ITEM 3. LEGAL PROCEEDINGS
The Company's 50% owned Chilean contractual mining company CMM has entered into arbitration proceedings in Chile with the contractor that designed and built the Refugio mine. CMM contends that the contractor was negligent in both the design and the construction of the facility, and should be held responsible for the cost of repairs as well as lost profits. As part of the same proceedings, the contractor is seeking to recover costs that they allegedly incurred while building the mine and which, they claim, were outside their scope of work and responsibility. Although the outcome of the arbitration proceedings cannot be determined at the current time, management is of the opinion that the outcome will not materially affect the financial position, results of operations or cash flows of the Company.
In August 1998, the U.S. Environmental Protection Agency served Kinam with a Unilateral Administrative Order ("UAO") as a Potentially Responsible Party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and Solid Waste Disposal Act ("SWDA"), requiring that Kinam, along with other PRPs, remove certain contaminated materials from the PRC Patterson Inc. site ("the Site") in Patterson, California. Kinam shipped waste oil to the Site from 1994 to 1996. Subsequent to that order Kinam joined with certain other PRPs to form the Patterson Environmental Response Trust, an entity which was created for the purpose of conducting the removal actions required by EPA. All materials had been removed and disposed of by the Trust by the end of the year 2000. Kinam's share in removal costs, nominally estimated at 5% of the total costs incurred,
will ultimately be determined once confirmation of the actual barrels of used oil is completed. The Company does not anticipate that this matter will have a material effect on the Company's financial position or results of operations.
In October 1996, an alleged shareholder derivative action was filed in the Court of Chancery of Delaware on behalf of a stockholder of the Company, entitled Harry Lewis v. Milton H. Ward, et al., C.A. No. 15255-NC, against Cyprus Amax, the directors of the Company and the Company as a nominal defendant. The complaint alleges, among other things, that the defendants engaged in self-dealing in connection with the Company's entry in March 1996 into a demand loan facility provided by Cyprus Amax. The complaint seeks, among other things, a declaration that the demand loan facility is not entirely fair to the Company and damages in an unspecified amount. The Company believes that the complaint is without merit and intends to defend the matter vigorously.
In March 1994, the U.S. Forest Service notified the Company that it considers the Company to be a PRP under CERCLA, jointly and severally liable with other PRP's for damages attributable to alleged releases of hazardous substances from the Siskon Mine, located in the Klamath National Forest in Siskiyou County, California. The Company conducted a limited exploration drilling program in the summer of 1991 on property at the Siskon mine site which the Company believes is not involved in the alleged releases. Based on facts currently known to management, the Company does not anticipate that this matter will have a material effect on the Company's financial condition or results of operations.
The Company is also involved in legal proceedings and claims which arise in the ordinary course of its business. The Company believes these claims are without merit and is vigorously defending them. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON AND PREFERRED EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the Kinross merger, the common stock of the Company was listed on the New York Stock Exchange (AU) and the Toronto Stock Exchange (AXG). Subsequent to the merger, all of the outstanding shares of Common Stock were converted into Kinross common stock.. Following the completion of the Kinross merger, the Company terminated the registration of its common stock under the Exchange Act and its listing of the common stock on the New York Stock Exchange. There is currently no public market for the common stock of the Company.
The Series B Convertible Preferred Stock of the Company is listed on the New York Exchange (KPRB) and the number of stockholders of record as of March 28, 2001 was 56. In the absence of earnings, the Board of Directors has suspended the quarterly dividends on the Series B Convertible Preferred Stock beginning with the dividend payable in August 2000. The decision was taken by the Board as a cash conservation measure due to continuing low gold prices. Regular dividends totaling $3.4 million were paid in February and May of 2000.
The following table sets forth for the periods indicated the high and the low sale prices per share of the Series B Convertible Preferred Stock as reported on the New York Stock Exchange Composite Tape and the dividends paid on such stock.
STOCK PRICES AND DIVIDENDS PER SHARE
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
KINAM GOLD INC. AND SUBSIDIARIES FOR THE YEARS ENDED DECEMBER 31 (IN MILLIONS EXCEPT PER SHARE AMOUNTS AND PERCENTAGES, PRODUCTION AND SALES OUNCES, AND AMOUNTS PER OUNCE)
(1) In the fourth quarter of 2000, following a comprehensive evaluation of its mining properties based on an assumed gold price of $300, the Company determined that the net recoverable amounts of the Refugio mine were less than the net book value. As a result of this review the Company recorded a $26.7 million pre-tax writedown of the Refugio mine. In addition, after a thorough review of various closure costs, the remaining carrying value and the current environment for surplus mining equipment and facilities, the remaining book value of the Hayden Hill mine, the Guanaco mine, the Haile property and other non-core properties, principally the Sleeper and Wind Mountain mines were written off. These special items increased the net loss by $37.7 million or $0.41 per common share.
In the fourth quarter of 1999, the Company recorded a $72.9 million pre-tax writedown of the Fort Knox mine, a $10.1 million pre-tax writedown of the Refugio mine and a $16.5 million pre-tax writedown of the Haile property. These special items increased the net loss by $99.5 million, or $1.08 per common share.
In the fourth quarter of 1998, the Company recorded a $53.1 million pre-tax writedown of the Refugio mine and a $140.3 million pre-tax writedown of the Fort Knox mine. In the second quarter of 1998, the Company recorded an $11.5 million loss on the early extinguishment of debt. These special items increased the net loss by $204.9 million, or $2.01 per common share.
In the fourth quarter of 1996, the Company recorded a $35.5 million pre- tax writedown of the Guanaco mine and an unrelated $10 million deferred tax benefit. These special items increased the net loss by $25.5 million, or $.26 per common share.
(2) Average costs weighted by ounces of gold produced at each mine.
(3) The Company follows the Gold Production Cost Standard developed by the Gold Institute in order to facilitate comparisons among companies in the gold industry. Total cash costs include royalties and production taxes, but exclude reclamation costs.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The Company reported a 2000 net loss of $53.2 million, or $0.65 per share after preferred dividends on revenues of $210.8 million, compared with a 1999 net loss of $112.7 million, or $1.30 per share after preferred dividends on revenues of $214.1 million, and a 1998 net loss of $202.3 million, or $2.05 per share after preferred dividends, on revenues of $268.1 million. The 2000 results included a $26.7 million writedown of the Refugio mine and an $11.0 million writedown of other properties in various stages of closure necessitated by continuing low gold prices. The 1999 results included a $10.1 million writedown of the Refugio mine, a $72.9 million writedown of the Fort Knox mine and a $16.5 million writedown of the Haile property. The 1998 results included a $53.1 million writedown of the Refugio mine, a $140.3 million writedown of the Fort Knox mine, and an $11.5 million loss on the early extinguishment of debt. Excluding these items, the 2000 net loss would be $15.5 million, or $0.24 per share after preferred dividends, compared with a 1999 net loss of $13.2 million or $0.22 per share, after preferred dividends. See note 5 of the Consolidated Financial Statements for further discussion of the writedowns.
The Company's operating loss (excluding the writedown of mineral properties) was $12.2 million for 2000 compared with a loss of $8.0 million for 1999 and 1998 operating income of $13.0 million. Higher diesel fuel costs and continuing low gold prices contributed to the 2000 loss.
