AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 2004
SEC FILE NO. 333-111516
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
AMENDMENT NO. 3
TO
FORM F-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
----------
KINROSS GOLD CORPORATION
(Exact name of registrant as specified in its charter)
ONTARIO, CANADA 1041 650430083
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
52ND FLOOR SCOTIA PLAZA, 40 KING STREET WEST
TORONTO, ONTARIO CANADA M5H 3Y2 (416) 365-5123
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
JOHN IVANY
52ND FLOOR SCOTIA PLAZA, 40 KING STREET WEST
TORONTO, ONTARIO CANADA M5H 3Y2 (416) 365-5123
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
KEITH L. POPE, ESQ. JOHN J. HALLE, ESQ.
PARR WADDOUPS BROWN GEE & LOVELESS CHRISTOPHER J. VOSS, ESQ.
185 SOUTH STATE STREET, SUITE 1300 STOEL RIVES LLP
SALT LAKE CITY, UTAH 84111-1537 3600 ONE UNION SQUARE
TELEPHONE: (801) 532-7840 600 UNIVERSITY STREET
TELECOPY: (801) 532-7750 SEATTLE, WASHINGTON 98101
TELEPHONE: (206) 624-0900
TELECOPY: (206) 386-7500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this registration statement and the
completion of the merger between Crown Merger Corporation, a wholly-owned
subsidiary of Kinross Gold Corporation, and Crown Resources Corporation.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
CALCULATION OF REGISTRATION FEE
====================================================================================================================
Title of Each Class Amount Proposed Maximum Proposed Maximum Amount of
of Securities to be Offering Price Aggregate Registration
to be Registered Registered(1) Per Share(2) Offering Price(2) Fee(2)
--------------------------------------------------------------------------------------------------------------------
Common Shares, no par value 14,441,460 $7.798 $ 112,614,612 $9,111
--------------------------------------------------------------------------------------------------------------------
====================================================================================================================
(1) Based on (i) (a) 20,488,101 shares of common stock, par value $0.01 per
share, of Crown Resources Corporation ("Crown") outstanding as of
December 9, 2003, (b) convertible debt, convertible into 12,329,527
shares of Crown common stock as of December 9, 2003, (c) warrants to
acquire up to 13,413,333 shares of Crown common stock as of December 9,
2003, and (d) options to acquire 3,379,000 shares of Crown common stock
as of December 9, 2003; and (ii) an exchange ratio of 0.2911 Kinross
Gold Corporation common shares for each share of Crown common stock
pursuant to the merger described herein.
(2) Pursuant to Rules 457(f)(1) and 457(c) under the Securities Act and
solely for the purpose of calculating the registration fee, the proposed
maximum aggregate offering price is equal to the aggregate market value
of the approximate number of shares of Crown common stock to be
converted in the merger (calculated as set forth in note (1) above)
based upon a market value of $2.27 per share of Crown common stock, the
average of the bid and asked price per share of Crown common stock on
the OTC Bulletin Board on December 22, 2003.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
SUBJECT TO COMPLETION, DATED JULY 2, 2004
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. KINROSS GOLD CORPORATION MAY NOT SELL THE SECURITIES OFFERED BY THIS
PROXY STATEMENT/PROSPECTUS UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROXY STATEMENT/PROSPECTUS
IS NOT AN OFFER TO SELL AND IT IS NOT SOLICITING AN OFFER TO BUY ANY SECURITIES
IN ANY JURISDICTION WHERE AN OFFER OR SOLICITATION IS NOT PERMITTED.
CROWN
[LOGO] RESOURCES
[____________, 2004]
Dear Shareholder of Crown Resources Corporation:
Crown Resources Corporation ("Crown") and Kinross Gold Corporation
("Kinross") have agreed to the acquisition of Crown by Kinross under the terms
of a merger agreement. Crown's board of directors is recommending approval of
the plan of merger because it believes the merger will benefit Crown's
shareholders by creating greater shareholder value and by allowing shareholders
to participate in a larger, more diversified company. Certain of the members of
the board of directors of Crown are subject to a potential conflict of interest
in connection with the proposed merger. See the discussion in the attached Proxy
Statement/Prospectus under the caption "The Merger--Interests of Certain
Individuals."
Under the terms of the merger agreement, each share of Crown common
stock will be converted into 0.2911 of a Kinross common share. Kinross will not
issue fractional shares and will pay cash in lieu thereof. Kinross estimates
that it will issue up to approximately 13.5 million Kinross common shares on a
fully-diluted basis in the merger and that immediately after the merger Crown
shareholders will hold up to approximately 3.9% of the then outstanding Kinross
common shares, based on the 345,929,995 million Kinross common shares
outstanding on March 31, 2004. Kinross common shares are listed and traded on
the Toronto Stock Exchange under the symbol "K" and on the New York Stock
Exchange under the symbol "KGC."
The proposed merger is subject to the approval of the Crown shareholders
and the Proxy Statement/ Prospectus attached to this letter is being sent to you
in order to solicit your support of the merger. The Proxy Statement/Prospectus
contains detailed information about the proposed merger and related matters. We
encourage you to read the entire Proxy Statement/Prospectus, including the
appendices, carefully prior to voting. YOU SHOULD PAY PARTICULAR ATTENTION TO
THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 10.
Your vote is very important. Whether or not you plan to attend the
special meeting, please take the time to vote by completing, signing, dating,
and mailing the enclosed proxy card to Crown or by providing voting instructions
to your broker.
On behalf of Crown's board of directors, I thank you for your support
and appreciate your consideration of this matter.
Sincerely yours,
/s/
Christopher Herald
President and CEO
Crown Resources Corporation
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE COMMISSION
HAS APPROVED OR DISAPPROVED THE KINROSS COMMON SHARES DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Proxy Statement/Prospectus is dated [__________________, 2004], and
is first being mailed to Crown shareholders on or about [__________, 2004].
ADDITIONAL INFORMATION
Kinross and Crown file annual, quarterly and other reports and other
information with the Securities and Exchange Commission, or SEC. For a listing
of the documents available from the SEC, Kinross and Crown, please see the
section entitled "Where You Can Find More Information" beginning on page 262.
Kinross will provide you with copies of the information relating to
Kinross, without charge, upon written or oral request to Shelley M. Riley,
Corporate Secretary:
Kinross Gold Corporation
52nd Floor, Scotia Plaza
40 King Street West
Toronto, Ontario, CANADA M5H 3Y2
Telephone: (416) 365-5198
Crown will provide you with copies of this information relating to
Crown, without charge, upon written or oral request to James R. Maronick, Chief
Financial Officer:
Crown Resources Corporation
4251 Kipling Street, Suite 390
Wheat Ridge, Colorado 80033
Telephone: (303) 534-1030
IN ORDER TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE
CROWN SPECIAL MEETING, KINROSS AND CROWN SHOULD RECEIVE YOUR REQUEST NO LATER
THAN [________________________], 2004.
CROWN RESOURCES CORPORATION
4251 KIPLING STREET, SUITE 390
WHEAT RIDGE, COLORADO 80033
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [__________], 2004
To the Shareholders of Crown Resources Corporation:
Notice is hereby given that a special meeting of the shareholders of
Crown Resources Corporation, a Washington corporation ("Crown"), will be held on
[__________], 2004, at [___:___ __].m., local time, at the offices of Crown
located at 4251 Kipling Street, Suite 390, Wheat Ridge, Colorado, to consider
and take action upon the following matters:
1. a proposal to approve a plan of merger among Crown,
Kinross Gold Corporation, a corporation organized in the Province of
Ontario, Canada ("Kinross"), and Crown Merger Corporation, a
wholly-owned subsidiary of Kinross ("Crown Merger"), in accordance with
the terms of the Acquisition Agreement and Agreement and Plan of Merger
among Kinross, Crown, and Crown Merger, dated as of November 20, 2003,
as amended, attached to the Proxy Statement/Prospectus as Appendix "A,"
such that Crown will become a wholly-owned subsidiary of Kinross upon
completion of the merger;
2. a proposal to approve one or more adjournments of the
special meeting, if necessary, to permit further solicitation of proxies
if there are not sufficient votes at the time of the special meeting to
approve the plan of merger; and
3. such other matters as may properly come before the
meeting or any adjournment or postponement thereof.
Holders of record of shares of Crown common stock at the close of
business on [__________, 2004,] the record date for the special meeting, are
entitled to notice of, and to vote at, the special meeting and any adjournments
or postponements of the special meeting. At the close of business on the record
date, Crown had [_______] shares of common stock outstanding and entitled to
vote.
Crown cannot complete the merger unless the plan of merger is approved
by the affirmative vote of the holders of at least two-thirds of the shares of
Crown common stock entitled to vote.
A form of proxy and a Proxy Statement/Prospectus containing more
detailed information with respect to the matters to be considered at the special
meeting, including a copy of the merger agreement, accompany and form a part of
this notice.
Whether or not you plan to attend the special meeting, please complete,
sign, date, and return the enclosed proxy card to ensure that your shares will
be represented at the special meeting. If you sign, date, and return your proxy
card without indicating how you wish to vote, your proxy will be counted as a
vote for the approval of all proposals. Even if you have returned your proxy,
you may still vote in person if you attend the special meeting.
If your shares are held of record by a broker, bank, or other nominee,
you must instruct the record holder how to vote if you wish your shares to be
voted. If you are not the record holder of your shares and you wish to vote at
the meeting, you must obtain a proxy issued in your name from the record holder.
If you fail to return your proxy or to vote in person at the special meeting,
your shares will effectively count as a vote against approval of the plan of
merger.
Under Washington law, Crown shareholders will have the opportunity to
assert dissenters' rights of appraisal in connection with the merger. These
rights are described in greater detail in the attached Proxy
Statement/Prospectus.
By Order of the Board of Directors
James R. Maronick, Secretary
Wheat Ridge, Colorado
[__________], 2004
TABLE OF CONTENTS
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Page
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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING................................................................1
SUMMARY........................................................................................................3
THE COMPANIES..................................................................................................3
Kinross Gold Corporation....................................................................................3
Crown Resources Corporation.................................................................................3
THE MERGER.....................................................................................................3
Reasons for the Merger......................................................................................3
Terms of the Merger.........................................................................................4
Dissenters' Rights in the Merger............................................................................5
Material U.S. Federal Income Tax Consequences...............................................................5
Material Canadian Federal Income Tax Consequences...........................................................5
Recommendation of the Board of Directors....................................................................5
Management of Kinross After the Merger......................................................................5
Interests of Certain Persons in the Merger..................................................................5
Distribution of Solitario Shares............................................................................6
Principal Conditions to Completion of the Merger............................................................6
Restrictions on Soliciting Alternative Transactions.........................................................6
Kinross and Crown May Amend or Terminate the Merger Agreement...............................................6
Restrictions on Resale of Kinross Common Stock Issued in the Merger.........................................7
Comparison of Shareholder Rights and Corporate Matters......................................................7
Shares Held by Crown Directors and Executive Officers.......................................................7
New Certificates for Common Shares..........................................................................7
COMPARATIVE PER SHARE DATA.....................................................................................8
Financial Per Share Data....................................................................................8
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION................................................9
TRADING PRICE DATA.............................................................................................9
CURRENCY AND EXCHANGE RATE DATA................................................................................9
GLOSSARY AND MEASUREMENTS CONVERSION TABLE.....................................................................9
RISK FACTORS..................................................................................................10
RISKS RELATING TO THE BUSINESS OF THE COMBINED COMPANY........................................................10
RISKS RELATING TO THE MERGER..................................................................................18
CAUTIONARY STATEMENT..........................................................................................19
THE CROWN SPECIAL MEETING.....................................................................................20
GENERAL.......................................................................................................20
DATE, TIME, AND PLACE.........................................................................................20
PURPOSE OF THE SPECIAL MEETING................................................................................20
CROWN BOARD RECOMMENDATION....................................................................................20
RECORD DATE AND VOTING POWER..................................................................................20
VOTES REQUIRED................................................................................................20
STOCKHOLDER AND VOTING AGREEMENT..............................................................................21
QUORUM; ABSTENTIONS AND BROKER NON-VOTES......................................................................21
VOTING, PROXIES, AND REVOCATION...............................................................................21
SOLICITATION OF PROXIES AND EXPENSES..........................................................................22
PROPOSAL TO APPROVE ADJOURNMENT OF SPECIAL MEETING............................................................22
NO ADDITIONAL MATTERS.........................................................................................23
SHAREHOLDER PROPOSALS FOR THE CROWN 2004 ANNUAL MEETING.......................................................23
DIVIDEND POLICY...............................................................................................23
BUSINESS OF CROWN.............................................................................................23
OVERVIEW......................................................................................................23
RECENT DEVELOPMENTS...........................................................................................24
MATERIAL PROPERTIES...........................................................................................25
Buckhorn Mountain Project..................................................................................25
Kings Canyon...............................................................................................30
Peru, Bolivia, and Brazil..................................................................................30
MINERAL PROPERTY AND EXPLORATION EXPENDITURE OVERVIEW.........................................................30
EXPLORATION ACTIVITIES........................................................................................30
EMPLOYEES.....................................................................................................31
LEGAL PROCEEDINGS.............................................................................................31
CORPORATE REORGANIZATION......................................................................................32
Plan of Reorganization.....................................................................................32
CONTROL OF CROWN..............................................................................................32
STOCKHOLDER AND VOTING AGREEMENT..............................................................................33
PRINCIPAL SHAREHOLDERS OF CROWN...............................................................................34
CROWN SELECTED HISTORICAL FINANCIAL INFORMATION...............................................................36
CROWN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................................................37
BUSINESS OVERVIEW.............................................................................................37
RECENT FINANCING TRANSACTIONS.................................................................................37
CORPORATE REORGANIZATION......................................................................................38
RESULTS OF OPERATIONS.........................................................................................38
Limited Revenue Sources....................................................................................38
Three months ended March 31, 2004, compared to the three months ended March 31, 2003.......................38
Year ended December 31, 2003, compared to the year ended December 31, 2002.................................40
Year ended December 31, 2002, compared to the year ended December 31, 2001.................................41
LIQUIDITY AND CAPITAL RESOURCES...............................................................................42
Three months ended March 31, 2004, compared to the three months ended March 31, 2003.......................42
Year ended December 31, 2003, compared to the year ended December 31, 2002.................................43
Year ended December 31, 2002, compared to the year ended December 31, 2001.................................44
Contractual Obligations and Planned Expenditures...........................................................45
RELATED PARTY TRANSACTIONS....................................................................................46
CRITICAL ACCOUNTING POLICIES..................................................................................47
ENVIRONMENTAL, PERMITTING AND LEGAL...........................................................................48
RECENT ACCOUNTING PRONOUNCEMENTS..............................................................................49
DISCLOSURE ABOUT MARKET RISKS.................................................................................51
INTEREST RATE RISKS...........................................................................................51
FLUCTUATIONS IN COMMODITY PRICES..............................................................................51
BUSINESS OF KINROSS...........................................................................................51
OVERVIEW......................................................................................................51
RECENT DEVELOPMENTS...........................................................................................52
HISTORY.......................................................................................................53
SUBSIDIARIES AND MANAGEMENT STRUCTURE.........................................................................55
Organization Chart.........................................................................................55
OPERATIONS....................................................................................................56
Operations.................................................................................................57
Gold Equivalent Production (Ounces)........................................................................57
Calculation of Total Cash Costs and Realized Revenue and Reconciliation to the Statement of Operations.....59
MARKETING.....................................................................................................62
MINERAL RESERVES AND MINERAL RESOURCES........................................................................63
Cautionary Note to United States Investors Concerning Estimates of Measured and Indicated Resources........64
MATERIAL PROPERTIES...........................................................................................68
Fort Knox Mine and Area, Alaska............................................................................68
The Porcupine Joint Venture................................................................................79
Kubaka Mine, Russian Federation............................................................................90
La Coipa Mine..............................................................................................98
Crixas Mine...............................................................................................105
Paracatu (Brasilia) Mine..................................................................................112
Musselwhite Mine..........................................................................................119
Round Mountain............................................................................................126
ENVIRONMENTAL REGULATIONS....................................................................................134
General...................................................................................................134
Permitting--Buckhorn Project..............................................................................134
CERCLA Action.............................................................................................135
LEGAL PROCEEDINGS............................................................................................135
Derivative Action.........................................................................................135
Class Action..............................................................................................135
Settlement in Greece......................................................................................136
The Hellenic Gold Properties Litigation...................................................................136
Russia....................................................................................................137
Chile.....................................................................................................137
Brazil....................................................................................................137
Summa.....................................................................................................137
Other.....................................................................................................138
EMPLOYEES....................................................................................................138
MANAGEMENT OF KINROSS........................................................................................139
DIRECTORS....................................................................................................139
OFFICERS.....................................................................................................141
EXECUTIVE COMPENSATION.......................................................................................143
Option Grants in Last Fiscal Year.........................................................................144
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values.........................144
Pension and Other Benefit Plans...........................................................................144
Employment Contracts......................................................................................145
Certain Transactions......................................................................................146
Directors and Officers' Insurance.........................................................................146
Compensation of Directors.................................................................................146
Report on Executive Compensation..........................................................................147
PRINCIPAL SHAREHOLDERS OF KINROSS............................................................................152
MARKET PRICE FOR KINROSS COMMON SHARES.......................................................................153
KINROSS SELECTED FINANCIAL DATA..............................................................................154
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF KINROSS...................................................154
EXCHANGE RATE DATA...........................................................................................156
KINROSS GOLD CORPORATION SELECTED UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION.....................................................................................157
KINROSS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.....................................................................................162
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE QUARTERS ENDED MARCH 31, 2004
AND 2003..................................................................................................162
Overview..................................................................................................163
Results Summary...........................................................................................163
Operating Results.........................................................................................164
Expenses..................................................................................................174
Liquidity and Capital Resources...........................................................................176
Outlook...................................................................................................178
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEARS ENDED DECEMBER 31, 2003,
2002, AND 2001............................................................................................178
Overview..................................................................................................179
Results Summary...........................................................................................179
Material Events...........................................................................................179
Financial/Operations......................................................................................182
Expenses..................................................................................................195
Liquidity and Capital Resources...........................................................................197
Critical Accounting Policies..............................................................................201
Recent Accounting Pronouncements..........................................................................209
Risk Analysis.............................................................................................210
Strategy..................................................................................................215
Outlook...................................................................................................216
THE MERGER...................................................................................................216
GENERAL......................................................................................................216
BACKGROUND OF THE MERGER.....................................................................................217
REASONS FOR THE MERGER--ADVANTAGES AND DISADVANTAGES.........................................................220
Kinross...................................................................................................221
Crown.....................................................................................................221
INTERESTS OF CERTAIN INDIVIDUALS.............................................................................223
STOCK OPTIONS................................................................................................224
REGULATORY APPROVALS REQUIRED................................................................................224
DISSENTERS' RIGHTS OF APPRAISAL..............................................................................224
Requirements for Exercising Dissenters' Rights............................................................224
Dissenters' Notice Procedure..............................................................................225
Payment Procedure.........................................................................................226
Payment Disputes..........................................................................................226
Fair Value................................................................................................227
ACCOUNTING FOR THE MERGER....................................................................................227
DELIVERY OF CERTIFICATES FOR KINROSS COMMON SHARES...........................................................227
PAYMENT IN LIEU OF ISSUING FRACTIONAL SHARES.................................................................228
EXPENSES OF THE MERGER.......................................................................................228
RESTRICTIONS ON TRANSFER OF KINROSS COMMON SHARES............................................................228
United States.............................................................................................228
Canada....................................................................................................228
AGREEMENTS RELATING TO THE MERGER............................................................................229
THE MERGER AGREEMENT.........................................................................................229
Structure of the Merger...................................................................................229
Effective Time and Timing of Closing......................................................................229
Consideration to be Received in the Merger................................................................229
Exchange of Certificates Representing Crown Common Stock..................................................229
Distribution of Solitario Common Stock....................................................................230
Treatment of Crown Stock Options..........................................................................230
Treatment of Crown Warrants...............................................................................230
Representations and Warranties............................................................................231
Conduct of Business Pending the Merger....................................................................231
Offers for Alternative Transactions.......................................................................231
Conditions to the Parties' Obligations to Close the Merger................................................233
Termination and Effects of Termination....................................................................234
Expenses..................................................................................................236
Additional Agreements.....................................................................................236
Amendment.................................................................................................236
Waiver....................................................................................................236
STOCKHOLDER AND VOTING AGREEMENT.............................................................................236
THE DISTRIBUTION AGREEMENT...................................................................................237
MARKET FOR SECURITIES........................................................................................237
DESCRIPTION OF SECURITIES....................................................................................238
KINROSS PREFERRED SHARES.....................................................................................238
Dividends.................................................................................................238
Conversion................................................................................................238
Redemption; Put Right.....................................................................................238
Other Payments............................................................................................238
Voting Rights.............................................................................................238
Liquidation Preference....................................................................................238
KINAM CONVERTIBLE PREFERRED SHARES...........................................................................239
Dividends.................................................................................................239
Conversion................................................................................................239
Redemption................................................................................................239
Voting Rights.............................................................................................239
WARRANTS.....................................................................................................239
KINROSS COMMON SHARES........................................................................................239
Dividends.................................................................................................240
Liquidation...............................................................................................240
Voting....................................................................................................240
TRANSFER AGENT...............................................................................................240
COMPARISON OF RIGHTS OF HOLDERS OF KINROSS COMMON SHARES AND HOLDERS OF
CROWN COMMON STOCK........................................................................................240
GENERAL PROVISIONS...........................................................................................241
Authorized Capital........................................................................................241
Number of Directors.......................................................................................241
Director Qualifications...................................................................................242
Election of Directors by Zoloto...........................................................................242
Vacancy on the Board of Directors.........................................................................242
Removal of Directors......................................................................................243
Amendments to Governing Documents.........................................................................243
Quorum of Shareholders....................................................................................243
Special Shareholder Meetings..............................................................................244
Shareholder Consent Instead of a Meeting..................................................................244
Significant Transactions..................................................................................244
Shareholder Proposals and Advance Notice Requirements.....................................................245
Dissenters' Rights........................................................................................246
Shareholder Derivative Actions............................................................................247
Oppression Remedy.........................................................................................247
Payment of Dividends......................................................................................248
Repurchase of Shares......................................................................................248
Fiduciary Duties of Directors.............................................................................249
Indemnification of Officers and Directors.................................................................249
Director Liability........................................................................................250
Access to Corporate Records...............................................................................251
Transactions With Interested Directors....................................................................251
Anti-Takeover Provisions and Interested Shareholder Transactions..........................................252
TAX CONSEQUENCES.............................................................................................254
UNITED STATES FEDERAL TAX CONSEQUENCES.......................................................................254
General...................................................................................................254
United States Federal Tax Consequences of the Merger......................................................255
Withholding With Respect to Cash Paid in Lieu of Fractional Kinross Shares................................256
United States Federal Tax Consequences to U.S. Holders Owning and Disposing of
Kinross Common Shares..................................................................................256
Taxation of Dividends on Kinross Common Shares............................................................256
Taxation on Sale or Exchange of Kinross Common Shares.....................................................257
Passive Foreign Investment Company Considerations.........................................................258
U.S. Information Reporting and Backup Withholding.........................................................259
CANADIAN FEDERAL TAX CONSEQUENCES............................................................................260
U.S. Shareholders and Warrant Holders.....................................................................260
Canadian Shareholders and Warrant Holders.................................................................261
EXPERTS......................................................................................................262
VALIDITY OF KINROSS COMMON SHARES............................................................................262
WHERE YOU CAN FIND MORE INFORMATION..........................................................................262
GLOSSARY OF TECHNICAL TERMS USED IN THIS DOCUMENT............................................................264
MEASUREMENTS CONVERSION TABLE................................................................................280
INDEX TO FINANCIAL STATEMENTS................................................................................281
APPENDICES
Appendix A - Merger Agreement.............................................................................A-1
Appendix B - Washington Dissenters' Rights Statute........................................................B-1
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING
Q. WHY IS MY VOTE IMPORTANT?
A. The plan of merger must be approved by at least two-thirds of the shares
of Crown common stock outstanding on the record date. If you do not
return your proxy card or vote at the special meeting, it will be more
difficult for Crown to obtain the necessary approval of the plan of
merger, because your failure to vote will have the same practical effect
as a vote against the plan of merger.
Q. WHAT DO I NEED TO DO NOW?
A. After you have carefully read this document, please complete, sign, and
date your proxy and return it in the enclosed postage-paid return
envelope as soon as possible. This will enable your shares to be
represented and voted at the special meeting. If your shares are held in
a brokerage account, you must provide instructions to your broker in
order for your shares to be voted on the plan of merger.
Q. CAN I CHANGE MY VOTE?
A. Yes. If you are a record holder, you can change your vote at any time
before your proxy is voted at the special meeting by:
o delivering to the Secretary of Crown a signed written notice of
revocation;
o delivering to the Secretary of Crown a signed proxy card with a
later date; or
o attending the special meeting and voting in person. However,
your attendance alone will not revoke your proxy.
If your shares are held in a "street name" account, you must timely
contact your broker, bank, or other nominee to change your vote.
To ensure that a notice of revocation is received and acted upon, please
send the notice so that it is received, at the latest, one business day
before the special meeting.
Q. CAN I ATTEND THE MEETING AND VOTE MY SHARES IN PERSON?
A. Yes. All shareholders are invited to attend the special meeting.
Shareholders of record can vote in person at the special meeting. If
your shares are held in street name, then you are not the shareholder of
record and you must ask your broker, bank, or other nominee how you can
vote at the meeting.
Q. IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER OR BANK, WILL MY
BROKER OR BANK VOTE MY SHARES FOR ME?
A. No, your broker or bank will not vote your shares on the plan of merger
unless you provide instructions on how to vote. You should follow the
directions provided by your broker or bank regarding how to instruct
your broker or bank to vote your shares.
Q. WHAT IF I FAIL TO INSTRUCT MY BROKER OR BANK ABOUT HOW TO VOTE?
A. Your failure to instruct your broker, bank, or other nominee to vote
your shares will have the same effect as a vote against approval of the
plan of merger.
Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A. No. After the merger is completed, you will receive a transmittal form
with instructions for the surrender of Crown stock certificates. Please
do not send in your stock certificates with your proxy.
Q. WHO CAN HELP ANSWER MY QUESTIONS?
A. You should contact Christopher E. Herald at Crown Resources Corporation,
4251 Kipling Street, Suite 390, Wheat Ridge, Colorado 80033, telephone
(303) 534-1030, or by e-mail to cherald@aol.com.
You also may obtain additional information about Kinross and Crown from
the documents filed with the Securities and Exchange Commission or by
following the instructions in the section entitled "Where You Can find
More Information" on page 262.
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SUMMARY
THIS SUMMARY HIGHLIGHTS MATERIAL INFORMATION ABOUT THE PROPOSED MERGER
THAT IS MORE FULLY DISCUSSED ELSEWHERE IN THIS DOCUMENT. THIS SUMMARY DOES NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
MERGER FULLY, WE ENCOURAGE YOU TO READ THE ENTIRE PROXY STATEMENT/PROSPECTUS,
INCLUDING THE MERGER AGREEMENT AND THE OTHER DOCUMENTS ATTACHED AS APPENDICES TO
THIS PROXY STATEMENT/PROSPECTUS. ALL INFORMATION CONCERNING KINROSS INCLUDED IN
THIS DOCUMENT HAS BEEN FURNISHED BY KINROSS, AND ALL INFORMATION CONCERNING
CROWN INCLUDED IN THIS DOCUMENT HAS BEEN FURNISHED BY CROWN.
THE COMPANIES
KINROSS GOLD CORPORATION
Kinross is principally engaged in the exploration for and the
acquisition, development, and operation of gold bearing properties in North and
South America and Russia. Kinross' principal product and source of cash flow is
gold. Kinross is amalgamated under and is governed by the laws of Ontario,
Canada. Kinross organized Crown Merger Corporation in the state of Washington
for the sole purpose of completing the merger and the acquisition of Crown.
Crown Merger has no operations or assets.
Kinross' principal offices are located at Suite 5200, Scotia Plaza, 40
King Street West, Toronto, Ontario, M5H 3Y2. Kinross' telephone number is (416)
365-5123. Kinross' corporate website is WWW.KINROSS.COM. The information on
Kinross' website is not incorporated by reference into this Proxy
Statement/Prospectus.
In Canada, the Kinross common shares trade on the Toronto Stock Exchange
(the "TSX") under the symbol "K." The Kinross common shares trade on the New
York Stock Exchange (the "NYSE") under the symbol "KGC." See "Business of
Kinross" beginning on page 51.
CROWN RESOURCES CORPORATION
Crown is a precious metals exploration company. Crown's primary business
has been to identify properties with promising mineral potential, acquire these
properties, and explore them to an advanced state. Other than its Buckhorn
Mountain Project, Crown currently has no active exploration activities and has
no revenues from operations.
Crown is organized under the laws of the state of Washington. Crown's
principal offices are located at 4251 Kipling Street, Suite 390, Wheat Ridge,
Colorado 80033, and its telephone number is (303) 534-1030. Crown's corporate
website is www.crownresources.com. The information on Crown's website is not
incorporated by reference into this Proxy Statement/Prospectus. See "Business of
Crown" beginning on page 23.
THE MERGER
REASONS FOR THE MERGER
Crown is the owner of a potential mining property referred to as the
Buckhorn Mountain Project. Crown has conducted exploration activities, completed
a feasibility study, and begun the necessary permitting process to seek to
develop the Buckhorn Mountain Project into a producing gold mine. However, Crown
may lack the future financial resources necessary to complete the permitting
process and does not currently have the funds required to commence mining at the
Buckhorn Mountain Project site. In addition to permitting and capital costs,
Crown would be obligated to obtain the required bonding in order to commence
mining at the Buckhorn Mountain Project. Battle Mountain, the former joint
venture partner of Crown which had previously managed the Buckhorn Mountain
Project and provided significant access to financial resources, withdrew as a
result of permitting delays and associated costs and transferred its interest in
the Buckhorn Mountain Project to Crown in July 2001. Crown has no assurance that
it would have access to the financial funding necessary to commence operations
at the Buckhorn Mountain Project.
Kinross is an established gold mining company that owns the Kettle River
mill, the only operating ore
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processing facility located near the Buckhorn Mountain Project and within the
state of Washington. Kinross currently has access to the technical personnel and
funding necessary to pursue the permitting, construction, and operation of the
Buckhorn Mountain Project. The Kettle River mill and tailings facilities will be
used to process the ore from the Buckhorn Mountain Project and gives Kinross
unique permitting and operational synergies with the Buckhorn Mountain Project.
In addition, the increase in gold prices over the past two years supports the
development of the Buckhorn Mountain Project on an accelerated basis.
On the basis of the foregoing, the proposed merger substantially
eliminates future permitting and financial risks to the Crown shareholders'
interest in the development of the Buckhorn Mountain Project and, at the same
time, permits Kinross to take advantage of the synergies between its existing
operations and facilities and the Buckhorn Mountain Project. The merger terms
were determined in negotiations between Crown and Kinross and are, in the
opinion of Crown's board of directors, fair to the Crown shareholders. Two of
the members of the board of directors of Crown who are also employees will
receive termination payments in connection with the merger. See "The
Merger--Reasons for the Merger--Advantages and Disadvantages" beginning on page
220 and "The Merger--Interests of Certain Individuals" at page 223.
TERMS OF THE MERGER
In the merger, Kinross will acquire complete ownership of Crown. Each
outstanding share of Crown common stock will be converted into 0.2911 of a
Kinross common share. Fractional shares will be paid in cash. For example, if
you own 100 shares of Crown common stock, then you will receive 29 Kinross
common shares, plus an amount in cash equal to the market value of 0.11 of a
Kinross common share. The total number of Kinross common shares to be issued in
the merger will vary depending on whether outstanding warrants to purchase Crown
common stock are exercised for cash or on a cashless basis, as permitted by the
terms of the Crown warrants. However, Kinross estimates that it will issue up to
13.5 million Kinross common shares in the merger. On completion of the merger,
Crown shareholders will hold approximately 3.9% of the outstanding Kinross
common shares and Crown will be a wholly-owned subsidiary of Kinross.
At the election of the holder of any unexercised warrant to purchase
Crown common stock, the warrant will be exchanged for 0.2911 of a Kinross common
share for each share of Crown common stock that would have been issued if the
warrant had been exercised on a cashless basis immediately prior to the merger.
If the warrant holder does not make this election, the warrant will represent
the right to acquire Kinross common shares subsequent to the merger, with the
number of shares and the exercise price appropriately adjusted on the basis of
the merger exchange ratio.
On December 8, 2003, the Crown board of directors took action, as
permitted under the Crown 2002 Stock Incentive Plan, so that all options to
purchase Crown common stock not exercised as of the effective time of the merger
will be terminated.
The merger is expected to be completed as soon as practicable after the
special meeting.
See "The Merger" beginning on page 216.
DISSENTERS' RIGHTS IN THE MERGER
Under applicable Washington law, you may assert dissenters' rights and
receive a cash payment for the fair value of your shares, but only if you comply
with all requirements of Washington law as set forth in Appendix B of this Proxy
Statement/Prospectus. Pursuant to your dissenters' rights under Washington law,
you may seek a determination by a Washington court of the fair value of your
shares. The fair value determined by the court may
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be more than, less than, or equal to the value of the consideration to be paid
in the merger. Kinross' obligation to consummate the merger is conditioned upon
no more than 5% of the Crown shareholders exercising dissenters' rights
immediately prior to the effective time of the merger. See "The
Merger--Dissenters' Rights of Appraisal" beginning on page 224.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
Parr Waddoups Brown Gee & Loveless, A Professional Corporation, counsel
to Kinross, has delivered its opinion to Kinross and Crown that, based on the
assumed accuracy of factual assumptions and representations of Kinross and
Crown, the merger will qualify as a reorganization for U.S. federal income tax
purposes, which means that Crown shareholders and warrant holders generally will
not recognize any gain or loss on the merger for United States federal income
purposes, except with respect to the cash, if any, received in lieu of
fractional Kinross common shares. Crown shareholders who exercise and perfect
their dissenters' rights will generally recognize gain or loss on the
transaction as if it constituted a sale of their Crown common stock. See "Tax
Consequences--United States Federal Tax Consequences" beginning on page 254.
MATERIAL CANADIAN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Cassels Brock & Blackwell LLP, counsel to Kinross,
Crown shareholders and warrant holders who are not, and have not been, resident
in Canada for purposes of the Income Tax Act (Canada) at any time while they
have held Crown common stock and/or warrants will not be subject to Canadian
federal income tax in respect of any capital gain arising on the exchange of
Crown common stock or warrants for Kinross common shares or cash in lieu of a
fractional Kinross common share as a result of the merger. For Crown
shareholders and warrant holders who are Canadian residents, the exchange will
be a taxable event so that they will realize a gain or loss, as applicable, for
Canadian income tax purposes. See "Tax Consequences--Canadian Federal Tax
Consequences" beginning on page 260.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Crown's board of directors believes the merger is in the best interests
of the Crown shareholders and has unanimously adopted the plan of merger. The
Crown board unanimously recommends that the Crown shareholders vote "FOR"
approval of the plan of merger. See "The Crown Special Meeting--Crown Board
Recommendation" beginning on page 20. Two members of the Crown board who are
also employees will receive termination payments in connection with the proposed
merger. See "The Merger--Interests of Certain Individuals" beginning on page
223.
MANAGEMENT OF KINROSS AFTER THE MERGER
Kinross' directors and executive officers will not change as a result of
the merger. See "The Merger" and "Management of Kinross" beginning on pages 216
and 139, respectively.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In June 2000, Crown entered into change in control agreements with each
of its executive officers. Completion of the merger will be considered a change
in control (as defined in the agreements) and will result in payments being made
to executives. See "The Merger--Interests of Certain Individuals" beginning on
page 223.
DISTRIBUTION OF SOLITARIO SHARES
Prior to the merger, Crown intends to distribute all of the 9,633,585
shares of common stock of Solitario Resources Corporation, a Colorado
corporation ("Solitario"), owned by it to Crown shareholders, other than those
shares of Solitario it is contractually obligated to withhold for delivery on
the exercise or exchange of outstanding warrants to purchase Crown common stock
or shares withheld to avoid the distribution of fractional shares. If you are a
Crown shareholder as of [__________], 2004, the record date for the
distribution, you will receive a pro rata portion of the Solitario common stock.
Holders of outstanding Crown warrants will also receive Solitario common stock
if they elect to exchange their warrants for Kinross common shares or if they
exercise their warrants after the merger. See
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"Agreements Relating to the Merger--The Distribution Agreement" beginning on
page 237.
PRINCIPAL CONDITIONS TO COMPLETION OF THE MERGER
The merger is conditioned on the following:
o approval of the plan of merger by the holders of at least
two-thirds of the Crown common stock outstanding as of the
record date for the Crown special meeting;
o the compliance by each of the parties with their respective
representations, warranties, and covenants as set forth in the
merger agreement, unless waived by the other party;
o the absence of any material adverse change in the condition of
either party not consented to by the other party;
o the absence of material regulatory limitations or prohibitions
on the consummation of the transaction or the continuation of
the proposed business of Crown; and
o other conditions described under the heading "Agreements
Relating to the Merger--The Merger Agreement--Conditions to the
Parties' Obligations to Close the Merger" beginning on page 233.
RESTRICTIONS ON SOLICITING ALTERNATIVE TRANSACTIONS
Crown has agreed that it will not conduct any discussions regarding, or
enter into a prospective business combination of Crown with any party other than
Kinross except in limited circumstances. The limited exceptions to this
prohibition are intended to enable Crown's board of directors to fulfill its
fiduciary duties to Crown's shareholders. Each of Crown's officers, directors,
and shareholders who signed a voting agreement with Kinross also agreed not to
initiate or engage in any such discussions. See "Agreements Relating to the
Merger--The Merger Agreement--Offers for Alternative Transactions" beginning on
page 231 and "Stockholder and Voting Agreement" beginning on page 236.
KINROSS AND CROWN MAY AMEND OR TERMINATE THE MERGER AGREEMENT
Kinross and Crown can mutually agree to terminate the merger agreement
at any time before completing the merger. Also, either of Kinross or Crown may,
without the other's consent, but subject to limitations, terminate the merger
agreement:
o if the merger has not been completed on or before September 30,
2004;
o if approval of the merger by Crown's shareholders is not
obtained;
o if a ruling or an injunction prohibiting or restraining the
merger has been issued or any law prohibits the merger;
o if the other company has breached its representations,
warranties, or covenants under the merger agreement;
o if the Crown board of directors withdraws its recommendation of
the merger or recommends or enters into a transaction providing
for the acquisition of Crown by an entity other than Kinross; or
o for other reasons described under the heading "Agreements
Relating to the Merger--The Merger Agreement--Termination and
Effects of Termination" beginning on page 234.
In some instances, termination of the merger agreement will require
Crown to pay to Kinross a termination fee of U.S. $2.0 million.
RESTRICTIONS ON RESALE OF KINROSS COMMON STOCK ISSUED IN THE MERGER
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Except for shares issued to "affiliates" of Crown, as that term is
defined in Rule 144 under the U.S. Securities Act of 1933, as amended (the
"Securities Act"), all Kinross common shares to be issued to U.S. shareholders
of Crown in connection with the merger will be transferable without further
registration under the Securities Act. Sales by affiliates of Crown must be made
in accordance with the requirements of Rules 144 and 145 under the Securities
Act.
Kinross common shares issued to Canadian shareholders of Crown in
connection with the merger will be distributed in reliance on exemptions from
the registration and prospectus requirements of Canadian securities laws,
subject, in the case of Quebec, to regulatory approval, and will be freely
tradable in or into Canada through appropriately registered dealers provided the
conditions of the exemptions are met at the time of such transaction.
See "The Merger--Restrictions on Transfer of Kinross Common Shares" beginning on
page 228.
COMPARISON OF SHAREHOLDER RIGHTS AND CORPORATE MATTERS
As of the effective time of the merger, Crown shareholders will cease to
own Crown shares and, to the extent they do not exercise dissenters' rights,
will become shareholders of Kinross. While the rights and privileges of
shareholders of a corporation organized under the Business Corporations Act
(Ontario) (the "OBCA"), such as Kinross are, in many instances, comparable to
those of shareholders of a Washington corporation such as Crown, there are
material differences.
For a discussion of significant differences in the rights of holders of
Crown common stock and the rights of holders of Kinross common shares, see
"Comparison of Rights of Holders of Kinross Common Shares and Holders of Crown
Common Stock" beginning on page 240.
SHARES HELD BY CROWN DIRECTORS AND EXECUTIVE OFFICERS
At the close of business on the record date, Crown's directors and
executive officers and their affiliates owned and were entitled to vote
[________] shares of Crown common stock, which represented approximately [__]%
of the shares of Crown common stock outstanding on that date. These shares are
subject to a voting agreement with Kinross, providing for the shares to be voted
in favor of the plan of merger. See "Principal Shareholders of Crown" beginning
on page 34 and "Agreements Relating to the Merger--Stockholder and Voting
Agreement" beginning on page 236.
NEW CERTIFICATES FOR COMMON SHARES
All shares of Crown common stock outstanding at the effective time of
the merger, except those held by Crown shareholders validly exercising their
dissenters' rights, automatically will be converted into Kinross common shares.
Each certificate formerly representing shares of Crown common stock will
represent that number of Kinross common shares into which the Crown stock has
been converted.
Record holders of Crown common stock will receive a letter from
Computershare Trust Company of New York, the exchange agent, with instructions
for submitting their old Crown certificates for Kinross certificates. You should
wait until you receive instructions from the exchange agent prior to submitting
your Crown certificates.
No fractional shares will be issued, and Crown shareholders who would
otherwise be entitled to receive a fractional share will receive a cash payment
equal to the market value of the fractional share based on the trading prices of
the Kinross common shares on the NYSE immediately prior to the merger. See
"Agreements Relating to the Merger--The Merger Agreement--Exchange of
Certificates Representing Crown Common Stock" beginning on page 229.
COMPARATIVE PER SHARE DATA
FINANCIAL PER SHARE DATA
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The following table sets forth, for the periods indicated, selected pro
forma per share amounts, prepared in accordance with CDN GAAP and U.S. GAAP, for
Kinross common shares after giving effect to the merger; pro forma equivalent
per share amounts for shares of Crown common stock; and the corresponding
historical per share data for Kinross common shares and shares of Crown common
stock. The information presented below should be read in conjunction with the
unaudited pro forma consolidated financial statements of Kinross, together with
the relevant notes, adjustments, and assumptions thereto, and the historical
audited consolidated financial statements for the three years ended December 31,
2003, and related notes of each of Kinross and Crown included in this Proxy
Statement/Prospectus.
AS AT AND AS AT AND
FOR THE AS AT AND FOR THE AS AT AND
THREE FOR THE THREE FOR THE
MONTHS YEAR MONTHS YEAR
ENDED ENDED ENDED ENDED
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
--------- ------------ --------- ------------
2004 2003 2004 2003
---- ---- ---- ----
CDN GAAP CDN GAAP U.S. GAAP U.S. GAAP
KINROSS COMMON SHARES
Net earnings:
Net earnings per share $ 0.04 $ 0.06 $ 0.04 $ (0.05)
Pro Forma 0.04 0.01 0.04 (0.09)
Cash dividends per Kinross common share:
Historical - - - -
Pro Forma - - - -
Book value per Kinross common share at period end:
Historical $ 5.23 $ 5.22 $ 5.22 $ 5.18
Pro Forma 5.30 5.29 5.29 5.24
CROWN COMMON STOCK
Net earnings:
Net (loss) earnings per share $ (0.02) $ (0.45) $ (0.02) $ (0.45)
Crown per share equivalent 0.01 0.00 0.01 (0.02)
Cash dividends per Crown common share:
Historical - - - -
Crown per share equivalent - - - -
Book Value per Crown common share at period end:
Historical $ 1.34 $ 1.36 $ 1.34 $ 1.36
Crown per share equivalent 1.54 1.54 1.56 1.54
You should not rely on the pro forma per share data as being indicative
of the results of operations or financial condition that would have been
reported by the combined company had the merger been in effect during the
periods set forth above or that may be reported in the future.
Equivalent per share data in respect of the shares of Crown common stock
has been calculated by multiplying the Kinross pro forma amounts by the exchange
ratio of 0.2911. Additional information regarding historical trading prices for
Kinross common shares can be found under "Market Price for Kinross Common
Shares" on page 153.
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Kinross' selected unaudited pro forma consolidated financial information
reflecting, among other things, the completion of the merger with Crown can be
found under the caption "Kinross Selected Financial Data--Kinross Gold
Corporation Selected Unaudited Pro Forma Consolidated Financial Information"
beginning on page 157 and in the financial statement presentation at F-A1.
TRADING PRICE DATA
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The table below presents the per share closing prices of Kinross common
shares on the TSX and the NYSE and Crown common stock on the OTC Bulletin Board
as of October 7, 2003, the last trading day before announcement of the merger
agreement, and June 30, 2004, a recent trading date. The table also sets forth
the equivalent per share price for Crown common stock. This price is calculated
by multiplying the price of the Kinross common shares as reported by the NYSE by
the merger exchange ratio of 0.2911. For more detailed trading price information
of Kinross common shares, see "Market Price for Kinross Common Shares" on page
153.
Kinross common Kinross common Crown common Crown common
shares (historical) shares (historical) stock (historical) stock (equivalent)
on the TSX on the NYSE OTC
October 7, 2003 $10.07 $7.58 $1.50 $2.21
June 30, 2004 $ 7.42 $5.56 $1.75 $1.62
Crown shareholders should obtain current market quotations for Kinross
common shares and Crown common stock in considering the proposal to approve the
plan of merger. No assurance can be given as to the market prices of Kinross
common shares or Crown common stock at any time before the merger or the market
price of Kinross common shares at any time after merger. The exchange ratio will
not be adjusted for increases or decreases in the market price of Kinross common
shares or Crown common stock, regardless of when they occur.
Kinross has not paid cash dividends on its common shares, and Crown has
not paid cash dividends on its common stock. Kinross has made an application
for, and the TSX has conditionally approved, the listing of the Kinross common
shares issuable in connection with the merger, subject to the receipt by the TSX
of (i) written confirmation of the date of completion of the merger and the
exact number of shares issued or to be issued; (ii) an executed copy of the
Acquisition Agreement and Plan of Merger and all other material agreements;
(iii) a copy of the form of any warrants assumed by Kinross as a result of the
merger; (iv) a customary legal opinion of counsel to Kinross regarding, among
other things, due authorization of the common shares issued in the merger; and
(v) payment of the required listing fee. Kinross filed an application for
listing with the NYSE.
CURRENCY AND EXCHANGE RATE DATA
References in this document to "$," "dollars," "U.S. dollars," or "U.S.
$," are to the currency of the United States, and references to "Canadian
dollars," or "CDN $," are to the currency of Canada. On June 30, 2004, the noon
buying rate as reported by the Bank of Canada was CDN $1.3404 per U.S. $1.00.
This information should not be construed as a representation that the Canadian
dollar amounts actually represent, or could be converted into, U.S. dollars at
the rate indicated. See "Kinross Selected Financial Data--Exchange Rate Data" on
page 156.
GLOSSARY AND MEASUREMENTS CONVERSION TABLE
Technical terms relating to geology, mining, and related matters are
defined in the "Glossary of Technical Terms Used in this Document" beginning on
page 264. A table providing information for converting metric measurements to
imperial measurements is under "Measurements Conversion Table" on page 280.
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RISK FACTORS
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An investment in the Kinross common shares involves certain risks. In
addition to considering the other information in this Proxy
Statement/Prospectus, you should consider carefully the following factors in
deciding whether to vote in favor of the plan of merger. If any of these risks
occur, or if other risks not currently anticipated or fully appreciated occur,
the business and prospects of Kinross could be materially adversely affected,
which could have an adverse effect on the trading price for its shares.
RISKS RELATING TO THE BUSINESS OF THE COMBINED COMPANY
KINROSS' MINERAL EXPLORATION AND MINING OPERATIONS INVOLVE SIGNIFICANT RISKS,
INCLUDING THE DIFFICULT NATURE OF ESTABLISHING THE EXISTENCE OF ECONOMIC
MINERALIZATION, SIGNIFICANT UP-FRONT CAPITAL REQUIREMENTS, VARIABILITY IN
DEPOSITS, AND OTHERS THAT MAY RESTRICT KINROSS' ABILITY TO RECEIVE AN ADEQUATE
RETURN ON ITS CAPITAL IN THE FUTURE.
The exploration and development of mineral deposits involves significant
financial and other risks over an extended period of time, which even a
combination of careful evaluation, experience, and knowledge may not eliminate.
Few mining properties that are explored are ultimately developed into producing
mines. Major expenses are required to establish reserves by drilling and to
construct mining and processing facilities. Large amounts of capital are
frequently required to purchase necessary equipment. Delays due to equipment
malfunction or inadequacy may adversely affect Kinross' results of operations.
It is impossible to ensure that the current or proposed exploration programs on
properties in which Kinross has an interest will result in profitable commercial
mining operations.
Whether a gold deposit will be commercially viable depends on a number
of factors, including the particular attributes of the deposit, such as its size
and grade, costs and efficiency of the recovery methods that can be employed,
proximity to infrastructure, financing costs and governmental regulations,
including regulations relating to prices, taxes, royalties, infrastructure, land
use, importing and exporting of gold, and environmental protection. The effect
of these factors cannot be accurately predicted, but the combination of these
factors may result in Kinross not receiving an adequate return on its invested
capital.
KINROSS IS SUBJECT TO RISKS CAUSED BY VARIOUS EXTERNAL FACTORS, INCLUDING LEGAL
LIABILITY CREATED BY ITS OPERATIONS.
The operations of Kinross are subject to the hazards and risks normally
incident to exploration, development, and production of gold, any of which could
result in damage to life or property, environmental damage and possible legal
liability for such damage. The activities of Kinross may be subject to prolonged
disruptions due to weather conditions depending on the location of operations in
which Kinross has interests. Hazards, such as unusual or unexpected formations,
faults and other geologic structures, rock bursts, pressures, cave-ins,
flooding, or other conditions may be encountered in the exploration, mining, and
removal of material.
CHANGES TO THE EXTENSIVE FOREIGN REGULATORY AND ENVIRONMENTAL RULES AND
REGULATIONS TO WHICH KINROSS IS SUBJECT COULD HAVE A MATERIAL ADVERSE EFFECT ON
KINROSS' FUTURE OPERATIONS.
Kinross' mining and processing operations and exploration activities in
the Americas, Russia, Australia, Africa, and other countries and regions are
subject to various laws and regulations governing the protection of the
environment, exploration, development, production, exports, taxes, labor
standards, occupational health, waste disposal, toxic substances, mine safety,
and other matters. The legal and political circumstances outside of the United
States cause these risks to be different from, and in many cases, greater than,
comparable risks associated with operations within the United States. New laws
and regulations, amendments to existing laws and regulations, or more stringent
implementation of existing laws and regulations could have a material adverse
impact on Kinross, increase costs, cause a reduction in levels of production
and/or delay or prevent the development of new mining properties. Compliance
with these laws and regulations requires significant expenditures and increases
the mine development and operating costs of Kinross. Changes in regulations and
laws could adversely affect Kinross' operations or substantially increase the
costs associated with those operations.
10
CHANGES TO THE EXTENSIVE UNITED STATES REGULATORY AND ENVIRONMENTAL RULES AND
REGULATIONS TO WHICH KINROSS IS SUBJECT COULD HAVE A MATERIAL ADVERSE EFFECT ON
KINROSS' FUTURE OPERATIONS.
Kinross' exploration programs in the United States are subject to
federal, state, and local environmental regulations. Some of Kinross' mining
claims are on United States public lands. The United States Forest Service (the
"USFS") and Bureau of Land Management (the "BLM") extensively regulate mining
operations conducted on public lands. Most operations involving the exploration
for minerals are subject to laws and regulations relating to exploration
procedures, safety precautions, employee health and safety, air quality
standards, pollution of stream and fresh water sources, odor, noise, dust, and
other environmental protection controls adopted by federal, state, and local
governmental authorities as well as the rights of adjoining property owners. In
addition, in order to conduct mining operations on Kinross' properties, it will
be required to obtain performance bonds related to environmental permit
compliance. These bonds may take the form of cash deposits or, if available,
could be provided by outside insurance policies. Kinross may be required to
prepare and present to federal, state, or local authorities' data pertaining to
the effect or impact that any proposed exploration or mining activity may have
upon the environment. All requirements imposed by any such authorities may be
costly and time-consuming and may delay commencement or continuation of
exploration or production operations.
KINROSS IS SUBJECT TO RISKS AND EXPENSES RELATED TO RECLAMATION COSTS AND
RELATED LIABILITIES. INCREASES IN THESE COSTS OVER CURRENT ESTIMATES COULD HAVE
A MATERIAL ADVERSE EFFECT ON KINROSS.
Kinross is generally required to submit for government approval a
reclamation plan and to pay for the reclamation of its mine sites upon the
completion of mining activities. Kinross estimates its share of reclamation
closure obligations as of December 31, 2003, at $146.3 million based on
information currently available. In addition, Kinross spent $19.3 million in
2003 and plans reclamation spending of approximately $19.2 million in 2004 as
part of its current closure plans and to get as many closure projects as
possible to post-closure monitoring by the end of 2005. Any increases over the
current estimates of these costs could have a material adverse effect on
Kinross.
KINROSS IS SUBJECT TO RISKS RELATED TO ENVIRONMENTAL LIABILITY, INCLUDING
LIABILITY FOR ENVIRONMENTAL DAMAGES CAUSED BY MINING ACTIVITIES PRIOR TO
OWNERSHIP BY KINROSS. THE PAYMENT OF SUCH LIABILITIES WOULD REDUCE FUNDS
OTHERWISE AVAILABLE AND COULD HAVE A MATERIAL ADVERSE EFFECT ON KINROSS.
Mining, like many other extractive natural resource industries, is
subject to potential risks and liabilities associated with pollution of the
environment and the disposal of waste products occurring as a result of mineral
exploration and production. Environmental liability may result from mining
activities conducted by others prior to the ownership of a property by Kinross.
The payment of such liabilities would reduce funds otherwise available and could
have a material adverse effect on Kinross. Should Kinross be unable to fund
fully the cost of remedying an environmental problem, Kinross might be required
to suspend operations or enter into interim compliance measures pending
completion of the required remedy, which could have a material adverse effect on
the operations and business of Kinross.
KINROSS' OPERATIONS COULD BE ADVERSELY AFFECTED BY CHANGES IN MINING LAWS
RELATED TO ROYALTIES, NET PROFITS INTERESTS, LAND AND MINERAL OWNERSHIP AND
SIMILAR MATTERS.
Bills proposing major changes to the mining laws of the United States
have been considered by Congress. If these bills, which may include royalty fees
or net profits interests, are enacted in the future, they could have a
significant effect on the ownership and operation of patented and unpatented
mining claims in the United States, including claims that Kinross owns or holds.
Any amendment to current laws and regulations governing operations and
activities of mining companies, or more stringent implementation thereof, could
have a material adverse impact on Kinross' financial condition and results of
operation.
11
CERTAIN CHARACTERISTICS OR MANAGEMENT DECISIONS OF KINROSS MAY NEGATIVELY AFFECT
UNITED STATES SHAREHOLDERS TO A GREATER EXTENT THAN THEY DO SHAREHOLDERS OF
OTHER NATIONALITIES.
The Kinross common shares that will be distributed to the former Crown
shareholders in the merger are shares of a Canadian corporation. Various United
States tax provisions apply only to foreign corporations or apply differently to
foreign corporations than they do to domestic corporations. The differences that
are currently material to United States' residents who hold Kinross common
shares are described in the section of this Proxy Statement/Prospectus entitled
"Tax Consequences." Other provisions may adversely affect U.S. holders of the
Kinross common shares in the future. As the managers of a Canadian company with
global operations and a substantial non-U.S. shareholder base, management of
Kinross may conduct its operations in a manner that does not maximize the value
of such operations either after tax or in United States dollars, or even the
value of the Kinross common shares.
FLUCTUATIONS IN UNITED STATES AND CANADIAN EXCHANGE RATES MAY NEGATIVELY AFFECT
THE PRICE OF KINROSS' COMMON SHARES IN UNITED STATES DOLLARS.
Fluctuations in the exchange rate between Canadian and United States
dollars may affect the United States dollar value of the Kinross common shares
in ways that are different than changes in the Canadian dollar value of Kinross
common shares.
THE BUSINESS OF KINROSS IS ADVERSELY AFFECTED BY THE LACK OF INFRASTRUCTURE.
Mining, processing, development, and exploration activities depend, to
one degree or another, on adequate infrastructure. Reliable roads, bridges,
power sources, and water supply are important determinants which affect capital
and operating costs. Unusual or infrequent weather phenomena, sabotage,
terrorism, government, or other interference in the maintenance or provision of
such infrastructure could adversely affect Kinross' operations, financial
condition, and results of operations.
THE RESERVE AND RESOURCE FIGURES OF KINROSS AND CROWN ARE ONLY ESTIMATES AND ARE
SUBJECT TO REVISION BASED ON DEVELOPING INFORMATION. A SIGNIFICANT REDUCTION IN
THESE RESERVES AND RESOURCES OR IN THEIR ESTIMATES COULD NEGATIVELY AFFECT THE
PRIOR OF KINROSS' STOCK.
The figures for reserves and resources presented herein, including the
anticipated tonnages and grades that will be achieved or the indicated level of
recovery that will be realized, are estimates. Market fluctuations in the price
of gold or increases in the costs to recover gold at Kinross' mines may render
the mining of ore reserves uneconomical and materially harm Kinross' results of
operations. Moreover, various short-term operating factors may cause a mining
operation to be unprofitable in any particular accounting period.
Proven and probable reserves at Kinross' mines and development projects
and probable reserves at the Buckhorn Mountain Project were calculated based
upon a gold price of $325 and $350 per ounce, respectively, and measured and
indicated resources for Kinross were calculated based upon a gold price of $350
per ounce. Prolonged declines in the market price of gold may render reserves
containing relatively lower grades of gold mineralization uneconomic to exploit
and could reduce materially Kinross' reserves and resources. Should such
reductions occur, material write downs of Kinross' investment in mining
properties or the discontinuation of development or production might be
required, and there could be material delays in the development of new projects,
increased net losses and reduced cash flow. The estimates of mineral reserves
and resources attributable to a specific property are based on accepted
engineering and evaluation principles. The estimated amount of contained gold in
proven and probable reserves does not necessarily represent an estimate of a
fair market value of the evaluated properties.
There are numerous uncertainties inherent in estimating quantities of
mineral reserves and resources. The estimates in this Proxy Statement/Prospectus
are based on various assumptions relating to gold prices and exchange rates
during the expected life of production, mineralization of the area to be mined,
the projected cost of mining, and the results of additional planned development
work. Actual future production rates and amounts, revenues, taxes, operating
expenses, environmental and regulatory compliance expenditures, development
expenditures, and recovery rates may vary substantially from those assumed in
the estimates. Any significant change in these
12
assumptions, including changes that result from variances between projected and
actual results, could result in material downward revision to current estimates.
Approximately 19% of Kinross' proven and probable reserves are located
on properties that are not currently being operated. Commencement of operations
and recovery of these reserves is dependent on obtaining the required operating
permits. If Kinross could not obtain the necessary permits, its future
operations would be negatively impacted.
THE MINERAL RESOURCES OF KINROSS MAY NOT BE ECONOMICALLY DEVELOPABLE, IN WHICH
CASE KINROSS MAY NEVER RECOVER ITS EXPENDITURES FOR EXPLORATION AND/OR
DEVELOPMENT.
Mineral resources that are not mineral reserves do not have demonstrated
economic viability. Due to the uncertainty of inferred mineral resources, these
mineral resources may never be upgraded to proven and probable mineral reserves.
IF KINROSS DOES NOT DEVELOP ADDITIONAL MINERAL RESERVES, IT MAY NOT BE ABLE TO
SUSTAIN FUTURE OPERATIONS WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS
FUTURE OPERATIONS.
Because mines have limited lives, Kinross must continually replace and expand
its mineral reserves as its mines produce gold. The life-of-mine estimates
included in this Proxy Statement/Prospectus for each of Kinross' material
properties may prove incorrect. Kinross' ability to maintain or increase its
annual production of gold will significantly depend on its ability to bring new
mines into production and to expand mineral reserves at existing mines.
THE OPERATIONS OF KINROSS OUTSIDE OF NORTH AMERICA MAY BE ADVERSELY AFFECTED BY
CHANGING POLITICAL, LEGAL, AND ECONOMIC CONDITIONS.
Kinross has mining and exploration operations in South America, Russia,
Australia, and Africa and such operations are exposed to various levels of
political, economic, and other risks and uncertainties. These risks and
uncertainties vary from country to country and include, but are not limited to,
terrorism; hostage taking; military repression; extreme fluctuations in currency
exchange rates; high rates of inflation; labor unrest; the risks of war or civil
unrest; expropriation and nationalization; renegotiation or nullification of
existing concessions, licenses, permits and contracts; illegal mining; changes
in taxation policies; restrictions on foreign exchange and repatriation; and
changing political conditions, currency controls, and governmental regulations
that favor or require the awarding of contracts to local contractors or require
foreign contractors to employ citizens of, or purchase supplies from, a
particular jurisdiction.
Future political and economic conditions in these countries may result
in these governments adopting different policies respecting foreign development
and ownership of mineral resources. Any changes in policy may result in changes
in laws affecting ownership of assets, foreign investment, taxation, rates of
exchange, gold sales, environmental protection, labor relations, price controls,
repatriation of income, and return of capital, which may affect both the ability
of Kinross to undertake exploration and development activities in respect of
future properties in the manner currently contemplated, as well as its ability
to continue to explore, develop, and operate those properties to which it has
rights relating to exploration, development, and operations. A future government
of these countries may adopt substantially different policies, which might
extend to, as an example, expropriation of assets.
THERE ARE SIGNIFICANT CURRENCY AND TAX RISKS RELATED TO KINROSS' RUSSIAN
OPERATIONS, WHICH COULD ADVERSELY AFFECT KINROSS' RUSSIAN OPERATIONS.
Kinross is subject to the considerations and risks of operating in the
Russian Federation. The Russian economy continues to display characteristics of
an emerging market. These characteristics include, but are not limited to, a
currency that is not freely convertible outside of the country and extensive
currency controls. 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 laws, licenses, and permits have been in a state of change and
new laws may be given retroactive effect. It is also not unusual in the context
of dispute resolution in Russia for parties to use the uncertainty in the
Russian legal environment as leverage in business negotiations. In addition,
Russian tax legislation is subject to
13
varying interpretations and constant change. Further, Kinross' interpretation of
tax legislation as applied to its transactions and activities may not coincide
with that of Russian tax authorities. As a result, transactions may be
challenged by tax authorities and Kinross' Russian operations may be assessed,
which could result in significant additional taxes, penalties and interest. The
periods remain open to review by the tax authorities for three years. See
"Business of Kinross--Legal Proceedings--Russia" beginning on page 137.
ZIMBABWE AND BRAZIL SUFFER FROM SIGNIFICANT ECONOMIC INSTABILITY WHICH COULD
ADVERSELY AFFECT KINROSS' OPERATIONS IN THOSE COUNTRIES.
Kinross is subject to risks relating to an uncertain or unpredictable
political and economic environment in Zimbabwe and Brazil. In the short term,
significant economic instability in these regions is expected to negatively
impact the business environment and may lead to long-term negative changes in
the approaches taken with respect to ownership of natural resources by foreign
companies. In the case of Zimbabwe, in 2001, Kinross recorded a writedown of
$11.8 million relating to Kinross' inability to manage this operation because of
political turmoil creating inflationary pressure within Zimbabwe, difficulty in
accessing foreign currency to pay for imported goods and services, and civil
unrest. Due to Kinross' continuing inability to control distributions from the
operations in Zimbabwe, Kinross stopped reporting mining production in 2003.
KINROSS REQUIRES THE ISSUANCE AND RENEWAL OF LICENSES AND PERMITS IN ORDER TO
CONDUCT ITS OPERATIONS, AND FAILURE TO RECEIVE THESE LICENSES MAY RESULT IN
DELAYS IN DEVELOPMENT OR CESSATION OF CERTAIN OPERATIONS.
The operations of Kinross require licenses and permits from various
governmental authorities to exploit its properties, which will include the
Buckhorn Mountain Project subsequent to the merger, and the process for
obtaining licenses and permits from governmental authorities often takes an
extended period of time and is subject to numerous delays and uncertainties.
Such licenses and permits are subject to change in various circumstances.
Kinross may be unable to timely obtain or maintain in the future all necessary
licenses and permits that may be required to explore and develop its properties,
commence construction or operation of mining facilities and properties under
exploration or development or to maintain continued operations that economically
justify the cost.
THE SUCCESS OF KINROSS IS DEPENDENT ON GOLD PRICES OVER WHICH IT HAS NO CONTROL.
The profitability of Kinross' operations are significantly affected by
changes in the market price of gold. Gold prices fluctuate on a daily basis and
are affected by numerous factors beyond the control of Kinross. The supply and
demand for gold, the level of interest rates, the rate of inflation, investment
decisions by large holders of gold, including governmental reserves, and
stability of exchange rates can all cause significant fluctuations in gold
prices. Such external economic factors are in turn influenced by changes in
international investment patterns and monetary systems and political
developments. The price of gold has fluctuated widely and future serious price
declines could cause continued commercial production to be impractical.
Depending on the price of gold, cash flow from mining operations may not be
sufficient to cover costs of production and capital expenditures. If, as a
result of a decline in gold prices, revenues from metal sales were to fall below
cash operating costs, production may be discontinued.
KINROSS HAS A HISTORY OF LOSSES, AND THE SUCCESS OF KINROSS WILL REQUIRE
PROFITABLE OPERATIONS IN THE FUTURE, WHICH CANNOT BE ASSURED.
Kinross had net losses of $30.9 million and $36.3 million for 2002 and
2001, respectively. Kinross' ability to operate profitably in the future
continues to depend on the success of its principal mines and on the price of
gold.
14
THE TITLE TO PROPERTIES OF KINROSS MAY BE UNCERTAIN AND SUBJECT TO RISKS.
The validity of mining claims which constitute most of Kinross' property
holdings in the Americas, Russia, Australia, and Africa may, in certain cases,
be uncertain and is subject to being contested. Kinross' titles, particularly
title to undeveloped properties, may be defective.
Certain of Kinross' United States mineral rights consist of unpatented
mining claims. Unpatented mining claims and mill sites are unique property
interests, and are generally considered to be subject to greater title risk than
other real property interests because the validity of unpatented mining claims
is often uncertain and is always subject to challenges of third parties or
contests by the United States government. The validity of an unpatented mining
claim, in terms of both its location and its maintenance, is dependent on strict
compliance with a complex body of United States federal and state statutory and
decisional law. In addition, there are few public records that definitively
control the issues of validity and ownership of unpatented mining claims. The
General Mining Law of the United States includes provisions for obtaining a
patent, which is essentially equivalent to fee title, for an unpatented mining
claim upon compliance with certain statutory requirements (including the
discovery of a valuable mineral deposit). However, a Congressional moratorium
against the filing of new applications for a mineral patent is currently in
effect.
NUMEROUS OTHER COMPANIES COMPETE IN THE MINING INDUSTRY, MANY OF WHICH HAVE
GREATER RESOURCES AND TECHNICAL CAPACITY THAN KINROSS AND, AS A RESULT, KINROSS
MAY BE UNABLE TO EFFECTIVELY COMPETE IN ITS INDUSTRY, WHICH COULD HAVE A
MATERIAL ADVERSE EFFECT ON KINROSS' FUTURE OPERATIONS.
The mineral exploration and mining business is competitive in all of its
phases. Kinross competes with numerous other companies and individuals,
including competitors with greater financial, technical and other resources than
Kinross, in the search for and the acquisition of attractive mineral properties.
The ability of Kinross to acquire properties in the future will depend not only
on its ability to develop its present properties, but also on its ability to
select and acquire suitable producing properties or prospects for mineral
exploration. Kinross may be unable to compete successfully with its competitors
in acquiring such properties or prospects on terms it considers acceptable, if
at all.
KINROSS MAY REQUIRE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.
The mining, processing, development, and exploration of Kinross'
properties may require substantial additional financing. Failure to obtain
sufficient financing may result in delaying or indefinite postponement of
exploration, development or production on any or all of Kinross' properties, or
even a loss of property interest. Additional capital or other types of financing
may not be available if needed or, if available, the terms of such financing may
be unfavorable to Kinross.
KINROSS' INSURANCE MAY NOT COVER THE RISKS TO WHICH ITS BUSINESS IS EXPOSED.
Kinross' business is subject to a number of risks and hazards generally,
including adverse environmental conditions, industrial accidents, labor
disputes, adverse property ownership claims, unusual or unexpected geological
conditions, ground or slope failures, cave-ins, changes in the regulatory
environment and natural phenomena such as inclement weather conditions, floods
and earthquakes. Such occurrences could result in damage to mineral properties
or production facilities, personal injury or death, environmental damage to
Kinross' properties or the properties of others, delays in mining, monetary
losses and legal liability.
Kinross' insurance does not cover all the potential risks associated
with a mining company's operations. Kinross may also be unable to maintain
insurance to cover insurable risks at economically feasible premiums, and
insurance coverage may not be available in the future or may not be adequate to
cover any resulting liability. Moreover, insurance against risks such as the
validity and ownership of unpatented mining claims and mill sites and
environmental pollution or other hazards as a result of exploration and
production is not generally available to Kinross or to other companies in the
mining industry on acceptable terms. Kinross might also become subject to
liability for pollution or other hazards for which it is uninsured or for which
it elects not to insure because of premium costs or other reasons. Losses from
these events may cause Kinross to incur significant costs that could have a
material adverse effect upon its financial condition and results of operations.
15
THE OPERATIONS OF KINROSS IN VARIOUS COUNTRIES ARE SUBJECT TO CURRENCY RISK.
Currency fluctuations may affect the revenues which Kinross will realize
from its operations since gold is sold in the world market in United States
dollars. The costs of Kinross are incurred principally in Canadian dollars,
United States dollars, Russian rubles, Chilean pesos, Brazilian reals, and
Zimbabwean dollars. The appreciation of non-U.S. dollar currencies against the
U.S. dollar can increase the cost of gold production in U.S. dollar terms. While
the Russian ruble, Chilean peso, Brazilian real, and the Zimbabwean dollar are
currently convertible into Canadian and United States dollars, they may not
always be convertible in the future. See "Kinross Management's Discussion and
Analysis of Financial Condition and Results of Operations--Management's
Discussion and Analysis for the Years Ended December 31, 2002, 2002, and
2001--Risk Analysis" beginning at page 210 for a detailed discussion of examples
of the impact on Kinross' earnings of currency fluctuations and Canadian dollar
hedging for 2004.
KINROSS MAY NOT BE ABLE TO CONTROL THE DECISIONS AND STRATEGY OF JOINT VENTURES
TO WHICH IT IS A PARTY.
Some of the mines in which Kinross owns interests are operated through
joint ventures with other mining companies and are subject to the risks normally
associated with the conduct of joint ventures. The existence or occurrence of
one or more of the following circumstances and events could have a material
adverse impact on Kinross' profitability or the viability of its interests held
through joint ventures, which could have a material adverse impact on Kinross'
results of operations and financial condition:
- inability to exert influence over strategic decisions made in
respect of joint venture properties;
- disagreement with partners on how to develop and operate mines
efficiently;
- inability of partners to meet their obligations to the joint
venture or third parties; and
- litigation between partners regarding joint venture matters.
THE FAILURE OF KINROSS TO PAY ROYALTIES WOULD ADVERSELY AFFECT ITS BUSINESS AND
OPERATIONS.
Kinross' mining properties are subject to various royalty and land
payment agreements. Failure by Kinross to meet its payment obligations under
these agreements could result in the loss of related property interests.
THE COMMODITY HEDGING ACTIVITIES OF KINROSS MAY HAVE AN ADVERSE EFFECT ON ITS
RESULTS OF OPERATIONS.
Kinross has historically reduced its exposure to gold price fluctuations
by engaging in hedging activities. In 2002, Kinross changed its hedging strategy
and discontinued its hedging activities for gold. If Kinross were to resume its
hedging activities, it may be unable to achieve realized prices for gold
produced in excess of average market prices. Hedging may not adequately protect
against declines in the price of gold. Hedging may prevent Kinross from
benefiting fully from gold price increases. Currency hedging involves risks and
may require margin activities. Sudden fluctuations in currencies could result in
margin calls that could have an adverse effect on Kinross' financial position.
Sudden fluctuations in the price of gold could result in margin calls that could
have an adverse effect on the financial position of Kinross. See "Kinross
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management's Discussion and Analysis for the Years Ended December
31, 2002, 2002, and 2001--Risk Analysis" at page 210 for a detailed discussion
of Kinross' hedging activities.
THE BUSINESS OF KINROSS IS DEPENDENT ON GOOD LABOR AND EMPLOYMENT RELATIONS.
Production at Kinross' mines is dependent upon the efforts of employees
of Kinross. Relations between Kinross and its employees may be impacted by
changes in labor relations which may be introduced by, among others, employee
groups, unions, and the relevant governmental authorities in whose jurisdictions
Kinross carries on business. Adverse changes in such legislation or in the
relationship between Kinross with its employees may have a material adverse
effect on Kinross' business, results of operations, and financial condition.
16
LIMITATIONS ON THE RIGHTS OF KINROSS' FOREIGN SUBSIDIARIES COULD ADVERSELY
AFFECT ITS ABILITY TO OPERATE EFFICIENTLY.
Kinross conducts operations through foreign subsidiaries and joint
ventures, and a substantial part of its assets are held in such entities.
Accordingly, any limitation on the transfer of cash or other assets between the
parent corporation and such entities, or among such entities, could restrict
Kinross' ability to fund its operations efficiently. Any such limitations, or
the perception that such limitations may exist now or in the future, could have
a material adverse impact on Kinross' valuation and stock price.
THE RESULTS OF KINROSS' OPERATIONS COULD BE ADVERSELY AFFECTED BY ITS
ACQUISITION STRATEGY.
As part of Kinross' business strategy, it has sought, and will continue
to seek, new mining and development opportunities in the mining industry. In
pursuit of such opportunities, Kinross may fail to select appropriate
acquisition candidates or to negotiate acceptable arrangements, including
arrangements to finance acquisitions or integrate the acquired businesses and
their personnel. Kinross may be unable to complete any acquisition or business
arrangement that it pursues on favorable terms. Any acquisitions or business
arrangements completed may not ultimately benefit Kinross' business.
CHANGES IN THE MARKET PRICE OF KINROSS COMMON SHARES MAY BE UNRELATED TO ITS
RESULTS OF OPERATIONS AND COULD HAVE AN ADVERSE IMPACT ON KINROSS.
The Kinross common shares are listed on the TSX and the NYSE. The price
of the Kinross common shares is likely to be significantly affected by
short-term changes in gold price or in its financial condition or results of
operations as reflected in its quarterly earnings reports. Other factors
unrelated to the performance of Kinross that may have an effect on the price of
the Kinross common shares include the following: a reduction in analytical
coverage by investment banks with research capabilities; a drop in trading
volume and general market interest in the securities of Kinross may affect an
investor's ability to trade significant numbers of Kinross common shares; and a
substantial decline in the price of the Kinross common shares that persists for
a significant period of time could cause the Kinross common shares to be
delisted from the NYSE, further reducing market liquidity.
As a result of any of these factors, the market price of the common
shares at any given point in time may not accurately reflect Kinross' long-term
value. Securities class action litigation often has been brought against
companies following periods of volatility in the market price of their
securities. Kinross may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and damages and divert
management's attention and resources.
KINROSS HAS NOT PAID DIVIDENDS IN THE PAST AND DOES NOT ANTICIPATE DOING SO IN
THE FUTURE.
No dividends on the common shares have been paid by Kinross to date.
Kinross anticipates that it will retain all future earnings and other cash
resources for the future operation and development of its business. Kinross does
not intend to declare or pay any cash dividends in the foreseeable future.
Payment of any future dividends will be at the discretion of Kinross' board of
directors, after taking into account many factors, including Kinross' operating
results, financial condition, and current and anticipated cash needs.
THE LOSS OF KEY EXECUTIVES COULD ADVERSELY AFFECT KINROSS.
Kinross has a relatively small executive management team. See
"Management of Kinross--Officers" beginning on page 141.
In the event that the services of one or a number of these executives
were no longer available, Kinross and its business could be adversely affected.
Kinross does not carry key-man life insurance with respect to its executives.
Other than severance agreements, described under "Management of
Kinross--Executive Compensation--Employment Contracts" beginning on page 145,
Kinross does not have employment agreements with its executive officers.
17
KINROSS IS SUBJECT TO CERTAIN LEGAL PROCEEDINGS.
Kinross is a party to the legal proceedings described under the caption
"Business of Kinross--Legal Proceedings" beginning on page 135. If decided
adversely to Kinross, these legal proceedings, or others that could be brought
against Kinross in the future, could have a material adverse effect on Kinross'
financial condition or prospects.
IT MAY BE DIFFICULT TO ENFORCE A UNITED STATES JUDGMENT AGAINST THE OFFICERS AND
DIRECTORS OF KINROSS OR THE EXPERTS NAMED IN THIS PROXY STATEMENT/PROSPECTUS OR
TO ASSERT UNITED STATES SECURITIES LAWS CLAIMS IN CANADA.
Substantially all of the executive officers and directors of Kinross and
its independent accountants are nonresidents of the United States, and a
substantial portion of Kinross' assets are located outside the United States.
These executives and accountants reside in Canada, making it difficult or
impossible to effect service upon them in the United States. As a result, it may
be difficult to effect service in the United States or enforce a judgment
obtained in the United States against Kinross or any such persons. Execution by
United States courts of any judgment obtained against Kinross or its officers or
directors in United States courts would be limited to the assets of Kinross or
such persons, as the case may be, located in the United States. Additionally, it
may be difficult for you to assert civil liabilities under United States
securities laws in original actions instituted in Canada.
RISKS RELATING TO THE MERGER
THE PRICE OF THE KINROSS COMMON SHARES THAT THE CROWN SHAREHOLDERS WILL RECEIVE
IN THE MERGER WILL FLUCTUATE BETWEEN NOW AND THE TIME THE MERGER IS COMPLETED.
The number of Kinross common shares that Kinross will issue to the
former Crown shareholders in the merger will not be adjusted as a result of any
change in the price of the Kinross common shares or the Crown common stock.
Therefore, the total market price of the Kinross common shares that the Crown
shareholders will receive in the merger will depend on the market price of the
Kinross common shares at the time of the merger. That price may be lower than
the market price on the date the merger was announced, the date the merger
agreement was signed, the date of this Proxy Statement/Prospectus, or the date
of the Crown shareholders' meeting. Because the merger will occur after the date
of the Crown shareholders' meeting, you will not know the exact market price of
the Kinross common shares that will be issued in the merger at the time you vote
on it.
There are many factors that could cause the market price of the Kinross
common shares to decrease, including adverse changes in the business,
operations, or prospects of Kinross or the combined company, the timing of the
merger, general market and economic conditions, and other factors described in
this Proxy Statement/Prospectus. Crown will not have the right to terminate the
merger agreement or to resolicit the vote of its shareholders based on changes
in the price of the Kinross common shares. After the merger, the market price of
the Kinross common shares will continue to fluctuate based on factors both
within and beyond Kinross' control.
THE TERMS OF THE MERGER MAY NOT REFLECT THE VALUE OF KINROSS OR CROWN.
The terms of the merger and the determination of the number of Kinross
common shares to be issued to the Crown shareholders represent determinations
arrived at during the negotiation process for the purpose of calculating the
relative values to be assigned to the parties. The number of shares was not
fixed based on traditional indicators of value such as the earnings of Crown,
its market share, return on assets, revenues, or market capitalization since
Crown is an exploration company. The Kinross common shares to be issued to the
Crown shareholders do not, and are not intended to, represent the value of
Crown. The amounts that may be realized by the Crown shareholders if they elect
to sell their Kinross common shares following the merger may vary widely from
the current or historical trading prices of Kinross common shares.
18
CROWN SHAREHOLDERS MUST PERFORM THEIR OWN ANALYSIS OF THE TRANSACTION.
Neither the board of directors of Kinross nor the board of directors of
Crown formed a special committee to evaluate the fairness of the proposed merger
to unaffiliated shareholders. The lack of consideration by a disinterested
committee means that the shareholders will be relying exclusively on the
recommendation of the board of directors of Crown, financial information
concerning Crown and Kinross contained in this Proxy Statement/Prospectus, their
own analysis of the condition of both companies, the prospects for the business
of Kinross following the merger, and the terms of the merger in deciding whether
or not to approve the transaction. Certain individuals on the Crown board are
subject to conflicts of interests in connection with the proposed merger. See
"The Merger--Interests of Certain Individuals" beginning on page 223.
FOLLOWING THE MERGER, CROWN SHAREHOLDERS WILL NOT HAVE A SIGNIFICANT VOTE IN
KINROSS.
The Crown shareholders who are currently entitled to elect directors and
vote on such other matters as may be presented to the shareholders will, as a
result of the merger, hold only approximately 3.9% of the issued and outstanding
Kinross common shares and, consequently, will not have a substantive say in any
matter submitted to the Kinross shareholders.
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CAUTIONARY STATEMENT
--------------------------------------------------------------------------------
This Proxy Statement/Prospectus contains "forward-looking statements."
Forward-looking statements include, but are not limited to, statements with
respect to the future price of gold and silver, the estimation of mineral
reserves and resources, the realization of mineral reserve estimates, the timing
and amount of estimated future production, costs of production, capital
expenditures, costs and timing of the development of new deposits, success of
exploration activities, permitting time lines, currency fluctuations,
requirements for additional capital, government regulation of mining operations,
environmental risks, unanticipated reclamation expenses, title disputes or
claims and limitations on insurance coverage. In certain cases, forward-looking
statements can be identified by the use of words such as "plans," "expects," or
"does not expect," "is expected," "budget," "scheduled," "estimates,"
"forecasts," "intends," "anticipates," or "does not anticipate," or "believes,"
or variations of such words and phrases or state that certain actions, events or
results "may," "could," "would," "might," or "will be taken," "occur" or "be
achieved." Forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Kinross to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements. In addition to the factors Kinross currently believes to be
material, which are identified under "Risk Factors," other factors not currently
viewed as material could cause actual results to differ materially from those
described in the forward-looking statements include, among others, risks related
to the integration of acquisitions; risks related to joint venture operations;
actual results of current exploration activities; actual results of current
reclamation activities; conclusions of economic evaluations; changes in project
parameters as plans continue to be refined; failure of plant, equipment or
processes to operate as anticipated; accidents, labor disputes and other risks
of the mining industry; and unanticipated delays. In addition, there may be
other factors not currently anticipated or that may have a greater effect than
expected that could cause actions, events or results not to be as anticipated,
estimated or intended. There can be no assurance that forward-looking statements
will prove to be accurate, as actual results and future events could differ
materially from those anticipated in such statements. Accordingly, readers
should not place undue reliance on forward-looking statements which speak only
as of the date of this Proxy Statement/Prospectus. Neither Kinross nor Crown
undertakes any obligation to update or revise these forward-looking statements.
19
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THE CROWN SPECIAL MEETING
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GENERAL
Crown is furnishing this Proxy Statement/Prospectus to you in connection
with the solicitation of proxies by Crown's board of directors for use at the
special meeting of Crown shareholders to be held on [__________], 2004, and any
adjournments or postponements of the meeting.
This Proxy Statement/Prospectus is being mailed to Crown shareholders on
or about [_____________], 2004. This Proxy Statement/Prospectus is also being
furnished to Crown shareholders as a prospectus in connection with the issuance
by Kinross of Kinross common shares as contemplated by the merger agreement.
DATE, TIME, AND PLACE
The special meeting of Crown shareholders will be held on
[______________], 2004 at [____ __].m., local time, at the offices of Crown
located at 4251 Kipling Street, Suite 390, Wheat Ridge, Colorado.
PURPOSE OF THE SPECIAL MEETING
At the special meeting of Crown shareholders, you will be asked to
consider and vote on the following proposals:
o to approve the plan of merger that provides for the merger of
Crown Merger, a subsidiary of Kinross, with and into Crown, with
Crown surviving as a wholly-owned subsidiary of Kinross; and
o approve one or more adjournments of the special meeting, if
necessary, to permit further solicitation of proxies if there
are not sufficient votes at the time of the special meeting to
approve the merger proposal.
CROWN BOARD RECOMMENDATION
Crown's board of directors has unanimously determined that the merger is
advisable and in the best interests of Crown and its shareholders and has
unanimously adopted the plan of merger and recommends that Crown shareholders
vote "FOR" approval of the plan of merger and "FOR" the adjournment proposal.
Two of the members of the Crown board who are also employees will receive
termination payments in connection with the consummation of the proposed merger.
See "The Merger--Interests of Certain Individuals."
RECORD DATE AND VOTING POWER
Crown's board of directors has fixed the close of business on
[______________], as the record date for determination of Crown shareholders
entitled to notice of and to vote at the special meeting. As of the record date,
there were [_______] shares of Crown common stock outstanding and entitled to
vote, held by approximately [_______] holders of record. The common stock is the
only outstanding class of stock of Crown. Shareholders of record on the record
date are entitled to one vote per share of common stock on any matter properly
brought before the special meeting and at any adjournment or postponement
thereof.
VOTES REQUIRED
The proposal to approve the plan of merger must be approved by the
affirmative vote of at least two-thirds of the Crown common stock outstanding on
the record date.
20
The record holders of a majority of the shares of Crown common stock
present at the special meeting, either in person or represented by proxy, must
vote to approve the adjournment proposal in order for Crown's management to have
the authority to adjourn the special meeting.
STOCKHOLDER AND VOTING AGREEMENT
As of the record date for the special meeting, the directors and
executive officers of Crown and their affiliates owned [_______] shares of Crown
common stock, which represented approximately [___]% of the outstanding shares
of Crown common stock entitled to vote at the special meeting of Crown
shareholders. Several directors and executive officers of Crown, and entities
affiliated with these directors and officers, have entered into a stockholder
and voting agreement with Kinross pursuant to which these directors and
executive officers and other shareholders agreed, among other things, to vote,
or cause to be voted, all of the shares of Crown common stock owned by them, as
set forth in the stockholder and voting agreement, as well as all shares of
Crown common stock acquired by them, in favor of the approval of the plan of
merger, and against the acquisition of Crown by any person other than Kinross.
As of the record date for the special meeting, [_______] shares of Crown common
stock were subject to the stockholder and voting agreement, representing
approximately [___]% of the outstanding shares of Crown common stock entitled to
vote at the Crown special meeting, so that the vote of approximately [_______]
additional shares of Crown common stock will be required to approve the merger.
See the section entitled "Agreements Relating to the Merger--Stockholder and
Voting Agreement."
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The required quorum for the transaction of business at the special
meeting of Crown shareholders is the presence in person or by proxy of the
holders of a majority of the shares of Crown common stock outstanding on the
record date for the special meeting. We will count abstentions and broker
non-votes to determine the number of shares present at the special meeting for
the purpose of determining the presence or absence of a quorum. Broker non-votes
are proxies from brokers or other nominees indicating that the record holder of
the shares has not received instructions from the beneficial owner or other
person entitled to vote the shares which are the subject of the proxy on a
particular matter with respect to which the broker or other nominee does not
have discretionary voting power.
For purposes of the proposal to approve the plan of merger, we will not
count abstentions and broker non-votes as votes in favor of the proposal and,
therefore, abstentions and broker non-votes will have the same effect as votes
against the merger proposal. IF YOU FAIL TO VOTE OR ABSTAIN FROM VOTING, IT WILL
HAVE THE EFFECT OF A VOTE AGAINST THE PROPOSAL TO APPROVE THE PLAN OF MERGER.
For purposes of the proposal to approve one or more adjournments of the
special meeting, abstentions and broker non-votes are not counted as votes cast
and generally will have no effect on the outcome of the adjournment proposal. To
approve the adjournment proposal, a majority of votes cast, which includes "FOR"
and "AGAINST" votes, must be in favor of the proposal.
THE ACTIONS PROPOSED IN THIS PROXY STATEMENT/PROSPECTUS ARE NOT MATTERS
THAT CAN BE VOTED ON BY BROKERS HOLDING SHARES FOR BENEFICIAL OWNERS WITHOUT THE
OWNERS' SPECIFIC INSTRUCTIONS. ACCORDINGLY, WE URGE YOU TO MARK, SIGN, DATE, AND
RETURN THE ENCLOSED PROXY CARD, OR TO GIVE YOUR BROKER VOTING INSTRUCTIONS.
VOTING, PROXIES, AND REVOCATION
Crown requests that you complete, date, and sign the proxy card and
promptly return it by mail in the accompanying envelope marked for this purpose
in accordance with the instructions accompanying the proxy card. All properly
executed proxies received before taking the vote at the special meeting and not
revoked will be voted as instructed on the proxy card. IF THE PROXY CARD IS
SIGNED AND RETURNED BY ANY MEANS WITHOUT INDICATING VOTING INSTRUCTIONS, THE
SHARES REPRESENTED BY THAT PROXY WILL BE VOTED "FOR" THE APPROVAL OF THE PLAN OF
MERGER AND "FOR" THE APPROVAL OF ONE OR MORE ADJOURNMENTS OF THE SPECIAL
MEETING.
21
If your broker holds your shares in "street name," your broker will vote
your shares only if you provide instructions on how to vote. Your broker will
provide directions on how to instruct it to vote your shares. Note that, if the
holder of record of your shares is your broker, bank, or other nominee and you
wish to vote at the special meeting, you must have a "legal" proxy from your
broker, bank, or other nominee authorizing you to vote those shares.
You may revoke your proxy at any time before it is voted by delivering
to Crown, to the attention of James R. Maronick, 4251 Kipling Street, Suite 390,
Wheat Ridge, Colorado 80033, a written notice of revocation or a new proxy card
dated after the first one relating to the same shares, or by attending the Crown
shareholder meeting and voting in person. Attendance at the Crown meeting will
not, by itself, constitute the revocation of the proxy.
SOLICITATION OF PROXIES AND EXPENSES
Crown will bear the costs of soliciting proxies. Proxies will initially
be solicited by mail, but executive officers, directors, and selected other
employees of Crown may also solicit proxies in person or by telephone or
facsimile. Such persons who solicit proxies will not be specially compensated
for such services. We will request nominees, fiduciaries, and other custodians
to forward soliciting materials to beneficial owners and reimburse them for
their reasonable expenses. BROKERAGE HOUSES, NOMINEES, FIDUCIARIES AND OTHER
CUSTODIANS WILL BE REQUESTED TO FORWARD SOLICITING MATERIALS TO BENEFICIAL
OWNERS AND WILL BE REIMBURSED FOR THEIR REASONABLE EXPENSES INCURRED IN SENDING
PROXY MATERIALS TO BENEFICIAL OWNERS.
PROPOSAL TO APPROVE ADJOURNMENT OF SPECIAL MEETING
Crown is submitting a proposal for consideration at the special meeting
to authorize the named proxies to approve one or more adjournments of the
special meeting if there are not sufficient votes to approve the plan of merger
at the time of the special meeting. Even though a quorum may be present at the
special meeting, it is possible that Crown may not have received sufficient
votes to approve the plan of merger by the time of the special meeting. In that
event, Crown would need to adjourn the special meeting in order to solicit
additional proxies. The adjournment proposal relates only to an adjournment of
the special meeting for purposes of soliciting additional proxies to obtain the
requisite shareholder approval to approve the plan of merger. Any other
adjournment of the special meeting (E.G., an adjournment required because of the
absence of a quorum) would be voted upon pursuant to the discretionary authority
granted by the proxy.
To allow the proxies that have been received by Crown at the time of the
special meeting to be voted for an adjournment, if necessary, Crown is
submitting a proposal to approve one or more adjournments to Crown shareholders
for their consideration. Approval of the adjournment proposal requires the
affirmative vote of holders of a majority of the shares of Crown common stock
who cast "FOR" and "AGAINST" votes at the special meeting, assuming a quorum is
present at the meeting. With respect to broker non-votes, brokers or other
nominees that hold shares of Crown common stock in "street name" accounts do not
have the discretionary authority to vote to approve any adjournment of the
special meeting without appropriate instructions from the beneficial owner. IF
YOUR SHARES ARE HELD IN STREET NAME AND YOU FAIL TO INSTRUCT YOUR BROKER ON HOW
TO VOTE WITH RESPECT TO THE ADJOURNMENT PROPOSAL, THOSE CROWN SHAREHOLDERS WHO
VOTE "FOR" OR "AGAINST" THE ADJOURNMENT PROPOSAL WILL DECIDE WHETHER TO ADOPT
THAT PROPOSAL AND YOUR SHARES WILL HAVE NO EFFECT ON THE OUTCOME OF THE
PROPOSAL. AN ABSTENTION AS TO THIS PROPOSAL WILL HAVE NO EFFECT ON WHETHER IT IS
ADOPTED.
THE CROWN BOARD RECOMMENDS THAT YOU VOTE "FOR" THE ADJOURNMENT PROPOSAL.
Properly executed proxies will be voted "FOR" the adjournment proposal,
unless otherwise noted on the proxies. If the special meeting is adjourned,
Crown is not required to give further notice of the time and place of the
adjourned meeting, unless the board of directors fixes a new record date for the
special meeting.
22
The adjournment proposal relates only to an adjournment of the special
meeting occurring for purposes of soliciting additional proxies for the approval
of the merger agreement proposal in the event that there are insufficient votes
to approve that proposal. The Crown board has full authority to adjourn the
special meeting for any other purpose, including the absence of a quorum, or to
postpone the special meeting before it is convened, without the consent of any
Crown shareholder.
NO ADDITIONAL MATTERS
This special meeting has been called to consider the merger proposal and
the adjournment proposal. Under Crown's bylaws, no other matters may be
considered at the special meeting.
SHAREHOLDER PROPOSALS FOR THE CROWN 2004 ANNUAL MEETING
If the merger is not completed, proposals of Crown shareholders that are
intended to be presented at Crown's 2004 Annual Meeting must be timely delivered
to or received by Crown. Under Crown's bylaws, in order to be deemed properly
presented, notice must be delivered to, or mailed and received by, Crown not
later than [_____________].
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DIVIDEND POLICY
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No dividends on the Kinross common shares have been paid by Kinross to
date. For the foreseeable future, it is anticipated that Kinross will use
earnings, if any, to finance its growth and that dividends will not be paid to
shareholders, other than dividends payable to the holder of the Kinross
preferred shares in accordance with their terms. Pursuant to the syndicated
credit facility, Kinross is required to obtain consent from the lenders prior to
declaring any common share dividend.
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BUSINESS OF CROWN
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OVERVIEW
Crown is a precious metals exploration company operating in the western
United States. As of June 7, 2004, Crown owns 37.1% of Solitario, which was
included in the financial statements of Crown on a consolidated basis prior to
October 2000. Since that date, Crown's investment in Solitario has been
accounted for under the equity method of accounting. Solitario operates as a
precious and base metals exploration company in the United States, Brazil,
Bolivia, and Peru.
Crown's principal expertise is in identifying properties and mineral
interests with promising mineral potential, acquiring these properties and
interests and exploring them to an advanced stage. Crown's goal historically has
been to advance its properties, either on its own or through joint ventures, to
the feasibility study stage and thereafter to pursue development of the
properties, typically through a joint venture with a partner that has expertise
in mining operations. Crown has in the past recognized revenues from the option
and sale of property interests to joint venture partners and from the sale of
its share of metals produced on its properties.
Over the past several years, Crown has had limited financial resources
and, accordingly, has not engaged directly in any significant exploration
activity other than at the Buckhorn Mountain Project. Crown's current activities
relate to the permitting process for development of the Buckhorn Mountain
Project.
23
Crown was incorporated under the laws of the State of Washington in
August 1988. Unless otherwise indicated by the context, all references to Crown
refer to Crown Resources Corporation and its subsidiaries.
RECENT DEVELOPMENTS
On February 21, 2003, Crown issued $2,705,000 of its Convertible
Subordinated Notes, Series B, due 2006 (the "Subordinated B Notes"). The
Subordinated B Notes were convertible into common stock of Crown at $0.75 per
share. Solitario invested $400,000 in the Subordinated B Notes on the same terms
as all other investors.
On October 8, 2003, Crown announced that it would be distributing its
holdings of 9,633,585 shares of Solitario's common stock, other than shares
withheld to meet its contractual obligations to warrant holders and to avoid the
distribution of fractional shares to its shareholders. Crown plans to make this
distribution prior to closing the merger with Kinross.
On October 31, 2003, and November 5, 2003, a total of $839,331 of
Crown's 10% Convertible Subordinated Notes due 2006 (the "Subordinated Notes")
were converted into 1,119,108 shares of Crown common stock. On November 5, 2003,
the remaining $3,160,669 of Subordinated Notes were automatically converted into
4,214,225 shares of Crown common stock. Also on November 5, 2003, $2,705,000 of
Crown's Subordinated B Notes were automatically converted into 3,606,667 shares
of Crown common stock. The automatic conversions were in accordance with the
provisions of the Subordinated Notes and Subordinated B Notes whereby the
Subordinated Notes and Subordinated B Notes automatically convert into common
stock if the price of the common stock trades above 233% of the conversion price
of $0.75, or $1.75, for 20 consecutive days. The shares related to the automatic
conversion are deemed issued and outstanding as of November 5, 2003.
On November 11, 2003, Crown entered into a toll milling agreement (the
"Toll Milling Agreement") with Echo Bay Minerals Co. ("Echo Bay Minerals"), a
wholly-owned subsidiary of Kinross, whereby Crown would deliver ore from its
Buckhorn Mountain Project deposit to Echo Bay Minerals' Kettle River mill,
located near Republic, Washington approximately 92 kilometers (57 miles) from
the Buckhorn Mountain Project. Under the terms of the Toll Milling Agreement,
Echo Bay Minerals agreed to process up to 1,500 tons per day of ore (the
"Production Ores") at a rate of $20 per ton. In addition Crown agreed to pay a
one-time capital charge of $5 million to Echo Bay Minerals on or before the last
day of the calendar month following the delivery of Production Ores to the
Kettle River Mill. The agreement is subject to Crown obtaining the necessary
permits to mine and deliver the Production Ores, standard toll-milling terms
regarding (among other terms) grade, delivery, commingling and refining, and
regulatory approval.
On November 20, 2003, Crown entered into the merger agreement with
Kinross whereby Kinross would acquire 100% of the shares of Crown common stock.
Under the terms of the merger agreement, shareholders of Crown will receive
0.2911 of a Kinross common share for each share of Crown and prior to the
completion of the acquisition, Crown would dividend to its shareholders its
equity interest in Solitario.
On November 21, 2003, the Secured Notes were called for redemption, and
prior to December 31, 2003, $1,994,000 in Secured Notes were converted into
5,679,142 shares of Crown common stock with the remainder being redeemed for
cash.
On December 1, 2003, Crown received a feasibility study for the Buckhorn
Mountain Project prepared by SRK Consulting, Suite 602, 357 Bay Street, Toronto,
ON, Canada ("SRK"), an independent mining and engineering consulting firm. The
SRK feasibility study determined that the reported mineral reserves in the study
are economically viable based on current information on costs and technology
applicable to mining, metallurgy and other relevant factors that relate to the
extraction of the mineral reserve. The mineral reserves and resources reported
in the SRK feasibility study have been verified by Mike Michaud, a Mineral
Economist representing SRK. Mr. Michaud is a "qualified person" within the
meaning of applicable Canadian securities regulatory standards. He has verified
the reserve data disclosed herein, including any relevant sampling, analytical
and test data.
24
MATERIAL PROPERTIES
The following discussion summarizes the primary mining properties in
which Crown has a direct interest. Crown believes the properties described below
are favorable for mineral development, although Crown cannot assure you that any
of the properties, in which Crown has or may acquire an interest, will be
economically viable.
BUCKHORN MOUNTAIN PROJECT
PROPERTY DESCRIPTION AND LOCATION
The Buckhorn Mountain Project is located on approximately 2,000 acres 24
miles east of Oroville, Washington. Crown currently owns 100% of the Buckhorn
Mountain Project, which was held in a joint venture with Battle Mountain Gold
Corporation ("Battle Mountain") prior to July 2001. During Crown's joint venture
with Battle Mountain, the Buckhorn Mountain Project was known as the Crown Jewel
Project. Battle Mountain merged with Newmont Gold Corporation ("Newmont") on
January 10, 2002.
The Buckhorn Mountain Project is held by a combination of fee ownership,
fee land for which leases are held with options to purchase, and unpatented
mining claims. The ore deposit lies primarily on unpatented claims owned by
Crown. Royalties on mineral property controlled by Crown payable to third
parties vary from a 2% net smelter return royalty to an 8.33% net profits
royalty on certain unpatented mining claims. The ore body as currently defined
is subject only to the sliding-scale royalty payable to Newmont of 0.5% to 4%,
depending on the price of gold. The Newmont royalty may be purchased in its
entirety for $2.0 million at any time before July 23, 2006.
Crown has applied for patents on nine unpatented mining claims covering
approximately 150 acres.
The following map depicts the approximate location of the Buckhorn
Mountain Project.
25
[PICTURE]
ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE, AND PHYSIOGRAPHY
The Buckhorn Mountain Project is located in the Okanogan Highlands, a
mountainous terrain province characterized by rounded peaks and moderately steep
walled valleys. The elevation range in the project area is approximately 4,500
feet to 5,500 feet.
Vegetative cover in the project area is mostly coniferous forest
dominated by Douglas fir and western larch. Natural openings on forested
hillsides consist of dry scrublands or grassy meadows. The climate in the
deposit area can be considered temperate. The calculated mean annual
precipitation is 20 inches, approximately 35% of which falls as snow. Average
total snow accumulation in the area of the deposit is about three feet.
The small community of Chesaw is the closest town. Oroville (population
1,500) is the nearest incorporated community. Paved roads from Oroville approach
to within six miles of the property with the remaining access by graded county
road and three miles of primitive USFS road. No power exists at the location of
the ore deposit. The nearest power is located three miles to the south.
HISTORY
Crown discovered the ore bodies known as the Buckhorn Mountain Project
shortly after acquiring the property in 1988. Prior to that time only small
prospect pits shafts and tunnels had explored the general area, none of which
intersected the ore body as it is currently defined.
26
In March 1990, Crown entered into a joint venture agreement with Battle
Mountain (the "Battle Mountain JV Agreement"), under which Battle Mountain could
earn a 51% interest in the Buckhorn Mountain Project by building a 3,000-ton per
day mining facility. The Battle Mountain JV Agreement was subsequently modified
in May 1994 allowing Battle Mountain the right to earn a 54% interest in the
Project. Under the Battle Mountain JV Agreement, as amended, Battle Mountain
paid Crown $18,500,000, and funded all exploration and permitting on the
Buckhorn Mountain Project through July 2001. On July 23, 2001, Crown entered
into an agreement (the "Termination Agreement") with Battle Mountain to
terminate the Battle Mountain JV Agreement. As part of the Termination
Agreement, Crown became the sole owner and manager of the Buckhorn Mountain
Project and granted Battle Mountain a sliding scale royalty of 0.5% to 4% on the
first one million ounces of gold. The royalty varies with the price of gold and
Crown may purchase the royalty from Newmont, as successor to Battle Mountain,
for a payment of $2 million any time before July 23, 2006.
Since return of 100% ownership of the property, Crown has conducted
drilling, engineering, and environmental studies and permitting activities.
GEOLOGY AND MINERALIZATION
The Buckhorn Mountain Project gold deposit occurs within a portion of an
extensive skarn system formed at the southern contact between a
diorite-granodiorite intrusive and sediments and volcanic rocks of Triassic age.
Both the skarn system and the gold-mineralized body are largely tabular and flat
lying in geometry. The skarn system shows a zonation in its composition when
observed in relation to the intrusive pluton. Gold mineralization can be both
concordant with the skarn or cross-cutting it. Gold enrichment occurs almost
exclusively within skarnified rocks both as irregular bodies and as more
continuous tabular replacements of limestone. Gold values are associated with
low grades of silver (less than one ounce per ton). No other economic minerals
occur within the ore.
EXPLORATION
Crown began an exploration program at the Buckhorn Mountain Project in
mid-1988 and by the end of 1989 had drilled approximately 200 holes on the
property. Between March 1990 and December 1992, Battle Mountain drilled over 550
holes designed to both confirm and expand the known reserve. In 2002 and 2003,
Crown drilled 41 core holes to further confirm the grade and continuity of
mineralization in selected parts of the ore body.
DRILLING, SAMPLE AND ANALYSIS, AND SECURITY OF SAMPLES
Drilling on the property occurred in three phases. Crown drilled core
and reverse circulation rotary holes during the period of 1988 to early 1989.
Battle Mountain drilled core and reverse circulation rotary holes from 1990 to
1995 and Crown drilled core holes in 2002 and 2003. During the first phase of
Crown drilling, splits were taken of drill samples and submitted for analysis to
Silver Valley Laboratories of Osburn, Idaho. Core was sawed and reverse
circulation rotary chips were riffle split in order to obtain representative
samples for analysis. Check assays of selected samples were submitted for
comparison with original assays. Sample intervals were selected by the geologist
in charge of the project. After acquiring its joint venture interest, Battle
Mountain checked Crown's drill results by submitting splits from the core, pulps
from core and reverse circulation rotary samples and reverse circulation rotary
duplicate chips to a second laboratory for confirmatory assays. Additionally,
Battle Mountain drilled twin holes to confirm Crown's results in selected areas.
Battle Mountain's drilling was logged by a geologist and was sampled on
five-foot intervals. Entire core samples were submitted for assay and pulps were
checked for re-assay. Rejects of reverse circulation rotary holes were
re-assayed. Standards and blanks were submitted along with exploration samples.
Battle Mountain primarily used Silver Valley Laboratory of Osburn, Idaho for
assay services.
27
Samples from Crown's second phase of drilling in 2002 and 2003 were
check assayed. Imbedded standards, sample duplicates and blanks were assayed.
Crown used ALS laboratories of Spokane, Washington as the primary laboratory and
ALS Chemex laboratory of Vancouver, British Columbia as the primary check assay
laboratory. Core was logged and sample intervals were selected by the geological
staff for analysis. Chain of custody was documented between the geologist and
the laboratory. Core samples and rejects are stored on site under the
supervision of Crown.
No significant sampling or analytical biases are known to exist that
could affect the modeling of the resources or reserves.
TOLL MILLING AGREEMENT
On November 11, 2003, Crown entered into a toll milling agreement with
Echo Bay Minerals whereby Crown has agreed to deliver ore from its Buckhorn
Mountain Project deposit to Echo Bay Minerals' Kettle River mill, located near
Republic, Washington approximately 92 kilometers (57 miles) from the Buckhorn
Mountain Project. Under the terms of the toll milling agreement, Echo Bay
Minerals agreed to process up to 1,500 tons per day of ore produced at the
Buckhorn Mountain Project at a rate of $20 per ton. In addition, Crown agreed to
pay a one-time capital charge of $5 million to Echo Bay Minerals on or before
the last day of the calendar month following the delivery of ores from the
Buckhorn Mountain Project to the Kettle River mill. The toll milling agreement
is subject to Crown obtaining the necessary permits to mine and deliver the ores
from the Buckhorn Mountain Project, standard toll-milling terms regarding (among
other terms) grade, delivery, commingling and refining, and regulatory approval.
If the merger is consummated, the toll milling agreement will be between
subsidiaries of Kinross and, therefore, may be terminated.
MINERAL RESERVE ESTIMATES
MINERAL RESERVES(1)(2)(3) - BUCKHORN MOUNTAIN PROJECT
---------------- ------------------ ---------------------------- ------------------------------------ -----------------
CLASSIFICATION TONNAGE GOLD GRADE GOLD CONTENT
---------------- ------------------ ---------------------------- ------------------------------------ -----------------
(TONS) (TONNES) (OUNCES/TON) (GRAMS/TONNE) (OUNCES)
---------------- ------------------ ------------- -------------- ----------------- ------------------ -----------------
CURRENT(4) PROBABLE 3,075,600 2,790,200 0.32 11.1 991,300
---------------- ------------------ ------------- -------------- ----------------- ------------------ -----------------
-------------------------
(1) Drill spacing used to determine reserves varies from 50 to 100 feet. The
cutoff grade used was 0.188 ounces per ton based on detailed costs
developed in the Feasibility Study. A mill recovery of 90% was assumed.
(2) Crown's mineral reserves reported herein are classified in accordance
with the Canadian Institute of Mining, Metallurgy and Petroleum's "CIM
Standards on Mineral Resources and Reserves, Definitions and Guidelines"
as required by Canadian National Instrument 43-101.
(3) The mineral reserve estimates presented herein comply with the reserve
categories required by Industry Guide 7 in the United States.
(4) Current Reserves are reported as of December 15, 2003.
The mineral reserves reported in this Proxy Statement/Prospectus have
been verified by Mike Michaud, a Mineral Economist representing SRK Consulting,
based in Toronto, Canada. Mr. Michaud, a "qualified person," under Canadian
National Instrument 43-101, has verified the data disclosed in this Proxy
Statement/Prospectus, including any relevant sampling, analytical and test data.
SRK's feasibility study for the Buckhorn Mountain Project incorporates the toll
milling agreement in this Proxy Statement/Prospectus and determined that the
reported mineral reserves are economically viable based on current information
on costs and technology applicable to mining, metallurgy, and other relevant
factors that relate to the extraction of the mineral reserve.
A summary of the major assumptions is provided below:
Toll milling contract costs: $20 per ton
Gold price: $350 per ounce
Gold recovery from mined ore: 90%
Economic cut off grade (ounces gold/ton): 0.19
Daily production rate: 1,500 tons
Total operating costs: $201 per ounce of gold recovered (including toll milling
agreement cost)
Initial capital costs: $32.6 million (including contingency reserve of $2.6 million)
Sustaining capital, life of mine: $10.0 million
28
Mineral reserves were estimated based on an estimated gold price of U.S.
$350 per ounce at December 31, 2003. The value of contained silver in the ore
was ignored. The gold market price at the time of reporting of the reserves was
substantially higher than the level used in estimating. However, the gold market
price has been lower during recent time periods. If the gold market price were
to decrease to significantly lower levels then Crown may determine that its
reserves should be re-estimated resulting in a potential reduction in the amount
of reserves. Crown estimates that mineral reserves will change if a different
estimated gold price is assumed. For example, at a gold price of $325 per ounce
and a cutoff of 0.20 ounces of gold per ton, probable reserves would be
approximately 2,979,800 tons of ore grading at 0.33 ounces of gold per ton,
resulting in 975,300 ounces of mineable reserve.
PERMITTING AND DEVELOPMENT
In July 2001, Crown became the sole owner of the Crown Jewel project and
renamed it the Buckhorn Mountain Project. Previously, the Crown Jewel Project
had been subject to a joint venture agreement between Crown and Battle Mountain.
Battle Mountain had proposed an open-pit mining operation with an on-site
processing facility. Battle Mountain's proposed open-pit Crown Jewel Project was
subjected to numerous permitting and legal challenges and delays. In January of
2000, the Washington Pollution Control Hearings Board (the "PCHB") vacated the
previously granted 401 Water Quality Permit and certain water rights for the
Crown Jewel Project. Other permits previously granted to the Crown Jewel Project
have since lapsed, some of which will have to be reacquired as part of the
ongoing permitting process.
As part of the analysis of the Buckhorn Mountain Project subsequent to
the January 2000 PCHB ruling, Crown retained Gochnour and Associates
("Gochnour") to review the required permits for a potential combination
underground/open-pit-mine design for the Buckhorn Mountain Project ore deposit.
Gochnour indicated this mine design would require conducting additional baseline
studies and collecting data for modeling to amend previously approved permits as
well as to obtain permits for activities that were not previously contemplated,
for example the underground mining effects on ground water. Gochnour indicated
the underground alternative would also require mitigation of environmental
impacts. The Gochnour report concluded the proposed mine design is legally
permittable.
Subsequent to the January 2000 PCHB ruling, Crown began seeking
regulatory approval and permits to operate an exclusively underground mining
operation at the Buckhorn Mountain Project. In May 2003, Crown submitted its
Initial Buckhorn Mountain Project Plan of Operations with the USFS and the
Washington State Department of Ecology. The Initial Buckhorn Mountain Project
Plan of Operations was deemed complete by the USFS in August 2003. This plan
proposes a processing facility seven miles from the mine that would be
constructed, owned, and operated by Crown. The ore would be trucked from the
mine to the mill. Crown believes this development plan significantly reduces the
environmental impacts compared to the Crown Jewel open-pit mining plan proposed
by Battle Mountain. Based on discussion with the regulatory agencies, Crown is
unaware of any legal impediments to permitting a mining operation as proposed in
the Initial Buckhorn Mountain Project Plan of Operations.
Subsequent to the signing of the toll milling agreement with Echo Bay
Minerals, Crown filed an amended plan of operations as outlined in the SRK
feasibility study that provides for trucking of ore from the mine to the Kettle
River processing facility owned by Echo Bay Minerals. This amended plan further
reduces environmental impacts in comparison to the initial Buckhorn Mountain
Project Plan of Operations.
Construction of the Buckhorn Mountain Project will not begin prior to
the successful issuance of the remaining permits and resolution of the potential
future legal and administrative challenges. Potential delays due to the appeals
process, permit process or litigation are difficult to quantify. See "--Legal
Proceedings" below.
If the Kinross merger is not completed, Crown would require additional
capital in the form of either equity or debt financing, or enter into a joint
venture to permit, develop, and operate the Buckhorn Mountain Project. Crown
cannot assure you that such financing would be available on acceptable terms in
order for the Buckhorn Mountain Project to enter into commercial production. See
also "--Corporate Reorganization" below and "Crown Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 37.
29
KINGS CANYON
The Kings Canyon property in Utah consists of 360 acres of unpatented
claims. Crown holds a 100% interest in the property, subject to a 4% NSR royalty
to third parties. Crown has conducted drilling at the Kings Canyon property but
does not report any capitalized costs or mineral reserves. Crown continues to
maintain the property and, if the proposed transaction with Kinross is not
consummated, may seek a joint venture partner to further evaluate and develop
Kings Canyon.
PERU, BOLIVIA, AND BRAZIL
Crown has no direct interest in properties outside of the United States.
Crown currently owns a 38.7% interest in Solitario, which owns interests in and
operates mineral property and operations in Peru, Bolivia, and Brazil. Crown
intends to distribute its interest in Solitario to Crown shareholders prior to
completion of the merger. If the distribution occurs, Crown will have
essentially no interest in Solitario as of the effective date of the merger.
MINERAL PROPERTY AND EXPLORATION EXPENDITURE OVERVIEW
During 2003, Crown incurred $1,168,000 in expenditures in support of
permitting and development of its Buckhorn Mountain Project. Crown paid $15,000
in claim maintenance fee payments for 2003. Crown has acquired certain other
mining claims and properties not subject to leases by deed located at its
Buckhorn Mountain Project. To maintain the claims and other properties that
Crown has acquired by deed or located, Crown must pay AD VALOREM property taxes
in the case of the patented mining claims and fee land, and annual rental fees
in the case of the unpatented mining claims. See "Considerations Related to
Crown's Business." Crown paid approximately $6,000 in property taxes and $17,000
in annual rental fees related to the Buckhorn Mountain Project in 2003. Crown
has no work commitments, claim maintenance fees, or property taxes remaining to
be fulfilled in 2003. If the proposed merger with Kinross is not completed,
Crown has budgeted $1,400,000 for permitting and development at the Buckhorn
Mountain Project for 2004.
Payments on unpatented
Property mining claims in 2003 Crown's share of costs in 2003
-------------------------------- ---------------------------- --------------------------------
Buckhorn Mountain Project $15,000 $15,000
Kings Canyon 2,000 2,000
------- -------
Total $17,000 $17,000
EXPLORATION ACTIVITIES
Historically, a significant part of Crown's business involves the review
of potential property acquisitions and continuing review and analysis of
properties in which it has an interest, to determine the exploration and
development potential of the properties. In analyzing expected levels of
expenditures for work commitments and lease obligations, Crown considers the
fact that its obligations to make such payments fluctuate greatly depending on
whether, among other things Crown makes a decision to sell a property interest,
convey a property interest to a joint venture, or to allow its interest in a
property to lapse by not making the work commitment or payment required. Crown
is not currently conducting any potential property acquisitions or exploration.
30
EMPLOYEES
As of June 30, 2004, Crown employed seven persons, all of whom are
located in the United States. Crown considers its relations with employees to be
excellent. All employees are eligible to participate in Crown's stock option
plans. None of Crown's employees are covered by a collective bargaining
agreement. A portion of Crown's employees' time is devoted to work under a
management services contract with Solitario. Solitario reimburses Crown for
direct out-of-pocket expenses; payment of 25% of total corporate administrative
costs for executive and technical salaries, benefits, and expenses; 50% of total
corporate administrative costs for financial management and reporting salaries,
benefits, and expenses; and 75% of total corporate administrative costs for
investor relations salaries, benefits, and expenses. These allocations are based
on estimated time and expenses spent by Crown management and employees on Crown
activities and Solitario activities. Management of Crown believes these
allocations are reasonable and the allocations are periodically reviewed by
management and approved by independent Board members of both Crown and
Solitario.
Effective with the completion of the distribution of the Solitario
common stock and assuming the merger is successfully consummated, the management
agreement will be terminated and Solitario will procure the services of the
Crown employees directly. In the event that the merger is not successfully
completed, it is anticipated that the management agreement would continue under
the same or similar terms.
LEGAL PROCEEDINGS
Crown is not currently involved in any legal proceedings. Crown is not
aware of any legal challenge to its current proposed mining plans at the
Buckhorn Mountain Project. However, beginning in March 1997, the prior attempt
to permit the Crown Jewel Project (as it was then known) was subject to various
legal challenges in Washington State court, United States District Court, and
administrative hearings. Prior permitting efforts centered on Battle Mountain's
proposed open pit mine. That plan of operations is no longer being pursued. The
currently proposed plan of operations calls for an underground mine, which Crown
anticipates will address many of the prior concerns. Most notably, the current
proposed plan substantially reduces the number of surface acres that will be
impacted by mining operations and utilizes the existing Kettle River processing
facility owned by Kinross, so that a new processing facility will no longer need
to be constructed at or near the proposed mine. Although none of the previous
legal challenges or protests relates to Crown's current proposed plan of
operations, Crown cannot make assurances that future litigation will not be
filed.
On April 16, 1992, Crown filed a patent application with the United
States Department of the Interior relating to the property underlying the
Buckhorn Mountain Project. The Mining Law of 1872 of the United States allows
owners of unpatented mining claims that demonstrate economic viability of
mineralization discovered on such claims to apply for patent of the unpatented
claim. Patenting involves the transfer of surface ownership from the United
States Government to the successful patent applicant. Certain opposition groups
filed a protest to Crown's patent application with the Department of Interior.
Crown has filed a response to the protest. The Department of Interior has not
set a time frame for granting the patents or adjudicating the protest.
Approval of this patent application will not change the ultimate
ownership of the reserves at the Buckhorn Mountain Project. Currently, retention
of the mineral rights under the unpatented claims is subject to meeting certain
annual maintenance work requirements and the payment of annual claim fees.
Approval of the patent application will eliminate the annual maintenance and fee
requirements as well as combine perfected title to the surface rights with
Crown's existing mineral rights. If the Department of the Interior does not
grant the patents, it will not affect Crown's rights to mine the unpatented
claims nor require a modification to the currently proposed plan of operations
at the Buckhorn Mountain Project.
31
CORPORATE REORGANIZATION
PLAN OF REORGANIZATION
On March 8, 2002, Crown filed a voluntary petition for protection under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy") in the United
States Bankruptcy Court for the District of Colorado (the "Court"). As part of
the Bankruptcy, Crown filed a Plan of Reorganization (the "Plan") and a
Disclosure Statement with the Court on March 25, 2002. On May 30, 2002, the
Court confirmed the Plan, which became effective on June 11, 2002 (the
"Effective Date"). As part of the Plan, Crown restructured its existing $15
million 5.75% Convertible Subordinated Debentures due August 2001 (the
"Debentures").
The restructuring was completed through an exchange of outstanding
Debentures, including any accrued interest thereon for the following
consideration: (i) issuance of $1,000,000 in cash; (ii) $2,000,000 in 10%
Convertible Secured Notes (the "Secured Notes") convertible into Crown common
shares at $0.35 per share; (iii) $4,000,000 of convertible unsecured
subordinated notes (the "Subordinated Notes") convertible into shares of Crown
common stock at $0.75 per share; and (iv) warrants, which expired in October
2006 that entitle the holders the right to purchase, in the aggregate, 5,714,285
shares of Crown common stock at an exercise price of $0.75 per share. The
interest on the Secured and Subordinated Notes was payable in cash or shares of
Crown common stock, at the conversion price, at Crown's election. In November
2003, all Subordinated Notes were automatically converted into shares of Crown
common stock. In December 2003, substantially all Secured Notes were converted
into shares of Crown common stock.
In order to effect the Plan on the Effective Date, Crown entered into a
Custody and Disbursing Agreement with Wells Fargo Bank, Minnesota N.A. (the
"Disbursing Agent") as well as trust indentures with Deutsche Bank Trust
Company, Americas, as Trustee on the Secured Notes and with Wells Fargo Bank
Minnesota, N.A. as Trustee on the Subordinated Notes. As of June 7, 2004,
$245,000 in Debenture certificates had not been presented. If all of these
Debentures are presented, the Disbursing Agent will distribute $16,000 in cash,
93,333 shares of Crown common stock from the converted Secured Notes (plus
interest accrued since June 11, 2002), 87,111 shares of Crown common stock from
the converted Subordinated Notes (plus interest accrued since June 11, 2002),
and warrants to acquire 93,333 shares of Crown common stock at an exercise price
of $0.75 per share. The Debenture holders have until June 2007 to present their
certificates, at which time any undistributed cash, stock, and warrants will
revert to Crown.
CONTROL OF CROWN
As a result of the Plan, holders of Crown's $3,600,000 Senior Notes
gained effective control of Crown (collectively the "Senior Lenders"). Senior
Notes with a face value of $3,250,000 (the "Escrowed Notes") are convertible
into Crown common stock at $0.35 per share and a $350,000 Solitario Note
(described below) is convertible into Crown common stock at $0.2916 per share.
In addition the Senior Lenders also received warrants exercisable into
10,485,714 shares of Crown common stock (the same number of shares as their
Senior Notes were convertible into), with an exercise price of $0.75 per Crown
share for 9,285,714 shares and an exercise price of $0.60 per Crown share for
1,200,000 shares. After the Effective Date, the Senior Lenders owned
approximately 52% of Crown's common stock on a fully diluted basis.
The largest investor in the Senior Notes, Zoloto Investors, LP
("Zoloto"), owns $2,000,000 in Senior Notes and Crown warrants exercisable into
5,714,286 shares. Steven Webster, the Chairman of the Board of Crown, is the
sole member of the general partner of Zoloto. Additionally, on the Effective
Date, the Senior Lenders granted a pari-passu security interest in the assets
securing the Senior Notes issued in connection with the Plan. However any
actions related to that security interest may only be taken pursuant to a second
intercreditor agreement based upon the combined vote of the Senior Lenders
voting as a block, and the Secured note holders voting as a block, giving
effective control of the security interest in the assets of Crown to the Senior
Lenders, and ultimately to Zoloto.
32
In October 2001, Solitario invested in two Secured Notes, which totaled
$1,000,000 of the $3,600,000 principal amount of Secured Notes issued. The
proceeds of $350,000 from the first note (the "Solitario Note") were delivered
to Crown. The proceeds from the second note from Solitario, and the remaining
Secured Notes of $2,600,000 or $3,250,000 in total, were placed in escrow
pending the outcome of Crown's Bankruptcy. The remaining balance of the proceeds
plus interest was released to Crown on the Effective Date. The independent Board
members of both Crown and Solitario approved the transaction. The terms of the
transaction on the Escrowed Notes were the same as given to other senior lenders
of Crown (the "Senior Lenders") and, with regard to the terms of the $350,000
Solitario Note, the terms were negotiated with and approved by the other Senior
Lenders.
As part of the Plan, the Senior Lenders, nominated three of the seven
initial board members. Two of the three nominated, Mr. Webster and Mr. Harte,
were investors in Zoloto. Zoloto also had, as part of the Voting Agreement
(described below), the right to vote any outstanding shares owned by Solitario
for their nominees to the board of directors at any subsequent meeting of
shareholders.
Crown entered into a Voting Agreement dated as of April 15, 2002 with
Zoloto and Solitario, who are each shareholders of Crown (the "Signing
Shareholders"). Pursuant to the Voting Agreement, Solitario and Zoloto agree
that they will each vote their owned shares during the term of the Voting
Agreement for the election of three designees of Zoloto and one designee of
Solitario (the "Designee Directors") to the board of directors of Crown. The
Signing Shareholders agreed that any shares received by either Signing
Shareholder would be subject to the Voting Agreement during its term and any
successor, assignee or transferee of shares from either Signing Shareholder
would be subject to the terms of the Voting Agreement during its term. The
Voting Agreement terminates on June 25, 2006. As of June 7, 2004, the Signing
Shareholders collectively held 1,733,866 shares, or approximately 7.7%, of the
outstanding shares of Crown. As of June 7, 2004, assuming conversion of all
outstanding convertible debt and exercise of all warrants on a cash basis, the
Signing Shareholders collectively would hold 19,276,724 shares or approximately
38.9% of the fully diluted shares calculated on the same basis.
STOCKHOLDER AND VOTING AGREEMENT
Several directors and executive officers of Crown, and entities
affiliated with these directors and officers, have entered into a stockholder
and voting agreement with Kinross pursuant to which these directors and
executive officers and other shareholders agreed, among other things, to convert
any Senior Notes held by them to common shares prior to the record date for the
special meeting and to vote all of the shares of Crown common stock owned by
them, as well as all shares of Crown common stock acquired by them, in favor of
the approval of the plan of merger, and against the acquisition of Crown by any
person other than Kinross. As of June 7, 2004, 2,012,458 shares of Crown common
stock were subject to the stockholder and voting agreement, representing
approximately 9% of the outstanding shares of Crown common stock. Parties to the
stockholder and voting agreement also hold $3,000,000 of Senior Notes which can
be converted into 8,771,429 shares, options to acquire 1,917,500 shares, and
warrants to acquire up to 8,771,429 shares. If all of these notes, options, and
warrants were converted or exercised prior to the record date for the special
meeting, the parties to the stockholder and voting agreement would hold
21,472,816 shares, or approximately 43.3% of the outstanding Crown common stock
on a fully diluted basis. See the section entitled "Agreements Relating to the
Merger--Stockholder and Voting Agreement."
33
--------------------------------------------------------------------------------
PRINCIPAL SHAREHOLDERS OF CROWN
--------------------------------------------------------------------------------
The table below sets forth information as to each person owning of
record or who was known by Crown to own beneficially more than 5% of the Crown
common stock (and other securities convertible into Crown common stock) as of
June 7, 2004, and information as to the ownership of Crown common stock by each
of its directors and by all directors and executive officers as a group. Except
as otherwise indicated, all shares are owned directly, and the persons named in
the table have sole voting and investment power with respect to shares shown as
beneficially owned by them.
Percent of
Crown's
common stock,
based on current
number of Percent of Percent of
outstanding Crown's Crown's
Amount and common shares Ownership common stock, common stock,
Nature of prior to Assuming based on exercise based on exercise
Beneficial conversion Conversion of of convertible of convertible
Ownership in of any other securities on a securities on a
Name and Address of Crown common convertible convertible non-diluted fully diluted
Beneficial Owner(1) stock(2) securities(2) securities(3) basis(4) basis(5)
------------------------------- -------------- ------------------ ---------------- ------------------ ------------------
Solitario Resources Corporation
4251 Kipling St., Suite 390 965,491 24.8% 14.3%
Wheat Ridge, CO 80033 4.3% 7,079,777(9)
Zoloto Investors, LP
14701 St. Mary's Lane,
Suite 800 1,733,866(6) 48.2% 38.9%
Houston, TX 77079 7.7% 19,276,724(10)
Loeb Partners Corporation(22)
61 Broadway
New York, NY 10006 3,554,985 15.9% 3,554,985 15.9% 7.2%
Deephaven Domestic Capital
Management(22)
130 Cheshire Lane, Suite 102
Minnetonka, MN 55305
2,539,740 11.3% 2,539,740 11.3% 5.1%
Gary L. Blum
3104 Oak Lane
Dallas, TX 75226 71,234 0.3% 1,214,092(11) 5.2% 2.4%
Oliver Baring
Devon House
12-15 Dartmouth St.
London, SW1 H9BL, England 96,048 0.4% 1,524,620(12) 6.4% 3.1%
Coot Investments, Ltd.
Summerhays Farm
Cotleigh, Honiton
Devon, EX14 9HF
United Kingdom 918,924 4.1% 1,337,973(13) 5.9% 2.7%
Steven A. Webster 1,885,513(7) 8.4% 19,653,371(14) 48.9% 39.6%
Christopher M. Harte - - 175,000(15) 0.8% 0.4%
Christopher E. Herald 37,268(8) 0.2% 887,268(16) 3.8% 1.8%
Mark E. Jones, III 87,500 0.4% 175,000(17) 0.8% 0.4%
Brian Labadie - - 225,000(18) 1.0% 0.5%
F. Gardner Parker - - 200,000(19) 0.9% 0.4%
Ronald Shorr - - 175,000(15) 0.8% 0.4%
James R. Maronick 2,177 0.0% 532,177(20) 2.3% 1.1%
All directors and executive
officers as a group (nine 2,012,458 52.5% 45.4%
persons) 9.0% 22,522,816(21)
(footnotes contained on following page)
34
-------------------------
(1) Based upon information supplied to Crown by the shareholder, including
filings as required under section 13 and 16 of the Securities and
Exchange Act of 1934.
(2) These columns reflect the ownership of outstanding Crown common stock as
of June 7, 2004. The percentages are based on the total outstanding
shares as of that date of 22,428,806. In addition to the outstanding
common stock, as of June 7, 2004, Crown had outstanding convertible
debt, which can be converted into 10,485,714 shares of Crown common
stock; warrants to acquire up to 13,380,953 shares of Crown common
stock; and options to acquire up to 3,287,500 shares of Crown common
stock.
(3) This column reflects the number of shares of Crown common stock held
assuming the conversion or exercise of all convertible debt, warrants
and options held by the identified shareholder.
(4) This column reflects the percentage ownership assuming the identified
shareholder's shares in (3) above divided by all currently outstanding
shares plus number of shares of Crown common stock that would be
outstanding assuming the conversion or exercise of all convertible debt,
warrants and options held by the identified shareholder.
(5) This column reflects the percentage ownership assuming the conversion of
all convertible debt, the exercise of all options, and the exercise of
all warrants for cash, which would result in 49,582,974 shares of Crown
common stock issued and outstanding.
(6) Includes 965,491 shares held by Solitario Resources Corporation, which
are subject to a voting agreement between Solitario and Zoloto.
(7) Includes 1,733,866 shares beneficially held by Zoloto Investors, LP, of
which Mr. Webster is the sole member of the general partner.
(8) Includes 1,528 shares owned by Mr. Herald's spouse, of which Mr. Herald
disclaims beneficial ownership.
(9) Includes 3,057,143 shares available upon conversion of Crown 10%
convertible secured notes and 3,057,143 shares available upon the
exercise of warrants. Solitario is a publicly-held corporation, whose
CEO is Christopher E. Herald, the CEO of Crown.
(10) Includes 5,714,286 shares available upon conversion of Crown 10%
convertible secured notes, 5,714,286 shares available from the exercise
of warrants and 7,079,777 shares beneficially owned by Solitario,
subject to a voting agreement between Solitario and Zoloto. Steven A.
Webster is the sole member of the general partner of Zoloto.
(11) Includes 571,429 shares available upon conversion of Crown 10%
convertible senior notes and 571,429 shares available upon the exercise
of warrants.
(12) Includes 714,286 shares available upon conversion of Crown 10%
convertible senior notes and 714,286 shares available upon the exercise
of warrants.
(13) Includes 419,049 shares available upon conversion of Crown 10%
convertible secured notes and 419,049 shares available upon the exercise
of warrants.
(14) Includes 225,000 shares available upon exercise of Crown options and
19,276,724 shares beneficially owned by Zoloto, of which Mr. Webster is
the sole member of general partner.
(15) Includes options to purchase 175,000 shares.
(16) Includes options to purchase 850,000 shares.
(17) Includes options to purchase 87,500 shares.
(18) Includes options to purchase 225,000 shares.
(19) Includes options to purchase 200,000 shares.
(20) Includes options to purchase 530,000 shares.
(21) Includes, in the aggregate, 8,771,429 shares available upon conversion
of Crown convertible senior notes, 8,771,429 shares available upon the
exercise of warrants and options to purchase 2,967,500 shares.
(22) Bob Grubin is a principal of Loeb Partners Corporation. Colin Smith is
the CEO of Deephaven Domestic Capital Management. Bruno Hanoman is the
investment manager of Coot Investments, Ltd.
35
--------------------------------------------------------------------------------
CROWN SELECTED HISTORICAL FINANCIAL INFORMATION
--------------------------------------------------------------------------------
The selected consolidated financial data set forth below as of and for
each of the five years in the period ended December 31, 2003, has been derived
from the audited consolidated financial statements of Crown (not all of which
financial statements are presented herein). The selected condensed consolidated
financial data set forth below as of and for each of the three months ended
March 31, 2004 and 2003, has been derived from the unaudited condensed
consolidated financial statements of Crown. The condensed financial statements
as of and for the three months ended March 31, 2004 and 2003, in the opinion of
Crown management, reflect all adjustments, consisting of only normal recurring
items, necessary to present fairly, in accordance with accounting principles
generally accepted in the United States, the information for the interim periods
indicated. Crown's historical results are not necessarily indicative of results
to be expected in future periods and the results for the three months ended
March 31, 2004, should not be considered indicative of results expected for the
full fiscal year. The selected consolidated financial data should be read in
conjunction with Crown's Management's Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial statements of
Crown and related notes thereto included elsewhere in this report.
BALANCE SHEET DATA: March 31, As of December 31,
-----------------------------------------------------------------
(in thousands) 2004 2003 2002(1) 2001(1) 2000(1) 1999(1)(2)
---- ---- ---- ---- ---- ----
Total assets $34,009 $34,446 $29,644 $31,030 $28,871 $30,514
Current portion of long term debt 49 49 70 18,302 15,000 -
Non-Current portion of long term debt 431 353 5,037 107 - 15,000
Working capital (deficit) 1,753 2,082 793 (15,713) (14,211) 4,881
Stockholders' equity $30,151 $30,244 $19,159 $11,630 $13,470 $13,785
INCOME STATEMENT DATA: March 31, Year ended December 31,
----------------------------------------------------------------------------------------
(in thousands, except per share amounts)(3) 2004 2003(5) 2003 2002(1) 2001(1) 2000(1)(2) 1999(1)(2)
---- ---- ---- ---- ---- ---- ----
Revenues and property sales $ - $ - $ - $ 171 $ 214 $ 6,057 $ 201
------- ------- ------- ------- ------- ------- -------
Income (loss) before change in
accounting principle (357) (423) (2,989) 2,091 (2,098) (688) (1,695)
Change in accounting principle(4) - - - - - - (8,451)
------- ------- ------- ------- ------- ------- --------
Net income (loss) $ (357) $ (423) $(2,989) $ 2,091 $(2,098) $ (688) $(10,146)
======= ======= ======= ======= ======= ======= ========
Basic income (loss) per share
before change in accounting principle $ (0.02) $ (0.10) $ (0.45) $ 0.65 $ (0.72) $ (0.24) $ (0.58)
Change in accounting principle - - - - - - (2.90)
------- ------- ------- ------- ------- ------- --------
Basic income (loss) per share $ (0.02) $ (0.10) $ (0.45) $ 0.65 $ (0.72) $ (0.24) $ (3.48)
======= ======= ======= ======= ======= ======= ========
Diluted income (loss) per share
before change in accounting principle $ (0.02) $ (0.10) $ (0.45) $ 0.10 $ (0.72) $(0.24) $ (0.58)
Change in accounting principle - - - - - - (2.90)
------- ------- ------- ------- ------- ------- --------
Diluted income (loss) per share $ (0.02) $ (0.10) $ (0.45) $ 0.10 $ (0.72) $ (0.24) $ (3.48)
======= ======= ======= ======= ======= ======= ========
-------------------------
(1) As restated. See note 12 to the 2003 Crown consolidated financial
statements starting on page F-E1.
(2) Includes the operations of Solitario on a consolidated basis through
October 18, 2000. Subsequent to October 18, 2000, the results of
Solitario are reflected under the equity method of accounting.
(3) All per share amounts have been adjusted to account for the one-for-five
reverse split pursuant to the Plan.
(4) Crown changed its method of accounting for exploration costs and
recorded an $8.5 million charge related to the cumulative effect of the
change in accounting principle to operations in 1999.
(5) The financial statements for the three months ended March 31, 2003, have
been restated. See Note 8 to the condensed consolidated financial
statements on page F-E46.
36
--------------------------------------------------------------------------------
CROWN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion should be read in conjunction with Crown's
consolidated financial statements for the years ended December 31, 2003, 2002,
and 2001, and the condensed consolidated financial statements for the three
months ended March 31, 2004 and 2003, included elsewhere in this report. Crown's
financial condition and results of operations are not necessarily indicative of
what may be expected in future years.
As discussed in Note 12 to the consolidated financial statements for the
years ended December 31, 2003, 2002, and 2001, Crown's financial statements as
of and for the years ended December 31, 2002 and 2001, have been restated. As
discussed in Note 8 to the condensed consolidated financial statements for the
three months ended March 31, 2004 and 2003, Crown's condensed consolidated
financial statements for the three months ended March 31, 2003 have been
restated. The following discussion and analysis of Crown's financial condition
and results of operations gives effect to the restatement.
BUSINESS OVERVIEW
Crown is a precious metals exploration company operating in the western
United States. At June 30, 2004, Crown owns 37.1% of Solitario Resources
Corporation ("Solitario"). Crown's investment in Solitario is accounted for
under the equity method of accounting. Solitario operates as a precious and base
metals exploration company in the United States, Brazil, Bolivia, and Peru.
Crown's principal expertise is in identifying properties with promising
mineral potential, acquiring these properties and exploring them to an advanced
stage. Crown's goal is to advance its properties and mineral interests, either
on its own or through joint ventures, to the feasibility study stage and
thereafter to pursue their development, typically through a joint venture with a
partner that has expertise in mining operations. Crown has in the past
recognized, and expects in the future to recognize, revenues from the option and
sale of its properties and mineral interests to joint venture partners and from
the sale of its share of metals produced from its mineral interests.
On November 20, 2003, Crown executed a definitive agreement to merge
with Kinross Gold Corporation ("Kinross"), a Canadian corporation. The merger is
expected to be consummated in the second quarter of 2004, and is subject to the
approval of two-thirds of Crown's shareholders and customary closing conditions.
On October 8, 2003, Crown announced that it would be distributing its
holdings of 9,633,585 shares of Solitario's common stock other than shares
withheld to avoid the distribution of fractional shares (the "Spin-off"). Crown
plans to distribute substantially all of its shares of Solitario's common stock
to its shareholders prior to closing the merger with Kinross.
RECENT FINANCING TRANSACTIONS
As part of the Corporate Reorganization in 2002, Crown issued $2,000,000
in 10% convertible Secured Notes and $4,000,000 in convertible Subordinated
Notes. On November 21, 2003, the Secured Notes were called for redemption, and
prior to December 31, 2003, $1,994,000 of Secured Notes were converted into
5,679,142 shares of Crown common stock, with the remainder being redeemed for
cash. On October 31, 2003 and November 5, 2003, a total of $839,331 of
Subordinated Notes were converted into 1,119,108 shares of Crown common stock.
On November 5, 2003, the remaining $3,160,669 of Subordinated Notes were
automatically converted into 4,214,225 shares of Crown common stock.
On February 21, 2003, Crown issued $2.7 million of 10% Convertible
Subordinated B Notes. On November 5, 2003, $2,705,000 of Subordinated B Notes
automatically converted into 3,606,667 shares of Crown common stock.
37
CORPORATE REORGANIZATION
On March 8, 2002, Crown filed a voluntary petition for protection under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy") in the United
States Bankruptcy Court for the District of Colorado (the "Court"). As part of
the Bankruptcy, Crown filed a Plan of Reorganization (the "Plan") and a
Disclosure Statement with the Court on March 25, 2002. On May 30, 2002, the
Court confirmed the Plan, which became effective on June 11, 2002 (the
"Effective Date"). As part of the Plan, Crown restructured its existing $15
million 5.75% Convertible Subordinated Debentures due August 2001 (the
"Debentures").
The restructuring was completed through an exchange of outstanding
Debentures, including any accrued interest thereon for the following
consideration: (i) issuance of $1,000,000 in cash; (ii) $2,000,000 in 10%
Convertible Secured Notes (the "Secured Notes") convertible into Crown common
shares at $0.35 per share; (iii) $4,000,000 of convertible unsecured
subordinated notes (the "Subordinated Notes") convertible into shares of Crown
common stock at $0.75 per share; and (iv) warrants, which expired in October
2006 that entitle the holders the right to purchase, in the aggregate, 5,714,285
shares of Crown common stock at an exercise price of $0.75 per share. The
interest on the Secured and Subordinated Notes was payable in cash or shares of
Crown common stock, at the conversion price, at Crown's election. In November
2003, all Subordinated Notes were automatically converted into shares of Crown
common stock. In December 2003, substantially all Secured Notes were converted
into shares of Crown common stock.
In order to effect the Plan on the Effective Date, Crown entered into a
Custody and Disbursing Agreement with Wells Fargo Bank, Minnesota N.A. (the
"Disbursing Agent") as well as trust indentures with Deutsche Bank Trust
Company, Americas, as Trustee on the Secured Notes and with Wells Fargo Bank
Minnesota, N.A. as Trustee on the Subordinated Notes. As of June 7, 2004,
$245,000 in Debenture certificates had not been presented. If all of these
Debentures are presented, the Disbursing Agent will distribute $16,000 in cash,
93,333 shares of Crown common stock from the converted Secured Notes (plus
interest accrued since June 11, 2002) 87,111 shares of Crown common stock from
the converted Subordinated Notes (plus interest accrued since June 11, 2002),
and warrants to acquire 93,333 shares of Crown common stock at an exercise price
of $0.75 per share. The Debenture holders have until June 2007 to present their
certificates, at which time any undistributed cash, stock, and warrants will
revert to Crown.
RESULTS OF OPERATIONS
LIMITED REVENUE SOURCES
Crown currently has no source of recurring revenue and anticipates any
future recurring revenue would only occur after the successful development of
the Buckhorn Mountain Project. The successful development of the Buckhorn
Mountain Project is dependent on several factors, many of which are beyond
Crown's control. Although Crown is in the late stages of the process of securing
the necessary permits for the development of the Buckhorn Mountain Project, it
cannot give any assurance regarding the timing of obtaining the required
permits.
Crown has historically derived its revenues from the option and sale of
property interests, interest income and to a lesser extent from payments on
royalty interests and the sale of its share of gold produced on its properties.
Revenues from the option and sale of property interests have consisted of a
small number of relatively large transactions. Such transactions have occurred,
and in the future are likely to occur, if at all, at irregular intervals and
have a significant impact on operating results in the periods in which they
occur. In the past, Crown's exploration and development expenditures, including
those of Solitario, have constituted the bulk of Crown's activities.
THREE MONTHS ENDED MARCH 31, 2004, COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2003
For the three months ended March 31, 2004, Crown had a net loss of
$357,000, or $0.02 per share, compared to net loss of $423,000, or $0.10 per
share for the three months ended March 31, 2003. The decrease in net loss per
share is primarily due to the additional shares outstanding related to the debt
conversion and warrant exercises in the fourth quarter of 2003. The reduction in
the net loss in 2004 primarily related to a reduction in variable option
compensation expense, which in turn is directly affected by changes in the
underlying price of Crown common shares. This reduction in variable option
compensation expense was partially offset by increases in general and
administrative costs associated with the Kinross merger, related costs and an
increase in the equity in
38
the loss of Solitario during the three months ended March 31, 2004, compared to
the same period in the prior year. Each of these items are discussed in more
detail below.
Exploration expense during the first three months of 2004 related to
certain property tax and option payments. There were no similar payments during
the first three months of 2003.
General and administrative expenses increased significantly to $283,000
in the first three months of 2004 from $133,000 in the same period of 2003,
primarily as a result of increased professional services fees for legal and
accounting related to Crown's pending merger with Kinross. Legal and accounting
costs were $149,000 and $51,000, respectively, in the first three months of 2004
compared to $21,000 and $18,000, respectively, in the first three months of
2003. Amounts charged to Solitario for management fees during the first quarter
of 2004 decreased to $89,000 from $97,000 in the first three months of 2003
primarily as a result of reduced activity in Solitario, compared to the prior
year. Other general and administrative costs, including salaries and other
personnel related costs, were comparable during the first quarter of 2004 and
2003. If the pending merger with Kinross is not completed, Crown expects the
2004 full-year general and administrative costs to be comparable to 2003 as a
result of ongoing professional service costs related to the merger, which Crown
incurred during the first three months of 2004 and the last three months of
2003.
Variable option compensation expense decreased significantly to $55,000
in the first quarter of 2004 compared to $416,000 in the same period of 2003,
primarily as a result of an decrease in the intrinsic value of stock options due
to a decrease in the value of Crown common stock from $2.58 per share at
December 31, 2003 to $2.26 per share at March 31, 2004. Under variable plan
accounting, which initially resulted from the re-pricing of existing options in
1999 and 1998, changes in the intrinsic value of the stock options are charged
(credited) to expense over the service period (the vesting period) of the
related options. Variable plan accounting continues until options are exercised,
cancelled or expire. Upon exercise, variable plan option expense is recorded for
the intrinsic value of the option on the date of exercise. If the pending merger
with Kinross is not completed, unless there is a similar or greater increase in
the market price of Crown common stock in 2004 compared to 2003, Crown would
expect the variable option expense to be less in 2004 than in 2003. If the
market price of Crown common stock declines during the remainder of 2004 from
the March 31, 2004 market price of $2.26 per share, Crown would record a credit
to expense for the change in the intrinsic value.
Crown's equity in the loss of Solitario was $202,000 in the first three
months of 2004, compared to $100,000 in the same period of 2003. The increased
loss resulted from Solitario's increased net exploration expense, higher general
and administrative costs, and decreased interest income during 2003. Solitario's
increased net exploration expense related to the majority of Solitario's
exploration costs on its Pedra Branca Project in Brazil being paid by its joint
venture partner on the Project. Solitario's net exploration cost increased from
$9,000 in the first three months of 2003 to $193,000 in the first three months
of 2004. In addition, Solitario also focused some of its exploration efforts in
the first three months of 2004 on newly-acquired projects which also contributed
to the increase compared to the same period of 2003. Additionally, Solitario had
higher general and administrative costs, which were $176,000 in the first
quarter of 2004 compared to $76,000 in the first quarter of 2003 as a result of
increased legal and accounting costs related to Solitario's filing of its Form
10 registration statement with the United States Securities and Exchange
Commission. If the distribution of Crown's holdings of Solitario common stock is
not completed, Crown expects their 2004 equity in loss of Solitario to be
comparable to 2003.
Crown recorded an income tax benefit of $185,000 in the first quarter of
2004 compared to an income tax benefit of $217,000 during the same period of
2003. The change was related to the level of pre-tax income in both periods.
Although Crown expects the spin-off of their interest in Solitario to Crown
stockholders to be a taxable transaction, Crown anticipates that it will not
result in current tax due to the utilization of net operating losses. If Crown's
pending merger with Kinross is not completed, Crown anticipates offsetting any
operating losses incurred in 2004 against Crown's existing deferred tax
liabilities at the statutory rate resulting in a tax benefit.
39
YEAR ENDED DECEMBER 31, 2003, COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
For 2003, Crown had a net loss of $2,989,000, or $0.45 per basic and
diluted share, compared to net income of $2,091,000, or $0.65 and $0.10 per
basic and diluted share, respectively, in 2002. The net loss in 2003 primarily
resulted from a lack of any revenue during the year, along with variable option
compensation expense of $3,126,000 and other costs of Crown's operations
aggregating $1,609,000, with an offsetting income tax benefit of $1,720,000. The
net income in 2002 primarily resulted from a $171,000 gain on the sale of
Crown's Cord Ranch properties and a gain of $8,684,000 from the discharge of
convertible debentures in Crown's 2002 Corporate Reorganization, offset by
$387,000 in reorganization costs, variable option compensation expense of
$175,000, other costs of Crown's operations aggregating $1,406,000, and an
income tax provision of $4,867,000. Each of these items are discussed in more
detail below.
No amounts were reported as revenues and property sales in 2003, and
$171,000 was reported in 2002 in relation to the sale of the Cord Ranch
properties.
Exploration expense decreased to $27,000 in 2003 from $58,000 in 2002,
as Crown focused its efforts on completing the merger agreement with Kinross and
finalizing its Amended Plan of Operations for the Buckhorn Mountain Project.
General and administrative expenses increased significantly to $995,000
in 2003 from $432,000 in 2002, primarily as a result of increased professional
services costs and a decrease in amounts charged to Solitario, as a result of
modifications to the Management and Technical Services Agreement with Solitario
in July 2002. Legal and accounting costs were $526,000 in 2003 versus $81,000 in
2002. The increase in 2003 was primarily associated with costs in relation to
the pending Kinross merger. In addition, the 2002 costs were lower since certain
other legal and accounting costs were charged to reorganization costs in the
2002 statement of operations as in relation to the Corporate Reorganization. All
reorganization costs were related to Crown's bankruptcy in 2002, totaled
$387,000, and were reported separately on Crown's consolidated statement of
operations. Amounts charged to Solitario for management fees in 2003 decreased
to $351,000 from $449,000 in 2002 primarily as a result of a modification to the
Management Agreement in July 2002 whereby the percentage of certain finance and
administrative costs to be charged to Solitario decreased from 75% for both to
50% and 25%, respectively. Other general and administrative costs, including
salaries and other personnel related costs, were comparable from 2002 to 2003.
If Crown's pending merger with Kinross is not completed, Crown expects its
general and administrative costs to be comparable to 2003 during 2004 as a
result of ongoing professional service costs related to the merger, which Crown
has incurred during the first three months of 2004.
Variable option compensation expense increased significantly to
$3,126,000 in 2003 from $175,000 in 2002, primarily as a result of an increase
in the intrinsic value of stock options due to an increase in the value of Crown
common stock from $0.58 per share at December 31, 2002, to $2.58 per share at
December 31, 2003. Under variable plan accounting, which initially resulted from
the re-pricing of existing options in 1999 and 1998, changes in the intrinsic
value of the stock options are charged (credited) to expense over the service
period (the vesting period) of the related options. Variable plan accounting
continues until options are exercised, cancelled or expire. If Crown's pending
merger with Kinross is not completed, unless there is a similar or greater
increase in the market price of Crown common stock in 2004 compared to 2003,
Crown would expect its variable option expense to be less in 2004 than in 2003.
If the market price of Crown common stock declines during 2004 from the December
31, 2003, market price of $2.58 per share, Crown would record a credit to
expense for the change in the intrinsic value.
Crown's equity in the loss of Solitario was $571,000 in 2003, versus
$873,000 in 2002. The $302,000 improvement resulted from Solitario's lower
exploration expense, lower management fees, and increased interest income during
2003. Solitario's lower exploration expense accounted for approximately $220,000
of the improvement, due primarily to joint venture reimbursements during 2003.
Lower management fees from Crown and increased interest income accounted for
approximately $40,000 and $55,000 of the improvement, respectively, while the
increase in interest income resulted primarily from Crown paying accrued
interest on its debt instruments in shares of Crown common stock where the value
of the shares at issuance was higher than the stated interest rate on the
related debt instruments. If Crown's distribution of its holdings of Solitario
common stock is not completed, Crown expects its 2004 equity in loss of
Solitario to be comparable to 2003.
40
Crown recorded an income tax benefit of $1,720,000 in 2003 versus an
income tax provision of $4,867,000 in 2002. Although Crown expects the Spin-Off
of its interest in Solitario to Crown stockholders to be a taxable transaction,
Crown anticipates this will not result in current tax due to the utilization of
net operating losses. If Crown's pending merger with Kinross is not completed,
Crown anticipates offsetting any operating losses incurred in 2004 against its
existing deferred tax liabilities at the statutory rate resulting in a tax
benefit.
YEAR ENDED DECEMBER 31, 2002, COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Crown had net income of $2,091,000, or $0.65 and $0.10 per basic and
diluted share, respectively in 2002 compared with a net loss of $2,098,000 or
$0.72 per basic and diluted share in 2001. The net income in 2002 primarily
resulted from a gain of $8,684,000 from the discharge of convertible debentures
in Crown's 2002 Corporate Reorganization less general and administrative costs
of $432,000, option compensation expense of $175,000, equity in the loss of
Solitario of $873,000, and income tax provision of $4,867,000.
Revenues and property sales consisted of a $171,000 gain on the sale of
the Cord Ranch properties in 2002, versus $214,000 in 2001. During 2001, Crown
sold its interest in Judith Gold for 200,000 shares of Canyon Resources common
stock, resulting in a gain on sale of $200,000, which equaled the proceeds from
the sale.
Exploration expense was $58,000 in 2002 versus $36,000 in 2001. Through
mid 2001, these costs had previously been paid by Crown's former joint venture
partner, Battle Mountain.
General and administrative expenses were $432,000 in 2002 compared to
$828,000 in 2001. The lower costs in 2002 primarily resulted from reduced
administrative costs, particularly related to legal and accounting expenses that
were reduced from $425,000 in 2001 to $81,000 in 2002. The increased 2001 legal
expenses for general corporate matters related to the default in 2001 on the
Debentures and related restructuring negotiations. In addition, certain
additional legal and accounting costs of $387,000 were incurred during 2002 as a
result of the bankruptcy filing and are charged as reorganization costs.
Personnel costs decreased to $570,000 in 2002 from $668,000 in 2001, primarily
due to lower staffing levels in 2002 and related severance charges in 2001 of
$37,000. All other general and administrative costs decreased to $230,000 in
2002 from $325,000 in 2001, due to lower spending on public relations, travel
and other office costs. Crown did not hold an annual meeting in 2002 due to the
bankruptcy, and as its corporate focus shifted to the corporate reorganization,
Crown lowered its overall administrative spending. Amounts charged to Solitario
for management fees decreased to $449,000 in 2002 from $590,000 in 2001,
primarily as a result of a modification to the Management Agreement in July 2002
whereby the percentage of certain finance and administrative costs to be charged
to Solitario decreased from 75% for both to 50% and 25%, respectively
In 2002, Crown recorded a charge of $175,000 for variable option
compensation expense related to 2002 options grants subject to variable plan
accounting. There were no charges to compensation expense for variable plan
accounting in 2001, as all variable plan option grants had exercise prices in
excess of the market price during the year.
