ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings required to be reported in response to this item.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1994 to a vote of security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the names and ages as of March 1, 1995, of each of the present executive officers of the Company together with principal occupations held by each during the past five years. Executive officers are appointed annually to serve for the ensuing year or until their successors have been appointed. No officer is related to any other by blood, marriage or adoption. No arrangement or understanding exists between any officer and any other person under which any officer was elected. Messrs. Mazur, Quinn and Reisbick have been employed with the Company since July 1985.
KARL E. ELERS previously served as President and Chief Operating Officer of the Company from April 1988 until April 1990. Mr. Elers also serves as a member of the Executive Committee and of the Environmental Affairs and Ethics Committee of the Company's Board of Directors.
KENNETH R. WERNEBURG was Executive Vice President of the Company from November 1989 until April 1990. Prior to joining the Company, Mr. Werneburg served as Chairman and Chief Executive Officer of Hill Refrigeration Corporation (commercial refrigeration equipment) since April 1989. From 1985 through 1988, Mr. Werneburg served as Executive Vice President of St. Joe
Minerals Corporation (international mining and manufacturing). Mr. Werneburg also serves as a member of the Executive Committee of the Company's Board of Directors.
ANDRE J. DOUCHANE was Manager of North American Operations from July 1991 until April 1992. Prior to joining the Company in July 1991, Mr. Douchane was employed by Round Mountain Gold Corp. as Vice President and General Manager.
R. DENNIS O'CONNELL was Vice President of the Company from May 1992 until July 1992 when he was named Vice President - Finance and Chief Financial Officer. Prior to joining the Company, Mr. O'Connell served as Assistant Controller, Worldwide Exploration and Production for Marathon Oil Company since January 1991. From July 1988 through January 1991, Mr. O'Connell served as Manager, Finance and Administration, Worldwide Production for Marathon Oil Company. From January 1987 through July 1988, Mr. O'Connell served as Director, Finance and Administration of Marathon Oil U.K., Ltd.
FRED B. REISBICK previously served as General Manager, North America Exploration until November 1992.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK The Company's common stock, par value $0.10 per share (the "Common Stock"), is traded on the New York Stock Exchange (the "NYSE"), the Toronto Stock Exchange, the Australian Stock Exchange Limited, the Swiss Stock Exchanges and the Frankfurt Stock Exchange. The ticker symbol for the Common Stock on the exchanges is "BMG."
The following table sets forth for the periods indicated the high and low sales prices for the Common Stock as reported on the NYSE Composite Tape.
As of March 20, 1994, the Company had 21,010 record holders of Common Stock.
Cash dividends of $0.025 per share were paid in each half of fiscal 1994 and 1993. A determination to pay future dividends and the amount thereof will be made by the Company's Board of Directors and will depend on the Company's future earnings, capital requirements, financial condition and other relevant factors. The Company's ability to pay dividends is subject to certain restrictions contained in the Company's committed revolving credit facility. These restrictions are not expected to affect the payment of dividends. For a further discussion of the credit facility and of restrictions on Inti Raymi's ability to pay dividends to BMG, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 10 of Notes to Consolidated Financial Statements under Item 8 herein. The Company intends to retain most of its earnings to support current operations, to fund exploration and development projects and to provide funds for acquiring gold properties.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data for the respective periods presented and should be read in conjunction with the Consolidated Financial Statements and the related notes thereto in Item 8 and Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents results of operations data on a per equivalent ounce of gold sold basis:
REVENUES
Gross revenue increased in 1994, compared with 1993 and 1992, because of both increased sales volumes and increased average realized gold prices. The volume increase came from the Kori Kollo mine in Bolivia, which sold 309,000 gross ounces in 1994 (271,000 ounces net to BMG), compared with 212,000 ounces (180,000 ounces net) in 1993 and 52,000 ounces (44,000 ounces net) in 1992. Sales volumes also increased from the San Cristobal mine in Chile. Volumes from the Kori Kollo mine increased in 1994 due to a full year of operation of the new milling facilities, increased recoveries and the re-treatment of used cathodes by electro-winning. Upgrading of the crushing facilities at the San Cristobal mine was the main factor contributing to the increase in that mine's sales volume. These increases were partially offset by a significant decrease in sales volumes at the Red Dome mine, which was caused primarily by the majority of the mining efforts being directed at a push back of the existing mine pit. Additionally, a pit wall slippage delayed startup of production from the push back of the mine pit and also delayed access to the higher grade ore. Improved mining operations at the Red Dome mine were achieved in the fourth quarter of 1994. The Battle Mountain Complex also experienced a decrease in production volumes compared to 1993 primarily because of the end of the production cycle at the Basin Leach facility. This decrease in production was partially offset by production from the start-up of the Reona Leach facility in October 1994.
SELLING AND OPERATING COSTS
Freight, allowances and royalties decreased in total and on a cost per equivalent ounce of gold sold basis due to fewer concentrate sales from the Red Dome mine in 1994. Shipments from the Red Dome mine carry relatively high freight charges. The freight, allowances and royalties costs were higher in 1993 compared with 1992 because of increased sales from the Kori Kollo mine and higher freight, allowances and royalty costs associated with new smelting and refining agreements for Red Dome mine concentrates which resulted in higher costs per equivalent ounce.
Mining, milling and other plant costs per equivalent ounce of gold sold decreased in 1994 because of an increased percentage (from approximately 41 percent in 1993 to approximately 52 percent in 1994) of consolidated sales volumes being derived from the Kori Kollo mine which has lower cash operating costs per equivalent ounce. Cash operating costs per equivalent ounce of gold sold at the Kori Kollo mine were lower in 1994 compared with 1993 due to increased recoveries and the re-treatment of used cathodes by electro-winning. The San Cristobal mine costs decreased on an equivalent ounce of gold sold basis due to improved efficiencies resulting from the addition of more efficient crushing equipment. Lower (per equivalent ounce sold) cash costs at the Battle Mountain Complex, the San Luis mine and the Pajingo mine also contributed to the decrease in total mining, milling and other plant costs on a per ounce and total basis. Higher costs, primarily associated with the production transition from the Fortitude mine to the Kori Kollo mine, and higher sales volumes contributed to higher aggregate mining, milling and other costs in 1993 compared with 1992.
The increase in depreciation, depletion and amortization, in total for 1994 compared with 1993, resulted primarily from increased sales volumes. The increase on a cost per equivalent ounce of gold sold basis resulted from higher per equivalent ounce depreciable bases at the new Reona mine and the expanded Red Dome mine. Depreciation, depletion and amortization expense increased in 1993 compared with 1992 as a result of the higher capital costs associated with the Company's newer operations, especially the Kori Kollo mine, and increases in sales volumes. Increased production and sales volumes, and the higher acquisition costs of new reserves, will cause depreciation, depletion and amortization to increase in the future.
Selling and operating costs per equivalent ounce of gold sold are based on actual sales and include inventoried costs; therefore, these costs are not directly comparable to production costs per equivalent ounce of gold disclosed elsewhere in this report.
EXPLORATION COSTS
Exploration and evaluation expenses increased in 1994 compared with 1993 and decreased in 1993 compared with 1992. In 1994, the Company expanded its exploration efforts in Latin America and the Austral Pacific. Also, it expanded its exploration efforts around its currently operating mines to determine the existence of new ore bodies in the vicinity of existing known reserves. (See "-- Liquidity and Capital Resources -- Investing Activities").
WRITE-DOWNS
The volatility of gold prices requires that the Company, in assessing the impact of prices on recoverability, exercise judgment as to whether price levels are temporary or are likely to persist. The Company performs a comprehensive evaluation of the recoverability of its assets on a periodic basis to assess the impact of significant changes in market conditions and other factors.
No write-downs are currently anticipated, and none were recorded in 1994 or 1993. However, asset write-downs may occur if the Company determines that the carrying values attributed to individual assets are not recoverable given reasonable expectations for future market
conditions. During 1992, the Company recognized charges totaling approximately $23.3 million, net of $11.1 million in income tax benefits, for the impairment in value of certain of the Company's assets. The charges included: (1) a write-down of $17.6 million, net of a $9.1 million income tax benefit, of BMG's investment in the San Luis mine in Colorado that reduced the carrying value of the investment to a level which BMG believed would be recoverable under then existing and expected future market conditions (lower gold prices, compared with those at the time of project conception, and greater than anticipated capital expenditures resulting from a difficult start-up period led to the write-down), (2) a write-off of $4 million, net of a $2 million income tax benefit, of BMG's investment in the previously closed Canyon Placer facility, which was abandoned because of gold prices being persistently less than needed for development, and (3) an impairment of $1.7 million, included as Other income (expense), net, to adjust to current market the carrying value of certain marketable equity security investments.
GENERAL AND ADMINISTRATIVE COSTS
The Company's general and administrative costs are presented on a consolidated basis without reduction for minority interest and include the following (in thousands):
The Company continues to emphasize controls on these costs and to evaluate peer group operational and reporting practices. As a result of these evaluations, management is considering alternative reporting of certain costs which are directly related to mine site, exploration and capital projects, but may initially be charged to a general or administrative cost center.
OTHER
Interest income increased in 1994 compared to 1993 primarily due to an increase in investable cash balances and higher rates. Interest income increased in 1993 compared to 1992. This increase resulted from greater levels of cash available for investment arising primarily from the proceeds of the Company's 1993 convertible preferred stock offering.
Gross interest expense, including amounts capitalized, increased in 1994 compared with 1993 because of generally higher interest rates on Inti Raymi's variable rate debt which was somewhat offset as described above and from recoveries under interest rate cap contracts. The increase in interest expense due to increases in interest rates was partially offset by a decrease in outstanding debt. Interest expense with respect to borrowings attributable to any given project in the pre-production stage is capitalized until such time as that project begins commercial
production. The interest associated with the 6 percent convertible subordinated debentures has been and continues to be capitalized against the Lihir project. Interest expense charged against income increased in 1993 compared with 1992 because interest expense related to the Kori Kollo sulfide project financing ceased to be capitalized since commencement of commercial operations in February 1993, and because project financing was outstanding for the entire 1993 year. Prior to 1993, the majority of interest expense was capitalized and was related primarily to the convertible subordinated debentures and to amounts outstanding under a committed revolving credit facility. Should additional borrowings be required to fund acquisitions and mine development, interest expense would be expected to increase when these new investments reach the operational stage.
Other expense, net in 1994 was substantially less than Other income, net in 1993. In 1994, the Company received approximately $.8 million in royalties from the owner of the Triple P ore deposit at BMG's Plutonic Bore exploration project in Western Australia which was sold by BMG in 1993 and $.7 million from the sale of a prospect in Chile. These gains were offset by foreign currency losses of approximately $1.2 million attributable to Papua New Guinea Kina cash deposits. Other income, net in 1993 represents an improvement from Other expense, net in 1992. The 1993 income resulted primarily from gains of $3.7 million from the sale of the Triple P ore deposit and $2 million from the sale of certain long-term investments.
