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ECHO BAY MINES LTD. INDEX



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


ý

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

o

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
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

 

 
Suite 1210, 10180-101 Street
Edmonton, Alberta
  T5J 3S4
(Address of principal executive offices)   (Zip Code)

Registrant's telephone number, including area code (780) 496-9002

        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 ý    No o

Title of Class   Shares Outstanding as of
November 6, 2002
Common Shares
without nominal or par value
  541,271,675



ECHO BAY MINES LTD.
INDEX

 
   
PART I—FINANCIAL INFORMATION
 
ITEM 1.

 

CONDENSED FINANCIAL STATEMENTS (Unaudited)
 
ITEM 2.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
ITEM 3.

 

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
 
ITEM 4.

 

CONTROLS AND PROCEDURES

PART II—OTHER INFORMATION
 
ITEM 1.

 

LEGAL PROCEEDINGS
 
ITEM 6.

 

EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURE

CERTIFICATIONS

CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

        "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements herein that are not historical facts are forward-looking statements. They involve risks and uncertainties that could cause actual results to differ materially from targeted results. These risks and uncertainties include, but are not limited to, the possibility that the combination of Kinross Gold Corporation, TVX Gold Inc. and Echo Bay Mines Ltd. (the "Company") may not be completed; future changes in gold prices (including derivatives) and/or production costs which could render projects uneconomic; ability to access financing; availability of hedging opportunities; differences in ore grades, recovery rates and tons mined from those expected; changes in mining and milling/heap leaching rates from currently planned rates; the results of future exploration activities and new exploration opportunities; changes in project parameters as plans continue to be refined; increasingly stringent reclamation requirements imposed by regulatory authorities; and other factors detailed in the Company's filings with the U.S. Securities and Exchange Commission.

        On September 17, 2002, the Company filed with the Commission a preliminary proxy statement regarding the proposed business combination transaction referred to in the following information. In addition, the Company will prepare and file with the Commission a definitive proxy statement and other documents regarding the proposed transaction. Investors and security holders are urged to read the definitive proxy statement, when it becomes available, because it will contain important information. The definitive proxy statement will be sent to shareholders of the Company to seek their approval of the proposed transaction. Investors and security holders may obtain a free copy of the definitive proxy statement, when it is available, and other documents filed with the Commission by the Company at the Commission's website at www.sec.gov. The definitive proxy statement, when it is available, and these other documents may also be obtained for free from the Company by directing a request to Lois-Ann L. Brodrick, Vice President and Secretary, 780-496-9002, investor_relations@echobaymines.ca.

Certain Information Concerning Participants

        The names, affiliations and interests of participants in the solicitation of proxies of the Company's shareholders to approve the combination is included in the preliminary proxy statement.


PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS (Unaudited)


ECHO BAY MINES LTD.

CONSOLIDATED BALANCE SHEETS

 
  September 30
2002

  December 31
2001

 
 
  thousands of U.S. dollars

 
ASSETS              
Current assets:              
  Cash and cash equivalents   $ 20,867   $ 12,351  
  Short-term investments     2,170     1,910  
  Interest and accounts receivable     5,095     3,645  
  Inventories (note 2)     25,866     29,506  
  Prepaid expenses and other assets     2,915     3,725  
   
 
 
      56,913     51,137  
Plant and equipment (note 3)     108,780     120,969  
Mining properties (note 3)     29,460     32,903  
Other long-term assets (note 4)     53,846     55,795  
   
 
 
    $ 248,999   $ 260,804  
   
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY              
Current liabilities:              
  Accounts payable and accrued liabilities   $ 22,271   $ 24,284  
  Income and mining taxes payable     2,952     3,570  
  Debt and other financings (note 5)         17,000  
  Deferred income (note 6)     697     876  
  Reclamation and mine closure liabilities     4,559     3,841  
   
 
 
      30,479     49,571  
Debt and other financings (note 5)         6,714  
Deferred income (note 6)     19,102     47,042  
Reclamation and mine closure liabilities     47,379     49,726  
Deferred income taxes     941     925  
Commitments and contingencies (notes 12 and 13)              
Shareholders' equity:              
  Capital stock (note 7)     1,042,571     713,343  
  Capital securities (note 8)         157,453  
  Deficit     (863,819 )   (734,665 )
  Foreign currency translation     (27,654 )   (29,305 )
   
 
 
      151,098     106,826  
   
 
 
    $ 248,999   $ 260,804  
   
 
 

See accompanying notes to interim consolidated financial statements.


ECHO BAY MINES LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

 
  Three months ended
September 30

  Nine months ended
September 30

 
 
  2002
  2001
  2002
  2001
 
 
  thousands of U.S. dollars, except for per share data

 
Revenue   $ 51,996   $ 58,545   $ 161,750   $ 186,658  
   
 
 
 
 
Expenses:                          
  Operating costs     30,104     42,173     99,520     133,317  
  Royalties     2,016     2,284     5,722     5,970  
  Production taxes     460     178     544     449  
  Depreciation and amortization     8,577     10,182     28,300     32,451  
  Reclamation and mine closure     1,359     1,578     3,839     4,843  
  General and administrative     2,840     1,476     5,731     4,316  
  Exploration and development     2,609     1,199     4,778     3,211  
  Loss on retirement of capital securities (note 7)             5,461      
  Interest and other (note 9)     289     454     126     1,286  
   
 
 
 
 
      48,254     59,524     154,021     185,843  
   
 
 
 
 
Earnings (loss) before income taxes     3,742     (979 )   7,729     815  
   
 
 
 
 
Income tax expense (recovery):                          
  Current         48         131  
  Deferred         (840 )       (2,519 )
   
 
 
 
 
          (792 )       (2,388 )
   
 
 
 
 
Net earnings (loss)   $ 3,742   $ (187 ) $ 7,729   $ 3,203  
   
 
 
 
 
Net earnings (loss) attributable to common shareholders (note 8)   $ 3,742   $ (4,252 ) $ (129,154 ) $ (9,518 )
   
 
 
 
 
Earnings (loss) per share—basic and diluted   $ 0.01   $ (0.03 ) $ (0.33 ) $ (0.07 )
   
 
 
 
 
Weighted average number of shares outstanding (thousands)                          
  —basic     541,269     140,607     392,620     140,607  
  —diluted     547,105     140,607     392,620     140,607  


CONSOLIDATED STATEMENTS OF DEFICIT

 
  Three months ended
September 30

  Nine months ended
September 30

 
 
  2002
  2001
  2002
  2001
 
 
  thousands of U.S. dollars

 
Balance, beginning of period   $ (867,561 ) $ (716,946 ) $ (734,665 ) $ (711,680 )
Net earnings (loss)     3,742     (187 )   7,729     3,203  
Loss on retirement of capital securities, net of nil tax effect (note 7)             (132,302 )    
Interest on capital securities, net of nil tax effect (note 8)         (4,065 )   (4,581 )   (12,721 )
   
 
 
 
 
Balance, end of period   $ (863,819 ) $ (721,198 ) $ (863,819 ) $ (721,198 )
   
 
 
 
 

See accompanying notes to interim consolidated financial statements.


ECHO BAY MINES LTD.

