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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 September 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
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ECHO BAY MINES LTD.
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(Exact name of registrant as specified in its charter)
Incorporated under the laws
of Canada None
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 1210, 10180-101 Street
Edmonton, Alberta T5J 3S4
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(Address of principal executive (Postal Code)
offices)
Registrant's telephone number, including area code (780) 496-9002
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Former address, Suite 540, 6400 S. Fiddlers Green Circle, Englewood, CO 80111-4957
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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 _____
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Title of Class Shares Outstanding as of
----------------------------- October 31, 2001
Common Shares ----------------------------
without nominal or par value 140,607,145
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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............. 12
ITEM 3. Qualitative and Quantitative Disclosures About Market Risk........................................ 26
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................. 26
ITEM 6. Exhibits and Reports on Form 8-K.................................................................. 26
SIGNATURE......................................................................................................... 27
i
ECHO BAY MINES LTD.
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED BALANCE SHEET September 30 December 31
thousands of U.S. dollars 2001 2000
----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,889 $ 14,269
Short-term investments 1,976 2,186
Interest and accounts receivable 1,979 3,022
Inventories (note 2) 36,137 39,443
Prepaid expenses and other assets 6,525 14,031
----------------------------------------------------------------------------------------------------------------------------
57,506 72,951
Plant and equipment (note 3) 128,958 138,527
Mining properties (note 3) 49,381 63,499
Long-term investments and other assets 21,376 20,868
----------------------------------------------------------------------------------------------------------------------------
$ 257,221 $ 295,845
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 24,346 $ 26,073
Income and mining taxes payable 3,818 5,780
Debt and other financings (notes 1 and 4) 17,000 26,500
Deferred income (note 5) 3,158 9,651
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48,322 68,004
Debt and other financings (note 4) 6,348 6,032
Deferred income (note 5) 33,711 50,698
Other long-term obligations 50,450 49,632
Deferred income taxes 1,833 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) 153,037 140,076
Deficit (721,198) (711,680)
Foreign currency translation (28,625) (24,954)
----------------------------------------------------------------------------------------------------------------------------
116,557 116,785
----------------------------------------------------------------------------------------------------------------------------
$ 257,221 $ 295,845
============================================================================================================================
See accompanying notes to interim consolidated financial statements.
1
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF OPERATIONS Three months ended Nine months ended
thousands of U.S. dollars, September 30 September 30
except for per share data 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------
Revenue $ 58,545 $ 76,415 $186,658 $212,505
-------------------------------------------------------------------------------------------------------
Expenses:
Operating costs 42,173 47,642 133,317 126,731
Royalties 2,284 1,840 5,970 5,842
Production taxes 178 137 449 1,469
Depreciation and amortization 10,182 13,150 32,451 39,079
Reclamation and mine closure 1,578 2,770 4,843 8,018
General and administrative 1,476 1,055 4,316 4,684
Exploration and development 1,199 1,548 3,211 8,978
Interest and other (note 7) 454 (1,028) 1,286 2,608
-------------------------------------------------------------------------------------------------------
59,524 67,114 185,843 197,409
-------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (979) 9,301 815 15,096
-------------------------------------------------------------------------------------------------------
Income tax expense (recovery):
Current 48 603 131 703
Deferred (840) (300) (2,519) (2,100)
-------------------------------------------------------------------------------------------------------
(792) 303 (2,388) (1,397)
-------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (187) $ 8,998 $ 3,203 $ 16,493
=======================================================================================================
Net earnings (loss) attributable to common
shareholders (note 6) $ (4,252) $ 5,154 $ (9,518) $ 5,176
=======================================================================================================
Earnings (loss) per share $ (0.03) $ 0.04 $ (0.07) $ 0.04
=======================================================================================================
Weighted average number of shares outstanding (thousands) 140,607 140,607 140,607 140,607
=======================================================================================================
CONSOLIDATED STATEMENT Three months ended Nine months ended
OF DEFICIT September 30 September 30
thousands of U.S. dollars 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------
Balance, beginning of period $(716,946) $(714,822) $(711,680) $(714,844)
Net earnings (loss) (187) 8,998 3,203 16,493
Interest on capital securities, net of nil tax effect (note 6) (4,065) (3,844) (12,721) (11,317)
-------------------------------------------------------------------------------------------------------------
Balance, end of period $(721,198) $(709,668) $(721,198) $(709,668)
=============================================================================================================
See accompanying notes to interim consolidated financial statements.
2
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT Three months ended Nine months ended
OF CASH FLOW September 30 September 30
thousands of U.S. dollars 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------
CASH PROVIDED FROM (USED IN):
OPERATING ACTIVITIES
Net cash flows provided from operating activities $ 8,778 $ 19,974 $ 19,448 $ 34,454
-----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Mining properties, plant and equipment (3,168) (1,650) (10,898) (9,425)
Long-term investments and other assets (2,177) 20 (2,164) (525)
Short-term investments -- 182 -- 182
Proceeds on the sale of plant and equipment 5 22 373 357
Other (506) (371) (639) 937
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(5,846) (1,797) (13,328) (8,474)
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FINANCING ACTIVITIES
Currency borrowings -- -- -- 12,000
Debt repayments (2,000) (16,750) (9,500) (29,000)
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(2,000) (16,750) (9,500) (17,000)
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 932 1,427 (3,380) 8,980
Cash and cash equivalents, beginning of period 9,957 10,954 14,269 3,401
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $10,889 $ 12,381 $ 10,889 $ 12,381
=====================================================================================================
See accompanying notes to interim consolidated financial statements.
