuation models that estimate the fair
market value.
11. OTHER COMMITMENTS AND CONTINGENCIES
Summa
In September 1992, Summa Corporation commenced a lawsuit against Echo Bay
Exploration Inc. and Echo Bay Management Corporation, indirect subsidiaries of
the Company, alleging improper deductions in the calculation of royalties
payable over several years of production at the McCoy/Cove and Manhattan mines.
The matter was tried in the Nevada State Court in April 1997, with Summa
claiming more than $13 million in damages, and, in September 1997, judgement was
rendered for the Echo Bay companies, with the Nevada State Court finding that
the Echo Bay companies had calculated the royalties correctly, in compliance
with an agreement which the court found unambiguous.
The decision was appealed by Summa to the Supreme Court of Nevada and on April
26, 2000, the court reversed the decision of the trial court and remanded the
case back to the trial court for "a calculation of the appropriate [royalties]
in a manner not inconsistent with this order". The case was decided by a panel
comprised of three of the seven Justices of the Supreme Court of Nevada and the
Echo Bay defendants petitioned that panel for a rehearing. The petition was
denied by the three member panel on May 15, 2000. The Echo Bay defendants then
filed for a petition for review of the panel decision by the full Court. On
April 3, 2001, the full court issued an order reversing the decision of the
panel. The full court noted, however, that the trial court had failed to
consider the testimony of one of Summa's trial witnesses and remanded the case
to the trial court for a redetermination of the meaning of the contract. The
other defences and arguments put forth by the Echo Bay defendants, which the
trial court originally elected not to consider, may now also be considered. The
Echo Bay defendants disagree that the trial court failed to consider the
testimony in question. The evidence was in fact considered and addressed in an
alternate finding of that court. Accordingly, the Supreme Court is now being
asked to review this one matter and reinstate the decision of the trial court.
It is not known when the Supreme Court will rule on this request.
The Company has $1.5 million accrued related to the Summa matter. If Summa were
ultimately to prevail, the royalty calculation at McCoy/Cove would change and
additional royalties would be payable.
9
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
Handy and Harman
On March 29, 2000 Handy & Harman Refining Group, Inc., which operated a facility
used by the Company for the refinement of dore bars, filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. The outcome of these proceedings is
uncertain at this time. The Company has a claim for gold and silver accounts at
this refining facility with an estimated market value of approximately $2.4
million.
Security for reclamation
Certain of the Company's subsidiaries have provided corporate guarantees and
other forms of security to regulatory authorities in connection with future
reclamation activities. Early in 2001, regulators formally called upon two of
the Company's subsidiaries to provide other security to replace corporate
guarantees that had been given in respect of the Round Mountain and McCoy/Cove
operations. The subsidiaries disagree with the regulators' position and believe
that they qualify under the criteria set out for corporate guarantees and will
oppose the regulatory decision. Although the outcome cannot be predicted, the
Company and its counsel believe that the Company will prevail.
10
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
June 30, 2001
(U.S. dollars)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's profitability is determined in large part by gold and silver
prices. Market prices of gold and silver are determined by factors beyond the
Company's control. The Company's operations continue to be materially affected
by the depressed price of gold, which averaged $279 per ounce in 2000 and $266
per ounce during the first six months of 2001.
The Company reduces the risk of future gold and silver price declines by hedging
a portion of its production. The principal hedging tools used are gold and
silver loans, fixed and floating forward sales contracts, spot-deferred
contracts, swaps and options.
The Company's hedge position as of June 30, 2001 partially protects the Company
against gold price declines in the years 2001 through 2005. For the remainder of
2001, this position includes forward sales of approximately 30,000 ounces at a
forward price of $302 per ounce. For the years 2002 through 2005, the Company
has forward sales totaling 195,000 ounces of gold at a forward price of $302 per
ounce. See note 10 to the interim consolidated financial statements.
The Company continues to defer a final construction decision on Aquarius, a
planned gold mine in Ontario, Canada.
The Company's exploration efforts are focused on projects principally located in
North America where the Company already has extensive gold mining
infrastructure.