Crown's equity in the loss of Solitario was $873,000 in 2002, versus
$1,512,000 in 2001. The $639,000 improvement resulted from Solitario's lower
exploration expense, general and administrative expenses, management fees and
asset write-downs, offset by higher amortization in relation to its mineral
interests. Solitario's lower exploration expense accounted for approximately
$215,000 of the improvement. During 2002, Solitario's exploration activities
were limited to a single project, versus three separate projects in 2001. Lower
management fees from Crown and lower general and administrative expenses
accounted for approximately $58,000 and $57,000 of the improvement,
respectively. During 2001, Solitario recorded certain asset write-downs that
accounted for $525,000 of the improvement. These improvements were offset by
$191,000 due to the effect of amortization of Solitario's mineral interests
recorded in 2002, where none was recorded in 2001.
Crown recorded an income tax provision of $4,867,000 in 2002, and did
not record an income tax benefit in 2001 against its 2001 pretax loss due
primarily to the establishment of a valuation allowance against deferred tax
assets from operating loss carryovers. As a result of Crown's bankruptcy during
2002, it recognized a gain of $8,684,000 on extinguishment of Crown Debentures
and it had a greater than 50% change in ownership as defined in Section 382 of
the Internal Revenue Code. This resulted in the utilization of $2,953,000 (tax
effected) of Crown's net operating loss carryovers and the change in ownership
caused a permanent reduction in previously recorded net operating loss
carryovers of $5,751,000 (tax effected) pursuant to Section 382 of the Internal
Revenue Code, which
41
limits future taxable income available to be offset. This reduction in Crown's
net operating losses during 2002 resulted in an offsetting reduction of its
valuation allowance of $3,241,000 during 2002. Crown recognized tax benefits of
$596,000 primarily related to net operating losses generated during the year
that were offset against deferred tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
Due to the nature of the mining business, the acquisition, exploration
and development of mineral properties require significant expenditures prior to
the commencement of production. Crown has in the past financed its activities
through the sale of debt and equity securities, joint venture arrangements
(including project financing) and the sale of interests in its properties. To
the extent necessary, Crown expects to continue to use similar financing
techniques.
Crown's exploration and development activities and funding
opportunities, as well as those of its joint venture partners, may be materially
affected by gold price and mineral commodity levels and changes in those levels.
The market price of gold and mineral commodities is determined in world markets
and is affected by numerous factors, all of which are beyond Crown's control.
On November 21, 2003, all $2,000,000 of the Secured Notes were called
for redemption, and prior to December 31, 2003, $1,994,000 of the Secured Notes
converted into 5,679,142 shares of Crown common stock, with the remainder being
redeemed for cash. On October 31, 2003 and November 5, 2003, a total $839,331 of
Subordinated Notes were converted into 1,119,108 shares of Crown common stock.
On November 5, 2003, the remaining $3,160,669 of Subordinated Notes were
automatically converted into 4,214,225 shares of Crown common stock.
On February 21, 2003, Crown issued $2,705,000 of 10% Convertible
Subordinated B Notes. On November 5, 2003, all $2,705,000 of Subordinated B
Notes automatically converted into 3,606,667 shares of Crown common stock.
THREE MONTHS ENDED MARCH 31, 2004, COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2003
Net cash used in operating activities increased to $663,000 in the first
three months of 2004 compared to $374,000 in the first three months of 2003. The
primary reason for the increase was an increase in professional services costs
related to the Crown's pending merger with Kinross. Legal and accounting costs
were $200,000 in the first quarter of 2004 compared to $39,000 in the first
three months of 2003. Additionally Crown reduced its accounts payable and
accrued liabilities by $299,000 during the first quarter of 2004 compared to
$257,000 in the same period of 2003 and increased its prepaid expenses by
$58,000 in the first quarter of 2004 compared to a decrease of $4,000 in the
same period of 2004, which, when combined with the increased legal and
accounting expense, accounted for the majority of the increased use of cash in
the first quarter of 2004 over the same period of 2003. If Crown's pending
merger with Kinross is not completed, Crown would expect their 2004 cash used in
operating activities to be comparable to 2003, as a result of ongoing
professional services costs in 2004 which have been incurred during the first
quarter of 2004 and the last quarter of 2003.
Net cash used in investing activities decreased to $183,000 in the first
three months of 2004 compared to $235,000 during the first three months of 2003
as a result of Crown's increased efforts at the Buckhorn Mountain Project during
the first quarter of 2003. During the first three months of 2003, Crown expended
$265,000 on non-interest costs in development of the Buckhorn Mountain Project
compared to $93,000 during the same period of 2004. The expenditures during 2003
included $78,000 for work performed to analyze on-site milling and tailings
facilities, $31,000 for study of Crown's underground mining plan and $40,000
related to completion of a drilling program, all three of which were necessary
to complete the Buckhorn Mountain Project feasibility study, which was prepared
by Steffen Robertson and Kirsten, an independent mining an consulting firm
("SRK") during 2003. Crown capitalized interest paid in cash during the first
quarter of 2004 of $168,000 compared to no capitalized interest paid in cash
during the first quarter of 2003, as all interest costs during the first quarter
of 2003 were related to a combination of amortization of note discounts of
$90,000 and shares of Crown common stock issued as interest of $322,000. If
Crown's pending merger with Kinross is not completed, Crown expects its 2004 net
cash used in investing activities to increase compared to 2003 as Crown has
budgeted approximately $1,400,000 for permitting and development at its Buckhorn
Mountain Project in 2004.
42
All interest costs, including non-cash interest costs, for the three
months ended March 31, 2004 and 2003, have been capitalized as part of Crown's
development of the Buckhorn Mountain Project. Crown capitalized interest costs
of $168,000 and $412,000 for the three months ended March 31, 2004 and 2003,
respectively. Interest costs decreased significantly during the first quarter of
2004 compared to 2003 as a result of the conversion of Crown's Subordinated,
Subordinated B and Secured Notes at the end of 2003. Additionally, Crown
recorded $56,000 of capitalized interest costs during the first three months of
2003 related to the issuance of shares of common stock as payment for interest
obligations at market prices above the conversion price, which is charged as
interest cost, and there were no similar charges in the first quarter of 2004,
as Crown paid all their interest costs in cash during 2004. Crown recorded
discount amortization charges (to capitalized interest) of $78,000 and $90,000
in the three months ended March 31, 2004 and 2003, respectively. If Crown's
pending merger with Kinross is not completed, Crown would expect its interest
costs to significantly decline for the full year for 2004 from 2003 as a result
of conversion of its Secured, Subordinated and Subordinated B notes. In
addition, because of an improvement in Crown's cash position, Crown anticipates
continuing to pay 2004 interest on the remaining Senior Notes in cash rather
than shares of Crown common stock, if the market price of their common stock is
above the conversion and interest price of $0.35 per share provided for by the
terms of the Senior Notes.
Net cash provided by financing activities during the first three months
of 2004 was $35,000, related to proceeds from the exercise of options compared
to cash provided of $2,705,000 in the same period of 2003 resulting from the
issuance of the $2,705,000 Subordinated B Notes in February 2003. If Crown's
pending merger with Kinross is not completed, Crown does not expect 2004 to have
any significant cash provided from financing activities as Crown does not expect
similar note conversions or warrant exercises, such as those that occurred in
2003, and Crown has no 2004 planned financing activities.
Cash and cash equivalents amounted to $1,554,000 at March 31, 2004.
These funds are generally invested in short-term interest-bearing deposits and
securities, pending investment in current and future projects. Working capital
at March 31, 2004, was $1,753,000.
YEAR ENDED DECEMBER 31, 2003, COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
Net cash used in operating activities increased to $813,000 in 2003
compared to $729,000 in 2002. The primary reason for the increase was an
increase in professional services costs at the end of the year related to the
Crown's pending merger with Kinross and a decrease in amounts charged to
Solitario, as a result of modifications to the Management and Technical Services
Agreement with Solitario in July 2002. Legal and accounting costs were $526,000
in 2003 versus $81,000 in 2002. The increase in 2003 was primarily associated
with costs in relation to the pending Kinross merger. However, during 2002,
certain other legal and accounting expense totaling $387,000 were charged to
reorganization costs in the 2002 statement of operations in connection with the
Corporate Reorganization. If Crown's pending merger with Kinross is not
completed, Crown would expect its 2004 cash used in operating activities to be
comparable to 2003, as a result of ongoing professional services costs in 2004
being incurred related to the merger.
Net cash used in investing activities increased to $1,215,000 in 2003
from $582,000 as a result of Crown's increased efforts at the Buckhorn Mountain
Project since June of 2002 when the bankruptcy became effective. During 2003,
Crown expended $1,168,000 on development of its Buckhorn Mountain Project
compared to $564,000 during 2002. The large increase during 2003 was primarily
due to an increase in work performed to complete the SRK feasibility study, as
well as capitalization of cash paid for interest of $310,000 during 2003
compared to no cash paid for capitalized interest in 2002. Crown's total costs
related to the feasibility study in 2003 were $345,000 compared to $56,000 in
the prior year. In addition, Crown hired additional staff and expanded its
on-site administrative costs, which increased to $314,000 in 2003 compared to
$173,000 in 2003. Capitalized costs during 2003 also included $159,000 for
additional work related to obtaining permits for the underground mine compared
to $53,000 in 2002. During 2002, Crown started a drilling campaign to provide
data to assist in completion of the feasibility study and for permitting the
Buckhorn Mountain Project. This drilling campaign ended in 2003. Crown
capitalized $40,000 related to this drilling program in 2003 compared to
$251,000 in 2002. If Crown's pending merger with Kinross is not completed, Crown
expects its 2004 net cash used in investing activities to increase compared to
2003 as Crown has budgeted approximately $1,400,000 for permitting and
development at its Buckhorn Mountain Project in 2004.
All interest costs, including non-cash interest costs, for the three
years ended December 31, 2003, have been capitalized as part of Crown's
development of the Buckhorn Mountain Project. Crown capitalized interest
43
costs of $3,068,000, $996,000, and $1,046,000 for the years ended December 31,
2003, 2002, and 2001, respectively. Interest costs increased significantly to
$3,068,000 in 2003 from $996,000 in 2002. This increase was due primarily to
increased discount amortization in relation to beneficial conversion feature
discounts associated with Crown's convertible debt instruments, and additional
interest cost resulting from its election to issue shares of Crown common stock
in satisfaction of accrued interest obligations. Interest cost on Crown's debt
obligations at the stated rate in 2003 was $1,075,000 compared to $923,000 in
2002, which included $231,000 of interest on the Convertible Debentures. Crown
recorded discount amortization charges (to capitalized interest) of $1,352,000
and $208,000 in 2003 and 2002, respectively. Of the 2003 discount amortization
charges, $940,000 was recorded as the full amortization of all discounts
associated with the conversion and redemption of the outstanding Secured Notes.
As a result of fair value differences in relation to the issuance of Crown
common stock in satisfaction of accrued interest charges, increases of $628,000
and decreases of $152,000 were recorded to interest costs in 2003 and 2002,
respectively. If Crown's pending merger with Kinross is not completed, Crown
would expect its interest costs to decline significantly in 2004 from 2003 as a
result of conversion of its Secured, Subordinated and Subordinated B notes. In
addition, because of an improvement in Crown's cash position, Crown anticipates
paying its 2004 interest on its remaining Senior Notes in cash rather than
shares of Crown common stock, if the market price of Crown common stock is above
the conversion and interest price of $0.35 per share in the Senior Notes.
Net cash provided from financing activities increased to $3,360,000 in
2003 from $2,234,000 in 2004 primarily as a result of the issuance of the
$2,705,000 Subordinated B Notes in February 2003, as well as the receipt of
$708,000 of cash from the exercise of warrants during 2003. The balance of the
$3,600,000 Senior Notes financing of $3,250,000, plus interest was delivered to
Crown during 2002. Of this amount, $1,000,000 was used to pay the cash portion
of the exchange with holders of the Debentures on the Effective Date of the plan
of reorganization. If Crown's pending merger with Kinross is not completed, it
does not expect 2004 to have any significant cash provided from financing
activities as Crown has no control over note conversions or warrant exercises,
such as those that occurred in 2003, and it has no 2004 planned financing
activities.
YEAR ENDED DECEMBER 31, 2002, COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Net cash used in operating activities was $729,000 in 2002 compared to
$763,000 in 2001. The staff levels and activities in both years were consistent
and reflected a reduced level of activity for exploration and development as a
result of the corporate reorganization. Although Crown recorded a gain of
$8,684,000 on the discharge of its debentures in 2002, this was a non-cash
transaction as was Crown's deferred tax expense recorded during the year of
$4,867,000. Crown's equity in the loss of Solitario was reduced in 2002 as a
result of Solitario's decreased losses.
Net cash used in investing activities in 2002 was $582,000 compared to
$418,000 in 2001. Crown began work to permit and develop its Buckhorn Mountain
Project during 2002 upon the completion of the corporate reorganization. These
costs totaled $533,000 and included costs of $251,000 for an in-fill drilling
program, $53,000 for permitting and monitoring work, $56,000 for feasibility
study update, and $173,000 for related on-site administrative costs. Permitting
and development work continued at a reduced rate from the time Crown terminated
its joint venture with Newmont in July 2001 until the completion of Crown's
bankruptcy in June of 2002. These increases in cash used in investing activities
during 2002 were offset by the payment of capitalized interest costs in stock
related to the Senior, Secured and Subordinated notes during 2002, compared to a
cash payment for interest of $431,000 on the Debentures in 2001. During 2001,
Crown received $211,000 in proceeds from asset sales, which offset its use of
funds from investing activities and there was no comparable proceeds received
during 2002.
Total capitalized interest costs, including non-cash interest costs,
were $996,000 in 2002 compared to $1,046,000 in 2001. Interest costs decreased
in 2002 as a result of the filing of bankruptcy and the confirmation of the 2002
Plan that resulted in no accrual of interest costs on the Debentures from the
date of the filing. In addition, as part of the 2002 Plan, Crown exchanged
$6,000,000 in new notes for $15,000,000 of Debentures. Included in capitalized
interest is amortization of warrant and beneficial conversion features related
to the Senior and Secured notes of $208,000 in 2002 and $12,000 in 2001, as well
as amortization of deferred offering costs related to the Debentures of $68,000
in 2001. In addition, 2002 capitalized interest cost was reduced by $152,000 as
a result of issuing shares of Crown common stock in satisfaction of accrued
interest, where the fair value of the issued shares was lower than the accrued
interest obligation, in accordance with the terms of the related note
agreements.
Net cash provided by financing activities was $2,234,000 in 2002
compared to $320,000 in 2001. Proceeds of $350,000 from the Secured Note
financing were delivered to Crown in October 2001. The balance of the $3,600,000
Senior Notes financing of $3,250,000, plus interest was delivered to us during
2002. Of this
44
amount, $1,000,000 was used to pay the cash portion of the exchange with holders
of the Debentures on the Effective Date of the plan of reorganization.
CONTRACTUAL OBLIGATIONS AND PLANNED EXPENDITURES
Crown has budgeted $1,400,000 for permitting and development
expenditures in 2004, which will be fully expended by Crown only if the pending
merger with Kinross is not completed. The bulk of these costs will be for
completion of a supplemental draft environmental impact statement related to the
currently filed amended plan of operations for the Buckhorn Mountain Project.
Crown has sufficient resources to fund its planned operations through 2005,
whether or not the Kinross merger is not completed.
This plan assumes the ores from the Buckhorn Mountain Project will be
trucked to Kinross' Kettle River Mill and will be processed in accordance with
Crown's toll milling agreement with Kinross. The capital costs of the Buckhorn
Mountain Project, through initial production, are currently estimated to be
approximately $32.6 million, assuming the toll milling discussed above. If the
pending merger with Kinross is not completed, Crown will require significant new
financial resources in order to complete the development of the Buckhorn
Mountain Project, which may be in the form of a joint venture, project or debt
finance, or issuance of equity. There is no assurance Crown will be able to
obtain the necessary financial resources on acceptable terms, if at all.
Future contractual obligations and cash commitments at March 31, 2004,
include the payment of: Senior Notes, long-term debt, unpatented mining claim
payments, and operating leases, as follows:
(in thousands) 2004 2005 2006 2007 2008+ TOTAL
---- ---- ---- ---- ----- -----
Senior Notes $ - $ - $3,600 $ - $ - $3,600
Long-term debt 50 50 - - - 100
Unpatented mining claim payments(1) 17 17 17 17 17 85
Asset retirement obligation - - - - 60 60
Operating leases 39 39 20 - - 89
------ ------ ------ ------ ------ ------
Total commitments $ 97 $ 106 $3,637 $ 17 $ 77 $3,934
====== ====== ====== ====== ====== ======
-------------------------
(1) Assumes continued payment of mining claim payments on existing mineral
properties.
Crown will need additional financial resources to pay the principal of
its Senior Notes when due in 2006. There can be no assurance that Crown will be
able to obtain the necessary financial resources.
45
RELATED PARTY TRANSACTIONS
At June 7, 2004, Crown owned 37.1% of Solitario. Crown provides
management and technical services to Solitario under a management and technical
services agreement originally signed in April 1994 and modified in April 1999,
December 2000, and July 2002. Under the modified agreement, Solitario reimburses
Crown for direct out-of-pocket expenses; payment of 25% of Crown's corporate
administrative costs for executive and technical salaries benefits and expenses,
50% of Crown's corporate administrative costs for financial management and
reporting salaries, benefits and expenses and 75% of Crown's corporate
administrative costs for investor relations salaries, benefits, and expenses.
These allocations are based upon estimated time and expenses spent by Crown's
management and employees on Crown's activities and Solitario's activities.
Crown's management believes these allocations are reasonable and the allocations
are periodically reviewed by management and approved by Crown's independent
board members and by Solitario's independent board members. Management service
fees are billed monthly, due on receipt and are generally paid within 30 days.
Management service fees paid by Solitario were $89,000 and $97,000 for the three
months ended March 31, 2004 and 2003, respectively, and were $351,000, for 2003,
$499,000 for 2002, and $590,000 for 2001. Crown anticipates the management and
technical services agreement will be terminated if its pending merger with
Kinross is completed.
Crown entered into a Voting Agreement dated as of April 15, 2002, among
Zoloto Investor's, LP ("Zoloto") and Solitario, who are each stockholders of
Crown (the "Signing Shareholders"). Pursuant to the Voting Agreement, Solitario
and Zoloto agree that they will each vote their owned shares during the term of
the Voting Agreement for the election of three designees of Zoloto and one
designee of Solitario (the "Designee Directors") to the board of directors of
Crown. The signing shareholders agreed that any shares received by either
signing shareholder would be subject to the Voting Agreement during its term and
any successor, assignee, or transferee of shares from either signing shareholder
would be subject to the terms of the Voting Agreement during its term. The
Voting Agreement terminates on the June 26, 2006. As of June 7, 2004, the
signing shareholders collectively held 1,733,866 shares or approximately 7.7% of
Crown's outstanding shares. As of June 7, 2004, assuming conversion of all
outstanding convertible debt and exercise of all warrants on a cash basis, the
signing shareholders collectively held 19,276,724 shares, or approximately
38.9%, of the fully diluted shares calculated on the same basis.
In October 2001, Solitario invested in two Senior Notes, which totaled
$1,000,000 of the $3,600,000 principal amount of Senior Notes issued. The
proceeds of $350,000 from the first note (the "Solitario Note") were delivered
to Crown. The Solitario Note was convertible into shares of Crown common stock
at $0.2916 per share. The proceeds from the second note from Solitario (the
"$650,000 Note"), and the remaining Senior Notes of $2,600,000, or $3,250,000 in
total, were placed in escrow pending the outcome of Crown's bankruptcy. The
$650,000 Note was convertible into shares of Crown common stock at $0.35 per
share. In March 2002, an additional $200,000 was advanced to Crown out of escrow
of which Solitario's share of the advance was $56,000. Crown's 2002 Plan was
confirmed on May 30, 2002, and the remaining balance of the proceeds plus
interest was released to Crown on the Effective Date. The independent board
members of both Solitario and Crown approved the transaction. The terms of the
transaction on the Escrowed Notes were the same as given to other senior lenders
of Crown (the "Senior Lenders") and, with regard to the terms of the $350,000
Solitario Note, the terms were negotiated with and approved by the other Senior
Lenders.
On June 26, 2001, Solitario acquired 200,000 shares of Canyon Resources
Corporation common stock as an investment from us at its fair value of $200,000
at that date. The transaction provided additional working capital to Crown, and
was approved by independent board members of both Solitario and Crown.
On February 21, 2003, Solitario invested $400,000 in the Subordinated B
Notes on the same terms and conditions as all other investors. On November 5,
2003, Solitario's Subordinated B Notes were automatically converted into 533,333
shares of Crown common stock, pursuant to the terms of all Subordinated B Notes,
as a result of the quoted market price of Crown common stock exceeding $1.75 per
share for 20 consecutive trading days. During 2003 and 2002, Crown issued
249,718 and 182,440 shares of Crown's common stock, with a value of $207,000 and
$75,000, respectively, in satisfaction of its accrued interest obligations to
Solitario under the Senior and Subordinated B Notes.
As of June 7, 2004, Solitario owns 965,491 shares of Crown common stock.
The directors and executive officers of Crown and their affiliates, including
Solitario, owned 2,012,458 shares of Crown common stock, which represents
approximately 9% of the outstanding shares of Crown common stock at June 7,
2004. Solitario has
46
entered into a stockholder and voting agreement with Kinross, along with several
of Crown's directors, Crown's executive officers and entities affiliated with
these directors and officers (collectively the "Signatories"), pursuant to which
the Signatories agreed, among other things, to convert any Senior Notes held by
them to Crown common stock prior to the record date for the special meeting, to
vote, or cause to be voted, all of the shares of Crown common stock owned by
them, as set forth in the stockholder and voting agreement, as well as all
shares of Crown common stock acquired by them, as set forth in the stockholder
and voting agreement, in favor of the approval of the plan of merger, and
against the acquisition of Crown by any person other than Kinross. As of June 7,
2004, 2,012,458 shares of Crown common stock were subject to the stockholder and
voting agreement, representing approximately 9% of the outstanding shares of
Crown common stock entitled to vote at the Crown special meeting. Additionally,
the Signatories agreed to convert $3,000,000 of Senior Notes into 8,771,429
shares and hold options to acquire 1,917,500 shares of Crown common stock, which
could be exercised prior to the record date for the shareholders' meeting, and
hold warrants to acquire 8,771,429 shares of Crown common stock, which could be
exercised prior to the record date for the shareholders' meeting for a total of
21,472,816 shares of Crown common stock, which would represent 43.3% of the then
outstanding shares.
CRITICAL ACCOUNTING POLICIES
On January 1, 2002, Crown adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which, among
other things, required the reclassification of Crown's mineral properties as
mineral interests (intangible assets). Crown's mineral interests represent
mineral use rights for parcels of land not owned by it. Crown's mineral
interests relate to exploration stage properties and the value of such
intangible assets is primarily driven by the nature and amount of economic
minerals believed to be contained, or potentially contained, in such properties.
At January 1, 2002, Crown reclassified $18,474,000 from mineral properties to
mineral interests. Crown amortizes mineral interests over their expected useful
lives or until it has been determined the mineral interest contains proven and
probable reserves. As all of Crown's capitalized costs since January 1, 2002,
have related to the Buckhorn Mountain Project that has proven and probable
reserves, Crown has not recorded any amortization of those costs. Crown
anticipates reclassifing its mineral interests as mineral property in accordance
with Emerging Issues Task Force Issue No. 04-2, "Whether Mineral Rights are
Tangible or Intangible Assets" ("EITF No. 04-2") which requires companies to
reclassify mineral interests as mineral properties. See "Recent Accounting
Pronouncements" below.
Land and leasehold acquisition costs are capitalized as mineral
interests. Development costs are capitalized as mineral properties. Where these
costs relate to mineral interests or mineral properties with proven and probable
reserves, these costs will be depleted using the units-of-production method over
the estimated life of the reserves. If there are insufficient reserves to use as
a basis for depleting such costs, they are written off as a mineral property or
a mineral interest impairment in the period in which the determination is made.
Interest costs are capitalized on mineral properties and mineral interests in
development. Interest is capitalized by applying a weighted average interest
rate, including the effect of any discounts, to the average capitalized costs
during a period, up to a maximum of total interest costs incurred during the
period. Crown capitalized all of its interest costs of $412,000 and $168,000 for
the three months ended March 31, 2004 and 2003, respectively, and $3,068,000,
$996,000, and $1,046,000 for the years ended December 31, 2003, 2002, and 2001,
respectively. At March 31, 2004 and December 31, 2003, a total of $14,297,000
and $13,885,000, respectively, of interest costs have been capitalized as
mineral interests and mineral properties at the Buckhorn Mountain Project.
Crown expenses all exploration costs incurred on its mineral interests,
other than acquisition costs, prior to the establishment of proven and probable
reserves. Upon identifying proven and probable reserves, Crown capitalized
substantially all costs incurred including drilling, permitting and development
as mineral property costs. Costs on mineral interests with proven and probable
reserves which support development of proven and probable reserves or which
expand existing proven and probable reserves are capitalized and amortized using
the units-of-production method over the estimated life of the reserves. Crown
regularly performs evaluations of its investment in mineral interests to assess
the recoverability and or the residual value of its investments in these assets.
All long-lived assets are reviewed for impairment whenever events or
circumstances change which indicate the carrying amount of an asset may not be
recoverable, utilizing established guidelines based upon discounted future net
cash flows from the asset or upon the determination that certain exploration
properties do not have sufficient potential for economic mineralization. There
were no mineral interest impairments in the three months ended March 31, 2004,
or in the years ended December 31, 2003, 2002, or 2001.
47
Crown's proven and probable reserves are based on extensive drilling,
sampling, mine modeling and metallurgical testing from which economic
feasibility has been determined. The price sensitivity of reserves depends upon
several factors including grade, waste-to-ore ratio, and ore type. The reserves
are estimated based on information available at the time the reserves are
calculated. Recovery rates vary depending on the metallurgical properties of
each deposit and the production process used. The reserve assumes the average
recovery rate for the deposit, which takes into account the processing methods
scheduled to be used. The cutoff grade, or lowest grade of mineralized material
considered economic to process, varies with material type, metallurgical
recoveries, and operating costs. The proven and probable reserves figures
presented herein are estimates, and no assurance can be given that the indicated
levels of recovery of gold will be realized. Ounces of gold in the proven and
probable reserves are prior to any losses during metallurgical treatment.
Reserve estimates may require revision based on actual production experience.
Market price fluctuations of gold, as well as increased production costs or
reduced recovery rates, could render proven and probable reserves containing
relatively lower grades of mineralization uneconomic to exploit and might result
in a reduction of reserves. As discussed below, the ultimate recovery of Crown's
mineral reserves is dependent on obtaining necessary permits for the Buckhorn
Mountain Project.
ENVIRONMENTAL, PERMITTING AND LEGAL
In July 2001, Crown became the sole owner of the Crown Jewel Project and
renamed it the Buckhorn Mountain Project. Previously, the Crown Jewel Project
had been subject to a joint venture agreement between Crown and Battle Mountain.
Battle Mountain had proposed an open-pit mining operation with an on-site
processing facility. Battle Mountain's proposed open-pit Crown Jewel Project was
subjected to numerous permitting and legal challenges and delays. In January of
2000, the Washington Pollution Control Hearings Board (the "PCHB") vacated the
previously granted 401 Water Quality Permit and certain water rights for the
Crown Jewel Project. Other permits previously granted to the Crown Jewel Project
have since lapsed, some of which will have to be reacquired as part of the
ongoing permitting process.
As part of the analysis of the Buckhorn Mountain Project subsequent to
the January 2000 PCHB ruling, Crown retained Gochnour and Associates
("Gochnour") to review the required permits for a potential combination
underground/open-pit-mine design for the Buckhorn Mountain Project ore deposit.
Gochnour indicated this mine design would require conducting additional baseline
studies and collecting data for modeling to amend previously approved permits,
as well as to obtain permits for activities that were not previously
contemplated, for example the underground mining effects on ground water.
Gochnour indicated the underground alternative would also require mitigation of
environmental impacts. The Gochnour report concluded the proposed mine design is
legally permittable.
During 2002, Crown began seeking regulatory approval and permits to
operate an exclusively underground mining operation at the Buckhorn Mountain
Project. In May 2003, Crown submitted its Initial Buckhorn Mountain Project Plan
of Operations with the USFS and the Washington State Department of Ecology. The
Initial Buckhorn Mountain Project Plan of Operations was deemed complete by the
USFS in August 2003. This plan proposed a processing facility seven miles from
the mine that Crown would construct, own, and operate. The ore would have been
trucked from the mine to the mill. Crown believed this development plan
significantly reduced the environmental impacts compared to the Crown Jewel
open-pit mining plan proposed by Battle Mountain.
Subsequent to the signing of the toll milling agreement with Echo Bay
Minerals, Crown filed an amended Buckhorn Mountain Plan of Operations as
outlined in the SRK feasibility study that provides for trucking of ore from the
mine to the Kettle River processing facility owned by Echo Bay Minerals. This
new development plan further reduces environmental impacts in comparison to the
previous Buckhorn Mountain Project Plan of Operations by eliminating the need
for new milling and tailings disposal facilities.
48
Construction of the Buckhorn Mountain Project will not begin prior to
the successful issuance of the remaining permits and resolution of the potential
future legal and administrative challenges. Potential delays due to the appeals
process, permit process or litigation are difficult to quantify.
RECENT ACCOUNTING PRONOUNCEMENTS
The Emerging Issues Task Force ("EITF") formed a committee ("Committee")
to evaluate certain mining industry accounting issues, including issues arising
from the application of SFAS No. 141, "Business Combinations" ("SFAS No. 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") to
issues that included whether mineral interests conveyed by leases represent
tangible or intangible assets and the amortization of such assets. In March
2004, the EITF reached a consensus in EITF Issue No. 04-2 "Whether Mineral
Rights Are Tangible or Intangible Assets" (EITF No. 0-2)", subject to
ratification by the Financial Accounting Standards Board ("FASB"), that mineral
interests conveyed by leases should be considered tangible assets. On March 31,
2004, the FASB ratified the consensus of the EITF that mineral interests
conveyed by leases should be considered tangible assets subject to the
finalization of a FASB Staff Position ("FSP") in this regard. On April 30, 2004,
the FASB issued a FSP amending SFAS No. 141 and SFAS No. 142 to provide that
certain mineral use rights are considered tangible assets and that mineral use
rights should be accounted for based on their substance. The FSP is effective
for the first reporting period beginning after April 29, 2004, with early
adoption permitted. Crown will reclassify all of its mineral interests conveyed
by leases from mineral interests, net to mineral property, net in its balance
sheets.
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150 "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity," which clarifies the classification as liabilities for certain financial
instruments including equity shares that are mandatorily redeemable, or a
financial instrument other than equity shares that has an obligation to
repurchase the instrument with equity shares, including a conditional obligation
to settle the financial instrument with equity shares. Crown adopted SFAS No.
150 effective for financial instruments entered into after May 31, 2003. The
adoption of this statement has not had a material effect on Crown's consolidated
financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" to amend and clarify financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
The changes in this statement are intended to improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly to achieve more consistent reporting of contracts as either derivative
or hybrid instruments. Crown adopted SFAS No. 149 and will apply it
prospectively for contracts entered into or modified after June 30, 2003. The
adoption of this statement has not had a material effect on Crown's consolidated
financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") and in December 2003
issued FIN 46R. FIN 46 requires the consolidation of variable interest entities
which have one or both of the following attributes (1) the equity investment at
risk is not sufficient to permit the entity to finance its activities without
additional financial support from other parties which is provided by other
parties that will absorb some or all of the expected losses of the entity; (2)
the equity investors lack controlling financial interest as evidenced by (i) the
ability to make decisions regarding the entity's activities through voting or
similar rights, (ii) the obligation to absorb expected losses, which make it
possible for the entity to finance its activities, and (iii) the right to
receive expected residual returns of the entity if they occur, which is the
compensation for absorbing the expected losses. FIN 46 was immediately effective
for variable interest entities formed after January 31, 2003. FIN 46R requires
the adoption of either FIN 46 or FIN 46R in financial statements of public
entities that have interests in structures that are commonly referred to as
special purpose entities for periods ending after December 15, 2003. Application
for all other types of variable interest entities is required in financial
statements for periods ending after March 15, 2004. Crown has no investments in
or relationships with variable interest entities at December 31, 2003. The
adoption of FIN 46R did not have a material effect on Crown's consolidated
financial position or results of operations.
49
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the
disclosure by guarantors of (a) the nature of any guarantee, (b) maximum
potential amount of future payments associated therewith, (c) carrying amounts
of liabilities, if any, related to the guarantor's obligations under the
guarantee and (d) the nature and extent of any recourse or collateral for
recovery of any amounts paid under the guarantee. FIN 45 also requires
guarantors to recognize at the inception of a guarantee within its scope a
liability for the fair value of obligations undertaken in issuing the guarantee,
including the obligation to stand ready to perform over the term of guarantee.
Crown has applied the provisions of FIN 45 for interim and annual periods ending
after December 15, 2002, and the effect of adopting this interpretation was not
material to Crown's consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and generally requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at its fair value in the
period in which the liability is incurred. SFAS No. 146 does not apply to costs
associated with the retirement of long-lived assets covered by SFAS No. 143.
Crown has adopted the provisions of SFAS No. 146 effective for exit or disposal
activities initiated after December 31, 2002. The adoption of this statement has
not had a material effect on Crown's consolidated financial position or results
of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates inconsistencies between the accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications. This statement also requires that gains and losses from debt
extinguishments should be classified as extraordinary items only if they meet
the criteria of Accounting Principles Board Opinion No. 30. This Statement also
amends existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their meanings under changed
conditions. Crown adopted SFAS No. 145 as of January 1, 2003. As a result of the
adoption of this Statement, Crown has reclassified a $8,684,000 gain during 2002
on the discharge of its Convertible Debentures from an extraordinary item net of
taxes, to a gain before related tax effects in Crown's 2002 consolidated
statement of operations. The adoption of this Statement has not had any other
material effects on Crown's financial position or results of operations.
On January 1, 2002, Crown adopted SFAS No. 142, which among other things
required the reclassification of its capitalized land and lease acquisition
costs from mineral properties to mineral interest (intangible assets). The
excess of the cost of each mineral interest over Crown's estimated residual
value is amortized over the proven and probable reserves on a
units-of-production basis. Since January 1, 2002, all of Crown's mineral
interests relate to its Buckhorn Mountain Project, which is in development and
will be amortized over Crown's proven and probable reserves. Accordingly, no
amortization has been recorded on these assets. Beginning January 1, 2002, Crown
reclassified $18,474,000 of these costs from mineral properties to mineral
interests.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." Under SFAS No. 143, the fair value of a liability for
an asset retirement obligation covered under the scope of SFAS No. 143 is
recognized in the period in which the liability is incurred, with a
corresponding increase in the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value, and the capitalized
cost is depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity would either settle the obligation for its recorded
amount or incur a gain or loss upon settlement. Crown adopted SFAS No. 143 as of
January 1, 2002. The adoption of this Statement has not had a material effect on
Crown's consolidated financial position or results of operations.
In April 2004, the EITF issued EITF Issue No. 04-3 "Mining Assets:
Impairment and Business Combinations" ("EITF No. 04-3") which evaluated certain
issues related to values in mining properties beyond proven and probable
reserves (VBPP) and the effects of anticipated fluctuations in the future market
price of minerals. The EITF reached a consensus that fair value of mining
properties generally includes both VBPP and the effects of anticipated
fluctuations in the future market price of minerals and that entities should
generally include both in determining the fair value allocated to mining assets
in a purchase price allocation and in the cash flow analysis (both discounted
and undiscounted) used for determining whether a mining asset is impaired. The
consensus reached by the EITF should be applied prospectively in the periods
after March 31, 2004, but early application is permitted in periods for which
financial statements have not been issued. Crown does not expect that the
adoption of EITF No. 04-3 will have a material impact on its financial position,
results of operations, or cash flows.
50
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DISCLOSURE ABOUT MARKET RISKS
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INTEREST RATE RISKS
The Senior Notes are not subject to market risk since they have a fixed
interest rate and a repayment amount payable either in cash or shares of Crown
common stock. Crown does not use financial or other derivative instruments to
manage interest market risks. A hypothetical change of 1% in the interest rate
earned on short-term investments during 2003 would have resulted in an increase
or decrease of less than $10,000 in net income.
FLUCTUATIONS IN COMMODITY PRICES
Crown is also exposed to commodity price risks for changes in the price
of precious and base metals insofar as such changes may affect the economic
viability of its exploration and development projects. A change of 10% in the
price of gold, silver, or zinc would not have resulted in a material change to
the carrying value of the Crown assets, liabilities, or net income. Given that
the feasibility study for the Buckhorn Mountain Project utilized a gold price of
$350 per ounce and that the closing gold price on June 7, 2004, was $394 per
ounce, a 10% change in the price of gold would not require a revision of Crown's
reported reserves, costs, or capitalized costs related to the Buckhorn Mountain
Project.
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BUSINESS OF KINROSS
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OVERVIEW
Kinross is principally engaged in the mining and processing of gold and,
as a by-product, silver ore and the exploration for, and the acquisition of,
gold bearing properties primarily in the Americas and Russia. The principal
products of Kinross are gold and silver produced in the form of dore that is
shipped to refineries for final processing.
Kinross is the continuing corporation resulting from the May 1993
amalgamation under the Business Corporations Act (Ontario) of CMP Resources Ltd.
("CMP Resources"), Plexus Resources Corporation ("Plexus Resources"), and
1021105 Ontario Corp ("1021105"). Kinross' registered and principal offices are
located at Suite 5200, Scotia Plaza, 40 King Street West, Toronto, Ontario, M5H
3Y2.
Kinross' long-term financial objective is growth in cash flow and a
return to sustained earnings per share through successful exploration,
acquisitions, and development of existing and acquired properties. Mine
operating plans focus on maximizing the pre-tax cash flow return on investment
over the life of the business unit.
Kinross' operations and reserves are impacted by changes in metal
prices. Over the past three years, gold has averaged approximately $315 per
ounce and was $417 per ounce on the last trading day of 2003. Gold traded above
$390 per ounce during much of 2003 and has continued to do so in 2004. Kinross
used a forecast of $325 per ounce at the end of 2003 and $300 at the end of 2002
to estimate reserves and $350 per ounce and $325 per ounce, respectively, to
assess mining assets for impairment.
Kinross' share of proven and probable reserves as at December 31, 2003,
was 14.1 million ounces of gold and 38.6 million ounces of silver. These
estimates have been calculated using industry standard methodology and the
appropriate cut-off grade assuming a gold price of $325 per ounce.
51
The estimate of Kinross' mineral reserves and resources and impairment
analysis is based on a number of assumptions, including the average process
recovery rate at the various mining operations, the gold cutoff grade used, the
foreign exchange rates for those operations not denominated in U.S. dollars, and
the recovery cost per tonne. These assumptions are unique for each property and
are identified for each mining operation in the table set forth on page 66. A
change in the underlying assumptions, or the use of different assumptions, could
have a material impact on the estimate of mineral reserves and resources or the
impairment analysis of existing assets.
A critical goal for Kinross is the creation of value through the
investment in quality projects and the consummation of accretive acquisitions.
Kinross more than doubled its exploration and business development expenditures
in 2003, increasing them to $24.3 million compared to $11.6 million in 2002.
Kinross expects to continue this effort, with $20 million budgeted for
exploration and business development during 2004. In addition, capital
expenditures were $73.4 million in 2003 as compared to $22.6 million in 2002 and
$30.4 million in 2001. Planned capital expenditures are estimated at $165
million in 2004. This capital expenditure program is the largest in Kinross'
history, and it is anticipated that it will be funded from cash flow from
operating activities.
RECENT DEVELOPMENTS
On January 31, 2003, Kinross completed its combination with TVX Gold
Inc. ("TVX") and Echo Bay Mines Ltd. ("Echo Bay"). This combination was effected
by way of a plan of arrangement under the Canada Business Corporations Act. TVX
amalgamated with a wholly-owned subsidiary of Kinross and each holder of a TVX
common share received 2.1667 Kinross common shares. Shareholders of Echo Bay,
other than Kinross, received 0.1733 of a Kinross common shares for each Echo Bay
common share. Kinross issued 177.8 million common shares with a fair value of
$1,269.8 million with respect to the combination with TVX and Echo Bay. The
exchange ratios reflect the one-for-three consolidation of Kinross common shares
that was effective January 31, 2003, immediately prior to the combination. In a
concurrent transaction, TVX acquired Newmont Mining Corporation's ("Newmont")
50% non-controlling interest in the TVX Newmont Americas Joint Venture for an
aggregate purchase price of $180 million. These acquisitions are being accounted
for using the purchase method of accounting. See "Kinross Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Management's Discussion and Analysis for the Years Ended December
31, 2002, 2002, and 2001--Material Events" beginning at page 179.
On August 28, 2003, Kinross issued 23.0 million common shares for gross
proceeds of CDN $213 million. The net proceeds of the offering were used to
redeem Kinross' outstanding 5.5% convertible unsecured subordinated debentures.
The principal amount of the convertible debentures was CDN $195.6 million. The
convertible debentures were redeemed on September 29, 2003.
On December 4, 2003, Kinross and Bema Gold Corporation ("Bema")
announced that their respective boards of directors approved the recommencement
of gold operations at the Refugio heap leach mine located near Copiapo, Chile.
The project is expected to begin producing gold from the expanded operations in
the fourth quarter of 2004. Compania Minera Maricunga ("CMM") owns the Refugio
mine and is owned 50% by Kinross, as operator, and 50% by Bema. The Refugio mine
had been placed on care and maintenance in May 2001 due to low gold prices and
has produced declining amounts of gold from residual leaching of existing heaps
since that time. During the past year, a 56,000 meter drill program was
successful in expanding reserves to justify a greater than 25% expansion of
daily throughput compared to historic production levels. Initially, the Verde
pits are scheduled to produce 40,000 tons of ore per day, which will be crushed
and placed on the leach pads. Subsequently, the new Pancho pit is expected to be
mined at 35,000 tons of ore per day. In making the decision to recommence gold
production at Refugio, Kinross and Bema used an assumed gold price of $350 per
ounce, which resulted in an estimated life-of-mine of approximately ten years.
For information concerning the estimated reserves and resources associated with
Refugio, see the information in the table labeled "Mineral Reserve and Resource
Statement," beginning on page 63. Kinross' 50% share of purchase commitments to
reopen Refugio at December 31, 2003, was $5.4 million.
Effective June 1, 2004, Mr. Lars-Eric Johansson was appointed Executive
Vice-President and Chief Financial Officer of Kinross, replacing Mr. Brian W.
Penny who resigned his functions as Vice-President Finance and Chief Financial
Officer for personal reasons.
52
As a result of the development of the Emmanuel Creek deposit and the
reopening the Kettle River mill, Kinross achieved commercial production of the
first of its recent development projects in January 2004. As of March 31, 2004,
approximately 106,000 tons of ore, grading approximately 0.27 ounces of gold per
ton, has been delivered to the mill from the Emanuel Creek zone at the K2 mine.
Kinross is currently mining the second level of primary stopes with the first
secondary stope projected to come on line in May 2004. There are no material
purchase commitments regarding Kettle River at December 31, 2003.
HISTORY
Following Kinross' amalgamation in May 1993 with CMP Resources, Plexus
Resources and 1021105, Kinross and Falconbridge Amalco Inc. ("Falconbridge
Amalco"), a corporation that was formed upon the amalgamation of Falconbridge
Gold Corporation and FGC Acquisition Inc., amalgamated on December 31, 1993, by
way of arrangement.
On June 1, 1998, a wholly-owned subsidiary of Kinross merged with Kinam
Gold Inc. ("Kinam"), formerly Amax Gold Inc. (unless otherwise indicated herein,
the term "Kinam" means Kinam and its subsidiaries). Concurrent with the merger,
Cyprus Amax Minerals Company ("Cyprus Amax") contributed $135.0 million to
Kinross in exchange for 11.7 million Kinross common shares and 2.9 million
common share purchase warrants (the "Amax Recapitalization") and 12.7 million
Kinross common shares were issued pursuant to a public offering (the "Amax
Equity Financing"). As a result of the acquisition of Kinam, the Amax
Recapitalization and the Amax Equity Financing, Kinross issued 55 million common
shares, representing approximately 56.4% of the common shares outstanding after
the merger, in addition to the common share purchase warrants to acquire 2.9
million Kinross common shares issued to Cyprus Amax, which subsequently expired
unexercised. The purchase price for Kinross of the Kinam merger was $337.9
million. Kinam owned various mining properties including the Fort Knox mine near
Fairbanks, Alaska, a 50% interest in the Refugio mine in Chile and a 50%
interest in the Kubaka mine located in the Russian Far East.
Kinross filed articles of amalgamation on December 29, 2000, in
connection with the amalgamation of Kinross with La Teko Resources Inc.
In 2001, Kinross embarked on a strategy to reduce long-term debt and the
costs associated with the outstanding convertible preferred shares of Kinam (the
"Kinam Preferred Shares"). The benefit to future consolidated results was a
reduction of interest expense, a reduced accrual of the dividends on the Kinam
Preferred Shares and lower non-cash charges such as depreciation, depletion and
amortization due to a negative purchase price discrepancy resulting from the
transaction being applied to the carrying value of property, plant and
equipment, since the Kinam Preferred Shares were trading at a discount to their
carrying value for financial reporting purposes. During 2001, Kinross repaid
$46.5 million of long-term debt and acquired 945,400 Kinam Preferred Shares with
a carrying value of $48.9 million in exchange for 8.1 million Kinross common
shares valued at $23.2 million. The $25.7 million difference in value associated
with this transaction was applied against the carrying value of certain
property, plant and equipment.
Kinross completed an equity offering in February 2002, pursuant to which
7.7 million Kinross common shares were issued for net proceeds of $18.5 million.
The majority of funds raised were used for a $16.00 per share cash tender offer
for the Kinam Preferred Shares. 670,722 Kinam Preferred Shares were tendered
having a book value of $36.6 million and were purchased by Kinross for $10.7
million ($11.4 million including costs of the tender offer). The $25.2 million
difference in value associated with this transaction was applied against the
carrying value of a portion of Kinam's property, plant and equipment.
On June 10, 2002, Kinross, TVX, and Echo Bay entered into a combination
agreement, for the purpose of combining the ownership of their respective
businesses. The combination was effected by way of a plan of arrangement under
the Canada Business Corporations Act on January 31, 2003.
53
Also on June 10, 2002, TVX and a subsidiary of TVX entered into
agreements with a subsidiary of Newmont pursuant to which TVX acquired Newmont's
50% non-controlling interest in the TVX Newmont Americas joint venture ("TVX
Newmont J/V") for an aggregate purchase price of $180.0 million.
On July 1, 2002, Kinross entered into an agreement with a wholly owned
subsidiary of Placer Dome Inc. ("Placer Dome"), Placer Dome (CLA) Limited
("Placer CLA"), to form a joint venture that combined the two companies'
respective gold mining operations in the Porcupine district in Ontario, Canada
(the "Porcupine Joint Venture"). Placer CLA owns a 51% interest and Kinross owns
a 49% interest in the Porcupine Joint Venture, which is operated by a Placer CLA
affiliate. Placer CLA contributed the Dome mine and mill and Kinross contributed
the Hoyle Pond, Pamour and Nighthawk Lake mines as well as the Bell Creek mill.
Capital and operating costs are shared in proportion to each party's ownership
interest.
On December 5, 2002, Kinross completed a public offering and issued 16.6
million Kinross common shares and 25.0 million common shares purchase warrants
for total proceeds of $97.7 million. Three common share purchase warrants can be
exercised on or before December 5, 2007, for one Kinross common share at an
exercise price of CDN $15.00.
54
SUBSIDIARIES AND MANAGEMENT STRUCTURE
Each of Kinross' operations is a separate business unit managed by its
general manager, who in turn, reports to the Chief Operating Officer.
Exploration activities, corporate financing, tax planning, additional technical
support services, hedging and acquisition strategies are managed centrally.
Kinross' risk management programs are subject to overview by its Audit Committee
and the board of directors.
A significant portion of Kinross' business is carried on through
subsidiaries. A chart showing the names of the significant subsidiaries of
Kinross and their respective jurisdictions of incorporation is set out below.
All subsidiaries are 100% owned unless otherwise noted. Unless otherwise
indicated herein, the term "Kinross" includes, collectively, all of the
subsidiaries of Kinross.
ORGANIZATION CHART
[PICTURE]
55
OPERATIONS
Kinross is principally engaged in the exploration for, and acquisition,
development and operation of, gold-bearing properties. The material properties
of Kinross are as follows:
Property
Property Location Ownership
-------- -------- ---------
Fort Knox Mine(1)................. Fairbanks, Alaska, United States 100%(2)
Porcupine Joint Venture(3)........ Timmins, Ontario, Canada 49%
Kubaka Mine(4).................... Magadan Oblast, far east Russia 98.1%(5)
La Coipa(6)....................... Chile 50%
Crixas(7)......................... Brazil 50%
Paracatu (Brasilia)(8)............ Brazil 49%
Musselwhite(9).................... Ontario, Canada 31.9%
Round Mountain(10)................ Nevada, United States 50%
-------------------------
(1) The True North property is subject to various net smelter return
royalties, ranging from 3.5% to 5%. The Ryan Lode project is subject to
various net smelter return royalties ranging from 3% to 5% and annual
rental payments of $150,000.
(2) Kinross holds a 100% interest in the properties forming part of the Fort
Knox mine except for the Gil property in which Kinross holds an 80%
interest.
(3) The Porcupine Joint Venture was formed pursuant to an agreement with
Placer CLA dated July 1, 2002. It owns and operates interests in two
mining properties: the Hoyle Pond mine and the Dome mine. The Hoyle Pond
mine is subject to two tonnage based royalties for which no expenses
were accrued in 2003. A 2% net smelter royalty is payable on production
from the Preston, Paymaster and Vedron properties.
(4) The Kubaka mine is subject to royalty and production based taxes which
amounted to 6.0% in 2003.
(5) In February 2003, Kinross increased its interest in the Kubaka Mine to
98.1% from 54.7%.
(6) No royalties are applicable on gold and silver produced but an annual
preferred dividend of $1.8 million is payable.
(7) The Crixas mine is subject to a mining tax of 1% or net sales and a
profits tax of 3% of net sales.
(8) The Paracatu (Brasilia) mine is subject to a royalty 0.33% of net sales,
a mining tax of 1% of net sales and a profits tax of 3% of net sales.
(9) The Musselwhite mine is subject to a 5% net profits royalty and a 3.75%
net profits royalty. Nothing was paid on these royalties in 2003.
(10) The Round Mountain mine is subject to a net smelter returns royalty
ranging from 3.53% to 6.35%. During 2003, this royalty averaged 4.54%.
Production is also subject to a gross revenue royalty of 3.0%.
In addition, Kinross holds a 100% interest in the Blanket mine, situated
in Zimbabwe, Africa, a 100% interest in the Kettle River mine in Washington,
United States, a 100% interest in the Lupin mine in Nunavut Territory, Canada, a
50% interest in the New Britannia mine in Manitoba, Canada, a 50% interest in
the Refugio mine, situated in Chile, and other mining properties in various
stages of exploration, development, reclamation, and closure.
56
OPERATIONS
Kinross' share of production in 2003 was derived from the mines in
Canada (23%), the United States (47%), Russia (10%), and South America (20%).
[PICTURE]
GOLD EQUIVALENT PRODUCTION (OUNCES)
The following table summarizes production by Kinross in the last three
years:
YEARS ENDED DECEMBER 31,
----------------------------------------
2003 2002 2001
---- ---- ----
Attributable gold equivalent production - ounces............ 1,620,410 888,634 944,803
Gold sales - ounces (excluding equity accounted ounces)..... 1,541,575 848,513 907,149
Included in attributable gold equivalent production is silver production
converted into gold production using a ratio of the average spot market prices
of gold and silver for the three comparative years. The ratios were 74.79:1 in
2003, 67.24:1 in 2002, and 62.00:1 in 2001.
57
The following table sets forth the gold equivalent production
attributable to Kinross' interest in each of its operating assets during the
last three years. Information for the quarters ended March 31, 2004 and 2003 is
included in the discussion under "Kinross Management's Discussion and Analysis
of Financial Condition and Results of Operations--Management's Discussion and
Analysis for the Quarters Ended March 31, 2004 and 2003--Operating Results."
YEARS ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
---- ---- ----
PRIMARY OPERATIONS:.................
Fort Knox........................... 391,831 410,519 411,221
Round Mountain(1)(4)................ 364,271 - -
Porcupine Joint Venture(2).......... 223,960 189,464 156,581
Kubaka(3)........................... 164,006 220,972 237,162
Paracatu (Brasilia)(1)(5)........... 91,176 - -
La Coipa(1)(4)...................... 144,125 - -
Crixas(1)(4)........................ 86,698 - -
Musselwhite(1)(6)................... 64,978 - -
New Britannia(1)(4)................. 31,627 - -
Lupin(9)............................ 56,008 - -
--------- ------- -------
Subtotal......................... 1,618,680 820,955 804,964
--------- ------- -------
OTHER OPERATIONS:
Refugio(4).......................... - 13,047 67,211
Blanket(8).......................... - 41,612 39,592
Denton-Rawhide(7)................... 1,730 11,162 17,713
Andacollo(7)........................ - 1,858 11,718
Hayden Hill......................... - - 1,887
Guanaco............................. - - 1,718
--------- ------- -------
Subtotal.......................... 1,730 67,679 139,839
--------- ------- -------
Total............................. 1,620,410 888,634 944,803
========= ======= =======
-------------------------
(1) Production data is for the eleven months from February to December,
2003.
(2) 2003 production reflects Kinross' 49% ownership interest in the
Porcupine Joint Venture. 2001 and 2002 production reflects Kinross' 100%
ownership interest in the Hoyle Pond mine to June 30, 2002, and the 49%
interest in the Porcupine Joint Venture thereafter.
(3) Represents Kinross' 54.7% ownership interest to February 28, 2003, and
its 98.1% thereafter.
(4) Represents Kinross' 50% ownership interest.
(5) Represents Kinross' 49% ownership interest.
(6) Represents Kinross' 31.9% ownership interest.
(7) Includes proportionate share of Denton-Rawhide and Andacollo production,
attributable to the ownership interest in Pacific Rim Mining Corp.
(formerly Dayton Mining Corporation) through December 2003, when the
ownership interest in Pacific Rim was sold.
(8) Because of the economic and political conditions and the negative impact
of inflationary pressures in Zimbabwe, the Blanket mine was written off
in 2001. Kinross commenced cost accounting for this investment in 2002
and ceased reporting its production in 2003.
(9) Production data is for the period January 31, 2003, to August, 2003,
when mining operations were suspended.
58
CALCULATION OF TOTAL CASH COSTS AND REALIZED REVENUE AND RECONCILIATION TO THE
STATEMENT OF OPERATIONS
Total cash costs and realized revenue are non-GAAP measures and are
reconciled to GAAP-based financial measures in the tables below and on the
following pages. These measures are intended to provide investors with
information about the cash generating capabilities (realized revenue, net of
total cash costs per ounce) of the mining operations. Kinross uses this
information for the same purpose and for assessing the relative current
performance and operating efficiencies of its individual mining operations.
Kinross uses this information to assess individual mine performance in
evaluating whether to continue or suspend mining operations. Mining operations
are a capital intensive business with the expenditure of significant amounts in
the acquisition, exploration, and development phases, even before commencement
of mining operations. In addition, capital expenditures are made after the
commencement of mining operations for the maintenance, upgrade, or expansion of
mining equipment and operations. The calculation of total cash costs does not
include these substantial amounts for capital expenditures, even though these
expenditures require the use of cash in prior and current periods. Depreciation,
depletion, and amortization related to historical capital expenditures, the
capital expenditures for each of the periods covered by the financial statements
included herein, and planned capital expenditures are discussed throughout the
Kinross management's discussion and analysis and are included in the segment
information note to the audited consolidated financial statements (Note 19) for
the three years ended December 31, 2003, and for the unaudited interim financial
statements for the quarters ended March 31, 2004 and 2003 (Note 6). While all of
these costs are required by GAAP to be included in the calculation of earnings,
total cash costs and realized revenue is intended to portray the cash generating
capabilities of current operations, without regard to prior capital
expenditures, by showing the difference between the per ounce operating costs
required to recover and refine the gold and the per ounce revenue realized on
the sale of the gold during the year. These measures are commonly used by
producers, technical and market analysts, and market participants involved in
the mining industry as a way to judge the cash generated by current mining
operations. However, the calculation of these measures by Kinross may not be
identical with the calculation of similar measures used by other producers.
Total cash costs and realized revenue should not be considered in isolation as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles and are not necessarily indicative of operating
profit from operations or costs as determined under generally accepted
accounting principles.
TOTAL CASH COSTS AND REALIZED REVENUE
The following table sets forth total cash costs and realized revenue for
the three years ended December 31, 2003. Similar information for the quarters
ended March 31, 2004 and 2003 is included in the discussion under "Kinross
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management's Discussion and Analysis for the Quarters Ended March
31, 2004 and 2003--Costs and Expenses."
YEARS ENDED DECEMBER 31,
------------------------------------------
2003 2002 2001
---- ---- ----
(IN MILLIONS EXCEPT UNIT COSTS)
CASH COSTS
Operating expense per financial statements............... $ 387.3 $ 174.8 $ 180.7
Operating costs for attributable production.............. 0.4 13.4 7.4
Site restoration cost accruals........................... (9.4) (3.0) (1.9)
Change in bullion inventory.............................. (2.5) (2.0) 1.5
Operating costs not related to gold production (16.4) (4.4) (5.2)
----------- ---------- ----------
Total cash costs........................................... $ 359.4 $ 178.8 $ 182.5
=========== ========== ==========
Gold equivalent production-ounces........................ 1,620,410 888,634 944,803
Total cash costs per equivalent ounce of gold.............. $ 222 $ 201 $ 193
REALIZED REVENUE
Mining revenue per financial statement................... $ 571.9 $ 261.0 $ 270.1
Silver revenue........................................... (22.0) (1.4) (1.3)
----------- ---------- ----------
$ 549.9 $ 259.6 $ 268.8
=========== ========== ==========
Gold ounces sold......................................... 1,541,575 848,513 907,149
Total realized revenue per ounce........................... $ 357 $ 306 $ 296
59
The above non-GAAP measures have been calculated on a consistent basis
in each period. For reasons of comparability, cash costs, production costs and
realized revenue do not include certain items such as property write-downs which
are included under GAAP in the determination of net earnings or loss.
Total cash costs is calculated in accordance with "The Gold Industry
Production Cost Standard." Total cash costs and realized revenue may not be
comparable to similarly titled measures of other companies.
RECONCILIATION TO SEGMENTED INFORMATION
Total cash costs used by management to assess the cash generating
ability of individual operations as well as to compare with other precious metal
producers. This measure is reconciled in the following table to operating
expenses for calculation of total cash costs per ounce. This measure provides
additional information on the cash cost of production and is congruous to
information included in the segmented information note to the audited
consolidated financial statements for the three years ended December 31, 2003
(Note 19). Similar information for the quarters ended March 31, 2004 and 2003 is
included in the individual mine discussions under "Kinross Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Management's Discussion and Analysis for the Quarters Ended March
31, 2004 and 2003--Operations" as discussed in Note 6 to the unaudited interim
financial statements for the quarters ended March 31, 2004 and 2003.
ROUND HOYLE/
FORT KNOX MOUNTAIN PORCUPINE KUBAKA
FOR THE YEAR ENDED DECEMBER 31, 2003:
Total cash costs:
Operating expense per financial statements ...... $ 92.9 $ 76.7 $ 53.4 $ 30.6
Operating costs for non-consolidated production.. -- -- -- --
Site restoration costs .......................... (2.5) (1.8) (1.6) (0.5)
Change in bullion inventory ..................... 4.8 (1.6) (1.5) 0.3
Management fees ................................. -- -- -- 1.6
Operating costs not related to gold production... -- -- (2.9) --
---------- ---------- ---------- ----------
$ 95.2 $ 73.3 $ 47.4 $ 32.0
========== ========== ========== ==========
Equivalent gold ounces produced ................... 391,831 364,271 223,960 164,006
Total cash costs per ounce ........................ $ 243 $ 201 $ 211 $ 194
Royalties ......................................... $ 1.0 $ 12.5 $ 0.1 $ 3.7
FOR THE YEAR ENDED DECEMBER 31, 2002:
Total cash costs(1):
Operating expense per financial statements ...... $ 99.2 $ -- $ 38.6 $ 28.6
Operating costs for non-consolidated production.. -- -- -- --
Site restoration costs .......................... (1.0) -- (1.5) (0.8)
Change in bullion inventory ..................... (2.9) -- 1.5 (0.1)
Management fees ................................. -- -- -- 1.6
Operating costs not related to gold production... -- -- (0.6) --
---------- ---------- ---------- ----------
Total cash costs of production .................... $ 95.3 $ -- $ 38.0 $ 29.3
========== ========== ========== ==========
Equivalent gold ounces produced ................... 410,519 -- 189,464 220,972
========== ========== ========== ==========
Total cash costs per ounce ........................ $ 232 $ -- $ 201 $ 133
FOR THE YEAR ENDED DECEMBER 31, 2001:
Total cash costs(1):
Operating expense per financial statements ...... $ 82.9 $ -- $ 29.1 $ 34.1
Operating costs for non-consolidated production.. -- -- -- --
Site restoration costs .......................... (1.2) -- (0.2) (0.4)
Change in bullion inventory ..................... 3.3 -- 0.7 (1.6)
Management fees ................................. -- -- -- 2.5
Operating costs not related to gold production... -- -- (1.1) (1.5)
---------- ---------- ---------- ----------
Total cash costs of production .................... $ 85.0 $ -- $ 28.5 $ 33.1
========== ========== ========== ==========
Equivalent gold ounces produced ................... 411,221 -- 156,581 237,162
========== ========== ========== ==========
Total cash costs per ounce ........................ $ 207 $ -- $ 182 $ 140
-------------------------
(1) Total cash costs is furnished to provide additional information and is a
non-GAAP measure. This measure should not be considered in isolation as
a substitute for a measure of performance prepared in accordance with
generally accepted accounting principles and is not necessarily
indicative of operating profit or cost from operations as determined
under generally accepted accounting principles. There are no differences
computing total cash costs under U.S. GAAP. Therefore, total cash costs
per ounce computed in accordance with U.S. GAAP are unchanged from the
Canadian GAAP amounts. For a further discussion of this non-GAAP
measure, please refer to the discussion under "Calculation of Total Cash
Costs and Realized Revenue and Reconciliation to the Statement of
Operations," above.
60
EXPLORATION
PARACATU AND CORPORATE
(BRASILIA) LA COIPA CRIXAS MUSSELWHITE E-CRETE ACQUISITIONS AND OTHER TOTAL
---------- -------- ------ ----------- ------- ------------ --------- -----
$ 19.9 $ 34.9 $ 10.5 $ 16.5 $ 2.4 $ -- $ 49.5 $ 387.3
-- -- -- -- -- -- 0.4 0.4
(0.8) (0.6) (0.2) (0.4) -- -- (1.0) (9.4)
(0.4) (0.6) (0.8) 0.8 -- -- (3.5) (2.5)
-- -- -- -- -- -- -- 1.6
(1.1) -- -- (0.2) (2.4) -- (11.4) (18.0)
--------- ------------- --------- --------- ---- ----------- --------- ------------
$ 17.6 $ 33.7 $ 9.5 $ 16.7 $ -- $ -- $ 34.0 $ 359.4
========= ============= ========= ========= ==== =========== ========= ============
91,176 144,125 86,698 64,978 -- -- 89,365 1,620,410
193 $ 234 $ 109 $ 257 $ -- $ -- $ 380 $ 222
$ 0.4 $ -- $ 0.3 $ -- $ -- $ -- $ -- $ 18.0
$ -- $ -- $ -- $ -- $ 3.2 $ -- $ 1.3 $ 174.8
-- -- -- -- -- -- 3.3 13.4
-- -- -- -- -- -- -- (3.3)
-- -- -- -- -- -- -- (2.0)
-- -- -- -- -- -- -- 1.7
-- -- -- -- (3.2) -- (0.9) (5.8)
--------- ------------- --------- --------- ---- ----------- --------- ------------
$ -- $ -- $ -- $ -- $ -- $ -- $ 3.7 $ 178.8
========= ============= ========= ========= ==== =========== ========= ============
-- -- -- -- -- -- 13,020 888,634
========= ============= ========= ========= ==== =========== ========= ============
$ -- $ -- $ -- $ -- $ -- $ -- $ 284 $ 201
$ -- $ -- $ -- $ -- $ 2.6 $ -- $ 3.4 $ 180.7
-- -- -- -- -- -- 7.4 7.4
-- -- -- -- -- -- -- (1.9)
-- -- -- -- -- -- -- 1.5
-- -- -- -- -- -- -- 2.7
-- -- -- -- (2.6) -- (2.4) (7.9)
--------- ------------- --------- --------- ---- ----------- --------- ------------
$ -- $ -- $ -- $ -- $ -- $ -- $ 8.4 $ 182.5
========= ============= ========= ========= ==== =========== ========= ============
-- -- -- -- -- -- 33,036 944,803
========= ============= ========= ========= ==== =========== ========= ============
$ -- $ -- $ -- $ -- $ -- $ -- $ 263 $ 193
61
MARKETING
Gold is a metal that is traded on world markets, with benchmark prices
generally based on the London market (London fix). Gold has two principal uses:
product fabrication and bullion investment. Fabricated gold has a wide variety
of end uses, including jewelry manufacture (the largest fabrication component),
electronics, dentistry, industrial and decorative uses, medals, medallions, and
official coins. Gold bullion is held primarily as a store of value and a
safeguard against the collapse of paper assets denominated in fiat currencies.
Kinross sells all of its refined gold to banks, bullion dealers, and refiners.
In 2003, Kinross had three customers that accounted for 10% or more of total
sales. They were Bank of Nova Scotia, 22.5%; HSBC, 17.0%; and JP Morgan Chase,
21.0%. In 2002, the customers that accounted for 10% or more of total sales were
Alpine Bank, 20%; Societe Generale, 16%; Bank of Nova Scotia, 14%; Hong Kong and
Shanghai Banking Corp., 13%; and JP Morgan Chase, 18%. In 2001, these customers
were Alpha Bank, 20%; Bank of Nova Scotia, 14%; Rothschilds, 14%; and JP Morgan
Stanley, 11%. Due to the size of the bullion market and the above ground
inventory of bullion, activities by Kinross will generally not influence gold
prices. Kinross believes that the loss of any of these customers would have no
material adverse impact on Kinross because of the active worldwide market for
gold.
The following table sets forth for the years indicated the high and low
London Bullion Market afternoon fixing prices for gold:
YEAR HIGH LOW
---- ---- ---
1998 $313.15 $273.40
1999 $325.50 $252.80
2000 $312.70 $263.80
2001 $293.25 $255.95
2002 $349.30 $277.75
2003 $416.25 $319.90
2004(1) $427.25 $375.00
-------------------------
(1) Information presented through June 30, 2004.
62
MINERAL RESERVES AND MINERAL RESOURCES
The following tables set forth the estimated mineral reserves and
mineral resources attributable to the interests held by Kinross for each of its
properties which contain mineral reserves:
MINERAL RESERVE AND RESOURCE STATEMENT
ESTIMATED AT AN ASSUMED GOLD PRICE OF $325 PER OUNCE
PROVEN AND PROBABLE MINERAL RESERVES(1,3,5,6,7)
KINROSS GOLD CORPORATION'S SHARE AT DECEMBER 31, 2003
-----------------------------------------------------------------------------------------------------------------------
Kinross PROVEN PROBABLE PROVEN AND PROBABLE
Interest Tonnes Grade Ounces Tonnes Grade Ounces Tonnes Grade Ounces
Property Location (%) (000s) (gpt) (000s) (000s) (gpt) (000s) (000s) (gpt) (000s)
-----------------------------------------------------------------------------------------------------------------------
GOLD
NORTH AMERICA
-----------------------------------------------------------------------------------------------------------------------
Fort Knox and area
(14) USA 100.0% 54,913 0.83 1,464 48,026 0.96 1,481 102,939 0.89 2,945
-----------------------------------------------------------------------------------------------------------------------
Round Mountain and
area(15) USA 50.0% 59,660 0.57 1,099 35,393 0.66 751 95,053 0.61 1,850
-----------------------------------------------------------------------------------------------------------------------
Porcupine Joint
Venture(9,13) Canada 49.0% 9,129 1.39 409 18,033 1.86 1,080 27,162 1.70 1,489
-----------------------------------------------------------------------------------------------------------------------
Aquarius(10) Canada 100.0% - - - 15,017 2.16 1,042 15,017 2.16 1,042
-----------------------------------------------------------------------------------------------------------------------
Musselwhite(13) Canada 31.9% 2,366 5.63 428 1,231 5.81 230 3,596 5.69 658
-----------------------------------------------------------------------------------------------------------------------
Lupin Canada 100.0% 310 7.37 73 248 10.25 82 558 8.64 155
-----------------------------------------------------------------------------------------------------------------------
New Britannia Canada 50.0% 33 4.80 5 167 5.07 27 200 4.98 32
-----------------------------------------------------------------------------------------------------------------------
Kettle River USA 100.0% 405 12.22 159 75 9.09 22 480 11.73 181
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL 126,815 0.89 3,636 118,190 1.24 4,715 245,005 1.06 8,350
-----------------------------------------------------------------------------------------------------------------------
SOUTH AMERICA
-----------------------------------------------------------------------------------------------------------------------
Paracatu
(Brasilia)(11) Brazil 49.0% 163,971 0.42 2,225 31,829 0.38 388 195,800 0.42 2,613
-----------------------------------------------------------------------------------------------------------------------
La Coipa(13,16) Chile 50.0% 11,358 1.20 440 4,327 1.04 145 15,685 1.16 584
-----------------------------------------------------------------------------------------------------------------------
Refugio Chile 50.0% 39,747 0.89 1,138 9,819 0.78 248 49,566 0.87 1,386
-----------------------------------------------------------------------------------------------------------------------
Crixas (12) Brazil 50.0% 1,569 6.39 323 577 7.92 147 2,146 6.81 470
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL 216,644 0.59 4,125 46,551 0.62 927 263,195 0.60 5,052
-----------------------------------------------------------------------------------------------------------------------
ASIA
-----------------------------------------------------------------------------------------------------------------------
Kubaka and area
(17,18) Russia 98.1% 903 3.92 114 720 12.80 296 1,623 7.86 410
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL 903 3.92 114 720 12.80 296 1,623 7.86 410
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
TOTAL GOLD (EXC. BLANKET) 344,362 0.71 7,874 165,461 1.12 5,938 509,823 0.84 13,812
-----------------------------------------------------------------------------------------------------------------------
AFRICA
-----------------------------------------------------------------------------------------------------------------------
Blanket (19) Zimbabwe 100.0% 1,300 3.71 155 1,221 4.18 164 2,521 3.94 319
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
TOTAL GOLD (INC. BLANKET) 345,662 0.72 8,029 166,682 1.14 6,102 512,344 0.86 14,131
-----------------------------------------------------------------------------------------------------------------------
SILVER
SOUTH AMERICA
-----------------------------------------------------------------------------------------------------------------------
La Coipa(13,16) Chile 50.0% 11,358 69.5 25,384 4,327 89.5 12,454 15,685 75.0 37,837
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL 11,358 69.5 25,384 4,327 89.5 12,454 15,685 75.0 37,837
-----------------------------------------------------------------------------------------------------------------------
ASIA
-----------------------------------------------------------------------------------------------------------------------
Kubaka and area
(17,18) Russia 98.1% 903 10.8 313 720 19.1 442 1,623 14.5 755
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL 903 10.8 313 720 19.1 442 1,623 14.5 755
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
TOTAL SILVER 12,260 65.2 25,696 5,047 79.5 12,896 17,307 69.4 38,592
-----------------------------------------------------------------------------------------------------------------------
NOTE: TOTALS MAY NOT ADD, DUE TO ROUNDING.
63
CAUTIONARY NOTE TO UNITED STATES INVESTORS CONCERNING ESTIMATES OF MEASURED AND
INDICATED RESOURCES
THIS SECTION USES THE TERMS "MEASURED" AND "INDICATED" RESOURCES. UNITED
STATES INVESTORS ARE ADVISED THAT WHILE THOSE TERMS ARE RECOGNIZED AND REQUIRED
BY CANADIAN REGULATIONS, THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
DOES NOT RECOGNIZE THEM. UNITED STATES INVESTORS ARE CAUTIONED NOT TO ASSUME
THAT ALL OR ANY PART OF MINERAL DEPOSITS IN THESE CATEGORIES WILL EVER BE
CONVERTED INTO PROVEN AND PROBABLE RESERVES.
MINERAL RESERVE AND RESOURCE STATEMENT
MEASURED AND INDICATED MINERAL RESOURCES (EXCLUDES PROVEN AND PROBABLE RESERVES)(2,3,4,6,7,8)
ESTIMATED AT A GOLD PRICE OF $350 PER OUNCE
KINROSS GOLD CORPORATION'S SHARE AT DECEMBER 31, 2003
-----------------------------------------------------------------------------------------------------------------------
Kinross MEASURED INDICATED MEASURED AND INDICATED
Interest Tonnes Grade Tonnes Grade Tonnes Grade
Property Location (%) (000s) (gpt) (000s) (gpt) (000s) (gpt)
-----------------------------------------------------------------------------------------------------------------------
GOLD
NORTH AMERICA
-----------------------------------------------------------------------------------------------------------------------
Fort Knox and area(14) USA 100.0% - - 1,141 1.12 1,141 1.12
-----------------------------------------------------------------------------------------------------------------------
Round Mountain and area(15) USA 50.0% 7,662 0.43 8,258 0.62 15,920 0.53
-----------------------------------------------------------------------------------------------------------------------
Porcupine Joint Venture(9,13) Canada 49.0% 39 1.55 536 0.68 576 0.74
-----------------------------------------------------------------------------------------------------------------------
Aquarius(10) Canada 100.0% - - - - - -
-----------------------------------------------------------------------------------------------------------------------
Musselwhite(13) Canada 31.9% 696 8.80 612 7.63 1,308 8.25
-----------------------------------------------------------------------------------------------------------------------
Lupin Canada 100.0% - - 305 8.29 305 8.29
-----------------------------------------------------------------------------------------------------------------------
New Britannia Canada 50.0% 95 4.42 954 5.31 1,049 5.23
-----------------------------------------------------------------------------------------------------------------------
Kettle River USA 100.0% - - 126 9.36 126 9.36
-----------------------------------------------------------------------------------------------------------------------
George-Goose Lake(10) Canada 100.0% - - 2,553 12.26 2,553 12.26
-----------------------------------------------------------------------------------------------------------------------
Delamar USA 100.0% 610 0.61 1,762 1.69 2,372 1.42
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL 9,102 1.13 16,247 3.35 25,349 2.56
-----------------------------------------------------------------------------------------------------------------------
SOUTH AMERICA
-----------------------------------------------------------------------------------------------------------------------
Paracatu (Brasilia)(11) Brazil 49.0% - - 76,627 0.39 76,627 0.39
-----------------------------------------------------------------------------------------------------------------------
La Coipa(13,16) Chile 50.0% 223 0.53 131 0.59 353 0.57
-----------------------------------------------------------------------------------------------------------------------
Refugio Chile 50.0% 6,753 1.15 2,210 1.06 8,962 1.13
-----------------------------------------------------------------------------------------------------------------------
Crixas(12) Brazil 50.0% 76 1.51 - - 76 1.51
-----------------------------------------------------------------------------------------------------------------------
Gurupi(10) Brazil 100.0% - - 60,385 1.39 60,385 1.39
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL 7,051 1.14 139,352 0.84 146,403 0.85
-----------------------------------------------------------------------------------------------------------------------
ASIA
-----------------------------------------------------------------------------------------------------------------------
Kubaka and area(17,18) Russia 98.1% - - - - - -
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL - - - - - -
-----------------------------------------------------------------------------------------------------------------------
AUSTRALIA
-----------------------------------------------------------------------------------------------------------------------
Norseman(10) Australia 100.0% - - 850 2.67 850 2.67
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL - - 850 2.67 850 2.67
-----------------------------------------------------------------------------------------------------------------------
TOTAL GOLD (EXC. BLANKET) 16,154 1.13 156,448 1.11 172,602 1.11
-----------------------------------------------------------------------------------------------------------------------
AFRICA
-----------------------------------------------------------------------------------------------------------------------
Blanket(19) Zimbabwe 100.0% - - 584 4.39 584 4.39
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL - - 584 4.39 584 4.39
-----------------------------------------------------------------------------------------------------------------------
TOTAL GOLD (INC. BLANKET) 16,154 1.13 157,032 1.12 173,186 1.12
-----------------------------------------------------------------------------------------------------------------------
64
-----------------------------------------------------------------------------------------------------------------------
SILVER
-----------------------------------------------------------------------------------------------------------------------
NORTH AMERICA
-----------------------------------------------------------------------------------------------------------------------
Delamar USA 100.0% 610 64.8 1,762 39.5 2,372 46.0
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL 610 64.8 1,762 39.5 2,372 46.0
-----------------------------------------------------------------------------------------------------------------------
SOUTH AMERICA
-----------------------------------------------------------------------------------------------------------------------
La Coipa(13,16) Chile 50.0% 223 36.1 131 32.8 353 34.8
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL 223 36.1 131 32.8 353 34.8
-----------------------------------------------------------------------------------------------------------------------
ASIA
-----------------------------------------------------------------------------------------------------------------------
Kubaka and area(17,18) Russia 98.1% - - - - - -
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL - - - - - -
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
TOTAL SILVER 833 57.1 1,893 39.0 2,725 44.5
-----------------------------------------------------------------------------------------------------------------------
NOTE: TOTALS MAY NOT ADD, DUE TO ROUNDING.
-------------------------
(1) Unless otherwise noted, Kinross' reserves are estimated using
appropriate cut-off grades derived from an estimated gold price of $325
per ounce, and a silver price of $4.75 per ounce. Reserves are estimated
using current and/or projected mining recoveries, operating costs, and
mine plans that are unique to each property and include estimated
allowances for dilution (waste) and mining (extraction) losses. Reserve
estimates do not include processing losses. Reserve estimates include
amounts contained in stockpiled material, but do not include estimated
amounts included in material placed on leach pads or gold or silver in
inventory.
(2) Unless otherwise noted, Kinross' resources are estimated using
appropriate cut-off grades derived from an estimated gold price of $350
per ounce, and a silver price of $4.75 per ounce.
(3) Kinross' reserves and resources as at December 31, 2003, are classified
in accordance with the Canadian Institute of Mining Metallurgy and
Petroleum's "CIM Standards on Mineral Resources and Reserves, Definition
and Guidelines" as per Canadian Securities Administrator's National
Instrument 43-101 ("the Instrument") requirements.
(4) CAUTIONARY NOTE TO U.S. INVESTORS CONCERNING ESTIMATES OF MEASURED,
INDICATED AND INFERRED RESOURCES. U.S. INVESTORS ARE ADVISED THAT USE OF
THE TERMS "MEASURED RESOURCE," "INDICATED RESOURCE," AND "INFERRED
RESOURCE" ARE RECOGNIZED AND REQUIRED BY CANADIAN SECURITIES
REGULATIONS. THESE TERMS ARE NOT RECOGNIZED BY THE U.S. SECURITIES AND
EXCHANGE COMMISSION. U.S. INVESTORS ARE CAUTIONED NOT TO ASSUME THAT ALL
OR ANY PART OF MINERAL DEPOSITS IN THESE CATEGORIES WILL EVER BE
CONVERTED INTO RESERVES.
(5) The mineral reserves presented herein comply with the reserve categories
of Industry Guide 7 applied in the United States by the Securities and
Exchange Commission.
(6) Individuals supervising the preparation of Kinross' reserve and resource
estimates for the material properties of Kinross presented in this
disclosure are listed in a separate table and meet the definition of a
"qualified person" as described by the Instrument.
(7) Kinross' normal data verification procedures have been used in
collecting, compiling, interpreting, and processing the data used to
estimate reserves and resources. Independent data verification has not
been performed.
(8) Resources, unlike reserves, do not have demonstrated economic viability.
(9) Includes the undeveloped Pamour deposit, which is subject to permitting
from Canadian authorities. The permits necessary to commence mining of
the mineral reserves contained in the existing Pamour pit, north of
highway 101, referred to as the phase one mine plan, have been
maintained in good standing and require administrative reactivation.
Additional permits are required to mine south of highway 101, which is
outside the phase one mine plan. There is a high level of assurance that
the project will receive all required permits for development.
(10) Undeveloped property, development assumes successful permitting allowing
mining operations to be conducted.
(11) Operated by Rio Tinto plc.
(12) Operated by AngloGold Ltd.
(13) Operated by Placer Dome Inc.
(14) Includes mineral reserves from the undeveloped Gil and Ryan Lode
deposits, both are part of the Fort Knox and area. Kinross holds a 100%
interest in the properties forming the Fort Knox and area except for the
Gil property in which Kinross holds an 80% interest.
(15) Includes mineral reserves and resources from the undeveloped Gold Hill
deposit, development is dependent on successful permitting.
(16) Includes mineral reserves and resources from the undeveloped Puren Norte
deposit, development is dependent on successful permitting.
(17) Includes mineral reserves from the Birkachan deposit. Open pit mining at
Birkachan has been approved, underground mining remains to be permitted
by Russian authorities.
(18) Includes mineral reserves and resources from the undeveloped Tsokol
deposit, development is dependent on successful permitting.
(19) Reserves and resources have been presented with and without the Blanket
mine located in Zimbabwe, Africa. Due to economic and political
conditions and the negative impact of inflationary pressures in
Zimbabwe, the Blanket mine was written off for financial reporting
purposes in 2001. Kinross continues operations at the mine, but is not
currently reporting production.
65
The following table summarizes the assumptions used in calculating
mineral resources and reserves, including average process recovery, cut off
grade assumptions, the foreign exchange rate into U.S. dollars, total cost per
ounce, and reserve drill spacing. The reserve estimates are based on a gold
price of $325 per ounce. The estimated gold price and foreign exchange rate is
not currently anticipated to change substantially for 2004 and 2005.
RESERVE DRILL SPACING
PROPERTY AVERAGE AVERAGE FOREIGN UNIT -------------------------
PROCESS GOLD CUTOFF EXCHANGE RATES COST PROVEN PROBABLE
RECOVERY (%) GRADE(S) (GPT) (PER U.S. $) (U.S. $/TONNE) (M) (M)
---------------------------------------------------------------------------------------------------------------------
GOLD
Fort Knox and area 85.6% 0.41 to 0.55 N/A $5.25 36.6 48.8
Round Mountain and area 16% to 85% 0.21 to 0.34 N/A $3.02 15.2 30.5
Porcupine Joint Venture 88% to 92% 0.69 to 7.18 1.45 $11.30 7.6 48.8
Aquarius 95.0% 0.50 1.41 $13.50 25.0 25.0
Musselwhite 95.2% 3.45 1.45 $35.74 50.0 50.0
Lupin 93.0% 6.55 1.45 $52.30 4.5 22.9
New Britannia 94.5% 4.15 1.45 $49.32 15.2 61.0
Kettle River 90.0% 7.03 N/A $52.18 22.9 22.9
Paracatu (Brasilia) 80.4% 0.30 3.20 $2.03 100.0 150.0
La Coipa 80.8% 0.45 to 0.92 750.00 $11.84 25.0 50.0
Refugio 48 to 67% 0.38 to 0.56 710.00 $4.53 30.0 60.0
Crixas 92 to 95% 2.31 to 5.82 3.10 $33.15 25.0 50.0
Kubaka and area 97.5% 1.58 to 7.75 N/A $61.80 6.1 40.0
Blanket 89.0% 3.00 2,750.00 $28.75 7.5 50.0
SILVER
La Coipa 62.5% 28.0 to 58.4 750.00 11.84 25.0 50.0
66
Reserve reconciliation is shown in the following table:
2002 PRO-FORMA
RESERVES PRODUCTION 2003 RESERVES
@$U.S. 300/OZ DEPLETION RESERVE GROWTH @$U.S. 325/OZ
MINING OPERATION (OZS AU X 1,000) (OZS AU X 1,000) (OZS. AU X 1,000) (OZS AU X 1,000)
------------------------------------------------------------------------------------------------------
Fort Knox 2,678 (431) 698 2,945
Kubaka 156 (137) 391 410
Refugio 706 0 679 1,386
Round Mountain 1,875 (436) 410 1,850
Kettle River 4 0 177 181
Lupin 332 (60) (117) 155
New Britannia 158 (37) (89) 32
Porcupine Joint Venture 1,485 (252) 256 1489
Musselwhite 667 (91) 82 658
La Coipa 645 (63) 2 584
Crixas 478 (99) 90 470
Paracatu (Brasilia) 2,500 (120) 233 2613
Aquarius 1,189 0 (147) 1,042
Blanket 280 (38) 77 319
-------------------------------------------------------------------------
TOTAL 13,153 (1,764) 2,742 14,131
=========================================================================
The following table reflects proven reserves attributable to Kinross'
ownership interest in the indicated mines contained in stockpiles:
---------------------------- ------------ ------------ ------------- ----------- ------------
KINROSS PROVEN
INTEREST TONNES GRADE OUNCES
PROPERTY LOCATION (%) (000S) (GPT) (000S)
---------------------------- ------------ ------------ ------------- ----------- ------------
---------------------------- ------------ ------------ ------------- ----------- ------------
GOLD
---------------------------- ------------ ------------ ------------- ----------- ------------
Fort Knox USA 100.0% 18,307 0.51 298
---------------------------- ------------ ------------ ------------- ----------- ------------
True North USA 100.0% 825 0.87 23
---------------------------- ------------ ------------ ------------- ----------- ------------
Round Mountain USA 50.0% 38,430 0.45 562
---------------------------- ------------ ------------ ------------- ----------- ------------
Porcupine Joint Venture Canada 49.0% 6,553 0.96 202
---------------------------- ------------ ------------ ------------- ----------- ------------
Kubaka Russia 98.1% 857 2.80 78
---------------------------- ------------ ------------ ------------- ----------- ------------
La Coipa Chile 50.0% 3,813 0.73 89
---------------------------- ------------ ------------ ------------- ----------- ------------
---------------------------- ------------ ------------ ------------- ----------- ------------
SILVER
---------------------------- ------------ ------------ ------------- ----------- ------------
Kubaka Russia 98.1% 857 10.0 275
---------------------------- ------------ ------------ ------------- ----------- ------------
La Coipa Chile 50.0% 3,813 47.2 5,787
---------------------------- ------------ ------------ ------------- ----------- ------------
67
MINERAL RESERVES AND RESOURCES
QUALIFIED PERSONS
The following table identifies the "qualified persons," as defined in
accordance with the Canadian Institute of Mining, Metallurgy and Petroleum's
"CIM Standards on Mineral Resources and Reserves Definition and Guidelines," for
the reserves and resource estimates with respect to the material properties in
which Kinross holds an interest.
--------------------------------------------------------------------------------
Property Qualified Person Company Qualification
--------------------------------------------------------------------------------
Fort Knox R.Cooper Kinross P.Eng
Round Mountain R.Cooper Kinross P.Eng
Porcupine Joint Venture A.Still Placer Dome P.Geo
Musselwhite A.Cheatle Placer Dome P.Geo
Paracatu (Brasilia) M.Sharrat RTZ Geologist
La Coipa J.Ochoa Placer Dome Chief Engineer AusIMM
Crixas W.Yamaoka AngloGold Geologist CREA
Kubaka R.Cooper Kinross P.Eng
--------------------------------------------------------------------------------
MATERIAL PROPERTIES
FORT KNOX MINE AND AREA, ALASKA
Kinross is the owner of the Fort Knox mine located in Fairbanks North
Star Borough, Alaska. The Fort Knox mine includes the main Fort Knox open pit
mine, mill, and tailings storage facility, the True North open pit mine, which
commenced production in 2001, the Ryan Lode project and an 80% ownership
interest in the Gil property that is subject to a joint venture agreement with
Teryl Resources Corp ("Teryl"). Kinross' ownership interest in the Fort Knox
mine was acquired as a result of the acquisition of Kinam on June 1, 1998. The
Fort Knox property has been pledged as security against the syndicated credit
facility which supports, INTER ALIA, $25.5 million of industrial revenue bonds
outstanding as at December 31, 2003.
PROPERTY DESCRIPTION AND LOCATION
FORT KNOX OPEN PIT
The Fort Knox open pit mine, mill and mineral claims cover approximately
20,463 hectares located 40 kilometers northeast of the City of Fairbanks,
Alaska. Kinross owns 1,168 State of Alaska mining claims covering an area of
approximately 19,962 hectares, an additional 501 hectares of mineral rights
comprised of an Upland Mineral Lease issued by the State of Alaska, a Millsite
Lease, and one unpatented federal lode mining claim. The Upland Mineral Lease
expires in 2014 and may be renewed for a period not to exceed 55 years. Mineral
reserves at the Fort Knox mine are situated on 505 hectares of land that are
covered by a State of Alaska Millsite Lease that expires in 2014, and may be
renewed for a period not to exceed 55 years.
The State of Alaska Millsite Lease carries a 3% production royalty,
based on net income and recovery of the initial capital investment. Mineral
production from State mining claims is subject to a Mine License Tax, following
a three-year grace period after production commences. The license tax ranges
from 3% to 7% of taxable income. There has been no production from State claims
situated outside the boundaries of the Millsite Lease at the Fort Knox mine. The
unpatented federal lode claim is owned by Kinross and is not currently subject
to any royalty provisions. There were no royalties paid in 2003 or 2002.
All requisite permits have been obtained for mining and continued
development of the Fort Knox open pit mine and are in good standing. Kinross is
in compliance with the Fort Knox permits in all material respects.
68
TRUE NORTH OPEN PIT
The True North open pit mine mineral claims cover approximately 3,804
hectares, located 43 kilometers northeast of the City of Fairbanks, Alaska.
Kinross owns 104 State of Alaska mining claims, covering 1,619 hectares which
are subject to a State production royalty tax of 3%. Mineral reserves are
situated on two groups of State claims that Kinross has leased from private
individuals. Mineral production to date has been from one of the leased claim
blocks. Mineral leases have been executed with third parties for an additional
138 State mining claims that cover approximately 2,185 hectares. Leased claims
are subject to net smelter return royalties ranging from 3.5% to 5%. Kinross
paid royalties of $1.0 million in 2003 and $0.6 million in 2002.
All requisite permits have been obtained for mining of the True North
open pit mine which consists of the Hindenburg, Shepard, Zeppelin, Central and
East Pit zones. These permits are in good standing. Kinross is currently in
compliance with the True North permits in all material respects.
RYAN LODE PROJECT
The Ryan Lode project mineral claims cover approximately 500 hectares
located 10 kilometers west of the City of Fairbanks, Alaska. The claim block
consists of 50 State of Alaska mining claims, ten patented federal mining claims
and five unpatented federal mining claims, which are either leased from third
parties or held by Kinross. All production from the State of Alaska mining
claims is subject to the State of Alaska Mine License Tax following a three-year
tax grace period after production commences. The State of Alaska Mine License
tax is graduated from 3% to 7% of taxable income. In addition to the State of
Alaska Mine License Tax, the leased claims are subject to net smelter royalties
of 5%, and annual rental payments of $150,000. The annual rental payments are
not deductible when computing the net smelter return royalties. Kinross paid
$150,000 of annual rental payments in each of 2003 and 2002.
GIL PROPERTY
The Gil property mineral claims cover approximately 2,700 hectares
located contiguous to the Fort Knox claim block. The claim block consists of 167
State of Alaska mining claims and is subject to a joint venture agreement
between Kinross and Teryl. Kinross' ownership interest in the Gil claim block is
80%. All production from the State of Alaska mining claims is subject to the
State of Alaska Mine License Tax following a three-year tax grace period after
production commences. The State of Alaska Mine License tax is graduated from 3%
to 7% of taxable income. Kinross continues to actively explore the Gil claims.
ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE, AND PHYSIOGRAPHY
The Fort Knox mine is situated in close proximity to the City of
Fairbanks, which is a major population, service and supply center for the
interior region of Alaska. Services, supplies, fuel and electricity are
available in Fairbanks in ample quantities to support the local and regional
needs, along with the mining and processing operations of Kinross.
Access to the Fort Knox mine from Fairbanks, Alaska is by 34 kilometers
of paved highway and eight kilometers of unpaved road. The True North mine is
located 18 kilometers west of the Fort Knox property and is accessible by an
unpaved road. The Ryan Lode project is located 65 kilometers from the Fort Knox
property and is accessible by 54 kilometers of paved road and 11 kilometers of
unpaved roads. The area has a sub-arctic climate, with long cold winters and
short summers. Winter low temperatures drop to the range of -40 to-48 Celsius
(-40 to -55 degrees Fahrenheit), while in the summer, highs may occasionally
exceed 32 degrees Celsius (90 degrees Fahrenheit). The annual rainfall in
Fairbanks is approximately 30 centimeters.
The area topography consists of rounded ridges with gentle side slopes.
Vegetation includes spruce, birch and willow trees and various shrubs, grasses
and mosses. The elevation ranges from 1,000 to 1,600 meters.
69
The Fort Knox milling operation obtains its process water from a fresh
water reservoir located within the permitted property area. The tailings storage
area on site has adequate capacity for the remaining mine life of the Fort Knox
and the True North mines. Power is provided to the mine by Golden Valley
Electric Association's power grid serving the area over a distribution line paid
for by Kinross.
HISTORY
An Italian prospector named Felix Pedro discovered gold in the Fairbanks
mining district in 1902. Between 1902 and 1993 more than 8.0 million ounces of
predominately placer gold were mined in the district. In 1984 a geologist
discovered visible gold in granitic hosted quartz veins on the Fort Knox
property. Between 1987 and 1991, a number of companies conducted extensive
exploration work on the Fort Knox, True North and Gil properties. In 1991, Kinam
entered into a joint venture agreement with Teryl to explore the Gil property.
In 1992, Kinam acquired ownership of the Fort Knox property. Construction of the
Fort Knox mine and mill operations began in 1995 and were completed in 1997.
Commercial production at Fort Knox was achieved on March 1, 1997. Construction
of the mine was completed at a capital cost of approximately $373 million, which
included approximately $28 million of capitalized interest. After acquiring
ownership of the True North property in 1999, Kinross completed pre-production
capital expenditures, primarily permitting and the building of a haulage road to
the Fort Knox mill. Commercial production at True North was achieved on April 1,
2001. Pre-production capital expenditures for True North were approximately
$29.6 million.
GEOLOGY AND MINERALIZATION
Kinross' mining and exploration properties are located within the
Fairbanks mining district, a southwest - northeast trending belt of lode and
placer gold deposits that comprise one of the largest gold producing areas in
the state of Alaska.
The Fairbanks district is situated in the northwestern part of a
geologic formation called the Yukon - Tanana Uplands. The Yukon - Tanana Uplands
consists of a thick sequence of metamorphic rocks that range from Precambrian to
upper Paleozoic in age. The dominant rock unit in the district is the Fairbanks
Schist, a geologic unit comprised mostly of gray to brown fine-grained micaceous
schist and micaceous quartzite. Interlayered with the Fairbanks Schist is the
Cleary Sequence, a varied assemblage of metamorphic lithologies. In the northern
part of the district high-grade metamorphic rocks of the Chatanika terrane have
been identified.
Several intrusive bodies of different ages penetrate the Yukon-Tanana
Uplands. They generally range from ultramafic to felsic in composition, and can
be distinguished from older intrusive rocks by their lack of metamorphic
textures.
The mineral deposits are partially situated in a structurally complex
zone that has a northeast elongated orientation that parallels a fault called
the Eldorado Fault. It is characterized by a series of folds, shear zones,
breccias, and occasional low angle faults. These structures, which were
important to the localization of gold mineralization, show a dominant
strike-slip movement.
The Fort Knox gold deposit is hosted by a granitic intrusive body
affecting the Yukon-Tanana Uplands. The surface exposure of the intrusive stock
is elongated and measures approximately 1,067 meters in the east-west direction
and 610 meters north-south.
Gold occurs in and along the margins of pegmatites, quartz veins and
veinlets, quartz-filled deformation zones (shear zones), and fractures within
the granite. Fractures that predated the mineralization provided the conduits
for the deposition of gold. The stockwork veins strike predominantly east-west
and dip randomly. Vein density decreases with depth. Shear zones generally
strike northwest to southeast and dip moderately to the southwest.
70
There appear to be two distinct zones of gold distribution within the
deposit: the inner zone, which is characterized by good continuity over
considerable distances; and an outer zone, where the mineralization has shown
itself to be less predictable. It appears that the differences in the continuity
of the mineralization may be due to grain size changes and different phases
within the stock.
Mineralization in the quartz-filled shear zones is distributed
relatively evenly, and individual gold grains are generally less than 100
microns in size. In contrast, the stockwork veins have gold particle size and
distribution that are more erratic. Overall, the mineralized zone has a very low
sulfide content.
The True North gold deposits lies within a metamorphic unit called
Chatanika terrane, constituted of marbles that are erosional remnants, schists
of various composition, phyllites and quartzites. The gold mineralization is
hosted in felsic schists and is frequently accompanied by carbon and carbonate
alteration in sheared or otherwise structurally prepared zones. The gold is very
fine grained, and is closely associated with pyrite, arsenopyrite, and stibnite
in the unoxidized zones. It occurs in quartz veins, and in altered and
brecciated rocks adjacent to breccia bodies. There appears to be a direct
relationship between veining and gold content, as weakly veined rocks generally
carry lower gold values.
EXPLORATION
The gold exploration procedures that have been utilized at the Fort Knox
and True North projects include: reconnaissance and detailed geologic mapping;
soil and rock chip sampling to determine the presence of gold mineralization, or
associated (trace) elements; trenching of soil anomalies to create exposures of
bedrock; drilling, geochemical and assay determinations for gold and associated
elements.
Two types of drilling methods have been used, diamond core and reverse
circulation (RC). Drilling is always completed by independent drilling
contractors under the supervision of Kinross personnel. Sampling of the drill
holes is done by the staff of the drill contractors, under close supervision of
Kinross or contract geologists. Geochemical and assay determinations for gold
and associated elements are undertaken by independent commercial laboratories.
Historically, Kinross has utilized the services of two firms - ALS Chemex
Laboratories and Bondar-Clegg (now owned by the ALS Chemex group). Check assay
work during 2003 was switched to American Assay Laboratories, Inc. after
Bondar-Clegg was acquired by the ALS Chemex group.
Kinross' regional exploration within the Fairbanks district totaled $2.4
million during 2003. Planned exploration spending for 2004 is $1.6 million.
DRILLING, SAMPLE AND ANALYSIS, AND SECURITY OF SAMPLES
Drilling is the principal tool utilized to explore for and define
mineral deposits in the Fairbanks mining district. Two types of drilling are
utilized during exploration and development programs at the various properties,
core and reverse circulation drilling.
Core drilling is the process of obtaining continuous cylindrical samples
of rock from drill holes by means of annular shaped rock cutting bits rotated by
a bore-hole drilling machine. Core drilling, also referred to as diamond
drilling, is commonly used to collect undisturbed and continuous samples from
either complete drill holes or intervals of holes that are of particular
interest for the purposes of detailed and comprehensive sampling, for
geotechnical and rock strength tests, or because alternative drilling methods
may be incapable of providing appropriate geological or geotechnical data.
Reverse circulation is a method of rotary drilling whereby the drilling
medium is circulated to the drill bit face from the surface and the drill
cuttings that are ground up by the drill bit cutting face are removed from the
drill hole by the drilling medium (water, foam or other drilling muds and
additives, or air) inside the drill rods. Reverse circulation drilling is a
generally accepted method that is commonly used in mineral exploration and
development drilling programs throughout the world.
Comprehensive drilling programs have been carried out at both the Fort
Knox and True North deposits. The Fort Knox deposit has been defined by 594
drill holes (201 core holes and 393 reverse circulation holes totaling
71
375,230 feet), which have provided 75,046 nominal 1.52-meter long samples. The
True North deposit has been defined by 1,353 drill holes (totaling 352,660
feet), which provided 70,532 nominal 1.52-meter long samples.
Core samples and reverse circulation drill cuttings are collected from
each drill hole and are geologically logged. Reverse circulation rotary drill
cuttings are collected at one and a half meter intervals by a geologist or
helper at each drill site. Each core interval and reverse circulation rotary
cutting sample is submitted to an independent assay laboratory for geochemical
analysis, and the subsequent geochemical data is entered, together with
information about the host rock, into the project database. In an effort to
collect the most representative sample possible, 83.1 millimeter (83 millimeter
prior to 1998) diameter core holes have been drilled at the Fort Knox and Ryan
Lode deposits, while 64 millimeter core holes are drilled at True North and Gil.
Core samples are regularly photographed and then logged and sampled in one and a
half meter intervals. Data is entered on the logs in a digital format. Special
emphasis is placed on shear and vein orientations, as well as mineralization and
oxidation. A representative sample is retained for later use and the remainder
of each interval is submitted for assay.
Drill samples are labeled and placed in bags at the drill site and
prepared for transport to commercial laboratories for preparation and assay. All
samples are either delivered to the preparation facility by Kinross personnel,
or are picked up at a Kinross facility by employees of the laboratory.
Duplicate samples are collected from every tenth sample and a check
assay is performed and compared to the original assay. As a form of quality
control, the inclusion of "blank" (unmineralized) samples within each sample
shipment is part of the standard procedure.
A pulp sample of known grade is also submitted to the laboratory. The
sample frequency is twice per core hole, and every 30 meters for reverse
circulation holes. These standards are prepared both in-house and by outside
laboratories over the different exploration seasons, and they represent
different ranges of gold grades. For samples with fire assays greater than 0.3
grams per tonne, the samples are resubmitted to the laboratory for a cyanide
soluble assay. The purpose of this procedure is to determine mill recovery
rates.
Kinross employs, as a standard operating procedure, a very detailed
analysis program for determining if a particular reverse circulation drill
sample is representative of the rock within the drill hole. This program
includes weighing the samples to determine if the sample is under weight
(indicating loss of material in the sampled interval). The presence of unusually
high sample weights is often an important indicator of sample contamination in a
drill hole. All assay data from mineralized intervals are analyzed by two
computer programs (developed by MRDI, an independent mining consulting firm) to
determine if there is a predictable repetition (cyclicity) to high grade
intervals, or (decay) of assays immediately adjacent to and below high grade
intervals, possibly indicating contamination of certain assay values. Any holes
suspected of down hole contamination on the basis of these three criteria are
examined in cross-sections. Based on how the area compared to adjacent holes, a
decision is made as to whether or not the data is to be rejected. If any samples
are determined from these procedures to be suspicious, that data is rejected and
is excluded from the database used to estimate mineral resources.
Any mineralized drill hole interval that has a calculated recovery
greater than 100% is closely scrutinized and may be rejected. This is the
primary (but not only) method for determining contamination at the Fort Knox
deposit, but it is a less effective method for the True North deposit, where
cyclicity and decay are more effective tools.
The nature of the mineralization and host rock at the Fort Knox deposit
requires that particular care be given to the collection of drill hole samples,
especially for reverse circulation holes, that penetrate the water table within
the deposit. The reasonableness of Kinross' methods in drilling this part of the
deposit has been validated by the results of mining in several of these areas of
the deposit. These techniques are now also used as standard practice at all of
Kinross' properties in the Fairbanks mining district, including the True North
mine.
72
MINERAL RESERVE AND RESOURCE ESTIMATES
The following table sets forth the estimated proven and probable
reserves for the Fort Knox mine and area as at December 31, 2003, and 2002:
2003 (AT A 2002 (AT A
GOLD PRICE OF GOLD PRICE OF
U.S. $325 PER U.S. $300 PER
OUNCE) OUNCE)
----------------------------------------------- -------------------------------------------------
AVERAGE GOLD AVERAGE GOLD
TONNES GRADE CONTENT TONNES GRADE CONTENT
------ ----- ------- ------ ----- -------
(000'S) (GPT) (000'S OZ) (000'S) (GPT) (000'S OZ)
Proven(1) 54,913 0.83 1,464 58,414 0.84 1,571
Probable 48,026 0.96 1,481 38,744 0.89 1,107
------- ---- ----- ------ ---- -----
Total 102,939 0.89 2,945 97,158 0.86 2,678
======= ==== ===== ====== ==== =====
-------------------------
(1) Includes 19,132,000 tonnes of stockpiled material at December 31, 2003,
with an average grade of 0.53 gpt or 321,000 ounces of proven reserves.
In addition to estimated proven and probable reserves, as at December
31, 2003, the Fort Knox mine and area has an estimated 1.141 million tonnes of
measured and indicated resources at an average grade of 1.12 grams of gold per
tonne at a gold price of U.S. $350 per ounce. UNITED STATES INVESTORS ARE
ADVISED THAT THE TERMS "MEASURED RESOURCES" AND "INDICATED RESOURCES" ARE
RECOGNIZED BY CANADIAN REGULATIONS BUT NOT BY THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION. UNITED STATES INVESTORS ARE CAUTIONED NOT TO ASSUME THAT
ALL OR ANY PART OF MINERAL DEPOSITS IN THESE CATEGORIES WILL EVER BE CONVERTED
INTO PROVEN AND PROBABLE RESERVES.
MINING AND MILLING OPERATIONS
The Fort Knox and True North deposits are mined by conventional open pit
methods. Ore from the Fort Knox and True North mines is processed at Kinross'
carbon-in-pulp mill located near the Fort Knox mine. The mill processes ore on a
24 hours per day, 365 days per year schedule.
The Fort Knox mill has a daily capacity of between 32,658 to 45,359
tonnes per day. An average of 36,400 tonnes per day is scheduled to be processed
in 2004, with True North providing 8% of the mill feed. Mill feed is first
crushed to minus 20 centimeters in the primary crusher located near the Fort
Knox pit and conveyed 800 meters to a coarse-ore stockpile located near the
mill. The crushed material is conveyed to a semi-autogenous (SAG) mill, which
operates in closed circuit with two ball mills and a bank of cyclones for
sizing. A portion of the cyclone underflow is screened and then directed to a
gravity recovery circuit. Because the True North mineralization has a much finer
gold particle size than the Fort Knox mineralization, the gravity circuit is not
a significant factor in recovering True North reserves.
Correctly sized material flows into a high rate thickener and then into
leach tanks where cyanide is used to dissolve the gold. Activated carbon is used
in the carbon-in-pulp circuit to absorb the gold from the cyanide solution.
Carbon particles loaded with gold are removed from the slurry by screening and
are transferred to the gold recovery circuit where the gold is stripped from the
carbon by a solution, plated onto a cathode by electrowinning, and melted into
dore bars for shipment to a refiner. Mill tailings are detoxified and
transferred into the tailings impoundment below the mill.
Gold recoveries at the Fort Knox mill have historically ranged from 87%
to more than 90% since production began in 1996. With the commencement of feed
from the True North mine in 2001, it has been necessary to add lead nitrate to
the process, and make modest increases to the cyanide and lime concentrations to
maintain mill recovery rates.
Kinross estimates the net present value of future cash outflows for site
restoration costs at Fort Knox and True North under CICA Handbook section 3063,
which is effective for years beginning January 1, 2004, at $18.9
73
million. Kinross has posted $14.6 million of letters of credit to various
regulatory agencies in connection with its closure obligation at Fort Knox and
True North.
FORT KNOX OPEN PIT
The mine production rate varies between 94,000 and 130,000 tonnes per
day of total material. Mining is carried out on a year round basis, seven days a
week. Standard drilling and blasting techniques are used, and the blast holes
are sampled and assayed for production grade control purposes. Broken rock is
loaded with a shovel or a wheel loader into haul trucks. Depending on the grade
control results, the mined material is delivered to either the primary crusher,
low-grade stockpiles, or to waste rock dumps.
In 1996 a 1.3 million short ton slope failure developed in the central
south wall above the granite-schist contact. The slide has been stabilized.
Ground water was believed to be a contributing factor to the failure, and a
dewatering program is planned before mining this zone.
The mine currently has 19 dewatering wells, which produce approximately
650 gallons per minute. In 2004, two additional wells will be drilled.
Stripping of Phase-6 is scheduled to begin in 2004 on the 2200 bench.
Before sustained mill feed rates from Phase-6 can be reached in mid 2006 on the
1460 bench, 55 million short tons of waste rock will be mined, at an average
rate of 60,000 short tons per day. Six additional haul trucks and a loader will
be added to the mining fleets in order to accomplish the stripping.
Typically, upper Phase-6 benches average 4,700 feet in length, with a
mining face width of between 150 and 500 feet. Haul road access to the Phase
will be from the northeastern end. Subdividing the Phase would reduce the
stripping load, but due to the bench geometry and access limitations, this has
not been considered.
TRUE NORTH OPEN PIT
Production rates for the True North open pit mine vary between 18,100
and 36,300 tonnes per day of material, seven days a week. Standard drilling and
blasting techniques are used and the blast holes are sampled and assayed for
grade control purposes. Broken rock is loaded with a shovel or a wheel loader
into 77-tonne haul trucks. Mined material is delivered either to the stockpiles
or to waste rock dumps.
From the stockpile, mill feed is reloaded into 77-tonne capacity trucks
for the 20.9 kilometer long trip to the Fort Knox mill at 8,437 tonnes per day.
The material is directed dumped into the primary crusher.
Mining at True North was temporarily suspended during the first quarter
of 2004 in order to use the mining equipment at the Fort Knox pit. It is
anticipated that mining operations at True North will recommence during the
fourth quarter of 2004 and continue into 2005.
The current True North mining permit does not allow water discharge or
mining below the water table. All the pits were designed to meet these criteria
based on Kinross' current estimation of the groundwater surface. As mining
progresses, refinements in the water table location may allow changes in the pit
designs.
74
As the mine is a side hill excavation, waste rock is placed either in
access roads or in dumps adjacent to the excavations. Because much of the
deposit is located on north and northwest facing slopes, discontinuous
permafrost is present in the mining area. Work in the permafrost areas must be
done during the winter months because bulldozing becomes very difficult once the
surface layers thaw. Access roads can be placed across permafrost areas but
waste dumps cannot.
SUMMARY OF PRODUCTION AND FINANCIAL DATA
The following table summarizes certain gold production, operating and
financial data relating to Kinross' 100% owned Fort Knox mine for the three
years ended December 31, 2003:
YEARS ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001
---- ---- ----
SELECTED PRODUCTION AND OPERATING INFORMATION:
Tonnes mined (000's)....................................................... 39,213.9 32,699.0 31,212.9
Tonnes of ore processed (000's)............................................ 13,684.6 13,842.9 14,209.1
Gold grade (gpt)........................................................... 1.07 1.09 1.05
Average gold recovery (%).................................................. 83 84 86
Gold equivalent production................................................. 391,831 410,519 411,221
Number of employees........................................................ 402 388 361
SELECTED FINANCIAL INFORMATION (IN MILLIONS EXCEPT UNIT COSTS):
Revenue.................................................................... $ 136.3 $ 131.6 $ 109.0
------------ ---------- ----------
Cost of production......................................................... 95.2 95.3 85.0
Inventory change/other..................................................... (4.8) 2.9 (3.3)
Site restoration cost accruals............................................. 2.5 1.0 1.2
Depreciation, depletion and amortization................................... 35.9 54.9 42.9
Interest................................................................... 1.2 1.5 3.6
Exploration................................................................ 2.4 1.6 0.5
------------ ---------- ----------
132.4 157.2 129.9
------------ ---------- ----------
Net earnings (loss)........................................................ $ 3.9 $ (25.6) $ (20.9)
============ ========== ==========
OTHER FINANCIAL INFORMATION:
Capital expenditures (millions)............................................ $ 26.5 $ 15.0 $ 20.2
Unit costs:
Total cash costs per gold equivalent ounce produced...................... $ 243 $ 232 $ 207
Total cash costs per tonne milled........................................ $ 7 $ 7 $ 6
Total production cost per gold equivalent ounce.......................... $ 341 $ 343 $ 314
Total cash costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under "Calculation of Total
Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations," above.
For further information on the 2003, 2002, and 2001, results, refer to
the disclosure included under "Kinross Management's Discussion and Analysis of
Financial Condition and Results of
Operations--Financial/Operations--Operations--Mine Operations--Fort Knox Mine
(100% ownership and operator); USA."
75
PRODUCTION FORECAST, LIFE OF MINE, AND CAPITAL EXPENDITURES
The life of mine plan prepared by Kinross provides for completion of
mining at True North in 2005. From that point onwards, production will be
derived entirely from the Fort Knox deposit until 2010 when the feed will
originate predominantly from the low grade stockpile material.
Capital expenditures at the Fort Knox operations in 2003 were $26.5
million compared to $15.0 million during 2002. The majority of the capital
expenditures was directed towards equipment purchases and rebuilds, the drilling
of pit de-watering wells, and exploration. Capital expenditures for 2004 are
planned to be $39.0 million, including mining equipment, development, a tailings
dam lift, pit de-watering wells, and exploration. The majority of the increase
in capital expenditures in 2003 was due to equipment purchases and rebuilds.
During 2003, exploration was conducted within the Fort Knox pit, on the
Gil project and at Ryan Lode. Results from the Fort Knox in-pit work confirmed
sufficient continuity of the mineralized zones to justify a major pit wall
layback at an assumed gold price of $325 per ounce. This major layback is
comprised of a three-year, approximately $60 million capital expenditure
project, mostly in the form of stripping to liberate ore to prolong the economic
life of the Fort Knox mine.
76
[PICTURE]
--------------------------------------------------------------------------------
Fairbanks Gold Mining, Inc. Fort Knox Mine Fort Knox Mine
A Subsidiary of Kinross Gold Corporation General Arrangement
--------------------------------------------------------------------------------
77
True North Property Map
[PICTURE]
78
THE PORCUPINE JOINT VENTURE
GENERAL
Kinross and Placer CLA entered into an asset exchange agreement (the
"Asset Exchange Agreement") and a joint venture agreement, both dated as of July
1, 2002, for the purpose of forming a joint venture that combined the two
companies' respective gold mining operations in the Porcupine district in the
Timmins area, Ontario, Canada (the "Porcupine Joint Venture"). Placer CLA owns a
51% participating interest and Kinross owns a 49% participating interest in the
Porcupine Joint Venture. The joint venture is managed by Placer CLA. The
Porcupine Joint Venture incorporates Placer CLA's Dome mine and mill, Kinross'
Hoyle Pond, Pamour and Nighthawk Lake mines and the Bell Creek mill.
THE ASSET EXCHANGE AGREEMENT
Pursuant to the Asset Exchange Agreement which was entered into as a
step in implementing the Porcupine Joint Venture, Placer CLA transferred to
Kinross an undivided 49% interest in all of Placer's assets owned, used or
thereafter acquired by Placer CLA or its affiliates and located within a 100
kilometer radius of Placer CLA's Dome mill in or near Timmins, Ontario (the
"Development Area") and used in the gold mining, milling and exploration
business and operations carried on by Placer CLA or its affiliates. Kinross in
turn transferred to Placer CLA an undivided 51% interest in all of Kinross'
assets owned, used or thereafter acquired by Kinross or its affiliates and
located within the Development Area and used in the gold mining, milling and
exploration business and operations carried on by Kinross or its affiliates. Any
interest that Kinross may acquire in and to the project within the Development
Area commonly known as the Aquarius Project is excluded from the Porcupine Joint
Venture pending agreement between the parties to include it.
Under the Asset Exchange Agreement, Kinross has also transferred all of
its contracts relating to its Timmins operations to Placer CLA, and Placer CLA
assumed such contracts as manager of the Porcupine Joint Venture for the benefit
of both parties and the exclusive use of the Porcupine Joint Venture. Placer
CLA's contracts relating to its Timmins operations remain in the name of Placer
CLA, which will hold such contracts as manager of the Porcupine Joint Venture
for the benefit of both parties and the exclusive use of the Porcupine Joint
Venture.
THE PORCUPINE JOINT VENTURE AGREEMENT
In connection with the Asset Exchange Agreement, Kinross and Placer CLA
entered into a joint venture agreement. The Porcupine Joint Venture Agreement
provides that the purpose of the Porcupine Joint Venture is to engage in
operations relating to the mining, milling, exploration and development of the
properties subject to the Porcupine Joint Venture, and to perform any other
activity necessary, appropriate or incidental to the foregoing.
The term of the Porcupine Joint Venture is from July 1, 2002, and until
so long thereafter as ores and mineral resources are produced from the assets
forming part of the Porcupine Joint Venture and all reclamation obligations,
liabilities or responsibilities under applicable laws or instruments of title
relating to operations under the Porcupine Joint Venture have ceased or been
satisfied, to a maximum of 99 years, unless the Porcupine Joint Venture is
earlier terminated pursuant to the terms of the Porcupine Joint Venture
agreement.
Each of Kinross and Placer CLA is obligated to contribute funds from
time to time to the Porcupine Joint Venture in proportion to their respective
participating interests, pursuant to adopted programs and budgets.
Under the Porcupine Joint Venture a party's participating interest may
be reduced upon the election by such party not to contribute to an adopted
program and budget for the Porcupine Joint Venture, or in the event of a default
by such party in making its agreed upon contribution to an adopted program and
budget.
79
In addition, if a party's participating interest is reduced to less than
10%, the other party may elect that the first party be vested with a 2% net
smelter returns royalty on ores and minerals mined from the properties subject
to the Porcupine Joint Venture and the first party shall be deemed to have
transferred its remaining participating interest to the other party.
PORCUPINE JOINT VENTURE OPERATIONS
The Porcupine Joint Venture operations consist of the Dome underground
and open pit mine and mill, the Hoyle Pond underground mine and the Bell Creek
mill and tailings storage facility which is presently on care and maintenance
with all processing taking place at the Dome mill. In addition, the Porcupine
Joint Venture operations consist of a number of former producing mines, most
notably the Pamour and Nighthawk Lake mines. The only producing mines forming
part of the Porcupine Joint Venture in Timmins at present are the Dome mine and
the Hoyle Pond mine.
PROPERTY DESCRIPTION AND LOCATION
HOYLE POND UNDERGROUND MINE AND BELL CREEK MILL
The Hoyle Pond underground mine and mineral claims and the Bell Creek
mill are located in Hoyle Township in Timmins, Ontario on 4,065 hectares of
patented land, land leased from the province and one private lease. The leases
expire at various times from September 2004 to January 2025. Subject to the
satisfaction of conditions, the leases can be renewed for additional terms of 10
to 21 years. The private lease is for a term of 20 years and is in good standing
until May 31, 2005. There are also two contiguous staked mining claims covering
32 hectares located in Whitney Township south of Hoyle Township.
There are various royalties on the Hoyle Pond underground mine land
package. The only royalty requiring payment at present is a tonnage-based
royalty on the private lease. Royalty payments were insignificant in 2003 and
2002.
All requisite permits have been obtained for the mining and continued
development of the Hoyle Pond underground mine and the Bell Creek mill and are
in good standing and the Porcupine Joint Venture is in compliance with Hoyle
Pond and Bell Creek permits in all material respects.
DOME MINE AND MILL
The Dome underground and open pit mine and mill are located within the
city limits of Timmins, Ontario, on an area that covers over 5,004 hectares of
staked and patented mining claims held or under option, including the Preston
property that lies to the south and east, immediately adjacent to the Dome
property and the Paymaster property that lies to the west of the Dome open pit.
The Dome open-pit and underground mines, claims, mining and surface
rights are registered in the name of Placer Dome Canada Limited ("Placer
Canada") (51%) and Kinross (49%). The Preston property includes 19 mining
claims. The Paymaster property includes 26 contiguous mining claims.
A 2% net smelter royalty is payable on production from the Preston,
Paymaster and Vedron properties. No other royalties are payable on the Dome
property.
All requisite permits have been obtained for the mining and continued
development of the Dome underground and open pit mine and mill and are in good
standing; the Porcupine Joint Venture is in compliance with such permits in all
material respects.
80
PAMOUR AND NIGHTHAWK LAKE MINES
The Pamour open pit and Nighthawk Lake underground mines and mineral
claims are located in Timmins, Ontario on 7,783 hectares. The Pamour mine is
located north of Highway 101 and the Pamour mine site is approximately 19
kilometers east of the downtown core of Timmins and 43 kilometers west of
Highway 11. The Pamour mine is also approximately two kilometers south of and
contiguous with the Hoyle Pond mine. The Nighthawk Lake mine is approximately 17
kilometers southeast of the Hoyle Pond mine. There has been no production at
these mines since their acquisition in 1999.
A Pamour open pit feasibility study was finalized in late 2003 and
permitting work was initiated. The necessary permits required to commence mining
of the mineral reserves contained in the existing Pamour pit, north of Highway
101, referred to as the phase one mine plan, have been maintained in good
standing and require only administrative reactivation. Demolition of the old
Pamour headframe and associated infrastructure was completed in preparation for
the development of the open pit operations. Saleable production is expected to
commence in 2005.
The Porcupine Joint Venture will require additional permit approvals to
mine south of Highway 101, which is outside of the phase one mine plan. The
government agencies that will be involved in the additional permitting process
include the City of Timmins, the Matagami River Conservation Authority, the
Ontario Ministries of Northern Development and Mines, Natural Resources,
Environment and Transportation, the Federal Department of Fisheries and Oceans
and Environment Canada.
The key element in the development of the expanded open pit outside of
the phase one mine plan will be the relocation of Highway 101. The proposed
relocation will involve constructing a causeway over a portion of a small lake,
the Three Nations Lake, and will therefore have a direct effect on a nearby fish
habitat. This highway has been relocated several times during the production
history of the mine. As a fishery resource will be involved in the project
planning, the Canadian Environmental Assessment Act process will be the guiding
legislation. Kinross believes there is a high level of assurance that the
project will receive all required approvals for development.
ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE, AND PHYSIOGRAPHY
Access to the Hoyle Pond mine is via a five kilometer all weather gravel
road north of Highway 101. Services are generally acquired from vendors in the
Timmins area. Adequate process water is available from the clear water pond at
the tailings, while make up water and potable water comes from underground
supply.
The existing Dome mill consists of three stages of crushing, rod/ball
and primary ball grinding, gravity recovery, cyanide leach, carbon-in-pulp,
carbon elution, solution electrowinning and direct smelting. Tailings are pumped
to a tailings basin where the solids settle out and a portion of the solution is
recycled to the mill. Excess effluent is seasonally treated and discharged.
As part of the Pamour project, the mill will be upgraded in 2004 with
the installation of a large rod mill in series with the existing primary ball
mill to provide additional grinding capacity for the harder Pamour ores. Three
leach tanks will be installed to provide longer leach retention time, and a new
carbon elution and regeneration circuit will be installed, together with an
upgrade to the process control network. This expansion will allow processing of
11,000 tonnes per day at a 95% mill utilization rate, making the mill more
efficient and flexible for processing ores from the Dome, Holye Pond, Pamour,
and other orebodies.
Access to the Dome mine is by paved road from the town of South
Porcupine, six kilometers east of Timmins on Highway 101. Rail freight service
is available from the Falconbridge -- Kidd Creek metallurgical site eight
kilometers east of the mine.
81
The dominant surface material in the Dome mine area is glacial till
overlain by glaciolacustrine silts and clays. Mine waste and tailings cover some
areas closer to the mine.
The Pamour mine is located two kilometers south of the Hoyle Pond mine
and is accessible by an unpaved road. The Nighthawk lake mine is located 17
kilometers southeast of the Hoyle Pond mine and accessible by 10 kilometers of
paved roads and seven kilometers of unpaved roads.
The area climate consists of cold winters and hot summers. Temperatures
range from below -40 degrees Celsius (-40 degrees Fahrenheit) to above +30
degrees Celsius (+95 degrees Fahrenheit). Mean precipitation is approximately 80
centimeters annually.
The topography of the area is typical of the Canadian Shield and
consists of an irregular surface with moderate relief. The topographic highs are
the result of bedrock outcrops and are surrounded by low lying areas of poorly
drained wetlands. Vegetation includes spruce, pine, poplar and birch trees and
various shrubs, grasses and mosses. The elevation ranges from 200 meters to 300
meters.
HISTORY
Land was first staked in the vicinity of the present day Pamour mine in
1910. Limited production was achieved from 1911 to 1914. The property remained
idle from 1914 to 1923. Between 1923 and 1935 several mining syndicates carried
out exploration work. In 1935 and 1936 the Pamour No. 3 shaft was sunk and a 650
tonnes per day mill was constructed. In 1938 the mill capacity was increased to
1,300 tonnes per day by installing new equipment. During the 1950's mill
throughput averaged 1,500 tonnes per day. In 1972, the mill was expanded to
treat 2,275 tonnes per day as production from the nearby Aunor mine was
processed at the Pamour mill. Open pit mining at the Pamour mine began in 1976
and continued until 1999.
Approximately 4.0 million ounces of gold were produced from the Pamour
mine from 1936 to 1997. There has been no production at the Pamour mine since
Kinross acquired it in 1999.
The Hoyle Pond discovery hole was drilled by Texas Gulf in 1980. The
deposit was explored in 1980 to 1982. The deposit was developed by ramp in 1983
and 1984. The first year of mining in 1985 yielded 64,400 tonnes at an average
grade of 13.0 grams per tonnes of gold. The mine has been in continuous
production since then and was acquired by Kinross pursuant to the amalgamation
with Falconbridge Amalco in 1993. Since 1993, Kinross has conducted exploration
programs and underground development has added significant additional
mineralization. From 1994 to 1999 Kinross sunk an 815 meter shaft and developed
a second ramp to access underground workings. The Bell Creek mill has gone
through a series of expansions with current capacity of 1,500 tonnes per day.
The head grade for the Hoyle Pond mine is the highest of any of the significant
past, or present producing mines in Timmins.
The Dome deposit was discovered in 1909. Operations commenced in 1910,
producing 214 ounces of gold. Mining has been continuous at Dome since 1910. In
1984, the mill capacity was increased from 2,000 to 3,000 tonnes per day. Part
of the extension included a new vertical shaft, the No. 8 shaft which was sunk
from the surface to a depth of 1,667 meters. In 1988, due to a skipping
accident, No. 8 shaft was not producing and, therefore, open pit mining was
commenced. From 1992 to 1996, Placer CLA produced from the Paymaster property.
In 1995, an expansion of the operations, which included an enlarged open pit and
an increase in milling capacity, was completed. As a result, full production
from the expanded open pit was achieved and mine production increased from a
nominal rate of 3,400 tonnes per day in 1994 to 9,100 tonnes per day in 1995. In
1997, the Preston property was purchased and the Dome open pit was expanded into
the Preston land holdings. Mining of open pit ore from the Preston property was
completed in 2000.
From its beginning in 1909 to December 31, 2003, the Dome mine has
produced 15,116,739 ounces of gold, making it the second largest gold producer
of the Timmins camp.
82
GEOLOGY AND MINERALIZATION
REGIONAL
All of the properties comprising the Porcupine Joint Venture lie within
the Porcupine Gold Camp (the "PGC"). The PGC, located in the Archean Abitibi
greenstone belt, has been the most productive gold-producing field in North
America. Total historic production is in excess of 62 million ounces of gold.
This production has come from quartz-carbonate lode systems hosted within low
temperature metamorphic rocks (greenschist facies). Lodes are found in a
corridor up to 10 kilometers wide parallel to the 200 kilometers long Destor
Porcupine Fault. At the regional scale, gold deposits are spatially associated
with regional fault zones. At the camp scale, gold deposits generally occur
within five kilometers of, but not in, the regional faults.
HOYLE POND
The Hoyle Pond Main Zone and 1060 Zone deposits, both of which are in
production, occur on opposite limbs of an open, northeast plunging
fold-structure (anticline), hosted within sheared and metamorphosed basalts rich
in pyroxenes. The 7 Vein system occurs as a series of stacked, flat to gently
northeast dipping veins at the nose of the anticline structure. Mineralization
occurs as coarse, free gold in white to grey-white quartz veins with variable
ankerite, tourmaline, pyrite and local arsenopyrite. Alteration halos are
generally narrow, consisting of mainly grey zones (carbon, carbonate, sericite,
cubic pyrite) in the Hoyle Pond system, and carbonate-sericite, with fuchsite,
pyrite, arsenopyrite and trace chalcopyrite, sphalerite within the 1060
structure.
The Hoyle Pond Main Zone includes a series of generally northeast
striking, linked quartz vein zones (at least 11 veins of economic significance)
folded on a small scale with moderate west trending and northeast plunging fold
axis. The 1060 Zone consists of at least five main vein structures (B1, B2, and
B3 Zones, A Zone and Porphyry Zone) with orientations ranging from north to
northeast with generally subvertical dips.
PAMOUR MINE
The Pamour mine is located approximately one kilometer north of the
Destor Porcupine Fault Zone. Volcanic rocks occupy the area north of the mine
and include interlayered mafic to ultramafic units. Sedimentary rocks including
greywackes, argillites, and conglomerates are found to the south. Gold
mineralization is hosted by both volcanic and sedimentary rocks and related to
both individual quartz veins and vein swarms, which trend mainly east-west.
Volcanic-hosted ore bodies include shallow north-dipping single vein structures
within mafic volcanics, as well as irregular shaped vein swarms along various
lithologic contacts within the volcanic sequence. Sedimentary hosted ore bodies
include irregular shaped vein swarms along the unconformity as well as narrow,
steep south-dipping veins in greywacke further to the south.
NIGHTHAWK LAKE MINE
The Nighthawk Lake mine is located along the Nighthawk Lake Break, a
branch fault of the Destor Porcupine Fault Zone. Rocks in the vicinity of the
Nighthawk Lake mine consist of mafic to felsic volcanics with intrusions of
albitite and syenite. Gold mineralization occurs both within the volcanic rocks
and intrusives, and generally shows a close spatial association with strong
carbonate alteration, brecciation, quartz veining and pyrite or arsenopyrite.
Based on past work, orebodies at the mine have been subdivided into six main
zones including the Main Zone, No. 1 Zone, No. 4 Zone, Ramp Zone, "A" Zone and
Deadman Island Zone.
83
DOME MINE
The Dome mine lies on the south limb of the Porcupine syncline in an
area where the Archean Metavolcanics are overlain by the metasedimentary rocks.
Gold mineralization is found in a number of different rock types and in
association with a number of different structural settings. Mineralization in
the district is commonly associated with the northeasterly plunge of the
Porcupine syncline.
At the mine site, the local sequence of north dipping metavolcanics and
metasedimentary rocks have been folded to form a northeasterly plunging
structure, referred to as "Greenstone Nose." Sediments consisting of
conglomerates, slates and greywackes are draped around this structure and form
the "Sedimentary Trough" on the south side.
Immediately south of the "Sedimentary Trough" lies an east-west
striking, highly strained zone in which magnesium rich, carbonatized rock
occurs. This highly altered zone corresponds to the trace of the ductile Dome
Fault interpreted to represent a branch off the main Destor-Porcupine Fault. To
the west, the Dome Fault Zone passes between two major porphyritic intrusive
bodies--the Paymaster and the Preston Porphyries. To the east, lenses of
porphyry, similar compositionally to the main porphyry bodies, occur within the
Dome Fault Zone. To the south of the Dome Fault Zone are the "Southern
Greenstones," a south-dipping sequence of basalts consisting of massive and
pillowed flows.
Mineralization occurs mainly in association with structurally controlled
quartz and quartz-ankerite veins. Principal orebodies can be classified into
three main types: Long narrow veins in shear zones parallel to the stratigraphic
trend; swarms of en-echelon veins and stockworks of veins; and disseminated
mineralization, in which the gold is associated with pyrite and/or pyrrhotite
and little or no vein material is present.
At the Paymaster property, historic mining operations extracted ore from
ankerite veins in mafic units and quartz veins in porphyry. The majority of
mineralization being targeted by current exploration is hosted by carbonated and
sulphidic greenstone adjacent to and within flexures in the mafic/ultramafic
contact (36 Zone).
EXPLORATION
Kinross' regional exploration within the Timmins camp totaled $2.5
million during 2003. Kinross' share of the planned exploration spending for 2004
is $2.5 million.
DRILLING, SAMPLE AND ANALYSIS, AND SECURITY OF SAMPLES
Kinross collects both exploration and production samples at its
operations in Timmins. Samples are collected using industry standard sample
collection procedures that are well understood by the geological personnel
collecting the samples in the field.
Kinross conducted both surface and underground diamond core drilling
operations during 2003. For resource estimation purposes, drilling spacing
ranges from a low of 8.0 meters to a high of 25.0 meters. Typically, drill holes
are sampled honoring geological contacts while maintaining a standard 1.5 meter
sample length wherever possible. Typically the core is not split prior to assay
unless the hole is an exploration hole targeting new mineralization.
Underground, sampling is conducted on a daily basis throughout the
active working faces. Chip samples, muck samples and sludge samples are
collected to provide daily grade control and to reconcile actual production to
the estimated reserves. At the Hoyle Pond mine, ore development headings are
typically sampled on 2 to 5 meter intervals using both chip samples and muck
samples. Production stoping areas are typically sampled at 5 meter intervals
wherever practical and stope muck is sampled at a frequency of 1 muck sample for
every 20 to 40 tonnes of ore.
84
At the Dome mine, ore development is sampled at 2 to 3 meter intervals
using both chip samples and muck samples. Cut and fill stopes are sampled at a
rate of one sample for every 30 tonnes and long-hole and bulk mining zones are
sampled at a rate of one sample for every 60 tonnes.
Open pit samples are collected from blasthole cuttings on an approximate
10 meter sample spacing. In ore zones, a single sample is collected from each
hole, representing approximately 450 tonnes of ore. In waste, the sample
frequency is reduced with one sample collected from every four holes.
Since the inception of the Porcupine Joint Venture until December 31,
2002, samples were analyzed at the Bell Creek lab, the Dome mine lab and at
independent assay labs. Prior to the completion of the Porcupine Joint Venture,
Kinross' analytical work was carried out at the Bell Creek lab with some
exploration samples sent to an independent lab for analysis.
Since December 31, 2002, Kinross' analytical work is completed at the
Dome mine lab with the Bell Creek lab placed on care and maintenance. At the
Dome mine lab, all gold analyses are completed using conventional fire assay
with an AA finish. Samples with visible gold are assayed using either a
gravimetric finish or pulp metallic assay. Each assay tray at the Dome mine lab
includes at least one standard, one check and one standard. The Dome mine lab
processes all surface and underground production and exploration samples. Check
assays are completed at the Dome mine lab or at external laboratories. All
multi-element analytical work is completed at external laboratories.
MINERAL RESERVE AND RESOURCE ESTIMATES
The following table sets forth the estimated proven and probable
reserves for Kinross' 49% interest in the Porcupine Joint Venture as at December
31, 2003, and 2002:
2003 (AT A 2002 (AT A
GOLD PRICE OF GOLD PRICE OF
U.S. $325 PER U.S. $300
OUNCE) PER OUNCE)
----------------------------------------------- -----------------------------------------------
AVERAGE GOLD AVERAGE GOLD
TONNES GRADE CONTENT TONNES GRADE CONTENT
------ ----- ------- ------ ----- -------
(000'S) (GPT) (000'S OZ) (000'S) (GPT) (000'S OZ)
Proven(1) 9,129 1.39 409 7,995 1.39 357
Probable 18,033 1.86 1,080 20,855 1.68 1,128
------ ---- ----- ------ ---- -----
Total 27,162 1.70 1,489 28,850 1.60 1,485
====== ==== ===== ====== ==== =====
-------------------------
(1) Includes 6,553,000 tons of stockpiled material at December 31, 2003,
with an average grade of 0.96 gpt or 202,000 ounces of proven reserves.
In addition to proven and probable reserves, as at December 31, 2003,
the Porcupine Joint Venture has an estimated 0.58 million tonnes of measured and
indicated resources at an average grade of 0.74 grams of gold per tonne at an
assumed gold price of U.S. $350 per ounce. UNITED STATES INVESTORS ARE ADVISED
THAT THE TERMS "MEASURED RESOURCES" AND "INDICATED RESOURCES" ARE RECOGNIZED BY
CANADIAN REGULATIONS BUT NOT BY THE UNITED STATES SECURITIES AND EXCHANGE
COMMISSION. UNITED STATES INVESTORS ARE CAUTIONED NOT TO ASSUME THAT ALL OR ANY
PART OF MINERAL DEPOSITS IN THESE CATEGORIES WILL EVER BE CONVERTED INTO PROVEN
AND PROBABLE RESERVES.
85
MINING AND MILLING OPERATIONS
The Hoyle Pond operations consist of an underground mine serviced by two
declines and one shaft. The underground operations are comprised of 17 main
levels, with the shallowest at 40 meters below surface and the deepest at 720
meters below surface. The Hoyle Pond ramp extends down to the 280 meter level
and services the Hoyle Pond and seven vein zones. The 1060 ramp, which services
the 1060 Zone, extends to the 900 meter level. Total production (ore and waste)
is transported to the loading pocket by means of an ore/waste pass system and
hoisted to surface in 6.5 tonne skips. The surface infrastructure consists of
administration buildings, maintenance, compressed air, paste fill plant, and
hoisting facilities.
The mineralized zones at Hoyle Pond are narrow high-grade veins, dipping
from 30 to 90 degrees. Mining methods used are cut and fill, shrinkage, panel
and long-hole methods. The percentage of ore production by mining method for
2003 is 34% long-hole, 31% cut and fill, and 23% shrinkage. The balance of
production is made up by other development such as drifting (7%) and raising
(2%).
The mining of the Hoyle Pond crown pillar will require significant
infrastructure including the installation of circular steel sheet pile cells,
steel sheet pile walls, and dams to isolate the adjacent Falconbridge tailings
management area, berms to separate the pit from the Hoyle Pond complex,
relocation of the Hoyle Pond mine water settling ponds, relocation of the
tailings management area utility and access road, and installation of
underground bulkheads to isolate the Hoyle Pond underground workings from the
pit. The Hoyle Pond crown pillar will be mined by conventional open-pit methods
in 2004.
The Dome underground mine had its final year of full production in 2003
after 93 years of operation that began in 1910. Attempts to extend the mine life
are being evaluated with on-going exploration of areas within and peripheral to
the mine.
The Dome open pit is being mined in three stages. Development of the
final stage commenced in the summer of 1998. Mining is conducted using
conventional open pit mining methods. All mining is carried out on 9.1 meter
benches. Pit wall inter-ramp angles vary but average 52 degrees. Haulage ramp
gradients are set to 10%. Conventional open pit mining equipment is used. The
mining fleet includes diesel powered drills, electric cable shovels, 136 tonne
haulage trucks, front-end loaders, dozers and support equipment.
Reserve estimates for the open pit include allowances for the presence
of mined-out underground workings. Open pit mining costs reflect the specialized
drilling, blasting and backfilling that is required to ensure that open pit
mining can proceed safely through these underground workings. Overburden
encountered in the upper portions of the open pit is stockpiled for use in
reclamation. Rock dumps are contoured and re-vegetated on an ongoing basis as
part of normal open pit operations. Open pit mineral reserves are scheduled to
be depleted in 2004. Stockpiled ore is expected to sustain mill operations until
2007.
The Pamour mine and mill are currently shutdown. The Pamour open pit
feasibility study was completed in 2003 and permitting work initiated.
Demolition of existing infrastructure at Pamour that will not be used in the new
mining operations has been completed. Construction of the haul road and major
infrastructure will be completed during 2004 and 2005. Stripping will begin in
late 2004 and full-scale ore mining will be achieved in 2005. Mining will be by
a conventional open pit method. Much of the equipment required for the Pamour
operation will be relocated from the Dome open pit. The initial capital costs
include the cost of equipment not available from the Dome operation as well as
rebuild costs of some of the older units.
Ore from the Hoyle Pond mine was historically (prior to the Porcupine
Joint Venture) milled at the nearby Bell Creek mill, which is also owned by
Kinross (and is part of the Porcupine Joint Venture). Bell Creek is currently
under care and maintenance, and all ore mined at Hoyle Pond is transported via
over-the-road trucks to the Dome mill. Currently there is no plan to reactivate
the Bell Creek mill.
86
All ore mined by the Porcupine Joint Venture is milled at the Dome mill.
Currently, the Dome mine and the Hoyle Pond mine provide feed to this mill. In
the future, the mill will be expanded to also accommodate production from the
Pamour mine, which is slated for production in 2005.
Gold is recovered at the Dome mill using a combination of gravity
concentration and cyanidation techniques. The flowsheet consists of primary
crushing, secondary crushing, rod/ball mill grinding, gravity concentration,
cyanide leaching, carbon-in-pulp gold recovery, stripping, electrowinning and
refining. The mill has a capacity of 12,000 tonnes per day and currently
processes over 11,500 tonnes of ore per day.
Kinross' share of the net present value of future cash outflows for site
restoration costs at the Porcupine Joint Venture under CICA Handbook section
3063, which is effective for fiscal years beginning January 1, 2004, are
estimated to be $9.9 million at December 31, 2003. Kinross has posted letters of
credit totaling $3.2 million for site restoration obligations with the
provincial government in connection with its share of closure obligations.
SUMMARY OF PRODUCTION AND FINANCIAL DATA
The following table summarizes certain gold production, operating and
financial data relating to Kinross' 49% ownership interest in the Porcupine
Joint Venture for year ended December 31, 2003, and the six months ended
December 31, 2002. Results prior to June 30, 2002, pertain to the 100% owned
Hoyle Pond mine:
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
---- ---- ----
SELECTED PRODUCTION AND OPERATING INFORMATION:
Tonnes mined (000's)(1).................................................... 33,995.0 10,821.9 635.8
Tonnes of ore processed (000's)(1)......................................... 4,130.0 2,390.7 443.9
Gold grade (gpt)........................................................... 3.73 5.00 12.40
Average gold recovery (%).................................................. 92 91 88
Gold equivalent production(3).............................................. 223,960 189,464 156,581
Number of employees(2)..................................................... 773 756 379
SELECTED FINANCIAL INFORMATION (IN MILLIONS EXCEPT UNIT COSTS)(III):
Revenue.................................................................... $ 83.0 $ 58.2 $ 41.7
------------ ---------- ---------
Cost of production......................................................... 47.4 38.0 28.5
Inventory change/other..................................................... 1.5 (1.5) (0.7)
Site restoration cost accruals............................................. 1.6 1.5 0.2
Depreciation, depletion and amortization................................... 24.1 16.4 13.2
Care and maintenance....................................................... 2.9 0.6 0.9
Exploration................................................................ 2.5 1.9 0.3
---------- ---------- ---------
80.0 56.9 42.4
------------ ---------- ---------
Net earnings (loss)........................................................ $ 3.0 $ 1.3 $ (0.7)
============ ========== =========
OTHER FINANCIAL INFORMATION:
Capital expenditures (millions)(3)......................................... $ 8.3 $ 6.7 $ 7.9
Unit costs:
Total cash costs per gold equivalent ounce produced...................... $ 211 $ 201 $ 182
Total cash costs per tonne milled........................................ $ 23 $ 32 $ 64
Total production cost per gold equivalent ounce.......................... $ 326 $ 295 $ 268
-------------------------
(1) Tonnes mined and ore processed includes 100% of mine production.
(2) Number of employees includes all employees and contractors on site.
(3) 2003 and 2002 gold equivalent production, selected financial information
and capital expenditures are 49% of the results of the Porcupine Joint
Venture commencing July 1, 2002. Prior results are 100% interest in the
Hoyle Pond Mine.
87
Total cash costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under "Calculation of Total
Cash Costs and Realized Revenue and Reconciliation to the Statements of
Operation," above.
For further information on the 2003, 2002, and 2001, results, refer to
the disclosure included under "Kinross Management's Discussion and Analysis of
Financial Condition and Results of
Operations--Financial/Operations--Operations--Mine Operations--Porcupine Joint
Venture (49% interest, Placer Dome 51%, operator), Canada."
PRODUCTION FORECAST, LIFE OF MINE, AND CAPITAL EXPENDITURES
The proven and probable reserves are sufficient for ten years of
production. There is significant potential for additional reserves and resources
in the current property position controlled by the joint venture. Permitting
activities on the Pamour mine are underway.
Kinross' share of capital expenditures at the Porcupine Joint Venture
operations in 2003 were $8.3 million compared to $6.7 million during 2002. The
capital expenditures for 2003 included expenditures on the tailings dam lift and
the development of the Pamour project. The majority of the increase in capital
expenditures in 2003 was due to the advancement of the Pamour project. Capital
expenditures in 2004 are planned to be $28.7 million for Kinross' share of the
Pamour project and Hoyle Pond development.
88
PORCUPINE JOINT VENTURE PROPERTY POSITION
[PICTURE]
89
KUBAKA MINE, RUSSIAN FEDERATION
Kinross owns a 98.1% interest in the Omolon Gold Mining, Inc.
("Omolon"), a Russian joint stock company. Omolon is operated under a
contractual agreement whereby a wholly-owned subsidiary of Kinross, Kinam
Magadon Gold Corporation, is the operator and manager. The major assets of the
joint stock company are the Kubaka mine and the Birkachan exploration project
located in the Russian Far East. The majority of Kinross' prior 54.7% ownership
interest in the Kubaka mine was acquired in connection with the acquisition of
Kinam on June 1, 1998.
On December 3, 2002, Kinross entered into purchase agreements with four
of the five Russian shareholders of Omolon. The four shareholders agreed to
tender their shares in Omolon and Omolon agreed to pay $44.7 million, including
certain transaction costs, for these shares. These transactions closed as at
February 28, 2003, increasing Kinross' interest in Omolon to 98.1% from 54.7%.
PROPERTY DESCRIPTION AND LOCATION
The Kubaka open pit mine, infrastructure and mining concession covers
approximately 897 hectares located 320 kilometers south of the Arctic Circle and
938 kilometers northeast of the major port city of Magadan. The Kubaka pit
operated for six years from 1997 to 2002, producing slightly more than 430,000
ounces of gold annually.
Currently, the Kubaka Project consists of mineralized stockpiles and two
small underground projects. The stockpiles, the Kubaka underground mining
operations, and the Tsokol deposit are located on the original land allotment
for the Kubaka project.
Omolon holds the license from the Russian government to operate the
Kubaka mine (the "Kubaka License"). The Kubaka License terminates in 2011,
subject to extension of up to an additional two years. The Kubaka License
establishes certain production requirements for the Kubaka mine and requires the
payment of a 3% royalty on the total value of the gold extracted. In 2003, the
Kubaka mine was subject to total royalty and production based taxes of 6.0%.
Kinross' proportionate share of royalties and production based taxes were $4.8
million in 2003.
The Birkachan exploration project covers approximately 515 hectares and
is located 28 kilometers north of the Kubaka operations. The Birkachan project
is not included in the Kubaka land allotment. A separate license has been
granted to Omolon allowing exploration and mining activities on the Birkachan
project. Initial production at the Birkachan project has commenced and is
expected to continue through 2005.
All requisite permits have been obtained for the mining and continued
operation of the Kubaka open pit mine and Birkachan and are in good standing.
Kinross is in compliance with the Kubaka and Birkachan permits in all material
respects.
ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE, AND PHYSIOGRAPHY
Access to the Kubaka mine is by air from Magadan or by a 362-kilometer
winter road from Omsukchan, and a 576-kilometer all weather road from Magadan to
Omsukchan. The winter road is generally open from mid-December until April and
is primarily used to ship the materials and supplies necessary for the next
year's production.
The Birkachan project is located 28-kilometers north of the Kubaka
project site. Winter access to the Birkachan project is by two routes; a 53
kilometer exploration trail from the Omolon winter road, or an alternate 45
kilometer route which has ecological sensitivities along the river but is far
superior especially for heavier equipment. Helicopter access is required during
spring thaw, fall freeze-up and summer high water periods. During the dryer
periods in the summer months, access to the site is by 4 x 4 vehicles.
90
The climate at Kubaka is characterized by long cold winters, lasting six
months or more. Summers vary between rainy and cool to very warm and dry. Snow
has fallen in all 12 months of the year. The mine operates in Arctic conditions.
Daylight varies from four to 20 hours per day. Temperatures range from below -52
degrees Celsius (-60 degrees Fahrenheit) to above 32 degrees Celsius (90 degrees
Fahrenheit). Mean precipitation is approximately 40 centimeters annually.
The area is mountainous with some rugged topography. The slopes have
gentle concavity with a steepness of between 10 and 30 degrees. The site is
situated in permafrost. The natural vegetation at the site consists of moss, low
shrubs and small larch trees. In the valley bottom the ground surface is
hummocky and grass covered. The elevation ranges from 500 to 932 meters.
Water utilized in the mill for processing the ore is obtained from four
sources: fresh water from a well 650 meters south of the mill complex, fresh
water from the Dukat tailings dam immediately south of the mill, reclaimed water
from the tailings dam facility, and waste water from the sewage treatment plant.
Electrical power at Kubaka is generated at site with seven 3516
Caterpillar diesel generators, each producing 1,500 kilowatts. Generally, four
of the generators are utilized in the summer and five in the winter, providing
power for the crusher and mill complex, office, and maintenance shop. Three G72M
diesel generators, each producing 800 kilowatts, provide power for the man camp.
Typically only one of these is utilized at any time, with two on standby.
HISTORY
The Kubaka Deposit was discovered in 1979 during a geological survey
conducted by the Russian State Geological Exploratory Expedition. While
conducting a group geological survey between 1983 and 1987, preliminary data on
the parameters and morphology of the orebodies and on the scales of
mineralization was obtained. Between 1986 and 1992, the Central Ore Zone and
Northern Ore Zones were explored in detail and confirmed the economic merit of
developing the project.
In 1987, a small open pit was operated with the ore being processed at
the Karamken and Omsukchan processing plants. In 1992, an 80,000 tonne per year
pilot process plant was constructed at the site and utilized a gravity/flotation
process.
In 1992, the comprehensive ore reserves of the Northern Ore Zones passed
State approval of reserves and were transferred to the Evensk stock society for
industrial development. Ore recovery began in 1993, with the ore processed at
the Karamken processing plant.
In 1992, ore reserves for the Kubaka Deposit were calculated and passed
State approval on July 19, 1993. In 1993, bidding was opened for commercial
development rights to the mineral resources of the Kubaka and Evenskoye
deposits. Omolon, a joint stock organization including five Russian partners and
Cyprus Amax won the bid and was issued the mining license for the Kubaka
deposit.
Construction of the mine and milling complex commenced in 1994 and was
completed at a total capital cost of approximately $242 million. This amount
included certain financing costs, working capital and approximately $14 million
in capitalized interest. Commercial production was achieved at Kubaka on June 1,
1997. The mine and mill have continued operations since then except for a short
period in September 1998.
GEOLOGY AND MINERALIZATION
The Kubaka gold deposit is located in an area of highly weathered
Paleozoic volcanic rocks resting on a Precambrian crystalline basement. The
Kubaka ore deposit is an epithermal quartz-adularia vein system hosted by
volcanic rocks and their sedimentary derivatives. Kubaka is older than, but
otherwise very similar to, volcanic hosted epithermal gold deposits found in the
North American Western Cordillera.
91
The ore body is located in a caldera represented by a crest like
depression about 2.5 kilometers in width and 4.2 kilometers in length. The
strata are complex and consist of sedimentary tuffs from the mid to late
Devonian in age. Tuffs and sandy tuff units are the main traps for the gold
mineralization. These are a few meters to tens of meters thick. The gold bearing
fluids utilized the ignimbrites for conduits and are 40 to 60 meters thick.
The mineralization at Kubaka extends over a strike length of 3.5
kilometers with the underground mining operation having a strike length of 2
kilometers. The Birkachan project has a strike length of 2.5 kilometers and is
open along strike both to the northeast and the southwest.
Commercial grade mineralization is found in three steeply dipping veins:
North, Central, and Zokol. The main Kubaka vein is steeply dipping and outcrops
at the surface. The vein consists of massive to finely banded quartz. Gold and
silver (electrum and other minerals) occurs in quartz. The gold to silver ratio
is approximately one to one.
EXPLORATION
Kinross will focus its exploration activities to identify resources that
can be quickly converted into reserves and provide mill feed for the Kubaka
processing plant in 2004. Exploration expenditures in 2003 were $1.3 million.
Planned exploration expenditures in 2004 are $2.5 million.
DRILLING, SAMPLE AND ANALYSIS AND SECURITY OF SAMPLES
The project area has been explored using reverse circulation and diamond
core drilling, with the majority being diamond core drilling. The resource at
Kubaka has been drilled on 20-meter sections, and in areas of complex geology or
high grade, drill density is increased to 10-meter sections. The majority of the
diamond drill holes are drilled at right angles to the vein (typically dipping
70 to 75 degrees). All of the exploration and reverse circulation infill data is
included in the geologic model.
Sample recovery for all the sampling methods is high. Very little water
has been encountered in both the diamond drilling and reverse circulation
drilling.
Samples are delivered to the assay department under direct control of
the geology department. All information is checked and verified by the
geological staff prior to entry into the geological database that is used to
create the resource models.
The local geologists and the technical services departments of Kinross
have developed the geological models. The reconciliation of the Kubaka geology
models with mining to date indicates a good correlation between the resource
model and production.
Drill and other exploration samples collected for use for geological
modeling and resource estimation are under the direct supervision of the
geological department and delivered to the assay laboratory under secure
conditions. 10% to 15% of all samples are resubmitted to the site laboratory as
check samples. This includes all exploration, infill, and production samples.
Also, check samples are sent to labs in the United States, Canada, and Irkutsk.
Over the last four years systematic but wide spaced exploration drilling
at the Birkachan gold prospect has partially identified a mineral deposit with
narrow high grade structures. Detailed drilling in the central Mezinitz valley
has outlined several near surface subparallel zones with potential for an open
pit. The low-grade mineralized zone hosting the higher-grade structures remains
open in two directions and the overall potential to expand the resource appears
to be good.
92
MINERAL RESERVE ESTIMATES
The following table sets forth the estimated proven and probable
reserves for the Kubaka mine as at December 31, 2003, and 2002, and represents
Kinross' 98.1% interest at December 31, 2003 and its 54.7% at December 31,2002:
2003 (AT A 2002 (AT A
GOLD PRICE OF GOLD PRICE OF
U.S. $325 PER U.S. $300 PER
OUNCE) OUNCE)(1)
----------------------------------------------- -----------------------------------------------
AVERAGE GOLD AVERAGE GOLD
TONNES GRADE CONTENT TONNES GRADE CONTENT
------ ----- ------- ------ ----- -------
(000'S) (GPT) (000'S OZ) (000'S) (GPT) (000'S OZ)
Proven(2) 903 3.92 114 920 4.46 132
Probable 720 12.80 296 33 22.62 24
----- ----- --- --- ----- ----
Total 1,623 7.86 410 953 5.09 156
===== ===== === === ===== ===
-------------------------
(1) Reflects Kinross' 54.7% interest at December 31, 2002.
(2) Includes 857,000 tonnes of stockpiled material at December 31, 2003,
with an average grade of 2.80 gpt or 78,000 ounces of proven gold
reserves and 857,000 tonnes of stockpiled material at December 31, 2003,
with an average grade of 10 gpt or 275,000 ounces of proven silver
reserves.
As at December 31, 2003, the Kubaka deposit did not host any measured
and indicated resources at an assumed gold price of U.S. $350 per ounce.
MINING AND MILLING OPERATIONS
Open pit mining ended in October 2002. Kinross commenced processing the
low-grade stockpiles and, during 2003, supplemented this with underground ore
from the North High Wall, Center Zone, and North Vein.
The underground projects represent extensions of the Kubaka ore zone
that could not be recovered through open pit mining. They will be mined with
conventional shrinkage and long-hole mining methods. These three underground
mining areas have ore mining widths ranging from one meter to six meters and
contain grades in excess of 10 grams per tonne.