3
ECHO BAY MINES LTD
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2001 and December 31, 2000 and the consolidated
results of operations and cash flow for the three and nine months ended
September 30, 2001 and 2000. 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, 2000. 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.
Basis of Presentation
On October 5, 2001, a new $17 million revolving credit and $4 million letter of
credit facility was established with HSBC Bank USA. The new facility has been
guaranteed by an affiliate of Franco-Nevada Mining Corporation Limited, which
holds approximately 72.4% of the Company's capital securities. The Company has
drawn down on the revolving credit facility to repay bank debt of $17 million
and has replaced the $4 million letter of credit issued under the syndicated
facility. The principal amount of the new credit facility matures on September
30, 2002 and interest is payable quarterly. The Company's ability to borrow has
been constrained by conditions in the gold mining industry, the capital
securities obligation (note 6) and its recent and currently expected future
operating results. The establishment of the new credit facility has resolved
these uncertainties for the term of the facility.
2. INVENTORIES
September 30 December 31
2001 2000
--------------------------------------------------------------------------------
Precious metals -- bullion $ 13,950 $ 18,357
-- in-process 6,825 8,293
Materials and supplies 15,362 12,793
--------------------------------------------------------------------------------
$ 36,137 $ 39,443
================================================================================
3. PROPERTY, PLANT AND EQUIPMENT
Plant and equipment September 30 December 31
2001 2000
--------------------------------------------------------------------------------
Cost $ 656,554 $ 653,653
Less accumulated depreciation 527,596 515,126
--------------------------------------------------------------------------------
$ 128,958 $ 138,527
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4
ECHO BAY MINES LTD
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
Mining properties September 30 December 31
2001 2000
-----------------------------------------------------------------------------------------------------
Producing mines' acquisition and development costs $279,475 $276,951
Less accumulated amortization 256,939 248,792
-----------------------------------------------------------------------------------------------------
22,536 28,159
Development properties' acquisition and development costs 12,856 13,532
Deferred mining costs 13,989 21,808
-----------------------------------------------------------------------------------------------------
$ 49,381 $ 63,499
=====================================================================================================
4. DEBT AND OTHER FINANCINGS
September 30 December 31
2001 2000
-----------------------------------------------------------------------------------------------------
Currency loans $ 17,000 $ 26,500
Capital securities (note 6) 6,348 6,032
-----------------------------------------------------------------------------------------------------
23,348 32,532
Less current portion 17,000 26,500
-----------------------------------------------------------------------------------------------------
$ 6,348 $ 6,032
=====================================================================================================
5. DEFERRED INCOME
September 30 December 31
2001 2000
-----------------------------------------------------------------------------------------------------
Modification of hedging contracts $ 24,123 $ 39,336
Premiums received on gold and silver option contracts 12,746 20,310
Other -- 703
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36,869 60,349
Less current portion 3,158 9,651
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$ 33,711 $ 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 $59.4 million at September 30,
2001 and is payable no later than March 31, 2003 together with any additional
compounded or deferred interest up to that date. Interest on the debt portion
of the capital securities has been classified as interest expense on the
consolidated statement of earnings, and interest on the equity portion of the
capital securities has been charged directly to deficit on the consolidated
balance sheet. For purposes of per share calculations, interest on the equity
portion decreases the earnings attributable to common shareholders. See note 8
for a discussion of differences in treatment of the capital securities under
generally accepted accounting principles in the United States.
5
ECHO BAY MINES LTD
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
On September 5, 2001, the Company announced that it had reached an agreement
with significant holders of the capital securities to exchange their capital
securities for common shares. The Company proposes to issue up to 361.5 million
common shares in exchange for the outstanding principal and accrued interest of
the capital securities. Holders representing 98% of the capital securities have
agreed to the exchange and have entered into support and lockup agreements. The
share issuance will be presented to shareholders for their consideration and
approval will be recommended by the Board of Directors. If shareholders
approve, and all other transaction conditions are satisfied, the exchange of
capital securities for common shares is expected to be completed in the first
quarter of 2002. Any gain or loss arising from the transaction will be recorded
at the closing date.
7. INTEREST AND OTHER
Three months ended Nine months ended
September 30 September 30
2001 2000 2001 2000
----------------------------------------------------------------------------------------------------
Interest income $(163) $ (214) $ (662) $ (600)
Interest expense 551 1,334 1,962 4,288
Alaska-Juneau reclamation -- (2,048) -- (2,048)
Unrealized loss on share investments 2 -- 104 --
Other 64 (100) (118) 968
----------------------------------------------------------------------------------------------------
$ 454 $(1,028) $1,286 $ 2,608
====================================================================================================
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.