The Company's effective income tax rate was 21 percent for the year ended December 31, 1994, compared with an income tax benefit rate of 48 percent for the year ended December 31, 1993. The effective income tax rate of 1994 has been influenced by a reduction in the Company's deferred tax valuation allowance. The Company has determined that it is more likely than not that additional deferred tax benefits will be realized as a result of the Company's profitability in 1994 which has created additional taxable temporary differences.
Income tax expense in 1994 resulted primarily from the accrual of withholding taxes on earnings from the Company's majority owned subsidiary Inti Raymi. The income tax benefit in 1993 resulted from the net operating loss generated in 1993.
Minority interest in net income decreased in 1994 compared with 1993 and increased in 1993 compared with 1992 as a result of the changes in the ownership interests in the Company's majority owned subsidiaries and the results of their operations. The Company's interest in Inti Raymi increased from 85 percent to 88 percent in 1994 and its interest in Niugini Mining decreased slightly, from 52.6 percent to 51.4 percent. The decrease in Minority interest in net income in 1994 resulted from BMG's calculation, under U.S. GAAP, of net losses incurred by Niugini Mining compared with net income from Niugini Mining in 1993. Minority interest in net income increased substantially in 1993 compared with 1992 because of a substantial increase in profits from Inti Raymi.
Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," and SFAS No. 106, "Employer's Accounting for Postretirement Benefits other than Pensions." (See Notes 5 and 6 to the Consolidated Financial Statements.) For 1992, the Company's Consolidated Statement of
Income reflects a credit of $3.9 million and an accrued charge of $5.3 million (net of $1.4 million in income tax benefits) representing the cumulative prior periods' effects of the adoption of these standards.
NET INCOME
The Company generated net income in 1994 primarily because of the increased profitability of its Kori Kollo mine in Bolivia and higher actual and realized gold, silver and copper prices. Production increases and decreased operating costs per equivalent ounce of gold were the main factors contributing to Kori Kollo's profitability.
During 1993, the Company completed the transition of its primary production stream from the Fortitude mine in Nevada to the Kori Kollo mine in Bolivia. As expected, there was little change in the Company's total gold production during this transition period. However, increased costs related to the transition to a lower grade ore body at the Battle Mountain Complex and lower than anticipated production levels from the heap leach operations at the Battle Mountain Complex and the San Cristobal mine resulted in an increase in total operating costs per equivalent ounce of gold sold for 1993. These factors all contributed to the net loss incurred by the Company in 1993.
In 1992, the Company increased its gold production as it realized the first full year of production from three new mines: the San Luis mine in Colorado, the San Cristobal mine in Chile and the Red Dome mine in Australia. For 1992, the Company reported a net loss as a result of weak gold prices, impairment in value of the Company's San Luis mine and the Canyon Placer facility in Nevada and higher operating costs associated with its new lower-grade mines. In particular, the San Luis mine experienced an extended period of start-up difficulties.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY
At December 31, 1994, the Company had cash and cash equivalents of $76.5 million, of which $21.2 million was held by BMG, $39.9 million was held by Niugini Mining, and $15.4 million was held by Inti Raymi.
OPERATING ACTIVITIES
The Company generated cash flow of $89.7 million, $30.1 million and $41.5 million from operating activities for the years ended December 31, 1994, 1993 and 1992, respectively. The increase in cash flow from operating activities in 1994 compared with 1993 resulted primarily from the increased revenues of the Company. Also, the recovery of approximately $8.1 million of refundable value added taxes from the Bolivian government related to the construction of the Kori Kollo sulfide mining facilities contributed to the increase in cash flow from operations. The increase in cash flow from operations was partially offset by increased
product inventories and materials and supplies inventories of $4.5 million and $4.6 million, respectively, in 1994. The increase in product inventories is primarily attributable to the accumulating of gold, silver and copper concentrates from the Red Dome mine in Australia. Since these products are shipped overseas, the Company realizes significant savings by shipping this product in large quantities. The Red Dome mine produces sufficient quantities to allow for approximately 4 or 5 shipments annually. Inventories of materials and supplies continue to increase at the expanding Kori Kollo mine in Bolivia due to increases in the cost and quantities of the materials which must be retained at the mine due to its remote location.
INVESTING ACTIVITIES
Cash used for investing activities increased to $107.3 million in 1994 compared with $60.3 million in 1993 and $103.5 million in 1992. Capital and exploration expenditures were the most significant components of cash flows used for investing activities. The Company expended approximately $21.9 million on completion of the development of the Reona mine, approximately $15.0 million on completion of the expansion of the Red Dome mine, approximately $27.0 million for capital expansion and improvements at the Kori Kollo mine and approximately $7.9 million, including $6.0 million of capitalized interest, for development of the Lihir prospect during 1994.
The Reona project contains reserves of approximately 350,000 ounces of gold in the Copper Canyon area of the Battle Mountain Complex. The total cost of developing this project was approximately $24.0 million. The cost of the project was greater than originally estimated because of delays in the permitting process and the establishment of a more aggressive completion schedule to make up for these delays. Also, certain pre-production costs were not included in the original cost estimate.
Niugini Mining has completed the expansion of the existing Red Dome pit. The total cost of this expansion project was $34 million. Total costs exceeded previous estimates primarily due to corrections of problems related to an unexpected pit wall slippage. The expansion is expected to extend the life of the mine through 1996.
Inti Raymi is implementing a $25.5 million capital expansion program at the Kori Kollo mine. The capital program includes the construction of a recovery enhancement system designed to increase recovery rates from 69 percent to approximately 77 percent. The program also includes a new tailings treatment facility and the acquisition of additional haul trucks. Completion of the enhanced recovery and tailings treatment facilities is expected approximately around the end of the first quarter of 1995. Inti Raymi is using cash generated from operations to fund these projects.
The Company has included $100.7 million for capital expenditures, including $7.4 million for the Crown Jewel project, in its 1995 business plan. The plan includes $67.3 million for the acquisition by Niugini Mining of an additional joint venture interest in the Lihir project and additional pre-development costs of this project. These expenditures are expected to be funded from Niugini Mining's working capital, other available facilities and possibly other alternative means of financing. Of the total 1995 projected expenditures, 14 percent is expected to be spent
in North America, 15 percent in Latin America, one percent in Australia and 70 percent in various countries by Niugini Mining.
PHOENIX PROJECT - BMG has announced its decision to develop the Phoenix project, subject to permitting. The project includes the construction of a milling facility and is located in the Copper Canyon area of the Battle Mountain Complex. The cost of developing the project is estimated to be approximately $87 million, of which $2.2 million has been spent through December 31, 1994. The project contains reserves of approximately 28.8 million tons of millable ore at an average ore grade of .043 ounces of gold per ton, and 8.9 million tons of heap leach ore with an average grade of .028 ounces of gold per ton, for a total of approximately 1.5 million contained ounces of gold. The project also includes approximately 8.8 million contained ounces of silver. The reserves were determined using cutoff grades ranging from .010 to .025 ounces of gold per ton and an assumed gold price of $375 per ounce. The estimated recovery factor was approximately 85 percent for the mill ore and 65 percent for the leach ore.
CROWN JEWEL PROJECT - BMG is continuing to seek permits for the Crown Jewel project in Washington state. BMG expects to construct a 3,000 ton per day milling facility with start-up possible in the spring of 1997, depending on the length of the permitting process, including the acquisition of water rights, the effect of possible legal challenges by project opponents and the potential impact of newly enacted and proposed legislation to amend or replace state and federal laws and regulations affecting mining projects. The delays in obtaining permits for the Crown Jewel project to date relate primarily to delays in regulatory approvals for certain site data collection activities, the time taken for agency development of certain wildlife studies and the time taken by the agencies to prepare the draft Environmental Impact Statement.
In March 1994, an arbitrator held that BMG was entitled, under "force majeure" provisions of BMG's joint venture agreement covering its Crown Jewel project, to suspend quarterly payments of $1 million to its co-venturer for the third and fourth quarters of 1993 because of delays in the permitting process. In May 1994, BMG announced that it had resolved outstanding contractual issues with the co-venturer, including all issues relating to BMG's obligation to subsequently make such quarterly $1 million payments. As part of its agreement to resolve these issues, BMG acquired the right to earn an additional 3 percent joint venture interest in the Crown Jewel project. The consideration paid by BMG to the co-venturer was $4.25 million in cash and 435,897 shares of BMG common stock. As a result of this agreement, BMG has the right to earn a 54 percent interest in the project, and the joint venture agreement has been amended to delete the terms requiring $1 million quarterly payments to the co-venturer. The 3 percent additional interest will apply only until the joint venture recovers the currently identified gold reserve of 1.5 million ounces of gold from the project at which time BMG's interest will be reduced to 51 percent.
To earn the 54 percent ownership interest in the Crown Jewel project, BMG will have to fund all expenditures for exploration, evaluation and development of the project through commencement of commercial production. The minority partner will not reimburse BMG for any portion of funding provided through the commencement of commercial production. These expenditures, plus acquisition costs, are currently estimated to be approximately $108 million, of which, as of December 31, 1994, $47.6 million ($39.3 million of which has been capitalized) has been
incurred. The current estimate and the expenditures to date include approximately $8.5 million related to the acquisition of the additional 3 percent interest in the project and the resolution of certain contractual issues. Management expects that BMG should be able to recover more than its total investment in the project from its 54 percent interest in the project's operating cash flows based on current market conditions and current expectations of the timing to obtain permitting.
LIHIR PROJECT - BMG holds an interest in the Lihir project through its 51.4 percent ownership of Niugini Mining. Niugini Mining's ownership interest in the Lihir project is in a state of transition as explained below. Niugini Mining's ownership interest is subject to a joint venture agreement with a subsidiary of RTZ Corporation plc ("RTZ") and the Mineral Resources Lihir Pty. Ltd., a wholly-owned entity of the PNG government.
On March 17, 1995, the Special Mining Lease (the "SML") for the Lihir project was executed by the PNG government. The SML provides Niugini Mining, RTZ and the PNG government, as joint venture partners, the right to develop and operate the Lihir gold project. The Lihir Island landowners have reached substantial agreement with the Lihir joint venture for the landowners' ongoing compensation, social well-being from development of the mine and eventual participation in the project. Formal execution of agreements with the landowners is expected to take place in the near future.
Upon execution of the agreements with the landowners, Niugini Mining will acquire an additional 16 percent of the Lihir joint venture for $3 million cash per percentage point, or $48 million. In connection with the execution of the SML, the PNG government acquired a 30 percent joint venture interest, pro rata from RTZ and Niugini Mining. Following the acquisition of the interest by the government and consummation of Niugini Mining's purchase of the additional interest from RTZ, Niugini Mining will have a 30 percent interest in the project and another subsidiary of RTZ will retain a 40 percent interest.