The Center Zone is located in the bottom of the pit and is accessed with
a spiral ramp. The ore is mined with a long-hole mining method. The North Vein
is accessed from an existing drift and is mined utilizing a shrink stoping
method. The North High Wall underground mining operation was completed in the
first quarter of 2004.
The mineralized stockpiles will be depleted in the first quarter 2005.
The Kubaka underground operations (the Central Zone, and the North Vein), will
be exhausted by December 2004.
The mineralized stockpiles are located varying distances from the
crusher yard. Slightly less than half the mill feed for 2004 will come from
stockpile 6, located 1.1 kilometers from the crusher yard. The remaining feed
derived from stockpiles is located 1.9 kilometers from the crusher yard, in
stockpile 3. Both of these stockpiles will be transported to the crusher yard
with existing equipment at site. The stockpiles are frozen and require blasting
to loosen the material for processing.
93
The Birkachan deposit is located 28 kilometers north of the Kubaka mill.
It was discovered by drilling in 1999 as follow-up to regional stream sediment
and soil geochemistry surveys. It forms a complex of epithermal veins and
veinlet swarms in faulted Devonian volcanics similar to Kubaka. The surrounding
alteration and low grade mineralization can be traced for almost 3 kilometers
along the axis of the Mezinitz valley. To date, six different veins or zones
have been identified in over 80,000 meters of diamond drilling. Vein 5 and zone
4 have been drilled on 50 meter centers and, locally, 25 meter centers. This
mineralization is exploitable by open pit mining methods and contains an
estimated 299,000 tonnes of 10.70 grams per tonne gold in the probable reserve
category. Preliminary metallurgical testwork indicates the gold is recoverable
in the Kubaka mill circuit.
Kinross is conducting further drilling and exploration activities in
order to determine whether or not additional mineralization exists that could be
exploited by an underground mine.
To date, a 70 person camp, a maintenance shop, and a fuel and explosive
storage have been set up on site. Prestripping has started and it is expected
that stockpiling of ore will commence in the spring of 2004. Test pitting and
environmental permits have been received.
Open pit operations are expected to continue for 12 - 15 months after
which an underground access ramp is being planned. Trade-off studies to review
lower grade cutoffs to potentially expand the pit resource are underway.
The processing facility at Kubaka is a standard carbon-in-pulp milling
process. The mill processes ore on a 24 hour per day, 365 day per year schedule.
The stockpiled ore is loaded into and crushed in the jaw crusher and conveyed to
a crushed ore stockpile. The crushed ore is reclaimed and ground in a
semi-autogenous grinding mill followed by a ball mill. The ground ore is
thickened, and then leached in a cyanidation circuit. The grind thickener
overflow flows through a carbon column circuit to recover any gold leached in
the grinding circuit. The cyanidation circuit has four stages of leaching,
followed by a six stage carbon-in-pulp circuit. The loaded carbon from the
carbon circuits is stripped of the gold and silver in a pressure stripping
circuit. Gold and silver are then recovered in electrowinning cells and smelted
to produce dore bullion. As at December 31, 2003, the mill had processed 882,800
tonnes resulting in 164,006 recovered gold ounces.
The Kubaka operations maintain the highest standards of environmental
compliance and monitoring. An environmental engineer supported by staff in the
Magadan office and in the Kinross Corporate Environmental Department, conducts
various daily, weekly, and monthly monitoring activities in and around the
project site to assure environmental compliance.
Reclamation activities started in the second year of production, 1998.
Areas are actively reclaimed and seeded as mining progresses. Through 2003, 60
hectares had been fully reclaimed and an additional 51.4 hectares have been
partially reclaimed (top soil is placed, but it has not been seeded). In 2004,
the plan is to fully reclaim an additional 30 hectares. The net present value of
future cash outflows for site restoration costs at the Kubaka mine under CICA
Handbook section 3063, which is effective for fiscal years beginning January 1,
2004, are estimated to be $5.2 million at December 31, 2003. There is no
requirement to post financial assurance in Russian currently.
The underground project returns an operating profit over the duration of
the project life.
94
SUMMARY OF PRODUCTION AND FINANCIAL DATA
The following table summarizes certain gold production, operating and
financial data relating to Kinross' 98.1% ownership interest (net of
non-controlling interest) in the Kubaka mine for the 10 months ended December
31, 2003. Prior to February 28, 2003, Kinross owned 54.7% of the Kubaka mine.
YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
---- ---- ----
SELECTED PRODUCTION AND OPERATING INFORMATION
Tonnes mined (000's)(1).................................................... 141.4 6,227.5 9,938.9
Tonnes of ore processed (000's)(1)......................................... 882.8 849.9 889.3
Gold grade (gpt)........................................................... 6.42 14.93 15.28
Average gold recovery (%).................................................. 97 98 98
Gold equivalent production(3)..............................................164,006 220,972 237,162
Number of employees(2)..................................................... 451 374 466
SELECTED FINANCIAL INFORMATION (IN MILLIONS EXCEPT UNIT COSTS):(4)
Revenue....................................................................$ 61.0 $ 71.5 $ 71.3
------- ------- --------
Cost of production......................................................... 32.0 29.3 33.1
Inventory change/other..................................................... (1.9) (1.5) 1.0
Site restoration cost accruals............................................. 0.5 0.8 0.4
Depreciation, depletion and amortization................................... 16.7 20.1 24.0
Interest................................................................... 0.2 0.3 2.0
Foreign exchange gain...................................................... (0.8) -- --
Exploration................................................................ 1.3 1.2 2.1
------- -------- --------
48.0 50.2 62.6
------- ------- --------
Earnings before taxes...................................................... 13.0 21.3 8.7
Income and mining taxes.................................................... 3.6 6.2 4.3
Non-controlling interest................................................... 0.2 -- --
------- ------- --------
Net earnings...............................................................$ 9.2 $ 15.1 $ 4.4
======= ======= ========
OTHER FINANCIAL INFORMATION:
Capital expenditures (millions)(4).........................................$ 1.7 $ 0.1 $ 0.4
Unit costs:
Total cash costs per gold equivalent ounce produced......................$ 194 $ 133 $ 140
Total cash costs per tonne milled........................................$ 43 $ 63 $ 68
Total production cost per gold equivalent ounce..........................$ 300 $ 227 $ 242
-------------------------
(1) Tonnes mined and ore processed includes 100% of mine production.
(2) Number of employees includes all employees and contractors on site.
(3) Gold equivalent production is 98.1% of mine production for the 10 months
ended December 31, 2003, and 54.7% of mine production for the periods
prior to February 28, 2003.
(4) Selected financial information and capital expenditures are 100% of the
results of the Kubaka mine commencing March 1, 2003. Prior results are
54.7% of the Kubaka mine.
Total cash costs is a non-GAAP measure. For further information on this
non-GAAP measures, please refer to the disclosure under "Calculation of Total
Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations," above.
For further information on the 2003, 2002, and 2001, results, refer to
the disclosure included under "Kinross Management's Discussion and Analysis of
Financial Condition and Results of
Operations--Financial/Operations--Operations--Mine Operations--Kubaka (98.1%
ownership and operator), Russia."
95
PRODUCTION FORECAST, LIFE OF MINE, AND CAPITAL EXPENDITURES
It is anticipated that the production attributable to Kinross' 98.1%
interest in Kubaka during 2004 will be 132,042 gold equivalent ounces, with a
total cost per ton of $69, at an estimated mill recovery of 96%. Total estimated
production over the remaining life of mine, extending into 2009, is 423,000 of
gold equivalent ounces.
Kinross' share of capital expenditures at the Kubaka operations in 2003
was $1.7 million compared to $0.1 million during 2002. The majority of the
increase in capital expenditures in 2003 was due to equipment purchases for
underground mining. Kinross plans to spend $11.2 million in 2004 on capital
expenditures, principally to develop the Birkachan test pit and commence
underground exploration and development of the Tsokol vein.
96
KUBAKA SITE PLAN
[PICTURE]
97
LA COIPA MINE
Kinross owns a 50% interest in the La Coipa mine through a joint venture
with Placer Dome. Placer Dome is the operator of the mine. Kinross acquired the
La Coipa mine in connection with its acquisition of TVX in January 2003.
PROPERTY DESCRIPTION AND LOCATION
The La Coipa mine is located in the Atacama Region of northern Chile,
approximately 1,000 kilometers north of Santiago and 140 kilometers northwest of
the community of Copiapo, Chile. The mine is operated by a Chilean contractual
company, Compania Minera Mantos de Oro ("MDO"), a joint venture between a
wholly-owned subsidiary of Placer Dome (50%) and Kinross (50%). There are three
known deposits remaining within the government-approved La Coipa mining area:
Coipa Norte and Brecha Norte are currently being mined by open pit methods, and
Can-Can is planned for exploitation beginning in 2005. MDO is actively exploring
in the district.
The La Coipa mine consists of approximately 7,500 hectares of mineral
claims, of which the principal ones are Indagua, Marta, Escondida, Candelaria,
Eduardo, and Chimberos.
MDO has obtained a series of permits that allow exploration and mining
activities to proceed in the La Coipa area. No other permits need to be
obtained. MDO's land position includes 57 exploitation concessions covering
14,827 hectares and 38 exploration permits covering 6,600 hectares.
The exploration permits are valid for a two-year period from the date
they are declared in force and can be renewed once for another two-year period.
Thereafter the size of the exploration permit area must be reduced by half. MDO
can elect to apply for mining concessions in areas where exploration concessions
are held.
The exploitation or mining concessions can be held indefinitely as long
as the annual fees are paid to keep the permits in good standing. The
exploitation permits covering the La Coipa area give MDO the right to extract
the ore and to sell the final products into the open market.
The corporate income tax rate is forecast at 17% in 2004 and subsequent
years. Depreciation and amortization of capital costs is allowed as a deduction
in the calculation of taxable income. Corporate taxes are estimated at $1.9
million in 2004 with respect to Kinross' interest. An annual fee of $55,000 is
also assessed to maintain the mining claims in good standing.
No royalties are applicable on gold and silver produced from the mine,
but an annual preferred dividend of $1.8 million is payable. The joint venture
partners receive disbursements from the operation via common dividends from MDO.
A 35% withholding tax is applicable on all dividends disbursed to foreign
shareholders, less the corporate income tax already paid.
ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE, AND PHYSIOGRAPHY
The La Coipa mine is located approximately 1,000 kilometers north of
Santiago in Copiapo Province in the Atacama Region of the Chilean Andes. Access
is by a 140 kilometer road of which 30 kilometers are paved, from the regional
center of Copiapo, which is served daily by commercial airline from Santiago.
The nearest port, Caldera is 80 kilometers west of Copiapo. The mine is
connected to the national power grid system.
The mine lies in the Domeyko Cordillera at an elevation of between 3,800
and 4,400 meters, the plant site being at 3,815 meters. Current and future
mining operations are at elevations ranging from 4,040 meters to 4,390 meters.
98
The climate is considered pre-arid Mediterranean, subject to low
temperatures, strong winds and some snow during the winter. Despite the adverse
climate, mining operations are performed year-round without interruption.
Temperatures range from a high of 25 degrees Celsius (77 degrees Fahrenheit) to
a low of -10 degrees Celsius (14 degrees Fahrenheit). Water is scarce in the
area, but the Salar de Mericunga provides sufficient water to fulfill industrial
needs through an approximately 40 kilometer pipeline. Vegetation is sparse.
HISTORY
The earliest written information about La Coipa as a precious metal
prospect dates back almost a century, when a small underground copper-silver
mine was in operation about 2 kilometers southeast of the present day
operations. Regional resources have been sporadically exploited since then, but
the La Coipa area itself did not receive any attention from exploration
geologists until the late 1970s.
TVX acquired an initial indirect 49% interest in the La Coipa mine in
June 1988 from companies controlled by Eike Batista, Roberto Hagemann Gerstmann
and Jozsef Ambrus, which at the time held the remaining 51% interest. Pursuant
to the La Coipa acquisition agreement dated January 25, 1989, Placer Dome
acquired a 50% indirect interest in the La Coipa mine from both TVX and
companies controlled by Messrs. Batista, Gerstmann and Ambrus, pro rata as to
their respective interests in the La Coipa mine. The La Coipa acquisition
agreement also provided for the future operation of the La Coipa mine and the
respective responsibilities of the joint venture parties. As a result of this
transaction, TVX's indirect interest in the La Coipa mine was reduced to 24.5%
and the indirect interests of Messrs. Batista, Gerstmann and Ambrus was reduced
to 25.5%. Between 1989 and 1994, TVX increased its ownership in the La Coipa
mine to 50%.
Kinross acquired TVX's ownership in La Coipa on January 31, 2003, on
completion of the business combination of Kinross, TVX, and Echo Bay.
GEOLOGY AND MINERALIZATION
The La Coipa mine is located in the northern Chilean volcanic belt known
as the Maricunga belt. It hosts a series of deposits of economic interest,
including Esperanza, Lobo-Marte, El Hueso, and La Pepa.
The La Coipa and surrounding deposits form part of a precious metal
epithermal system. Three main mineralized zones are found at La Coipa. They are
Ladera-Farellon and Coipa Norte, about three kilometers apart, and the Chimberos
deposit approximately 25 kilometers northeast of the 15,000 tonnes per day
plant.
The eastern portion of Coipa Norte and Ladera-Farellon show high gold
grades associated with advanced argillic alteration (alunite -- kaolinite --
dickite, quartz) semi-tabular forms and ore hosted mainly in the
triassic-sedimentary rocks. Ladera-Farellon and western Coipa Norte have high
silver-to-gold ratios, mushroom-like shapes and are hosted in the tertiary
pyroclastic unit.
The most common precious metal-bearing minerals are cerargyrite, several
other silver halide complexes, native silver, electrum and native gold as free
particles in the size range of 0.5 to 50 microns. Mercury is common in all the
deposits and occurs as calomel.
All the known reserves at La Coipa are found in oxidized zones. Both
Ladera-Farellon and the silver orebody in Coipa Norte are located in the western
and upper portions of the mineralized zones. At Coipa Norte, the silver orebody
outcrops are closely associated with pervasively silicified rocks. The presence
of bedded outflow material and geyserites suggest that this area has not been
subjected to significant erosion.
99
EXPLORATION
Exploration work in the La Coipa district started in the late 1800s and
has been ongoing since, although the property ownership has changed a number of
times. Modern exploration techniques have been implemented starting in the late
1970s to early 1980s. They included geological mapping, geochemistry, channel
sampling, drilling and 800 meters of underground development.
Kinross' share of exploration expenditures totaled $0.9 million during
2003. Kinross' share of the planned exploration spending for 2004 is $0.8
million.
DRILLING, SAMPLE AND ANALYSIS AND SECURITY OF SAMPLES
Various drilling methods and sampling protocols have been used at La
Coipa. Diamond drill holes completed during the exploration phase were
systematically sampled in 2 meter intervals. Half the core was sent for assaying
and the other half stored in a warehouse near the camp. Reverse circulation
holes for both exploration and in-pit drilling are sampled in 2 meter long
"runs." All drill chips are also stored in the same location as the core.
Since 1984, a total of 97,225 meters in 2,002 holes has been completed
in the La Coipa mining area. Most of the exploration drilling was completed with
reverse circulation holes. All exploration holes are surveyed by the mining
surveyors. These holes have also been down-hole surveyed at about 20 meter
intervals. Most of the exploration holes are inclined holes.
Drill core is delivered to the exploration storage building located by
the camp at the mine complex. A geologist completes a written log for the hole
that includes geological and geotechnical information. The geological data
include identification of specific geological formations, color, alterations,
presence and visual estimate of sulphide and oxide minerals, nature of fracture
filling and a detailed geological description of the core that includes textural
and lithologic characteristics, contact styles and mineralization. Geotechnical
data are also recorded. Structures are described with measurements to determine
top, bottom, orientations and dip angles.
Standards are inserted by the mine laboratory. Duplicate analyses are
done from time to time at independent labs, including pulp duplicates of
selected samples.
The lab carefully monitors MDO's performance in all aspects of sample
preparation and assaying for exploration activities, the mine, the plant and the
refinery. Analyses are performed at the mine laboratory, with some exploration
samples sent to an outside laboratory. The La Coipa lab performs numerous
control checks when the drill or blast hole samples are received for preparation
and analysis. The lab department uses a set of quality assurance and quality
control protocols to monitor its own performance.
100
MINERAL RESERVES AND RESOURCE ESTIMATES
The following table sets forth the estimated proven and probable
reserves for the La Coipa mine as at December 31, 2003, and 2002, and represents
Kinross' 50% interest:
2003 (AT A 2002 (AT A
GOLD PRICE OF GOLD PRICE OF
U.S. $325 PER U.S. $300 PER
OUNCE) OUNCE)
------------------------------------------------ ------------------------------------------------
GOLD SILVER GOLD SILVER
TONNES GRADE GRADE TONNES GRADE GRADE
------ ----- ----- ------ ----- -----
(MILLIONS) (GPT) (GPT) (MILLIONS) (GPT) (GPT)
Proven(1) 11.4 1.20 69.5 14.0 1.15 58.3
Probable 4.3 1.04 89.5 3.8 1.05 47.4
---- ---- ---- ---- ---- ----
Total 15.7 1.16 75.0 17.8 1.13 56.0
==== ==== ==== ==== ==== ====
2003 (AT A GOLD PRICE OF 2002 (AT A GOLD PRICE OF
U.S. $325 PER OUNCE) U.S. $300 PER OUNCE)
------------------------------ --------------------------
GOLD SILVER GOLD SILVER
CONTENT CONTENT CONTENT CONTENT
(000'S OZ) (000'S OZ) (000'S OZ) (000'S OZ)
Proven 440 25,384 518 26,295
Probable 145 12,454 127 5,743
--- ------ --- ------
Total 584 37,837 645 32,038
=== ====== === ======
-------------------------
(1) Includes 3,813,000 tonnes stockpiled at December 31, 2003, with an
average grade of 2.80 gpt or 89,000 ounces of proven gold reserves and
3,813,000 tonnes stockpiled with an average grade of 47.2 gpt or
5,787,000 ounces of proven silver reserves.
In addition to proven and probable reserves, as at December 31, 2003,
the La Coipa mine has an estimated 0.353 million tonnes of measured and
indicated resources at an average grade of 0.57 grams of gold per tonne and 34.8
grams of silver per tonne at a gold price of U.S. $350 per ounce and a silver
price of U.S. $4.75 per ounce. UNITED STATES INVESTORS ARE ADVISED THAT THE
TERMS "MEASURED RESOURCES" AND "INDICATED RESOURCES" ARE RECOGNIZED BY CANADIAN
REGULATIONS BUT NOT BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION.
UNITED STATES INVESTORS ARE CAUTIONED NOT TO ASSUME THAT ALL OR ANY PART OF
MINERAL DEPOSITS IN THESE CATEGORIES WILL EVER BE CONVERTED INTO PROVEN AND
PROBABLE RESERVES.
MINING AND PROCESSING
The La Coipa mine currently operates two conventional open pits: Coipa
Norte, and Brecha Norte. A third pit, Can-Can, is scheduled to commence in 2005.
The current pits are mined on 10 meter benches with the final highwall
developed in a double-bench configuration.
The decision was made during 1997 to develop the Chimberos high-grade
silver deposit and work commenced in the fourth quarter of 1997. Milling of the
Chimberos ore commenced in July, 1998 and was completed in August, 1999.
Following the completion of the milling of the Chimberos ore in August, 1999,
production came from the reserves at La Coipa. In 2001, production from the
Ladera-Farellon open pit ceased and mining activities focused on the Coipa Norte
open pit which is to provide the majority of mill feed until 2007.
101
In the milling process, ore is crushed, then ground in a circuit
incorporating a semi-autogenous mill with a pebble crusher and two ball mills. A
new crushing system installed in October, 1999 allows throughput of up to 17,000
tonnes per day. The ground ore is leached, then filtered and washed to separate
out the tailings, and the solution is passed through a Merrill-Crowe plant. The
precipitate is then sent to the refinery.
Process plant gold and silver recoveries are forecast at approximately
80% and 60%, respectively. This compares to actual average recovery of 82.8% for
gold and 63% for silver over the past three years.
Water and power supplies are critical infrastructure aspects of the La
Coipa mine. Water requirements for the 15,000 tonnes per day plant are 100
liters per second and are obtained from underground springs which feed the Salar
de Maricunga, a saltwater lake 38 kilometers from the mine site. The water is
pumped via a pipeline built by MDO from the springs to the plant site. Power for
the 15,000 tonnes per day plant is supplied by the National Power grid from a
tie-in approximately 88 kilometers from La Coipa. MDO has built a substation at
Carrera Pinto which ties the line from the mine site into the grid.
The dore produced at the mine is shipped to refineries in the United
States and England, with gold and silver credited to MDO metal accounts. The
gold and silver are sold into world markets at spot prices.
The La Coipa mine received an ISO 14001 certification in July 2002 and
there are comprehensive procedures in place in the event of a safety or
environmental incident. The most significant environmental issue at the mine is
mercury contamination of the Campamento Aquifer. A processing plant incident in
1995 resulted in mercury-contaminated tailings being discharged at the tailings
site. Mercury-contaminated water has been detected in the aquifer since that
time. The mercury concentration in the water is adversely affected by the low
aquifer flow rates, estimated at 10 liters per second to 15 liters per second,
but low flow rates also reduce the rate of impact. This compares with 1,500
liters per second in the aquifer that serves as the source of water for the
mine.
As a remedial measure, MDO installed a fence of wells to intercept and
divert uncontaminated water through a pipeline around the problem area. Other
wells were also installed below the tailings area to collect contaminated water,
which was then pumped to the process plant for recycling. These measures were
not entirely successful, and so a water treatment plant was constructed further
downstream in 1999. The aquifer water is intercepted and passed through a resin
filter at the treatment plant where mercury is removed. It is not known how long
the plant, which is effective in removing mercury contamination, will have to
operate after mine closure.
Kinross' share of the net present value of future cash outflows for site
restoration costs at La Coipa under CICA Handbook section 3063, which is
effective for fiscal years beginning January 1, 2004, are estimated at $5.2
million at December 31, 2003. This includes costs to demolish and remove plant
site buildings, secure the pit area and prevent a safety hazard to the public,
and operate the water treatment facility for up to 20 years. Because of the lack
of vegetation in the area no major revegetation or resloping activities are
currently proposed. Small-scale experimentation with growing plants in the arid
climate is currently underway, and further field-testing is planned prior to
closure. There is no requirement to post financial assurance to secure site
restoration costs in Chile at present.
102
SUMMARY OF PRODUCTION AND FINANCIAL DATA
The following table summarizes certain gold production, operating and
financial data relating to Kinross' 50% ownership interest in the La Coipa mine
for the eleven months ended December 31, 2003. Information for the years ended
December 31, 2003, 2002, and 2001, is included for comparative purposes.
KINROSS
SHARE YEARS ENDED DECEMBER 31
----- -----------------------
2003 2003 2002 2001
---- ---- ---- ----
SELECTED PRODUCTION AND OPERATING INFORMATION:
Tonnes mined (000's)(1).................................. 34,866.0 38,329.0 31,734.0 34,001.0
Tonnes of ore processed (000's)(1)....................... 5,928.0 6,415.0 6,343.0 6,347.0
Gold grade (gpt)......................................... 1.20 1.20 1.10 0.70
Silver grade (gpt)....................................... 65.36 65.00 58.25 90.12
Average gold recovery (%)................................ 84 84 85 82
Average silver recovery (%).............................. 61 61 61 66
Production (ounces)(3)
Gold................................................... 92,961 99,637 95,989 58,424
Silver................................................. 3,793,568 4,066,554 3,594,763 6,059,869
Gold equivalent........................................ 144,125 154,518 149,284 155,915
Number of employees(2)................................... 704 704 736 705
SELECTED FINANCIAL INFORMATION
(IN MILLIONS EXCEPT UNIT COSTS):(3)
Revenue.................................................. $ 51.6 $ 53.0 $ 46.3 $ 41.4
-------- -------- ---------- --------
Cost of production....................................... 33.7 36.2 33.7 32.7
Inventory change/other................................... 0.6 (1.0) (0.1) (0.6)
Site restoration cost accruals........................... 0.6 0.6 0.5 0.5
Depreciation, depletion and amortization................. 8.9 9.2 12.2 15.8
Mining property write-down............................... -- -- -- 13.0
Loss on sale of assets 0.1 0.1 -- --
Interest................................................. 0.1 0.1 0.2 0.3
Foreign exchange loss (gain)............................. 1.1 1.1 (0.5) 0.6
Exploration.............................................. 0.9 0.9 0.7 0.3
-------- -------- ---------- --------
46.0 47.2 46.7 62.6
-------- -------- ---------- --------
Earnings (loss) before the undernoted.................... 5.6 5.8 (0.4) (21.2)
Income taxes............................................. 3.6 3.4 0.8 --
-------- -------- ---------- --------
Net earnings (loss)...................................... $ 2.0 $ 2.4 $ (1.2) $ (21.2)
======== ======== ========== ========
OTHER FINANCIAL INFORMATION:
Capital expenditures (millions)(3)....................... $ 0.5 $ 0.5 $ 0.9 $ 6.0
Unit costs:
Total cash costs per equivalent ounce produced......... $ 234 $ 234 $ 226 $ 210
Total cash costs per tonne milled...................... $ 11 $ 11 $ 11 $ 10
Total production cost per gold equivalent ounce........ $ 30 $ 298 $ 311 $ 314
-------------------------
(1) Tonnes mined and ore processed includes 100% of mine production.
(2) Number of employees includes all employees and contractors on site.
(3) Production, selected financial information and capital expenditures are
50% of the results of the La Coipa mine for the periods indicated.
Total cash costs is a non-GAAP measure. For further information on this
non-GAAP measures, please refer to the disclosure under "Calculation of Total
Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations," above.
103
For further information on the 2003 results, refer to the disclosure
included under "Kinross Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial/Operations--Operations--Mine
Operations--La Coipa (50% ownership, Placer Dome 50%, operator), Chile."
PRODUCTION FORECAST, LIFE OF MINE, AND CAPITAL EXPENDITURES
The proven and probable reserves are sufficient for six years of
production. The mine is scheduled to cease production in 2008 if additional
reserves are not found; however, Kinross believes there is significant potential
for additional reserves and resources near the present mine site.
Kinross' share of capital expenditures at the La Coipa mine in 2003 was
$0.5 million compared to $nil during 2002. The increase was due to the
completion of the TVX business combination on January 31, 2003. Kinross expects
to spend $1.4 million for its share of capital expenditures in 2004.
[PICTURE]
104
CRIXAS MINE
The Crixas mine is owned by Mineracao Serra Grande, S.A. ("MSG"), which
in turn is 50% owned by Newinco Comercio e Participacoes Limitada, a Brazilian
corporation wholly owned by Kinross, and 50% by Brazilian affiliates of
AngloGold. Kinross acquired the Crixas mine in its combination with TVX in
January 2003.
PROPERTY DESCRIPTION AND LOCATION
The Crixas mine is situated in central Goias State, Brazil,
approximately 250 kilometers northwest of Goiania, the state capital, and three
kilometers from the town of Crixas. The Crixas mine constitutes two currently
operating underground gold mines accessed by decline, Mina III and Mina Nova;
three orebodies that have been accessed by underground development, Corpo SUL,
Corpo IV, and Corpo V; and two orebodies under evaluation, Forquilha and
Palmeiras. The maximum production capacity of the mining complex is 740,000 ore
tonnes treated per year, constrained by the single ball mill in the grinding
circuit.
MSG has interests in mineral rights covering a total area of 15,488
hectares. These interests include two mining leases covering a combined area of
6,482 hectares, 19 exploration licenses over an area of 14,944 hectares. Mining
licenses are renewable annually and have no expiry date. Generally, exploration
licenses are valid for three years, extendable for additional two years.
The Crixas mine is exposed to potential environmental liabilities
related to the tailings storage area; waste rock storage on surface; industrial
plant site; site water management; and mining lease MM2286/35 (area of
historical mining by local miners or Garimpeiros). Preventive measures have been
taken to limit any potential environmental liabilities.
With regards to the MM2286/35 mining lease, there is an area where
approximately 100 Garimpeiros are currently conducting small scale mining
operations. This mining is illegal under Brazilian law, and has been ongoing for
many years. Mercury has been used to recover gold, and there is mercury
contamination in this area. These conditions existed when MSG purchased the
mining rights. MSG has prepared a thorough report documenting the existing
conditions in the area of the Garimpeiros. Current agreements state that MSG is
not responsible for the rehabilitation of the existing contamination. The cost
of rehabilitation has not been studied.
MSG's mining operation at Crixas is subject to a mining tax equal to 1%
of net sales and a tax on profit equal to the greater of: (a) 34% of actual
profit and (b) 3% of net sales. MSG is currently paying tax at a rate of 3% of
net sales from 2000 to 2004, when it will begin paying tax of 34% of profits.
ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE, AND PHYSIOGRAPHY
Access to the area is by a paved road which links the town of Crixas and
the Belem-Brasilia highway 120 kilometers to the southeast. There is an airstrip
suitable for small aircraft outside the town of Crixas.
In the area of the Crixas mine, the topography is slightly undulated
with vegetation close to savannah type (cerrado) with medium to small trees. The
elevation of the mine office is 385 meters.
The climate is characterized by two well defined seasons; the rainy
season with heavy precipitation and the dry season with low humidity values. The
rainy season is from October to March, with the remaining months hot and dry.
Annual rainfall is approximately 150 centimeters. Operations run year round,
with minimal disruptions due to weather.
105
Domestic water for the mine is supplied from wells. These wells also
supply the small amount of process make up water that is required. Due to the
high amount of annual rainfall, water recycling practices, and system of water
holding tanks on surface and underground, very little make up water is needed
for the process plant or the underground mines. Electrical power is supplied to
the site by a 135 kilometer power line connected to the national grid.
The mine has established surface areas for tailings disposal, waste
disposal and for mineral processing. These are all sufficient to meet the future
needs as defined by the life of mine plan. In the case of the tailings storage,
the impoundment dam will be raised an additional five vertical meters.
HISTORY
In January 1991, TVX acquired all of the issued and outstanding shares
of two wholly-owned subsidiaries of Inco Limited ("Inco") which held certain
gold exploration, development and mining interests. This transaction included a
50% interest in Mineracao Serra Grande S.A., which owns the Crixas mine in
Brazil.
Inco first began geological, geochemical and geophysical reconnaissance
work in the Crixas region in 1973. Detailed geological mapping and ground
magnetic surveys were completed and diamond drilling was conducted from 1973 to
1976. In 1976, Inco discovered gold mineralization below a group of excavations
known as the Mina III Old Workings and began concentrating its effort in that
area.
Subsequently, Inco decided to seek a partner to help fund further
exploration and development and, in April 1983, Kennecott Corporation signed an
option agreement to earn a 50% interest in the project. This agreement required
the submission of a feasibility study and the commitment to spend $21 million.
In 1986, Kennecott Corporation sold its participation in the project to an
affiliate of Anglo American, which continued underground development and
exploration and completed a feasibility study in 1987.
On October 16, 1987, the decision was made to proceed with the
development of a mine and associated processing facilities having an annual
throughput of 400,000 tonnes at a total capital cost of $73 million. Mining
started in 1987 with ore being stockpiled on the surface. Development was
largely completed by the end of 1989, enabling successful testing of the
metallurgical circuit to take place through the fourth quarter of 1989. Initial
dore bullion associated with this testing was poured on November 14, 1989.
Initial gold sales from the project occurred in January 1990.
In 1995, the annual site throughput was increased from 450,000 to
485,000 tonnes. The maximum annual throughput has subsequently been increased to
740,000 tonnes by feeding finer material to the ball mill.
Kinross acquired TVX's ownership in Crixas on January 31, 2003, on
completion of the business combination of Kinross, TVX, and Echo Bay.
GEOLOGY AND MINERALIZATION
The Crixas property is situated in the Crixas greenstone belt in the
State of Goias in central Brazil. It is located in a well-preserved tract of
Archean terrain composed of three slightly arcuate strips or belts of
volcano-sedimentary rocks trending in an approximately north-south direction.
They are intruded by granitic rocks and, in places, are partially covered by
younger rocks.
The Mina III gold deposit occurs within folded metavolcanic and
metasedimentary rocks of Archean age. The metamorphism in the area has been
described as upper greenschist facies which indicate conditions of medium
temperature. These rocks are well foliated and are largely constituted of
chlorite, biotite, graphite, carbonate and feldspar plus minor chloritoid and
garnet. Although uniformly foliated, the schists do not commonly exhibit joints
or shear fractures.
The Mina III deposit is a stratabound deposit. Mineralization occurs
within three stratagraphic horizons referred to as the Upper, Intermediate and
Lower Ore Zones. The ore grade portions of the three horizons are markedly
elongated in a west-northwest direction and are stacked vertically above one
another. About 60 meters of barren rock separate each ore zone from the next
overlying zone.
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The Upper Zone ore is geologically complex and includes massive
sulphide, chloritoid-garnet with lesser amounts of arsenopyrite, pyrrhotite and
magnetite and sericite, a quartz-sericite schist with minor disseminated
arsenopyrite and pyrrhotite. The Intermediate Zone ore is very similar to the
Upper Zone and is sandwiched within a dolomite unit. This zone is less
continuous than the other zones. The Lower Zone ore is associated with a very
persistent metachert horizon which has been traced by drilling for 1,800 meters
down plunge. Gold mineralization occurs within the metachert, at the footwall of
the chert and in the foot and hangingwall of the graphite schists.
The Mina Nova orebody lies two kilometers north of Mina III and occurs
as a series of elongate tabular bodies, horizontal in the east and dipping in
the west. Mineralization occurs as disseminated sulphides, predominantly
Pyrrhotite, hosted in graphitic schist. Abundant quartz mineralization occurs at
the base of the mineralized sequences. The hangingwall is well defined and
marked by a sharp increase in the percentage of arsenopyrite present. The basal
quartz mineralization carries fine grained free gold and during the mining
process this unit is preferentially mined as dilution over the hangingwall.
Minor quartz carbonate veining occurs with pyrrhotite and indicates areas of
elevated grade.
EXPLORATION
Kinross' share of exploration expenditures totaled $0.5 million during
2003. Kinross' share of the planned exploration spending for 2004 is $0.5
million.
DRILLING, SAMPLE AND ANALYSIS AND SECURITY OF SAMPLES
The sampling methodology at Crixas is dependent on the particular
orebody being investigated and has a direct influence on the classification
category applied to the resources and reserves. There are three primary sources
of information, surface and underground diamond drilling and underground chip
sampling.
The surface drilling is used, primarily, for exploration and delineation
of the orebody at depth. Underground drilling is used for improving confidence
in the location and form of the orebody and for definition of inferred and
indicated resources. The chip sampling is used, along with the drilling results,
for calculation of grade of the measured and indicated resources and for
locating the hangingwall and footwall contacts for mining.
Surface drilling is carried out by conventional diamond core drilling.
Drill samples are taken at 1 meter intervals with a 20% variance in sample
length to take account of significant geological contacts. The average recovery
is quite high, at in excess of 95%. Given the competency of the rock and the
general ground conditions it is unlikely that there would be significant core
loss when drilling in the vicinity of the orebody.
Surface drilling is carried out at 25 to 50 meters spaced intervals
along drill lines spaced approximately 100 meters apart. Drilling is generally
carried out with orientations to the east-southeast in order to provide the best
intersection with the orebodies. Downhole surveys are carried out at 15 meters
intervals using Sperry Sun and Tropari instruments. All core is sawn in half
with one half provided for assay and the remaining half retained for data
verification work.
Core is obtained from underground drilling and is used for sampling of
indicated panels in order to bring them into the measured category. As with the
surface drilling, the sampling is carried out at one-meter intervals. The whole
core sample is crushed for sampling and therefore detailed geological logging is
necessary prior to crushing.
107
At the Upper Zone in Mina III, the drilling is carried out in a 360
degree fan pattern in order to define the lateral extent of the discontinuous
orebodies. Drill sections are spaced at 15 to 20 meter intervals along
development drives. The mineralization in the Lower Zone tends to be more
continuous and drilling is carried out on drill lines 30 meters apart. Drilling
is carried out from development drives parallel to the plunge direction.
The majority of the underground sampling is carried out using what is
referred to as channel sampling. The method would more accurately be described
as chip sampling. Chip samples are collected on two-meter intervals along
development drives and in raises developed through the orebody between levels.
Samples are collected in one-meter intervals starting approximately one-meter in
the footwall. The footwall can generally be defined visually in the drives and
stopes and the quartz orebodies, in particular, are easily identifiable. The
sampling is carried out along the circumference of the drive outline after the
rock face has been washed down and the sample line located by the survey.
Sampling occurs across the dip of the orebody and, where the full
thickness of the orebody is not exposed, short diamond holes are drilled
horizontally into the hangingwall and/or footwall to provide a full
intersection.
All sample preparation and analysis is carried out at the laboratory
facilities situated at the Crixas mine. The laboratory at Crixas is responsible
for analysis of all samples originating from the metallurgical plant, tailings
and underground sampling (drilling and channel samples). Exploration samples are
analyzed by an independent laboratory. Samples from the various sources are kept
separate and analyzed in separate batches and, in some cases, dedicated
equipment is reserved for particular sample types. Quality checks are carried
out internally and externally at other laboratories in Brazil.
MINERAL RESERVE AND RESOURCE ESTIMATES
The following table sets forth the estimated proven and probable
reserves for the Crixas mine as at December 31, 2003, and 2002, and represents
Kinross' 50% interest:
2003 (AT A 2002 (AT A
GOLD PRICE OF GOLD PRICE OF
U.S. $325 PER U.S. $300 PER
OUNCE) OUNCE)
------------------------------------------------ ------------------------------------------------
AVERAGE GOLD AVERAGE GOLD
TONNES GRADE CONTENT TONNES GRADE CONTENT
------ ----- ------- ------ ----- -------
(000'S) (GPT) (000'S OZ) (000'S) (GPT) (000'S OZ)
Proven 1,569 6.39 323 1,392 7.64 342
Probable 577 7.92 147 526 8.04 136
----- ---- --- ----- ---- ---
Total 2,146 6.81 470 1,918 7.75 478
===== ==== === ===== ==== ===
In addition to proven and probably reserves, as at December 31, 2003,
the Crixas mine has an estimated 76,000 tonnes of measured and indicated
resources at an average grade of 1.51 grams of gold per tonne at a gold price of
U.S. $350 per ounce. UNITED STATES INVESTORS ARE ADVISED THAT THE TERMS
"MEASURED RESOURCES" AND "INDICATED RESOURCES" ARE RECOGNIZED BY CANADIAN
REGULATIONS BUT NOT BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION.
UNITED STATES INVESTORS ARE CAUTIONED NOT TO ASSUME THAT ALL OR ANY PART OF
MINERAL DEPOSITS IN THESE CATEGORIES WILL EVER BE CONVERTED INTO PROVEN AND
PROBABLE RESERVES.
108
MINING AND PROCESSING
The Crixas mine is an underground operation accessed from the surface by
means of a decline ramp. The mining methods used are primarily mechanized
cut-and-fill and room-and-pillar with some slusher mucking. Ore is transported
to surface by 25 tonne trucks. The life of mine plan is based on a combined
production rate of 735,000 tonnes per year. For 2004, Mina III will contribute
456,000 tonnes (63%) and Mina Nova 270,000 tonnes (37%). Both mines operate 24
hours per day, 7 days per week, with a total of 341 operating days scheduled per
year. At the Mina III deposit, the overall mining sequence has been from the
top, downward. The main ramp has been advanced down to 550 meters level, while
levels 350 to 450 meters represent the current mining horizon.
The mining methods used at Crixas are mechanized cut and fill and room
and pillar.
The ore is processed at an on-site mill which has a 725,000 tonnes per
annum capacity. The mill operates 362 days per year and uses the Merrill-Crowe
zinc precipitation process to recover gold.
Mill tailings are deposited in a tailings area located in a natural
valley approximately two kilometers from the plant. A second dam, located down
the valley, acts as an overflow catchment area during periods of high rainfall.
Decanted solutions from the tailings area are recirculated as mill process
makeup water.
At the Mina III deposit, mine dewatering requirements average 80 cubic
meters per hour, increasing to 170 cubic meters per hour during backfilling. The
main sump on the 150 meter level is equipped with three 112 kilowatt slurry
pumps in series, capable of a total of 220 cubic meters per hour. Each main
level has a sump and 93 kilowatt slurry pump to deliver water to the main sump.
The main sump delivers water to one of the thickeners in the mill, used to
clarify the water. Water from the thickener is recycled to the mine.
The Mina Nova is a relatively shallow mine, and there is a river flowing
over it (Rio Vermelho). For this reason the geomechanical design of the mine is
being carefully engineered and monitored. No instability has been detected.
Hydrogeologic studies have been undertaken at Mina III and Mina Nova to
characterize the permeability of the rock. The hydraulic transmissibility is
very low due to the presence of schist type rocks.
In Brazil, electricity is predominantly (90%) sourced from
hydro-electric power. Low rainfalls in recent years caused serious energy
shortfalls. In response to this shortfall, the Crixas mine secured alternative
electricity supplies from rented generators and buying power on the market.
Rainfall has been above normal in 2004 and the cost and availability of
electricity has returned to normal levels.
MSG sells the refined gold from the Crixas mine at spot prices and
provides a dividend to Kinross.
The net present value of future cash outflows for site restoration costs
for Kinross' 50% ownership interest in Crixas under CICA Handbook section 3063,
which is effective for fiscal years beginning January 1, 2004, was $1.2 million
at December 31, 2003. Currently in Brazil there are no laws requiring the
posting of a reclamation bond or other financial assurance.
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SUMMARY OF PRODUCTION AND FINANCIAL DATA
The following table summarizes certain gold production, operating and
financial data relating to Kinross' 50% ownership interest in the Crixas mine
for the eleven months ended December 31, 2003. Information for the years ended
December 31, 2003, 2002, and 2001, is included for comparative purposes.
KINROSS
SHARE YEARS ENDED DECEMBER 31,
----- ------------------------
2003 2003 2002 2001
---- ---- ---- ----
SELECTED PRODUCTION AND OPERATING INFORMATION:
Tonnes mined (000's)(1).................................. 684.1 747.5 743.0 740.3
Tonnes of ore processed (000's)(1)....................... 684.1 747.5 743.0 740.3
Gold grade (gpt)......................................... 8.20 8.20 8.20 8.50
Average gold recovery (%)................................ 96 96 96 95
Gold equivalent production(3)............................ 86,698 94,746 93,660 96,157
Number of employees(2)................................... 644 644 625 652
SELECTED FINANCIAL INFORMATION
(IN MILLIONS EXCEPT UNIT COSTS):(3)
Revenue.................................................. $ 32.7 $ 35.2 $ 30.7 $ 27.5
-------- -------- ------- -------
Cost of production....................................... 9.5 10.3 8.2 10.6
Inventory change/other................................... 0.8 0.7 0.2 0.1
Site restoration cost accruals........................... 0.2 0.2 0.1 0.3
Depreciation, depletion and amortization................. 9.1 9.4 4.7 4.7
Loss on sale of assets................................... 0.3 0.4 0.1 --
Interest................................................. -- -- 0.2 0.5
Foreign exchange (gain) loss............................. (0.1) (0.2) 0.6 0.6
Exploration.............................................. 0.5. 0.5 0.5 0.3
-------- -------- ------- -------
20.3 21.3 14.6 17.1
-------- -------- ------- -------
Earnings before the undernoted........................... 12.4 13.9 16.1 10.4
Income taxes............................................. 0.5 0.8 1.5 1.4
-------- -------- ------- -------
Net earnings............................................. $ 11.9 $ 13.1 $ 14.6 $ 9.0
======== ======== ======= =======
OTHER FINANCIAL INFORMATION:
Capital expenditures (millions)(3)....................... $ 3.2 $ 3.3 $ 1.8 $ 3.3
Unit costs:
Total cash costs per equivalent ounce produced......... $ 109 $ 109 $ 88 $ 110
Total cash costs per tonne milled...................... $ 28 $ 28 $ 22 $ 29
Total production cost per gold equivalent ounce........ $ 217 $ 210 $ 139 $ 162
-------------------------
(1) Tonnes mined and ore processed includes 100% of mine production.
(2) Number of employees includes all employees and contractors on site.
(3) Gold equivalent production, selected financial information and capital
expenditures are 50% of the results of the Crixas mine for the periods
indicated.
Total cash costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under "Calculation of Total
Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations," above.
For further information on the 2003 results, refer to the disclosure
included under "Kinross Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial/Operations--Operations--Mine
Operations--Crixas (50% ownership, Anglo Gold 50%, operatoR), Brazil."
110
PRODUCTION FORECAST, LIFE OF MINE, AND CAPITAL EXPENDITURES
The life of mine plan based on proven and probable mineral reserves
indicates a remaining mine life into 2007.
Kinross' share of capital expenditures at the Crixas mine in 2003 was
$3.2 million compared to $nil during 2002. The increase was due to the
completion of the TVX business combination on January 31, 2003. Kinross' planned
expenditures for 2004 are $3.3 million.
[PICTURE]
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PARACATU (BRASILIA) MINE
The Paracatu (Brasilia) mine is held by Rio Paracatu Mineracao S.A.
("RPM"), which is 49% owned by Kinross and 51% owned by a subsidiary of Rio
Tinto. The mine is operated by Rio Tinto. Kinross acquired its interest in the
Paracatu (Brasilia) mine in its combination with TVX in January 2003.
PROPERTY DESCRIPTION AND LOCATION
The large scale open pit mine is located less than two kilometers north
of Paracatu City, situated in the northwest part of Minas Gerais State, 230
kilometers from Brasilia, the capital of Brazil, on the paved highway connecting
Paracatu (Brasilia) with Belo Horizonte, the state capital of Minas Gerais.
The mine site is comprised of an open pit mine, a mineral processing
plant, tailings storage facilities and related surface infrastructure, currently
operating at approximately 20 million tonnes per year. No waste stripping is
required, nor is drilling and blasting employed in the mine, as the weathered
ore is ripped by bulldozers prior to excavation. The open pit benching operation
measures approximately four kilometers by two kilometers, and it is located on a
gently sloping hillside. The elevation of the open pit and industrial plant area
ranges from approximately 720 to 820 meters.
RPM holds two mining licenses covering the area (approximately 1,253
hectares) of the open pit mine. RPM also holds two exploration permits in the
immediate mine area know as "Alvara de Pesquisa." Generally, these permits are
valid for three years, extendable for an additional two years.
RPM must pay a third party royalty of 0.33% of net sales to a
landholder.
The Paracatu (Brasilia) mine is exposed to limited environmental
liabilities related to the following: site water management; main tailings
storage area; sulphide tailings storage area; industrial plant site; and
airborne dust. Environmental liabilities are being minimized through good
management practices.
RPM's mining operations at Paracatu (Brasilia) are subject to a mining
tax equal to 1% of net sales and a tax on profit equal to the greater of: (a)
34% of actual profit; and (b) 3% of net sales.
ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE, AND PHYSIOGRAPHY
Access to the Paracatu (Brasilia) mine is by paved road, as the mine is
located next to the city of Paracatu, which lies on the main highway between Rio
de Janeiro and Brasilia, the national capital. There is also an airstrip
suitable for small aircraft in the city of Paracatu.
The local terrain is dominated by low rolling hills, largely cleared,
and supporting mixed agriculture of dairy and beef cattle farming and intensive
irrigated cropping, primarily soya beans.
The average rainfall varies between 1,800 and 2,000 millimeters per year
occurring in a distinct wet season between October and March.
Most of the labor force resides in the city of Paracatu.
Domestic water for the mine is obtained from the city of Paracatu,
delivered by truck. Process water is recycled from the tailings pond. Some make
up water is drawn from two rivers during the rainy season, as needed, to ensure
that the water level in the tailings pond is sufficient for the dry part of the
year. These are the Sao Domingos and Sao Pedro rivers. The mine also has access
to artesian wells as an emergency water supply.
112
The mine is connected to the national power grid, which relies mainly on
hydroelectric generation. Electricity is supplied in a free market with
consumers able to select their supplier of choice. RPM obtains electricity from
Centrais Electricias Minas Gerias. Some power supply outages have been
experienced during the rainy season due to water getting into high voltage
equipment, but these have not had a significant impact on production. The mine
has a small emergency power capability, used for critical process equipment that
cannot be suddenly stopped such as thickeners and CIL tanks.
HISTORY
Paracatu's (Brasilia) history is intimately linked to the Portuguese
bandeirantes expeditions prospecting for gold in the interior of Brazil. They
arrived in the region in 1722 after the discovery of gold-bearing alluvial fans.
The extractive activity had its peak during the second half of the 18th century,
when not only the alluvial deposits where mined but also the oxidized ore
outcropping on the top of Morro do Ouro Hill (or "Hill of Gold"), at the time
called Morro da Cruz das Almas; also in this period there were mining activities
on the alluvial terraces along Rico river. With the gold occurrences becoming
lean, production declined sharply during the first decade of the 19th century.
From this period "garimpagem" was practiced by Paracatu inhabitants only for
their subsistence. Various prospectors studied the region but did not turn the
extraction economically viable due to the low grade of gold in the ore.
Beginning in 1970, Paracatu (Brasilia) attracted some attention from the
mineral exploration companies that were interested mainly in lead and zinc. The
interest in the gold of Morro do Ouro was secondary, as the majority of the
companies were not attracted by the gold grade, which was considered to be
uneconomic.
In 1980, Rio Tinto Zinc (currently Rio Tinto plc.) that operated in
Brazil under the name of Riofinex do Brasil, joined with Billiton in a
partnership. Billiton owned the Morro do Ouro area but had no interest in
investing in the area. In 1984 Billiton sold the balance of its shares to
Riofinex, and Riofinex became the sole controller of the prospective area. At
the end of 1984, based on the data from hundreds of deep shafts (up to a 25
meter depth) and 44 drill holes, a reserve of 97.5 million tonnes at 0.587 grams
per tonne of gold was estimated. This estimate only included the superficial
oxidized ore, currently categorized as type CT. In spite of the low gold grade
of the ore, the geologists responsible for exploration (namely, Antonio Zini and
Rubes Forlin) believed that these exploration results could generate a
profitable business, and in 1985 this was confirmed by financial viability
studies. Total investment up to that time was $7.3 million including ground
acquisition costs, exploration costs, and the cost of feasibility studies.
The holding company approved the initiation of a mining project at a
capital cost of approximately $65 million, on the condition that a Brazilian
partner could be secured for the venture. At the end of 1985, RTZ Mineracao (now
Rio Tinto Brasil), arranged with Autram Mineracao e Participacoes S.A. (now TVX
Participacoes S.A.) to joint venture the project through a new company, RPM,
with Rio Tinto Brasil having a 51% interest and TVX Participacoes S.A. a 49%
interest.
The mine began production in October, 1987, treating oxidized ore. The
first bar of gold was produced in December, 1987. Ore milled in the following
year was 6.1 million tonnes averaging 0.652 grams per tonne of gold. In 1993 the
milling rate reached 13 million tonnes per year. Mill throughput in 2000 was
19.7 million tonnes averaging 0.467 grams per tonne of gold.
Until 1997 the mill was fed exclusively with oxide ore. Since 1998
primary sulphide mineralization has also been fed to the mill, without any drop
in grade, though that has required a series of investments in the beneficiation
and metallurgical circuits.
Kinross acquired TVX's ownership in the Paracatu (Brasilia) mine on
January 31, 2003, on completion of the business combination of Kinross, TVX, and
Echo Bay.
113
EXPLORATION
Kinross did not incur any exploration expenditures in 2003 nor are any
planned for 2004.
GEOLOGY AND MINERALIZATION
The host rock comprising the Morro do Ouro deposit lies within a
sandstone-shale succession of sedimentary rocks known as the Paracatu Formation.
These rocks are part of the central Brazilian shield, are Proterozoic in age and
form part of a marine sequence containing carbonates, shales, and sandstone.
The portion of the Paracatu Formation of economic interest is a very
well laminated, dark grey phyllite with thin lenses of carbonate and lenses or
single crystals of sulphides, and contains a thin but persistent band of
quartzite and other thinner and less consistent sandstone horizons. Quartz is
present as variably-sized occurrences up to 0.5 meters in size, called boudins.
Gold is present as the native metal, alloyed with minor amounts of silver, and
tends to occur around the quartz boudins particularly where the boudins are
marked by layers of iron carbonates and/or pyrrhotite. The weathered 40 meter
thick phyllite package was the object of the mining plan to the end of 1997 and
has been subdivided from top to bottom into ore types C, T, B1 and B2.
Underlying the B1 ore the mineralization extends for approximately 30 meters
more, hosted in a layer of partially weathered phyllite with visible sulphide
(total sulphur exceeds one per cent) and high graphitic content. The grade of
this lower phyllite layer, known as type B2 ore, is similar to the remainder of
the orebody.
The mineralization appears to be cut off to the north by a major fault
which trends east-northeast. The offset and true morphology of this fault are
not clearly understood but it is used as a hard boundary for the resource
estimation and it is assumed that the upthrow is to the north which would
indicate that the orebody on the north of the fault has been eroded. The western
boundary of the mineralization is also currently defined by a fault. Once again
the morphology of this fault is poorly understood and it is assumed that
downthrow occurs to the west. The western boundary fault strikes to the
north-northwest and is believed to follow a linear topographic low feature to
the west of the river valley, which forms the limit of the current mining
operation.
DRILLING, SAMPLE AND ANALYSIS AND SECURITY OF SAMPLES
In the 1970's the area was prospected extensively for lead and zinc and
in 1984 Rio Tinto took over the Billiton share of the exploration license over
the Morro do Ouro area. By the end of 1984 a reserve had been delineated based
on 44 drill holes and 458 surface pits (25 meter maximum depth). This reserve
was stated to be 97.5 million tonnes at 0.59 grams per tonne of gold and was
exclusively composed of C and T type ore.
Various drilling and pitting campaigns have been carried out over the
years on a grid spacing of between 50 meters and 400 meters. To date, the total
sampling consists of 1,129 drill holes 31,473 meters of drilling and 29,767
one-meter samples. In 1989, a reverse circulation drill campaign was carried out
with 67 holes drilled on a 400 meter by 200 meter grid. The results of this
drilling exhibited a 25-30% drop in grade when compared to the diamond core
drilling campaigns. However, the data from these reverse circulation rotary
holes is currently retained in the drillhole database and is used for the
resource calculations. Until 1993 drilling was restricted to the oxide capping,
but since 1993 drilling has been extended into the fresh sulphide material of
the B2 horizon. The orebody is now effectively covered with a 100 meter grid of
drillholes. Definition of fault boundaries has led to a better understanding of
the boundaries of the deposit and future drilling is planned to deepen existing
holes rather than drill any new areas around the periphery of the orebody.
Currently, some 50% of the drilling do not intersect the full thickness of the
orebody. The plan calls for drilling some 2,000 meters a year and it is
estimated that at least 13,000 meters of additional drilling are required to
complete all holes in the orebody footwall.
The current understanding is that the orebody boundaries are defined
laterally. The exception to this is in the west of the deposit on the western
side of the Corrego Rico river valley where a series of deep drillholes are
planned to test the down dip extension of the orebody. It is believed that the
orebody may be up to 160 meters deep in this area. The river currently forms the
western boundary of the mining operation.
114
Since the initial exploration campaign, virtually all sampling has been
carried out by diamond drilling. The majority of this has been through core
drilling with only a restricted reverse circulation rotary campaign in 1989.
Prior to 1999 all holes were drilled with a 51 x 6 inch diameter barrel.
However, since 1999 the core size has been reduced to 3 inches.
Core recovery is high, with a consistent recovery of greater than 95%.
Prior to crushing, the core is photographed and logged.
Density measurements have been collected from the deposit at various
times from feasibility through to current production.
During evaluation drilling, samples of core are taken from one-meter
intervals, weighed, and specific gravity is determined using the water
displacement method.
Assaying is carried out on 50 gram aliquots. A total of six separate
assays for gold are carried out from each 1 meter sample pulp. A sulphur assay
value is calculated for each sample. Additional elements assayed are arsenic,
copper, lead, zinc, manganese, cadmium and silver. The last two elements are not
assayed as a matter of course.
Interlaboratory check assay exercises are carried out between the RPM
internal laboratory and the laboratory at Lakefield Research in Canada.
Additional check assay work is carried out at the Phalabwora mine laboratory in
South Africa. For these checks the coarse reject is sent to the external
facilities to allow preparation of an independently produced pulp.
MINERAL RESERVE AND RESOURCE ESTIMATES
The following table sets forth the estimated proven and probable
reserves for the Paracatu (Brasilia) mine as at December 31, 2003, and 2002, and
represents Kinross' 49% interest:
2003 (AT A 2002 (AT A
GOLD PRICE OF GOLD PRICE OF
U.S. $325 PER U.S. $300 PER
OUNCE) OUNCE)
------------------------------------------------- -------------------------------------------------
AVERAGE GOLD AVERAGE GOLD
TONNES GRADE CONTENT TONNES GRADE CONTENT
------ ----- ------- ------ ----- -------
(MILLIONS) (GPT) (000'S OZ) (MILLIONS) (GPT) (000'S OZ)
Proven 164.0 0.42 2,225 156.4 0.43 2,163
Probable 31.8 0.38 388 24.4 0.43 337
----- ---- ----- ----- ---- -----
Total 195.8 0.42 2,613 180.9 0.43 2,500
===== ==== ===== ===== ==== =====
In addition to proven and probable reserves, as at December 31, 2003,
the Paracatu (Brasilia) mine has an estimated 76.63 million tonnes of measured
and indicated resources at an average grade of 0.39 grams of gold per tonne.
UNITED STATES INVESTORS ARE ADVISED THAT THE TERMS "MEASURED RESOURCES" AND
"INDICATED RESOURCES" ARE RECOGNIZED BY CANADIAN REGULATIONS BUT NOT BY THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION. UNITED STATES INVESTORS ARE
CAUTIONED NOT TO ASSUME THAT ALL OR ANY PART OF MINERAL DEPOSITS IN THESE
CATEGORIES WILL EVER BE CONVERTED INTO PROVEN AND PROBABLE RESERVES.
115
MINING AND MILLING OPERATIONS
The Paracatu (Brasilia) mine is a high tonnage low-grade open pit
operation. The mine is unusual in that the entire pit is either free dug or
utilizes ripping and dozing with no drilling and blasting. Weathering has led to
the development of an oxidized mantle over the sulphide mineralization with
thickness varying from 20 to 40 meters. The economic viability of this low-grade
orebody has been partly derived from the soft rock and free gold in the
weathered mantle. Also, the mine is situated on a gently sloping hillside and
there are no waste stripping requirements.
The ore, which is mined from the surface and requires no drilling or
stripping, and minimal blasting, is loaded by front-end loaders into 85 and 100
tonne trucks which transport the ore to the crushers. Exploration started in
1999 to evaluate extensions of the orebody both laterally and at depth. The mill
and mine operate 24 hours per day, 7 days per week. The nominal plant throughput
is 1.6 million tonnes per month. An ore stockpile of approximately 10 days
production is maintained near the processing plant. Its main purpose is to
ensure uninterrupted mill feed in the rainy season when some delays may be
experienced in the pit during extreme rainfall. During the dry season the
stockpile can be used if the pit becomes too dusty. RPM is committed to
controlling dust levels on site and in the city.
Ore is crushed and ground prior to introduction into a flotation
circuit. The concentrate is treated by gravimetric methods first and the coarser
gold is recovered. The concentrate reject from the gravimetric plant is then
treated by a conventional cyanidation and carbon-in-leach circuit developed by
Rio Tinto Zinc.
The processing plant, subjected to several upgrades over the mine life,
currently processes 20 million tonnes per year. Significant repairs were
required to all mills in 2001 due to the development of extensive cracks in
welds directly associated with the processing of harder ore.
Since start up, the mined grade has declined, but has stabilized since
the late-1990s near 0.43 grams per tonne of gold that is essentially reserve
grade. Despite the downward trend in grade, gold production has increased. This
is due to the fact that site production has significantly increased, more than
offsetting the reduction in grades. Also, the total metallurgical gold recovery
achieved each year has remained relatively steady, despite the decrease in
grades.
Rio Tinto Brasil sells the gold from the Paracatu (Brasilia) mine at
spot prices.
As at December 31, 2003, Kinross' share of the net present value of
future cash outflows for site restoration costs for Paracatu (Brasilia) under
CICA Handbook section 3063, which is effective for fiscal years beginning
January 1, 2004, was $7.3 million. The mine currently has many years of life
remaining, and the estimated cost will very likely be affected by variances in
the exchange rate.
Currently in Brazil there are no laws requiring the posting of a
reclamation bond or other financial assurance.
There is a plan to mine oxide ore only during the last year of
production. This will provide a cover for the main tailings pond, which will
then be drained. The closure plan involves placing a 1-meter thickness of cover
materials on the final pit floor, the top 0.8 of a meter being soil material.
116
SUMMARY OF PRODUCTION AND FINANCIAL DATA
The following table summarizes certain gold production, operating and
financial data relating to Kinross' 49% ownership interest in the Paracatu
(Brasilia) mine for the eleven months ended December 31, 2003. Information for
the years ended December 31, 2003, 2002, and 2001, is included for comparative
purposes.
KINROSS
SHARE YEARS ENDED DECEMBER 31,
----- ------------------------
2003 2003 2002 2001
---- ---- ---- ----
SELECTED PRODUCTION AND OPERATING INFORMATION:
Tonnes mined (000's)(1)................................ 17,263.0 18,613.0 18,400.0 16,500.0
Tonnes of ore processed (000's)(1)..................... 16,891.4 18,411.0 18,400.0 16,500.0
Gold grade (gpt)....................................... 0.40 0.44 0.48 0.45
Average gold recovery (%).............................. 77 77 79 78
Gold equivalent production(3).......................... 91,176 98,326 110,035 91,588
Number of employees(2)................................. 696 696 724 644
SELECTED FINANCIAL INFORMATION
(IN MILLIONS EXCEPT UNIT COSTS):(3)
Revenue................................................ $ 33.6 $ 37.0 $ 35.3 $ 27.1
-------- -------- -------- --------
Cost of production..................................... 17.3 18.6 18.4 17.5
Inventory change/other................................. 0.4 0.8 (0.3) 0.4
Site restoration costs accruals........................ 0.8 0.9 1.0 1.1
Depreciation, depletion and amortization............... 5.7 6.1 4.5 4.0
Care and maintenance................................... 1.4 1.2 -- --
Interest............................................... 0.1 0.1 0.1 0.6
Foreign exchange (gain) loss........................... (1.1) (1.2) 4.2 2.3
-------- -------- -------- --------
24.6 26.5 27.9 25.9
-------- -------- -------- --------
Earnings before the undernoted......................... 9.0 10.5 7.4 1.2
Income taxes (recovery)................................ 2.5 2.9 0.8 (0.2)
-------- -------- -------- --------
Net earnings........................................... $ 6.5 $ 7.6 $ 6.6 $ 1.4
======== ======== ======== ========
OTHER FINANCIAL INFORMATION:
Capital expenditures (millions)(3)..................... $ 5.2 $ 5.3 $ 2.7 $ 2.0
Unit costs:
Total cash costs per equivalent ounce produced....... $ 193 $ 189 $ 167 $ 191
Total cash costs per tonne milled.................... $ 2 $ 2 $ 2 $ 2
Total production cost per gold equivalent ounce...... $ 261 $ 260 $ 217 $ 247
-------------------------
(1) Tonnes mined and ore processed includes 100% of mine production.
(2) Number of employees includes all employees and contractors on site.
(3) Gold equivalent production, selected financial information and capital
expenditures are 49% of the results of the Paracatu (Brasilia) mine for
the periods indicated.
Total cash costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under "Calculation of Total
Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations," above.
For further information on the 2003 results, refer to the disclosure
included under "Kinross Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial/Operations--Operations--Mine
Operations--Paracatu (Brasilia) (49% ownership, Rio Tinto 51%, operator),
Brazil."
117
PRODUCTION FORECAST, LIFE OF MINE, AND CAPITAL EXPENDITURES
The Paracatu (Brasilia) mine currently has a nominal capacity of about
20 million tonnes per year with variations depending on the hardness of the ore,
as it affects grinding throughput. In general, ore hardness is expected to
increase over the remaining mine life as the pit is deepened. Under this
scenario, the current reserves will be exhausted by 2022.
RPM is in the process of studying a major expansion project that would
potentially increase the future capacity to approximately 30 million tonnes per
year. If the expansion were implemented, the current reserves would be exhausted
by year 2016.
Kinross' share of capital expenditures at the Paracatu (Brasilia) mine
in 2003 was $5.2 million compared to $nil during 2002. The increase was due to
the completion of the TVX business combination on January 31, 2003. Capital
expenditures in 2003 were mainly related to additions to the mining fleet and
work related to the tailings dam. Kinross plans to spend $13.1 million for its
share of capital expenditures in 2004 to expand the mine.
[PICTURE]
118
MUSSELWHITE MINE
The Musselwhite property is operated as an unincorporated joint venture
between Placer Canada (68.07%) and Kinross (31.93%). Each party is responsible
for funding the expenses incurred in any work program in proportion to its
participating interest in the joint venture. Placer Canada is designated as the
operator of the joint venture, and thus is responsible for preparing work
programs and carrying out and supervising all work to be performed under each
work program. The management committee is comprised of four members of whom two
are the nominees of Kinross. Decisions of the management committee require the
approval of nominees representing at least a majority interest in the joint
venture. Kinross acquired its interest in the Musselwhite Mine in its
combination with TVX in January 2003.
PROPERTY DESCRIPTION AND LOCATION
The Musselwhite property is located in the Patricia Mining District of
northwestern Ontario, Canada. The mine lies in the Opapimiskan Lake area,
approximately 76 kilometers southeast of the First Nations community of Round
Lake (Weagamow), 130 kilometers north of the town of Pickle Lake, Ontario and
430 kilometers northwest of Thunder Bay, Ontario. The property consists of a
total of 617 claims. There is a core holding of 338 leased mining leases, of
which 96 claims are mining rights only, and 242 are mining and surface rights
leases. Surrounding this core holding are 279 contiguous unpatented mining
claims. The core holding and unpatented claims together span approximately 5,444
and 12,104 hectares, respectively, for a total of 17,548 hectares. The claims
have expiration dates ranging from January 13, 2005, to June 12, 2012.
The mine has recently renewed an impact benefit agreement with local
First Nations groups. In the new agreement, restrictions on daily mill
throughput have been removed, and revenue sharing provisions have been
incorporated to help direct some of the mine's economic benefits directly into
local communities.
As an unincorporated joint venture, the mine does not pay income taxes
directly, and Kinross and Placer Canada must pay taxes on a corporate level
based on their prorated shares of revenue. In Ontario, profits are taxed at the
federal and provincial levels. Federal taxes are levied on each partner's share
of the mine operations taxable income, which is net of direct operating
expenses, appropriate share of depreciation of capital and resource allowances,
and deductions for exploration and pre-production development. The net federal
tax rate is currently 28.12%, reducing to 22.12% by 2007. Ontario uses the
federal taxable income, with some minor adjustments to deductions and
allowances, and taxes this at rate of 11%, increasing to 12% in 2004. In
addition, Ontario levies a small capital tax on the paid-up capital of the mine
above $5 million. Ontario also levies a mining tax after deductions, including
processing allowances, at a 2002 rate of about 12%; this is scheduled to reduce
to 10% in 2004.
ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE, AND PHYSIOGRAPHY
Access to the property is by a 45 kilometer road from Provincial Highway
808 or by air from Pickle Lake.
The topography of the project area is relatively flat, with granite
intrusions associated with regional highlands. Local relief, which ranges from 5
meters to 45 meters, can be attributed to glacial deposits in the form of
moraines, eskers and drumlins. Extensive, low-lying swampy areas surround
streams, ponds, and lakes on the property. The elevation of Opapimiskan Lake is
about 300 meters. The Opapimiskan Lake area lies within the northern coniferous
section of the boreal forest. A forest fire destroyed most of the area south of
Opapimiskan Lake in 1979. Vegetation is slowly returning but currently has no
economic value.
119
The nearest permanent weather monitoring station is located in Pickle
Lake. Weather statistics for the period from 1951 to 1980 indicate a mean daily
temperature of -0.9 degrees Celsius (30 degrees Fahrenheit). Temperatures range
between a maximum of 40 degrees Celsius (105 degrees Fahrenheit) and a minimum
of -51 degrees Celsius (-60 degrees Fahrenheit). The mean annual rainfall is
recorded at 50.9 centimeters and the mean annual snowfall is 266 centimeters.
Five First Nations and two non-First Nation communities, consisting of a
total of about 3,000 inhabitants, live within the vicinity of the Musselwhite
project.
The major infrastructure consists of the airstrip, bunkhouses, mill
buildings, a tailings pond, a portal and conveyor adits and various pump
stations. Mining and milling are carried out at approximately 1.2 million tonnes
of ore per year. The mine is a fly in, fly out operation and power is provided
by a transmission line connected to the provincial power grid at Pickle Lake.
HISTORY
In 1962, two Ontario prospectors, Harold and Allan Musselwhite,
discovered a gold-bearing quartz vein on the north shore of Lake Opapimiskan and
in 1973, they obtained sufficient financing to carry out exploration on a
relatively small scale. Exploration continued until 1980, during which time
several small zones of gold mineralization were discovered.
In 1980, a major drilling program resulted in the discovery of the West
Anticline Zone (1 million tonnes averaging 7.5 grams of gold per tonne) and the
Camp Zone (400,000 tonnes at 6.9 grams per tonne). Underground exploration of
the West Anticline Zone was carried out from an adit in 1984 but structural
complexities affected the calculated resource grade and activity moved elsewhere
on the property. The East Bay Zones (formerly Snoppy Pond Zones) were found in
1985.
In 1988 and 1989, a $17 million underground exploration program and a
feasibility study were carried out. Mine construction was postponed due to the
high cost of power and infrastructure.
By the end of 1992, 12 zones of gold mineralization had been identified.
The main Musselwhite deposit is a long narrow band that starts near the surface
of Snoppy Pond, then plunges northwest to about 200 meters below surface at the
edge of Lake Opapimiskan, reaching about 400 meters below surface under the
lake.
The 1993 work program focused on a new exploration strategy which was to
improve the tonnage rather than the grade of material, thereby creating a much
larger inventory of contained gold. In early 1993, this inventory amounted to
1.3 million ounces of gold.
In 1993, diamond drilling, including barge drilling, and geological
compilations were carried out. As a result of this exploration work, TVX and
Placer Canada agreed to accelerate the underground exploration program for the
Musselwhite project to complete exploration and to advance the project to the
feasibility stage.
The 1994 work program included infill surface drilling, dewatering the
underground workings, driving an access ramp to the T-Antiform Zone and
underground diamond drilling. Drifts and raises were positioned along the
mineralized zones to gather detailed geological and engineering information.
Construction of the ramp and related underground work were completed to enable
the detailed drilling and sampling necessary to upgrade the measured and
indicated resource estimate.
Total costs for the 1995 program were approximately $15 million and
included the construction of a 45-kilometer all-weather road to the property and
a feasibility study which was completed in the first quarter of 1996 when a
production decision was made.
120
Exploration work in 1997 identified additional resources. Of particular
interest was shallow-depth mineralization outlined at Snoppy Pond which was
included in the 1998 year-end reserve statement for the first time.
GEOLOGY AND MINERALIZATION
The Musselwhite property ore zones are situated within the
Weagamow-North Caribou Greenstone Belt of the Superior geologic province. This
belt consists of a narrow swath of metavolcanic and metasedimentary supracrustal
assemblages that extend 160 kilometers in an overall northwest direction. The
belt is comprised of three linear segments, east-west, north-northwest, and
west-northwest. Another branch of the greenstone belt extends to the southwest
from the point where the west-northwest and north-northwest segments join. This
triple junction forms complex geometries and is the locus of outcropping iron
formation, known gold mineralization, and the Musselwhite mine. Gold bearing
mineralization is characteristically hosted in folded oxide-silicate facies
banded iron formations. The main deposits are developed as a series of
sub-vertical tabular bodies along the tightly-folded 15 to 18 degree
northwesterly plunging T-Antiform structure. Gold mineralization in the West
Anticline zone occurs within quartz-pyrrhotite-albite- almandine veinlets and
lenses which parallel a secondary deformation axial planar cleavage, and as
stratabound disseminated mineralization. Other deposits are developed along the
limbs and subsidiary fold structures within the larger East Bay Synform and West
Anticline.
EXPLORATION
Recent exploration has been focused on defining the extent of
mineralization down-plunge along the T-Antiform and in the nearby PQ Deeps zone
with diamond drilling. Drilling down plunge on the T-Antiform has demonstrated
that the structure continues beyond the northernmost drill holes, but gold
grades are uneconomic to the north of 11800N. The reduction in grade in this
area may be due to the increasing distance away from the longitudinal fault
zones that add to the permeability in the better mineralized portions of the
T-Antiform. However, based on the persistence of the T-Antiform structure, and
the presence of gold occurrences at the Kenpat zone (stratigraphically above the
down-plunge projection of the T-Antiform), there is good potential for the
discovery of additional mineralization further along the structure in the down
plunge direction.
Mineralization in the PQ Deeps zone is currently being defined by deep
surface drilling beneath the ice of Opapimiskan Lake. Recent high-grade
intersections in the zone are encouraging and warrant further diamond drilling.
Kinross' share of exploration expenditures totaled $2.1 million during
2003. Kinross' share of the planned exploration spending for 2004 is $1.2
million.
DRILLING, SAMPLE AND ANALYSIS AND SECURITY OF SAMPLES
All exploration and definition drilling conducted on the property to
date has been diamond drilling. By the end of 2002, a total of 3,261 diamond
drill holes with an aggregate length of 495,033 meters had been completed at
Musselwhite. All drill hole collars are surveyed and most holes have been
surveyed using recognized down hole survey methods.
Diamond drill core is sampled by rotating the core perpendicular to the
foliation and halving it longitudinally with a diamond saw into intervals
selected by the geologist during core logging. One half of the core is collected
in sample bags for analysis, and the other half is retained for a permanent
record. Samples are constrained by geology to aid in the interpretation of gold
distribution. A nominal sample length of 0.5 to 1.0 meters is used.
Diamond drill core samples at Musselwhite have been prepared and
analyzed at a number of laboratories since exploration drilling began in 1974.
Currently, the samples are being prepared and analyzed at three different
laboratories: the mine lab and two independent labs in Thunder Bay, Ontario. All
of the assays completed on drill core have utilized a fire assay
pre-concentration method followed by an AA finish or gravimetric finish on a one
assay ton aliquot (approximately 30 grams). The gravimetric finish is employed
if the AA finish results are greater than 20 grams per tonne of gold.
121
A large number of samples were analyzed to develop the specific gravity
of the host rocks and mineralization. Specific gravities range between 3.0 to
3.3 grams per cubic centimeter and generally result from measurements collected
using water displacement field measurements.
The Geology Department at the Musselwhite mine uses a defined Quality
Assurance/Quality Control program to monitor accuracy and precision of all
results. Commercially prepared standards and blanks are routinely inserted into
the sample stream, both as part of the Geology Department's Quality
Assurance/Quality Control program and by the lab, as part of their own internal
system of checks.
Sample contamination was monitored by inserting blank samples. Some
contamination issues were recognized during the equipment start-up phase and
remedial action was taken. The sample preparation protocols were altered and the
core intervals that may have been contaminated during this period were
re-sampled. Pulp and reject duplicate samples were inserted to monitor
analytical precision.
MINERAL RESERVE AND RESOURCE ESTIMATES
The following table sets forth the estimated proven and probable
reserves for the Musselwhite mine as at December 31, 2003, and 2002, and
represents Kinross' 31.93% interest:
2003 (AT A 2002 (AT A
GOLD PRICE OF GOLD PRICE OF
U.S. $325 PER U.S. $300 PER
OUNCE) OUNCE)
------------------------------------------------- -------------------------------------------------
AVERAGE GOLD AVERAGE GOLD
TONNES GRADE CONTENT TONNES GRADE CONTENT
------ ----- ------- ------ ----- -------
(MILLIONS) (GPT) (000'S OZ) (MILLIONS) (GPT) (000'S OZ)
Proven 2.4 5.63 428 2.8 5.67 511
Probable 1.2 5.81 230 1.0 4.81 156
--- ---- --- --- ---- ---
Total 3.6 5.69 658 3.8 5.44 667
=== ==== === === ==== ===
In addition to proven and probable reserves, as at December 31, 2003,
the Musselwhite mine has an estimated 1.3 million tonnes of measured and
indicated resources at an average grade of 8.25 grams of gold per tonne. UNITED
STATES INVESTORS ARE ADVISED THAT THE TERMS "MEASURED RESOURCES" AND "INDICATED
RESOURCES" ARE RECOGNIZED BY CANADIAN REGULATIONS BUT NOT BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION. UNITED STATES INVESTORS ARE CAUTIONED NOT TO
ASSUME THAT ALL OR ANY PART OF MINERAL DEPOSITS IN THESE CATEGORIES WILL EVER BE
CONVERTED INTO PROVEN AND PROBABLE RESERVES.
MINING AND MILLING OPERATIONS
The mining operations are accessed via a twin decline system extending
from surface. Men and material are transported via a 12.5% grade ramp. Emergency
access is via a 20% grade conveyor ramp extending from surface to the 460 meter
level.
Ventilation is provided by twin 375 kilowatt fans. Fresh air travels to
the work face by means of a ventilation raise which ties into the conveyor ramp
at the 240 meter level and travels along it to the lower levels of the mine.
Exhaust air travels up the main access ramp to surface.
Mining is conducted using sublevel blasthole stoping methods with waste
rock backfill. Sublevels are established at 25 meter intervals.
The ore is drilled off using three-inch and four-inch production holes
using longhole drill rigs. Ore above the 200 meter level is direct hauled to
surface. Ore below the 200 meter level is hauled to the underground crusher.
Stopes are backfilled with either cemented or un-cemented rock backfill.
122
Most of the ore production has and will continue to come from
underground sources, with some production from open pits at the beginning and
end of the mine life. The mine currently plans to produce approximately 75,000
ounces of gold attributable to Kinross' interest in 2004.
The Musselwhite mill circuit uses a fairly standard approach with fine
crushing/rod milling/ball milling to prepare the ore to the correct size. For
the actual recovery of gold, gravity is used to scalp coarse gold from the ball
milling circuit into a intensive cyanide leach system. The gravity tails are
sent to conventional cyanide leaching which dissolves the remainder of the
recoverable gold. Carbon is used to recover gold from leaching and after the
stripping and electrowinning processes, a gold dore is produced. The dore bars
produced at the mine are shipped under contract to Johnson Matthey for refining.
The 2004 operating budget calls for a mill throughput rate of 3,832
tonnes per day.
The current mining fleet is essentially the original mine equipment. The
capital budget for Musselwhite includes costs for equipment replacement as
dictated by accumulated operating hours and suggested replacement schedules.
Boart Longyear Inc. provides all production longhole drilling services
for the mine on a contract basis.
The Musselwhite mine operates under Placer Canada's sustainability
policy, which commits the operation to a high standard of environmental
stewardship. Sustainability is an important issue for every department. This
involves protecting human health, reducing the impact of mining on the
ecosystem, and returning the site to a state compatible with a healthy
environment. Musselwhite has implemented a series of management systems for
maintenance, environmental activities and occupational health and safety.
Currently, operations at Musselwhite appear to be in compliance with applicable
corporate standards and environmental regulations.
The closure plan involves progressive rehabilitation through an ongoing
program of grass seeding. This information will be a useful start in compiling a
chronological record of reclamation for use in the closure plan to be presented
to stakeholders at the end of the mine life. As at December 31, 2003, the net
present value of future cash outflows for Kinross' share of site restoration
costs at Musselwhite under CICA Handbook section 3063, which is effective for
fiscal years beginning January 1, 2004, are estimated at $1.6 million. Kinross
has posted $0.6 million of letters of credit for site restoration with the
province of Ontario.
Musselwhite continues to evaluate options for its tailings management
practices to mitigate the risks associated with tailings and waste rock. One
option is a paste backfill/tailings disposal system; another is to produce a
sulphide flotation product that would reduce the amount of potential acid
generating material. The potential for acid rock drainage from the tailings is
taken into account in the closure plan. Stockpiled open-pit waste rock has low
potential for acid drainage and will be transported underground for use as
rockfill.
At present, all tailings pass through a water treatment plant for
destruction of cyanide before discharge to the tailings pond. Additional
remediation occurs naturally in the tailings pond, polishing ponds, and
wetlands.
Local First Nations communities monitor environmental issues through an
environmental working committee. First Nations issues are listened to,
documented, and addressed in this forum, and mine closure plans are periodically
reviewed and analyzed.
123
SUMMARY OF PRODUCTION AND FINANCIAL DATA
The following table summarizes certain gold production and operating and
financial data relating to Kinross' 31.93% ownership interest in the Musselwhite
mine for the eleven months ended December 31, 2003. Information for the years
December 31, 2003, 2002, and 2001, is included for comparative purposes.
KINROSS
SHARE YEARS ENDED DECEMBER 31,
----- ------------------------
2003 2003 2002 2001
---- ---- ---- ----
SELECTED PRODUCTION AND OPERATING INFORMATION:
Tonnes mined (000's)(1)................................ 1,228.7 1,330.3 1,156.9 1,290.2
Tonnes of ore processed (000's)(1)..................... 1,228.7 1,330.9 1,156.9 1,290.2
Gold grade (gpt)....................................... 5.40 5.45 5.90 5.90
Average gold recovery (%).............................. 96 96 95 95
Gold equivalent production(3).......................... 64,978 71,028 66,879 74,577
Number of employees(2)................................. 418 418 374 485
SELECTED FINANCIAL INFORMATION
(IN MILLIONS EXCEPT UNIT COSTS):(3)
Revenue................................................ $ 22.6 $ 25.9 $ 21.4 $ 20.1
------- ------- ------- --------
Cost of production..................................... 16.7 18.2 15.3 14.3
Inventory change/other................................. (0.8) 0.2 0.3 --
Site restoration costs accruals........................ 0.4 0.4 0.2 0.2
Depreciation, depletion and amortization............... 6.5 6.9 4.7 5.7
Care and maintenance................................... 0.2 0.2 -- --
Foreign exchange (gain) loss........................... (0.5) (0.5) 0.4 --
Exploration............................................ 2.1 2.2 0.8 0.5
------- ------- ------- --------
24.6 27.6 21.7 20.7
------- ------- ------- --------
Net loss............................................... $ (2.0) $ (1.7) $ (0.3) $ (0.6)
======= ======= ======= ========
OTHER FINANCIAL INFORMATION:
Capital expenditures (millions)(3)...................... $ 2.7 $ 2.8 $ 3.7 $ 4.0
Unit costs:
Total cash costs per equivalent ounce produced........ $ 257 $ 256 $ 228 $ 192
Total cash costs per tonne milled..................... $ 42 $ 43 $ 41 $ 35
Total production cost per gold equivalent ounce....... $ 363 $ 359 $ 302 $ 271
-------------------------
(1) Tonnes mined and ore processed includes 100% of mine production.
(2) Number of employees includes all employees and contractors on site.
(3) Gold equivalent production, selected financial information and capital
expenditures are 31.9% of the results of the Musselwhite mine for the
periods indicated.
Total cash costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under "Calculation of Total
Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations," above.
For further information on the 2003 results, refer to the disclosure
included under "Kinross Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial/Operations--Operations--Mine
Operations--Musselwhite (31.93% ownership, Placer Dome 68.07%, operator),
Canada."
124
PRODUCTION FORECAST, LIFE OF MINE, AND CAPITAL EXPENDITURES
The Musselwhite mine has a projected mine life of 12 years at a mining
rate of 4,000 tonnes per day.
Kinross' share of capital expenditures at the Musselwhite mine in 2003
were $2.7 million compared to $nil during 2002. The increase was due to the
completion of the TVX business combination on January 31, 2003. Planned
expenditures of Kinross for 2004 total $3.7 million.
[PICTURE]
125
ROUND MOUNTAIN
Kinross owns an undivided 50% interest in and operates the Round
Mountain gold mine. An affiliate of Barrick Gold Corporation owns the remaining
undivided 50% interest in the joint venture common operation. Kinross acquired
its interest in the Round Mountain in its combination with Echo Bay in January
2003.
PROPERTY DESCRIPTION AND LOCATION
The Round Mountain gold mine is an open-pit mining operation located 60
miles north of Tonopah in Nye County, Nevada, U.S.A. The property position
consists of contiguous patented and unpatented mining claims covering
approximately 27,500 acres, while the active project boundary encompasses 7,263
acres. Kinross has received patents to convert mineable land to patented status.
Patented claims cover all of the current reserves in the mine pit.
The Smoky Valley Common Operation controls the mineral and surface
rights of the mine through the ownership of 84 patented lode claims and 1,453
unpatented lode claims. The patented claims are held as private property and are
legally surveyed. All of the reserves are located on patented claims. The
unpatented claims are held under the 1872 Mining Law and are subject to normal
annual filing requirements and fees. The majority of the unpatented claims are
located on land administered by the Bureau of Land Management; the remainder are
located on land administered by the United States Forest Service.
Round Mountain mine production is subject to a net smelter return
royalty ranging from 3.53% at gold prices of $320 per ounce or less to 6.35% at
gold prices of $440 per ounce or more. During 2003, this royalty averaged 4.5%.
Its production is also subject to a gross revenue royalty of 3.0%, reduced to
1.5% after $75.0 million has been paid. For the period from the date that the
royalty commenced through December 31, 2003, cumulative royalties of $33.1
million have been paid.
The property is subject to no known environmental liabilities or
mitigative measures. All environmental permitting is up to date and in order.
The Round Mountain gold mine is subject to the Nevada State and United
States federal employment taxes, business license tax, net proceeds of minerals
tax and properties sales and use tax.
ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE, AND PHYSIOGRAPHY
The mine site is accessed by State Highway 376, a paved two-lane paved
highway that connects U.S. Highway 6 in Tonopah to the south and U.S. Highway 50
to the north. The mine is located approximately 250 miles from the major
metropolitan areas of Las Vegas and Reno, Nevada. The mine is supported by the
local communities of Hadley and Carvers, which provide most of the housing for
mine personnel. Sierra Pacific Power Co. provides electrical power to the mine.
There are sufficient surface and water rights to support all current and
forecasted mining at the site.
The mine area straddles the transition between the floor of the Big
Smoky Valley and the adjacent Toquima Range. Mine site elevations vary between
5,800 to 6,800 feet above sea level. Elevations in the Big Smoky Valley and
Toquima Range vary from 5,800 feet in the valley floor to 11,941 feet at the
summit of Mount Jefferson.
The oblong open-pit mine is over a mile at its longest dimension and
currently more than 1,200 feet from the highest working level to the bottom of
the pit.
The Round Mountain mine lies within an arid, high desert setting.
Average annual precipitation in the Big Smoky Valley is approximately five to
seven inches with most of that total falling during the winter months. Snow is
common at the valley floor, but rarely remains on the ground for more than a few
days. Local rainfall can be extreme and flash flood events are not uncommon in
the region. Temperature range can be extreme, with average daily fluctuations
exceeding 22 degrees Celsius (40 degrees Fahrenheit). Winter temperatures are
typically -12 to -7 degrees Celsius (10 to 20 degrees Fahrenheit) at night and 0
to 10 degrees Celsius (30 to 50 degrees Fahrenheit) during the day. Rarely
(typically less than 10 days per year), winter low temperatures can fall below
-18 degrees
126
Celsius (0 degrees Fahrenheit). Summer temperatures vary from 32 to 40 degrees
Celsius (40 to 55 degrees Fahrenheit) at night to 90 to 105 degrees Fahrenheit
during the day.
HISTORY
The first gold production from the Round Mountain District occurred in
1906. Historic production from 1906 through 1969 based on United States Bureau
of Mines records was 346,376 ounces of gold and 362,355 ounces of silver. Actual
unreported production was probably significantly higher. Early important
companies actively mining in the district were the Round Mountain Mining Co.,
the Fairview Round Mountain Mining Co., the Round Mountain Daisy Mining Co., the
Round Mountain Sphinx Co., the Round Mountain Red Top Co., and the Round
Mountain Red Antelope Mining Co. At some point prior to 1929, Nevada Porphyry
Mines, Inc. consolidated many of the claims and controlled most of the district.
Nevada Porphyry Mines and the A. O. Smith Corp. investigated the bulk tonnage
potential of the property in 1929 and 1936 to 1937, respectively. In 1946
through 1962, the Yuba Consolidated, Fresnillo, and Consolidated Goldfields
developed and mined the placer deposits flanking Round Mountain and Stebbins
Hill.
At some time between 1962 and 1969, the Ordrich Gold Resources Inc.
acquired control of the property from Nevada Porphyry Gold Mines. In 1969,
Copper Range Co. leased the property and developed a small reserve of 12 million
tons at a grade of 0.062 oz Au/ton. The Smoky Valley Common Operation was formed
in 1975 to operate the mine. This was initially a joint venture in which Copper
Range held a 50 percent interest and Felmont Oil Co. and Case Pomeroy Co. each
held a 25% interest.
Commercial production commenced in 1977. In 1984, Homestake Mining
Company acquired the Felmont Oil interest in the operation and, in 1985, Echo
Bay acquired the Copper Range interest. Effective July 1, 2000, Homestake
increased its interest in the Round Mountain mine from 25% to 50% when it
acquired the Case Pomeroy interest. Effective December 14, 2001, Barrick Gold
Corporation completed a merger with Homestake Mining Company thereby acquiring
the Homestake interest in the mine.
Since 1997, development drilling has continued and the reserve base has
been significantly expanded and refined. The production rate for 2003 averaged
266,249 tons per day.
In 2003, total gold production attributable to Kinross' 50% interest was
364,271 ounces.
GEOLOGY AND MINERALIZATION
The Round Mountain mine is located along the western flank of the
southern Toquima Range within the Great Basin sub-province of the Basin and
Range province of western North America. The Basin and Range physiographic
province is characterized by generally north-south trending block faulted
mountain ranges, separated by alluvium-filled valleys. The Great Basin
sub-province is specifically characterized by internal drainage. Topographic
relief varies across the Basin and Range, from 1,500 feet to in excess of 5,000
vertical feet.
The geology of the Round Mountain mine consists of a thick sequence of
intracaldera Oligocene ash-flow tuffs and volcaniclastic rocks resting upon
pre-Tertiary basement rocks. The caldera margin is mostly buried but in the pit
area is well defined by a progressively steeper dipping arcuate contact between
the volcanic rocks and older basement rocks. The caldera margin and caldera
related structures provided the structural ground preparation for the
hydrothermal system. The primary host rocks for gold mineralization are the
volcanic rocks. A minor amount of ore occurs in the Paleozoic rocks along the
caldera margin.
The Round Mountain Gold deposit is a large, epithermal, low-sulfidation,
volcanic-hosted, hot-springs type, precious metal deposit, located along the
margin of a buried volcanic caldera. The deposit genesis is intimately
associated with the Tertiary volcanism and caldera formation. Intra-caldera
collapse features and sympathetic faulting in the metasedimentary rocks provided
the major structural conduits for gold-bearing hydrothermal fluids. In the
volcanic units, these ascending fluids deposited gold along a broad
west-northwest trend.
Gold mineralization at Round Mountain occurs as electrum in association
with quartz, adularia, pyrite and iron oxides. Shear zone fractures, veins and
disseminations within the more permeable units host the
127
mineralization. Primary sulfide mineralization consists of electrum associated
with or internal to pyrite grains. In oxidized zones, gold occurs as electrum
associated with iron oxides, or as disseminations along fractures.
Alteration of the volcanic units at Round Mountain can be characterized
as a continuum from fresh rock progressing through highly altered alteration
assemblages. There is a reasonable correlation between increasing gold grades
and increasing degrees of alteration.
Ore zones within the metasediments are more subtle, largely defined by
secondary quartz overgrowths, pyrite, and adularia associated with narrow
northwest trending structures.
EXPLORATION
Kinross' share of exploration expenditures totaled $2.1 million during
2003. Kinross' share of the exploration forecast for 2004 is $2.7 million.
DRILLING, SAMPLE AND ANALYSIS AND SECURITY OF SAMPLES
The current drill database for the open pit reserve contains a total of
4,089 drill hole records, of which 3,812 were established using reverse
circulation drilling and 277 were drilled using diamond core methods. A separate
database is maintained for dump drilling which contains an additional 1,293
drill hole records.
The majority of the drilling is vertical with angle holes used where
vertical structures are anticipated. All dump holes are drilled vertical.
All holes are sampled on five-foot intervals and a "chipboard"
constructed for each drill hole with sample from each interval glued to a board
representing the complete hole.
Sample data for the reserve model is derived primarily from
conventional, reverse circulation rotary and HQ size core drilling. Holes are
initially drilled on +200 foot centers defining deposit limits. In-fill drilling
is completed on centers of 140 foot or less to develop reportable reserves used
in mine planning.
Reverse circulation drill cuttings are passed through a wet rotary
splitter to collect a 10 to 15 pound sample for each five-foot interval. A
sampling technique which uses flocculent to settle drill cuttings has been
employed to capture very fine-grained material and assure sample integrity. This
technique captures nearly 100% of the rock material generated during the
drilling process. Core samples are split with a rock saw in five-foot intervals,
with half the sample assayed, and the other half stored for reference.
All samples collected from drill holes are prepared and assayed by the
Round Mountain mine assay laboratory. All assay laboratory chemists and
technicians are employees of Round Mountain Gold Corporation. The laboratory is
not certified by any standards association. A mine geologist or mine geologic
technician delivers the drill samples to the assay laboratory.
The Round Mountain Deposit is noted for its coarse gold occurrences and
high nugget effect in assaying. In order to minimize the sampling variation, a
five-assay ton or 145.8 gram sample is used in the fire assay. To minimize
potential lead exposure of the laboratory staff, bismuth is used as the
collector of the gold and silver. After a 2-hour fusion, the samples are poured
into molds. The samples are slagged and are cupelled in the cupel room.
Following cupellation, the bead is smashed and parted with nitric acid, rinsed,
dried, and annealed. The fire assay is completed with a gravitimetric finish.
128
The assay laboratory maintains an internal assay quality control
program. Laboratory supervisors routinely conduct quality inspections of sample
preparation, equipment calibration, and assaying procedures. The lab regularly
participates in round robin assays with other mine labs to check internal
procedures. Five percent of all pulps are screened to verify that the pulps meet
specification. Because of the large crucibles used in the five assay-ton fire
assay, only 11 samples are fired per oven. Of these, one of the samples is
either a blank (barren silica sand) or a certified standard that is inserted
randomly by the lab computer system. The blank is inserted prior to the
preparation stage. The standard is inserted following sample preparation. If the
assay results exceed limits for either the blank or the standard, the entire
batch is re-assayed.
Assay results from blanks and standards are plotted and graphed daily.
These graphs are an integral tool used by the assayers and supervisors to
continuously monitor and improve lab procedures.
MINERAL RESERVE AND RESOURCE ESTIMATES
The following table sets forth the estimated proven and probable
reserves for the Round Mountain mine as at December 31, 2003, and 2002,
reflecting Kinross' 50% interest:
2003 (AT A 2002 (AT A
GOLD PRICE OF GOLD PRICE OF
U.S. $325 PER U.S. $300 PER
OUNCE) OUNCE)
------------------------------------------------- -------------------------------------------------
AVERAGE GOLD AVERAGE GOLD
TONNES GRADE CONTENT TONNES GRADE CONTENT
------ ----- ------- ------ ----- -------
(MILLIONS) (GPT) (000'S OZ) (MILLIONS) (GPT) (000'S OZ)
Proven(1) 59.7 0.57 1,099 42.9 0.59 815
Probable 35.4 0.66 751 44.2 0.75 1,060
---- ---- ----- ---- ---- -----
Total 95.1 0.61 1,850 87.1 0.67 1,875
==== ==== ===== ==== ==== =====
-------------------------
(1) Includes 38,430,000 tonnes stockpiled at December 31, 2003, with an
average grade of 0.45 gpt or 562,000 ounces of proven gold reserves.
In addition to the estimated proven and probable reserves, as at
December 31, 2003, the Round Mountain mine has an estimated 15.9 million tonnes
of measured and indicated resources at an average grade of 0.53 grams of gold
per tonne at a gold price of U.S. $350 per ounce. UNITED STATES INVESTORS ARE
ADVISED THAT THE TERMS "MEASURED RESOURCES" AND "INDICATED RESOURCES" ARE
RECOGNIZED BY CANADIAN REGULATIONS BUT NOT BY THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION. UNITED STATES INVESTORS ARE CAUTIONED NOT TO ASSUME THAT
ALL OR ANY PART OF MINERAL DEPOSITS IN THESE CATEGORIES WILL EVER BE CONVERTED
INTO PROVEN AND PROBABLE RESERVES.
MINING AND MILLING OPERATIONS
The Round Mountain mine currently operates a conventional open pit that
is approximately 8200 feet long in the north-west, south-east direction and 5000
feet wide (north-east to south-west). The mining is conducted on 35 foot benches
by electric shovels and front end loaders paired with 150, 190 and 240 ton haul
trucks.
129
Blasthole patterns are drilled on centers that range from 16 to 30 feet.
Blasthole samples are collected and assayed and provide the control for ore
segregation. Based upon these assays, blasted pit ore is determined to be
run-of-mine dedicated pad ore, crushed reusable pad ore, or waste. Sulfide
material greater than or equal to 0.018 opt of gold is shipped directly to the
mill or mill stockpile. Run-of-mine ore is delivered the dedicated pad.
Re-usuable pad ore is crushed and placed on reusable leach pads and waste is
delivered directly to the waste dumps. Placer material encountered during normal
stripping operations is sent to the dedicated pad. High grade coarse gold
bearing ore is handled in one of three ways: 1) leached on the re-useable pad
and offloaded to the mill; 2) sent directly to the gravity plant with tails
reporting to the mill; or 3) sent directly to the mill or mill stockpile. Gold
particle size distribution of high-grade ore determines the processing method.
The Round Mountain operation uses conventional open-pit mining methods
and recovers gold using four independent processing operations. These include
crushed ore leaching (reusable pad), run-of-mine ore leaching (dedicated pad),
milling and the gravity concentration circuit. Most of the ore is heap leached,
with higher grade oxidized ores crushed and placed on the reusable pad. Lower
grade ore, ore removed from the reusable leach pad and stockpiled ore that was
previously leached are placed on the dedicated pad.
The reusable pad processed 19,434 tons of ore per day in 2003, compared
to 26,987 tons per day in 2002. Reusable pad volume varies with ore release,
which is determined by the phases of the pit being mined. Reusable pad
production increased in 2003 to 230,773 ounces from 242,808 ounces in 2002 due
to the processing of higher grade ores and higher recoveries.
The dedicated pad processed 145,125 tons of ore per day in 2003,
compared to 135,222 tons per day in 2002. Production in 2003 from the dedicated
pad was 421,218 ounces, compared to 347,966 ounces in 2002, due to higher
recoveries.
The mill processed 7,366 tons per day in 2003 producing 124,341 ounces,
compared to 10,067 tons per day in 2002 producing 153,946 ounces. The mill
facility achieved a recovery rate of 84.9% from both higher-grade oxide and
non-oxidized ores during 2003 by employing gravity concentration, fine grinding
and cyanide leaching.
Ore and waste rock were mined at a rate of approximately 134,224 tons
per day in 2003 compared to 174,920 tons per day in 2002.
The finished dore bullion is shipped to refineries in North America for
further processing as per the agreements of established contracts of the
participants of the Smoky Valley Common Operation. Once the dore bullion leaves
the mine site, marketing and sales are the responsibility and discretion of the
Joint Venture partners.
The site Plan of Operations and Comprehensive Reclamation Plans filed
with the United States Department of the Interior, BLM and Nevada Division of
Environmental Protection (NDEP) have been approved for all current operational
facilities. Annual updates of the Reclamation Plan are prepared to adjust for
cost inflation and to take credit for concurrent reclamation activities and
submitted to the above listed agencies. The current reclamation cost estimate,
approved in December 2003 by the BLM, USFS and NDEP totals $36.8 million. The
net present value of these future cash outflows computed in accordance with CICA
Handbook section 3063, which is effective for fiscal years beginning January 1,
2004, was $26.5 million at December 31, 2003. Tentative plans for permanent
closure activities have been approved by the NDEP and BLM. Each participant in
the Common Operation is responsible for its own estimate of reclamation costs in
its own accounts. Kinross has posted letters of credit totaling $20.9 million in
support of its share of site restoration costs at December 31, 2003.
130
SUMMARY OF PRODUCTION AND FINANCIAL DATA
The following table summarizes certain gold production, operating and
financial data relating to Kinross' 50% ownership interest in the Round Mountain
mine for the eleven months ended December 31, 2003. Information for the years
ended December 31, 2003, 2002, and 2001, is included for comparative purposes.
KINROSS
SHARE YEARS ENDED DECEMBER 31,
----- ------------------------
2003 2003 2002 2001
---- ---- ---- ----
SELECTED PRODUCTION AND OPERATING INFORMATION:
Gold produced (ounces)(3)
Heap leach--reusable pad............................ 102,629 115,386 121,404 109,852
Heap leach--dedicated pad........................... 191,770 210,609 173,983 184,875
Milled.............................................. 57,450 62,171 76,973 78,427
Other(2)............................................ 4,484 4,484 5,387 321
------- ------- ------- -------
Total............................................... 356,333 392,650 377,747 373,475
======= ======= ======= =======
Equivalent gold ounces(3)(4)........................... 364,271 401,127 382,414 376,899
SELECTED FINANCIAL INFORMATION
(IN MILLIONS EXCEPT UNIT COSTS):(3)
Revenue................................................ $ 132.7 $ 144.6 $ 114.3 $ 105.5
------- ------- ------- -------
Cost of production..................................... 60.8 64.2 68.1 70.6
Royalties and production taxes......................... 12.5 13.5 9.3 7.6
Inventory change/other................................. 1.6 2.3 0.2 1.4
Site restoration costs accruals........................ 1.8 2.5 3.4 3.4
Depreciation, depletion and amortization............... 33.7 36.2 21.6 20.6
Interest............................................... -- -- 0.3 (0.8)
Exploration............................................ 2.1 2.1 1.0 0.7
------- ------- ------- -------
112.5 120.8 103.9 103.5
------- ------- ------- -------
Net earnings........................................... $ 20.2 $ 23.8 $ 10.4 $ 2.0
======= ======= ======= =======
OTHER FINANCIAL INFORMATION:
Capital expenditures (millions)(3)..................... $ 5.7 $ 5.8 $ 8.6 $ 15.0
Production cost per ounce of gold produced
Direct mining expense............................... $ 167 $ 164 $ 180 $ 190
Royalties and production taxes...................... 34 34 25 20
------- ------- ------- -------
Total cash cost..................................... 201 198 205 210
Depreciation, depletion and amortization............ 93 92 57 55
Reclamation......................................... 5 6 9 9
------- ------- ------- -------
Total production costs.............................. $ 299 $ 296 $ 271 $ 274
======= ======= ======= =======
OTHER INFORMATION:
Heap leach--reusable pad(1)
Ore processed (tons/day)............................ 19,045 19,704 26,987 23,601
Total tons of ore processed......................... 6,285 7,113 9,742 8,520
Grade (ounces per ton).............................. 0.043 0.043 0.043 0.035
Average gold recovery rate (%)...................... 67.0 69.5 61.3 77.4
Heap leach--dedicated pad(1)
Ore processed (tons/day)............................ 149,570 147,136 135,322 128,637
Total tons of ore processed......................... 49,358 53,116 48,815 46,438
Grade (ounces per ton).............................. 0.011 0.011 0.011 0.011
Average gold recovery rate (%)...................... (5) (5) (5) (5)
Milled(1)
Ore processed (tons/day)............................ 8,045 7,508 10,067 10,171
Total tons of ore processed......................... 2,655 2,711 3,664 3,702
Grade (ounces per ton).............................. 0.050 0.053 0.050 0.050
Average gold recovery rate (%)...................... 86.0 85.7 84.6 83.7
(footnotes contained on following page)
131
-------------------------
(1) Tons processed include 100% of mine production.
(2) A high-grade occurrence was discovered in April 1992. A small gravity
plant was constructed to recover these ounces.
(3) Gold equivalent production, selected financial information and capital
expenditures are 50% of the results of the Round Mountain mine for the
periods indicated.
(4) Equivalent gold production presented by Kinross includes silver
production converted to gold production using the ratio of the average
spot market prices (eleven months--2003: 74.60:1; 2003: 74.79:1; 2002:
67.49:1; 2001: 62.00:1).
(5) For dedicated leach pads, a gold recovery rate cannot be calculated
until leaching is complete. Based on metallurgical test work completed
during 1994 and 1995, the eventual recovery rate is estimated to be
approximately 65%.
Total cash costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under "Calculation of Total
Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations," above.
For further information on the 2003 results, refer to the disclosure
included under "Kinross Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial/Operations--Operations--Mine
Operations--Round Mountain (50% owner and operator), USA.
PRODUCTION, LIFE OF MINE, AND CAPITAL EXPENDITURES
The planned average production rate (total tons moved) for 2004 is
240,860 tons per day. Of this, 189,300 tons per day are ore production. The
annual mining forecast for mill tons mined in 2004 is 1.4 million tons
containing 38,300 ounces. Dedicated pad feed mined from the pit are estimated to
be 18.5 million tons containing 231,200 ounces. Dedicated pad feed mined from
the offload material are estimated to be 38.1 million tons containing 393,300
ounces. Mined production for the Reusable pad in 2004 is estimated to be 7.0
millions tons containing 207,900 ounces.
Mining at Round Mountain is expected to be complete during 2006
(assuming no additions to reserves), with completion of stockpile processing in
2008. The joint venture partners continue to support an aggressive exploration
program in the vicinity of the mine in order to add reserves and extend the mine
life.
Kinross' share of estimated gold equivalent production for 2004 is
367,500 ounces at total cash costs of $223 per ounce.
Kinross' share of capital expenditures at the Round Mountain mine in
2003 was $5.7 million compared to $nil during 2002. The increase was due to the
completion of the Echo Bay business combination on January 31, 2003. Pit
de-watering and dedicated leach pad construction accounted for the majority of
the capital expenditures in 2003. Kinross' share of planned capital expenditures
for 2004 is $8.1 million.
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[PICTURE]
RMGC Site Map
133
ENVIRONMENTAL REGULATIONS
GENERAL
Kinross' exploration activities and mining and processing operations are
subject to the federal, state, provincial, regional and local environmental laws
and regulations in the jurisdictions in which Kinross' facilities are located,
such as the Clean Air Act; the Clean Water Act; the Comprehensive Environmental
Response, Compensation and Liability Act; the Emergency Planning and Community
Right to Know Act; the Endangered Species Act; the Federal Land Policy and
Management Act; the National Environmental Policy Act; the Resource Conservation
and Recovery Act; and related state laws and their equivalent in other
jurisdictions. In all jurisdictions in which Kinross operates, environmental
licenses, permits and other regulatory approvals are required in order to engage
in exploration, mining and processing, and mine closure activities. Regulatory
approval of a detailed plan of operations and a comprehensive environmental
impact assessment is required prior to initiating mining or processing
activities or for any substantive change to previously approved plans. In all
jurisdictions in which Kinross operates, specific statutory and regulatory
requirements and standards must be met throughout the life of the mining or
processing operations in regard to air quality, water quality, fisheries and
wildlife protection, archaeological and cultural resources, solid and hazardous
waste management and disposal, the management and transportation of hazardous
chemicals, toxic substances, noise, community right-to-know, land use, and
reclamation. Kinross is currently in compliance in all material respects with
all applicable environmental laws and regulations.
PERMITTING--BUCKHORN PROJECT
Development of the Buckhorn Mountain Project is subject to various
permitting requirements. A plan of operations has been submitted to the
governing agencies for the purpose of review of the project proposal and
preparation of environmental documents as required by law as a prerequisite to
any application for permits necessary for operation. The document builds in part
on the previous work developed by Battle Mountain Gold relating to the Buckhorn
Mountain Project (then known as the "Crown Jewel Project"). The plan of
operations is also based in part on studies performed during the environmental
review of the prior proposal. The current plan of operations proposes
underground mining operation rather than an open pit operation and includes the
incorporation of the existing and approved Kettle River Mill for the processing
of the ore. These changes greatly simplify the project description,
environmental concerns, and associated technical issues.
In addition to receiving agency approval on the plan of operations, the
Buckhorn Mountain Project must comply with other federal, state, and local laws
and regulations. As part of the scoping process governmental agencies determine
what permits will be required for operation of the mine and which existing or
new environmental information will be necessary to review in order to determine
any mitigation measures which must be undertaken to address identified impacts.
Securing the necessary environmental approvals is expected to take
approximately 18 months in total, and at a cost of approximately $1.5 million.
The costs include the third party contractor for the supplemental environmental
impact statement, additional technical studies (e.g., hydrology, geochemistry),
and general permitting costs.
Although all required environmental permits are expected to be issued
for the Buckhorn Mountain Project, significant public opposition to the Project
could result in delays, increased costs, or the inability to obtain one or more
necessary permits. However, most of the sensitive environmental issues
associated with the previous Battle Mountain Gold proposed mine plan are not
part of the current proposal, reducing, but not eliminating, the risk of delays
resulting from public opposition to the Project.
134
CERCLA ACTION
In 1998, Lassen Gold Mining Inc. (a subsidiary of Kinross) was
identified as a Potentially Responsible Party ("PRP") under the United States
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
42 U.S.C. ss.ss.9601, et seq.; the Resource Conservation and Recovery Act, as
amended 42 U.S.C. ss.ss.6901, et seq.; and the California Hazardous Substances
Account Act, as amended, the California Health and Safety Code ss.ss. 25300 et
seq., in connection with the PRC Patterson Superfund Site. Kinross became a
member of the Patterson Environmental Trust that funded the site remediation.
The total paid to the Trust by Kinross was $175,552. As more PRPs were
identified and became contributors to the Trust or participated in funding
remediation separately, the amount of funds held by the Trust exceeded the
financial obligation. In 2001, in accordance with a Cash-Out Settlement
Agreement, Kinross was refunded $152,308. Kinross may receive a supplemental
distribution when settlement is reached with the additional PRPs and from
accrued interest in the Trust escrow account. All remediation and restoration
activities have been completed at the PRC Patterson Superfund site. Kinross no
longer has any liability associated with the site.
Other than as disclosed above, Kinross is not a PRP in any other CERCLA
action.
LEGAL PROCEEDINGS
DERIVATIVE ACTION
In October 1996, a shareholder derivative action was filed in the Court
of Chancery of Delaware on behalf of Kinam Gold Inc. ("Kinam") formerly Amax
Gold Inc. shareholder, entitled HARRY LEWIS V. MILTON H. WARD, ET AL., C.A. No.
15255-NC, against Cyprus Amax, Kinam's directors and Kinam as a nominal
defendant. The complaint alleges, among other things, that the defendants
engaged in self-dealing in connection with Kinam'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
Kinam and damages in an unspecified amount. Kinross subsequently filed a motion
to dismiss the action with the court. On October 30, 2003, the Court of Chancery
of Delaware granted Kinam's motion to dismiss the complaint. The plaintiff
appealed this decision on November 30, 2003. This appeal was denied by the
Delaware Supreme Court which affirmed the trial court's dismissal. Kinam
believes that the complaint is without merit and will continue to defend the
matter as required.
CLASS ACTION
Kinross was named as a defendant in a class action complaint filed on or
about April 26, 2002, entitled ROBERT A. BROWN, ET AL. V. KINROSS GOLD U.S.A.,
INC., ET AL., Case No. CV-S-02-0605-KJD-RJJ, brought in the United States
District Court for the District of Nevada. Defendants named in the complaint are
Kinross, its subsidiaries, Kinross Gold U.S.A., Inc. and Kinam, and Robert M.
Buchan, president and C.E.O. of Kinross. The complaint is brought on behalf of
two potential classes, those who tendered their Kinam preferred stock into the
tender offer for the Kinam $3.75 Series B Preferred Stock made by Kinross Gold
U.S.A. and those who did not. Plaintiffs argue, among other things, that amounts
historically advanced by Kinross to Kinam should be treated as capital
contributions rather than loans, that the purchase of Kinam preferred stock from
institutional investors in July 2001 was a constructive redemption of the
preferred stock, an impermissible amendment to the conversion rights of the
preferred stock, or constituted the commencement of a tender offer, that Kinross
and its subsidiaries have intentionally taken actions for the purpose of
minimizing the value of the Kinam preferred stock, and that the amount offered
in the tender offer of $16.00 per share was not a fair valuation of the Kinam
preferred stock. The complaint alleges breach of contract based on the governing
provisions of the Kinam preferred stock, breach of fiduciary duties, violations
of the "best price" rule under Section 13(e) of the Securities Exchange Act of
1934, as amended, and the NYSE rules, violations of Section 10(b) and 14(e) of
the Securities Exchange Act of 1934, as amended, and Rules 10b-5 and 14c-6(a)
hereunder, common law fraud based on the acts taken and information provided in
connection with the tender offer, violation of Nevada's anti-racketeering law,
and control person liability under Section 20A of the Securities Exchange Act of
1934, as amended. A second action seeking certification as a class action and
based on the same allegations was also filed in the United States district Court
for the District of Nevada on or about May 22, 2002. It names the same parties
as defendants. This action has been consolidated into the Brown case and the
Brown plaintiffs have been designated as lead plaintiffs. The plaintiffs seek
damages ranging from $9.80 per share, plus accrued dividends, to $39.25 for the
894,600 shares of Kinam preferred stock potentially subject to the litigation,
an aggregate of $8.8 million to $35.1 million or, in the
135
alternative, the issuance of 26.875 to 80.625 Kinross shares for each Kinam
preferred share. They also seek triple damages under Nevada statutes. Kinross
brought a motion for judgment on the pleadings with respect to the federal
securities claims based on fraud. Discovery was stayed pending the resolution of
this matter. On September 29, 2003, the Court ruled that plaintiffs had failed
to adequately state a federal securities fraud claim. The plaintiffs were given
an opportunity to amend the complaint to try and state a claim that would meet
the pleading standards established by the Court, but, if they are unable to do
so, these claims will be dismissed. The plaintiffs have filed an amended
complaint with the Court in an effort to eliminate the deficiencies in their
original complaint. Kinross believes the amended complaint is without merit and
has filed a motion for judgment on the pleadings seeking dismissal of the
securities fraud claims without prejudice. Kinross anticipates continuing to
vigorously defend this litigation. Kinross cannot reasonably predict the outcome
of this action and the amount of loss cannot be reasonably estimated.
SETTLEMENT IN GREECE
On December 10, 2003, the Greek government unilaterally terminated the
contract pursuant to which Kinross' two subsidiaries, TVX and TVX Hellas S.A.,
held title to the Hellenic Gold Properties, and invited them to enter into a
settlement agreement. A settlement agreement was then executed on December 12,
2003, pursuant to which the Greek government agreed to pay 11 million euros to
TVX Hellas. Kinross agreed to augment the 11 euros with an additional 11 million
euros, and to contribute all such amounts in full satisfaction of labor and
trade liabilities of TVX Hellas. On January 30, 2004, Kinross advanced TVX
Hellas 11 million euros and received a full release from all liabilities in
connection with environmental remediation. TVX Hellas has settled all labor
related claims and has filed for bankruptcy. Trade and other payables will be
settled in the bankruptcy proceeding out of the remaining funds on hand in
Greece.
THE HELLENIC GOLD PROPERTIES LITIGATION
The Ontario Court (General Division) issued its judgment in connection
with the claim against TVX by three individuals (collectively the "Alpha Group")
on October 14, 1998, relating to TVX's interest in the Hellenic Gold Mining
assets in Greece. The Court rejected full ownership and monetary damages claims
but did award the Alpha Group a 12% carried interest and the right to acquire a
further 12% participating interest in the Hellenic Gold Assets. TVX filed a
notice to appeal and the Alpha Group filed a notice of cross appeal.
Subsequent to the trial decision in October, 1998, TVX received
notification of two actions commenced by 1235866 Ontario Inc. ("1235866"), the
successor to Curragh Inc., Mineral Services Limited and Curragh Limited, against
the Alpha Group, and others, in Ontario and English Courts, in relation to the
claim by the Alpha Group against TVX for an interest in the Hellenic gold mines.
On July 28, 1999, TVX entered into an agreement with 1235866 to ensure that
these new claims would not result in any additional diminution of TVX's interest
in the Hellenic gold mines. 1235866 agreed not to pursue any claim against TVX
for an interest in the Hellenic Gold Properties beyond the interest awarded to
the Alpha Group by the courts. In the event that 1235866 is successful in its
claim against the Alpha Group, 1235866 would be entitled to a 12% carried
interest as defined in the agreement and the right to acquire a 12%
participating interest upon payment of 12% of the aggregate amounts expended by
TVX and its subsidiaries in connection with the acquisition, exploration,
development and operation of the Hellenic Gold Properties up to the date of
exercise. The TVX appeal, the Alpha Group cross appeal and a motion by 1235866
were all heard on February 17, 18 and 25, 2000. By judgment released June 1,
2000, the Court of Appeal, while partially granting the TVX appeal, upheld the
trial decision and rejected the Alpha Group cross appeal. The Court also
rejected the motion of 1235866 for a new trial. As a result, TVX holds, as
constructive trustee, a 12% carried interest and a right to acquire 12%
participating interest in the Hellenic Gold Properties upon the payment of costs
associated with that interest. The action by 1235866 against the Alpha Group
continues. TVX and the Alpha Group have been unable to agree on the definition
and application of the 12% carried interest and the right to acquire a 12%
participating interest in the Hellenic Gold Properties awarded to Alpha Group in
the trial judgment. Accordingly, in June 2001, a new action was commenced
between the Alpha Group and TVX to clarify the award. TVX anticipates that the
hearing with respect to such matter may be held in 2005.
136
As a result of the settlement agreement Kinross executed with the Greek
Government with respect to TVX Hellas S.A., the Alpha group has threatened
further litigation due to an alleged breach of the October 14, 1998, judgment in
the action noted above between the Alpha Group and TVX relating to the Hellenic
Gold mines. The Alpha Group has threatened to expand this claim to include a
claim against Kinross for breach of fiduciary duty. In addition, 1235866 has
threatened further litigation for breach of fiduciary duty. Kinross cannot
reasonably predict the outcome of this litigation and the threatened litigation
and the amount of loss cannot be reasonably estimated. No pleadings have been
exchanged with respect to these two threatened actions.
RUSSIA
In July 2003, Kinross received notice that local taxation authorities in
Russia are seeking a reassessment of the tax paid relating to the Kubaka mine by
Omolon, Kinross' 98.1% owned Russian Joint Stock Company, in the amount of $8.5
million, which included penalties and interest. The notice challenged certain
deductions and tax concessions relating to tax returns filed by Kinross in prior
years. Kinross appealed this notice of reassessment and, on January 27, 2004,
the Magadan Arbitration court agreed with Kinross on three of the four major
reassessment items. The impact of this ruling reduced the liability to $3.9
million, which included interest and penalties. However, on May 14, 2004, the
Magadan Appeal Court reversed this ruling. Kinross is appealing this decision to
the Khaborovsk Cessation Court. Kinross cannot reasonably predict the potential
outcome of this action and the amount of loss cannot reasonably be estimated.
CHILE
On September 27, 2001, Kinross' 100% owned Chilean mining company,
Compania Minera Kinam Guanaco ("CMKG") received a tax reassessment from the
Chilean IRS. The reassessment, in the amount of $6.7 million, disallows certain
deductions utilized by a third party. The third-party has indemnified Kinross
for up to $13.5 million in relation to this reassessment. Kinross appealed the
reassessment and, on January 12, 2004, the Chilean IRS upheld the tax auditors'
position. Kinross plans to appeal the reassessment with the Chilean Tax Court.
Kinross believes this reassessment will be resolved with no material adverse
affect to Kinross' financial position, results of operations or cash flows.
BRAZIL
Kinross' 50% owned Brazilian mining company, Mineracao Serra Grande S.A.
which owns the Crixas mine, received a tax reassessment in November 2003 from
the Brazilian IRS. The reassessment disallowed the claiming of certain sales tax
credits and assessed interest and penalties of which Kinross' 50% share totals
$9.5 million. Kinross and its joint venture partner believe that this
reassessment will be resolved without any material adverse affect on its
financial position, results of operations, or cash flows.
SUMMA
In September 1992, Summa Corporation ("Summa") commenced a lawsuit
against Echo Bay Exploration Inc. and Echo Bay Management Corporation (together,
the "Subsidiaries"), indirect subsidiaries of Echo Bay, alleging improper
deductions in the calculation of royalties payable over several years of
production at McCoy/Cove and another mine, which is no longer in operation. The
matter was tried in the Nevada State Court in April 1997, with Summa claiming
more than $13 million in damages, and, in September 1997, judgment was rendered
for the Subsidiaries. The decision was appealed by Summa to the Supreme Court of
Nevada, which in April 2000 reversed the decision of the trial court and
remanded the case back to the trial court for "a calculation of the appropriate
royalties in a manner not inconsistent with this order." The case was decided by
a panel comprised of three of the seven Justices of the Supreme Court of Nevada
and the Subsidiaries petitioned that panel for a rehearing. The petition was
denied by the three-member panel on May 15, 2000 and remanded to the lower court
for consideration of other defenses and arguments put forth by the Subsidiaries.
The Subsidiaries filed a petition for a hearing before the full Supreme Court
and on December 22, 2000, the Court recalled its previous decision. Both the
Subsidiaries and their counsel believe that grounds exist to modify or reverse
the decision. Echo Bay has $1.5 million accrued related to this litigation. If
the appellate reversal of the trial decision is maintained and the trial court,
on remand, were to dismiss all of the Subsidiaries' defenses, the royalty
calculation at McCoy/Cove would change and additional royalties would be
payable. Neither Echo Bay, nor counsel to the Subsidiaries, believe it is
possible to quantify the precise amount of liability pursuant to a revised
royalty calculation.
137
In March, 2004, Summa filed a complaint in the District Court of Nevada,
THE HOWARD HUGHES CORPORATION V. ECHO BAY MANAGEMENT CORPORATION, ET AL., Case
No. A481813, against Echo Bay, the Subsidiaries, Kinross, Newmont Mining
Corporation, and the officers and directors of the various corporate entities,
alleging that the Subsidiaries have transferred substantially all of their
assets to insiders and close third-parties, rendering them unable to respond to
any judgment that Summa may obtain in the underlying litigation. The complaint
alleges that the Echo Bay and TVX combination with Kinross and the acquisition
of the closed McCoy/Cove mining operations by Newmont in exchange for assumption
of the reclamation obligations was the culmination of a scheme to improperly
strip the Subsidiaries of their assets. Kinross filed an answer to the complaint
and sought to stay the action until the resolution of the 1992 action described
above. This motion was denied and is being appealed by Kinross. No discovery has
taken place in this action. Kinross believes this complaint to be without merit
and anticipates vigorously defending the action.
OTHER
In November 2001, two former employees of Echo Bay brought a claim
against Echo Bay pursuant to the CLASS PROCEEDINGS ACT (British Columbia) as a
result of the temporary suspension of operations at Echo Bay's Lupin mine in the
spring of 1998 and the layoff of employees at that time. On August 12, 2002, the
Supreme Court of British Columbia dismissed Echo Bay's application for a
declaration that British Columbia did not have jurisdiction in connection with
this claim or in the alternative, that the Court should decline jurisdiction.
Echo Bay appealed this decision. On April 4, 2003, the appeal was heard by the
Court of Appeal for British Columbia. On May 16, 2003, in a unanimous decision,
the Court of Appeal allowed Kinross' appeal and service was set aside on the
basis that British Columbia does not have jurisdiction in connection with this
claim. In addition the court ordered the former employees to reimburse Echo Bay
for costs associated with the appeal and the Supreme Court of British Columbia
proceedings. On August 18, 2003, counsel for the former employees filed an
application for leave to appeal to the Supreme Court of Canada. On March 4,
2004, the application for leave to appeal to the Supreme Court of Canada was
dismissed with costs payable to Echo Bay.
Kinross has been advised by counsel for the claimants that they have
initiated proceedings on behalf of 75 employees for damages for wrongful
dismissal in Nanavut and the Northwest Territories. They have requested that
Echo Bay choose the jurisdiction in which proceedings are to be pursued. Echo
Bay has not yet been served with these proceedings nor is the amount involved
known at this time.
Kinross is also involved in legal proceedings and claims arising in the
ordinary course of its business. Kinross 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
Kinross' financial position, results of operations or cash flows.
EMPLOYEES
At June 30, 2004, Kinross and its subsidiaries employed approximately
6,800 persons. Kinross' employees in the United States and Canada are
predominately non-unionized. At the Porcupine Joint Venture a three-year
Collective Bargaining Agreement was ratified on November 1, 2002. Kinross
considers its employee relations to be good.
138
--------------------------------------------------------------------------------
MANAGEMENT OF KINROSS
--------------------------------------------------------------------------------
DIRECTORS
Set forth below is information regarding the directors of Kinross.
COMMON SHARES,
RESTRICTED MEETINGS ATTENDED(3)
SHARE RIGHTS
AND DEFERRED
SHARE UNITS
OWNED,
NAME AND PLACE PRINCIPAL CONTROLLED OR CURRENT BOARD
OF RESIDENCE OCCUPATION DIRECTOR SINCE DIRECTED(1) COMMITTEES(3) (TOTAL 7) COMMITTEES
------------------------------------------------------------------------------------------------------------------------
John A. Brough President, January 19, 1994 1,166 Common A, C, N 7 of 7 A - 5 of 5
Vero Beach, Florida Torwest Inc. 2,673.46 DSUs C - 3 of 3
(real estate N - 2 of 2
development
company)
Robert M. Buchan(2) President and May 31, 1993 145,772 Common None 7 of 7
Toronto, Ontario Chief 50,000
Executive Officer Restricted
of Kinross Share Rights
Scott A. Caldwell Executive Vice- March 3, 2003 46,068 Common None
Toronto, Ontario President and 17,000 7 of 7
Chief Restricted
Operating Officer Share Rights
of Kinross
Arthur H. Ditto Retired Mining May 31, 1993 182,953 Common None
Phoenix, Arizona Executive 2,005.10 DSUs 7 of 7
John A. Keyes Retired Mining March 3, 2003 11,666 Common E 7 of 7 E - 4 of 4
The Woodlands, Texas Executive 2,272.44 DSUs A - 1 of 1
Richard S. Hallisey President of December 5, 2003 None A,E -
Toronto, Ontario Sullivan Holdings 1,047.49 DSUs
Limited
John M. H. Huxley Principal, May 31, 1993 41,603 Common A, C, N 6 of 7 A - 4 of 5
Toronto, Ontario Algonquin 2,272.44 DSUs C - 3 of 3
Management Inc. N - 2 of 2
(management
company)
George A. Michals President, January 31, 2003 27,083 Common A, CG A - 3 of 3
Orangeville, Ontario Baymont Capital 2,005.10 DSUs 7 of 7 CG - 2 of 2
Resources Inc.
(investment
holding company)
Cameron A. Mingay Partner, Cassels January 12, 2001 1,666 Common CG, E 7 of 7 CG - 2 of 2
Toronto, Ontario Brock & Blackwell 2,005.10 DSUs E - 4 of 4
LLP (law firm)
John E. Oliver Senior March 7, 1995 7,360 Common C, CG, N 7 of 7 A - 1 of 1
San Francisco, Vice-President, 5,346.92 DSUs C - 3 of 3
California Atlantic Region, CG - 2 of 2
Bank of Nova N - 2 of 2
Scotia (financial
institution)
-------------------------
(1) Information respecting holdings of common shares has been provided by
individual directors. Information respecting Restricted Shares Rights
and Deferred Share Units is set forth in "Management of
Kinross--Executive Compensation."
(2) Mr. Buchan also holds 384,613 convertible preferred shares of Kinross
which are convertible into 1,058,390 common shares.
(3) Committees: A-Audit, C-Compensation, CG-Corporate Governance,
E-Environmental, N-Nominating.
139
Each of the directors has held the principal occupation set forth
opposite his name, or other executive offices with the same firm or its
affiliates, for the past five years, with the exception of Messrs. Arthur H.
Ditto, Richard S. Hallisey, and John A. Keyes. Prior to February 2003, Mr. Ditto
held the position of Vice-Chairman of Kinross from April 2002 to January 2003.
Prior to that, from 1993 to 2002, he was Chief Operating Officer of Kinross and
from 1996 to 2002 he was President of Kinross. Prior to December 2001, Mr.
Hallisey was Vice-Chairman, National Bank Limited and, prior to January 1999, he
was Vice-Chairman, First Marathon Securities Limited. Mr. Keyes, prior to
January 2001, was President and Chief Operating Officer of Battle Mountain Gold
Company and prior thereto was Senior Vice-President of Battle Mountain Gold
Company.
Below is a biography of each of the directors of Kinross:
JOHN A. BROUGH
Mr. Brough has been President of Torwest Inc., a real estate development
company, since 1998. Prior to 1998, Mr. Brough held the position of Executive
Vice-President and Chief Financial Officer of iStar Internet Inc. Prior to 1997,
Mr. Brough was Senior Vice-President and Chief Financial Officer of Markborough
Properties Limited. He holds a Bachelor of Arts degree and is a Chartered
Accountant.
ROBERT M. BUCHAN
Mr. Buchan has been Chief Executive Officer of Kinross since May 1993.
Prior to that he was Vice-Chairman of Dundee Bancorp Inc. Mr. Buchan is a
director of B. C. Metals Corporation and also sits on the Board of the Art
Gallery of Ontario. He has a degree in Mining Engineering and a Masters in
Mineral Economics.
SCOTT A. CALDWELL
Mr. Caldwell has been Executive Vice-President and Chief Operating
Officer of Kinross since June 2002. Prior to that Mr. Caldwell was Senior
Vice-President of Mine Operations of Kinross from 2001 to 2002 and he was and
Senior Vice-President of Surface Operations of Kinross from 1998 to 2001. Prior
to joining Kinross, he was Vice-President of Operations for Echo Bay from 1996
to 1998. Mr. Caldwell has a Bachelor of Science (Mining) degree.
ARTHUR H. DITTO
Mr. Ditto previously held the position of the Vice-Chairman of Kinross
from April 2002 to January 2003. Prior to that, from 1993 to 2002, he was Chief
Operating Officer of Kinross and from 1996 to 2002, he was the President of
Kinross. Mr. Ditto is currently retired and sits on the Board of Montana Tech
Foundation. Mr. Ditto is also a director of Titanium Corporation, Inc., a
position he has held since January 15, 2003. He holds a Bachelor of Science
degree, is a registered Professional Engineer and has completed the executive
development program at the University of Illinois.
RICHARD S. HALLISEY
Mr. Hallisey is President and a director of Sullivan Holdings Limited, a
position he has held since December, 2001. From January 1999 to December 2001,
Mr. Hallisey was Vice-Chairman and Managing Director of National Bank Financial.
Prior to his position with National Bank Financial, Mr. Hallisey was
Vice-Chairman and a director of First Marathon Securities Limited. Mr. Hallisey
holds a Bachelor of Science degree and a Masters in Business Administration.
JOHN M. H. HUXLEY
Mr. Huxley has been a principal of Algonquin Management Inc., the
manager of the Algonquin Power Income Fund, since 1997. Prior to that he was
President of Algonquin Power Corporation, a builder, developer and operator of
hydroelectric generating facilities in Canada and the United States. He holds a
Bachelor of Laws degree.
140
JOHN A. KEYES
Mr. Keyes most recently held the position of President and Chief
Operating Officer of Battle Mountain Gold Company until 2001. Prior to that
position, Mr. Keyes served as the Senior Vice-President, Operations, for Battle
Mountain Gold Company with responsibility for operations in the United States,
Canada, Bolivia, Chile, and Australia. Mr. Keyes has a Bachelor of Science
degree (honors) and has completed an executive MBA course.
GEORGE F. MICHALS
Mr. Michals is President of Baymont Capital Resources Inc., an
investment holding company. Mr. Michals is a director of Morguard Corporation
and Headwaters HealthCare Centre and has served in the past on the Boards of a
number of private and public companies. From 1987 to 1990, he held the position
of Executive Vice-President and Chief Financial Officer of Canadian Pacific
Limited. He holds a Bachelor of Commerce degree and is a Chartered Accountant.
CAMERON A. MINGAY
Mr. Mingay has been a partner of Cassels, Brock & Blackwell LLP, a law
firm, since 1999. Prior to 1999, he was a partner of Smith Lyons LLP. He is also
a director of Waverider Communications Inc., Alliance Surface Finishing Inc.,
and the Canadian Parapalegic Association (Ontario). Mr. Mingay holds a Bachelor
of Laws degree and is a member of the Law Society of Upper Canada.
JOHN E. OLIVER
Mr. Oliver was appointed Senior Vice-President, Atlantic Region, Bank of
Nova Scotia in March 2004. Prior to that, Mr. Oliver was Executive Managing
Director and Co-Head of Scotia Capital U.S., Bank of Nova Scotia from October
1999. From 1997 to 1999 Mr. Oliver was Senior Vice-President, Corporate and Real
Estate Banking of Bank of Nova Scotia and prior thereto, he was Senior
Vice-President of Real Estate Banking of Bank of Nova Scotia. Mr. Oliver was
appointed the Independent Chairman of Kinross in August 2002.
OFFICERS
The following table sets forth the names of each of the officers of
Kinross and all offices of Kinross now held by each of them.
NAME OFFICE HELD
---- -----------
ROBERT M. BUCHAN............................. President and Chief Executive Officer
SCOTT A. CALDWELL............................ Executive Vice-President and Chief Operating Officer
RODNEY A. COOPER............................. Vice-President, Technical Services
JERRY W. DANNI............................... Vice-President, Environmental Affairs
ALAN R. EDWARDS.............................. Vice-President, Operations
CHRISTOPHER T. HILL.......................... Vice-President, Investor Relations, and Treasurer
JOHN W. IVANY................................ Executive Vice-President
LARS-ERIC JOHANSSON.......................... Executive Vice-President and Chief Financial Officer
ANDREW F. KACZMAREK.......................... Vice-President, Project Development
JOHN E. OLIVER............................... Independent Chairman
SHELLEY M. RILEY............................. Corporate Secretary
ALLAN D. SCHOENING........................... Vice-President, Human Resources and Community Relations
RONALD W. STEWART............................ Vice-President, Exploration
141
The following sets forth biographical information for each of the
executive officers of Kinross who is not also a director of Kinross:
RODNEY A. COOPER was appointed Vice-President, Technical Services, on
March 15, 2004. Prior to that, Mr. Cooper held the position of Director,
Technical Services, from March 2002 to March 2004, and Project Manager, Timmins,
from June 2000 to February 2002. From January 1999 to May 2000, he was Mine
Superintendent, Eskay Creek Mine for Homestake Canada Inc.
JERRY W. DANNI has been Vice-President, Environmental Affairs since July
2000. Prior to joining Kinross, Mr. Danni was Vice-President of Environmental
Affairs for Cyprus Climax Metals Company from 1994 to June 2000.
ALAN R. EDWARDS has been Vice-President, Operations, since July 2003.
Prior to that Mr. Edwards was a member in two mining limited liability
partnerships, Perlite Southwest and CE Resources, from February 2002 to June
2003; Senior Vice-President, Operations, for P.T. Freeport Indonesia from
September 2000 to February 2002; Vice-President, Surface Mines, for P.T.
Freeport Indonesia from May 2000 to September 2000; President and General
Manager for Minero C.V. from January 2000 to April 2000; and Vice-President and
General Manager of Minero Coiso Verde from January 1998 to January 2000.
CHRISTOPHER T. HILL has been Vice-President, Investors Relations, and
Treasurer since March 2004. Mr. Hill was Vice-President, Treasurer from May 1998
to March 2004. Prior to that he was Treasury Manager, Barrick Gold Corporation
from September 1994 to May 1998.
JOHN W. IVANY has been Executive Vice-President of Kinross since July
1995.
Lars-Eric Johansson was appointed Executive Vice-President and Chief
Financial Officer effective June 1, 2004. Prior to that, he was Executive
Vice-President and Chief Financial Officer of Noranda, Inc. of Toronto and prior
to Noranda, he was Senior Vice-President and Chief Financial Officer of
Falconbridge.
ANDREW F. KACZMAREK was appointed Vice-President, Project Development,
on March 15, 2004. Prior to that, Mr. Kaczmarek was Vice-President and General
Manager, Chairman of Gabriel Resources Limited from July 2002 to May 2003. From
January 2000 to July 2002, Mr. Kaczmarek was Manager, Safford Project of Phelps
Dodge Corporation. Prior to that, he was Director, Project Development, of
Cyprus Amax Corporation.
SHELLEY M. RILEY has been the Corporate Secretary of Kinross since June
1993.
ALLAN D. SCHOENING has been Vice-President, Human Resources and
Community Relations for Kinross since July 1998. Prior to this he was Director,
Human Resources for Barrick Gold Corporation from May 1995 to June 1998.
RONALD W. STEWART has been the Vice-President, Exploration of Kinross
since March 2002. Prior to that date he was Director of Investor Relations for
Placer Dome from January 2000 to March 2002, Manager Mine Exploration for Placer
Dome from February 1998 to January 2000 and Country Exploration Manager,
Indonesia for Placer Dome from March 1996 to February 1998.
Other than the following, none of the directors or officers: (i) has
been subject to corporate cease trade order or similar order in the past ten
years; (ii) became bankrupt or was the director or officer of a company that
became bankrupt in the last ten years; or (iii) has been subject to penalties or
sanctions imposed by a court relating to Canadian securities legislation.
142
John Ivany, the Executive Vice-President of Kinross, was the subject of
enforcement proceedings by the Alberta Securities Commission IN RE CARTAWAY
RESOURCES CORP. In its order dated February 22, 2001, the Alberta Securities
Commission found that Mr. Ivany, as Chief Executive Officer of Cartaway
Resources Corp., had allowed the issuance of a press release that contained a
material factual error in violation of the securities laws of the Province of
Alberta. As a result, Mr. Ivany was prohibited from acting as a director or
officer of any "junior issuer" for a period of five years and ordered to pay
costs in the amount of CDN $20,000. Kinross is not a junior issuer under the
applicable Alberta Securities Commission provisions.
EXECUTIVE COMPENSATION
The following table sets forth all annual and long-term compensation for
services in all capacities to Kinross and its subsidiaries for the fiscal year
ended December 31, 2003, in respect of each of the individuals who were, at
December 31, 2003, the Chief Executive Officer and the four senior executive
officers, whose total salary exceeded $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE(1)
=============================== ================================== ============================== =====================
ALL OTHER(7)
ANNUAL LONG TERM COMPENSATION COMPENSATION
---------------------------------- ------------------------------
COMMON SHARE RESTRICTED
OPTIONS SHARES
SALARY BONUS GRANTED RIGHTS
NAME AND PRINCIPAL POSITION YEAR $ $ # GRANTED
#
------------------------------- ------- ------------ ------------- ---------------- ------------- ---------------------
Robert M. Buchan 2003 713,500 535,125(6) 100,000 50,000 111,260
President and Chief Executive 2002 420,479 964,752(5) 124,117 - 50,367
Officer 2001 387,360 64,650(2) 66,667 - 52,534
------------------------------- ------- ------------ ------------- ---------------- ------------- ---------------------
Scott A. Caldwell 2003 273,806 121,295 53,125 17,000 22,722
Executive Vice-President and 2002 203,351 175,120(5) 42,105 - 66,787(3)
Chief Operating Officer 2001 172,892 63,527 26,667 - 35,341(3)
------------------------------- ------- ------------ ------------- ---------------- ------------- ---------------------
Arthur H. Ditto 2003 21,553 - - - 1,012,974(4)
Former Vice-Chairman 2002 247,274 - - - 23,758
2001 228,421 32,900 41,667 - 23,398
------------------------------- ------- ------------ ------------- ---------------- ------------- ---------------------
John W. Ivany 2003 237,685 102,030 44,688 14,300 27,667
Executive Vice-President 2002 197,726 226,064(5) 38,916 - 22,199
2001 193,680 64,560 26,667 - 22,055
------------------------------- ------- ------------ ------------- ---------------- ------------- ---------------------
Brian W. Penny 2003 198,353 69,424 27,800 8,340 18,713
Former Vice-President Finance 2002 171,936 201,388(5) 33,835 - 13,109
and Chief Financial Officer 2001 159,592 47,904 23,333 - 30,613(3)
=============================== ======= ============ ============= ================ ============= =====================
(1) Compensation, which is paid in Canadian dollars, is reported in United
States dollars. The rates of exchange used to convert Canadian dollars
to United States dollars are: 2001, 1.5489; 2002, 1.5703; and 2003,
1.4051.
(2) Paid in January 2002.
(3) Included in all other compensation is the value of the common shares
granted under the restricted share plan in 2000.
(4) Mr. Ditto retired as Vice-Chairman on February 1, 2003, and this amount
includes his retirement allowance and bonus amount previously shown in
2002.
(5) Includes bonuses earned in 2002 and paid in January 2003.
(6) Paid in January 2004.
(7) Includes pension contributions, auto allowances, and other perquisites.
For the period January 1 to December 31, 2003, the five senior
executives of Kinross received salaries, bonuses, and other compensation
totaling $3,466,107 in respect of services rendered to Kinross and its
subsidiaries.
Last year's management information circular of Kinross for its annual
meeting of shareholders reported that for the period January 1 to December 31,
2002, the five senior executives of Kinross received salaries, bonuses, and
other compensation totaling $2,180,621. This figure was incorrect, as it did not
include bonuses totaling $967,936, paid in January 2003, but earned in 2002.
These bonuses were declared in recognition of the combination of Kinross with
Echo Bay and TVX.
143
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth stock options granted under Kinross'
Stock Option Plan during the fiscal year ended December 31, 2003, to each of the
named executive officers.
The options become exercisable as to 33-1/3% on each of the first,
second, and third anniversary of the date of grant. The exercise price of the
option is the market value (as defined in Kinross' Share Incentive Plan) of the
common shares on the date of grant.
OPTION GRANTS IN LAST FISCAL YEAR
===================== ================== =================== ================== ==================== =================
AVERAGE
EXERCISE PRICE MARKET VALUE ON DATE OF
NAME NUMBER % (CDN $/SHARE) GRANT (CDN $/SHARE) EXPIRY
--------------------- ------------------ ------------------- ------------------ -------------------- -----------------
Robert M. Buchan 100,000 13.55% $10.90 $10.90 11/24/08
--------------------- ------------------ ------------------- ------------------ -------------------- -----------------
Scott A. Caldwell 53,125 7.20% $10.90 $10.90 11/24/08
--------------------- ------------------ ------------------- ------------------ -------------------- -----------------
John W. Ivany 44,688 6.05% $10.90 $10.90 11/24/08
--------------------- ------------------ ------------------- ------------------ -------------------- -----------------
Brian W. Penny 27,800 3.77% $10.90 $10.90 11/24/08
===================== ================== =================== ================== ==================== =================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth details of exercised stock options during
the fiscal year ended December 31, 2003, by each of the named executive officers
and the fiscal year end value of unexercised options on an aggregate basis.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
======================== ============ ====================== ============================= ===========================
NAME COMMON AGGREGATE VALUE UNEXERCISED AT FISCAL VALUE OF UNEXERCISED
SHARES REALIZED ($) YEAR-END IN-THE-
ACQUIRED ON EXERCISABLE/UNEXERCISABLE MONEY OPTIONS AT FISCAL
EXERCISE YEAR-
END (CDN $)(1)
EXERCISABLE/UNEXERCISABLE
------------------------ ------------ ---------------------- ----------------------------- ---------------------------
Robert M. Buchan - - 690,784/100,000 3,285,623/0
------------------------ ------------ ---------------------- ----------------------------- ---------------------------
Scott A. Caldwell 60,000 309,323 125,438/53,125 250,683/0
------------------------ ------------ ---------------------- ----------------------------- ---------------------------
Arthur H. Ditto 42,200 36,714 270,000/0 1,441,651/0
------------------------ ------------ ---------------------- ----------------------------- ---------------------------
John W. Ivany 33,333 4,000 242,249/44,688 1,053,708/0
------------------------ ------------ ---------------------- ----------------------------- ---------------------------
Brian W. Penny 30,000 202,600 97,168/27,800 307,282/0
======================== ============ ====================== ============================= ===========================
-------------------------
(1) Value of unexercised-in-the-money options calculated using the closing
price of CDN $10.32 of the Kinross common shares on the TSX on December
31, 2003, less the exercise price of in-the-money stock options.
PENSION AND OTHER BENEFIT PLANS
CANADA
In 1997, Kinross established a deferred profit sharing plan and a
registered retirement savings plan covering all of the Canadian non-unionized
employees. The deferred profit sharing plan provides for basic contributions by
Kinross (which cannot be less than 4% of the member's compensation). In
addition, there is an annual profit sharing contribution based on Kinross'
financial performance. Kinross contributed an aggregate of $93,985 to the
deferred profit sharing plan on behalf of the named executive officers during
the year ended December 31, 2003.
144
The registered retirement savings plan is available to all Canadian
employees and allows for the minimum contribution of CDN $60 per month with
Kinross matching 100% of this amount with any additional contributions being
matched by 50% up to a maximum of CDN $30. Kinross contributed $3,084 to the
registered retirement savings plan on behalf of each of Messrs. Buchan,
Caldwell, Ivany, and Penny during the year ended December 31, 2003.
UNITED STATES
Kinross' subsidiary, Kinross Gold U.S.A., Inc., has various pension
plans in which one executive officer is eligible to participate. Kinross is
required to make certain contributions to the pension plans on behalf of Arthur
H. Ditto.
Employees are allowed to make contributions to the 401(k) Savings Plan
from salary deductions each year subject to certain limitations. Kinross has in
past years made matching contributions of 50% of each employee's contributions,
but subject to a maximum contribution of 3% of the employee's annual
compensation. Employees are always fully vested in their own salary deferral
contributions and become fully vested (in 33?% increments) in any contribution
by Kinross after three years. Participants are allowed to direct the investment
of their account within a group of designated investment funds. Kinross
contributed $3,912 to the 401(k) Savings Plan on behalf of Arthur H. Ditto
during the year ended December 31, 2003.
Kinross established a defined contribution money purchase plan (the
"Money Purchase Plan") in which substantially all of the employees in the United
States participate. The Money Purchase Plan is funded entirely by Kinross.
Kinross contributes 5% of the employees' annual wages to this plan. Kinross is
required to make contributions to this plan such that no unfunded pension
obligations exist. Participants are allowed to direct the investment of the
pension plan account balances. Kinross contributed $6,520 to the Money Purchase
Plan on behalf of Arthur H. Ditto during the year ended December 31, 2003.
EMPLOYMENT CONTRACTS
Kinross has entered into a severance agreement with each of the Named
Executive Officers. Each of the severance agreements provides for a severance
payment equal to two (in the case of Messrs. Ivany and Penny) or 2.5 (in the
case of Messrs. Buchan and Caldwell multiplied by the sum of the Named Executive
Officer's annual compensation (annual base salary and benefits) and target
bonus. In the case of Messrs. Buchan and Caldwell, the severance payment may be
paid to the Named Executive Officer following a change of control of Kinross, at
the option of the Named Executive Officer. On January 31, 2003, Mr. Ditto
retired as Vice-Chairman of Kinross and received payments in consideration of
the grant of a release of his entitlement under his severance agreement. In the
case of Messrs. Ivany and Penny, the severance is paid to the Named Executive
Officer if a triggering event occurs following a change of control. A triggering
event includes: (i) an adverse change in the employment terms of the executive,
(ii) a diminution of the title of the executive; (iii) a change in the person to
whom the executive reports (subject to certain exceptions); and (iv) a change in
the location at which the executive is required to work (subject to certain
exceptions). The severance amount is payable at the option of Messrs. Ivany and
Penny provided the exercise of such option occurs within 18 months following the
change of control and within six months of the triggering event.
Other than as described above, Kinross (and its subsidiaries) have no
employment contracts in place with the Named Executive Officers and no
compensatory plans or arrangements with respect to the Named Executive Officers
that results or will result from the resignation, retirement or any other
termination of employment of such officers' employment with Kinross (and its
subsidiaries), from a change of control of Kinross (and its subsidiaries) or a
change in the Named Executive Officers' responsibilities following a change of
control.
145
CERTAIN TRANSACTIONS
John E. Oliver is Senior Vice President, Atlantic Region, of the Bank of
Nova Scotia. The Bank of Nova Scotia is a co-lead of the lending syndicate for
Kinross' credit facility. The Bank of Nova Scotia's commitment to the credit
facility is approximately $20 million. Mr. Oliver's duties do not include
responsibilities in the commercial lending department responsible for management
and decisions with respect to the Kinross credit facility. The board of Kinross
does not consider this relationship to present a conflict of interest with Mr.
Oliver's responsibilities as a board member.
Kinross holds an ownership interest in a joint venture to develop a
potential copper property in which Arthur H. Ditto, a director of Kinross, also
holds an ownership interest. Kinross contributed $0.7 million to this joint
venture during the preceding three years to provide working capital.
DIRECTORS AND OFFICERS' INSURANCE
Kinross has purchased an insurance policy which covers actions against
its directors and officers and those of its subsidiaries. The limit of liability
applicable to all insured directors and officers under the current policy, which
expires on February 1, 2005, is $25 million in the aggregate inclusive of
defense costs. Under the policy, Kinross has reimbursement coverage to the
extent that it has indemnified the directors and officers in excess of a
deductible of $2 million each loss for securities claims and $1 million each
loss for non-securities claims. The total premium paid by Kinross in respect of
coverage for 2004 was $775,000, no part of which is payable by the directors or
officers of Kinross.
The bylaws of Kinross also provide for the indemnification of Kinross'
directors and officers from and against any liability and cost in respect of any
action or suit against them in connection with the execution of their duties of
office, subject to the limitations contained in the BUSINESS CORPORATION ACT
(ONTARIO).
COMPENSATION OF DIRECTORS
During the year ended December 31, 2003, the Compensation Committee
determined that it was desirable to obtain professional advice regarding the
compensation of Kinross' directors. Mercer Human Resource Consulting LLC
("Mercer") was retained to develop alternative pay programs for consideration by
the Compensation Committee for Kinross' outside directors and Non-Executive
Chair taking into consideration:
(a) Competitive compensation levels relative to the TSX 60 and TSX
100 companies;
(b) Introduction of a flat fee approach; and
(c) Introduction of deferred share units in place of stock options.
Reports were then prepared by Mercer pertaining to alternate methods of
director compensation and corporate governance considerations. These reports
were discussed in detail with the Compensation Committee and then presented to
the board of directors for their review and approval.
Under the new compensation plan adopted by the board of directors, each
director who is not a salaried employee of Kinross or any of its subsidiaries is
entitled to an annual retainer of CDN $75,000; the Chairs of the Compensation,
Corporate Governance, Environmental, Health and Safety and Nominating Committees
will receive an additional annual retainer of CDN $10,000; the Chair of the
Audit Committee will receive an additional annual retainer of CDN $25,000 and
the Non-Executive Chair will receive an additional annual retainer of CDN
$125,000. The flat fee will be paid 50% in cash and 50% in deferred share units.
In addition, such directors are also entitled to the reimbursement of their
expenses.
146
The main purpose of the deferred share unit plan is to strengthen the
alignment of interests between the directors and the shareholders of Kinross by
linking a portion of annual director compensation to the future value of Kinross
common shares. Under the plan, each director receives, on the date in each
quarter, which is two business days following the publication by Kinross of its
earnings results for the previous quarter (or year in the case of the first
quarter) that number of deferred share units having a value equal to 50% of the
compensation of the director for the current quarter. The number of deferred
share units granted to a director is determined by dividing the closing price of
Kinross' common shares on the Toronto Stock Exchange on the business day
immediately preceding the date of grant. At such time as a director ceases to be
a director, Kinross will make a cash payment to the director, equal to the
market value of Kinross' common shares on the date of departure, multiplied by
the number of deferred share units held on that date.
REPORT ON EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION PROGRAM
The executive compensation program of Kinross is designed to encourage,
compensate, and reward employees on the basis of individual and corporate
performance, both in the short and long term. Base salaries are set at levels
which are competitive with the base salaries paid by similar corporations within
the mining industry. Compensation is directly tied to corporate and individual
performance. Bonuses are directly tied to the performance of Kinross. Share
ownership opportunities are provided as an incentive to align the interests of
senior officers with the longer term interests of shareholders and to reward
past performance.
Compensation for Named Executive Officers, as well as for the senior
officers as a whole, consists of a base salary, bonus, stock options, and
restricted share rights.
During the year ended December 31, 2003, the Compensation Committee
determined that it was desirable to obtain professional advice regarding the
compensation of the senior officers of Kinross and for a review to be conducted
generally in relation to compensation matters that are properly within the
purview of the Compensation Committee. As set forth above, Mercer was retained
to work with the Compensation Committee on executive compensation and related
governance requirements, including in particular:
(a) conducting interviews with senior management and the board of
directors to review the performance management process;
(b) executive compensation benchmarking;
(c) studying director compensation;
(d) the CEO evaluation process; and
(e) the appropriate quantum of transaction bonuses.
Reports were then prepared by Mercer pertaining to transaction bonuses, director
compensation, corporate governance considerations and executive compensation.
These reports were discussed in detail with the Compensation Committee.
BASE SALARY
Corporate office base salaries are established at a competitive level.
The level of base salary for each senior officer of Kinross is determined by the
level of responsibility and the importance of the position to Kinross.
For 2003, the President and Chief Executive Officer presented salary
recommendations to the Compensation Committee with respect to the senior
officers of Kinross. The Compensation Committee's recommendations for the base
salaries for the senior officers were then submitted for approval by the board
of directors of Kinross.
147
PRESIDENT AND CHIEF EXECUTIVE OFFICER COMPENSATION
The Chairman of the Compensation Committee presents recommendations to
the Compensation Committee with respect to the President and Chief Executive
Officer. In setting the President and Chief Executive Officer's salary for 2003,
the Compensation Committee reviewed salaries paid to other senior officers in
Kinross, salaries paid to other chief executive officers in the industry and the
President and Chief Executive Officer's impact on the achievement of Kinross'
objectives for the previous financial year.
To determine the President and Chief Executive Officer's compensation
for the year the Committee took into consideration Kinross' balance sheet and
other financial items; merger and acquisition initiatives; reserve position and
investor profile.
During 2003, under President and Chief Executive Officer Robert M.
Buchan's leadership, Kinross achieved a number of important goals and
objectives. In September, 2003 the redemption of approximately CDN $195 million
5.5% Unsecured Subordinated Convertible Debentures eliminated a significant
portion of Kinross' balance sheet debt. Mr. Buchan took a leadership role in
this initiative at a time that capitalized on commodity price strength and
reduced the equity issuance obligations on Kinross. In addition, Kinross' cash
position increased 50% over prior year end. While some portion of this
improvement was attributable to the increase in the gold price and corresponding
improvements in cash flow generated from operating activities, a meaningful
portion was attributable to Mr. Buchan's leadership in asset disposal decisions.
Two very significant merger and acquisition initiatives were completed
or initiated in 2003. In January, Kinross successfully completed a combination
agreement with Echo Bay Mines Ltd. and TVX Gold Inc., resulting in Kinross
becoming the seventh largest primary gold producer in the world. In October, Mr.