The effects of the GAAP differences on the consolidated statement of operations
would have been as follows.
Three months ended Nine months ended
September 30 September 30
2001 2000 2001 2000
------------------------------------------------------------------------------------------------------
Net earnings (loss) under Canadian GAAP $ (187) $ 8,998 $ 3,203 $ 16,493
Unrealized loss on share investments 2 -- 104 --
Change in market value of foreign exchange contracts (780) (1,117) (2,720) (1,750)
Change in market value of option contracts 345 -- (446) --
Transition adjustment on adoption of FAS 133 -- -- (3,090) --
Additional interest expense on capital securities (4,065) (3,844) (12,721) (11,317)
Unrealized gain (loss) on call options -- 1,799 -- 1,160
Amortization of deferred financing on capital securities (158) (158) (475) (475)
------------------------------------------------------------------------------------------------------
Net earnings (loss) under U.S. GAAP $(4,843) $ 5,678 $(16,145) $ 4,111
======================================================================================================
Earnings (loss) per share under U.S. GAAP $ (0.03) $ 0.04 $ (0.11) $ 0.03
======================================================================================================
6
ECHO BAY MINES LTD
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 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 balance sheet would have
been as follows.
Canadian Capital Derivative U.S.
September 30, 2001 GAAP Securities Contracts Other GAAP
------------------------------------------------------------------------------------------------------
Short-term investments $ 1,976 $ -- $ -- $ 1,830 $ 3,806
Long-term investments and other assets 21,376 317 (4,137) (6,559) 10,997
Debt and other financings 23,348 93,652 -- -- 117,000
Deferred income 36,869 -- (3,036) (33,833) --
Other long-term obligations 50,450 59,385 1,617 159 111,611
Common shares 713,343 -- -- 36,428 749,771
Capital securities 153,037 (153,037) -- -- --
Deficit 721,198 (317) 2,718 36,454 760,053
Shareholders' equity (deficit) 116,557 (152,720) (2,718) 28,945 (9,936)
------------------------------------------------------------------------------------------------------
The following statement of comprehensive income (loss) would be disclosed in
accordance with U.S. GAAP.
Three months ended Nine months ended
September 30 September 30
2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------
Net earnings (loss) under U.S. GAAP $ (4,843) $ 5,678 $(16,145) $ 4,111
Other comprehensive income (loss), after a nil income tax effect:
Unrealized gain on share investments arising during period 742 1,460 1,098 1,460
Modification of derivative contracts realized in net income (4,166) -- (11,960) --
Foreign currency translation adjustments (2,756) (1,407) (3,671) (3,242)
Transition adjustment on adoption of FAS 133 -- -- 39,234 --
---------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (6,180) 53 24,701 (1,782)
---------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $(11,023) $ 5,731 $ 8,556 $ 2,329
=========================================================================================================
Additionally, under U.S. GAAP, the equity section of the balance sheet would
present a subtotal for accumulated other comprehensive income (loss), as
follows.
September 30 December 31
2001 2000
----------------------------------------------------------------------------------
Unrealized gain on share investments $ 1,697 $ 732
Modification of derivative contracts 27,274 --
Foreign currency translation (28,625) (24,954)
----------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) $ 346 $(24,222)
==================================================================================
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 these contracts 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
7
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
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 and 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 Nine months ended
September 30 September 30
Gold Production (ounces) 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
Round Mountain (50%) 102,883 79,987 301,021 228,349
McCoy/Cove 23,450 39,362 73,138 131,956
Lupin 33,000 40,696 105,710 79,055
Kettle River 12,200 24,404 41,418 73,734
---------------------------------------------------------------------------------------------------------------------------------
Total gold 171,533 184,449 521,287 513,094
=================================================================================================================================
Silver Production (ounces) - all from McCoy/Cove 1,731,444 2,724,463 5,028,029 10,149,307
=================================================================================================================================
Three months ended Nine months ended
September 30 September 30
Cash Operating Costs per Ounce of Gold Produced 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
Round Mountain $ 191 $ 201 $ 190 $ 197
McCoy/Cove 239 189 243 165
Lupin 241 199 228 206
Kettle River 278 206 265 211
---------------------------------------------------------------------------------------------------------------------------------
Company consolidated weighted average $ 217 $ 197 $ 216 $ 185
=================================================================================================================================
8
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 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 Nine months ended
Reconciliation of Cash Operating September 30 September 30
Costs per Ounce to Financial Statements 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------
Operating costs by minesite:
Round Mountain $ 20,052 $ 17,216 $ 58,312 $ 43,776
McCoy/Cove 11,663 16,693 40,637 53,872
Lupin 6,943 8,268 22,797 13,709
Kettle River 3,515 5,465 11,571 15,374
-----------------------------------------------------------------------------------------------------
Total operating costs per financial statements 42,173 47,642 133,317 126,731
Change in finished goods inventories and other 1,543 (2,070) (657) (1,666)
Co-product cost of silver produced (6,493) (9,236) (20,062) (30,143)
-----------------------------------------------------------------------------------------------------
Cash operating costs $ 37,223 $ 36,336 $112,598 $ 94,922
=====================================================================================================
Gold ounces produced 171,533 184,449 521,287 513,094
=====================================================================================================
Cash operating costs per ounce $ 217 $ 197 $ 216 $ 185
=====================================================================================================
The Company's management generally monitors revenue on a consolidated basis.