In March 1997, the Company issued $100.0 million of 11% capital securities due
2027 (see note 6 to the interim consolidated financial statements). The Company
has the right to defer interest payments on the capital securities for a period
not to exceed 10 consecutive semi-annual periods. During a period of interest
deferral, interest accrues at a rate of 12% per annum, compounded semi-annually,
on the full principal amount and deferred interest. The Company, at its option,
may satisfy its deferred interest obligation by delivering common shares to the
indenture trustee for the capital securities. The trustee would sell the
Company's shares and remit the proceeds to the holders of the securities in
payment of the deferred interest obligation. Deferred interest obligations not
settled with proceeds from the sale of shares remain an unsecured liability of
the Company. Since April 1998, the Company has exercised its right to defer its
semi-annual interest payments to holders of the capital securities. The deferred
interest accrued at June 30, 2001, totaling $52.1 million, has been classified
within the equity component of the capital securities obligation on the balance
sheet as the Company has the option to satisfy the deferred interest by
delivering common shares. Although the Company has the contractual right to
issue shares in settlement of this obligation, market conditions in 2003 will
determine the Company's ability to settle through the delivery and sale of
common shares.
11
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
June 30, 2001
(U.S. dollars)
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided from operating activities was $10.7 million for the first
six months of 2001 compared to $14.5 million for the first six months of 2000.
The 2001 results compared to 2000 reflect decreased silver cash revenue ($19.0
million) and increased operating costs in 2001 ($12.1 million) related to Lupin
operations and increased fuel and related costs. These factors were partially
offset by increased gold cash revenue ($10.4 million), Lupin start-up costs in
2000 ($4.8 million) and increases in inventories in 2000 ($12.1 million).
Net cash used in investing activities was $7.5 million in the first six months
of 2001, primarily related to mining properties, plant and equipment.
Net cash used in financing activities included $7.5 million for loan repayments
in the first six months of 2001.
At June 30, 2001, the Company had $10.0 million in cash and cash equivalents and
$2.1 million in short-term investments.
At June 30, 2001, the Company's current debt was $19.0 million and its long-term
debt was $6.4 million.
The Company's syndicated bank debt, which had a balance of $19.0 million at June
30, 2001, has been extended to September 5, 2001. The Company expects to
finalize terms and have agreements to a refinancing with the current syndicate
on or before that date. The Company is not permitted to make further draws under
the current facility. The Company's ability to borrow is constrained by
conditions in the gold mining industry and its recent and currently expected
future operating results. Should the Company be unable to arrange a new
borrowing facility to replace its maturing facility, it is unlikely that the
Company would be able to settle its existing loan with cash from operations or
other sources and there would be substantial doubt about the Company's ability
to continue its operations in the normal course of business.
At June 30, 2001, the fair value of the Company's hedge portfolio was $4.2
million, which is within the predetermined margin limits. Margin deposits could
be required by certain counterparties if the fair value of the hedge portfolio
were less than the predetermined margin threshold.
For the full year 2001, the Company expects to incur $22 million in capital
expenditures, of which $13 million has been incurred in the first six months of
2001. The Company will rely on its operating cash flow to fund the remainder of
its planned 2001 capital expenditures. The Company continues to monitor its
discretionary spending in view of the depressed gold price and the cost
structure at the Company's operating mines.
Early in 2000, The American Stock Exchange advised the Company that its listing
eligibility was under review. The review was undertaken because the Company had
fallen below two of the Exchange's continued listing guidelines. The Company had
sustained net losses in its five most recent fiscal years (1995 to 1999) and in
the Exchange's view, the Company's shareholders' equity under generally accepted
accounting principles in the United States is inadequate. The Company is
addressing the Exchange's concerns through periodic progress reviews and
currently the matter is in abeyance.
See note 11 to the interim consolidated financial statements, "Other Commitments
and Contingencies".
12
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2001
(U.S. dollars)
FINANCIAL REVIEW
Three month results
The Company reported a net loss of $0.4 million ($0.03 per share) in the second
quarter of 2001, compared to net earnings of $10.2 million ($0.04 per share) in
the second quarter of 2000. The 2001 results compared to 2000 reflect decreased
gold and silver sales volume ($14.9 million) and lower prices realized ($5.7
million), partially offset by decreased operating costs ($2.4 million) and
depreciation and amortization ($2.9 million).