Buchan led the proposed acquisition of Crown Resources Corporation and its 100%
owned Buckhorn Mountain gold deposit. This transaction will add to Kinross'
proven and probable resources and support efforts to address concerns regarding
Kinross' long-term reserve position.
Mr. Buchan played a key role in monitoring and supporting aggressive
drilling efforts at various of Kinross' properties which resulted in an increase
in the reported reserve position.
Under Mr. Buchan's direction, Kinross committed significant resources to
advancing its profile with investors with very positive results. Mr. Buchan took
a very active role in both participating in events to promote Kinross as well as
directing resources to ensure that Kinross remains a key player with a much
larger investor base.
BONUS
The Committee set the proposed bonuses for the 2003 fiscal year of
Kinross for the Named Executives Officers based on the performance of the Chief
Executive Officer and the senior executives with reference to the Mercer reports
discussed above with particular emphasis on the following performance metrics:
(a) shareholder value creation;
(b) corporate financial performance; and
(c) implementation of strategic goals.
The Committee also reviewed comparator groups to determine that bonuses were in
line with market expectations.
148
SHARE INCENTIVE PLAN
The Share Incentive Plan of Kinross is designed to advance the interests
of Kinross by encouraging employees to acquire equity participation in Kinross
through the acquisition of Kinross common shares. The Share Incentive Plan
consists of a stock option plan (the "Stock Option Plan") and a share purchase
plan (the "Share Purchase Plan"). Currently the maximum number of Kinross common
shares issuable pursuant to the Share Incentive Plan is 6,833,333, representing
approximately 2.0% of the number of Kinross common shares currently issued and
outstanding.
OPTIONS
The Stock Option Plan of Kinross is administered by the Compensation
Committee and forms part of Kinross' Share Incentive Plan. The Stock Option Plan
is designed to give each holder of an option an interest in preserving and
maximizing shareholder value in the longer term, to enable Kinross to attract
and retain individuals with experience and ability and to reward individuals for
current and future performance. The Compensation Committee considers option
grants when reviewing key employee compensation packages. Any grant
recommendations made by the Compensation Committee requires approval by the
board of directors of Kinross. In determining the number of options to be
granted, the Compensation Committee gives consideration to an individual's
present and potential contribution to the success of Kinross.
The number of options which may be issued under the Stock Option Plan in
the aggregate and in respect of any fiscal year is limited under the terms of
the Stock Option Plan and cannot be increased without shareholder and regulatory
approval. The exercise price per share is not less than the closing price of the
Kinross common shares on the TSX on the trading day preceding the day on which
the option is granted. Each option is for a term of five years and have various
vesting periods.
The maximum number of Kinross common shares issuable under the Stock
Option Plan is currently set at 4,166,667 in the aggregate, representing 1.2% of
the outstanding number of Kinross common shares. The maximum number of common
shares issuable to insiders pursuant to the Stock Option Plan within a one-year
period, is limited to 10% of the total number of common shares then outstanding.
The maximum number of common shares issuable to any one insider and such
insider's associates pursuant to the Stock Option Plan, within a one year
period, is limited to 5% of the total of common shares then outstanding. The
maximum number of Kinross common shares reserved for issue to any one person
under the Stock Option Plan is limited to 5% of the outstanding number of
Kinross common shares from time to time.
The initial grants of options to directors, officers, and employees of
Kinross and options granted by and inherited from Kinross' predecessor companies
were ratified by the full board of directors of Kinross. All subsequent grants
were reviewed by the Compensation Committee and recommended to and approved by
the board of directors of Kinross.
SHARE PURCHASE PLAN
For the year ended December 31, 2003, employees of Kinross or designated
affiliates are entitled to contribute up to 10% of their annual basic salary to
the Share Purchase Plan. Kinross matches the participant's contribution on a
quarterly basis and each participant is then issued common shares having a value
equal to the aggregate amount contributed to the Share Purchase Plan by the
participant and by Kinross. The purchase price per share is the weighted average
closing price of the common shares on the TSX, for participants resident in
Canada, or the NYSE, for participants resident in the United States, for the 20
consecutive trading day period prior to the end of the calendar quarter in
respect of which the common shares are issued. Such common shares are delivered
to participants 12 months following their date of issue. In the event of
termination of employment or death of an employee, any portion of the
participant's contribution then held in trust shall be paid to the participant
or his or her estate and any portion of Kinross' contribution shall be returned
to Kinross. In addition, any common shares held in safekeeping will be purchased
for cancellation at an amount equal to the participant's contribution and the
proceeds will be paid to the participant. The maximum number of common shares
issuable under the Share Purchase Plan is currently set at 2,666,666 common
shares in the aggregate.
149
Subsequent to year end, Kinross made revisions to the Share Purchase
Plan. Effective January 1, 2004, Kinross' match was reduced to 50% from 100% of
the participant's contribution and common shares will be delivered to
participants six months instead of one year following their date of issue. These
changes were made to more closely align the Share Purchase Plan with those of
comparative companies.
RESTRICTED SHARE RIGHTS
The Restricted Share Plan of Kinross is administrated by the
Compensation Committee. The purpose of the Restricted Share Plan is to advance
the interests of Kinross through the motivation, attraction, and retention of
employees, directors, and consultants of Kinross and to secure for Kinross and
its shareholders the benefits inherent in the ownership of Kinross common shares
to key employees, directors, and consultants of Kinross. Restricted share rights
("Restricted Share Rights") may be granted by the Compensation Committee to
employees, officers, directors, and consultants of Kinross as a discretionary
payment in consideration of past services to Kinross. In determining the
eligibility of participants to the Restricted Share Plan, the Compensation
Committee considers the present and potential contributions and the services
rendered by each particular participant to the success of Kinross.
A Restricted Share Right is exercisable for no additional consideration
into one common share on the later of: (i) the end of a restricted period of
time wherein a Restricted Share Right cannot be exercised as determined by the
Committee ("Restricted Period"); and (ii) a date determined by an eligible
participant that is after the Restricted Period and before a participant's
retirement date or termination date (a "Deferred Payment Date"). The maximum
number of common shares issuable under the Restricted Share Plan is currently
set at 333,333. The maximum number of common shares issuable to insiders
pursuant to the Restricted Share Plan, within a one-year period, is limited to
10% of the total number of common shares then outstanding. The maximum number of
common shares issuable to any one insider and such insider's associates pursuant
to the Restricted Share Plan, within a one-year year period, is limited to 5% of
the total number of common shares then outstanding. The maximum number of common
chares reserved for issue to any one person under the Restricted Share Plan is
limited to 5% of the total number of common shares then outstanding. The maximum
number of common shares reserved for issue to any one person under the
Restricted Share Plan is limited to 5% of the number of common shares
outstanding from time to time.
The grant of a Restricted Share Right is evidenced by a Restricted Share
Rights agreement between a participant and Kinross which is subject to the
Restricted Share Plan and may be subject to other terms and conditions that are
not inconsistent with the Restricted Share Plan and which the Compensation
Committee deems appropriate.
Participants seeking to set a Deferred Payment Date must give Kinross at
least 60 days notice prior to the expiration of the Restricted Period in order
to effect such change. Participants electing to change a Deferred Payment Date
must give Kinross prior written notice not later than 60 days prior to the
Deferred Payment Date.
In the event of a participant's retirement or termination during a
Restricted Period, any Restricted Share Rights automatically terminate, unless
otherwise determined by the Committee. In the event of the retirement or
termination after the Restricted Period and prior to any Deferred Payment Date,
any Restricted Share Rights shall be immediately exercised without any further
action by the participant and Kinross shall issue Restricted Shares and any
dividends declared but unpaid to the participant. In the event of death or
disability, such Restricted Share Rights shall be immediately exercised.
If a participant holds Restricted Share Rights that are subject to a
Restricted Period, the Committee shall have the discretion to pay a participant
cash equal to any cash dividends declared on the common shares at the time such
dividends are ordinarily paid to holders of the common shares. Kinross shall pay
such cash dividends, if any, to those participants that hold Restricted Share
Rights that are no longer subject to a Restricted Period and are exercisable at
a Deferred Payment Date.
150
A participant has the right, subject to the approval of the Committee,
to receive cash instead of Restricted Shares upon the exercise of Restricted
Share Rights calculated on the basis of the current market value of the common
shares.
In the event of a change of control, all Restricted Share Rights shall
be immediately exercised notwithstanding the Restricted Period and any
applicable Deferred Payment Date.
The Restricted Share Plan shall remain in effect until terminated by the
directors.
SHAREHOLDER RETURN PERFORMANCE GRAPH
The following chart compares the yearly percentage changes in the
cumulative total shareholder return on the common shares against the cumulative
total shareholder return of the TSX 300 Index and the TSX Gold and Silver Index
for the period December 31, 1998 to December 31, 2003.
COMPARISON OF CUMULATIVE TOTAL SHAREHOLDER RETURN ON THE COMMON SHARES,
THE TSX 300 INDEX AND THE TSX GOLD AND SILVER INDEX
[PERFORMANCE GRAPH]
1998 1999 2000 2001 2002 2003
Kinross 100.00 75.92 22.95 33.71 109.63 97.45
S&P/TSX Composite Index 100.00 131.71 141.47 123.69 108.30 137.25
TSX Gold and Precious Minerals Index 100.00 83.01 74.74 88.40 112.41 132.91
151
--------------------------------------------------------------------------------
PRINCIPAL SHAREHOLDERS OF KINROSS
--------------------------------------------------------------------------------
The table below sets forth information as to each person owning of
record or who was known by Kinross to own beneficially more than 5% of the
Kinross common shares as of June 30, 2004, and information as to the ownership
of Kinross common shares by each of its directors and by all directors and
executive officers as a group. Except as otherwise indicated, all shares are
owned directly, and the persons named in the table have sole voting and
investment power with respect to shares shown as beneficially owned by them.
Amount and Nature of Percent of Kinross'
Name and Address of Beneficial Owner(1) Beneficial Ownership(1) Common Shares
------------------------------------------ ----------------------- --------------------
FMR Corp.
82 Devonshire Street
Boston, Massachusetts 02109 29,555,088 8.5
John A. Brough(3) 31,166 (2)
Robert M. Buchan(4) 886,556 (2)
Scott A. Caldwell(5) 188,506 (2)
Arthur H. Ditto(6) 299,620 (2)
Richard S. Hallisey 0 (2)
John M. H. Huxley(7) 71,603 (2)
John A. Keyes 11,666 (2)
George F. Michals(8) 102,917 (2)
Cameron A. Mingay(9) 6,666 (2)
John E. Oliver(10) 37,360 (2)
EXECUTIVE OFFICERS (2)
Robert M. Buchan See above
Scott A. Caldwell See above (2)
John W. Ivany(11) 281,458 (2)
Lars-Eric Johansson _____ (2)
All Directors, nominees for director,
and executive officers as a group
twelve (12) persons 1,989,072 (2)
-------------------------
(1) The information in the foregoing table is based on 345,929,995 Kinross
common shares outstanding as of June 30, 2004. With respect to FMR
Corp., this information is based on the filings of FMR Corp. under
section 13 of the Securities and Exchange Act of 1934.
(2) Less than 1%.
(3) Includes 30,000 options to purchase common shares.
(4) Includes 690,784 options to purchase common shares exercisable within 60
days and 50,000 restricted share rights. Mr. Buchan also owns 384,613
preferred shares convertible into 1,058,390 common shares and an
additional 100,000 options.
(5) Includes 125,438 options to purchase common shares exercisable within 60
days and 17,000 restricted share rights. Mr. Caldwell also owns an
additional 53,125 options.
(6) Includes 116,667 options to purchase common shares exercisable within 60
days.
(7) Includes 30,000 options to purchase common shares.
(8) Includes 75,834 options to purchase common shares.
(9) Includes 5,000 options to purchase common shares.
(10) Includes 30,000 options to purchase common shares.
(11) Includes 242,249 options to purchase common shares exercisable within 60
days and 14,300 restricted share rights. Mr. Ivany also owns an
additional 44,688 options.
152
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MARKET PRICE FOR KINROSS COMMON SHARES
--------------------------------------------------------------------------------
In Canada, the Kinross common shares trade on the TSX under the symbol
"K." The Kinross common shares trade on the NYSE under the symbol "KGC." The
Kinross common shares began trading on the NYSE on February 3, 2003. The
following table sets forth, for the periods indicated, the high and low sales
prices of the Kinross common shares on the TSX and the NYSE.
Kinross Common Shares on the TSX(1)(2) Kinross Common Shares on the
NYSE(1)(2)(3)
--------------------------------------- --------------------------------------
Average Average
Daily Daily
High Low Trading High Low Trading
Volume Volume
------------ ------------ ------------- ------------ ------------ ------------
(CDN (CDN (U.S. (U.S.
Dollars) Dollars) Dollars) Dollars)
Fiscal Year Ended December 31, 1998 21.45 8.10 323,136 15.00 5.25 31,331
Fiscal Year Ended December 31, 1999 16.65 6.81 245,226 11.06 4.50 43,325
Fiscal Year Ended December 31, 2000 10.05 1.50 244,338 6.94 1.13 59,121
Fiscal Year Ended December 31, 2001
First Quarter 3.12 1.98 217,003 1.98 1.31 57,332
Second Quarter 4.89 2.10 529,899 3.60 1.32 137,884
Third Quarter 5.19 3.57 379,393 3.15 2.31 89,226
Fourth Quarter 4.59 2.85 331,562 2.97 1.86 58,322
Fiscal Year Ended December 31, 2002
First Quarter 6.42 3.51 907,887 4.02 2.13 143,703
Second Quarter 13.32 5.55 2,146,161 8.70 3.48 394,243
Third Quarter 11.25 6.18 1,695,503 7.20 3.75 282,677
Fourth Quarter 12.06 7.23 1,494,885 7.71 4.62 288,623
Fiscal Year Ending December 31, 2003
First Quarter 12.33 7.72 2,568,167 8.10 5.23 796,587
Second Quarter 9.88 7.92 2,132,746 7.39 5.34 645,859
Third Quarter 11.30 8.06 3,425,746 8.29 5.70 1,260,880
Fourth Quarter 12.00 9.61 2,684,527 9.22 7.19 1,361,578
Fiscal Year Ending December 31, 2004
First Quarter 10.93 8.70 2,327,337 8.53 6.48 1,444,124
Second Quarter [ 9.85 6.66 2,205,556 7.53 4.80 1,042,771
-------------------------
(1) All amounts presented have been restated to reflect a three old for one
new share consolidation which was completed on January 31, 2003.
(2) Information presented through June 30, 2004.
(3) From August 1, 2001 until February 3, 2003, the Kinross common shares
were listed on the American Stock Exchange under the symbol "KGC." Prior
to August 1, 2001, the Kinross common shares were listed on the NYSE.
In addition to common shares, Kinross has redeemable retractable
preferred shares outstanding. As of June 30, 2004, there were approximately
24,000 holders of record of Kinross common shares (including holders who are
nominees for an undetermined number of beneficial owners).
153
--------------------------------------------------------------------------------
KINROSS SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------
The selected financial data presented in this Proxy Statement/Prospectus
should be read in conjunction with the audited consolidated financial statements
of Kinross for the three years ended December 31, 2003, and the notes thereto
and the discussion under the caption "--Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF KINROSS
The financial data set forth in the table below has been selected by
Kinross and has been derived from the audited financial statements for the
periods indicated.
The selected consolidated financial data set forth below should be read
in conjunction with the audited consolidated financial statements of Kinross for
the three years ended December 31, 2003, and the unaudited interim financial
statements for the quarters ended March 31, 2004 and 2003, and the notes thereto
included in this Proxy Statement/Prospectus, and management's discussion and
analysis of financial condition and results of operations included in this Proxy
Statement/Prospectus. The financial information as at March 31, 2004 and 2003,
December 31, 2003 and 2002, and for the three months ended March 31, 2004 and
2003, and for the years ended December 31, 2003, 2002, and 2001, is derived from
the audited consolidated financial statements of Kinross for the three years
ended December 31, 2003, included in this Proxy Statement/Prospectus and the
unaudited interim financial statements for the quarters ended March 31, 2004 and
2003, respectively. The financial information as of December 31, 2001, 2000, and
1999, and for the years ended December 31, 2000, and 1999, is derived from
audited consolidated financial statements of Kinross that are neither included
nor incorporated by reference in this Proxy Statement/Prospectus.
Readers should read Note 22 to the audited consolidated financial
statements for the three years ended December 31, 2003, and Note 11 to the
unaudited interim financial statements for the quarters ended March 31, 2004 and
2003, for a reconciliation of the financial statements to U.S. GAAP. The
formation of Kinross on May 31, 1993, qualifies under International Accounting
Standard No. 22 (IAS 22), business combinations, as a uniting of interests and
thereby has been accounted for as a pooling of interests.
Readers should note that in the United States, reporting standards for
auditors require the addition of an explanatory paragraph (following the opinion
paragraph) when there are changes in accounting principles that have a material
effect on the comparability of the financial statements, such as the changes
described in Note 1 to Kinross' audited consolidated financial statements for
the three years ended December 31, 2003. The auditor's report to the
shareholders dated March 12, 2004, is expressed in accordance with Canadian
reporting standards, which do not require a reference to such changes in
accounting principles in the auditors' report when the changes are properly
accounted for and adequately disclosed in the financial statements.
The audited consolidated financial statements for the three years ended
December 31, 2003, have been prepared in accordance with Canadian generally
accepted accounting principles, which differ in certain respects from generally
accepted accounting principles in the United States. See Note 22 of the audited
consolidated financial statements for the three years ended December 31, 2003,
and Note 11 of the unaudited interim financial statements for the quarters ended
March 31, 2004 and 2003, for a description of these differences.
Kinross utilizes the U.S. $ as its reporting currency. All financial
data presented below are in millions of dollars except per share data and number
of shares outstanding.
154
---------------------- --------------------------------------------------------------
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- --------------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
----------- ---------- -------------- ------------ ----------- ----------- ----------
(CDN GAAP)
FOR THE PERIOD: (RESTATED)(4)
Revenue and other income $ 156.6 $ 120.1 $ 584.6 $ 275.2 $ 282.9 $ 289.3 $ 317.0
Net earnings (loss) 13.2 (12.0) 9.7 (30.9) (36.3) (125.4) (243.9)
Net earnings (loss)
attributable to common
shareholders 13.2 (14.1) 19.7 (38.2) (44.0) (132.6) (250.4)
Cash flow provided from
operating activities 17.9 16.2 92.7 59.5 75.0 48.0 67.3
Cash flow from (used in)
financing activities (23.9) (0.6) 28.1 67.8 (46.5) (36.8) (31.5)
Cash flow provided from
(used in) investing (21.9) (66.1) 54.7 (40.7) (24.8) (47.1) (77.5)
activities
Weighted average common
shares outstanding
(millions)
--Basic 345.7 253.1 308.6 119.7 104.5 99.4 99.7
--Diluted 346.3 253.1 309.6 119.7 104.5 99.4 99.7
Capital expenditures 22.4 (12.8) 73.4 22.6 30.4 41.6 44.0
PER COMMON SHARE:
Net earnings (loss)--basic
and diluted $ 0.04 $ (0.06) $ 0.06 $ (0.32) $ (0.42) $ (1.32) $ (2.52)
Cash dividends to common
shareholders -- -- -- -- -- $ -- $ --
Dividends declared per
common share -- -- -- -- -- -- --
---------------------- --------------------------------------------------------------
AS AT DECEMBER 31,
AS AT MARCH 31, --------------------------------------------------------------
2004 2003 2002 2001 2000 1999
---------------------- -------------- ------------ ----------- ----------- ----------
(CDN GAAP)
AT PERIOD END: (RESTATED)(4)
Cash and cash equivalents $ 217.6 $ 245.8 $ 170.6 $ 81.0 $ 77.8 $ 113.9
Current assets 381.8 402.3 246.2 138.7 156.3 215.1
Total assets 2,116.2 2,145.1 598.0 577.6 700.0 882.4
Current liabilities 111.3 150.0 73.8 76.7 81.6 90.5
Long-term debt(1) 7.7 33.1 60.4 92.5 145.6 177.6
Convertible preferred
shares of 12.9 12.6 12.9 48.0 91.8 88.3
subsidiary company
Net shareholders' equity 1,819.7 1,804.6 418.9 331.6 340.9 477.1
Working capital 270.5 252.3 172.4 62.0 74.7 124.6
155
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- --------------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
---------- ----------- -------------- ------------ ----------- ----------- ----------
FOR THE PERIOD: (U.S. GAAP) RESTATED(3)
Net earnings (loss) $ 15.5 $ (32.1) $ (16.6) $ 17.3 $ (32.3) $ (113.6) $ (228.3)
Net earnings (loss)
attributable to common
shareholders 15.5 (32.1) (16.6) 17.3 (32.3) (113.6) (228.3)
Cash flow provided from
operating activities 17.9 12.5 86.2 29.8 42.1 19.7 38.2
Cash flow provided from
(used in) financing
activities (23.9) 0.8 32.3 74.7 (6.5) (12.5) (7.0)
Cash flow from (used in)
investing activities (21.9) (34.4) (23.0) (37.2) (23.3) (46.9) (75.3)
Net income (loss) per share -
basic and diluted $ 0.04 $ (0.13) $ (0.05) $ 0.14 $ (0.31) $ (1.14) $ (2.29)
AS AT DECEMBER 31,
AS AT MARCH 31, --------------------------------------------------------------
2004 2003 2002 2001 2000 1999
---------------------- -------------- ------------ ----------- ----------- ----------
AT PERIOD END: (U.S. GAAP) RESTATED(3)
Current assets $ 382.0 $ 402.6 $ 204.6 $ 123.6 $ 118.6 $ 178.4
Current liabilities 130.9 172.7 90.2 69.9 51.2 64.1
Total assets 2,135.5 2,164.5 611.2 526.2 602.3 758.0
Long-term debt(2) 7.7 33.1 159.9 184.9 205.3 218.1
Net shareholders' equity 1,818.0 1,799.8 321.9 201.5 194.6 318.6
Working capital 251.1 229.9 114.4 53.7 67.4 114.3
-------------------------
(1) Includes long-term debt (current and long-term portions), the debt
component of Kinross' 5.5% convertible subordinated unsecured debentures
and Kinross' redeemable retractable preferred shares.
(2) Includes long-term debt (current and long-term portions), Kinross' 5.5%
convertible subordinated unsecured debentures and Kinross' redeemable
retractable preferred shares.
(3) Subsequent to the exchange of debt securities, Kinross accounted for its
share investment in Echo Bay as an available for sale security under
U.S. GAAP. At January 31, 2003, when Kinross acquired the remaining
outstanding common shares of Echo Bay, Kinross retroactively restated
its 2002 financial statements to account for its share investment in
Echo Bay on an equity basis. As a result, Kinross reversed an unrealized
gain of $21.8 million previously included in other comprehensive income,
increased its deficit by $0.7 million to reflect its share of equity
losses for the period ended December 31, 2002, and correspondingly
reduced the carrying value of its investment. In addition, Kinross
decreased long-term investments and recorded a share of loss in investee
company of $1.0 million for the one month ended January 31, 2003, and
increased long-term investments and recorded a share of income in
investee company of $0.7 million for the year ended December 31, 2002.
For U.S. GAAP purposes, as a result of the business combination on
January 31, 2003, Kinross recognized an additional $40.8 million of
goodwill representing the difference in carrying value of its share
investment in Echo Bay between CDN and U.S. GAAP.
(4) The restatement reflects the impact of the adoption of CICA Handbook
Section 3110. See Note 2(b) to Kinross' unaudited interim consolidated
financial statements for the quarters ended March 31, 2004 and 2003.
EXCHANGE RATE DATA
References in this document to "U.S. dollars," or "U.S. $" are to the
currency of the United States and references to "Canadian dollars," or "CDN $"
are to the currency of Canada. Solely for your convenience, we have provided the
following exchange rate information. You should not take this information as an
assurance that the Canadian dollar amounts currently represent U.S. dollar
amounts or could be converted into U.S. dollars at the rate indicated or at any
other rate, at any time.
156
The following table sets forth, for each period indicated, the high and
low exchange rates for one United States dollar expressed in Canadian dollars,
the average of such exchange rates during such period, and the exchange rate at
the end of such period, based upon the noon buying rate as reported by the Bank
of Canada:
Exchange Rates
---------------------------------------------------------
High Low Average Period End
----------- ------------- ------------- --------------
(Canadian Dollars)
Fiscal Year Ended December 31, 2000 1.5593 1.4341 1.4850 1.5002
Fiscal Year Ended December 31, 2001 1.6021 1.4936 1.5484 1.5926
Fiscal Year Ended December 31, 2002 1.6132 1.5110 1.5704 1.5796
Fiscal Year Ended December 31, 2003
First Quarter 1.5747 1.4656 1.5102 1.4693
Second Quarter 1.4846 1.3342 1.3984 1.3553
Third Quarter 1.4116 1.3363 1.3799 1.3504
Fourth Quarter 1.3480 1.2924 1.3160 1.2924
Fiscal Year Ended December 31, 2004
First Quarter 1.3476 1.2692 1.3178 1.3105
Second Quarter 1.3968 1.3093 1.3595 1.3404
As of June 30, 2004, the noon buying rate as reported by the Bank of
Canada was CDN $1.3404 per U.S. $1.00. This information should not be construed
as a representation that the Canadian dollar amounts actually represent, or
could be converted into, U.S. dollars at the rate indicate.
KINROSS GOLD CORPORATION
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following summary of selected unaudited pro forma consolidated
financial information for Kinross is derived from and should be read in
conjunction with the detailed information contained in the audited consolidated
financial statements of Kinross and Crown as at and for the year ended December
31, 2003, the unaudited interim consolidated financial statements of Kinross and
Crown as at and for the three months ended March 31, 2004, each of which
financial statements are included in this Proxy Statement/Prospectus, together
with the accompanying notes to such financial statements.
The unaudited pro forma consolidated financial statements of Kinross
reflect the completion of the acquisition of TVX and Echo Bay and the merger
with Crown if these transactions had occurred on January 1, 2003, for purposes
of the pro forma consolidated statement of operations and as at March 31, 2004,
for purposes of the consolidated balance sheet. The unaudited pro forma
consolidated financial statements are not necessarily indicative of the
financial position or financial results that would have been achieved had the
transactions been completed as of the beginning of the period presented and
should not be construed as representative of such amounts for any future dates
or periods.
157
All financial data presented are in millions of dollars, except per
share data.
PRO FORMA FOR PRO FORMA FOR
THE THREE MONTHS ENDED THE YEAR ENDED
MARCH 31, 2004 DECEMBER 31, 2003
------------------------ ----------------------
OPERATING RESULTS:
Revenue and other income $ 156.6 $ 613.5
Net earnings (loss) for the period 13.0 (5.0)
Net earnings attributable to common 13.0
shareholders 5.0
PER SHARE DATA:
Net earnings per share - basic and diluted $ 0.04 $ 0.01
PRO FORMA
AS AT
MARCH 31, 2004
-----------------------
FINANCIAL POSITION:
Cash and cash equivalents $ 217.5
Current assets 382.0
Total assets 2,223.1
Current liabilities 111.5
Long-term debt(1) 7.8
Common shareholders' equity 1,924.7
Working capital 270.5
-------------------------
(1) Includes long-term debt (current and long-term portions), and Kinross'
redeemable retractable preferred shares.
158
The tables below set out the material adjustments to pro forma
consolidated net earnings (loss) and shareholders' equity reflected in the
unaudited pro forma consolidated financial information which would be required
if U.S. GAAP had been applied. These tables should be read in conjunction with
Note 22 of Kinross' audited consolidated financial statements for the three
years ended December 31, 2003, and Note 11 of the unaudited interim financial
statements for the quarters ended March 31, 2004 and 2003, which are included in
this Proxy Statement/Prospectus.
RECONCILIATION OF PRO FORMA NET LOSS
Three months ended Year ended
March 31, 2004 December 31, 2003
--------------------------------------
Pro forma net earnings for the year under CDN GAAP $ 13.2 $ (5.0)
Adjustments for:
Recognition of deferred exchange gains and losses on convertible
debentures (a) -- (17.8)
Elimination of effects of recognition of equity component of
convertible debentures (a) -- (3.2)
Property, plant and equipment & amortization of differences from
applying SFAS 121(b) 0.9 6.3
Restatement to equity account for investment in Echo Bay (c) -- (1.0)
Effect of SFAS 133(d) 0.4 0.5
Impact of adoption of Section 3110(e) 1.0 (11.1)
--------------------------------------
Pro forma net earnings (loss) for the year under U.S. GAAP $ 15.5 $ (31.3)
======================================
Pro forma U.S. GAAP earnings (loss) per common share $ 0.04 $ (0.09)
RECONCILIATION OF PRO FORMA CONSOLIDATED SHAREHOLDERS' EQUITY
As of March 31,
2004
---------------------
Pro forma shareholders' Equity under CDN GAAP $ 1,819.7
Adjustments for:
Property, plant and equipment & amortization of differences from
applying SFAS 121(b) (27.3)
Gains on marketable securities and long-term investments (c) 5.8
Restatement to equity account for investment in Echo Bay (c) 40.8
Effect of SFAS 133(d) (17.9)
Minimum pension liability(g) (3.1)
---------------------
Pro forma shareholders equity under U.S. GAAP $ 1,818.0
=====================
The pro forma U.S. GAAP net earnings (loss) per common share in the
amount of $0.04 and ($0.09) for the three months ended March 31, 2004, and year
ended December 31, 2003, respectively, have been calculated using the weighted
average number of common shares of Kinross outstanding during the three months
ended March 31, 2004, and year ended December 31, 2003, plus the additional
common shares that will be issued to complete the business combination with
Crown and the additional weighting of the shares issued to complete the business
combination with TVX and Echo Bay, had that combination been completed on
January 1, 2003.
159
(a) Under CDN GAAP, the convertible debentures were accounted for in
accordance with their substance and were presented in the financial statements
in their respective liability and equity components. Kinross redeemed these
convertible debentures on September 29, 2003. Under U.S. GAAP, the entire
principal amount of the convertible debentures plus accrued interest of $146.8
million immediately prior to the redemption was treated as debt with interest
expense based on the coupon rate of 5.5%.
In addition, under CDN GAAP, realized and unrealized foreign exchange
gains and losses on the debt component of the debentures were recognized in
income. For U.S. GAAP, in addition to including these gains and losses in
income, realized and unrealized exchange gains and losses related to the portion
of the convertible debentures included in equity under CDN GAAP were also
included in income. There was no gain or loss on the redemption of the
convertible debentures for U.S. GAAP.
(b) Cumulatively, as a result of applying SFAS 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and following the adoption of SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets," property, plant and equipment is reduced and the
deficit increased by $60.5 million. This difference arose from the requirement
to discount future cash flows from impaired property, plant and equipment under
U.S. GAAP and from using proven and probable reserves only. At the time of the
impairment, future cash flows from impaired property, plant and equipment were
not discounted under CDN GAAP. Under U.S. GAAP, depreciation, depletion and
amortization, in periods subsequent to the impairment, would be reduced by $0.9
million and $6.3 million for the three months ended March 31, 2004, and for the
year ended December 31, 2003, respectively, to reflect the above. Cumulatively,
as a result of these reductions in depreciation, depletion and amortization,
property, plant and equipment is increased and the deficit decreased by $27.3
million and $28.2 million as of March 31, 2004 and December 31, 2003,
respectively.
(c) Under CDN GAAP, unrealized gains and losses on long-term
investments and marketable securities are not recorded. Under U.S. GAAP,
unrealized gains on long-term investments that are classified as securities
available for sale of $5.6 million and $6.9 million as of March 31, 2004 and
December 31, 2003, respectively, and marketable securities of $0.2 million and
$0.3 million as of March 31, 2004 and December 31, 2003, respectively, are
included as a component of comprehensive income (loss).
Furthermore, U.S. GAAP requires that the transaction on April 3, 2002,
whereby Kinross exchanged its investment in debt securities of Echo Bay for 57.1
million common shares of Echo Bay, be recorded at fair value with the resulting
gain included in earnings. Under CDN GAAP, the cost of the Echo Bay common
shares acquired on the exchange was recorded at the values of the securities
given up. Since the fair value of the capital securities given up approximated
their carrying value, no gain was recorded under CDN GAAP.
Subsequent to the exchange of debt securities, Kinross accounted for its
share investment in Echo Bay as an available for sale security under U.S. GAAP.
At January 31, 2003, when Kinross acquired the remaining outstanding common
shares of Echo Bay, Kinross retroactively restated its 2002 consolidated
financial statements, prepared in accordance with U.S. GAAP, to account for its
share investment in Echo Bay on an equity basis. As a result, Kinross reversed
an unrealized gain of $21.8 million previously included in other comprehensive
income, increased its deficit by $0.7 million to reflect its share of equity
losses for the period ended December 31, 2002 and correspondingly reduced the
carrying value of its investment. In addition, Kinross decreased long-term
investments and recorded a share of loss in investee company of $1.0 million for
the one month ended January 31, 2003 and increased long-term investments and
recorded a share of income in investee company of $0.7 million during the year
ended December 31, 2002. For U.S. GAAP purposes, as a result of the business
combination on January 31, 2003, Kinross recognized an additional $40.8 million
of goodwill representing the difference in carrying value of its share
investment in Echo Bay between CDN and U.S. GAAP.
160
Under CDN GAAP, derivatives hedging forecasted transactions are
off-balance sheet until the hedged transaction is recorded. Realized gains and
losses on derivatives that are closed out early are initially recorded as
deferred revenue or deferred charges and are recorded as an adjustment to net
earnings (loss) when the original hedged transaction is recorded.
On January 1, 2001, Kinross adopted Financial Accounting Standards Board
("FASB") Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), and the corresponding amendments under FASB Statement
No. 138 ("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 periodically 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. For derivatives designated as cash
flow hedges, the effective portions of changes in fair value of the derivative
are reported in other comprehensive income and are subsequently reclassified
into other income when the hedged item affects other income. Changes in fair
value of the derivative instruments used as economic instruments and ineffective
portions of hedges are recognized in other income in the period incurred. The
application of SFAS 133 results in a cumulative decrease in deferred revenue of
$1.7 million and $2.2 million, a cumulative increase in accounts payable and
accrued liabilities of $19.6 million and $22.7 million, a cumulative increase in
deficit of $1.0 million and $1.4 million, and a cumulative decrease in other
comprehensive income of $16.9 million and $19.1 million as of March 31, 2004 and
December 31, 2003, respectively. Additionally, as a result of applying SFAS 133,
there would be an increase in the CDN GAAP net earnings of $0.4 million and a
decrease in the CDN GAAP net loss of $0.9 million for the three months ended
March 31, 2004, and for the year ended December 31, 2003, respectively. On
adoption of SFAS 133, Kinross did not complete the required documentation and
effectiveness assessments to achieve hedge accounting for the commodity
derivatives hedging gold revenues and energy price risk, although the contracts
are considered to be effective economic hedges and they were accounted for as
hedges for CDN GAAP purposes. For U.S. GAAP only, these derivatives are carried
at fair value with the changes in fair value recorded as an adjustment to net
earnings (loss). The SFAS 133 requirements for foreign exchange forward
contracts were accounted for as cash flow hedges from January 1, 2001. Realized
and unrealized derivatives gains and losses included in other comprehensive
income ("OCI") on transition and during 2001 were reclassified into mining
revenue for cash-flow hedges of forecasted commodity sales and foreign exchange
gain (loss) for forecasted foreign currency revenues or expenses when the hedged
forecasted revenue or expense is recorded. For the three months ended March 31,
2004, and for the year ended December 31, 2003, $2.7 million and $9.3 million,
respectively, of derivative losses were reclassified out of other comprehensive
income. As at March 31, 2004, Kinross estimates that $15.9 million of net
derivatives losses included in other comprehensive income will be reclassified
into earnings within the next twelve months. Beginning January 2002, Kinross met
the required documentation requirements under SFAS 133 relating to the
prospective and retrospective effectiveness assessments for the commodity
derivatives; thus, these derivatives were designated as cash flow hedges. The
effective portions of changes in fair values of these derivatives are now
recorded in other comprehensive income and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in fair value of cash flow hedges are recognized in earnings. There was no
ineffectiveness recorded during the three months ended March 31, 2004.
(e) Effective January 1, 2004, Kinross adopted Section 3110,
"Accounting for Asset Retirement Obligations" which requires that the fair value
of liabilities for asset retirement obligations associated with tangible
long-lived assets be recognized in the period in which they are incurred. This
Section harmonizes CDN GAAP with U.S. GAAP for the accounting for asset
retirement obligations. There are no GAAP differences between CDN GAAP and U.S.
GAAP related to the accounting for asset retirement obligations on a prospective
basis.
Under Section 3110, the transition provisions required the prior year
comparatives to be restated. However, U.S. GAAP required a cumulative effect of
accounting change to be recorded in the period of adoption for SFAS 143, which
was recorded by Kinross during the three months ended March 31, 2003.
161
(f) Under CDN GAAP and U.S. GAAP, effective January 1, 2004, Kinross
recorded an expense for employee stock-based compensation using the fair value
based method in accordance with the transitional provisions of Section 3870 and
SFAS 123, as amended by SFAS 148. Section 3870 is harmonized with SFAS 123 and
SFAS 148. As a result no GAAP differences are required on the adoption of the
fair value based method of accounting for stock options.
The fair value at grant date of stock options is estimated using the
Black-Scholes option-pricing model. Compensation expense is recognized over the
stock option vesting period.
(g) Under U.S. GAAP, if the accumulated pension plan benefit
obligation exceeds the market value of plan assets, a minimum pension liability
for the excess is recognized to the extent that the liability recorded in the
balance sheet is less than the minimum liability. Any portion of this additional
liability that relates to unrecognized prior service cost is recognized as an
intangible asset while the remainder is charged to Other Comprehensive Income.
CDN GAAP does not require Kinross to record a minimum liability and does not
have the concept of Other Comprehensive Income. In 2003, Kinross recorded a
minimum pension liability of $3.1 million with a corresponding decrease in Other
Comprehensive Income. None of the additional liability relates to unrecognized
prior service cost.
--------------------------------------------------------------------------------
KINROSS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
The financial statements have been prepared in accordance with Canadian
generally accepted accounting principles ("CDN GAAP"). Reconciliation to United
States generally accepted accounting principles ("U.S. GAAP") is provided in
Note 22 to the audited consolidated financial statements for the three years
ended December 31, 2003, and Note 11 to the unaudited interim financial
statements for the quarters ended March 31, 2004 and 2003. All amounts expressed
herein are in United States dollars unless otherwise stated.
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE QUARTERS ENDED MARCH 31, 2004
AND 2003
This section contains management's analysis of the financial performance
of the Company and its financial position for the quarters ended March 31, 2004
and 2003, and it should be read in conjunction with the unaudited interim
financial statements for the quarters ended March 31, 2004 and 2003. Readers are
cautioned that management's discussion and analysis of operating results and
financial condition ("MD&A") contains forward-looking statements and that actual
events may vary from management's expectations. In the MD&A and elsewhere,
Kinross refers to measures such as total cash costs per equivalent ounce of
gold, realized revenue and total cash costs items that are not defined by U.S.
GAAP. The use of these terms may not be consistent with the way these terms are
used by others. Where possible, Kinross has provided tables or other information
that enables readers to reconcile between such non-GAAP measures and standard
GAAP measures. While these measures are not defined by or required by GAAP, this
information is provided to readers to help them better understand the
significant events, transactions and trends that affect Kinross' businesses.
162
This interim MD&A focuses on Kinross' results from operations for the
three months ended March 31, 2004, and with discussion and analysis of Kinross'
financial condition as at March 31, 2004 and for the three months then ended
with comparisons to the corresponding period in 2003. This discussion should be
read in conjunction with the financial statements and notes included in this
Proxy Statement/Prospectus, along with the discussion under Management's
Discussion and Analysis for the Years Ended December 31, 2003, 2002, and 2001
("Annual MD&A").
OVERVIEW
The profitability of Kinross and its competitors is subject to the world
prices of gold and silver and the costs associated with: the acquisition of
mining interests; exploration and development of mining interests; mining and
processing of gold and silver; regulatory and environmental compliance and
general and administrative functions. The prices of gold and silver are subject
to a multitude of variables outside Kinross' control. In order to minimize the
impact of price movements, management continually strives to be an efficient,
cost effective producer. This discussion is based on issues which Kinross can
control and Kinross' progress in meeting its primary objective for 2004 of
producing between 1.70 and 1.75 million ounces of gold equivalent at total cash
costs in the range of $225 to $235 per ounce.
On January 31, 2003, Kinross combined its operations with those of TVX
and Echo Bay. This transaction is fully described in the December 31, 2003
financial statements, the accompanying notes and the Annual MD&A. As a result,
comparative numbers for the first quarter of 2003 include only two months of
operations of the mines acquired from the combination. This transaction had a
material impact on Kinross' operations and its balance sheet rendering
comparisons rather meaningless except in the discussion of the operations of
each mine.
RESULTS SUMMARY
==============================================================================================
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------------------------------
SUMMARY OF FIRST QUARTER CONSOLIDATED RESULTS 2004 2003 CHANGE
----------------------------------------------------------------------------------------------
Attributable Gold Equivalent Production - ounces 397,011 326,812 21%
Mining Revenues (millions) $ 155.6 $ 117.0 33%
Net earnings (loss) for the period (millions) $ 13.2 $ (12.0) 210%
Basic and Diluted earnings (loss) per share $ 0.04 $ (0.06) 167%
==============================================================================================
Kinross' share of attributable gold equivalent production for the first
quarter of 2004 was 397,011 ounces, an increase of 21% over the 326,812 gold
equivalent ounces produced in the corresponding period in 2003. The principal
reason for the increase is that the first quarter of 2003 includes only two
months of operations for the mines acquired in the TVX and Echo Bay
combinations.
Revenue from gold and silver sales in the first quarter of 2004 was
$155.6 million compared to $117.0 million in first quarter of 2003, an increase
of 33%. Kinross sold 374,126 ounces of gold in the quarter at an average
realized price of $403 per ounce while the average spot gold price for the
quarter was $408. This compares to 320,943 ounces of gold sold in the first
quarter of 2003 at an average realized price per ounce of gold of $342 per ounce
($352 average spot price). There is discussion later concerning Kinross' hedge
position, which causes the difference between the realized price and the average
spot price for gold.
Average total cash costs per attributable gold equivalent ounce for the
quarter were $241 compared to $237 per ounce in 2003. Cash flow provided from
operating activities for the quarter was $17.9 million in 2004 compared to $16.2
million in 2003. Cash flow provided from operating activities was positively
impacted by higher production and gold sales and negatively impacted by an
increase in working capital requirements. Two significant factors in the use of
cash were: $12.9 million related to winter road resupply purchases at Kubaka and
Lupin; and $13.6 million of reduction in accrued liabilities due to payments
associated with the completion of the settlement agreement regarding TVX Hellas.
163
Net earnings for the quarter were $13.2 million or $0.04 per share
compared to a net loss of $12.0 million or $0.06 per share for the first quarter
of 2003. The net loss for the first quarter of 2003 has been restated to reflect
the adoption of the Canadian Institute of Chartered Accountants ("CICA")
Handbook Section 3110 "Asset retirement obligations" ("Section 3110"). This
restatement increased the net loss for the first quarter of 2003 by $0.8 million
to $12.0 million and increased the basic and diluted loss per share by $0.01 to
$0.06. The bottom line improvement in the first quarter of 2004 was principally
due to higher production levels coupled with higher gold selling prices.
Kinross' first quarter plan called for gold equivalent production of
389,800 ounces at average total cash costs per equivalent ounce of $255. The
actual results for the quarter exceeded both targets.
Due to poor economic performance, management of Kinross and its joint
venture partner, High River Gold, have made the decision to suspend all
underground mine development work at the New Britannia Mine. Mining and milling
of developed ore will continue until late in the third quarter of 2004.
OPERATING RESULTS
REVENUES
A summary of revenue and production for Kinross, as a whole, is provided
below.
========================================================= ==============================================
REVENUE AND PRODUCTION(1) THREE MONTHS ENDED
MARCH 31,
--------------------------------------------------------- ----------------------------------------------
2004 2003
--------------------------------------------------------- ----------------------- ----------------------
Attributable gold equivalent production - ounces 397,011 326,812
Gold sales - ounces 374,126 320,943
Gold sales - revenue (millions) $ 150.0 $ 112.4
Gold deferred revenue realized (millions) 0.5 0.6
--------------------------------------------------------- ----------------------- ----------------------
Total gold revenue realized (millions) $ 150.5 $ 113.0
========================================================= ======================= ======================
Average sales price per ounce of gold $ 402 $ 340
Deferred revenue realized per ounce of gold 1 2
--------------------------------------------------------- ----------------------- ----------------------
Average realized price per ounce of gold sold $ 403 $ 342
========================================================= ======================= ======================
Average spot gold price per ounce $ 408 $ 352
--------------------------------------------------------- ----------------------- ----------------------
Silver sales revenue (millions) $ 5.1 $ 4.0
--------------------------------------------------------- ----------------------- ----------------------
Total gold and silver revenue (millions) $ 155.6 $ 117.0
========================================================= ======================= ======================
-------------------------
(1) Revenue and production data for 2003 are for two months from January 31,
2003 to March 31, 2003.
Included in gold equivalent production is silver production converted to
gold production using a ratio of the average spot market prices for the
commodities for each comparative quarter. The resulting ratios are 61.1:1 for
the first quarter of 2004 and 75.6: 1 for the first quarter of 2003. Kinross
produced 0.8 million ounces of silver in each of the first quarters of 2004 and
2003, respectively.
Realized revenue is furnished to provide additional information and is a
non-GAAP measure. This measure combined with total cash costs is intended to
provide investors with information about the cash generating capability
(realized revenue per ounce net of total cash costs per ounce) of the mining
operations. Kinross uses this information for the same purpose and for assessing
the performance of its mining operations. The measure of average realized price
per ounce of gold sold has been calculated on a consistent basis in each period.
164
COSTS AND EXPENSES
The following tables compare consolidated production costs per
equivalent ounce of attributable gold production for the first quarter of 2004
and 2003 and provide reconciliations of total cash costs as per the financial
statements.
======================================================================= ===========================================
CONSOLIDATED PRODUCTION COSTS PER EQUIVALENT OUNCE OF ATTRIBUTABLE THREE MONTHS ENDED
GOLD PRODUCTION MARCH 31,
----------------------------------------------------------------------- --------------------- ---------------------
2004 2003
----------------------------------------------------------------------- --------------------- ---------------------
Cash operating costs $ 227 $ 228
Royalties 14 9
----------------------------------------------------------------------- --------------------- ---------------------
Total cash costs $ 241 $ 237
Accretion expense 6 4
Depreciation, depletion and amortization 87 84
----------------------------------------------------------------------- --------------------- ---------------------
Total production costs $ 334 $ 325
======================================================================= ===================== =====================
The following table reconciles the production costs per equivalent ounce
of gold presented above to the operating costs presented in the unaudited
interim financial statements for the quarters ended March 31, 2004 and 2003.
======================================================================= ===========================================
RECONCILIATION OF TOTAL CASH COSTS PER EQUIVALENT THREE MONTHS ENDED
OUNCE OF GOLD TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
----------------------------------------------------------------------- --------------------- ---------------------
2004 2003
----------------------------------------------------------------------- --------------------- ---------------------
(millions except production in ounces and per ounce amounts)
Operating costs per financial statements $ 94.5 $ 87.5
Accretion expense (2.2) (2.1)
Change in bullion inventory 5.7 (8.0)
Operating costs not related to gold production (2.2) (0.1)
======================================================================= ===================== =====================
Total cash costs for per ounce calculation purposes $ 95.8 $ 77.3
======================================================================= ===================== =====================
Gold equivalent production - ounces 397,011 326,812
Total cash costs per equivalent ounce of gold $ 241 $ 237
======================================================================= ===================== =====================
Total cash costs per equivalent ounce of gold is furnished to provide
additional information and is a non-GAAP measure. This measure should not be
considered in isolation as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles and is not necessarily
indicative of operating expenses as determined under generally accepted
accounting principles. This measure intends to provide investors with
information about the cash generating capabilities of Kinross' mining
operations. Kinross uses this information for the same purpose and for assessing
the performance of its mining operations. Mining operations are capital
intensive. The measure total cash costs excludes capital expenditures but is
reconciled to total operating costs for each mine. Capital expenditures require
the use of cash in the current period, and in prior periods and are discussed
throughout the MD&A and included in the segmented information note to the
unaudited interim financial statements for the quarters ended March 31, 2004 and
2003.
165
OPERATIONS
Details of each individual mine operation, its performance and outlook
are discussed in this section. First a summary:
PRODUCTION AND COST SUMMARY
=======================================================================================================================
GOLD EQUIVALENT PRODUCTION TOTAL CASH COSTS
(OUNCES) ($/OUNCE)
THREE MONTHS ENDED MARCH 31, 2004 2003 2004 2003
-----------------------------------------------------------------------------------------------------------------------
Mining Operations:
Fort Knox 75,980 91,214 290 260
Round Mountain 1, 2 94,984 64,034 191 192
Porcupine 3 51,867 47,580 251 257
Kubaka 4 29,259 30,050 323 188
Paracatu 1, 3 24,340 16,958 201 166
La Coipa 1, 2 40,549 23,923 229 244
Crixas 1, 2 22,511 15,604 127 101
Musselwhite 1, 5 17,549 9,475 294 319
New Britannia 1, 2 6,707 7,460 422 272
Lupin 1 5,187 18,784 304 411
Kettle River 25,347 - 228 -
Refugio 2 2,731 - 211 -
Denton-Rawhide 6 - 1,730 - 221
--------------------------------------------------------------------------------- ----------------------------
Total 397,011 326,812 Average 241 237
================================================================================= ============================
1. Production and cost data for 2003 are for two months from January 31,
2003 to March 31, 2003.
2. Production reflects Kinross' 50% ownership interest.
3. Production reflects Kinross' 49% ownership interest.
4. Production reflects Kinross' 54.7% ownership interest to February 28,
2003, and its 98.1% interest thereafter.
5. Production reflects Kinross' 32% ownership interest.
6. Includes Kinross' share of Denton-Rawhide and Andacollo production
attributable to the Pacific Rim (formerly Dayton) ownership interest.
Total cash costs are a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Costs and
Expenses."
MINING OPERATIONS
FORT KNOX (100% OWNERSHIP AND OPERATOR) - U.S.A
Kinross acquired the Fort Knox open pit mine, located near Fairbanks,
Alaska, in 1998. The Fort Knox operation consists of the main Fort Knox open pit
and the True North open pit located approximately 15 kilometers northwest of
Fort Knox. Gold equivalent production in the first quarter of 2004 was 75,980
ounces at a total cash cost per gold equivalent ounce of $290. Production for
the first quarter of 2004 was marginally ahead of plan and total cash costs per
ounce were 6% below plan. This compares to first quarter 2003 gold equivalent
production of 91,214 ounces at a total cash cost per gold equivalent ounce of
$260.
Management of Kinross has decided to suspend mining of the True North
mine for several months this year and use the True North mining fleet to
complete the next phase of the tailings dam lift at Fort Knox rather than rely
on more expensive third-party contractors. This will result in decreased
production for the full year 2004 compared to 2003. Kinross' plan for 2004 is
for gold production of 340,000 ounces at total cash costs of $220 per ounce.
During the first half of the year, the mill feed grades are expected to
be low due to the mining sequence at Fort Knox and the deferral of True North
mining to the second half of 2004. Mill feed grades are expected to increase in
the second half of the year due to improved grade at Fort Knox and the
resumption of mining at True North. During the first half of 2004, gold
production is expected to be approximately 145,000 ounces, increasing to
approximately 195,000 ounces in the second half of the year. Cash costs will
decrease quarter over quarter as the waste mining efforts shift to the Fort Knox
mine expansion program. This expansion is of a capital nature and as a result
major pit expansion will take place over the next several years, releasing
approximately 1 million ounces of
166
gold. Total cash costs per ounce for the first half of the year are expected to
average approximately $280 per ounce, decreasing to approximately $176 per ounce
for the second half of the year.
============================================================== ==================================
RECONCILIATION OF FORT KNOX TOTAL CASH COSTS PER EQUIVALENT THREE MONTHS ENDED
OUNCE OF GOLD TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
-------------------------------------------------------------- ----------------------------------
2004 2003
-------------------------------------------------------------- ----------------- ----------------
(millions except production in ounces and per ounce amounts)
Operating costs included in financial statements $ 23.0 $ 23.8
Accretion expense (0.3) (0.2)
Change in bullion inventory (0.6) 0.1
-------------------------------------------------------------- ----------------- ----------------
Total cash costs for per ounce calculation purposes $ 22.1 $ 23.7
============================================================== ================= ================
Gold equivalent production - ounces 75,980 91,214
Total cash costs per equivalent ounce of gold $ 290 $ 260
============================================================== ================= ================
Total cash costs are a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Business of
Kinross--Operations--Calculation of Total Cash Costs and Realized Revenue and
Reconciliation to the Statement of Operations."
During 2003, exploration was conducted within the Fort Knox pit, at the
True North mine, on the Gil project and at Ryan Lode. Results from the Fort Knox
in-pit work confirmed sufficient continuity of the mineralized zones to justify
a major pit wall layback at an assumed gold price of $325 per ounce. This major
layback is comprised of a three year, approximately $60.0 million capital
expenditure program mostly in the form of stripping to liberate ore to prolong
the economic life of the Fort Knox mine. The 2004 capital budget totals $39.0
million. In the first quarter of 2004 $7.2 million was spent - $4.7 million for
mine development, $1.0 million on the tailings dam with the balance on new
equipment or equipment rebuilds.
ROUND MOUNTAIN (50% OWNERSHIP AND OPERATOR) - U.S.A
Kinross acquired its ownership interest in the Round Mountain open pit
mine, located in Nye County, Nevada, upon completion of the combination with
Echo Bay on January 31, 2003. Kinross' share of production for the first quarter
of 2004 was 94,984 ounces at total cash costs per gold equivalent ounce of $191
compared to 64,034 ounces for the corresponding period in 2003 (two months only)
at total cash costs per gold equivalent ounce of $192. Production levels
exceeded plan by 9% while total cash costs per equivalent ounce were 13% below
plan.
Due to the failure of an electrical transformer in the last half of
2003, Kinross' focus was on accelerating the placement of ore on the dedicated
leach pads to offset crushing and milling limitations and to stockpile higher
grade ore. Once the mine resumed normal operations, the stockpiled ore was
processed in the first quarter of 2004 at levels exceeding plan. Total cash
costs per equivalent ounce of gold were below plan due primarily to the higher
than expected production.
Management's expectations for the full year are for the production of
367,000 ounces at total cash costs of $223 per ounce.
============================================================== ==================================
RECONCILIATION OF FORT KNOX TOTAL CASH COSTS PER EQUIVALENT THREE MONTHS ENDED
OUNCE OF GOLD TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
-------------------------------------------------------------- ----------------------------------
2004 2003
-------------------------------------------------------------- ----------------- ----------------
(millions except production in ounces and per ounce amounts)
Operating costs included in financial statements $ 18.1 $ 14.1
Accretion expense (0.5) (0.3)
Change in bullion inventory 0.6 (1.5)
-------------------------------------------------------------- ----------------------------------
Total cash costs for per ounce calculation purposes $ 18.2 $ 12.3
============================================================== ==================================
Gold equivalent production - ounces 94,984 64,034
Total cash costs per equivalent ounce of gold $ 191 $ 192
============================================================== ==================================
1. Includes the months of February and March 2003.
167
Total cash costs are a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Business of
Kinross--Operations--Calculation of Total Cash Costs and Realized Revenue and
Reconciliation to the Statement of Operations."
Capital expenditures during the quarter were $1.8 million with total
year planned expenditures of $8.1 million (Kinross' share). Capital expenditures
during the first quarter of 2004 were incurred primarily on leach pad expansions
and capitalized exploration on the Gold Hill deposit.
PORCUPINE (49% INTEREST, PLACER DOME 51%, OPERATOR) - CANADA
Kinross formed this joint venture on July 1, 2002, with a wholly owned
subsidiary of Placer Dome Inc. combining each company's gold mining operations
in the Porcupine district of Timmins, Ontario. Kinross' share of gold production
in the first quarter of 2004 was 51,867 ounces at a total cash costs of $251 per
equivalent ounce compared to 47,580 ounces in 2003 at total cash costs per gold
equivalent ounce of $257. Production increases over the prior year were due
primarily to higher underground grades being processed. Total cash costs per
ounce improved slightly as the impact of greater production output more than
offset the approximately 15% appreciation of the Canadian dollar, compared to
the United States dollar, when compared to the same quarter of 2003. Results to
date are essentially on plan with the expectation of producing 200,000 ounces to
Kinross' account at total cash costs per equivalent ounce of $230 for the whole
year 2004.
======================================================================= ================================
RECONCILIATION OF PORCUPINE TOTAL CASH COSTS PER EQUIVALENT OUNCE OF THREE MONTHS ENDED
GOLD TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
----------------------------------------------------------------------- --------------------------------
2004 2003
----------------------------------------------------------------------- ---------------- ---------------
(millions except production in ounces and per ounce amounts)
Operating costs included in financial statements $ 12.8 $ 13.8
Accretion expense (0.2) (0.3)
Change in bullion inventory 0.4 (1.2)
----------------------------------------------------------------------- ---------------- ---------------
Total cash costs for per ounce calculation purposes $ 13.0 $ 12.3
======================================================================= ================ ===============
Gold equivalent production - ounces 51,867 47,580
Total cash costs per equivalent ounce of gold $ 251 $ 257
======================================================================= ================ ===============
Total cash costs are a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Business of
Kinross--Operations--Calculation of Total Cash Costs and Realized Revenue and
Reconciliation to the Statement of Operations."
Kinross and its partner plan an aggressive spending program for 2004
focussing on expanding reserves through the development of the Pamour project
and Hoyle Pond development. Kinross' share of capital expenditures is estimated
at $28.7 million for 2004. In the first quarter, Kinross' share of capital
expenditures was $2.3 million which is less than the $4.5 million planned as
certain spending was deferred until later in 2004.
KUBAKA (98.1% OWNERSHIP AND OPERATOR) - RUSSIA
Kinross completed its acquisition of a further 43.44% of the mining
operation in 2003 to bring its ownership to 98.1%. The transaction closed on
February 28, 2003, so the comparative results include Kinross' 54.7% share for
the first two months of 2003 and its 98.1 % ownership for the first quarter of
2004.
Kinross' 98.1% share of gold equivalent production was 29,259 ounces for
the first quarter of 2004 at total cash costs per equivalent ounce of $323 per
ounce compared to 30,055 at $188 per ounce in 2003.
Mining activities at the Kubaka open pit ceased in October 2002 and the
processing of relatively lower grade stockpiles commenced along with additional
exploration drilling to further define mineralization at the Birkachan and
Tsokol deposits. Production in the first quarter of 2004 was 4% above plan while
total cash costs per equivalent ounce of gold were as per plan.
168
Pre-stripping of the Birkachan pit continued during the first quarter of
2004, and the first ore was mined in May, 2004. This initially mined ore and
future ore will be placed in a stockpile. The all season road connecting the
Birkachan deposit to the Kubaka processing facility is expected to be completed
by the third quarter of 2004. Transportation of ore from the Birkachan mine to
the Kubaka mill is planned to begin in the fourth quarter of 2004. Current plans
indicate that a eight-week shut-down of the Kubaka mill during the third quarter
of 2004 will reduce the over-all operating cost profile and will improve the
annual cash flow of the mine. This eight-week suspension will allow for more
efficient operations of the mill in the fourth quarter of 2004, and will
eliminate over-time related labor costs associated with vacations. Spending for
the first half of 2004 is expected to be slightly greater than the second half
of the year. The total cash cost per ounce for the first half of 2004 is
expected to average approximately $308 per ounce, decreasing to approximately
$225 per ounce in the second half of the year. With the addition of the high
grade Birkachan ore, the mill feed grade will increase in the second half of the
year, resulting in gold production increases. Gold production for the first half
of 2004 is expected to be approximately 60,000 ounces of gold equivalent,
increasing to approximately 73,000 ounces in the second half of the year.
======================================================================= =============================
RECONCILIATION OF KUBAKA TOTAL CASH COSTS PER EQUIVALENT OUNCE OF THREE MONTHS ENDED
GOLD TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
----------------------------------------------------------------------- -----------------------------
2004 2003
----------------------------------------------------------------------- -------------- --------------
(millions except production in ounces and per ounce amounts)
Operating costs included in financial statements $ 8.0 $ 5.7
Accretion expense (0.1) (0.1)
Change in bullion inventory 1.5 -
Management fees 0.5 0.1
Operating costs not related to gold production (0.5) -
======================================================================= ============== ==============
Total cash costs for per ounce calculation purposes $ 9.4 $ 5.7
======================================================================= ============== ==============
Gold equivalent production - ounces 29,259 30,050
Total cash costs per equivalent ounce of gold $ 323 $ 188
======================================================================= ============== ==============
Total cash costs are a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Business of
Kinross--Operations--Calculation of Total Cash Costs and Realized Revenue and
Reconciliation to the Statement of Operations."
Kinross plans capital expenditures of $11.2 million in 2004 principally
to develop the Birkachan test pit and commence underground exploration of the
Tsokol vein. In the first quarter of 2004, Kinross spent $4.5 million compared
to plan of $5.7 million primarily related to the pre-strip and construction at
Birkachan and the tailings expansion program.
PARACATU (ALSO KNOWN AS BRASILIA - 49% OWNERSHIP, RIO TINTO 51%, OPERATOR) -
BRAZIL
Kinross acquired its ownership interest in the Paracatu open pit mine,
located in the State of Minas Gerais, upon completion of the combination with
TVX on January 31, 2003. Kinross' share of gold equivalent production for the
first quarter of 2004 was 24,340 ounces at total cash costs per gold equivalent
ounce of $201 compared to 16,958 ounces for the corresponding period in 2003
(two months only) at total cash costs per gold equivalent ounce of $166.
Production was slightly below budget while total cash costs were slightly
greater than budget. Plant throughput during the quarter was lower than budget
due to harder ore being processed while recovery was negatively impacted by
higher arsenic content in the ore. Notwithstanding these issues, management
considers the 2004 plan of 95,000 ounces produced to Kinross' account at total
cash costs per equivalent ounce of $228 achievable.
169
======================================================================= =============================
RECONCILIATION OF PARACATU TOTAL CASH COSTS PER EQUIVALENT OUNCE OF THREE MONTHS ENDED
GOLD TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
----------------------------------------------------------------------- -----------------------------
2004 2003
----------------------------------------------------------------------- -------------- --------------
(millions except production in ounces and per ounce amounts)
Operating costs included in financial statements $ 4.6 $ 3.7
Accretion expense (0.1) (0.1)
Change in bullion inventory 0.4 (0.8)
----------------------------------------------------------------------- -------------- --------------
Total cash costs for per ounce calculation purposes $ 4.9 $ 2.8
======================================================================= ============== ==============
Gold equivalent production - ounces 24,340 16,958
Total cash costs per equivalent ounce of gold $ 201 $ 166
======================================================================= ============== ==============
-------------------------
(1) Includes the months of February and March 2003.
Total cash cost are a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Business of
Kinross--Operations--Calculation of Total Cash Costs and Realized Revenue and
Reconciliation to the Statement of Operations."
Kinross plans capital expenditures of $13.1 million in 2004 (its share)
focussed on expansion of the mines' output. In the first quarter of 2004, $0.7
million was spent which was well below the budgeted amount of $5.6 million
mainly due to the delay in completion of the SAG mill feasibility study ($2.7
million), which is now forecast to be completed in the second quarter of 2004.
LA COIPA (50% OWNERSHIP, PLACER DOME 50%, OPERATOR) - CHILE
Kinross acquired its ownership interest in the La Coipa open pit mine,
located in the Atacama region, Chile, upon completion of the combination with
TVX on January 31, 2003. Kinross' share of gold equivalent production for the
first quarter of 2004 was 40,549 ounces at total cash costs per gold equivalent
ounce of $229 compared to 23,923 ounces for the corresponding period in 2003
(two months only) at total cash costs per gold equivalent ounce of $244.
Production levels were 18% ahead of plan for the quarter while total cash costs
per gold equivalent ounce were 5% below plan. Gold production was higher than
plan due mainly to changes in the mine plan, notably a change in sequencing of
ore from Phase Three at Coipa Norte rather than Phase Five. Gold production was
also positively impacted by the lower gold to silver ratio (61.1: 1 for the
first quarter of 2004 compared to 74.8: 1 for all of 2003). Total cash costs per
equivalent ounce were lower than plan due to the higher production levels.
Management expects total cash costs to increase throughout the year with the
mining of more in-pit waste rock than in 2003. However, the full year 2004
production budget of 145,000 gold equivalent ounces at total cash costs per
equivalent ounce of $288 is attainable.
======================================================================= =============================
RECONCILIATION OF LA COPIA TOTAL CASH COSTS PER EQUIVALENT OUNCE OF THREE MONTHS ENDED
GOLD TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
----------------------------------------------------------------------- -----------------------------
2004 2003
----------------------------------------------------------------------- -------------- --------------
(millions except production in ounces and per ounce amounts)
Operating costs included in financial statements $ 8.4 $ 8.4
Accretion expense (0.1) (0.1)
Change in bullion inventory 1.0 (2.4)
----------------------------------------------------------------------- -------------- --------------
Total cash costs for per ounce calculation purposes $ 9.3 $ 5.9
======================================================================= ============== ==============
Gold equivalent production - ounces 40,549 23,923
Total cash costs per equivalent ounce of gold $ 229 $ 244
======================================================================= ============== ==============
-------------------------
(1) Includes the months of February and March 2003.
Total Cash Costs are a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Business of
Kinross--Operations--Calculation of Total Cash Costs and Realized Revenue and
Reconciliation to the Statement of Operations."
170
During the first quarter of 2004, Kinross' share of capital expenditures
was $0.3 million with nominal spending required for the balance of the year
2004.
CRIXAS (50% OWNERSHIP, ANGLO GOLD 50%, OPERATOR) - BRAZIL
Kinross acquired its ownership interest in the Crixas underground mine,
located in the state of Goias, upon completion of the combination with TVX on
January 31, 2003. Kinross' share of gold equivalent production for the first
quarter of 2004 was 22,511 ounces at total cash costs per gold equivalent ounce
of $127 compared to 15,604 ounces for the corresponding period last year (two
months only) at total cash costs per equivalent ounce of $101. The increase in
total cash costs in 2004 was a result of increased haulage costs as mining
continued at depth as well as the impact from the strengthening of the Brazilian
real in relation to the U.S. dollar. Production was 4% ahead of plan while total
cash costs per ounce were on plan. Recoveries and plant throughput were greater
than plan resulting in higher gold production; however, improvements in total
cash costs per ounce, resulting from the higher production, were offset by the
appreciation of the Brazilian real. Management considers the 2004 target of
producing 94,000 ounces to Kinross' account at total cash costs of $129 per
ounce achievable.
======================================================================= =============================
RECONCILIATION OF CRIXAS TOTAL CASH COSTS PER EQUIVALENT OUNCE OF THREE MONTHS ENDED
GOLD TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
----------------------------------------------------------------------- -----------------------------
2004 2003
----------------------------------------------------------------------- -------------- --------------
(millions except production in ounces and per ounce amounts)
Operating costs included in financial statements $ 3.0 $ 2.5
Accretion expense - -
Change in bullion inventory (0.1) (0.9)
----------------------------------------------------------------------- -------------- --------------
Total cash costs for per ounce calculation purposes $ 2.9 $ 1.6
======================================================================= ============== ==============
Gold equivalent production - ounces 22,511 15,604
Total cash costs per equivalent ounce of gold $ 127 $ 101
======================================================================= ============== ==============
-------------------------
(1) Includes the months of February and March 2003.
Total cash costs are a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Business of
Kinross--Operations--Calculation of Total Cash Costs and Realized Revenue and
Reconciliation to the Statement of Operations."
Kinross' share of capital expenditures in the first quarter of 2004 was
$0.7 million spent mostly on ore development and equipment replacement. Total
capital expenditures for the full year 2004 are budgeted at $3.3 million
(Kinross' share).
MUSSELWHITE (31.93% OWNERSHIP, PLACER DOME 68.07%, OPERATOR) - CANADA
Kinross acquired its ownership interest in the Musselwhite under ground
mine, located in northwestern Ontario, Canada, upon completion of the
combination with TVX on January 31, 2003. Kinross' share of gold equivalent
production for the first quarter of 2004 was 17,549 ounces at total cash costs
per gold equivalent ounce of $294 compared to 9,475 ounces for the corresponding
period last year (two months only) at total cash costs per equivalent ounce of
$319. Increased mill throughput in the quarter more than offset the lower grades
and recoveries. Total cash costs decreased in the quarter from the prior year as
the higher production more than offset the appreciation of the Canadian dollar.
Production was slightly below plan while total cash costs were 7% higher than
plan due principally to the Canadian dollar appreciation. The Joint Venture
management considers the full year 2004 budget of producing 75,000 ounces to
Kinross' account at total cash costs of $251 achievable. Higher grade ore is
expected in the second quarter of 2004 and will continue into the fourth quarter
of 2004, which will help reduce the total cash costs per equivalent ounce of
gold.
171
======================================================================= =============================
RECONCILIATION OF MUSSELWHITE TOTAL CASH COSTS PER EQUIVALENT OUNCE OF THREE MONTHS ENDED
GOLD TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
----------------------------------------------------------------------- -----------------------------
2004 2003
----------------------------------------------------------------------- -------------- --------------
(millions except production in ounces and per ounce amounts)
Operating costs included in financial statements $ 5.6 $ 2.8
Accretion expense - (0.1)
Change in bullion inventory (0.4) 0.3
----------------------------------------------------------------------- -------------- --------------
Total cash costs for per ounce calculation purposes $ 5.2 $ 3.0
======================================================================= ============== ==============
Gold equivalent production - ounces 17,549 9,475
Total cash costs per equivalent ounce of gold $ 294 $ 319
======================================================================= ============== ==============
-------------------------
(1) Includes the months of February and March 2003.
Total cash costs are a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Business of
Kinross--Operations--Calculation of Total Cash Costs and Realized Revenue and
Reconciliation to the Statement of Operations."
During the first quarter of 2004, Kinross' share of capital expenditures
was $0.4 million with full year 2004 capital expenditures expected to be $3.7
million (Kinross' share).
NEW BRITANNIA (50% OWNERSHIP AND OPERATOR) - CANADA
Kinross operates and owns a 50% interest in the New Britannia mine,
located in northern Manitoba, Canada, acquired in the combination with TVX on
January 31, 2003. Kinross' share of gold equivalent production for the first
quarter of 2004 was 6,707 ounces at total cash costs of $422 per ounce compared
to 7,460 ounces (two months only) at total cash costs per gold equivalent ounce
of $272 for the corresponding period last year.
The ore grade at the mine continues to adversely affect the sites
ability to operate economically. Various options for the site are being reviewed
with the preferred operating strategy being to stop underground development and
mine the developed ore over the next four months after which the mine will shut
down and enter reclamation and closure. As a result, Management has revised
downward its 2004 production levels to 16,500 ounces from the planned 34,000
ounces. It is expected, however, that the mine will generate positive cash flow
until closure.
The New Britannia mine team has done an outstanding job of operating the
mine over the last 10 years. The mine produced approximately 100,000 ounces gold
above original expectations. The New Britannia mine earned the prestigious John
T. Ryan Safety award, given to the safest underground mine in Canada. The Team
earned this award not once but five times over the course of ten years, the
Regional Trophy three times for the Prairies and Northwest Territories Region
and the Canada Trophy two times, the latest award was earned in 2003.
======================================================================= =============================
RECONCILIATION OF NEW BRITANNIA TOTAL CASH COSTS PER EQUIVALENT OUNCE THREE MONTHS ENDED
OF GOLD TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
----------------------------------------------------------------------- -----------------------------
2004 2003
----------------------------------------------------------------------- -------------- --------------
(millions except production in ounces and per ounce amounts)
Operating costs included in financial statements $ 3.2 $ 2.2
Accretion expense - (0.1)
Change in bullion inventory (0.4) (0.1)
---------------------------------------------------------------------- --------------- -------------
Total cash costs for per ounce calculation purposes $ 2.8 $ 2.0
====================================================================== =============== =============
Gold equivalent production - ounces 6,707 7,460
Total cash costs per equivalent ounce of gold $ 422 $ 272
====================================================================== =============== =============
-------------------------
(1) Includes the months of February and March 2003.
Total cash costs are a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Business of
Kinross--Operations--Calculation of Total Cash Costs and Realized Revenue and
Reconciliation to the Statement of Operations."
There are no capital expenditures planned for 2004.
172
LUPIN (100% OWNERSHIP AND OPERATOR) - CANADA
Kinross operates the Lupin underground mine, located in the Nunavut
Territory, Canada, acquired in the combination with Echo Bay on January 31,
2003. In August 2003, Kinross announced the immediate suspension of operations
at Lupin due to the poor economic performance of the operation over a protracted
period of time. The plant and equipment was placed on care and maintenance
pending a review of alternatives for the mine. This review concluded that the
development of a mine plan to extract the shaft and crown pillars and previously
developed remnant ore would be appropriate. Accordingly, the mine recommenced
production on March 3, 2004, and produced 5,187 gold equivalent ounces at total
cash costs per gold equivalent ounce of $304. Management expects that the mine
will meet its target for 2004 of producing 79,000 gold equivalent ounces at
total cash costs per equivalent ounce of $319.
======================================================================= =============================
RECONCILIATION OF LUPIN TOTAL CASH COSTS PER EQUIVALENT OUNCE THREE MONTHS ENDED
OF GOLD TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,
----------------------------------------------------------------------- -----------------------------
2004 2003
----------------------------------------------------------------------- -------------- --------------
(millions except production in ounces and per ounce amounts)
Operating costs included in financial statements $ 1.3 $ 9.2
Accretion expense (0.3) (0.3)
Change in bullion inventory 1.6 (1.2)
Operating costs not related to gold production (1.0) -
----------------------------------------------------------------------- -------------- --------------
Total cash costs for per ounce calculation purposes $ 1.6 $ 7.7
======================================================================= ============== ==============
Gold equivalent production - ounces 5,187 18,784
Total cash costs per equivalent ounce of gold $ 304 $ 114
======================================================================= ============== ==============
-------------------------
(1) Includes the months of February and March 2003.
Total cash costs are a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Business of
Kinross--Operations--Calculation of Total Cash Costs and Realized Revenue and
Reconciliation to the Statement of Operations."
A total of $2.6 million was spent to restart the operation and to buy
additional equipment needed to meet the revised operating plan. There are no
further capital spending requirements in 2004.
KETTLE RIVER (100% OWNERSHIP AND OPERATOR) - U.S.A.
The Kettle River operations, located in the state of Washington, U.S.A.,
recommenced operations in late December 2003. During the first quarter of 2004,
the mine produced 25,347 gold equivalent ounces at total cash costs of $228 per
gold equivalent ounce.
Production for the first quarter was essentially on plan despite more
challenging ground conditions than expected. Ground support activities are now
almost complete. Mill throughput was ahead of plan by 9% reflecting an efficient
operation that is essential for the processing of ore from the Buckhorn Mountain
mine, which will be acquired upon the close of the Crown transaction.
Management is confident that the 2004 budget of 100,000 ounces produced
at total cash costs per gold equivalent ounce of $208 will be met. In order to
meet the objectives, $1.5 million in capital spending is required, primarily for
the refurbishment of equipment.
173
REFUGIO (50% OWNERSHIP AND OPERATOR) - CHILE
Kinross and its joint venture partner, Bema Gold Corporation, announced
in 2003 plans to recommence production at the Refugio mine in late 2004.
Kinross' share of capital expenditures associated with the recommencement of
operations are expected to be approximately $53 million. During the first
quarter of 2004, activities were focused on engineering, procurement and design
of the expanded processing plant. Once complete in the fourth quarter of 2004,
the Refugio mine will be capable of producing approximately 115,000 to 130,000
ounces of gold equivalent per annum to Kinross' share at total cash costs per
ounce produced of approximately $225.
EXPENSES
GENERAL AND ADMINISTRATIVE
General and administrative costs include corporate office expenses
related to the overall management of the business which are not part of direct
mine operating costs. General and administrative costs include the costs
incurred at two corporate offices located in Toronto and Reno. There are two
leases associated with the Toronto office, which expire in 2005 and in 2007
while the Reno office lease expires in 2006. General and administrative expenses
totaled $6.9 million in the first quarter of 2004 compared to $5.8 million in
2003.
The 2004 first quarter general and administrative expenses are higher
than the 2003 comparative expenses as Kinross adopted CICA Handbook Section 3870
"Stock-based compensation and other stock-based payments." During the first
quarter ended March 31, 2004, Kinross recorded compensatory expense of $0.5
million relating to stock options and restricted stock units previously granted
over the respective vesting periods. All stock options granted since January 1,
2002 until December 31, 2003 have been recorded as a charge to opening retained
earnings upon adoption and prior period results have not been restated. As a
result of the adoption of CICA Handbook Section 3870, Kinross has increased its
planned general and administrative spending in 2004 to $23.0 million.
EXPLORATION AND BUSINESS DEVELOPMENT
Total exploration and business development expenses incurred during the
first quarter of 2004 was $3.5 million, compared with $6.2 million in 2003.
Planned exploration and business development expenditures for the first quarter
of 2004 were $6.0 million. Exploration and business development activities were
lower than planned as certain projects that were to begin in the first quarter
were delayed until the second quarter. Costs pertaining to these activities will
increase during the remaining quarters to compensate for the lower than planned
first quarter spending.
Kinross plans to spend a minimum of $20.0 million on its exploration
program in order to replace and increase reserves at existing mines and increase
reserves at development projects.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization totaled $32.4 million during
the first quarter 2004 compared to $28.2 million in 2003. Depreciation,
depletion and amortization increased in 2004 when compared to 2003 since the
results of operations for the first quarter of 2003 included only two months of
depreciation, depletion and amortization for the assets acquired from TVX and
Echo Bay. Depreciation, depletion and amortization have increased per equivalent
ounce of gold to $87 in 2004 from $84 in 2003. The 2004 increase per equivalent
ounce of gold was largely due to the impact of the combination with TVX and Echo
Bay. It is expected that depreciation, depletion and amortization expenses will
be $147.7 million for 2004.
174
INTEREST EXPENSE
Interest expense totaled $0.7 million during the first quarter of 2004,
compared to $1.1 million in 2003. Interest expense in 2004 is comprised of $0.1
million relating to interest on the Kubaka project loans, $0.3 million of
interest on the Industrial Revenue Bonds and the Fort Knox capital leases and
$0.3 million on other items. Interest expense is expected to remain low for the
remainder of 2004, as Kinross has repaid the Industrial Revenue Bonds and the
only plan to increase current debt levels is through the addition of $16.0
million of capital leases for the Refugio mining fleet.
FOREIGN EXCHANGE (GAIN) LOSS
During the first quarter of 2004, Kinross recorded a net loss on foreign
currency translation and transactions of $2.4 million compared to net losses in
2003 of $0.7 million.
Kinross' 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. Revenues and expenses are
translated at the average rate of exchange for the year. Exchange gains and
losses are included in income.
The foreign exchange risks facing Kinross and the impact of changes in
the currencies in which Kinross conducts its operations in relation to the U.S.
dollar are discussed in the "Risk Analysis" section of the MD&A for the year
ended December 31, 2003.
INCOME AND MINING TAXES
Kinross is subject to tax in various jurisdictions including Canada, the
United States, Russia, Brazil and Chile. Kinross has substantial operating
losses and other tax deductions in Canada, the United States and Chile (Refugio
mine) to shelter future taxable income in those jurisdictions. The 2004 first
quarter liability arose from income taxes in Russia, Brazil, Chile (La Coipa
mine) and federal large corporations tax and provincial mining taxes in Canada.
Kinross' joint venture investments in the La Coipa and Refugio mines are held in
separate Chilean companies, each of which is subject to tax.
BALANCE SHEET
Key items and statistics are highlighted below (in millions of U.S.
dollars).
============================================================= ====================== =====================
AS AT: MARCH 31 DECEMBER 31
2004 2003
------------------------------------------------------------- ---------------------- ---------------------
Unrestricted cash & equivalents $ 217.6 $ 245.8
Current assets 381.8 402.3
Total assets 2,116.2 2,145.1
Current Liabilities 111.3 150.0
Total Debt(1) 20.6 45.7
Total Liabilities(2) 296.5 340.5
Shareholders' Equity $ 1,819.7 $ 1,804.6
------------------------------------------------------------- ---------------------- ---------------------
STATISTICS
Working Capital $ 270.5 $ 252.3
Working Capital Ratio(3) 3.43x 2.68x
============================================================= ====================== =====================
-------------------------
(1) Includes long-term debt plus the current portion thereof and preferred
shares.
(2) Includes preferred shares and non-controlling interest.
(3) Current assets divided by current liabilities.
175
During 2003, Kinross completed a number of material transactions that
significantly improved its balance sheet. These events are fully described in
the year ended December 31, 2003 MD&A. During the first quarter of 2004,
unrestricted cash and equivalents decreased by $28.2 million. The changes in
cash are fully described in the liquidity section that follows. The balance
sheet has improved over the quarter as working capital increased, while debt and
other obligations decreased.
LIQUIDITY AND CAPITAL RESOURCES
Kinross is highly liquid. During the first quarter of 2004, Kinross
fully repaid the Industrial Revenue Bonds of $25.0 million owing to the Alaska
Industrial Development and Export Authority. Kinross is essentially debt free.
Cash flow provided from operating activities for the quarter was $17.9
million in 2004 compared to $16.2 million in 2003. Cash flow provided from
operating activities increased due to higher production and gold sales offset by
an increase in working capital requirements. Two significant factors in the use
of cash were: $12.9 million related to winter road resupply purchases at Kubaka
and Lupin; and $13.6 million of reduction in accrued liabilities due to payments
associated with the completion of the settlement agreement regarding TVX Hellas.
CAPITAL ADDITIONS
Kinross plans to spend $165.0 million on additions to property, plant
and equipment as fully described in the December 31, 2003 MD&A. This is a
significant increase over the $73.4 million spent in 2003. Management believes
that, with the price of gold in the $400 range, it is the correct time to
upgrade and expand its mining operations.
In the first quarter of 2004, $22.4 million was spent on additions to
property, plant and equipment. In the section, "Mining Operations," the
expenditures per mine are detailed.
LIQUIDITY OUTLOOK
In Kinross' 2003 year-end MD&A, the following details were provided of
the major uses of cash for 2004 outside of operating activities. These were:
================================================= ================== ===================
FULL YEAR FIRST QUARTER
2004 - PLAN 2004 - ACTUAL
------------------------------------------------- ------------------ -------------------
Site Restoration $ 19.2 $ 1.7
Exploration 20.0 2.7
Property, plant and equipment additions 165.0 22.4
------------------------------------------------- ------------------ -------------------
$ 204.2 $ 26.8
================================================= ================== ===================
At the end of the first quarter, Kinross continues to plan for the above
expenditures for the full year. It is expected that all of the $204.2 million
will be paid for from cash flow provided from operating activities. Based on a
gold price of $400 and average costs of production of $235 per ounce, a 10%
change in production ounces will result in a reduction in cash flows of
approximately, $28.1 million. However, Kinross' strong cash position and the low
debt levels will allow Kinross to meet its requirements for capital expenditures
and operating costs.
COMMITMENTS
As at March 31, 2004, Kinross does not have any material monetary
commitments other than the planned spending described above and its obligations
under its hedge program as discussed later in this MD&A.
176
On November 20, 2003, Kinross announced that it had executed a
definitive acquisition agreement with Crown whereby Kinross will acquire Crown
and its wholly-owned Buckhorn gold deposit located in north central Washington
State, approximately 67 kilometers by road from Kinross' Kettle River gold
milling facility. On December 16, 2003, Crown reported total proven and probable
reserves, at a gold price of $350 per ounce, for the Buckhorn deposit of 2.79
million tonnes grading 11.05 grams per tonne containing 991,300 ounces of gold.
The current operating plan for Buckhorn contemplates the development of
an underground mine and the shipping of ore to the Kettle River mill. This
development strategy addresses the major environmental issues identified during
prior permitting efforts. Kinross has a strong environmental record and believes
that by working diligently with federal, state and local agencies, as well as
other stakeholders, the permitting process initiated by Crown can be
successfully completed in a timely manner.
HEDGING ACTIVITIES
The outstanding number of ounces, average expected realized prices and
maturities for the gold commodity derivative contracts as at March 31, 2004, are
as follows:
=============================================================================================================
YEAR OUNCES HEDGED AVERAGE PRICE CALL OPTIONS SOLD AVERAGE STRIKE PRICE
-------------------------------------------------------------------------------------------------------------
2004 107,500 $ 280 50,000 $ 340
2005 37,500 $ 296 - -
-------------------------------------------------------------------------------------------------------------
Total 145,000 $ 284 50,000 $ 340
=============================================================================================================
The fair value of the call options sold is recorded in the audited
consolidated financial statements for the three years ended December 31, 2003,
at each measurement date. The fair value of the gold forward sales and spot
deferred forward sales contracts, as at March 31, 2004 was $(20.5) million based
on a gold price of $424 per ounce. In the first quarter of 2004, Kinross
delivered 30,000 ounces into contracts outstanding at December 31, 2003 leaving
145,000 ounces hedged at March 31, 2004. Subsequent to the end of the quarter,
Kinross delivered a further 20,000 ounces and financially closed out another
90,000 ounces at a cost of $9.7 million. This loss will be recognized in
accordance with the original maturity dates of the contracts, which range from
the third quarter of 2004 to the second quarter of 2005. The remaining 35,000
ounces hedged will be delivered in the second quarter of this year. If the
market price of gold is $400 per ounce on the dates the ounces are delivered
into the remaining forward sales contracts, Kinross would be paid $3.9 million
less than if it were unhedged. In addition, at March 31, 2004, Kinross has
50,000 ounces of written call options outstanding. If the market price of gold
is above $340 per ounce upon expiry in June 2004, Kinross will be committed to
sell 50,000 ounces at $340 per ounce. If the market price of gold is $400 per
ounce, Kinross would be paid $3.0 million less than if the calls did not exist.
Kinross does not include these financial instruments in testing for impairment
of operating mines, mineral rights and development properties.
CRITICAL ACCOUNTING POLICIES
In the MD&A for the year 2003, there is a full discussion and
description of the critical accounting policies appropriate to Kinross. The
preparation of Kinross' audited consolidated financial statements for the three
years ended December 31, 2003, in conformity with CDN GAAP requires management
to make estimates and assumptions that affect amounts reported in the audited
consolidated financial statements for the three years ended December 31, 2003,
and the accompanying notes. These are fully described in the MD&A for the year
2003.
During the first quarter of 2004, Kinross adopted two accounting
changes:
(1) Stock-based compensation; and
(2) Asset retirement obligations
The description and impact of these two changes are described in Note 2
of the notes to the unaudited interim financial statements for the quarters
ended March 31, 2004 and 2003, which are included in this Proxy
Statement/Prospectus. Neither of these accounting changes had a material impact
on Kinross' first quarter 2004 results.
177
OUTLOOK
During the first quarter of 2004, Kinross was able to exceed budget for
production and its expectations with respect to its mine operating costs. This
is a result of Kinross' continuous improvement program. The first quarter
generally is the weakest and Kinross expects production throughput to increase
each quarter in 2004. This is expected to bring Kinross to its target of 1.70 to
1.75 million ounces of gold equivalent production for 2004. As production
volumes increase, Kinross' total cash costs per gold equivalent ounce will
decrease. Kinross considers, therefore, its target costs of $225 to $235 per
ounce of gold for the whole year achievable. Kinross' investments in exploration
at its existing operations continues to yield promising results.
In 2003, Kinross announced plans to expand and recommission the Refugio
mine and restart the Kettle River operation. The Refugio mine is scheduled to
achieve production during the fourth quarter of 2004, while the Kettle River
operation reopened in January 2004 and, after some initial start-up issues, is
now working efficiently. We continue to plan to spend $165.0 million in capital
improvements in 2004 in pursuit of meeting objective number two above.
Kinross continues to look at opportunities to build the company through
accretive acquisitions. It is very important that Kinross remain patient in this
endeavor, since currently assets are being exchanged at higher than value
prices. Opportunities will continue to arise and be evaluated appropriately.
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEARS ENDED DECEMBER 31, 2003,
2002, AND 2001
This portion of MD&A provides a detailed discussion of Kinross'
financial and operating results for the year ended December 31, 2003, with
comparisons to the two previous years. The following information should be read
in conjunction with the audited consolidated financial statements for the three
years ended December 31, 2003, and accompanying notes.
This discussion is intended to provide investors with a reasonable basis
for assessing Kinross' operating and financial performance and future prospects.
The discussion is comprised of eight key sections.
1. Overview--a summary of production, financial results, and cash
flow provided from operating activities.
2. Material Events--details of events during the year that
materially impacted Kinross' operations and financial position.
3. Financial/Operations--analysis of the overall results of Kinross
with specific details of each mine's operations.
4. Liquidity and Capital Resources--details of the Kinross'
liquidity and the sources and uses of cash.
5. Critical Accounting Policies--summary of material accounting
policies.
6. Risk Analysis--details of the material risks to Kinross.
7. Strategy--describes Kinross' strategic plan.
8. Outlook--summary outlook for the year ahead.
178
OVERVIEW
Kinross is principally engaged in the mining and processing of gold and,
as a by-product, silver ore and the exploration for, and the acquisition of,
gold-bearing properties, principally in the Americas and Russia. Kinross'
products are gold and silver produced in the form of dore that is shipped to
refineries for final processing.
The profitability of Kinross and its competitors is subject to the world
prices of gold and silver and the costs associated with the acquisition,
exploration, and development of mining interests, the mining and processing of
gold and silver, regulatory and environmental compliance, and general and
administrative functions. The prices of gold and silver are subject to a
multitude of variables outside of Kinross' control. In order to minimize the
impact of price movements, management continually strives to be a low cost
producer.
On January 31, 2003, Kinross combined its operations with those of TVX
and Echo Bay. This transaction is more fully discussed in the section entitled
"Material Events" and in Note 2 to the audited consolidated financial statements
for the three years ended December 31, 2003. The results for 2003 include eleven
months of operations of these assets. The results of operations of TVX and Echo
Bay are not included in the audited consolidated financial statements for the
years ended December 31, 2002 and 2001.
This transaction had a material impact on Kinross' operations and its
balance sheet rendering comparisons to previous years rather meaningless except
in the discussion of the operations of each mine. Those discussions include both
mines owned at the beginning of the year and those added during the year as a
result of the combination.
RESULTS SUMMARY
Kinross' share of attributable gold equivalent production was 1,620,410
ounces in 2003, an increase of 82% over 2002 production of 888,634 ounces and
72% over 2001 production of 944,803 ounces. The increase in 2003 is attributed
to the addition of 838,883 ounces resulting from the combination with TVX and
Echo Bay.
Revenue from gold and silver sales was $571.9 million in 2003, compared
to $261.0 million in 2002 and $270.1 million in 2001.
Average total cash costs per attributable gold equivalent ounces were
$222 in 2003 compared to $201 in 2002 and $193 in 2001. Cash flow provided from
operating activities for the year was $92.7 million compared to $59.5 million in
2002 and $75.0 million 2001. Cash flow provided from operating activities in
2003 was positively impacted by higher gold production and higher gold prices.
Net income for the year ended December 31, 2003, totaled $9.7 million,
or $0.06 per share. This compares to net losses of $30.9 million ($0.32 per
share) for 2002 and $36.3 million ($0.42 per share) in 2001.
MATERIAL EVENTS
During 2003, Kinross completed or committed to certain transactions that
had, and will have, a material impact on Kinross' operations, its financial
condition, and its prospects. The following details those transactions:
1. TVX GOLD INC. AND ECHO BAY MINES LTD. COMBINATION
Kinross, TVX, and Echo Bay entered into a combination agreement dated
June 10, 2002, as amended as of July 12, 2002 and November 19, 2002, for the
purpose of combining the ownership of their respective businesses. The
combination was effected by way of a plan of arrangement under the Canada
Business Corporations Act with an effective date of January 31, 2003.
179
In a concurrent transaction, TVX entered into two agreements dated June
10, 2002, each amended as of November 19, 2002, with a subsidiary of Newmont.
Pursuant to these agreements, TVX acquired Newmont's 50% non-controlling
interest in the TVX Newmont Americas Joint Venture ("TVX Newmont J/V") for an
aggregate purchase price of $180.0 million with an effective date of January 31,
2003. Kinross advanced TVX $94.5 million immediately prior to the completion of
the combination which allowed TVX to complete the acquisition of the 50%
non-controlling ownership interest in TVX Newmont J/V.
Pursuant to the combination, TVX became a wholly-owned subsidiary of
Kinross on January 31, 2003, and each holder of TVX common shares received
2.1667 common shares of Kinross for each TVX common share. Also pursuant to the
combination, Echo Bay became a wholly-owned subsidiary of Kinross and each
holder of Echo Bay common shares, other than Kinross, received 0.1733 of a
common share of Kinross for each Echo Bay common share. The exchange ratios
reflect the three-for-one consolidation of Kinross' common shares that was
completed on January 31, 2003, immediately prior to the arrangement. Kinross
issued 177.8 million common shares with a fair value of $1,269.8 million with
respect to the combination with TVX and Echo Bay.
TVX held interests in various operating mines located in Canada, Brazil,
and Chile. Giving effect to the acquisition of Newmont's 50% interest in TVX
Newmont J/V, TVX's share of production from these mines in 2002 was 473,602
ounces of gold equivalent. Echo Bay held interests in various operating mines in
Canada and the United States. Echo Bay's share of production from these mines in
2002 was 522,208 ounces of gold equivalent.
The combination is being accounted for using the purchase method of
accounting. Pursuant to the purchase method of accounting, the TVX and Echo Bay
assets acquired and liabilities assumed have been recorded at their fair values
as of the effective date of the combination. The excess of the purchase price
over such fair values is recorded as goodwill. Goodwill is assigned to specific
reporting units as of the date of the combination and will not be amortized.
The goodwill resulting from the business combinations is $918.0 million
and has been assigned to the Exploration and Acquisitions reporting unit and the
Corporate reporting unit in the amount of $908.4 million and $9.6 million,
respectively. Goodwill will be tested for possible impairment at least annually
or more frequently upon the occurrence of certain events or when circumstances
indicate the reporting unit's carrying value, including goodwill, is greater
than its fair value. At December 31, 2003, Kinross has determined that there is
no impairment of goodwill as discussed in more detail in the section entitled
"Critical Accounting Policies."
A more detailed discussion of the properties acquired pursuant to the
business combinations and their impact on Kinross' operations, is provided under
the section entitled "Financial/Operations--Operation."
Concurrent with Kinross' shareholder approval of the combination,
approval was also given for the elimination of Kinross' accumulated deficit of
approximately $761.4 million as at December 31, 2002.
2. COMMON SHARE ISSUE AND CONVERTIBLE DEBENTURE REDEMPTION
On August 28, 2003, Kinross issued 23.0 million common shares from its
treasury for gross proceeds of $152.5 million. The bulk of the net proceeds from
the offering were used to redeem the outstanding 5.5% convertible unsecured
subordinated debentures. The principal amount of the convertible debentures was
$144.8 million.
The debentures were redeemed on September 29, 2003, which gave rise to a
net gain on redemption of $15.4 million. The financial impact of the redemption
is fully described in Note 13 to the audited consolidated financial statements
for the three years ended December 31, 2003.
180
3. SALE OF EQUITY INVESTMENTS
During the fourth quarter of 2003, Kinross sold several of its equity
interests and portfolio investments which were considered non-strategic,
including investments in Minefinders Corporation Ltd., Pacific Rim Mining
Corporation, and Endeavor Mining Capital Corporation. Proceeds from the sale of
equity investments totaled $56.2 million. These transactions resulted in
after-tax gains amounting to $26.0 million which are included in the
Consolidated Statements of Operations for the year as a component of the $29.5
million gain on disposal of assets.
4. FURTHER DEBT REPAYMENT
As at December 31, 2003, Kinross owed $25.0 million in tax exempt
industrial revenue bonds to the Alaska Industrial Development and Export
Authority. The obligation was fully secured by a letter of credit issued by
Kinross under its syndicated credit facility. On January 7, 2004, Kinross repaid
the debt in its entirety and the letter of credit was returned and cancelled.
5. NEW SYNDICATED CREDIT FACILITY
On February 27, 2003, Kinross arranged a new $125.0 million credit
facility with a group of eight banks. The facility may be used for general
corporate purposes but its main purpose is to allow for the issuance of letters
of credit to various regulatory agencies to satisfy financial assurance
requirements. The facility is secured by the Fort Knox mine and shares in
various wholly-owned subsidiaries. As at December 31, 2003, there were letters
of credit issued against the facility totaling $118.2 million. This has been
reduced subsequent to the year end to $92.7 million as a result of the
cancellation of the letter of credit supporting the industrial revenue bonds
that were repaid subsequent to year end as described above.
6. ACQUISITION OF 43.44% OF OMOLON GOLD MINING COMPANY
On December 3, 2002, Kinross entered into purchase agreements with four
of the five Russian minority shareholders holding 44.17% of the shares of Omolon
Gold Mining Company ("Omolon"). Omolon agreed to purchase these shares from the
four shareholders for $44.7 million. The acquisition increased Kinross'
ownership interest in Omolon to 98.1% and closed in February of 2003.
7. ACQUISITION OF CROWN RESOURCES CORPORATION
On November 20, 2003, Kinross announced that it had executed a
definitive acquisition agreement with Crown Resources Corporation ("Crown")
whereby Kinross will acquire Crown and its wholly-owned Buckhorn gold deposit
located in north central Washington State, approximately 67 kilometers by road
from Kinross' Kettle River gold milling facility. On December 16, 2003, Crown
reported total proven and probable reserves, at a gold price of $350 per ounce,
for the Buckhorn Mountain Project of 2.79 million tonnes grading 11.05 grams of
gold per tonne containing 991,300 ounces of gold. If the reserves had been
calculated on the basis used by Crown, but the assumed gold price was changed to
the $325 per ounce used by Kinross in calculating its proven and probable
reserves at December 31, 2003, Crown estimates that, at a cutoff grade of 0.20
ounces per ton, there would be approximately 2,979,800 tons of ore grading at
0.33 ounces per ton, resulting in 975,300 ounces of mineable reserve.
The current operating plan for the Buckhorn Mountain Project
contemplates the development of an underground mine and the shipping of ore to
the Kettle River mill. This development strategy addresses the major
environmental issues identified during prior permitting efforts. Kinross has a
strong environmental record and believes that by working diligently with
federal, state, and local agencies as well as other stakeholders, the permitting
process, initiated by Crown, can be successfully completed in a timely manner.
Kinross has agreed to issue 0.2911 of a common share of Kinross for each
outstanding common share of Crown. The total common shares to be issued by
Kinross is approximately 13.6 million. A registration statement covering the
issuance of the common shares has been filed with the U.S. Securities and
Exchange Commission. It is anticipated that the acquisition of Crown will be
completed following the effectiveness of the registration statement and the
approval of the transaction by the Crown shareholders.
181
8. SUMMARY
The results of these material transactions were to add to Kinross'
annual production output, to increase reserves, to virtually eliminate all debt
and to increase cash balances as at December 31, 2003, to $245.8 million.
Management considers 2003 as a transition year whereby a strong
financial and operating foundation was put in place to provide a basis for
future growth and profitability.
FINANCIAL/OPERATIONS
BALANCE SHEET
Key items and statistics are highlighted below (in millions of U.S. dollars):
2003 2002 2001
-------------- --------------- ---------------
Unrestricted cash and equivalents $ 245.8 $ 170.6 $ 81.0
Current Assets $ 402.3 $ 246.2 $ 138.7
Total Assets $ 2,142.5 $ 598.0 $ 577.6
Debt and other obligations(1) $ 45.7 $ 205.6 $ 265.3
Current Liabilities $ 150.0 $ 73.8 $ 76.7
Total Liabilities(2) $ 327.8 $ 311.4 $ 370.8
Shareholders' Equity(3) $ 1,814.7 $ 286.6 $ 206.8
STATISTICS
Working Capital $ 252.3 $ 172.4 $ 62.0
Working Capital Ratio(4) 2.68x 3.34x 1.81x
-------------------------
(1) Includes long-term debt (plus the current portion thereof), preferred
shares, and debt and equity components of convertible debentures.
(2) Include equity component of convertible debentures, preferred shares,
and non-controlling interest.
(3) Excludes equity component of convertible debentures.
(4) Current assets divided by current liabilities.
REVENUES
GOLD AND SILVER SALES
Kinross' primary source of revenue is from the sale of its gold
production. Kinross sold 1,541,575 ounces of gold in 2003, compared to 848,513
ounces in 2002 and 907,149 ounces in 2001. Revenue from gold and silver sales
was $571.9 million in 2003, compared to $261.0 million in 2002 and $270.1
million in 2001. In 2003, Kinross realized, on average, $357 per ounce of gold
compared to $306 in 2002 and $296 in 2001. Revenue increases in 2003 were
principally from the sale of gold and silver produced by the properties added
from the TVX/Echo Bay combination totaling 838,883 ounces of gold equivalent and
the increase in the realized gold price.
2003 2002 2001
--------------- --------------- -------------
Attributable gold equivalent production--ounces 1,620,410 888,634 944,803
Gold sales--ounces 1,541,575 848,513 907,149
Gold sales--revenue (millions) $ 547.6 $ 254.5 $ 251.1
Gold deferred revenue realized (millions) 2.3 5.1 $ 17.7
---------- ---------- ----------
Total gold revenue realized (millions) $ 549.9 $ 259.6 268.8
========== ========== ==========
Average sales price per ounce of gold $ 355 $ 300 $ 277
Deferred revenue realized per ounce of gold 2 6 19
---------- ---------- ----------
Average realized price per once of gold sold $ 357 $ 306 $ 296
========== ========== ==========
Average spot gold price per ounce $ 364 $ 310 $ 271
---------- ---------- ----------
Silver sales revenue (millions) $ 22.0 $ 1.4 $ 1.3
---------- ---------- ----------
Total gold and silver revenue (millions) $ 571.9 $ 261.0 $ 270.1
========== ========== ==========
182
Included in gold equivalent production is silver production converted to
gold production using a ratio of the average spot market prices for the
commodities for each year. The ratios are 74.79:1 in 2003, 67.24:1 in 2002, and
62.00:1 in 2001. Silver production was 4.4 million ounces in 2003, 0.3 million
ounces in 2002, and 0.4 million ounces in 2001. For 2003, 86% of the total was
produced at the La Coipa mine.
Realized revenue is furnished to provide additional information and is a
non-GAAP measure. This measure combined with total cash costs is intended to
provide investors with information about the cash generating capability
(realized revenue per ounce net of total cash costs per ounce) of the mining
operations. Kinross uses this information for the same purpose and for assessing
the performance of its mining operations. The measure of average realized price
per ounce of gold sold has been calculated on a consistent basis in each period.
INTEREST AND OTHER INCOME
Kinross invests its surplus cash in high quality, interest-bearing cash
equivalents. Interest and other income during 2003 totaled $12.3 million
compared to $16.9 million in 2002 and $9.3 million in 2001. Interest and other
income in 2003 was comprised of interest on cash deposits of $4.6 million, the
Sleeper mine reclamation recovery of $4.0 million and $3.7 million of other
items. This compares to 2002 interest on cash deposits of $1.5 million,
arbitration settlements of $10.3 million, and $5.1 million of other items. For
2001, interest on cash deposits totaled $4.9 million, insurance settlements were
$1.3 million, and other items totaled $3.1 million.
MARK-TO-MARKET GAIN (LOSS) ON WRITTEN CALL OPTIONS
In accordance with recommendations from the Canadian Institute of
Chartered Accountants ("CICA") regarding accounting for written call options,
the premiums received at the inception of the option are recorded as a
liability. Changes in the fair value of the liability are recognized in
earnings. The change in fair value of the written call options resulted in a
mark-to-market gain of $0.4 million in 2003. This compared to a loss of $2.7
million in 2002 and a gain of $3.5 million in 2001. The remaining positions held
by Kinross at December 31, 2003, will expire by June 2004.
COSTS AND EXPENSES
OPERATING COSTS
Gold equivalent production in 2003 increased by 82% when compared to
2002, while operating costs increased by 122%. Operating costs were $387.3
million in 2003 compared to $174.8 million in 2002 and $180.7 million in 2001.
Total cash costs per ounce of gold equivalent production were $222 in
2003, compared to $201 in 2002, and $193 in 2001. Total cash costs per ounce of
gold equivalent produced in 2003 increased at Kubaka as low-grade stockpiles
were being milled. Total cash costs increased at the Porcupine Joint Venture as
the Canadian dollar strengthened against the United States dollar materially
during the year. Total cash costs at Fort Knox increased due primarily to lower
gold production from the True North mine. Total cash costs for each mine are
discussed in more detail in the section entitled "Operations."
CONSOLIDATED PRODUCTION COSTS PER
EQUIVALENT OUNCE OF ATTRIBUTABLE
GOLD PRODUCTION YEARS ENDED DECEMBER 31,
----------------------------------------
2003 2002 2001
----------- ------------ -------------
Cash operating costs $ 211 $ 194 $ 186
Royalties 11 7 7
-------- -------- ---------
Total cash costs $ 222 $ 201 $ 193
-------- -------- ---------
Reclamation 6 4 2
Depreciation, depletion and amortization 91 101 94
-------- -------- ---------
Total production costs $ 319 $ 306 $ 289
======== ======== =========
183
The following table reconciles the production costs per equivalent ounce
of gold presented above to the operating costs presented in the audited
consolidated financial statements for the three years ended December 31, 2003.
RECONCILIATION OF TOTAL CASH COSTS PER
EQUIVALENT OUNCE OF GOLD TO CONSOLIDATED
FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31,
-------------------------------------------------
(millions except production in ounces and per ounce amounts) 2003 2002 2001
--------------- --------------- ---------------
Operating costs per financial statements $ 387.3 $ 174.8 $ 180.7
Operating costs for attributable production 0.4 13.4 7.4
Site restoration cost accruals (9.4) (3.0) (1.9)
Change in bullion inventory (2.5) (2.0) 1.5
Operating costs not related to gold production (16.4) (4.4) (5.2)
----------- ----------- -----------
Total cash costs for per ounce calculation purposes $ 359.4 $ 178.8 $ 182.5
----------- ----------- -----------
Gold equivalent production--ounces 1,620,410 888,634 944,803
Total cash costs per equivalent ounce of gold $ 222 $ 201 $ 193
=========== =========== ===========
Total cash costs per equivalent ounce of gold is furnished to provide
additional information and is a non-GAAP measure. This measure should not be
considered in isolation as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles and is not necessarily
indicative of operating expenses as determined under generally accepted
accounting principles. This measure intends to provide investors with
information about the cash generating capabilities of Kinross' operations.
Kinross uses this information for the same purpose and for assessing the
performance of its mining operations. Mining operations are capital intensive.
The measure total cash costs excludes capital expenditures but is reconciled to
total operating costs for each mine. Capital expenditures require the use of
cash in the current period, and in prior periods and are discussed throughout
the MD&A and included in the segmented information note to the audited
consolidated financial statements for the three years ended December 31, 2003,
(Note 19). For additional information about this non-GAAP measure, please see
the discussion under the caption "Calculation of Total Cash Costs and Realized
Revenue and Reconciliation to the Statement of Operations" on page 59.
184
OPERATIONS
Details of each individual mine operation, its performance, and outlook
are discussed in this section. First a summary:
YEARS ENDED DECEMBER 31,
----------------------------------------------------
GOLD EQUIVALENT PRODUCTION (OUNCES) 2003 2002 2001
---------------- -------------- --------------
PRIMARY OPERATIONS:
Fort Knox 391,831 410,519 411,221
Round Mountain(1)(4) 364,271 -- --
Porcupine(2) 223,960 189,464 156,581
Kubaka(3) 164,006 220,972 237,162
Paracatu Brasilia(1)(5) 91,176 -- --
La Coipa(1)(4) 144,125 -- --
Crixas(1)(4) 86,698 -- --
Musselwhite(1)(6) 64,978 -- --
New Britannia(1)(4) 31,627 -- --
Lupin(9) 56,008 -- --
---------------- -------------- --------------
1,618,680 820,955 804,964
---------------- -------------- --------------
OTHER OPERATIONS:
Blanket(8) -- 41,612 39,592
Refugio(4) -- 13,047 67,211
Denton-Rawhide(7) 1,730 11,162 17,713
Andacollo(7) -- 1,858 11,718
Other -- -- 3,605
---------------- -------------- --------------
Total gold equivalent ounces 1,620,410 888,634 944,803
================ ============== ==============
-------------------------
(1) Production data is for eleven months from January 31, 2003, to December
31, 2003.
(2) 2003 production reflects Kinross' 49% ownership interest in the
Porcupine Joint Venture. 2002 production reflects Kinross' 100%
ownership interest in the Hoyle Pond mine to June 30, and its 49%
ownership interest in the Porcupine Joint Venture thereafter.
(3) Represents Kinross' 54.7% ownership interest to February 28, 2003, and
its 98.1% interest thereafter.
(4) Represents Kinross' 50% ownership interest.
(5) Represents Kinross' 49% ownership interest.
(6) Represents Kinross' 31.9% ownership interest.
(7) Includes proportionate share of Denton-Rawhide and Andacollo production
attributable to the Pacific Rim (formerly Dayton) ownership interest.
(8) Because of the economic and political conditions and the negative impact
of inflationary pressures in Zimbabwe, Blanket was written off in 2001,
Kinross commenced cost accounting for this investment in 2002 and ceased
reporting its production in 2003.
(9) Production data is for the period January 31, 2003, to August 2003, when
mining operations were suspended.
185
YEARS ENDED DECEMBER 31,
----------------------------------------------------
TOTAL CASH COSTS PER OUNCE OF ATTRIBU-
TABLE GOLD EQUIVALENT PRODUCTION 2003 2002 2001
---------------- -------------- --------------
(Dollars per equivalent ounce of gold)
PRIMARY OPERATIONS:
Fort Knox 243 232 207
Round Mountain(1) 201 -- --
Porcupine 211 201 182
Kubaka 194 133 140
Paracatu Brasilia(1) 193 -- --
La Coipa(1) 234 -- --
Crixas(1) 109 -- --
Musselwhite(1) 257 -- --
New Britannia(1) 327 -- --
Lupin(1) 407 -- --
OTHER OPERATIONS:
Blanket -- 243 279
Refugio -- 186 242
Denton-Rawhide 221 249 248
Andacollo -- 295 259
Other -- -- 353
---------------- -------------- --------------
Average total cash costs 222 201 193
================ ============== ==============
-------------------------
(1) Cost data is for eleven months from January 31, 2003, to December 31,
2003, except Lupin which suspended operations in August 2003.
Total Cash Costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Costs and
Expenses--Operating Costs" and "Business of Kinross--Operations--Calculation of
Total Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations."
MINE OPERATIONS
FORT KNOX (100% OWNERSHIP AND OPERATOR) - USA
Kinross acquired the Fort Knox open pit mine, located near Fairbanks,
Alaska, in 1998. The Fort Knox operation consists of the main Fort Knox open pit
and the True North open pit located approximately 15 kilometers northwest of
Fort Knox. Gold equivalent production for 2003 was 391,831 ounces compared to
410,519 ounces in 2002 and 411,221 in 2001. The processing of lower grade True
North ore that was slightly more refractory, due to the presence of sulphides,
adversely impacted gold recoveries and the total cash costs per ounce in 2003.
Total cash costs per gold equivalent ounce for 2003 increased to $243 from $232
in 2002 and $207 in 2001.
RECONCILIATION OF THE FORT KNOX TOTAL CASH COSTS
PER EQUIVALENT OUNCE OF GOLD TO CONSOLIDATED
FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31,
------------------------------------------------------
(millions except production in ounces and per ounce 2003 2002 2001
amounts)
---------------- -------------- ---------------
Operating costs per financial statements $ 92.9 $ 99.2 $ 82.9
Site restoration cost accruals (2.5) (1.0) (1.2)
Change in bullion inventory 4.8 (2.9) 3.3
---------- ----------- -----------
Total cash costs for per ounce calculation purposes $ 95.2 $ 95.3 $ 85.0
---------- ---------- -----------
Gold equivalent production--ounces 391,831 410,519 411,221
Total cash costs per equivalent ounce of gold $ 243 $ 232 $ 207
========== ========= ===========
186
Total Cash Costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Costs and
Expenses--Operating Costs" and "Business of Kinross--Operations--Calculation of
Total Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations."
Management's expectation for the mine is for 2004 gold production of
approximately 340,000 ounces at total cash costs of $220 per ounce. This
reflects the intention to suspend mining of the True North mine for several
months in 2004 and use the True North mining fleet to complete the next phase of
the tailings dam lift at Fort Knox rather than rely on more expensive third
party contractors. This will result in decreased production in 2004. Mining of
True North is expected to be reactivated later in 2004 and is expected to
continue into mid-2005.
Capital expenditures at the Fort Knox operations in 2003 were $26.5
million compared to $15.0 million in 2002 and $20.2 million in 2001. The
majority of capital expenditures was directed towards equipment purchases and
rebuilds, the drilling of pit de-watering wells and exploration. Capital
expenditures for 2004 are planned to be $39.0 million including mining
equipment, development, a tailings dam lift, pit de-watering wells, and
exploration.
During 2003, exploration was conducted within the Fort Knox pit, at the
True North mine, on the Gil project, and at Ryan Lode. Results from the Fort
Knox in-pit work confirmed sufficient continuity of the mineralized zones to
justify a major pit wall layback at an assumed gold price of $325 per ounce.
This major layback is comprised of a three year, approximately $60.0 million
capital expenditure program mostly in the form of stripping to liberate ore to
prolong the economic life of the Fort Knox mine. At Gil, 10 kilometers east of
the Fort Knox mine site, an engineering scoping study was completed. Reserves at
year-end 2003 for Fort Knox and area deposits increased by approximately 10% to
2,945,000 ounces at a gold price of $325 per ounce.
ROUND MOUNTAIN (50% OWNERSHIP AND OPERATOR) - USA
Kinross acquired its ownership interest in the Round Mountain open pit
mine, located in Nye County, Nevada, upon completion of the combination with
Echo Bay on January 31, 2003. Round Mountain continues to perform well in spite
of a power problem that limited mill production in the second half of 2003.
Kinross' share of the eleven-month production ended December 31, 2003, totaled
364,271 ounces. Gold equivalent production was positively impacted by higher
gold recoveries due to the installation of new carbon columns during the second
quarter and the implementation of side slope leaching of the historic dedicated
leach pad.
Due to the failure of an electrical transformer, production activities
in the second half of the year focused on accelerating ore placement on the
dedicated leach pads to offset crushing and milling limitations. Higher grade
ore, which would have been milled during a portion of the third and fourth
quarters, was stockpiled. As a result of the flexibility provided by having
three separate processing streams, the lower mill throughput did not severely
impact production for the second half of 2003. The transformer repairs have been
completed and the mill was back at full production in February 2004.
Total cash costs per gold equivalent ounce were $201 per ounce for the
eleven-month period ended December 31, 2003.
Kinross' expectation for Round Mountain is to produce approximately
367,000 ounces to Kinross' account at total cash costs of $223 per ounce in
2004.
187
Costs in 2004 will increase since royalty payments are geared to the
price of gold. In addition, the Nevada "Net Proceeds Tax" is also geared towards
the price of gold and will negatively impact total cash costs per ounce.
RECONCILIATION OF THE ROUND MOUNTAIN TOTAL CASH
COSTS PER EQUIVALENT OUNCE OF GOLD TO ELEVEN MONTHS ENDED
CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003
---------------------
(millions except production in ounces and per ounce
amounts)
Operating costs per financial statements $ 76.7
Site restoration cost accruals (1.8)
Change in bullion inventory (1.6)
--------------
Total cash costs for per ounce calculation purposes $ 73.3
-------------
Gold equivalent production--ounces 364,271
Total cash costs per equivalent ounce of gold $ 201
==============
Total Cash Costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Costs and
Expenses--Operating Costs" and "Business of Kinross--Operations--Calculation of
Total Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations."
Kinross' share of capital expenditures at the Round Mountain mine in
2003 was $5.7 million. Pit de-watering and dedicated leach pad construction
accounted for the majority of the capital expenditures. Capital expenditures for
2004 are planned to be $8.1 million.
At the Gold Hill project, reverse circulation and diamond drilling was
completed during 2003 in order to verify the existing block models. As a result
of exploration activity at Round Mountain and Gold Hill, Kinross' gold reserves
at Round Mountain and area were 1,850,000 ounces at an estimated gold price of
$325 per ounce, essentially unchanged at the end of 2003 compared to the pro
forma reserves at December 31, 2002.
PORCUPINE JOINT VENTURE (49% INTEREST, PLACER DOME 51%, OPERATOR) - CANADA
On July 1, 2002, Kinross formed a joint venture with a wholly-owned
subsidiary of Placer Dome Inc. ("Placer"). The formation of the joint venture
combined the two companies' gold mining operations in the Porcupine district in
Timmins, Ontario. The ownership of this unincorporated joint venture is 51%
Placer and 49% Kinross. The joint venture operates pursuant to a contractual
agreement and both parties receive their share of gold output in kind. Capital,
exploration and operating costs are funded in proportion to each party's
ownership interest. Upon creation of the joint venture, Placer contributed the
Dome mine and mill and Kinross contributed the Hoyle Pond, Nighthawk Lake, and
Pamour mines, exploration properties in the Porcupine district, as well as the
Bell Creek mill.
Comparative production and cost information for the first half of 2002,
and for the full year ended December 31, 2001, represent Kinross' results from
the Hoyle Pond mine.
Kinross' share of gold production in 2003 increased to 223,960 ounces at
a total cash cost of $211 per ounce compared to 189,464 ounces during 2002 at
$201 per ounce and 156,581 ounces during 2001 at $182 per ounce.
188
Kinross' expectation for the Porcupine joint venture is to produce
approximately 200,000 ounces for Kinross' account at total cash costs of $230
per ounce in 2004. The reduction in production in 2004 and the cash costs per
ounce increase in 2004 are due principally to the processing of lower grade ore.
RECONCILIATION OF THE PORCUPINE TOTAL CASH COSTS
PER EQUIVALENT OUNCE OF GOLD TO CONSOLIDATED
FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31,
----------------------------------------------------
(millions except production in ounces and per ounce amounts) 2003 2002 2001
---------------- -------------- ---------------
Operating costs per financial statements $ 53.4 $ 38.6 $ 29.1
Site restoration cost accruals (1.6) (1.5) (0.2)
Change in bullion inventory (1.5) 1.5 0.7
Operating costs not related to gold production (2.9) (0.6) (1.1)
----------- ----------- ------------
Total cash costs for per ounce calculation purposes $ 47.4 $ 38.0 $ 28.5
---------- ----------- -----------
Gold equivalent production--ounces 223,960 189,464 156,581
Total cash costs per equivalent ounce of gold $ 211 $ 201 $ 182
========== ========== ===========
Total Cash Costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Costs and
Expenses--Operating Costs" and "Business of Kinross--Operations--Calculation of
Total Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations."
Kinross' share of capital expenditures at the Porcupine joint venture in
2003 was $8.3 million compared to $6.7 million in 2002 and $7.9 million in 2001.
This amount included expenditures on the tailings dam lift and the development
of the Pamour project. Capital expenditures in 2004 are planned to be $28.7
million for Kinross' share of the Pamour project and Hoyle Pond development.
The Pamour open pit feasibility study was finalized in late 2003 and
permitting work was initiated. Demolition of the old Pamour headframe and
associated infrastructure was completed in preparation for the development of
the open pit operations. Saleable production is expected to commence in 2005.
An aggressive exploration program continued during 2003 with 88,090
meters of exploration diamond drilling completed. These activities resulted in
the Porcupine joint venture replacing its reserves consumed in 2003. Kinross'
share of the reserves was 1,489,000 ounces at December 31, 2003, using a gold
price of $325 per ounce.
KUBAKA (98.1% OWNERSHIP AND OPERATOR) - RUSSIA
Kinross acquired a 54.7% interest in the Kubaka open pit mine located in
the Magadan Oblast in far eastern Russia in three transactions during 1998 and
1999. In December 2002, Kinross entered into purchase agreements with its former
Russian partners to acquire further shares to increase its interest to 98.1%.
Consideration for this further purchase was $44.7 million with the transaction
closing February 28, 2003.
Mining activities at the Kubaka pit ceased in October of 2002, and the
processing of relatively lower grade stockpiles commenced along with further
exploration drilling.
189
Kinross' share of gold equivalent production totaled 164,006 ounces in
2003 (54.7% ownership to February 28, 2003, 98.1% thereafter) at a total cash
cost of $194 per ounce down from its 2002 share of gold equivalent production of
220,992 ounces at $133 per ounce and its 2001 share of 237,162 ounces at $140
per ounce.
RECONCILIATION OF THE KUBAKA TOTAL CASH COSTS
PER EQUIVALENT OUNCE OF GOLD TO CONSOLIDATED
FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31,
------------------------------------------------------
(millions except production in ounces and per ounce 2003 2002 2001
amounts)
---------------- -------------- ---------------
Operating costs per financial statements $ 30.6 $ 28.6 $ 34.1
Site restoration cost accruals (0.5) (0.8) (0.4)
Change in bullion inventory 0.3 (0.1) (1.6)
Management fees 1.6 1.6 1.0
---------- ---------- -----------
Total cash costs for per ounce calculation purposes $ 32.0 $ 29.3 $ 33.1
---------- ---------- -----------
Gold equivalent production--ounces 164,006 220,972 237,162
Total cash costs per equivalent ounce of gold $ 194 $ 133 $ 140
========== ========== ===========
Total Cash Costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Costs and
Expenses--Operating Costs" and "Business of Kinross--Operations--Calculation of
Total Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations."
Gold equivalent production in 2003 was 13% below Kinross' expectations
due to lower underground production which was partially offset by higher than
anticipated mill throughput. Underground production is expected to continue well
into 2004 to supplement low-grade stockpiles and initial ore from a test pit at
the Birkachan property located 28 kilometers north of Kubaka. In 2003, capital
expenditures were $1.7 million compared to $0.1 million in 2002 and $0.4 million
in 2001. Kinross plans to spend $11.2 million in 2004 on capital expenditures
principally to develop the Birkachan test pit and commence underground
exploration and development of the Tsokol vein.
For 2004, Kubaka is expected to produce approximately 137,000 gold
equivalent ounces at total cash costs of $260 per ounce. The expected increase
in total cash costs per ounce in 2004 is due to lower grade ore being processed
and the additional costs to transport the ore from the Birkachan property to the
mill.
Exploration drilling during the second half of 2003 assisted in further
defining mineralization at the Birkachan and Tsokol deposits. Kinross' share of
gold reserves at Kubaka and area, estimated at $325 per ounce of gold, increased
to 410,000 ounces at year-end 2003 due to the inclusion of initial reserves at
Birkachan and Tsokol, exploration success on the underground portion of Kubaka
and the increase in ownership year-over-year.
PARACATU (ALSO KNOWN AS BRASILIA - 49% OWNERSHIP, RIO TINTO 51%, OPERATOR) -
BRAZIL
Kinross acquired its ownership interest in the Paracatu (Brasilia) open
pit mine, located in the State of Minas Gerais, upon completion of the
combination with TVX on January 31, 2003. During the eleven-months ended
December 31, 2003, Kinross' share of gold production was 91,176 ounces at a
total cash cost of $193 per ounce. In the second half of 2003, harder than
anticipated ore, which reduced mill throughput, and the higher sulphide content
of the ore processed, which reduced recoveries, combined to negatively impact
gold production as compared to Kinross' expectations. The lower gold production
in addition to higher electricity, fuel, and maintenance costs resulted in
fourth quarter total cash costs per ounce being 20% above expectations.
The economics of the Calha Mill expansion prefeasibility study completed
during the second quarter were favorable and, as a result, work is well advanced
on a full feasibility study that is to be completed during the second quarter of
2004. The study envisions the installation of a SAG mill to increase mill
throughput by approximately 50% to 30 million tonnes per year.
190
Kinross expects the Paracatu (Brasilia) mine to produce approximately
95,000 ounces to Kinross' account at total cash costs of $228 per ounce in 2004.
The expected increase in total cash costs per ounce in 2004 is due to the
strengthening of the Brazilian real in relation to the United States dollar and
higher than normal electrical and fuel costs resulting from processing harder
ore. The SAG mill, once commissioned in 2005, will mitigate the hard ore issue
and should translate into higher production at reduced operating costs.
RECONCILIATION OF THE PARACATU (BRASILIA) TOTAL
CASH COSTS PER EQUIVALENT OUNCE OF GOLD TO ELEVEN MONTHS ENDED
CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003
----------------------
(millions except production in ounces and per ounce
amounts)
Operating costs per financial statements $ 19.9
Site restoration cost accruals (0.8)
Change in bullion inventory (0.4)
Operating costs not related to gold mining (1.1)
--------------
Total cash costs for per ounce calculation purposes $ 17.6
-------------
Gold equivalent production--ounces 91,176
Total cash costs per equivalent ounce of gold $ 193
==============
Total Cash Costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Costs and
Expenses--Operating Costs" and "Business of Kinross--Operations--Calculation of
Total Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations."
Kinross' share of capital expenditures at the Paracatu (Brasilia) mine
in 2003 was $5.2 million. Capital expenditures were mainly related to additions
to the mining fleet and work related to the tailings dam. Kinross plans to spend
$13.1 million in 2004 for capital expenditures to expand the output of the mine.
In 2003, Kinross' share of reserves at Paracatu (Brasilia) increased by
almost 5% to 2,613,000 ounces of gold, estimated at a gold price of $325 per
ounce, compared to the pro forma reserves for the previous year. In addition,
the economies of scale resulting from the proposed expansion could lower the
cut-off grade and, consequently, could have the impact of enhancing future
reserves.
LA COIPA (50% OWNERSHIP, PLACER DOME 50%, OPERATOR) - CHILE
Kinross acquired its ownership interest in the La Coipa open pit mine
upon completion of the combination with TVX on January 31, 2003. Kinross' share
of gold equivalent production for the eleven-months ended December 31, 2003, was
144,125 ounces at a total cash cost of $234 per ounce. During the fourth quarter
of the year, production was 44,454 ounces which was 48% above management's
expectations at a total cash cost of $204 which was 34% below management's
expectations. The much higher production and much lower costs resulted from a
positive grade variance caused by a change in the sequencing of ore from Phase
Three at Coipa Norte rather than Phase Five. Also, a planned maintenance
shutdown in December was deferred to January 2004, causing throughput to exceed
expectations.
191
Kinross' expectation for the La Coipa mine is to produce approximately
145,000 gold equivalent ounces to Kinross' account at total cash costs of $288
per ounce in 2004. In 2004, Kinross will be mining more in-pit waste rock than
in 2003, which will increase costs by approximately $6.0 million for its
ownership interest. This additional cost will account for the majority of the
increase in total cash costs per ounce in 2004. In 2005, total cash costs per
ounce should decline as less waste is mined.
RECONCILIATION OF THE LA COIPA TOTAL CASH
COSTS PER EQUIVALENT OUNCE OF GOLD TO ELEVEN MONTHS ENDED
CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003
----------------------
(millions except production in ounces and per ounce
amounts)
Operating costs per financial statements $ 34.9
Site restoration cost accruals (0.6)
Change in bullion inventory (0.6)
--------------
Total cash costs for per ounce calculation purposes $ 33.7
--------------
Gold equivalent production--ounces 144,125
Total cash costs per equivalent ounce of gold $ 234
==============
Total Cash Costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Costs and
Expenses--Operating Costs" and "Business of Kinross--Operations--Calculation of
Total Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations."
Kinross' share of capital expenditures at La Coipa during 2003 was $0.5
million and Kinross plans to spend $1.4 million in 2004.
Exploration activity in 2003 at La Coipa focused on the Puren Norte
deposit that has a significant silver component. Compared to the pro forma
reserves of the previous year, Kinross' share of gold reserves at La Coipa
declined by 9% to 584,000 ounces while silver reserves increased by 18% to
37,837,000 ounces, estimated at a gold price of $325 per ounce and a silver
price of $4.75 per ounce.
CRIXAS (50% OWNERSHIP, ANGLO GOLD 50%, OPERATOR) - BRAZIL
Kinross acquired its ownership interest in the Crixas underground mine,
located in the State of Goias, upon completion of the combination with TVX on
January 31, 2003. For the eleven months ended December 31, 2003, Kinross' share
of production was 86,698 ounces of gold at a total cash cost of $109 per ounce.
Expectations are for the Crixas mine to produce approximately 94,000
ounces to Kinross' account at total cash costs of $129 per ounce in 2004. The
expected total cash costs per ounce increase in 2004 is due to the strengthening
of the Brazilian real in relation to the United States dollar and the fact that
the mine is deeper which translates into higher operating costs.
RECONCILIATION OF THE CRIXAS TOTAL CASH
COSTS PER EQUIVALENT OUNCE OF GOLD TO ELEVEN MONTHS ENDED
CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003
---------------------
(millions except production in ounces and per ounce
amounts)
Operating costs per financial statements $ 10.5
Site restoration cost accruals (0.2)
Change in bullion inventory (0.8)
-------------
Total cash costs for per ounce calculation purposes $ 9.5
-------------
Gold equivalent production--ounces 86,698
Total cash costs per equivalent ounce of gold $ 109
=============
Total Cash Costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Costs and
Expenses--Operating Costs" and "Business of Kinross--Operations--Calculation of
Total Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations."
192
Kinross' share of capital expenditures at the Crixas mine in 2003 was
$3.2 million. Planned 2004 capital expenditures are $3.3 million.
Exploration work on the Forquilha Sul zone, which overlies the principal
Mina III ore body, has confirmed continuity of mineralization over a strike
length of approximately 400 meters. The zone remains open and exploration
drilling in 2004 will target extensions along the strike. Kinross' share of 2003
gold reserves at Crixas was essentially unchanged at 470,000 ounces, estimated
at a gold price of $325 per ounce, compared to pro forma reserves the previous
year of 478,000 ounces.
MUSSELWHITE (31.93% OWNERSHIP, PLACER DOME 68.07%, OPERATOR) - CANADA
Kinross acquired its ownership interest in the Musselwhite underground
mine, located in northwestern Ontario, Canada, upon completion of the
combination with TVX on January 31, 2003. For the eleven-month period ended
December 31, 2003, Kinross' share of gold production was 64,978 ounces at total
cash costs of $257 per ounce. Operational shortfalls in the first quarter of
2003 were largely responsible for the lower than expected gold production and
higher total cash costs for the year.
Kinross' expectation for the Musselwhite mine is to produce
approximately 75,000 ounces to Kinross' account at total cash costs of $251 per
ounce in 2004.
RECONCILIATION OF THE MUSSELWHITE TOTAL CASH
COSTS PER EQUIVALENT OUNCE OF GOLD TO ELEVEN MONTHS ENDED
CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003
---------------------
(millions except production in ounces and per ounce
amounts)
Operating costs per financial statements $ 16.5
Site restoration cost accruals (0.4)
Change in bullion inventory 0.8
Operating costs not related to gold mining (0.2)
--------------
Total cash costs for per ounce calculation purposes $ 16.7
--------------
Gold equivalent production--ounces 64,978
Total cash costs per equivalent ounce of gold $ 257
==============
Total Cash Costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Costs and
Expenses--Operating Costs" and "Business of Kinross--Operations--Calculation of
Total Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations."
Kinross' share of capital expenditures at the Musselwhite mine in 2003
was $2.7 million. Planned 2004 capital expenditures total $3.7 million.
During 2003, over 80,000 meters of drilling was completed at
Musselwhite. Positive results continue to be obtained from infill diamond
drilling of the PQ Deeps zone. Kinross' share of gold reserves in 2003,
estimated at a gold price of $325 per ounce, was essentially unchanged at
658,000 ounces compared to pro forma reserves containing 667,000 ounces in 2002.
NEW BRITANNIA (50% OWNERSHIP AND OPERATOR) - CANADA
Kinross operates and owns a 50% interest in the New Britannia
underground mine, located in northern Manitoba, acquired in the combination with
TVX on January 31, 2003. Kinross' share of gold production for the eleven-months
ended December 31, 2003, was 31,627 ounces at total cash costs of $327 per
ounce. During the fourth quarter of 2003, Kinross' share of gold production was
a disappointing 6,567 ounces at total cash costs of $408 per ounce. Kinross and
its joint venture partner, High River Gold Mines Limited have completed an
initial evaluation of the future of the mine. Due to the escalating unit cost
and rapidly declining gold reserves, it is currently projected that gold
production from New Britannia will be suspended in the third quarter of 2004.
193
Kinross' revised expectation for the New Britannia mine is to produce
approximately 16,500 ounces to Kinross' account in 2004.
RECONCILIATION OF THE NEW BRITANNIA TOTAL CASH
COSTS PER EQUIVALENT OUNCE OF GOLD TO ELEVEN MONTHS ENDED
CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003
---------------------
(millions except production in ounces and per ounce
amounts)
Operating costs per financial statements $ 11.3
Site restoration cost accruals (0.1)
Change in bullion inventory (0.8)
Operating costs not related to gold mining (0.1)
Total cash costs for per ounce calculation purposes $ 10.3
--------------
Gold equivalent production--ounces 31,627
--------------
Total cash costs per equivalent ounce of gold $ 327
==============
Total Cash Costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Costs and
Expenses--Operating Costs" and "Business of Kinross--Operations--Calculation of
Total Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations."
Kinross' share of capital expenditures at the New Britannia mine in 2003
was $1.0 million. No capital expenditures are planned for 2004.
LUPIN (100% OWNERSHIP AND OPERATOR) - CANADA
Kinross operates the Lupin underground mine, located in the Nunavut
Territory, acquired in the combination with Echo Bay on January 31, 2003.
In August 2003, Kinross announced the immediate suspension of operations
at the Lupin mine due to the poor economic performance of the operation over a
protracted period of time. As a result, there was no gold production during the
fourth quarter of 2003 and gold production for the full year was 56,008 ounces
at total cash costs of $407 per ounce. Kinross tested the carrying value of the
Lupin assets for impairment upon suspension of operations, but determined that,
based on cash flows from preliminary mine plan alternatives, the assets were not
impaired at that time. The plant and equipment was placed on care and
maintenance pending the results of the review of future alternatives for the
property. Personnel have remained on site to continue with environmental
management programs to ensure compliance with all regulatory requirements.
Kinross incurred $9.1 million for severance and holding costs during the balance
of 2003 as operations remained suspended.
During the fourth quarter of 2003, a review of alternatives for the
property concluded that the development of a mine plan to extract the shaft and
crown pillars and previously developed remnant ore was optional. Consequently,
plans have been developed that consume the remaining supply inventories and the
projected cash flow, at a gold price of $350 per ounce continues to support the
remaining mine carrying value. During the first quarter of 2004, Kinross has
been preparing to reactivate Lupin with the objective of producing 79,000 ounces
in 2004 at total cash costs of $319 per ounce with additional production to
mid-2005. Mill operations and gold production are to commence in March 2004.
RECONCILIATION OF THE LUPIN TOTAL CASH
COSTS PER EQUIVALENT OUNCE OF GOLD TO ELEVEN MONTHS ENDED
CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003
---------------------
(millions except production in ounces and per ounce
amounts)
Operating costs per financial statements $ 35.6
Site restoration cost accruals (0.8)
Change in bullion inventory (2.9)
Operating costs not related to gold mining (9.1)
-------------
Total cash costs for per ounce calculation purposes $ 22.8
-------------
Gold equivalent production--ounces 56,008
Total cash costs per equivalent ounce of gold $ 407
=============
194
Total Cash Costs is a non-GAAP measure. For further information on this
non-GAAP measure, please refer to the disclosure under the heading "Costs and
Expenses--Operating Costs" and "Business of Kinross--Operations--Calculation of
Total Cash Costs and Realized Revenue and Reconciliation to the Statement of
Operations."
Capital expenditures at the Lupin mine in 2003 were $1.1 million.
Capital expenditures in 2004 have been $2.6 million with no further planned
expenditures.
EXPENSES
GENERAL AND ADMINISTRATIVE
General and administrative costs include corporate office expenses
related to the overall management of the business which are not part of direct
mine operating costs. General and administrative costs include the costs
incurred at two corporate offices located in Toronto and Reno. There are two
leases associated with the Toronto office which expire in 2005 and in 2007 while
the Reno office lease expires in 2006. General and administrative expenses
totaled $25.0 million in 2003 compared to $11.3 million in 2002 and $10.1
million in 2001.
The 2003 general and administrative expenses are higher due to the
increased size of Kinross resulting from the combination with TVX and Echo Bay,
increased costs associated with compliance with new regulatory requirements, and
increased costs dealing with transitional issues when compared to 2002. As
Kinross continues to realize synergies associated with the combination, general
and administrative expenses are estimated to decrease to $21.0 million in 2004.
EXPLORATION AND BUSINESS DEVELOPMENT
Total exploration and business development expenses in 2003 were $24.3
million, compared with $11.6 million in 2002 and $7.9 million in 2001.
Exploration activities increased significantly in 2003 upon completion of the
TVX and Echo Bay combination and as a result of higher gold prices. Exploration
activities were focused principally at and around existing operating mines and
at the Kettle River - Emanuel Creek project in Washington State and the Refugio
project in Chile. During 2003, Kinross spent $11.3 million on exploration at
mines it operates including $2.7 million at Kettle River, $2.4 million at Fort
Knox including the True North, Gil, and Ryan Lode projects, $2.1 million on
district exploration and advancing the Gold Hill project at Round Mountain, and
$1.3 million in the Kubaka area. At Kinross' joint venture properties operated
by others, Kinross' portion of exploration expenditures in 2003 totaled $6.0
million, including $2.5 million at Porcupine and $2.1 million at Musselwhite.
Other exploration expenses totaled $3.8 million, of which $1.4 million was spent
at Refugio.
As a result of this exploration activity and using a gold price
assumption of $325 per ounce compared to $300 per ounce the previous year, gold
reserves increased by 978,000 ounces, an increase of 7.4% during 2003. Total
reserve growth was 2,742,000 ounces of gold in 2003, thereby more than
offsetting reserve depletion during the year.
For 2004, Kinross plans to spend a minimum of $20 million on its
exploration program in order to replace and increase reserves at existing mines
and increase reserves at development projects.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion, and amortization totaled $140.9 million in 2003
compared to $85.3 million in 2002 and $85.8 million in 2001. Depreciation,
depletion, and amortization have decreased per equivalent ounce of gold to $91
in 2003 from $101 in 2002 and $94 in 2001. The 2003 decrease per equivalent
ounce of gold was largely due to the impact of the combination with TVX and Echo
Bay and the increase in the reserve base of Kinross. It is expected that
depreciation, depletion, and amortization expenses will increase by
approximately 4.8% in 2004 to $147.7 million but is expected to decline
marginally per gold equivalent ounce as production levels are expected to
increase in 2004 compared to 2003.
195
GAIN ON DISPOSAL OF ASSETS
The net gain on asset disposals for the year 2003 totaled $29.5 million.
The bulk of this is from the gain on the sale of equity investments in
Minefinders Corporation Ltd., Pacific Rim Mining Corporation, and Endeavor
Mining Capital Corporation totaling $26.0 million as described in the section
entitled "Material Events." There can be no assurance that similar gains will
occur in future years. Gains in 2002 were $2.7 million and $1.2 million in 2001.
INTEREST EXPENSE
Interest expense totaled $5.1 million in 2003, compared to $5.0 million
in 2002 and $9.1 million in 2001. Interest expense in 2003 is comprised of $0.2
million relating to interest on the Kubaka project loans, $1.2 million of
interest on the industrial revenue bonds and the Fort Knox capital leases, $2.4
million of interest on the debt component of the convertible debentures, and
$1.3 million on other items. Interest expense is expected to decrease
substantially in 2004 as the convertible debentures and the industrial revenue
bonds have been fully repaid.
FOREIGN EXCHANGE (GAIN) LOSS
For 2003, Kinross recorded net gains on foreign currency transactions of
$3.3 million compared to net losses in 2002 of $4.3 million and $0.5 million in
2001.
Kinross' 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. Revenues and expenses are
translated at the average rate of exchange for the year. Exchange gains and
losses are included in income.
The foreign exchange risks facing Kinross and the impact of swings in
the currencies in which Kinross conducts its operations in relation to the
United States dollar are discussed later in the "Risk Analysis" section.
Since Kinross' major exposure to foreign currencies is the relationship
between the Canadian and the United States dollar, Kinross has entered into
foreign exchange forward contracts to sell United States dollars and buy
Canadian dollars. As at December 31, 2003, the contracts to buy Canadian dollars
totaled CDN $28.4 million at an average exchange rate of 1.4221.
ASSET WRITE-DOWNS AND NON-CASH CHARGES
Impairment analysis for the operating assets consists of comparing the
estimated undiscounted future net cash flows on an area of interest basis with
the assets' carrying values, and when the future net cash flows are less than
the carrying value of any particular asset, a write-down is recorded. Over the
past three years, gold has averaged $315 per ounce and closed the year at $417
per ounce. Subsequent to the end of 2003, gold has continued to trade above $390
per ounce. In addition to considering current and historical spot gold prices,
Kinross reviewed analysts' reports and participated in external surveys. As a
result of this trend, and external survey expectations for spot gold prices,
Kinross used an assumption of $350 per ounce for gold for impairment analysis in
2003, compared to $325 per ounce in 2002.
Asset write-downs and non-cash charges totaled $9.9 million in 2003
compared to $7.9 million in 2002 and $16.1 million in 2001. The 2003 write-downs
relate to a reduction in the carrying value of E-Crete of $5.2 million and $4.7
million of other write-downs. The 2002 write-down and other non-cash charges
were principally as a result of increases in reclamation provisions at the
closure properties.
196
SHARE OF LOSS OF INVESTEE COMPANIES
Kinross' share of gain or loss of investee companies was $ nil in 2003,
compared to a loss of $0.6 million in 2002 and $2.2 million in 2001. Kinross
accounts for investments on an equity basis when it owns more than 20% and
exercises significant influence over management and operations of the business.
As at December 31, 2003, Kinross did not have any investments accounted for on
an equity basis.
INCOME AND MINING TAXES
Kinross is subject to tax in various jurisdictions including Canada, the
United States, Russia, Brazil, and Chile. Kinross has substantial operating
losses and other tax deductions in Canada, the United States, and Chile (Refugio
mine) to shelter future taxable income in those jurisdictions. The 2003
liability arose from income taxes in Russia, Brazil, Chile (La Coipa mine), and
federal large corporations tax and provincial mining taxes in Canada. Kinross'
joint venture investments in the La Coipa and Refugio mines are held in separate
Chilean companies, each of which is subject to tax.
SITE RESTORATION COSTS
Although the ultimate amount of reclamation and closure costs is
uncertain, Kinross estimates its closure obligations at December 31, 2003, to be
$146.3 million based on information currently available including preliminary
closure plans and existing regulations. As at December 31, 2003, Kinross has
accrued $119.7 million of this estimated obligation compared to the December 31,
2002, accrual of $57.0 million and the December 31, 2001, accrual of $55.6
million. The major reason for the significant increase at December 31, 2003, was
the accrual established for the acquired properties resulting from the TVX and
Echo Bay combination.
Kinross plans reclamation spending of $19.2 million in 2004 compared to
$19.3 million in 2003.
LIQUIDITY AND CAPITAL RESOURCES
The mining business is highly capital intensive. It is imperative that
Kinross be liquid with sufficient cash resources to meet the objectives of
expanding existing mine production, to add to its reserves through exploration
and development and to have the ability to acquire properties.
OPERATING ACTIVITIES
Cash flow provided from operating activities was $92.7 million in 2003
compared to $59.5 million in 2002 and $75.0 million in 2001. The improvement in
cash flow for 2003 was due principally to the properties added from the TVX and
Echo Bay combination and the increase in the price received per ounce of gold
sold.
FINANCING ACTIVITIES
(i) Equity issues
o On August 28, 2003, Kinross issued 23.0 million common
shares for gross proceeds of $152.5 million. The net
proceeds from the offering were used to redeem the
outstanding 5.5% convertible unsecured subordinated
debentures. The principal amount of the convertible
debentures was $144.8 million. The convertible
debentures were redeemed on September 29, 2003.
o On November 14, 2003, Kinross issued 6.7 million common
shares upon the exercise of Echo Bay warrants. Total
proceeds of $34.9 million were realized.
197
(ii) Credit facility
As at December 31, 2002, Kinross had a $30.0 million operating line of
credit in place with a bank syndicate which was being utilized for letters of
credit purposes. As at December 31, 2002, $38.5 million of letters of credit
were issued under this facility requiring Kinross to restrict $8.5 million of
cash. On February 27, 2003, Kinross entered into a new credit facility for
$125.0 million with a maturity date of December 31, 2005. The primary purpose of
the new credit facility is to provide credit support so Kinross can issue
letters of credit to satisfy financial assurance requirements.
The new credit facility is extendable for further one-year periods with
the mutual agreement of Kinross and the banks. Interest rates and letters of
credit fees vary based on the results of the net debt to operating cash flow
ratio and a standby fee is charged on the unused amount. As at December 31,
2003, the letter of credit fee was 1.5% and the standby fee 0.3%. The facility
was put in place prior to certain events that significantly improved the
financial position and liquidity of Kinross, notably, the equity issue, the
debenture redemption and the sale of non-core investments. The covenants in the
loan agreement were, therefore, tailored towards the then balance sheet. As a
result, Kinross is well within the financial covenants which include a test of
minimum tangible net worth, an interest coverage ratio, a net debt to operating
cash flow ratio and a minimum proven and probable reserve test. Kinross was in
compliance with all covenants at December 31, 2003. Kinross is in discussions
with the banks to extend the maturity date and possibly increase the size of the
credit facility.
The loan facility is secured by the assets of the Fort Knox mine as well
as by shares in various wholly-owned subsidiaries.
Kinross had restricted cash of $21.1 million at December 31, 2002, which
was comprised of $8.5 million of cash securing letters of credit issued in
excess of the maximum allowable under the then credit facility, $12.2 million
representing Kinross' share of restricted cash subject to a court ordered freeze
in Russia and $0.4 million of other items. The court ordered freeze resulted
from legal claims against Omolon alleging that the original issuance of its
shares was flawed and therefore, null and void. On January 8, 2003, the claim
was dismissed and the restrictions on cash were released.
Kinross had restricted cash of $5.1 million at December 31, 2003. This
restricted cash is associated with cash deposits that were made by Echo Bay to
secure letters of credit for various financial assurance requirements. At the
end of the year, letters of credit had been issued to replace all of the old
financial assurances. Some state agencies have not released, as yet, the old
financial assurance they were holding resulting in the restricted cash balances
which are expected to be released in 2004.
DEBT REPAYMENT
Kinross' outstanding convertible debentures were fully repaid during the
third quarter of 2003, at par, using the proceeds of the equity issue which
closed on August 28, 2003.
Other long-term debt of $10.5 million was repaid during the year
including $4.7 million of capital leases, $3.8 million of debt at E-Crete and
$2.0 million of debt in Russia.
No dividends were declared or paid to the holders of the convertible
preferred shares of subsidiary company Kinam Gold Inc., in 2003, 2002, or 2001.
As at December 31, 2003, Kinross' long-term debt was $0.7 million
consisting of various capital leases. The current portion of the long-term debt
is $29.4 million which includes $25.0 million in respect of the industrial
revenue bonds, which were repaid on January 7, 2004.
198
INVESTING ACTIVITIES
Additions to property, plant and equipment were $73.4 million in 2003
compared to $22.6 million in 2002 and $30.4 million in 2001. The amount of
capital expenditures per mine is included in the "Operations" section. Capital
expenditures increased by $50.8 million in 2003 with $28.9 million spent on
additions to the mines added pursuant to the Echo Bay and TVX combination,
including $9.5 million in preparation for the reactivation of the Kettle River
operation with ore from the Emanuel zones. The largest amount spent was at the
Fort Knox mine at $26.5 million. The remainder was spent fairly evenly across
the other operating mines including the mines added by the combination. All
capital expenditures were funded from cash flow provided from operating
activities.
LIQUIDITY OUTLOOK
As a result of the operating, financing, and investing activities during
2003, Kinross has significantly strengthened its financial condition and
liquidity such that as at December 31, 2003, cash and cash equivalents totaled
$245.8 million.
Kinross has planned an aggressive spending program for 2004. The three
major uses of cash, outside of operating activities, are expected to be:
(IN MILLIONS)
---------------
Site restoration $ 19.2
Exploration 20.0
Property, plant and equipment additions 165.0
-------------
Total $ 204.2
=============
The site restoration and exploration costs are discussed in more detail
in the section entitled "Financial/Operations."
(i) 2004 capital additions
Kinross plans to spend $165.0 million on additions to its property,
plant, and equipment in 2004. This is a significant increase over the $73.4
million spent in 2003. Management believes that, with the price of gold in the
$400 range, it is the correct time to upgrade and expand its mining operations.
Below is a summary by mine of the planned expenditures. All amounts presented
represent Kinross' proportionate share of planned expenditures.
(IN MILLIONS)
--------------
Fort Knox $ 39.0
Round Mountain 8.1
Porcupine 28.7
Kubaka 11.2
Paracatu (Brasilia) 13.1
La Coipa 1.4
Crixas 3.3
Musselwhite 3.7
Refugio 52.3
Other 4.2
-------------
$ 165.0
=============
199
The major projects are for equipment and development at Fort Knox, the
expansion and recommissioning of Refugio, the Pamour open pit project for the
Porcupine joint venture and the mill expansion at Paracatu (Brasilia). This
spending is in pursuit of expanding production and reserves and improving
operating efficiencies.
The total spending program of $204.2 million is expected to be paid for,
in its entirety, with cash flow provided from operating activities.
(ii) Contractual obligations and commitments
Once the industrial revenue bonds were repaid in January 2004, Kinross
was essentially debt free. Therefore, there are no significant debt repayment
obligations for the balance of 2004.
Kinross has entered into an agreement to acquire Crown in exchange for
the issuance of Kinross' common shares. Kinross will not issue fractional shares
to the shareholders of Crown resulting in a small amount that will be paid in
cash. This acquisition is fully discussed in the section entitled "Material
Events."
A Brazilian Central Bank program enables exporters to borrow United
States dollars and commit to conduct export activities. The borrowed amounts are
then reinvested locally at rates in excess of those on the loans. These
contracts are referred to as export prepayment contracts. Kinross' Paracatu
(Brasilia) joint venture participates in this program and entered into contracts
during 2000 and 2001, which were immediately assigned to a Brazilian bank. The
joint venture receives a premium instead of the higher interest rate earned by
the bank. The lenders of the funds agreed to the assignment of the borrowed
amounts to the local bank. There is no obligation by Kinross to repay any of the
borrowed amounts. Kinross has $1.1 million of unearned premium related to these
export prepayment contracts at December 31, 2003. Kinross will earn this premium
as it exports gold. As at December 31, 2003, Kinross is committed to export
$50.4 million of gold, $25.9 million in 2004, and $24.5 million in 2005.
2008 AND
Contractual Obligations (millions) TOTAL 2004 2005 2006 2007 BEYOND
-------------------------------------------------------------------------------
Long-term debt obligations $ 27.8 $ 27.8 $ -- $ -- $ -- $ --
Capital lease obligations 2.3 1.6 0.7 -- -- --
Operating lease obligations 9.3 3.0 3.0 2.6 0.7 --
Purchase obligations 5.7 5.7 -- -- -- --
Export prepayment contracts 50.4 25.9 24.5 -- -- --
Other long-term liabilities reflected
on the balance sheet under CDN GAAP 2.5 0.4 0.3 0.3 0.3 1.2
-------------------------------------------------------------------------------
Total $ 98.0 $ 64.4 $ 28.5 $ 2.9 $ 1.0 $ 1.2
===============================================================================
(iii) Financial instruments
Kinross manages its exposure to fluctuations in commodity prices and
foreign exchange rates by entering into derivative financial instrument
contracts in accordance with the formal risk management policies approved by its
board of directors. Kinross does not hold or issue derivative contracts for
speculative or trading purposes. Kinross' exposure with respect to foreign
exchange is addressed under the heading "Expenses--Foreign Exchange" and in the
section entitled "Risk Analysis--Foreign Exchange Risk."
Kinross' net income can vary significantly with fluctuations in the
market price of gold. At various times, in response to market conditions,
Kinross has entered into gold forward sales contracts, spot deferred forward
sales contracts and written call options for some portion of expected future
production to mitigate the risk of adverse price fluctuations. Kinross does not
hold these financial instruments for speculative or trading purposes. In
addition, Kinross is not subject to margin requirements on any of its hedging
lines. Due to the increase in gold prices, Kinross made a decision in 2002 to
continue to deliver into these financial instruments and to not replace them
with new financial instruments, thereby increasing its exposure to changes in
gold prices.
200
The outstanding number of ounces, average expected realized prices and
maturities for the gold commodity derivative contracts as at December 31, 2003,
are as follows:
OUNCES AVERAGE CALL OPTIONS AVERAGE
YEAR HEDGED PRICE SOLD STRIKE PRICE
--------------- -------------- ---------------- --------------- ---------------
2004 137,500 $ 277 50,000 $ 340
2005 37,500 $ 296 -- $ --
-------------- ---------------- --------------- ---------------
Total 175,000 $ 281 50,000 $ 340
============== ================ =============== ===============
The fair value of the call options sold is recorded in the financial
statements at each measurement date. The fair value of the gold forward sales
and spot deferred forward sales contracts, as at December 31, 2003, was negative
$24.4 million based on a gold price of $417 per ounce. In 2004, Kinross will
receive $277 per ounce of gold for 137,500 ounces which may be significantly
different from market prices. If the market price of gold is $400 per ounce on
the dates the ounces are delivered into the forward sales contracts, Kinross
would be paid $16.9 million less than if it were unhedged. In addition, at
December 31, 2003, Kinross has 50,000 ounces of written call options
outstanding. If the market price of gold is above $340 per ounce on expiry in
June 2004, Kinross will be committed to sell 50,000 ounces at $340 per ounce. If
the market price of gold is $400 per ounce, Kinross would be paid $3.0 million
less than if it were unhedged. Kinross does not include these financial
instruments in testing for impairment of operating mines, mineral rights, and
development properties.
Based on a gold price of $400 and average costs of production of $235
per ounce, a 10% reduction in production will result in a reduction in cash
flows of approximately, $28.1 million. However, Kinross' strong cash position
and low debt levels will allow the Company to meet its requirements for capital
expenditures and operating costs for the 2004 year.
CRITICAL ACCOUNTING POLICIES
Kinross' accounting policies are described in Note 1 to the audited
consolidated financial statements for the three years ended December 31, 2003,
including the recognition of revenue which occurs upon shipment to third-party
gold refineries when the sales price is fixed and title has passed to the
customer. The preparation of Kinross' audited consolidated financial statements
for the three years ended December 31, 2003, in conformity with Canadian ("CDN")
GAAP requires management to make estimates and assumptions that affect amounts
reported in the audited consolidated financial statements for the three years
ended December 31, 2003, and accompanying notes. These estimates and assumptions
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the audited consolidated
financial statements for the three years ended December 31, 2003, and the
reported amounts of revenues and expenses during the reporting period. Changes
in estimates of useful lives are accounted for prospectively from the date of
change. Actual results could differ from these estimates.