Information regarding the Company's consolidated revenue is provided below.
Three months ended Nine months ended
September 30 September 30
2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------------
Total gold and silver revenues (millions) $ 58.5 $ 76.4 $ 186.7 $ 212.5
Average gold price realized per ounce $ 298 $ 313 $ 302 $ 318
Average silver price realized per ounce $ 4.43 $ 5.13 $ 4.77 $ 5.34
-------------------------------------------------------------------------------------------------------------------------
10. HEDGING ACTIVITIES AND COMMITMENTS
Gold commitments
The Company's gold forward sales and option positions at September 30, 2001 were
as follows.
Forward Price of Call Options Purchased Call Options Sold
Sales Forward Sale Strike Price Strike Price
(ounces) (per ounce) Ounces per Ounce Ounces per Ounce
--------------------------------------------------------------------------------------------------------
Remainder of 2001 15,000 $ 302 15,000 $ 360 -- $ --
2002 60,000 302 60,000 360 -- --
2003 60,000 302 60,000 360 -- --
2004 60,000 302 60,000 360 -- --
2005 15,000 302 120,000 395 105,000 340
--------------------------------------------------------------------------------------------------------
210,000 $ 302 315,000 $ 373 105,000 $ 340
========================================================================================================
9
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2001, the Company had an obligation under foreign currency
exchange contracts to purchase C$3 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 September 30, 2001 and December 31, 2000.
September 30, 2001 December 31, 2000
----------------------------------- -------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------------------------------------------------
Gold forward sales $ -- $ 700 $ -- $ 5,700
Silver forward sales -- -- -- 1,800
Gold options - puts purchased -- -- -- --
- calls sold (3,000) (1,600) (3,000) (2,200)
- puts sold -- -- -- --
- calls purchased 5,700 1,600 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)
--------------------------------------------------------------------------------------------------------------------------------
$ 500 $ 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 decision was made 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 defenses and arguments put forth by the Echo Bay defendants, which the
10
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
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.
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.
11
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
September 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 $269
per ounce during the first nine 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 September 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 15,000
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 September 30, 2001, totaling $59.4 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.
On September 5, 2001, the Company announced that it had reached an agreement
with significant holders of the capital securities to exchange their capital
securities for common shares. The Company proposes to issue up to 361.5 million
common shares in exchange for the outstanding principal and accrued interest of
the capital securities. Holders representing 98% of the capital securities have
agreed to the exchange and have entered into support and lockup agreements. The
share issuance will be presented to shareholders for their consideration and
approval will be recommended by the Board of Directors. If shareholders approve,
and all other transaction conditions are satisfied, the exchange of capital
securities for common shares is expected to be completed in the first quarter of
2002. Any gain or loss arising from the transaction will be recorded at the
closing date.
12
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
September 30,2001
(U.S. dollars)
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided from operating activities was $19.4 million for the first
nine months of 2001 compared to $34.5 million for the first nine months of 2000.
The 2001 results compared to 2000 reflect decreased silver cash revenue ($26.0
million) and increased operating costs in 2001 ($6.6 million) related to Lupin
operations and increased reagent and power costs at Round Mountain. These
factors were partially offset by Lupin start-up costs in 2000 ($4.8 million) and
increases in inventories in 2000 ($5.0 million) and reduced spending for
production taxes, exploration and interest ($5.4 million).
Net cash used in investing activities was $13.3 million in the first nine months
of 2001, primarily related to mining properties, plant and equipment.
Net cash used in financing activities included $9.5 million for loan repayments
in the first nine months of 2001.
At September 30, 2001, the Company had $10.9 million in cash and cash
equivalents and $2.0 million in short-term investments.
At September 30, 2001, the Company's current debt was $17.0 million and its
long-term debt was $6.3 million.
The Company's syndicated bank debt had a balance of $17.0 million at September
30, 2001. During the third quarter, the Company repaid debt of $2.0 million. On
October 5, 2001, a new $17 million revolving credit and $4 million letter of
credit facility was established with HSBC Bank USA, one of the Company's
syndicated bankers. The new facility has been guaranteed by an affiliate of
Franco-Nevada Mining Corporation Limited, which holds approximately 72.4 percent
of the Company's capital securities. The Company has drawn down on the revolving
credit facility to repay bank debt of $17 million and has replaced the $4
million letter of credit issued under the syndicated facility. The principal
amount of the new credit facility matures on September 30, 2002 and interest is
payable quarterly.
At September 30, 2001, the fair value of the Company's hedge portfolio was $0.5
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 $18.7 million has been incurred in the first nine 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 the 1995 to 1999 fiscal years 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".