Gold production decreased 6% to 176,284 ounces in the second quarter of 2001
compared to 188,475 ounces in the second quarter of 2000. This year's quarter
reflects the reducing production profile from the McCoy/Cove mine, partially
offset by an increase in gold production at the Round Mountain mine. Silver
production from McCoy/Cove in the second quarter of 2001 was 1.7 million ounces,
51% lower than the 3.6 million ounces produced in the second quarter of 2000.
Cash operating costs were $218 per ounce of gold in the second quarter of 2001,
versus $186 in the second quarter of 2000. The increase was primarily a result
of decreased grades and lower production at McCoy/Cove. Total production costs
were $291 per ounce in the second quarter of 2001, versus $262 per ounce in the
second quarter of 2000.
Six month results
The Company reported net earnings of $3.4 million ($0.04 loss per share) in the
first six months of 2001, compared to net earnings of $7.5 million ($0.00 per
share) in the first six months of 2000. The 2001 results compared to 2000
reflect decreased gold and silver sales prices realized ($8.2 million) and six
months of Lupin operations in 2001 compared to three months in 2000 ($10.4
million). These factors were partially offset by decreased exploration and
development spending ($5.4 million), depreciation and amortization ($3.7
million), interest and other expenses ($2.8 million) and reclamation and mine
closure ($2.0 million).
Gold production increased 6% to 349,754 ounces in the first six months of 2001
compared to 328,645 ounces in the first six months of 2000 reflecting increased
production at Round Mountain and the re-commissioned Lupin mine offset by the
reduced production from McCoy/Cove. Silver production from McCoy/Cove was 3.3
million ounces, 56% lower than the 7.4 million ounces produced in 2000.
Cash operating costs were $215 per ounce of gold in the first six months of
2001, versus $179 in the first six months of 2000. The increase was primarily a
result of decreased grades and lower production at McCoy/Cove. Total production
costs were $285 per ounce in the first six months of 2001, versus $257 per ounce
in the first six months of 2000.
The term ounce as used in this Form 10-Q means "troy ounce".
13
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2001
(U.S. dollars)
Revenue
Statistics for gold and silver ounces sold and other revenue data are set out
below.
Three months ended Six months ended
June 30 June 30
Revenue Data 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------------------
Gold
----
Ounces sold 185,825 182,372 357,910 299,166
Average price realized/ounce -- revenue basis $ 298 $ 322 $ 304 $ 321
Average price realized/ounce -- cash basis (1) $ 273 $ 302 $ 281 $ 301
Average market price/ounce $ 268 $ 280 $ 266 $ 285
Revenue (millions of U.S. $) $ 55.4 $ 58.7 $ 108.8 $ 96.1
Percentage of total revenue 87% 70% 85% 71%
Silver
------
Ounces sold 1,824,329 4,886,675 3,918,144 7,374,682
Average price realized/ounce -- revenue basis $ 4.52 $ 5.23 $ 4.93 $ 5.42
Average price realized/ounce -- cash basis (1) $ 4.30 $ 5.18 $ 5.22 $ 5.35
Average market price/ounce $ 4.40 $ 5.06 $ 4.48 $ 5.13
Revenue (millions of U.S. $) $ 8.2 $ 25.6 $ 19.3 $ 40.0
Percentage of total revenue 13% 30% 15% 29%
-------------------------------------------------------------------------------------------------------------------------------
Total revenue (millions of U.S. dollars) $ 63.6 $ 84.3 $ 128.1 $ 136.1
===============================================================================================================================
(1) Excludes non-cash items affecting gold and silver revenues, such as the
recognition of deferred income or deferral of revenue to future periods for
hedge accounting purposes.
The effects of changes in sales prices and volume were as follows.
Revenue Variance Analysis
2001 vs. 2000 Three months ended Six months ended
(millions of U.S. dollars) June 30 June 30
-----------------------------------------------------------------------------------------------------------------------------
Lower gold prices $ (4.4) $ (6.3)
Lower silver prices (1.3) (1.9)
Change in volume (14.9) 0.2
-----------------------------------------------------------------------------------------------------------------------------
Decrease in revenue $ (20.6) $ (8.0)
=============================================================================================================================
14
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2001
(U.S. dollars)
Production Costs
Production cost data per ounce of gold is set out below.
