March 29, 2001
HOMESTAKE MINING CO /DE/ (HM)
Annual Report (SEC form 10-K)
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of operations covering the three year periods ended December 31, 2000 appears on pages 24 through 32 in the Company's 2000 Annual Report to Shareholders and is hereby incorporated by reference.
ITEM 7(a)--MARKET RISK DISCLOSURES
See notes 2 and 19 to the consolidated financial statements at December 31, 2000 for additional information regarding the Company's precious metals and foreign currency hedging programs and the adoption of Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities." Such information is hereby incorporated by reference.
Gold and Silver Risk Disclosures
The results of the Company's operations are affected significantly by the market price of gold. Gold prices are influenced by numerous factors over which the Company has no control, including expectations with respect to the rate of inflation, the relative strength of the United States dollar and certain other currencies, interest rates, global or regional political or economic crises, demand for gold for jewelry and industrial products, and sales by holders and producers of gold in response to these factors. Homestake's precious metals risk management policy provides for the use of forward sales contracts to hedge up to 30% of each of the following ten year's expected annual gold production, and up to 30% of each of the following five year's expected annual silver production, at prices in excess of certain targeted prices. The policy also provides for the use of combinations of put and call option contracts to establish minimum floor prices. Homestake does not hold or issue financial instruments or derivative financial instruments for trading purposes or to create hedge positions in excess of forecast identifiable exposures.
At December 31, 2000 the Company's gold hedging contracts, used to reduce exposure to precious metal prices, consisted entirely of forward sales contracts. The Company intends to physically deliver metals in accordance with the terms of these forward sales contracts.
At December 31, 2000 the Company had gold forward sales contracts outstanding as follows:
Fair
Value
Expected Maturity or Transaction Date Total (US$
------------------------------------------------- or millions)
2001 2002 2003 2004 2005 Thereafter Average (2)
------- ------- ------- ------- ------ ---------- ------- ---------
US $ denominated
contracts:
Ounces................ 10,000 10,000 -- -- 90,000 559,200 669,200 $14.8
Average price
($ per oz.).......... $ 400 $ 403 -- -- $ 400 $ 418 $ 415
Australian $ denominated
contracts: (1) 12.2
Ounces................ 300,000 264,800 144,800 228,800 26,000 -- 964,400
Average price
(US$ per oz.)........ $ 290 $ 306 $ 317 $ 331 $ 294 -- $ 308
--------
(1) Expressed in US dollars at an exchange rate of A$ = US$0.5588.
(2) Fair values are based on market quotations for similar financial instruments.
During 2000, the Company closed out and financially settled its then- remaining US dollar-denominated silver forward sales contracts covering 3.6 million ounces maturing in 2000 and 2001 and US and Australian dollar denominated option contracts covering 884,000 ounces of gold expiring in 2001 through 2004. The pretax gains of $4.2 million realized as a result of these transactions have been deferred and are being recorded in income as the originally designated production is sold.
Foreign Currency Risk Disclosures
Significant portions of the Company's operations are located in Australia and Canada. The Company's profitability is impacted by fluctuations in those countries' currency exchange rates relative to the United States dollar. Under the Company's foreign currency protection program, the Company has entered into a series of foreign currency option contracts to minimize the effects of a strengthening of either the Canadian or Australian currencies in relation to the United States dollar. In July 2000, the Company discontinued its foreign currency protection program. Option contracts outstanding at December 31, 2000 are expected to remain in place until maturity.
At December 31, 2000 the Company had Canadian and Australian foreign currency option contracts outstanding as follows:
Expected Maturity or Transaction Date
--------------------------------------------
Total or Fair
2001 2002 Average Value (4)
--------- --------- ---------- ------------
(US$ in millions)
Canadian $ / US $ option contracts:
US $ covered..................... $ 66.1 $ 66.1 $ (0.1)
Written puts, average exchange
rate (1)...................... 0.69 0.69
US $ covered..................... $ 62.1 $ 62.1
Purchased calls, average
exchange rate (2)............. 0.66 0.66
US $ covered..................... $ 38.3 $ 38.3
Purchased puts, average
exchange rate (3)............. 0.65 0.65
Australian $ / US $ option
contracts:
US $ covered..................... $ 96.8 $ 33.0 $ 129.8 (4.1)
Written puts, average exchange
rate (1)...................... 0.66 0.68 0.66
US $ covered..................... $ 96.8 $ 33.0 $ 129.8
Purchased calls, average
exchange rate (2)............. 0.65 0.68 0.66
US $ covered..................... $ 85.8 $ 33.0 $ 118.8
Purchased puts, average
exchange rate (3)............. 0.63 0.65 0.64
--------
(1) Assuming exercise by the counter-party at the expiration date, the Company
would exchange US dollars for Canadian or Australian dollars at the put
exchange rate if the spot exchange was below the put exchange rate.
(2) Assuming exercise by the Company of the expiration date, the Company would exchange US dollars for Canadian dollars or Australian dollars at the call exchange rate if the spot exchange rate was above the call exchange rate.
(3) Assuming exercise by the Company of the expiration date, the Company would exchange Canadian or Australian dollars for US dollars at the put exchange rate if the spot exchange rate was below the put exchange rate.
(4) Fair values are based on market quotations for similar financial instruments.
At December 31, 2000 the Company had borrowings outstanding under its cross-border credit facility ("Credit Facility") of $148.9 million. Interest on these borrowings is payable quarterly, based upon the Bankers' Acceptance Discount Rate plus a stamping fee. At December 31, 2000 and 1999 this rate was 6.95% and 6.17% respectively. If this rate had been 1% higher during 2000, the Company's interest expense would have increased by $1.5 million. Conversely, if this rate had been 1% lower during 2000, the Company's interest expense would have decreased by $1.6 million.
The Company does not require or place collateral for its foreign currency and precious metals hedging derivatives. However, the Company minimizes its credit risk by dealing with only major international banks and financial institutions.
Other Financial Instrument Risk Disclosures
The carrying values of the Company's long-term debt and other financial instruments approximated their estimated fair values at December 31, 2000 (see notes 13 and 16 to the consolidated financial statements at December 31, 2000). The fair value of borrowings under the pollution control bonds and the Company's Credit Facility have been estimated to approximate their carrying values as these instruments bear interest at prevailing market rates. The Canadian dollar-denominated borrowings under the Credit Facility are held by the Company's Canadian subsidiaries whose functional currency is the Canadian dollar. Therefore the reported liability balance, as expressed in the US dollar reporting currency of Homestake, will fluctuate as the Canadian to US dollar exchange rate changes.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's 2000 Annual Report to Shareholders includes the Company's consolidated balance sheets as of December 31, 2000 and 1999 and related statements of consolidated operations, consolidated shareholders' equity, consolidated cash flows and consolidated comprehensive income (loss) for each of the three years in the period ended December 31, 2000 and the independent accountants' report thereon, and certain supplementary financial information. The following are hereby incorporated by reference from the Company's 2000 Annual Report to Shareholders at the pages indicated:
Statements of Consolidated Operations (page 34) Consolidated Balance Sheets (page 35) Statements of Consolidated Shareholders' Equity (page 36) Statements of Consolidated Cash Flows (page 37) Statements of Consolidated Comprehensive Income (Loss) (page 38) Notes to Consolidated Financial Statements (pages 39-55) Report of Independent Accountants (page 56) Quarterly Selected Data (page 57)
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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