Niugini Mining, RTZ and the PNG government have signed other agreements which will govern the ownership of the project and provide the legal and financial framework for the development and operation of the Lihir mine. The parties have formed a new company named Lihir Gold Limited ("LGL") for the ownership and development of the Lihir project. The new company will be owned 30 percent by Niugini Mining, 40 percent by the subsidiary of RTZ and 30 percent by the PNG government. Related to this restructuring, the carried interest arrangement between Niugini Mining and RTZ will terminate with no further rights or obligations continuing to either party. LGL will enter into a management contract with Lihir Management Company Pty. Ltd., a wholly-owned subsidiary of RTZ ("LMC"), whereby LMC will manage the administration, financing, construction and subsequent operation of the project. The project is expected to be partially funded through the offering of the equity of LGL common stock to the public at a price yet to be determined. Niugini Mining's interest in LGL will thereby be proportionately reduced depending on the number of shares issued. Additional funding required for the project is expected to be provided in the form of debt financing by LGL.
The capital costs for the Lihir project are presently estimated by the manager of the project at $671 million. The capital cost increase takes into account inflation due to delays in the
issuance of the SML and exchange rate variations that have occurred since the last estimate was compiled. Over the first 15 years of operations, the manager's estimate of total cash operating costs, which exclude royalties and sales costs, is $199 per ounce. The estimate of minable sulfide reserves is 114.6 million tons, or 14.6 million contained gold ounces, with the average grade of .13 ounces of gold per ton.
As of December 31, 1994, the carrying value of the Company's investment in the Lihir project was approximately $135.9 million. If the Lihir project does not proceed as contemplated, the Company may be required to write down part or all of its investment in the Lihir project.
CINDY PROJECT - In Queensland, Australia, BMG is proceeding with the $4.3 million development of the Cindy ore deposit, containing approximately 42,500 ounces of gold. Through December 31, 1994, $3.0 million has been spent on this development project. Ore from the Cindy deposit is to be processed at the existing Pajingo milling facility beginning in June 1995 and is expected to extend the productive life of the Pajingo property to June 1996. The cost of this project has increased because of the inclusion of certain pre-operating mining costs that had not been previously included in the cost estimate.
The Company currently estimates that it will spend approximately $14.5 million on its 1995 exploration programs to identify potential additional mineral deposits. Of this amount, 17 percent is budgeted to be spent in North America, 23 percent in Latin America, 37 percent in Australia and the South Pacific and 19 percent in various countries by Niugini Mining. Four percent of the budgeted amount is as yet undesignated. During 1994, the Company spent approximately $15.0 million on exploration and evaluation activities and related capital expenditures.
FINANCING ACTIVITIES
BMG can borrow funds under a committed revolving credit agreement, which is scheduled to expire on December 31, 1996. Scheduled $9.4 million quarterly reductions in commitments under the agreement began on March 31, 1993, and will continue until the agreement expires. As of December 31, 1994, the remaining availability under this agreement was $84.4 million. This agreement contains certain financial covenants as well as restrictions on dispositions of major assets and the payment of dividends. These restrictions are not expected to affect planned operations. BMG may borrow an additional $15 million through a separate uncommitted revolving credit facility. As of December 31, 1994, no borrowings were outstanding under either of these facilities; however, letters of credit amounting to approximately $4.8 million had been issued against the uncommitted facility. The Company is currently evaluating proposals from certain banks to revise or replace the committed revolving credit agreement.
BMG's majority owned Bolivian subsidiary, Inti Raymi, has borrowed funds from three international agencies, the Overseas Private Investment Corporation (OPIC) ($40 million), the International Finance Corporation (IFC) ($40 million) and the Corporacion Andina de
Fomento (CAF) ($15 million) under three separate but coordinated financing facilities. These facilities provided most of the funding necessary for the development of the Kori Kollo mine. Each of these facilities imposes restrictions on dividend payments and loan repayments by Inti Raymi to its shareholders, and limits additional fixed asset purchases or dispositions, debt and liens. As of February 17, 1995, Inti Raymi owed an aggregate of $79.0 million under these facilities. This amount includes $3.2 million previously owed by Inti Raymi to OPIC. The IFC facility includes a $5 million convertible loan payable on March 1, 2002, which may be converted at any time, at IFC's option, into a 3.98 percent ownership interest in Inti Raymi. Other than the convertible portion, loans under the facilities are to be repaid in semi-annual installments which commenced in December 1993 and will continue through June 2000. Certain prepayments would be required in the event of substantial Kori Kollo reserve losses or significantly improved gold prices.
In 1994, Inti Raymi successfully obtained lender acceptance of project completion status under the Kori Kollo project financing agreements. Accordingly, BMG is no longer required to provide financial support to Inti Raymi under the terms of these agreements. Subject to other restrictions in the financing agreements and general operating needs, Inti Raymi may generally pay dividends up to the amount of Inti Raymi's net income for the preceding fiscal year, which ends September 30. In 1994, Inti Raymi paid dividends of $8.1 million to its shareholders ($7.1 million to BMG). Currently, Inti Raymi has elected to retain the majority of fiscal 1994 earnings in order to fund its $25.5 million capital expansion program (See "-Liquidity and Capital Resources - Investing Activities").
The Company does not expect Niugini Mining to pay dividends currently because of Niugini Mining's other business commitments and plans for its working capital as previously discussed.
BMG has effective a registration statement under the Securities Act of 1933 for what is commonly referred to as a "universal shelf" filing covering up to $200 million of its debt securities, preferred stock, depository shares, common shares and warrants, which BMG may elect to offer from time to time and in any combination. BMG has no current plans to issue securities under this registration statement.
CONCLUSION
The Company expects the cash currently held along with cash flows from operations and financing facilities currently in place, to be adequate to meet its cash needs at least through the end of 1995. Funding may also be provided from offerings of additional securities under the Company's $200 million universal shelf registration statement, assuming any such offering could be completed under satisfactory terms or possibly other alternative means of financing.
GOVERNMENT REGULATION
All of the Company's mining and processing operations are subject to reclamation requirements. The Company believes it is making sufficient accruals for known reclamation obligations. Such accruals, amounting to an aggregate of $10.7 million at December 31, 1994, are included as long-term liabilities in the Company's consolidated balance sheet. At the Battle Mountain Complex, aggregate reclamation expenditures required to be spent in the area are expected to amount to approximately $7.7 million, of which $3.1 million remained accrued at December 31, 1994. Estimated reclamation obligations and related amounts accrued as of December 31, 1994, respectively, for each of the Company's other operating mines are as follows: San Luis $3.3 million and $1.4 million, Pajingo $2.6 million and $1.5 million, Kori Kollo $10.0 million and $1.1 million, Red Dome $4.4 million and $3.8 million. Reclamation expenditures for the Company's San Cristobal mine are not expected to be material.
BMG has been issued a water pollution control permit for the Battle Mountain Complex project facilities from the Nevada Division of Environmental Protection. This permit was amended in 1994 to include the Reona operations. BMG has also received a stormwater discharge permit covering the Battle Mountain Complex area. BMG has applied for a reclamation permit covering the Battle Mountain Complex area which is currently under review. Activity expected to be performed as part of the development and operation of the Phoenix Project would eliminate certain possible reclamation costs. If this project does not proceed, reclamation expenditures would be expected to be up to $3 million higher than current estimates. BMG is currently conducting further site characterization studies for the Battle Mountain Complex area and is communicating with the Nevada Division of Environmental Protection to determine the ultimate permit requirements. Potentially adverse site characterization results or the imposition by regulatory authorities of unanticipated reclamation standards could substantially increase future reclamation requirements and expenditures. Laws and regulations applicable to these permits have been amended during the past few years, and it is difficult to ascertain the exact terms and conditions which will be required thereunder. Based on data collected to date, management has not identified any adverse site characterization results that are expected to have a material adverse effect on the Company's financial condition. Reclamation obligations could also be impacted by proposed federal legislation to amend or replace the General Mining Law.
The Company's Crown Jewel, Phoenix and Lihir development projects are dependent upon securing requisite permits and approvals and the impacts of legal challenges. Although the Company believes the requisite permits and approvals for its development properties can be obtained in due course, the requisite permitting efforts are complex, time consuming and subject to legal challenge. At this time, the Company does not believe that the impact of existing permitting requirements or existing environmental laws and regulations will have a material adverse effect on the Company's business, financial condition or results of operations. There can be no assurance that future changes in laws and regulations and legal challenges to regulatory actions would not result in additional expense, capital expenditures, restrictions and delays associated with the development and operation of the Company's properties.
Legislative amendment or replacement of the General Mining Law under which the Company holds claims on public lands could take place in 1995. Such legislation could result in
new environmental standards, additional reclamation requirements and new procedural steps which could result in delays and additional expenditures for all phases of mining activity. Such legislation could also impose a royalty. Approximately 40 percent of the Reona reserves, 23 percent of Phoenix project reserves and 80 percent of the Crown Jewel ore body are on public lands and could be subject to a royalty. These projects, as well as reclamation and closure activities at the Battle Mountain Complex, could be subject to additional permitting and environmental requirements. The Company has applied for mineral surveys for the claims constituting the unpatented portion of the Reona reserves. The Company has applied for patents covering the unpatented portion of the Crown Jewel ore body but has not yet received the "first half" of the final certificate. The extent to which existing law might change is not yet known. The Company cannot yet predict the impact of any such change on its U.S. activities. However, the passage of legislation that can be reasonably anticipated is not expected to render uneconomic any of the Company's existing operating mines or development projects, assuming current gold prices.
In Bolivia, new environmental regulations are being developed to implement federal legislation passed in 1992. Various versions of the proposed regulations are currently being reviewed by several governmental agencies and final regulations are expected by mid-1995. The new regulations will generally require the preparation of environmental impact studies, set air and water discharge standards and provide protocols for dealing with hazardous substances. Such regulations could result in new environmental standards and requirements for the Company's Kori Kollo project which, in turn, could require additional expenditures and changes in operations. At this time, the Company is not able to determine the impact of these anticipated regulations, but does not anticipate that such regulations will have a material impact on the Company's financial condition or results of operations.
FORWARD SALES AND HEDGING
The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate and commodity price risks.