CONSOLIDATED STATEMENTS OF CASH FLOW

 
  Three months ended
September 30

  Nine months ended
September 30

 
 
  2002
  2001
  2002
  2001
 
 
  thousands of U.S. dollars

 
CASH PROVIDED FROM (USED IN):                          
OPERATING ACTIVITIES                          
  Net cash flows provided from operating activities   $ 9,629   $ 10,936   $ 14,878   $ 27,233  
   
 
 
 
 
INVESTING ACTIVITIES                          
  Mining properties, plant and equipment     (1,926 )   (5,326 )   (10,790 )   (18,683 )
  Other long-term assets     (3,798 )   (2,177 )   (3,719 )   (2,164 )
  Proceeds on the sale of plant and equipment     168     5     1,860     373  
  Other     227     (506 )   771     (639 )
   
 
 
 
 
      (5,329 )   (8,004 )   (11,878 )   (21,113 )
   
 
 
 
 
FINANCING ACTIVITIES                          
  Debt repayments         (2,000 )   (17,000 )   (9,500 )
  Units offering, net of issuance costs (note 7)             25,513      
  Warrants exercised     3         3      
  Costs of capital securities retirement (note 7)     (48 )       (3,000 )    
   
 
 
 
 
      (45 )   (2,000 )   5,516     (9,500 )
   
 
 
 
 
Net increase (decrease) in cash and cash equivalents     4,255     932     8,516     (3,380 )
Cash and cash equivalents, beginning of period     16,612     9,957     12,351     14,269  
   
 
 
 
 
Cash and cash equivalents, end of period   $ 20,867   $ 10,889   $ 20,867   $ 10,889  
   
 
 
 
 

See accompanying notes to interim consolidated financial statements.


ECHO BAY MINES LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2002

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 sheets, consolidated statements of operations, consolidated statements of deficit and consolidated statements 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 September 30, 2002 and December 31, 2001 and the consolidated results of operations and cash flow for the three and nine months ended September 30, 2002 and 2001. These financial statements do not include all disclosures required by generally accepted accounting principles for annual financial statements. 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, 2001. Except as otherwise noted in this report, the accounting policies described in the annual report have been applied in the preparation of these financial statements.

        On June 10, 2002, the Company, Kinross Gold Corporation ("Kinross") and TVX Gold Inc. ("TVX") announced that they had entered into an agreement providing for the proposed combination of the companies. In a concurrent transaction, TVX agreed to acquire from Newmont Mining Corporation ("Newmont") the interest in the TVX Newmont Americas joint venture that it does not already own. The combination of the companies is conditional upon the completion of this purchase.

        Shareholders of Echo Bay (other than Kinross) would receive 0.52 of a Kinross common share for each Echo Bay common share. At a Kinross special meeting, the shareholders of Kinross are expected to consider a one-for-three share consolidation which, if approved, would result in an exchange ratio change from 0.52 to 0.1733 of a Kinross common share for each Echo Bay common share. The Kinross share consolidation would not affect the percentage ownership interest of the Echo Bay shareholders in Kinross.

        As a result of the U.S. Securities and Exchange Commission's ongoing review of the preliminary proxy statement filed with the Commission on September 17, 2002, the Company will not be able to finalize and mail the proxy statement in time for the Company to hold its special meeting for the purpose of considering the combination in advance of November 30, 2002, the termination date specified in the combination agreement. The parties are discussing amending the combination agreement to extend the termination date, with a view to holding special meetings late in the fourth quarter 2002 or early in 2003.

        On June 9, 2002, Echo Bay Exploration Inc. and Echo Bay Minerals Company, two subsidiaries of the Company, entered into an asset purchase agreement with Newmont USA Limited ("Newmont USA"), a subsidiary of Newmont, providing for the conveyance of the McCoy/Cove complex. The agreement replaces a letter agreement dated February 13, 2002 related to the conveyance of the McCoy/Cove complex which called for a payment to the seller of $6 million and the assumption by Newmont of all reclamation and closure obligations. Under the February 13, 2002 letter agreement, Newmont had no obligation to complete the transaction. Newmont indicated it was willing to proceed with the conveyance of the McCoy/Cove complex only if the Kinross Combination was completed and the cash payment was eliminated. Accordingly, a new agreement was reached expressly containing these two conditions. The closing of the transaction is subject to, among other conditions, the completion of the Kinross Combination. In consideration of the conveyance of such assets, Newmont USA has agreed to assume all liabilities and obligations relating to the reclamation or remediation required for the McCoy/Cove complex. A gain is expected on the conveyance of the McCoy/Cove complex. Pending completion of the transaction, the Company will continue to operate McCoy/Cove for its own account. Mining and processing activities at the McCoy/Cove complex were completed on March 31, 2002.

        In May 2002, the Company sold a total of 39,100,000 units at a price of $0.70 per unit for aggregate gross proceeds of approximately $27.4 million. Each unit consisted of one common share and one share purchase warrant. The common shares and the warrants comprising the units separated upon closing and trade separately on the Toronto Stock Exchange and on the American Stock Exchange. Each warrant entitles the holder to purchase one common share of the Company at a price of $0.90 at any time prior to November 14, 2003.

        On April 3, 2002 the Company issued 361,561,230 common shares in exchange for the entire capital securities debt obligation of $100 million in principal amount plus accrued and unpaid interest (notes 7 and 8).

        Certain of the comparative figures have been reclassified to conform to the current year's presentation.

2. INVENTORIES

 
  September 30
2002

  December 31
2001

Precious metals bullion   $ 7,299   $ 12,215
In-process     4,907     5,720
Materials and supplies     13,660     11,571
   
 
    $ 25,866   $ 29,506
   
 

3. PROPERTY, PLANT AND EQUIPMENT

Plant and equipment

  September 30
2002

  December 31
2001

Cost   $ 652,534   $ 655,179
Less accumulated depreciation     543,754     534,210
   
 
    $ 108,780   $ 120,969
   
 

Mining properties

  September 30
2002

  December 31
2001

Producing mines' acquisition and development costs   $ 283,211   $ 280,545
Less accumulated amortization     266,618     260,365
   
 
      16,593     20,180
Development properties' acquisition and development costs     12,867     12,723
   
 
    $ 29,460   $ 32,903
   
 

4. OTHER LONG-TERM ASSETS

 
  September 30
2002

  December 31
2001

Deferred losses on modification of hedging contracts   $ 25,600   $ 29,305
Deferred mining costs     13,683     15,648
Reclamation and other deposits     14,334     10,485
Premiums paid on gold and silver option contracts     454     1,871
Other     229     357
   
 
      54,300     57,666
Less current portion included in prepaid expenses and other assets     454     1,871
   
 
    $ 53,846   $ 55,795
   
 

5. DEBT AND OTHER FINANCINGS

 
  September 30
2002

  December 31
2001

Currency loans   $   $ 17,000
Capital securities (note 8)         6,714
   
 
          23,714
Less current portion         17,000
   
 
    $   $ 6,714
   
 

6. DEFERRED INCOME

 
  September 30
2002

  December 31
2001

Deferred gains on modification of hedging contracts   $ 19,102   $ 47,042
Premiums received on gold and silver option contracts     697     876
   
 
      19,799     47,918
Less current portion     697     876
   
 
    $ 19,102   $ 47,042
   
 

7. CAPITAL STOCK

 
  Units
  Amount
Common shares          
Balance, December 31, 2001   140,607,145   $ 713,343
Issued in exchange for capital securities and accrued interest   361,561,230     303,711
Units offering, net of issuance costs   39,100,000     23,236
Issued upon exercise of warrants   3,300     3
   
 
Balance, September 30, 2002   541,271,675   $ 1,040,293
   
 
Warrants          
Balance, December 31, 2001     $
Units offering, net of issuance costs   39,100,000     2,278
Warrants exercised   (3,300 )  
   
 
Balance, September 30, 2002   39,096,700   $ 2,278
   
 

Capital securities retirement

        On April 3, 2002 the Company issued 361,561,230 common shares, representing approximately 72% of the outstanding common shares after giving effect to such issuance, in exchange for all of its $100 million aggregate principal amount of 11% junior subordinated debentures due 2027, plus accrued and unpaid interest thereon (the "capital securities").

        Following this issuance of common shares, and as at April 3, 2002, the principal holders of the Company's common shares and their respective ownership positions in the Company were Newmont Mining Corporation of Canada Limited ("Newmont Canada") (48.8%) and Kinross (11.4%). In connection with the completion of the capital securities exchange, three directors of the Company resigned from the board of directors. Two of the vacancies created by these resignations were filled by executive officers of Newmont Canada.