Three months ended Six months ended
Production Costs per June 30 June 30
Ounce of Gold Produced 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Direct mining expense $ 209 $ 190 $ 208 $ 190
Deferred stripping and mine development costs 9 (3) 11 (8)
Inventory movements and other -- (1) (4) (3)
-----------------------------------------------------------------------------------------------------------------------------
Cash operating costs 218 186 215 179
Royalties 12 10 9 9
Production taxes 1 3 1 3
-----------------------------------------------------------------------------------------------------------------------------
Total cash costs 231 199 225 191
Depreciation 38 31 38 34
Amortization 14 20 14 21
Reclamation and mine closure 8 12 8 11
-----------------------------------------------------------------------------------------------------------------------------
Total production costs $ 291 $ 262 $ 285 $ 257
=============================================================================================================================
Expenses
Operating costs per ounce vary with the quantity of gold and silver sold and
with the cost of operations. Cash operating costs were $218 per ounce of gold in
the second quarter of 2001 and $186 in the second quarter of 2000. See
"Operations Review."
Reconciliation of Cash Operating
Costs per Ounce to Financial Statements Three months ended Six months ended
thousands of U.S. dollars, June 30 June 30
except per ounce amounts 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Operating costs per financial statements $ 46,521 $ 48,880 $ 91,144 $ 79,089
Change in finished goods inventory and other (1,434) (3,214) (2,365) 656
Co-product cost of silver produced (6,657) (10,602) (13,582) (20,864)
-----------------------------------------------------------------------------------------------------------------------------
Cash operating costs $ 38,430 $ 35,064 $ 75,197 $ 58,881
=============================================================================================================================
Gold ounces produced 176,284 188,475 349,754 328,645
=============================================================================================================================
Cash operating costs per ounce $ 218 $ 186 $ 215 $ 179
=============================================================================================================================
Reserve estimates
The prices used in estimating the Company's ore reserves at December 31, 2000
were $300 per ounce of gold and $5.00 per ounce of silver. The market price for
gold has for more than three years traded, on average, below the level used in
estimating reserves at December 31, 2000. If the market price for gold were to
continue at such levels and the Company determined that its reserves should be
estimated at a significantly lower gold price than that used at December 31,
2000, there would be a reduction in the amount of gold reserves. The Company
estimates that if reserves at December 31, 2000 were based on $275 per ounce of
gold, reserves would decrease by approximately 10% at Round Mountain, 3% at
Kettle River and 2% at the Aquarius development property. There would be no
impact on reserves at Lupin and McCoy/Cove. The estimates are based on
extrapolation of information developed in the reserve calculation, but without
the same degree of analysis required for reserve estimation. Should any
significant reductions in reserves occur, material write-downs of the Company's
investment in mining properties and/or increased amortization, reclamation and
closure charges may be required.
15
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2001
(U.S. dollars)
OPERATIONS REVIEW
Operating data by mine is set out below.
Three months ended Six months ended
June 30 June 30
Operating Data by Mine 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Gold production (ounces)
(a)Round Mountain (50%) 97,770 76,408 198,138 148,362
(b)McCoy/Cove 27,385 49,448 49,688 92,594
(c)Lupin 34,756 38,359 72,710 38,359
(d)Kettle River 16,373 24,260 29,218 49,330
-----------------------------------------------------------------------------------------------------------------------------
Total gold 176,284 188,475 349,754 328,645
=============================================================================================================================
Silver production (ounces)
(b)McCoy/Cove 1,738,056 3,581,898 3,296,585 7,424,844
-----------------------------------------------------------------------------------------------------------------------------
Total silver 1,738,056 3,581,898 3,296,585 7,424,844
=============================================================================================================================
Gold production decreased 6% to 176,284 ounces in the second quarter of 2001
compared to 188,475 ounces in the second quarter of 2000. Decreased production
reflects the reducing production profile from the McCoy/Cove mine offset by an
increase in gold production at the Round Mountain mine. Silver production from
McCoy/Cove was 1.7 million ounces, 51% less than the 3.6 million ounces produced
in 2000, reflecting decreased grades and recoveries. With the better than
anticipated gold production achieved during the first half of 2001, production
for the full year is now expected to total 670,000 ounces, 18% higher than
originally forecast primarily due to better grades at Round Mountain and more
production from McCoy/Cove.