Interest rate cap agreements are used to reduce the potential impact of increases in interest rates on floating-rate long-term debt. At December 31, 1994, Inti Raymi was party to three interest rate cap agreements, each with a term of three years. The agreements entitle Inti Raymi to receive from counterparties on a quarterly basis the amounts, if any, by which Inti Raymi's interest payments on a portion of its LIBOR based floating-rate Kori Kollo project financing exceed various fixed rates over the term of the caps. The fixed rates in the cap agreements gradually escalate from 4.5 percent in 1994 to 7.2 percent in 1997. Currently, Inti Raymi has hedged approximately 50 percent of its net interest rate exposure related to the Kori Kollo project financing. The hedge increases to 100 percent of its exposure by June 1996. Inti Raymi has not hedged any of its exposure subsequent to December 1997. The net unamortized cost of the premiums paid for these caps, amounting to $.7 million at December 31, 1994, has been included in other assets.
The Company uses fixed forward sales contracts, spot deferred sales contracts and put options to hedge anticipated sales of gold, silver and copper. The following table summarizes the Company's contracts at December 31, 1994:
Deferred costs associated with forward sales contracts amounted to $1.5 million at December 31, 1994 and 1993. There were no deferred costs associated with put options at December 31, 1994. Deferred costs associated with put options amounted to $.6 million at December 31, 1993.
At December 31, 1994, in the aggregate, the Company's forward sales contracts were approximately at market based on the then current spot price of $381 per ounce and an exchange rate of US$.77 to A$1.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to its interest rate caps and forward sales contracts, but does not expect any counterparties to fail to meet their obligations. The Company does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of counterparties.
In future periods, the Company may continue to employ selective hedging strategies, where appropriate, to protect cash flow for specific needs.
FOREIGN OPERATIONS
The Company continues to expand and geographically diversify its resource base through the exploration, acquisition, development and exploitation of foreign gold reserves. The Company's identifiable assets attributable to foreign operations as of December 31, 1994, were
approximately $474 million and foreign operations represented approximately 81 percent of the total gross revenues of the Company for the year ended December 31, 1994. As a result, the Company is exposed to risks normally associated with foreign operations, including political, economic, social and labor instabilities, as well as foreign exchange controls and currency fluctuations. Foreign operations and investments may also be subject to laws and policies of the United States affecting foreign trade, investment and taxation which could affect the conduct or profitability of those operations.
INFLATION AND CHANGING PRICES
Gold production costs and corporate expenses are subject to normal inflationary pressures, which, to date, have not had a significant impact on the Company. The Company's results of operations and cash flows are affected by fluctuations in the market prices of gold, silver and copper, and to a lesser extent by changes in foreign currency exchange rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Battle Mountain Gold Company:
We have audited the accompanying consolidated balance sheets of Battle Mountain Gold Company (a Nevada corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the financial statements of Niugini Mining Limited and subsidiaries, which statements reflect assets and net sales of 18 percent and 23 percent in 1994, 17 percent and 29 percent in 1993 and 15 percent and 35 percent in 1992, respectively, of the consolidated totals. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Battle Mountain Gold Company and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
As explained in Note 5 to the consolidated financial statements, effective January 1, 1992, the Company changed its method of accounting for income taxes with the adoption of Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes." Also, as explained in Note 6 to the consolidated financial statements, effective January 1, 1992, the Company changed its method of accounting for postretirement benefits other than pension plans with the adoption of Financial Accounting Standards Board Statement No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions."
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed in Item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, based on our audits and the report of other auditors, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas February 17, 1995
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Battle Mountain Gold Company and the Board of Niugini Mining Limited:
We have audited the consolidated balance sheet of Niugini Mining Limited (a company incorporated in Papua New Guinea) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994 and the consolidated financial statement schedules which are not presented separately in the Battle Mountain Gold Company December 31, 1994 Form 10-K. Battle Mountain Gold Company is the Company's majority shareholder. Those financial statements and the financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on those financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Niugini Mining Limited and subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND
Sydney, Australia January 31, 1995
BATTLE MOUNTAIN GOLD COMPANY CONSOLIDATED STATEMENT OF INCOME
The accompanying notes are an integral part of these financial statements.
BATTLE MOUNTAIN GOLD COMPANY CONSOLIDATED BALANCE SHEET
The accompanying notes are an integral part of these financial statements.
BATTLE MOUNTAIN GOLD COMPANY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
BATTLE MOUNTAIN GOLD COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
BATTLE MOUNTAIN GOLD COMPANY Notes to Consolidated Financial Statements
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -
The accompanying consolidated financial statements include the accounts of the Battle Mountain Gold Company ("BMG") and its wholly-owned and majority-owned subsidiaries ("the Company"). The accounts of Niugini Mining Limited, a Papua New Guinea precious metals exploration, development and production company ("Niugini Mining"), have been consolidated with the Company's from January 1, 1989 (See Note 7). The accounts of Empresa Minera Inti Raymi S.A., a Bolivian gold mining company ("Inti Raymi"), have been consolidated with the Company's from April 1, 1990 (See Note 7). All significant intercompany transactions have been eliminated in consolidation. Majority-owned, non-corporate joint ventures are proportionately consolidated. Non-corporate joint ventures in which the Company owns less than a majority interest and has the ability to exercise significant influence are accounted for by the equity method. All other joint ventures are carried at cost. Certain prior-period items have been reclassified in the consolidated financial statements in order to conform with current year presentation.
Inventories -
Inventories, consisting of gold, silver and copper, are reported at cost, using the first-in, first-out method, which is lower than market.
Property, Plant and Equipment -
Property, plant and equipment are stated at cost. Expenditures for development of new mines and major development expenditures at existing mines, which are expected to benefit future periods, are capitalized and amortized, generally, on the units of production method. Exploration and development costs expended to maintain production at operating mines are charged to expense as incurred. In certain cases, mining costs associated with waste rock removal are deferred as development costs and charged to operations on the basis of the average stripping ratio over the life of the mine.
Other property, plant and equipment includes capitalized lease costs and mine development in progress. Capitalized exploration lease costs are apportioned to expense in interim periods through a provision for abandonment of unproductive projects. Actual abandonments of unproductive projects are charged against the allowance. The balance in the allowance for abandonment is then evaluated on an annual basis and adjusted as necessary.
Generally, depreciation, depletion and amortization of mining properties and related assets are determined using the units of production method based upon estimated
recoverable ore reserve tonnages or reserve ounces at the beginning of the year. However, assets having an estimated life of less than the estimated life of the mineral deposits are depreciated on the straight-line method based on the expected life of the asset. Write-downs and write-offs of depreciable properties are included in accumulated depreciation, depletion and amortization.
Exploration and Evaluation Expenditures -
With the exception of lease acquisition costs incurred to acquire mineral rights, the Company charges all exploration and predevelopment evaluation expenditures to expense as incurred.
Capitalization of Operating Results During Mine Development -
During the start-up period for each developing mine, operating costs may exceed revenues earned from the sale of precious metals produced. In these instances, all costs incurred during this precommercial production period, net of revenues earned, are capitalized as property costs.
Capitalization of Interest -
Interest expense incurred in connection with borrowings attributable to pre-production stage projects is capitalized until those projects commence commercial production.
Reclamation -
Reserves for estimated future costs for reclamation of the Company's operating sites are accrued on a units of production basis over the estimated lives of the respective mines. These costs are charged to milling and other plant costs as accrued (See Note 13).
Revenue Recognition -
Revenue is recognized when the dore (a combination of gold and silver) or concentrates are delivered against sales agreements or contracts and risk of loss passes to the buyer.
Currency Translation -
Foreign currency financial statements are translated into U.S. dollars using current exchange rates and translation gains and losses are accumulated in the balance sheet caption "Cumulative Foreign Currency Translation Adjustment," a separate component of shareholders' equity.
Effective January 1, 1994, NML changed its functional currency from the Papua New Guinea Kina to U.S. dollars.
Income (Loss) Per Share -
Income (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the year, adjusted for common stock equivalents, if dilutive. The effect of other dilutive securities are not included in the computation of the 1994 income per share and the effects of common stock equivalents and other dilutive securities are not included in the computation of the 1993 and 1992 losses per share because of their antidilutive effect.
Statement of Cash Flows -
At December 31, 1994, cash and cash equivalents included $39.9 million and $15.4 million attributable to Niugini Mining and Inti Raymi, respectively. Cash and cash equivalents at December 31, 1993, included $44.7 million and $9.3 million held by Niugini Mining and Inti Raymi, respectively. At December 31, 1994 and December 31, 1993, other assets included $.9 million and $1.3 million, respectively, of restricted cash held by Niugini Mining.
For purposes of the Consolidated Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
For the year ended December 31, 1994 the Company received U.S. federal income tax refunds of $4.3 million and paid Bolivian withholding taxes of $.9 million. For the years ended December 31, 1993, and 1992, the Company paid $.7 million and $3.2 million respectively, for income taxes. The Company paid $6.4 million, $6.8 million and $1.4 million in interest, net of amounts capitalized, during 1994, 1993 and 1992, respectively.
For 1994, the Company's investing activities included the issuance of 435,897 shares of BMG's common stock (market value of $4.25 million) in addition to $4.25 million of cash for the purchase of an additional 3% interest in the Crown Jewel Project (see Note 3). During 1993 and 1992 the Company's investing activities did not include any significant non-cash transactions.
Issuance of Stock by Subsidiaries
The issuance of stock by subsidiaries is accounted for as a capital transaction in the Consolidated Financial Statements.
Forward Sales Contracts, Options and Interest Rate Caps
The Company may enter into fixed forward and spot deferred sales contracts for the sale of its metals as a hedge against changes in prices. Gains, losses or expenses related to these transactions are netted against revenue when the hedged production is sold. The Company may also purchase put options for the sale of its produced metals.
Premiums paid for purchased interest rate caps are amortized to interest expense over the terms of the interest rate cap agreement. Unamortized premiums are included in other assets in the Consolidated Balance Sheet. Amounts earned under cap agreements are accrued as a reduction of interest expense.
Spot deferred sales contracts allow the Company to defer the delivery of gold under the contract to a later date at the original contract price plus the prevailing premium at the time of the deferral, as long as certain conditions are satisfied. Although spot deferred sales contracts could limit amounts realizable during a period of rising process, the Company may "roll forward" its spot deferred contracts to future periods in order to realize current market price increases, while maintaining future downside protection.
Note 2. ASSET IMPAIRMENTS
The Company did not recognize any charges for asset impairments during 1994 and 1993. During the third quarter of 1992, the Company recognized charges totaling approximately $23.3 million, net of $11 million in income tax benefits for the impairment in value of certain of the Company's assets. The charges included (1) a write-down of $17.6 million, net of a $9 million income tax benefit, of the Company's investment in the San Luis mine in Colorado to reduce the carrying value of the investment to a level which the Company believed would be recoverable under then existing and expected future market conditions (lower gold prices, compared with those at the time of project conception, and greater than anticipated capital expenditures resulting from a difficult start-up period led to the write-down), (2) a write-off of $4 million, net of a $2 million income tax benefit, of the Company's investment in the previously closed Canyon Placer facility, which was abandoned because of gold prices being persistently less than needed for development, and (3) an impairment of $1.7 million, included as other income (expense), net, to adjust to current market the carrying value of certain marketable equity security investments acquired upon the previous disposition of a discontinued project.