13
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine months ended September 30, 2001
(U.S. dollars)
FINANCIAL REVIEW
Three month results
The Company reported a net loss of $0.2 million in the third quarter of 2001,
compared to net earnings of $9.0 million in the third quarter of 2000. The loss
per share was $0.03 in the third quarter of 2001, compared to earnings per share
of $0.04 in the third quarter of 2000. The per share amount includes the equity
portion of the interest on the Company's capital securities, $4.1 million ($0.03
per share) in the third quarter of 2001 and $3.8 million ($0.03 per share) in
the third quarter of 2000. The 2001 results compared to 2000 reflect decreased
gold and silver sales volume ($14.0 million) and lower prices realized ($3.9
million), partially offset by decreased operating costs ($5.4 million) and
depreciation and amortization ($3.0 million).
Gold production decreased 7% to 171,533 ounces in the third quarter of 2001
compared to 184,449 ounces in the third 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 third quarter of 2001 was 1.7 million ounces,
36% lower than the 2.7 million ounces produced in the third quarter of 2000.
Cash operating costs were $217 per ounce of gold in the third quarter of 2001,
versus $197 in the third quarter of 2000. The increase was primarily a result of
lower grades and production at McCoy/Cove. Total production costs were $289 per
ounce in the third quarter of 2001, versus $274 per ounce in the third quarter
of 2000.
Nine month results
The Company reported net earnings of $3.2 million in the first nine months of
2001, compared with net earnings of $16.5 million in the same period in 2000.
The loss per share was $0.07 in the first nine months of 2001, compared with
earnings per share of $0.04 in the first nine months of 2000. The per share
amount includes the equity portion of the interest on the Company's capital
securities, $12.7 million ($0.09 per share) in the first nine months of 2001 and
$11.3 million ($0.08 per share) in the first nine months of 2000. The 2001
results compared to 2000 reflect decreased silver sales volume ($24.3 million),
decreased gold and silver sales prices realized ($11.7 million) and increased
operating costs ($6.6 million). These factors were partially offset by increased
gold sales volume ($10.2 million), decreased depreciation and amortization ($6.6
million), exploration and development spending ($5.8 million), reclamation and
mine closure ($3.2 million), income and production taxes ($2.0 million) and
interest and other expenses ($1.3 million).
Gold production increased 2% to 521,287 ounces in the first nine months of 2001
compared to 513,094 ounces in the first nine 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 5.0
million ounces, 50% lower than the 10.1 million ounces produced in 2000.
Cash operating costs were $216 per ounce of gold in the first nine months of
2001, versus $185 in the first nine months of 2000. The increase was primarily a
result of decreased grades and lower production at McCoy/Cove. Total production
costs were $287 per ounce in the first nine months of 2001, versus $260 per
ounce in the first nine months of 2000.
The term ounce as used in this Form 10-Q means "troy ounce".
14
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine months ended September 30,2001
(U.S. dollars)
Revenue
Statistics for gold and silver ounces sold and other revenue data are set out
below.
Three months ended Nine months ended
September 30 September 30
Revenue Data 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------
Gold
----
Ounces sold 169,804 196,460 527,714 495,626
Average price realized/ounce - revenue basis $ 298 $ 313 $ 302 $ 318
Average price realized/ounce - cash basis (1) $ 279 $ 290 $ 280 $ 297
Average market price/ounce $ 274 $ 277 $ 269 $ 282
Revenue (millions of U.S. $) $ 50.6 $ 61.9 $ 159.4 $ 157.3
Percentage of total revenue 86% 81% 85% 74%
Silver
-----
Ounces sold 1,790,375 2,893,295 5,708,519 10,267,977
Average price realized/ounce - revenue basis $ 4.43 $ 5.13 $ 4.77 $ 5.34
Average price realized/ounce - cash basis (1) $ 4.24 $ 5.06 $ 4.91 $ 5.27
Average market price/ounce $ 4.29 $ 4.96 $ 4.42 $ 5.08
Revenue (millions of U.S. $) $ 7.9 $ 14.5 $ 27.3 $ 55.2
Percentage of total revenue 14% 19% 15% 26%
---------------------------------------------------------------------------------------------------
Total revenue (millions of U.S. dollars) $ 58.5 $ 76.4 $ 186.7 $ 212.5
===================================================================================================
(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 Three months ended Nine months ended
2001 VS. 2000 September 30 September 30
(millions of U.S. dollars)
----------------------------------------------------------------------------------------------------------------------------
Lower gold prices $ (2.6) $ (8.5)
Lower silver prices (1.3) (3.2)
Change in volume (14.0) (14.1)
----------------------------------------------------------------------------------------------------------------------------
Decrease in revenue $ (17.9) $ (25.8)
============================================================================================================================
15
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine months ended September 30,2001
Production Costs
Production cost data per ounce of gold is set out below.