The assets and liabilities which require management to make significant
estimates and thus are deemed critical accounting policies are:
o Carrying value of goodwill;
o Carrying value of operating mines, mineral rights, development
properties and other assets;
o Depreciation, depletion and amortization;
o Inventories;
o Site restoration accruals;
o Provision for income and mining taxes; and
o Contingencies.
201
CARRYING VALUE OF GOODWILL
Goodwill of $918.0 million arose as a result of Kinross' combination
with TVX and Echo Bay. The total purchase price was $683.8 million for TVX and
$634.9 million for Echo Bay. In the final purchase equation, the identifiable
assets acquired and liabilities assumed were recorded at amounts equal to their
respective fair values as at January 31, 2003, being the effective date of the
combination. The remaining balance of the purchase price was allocated to
goodwill. Goodwill is not subject to amortization but is subject to annual tests
for impairment.
Goodwill has been allocated to two reporting units: the Exploration and
Acquisitions reporting unit and the Corporate reporting unit.
EXPLORATION AND ACQUISITIONS REPORTING UNIT
The fundamental objective of the Exploration and Acquisitions reporting
unit is to sustain and enhance growth in Kinross' mineral reserves through
successful exploration programs and acquisitions of gold assets. The reporting
unit's assets include Kinross' exploration properties, its exploration
experience and databases, and its senior management's focus on value-enhancing
acquisitions. Goodwill of $908.4 million has been allocated to this reporting
unit.
As a result of the business combination, Kinross has estimated that it
will add 2.6 million recoverable ounces to proven and probable reserves
annually, computed on an average basis over a three year period to account for
anticipated year-to-year variances. Kinross' fundamental underlying objective is
to replace annual production plus add an additional 0.4 to 0.8 million
recoverable ounces to proven and probable reserves each year. The assignment of
goodwill to the Exploration and Acquisitions reporting unit is premised upon the
proposition that, as a result of the combination with TVX and Echo Bay, Kinross
now has an increased portfolio of mining and exploration assets, increased cash
flow, a global presence, the financial strength, and the currency, in the form
of its common stock, that will allow it to focus upon the significant
enhancement of its reserves, not only through its exploration programs, but also
by becoming a fully competitive contender in bidding for gold assets as they
become available throughout the world.
The key strategy of Kinross and the most relevant measure of its success
is its growth in annual production levels. The combination with TVX and Echo Bay
was accretive to Kinross not only by adding immediately to production and cash
flow but by also allowing Kinross to establish a global platform from which it
can meet its long-term growth objectives.
The amount of goodwill assigned to the Exploration and Acquisitions
reporting unit upon completion of the combination is intended to represent the
increase in the value of Kinross resulting from the combination which can be
attributed to the enhancement of Kinross' ability to significantly increase its
mineral reserves and, hence, increase its future production capabilities. The
quantification of this increase in value was based upon a discounted cash flow
methodology that assumed an increase in exploration spending to $20 million
annually over a 10 year period, an average annual increase in proven and
probable reserves of 2.6 million recoverable ounces, an average process recovery
rate of 85%, a value of $52 for each recoverable ounce estimated to be added
to proven and probable reserves (based upon a gold price of $325 per ounce and
estimated costs of acquisition, development, infrastructure, and production) and
a discount rate of 7%, representing Kinross' cost of capital.
While Kinross believes that this discounted cash flow model provides a
reasonable basis for the allocation of goodwill to the Exploration and
Acquisitions reporting unit, Kinross also recognizes that the actual timing and
value of additions to proven and probable reserves in the future could be
significantly different from the assumptions used in the model. In this respect,
reducing the additions to proven and probable reserves by 300,000 ounces per
year would have decreased the value of the goodwill by $69.0 million at December
31, 2003, keeping other variables constant. A reduction in the gold price to
$300 would have had the impact of reducing the value of the goodwill by $416.0
million, keeping other variables constant.
202
Kinross tested the goodwill for impairment as at December 31, 2003. As a
result of the closing of the combination on January 31, 2003, and the delays
inherent in integrating the combined businesses and implementing the new
policies, the calculations for 2003 are based on a partial year starting May 1,
2003. In carrying out the impairment test, Kinross considered the following
factors:
1. Maintenance of exploration spending at an annual level of at
least $20 million.
2. Based on proven and probable reserves added during 2003, whether
Kinross was on track to meet its target of adding 2.6 million recoverable ounces
to its proven and probable reserves annually.
3. At the time of the impairment testing, a value of $58 was
assigned to each recoverable ounce estimated to be added to proven and probable
reserves in the future (based upon an assumed gold price of $350 per ounce and
the three year average of the expected costs of acquisition, development and
production) and a discount rate of 7% was utilized. An assumed process recovery
rate of 85%, which is the weighted average of the process recovery rate for 2003
at the mines currently operated by Kinross , was used.
Kinross concluded that there was no impairment of the goodwill allocated
to the Exploration and Acquisitions reporting unit as at December 31, 2003.
CORPORATE REPORTING UNIT
Goodwill of $9.6 million has been allocated to the Corporate reporting
unit. This allocation is based upon the anticipated reduction in corporate
overhead resulting from synergies arising from the business combination. The
value of this component of the total goodwill has been determined based upon the
net present value of the anticipated savings over a five year period, calculated
using a discount rate of 7%, representing Kinross' cost of capital.
For purposes of impairment testing at December 31, 2003, Kinross
determined that 50% of the anticipated annual savings should be the target for
2003 in recognition of the fact that significant "one-time" costs were incurred
in 2003 in order to effect the combination. Kinross has concluded that there was
no impairment of the goodwill allocated to the Corporate reporting unit as at
December 31, 2003.
CARRYING VALUE OF OPERATING MINES, MINERAL RIGHTS, DEVELOPMENT PROPERTIES AND
OTHER ASSETS
Kinross reviews and evaluates the carrying value of its operating mines
and development properties for impairment when events or changes in
circumstances indicate that the carrying amounts of related assets or groups of
assets may not be recoverable. If the total estimated future cash flows on an
undiscounted basis are less than the carrying amount of the asset, an impairment
loss is measured and recorded. Future cash flows are based on estimated future
recoverable mine production, expected sales prices (considering current and
historical prices, price trends and related factors), production levels, cash
costs of production, capital and reclamation costs, all based on detailed
engineering life-of-mine plans. Kinross does not take into effect the impact on
cash flows associated with derivative instruments in testing for impairment.
Future recoverable mine production is determined from proven and probable
reserves and measured, indicated and inferred mineral resources after taking
into account losses during ore processing and treatment. Estimates of
recoverable production from measured, indicated, and inferred mineral interests
are risk adjusted based on management's relative confidence in converting such
interests to proven and probable reserves. All long-lived assets at a particular
operation are considered together for purposes of estimating future cash flows.
In the case of exploration stage mineral interests associated with greenfields
exploration potential, cash flows and fair values are individually evaluated
based primarily on recent exploration results and recent transactions involving
sales of similar properties. Assumptions underlying future cash flow estimates
are subject to risks and uncertainties. It is possible that changes in estimates
could occur which may affect the expected recoverability of Kinross' investments
in mineral properties.
These changes in estimates could include differences in estimated and
actual cash costs of mining, differences between actual gold and silver prices
and price assumptions used in the estimation of reserves and resources,
differences in capital expenditure and reclamation cost estimates.
203
The reviews and evaluations completed for 2003, 2002, and 2001
determined that certain asset values had become impaired and certain site
restoration costs were under-accrued. Assets identified as impaired were
written-down to their estimated recoverable amounts while accruals were made for
certain restoration costs. The components of the asset write-downs and other
non-cash charges are as follows:
2003 2002 2001
--------------- -------------- ---------------
Blanket mine--producing mine $ -- $ -- $ 11.8
E-Crete--aerated concrete producer 5.2 -- --
Delamar property--reclamation project 2.0 5.7 4.3
Haile property--reclamation project 0.8 0.6 --
Sleeper property--reclamation project -- 0.3 --
Q.R. property--reclamation project -- 1.1 --
Loan receivable from joint venture partner 1.2 -- --
Marketable securities 0.2 0.1 --
Long-term investments 0.5 0.1 --
--------------- -------------- ---------------
$ 9.9 $ 7.9 $ 16.1
=============== ============== ===============
In the fourth quarter of 2003, following a comprehensive review of its
properties, Kinross determined that the net recoverable amount of E-Crete, a
producer of aerated concrete located in Phoenix, Arizona, was less than net book
value. Accordingly, Kinross recorded a $5.2 million write-down. In addition,
Kinross determined that a loan receivable from a joint venture partner was not
collectible and that the liabilities previously accrued to reclaim certain
closure properties were insufficient and required a further $2.8 million
accrual. The 2003 fourth quarter review was performed using a gold price
assumption of $350 per ounce.
In the fourth quarter of 2002, following a comprehensive review of its
mining properties, Kinross determined that the liabilities accrued to reclaim
certain closure properties were insufficient and required a further $7.7 million
accrual. These adjustments were required due to new and more stringent
regulatory requirements for mine closures. The 2002 fourth quarter review was
performed using a gold price assumption of $325 per ounce.
In the fourth quarter of 2001, following a comprehensive review of its
mining properties, Kinross determined that the estimated cost to reclaim the
Delamar property was insufficient and required a further $4.3 million accrual.
This adjustment was required due to a reassessment of the amount of water to be
reclaimed from this site. In addition, as a result of the extreme inflationary
pressures in Zimbabwe, difficulty in accessing foreign currency to pay for
imported goods and services and the then current civil unrest, Kinross recorded
a write-down of the carrying value of the Blanket mine by $11.8 million.
Furthermore, the political situation in Zimbabwe and the related social and
economic instability have prevented Kinross from continuing to exercise control
of its subsidiary in Zimbabwe, which operates the Blanket mine. Consequently,
due to the imposition of severe foreign exchange and currency export
restrictions and the uncertainty as to whether the Zimbabwean subsidiary had the
ability to distribute its earnings, Kinross discontinued the consolidation of
the Zimbabwean subsidiary effective December 31, 2001. The investment in the
subsidiary is nil following the write-down of the Blanket mine described above.
The 2001 fourth quarter review was performed using a gold price assumption of
$300 per ounce.
DEPRECIATION, DEPLETION AND AMORTIZATION
(i) Building, Plant, and Equipment
New facilities, plant, and equipment are recorded at cost and carried
net of depreciation. Mobile and other equipment is amortized, net of residual
value, using the straight-line method, over the estimated productive life of the
asset. Productive lives range from 2 to 5 years, but do not exceed the related
estimated mine life based on proven and probable reserves. Plant and other
facilities, used in carrying out the mine operating plan, are amortized using
the units-of-production ("UOP") method over the estimated life of the ore body
based on recoverable ounces to be mined from estimated proven and probable
reserves. Repairs and maintenance expenditures are expensed as incurred.
Expenditures that extend the useful lives of existing facilities or equipment
are capitalized and amortized over the remaining useful life of the related
asset.
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(ii) Mineral Exploration and Mine Development Costs
Mineral exploration costs are expensed as incurred. When it has been
determined that a mineral property can be economically developed as a result of
establishing proven and probable reserves, costs incurred prospectively to
develop the property are capitalized as incurred and are amortized using the UOP
method over the estimated life of the ore body based on recoverable ounces to be
mined from estimated proven and probable reserves. At Kinross' open pit mines,
these costs include costs to further delineate the ore body and remove
overburden to initially expose the ore body. Kinross expenses in-pit stripping
costs as incurred. At Kinross' underground mines, these costs include the cost
of building access ways, shaft sinking and access, lateral development, drift
development, ramps and infrastructure development.
Major development costs incurred after the commencement of production
are amortized using the UOP method based on recoverable ounces to be mined from
estimated proven and probable reserves.
Ongoing development expenditures to maintain production are charged to
operations as incurred.
(iii) Mineral Interests
Mineral interests include acquired mineral use rights in production,
development, and exploration stage properties. The amount capitalized related to
a mineral interest represents its fair value at the time it was acquired, either
as an individual asset purchase or as part of a business combination. The values
of such mineral use rights are primarily driven by the nature and amount of
mineral interests believed to be contained, or potentially contained, in
properties to which they relate.
Production stage mineral interests represent mineral use rights in
operating properties that contain proven and probable reserves. Development
stage mineral interests represent mineral use rights in properties under
development that contain proven and probable reserves. Exploration stage mineral
interests represent mineral use rights in properties that are believed to
potentially contain: (i) other mineralized material such as measured, indicated,
or inferred mineral resources with insufficient drill spacing to qualify as
proven and probable reserves which is in close proximity to proven and probable
reserves and within the immediate mine structure; or (ii) around - mine
exploration potential such as inferred mineral resources not immediately
adjacent to existing reserves and mineralization but located within the
immediate mine infrastructure; and (iii) other mine-related or greenfields
exploration potential that is not part of measured or indicated resources and is
comprised mainly of material outside of the immediate mine area.
Currently, under CDN GAAP, pursuant to CICA Handbook Section 1581
(Appendix A31) "business combinations" and Section 3062 "goodwill and other
intangible assets," mineral use rights are listed as contract-based intangible
assets. These new Handbook sections resulted in a conflict between previously
issued accounting standards included in the CICA Handbook Section 3061 and
EIC-126, which identify acquired mineral rights as property, plant, and
equipment.
Kinross has elected to account for the mineral use rights it acquired
after January 1, 2002, in accordance with the CICA Handbook Sections 1581 and
3062. Had Kinross elected to account for acquired mineral use rights in
accordance with CICA Handbook Sections 3061 and EIC-126, Kinross would increase
property, plant, and equipment by $260.1 million and reduce mineral interests by
$260.1 million as at December 31, 2003. There would be no effect on reported
earnings.
Kinross' mineral use rights generally are enforceable regardless of
whether proven and probable mineral reserves have been established. Kinross has
the ability and intent to renew mineral use rights where the existing term is
not sufficient to recover all identified and valued proven and probable reserves
and/or undeveloped mineral interests.
Production stage mineral interests are amortized over the life of mine
using the UOP method based on recoverable ounces to be mined from estimated
proven and probable reserves. Development stage mineral interests are not
amortized until such time as the underlying property is converted to the
production stage. With respect to exploration stage mineral interests, the
excess of the carrying value over the residual value is amortized on a
straight-line basis over the period that Kinross expects to convert, develop or
further explore the underlying properties. Residual values for exploration stage
mineral interests represent the expected fair value of the interests
205
at the time Kinross plans to convert, develop, further explore, or dispose of
the interests. The residual values range from 75% to 90% of the gross carrying
value of the respective exploration stage mineral interests. Residual values are
determined for each individual property based on the fair value of the
exploration stage mineral interest, and the nature of, and Kinross' relative
confidence in, the mineralized material believed to be contained, or potentially
contained, in the underlying property. Such values are based on: (i) discounted
cash flow analyses for those properties characterized as other mineralized
material and around - mine exploration potential; and (ii) recent transactions
involving similar properties for those properties characterized as other
mine-related exploration potential and greenfields exploration potential. Based
on its knowledge of the secondary market that exists for the purchase and sale
of mineral properties, Kinross believes that both methods result in a residual
value that is representative of the amount that Kinross could expect to receive
if the property were sold to a third party. When an exploration stage mineral
interest is converted to a development or production stage mineral interest, the
residual value is reduced to zero for purposes of calculating UOP amortization.
The expected useful lives and residual values used in amortization
calculations are determined based on the facts and circumstances associated with
the mineral interest. The useful lives used to amortize production stage mineral
interests range from 3 to 19 years. Kinross evaluates the remaining amortization
period and residual value for each individual mineral interest on at least an
annual basis. Any changes in estimates of useful lives and residual values are
accounted for prospectively from the date of the change.
The calculation of UOP depreciation, depletion, and amortization on
buildings, plant, and equipment, mineral exploration and mine development costs
and mineral interests could be materially affected by change in estimates. These
changes in estimates could be as a result of actual future production differing
from current forecasts of future production based on proven and probable
reserves. These factors could include an expansion of proven and probable
reserves through exploration activities, differences between estimated and
actual cash costs of mining and differences in gold and silver prices used in
the estimation of proven and probable reserves.
The calculation of straight line amortization of intangible assets could
be materially affected by changes in the estimated useful life and residual
values. These changes could be a result of exploration activities and
differences in gold and silver prices used in the estimation of resources.
Significant judgment is involved in the determination of useful life and
residual values for the computation of depreciation, depletion, and amortization
and no assurance can be given that actual useful lives and residual values will
not differ significantly from current assumptions.
INVENTORIES
Expenditures and depreciation, depletion, and amortization of assets
incurred in the mining and processing activities that will result in future gold
production are deferred and accumulated as ore in stockpiles, ore on leach pads
and in-process inventories. These deferred amounts are carried at the lower of
average cost or net realizable value ("NRV"). NRV is the difference between the
estimated future gold price based on prevailing and long-term metal prices, less
estimated costs to complete production into a saleable form. Write-downs of ore
in stockpiles, ore on leach pads and inventories resulting from NRV impairments
are reported as a component of current period costs.
(i) Ore in Stockpiles
Stockpiles are comprised of coarse ore that has been extracted from the
mine and is available for further processing. Stockpiles are measured by
estimating the number of tonnes (via truck counts and/or in-pit surveys of the
ore before processing) added and removed from the stockpile. Stockpile tonnages
are verified by periodic surveys. Stockpiles are valued based on mining costs
incurred up to the point of stockpiling the ore, including applicable
depreciation, depletion, and amortization relating to mining operations. Costs
are added to stockpiles based on the current mining cost per tonne and removed
at the average costs per tonne.
Ore in stockpiles is processed according to a life of mine plan that is
designed to optimize use of known mineral reserves, present processing capacity
and pit design. The market price of gold does not significantly affect the
timing of processing of ore in stockpiles. While stockpiled ore can be processed
earlier than planned in the event of an unforeseen disruption to mining
activities, the current portion of ore in stockpiles represents the amount
expected to be processed in the next twelve months. Ore in stockpiles not
expected to be processed in the next twelve months is classified as long-term.
206
Kinross' ore in stockpiles had a carrying value of $15.3 million at
December 31, 2003.
(ii) Ore on Leach Pads
The recovery of gold from certain oxide ores is best achieved through
the heap leaching process. Under this method, ore is placed on leach pads where
it is permeated with a chemical solution, which dissolves the gold contained in
the ore. The resulting recovered solution, which is included in in-process
inventory, is further processed in a plant where gold is recovered. For
accounting purposes, costs are added to leach pads based on current mining
costs, including applicable depreciation, depletion, and amortization relating
to mining operations. Costs are removed from the leach pad as ounces are
recovered in circuit at the plant based on the average cost per recoverable
ounce of gold on the leach pad.
The engineering estimates of recoverable gold on the leach pads are
calculated from the quantities of ore placed on the pads (measured tonnes added
to the leach pads), the grade of ore placed on the leach pads (based on assay
data) and a recovery percentage (based on the leach process and ore type). While
it may not be uncommon for recoveries to occur on a declining basis over a
period of time in excess of twelve months, the engineering estimates of
economically recoverable gold, based on Kinross' current operations, will be
recovered within a period of twelve months or less. Presently, the Round
Mountain mine is the only active heap leach operation. As such, all of Kinross'
ore on leach pads is classified as current. In the event that Kinross
determined, based on engineering estimates, that a quantity of gold contained in
ore on leach pads was to be recovered over a period exceeding twelve months,
that portion would be classified as long-term.
Although the quantities of recoverable gold placed on the leach pads are
reconciled by comparing the grades of ore placed on the leach pads to the
quantities of gold actually recovered (metallurgical balancing), the nature of
the leaching process inherently limits the ability to precisely monitor
inventory levels. As a result, the metallurgical balancing process is constantly
monitored and the engineering estimates are refined based on actual results over
time. Operating results at the Refugio mine, Kinross' only historic interest in
a heap leach operation, were not materially impacted by variations between the
estimated and actual recoverable ounces of gold on its leach pads. Variances
between actual and estimated quantities resulting from changes in assumptions
and estimates that do not result in write-downs to net realizable value are
accounted for on a prospective basis. Assuming a one percent change in the
estimated economically recoverable gold on the leach pads at December 31, 2003,
Kinross would experience a production variance of approximately 1,000 ounces. As
at December 31, 2003, the weighted average cost per recoverable ounce of gold on
the leach pads was $120 per ounce. The ultimate recovery of gold from a leach
pad will not be known until the leaching process is concluded. Kinross expects
to place the last tonne of ore on its current leach pad in 2008 and recover the
remaining economic ounces during the following twelve months.
Kinross' ore on leach pads had a carrying value of $8.3 million at
December 31, 2003.
(iii) In-process Inventory
In-process inventories represent materials that are currently in the
process of being converted to a saleable product. Conversion processes vary
depending on the nature of the ore and the specific mining operation, but
include mill in-circuit, leach in-circuit, flotation and column cells, and
carbon in-pulp inventories. In-process material is measured based on assays of
the material fed to the processing plants and the projected recoveries of the
respective plants. In-process inventories are valued at the average cost of the
material fed to the processing plant which is attributable to the source
material coming from the mines, stockpiles or leach pads plus the in-process
conversion costs, including applicable depreciation relating to the process
facilities, incurred to that point in the process.
Kinross' in-process inventory had a carrying value of $15.5 million at
December 31, 2003.
(iv) Finished Metal
Finished metal inventories, comprised of gold and silver dore and
bullion, are valued at the lower of average production cost and net realizable
value. Average production cost represents the average cost of the respective
in-process inventories incurred prior to the refining process, plus applicable
refining costs.
207
Kinross' finished metal inventory had a carrying value of $15.4 million
at December 31, 2003.
The allocation of costs to ore in stockpiles, ore on leach pads and
in-process inventories and the determination of NRV involves the use of
estimates. A high degree of judgment is involved in estimating future costs,
future production levels, proven and probable reserve estimates, gold and silver
prices and the ultimate estimated recovery (for ore on leach pads). There can be
no assurance that actual results will not differ significantly from estimates
used in the determination of the carrying value of inventories.
SITE RESTORATION ACCRUALS
Estimated costs of site restoration for producing mines are accrued and
expensed over the estimated life of the mine on a UOP basis using proven and
probable reserves. Ongoing environmental protection expenditures are expensed as
incurred. Estimated costs of site restoration for inactive mines are accrued
based on management's best estimate at the end of each period. Changes in the
estimate of site restoration costs for inactive mines are charged to income in
the period the estimate is revised. Estimates of the ultimate site restoration
costs are based on current laws and regulations and expected costs to be
incurred, calculated on an undiscounted basis, all of which are subject to
possible future changes to environmental laws and regulations which could
materially impact amounts changed to operations for site restoration.
The site restoration accrual as at December 31, 2003, is $146.3 million
and is discussed in the section entitled "Financial/Operations."
PROVISION FOR INCOME AND MINING TAXES
The provision for income and mining taxes is based on the liability
method. Future taxes arise from the recognition of the tax consequences of
temporary differences by applying enacted or substantively enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of certain assets and liabilities. There was
no difference between enacted and substantially enacted statutory tax rates as
at December 31, 2003, 2002, and 2001, respectively. Kinross records a valuation
allowance against any portion of those future 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 other than
non-tax deductible goodwill, and liabilities assumed exist, Kinross recognizes
the future tax assets and liabilities in respect of the tax effects of such
differences.
Assessing the recoverability of future income tax asset requires
management to make significant estimates of future taxable income. Estimates of
future taxable income are subject to changes in estimates discussed under the
section "Carrying value of operating mines, mineral rights, development
properties and other assets." In addition, future tax assets are subject to
changes in future tax rates.
208
CONTINGENCIES
Kinross follows Section 3290 of the CICA Handbook in determining its
accruals and disclosures with respect to loss contingencies. Accordingly,
estimated losses from loss contingencies are accrued by a charge to income when
information available prior to the issuance of the financial statements
indicates that it is likely that a future event will confirm that an asset has
been impaired or a liability incurred at the date of the financial statements
and the amount of the loss can be reasonably estimated.
Note 23 to the audited consolidated financial statements for the three
years ended December 31, 2003, describes the material contingencies facing
Kinross as at December 31, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("Fin 46"). FIN 46 requires that the assets,
liabilities and results of variable interest entities be consolidated into the
financial statements of the entity that has the controlling financial interest.
FIN 46 also provides the framework for determining whether a variable interest
entity should be consolidated based on voting interest or significant financial
support provided to it. In December 2003, the FASB issued FIN 46(R), amending
the guidance in FIN 46 as well as the transition guidance. As a Foreign Private
Issuer and based on its interpretation of the revised transition guidance,
Kinross will be required to adopt the guidance in FIN 46(R) for the first
reporting period that ends after March 15, 2004. Kinross is in the process of
assessing the impact of the amended standard on the audited consolidated
financial statements for the three years ended December 31, 2003.
HEDGING RELATIONSHIPS
In 2002, the Accounting Standards Board of the CICA issued Accounting
Guideline No. 13 "Hedging Relationships" ("AcG-13"). AcG-13 increases the
documentation, designation and effectiveness criteria to achieve hedge
accounting. The guideline requires the discontinuance of hedge accounting for
hedging relationships established that do not meet the conditions at the date
AcG-13 is first applied. It does not change the method of accounting for
derivatives in hedging relationships, but requires fair value accounting for
derivatives that do not qualify for hedge accounting. The new guideline is
applicable for fiscal years commencing July 1, 2003. Kinross does not believe
that the adoption of AcG-13 will have an impact on its results of operations and
financial position.
IMPAIRMENT OF LONG-LIVED ASSETS
In 2002, the CICA Handbook Section 3063 - "Impairment of long-lived
Assets" ("CICA 3063") was amended to harmonize with SFAS 144. CICA 3063 applies
to long-lived assets held for use and is effective on a prospective basis, for
fiscal years beginning on or after April 1, 2003. Early adoption is encouraged.
This standard requires that an impairment loss be recognized when the carrying
amount of an asset held for use exceeds the sum of undiscounted cash flows. The
impairment loss is measured as the amount by which the carrying amount exceeds
the fair value of the asset. Kinross does not believe that the adoption of CICA
3063 will have an impact on its results of operations and financial position.
ASSET RETIREMENT OBLIGATIONS
In 2003, the CICA issued Handbook Section 3110 - "Asset Retirement
Obligations" ("CICA 3110"), which is consistent with SFAS 143, "Accounting for
Asset Retirement Obligations." The standard provides for the recognition,
measurement and disclosure of liabilities for asset retirement obligations and
the associated asset retirement costs. It addresses obligations required to be
settled as a result of an existing law, regulation or contract related to asset
retirements. The new standard is applicable for fiscal years beginning January
1, 2004. Upon adoption, CICA 3110 will require retroactive restatement of all
comparative periods which Kinross estimates may represent a cumulative increase
in site restoration cost accruals of approximately $12.1 million based on the
calculations done for the implementation of SFAS 143.
STOCK-BASED COMPENSATION
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Effective January 1, 2004, Kinross is required to adopt CICA Handbook
Section 3870 - "Stock-based Compensation and Other Stock-based Payments" ("CICA
3870") for fiscal years beginning on or after January 1, 2004, CICA 3870
requires fair value accounting for stock options. Adoption is retroactive,
covering all stock options granted on or after January 1, 2002. Kinross will be
required to restate the results for the years ended December 31, 2003 and 2002,
upon adoption. The effects of this restatement will be to reduce net earnings
$1.1 million ($nil per share) in 2003 and increase net loss by $2.0 million
($0.02 per share) in 2002. In addition, retained earnings would decrease by $3.1
million at December 31, 2003, and by $2.0 million at December 31, 2002. Common
share capital and common share purchase warrants would increase by $3.1 million
and $2.0 million at December 31, 2003, and 2002, respectively.
RISK ANALYSIS
The operations of Kinross are high-risk due to the nature of operation,
exploration, and development of mineral properties. Certain of the risk factors
listed below are related to the mining industry in general while some are
specific to Kinross. Included in the risk factors below are details on how
Kinross mitigates these risks wherever possible.
NATURE OF MINERAL EXPLORATION AND MINING
The exploration and development of mineral deposits involves significant
financial and other risks over an extended period of time, which even a
combination of careful evaluation, experience and knowledge may not eliminate.
While discovery of a gold-bearing structure may result in substantial rewards,
few properties explored are ultimately developed into producing mines. Major
expenses are required to establish reserves by drilling and to construct mining
and processing facilities at a site. It is impossible to ensure that the current
or proposed exploration programs on properties in which Kinross has an interest
will result in profitable commercial mining operations.
The operations of Kinross are subject to the hazards and risks normally
incident to exploration, development and production of gold, any of which could
result in damage to life or property, environmental damage and possible legal
liability for such damage. The activities of Kinross may be subject to prolonged
disruptions due to weather conditions depending on the location of operations in
which it has interests. Hazards, such as unusual or unexpected formations, rock
bursts, pressures, cave-ins, flooding or other conditions, may be encountered in
the drilling and removal of material. While Kinross may obtain insurance against
certain risks, potential claims could exceed policy limits or could be excluded
from coverage. There are also risks against which Kinross cannot or may not
elect to insure. The potential costs which could be associated with any
liabilities not covered by insurance or in excess of insurance coverage or
compliance with applicable laws and regulations may cause substantial delays and
require significant capital outlays, adversely affecting the future earnings and
competitive position of Kinross and, potentially, its financial viability.
Whether a gold deposit will be commercially viable depends on a number
of factors, some of which are the particular attributes of the deposit, such as
its size and grade, costs and efficiency of the recovery methods that can be
employed, proximity to infrastructure, financing costs and governmental
regulations, including regulations relating to prices, taxes, royalties,
infrastructure, land use, importing and exporting of gold and environmental
protection. The effect of these factors cannot be accurately predicted, but the
combination of these factors may result in Kinross not receiving an adequate
return on its invested capital.
Kinross mitigates the likelihood and potential severity of these mining
risks it encounters in its day-to-day operations through the application of high
operating standards. In addition, Kinross reviews its insurance coverage at
least annually to ensure the most complete and cost-effective coverage is
obtained.
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ENVIRONMENTAL RISKS
Kinross' mining and processing operations and exploration activities in
Canada, the United States, Russia, Brazil, Chile, and other countries are
subject to various laws and regulations governing the protection of the
environment, exploration, development, production, exports, taxes, labor
standards, occupational health, waste disposal, toxic substances, mine safety,
and other matters. New laws and regulations, amendments to existing laws and
regulations, or more stringent implementation of existing laws and regulations
could have a material adverse impact on Kinross, increase costs, cause a
reduction in levels of production and/or delay or prevent the development of new
mining properties. Compliance with these laws and regulations requires
significant expenditures and increases Kinross' mine development and operating
costs.
In all jurisdictions, permits from various governmental authorities are
necessary in order to engage in mining operations. Such permits relate to many
aspects of mining operations, including maintenance of air, water and soil
quality standards. In most jurisdictions, the requisite permits cannot be
obtained prior to completion of an environmental impact statement and, in some
cases, public consultation. Further, Kinross may be required to submit for
government approval a reclamation plan and to pay for the reclamation of the
mine site upon the completion of mining activities. Kinross estimates its share
of reclamation closure obligations at $146.3 million based on information
currently available. As at December 31, 2003, Kinross has accrued $119.7 million
of this liability. Kinross mitigates this risk by performing reclamation
activities concurrent with production. In addition, planned spending on closure
properties of approximately $19.2 million in 2004 is part of an aggressive plan
to bring the majority of the closure projects to post closure monitoring by the
end of 2005.
Mining, like many other extractive natural resource industries, is
subject to potential risks and liabilities associated with pollution of the
environment and the disposal of waste products occurring as a result of mineral
exploration and production. Environmental liability may result from mining
activities conducted by others prior to Kinross' ownership of a property. To the
extent Kinross is subject to uninsured environmental liabilities, the payment of
such liabilities would reduce funds otherwise available and could have a
material adverse effect on Kinross. Should Kinross be unable to fund fully the
cost of remedying an environmental problem, Kinross might be required to suspend
operations or enter into interim compliance measures pending completion of the
required remedy, which could have a material adverse effect. Kinross mitigates
the likelihood and potential severity of these environmental risks it encounters
in its day-to-day operations through the application of high operating
standards.
RESERVE ESTIMATES
The figures for reserves presented are estimates, and no assurance can
be given that the anticipated tonnages and grades will be achieved or that the
indicated level of recovery will be realized. Market fluctuations in the price
of gold may render the mining of ore reserves uneconomical and require Kinross
to take a write-down of the asset or to discontinue development or production.
Moreover, short-term operating factors relating to the reserves, such as the
need for orderly development of the ore body or the processing of new or
different ore grades, may cause a mining operation to be unprofitable in any
particular accounting period.
Proven and probable reserves at Kinross' mines and development projects
were calculated based upon a gold price of $325 per ounce of gold. Prior to
2002, gold prices were significantly below these levels. Prolonged declines in
the market price of gold may render reserves containing relatively lower grades
of gold mineralization uneconomic to exploit and could reduce materially
Kinross' reserves. Should such reductions occur, material write-downs of
Kinross' investment in mining properties or the discontinuation of development
or production might be required, and there could be material delays in the
development of new projects and reduced income and cash flow.
As set forth under "Environmental Risks" above, mining an ore body
requires permits from various governmental agencies. Several of Kinross' gold
properties, including Pamour and Aquarius, are not in active operation and
commencement of operations would require permitting to be completed.
Approximately 19% of Kinross' total reserves are located on inactive properties
and could not be mined in the event the necessary permits could not be obtained.
The inabilities to obtain the necessary permits on a delay in obtaining permits
could adversely effect Kinross' future operations and cash flow.
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There are numerous uncertainties inherent in estimating quantities of
proven and probable gold reserves. The estimates in this document are based on
various assumptions relating to gold prices and exchange rates during the
expected life of production, and the results of additional planned development
work. Actual future production rates and amounts, revenues, taxes, operating
expenses, environmental and regulatory compliance expenditures, development
expenditures and recovery rates may vary substantially from those assumed in the
estimates. Any significant change in these assumptions, including changes that
result from variances between projected and actual results, could result in
material downward or upward revision of current estimates.
OPERATIONS OUTSIDE OF NORTH AMERICA
Kinross has mining operations and carries out exploration and
development activities in Russia, Brazil, and Chile. There is no assurance that
future political and economic conditions in these countries will not result in
those countries governments adopting different policies respecting foreign
development and ownership of mineral resources. Any such changes in policy may
result in changes in laws affecting ownership of assets, taxation, rates of
exchange, gold sales, environmental protection, labor relations, repatriation of
income, and return of capital, which may affect both the ability of Kinross to
undertake exploration and development activities in respect of future properties
in the manner currently contemplated, as well as its ability to continue to
explore, develop, and operate those properties for which it has obtained
exploration, development, and operating rights to date. The possibility that a
future government of these countries may adopt substantially different policies,
which might extend to expropriation of assets, cannot be ruled out.
Kinross is subject to the considerations and risks of operating in
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 laws, licenses and permits have been in a state of change and
new laws may be given a retroactive effect. It is also not unusual in the
context of dispute resolution in Russia for parties to use the uncertainty in
the Russian legal environment as leverage in business negotiations. In addition,
Russian tax legislation is subject to varying interpretations and constant
change. Further, the interpretation of tax legislation by tax authorities as
applied to the transactions and activities of Kinross' Russian operations may
not coincide with that of management. As a result, transactions may be
challenged by tax authorities and Kinross' Russian operations may be assessed
additional taxes, penalties and interest, which could be significant. The
periods remain open to review by the tax authorities for three years. Kinross
mitigates this risk through effective communications with the Russian
regulators.
In addition, the economies of Russia, Brazil, and Chile differ
significantly from the economies of Canada and the United States. Growth rates,
inflation rates and interest rates of developing nations have been and are
expected to be more volatile than those of western industrial countries.
LICENSES AND PERMITS
The operations of Kinross require licenses and permits from various
governmental authorities. However, such licenses and permits are subject to
change in various circumstances. There can be no guarantee that Kinross will be
able to obtain or maintain all necessary licenses and permits that may be
required to explore and develop its properties, commence construction or
operation of mining facilities and properties under exploration or development
or to maintain continued operations that economically justify the cost. Kinross
endeavors to be in compliance with these regulations at all times.
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GOLD PRICE
The profitability of any gold mining operations in which Kinross has an
interest will be significantly affected by changes in the market price of gold.
Gold prices fluctuate on a daily basis and are affected by numerous factors
beyond the control of Kinross. The supply and demand for gold, the level of
interest rates, the rate of inflation, investment decisions by large holders of
gold, including governmental reserves, and stability of exchange rates can all
cause significant fluctuations in gold prices. Such external economic factors
are in turn influenced by changes in international investment patterns and
monetary systems and political developments. The price of gold has fluctuated
widely and future serious price declines could cause continued commercial
production to be impractical. Depending on the price of gold, cash flow from
mining operations may not be sufficient to cover costs of production and capital
expenditures. If, as a result of a decline in gold prices, revenues from metal
sales were to fall below cash operating costs, production may be discontinued.
TITLE TO PROPERTIES
The validity of mining claims which constitute most of Kinross' property
holdings in Canada, the United States, Brazil, Chile, and Russia may, in certain
cases, be uncertain and is subject to being contested. Kinross' titles,
particularly title to undeveloped properties, may be defective.
Certain of Kinross' United States mineral rights consist of unpatented
lode mining claims. Unpatented mining claims may be located on U.S. federal
public lands open to appropriation, and may be either lode claims or placer
claims depending upon the nature of the deposit within the claim. In addition,
unpatented mill site claims, which may be used for processing operations or
other activities ancillary to mining operations, may be located on federal
public lands that are non-mineral in character. Unpatented mining claims and
mill sites are unique property interests, and are generally considered to be
subject to greater title risk than other real property interests because the
validity of unpatented mining claims is often uncertain and is always subject to
challenges of third parties or contests by the federal government of the United
States. The validity of an unpatented mining claim, in terms of both its
location and its maintenance, is dependent on strict compliance with a complex
body of U.S. federal and state statutory and decisional law. In addition, there
are few public records that definitively control the issues of validity and
ownership of unpatented mining claims. The General Mining Law of the United
States, which governs mining claims and related activities on U.S. federal
public lands, includes provisions for obtaining a patent, which is essentially
equivalent to fee title, for an unpatented mining claim upon compliance with
certain statutory requirements (including the discovery of a valuable mineral
deposit).
COMPETITION
The mineral exploration and mining business is competitive in all of its
phases. Kinross competes with numerous other companies and individuals,
including competitors with greater financial, technical, and other resources
than Kinross, in the search for and the acquisition of attractive mineral
properties. The ability of Kinross to acquire properties in the future will
depend not only on its ability to develop its present properties, but also on
its ability to select and acquire suitable producing properties or prospects for
mineral exploration. There is no assurance that Kinross will continue to be able
to compete successfully with its competitors in acquiring such properties or
prospects.
JOINT VENTURES
After completion of the combination, Kinross has ownership in eight
mines that are operated through joint ventures with other mining companies. Any
failure of such other companies to meet their obligations to Kinross or to third
parties could have a material adverse effect on the joint ventures.
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DISCLOSURES ABOUT MARKET RISKS
To determine its market risk sensitivities, Kinross uses an internally
generated financial forecast that is sensitized to various gold prices, currency
exchange rates, interest rates and energy prices. The variable with the greatest
impact is the gold price, and Kinross prepares a base case scenario and then
sensitizes it by a $10 increase and decrease in the gold price. For 2004,
sensitivity to a $10 change in the gold price is $15 million on pre-tax
earnings.
The financial forecast Kinross uses covers the life of the mine. In each
year gold is produced according to the mine plan, the production is estimated
based on current production costs plus the impact of any major changes to the
operation during its life. Quantitative disclosure of market risks is disclosed
below.
COMMODITY PRICE RISKS
Kinross' net income can vary significantly with fluctuations in the
market price of gold. At various times, in response to market conditions,
Kinross has entered into gold forward sales contracts, spot deferred forward
sales contracts and written call options for some portion of expected future
production to mitigate the risk of adverse price fluctuations. Kinross does not
hold these financial instruments for speculative or trading purposes. In
addition, Kinross is not subject to margin requirements on any of its hedging
lines. Due to the increase in gold prices, Kinross made a decision in 2002 to
continue to deliver into these financial instruments and will not replace them
with new financial instruments thereby increasing its exposure to changes in
gold prices.
The outstanding number of ounces, average expected realized prices and
maturities for the gold commodity derivative contracts as at December 31, 2003,
are as follows:
OUNCES AVERAGE CALL OPTIONS AVERAGE
YEAR HEDGED PRICE SOLD STRIKE PRICE
--------------- --------------- ---------------- ---------------- ---------------
2004 137,500 $ 277 50,000 $ 340
2005 37,500 $ 296 -- $ --
--------------- ---------------- ---------------- ---------------
Total 175,000 $ 281 50,000 $ 340
=============== ================ ================ ===============
The fair value of the call options sold is recorded in the financial
statements at each measurement date. The fair value of the gold forward sales
and spot deferred forward sales contracts, as at December 31, 2003, was negative
$24.4 million based on a gold price of $417 per ounce. In 2004, Kinross will
receive $277 per ounce of gold for 137,500 ounces which may be significantly
different from market prices. If the market price of gold is $400 per ounce on
the dates the ounces are delivered into the forward sales contracts, Kinross
would be paid $16.9 million less than if it were unhedged. In addition, at
December 31, 2003, Kinross has 50,000 ounces of written call options
outstanding. If the market price of gold is above $340 per ounce on expiry in
June 2004, Kinross will be committed to sell 50,000 ounces at $340 per ounce. If
the market price of gold is $400 per ounce, Kinross would be paid $3.0 million
less than if it were unhedged. Kinross does not include these financial
instruments in testing for impairment of operating mines, mineral rights, and
development properties.
FOREIGN CURRENCY EXCHANGE RISK
Kinross conducts the majority of its operations in the United States,
Russia, Canada, Brazil, and Chile. Currency fluctuations affect the cash flow
that Kinross will realize from its operations as gold is sold in U.S. dollars,
while production costs are incurred in Russian rubles, Chilean pesos, Brazilian
reals, Canadian, and U.S. dollars. Kinross' 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. Kinross'
cash and cash equivalent balances are held in U.S. and Canadian dollars;
holdings denominated in other currencies are relatively insignificant.
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RUSSIAN RUBLES
Kinross operates the Kubaka mine in Russia. Kinross estimates 2004
Russian ruble payments for operating, exploration and royalty expenses of 580.1
million Russian rubles at an exchange rate of 29 rubles to one U.S. dollar. A
10% change in the exchange rate could result in an approximate $2.0 million
change in Kinross' pre-tax earnings.
CHILEAN PESOS
Kinross has joint venture interests in the Refugio mine and the La Coipa
mine, both located in Chile. Kinross estimates 2004 payments for operating,
exploration, and royalty expenses of 10.4 billion Chilean pesos at an exchange
rate of 700 pesos to one U.S. dollar. A 10% change in the exchange rate could
result in an approximate $1.5 million change in Kinross' pre-tax earnings. In
addition, Kinross has budgeted capital expenditures of 15.0 billion Chilean
pesos. A 10% change in the exchange rate could result in an approximate $2.1
million change in Kinross' capital expenditures.
BRAZILIAN REALS
Kinross is a partner in the Paracatu (Brasilia) and Crixas mines, both
located in Brazil. Kinross estimates 2004 payments for operating, exploration,
and royalty expenses of 51.0 million Brazilian reals at an exchange rate of 3
Brazilian reals to one U.S. dollar. A 10% change in the exchange rate could
result in an approximate $1.7 million change in Kinross' pre-tax earnings. In
addition, Kinross has budgeted capital expenditures of 36.3 million Brazilian
reals. A 10% change in the exchange rate could result in an approximate $1.2
million change in Kinross' capital expenditures.
CANADIAN DOLLARS
Kinross operates the Lupin mine and is a partner in the New Britannia,
Musselwhite, and Porcupine joint ventures. As a result of these ownership
interests and expenses incurred by the Canadian corporate office, Kinross has
Canadian dollar denominated operating, exploration, and administrative expenses.
Kinross has currency hedges of CDN $14.1 million for 2004 at an exchange rate of
1.4121 to one U.S. dollar. Assuming 2004 budgeted payments of CDN $163.0 million
at an exchange rate of CDN $1.30 per U.S. dollar and considering the 2004
Canadian dollar hedges, a 10% change in the exchange rate could result in an
approximate $11.5 million change in Kinross' pre-tax earnings. In addition,
Kinross has budgeted capital expenditures of CDN $42.0 million. A 10% change in
the exchange rate could result in an approximate $3.2 million change in Kinross'
capital expenditures.
STRATEGY
Kinross' strategy is to increase shareholder value through increases in
long-term cash flow, production, and earnings per share. Kinross' strategy
consists of optimizing the performance and, therefore, the value of existing
mines, investing in quality projects and looking for additional accretive
acquisitions.
The first component of this strategy is addressed as Kinross continues
to look for opportunities to enhance the performance of existing assets that it
operates, through its continuous improvement program. The continuous improvement
program focuses on productivity improvements and cost cutting initiatives that
add value by improving cash flow and earnings per share. Two significant
initiatives in 2003 at the Round Mountain mine focused on waste dump haulage
costs and heap leach pad inventory management. Modifications to the waste rock
haulage process reduced haulage distances and costs, while side slope leaching
of the heap leach pad improved the timing of the recovery of gold ounces.
The second component of the strategy is the value created by investing
in quality projects. In 2003, Kinross announced plans to expand and recommission
the Refugio mine and restart the Kettle River operation. The Refugio mine is
scheduled to achieve production during the fourth quarter of 2004, while the
Kettle River operation reopened in January of 2004. The Pamour open pit project
is being developed as a long-term source of ore for the Porcupine joint
venture's Dome mill and at Paracatu (Brasilia), the joint venture partners are
currently evaluating an expansion project. In addition, 2003 exploration
activities added proven and probable reserves of 2.7 million ounces of gold,
less the 1.8 million ounces of reserves depleted by production during the year.
Kinross' current
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exploration budget in 2004 is approximately $20.0 million and may be expanded
depending on success-driven opportunities. The objective of these exploration
activities is to again increase proven and probable reserves in 2004.
The third component of this strategy is to increase value through
accretive acquisitions. On November 20, 2003, Kinross announced it had entered
into an agreement with Crown whose major asset is the Buckhorn Mountain gold
deposit located in north central Washington State. The current operating plan
for Buckhorn contemplates the development of an underground mine and processing
the ore at the nearby Kettle River mill. This component of the business strategy
is designed to add value by increasing proven and probable reserves and
providing additional production thereby increasing earnings and cash flow.
Kinross will continue to focus on its continuous improvement program in
2004, advance existing exploration and development projects and look for
accretive projects to acquire that will ultimately create additional value to
Kinross' shareholders.
OUTLOOK
Kinross has a robust pipeline of new projects at various stages of
exploration and development and is well positioned financially through strong
cash flow from operating activities and significant cash balances to advance
these projects towards production. The first of these projects achieved
commercial production in January 2004, with the development of the Emanuel Creek
ore body and the restart of the Kettle River mill where gold production of
approximately 100,000 ounces is anticipated in 2004. As a result of major
projects such as the restart of an expanded Refugio, the development of the
Pamour pit and the potential expansion of Paracatu (Brasilia), the capital
expenditure program in 2004 is currently budgeted at approximately $165.0
million. It is expected that this capital expenditure program, the largest in
Kinross' history, can be funded entirely from cash flow from operating
activities at year end gold prices. During 2004, Kinross will deliver into
essentially all remaining gold hedges and in the first quarter of 2005 will
become totally unhedged.
A key focus in 2004, and into the future, will be to continue to expand
the reserve base of Kinross through exploration, optimization of producing
assets and accretive acquisitions such as the Crown transaction. Planned
production for Kinross in 2004 is 1.70 to 1.75 million ounces of gold equivalent
at total cash costs in the range of $225 to $235 per ounce. A primary objective
is to meet or exceed expectations in this regard, and to work toward our goal of
ultimately reaching an annual production rate of two million ounces.
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THE MERGER
--------------------------------------------------------------------------------
The discussion in this Proxy Statement/Prospectus of the merger and the
principal terms of the merger agreement is subject to, and qualified in its
entirety by, the merger agreement attached to this Proxy Statement/Prospectus as
Appendix "A," which is incorporated herein by this reference.
GENERAL
Kinross and Crown are furnishing this Proxy Statement/Prospectus to
holders of Crown common stock in connection with the solicitation of proxies by
the board of directors of Crown for approval, among other things, of the merger
contemplated by the merger agreement. The merger agreement provides for the
merger of Crown with and into Crown Merger, with Crown surviving the merger.
The merger was unanimously approved by the board of directors of both
Kinross and Crown. Neither board formed a special committee in connection with
their consideration of the merger.
216
The Crown common stock will be converted into Kinross common shares on
the basis of 0.2911 shares of Kinross common shares for each share of Crown
common stock previously outstanding.
If the holder of any unexercised warrant to purchase shares of Crown
common stock so elects, the warrant will be exchanged for 0.2911 of a Kinross
common share for each share of Crown common stock that would have been issued on
exercise of the warrant immediately prior to the effective time of the merger on
a cashless basis and the number of shares of Solitario common stock to which the
holder would have been entitled if the warrant had been exercised on a cashless
basis immediately prior to the merger. If the holder does not make the foregoing
election, the warrant will represent the right to acquire Kinross common shares
in accordance with the terms and conditions of the warrant as amended pursuant
to the merger agreement.
On December 8, 2003, the Crown board of directors took action, as
permitted under the Crown 2002 Stock Incentive Plan, so that conditional upon
the completion of the merger as contemplated by the merger agreement, all
options to purchase Crown common stock not exercised as of the effective time of
the merger will be terminated on three days notice of the completion of the
merger.
The merger agreement contemplates that the merger will be completed
within three business days of the satisfaction of all conditions precedent. The
parties anticipate closing the merger as quickly as practicable subsequent to
the approval of the transaction by the Crown shareholders. Completion of the
merger is subject to the satisfaction of all conditions which must be satisfied
or waived by the parties. In the event of the failure to meet any of these
conditions, the merger may not be completed even if approved by the Crown
stockholders.
For a discussion of the principal United States federal income tax
consequences of the merger to Kinross, Crown, and their respective shareholders,
see "Tax Consequences."
BACKGROUND OF THE MERGER
In 1991, Crown had formed a joint venture with Battle Mountain to
develop Crown's Buckhorn Mountain Project, then named the Crown Jewel. Battle
Mountain spent a substantial amount of its money and time in developing an
open-pit mining plan and seeking appropriate permitting and other approvals for
the plan. Battle Mountain's plan encountered substantial regulatory, political,
and environmental opposition, and these factors, along with the acquisition of
Battle Mountain by Newmont, lead to the abandonment of its interest in the joint
venture to Crown in July 2001. As a result of Battle Mountain's withdrawal from
the venture, Crown began work on a revised plan of operations for the Buckhorn
Mountain Project. During this period, and primarily as a result of previous
difficulties in obtaining the permitting and other approvals required to
commence open pit mining operations, Crown did not gain the interest of
qualified third parties as either joint venture partners or merger or
acquisition candidates, under any reasonable economic terms. However, as part of
Crown's efforts to complete a revised plan of operations and updated feasibility
study for the Buckhorn Mountain Project, Crown remained aware of a potential
venture with Echo Bay, specifically in relation to its Kettle River mill and
tailings facilities, which had unique and favorable economic and geographic
synergies in relation to the Buckhorn Mountain Project.
On May 3, 2002, a meeting was held between Chris Herald, Crown's Chief
Executive Officer and Bob LeClerc, then the Chief Executive Officer of Echo Bay
at Echo Bay's Littleton, Colorado office. At the meeting, Mr. Herald and Mr.
LeClerc discussed whether Crown and Echo Bay would be interested in a possible
combination of Crown's Buckhorn Mountain Project with Echo Bay's Kettle River
operations, both of which sites are located in Washington, and the possible
benefits of such a combination. Both parties agreed that a combination of the
projects potentially had substantial merit and agreed to work towards the
execution of a confidentiality agreement.
On June 10, 2002, Kinross, Echo Bay, and TVX announced an agreement to
combine their respective business, with Kinross being the surviving parent
corporation.
On June 18, 2002, Crown and Echo Bay executed a confidentiality
agreement, allowing each company to make documents and other confidential
information available to the other for a possible transaction.
217
On July 20 and 21, 2002, Crown and Echo Bay held technical due diligence
meetings at Crown's Oroville, Washington office, and at the Buckhorn Mountain
Project and Kettle River sites. Crown and Echo Bay exchanged technical reports
and data prior to such meetings. Participating in the meeting on behalf of Crown
were Mr. Herald and Peter Cooper, and on behalf of Echo Bay were Dan Hussey and
Scott Marikis.
On August 29, 2002, Mr. Herald and Mr. LeClerc held telephone
discussions regarding a possible Buckhorn Mountain Project and Kettle River
business combination. The general proposal discussed by Mr. LeClerc involved a
5% net smelter royalty to Crown, in exchange for its interest in the Buckhorn
Mountain Project. Mr. Herald declined to make a counter proposal to Echo Bay.
Mr. Herald and Mr. LeClerc determined that the parties had substantially
different views regarding the relative valuations of each company's respective
assets and discussions did not proceed at that point.
On September 30, 2002, Mr. Herald held an in-person meeting at the
Westin Hotel in Denver, Colorado, with Gordon McCreary, Kinross' then
Vice-President of Investor Relations and Corporate Development concerning
Kinross' possible interest in the Buckhorn Mountain Project following completion
of Kinross' combination with Echo Bay and TVX. Mr. Herald and Mr. McCreary
agreed that a discussion between Crown and Kinross may be appropriate after
completion of the merger.
On January 31, 2003, the combination among Kinross, Echo Bay, and TVX
was completed.
On February 18, 2003, Kinross entered into a confidentiality agreement
with Crown, whereby the parties could investigate possible synergies between the
Buckhorn Mountain Project and Kinross' Kettle River operations.
On February 20, 2003, Mr. Herald and Walt Hunt, Crown's Vice-President
of Operations, met with representatives of Kinross in its Toronto, Ontario
office to discuss a potential transaction. Kinross was represented by Robert
Buchan, its President and Chief Executive Officer, John Ivany, its Executive
Vice-President and General Counsel, Rod Cooper, its then Director of Technical
Services, Gordon McCreary, its Vice-President of Corporate Affairs, and Ronald
Stewart, its Vice-President of Exploration. Crown presented the current status
of the Buckhorn Mountain Project, discussing resources, permitting and
feasibility studies either underway or planned. Crown delivered updated Buckhorn
Mountain Project information to Kinross for its review. Kinross and Crown agreed
to continue discussions and to exchange additional information in the future as
necessary for the companies' respective technical reviews. Later that day,
additional Kinross personnel were notified of the meeting and the status of the
review, including Scott Caldwell, Executive Vice-President and Chief Operating
Officer, Brian W. Penny, Vice-President-Finance and Chief Financial Officer,
Chris Hill, then Treasurer, and Jerry Danni, Vice-President of Environmental
Affairs.
In March, 2003, Kinross held several telephone discussions with Crown,
particularly Walt Hunt, regarding the technical aspects of the Buckhorn Mountain
Project and exchanged various documents. Also in March of 2003, AMEC Engineering
and Constructors were commissioned by Kinross to review the geological data
concerning the Buckhorn Mountain Project and construct a confirmatory resource
model.
On April 2, 2003, Mr. Ivany telephoned Mr. Herald and indicated that
Kinross' technical review of the Buckhorn Mountain Project appeared positive.
Mr. Ivany thought it would take a couple of weeks to complete the evaluation and
potentially develop a proposal.
On April 20, 2003, Mr. Ivany called Mr. Herald to discuss the results of
Kinross' technical evaluation. Mr. Ivany indicated that Kinross was pleased with
the technical review of the Buckhorn Mountain Project, but was concerned about
permitting. Mr. Ivany indicated that Kinross was continuing to develop and
explore its Emanuel Creek project. Mr. Ivany and Mr. Herald discussed some
general concepts whereby Kinross might make an offer conditioned on reaching
future permitting milestones at the Buckhorn Mountain Project, but it was
decided that the concepts would be too ambiguous and not attractive for either
party. Mr. Ivany and Mr. Herald agreed to stay in touch and that Kinross would
continue to monitor Crown's progress on the project.
218
Between April and July, 2003, Walt Hunt of Crown and Scott Marikis of
Kinross held informal telephone discussions regarding the progress of the
permitting effort at the Buckhorn Mountain Project.
On July 30, 2003, Mr. Ivany and Mr. Herald held discussions by
telephone, arranging a meeting between Mr. Herald and Mr. Danni for the purpose
of updating Kinross on the permitting developments with respect to the Buckhorn
Mountain Project.
On August 1, 2003, Mr. Herald met with Mr. Danni and Debbie Struhsacker,
Kinross Gold U.S.A., Inc.'s (a wholly-owned subsidiary of Kinross)
Vice-President-U.S. Governmental and Environmental Affairs, in Denver, Colorado.
Mr. Herald updated Mr. Danni and Ms. Struhsacker on Crown's progress on the new
Buckhorn Mountain Project Plan of Operations to be filed with the USFS and the
Washington State Department of Ecology. Crown's political efforts and its public
outreach program were also discussed. In addition, Mr. Herald provided an update
of recent Washington legislation pertaining to regulatory reform to Kinross. The
parties also discussed the status of Crown's patent application with the Bureau
of Land Management. Mr. Herald provided documents related to many of the topics
discussed. Mr. Danni said he would evaluate the information further and report
to Kinross management.
On August 7, 2003, during a meeting of Kinross' board of directors, Mr.
Buchan informed Kinross' directors of the ongoing discussions with Crown.
A meeting was held on August 25 and 26, 2003, at Crown's Oroville,
Washington office between Mr. Herald, Mr. Hunt and Lyle Morganthaler, an
independent mining engineer representing Crown, on behalf of Crown, and Mr.
Cooper, Mr. Caldwell, Mike Doyle, the General Manager for Kinross' Round
Mountain mine in Nevada and Al Kirkem, Kinross' Exploration Manager, on behalf
of Kinross. Crown presented information regarding the Buckhorn Mountain Project
that had been developed to date. The parties also generally discussed options
related to the Kettle River mill, and its potential utility in the Buckhorn
Mountain Project. The meetings also included a brief inspection of core
drillings, a visit to the Buckhorn Mountain Project proposed mill and tailings
site, a tour of the Buckhorn Mountain Project deposit, and a drive of a Buckhorn
Mountain Project to Emanuel Creek potential haul road. Kinross also provided a
review of its exploration results from the Emanuel Creek site.
On August 26, 2003, Mr. Cooper, Mr. Caldwell, Mr. Danni, Mr. Doyle, and
Mr. Kirkham met with Gordon Fellows, Kinross' Engineering and Environmental
Manager at Kettle River, Mike Rasmussen, Kinross' Senior Exploration Geologist,
and Robert Taylor, Kinross' General Manager at Kettle River. The meeting took
place at the Kettle River mine offices. The individuals from Kinross discussed
the potential for a transaction with Crown and reviewed Kettle River information
relevant to Kinross' financial analysis of Crown. After the meeting, Kinross
confidentially informed Wayne Zigarlick, Kinross' Mill Manager at Kettle River
and Dave Riggleman, Kinross' Operations Manager at Kettle River, of the
potential transaction, since their input would be required to finalize the
financial analysis. Mr. Dan Hussey, Kinross' Chief Geologist at Kettle River,
was also informed of the discussions regarding the Buckhorn Mountain Project.
Later, on August 26, Sue Davis, Kinross' Human Resources Manager at Kettle River
provided historical employment numbers for the Kettle River operations to Mr.
Morgenthaler. Also on August 26, a meeting between Mr. Morgenthaler, an
independent mining engineer representing Crown and Mr. Riggleman, Ms. Fellows
and Pam Allen, Kinross' Accounting Manager at Kettle River, occurred whereby
both companies exchanged information regarding Kettle River and the Buckhorn
Mountain Project.
On September 2, 2003, Mr. Kirkham contracted Mr. Tom Rice, a consultant
from Reno, Nevada, to conduct land title due diligence on Kinross' behalf. On
September 4 and 5, 2003, Mr. Rice visited Crown's Oroville, Washington office
and reviewed certain files and held conversations with Mr. Hunt of Crown.
Subsequently, under the coordination of John Bokich, Kinross' Director of
Environmental Affairs, and Susan Mason, a consultant retained by Kinross for
U.S. land management, Mr. Rice spent approximately 12 days during two trips
doing extensive title research on the Buckhorn Mountain Project.
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From September 2-4, 2003, Ms. Struhsaker, Ed Opitz, Kinross' Manager of
Environmental Engineering, and Mr. Fellows visited the Buckhorn Mountain Project
to review environmental and permitting issues. Additionally, Vector Colorado,
LLC completed an engineering review of certain aspects of the Buckhorn Mountain
Project.
From September 9-11, 2003, Tony Lipiec, Kinross' Manager, Process
Engineering, conducted a site visit to Kettle River, the Buckhorn Mountain
Project and to Crown's Oroville office to review information with Mr. Hunt of
Crown.
On September 22, 2003, Mr. Herald, Mr. Buchan, and Mr. Caldwell held
discussions concerning a Kinross proposal to acquire Crown at the Denver Gold
Conference in Denver, Colorado. Just prior to the meeting, Mr. Caldwell
forwarded by fax Kinross' evaluation materials relating to the Buckhorn Mountain
Project to Mr. Herald. Mr. Buchan and Mr. Caldwell reviewed Kinross' technical
evaluation results with Mr. Herald. Mr. Herald explained Crown's capital
structure. Mr. Buchan presented Kinross' proposal to acquire Crown which, from
Mr. Buchan's point of view, contemplated that Crown's equity interest in
Solitario would be included in the merger. The remaining material terms were
substantially consistent with the final agreement. Mr. Herald indicated that
Kinross' proposal appeared to be an offer that Crown's board of directors would
consider, and that he would discuss it with certain members of Crown's board
that evening.
On September 23, 2003, a meeting was held between Mr. Herald and Jim
Maronick, Crown's Chief Financial Officer, and Mr. Buchan concerning Kinross'
proposal of the prior day. Crown sought certain clarifications regarding the
offer and Kinross sought clarifications regarding Crown's capital structure. Mr.
Herald presented the proposal to distribute the equity interest in Solitario to
the Crown shareholders prior to the merger. Although Mr. Buchan indicated that
Kinross was not necessarily agreeing to Mr. Herald's proposal, both parties
agreed that they were close on the principal terms and agreed to proceed toward
an agreement, subject to further consideration of the exact terms. An additional
meeting was held between Mr. Herald, Mr. Maronick, and Mr. Penny, during which
Crown provided Kinross certain additional information regarding its capital
structure.
On September 30, 2003, telephone discussions were held between Mr. Ivany
and Mr. Herald concerning the terms of the transaction, and each agreed to
consult with their respective associates to reach an agreement. Also on
September 30, 2003, AMEC was engaged to provide assistance in completing the
reserves and resources preliminary due diligence.
On October 1, 2003, telephone discussions were held between Mr. Ivany
and Mr. Herald concerning the final business terms of Kinross' offer. The
parties agreed to the principal business terms and committed to work towards the
execution of a letter of intent. Mr. Ivany informed Parr Waddoups Brown Gee &
Loveless, a Professional Corporation, Kinross' U.S. counsel, of the verbal
agreement.
During the first week of October, the parties and their lawyers
communicated several times by telephone and e-mail negotiating a letter of
intent. The parties signed the letter of intent the evening of October 8, 2003,
and publicly announced the execution of the letter of intent and the transaction
on October 8, 2003.
On November 11, 2003, Crown entered into the Echo Bay Minerals (a
wholly-owned subsidiary of Kinross) toll milling agreement relating to the
milling of ore produced at the Buckhorn Mountain Project. See "Business of
Crown--Recent Developments."
REASONS FOR THE MERGER--ADVANTAGES AND DISADVANTAGES
The Buckhorn Mountain Project, prior to July 2001, was held by a joint
venture between Crown and Battle Mountain. Battle Mountain had managed the
project and had sought to have it permitted as an open pit mine. When Battle
Mountain was unable to complete the permitting process, it entered into an
agreement with Crown, transferring ownership and control of the Buckhorn
Mountain Project to Crown. Crown does not currently have the funds necessary to
obtain the necessary permits and fund the capital expenditures necessary to
commence mining operations at the Buckhorn Mountain Project.
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In connection with its acquisition of Echo Bay in January 2003, Kinross
obtained ownership of the Kettle River mill located approximately 92 kilometers
(57 miles) from the Buckhorn Mountain Project. Under the currently proposed
operating plan, the Buckhorn Mountain Project will be developed as an
underground mine and the ore will be processed at the Kettle River facility,
which has already been licensed and permitted. Kinross has access to the
technical personnel and funding to pursue the permitting, construction, and
operation of the Buckhorn Mountain Project. In addition, the existence of the
Kettle River facility gives Kinross unique permitting and operational synergies
with the Buckhorn Mountain Project.
Set forth below are the material advantages and disadvantages to Kinross
and Crown of the proposed merger.
KINROSS
Kinross has recently restarted the Kettle River mill to process ore from
the newly discovered Emanuel Creek deposit. The merger with Crown will provide
Kinross with an opportunity to more effectively utilize the Kettle River mill by
processing ore produced at the Buckhorn Mountain Project.
Kinross anticipates that by combining the Kettle River and Buckhorn
Mountain Project operations, there will be increased operating efficiency
because only one management team will be required to manage the two locations.
Kinross expects the combined Buckhorn Mountain Project and Emanuel Creek
operations to produce gold for total cash costs and total costs per ounce less
than Kinross' current average costs per ounce resulting in the merger being
accretive to earnings and cash flow.
Kinross believes that the Buckhorn Mountain Project mineral claims have
been under-explored and may conduct further exploration activities in the
future.
Acquiring Crown at this time means that Kinross will be obligated to
complete the permitting process before beginning production at the Buckhorn
Mountain Project. The permitting process has been difficult and subject to
delays beyond Crown or Kinross' control. The permitting process has involved a
large number of interested parties who opposed permitting gold production at the
Buckhorn Mountain Project. Kinross believes that by utilizing the existing
Kettle River mill and by mining using underground methods, a plan that is
acceptable to all concerned is achievable.
See "Business of Kinross" beginning on page 51 and "Risk Factors" beginning on
page 10.
CROWN
The board of directors of Crown has unanimously approved the adoption of
the merger agreement and the transactions contemplated thereby and recommends
that the transaction be approved by the Crown shareholders. Members of the board
of directors are subject to conflicts of interest. See "Interests of Certain
Individuals," below.
In reaching its determination, the board of directors of Crown
considered the following material factors, which were viewed as being factors in
support of the adoption of the merger agreement:
o the unique operational and cost synergies as a result of
leveraging Kinross' existing management and business structure,
utilizing Kinross' Kettle River facility, and the anticipated
impact of reducing the permitting difficulties for the Buckhorn
Mountain Project based on Kinross' successful permitting history
in the State of Washington;
o the amount of total consideration and the nature of that
consideration to be paid by Kinross to the security holders of
Crown;
o the board analyzed the imputed value of the Kinross shares to
the Crown shareholders as being between $80 and $105 million,
based on the previous 90 days of Kinross stock market trading
history; the board determined that because of the high market
liquidity of Kinross' common shares on both the NYSE and TSX,
its intrinsic value was adequately reflected in the market
price; furthermore, because
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the dilution caused by the contemplated Kinross-Crown
transaction was less than 4% to Kinross, no consideration was
given to pro forma valuations post-merger;
o the additional value to the shareholders of Crown as a result of
Kinross having agreed to the distribution of the Solitario
common stock to the Crown shareholders prior to consummating the
merger so that the Crown shareholders would continue to hold an
interest in Solitario;
o the expectation that the merger would be treated as a tax-free
merger for United States federal income tax purposes based on
consultations with Crown's tax advisors;
o the regulatory approvals required to consummate the merger were
not expected to be difficult to obtain;
o the elimination of the uncertainty to the Crown shareholders
relating to the time and expense to permit and develop the
Buckhorn Mountain Project;
o the significant financial resources of Kinross, and Crown's need
to raise significant funds to develop the Buckhorn Mountain
Project if the transaction with Kinross was not completed, the
time required to do this, the risk of being unsuccessful in
securing enough financial resources, and the potential dilution
to the existing Crown shareholders;
o the development of the Buckhorn Mountain Project requiring
qualified technical and operational personnel already available
to Kinross and the difficulties faced by Crown in seeking to
attract and retain such personnel;
o the wide distribution and liquidity of Kinross common shares on
the NYSE and TSX, compared to the limited market for shares of
Crown's common stock which currently trade on the OTC Bulletin
Board;
o with increased price of gold, which was or near a six-year high,
providing a more favorable time to market the Buckhorn Mountain
Project, and more favorable economics to the Crown shareholders;
o the limited number of potential bidders with resources and
synergies described above; and
o the arms-length bargaining process, lasting more than a year, by
which the merger terms were determined.
The board of directors of Crown also considered the following material
factors, which were viewed as being factors challenging the adoption of the
merger agreement:
o the potential additional value that might be realized if Crown
were able to develop and operate the Buckhorn Mountain Project
on its own was considered. However, this option included
significant inherent risks as a result of the financing,
permitting, and other operational implications of this course of
action;
o the potential for superior offers. However, based on Crown's
history of difficulties with Buckhorn Mountain, including Battle
Mountain's withdrawal, the historical permitting challenges,
Crown's financial constraints, informal discussions with other
mining companies (in the normal course of Crown's activities)
that did not have the unique synergies of Kinross, Crown's
knowledge of other transactions in the mining industry, and the
unique operations synergies with Kinross, superior offers were
considered unlikely; and
o the conflict of interest to which certain members of the board
and management were subject, as described below under "Interests
of Certain Individuals."
The board of directors of Crown determined that the negative factors
were outweighed by the potential benefits to be gained by Crown and its
shareholders as a result of the proposed merger with Kinross and concluded that
the proposed merger was in the best interests of Crown and its shareholders.
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The foregoing discussion of the factors considered by the board of
directors of Crown includes all material factors considered. In view of the
variety of factors considered in connection with its evaluation of the proposed
merger, the board of directors of Crown did not find it practicable to and did
not attempt to rank or assign relative weights to the foregoing factors.
INTERESTS OF CERTAIN INDIVIDUALS
Certain members of Crown's management and board of directors have
interests in the merger that are described below that are in addition to their
interests as Crown shareholders in general. Crown's board of directors took
these interests into account in approving and adopting the acquisition agreement
and the transactions contemplated thereby.
On June 19, 2000, Crown entered into Change in Control and Severance
Agreements with (i) Mr. Mark Jones, its Vice-Chairman of the Board; (ii) Mr.
Christopher Herald, its President and Chief Executive Officer; (iii) Mr. James
Maronick, its Chief Financial Officer and Vice-President, Finance; (iv) Mr.
Walter Hunt, its Vice-President, Operations; and (v) Ms. Debbie Mino, its
manager of investor relations.
These agreements provide that if a change in control of Crown occurs,
and if their employment is terminated other than for cause or if they resign for
a good reason, they are entitled, on such date, to a payment of two and one-half
(2 1/2) times their annual salary in the case of Messrs. Jones and Herald, and
one and one-half times (1 1/2) their annual salary in the case of Messrs.
Maronick and Hunt and Ms. Mino. The merger constitutes a change in control of
Crown, and Kinross intends to terminate the employment of each of these
employees following the merger. Accordingly, Kinross will pay the following to
these individuals upon the date their employment is terminated, based upon their
annual salaries for the 2004 year:
Mr. Jones: $245,000
Mr. Herald: $362,500
Mr. Maronick: $150,000
Mr. Hunt: $132,000
Ms. Mino: $120,000
At the time that the Change in Control and Severance Agreements were
executed, Crown was experiencing severe financial difficulties, ultimately
resulting in a bankruptcy filing. The Crown board of directors at the time, and
currently, considers these agreements to be both customary and appropriate
mechanisms for retaining the services of key employees. Crown's board considered
the existence of those agreements in determining to enter into the merger
agreement with Kinross. The Kinross agreement was unanimously approved by the
board, including all disinterested board members.
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STOCK OPTIONS
The acquisition agreement provides that Crown's board of directors will
take action as permitted under the Crown 2002 Stock Incentive Plan so that all
options to purchase Crown common stock will either be exercised or terminated
prior to the effective time of the merger. Each Crown share issued upon exercise
of an option will be treated like all other Crown shares and converted into
0.2911 of a Kinross common share upon completion of the merger. All of the
options to purchase Crown shares are exercisable at $0.40 per share. The number
of options to purchase Crown common shares held by its officers and directors,
and the number of Kinross common shares into which such options are convertible,
are as follows:
Name Options Shares of Kinross
---- ------- -----------------
Steven Webster 225,000 65,498
Christopher Harte 175,000 50,943
Christopher Herald 850,000 247,435
Mark Jones 175,000 50,943
Brian Labadie 225,000 65,498
F. Gardner Parker 200,000 58,220
Ronald Shorr 175,000 50,943
James Maronick 530,000 154,283
Walt Hunt 500,000 145,550
Debbie Mino 150,000 43,665
REGULATORY APPROVALS REQUIRED
Except as outlined in "Restrictions on Transfer of Kinross Common
Shares," Kinross and Crown do not believe there are any material regulatory
approvals required for the merger, other than the effectiveness of the
registration statement filed with the Commission of which this Proxy
Statement/Prospectus forms a part.
DISSENTERS' RIGHTS OF APPRAISAL
Holders of Crown common stock have the right to dissent from the merger
and receive cash equal to the fair value of their Crown common stock. The
following discussion identifies the material requirements necessary to assert
your rights, should you choose to do so. This summary is not exhaustive, and you
should also carefully read the applicable sections of Chapter 23B.13 of the
Washing Business Corporation Act ("WBCA"), which is attached to this Proxy
Statement/Prospectus as Appendix B.
If you are a Crown shareholder and wish to dissent from the merger, you
should carefully review the text of Appendix B, particularly the procedural
steps required to perfect dissenters' rights, which are complex. Because of the
technical nature of these requirements, you are encouraged to consult with your
legal counsel if you wish to assert dissenter rights. If you do not fully and
precisely satisfy the procedural requirements of Washington law, you may lose
your dissenters' rights.
REQUIREMENTS FOR EXERCISING DISSENTERS' RIGHTS
Under Washington law, Crown shareholders have the right to dissent from
the merger and to receive payment in cash for the fair value of their shares of
Crown common stock. To preserve your statutory dissenters' rights, you must:
o deliver to Crown, before the vote on the proposal to approve the
merger agreement is taken at the special meeting, notice of your
intent to demand the fair value for your Crown common stock if
the merger is consummated and becomes effective;
o not vote your shares of Crown common stock at the special
meeting in favor of the proposal to approve the merger agreement
and the transactions contemplated by the merger agreement,
including the merger; and
224
o follow the statutory procedures for perfecting dissenters'
rights under Washington law, which are described below under
"--Dissenters' Notice Procedure."
Merely voting against the merger agreement and the merger will not
preserve your dissenters' rights. Failure to precisely comply with all
procedures required by Washington law will result in the loss of your
dissenters' rights. If you do not satisfy each of the statutory requirements,
you cannot exercise dissenters' rights and you will be bound by the terms of the
merger agreement.
A shareholder of record may assert dissenters' rights as to fewer than
all of the shares registered in the shareholder's name only if he or she
dissents with respect to all shares beneficially owned by any one person and
notifies Crown in writing of the name and address of each person on whose behalf
he or she asserts dissenters' rights. The rights of the partial dissenting
shareholder are determined as if the shares as to which he or she dissents and
his or her other shares were registered in the names of different shareholders.
If your shares are not held of record in your name, you must instruct the record
owner to act on your behalf to assert your dissenters' rights. You should
contact the record holder to establish the necessary procedures sufficiently in
advance so that your dissenters' rights are not lost.
Your shares must either not be voted at the special meeting of Crown
shareholders or must be voted against the approval of the merger agreement.
Submitting a proxy card that does not direct how the shares of Crown common
stock represented by that proxy are to be voted will constitute a vote in favor
of each of the proposals being presented to Crown shareholders at the special
meeting and a waiver of your statutory dissenters' rights. In addition, voting
against the proposal to approve the merger agreement will not satisfy the notice
requirement referred to above. You must deliver notice of the intent to exercise
dissenters' rights to Crown prior to the vote being taken at the special meeting
at: James R. Maronick, 4251 Kipling Street, Suite 390, Wheat Ridge, Colorado
80033.
DISSENTERS' NOTICE PROCEDURE
Within ten days after the effective date of the proposed merger, Crown
will deliver a notice to all shareholders who have properly given notice under
the dissenters' rights provisions and have not voted in favor of the merger
agreement as described above. The notice will contain:
o the address where the demand for payment and certificates
representing shares of Crown common stock must be sent and the
date by which they must be received;
o any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
o a form for demanding payment that states the date of the first
announcement to the news media or to shareholders of the
proposed transactions (October 9, 2003) and requires
certification of the date the shareholder, or the beneficial
owner on whose behalf the shareholder dissents, acquired the
Crown common stock or an interest in it;
o a date by which Crown must receive the payment demand; and
o a copy of Chapter 23B-13 of the WBCA.
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PAYMENT PROCEDURE
If you wish to assert dissenters' rights, you must demand payment,
certify that you acquired the Crown shares before October 8, 2003, the date that
the proposed transaction was publicly announced, and deposit your Crown
certificates within 30 days after the notice is given. If you fail to make
demand for payment and deposit your Crown certificates within the 30-day period,
you will lose the right to receive fair value for your shares under the
dissenters' rights provisions, even if you delivered a timely notice of intent
to demand payment.
Except as provided below, within 30 days of the later of the effective
date of the merger or Crown's receipt of a valid demand for payment, Crown will
remit to each dissenting shareholder who complied with the requirements of
Washington law the amount Crown estimates to be the fair value of the
shareholder's Crown common stock, plus accrued interest.
Crown will include the following information with the payment:
o financial data relating to Crown, including Crown's balance
sheet, income statement and statement of changes in
shareholder's equity for its last fiscal year and its latest
available financial statements;
o Crown's estimate of the fair value of the shares and a brief
description of the methods used to reach those estimates;
o an explanation of how the interest was calculated;
o a statement of the dissenter's right to demand further payment
under Chapter 23B.13.280 of the WBCA if they are dissatisfied
with the estimate of the fair value of the shares determined by
Crown; and
o a copy of Chapter 23B.13 of the WBCA.
For a dissenting shareholder who was not the beneficial owner of the
shares of Crown common stock on October 7, 2003, Crown may withhold payment and
instead send a statement setting forth its estimate of the fair value of the
shares and offering to pay such amount, with interest, as a final settlement of
the dissenting shareholder's demand for payment. Crown will also include in such
statement an explanation of how it estimated the fair value of the shares and
calculated the interest, and a statement of the dissenter's right to demand
payment under Chapter 23B.13.280 of the WBCA if they are dissatisfied with the
estimate of the fair value of the shares determined by Crown.
PAYMENT DISPUTES
If you are dissatisfied with your payment or offer, you may, within 30
days of the payment or offer of payment, notify Crown and demand payment of your
estimate of the fair value of your shares and the amount of interest due. If any
dissenting shareholder's demand for payment is not settled within 60 days after
receipt by Crown of the payment demand, Crown must commence a proceeding in King
County Superior Court and petition the court to determine the fair value of the
shares and accrued interest, naming all the dissenting shareholders whose
demands remain unsettled as parties to the proceeding. If Crown does not
commence the proceeding within the 60-day period, it will pay each dissenter
whose demand remains unsettled the amount demanded.
The court may appoint one or more appraisers to receive evidence and
make recommendations to the court as to the amount of the fair value of the
shares. The fair value of the shares as determined by the court is binding on
all dissenting shareholders and may be less than, equal to, or greater than the
value of the merger consideration to be issued to non-dissenting shareholders
for shares of their Crown common stock under the terms of the merger agreement
if the merger is consummated. The dissenters have the same discovery rights as
parties in other civil proceedings. If the court determines that the fair value
of the shares is in excess of any amount remitted by Crown, then the court will
enter a judgment for cash in favor of the dissenting shareholders in an amount
by which the value determined by the court, plus interest, exceeds the amount
previously remitted. For dissenting shareholders who were not the beneficial
owners of their shares of Crown common stock before October 8, 2003, and for
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which Crown withheld payment pursuant to Chapter 23B.13.270 of the WBCA, the
court may enter judgment for the fair value, plus accrued interest, of the
dissenting shareholders after acquired shares.
The court will determine the costs and expenses of the court proceeding
and assess them against Crown, except that the court may assess part or all of
the costs against any dissenting shareholders whose actions in demanding payment
are found by the court to be arbitrary, vexatious or not in good faith. If the
court finds that Crown did not substantially comply with the relevant statutory
provisions, the court may also assess against Crown any fees and expenses of
attorneys or experts that the court deems equitable. The court may also assess
those fees and expenses against any party if the court finds that the party has
acted arbitrarily, vexatiously or not in good faith in bringing the proceedings.
The court may award, in its discretion, fees and expenses of an attorney for the
dissenting shareholders out of the amount awarded to the shareholders, if it
finds the services of the attorney were of substantial benefit to the other
dissenting shareholders and that those fees should not be assessed against
Crown.
FAIR VALUE
For purposes of Washington law, "fair value" means the value of Crown
common stock immediately before the effective time of the merger, excluding any
appreciation or depreciation in anticipation of the merger, unless that
exclusion would be inequitable. A Crown shareholder has no right, at law or in
equity, to set aside the approval of the merger or the consummation of the
merger except if the approval or consummation fails to comply with the
procedural requirements of Chapter 23B.13 of the WBCA, Crown's articles of
incorporation or Crown's bylaws, or was fraudulent with respect to that
shareholder or Crown.
ACCOUNTING FOR THE MERGER
The merger will be accounted for by Kinross using the purchase method of
accounting in accordance with both Section 1581, "Business Combinations," of the
CICA Handbook, for purposes of Canadian generally accepted accounting
principals, and SFAS 141, "Business Combinations," for purposes of United States
generally accepted accounting principles. Pursuant to the purchase method of
accounting under both Canadian and United States generally accepted accounting
principles, the Crown assets acquired, other potential intangible assets
identified, and liabilities assumed will be recorded at their fair market values
as of the effective date of the merger. The excess of the purchase price over
such fair value will be recorded as goodwill. In accordance with Section 3062,
"Goodwill and Other Intangible Assets," of the CICA Handbook, for purposes of
Canadian generally accepted accounting principles, and SFAS 142, "Goodwill and
Other Intangible Assets," for purposes of United States generally accepted
accounting principles, goodwill will be assigned to specific reporting units and
will not be amortized. Goodwill is subject to a determination of fair value and
will be reviewed for possible impairment at least annually or more frequently
upon the occurrence of certain events or when circumstances indicate that a
reporting unit's carrying value, including the goodwill which was allocated to
it, is greater than its fair value.
DELIVERY OF CERTIFICATES FOR KINROSS COMMON SHARES
It is anticipated that certificates for the Kinross common shares will
be available to exchange for the Crown common stock within two business days
following the completion of the merger. A properly completed letter of
transmittal, together with the certificates representing shares of Crown common
stock to be exchanged, must be delivered to the exchange agent prior to the
issuance of certificates representing the Kinross common shares. Shareholders of
record will receive a letter of transmittal from the exchange agent subsequent
to the merger with specific instructions regarding the delivery of existing
certificates in exchange for the issuance of new certificates. The exchange
agent can be contacted at Computershare Trust Company of New York, telephone
(212) 701-7650.
Certificates for Crown common stock that are not exchanged shall only
represent the right to receive Kinross common shares subsequent to the merger.
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PAYMENT IN LIEU OF ISSUING FRACTIONAL SHARES
No fractional shares will be issued by Kinross in connection with the
merger. In lieu thereof, a shareholder otherwise entitled to receive a
fractional share shall be paid the value of such fractional share in cash, based
on the closing sales price, rounded to the nearest cent, for Kinross common
shares as reported by the NYSE for the ten trading days ended the third business
day prior to the closing date.
EXPENSES OF THE MERGER
Kinross and Crown will each bear its own expenses incurred in connection
with effecting the merger and the preparation of the Proxy Statement/Prospectus.
RESTRICTIONS ON TRANSFER OF KINROSS COMMON SHARES
UNITED STATES
The Kinross common shares to be issued in the merger will be issued
pursuant to the registration statement, of which this Proxy Statement/Prospectus
forms a part, filed under the Securities Act. Notwithstanding such registration,
several persons receiving shares of common stock will be subject to restrictions
on the resale of such securities.
The sale of shares issued to affiliates of Crown will be subject to
restrictions on transfer under Rule 145 promulgated pursuant to the Securities
Act. In general, under Rule 145, sales of securities are permitted only (a)
after Kinross has been subject to the reporting requirements of the Exchange Act
and has filed all required reports thereunder for a period of at least 90 days
preceding the sale, and (b) if the sales are made in compliance with the
limitations on volume and manner of sale contained in rule 144. Kinross is, and
has been for in excess of 90 days, subject to the reporting requirements, so
that Rule 145 would be available immediately upon consummation of the merger,
subject to the limitations on volume and manner of sale. Alternatively, common
stock may be sold by Crown shareholders subject to the rule without compliance
with such limitations on volume and manner of sale if the holder, at the time of
sale, (a) is not, and has not been for at least three months, an affiliate of
either Kinross, Crown, or Kinross, and has held the securities for at least 2
years; or (b) is not an affiliate of the combined company and has held the
securities for at least 1 year, and for the preceding 12 months Kinross has
filed all required reports under the Exchange Act.
CANADA
Kinross common shares issued in connection with the merger will be
distributed in reliance on exemptions from the registration and prospectus
requirements of Canadian securities laws, subject to regulatory approval in the
case of Quebec, and will be freely tradeable in or into all provinces of Canada
through appropriately registered dealers provided the following conditions are
met at the time of such transaction:
o at the time of the trade, Kinross has been a reporting issuer
(which Kinross is) for at least 4 months (12 months in the case
of Quebec);
o the selling shareholder does not hold (alone or in combination
with others) more than 20% of the outstanding voting securities
of Kinross and does not otherwise hold a sufficient number of
any securities of Kinross to affect materially the control of
Kinross;
o if the selling shareholder is an insider or officer of Kinross,
the selling shareholder has no reasonable grounds to believe
that Kinross is in default of any requirements under applicable
Canadian securities laws;
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o no unusual effort is made to prepare the market or create a
demand for the Kinross common shares; and
o no extraordinary commission or consideration is paid in respect
of the transaction in the Kinross common shares.
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AGREEMENTS RELATING TO THE MERGER
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THE MERGER AGREEMENT
The following is a description of the material provisions of the merger
agreement, a copy of which is attached to this Proxy Statement/Prospectus as
Annex A. While Kinross and Crown believe this description covers the material
terms of the merger agreement, it may not contain all the information that is
important to you and is qualified in its entirety by reference to the merger
agreement. You are urged to read the merger agreement carefully and in its
entirety.
STRUCTURE OF THE MERGER
The merger agreement provides for the acquisition of Crown by Kinross
through the merger of Crown Merger into Crown. As a result of the merger, Crown
Merger will cease to exist and Crown will be the surviving corporation. Shares
of Crown Merger's outstanding common stock, which are held by Kinross, will be
converted in the merger into preferred stock of Crown with a fair market value
and redemption amount equal to the value of the shares of Crown Merger common
stock converted, and will remain outstanding following the merger.
EFFECTIVE TIME AND TIMING OF CLOSING
The closing of the merger will take place no later than the third
business day after satisfaction or waiver of the conditions to the merger set
forth in the merger agreement (see "Conditions to the Merger" below), unless
Kinross, Crown and Crown Merger agree to another time or date. Crown will file
articles of merger with the Washington Secretary of State at the closing. The
merger will be effective at the time that the articles of merger are filed,
unless a later date is specified in the articles of merger and agreed to in
writing by Kinross, Crown and Crown Merger.
CONSIDERATION TO BE RECEIVED IN THE MERGER
At the effective time of the merger, Crown shareholders (other than
shareholders exercising rights of appraisal under Washington law) will have the
right, with respect to each of their shares of Crown common stock, to receive
0.2911 of a Kinross common share. Kinross will not issue any fractional Kinross
common shares to holders of Crown common stock in connection with the merger.
Instead, Kinross will pay in cash an amount equal to the product of the
fractional part of a Kinross common share each such holder would otherwise be
entitled to receive (taking into account all Crown common stock delivered by
such holder) multiplied by the closing price of one Kinross common share on the
NYSE Composite Tape (as reported by The Wall Street Journal or, if not reported
by The Wall Street Journal, some other authoritative source) for the ten
consecutive trading days ending on the third trading day immediately preceding
the effective time of the merger.
EXCHANGE OF CERTIFICATES REPRESENTING CROWN COMMON STOCK
Kinross will appoint an exchange agent who will exchange certificates
representing shares of Crown common stock outstanding as of the effective time
of the merger for certificates representing Kinross common shares and any cash
issuable in lieu of fractional shares.
As soon as reasonably practicable after the effective time of the
merger, Kinross will cause the exchange agent to mail to each holder of record
of a certificate representing shares of Crown common stock outstanding as of the
effective time of the merger, a letter of transmittal which the holder must
properly complete and deliver to the
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exchange agent along with the holder's certificate or certificates for Crown
common stock, and instructions for effecting surrender of the certificate. The
letter of transmittal will specify that the exchange agent will deliver the
certificate representing Kinross common shares, and risk of loss and title to
the certificate representing Crown common stock will pass, only upon delivery of
the certificate to the exchange agent and will be in a form and have other
provisions that Kinross will reasonably specify.
Until each certificate representing Crown common stock is surrendered
(except for certificates representing shares with respect to which appraisal
rights have been validly exercised) it will be deemed from and after the
effective time of the merger, for all corporate purposes, to evidence the
Kinross common shares into which the shares of Crown common stock represented by
the certificate have been converted in connection with the merger and the
payment of cash for fractional shares. Certificates representing shares of Crown
common stock with respect to which a Crown shareholder has validly exercised
appraisal rights will represent the right to pursue any appraisal rights that
the holder may have.
After the surrender of a certificate representing Crown common stock to
the exchange agent, together with a duly executed and completed letter of
transmittal and all other documents and other materials required by the exchange
agent, the holder of the certificate will be entitled to receive a certificate
representing the Kinross common shares into which the Crown common stock
represented by the certificate have been converted in connection with the
merger, excluding fractional shares, and payment of cash for fractional shares.
DISTRIBUTION OF SOLITARIO COMMON STOCK
The merger agreement contemplates that all or some portion of the common
stock of Solitario held by Crown may be distributed to the Crown shareholders
prior to the effective time of the merger. Crown agreed to use its commercially
reasonable efforts to cause Solitario to make all filings and obtain all
regulatory approvals required by the Securities Act, the Exchange Act, Canadian
securities laws and rules of the TSX in connection with the distribution by
Crown of the Solitario Common Stock to the shareholders of Crown and to
reasonably cooperate in providing all information to Solitario necessary to
complete such filings. Solitario has filed documents with the SEC to permit the
distribution of all of the shares of Solitario held by Crown to the Crown
shareholders, except those shares, estimated to be approximately 1,000 shares,
that would otherwise result in one or more Crown shareholders holding a fraction
of a share of Solitario stock. The registration statement is subject to review
and comment by the SEC prior to the distribution of the Solitario common stock.
Crown anticipates completing the distribution prior to the merger.
TREATMENT OF CROWN STOCK OPTIONS
The merger agreement provides that the Crown board of directors will
take action as permitted under the Crown 2002 Stock Incentive Plan so that all
options to purchase Crown common stock will either be exercised or terminated
prior to the effective time of the merger.
TREATMENT OF CROWN WARRANTS
If the holder of any unexercised warrant to purchase shares of Crown
common stock elect, the warrant will be exchanged for 0.2911 of a Kinross common
share for each share of Crown common stock that would have been issued on
exercise of the warrant immediately prior to the effective time of the merger on
a cashless basis. If the holder does not make the foregoing election, the
warrant will represent the right to acquire Kinross common shares in accordance
with the terms and conditions of the warrant as amended pursuant to the merger
agreement.
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REPRESENTATIONS AND WARRANTIES
In the merger agreement, Kinross and Crown Merger, on the one hand, and
Crown, on the other, have made various representations and warranties relating
to, among other things, their respective organization, capital structure,
business and financial condition, the completeness and accuracy of filings made
with the SEC, and the satisfaction of certain legal requirements for the merger.
The representations and warranties of each of the parties to the merger
agreement will expire upon consummation of the merger. The representations and
warranties of Kinross and Crown Merger, on the one hand, and Crown, on the
other, are set forth in Articles III and IV, respectively, of the merger
agreement.
The merger agreement provides that these representations and warranties
of Crown, Kinross and Crown Merger will not survive, or continue in effect,
after the closing date of the merger.
CONDUCT OF BUSINESS PENDING THE MERGER
Crown has agreed that, until the closing of the merger or the
termination of the merger agreement, unless Kinross otherwise agrees in writing
or as otherwise contemplated by the merger agreement, Crown will cause its
business and the business of its subsidiaries to be conducted only in the
ordinary course of business or as reasonably necessary to consummate the
transactions contemplated by the merger agreement and will otherwise not engage
in certain activities, including certain significant business or financing
transactions or changes in corporate structure. The specific restrictions on the
conduct of Crown's business are listed in Article V of the merger agreement.
OFFERS FOR ALTERNATIVE TRANSACTIONS
The merger agreement provides that, until the earlier of the effective
time of the merger or the termination of the merger agreement, Crown will not,
and will not agree to:
o enter into any transaction with any party other than Kinross
relative to an alternative transaction (including a merger or
consolidation or any other business combination or any
disposition of Crown's assets or any interest in its business,
its capital stock or any part thereof or a transaction
comparable or similar to the merger with Kinross or that would
prevent or materially impede the merger),
o solicit or encourage submission of inquiries, proposals or
offers from any other party relative to an alternative
transaction;
o except in the ordinary course of business or as required by law,
regulation, or court order or by agreements existing at the date
of the merger agreement, provide information to any other person
regarding Crown or any of its subsidiaries (other than
Solitario); or
o conduct any discussions or negotiations regarding, or enter into
any agreement, arrangement or understanding regarding, or
approve, recommend or propose publicly to approve or recommend,
an alternative transaction.
Crown agreed to cease and cause to be terminated any existing
discussions or negotiations with any person (other than Kinross) conducted prior
to the date of the merger agreement with respect to any alternative transaction.
Crown also agreed not to release any third party from the confidentiality and
standstill provisions of any agreement to which Crown is a party, other than
agreements with Crown's customers and suppliers entered into in the ordinary
course of business.
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The merger agreement further provides that Crown will promptly notify
Kinross if Crown receives any offer, inquiry or proposal or enters into any
discussions, including without limitation, the terms and conditions of any
alternative transaction and the identity of the potential acquirer relating to
an alternative transaction and the details of the foregoing. Crown has agreed to
keep Kinross fully informed on an ongoing basis with respect to each offer,
inquiry, proposal or discussions with any person relating to an alternative
transaction. Crown will provide Kinross with copies of all offers, inquiries or
proposals relating to an alternative transaction that are in writing and all
written materials and correspondence relating to those as soon as practicable
after Crown receives them.
Crown has agreed that neither it nor its board of directors will enter
into any agreement with respect to, or otherwise approve or recommend, any
alternative transaction, unless it has provided Kinross with the details of the
alternative transaction (including a copy of all written agreements,
correspondence and other documents relating thereto) and a reasonable period of
time (which shall not be less than two business days) during which Kinross may
propose changes to the transaction provided for by the merger agreement. The
merger agreement provides that Crown may not furnish any of its non-public
information to a potential party to a proposal superior to that of Kinross
unless Crown has previously furnished or provided access to, or promptly
thereafter furnishes or provides access to, such information to Kinross.
In response to an unsolicited offer, inquiry or proposal from any person
with respect to an alternative transaction, however, if the alternative
transaction is a proposal superior to the transaction with Kinross, Crown (and
its directors, officers, agents, representatives, affiliates, shareholders and
other persons acting on its behalf) may
o participate in discussions or negotiations with, review
information from, any third party that has made the offer,
inquiry or proposal relative to an alternative transaction;
o subject to Crown providing Kinross with notice and an
opportunity to propose changes to the offer, furnish non-public
information to any third party that has made the offer, inquiry
or proposal relative to an alternative transaction;
o approve or accept an unsolicited alternative transaction; and
o make or authorize any statement, recommendation or solicitation
in support of an unsolicited alternative transaction.
An alternative transaction is a superior proposal if Crown's board of
directors determines in good faith that:
o with regard to participation in discussion or providing
non-public information, the alternative transaction proposal is
or is reasonably likely to be or become, or with regard to
approving, accepting or recommending an alternative transaction,
the alternative transaction proposal is more favorable to Crown
and its shareholders than the transactions contemplated by the
merger agreement; and
o following consultation with outside legal counsel, that the
failure to participate in discussions or negotiations, review
such information or furnish such information regarding, or
approve or accept, the alternative transaction would violate the
fiduciary duties under applicable law.
Crown has agreed that it will, prior to providing information or
participating in discussions relating to an alternative transaction, advise
Kinross that Crown will do so.
Even if Crown's board of directors changes or withdraws its
recommendation, the merger agreement requires Crown to take all action under law
necessary to provide notice of and hold the special meeting of shareholders to
seek approval of the merger.
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CONDITIONS TO THE PARTIES' OBLIGATIONS TO CLOSE THE MERGER
The obligations of Crown, Kinross and Crown Merger to complete the
merger depend upon the satisfaction or waiver of a number of conditions,
including the following:
o the effectiveness of the registration statement that includes
this Proxy Statement/Prospectus and the receipt of all other
authorizations necessary under applicable securities laws to
consummate the transactions contemplated by the merger
agreement;
o the adoption and approval of the merger agreement, the merger
and all other transactions contemplated by the merger agreement
by Crown's shareholders holding at least 66-2/3% of Crown's
outstanding common stock;
o the absence of any law or any preliminary or permanent
injunction or other order by any federal, state or foreign court
having appropriate jurisdiction prohibiting, restraining,
enjoining, restricting or preventing consummation of the merger
having been issued and continuing in effect;
o the absence of any litigation instigated which seeks to
prohibit, restrain, enjoin, or restrict the consummation of the
merger; and
o the receipt and continuing effectiveness of all approvals,
consents, or authorizations of any governmental entity or other
regulatory body having jurisdiction over the matter, including,
but not limited to, the NYSE and the TSX, so long as neither
Crown nor Kinross have received written notice from any
governmental entity or regulatory body that it is conducting any
review or investigation to determine whether any approval,
consent, or authorization should be withdrawn or materially
modified.
The obligation of Crown to complete the merger also depends on the
satisfaction or waiver of, among others, the following additional conditions
(any of which may be waived by Crown):
o The truthfulness and correctness, as of the closing date, of the
representations and warranties of Kinross and Crown Merger in
the merger agreement and Crown's receipt of a certificate of the
President and the Chief Financial Officer of Kinross, dated the
closing date, to that effect;
o Kinross and Crown Merger's performance of or compliance with, in
all material respects, all agreements and covenants required by
the merger agreement to be performed or complied with by them on
or prior to the closing date and Crown's receipt of a
certificate of the President and the Chief Financial Officer of
Kinross and Crown Merger, dated the closing date, to that
effect;
o The absence of any change, occurrence, or circumstance, since
the date of the merger agreement, in the current or future
business, assets, liabilities, financial condition, or results
of operations of Kinross and its consolidated subsidiaries
having, or reasonably likely to have, individually or in the
aggregate, a material adverse effect on Kinross, viewed on a
consolidated basis;
o Crown's receipt of the written opinion of Parr Waddoups Brown
Gee & Loveless, counsel to Kinross, dated the closing date, to
the effect that: (a) the merger will constitute a reorganization
within the meaning of Section 368(a) of the Internal Revenue
Code; (b) Kinross, Crown Merger, and Crown will constitute
parties to the reorganization within the meaning of Section
368(b) of the Internal Revenue Code; and (c) for United States
federal income tax purposes no gain or loss will be recognized
by the holders of Crown common stock or outstanding warrants to
purchase Crown common stock upon receipt of Kinross common
shares in the merger in exchange for the Crown common stock or
the warrants, except for any cash received in lieu of a
fractional share interest in the Kinross common shares; and (d)
Crown shareholders will not recognize taxable gain under Section
367(a) of the Internal Revenue Code as a result of the merger;
and the opinion shall not have been withdrawn or modified;
233
o Kinross obtaining any consents from third parties necessary to
consummate the transactions contemplated hereby without material
adverse effect on the business or financial condition of
Kinross; and
The obligation of Kinross and Crown Merger to complete the merger also
depends on the satisfaction or waiver of the following additional conditions
(any of which may be waived by Kinross):
o The truthfulness and correctness, as of the closing date, of the
representations and warranties of Crown in the merger agreement
and Kinross' receipt of a certificate of the President and the
Chief Financial Officer of Crown, dated the closing date, to
that effect;
o Crown's performance of or compliance with, in all material
respects, all agreements and covenants required by the merger
agreement to be performed or complied with by it on or prior to
the closing date and Kinross' receipt of a certificate of the
President and the Chief Financial Officer of Crown, dated the
closing date, to that effect;
o The absence of any change, occurrence, or circumstance, since
the date of the merger agreement, in the current or future
business, assets, liabilities, financial condition, or results
of operations of Crown and its consolidated subsidiaries having,
or reasonably likely to have, individually or in the aggregate,
a material adverse effect on the business, properties or
prospects of Crown;
o The number of shares of Crown common stock for which valid
notices of the intent to exercise shareholder appraisal rights
have been provided and remain outstanding immediately prior to
the effectiveness of the merger not exceeding 5% of the issued
and outstanding Crown common stock immediately prior to the
effective time of the merger;
o Completion of the distribution of the Solitario common stock to
the shareholders of Crown, if any, in accordance with applicable
United States and Canadian securities and corporate laws in a
method reasonably satisfactory to Kinross;
o Crown obtaining consents from third parties necessary to
consummate the transactions contemplated hereby without material
adverse effect on the business or financial condition of Crown;
o Conversion or redemption of all of Crown's convertible notes
prior to the effective time of the merger; and
o Exercise or termination of all options to purchase Crown common
stock prior to the effective time of the merger.
TERMINATION AND EFFECTS OF TERMINATION
The merger agreement may be terminated, and the merger may be abandoned,
at any time before Kinross and Crown complete the merger, under the following
circumstances:
o By mutual written consent of Kinross and Crown;
o By either Kinross or Crown, if:
o the merger has not occurred by September 30, 2004,
provided that the party seeking to terminate the merger
agreement for this reason has not breached in any
material respect its obligations under the merger
agreement in any manner that has contributed to the
failure of the consummation of the merger on or before
the such date;
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o the existence of any law that prohibits or makes the
consummation of the merger illegal, or the entry of an
order, decree, ruling, judgment or injunction by a
governmental entity of competent jurisdiction
permanently restraining, enjoining or otherwise
prohibiting the merger and such order, decree, ruling,
judgment or injunction has become final and
non-appealable;
o approval of the Crown shareholders has not been obtained
at the Crown special meeting (including any adjournment
or postponement thereof), if required by applicable law,
unless the failure to obtain the approval is the result
of a material breach of merger agreement by the party
seeking to terminate the merger agreement; or
o Crown's board of directors has withdrawn its
recommendation or has recommended or entered into a
definitive agreement with respect to a superior
proposal.
o By Crown, if:
o the representations and warranties of Kinross and Crown
Merger in the merger agreement fail to be true and
correct in any material respect (or if the
representation or warranty already is qualified as to
materiality, shall fail to be true and correct as so
qualified) either (x) as of the date referred to in any
representation or warranty that addresses matters as of
a particular date or (y) as to all other representations
and warranties, as of the date of determination and the
failure cannot be or has not been cured in all material
respects within ten days after Crown's written notice
thereof to Kinross or Crown Merger; or
o Kinross or Crown Merger materially breaches or
materially fails to perform its covenants and other
agreements contained herein; provided that, in each of
the foregoing clauses and the breach or failure cannot
be or has not been cured in all material respects within
ten days after Crown's written notice thereof to Kinross
or Crown Merger.
o By Kinross and Crown Merger, if:
o the representations and warranties of Crown in the
merger agreement fail to be true and correct in any
material respect (or if the representation or warranty
already is qualified as to materiality, shall fail to be
true and correct as so qualified) either (1) as of the
date referred to in any representation or warranty that
addresses matters as of a particular date or (2) as to
all other representations and warranties, as of the date
of determination and the failure cannot be or has not
been cured in all material respects within ten days
after Kinross' written notice thereof to Crown; or
o Crown materially breaches or materially fails to perform
its covenants and other agreements contained herein;
provided that, in each of the foregoing clauses and the
breach or failure cannot be or has not been cured in all
material respects within ten days after Kinross' written
notice thereof to Crown.
If the merger agreement is terminated, all rights and obligations of
Kinross, Crown and Crown Merger under the merger agreement will terminate
without any liability of any party to any other party. However, termination of
the merger agreement will not relieve any party from liability for breach of the
merger agreement. In addition, the provisions of the agreement relating to
termination, fees and expenses (including the termination fees), confidentiality
and certain miscellaneous provisions will survive termination of the merger
agreement.
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EXPENSES
Generally, all fees and expenses incurred by either party will be paid
by the party incurring the expenses, whether the merger is consummated or not.
If Crown does not complete the merger as a result of entering into any agreement
resulting from a superior proposal within six months of the date of the merger
agreement, then Crown has agreed (1) to pay to Kinross a fee of U.S. $2.0
million, and (2) reimburse Kinross for its documented, reasonable third-party,
out-of-pocket expenses in connection with the merger agreement.
ADDITIONAL AGREEMENTS
Kinross and Crown have agreed in the merger agreement to use
commercially reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all things necessary, proper or advisable on its
part, to consummate and make effective the transactions contemplated by the
merger agreement at the earliest practicable date.
Crown has also agreed in the merger agreement
o to use its commercially reasonable efforts to amend or redeem
its outstanding convertible notes so that, in any event, all of
its outstanding convertible notes are redeemed or are converted
into Crown common stock prior to the effective time of the
merger; and
o to provide Kinross and its representatives with full access
during normal business hours to Crown's facilities, personnel
and records.
Kinross has also agreed in the merger agreement that the surviving
corporation in the merger and Kinross will assume and be jointly and severally
liable for all obligations of Crown under the indemnification provisions in
Crown's articles of incorporation and bylaws for any "proceeding" (as defined in
Crown's bylaws) that arises with respect to the former officers and directors of
Crown within six (6) years after the effective time of the merger.
AMENDMENT
The merger agreement provides that the parties may amend the merger
agreement in writing at any time prior to the effective time of the merger. In
the event the parties amend the merger agreement following approval of the
agreement by the Crown shareholders, Crown may need to obtain further
shareholder approval of those amendments.
WAIVER
Either party may waive any failure of the other party to comply with any
provision of the merger agreement. Any waiver must be in writing and must be
signed by the party giving the waiver.
STOCKHOLDER AND VOTING AGREEMENT
On November 20, 2003, as a condition and an inducement to Kinross'
willingness to enter into the merger agreement, several directors and officers
of Crown and certain significant shareholders of Crown entered into a
stockholder and voting agreement with Kinross under which they agreed, among
other things, to vote or cause the vote of all of the shares of Crown common
stock owned by them, as set forth in the stockholder and voting agreement, as
well as any shares of Crown common stock acquired by them (i) in favor of the
adoption and approval of the merger, and (ii) against any proposal to acquire
the stock or assets of Crown made by any person or group other than Kinross and
any other action that is intended or could reasonably be expected to impede,
interfere with, delay or materially and adversely affect the contemplated
economic benefits to Kinross of any of the transactions contemplated by the
merger agreement or any of the other transactions contemplated by the
stockholder and voting agreement. The stockholder and voting agreement expires
on the earlier of the effective time of the merger or the termination of the
merger agreement in accordance with its terms.
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Each shareholder that is a party to the stockholder and voting agreement
has appointed Kinross and its designees, individually, as the shareholder's
proxy to vote or act by written consent with respect to the shareholder's shares
of Crown common stock in the manner described above. The shareholder also
revoked all prior proxies granted with respect to the shareholders shares.
Each shareholder also agreed generally not to grant any proxies or
transfer his or its shares of Crown common stock during the term of the
stockholder and voting agreement. The Crown shareholders who entered into the
and voting agreement did not receive any additional consideration for entering
into the stockholder and voting agreement.
The following shareholders of Crown entered into the stockholder and
voting agreement: Zoloto Investors, LP, a Delaware limited partnership,
Solitario, Christopher E. Herald, Mark E. Jones, III, Brian Labadie, James R.
Maronick, and Steven A. Webster. As of June 7, 2004, 2,012,458 shares of Crown
common stock were subject to the stockholder and voting agreement, representing
approximately 9% of the outstanding shares of Crown common stock. Parties to the
stockholder and voting agreement also hold $3,000,000 of Senior Notes which can
be converted into 8,771,429 shares, options to acquire 1,917,500 shares, and
warrants to acquire up to 8,771,429 shares. If all of these notes, options, and
warrants were converted or exercised prior to the record date for the special
meeting, the parties to the stockholder and voting agreement would hold
21,472,816 shares, or 43.3% of the outstanding Crown common stock on a fully
diluted basis.
THE DISTRIBUTION AGREEMENT
On November 20, 2003, Solitario and Crown entered into a distribution
agreement with Kinross under which Solitario agreed, among other things, to file
a registration statement under the Exchange Act with the Securities and Exchange
Commission and all other necessary filings under applicable federal, state and
provincial laws of the United States and Canada to permit the distribution of
Solitario common stock by Crown to the Crown shareholders in accordance with
applicable law. Solitario further agreed to work in good faith and use its best
efforts to obtain the effectiveness of the registration statement and other
filings. Kinross and Crown agreed to cooperate in providing information required
to permit Solitario prepare the registration statement and other filings.
Solitario filed an amended registration statement on Form 10/A with the
SEC on April 22, 2004 that provides for the distribution of all of the shares of
Solitario common stock held by Crown to the Crown shareholders, other than those
shares, estimated to be approximately 1,000 shares, that could otherwise result
in Crown shareholders owning a fraction of a share of Solitario common stock.
Crown will make cash payment to its shareholders in lieu of fractional shares,
based upon the market price of Solitario common stock on the record date for the
distribution of Solitario shares. The registration statement is subject to
review and comment by the SEC prior the distribution of the Solitario common
stock.
Each of the parties agreed to bear its own expenses in performing their
obligations under the distribution agreement. Solitario agreed to indemnify
Crown and Kinross for certain untrue statements or omissions of material facts
in the registration statement, blue sky filings or other filings and for
violations of applicable securities laws. Crown and Kinross agreed to indemnify
Solitario for untrue statements in the registration statement to the extent the
statements were provided by Crown or Kinross.
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MARKET FOR SECURITIES
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The common shares of Kinross are listed and posted for trading on the
TSE and the NYSE. In addition, Kinross has issued warrants that are listed and
posted for trading on the TSX. The warrants are exercisable to acquire common
shares of Kinross. See "Description of Securities."
237
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DESCRIPTION OF SECURITIES
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KINROSS PREFERRED SHARES
A total of 384,613 shares of Kinross preferred shares are authorized and
outstanding. A summary of the terms of the Kinross preferred shares is set forth
below.
DIVIDENDS
Holders of Kinross preferred shares are entitled to receive fixed
cumulative preferential cash dividends as and when declared by the board of
directors of Kinross at an annual rate of CDN $0.80 per share payable in equal
quarterly installments on the first day of January, April, July, and October in
each year.
CONVERSION
Holders of Kinross preferred shares are entitled at any time to convert
all or any part of the Kinross preferred shares into Kinross common shares on
the basis of 2.7518 Kinross common shares for each Kinross preferred share so
converted, subject to usual anti-dilution adjustments.
REDEMPTION; PUT RIGHT
Kinross may at any time redeem all or any part of the Kinross preferred
shares at a price of CDN $10 per share, together with an amount equal to all
dividends accrued and unpaid thereon, whether or not declared, to and including
the date of redemption (collectively the "Redemption Price"). The holders of
Kinross preferred shares are entitled to require Kinross to redeem all or any
part of their Kinross preferred shares at any time at a price equal to the
Redemption Price.
OTHER PAYMENTS
So long as any Kinross preferred shares are outstanding, Kinross is not
permitted, without the approval of the holders of the Kinross preferred shares,
to declare or pay dividends on, or redeem, purchase for cancellation or
otherwise retire shares of Kinross ranking junior to the Kinross preferred
shares unless all dividends on the Kinross preferred shares have been paid and,
after giving effect to such payment, Kinross would still be in a legal position
to redeem all of the Kinross preferred shares then outstanding prior to any
payment being made to any security ranking junior to the Kinross preferred
shares.
VOTING RIGHTS
The holders of Kinross preferred shares are not entitled (except as
required by law) to receive notice of or to attend or vote at any meeting of
shareholders of Kinross.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution, or winding-up of Kinross,
holders of Kinross preferred shares will have preference over holders of Kinross
common shares and will be entitled to receive an amount equal to the Redemption
Price for each Kinross preferred share held by them.
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KINAM CONVERTIBLE PREFERRED SHARES
The convertible preferred shares of Kinam Gold Inc. comprise 1,840,000
shares of $3.75 Series B convertible preferred stock. A summary of the terms and
provisions of the Kinam preferred shares is set forth below. A subsidiary of
Kinross, Kinross Gold U.S.A., Inc., holds 1,632,717 of the issued and
outstanding Kinam preferred shares, representing approximately 88.7% of the
outstanding number of such shares.
DIVIDENDS
Annual cumulative dividends of $3.75 per Kinam preferred share are
payable quarterly on each February 15, May 15, August 15, and November 15, as
and if declared by Kinam's board of directors. No dividends were paid on the
Kinam preferred shares during 2001. Due to low gold prices and reduced cash flow
from Kinam operations, dividend payments on these shares were suspended in
August 2000 and continue to remain suspended.
CONVERSION
The Kinam preferred shares are convertible into Kinross common shares at
a conversion price of $30.92 per share (equivalent to a conversion rate of
1.6171 Kinross common shares for each preferred share), subject to adjustment in
certain events.
REDEMPTION
The Kinam preferred shares are redeemable at the option of Kinross 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 rateably annually to $50.00
per share on or after August 15, 2004, plus accrued and unpaid dividends.
VOTING RIGHTS
The holders of Kinam preferred shares are not entitled to receive notice
of or to attend or vote at any meeting of shareholders of Kinross. The holders
of Kinam preferred shares are entitled to one vote per share at meetings of the
shareholders of Kinam Gold Inc.
WARRANTS
As a result of the unit offering of Kinross, which closed on December 5,
2002, 25,000,000 common shares purchase warrants of Kinross are outstanding.
Each three common share purchase warrants are exercisable on or before
5:00 p.m. (eastern standard time) on December 5, 2007, for one Kinross common
share at an exercise price of CDN $15.00. The exercise price and the number of
Kinross common shares issuable upon exercise are both subject to adjustment as
provided for in the indenture governing the warrants. The warrants will expire
and become null and void after 5:00 p.m. (eastern standard time) on December 2,
2007.
KINROSS COMMON SHARES
Kinross has an unlimited number of common shares authorized and
345,929,995 common shares issued and outstanding as of March 31, 2004. There are
no limitations contained in the articles or bylaws of Kinross on the ability of
a person who is not a Canadian resident to hold Kinross common shares or
exercise the voting rights associated with Kinross common shares. A summary of
the rights of the Kinross common shares is set forth below.
239
DIVIDENDS
Holders of Kinross common shares are entitled to receive dividends when,
as and if declared by the board of directors of Kinross out of funds legally
available therefor, provided that if any Kinross preferred shares or any other
preferred shares are at the time outstanding, the payment of dividends on common
shares or other distributions (including repurchases of common shares by
Kinross) will be subject to the declaration and payment of all cumulative
dividends on outstanding Kinross preferred shares and any other preferred shares
which are then outstanding. The OBCA provides that a corporation may not declare
or pay a dividend if there are reasonable grounds for believing that the
corporation is, or would after the payment of the dividend, be unable to pay its
liabilities as they fall due or the realizable value of its assets would thereby
be less than the aggregate of its liabilities and stated capital of all classes
of shares of its capital.
LIQUIDATION
In the event of the dissolution, liquidation, or winding up of Kinross,
holders of Kinross common shares are entitled to share rateably in any assets
remaining after the satisfaction in full of the prior rights of creditors,
including holders of Kinross' indebtedness, and the payment of the aggregate
liquidation preference of the Kinross preferred shares, and any other preferred
shares then outstanding.
VOTING
Holders of Kinross common shares are entitled to one vote for each share
on all matters voted on by shareholders, including the election of directors.
TRANSFER AGENT
Computershare Trust Company, Inc., is the Transfer Agent for Kinross.
Computershare can be reached at 100 University Avenue, Toronto, Ontario, Canada
M5J 2Y1, telephone 1-800-663-9097.
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COMPARISON OF RIGHTS OF HOLDERS OF KINROSS COMMON SHARES AND
HOLDERS OF CROWN COMMON STOCK
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The WBCA, Crown's amended and restated articles of incorporation,
Crown's bylaws, and U.S. securities laws govern the rights of holders of Crown
common stock.
When the merger is effective, Crown shareholders who receive Kinross
common shares will become shareholders of Kinross Gold Corporation, which is
organized under the laws of the province of Ontario, Canada. The OBCA; Kinross'
amended and restated articles of incorporation, referred to as the "Kinross
Charter"; Kinross' bylaws; and the securities laws applicable in Canada and the
United States govern the rights of holders of Kinross common shares.
While the rights and privileges of shareholders of a corporation
organized under the OBCA, such as Kinross, are, in many instances, comparable to
those of shareholders of a Washington corporation such as Crown, there are
material differences. The following is a summary of material differences between
the rights of holders of Crown common stock and the holders of Kinross common
shares.
240
While we believe that the summary covers the material differences, it
may not cover all of the information important to you. Moreover, this summary is
not a complete discussion of the relative rights of the holders of each
company's shares and it qualified in its entirety by reference to the WBCA and
the OBCA, applicable provisions of U.S. and Canadian securities laws, and the
respective charters and bylaws of Crown and Kinross. You should review these
documents and the other documents referred to in this section for a more
complete understanding of the differences between being a Crown shareholder and
a Kinross shareholder. Upon request, Crown will send you copies of the charters
and bylaws of Crown and Kinross.
GENERAL PROVISIONS
AUTHORIZED CAPITAL
CROWN KINROSS
AUTHORIZED: AUTHORIZED:
100,000,000 common shares, par value U.S. $0.01 per an unlimited number of common shares without
share, of which there were 22,424,806 shares nominal or par value, of which there were 345.9
outstanding as of March 31, 2004 million shares outstanding as of March 31, 2004
40,000,000 preferred shares, par value U.S. $0.01 per 384,613 convertible preferred shares without
share, of which none were outstanding as of March 31, nominal or par value, of which there were 384,613
2004. Any increase in authorized capital stock of shares outstanding as of March 31, 2004.
Crown would require approval by Crown's shareholders.
Kinross shareholders are not required to approve
issuances of Kinross' capital stock, since Kinross has
an unlimited number of shares authorized.
NUMBER OF DIRECTORS
CROWN KINROSS
The WBCA allows a corporation to specify the number of Under the OBCA, the number of directors is set out
directors that make up a full board in its articles of in the articles of the corporation. The OBCA
incorporation or bylaws. Crown's restated articles of requires, however, that a corporation whose
incorporation provide that the corporation must have at securities are publicly traded have not fewer than
least one director. Crown's bylaws provide that the three directors, at least one-third of whom are
number of directors shall be fixed by resolution of the not officers or employees of the corporation or
board of directors. Crown currently has seven any of its affiliates. However, where the
directors. Crown has a classified board of directors. articles provide for a minimum and maximum number
of directors, the shareholders may authorize the
directors by a resolution passed by at least
two-thirds of the votes cast by shareholders who
voted in respect of the resolution, to determine
the number of directors from time to time. The
articles of Kinross provide for a minimum of three
and a maximum of 15 directors. The board of
directors of Kinross have been authorized by a
resolution to set the number of directors from
time to time and such number has currently been
set at seven. It is contemplated that Kinross
will have seven directors upon completion of the
merger. Kinross' board of directors is not
classified.
241
DIRECTOR QUALIFICATIONS
CROWN KINROSS
The bylaws of Crown require its directors to be at A majority of the directors of an OBCA corporation
least 18 years old. generally must be resident Canadians and a
majority of resident Canadian directors must be
present at a meeting in order to transact
business. Certain persons are disqualified by the
OBCA from being directors, such as bankrupts or
persons under 18 years of age or of unsound mind.
The bylaws of Kinross follow the qualifications
prescribed under the OBCA.
ELECTION OF DIRECTORS BY ZOLOTO
CROWN KINROSS
On April 15, 2002, Crown entered into a Voting Members of the board of directors of Kinross are
Agreement with Zoloto, Solitario, and Crown, which elected by the holders of Kinross common shares.
expires in June 2006. The Voting Agreement provides Kinross is not a party to, or aware of, any voting
that Zoloto and Solitario must each vote all of its agreement with respect to the election of
shares of Crown's common stock in favor of the election directors.
of three designees of Zoloto and one designee of
Solitario to Crown's board at any annual or special
meeting where directors are being elected during the
term of the agreement.
VACANCY ON THE BOARD OF DIRECTORS
CROWN KINROSS
While the WBCA provides that board vacancies, including Generally, under the OBCA, if a vacancy occurs in
those created by increasing the number of directors, the board of directors, the remaining directors,
may be filled by a vote of the shareholders or the if constituting a quorum, may appoint a qualified
board of directors, Crown's restated articles provide person to fill the vacancy for the remainder of
that vacancies may be filled only by the board of the vacating director's term. In the absence of a
directors, acting by a majority vote, even if less than quorum, the remaining directors shall call a
a quorum. meeting of shareholders to fill the vacancy. If
the shareholders have authorized the directors by
If a vacancy was held by a director elected by one or a resolution passed by at least two-thirds of the
more classes or series of shares, only those classes or votes cast by shareholders who voted in respect of
series may fill the vacancy. If a vacancy will occur the resolution, the directors may not, between
in the future due to a director's resignation at a meetings of shareholders, appoint additional
later date, it may be filled before the vacancy occurs, directors to fill vacancies created by increasing
but the new director may not be installed until the the number of directors, if the total number of
vacancy occurs. directors would thereby exceed by more than
one-third the number of directors required to have
been elected at the last annual meeting.
242
REMOVAL OF DIRECTORS
CROWN KINROSS
Crown's restated articles provide that Crown's Under the OBCA, the shareholders of a corporation
shareholders can only remove directors for cause. may, by a resolution passed by a majority of the
votes cast thereon at a meeting of shareholders
called for that purpose, remove any director from
office and may elect any qualified person to fill
the resulting vacancy for the remainder of the
removed director's term.
AMENDMENTS TO GOVERNING DOCUMENTS
CROWN KINROSS
In the case of a Washington public company, such as Under the OBCA, an amendment to a corporation's
Crown, amendments to the articles of incorporation articles of incorporation generally requires
generally must be approved by a majority of all the shareholder approval by a resolution passed by at
shares entitled to vote by each voting group that has a least two-thirds of the votes cast by shareholders
right to vote on the amendment. Crown may amend its who voted in respect of the resolution. In
bylaws by a majority vote of the board or by the addition, under the OBCA, if certain amendments to
affirmative vote of a majority of its outstanding the articles of incorporation directly or
shares. indirectly affect the rights of a particular class
or series of shares, that class or series is
The Voting Agreement requires the consent of Zoloto and entitled to vote separately on the amendment as a
Solitario for amendments to Crown's organizational class, whether or not that class or series
documents regarding the size of the board. otherwise carries the right to vote. Under the
OBCA, unless the articles of incorporation or
bylaws otherwise provide, the directors may, by
resolution, make, amend, or repeal any bylaw that
regulates the business or affairs of a
corporation. Where the directors make, amend, or
repeal a bylaw, they are required under the OBCA
to submit the bylaw, amendment, or repeal to the
shareholders at the next meeting of shareholders,
and the shareholders may confirm, reject, or
amend, the bylaw amendment or repeal.
QUORUM OF SHAREHOLDERS
CROWN KINROSS
Under the WBCA and Crown's bylaws, a majority of shares As permitted by the OBCA, the bylaws of Kinross
entitled to vote at a meeting constitutes a quorum. provide that a quorum for any meeting of
shareholders shall be at least two persons present
who are entitled to vote not less than 5% of the
total number of votes entitled to be cast at the
meeting.
243
SPECIAL SHAREHOLDER MEETINGS
CROWN KINROSS
Under Crown's restated articles, a special meeting may The OBCA provides that shareholder meetings may be
be called only by the chairman of the board of called by the board of directors, and must be
directors, the president, or two or more members of the called by the board of directors, when so
board. requested by holders of not less than 5% of the
issued shares of the corporation that carry the
right to vote at the meeting sought. A court may
also order, in its discretion, the calling of a
meeting upon the application of a director or a
shareholder entitled to vote at the meeting.
SHAREHOLDER CONSENT INSTEAD OF A MEETING
CROWN KINROSS
Crown's bylaws provide that shareholder action must be Under the OBCA, shareholder action without a
taken at a duly called meeting of the shareholders. meeting may be taken by written resolution signed
by all shareholders who would be entitled to vote
thereon at a meeting.
SIGNIFICANT TRANSACTIONS
CROWN KINROSS
To engage in significant transactions, such as share Under the OBCA, extraordinary corporate actions,
exchange, merger, or sale of substantially all of a such as an amalgamation with another corporation
corporation's assets, the WBCA generally requires the (other than an amalgamation between a parent
board to recommend the actions to the shareholders for corporation and one or more of its wholly-owned
approval. Two-thirds of the shares of each voting subsidiaries or between two or more of such
group entitled to vote on the action must approve the subsidiaries), a continuance under the laws of
action, unless the articles specify a lower threshold another jurisdiction, a sale, lease or exchange of
(but not less than a majority). Crown's restated all or substantially all of the property of the
articles do not lower this threshold. corporation other than in the ordinary course of
business, and other extraordinary corporate
actions, such as the winding-up or dissolution of
the corporation, are required to be approved by a
resolution passed by at least two-thirds of the
votes cast by shareholders who voted in respect of
the resolution. A resolution to approve an
extraordinary corporate action is also required in
some cases to be approved separately by the
holders of a class or series of shares, including
a class or series that does not otherwise carry
the right to vote (generally if such class or
series is affected differently from other shares
by such action). A corporation may also apply to
a court for an order approving an arrangement,
which can be any form of corporate reorganization,
including one or more of amendments to the
articles of incorporation, an exchange of the
corporation's securities for securities, cash or
property of another corporation, an amalgamation,
a transfer of all or substantially all the
property of the corporation to another corporation
in exchange for securities,
244
money or other property of such other corporation,
a liquidation or a dissolution. The court may make
such order as it considers appropriate with respect
to such proposed arrangement.
SHAREHOLDER PROPOSALS AND ADVANCE NOTICE REQUIREMENTS
CROWN KINROSS
Crown's bylaws require shareholders to submit notice of Under the OBCA, a shareholder entitled to vote at
their intent to bring business before a meeting not a meeting of shareholders may submit to the
less than 60 days before the scheduled annual meeting corporation a notice of a proposal consisting of
and to provide certain information in the notice. matters that the shareholder proposes to raise at
the meeting. Upon receipt of a notice of such a
Generally, under U.S. securities laws, a shareholder proposal, a corporation that solicits proxies
may submit a proposal to be included in a corporation's shall set out the proposal in the management proxy
proxy statement if the shareholder: circular and, if requested by the shareholder,
include in the management proxy circular a
o owns at least 1% or $2,000 market value of the statement by the shareholder of not more than 200
securities entitled to be voted on the proposal; words in support of the proposal and the name and
address of the shareholder. A corporation may,
o has owned the securities for at least one year within ten days after receiving a shareholder
prior to the date of the proposal; and proposal, notify the shareholder of its intention
to omit the proposal from the management proxy
o continues to own the securities through the circular if:
date of the meeting.
o the proposal is not submitted at least 60
Under the U.S. securities laws, Crown may exclude a days before the anniversary date of the
shareholder proposal from its proxy statement if: previous annual meeting or 60 days before the
date of the special meeting at which the
o it is not a proper subject for shareholder matter is proposed to be raised, as
action under Washington law; applicable;
o it would, if implemented, cause a violation of o it clearly appears that the proposal is
law; submitted by the shareholder primarily for
the purpose of enforcing a personal claim or
o it is materially false or misleading; redressing a personal grievance against the
corporation or any of its directors, officers
o it relates to a personal grievance or is or security holders, or for a purpose that is
designed to further a personal interest not shared not related in any significant way to the
by other shareholders; business or affairs of the corporation;
o it relates to operations of the company that o the corporation, in the previous two
are immaterial; years, included a proposal in a management
proxy circular at the request of the
o Crown lacks the power or authority to shareholder and the shareholder failed to
implement it; present the proposal at the meeting; or
o it deals with a matter relating to Crown's o substantially the same proposal was
ordinary business operations; submitted to shareholders within the past two
years and the proposal was defeated.
o it relates to an election for membership to
Crown's board of directors;
o it conflicts with a proposal submitted by
Crown at the same meeting;
245
o it has already been substantially implemented;
o it substantially duplicates a proposal of
another proponent that Crown is including in the
proxy statement;
o it deals with substantially the same subject
matter as another proposal that was included in
Crown's proxy statement for a previous meeting and
which did not receive the prescribed level of
support; or
o it relates to specific amounts of cash or
shares dividends.
DISSENTERS' RIGHTS
CROWN KINROSS
Under the WBCA, a shareholder is entitled to dissent The OBCA provides that shareholders entitled to
from and, upon perfection of the shareholder's vote on certain matters are entitled to exercise
appraisal right, to obtain the fair value of his or her dissenters' rights and to be paid the fair value
shares in the event of specified corporate actions, of their shares. Such matters include the
including specified mergers, share exchanges, sales of following:
substantially all of the corporation's assets, and
certain amendments to the corporation's articles of o any amalgamation (other than with one or
incorporation if the amendment effects a redemption or more wholly-owned subsidiaries, or between
cancellation of all of the shareholder's shares in one or more such subsidiaries);
exchange for cash or other consideration other than
shares of the corporation. For a description of the o an amendment to the articles to add,
dissenters' rights of Crown common shareholders, see remove or change restrictions on the issue,
"Dissenters' Rights." transfer or ownership of shares;
o an amendment to the articles to add,
remove or change any restriction upon the
business or businesses that the corporation
may carry on or upon the powers the
corporation may exercise;
o a continuance under the laws of another
jurisdiction;
o a sale, lease or exchange of all or
substantially all of the property of the
corporation other than in the ordinary course
of business;
o an arrangement proposed by the corporation
if the applicable court order permits a
shareholder to dissent in connection with
that arrangement; or
amendments to the articles of the corporation
which require a separate vote by class or series.
246
SHAREHOLDER DERIVATIVE ACTIONS
CROWN KINROSS
Derivative actions may be brought in Washington by a Under the OBCA, a complainant (as described below
shareholder on behalf of, and for the benefit of, the for the purposes of the oppression remedy) may
corporation. The WBCA provides that a shareholder must apply to the court for leave to bring an action in
have been a shareholder of the corporation when the the name and on behalf of a corporation or any
transaction complained of occurred unless the person subsidiary, or to intervene in an existing action
became a shareholder through transfer by operation of to which any such corporation or subsidiary is a
law from one who was a shareholder at that time. The party, for the purpose of prosecuting, defending
complaint must be verified and allege with or discontinuing the action on behalf of such
particularity the demand made, if any, to obtain action corporation or subsidiary. Under the OBCA, no
by the board of directors and either that the demand action may be brought and no intervention in an
was refused or ignored or why a demand was not made. action may be made unless the complainant has
Whether or not a demand for action was made, if the given 14 days' notice to the directors of the
corporation commences an investigation of the charges corporation or its subsidiary of the complainant's
made in the demand or complaint, the court may stay any intention to apply to the court and the court is
proceeding until the investigation is completed. Once satisfied that:
such a proceeding is commenced, it may not be
discontinued or settled without the court's approval. o the directors of the corporation or its
If the court determines that a proposed discontinuance subsidiary will not bring, diligently
or settlement will substantially affect the interest of prosecute or defend or discontinue the action;
the corporation's shareholders or a class of
stockholders, the court shall direct that notice be o the complainant is acting in good faith;
given to the shareholders affected. On termination of and
the proceeding the court may require the plaintiff to
pay any defendant's reasonable expenses, including o it appears to be in the interests of the
counsel fees, incurred in defending the proceeding if corporation or its subsidiary that the action
it finds that the proceeding was commenced without be brought, prosecuted, defended or
reasonable cause. discontinued.
Under the OBCA, the court in connection with a
derivative action may make any order it thinks fit.
OPPRESSION REMEDY
CROWN KINROSS
WBCA does not provide for a statutory oppression remedy. The OBCA allows a court to rectify unfairness to,
or oppression of, shareholders, if the court is
satisfied that:
o any act or omission of the corporation or
an affiliate effects or threatens to effect
such a result;
o the business or affairs of the
corporation or an affiliate are, have been or
are threatened to be carried on or conducted
in such a manner; or
o the powers of the directors of the
corporation or an affiliate are, have been or
are threatened to be exercised in such a
manner.
A complainant entitled to apply for an oppression
remedy can be:
o a present or former registered holder or
beneficial owner of securities of a
corporation or any of its affiliates; or
247
o any other person who, in the discretion
of the court, is a proper person to make such
an application.
PAYMENT OF DIVIDENDS
CROWN KINROSS
Under the WBCA, the corporation may make a Under the OBCA, a corporation may pay a dividend
distribution, in cash or in property, to its by issuing fully paid shares of the corporation or
shareholders upon authorization by its board of options or rights to acquire such shares. A
directors unless, after giving effect to such corporation may also pay a dividend in money or
distribution the corporation would be unable to pay its property unless there are reasonable grounds for
debts as they become due in the usual course of believing that (1) the corporation is, or would
business; or the corporation's total assets would be after the payment be, unable to pay its
less than the sum of its total liabilities, plus, liabilities as they become due; or (2) the
unless the articles of incorporation permit otherwise, realizable value of the corporation's assets would
the amount that the corporation would need, if it were thereby be less than the aggregate of its
to be dissolved at the time of the distribution, to liabilities and stated capital of all classes.
satisfy the preferential rights of shareholders whose
preferential rights are superior to those receiving the
distribution.
REPURCHASE OF SHARES
CROWN KINROSS
Under the WBCA, the corporation may acquire its own Under the OBCA, a repurchase or redemption by the
shares and shares so acquired constitute authorized but corporation of its shares, or other reduction of
unissued shares. If the articles of incorporation capital, is generally subject to solvency tests
prohibit the reissue of acquired shares, the number of similar to those applicable to the payment of
authorized shares is reduced by the number of shares dividends, as set out above for the purpose of the
acquired, effective upon amendment of the articles of payment of dividends.
incorporation. However, any repurchase of shares is
generally subject to solvency tests similar to those
applicable to the payment of dividends, as set out
above for the purpose of the payment of dividends.
248
FIDUCIARY DUTIES OF DIRECTORS
CROWN KINROSS
Under the WBCA, directors owe a duty of care and a duty Pursuant to the OBCA, the duty of loyalty requires
of loyalty to the corporation and its shareholders. directors to act honestly and in good faith with a
The duty of care requires that the directors act with view to the best interests of the corporation, and
the care an ordinarily prudent person in a like the duty of care requires that the directors
position would exercise under similar circumstances. exercise the care, diligence and skill that a
They must act in an informed and deliberative manner reasonably prudent person would exercise in
and inform themselves, prior to making a business comparable circumstances.
decision, of all material information reasonably
available to them. The duty of loyalty may be
summarized as the duty to act in good faith, not out of
self-interest, and in a manner that the directors
reasonably believe to be in the best interests of the
corporation.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
CROWN KINROSS
The WBCA generally permits indemnification of a person Under the OBCA, a corporation may indemnify a
who acted in good faith and in a manner the person director or officer, a former director or officer
reasonably believed to be in, or not opposed to, the or a person who acts or acted at the corporation's
best interests of the corporation and, with respect to request as a director or officer of another
any criminal action or proceeding, had no reasonable corporation of which the corporation is or was a
cause to believe that the conduct was unlawful. shareholder or creditor, and his or her heirs and
Indemnification is permissive under Washington law, legal representatives, against all costs, charges
except that, unless limited by the articles of and expenses, including an amount paid to settle
corporation, a corporation must indemnify a present or an action or satisfy a judgment, reasonably
former officer or director who is successful on the incurred by him or her in respect of any civil,
merits or otherwise in the defense of certain specified criminal or administrative action or proceeding to
actions, suits or proceedings for expenses, including which he or she is made a party by reason of being
attorney's fees, actually and reasonably incurred in or having been a director or officer of the
connection therewith. Under the WBCA, if authorized by corporation or such other corporation, if: (1) he
the articles of incorporation, a bylaw adopted or or she acted honestly and in good faith with a
ratified by shareholders or a resolution adopted or view to the best interests of the corporation; and
ratified, before or after the event, by the (2) in the case of a criminal or administrative
shareholders, a corporation has the power to indemnify action or proceeding that is enforced by a
a director, officer or employee made a party to a monetary penalty, he or she had reasonable grounds
proceeding, or advance or reimburse expenses incurred to believe that his or her conduct was lawful.
in a proceeding, except for: Any such person is entitled to such indemnity from
the corporation if he or she was substantially
o acts or omissions of a director, officer or successful on the merits in his or her defense of
employee finally found to have engaged in the action or proceeding and fulfilled the
intentional misconduct or a knowing violation of conditions set out in (1) and (2) above. A
the law; corporation may, with the approval of a court,
also indemnify any such person in respect of an
o conduct of a director, officer or employee in action by or on behalf of the corporation or such
connection with a transaction finally found to be other corporation to procure a judgment in its
an unlawful distribution; or favor, to which such person is made a party by
reason of being or having been a director or
o any transaction if such director, officer or officer of the corporation or such other
employee is finally found to have personally corporation, if he or she fulfills the conditions
received a benefit in money, property or services set out in (1) and (2) above. Kinross' bylaws
to which he or she was not legally entitled. require Kinross to indemnify the persons permitted
to be indemnified by the provisions of the OBCA
summarized above
249
If the corporation indemnifies or advances expenses to and every other person who
a director in connection with a proceeding by or in the properly incurred any liability on behalf of
right of the corporation, the corporation must report Kinross or acted at Kinross' request.
the indemnification or advance in the form of a notice
to the shareholders delivered with or before the notice
of the next shareholders' meeting.
Crown's restated articles authorize the board of
directors to indemnify its directors to the fullest
extent permitted by the WBCA and to determine the terms
of such indemnification. Crown's bylaws provide
mandatory indemnification for officers and directors
who are made a party to or are involved in any
threatened, pending, or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is
or was a director or officer. Crown's bylaws provide
that the right of indemnification includes the right to
have Crown advance expenses for such indemnifiable
actions unless the board of directors adopts a
resolution expressly disapproving such advancement of
expenses. However, such advances are contingent upon
the director or officer delivering an undertaking to
the corporation to repay all amounts so advanced if it
is ultimately determined that such director or officer
is not entitled to indemnification under the bylaws or
otherwise.
DIRECTOR LIABILITY
CROWN KINROSS
The WBCA allows a corporation's articles of The OBCA provides that no provision in a contract,
incorporation to limit directors' personal liability the articles of incorporation, the bylaws or a
except for: resolution relieves a director or officer from the
duty to act in accordance with the OBCA or
o acts or omissions involving intentional relieves him or her from liability for a breach
misconduct or knowing violations of the law; thereof. The bylaws of Kinross provide
protections from liability to directors, officers
o a director's assent to or vote in favor of an and, to the extent applicable, employees of
unlawful distribution; or Kinross, as long as he or she acted honestly and
in good faith with a view to the best interests of
o any transaction from which the director will Kinross.
personally receive a benefit in money, property or
services to which he or she is not legally
entitled.
Crown's restated articles limit the liability of its
directors to the extent allowed by Washington law.
250
ACCESS TO CORPORATE RECORDS
CROWN KINROSS
Under the WBCA, a shareholder of a Washington Under the OBCA, shareholders, creditors, their
corporation may inspect certain corporate records upon agents and legal representatives may examine the
five business days notice to the corporation, including articles of incorporation, bylaws, minutes of
the articles of incorporation and bylaws currently in meetings and resolutions of shareholders, register
effect, the minutes and records of all shareholders' of directors and securities register of the
meetings or actions taken without a meeting for the corporation during usual business hours and take
past three years and the balance sheets and income extracts therefrom, free of charge. Shareholders
statements for the past three years. A shareholder may and others have the right to obtain a shareholder
also inspect upon five business days notice other list, upon payment of a reasonable fee, as long as
corporate records if: such list is used only in connection with an
effort to influence voting by shareholders of the
o the shareholder makes a good faith demand to corporation, an offer to acquire shares of the
inspect the records for a proper purpose; corporation or any other matter relating to the
affairs of the corporation.
o the shareholder describes with reasonable
particularity the shareholder's purpose and the
records the shareholder desires to inspect; and
o the records are directly connected with the
shareholder's purpose.
Such records include the following: excerpts from
minutes of any meeting of the board of directors,
records of any action of a committee of the board of
directors, records of any action taken by the board of
directors without a meeting, accounting records and the
record of shareholders.
TRANSACTIONS WITH INTERESTED DIRECTORS
CROWN KINROSS
The WBCA permits transactions in which one or more The OBCA requires that a director or officer of a
directors have a conflicting interest if: corporation who (1) is a party to a material
contract or transaction or proposed material
o a majority, although no fewer than two, of contract or transaction with the corporation, or
qualified directors on the board, or on the (2) is a director or an officer of, or has a
committee considering the transaction, approves material interest in, any person who is a party to
the transaction; a material contract or transaction or proposed
material contract or transaction with the
o an affirmative vote of a majority of all corporation shall disclose in writing to the
qualified shares approves the transaction; or corporation or request to have entered in the
minutes of meetings of directors the nature and
o at the time of commitment, the transaction was extent of his or her interest. An interested
fair to the corporation. director is prohibited from voting on a resolution
to approve the contract or transaction except in
Such vote must occur after the directors have received certain circumstances, such as a contract or
disclosure of the conflicting interest, with certain transaction relating primarily to his or her
limited exceptions, or the vote will be invalid. remuneration, a contract or transaction for
Further, a committee vote is valid only if all members indemnification or liability insurance of the
of the committee are qualified directors and either: director, or a contract or transaction with an
affiliate of the corporation. If a director or
o consist of all the qualified directors on the officer has disclosed his or her interest in
board; or accordance with the OBCA and the contract or
transaction was reasonable and fair to the
corporation at the time it was approved, the
251
o were appointed by affirmative vote of a director or officer is not accountable to the
majority of the board's qualified directors. corporation or its shareholders for any profit or
gain realized from the contract or transaction and
A director is a "qualified director" if he or she has the contract or transaction is neither void nor
neither: voidable by reason only of the interest of the
director or officer or that the director is
o a conflicting interest regarding the present at or is counted to determine the presence
transaction; nor of a quorum at the meeting of directors that
authorized the contract or transaction. The OBCA
o any familial, financial, professional or further provides that even if a director or
employment relationship with a second director who officer does not disclose his or her interest in
does have a conflicting interest, if the accordance with the OBCA, or (in the case of a
relationship would reasonably be expected to exert director) votes in respect of a resolution on a
influence on the first director's judgment in contract or transaction in which he or she is
voting on the transaction. interested contrary to the OBCA, if the director
or officer acted honestly and in good faith and
Qualified shares are defined generally as shares other the contract or transaction was reasonable and
than those beneficially owned, or the voting of which fair to the corporation at the time it was
is controlled, by a director who has a conflicting approved, the director or officer is not
interest regarding the transaction. accountable to the corporation or to its
shareholders for any profit or gain realized from
the contract or transaction by reason only of his
or her holding the office of director or officer
and the contract or transaction is not by reason
only of the director's or officer's interest
therein void or voidable, if the contract or
transaction has been confirmed or approved by the
shareholders by a resolution passed by at least
two-thirds of the votes cast by shareholders who
voted in respect of the resolution, on the basis
of disclosure in reasonable detail of the nature
and extent of the director's or officer's interest
in the notice of meeting or management proxy
circular.
ANTI-TAKEOVER PROVISIONS AND INTERESTED SHAREHOLDER TRANSACTIONS
CROWN KINROSS
The WBCA prohibits a target corporation, with certain The OBCA does not contain a provision comparable
exceptions, from engaging in certain significant to the WBCA with respect to business
business transactions with a person or group of persons combinations. However, Canadian securities
beneficially owning 10% or more of the target regulators have adopted requirements in connection
corporation's voting securities for a period of five with related party transactions, such as Rule
years after the acquisition unless a majority of the 61-501 of the Ontario Securities Commission. A
members of the target corporation's board of directors related party transaction generally includes any
approve the transaction or share acquisition prior to transaction by which an issuer, directly or
the acquisition date. Significant business indirectly, acquires an asset, or subscribes for a
transactions include, among others: security, from a related party, or transfers an
asset or issues a security to a related party,
o mergers or consolidations with, dispositions assumes or forgives a liability of a related
of assets to, or issuances or redemptions of party, by any means in any one or any combination
shares to or from, the acquiring person; of transactions. "Related party" is defined to
include, in relation to the issuer or a related
o termination of 5% or more of the target party involved in the transaction, directors,
corporation's employees employed in Washington senior officers and holders of securities
State, occurring as a result of the acquiring sufficient to affect materially the control of the
person's acquisition of 10% or more of the shares; issuer or of such other party, or persons
or beneficially owning or exercising control or
direction over more than 10% of the voting
securities of the issuer or of such other party.
252
o allowing the acquiring person to receive any Rule 61-501 requires more detailed disclosure in
disproportionate benefit as a shareholder. the proxy material sent to security holders in
connection with a related party transaction and,
Target corporations include all domestic corporations subject to certain exemptions, the preparation by
with principal executive offices in Washington and an independent value of a formal valuation of the
either a majority or more than 1,000 of their employees subject matter of the related party transaction
reside in Washington. and any non-cash consideration offered therefore
and the inclusion of a summary of the valuation in
Crown's bylaws provide that Crown's board may consider the proxy material. It also requires, subject to
the interests of other constituencies in evaluating an certain exemptions, that the shareholders of the
unsolicited bid. This allows a board to defend against issuer, other than related parties, separately
an unsolicited bid. The WBCA also provides that the approve the transaction, by either a simple
board of directors, when evaluating an offer to effect majority or two-thirds of the votes cast,
a merger, may consider the extent to which such offer depending on the circumstances.
furthers the purposes of Crown and the social, legal,
economic or other effects of such offer upon employees, These requirements of Canadian securities
customers, suppliers and other constituencies of Crown, regulators provide, in addition to specified
the community and all other relevant factors. exemptions in certain circumstances, for
discretion to be exercised by such regulators to
Any shareholder attempting to gain control of Crown's exempt parties from some or all of such
board would, therefore, be prevented from doing so at requirements, with or without conditions, where
one annual meeting, unless such shareholder had the such regulators consider it to be consistent with
ability to remove the classification requirement set the public interest to do so. In general, these
forth in Crown's restated articles. requirements of Canadian securities laws are
administered and enforced by securities regulators
rather than by the courts and the basis upon which
such regulators take jurisdiction over a matter
and the remedies that may be available differ
significantly from those applicable to
requirements of corporate law contained in the
OBCA.
253
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TAX CONSEQUENCES
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UNITED STATES FEDERAL TAX CONSEQUENCES
GENERAL
The obligations of Crown to consummate the merger are conditioned upon
the receipt by Crown of an opinion (the "Closing U.S. Tax Opinion"), dated the
Closing Date, from Parr Waddoups Brown Gee & Loveless, A Professional
Corporation, special counsel to Kinross, to the effect that: (i) for U.S.
federal income tax purposes, the merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code; (ii) Kinross, Crown Merger,
and Crown will be "parties" to that reorganization within the meaning of Code
Section 368(b); and (iii) the Crown shareholders and warrant holders will not
recognize any taxable gain or loss on their exchange of Crown common stock or
warrants for Kinross common shares in the merger. The issuance of the tax
opinion of Parr Waddoups Brown Gee & Loveless, A Professional Corporation, to
Kinross and Crown as of the Closing Date will depend on the facts as they exist
at the time of the merger and the tax opinion will be based upon, among other
things, certain factual assumptions and representations by Kinross, Crown
Merger, and Crown (the "Factual Representations") and customary for similar
transactions. If any of those Factual Representations is or becomes inaccurate,
the tax opinion may not be an appropriate basis for your tax position or the
preparation of your tax return. The Closing U.S. Tax opinion will not be binding
on the Internal Revenue Service or the courts.
Crown may, in its discretion, waive the receipt of the Closing U.S. Tax
Opinion as a condition to consummate the merger. If the Closing U.S. Tax Opinion
is materially different from the tax opinion of Parr Waddoups Brown Gee &
Loveless attached hereto as Exhibit 8.1, or if the condition requiring receipt
of the Closing U.S. Tax Opinion is waived and the merger would result in
materially different tax consequences to the holders of Crown common stock and
Crown warrants, Kinross and Crown will recirculate a revised Proxy
Statement/Prospectus disclosing such material differences to the Crown
shareholders and resolicit their vote to approve the merger.
NEITHER KINROSS NOR CROWN HAS REQUESTED A RULING FROM THE IRS WITH
RESPECT TO ANY OF THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER OR OF
OWNING AND DISPOSING OF KINROSS COMMON SHARES AND, AS A RESULT, THERE CAN BE NO
ASSURANCE THAT THE IRS WILL NOT DISAGREE WITH OR CHALLENGE ANY OF THE
CONCLUSIONS SET FORTH HEREIN OR IN THE CLOSING U.S. TAX OPINION.
As used herein, the term "U.S. Holder" means a beneficial owner of Crown
common stock, Crown warrants, or Kinross common shares, as applicable, that is,
for U.S. federal income tax purposes: (i) an individual who is a U.S. citizen or
resident, (ii) a corporation or other entity created or organized in or under
the laws of the U.S. or any state or political subdivision thereof, (iii) an
estate whose income is subject to U.S. federal income taxation regardless of its
source or (iv) a trust if (A) a court within the U.S. is able to exercise
primary supervision over the administration of the trust and if one or more U.S.
persons have the authority to control all substantial decisions of the trust, or
(B) the trust was in existence on August 20, 1996, was treated as a U.S. person
under the tax law in effect immediately prior to that date, and has validly
elected to continue to be treated as a U.S. person after that date. The term
"Non-U.S. Holder" means a beneficial owner of Crown common stock, Crown
warrants, or Kinross common shares, as applicable, that is not, for U.S. federal
income tax purposes, a U.S. Holder.
If a partnership (or other entity treated as a partnership for U.S. tax
purposes) holds the shares or warrants in question, the tax treatment of a
partner generally will depend upon the status of the partner and the activities
of the partnership.
254
Each U.S. Holder and Non-U.S. Holder is urged to consult his own tax
advisor concerning the specific U.S. and Canadian federal, state, and local tax
consequences of the merger and the ownership and disposition of Kinross common
shares received in the merger in light of their particular situations as well as
any consequences arising under the laws of any other taxing jurisdiction.
UNITED STATES FEDERAL TAX CONSEQUENCES OF THE MERGER
The following represents the opinion of Parr Waddoups Brown Gee &
Loveless, provided to Kinross and Crown as to the anticipated material United
States ("U.S.") federal income tax consequences to Crown shareholders and
warrant holders of the merger, and of owning and disposing of Kinross common
shares. That opinion is based upon the Code, Treasury Regulations promulgated
thereunder, the Canada-United States Income Tax Convention (1980) (the
"Treaty"), administrative rulings, and judicial decisions currently in effect,
all of which are subject to change, possibly on a retroactive basis, and on
certain factual representations made by Kinross, Crown Merger, and Crown. Any
change in currently applicable law, which may or may not be retroactive, or
failure of any of the Factual Representations made by Kinross, Crown Merger, or
Crown to be true, correct, and complete in all material respects could affect
the continuing validity of the opinion, as to the material U.S. federal income
tax consequences of the merger. Each Crown shareholder and warrant holder should
be aware that neither the Internal Revenue Service (the "IRS") nor any court is
bound by the opinion of Parr Waddoups Brown Gee & Loveless, A Professional
Corporation, or the interpretations of the Code and the regulations set forth
below.
The opinion of Parr Waddoups Brown Gee & Loveless assumes that Crown
shareholders and warrant holders hold their Crown common stock and Crown
warrants, as applicable, as capital assets within the meaning of Section 1221 of
the Code, and will hold any Kinross common shares as capital assets. Further,
the opinion does not address all aspects of U.S. federal income taxation that
may be relevant to a particular shareholder or warrant holder in light of his or
her personal investment circumstances or to persons subject to special treatment
under U.S. federal income tax laws such as insurance companies, tax-exempt
organizations, dealers in securities or foreign currency, banks, trusts, persons
that hold their Crown common stock as part of a straddle, a hedge against
currency risk, a constructive sale or conversion transaction, persons that have
a functional currency other than the U.S. dollar, investors in pass-through
entities, shareholders who acquired their Crown common stock through the
exercise of options or otherwise as compensation or through a tax-qualified
retirement plan, holders of options granted under any Crown benefit plan or
persons that, as a result of the merger, will own, directly or indirectly, at
least 10% of the total combined voting power of Kinross. Furthermore, this
discussion does not consider the potential effects of any state, local or
foreign tax laws.
Subject to the foregoing and assuming the merger is consummated in
accordance with the terms of the merger agreement and as described therein, and
that the Factual Representations made by Kinross, Crown Merger, and Crown are
accurate in all respects, Parr Waddoups Brown Gee & Loveless, A Professional
Corporation, is of the opinion that for U.S. federal income tax purposes:
(a) the merger will constitute a "reorganization" within the meaning
of Section 368(a) of the Code, and Kinross, Crown Merger, and Crown will each be
a party to that reorganization within the meaning of Section 368(b);
(b) no gain or loss will be recognized by Kinross or Crown as a
result of the Merger (other than gain or loss recognized by Crown on the
distribution of shares of Solitario common stock in connection with the merger);
(c) no gain or loss will be recognized by the holder of Crown common
stock or warrants, as applicable, on the conversion of such holder's Crown
common stock or warrant, as applicable, into Kinross common shares (except with
respect to cash, if any, received in lieu of fractional shares of Kinross common
shares) unless such holder is a U.S. Holder that owns, directly or indirectly,
5% or more of the Kinross common shares measured by either voting rights or
value, immediately after the merger and fails to enter into gain recognition
agreements with the IRS as required under Section 367 of the Code and Treasury
Regulations promulgated thereunder, in which case gain (but not loss) would be
recognized;
255
(d) the aggregate tax basis of the Kinross common shares received in
the merger (including any fractional interest) by a holder of Crown common stock
or warrants will be the same as the aggregate tax basis of such holder's Crown
common stock or warrants, as applicable, exchanged therefore;
(e) the holding period of Kinross common shares received in the
merger by a holder of Crown common stock will include the holding period of such
holder's Crown common stock provided such common stock was held as capital
assets by the holder at the effective time of the merger; and
(f) a holder of Crown common stock or warrants, as applicable, who
receives cash in lieu of a fractional share of Kinross common shares will
recognize gain or loss equal to the difference, if any, between such holder's
basis in the fractional share (determined under clause (d) above) and the amount
of cash received.
