November 14, 1997
ROYAL OAK MINES INC (RYO)
Quarterly Report (SEC form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations.
REVENUE
Consolidated revenues were $54,116,000 for the three months ended September 30, 1997
compared to $77,323,000 for the same period in 1996. The decrease of 30% in the third quarter
this year resulted from the combined impact of a 24% lower realized gold price due to lower
hedging gains, and a 9% decline in production resulting from the closure of the Hope Brook and
Colomac mines. Consolidated revenues were $160,579,000 for the nine months ended September
30, 1997 compared to $183,169,000 for the year-to-date period in 1996, a decrease of 12%.
Gold production was similar in the two periods but the realized gold price was 13% lower in the
nine-month period of 1997 due to lower hedging gains.
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
1997 1996 1997 1996
========= ======== ======== ========
Gold production (ounces)
Northwest Territories - Giant Mine 22,749 20,984 68,578 61,033
- Colomac Mine 27,993 28,002 90,260 88,554
Ontario Division - Pamour/Nighthawk 25,881 28,826 77,339 76,803
Newfoundland Division - Hope Brook Mine 17,882 26,200 48,253 57,265
--------- -------- -------- --------
Total gold ounces produced 94,505 104,012 284,430 283,655
========= ======== ======== ========
Average spot price (US$/oz) $324 $385 $339 $392
Average realized price (US$/oz) $412 $543 $410 $472
Cash cost (US$/oz) $310 $348 $344 $337
EXPENSES
Review of Mine Operations
Average cash costs in the third quarter this year were US$310 per ounce, a decrease of 11% from
US$348 per ounce reported in the third quarter of last year. Improved operating performance
during 1997 has resulted in cash costs declining in successive quarters, from US$372 per ounce in
the first quarter and from US$351 per ounce in the second quarter. In the year-to-date period, cash
costs of US$344 per ounce were similar to the US$337 per ounce reported in the year-ago period.
Northwest Territories Division
Giant Mine
In the third quarter of 1997, gold production at the Giant Mine was 22,749 ounces (1996 - 20,984
ounces), an increase of 8% from the year-ago period, largely due to the impact of increased
tonnage of ore milled. Mill throughput of 101,353 tons (1996 - 90,066 tons) was 13% higher in the
period this year. Mill head grade decreased by 5% to 0.254 opt gold (1996 - 0.266 opt). Gold
recovery increased by 1% to 88.17% (1996 - 87.37%). The cash cost of US$296 per ounce
(1996 - US$339 per ounce) decreased by 13% from the cost reported in the third quarter of 1996.
In the year-to-date period ended September 30, 1997, the Giant Mine produced 68,578 ounces of
gold (1996 - 61,033 ounces), an increase of 12% due to the higher tonnage of ore processed and
improved grade and recovery. Mill throughput was 294,259 tons (1996 - 274,462 tons), an
increase of 7%. Mill head grade improved by 3% to 0.265 opt gold (1996 - 0.257 opt). Gold
recovery also increased by 3% to 87.72% (1996 - 85.51%). The cash cost of US$314 per ounce
(1996 - US$348 per ounce) was 10% below the cost reported in the same period a year earlier.
Colomac Mine
Operating results in both reporting periods this year were impacted by permanent closure of the
Colomac Mine. Gold production at the Colomac Mine in the third quarter of this year was 27,993
ounces (1996 - 28,002 ounces), similar to the same period last year. Mill throughput of 828,375
tons (1996 - 713,382 tons) was 16% above the throughput in the same period a year earlier. Mill
head grade decreased by 17% to 0.040 opt gold (1996 - 0.048 opt) and reflected the declining ore
grade in the open pit. Gold recovery of 85.19% (1996 - 82.37%) was 4% higher than in the third
quarter of last year. The cash cost of US$329 per ounce (1996 - US$397 per ounce) was 17%
lower than the cost reported in the period a year earlier. Costs decreased after mining operations
ceased in August, although milling of the coarse ore stockpile will continue through November.
In the nine-month period ended September 30, 1997, gold production at Colomac was 90,260
ounces (1996 - 88,554 ounces), an increase of 2% from the year-ago period. Mill throughput
increased by 11% to 2,406,764 tons (1996 - 2,171,944 tons). Mill head grade decreased by 4%
to 0.044 opt gold (1996 - 0.046 opt). Gold recovery declined by 3% to 85.27% (1996 -
87.99%). The cash cost in the nine-month period was US$378 per ounce (1996 - US$369 per
ounce), an increase of 2%.
In light of the current low gold price, declining ore reserves and grade, and the continuing high cash
cost of the Colomac operation, mining operations were discontinued in early August. The Company
will permanently close the Colomac Mine at the end of November after processing the remaining
coarse ore stockpile. In the second quarter of this year, the Company took a write-down of $39.7
million on the carrying value of the Colomac assets.