Revenues decreased to $210.8 million compared with $214.1 million in 1999 and $268.1 million in 1998. The decrease in 2000 is due to lower gold equivalent production of 718,395 ounces in 2000 compared with 736,463 equivalent ounces in 1999 and 781,497 equivalent ounces in 1998. Realized prices of $292 in 2000, $289 in 1999 and $344 in 1998 compared with average spot prices of $279 per ounce in 2000, $279 per ounce in 1999, and $289 per ounce in 1998. The Company's realized price exceeded the average spot price due to the positive impact of hedging activities. See note 7 to the Consolidated Financial Statements for further discussion on hedging activities.
The Company's share of equivalent gold production in 2000 from the various mines in which it holds an interest was as follows:
Production for Hayden Hill and Guanaco decreased dramatically as mining was terminated at these properties in 1997. Residual leaching is expected to continue during 2001.
PRIMARY OPERATIONS
FORT KNOX MINE
Gold equivalent production for 2000 was 362,959 ounces compared with 351,120 ounces in 1999 and 365,452 ounces in 1998. The increase from 1999 was due to the milling of higher grade ore in the fourth quarter of 2000. In 2000, total cash costs were $203 per ounce compared with $194 in 1999 and $189 per in 1998. Cash production costs were higher than planned primarily due to increased diesel fuel costs, but record mill throughput and nominally higher grade compensated for most of the increased costs. During 2000, the Company focused on permitting activities on the nearby True North. The required permits were received in January 2001 which should allow the Company to achieve planned production targets at True North by April, 2001. Estimated gold production for 2001 is 450,000 ounces at total cash costs of approximately $196 per ounce.
KUBAKA (54.7% OWNERSHIP INTEREST IN 2000, 53% IN 1999, AND 50% IN 1998)
The Company's share of gold equivalent production was 244,641 ounces in 2000 compared with 254,625 ounces in 1999 and 253,434 ounces in 1998 due to lower ore grades. In 2000, total cash costs were $139 per gold equivalent ounce compared with $143 in 1999 and $154 in 1998. The Kubaka mine continues to perform exceptionally well, having achieved the lowest total cash costs per ounce of the Company's primary operations due to the high grade nature of the ore body and its efficient exploitation. Mill throughput increased by 7%, which combined with lower cash spending compensated for the 13% decrease in the grade of the ore processed. Estimated gold equivalent production for the Company's ownership interest in 2001 is 214,000 ounces at total cash costs of approximately $160 per equivalent ounce.
In 1999, the Company began an extensive drilling program looking for alternative mill feed for the Kubaka operations beyond the then known mine life. In 2000, these efforts have identified remnant ore below the pit bottom and within the pit wall which have increased the reserve estimates at the end of 2000. In addition one exploration project, Birkachan, located 19 miles north of the Kubaka processing plant, has encountered encouraging drill results and follow up drilling will continue into 2001.
REFUGIO MINE (50% OWNERSHIP INTEREST)
The Company's share of gold equivalent production was 85,184 ounces in 2000 compared with 90,008 ounces in 1999 and 80,660 ounces in 1998. Total cash costs in 2000 were $300 per gold equivalent ounce compared with $277 in 1999 and $313 in 1998. In 2000, the Company continued to experience operational problems and during the fourth quarter suspended operations when the Company's joint venture partner failed to fund its share of cash calls. Mining operations remained on standby during this period, but resumed in mid December. Heap leaching activities continued throughout this period. The current operating plan for Refugio is to continue to mine and stack ore on the leachpad until May 31, 2001. In the event spot gold prices do not increase substantially, the Refugio operations will commence residual leaching and the mining activities will be placed on care and maintenance. Assuming the operations commence residual leaching in June 2001, estimated gold equivalent production attributable to Kinross' 50% interest for 2001 is 61,000 ounces at total cash costs of approximately $260 per equivalent ounce. This will be a substantial reduction in gold production from this mine, but also a significant decrease in the total cash costs per ounce of gold.
OTHER OPERATIONS
In addition to its primary operating mines, the Hayden Hill and Guanaco mines continued residual leaching activities in 2000. Hayden Hill completed mining in December 1997 and gold equivalent production in 2000 declined to 9,582 ounces at a total cash cost of $240 per ounce. Guanaco completed mining in July 1997 and gold equivalent production in 2000 declined to 16,029 ounces at a total cash cost of $278 per ounce. Residual leaching will continue in 2001 with continuing decreasing production. After 2001, no meaningful gold production is currently planned at these operations.
The Company's cost of sales as a percentage of revenue increased to 69% in 2000, compared with 66% in 1999, and 59% in 1998 primarily due to continued low gold prices and higher fuel costs. Consolidated total cash cost of $192 per ounce compared with $186 per ounce in 1999 and $185 per ounce in 1998.
Depreciation, depletion and amortization expense fell to $74.2 million in 2000 compared with $77.8 million in 1999 and $91.1 million in 1998. The consolidated rate per ounce decreased to $104 per ounce in 2000 compared with $108 in 1999 and $119 in 1998 due to the 1998 and 1999 writedowns. The 2001 consolidated depreciation rate is expected to decrease due to the 2000 writedowns, as more fully described in Note 5 to the consolidated financial statements, and additional reserves at Kubaka.
General and administrative expense was $1.0 million in 2000 compared with $1.5 million in 1999 and $2.9 million in 1998.
Exploration expense was $3.3 million in 2000 compared with $1.8 million in 1999 and $3.9 million in 1998. The increase in 2000 is due to increased exploration near the Kubaka mine in Russia and the Guanaco mine in Chile.
Interest expense in 2000 was $9.9 million compared with $10.0 million in 1999 and $23.4 million in 1998. The decrease in 2000 and 1999 was attributable to lower debt balances as a result of debt repayments. In addition, the inter-corporate advances to the Company from Kinross are non-interest bearing.
Other income was $8.3 million in 2000 compared with $6.2 million in 1999 and $11.9 million in 1998. The Company earns management fee income from its Kubaka and Refugio mines. In 2000, the Company also received $2.6 million in insurance proceeds relating to the Refugio mine.
LIQUIDITY AND CAPITAL RESOURCES
The Company's 2000 cash flow provided from operating activities was $39.8 million compared with $72.1 million in 1999 and $109.8 million in 1998. The decrease in 2000 is due to higher operating costs due to increased fuel prices, lower sales and increased reclamation spending. Due to continued low gold prices, the Company is continuing its policy of reducing spending in all areas to conserve cash.
Capital spending was $16.7 million in 2000 compared with $16.9 million 1999 and $15.4 million in 1998. Capital spending at Fort Knox was $12.8 million on drilling at the True North property, pit dewatering, and equipment fleet additions compared with $7.8 million in 1999 and $12.3 million in 1998. In 2000, Kubaka capital spending was $0.1 million compared with $1.1 million in 1999 and $0.7 million in 1998. Capital spending at Refugio was $3.2 million in 2000, primarily on a leachpad expansion, compared with $8.0 million in 1999 and $2.4 million in 1998. In 2000, capital spending at Guanaco totaled $0.6 million for a land purchase.