        As a result of eliminating the capital securities, the Company recorded an increase to common shares of $303.7 million, based on their quoted market value at the date of issue. The quoted market value of the common shares issued exceeded the book value of the capital securities by $134.8 million. This difference, along with transaction costs of $3.0 million, were recorded proportionately between interest expense ($5.5 million) and deficit ($132.3 million) in the second quarter of 2002 based on the debt and equity classifications of the capital securities.

Units offering

        In May 2002, the Company sold a total of 39,100,000 units at a price of $0.70 per unit for aggregate gross proceeds of approximately $27.4 million. Each unit consisted of one common share and one share purchase warrant. The common shares and the warrants comprising the units separated upon closing and trade separately on the Toronto Stock Exchange and the American Stock Exchange. Each warrant entitles the holder to purchase one common share of the Company at a price of $0.90 at any time prior to November 14, 2003.

8. CAPITAL SECURITIES

        On April 3, 2002 the Company issued 361,561,230 common shares in exchange for all of its capital securities (note 7). Prior to the exchange, the present value of the capital securities' principal amount was classified as debt (note 5) and the present value of the future interest payments plus deferred accrued interest was classified within a separate component of shareholders' equity. Interest on the debt portion of the capital securities was classified as interest expense on the consolidated statement of earnings and interest on the equity portion of the capital securities was charged directly to deficit on the consolidated balance sheet. The loss on conversion of the capital securities was charged proportionately between earnings and deficit (note 7). For purposes of per share calculations, the equity portions of interest and the loss on conversion decreases the earnings attributable to common shareholders. See note 10 for a discussion of differences in treatment of the capital securities under generally accepted accounting principles in the United States.

9. INTEREST AND OTHER

 
  Three months ended
September 30

  Nine months ended
September 30

 
 
  2002
  2001
  2002
  2001
 
Interest income   $ (104 ) $ (163 ) $ (322 ) $ (662 )
Interest expense     119     551     661     1,962  
Gain on sale of assets     (130 )       (1,229 )   (285 )
Unrealized loss on share investments         2         104  
Other     404     64     1,016     167  
   
 
 
 
 
    $ 289   $ 454   $ 126   $ 1,286  
   
 
 
 
 

10. 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, 2001.

Capital securities retirement

        In accordance with Canadian GAAP, the loss on the retirement of the capital securities (note 7) was recorded proportionately between interest expense ($5.5 million) and deficit ($132.3 million) in the second quarter of 2002 based on the debt and equity classifications of the capital securities. Under U.S. GAAP, the entire loss of $137.8 million would be recorded as an extraordinary item.

        The effects of the GAAP differences on the consolidated statement of operations would have been as follows.

 
  Three months ended
September 30

  Nine months ended
September 30

 
 
  2002
  2001
  2002
  2001
 
Net earnings (loss) under Canadian GAAP   $ 3,742   $ (187 ) $ 7,729   $ 3,203  
Additional interest expense on capital securities         (4,065 )   (4,581 )   (12,721 )
Amortization of deferred financing on capital securities         (158 )   (158 )   (475 )
Loss on retirement of capital securities             5,461      
Change in market value of foreign exchange contracts     (719 )   (780 )   (48 )   (2,720 )
Change in market value of option contracts     (172 )   345     (1,875 )   (446 )
Modification of derivative contracts realized in net earnings     344         1,031      
Transition adjustment on adoption of FAS 133                 (3,090 )
Kettle River exploration expense         (122 )       (1,425 )
Kettle River amortization expense         488         1,657  
Unrealized loss on share investments         2         104  
   
 
 
 
 
Net earnings (loss) under U.S. GAAP before extraordinary loss   $ 3,195   $ (4,477 ) $ 7,559   $ (15,913 )
Loss on retirement of capital securities, net of nil tax effect             (137,763 )    
   
 
 
 
 
Net earnings (loss) under U.S. GAAP   $ 3,195   $ (4,477 ) $ (130,204 ) $ (15,913 )
   
 
 
 
 
Earnings (loss) per share under U.S. GAAP—basic and diluted                          
  —before extraordinary loss   $ 0.01   $ (0.03 ) $ 0.02   $ (0.11 )
  —extraordinary loss   $   $   $ (0.35 ) $  
   
 
 
 
 
  —after extraordinary loss   $ 0.01   $ (0.03 ) $ (0.33 ) $ (0.11 )
   
 
 
 
 
Weighted average number of shares outstanding (thousands)                          
  —basic     541,269     140,607     392,620     140,607  
  —diluted     547,105     140,607     397,488     140,607  

        The effects of the GAAP differences on the consolidated balance sheet would have been as follows.

September 30, 2002

  Canadian
GAAP

  Short-term
Investments

  Derivative
Contracts

  Other(1)
  U.S.
GAAP

 
Short-term investments   $ 2,170   $ 14,094   $   $   $ 16,264  
Other long-term assets     53,846         (25,507 )       28,339  
Accounts payable and accrued liabilities     22,271         2,387         24,658  
Deferred income     19,799         (19,799 )        
Common shares     1,042,571             36,428     1,078,999  
Deficit     (863,819 )   178     (4,314 )   (36,428 )   (904,383 )
Foreign currency translation     (27,654 )           27,654      
Accumulated other comprehensive loss         13,916     (3,781 )   (27,654 )   (17,519 )
Shareholders' equity     151,098     14,094     (8,095 )       157,097  

(1)
The adjustment to common shares and deficit relates to the 1996 acquisition and 1997 write-off of the Company's investment in Santa Elina.

        The following statement of comprehensive income (loss) would be disclosed in accordance with U.S. GAAP.

 
  Three months ended
September 30

  Nine months ended
September 30

 
 
  2002
  2001
  2002
  2001
 
Net earnings (loss) under U.S. GAAP   $ 3,195   $ (4,477 ) $ (130,204 ) $ (15,913 )
Other comprehensive income (loss), after a nil income tax effect:                          
  Unrealized gain on share investments arising during period     1,702     742     11,458     1,098  
  Foreign currency translation adjustments     (2,356 )   (2,756 )   1,651     (3,671 )
  Transition adjustment on implementation of FAS 133                 39,234  
  Modification of derivative contracts realized in net earnings (loss)     (7,406 )   (4,166 )   (25,266 )   (11,960 )
   
 
 
 
 
Other comprehensive income (loss)     (8,060 )   (6,180 )   (12,157 )   24,701  
   
 
 
 
 
Comprehensive income (loss)   $ (4,865 ) $ (10,657 ) $ (142,361 ) $ 8,788  
   
 
 
 
 

        Additionally, under U.S. GAAP, the equity section of the balance sheet would present a subtotal for accumulated other comprehensive loss, as follows.

 
  September 30
2002

  December 31
2001

 
Unrealized gain on share investments   $ 13,916   $ 2,458  
Modification of derivative contracts     (3,781 )   21,485  
Foreign currency translation     (27,654 )   (29,305 )
   
 
 
Accumulated other comprehensive loss   $ (17,519 ) $ (5,362 )
   
 
 

Recent accounting pronouncements

        In 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, which is effective for fiscal years beginning after June 15, 2002. The Statement requires obligations associated with the retirement of long-lived assets be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost should be capitalized as part of the related long-lived assets and allocated to expense over the useful life of the asset. The Company will adopt Statement 143 on January 1, 2003. The impact of adoption of Statement 143 on the Company's financial position or results of operations has not yet been determined.

11. 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. In the third quarter of 2002, the Company had three operating mines: Round Mountain 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. The Company operated a fourth mine, McCoy/Cove in Nevada, USA, until March 31, 2002 at which date mining and processing activities were completed.

        The Company's management generally monitors revenue on a consolidated basis. Information regarding the Company's consolidated revenue is provided below.