Ontario Division
Pamour/Nighthawk Mines
In the third quarter of this year, gold production from the Pamour and Nighthawk mines was 25,881
ounces (1996 - 28,826 ounces), a decrease of 10% from the same period of the prior year. Mill
throughput of 344,580 tons (1996 - 355,159 tons) was 3% lower than in the year-ago period. Mill
head grade of 0.087 opt (1996 - 0.092 opt) was 5% lower. Gold recovery of 86.55% (1996 -
88.23%) was 2% below the recovery in the third quarter of 1996. The cash cost of US$301 per
ounce (1996 - US$276 per ounce) was 9% above the level in the year-ago quarter.
In the year-to-date period, gold production at Pamour was 77,339 ounces (1996 - 76,803
ounces), an increase of 1%. Mill throughput of 1,022,469 tons (1996 - 1,029,856 tons) was 1%
lower than the amount of ore milled in the same period last year. Mill head grade of 0.087 opt gold
(1996 - 0.085 opt) improved by 2%. Gold recovery of 86.50% (1996 - 87.80%) declined by 1%.
Cash costs of US$317 per ounce (1996 - US$283 per ounce) increased by 12% in the nine-month
period this year. In the nine-month period last year, costs were lower due to the temporary
suspension of higher cost underground mining operations at the Hoyle deposit in the second quarter
to advance development into areas of higher grade ore.
Newfoundland Division
Hope Brook Mine
Operating results in the third quarter and year-to-date period were impacted by permanent closure
of the Hope Brook Mine. In the third quarter this year, gold production at the Hope Brook Mine
was 17,882 ounces (1996 - 26,200 ounces), a decrease of 32% due to permanent closure of the
mine in August. As a result of cessation of mining operations, mill throughput was 50% lower at
169,432 tons (1996 - 341,678 tons). The mill head grade of 0.087 opt gold (1996 - 0.089 opt)
declined by 2% from the level in the third quarter of 1996. Gold recovery of 84.33% (1996 -
85.98%) was also 2% lower than in the year-ago period. The cash cost was US$313 per ounce
(1996 - US$381 per ounce), a decrease of 18% which reflected termination of operations. The mill
was closed in September, 1997.
In the year-to-date period, gold production was 48,253 ounces (1996 - 57,265 ounces), a
decrease of 16% from the same period last year and reflected mine closure in the third quarter. Ore
processed was 586,727 tons (1996 - 717,163 tons), a decrease of 18%. Mill head grade of 0.087
opt gold (1996 - 0.089 opt) was 2% lower than in the nine-month period last year. Gold recovery
decreased by 7% to 84.10% (1996 - 89.99%). Cash costs increased by 4% to US$366 per ounce
(1996 - US$351 per ounce). Production and cash costs in the nine-month period of both years
were impacted by temporary suspension of milling operations (in January and February of 1997,
and in March and April of 1996), for economic reasons. Mining costs incurred during the first two
months of this year were deferred and charged to operating costs as the ore mined during the
shut-down period was milled during the second and third quarters of 1997.
Other Expenses
Royalties and marketing expenses for the third quarter of 1997 declined 56% or $0.45 million from
the 1996 second quarter amount of $0.8 million. Cost declines were attributed to the expiration of
the Hope Brook royalty agreement at the end of 1996. The 45% or $0.987 million decline on a
year-to-date basis was partially offset by increased royalties associated with increased production
at the Nighthawk Mine.
Administrative and corporate expenses for the third quarter remained consistent with those in the
same period in 1996. Cost increases on a year-to-date basis were mainly attributed to increased
manpower to manage the strategic growth of the Company.
Depreciation and amortization costs for the third quarter of 1997 were $4.6 million, a decrease of
37% from the amount of $7.4 million reported for the comparable period in 1996. Decreased
depreciation and amortization costs in the third quarter of 1997 were primarily associated with the
closure of the Hope Brook Mine and lower production volumes. Depreciation and amortization
costs for the nine months ended September 30, 1997 were lower than in 1996 due primarily to the
elimination of Hope Brook depreciation costs due to the 1996 write-down of the assets to their net
realizable value.
Reclamation costs increased during the third quarter of 1997 to $1.2 million from $0.2 million in the
same period of 1996. The Company applies the unit-of-production method based on estimated
total mineral inventory in calculating the charge to income for reclamation. Increases in reclamation
costs were mainly attributed to mill production volumes at the Colomac Mine and write-downs in
Colomac gold ore reserve estimates at the end of 1996.