Note 3. INVESTMENTS
The Company's long-term investments include the following:
Crown Jewel Joint Venture -
On March 14, 1990, the Company purchased, for $5 million, an option to acquire a 51 percent joint venture interest in Crown Resources Corporation's Crown Jewel gold project and surrounding exploration rights in Washington state. The Company paid an additional $5 million on January 4, 1991, to exercise the option and retain the right to acquire an ownership interest in the project. The Company has spent an additional $29.1 million as of December 31, 1994, evaluating and developing the project. The evaluation expenditures were charged to expense in the periods incurred prior to March 31, 1992, when the Company decided to proceed with the development of the project. Since that time, all evaluation expenditures ($20.4 million) have been capitalized.
In March 1994, an arbitrator held that BMG was entitled, under "force majeure" provisions of BMG's joint venture agreement covering its Crown Jewel project, to suspend quarterly payments of $1 million to its co-venturer for the third and fourth quarters of 1993 because of delays in the permitting process. On May 10, 1994, BMG announced that it had resolved outstanding contractual issues with the co-venturer, including all issues relating to BMG's obligation to subsequently make such quarterly $1 million payments. As part of its agreement to resolve these issues, BMG acquired the right to earn an additional 3 percent joint venture interest in the Crown Jewel project. The consideration paid by BMG to the co-venturer totaled $4.25 million in cash and 435,897 shares of BMG common stock. As a result of this agreement, BMG has the right to earn a 54 percent interest in the project, and the joint venture agreement has been amended to delete the terms requiring $1 million quarterly payments to the co-venturer. The 3 percent additional interest will apply only until the joint venture recovers 1.5 million ounces of gold from the project at which time BMG's interest will be reduced to 51 percent.
To earn a 54 percent undivided interest in the project and certain adjacent mineral claims, the Company would be required to fund an estimated additional $61 million for construction and development of the project through commencement of commercial production.
Note 4. OTHER INCOME (EXPENSE), NET
Included in other income (expense), net, are certain non-operating revenues, net of related expenses, consisting of:
Note 5. FEDERAL AND FOREIGN INCOME TAX
The discussion of income taxes herein does not include the cumulative income tax effects of accounting changes explained in Note 6 to these Consolidated Financial Statements.
Federal and foreign income tax expense (benefit) consisted of the following:
Consolidated income before income taxes and the cumulative effect of the accounting change includes income from foreign operations of $32.7 million, $13.8 million and $1.7 million in 1994, 1993 and 1992, respectively.
Effective January 1, 1992, the Company adopted the provisions of SFAS No. 109. SFAS No. 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Effective January 1, 1992, the Company recorded a deferred tax liability of $12.6 million, representing the net effect of adopting SFAS No. 109 as of that date. This liability was comprised of a $16.5 million purchase acquisition liability related to the Westworld acquisition (See Note 7), which was capitalized to property, and a partially offsetting net $3.9 million tax benefit which has been reflected in the consolidated statement of income as the cumulative effect of the accounting change.
For the year 1992, loss before cumulative effects of accounting changes includes an additional income tax benefit of approximately $8.7 million or $.11 per share resulting from the adoption of SFAS No. 109.
The significant components of the deferred tax benefit in 1992 were as follows:
The Company's deferred tax position at December 31, 1994 and 1993, is comprised of the following:
Temporary differences and carryforwards which gave rise to significant portions of deferred tax assets and liabilities at December 31, 1994 and 1993 are as follows:
A reconciliation of income tax at the statutory rate to income tax expense (benefit) follows:
The Omnibus Budget Reconciliation Act of 1993, enacted on August 10, 1993, retroactively increased the federal statutory income tax from 34 percent to 35 percent for periods beginning on or after January 1, 1993. The effect of the rate change was not significant to the Company's net deferred income tax position.
Taxes have been provided on the undistributed earnings of subsidiaries and joint ventures with the exception of Niugini Mining which is in a cumulative loss position.
The Company and its domestic subsidiaries file a consolidated U.S. federal income tax return. Such returns have been closed through the year 1990.
At December 31, 1994, the Company had approximately $4.6 million of alternative minimum tax credits available on an indefinite carryforward basis, and approximately $71.4 million of regular net operating losses expiring beginning in 2007, available to offset future U.S. federal income tax.
Note 6. BENEFITS PLANS
Pension Plans -
Substantially all U.S. employees of the Company are covered by non-contributory pension plans. The U.S. plans provide benefits based on participants' years of service and compensation or defined amounts for each year of service. The Company makes annual contributions to the U.S. plans that comply with the minimum funding provisions of the Employee Retirement Income Security Act ("ERISA").
During 1993, the plans for BMG's Australian employees were changed from non-contributory defined benefit plans to defined contribution plans.
Pension costs are generally accrued and charged to expense currently. Net periodic pension cost included the following components:
The projected long-term rate of return on U.S. plan assets was 9 percent at December 31, 1994 and 1993. At December 31, 1992, the projected long-term rate of return was 8 percent for the U.S. plans and 9 percent for the Australian plans.
Actual return on U.S. plans' assets was $1.4 million for the year ended December 31, 1994, $.3 million for the year ended December 31, 1993, and $1.1 million for the year ended December 31, 1992. For Australian plans, actual return on plan assets for the year ended December 31, 1992 was $(.1) million.
Plan assets include equity securities, common trust funds and various debt securities. Weighted average rate assumptions used in determining estimated benefit obligations were as follows:
Early Retirement Program -
In July 1992, 29 of the Company's salaried employees elected to accept early retirement benefits offered by the Company as part of general cost reduction efforts. In connection with these special benefits, a $1.3 million charge (net of a $.7 million income tax benefit) was taken against 1992 earnings.
Contribution Plans -
The Company has defined contribution plans available for all full-time U.S. salaried employees and all full-time U.S. hourly employees. The plans provide for savings contributions by employees from 1 to 16 percent of their compensation, subject to ERISA limitations. The Company matches 50 to 100 percent of employee contributions with BMG's common stock, subject to a limit of 6 percent of an employee's compensation during each plan year.
The Company has defined contribution plans available for all BMG's Australian salaried and hourly employees. The Company's contributions to the salaried plan are determined in accordance with the trust deed. The Company's contributions to the hourly plan are determined in accordance with the union award.
All Company contributions to the plans are expensed and funded currently. The cost of such Company contributions was $.5 million in 1994, $.7 million in 1993 and $.4 million in 1992.
Postretirement Health Care and Life Insurance Benefits -
Substantially all of the Company's U.S. employees may become eligible for certain unfunded health care and life insurance benefits when they reach retirement age while working for the Company.
In October 1992, the Company announced its decision to adopt SFAS No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions", effective January 1, 1992. This standard requires that the expected cost of these benefits must be charged to expense during the years that the employees render service. As a result of the adoption, the Company's results of operations for the year ended December 31, 1992, reflected an accrued charge of $5.3 million (net of $1.4 million in income tax benefits) representing the cumulative effect of the change in accounting principle for periods prior to 1992. Ongoing postretirement benefit costs recognized under this standard do not differ significantly from those that would have been reported under the previous method.
Net periodic postretirement benefit cost for the years ended December 31, 1994, 1993 and 1992, included the following components (in thousands):
The following table presents the plans' status at December 31, 1994 and 1993 (in thousands):
The discount rate used in determining the accumulated postretirement benefit obligation was 8.5 percent for 1994 and 7 percent for 1993. For 1994 and 1993, the assumed annual rate of increase in the per capita cost of covered health care benefits was 12 and 14 percent, respectively. In 1994 and 1993, a gradual decrease in the rate is assumed through the years, 1999 and 2001, respectively, when the rate is estimated to reach 6 percent for the 1994 calculations and 7 percent for 1993 calculation and remain at that level thereafter. A one- percentage-point increase in the assumed health care cost trend rates would increase the accumulated postretirement benefit obligation as of December 31, 1994, by approximately $1.1 million, and the total of the service and interest cost components of net periodic postretirement health care cost for 1994 by approximately $.2 million.
Postemployment Benefits -
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits". This standard requires that the expected cost of these benefits must be charged to expense during the periods that employees vest in these benefits. The Company had previously recognized these costs as an expense when paid. Adoption of the standard did not have a material effect on the Company's financial position or on its results of operations. Postemployment benefit costs recognized under this standard do not differ significantly from those that would have been reported under the previous method.
Note 7. ACQUISITIONS
Niugini Mining -
In the aggregate, since January 1, 1989, the Company has paid $179.6 million for 47.5 million shares of the common stock of Niugini Mining. In December 1993, Niugini Mining issued 5.8 million of its common shares at A$5.00 per share in a public offering which provided net proceeds of approximately $19.1 million U.S. equivalent. As a result of this stock offering, BMG's ownership interest in Niugini Mining decreased from 56.5 percent to 52.6 percent. In December 1993, the Company recorded a $2.1 million adjustment to reduce the carrying value of its investment in Niugini Mining to reflect the reduction in ownership interest. In 1994, BMG's ownership interest was diluted to 51.4 percent due to employee stock options that were exercised during the year. In June 1994 the Company recorded a $1.2 million adjustment to reduce the carrying value of its investment in NML to reflect this reduction in ownership interest. These adjustments were charged to shareholders' equity and not charged against net income because the Company believed the carrying value of its investment to be fully recoverable. Based on existing Niugini Mining employee incentive option schemes, BMG's ownership could be diluted to as low as 50.03 percent.
At December 31, 1994, the carrying value attributed to the Company's share of the Lihir gold project exceeded its proportionate share of Niugini Mining's historical cost basis in the project by $135.9 million. Such excess will be amortized based on the estimated recoverable reserves attributable to the Lihir project upon commencement of production.
Interest costs amounting to $6 million in 1994, 1993 and 1992 each were capitalized in connection with the Lihir gold project.
Inti Raymi -
On March 8, 1994, the Company purchased an additional 3 percent of Inti Raymi's outstanding stock for $5.2 million from Zeland Mines, S.A., a Panamanian mining company ("Zeland") to increase the Company's ownership interest to 88 percent. As of December 31 1994, the Company had invested an aggregate of $41.1 million in cash and 9 million of its common shares (valued at approximately $76.3 million) to acquire its 88 percent equity interest in Inti Raymi.
At December 31, 1994, the carrying value, net of accumulated amortization, attributed to the Company's share of the Kori Kollo gold deposit (including a $16.5 million deferred tax charge capitalized in connection with the Westworld purchase acquisition) (See Note 5), exceeded its proportionate share of Inti Raymi's historical cost basis in the deposit by $93.6 million. This excess has been capitalized to property and is being amortized by the units of production method based on the deposit's estimated recoverable reserves. Amortization of the excess cost amounted to $11.1 million, $8.6 million and $3.0 million in 1994, 1993 and 1992, respectively.