Three months ended Six months ended
June 30 June 30
Operating Data by Mine 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Cash operating costs (per ounce of gold)
(a) Round Mountain $ 194 $ 202 $ 190 $ 194
(b) McCoy/Cove 234 163 245 156
(c) Lupin 230 213 223 213
(d) Kettle River 274 201 260 214
-----------------------------------------------------------------------------------------------------------------------------
Company average $ 218 $ 186 $ 215 $ 179
=============================================================================================================================
Cash operating costs were $218 per ounce of gold in the second quarter of 2001,
versus $186 in the second quarter of 2000. The increase was primarily a result
of lower production at McCoy/Cove and higher fuel and related costs at Round
Mountain. The Company expects to achieve the planned cash operating costs of
$225 per ounce of gold produced for the full year 2001.
16
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2001
(U.S. dollars)
(a) Round Mountain, Nevada (50% owned)
Three months ended Six months ended
June 30 June 30
OPERATING DATA 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
Gold produced (ounces):
Heap leached -- reusable pad (50%) 30,572 18,452 57,822 36,220
Heap leached -- dedicated pad (50%) 58,118 41,114 98,805 73,487
Milled (50%) 9,080 16,842 41,511 36,720
Other (50%) -- -- -- 1,935
--------- --------- --------- ---------
Total (50%) 97,770 76,408 198,138 148,362
Mining cost/ton of ore and waste $ 0.88 $ 0.82 $ 0.86 $ 0.82
Heap leaching cost/ton of ore $ 0.81 $ 0.63 $ 0.75 $ 0.60
Milling cost/ton of ore $ 3.18 $ 2.80 $ 3.09 $ 2.85
Production cost per ounce of gold produced:
Direct mining expense $ 173 $ 206 $ 169 $ 211
Deferred stripping cost 20 (4) 21 (11)
Inventory movements and other 1 -- 0 (6)
--------- --------- --------- ----------
Cash operating cost 194 202 190 194
Royalties 22 23 16 17
Production taxes 1 1 1 1
--------- --------- --------- ---------
Total cash cost 217 226 207 212
Depreciation 40 45 38 46
Amortization 15 18 15 18
Reclamation and mine closure 9 9 9 9
--------- --------- --------- ---------
Total production costs $ 281 $ 298 $ 269 $ 285
--------- --------- --------- ---------
Heap leached -- reusable pad:
Ore processed (tons/day) (100%) 26,844 27,630 27,303 27,784
Total ore processed (000 tons) (100%) 2,443 2,514 4,969 5,057
Grade (ounce/ton) 0.031 0.030 0.034 0.028
Recovery rate (%) 72.9 58.1 78.0 59.9
Heap leached -- dedicated pad:
Ore processed (tons/day) (100%) 128,231 145,198 137,819 145,236
Total ore processed (000 tons) (100%) 11,669 13,213 25,083 26,433
Grade (ounce/ton) 0.011 0.011 0.011 0.011
Recovery rate (1)
Milled:
Ore processed (tons/day) (100%) 10,097 8,581 9,989 8,322
Total ore processed (000 tons) (100%) 919 781 1,818 1,515
Grade (ounce/ton) 0.040 0.051 0.064 0.049
Recovery rate (%) 80.5 82.9 84.0 83.9
----------------------------------------------------------------------------------------------------------------------------------
(1) Recovery rates on dedicated pads can only be estimated, as actual
recoveries will not be known until leaching is complete. At the Round
Mountain mine, the gold recovery rate on the dedicated heap leach pad is
estimated at 50%.
The Company has a 50% ownership interest in, and is the operator of, the Round
Mountain mine in Nevada. The Company's share of mine production was 97,770
ounces for the second quarter compared with 76,408 ounces in 2000. The mine
continues to have an excellent year, which is attributable to better heap leach
recoveries as well as the benefit of higher grade ore having been placed on the
pads during the first quarter of the year. Cash
17
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2001
(U.S. dollars)
operating costs for the second quarter were $194 per ounce, compared to $202 in
the second quarter of 2000. The higher production helped offset increased
reagent and power costs.