Three months ended Nine months ended
PRODUCTION COSTS PER September 30 September 30
OUNCE OF GOLD PRODUCED 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------------
Direct mining expense $ 197 $ 195 $ 204 $ 192
Deferred stripping and mine development costs 19 2 13 (5)
Inventory movements and other 1 -- (1) (2)
-------------------------------------------------------------------------------------------------------------------------
Cash operating costs 217 197 216 185
Royalties 11 8 10 8
Production taxes 1 1 1 2
-------------------------------------------------------------------------------------------------------------------------
Total cash costs 229 206 227 195
Depreciation 38 37 38 33
Amortization 14 19 14 20
Reclamation and mine closure 8 12 8 12
-------------------------------------------------------------------------------------------------------------------------
Total production costs $ 289 $ 274 $ 287 $ 260
=========================================================================================================================
Expenses
Operating costs per ounce vary with the quantity of gold and silver sold and
with the cost of operations. Cash operating costs were $ 217 per ounce of gold
in the third quarter of 2001 and $197 in the third quarter of 2000. See
"Operations Review."
RECONCILIATION OF CASH OPERATING
COSTS PER OUNCE TO FINANCIAL STATEMENTS Three months ended Nine months ended
thousands of U.S. dollars, September 30 September 30
except per ounce amounts 2001 2000 2001 2000
------------------------------------------------------------------------------------------------
Operating costs per financial statements $ 42,173 $ 47,642 $133,317 $126,731
Change in finished goods inventory and other 1,543 (2,070) (657) (1,666)
Co-product cost of silver produced (6,493) (9,236) (20,062) (30,143)
------------------------------------------------------------------------------------------------
Cash operating costs $ 37,223 $ 36,336 $112,598 $ 94,922
================================================================================================
Gold ounces produced 171,533 184,449 521,287 513,094
================================================================================================
Cash operating costs per ounce $ 217 $ 197 $ 216 $ 185
================================================================================================
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.
16
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine months ended September 30,2001
(U.S. dollars)
OPERATIONS REVIEW
Operating data by mine is set out below.
Three months ended Nine months ended
September 30 September 30
Operating Data by Mine 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------
Gold production (ounces)
-----------------------
(a) Round Mountain (50%) 102,883 79,987 301,021 228,349
(b) McCoy/Cove 23,450 39,362 73,138 131,956
(c) Lupin 33,000 40,696 105,710 79,055
(d) Kettle River 12,200 24,404 41,418 73,734
----------------------------------------------------------------------------------------------------------------------
Total gold 171,533 184,449 521,287 513,094
======================================================================================================================
Silver production (ounces)
-------------------------
(b) McCoy/Cove 1,731,444 2,724,463 5,028,029 10,149,307
----------------------------------------------------------------------------------------------------------------------
Total silver 1,731,444 2,724,463 5,028,029 10,149,307
======================================================================================================================
Gold production decreased 7% to 171,533 ounces in the third quarter of 2001
compared to 184,449 ounces in the third quarter of 2000. Decreased production
reflects the reducing production profile from the McCoy/Cove and Kettle River
mines and lower grades mined at Lupin partially offset by an increase in gold
production at the Round Mountain mine. Silver production from McCoy/Cove was 1.7
million ounces, 36% less than the 2.7 million ounces produced in 2000,
reflecting decreased grades and recoveries. Production for the year is expected
to total approximately 650,000 ounces of gold and 6.5 million ounces of silver.
Three months ended Nine months ended
September 30 September 30
Operating Data by Mine 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------
Cash operating costs (per ounce of gold)
---------------------------------------
(a) Round Mountain $ 191 $ 201 $ 190 $ 197
(b) McCoy/Cove 239 189 243 165
(c) Lupin 241 199 228 206
(d) Kettle River 278 206 265 211
-----------------------------------------------------------------------------------------------------------------
Company average $ 217 $ 197 $ 216 $ 185
=================================================================================================================
Cash operating costs were $217 per ounce of gold in the third quarter of 2001,
versus $197 in the third quarter of 2000. The increase was primarily a result of
lower production at McCoy/Cove and Lupin and higher reagent and power 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.