If the merger does not qualify as a reorganization within the meaning of
Section 368(a) of the Code, U.S. Holders of Crown common stock or warrants will
recognize gain or loss equal to the difference between such holder's basis in
the shares or warrants and the fair market value of the Kinross common shares
and any cash consideration (including cash in lieu of fractional Kinross common
shares) received. Furthermore, if the failure to qualify the merger under
Section 368(a) of the Code arose solely from the failure to meet the
requirements of Section 367 of the Code, U.S. Holders of Crown common stock or
warrants would recognize gain, but not loss, on the merger. The U.S. federal tax
consequences described in this paragraph could occur notwithstanding special
counsel's opinion to the contrary.
WITHHOLDING WITH RESPECT TO CASH PAID IN LIEU OF FRACTIONAL KINROSS SHARES
Certain Crown shareholders and warrant holders may be subject to U.S.
withholding on cash payments received in lieu of fractional Kinross common
shares. Withholding will not apply, however, to a Crown shareholder or warrant
holder who (i) furnishes a correct taxpayer identification number and certifies
that he or she is not subject to backup withholding on the substitute Form W-9
(or successor form) included in the letter of transmittal to be delivered to
Crown shareholders and warrant holders following the consummation of the merger,
(ii) provides a certification of foreign status on Form W-8 (or successor form)
or (iii) is otherwise exempt from withholding.
UNITED STATES FEDERAL TAX CONSEQUENCES TO U.S. HOLDERS OWNING AND DISPOSING OF
KINROSS COMMON SHARES
The following discussion summarizes the material U.S. federal income tax
consequences to a U.S. Holder of owning and disposing of Kinross common shares.
This discussion assumes that each such U.S. Holder will be a "resident" of the
U.S. within the meaning of the Treaty who is eligible for benefits under the
Treaty and is limited as described under "United States Federal Tax
Consequences--General" above. Each U.S. Holder is urged to consult his own tax
advisor concerning whether the U.S. Holder is eligible for benefits under the
Treaty and, if not so eligible, the material U.S. federal income tax
consequences arising from ownership of Kinross common shares. The discussion
that follows is not intended to apply to or be used by Non-U.S. Holders. All
persons, whether U.S. Holders of Non-U.S. Holders, are advised to consult with
their own tax advisors concerning the specific Canadian and U.S. federal, state,
and local tax consequences of the ownership and disposition of Kinross common
shares in light of their particular situations as well as any consequences
arising under the laws of any other taxing jurisdiction.
TAXATION OF DIVIDENDS ON KINROSS COMMON SHARES
Subject to the discussion under "Passive Foreign Investment Company
Considerations" below, the gross amount of any distribution of cash (including
any amounts withheld in respect of Canadian withholding tax, as discussed below)
with respect to Kinross common shares held by a U.S. Holder will be includable
in income by that U.S. Holder as a taxable dividend to the extent of Kinross'
current or accumulated earnings and profits, computed in accordance with U.S.
federal income tax principles. A dividend distribution will be so included in
gross income when received by (or otherwise made available to) the U.S. Holder,
and will be characterized as ordinary income for U.S. federal income tax
purposes. The dividend income will not be eligible for the dividends received
deduction allowed to corporations.
256
Under recent legislation generally effective for tax years beginning
after December 31, 2002, through tax years beginning on or before December 31,
2008, dividend income received by an individual from a corporation organized in
the U.S. or from a "qualified foreign corporation" is eligible for taxation at
the reduced rates imposed on long-term capital gains recognized by individuals.
A corporation organized outside the U.S. is a "qualified foreign corporation" if
it is not a passive foreign investment company ("PFIC," as described below), and
if either (i) the foreign corporation is eligible for the benefits of a
comprehensive income tax treaty with the U.S. determined to be satisfactory to
the U.S. Department of Treasury (which includes the Treaty as currently in
effect), or (ii) the foreign corporation's stock with respect to which a
dividend is paid is readily tradable on an established securities market within
the U.S. Because of uncertainty regarding Kinross' status as a PFIC (see below),
no assurance can be given that Kinross is or will become a "qualified foreign
corporation."
Distributions in excess of Kinross' current accumulated earnings and
profits, as determined under U.S. federal tax law, will be treated as (i) a
tax-free return of capital to the extent of a U.S. Holder's adjusted tax basis
in its Kinross common shares (reducing such adjusted basis, but not below zero),
and (ii) thereafter as gain from a sale or exchange of such Kinross common
shares. If the distribution is paid in Canadian currency, the amount includable
in the U.S. Holder's income will be the U.S. dollar value of the Canadian
currency, based on the prevailing U.S. dollar/Canadian dollar exchange rate on
the date of receipt, regardless of whether the payment is actually converted
into U.S. dollars. Any gain or loss resulting from foreign currency exchange
rate fluctuations during the period from the date the dividend is includable in
income to the date the foreign currency is converted into U.S. dollars will
generally be treated as ordinary income or loss. If Canadian withholding taxes
are imposed with respect to such dividend, a U.S. Holder will be treated as
having actually received the amount of such taxes and as having paid such amount
to the Canadian taxing authorities. As a result, the amount of dividend income
included in a U.S. Holder's gross income will be greater than the amount of cash
actually received with respect to such dividend income.
A dividend distribution generally will be treated as foreign source
income and generally will be classified as "passive income" or "financial
services income," depending on the U.S. Holder's states, for U.S. foreign tax
credit purposes. A U.S. Holder may be able, subject to certain generally
applicable limitations, to claim a United States foreign tax credit or a
deduction for any Canadian withholding taxes imposed on dividend payments. The
rules relating to the determination of the U.S. foreign tax credit are complex,
and the calculation of U.S. foreign tax credits and, in the case of a U.S.
Holder that elects to deduct foreign taxes in lieu of claiming a U.S. foreign
tax credit, the availability of deductions, involve the application of rules
that depend on a U.S. Holder's particular circumstances. U.S. Holders are urged
to consult their own tax advisor regarding the application of the U.S. foreign
tax credit rules to dividend income on the Kinross common shares.
TAXATION ON SALE OR EXCHANGE OF KINROSS COMMON SHARES
Upon the sale, redemption or other disposition of Kinross common shares,
a U.S. Holder generally will recognize gain or loss equal to the difference
between the amount realized and its adjusted tax basis in the Kinross common
shares. Generally the U.S. dollar value of the amount realized by a U.S. Holder
that (i) receives foreign currency on the sale or other disposition of Kinross
common shares and (ii) is a cash basis taxpayer or an accrual basis taxpayer
that so elects, will be determined by translating the foreign currency received
at the spot rate of exchange on the settlement date of the sale or other
disposition (or in the case of a non-electing accrual basis U.S. Holder, the
spot rate of the foreign currency on the date of the sale or other disposition).
Except as provided under "Passive Foreign Investment Company
Considerations" below, gain or loss recognized on the sale or other disposition
of Kinross common shares will be a capital gain or loss. In the case of
non-corporate U.S. Holders, including individuals, net capital gains derived
with respect to capital assets held for more than one year are eligible for
reduced rates of taxation. Certain limitations exist on the deductibility of
capital losses by both corporations and individual taxpayers. Any tax imposed by
Canada directly on the gain from such a sale should be eligible for the United
States foreign tax credit; however, because the gain generally will be
U.S.-source gain, a U.S. Holder might not be able to use the credit otherwise
available. Any loss recognized generally will be allocated to reduce United
States-source income. U.S. Holders should consult their tax advisors regarding
the U.S. foreign tax credit implications of the sale, redemption or other
disposition of Kinross common shares.
257
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
A foreign corporation is considered to be a PFIC if, with respect to a
taxable year, (i) at least 75% of its gross income is "passive income" (the
"income test") or (ii) the average value of its assets held during its taxable
year (measured at the end of each quarter) that produce or are held for the
production of "passive income" is at least 50% (the "asset test"). In applying
the income test and the asset test, if a foreign corporation owns (directly or
indirectly) at least 25% (by value) of the stock of another corporation, such
foreign corporation is treated as if it had directly received its proportionate
share of the gross income of the other corporation and as if it directly owned
its proportionate share of the assets of such other corporation.
For this purpose, "passive income" generally includes dividends,
interest, certain royalties and rents, and net gains from the sale of stock,
securities or partnership interests. Net gains from commodities transactions are
generally also included within the definition of "passive income," unless such
net gains are derived in the active conduct of a commodities business and
substantially all of the foreign corporation's business is as an active
producer, processor, merchant or handler of commodities (the "commodities
exception"). The commodities exception generally applies only if the
corporation's gross receipts from qualified active sales equals or exceeds 85%
of its gross receipts.
The PFIC asset test is applied using the fair market value of a publicly
traded foreign corporation's assets, not the adjusted book value of its assets.
The legislative history to the PFIC rules provides that in applying the PFIC
asset test, the total value of a publicly-traded corporation's assets
"generally" will be treated as equal to the sum of the aggregate value of its
outstanding stock plus its liabilities (the "General Rule"). There are, however,
no regulations or other guidance which define when this General Rule applies and
when it does not apply, and how it applies in particular circumstances.
The determination of whether or not Kinross is a PFIC is a factual
determination that can only be made annually after the close of each taxable
year and must take into account the activities, income and assets of Kinross and
each of Kinross' subsidiaries. Kinross has not definitively determined whether
it was a PFIC during its tax year ended December 31, 2003, and it cannot at
present be determined with certainty whether Kinross will be a PFIC in its
current taxable year ending December 31, 2004, or in any future taxable year.
This determination will depend on the various sources of Kinross' income and
whether the commodities exception is satisfied. In addition, this determination
will depend on the relative values of Kinross' passive assets, such as cash, and
the relative values of its non-passive assets, including goodwill. Furthermore,
since the goodwill of a publicly-traded corporation such as Kinross is largely a
function of the trading price of its shares, the valuation of that goodwill may
be subject to significant change throughout the year. Therefore, it is possible
that Kinross is or could become a PFIC for its current taxable year or any
subsequent taxable year due to the nature of its income or its assets or as the
result of a decrease in the trading price of the Kinross common shares. If
Kinross is or becomes a PFIC in any taxable year in a U.S. Holder's holding
period, it generally will remain a PFIC for all subsequent taxable years with
respect to that U.S. Holder.
In general, if Kinross were a PFIC:
(a) Any distribution made by Kinross during a taxable year to a U.S.
Holder with respect to the Kinross common shares that was an "excess
distribution" (defined generally as the excess of the amount received with
respect to the Kinross common shares in any taxable year over 125% of the
average amount received in the three previous taxable years or, if shorter, the
U.S. Holder's holding period before the taxable year) would be allocated ratably
to each day of the U.S. Holder's holding period. The amount allocated to the
current taxable year would be included as ordinary income for that year. The
amount allocated to each prior PFIC year in the U.S. Holder's holding period
generally would be taxed as ordinary income at the highest rate in effect for
that U.S. Holder in that prior year and such tax would be subject to an interest
charge at the rate applicable to income tax deficiencies as if it were overdue
with respect to such prior year.
258
(b) Dividends paid to individual U.S. Holders would not qualify for
reduced long-term capital gains rates.
(c) The entire amount of any gain realized upon the sale or other
disposition of Kinross common shares (generally including any disposition
otherwise treated as tax-free and the use of Kinross common shares as security
for an obligation) that was held during more than one taxable year would be
treated as an excess distribution made in the year of sale or other disposition
and, as a consequence, would be treated as ordinary income (rather than capital
gain), and to the extent allocated to PFIC years in the U.S. Holder's holding
period prior to the year of sale or other disposition, would be subject to the
interest charge described above.
Among other PFIC elections which may be available, a so-called
"mark-to-market election" may be made by a U.S. Holder who owns marketable stock
in a PFIC at the close of such person's taxable year. If a mark-to-market
election is made, instead of the PFIC rules described above, such U.S. Holder
generally would be required to include as ordinary income or, to the extent
described in the next sentence, be allowed an ordinary loss deduction in an
amount equal to the difference between the fair market value of such stock as of
the close of such taxable year (or the amount realized from a sale or other
disposition) and the U.S. Holder's adjusted basis, and certain additional rules
would apply. An ordinary loss deduction will be allowed only to the extent that
ordinary income was previously included under the mark-to-market election and
was not substantially offset by ordinary loss deductions. The mark-to-market
election is available with respect to marketable stock in a PFIC on a
shareholder-by-shareholder basis and, once made, can only be revoked with the
consent of the IRS. The Kinross common shares will be treated as marketable
stock for these purposes provided that the shares continue to be actively traded
on an established stock exchange. U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX
ADVISORS REGARDING THE CONSEQUENCES AND ADVISABILITY OF MAKING SUCH A
MARK-TO-MARKET ELECTION AND WHETHER ANY OTHER PFIC ELECTION IS AVAILABLE.
A shareholder in a PFIC who is a U.S. person is generally required to
file with the U.S. federal income tax return a completed Form 8621 in each year
that shares are owned in the PFIC.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
Payments of dividends on and proceeds from the sale or other disposition
of the Kinross common shares may be subject to information reporting to the IRS
and backup withholding at a current rate of 28% on the gross proceeds received.
Backup withholding will not apply to a holder who furnishes a correct taxpayer
identification number or certificate of foreign status and makes any other
required certification, or who is otherwise exempt from backup withholding. U.S.
Holders who are required to establish their exempt status generally must provide
IRS Form W-9 (Request for Taxpayer Identification Number and Certification).
Persons in doubt as to the necessity of furnishing this form should consult
their own tax advisors. Non-U.S. Holders generally will not be subject to U.S.
information reporting or backup withholding. However, such Non-U.S. Holders may
be required to provide certification of Non-U.S. Holder status (generally on IRS
Form W-8BEN) in connection with payments received in the U.S. or through certain
U.S.-related financial intermediaries.
Amounts withheld as backup withholding may be credited against a U.S.
Holder's federal income tax liability. A U.S. Holder may obtain a refund of any
excess amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS and furnishing any required
information.
259
CANADIAN FEDERAL TAX CONSEQUENCES
In the opinion of Cassels Brock & Blackwell LLP the following discussion
describes the material Canadian federal income tax considerations generally
applicable to Crown shareholders and warrant holders who exchange their Crown
common stock and warrants for Kinross common shares pursuant to the merger and
of holding and subsequently disposing of Kinross common shares. The opinion
applies to shareholders and warrant holders who, for the purposes of the Income
Tax Act (Canada) (the "Canadian Tax Act"): (i) deal at arm's length and are not
affiliated with Kinross and Crown; (ii) are not "financial institutions" for
purposes of the mark-to-market rules; (iii) are not "specified financial
institutions"; and (iv) hold their Crown common stock and warrants and will hold
their Kinross common shares as capital property.
This opinion is based upon the current provisions of the Canadian Tax
Act and the regulations thereunder (the "Regulations") in force as of the date
hereof, all specific proposals (the "Proposed Amendments") to amend the Canadian
Tax Act or the Regulations that have been publicly announced by, or on behalf
of, the Minister of Finance (Canada) prior to the date hereof, the current
provisions of the Treaty and counsel's understanding of the current published
administrative and assessing practices of the Canada Customs and Revenue Agency
(the "CCRA"). No assurance can be given that the Proposed Amendments will be
enacted in their current proposed form if at all; however, the Canadian federal
income tax considerations generally applicable to holders with respect to the
merger will not be different in a material adverse way if the Proposed
Amendments are not enacted. This opinion does not take into account or
anticipate any other changes to the law, whether by legislative, governmental or
judicial decision or action, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax considerations.
This opinion is not exhaustive of all possible Canadian federal income
tax considerations and is not intended to be, nor should it be construed to be,
legal or tax advice to any particular holder. Therefore, holders are urged to
consult their own tax advisors with respect to their particular circumstances.
U.S. SHAREHOLDERS AND WARRANT HOLDERS
This description is generally applicable to Crown shareholders and
warrant holders who, for the purposes of the Canadian Tax Act, (i) have not been
and will not be deemed to be resident in Canada at any time while they hold
Crown common stock, warrants, or Kinross common shares; and (ii) do not use or
hold the Crown common stock, warrants, or Kinross common shares in carrying on a
business in Canada; and who, for purposes of the Treaty, are residents of the
United States ("U.S. Holders"). Special rules, which are not discussed below,
may apply to a U.S. Holder that is an insurer carrying on business in Canada and
elsewhere.
A U.S. Holder will not be subject to tax under the Canadian Tax Act in
respect of any capital gain arising on the exchange of Crown common stock or
warrants for Kinross common shares or cash in lieu of a fractional Kinross
common share as a result of the merger. Similarly, a U.S. Holder will not be
subject to tax under the Canadian Tax Act in respect of any capital gain arising
on a disposition of Kinross common shares provided that (i) the Kinross common
shares are listed on a prescribed stock exchange (which includes the TSX) for
the purposes of the Canadian Tax Act at the time of disposition; and (ii) at no
time during the 60 month period immediately preceding the disposition of the
Kinross common shares were 25% or more of the issued shares of any class or
series of the capital stock of Kinross owned by the U.S. Holder, by persons with
whom the U.S. Holder did not deal at arm's length, or by the U.S. Holder
together with such persons.
Dividends paid or credited or deemed under the Canadian Tax Act to be
paid or credited to a U.S. Holder on the Kinross common shares will generally be
subject to Canadian withholding tax at the rate of 15%. This rate is reduced to
5% in the case of a U.S. Holder that is a company that owns at least 10% of the
voting stock of Kinross.
260
CANADIAN SHAREHOLDERS AND WARRANT HOLDERS
This description is generally applicable to Crown shareholders and
warrant holders, who, for the purposes of the Canadian Tax Act, are or are
deemed to be resident in Canada and for whom Crown is not a "foreign affiliate"
("Canadian Holders").
A Canadian Holder whose Crown common stock or warrants are exchanged for
Kinross common shares as a result of the merger will realize a capital gain (or
capital loss) equal to the amount by which the proceeds of disposition received
for such Crown common stock or warrants, net of any reasonable costs of
disposition, are greater (or less) than the adjusted cost base to the Canadian
Holder of such Crown common stock or warrants, respectively. For this purpose,
the proceeds of disposition will be equal to the fair market value of the
Kinross common shares received by a Canadian Holder as a result of the merger
plus the amount of any cash received in lieu of a fractional Kinross common
share.
Dividends on Kinross common shares received by a Canadian Holder who is
an individual will be included in the individual's income and will be subject to
the gross-up and dividend tax credit rules normally applicable under the
Canadian Tax Act to taxable dividends received from taxable Canadian
corporations. Dividends on Kinross common shares received by a Canadian Holder
that is a corporation will be included in computing its income and generally
will be deductible in computing its taxable income.
A Canadian Holder that is a private corporation or a subject corporation
(as defined in the Canadian Tax Act) will generally be liable to pay a
refundable tax under Part IV of the Canadian Tax Act at the rate of 33-1/3% on
dividends received on the Kinross common shares to the extent that such
dividends are deductible in computing taxable income.
A disposition or deemed disposition by a Canadian Holder of Kinross
common shares will generally give rise to a capital gain (or capital loss) equal
to the amount by which the proceeds of disposition, net of any reasonable costs
of disposition, are greater (or less) than the holder's adjusted cost base of
the Kinross common shares. In this regard the cost to the holder of a Kinross
common share acquired pursuant to the merger will equal the fair market value of
the Crown common stock or warrants exchanged therefore, less the amount of any
cash received in lieu of a fractional Kinross common share, and will be averaged
with the adjusted cost base of any other Kinross common shares then owned by
such holder as capital property for purposes of determining the holder's
adjusted cost base of such Kinross common shares.
Where a corporate Canadian Holder disposes of Kinross common shares, the
amount of any capital loss will be reduced by dividends received on such Kinross
common shares to the extent and under the circumstances provided in the Canadian
Tax Act. Similar rules may apply where a Canadian Holder that is a corporation
is a member of a partnership or beneficiary of a trust that owns such shares or
that is itself a member of a partnership or a beneficiary of a trust that owns
shares
One-half of any capital gain will be a taxable capital gain and will be
included in income and one-half of any capital loss will be an allowable capital
loss. Allowable capital losses may generally be deducted against taxable capital
gains realized in the year of disposition, the three preceding taxation years or
future taxation years, subject to and in accordance with the rules contained in
the Canadian Tax Act.
Certain corporations may be liable to pay an additional refundable tax
of 6-2/3% on their "aggregate investment income," which is defined by the
Canadian Tax Act to include an amount in respect of taxable capital gains. This
tax generally will be refunded to a corporate holder at the rate of $1 for every
$3 of taxable dividends paid while it is a private corporation.
Individuals (other than certain trusts) may be subject to alternative
minimum tax in respect of realized capital gains.
261
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EXPERTS
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The consolidated financial statements of Kinross Gold Corporation and
Subsidiaries as of December 31, 2003 and 2002, and for each of the years in the
three-year period ended December 31, 2003, included in this Proxy
Statement/Prospectus have been audited by Deloitte & Touche LLP, Independent
Registered Chartered Accountants as stated in their report appearing herein, and
have been included herein in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The consolidated financial statements of TVX Gold Inc. as of December
31, 2002 and 2001, and for each of the years in the three-year period ended
December 31, 2002, included in this Proxy Statement/Prospectus have been audited
by PricewaterhouseCoopers LLP, independent auditors, as stated in their report
appearing herein, and have been included herein in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Echo Bay Mines Ltd. as of
December 31, 2002 and 2001, and for each of the years in the three-year period
ended December 31, 2002, included in this Proxy Statement/Prospectus have been
audited by Ernst & Young LLP, independent chartered accountants, as set forth in
their report appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
The financial statements of Crown Resources Corporation and subsidiaries
as of December 31, 2003 and 2002, and for each of the three years in the period
ended December 31, 2003, included in this Proxy Statement/Prospectus have been
audited by Deloitte & Touche LLP, an independent registered public accounting
firm, as stated in their report appearing herein, and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
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VALIDITY OF KINROSS COMMON SHARES
--------------------------------------------------------------------------------
The validity of the Kinross common shares offered hereby under the laws
of the Province of Ontario will be passed upon for Kinross by Cassels Brock &
Blackwell LLP. Mr. Mingay, a partner at Cassels Brock & Blackwell LLP, is a
director of Kinross. Cassels Brock & Blackwell LLP has also delivered an opinion
concerning the material Canadian federal income tax consequences of the merger.
Parr Waddoups Brown Gee & Loveless has delivered an opinion concerning the
material United States federal income tax consequences of the merger.
--------------------------------------------------------------------------------
WHERE YOU CAN FIND MORE INFORMATION
--------------------------------------------------------------------------------
You may read and copy any document filed by Kinross or Crown with the SEC at the
SEC's public reference room in Washington, D.C. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Filings
with the SEC are also available to the public from the SEC's website at
HTTP://WWW.SEC.GOV.
262
The following documents were filed by Kinross with the SEC and are available
upon request from Kinross:
Kinross' Annual Report on Form 40-F for the fiscal year ended December 31, 2003,
dated May 3, 2004;
Kinross' Report on Form 6-K dated May 12, 2004;
Kinross' Report on Form 6-K dated May 17, 2004;
Kinross' Report on Form 6-K dated May 21, 2004; and
The description of Kinross' Common Shares, no par value, contained in Kinross'
Registration Statement on Form 8-A12B, filed on January 29, 2003, under the
Securities Exchange Act of 1934, as amended.
Kinross has filed a registration statement (File No. 333-111516) on Form
F-4 with the Securities and Exchange Commission (the "SEC"). This Proxy
Statement/Prospectus, which is a part of that registration statement, does not
contain all of the information included in the registration statement. You
should refer to the registration statement and its exhibits for additional
information. With respect to references made in this document to any contract,
agreement, or other document, such references are not necessarily complete and
you should refer to the exhibits attached to the registration statement for
copies of the actual contract, agreement, or other document.
The following documents were filed by Crown with the SEC and are available upon
request from Crown:
Annual Report on Form 10-K dated for the year ended December 31, 2003; and
Quarterly Report on Form 10-Q for the three months ended March 31, 2004.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED ON AS HAVING BEEN
AUTHORIZED BY KINROSS, CROWN, OR ANY OTHER PERSON. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS,
OR THE SOLICITATION OF A PROXY FROM ANY PERSON, IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER, OR PROXY SOLICITATION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF
THE SECURITIES MADE UNDER THIS PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF KINROSS OR CROWN SINCE THE DATE OF THIS PROXY STATEMENT/PROSPECTUS.
263
GLOSSARY OF TECHNICAL TERMS USED IN THIS DOCUMENT
AA FINISH
A method used to complete fire assaying where the bead produced by this
assay technique is dissolved in strong acids. The gold in the acid solution is
determined by a machine called an atomic adsorption spectrometer. This method is
used to accurately quantify small amounts of gold and other metals.
ADIT
A nearly horizontal gallery or passage driven from the surface of the
ground to the ore body. The term "tunnel" is frequently used in place of adit,
but technically a tunnel is open to the surface on both ends.
ADULARIA
A variety of orthoclase, a mineral part of the feldspar group. A common
mineral of granitic rocks.
ALBITITE
A porphyritic igneous rock, containing phenocrysts of albite in a
groundmass chiefly consisting of albite. Muscovite, garnet, apatite, quartz, and
opaque oxides are common accessory minerals.
ALIQUOTS
A small representative sample taken from a gold bar or article from
assay to determine its fine gold content.
ALLUVIAL
Referring to material, which has been placed by the action of surface
water.
ALLUVIAL PLACER
Gravel that has been transported and deposited by flowing waters,
streams, creeks, etc., depositing placer gold and other valuable minerals. Also
called an "alluvial deposit."
ALLUVIUM
A general term for all detrital deposits resulting from the flow of
present waterways, thus including the sediments laid down in streambeds, flood
plain, lakes, fan at the foot of mountain slopes, and estuaries.
ALMANDINE
An isometric mineral, 8[Fe32+Al2Si3O12]; pyralspilite subgroup of the
garnet group, with Fe replaced by Mg, Mn, and Ca; in red to brownish-black
dodecahedral and trapezohedral crystals, or massive; Mohs hardness, 7-1/2;
occurs in medium-grade metamorphic rock and felsic igneous rocks; used as a
gemstone and an abrasive.
ALUNITE
1. A trigonal mineral, Kal3(OH)6(SO4)2; massive or disseminated; in pale
tints; formed from sulfuric acid acting on potassium feldspar in volcanic
regions (alunization), and around fumaroles. 2. A mineral group including
jarosite.
ANKERITE
A trigonal mineral, Ca(Fe,Mg,Mn)(CO3)2; dolomite group; forms series
with dolomite and with kutnohorite; associated with iron ores; commonly forms
thin veins in some coal seams.
ANTIFORM
A fold that is convex upward or had such an attitude at some stage of
development.
264
ARCHEAN ABITIBI
The Abitibi-Grenville Transect focuses on the Late Archean Abitibi
greenstone belt, which is part of the southern Superior Province, the central
core of the North American craton, and on the Mesoproterozoic Grenville orogen
which extends from southern Sweden to southern Mexico, but is exposed
principally as the southeastern Canadian shield. The Abitibi subprovince is the
largest, and perhaps the best studied, of the Archean greenstone terranes of the
world and is host to a major proportion of Canada's mineral resources.
ARCUATE STRIPS OR BELTS
A geological term referring to a long narrow structure (i.e., reef) that
derives its name from the fact that it has a shape resembling an arc.
ARGILLIC
Pertaining to clay or clay minerals; e.g., argillic alteration in which
certain minerals of a rock are converted to minerals of the clay group.
ARGILLITE
A compact rock, derived either from mudstone (claystone or siltstone),
or shale, that has undergone a somewhat higher degree of induration than
mudstone or shale but is less clearly laminated and without its fissility, and
that lacks the cleavage distinctive of slate.
ARSENOPYRITE
The most common arsenic mineral and principal ore of arsenic; occurs in
many sulfide ore deposits, particularly those containing lead, silver and gold.
ASSAY
To determine the value of various elements within an ore sample,
streambed sample, or valuable metal sample.
B2 HORIZON
A local geological term identifying a particular formation of rock.
BALL MILL
A steel cylinder filled with steel balls into which crushed ore is fed.
The ball mill is rotated, causing the balls to cascade and grind the ore.
BASALT
An extrusive volcanic rock composed primarily of plagioclase, pyroxene
and some olivine.
BASEMENT ROCKS
A name commonly applied to metamorphic or igneous rocks underlying the
sedimentary sequence.
BELT
A series of mineral deposits occurring in close proximity to each other
often with a common origin.
BIOTITE
A common rock-forming mineral in crystalline rocks, either as an
original crystal in igneous rocks or as a metamorphic product in gneisses and
schists; a detrital constituent of sedimentary rocks.
BLOCK FAULTED
A type of normal faulting in which the crust is divided into structural
or fault blocks of different elevations and orientations. It is the process by
which block mountains are formed.
265
BOUDINS
Series of sausage-shaped segments occurring in a boudinage structure.
Boudinage occurs when bed sets are divided by cross-fractures into pillowlike
segments. The cross-fractures are not sharp, but rather rounded, and may be
compared with the necks that develop in ductile metal pieces under tension. The
overall resulting appearance is that of a string of linked sausages when
observed in section.
BQ
A diamond drill core measuring 1.432 inches in diameter (3.637 cm).
BRECCIA
A coarse-grained clastic rock, composed of angular broken rock fragments
held together by a mineral cement or in a fine-grained matrix; it differs from
conglomerate in that the fragments have sharp edges and unworn corners.
CALDERA
A large, basin-shaped volcanic depression, more or less circular, the
diameter of which is many times greater than that of the included vent or vents,
no matter what the steepness of the walls or the form of the floor may be.
CALL OPTION
A bullion option entitling, but not obliging, except upon exercise, the
buyer to purchase from the seller at the strike price a specified number of
ounces of bullion.
CALOMEL
A tetragonal mineral, 2[Hg2Cl2]; a secondary alteration of
mercury-bearing minerals; horn quicksilver; mercurial horn ore.
CARBON-IN-LEACH
A process step wherein granular activated carbon particles much larger
than the ground ore particles are introduced into the ore pulp. Cyanide leaching
and precious metals adsorption onto the activated carbon occur simultaneously.
The loaded activated carbon is mechanically screened to separate it from the
barren ore pulp and processed to remove the precious metals and prepare it for
reuse.
CARBON-IN-PULP
A process step wherein granular activated particles much larger than the
ground ore particles are introduced into the ore pulp after primary leaching in
cyanide. Precious metals adsorption occurs onto the activated carbon from the
pregnant cyanide solution.
CARBONACEOUS
1. containing carbon or coal, especially shale or other rock containing
small particles of carbon distributed throughout the whole mass. 2. Carbonaceous
sediments include original organic tissues and subsequently produced derivatives
of which the composition is organic chemically.
CARE AND MAINTENANCE
The status of a mining operation when mining has been suspended but
reclamation and closure of the property has not been commenced. The mill and
associated equipment is being cared for and maintained until operations
re-commence.
CATHODE
A rectangular plate of metal, produced by electrolytic refining, which
is melted into commercial shapes such as wire-bars, billets, ingots, etc.
266
CERARGYRITE
A former name for chlorargyrite, which is an isometric mineral, 4[AgCl];
sectile; forms waxy white, yellow, or pearl-gray incrustations, darkening to
violet on exposure to light; a supergene mineral occurring in silver veins; an
important source of silver.
CHALCOPYRITE
A copper mineral composed of copper, iron and sulphur. This mineral is
very similar to marcasite in its characteristics; it tarnishes easily; going
from bronze or brassy yellow to yellowish or grayish brown, has a dark streak,
and are lighter in weight and harder than gold.
CHERT
A compact, glass-like siliceous rock composed of silica of various types
(opaline or chalcedonic).
CHIP SAMPLE
A method of sampling of rock exposure whereby a regular series of small
chips of rock is broken off along a line across the face.
CHLORITE
1. The mineral group chamosite, clinochlore, cookeite, gonyerite,
nimite, orthochamosite, pennantite, and sudoite. 2. Chlorites are associated
with and resemble micas (the tabular crystals of chlorites cleave into small,
thin flakes or scales that are flexible, but not elastic like those of micas);
they may also be considered as clay minerals when very fine grained. Chlorites
are widely distributed, esp. in low-grade metamorphic rocks, or as alteration
products of ferromagnesian minerals.
CHLORITOID
A monoclinic or triclinic mineral, (Fe,Mg,Mn)2Al4Si2O10(OH)4; dull green
to gray-black; occurs in masses of brittle folia in metamorphosed argillaceous
sedimentary rocks. It is related to the brittle micas.
CIRCUIT
A processing facility for removing valuable minerals from the ore so
that it can be processed and sold.
CLAY
An extremely fine-grained natural earthy material composed primarily of
hydrous aluminum silicates. It may be a mixture of clay minerals and small
amounts of nonclay materials or it may be predominantly one clay mineral. The
type is determined by the predominant clay mineral. Clay is plastic when
sufficiently pulverized and wetted, rigid when dry, and vitreous when fired to a
sufficiently high temperature.
CONGLOMERATE
Rounded, water-worn fragments of rock or pebbles, cemented together by
another mineral substance.
CORE
The long cylindrical piece of rock, about an inch in diameter, brought
to surface by diamond drilling.
COVELLITE
A copper mineral, CuS; metallic indigo blue with iridescent tarnish. It
is a mineral produced by supergene enrichment.
CRETACEOUS
1. Applied to the third and final period of the Mesozoic Era. Extensive
marine chalk beds were deposited during this period. 2. Of the nature of chalk
or relating to chalk. 3. System of strata deposited in the Cretaceous Period.
267
CUPEL
1. A small bone-ash cup used in gold or silver assaying with lead. 2.
The hearth of a small furnace used in refining metals.
CUT-OFF GRADE
The lowest grade of mineral resources considered economic; used in the
calculation of reserves in a given deposit.
CYANIDATION
A method of extracting exposed gold or silver grains from crushed or
ground ore by dissolving the contained gold and silver in a weak cyanide
solution. May be carried out in tanks inside a mill or in heaps of ore out of
doors.
CYCLONE UNDERFLOW
A coarser sized fraction, which leaves via apex aperture of
hydrocyclone.
DEDICATED PAD
An area of topography where gold ore will be placed in order to be
leached. The ore will remain permanently upon this pad upon the completion of
the gold extraction.
DEVONIAN
The fourth period, in order of decreasing age, of the periods making up
the Paleozoic era. It followed the Silurian period and was succeeded by the
Mississippian period. Also, the system of strata deposited at that time.
Sometimes called the Age of Fishes.
DILUTION
The effect of waste or low-grade ore being included unavoidably in the
mine ore, lowering the recovered grade.
DOLOMITE
A carbonate sedimentary rock consisting of more than 50% to 90% mineral
dolomite, depending upon classifier, or having a Ca:Mg ratio in the range 1.5 to
1.7, or having an MgO equivalent of 19.5% to 21.6%, or having a
magnesium-carbonate equivalent of 41.0% to 45.4%. Dolomite beds are associated
and interbedded with limestone, commonly representing postdepositional
replacement of limestone.
DORE
Unrefined gold and silver bullion bars, which will be further, refined
to almost pure metal.
DRUMLINS
A hilly remnant from the ice ages.
DRUSY
Pertaining to an insoluble residue or encrostation, especially of quartz
crystals; e.g. a drusy oolith covered with subhedral quartz.
ELECTROWINNING
Recovery of a metal from a solution by means of electro-chemical
processes.
ENARGITE
An orthorhombic mineral, Cu3AsS4; dimorphous with luzonite, metallic
gray-black; in vein and replacement copper deposits as small crystals or
granular masses; an important ore of copper and arsenic; may contain up to 7%
antimony.
EPITHERMAL
Said of a hydrothermal mineral deposit formed within about 1 kilometer
of the Earth's surface and in the temperature range of 50 to 200 degrees C,
occurring mainly as veins. Also, said of that depositional environment.
268
ESKERS
A sinuous ridge of sedimentary material (typically gravel or sand)
deposited by streams that cut channels under or through the glacier ice.
FACIES
A term of wide application, referring to such aspects of rock units as
rock type, mode of origin, composition, fossil content, or environment of
deposition.
FAULT
A fracture in the earth's crust accompanied by a displacement of one
side of the fracture with respect to the other and in a direction parallel to
the fracture.
FELDSPAR
1. Constituting 60% of the Earth's crust, feldspar occurs in all rock
types and decomposes to form much of the clay in soil, including kaolinite. 2.
The mineral group albite, andesine, anorthite, anorthoclase, banalsite,
buddingtonite, bytownite, celsian, hyalophane, labradorite, microcline,
oligoclase, orthoclase, paracelsian, plagioclase, reedmergnerite, sanidine, and
slawsonite.
FELSIC
A mnemonic adjective derived from (fe) for feldspar, (l) for lenad or
feldspathoid, and (s) for silica, and applied to light-colored rocks containing
an abundance of one or all of these constituents. Also applied to the minerals
themselves, the chief felsic minerals being quartz, feldspar, feldspathoid, and
muscovite.
FLOCCULENT
A chemical used to promote the formation of denser slurries.
FLOTATION
A separation process in which valuable mineral particles are induced to
become attached to bubbles and float, which the non-valuable minerals sink.
FOLD
Any bending or wrinkling of rock strata.
FOLIATION
Laminated structure resulting from the segregation of different minerals
into parallel layers.
FOOTWALL
The mass of rock beneath a fault plane, vein, lode, or bed of ore.
FORMATION
Unit of sedimentary rock of characteristic composition or genesis.
GALENA
A lead mineral, which occurs with sphalerite in hydrothermal veins, also
in sedimentary rocks as replacement deposits; an important source of lead and
silver.
GARNET
The silicate minerals almandine, andradite, calderite, goldmanite,
grossular, hibshite, katoite, kimzeyite, knorringite, majorite, pyrope,
schlorlomite, spessartine, and uvarovite.
269
GEYSERITES
A type of rock associated with natural hot springs.
GLACIAL TILL
Dominantly unsorted and unstratified drift, generally unconsolidated,
deposited directly by and underneath a glacier without subsequent reworking by
meltwater, and consisting of a heterogeneous mixture of clay, silt, sand,
gravel, and boulders ranging widely in size and shape; ice-laid drift.
GLACIOLACUSTRINE
Pertaining to, derived from, or deposited in glacial lakes; especially
said of the deposits and landforms composed of suspended material brought by
meltwater streams flowing into lakes bordering the glacier, such as deltas, kame
deltas, and varved sediments.
GOLD
A yellow malleable ductile high density metallic element resistant to
chemical reaction, often occurring naturally in quartz veins and gravel, and
precious as a monetary medium, in jewellery, etc. Symbol - Au.
GOLD EQUIVALENT PRODUCTION
Gold equivalent production represents gold production plus silver
production computed into gold ounces using a market price ratios.
GRADE
The amount of valuable metal in each tonne or ore, expressed as grams
per tonne for precious metals.
CUT-OFF GRADE - is the minimum metal grade at which a tonne of rock can
be processed on an economic basis.
RECOVERED GRADE - is actual metal grade realized by the metallurgical
process and treatment or ore, based on actual experience or laboratory
testing.
GRAVIMETRIC FINISH
A method used to complete fire assaying where the bead produced by this
assay technique is weighed upon an extremely sensitive weigh scale.
GRAVITY RECOVERY CIRCUIT
Equipment used within a plant to recover gold from the ore using the
difference in specific gravity between the gold and the host rock. Typically
used are shaking tables, spirals, etc.
GREENSCHIST
A metamorphosed basic igneous rock, which owes its color and schistosity
to abundant chlorite.
GREENSCHIST FACIES
Metamorphic rocks produced under low temperature conditions.
GREENSTONE
An old field term applied to altered basic igneous rocks which owe their
color to the presence of chlorite, hornblende, and epidote.
HALIDE
A fluoride, chloride, bromide, or iodide.
270
HALOS
A differentiated (lower) grade zone surrounding a central zone of higher
grade.
HANGINGWALL
The mass of rock located above a fault plane, vein, lode, or bed of ore.
HEAP LEACHING
A process whereby gold is extracted by "heaping" broken ore on sloping
impermeable pads and repeatedly spraying the heaps with a weak cyanide solution
which dissolves the gold content. The gold-laden solution is collected for gold
recovery.
HEDGING
Taking a buy or sell position in a futures market opposite to a position
held in the cash market to minimize the risk of financial loss from an adverse
price change.
HIGH-GRADE
Rich ore. As a verb, it refers to selective mining of the best ore in a
deposit.
HIGH RATE THICKENER
A type of equipment used to perform solid liquid separation. Slurry (a
mixture of rock and water) is fed into this unit with a clear solution produced
in one stream and a moist solid produced in the second stream.
HQ
A diamond drill core measuring 2.500 inches in diameter (6.35 cm).
INTRUSIVE
Rock which while molten, penetrated into or between other rocks but
solidified before reaching the surface.
IGNIMBRITES
A silicic volcanic rock forming thick, massive, lavalike sheets. The
rock is chiefly a fine grained rhyolitic tuff.
INTRACALDERA OLIGOCENE ASH-FLOW TUFFS
A geological term referring to a rock formation comprising ash-flow
tuffs existing inside a caldera. A caldera is a crater formed from by the
collapse of the central part of a volcano. This particular formation dates back
to the Oligocene epoch.
JOINTS
Natural cracks or fractures in rocks. They tend to occur in more or less
parallel systems, and when quarry walls are maintained parallel and at right
angles to them, they may be utilized as natural partings in the process of block
removal.
KAOLINITE
A monoclinic mineral, 2[Al2Si2O5(OH)4]; kaolinite-serpentine group;
kaolinite structure consists of a sheet of tetrahedrally bonded silica and a
sheet of octahedrally bonded alumina with little tolerance for cation exchange
or expansive hydration; polymorphous with dickite, halloysite, and nacrite;
soft; white; formed by hydrothermal alteration or weathering of
aluminosilicates, esp. feldspars and feldspathoids; formerly called kaolin.
K-FELDSPAR
A potassium-bearing feldspar.
271
LEACH
A method of extracting gold from ore by a chemical solution usually
containing cyanide.
LENSE
Pyrite, round or oval in plan and lenticular in section, ranging up to 2
to 3 feet (0.6 to 0.9 meters) in thickness and several hundred feet in the
greatest lateral dimension, that is found in coalbeds.
LENTICULAR
Resembling in shape the cross section of a lens. The term may be
applied, e.g., to a body of rock, a sedimentary structure, or a mineral habit.
LENTICULAR SULPHIDE OREBODIES
Sulphide orebodies that are shaped approximately like a double convex
lens. When a rock mass thins out from the center to the edge all around it is
said to be lenticular in form.
LIMBS
The two parts of a fold on either side of its axis.
LITHOLOGIES
Refers to the physical characteristics of a rock, generally as
determined megascopically or with the aid of low-powered magnification.
LODE
Vein of metal ore.
LOW-GRADE
A term applied to ores relatively poor in the metal they are mined for;
lean ore.
MAFIC
Igneous rocks composed mostly of dark, iron- and magnesium-rich
minerals.
MAGMATIC DOMING
Creation of a roughly symmetrical structure resembling a dome produced
by the actions of magma.
METACHERT HORIZON
Layers of compact siliceous rock formed of chalcedonic silica that has
been subjected to the forces of metamorphism.
METAMORPHISM
The process by which the form or structure of rocks is changed by heat
and pressure.
METASEDIMENTARY SLATES
Partially metamorphosed slate.
MICA
1. A group of phyllosilicate minerals having the general composition,
X2Y4-6Z8O20(OH,F) where X=(Ba,Ca,Cs,H3O,K,Na,NH4), Y=(Al,Cr,Fe,Li,Mg,Mn,V,Zn),
and Z=(Al,Be,Fe,Si); may be monoclinic, pseudohexagonal or pseudo-orthorhombic;
soft; perfect basal (micaceous) cleavage yielding tough, elastic flakes and
sheets; colorless, white, yellow, green, brown, or black; excellent electrical
and thermal insulators (isinglass); common rock-forming minerals in igneous,
metamorphic, and sedimentary rocks. 2. The mineral group anandite, annite,
biotite, bityite, celadonite, chernykhite, clintonite, ephesite, ferri-annite,
glauconite, hendricksite, kinoshitalite, lepidolite, margarite, masutomilite,
montdorite, muscovite, nanpingite, norrishite, paragonite, phlogopite,
polylithionite, preiswerkite, roscoelite, siderophyllite, sodium phlogopite,
taeniolite, tobelite, wonesite, and zinnwaldite.
MICACEOUS
Consisting of or containing mica; e.g., a micaceous sediment.
272
MILL
A plant where ore is ground fine and undergoes physical or chemical
treatment to extract the valuable metals.
MINERAL CLAIM
A mineral claim usually authorizes the holder to prospect and mine for
minerals and to carry out works in connection with prospecting and mining.
MINERAL RESERVES
The economically mineable part of a measured or indicated mineral
resource demonstrated by at least a preliminary feasibility study. This study
must include adequate information on mining, processing metallurgical, economic
and other relevant factors that demonstrate, at the time of reporting, that
economic extraction can be justified. An mineral reserve includes diluting
materials and allowances for losses that may occur when the material is mined.
PROVEN MINERAL RESERVE: The economically mineable part of a measured
mineral resource demonstrated by at least a preliminary feasibility
study. This study must include adequate information on mining,
processing, metallurgical, economic, and other relevant factors that
demonstrate, at the time of reporting, that economic extraction is
justified.
PROBABLE MINERAL RESERVE: The economically mineable part of an
Indicated, and in some circumstances a measured mineral resource
demonstrated by at least a preliminary feasibility study. This study
must include adequate information on mining, processing, metallurgical,
economic, and other relevant factors that demonstrate, at the time of
reporting, that economic extraction can be justified.
MINERAL RESOURCE
A concentration or occurrence of natural, solid, inorganic or fossilized
organic material in or on the earth's crust in such form and quantity and of
such a grade or quality that it has reasonable prospects for economic
extraction. The location, quantity, grade, geological characteristics and
continuity of a mineral resource are known, estimated or interpreted from
specific geological evidence and knowledge.
MEASURED MINERAL RESOURCES: A measured mineral resource is that part of
a mineral resource for which quantity, grade or quality, densities,
shape, physical characteristics are so well established that they can be
estimated with confidence sufficient to allow the appropriate
application of technical and economic parameters, to support production
planning and evaluation of the economic viability of the deposit. The
estimate is based on detailed and reliable exploration, sampling and
testing information gathered through appropriate techniques from
locations such as outcrops, trenches, pits, workings and drill holes
that are spaced closely enough to confirm both geological and grade
continuity.
INDICATED MINERAL RESOURCES: An indicated mineral resource is that part
of a mineral resource for which quantity, grade or quality, densities,
shape and physical characteristics, can be estimated with a level of
confidence sufficient to allow the appropriate application of technical
and economic parameters, to support mine planning and evaluation of the
economic viability of the deposit. The estimate is based on detailed and
reliable exploration and test information gathered through appropriate
techniques from location such as outcrops, trenches, pits, workings and
drill holes that are spaced closely enough for geological and grade
continuity to be reasonably assumed.
273
INFERRED MINERAL RESOURCE: The part of a mineral resource for which
quantity and grade or quality can be estimated on the basis of
geological evidence and limited sampling and reasonably assumed, but not
verified, geological and grade continuity. The estimate is based on
limited information and sampling gathered through appropriate techniques
from locations such as outcrops, trenches, pits, workings and drill
holes. Due to the uncertainty which may attach to inferred mineral
resources, it cannot be assumed that all or any part of an inferred
mineral resource will be upgraded to an indicated or measured mineral
resource as result of continued exploration.
MINERALIZATION
The process or processes by which a mineral or minerals are introduced
into a rock, resulting in a valuable or potentially valuable deposit. It is a
general term, incorporating various types; e.g., fissure filling, impregnation,
and replacement.
MISSISSIPPIAN
Belonging to the geologic time, system of rocks or sedimentary deposits
of the fifth period of the Paleozoic Era, characterized by the submergence of
extensive land areas under shallow seas.
MORAINES
A mound, ridge, or other distinct accumulation of glacial till.
MUCK SAMPLE
A representative piece of ore that is taken from a muck pile and then
assayed to determine the grade of the pile.
MUSCOVITE
A monoclinic mineral, Kal2(Si3Al)O10(OH,F)2; mica group;
pseudohexagonal; perfect basal cleavage; forms large, transparent, strong,
electrically and thermally insulating, stable sheets; a common rock-forming
mineral in silicic plutonic rocks, mica schists, gneisses, and commercially in
pegmatites; also a hydrothermal and weathering product of feldspar and in
detrital sediments. Also spelled muscovite.
NET SMELTER RETURN
A type of royalty payment where the royalty owner receives a fixed
percentage of the revenues of a property or operation.
NQ
A letter name specifying the dimensions of bits, core barrels, and drill
rods in the N-size and Q-group wireline diamond drilling system having a core
diameter of 47.6 mm and a hole diameter of 75.7 mm.
OPEN PIT
A mine that is entirely on surface. Also referred to as open-cut or
open-cast mine.
OLIGOCENE
An epoch of the early Tertiary Period, after the Eocene and before the
Miocene; also, the corresponding worldwide series of rocks. It is considered to
be a period when the Tertiary is designated as an era.
OXIDATION
A reaction where a material is reacted with an oxidizer such as pure
oxygen or air in order to alter the state of the material.
274
OXIDE CAPPING
Is the part of the orebody, which is found on top of the original ore
material, but which has not been altered by climate and groundwater.
OXIDE-SILICATE FACIES BANDED IRON FORMATIONS
A geological term referring to a part of a group of rocks that differs
from the whole formation in composition. In this instance the rock comprises
iron-bearing minerals of the oxide-silicate variety (i.e., hematite, magnetite).
These iron-bearing rocks exist in thin layers or bands hence the term "banded
iron formation."
PALEOZOIC
The era of geologic time that includes the Cambrian, Ordovician,
Silurian, Devonian, Mississippian, Pennsylvanian and Permian periods and is
characterized by the appearance of marine invertebrates, primitive fishes, land
plants and primitive reptiles.
PEGMATITES
Igneous rocks of coarse grain found usually as dikes associated with
large masses of plutonic rock.
PHASES
Stages in time and/or composition in forming the rock.
PHYLLITE
1. A metamorphic rock, intermediate in grade between slate and mica
schist. Minute crystals of sericite and chlorite impart a silky sheen to the
surfaces of cleavage (or schistosity). Phyllites commonly exhibit corrugated
cleavage surfaces. 2. A general term for minerals with a layered crystal
structure. 3. A general term used by some French authors for the scaly minerals,
such as micas, chlorites, clays, and vermiculites.
PLACER
A place where gold is obtained by the washing of materials: rocks,
boulders, sand, clay, etc. containing gold or other valuable minerals by the
elements. These are deposits of valuable minerals, in Kinross' case, native
gold, are found in the form of dust, flakes, grains, and nuggets. In the United
States mining law, mineral deposits, not veins in place, are treated as placers
as far as locating, holding, and patenting are concerned. The term "placer"
applies to ancient (Tertiary) gravel as well as to recent deposits, and to
underground (drift mines) as well as surface deposits.
PORPHYRY
An igneous rock in which relatively large crystals, called phenocrysts,
are set in a fine-granted groundmass.
POLYMETAMORPHIC
The property possessed by certain chemicals compounds of crystallizing
in several distinct forms.
POTASSIC
Of, pertaining to, or containing potassium; relating to or containing
potash.
PQ
A diamond drill core measuring 2.344 inches in diameter (5.954 cm).
PREMIUM
An amount specified as such by the parties to a hedging agreement, which
amount is the purchase price of the bullion option and is payable by the buyer
to the seller on the premium payment date for value on such date.
275
PUT OPTION
A bullion option entitling, but not obliging, except upon exercise, the
buyer to sell to the seller at the strike price a specified number of ounces of
bullion.
PULP METALLIC
A type of assay method, which is used to handle the coarse gold
component of a sample to allow for its accurate determination.
PYRITE
A yellow iron sulphide mineral, normally of little value. It is
sometimes referred to as "fool's gold."
PYROCLASTIC
Produced by explosive or aerial ejection of ash, fragments, and glassy
material from a volcanic vent. Applied to the rocks and rock layers as well as
to the textures so formed.
QUALIFIED PERSON
An individual who: (a) is an engineer or geoscientist with at least five
years of experience in mineral exploration, mine development or operation, or
mineral project assessment, or any combination of these; (b) has experience
relevant to the subject matter of the mineral project; and (c) is a member in
good standing of a professional association as defined by NI 43-101.
QUARTZ
Common rock-forming mineral consisting of silicon and oxygen.
QUARTZITE
1. A granoblastic metamorphic rock consisting mainly of quartz and
formed by recrystallization of sandstone or chert by either regional or thermal
metamorphism; metaquartzite. 2. A very hard but unmetamorphosed sandstone,
consisting chiefly of quartz grains that are so completely cemented with
secondary silica that the rock breaks across or through the grains rather than
around them; an orthoquartzite. 3. Stone composed of silica grains so firmly
cemented by silica that fracture occurs through the grains rather than around
them. 4. As used in a general sense by drillers, a very hard, dense sandstone.
5. A granulose metamorphic rock consisting essentially of quartz. 6. Sandstone
cemented by silica that has grown in optical continuity around each fragment.
QUARTZ-MUSCOVITE
A mineral, a member of the mica group.
RECLAMATION
The restoration of a site after mining or exploration activity is
completed.
RECOVERY
A term used in process metallurgy to indicate the proportion of valuable
material obtained in the processing of an ore. It is generally stated as a
percentage of valuable metal in the ore that is recovered compared to the total
valuable metal present in the ore.
RUN-OF-MINE
Said of ore in its natural, unprocessed state; pertaining to ore just as
it is mined.
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REUSABLE PAD ORE
Ore which is processed on a reusable pad. The reusable pad is an area
where heap leaching takes place on ore material temporarily placed onto it. Upon
completion of leaching, the ore is removed from the pad and sent to disposal.
New material is then applied.
SAMPLE
A small portion of rock or a mineral deposit, taken so that the metal
content can be determined by assaying.
SANIDINE
A monoclinic mineral, (K,Na)AlSi3O8; feldspar group; forms a series with
albite; prismatic cleavage; colorless; forms phenocrysts in felsic volcanic
rocks.
SCALP
The process of removing oversize lumps on a continuous basis from a
stream of bulk material.
SCHIST
A foliated metamorphic rock the grains of which have a roughly parallel
arrangement; generally developed by shearing.
SEDIMENTARY ROCKS
Secondary rocks formed from material derived from other rocks and laid
down under water. Examples are limestone, shale and sandstone.
SEMI-AUTOGENOUS (SAG) MILL
A steel cylinder with steel balls into which run-of-mine material is
fed. The ore is ground in the action of large lumps of rock and steel balls.
SEMI-TABULAR FORMS
Geological formations that are somewhat flat or tabular in character.
SERICITE
A white, fine-grained potassium mica occurring in small scales as an
alteration product of various aluminosilicate minerals, having a silky luster,
and found in various metamorphic rocks (especially in schists and phyllites) or
in the wall rocks, fault gouge, and vein fillings of many ore deposits. It is
commonly muscovite or very close to muscovite in composition, but may also
include paragonite and illite.
SHEAR ZONE
A geological term to describe a geological area in which shearing has
occurred on a large scale.
SILICA
The chemically resistant dioxide of silicon, SiO2; occurs naturally as
five crystalline polymorphs: trigonal and hexagonal quartz, orthorhombic and
hexagonal tridymite, tetragonal and isometric cristobalite, monoclinic coesite,
and tetragonal stishovite. Also occurs as cryptocrystalline chalcedony, hydrated
opal, the glass lechatelierite, skeletal material in diatoms and other living
organisms, and fossil skeletal material in diatomite and other siliceous
accumulations. Also occurs with other chemical elements in silicate minerals.
SILT
Material passing the No. 200 U.S. standard sieve that is nonplastic or
very slightly plastic and that exhibits little or no strength when air-dried.
Material composes of fine rock components.
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SKIP
1. A guided steel hoppit, usually rectangular, with a capacity up to 50
st (45.4 t), which is used in vertical or inclined shafts for hoisting coal or
minerals. It can also be adapted for personnel riding. 2. A large hoisting
bucket, constructed of boiler plate that slides between guides in a shaft, the
bail usually connecting at or near the bottom of the bucket so that it may be
automatically dumped at the surface. 3. An open iron vehicle or car on four
wheels, running on rails and used esp. on inclines or in inclined shafts. 4. A
truck used in a mine. 5. A small car that conveys the charge to the top of a
blast furnace.
SLURRY
Fine rock particles are suspended in a stream of water.
SPHALERITE
A zinc mineral, which is composed of zinc and sulphur. It has a specific
gravity of 3.9 to 4.1.
SPOT DEFERRED CONTRACT
A forward sale of gold based on the spot gold price at the inception of
the contract plus contango that accrues until the future delivery date under the
contract. The underlying LIBOR based return and gold lease rate expense may be
fixed or left floating, at the option of Kinross.
STIBNITE
A mineral composed of antimony and sulphur often associated with other
sulphides.
STOCK
A magma that has intruded into preexisting rock in a columnar shape
typically a kilometer or more in diameter.
STOCKPILE
Broken ore heaped on surface, pending treatment or shipment.
STOCKWORK
A mineral deposit consisting of a three-dimensional network of planar to
irregular veinlets closely enough spaced that the whole mass can be mined.
STOPES
An underground opening in a mine from which ore is extracted.
STRATABOUND DEPOSIT
An ore deposit, which is confined within a geological strata or layer.
STRATABOUND DISSEMINATED
Disseminated ore within a stratabound deposit.
STRIKE-SLIP MOVEMENT
1. In a fault, the component of the movement or slip that is parallel to
the strike of the fault. 2. A horizontal component of the slip parallel with the
fault strike.
SUMP
The lowest part of a mine shaft into which water drains.
SUPRACRUSTAL ASSEMBLAGES
Referring to overlying or "last in the sequence" groups of rocks or
assemblages in the earth's crust.
278
SYENITE
A group of plutonic rocks containing alkali feldspar (usually
orthoclase, microcline, or perthite), a small amount of plagioclase (less than
in "monzonite"), one or more mafic minerals (esp. hornblende), and quartz, if
present, only as an accessory; also, any rock in that group; the intrusive
equivalent of "trachyte." With an increase in the quartz content, syenite grades
into "granite."
SYMPATHETIC FAULTING
A minor fault that has the same orientation as the major fault or some
such structure with which it is associated.
SYNCLINE
A fold in rocks in which the strata dip inward from both sides toward
the axis.
TAILINGS
The material that remains after all metals considered economic have been
removed from ore during milling.
T-ANTIFORM STRUCTURE
A local geological term identifying a particular formation of rock. In
this instance the structure is an antiform, which is an "n"shaped fold.
TENNANTITE
An isometric mineral, (Cu,Fe)12As4S13; tetrahedrite group; forms a
series with tetrahedrite; may contain zinc, silver, or cobalt replacing copper;
in veins; an important source of copper.
TERRANE
Area of land of a particular character, E.G., mountainous, swampy.
TETRAHEDRITE
1. An isometric mineral, (Cu,Fe)12Sb4S13, having copper replaced by
zinc, lead, mercury, cobalt, nickel, or silver; forms a series with tennantite
and freibergite; metallic; crystallizes tetrahedra; occurs in hydrothermal veins
and contact metamorphic deposits; a source of copper and other metals. 2. The
mineral group freibergite, giraudite, goldfieldite, hakite, tennantite, and
tetrahedrite.
THOLEIITIC
A silica-oversaturated (quartz-normative) basalt, characterized by the
presence of low-calcium pyroxenes (orthopyroxene and/or pigeonite) in addition
to clinopyroxene and calcic plagioclase.
TOURMALINE
1. Any member of the trigonal mineral group,
XY3Z6(BO3)3Si6O18(OH,F)4where X is Na partially replaced by Ca, K, Mg, or a
vacancy, Y is Mg, Fe2+, Li, or Al, and Z is Al and Fe3+; forms prisms of three,
six, or nine sides; commonly vertically striated; varicolored; an accessory in
granite pegmatites, felsic igneous rocks, and metamorphic rocks. Transparent and
flawless crystals may be cut for gems. 2. The mineral group buergerite, dravite,
elbaite, ferridravite, liddicoatite, schorl, and uvite.
TRENDING FAULTS
Faults that are similar in direction or bearing.
TRIASSIC
Belonging to the geolic time, system of rocks or sedimentary deposits of
the first period of the Mesozoic Era, characterized by the diversification of
land life, the rise of dinosaurs and the appearance of the earliest mammals.
279
TUFF
Rock composed of fine volcanic ash.
ULTRAMAFIC
Also called ultrabasic. Characterizes rocks containing less than 45%
silica; containing virtually no quartz or feldspar. They are essentially
composed of iron and magnesium-rich minerals, metallic oxides and sulfides, and
native metals.
UNCONFORMITY
A surface between successive strata representing a missing interval in
the geologic record of time, and produced either by an interruption in
deposition or by the erosion of depositionally continuous strata followed by
renewed deposition.
VEIN
A fissure, fault or crack in a rock filled by minerals that have
traveled upwards from some deep source.
VOLCANICS
A general collective term for extrusive igneous and pyroclastic material
and rocks.
VUG
A small cavity in a rock, usually lined with crystals of a different
mineral composition than the enclosing rock.
VUGGY
Pertaining to a vug or having numerous vugs.
ZONE
An area of distinct mineralization.
MEASUREMENTS CONVERSION TABLE
METRIC CONVERSION TABLE
---------------------------------------------------------------------
TO CONVERT TO IMPERIAL MEASUREMENT UNITS MULTIPLY BY
Tonnes Short tons 1.10231
Tonnes Long tons 0.98422
Tonnes Pounds 2204.62
Tonnes Ounces (troy) 32,150
Kilograms Ounces (troy) 32.150
Grams Ounces (troy) 0.03215
Grams/tonnes Ounces (troy)/short ton 0.02917
Hectares Acres 2.47105
Kilometers Miles 0.62137
Meters Feet 3.28084
280
INDEX TO FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENTS:
Compilation report on pro forma consolidated financial statements.............................................F-A1
Comment for United States Readers on Differences Between Canadian and United States
Reporting Standards......................................................................................F-A2
Pro forma consolidated balance sheet as at March 31, 2004 (unaudited).........................................F-A3
Pro forma consolidated statement of operations for the three months ended March 31, 2004 (unaudited)..........F-A4
Pro forma consolidated statement of operations for the year ended December 31, 2003 (unaudited)...............F-A5
Notes to the pro forma consolidated financial statements (unaudited)..........................................F-A6
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF KINROSS:
Consolidated balance sheets as at March 31, 2004 and 2003 (unaudited).........................................F-B1
Consolidated statements of operations for the three months ended March 31, 2004 and 2003 (unaudited)..........F-B2
Consolidated statements of cash flows for the three months ended March 31, 2004 and 2003 (unaudited)..........F-B3
Consolidated statement of common shareholders equity for the three months ended March 31, 2004 and
2003 (unaudited).........................................................................................F-B4
Notes to the consolidated financial statements for the three months ended March 31, 2004 (unaudited)..........F-B5
Report of Independent Registered Chartered Accountants.......................................................F-B35
Consolidated balance sheets as at December 31, 2003 and 2002.................................................F-B36
Consolidated statements of operations for the years ended December 31, 2003, 2002 and 2001...................F-B37
Consolidated statements of cash flows for the years ended December 31, 2003, 2002 and 2001...................F-B38
Consolidated statements of common shareholders' equity for the years ended December 31, 2003, 2002
and 2001................................................................................................F-B39
Notes to the consolidated financial statements...............................................................F-B40
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF TVX:
Auditors' report..............................................................................................F-C1
Consolidated balance sheets as at December 31, 2002 and 2001..................................................F-C2
Consolidated statements of operations for the years ended December 31, 2002, 2001, and 2000...................F-C3
Consolidated statements of deficit for the years ended December 31, 2002, 2001, and 2000......................F-C4
Consolidated statements of cash flows for the years ended December 31, 2002, 2001, and 2000...................F-C5
Notes to consolidated financial statements....................................................................F-C6
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF ECHO BAY:
Report of independent chartered accountants...................................................................F-D1
Consolidated balance sheets as at December 31, 2002 and 2001..................................................F-D2
Consolidated statements of operations for the years ended December 31, 2002, 2001 and 2000....................F-D3
Consolidated statements of deficit for the years ended December 31, 2002, 2001 and 2000.......................F-D3
Consolidated statements of cash flows for the years ended December 31, 2002, 2001 and 2000....................F-D4
Notes to consolidated financial statements....................................................................F-D5
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF CROWN:
Report of Independent Registered Public Accounting Firm.......................................................F-E1
Consolidated balance sheets as at December 31, 2003 and 2002 (As Restated)....................................F-E2
Consolidated statements of operations for the years ended December 31, 2003, 2002 (As Restated),
and 2001 (As Restated)...................................................................................F-E3
Consolidated statements of stockholders' equity and comprehensive income (loss) for the years ended
December 31, 2003, 2002 (As Restated), and 2001 (As Restated)............................................F-E4
Consolidated statements of cash flows for the years ended December 31, 2003, 2002 (As Restated),
and 2001 (As Restated)...................................................................................F-E5
Notes to consolidated financial statements (As Restated)......................................................F-E6
Unaudited condensed consolidated balance sheets as at March 31, 2004 and December 31, 2003...................F-E32
Unaudited condensed consolidated statements of operations for the three months ended March 31, 2004
and 2003 (As Restated)..................................................................................F-E33
Unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2004
and 2003 (As Restated)..................................................................................F-E34
Notes to the unaudited condensed consolidated financial statements...........................................F-E35
281
COMPILATION REPORT ON PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
To the Directors of
Kinross Gold Corporation
We have read the accompanying unaudited pro forma consolidated balance sheet of
Kinross Gold Corporation (the "Company") as at March 31, 2004, and unaudited pro
forma consolidated statement of operations for the three months ended March 31,
2004, and the year ended December 31, 2003, and have performed the following
procedures:
1. Compared the figures in the columns captioned "Kinross" to the unaudited
financial statements of the Company as at and for the three months ended March
31, 2004, and to the audited consolidated financial statements of the Company
for the year ended December 31, 2003, and found them to be in agreement.
2. Compared the figures in the columns captioned "Crown" to the unaudited
financial statements of Crown Resources Corporation as at and for the three
months ended March 31, 2004, and to the audited consolidated financial
statements of Crown Resources Corporation for the year ended December 31, 2003,
and found them to be in agreement.
3. Made enquiries of certain officials of the Company who have
responsibility for financial and accounting matters about:
(a) the basis for determination of the pro forma adjustments; and
(b) whether the unaudited pro forma consolidated financial
statements comply as to form in all material respects with the regulatory
requirements of the various Securities Commissions and similar regulatory
authorities in Canada.
The officials:
(a) described to us the basis for determination of the pro forma
adjustments, and
(b) stated that the unaudited pro forma consolidated financial
statements comply as to form in all material respects with the regulatory
requirements of the various Securities Commissions and similar regulatory
authorities in Canada.
4. Read the notes to the unaudited pro forma consolidated financial
statements and found them to be consistent with the basis described to us for
determination of the pro forma adjustments.
5. Recalculated the application of the pro forma adjustments to the
aggregate of the amounts in the columns captioned "Kinross" and "Crown" as at
and for the three months ended March 31, 2004, and for the year ended December
31, 2003, and found the amounts in the column captioned "Pro-Forma Consolidated"
to be arithmetically correct.
A pro forma financial statement is based on management assumptions and
adjustments which are inherently subjective. The foregoing procedures are
substantially less than either an audit or a review, the objective of which is
the expression of assurance with respect to management's assumptions, the pro
forma adjustments, and the application of the adjustments to the historical
financial information. Accordingly, we express no such assurance. The foregoing
procedures would not necessarily reveal matters of significance to the pro forma
consolidated financial statements, and we therefore make no representation about
the sufficiency of the procedures for the purposes of a reader of such
statements.
(SIGNED) DELOITTE & TOUCHE LLP
INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
Toronto, Canada
June ___, 2004
F-A1
COMMENT FOR UNITED STATES READERS ON DIFFERENCES BETWEEN CANADIAN AND UNITED
STATES REPORTING STANDARDS
The above compilation report on pro forma consolidated financial statements,
provided solely pursuant to Canadian requirements, is expressed in accordance
with reporting standards generally accepted in Canada. Such standards
contemplate the issuance of a report with respect to the compilation of
unaudited pro forma financial statements. U.S. standards do not provide for the
issuance of a report on the compilation of unaudited pro forma financial
statements. To report in conformity with United States standards on the
reasonableness of the pro forma adjustments and their application to the
unaudited pro forma consolidated financial statements would require an
examination or review which would be substantially greater in scope than the
review as to compilation only that we have conducted. Consequently, under U.S.
standards, we would be unable to issue our report with respect to the
compilation of the accompanying unaudited pro forma consolidated financial
statements.
(SIGNED) DELOITTE & TOUCHE LLP
INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
Toronto, Canada
June ___, 2004
F-A2
KINROSS GOLD CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET - UNAUDITED
(EXPRESSED IN MILLIONS OF U.S. DOLLARS)
AS AT MARCH 31, 2004
PRO-FORMA PRO-FORMA
NOTES KINROSS CROWN ADJUSTMENTS CONSOLIDATED
----- ------- ----- ----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents 2.2 $ $ $ (1.7) $ 217.5
217.6 1.6
Restricted cash 1.4 - - 1.4
Accounts receivable and other assets 30.4 0.4 - 30.8
Inventories 132.4 - - 132.4
----------------------------------------------------------
381.8 2.0 (1.7) 382.1
----------------------------------------------------------
Property, plant and equipment 2.2 520.7 8.8 (8.8) 520.7
Mineral interests 2.2 253.4 21.1 85.5 360.0
Goodwill 918.0 - - 918.0
Future income and mining taxes 1.3 - - 1.3
Long-term investments 2.2 16.5 2.0 (2.0) 16.5
Deferred charges and other long-term assets 24.5 0.1 - 24.6
----------------------------------------------------------
$ 2,116.2 $ 34.0 $ 73.0 $ 2,223.2
==========================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 84.8 0.1 - 84.9
Current portion of long-term debt 4.4 0.1 - 4.5
Current portion of site restoration cost 22.1 - - 22.1
accruals
----------------------------------------------------------
111.3 0.2 - 111.5
----------------------------------------------------------
Long-term debt 0.4 - - 0.4
Site restoration cost accruals 107.4 - - 107.4
Future income and mining taxes 2.2 54.5 3.2 (1.5) 56.2
Deferred revenue 1.7 - - 1.7
Other long-term liabilities 4.7 0.1 - 4.8
Convertible senior notes payable 2.2 - 0.4 (0.4) -
Redeemable retractable preferred shares 2.9 - - 2.9
----------------------------------------------------------
282.9 3.9 (1.9) 284.9
NON-CONTROLLING INTERESTS 0.7 - - 0.7
CONVERTIBLE PREFERRED SHARES OF SUBSIDIARY COMPANY 12.9 - - 12.9
COMMON SHAREHOLDERS' EQUITY
Common share capital and common share purchase
warrants 2.2 1,784.0 56.9 48.1 1,889.0
Treasury stock 2.2 - (0.3) 0.3 -
Unearned compensation 2.2 - (1.4) 1.4 -
Contributed surplus 2.2 32.9 - - 32.9
Retained earnings (deficit) 2.2 4.8 (25.1) 25.1 4.8
Cumulative translation adjustments (2.0) - - (2.0)
----------------------------------------------------------
$ 1,819.7 $ 30.1 $ 74.9 $ 1,924.7
----------------------------------------------------------
$ 2,116.2 $ 34.0 $ 73.0 $ 2,223.2
==========================================================
F-A3
KINROSS GOLD CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED
(EXPRESSED IN MILLIONS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED MARCH 31, 2004
PRO-FORMA PRO-FORMA
NOTES KINROSS CROWN ADJUSTMENTS CONSOLIDATED
----- ------- ----- ----------- ------------
REVENUE AND OTHER INCOME
Mining revenue $ 155.6 $ - $ - $ 155.6
Interest and other income 1.8 - - 1.8
Mark to market gain on call options (0.8) - - (0.8)
--------------------------------------------------------------
156.6 - - 156.6
--------------------------------------------------------------
EXPENSES
Operating (exclusive of depreciation, depletion and
amortization shown separately below) 94.5 - - 94.5
General and administrative 6.9 0.4 - 7.3
Exploration and business development 3.5 - - 3.5
Depreciation, depletion and amortization 32.4 - - 32.4
Gain on disposal of assets (0.4) - - (0.4)
Foreign exchange loss 2.4 - - 2.4
Interest expense on long-term liabilities 0.7 - - 0.7
==============================================================
140.0 0.4 - 140.4
==============================================================
EARNINGS (LOSS) BEFORE TAXES AND OTHER ITEMS 16.6 (0.4) - 16.2
Provision for income and mining taxes (3.2) 0.2 - (3.0)
Share of loss in investee companies 2.3 - (0.2) 0.2 -
--------------------------------------------------------------
EARNINGS (LOSS) FOR THE YEAR BEFORE DIVIDENDS ON
CONVERTIBLE 13.4 (0.4) 0.2 13.2
PREFERRED SHARES OF SUBSIDIARY COMPANY
DIVIDENDS ON CONVERTIBLE PREFERRED SHARES OF
SUBSIDIARY (0.2) - - (0.2)
COMPANY
--------------------------------------------------------------
NET EARNINGS (LOSS) FOR THE YEAR $ 13.2 $ (0.4) $ 0.2 $ 13.0
==============================================================
ATTRIBUTABLE TO COMMON SHAREHOLDERS:
--------------------------------------------------------------
NET EARNINGS FOR THE YEAR ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ 13.2 $ (0.4) $ 0.2 $ 13.0
==============================================================
EARNINGS (LOSS) PER SHARE
Basic $0.04 ($0.02) $ 0.04
Diluted $0.04 - $ 0.04
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
(MILLIONS)
Basic 345.7 22.0 356.2
Diluted 346.3 - 356.8
F-A4
KINROSS GOLD CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED
(EXPRESSED IN MILLIONS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31, 2003
PRO-FORMA PRO-FORMA
NOTES KINROSS CROWN ADJUSTMENTS CONSOLIDATED
----- ------- ----- ----------- ------------
REVENUE AND OTHER INCOME
Mining revenue 2.4 $ 571.9 $ - $ 11.7 $ 600.5
2.5 - - 16.7
2.6 - - 0.2
Interest and other income 12.3 - 0.3 12.6
Mark to market gain on call options 0.4 - - 0.4
----------------------------------------------------------------
584.6 - 28.9 613.5
----------------------------------------------------------------
EXPENSES
Operating (exclusive of depreciation, depletion and
amortization shown separately below) 2.4 387.3 - 6.1 404.9
2.5 - - 11.0
2.6 - - 0.2
2.7 - - 0.3
General and administrative 2.4 25.0 4.1 6.2 46.4
2.5 - - 11.1
Exploration and business development 2.4 24.3 - 0.3 25.4
2.5 - - 0.8
Depreciation, depletion and amortization 2.4 140.9 - 2.0 146.4
2.5 - - 2.8
2.8 - - 0.7
Gain on disposal of assets (29.5) - - (29.5)
Foreign exchange (gain) loss 2.4 (3.3) - (0.8) (4.1)
Interest expense on long-term liabilities 5.1 - - 5.1
Loss on redemption of debt component of
convertible debentures 1.1 - - 1.1
Asset write-downs and non-cash charges 9.9 - - 9.9
----------------------------------------------------------------
560.8 4.1 40.7 605.6
================================================================
EARNINGS (LOSS) BEFORE TAXES AND OTHER ITEMS 23.8 (4.1) (11.8) 7.9
Provision for income and mining taxes 2.4 (13.1) 1.7 (0.5) (11.9)
Non-controlling interest (0.2) - - (0.2)
Share of loss in investee companies 2.3 - (0.6) 0.6 -
----------------------------------------------------------------
EARNINGS (LOSS) FOR THE YEAR BEFORE DIVIDENDS ON
CONVERTIBLE 10.5 (3.0) (11.7) (4.2)
PREFERRED SHARES OF SUBSIDIARY COMPANY
DIVIDENDS ON CONVERTIBLE PREFERRED SHARES OF
SUBSIDIARY 0.8 - - 0.8
COMPANY
----------------------------------------------------------------
NET EARNINGS (LOSS) FOR THE YEAR $ 9.7 $ (3.0) $ (11.7) $ (5.0)
================================================================
ATTRIBUTABLE TO COMMON SHAREHOLDERS:
NET EARNINGS (LOSS) FOR THE YEAR $ 9.7 $ (3.0) $ (11.7) $ (5.0)
INCREASE IN EQUITY COMPONENT OF CONVERTIBLE (6.5) - - (6.5)
DEBENTURES
GAIN ON REDEMPTION OF EQUITY COMPONENT OF
CONVERTIBLE 16.5 - - 16.5
DEBENTURES
----------------------------------------------------------------
NET EARNINGS FOR THE YEAR ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ 19.7 $ (3.0) $ (11.7) $ 5.0
================================================================
EARNINGS (LOSS) PER SHARE
Basic $ 0.06 $ (0.45) $ 0.01
Diluted $ 0.06 - $ 0.01
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
(MILLIONS)
Basic 308.6 6.6 333.9
Diluted 309.6 6.6 334.9
F-A5
KINROSS GOLD CORPORATION
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN MILLIONS OF U.S. DOLLARS EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated financial statements ("pro forma financial
statements") have been prepared using the purchase method of accounting for the
business combination of Kinross Gold Corporation ("the Company" or "Kinross"),
TVX Gold Inc. ("TVX") and Echo Bay Mines Ltd. ("Echo Bay") and using the
purchase method of accounting for the business combination of the Company and
Crown Resources Corporation ("Crown"). The Company has been identified as the
acquirer for both business combinations. The purchase price allocated to the TVX
and Echo Bay assets acquired and liabilities assumed was based on the final
purchase equation and their respective fair values at January 31, 2003 upon
completion of the business combination. The purchase price allocated to the
Crown assets acquired and liabilities assumed was based on their respective fair
values at March 31, 2004. The allocation of the aggregate purchase price
reflected in the pro forma financial statements for the Crown business
combination is preliminary. The actual purchase adjustment to reflect the fair
values of the assets acquired and liabilities assumed will be based upon
management's evaluation of such assets and liabilities and, accordingly, the
adjustments that have been included in the pro forma financial statements may be
subject to change. Such allocation may differ significantly from the preliminary
allocation included herein.
The accompanying pro forma financial statements as at and for the year ended
December 31, 2003, and as at and for the three months ended March 31, 2004, have
been prepared by the Company's management based on the audited consolidated
financial statements of the Company and Crown for the year ended December 31,
2003, and the unaudited interim consolidated financial statements of the Company
and Crown as at and for the three months ended March 31, 2004, and the unaudited
results of operations for TVX and Echo Bay for the one month period ended
January 31, 2003. The pro forma financial statements are presented as if the
business combinations had occurred on March 31, 2004, in respect to the pro
forma consolidated balance sheet and on January 1, 2003, in respect of the pro
forma consolidated statement of operations. The pro forma financial statements
have been reclassified to reflect classifications consistent with the
presentation adopted by the Company.
Accounting policies used in the preparation of the pro forma financial
statements are those disclosed in the Company's consolidated financial
statements. The financial statements of the Company and Crown have been prepared
in accordance with Canadian Generally Accepted Accounting Principles ("CDN
GAAP"). In the opinion of management of the Company, these pro forma financial
statements include all adjustments necessary for a fair presentation applicable
to the preparation of pro forma financial statements.
The pro forma financial statements are not necessarily indicative either of the
results that actually would have been achieved if the transactions reflected
herein had been completed on the dates indicated or the results, which may be
obtained in the future. In preparing these pro forma financial statements no
adjustments have been made to reflect transactions that have occurred since the
dates indicated or the general and administrative cost savings expected to
result from combining the operations of the Company, TVX, Echo Bay and Crown.
The pro forma financial statements should be read in conjunction with the
description of the combination of the Company and Crown in this registration
statement, the audited consolidated financial statements of the Company and
Crown as at and for the year ended December 31, 2003 and notes attached thereto,
the unaudited interim consolidated financial statements of the Company and Crown
as at and for the three months ended March 31, 2004 and notes attached hereto,
each contained elsewhere in this registration statement.
The combinations will be accounted for by the Company using the purchase method
of accounting in accordance with both Section 1581 "Business Combinations" of
the Canadian Institute of Chartered Accountants Handbook ("CICA Handbook"), for
purposes of CDN GAAP and Statement of Accounting Standards ("SFAS") 141,
"Business Combinations," for purposes of United States Generally Accepted
Accounting Principles ("U.S. GAAP"). Pursuant to the purchase method of
accounting under both CDN and U.S. GAAP, the TVX and Echo Bay assets acquired
and liabilities assumed were recorded at their fair values on January 31, 2003,
while, the Crown assets acquired and liabilities assumed will be recorded at
their fair values as of the effective date of the Combination. The excess of the
purchase price over the TVX and Echo Bay fair values of assets acquired and
liabilities assumed has been recorded as goodwill. In accordance with CICA
Handbook Section 3062, "Goodwill and Other Intangible Assets" for purposes of
CDN GAAP and SFAS 142 "Goodwill and Other Intangible Assets" for the purposes of
U.S. GAAP, goodwill was assigned to specific reporting units and will not be
amortized. Based on the preliminary purchase equation for Crown there was no
goodwill to be allocated.
F-A6
2. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS
The pro forma financial statements have been prepared on the basis that
the business combination more fully described elsewhere herein is completed and
the shareholders of Crown approve the business combination. In addition, the
results of operations of the Company have been adjusted to reflect the results
of operations for TVX and Echo Bay for the one month ended January 31, 2003 to
reflect the business combination as if it had occurred on January 1, 2003 for
purposes of pro forma statement of operations.
2.1 TVX AND ECHO BAY COMBINATION
On January 31, 2003, pursuant to a Canadian Plan of Arrangement, the
Company acquired 100% of TVX and 100% of Echo Bay. Consideration paid
for the TVX common shares was 2.1667 Kinross common shares for each TVX
common share. Consideration paid for the Echo Bay shares was 0.1733 of a
Kinross common share for each Echo Bay common share. The exchange ratio
reflects the three for one consolidation of the Company's common shares
that was approved by the shareholders on January 28, 2003 (see Note 16
to the audited consolidated financial statements). The purchase price
for these acquisitions totaled $1.3 billion, comprised of 177.8 million
Kinross common shares, $12.6 million of direct costs and $29.3 million
representing the fair value of common share purchase warrants and stock
options assumed. The value of Kinross was $7.14 per share based on the
average market price of the shares over the two-day period before and
after June 10, 2002, being the date Kinross, TVX and Echo Bay entered
into the combination agreement.
In a separate transaction, immediately prior to the business
combination, TVX acquired Newmont Mining Corporation's ("Newmont") 50%
non-controlling interest in the TVX Newmont Americas joint venture ("TVX
Newmont JV") for $180.0 million in cash. The purchase price was
satisfied using TVX's available cash of $85.5 million and cash advanced
by Kinross to TVX of $94.5 million.
Upon completion of the acquisition of TVX and TVX's purchase of
Newmont's interest in the TVX Newmont JV, Kinross holds various
non-operating interests in gold mines located in Chile (La Coipa - 50%),
Brazil (Paracatu - 49% and Crixas - 50%) and Canada (Musselwhite 32%),
an operating interest in one other Canadian mine (New Britannia - 50%)
and exploration interests in Brazil. Upon acquiring Echo Bay, Kinross
holds operating interests in gold mines located in the United States
(Round Mountain - 50%) and Canada (Lupin 100%) and interests in
development properties in both Canada and the United States.
The combination of Kinross, TVX and Echo Bay was undertaken to create
the seventh largest senior primary gold producer in the world, with the
financial and operating base necessary to continue to grow the Company.
With an expanded global operating base, a more than doubling of gold
production, increased cash flow provided from operating activities and a
portfolio of development projects, the Company has an enhanced ability
to pursue new growth strategies, previously unattainable, and undertake
significant exploration programs.
The acquisitions were accounted for using the purchase method of
accounting whereby identifiable assets acquired and liabilities assumed
were recorded at their fair market values as of the date of acquisition.
The excess of the purchase price over such fair value was recorded as
goodwill and amounted to $918 million. During the fourth quarter of
2003, the Company finalized the purchase price allocations for the TVX
and Echo Bay acquisitions. In addition, Kinross tested the goodwill for
impairment as at December 31, 2003 and determined that there was no
impairment at that date.
F-A7
The following reflects the final purchase price allocation for the combination
with TVX and Echo Bay (in millions except per share data):
TVX ECHO BAY
Common shares of Kinross issued to Echo Bay and TVX shareholders 93.9 83.9
Value of Kinross common stock per share $ 7.14 $ 7.14
------------------------------
Fair value of the Company's common stock issued $ 670.7 $ 599.1
Plus - fair value of warrants and options assumed by the Company (100% vested) 6.8 22.5
Plus - direct acquisition costs incurred by the Company 6.3 6.3
Plus - the Company's previous 10.6% ownership interest in Echo Bay - 7.0
------------------------------
Total purchase price $ 683.8 $ 634.9
Plus - fair value of liabilities assumed by Kinross
Accounts payable and accrued liabilities 53.6 23.1
Long-term debt, including current portion 2.2 -
Site restoration cost accruals, including current portion 17.5 45.5
Future income tax liabilities 52.0 0.8
Other long-term liabilities 0.1 -
Liability with respect to TVX Newmont JV assets acquired 94.5 -
Less - fair value of assets acquired by Kinross
Cash (27.8) (16.4)
Restricted cash (11.3) (10.1)
Marketable securities (0.5) (1.9)
Accounts receivable and other assets (18.2) (4.6)
Inventories (19.1) (28.8)
Properties, plant and equipment (129.1) (84.6)
Mineral interests (205.5) (78.4)
Long-term investments and other non-current assets (5.1) (48.6)
------------------------------
Residual purchase price allocated to goodwill $ 487.1 $ 430.9
==============================
Property, plant and equipment was adjusted to estimated fair values based on
replacement costs as determined through independent appraisals performed by a
third party. Mineral interests, representing acquired mineral use rights and
previously included in property, plant and equipment, were fair valued based on
estimated future cash flows or recent transactions involving sales of similar
properties, depending on the nature of the underlying property. Estimated future
cash flows were based on estimated quantities of gold to be produced at each
site, the estimated costs, timing and capital expenditures associated with such
production, the Company's long-term expectation that a price of $325 would be
realized for each ounce of gold produced, foreign currency exchange rates at the
date of acquisition and a discount rate specific to the Company's cost of
capital, estimated to be equal to 7%.
2.2 CROWN COMBINATION
On November 20, 2002, the Company executed a definitive acquisition agreement to
acquire 100% of the common shares of Crown. The Company has agreed to issue
0.2911 of a common share for each outstanding common share of Crown. The value
of the Kinross shares is $7.49 per share based on the average market price of
the shares over the two day period before and after October 8, 2003, being the
date Kinross and Crown announced the combination and entered into a letter
agreement. Total number of common shares to be issued by the Company is
approximately 10.54 million. The 10.54 million common shares to be issued by the
Company assume that all of the convertible senior notes payable outstanding by
Crown will be converted into common shares of Crown immediately prior to
closing, and the exercise of all stock options outstanding at March 31, 2004 for
net proceeds of $1.3 million. All stock options expire if not exercised prior to
closing. In addition, the Company has eliminated Crown's investment in Solitario
as the purchase agreement with the Company contemplates Crown distributing to
its shareholders the 9,633,585 shares it holds in Solitario immediately prior to
the closing of the combination. The transaction is expected to close in 2004.
F-A8
The following reflects the preliminary purchase price allocation for the
acquisition of 100% of Crown (in millions except per share data):
Common shares of Kinross to be issued to Crown shareholders 10.54
Value of Kinross common stock per share $ 7.49
---------
Fair value of the Company's common stock to be issued $ 79.1
Plus - Fair value of Crown's warrants and options 25.9
Acquisition costs 3.0
---------
Total purchase price $ 108.0
Plus - fair value of liabilities assumed by Kinross
Accounts payable and accrued liabilities 0.1
Long-term debt, including current portion 0.1
Future income tax liabilities 1.7
Less - fair value of assets acquired by Kinross
Cash (including $1.3 million of stock option proceeds) (2.9)
Short term investments (0.2)
Accounts receivable and other assets (0.1)
Mineral interests (106.6)
Long-term investments and other non-current assets (0.1)
---------
Residual purchase price allocated to goodwill $ NIL
=========
Mineral interests were fair valued based on estimated future cash flows
of the underlying property. Estimated future cash flows were based on estimated
quantities of gold to be produced, the estimated costs, timing and capital
expenditures associated with such production, the Company's long-term
expectation that a price of $350 would be realized for each ounce of gold
produced and a discount rate specific to the Company's cost of capital,
estimated to be equal to 7%.
2.3 DISTRIBUTION OF SOLITARIO RESOURCES CORPORATION ("SOLITARIO")
To eliminate Crown's share of loss on the investment in Solitario for the year
ended December 31, 2003 of $0.6 million and for the three months ended March 31,
2004 of $0.2 million as the purchase agreement with the Company contemplates
Crown distributing to its shareholders the 9,633,585 shares it holds in
Solitario prior to the closing of the purchase by the Company.
2.4 TVX JANUARY RESULTS OF OPERATIONS
To increase mining revenue by $11.7 million, interest and other income by $0.3
million, operating costs by $6.1 million, general and administration costs by
$6.2 million, exploration and business development costs by $0.3 million,
depreciation depletion and amortization costs by $2.0 million, foreign exchange
gain by $0.8 million, and income tax expense by $0.5 million to reflect the
results of operations for January 2003 by TVX. Included in TVX's general and
administration cost for January are costs to complete the business combination
of $5.4 million.
2.5 ECHO BAY JANUARY RESULTS OF OPERATIONS
To increase mining revenue by $16.7 million, operating costs by $11.0 million,
general and administrative costs by $11.1 million, exploration and business
development costs by $0.8 million and depreciation, depletion and amortization
by $2.8 million to reflect the results of operations for January 2003 by Echo
Bay. Included in Echo Bay's general and administration cost for January are
costs to complete the business combination of $11.0 million.
CONFORMING ADJUSTMENTS
2.6 REVENUE RECOGNITION
To increase Echo Bay's mining revenue for the year ended December 31, 2003 by
$0.2 million and operating costs by $0.2 million to reflect silver sales as
revenue in accordance with the Company's accounting policies. Echo Bay credited
by-product silver revenues to operating costs where the Company records
by-product silver as part of revenue.
F-A9
2.7 DEFERRED STRIPPING
To increase operating costs for the year ended December 31, 2003 of TVX by $0.3
million to reflect the impact of expensing stripping costs as incurred in
accordance with the Company's accounting policies.
2.8 DEPRECIATION, DEPLETION AND AMORTIZATION
To increase depreciation, depletion and amortization expense for the year ended
December 31, 2003 of TVX and Echo Bay by $0.7 million to reflect the impact of
the final purchase equation on the pro forma results for January 2003.
3. ITEMS NOT ADJUSTED
The pro forma financial statements do not give effect to operating efficiencies,
cost savings and synergies that might result from the business combinations of
Kinross, TVX, Echo Bay and Crown at the corporate level.
4. SHARE INFORMATION
The number of pro forma common shares outstanding after giving effect to the
transaction is:
Kinross issued and outstanding at March 31, 2004 345.9
Crown shares converted to equivalent Kinross shares(1) 10.5
------------
356.4
============
-----------------------
(1) Assumes the issuance of 10.5 million common shares of the Company for
36.2 million common shares of Crown.
The pro forma net earnings per common share in the amount of $0.01 for the year
ended December 31, 2003 and $0.04 for the three months ended March 31, 2004 has
been calculated using the weighted average number of common shares of the
Company outstanding during the year ended December 31, 2003, and the three
months ended March 31, 2004, plus the additional common shares that will be
issued to complete the business combination with Crown and the additional
weighting of the shares issued to complete the business combination with TVX and
Echo Bay, had that combination been completed on January 1, 2003. The increase
in equity component of convertible debentures and gain on redemption of equity
component of convertible debentures have been included in the determination of
net earnings attributable to common shareholders on the pro forma statement of
operations in the determination of per share data.
Weighted average number of common shares outstanding used in computing per share
amounts for the year ended December 31, 2003:
Weighted average number of common shares outstanding for the Company for the year ended 308.6
December 31, 2003
Additional common shares issued to complete the Crown combination 10.5
Additional weighting of common shares issued to complete the TVX combination 7.8
Additional weighting of common shares issued to complete the Echo Bay combination 7.0
------------
333.9
============
Weighted average number of common shares outstanding used in computing per share
amounts for the three months ended March 31, 2004:
Weighted average number of common shares outstanding for the Company for the period
ended March 31, 2004 345.7
Additional common shares issued to complete the Crown combination 10.5
------------
356.2
============
F-A10
5. INCOME AND MINING TAXES
The December 31, 2003 pro forma tax adjustment and the pro forma consolidated
provision for income and mining taxes were recorded at the statutory rates that
were then in force. The statutory rates are: Canada income tax--approximately
40%; Ontario mining tax--12%; Manitoba mining tax--18%; U.S. income tax--35%;
Russian income tax--24%; Brazil income tax--34%; Chile income tax--35%. For the
Canada and U.S. income tax, no recognition was given to tax losses for purposes
of the calculation of the current period tax expense.
6. RECONCILIATION OF UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
FROM CDN TO U.S. GAAP
The tables below set out the material adjustments to pro forma consolidated net
earnings (loss) and shareholders' equity reflected in the unaudited pro forma
consolidated financial information which would be required if U.S. GAAP had been
applied. These tables should be read in conjunction with Note 22 of the
Company's audited financial statements for the year ended December 31, 2003, and
Note 11 of these unaudited consolidated financial statements.
RECONCILIATION OF PRO FORMA NET LOSS
Three months ended Year ended
March 31, 2004 December 31, 2003
----------------------------------------
Pro forma net earnings for the year under CDN GAAP $ 13.2 $ (5.0)
Adjustments for:
Recognition of deferred exchange gains and losses on convertible debentures (a) -- (17.8)
Elimination of effects of recognition of equity component of convertible
debentures (a) -- (3.2)
Property, plant and equipment & amortization of differences from applying SFAS
121(b) 0.9 6.3
Restatement to equity account for investment in Echo Bay (c) -- (1.0)
Effect of SFAS 133(d) 0.4 0.5
Impact of adoption of Section 3110(e) 1.0 (11.1)
----------------------------------------
Pro forma net earnings (loss) for the year under U.S. GAAP $ 15.5 $ (31.3)
========================================
Pro forma U.S. GAAP earnings (loss) per common share $ 0.04 $ (0.09)
RECONCILIATION OF PRO FORMA CONSOLIDATED SHAREHOLDERS' EQUITY
As of March 31,
2004
----------------------
Pro forma shareholders' Equity under CDN GAAP $ 1,819.7
Adjustments for:
Property, plant and equipment & amortization of differences from applying SFAS
121(b) (27.3)
Gains on marketable securities and long-term investments (c) 5.8
Restatement to equity account for investment in Echo Bay (c) 40.8
Effect of SFAS 133(d) (17.9)
Minimum pension liability(g) (3.1)
----------------------
Pro forma shareholders equity under U.S. GAAP $ 1,818.0
======================
The pro forma U.S. GAAP net earnings (loss) per common share in the amount of
$0.04 and ($0.09) for the three months ended March 31, 2004, and year ended
December 31, 2003, respectively, have been calculated using the weighted average
number of common shares of the Company outstanding during the three months ended
March 31, 2004, plus the additional
F-A11
common shares that will be issued to complete the business combination with
Crown and the additional weighting of the shares issued to complete the business
combination with TVX and Echo Bay, had that combination been completed on
January 1, 2003.
(a) Under CDN GAAP, the convertible debentures were accounted for in
accordance with their substance and were presented in the financial statements
in their respective liability and equity components. The Company redeemed these
convertible debentures on September 29, 2003. Under U.S. GAAP, the entire
principal amount of the convertible debentures plus accrued interest of $146.8
million immediately prior to the redemption was treated as debt with interest
expense based on the coupon rate of 5.5%.
In addition, under CDN GAAP, realized and unrealized foreign exchange gains and
losses on the debt component of the debentures were recognized in income. For
U.S. GAAP, in addition to including these gains and losses in income, realized
and unrealized exchange gains and losses related to the portion of the
convertible debentures included in equity under CDN GAAP were also included in
income. There was no gain or loss on the redemption of the convertible
debentures for U.S. GAAP.
(b) Cumulatively, as a result of applying SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
following the adoption of SFAS 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets," property, plant and equipment is reduced and the deficit
increased by $60.5 million. This difference arose from the requirement to
discount future cash flows from impaired property, plant and equipment under
U.S. GAAP and from using proven and probable reserves only. At the time of the
impairment, future cash flows from impaired property, plant and equipment were
not discounted under CDN GAAP. Under U.S. GAAP, depreciation, depletion and
amortization, in periods subsequent to the impairment, would be reduced by $0.9
million and $6.3 million for the three months ended March 31, 2004, and the year
ended December 31, 2003, respectively, to reflect the above. Cumulatively, as a
result of these reductions in depreciation, depletion and amortization,
property, plant and equipment is increased and the deficit decreased by $27.3
million and $28.2 million as of March 31, 2004 and December 31, 2003,
respectively.
(c) Under CDN GAAP, unrealized gains and losses on long-term investments and
marketable securities are not recorded. Under U.S. GAAP, unrealized gains on
long-term investments that are classified as securities available for sale of
$5.6 million and $6.9 million as of March 31, 2004 and December 31, 2003,
respectively, and marketable securities of $0.2 million and $0.3 million as of
March 31, 2004 and December 31, 2003, respectively are included as a component
of comprehensive income (loss).
Furthermore, U.S. GAAP requires that the transaction on April 3, 2002, whereby
the Company exchanged its investment in debt securities of Echo Bay for 57.1
million common shares of Echo Bay, be recorded at fair value with the resulting
gain included in earnings. Under CDN GAAP, the cost of the Echo Bay common
shares acquired on the exchange was recorded at the values of the securities
given up. Since the fair value of the capital securities given up approximated
their carrying value, no gain was recorded under CDN GAAP.
Subsequent to the exchange of debt securities, the Company accounted for its
share investment in Echo Bay as an available for sale security under U.S. GAAP.
At January 31, 2003, when the Company acquired the remaining outstanding common
shares of Echo Bay, the Company retroactively restated its 2002 consolidated
financial statements, prepared in accordance with U.S. GAAP, to account for its
share investment in Echo Bay on an equity basis. As a result, the Company
reversed an unrealized gain of $21.8 million previously included in other
comprehensive income, increased its deficit by $0.7 million to reflect its share
of equity losses for the period ended December 31, 2002 and correspondingly
reduced the carrying value of its investment. In addition, the Company decreased
long-term investments and recorded a share of loss in investee company of $1.0
million for the one month ended January 31, 2003 and increased long-term
investments and recorded a share of income in investee company of $0.7 million
during the year ended December 31, 2002. For U.S. GAAP purposes, as a result of
the business combination on January 31, 2003, the Company recognized an
additional $40.8 million of goodwill representing the difference in carrying
value of its share investment in Echo Bay between CDN and U.S. GAAP.
F-A12
(d) Under CDN GAAP, derivatives hedging forecasted transactions are
off-balance sheet until the hedged transaction is recorded. Realized gains and
losses on derivatives that are closed out early are initially recorded as
deferred revenue or deferred charges and are recorded as an adjustment to net
earnings (loss) when the original hedged transaction is recorded.
On January 1, 2001, the Company adopted Financial Accounting Standards Board
("FASB") Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), and the corresponding amendments under FASB Statement
No. 138 ("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 periodically 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. For derivatives designated as cash
flow hedges, the effective portions of changes in fair value of the derivative
are reported in other comprehensive income and are subsequently reclassified
into other income when the hedged item affects other income. Changes in fair
value of the derivative instruments used as economic instruments and ineffective
portions of hedges are recognized in other income in the period incurred. The
application of SFAS 133 results in a cumulative decrease in deferred revenue of
$1.7 million and $2.2 million, a cumulative increase in accounts payable and
accrued liabilities of $19.6 million and $22.7 million, a cumulative increase in
deficit of $1.0 million and $1.4 million, and a cumulative decrease in other
comprehensive income of $16.9 million and $19.1 million as of March 31, 2004,
and December 31, 2003, respectively. Additionally, as a result of applying SFAS
133, there would be an increase in the CDN GAAP net earnings of $0.4 million and
a decrease in the CDN GAAP net loss of $0.9 million for the three months ended
March 31, 2004, and December 31, 2003, respectively. On adoption of SFAS 133,
the Company did not complete the required documentation and effectiveness
assessments to achieve hedge accounting for the commodity derivatives hedging
gold revenues and energy price risk, although the contracts are considered to be
effective economic hedges and they were accounted for as hedges for CDN GAAP
purposes. For U.S. GAAP only, these derivatives are carried at fair value with
the changes in fair value recorded as an adjustment to net earnings (loss). The
SFAS 133 requirements for foreign exchange forward contracts were accounted for
as cash flow hedges from January 1, 2001. Realized and unrealized derivatives
gains and losses included in other comprehensive income ("OCI") on transition
and during 2001 were reclassified into mining revenue for cash-flow hedges of
forecasted commodity sales and foreign exchange gain (loss) for forecasted
foreign currency revenues or expenses when the hedged forecasted revenue or
expense is recorded. For the three months ended March 31, 2004, and the year
ended December 31, 2003, $2.7 million and $9.3 million, respectively, of
derivative losses were reclassified out of other comprehensive income. As at
March 31, 2004, the Company estimates that $15.9 million of net derivatives
losses included in other comprehensive income will be reclassified into earnings
within the next twelve months. Beginning January 2002, the Company met the
required documentation requirements under SFAS 133 relating to the prospective
and retrospective effectiveness assessments for the commodity derivatives; thus,
these derivatives were designated as cash flow hedges. The effective portions of
changes in fair values of these derivatives are now recorded in other
comprehensive income and are recognized in the income statement when the hedged
item affects earnings. Ineffective portions of changes in fair value of cash
flow hedges are recognized in earnings. There was no ineffectiveness recorded
during the three months March 31, 2004.
(e) Effective January 1, 2004, the Company adopted Section 3110, "Accounting
for Asset Retirement Obligations" which requires that the fair value of
liabilities for asset retirement obligations associated with tangible long-lived
assets be recognized in the period in which they are incurred. This Section
harmonizes CDN GAAP with U.S. GAAP for the accounting for asset retirement
obligations. There are no GAAP differences between CDN GAAP and U.S. GAAP
related to the accounting for asset retirement obligations on a prospective
basis.
Under Section 3110 the transitions provisions required the prior year
comparatives to be restated. However, U.S. GAAP required a cumulative effect of
accounting change to be recorded in the period of adoption for SFAS 143, which
was recorded during the three months ended March 31, 2003.
(f) Under CDN GAAP and U.S. GAAP, effective January 1, 2004, the Company
recorded an expense for employee stock-based compensation using the fair value
based method in accordance with the transitional provisions of Section 3870 and
SFAS 123, as amended by SFAS 148. Section 3870 is harmonized with SFAS 123 and
SFAS 148. As a result no GAAP differences are required on the adoption of the
fair value based method of accounting for stock options.
The fair value at grant date of stock options is estimated using the
Black-Scholes option-pricing model. Compensation expense is recognized over the
stock option vesting period.
F-A13
(g) Under U.S. GAAP, if the accumulated pension plan benefit obligation
exceeds the market value of plan assets, a minimum pension liability for the
excess is recognized to the extent that the liability recorded in the balance
sheet is less than the minimum liability. Any portion of this additional
liability that relates to unrecognized prior service cost is recognized as an
intangible asset while the remainder is charged to Other Comprehensive Income.
CDN GAAP does not require the Company to record a minimum liability and does not
have the concept of Other Comprehensive Income. In 2003, the Company recorded a
minimum pension liability of $3.1 million with a corresponding decrease in Other
Comprehensive Income. None of the additional liability relates to unrecognized
prior service cost.
F-A14
KINROSS GOLD CORPORATION
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN MILLIONS OF U.S. DOLLARS) (UNAUDITED)
As at As at
March 31, December 31
2004 2003
-------------------------- ------------------------
Restated(a)
ASSETS
Current assets
Cash and cash equivalents $ 217.6 $ 245.8
Restricted cash 1.4 5.1
Accounts receivable and other assets 30.4 42.2
Inventories (Note 4) 132.4 109.2
--------------- -------------
381.8 402.3
Property, plant and equipment 520.7 525.2
Mineral interests 253.4 260.1
Goodwill 918.0 918.0
Long-term investments (Note 5) 16.5 2.1
Future income and mining taxes 1.3 1.5
Deferred charges and other long-term assets 24.5 35.9
---------------
$ 2,116.2 $ 2,145.1
=============== =============
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 84.8 $ 101.4
Current portion of long-term debt 4.4 29.4
Current portion of site restoration cost obligations (Note 2(b)) 22.1 19.2
--------------- -------------
111.3 150.0
Long-term debt 0.4 0.7
Site restoration cost obligations (Note 2(b)) 107.4 111.0
Future income and mining taxes 54.5 55.6
Deferred revenue 1.7 2.2
Other long-term liabilities 4.7 4.7
Redeemable retractable preferred shares 2.9 3.0
--------------- -------------
282.9 327.2
--------------- -------------
NON-CONTROLLING INTEREST 0.7 0.7
--------------- -------------
CONVERTIBLE PREFERRED SHARES OF SUBSIDIARY COMPANY 12.9 12.6
--------------- -------------
COMMON SHAREHOLDERS' EQUITY
Common share capital and common share purchase warrants 1,784.0 1,783.5
Contributed surplus 32.9 30.0
Retained earnings 4.8 (6.9)
Cumulative translation adjustments (2.0) (2.0)
--------------- --------------
1,819.7 1,804.6
--------------- -------------
$ 2,116.2 $ 2,145.1
=============== =============
------------------------
(a) See Note 2(b).
F-B1
KINROSS GOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31
(EXPRESSED IN MILLIONS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three months ended
March 31,
------------------------------------------------------
2004 2003
-------------------------- ------------------------
Restated(a)
REVENUE AND OTHER INCOME
Mining revenue $ 155.6 $ 117.0
Interest and other income 1.8 1.0
Mark-to-market (loss) gain on call options (0.8) 2.1
--------------- -------------
156.6 120.1
--------------- -------------
Expenses
Operating (exclusive of depreciation, depletion and amortization
shown separately below) 94.5 87.5
General and administrative 6.9 5.8
Exploration and business development 3.5 6.2
Depreciation, depletion and amortization 32.4 28.2
Gain on disposal of assets (0.4) (0.1)
Foreign exchange loss 2.4 0.7
Interest expense on long-term liabilities 0.7 1.1
--------------- -------------
140.0 129.4
--------------- -------------
EARNINGS (LOSS) BEFORE TAXES AND OTHER ITEMS 16.6 (9.3)
Provision for income and mining taxes (3.2) (2.5)
--------------- -------------
EARNINGS (LOSS) FOR THE PERIOD BEFORE DIVIDENDS ON CONVERTIBLE
PREFERRED SHARES OF SUBSIDIARY COMPANY 13.4 (11.8)
DIVIDENDS ON CONVERTIBLE PREFERRED SHARES OF SUBSIDIARY COMPANY (0.2) (0.2)
--------------- -------------
NET EARNINGS (LOSS) FOR THE PERIOD $ 13.2 $ (12.0)
=============== =============
ATTRIBUTABLE TO COMMON SHAREHOLDERS:
NET EARNINGS (LOSS) FOR THE PERIOD $ 13.2 $ (12.0)
Increase in equity component of convertible debentures -- (2.1)
--------------- -------------
NET EARNINGS (LOSS) ATTRIBUTABLE TO COMMON SHARES $ 13.2 $ (14.1)
=============== =============
EARNINGS (LOSS) PER SHARE
Basic (note 7) $ 0.04 $ (0.06)
Diluted (Note 7) $ 0.04 $ --
WEIGHTED AVERAGE NUMBER COMMON SHARES OUTSTANDING
Basic (Note 7) 345.7 253.1
Diluted (Note 7) 346.3 --
TOTAL OUTSTANDING AND ISSUED COMMON SHARES AT MARCH 31 345.9 314.7
F-B2
KINROSS GOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
(EXPRESSED IN MILLIONS OF U.S. DOLLARS) (UNAUDITED)
Three months ended
March 31,
------------------------------------------------------
2004 2003
-------------------------- ------------------------
Restated(a)
NET INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING:
Earnings (loss) for the period before dividends on convertible preferred
shares of subsidiary company $ 13.4 $ (11.8)
Items not affecting cash:
Depreciation, depletion and amortization 32.4 28.2
Future income and mining taxes (0.9) 0.1
Accretion expense 2.2 2.1
Changes in non-cash working capital items
Accounts receivable and other assets 11.6 6.2
Inventories (22.0) (5.4)
Accounts payable and accrued liabilities (16.6) (1.6)
Site restoration cash expenditures (1.7) (2.1)
Other (0.5) 0.5
--------------- -------------
CASH FLOW PROVIDED FROM OPERATING ACTIVITIES 17.9 16.2
--------------- -------------
FINANCING:
Issuance of common shares 1.4 1.8
Reduction of debt component of convertible debentures -- (1.4)
Repayment of debt (25.3) (1.0)
--------------- -------------
CASH FLOW USED IN FINANCING ACTIVITIES (23.9) (0.6)
--------------- -------------
INVESTING:
Additions to property, plant and equipment (22.4) (12.8)
Business acquisitions, net of cash acquired -- (81.4)
Long-term investments and other assets (3.7) (3.7)
Proceeds form the sale of property, plant and equipment 0.5 --
Decrease in restricted cash 3.7 31.8
--------------- -------------
CASH FLOW USED IN INVESTING ACTIVITIES (21.9) (66.1)
--------------- -------------
Effect of exchange rate changes on cash (0.3) 2.3
--------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS (28.2) (48.2)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 245.8 170.6
--------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 217.6 $ 122.4
=============== =============
------------------------
(a) See Note 2(b).
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ 0.4 $ 0.3
Income taxes $ 1.7 $ 1.2
KINROSS GOLD CORPORATION
F-B3
KINROSS GOLD CORPORATION
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31
(EXPRESSED IN MILLIONS OF U.S. DOLLARS) (UNAUDITED)
COMMON RETAINED CUMULATIVE
SHARE CONTRIBUTED CONVERTIBLE EARNINGS TRANSLATION
CAPITAL SURPLUS DEBENTURES (DEFICIT) ADJUSTMENTS TOTAL
---------------------------------------------------------------------------------
Restated(a)
BALANCE, DECEMBER 31, 2002 (RESTATED) $ 1,058.5 $ 12.9 $ 132.3 $ (773.1) $ (23.4) $ 407.2
Reduction of stated capital (761.4) -- -- 761.4 -- --
Issuance of common shares 1,301.0 -- -- -- -- 1,301.0
Increase in equity component of
convertible debentures -- -- 2.2 (2.1) -- 0.1
Net loss for the period -- -- -- (12.0) -- (12.0)
Cumulative translation adjustments -- -- -- -- 9.4 9.4
--------- --------- ---------- ---------- ---------- ---------
BALANCE, MARCH 31, 2003 $ 1,598.1 $ 12.9 $ 134.5 $ (25.8) $ (14.0) $ 1,705.7
========= ========= ========== ========== ========== =========
BALANCE, DECEMBER 31, 2003 (RESTATED) $ 1,783.5 $ 30.0 $ -- $ (6.9) $ (2.0) $ 1,804.6
Cumulative effect of recording the
fair value of stock options as
compensation expense -- 1.5 -- (1.5) -- --
--------- --------- ---------- ---------- ---------- ---------
BALANCE, JANUARY 1, 2004 1,783.5 31.5 -- (8.4) (2.0) 1,804.6
Issuance of common shares 1.4 -- -- -- -- 1.4
Stock-based compensation expense(b) -- 0.5 -- -- -- 0.5
Net earnings for the period -- -- -- 13.2 -- 13.2
Transfer of fair value of expired options (0.9) 0.9 -- -- -- --
--------- --------- ---------- ---------- ---------- ---------
BALANCE, MARCH 31, 2004 $ 1,784.0 $ 32.9 $ -- $ 4.8 $ (2.0) $ 1,819.7
========= ========= ========== ========== ========== =========
------------------------
(a) See Note 2(b).
(b) Includes stock option and restricted stock unit expense.
F-B4
KINROSS GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS, EXCEPT PER SHARE AND PER
OUNCE AMOUNTS, UNLESS OTHERWISE STATED)
1. BASIS OF PRESENTATION
The interim consolidated financial statements (the "financial
statements") of Kinross Gold Corporation (the "Company") have been prepared in
accordance with the accounting principles and methods of application disclosed
in the consolidated financial statements for the year ended December 31, 2003,
except for those indicated below.
The accompanying interim unaudited consolidated financial statements
include all adjustments that are, in the opinion of management, necessary for a
fair presentation. These financial statements do not include all disclosures
required by Canadian Generally Accepted Accounting Principles ("CDN GAAP") for
annual consolidated financial statements and accordingly the financial
statements should be read in conjunction with the Company's annual report for
the year ended December 31, 2003 filed with all the Canadian securities
regulatory agencies on April 16, 2004.
RECENT ACCOUNTING PRONOUNCEMENT
On March 19, 2003, the Emerging Issues Committee (EIC) of the Canadian
Institute of Chartered Accountants ("CICA") issued EIC 146 "Flow through shares"
("EIC 146"). EIC 146 requires the recognition of a future tax liability and a
reduction to shareholders equity on the date that the company renounces the tax
credits associated with tax expenditures provided there is reasonable assurance
that the expenditures will be made. This EIC is applicable on a prospective
basis for all transactions initiated after March 19, 2003. The Company will be
adopting EIC 146 on a prospective basis.
COMPARATIVE FIGURES
Certain 2003 figures in the accompanying unaudited consolidated
financial statements have been reclassified to conform to the 2004 presentation.
2. ACCOUNTING CHANGES
(A) STOCK-BASED COMPENSATION
In November 2001, the CICA issued Handbook Section 3870, "Stock-Based
Compensation and Other Stock-Based Payments" ("Section 3870"), which was revised
in November 2003. Section 3870 establishes standards for the recognition,
measurement, and disclosure of stock-based compensation and other stock-based
payments made in exchange for goods and services and applies to transactions,
including non-reciprocal transactions, in which an enterprise grants common
shares, stock options or other equity instruments, or incurs liabilities based
on the price of common shares or other equity instruments. Section 3870 outlines
a fair value based method of accounting required for certain stock-based
transactions, effective January 1, 2002 and applied to awards granted on or
after that date.
Prior to January 1, 2004, as permitted by Section 3870, the Company did
not adopt the provisions in respect of the fair value based method of accounting
for its employee stock-based transactions.
Effective January 1, 2004, the Company recorded an expense for employee
stock-based compensation using the fair value based method prospectively for all
awards granted or modified on or after January 1, 2002, in accordance with the
transitional provisions of Section 3870. The fair value at grant date of stock
options is estimated using the Black-Scholes option-pricing model. Compensation
expense is recognized over the stock option vesting period.
The impact of the adoption of the fair value based method for all awards
only impacted the Company's method of accounting for stock options. Stock option
compensation (pre-tax) of $1.5 million is recorded as a result of the cumulative
effect of the adoption of Section 3870 as an adjustment to opening retained
earnings as shown in the consolidated statements of common shareholders' equity.
Additionally, during the three months ended March 31, 2004 the Company recorded
stock option expense of $0.3 million. Additionally, the Company recorded
restricted stock unit expense of $0.2 million during the three months ended
March 31, 2004.
Had the Company adopted the fair value based method of accounting for
all stock-based awards, reported net earnings (loss) and earnings (loss) per
common share would have been adjusted to the pro forma amounts indicated in the
table below:
F-B5
THREE MONTHS ENDED
MARCH 31, 2003
-------------------------
Restated(a)
Net earnings (loss) $ (12.0)
Stock-based compensation expense--pro forma (0.1)
Net earnings (loss)--pro forma $ (12.1)
-------------------------
Loss per common share
Basic and diluted--reported $ (0.06)
Basic and diluted--pro forma $ (0.06)
=========================
(B) ASSET RETIREMENT OBLIGATIONS
The CICA issued Handbook Section 3110 "Asset Retirement Obligations"
("Section 3110") to be applied to fiscal years commencing on or after January 1,
2004. Section 3110 requires a liability to be initially recognized for the
estimated fair value of the obligation when it is incurred. The associated asset
retirement cost is capitalized as part of the carrying amount of the long-lived
asset and depreciated over the remaining life of the underlying asset and the
associated liability is accreted to the estimated fair value of the obligation
at the settlement date through periodic accretion charges to net earnings
(loss). When the obligation is settled, any difference between the final cost
and the recorded liability is recognized as income or loss on settlement.
The Company's mining and exploration activities are subject to various
laws and regulations for federal, provincial and various international
jurisdictions governing the protection of the environment. These laws and
regulations are continually changing. The Company conducts its operations so as
to protect the public health and environment and believes its operations are in
compliance with all applicable laws and regulations. The Company has made, and
expects to make in the future, expenditures to comply with such laws and
regulations, but cannot predict the amount of such future expenditures.
Estimated future reclamation costs are based principally on legal and regulatory
requirements. Prior to the issue of Section 3110 the Company accrued for
estimated site restoration and closure obligations over the producing life of a
mine with an annual charge to earnings based primarily on legal, regulatory
requirements and company policy.
Effective January 1, 2004, the Company adopted the initial recognition
and measurement provisions of Section 3110 and applied them retroactively. The
financial statements and accompanying notes have been restated to reflect the
adoption of Section 3110. The adoption of Section 3110 resulted in an increase
in net loss for the period of $0.8 million (pretax) for the period ended March
31, 2003 as a result of adjustments required to the site restoration cost
obligation and the recording of a cumulative effect of accounting change of
$10.1 million and $12.3 million as at December 31, 2002 and 2003, respectively,
which reduced opening retained earnings (deficit) as shown in the Consolidated
statements of common shareholders' equity. During the three months ended March
31, 2004, the Company recorded depreciation expense of $0.5 million (pretax) and
accretion expense of $2.2 million (pretax). The adoption also resulted in the
recording of a long-lived asset of $3.3 million and $3.8 million as at March 31,
2004 and December 31, 2003, respectively. The site restoration cost obligation
(asset retirement obligation liability) as at December 31, 2003 of $117.5
million was also increased by $12.6 million to $130.2 million to reflect the
adoption of Section 3110. The site restoration cost accrual as at March 31, 2004
was $129.5 million. The undiscounted amount of estimated cash flows to settle
the site restoration cost accruals was approximately $145 million. The expected
timing of expenditures ranges from 2004 to 2025. The credit adjusted risk free
rate used in estimating the site restoration cost obligation was 7%.
F-B6
THREE MONTHS ENDED
MARCH 31, 2003
-----------------------
Net loss for the period
As previously reported $ (11.2)
Impact of adoption of Section 3110 (0.8)
As currently reported $ (12.0)
Earnings (loss) per common share
Basic and diluted
As previously reported $ (0.05)
Impact of adoption of Section 3110 (0.01)
As currently reported $ (0.06)
=======================
The following table provides a reconciliation of the site restoration
cost obligation for the following periods:
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2004 DECEMBER 31, 2003
----------------------- ----------------------
Balance at the beginning of the period $ 130.2 $ 57.0
Impact on adoption of Section 3110 -- 13.2
Additions resulting from acquisitions(a) -- 64.6
Liabilities settled (2.6) (22.4)
Accretion expense 2.2 9.4
Foreign exchange (0.3) 3.4
Revisions -- 5.0
----------------------- ----------------------
Balance at the end of the period $ 129.5 $ 130.2
======================= ======================
-------------------------
(a) Reflects the acquisitions of TVX and Echo Bay as well as the increase in
ownership of Kubaka.
3. 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.
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. 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.
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. The mark-to-market adjustments increased the liability by
$0.8 million for the three months ended March 31, 2004 and decreased the
liability by $2.1 million for the three months ended March 31, 2003.
F-B7
4. INVENTORIES
The following table details the composition of inventories as at:
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2004 DECEMBER 31, 2003
----------------------- ----------------------
In-process $ 15.9 $ 15.5
Finished metal 21.0 15.4
Ore in stockpiles 14.7 15.3
Ore on leach pads 13.2 8.3
Materials and supplies 75.4 62.5
----------------------- ----------------------
$ 140.2 $ 117.0
Long-term portion of ore in stockpiles(a) (7.8) (7.8)
----------------------- ----------------------
$ 132.4 $ 109.2
======================= ======================
-------------------------
(a) Long-term portion of ore in stockpiles is included in deferred charges
and other assets on the consolidated balance sheets.
The most significant amounts of ore in stockpiles represents stockpiled
ore at the Company's Fort Knox mine and its proportionate share of stockpiled
ore at Round Mountain, La Coipa and the Porcupine Joint Venture.
Ore on leach pads relates entirely to the Company's 50% owned Round
Mountain mine.
Based on current mine plans, the Company expects to place the last tonne
of ore on its current leach pad in 2008. The Company expects that all economic
ounces will be recovered within approximately 12 months following the date the
last tonne of ore is placed on the leach pad.
5. LONG-TERM INVESTMENTS
On February 10, 2004, the Company entered into a transaction with
Wolfden Resources Inc. to sell its interests in the Ulu gold property in
exchange for 2.0 million common shares of Wolfden Resources Inc. valued at $7.7
million and 1.0 million common share warrants each to acquire one common share
at an exercise price of $5.80 valued at $1.1 million exercisable for 18 months
from the transaction date. In addition, the Company also received $2.0 million
in cash consideration. There was no gain or loss on sale as result of this
transaction.
On January 8, 2004, the Company purchased a 10.2% interest in Anatolia
Minerals Development Limited. As a result, the Company received 4.0 million
common shares of Anatolia Minerals Development Limited valued at $5.4 million.
6. SEGMENTED INFORMATION
The Company operates primarily in the gold mining industry. Its
activities include gold production, exploration for gold and the acquisition of
gold properties. The Company's primary mining operations are in North America,
South America and Russia and are supported by two corporate offices, one in
Canada and the other in the United States. The Company's major product is gold.
Reportable segments are identified as those individual mine sites having over
10% of total earnings (loss) or assets of the Company. The exploration and
acquisition segment is responsible for all activities involved in the
exploration for gold bearing properties, regardless of location and has the
responsibility for additions to the proven and probable reserves of the Company.
In addition, this segment is responsible for the addition of proven and probable
reserves through acquisitions and subsequent exploration of those acquired
properties. Operations not meeting these thresholds are included in corporate
and other. Segment earnings (loss) do not include general and administrative
expenses or other revenues and expenses of a corporate nature.
The following tables set forth information by segment for the following
periods:
F-B8
DEPRECIATION, SEGMENT
OWNERSHIP MINING OPERATING DEPLETION AND EARNINGS
LOCATION INTEREST REVENUE COSTS AMORTIZATION EXPLORATION (LOSS)
---------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2004:
OPERATED BY KINROSS
Fort Knox Alaska 100.0% $ 35.8 $ 23.0 $ 7.1 $ -- $ 5.7
Kubaka Russia 98.1% 12.0 8.0 1.7 -- 2.3
Round Mountain Nevada 50.0% 36.8 18.1 8.0 -- 10.7
JOINT VENTURE PARTICIPANT
La Coipa Chile 50.0% 15.8 8.4 2.5 -- 4.9
Crixas Brazil 50.0% 9.5 3.0 2.2 -- 4.3
Paracatu Brazil 49.0% 9.5 4.6 1.5 -- 3.4
Musselwhite Ontario 31.9% 8.0 5.6 1.8 -- 0.6
Porcupine Joint Venture Ontario 49.0% 20.4 12.8 5.1 -- 2.5
OTHER
Exploration and acquisitions 100.0% -- -- -- 3.5 (3.5)
Corporate and other(b) 7.8 11.0 2.5 -- (5.7)
-------------------------------------------------------------------------------------------------------------------
TOTAL $ 155.6 $ 94.5 $ 32.4 $ 3.5 $ 25.2
===================================================================================================================
FOR THE THREE MONTHS ENDED MARCH 31, 2003--RESTATED(A):
OPERATED BY KINROSS
Fort Knox Alaska 100.0% $ 33.2 $ 23.9 $ 10.0 $ -- $ (0.7)
Kubaka(c) Russia 98.1% 11.5 5.8 3.1 -- 2.6
Round Mountain Nevada 50.0% 21.3 14.1 6.1 -- 1.1
JOINT VENTURE PARTICIPANT
La Coipa Chile 50.0% 10.6 8.4 1.1 -- 1.1
Crixas Brazil 50.0% 5.6 2.5 1.8 -- 1.3
Paracatu Brazil 49.0% 5.8 3.7 1.0 -- 1.1
Musselwhite Ontario 32.0% 2.9 2.8 1.0 -- (0.9)
Porcupine Joint Venture Ontario 49.0% 18.2 13.7 4.4 -- 0.1
OTHER
Exploration and acquisitions 100.0% -- 0.7 -- 6.2 (6.9)
Corporate and other(b) 7.9 11.9 (0.3) -- (3.7)
-------------------------------------------------------------------------------------------------------------------
TOTAL $ 117.0 $ 87.5 $ 28.2 $ 6.2 $ (4.9)
===================================================================================================================
-------------------------
(a) See note 2(b).
(b) Includes Corporate and other non-core mining operations.
(c) Segment information for the three months ended March 31, 2003 included
the Company's portion of Kubaka's financial results (54.7% until
February 28, 2003 and 100% thereafter).
F-B9
The following table reconciles the reportable operating segment earnings
(loss) to net earnings (loss) for the three months ended March 31:
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2004 2003
---------------- ----------------
Restated(a)
Segment earnings (loss) $ 25.2 $ (4.9)
Interest and other income 1.8 1.0
Mark-to-market (loss) gain on call options (0.8) 2.1
General and administrative (6.9) (5.8)
Gain on sale of assets 0.4 0.1
Foreign exchange (2.4) (0.7)
Interest expense on long-term liabilities (0.7) (1.1)
---------------- ----------------
Earnings (loss) before taxes and dividends on
convertible preferred shares of subsidiary company $ 16.6 $ (9.3)
================ ================
-------------------------
(a) See note 2(b).
The following table details the segment assets and capital expenditures
for the following periods:
CAPITAL EXPENDITURES
SEGMENT ASSETS AS AT THREE MONTHS ENDED
---------------------------------- -----------------------------------
MARCH 31, DECEMBER 31, MARCH 31, MARCH 31,
2004 2003 2004 2003(A)
--------------- -------------- --------------- ---------------
Restated(a) Restated(a)
OPERATED BY KINROSS
Fort Knox Alaska $ 261.2 $ 261.2 $ 7.2 $ 9.2
Kubaka(d) Russia 64.0 73.3 4.5 0.1
Round Mountain Nevada 134.1 138.4 1.8 0.2
JOINT VENTURE PARTICIPANT
La Coipa Chile 53.2 54.0 0.3 --
Crixas Brazil 56.5 54.2 0.7 0.1
Paracatu Brazil 139.7 141.0 0.7 0.4
Musselwhite Ontario 76.9 80.4 0.4 0.2
Porcupine Joint Venture Ontario 78.1 83.7 2.3 1.4
OTHER
Exploration and acquisitions(b) 908.4 908.4 -- --
Corporate and other(b)(c) 344.1 350.5 4.5 1.2
--------------- -------------- --------------- ---------------
TOTAL $ 2,116.2 $ 2,145.1 $ 22.4 $ 12.8
=============== ============== =============== ===============
-------------------------
(a) See note 2(b).
(b) Segment assets represent goodwill of $908.4 million allocated to the
Exploration and acquisitions segment with the remainder of $9.6 million
of goodwill allocated to Corporate and other.
(c) Includes Corporate and other non-core mining operations. Also includes
$182.4 million and $91.1 million in cash and cash equivalents held at
the Corporate level as at March 31, 2004 and December 31, 2003,
respectively.
(d) Segment information for the three months ended March 31, 2003 included
the Company's portion of Kubaka's financial results (54.7% until
February 28, 2003 and 100% thereafter).
F-B10
MINING REVENUES PROPERTY, PLANT &
THREE MONTHS ENDED EQUIPMENT AS AT
---------------------------------- -----------------------------------
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31
2004 2003 2004 2003(A)
--------------- --------------- ---------------- ---------------
Restated(a) Restated(a)
GEOGRAPHIC INFORMATION:
United States $ 78.9 $ 54.5 $ 293.6 $ 296.0
Canada 29.0 29.0 110.8 113.5
Russia 12.0 11.5 13.0 10.3
Chile 16.7 10.6 38.4 39.3
Brazil 19.0 11.4 59.7 60.9
Other -- -- 5.2 5.2
--------------- --------------- ---------------- ---------------
TOTAL $ 155.6 $ 117.0 $ 520.7 $ 525.2
=============== =============== ================ ===============
-------------------------
(a) See note 2 (b).
The Company is not economically dependent on a limited number of
customers for the sale of its product because gold can be sold through numerous
commodity market traders worldwide. For the three months ended March 31, 2004
sales to three customers totaled $53.4 million, $30.9 million and $24.1 million,
respectively. For the three months ended March 31, 2003 sales to five customers
totaled $10.2 million, $20.2 million, $28.4 million, $22.2 million and $12.1
million, respectively.
7. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share ("EPS") have been calculated using the
weighted average number of shares outstanding during the period. Diluted EPS is
calculated using the treasury stock method. The following table details the
calculation of loss applicable to common shareholders and the weighted average
number of outstanding common shares for the purposes of computing basic and
diluted earnings (loss) per common share for the following periods.
MARCH 31, MARCH 31
(NUMBER OF COMMON SHARES IN MILLIONS) 2004 2003(a)
------------------ -----------------
Basic weighted average shares outstanding: 345,780 253,096
Weighted average shares dilution adjustments:
Dilutive stock options(b) 352 --
Restricted shares 206 --
------------------ -----------------
Diluted weighted average shares outstanding 346,338 253,096
------------------ -----------------
Weighted average shares dilution adjustments--exclusions:(c)
Dilutive stock options -- 2,277
Echo Bay warrants(d) -- 1,682
Redeemable preferred shares 1,058 1,058
Kinam preferred 334 360
Convertible debt -- 4,994
------------------ -----------------
-------------------------
(a) As a result of the net loss from continuing operations for the three
month period ended March 31, 2003, diluted earnings per share was
calculated using the basic weighted average shares outstanding because
to do otherwise would have been anti-dilutive.
(b) Dilutive stock options were determined by using the Company's average
share price for the period. For the three months ended March 31, 2004,
and 2003, the average share price used were $7.14, and $6.89 per share,
respectively.
(c) These adjustments were excluded, as they were anti-dilutive for the
three months ended March 31, 2004 and 2003, respectively.
(d) Echo Bay warrants were exercised during the three months ended December
31, 2003 and are no longer outstanding.
F-B11
8. LONG-TERM DEBT
During the three months ended March 31, 2004 the Company fully repaid
the Industrial Revenue Bonds of $25.0 million owing to the Alaska Industrial
Development and Export Authority.
9. COMMITMENTS AND CONTINGENCIES
GENERAL
The Company follows Section 3290 of the CICA handbook in determining its
accruals and disclosures with respect to loss contingencies. Accordingly,
estimated losses from loss contingencies are accrued by a charge to income when
information available prior to the issuance of the financial statements
indicates that it is likely that a future event will confirm that an asset has
been impaired or a liability incurred at the date of the financial statements
and the amount of the loss can be reasonably estimated.
OTHER LEGAL MATTERS
DERIVATIVE ACTION
In October 1996, a shareholder derivative action was filed in the Court
of Chancery of Delaware on behalf of a Kinam Gold Inc. ("Kinam") formerly Amax
Gold Inc., shareholder, entitled HARRY LEWIS V. MILTON H. WARD, ET AL., C.A. No.
15255-NC, against Cyprus Amax, Kinam's directors and Kinam as a nominal
defendant. Kinam Gold Inc. is a 100% owned subsidiary of the Company. The
complaint alleges, among other things, that the defendants engaged in
self-dealing in connection with Kinam'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 Kinam and
damages in an unspecified amount. Kinam subsequently filed a motion to dismiss
the action with the court. On October 30, 2003, the Court of Chancery of
Delaware granted Kinam's motion to dismiss the complaint. The plaintiff appealed
this decision on November 30, 2003. The Company and Kinam believe that the
complaint is without merit and will continue to defend the matter as required.
The Company cannot reasonably predict the outcome of this action and the amount
of loss cannot be reasonably estimated, therefore no loss contingency has been
recorded in the financial statements. This derivative action relates to the
Corporate and other segment (see note 6).
CLASS ACTION
The Company was named as a defendant in a class action complaint filed
on or about April 26, 2002, entitled ROBERT A. BROWN, ET AL. V. KINROSS GOLD
U.S.A., INC., ET AL., Case No. CV-S-02-0605-KJD-RJJ, brought in the United
States District Court for the District of Nevada. Defendants named in the
complaint are the Company, its subsidiaries, Kinross Gold U.S.A., Inc. and
Kinam, and Robert M. Buchan, President and C.E.O. of the Company. The complaint
is brought on behalf of two potential classes, those who tendered their Kinam
preferred stock into the tender offer for the Kinam $3.75 Series B Preferred
Stock made by the Kinross Gold U.S.A. and those who did not. Plaintiffs argue,
among other things, that amounts historically advanced by the Company to Kinam
should be treated as capital contributions rather than loans, that the purchase
of Kinam preferred stock from institutional investors in July 2001 was a
constructive redemption of the preferred stock, an impermissible amendment to
the conversion rights of the preferred stock, or constituted the commencement of
a tender offer, that the Company and its subsidiaries have intentionally taken
actions for the purpose of minimizing the value of the Kinam preferred stock,
and that the amount offered in the tender offer of $16.00 per share was not a
fair valuation of the Kinam preferred stock. The complaint alleges breach of
contract based on the governing provisions of the Kinam preferred stock, breach
of fiduciary duties, violations of the "best price" rule under Section 13(e) of
the Securities Exchange Act of 1934, as amended, and the New York Stock Exchange
rules, violations of Section 10(b) and 14(e) of the Securities Exchange Act of
1934, as amended, and Rules 10b-5 and 14c-6(a) hereunder, common law fraud based
on the acts taken and information provided in connection with the tender offer,
violation of Nevada's anti-racketeering law, and control person liability under
Section 20A of the Securities Exchange Act of 1934, as amended. A second action
seeking certification as a class action and based on the same allegations was
also filed in the United States District Court for the District of Nevada on or
about May 22, 2002. It names the same parties as defendants. This action has
been consolidated into the Brown case and the Brown plaintiffs have been
designated as lead plaintiffs. The plaintiffs seek damages ranging from $9.80
per share, plus accrued dividends, to $39.25 per share of Kinam preferred stock
or, in the alternative, the issuance of 26.875 to 80.625 shares of the Company
for each Kinam preferred share. They also seek triple damages under Nevada
statutes. The Company brought a motion for judgment on the pleadings with
respect to the federal securities claims based on fraud. Discovery was stayed
pending the resolution of this matter. On September 29, 2003, the Court ruled
that plaintiffs had failed to adequately state a federal securities fraud claim.
The plaintiffs were given an opportunity to amend the complaint to try and state
a
F-B12
claim that would meet the pleading standards established by the Court but, if
they are unable to do so, these claims will be dismissed. The plaintiffs have
filed an amended complaint with the Court in an effort to eliminate the
deficiencies in their original complaint. The Company believes the amended
complaint is without merit and has filed a motion for judgment on the pleadings
seeking dismissal of the securities fraud claims without prejudice. The Company
anticipates continuing to vigorously defend this litigation. The Company cannot
reasonably predict the outcome of this action and the amount of loss cannot be
reasonably estimated, therefore no loss contingency has been recorded in the
financial statements. This class action relates to the Corporate and other
segment (see note 6).
SETTLEMENT IN GREECE
In January 2003, the Stratoni lead / zinc mine located in Greece, owned
by TVX Hellas S.A. ("TVX Hellas"), a subsidiary of the Company, was shut down
pending the receipt of new mining permits. Revised mining permits were issued on
February 18, 2003. However, operations remained suspended throughout 2003 as the
Company worked with the Greek government and potential investors to develop the
appropriate exit strategy. On December 10, 2003, the Greek government
unilaterally terminated the contract pursuant to which the Company's two
subsidiaries, TVX and TVX Hellas, held title to the Hellenic gold mines, and
invited them to enter into a settlement agreement. A settlement agreement was
then executed on December 12, 2003, pursuant to which the Greek government
agreed to pay 11 million Euros to TVX Hellas. The Company agreed to augment the
11 million Euros ($13.6 million), with an additional 11 million Euros, and to
contribute all such amounts in full satisfaction of labor and trade liabilities
of TVX Hellas. On January 30, 2004, the Company advanced TVX Hellas 11 million
Euros ($13.6 million) and received a full release from all liabilities in
connection with environmental remediation. TVX Hellas has settled all labor
related claims and has filed for bankruptcy. Trade and other payables will be
settled in the bankruptcy proceedings out of the remaining funds on hand in
Greece.
THE HELLENIC GOLD PROPERTIES LITIGATION
The Ontario Court (General Division) issued its judgment in connection
with the claim against TVX by three individuals (collectively the "Alpha Group")
on October 14, 1998, relating to TVX's interest in the Hellenic Gold Mining
assets in Greece owned by TVX Hellas. The Court rejected full ownership and
monetary damage claims but did award the Alpha Group a 12% carried interest and
the right to acquire a further 12% participating interest in the Hellenic Gold
assets. TVX filed a notice to appeal and the Alpha Group filed a notice of cross
appeal.
Subsequent to the trial decision in October, 1998, TVX received
notification of two actions commenced by 1235866 Ontario Inc. ("1235866"), the
successor to Curragh Inc., Mineral Services Limited and Curragh Limited, against
the Alpha Group, and others, in Ontario and English Courts, in relation to the
claim by the Alpha Group against TVX for an interest in the Hellenic gold mines.
On July 28, 1999, TVX entered into an agreement with 1235866 to ensure that
these new claims would not result in any additional diminution of TVX's interest
in the Hellenic gold mines. 1235866 agreed not to pursue any claim against TVX
for an interest in the Hellenic gold mines beyond the interest awarded to the
Alpha Group by the courts. In the event that 1235866 is successful in its claim
against the Alpha Group, 1235866 would be entitled to a 12% carried interest as
defined in the agreement and the right to acquire a 12% participating interest
upon payment of 12% of the aggregate amounts expended by TVX and its
subsidiaries in connection with the acquisition, exploration, development and
operation of the Hellenic gold mines up to the date of exercise. The TVX appeal,
the Alpha Group cross appeal and a motion by 1235866 were all heard on February
17, 18 and 25, 2000. By judgment released June 1, 2000, the Court of Appeal,
while partially granting the TVX appeal, upheld the trial decision and rejected
the Alpha Group cross appeal. The Court also rejected the motion of 1235866 for
a new trial. As a result, TVX holds, as constructive trustee, a 12% carried
interest and a right to acquire 12% participating interest in the Hellenic gold
mines upon the payment of costs associated with that interest. The action by
1235866 against the Alpha Group continues. TVX and the Alpha Group have been
unable to agree on the definition and application of the 12% carried interest
and the right to acquire a 12% participating interest in the Hellenic gold mines
awarded to Alpha Group in the trial judgment. Accordingly, in June 2001, a new
action was commenced between the Alpha Group and TVX to clarify the award. TVX
anticipates that the hearing with respect to such matter may be held in 2005.
As a result of the settlement agreement the Company executed with the
Greek Government with respect to TVX Hellas S.A., the Alpha group has threatened
further litigation due to an alleged breach of the October 14, 1998 judgment in
the action noted above between the Alpha Group and TVX relating to the Hellenic
Gold mines. The Alpha Group has threatened to expand this claim to include a
claim against the Company for breach of fiduciary duty. In addition, 1235866 has
threatened further litigation for breach of fiduciary duty. The Company cannot
reasonably predict the outcome of this litigation and the threatened litigation
and the amount of loss cannot be reasonably estimated, therefore no loss
contingency has been recorded in the financial statements.
No pleadings have been exchanged with respect to these two threatened
actions.
F-B13
SUMMA
In September 1992, Summa Corporation ("Summa") commenced a lawsuit
against Echo Bay Exploration Inc. and Echo Bay Management Corporation (together,
the "Subsidiaries"), 100% owned subsidiaries of Echo Bay, alleging improper
deductions in the calculation of royalties payable over several years of
production at McCoy/Cove and another mine, which is no longer in operation. The
assets and liabilities of the Subsidiaries are included under the heading
Corporate and other in the segmented information (see note 6). The matter was
tried in the Nevada State Court in April 1997, with Summa claiming more than $13
million in damages, and, in September 1997, judgment was rendered for the
Subsidiaries. The decision was appealed by Summa to the Supreme Court of Nevada,
which in April 2000 reversed the decision of the trial court and remanded the
case back to the trial court for "a calculation of the appropriate royalties in
a manner not inconsistent with this order." The case was decided by a panel
comprised of three of the seven Justices of the Supreme Court of Nevada and the
Subsidiaries petitioned that panel for a rehearing. The petition was denied by
the three-member panel on May 15, 2000 and remanded to the lower court for
consideration of other defenses and arguments put forth by the Subsidiaries. The
Subsidiaries filed a petition for a hearing before the full Supreme Court and on
December 22, 2000, the Court recalled its previous decision. Both the
Subsidiaries and their counsel believe that grounds exist to modify or reverse
the decision. Echo Bay has $1.5 million accrued related to this litigation. If
the appellate reversal of the trial decision is maintained and the trial court,
on remand, were to dismiss all of the Subsidiaries' defenses, the royalty
calculation at McCoy/Cove would change and additional royalties would be
payable. Neither the Company, nor counsel to the Subsidiaries, believe it is
possible to quantify the precise amount of liability pursuant to a revised
royalty calculation.
In March, 2004, Summa filed a complaint in the District Court of Nevada,
THE HOWARD HUGHES CORPORATION V. ECHO BAY MANAGEMENT CORPORATION, ET AL., Case
No. A481813, against Echo Bay, the Subsidiaries, Kinross, Newmont Mining
Corporation, and the officers and directors of the various corporate entities,
alleging that the Subsidiaries have transferred substantially all of their
assets to insiders and close third-parties, rendering them unable to respond to
any judgment that Summa may obtain in the underlying litigation. The complaint
alleges that the Echo Bay and TVX combination with Kinross and the acquisition
of the closed McCoy/Cove mining operations by Newmont in exchange for assumption
of the reclamation obligations was the culmination of a scheme to improperly
strip the Subsidiaries of their assets. Kinross has not filed an answer to the
complaint, and no discovery has taken place. Kinross believes this complaint to
be without merit and anticipates vigorously defending the action.
OTHER
In November 2001, two former employees of Echo Bay brought a claim
against Echo Bay pursuant to the Class Proceedings Act (British Columbia) as a
result of the temporary suspension of operations at Echo Bay's Lupin mine in the
spring of 1998 and the layoff of employees at that time. On August 12, 2002, the
Supreme Court of British Columbia dismissed Echo Bay's application for a
declaration that British Columbia did not have jurisdiction in connection with
this claim or in the alternative, that the Court should decline jurisdiction.
Echo Bay appealed this decision. On April 4, 2003, the appeal was heard by the
Court of Appeal for British Columbia. On May 16, 2003, in a unanimous decision,
the Court of Appeal allowed Kinross' appeal and service was set aside on the
basis that British Columbia does not have jurisdiction in connection with this
claim. In addition the court ordered the former employees to reimburse Echo Bay
for costs associated with the appeal and the Supreme Court of British Columbia
proceedings. On August 18, 2003, counsel for the former employees filed an
application for leave to appeal to the Supreme Court of Canada. On March 4,
2004, the application for leave to appeal to the Supreme Court of Canada was
dismissed with costs payable to Echo Bay.
F-B14
GENERAL
The Company is also involved in legal proceedings and claims arising 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 Kinross' financial position, results of operations or cash
flows.
Total accrued liabilities in relation to legal contingencies as at March
31, 2004 and December 31, 2003 were $1.5 million and $15.1 million,
respectively.
INCOME TAXES
The Company operates in numerous countries around the world and
accordingly is subject to, and pays annual income taxes under the various
regimes in countries in which it operates. These tax regimes are determined
under general corporate income tax laws of the country. The Company has
historically filed, and continues to file, all required income tax returns and
to pay the taxes reasonably determined to be due. The tax rules and regulations
in many countries are complex and subject to interpretation. From time to time
the Company will undergo a review of its historic tax returns and in connection
with such reviews, disputes can arise with the taxing authorities over the
Company's interpretation of the country's income tax rules. As at March 31,
2004, the Company had the following disputes and has not accrued any additional
tax liabilities in relation to the disputes listed below:
RUSSIA
In July, 2003, the Company received notice that local taxation
authorities in Russia are seeking a reassessment of the tax paid relating to the
Kubaka mine by Omolon, the Company's 98.1% owned Russian Joint Stock Company in
the amount of $8.5 million, which included penalties and interest. The notice
challenged certain deductions taken by the Company and tax concessions relating
to tax returns filed by the Company in prior years. The Company appealed this
notice of reassessment and on January 27, 2004, the Magadan Arbitration court
agreed with the Company on three of the four major reassessment items. The
impact of this ruling reduced the liability to $3.9 million, which includes
interest and penalties. The Company will appeal the decision, but in the event
the decision of the appellant court is not ruled in the Company's favor, Omolon
has enough unutilized deductions to shelter the additional taxable income. The
Company believes that this reassessment will be resolved with no material
adverse to the Company's financial position, results of operations or cash
flows. This reassessment relates to the Kubaka business segment (see note 6).
CHILE
On September 27, 2001, the Company's 100% owned Chilean mining company,
Compania Minera Kinam Guanaco ("CMKG") received a tax reassessment from the
Chilean IRS. The assets of CMKG are included under the heading Corporate and
other in the segmented information (see note 6). The reassessment, in the amount
of $6.7 million, disallows certain deductions utilized by a third party. The
third party has indemnified the Company for up to $13.5 million in relation to
this reassessment. The Company appealed the reassessment and on January 12,
2004, the Chilean IRS upheld the tax auditors position. The Company plans to
appeal the reassessment with the Chilean Tax Court. The Company believes this
reassessment will be resolved with no material adverse impact on to the
Company's financial position, results of operations or cash flows.
BRAZIL
The Company's 50% owned Brazilian mining company, Mineracao Serra Grande
S.A. which owns the Crixas mine received a tax reassessment in November 2003
from the Brazilian IRS. The reassessment disallowed the claiming of certain
sales tax credits and assessed interest and penalties of which the Company's 50%
share totals $9.5 million. The Company and its joint venture partner believe
that this reassessment will be resolved without any material adverse affect on
its financial position, results of operations or cash flows. This reassessment
relates to the Crixas business segment (see note 6).
F-B15
10. HEDGING ACTIVITIES
The outstanding number of ounces, average expected realized prices and
maturities for the gold commodity derivative contracts as at March 31, 2004 are
as follows:
OUNCES HEDGED AVERAGE PRICE CALL OPTIONS SOLD AVERAGE STRIKE PRICE
--------------- --------------- ------------------- ----------------------
107,500 $280 50,000 $340
37,500 $296 -- --
--------------- --------------- ------------------- ----------------------
145,000 $284 50,000 $340
=============== =============== =================== ======================
The fair value of the call options sold is recorded in the consolidated
financial statements at each measurement date. The fair value of the gold
forward sales and spot deferred forward sales contracts, as at March 31, 2004,
was $(20.5) million based on a gold price of $424 per ounce. In the first
quarter of 2004, the Company delivered 30,000 ounces into contracts outstanding
at December 31, 2003 leaving 145,000 ounces hedged at March 31, 2004. Subsequent
to the end of the quarter, the Company delivered a further 20,000 ounces and
financially closed out another 90,000 ounces at a cost of $9.7 million. This
loss will be recognized in accordance with the original maturity dates of the
contracts, which range from the third quarter of 2004 to the second quarter of
2005. The remaining 35,000 ounces hedged will be delivered in the second quarter
of this year.
F-B16
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("CDN GAAP"), which differ
from those principles that the Company would have followed had its consolidated
financial statements been prepared in accordance with generally accepted
accounting principles in the United States ("U.S. GAAP").