With the improved operating performance during the first half of the year, the
Company has revised its total year production forecast to 370,000 ounces from
300,000 ounces (the Company's share) at cash operating costs of $200 per ounce.
A $1.2 million exploration program is underway which includes further drilling,
target identification and other activity in the large area of mutual interest
surrounding Round Mountain.
18
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2001
(U.S. dollars)
(b) McCoy/Cove, Nevada (100% owned)
Three months ended Six months ended
June 30 June 30
OPERATING DATA 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
Gold produced (ounces):
Milled 19,746 33,005 37,724 61,703
Heap leached 7,639 16,443 11,964 30,891
--------- --------- --------- ---------
Total gold 27,385 49,448 49,688 92,594
Silver produced (ounces):
Milled 1,636,147 3,229,514 3,131,456 6,844,790
Heap leached 101,909 352,384 165,129 580,054
--------- --------- --------- ---------
Total silver 1,738,056 3,581,898 3,296,585 7,424,844
Mining cost/ton of ore and waste $ -- $ 0.70 $ -- $ 0.72
Milling cost/ton of ore $ 7.29 $ 6.75 $ 6.84 $ 6.77
Heap leaching cost/ton of ore $ -- $ 1.91 $ -- $ 1.80
Production cost per ounce of gold produced:
Direct mining expense $ 245 $ 155 $ 250 $ 160
Deferred stripping cost (10) 5 (2) (3)
Inventory movements and other (1) 3 (3) (1)
---------- --------- ---------- ----------
Cash operating cost 234 163 245 156
Royalties 1 3 1 3
Production taxes -- 6 -- 5
--------- --------- --------- ---------
Total cash cost 235 172 246 164
Depreciation 44 22 47 23
Amortization 8 28 8 28
Reclamation and mine closure -- 11 -- 11
--------- --------- --------- ---------
Total production costs $ 287 $ 233 $ 301 $ 226
--------- --------- --------- ---------
Average gold-to-silver price ratio (1) 61.1:1 55.1:1 59.4:1 55.5:1
Milled:
Ore processed (tons/day) 11,209 11,313 11,523 11,257
Total ore processed (000 tons) 1,020 1,029 2,097 2,049
Gold grade (ounce/ton) 0.043 0.054 0.043 0.057
Silver grade (ounce/ton) 2.69 3.78 2.63 4.44
Gold recovery rate (%) 45.7 52.2 45.1 54.0
Silver recovery rate (%) 66.1 72.7 65.5 72.5
Heap leached:
Ore processed (tons/day) -- 9,010 -- 9,942
Total ore processed (000 tons) -- 820 -- 1,809
Gold grade (ounce/ton) -- 0.019 -- 0.024
Silver grade (ounce/ton) -- 0.83 -- 0.96
Recovery rates (2)
----------------------------------------------------------------------------------------------------------------------------------
(1) To convert costs per ounce of gold into comparable costs per ounce of
co-product silver, divide the production cost per ounce of gold by the
period's average gold-to-silver price ratio.
(2) Recovery rates on dedicated pads can only be estimated, as actual
recoveries will not be known until leaching is complete. At the McCoy/Cove
mine, the gold recovery rate is estimated at 68% for crushed ore and 48%
for uncrushed, run-of-mine ore, while the silver recovery rate is estimated
at 35% for crushed ore and 10% for uncrushed, run-of-mine ore.
19
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2001
(U.S. dollars)
At McCoy/Cove in Nevada, gold production was 27,385 ounces for the second
quarter compared with 49,448 ounces in the second quarter of 2000. Silver
production amounted to 1.7 million ounces in the second quarter compared with
3.6 million ounces in the second quarter of 2000. The lower production level
reflects the processing of low grade stockpiles as mining was completed last
year. With the lower production, cash operating costs for the quarter were $234
per ounce, compared to $163 per ounce in 2000.
The Company had been concerned about its ability to ensure the processing of
stockpiled concentrates, given the shutdown of a major smelter which had been
contracted to handle this material. During the quarter, however, alternate
arrangements were secured and the processing challenge has been overcome.