The Board of Directors suspended the quarterly dividends on the Series B Convertible Preferred Stock beginning August 2000. The decision was taken by the Board as a cash conservation measure due to the persistence of low gold prices and the absence of earnings. Regular dividends totaling $3.4 million were paid in February and May of 2000.
Pursuant to the merger in 1998, Kinross advanced $255.8 million to the Company for repayment of outstanding debt. In 1999, $16.6 million was advanced to purchase the assets related to the True North property in Alaska. An additional $6.7 million was advanced in 2000, primarily for True North property development. The advances are non-interest bearing and have no fixed terms of repayment. Kinross has agreed not to seek repayment of these advances during 2001.
Management has budgeted $17.7 million for capital spending in 2001, of which $12.3 million is set for bringing the True North property into commercial production. In addition, the Company anticipates that it will require approximately $30.5 million for debt
reduction during 2001. To the extent that funds are not available to meet these planned expenditures from operations, the Company will be dependent on advances from its corporate parent, Kinross.
The Company relies solely on Kinross for funding the portion of operating costs, capital expenditures, general corporate expenditures and debt and interest payments not funded by cash flow from operating activities. The Company continues to conserve cash whenever possible including approving only capital expenditures necessary to sustain operations, continued low exploration expenditures, suspending the payment of preferred stock dividends and continually monitoring operating costs at all its operations. Assuming the price of gold remains at $260 per ounce the Company anticipates additional borrowings from Kinross in 2001 to fund current debt repayment requirements and planned capital expenditures, primarily on the True North project. While Kinross has funded these obligations in the past it is under no obligation to do so, and there can be no assurance that the Company may not have to seek funding from other sources in the future.
NEW PRONOUNCEMENTS
Beginning January 1, 2001, the Company will be adopting Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), and the corresponding amendments under SFAS 138. SFAS 133 requires that all derivative financial instruments be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized in income or shareholders' equity (as a component of other comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. SFAS 138 amends certain provisions of SFAS 133 to clarify four areas causing difficulties in implementation. There were no derivative instruments outstanding at December 31, 2000.
CONTINGENCIES AND RELATED COMMITMENTS
The Company is subject to the considerations and risks of operating in Russia as a result of its 54.7% ownership of the Kubaka mine located in eastern Russia. The economy of the Russian Federation continues to display characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible outside of the country, extensive currency controls and high inflation. The prospects for future economic stability in the Russian Federation are largely dependent upon the effectiveness of economic measures undertaken by the government, together with legal, regulatory, and political developments. Russian tax legislation is subject to varying interpretations and frequent changes. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activities of the Company may not coincide with that of management. As a result, transactions may be challenged by tax authorities and the Company may be assessed additional taxes, penalties and interest, which can be significant. The fiscal periods remain open to review for three years by the tax and customs authorities with respect to tax liabilities.
The Company's 50% owned Chilean contractual mining company CMM has entered into arbitration proceedings in Chile with the contractor that designed and built the mine. CMM contends that the contractor was negligent in both the design and the construction of the facility, and should be held responsible for the cost of repairs as well as lost profits. As part of the same proceedings, the contractor is seeking to recover costs that they allegedly incurred while building the mine and which, they claim, were outside their scope of work and responsibility. Although the outcome of the arbitration proceedings cannot be determined at the current time, management is of the opinion that the outcome will not materially affect the financial position, results of operations or cash flows of the Company.
The Company is also involved in legal proceedings and claims which arise in the ordinary course of its business. The Company believes these claims are without merit and is vigorously defending them. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
With the exception of historical matters, the matters discussed in this report are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. Such forward-looking statements include statements regarding expected dates for commencement of commercial operations, reserve additions, projected quantities of future gold production, estimated reserves and recovery rates, anticipated production rates, costs and expenditures, prices realized by the Company and expected to be realized, expected future cash flows, anticipated financing needs, growth plans and sources of financing
and repayment alternatives Factors that could cause actual results to differ materially include, among others: risks and uncertainties relating to general domestic and international economic and political conditions, the cyclical and volatile price of gold, the political and economic risks associated with foreign operations, currency fluctuations, governmental regulation of investment and withdrawal of funds, decisions by significant holders of gold reserves, competition in gold production and competition in uses for gold, cost overruns, unanticipated ground and water conditions, unanticipated grade and geological problems, metallurgical and other processing problems, availability of materials and equipment, the timing of receipt of necessary governmental permits and approvals, the occurrence of unusual weather or operating conditions, force majeure events, lower than expected ore grades, the failure of equipment or processes to operate in accordance with environmental risks, the results of financing efforts and financial market conditions, and other risk factors detailed in the Company's filings with the Securities and Exchange Commission. Many of such factors are beyond the Company's ability to control or predict. Readers are cautioned not to put undue reliance on forward-looking statements. The Company disclaims any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
COMMODITY PRICE RISKS
The Company's revenues are derived primarily from the sale of gold production. The Company's net income can vary significantly with fluctuations in the market prices of gold. At various times, in response to market conditions, the Company has entered into gold forward sales contracts for some portion of expected future production to mitigate the risk of adverse price fluctuations. The significant decline in spot gold prices in 1998 increased the value of the Company's forward sales contracts. The Company closed out these contracts in 1998 for $45.9 million in cash. This gain is being included in revenue over the period the underlying hedge contacts were originally scheduled to expire. As of December 31, 2000, $4.7 million of this gain was included in long-term liabilities. For further details of the remaining deferred revenue and the period it will be recorded in revenue, see Note 7 of the Consolidated Financial Statements. At December 31, 2000 the Company had no gold forward sales contracts. Based on the Company's projected 2001 sales volumes, each $10 per ounce change in the average realized price on gold sales would have an approximate $7.25 million impact on revenues and pre-tax earnings.
FOREIGN CURRENCY EXCHANGE RISK
The Company conducts the majority of its operations in the U.S., Russia, and Chile. Currency fluctuations affect the cash flow that the Company will realize from its operations as gold is sold in U.S. dollars, while production costs are incurred in Russian rubles, Chilean pesos and U.S. dollars. The Company's results are positively affected when the U.S. dollar strengthens against these foreign currencies and adversely affected when the U.S. dollar weakens against these foreign currencies. The Company's cash and cash equivalent balances are held in U.S. dollars. Holdings denominated in other currencies are relatively insignificant.
The temporal method is used to consolidate the results of operations in Russia. The major currency -related exposure at any balance sheet date is on ruble denominated cash balances and working capital. Because the bullion inventory is denominated in U.S. dollars, there are no related foreign exchange risks. The foreign exchange exposure on the balance of the working capital items is nominal. Of particular significance in Russia is the right of Russian authorities to purchase gold produced from the Kubaka mine, with payment 50% in U.S. dollars and 50% in Russian rubles at then current London gold prices. Over the past year, these authorities have regularly refused to make payment in U.S. dollars, therefore the Company is negotiating a new agreement for payment 100% in rubles. If expenses denominated in rubles are less than payments in rubles, the Company may be exposed to currency exchange risks and the risk that viable and adequate currency exchange mechanisms may not be available. To date the Company has not experienced problems converting rubles to U.S. dollars. The U.S. dollars received are used to service the U.S. dollar denominated debt and the foreign supplies inventory purchases, while the rubles received from the gold sales are used to pay local operating costs. The Company has and will continue to convert any excess rubles into U.S. dollars to repay U.S. denominated third party and inter-corporate debt obligations. Assuming estimated 2001 ruble payments of 615 million rubles at an exchange rate of 30 rubles to one U.S. dollar, each 3 ruble change to the U.S. dollar could result in an approximate $2.0 million change in the Company's pre-tax earnings.