 
  Three months ended
September 30

  Nine months ended
September 30

 
  2002
  2001
  2002
  2001
Total gold and silver revenues   $ 51,996   $ 58,545   $ 161,750   $ 186,658
Average gold price realized per ounce   $ 361   $ 298   $ 360   $ 302
Average silver price realized per ounce   $   $ 4.43   $ 4.36   $ 4.77

        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
September 30

  Nine months ended
September 30

Production (ounces)

  2002
  2001
  2002
  2001
Gold                
  Round Mountain (50%)   100,063   102,883   289,133   301,021
  Lupin   31,118   33,000   84,478   105,710
  Kettle River   7,907   12,200   27,894   41,418
  McCoy/Cove     23,450   16,501   73,138
   
 
 
 
Total gold   139,088   171,533   418,006   521,287
   
 
 
 
Silver—all from McCoy/Cove     1,731,444   1,470,094   5,028,029
   
 
 
 
 
  Three months ended
September 30

  Nine months ended
September 30

Operating costs

  2002
  2001
  2002
  2001
Round Mountain (50%)   $ 19,751   $ 20,052   $ 52,873   $ 58,312
Lupin     8,016     6,943     26,287     22,797
Kettle River     2,337     3,515     6,907     11,571
McCoy/Cove         11,663     13,453     40,637
   
 
 
 
Total operating costs per financial statements   $ 30,104   $ 42,173   $ 99,520   $ 133,317
   
 
 
 
 
  Three months ended
September 30

  Nine months ended
September 30

Royalties

  2002
  2001
  2002
  2001
Round Mountain (50%)   $ 1,949   $ 2,147   $ 5,543   $ 5,354
Kettle River     67     90     138     448
McCoy/Cove         47     41     168
   
 
 
 
Total royalties per financial statements   $ 2,016   $ 2,284   $ 5,722   $ 5,970
   
 
 
 

 
  Three months ended
September 30

  Nine months ended
September 30

Depreciation and amortization

  2002
  2001
  2002
  2001
Round Mountain (50%)   $ 6,267   $ 5,261   $ 16,996   $ 15,919
Lupin     1,436     1,103     3,636     3,708
Kettle River     418     653     2,052     1,711
McCoy/Cove         2,778     4,385     9,842
Depreciation of non-minesite assets     456     387     1,231     1,271
   
 
 
 
Total depreciation and amortization per financial statements   $ 8,577   $ 10,182   $ 28,300   $ 32,451
   
 
 
 

12. HEDGING ACTIVITIES AND COMMITMENTS

Gold commitments

        At September 30, 2002, the Company had commitments to deliver 15,000 ounces of gold in October 2002 at a price of $293 per ounce. The gold ounces were delivered as scheduled. The Company's option position at September 30, 2002 included 75,000 ounces of gold call options in October 2002 at an average strike price of $294 per ounce. The Company delivered 15,000 ounces into gold call options at $302 per ounce and settled the remaining 60,000 gold call options at a cost of $1.1 million in October 2002.

Currency position

        At September 30, 2002, the Company had an obligation under foreign currency exchange contracts to purchase C$12.3 million during the remainder of 2002 at an exchange rate of C$1.60 to U.S.$1.00. On October 7, 2002, the Company entered into foreign currency contracts to purchase C$45.1 million through June 2003 at an exchange rate of C$1.61 to U.S.$1.00.

        Shown below are the carrying amounts and estimated fair values of the Company's hedging instruments at September 30, 2002 and December 31, 2001.

 
  September 30, 2002
  December 31, 2001
 
 
  Carrying
Amount

  Estimated
Fair Value

  Carrying
Amount

  Estimated
Fair Value

 
Gold forward sales   $   $ (400 ) $   $ 2,000  
Gold options—calls sold     (697 )   (2,000 )   (876 )   (700 )
Foreign currency contracts         100         100  
         
       
 
          $ (2,300 )       $ 1,400  
         
       
 

        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.

13. OTHER COMMITMENTS AND CONTINGENCIES

Summa

        In September 1992, Summa Corporation commenced a lawsuit against two indirect subsidiaries of the Company, Echo Bay Exploration Inc. and Echo Bay Management Corporation (together the "Subsidiaries") alleging improper deductions in the calculation of royalties payable over several years of production at McCoy/Cove and another mine, which is no longer in operation. 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, judgment was rendered for the Subsidiaries. The decision was appealed by Summa to the Supreme Court of Nevada, which in April 2000 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 Subsidiaries petitioned that panel for a rehearing. The petition was denied by the three member panel on May 15, 2000 and remanded to the lower court for consideration of other defences and arguments put forth by the Subsidiaries. The Subsidiaries filed a petition for a hearing before the full Supreme Court and on December 22, 2000, the Court recalled its previous decision. Both the Subsidiaries and their counsel believe that grounds exist to modify or reverse the decision. The Company has $1.5 million accrued related to this litigation. If the appellate reversal of the trial decision is maintained and the trial court, on remand, were to dismiss all of the Subsidiaries' defences, the royalty calculation at McCoy/Cove would change and additional royalties would be payable. Neither the Company, nor counsel to the Subsidiaries believe it is possible to quantify the precise liability pursuant to a revised royalty calculation.

Handy & Harman

        On March 29, 2000 Handy & Harman Refining Group, Inc., which operated a facility used by the Company for the refinement of doré bars, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The Company has a claim for gold and silver accounts at this refining facility with an estimated market value of approximately $2.4 million. Further, in March 2002, the liquidating trustee for Handy & Harman commenced a series of adversary proceedings against numerous creditors, including two Company subsidiaries, alleging that certain creditors received preferential payments in metal or otherwise. The Company intends to oppose these proceedings vigorously. The success or failure of the liquidating trustee in prosecuting the claims may have an impact on the ultimate distribution of funds to creditors. The outcome of these proceedings is uncertain at this time.

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 in Nevada 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 totaling approximately $33 million. The Company disagrees with the regulators' position and believes that the subsidiaries 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.


ECHO BAY MINES LTD.

MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS

For the Three Months and Nine Months Ended September 30, 2002

(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 prices. Market prices of gold are determined by factors beyond the Company's control. The Company's operations continue to be materially affected by the price of gold, which averaged $271 per ounce in 2001 and $306 per ounce during the first nine months of 2002.

        The Company continually monitors its hedging policy in light of forecasted production, operating and capital expenditures, exploration and development requirements and factors affecting volatility of gold prices such as actual and prospective interest and gold lease rate performance. The principal hedging tools used are forward sales contracts and options. Forward sales contracts obligate the Company to sell gold at a specific price on a future date. Call options give the holder the right, but not the obligation, to buy gold on a specific future date at a specific price. These tools reduce the risk associated with gold price declines, but also could limit the Company's participation in increases of gold prices.

        The Company's hedge position as of September 30, 2002 is shown in note 12 to the interim consolidated financial statements. The Company fulfilled its gold forward sales obligations in October 2002 by delivering 15,000 ounces of gold at $293 per ounce. The Company also delivered 15,000 ounces into gold call options at $302 per ounce and settled the remaining 60,000 gold call options at a cost of $1.1 million in October 2002.

        The Company engages in forward currency exchange contracts to reduce the impact on the Lupin mine's operating costs caused by fluctuations in the exchange rate of U.S. dollars to Canadian dollars. The Company has obligations to purchase C$12.3 million for the remainder of 2002 at an exchange rate of C$1.60 to US$1.00. In October 2002, the Company contracted to purchase C$45.1 million in 2003 at an exchange rate of C$1.61 to US$1.00.

        On June 10, 2002, the Company, Kinross and TVX announced that they had entered into an agreement providing for the proposed combination of the companies. In a concurrent transaction, TVX agreed to acquire from Newmont the interest in the TVX Newmont Americas joint venture that it does not already own. The combination of the companies is conditional upon the completion of this purchase.

        Shareholders of Echo Bay (other than Kinross) would receive 0.52 of a Kinross common share for each Echo Bay common share. At a Kinross special meeting, the shareholders of Kinross are expected to consider a one-for-three share consolidation which, if approved, would result in an exchange ratio change from 0.52 to 0.1733 of a Kinross common share for each Echo Bay common share. The Kinross share consolidation would not affect the percentage ownership interest of the Echo Bay shareholders in Kinross.