Therefore, the Company has revised its production forecast upward for the full
year to 90,000 ounces of gold from 60,000 ounces and 6.5 million ounces of
silver from the previous 5.0 million ounces. Cash operating costs per ounce for
the year are now expected to be $250 compared with $275 per ounce previously
disclosed.
Reclamation activities continued during the quarter with contouring of rock
stockpiles, infiltration basins, and leach pads. Contouring of slopes,
application of an alluvial growth media, and seeding with a mixture of native
plant species has been accomplished on 1,571 acres. Reclamation will be underway
on an additional 500 acres by the end of the year.
20
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2001
(U.S. dollars)
(c) Lupin, Nunavut, Canada (100% owned)
Three months ended Six months ended
June 30 June 30
OPERATING DATA 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
Gold produced (ounces) 34,756 38,359 72,710 38,359
Mining cost/ton of ore C $ 48.14 C $ 38.50 C $ 46.47 C $ 38.50
Milling cost/ton of ore C $ 13.54 C $ 14.45 C $ 13.97 C $ 14.45
Production cost per ounce of gold produced:
Canadian dollars:
Direct mining expense C $ 400 C $ 341 C $ 389 C $ 341
Deferred mine development cost C $ (18) C $ (4) C $ (15) C $ (4)
Inventory movements and other C $ 2 C $ -- C $ 1 C $ --
--------- --------- --------- ---------
Cash operating cost C $ 384 C $ 337 C $ 375 C $ 337
U.S. dollars
Cash operating costs US $ 230 US $ 213 US $ 223 US $ 213
Royalties -- -- -- --
Production taxes -- -- -- --
--------- --------- --------- ---------
Total cash cost 230 213 223 213
Depreciation 30 28 29 28
Amortization 7 9 7 9
Reclamation and mine closure 14 17 14 17
--------- --------- --------- ---------
Total production costs US $ 281 US $ 267 US $ 273 US $ 267
--------- --------- --------- ---------
Milled:
Ore processed (tons/day) 1,818 1,934 1,834 1,934
Total ore processed (000 tons) 165 176 334 176
Grade (ounce/ton) 0.226 0.235 0.234 0.235
Recovery rate (%) 92.9 92.9 93.2 92.9
----------------------------------------------------------------------------------------------------------------------------------
Gold production for the quarter was 34,756 ounces compared with 38,359 ounces in
the second quarter of 2000. Cash operating costs were $230 per ounce compared to
$213 per ounce in the second quarter of 2000. Mining costs were higher and
grades lower than in 2000 due to the sequencing of production areas in the mine.
Production rates are expected to improve in the second half of the year with
Lupin meeting its 2001 production target of 150,000 ounces. The cash operating
costs include a $0.7 million benefit ($19 per ounce) in the second quarter from
hedging Canadian dollars for Lupin expenditures. A $6.0 million gain was
realized when certain contracts were closed during the first quarter of 1997.
The gain was deferred and will be recognized through the third quarter of 2001.
The internal hoisting system (winze) was commissioned during the quarter and is
operating well, allowing a more cost effective method of transporting ore and
waste from the lower levels of the mine.
21
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2001
(U.S. dollars)
(d) Kettle River, Washington (100% owned)
Three months ended Six months ended
June 30 June 30
OPERATING DATA 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
Gold produced (ounces) 16,373 24,260 29,218 49,330
Mining cost/ton of ore $ 23.37 $ 20.01 $ 23.58 $ 21.06
Milling cost/ton of ore $ 10.15 $ 11.15 $ 10.91 $ 11.51
Production cost per ounce of gold produced:
Direct mining expense $ 192 $ 238 $ 201 $ 238
Deferred mine development cost -- -- -- --
Inventory movements and other 82 (37) 59 (24)
--------- ---------- --------- ----------
Cash operating cost 274 201 260 214
Royalties 12 13 12 13
Production taxes 1 1 1 1
--------- --------- --------- ---------
Total cash cost 287 215 273 228
Depreciation 7 10 7 10
Amortization 40 8 40 8
Reclamation and mine closure 15 15 15 15
--------- --------- --------- ---------
Total production costs $ 349 $ 248 $ 335 $ 261
--------- --------- --------- ---------
Milled:
Ore processed (tons/day) 1,303 1,378 1,102 1,443
Total ore processed (000 tons) 119 125 201 263
Grade (ounce/ton) 0.167 0.223 0.176 0.221
Recovery rate (%) 82.7 86.9 82.7 85.0
----------------------------------------------------------------------------------------------------------------------------------
Production for the second quarter was 16,373 ounces, down from 24,260 ounces in
the second quarter of 2000. Production in 2001 was from existing stockpiles and
the K-2 mine and, as anticipated, was lower than 2000 production, due to the
completion of mining at the Lamefoot deposit in the fourth quarter of 2000. Cash
operating costs per ounce were $274 in the second quarter of 2001 compared to
$201 per ounce in the second quarter of 2000, reflecting the lower production.