In Chile, the currency of measurement is the U.S. dollar as the majority of transactions are denominated in U.S. dollars. Local expenditures are recorded based on the prevailing exchange rate at the time and bullion settlement receivables are denominated in U.S. dollars. Assuming the Company's share of estimated 2001 peso payments of 3.4 billion pesos at an exchange rate of 560 pesos
to one U.S. dollar, each 50 peso change to the U.S. dollar could result in an approximately $0.6 million change in the Company's pre-tax earnings.
INTEREST RATE RISK
As at December 31, 1998, the Company held interest rate swaps to fix interest rates on a portion of its floating rate debt. The costs associated with these contracts were amortized to interest expense over the terms of the agreements. For details on the interest rate swap agreements outstanding as at December 31, 1998, see Note 7 to the Consolidated Financial Statements. There were no outstanding interest rate swaps at December 31, 1999 or 2000.
As at December 31, 2000, the Company had $96.7 million (1999 - $117.7 million) of variable rate debt, all denominated in U.S. dollars. Interest expense would change by approximately $1.0 million for every 1% change in interest rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The management of the Company is responsible for the integrity and objectivity of the financial statements and other financial information contained in this Annual Report on form 10-K. The financial statements were prepared in accordance with accounting principles generally accepted in the United States and include estimates that are based on management's best judgment.
The Company maintains an internal control system which includes formal policies and procedures designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with management's authorization.
Kinam Gold's financial statements have been audited by independent accountants, whose appointment is ratified yearly by the shareholders at the annual shareholders' meeting. The independent accountants conducted their audits in accordance with auditing standards generally accepted in the United States. These standards include an evaluation of the internal accounting controls in establishing the scope of audit testing necessary to allow them to render an independent professional opinion on the fairness of the Company's financial statements.
The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with representatives of management and the independent accountants to review their work and ensure that they are properly discharging their responsibilities.
Arthur H. Ditto President
Brian W. Penny Treasurer
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Kinam Gold Inc.
We have audited the accompanying consolidated balance sheets of Kinam Gold Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity (capital deficiency) and cash flows for each of the years in the three year period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Omolon Gold Mining Company, a 54.7% owned subsidiary, which statements reflect total assets and revenues constituting 32% and 32%, respectively for 2000, and 32% and 34%, respectively, for 1999, of the related consolidated totals. Those statements were audited by other auditors whose report dated February 28, 2001 has been furnished to us, and our opinion, insofar as it relates to the amounts included for Omolon Gold Mining Company, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kinam Gold Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP Toronto, Ontario March 28, 2001
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Omolon Gold Mining Company
In our opinion, the accompanying balance sheets and the related statements of operations, cash flows and changes in shareholders' equity present fairly, in all material respects, the financial position of Omolon Gold Mining Company at December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 11 to the financial statements, the Company changed its method of accounting for insurance spare parts effective January 1, 2000.
PriceWaterhouseCoopers
Moscow, Russia February 28, 2001
KINAM GOLD INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31 (IN MILLIONS EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these financial statements
KINAM GOLD INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31 (IN MILLIONS EXCEPT PER SHARE AMOUNTS)
KINAM GOLD INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31 (IN MILLIONS EXCEPT PER SHARE AMOUNTS)
* During the fourth quarter of 1996, the Company issued $15.2 million in stock to Cyprus Amax in payment of $5.2 million in interest and a $10 million guaranty and financing fee. The guaranty and financing fee was recorded as unearned equity and $3.9 million had been amortized through May 31, 1998. In June 1998, upon repayment of debt, the balance of $6.1 million was expensed as part of the $11.5 extraordinary loss on early extinguishment of debt.
Cash paid for interest was $10.2 million, $9.9 million and $28.9 million in 2000, 1999 and 1998, respectively. Cash paid for income taxes was $4.1 million in 2000 and $2.9 million in 1999. There were no income taxes paid during 1998.
KINAM GOLD INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY) FOR THE YEARS ENDED DECEMBER 31 (IN MILLIONS)
KINAM GOLD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL TABULAR DOLLAR AMOUNTS ARE IN MILLIONS OF U.S. DOLLARS EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Kinam Gold Inc. ("Kinam" or the "Company") are expressed in U.S. dollars and have been prepared in accordance with accounting principles generally accepted in the United States. Kinross Gold U.S.A., Inc., a wholly-owned subsidiary of Kinross Gold Corporation ("Kinross"), owns 100% of the common shares of the Company.
NATURE OF OPERATIONS
The Company is engaged in the mining and processing of gold and silver ore and the exploration for, and acquisition of, gold-bearing properties, principally in the Americas and Russia. The Company's products are gold and silver produced in the form of dore which is shipped to refineries for final processing.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company, its subsidiaries and its proportionate share of joint venture interests consistent with mining industry practices.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Management's estimates are made in accordance with mining industry practice. Significant areas requiring the use of management estimates relate to the determination of mineral reserves, reclamation and environmental obligations, impairment of assets and useful lives used to compute depreciation, depletion and amortization. Actual results could differ from those estimates.
TRANSLATION OF FOREIGN CURRENCIES
Domestic and foreign operations
The Company reports its financial statements in U.S. dollars, while the currency of measurement for the Company's operations varies depending upon location.
The currency of measurement for the Company's self-sustaining operations in the U.S. and Chile is the U.S. dollar. Although the operation in Russia is self-sustaining, the temporal method is used to translate local currency amounts into U.S. dollars due to the highly inflationary economy in that country. Under the temporal method, all non-monetary items are translated at historical rates. Monetary assets and liabilities are translated at actual exchange rates in effect at the balance sheet date, revenues and expenses are translated at average rates for the year and gains and losses on translation are included in income.
Foreign currency transactions
Monetary assets and liabilities are translated at the rate of exchange prevailing at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenue and expenses are translated at the average rate of exchange for the year. Exchange gains and losses are included in income.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments with an original maturity of three months or less. The Company invests cash in time deposits maintained in high credit quality financial institutions.
INVENTORIES
Gold inventory is valued at the lower of aggregate cost, computed using a three-month rolling average method, or market. Materials and supplies are valued at average cost less reserves for obsolescence.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Costs associated with properties which are in the development stage are deferred, on a project basis, until the economic viability of the project is determined. Once commercial production is reached, the deferred costs of the project are amortized over their economic lives, on the basis described below.
Where the mine operating plan calls for production from well-defined ore reserves, the unit-of-production method of amortization is applied.
Plant and equipment that have useful lives shorter than the mine life are depreciated on a straight-line basis over their estimated useful lives of up to five years.