        As a result of the U.S. Securities and Exchange Commission's ongoing review of the preliminary proxy statement filed with the Commission on September 17, 2002, the Company will not be able to finalize and mail the proxy statement in time for the Company to hold its special meeting for the purpose of considering the combination in advance of November 30, 2002, the termination date specified in the combination agreement. The parties are discussing amending the combination agreement to extend the termination date, with a view to holding special meetings late in the fourth quarter 2002 or early in 2003.

        On June 9, 2002, Echo Bay Exploration Inc. and Echo Bay Minerals Company, two subsidiaries of the Company, entered into an asset purchase agreement with Newmont USA, a subsidiary of Newmont, providing for the conveyance of the McCoy/Cove complex. The agreement replaces a letter agreement dated February 13, 2002 related to the conveyance of the McCoy/Cove complex which called for a payment to the seller of $6 million and the assumption by Newmont of all reclamation and closure obligations. Under the February 13, 2002 letter agreement, Newmont had no obligation to complete the transaction. Newmont indicated it was willing to proceed with the conveyance of the McCoy/Cove complex only if the Kinross Combination was completed and the cash payment was eliminated. Accordingly, a new agreement was reached expressly containing these two conditions. The closing of the transaction is subject to, among other conditions, the completion of the Kinross Combination. In consideration of the conveyance of such assets, Newmont USA has agreed to assume all liabilities and obligations relating to the reclamation or remediation required for the McCoy/Cove complex. A gain is expected on the conveyance of the McCoy/Cove complex. Pending completion of the transaction, the Company will continue to operate McCoy/Cove for its own account. Mining and processing activities at the McCoy/Cove complex were completed on March 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

        Net cash flow provided by operating activities was $14.9 million for the first nine months of 2002 compared to $27.2 million for the first nine months of 2001. The 2002 results compared to 2001 reflect the decrease in production.

        Net cash used in investing activities was $11.9 million in the first nine months of 2002, primarily related to investments in mining properties, plant and equipment and a $4.0 million reclamation deposit to support letters of credit and bonds issued by third parties.

        Net cash provided from financing activities was $5.5 million in the first nine months of 2002 compared to net cash used for scheduled debt repayments of $9.5 million for the first nine months of 2001. In May 2002, the Company sold a total of 39,100,000 units at a price of $0.70 per unit for net proceeds of $25.5 million. Each unit consisted of one common share and one share purchase warrant. The Company repaid the remaining $17.0 million on its revolving credit facility and incurred $3.0 in transaction costs related to the issuance of common shares in exchange for its capital securities obligation. The Company is now debt free.

        On April 3, 2002 the Company issued 361,561,230 common shares in exchange for the entire capital securities debt obligation of $100 million in principal amount plus accrued and unpaid interest (See notes 7 and 8 to the interim consolidated financial statements).

        At September 30, 2002, the Company had $20.9 million in cash and cash equivalents and $2.2 million in short-term investments recorded at the lower of cost or fair value. The fair value of the short-term investments at September 30, 2002 was $16.3 million.

        The Company fulfilled its gold forward sales obligations in October 2002 by delivering 15,000 ounces of gold at $293 per ounce. The Company also delivered 15,000 ounces into gold call options at $302 per ounce and settled the remaining 60,000 gold call options at a cost of $1.1 million in October 2002. The Company's production is now completely unhedged.

        The Company expects to incur approximately $13.0 million for capital expenditures in 2002 funded by its operating cash flow, of which $10.8 million in expenditures have been incurred in the first nine months of 2002. The Company will rely on its operating cash flow to fund the remainder of its planned 2002 capital expenditures. The expenditures primarily relate to mining equipment at Round Mountain and Lupin. The Company monitors its discretionary spending in view of the cost structure of its operating mines and the availability of additional credit, and will modify or reduce its discretionary spending where necessary.

        See note 13 to the interim consolidated financial statements.

FINANCIAL REVIEW

Three month results

        The Company reported net income of $3.7 million for the third quarter of 2002 compared with a net loss of $0.2 million in the third quarter of 2001. On a per share basis, net earnings were $0.01 for the quarter compared to a net loss of $0.03 in 2001. The loss per share in 2001 included $4.1 million representing the equity portion of the interest on the Company's capital securities. The 2002 results, compared to 2001, reflect 15% lower gold sales volume and no silver sales due to the completion of operations at McCoy/Cove. These factors were partially offset by lower operating costs, depreciation and amortization reflecting the reduction in ounces sold and a 21% higher average realized gold price. Deferred gold revenue recognized in the third quarter of 2002 was $6.7 million compared to $3.2 million in 2001.

        Gold production decreased 19% to 139,088 ounces in the third quarter of 2002 compared to 171,533 ounces in the third quarter of 2001. The decrease in production resulted from lower tonnage at Lupin and Kettle River and the completion of production from McCoy/Cove, which has been in full reclamation mode since March 31, 2002. There was no silver production in the third quarter of 2002 compared to 1.7 million ounces from McCoy/Cove in the third quarter of 2001.

Nine month results

        The Company reported net earnings of $7.7 million in the first nine months of 2002, compared with net earnings of $3.2 million in the same period in 2001. On a per share basis, the loss was $0.33 (which includes a loss of $132.3 million on the retirement of capital securities in the second quarter as well as capital securities interest of $4.6 million) for the first nine months of 2002 compared with a loss of $0.07 in the same period of 2001 (which included $12.7 million representing the equity portion of interest on the capital securities). The 2002 results compared to 2001 reflect 20% lower gold sales volume, 63% lower silver sales volume and a one time charge of $5.5 million relating to the exchange of the Company's capital securities for common shares. These factors were partially offset by lower operating costs, depreciation and amortization reflecting the reduction in ounces sold and a 19% higher average realized gold price. Deferred revenue recognized in the first nine months of 2002 was $23.0 million compared to $10.6 million in the same period of 2001.

        Gold production decreased 20% to 418,006 ounces in the first nine months of 2002 compared to 521,287 ounces in the first nine months of 2001. The lower production resulted from mining lower grades and fewer tons at Lupin and Kettle River and completion of production at McCoy/Cove in March 2002. Silver production from McCoy/Cove was 1.5 million ounces, 71% lower than the 5.0 million ounces produced in 2001.

        The term "ounce" as used in this Form 10-Q means "troy ounce".

Revenue

        Statistics for gold and silver ounces sold and other revenue data are set out below.

 
  Three months ended
September 30

  Nine months ended
September 30

 
Revenue Data

 
  2002
  2001
  2002
  2001
 
Gold                          
  Ounces sold     144,200     169,804     423,230     527,714  
  Average price realized/ounce—revenue basis   $ 361   $ 298   $ 360   $ 302  
  Average price realized/ounce—cash basis(1)   $ 314   $ 279   $ 306   $ 280  
  Average market price/ounce   $ 314   $ 274   $ 306   $ 269  
  Revenue (millions of U.S. dollars)   $ 52.0   $ 50.6   $ 152.5   $ 159.4  
  Percentage of total revenue     100 %   86 %   94 %   85 %
Silver                          
  Ounces sold         1,790,375     2,118,181     5,708,519  
  Average price realized/ounce—revenue basis   $   $ 4.43   $ 4.36   $ 4.77  
  Average price realized/ounce—cash basis(1)   $   $ 4.24   $ 4.36   $ 4.91  
  Average market price/ounce   $ 4.70   $ 4.29   $ 4.66   $ 4.42  
  Revenue (millions of U.S. dollars)   $   $ 7.9   $ 9.2   $ 27.3  
  Percentage of total revenue     0 %   14 %   6 %   15 %
   
 
 
 
 
Total revenue (millions of U.S. dollars)   $ 52.0   $ 58.5   $ 161.7   $ 186.7  
   
 
 
 
 

(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
2002 vs. 2001

  Three months ended
September 30

  Nine months ended
September 30

 
 
  (millions of U.S. dollars)

 
Higher gold prices   $ 9.0   $ 24.6  
Lower silver prices         (0.9 )
Change in volume     (15.5 )   (48.7 )
   
 
 
Decrease in revenue   $ (6.5 ) $ (25.0 )
   
 
 

Production Costs

        The Company reports per ounce production cost data in accordance with The Gold Institute Production Cost Standard (the "Standard"). The Gold Institute is an association of suppliers of gold and gold products and includes leading North American gold producers. Adoption of the Standard is voluntary, and the data presented may not be comparable to data presented by other gold producers. Production costs per ounce are derived from amounts included in the unaudited Statements of Operations and include mine site operating costs such as mining, processing, administration, transportation, royalties, production taxes, depreciation, amortization and reclamation costs, but exclude financing, capital, development and exploration costs. These costs are then divided by gold ounces produced to arrive at the total production costs per ounce. Cash operating costs and total production costs are furnished to provide additional information and are non-GAAP measures. These measures should not be considered in isolation as a substitute for measures of performance prepared in accordance with generally accepted accounting principles, and are not necessarily indicative of operating profit or cost from operations as determined under generally accepted accounting principles. Throughout this report, all references to per ounce production cost data, or cash operating costs, will be in accordance with the Standard.