17
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine months ended September 30, 2001
(U.S. dollars)
(a) Round Mountain, Nevada (50% owned)
Three months ended Nine months ended
September 30 September 30
OPERATING DATA 2001 2000 2001 2000
-------------------------------------------------------------------------------------------
Gold produced (ounces):
Heap leached - reusable pad (50%) 27,610 17,747 85,432 53,967
Heap leached - dedicated pad (50%) 50,425 49,686 149,230 123,173
Milled (50%) 24,607 12,257 66,118 48,977
Other (50%) 241 297 241 2,232
-------- -------- -------- --------
Total (50%) 102,883 79,987 301,021 228,349
Mining cost/ton of ore and waste $ 0.77 $ 0.82 $ 0.83 $ 0.82
Heap leaching cost/ton of ore $ 0.97 $ 0.77 $ 0.81 $ 0.65
Milling cost/ton of ore $ 2.72 $ 2.81 $ 2.95 $ 2.83
Production cost per ounce of gold produced:
Direct mining expense $ 156 $ 203 $ 165 $ 208
Deferred stripping cost 25 2 22 (6)
Inventory movements and other 10 (4) 3 (5)
-------- -------- -------- --------
Cash operating cost 191 201 190 197
Royalties 21 16 18 17
Production taxes 2 -- 1 1
-------- -------- -------- --------
Total cash cost 214 217 209 215
Depreciation 35 44 37 45
Amortization 15 18 15 18
Reclamation and mine closure 9 9 9 9
-------- -------- -------- --------
Total production costs $ 273 $ 288 $ 270 $ 287
-------- -------- -------- --------
Heap leached - reusable pad:
Ore processed (tons/day) (100%) 22,174 20,280 25,593 25,283
Total ore processed (000 tons) (100%) 2,018 1,845 6,987 6,902
Grade (ounce/ton) 0.032 0.030 0.034 0.028
Recovery rate (%) 79.8 58.7 78.1 59.1
Heap leached - dedicated pad:
Ore processed (tons/day) (100%) 97,022 136,275 124,220 142,249
Total ore processed (000 tons) (100%) 8,829 12,401 33,912 38,834
Grade (ounce/ton) 0.011 0.012 0.011 0.011
Recovery rate /(1)/
Milled:
Ore processed (tons/day) (100%) 11,226 9,359 10,401 8,668
Total ore processed (000 tons) (100%) 1,022 852 2,840 2,366
Grade (ounce/ton) 0.036 0.045 0.054 0.047
Recovery rate (%) 82.8 82.8 83.7 83.5
-------------------------------------------------------------------------------------------
/(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 mine continues to have an excellent year. The
Company's share of mine production was 102,883 ounces for the third quarter of
2001 compared with 79,987 ounces in the third quarter of 2000. The increase in
production is attributable to an increase in mill tonnage, reduction of in-
process inventory and the dual processing of high grade oxide material. Dual
processing means the material is first leached on the reusable pad and then
processed
18
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine months ended September 30, 2001
(U.S. dollars)
through the mill allowing coarse gold to be recovered and increasing the
ultimate recovery. Cash operating costs per ounce for the quarter were $191,
compared with $201 in the third quarter of 2000. Revenues from higher production
offset increased reagent and power costs resulting in the lower cash cost per
ounce.
19
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine months ended September 30, 2001
(U.S. dollars)
(b) McCoy/Cove, Nevada (100% owned)
Three months ended Nine months ended
September 30 September 30
OPERATING DATA 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------
Gold produced (ounces):
Milled 16,780 28,937 54,504 90,640
Heap leached 6,670 10,425 18,634 41,316
---------- ---------- ---------- -----------
Total gold 23,450 39,362 73,138 131,956
Silver produced (ounces):
Milled 1,654,811 2,505,429 4,786,267 9,350,219
Heap leached 76,633 219,034 241,762 799,088
---------- ---------- ---------- -----------
Total silver 1,731,444 2,724,463 5,028,029 10,149,307
Mining cost/ton of ore and waste n/a $ 0.79 n/a $ 0.74
Milling cost/ton of ore $ 7.83 $ 5.90 $ 7.13 $ 6.47
Heap leaching cost/ton of ore n/a n/a n/a $ 2.12
Production cost per ounce of gold produced:
Direct mining expense $ 223 $ 173 $ 241 $ 164
Deferred stripping cost 27 11 7 1
Inventory movements and other (11) 5 (5) --
---------- ---------- ---------- -----------
Cash operating cost 239 189 243 165
Royalties 1 3 1 3
Production taxes -- 1 -- 4
---------- ---------- ---------- -----------
Total cash cost 240 193 244 172
Depreciation 49 28 47 24
Amortization 9 28 8 28
Reclamation and mine closure -- 11 -- 11
---------- ---------- ---------- -----------
Total production costs $ 298 $ 260 $ 299 $ 235
---------- ---------- ---------- -----------
Average gold-to-silver price ratio /(1)/ 63.8:1 55.7:1 60.9:1 55.5:1
Milled:
Ore processed (tons/day) 9,612 11,594 10,886 11,369
Total ore processed (000 tons) 875 1,055 2,972 3,104
Gold grade (ounce/ton) 0.051 0.050 0.045 0.055
Silver grade (ounce/ton) 2.44 3.16 2.57 4.00
Gold recovery rate (%) 47.3 46.8 45.9 51.8
Silver recovery rate (%) 56.4 68.8 63.0 71.5
Heap leached:
Ore processed (tons/day) n/a n/a n/a 6,628
Total ore processed (000 tons) n/a n/a n/a 1,809
Gold grade (ounce/ton) n/a n/a n/a 0.024
Silver grade (ounce/ton) n/a n/a n/a 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.
20
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine months ended September 30, 2001
(U.S. dollars)
At McCoy/Cove in Nevada, gold production was 23,450 ounces for the third quarter
compared with 39,362 ounces in the third quarter of 2000. Silver production
amounted to 1.7 million ounces in the third quarter compared with 2.7 million
ounces in the third quarter of 2000. The lower production level reflects the
processing of low grade stockpiles as open pit mining was completed in 2000.
With the lower production, cash operating costs for the quarter were $239 per
ounce, compared to $189 per ounce in third quarter of 2000.
Reclamation activities continued during the quarter with contouring of rock
stockpiles, infiltration basins, and leach pads. Work is on track to have
significant acreage available for the fall/winter planting season and earthwork
activities will proceed through the winter.