Kettle River is expected to produce 60,000 ounces with cash operating costs of
$240 per ounce in 2001.
Underground exploration and development of the previously reported north east
extension to the K-2 mine is currently being conducted.
22
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2001
(U.S. dollars)
RECENT DEVELOPMENTS
Exploration and development programs
With the ongoing low gold price environment, the Company continues its focused
approach to exploration and development activities primarily within close
proximity to the existing mine sites as well as in the Western United States and
in the Timmins area of Ontario. For the second quarter of 2001, the Company
spent $1.1 million on exploration activities. Exploration costs are expensed as
incurred.
In 1997, the Company deferred a final construction decision on its planned gold
mine, the 100% owned Aquarius in Ontario, Canada. Development holding costs are
expensed as incurred. During the second quarter of 2001, the Company expensed
$0.1 million in holding costs related to Aquarius.
Other
See note 11 to the interim consolidated financial statements.
23
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2001
(U.S. dollars)
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES 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 targeted or projected results.
Such forward-looking statements include statements regarding targets for gold
and silver production, cash operating costs and certain significant expenses,
percentage increases and decreases in production from the Company's principal
mines, schedules for completion of detailed feasibility studies and initial
feasibility studies, potential changes in reserves and production, the timing
and scope of future drilling and other exploration activities, expectations
regarding receipt of permits and commencement of mining or production,
anticipated grades and recovery rates, the ability to secure financing, and
potential acquisitions or increases, divestitures or decreases in property
interests. Factors that could cause actual results to differ materially include,
among others: changes in gold and silver prices; fluctuations in grades and
recovery rates; geological, metallurgical, processing, access, transportation or
other problems; results of exploration activities, pending and future
feasibility studies; changes in project parameters as plans continue to be
refined; political, economic and operational risks; availability of materials
and equipment; regulatory risks, including but not limited to reclamation
security requirements and the timing for the receipt of governmental permits;
force majeure events; the failure of plant, equipment or processes to operate in
accordance with specifications or expectations; accidents, labor relations;
delays in start-up dates for projects; environmental costs and risks; and other
factors described herein or in the Company's filings with the U.S. Securities
and Exchange Commission. Many of these factors are beyond the Company's ability
to predict or control. Readers are cautioned not to put undue reliance on
forward-looking statements.
24
ECHO BAY MINES LTD.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Summa
See note 11 to the interim consolidated financial statements.
Other
The Company is also engaged in routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
(a) The Company's Annual General Meeting was held June 15, 2001.
(c) (1) Election of Directors
Votes Against
Nominee Votes For or Withheld
------- --------- -----------
John Norman Abell 69,747,510 985,907
Latham Cawthra Burns 69,710,331 1,023,086
John Gilray Christy 69,810,255 923,162
Peter Clarke 69,761,268 972,149
Robert Leigh Leclerc, Q.C. 69,816,834 916,583
John Frederick McOuat 69,747,506 985,911
Monica Elizabeth Sloan 69,701,288 1,032,129
(c) (2) Appointment of Ernst & Young LLP as Auditors of the Company.
Votes Against
Votes For or Withheld
--------- -----------
Appointment of Ernst & Young LLP 70,016,826 368,854
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K None.
25
SIGNATURE
Pursuant to the requirements 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.
ECHO BAY MINES LTD.
------------------------------------
(Registrant)
August 3, 2001
--------------
Date
/s/ David A. Ottewell
------------------------------------
DAVID A. OTTEWELL
Controller and Principal
Accounting Officer
26