        Production cost data per ounce of gold is set out below.

 
  Three months ended
September 30

  Nine months ended
September 30

 
Production Costs per
Ounce of Gold Produced

 
  2002
  2001
  2002
  2001
 
Direct mining expense   $ 210   $ 197   $ 217   $ 204  
  Deferred stripping and mine development costs     10     19     5     13  
  Inventory movements and other     2     1     (2 )   (1 )
   
 
 
 
 
Cash operating costs     222     217     220     216  
  Royalties     14     11     13     10  
  Production taxes     3     1     1     1  
   
 
 
 
 
Total cash costs     239     229     234     227  
  Depreciation     42     38     46     38  
  Amortization     15     14     14     14  
  Reclamation and mine closure     10     8     9     8  
   
 
 
 
 
Total production costs   $ 306   $ 289   $ 303   $ 287  
   
 
 
 
 

Expenses

        Operating costs per ounce vary with the quantity of gold and silver sold and with the cost of operations. Cash operating costs were $222 per ounce of gold in the third quarter of 2002 and $217 in the third quarter of 2001.

        The above non-GAAP measures have been calculated on a consistent basis each period.

        For reasons of comparability, cash operating costs and total production costs do not include certain items such as property write-downs which do not occur in all periods but are included under GAAP in the determination of net earnings or loss.

        Cash operating costs and total production costs are calculated in accordance with the "Gold Institute Production Cost Standard." Cash operating costs and total production costs may not be comparable to similarly titled measures of other companies.

        Cash operating costs and total production costs are used by management to assess profitability and cash flow of individual operations as well as to compare to other precious metals producers.

        See "Operations Review."

 
  Three months ended
September 30

  Nine months ended
September 30

 
Reconciliation of Cash Operating
Costs per Ounce to Financial Statements

 
  2002
  2001
  2002
  2001
 
 
  thousands of U.S. dollars, except per ounce amounts

 
Round Mountain                          
Operating costs per financial statements   $ 19,751   $ 20,052   $ 52,873   $ 58,312  
Change in finished goods inventory     (630 )   (414 )   557     (1,095 )
   
 
 
 
 
Cash operating costs   $ 19,121   $ 19,638   $ 53,430   $ 57,217  
   
 
 
 
 
Gold ounces produced     100,063     102,883     289,133     301,021  
Cash operating costs per ounce   $ 191   $ 191   $ 185   $ 190  
   
 
 
 
 

Lupin

 

 

 

 

 

 

 

 

 

 

 

 

 
Operating costs per financial statements   $ 8,016   $ 6,943   $ 26,287   $ 22,797  
Change in finished goods inventory     1,535     997     857     1,340  
   
 
 
 
 
Cash operating costs   $ 9,551   $ 7,940   $ 27,144   $ 24,137  
   
 
 
 
 
Gold ounces produced     31,118     33,000     84,478     105,710  
Cash operating costs per ounce   $ 307   $ 241   $ 321   $ 228  
   
 
 
 
 

Kettle River

 

 

 

 

 

 

 

 

 

 

 

 

 
Operating costs per financial statements   $ 2,337   $ 3,515   $ 6,907   $ 11,571  
Change in finished goods inventory     (118 )   (117 )   714     (578 )
   
 
 
 
 
Cash operating costs   $ 2,219   $ 3,398   $ 7,621   $ 10,993  
   
 
 
 
 
Gold ounces produced     7,907     12,200     27,894     41,418  
Cash operating costs per ounce   $ 281   $ 278   $ 273   $ 265  
   
 
 
 
 

McCoy/Cove

 

 

 

 

 

 

 

 

 

 

 

 

 
Operating costs per financial statements   $   $ 11,663   $ 13,453   $ 40,637  
Change in finished goods inventory         405     (4,598 )   (2,817 )
   
 
 
 
 
Cash operating costs   $   $ 12,068   $ 8,855   $ 37,820  
   
 
 
 
 
Gold ounces produced         23,450     16,501     73,138  
Silver ounces produced         1,731,444     1,470,094     5,028,029  
Average gold-to-silver price ratio         63.8     64.6     60.9  
Cash operating costs per ounce   $   $ 239   $ 225   $ 243  
   
 
 
 
 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 
Operating costs per financial statements   $ 30,104   $ 42,173   $ 99,520   $ 133,317  
Change in finished goods inventory     787     871     (2,470 )   (3,150 )
   
 
 
 
 
Cash operating costs   $ 30,891   $ 43,044   $ 97,050   $ 130,167  
   
 
 
 
 
Gold ounces produced     139,088     171,533     418,006     521,287  
Silver ounces produced         1,731,444     1,470,094     5,028,029  
Average gold-to-silver price ratio         63.8     64.6     60.9  
Cash operating costs per ounce   $ 222   $ 217   $ 220   $ 216  
   
 
 
 
 

Reserve estimates

        Mineral reserves at December 31, 2001 were estimated based on a price of $300 per ounce of gold and $4.25 per ounce of silver. The market price for gold has for more than four years traded, on average, below the level used in estimating reserves at December 31, 2001. 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, 2001, there would be a reduction in the amount of gold reserves. The Company estimates that if reserves at December 31, 2001 were based on $275 per ounce of gold, reserves would decrease by approximately 13% at Round Mountain, 5% 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 the 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.

OPERATIONS REVIEW

        Operating data by mine is set out below.

 
  Three months ended
September 30

  Nine months ended
September 30

Operating Data by Mine

  2002
  2001
  2002
  2001
Gold production (ounces)                
  (a) Round Mountain (50%)   100,063   102,883   289,133   301,021
  (b) Lupin   31,118   33,000   84,478   105,710
  (c) Kettle River   7,907   12,200   27,894   41,418
        McCoy/Cove     23,450   16,501   73,138
   
 
 
 
Total gold   139,088   171,533   418,006   521,287
   
 
 
 
Silver production (ounces)                
        McCoy/Cove     1,731,444   1,470,094   5,028,029
   
 
 
 
Total silver     1,731,444   1,470,094   5,028,029
   
 
 
 

        Gold production decreased 19% to 139,088 ounces in the third quarter of 2002 compared to 171,533 ounces in the third quarter of 2001. The decrease in production resulted from lower tonnage at Lupin and no production from McCoy/Cove. There was no silver production in the third quarter of 2002 compared to 1.7 million ounces from McCoy/Cove in the third quarter of 2001. Milling was completed at McCoy/Cove in March 2002.

 
  Three months ended
September 30

  Nine months ended
September 30

Operating Data by Mine

  2002
  2001
  2002
  2001
Cash operating costs (per ounce of gold)                        
  (a) Round Mountain   $ 191   $ 191   $ 185   $ 190
  (b) Lupin     307     241     321     228
  (c) Kettle River     281     278     273     265
        McCoy/Cove         239     225     243
   
 
 
 
Company average   $ 222   $ 217   $ 220   $ 216
   
 
 
 

        Cash operating costs were $222 per ounce of gold in the third quarter of 2002, versus $217 in the third quarter of 2001. The increase was primarily a result of lower production.