PROPERTY EVALUATIONS
Annually, the Company reviews the carrying values of its portfolio of mining properties and advanced stage exploration properties. The impairment analysis is performed on an undiscounted basis in order to determine whether an impairment exists. If the undiscounted cash flow is less than the carrying value of the related mines, the Company uses a discounted cash flow analysis to determine the amount of the writedown. The estimated future net cash flows from each property are calculated using estimated recoverable ounces of gold, estimated future gold price realization (considering historical and current prices, price trends and related factors), and operating, capital and reclamation costs. Estimated future cash flows are subject to risks and uncertainties. It is possible that changes could occur which may affect the recoverability of property, plant and equipment.
LONG-TERM INVESTMENTS
Long-term investments in shares of associated companies, over which the Company has the ability to exercise significant influence, are accounted for using the equity method. The cost method is used for entities in which the Company owns less than 20%. The Company periodically reviews the carrying value of its investments. When a decline in the value of an investment is other than temporary, the investment is written down accordingly.
FINANCIAL INSTRUMENTS
The Company enters into derivative financial instrument contracts to manage certain market risks which result from the underlying nature of its business. The Company uses spot deferred contracts and fixed forward contracts to hedge exposure to commodity price risk for gold and silver; foreign exchange forward contracts to hedge exposure to fluctuations in foreign currency denominated operating costs; and interest rate swaps to hedge exposure to changes in interest rates. The Company uses written gold call options to economically hedge exposure to commodity price risk for gold. Non-option derivative financial instruments are accounted for using the accrual method as management views the contracts as effective hedges and has designated the contracts as hedges of specific exposures. Hedge effectiveness is assessed based on the degree to which the cash flows on the derivative contracts are expected to offset the cash flows of the underlying position or transaction being hedged.
Realized and unrealized gains or losses on derivative contracts, that qualify for hedge accounting, are deferred and recorded in income when the underlying hedged transaction is recognized. The premiums received at the inception of written call options are recorded as a liability. Changes in the fair value of the liability are recognized currently in earnings. Gains or losses (realized or unrealized) for derivative contracts which no longer qualify as hedges for accounting purposes or which relate to a hedged transaction that has been sold or terminated are recorded in income.
Gains on the early settlement of gold hedging contracts are recorded as deferred revenue on the balance sheet and included in income over the original delivery schedule of the hedged production.
PENSION, POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
Pension expense, based on management assumptions, consists of the actuarially computed costs of pension benefits in respect of the current year's service; imputed interest on plan assets and pension obligations; and straight-line amortization of experience gains and losses; assumption changes and plan amendments over the expected average remaining service life of the employee group.
The expected costs of post-retirement and post-employment benefits, other than pensions, to active employees are accrued for in the financial statements during the years employees provide service to the Company.
REVENUE RECOGNITION
Gold revenues are recorded when bullion is shipped to the refineries and title has passed to the customer.
SITE RESTORATION COSTS
Estimated costs of site restoration are accrued and expensed over the estimated life of the mine on a unit-of-production basis. Ongoing environmental protection expenditures are expensed as incurred. Estimates of the ultimate site restoration costs are based on current laws and regulations and expected costs to be incurred, all of which are subject to possible changes thereby impacting current determinations.
MINERAL EXPLORATION
Mineral exploration expenditures are charged to income as incurred. Property acquisition costs relating to exploration properties and expenditures incurred on properties identified as having development potential are deferred on a project basis until the viability of the project is determined. Costs associated with economically viable projects are depreciated and amortized in accordance with the policies described above. If a project is not viable, the accumulated project costs are charged to income in the year in which that determination is made.
INCOME AND MINING TAXES
The provisions for income and mining taxes are based on the liability method. Deferred income taxes arise from the recognition of the tax consequences of temporary differences by applying statutory tax rates applicable to future years to differences between the financial statements carrying amounts and the tax bases of certain assets and liabilities. The Company records a valuation allowance against any portion of those deferred income tax assets that it believes will, more likely than not, fail to be realized. On business acquisitions, where differences between assigned values and tax bases of assets acquired and liabilities assumed exist, the Company recognizes the deferred income tax assets and liabilities for the tax effects of such differences. Future withholding taxes are provided on the unremitted net earnings of foreign subsidiaries and associates to the extent that dividends or other repatriations are anticipated in the future and will be subject to such taxes. The income statement effect is derived from current taxes payable and changes in deferred income taxes on the balance sheet.
PER SHARE INFORMATION
Basic loss per common share has been calculated using the weighted average number of common shares outstanding during the year.
NEW PRONOUNCEMENTS
Beginning January 1, 2001, the Company will be adopting Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), and the corresponding amendments under SFAS 138. SFAS 133 requires that all derivative financial instruments be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized in income or shareholders' equity (as a component of other comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. SFAS 138 amends certain provisions of SFAS 133 to clarify four areas causing difficulties in implementation. There were no derivative instruments outstanding at December 31, 2000.
STATEMENTS OF COMPREHENSIVE INCOME
There are no differences between comprehensive loss and net loss as reported in the Consolidated Statements of Operations for the years ended December 31, 2000, 1999, and 1998.
1999 AND 1998 FIGURES Certain of the 1999 and 1998 figures have been reclassified to conform to the 2000 presentation.
2. ECONOMIC DEPENDENCE
The Company relies solely on Kinross for funding the portion of operating costs, capital expenditures, general corporate expenditures and debt and interest payments not funded by cash flow from operations. Assuming the gold price remains at current levels the Company anticipates additional borrowings from Kinross in 2001. While Kinross has funded these obligations in the past it is under no obligation to do so, and there can be no assurance that the Company may not have to seek funding from other sources in the future. Kinross has agreed to continue to support the Company for the next twelve months.
3. TRANSACTIONS WITH AFFILIATES
On June 1, 1998, the Company completed a merger agreement with Kinross providing for a combination of their businesses. In the merger, each outstanding share of the Company's common stock was converted into 0.8004 of a share of Kinross common stock. Kinross Merger Corporation ("Kinross Merger"), a wholly-owned subsidiary of Kinross was merged with and into the Company which became a wholly-owned subsidiary of Kinross. Immediately following the effective time of the merger, the Company, as the surviving entity of the combination with Kinross Merger, issued to Kinross 92.2 million shares of the Company's common stock, representing all of the issued and outstanding common shares. Kinross subsequently transferred ownership of such shares to Kinross Gold U.S.A., Inc., a wholly-owned subsidiary of Kinross, which is currently the sole common shareholder of the Company. Prior to the merger, the Company was approximately 59% owned by Cyprus Amax Minerals Company (Cyprus Amax).
Pursuant to the merger in 1998, Kinross advanced $255.8 million to the Company for repayment of outstanding debt. In 1999, $16.6 million was advanced to purchase the assets related to the True North property in Alaska. An additional $6.7 million was advanced in 2000, primarily for True North property development. The advances from parent are non-interest bearing and have no fixed terms of repayment. Kinross has agreed not to seek repayment of these advances during 2001 from parent.
Pursuant to a financing arrangement with Cyprus Amax, approved by the Company's shareholders in September 1996, Cyprus Amax had guaranteed the Company's $250.0 million Fort Knox loan until economic completion of the Company's Fort Knox mine. In connection with the Kinross merger, the balance of the $250.0 million loan was repaid on June 1, 1998. Upon repayment, the Company expensed $11.5 million in unamortized financing costs.