Interest costs amounting to $.4 in 1994, $.6 million in 1993 and $2.8 million in 1992 were capitalized in connection with the Kori Kollo project.
Note 8. COMMON STOCK AND STOCK OPTIONS
Reference is made to Notes 9 and 10 for discussion regarding the number of shares of common stock reserved for issuance for the conversion of the Company's outstanding convertible preferred stock and convertible subordinated debentures.
Stock Options -
The Company has two stock option plans available to officers and key employees covering non-qualified and incentive stock options. A total of 1,980,000 shares of common stock are reserved for issuance under the 1985 Stock Option Plan, of which 52,073 shares remained available for granting at December 31, 1994. At December 31, 1993, there were 8,549 shares available for granting under this plan. During 1994, 45,023 stock option shares expired and were put back into the available pool.
During 1994, the 1994 Long Term Incentive Stock Option Plan was approved by the Company's shareholders. Under this plan, a total of 4,000,000 shares of the Company's common stock are reserved for issuance. At December 31, 1994, 3,589,100 shares remained available for granting. During 1994, 3,900 stock option shares expired and were put back into the available pool.
Non-employee directors of the Company are granted non-qualified stock options under the Non-qualified Stock Option Plan for Outside Directors, which was approved by the Company's shareholders on April 21, 1992. Under this plan, a total of 250,000 shares of the Company's common stock are reserved for issuance, of which 160,500 shares remained available for granting at December 31, 1994. At December 31, 1993, there were 177,500 shares available for granting under the plan.
Options granted under the above plans are exercisable under the terms of the respective option agreements at the market price of the common stock at the date of grant, subject to anti-dilution adjustments in certain circumstances. Payment of the exercise price may be made in cash or in shares of common stock previously owned by the optionee, valued at current market value.
Under the deferred income stock option plan for officers and directors, each participant may elect to receive a non-qualified stock option in lieu of a portion of his compensation. A maximum of 2,000,000 shares of common stock is issuable under the plan, of which 1,751,391 shares remained available for granting at December 31, 1994. At December 31, 1993, 1,774,641 shares remained available for granting under the plan. Options granted pursuant to the plan become exercisable at the beginning of the calendar year immediately following the year in which the option was granted. They expire no later than 10 years after the date of grant.
The amount of deferred compensation is accrued as compensation expense during the period earned.
Additional information for 1994 related to the Company's stock option plans follows:
At December 31, 1994, expiration dates for the outstanding options ranged from July 1, 1996 to May 9, 2004. The weighted average exercise price per share was $9.00.
Additionally, the Company has reserved 950,000 shares for issuance under restricted stock and stock award plans. At December 31, 1994, a total of 698,611 shares remained available for issuance under these plans. Compensation expense related to the plans is accrued ratably over periods vested.
Note 9. PREFERRED STOCK AND STOCK RIGHTS
The Company's Board of Directors is authorized to divide the preferred stock into series. With respect to each series the Board may determine the dividend rights, dividend rates, conversion rights and voting rights (which may be greater or less than the voting rights of the common stock). The Board may also determine the redemption rights and terms, liquidation preferences, sinking fund rights and terms, the number of shares constituting the series and the designation of each series.
Pursuant to their authority to divide the preferred stock into series, the Board of Directors in 1988 designated 2,000,000 shares of preferred stock as "Series A Junior Participating Preferred Stock" for possible issuance upon the exercise of stock rights as described below.
Stock Rights -
Since November 21, 1988, when the Company's Board of Directors declared a dividend of one right for each outstanding share of the Company's common stock, each share of the Company's outstanding common stock carries with it such right. Each right entitles the holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $1.00 per share, for an exercise price of $60, subject to adjustment. The rights expire on November 10, 1998. They will not be exercisable nor transferable apart from the common stock until such time as a person or group acquires 20 percent of the Company's common stock or initiates a tender offer that will result in ownership of 30 percent of the
Company's common stock. In the event that the Company is merged, and its common stock is exchanged or converted, the rights will entitle the holders to buy shares of the acquirer's common stock at a 50 percent discount. Under certain other circumstances, the rights can become rights to purchase the Company's common stock at a 50 percent discount. The rights may be redeemed by the Company for one cent per right at any time until 10 days following the first public announcement of a 20 percent acquisition of beneficial ownership of the Company's common stock.
Convertible Preferred Stock -
On May 20, 1993, the Company received $111 million in net proceeds from the issuance of 2.3 million shares of its convertible preferred stock with a liquidation preference of $50 per share plus any accrued and unpaid dividends. Each share of preferred stock will pay an annual cumulative dividend of $3.25 and is convertible at any time at the option of the holder into 4.762 shares of Battle Mountain Gold Company common stock. The preferred stock is redeemable at the option of the Company solely for shares of the Company's common stock beginning May 15, 1996. There are 11 million shares of the Company's common stock reserved for issuance upon conversion of the preferred stock.
Note 10. DEBT
The Company had the following long-term debt outstanding as of December 31 (in thousands):
On January 4, 1990, the Company received net proceeds of $97.4 million upon the completion of a $100 million Euromarket issue of 6 percent convertible subordinated debentures, due January 4, 2005. The debentures are convertible into shares of the Company's common stock at a conversion price of $20 5/8 per share, subject to adjustment in case of certain events. The debentures are now redeemable at the Company's option at any time at par value plus accumulated interest. There are 4.8 million shares of the Company's common stock reserved for issuance upon conversion of the debentures. Interest payments are due annually on the anniversary date of the issuance. Proceeds from the issuance were added to working capital and
used for general corporate purposes, including mineral acquisitions and development of properties. There are no sinking fund requirements imposed under the debenture agreement.
During 1992, the Company's majority-owned subsidiary, Inti Raymi, established separate but coordinated term credit facilities with the Overseas Private Investment Corporation (OPIC), International Finance Corporation (IFC) and Corporacion Andina de Fomento (CAF) for the development of its Kori Kollo expansion project in Bolivia. Each loan is secured by a lien on the project and is to be repaid in semi-annual installments which commenced in December 1993 and will continue through June 2000, with certain provisions for accelerated repayment in the event of substantial Kori Kollo reserve losses or significantly improved gold market conditions. Through certain ratio tests, each loan may restrict payments of intercompany debt and dividends by Inti Raymi to the owners of shares of its capital stock. Additional covenants exist which limit fixed asset purchases, additional debt and liens, and require compliance with applicable environmental laws. During 1993, the project met the prerequisite physical and financial completion tests as set forth in the facility agreements and in April 1994 achieved project completion status from the lenders. The most significant implication of project completion is the ability for Inti Raymi to begin paying dividends and repaying loans to the Company. Additionally, BMG is no longer required to provide financial support to ensure Inti Raymi's ability to meet its obligations.
The OPIC and IFC loan agreements require that the current mining plan indicate that production from the Kori Kollo mine extends at least three years beyond the final scheduled principal payment ("Reserve Life Provision"). Failure to meet this Reserve Life Provision results in the suspension of all debt repayments from Inti Raymi to its shareholders and all Inti Raymi dividend payments until such time as compliance with the Reserve Life Provision is achieved by either a pre-payment of a sufficient portion of the debt or an increase in the Kori Kollo mine ore reserves. The IFC and CAF loan agreements contain provisions which entitle their respective agencies to receive principal pre-payments proportionate to those received by OPIC. In the third quarter of 1994, the Company completed a rescheduling of the life of mine production and observed that the new schedule was not in compliance with the Reserve Life Provision due to more accelerated mining and production than originally planned. The current plan indicates that production will extend approximately 2.8 years beyond the date of the final scheduled principal payment. To allow continuing payments of dividends and the repayment of intercompany debts, Inti Raymi obtained a temporary waiver, permitting noncompliance with the Reserve Life Provision until June 30, 1996. Inti Raymi is currently undertaking evaluations in areas of identified mineralization to be able to add the reserves necessary to satisfy the Reserve Life Provision within the agreed time frame.
The OPIC facility provided for borrowings of $40 million. Interest rates under the facility are based on LIBOR plus 2.0 percent. Additionally, $4.1 million of previously existing OPIC loans to Inti Raymi were restructured as loan obligations under the terms of the agreement, with the exception that they are subject to their originally agreed interest rates. As of December 31, 1994 and 1993, Inti Raymi owed $34.7 million and $41.0 million, respectively, under these combined facilities. Interest charges for the years ended December 31, 1994, 1993 and 1992,
were based on weighted average interest rates of 6.7 percent, 5.6 percent and 6.2 percent, respectively.
Under the IFC commitment, borrowings of $40 million were made. The interest rate for the non-convertible portion of the loan is based on LIBOR plus 2.375 percent, but Inti Raymi has the right to request an interest rate cap or collar, or may elect at any time to pay a fixed rate of interest. Of the total IFC borrowings, $5 million represents a convertible loan due on March 1, 2002, carrying a fixed annual interest rate of 11 percent with an additional interest rate provision which varies with the price of gold. Interest charges for the years ended December 31, 1994, 1993 and 1992 were based on weighted average interest rates of 6.9 percent, 6.0 percent and 6.2 percent, respectively, for the non-convertible portion of the loan and 13.7 percent, 12 percent and 11 percent, respectively, for the convertible portion of the loan. The loan may be converted, at IFC's option, into up to a 3.98 percent equity interest in Inti Raymi. Upon the conversion of the convertible loan into equity, the Company and Inti Raymi's minority owner would have their interests in the capital stock of Inti Raymi diluted proportionately. Each share of Inti Raymi common stock issued by Inti Raymi as a result of such conversion will carry a put option which, when exercised by IFC, would require BMG and Inti Raymi's minority shareholder to purchase such share at its fair market value as determined at the time the put is exercised. As of December 31, 1994 and 1993, Inti Raymi owed $32.5 million and $37.5 million, respectively, under this facility.
The CAF facility provided for borrowings of $15 million. Interest rates under the facility are based on LIBOR. These funds were obtained from several sources. CAF charged a supervision and oversight fee and a commitment fee in addition to fees charged by the participants in the funding. As of December 31, 1994 and 1993, Inti Raymi owed $11.8 million and $13.9 million, respectively, under this facility. Interest charges for the years ended December 31, 1994, 1993 and 1992, were based on weighted average interest rates of 5.5 percent 4.7 percent and 4.8 percent, respectively.