        Cash operating costs per ounce of gold produced is a non-GAAP measure. For further information on non-GAAP measures, please refer to the disclosure under the heading "FINANCIAL REVIEW—Production Costs".

(a)
Round Mountain, Nevada (50% owned)

 
  Three months ended
September 30

  Nine months ended
September 30

OPERATING DATA

  2002
  2001
  2002
  2001
Gold produced (ounces) (the Company's 50% share):                        
  Heap leached—reusable pad     30,814     27,610     104,527     85,432
  Heap leached—dedicated pad     47,312     50,425     126,995     149,230
  Milled     18,645     24,607     54,319     66,118
  Other     3,292     241     3,292     241
   
 
 
 
  Total     100,063     102,883     289,133     301,021
Mining cost/ton of ore and waste   $ 0.80   $ 0.77   $ 0.79   $ 0.83
Heap leaching cost/ton of ore   $ 0.92   $ 0.97   $ 0.82   $ 0.81
Milling cost/ton of ore   $ 3.48   $ 2.72   $ 3.20   $ 2.95
Production cost per ounce of gold produced:(1)                        
  Direct mining expense   $ 172   $ 156   $ 173   $ 165
  Deferred stripping cost     15     25     13     22
  Inventory movements and other     4     10     (1 )   3
   
 
 
 
    Cash operating cost     191     191     185     190
  Royalties     19     21     19     18
  Production taxes     4     2     3     1
   
 
 
 
    Total cash cost     214     214     207     209
  Depreciation     42     35     43     37
  Amortization     15     15     15     15
  Reclamation and mine closure     9     9     9     9
   
 
 
 
    Total production costs   $ 280   $ 273   $ 274   $ 270
   
 
 
 
Heap leached—reusable pad:                        
  Ore processed (tons/day)     28,867     22,174     30,477     25,593
  Total ore processed (000 tons)     2,627     2,018     8,320     6,987
  Grade (ounce/ton)     0.042     0.032     0.045     0.034
  Recovery rate (%)     57.7     79.8     61.6     78.1
Heap leached—dedicated pad:                        
  Ore processed (tons/day)     124,220     97,022     134,564     124,220
  Total ore processed (000 tons)     11,304     8,829     36,736     33,912
  Grade (ounce/ton)     0.012     0.011     0.011     0.011
  Recovery rate(2)                        
Milled:                        
  Ore processed (tons/day)     10,094     11,226     9,881     10,401
  Total ore processed (000 tons)     919     1,022     2,698     2,840
  Grade (ounce/ton)     0.052     0.036     0.051     0.054
  Recovery rate (%)     84.3     82.8     84.8     83.7

(1)
Production costs per ounce of gold produced are non-GAAP measures. For further information on these non-GAAP measures, please refer to the disclosure under the heading "FINANCIAL REVIEW—Production Costs".

(2)
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 100,063 ounces for the third quarter compared with 102,883 ounces for the third quarter in 2001. Cash operating costs for the third quarter were $191 per ounce, the same as the previous year.

        During the quarter, work on the Gold Hill property, located four miles north of the current mining and processing facilities, continued to focus on shallow mineralization to assess the economics of a small starter pit. Gold Hill displays Round Mountain style mineralization over an area that presently measures approximately 2,000 by 4,000 feet. While the extent of the mineralization has not been fully defined, an internal study is being conducted to determine the preliminary economics of the shallow mineralization. Results of this study are expected by year end.

(b)
Lupin, Nunavut, Canada (100% owned)

 
  Three months ended
September 30

  Nine months ended
September 30

 
OPERATING DATA

 
  2002
  2001
  2002
  2001
 
Gold produced (ounces)     31,118     33,000     84,478     105,710  
Mining cost/ton of ore   C$ 55.55   C$ 43.77   C$ 57.12   C$ 45.56  
Milling cost/ton of ore   C$ 13.46   C$ 12.83   C$ 13.88   C$ 13.58  
Production cost per ounce of gold produced:(1)                          
  Canadian dollars:                          
    Direct mining expense   C$ 500   C$ 422   C$ 552   C$ 399  
    Deferred mine development cost     (8 )   (19 )   (35 )   (16 )
    Inventory movements and other     (2 )   1         1  
   
 
 
 
 
      Cash operating cost   C$ 490   C$ 404   C$ 517   C$ 384  
  U.S. dollars:                          
    Cash operating costs   US$ 307   US$ 241   US$ 321   US$ 228  
    Royalties                  
    Production taxes                  
   
 
 
 
 
      Total cash cost     307     241     321     228  
    Depreciation     38     33     39     30  
    Amortization     6     7     6     7  
    Reclamation and mine closure     15     14     15     14  
   
 
 
 
 
      Total production costs   US$ 366   US$ 295   US$ 381   US$ 279  
   
 
 
 
 
Milled:                          
  Ore processed (tons/day)     1,729     1,884     1,670     1,850  
  Total ore processed (000 tons)     157     171     456     505  
  Grade (ounce/ton)     0.213     0.205     0.200     0.224  
  Recovery rate (%)     93.0     93.7     92.7     93.3  

(1)
Production costs per ounce of gold produced are non-GAAP measures. For further information on these non-GAAP measures, please refer to the disclosure under the heading "FINANCIAL REVIEW—Production Costs".

        Gold production for the quarter was 31,118 ounces compared with 33,000 ounces in the third quarter of 2001 reflecting fewer tons mined and milled. During the quarter, activity was focused on increasing development and production stopes to provide additional ore sources. Cash operating costs for the quarter were $307 per ounce compared with $241 per ounce for the same period in 2001. The significant increase in cash operating costs per ounce is directly attributable to higher development spending and lower production.

        The Company is assessing the feasibility of recommencing exploration activities at the Ulu project (125 km north of Lupin). Repair and maintenance of the Ulu camp facilities were completed during the quarter.

(c)
Kettle River, Washington (100% owned)

 
  Three months ended
September 30

  Nine months ended
September 30

OPERATING DATA

  2002
  2001
  2002
  2001
Gold produced (ounces)     7,907     12,200     27,894     41,418
Mining cost/ton of ore   $ 19.80   $ 23.63   $ 21.54   $ 23.59
Milling cost/ton of ore   $ 8.76   $ 12.93   $ 10.18   $ 11.47
Production cost per ounce of gold produced:(1)                        
  Direct mining expense   $ 270   $ 225   $ 262   $ 208
  Deferred mine development cost                
  Inventory movements and other     11     53     11     57
   
 
 
 
    Cash operating cost     281     278     273     265
  Royalties     8     7     5     11
  Production taxes     2     1     2     1
   
 
 
 
    Total cash cost     291     286     280     277
  Depreciation         10         8
  Amortization     50     40     50     40
  Reclamation and mine closure         15         15
   
 
 
 
    Total production costs   $ 341   $ 351   $ 330   $ 340
   
 
 
 
Milled:                        
  Ore processed (tons/day)     652     856     706     1,020
  Total ore processed (000 tons)     59     78     193     278
  Grade (ounce/ton)     0.158     0.188     0.173     0.179
  Recovery rate (%)     84.4     83.5     83.8     82.9

(1)
Production costs per ounce of gold produced are non-GAAP measures. For further information on these non-GAAP measures, please refer to the disclosure under the heading "FINANCIAL REVIEW—Production Costs".

        Gold production for the third quarter was 7,907 ounces, down from 12,200 ounces in the third quarter of 2001, reflecting the lower tonnage available from the K-2 mine and ore stockpiles. With the lower production, cash operating costs per ounce for the quarter were $281 per ounce compared with $278 per ounce in the same quarter of 2001. The higher costs per ounce resulted only from the lower production as actual spending was 22% less than in 2001. The Company anticipates that the last ore from the K-2 mine and stockpiles will be consumed in November. The mill facility will then be put on care and maintenance awaiting results from exploration at the adjacent Emanuel Creek property, which continue to be encouraging. Data from surface drilling conducted over the past two years is being supplemented by an underground exploration and development program which began in June 2002. Results of this program should be available early in 2003.