Pursuant to the Kinross merger, Kinross assumed a demand loan of $92.3 million which was transferred from Cyprus Amax to Kinross. Subsequent repayments have reduced the demand loan payable to $73.6 million at December 31, 1999 and December 31, 2000. The demand loan is non-interest bearing and is due on demand.
Kinross has issued letters of credit under a syndicated credit facility to guarantee the Fort Knox Industrial Revenue Bonds and the Kubaka subordinated totaling $83.2 million. See Note 6 of the Consolidated Financial Statements for further discussion.
4. INVENTORIES
Inventories at December 31, 2000 and 1999, consisted of the following:
5. PROPERTY, PLANT AND EQUIPMENT AND WRITEDOWNS
The components of property, plant and equipment at December 31, 2000 and 1999, were as follows:
Acquisitions
There were no business acquisitions during the year.
On March 1, 1999, the Company acquired 100% of Kershaw Gold Company, Inc. ("Kershaw") for $2.0 million, thereby increasing its ownership interest in the Haile property from 62.5% to 100%.
On June 28, 1999, the Company acquired a 65% interest in the True North property in Alaska for cash of $28.1 million.
On December 31, 1999, the Company acquired a further 1.7% of Omolon Gold Mining Company ("Omolon") for cash of $0.3 million.
In December 1998, the Company acquired an additional 3% of Omolon in consideration for settling obligations of the Russian partner for $3.8 million. Repayment of the $3.8 million owing to the Company by the Russian partner will be made from the Russian partner's share of dividends from Omolon. The Russian partner has the right to reacquire the 3% interest in Omolon for approximately $7.5 million.
Writedown of Property, Plant and Equipment
Annually, the Company reviews the carrying values of its portfolio of mining properties and advanced stage exploration properties. Through this process the Company determined that the following assets had suffered a permanent impairment in value and therefore have been written down to their estimated recoverable amounts. The impairment analysis is performed on an undiscounted basis in order to determine whether an impairment exists. Because the undiscounted cash flow was less than the carrying value of the related mines, the Company used a discounted cash flow analysis to determine the amount of the writedown. The estimated future net cash flows from each property are calculated using estimated recoverable ounces of gold, estimated future gold price realization (considering historical and current prices, price trends and related factors), and operating, capital and reclamation costs. Estimated future cash flows are subject to risks and uncertainties. It is possible that changes could occur which may affect the recoverability of property, plant and equipment.
In the fourth quarter of 2000, following a comprehensive evaluation of its mining properties based on an assumed gold price of $300, the Company determined that the net recoverable amounts of the Refugio mine were less than the net book value. As a result of this review the Company recorded a $26.7 million pre-tax writedown of the Refugio mine. In addition, after a through review of various closure properties, the remaining carrying value and the current environment for surplus mining equipment and facilities, the remaining book value of the Hayden Hill mine, the Guanaco mine, the Haile property and other non-core properties, principally the Sleeper and Wind Mountain mines were written off.
In the fourth quarter of 1999, following a comprehensive evaluation of its mining properties based on an assumed gold price of $300, the Company determined that the net recoverable amounts of the Fort Knox and Refugio mines and the Haile property were less than the net book value of the related assets. As a result of this review the Company recorded a $72.9 million pre-tax writedown of the Fort Knox mine, a $10.1 million pre-tax writedown of the Refugio mine and a $16.5 million pre-tax writedown of the Haile property.
In the fourth quarter of 1998, following a comprehensive evaluation of its mining properties based on an assumed gold price of $325, the Company determined that the net recoverable amounts of the Fort Knox and Refugio mines were less than the net book value of the related assets. As a result of this review the Company recorded a $140.3 million writedown of the Fort Knox mine and a $53.1 million writedown of the Refugio mine.
The European Bank of Reconstruction and Development ("EBRD") and the U.S. Overseas Private Investment Corporation ("OPIC") provided project-financing debt on the Kubaka mine. As at December 31, 1998, this debt was $92.5 million. In 1999, Omolon repaid $25.0 million of these obligations, and in 2000 repaid $30.9 million leaving $36.6 million outstanding as at December 31, 2000 (December 31, 1999 - $67.5 million). The Company's 54.7% proportionate share of these obligations is $20.0 million as at December 31, 2000 (December 31, 1999 - $36.9 million). Interest on the project-financing debt is variable based upon LIBOR and as at December 31, 2000 is approximately 11.8% per annum (December 31, 1999 - - 10.5%). The project-financing debt has become recourse solely to Omolon after completion tests were passed in late 1999.
A bank licensed to do business in Russia has provided subordinated debt to finance the Kubaka mine. As at December 31, 2000, $10.4 million remains outstanding on this debt (December 31, 1999 - $14.6 million). The Company's 54.7% proportionate share of these obligations is $5.7 million as at December 31, 2000 (December 31, 1999 - $8.0 million). Interest on the subordinated debt is variable based upon LIBOR and as at December 31, 2000 is approximately 12% per annum (December 31, 1999 - 12%). The loan is repayable in semi-annual payments through June 15, 2003. The Company anticipates repaying the entire obligations in 2001 from Kubaka generated cash flow. The subordinated debt is supported by a letter of credit from Kinross.
A bank licensed to do business in Russia had provided subordinated working capital debt for the Kubaka mine operations to a maximum of $10.0 million. As at December 31, 2000, no balance was outstanding and the facility was cancelled (December 31, 1999 - $3.3 million was outstanding).
The solid waste disposal facility at the Fort Knox mine has been financed by $71.0 million of tax-exempt industrial revenue bonds. The variable rate bonds, maturing in May 2009, were issued by the Alaska Industrial Development and Export Authority and are supported by a letter of credit issued by Kinross. The floating interest rate on the bonds is approximately 4.5% as at December 31, 2000.
The Company has capital leases for certain production equipment at Fort Knox and Refugio. Interest on there leases ranges from 8.0% - 9.5% per annum.
In 1999, Kinross had a $50.0 million credit facility with a major chartered bank at commercial rates. As at December 31, 1999, Kinross had utilized $43.0 million of this facility. In March 2000, Kinross arranged a new syndicated credit facility for $110 million. The primary purpose of this facility is to provide credit support that enables Kinross to issue letters of credit on the Fort Knox industrial revenue bonds and the Kubaka subordinated debt. During the life of the syndicated credit facility Kinross must either reduce its letters of credit according to an agreed upon amortization schedule or post cash in order to decrease the debt. This syndicated credit facility matures in December, 2002. The repayment schedule presented above reflects Kinross and the Company's expectation that the maturity date on the $30.0 million of the Kinross syndicated credit facility will be extended beyond 2002.
Loan Amortization Schedule
As at December 31, 2000, the loan facility had been reduced to $90.0 million. The letters of credit issued on behalf of the Company under the Kinross syndicated facility at December 31, 2000 were as follows:
7. DERIVATIVE CONTRACTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company manages its exposure to fluctuations in commodity prices, foreign exchange rates and interest rates by entering into derivative financial instrument contracts in accordance with the formal risk management policy approved by the Company's Board of Directors. The Company does not hold or issue derivative contracts for speculative or trading purposes.