21
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine months ended September 30, 2001
(U.S. dollars)
(c) Lupin, Nunavut, Canada (100% owned)
Three months ended Nine months ended
September 30 September 30
OPERATING DATA 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------
Gold produced (ounces) 33,000 40,696 105,710 79,055
Mining cost/ton of ore C $ 43.77 C $ 43.18 C $ 45.56 C $ 40.87
Milling cost/ton of ore C $ 12.83 C $ 13.18 C $ 13.58 C $ 13.84
Production cost per ounce of gold produced:
Canadian dollars:
Direct mining expense C $ 422 C $ 325 C $ 399 C $ 333
Deferred mine development cost C $ (19) C $ (7) C $ (16) C $ (6)
Inventory movements and other C $ 1 C $ -- C $ 1 C $ --
-------- ------- -------- -------
Cash operating cost C $ 404 C $ 318 C $ 384 C $ 327
U.S. dollars
Cash operating costs US $ 241 US $ 199 US $ 228 US $ 206
Royalties -- -- -- --
Production taxes -- -- -- --
-------- ------- -------- -------
Total cash cost 241 199 228 206
Depreciation 33 26 30 27
Amortization 7 9 7 9
Reclamation and mine closure 14 17 14 17
-------- ------- -------- -------
Total production costs US $ 295 US $ 251 US $ 279 US $ 259
-------- ------- -------- -------
Milled:
Ore processed (tons/day) 1,884 1,785 1,850 1,859
Total ore processed (000 tons) 171 162 505 338
Grade (ounce/ton) 0.205 0.267 0.224 0.250
Recovery rate (%) 93.7 93.8 93.3 93.4
--------------------------------------------------------------------------------------------------------
Gold production for the quarter was 33,000 ounces compared with 40,696 ounces in
the third quarter of 2000. Cash operating costs were $241 per ounce for the
quarter compared to $199 per ounce in the third quarter of 2000. Mining costs
were higher and grades lower than in 2000 due to the sequencing of production
areas in the mine. The cash operating costs include a $0.7 million benefit ($21
per ounce) in the third quarter from hedging Canadian dollars for Lupin
expenditures. A $6.0 million gain, realized when certain contracts were closed
during the first quarter of 1997, has now been fully amortized.
22
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine months ended September 30, 2001
(U.S. dollars)
(d) Kettle River, Washington (100% owned)
Three months ended Nine months ended
September 30 September 30
OPERATING DATA 2001 2000 2001 2000
---------------------------------------------------------------------------------------------
Gold produced (ounces) 12,200 24,404 41,418 73,734
Mining cost/ton of ore $ 23.63 $ 19.46 $ 23.59 $ 20.49
Milling cost/ton of ore $ 12.93 $ 11.35 $ 11.47 $ 11.45
Production cost per ounce of gold produced:
Direct mining expense $ 225 $ 214 $ 208 $ 230
Deferred mine development cost -- -- -- --
Inventory movements and other 53 (8) 57 (19)
------- ------- ------- -------
Cash operating cost 278 206 265 211
Royalties 7 12 11 13
Production taxes 1 1 1 1
------- ------- ------- -------
Total cash cost 286 219 277 225
Depreciation 10 10 8 10
Amortization 40 8 40 8
Reclamation and mine closure 15 15 15 15
------- ------- ------- -------
Total production costs $ 351 $ 252 $ 340 $ 258
------- ------- ------- -------
Milled:
Ore processed (tons/day) 856 1,575 1,020 1,487
Total ore processed (000 tons) 78 143 278 406
Grade (ounce/ton) 0.188 0.205 0.179 0.215
Recovery rate (%) 83.5 83.1 82.9 84.4
---------------------------------------------------------------------------------------------
Production for the third quarter was 12,200 ounces, down from 24,404 ounces in
the third quarter of 2000. Mining at the Lamefoot deposit was completed in the
fourth quarter of 2000 meaning that production in 2001 has been solely from
existing stockpiles and the K-2 mine and, as anticipated, was lower than 2000
production. Cash operating costs per ounce were $278 in the third quarter of
2001 compared to $206 per ounce in the third quarter of 2000, reflecting the
lower production.
Underground exploration and development of an extension to the K-2 mine is
currently underway.
23
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine months ended September 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 third quarter of 2001, the Company
spent $0.8 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 third quarter of 2001, the Company expensed
$0.4 million in holding costs related to Aquarius.
Other
See note 11 to the interim consolidated financial statements.
24
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine months ended September 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; the
possibility that the exchange of the capital securities for common shares will
not be completed, 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.
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ECHO BAY MINES LTD.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the three months ended September 30, 2001
does not differ materially from that discussed under Item 7A of the registrant's
Annual Report on Form 10-K for 2000.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K Filed on September 12, 2001, related to the
proposed conversion of capital securites into
common shares.
Filed on September 20, 2001, related to the
deferral of the October 2001 interest payment on
the capital securities.
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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 2, 2001
----------------
Date
/s/ David A. Ottewell
---------------------------------------------
DAVID A. OTTEWELL
Controller and Principal
Accounting Officer
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