RECENT DEVELOPMENTS

Capital securities

        On April 3, 2002 the Company issued 361,561,230 common shares, representing approximately 72% of the outstanding common shares after giving effect to such issuance, in exchange for all of its $100 million aggregate principal amount of 11% junior subordinated debentures due 2027, plus accrued and unpaid interest thereon.

        Following this issuance of common shares, and as at April 3, 2002, the new principal holders of the Company's common shares and their respective ownership positions in the Company were Newmont Canada (48.8%) and Kinross (11.4%). In connection with the completion of the capital securities exchange, three directors of the Company resigned from the board of directors. Two of the vacancies created by these resignations were filled by executive officers of Newmont Canada.

        As a result of eliminating the capital securities, the Company recorded an increase to common shares of $303.7 million, based on their quoted market value at the date of issue. The quoted market value of the common shares issued exceeded the book value of the capital securities by $134.8 million. This difference, along with transaction costs of $3.0 million, were recorded proportionately between interest expense ($5.5 million) and deficit ($132.3 million) in the second quarter of 2002 based on the debt and equity classifications of the capital securities. Under U.S. GAAP, the entire loss of $137.8 million would be recorded as an extraordinary item.

Combination agreement

        On June 10, 2002, the Company, Kinross and TVX announced that they had entered into an agreement providing for the proposed combination of the companies. In a concurrent transaction, TVX agreed to acquire from Newmont the interest in the TVX Newmont Americas joint venture that it does not already own. The combination of the companies is conditional upon the completion of this purchase.

        Shareholders of Echo Bay (other than Kinross) would receive 0.52 of a Kinross common share for each Echo Bay common share. At a Kinross special meeting, the shareholders of Kinross are expected to consider a one-for-three share consolidation which, if approved, would result in an exchange ratio change from 0.52 to 0.1733 of a Kinross common share for each Echo Bay common share. The Kinross share consolidation would not affect the percentage ownership interest of the Echo Bay shareholders in Kinross.

        As a result of the U.S. Securities and Exchange Commission's ongoing review of the preliminary proxy statement filed with the Commission on September 17, 2002, the Company will not be able to finalize and mail the proxy statement in time for the Company to hold its special meeting for the purpose of considering the combination in advance of November 30, 2002, the termination date specified in the combination agreement. The parties are discussing amending the combination agreement to extend the termination date, with a view to holding special meetings late in the fourth quarter 2002 or early in 2003.

Completion of financing

        In May 2002, the Company sold a total of 39,100,000 units at a price of $0.70 per unit for aggregate gross proceeds of approximately $27.4 million. Each unit consists of one common share and one share purchase warrant. The common shares and the warrants comprising the units separated upon closing and trade separately on the Toronto Stock Exchange and the American Stock Exchange. Each warrant entitles the holder to purchase one common share of the Company at a price of $0.90 at any time prior to November 14, 2003.

Sale of McCoy/Cove complex

        On June 9, 2002, Echo Bay Exploration Inc. and Echo Bay Minerals Company, two subsidiaries of the Company, entered into an asset purchase agreement with Newmont USA, a subsidiary of Newmont, providing for the conveyance of the McCoy/Cove complex. The agreement replaces a letter agreement dated February 13, 2002 related to the conveyance of the McCoy/Cove complex which called for a payment to the seller of $6 million and the assumption by Newmont of all reclamation and closure obligations. Under the February 13, 2002 letter agreement, Newmont had no obligation to complete the transaction. Newmont indicated it was willing to proceed with the conveyance of the McCoy/Cove complex only if the Kinross Combination was completed and the cash payment was eliminated. Accordingly, a new agreement was reached expressly containing these two conditions. The closing of the transaction is subject to, among other conditions, the completion of the Kinross Combination. In consideration of the conveyance of such assets, Newmont USA has agreed to assume all liabilities and obligations relating to the reclamation or remediation required for the McCoy/Cove complex. A gain is expected on the conveyance of the McCoy/Cove complex. Pending completion of the transaction, the Company will continue to operate McCoy/Cove for its own account. Mining and processing activities at the McCoy/Cove complex were completed on March 31, 2002.

Exploration and development programs

        The Company is engaged in exploration activity at its Round Mountain and Kettle River mines. At Round Mountain, work on the Gold Hill property, located four miles north of the current mining and processing facilities, continued to focus on shallow mineralization to assess the economics of a small starter pit. Gold Hill displays Round Mountain style mineralization over an area that presently measures approximately 2,000 by 4,000 feet. While the extent of the mineralization has not been fully defined, an internal study is being conducted to determine the preliminary economics of the shallow mineralization. Results of this study are expected by year end.

        At the Company's Kettle River operation, results from exploration at the adjacent Emanuel Creek property continue to be encouraging. Data from surface drilling conducted over the past two years will be supplemented by an underground exploration and development program which began in June 2002. Results from this program will be available early in 2003.

        For the third quarter of 2002, the Company spent $2.4 million on exploration activities. Exploration costs are expensed as incurred.

        The Company continues to defer a construction decision on the 100% owned Aquarius gold development project in Ontario, Canada. Development holding costs are expensed as incurred and $0.2 million such costs were expensed during the third quarter of 2002.

Other

        See note 13 to the interim consolidated financial statements.


ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

        The estimated fair values of the Company's gold commitments decreased by approximately $3.7 million from December 31, 2001 to September 30, 2002, primarily due to the increase in the gold price from $277 to $320 per ounce. Information about market risks are discussed under Item 7A of the registrant's Annual Report on Form 10-K for 2001.


ITEM 4. CONTROLS AND PROCEDURES

        Within the 90 days prior to the date of this Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer, concluded that our disclosure controls and procedures were effective. There have been no significant changes in our internal controls and procedures or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation.


PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Summa

        See note 13 to the interim consolidated financial statements.

Handy & Harman

        See note 13 to the interim consolidated financial statements.

Other

        In November, 2001, two former employees of the Company brought a claim against the Company pursuant to the Class Proceedings Act (British Columbia) as a result of the temporary suspension of operations at the Company's Lupin mine early in 1998 and the layoff of employees at that time. At this time, the Company does not know the amount being claimed by the former employees nor whether the claim is appropriate for certification as a class action. On August 12, 2002, the Supreme Court of British Columbia decided it had jurisdiction. The Company is appealing this decision. No determination has been made by this Court as to whether this action is suitable for certification as a class action and no decision has been rendered with respect to the merits of the action.

        The Company is also engaged in routine litigation incidental to its business.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Reports on Form 8-K   Filed on July 8, 2002 related to the proposed purchase and sale of the McCoy/Cove complex, between subsidiaries of Echo Bay Mines Ltd. and a subsidiary of Newmont Mining Corporation.


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)

November 8, 2002

 

By:

 

/s/  
DAVID A. OTTEWELL      
David A. Ottewell
Controller and Principal Accounting Officer

Certifications

I, Robert L. Leclerc, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Echo Bay Mines Ltd.;

2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.
The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

November 8, 2002

 

/s/  
ROBERT L. LECLERC      
Robert L. Leclerc
Chairman and Chief Executive Officer

Certifications

I, Tom S.Q. Yip, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Echo Bay Mines Ltd.;

2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.
The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

November 8, 2002

 

/s/  
TOM S. Q. YIP      
Tom S. Q. Yip
Vice President and Chief Financial Officer

Certification Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

        Pursuant to 18 U.S.C. Section 1350 as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Echo Bay Mines Ltd. (the "Company"), does hereby certify, to such officer's knowledge, that:

        The Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.


November 8, 2002

 

/s/  
ROBERT L. LECLERC      
Robert L. Leclerc
Chairman and Chief Executive Officer

 

 

/s/  
TOM S. Q. YIP      
Tom S. Q. Yip
Vice President and Chief Financial Officer