(a) Commodity risk management
The profitability of the Company is directly related to the market price of gold and silver. The Company uses spot deferred contracts, fixed forward contracts and option contracts to hedge against the unfavorable changes in commodity prices for a portion of its forecasted gold and silver production. Spot deferred contracts are forward sale contracts with flexible delivery dates that enable management to choose to deliver into the contract on a specific date or defer delivery until a future date. If delivery is postponed, a new contract price is established based on the old contract price plus a premium (referred to as "contango"). Use of these instruments has resulted in a realized price per ounce of gold $292 in 2000 as compared with $289 in 1999 and $344 in 1998. These realized prices compare with average spot gold prices of $279 per ounce in 2000, $279 per ounce in 1999 and $294 per ounce in 1998.
On June 1, 1998, the commodity derivative contract portfolio held by Kinam had a fair value of $46 million. Subsequent to the Kinross merger the Company closed out the contracts and realized approximately $46 million in cash. Net of costs previously incurred, the $41.7 million gain is being included in revenue over the period the underlying hedge contracts were originally scheduled to expire. As at December 31, 2000, $4.7 million (December 31, 1999 - $10.2 million) of this gain is included in other long-term liabilities. There were no outstanding hedge contracts as at December 31, 2000 or 1999.
In December, 1997, the Company refinanced the Refugio gold loan realizing a gain of $6.0 million. This gain, net of approximately $2.0 million in deferred financing costs is being taken into income over the schedule set out in the loan agreement. The deferred portion of this gain at December 31, 2000 amounted to $1.4 million and will be recognized in income in 2001.
On June 1, 1998, the Company repaid the gold loan portion of the Fort Knox project financing realizing a gain of $3.6 million. The gain is being taken into income over the original delivery schedule set out in the loan payments. The deferred portion of this gain at December 31, 2000 amounted to $1.0 million and will be recognized in income in 2001.
(b) Interest rate risk management
The Company is exposed to interest rate risk as a result of its issuance of variable rate debt. There are no interest rate hedging transactions outstanding as at December 31, 2000.
(c) Credit risk management
Credit risk relates to bullion settlements and other accounts receivable and derivative contracts and arises from the possibility that a counterparty to an instrument in which the Company has an unrealized gain fails to perform. The Company only transacts with high-rated counterparties and a limit on contingent exposure has been established for each counterparty based on the counterparty's credit rating. At December 31, 2000, the Company's credit exposure was limited to accounts receivable of $19.9 million (1999 - $21.8 million).
(d) Foreign currency risk management
All sales revenues for the Company are denominated in U.S. dollars. The Company is exposed to currency fluctuations on expenditures which are denominated in Russian rubles and Chilean pesos. These potential currency fluctuations could have a significant impact on the cost of producing gold and the profitability of the Company. This risk is reduced, from time to time, through the use of foreign exchange forward contracts to lock in the exchange rates on firmly committed future operating costs.
There were no outstanding foreign exchange forward contracts at December 31, 2000 or 1999.
(e) Fair values of financial instruments
Carrying values for primary financial instruments, including cash and cash equivalents, receivables, demand loan, accounts payable, accrued and other current liabilities, approximate fair values due to their short-term maturities. The carrying value for long-term debt approximates fair value primarily due to the floating rate nature of the debt instruments.
The fair value of the advance from parent cannot be readily determined as there is no available market data for these instruments due to the unique nature of these related party amounts.
The fair value of the outstanding preferred shares at December 31, 2000 was $13.8 million (1999 - $48.5 million).
8. INCOME TAXES
Loss before income taxes consists of the following:
The components of deferred tax (assets) liabilities are as follows:
The following is a reconciliation between the amount determined by applying the federal statutory rate of 35% in 2000 (1999 - 35%, 1998 - 34%) to the loss before taxes and the income tax expense:
The following is a reconciliation between the amount determined by applying the federal statutory rate of 35% in 2000 (1999 - 35%, 1998 - 34%) to the loss before taxes and the income tax expense:
The valuation allowance increased by $125.3 million in 2000 due to uncertainties of realizing the benefit of all deductible temporary differences, loss carry forwards and income tax reductions in the future.
At December 31, 2000, the Company has federal tax net operating loss carry forwards of approximately $205.3 million and alternative minimum tax net operating loss carry forwards of $135.1 million expiring in the years 2004 through 2020 and minimum tax credit carry forwards of $3.7 million, which do not expire. The use of the federal and alternative minimum tax loss carry forwards will be limited in any given year as a result of a previous change in ownership. At December 31, 2000, the Company has Chilean tax net operating loss carry forwards of $192.0 million, which do not expire. At December 31, 2000, the Company also has Russian tax net operating loss carry forwards of $12.7 million which expire in 2003.
9. EMPLOYEE PENSION AND RETIREMENT PLANS
Defined Contribution Pension and Retirement Plans
The Company has several defined contribution pension plans covering substantially all employees in the United States and certain foreign countries. Under these plans the Company either contributes a set percentage of the employees salary or matches a percentage of the employees contributions. The employees are able to direct the contributions into a variety of investment funds offered by the plans. Company contributions to these plans amounted to $1.2 million in 2000, $0.8 million in 1999, and $0.3 million in 1998.
Defined Benefit Pension Plans
Prior to the Kinross merger all employees in the United States were covered by a non-contributory defined benefit pension plan. Benefits are based generally on years of service and compensation levels prior to retirement. The plan was frozen on June 1,1998 and all active employees were transferred into the Kinross defined contribution pension plan. The Company makes contributions to the plan in accordance with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). Plan assets are invested in a balanced fund and small market equity fund.
Net annual pension expense includes the following components:
The following table summarizes the change in benefit obligations:
The following table summarizes the funded status of the plan and related amounts recognized in the Company's financial statements at December 31:
The following table summarizes the change in fair value of plan assets
The following assumptions were used in calculating the funded status of the plan at December 31 and the pension cost for the subsequent year:
Post Retirement Benefits Other Than Pensions
The Company also provides certain health care and life insurance benefits for retired employees in the United States. The postretirement health care plans are contributory in certain cases based upon years of service, age and retirement date. The Company currently does not fund postretirement benefits and may modify plan provisions at its discretion. Net periodic post retirement costs for the years ended December 31, 2000, 1999 and 1998 were insignificant.
The following table sets forth the status of the plan and the related amounts recognized in the Company's financial statements at December 31:
The accumulated post-retirement benefit obligation was determined using a weighted average annual discount rate of 7.75% in 2000 and 8% in 1999. The assumed health care trend rate for 2001 is 11% declining gradually to 5.50% in 2017 when Company costs associated with the plan are capped. A 1% increase in the health care cost trend rate used would have resulted in an insignificant increase in the 2000 post-retirement benefit cost and the accumulated benefit obligation at December 31, 2000.
Postemployment Benefits
The Company has a number of postemployment plans covering severance, disability income, and continuation of health and life insurance for disabled employees. At December 31, 2000 and 1999, the Company's liability for postemployment benefits totaled $2.3 million and $1.9 million respectively, and is included in other liabilities.
10. PREFERRED STOCK
The Preferred Stock is redeemable at the option of the Company at any time on or after August 15, 1997, in whole or in part, for cash, initially at a redemption price of $52.625 per share declining ratably annually to $50.00 per share on or after August 15, 2004, plus accrued and unpaid dividends. Annual cumulative dividends of $3.75 per share are payable quarterly on each November 15, February 15, May 15 and August 15, as and if declared by the Board of Directors. In the absence of earnings, the Board of Directors has suspended the quarterly dividends on the $3.75 Series B Convertible Preferred Stock effective August 2000. The decision has been taken by the Board as a cash conservation measure due to the persistence of low gold prices. Regular dividends totaling $3.4 million were paid in February and May of 2000.