Material variations between financial statement items under CDN GAAP and the
amounts determined using U.S. GAAP are as follows:
CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 2004 Property,
plant
and equipment Reversal of Gains
& amortization 1991 and on marketable
differences 2003 securities
Under from applying deficit and long-term Effect of
CDN GAAP SFAS 121 eliminations investments SFAS 133
---------------------------------------------------------------------------------------------------------------
ASSETS (b) (c) (d) (e)
CURRENT ASSETS
Cash and cash equivalents $ 217.6 $ -- $ -- $ -- $ --
Restricted cash 1.4 -- -- -- --
Accounts receivable and other assets 30.4 -- -- -- --
Inventories 132.4 -- -- -- --
Marketable securities -- -- -- 0.2 --
---------------------------------------------------------------------------------------------------------------
381.8 -- -- 0.2 --
Property, plant and equipment 520.7 (27.3) -- -- --
Mineral interests 253.4 -- -- -- --
Goodwill 918.0 -- -- -- --
Long-term investments 16.5 -- -- 5.6 --
Future income and mining taxes 1.3 -- -- -- --
Deferred charges and other long-term 24.5 -- -- -- --
assets
---------------------------------------------------------------------------------------------------------------
$ 2,116.2 $ (27.3) $ -- $ 5.8 $ --
===============================================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 84.8 $ -- $ -- $ -- $ 19.6
Current portion of long-term debt 4.4 -- -- -- --
Current portion of site restoration
cost obligations 22.1 -- -- -- --
---------------------------------------------------------------------------------------------------------------
111.3 -- -- -- 19.6
Long-term debt 0.4 -- -- -- --
Site restoration cost obligations 107.4 -- -- -- --
Future income and mining taxes 54.5 -- -- -- --
Deferred revenue 1.7 -- -- -- (1.7)
Other long-term liabilities 4.7 -- -- -- --
Redeemable retractable preferred shares 2.9 -- -- -- --
---------------------------------------------------------------------------------------------------------------
282.9 -- -- -- 17.9
---------------------------------------------------------------------------------------------------------------
NON-CONTROLLING INTEREST 0.7 -- -- -- --
---------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED SHARES OF
SUBSIDIARY COMPANY 12.9 -- -- -- --
---------------------------------------------------------------------------------------------------------------
COMMON SHAREHOLDERS' EQUITY
Common share capital 1,784.0 -- 766.7 -- --
Contributed surplus 32.9 -- -- -- --
Retained earnings (deficit) 4.8 (27.3) (766.7) -- (1.0)
Cumulative translation adjustments (2.0) -- -- -- --
Other comprehensive income (loss) -- -- -- 5.8 (16.9)
---------------------------------------------------------------------------------------------------------------
1,819.7 (27.3) -- 5.8 (17.9)
---------------------------------------------------------------------------------------------------------------
$ 2,116.2 $ (27.3) $ -- $ 5.8 $ --
===============================================================================================================
Common shares outstanding as of
period end (millions) 345.9
F-B17
Impact on
Reclassi- adoption of
fication of Accounting accounting
Flow cumulative for equity for asset Minimum
through translation To adjust to interest in retirement pension Under
shares adjustments equity basis Echo Bay obligations liability U.S. GAAP
---------------------------------------------------------------------------------------------------
(f) (h) (i) (d) (j) (k)
$ -- $ -- $ -- $ -- $ -- $ -- $ 217.6
-- -- -- -- -- -- 1.4
-- -- -- -- -- -- 30.4
-- -- -- -- -- -- 132.4
-- -- -- -- -- -- 0.2
---------------------------------------------------------------------------------------------------
-- -- -- -- -- -- 382.0
-- -- -- -- -- -- 493.4
-- -- -- -- -- -- 253.4
-- -- -- 40.8 -- -- 958.8
-- -- -- -- -- -- 22.1
-- -- -- -- -- -- 1.3
-- -- -- -- -- -- 24.5
---------------------------------------------------------------------------------------------------
$ -- $ -- $ -- $ 40.8 $ -- $ -- $ 2,135.5
===================================================================================================
$ -- $ -- $ -- $ -- $ -- $ -- $ 104.4
-- -- -- -- -- -- 4.4
-- -- -- -- -- -- 22.1
---------------------------------------------------------------------------------------------------
-- -- -- -- -- -- 130.9
-- -- -- -- -- -- 0.4
-- -- -- -- -- -- 107.4
-- -- -- -- -- -- 54.5
-- -- -- -- -- -- --
-- -- -- -- -- 3.1 7.8
-- -- -- -- -- -- 2.9
---------------------------------------------------------------------------------------------------
-- -- -- -- -- 3.1 303.9
---------------------------------------------------------------------------------------------------
-- -- -- -- -- -- 0.7
---------------------------------------------------------------------------------------------------
-- -- -- -- -- -- 12.9
---------------------------------------------------------------------------------------------------
(1.1) -- -- -- -- -- 2,549.6
-- -- -- -- -- -- 32.9
1.1 -- -- 40.8 -- -- (748.3)
-- 2.0 -- -- -- -- --
-- (2.0) -- -- -- (3.1) (16.2)
---------------------------------------------------------------------------------------------------
-- -- -- 40.8 -- (3.1) (1,818.0)
---------------------------------------------------------------------------------------------------
$ -- $ -- $ -- $ 40.8 $ -- $ -- $ 2,135.5
===================================================================================================
345.9
F-B18
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2003 Property,
plant
and equipment Gains
& amortization Reversal of on marketable
differences 1991 and securities
Under from applying 2003 deficit and long-term Effect of
CDN GAAP SFAS 121 eliminations investments SFAS 133
---------------------------------------------------------------------------------------------------------------------
ASSETS (b) (c) (d) (e)
CURRENT ASSETS
Cash and cash equivalents $ 245.8 $ -- $ -- $ -- $ --
Restricted cash 5.1 -- -- -- --
Accounts receivable and other assets 42.1 -- -- -- --
Inventories 109.2 -- -- -- --
Marketable securities 0.1 -- -- 0.3 --
---------------------------------------------------------------------------------------------------------------------
402.3 -- -- 0.3 --
Property, plant and equipment 525.2 (28.2) -- -- --
Mineral interests 260.1 -- -- -- --
Goodwill 918.0 -- -- -- --
Long-term investments 1.5 -- -- -- --
Future income and mining taxes 2.1 -- -- 6.9 --
Deferred charges and other long-term
assets 35.9 -- -- -- --
---------------------------------------------------------------------------------------------------------------------
$ 2,145.1 $ (28.2) $ -- $ 7.2 $ --
=====================================================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 101.4 $ -- $ -- $ -- $ 22.7
Current portion of long-term debt 29.4 -- -- -- --
Current portion of site restoration
cost obligations 19.2 -- -- -- --
---------------------------------------------------------------------------------------------------------------------
150.0 -- -- -- 22.7
Long-term debt 0.7 -- -- -- --
Site restoration cost obligations 111.0 -- -- -- --
Future income and mining taxes 55.6 -- -- -- --
Deferred revenue 2.2 -- -- -- (2.2)
Other long-term liabilities 4.7 -- -- -- --
Redeemable retractable preferred shares 3.0 -- -- -- --
---------------------------------------------------------------------------------------------------------------------
327.2 -- -- -- 20.5
---------------------------------------------------------------------------------------------------------------------
NON-CONTROLLING INTEREST 0.7 -- -- -- --
---------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED SHARES OF
SUBSIDIARY COMPANY 12.6 -- -- -- --
---------------------------------------------------------------------------------------------------------------------
COMMON SHAREHOLDERS' EQUITY
Common share capital 1,783.5 -- 766.7 -- --
Contributed surplus 30.0 -- -- -- --
Deficit (6.9) (28.2) (766.7) -- (1.4)
Cumulative translation adjustments (2.0) -- -- -- --
Other comprehensive income (loss) -- -- -- 7.2 (19.1)
---------------------------------------------------------------------------------------------------------------------
1,804.6 (28.2) -- 7.2 (20.5)
---------------------------------------------------------------------------------------------------------------------
$ 2,145.1 $ (28.2) $ -- $ 7.2 $ --
=====================================================================================================================
Common shares outstanding as of
period end (millions) 345.6
F-B19
Impact on
Reclassi- adoption of
fication of Accounting accounting
Flow cumulative for equity for asset Minimum
through translation To adjust to interest in Effect of retirement pension Under
shares adjustments equity basis Echo Bay SFAS 143 obligations liability U.S. GAAP
-----------------------------------------------------------------------------------------------------------------
(f) (h) (i) (d) (j) (j) (k)
$ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 245.8
-- -- -- -- -- -- -- 5.1
-- -- -- -- -- -- -- 42.1
-- -- -- -- -- -- -- 109.2
-- -- -- -- -- -- -- 0.4
-----------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- 402.6
-- -- -- -- 2.2 (2.6) -- 496.6
-- -- -- -- -- -- -- 260.1
-- -- -- 40.8 -- -- -- 958.8
-- -- -- -- -- -- -- 1.5
-- -- -- -- -- -- -- 9.0
-- -- -- -- -- -- -- 35.9
-----------------------------------------------------------------------------------------------------------------
$ -- $ -- $ -- $ 40.8 $ 2.2 $ (2.6) $ -- $ 2,164.5
=================================================================================================================
$ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 124.1
-- -- -- -- -- -- -- 29.4
-- -- -- -- -- -- -- 19.2
-----------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- 172.7
-- -- -- -- -- -- -- 0.7
-- -- -- -- 11.1 (10.5) -- 111.6
-- -- -- -- -- -- -- 55.6
-- -- -- -- -- -- -- --
-- -- -- -- 2.2 (2.2) 3.1 7.8
-- -- -- -- -- -- -- 3.0
-----------------------------------------------------------------------------------------------------------------
-- -- -- -- 13.3 (12.7) 3.1 351.4
-----------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- 0.7
-----------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- 12.6
-----------------------------------------------------------------------------------------------------------------
(1.1) -- -- -- -- -- -- 2,549.1
-- -- -- -- -- -- -- 30.0
1.1 -- -- 40.8 (11.1) 10.1 -- (762.3)
-- 2.0 -- -- -- -- -- --
-- (2.0) -- -- -- -- (3.1) (17.0)
-----------------------------------------------------------------------------------------------------------------
-- -- -- 40.8 11.1 10.1 (3.1) 1,799.8
-----------------------------------------------------------------------------------------------------------------
$ -- $ -- $ -- $ 40.8 $ 2.2 $ (2.6) $ -- $ 2,164.5
=================================================================================================================
345.6
F-B20
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
Property,
plant Gains on
and equipment marketable
& amortization Reversal of securities
differences 1991 and and
Under from applying 2003 deficit long-term Effect of
CDN GAAP SFAS 121 elimination investments SFAS 133
-------------------------------------------------------------------------------------------------------------
(b) (c) (d) (e)
REVENUE
Mining revenue $ 155.6 $ -- $ -- $ -- $ 0.3
Interest and other income 1.8 -- -- -- 0.1
Mark-to-market gain on call options (0.8) -- -- -- --
-------------------------------------------------------------------------------------------------------------
156.6 -- -- -- 0.4
-------------------------------------------------------------------------------------------------------------
EXPENSES
Operating 94.5 -- -- -- --
General and administrative 6.9 -- -- -- --
Exploration 3.5 -- -- -- --
Depreciation, depletion and
amortization 32.4 (0.9) -- -- --
Gain on disposal of assets (0.4) -- -- -- --
Foreign exchange loss 2.4 -- -- -- --
Interest expense on long-term
liabilities 0.7 -- -- -- --
-------------------------------------------------------------------------------------------------------------
140.0 (0.9) -- -- --
-------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE TAXES AND
OTHER ITEMS 16.6 0.9 -- -- 0.4
Provision for income and mining taxes (3.2) -- -- -- --
-------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE AND DIVIDENDS ON CONVERTIBLE
PREFERRED SHARES OF SUBSIDIARY COMPANY 13.4 0.9 -- -- 0.4
Cumulative effect of a change in
accounting principle -- -- -- -- --
-------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) FOR THE YEAR BEFORE
DIVIDENDS ON CONVERTIBLE PREFERRED
SHARES OF SUBSIDIARY COMPANY 13.4 0.9 -- -- 0.4
Dividends on convertible preferred
shares of subsidiary company (0.2) -- -- -- --
-------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) FOR THE YEAR 13.2 0.9 -- -- 0.4
Increase in equity component of
convertible debentures -- -- -- -- --
-------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) FOR THE PERIOD
ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 13.2 $ 0.9 $ -- $ -- $ 0.4
=============================================================================================================
EARNINGS (LOSS) PER SHARE
Basic $ 0.04
Diluted $ 0.04
WEIGHTED AVERAGE COMMON SHARES
ISSUED AND OUTSTANDING (MILLION)
Basic 345.7
Diluted 346.3
F-B21
Impact on
Reclassi- adoption of
fication of To adjust Accounting Impact on fair value
Flow cumulative to for equity adoption of base method
through translation equity interest in Section on stock Under
shares adjustments basis Echo Bay 3110 options U.S. GAAP
------------------------------------------------------------------------------------------
(f) (h) (i) (d) (j) (l)
$ -- $ -- $ -- $ -- $ -- $ -- $ 155.9
-- -- -- -- -- -- 1.9
-- -- -- -- -- -- (0.8)
------------------------------------------------------------------------------------------
-- -- -- -- -- -- 157.0
------------------------------------------------------------------------------------------
-- -- -- -- (0.6) -- 93.9
-- -- -- -- -- -- 6.9
-- -- -- -- -- -- 3.5
-- -- -- -- (0.4) -- 31.1
-- -- -- -- -- -- (0.4)
-- -- -- -- -- -- 2.4
-- -- -- -- -- -- 0.7
------------------------------------------------------------------------------------------
-- -- -- -- (1.0) -- 138.1
------------------------------------------------------------------------------------------
-- -- -- -- 1.0 -- 18.9
-- -- -- -- -- -- (3.2)
------------------------------------------------------------------------------------------
-- -- -- -- 1.0 -- 15.7
-- -- -- -- -- -- --
------------------------------------------------------------------------------------------
-- -- -- -- 1.0 -- 15.7
-- -- -- -- -- -- (0.2)
------------------------------------------------------------------------------------------
-- -- -- -- 1.0 -- 15.5
-- -- -- -- -- -- --
------------------------------------------------------------------------------------------
$ -- $ -- $ -- $ -- $ 1.0 $ -- $ 15.5
==========================================================================================
$ 0.04
$ 0.04
345.7
346.3
F-B22
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
Recognition Property,
of Elimination plant
deferred of effects of and equipment
exchange recognizing the &
gains/losses equity amortization Reversal of
on component difference 1991 and
Under convertible of convertible from applying 2003 deficit
CDN GAAP debentures debentures SFAS 121 elimination
------------------------------------------------------------------------------------------------------------------
(a) (a) (b) (c)
REVENUE
Mining revenue $ 117.0 $ -- $ -- $ -- $ --
Interest and other income 1.0 -- -- -- --
Mark-to-market gain on call options 2.1 -- -- -- --
------------------------------------------------------------------------------------------------------------------
120.1 -- -- -- --
------------------------------------------------------------------------------------------------------------------
EXPENSES
Operating 87.5 -- -- -- --
General and administrative 5.8 -- -- -- --
Exploration 6.2 -- -- -- --
Depreciation, depletion and
amortization 28.2 -- -- (1.5) --
Gain on sale of assets (0.1) -- -- -- --
Foreign exchange loss 0.7 8.0 -- -- --
Interest expense on long-term
liabilities 1.1 -- 1.3 -- --
Accretion expense -- -- -- -- --
------------------------------------------------------------------------------------------------------------------
129.4 8.0 1.3 (1.5) --
------------------------------------------------------------------------------------------------------------------
LOSS BEFORE TAXES AND OTHER ITEMS (9.3) (8.0) (1.3) 1.5 --
Provision for income and mining taxes (2.5) -- -- -- --
------------------------------------------------------------------------------------------------------------------
Share of income (loss) of investee
companies -- -- -- -- --
------------------------------------------------------------------------------------------------------------------
LOSS BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING
PRINCIPLE AND DIVIDENDS ON CONVERTIBLE
PREFERRED SHARES OF SUBSIDIARY COMPANY (11.8) (8.0) (1.3) 1.5 --
Cumulative effect of a change in
accounting principle -- -- -- -- --
------------------------------------------------------------------------------------------------------------------
LOSS FOR THE PERIOD BEFORE DIVIDENDS
ON CONVERTIBLE PREFERRED SHARES OF
SUBSIDIARY COMPANY (11.8) (8.0) (1.3) 1.5 --
Dividends on convertible preferred
shares of subsidiary company (0.2) -- -- -- --
------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD (12.0) (8.0) (1.3) 1.5 --
Increase in equity component of
convertible debentures (2.1) -- 2.1 -- --
------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD ATTRIBUTABLE
TO COMMON SHAREHOLDERS $ (14.1) $ (8.0) $ 0.8 $ 1.5 $ --
==================================================================================================================
LOSS PER SHARE
Basic and diluted $ (0.6)
COMMON SHARES ISSUED AND OUTSTANDING
(MILLIONS)
Weighted average $ 253.1
F-B23
Reclassi-
Gains on fication
marketable of To adjust Accounting Impact on
securities and Flow cumulative to for equity adoption of
long-term Effect of through translation equity interest in Effect of Section Under
investments SFAS 133 shares adjustments basis Echo Bay SFAS 143 3110 U.S. GAAP
----------------------------------------------------------------------------------------------------------------------
(d) (e) (f) (h) (i) (d) (j) (j)
$ -- $ 0.9 $ -- $ -- $ (6.0) $ -- $ -- $ -- $ 111.9
-- -- -- -- 0.3 -- -- -- 1.3
-- -- -- -- -- -- -- -- 2.1
----------------------------------------------------------------------------------------------------------------------
-- 0.9 -- -- (5.7) -- -- -- 115.3
----------------------------------------------------------------------------------------------------------------------
-- -- -- -- (2.9) -- (1.2) 1.2 84.6
-- -- -- -- -- -- -- -- 5.8
-- -- -- -- (0.1) -- -- -- 6.1
-- -- -- -- (1.2) -- 0.1 -- 25.6
-- -- -- -- -- -- -- -- (0.1)
-- -- -- -- -- -- -- -- 8.7
-- -- -- -- -- -- -- -- 2.4
-- -- -- -- -- -- 2.0 (2.0) --
----------------------------------------------------------------------------------------------------------------------
-- -- -- -- (4.2) -- 0.9 (0.8) 133.1
----------------------------------------------------------------------------------------------------------------------
-- 0.9 -- -- (1.5) -- (0.9) 0.8 (17.8)
----------------------------------------------------------------------------------------------------------------------
-- -- -- -- 0.4 -- -- -- (2.1)
----------------------------------------------------------------------------------------------------------------------
-- -- -- -- 1.1 (1.0) -- -- 0.1
----------------------------------------------------------------------------------------------------------------------
-- 0.9 -- -- -- (1.0) (0.9) 0.8 (19.8)
-- -- -- -- -- -- (12.1) -- (12.1)
----------------------------------------------------------------------------------------------------------------------
-- 0.9 -- -- -- (1.0) (13.0) 0.8 (31.9)
-- -- -- -- -- -- -- -- (0.2)
----------------------------------------------------------------------------------------------------------------------
-- 0.9 -- -- -- (1.0) (13.0) 0.8 (32.1)
-- -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------------------------------------
$ -- $ 0.9 $ -- $ -- $ -- $ (1.0) $ (13.0) $ 0.8 $ (32.1)
======================================================================================================================
$ (0.13)
253.1
F-B24
Statement of Operations Presentation: For U.S. GAAP purposes, the measure
"(Loss) earnings before cumulative effect of a change in accounting principle
and dividends on convertible preferred shares of subsidiary company" is not a
recognized term and would therefore not be presented.
The following table reconciles "(Loss) Earnings before cumulative effect of a
change in accounting principle and dividends on convertible preferred shares of
subsidiary company" to "loss from operations":
THREE MONTHS ENDED MARCH 31,
------------------------------------
2004 2003
--------------- -----------------
Earnings (loss) before cumulative effect of a change in
accounting principle and dividends on convertible preferred
shares of subsidiary company $ 15.7 $ (19.8)
Add/(deduct):
Interest and other income (1.9) (1.3)
Mark-to-market (gain) loss on call options 0.8 (2.1)
Interest expense on long-term liabilities 0.7 2.4
Gain on disposal of assets(1) (0.3) --
Provision for (recovery of) income and mining taxes 3.2 2.1
Share in loss (income) of investee companies -- (0.1)
Earnings (loss) from operations for U.S. GAAP $ 18.2 $ (18.8)
(1) Gain on disposal of assets includes gains on sales of marketable
securities and long-term investments of $0.2 million, a component of
non- operating earnings. In addition, "dividends on convertible
preferred shares of subsidiary" are required to be presented as a
component of non-operating earnings: For U.S. GAAP purposes, the
components of non-operating earnings (loss) are as follows:
Non-operating earnings (loss) are as follows:
THREE MONTHS ENDED MARCH 31,
------------------------------------
2004 2003
--------------- -----------------
Add/(deduct):
Interest and other income 1.9 1.3
Mark-to-market (gain) loss on call options (0.8) 2.1
Interest expense on long-term liabilities (0.7) (2.4)
Gain on disposal of assets(1) 0.3 --
Share in loss (income) of investee companies -- 0.1
Dividends on convertible preferred shares of subsidiary company (0.2) (0.2)
Earnings (loss) from operations for U.S. GAAP $ 0.5 $ 0.9
F-B25
CONSOLIDATED STATEMENTS OF CASH FLOWS Property, Gains
FOR THE PERIOD ENDED MARCH 31, 2004 plant and on
equipment & marketable
amortization Reversal of securities
differences 1991 and and
Under from applying 2003 deficit long-term Effect of
CDN GAAP SFAS 121 elimination investments SFAS 133
(b) (c) (d) (e)
NET INFLOW (OUTFLOW) OF CASH RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING:
Earnings for the year before dividends on
convertible preferred shares of subsidiary
company $ 13.4 $ 0.9 $ -- $ -- $ 0.4
Items not affecting cash:
Depreciation, depletion and amortization 32.4 (0.9) -- -- --
Future income and mining taxes (0.9) -- -- -- --
Cumulative effect of a change in accounting
principle -- -- -- -- --
Accretion expense 2.2 -- -- -- --
Share in (income) loss of investee companies -- -- -- -- --
Site restoration cash expenditures (1.7) -- -- -- --
Other (0.5) -- -- -- --
Interest on convertible debentures -- -- -- -- --
Realized foreign exchange losses on
convertible debentures -- -- -- -- --
Unrealized foreign exchange losses on
redeemable retractable preferred shares -- -- -- -- --
Gain on disposal of assets -- -- -- -- --
Deferred revenue realized -- -- -- -- 0.2
Changes in non-cash operating assets and
liabilities:
Accounts receivable and other assets 11.6 -- -- -- --
Inventories (22.0) -- -- -- --
Ore in stockpiles -- -- -- -- --
Accounts payable and accrued liabilities (16.6) -- -- -- (0.6)
Other long-term obligations -- -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
CASH FLOW PROVIDED FROM OPERATING ACTIVITIES 17.9 -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
FINANCING:
Issuance of common shares 1.4 -- -- -- --
Reduction of debt component of convertible
debentures -- -- -- -- --
Repayment of debt (25.3) -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
CASH FLOW PROVIDED FROM FINANCING ACTIVITIES (23.9) -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
INVESTING:
Additions to property, plant and equipment (22.4) -- -- -- --
Long-term investments and other assets (3.7) -- -- -- --
Proceeds from the disposal of property,
plant and equipment 0.5 -- -- -- --
Decrease in restricted cash 3.7 -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
CASH FLOW USED IN INVESTING ACTIVITIES (21.9) -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (0.3) -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (28.2) -- -- -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 245.8 -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 217.6 $ -- $ -- -- --
==========================================================================================================================
F-B26
Reclassi- Adoption of
fication of Accounting fair value
Flow cumulative for equity based method
through translation To adjust to interest in Effect of on stock Under
shares adjustments equity basis Echo Bay SFAS 143 options U.S. GAAP
------------------------------------------------------------------------------------------------------
(f) (h) (i) (d) (j) (l)
$ -- $ -- $ -- $ -- $ 1.0 $ -- $ 15.7
-- -- -- -- (0.4) -- 31.1
-- -- -- -- -- -- (0.9)
-- -- -- -- -- -- --
-- -- -- -- (0.6) -- 1.6
-- -- -- -- -- -- --
-- -- -- -- -- -- (1.7)
-- -- -- -- -- -- (0.5)
-- -- -- -- -- -- --
-- -- -- -- -- -- --
-- -- -- -- -- -- --
-- -- -- -- -- -- --
-- -- -- -- -- -- --
-- -- -- -- -- -- 0.2
-- -- -- -- -- -- --
-- -- -- -- -- -- 11.6
-- -- -- -- -- -- (22.0)
-- -- -- -- -- -- --
-- -- -- -- -- -- (17.2)
-- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- 17.9
------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- 1.4
-- -- -- -- -- -- --
-- -- -- -- -- -- (25.3)
------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- (23.9)
------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- (22.4)
-- -- -- -- -- -- (3.7)
-- -- -- -- -- -- 0.5
-- -- -- -- -- -- 3.7
------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- (21.9)
------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- (0.3)
------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- (28.2)
-- -- -- -- -- -- 245.8
------------------------------------------------------------------------------------------------------
$ -- $ -- $ -- $ -- $ -- $ -- $ 217.6
======================================================================================================
F-B27
CONSOLIDATED STATEMENTS OF CASH FLOWS Elimination Property,
FOR THE PERIOD ENDED MARCH 31, 2003 Recognition of of effects of plant and
deferred recognition of equipment &
exchange equity amortization Reversal of
gains/losses component differences 1991 and
Under on convertible of convertible from applying 2003 deficit
CDN GAAP debentures debentures SFAS 121 elimination
(a) (a) (b) (c)
NET INFLOW (OUTFLOW) OF CASH RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING:
Earnings (loss) for the year before dividends
on convertible preferred shares of subsidiary
company $ (11.8) $ (8.0) $ (1.3) $ 1.5 $ --
Items not affecting cash:
Depreciation, depletion and amortization 28.2 -- -- (1.5) --
Future income and mining taxes 0.1 -- -- -- --
Cumulative effect of a change in accounting
principle -- -- -- -- --
Accretion expense 2.1 -- -- -- --
Share in (income) loss of investee companies -- -- -- -- --
Site restoration cash expenditures (2.1) -- -- -- --
Other
Interest on convertible debentures -- -- (0.1) -- --
Unrealized foreign exchange losses on
convertible debentures 1.6 8.0 -- -- --
Gain on disposal of assets (0.1) -- -- -- --
Deferred revenue realized (0.6) -- -- -- --
Changes in non-cash operating assets and liabilities:
Accounts receivable and other assets 6.2 -- -- --
Inventories (5.4) -- -- -- --
Ore in stockpiles (0.4) -- -- -- --
Accounts payable and accrued liabilities (1.6) -- -- -- --
Other long-term obligations -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
CASH FLOW PROVIDED FROM OPERATING ACTIVITIES 16.2 -- (1.4) -- --
-------------------------------------------------------------------------------------------------------------------------------
FINANCING:
Issuance of common shares 1.8 -- -- -- --
Reduction of debt component of convertible
debentures (1.4) -- 1.4 -- --
Repayment of debt (1.0) -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
CASH FLOW PROVIDED FROM FINANCING ACTIVITIES (0.6) -- 1.4 -- --
-------------------------------------------------------------------------------------------------------------------------------
INVESTING:
Additions to property, plant and equipment (12.8) -- -- -- --
Business acquisitions, net of cash acquired (81.4) -- -- -- --
Long-term investments and other assets (3.7) -- -- -- --
Proceeds from the disposal of property,
plant and equipment -- -- -- -- --
Decrease in restricted cash 31.8 -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
CASH FLOW USED IN INVESTING ACTIVITIES (66.1) -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 2.3 -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (48.2) -- -- -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 170.6 -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 122.4 $ -- $ -- $ -- $ --
===============================================================================================================================
F-B28
Gains Reclassi-
on marketable fication of Accounting Impact on
securities Flow cumulative for equity adoption of
and long-term Effect of through translation To adjust to interest in Effect of Section Under
investments SFAS 133 shares adjustments equity basis Echo Bay SFAS 143 3110 U.S. GAAP
-------------------------------------------------------------------------------------------------------------------------------
(d) (e) (f) (h) (i) (d) (k) (j)
$ -- $ 0.9 $ -- $ -- $ -- $ (1.0) $ (13.0) $ 0.8 $ (31.9)
-- -- -- -- (1.2) -- 0.1 -- 25.6
-- -- -- -- -- -- -- -- 0.1
-- -- -- -- -- -- 12.1 -- 12.1
-- -- -- -- -- -- 0.6 (0.8) 1.9
-- -- -- -- (1.1) 1.0 -- -- (0.1)
-- -- -- -- -- -- -- -- (2.1)
-- -- -- -- -- -- -- -- (0.1)
-- -- -- -- -- -- -- -- 9.6
-- -- -- -- -- -- -- -- (0.1)
-- 0.2 -- -- -- -- -- -- (0.4)
-- -- -- -- -- -- -- -- 6.2
-- -- -- -- -- -- -- -- (5.4)
-- -- -- -- -- -- -- -- (0.4)
-- (1.1) -- -- -- -- -- -- (2.7)
-- -- -- -- -- -- 0.2 -- 0.2
-------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- (2.3) -- -- -- 12.5
-------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- -- 1.8
-- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- (1.0)
-------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- -- 0.8
-------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- -- (12.8)
-- -- -- -- -- -- -- -- (81.4)
-- -- -- -- 31.7 -- -- -- 28.0
-- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- 31.8
-------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- 31.7 -- -- -- (34.4)
-------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- -- 2.3
-------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- 29.4 -- -- -- (18.8)
-- -- -- -- (29.4) -- -- -- 141.2
-------------------------------------------------------------------------------------------------------------------------------
$ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 122.4
===============================================================================================================================
F-B29
Consolidated statements of cash flows presented in accordance with U.S. GAAP
would require the following changes from the consolidated statements of cash
flows prepared in accordance with CDN GAAP:
1. Within cash flows provided from operating activities, the determination
should begin with "net earnings (loss)," instead of the "earnings (loss) for the
year before dividends on convertible preferred shares of subsidiary company."
2. Under U.S. GAAP, the reduction of the debt component of convertible
debentures is treated as interest expense and as a cash flow from operating
activities. Under CDN GAAP, the interest expense is classified as a financing
activity.
Consolidated Statements of Comprehensive Income (Loss): The Company's statements
of comprehensive income (loss) under U.S. GAAP are as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------------
2004 2003
--------------- --------------
Net earnings (loss) for the period under U.S. GAAP $ 15.5 $ (32.1)
Change in currency translation adjustments -- (9.4)
Change in unrealized gains on marketable securities and (1.4) 27.6
long-term investments (d)
SFAS 133 (e) 2.2 (4.6)
Comprehensive income (loss) under U.S. GAAP $ 16.3 $ (18.5)
(a) Under CDN GAAP, the convertible debentures were accounted for in
accordance with their substance and were presented in the financial statements
in their respective liability and equity components. The Company redeemed these
convertible debentures on September 29, 2003. Under U.S. GAAP, the entire
principal amount of the convertible debentures plus accrued interest of $146.8
million immediately prior to the redemption was treated as debt with interest
expense based on the coupon rate of 5.5%.
In addition, under CDN GAAP, realized and unrealized foreign exchange gains and
losses on the debt component of the debentures were recognized in income. For
U.S. GAAP, in addition to including these gains and losses in income, realized
and unrealized exchange gains and losses related to the portion of the
convertible debentures included in equity under CDN GAAP were also included in
income. There was no gain or loss on the redemption of the convertible
debentures for U.S. GAAP.
(b) Cumulatively, as a result of applying SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
following the adoption of SFAS 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets," property, plant and equipment is reduced and the deficit
increased by $60.5 million. This difference arose from the requirement to
discount future cash flows from impaired property, plant and equipment under
U.S. GAAP and from using proven and probable reserves only. At the time of the
impairment, future cash flows from impaired property, plant and equipment were
not discounted under CDN GAAP. Under U.S. GAAP, depreciation, depletion and
amortization, in periods subsequent to the impairment, would be reduced by $0.9
million and $1.5 million during the three months ended March 31, 2004 and 2003,
respectively, to reflect the above. Cumulatively, as a result of these
reductions in depreciation, depletion and amortization, property, plant and
equipment is increased and the deficit decreased by $27.3 million and $28.2
million as of March 31, 2004 and December 31, 2003, respectively.
(c) CDN GAAP allows for the elimination of operating deficits by the
reduction of stated capital attributable to common shares with a corresponding
offset to the accumulated deficit. For CDN GAAP, the Company eliminated
operating deficits of $761.4 million and $5.3 million in 2003 and 1991,
respectively. These reclassifications are not permitted by U.S. GAAP and would
require in each subsequent year a cumulative increase in share capital and a
cumulative increase in deficit of $766.7 million.
(d) Under CDN GAAP, unrealized gains and losses on long-term investments and
marketable securities are not recorded. Under U.S. GAAP, unrealized gains on
long-term investments that are classified as securities available for sale of
$5.6 million and $6.9 million as of March 31, 2004 and December 31, 2003,
respectively, and marketable securities of $0.2 million and $0.3 million as of
March 31, 2004, and December 31, 2003, respectively, are included as a component
of comprehensive income (loss).
Furthermore, U.S. GAAP requires that the transaction on April 3, 2002, whereby
the Company exchanged its investment in debt securities of Echo Bay for 57.1
million common shares of Echo Bay, be recorded at fair value with the resulting
gain included in earnings. Under CDN GAAP, the cost of the Echo Bay common
shares acquired on the exchange was recorded
F-B30
at the values of the securities given up. Since the fair value of the capital
securities given up approximated their carrying value, no gain was recorded
under CDN GAAP.
Subsequent to the exchange of debt securities, the Company accounted for its
share investment in Echo Bay as an available for sale security under U.S. GAAP.
At January 31, 2003, when the Company acquired the remaining outstanding common
shares of Echo Bay, the Company retroactively restated its 2002 consolidated
financial statements, prepared in accordance with U.S. GAAP, to account for its
share investment in Echo Bay on an equity basis. As a result, the Company
reversed an unrealized gain of $21.8 million previously included in other
comprehensive income, increased its deficit by $0.7 million to reflect its share
of equity losses for the period ended December 31, 2002 and correspondingly
reduced the carrying value of its investment. In addition, the Company decreased
long-term investments and recorded a share of loss in investee company of $1.0
million for the one month ended January 31, 2003 and increased long-term
investments and recorded a share of income in investee company of $0.7 million
during the year ended December 31, 2002. For U.S. GAAP purposes, as a result of
the business combination on January 31, 2003, the Company recognized an
additional $40.8 million of goodwill representing the difference in carrying
value of its share investment in Echo Bay between CDN and U.S. GAAP.
(e) Under CDN GAAP, derivatives hedging forecasted transactions are
off-balance sheet until the hedged transaction is recorded. Realized gains and
losses on derivatives that are closed out early are initially recorded as
deferred revenue or deferred charges and are recorded as an adjustment to net
earnings (loss) when the original hedged transaction is recorded.
On January 1, 2001, the Company adopted Financial Accounting Standards Board
("FASB") Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), and the corresponding amendments under FASB Statement
No. 138 ("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 periodically 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. For derivatives designated as cash
flow hedges, the effective portions of changes in fair value of the derivative
are reported in other comprehensive income and are subsequently reclassified
into other income when the hedged item affects other income. Changes in fair
value of the derivative instruments used as economic instruments and ineffective
portions of hedges are recognized in other income in the period incurred. The
application of SFAS 133 results in a cumulative decrease in deferred revenue of
$1.7 million and $2.2 million, a cumulative increase in accounts payable and
accrued liabilities of $19.6 million and $22.7 million, a cumulative increase in
deficit of $1.0 million and $1.4 million, and a cumulative decrease in other
comprehensive income of $16.9 million and $19.1 million as of March 31, 2004 and
December 31, 2003, respectively. Additionally, as a result of applying SFAS 133,
there would be an increase in the CDN GAAP net earnings of $0.4 million and a
decrease in the CDN GAAP net loss of $0.9 million for the three months ended
March 31, 2004 and March 31, 2003, respectively. For the year ended December 31,
2003, the application of SFAS 133 would have resulted in a decrease of the CDN
GAAP net loss of $0.5 million. On adoption of SFAS 133, the Company did not
complete the required documentation and effectiveness assessments to achieve
hedge accounting for the commodity derivatives hedging gold revenues and energy
price risk, although the contracts are considered to be effective economic
hedges and they were accounted for as hedges for CDN GAAP purposes. For U.S.
GAAP only, these derivatives are carried at fair value with the changes in fair
value recorded as an adjustment to net earnings (loss). The SFAS 133
requirements for foreign exchange forward contracts were accounted for as cash
flow hedges from January 1, 2001. Realized and unrealized derivatives gains and
losses included in other comprehensive income ("OCI") on transition and during
2001 were reclassified into mining revenue for cash-flow hedges of forecasted
commodity sales and foreign exchange gain (loss) for forecasted foreign currency
revenues or expenses when the hedged forecasted revenue or expense is recorded.
During the three months ended March 31, 2004, $2.7 million of derivative losses
were reclassified out of other comprehensive income (three months ended March
31, 2003, $2.2 million of derivative losses). The Company estimates that $15.9
million of net derivatives losses included in other comprehensive income will be
reclassified into earnings within the next twelve months. Beginning January
2002, the Company met the required documentation requirements under SFAS 133
relating to the prospective and retrospective effectiveness assessments for the
commodity derivatives; thus, these derivatives were designated as cash flow
hedges. The effective portions of changes in fair values of these derivatives
are now recorded in other comprehensive income and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in fair value of cash flow hedges are recognized in earnings. There was no
ineffectiveness recorded during the three months March 31, 2004 and 2003.
(f) Under Canadian income tax legislation, a company is permitted to issue
shares whereby the company agrees to incur qualifying expenditures and renounce
the related income tax deductions to the investors. The Company accounted for
the issue of flow-through shares using the deferral method in accordance with
CDN GAAP. At the time of issue the funds received were recorded as share
capital. Qualifying expenditure did not begin to be incurred until 2002. For
U.S. GAAP, the premium paid in excess of the market value of $1.1 million was
credited to other liabilities and included in income as the
F-B31
qualifying expenditures were made. All of the qualifying expenditures were made
in 2002. $1.1 million was included in interest and other income for the year
ended December 31, 2002.
(g) The terms "proven and probable reserves," "exploration," "development,"
and "production" have substantially the same meaning under both U.S. and CDN
GAAP. Exploration costs incurred are expensed at the same point in time based on
the same criteria under both U.S. and CDN GAAP. In addition, mining related
costs are only capitalized after proven and probable reserves have been
designated under both U.S. and CDN GAAP.
(h) Under CDN GAAP, the unrealized translation gains and losses on the
Company's net investment in self-sustaining operations translated using the
current rate method accumulated in a separate component of shareholders' equity,
described as cumulative translation adjustments on the consolidated balance
sheet. Under U.S. GAAP, the unrealized foreign exchange gains and losses would
not accumulate in a separate component of shareholders equity but rather as an
adjustment to accumulated other comprehensive income. On September 29, 2003, the
Company changed its accounting policy with respect to the translation of foreign
currencies during 2003. As such, the $2.0 million accumulated translation loss
in other comprehensive income, will only become realized in earnings upon the
substantial disposition, liquidation or closure of the mining property or
investment that gave rise to such amounts.
(i) Under CDN GAAP, Kinross proportionately consolidates its interests in
the following incorporated joint ventures: RPM (Paracatu), MDO (La Coipa), MSG
(Crixas ) and CMM (Refugio). In addition, the Company proportionately
consolidates its interests in the following unincorporated joint ventures: Round
Mountain, Porcupine Joint Venture, Musselwhite and New Britannia. Prior to March
1, 2003, the investment in Omolon was also proportionately consolidated under
CDN GAAP. Effective March 1, 2003, following the Company's increase in share
ownership to 98.1%, as described in note 2(b), Omolon is fully consolidated
under both CDN and U.S. GAAP.
These investments are accounted for using the equity method under U.S. GAAP. The
Company relies on an accommodation provided for in Item 17(c) (2)(vii) of SEC
Form 20-F, which permits a company using the equity method for U.S. GAAP to omit
the differences arising from the use of proportionate consolidation under CDN
GAAP. Each of the joint ventures listed, except Omolon prior to March 1, 2003,
qualifies for this accommodation on the basis that it is an operating entity,
the significant financial and operating policies of which are, by contractual
arrangement, jointly controlled by all parties having an equity interest in the
entity.
With respect to Omolon, the Company concluded that it did not meet the criteria
outlined for the accommodation. Therefore, the financial information of Omolon
has been disclosed using the equity method for U.S. GAAP purposes for
comparative periods prior to March 1, 2003. Under the equity method, an
investment in common shares is generally shown in the balance sheet of an
investor as a single amount as "Investment in investee company." Likewise, an
investor's share of earnings or losses from its investment is ordinarily shown
in its statement of operations as a single amount as "Share of income (loss) of
investee company."
(j) Asset retirement obligations
Effective January 1, 2004, the Company adopted Section 3110, "Accounting for
Asset Retirement Obligations" which requires that the fair value of liabilities
for asset retirement obligations associated with tangible long-lived assets be
recognized in the period in which they are incurred. This Section harmonizes
Canadian GAAP with U.S. GAAP (SFAS 143) for the accounting of asset retirement
obligations. There are no GAAP differences between Canadian GAAP and U.S. GAAP
related to the accounting for asset retirement obligations on a prospective
basis.
Under Section 3110 the transitions provisions required the prior year
comparatives to be restated. However, U.S. GAAP required a cumulative effect of
accounting change to be recorded in the period of adoption for SFAS 143, which
was recorded by the Company for the three months ended March 31, 2003.
F-B32
(k) Under U.S. GAAP, if the accumulated pension plan benefit obligation
exceeds the market value of plan assets, a minimum pension liability for the
excess is recognized to the extent that the liability recorded in the balance
sheet is less than the minimum liability. Any portion of this additional
liability that relates to unrecognized prior service cost is recognized as an
intangible asset while the remainder is charged to Other Comprehensive Income.
CDN GAAP does not require the Company to record a minimum liability and does not
have the concept of Other Comprehensive Income. In 2003, the Company recorded a
minimum pension liability of $3.1 million with a corresponding decrease in Other
Comprehensive Income. None of the additional liability relates to unrecognized
prior service cost.
(l) Stock-based compensation
Under Canadian GAAP and US GAAP, effective January 1, 2004, the Company recorded
an expense for employee stock-based compensation using the fair value based
method, in accordance with the transitional provisions of Section 3870 and SFAS
123, as amended by SFAS 148. Section 3870 is harmonized with SFAS 123 and SFAS
148. As a result no GAAP differences are required on the adoption of the fair
value based method of accounting for stock options.
The fair value at grant date of stock options is estimated using the
Black-Scholes option-pricing model. Compensation expense is recognized over the
stock option vesting period.
ACCOUNTING CHANGES
STOCK-BASED COMPENSATION
The Company adopted the fair value method of accounting for stock options. See
Note 2(a).
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
On December 24, 2003, the FASB issued Interpretation No. 46 (revised December
2003) ("FIN 46R"). FIN 46R requires that the assets, liabilities and results of
variable interest entities be consolidated into the financial statements of the
entity that has the controlling financial interest. FIN 46R also provides the
framework for determining whether a variable interest entity should be
consolidated based on voting interest or significant financial support provided
to it. During the three months ended March 31, 2004, the Company evaluated the
impact of FIN 46R at March 31, 2004, and determined that it did not have an
impact on its results of operations or financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
The Emerging Issues Task Force ("EITF") formed a committee ("Committee") to
evaluate certain mining industry accounting issues, including issues arising
from the application of SFAS No. 141, "Business Combinations" ("SFAS No. 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") to
business combinations within the mining industry, accounting for goodwill and
other intangibles and the capitalization of costs after the commencement of
production, including deferred stripping. The issues discussed also included
whether mineral interests conveyed by leases represent tangible or intangible
assets and the amortization of such assets. In March 2004, the EITF reached a
consensus, subject to ratification by the Financial Accounting Standards Board
("FASB"), that mineral interests conveyed by leases should be considered
tangible assets. The EITF also reached a consensus, subject to ratification by
the FASB, on other mining related issues involving impairment and business
combinations.
F-B33
On March 31, 2004, the FASB ratified the consensus of the EITF on other mining
related issues involving impairment and business combinations. This did not have
an impact to the Company's financial statements since it did not change the
current accounting. The FASB also ratified the consensus of the EITF that
mineral interests conveyed by leases should be considered tangible assets
subject to the finalization of a FASB Staff Position ("FSP") in this regard.
On April 30, 2004, the FASB issued a FSP amending SFAS No. 141 and SFAS No. 142
to provide that certain mineral use rights are considered tangible assets and
that mineral use rights would be accounted for based on their substance. The FSP
is effective for the first reporting period beginning after April 29, 2004, with
early adoption permitted. The Company does not expect this FSP to have a
material impact on its results of operation or financial condition.
The Committee is continuing its evaluation of mining industry accounting issues,
which may have an impact on the Company's accounting in the future.
12. CROWN RESOURCES
On October 8, 2003, Kinross Gold Corporation and Crown Resources
Corporation ("Crown") announced that they have executed a Letter of Intent
whereby Kinross Gold Corporation will acquire Crown and its 100%-owned Buckhorn
Mountain gold deposit located in north central Washington State, USA,
approximately 67 kilometers by road from Kinross' Kettle River gold milling
facility.
On November 20, 2003, Kinross Gold Corporation executed a definitive
agreement to acquire Crown. Each of the outstanding shares of common stock of
Crown will be exchanged for 0.2911 shares of Kinross Gold Corporation common
stock at closing and is subject to the approval of two thirds of Crown's
shareholders and customary closing conditions. Until the acquisition is
completed, Crown is required to operate its business in the ordinary course, and
is restricted from engaging in certain significant business and financing
transactions, or changes in corporate structure. Prior to the completion of the
acquisition, Crown would dividend to its shareholders its approximate 41% equity
interest in Solitario Resources Corporation (TSX-SLR).
The current plan, which contemplates the development of an underground
mine rather than an open pit mine, positively addresses major environmental
concerns identified during previous permitting efforts. Kinross is confident
that by working in conjunction with Federal, State and local agencies as well as
other stakeholders, the permitting process, initiated by Crown, will be
successful in obtaining the necessary regulatory approvals to develop an
underground mine in a timely manner. In conjunction with the permitting process,
Kinross will review potential synergies between its Kettle River operation and
the Buckhorn Mountain deposit.
Either party may terminate the Merger Agreement if the transaction has
not been consummated by September 30, 2004 subject to certain conditions. The
Company expects the transaction to close by September 30, 2004.
F-B34
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTSS
TO THE SHAREHOLDERS OF KINROSS GOLD CORPORATION
We have audited the consolidated balance sheets of Kinross Gold Corporation as
at December 31, 2003 and 2002 and the
consolidated statements of operations, common shareholders' equity and cash
flows for each of the years in the three year period ended December 31, 2003.
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 in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2003
and 2002 and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 2003, in accordance with
Canadian generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Independent Registered Chartered Accountants
Toronto, Canada
March 12, 2004
COMMENTS BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS CANADA - UNITED STATES
OF AMERICA REPORTING DIFFERENCE
In the United States of America, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph) when
there are changes in accounting principles that have material effect on the
comparability of the Company's financial statements, such as the changes
described in Note (1) to the financial statements. Our report to the
Shareholders, dated March 12, 2004, is expressed in accordance with Canadian
reporting standards which do not require a reference to such changes in
accounting principles in the Independent Registered Chartered Accountants'
report when the change is properly accounted for and adequately disclosed in the
financial statements.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Independent Registered Chartered Accountants
Toronto, Canada
March 12, 2004
F-B35
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN MILLIONS OF U.S. DOLLARS)
AS AT DECEMBER 31
========================================================================================== ============
2003 2002
========================================================================================== ============
ASSETS
Current assets
Cash and cash equivalents $ 245.8 $ 170.6
Restricted cash 5.1 21.1
Accounts receivable and other assets (Note 3) 42.2 15.6
Inventories (Note 4) 109.2 38.9
402.3 246.2
Property, plant and equipment (Note 5) 522.6 330.0
Mineral interests (Note 6) 260.1 -
Goodwill (Note 2) 918.0 -
Future income and mining taxes (Note 18) 1.5 -
Long-term investments (Note 7) 2.1 11.8
Deferred charges and other long-term assets (Note 8) 35.9 10.0
------------ ------------
$ 2,142.5 $ 598.0
============ ============
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 101.4 $ 35.5
Current portion of long-term debt (Note 11) 29.4 23.3
Current portion of site restoration cost accruals (Note 12) 19.2 15.0
------------ ------------
150.0 73.8
Long-term debt (Note 11) 0.7 12.9
Site restoration cost accruals (Note 12) 100.5 42.0
Future income and mining taxes (Note 18) 55.6 3.3
Deferred revenue (Note 10(a)) 2.2 4.5
Other long-term liabilities 2.5 5.5
Debt component of convertible debentures (Note 13) - 21.7
Redeemable retractable preferred shares (Note 14) 3.0 2.5
------------ ------------
314.5 166.2
------------ ------------
NON-CONTROLLING INTEREST 0.7 -
------------ ------------
CONVERTIBLE PREFERRED SHARES OF SUBSIDIARY COMPANY (NOTE 15) 12.6 12.9
------------ ------------
COMMON SHAREHOLDERS' EQUITY
Common share capital and common share purchase warrants (Note 16) 1,783.5 1,058.5
Contributed surplus 30.0 12.9
Equity component of convertible debentures (Note 13) - 132.3
Retained earnings (deficit) 3.2 (761.4)
Cumulative translation adjustments (2.0) (23.4)
------------ ------------
1,814.7 418.9
------------ ------------
$ 2,142.5 $ 598.0
========================================================================================== ============
COMMITMENTS AND CONTINGENCIES (NOTE 23)
Signed on behalf of the Board:
/s/ John A. Brough /s/ John M.H. Huxley
John A. Brough John M.H. Huxley
Director Director
F-B36
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31
======================================================================================================= =========== ===========
2003 2002 2001
======================================================================================================= =========== ===========
REVENUE AND OTHER INCOME
Mining revenue $ 571.9 $ 261.0 $ 270.1
Interest and other income 12.3 16.9 9.3
Mark-to-market gain (loss) on call options 0.4 (2.7) 3.5
---------- ----------- -----------
584.6 275.2 282.9
---------- ----------- -----------
EXPENSES
Operating (exclusive of depreciation, depletion and amortization shown separately below) 387.3 174.8 180.7
General and administrative 25.0 11.3 10.1
Exploration and business development 24.3 11.6 7.9
Depreciation, depletion and amortization 140.9 85.3 85.8
Gain on disposal of assets (29.5) (2.7) (1.2)
Foreign exchange (gain) loss (3.3) 4.3 0.5
Interest expense on long-term liabilities 5.1 5.0 9.1
Loss on redemption of debt component of convertible debentures 1.1 - -
Asset write-downs and non-cash charges (Note 17) 9.9 7.9 16.1
---------- ----------- -----------
560.8 297.5 309.0
---------- ----------- -----------
EARNINGS (LOSS) BEFORE TAXES AND OTHER ITEMS 23.8 (22.3) (26.1)
Provision for income and mining taxes (Note 18) (13.1) (6.5) (2.9)
Non-controlling interest (0.2) - -
Share in loss of investee companies - (0.6) (2.2)
EARNINGS (LOSS) FOR THE YEAR BEFORE DIVIDENDS ON CONVERTIBLE PREFERRED SHARES OF
SUBSIDIARY COMPANY 10.5 (29.4) (31.2)
DIVIDENDS ON CONVERTIBLE PREFERRED SHARES OF SUBSIDIARY COMPANY 0.8 1.5 5.1
---------- ----------- -----------
NET EARNINGS (LOSS) FOR THE YEAR $ 9.7 $ (30.9) $ (36.3)
========== =========== ===========
ATTRIBUTABLE TO COMMON SHAREHOLDERS:
NET EARNINGS (LOSS) FOR THE YEAR $ 9.7 $ (30.9) $ (36.3)
INCREASE IN EQUITY COMPONENT OF CONVERTIBLE DEBENTURES (NOTE 13) (6.5) (7.3) (7.7)
GAIN ON REDEMPTION OF EQUITY COMPONENT OF CONVERTIBLE DEBENTURES (NOTE 13) 16.5 - -
---------- ----------- -----------
NET EARNINGS (LOSS) FOR THE YEAR ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 19.7 $ (38.2) $ (44.0)
EARNINGS (LOSS) PER SHARE
Basic (Note 16) $ 0.06 $ (0.32) $ (0.42)
Diluted (Note 16) $ 0.06 n/a n/a
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (MILLIONS)
Basic (Note 16) 308.6 119.7 104.5
Diluted (Note 16) 309.6 n/a n/a
======================================================================================================= =========== ===========
F-B37
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN MILLIONS OF U.S. DOLLARS)
FOR THE YEARS ENDED DECEMBER 31
============================================================================================= ============= =============
2003 2002 2001
============================================================================================= ============= =============
NET INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING:
Earnings (loss) for the year before dividends on convertible preferred shares
of subsidiary company $ 10.5 $ (29.4) $ (31.2)
Items not affecting cash:
Depreciation, depletion and amortization 140.9 85.3 85.8
Asset write-downs and non-cash charges 9.9 7.9 14.6
Gain on disposal of assets (29.5) (2.7) (1.2)
Future income and mining taxes (2.8) - -
Deferred revenue recognized (2.3) (5.1) (17.7)
Site restoration cost accruals 9.4 3.0 1.9
Proceeds on restructuring of gold forward sales contracts - - 21.6
Changes in non-cash working capital items:
Accounts receivable and other assets 3.0 1.2 5.1
Inventories (11.3) 2.4 9.6
Accounts payable and accrued liabilities (20.1) 5.6 (8.0)
Site restoration cash expenditures (19.3) (9.8) (7.1)
Other 4.3 1.1 1.6
------------- ------------- -------------
CASH FLOW PROVIDED FROM OPERATING ACTIVITIES 92.7 59.5 75.0
------------- ------------- -------------
FINANCING:
Issuance of common shares and common share purchase warrants 187.9 112.8 5.4
Redemption of convertible debentures (144.8) - -
Acquisition of convertible preferred shares of subsidiary company (0.3) (11.4) -
Reduction of debt component of convertible debentures (4.2) (5.1) (5.4)
Repayment of debt (10.5) (28.5) (46.5)
------------- ------------- -------------
CASH FLOW PROVIDED FROM (USED IN) FINANCING ACTIVITIES 28.1 67.8 (46.5)
------------- ------------- -------------
INVESTING:
Additions to property, plant and equipment (73.4) (22.6) (30.4)
Business acquisitions, net of cash acquired (Note 2) (81.9) (0.1) (1.2)
Long-term investments and other assets 57.2 1.8 2.1
Proceeds from the sale of property, plant and equipment 5.9 1.3 1.8
Decrease (increase) in restricted cash 37.5 (21.1) 2.9
------------- ------------- -------------
CASH FLOW USED IN INVESTING ACTIVITIES (54.7) (40.7) (24.8)
------------- ------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 9.1 3.0 (0.5)
------------- ------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 75.2 89.6 3.2
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 170.6 81.0 77.8
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 245.8 $ 170.6 $ 81.0
============= ============= =============
Cash and cash equivalents consist of the following:
Cash on hand and balances with banks $ 89.8 $ 16.3 $ 12.9
Short-term investments 156.0 154.3 68.1
------------- ------------- -------------
$ 245.8 $ 170.6 $ 81.0
============= ============= =============
Supplementary disclosure of cash flow information:
Cash paid for:
Interest $ 8.0 $ 8.8 $ 13.1
Income taxes $ 7.0 $ 6.8 $ 3.9
============================================================================================= ============= =============
F-B38
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(EXPRESSED IN MILLIONS OF U.S. DOLLARS)
FOR THE YEARS ENDED DECEMBER 31
========================================================== =============== ============== ============= =============== ===========
Equity
Common component of Retained Cumulative
share Contributed convertible earnings translation
capital surplus debentures (Deficit) adjustments Total
========================================================== =============== ============== ============= =============== ===========
BALANCE, DECEMBER 31, 2000 $ 913.2 $ 12.9 $ 117.0 $ (679.2) $ (23.0) $ 340.9
Issuance of common shares 32.5 - - - - 32.5
Increase in equity component of convertible
debentures - - 7.8 (7.7) - 0.1
Net loss for the year - - - (36.3) - (36.3)
Cumulative translation adjustments - - - - (5.6) (5.6)
------------ --------------- -------------- ------------- --------------- -----------
BALANCE, DECEMBER 31, 2001 945.7 12.9 124.8 (723.2) (28.6) 331.6
Issuance of common shares and
common share purchase warrants 112.8 - - - - 112.8
Increase in equity component of convertible
debentures - - 7.5 (7.3) - 0.2
Net loss for the year - - - (30.9) - (30.9)
Cumulative translation adjustments - - - - 5.2 5.2
------------ --------------- -------------- ------------- --------------- -----------
BALANCE, DECEMBER 31, 2002 1,058.5 12.9 132.3 (761.4) (23.4) 418.9
Reduction of stated capital (761.4) - - 761.4 - -
Issuance of common shares 1,487.0 - - - - 1,487.0
Increase in equity component of convertible
debentures - - 6.7 (6.5) - 0.2
Redemption of convertible debentures - 16.5 (139.0) - - (122.5)
Transfer of fair value of expired
warrants and options (0.6) 0.6 - - - -
Net earnings for the year - - - 9.7 - 9.7
Cumulative translation adjustments - - - - 21.4 21.4
------------ --------------- -------------- ------------- --------------- -----------
BALANCE, DECEMBER 31, 2003 $ 1,783.5 $ 30.0 $ - $ 3.2 $ (2.0) $ 1,814.7
========================================================== =============== ============== ============= =============== ===========
F-B39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(ALL TABULAR DOLLAR AMOUNTS ARE IN MILLIONS OF UNITED STATES DOLLARS,
EXCEPT PER SHARE DATA]
AS AT DECEMBER 31
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Kinross Gold Corporation and its subsidiaries and joint ventures (collectively,
"Kinross" or the "Company") are engaged in gold mining and related activities,
including exploration and acquisition of gold-bearing properties, extraction,
processing and reclamation. Kinross' gold production and exploration activities
are carried out principally in the United States, Canada, Russia, Brazil, Chile,
Australia and Zimbabwe. Gold, the Company's primary product, is produced in the
form of dore which is shipped to refineries for final processing. Kinross also
produces and sells a limited amount of silver as a by-product of gold mining
activities.
The operating cash flow and profitability of the Company are affected by various
factors, including the amount of gold and silver produced and sold, the market
prices of gold and silver, cash operating costs, interest rates, environmental
costs and the level of exploration and other discretionary costs. Due to the
global nature of the Company's operations, exposure also arises from
fluctuations in foreign currency exchange rates, political risk and varying
levels of taxation. While Kinross seeks to manage the level of risk associated
with its business, many of the factors affecting these risks are beyond the
Company's control.
The United States ("U.S.") dollar is the principal currency of measure of all of
the Company's operations and the reporting currency of the Company's business;
accordingly, these consolidated financial statements are expressed in U.S.
dollars. The consolidated financial statements of Kinross have been prepared in
accordance with Canadian generally accepted accounting principles ("CDN GAAP")
which differ in certain material respects from those generally accepted in the
United States ("U.S. GAAP"), as described in Note 22.
The following is a summary of the accounting policies significant to the
Company:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries and its proportionate share of assets, liabilities, revenues
and expenses of jointly controlled companies and ventures in which it has an
interest. Effective December 31, 2001, the Company discontinued the
consolidation of its wholly-owned subsidiary in Zimbabwe, which operates the
Blanket mine. Extreme inflationary pressures within Zimbabwe, civil unrest and
currency export restrictions have prevented the Company from exercising control
over the Zimbabwean subsidiary. As a result, Kinross accounts for its investment
in the Blanket mine on the cost basis with amounts received recorded in other
income only upon receipt of dividends or other cash payments (see Note 17).
On January 28, 2003, the shareholders of the Company by way of special
resolution, authorized the consolidation of the issued and outstanding common
shares of the Company on the basis of one consolidated common share for each
three old common shares. The consolidation was made effective on January 31,
2003. All share capital, share and option data give retroactive effect to
reflect the share consolidation (see Note 16).
F-B40
The following table sets forth the Company's ownership of its mining interests:
================================================================================= ====================
DECEMBER 31, 2003 December 31, 2002
--------------------------------------------------------------------------------- --------------------
THROUGH MAJORITY OWNED SUBSIDIARIES
Fort Knox 100% 100%
Kubaka (Note 2(b)) 98% 55%
Lupin (Note 2(a)) 100% -
Blanket 100% 100%
Kettle River / Emanuel Creek (Note 2(a)) 100% -
--------------------------------------------------------------------------------- --------------------
AS INTERESTS IN UNINCORPORATED JOINT VENTURES
Round Mountain (Note 2(a)) 50% -
Porcupine (Note 9) 49% 49%
Musselwhite (Note 2(a)) 32% -
New Britannia (Note 2(a)) 50% -
--------------------------------------------------------------------------------- --------------------
AS INTERESTS IN INCORPORATED JOINT VENTURES
Paracatu (Note 2(a)) 49% -
La Coipa (Note 2(a)) 50% -
Crixas (Note 2(a)) 50% -
Refugio 50% 50%
================================================================================= ====================
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in conformity
with CDN GAAP requires management to make estimates and assumptions that affect
amounts reported in the consolidated financial statements and accompanying
notes. These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Changes in estimates of useful lives are
accounted for prospectively from the date of change. Actual results could differ
from these estimates. The assets and liabilities which require management to
make significant estimates and assumptions in determining carrying values
include property, plant and equipment; mineral interests and other intangibles;
inventories; goodwill; site restoration cost accruals; provision for income and
mining taxes; and pension liability.
TRANSLATION OF FOREIGN CURRENCIES
DOMESTIC AND FOREIGN OPERATIONS
As of September 29, 2003, the functional currency of all the Company's
operations is the U.S. dollar. Prior to that date, the currency of measurement
for certain of the Company's operations domiciled in Canada was the Canadian
dollar. On September 29, 2003, the Company repaid all of its outstanding
Canadian dollar denominated debt. All of the Company's revenues are in U.S.
dollars.
Prior to the repayment of its Canadian dollar denominated convertible debentures
(see Note 13), certain of the Company's Canadian dollar amounts were translated
to U.S. dollars for reporting purposes using the current rate method. Under the
current rate method, assets and liabilities were translated at the exchange
rates in effect at the balance sheet date and revenues and expenses were
translated at average rates for the period.
After September 29, 2003, for these operations and for all other foreign
operations, the temporal method is used to translate to U.S. dollars for
reporting purposes. Under the temporal method, all non-monetary items are
translated at historical rates. Monetary assets and liabilities are translated
at 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.
The cumulative translation adjustments ("CTA") relate to the unrealized
translation gains and losses on the Company's net investment in self-sustaining
operations, translated using the current rate method, prior to September 29,
2003. Such exchange gains and losses will become realized in income upon the
substantial disposition, liquidation or closure of the mining property or
investment that gave rise to such amounts.
F-B41
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 term
deposits maintained in high credit quality financial institutions.
MARKETABLE SECURITIES
Marketable securities are carried at the lower of cost and quoted market value.
LONG-TERM INVESTMENTS
Investments in shares of investee companies in which Kinross' ownership is
greater than 20% but not more than 50%, 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% or
cannot exercise significant influence. 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.
INVENTORIES
Expenditures and depreciation, depletion and amortization of assets incurred in
the mining and processing activities that will result in future gold production
are deferred and accumulated as ore in stockpiles, ore on leach pads and
in-process inventories. These deferred amounts are carried at the lower of
average cost or net realizable value ("NRV"). NRV is the difference between the
estimated future gold price based on prevailing and long-term metal prices, and
estimated costs to complete production into a saleable form. Write-downs of ore
in stockpiles, ore on leach pads and inventories resulting from NRV impairments
are reported as a component of current period costs.
ORE IN STOCKPILES
Stockpiles are comprised of coarse ore that has been extracted from the mine and
is available for further processing. Stockpiles are measured by estimating the
number of tonnes (via truck counts and/or in-pit surveys of the ore before
processing) added and removed from the stockpile. Stockpile tonnages are
verified by periodic surveys. Stockpiles are valued based on mining costs
incurred up to the point of stockpiling the ore, including applicable
depreciation, depletion and amortization relating to operations. Costs are added
to stockpiles based on the current mining cost per tonne and removed at the
average cost per tonne.
Ore in stockpiles is processed according to a life of mine plan that is designed
to optimize use of known mineral reserves, present processing capacity and pit
design. The market price of gold does not significantly affect the timing of
processing of ore in stockpiles. While stockpiled ore can be processed earlier
than planned in the event of an unforeseen disruption to mining activities, the
current portion of ore in stockpiles represents the amount expected to be
processed in the next twelve months. Ore in stockpiles not expected to be
processed in the next twelve months is classified as long-term.
ORE ON LEACH PADS
The recovery of gold from certain oxide ores is best achieved through the heap
leaching process. Under this method, ore is placed on leach pads where it is
permeated with a chemical solution, which dissolves the gold contained in the
ore. The resulting recovered solution, which is included in in-process
inventory, is further processed in a plant where gold is recovered. For
accounting purposes, costs are added to leach pads based on current mining
costs, including applicable depreciation, depletion, and amortization relating
to operations. Costs are removed from the leach pad as ounces are recovered in
circuit at the plant based on the average cost per recoverable ounce of gold on
the leach pad.
F-B42
The engineering estimates of recoverable gold on the leach pads are calculated
from the quantities of ore placed on the pads (measured tonnes added to the
leach pads), the grade of ore placed on the leach pads (based on assay data) and
a recovery percentage (based on the leach process and ore type). While it may
not be uncommon for recoveries to occur on a declining basis over a period of
time in excess of twelve months, economically recoverable gold reflected in the
Company's carrying value for ore on leach pads, based on its current operations,
will be recovered within a period of twelve months or less. Presently, the Round
Mountain mine is the only active heap leach operation. As such, all of the
Company's ore on leach pads is classified as current. In the event that the
Company determined, based on engineering estimates, that a quantity of gold
contained in ore on leach pads was to be recovered over a period exceeding
twelve months, that portion would be classified as long-term.
Although the quantities of recoverable gold placed on the leach pads are
reconciled by comparing the grades of ore placed on the leach pads to the
quantities of gold actually recovered (metallurgical balancing), the nature of
the leaching process inherently limits the ability to precisely monitor
inventory levels. As a result, the metallurgical balancing process is constantly
monitored and the engineering estimates are refined based on actual results over
time. Operating results at the Refugio mine, the Company's only historic
interest in a heap leach operation, were not materially impacted by variations
between the estimated and actual recoverable ounces of gold on its leach pads.
Variances between actual and estimated quantities resulting from changes in
assumptions and estimates that do not result in write-downs to net-realizable
value are accounted for on a prospective basis. The ultimate recovery of gold
from a leach pad will not be known until the leaching process is concluded.
IN-PROCESS INVENTORY
In-process inventories represent materials that are currently in the process of
being converted to a saleable product. Conversion processes vary depending on
the nature of the ore and the specific mining operation, but include mill
in-circuit, leach in-circuit, flotation and column cells, and carbon-in-pulp
inventories. In-process material is measured based on assays of the material fed
to the processing plants and the projected recoveries of the respective plants.
In-process inventories are valued at the average cost of the material fed to the
processing plant attributable to the source material coming from the mines,
stockpiles or leach pads plus the in-process conversion costs, including
applicable depreciation relating to the process facilities, incurred to that
point in the process.
FINISHED METAL
Finished metal inventories, comprised of gold and silver dore and bullion, are
valued at the lower of average production cost and net realizable value. Average
production cost represents the average cost of the respective in-process
inventories incurred prior to the refining process, plus applicable refining
costs.
MATERIALS AND SUPPLIES
Materials and supplies are valued at the lower of average cost and replacement
cost.
PROPERTY, PLANT AND EQUIPMENT
BUILDINGS, PLANT AND EQUIPMENT
New facilities, plant and equipment are recorded at cost and carried net of
depreciation. Mobile and other equipment is amortized, net of residual value,
using the straight-line method, over the estimated productive life of the asset.
Productive lives for mobile and other equipment range from 2 to 5 years, but do
not exceed the related estimated mine life based on proven and probable
reserves. Plant and other facilities, used in carrying out the mine operating
plan, are amortized using the units-of-production ("UOP") method over the
estimated life of the ore body based on recoverable ounces to be mined from
estimated proven and probable reserves. Repairs and maintenance expenditures are
expensed as incurred. Expenditures that extend the useful lives of existing
facilities or equipment are capitalized and amortized over the remaining useful
life of the related asset.
F-B43
MINERAL EXPLORATION AND MINE DEVELOPMENT COSTS
Mineral exploration costs are expensed as incurred. When it has been determined
that a mineral property can be economically developed as a result of
establishing proven and probable reserves, costs incurred prospectively to
develop the property are capitalized as incurred and are amortized using the UOP
method over the estimated life of the ore body based on recoverable ounces to be
mined from estimated proven and probable reserves.
At the Company's open pit mines, these costs include costs to further delineate
the ore body and remove overburden to initially expose the ore body. The Company
expenses in-pit stripping cost as incurred. At the Company's underground mines,
these costs include the cost of building access ways, shaft sinking and access,
lateral development, drift development, ramps and infrastructure development.
Major development costs incurred after the commencement of production are
amortized using the UOP method based on recoverable ounces to be mined from
estimated proven and probable reserves. Commercial production occurs when an
asset or property is substantially complete and ready for its intended use. The
Company expenses start-up activities including pre-production losses and
organizational costs as incurred.
Ongoing development expenditures to maintain production are charged to
operations as incurred.
MINERAL INTERESTS
Mineral interests include acquired mineral use rights in production, development
and exploration stage properties. The amount capitalized related to a mineral
interest represents its fair value at the time it was acquired, either as an
individual asset purchase or as a part of a business combination. The values of
such mineral use rights are primarily driven by the nature and amount of mineral
interests believed to be contained, or potentially contained, in properties to
which they relate.
Production stage mineral interests represent mineral use rights in operating
properties that contain proven and probable reserves. Development stage mineral
interests represent mineral use rights in properties under development that
contain proven and probable reserves. Exploration stage mineral interests
represent mineral use rights in properties that are believed to potentially
contain (i) other mineralized material such as measured, indicated or inferred
mineral resources with insufficient drill spacing to qualify as proven and
probable reserves which is in close proximity to proven and probable reserves
and within the immediate mine structure; or (ii) around - mine exploration
potential such as inferred mineral resources not immediately adjacent to
existing reserves and mineralization but located within the immediate mine
infrastructure and (iii) other mine-related or greenfields exploration potential
that is not part of measured or indicated resources and is comprised mainly of
material outside of the immediate mine area.
The Company's mineral use rights generally are enforceable regardless of whether
proven and probable mineral reserves have been established. The Company has the
ability and intent to renew mineral use rights where the existing term is not
sufficient to recover all identified and valued proven and probable reserves
and/or undeveloped mineral interests.
AMORTIZATION
Production stage mineral interests are amortized over the life of mine using the
UOP method based on recoverable ounces to be mined from estimated proven and
probable reserves. Development stage mineral interests are not amortized until
such time as the underlying property is converted to the production stage. With
respect to exploration stage mineral interests, the excess of the carrying value
over the residual value is amortized on a straight-line basis over the period
that the Company expects to convert, develop or further explore the underlying
properties. Residual values for exploration stage mineral interests represent
the expected fair value of the interests at the time the Company plans to
convert, develop, further explore or dispose of the interests. The residual
values range from 75% to 90% of the gross carrying value of the respective
exploration stage mineral interests. Residual values are determined for each
individual property based on the fair value of the exploration stage mineral
interest, and the nature of, and the Company's relative confidence in, the
mineralized material believed to be contained, or potentially contained, in the
underlying property. Such values are based on (i) discounted cash flow analyses
for those properties characterized as other mineralized material and around -
mine exploration potential and (ii) recent transactions involving similar
properties for those properties characterized as other mine-related exploration
potential and greenfields exploration potential. Based on its knowledge of the
secondary market that exists for the purchase and sale of
F-B44
mineral properties, the Company believes that both methods result in a residual
value that is representative of the amount that the Company could expect to
receive if the property were sold to a third party. When an exploration stage
mineral interest is converted to a development or production stage mineral
interest, the residual value is reduced to zero for purposes of calculating UOP
amortization.
The expected useful lives and residual values used in amortization calculations
are determined based on the facts and circumstances associated with the mineral
interest. The useful lives used to amortize production stage mineral interests
range from 3 to 19 years. The Company evaluates the remaining amortization
period and residual value for each individual mineral interest on at least an
annual basis. Any changes in estimates of useful lives and residual values are
accounted for prospectively from the date of the change.
ASSET IMPAIRMENT
LONG-LIVED ASSETS
The Company reviews and evaluates the carrying value of its operating mines and
development properties for impairment when events or changes in circumstances
indicate that the carrying amounts of related assets or groups of assets may not
be recoverable. If the total estimated future cash flows on an undiscounted
basis are less than the carrying amount of the asset, an impairment loss is
measured and recorded. Future cash flows are estimated based on estimated future
recoverable mine production, expected sales prices (considering current and
historical prices, price trends and related factors), production levels, cash
costs of production, capital and reclamation costs, all based on detailed
engineering life-of-mine plans. Future recoverable mine production is determined
from proven and probable reserves and measured, indicated and inferred mineral
resources after taking into account estimated losses during ore processing and
treatment. Estimates of recoverable production from measured, indicated and
inferred mineral interests are risk adjusted based on management's relative
confidence in converting such interests to proven and probable reserves. All
long-lived assets at a particular operation are considered together for purposes
of estimating future cash flows. In the case of exploration stage mineral
interests associated with greenfields exploration potential, cash flows and fair
values are individually evaluated based primarily on recent exploration results
and recent transactions involving sales of similar properties. Assumptions
underlying future cash flow estimates are subject to risks and uncertainties. It
is possible that changes in estimates could occur which may affect the expected
recoverability of the Company's investments in mineral properties.
GOODWILL
Acquisitions are accounted for using the purchase method whereby acquired assets
and liabilities are recorded at fair value as of the date of acquisition. The
excess of the purchase price over such fair value is recorded as goodwill. The
carrying amount of goodwill is then assigned to one or more reporting units at
the date of acquisition and is not amortized. The allocation of goodwill to one
or more specific reporting units is determined by the Company based on unique
synergies and anticipated future benefits related to the generation of
additional proven and probable reserves to be achieved as a result of the
business combination.
The Company evaluates, on at least an annual basis, the carrying amount of
goodwill to determine whether events and circumstances indicate that such
carrying amount may no longer be recoverable. To accomplish this, the Company
compares the fair value of reporting units, to which goodwill was allocated, to
their carrying amounts. If the carrying value of a reporting unit were to exceed
its fair value, the Company would perform the second step of the impairment
test. In the second step, the Company would compare the implied fair value of
the reporting unit's goodwill to its carrying amount and any excess of the
carrying value over the fair value would be charged to earnings. Assumptions
underlying fair value estimates are subject to risks and uncertainties.
FINANCIAL INSTRUMENTS AND HEDGING ACTIVITY
As part of its strategy to manage exposure to fluctuations in metal prices,
foreign currency exchange rates and interest rates, Kinross enters into metals
and currency contracts, including forward contracts, spot deferred contracts and
options. The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objectives and
strategies for undertaking the hedge transactions. This process includes linking
all derivatives to specific assets and liabilities on the balance sheet or to
specific firm commitments or forecasted transactions. 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
F-B45
underlying position or transaction being hedged. The Company formally assesses,
both at the hedge's inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items.
For gold and silver production, the use of spot deferred and fixed forward
contracts is intended to hedge the Company's exposure to the risk of falling
commodity prices. Gains or losses on derivative contracts that effectively
establish prices for future production, are deferred and recorded in income when
the underlying hedged transaction, identified at the contract inception, is
completed. Premiums received at the inception of written call options are
recorded as a liability. Changes in the fair value of the liability are
recognized in current 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 current earnings. Gains or losses on the early settlement of metal
hedging contracts, that were deemed to be effective at the inception of the
contract, are recorded as deferred revenue on the balance sheet and included in
earnings over the original delivery schedule of the hedged production.
Foreign currency forward contracts are used to hedge exposure to fluctuations in
foreign currency denominated anticipated capital and operating expenditures.
Gains or losses on these contracts are recognized in earnings as foreign
exchange gains and losses at the maturity of the contracts. Realized and
unrealized gains or losses associated with foreign exchange forward contracts,
which have been terminated or cease to be effective prior to maturity, are
deferred under other assets or liabilities on the balance sheet and recognized
in income in the period in which the underlying hedged transaction is
recognized. In addition, interest rate swaps may be used to hedge exposure to
changes in interest rates.
In November 2001, the Canadian Accounting Standards Board, ("AcSB") issued
accounting guideline AcG-13, "Hedging Relationships", which establishes the
conditions for applying hedge accounting. AcG-13 is effective for fiscal years
commencing on or after July 1, 2003. The adoption of AcG-13 is not expected to
have a material impact on the Company's financial position and results of
operations.
PENSION, POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
The Company participates in both defined contribution and defined benefit
pension plans. The costs of defined contribution plans, representing the
Company's required contribution, and the costs of defined benefit pension plans
are charged to earnings in the year incurred. Defined benefit plan pension
expense, based on managements 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, 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 consolidated financial
statements during the years employees provide service to be entitled to receive
such benefits.
STOCK-BASED INCENTIVE AND COMPENSATION PLANS
The Company has four stock-based incentive and compensation plans which are
described in Note 16 to the consolidated financial statements. The Company has
elected not to early-adopt the fair value method of accounting for stock options
as recommended in the Canadian Institute of Chartered Accountants ("CICA")
handbook section 3870 for stock-based compensation and other stock-based
payments. No compensation expense is recognized under the stock option plan when
shares or share options are issued to employees. Shares issued under this plan
are recorded at the issue price. Any consideration paid by employees on exercise
of stock options or purchases of stock is credited to common share capital.
REVENUE RECOGNITION
Gold revenue is recognized upon shipment to third-party gold refineries, when
the sales price is fixed and title has passed to the customer.
Silver revenue, the Company's only by-product, is included in mining revenue.
F-B46
SITE RESTORATION COSTS
Estimated costs of site restoration for producing mines are accrued and expensed
over the estimated life of the mine on a unit-of-production basis using proven
and probable reserves. Ongoing environmental protection expenditures are
expensed as incurred. Estimated costs of site restoration for inactive mines are
accrued based on management's best estimate at the end of each year. Changes in
estimate of site restoration costs for inactive mines are charged to income in
the period the estimate is revised. Estimates of the ultimate site restoration
costs are based on current laws and regulations and expected costs to be
incurred (calculated on a undiscounted basis), all of which are subject to
possible changes thereby impacting current determinations.
INCOME AND MINING TAXES
The provision for income and mining taxes is based on the liability method.
Future taxes arise from the recognition of the tax consequences of temporary
differences by applying enacted or substantively enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of certain assets and liabilities. The
Company records a valuation allowance against any portion of those future 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 (other than non-tax deductible goodwill) and liabilities
assumed exist, the Company recognizes the future 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 joint ventures to the extent that dividends or other
repatriations are anticipated in the future and will be subject to such taxes.
RECLASSIFICATIONS
Certain comparative figures for 2002 and 2001 have been reclassified to conform
to the 2003 presentation.
2. BUSINESS AND PROPERTY ACQUISITIONS
2003
(A) TVX GOLD INC., ECHO BAY MINES LTD. AND THE TVX NEWMONT AMERICAS JOINT
VENTURE
On January 31, 2003, pursuant to a Canadian Plan of Arrangement, Kinross
acquired 100% of TVX Gold Inc. ("TVX") and 100% of Echo Bay Mines Ltd. ("Echo
Bay"). Consideration paid for the TVX common shares was 2.1667 Kinross common
shares for each TVX common share. Consideration paid for the Echo Bay shares was
0.1733 of a Kinross common share for each Echo Bay common share. The exchange
ratio reflects the three for one consolidation of the Company's common shares as
described in Note 16. The purchase price for these acquisitions totaled $1.3
billion, comprised of 177.8 million Kinross common shares, $12.6 million of
direct costs and $29.3 million representing the fair value of common share
purchase warrants and stock options assumed. The value of Kinross shares was
$7.14 per share based on the average market price of the shares over the two-day
period before and after June 10, 2002, being the date Kinross, TVX and Echo Bay
entered into the combination agreement.
In a separate transaction, immediately prior to the business combination, TVX
acquired Newmont Mining Corporation's ("Newmont") 50% non-controlling interest
in the TVX Newmont Americas joint venture ("TVX Newmont JV") for $180.0 million
in cash. The purchase price was satisfied using TVX's available cash of $85.5
million and cash advanced by Kinross to TVX of $94.5 million.
Upon completion of the acquisition of TVX and TVX's purchase of Newmont's
interest in the TVX Newmont JV, Kinross holds various non-operating interests in
gold mines located in Chile (La Coipa - 50%), Brazil (Paracatu - 49% and Crixas
- 50%) and Canada (Musselwhite - 32%), an operating interest in one other
Canadian mine (New Britannia - 50%) and exploration interests in Brazil. Upon
acquiring Echo Bay, Kinross holds operating interests in gold mines located in
the United States (Round Mountain - 50%) and Canada (Lupin - 100%) and interests
in development properties in both in Canada and the United States.
F-B47
The combination of Kinross, TVX and Echo Bay was undertaken to create the
seventh largest senior primary gold producer in the world, with the financial
and operational base necessary to continue to grow the Company. With an expanded
global operating base, a more than doubling of gold production, increased cash
flow provided from operating activities and a portfolio of development projects,
the Company has an enhanced ability to pursue new growth strategies, previously
unattainable, and undertake significant exploration programs.
The acquisitions were accounted for using the purchase method of accounting
whereby identifiable assets acquired and liabilities assumed were recorded at
their fair market values as of the date of acquisition. The excess of the
purchase price over such fair value was recorded as goodwill and amounted to
$918 million. In accordance with CICA Handbook Section 3062, "Goodwill and Other
Intangible Assets", for purposes of CDN GAAP, and Statement of Financial
Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible Assets", for
purposes of U.S. GAAP, goodwill was assigned to the Company's Exploration and
Acquisitions and Corporate reporting units and will not be amortized. During the
fourth quarter of 2003, the Company finalized the purchase price allocations for
the TVX and Echo Bay acquisitions. In addition, Kinross tested the goodwill for
impairment as at December 31, 2003 and determined that there was no impairment
as at that date.
The following reflects the final purchase price allocation for the acquisition
of 100% of Echo Bay and 100% of TVX (in millions, except per share data):
================================================================================================= ===============
TVX Echo Bay
------------------------------------------------------------------------------------------------- ---------------
Common shares of Kinross issued to Echo Bay and TVX shareholders 93.9 83.9
Value of Kinross common stock per share $ 7.14 $ 7.14
------------------------------------------------------------------------------------------------- ---------------
Fair value of the Company's common stock issued $ 670.7 $ 599.1
Plus - fair value of warrants and options assumed by the Company (100% vested) 6.8 22.5
Plus - direct acquisition costs incurred by the Company 6.3 6.3
Plus - the Company's previous 10.6% ownership interest in Echo Bay - 7.0
------------------------------------------------------------------------------------------------- ---------------
Total purchase price $ 683.8 $ 634.9
Plus - Fair value of liabilities assumed by Kinross
Accounts payable and accrued liabilities 53.6 23.1
Long-term debt, including current portion 2.2 -
Site restoration cost accruals, including current portion 17.5 45.5
Future income tax liabilities 52.0 0.8
Other long-term liabilities 0.1 -
Liability with respect to TVX Newmont JV assets acquired 94.5 -
Less - Fair value of assets acquired by Kinross
Cash (27.8) (16.4)
Restricted cash (11.3) (10.1)
Marketable securities (0.5) (1.9)
Accounts receivable and other assets (18.2) (4.6)
Inventories (19.1) (28.8)
Property, plant and equipment (129.1) (84.6)
Mineral interests (205.5) (78.4)
Long-term investments and other non-current assets (5.1) (48.6)
------------------------------------------------------------------------------------------------- ---------------
Residual purchase price allocated to goodwill $ 487.1 $ 430.9
================================================================================================= ===============
With the finalization of the purchase price allocation, there have been several
adjustments to the fair values assigned to the acquired assets and liabilities
from the initial purchase price allocation presented in the Company's 2003
quarterly reports.
Property, plant and equipment was adjusted to estimated fair value based on the
replacement costs as determined through independent appraisals performed by a
third party. Mineral interests, representing acquired mineral use rights and
previously included in property, plant and equipment, were fair valued based on
estimated future cash flows or recent transactions involving sales of similar
properties, depending on the nature of the underlying property. Details of
intangible assets acquired pursuant to the business combination are included in
Note 6, mineral interests. Estimated future cash flows were based on estimated
quantities of gold to be produced at each site, the estimated costs, timing and
capital expenditures associated with
F-B48
such production, the Company's long-term expectation that a price of $325 would
be realized for each ounce of gold produced, foreign currency exchange rates at
the date of acquisition and a discount rate specific to the Company's cost of
capital, estimated to be equal to 7%.
TVX
The residual purchase price allocated to goodwill increased by $52.6 million
from the preliminary purchase price allocation to $487.1 million in the final
purchase price allocation. The change results primarily from an increase in the
fair values of future income tax liabilities of $10.0 million and an increase in
the estimated exit accruals associated with TVX Hellas of $12.6 million. This
was accompanied by a decrease in the fair values of certain assets including
future income taxes of $13.8 million. Property, plant and equipment decreased by
$208.7 million and mineral interests increased by $205.5 million primarily
representing an allocation of intangible mineral interests to a separate asset
class.
ECHO BAY
The residual purchase price allocated to goodwill decreased by $23.2 million
from the preliminary purchase price allocation to $430.9 million in the final
purchase price allocation. The change results primarily from a net increase in
the fair values associated with mineral interests and long-term assets of $78.4
million and $23.7 million, respectively, offset by a net decrease in the fair
values of property, plant and equipment of $85.0 million. The change in the
allocation of the fair values of property, plant and equipment and mineral
interests was due to allocating the fair value of the intangible to a separate
asset class.
GOODWILL
Kinross has allocated the goodwill arising from the TVX and Echo Bay
acquisitions to its Exploration and Acquisitions ($908.4 million) and Corporate
reporting units ($9.6 million). The Company did not allocate any goodwill to
mine site reporting units, since it is the belief of the Company that there will
not be mine specific synergies resulting from the business combination. Instead,
the assignment of goodwill to the Exploration and Acquisitions and Corporate
reporting units is based on the fact that, following the acquisition, these
reporting units have enhanced abilities to pursue new acquisition based growth
strategies, undertake significant exploration programs and realize synergies in
general and administration expenses. Kinross does not anticipate goodwill
related to these acquisitions will be deductible for tax purposes.
PRO FORMA CONSOLIDATED RESULTS
The combination of Kinross, TVX and Echo Bay was effective on January 31, 2003.
If the combination had been effective as of January 1, 2003, pro forma
consolidated revenues and pro forma consolidated net earnings for the year ended
December 31, 2003, would increase by $28.9 million to $613.5 million and pro
forma consolidated net earnings for the year ended December 31, 2003, would
decrease by $11.9 million to a net loss of $2.2 million. If the combination had
been effective as of January 1, 2002, pro forma consolidated revenues and the
pro forma consolidated net loss for the year ended December 31, 2002, would
increase by $396.0 million to $671.2 million and $63.2 million to $94.1 million,
respectively. These pro forma results were adjusted as depreciation, depletion
and amortization were calculated based on the allocation determined in the final
purchase price equation. The pro forma financial information does not purport to
represent what the Company's results of operations would have been had the
acquisition occurred at the beginning of 2003 or 2002 or to project the
Company's results of operations for any future periods.
(B) OMOLON GOLD MINING CORPORATION
On December 3, 2002, the Company entered into purchase agreements with four of
the five Russian minority shareholders, holding in aggregate, 44.17% of the
shares of Omolon Gold Mining Company ("Omolon"). Omolon agreed to purchase these
shares, from the four shareholders, for $44.7 million, including legal fees. The
transactions were completed in February, 2003 and Omolon subsequently cancelled
these shares. As a result of the share cancellation, the Company increased its
ownership in the outstanding shares of Omolon to 98.1% from 54.7%.
F-B49
The fair value of the assets and liabilities of the 45.3% interest in Omolon and
the allocation of the purchase consideration are as follows (in millions):
==========================================================================================
FAIR VALUE OF ASSETS ACQUIRED BY KINROSS:
Cash $ 26.1
Accounts receivable 2.9
Inventories 12.3
Property, plant and equipment 13.8
Other non-current assets 1.9
LESS - FAIR VALUE OF LIABILITIES ASSUMED BY KINROSS:
Accounts payable and accrued liabilities (5.7)
Long-term debt, including current portion (2.2)
Site restoration cost accruals, including current portion (3.4)
Non-controlling interest (1.0)
------------------------------------------------------------------------------------------
Total cash consideration $ 44.7
==========================================================================================
Financed by:
Cash (including cash acquired - $26.1 million) $ 44.7
==========================================================================================
(C) E-CRETE
During 2003, the Company acquired a further 1.2% interest in E-Crete for cash
consideration of $0.1 million, by funding its partner's share of cash calls,
thereby increasing its ownership interest to 90.0%.
2002
(D) E-CRETE
During 2002, the Company acquired a further 2.9% interest in E-Crete for cash
consideration of $0.1 million, by funding its partner's share of cash calls,
thereby increasing its ownership interest to 88.8%.
2001
(E) E-CRETE
During 2001, the Company acquired a further 12.4% interest in E-Crete for cash
consideration of $1.2 million, by funding its partner's share of cash calls,
thereby increasing its ownership interest to 85.9%.
(F) GEORGE/GOOSE LAKE GOLD PROJECT
On December 14, 2001, the Company completed the acquisition of a 100% interest
in the George/Goose Lake gold project in the Nunavut Territory by issuing
1,333,333 common shares of the Company valued at $3.8 million.
F-B50
The following is a summary of the 2001 acquisitions both of which were accounted
for using the purchase method.
========================================================================== ============= ============
GEORGE/
E-CRETE GOOSE LAKE TOTAL
-------------------------------------------------------------------------- ------------- ------------
Fair value ascribed to net assets acquired:
Property, plant and equipment $ 1.7 $ 3.8 $ 5.5
Less: liabilities assumed 0.5 - 0.5
-------------------------------------------------------------------------- ------------- ------------
$ 1.2 $ 3.8 $ 5.0
========================================================================== ============= ============
Purchase price:
Cash $ 1.2 $ - $ 1.2
Common shares - 3.8 3.8
-------------------------------------------------------------------------- ------------- ------------
$ 1.2 $ 3.8 $ 5.0
========================================================================== ============= ============
3. ACCOUNTS RECEIVABLE AND OTHER ASSETS
Accounts receivable and other assets are comprised of the following:
=========================================================================================== ==============
2003 2002
------------------------------------------------------------------------------------------- --------------
Taxes recoverable, interest and accounts receivable $ 41.7 $ 9.9
Deferred costs associated with business and property acquisitions 0.4 5.6
Marketable securities (quoted market value: 2003 - $0.5; 2002 - $0.1) 0.1 0.1
------------------------------------------------------------------------------------------- --------------
$ 42.2 $ 15.6
=========================================================================================== ==============
4. INVENTORIES
Inventories are comprised of the following:
=========================================================================================== ==============
2003 2002
------------------------------------------------------------------------------------------- --------------
In-process $ 15.5 $ 9.0
Finished metal 15.4 3.9
Ore in stockpiles 15.3 2.3
Ore on leach pads 8.3 -
Materials and supplies 62.5 26.0
------------------------------------------------------------------------------------------- --------------
117.0 41.2
Long-term portion of ore in stockpiles (Note 8) (7.8) (2.3)
------------------------------------------------------------------------------------------- --------------
$ 109.2 $ 38.9
=========================================================================================== ==============
The most significant amounts of ore in stockpiles represents stockpiled ore at
the Company's Fort Knox mine and its proportionate share of stockpiled ore at
Round Mountain, La Coipa and the Porcupine Joint Venture (2002 - Fort Knox and
the Porcupine Joint Venture).
Ore on leach pads relates entirely to the Company's 50% owned Round Mountain
mine. As at December 31, 2003, the weighted average cost per recoverable ounce
of gold on the leach pads was $120 per ounce.
Based on current mine plans, the Company expects to place the last tonne of ore
on its current leach pad in 2008. The Company expects that all economic ounces
will be recovered within approximately 12 months following the date the last
tonne of ore is placed on the leach pad.
F-B51
5. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
====================================================================================== ======================================
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------------------------------------------------------------------------- ---------------------------------------
ACCUMULATED ACCUMULATED
DEPRECIATION, DEPRECIATION,
COST, DEPLETION NET COST, DEPLETION NET
NET OF AND BOOK NET OF AND BOOK
WRITE-DOWN AMORTIZATION VALUE WRITE-DOWN AMORTIZATION VALUE
---------------------------------------------------------- --------------- ---------- ------------ --------------- -----------
Producing properties
Mineral properties $ - $ - $ - $ 0.2 $ - $ 0.2
Plant and equipment (amortized on a
straight-line basis) 15.0 (5.9) 9.1 16.8 (6.1) 10.7
Plant and equipment (amortized on
unit-of-production basis) 1,074.9 (590.7) 484.2 753.5 (458.6) 294.9
Development properties (i) 19.5 - 19.5 15.1 - 15.1
Exploration properties (i) 9.8 - 9.8 9.1 - 9.1
---------------------------------------------------------- --------------- ---------- ------------ --------------- -----------
$ 1,119.2 $ (596.6) $ 522.6 $ 794.7 $ (464.7) $ 330.0
========================================================== =============== ========== ============ =============== ===========
(i) These properties were owned by Kinross prior to January 1, 2002 when Kinross prospectively adopted CICA Handbook Section
3062. In accordance with Section 3062 of the CICA Handbook, they have not been reclassified as Mineral Interests (see
Note 6).
There were no major asset disposals in 2003 or 2002.
6. MINERAL INTERESTS
The components of mineral interests acquired on the acquisition of TVX and Echo
Bay are as follows:
======================================================================== ========================================
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------------------------------------------------------ ----------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED BOOK CARRYING ACCUMULATED BOOK
VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE
---------------------------------------------- -------------- ---------- ------------ -------------- ------------
Production stage $ 176.9 $ (21.0) $ 155.9 $ - $ - $ -
Development stage 13.9 - 13.9 - - -
Exploration stage 93.0 (2.7) 90.3 - - -
---------------------------------------------- -------------- ---------- ------------ -------------- ------------
$ 283.8 $ (23.7) $ 260.1 $ - $ - $ -
============================================== ============== ========== ============ ============== ============
For the purpose of computing the amortization of mineral interests, the
following residual values and amortization periods have been used:
=================================================================================================================
DECEMBER 31, 2003
-----------------------------------------------------------------------------------------------------------------
RESIDUAL WEIGHTED AVERAGE
VALUES AMORTIZATION PERIOD
(IN YEARS)
----------------------------------------------------------------------------------------- -----------------------
Production stage $ - 10
Development stage - -
Exploration stage 81.3 8
----------------------------------------------------------------------------------------- -----------------------
Total weighted average amortization period 10
========================================================================================= =======================
Currently under Canadian GAAP, pursuant to CICA Handbook Section 1581 (Appendix
A31) "business combinations" and Section 3062 "goodwill and other intangible
assets", mineral use rights are listed as contract-based intangible assets.
These new handbook sections resulted in a conflict between previously issued
accounting standards included in CICA Handbook Section 3061 and EIC-126, which
identify acquired mineral rights as property, plant and equipment.
F-B52
The Company has elected to account for the mineral use rights it acquired after
January 1, 2002, in accordance with CICA Handbook Section 1581 and 3062. Had the
Company elected to account for acquired mineral use rights in accordance with
CICA Handbook Section 3061 and EIC-126, the Company would increase property,
plant and equipment by $260.1 million and reduce mineral interests by $260.1
million as at December 31, 2003. There would be no effect on reported earnings.
7. LONG-TERM INVESTMENTS
The quoted market value of the Company's long-term investments at December 31,
2003 is $9.0 million (December 31, 2002 - $89.6 million, of which $70.8 million
represented its investment in Echo Bay which was consolidated in 2003). All
long-term investments are recorded at cost. During 2003, the Company sold
certain long-term investments with a book value of $30.2 million for net
proceeds of $56.2 million.
8. DEFERRED CHARGES AND OTHER LONG-TERM ASSETS
Deferred charges and other long-term assets are comprised of the following:
===================================================================================== =============
2003 2002
------------------------------------------------------------------------------------- -------------
Long-term ore in stockpiles (see Note 4) $ 7.8 $ 2.3
Deferred charges, net of amortization 2.2 1.0
Long-term receivables 7.1 5.0
Long-term deposits 2.6 1.7
Assets held for sale (i) 14.1 -
Other 2.1 -
------------------------------------------------------------------------------------- -------------
$ 35.9 $ 10.0
===================================================================================== =============
(i) The Ulu property and airplane hanger in Edmonton, Alberta were disposed of in early 2004 for
$14.1 million.
9. JOINT VENTURE INTERESTS
The Company conducts a substantial portion of its business through joint
ventures under which the venturers are bound by contractual arrangements
establishing joint control over the ventures. The Company records its
proportionate share of assets, liabilities, revenue and operating costs of the
joint ventures. As at December 31, 2003, the Company had interests in eight
joint venture projects (December 31, 2002 - three) after acquiring an interest
in six joint ventures as a result of the combination with TVX and Echo Bay, and
the full consolidation of Omolon (a Russian joint stock company) following the
increase in the Company's ownership interest from 54.7% to 98.1% in February of
2003 (see Note 2(b)). Prior to January 1, 2002, E-Crete was considered to be a
joint venture but following the increase in the Company's ownership interest as
described in Note 2, and other changes in conditions between the joint venture
partners, it was fully consolidated. Kamgold, a Russian joint stock company in
which Kinross held a 25% interest, was sold in August 2002.
(A) ROUND MOUNTAIN
The Company owns a 50% interest in the Smoky Valley Common Operation joint
venture, which owns the Round Mountain mine, located in Nye County, Nevada, USA.
Under the joint venture agreement, the Company is the Operator of the Round
Mountain mine.
The Management Committee represents the joint venture partners, authorizes
annual programs and budgets and approves major transactions prior to execution
by site management. The joint venture owners are entitled to their pro-rata
share of production and are obliged to make their pro-rata share of
contributions as requested.
F-B53
(B) PORCUPINE
The Company owns a 49% interest in the Porcupine Joint Venture ("PJV"), which
conducts mining, milling and exploration operations in the Timmins area of
Ontario. As of July 1, 2002, the Company agreed to transfer to Placer Dome (CLA)
Limited, an undivided 51% interest in various owned and leased mineral
properties, including the Hoyle Pond mine. Placer Dome (CLA) Limited agreed to
transfer to the Company an undivided 49% interest in various owned and leased
mineral properties. Under the PJV agreement, Placer Dome (CLA) Limited is the
Operator.
The Management Committee of the PJV approves annual programs and budgets, and
authorizes major transactions prior to execution by site management. The PJV
participants are entitled to their pro-rata share of production and are obliged
to make their pro-rata share of contributions as requested.
(C) PARACATU
The Company owns a 49% interest in Rio Paracatu Mineracao S.A. ("RPM"). RPM owns
the Brasilia mine located next to the city of Paracatu, Brazil, 200 kilometres
southeast of Brasilia, Brazil's capital city. Under the joint venture agreement,
Rio Tinto Brasil, a subsidiary of Rio Tinto PLC is the Operator.
The Board of Directors of RPM approves annual programs and budgets and
authorizes major transactions prior to execution by site management. The joint
venture participants are entitled to their pro-rata share of profits in the form
of distributions and are obliged to make their pro-rata share of contributions
if required.
(D) LA COIPA
The Company owns a 50% interest in Compania Minera Mantos de Oro ("MDO"), a
Chilean contractual mining company. MDO owns the La Coipa mine, located in
central Chile, 140 kilometres northeast of the city of Copiapo. Under the joint
venture agreement, a wholly-owned subsidiary of Placer Dome Inc. is the
Operator.
The Board of Directors of MDO approves annual programs and budgets and
authorizes major transactions prior to execution by site management. The joint
venture participants are entitled to their pro-rata share of profits in the form
of distributions and are obliged to make their pro-rata share of contributions
if required.
(E) CRIXAS
The Company owns a 50% interest in Mineracao Serra Grande, S.A. ("MSG"). MSG
owns the Crixas mine, located in central Brazil, 260 kilometres northeast of the
city of Brasilia. Under the joint venture agreement, a wholly-owned subsidiary
of AngloGold is the Operator.
The Board of Directors of MSG approves annual programs and budgets, and
authorizes major transactions prior to execution by site management. The joint
venture participants are entitled to their pro-rata share of profits in the form
of distributions and are obliged to make their pro-rata share of contributions
if required.
(F) MUSSELWHITE
The Company owns a 31.93% interest in the Musselwhite joint venture. The mine is
located 430 kilometres north of the city of Thunder Bay, in northwestern
Ontario. Under the joint venture agreement, Placer Dome (CLA) Limited is the
Operator.
The Management Committee of the joint venture approves annual programs and
budgets, and authorizes major transactions prior to execution by site
management. The joint venture participants are entitled to their pro-rata share
of production and are obliged to make their pro-rata share of contributions as
requested.
F-B54
(G) NEW BRITANNIA
The Company owns a 50% interest in the New Britannia joint venture. The mine is
located in the town of Snow Lake in northern Manitoba, 700 kilometres north of
Winnipeg. Under the joint venture agreement, the Company is the Operator.
The Management Committee of the joint venture approves annual programs and
budgets, and authorizes major transactions prior to execution by site
management. The joint venture participants are entitled to their pro-rata share
of production and are obliged to make their pro-rata share of contributions as
requested. At present, the Company has a loan receivable from its joint venture
partner. Kinross sells all of the production from the mine and on an annual
basis, is entitled to apply its partner's share of any operating surplus against
the outstanding balance of the loan. Both partners are required to fund their
pro-rata share of an annual operating deficit. During 2003, the Company funded
all of the cash requirements of the joint venture and as at December 31, 2003,
the Company has included in accounts receivable, its joint venture partner's
share of the 2003 operating deficit.
(H) REFUGIO
The Company owns a 50% interest in Compania Minera Maricunga ("CMM"), a Chilean
contractual mining company. CMM owns the Refugio mine located in central Chile.
On June 1, 1999, the Company was appointed Operator of the Refugio mine and
continues in that capacity. The Company provides services to CMM in the planning
and conduct of exploration, development and mining, and related operations with
respect to the Refugio Project Properties and the Refugio mine. The investment
in CMM was written off during 2000.
The Board of Directors of CMM approves annual budgets, approves distributions
and authorizes major transactions prior to execution by site management. The
shareholders are entitled to their pro-rata share of profits in the form of
distributions and are obliged to make their pro-rata share of contributions if
required.
F-B55
(i) Summary of joint venture information: 2003
=================================================== ======== ========== ======== ========= ======== ============ =========== =======
ROUND NEW
PORCUPINE REFUGIO MOUNTAIN PARACATU LA COIPA CRIXAS MUSSELWHITE BRITANNIA TOTAL
--------------------------------------------------- -------- ---------- -------- --------- -------- ------------ ----------- -------
Revenue $ 83.0 $ 0.1 $ 132.7 $ 33.6 $ 51.6 $ 32.7 $ 22.6 $ 11.8 $ 368.1
--------------------------------------------------- -------- ---------- -------- --------- -------- ------------ ----------- -------
Operating costs 53.4 0.4 76.7 19.9 34.9 10.5 16.5 11.3 223.6
Depreciation, depletion and
amortization 24.1 - 33.7 5.7 8.9 9.1 6.5 2.6 90.6
Exploration 2.5 1.4 2.1 - 0.9 0.5 2.1 0.8 10.3
Interest/foreign exchange/other - 0.2 - (1.0) 1.5 0.2 (0.5) (0.4) -
Asset write-downs and non-cash charges - - - - - - - 1.2 1.2
--------------------------------------------------- -------- ---------- -------- --------- -------- ------------ ----------- -------
80.0 2.0 112.5 24.6 46.2 20.3 24.6 15.5 325.7
--------------------------------------------------- -------- ---------- -------- --------- -------- ------------ ----------- -------
Earnings (loss) before taxes $ 3.0 $ (1.9) $ 20.2 $ 9.0 $ 5.4 $ 12.4 $ (2.0) $ (3.7 ) $ 42.4
=================================================== ======== ========== ======== ========= ======== ============ =========== =======
Current assets $ 9.5 $ 2.4 $ 27.3 $ 11.5 $ 10.7 $ 11.8 $ 6.3 $ 2.8 $ 82.3
Property, plant and equipment 68.4 1.5 50.3 39.9 37.8 21.0 21.8 - 240.7
Mineral interests - - 58.8 87.9 4.4 21.3 52.3 - 224.7
Deferred charges and other assets 3.2 - 2.0 1.7 1.1 0.1 - - 8.1
--------------------------------------------------- -------- ---------- -------- --------- -------- ------------ ----------- -------
81.1 3.9 138.4 141.0 54.0 54.2 80.4 2.8 555.8
--------------------------------------------------- -------- ---------- -------- --------- -------- ------------ ----------- -------
Current liabilities 9.7 0.8 16.7 4.0 8.7 2.2 1.8 1.1 45.0
Long-term liabilities 5.9 5.1 24.3 30.9 3.7 11.0 1.8 0.6 83.3
--------------------------------------------------- -------- ---------- -------- --------- -------- ------------ ----------- -------
15.6 5.9 41.0 34.9 12.4 13.2 3.6 1.7 128.3
--------------------------------------------------- -------- ---------- -------- --------- -------- ------------ ----------- -------
Net investment in joint ventures $ 65.5 $ (2.0) $ 97.4 $ 106.1 $ 41.6 $ 41.0 $ 76.8 $ 1.1 $ 427.5
=================================================== ======== ========== ======== ========= ======== ============ =========== =======
Cash flow provided from (used in)
operating activities $ 27.2 $ (2.3) $ 51.7 $ 13.5 $ 14.9 $ 21.4 $ 3.8 $ 0.1 $ 130.3
=================================================== ======== ========== ======== ========= ======== ============ =========== =======
Cash flow used in investing activities $ (8.3) $ (1.5) $ (6.0) $ (5.0) $ (0.5) $ (3.1) $ (2.7) $ (1.1) $ (28.2)
=================================================== ======== ========== ======== ========= ======== ============ =========== =======
Cash flow used in financing activities $ - $ - $ - $ - $ (0.7) $ (1.5) $ - $ - $ (2.2)
=================================================== ======== ========== ======== ========= ======== ============ =========== =======
2002 2001
=========================================================== ========= ========== ========= ========== ========= ========= ==========
PORCUPINE REFUGIO KUBAKA TOTAL E-CRETE REFUGIO KUBAKA TOTAL
----------------------------------------------------------- --------- ---------- --------- ---------- --------- --------- ----------
Revenue $ 28.5 $ 14.8 $ 69.2 $ 112.5 $ 0.1 $ 19.5 $ 67.8 $ 87.4
----------------------------------------------------------- --------- ---------- --------- ---------- --------- --------- ----------
Operating costs 21.7 3.3 30.3 55.3 2.5 17.4 37.8 57.7
Depreciation, depletion and amortization 7.7 - 17.4 25.1 1.1 - 20.5 21.6
Exploration 1.6 0.4 1.3 3.3 - - 2.1 2.1
Interest - 0.3 0.5 0.8 0.3 0.3 2.9 3.5
----------------------------------------------------------- --------- ---------- --------- ---------- --------- --------- ----------
31.0 4.0 49.5 84.5 3.9 17.7 63.3 84.9
----------------------------------------------------------- --------- ---------- --------- ---------- --------- --------- ----------
Earnings (loss) before taxes $ (2.5) $ 10.8 $ 19.7 $ 28.0 $ (3.8) $ 1.8 $ 4.5 $ 2.5
=========================================================== ========= ========== ========= ========== ========= ========= ==========
Current assets $ 8.2 $ 3.1 $ 46.5 $ 57.8 $ 0.2 $ 6.2 $ 23.8 $ 30.2
Property, plant and equipment, net 74.9 - 12.7 87.6 8.2 - 31.2 39.4
----------------------------------------------------------- --------- ---------- --------- ---------- --------- --------- ----------
83.1 3.1 59.2 145.4 8.4 6.2 55.0 69.6
----------------------------------------------------------- --------- ---------- --------- ---------- --------- --------- ----------
Current liabilities 5.3 6.0 9.5 20.8 0.5 1.7 18.1 20.3
Long-term liabilities 3.1 5.1 3.8 12.0 3.4 5.2 4.5 13.1
----------------------------------------------------------- --------- ---------- --------- ---------- --------- --------- ----------
8.4 11.1 13.3 32.8 3.9 6.9 22.6 33.4
----------------------------------------------------------- --------- ---------- --------- ---------- --------- --------- ----------
Net investment in joint ventures $ 74.7 $ (8.0) $ 45.9 $ 112.6 $ 4.5 $ (0.7) $ 32.4 $ 36.2
=========================================================== ========= ========== ========= ========== ========= ========= ==========
Cash flow provided from operating activities $ 3.4 $ 14.3 $ 39.6 $ 57.3 $ (4.1) $ 2.2 $ 37.7 $ 35.8
=========================================================== ========= ========== ========= ========== ========= ========= ==========
Cash flow used in investing activities $ (2.9) $ - $ (0.1) $ (3.0) $ (0.2) $ - $ (0.4) $ (0.6)
=========================================================== ========= ========== ========= ========== ========= ========= ==========
Cash flow used in financing activities $ - $ - $ (1.6) $ (1.6) $ - $ (0.4) $ (21.5) $ (21.9)
=========================================================== ========= ========== ========= ========== ========= ========= ==========
F-B56
10. 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 policies
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 and fixed forward contracts
to hedge against 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").
The Company sells call options to economically hedge exposure to changes in spot
gold prices. The option premium is received at the time call options are sold.
If the gold price is higher than the call option strike price on the expiry date
of the option Kinross sells gold at the strike price of the option. If the gold
price is lower than the strike price of the call option at expiry, the option
expires worthless.
The Company buys put options to protect against lower gold prices, while
participating in higher gold prices. The option premium is paid out at the time
the put options are purchased. If the gold price is lower than the strike price
of the put option on the expiry date, gold is sold at the strike price of the
option. If the gold price is higher than the strike price of the put option, the
option expires worthless.
The outstanding number of ounces, average expected realized prices and
maturities for the gold commodity derivative contracts as at December 31, 2003
are as follows:
==================================================== ============= ============== ============ =========== =============
SPOT DEFERRED CALL AVERAGE PUT OPTIONS AVERAGE
OUNCES AVERAGE OPTIONS STRIKE BOUGHT STRIKE
Expected Year of Delivery HEDGED PRICE SOLD (OUNCES) PRICE (OUNCES) PRICE
---------------------------------------------------- ------------- -------------- ------------ ----------- -------------
2004 137,500 $ 277 50,000 $ 340 150,000 $ 250
2005 37,500 $ 296 - - 150,000 $ 250
2006 - - - - 150,000 $ 250
---------------------------------------------------- ------------- -------------- ------------ ----------- -------------
Total 175,000 $ 281 50,000 $ 340 450,000 $ 250
==================================================== ============= ============== ============ =========== =============
As at December 31, 2002, the Company had spot deferred contracts for 312,500
ounces of gold and call options sold for 150,000 ounces of gold.
As at December 31, 2003, the Company has sold 250,000 ounces of silver forward
at a price of $4.92 per ounce. As at December 31, 2002, the Company had no
outstanding silver positions.
In February 2001, the Company closed out 500,000 ounces of spot deferred
contracts that were designated as hedges for 2001 to 2004 and realized a gain of
$16.6 million on proceeds of $21.1 million. This gain has been deferred and is
being included in income over the original delivery schedule of the various
contracts.
(B) 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
Canadian dollars, Russian rubles, Chilean pesos, Brazilian reals and other
currencies. These potential currency fluctuations could have a significant
impact on the cost of producing gold and thereby, 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 future revenue
flows.
F-B57
As at December 31, 2003, the Company has foreign currency forward contracts to
sell U.S. dollars and buy Canadian dollars of CDN $28.4 million at an average
exchange rate of 1.4221 (2002 - CDN $25.8 million at an average exchange rate of
1.5175). These contracts mature over an eighteen month period ending June 2005.
(C) INTEREST RATE RISK MANAGEMENT
The Company is exposed to interest rate risk as a result of its issuance of
variable rate debt. There were no interest rate hedging transactions outstanding
as at December 31, 2002 or December 31, 2003.
(D) ENERGY PRICE RISK
The Company is exposed to changes in crude oil prices as a result of diesel fuel
consumption, primarily at its open pit mines and the remote Lupin underground
mine. The potential fluctuations in crude oil prices 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 crude oil forward
purchase contracts to lock in firmly committed future operating costs.
As at December 31, 2003, the Company had no hedging agreements in place to
purchase fuel. There was no fuel hedging activity during 2002 or 2003.
(E) CREDIT RISK MANAGEMENT
Credit risk relates to accounts receivable and derivative contracts and arises
from the possibility that a counterparty to an instrument fails to perform. The
Company only transacts with highly-rated counterparties and a limit on
contingent exposure has been established for each counterparty based on the
counterparty's credit rating. At December 31, 2003, the Company's gross credit
exposure was $43.6 million (December 31, 2002 -- $9.9 million).
(F) FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying values for primary financial instruments, including cash and cash
equivalents, bullion settlements and other accounts receivable, marketable
securities, accounts payable and accrued liabilities, approximate fair values
due to their short-term maturities. The carrying value for long-term debt (other
than convertible debentures and redeemable retractable preferred shares)
approximates fair value primarily due to the floating rate nature of the debt
instruments.
The 5.5% subordinated convertible debentures of the Company were redeemed at par
plus accrued interest on September 29, 2003. The fair value of the outstanding
convertible debentures based on the quoted market price of the debentures at
December 31, 2002 was approximately $107.1 million (CDN $169.2 million).
Fair value estimates for derivative contracts are based on quoted market prices
for comparable contracts and represent the amount the Company would have
received from, or paid to, a counterparty to unwind the contract at the market
rates in effect at December 31. The following table represents the fair value
gain (loss) relating to derivative contracts outstanding as at December 31:
================================================================================ =================
2003 2002
-------------------------------------------------------------------------------- -----------------
Gold forward sales contracts (i) $ (24.4) $ (20.3)
Foreign currency contracts (ii) 1.8 (0.8)
================================================================================ =================
(i) Based on a spot gold price of $417 and $343 per ounce as at December 31, 2003, and 2002, respectively.
(ii) Based on a Canadian dollar exchange rate of 1.2924 and 1.5796 at December 31, 2003, and 2002, respectively.
F-B58
11. LONG-TERM DEBT
=================================================================================================================
PRINCIPAL REPAYMENT
SCHEDULE
AS AT DECEMBER 31, 2003
-------------------------------------------------- -------------- ---------- ----------- ------------ -----------
Interest rates 2002 2003 2004 2005
-------------------------------------------------- -------------- ---------- ----------- ------------ -----------
Kubaka project-financing debt Variable $ 2.6 $ 2.8 $ 2.8 $ -
Fort Knox industrial revenue bonds Variable 25.0 25.0 25.0 -
E-Crete project financing debt Variable 3.8 - - -
Capital leases 8.0%-9.5% 4.8 2.3 1.6 0.7
---------- ----------- ------------ -----------
36.2 30.1 29.4 0.7
============ ===========
Less: current portion (23.3) (29.4)
----------------------------------------------------------------- ---------- -----------
$ 12.9 $ 0.7
================================================================= ========== ===========
All long-term debt is denominated in US dollars.
The European Bank for Reconstruction and Development ("EBRD") provides project
financing debt to Omolon, owner of the Kubaka mine. As at December 31, 2002, the
remaining project financing debt was $4.75 million of which Kinross' 54.7%
proportionate share of this obligation was $2.6 million. In June 2003, Omolon
repaid $2.0 million against this project financing debt leaving a balance of
$2.75 million. Kinross fully consolidated its investment in Omolon as at
December 31, 2003 and therefore includes the entire amount of the project
financing debt in its consolidated financial statements. Interest on the project
financing debt is variable based upon LIBOR and as at December 31, 2003 is
approximately 5.6% per annum (December 31, 2002 -- 5.8%). Standard default
covenants apply to the project financing debt and EBRD has a right of first
refusal on any future project debt required by Omolon. The assets of Omolon
secure the project financing debt. The project financing debt final payment is
due on December 15, 2004.
The solid waste disposal facility at the Fort Knox mine was financed by $71.0
million of tax-exempt industrial revenue bonds. As at December 31, 2002 $25.0
million of tax-exempt industrial revenue bonds remained outstanding. There were
no repayments of the tax-exempt industrial revenue bonds made in 2003. The
variable rate tax-exempt industrial revenue bonds mature in May 2009 and are
issued by the Alaska Industrial Development and Export Authority. These
tax-exempt industrial revenue bonds can be prepaid anytime without penalty. The
tax-exempt industrial revenue bonds are secured by a letter of credit issued by
Kinross pursuant to the syndicated credit facility. The letter of credit issued
under the Kinross syndicated credit facility is for $25.5 million and covers the
principle portion outstanding plus an additional amount for accrued and unpaid
interest. The floating interest rate on the bonds is approximately 1.13 % as at
December 31, 2003 (December 31, 2002 -- 1.3%). On January 7, 2004 Kinross repaid
the remaining outstanding balance of the tax-exempt industrial revenue bonds and
the letter of credit issued by Kinross pursuant to the syndicated credit
facility was returned and cancelled.
SYNDICATED CREDIT FACILITY
In March 2000, Kinross arranged a syndicated credit facility for $110.0 million.
The primary purpose of this syndicated credit facility was to provide credit
support that enabled Kinross to issue letters of credit on the industrial
revenue bonds. This syndicated credit facility was scheduled to mature on
October 2, 2003. As at December 31, 2002, this syndicated credit facility had
been reduced to $30.0 million. This facility was replaced with a new syndicated
credit facility on February 27, 2003.
The new syndicated credit facility has a maturity date of December 31, 2005 and
a total committed amount of $125.0 million. The primary purpose of the new
syndicated credit facility is to enable Kinross to issue letters of credit to
various regulatory agencies to satisfy its financial assurance requirements. The
assets of the Fort Knox mine and shares in various wholly owned subsidiaries are
pledged as collateral for this facility.
At December 31, 2003, letters of credit issued under the syndicated credit
facility were $118.2 million. After repayment of the Fort Knox industrial
revenue bonds in January, 2004, committed utilization of the credit facility is
as follows. The Company anticipates additional letters of credit will be
released over the next two years as various closure properties continue to
proceed with final reclamation.
F-B59
===========================================================================================================
At December 31,
-----------------------------------------------------------------------------------------------------------
2003 2004 2005
-------------------------------------------------------------------------------- ------------ -------------
Credit support for Fort Knox industrial revenue bonds $ 25.5 $ - $ -
Other financial assurance 5.5 1.5 1.5
Reclamation 87.2 101.1 113.7
-------------------------------------------------------------------------------- ------------ -------------
Total letters of credit $ 118.2 $ 102.6 $ 115.2
================================================================================ ============ =============
In the event Kinross were to utilize the credit facility and draw a dollar loan,
the current interest rate on amounts drawn under the syndicated credit facility
is LIBOR plus 1.50%. Letters of credit attract a charge of 1.5%. Kinross is
currently in discussions with the syndicate to extend the credit facility beyond
December 31, 2005. A standby fee of 0.3% applies to undrawn amounts.
This revolving credit facility contains various debt covenants that include
limits on indebtedness, distributions, asset sales and liens. Significant
financial covenants include a minimum tangible net worth of $698 million, an
interest coverage ratio of 4.5 : 1, net debt to operating cash flow of 3.5 : 1,
minimum cash of $45.0 million and minimum proven and probable reserves of 5.0
million ounces of gold. The Company was in compliance with all covenants as at
December 31, 2003.
ECHO BAY CREDIT FACILITY
Echo Bay, a wholly owned subsidiary of Kinross, has a collateralized credit
facility that was in place prior to its acquisition by Kinross. The purpose of
this collateralized credit facility was to issue a letter of credit to a surety
underwriter as collateral to induce it to underwrite a surety bond for the Round
Mountain mine in Nevada. Kinross replaced the surety bond with a letter of
credit issued under its new syndicated credit facility in early 2003 and the
regulatory body has not yet released the original surety bond that it was
provided. Kinross has restricted cash of $4.0 million due to the deposit on hand
with the financial institution as security for issuing this letter of credit.
Kinross expects the letter of credit to be released and cancelled, and the
restricted cash to become unrestricted in 2004. The letter of credit fee for
this facility is 0.75%
CAPITAL LEASES
The Company has capital leases for certain production equipment at its various
operations. Interest on these leases ranges from 8.0%--9.5% per annum. The
underlying equipment secures these leases.
12. SITE RESTORATION COSTS
Although the ultimate amount of site restoration costs is uncertain, the Company
estimates this obligation at $146.3 million based on information currently
available including closure plans and applicable regulations. As at December 31,
2003, the Company has accrued $119.7 million of this estimated obligation
(December 31, 2002 - $57.0 million). In view of uncertainties concerning future
site restoration costs, ultimate costs could differ from the estimated amounts.
Future changes, if any, in regulations and cost assumptions may be significant
and will be recognized when applicable.
13. CONVERTIBLE DEBENTURES
On December 5, 1996, the Company issued unsecured subordinated convertible
debentures in the aggregate principal amount of $146.0 million (CDN $200.0
million). The debentures bore interest at 5.5% per annum, matured on December 5,
2006, and, at the holders' option, were convertible into common shares of the
Company at a conversion price of CDN $40.05 per share, being a rate of 24.9687
common shares per CDN $1,000 principal amount of debentures. Interest was
payable in cash; however, the Company had the right to settle the principal
amount by the issuance of common shares. On or after December 31, 2001, the
debentures were redeemable at par plus accrued and unpaid interest.
The debentures were being accounted for in accordance with their substance and
were presented in the financial statements in their component parts, measured at
their respective fair values at the time of issue. The debt component had been
calculated as the present value of the required interest payments discounted at
a rate approximating the interest rate that would have been applicable to
non-convertible debt at the time the debentures were issued. Interest expense
was determined on the debt component, such component being reduced by the
required semi-annual interest payments. The difference between the debt
component and the face value of the debentures was classified as equity, net of
issue costs adjusted for income taxes. The
F-B60
equity component of the debentures, net of the value ascribed to the holders'
option, was increased over the term to the full face value by charges to
retained earnings (deficit).
No debentures were redeemed in 2002. On September 29, 2003, Kinross redeemed all
of the outstanding convertible debentures at par plus accrued interest. The
total payment was $146.8 million (CDN $198.3 million), comprised of the
principal amount of $144.8 million (CDN $195.6 million) and accrued interest of
$2.0 million (CDN $2.7 million).
The cost of redemption was allocated based on the respective fair values of the
debt and equity components at the date of redemption. The redemption of the
debentures resulted in a loss on redemption of the debt component of the
debentures of approximately $1.1 million and a net gain on redemption of the
equity component of the debentures of approximately $16.5 million. The loss on
the debt component has been charged against income and the gain on the equity
component has been accounted for as an increase in contributed surplus.
As at December 31, 2003, the outstanding principal amount of the debentures was
$ nil (December 31, 2002 -- $123.8 million (CDN $195.6 million)).
14. REDEEMABLE RETRACTABLE PREFERRED SHARES
As at December 31, 2003 and 2002, 384,613 redeemable retractable preferred
shares are outstanding and held by a senior officer and director of the Company.
The holder of the redeemable retractable preferred shares is entitled to receive
a CDN $0.80 per share fixed cumulative annual preferential cash dividend,
payable in equal quarterly installments and, is entitled at any time to convert
all or any part of the redeemable retractable preferred shares into common
shares on the basis of 2.7518 common shares for each redeemable retractable
preferred share so converted, subject to anti-dilution adjustments. The Company
may at any time redeem, upon a minimum thirty day notice, all or any part of the
redeemable retractable preferred shares at a price of CDN $10.00 per share,
together with unpaid dividends accrued to the date of redemption. The holder of
the redeemable retractable preferred shares is entitled to require the Company
to redeem for cash all or any part of the redeemable retractable preferred
shares at this price.
15. CONVERTIBLE PREFERRED SHARES OF SUBSIDIARY COMPANY
The convertible preferred shares of subsidiary company comprise 1,840,000 shares
of $3.75 Series B Convertible Preferred Shares of Kinam ("Kinam Preferred
Shares"). The Kinam Preferred Shares are convertible into common shares of the
Company at a conversion price of $30.92 per share (equivalent to a conversion
rate of 1.6171 common shares for each preferred share), subject to adjustment in
certain events.
The Kinam Preferred Shares are 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
February 15, May 15, August 15 and November 15, as and if declared by Kinam's
Board of Directors. No dividends were declared or paid on the Kinam Preferred
Shares during 2003 or 2002. Dividend payments on these shares were suspended in
accordance with their terms in August 2000 and continue to remain suspended. The
cumulative dividends in arrears on the Kinam Preferred Shares owned by
non-affiliated shareholders of $2.7 million as at December 31, 2003 have been
accrued and included in the carrying value of the convertible preferred shares
of subsidiary company.
On July 12, 2001, the Company acquired 945,400 Kinam Preferred Shares in
exchange for 8,062,164 common shares of the Company (Note 16). On March 28,
2002, 652,992 Kinam Preferred Share were acquired in a $16.00 per share cash
tender offer and after extending the offer, an additional 17,730 Kinam Preferred
Shares were tendered on April 4, 2002. During 2002, 350 Kinam Preferred Shares
were converted into 566 common shares of the Company. During 2003, 14,700 Kinam
Preferred Shares were acquired at $18.00 per share and a further 1,645 Kinam
Preferred Shares were converted into 2,657 common shares of the Company, leaving
207,183 held by non-affiliated shareholders at December 31, 2003.
F-B61
If all the Kinam Preferred Shares owned by non-affiliated shareholders were
converted, an additional 335,036 common shares of the Company would be issued.
16. COMMON SHARE CAPITAL
The authorized share capital of the Company is comprised of an unlimited number
of common shares.
A summary of common share transactions for each of the years in the three year
period ended December 31, 2003 is as follows.
=============================================================================================================================
2003 2002 2001
---------------------------------------------------------------------------- ----------------------- ------------------------
Number of Number of Number of
shares shares shares
(millions) Amount (millions) Amount (millions) Amount
---------------------------------------------------------------- ----------- ------------ ---------- ----------- ------------
Balance, January 1, 136.1 $ 1,058.5 111.5 $ 945.7 100.3 $ 913.2
Issued:
Reduction of stated capital - (761.4) - - - -
Upon acquisition of TVX 93.9 670.7 - - - -
Value ascribed to TVX options and warrants
assumed by Kinross - 6.8 - - - -
Upon acquisition of Echo Bay 83.9 599.1 - - - -
Value ascribed to Echo Bay options assumed
by Kinross - 1.5 - - - -
Upon conversion of Echo Bay warrants 6.7 55.9 - - - -
Public offering 23.0 145.9 24.3 102.2 - -
Upon acquisition of Kinam Preferred Shares - - - - 8.1 23.2
Under restricted share plan - - - - - 0.1
Under employee share purchase plan 0.1 1.0 0.2 0.9 0.4 0.8
Under stock option plan 1.8 6.1 0.1 0.3 - -
Upon the acquisition of George/Goose Lake
Gold Project - - - - 1.3 3.8
Private placement for cash - - - - 1.4 4.6
Value ascribed to common share purchase warrants - (0.6) - 9.4 - -
---------------------------------------------------------------- ----------- ------------ ---------- ----------- ------------
Balance, December 31, 345.5 $ 1,783.5 136.1 $ 1,058.5 111.5 $ 945.7
================================================================ =========== ============ ========== =========== ============
On January 28, 2003, the shareholders of Kinross, by way of special resolution,
approved the consolidation of the issued and outstanding common shares of the
Company on the basis of one consolidated common share for each three old common
shares, which became effective on January 31, 2003. At the same meeting, the
shareholders of the Company approved the elimination of the Company's deficit
balance at December 31, 2002 of $761.4 million through a reduction of the
Company's stated share capital account. All share capital, share and option data
have been retroactively restated to reflect the share consolidation (see Notes 1
and 2).
On January 31, 2003, the Company issued 93.9 million common shares from treasury
to effect a combination with TVX under a plan of arrangement whereby
shareholders of TVX received 2.1667 common shares of the Company for each TVX
common share. Also pursuant to the arrangement, the Company issued 83.9 million
common shares from treasury to effect a combination with Echo Bay whereby
shareholders of Echo Bay received 0.1733 common shares of the Company for each
Echo Bay common share. The aggregate fair value of the Company's common shares
issued with respect to these acquisitions was $1,269.8 million (see Note 2).
On August 28, 2003, the Company issued 23.0 million common shares from treasury
for total proceeds, before costs of issue, of $152.5 million. The net proceeds
from the offering were used to redeem Kinross' outstanding 5.5% convertible
unsecured subordinated debentures (see Note 13).
During November 2003, the Company issued 6.7 million common shares from treasury
upon the exercise of Echo Bay warrants assumed on the acquisition of Echo Bay
resulting in an increase in common share equity of $55.9 million. This increase
was comprised of $21.0 million being the fair value of warrants assumed at
acquisition and $34.9 million of cash received on the exercise date.
On February 12, 2002, the Company issued 7.7 million common shares from treasury
for total proceeds, before costs of issue, of $19.5 million.
F-B62
On December 5, 2002, the Company issued 16.6 million common shares and 25.0
million common share purchase warrants, for total proceeds, before costs of
issue, of $97.7 million. Three common share purchase warrants can be exercised
on or before December 5, 2007 for one common share at an exercise price of CDN
$15.00. The fair value of the common share purchase warrants was $9.4 million.
On July 12, 2001, the Company issued 8.1 million common shares valued at $23.2
million to acquire 945,400 Kinam Preferred Shares plus rights to accrued but
unpaid dividends with a book value of $48.9 million (Note 15). The $25.7 million
difference between the fair value of the Company's common stock on the date of
announcement and the book value of the Kinam Preferred Shares owned by the
non-affiliated shareholders was applied against the carrying values of certain
property, plant and equipment.
On September 27, 2001, the Company issued 0.7 million flow-through common shares
under a private placement transaction, for cash consideration of $2.1 million.
On December 10, 2001 an additional 0.8 million flow-through common shares were
issued under a private placement transaction for cash consideration of $2.5
million.
On December 14, 2001, the Company issued 1.3 million common shares to acquire a
100% interest in the George/Goose Lake gold project in Nunavut valued at $3.8
million.
SHARE PURCHASE PLAN:
The Company has an employee share purchase plan whereby employees of the Company
have an opportunity to purchase common shares. The plan allows employees to
contribute up to a maximum of 10% of their base annual salary. In addition, the
Company matches 50% of the employees' contributions. Quarterly, the Company
issues from treasury common shares equal to the employees' contribution and the
Company's contribution. The common shares are purchased based on the average of
the last twenty trading sessions prior to the end of the quarter. The Company
issued from treasury 0.1 million common shares pursuant to the plan during 2003
(2002 -- 0.2 million). Compensation expense is recorded upon issuance of shares.
RESTRICTED SHARE PLAN:
On February 15, 2001, the Company adopted a restricted share plan. The
restricted share plan provides that restricted share rights may be granted to
employees, officers, directors and consultants of the Company. A restricted
share right is exercisable into one common share entitling the holder to acquire
the common share for no additional consideration. Restricted share rights vest
over a three year period. The remaining maximum number of common shares issuable
under the restricted share plan is currently 75,660. As at December 31, 2003,
the Company had 196,007 restricted share rights outstanding. Compensation
expense is recorded over the vesting period.
DEFERRED SHARE UNIT PLAN:
On October 1, 2003, the Company adopted of a Deferred Share Unit ("DSU") Plan
for its outside directors. The DSU plan provides that each outside director
receives, on the date in each quarter which is two business days following the
publication by the Company of its earnings results for the previous quarter, (or
year in the case of the first quarter), that number of DSU's having a value
equal to 50% of the compensation of the outside director for the current
quarter. The number of DSU's granted to an outside director is based on the
closing price of the Company's common shares on the Toronto Stock Exchange on
the business day immediately preceding the date of grant. At such time as an
outside director ceases to be a director, the Company will make a cash payment
to the outside director, equal to the market value of a Kinross common share on
the date of departure, multiplied by the number of DSU's held on that date. As
at December 31, 2003, the Company had 8,874 DSU's outstanding. Compensation
expense is recorded upon issuance of units.
STOCK OPTION PLAN:
The Company has a stock option plan for directors, officers and employees,
enabling them to purchase common shares. The total number of options outstanding
at any time cannot exceed 10% of the total number of outstanding common shares.
Each option granted under the plan is for a maximum term of five years and
options granted before July 20, 2000 are exercisable as to 33.33% each year,
commencing one year after the date of grant. Options granted from July 20, 2000
to September 19,
F-B63
2001 are exercisable 50% immediately and 50% on or after the first anniversary
date of such grant. Options granted to the Chairman, President and Directors,
subsequent to September 19, 2001 are exercisable as to 33.33% each year
commencing one year after the date of grant. Options granted to all other
officers and employees, subsequent to September 19, 2001, are exercisable as to
50% each year commencing one year after the date of grant. Effective November
24, 2003, all options granted pursuant to the plan are exercisable as to 33.33%
each year commencing one year after the date of grant. The exercise price is
determined by the Company's Board of Directors at the time the option is
granted, subject to regulatory approval and may not be less than the closing
market price of the common shares on the last trading day prior to the grant of
the option. The stock options outstanding at December 31, 2003 expire at various
dates to November 24, 2008. As at December 31, 2003, 0.3 million common shares,
in addition to those outstanding at year-end, were available for granting of
options.
A summary of the status of the stock option plan as at December 31, 2003, 2002,
and 2001, and changes during the years ended on those dates, is as follows:
==============================================================================================
2003 2002 2001
---------------------------------------------------------------------- ------------ ----------
(millions) (millions) (millions)
Outstanding at beginning of year 3.3 4.0 3.8
Assumed on acquisition of TVX and Echo Bay 2.1 - -
Exercised (1.8) (0.1) -
Granted 0.7 0.5 0.5
Cancelled (0.9) (1.1) (0.3)
---------------------------------------------------------------------- ------------ ----------
Outstanding at end of year 3.4 3.3 4.0
====================================================================== ============ ==========
The following table summarizes information about the stock options outstanding
at December 31, 2003 (all per share amounts in Canadian dollars):
=========================================================================================== ============================
Options outstanding Options exercisable
------------------------------------------------------------------------------------------- ----------------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED EXERCISABLE
AS AT AVERAGE WEIGHTED AS AT WEIGHTED
DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE
2003 CONTRACTUAL EXERCISE 2003 EXERCISE
Range of exercise prices (000'S) LIFE PRICE (000'S) PRICE
---------------------------------------------------------- ------------------- ------------ -------------- -------------
$2.43 - $9.00 2,158 1 year, 274 days $ 5.81 2,155 $ 5.81
$9.01 - $12.00 697 4 years, 277 days $ 10.77 264 $ 10.77
$12.01 - $113.24 596 3 years, 142 days $ 48.12 596 $ 48.12
---------------------------------------------------------- ------------------- ------------ -------------- -------------
3,451 3,015
========================================================== =================== ============ ============== =============
Effective January 1, 2002, the Company adopted the recommendations of the CICA
for stock-based compensation and other stock-based payments. This recommendation
establishes standards for the recognition, measurement and disclosure of
stock-based compensation and other stock-based payments made in exchange for
goods and services. The standard requires that all stock-based awards made to
non-employees be measured and recognized using a fair value based method. The
standard encourages the use of a fair value based method for all awards granted
to employees, but only requires the use of a fair value based method for direct
awards of stock, stock appreciation rights, and awards that call for settlement
in cash or other assets. Awards that the Company has the ability to settle in
stock are recorded as equity, whereas awards that the Company is required to or
has a practice of settling in cash are recorded as liabilities.
Applying the fair value based method encouraged under CICA Handbook Section
3870, "Stock-based Compensation and Other Stock-based Payments", the Company's
pro forma net earnings (loss) and earnings (loss) per share would be as follows:
===================================================================================================================
Years Ended December 31,
-------------------------------------------------------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------------------------- ------------- ------------
Net earnings (loss) applicable to common shares
As reported $ 19.7 $ (38.2) $ (44.0)
Less: Stock compensation cost (1.1) (2.0) (1.1)
---------------------------------------------------------------------------------------- ------------- ------------
Pro forma $ 18.6 $ (40.2) $ (45.1)
---------------------------------------------------------------------------------------- ------------- ------------
Earnings (loss) per share, basic and diluted (dollars)
As reported $ 0.06 $ (0.32) $ (0.42)
Pro forma $ 0.06 $ (0.34) $ (0.43)
======================================================================================== ============= ============
F-B64
The weighted average fair value of options granted in 2003, 2002 and 2001 was
$4.53, $4.00 and $2.20 per share, respectively. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in 2003,
2002 and 2001: dividend yield of 0%; expected volatility of 70%, 70% and 61%
respectively; risk-free interest rates varying from 2.9% to 3.2%; and an
expected life of five years.
EARNINGS PER SHARE
Basic earnings (loss) per common share has been calculated using the weighted
average number of common shares outstanding during the year. The 1.0 million
share difference between the 308.6 million basic weighted average common shares
outstanding and the 309.6 million diluted weighted average common shares
outstanding at December 31, 2003, is due to the assumed conversion of 2.2
million employee stock options in accordance with the treasury method.
Approximately 1.2 million employee stock options with exercise prices greater
than the closing price at December 31, 2003 and 1.1 million and 0.3 million
shares that could be issued upon conversion of the redeemable retractable
preferred shares and the convertible preferred shares of subsidiary company,
respectively, were excluded from the December 31, 2003 diluted weighted average
common shares because the effect would have been anti-dilutive. As the Company
reported a loss for the years ended December 31, 2002 and 2001, basic and
diluted weighted average common shares outstanding are the same.
17. ASSET WRITE-DOWNS AND NON-CASH CHARGES
The Company annually reviews the carrying values of its portfolio of investments
and mining development and reclamation properties, including estimated costs for
closure. Through this process the Company determined that certain asset values
had become impaired and certain site restoration cost accruals were
under-accrued. Assets identified as impaired were written down to their
estimated recoverable amounts while accruals were made for certain site
restoration costs.
The components of the asset write-downs and other non-cash charges are as
follows:
======================================================================== =========== ============
2003 2002 2001
------------------------------------------------------------------------ ----------- ------------
Blanket mine-- producing mine $ - $ - $ 11.8
E-Crete - aerated concrete producer 5.2 - -
Delamar property-- reclamation project 2.0 5.7 4.3
Haile property-- reclamation project 0.8 0.6 -
Sleeper property-- reclamation project - 0.3 -
Q.R. property-- reclamation project - 1.1 -
Loan receivable from joint venture partner 1.2 - -
Marketable securities 0.2 0.1 -
Long-term investments 0.5 0.1 -
------------------------------------------------------------------------ ----------- ------------
$ 9.9 $ 7.9 $ 16.1
======================================================================== =========== ============
In the fourth quarter of 2003, following a comprehensive review of its
investments and properties on the basis set out in Note 1, the Company
determined that the net recoverable amount of its investment in E-Crete, a
producer of aerated concrete located in Phoenix, Arizona, was less than net book
value. Accordingly, the Company recorded a $5.2 million write-down. In addition,
the Company determined that a loan receivable from a joint venture partner was
not collectible and that the liabilities previously accrued to reclaim certain
closure properties were insufficient and required a further $2.8 million
accrual. The 2003 fourth quarter review was performed using a gold price
assumption of $350 per ounce.
In the fourth quarter of 2002, following a comprehensive review of its mining
properties on the basis set out in Note 1, the Company determined that the
liabilities previously accrued to reclaim certain closure properties were
insufficient and required a further $7.7 million accrual. These adjustments were
required due to new and more stringent regulatory requirements for mine
closures. The 2002 fourth quarter review was performed using a gold price
assumption of $325 per ounce.
In the fourth quarter of 2001, following a comprehensive review of its mining
properties on the basis set out in Note 1, the Company determined that the
estimated cost to reclaim the DeLamar property was insufficient and required a
further $4.3 million accrual. This adjustment was required due to a reassessment
of the amount of water to be reclaimed from this site. In
F-B65
addition, as a result of the extreme inflationary pressures in Zimbabwe,
difficulty in accessing foreign currency to pay for imported goods and services
and the then current civil unrest, the Company recorded a write-down of the
carrying value of the Blanket mine by $11.8 million (including cash of $1.5
million). Furthermore, the political situation in Zimbabwe and the related
social and economic instability have prevented the Company from continuing to
exercise control of its subsidiary in Zimbabwe, which operates the Blanket mine.
Consequently, due to the imposition of severe foreign exchange and currency
export restrictions and the uncertainty as to whether the Zimbabwean subsidiary
had the ability to distribute its earnings, the Company discontinued the
consolidation of the Zimbabwean subsidiary effective December 31, 2001. The
investment in the subsidiary is nil following the write-down of the Blanket mine
described above. The 2001 fourth quarter review was performed using a gold price
assumption of $300 per ounce.
18. INCOME AND MINING TAXES
(a) The provision for (recovery of) income and mining taxes is as follows:
======================================================================== =========== ============
2003 2002 2001
------------------------------------------------------------------------ ----------- ------------
Income taxes
Current
Canada (i) $ 0.6 $ 0.3 $ 0.2
Foreign 16.2 6.2 2.7
Future
Canada (0.7) - -
Foreign (3.2) - -
Mining taxes
Current-- Canada - - -
Future-- Canada 0.2 - -
------------------------------------------------------------------------ ----------- ------------
$ 13.1 $ 6.5 $ 2.9
======================================================================== =========== ============
(i) Represents Large Corporations Tax.
(b) The reconciliation of the combined Canadian federal and provincial statutory
income tax rate to the effective tax rate is as follows:
======================================================================== =========== ============
2003 2002 2001
------------------------------------------------------------------------ ----------- ------------
Combined statutory income tax rate 39.1% (40.1)% (41.1)%
Increase (decrease) resulting from:
Mining taxes (2.1) - -
Resource allowance and depletion (10.9) (3.7) (3.3)
Difference in foreign tax rates (9.7) (7.0) 11.3
Benefit of losses not recognized 35.8 78.5 43.6
Other 2.8 1.4 0.6
------------------------------------------------------------------------ ----------- ------------
Effective tax rate 55.0% 29.1% 11.1%
======================================================================== =========== ============
(c) At December 31, 2003, the Company has Canadian losses carried forward of
approximately $143.5 million that expire in 2006 through 2010, including
approximately $97.8 million that are limited in their deduction to income
from specific operations.
(d) At December 31, 2003, the Company has U.S. net operating loss carryforwards
of approximately $683.6 million and alternative minimum tax net operating
losses of approximately $390.3 million expiring in 2004 through 2023. The
use of the U.S. loss carryforwards will be limited in any given year as a
result of previous changes in ownership of the Company.
(e) At December 31, 2003, the Company has Chilean net operating loss
carryforwards of approximately $159.0 million that do not expire.
(f) At December 31, 2003, the Company has Brazilian net operating loss
carryforwards of approximately $4.4 million that do not expire.
F-B66
(g) At December 31, 2003, the Company has Australian net operating loss
carryforwards of approximately $11.3 million that do not expire.
(h) The following information summarizes the principal temporary differences and
the related future tax effect:
======================================================================== ===============
2003 2002
------------------------------------------------------------------------ ---------------
Future tax assets
Accrued expenses and other $ 10.9 $ 4.2
Site restoration cost accruals 26.5 9.3
Alternative minimum tax credits 10.4 8.0
Non-capital loss carryforwards 324.2 127.0
Inventory capitalization 0.4 0.2
Property, plant and equipment 153.7 39.6
------------------------------------------------------------------------ ---------------
Gross future tax assets 526.1 188.3
Valuation allowance (465.9) (129.3)
------------------------------------------------------------------------ ---------------
60.2 59.0
------------------------------------------------------------------------ ---------------
Future tax liabilities
Property, plant and equipment 114.3 62.3
------------------------------------------------------------------------ ---------------
Gross future tax liabilities 114.3 62.3
------------------------------------------------------------------------ ---------------
Net future tax liabilities $ 54.1 $ 3.3
======================================================================== ===============
19. SEGMENTED INFORMATION
Kinross operates primarily in the gold mining industry. Its activities include
gold production, exploration for gold and the acquisition of gold properties.
The Company's primary mining operations are in North America, South America and
Russia and are supported by two corporate offices, one in Canada and the other
in the United States. The Company's major product is gold. The Company has only
one segment, E-Crete, which is a non-gold investment and therefore shown as a
separate segment. Reportable segments are identified as those individual mine
sites having over 10% of total revenues, earnings (loss) or assets of the
Company. Operations not meeting these thresholds are included in corporate and
other. Segment earnings (loss) do not include general and administrative
expenses or other revenues and expenses of a corporate nature.
The exploration and acquisitions segment is responsible for all activities
involved in the exploration for gold bearing properties, regardless of location
and has the responsibility for additions to the proven and probable reserves of
the Company. In addition, this segment is responsible for the addition of proven
and probable reserves through acquisitions and subsequent exploration of those
acquired properties.
F-B67
As at December 31, 2003 and for the year ended December 31, 2003:
====================================================================================================================================
Asset
Depreciation, write-downs
depletion and Segment
Ownership Mining Operating and non-cash earnings Segment Capital
Location interest revenue costs amortization Exploration charges (loss) assets expenditures
------------------------------------------------------------------------------------------------------------------------------------
Operated by Kinross (a)
Fort Knox Alaska 100.0% $136.3 $92.9 $ 35.9 $ - $ - $ 7.5 $ 261.2 $26.5
Kubaka (e) Russia 98.1% 60.7 30.6 16.7 - - 13.4 73.3 1.7
Round Mountain Nevada 50.0% 131.9 76.7 33.7 - - 21.5 138.4 5.7
Joint Venture
participant
La Coipa Chile 50.0% 51.5 34.9 8.9 - - 7.7 54.0 0.5
Crixas Brazil 50.0% 31.9 10.5 9.1 - - 12.3 54.2 3.2
Paracatu Brazil 49.0% 32.0 19.9 5.7 - - 6.4 141.0 5.2
Musselwhite Ontario 31.9% 22.5 16.5 6.5 - - (0.5) 80.4 2.7
Porcupine Joint
Venture Ontario 49.0% 83.0 53.4 24.1 - - 5.5 81.1 8.3
Other
E - Crete Arizona 90.0% - 2.4 0.5 - 5.2 (8.1) 2.0 -
Exploration and
acquisitions 100.0% - - - 24.3 - (24.3) (f)908.4 -
Corporate and
other (c) 22.1 49.5 (0.2) - 4.7 (31.9) (b)348.5 19.6
------------------------------------------------------------------------------------------------------------------------------------
Total $571.9 $387.3 $140.9 $24.3 $9.9 $ 9.5 $2,142.5 $73.4
====================================================================================================================================
As at December 31, 2002 and for the year ended December 31, 2002:
====================================================================================================================================
Asset
Depreciation, write-downs
depletion and Segment
Ownership Mining Operating and non-cash earnings Segment Capital
Location interest revenue costs amortization Exploration charges (loss) assets expenditures
------------------------------------------------------------------------------------------------------------------------------------
Operated by Kinross (a)
Fort Knox Alaska 100.0% $131.6 $99.2 $54.9 $ - $ - $(22.5) $ 264.4 $15.0
Kubaka (e) Russia 54.7% 69.2 28.6 20.1 - - 20.5 64.4 0.1
Joint Venture
participant
Porcupine Joint
Venture (d) Ontario 49.0% 58.2 38.6 16.4 - - 3.2 83.1 6.7
Other
E - Crete Arizona 88.8% - 3.2 1.1 - - (4.3) 8.3 0.3
Exploration and
acquisitions 100.0% - - - 11.6 - (11.6) - -
Corporate and
other (c) 2.0 5.2 (7.2) - 7.9 (3.9) (b)177.8 0.5
------------------------------------------------------------------------------------------------------------------------------------
Total $261.0 $174.8 $85.3 $11.6 $7.9 $(18.6) $598.0 $22.6
====================================================================================================================================
As at December 31, 2001 and for the year ended December 31, 2001:
====================================================================================================================================
Asset
Depreciation, write-downs
depletion and Segment
Ownership Mining Operating and non-cash earnings Segment Capital
Location interest revenue costs amortization Exploration charges (loss) assets expenditures
------------------------------------------------------------------------------------------------------------------------------------
Operated by Kinross (a)
Fort Knox Alaska 100.0% $109.0 $ 82.9 $42.9 $ - $ - $(16.8) $ 324.3 $20.2
Kubaka Russia 54.7% 67.8 34.1 24.0 - - 9.7 70.3 0.4
Hoyle Pond
mine (d) Ontario 100.0% 41.7 29.1 13.2 - - (0.6) 86.6 7.9
Other
E - Crete Arizona 85.9% - 2.6 1.1 - - (3.7) 8.5 0.1
Exploration and
acquisitions 100.0% - - - 7.9 - (7.9) - -
Corporate and
other (c) 51.6 32.0 4.6 - 16.1 (1.1) (b)87.9 1.8
------------------------------------------------------------------------------------------------------------------------------------
Total $270.1 $180.7 $85.8 $7.9 $16.1 $(20.4) $ 577.6 $30.4
====================================================================================================================================
F-B68
(a) Segment earnings (loss) includes asset write-downs and other non-cash
charges.
(b) Includes $191.9 million (2002 - $155.4 million, 2001 - $64.4 million) in
cash and cash equivalents held at the Corporate level.
(c) Includes Corporate and other non-core mining operations.
(d) 2002 amounts include 100% of the Hoyle Pond mine from January 1 to June 30
and the 49% interest in the Porcupine Joint Venture from July 1 to December
31. 2001 amounts include 100% of the Hoyle Pond mine.
(e) 2003 amounts include 54.7% of Kubaka mine results to February 28, 100%
thereafter.
(f) Segment assets represent goodwill of $908.4 million allocated to the
Exploration and acquisition segment with the remainder of $9.6 million of
goodwill allocated to Corporate and other.
Reconciliation of reportable operating segment earnings (loss) to net earnings
(loss) for the year:
2003 2002 2001
====================================================================================================================================
Segment earnings (loss) $ 41.4 $(14.7) $(19.3)
Add (deduct) items not included in segment earnings (loss):
Corporate and other (31.9) (3.9) (1.1)
------------------------------------------------------------------------------------------------------------------------------------
9.5 (18.6) (20.4)
Interest and other income 12.3 16.9 9.3
Mark-to-market gain (loss) on call options 0.4 (2.7) 3.5
General and administrative (25.0) (11.3) (10.1)
Gain on sale of assets 29.5 2.7 1.2
Foreign exchange 3.3 (4.3) (0.5)
Interest expense on long-term liabilities (5.1) (5.0) (9.1)
Minority interest (0.2) - -
Loss on redemption of convertible debentures (1.1) - -
Share in loss of investee companies - (0.6) (2.2)
Provision for income taxes (13.1) (6.5) (2.9)
Dividends on convertible preferred shares of subsidiary company (0.8) (1.5) (5.1)
------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year $ 9.7 $(30.9) $(36.3)
====================================================================================================================================
Enterprise wide disclosure:
Geographic information:
====================================================================================================================================
Property, plant, Mineral
Mining revenue and equipment Interests
------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
United States $268.2 $128.0 $123.3 $296.0 $234.7 $61.4 $ -
Canada 127.6 59.5 47.0 110.9 78.9 59.3 -
Russia 60.7 69.2 67.8 10.3 11.2 - -
Chile 51.5 4.3 18.7 39.3 - 4.4 -
Brazil 63.9 - - 60.9 - 135.0 -
Other - - 13.3 5.2 5.2 - -
------------------------------------------------------------------------------------------------------------------------------------
Total $571.9 $261.0 $270.1 $522.6 $330.0 $260.1 $ -
====================================================================================================================================
The Company is not economically dependent on a limited number of customers for
the sale of its product because gold can be sold through numerous commodity
market traders worldwide. In 2003, sales to five customers totaled $127.4
million, $118.9 million, $96.2 million, $46.8 million and $43.3 million,
respectively. In 2002, sales to five customers totaled $52.1 million, $41.3
million, $35.7 million, $34.1 million and $27.4 million, respectively. In 2001,
sales to four customers totaled $46.5 million, $43.3 million, $32.0 million, and
$26.8 million, respectively.
F-B69
20. Employee pension and post-retirement pension plans
Defined contribution pension and retirement plans:
The Company has several defined contribution pension and retirement plans
covering substantially all employees in North America and certain foreign
countries. Under these plans, the Company either contributes a set percentage of
the employee's salary or matches a percentage of the employee's contributions.
The employees are able to direct the contributions into a variety of investment
funds offered by the plans. The Company's contribution to these plans were $3.9
million in 2003, $2.0 million in 2002, and $2.1 million in 2001, respectively.
Defined benefit pension plans:
In Canada, the Company has a defined benefit pension plan covering the former
employees of the Macassa mine. The plan is currently in the process of being
wound up effective November 30, 2001. The Financial Services Commission of
Ontario approved the wind-up report early in 2003 and benefits were partially
settled in 2003. Full settlement of benefits is expected to occur in early 2004.
An additional contribution may be necessary in 2004 to allow all benefits to be
settled and to permit an annuity purchase.
In the United States, defined benefit plans cover former employees of the
Candelaria and DeLamar mines, and certain U.S. employees of the mines previously
owned by Kinam. Prior to the Kinam acquisition, all employees in the U.S.
employed by Kinam were covered by a non-contributory defined benefit pension
plan. That plan was frozen on June 1,1998, and all active employees were
transferred into the Company's defined contribution pension plan. Benefits under
these plans are based on either the employees' compensation prior to retirement
or stated amounts for each year of service with the Company. The Company makes
annual contributions to the U.S. plans in accordance with the requirements of
the Employee Retirement Income Security Act of 1974 (ERISA).
Other benefit plans:
The Company provides certain health care benefits to retired employees in the
United States. The retiree plan covers the former employees of the Candelaria
and DeLamar mines as well as former Kinam employees. Following the acquisition
of the Candelaria and DeLamar mines in August 1993, that retiree plan was frozen
and employees who retired after August 1993, were not eligible to participate in
the plan. Following the merger with Kinam in June 1998 that retiree plan was
also frozen and employees who retired after June 1998, were not eligible to
participate in the plan, absent special circumstances. The post-retirement
health plans are contributory in certain cases based upon years of service, age,
and retirement date. The Company does not fund post-retirement benefits other
than pensions and may modify the plan provisions at its discretion.
The following tables summarize the change in benefit obligations and fair value
of assets as at December 31:
====================================================================================================================================
Defined benefit pension plans Other benefits
------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation, beginning of year $10.9 $11.6 $3.1 $2.9
Service costs - 0.1 - -
Interest costs 0.7 0.8 0.2 0.2
Plan participants' contributions - - 0.1 0.1
Amendments (0.3) - - -
Actuarial loss (gain) 1.2 1.7 (0.1) 0.2
Acquisition - - - -
Benefits paid (0.4) (3.3) (0.4) (0.4)
------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $12.1 $10.9 $2.9 $3.0
====================================================================================================================================
F-B70
====================================================================================================================================
Defined benefit pension plans Other benefits
------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets, beginning of year $ 9.6 $10.3 $ - $ -
Actual return on plan assets 0.9 1.2 - -
Acquisition - - - -
Employer contributions 0.4 1.7 0.3 0.2
Plan participant contributions - - 0.1 0.1
Foreign currency exchange loss - (0.3) - -
Benefits paid (0.4) (3.3) (0.4) (0.3)
------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, end of year $10.5 $ 9.6 $ - $ -
====================================================================================================================================
Funded status $(1.6) $(1.3) $(2.9) $(3.0)
Unrecognized net actuarial loss 2.6 1.7 0.3 0.3
Unrecognized prior service cost - - - -
------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 1.0 $ 0.4 $(2.6) $(2.7)
====================================================================================================================================
The following table summarizes components of net periodic pension cost for the
fiscal years indicated:
====================================================================================================================================
Defined benefit pension plans Other benefits
------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Service cost $ - $ 0.1 $ 0.1 $ - $ - $ -
Interest cost 0.7 0.8 0.7 0.2 0.2 0.2
Expected return on plan assets (0.8) (0.9) (0.8) - - -
Amortization of prior service costs - - - - - -
Amortization of net loss 0.1 0.8 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Net periodic cost $ - $ 0.8 $ - $0.2 $0.2 $ 0.2
====================================================================================================================================
The following table summarizes the assumptions used in measuring the Company's
benefit obligation:
====================================================================================================================================
Defined benefit pension plans Other benefits
------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Discount rate 6.00% 6.50% 6.00% 6.50%
Expected long-term return on plan assets 6.00% 7.50% 6.00% 7.50%
Rate of compensation increase n\a n\a n\a n\a
====================================================================================================================================
The expected long-term rate of return on assets was determined using a weighted
average calculation for the various investments of the plans. For 2003, the
expected yield on bonds, based on the Moodys AA year end rate, was 5.5%. Based
on current short-term investment rates, the yield on cash investments was 2%.
For equities, based on current forecasts and the plans' historical return on
equities, the rate was set at 7.5%.
The following table summarizes the assumed health care trend rates at December
31:
====================================================================================================================================
2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Health care cost trend rate assumed for next year 9.95% 10.3%
Rate to which the cost trend rate is assumed to decline
(Ultimate trend rate) 5.5% 5.5%
Year that the rate reaches the ultimate trend rate 2016 2016
====================================================================================================================================
The assumed health care cost trend rates can have a significant effect on the
amounts reported for the health care plans:
====================================================================================================================================
1 Percentage- 1 Percentage-
Point Increase Point Decrease
------------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
Effect on total of service and interest cost 30 (8)
Effect on post-retirement benefit obligation 331 (283)
====================================================================================================================================
F-B71
Plan Assets
The following table summarizes the defined benefit plan asset weighted-average
asset allocation percentages by asset category:
====================================================================================================================================
Asset category 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Equities 22% 10%
Fixed Income 73% 86%
Cash 5% 4%
Other - -
====================================================================================================================================
The allocation of plan assets is set forth in the Investment Policy Statement.
The investment policy statement delegates authority to the Employee Benefits
Committee to maintain and establish investment policies relating to the defined
benefit and defined contribution pension plans. These policies and any changes
to these policies are approved by the Kinross Board of Directors. The Company
has adopted the following standards for the Employee Benefits Committee to
follow when deciding how to invest the plan assets.
Assets shall be invested:
(a) in the sole interest of the plan participants and beneficiaries;
(b) with the care, skill, prudence and diligence under the circumstances then
prevailing that a prudent person acting in like capacity and familiar with
such matters would use in the conduct of an enterprise of a like character
and of like aims in compliance with Section 404(A) of ERISA, and other
applicable provisions of ERISA; and
(c) by diversifying the investments so as to minimize the risk of large losses
as well as provide a reasonable rate of return on the assets.
The following table summarizes the target asset allocation as of December 31,
2003:
================================================================================
Asset category 2003
--------------------------------------------------------------------------------
Equities 25 - 45%
Fixed Income 60 - 70%
Cash 5 - 15%
Other 0 - 15%
================================================================================
Contributions
The Company expects to contribute $0.2 million to its defined benefit pension
plans and $0.2 million to its post-retirement benefit plans in 2004.
Estimated future benefit payments
F-B72
The following table summarizes the expected future benefit payments by the years
indicated:
================================================================================
(in thousands of dollars) Defined benefit Other
Pension plan Benefits
--------------------------------------------------------------------------------
2004 240 189
2005 183 187
2006 340 188
2007 493 187
2008 457 191
2009-2013 3,545 1,015
================================================================================
Post-employment benefits
The Company has a number of post-employment plans covering severance and
disability income. At December 31,2003 and 2002 the Company's liability for
post-employment benefits totaled $1.5 million and $1.4 million, respectively.
21. Operating leases
The Company has a number of operating lease agreements primarily involving
office space. The operating leases for equipment provide that the Company may,
after the initial lease term, renew the lease for successive yearly periods or
may purchase the equipment at its fair market value. One of the operating leases
for office facilities contains escalation clauses for increases in operating
costs and property taxes. The majority of the leases are cancelable and are
renewable on a yearly basis. Future minimum lease payments required to meet
obligations that have initial or remaining non-cancelable lease terms in excess
of one year as of December 31, 2003 are as follows:
================================================================================
Years Minimum Lease Payments
--------------------------------------------------------------------------------
2004 $3.0
2005 3.0
2006 2.6
2007 0.7
--------------------------------------------------------------------------------
$9.3
================================================================================
Rent expense was $3.1 million, $0.5 million and $0.6 million in 2003, 2002 and
2001, respectively.
22. Differences between Canadian and United States generally accepted accounting
principles
The consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("CDN GAAP") which differ from
those principles that the Company would have followed had its consolidated
financial statements been prepared in accordance with generally accepted
accounting principles in the United States ("U.S. GAAP").