Exploration expenditures are periodically reviewed and assessed as to their future economic value in
light of strategic plans, gold price forecasts and potential ore reserves. Those reserves determined to
be of little or no future economic value are written-down or written-off against income in the period
of determination. Exploration costs for the third quarter of 1997 were $1.3 million compared to
$1.4 million for the same period in the prior year. The Company intends to carefully manage and
control exploration expenditures throughout the remainder of 1997 and make appropriate
adjustments based upon its assessment of likely changes in the price of gold.
The gold price used in estimating the Company's ore reserves at December 31, 1996 was Cdn
$527 per ounce of gold. The market price for gold is currently below these levels. If the Company
determines that ore reserves at the end of December 1997 should be calculated at a lower gold
price than used at December 31, 1996, it is likely there may be adjustments in the amount of
economic gold reserves and potential gold prospects.
The Company enters into foreign currency and commodity contracts to minimize exposure to
adverse fluctuations in foreign currency exchange rates associated with US dollar gold sales and
commodity prices. A provision for loss on hedging activity of $4.1 million was recorded in the third
quarter of 1997, as compared to a provision for a $0.6 million gain in the same period in 1996. The
majority of the provision for loss was related to the close-out of certain future commodity contracts.
The provision for loss recorded for the nine months ended September 30, 1997 was $13.9 million
as compared to a provision for a gain of $1.6 million for the same period in 1996.
Interest expense accrued on the Company's Series B 11% Senior Subordinated Notes for the three
and nine month periods ended September 30, 1997 was $6.9 and $19.7 million, respectively.
Interest expense was, however, partially offset by interest income earned on, and interest capitalized
from, the proceeds of the Notes used to invest in marketable securities, or expended on long-term
construction projects, primarily the Kemess project, respectively.
The Company's Series B 11% Senior Subordinated Notes are denominated in United States
dollars. Generally accepted accounting principles require the translation of these Notes at the
exchange rate in effect at the balance sheet date. This resulted in the Company recognizing a loss on
translation of $2.0 million for the nine month period ended September 30, 1997. A gain of $1.6
million was recorded during the three and nine months ended September 30, 1996 as the Senior
Subordinated Notes were issued in August of 1996.
Mining and income taxes for the three month period ended September 30, 1997 decreased $6.9
million compared to the same period of 1996. Mining and income taxes for the nine month period
ended September 30, 1997 decreased $13.2 million compared to the same period in 1996.
Decreases in tax expense were a direct result of net losses incurred. No deferred tax assets were
recognized during the three month period ended September 30, 1997. Generally accepted
accounting principles disallow recognition of deferred tax assets unless ultimate realization of the tax
asset is virtually certain.
The Company currently holds long-term investments in equity securities of other gold mining
companies. Current market values for those securities are below original investment cost by
approximately $20.8 million, due mainly to recent declines in spot gold prices. Generally accepted
accounting principles (as referenced in Note 7 to the financial statements) do not require recognition
of a provision for loss on long-term investments unless the Company determines the loss in value to
be permanent in nature.
Liquidity and Capital Resources At September 30, 1997 the Company had cash, cash equivalents
and marketable securities of $37.5 million compared to $72.8 million at June 30, 1997 and $198.4
million at December 31, 1996.
OPERATING ACTIVITIES
Net cash provided by operating activities for the three month period ended September 30, 1997
was $34.6 million compared to $25.6 million in the same period of 1996. Net cash used by
operating activities for the nine month period ended September 30, 1997 was $37.2 million
compared to net cash provided by operating activities of $41.2 million for the same period of 1996.
Increase in cash provided by operating activities for the three months ended September 30, 1997 as
compared to the same period in 1996 was primarily attributable to a significant decline in accounts
receivable and inventories as supplies used by both the Colomac and Hope Brook mines were not
replaced due to the closure of these mines. Reduced cash flows from operations in the nine months
ended September 30, 1997 compared to the same period in 1996 was primarily attributable to
declining gold price, higher operating cost at Hope Brook and Colomac mines, reduced interest
income from declining cash balances, and increased investment in accounts receivable, principally
from the B.C. Government in conjunction with construction of the Kemess project. The Company
expects to continue to reduce its investment in working capital through the balance of 1997 as it
continues to receive money from the B.C. Government and as inventories decline as a result of the
closure of both the Hope Brook and Colomac mines.
FINANCING ACTIVITIES
Net cash provided by financing activities for the three months ended September 30, 1997 was
$16.2 million compared to $231.5 million in the same period in 1996. During the third quarter of
1997, the Company entered into capital leases for mining equipment for the Kemess project. During
the same period in 1996, the Company issued the Senior Subordinated Notes, the proceeds of
which were used to finance the Kemess and other development projects of the Company. For the
nine months ended September 30, 1997, cash provided by financing activities declined from $348.3
million in the same period of 1996 to $15.8 million. The issuance of share capital to acquire the
Kemess project and the sale of the Series B 11% Senior Subordinates Notes were the principal
reasons for differences in financing activity in the two periods.