11. COMMON STOCK
On June 1, 1998, the Company completed the merger with Kinross whereby Kinross acquired 100% of the issued and outstanding common shares of the Company. As a result of the merger all plans to purchase common stock of Kinam were cancelled and all stock options were adjusted to reflect the exchange ratio of .8004. Substitute Kinross options were issued. As at December 31, 2000 and 1999 there are no plans that require the issuance of the Company's stock.
12. SEGMENTED INFORMATION
The Company operates five gold mines: Fort Knox, located in Alaska; Kubaka, located in Russia; Refugio, located in Chile, Hayden Hill, located in California; and Guanaco, located in Chile. In addition to its producing gold mines, the Company has several other gold mining assets in various stages of reclamation, closure, care and maintenance, and development. The accounting policies used by these segments are the same as those described in the Summary of Significant Accounting Policies (see Note 2).
As the products and services in each of the reportable segments, except for the corporate activities, are essentially the same, the reportable segments have been determined at the level where decisions are made on the allocation of resources and capital, and where complete internal financial statements are available.
(a) Segment profit (loss) includes writedown of mineral properties
RECONCILIATION OF REPORTABLE OPERATING SEGMENT LOSS TO NET LOSS FOR THE YEAR:
ENTERPRISE-WIDE DISCLOSURE: Geographic information:
13. CONTINGENCIES AND RELATED COMMITMENTS
The Company is subject to the considerations and risks of operating in Russia as a result of its 54.7% ownership of the Kubaka mine located in eastern Russia. The economy of the Russian Federation continues to display characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible outside of the country, extensive currency controls and high inflation. The prospects for future economic stability in the Russian Federation are largely dependent upon the effectiveness of economic measures undertaken by the government, together with legal, regulatory, and political developments. Russian tax legislation is subject to varying interpretations and frequent changes. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activities of the Company may not coincide with that of management. As a result, transactions may be challenged by tax authorities and the Company may be assessed additional taxes, penalties and interest, which can be significant. The fiscal periods remain open to review for three years by the tax and customs authorities with respect to tax liabilities.
The Company's 50% owned Chilean contractual mining company CMM has entered into arbitration proceedings in Chile with the contractor that designed and built the mine. CMM contends that the contractor was negligent in both the design and the construction of the facility, and should be held responsible for the cost of repairs as well as lost profits. As part of the same proceedings, the contractor is seeking to recover costs that they allegedly incurred while building the mine and which, they claim, were outside their scope of work and responsibility. Although the outcome of the arbitration proceedings cannot be determined at the current time, management is of the opinion that the outcome will not materially affect the financial position, results of operations or cash flows of the Company.
The Company is also involved in legal proceedings and claims which arise in the ordinary course of its business. The Company believes these claims are without merit and is vigorously defending them. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company.
14. SUBSEQUENT EVENT
On December 31, 2000, the Board of Directors gave approval for the Company to enter into an agreement with Kinross Gold U.S.A. Inc. to acquire all of the outstanding common shares of La Teko Resources Inc., a wholly owned subsidiary of Kinross. Consideration will be common shares of Kinam Gold Inc. with the effective date of the transaction to be January 1, 2001. Since this is a related party transaction which did not result in a substantive change in ownership, this transaction will be recorded at the carrying value of La Teko's assets which was approximately $36.0 million at December 31, 2000. The assets of La Teko include the Ryan Lode project, which is in the advanced exploration stage and 35% of the True North project which is scheduled to commence production in early 2001. It is anticipated that ore from the True North project will be processed through the Fort Knox mill.
ITEM 8(a) SUPPLEMENTARY FINANCIAL DATA
1. QUARTERLY DATA (UNAUDITED)
Quarterly data for the years ended December 31, 2000 and 1999 are as follows:
Fourth quarter 2000 results included a $26.7 million pre-tax charge due to the writedown of the Refugio mine, a $2.9 million pre-tax charge due to the writedown of the Hayden Hill mine, a $2.1 million pre-tax charge due to the writedown of the Guanaco mine and a $6.0 million pre-tax charge due to the writedown of other non-core assets.
Fourth quarter 1999 results included a $72.9 million pre-tax charge due to the writedown of the Fort Knox mine, a $10.1 million pre-tax due to the writedown of the Refugio mine and a $16.5 million pre-tax charge due to the writedown of the Haile property.
2. RESERVE DATA (UNAUDITED)
The following tables present reserve data for each of its properties:
Kinam Gold Inc. share at December 31, 2000
PROVEN AND PROBABLE RESERVES
RESERVE NOTES
1. RESERVES. That part of a mineral deposit that could be economically and legally extracted or produced at the time of the reserve determination. Reserves have been calculated by competent persons using a $300 per ounce gold price at all properties.
PROVEN RESERVES. Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established.
PROBABLE RESERVES. Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
These definitions comply with definitions used in the Society for Mining, Metallurgy and Exploration Inc.'s Guide for Reporting Exploration Information, Mineral Resources and Mineral Reserves dated March 1, 1999.
2. Reserves are based on an assumed long-term price per ounce of US $300 for gold and US $5.00 for silver.
3. Each property has a unique cutoff grade(s) that is calculated using industry standard practices.
4. The impact of a $25/oz. reduction in the long-term gold price to $275/oz. would result in an estimated 12% decrease in reserve gold ounces. Alternately, the impact of a $25/oz. rise in the long-term gold price to $325/oz. results in an estimated 8% increase in reserve gold ounces.
3. VALUATION AND QUALIFYING ACCOUNTS
Site restoration costs: Estimated costs of site restoration are expensed and accrued over the estimated life of each property on a unit of production basis. Details of the site restoration accrual are as follows:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEMS 10, 11, 12 AND 13
These items are incorporated by reference to the Company's definitive information statement relating to the Company's annual meeting of shareholders to be held during 2001. The definitive information statement will be filed with the Commission not later than 120 days after December 31, 2000, pursuant to Regulation 14C of the Securities Exchange Act of 1934, as amended.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
3. Exhibits
*Filed herewith
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
KINAM GOLD INC.
Date: March 28, 2001 By /s/ Arthur H. Ditto -----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 29, 2000.
/s/ Arthur H. Ditto President - -------------------------------------- Arthur H. Ditto
/s/ John W. Ivany Vice President - -------------------------------------- John W. Ivany
/s/ Robert W. Schafer Vice President - -------------------------------------- Robert W. Schafer
/s/ Brian W. Penny Treasurer - -------------------------------------- Brian W. Penny
/s/ Shelley M. Riley Secretary - -------------------------------------- Shelley M. Riley
/s/ John A. Brough Director - -------------------------------------- John A. Brough
/s/ John M.H. Huxley Director - -------------------------------------- John M.H. Huxley
/s/ John W. Ivany Vice President - -------------------------------------- John W. Ivany
/s/ Cam Mingay Director - -------------------------------------- Cam Mingay
EXHIBIT INDEX
*Filed herewith