The Company has a committed revolving credit agreement with a syndicate of seven banks, led by Citibank N.A. as agent. At December 31, 1994, the facility would provide unsecured borrowings up to $84.4 million. The facility provides for quarterly reductions in commitments of $9.4 million which are scheduled to continue until the facility termination date of December 31, 1996. As a result of 1992 amendments, the facility permits the Company to pledge its shareholdings in Inti Raymi and restricts the amounts that the Company may borrow under the facility if the Company does not meet certain net worth criteria. The amendments also impose additional facility costs in the form of amendment arrangement fees and increased interest rates. Interest rates under this facility are based on the facility agent bank's base rate, LIBOR or applicable certificate of deposit rates. There were no interest charges related to this facility for the year ended December 31, 1994, since the Company did not make any borrowings under it in 1994. Interest charges for the years ended December 31, 1993 and 1992, were based on weighted average interest rates of 3.9 to 6.0 percent and 4.0 to 6.5 percent, respectively. Other costs associated with the facility include commitment fees of one-eighth percent per annum on the unused portion of the facility and facility fees of one-eighth percent per annum of the average daily commitment. The credit agreement imposes certain financial covenants upon the Company which include covenants relating to leverage, net worth and working capital, as well as certain
restrictions on liens, additional debt or lease obligations and the acquisition or disposition of major assets. Additionally, the agreement sets forth restrictions limiting the amount of dividends the Company may pay based on the Company's equity position applied on a cumulative basis from the date of the agreement. As of December 31, 1994, cumulative dividend restriction levels exceeded cumulative dividends paid or declared by $119.9 million. No amounts were outstanding under this revolving credit facility as of December 31, 1994 or 1993.
In August 1992, the Company established a $15 million uncommitted revolving credit facility with the Union Bank of Switzerland. Interest rates under the facility are variable, based on either the bank's base rate or a negotiated rate. There are no additional costs or financial restrictions imposed on the Company by this facility. No amounts were outstanding under this revolving credit facility as of December 31, 1994 or 1993; however, letters of credit amounting to $4.8 million had been issued against this facility as of December 31, 1994. There were no interest charges for the year ended December 31, 1994 since the Company did not borrow against this facility in 1994. Interest charges for the year ended December 31, 1993 and 1992 were based on weighted average interest rates of 3.5 to 4.3 percent and 3.4 to 4.5 percent, respectively.
Maturities of the Company's long-term debt for each of the next five years are $13.4 million.
As of February 9, 1994, BMG has effective a registration statement under the Securities Act of 1933, as amended, for what is commonly referred to as a "universal shelf" filing covering up to $200 million of its debt securities, preferred stock, depository shares, common shares and warrants which BMG may elect to offer from time to time and in any combination.
Note 11. MAJOR CUSTOMERS AND EXPORT SALES
During 1994, sales to three separate buyers accounted for $68.3 million, $63.1 million and $36.4 million of total sales, respectively, representing 71.3 percent of total sales. International sales for 1994 were $235.3 million, of which $46.2 million were export sales of U.S. product. In 1993, sales to three separate buyers of $55.3 million, $36.2 million and $25.3 million, respectively, accounted for 56.4 percent of total sales. Of the Company's $205.7 million international sales in 1993, $47.9 million were export sales of U.S. product. For 1992, 78.1 percent of the Company's total sales were distributed among five separate buyers who accounted for $34.9 million, $30.0 million, $28.9 million, $28.6 million and $27.7 million in sales, respectively. International sales of $192.2 million in 1992 included $83.6 million in export sales of U.S. product. Alternate buyers are available to replace the loss of any of the Company's principal customers.
All sales of the Company's products are made to precious metals smelters, refiners or traders. Accordingly, the precious metals industry has substantial influence over the market for the Company's products.
Note 12. GEOGRAPHIC SEGMENT INFORMATION
The following table sets forth certain financial information relating to international and domestic operations:
Note 13. COMMITMENTS AND CONTINGENCIES
Total operating lease rental expenses (exclusive of mineral leases) were $2.3 million, $1.4 million and $1.6 million for 1994, 1993 and 1992, respectively.
Aggregate minimum rentals (exclusive of mineral leases) subsequent to December 31, 1994, under non-cancelable leases for the years ending December 31, 1995 to 1999, are estimated to be $3.0 million, $2.8 million, $2.3 million, $1.6 million and $.8 million, respectively. Lease commitments beyond 1999 total $2.4 million.
Pursuant to pricing provisions as set out in dore customer contracts, as of December 31, 1994, the Company had committed to sell 8,800 ounces of gold contained in dore valued at approximately $3.3 million at prices determined during various pricing periods in 1994, none of which exceeds 45 days. The average price of gold sold under this commitment is approximately $380 per ounce.
All of the Company's mining and processing operations are subject to reclamation requirements. The Company believes it is making sufficient accruals for known reclamation obligations and has accrued an aggregate of $10.7 million at December 31, 1994. The accrued reclamation charges are included as long-term liabilities in the Company's consolidated balance sheet. At the Battle Mountain complex, assuming the Phoenix project is permitted and proceeds, aggregate reclamation expenditures required to be spent in the area are expected to amount to approximately $7.7 million, of which $3.1 million remained accrued at December 31, 1994. Activity expected to be performed as part of the development and operation of the Phoenix project will eliminate certain reclamation costs. If this project is not permitted and does not proceed, reclamation expenditures would be expected to be up to $3 million higher than current estimates. Estimated reclamation obligations and related amounts accrued as of December 31, 1994, respectively, for each of the Company's other operating mines is as follows: San Luis $3.3 million and $1.4 million, Pajingo $2.6 million and $1.5 million, Kori Kollo $10.0 million and $1.1 million and Red Dome $4.4 million and $3.8 million. Reclamation expenditures for the San Cristobal mine are not expected to be material.
Note 14. FORWARD SALES AND HEDGING
The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate and commodity price risks.
Interest rate cap agreements are used to reduce the potential impact of increases in interest rates on floating-rate long-term debt. At December 31, 1994, Inti Raymi was party to three interest rate cap agreements, each with a term of three years. The agreements entitle the Inti Raymi to receive from counterparties on a quarterly basis the amounts, if any, by which Inti Raymi's interest payments on a portion of its LIBOR based floating-rate Kori Kollo project financing exceed various fixed rates over the term of the caps. The fixed rates in the cap agreements gradually escalate from 4.5 percent in 1994 to 7.2 percent in 1997. Inti Raymi has hedged 50 percent of its net interest rate exposure currently related to the Kori Kollo LIBOR based project financing. The hedge increases to 100 percent of its exposure by June 1996. Inti Raymi has not hedged any of its exposure subsequent to December 1997. The net unamortized cost of the premiums paid for these caps amounting to $.7 million at December 31, 1994 has been included in other assets.
The Company uses fixed forward sales contracts, spot deferred sales contracts and put options to hedge anticipated sales of gold, silver and copper. The following table summarizes the Company's forward sales contracts at December 31, 1994:
The following table summarizes the Company's forward sales contracts and put options at December 31, 1993:
Deferred costs associated with forward sales contracts amounted to $1.5 million at December 31, 1994 and 1993. There were no deferred costs associated with put options at
December 31, 1994. Deferred costs associated with put options amounted to $.6 million at December 31, 1993.
At December 31, 1994, in the aggregate, the Company's forward sales contracts were approximately at the market based on the then current spot price of $381 per ounce and an exchange rate of US$.77 to A$1. At December 31, 1993 the aggregate amount by which the net market value of the Company's forward sales contracts is less than the then current spot price of $390 per ounce of gold and an exchange rate of US$.67 to A$1 is $19.4 million, of which $6.2 million is attributable to minority interests.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to its interest rate caps and forward sales contracts, but does not expect any counterparties to fail to meet their obligations. The Company does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of counterparties.
Note 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1994 and 1993. SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
The carrying amounts shown in the table are included in the Consolidated Balance Sheet under the indicated captions.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
CASH, CASH EQUIVALENTS, TRADE RECEIVABLES, AND TRADE PAYABLES: The carrying amounts approximate fair value because of the short maturity of those instruments.
OTHER ASSETS: The amounts reported relate to the interest rate cap agreements described in Note 14. The carrying amount comprises the unamortized premiums paid for the contracts. The
fair value is estimated using option pricing models and essentially values the potential for the caps to become in-the-money through changes in interest rates during the remaining terms.
DEBT: The fair value of the Company's Convertible subordinated debentures is based on the quoted market price of the debentures at the reporting date. Due to the generally variable interest rate features of the OPIC, IFC and CAF loans, the Company believes the carrying amounts approximate the fair value of this debt at the reporting date.
The Company has a letter of credit outstanding for $3.3 to ensure that the reclamation of the Company's San Luis mine will be performed as specified in the operating permit issued by the State of Colorado. The Company has letters of credit totaling $1.5 million and corporate guarantees totaling $4.5 million to ensure that the reclamation of the Battle Mountain Complex mines will be performed as specified in the operating permits issued by the State of Nevada. In addition, the Company has a letter of credit outstanding for $1.5 million as collateral for the issuance of bonds to be issued after December 31, 1994. The Company believes the carrying value of these financial instruments approximates their fair market value.
SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED)
QUARTERLY RESULTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the captions "Nominees" and "Directors with Terms Expiring in 1996 and 1997" set forth under "Election of Three Directors and Director Compensation" in the Company's definitive Proxy Statement for its annual meeting of shareholders to be held April 27, 1995, as filed within 120 days of December 31, 1994, pursuant to Regulation 14A under the Security Exchange Act of 1934, as amended (the "Company's 1995 Proxy Statement"), is incorporated herein by reference. See also "Executive Officers of the Registrant" appearing in Part I of this Annual Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the captions "Board Organization and Committees" set forth under "Election of Three Directors and Director Compensation" and "Executive Compensation" (other than the Compensation and Stock Option Committee Report on Executive Compensation) in the Company's 1995 Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Security Ownership" set forth under "Election of Three Directors and Director Compensation" in the Company's 1995 Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Supplementary Data. Consolidated financial statements of the Company and its subsidiaries are incorporated under Item 8 of this Form 10-K.
(a)(2) Financial Statement Schedules.
Schedule I. Condensed Financial Information of Registrant............ S-1
Other schedules of Battle Mountain Gold Company and subsidiaries are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto.
(a)(3) Exhibits: See attached exhibit index, page E-1, which also includes the management contracts or compensatory plans or arrangements required to be filed as exhibits to this Annual Report by Item 601 (10)(iii) of Regulation S-K.