INVESTMENT ACTIVITIES
Net cash used in investing activities during the three month period ended September 30, 1997 was
$86.2 million compared to $43.0 million for the same period in 1996 as a result of increased
expenditures on the Kemess project. For the nine months ended September 30, 1997 the cash used
in investing activities was $139.5 million compared to $278.1 million in 1996 as a result of strategic
investments in equity securities of other companies and the expenditures on development projects,
primarily the Kemess project. The higher cash usage in 1996 reflected the initial acquisition cost of
the Kemess project.
The Company continues to assess projected development and capital spending programs in the
context of the continuing low gold price and its impact on cash flow. Based on estimates of cash
flow from operations and the need to conserve cash to complete construction of the Kemess Mine,
as well as to maintain sufficient working capital, the Company announced in May of this year its
intent to delay the development and construction schedule on projects other than Kemess. In the
second quarter, the Company announced that it was delaying capital expenditures on the
Matachewan, Duport, Copperstone and Pamour expansion projects until it had concluded there
would be adequate cash flow from operations (principally from the Kemess Mine starting in
mid-1998). The Company plans in mid 1998 to update the past feasibility work on these
development projects and to prioritize their development.
The Company has recently revised its estimate of the total cost of the Kemess project to
approximately $430 million from $390 million. The principal reasons for the increase are the
additional stumpage fees payable to the B.C. Government related to the clearing of the power line
corridor and additional costs associated with design modifications to the tailings line and the tailings
dam.
Construction of the Kemess Mine is proceeding on schedule and is estimated to be approximately
67% complete. The construction workforce comprises approximately 1,000 personnel.
Approximately $410 million of the anticipated $430 million capital cost of the project had been
committed in the form of purchase orders for equipment and construction contracts, with $295
million being spent at the end of October. The B.C. government had reimbursed the Company
approximately $110 million out of an economic assistance package of up to $166 million at the
same date. Major services have been installed, and cladding of the mill and service buildings is
complete. The mills, flotation cells, piping and electrical services are being installed in the mill
building. Clearing of the corridor for the power line and erection of the pylons as well as
construction of the tailings pipeline and dam are proceeding on schedule. Preproduction stripping of
the open pit commenced in July.
The Company expects to fund the completion of the project from current cash and securities in
treasury, investment and economic assistance from the B.C. government, as well as from permitted
debt capacity and equipment lease financing.
The Company's revolving line of credit expired on September 30, 1997. The Company is currently
in the process of negotiating the terms of another credit facility to replace this revolving line of credit
and anticipates that the negotiations will be concluded by the end of the fiscal year.
OUTLOOK
The spot gold price has continued to weaken throughout 1997, from a high of US$370 per ounce
on January 1 to a low of US$307 per ounce in mid-November, with a year-to-date average (at the
end of September) of US$339 per ounce. In 1995 and 1996, the spot price averaged US$384 and
US$388 per ounce, respectively. The average quarterly spot gold price has decreased steadily
throughout the year, from US$351 per ounce in the first quarter, to US$343 per ounce in the
second quarter, and US$324 per ounce in the third quarter. The Company expects to receive an
average realized price of approximately US$400 per ounce in 1997 as a result of its gold hedging
program, but thereafter gold sales are not hedged.
Management continues to review the Company's operating strategy at its mines and its capital
development program in response to the low gold price, its present high cash cost structure until the
Kemess Mine commences production, and its ability to generate cash flow from operations. In
response to these factors, the Company closed its Hope Brook and Colomac mines in the third
quarter and has deferred development and construction of other projects until the gold price
recovers and cash flow is generated from the Kemess Mine. Kemess is scheduled to commence
production in April of next year.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
With the exception of historical statements, the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are based on numerous variables and assumptions that are inherently uncertain and could
cause actual results to be materially more or less favorable than projected, including without
limitation general economic and competitive conditions and other factors. Among such factors are
those related to volatility in the price of gold, copper and other commodities, changes in interest and
foreign exchange rates, government regulation and agency action, competing land claims, the
accuracy of estimates of ore reserves and mineral inventory, environmental costs and risks,
unanticipated processing, access, transportation of supplies, water availability or other problems,
other factors relating to the Company's ability successfully to complete development projects within
projected capital budgets or to carry on mining operations within projected operating budgets and
the risk factors listed from time to time in the Company's filings with the Securities and Exchange
Commission, including without limitation the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, Part I:, Item 7, Risks and Uncertainties. |