(b) Reports on Form 8-K: None
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
BATTLE MOUNTAIN GOLD COMPANY
By /s/ Karl E. Elers ----------------------------- Karl E. Elers CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Date: March 27, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date --------- ----- ---- /s/ Karl E. Elers Chairman of the Board, March 27, 1995 - -------------------------- Chief Executive Officer (Karl E. Elers) and Director (Principal Executive Officer)
/s/ R. Dennis O'Connell Vice President - Finance and March 27, 1995 - -------------------------- Chief Financial Officer (R. Dennis O'Connell) (Principal Financial and Accounting Officer)
DOUGLAS J. BOURNE* DELO H. CASPARY* CHARLES E. CHILDERS* JACK R. CROSBY* RODNEY L. GRAY* A majority of the Directors March 27, 1995 TED H. PATE* of the Registrant KENNETH R. WERNEBURG*
*By /s/ Karl E. Elers ---------------------- (Karl E. Elers, ATTORNEY IN FACT)
BATTLE MOUNTAIN GOLD COMPANY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET
S-1
BATTLE MOUNTAIN GOLD COMPANY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENT OF INCOME
This condensed statement should be read in conjunction with the Consolidated Financial Statements and Notes thereto which are included in Item 8 herein.
S-2
BATTLE MOUNTAIN GOLD COMPANY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENT OF CASH FLOWS
This condensed statement should be read in conjunction with the Consolidated Financial Statements and Notes thereto which are included in Item 8 herein.
S-3
INDEX OF EXHIBITS
EXHIBIT NO. DOCUMENT - ----------- --------
*3(a) -- Restated Articles of Incorporation of the Company, as amended and restated through May 11, 1988 (Exhibit 4(a) to the Company's Registration Statement on Form S-3 as filed with the Commission on January 14, 1994; Registration No. 33-51921).
*3(b) -- Certificate of Resolution Establishing Designation, Preferences and Rights of $3.25 Convertible Preferred Stock (Exhibit 4(b) to the Company's Registration Statement on Form S-3 as filed with the Commission on January 14, 1994; Registration No. 33-51921).
*3(c) -- Bylaws of the Company, as amended through April 27, 1988 (Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1988; File No. 1-9666).
*4(a)(1) -- Rights Agreement, dated November 10, 1988, between the Company and NCNB Texas National Bank, as Rights Agent (Exhibit to the Company's Form 8 filed with the Commission on November 30, 1988, amending the Company's Current Report on Form 8-K dated November 21, 1988; File No. 1-9666).
*4(a)(2) -- First Amendment to Rights Agreement, dated July 30, 1992, between the Company and the Bank of New York, as successor Rights Agent (Exhibit 4(a)(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666).
*4(b) -- Specimen Stock Certificate for the Common Stock of the Company (Exhibit 4(b) to the Company's Annual Report on Form 10-K for the year ended December 1, 1988; File No. 1-9666).
*4(c) -- Fiscal and Paying Agency Agreement, dated as of January 4, 1990, between the Company and Citibank, N.A., Fiscal Agent (Exhibit 4(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989; File No. 1-9666).
*4(d)(1) -- Credit Agreement, dated as of December 29, 1989, among the Company, the banks named therein and Citibank, N.A., as agent, as amended (Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992; File No. 1-9666).
E-1
*4(d)(2) -- Amendment to Credit Agreement, dated April 30, 1994, among the Company, the lenders parties thereto and Citibank, N.A., as agent (Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994; File No. 1-9666).
*4(e) -- Investment Agreement, dated May 22, 1992, between Empresa Minera Inti Raymi S.A. and International Finance Corporation (Exhibit 4(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666).
*4(f)(1) -- Finance Agreement, dated as of September 14, 1992, between Empresa Minera Inti Raymi S.A. and Overseas Private Investment Corporation (Exhibit 4(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666).
4(f)(2) -- First Amendment to Finance Agreement and Limited Waiver, effective as of December 31, 1994, between Empresa Minera Inti Raymi S.A. and Overseas Private Investment Corporation.
*4(g) -- Loan Agreement, dated June 29, 1992, between Empresa Minera Inti Raymi S.A. and Corporacion Andina de Fomento (English translation) (Exhibit 4(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666).
+*10(a)(1) -- Battle Mountain Gold Company 1988 Deferred Income Stock Option Plan, as amended through September 1, 1988 (Exhibit 10(a) to the Company's Post-Effective Amendment No. 1 to Registration Statement on Form S-8 as filed with the Commission on September 2, 1988; Registration No. 33-22146).
+*10(a)(2) -- Amendment to Battle Mountain Gold Company 1988 Deferred Income Stock Option Plan dated February 23, 1992 (Exhibit 10(a)(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666).
+10(a)(3) -- Amendment to Battle Mountain Gold Company 1988 Deferred Income Stock Option Plan effective February 9, 1995.
+10(a)(4) -- Specimen of Deferred Income Stock Option Agreement for non-employee directors of the Company, as amended and restated.
+*10(a)(5) -- Specimen of Deferred Income Stock Option Agreement for officers of the Company, as amended and restated (Exhibit 10(a)(4) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666).
E-2
+*10(b)(1) -- 1985 Stock Option Plan of the Company, as amended and restated effective April 7, 1993 (Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993; File No. 1-9666).
+*10(b)(2) -- Specimen of the Company's 1985 Stock Option Plan Non-Qualified Stock Option Agreement for executive officers of the Company (Exhibit 10(a)(1) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993; File No. 1-9666).
+*10(b)(3) -- Specimen of the Company's 1985 Stock Option Plan Incentive Stock Option Agreement for executive officers of the Company (Exhibit 10(a)(2) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993; File No. 1-9666).
+*10(c)(1) -- Battle Mountain Gold Company 1986 Restricted Stock Plan, as amended and restated (Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1988; File No. 1-9666).
+*10(c)(2) -- Specimen of Agreement under the Company's 1986 Restricted Stock Plan (Exhibit 10(c)(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666).
+*10(d)(1) -- Battle Mountain Gold Company 1988 Long-Term Performance Unit Plan, as amended and restated effective July 1, 1992 (Exhibit 10(d)(1) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666).
+*10(d)(2) -- Specimen of Agreement under the Company's 1988 Long-Term Performance Unit Plan (Exhibit 10(d)(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666).
+*10(e)(1) -- Battle Mountain Gold Company Deferred Compensation Plan (Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993; File No. 1-9666).
+*10(e)(2) -- Specimen of the Company's Deferred Compensation Agreement for directors of the Company (Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986; File No. 0-13728).
+*10(f)(1) -- Battle Mountain Gold Company Executive Supplemental Retirement Income Plan (Exhibit 10(f)(1) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666).
E-3
+-*10(f)(2) -- Specimen of the Company's Executive Supplemental Retirement Income Plan Agreement (Exhibit 10(f)(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666).
+-*10(g)(1) -- Specimen of the Company's Severance Agreements with officers of the Company regarding certain benefits payable in the event of change of control of the Company (Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986; File No. 0-13728).
+*10(g)(2) -- Severance Agreement, dated June 5, 1992, between the Company and R. Dennis O'Connell (Exhibit 10(g)(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666).
+*10(h) -- Battle Mountain Gold Company Contribution Equalization Plan, as amended and restated effective as of November 10, 1988 (Exhibit 10(h) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666).
+*10(i) -- Battle Mountain Gold Company Executive Productivity Bonus Plan, as amended and restated effective January 1, 1994 (Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993; File No. 1-9666).
*10(j)(1) -- Battle Mountain Gold Company Non-Qualified Stock Option Plan for Outside Directors. (Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991; File No. 1-9666).
10(j)(2) -- Amendment to Battle Mountain Gold Company Non-Qualified Stock Option Plan for Outside Directors effective January 1, 1995.
*10(j)(3) -- Specimen of Director's Stock Option Agreement under the Company's Non-Qualified Stock Option Plan for Outside Directors (Exhibit 10(j)(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992; File No. 1-9666).
*10(k) -- Heads of Agreement, dated March 23, 1989, among the Company, Niugini Mining Limited and the individuals listed on the signature page thereto (Exhibit 10(k) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988; File No. 1-9666).
*10(l) -- Mining Lease, dated May 5, 1987, granted by the Queensland (Australia) Department of Mines to Pajingo Gold Mine Pty. Ltd. (Exhibit 28(a) to the Company's Current Report on Form 8-K dated February 14, 1990; File No. 1-9666).
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*10(m) -- Mining Lease, dated October 1, 1987, as amended, between Earth Sciences, Inc. and Battle Mountain Gold Company (Exhibit 28(b) to the Company's Current Report on Form 8-K dated February 14, 1990; File No. 1-9666).
+*10(n)(1) -- 1994 Long-Term Incentive Plan of Battle Mountain Gold Company, as effective April 21, 1994 (Exhibit 10(a)(1) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994; File No. 1-9666).
+*10(n)(2) -- Specimen of the Company's 1994 Long-Term Incentive Plan Non-Qualified Stock Option Agreement (Exhibit 10(a)(2) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994; File No. 1-9666).
+*10(n)(3) -- Specimen of the Company's 1994 Long-Term Incentive Plan Incentive Stock Option Agreement (Exhibit 10(a)(3) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994; File No. 1-9666).
+*10(n)(4) -- Specimen of the Company's 1994 Long-Term Incentive Plan Restricted Stock Agreement (Exhibit 10(a)(4) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994; File No. 1-9666).
+10(n)(5) -- Specimen of the Company's 1994 Long-Term Incentive Plan Performance Unit Agreement.
+10(o)(1) -- Specimen Split-Dollar Agreement (Individual).
+10(o)(2) -- Specimen Amendment to Split-Dollar Agreement (Individual).
+10(o)(3) -- Specimen Split-Dollar Agreement (Trustee).
+10(o)(4) -- Specimen Amendment to Split-Dollar Agreement (Trustee).
11 -- Computation of Earnings Per Common Share.
12 -- Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Dividends.
21 -- Subsidiaries of the Company.
23(a) -- Consent of Arthur Andersen LLP.
23(b) -- Consent of Coopers & Lybrand.
24 -- Powers of Attorney.
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27 -- Financial Data Schedule for the year ended December 31, 1994.
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* Incorporated by reference as indicated.
+ Represent management contracts or compensatory plans or arrangements required to be filed as exhibits to this Annual Report by Item 601(10)(iii) of Regulation S-K.
- - Pursuant to Instruction 2 accompanying paragraph (a) and the Instruction accompanying paragraph (b)(10)(iii)(B)(6) of Item 601 of Regulation S-K, the registrant has not filed each executive officer's individual Executive Supplemental Retirement Income Agreement with the Company as an exhibit hereto; the registrant has agreements substantially identical to Exhibit 10(f)(2) above with each of Karl E. Elers, Kenneth R. Werneburg, Andre, Douchane, Joseph L. Mazur, R. Dennis O'Connell, Robert J. Quinn and Fred B. Reisbick except that the monthly benefits for such executive officers under such agreements are $12,917, $10,292, $6,083, $6,125, $6,458, $5,750 and $4,417, respectively. In addition, the registrant has not filed each executive officer's individual Severance Agreement with the Company as an exhibit hereto; the registrant has agreements substantially identical to Exhibit 10(g)(1) above with each of Messrs. Elers, Werneburg, Mazur, Quinn, Douchane and Reisbick.
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