Material variations between financial statement items under CDN GAAP and the
amounts determined using U.S. GAAP are as follows:
F-B73
====================================================================================================================================
CONSOLIDATED BALANCE SHEET As at December 31, 2003 Recognition Elimination Property, plant
of deferred of effects of and equipment
exchange recognition of & amortization Reversal of
gains and losses equity component differences 1991 and
Under on convertible of convertible from applying 2003 deficit
CDN GAAP debentures debentures SFAS 121 eliminations
------------------------------------------------------------------------------------------------------------------------------------
Assets (a) (a) (b) (c)
Current assets
Cash and cash equivalents $ 245.8 $ - $ - $ - $ -
Restricted cash 5.1 - - - -
Accounts receivable and other assets 42.1 - - - -
Inventories 109.2 - - - -
Marketable securities 0.1 - - - -
402.3 - - - -
Property, plant and equipment 522.6 - - (28.2) -
Mineral interests 260.1 - - - -
Goodwill 918.0 - - - -
Future income and mining taxes 1.5 - - - -
Long-term investments 2.1 - - - -
Deferred charges and other long-term assets 35.9 - - - -
------------------------------------------------------------------------------------------------------------------------------------
$2,142.5 $ - $ - $(28.2) $ -
====================================================================================================================================
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 101.4 $ - $ - $ - $ -
Current portion of long-term debt 29.4 - - - -
Current portion of site restoration cost accruals 19.2 - - - -
------------------------------------------------------------------------------------------------------------------------------------
150.0 - - - -
Long-term debt 0.7 - - - -
Site restoration cost accruals 100.5 - - - -
Future income and mining taxes 55.6 - - - -
Deferred revenue 2.2 - - - -
Other long-term liabilities 2.5 - - - -
Redeemable retractable preferred shares 3.0 - - - -
------------------------------------------------------------------------------------------------------------------------------------
314.5 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Non-controlling interest in subsidiary 0.7 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Convertible preferred shares of subsidiary company 12.6 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Common shareholders' equity
Common share capital and common share purchase
warrants 1,783.5 - - - 766.7
Contributed surplus 30.0 - - - -
Retained earnings (deficit) 3.2 - - (28.2) (766.7)
Cumulative translation adjustments (2.0) - - - -
Other comprehensive income (loss) - - - - -
------------------------------------------------------------------------------------------------------------------------------------
1,814.7 - - (28.2) -
------------------------------------------------------------------------------------------------------------------------------------
$2,142.5 $ - $ - $(28.2) $ -
====================================================================================================================================
CONSOLIDATED BALANCE SHEET As at December 31, 2002
Assets (a) (a) (b) (c)
Current Assets
Cash and cash equivalents $ 170.6 $ - $ - $ - $ -
Restricted cash 21.1 - - - -
Accounts receivable and other assets 15.5 - - - -
Inventories 38.9 - - - -
Marketable securities 0.1 - - - -
------------------------------------------------------------------------------------------------------------------------------------
246.2 - - - -
Property, plant and equipment 330.0 - - (34.5) -
Long-term investments 11.8 - - - -
Deferred charges and other long-term assets 10.0 - 0.8 - -
------------------------------------------------------------------------------------------------------------------------------------
$ 598.0 $ - $ 0.8 $(34.5) $ -
====================================================================================================================================
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 35.5 $ - $ - $ - $ -
Current portion of long-term debt 23.3 - - - -
Current portion of site restoration cost
accruals 15.0 - - - -
------------------------------------------------------------------------------------------------------------------------------------
73.8 - - - -
Long-term debt 12.9 - - - -
Site restoration cost accruals 42.0 - - - -
Future income and mining taxes 3.3 - - - -
Deferred revenue 4.5 - - - -
Other long-term liabilities 5.5 - - - -
Debt component of convertible debentures 21.7 - 102.1 - -
Redeemable retractable preferred shares 2.5 - - - -
------------------------------------------------------------------------------------------------------------------------------------
166.2 - 102.1 - -
------------------------------------------------------------------------------------------------------------------------------------
Convertible preferred shares of subsidiary
company 12.9 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Common shareholders' equity
Common share capital and common share purchase
warrants 1,058.5 - - - 5.3
Contributed surplus 12.9 - - - -
Equity component of convertible debentures 132.3 (17.8) (114.5) - -
Deficit (761.4) 17.8 13.2 (34.5) (5.3)
Cumulative translation adjustments (23.4) - - - -
Other comprehensive income (loss) - - - - -
------------------------------------------------------------------------------------------------------------------------------------
418.9 - (101.3) (34.5) -
------------------------------------------------------------------------------------------------------------------------------------
$ 598.0 $ - $ 0.8 $(34.5) $ -
====================================================================================================================================
F-B74
============================================================================================================================
CONSOLIDATED BALANCE SHEET As at December 31, 2003
Gains Reclassi-
on marketable fication of
securities Flow cumulative
and long-term Effect of through translation To adjust to
investments SFAS 133 shares adjustments equity basis
----------------------------------------------------------------------------------------------------------------------------
Assets (d) (e) (f) (h) (i)
Current assets
Cash and cash equivalents $ - $ - $ - $ - $ -
Restricted cash - - - - -
Accounts receivable and other assets - - - - -
Inventories - - - - -
Marketable securities 0.3 - - - -
0.3 - - - -
Property, plant and equipment - - - - -
Mineral interests - - - - -
Goodwill - - - - -
Future income and mining taxes - - - - -
Long-term investments 6.9 - - - -
Deferred charges and other long-term assets - - - - -
----------------------------------------------------------------------------------------------------------------------------
$7.2 $ - $ - $ - $ -
============================================================================================================================
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ - $ 22.7 $ - $ - $ -
Current portion of long-term debt - - - - -
Current portion of site restoration cost accruals - - - - -
----------------------------------------------------------------------------------------------------------------------------
- 22.7 - - -
Long-term debt - - - - -
Site restoration cost accruals - - - - -
Future income and mining taxes - - - - -
Deferred revenue - (2.2)
Other long-term liabilities - - - - -
Redeemable retractable preferred shares - - - - -
----------------------------------------------------------------------------------------------------------------------------
- 20.5 - - -
----------------------------------------------------------------------------------------------------------------------------
Non-controlling interest in subsidiary - - - - -
----------------------------------------------------------------------------------------------------------------------------
Convertible preferred shares of subsidiary company - - - - -
----------------------------------------------------------------------------------------------------------------------------
Common shareholders' equity
Common share capital and common share purchase
warrants - - (1.1) - -
Contributed surplus - - - - -
Retained earnings (deficit) - (1.4) 1.1 - -
Cumulative translation adjustments - - - 2.0 -
Other comprehensive income (loss) 7.2 (19.1) - (2.0) -
----------------------------------------------------------------------------------------------------------------------------
7.2 (20.5) - - -
----------------------------------------------------------------------------------------------------------------------------
$7.2 $ - $ - $ - $ -
============================================================================================================================
CONSOLIDATED BALANCE SHEET As at December 31, 2002
Assets (d) (e) (f) (h) (i)
Current Assets
Cash and cash equivalents $ - $ - $ - $ - $(29.4)
Restricted cash - - - - -
Accounts receivable and other assets - - - - 1.9
Inventories - - - - (14.2)
Marketable securities 0.1 - - - -
----------------------------------------------------------------------------------------------------------------------------
0.1 - - - (41.7)
Property, plant and equipment - - - - (9.8)
Long-term investments 77.8 - - - 45.9
Deferred charges and other long-term assets - - - - (2.9)
----------------------------------------------------------------------------------------------------------------------------
$77.9 $ - $ - $ - $ (8.5)
============================================================================================================================
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ - $ 21.1 $ - $ - $ (1.8)
Current portion of long-term debt - - - - (2.6)
Current portion of site restoration cost
accruals - - - - (0.3)
----------------------------------------------------------------------------------------------------------------------------
- 21.1 - - (4.7)
Long-term debt - - - - -
Site restoration cost accruals - - - - (3.8)
Future income and mining taxes - - - - -
Deferred revenue - (4.5) - - -
Other long-term liabilities - - - - -
Debt component of convertible debentures - - - - -
Redeemable retractable preferred shares - - - - -
----------------------------------------------------------------------------------------------------------------------------
- 16.6 - - (8.5)
----------------------------------------------------------------------------------------------------------------------------
Convertible preferred shares of subsidiary
company - - - - -
----------------------------------------------------------------------------------------------------------------------------
Common shareholders' equity
Common share capital and common share purchase
warrants - - (1.1) - -
Contributed surplus - - - - -
Equity component of convertible debentures - - - - -
Deficit 42.5 (1.9) 1.1 - -
Cumulative translation adjustments - - - 23.4 -
Other comprehensive income (loss) 35.4 (14.7) - (23.4) -
----------------------------------------------------------------------------------------------------------------------------
77.9 (16.6) - - -
----------------------------------------------------------------------------------------------------------------------------
$77.9 $ - $ - $ - $ (8.5)
============================================================================================================================
F-B75
=============================================================================================================================
CONSOLIDATED BALANCE SHEET As at December 31, 2003
Restatement
to equity
account for Minimum
investment in Effect of pension Under
Echo Bay SFAS 143 liability U.S. GAAP
-----------------------------------------------------------------------------------------------------------------------------
Assets (d) (j) (k)
Current assets
Cash and cash equivalents $ - $ - $ - $ 245.8
Restricted cash - - - 5.1
Accounts receivable and other assets - - - 42.1
Inventories - - - 109.2
Marketable securities - - - 0.4
- - - 402.6
Property, plant and equipment - 2.2 - 496.6
Mineral interests - - - 260.1
Goodwill 40.8 - - 958.8
Future income and mining taxes - - - 1.5
Long-term investments - - - 9.0
Deferred charges and other long-term assets - - - 35.9
-----------------------------------------------------------------------------------------------------------------------------
$40.8 $ 2.2 $ - 2,164.5
=============================================================================================================================
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ - $ - $ - $ 124.1
Current portion of long-term debt - - - 29.4
Current portion of site restoration cost accruals - - - 19.2
-----------------------------------------------------------------------------------------------------------------------------
- - - 172.7
Long-term debt - - - 0.7
Site restoration cost accruals - 11.1 - 111.6
Future income and mining taxes - - - 55.6
Deferred revenue - - - -
Other long-term liabilities - 2.2 3.1 7.8
Redeemable retractable preferred shares - - - 3.0
-----------------------------------------------------------------------------------------------------------------------------
- 13.3 3.1 351.4
-----------------------------------------------------------------------------------------------------------------------------
Non-controlling interest in subsidiary - - - 0.7
-----------------------------------------------------------------------------------------------------------------------------
Convertible preferred shares of subsidiary company - - - 12.6
-----------------------------------------------------------------------------------------------------------------------------
Common shareholders' equity
Common share capital and common share purchase
warrants - - - 2,549.1
Contributed surplus - - - 30.0
Retained earnings (deficit) 40.8 (11.1) - (762.3)
Cumulative translation adjustments - - - -
Other comprehensive income (loss) - - (3.1) (17.0)
-----------------------------------------------------------------------------------------------------------------------------
40.8 (11.1) (3.1) 1,799.8
----------------------------------------------------------------------------------------------------------------------------
$40.8 $ 2.2 $ - 2,164.5
=============================================================================================================================
CONSOLIDATED BALANCE SHEET As at December 31, 2002
Assets (d) (restated-note d)
Current Assets
Cash and cash equivalents $ - $ 141.2
Restricted cash - 21.1
Accounts receivable and other assets - 17.4
Inventories - 24.7
Marketable securities - 0.2
-----------------------------------------------------------------------------------------------------------------------------
- 204.6
Property, plant and equipment - 285.7
Long-term investments (22.5) 113.0
Deferred charges and other long-term assets - 7.9
-----------------------------------------------------------------------------------------------------------------------------
$(22.5) $ 611.2
=============================================================================================================================
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ - $ 54.8
Current portion of long-term debt - 20.7
Current portion of site restoration cost
accruals - 14.7
-----------------------------------------------------------------------------------------------------------------------------
- 90.2
Long-term debt - 12.9
Site restoration cost accruals - 38.2
Future income and mining taxes - 3.3
Deferred revenue - -
Other long-term liabilities - 5.5
Debt component of convertible debentures - 123.8
Redeemable retractable preferred shares - 2.5
-----------------------------------------------------------------------------------------------------------------------------
- 276.4
-----------------------------------------------------------------------------------------------------------------------------
Convertible preferred shares of subsidiary
company - 12.9
-----------------------------------------------------------------------------------------------------------------------------
Common shareholders' equity
Common share capital and common share purchase
warrants - 1,062.7
Contributed surplus - 12.9
Equity component of convertible debentures - -
Deficit (0.7) (729.2)
Cumulative translation adjustments - -
Other comprehensive income (loss) (21.8) (24.5)
-----------------------------------------------------------------------------------------------------------------------------
(22.5) 321.9
-----------------------------------------------------------------------------------------------------------------------------
$(22.5) $ 611.2
=============================================================================================================================
====================================================================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS Recognition Elimination Property, plant
For the year ended December 31, 2003 of deferred of effects of and equipment
exchange recognition of & amortization Reversal of
gains and losses equity component differences 1991
Under on convertible of convertible from applying deficit
CDN GAAP debentures debentures SFAS 121 elimination
------------------------------------------------------------------------------------------------------------------------------------
(a) (a) (b) (c)
Revenue and other income
Mining revenue $571.9 $ - $ - $ - $ -
Interest and other income 12.3 - - - -
Mark-to-market gain on call options 0.4 - - - -
------------------------------------------------------------------------------------------------------------------------------------
584.6 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Expenses
Operating 387.3 - - - -
General and administrative 25.0 - - - -
Exploration and business development 24.3 - - - -
Depreciation, depletion and amortization 140.9 - - (6.3) -
Gain on disposal of assets (29.5) - - - -
Loss on redemption of debt component of
convertible debentures 1.1 0.9 (2.0) - -
Foreign exchange (gain) loss (3.3) 16.9 - - -
Interest expense on long-term liabilities 5.1 - 5.2 - -
Accretion expense - - - - -
Asset write-downs and non-cash charges 9.9 - - - -
------------------------------------------------------------------------------------------------------------------------------------
560.8 17.8 3.2 (6.3) -
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before taxes and other items 23.8 (17.8) (3.2) 6.3 -
Provision for income and mining taxes (13.1) - - - -
Non-controlling interest in subsidiary (0.2)
Share of income (loss) of investee companies - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of a change in
accounting principle and dividends on convertible
preferred shares of subsidiary company 10.5 (17.8) (3.2) 6.3 -
Cumulative effect of a change in accounting principle - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for the year before dividends on
convertible preferred shares of subsidiary company 10.5 (17.8) (3.2) 6.3 -
Dividends on convertible preferred shares of
subsidiary company (0.8) - - - -
------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year 9.7 (17.8) (3.2) 6.3 -
Increase in equity component of convertible debentures (6.5) - 6.5 - -
Gain on redemption of equity component of convertible
debentures 16.5 - (16.5) - -
------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year attributable to common
shareholders $ 19.7 $(17.8) $(13.2) $ 6.3 $ -
====================================================================================================================================
Earnings (loss) per share
Basic and diluted $ 0.06
Common shares issued and outstanding (millions)
Weighted average - basic 308.6
Weighted average - diluted 309.6
Total 345.6
====================================================================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS (a) (a) (b) (c)
For the year ended December 31, 2002
Revenue and other income
Mining revenue $261.0 $ - $ - $ - $ -
Interest and other income 16.9 - - - -
Mark-to-market (loss) on call options (2.7) - - - -
------------------------------------------------------------------------------------------------------------------------------------
275.2 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Expenses
Operating 174.8 - - - -
General and administrative 11.3 - - - -
Exploration and business development 11.6 - - - -
Depreciation, depletion and amortization 85.3 - - (8.1) -
Gain on disposal of assets (2.7) - - - -
Foreign exchange loss 4.3 0.3 - - -
Interest expense on long-term liabilities 5.0 - 4.5 - -
Asset write-downs and non-cash charges 7.9 - - - -
------------------------------------------------------------------------------------------------------------------------------------
297.5 0.3 4.5 (8.1) -
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before taxes and other items (22.3) (0.3) (4.5) 8.1 -
Provision for income and mining taxes (6.5) - - - -
Share in income (loss) of investee companies (0.6) - - - -
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for the year before dividends on
convertible preferred shares of subsidiary company (29.4) (0.3) (4.5) 8.1 -
Dividends on convertible preferred shares of
subsidiary company (1.5) - - - -
------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year (30.9) (0.3) (4.5) 8.1 -
Increase in equity component of convertible debentures (7.3) - 7.3 - -
------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year attributable to
common shareholders $(38.2) $ (0.3) $ 2.8 $ 8.1 $ -
====================================================================================================================================
Earnings (loss) per share
Basic and diluted $(0.32)
Common shares issued and outstanding (millions)
Weighted average - basic 119.7
Weighted average - diluted 119.7
Total 136.1
====================================================================================================================================
F-B76
=================================================================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31, 2003 Gains Reclassi-
on marketable fication of
securities Flow cumulative
and long-term Effect of through translation To adjust to
investments SFAS 133 shares adjustments equity basis
---------------------------------------------------------------------------------------------------------------------------------
(d) (e) (f) (h) (i)
Revenue and other income
Mining revenue $ - $ 0.9 $ - $ - $ (6.0)
Interest and other income - (0.4) - - 0.3
Mark-to-market gain on call options - - - - -
---------------------------------------------------------------------------------------------------------------------------------
- 0.5 - - (5.7)
---------------------------------------------------------------------------------------------------------------------------------
Expenses
Operating - - - - (2.9)
General and administrative - - - - -
Exploration and business development - - - - (0.1)
Depreciation, depletion and amortization - - - - (1.2)
Gain on disposal of assets - - - - -
Loss on redemption of debt component of
convertible debentures - - - - -
Foreign exchange (gain) loss - - - - -
Interest expense on long-term liabilities - - - - -
Accretion expense - - - - -
Asset write-downs and non-cash charges - - - - -
---------------------------------------------------------------------------------------------------------------------------------
- - - - (4.2)
---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before taxes and other items - 0.5 - - (1.5)
Provision for income and mining taxes - - - - 0.4
Non-controlling interest in subsidiary
Share of income (loss) of investee companies - - - - 1.1
---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of a change in
accounting principle and dividends on convertible
preferred shares of subsidiary company - 0.5 - - -
Cumulative effect of a change in accounting principle - - - - -
---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for the year before dividends on
convertible preferred shares of subsidiary company - 0.5 - - -
Dividends on convertible preferred shares of
subsidiary company - - - - -
---------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year - 0.5 - - -
Increase in equity component of convertible debentures - - - - -
Gain on redemption of equity component of convertible
debentures - - - - -
---------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year attributable to common
shareholders $ - $ 0.5 $ - $ - $ -
=================================================================================================================================
Earnings (loss) per share
Basic and diluted
Common shares issued and outstanding (millions)
Weighted average - basic
Weighted average - diluted
Total
=================================================================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS (d) (e) (f) (h) (i)
For the year ended December 31, 2002
Revenue and other income
Mining revenue $ - $ - $ - $ - $(69.2)
Interest and other income 42.5 2.0 1.1 - 3.1
Mark-to-market (loss) on call options - - - - -
---------------------------------------------------------------------------------------------------------------------------------
42.5 2.0 1.1 - (66.1)
---------------------------------------------------------------------------------------------------------------------------------
Expenses
Operating - - - - (27.2)
General and administrative - - - - -
Exploration and business development - - - - (1.3)
Depreciation, depletion and amortization - - - - (17.4)
Gain on disposal of assets - - - - -
Foreign exchange loss - - - - (0.2)
Interest expense on long-term liabilities - - - - (0.3)
Asset write-downs and non-cash charges - - - - -
---------------------------------------------------------------------------------------------------------------------------------
- - - - (46.4)
---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before taxes and other items 42.5 2.0 1.1 - (19.7)
Provision for income and mining taxes - - - - 6.2
Share in income (loss) of investee companies - - - - 13.5
---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for the year before dividends on
convertible preferred shares of subsidiary company 42.5 2.0 1.1 - -
Dividends on convertible preferred shares of
subsidiary company - - - - -
---------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year 42.5 2.0 1.1 - -
Increase in equity component of convertible debentures - - - - -
---------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year attributable to
common shareholders $42.5 $ 2.0 $1.1 $ - $ -
=================================================================================================================================
Earnings (loss) per share
Basic and diluted
Common shares issued and outstanding (millions)
Weighted average - basic
Weighted average - diluted
Total
=================================================================================================================================
=============================================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31, 2003
Minimum
Effect of pension Under
SFAS 143 liability U.S. GAAP
-------------------------------------------------------------------------------------------------------------
(j) (k)
Revenue and other income
Mining revenue $ - - $ 566.8
Interest and other income - - 12.2
Mark-to-market gain on call options - - 0.4
-------------------------------------------------------------------------------------------------------------
- - 579.4
-------------------------------------------------------------------------------------------------------------
Expenses
Operating (8.8) - 375.6
General and administrative - - 25.0
Exploration and business development - - 24.2
Depreciation, depletion and amortization 0.8 - 134.2
Gain on disposal of assets - - (29.5)
Loss on redemption of debt component of
convertible debentures - - -
Foreign exchange (gain) loss - - 13.6
Interest expense on long-term liabilities - - 10.3
Accretion expense 9.4 - 9.4
Asset write-downs and non-cash charges (2.4) - 7.5
-------------------------------------------------------------------------------------------------------------
(1.0) - 570.3
-------------------------------------------------------------------------------------------------------------
Earnings (loss) before taxes and other items 1.0 - 9.1
Provision for income and mining taxes - - (12.7)
Non-controlling interest in subsidiary (0.2)
Share of income (loss) of investee companies - - 0.1
-------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of a change in
accounting principle and dividends on convertible
preferred shares of subsidiary company 1.0 - (3.7)
Cumulative effect of a change in accounting principle (12.1) - (12.1)
-------------------------------------------------------------------------------------------------------------
Earnings (loss) for the year before dividends on
convertible preferred shares of subsidiary company (11.1) - (15.8)
Dividends on convertible preferred shares of
subsidiary company - - (0.8)
-------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year (11.1) - (16.6)
Increase in equity component of convertible debentures - - -
Gain on redemption of equity component of convertible
debentures - - -
-------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year attributable to common
shareholders $(11.1) $ - (16.6)
=============================================================================================================
Earnings (loss) per share
Basic and diluted $ (0.05)
Common shares issued and outstanding (millions)
Weighted average - basic 308.6
Weighted average - diluted 309.6
Total 345.6
=============================================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS (restated-note d)
For the year ended December 31, 2002
Revenue and other income
Mining revenue $ 191.8
Interest and other income 65.6
Mark-to-market (loss) on call options (2.7)
-------------------------------------------------------------------------------------------------------------
254.7
-------------------------------------------------------------------------------------------------------------
Expenses
Operating 147.6
General and administrative 11.3
Exploration and business development 10.3
Depreciation, depletion and amortization 59.8
Gain on disposal of assets (2.7)
Foreign exchange loss 4.4
Interest expense on long-term liabilities 9.2
Asset write-downs and non-cash charges 7.9
-------------------------------------------------------------------------------------------------------------
247.8
-------------------------------------------------------------------------------------------------------------
Earnings (loss) before taxes and other items 6.9
Provision for income and mining taxes (0.3)
Share in income (loss) of investee companies 12.2
-------------------------------------------------------------------------------------------------------------
Earnings (loss) for the year before dividends on
convertible preferred shares of subsidiary company 18.8
Dividends on convertible preferred shares of
subsidiary company (1.5)
-------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year 17.3
Increase in equity component of convertible debenture -
-------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the year attributable to
common shareholders $ 17.3
=============================================================================================================
Earnings (loss) per share
Basic and diluted $ 0.14
Common shares issued and outstanding (millions)
Weighted average - basic 119.7
Weighted average - diluted 120.6
Total 136.1
=============================================================================================================
F-B77
=======================================================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS Recognition Elimination Property, plant
For the year ended December 31, 2003 of deferred of effects of and equipment
exchange recognition of & amortization
gains and losses equity component differences
Under on convertible of convertible from applying
CDN GAAP debentures debentures SFAS 121
-----------------------------------------------------------------------------------------------------------------------
(a) (a) (b)
Revenue and other income
Mining revenue $270.1 $ - $ - $ -
Interest and other income 9.3 - - -
Mark-to-market gain on call options 3.5 - - -
-----------------------------------------------------------------------------------------------------------------------
282.9 - - -
-----------------------------------------------------------------------------------------------------------------------
Expenses
Operating 180.7 - - -
General and administrative 10.1 - - -
Exploration and business development 7.9 - - -
Depreciation, depletion and amortization 85.8 - - (6.1)
Gain on disposal of assets (1.2) - - -
Foreign exchange loss (gain) 0.5 (5.9) - -
Interest expense on long-term liabilities 9.1 - 4.1 -
Asset write-downs and non-cash charges 16.1 - - -
-----------------------------------------------------------------------------------------------------------------------
309.0 (5.9) 4.1 (6.1)
-----------------------------------------------------------------------------------------------------------------------
Loss before taxes and other items (26.1) 5.9 (4.1) 6.1
Provision for income and mining taxes (2.9) - - -
Share in loss of investee companies (2.2) - - -
-----------------------------------------------------------------------------------------------------------------------
Loss for the year before dividends on
convertible preferred shares of subsidiary
company (31.2) 5.9 (4.1) 6.1
Dividends on convertible preferred shares of
subsidiary company (5.1) - - -
-----------------------------------------------------------------------------------------------------------------------
Net loss for the year (36.3) 5.9 (4.1) 6.1
Increase in equity component of convertible
debentures (7.7) - 7.7 -
-----------------------------------------------------------------------------------------------------------------------
Net loss for the year attributable to
common shareholders $(44.0) $ 5.9 $ 3.6 $ 6.1
=======================================================================================================================
Loss per share
Basic and diluted $(0.42)
Common shares issued and outstanding (millions)
Weighted average - basic and diluted 104.5
Total 111.5
=======================================================================================================================
Statement of Operations Presentation: For U.S. GAAP purposes, the measure
"(Loss) earnings before cumulative effect of a change in accounting principle
and dividends on convertible preferred shares of subsidiary company" is not a
recognized term and would therefore not be presented.
The following table reconciles "(Loss) Earnings before cumulative effect of a
change in accounting principle and dividends on convertible preferred shares of
subsidiary company" to "loss from operations":
====================================================================================================================================
Year ended December 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
(restated)
(Loss) earnings before cumulative effect of a change in accounting
principle and dividends on convertible preferred shares of
subsidiary company $ (3.7) $ 18.8 $(27.2)
Add/(deduct):
Interest and other income (12.2) (65.6) (7.9)
Mark-to-market (gain) loss on call options (0.4) 2.7 (3.5)
Interest expense on long-term liabilities 10.3 9.2 9.6
Gain on disposal of assets (1) (27.6) - -
Write-down of marketable securities 0.2 0.2 -
Provision for (recovery of) income and mining taxes 12.7 0.3 (2.4)
Minority interest 0.2 - -
Share in loss (income) of investee companies (0.1) (12.2) 3.0
------------------------------------------------------------------------------------------------------------------------------------
Loss from operations for U.S. GAAP $(20.6) $(46.6) $(28.4)
====================================================================================================================================
(1) Gain on disposal of assets includes gains on sales of marketable securities
and long-term investments of $27.6 million, a component of non-operating
earnings.
In addition, "dividends on convertible preferred shares of subsidiary" are
required to be presented as a component of non-operating earnings:
For U.S. GAAP purposes, the components of non-operating earnings (loss) are as
follows:
====================================================================================================================================
Year ended December 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
(restated)
Interest and other income $ 12.2 $ 65.6 $ 7.9
Mark-to-market gain (loss) on call options 0.4 (2.7) 3.5
Minority interest (0.2) - -
Share in income (loss) of investee companies 0.1 12.2 (3.0)
Interest expense on long-term liabilities (10.3) (9.2) (9.6)
Gain on disposal of assets (1) 27.6 - -
Write-down of marketable securities (0.2) (0.2) -
Dividends on convertible preferred shares of subsidiary company (0.8) (1.5) (5.1)
------------------------------------------------------------------------------------------------------------------------------------
Non-operating earnings (loss) for U.S. GAAP $ 28.8 $ 64.2 $ (6.3)
====================================================================================================================================
F-B78
===================================================================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31, 2003 Gains Reclassi-
Reversal of on marketable fication of
1991 securities Flow cumulative
deficit and long-term Effect of through translation To adjust to Under
elimination investments SFAS 133 shares adjustments equity basis U.S. GAAP
-----------------------------------------------------------------------------------------------------------------------------------
(c) (d) (e) (f) (h) (i)
Revenue and other income
Mining revenue $ - $ - $ - $ - $ - $(67.8) $202.3
Interest and other income - - (3.9) - - 2.5 7.9
Mark-to-market gain on call options - - - - - - 3.5
-----------------------------------------------------------------------------------------------------------------------------------
- - (3.9) - - (65.3) 213.7
-----------------------------------------------------------------------------------------------------------------------------------
Expenses
Operating - - - - - (34.2) 146.5
General and administrative - - - - - - 10.1
Exploration and business development - - - - - (2.1) 5.8
Depreciation, depletion and
amortization - - - - - (20.5) 59.2
Gain on disposal of assets - - - - - - (1.2)
Foreign exchange loss (gain) - - - - - (0.4) (5.8)
Interest expense on long-term
liabilities - - - - - - (3.6) 9.6
Asset write-downs and non-cash charges - - - - - - 16.1
-----------------------------------------------------------------------------------------------------------------------------------
- - - - - - (60.8) 240.3
-----------------------------------------------------------------------------------------------------------------------------------
Loss before taxes and other items - - (3.9) - - (4.5) (26.6)
Provision for income and mining taxes - - - - - 5.3 2.4
Share in loss of investee companies - - - - - (0.8) (3.0)
-----------------------------------------------------------------------------------------------------------------------------------
Loss for the year before dividends on
convertible preferred shares of
subsidiary company - - (3.9) - - - (27.2)
Dividends on convertible preferred
shares of subsidiary company - - - - - - (5.1)
-----------------------------------------------------------------------------------------------------------------------------------
Net loss for the year - - (3.9) - - - (32.3)
Increase in equity component of
convertible debentures - - - - - - -
-----------------------------------------------------------------------------------------------------------------------------------
Net loss for the year attributable to
common shareholders $ - $ - $(3.9) $ - $ - $ - $(32.3)
===================================================================================================================================
Loss per share
Basic and diluted $(0.31)
Common shares issued and
outstanding (millions)
Weighted average -
basic and diluted 104.5
Total 111.5
===================================================================================================================================
F-B79
====================================================================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS Recognition Elimination Property, plant
For the year ended December 31, 2003 of deferred of effects of and equipment
exchange recognition of & amortization Reversal of
gains and losses equity component differences 1991
Under on convertible of convertible from applying deficit
CDN GAAP debentures debentures SFAS 121 elimination
------------------------------------------------------------------------------------------------------------------------------------
(a) (a) (b) (c)
Net inflow (outflow) of cash related to the following
activities:
Operating:
Earnings (loss) for the year before dividends on
convertible preferred shares of subsidiary
company $ 10.5 $(17.8) $(3.2) $ 6.3 $ -
Items not affecting cash:
Depreciation, depletion and amortization 140.9 - - (6.3) -
Asset write-downs and non-cash charges 9.9 - - - -
Gain on disposal of assets (29.5) - - - -
Loss on redemption of debt component of
convertible debentures 1.1 0.9 (2.0) - -
Future income and mining taxes (2.8) - - - -
Deferred revenue realized (2.3) - - - -
Cumulative effect of a change in accounting
principle - - - - -
Accretion expense - - - - -
Site restoration cost accruals 9.4 - - - -
Share in (income) loss of investee companies - - - - -
Interest on convertible debentures - - 1.0 - -
Realized foreign exchange losses on convertible
debentures 4.2 16.9 - - -
Unrealized foreign exchange losses on
redeemable retractable preferred shares 0.4 - - - -
Site restoration cash expenditures (19.3) - - - -
Changes in non-cash operating assets and liabilities:
Accounts receivable and other assets (1.5) - - - -
Inventories (11.3) - - - -
Marketable securities 4.5 - - - -
Ore in stockpiles (1.4) - - - -
Accounts payable and accrued liabilities (20.1) - - - -
Other long-term obligations - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash flow provided from operating activities 92.7 - (4.2) - -
------------------------------------------------------------------------------------------------------------------------------------
Financing:
Issuance of common shares 187.9 - - - -
Redemption of convertible debentures (144.8) - - - -
Acquisition of preferred shares of subsidiary
company (0.3) - - - -
Reduction of debt component of convertible
debentures (4.2) - 4.2 - -
Repayment of debt (10.5) - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash flow provided from financing activities 28.1 - 4.2 - -
------------------------------------------------------------------------------------------------------------------------------------
Investing:
Additions to property, plant and equipment (73.4) - - - -
Business acquisitions, net of cash acquired (81.9) - - - -
Long-term investments and other assets 57.2 - - - -
Proceeds from the disposal of property, plant and
equipment 5.9 - - - -
Decrease in restricted cash 37.5 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash flow used in investing activities (54.7) - - - -
------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 9.1 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 75.2 - - - -
Cash and cash equivalents, beginning of year 170.6 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 245.8 $ - $ - $ - $ -
====================================================================================================================================
F-B80
====================================================================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2003 Gains Reclassi-
on marketable fication of
securities Flow cumulative
and long-term Effect of through translation To adjust to
investments SFAS 133 shares adjustments equity basis
------------------------------------------------------------------------------------------------------------------------------------
(d) (e) (f) (h) (i)
Net inflow (outflow) of cash related to the following
activities:
Operating:
Earnings (loss) for the year before dividends on
convertible preferred shares of subsidiary
company $ - $(0.5) $ - $ - $ -
Items not affecting cash:
Depreciation, depletion and amortization - - - - (1.2)
Asset write-downs and non-cash charges - - - - -
Gain on disposal of assets - - - - -
Loss on redemption of debt component of
convertible debentures - - - - -
Future income and mining taxes - - - - -
Deferred revenue realized - 0.8 - - -
Cumulative effect of a change in accounting
principle - - - - -
Accretion expense - - - - -
Site restoration cost accruals - - - - -
Share in (income) loss of investee companies - - - - (1.1)
Interest on convertible debentures - - - - -
Realized foreign exchange losses on convertible
debentures - - - - -
Unrealized foreign exchange losses on
redeemable retractable preferred shares - - - - -
Site restoration cash expenditures - - - - -
Changes in non-cash operating assets and liabilities:
Accounts receivable and other assets - - - - -
Inventories - - - - -
Marketable securities - - - - -
Ore in stockpiles - - - - -
Accounts payable and accrued liabilities - (1.3) - - -
Other long-term obligations - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash flow provided from operating activities - - - - (2.3)
------------------------------------------------------------------------------------------------------------------------------------
Financing:
Issuance of common shares - - - - -
Redemption of convertible debentures - - - - -
Acquisition of preferred shares of subsidiary
company - - - - -
Reduction of debt component of convertible
debentures - - - - -
Repayment of debt - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash flow provided from financing activities - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Investing:
Additions to property, plant and equipment - - - - -
Business acquisitions, net of cash acquired - - - - -
Long-term investments and other assets - - - - 31.7
Proceeds from the disposal of property, plant and
equipment - - - - -
Decrease in restricted cash - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash flow used in investing activities - - - - 31.7
------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents - - - - 29.4
Cash and cash equivalents, beginning of year - - - - (29.4)
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ - $ - $ - $ - $ -
====================================================================================================================================
==================================================================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2003 Restatement
to equity
account for Minimum
investment in Effect of pension Under
Echo Bay SFAS 143 liability U.S. GAAP
---------------------------------------------------------------------------------------------------------------------------
(d) (j) (k)
Net inflow (outflow) of cash related to the following
activities:
Operating:
Earnings (loss) for the year before dividends on
convertible preferred shares of subsidiary
company $(1.0) $(11.1) $ - $ (15.8)
Items not affecting cash:
Depreciation, depletion and amortization - 0.8 - 134.2
Asset write-downs and non-cash charges - (2.4) - 7.5
Gain on disposal of assets - - - (29.5)
Loss on redemption of debt component of
convertible debentures - - - -
Future income and mining taxes - - - (2.8)
Deferred revenue realized - - - (1.5)
Cumulative effect of a change in accounting
principle - 12.1 - 12.1
Accretion expense - 9.4 - 9.4
Site restoration cost accruals - (9.4) - -
Share in (income) loss of investee companies 1.0 - - (0.1)
Interest on convertible debentures - - - 1.0
Realized foreign exchange losses on convertible
debentures - - - 21.1
Unrealized foreign exchange losses on
redeemable retractable preferred shares - - - 0.4
Site restoration cash expenditures - - - (19.3)
Changes in non-cash operating assets and liabilities:
Accounts receivable and other assets - - - (1.5)
Inventories - - - (11.3)
Marketable securities - - - 4.5
Ore in stockpiles - - - (1.4)
Accounts payable and accrued liabilities - - - (21.4)
Other long-term obligations - 0.6 - 0.6
-------------------------------------------------------------------------------------------------------------------------
Cash flow provided from operating activities - - 86.2
-------------------------------------------------------------------------------------------------------------------------
Financing:
Issuance of common shares - - - 187.9
Redemption of convertible debentures - - - (144.8)
Acquisition of preferred shares of subsidiary
company - - - (0.3)
Reduction of debt component of convertible
debentures - - - -
Repayment of debt - - - (10.5)
-------------------------------------------------------------------------------------------------------------------------
Cash flow provided from financing activities - - - 32.3
-------------------------------------------------------------------------------------------------------------------------
Investing:
Additions to property, plant and equipment - - - (73.4)
Business acquisitions, net of cash acquired - - - (81.9)
Long-term investments and other assets - - - 88.9
Proceeds from the disposal of property, plant and
equipment - - - 5.9
Decrease in restricted cash - - - 37.5
-------------------------------------------------------------------------------------------------------------------------
Cash flow used in investing activities - - - (23.0)
-------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - - - 9.1
-------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents - - - 104.6
Cash and cash equivalents, beginning of year - - - 141.2
-------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ - $ - $ - $ 245.8
=========================================================================================================================
F-B81
====================================================================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS Recognition Elimination Property, plant
For the year ended December 31, 2002 of deferred of effects of and equipment
exchange recognition of & amortization
gains and losses equity component differences Reversal of
Under on convertible of convertible from applying 1991 deficit
CDN GAAP debentures debentures SFAS 121 elimination
------------------------------------------------------------------------------------------------------------------------------------
(a) (a) (b) (c)
Net inflow (outflow) of cash related to the following
activities:
Operating:
(Loss) earnings for the year before dividends on
convertible preferred shares of subsidiary
company $ (29.4) $(0.3) $(4.5) $ 8.1 $ -
Items not affecting cash:
Depreciation, depletion and amortization 85.3 - - (8.1) -
Asset write-downs and non-cash charges 7.9 - - - -
Gain on disposal of assets (2.7) - - - -
Future income and mining taxes - - - - -
Deferred revenue realized (5.1) - - - -
Site restoration cost accruals 3.0 - - - -
Share in loss of investee companies 0.6 - - - -
Interest on convertible debentures - - (0.6) - -
Unrealized foreign exchange losses on
convertible debentures 0.9 0.3 - - -
Site restoration cash expenditures (9.8) - - - -
Changes in non-cash operating assets and liabilities:
Accounts receivable (1.6) - - - -
Inventories 2.4 - - - -
Marketable securities 2.8 - - - -
Ore in stockpiles (0.4) - - - -
Accounts payable and accrued liabilities 5.6 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash flow provided from operating activities 59.5 - (5.1) - -
------------------------------------------------------------------------------------------------------------------------------------
Financing:
Issuance of common shares and common share
purchase warrants 112.8 - - - -
Acquisition of preferred shares of subsidiary
company (11.4) - - - -
Reduction of debt component of convertible
debentures (5.1) - 5.1 - -
Repayment of debt (28.5) - - - -
Dividends on convertible preferred shares
of subsidiary company - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash flow provided from financing activities 67.8 - 5.1 - -
------------------------------------------------------------------------------------------------------------------------------------
Investing:
Additions to property, plant and equipment (22.6) - - - -
Business acquisitions, net of cash acquired (0.1) - - - -
Long-term investments and other assets 1.8 - - - -
Proceeds from the disposal of property, plant and
equipment 1.3 - - - -
(Increase) decrease in restricted cash (21.1) - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash flow used in investing activities (40.7) - - - -
------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 3.0 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 89.6 - - - -
Cash and cash equivalents, beginning of year 81.0 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 170.6 $ - $ - $ - $ -
====================================================================================================================================
F-B82
====================================================================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2002 Gains Reclassi-
on marketable fication of
securities Flow cumulative
and long-term Effect of through translation To adjust to
investments SFAS 133 shares adjustments equity basis
------------------------------------------------------------------------------------------------------------------------------------
(d) (e) (f) (h) (i)
Net inflow (outflow) of cash related to the following
activities:
Operating:
(Loss) earnings for the year before dividends on
convertible preferred shares of subsidiary
company $ 42.5 $ 2.0 $ 1.1 $ - $ -
Items not affecting cash:
Depreciation, depletion and amortization - - - - (17.4)
Asset write-downs and non-cash charges - - - - -
Gain on disposal of assets (42.5) - - - -
Future income and mining taxes - - - - -
Deferred revenue realized - (2.0) - - -
Site restoration cost accruals - - - - (0.7)
Share in loss of investee companies - - - - (13.5)
Interest on convertible debentures - - - - -
Unrealized foreign exchange losses on
convertible debentures - - - - -
Site restoration cash expenditures - - - - -
Changes in non-cash operating assets and liabilities:
Accounts receivable - - - - 3.8
Inventories - - - - (1.4)
Marketable securities - - - - -
Ore in stockpiles - - - - -
Accounts payable and accrued liabilities - - (1.1) - 4.6
------------------------------------------------------------------------------------------------------------------------------------
Cash flow provided from operating activities - - - - (24.6)
------------------------------------------------------------------------------------------------------------------------------------
Financing:
Issuance of common shares and common share
purchase warrants - - - - -
Acquisition of preferred shares of subsidiary
company - - - - -
Reduction of debt component of convertible
debentures - - - - -
Repayment of debt - - - - 1.8
Dividends on convertible preferred shares
of subsidiary company - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash flow provided from financing activities - - - - 1.8
------------------------------------------------------------------------------------------------------------------------------------
Investing:
Additions to property, plant and equipment - - - - 0.3
Business acquisitions, net of cash acquired - - - - -
Long-term investments and other assets - - - - (1.4)
Proceeds from the disposal of property, plant and
equipment - - - - -
Increase (decrease) in restricted cash - - 4.6 - -
------------------------------------------------------------------------------------------------------------------------------------
Cash flow used in investing activities - - 4.6 - (1.1)
------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents - - 4.6 - (23.9)
Cash and cash equivalents, beginning of year - - (4.6) - (5.5)
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ - $ - $ - $ - $(29.4)
====================================================================================================================================
==============================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2002 Restatement
to equity
account for
investment in Under
Echo Bay U.S. GAAP
----------------------------------------------------------------------------------------------
(d) (restated-note d)
Net inflow (outflow) of cash related to the following
activities:
Operating:
(Loss) earnings for the year before dividends on
convertible preferred shares of subsidiary
company $(0.7) $ 18.8
Items not affecting cash:
Depreciation, depletion and amortization - 59.8
Asset write-downs and non-cash charges - 7.9
Gain on disposal of assets - (45.2)
Future income and mining taxes - -
Deferred revenue realized - (7.1)
Site restoration cost accruals - 2.3
Share in loss of investee companies 0.7 (12.2)
Interest on convertible debentures - (0.6)
Unrealized foreign exchange losses on
convertible debentures - 1.2
Site restoration cash expenditures - (9.8)
Changes in non-cash operating assets and liabilities:
Accounts receivable - 2.2
Inventories - 1.0
Marketable securities - 2.8
Ore in stockpiles - (0.4)
Accounts payable and accrued liabilities - 9.1
----------------------------------------------------------------------------------------------
Cash flow provided from operating activities - 29.8
----------------------------------------------------------------------------------------------
Financing:
Issuance of common shares and common share
purchase warrants - 112.8
Acquisition of preferred shares of subsidiary
company - (11.4)
Reduction of debt component of convertible
debentures - -
Repayment of debt - (26.7)
Dividends on convertible preferred shares
of subsidiary company - -
----------------------------------------------------------------------------------------------
Cash flow provided from financing activities - 74.7
----------------------------------------------------------------------------------------------
Investing:
Additions to property, plant and equipment - (22.3)
Business acquisitions, net of cash acquired - (0.1)
Long-term investments and other assets - 0.4
Proceeds from the disposal of property, plant and
equipment - 1.3
Increase (decrease) in restricted cash - (16.5)
----------------------------------------------------------------------------------------------
Cash flow used in investing activities - (37.2)
----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - 3.0
----------------------------------------------------------------------------------------------
Increase in cash and cash equivalents - 70.3
Cash and cash equivalents, beginning of year - 70.9
----------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ - $ 141.2
==============================================================================================
F-B83
====================================================================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS Recognition Elimination Property, plant
For the year ended December 31, 2001 of deferred of effects of and equipment
exchange recognition of & amortization
gains and losses equity component differences Reversal of
Under on convertible of convertible from applying 1991 deficit
CDN GAAP debentures debentures SFAS 121 elimination
------------------------------------------------------------------------------------------------------------------------------------
(a) (a) (b) (c)
Net inflow (outflow) of cash related to the following
activities:
Operating:
Loss for the year before dividends on
convertible preferred shares of subsidiary
company $ (31.2) $ 5.9 $(4.1) $ 6.1 $ -
Items not affecting cash:
Depreciation, depletion and amortization 85.8 - - (6.1) -
Asset write-downs and non-cash charges 14.6 - - - -
Gain on disposal of assets (1.2) - - - -
Future income and mining taxes - - - - -
Deferred revenue realized (17.7) - - - -
Site restoration cost accruals 1.9 - - - -
Share in loss of investee companies 2.2 - - - -
Interest on convertible debentures - - (1.3) - -
Unrealized foreign exchange gains on
convertible debentures (0.6) (5.9) - - -
Proceeds on restructuring of gold forward
sales contracts 21.6
Site restoration cash expenditures (7.1) - - - -
Changes in non-cash operating assets and liabilities:
Accounts receivable 5.1 - - - -
Inventories 9.6 - - - -
Marketable securities - - - - -
Accounts payable and accrued liabilities (8.0) - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash flow provided from operating activities 75.0 - (5.4) - -
------------------------------------------------------------------------------------------------------------------------------------
Financing:
Issuance of common shares 5.4 - - - -
Reduction of debt component of convertible
debentures (5.4) - 5.4 - -
Repayment of debt (46.5) - - - -
Dividends on convertible preferred shares
of subsidiary company - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash flow used in financing activities (46.5) - 5.4 - -
------------------------------------------------------------------------------------------------------------------------------------
Investing:
Additions to property, plant and equipment (30.4) - - - -
Business acquisitions, net of cash acquired (1.2) - - - -
Long-term investments and other assets 2.1 - - - -
Proceeds from the sale of property, plant and
equipment 1.8 - - - -
Decrease (increase) in restricted cash 2.9 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash flow used in investing activities (24.8) - - - -
------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (0.5) - - - -
------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 3.2 - - - -
Cash and cash equivalents, beginning of year 77.8 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 81.0 $ - $ - $ - $ -
====================================================================================================================================
F-B84
==================================================================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2001 Gains Reclassi-
on marketable fication of
securities Flow cumulative
and long-term Effect of through translation To adjust to
investments SFAS 133 shares adjustments equity basis
----------------------------------------------------------------------------------------------------------------------------------
(d) (e) (f) (h) (i)
Net inflow (outflow) of cash related to the following
activities:
Operating:
Loss for the year before dividends on
convertible preferred shares of subsidiary
company $ - $(3.9) $ - $ - $ -
Items not affecting cash:
Depreciation, depletion and amortization - - - - (20.5)
Asset write-downs and non-cash charges - - - - -
Gain on disposal of assets - - - - -
Future income and mining taxes - - - - -
Deferred revenue realized - 3.9 - - -
Site restoration cost accruals - - - - (0.4)
Share in loss of investee companies - - - - 0.8
Interest on convertible debentures - - - - -
Unrealized foreign exchange gains on
convertible debentures - - - - -
Proceeds on restructuring of gold forward
sales contracts - - - - -
Site restoration cash expenditures - - - - -
Changes in non-cash operating assets and liabilities:
Accounts receivable - - - - (4.4)
Inventories - - - - (4.7)
Marketable securities - - - - -
Accounts payable and accrued liabilities - - - - 1.7
--------------------------------------------------------------------------------------------------------------------------------
Cash flow provided from operating activities - - - - (27.5)
--------------------------------------------------------------------------------------------------------------------------------
Financing:
Issuance of common shares - - - - -
Reduction of debt component of convertible
debentures - - - - -
Repayment of debt - - - - 34.6
Dividends on convertible preferred shares
of subsidiary company - - - - -
--------------------------------------------------------------------------------------------------------------------------------
Cash flow used in financing activities - - - - 34.6
--------------------------------------------------------------------------------------------------------------------------------
Investing:
Additions to property, plant and equipment - - - - 0.4
Business acquisitions, net of cash acquired - - - - -
Long-term investments and other assets - - - - 4.3
Proceeds from the sale of property, plant and
equipment - - - - -
Decrease (increase) in restricted cash - - (3.2) - -
--------------------------------------------------------------------------------------------------------------------------------
Cash flow used in investing activities - - (3.2) - 4.7
--------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - - - - -
--------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents - - (3.2) - 11.8
Cash and cash equivalents, beginning of year - - (1.4) - (17.3)
--------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ - $ - $(4.6) $ - $ (5.5)
================================================================================================================================
=====================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2001
Under
U.S. GAAP
---------------------------------------------------------------------
Net inflow (outflow) of cash related to the following
activities:
Operating:
Loss for the year before dividends on
convertible preferred shares of subsidiary
company $(27.2)
Items not affecting cash:
Depreciation, depletion and amortization 59.2
Asset write-downs and non-cash charges 14.6
Gain on disposal of assets (1.2)
Future income and mining taxes -
Deferred revenue realized (13.8)
Site restoration cost accruals 1.5
Share in loss of investee companies 3.0
Interest on convertible debentures (1.3)
Unrealized foreign exchange losses on
convertible debentures (6.5)
Proceeds on restructuring of gold forward
sales contracts 21.6
Site restoration cash expenditures (7.1)
Changes in non-cash operating assets and liabilities:
Accounts receivable 0.7
Inventories 4.9
Marketable securities -
Accounts payable and accrued liabilities (6.3)
---------------------------------------------------------------------
Cash flow provided from operating activities 42.1
---------------------------------------------------------------------
Financing:
Issuance of common shares 5.4
Reduction of debt component of convertible
debentures -
Repayment of debt (11.9)
Dividends on convertible preferred shares
of subsidiary company -
---------------------------------------------------------------------
Cash flow used in financing activities (6.5)
---------------------------------------------------------------------
Investing:
Additions to property, plant and equipment (30.0)
Business acquisitions, net of cash acquired (1.2)
Long-term investments and other assets 6.4
Proceeds from the disposal of property, plant and
equipment 1.8
Decrease in restricted cash (0.3)
---------------------------------------------------------------------
Cash flow used in investing activities (23.3)
---------------------------------------------------------------------
Effect of exchange rate changes on cash (0.5)
---------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 11.8
Cash and cash equivalents, beginning of year 59.1
---------------------------------------------------------------------
Cash and cash equivalents, end of year $ 70.9
=====================================================================
F-B85
Consolidated statements of cash flows presented in accordance with U.S. GAAP
would require the following changes from the consolidated statements of cash
flows prepared in accordance with CDN GAAP:
1. Within cash flows provided from operating activities, the determination
should begin with "net earnings (loss)", instead of the "earnings (loss)
for the year before dividends on convertible preferred shares of subsidiary
company".
2. Under U.S. GAAP, the reduction of the debt component of convertible
debentures is treated as interest expense and as a cash flow from operating
activities. Under CDN GAAP, the interest expense is classified as a
financing activity.
Consolidated Statements of Comprehensive Income (Loss): The Company's statements
of comprehensive income (loss) under U.S. GAAP are as follows:
--------------------------------------------------------------------------------------------------------------------
Year ended December 31 2003 2002 2001
--------------------------------------------------------------------------------------------------------------------
(restated)
Net (loss) earnings for the period under U.S. GAAP $(16.6) $ 17.3 $(32.3)
Change in currency translation adjustments 21.4 5.2 (5.6)
Change in unrealized gains on marketable securities
and long-term investments(d) (6.4) 8.7 4.5
SFAS No. 133(e) (4.4) (23.6) 8.9
Change in minimum pension liability(k) (3.1) - -
------------------------------
Comprehensive (loss) earnings under U.S. GAAP $ (9.1) $ 7.6 $(24.5)
==============================
(a) Under CDN GAAP, the convertible debentures, described in Note 13 were
accounted for in accordance with their substance and, as such, were
presented in the financial statements in their liability and equity
component parts. The Company redeemed these convertible debentures on
September 29, 2003. Under U.S. GAAP, the entire principal amount of the
convertible debentures plus accrued interest of $146.8 million immediately
prior to the redemption and $123.8 million at December 31, 2002, was
treated as debt with interest expense based on the coupon rate of 5.5%.
In addition, under CDN GAAP, realized and unrealized foreign exchange gains
and losses on the debt component of the debentures were recognized in
income. For U.S. GAAP, in addition to including these gains and losses in
income, realized and unrealized exchange gains and losses related to the
portion of the convertible debentures included in equity under CDN GAAP
were also included in income. There was no gain or loss on the redemption
of the convertible debentures for U.S. GAAP.
(b) Cumulatively, as a result of applying SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and following the adoption of SFAS 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets", property, plant and equipment is reduced
and the deficit increased by $60.5 million. This difference arose from the
requirement to discount future cash flows from impaired property, plant and
equipment under U.S. GAAP and from using proven and probable reserves only.
At the time of the impairment, future cash flows from impaired property,
plant and equipment were not discounted under CDN GAAP. Under U.S. GAAP,
depreciation, depletion and amortization, in periods subsequent to the
impairment, would be reduced by $6.3 million, $8.1 million and $6.1 million
during the years ended December 31, 2003, 2002 and 2001, respectively, to
reflect the above. Cumulatively, as a result of these reductions in
depreciation, depletion and amortization, property, plant and equipment is
increased and the deficit decreased by $32.3 million and $26.0 million as
at December 31, 2003 and 2002, respectively.
(c) CDN GAAP allows for the elimination of operating deficits by the reduction
of stated capital attributable to common shares with a corresponding offset
to the accumulated deficit. For CDN GAAP, the Company eliminated operating
deficits of $761.4 million and $5.3 million in 2003 and 1991, respectively.
These reclassifications are not permitted by U.S. GAAP and would require in
each subsequent year a cumulative increase in share capital and a
cumulative increase in deficit of $766.7 million.
(d) Under CDN GAAP, unrealized gains and losses on long-term investments and
marketable securities are not recorded. Under U.S. GAAP, unrealized gains
on long-term investments that are classified as securities available for
sale of $6.9 million and $13.5 million at December 31, 2003 and December
31, 2002, respectively, and marketable securities of $0.3 million and $0.1
million at December 31, 2003 and December 31, 2002, respectively are
included as a component of comprehensive income (loss).
F-B86
Furthermore, U.S. GAAP requires that the transaction on April 3, 2002,
whereby the Company exchanged its investment in debt securities of Echo Bay
for 57.1 million common shares of Echo Bay, be recorded at fair value with
the resulting gain included in earnings. Fair value of the Echo Bay common
shares received, under U.S. GAAP, was $49.1 million, representing 57.1
million common shares at $0.86 each, being the closing market price of such
shares on April 3, 2002. Fair value is not discounted for liquidity
concerns or other valuation considerations. The resulting gain of $42.5
million, after deducting the $6.6 million carrying value of the debt
securities exchanged, increased the carrying value of this investment and
was included in earnings for the year ended December 31, 2002. Under CDN
GAAP, the cost of the Echo Bay common shares acquired on the exchange was
recorded at the values of the securities given up. Since the fair value of
the capital securities given up approximated their carrying value, no gain
was recorded under CDN GAAP.
Subsequent to the exchange of debt securities, the Company accounted for
its share investment in Echo Bay as an available for sale security under
U.S. GAAP. At January 31, 2003, when the Company acquired the remaining
outstanding common shares of Echo Bay, the Company retroactively restated
its 2002 consolidated financial statements, prepared in accordance with
U.S. GAAP, to account for its share investment in Echo Bay on an equity
basis. As a result, the Company reversed an unrealized gain of $21.8
million previously included in other comprehensive income, increased its
deficit by $0.7 million to reflect its share of equity losses for the
period ended December 31, 2002 and correspondingly reduced the carrying
value of its investment. In addition, the Company decreased long-term
investments and recorded a share of loss in investee company of $1.0
million for the one month ended January 31, 2003 and increased long-term
investments and recorded a share of income in investee company of $0.7
million during the year ended December 31, 2002.
For U.S. GAAP purposes, as a result of the business combination on January
31, 2003, the Company recognized an additional $40.8 million of goodwill
representing the difference in carrying value of its share investment in
Echo Bay between CDN and U.S. GAAP.
(e) Under CDN GAAP, derivatives hedging forecasted transactions are off-balance
sheet until the hedged transaction is recorded. Realized gains and losses
on derivatives that are closed out early are initially recorded as deferred
revenue or deferred charges and are recorded as an adjustment to net
earnings (loss) when the original hedged transaction is recorded.
On January 1, 2001, the Company adopted Financial Accounting Standards
Board ("FASB") Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), and the corresponding amendments
under FASB Statement No. 138 ("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 periodically 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.
For derivatives designated as cash flow hedges, the effective portions of
changes in fair value of the derivative are reported in other comprehensive
income and are subsequently reclassified into other income when the hedged
item affects other income. Changes in fair value of the derivative
instruments used as economic instruments and ineffective portions of hedges
are recognized in other income in the period incurred. The application of
SFAS 133 results in a cumulative decrease in deferred revenue of $2.2
million and $4.5 million, a cumulative increase in accounts payable and
accrued liabilities of $22.7 million and $21.1 million, a cumulative
increase in deficit of $1.4 million and $1.9 million, and a cumulative
decrease in other comprehensive income of $19.1 million and $14.7 million
at December 31, 2003 and December 31, 2002, respectively. Additionally, as
a result of applying SFAS 133, there would be an increase in the CDN GAAP
net earnings of $0.5 million and a decrease in the CDN GAAP net loss of
$2.0 million for the years ended December 31, 2003 and 2002 respectively.
On adoption of SFAS 133, the Company did not complete the required
documentation and effectiveness assessments to achieve hedge accounting for
the commodity derivatives hedging gold revenues and energy price risk,
although the contracts are considered to be effective economic hedges and
they were accounted for as hedges for CDN GAAP purposes. For U.S. GAAP
only, these derivatives are carried at fair value with the changes in fair
value recorded as an adjustment to net earnings (loss). The SFAS
requirements for foreign exchange forward contracts were accounted for as
cash flow hedges from January 1, 2001. Realized and unrealized derivatives
gains and losses included in other comprehensive income ("OCI") on
transition and during 2001 were reclassified into mining revenue for
cash-flow hedges of forecasted commodity sales and foreign exchange gain
(loss) for forecasted foreign currency revenues or expenses when the hedged
forecasted revenue or expense is recorded. During the year ended December
31, 2003, $9.3 million of derivative losses were reclassified out of other
comprehensive income (year ended December 31, 2002, $16.3 million of
comprehensive gain). The Company estimates that $15.3 million of net
derivatives losses included in other comprehensive income will be
reclassified into earnings within the next twelve months.
F-B87
Beginning January 2002, the Company met the required documentation
requirements under SFAS 133 relating to the prospective and retrospective
effectiveness assessments for the commodity derivatives; thus, these
derivatives were designated as cash flow hedges. The effective portions of
changes in fair values of these derivatives are now recorded in other
comprehensive income and are recognized in the income statement when the
hedged item affects earnings. Ineffective portions of changes in fair value
of cash flow hedges are recognized in earnings. There was no
ineffectiveness recorded during 2003, 2002 or 2001.
(f) Under Canadian income tax legislation, a company is permitted to issue
shares whereby the company agrees to incur qualifying expenditures and
renounce the related income tax deductions to the investors. The Company
accounted for the issue of flow-through shares using the deferral method in
accordance with CDN GAAP. At the time of issue the funds received were
recorded as share capital. Qualifying expenditure did not begin to be
incurred until 2002. For U.S. GAAP, the premium paid in excess of the
market value of $1.1 million was credited to other liabilities and included
in income as the qualifying expenditures were made. All of the qualifying
expenditures were made in 2002. $1.1 million was included in interest and
other income for the year ended December 31, 2002.
(g) The terms "proven and probable reserves", "exploration", "development", and
"production" have the same meaning under both U.S. and CDN GAAP.
Exploration costs incurred are expensed at the same point in time based on
the same criteria under both U.S. and CDN GAAP. In addition, mining related
costs are only capitalized after proven and probable reserves have been
designated under both U.S. and CDN GAAP.
(h) Under CDN GAAP, the unrealized translation gains and losses on the
Company's net investment in self-sustaining operations translated using the
current rate method accumulated in a separate component of shareholders'
equity, described as cumulative translation adjustments on the consolidated
balance sheet. Under U.S. GAAP, the unrealized foreign exchange gains and
losses would not accumulate in a separate component of shareholders equity
but rather as an adjustment to accumulated other comprehensive income. As
indicated in Note 1, the Company changed its accounting policy with respect
to the translation of foreign currencies during the year. As such, the $2.0
million accumulated translation loss in other comprehensive income, will
only become realized in earnings upon the substantial disposition,
liquidation or closure of the mining property or investment that gave rise
to such amounts.
(i) Under CDN GAAP, Kinross proportionately consolidates its interests in the
following incorporated joint ventures: RPM (Paracatu), MDO (La Coipa), MSG
(Crixas ) and CMM (Refugio). In addition, the Company proportionately
consolidates its interests in the following unincorporated joint ventures:
Round Mountain, Porcupine Joint Venture, Musselwhite and New Britannia.
Prior to March 1, 2003, the investment in Omolon was also proportionately
consolidated under CDN GAAP. Effective March 1, 2003, following the
Company's increase in share ownership to 98.1%, as described in note 2(b),
Omolon is fully consolidated under both CDN and U.S. GAAP.
These investments are accounted for using the equity method under U.S.
GAAP. The Company relies on an accommodation provided for in Item 17(c)
(2)(vii) of SEC Form 20-F, which permits a company using the equity method
for U.S. GAAP to omit the differences arising from the use of proportionate
consolidation under CDN GAAP. Each of the joint ventures listed, except
Omolon prior to March 1, 2003, qualifies for this accommodation on the
basis that it is an operating entity, the significant financial and
operating policies of which are, by contractual arrangement, jointly
controlled by all parties having an equity interest in the entity.
With respect to Omolon, the Company concluded that it did not meet the
criteria outlined for the accommodation. Therefore, the financial
information of Omolon has been disclosed using the equity method for U.S.
GAAP purposes for comparative periods prior to March 1, 2003. Under the
equity method, an investment in common shares is generally shown in the
balance sheet of an investor as a single amount as "Investment in investee
company". Likewise, an investor's share of earnings or losses from its
investment is ordinarily shown in its statement of operations as a single
amount as "Share of income (loss) of investee company".
(j) On January 1, 2003, the Company adopted SFAS 143, "Accounting for Asset
Retirement Obligations" which requires that the fair value of liabilities
for asset retirement obligations associated with tangible long-lived assets
be recognized in the period in which they are incurred. For the purposes of
applying SFAS 143, asset retirement obligations are based principally on
legal and regulatory requirements associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and/or the normal operation of a long-lived asset. When the
liability is initially
F-B88
recorded, a corresponding increase to the carrying amount of the related
asset is recorded and then depreciated over the useful life of the asset.
Over time, the liability is increased to reflect an interest element
(accretion) considered in its initial measurement at fair value. This
differs from the prior practice in which Kinross accrued for the estimated
site restoration and closure obligations over the producing life of the
mine with an annual charge to earnings. Under SFAS 143, accretion is
charged against earnings during the life of the mine and afterwards until
all obligations have been settled.
The Company is not required to re-measure the obligation at fair value each
period, but is required to evaluate the cash flow estimates at the end of
each reporting period to determine whether the estimates continue to be
appropriate. Upon settlement of the liability, the Company will record a
gain or loss if the actual cost incurred is different than the liability
recorded. The cumulative effect of adopting SFAS 143 was to increase
property, plant and equipment by $1.6 million, increase long-term equity
accounted investments by $0.3 million, increase site restoration cost
accruals by $14.0 million and to record a one-time charge of $12.1 million
($0.04 per share) to earnings in the year ended December 31, 2003.
Following the adoption of SFAS 143, the total amount of recognized
liabilities for asset retirement obligations was $66.9 million. If the
change had occurred on January 1, 2002, the cumulative effect would have
resulted in no change to property, plant and equipment, an increase of $0.3
million in long-term equity accounted investments, an increase in site
restoration cost accruals of $22.5 million and a one-time charge of $22.2
million ($0.18 per share) to earnings in the year ended December 31, 2002.
The total amount of recognized liabilities would have been $74.7 million at
December 31, 2001. For the year ended December 31, 2003, the effect on
earnings in addition to the cumulative effect of adopting SFAS 143 was a
decrease in net loss of $1.0 million ($nil per share). For the year ended
December 31, 2002, the effect of adopting SFAS 143 in addition to the
cumulative effect, would have been a decrease in net income of $0.1 million
($nil per share), an increase in property, plant and equipment of $1.7
million and a reduction in long-term investments of $0.1 million.
The following is a reconciliation of the liability for asset retirement
obligations:
===========================================================================
(unaudited, in millions)
---------------------------------------------------------------------------
Balance as at December 31, 2002 $ 52.9
Impact of adoption of SFAS 143 14.0
Additions to liabilities(1) 68.5
Liabilities settled (22.4)
Accretion expense 9.4
Foreign exchange 3.4
Revisions 5.0
---------------------------------------------------------------------------
Balance as at December 31, 2003 $130.8
===========================================================================
(1) Properties acquired from Echo Bay and TVX of $45.5 million and $17.5
million, respectively, and $5.5 million relating to the Kubaka Mine as
a result of changing accounting for the investment in Omolon from the
equity method to full consolidation.
(k) Under U.S. GAAP, if the accumulated pension plan benefit obligation exceeds
the market value of plan assets, a minimum pension liability for the excess
is recognized to the extent that the liability recorded in the balance
sheet is less than the minimum liability. Any portion of this additional
liability that relates to unrecognized prior service cost is recognized as
an intangible asset while the remainder is charged to Other Comprehensive
Income. CDN GAAP does not require the Company to record a minimum liability
and does not have the concept of Other Comprehensive Income. During the
year, the Company recorded a minimum pension liability of $3.1 million
(2002 - $nil) with a corresponding decrease in Other Comprehensive Income.
None of the additional liability relates to unrecognized prior service
cost.
=========================================================================================================================
Plans where assets Plans where
exceed accumulated accumulated benefits
benefits exceed assets
-------------------------------------------------------------------------------------------------------------------------
Amounts recognized on the consolidated December December December December
balance sheets consist of: 31, 2003 31, 2002 31, 2003 31, 2002
-------------------------------------------------------------------------------------------------------------------------
Accrued pension asset (liability) $(0.3) $ 0.4 $ 1.3 $ -
Additional minimum pension obligation - - (3.1) -
Accumulated other comprehensive income - - 3.1 -
-------------------------------------------------------------------------------------------------------------------------
Net amount recognized on consolidated balance sheets $(0.3) $ 0.4 $ 1.3 $ -
=========================================================================================================================
F-B89
Stock-based compensation
The Company follows Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and its related interpretations in
accounting for stock options. Accordingly, because stock option exercise prices
equal the market value on the date of the grant, no compensation cost has been
recognized at the grant date of the stock options. Had compensation expense for
the stock option plans been determined based upon fair value at the grant date
for awards under these plans consistent with the methodology prescribed under
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and SFAS
No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment to SFAS No. 123" ("SFAS 148"), the Company's pro forma net (loss)
earnings and (loss) earnings per share would be as follows:
=========================================================================================================================
Year ended December 31
-------------------------------------------------------------------------------------------------------------------------
U.S. GAAP 2003 2002 2001
-------------------------------------------------------------------------------------------------------------------------
Net (loss) earnings applicable to common shares (restated)
As reported $(16.6) $ 17.3 $(32.3)
Add stock compensation cost (1.1) (2.0) (1.1)
--------------------------------------------
Pro forma $(17.7) $ 15.3 $(33.4)
============================================
(Loss) earnings per share, basic and diluted (dollars)
As reported (1) $(0.05) $ 0.14 $ (0.31)
Pro forma (1) $(0.06) $ 0.13 $ (0.32)
-------------------------------------------------------------------------------------------------------------------------
(1) Reflects the effects of a three for one share consolidation approved
January 2003 as described in Note 16.
Other requirements of SFAS 148 are disclosed in Note 16 as prescribed under CICA
Handbook Section 3870, "Stock-based Compensation and Other Stock-based Payments"
("CICA 3870"), which is consistent with the U.S. pronouncement. In addition, for
fiscal years beginning on or after January 1, 2004, CICA 3870 requires fair
value accounting for stock options. Adoption is retroactive, covering all stock
options granted on or after January 1, 2002. The Company has the option to
restate prior periods to include the expense for awards that was included in the
pro forma note disclosure of prior periods or to make an adjustment to the
opening balance of retained earnings of the current period to reflect the
cumulative effect of the change on prior periods.
Other Recent Accounting Pronouncements
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires that the assets,
liabilities and results of variable interest entities be consolidated into the
financial statements of the entity that has the controlling financial interest.
FIN 46 also provides the framework for determining whether a variable interest
entity should be consolidated based on voting interest or significant financial
support provided to it. In December 2003, the FASB issued FIN 46(R), amending
the guidance in FIN 46 as well as the transition guidance. As a Foreign Private
Issuer and based on its interpretation of the revised transition guidance, the
Company will be required to adopt the guidance in FIN 46(R) for the first
reporting period that ends after March 15, 2004. The Company is in the process
of assessing the impact of the amended standard on the consolidated financial
statements.
In June 2003, the CICA issued a similar pronouncement, Accounting Guideline No.
15, "Consolidation of Variable Interest Entities" ("AcG-15"). AcG-15 is
effective for reporting periods beginning on or after November 1, 2004. Kinross
is currently evaluating the potential impact of AcG-15.
Hedging Relationships
In 2002, the Accounting Standards Board of the CICA issued Accounting Guideline
No. 13 "Hedging Relationships" ("AcG-13). AcG-13 increases the documentation,
designation and effectiveness criteria to achieve hedge accounting. The
guideline requires the discontinuance of hedge accounting for hedging
relationships established that do not meet the conditions at the date AcG-13 is
first applied. It does not change the method of accounting for derivatives in
hedging relationships, but requires fair value accounting for derivatives that
do not qualify for hedge accounting. The new guideline is applicable for fiscal
years commencing on or after July 1, 2003. The Company does not believe that the
adoption of AcG-13 will have an impact on its results of operations and
financial position.
F-B90
Impairment of Long-lived Assets
In 2002, the CICA Handbook Section 3063 - "Impairment of long-lived Assets"
("CICA 3063") was amended to harmonize with SFAS 144. CICA 3063 applies to
long-lived assets held for use and is effective on a prospective basis, for
fiscal years beginning on or after April 1, 2003. Early adoption is encouraged.
This standard requires that an impairment loss be recognized when the carrying
amount of an asset held for use exceeds the sum of undiscounted cash flows. The
impairment loss is measured as the amount by which the carrying amount exceeds
the fair value of the asset. The Company does not believe that the adoption of
CICA 3063 will have an impact on its results of operations and financial
position.
Asset Retirement Obligations
In 2003, the CICA issued Handbook Section 3110 - "Asset Retirement Obligations"
("CICA 3110"), which is consistent with SFAS 143, "Accounting for Asset
Retirement Obligations." The standard provides for the recognition, measurement
and disclosure of liabilities for asset retirement obligations and the
associated asset retirement costs. It addresses obligations required to be
settled as a result of an existing law, regulation or contract related to asset
retirements. The new standard is applicable for fiscal years beginning January
1, 2004. Upon adoption, CICA 3110 will require retroactive restatement of all
comparative periods. The Company is currently evaluating the impact this
standard may have on its results of operations and financial position.
Other
In July 2003, the CICA issued Handbook Section 1100 "Generally Accepted
Accounting Principles" ("CICA 1100") and Handbook Section 1400 "General
Standards of Financial Statement Presentation" ("CICA 1400"). CICA 1100
describes what constitutes CDN GAAP and its sources. CICA 1400 clarifies what
constitutes fair presentation in accordance with generally accepted accounting
principles. Both sections are effective for fiscal years beginning on or after
October 1, 2003. The Company is currently evaluating the potential impact these
standards may have on its results of operations, financial position and note
disclosures.
The Emerging Issues Task Force ("EITF") of FASB has as part of its agenda, a
review of a broad range of accounting policies related to the mining industry.
The outcome of this review may result in changes to U.S. GAAP as applied to
these consolidated financial statements. In addition, as a result of an ongoing
harmonization process with U.S. GAAP, the outcome may also result in changes to
CDN GAAP.
Consistent with common industry practice, Kinross has historically classified
mineral lease rights in the same manner as property, plant and equipment on its
balance sheet. However, in accordance with SFAS 141 "Business Combinations" and
SFAS 142 "Goodwill and Intangible Assets", the Company has accounted for mineral
lease rights as intangible assets and recorded them as "Mineral Interests" on
the balance sheet, separate and apart from property, plant and equipment. At its
March 2004 meeting, the EITF is expected to discuss Issue 03-0, "Whether Mineral
Lease Rights are Tangible or Intangible Assets". Depending on the EITF's
resolution of this issue, the Company may be required to change the
classification of its mineral lease rights. Notwithstanding a decision by the
EITF, the classification of mineral lease rights as tangible assets under U.S.
GAAP will require the approval of the FASB and amendments to SFAS 141 and SFAS
142 in order to effect such change.
23. Commitments and contingencies
General
The Company follows Section 3290 of the CICA handbook in determining its
accruals and disclosures with respect to loss contingencies. Accordingly,
estimated losses from loss contingencies are accrued by a charge to income when
information available prior to the issuance of the financial statements
indicates that it is likely that a future event will confirm that an asset has
been impaired or a liability incurred at the date of the financial statements
and the amount of the loss can be reasonably estimated.
F-B91
Environmental and Site Restoration Costs
The Company's mining, processing and exploration activities are subject to
various federal, state and provincial laws and regulations regarding the
protection of the environment. These laws and regulations are continually
changing and are generally becoming more restrictive. The Company conducts its
operations so as to protect the public health and environment and believes its
operations are in compliance with all applicable laws and regulations. The
Company has made and expects to make, in the future, expenditures to comply with
such laws and regulations. Estimated future site restoration costs are based
principally on legal and regulatory requirements. As at December 31, 2003 and
2002, $119.7 million and $57.0 million, respectively, were accrued for site
restoration costs relating to currently or past producing properties.
In addition, the Company is currently involved in two matters concerning
environmental matters on sites that have been sold. Details about these sites
are discussed below:
Candelaria Mine sale
On October 1, 2001 the Company sold 100% of its investment in Kinross Candelaria
Mining Company to Silver Standard Resources Inc. ("Silver Standard"). As part of
the sales agreement the Company agreed to maintain the financial assurance
provided to the Bureau of Land Management ("BLM"). The financial assurance is in
the form of a letter of credit for $1.7 million. Silver Standard has agreed to
reimburse the Company for the costs of the financial assurance and will provide
an alternative form of financial assurance acceptable to the BLM on or before
April 15, 2004, which will allow the BLM to release the Company from its
financial assurance. The Company expects to be released from this obligation in
2004.
Sleeper Mine sale
On December 31, 2003, the Company sold its remaining 50% ownership interest in
Sleeper Mining Company LLC to a subsidiary of X-Cal Resources Ltd. ("X-Cal"). As
part of the sales agreement, the Company agreed to maintain the financial
assurances provided to the BLM. The financial assurances are in the form of two
letters of credit totalling $8.0 million. In addition, pursuant to the sales
agreement X-Cal escrowed $8.0 million of its own cash until an alternative form
of financial assurance is provided and accepted by the BLM or July 8, 2004. The
Company has agreed to allow X-Cal to utilize $5.2 million of the escrowed cash
as security for an alternative form of financial assurance acceptable to the
BLM. If by July 8, 2004, X-Cal has not provided the alternative form of
financial assurance acceptable to the BLM, X-Cal has arranged for an insurer to
post a surety bond, which would effectively put the Company in the position of
having its obligation collateralized. The Company has the right to utilize the
escrowed funds to pay for the costs of its letter of credit. Kinross expects to
be released from this obligation in 2004.
Export prepayment contracts
A Brazilian Central Bank program enables exporters to borrow US dollars and
commit to conduct export activities. The borrowed amounts are then reinvested
locally at rates in excess of those on the loans. These contracts are referred
to as export prepayment contracts.
The Company's Paracatu joint venture participates in this program and entered
into contracts during 2000 and 2001, which were immediately assigned to a
Brazilian bank. The joint venture receives a premium instead of the higher
interest rate earned by the bank. The lenders of the funds agreed to the
assignment of the borrowed amounts to the local bank. There is no obligation by
the Company to repay any of the borrowed amounts.
The Company has $1.1 million of unearned premium related to these export
prepayment contracts at December 31, 2003. The Company will earn this premium as
it exports gold. As at December 31, 2003, the Company is committed to export
$50.4 million of gold (2004 - $25.9 million, 2005 - $24.5 million).
F-B92
Other legal matters
Derivative action
In October 1996, a shareholder derivative action was filed in the Court of
Chancery of Delaware on behalf of a Kinam Gold Inc. ("Kinam") formerly Amax Gold
Inc., shareholder, entitled Harry Lewis v. Milton H. Ward, et al., C.A. No.
15255-NC, against Cyprus Amax, Kinam's directors and Kinam as a nominal
defendant. Kinam Gold Inc. is a 100% owned subsidiary of the Company. The
complaint alleges, among other things, that the defendants engaged in
self-dealing in connection with Kinam'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 Kinam and
damages in an unspecified amount. Kinam subsequently filed a motion to dismiss
the action with the court. On October 30, 2003, the Court of Chancery of
Delaware granted Kinam's motion to dismiss the complaint. The plaintiff appealed
this decision on November 30, 2003. The Company and Kinam believe that the
complaint is without merit and will continue to defend the matter as required.
The Company cannot reasonably predict the outcome of this action and the amount
of loss cannot be reasonably estimated, therefore no loss contingency has been
recorded in the financial statements. This derivative action relates to the
Corporate and other segment (see Note 19).
Class action
The Company was named as a defendant in a class action complaint filed on or
about April 26, 2002, entitled Robert A. Brown, et al. v. Kinross Gold U.S.A.,
Inc., et al., Case No. CV-S-02-0605-KJD-RJJ, brought in the United States
District Court for the District of Nevada. Defendants named in the complaint are
the Company, its subsidiaries, Kinross Gold U.S.A., Inc. and Kinam, and Robert
M. Buchan, President and C.E.O. of the Company. The complaint is brought on
behalf of two potential classes, those who tendered their Kinam preferred stock
into the tender offer for the Kinam $3.75 Series B Preferred Stock made by the
Kinross Gold U.S.A. and those who did not. Plaintiffs argue, among other things,
that amounts historically advanced by the Company to Kinam should be treated as
capital contributions rather than loans, that the purchase of Kinam preferred
stock from institutional investors in July 2001 was a constructive redemption of
the preferred stock, an impermissible amendment to the conversion rights of the
preferred stock, or constituted the commencement of a tender offer, that the
Company and its subsidiaries have intentionally taken actions for the purpose of
minimizing the value of the Kinam preferred stock, and that the amount offered
in the tender offer of $16.00 per share was not a fair valuation of the Kinam
preferred stock. The complaint alleges breach of contract based on the governing
provisions of the Kinam preferred stock, breach of fiduciary duties, violations
of the "best price" rule under Section 13(e) of the Securities Exchange Act of
1934, as amended, and the New York Stock Exchange rules, violations of Section
10(b) and 14(e) of the Securities Exchange Act of 1934, as amended, and Rules
10b-5 and 14c-6(a) hereunder, common law fraud based on the acts taken and
information provided in connection with the tender offer, violation of Nevada's
anti-racketeering law, and control person liability under Section 20A of the
Securities Exchange Act of 1934, as amended. A second action seeking
certification as a class action and based on the same allegations was also filed
in the United States District Court for the District of Nevada on or about May
22, 2002. It names the same parties as defendants. This action has been
consolidated into the Brown case and the Brown plaintiffs have been designated
as lead plaintiffs. The plaintiffs seek damages ranging from $9.80 per share,
plus accrued dividends, to $39.25 per share of Kinam preferred stock or, in the
alternative, the issuance of 26.875 to 80.625 shares of the Company for each
Kinam preferred share. They also seek triple damages under Nevada statutes. The
Company brought a motion for judgement on the pleadings with respect to the
federal securities claims based on fraud. Discovery was stayed pending the
resolution of this matter. On September 29, 2003, the Court ruled that
plaintiffs had failed to adequately state a federal securities fraud claim. The
plaintiffs were given an opportunity to amend the complaint to try and state a
claim that would meet the pleading standards established by the Court but, if
they are unable to do so, these claims will be dismissed. The plaintiffs have
filed an amended complaint with the Court in an effort to eliminate the
deficiencies in their original complaint. The Company believes the amended
complaint is without merit and has filed a motion for judgement on the pleadings
seeking dismissal of the securities fraud claims without prejudice. The Company
anticipates continuing to vigorously defend this litigation. The Company cannot
reasonably predict the outcome of this action and the amount of loss cannot be
reasonably estimated, therefore no loss contingency has been recorded in the
financial statements. This class action relates to the Corporate and other
segment (see Note 19).
F-B93
Settlement in Greece
In January 2003, the Stratoni lead / zinc mine located in Greece, owned by TVX
Hellas S.A. ("TVX Hellas"), a subsidiary of the Company, was shut down pending
the receipt of new mining permits. The TVX Hellas assets and liabilities are
included under the heading Corporate and other in the segmented information (see
Note 19). Revised mining permits were issued on February 18, 2003. However,
operations remained suspended throughout 2003 as the Company worked with the
Greek government and potential investors to develop the appropriate exit
strategy. On December 10, 2003, the Greek government unilaterally terminated the
contract pursuant to which the Company's two subsidiaries, TVX and TVX Hellas,
held title to the Hellenic gold mines, and invited them to enter into a
settlement agreement. A settlement agreement was then executed on December 12,
2003, pursuant to which the Greek government agreed to pay 11 million Euros to
TVX Hellas. The Company agreed to augment the 11 million Euros ($13.6 million),
with an additional 11 million Euros, and to contribute all such amounts in full
satisfaction of labour and trade liabilities of TVX Hellas. On January 30, 2004
the Company advanced TVX Hellas 11 million Euros ($13.6 million) and received a
full release from all liabilities in connection with environmental remediation.
TVX Hellas has settled all labour related claims and has filed for bankruptcy.
Trade and other payables will be settled in the bankruptcy proceedings out of
the remaining funds on hand in Greece. The Company has accrued $13.6 million as
a current payable at December 31, 2003.
The Hellenic Gold Properties litigation
The Ontario Court (General Division) issued its judgement in connection with the
claim against TVX by three individuals (collectively the "Alpha Group") on
October 14, 1998, relating to TVX's interest in the Hellenic Gold Mining assets
in Greece owned by TVX Hellas. The TVX Hellas assets and liabilities are
included under the heading Corporate and other in the segmented information (see
Note 19). The Court rejected full ownership and monetary damage claims but did
award the Alpha Group a 12% carried interest and the right to acquire a further
12% participating interest in the Hellenic Gold assets. TVX filed a notice to
appeal and the Alpha Group filed a notice of cross appeal.
Subsequent to the trial decision in October, 1998, TVX received notification of
two actions commenced by 1235866 Ontario Inc. ("1235866"), the successor to
Curragh Inc., Mineral Services Limited and Curragh Limited, against the Alpha
Group, and others, in Ontario and English Courts, in relation to the claim by
the Alpha Group against TVX for an interest in the Hellenic gold mines. On July
28, 1999, TVX entered into an agreement with 1235866 to ensure that these new
claims would not result in any additional diminution of TVX's interest in the
Hellenic gold mines. 1235866 agreed not to pursue any claim against TVX for an
interest in the Hellenic gold mines beyond the interest awarded to the Alpha
Group by the courts. In the event that 1235866 is successful in its claim
against the Alpha Group, 1235866 would be entitled to a 12% carried interest as
defined in the agreement and the right to acquire a 12% participating interest
upon payment of 12% of the aggregate amounts expended by TVX and its
subsidiaries in connection with the acquisition, exploration, development and
operation of the Hellenic gold mines up to the date of exercise. The TVX appeal,
the Alpha Group cross appeal and a motion by 1235866 were all heard on February
17, 18 and 25, 2000. By judgement released June 1, 2000, the Court of Appeal,
while partially granting the TVX appeal, upheld the trial decision and rejected
the Alpha Group cross appeal. The Court also rejected the motion of 1235866 for
a new trial. As a result, TVX holds, as constructive trustee, a 12% carried
interest and a right to acquire 12% participating interest in the Hellenic gold
mines upon the payment of costs associated with that interest. The action by
1235866 against the Alpha Group continues. TVX and the Alpha Group have been
unable to agree on the definition and application of the 12% carried interest
and the right to acquire a 12% participating interest in the Hellenic gold mines
awarded to Alpha Group in the trial judgement. Accordingly, in June 2001, a new
action was commenced between the Alpha Group and TVX to clarify the award. TVX
anticipates that the hearing with respect to such matter may be held in 2005.
As a result of the settlement agreement the Company executed with the Greek
Government with respect to TVX Hellas S.A., the Alpha group has threatened
further litigation due to an alleged breach of the October 14, 1998 judgement in
the action noted above between the Alpha Group and TVX relating to the Hellenic
Gold mines. The Alpha Group has threatened to expand this claim to include a
claim against the Company for breach of fiduciary duty. In addition, 1235866 has
threatened further litigation for breach of fiduciary duty. The Company cannot
reasonably predict the outcome of this litigation and the threatened litigation
and the amount of loss cannot be reasonably estimated, therefore no loss
contingency has be recorded in the financial statements.
No pleadings have been exchanged with respect to these two threatened actions.
F-B94
Summa
In September 1992, Summa Corporation ("Summa") commenced a lawsuit against Echo
Bay Exploration Inc. and Echo Bay Management Corporation (together, the
"Subsidiaries"), 100% owned subsidiaries of Echo Bay, alleging improper
deductions in the calculation of royalties payable over several years of
production at McCoy/Cove and another mine, which is no longer in operation. The
assets and liabilities of the Subsidiaries are included under the heading
Corporate and other in the segmented information (see Note 19). The matter was
tried in the Nevada State Court in April 1997, with Summa claiming more than $13
million in damages, and, in September 1997, judgement was rendered for the
Subsidiaries. The decision was appealed by Summa to the Supreme Court of Nevada,
which in April 2000 reversed the decision of the trial court and remanded the
case back to the trial court for "a calculation of the appropriate royalties in
a manner not inconsistent with this order." The case was decided by a panel
comprised of three of the seven Justices of the Supreme Court of Nevada and the
Subsidiaries petitioned that panel for a rehearing. The petition was denied by
the three-member panel on May 15, 2000 and remanded to the lower court for
consideration of other defenses and arguments put forth by the Subsidiaries. The
Subsidiaries filed a petition for a hearing before the full Supreme Court and on
December 22, 2000, the Court recalled its previous decision. Both the
Subsidiaries and their counsel believe that grounds exist to modify or reverse
the decision. Echo Bay has $1.5 million accrued related to this litigation. If
the appellate reversal of the trial decision is maintained and the trial court,
on remand, were to dismiss all of the Subsidiaries' defenses, the royalty
calculation at McCoy/Cove would change and additional royalties would be
payable. Neither the Company, nor counsel to the Subsidiaries, believe it is
possible to quantify the precise amount of liability pursuant to a revised
royalty calculation.
Handy and Harman
On March 29, 2000, Handy & Harman Refining Group, Inc., which operated a
facility used by Echo Bay for the refinement of dore bars, filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. Echo Bay filed a claim for gold
and silver accounts at this refining facility with an estimated market value of
approximately $2.8 million at the time the shipments were made. $0.6 million of
this amount was on behalf of Case, Pomeroy & Company, Inc. ("Case Pomeroy"), who
owned a 25 percent interest in the Round Mountain mine at the time of the
bankruptcy filing. Echo Bay fully provided for its net claim of $2.2 million as
unrecoverable. Further, in March 2002, the liquidating trustee for Handy &
Harman commenced a series of adversary proceedings against numerous creditors,
including two of Echo Bay's subsidiaries, alleging that certain creditors
received preferential payments in metal or otherwise. The preferential payment
claims against the Echo Bay's subsidiaries approximated $9.0 million.
In October 2003, a settlement was reached between the liquidating trustee, Echo
Bay, Homestake Mining Company ("Homestake"), a subsidiary of Barrick Gold
Corporation ("Barrick") and Case Pomeroy. Under the terms of the settlement, the
liquidating agent received payments of $0.2 million from Homestake and $0.1
million from Echo Bay. The liquidating agent agreed to release the Company and
Barrick from any and all future claims. In addition, Echo Bay agreed to waive
the $2.8 million claim against the refinery and to pay $0.2 million to Case
Pomeroy in settlement of their share of its claim. This settlement was recorded
in 2003.
General
The Company is also involved in legal proceedings and claims arising 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
Kinross' financial position, results of operations or cash flows.
The Company settled various litigation and included in the statement of
operations was $0.3 million in 2003, $0.6 million in 2002 and $nil million in
2001.
Total accrued liabilities in relation to legal contingencies were $15.1 million,
$nil and $nil at December 31, 2003, 2002 and 2001, respectively.
Income taxes
The Company operates in numerous countries around the world and accordingly is
subject to, and pays annual income taxes under the various regimes in countries
in which it operates. These tax regimes are determined under general corporate
income tax laws of the country. The Company has historically filed, and
continues to file, all required income tax returns and to pay the taxes
reasonably determined to be due. The tax rules and regulations in many countries
are complex and subject to interpretation. From time to time the Company will
undergo a review of its historic tax returns and in connection with such
reviews, disputes can arise with the taxing authorities over the Company's
interpretation of the country's income tax rules. As at December 31, 2003 the
Company has the following disputes and has not accrued any additional tax
liabilities in relation to the disputes listed below:
F-B95
Russia
In July, 2003, the Company received notice that local taxation authorities in
Russia are seeking a reassessment of the tax paid relating to the Kubaka mine by
Omolon, the Company's 98.1% owned Russian Joint Stock Company in the amount of
$8.5 million, which included penalties and interest. The notice challenged
certain deductions taken by the Company and tax concessions relating to tax
returns filed by the Company in prior years. The Company appealed this notice of
reassessment and on January 27, 2004, the Magadan Arbitration court agreed with
the Company on three of the four major reassessment items. The impact of this
ruling reduced the liability to $3.9 million, which includes interest and
penalties. The Company will appeal the decision, but in the event the decision
of the appellant court is not ruled in the Company's favour, Omolon has enough
unutilized deductions to shelter the additional taxable income. The Company
believes that this reassessment will be resolved with no material adverse to the
Company's financial position, results of operations or cash flows. This
reassessment relates to the Kubaka business segment (see Note 19).
Chile
On September 27, 2001, the Company's 100% owned Chilean mining company, Compania
Minera Kinam Guanaco ("CMKG") received a tax reassessment from the Chilean IRS.
The assets of CMKG are included under the heading Corporate and other in the
segmented information (see Note 19). The reassessment, in the amount of $6.7
million, disallows certain deductions utilized by a third party. The third party
has indemnified the Company for up to $13.5 million in relation to this
reassessment. The Company appealed the reassessment and on January 12, 2004, the
Chilean IRS upheld the tax auditors position. The Company plans to appeal the
reassessment with the Chilean Tax Court. The Company believes this reassessment
will be resolved with no material adverse impact on to the Company's financial
position, results of operations or cash flows.
Brazil
The Company's 50% owned Brazilian mining company, Mineracao Serra Grande S.A.
which owns the Crixas mine received a tax reassessment in November 2003 from the
Brazilian IRS. The reassessment disallowed the claiming of certain sales tax
credits and assessed interest and penalties of which the Company's 50% share
totals $9.5 million. The Company and its joint venture partner believe that this
reassessment will be resolved without any material adverse affect on its
financial position, results of operations or cash flows. This reassessment
relates to the Crixas business segment (see Note 19).
Guarantee of third party contracts
Kinross has no third party contracts that qualify as a guarantee under AcG-14
(which become effective for financial periods ending on or after January 1,
2003) other than what has been disclosed under the Candelaria mine sale and the
Sleeper mine sale discussed above as at December 31, 2003 and 2002,
respectively.
Other commitments and contingencies
Financial assurance
As part of its ongoing business and operations, the Company and its affiliates
are required to provide financial assurance in the form of letters of credit for
environmental and site restoration costs, exploration permitting, workers
compensation and other general corporate purposes. As at December 31, 2003,
there were $118.2 million of letters of credit issued pursuant to the syndicated
credit facility further described in Note 11. The obligations associated with
these instruments are generally related to performance requirements that the
Company addresses through its operations including post closure site
restoration. Upon completion of the underlying performance requirement, the
beneficiary of the associated letter of credit cancels and returns the letter of
credit to the issuing entity. Some of the instruments associated with long-lived
assets will remain outstanding until closure. Generally, financial assurance
requirements associated with environmental regulations are becoming more
restrictive. In addition, the capacity of surety markets for performance bonds
have diminished. The Company has replaced all previously issued surety bonds
with letters of credit in 2003. The Company believes it is in compliance with
all applicable financial assurance requirements and will be able to satisfy all
future financial assurance requirements.
F-B96
Acquisition of Crown Resources Corporation
On November 20, 2003, the Company announced that it had executed a definitive
acquisition agreement with Crown Resources Corporation ("Crown") whereby it will
acquire Crown and its wholly owned Buckhorn gold deposit located in
north-central Washington State. The Company has agreed to issue approximately
13.6 million common shares in exchange for 100% of the issued and outstanding
common shares of Crown. A registration statement has been filed with the U.S.
Securities and Exchange Commission. Once effective, the shareholders of Crown
will vote on the transaction. This transaction is expected to close in 2004.
F-B97
Supplementary Information - Quarterly Data
(Expressed in millions of US dollars, except per share amounts) (unaudited)
====================================================================================================================================
March June September December
Quarter Quarter Quarter Quarter Full Year
Revenue and other income 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Mining revenue $117.0 $ 68.8 $157.8 $ 59.2 $ 153.8 $ 56.5 $143.3 $ 76.5 $ 571.9 $261.0
Interest and other income 1.0 1.2 1.8 6.5 2.4 6.0 7.1 3.2 12.3 16.9
Mark-to-market gain (loss) on call
options 2.1 (1.0) (0.9) (0.6) (0.9) (0.3) 0.1 (0.8) 0.4 (2.7)
------------------------------------------------------------------------------------------------------------------------------------
120.1 69.0 158.7 65.1 155.3 62.2 150.5 78.9 584.6 275.2
------------------------------------------------------------------------------------------------------------------------------------
Expenses
Operating 86.7 46.8 107.6 41.1 107.1 39.0 85.9 47.9 387.3 174.8
General and administrative 5.8 2.3 6.0 2.5 4.7 3.2 8.5 3.3 25.0 11.3
Exploration and business development 6.2 2.1 7.1 2.0 5.4 2.4 5.6 5.1 24.3 11.6
Depreciation, depletion and amortization 28.2 21.8 40.3 19.6 40.0 19.9 32.4 24.0 140.9 85.3
(Gain) loss on sale of assets (0.1) (0.3) 0.5 (1.2) (0.2) (0.5) (29.7) (0.7) (29.5) (2.7)
Loss on redemption of convertible
debentures - - - - 1.1 - - - 1.1 -
Foreign exchange loss (gain) 0.7 0.8 (1.0) 2.2 (0.5) - (2.5) 1.3 (3.3) 4.3
Interest expense on long-term liabilities 1.1 1.5 1.4 1.3 0.6 1.2 2.0 1.0 5.1 5.0
Asset write-downs and other non-cash
charges - - 0.1 - - - 9.8 7.9 9.9 7.9
------------------------------------------------------------------------------------------------------------------------------------
128.6 75.0 162.0 67.5 158.2 65.2 112.0 89.8 560.8 297.5
------------------------------------------------------------------------------------------------------------------------------------
(8.5) (6.0) (3.3) (2.4) (2.9) (3.0) 38.5 (10.9) 23.8 (22.3)
Provision for income and mining taxes (2.5) (1.4) (1.6) (1.6) (3.0) (1.7) (6.0) (1.8) (13.1) (6.5)
Minority interest - - (0.1) - - - (0.1) - (0.2) -
Share in earnings (loss) of associated
companies - 0.3 - (0.1) - (0.8) - - - (0.6)
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for the period before
dividends on convertible preferred
shares of subsidiary company (11.0) (7.1) (5.0) (4.1) (5.9) (5.5) 32.4 (12.7) 10.5 (29.4)
Dividends on convertible preferred
shares of subsidiary company (0.2) (0.8) (0.2) (0.2) (0.2) (0.3) (0.2) (0.2) (0.8) (1.5)
------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the period (11.2) (7.9) (5.2) (4.3) (6.1) (5.8) 32.2 (12.9) 9.7 (30.9)
Increase in equity component of
convertible debentures (2.1) (2.1) (2.2) (2.1) (2.2) (1.3) - (1.8) (6.5) (7.3)
Gain on redemption of convertible
debentures - - - - 16.5 - - - 16.5 -
------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) for the period
attributable to common shareholders $(13.3) $(10.0) $ (7.4) $ (6.4) $ 8.2 $ (7.1) $ 32.2 $(14.7) $ 19.7 $(38.2)
====================================================================================================================================
Earnings (loss) per share - Basic $(0.05) $(0.$9) $(0.02) $(0.05) $ 0.03 $(0.06) $ 0.09 $(0.12) $ 0.06 $(0.32)
Operating activities
Earnings (loss) for the period before
dividends on convertible preferred
shares of subsidiary company $(11.0) $ (7.1) $ (5.0) $ (4.1) $ (5.9) $ (5.5) $ 32.4 $(12.7) $ 10.5 $(29.4)
Items not affecting cash 30.6 20.9 43.4 19.5 40.2 18.6 15.7 30.5 129.9 89.5
------------------------------------------------------------------------------------------------------------------------------------
19.6 13.8 38.4 15.4 34.3 13.1 48.1 17.8 140.4 60.1
Site restoration cash expenditures (2.1) (1.1) (2.9) (1.5) (4.8) (2.4) (9.5) (4.8) (19.3) (9.8)
Changes in non-cash working capital items (0.8) 6.8 (16.3) (4.4) 8.2 6.4 (19.5) 0.4 (28.4) 9.2
------------------------------------------------------------------------------------------------------------------------------------
Cash flow provided from operating
activities 16.7 19.5 19.2 9.5 37.7 17.1 19.1 13.4 92.7 59.5
------------------------------------------------------------------------------------------------------------------------------------
Financing activities
Issuance of common shares, net 1.8 19.0 1.5 0.3 147.6 0.2 37.0 93.3 187.9 112.8
Redemption of convertible debentures - - - - (144.8) - - - (144.8) -
Acquisition of preferred shares of
subsidiary company - (11.1) - (0.3) (0.2) - (0.1) - (0.3) (11.4)
Repayment of debt, net (1.0) (10.5) (8.2) (1.7) (0.8) (0.2) (0.5) (16.1) (10.5) (28.5)
Reduction of debt component of
convertible debentures (1.4) (1.3) (1.4) (1.2) (1.4) (1.3) - (1.3) (4.2) (5.1)
------------------------------------------------------------------------------------------------------------------------------------
(0.6) (3.9) (8.1) (2.9) 0.4 (1.3) 36.4 75.9 28.1 67.8
------------------------------------------------------------------------------------------------------------------------------------
Investment activities
Additions to property, plant and
equipment (12.8) (3.1) (12.1) (6.1) (27.4) (8.9) (21.1) (4.5) (73.4) (22.6)
Business acquisitions, net of cash
acquired (81.4) - - - - - (0.5) (0.1) (81.9) (0.1)
Long-term investments and other assets (4.2) - (3.5) 1.9 1.0 0.2 63.9 (0.3) 57.2 1.8
Proceeds from the sale of property,
plant and equipment - 0.1 - - 0.2 0.5 5.7 0.7 5.9 1.3
Decrease (increase) in restricted cash 31.8 (4.0) 5.6 (0.4) - (17.1) 0.1 0.4 37.5 (21.1)
------------------------------------------------------------------------------------------------------------------------------------
(66.6) (7.0) (10.0) (4.6) (26.2) (25.3) 48.1 (3.8) (54.7) (40.4)
------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 2.3 0.4 1.5 1.6 4.3 0.4 1.0 0.6 9.1 3.0
------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
equivalents (48.2) 9.0 2.6 3.6 16.2 (9.1) 104.6 86.1 75.2 89.6
Cash and equivalents, beginning of year 170.6 81.0 122.4 90.0 125.0 93.6 141.2 84.5 170.6 81.0
------------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year $122.4 $ 90.0 $125.0 $ 93.6 $ 141.2 $ 84.5 $245.8 $170.6 $ 245.8 $170.6
====================================================================================================================================
F-B98
[LOGO] PRICEWATERHOUSECOOPERS
AUDITORS' REPORT PRICEWATERHOUSECOOPERS LLP
CHARTERED ACCOUNTANTS
PO Box 82
TO THE SHAREHOLDER OF Royal Trust Tower Suite 3000
TVX GOLD INC. Toronto Dominion Centre
Toronto Ontario
Canada M5K 1G8
Telephone +1 416 863 1133
Facsimile +1 416 365 8215
We have audited the consolidated balance sheets of TVX Gold Inc. as at December
31, 2002 and 2001 and the consolidated statements of operations, deficit and
cash flows for the years ended December 31, 2002, 2001 and 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with Canadian and United States generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of TVX Gold Inc. as at December 31,
2002 and 2001 and the results of its operations and its cash flows for the years
ended December 31, 2002, 2001 and 2000 in accordance with Canadian generally
accepted accounting principles.
CHARTERED ACCOUNTANTS
Toronto, Ontario
April 16, 2003, except for Note 19(c) which is as of April 28, 2003, and
Note 19(b) which is as of May 5, 2003
(C) 2003 PricewaterhouseCoopers LLP, Canada. "PricewaterhouseCoopers" refers to
PricewaterhouseCoopers LLP, Canada, an Ontario Limited liability partnership,
or, as the context requires, the network of member firms of
PricewaterhouseCoopers International Limited, each of which is a separate and
independent legal entity.
F-C1
TVX GOLD INC.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 2002 AND 2001
(thousands of United States dollars)
2002 2001
--------- ---------
$ $
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................... 115,212 16,568
Short-term investments...................................................... 1,531 28,740
Accounts receivable......................................................... 21,576 25,739
Inventories (note 3)........................................................ 16,439 24,299
--------- ---------
154,758 95,346
MINING PROPERTY, PLANT AND EQUIPMENT (note 4)............................... 201,830 237,262
RESTRICTED CASH AND CASH EQUIVALENTS (notes 7(d), 11(f) and 16(c)).......... 9,123 16,615
EXPORT PREPAYMENT CONTRACTS (note 5)........................................ -- 66,983
DEFERRED CHARGES (note 11(d))............................................... 6,579 182
DEFERRED INCOME TAXES (note 12(d)).......................................... 13,398 12,473
OTHER ASSETS (note 6)....................................................... 12,262 29,434
--------- ---------
397,950 458,295
========= =========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (notes 5 and 8(b)) ................ 30,354 28,266
Current portion of long-term debt (note 7).................................. 1,500 15,401
Current portion of deferred revenue (note 11(d)) ........................... 6,397 5,332
--------- ---------
38,251 48,999
LONG-TERM DEBT (note 7)..................................................... -- 58,832
OTHER LIABILITIES (note 8).................................................. 24,423 22,943
DEFERRED INCOME TAXES (note 12(d)).......................................... 20,395 20,948
--------- ---------
83,069 151,722
MINORITY INTERESTS AND PARTICIPATION RIGHTS................................. 124,157 132,088
--------- ---------
207,226 283,810
--------- ---------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (note 9)...................................................... 641,516 594,661
CONTRIBUTED SURPLUS (note 9(d))............................................. 36,255 36,255
DEFICIT..................................................................... (487,047) (456,431)
--------- ---------
190,724 174,485
--------- ---------
397,950 458,295
========= =========
COMMITMENTS AND CONTINGENCIES (notes 7(d) and 16)
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
On behalf of the Board: "Brian W. Penny" "Scott A. Caldwell"
Director Director
F-C2
TVX GOLD INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(thousands of United States dollars except for per share amounts)
2002 2001 2000
--------- --------- ---------
$ $ $
REVENUE....................................................................... 184,757 158,340 170,030
--------- --------- ---------
MINE OPERATING COSTS
Cost of sales................................................................. 121,310 108,148 106,804
Depletion and depreciation.................................................... 34,149 40,243 38,000
--------- --------- ---------
155,459 148,391 144,804
--------- --------- ---------
EARNINGS FROM OPERATIONS BEFORE THE UNDERNOTED................................ 29,298 9,949 25,226
OTHER EXPENSES (INCOME)
Mining property, plant and equipment write-downs (note 4)..................... 4,071 21,000 --
Non-operating asset write-downs (note 4)...................................... 15,000 223,513 --
Other asset write-downs (notes 3 and 6)....................................... 12,903 -- --
Corporate administration...................................................... 6,297 8,123 6,597
Interest expense.............................................................. 555 3,769 3,447
Exploration................................................................... 3,660 3,380 5,497
Transaction costs............................................................. 3,217 -- --
Foreign exchange loss......................................................... 7,345 3,293 2,015
Interest income............................................................... (4,273) (5,650) (9,503)
Other, net.................................................................... (3,118) (3,883) 5,420
--------- --------- ---------
45,657 253,545 13,473
--------- --------- ---------
EARNINGS (LOSS) BEFORE THE UNDERNOTED......................................... (16,359) (243,596) 11,753
INCOME TAX (RECOVERY) EXPENSE (note 12)....................................... 7,279 (5,634) (179)
MINORITY INTERESTS AND PARTICIPATION RIGHTS .................................. 6,978 (10,034) (496)
--------- --------- ---------
NET EARNINGS (LOSS) FOR THE YEAR.............................................. (30,616) (227,928) 12,428
========= ========= =========
EARNINGS (LOSS) PER SHARE (notes 2(c) and 9(c))............................... (0.75) (10.58) 0.03
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-C3
TVX GOLD INC.
CONSOLIDATED STATEMENTS OF DEFICIT
For the years ended December 31, 2002, 2001 and 2000
(thousands of United States dollars)
2002 2001 2000
--------- --------- ---------
$ $ $
Deficit, beginning of year-- as originally reported........................... (456,431) (221,837) (219,838)
Change in accounting for income taxes (note 2(d))............................. -- -- (2,102)
Deficit, beginning of year-- restated ........................................ (456,431) (221,837) (221,940)
Net earnings (loss) for the year.............................................. (30,616) (227,928) 12,428
Accretion of convertible notes (note 14)...................................... -- (6,666) (12,325)
Deficit, end of year.......................................................... (487,047) (456,431) (221,837)
========= ========= =========
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-C4
TVX GOLD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000
(thousands of United States dollars)
2002 2001 2000
--------- --------- ---------
$ $ $
OPERATING ACTIVITIES
Net earnings (loss) for the year.............................................. (30,616) (227,928) 12,428
Non-cash items:
Depletion and depreciation.................................................. 34,149 40,243 38,000
Gain on sale of other assets................................................ (1,675) -- --
Deferred income taxes....................................................... (1,469) (10,919) (4,022)
Mining property, plant and equipment write-downs............................ 4,071 21,000 --
Non-operating asset write-downs............................................. 15,000 223,513 --
Other asset write-downs..................................................... 12,903 -- --
Minority interests and participation rights................................. 6,978 (10,034) (496)
Change in reclamation provision............................................. -- (2,771) --
Other....................................................................... 3,218 1,006 326
Deferred revenue............................................................ (5,332) (4,608) (11,020)
Net proceeds from hedge book restructuring (note 11(e))..................... -- 16,801 --
--------- --------- ---------
37,227 46,303 35,216
--------- --------- ---------
Changes in non-cash working capital (note 17(e)).............................. 7,179 (520) (2,659)
--------- --------- ---------
Cash provided by operating activities......................................... 44,406 45,783 32,557
--------- --------- ---------
INVESTING ACTIVITIES
Mining property, plant and equipment.......................................... (15,166) (25,552) (48,746)
Payment of receivable from High River Gold Mines Ltd (note 6)................. 3,319 3,014 1,541
Purchases of short-term investments........................................... (30,279) (51,931) (130,562)
Sales and maturities of short-term investments................................ 57,488 81,152 136,612
Export prepayment contracts (note 5).......................................... -- (24,500) (42,483)
Proceeds from sale of other assets............................................ 4,495 -- --
Decrease (increase) in restricted cash and cash equivalents................... 7,492 1,255 (9,770)
Other......................................................................... 693 (1,495) (2,569)
--------- --------- ---------
Cash (used for) provided by investing activities.............................. 28,042 (18,057) (95,977)
--------- --------- ---------
Financing activities
Long-term debt borrowings..................................................... -- 26,944 45,133
Long-term debt repayments..................................................... (5,750) (26,470) (25,622)
Debenture payable (note 13)................................................... -- (26,855) 26,855
Minority interest dividends................................................... (14,909) (22,666) (15,963)
Gold linked convertible notes................................................. -- (9,173) (10,501)
Contributed surplus........................................................... -- (1,595) --
Common shares................................................................. 46,855 (639) (626)
--------- --------- ---------
Cash (used for) provided by financing activities.............................. 26,196 (60,454) 19,276
--------- --------- ---------
(Decrease) increase in cash and cash equivalents.............................. 98,644 (32,728) (44,144)
Cash and cash equivalents, beginning of year.................................. 16,568 49,296 93,440
--------- --------- ---------
Cash and cash equivalents, end of year........................................ 115,212 16,568 49,296
========= ========= =========
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-C5
TVX GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands of U.S. dollars, except
amounts per share and per ounce or unless otherwise noted
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada which, in the
Company's case, conform with accounting principles generally accepted in
the United States ("US"), except as disclosed in note 17. The significant
accounting policies followed by the Company and its incorporated and
unincorporated joint ventures are summarized as follows:
a) BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of the
Company and its subsidiaries. Investments in incorporated and
unincorporated joint ventures are accounted for by the proportionate
consolidation method as substantially all of the Company's business is
conducted through joint ventures.
b) USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant estimates are related
to the physical and economic lives and the recoverability of mining
assets, mineral reserves, site restoration and related obligations,
commodity contracts and financial instruments and income taxes. Actual
results could differ from those estimates.
c) TRANSLATION OF FOREIGN CURRENCIES
The accounts of the Canadian operations and operations in foreign
countries have been translated using the temporal method for foreign
integrated operations. The functional currency of the Company is US
dollars, as the Company considers the US dollar to be the principal
currency of its operations. Under the temporal method, monetary assets
and liabilities have been translated at the end of year exchange rates.
Non-monetary assets, which primarily comprise mining property, plant and
equipment, have been translated using historic rates of exchange.
Revenues and expenses have been translated at the average rates of
exchange during the years, except for depletion and depreciation, which
have been translated at the same rates as the related assets. Foreign
exchange gains and losses on translation are included in the
determination of earnings.
d) COMMODITY CONTRACTS AND FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses agreements with
financial institutions, principally derivatives, to hedge its exposure to
fluctuations in metal prices, foreign exchange rates and interest rates.
The intent is to protect the Company against downside price risk on
future metal sales and cash flow risk on interest rates and foreign
exchange.
The Company mitigates the counterparty credit risk exposure arising from
these agreements by transacting with what it believes are financially
sound institutions. Some derivative instruments entered into by the
Company are subject to margin requirements, beyond varying threshold
limits, in the event that values of the hedged instruments significantly
change.
Commodity derivative hedging transactions include forward sales and
options contracts. Realized gains and losses, as well as premiums, are
recognized in revenue as the designated production is delivered. If
contracts are amended or closed out before the planned delivery of the
designated production, recognition of any gains or losses is deferred
until their original designation period. Commodity commitments not
designated as hedges are marked to market and the resultant gains or
losses are recorded in earnings in the period.
The Company has periodically entered into lease rate swap agreements in
conjunction with commodity contracts. Obligations under lease rate swap
agreements, entered into expressly to finance options purchased, are
marked to market at the balance sheet date and the resulting gains or
losses are deferred until the related production is delivered.
The Company has periodically entered into foreign exchange contracts to
hedge the effect of exchange rates on a portion of its future currency
requirements. Gains and losses are recognized and reported as a component
of the related transactions.
The carrying amount of cash and cash equivalents, short-term investments,
accounts receivable, restricted cash, export prepayment contracts,
accounts payable and accrued liabilities and current and long-term debt
approximates their fair value unless otherwise specified.
e) REVENUE RECOGNITION
Revenue from the sale of bullion and base metal concentrates is
recognized when title passes to the purchaser.
F-C6
f) INVENTORIES
Gold and silver bullion inventories, dore, base metal concentrates,
work-in-process and ore stockpiles are carried at the lower of average
production cost and net realizable value. Materials and supplies
inventories are stated at the lower of cost and replacement value.
g) MINING PROPERTY, PLANT AND EQUIPMENT
Mining property, plant and equipment is recorded at cost including costs
associated with acquisition and further development, including costs
incurred to access ore, of mining properties. Mine development costs
include costs incurred to expand reserves in existing ore bodies at
development properties or operating mines. Depletable assets are
amortized over the life of the mine on a unit-of-production basis. The
current estimated gold mine lives range from 4 to 17 years with the
average being 8 years. Depreciable assets are also amortized over the
life of the mine on a unit-of-production basis except where the useful
life of a depreciable asset is less than the life of the mine, in which
case depreciation is recorded on a straight-line basis over its useful
life. Amortization on a unit-of-production basis is calculated using only
proven and probable reserves.
The Company carries out an impairment evaluation when conditions or
events occur suggesting that an asset has been impaired. Mining assets
are evaluated by comparing the undiscounted future net cash flows against
their current carrying value. When the cash flows demonstrate an
impairment, the Company will write down its value. Operational
considerations include projected operating cost structures, future
capital requirements, including mine closure costs, and estimates of mine
life based on known reserves. Metal prices utilized for the 2002
evaluation were $300 per ounce (2001 -- $300; 2000 -- $300) for gold and
$4.75 per ounce (2001 -- $4.50; 2000 -- $5.50) for silver. Lead prices
utilized for the 2001 and 2000 evaluations were $475 per tonne and $550
per tonne respectively and zinc prices utilized for the 2001 and 2000
evaluations were $775 per tonne and $1,200 per tonne, respectively. No
lead or zinc prices were required for the 2002 evaluations.
h) EXPLORATION
Exploration expenditures, excluding property acquisition costs, are
charged to earnings as incurred. When it has been established that a
mining property has development potential, further costs incurred prior
to the start of mining operations, are recorded as deferred development
costs and amortized in accordance with the policies described under note
1(g). The development potential of mining properties is established by
the existence of proven and probable reserves, reasonable assurance that
the property can be permitted as an operating mine and evidence that
there are no metallurgical or other impediments to the production of
saleable metals.
i) RECLAMATION COSTS
Expenditures relating to ongoing environmental and reclamation programs
are charged against earnings as incurred or capitalized and amortized
depending on their future economic benefit. Estimated future reclamation
costs, including site restoration, where reasonably determinable are
charged against earnings over the estimated useful life of the mine based
on proven and probable reserves. These estimates are based on current
standards or higher. These standards are subject to future legislative
changes which will be reflected in the estimates when passed.
j) FINANCING COSTS
Debt issue costs are deferred and amortized over the term of the debt.
Interest and debt issue costs, whether incurred directly or indirectly,
are capitalized when they arise from indebtedness incurred to finance
development activities on mining properties and are amortized to earnings
when production commences.
k) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term money market instruments
which, on acquisition, have a term to maturity of three months or less.
Short-term investments represent short-term money market instruments with
maturities, on acquisition, greater than three months and less than one
year.
l) STOCK-BASED COMPENSATION PLAN (NOTE 2(A))
The Company has a stock-based compensation plan which is described in
note 10. No compensation expense is recognized under the plan when stock
or stock options are issued under the plan to directors, officers and
employees. The fair value of options issued to consultants is recognized
as an expense at the date of issue. Consideration received on exercise of
stock options is credited to share capital.
2. CHANGES IN ACCOUNTING POLICIES
a) Effective January 1, 2002, the Company adopted a new accounting
standard issued by the Canadian Institute of Chartered Accountants
("CICA") relating to stock-based compensation and other stock-based
payments. This new standard requires either the recognition of
compensation expense for grants of stock, stock options and other equity
instruments to employees, or, alternatively, the disclosure of pro forma
net earnings and net earnings per share data as if stock-based
compensation had been recognized in earnings. The Company has elected to
disclose pro forma net earnings and earnings per share data for options
granted after January 1, 2002. Therefore, there is no effect of adopting
this standard on the Company's results of operations and financial
position.
b) Effective January 1, 2002, the Company adopted retroactively a new
CICA accounting standard in respect of foreign currency translation that
eliminates the deferral and amortization of currency translation
adjustments related to long-term monetary items with a fixed and
ascertainable life. There is no impact on the Company's results of
operations and financial position as a result of adoption of this new
standard.
F-C7
c) Effective January 1, 2001, the Company adopted, retroactively, a new
accounting standard issued by the CICA relating to earnings per share.
This standard modifies the method of calculating fully diluted earnings
per share. Diluted earnings per share was unchanged as a result of
adopting the new standard.
d) In December 1997, the CICA issued Handbook section 3465, Income Taxes,
which was effective January 1, 2000. The standard required a change from
the deferral method of accounting to the asset and liability method of
accounting for income taxes. Under the asset and liability method, future
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Future tax assets and liabilities are measured using enacted or
substantively enacted tax rates expected to apply when the asset is
realized or the liability settled. The effect on future tax assets and
liabilities of a change in tax rates is recognized in income in the
period that substantive enactment or enactment occurs.
The deficit as at January 1, 2000 was increased by $2,102 and earnings
for the year ended December 31, 2000 increased by $3,232 as a result of
this change.
3. INVENTORIES
DECEMBER 31,
-------------------
2002 2001
-------- --------
$ $
Bullion and dore......................................................... 3,345 3,294
Base metal concentrates (a).............................................. -- 4,199
Work-in-process.......................................................... 2,461 2,257
Ore stockpiles-- precious metals......................................... 1,649 2,693
Materials and supplies (a)............................................... 8,984 11,856
-------- --------
16,439 24,299
======== ========
a) Base metal concentrates of $2,299 and warehouse inventory of
$2,119, relating to the Stratoni mine, were written off at
December 31, 2002.
4. MINING PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
----------------------
2002 2001
--------- ---------
$ $
Producing properties
Mining property and deferred development............................... 336,465 339,214
Accumulated depletion.................................................. (240,226) (226,528)
--------- ---------
96,239 112,686
--------- ---------
Mine plant and equipment............................................... 271,323 265,562
--------- ---------
Accumulated depreciation............................................... (167,837) (158,965)
--------- ---------
103,486 106,597
--------- ---------
Equipment under capital lease.......................................... 4,943 4,943
Accumulated depreciation............................................... (2,838) (1,964)
--------- ---------
2,105 2,979
--------- ---------
201,830 222,262
--------- ---------
Development properties
Greek development projects............................................. -- 15,000
--------- ---------
Total mining property, plant and equipment............................... 201,830 237,262
========= =========
The Company wrote down the carrying value of certain assets as follows:
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
2002 2001 2000
---- ---- ----
Reduction in carrying value of La Coipa Mine............................ -- 13,000 --
Reduction in carrying value of New Britannia Mine....................... -- 8,000 --
Write-off of carrying value of Stratoni Mine ........................... 4,071 -- --
------ ------- -------
Mining property, plant and equipment write-downs........................ 4,071 21,000 --
====== ======= =======
Write-off of and reduction in carrying value of Skouries development
project............................................................... 15,000 25,000
Write-off of carrying value of Olympias development project
(note 16(b)).......................................................... -- 198,513 --
------ ------- -------
Non-operating asset write-downs......................................... 15,000 223,513 --
====== ======= =======
Interest capitalized to the Greek development projects during 2002 is
$nil (2001 -- $671; 2000 -- $1,996).
5. EXPORT PREPAYMENT CONTRACTS
A Brazilian Central Bank program enables exporters to borrow US dollars
which are then immediately reinvested at rates in excess of those on the
loans.
F-C8
The Company's Brasilia joint venture participates in this program and
entered into contracts during 2000 and 2001 that were immediately
assigned to a Brazilian bank holding the amounts put on deposit. The
amounts on deposit were referred to as export prepayment contracts on the
balance sheet. The joint venture received a premium instead of a higher
interest rate on the amounts on deposit. Under the terms of the related
contracts, the bank would make all repayments of principal and interest
on the export loans as they become due.
The joint venture received a premium of $1,866 in 2001 and $1,782 in
2000. The premiums are included in accounts payable and recognized over
the term of the corresponding commitment to conduct export activities.
The premiums included in accounts payable total $1,817 as at December 31,
2002 (2001 -- $2,540).
During 2002, under an Amended and Restated Debt Assumption Agreement,
long-term debt in an amount of $66,983 was legally extinguished.
Consequently, the debt and the related export prepayment contract
balances were removed from the consolidated balance sheet in a non-cash
transaction (note 7).
6. OTHER ASSETS
DECEMBER 31,
-------------------
2002 2001
------- -------
$ $
Receivable from High River Gold Mines Ltd.(a)................... 9,790 14,867
Pyrite concentrates (b)......................................... -- 8,485
Other........................................................... 2,472 6,082
------- -------
12,262 29,434
======= =======
a) The receivable from High River Gold Mines Ltd., a joint venture
partner in the New Britannia Mine, bears interest at prime plus 0.625%
and is repayable from their share of cash flow from the New Britannia
Mine.
b) Pyrite concentrates were written off at December 31, 2002.
7. LONG-TERM DEBT
DECEMBER 31,
--------------------
2002 2001
------- -------
$ $
Crixas export loans (a)......................................... 1,500 7,250
Brasilia export loans (b)....................................... -- 66,983
------- -------
Total debt...................................................... 1,500 74,233
Less: Current portion........................................... (1,500) (15,401)
------- -------
Long-term debt.................................................. -- 58,832
======= =======
a) The Crixas mine received advances against future export
commitments. These loans are denominated in US dollars and bear interest
at a rate of 2.7%.
b) The Brasilia loan balance had corresponding deposits to match all
maturities which were included in export prepayment contracts in 2001.
During 2002, under an Amended and Restated Debt Assumption Agreement,
long-term debt in an amount of $66,983 was legally extinguished (note 5).
c) The Company has an unutilized $2.0 million revolving line of
credit with Normandy Finance Limited. Amounts drawn on this facility are
subject to interest at LIBOR plus 2.35% and are collateralized. This
revolving line of credit was terminated in 2003.
d) Letters of credit have been issued against reclamation costs at
the Mineral Hill mine which was closed in 1996. Cash in an amount of $8.6
million is pledged against these letters of credit at December 31, 2002
(2001 -- $8.6 million).
An additional $0.9 million of letters of credit have been issued relating
to the Musselwhite mine (2001 -- $0.9 million)
See also note 16(c) regarding Hellenic Gold commitments.
e) Interest paid during 2002 amounted to $555 (2001 -- $13,615; 2000
-- $18,170).
8. OTHER LIABILITIES
DECEMBER 31,
----------------------
2002 2001
--------- ---------
$ $
Closure provisions-- operating properties (a)............................ 23,554 19,742
Closure provisions-- non-operating properties (b)........................ -- 1,000
Capital lease (c)........................................................ 826 1,901
Other.................................................................... 43 300
--------- ---------
24,423 22,943
========= =========
F-C9
a) Included in closure provisions -- operating properties is $9,466
(2001 -- $6,960) relating to the Stratoni mine.
b) An additional $2.1 million (2001 -- $2.9 million) of accrued
reclamation costs, relating to the current portion of the reclamation
accrual for the Mineral Hill mine, are included in accounts payable at
December 31, 2002.
c) The total remaining capital lease obligation of $1,896 bears
interest at 90 day LIBOR plus 1.5%. Future minimum lease payments are as
follows:
$
-------
2003.......................................................... 1,131
2004.......................................................... 848
-------
1,979
Less: Interest................................................ (83)
-------
1,896
Less Current portion..........................................(1,070)
-------
826
=======
9. CAPITAL STOCK
a) Authorized
Unlimited number of common shares without par value.
b) Issued
The Company's issued and outstanding common shares are as follows:
NUMBER OF
SHARES $
----------- ---------
Outstanding as at December 31, 1999..................................... 3,592,322 385,052
Shares repurchased and cancelled........................................ (20,080) (2,152)
Fractional shares redeemed.............................................. (7) --
----------- ---------
Outstanding as at December 31, 2000..................................... 3,572,235 382,900
Shares issued on conversion of the Notes (note 14)...................... 32,150,118 211,761
----------- ---------
Outstanding as at December 31, 2001..................................... 35,722,353 594,661
Shares issued for cash ................................................. 7,422,655 46,855
----------- ---------
Outstanding as at December 31, 2002..................................... 43,145,008 641,516
=========== =========
Under a special resolution of the shareholders of the Company on June 27,
2000, the shareholders authorized the consolidation of share capital on a
five for one basis. Effective June 30, 2002, the Company further
consolidated its common shares on a ten for one basis. All share capital,
share and option data in the consolidated financial statements have been
retroactively restated to reflect the share consolidations.
c) The earnings (loss) per share has been calculated using the
weighted average number of shares outstanding during the year of
41,031,231 shares (2001 -- 18,898,593; 2000 -- 3,581,370). For purposes
of the calculation, the loss is adjusted for charges related to the Notes
totaling $nil (2001 -- $6,666; 2000 -- $12,325) and the increase in
contributed surplus resulting from the settlement of the Notes (note 14).
Diluted earnings (loss) per share has not been presented as it would not
be dilutive. Diluted earnings (loss) per share would reflect the maximum
possible dilution from the potential conversion of stock options.
2002 2001 2000
------------ ------------ ----------
$ $ $
Basic earnings (loss) per share
Net earnings (loss).......................................... (30,616) (227,928) 12,428
Interest accretion on the Notes.............................. -- (6,666) (12,325)
Increase from the settlement of the Notes.................... -- 34,729 --
Net earnings (loss) applicable to common shares.............. (30,616) (199,865) 103
=========== =========== ==========
Weighted average common shares outstanding................... 41,031,231 18,898,593 3,581,370
=========== =========== ==========
Basic earnings (loss) per common share....................... (0.75) (10.58) 0.03
=========== =========== ==========
d) During 2000, under the terms of a normal course issuer bid, the
Company repurchased 20,080 common shares at an average cost of CAN $46.00
per share. These transactions resulted in contributed surplus of $1,526.
The restructuring of the Notes during 2001 (note 14) resulted in
additional contributed surplus of $34,729 in 2001.
e) The Company has issued 8,000 warrants outstanding to purchase
common shares at CAN $66.50 per share expiring August 11, 2003.
10. STOCK-BASED COMPENSATION PLAN
The Company has granted common share options to certain directors,
officers, employees and consultants to attract and retain key personnel.
Under the Company's 1994 Stock Option Plan, as amended, up to 3.5 million
common share options for terms up to ten years at a price no lower than
the
F-C10
market price at the time of the grant are available to certain directors,
officers, employees and consultants. The total number of shares which may
be purchased under any options granted to insiders of the Company under
the Stock Option Plan shall be less than a majority of the total number
of shares available for issuance under the Stock Option Plan.
At the time of the grant, vesting is at the discretion of the Board of
Directors. In the event of a fundamental change in the ownership and/or
capital structure of the Company, all options outstanding will
automatically vest and become fully exercisable and the options will
continue until the end of the expiry period. All outstanding options
vested upon completion of the business combination (note 19(a)). All
options granted have five-year terms.
A summary of the status of the stock option plan as at December 31, 2002,
2001 and 2000 and changes during the years ending on those dates,
reflecting the share consolidations referred to in note 9(b) is as
follows:
2002 2001 2000
-------------------- ------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- ----------- -------- ---------- -------- ----------
(000S) CAN$ (000S) CAN$ (000S) CAN$
Outstanding at beginning of year............... 1,242 30.10 267 155.50 328 191.00
Granted........................................ -- -- 1,016 8.50 -- --
Exercised...................................... (273) 8.50 -- -- -- --
Expired........................................ (62) 163.21 (41) 204.70 (61) 346.10
---- ------ ----- ------ ---- -------
Outstanding at end of year................... 907 27.46 1,242 30.10 267 155.50
==== ====== ===== ====== ==== =======
Options exercisable at year end.............. 257 75.43 546 57.20 198 175.00
==== ====== ===== ====== ==== =======
The following table summarizes information on stock options outstanding
at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES CAN$ 2002 LIFE YEARS PRICE 2002 PRICE
----------------------------------------------- -------------- ----------- ---------- -------------- ----------
(000s) CAN$ (000s) CAN$
194.00-- 229.50................................ 20 0.17 201.30 20 201.30
138.00-- 162.50................................ 41 0.61 162.00 41 162.00
66.50-- 99.50................................ 122 1.61 66.50 122 66.50
8.50-- 12.50................................ 724 3.70 8.50 74 8.50
8.50-- 229.50................................ 907 3.20 27.46 257 75.43
11. COMMODITY CONTRACTS AND FINANCIAL INSTRUMENTS
The Company's consolidated precious metals hedging program and deferred
revenue as at December 31, 2002 are presented below:
a) Gold
PUTS BOUGHT
-----------------
OUNCES $/OZ
-------- -------
2003................................................... 150,000 260
2004................................................... 150,000 250
2005................................................... 150,000 250
2006................................................... 150,000 250
--------
600,000 253
========
The fair value of the gold put option contracts at December 31, 2002 was
$845.
b) Silver
CALLS SOLD
-----------------
OUNCES $/OZ
--------- ------
2003................................................... 2,000,000 6.00
---------
2,000,000 6.00
=========
The silver calls sold are not considered to be a hedge and have been
marked to market at December 31, 2002.
c) As at December 31, 2002, a joint venture of TVX had currency
contracts outstanding up to May 2003 to fix the US dollar amount
for 14.9 million Brazilian Reals at exchange rates prevailing at
the inception of the contracts. These contract rates range from
2.3568 to 3.7535. The contracts have been marked to market as at
December 31, 2002, and are included in short-term investments.
F-C11
d) Deferred revenue and deferred charges comprise net premiums on
open calls and put options as well as realized gains and losses on
hedging transactions. Deferred revenue will be recognized as the
originally designated hedged production is delivered, and
reflected in earnings as follows:
DEFERRED DEFERRED NET
REVENUE CHARGES TOTAL
------- ------- -------
$ $ $
2003........................................................ 9,894 (3,497) 6,397
2004........................................................ 9,873 (8,073) 1,800
2005........................................................ 6,416 (8,819) (2,403)
2006........................................................ 5,624 (8,793) (3,169)
2007........................................................ -- (2,807) (2,807)
------ ------- -------
31,807 (31,989) (182)
====== ======= =======
Current portion of deferred revenue......................... (6,397)
-------
Deferred charges............................................ 6,579
=======
e) In August 2001, the Company restructured its gold hedging program
to replace 390,000 ounces of $360 put options financed by lease rate
swaps with 550,000 ounces of $250 put options maturing from 2003 to 2006.
The lease rate swaps were repaid. In addition, the 129,600 ounces of $280
per ounce put options previously financed by lease rate swaps were
restructured to be puts. The effect of the restructuring was to reduce
total debt by $17,626 and increase deferred revenue by $14,829. The total
net cash cost of the restructuring was $825.
The net gain of $3,658 resulting from the restructuring has been deferred
to be recognized over the period of the originally designated production
ending in 2006.
f) Certain commodity contracts entered into by the Company require a
deposit with an intermediary to cover margin calls. This amount
fluctuates with spot gold and silver prices and at December 31, 2002
amounted to $523 (2001 -- $515) which is included in restricted cash.
12. INCOME TAXES
a) Details of income tax (recovery) expense for the years ended
December 31 are as follows:
2002 2001 2000
------ ------- ------
$ $ $
Income taxes
Current
Foreign.............................................. 8,416 4,863 3,680
Canada............................................... 332 422 163
------ ------- ------
8,748 5,285 3,843
------ ------- ------
Deferred
Foreign.............................................. (545) (7,559) (3,282)
Canada............................................... (924) (3,360) (740)
------ ------- ------
(1,469) (10,919) (4,022)
------ ------- ------
7,279 (5,634) (179)
====== ======= ======
Income taxes paid during 2002 amounted to $8,748 (2001 -- $5,285; 2000 --
$3,843).
b) The reconciliation of the combined Canadian federal and provincial
statutory income tax rates to the effective tax rate on earnings for the
years ended December 31 is as follows:
2002 2001 2000
---- ---- ----
% % %
Combined Canadian federal and provincial statutory income tax rate....... 38.6 41.7 44.0
Impact of change in future tax rates..................................... 3.0 (1.0) 2.5
Non-temporary differences................................................ (4.5) 0.4 3.3
Tax rates of other jurisdictions......................................... 1.3 (0.5) --
Unrecorded (realized) benefit of tax losses.............................. (82.9) (38.3) (51.3)
----- ----- -----
Effective tax rate..................................................... (44.5) 2.3 (1.5)
===== ===== =====
The combined Canadian federal and provincial statutory income tax rate
includes the weighted average of Canadian provincial income tax rates,
including surtaxes.
Cumulative withholding taxes of $8,559 (2001 -- $8,559) have been
provided on unremitted foreign earnings.
F-C12
c) The Company has unutilized tax deductions in Canada totaling
approximately $22,300 (2001 -- $26,700) which are available to be applied
against future taxable income. There has been no recognition in the
financial statements for these tax deductions. Of this amount, $10,100
will expire in 2008, $3,700 will expire in 2009 and the remainder is not
subject to expiry.
d) Deferred income taxes are provided as a result of temporary
differences that arise due to differences between the tax values and
carrying amount of assets and liabilities. The sources of temporary
differences and the related tax amounts are as follows:
DECEMBER 31,
---------------------
2002 2001
------- --------
Assets $ $
Depletion and amortization................................................. 2,978 307
Deferred mining costs..................................................... 14,687 16,680
Reclamation .............................................................. 467 344
Net operating losses...................................................... 17,153 22,055
Other..................................................................... 6,003 6,179
------- -------
Gross future tax assets................................................... 41,288 45,565
Valuation allowance....................................................... (27,890) (33,092)
------- -------
Net future tax assets..................................................... 13,398 12,473
======= =======
Liabilities
Depletion and amortization................................................ (2,698) (3,962)
Deferred mining costs .................................................... (11,685) (11,962)
Other, including accrued withholding taxes................................ (6,012) (5,024)
------- -------
Future tax liabilities.................................................... (20,395) (20,948)
======= =======
13. DEBENTURE PAYABLE
A Brazilian subsidiary of the Company issued a short-term debenture in
December 2000 in the amount of $26,855. The debenture bore interest at
7.88% and was repaid on June 25, 2001.
14. GOLD LINKED CONVERTIBLE NOTES
On March 14, 1997, the Company issued $250 million of subordinated
unsecured convertible notes ("Notes"). The Notes bore interest at 5% per
annum which was payable semi-annually. The original maturity date of the
Notes was March 28, 2002.
On July 10, 2001, the Company completed the conversion of the Notes into
32,150,118 common shares of the Company. The effect of the conversion was
to increase capital stock by $211,761, increase contributed surplus by
$34,729, reduce the current portion of long-term debt by $8,403, reduce
deferred charges by $2,539 and reduce the equity component of gold linked
convertible notes by $240,626. No gain or loss was recognized on the
consolidated statement of operations.
The Notes were accounted for in accordance with CICA Section 3860 whereby
debt securities which have interest payable in cash and give the issuer
the right to settle the principal amount in common shares are split into
a liability and an equity component. The liability component of the debt
was calculated as the present value of the interest payments discounted
at a rate estimated to be equivalent to a similar non-convertible debt.
The net proceeds received from the issuance of the Notes, less the
liability component, were classified as equity.
The liability component was reduced by semi-annual interest payments, net
of changes in the present value of the liability component which were
charged to earnings. The equity component was increased over time by
charges to deficit for interest accretion and amortization of issuance
costs so that at maturity, it would be equal to the face value of the
Notes.
During the year ended December 31, 2002, the charges to deficit were $nil
(2001 -- $6,666; 2000 -- $12,325).
F-C13
15. SEGMENTED INFORMATION
The Company's industry segments are concentrated in the development and
mining of precious metals in North and South America and in Europe. Gold
and silver are currently the primary commodities produced. Details of the
Company's financial information segmented operationally are as follows:
FOR THE YEAR ENDED DECEMBER 31, 2002
-------------------------------------------------------------------------------------------------
MUSSEL- NEW STRATONI
LA COIPA BRASILIA CRIXAS WHITE BRITANNIA OPERATIONS GREECE CORPORATE/
(CHILE) (BRAZIL) (BRAZIL) (CANADA) (CANADA) (GREECE) DEVELOPMENT OTHER TOTAL
------- -------- -------- -------- -------- -------- ----------- ----- -----
$ $ $ $ $ $ $ $ $
Revenue..................... 46,252 33,546 30,020 21,384 17,126 31,007 -- 5,422 184,757
------ ------ ------ ------ ------ ------ ------- ------- -------
Cost of sales............... 33,621 18,110 8,417 15,485 11,117 34,560 -- -- 121,310
Depletion and depreciation.. 12,672 5,447 4,788 4,851 3,343 2,536 -- 512 34,149
------ ------ ------ ------ ------ ------ ------- ------- -------
46,293 23,557 13,205 20,336 14,460 37,096 -- 512 155,459
------ ------ ------ ------ ------ ------ ------- ------- -------
Earnings (loss) from
operations before the
undernoted............... (41) 9,989 16,815 1,048 2,666 (6,089) -- 4,910 29,298
Mining property, plant and
equipment write-downs... -- -- -- -- -- 4,071 -- -- 4,071
Non-operating asset
write-downs............... -- -- -- -- -- -- 15,000 -- 15,000
Other asset write-downs..... -- -- -- -- -- 4,418 8,485 -- 12,903
Corporate administration.... -- -- -- -- -- -- -- 6,297 6,297
Interest expense............ 176 76 211 -- -- -- -- 92 555
Exploration................. 691 -- 484 779 1,053 -- -- 653 3,660
Transaction costs........... -- -- -- -- -- -- -- 3,217 3,217
Foreign exchange loss....... (238) 4,254 541 445 (27) 707 -- 1,663 7,345
Interest income............. (35) (1,800) (683) (36) -- -- -- (1,719) (4,273)
Other....................... (195) (15) 120 32 -- -- -- (3,060) (3,118)
------ ------ ------ ------ ------ ------- ------- ------- -------
399 2,515 673 1,220 1,026 9,196 23,485 7,143 45,657
------ ------ ------ ------ ------ ------- ------- ------- -------
Earnings (loss) before the
undernoted................ (440) 7,474 16,142 (172) 1,640 (15,285) (23,485) (2,233) (16,359)
Income taxes................ 757 844 1,553 -- -- -- -- 4,125 7,279
Minority interests and
participation rights...... (599) 3,315 7,295 (86) 820 -- -- (3,767) 6,978
------ ------ ------ ------ ------ ------- ------- ------- -------
Net earnings (loss)......... (598) 3,315 7,294 (86) 820 (15,285) (23,485) (2,591) (30,616)
====== ====== ====== ====== ====== ======= ======= ======= =======
Cash and cash equivalents... 1,713 2,675 5,246 -- 104 399 -- 105,075 115,212
Capital expenditures........ 836 2,696 1,819 3,656 1,637 1,996 -- 2,526 15,166
Mining property, plant and
equipment................. 62,437 62,206 23,623 45,497 7,927 -- -- 140 201,830
Total assets................ 72,210 78,696 34,633 49,930 10,762 4,158 -- 147,561 397,950
F-C14
FOR THE YEAR ENDED DECEMBER 31, 2001
-------------------------------------------------------------------------------------------------
MUSSEL- NEW STRATONI
LA COIPA BRASILIA CRIXAS WHITE BRITANNIA OPERATIONS GREECE CORPORATE/
(CHILE) (BRAZIL) (BRAZIL) (CANADA) (CANADA) (GREECE) DEVELOPMENT OTHER TOTAL
------- -------- -------- -------- -------- -------- ----------- ----- -----
$ $ $ $ $ $ $ $ $
Revenue...................... 41,404 25,386 26,699 20,122 15,289 24,160 -- 5,280 158,340
------ ------ ------ ------ ------ ------- ------- ------- -------
Cost of sales................ 32,128 17,953 10,719 14,281 10,537 22,530 -- -- 108,148
Depletion and depreciation... 16,260 5,091 5,007 5,904 5,916 1,871 -- 194 40,243
------ ------ ------ ------ ------ ------- ------- ------- -------
48,388 23,044 15,726 20,185 16,453 24,401 -- 194 148,391
------ ------ ------ ------ ------ ------- ------- ------- -------
Earnings (loss) from
operations before the
undernoted................. (6,984) 2,342 10,973 (63) (1,164) (241) -- 5,086 9,949
Mining property, plant and
equipment write-downs...... 13,000 -- -- -- 8,000 -- -- -- 21,000
Non-operating asset
write-downs................ -- -- -- -- -- -- 223,513 -- 223,513
Other asset write-downs...... -- -- -- -- -- -- -- -- --
Corporate administration..... -- -- -- -- -- -- -- 8,123 8,123
Interest expense............. 309 575 534 -- -- -- -- 2,351 3,769
Exploration.................. 320 -- 237 488 466 -- -- 1,869 3,380
Foreign exchange loss........ -- 2,278 976 94 62 -- -- (117) 3,293
Interest income.............. (28) (1,682) (769) (59) -- -- -- (3,112) (5,650)
Other........................ 623 (3) (373) 12 -- -- -- (4,142) (3,883)
------ ------ ------ ------ ------ ------- ------- ------- -------
14,224 1,168 605 535 8,528 -- 223,513 4,972 253,545
------ ------ ------ ------ ------ ------- ------- ------- -------
Earnings (loss) before the
undernoted................. (21,208) 1,174 10,368 (598) (9,692) (241) (223,513) 114 (243,596)
Income taxes................. (41) (215) 1,325 -- -- -- -- (6,703) (5,634)
Minority interests and
participation rights....... (10,584) 695 4,522 (299) (4,846) -- -- 478 (10,034)
------ ------ ------ ------ ------ ------- ------- ------- -------
Net earnings (loss).......... (10,583) 694 4,521 (299) (4,846) (241) (223,513) 6,339 (227,928)
====== ====== ====== ====== ====== ======= ======= ======= =======
Cash and cash equivalents.... 1,133 1,021 5,980 -- 14 574 -- 7,846 16,568
Capital expenditures......... 5,975 2,004 3,254 4,032 1,298 3,471 5,419 99 25,552
Mining property, plant and
equipment.................. 72,379 63,955 25,503 46,539 9,546 4,111 15,000 229 237,262
Total assets................. 82,639 151,147 35,616 50,490 12,416 13,990 23,485 88,512 458,295
F-C15
FOR THE YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------------------------------------------------------
MUSSEL- NEW STRATONI
LA COIPA BRASILIA CRIXAS WHITE BRITANNIA OPERATIONS GREECE CORPORATE/
(CHILE) (BRAZIL) (BRAZIL) (CANADA) (CANADA) (GREECE) DEVELOPMENT OTHER TOTAL
------- -------- -------- -------- -------- -------- ----------- ----- -----
$ $ $ $ $ $ $ $ $
Revenue...................... 48,902 30,361 26,774 21,892 14,552 16,081 -- 11,468 170,030
------ ------ ------ ------ ------ ------- ------- ------- -------
Cost of sales................ 37,256 19,402 10,624 12,526 10,992 16,004 -- -- 106,804
Depletion and depreciation... 13,859 8,079 4,897 5,922 4,158 1,003 -- 82 38,000
------ ------ ------ ------ ------ ------- ------- ------- -------
51,115 27,481 15,521 18,448 15,150 17,007 -- 82 144,804
------ ------ ------ ------ ------ ------- ------- ------- -------
Earnings (loss) from
operations before the
undernoted................. (2,213) 2,880 11,253 3,444 (598) (926) -- 11,386 25,226
Mining property, plant and
equipment write-downs...... -- -- -- -- -- -- -- -- --
Non-operating asset
write-downs................ -- -- -- -- -- -- -- -- --
Corporate administration..... -- 13 -- -- -- -- -- 6,584 6,597
Interest expense............. 426 505 1,131 -- -- -- -- 1,385 3,447
Exploration.................. 768 -- 584 555 515 146 -- 2,929 5,497
Foreign exchange loss........ -- 993 539 45 16 -- -- 422 2,015
Interest income.............. (44) (1,872) (618) -- -- -- -- (6,969) (9,503)
Other........................ 8,625 (3,194) (420) 121 12 -- -- 276 5,420
------ ------ ------ ------ ------ ------- ------- ------- -------
9,775 (3,555) 1,216 721 543 146 -- 4,627 13,473
------ ------ ------ ------ ------ ------- ------- ------- -------
Earnings (loss) before the
undernoted................. (11,988) 6,435 10,037 2,723 (1,141) (1,072) -- 6,759 11,753
Income taxes................. (1,298) 253 2,529 -- -- -- -- (1,663) (179)
Minority interests and
participation rights....... (5,345) 3,091 3,754 1,362 (571) -- -- (2,787) (496)
------ ------ ------ ------ ------ ------- ------- ------- -------
Net earnings (loss).......... (5,345) 3,091 3,754 1,361 (570) (1,072) -- 11,209 12,428
====== ====== ====== ====== ====== ======= ======= ======= =======
Cash and cash equivalents.... 24 4,012 2,529 351 48 1,590 -- 40,742 49,296
Capital expenditures......... 6,053 2,171 2,912 1,076 1,612 3,258 31,616 48 48,746
GEOGRAPHIC SEGMENTS ARE AS FOLLOWS:
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2002 2001 2000
------- ------- -------
$ $ $
Revenue
Canada........................................................ 43,932 40,691 47,912
Chile......................................................... 46,252 41,404 48,902
Brazil........................................................ 63,566 52,085 57,135
Greece........................................................ 31,007 24,160 16,081
------- ------- -------
184,757 158,340 170,030
======= ======= =======
Identifiable assets
Canada........................................................ 101,207 108,576
Chile......................................................... 75,374 88,430
Brazil........................................................ 113,944 188,148
Greece........................................................ 4,158 37,475
Other......................................................... 103,267 35,666
------- -------
397,950 458,295
======= =======
16. COMMITMENTS AND CONTINGENCIES
A) ALPHA GROUP LITIGATION
The Ontario Court (General Division) issued its judgment in connection
with the claim against TVX Gold Inc. (TVX) by three individuals
(collectively the "Alpha Group") on October 14, 1998 relating to TVX's
interest in the Hellenic Gold mining assets in Greece (the "Hellenic Gold
Assets").
The Court rejected full ownership and monetary damages claims but did
award the Alpha Group a 12% carried interest and a right to acquire a
further 12% participating interest in the Hellenic Gold Assets. TVX filed
a notice to appeal and the Alpha Group filed a notice of cross-appeal.
Subsequent to the trial decision, the Company received notification of
two actions commenced by 1235866 Ontario Inc. ("1235866") the successor
to Curragh Inc. ("Curragh"), Mineral Services Limited ("Mineral") and
Curragh Limited ("Curragh Ltd.") against the Alpha Group, and others, in
Ontario and English Courts, in relation to the claim by the Alpha Group
against the Company for an interest in the Hellenic Gold Assets.
On July 28, 1999, the Company entered into an agreement with 1235866 to
ensure that these new claims would not result in any additional
diminution of the Company's interest in the Hellenic Gold Assets. 1235866
agreed not to pursue any claim against the Company for an interest in the
Hellenic Gold Assets beyond the interest which had been awarded to the
Alpha Group. In the event that 1235866 is successful in its claim against
the Alpha Group, 1235866 would be entitled to a 12% carried interest as
defined in the agreement (being an economic interest) and the right to
acquire a 12% participating interest upon payment of 12% of the aggregate
amounts expended by the Company and its subsidiaries in connection with
F-C16
the acquisition, exploration, development and operation of the Hellenic
Gold Assets up to the date of exercise.
The Company's appeal, the Alpha Group cross-appeal and the 1235866 motion
were all heard on February 17, 18 and 25, 2000. By judgment released on
June 1, 2000, the Court of Appeal, while partially granting the TVX
appeal, essentially upheld the trial decision, rejected the Alpha Group
cross-appeal and denied the 1235866 motion for a new trial. The result is
that TVX holds, as constructive trustee, a 12% carried interest and a
right to acquire a 12% participating interest in the Hellenic Gold Assets
upon payment of costs associated with that interest. 1235866 continues
its separate action against the Alpha Group.
TVX and the Alpha Group have been unable to agree on the definition and
application of the interests awarded in the trial judgment. Accordingly,
in June, 2001, a new action was commenced between the Alpha Group and TVX
to clarify the award. TVX anticipates that the hearing with respect to
this matter may be held in 2004. The amount of a loss, if any, cannot be
determined at this time.
B) LITIGATION IN GREECE
On March 1, 2002, the Conseil d'Etat, the Greek Supreme Court, issued its
judgment which annulled the purportedly valid permits issued by the Greek
Government to TVX Hellas with respect to the Olympias project. The
Conseil D'Etat ruling effectively prohibits development of the Olympias
project. TVX is reviewing its options, including legal remedies, with
respect to recovery of its investment in Greece. As a result of the
judgment, the Company wrote off the carrying value of Olympias in 2001
(note 4).
On February 15, 2002, a new mining permit, allowing for the continuation
of mining beneath the village of Stratoniki was issued to TVX Hellas. A
local action group filed a Petition of Annulment against the Greek
Government to have the new permit annulled. This action was heard on June
7, 2002. On December 9, 2002, the Conseil D'Etat released its decision on
the challenge to the Stratoni mining permits. The Company was informed
that the court ruled that TVX Hellas is not required to submit a new
environmental impact study to support the relevant mine permits. The
court also ruled, however, that the Greek Government had improperly
issued the new mining permits because the Ministry of Development had not
obtained a joint ministerial decision signed by five relevant ministries
prior to issuing the permits. On January 9, 2003 the Company was informed
by the Greek Ministry of Development instructing that mining beneath the
village of Stratoniki be suspended until the new mining permits were
signed by the five relevant ministries.
Operations were suspended on January 9, 2003 and did not re-commence once
the revised permits were issued on February 18, 2003. Kinross is
currently assessing its future plans for the Stratoni base metal
operations. The amount of a loss, if any, cannot be determined at this
time (note 19(b)).
C) HELLENIC GOLD COMMITMENTS
Pursuant to the acquisition contract of the Hellenic Gold assets in 1995
the Company has the obligation to fulfill the following: (1) Gold Plant
Guarantee -- the Company is obligated to construct a gold plant within
two years from receiving all applicable licenses, which may be extended
by a further eight months under certain circumstances. The Company
pledged an amount of $7.5 million to satisfy a GRD2.6 billion guarantee;
(2) employment must be offered by the construction contractor to 150
former employees of Hellenic Gold for a period of 18 months, during the
construction of the gold plant. In 2002 the Greek State released the
Company from the Gold Plant Guarantee and the relevant bank released the
pledged amount; (3) the Company is also obligated to employ at least 477
employees for a period of 10 years to maintain its eligibility for
government grants.
D) BRASILIA MINE
In September 2001, Rio Tinto Brasil Ltda. ("Rio Tinto Brasil"), a
subsidiary of Rio Tinto PLC, purported to terminate the shareholders
agreement relating to Rio Paracatu Mineracao S.A., the operating
corporation which holds the Brasilia mine. Rio Tinto Brasil also caused
Rio Paracatu to call a meeting of its shareholders to amend its Articles
of Association. The proposed amendments would permit Rio Tinto Brasil to
have sole decision-making authority over Rio Paracatu through its 51%
interest. Rio Tinto Brasil alleged that the transaction resulting in the
formation of the TVX Newmont Americas joint venture (formerly TVX
Normandy Americas joint venture) in June 1999 and the resignation of the
former Chairman and Chief Executive Officer of TVX in April 2001 had
triggered rights of first refusal under the shareholders agreement in
favor of Rio Tinto Brasil and as such rights were not made available to
Rio Tinto Brasil, it was permitted to terminate the shareholders
agreement.
The TVX Newmont Americas joint venture disagrees with Rio Tinto Brasil's
interpretation of the shareholders agreement and was successful in
obtaining an injunction against Rio Paracatu from holding the proposed
shareholders meeting. Following the granting of the injunction in
November 2001, the TVX Newmont Americas joint venture commenced a claim
in Brazil against Rio Tinto Brasil and Rio Paracatu to declare that the
shareholders agreement continues to be valid. Rio Tinto Brasil and the
TVX Newmont Americas joint venture have each filed pleadings with respect
to this action. In October 2002, Rio Tinto Brasil again caused Rio
Paracatu to call a meeting of its shareholders and TVX Newmont Americas
was successful in obtaining another injunction. Subsequently, Rio Tinto
Brasil and TVX Newmont Americas agreed to freeze litigation activities
until the end of January 2003 which date coincides with the termination
date specified in the combination agreement among Kinross, TVX and Echo
Bay (note 19(c)).
F-C17
In the event that Rio Tinto Brazil is successful in having the court rule
that its termination of the shareholders agreement was valid, TVX would
not be able to exercise joint control of Rio Paracatu under the terms of
the agreement. In the event of such outcome, TVX will evaluate other
legal remedies with respect to the management of Rio Paracatu. If TVX is
not able to retain joint control of Rio Paracatu, management of Rio
Paracatu, and operation of the Brasilia mine would be subject to the
discretion of Rio Tinto Brasil. Further, upon a loss of joint control,
TVX would no longer proportionately consolidate its interest in Rio
Paracatu and would account for its interest using the equity method under
Canadian and US GAAP. The termination of the shareholders agreement would
not effect TVX's current ownership interest in Rio Paracatu and the
amount of a loss, if any, cannot be determined at this time.
NORMANDY INTERNATIONAL HOLDINGS (PTY) LTD. ("NORMANDY") INDEMNIFICATION
Effective July 1, 1999, the Company conveyed 50% of its interests in five
operating mines to Normandy for net proceeds of $180,953. As part of the
transaction, the Company agreed to indemnify Normandy until June 2005 for
up to $15 million of unforeseen, pre-existing environmental liabilities
associated with the assets transferred. These assets were reacquired
under the terms of the transaction described in note 19(a).
GENERAL
Various lawsuits are pending against the Company. The actual liability
with respect to these lawsuits is not determinable, but management
believes, based on the opinion of counsel, that any liability will not
materially affect the Company's consolidated financial position.
17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The Company prepares its financial statements in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP")
which generally conform to generally accepted accounting principles in
the United States ("US GAAP") except for the following significant
differences that affect the Company:
a) (i) Effective January 1, 2000, the Company adopted the asset and
liability method of accounting for income taxes under Canadian GAAP (note
2(d)). This change was made without restatement of the 1999 comparative
figures.
Prior to 2000, under Canadian GAAP, deferred income taxes were
determined using the deferral method whereby deferred income taxes were
provided for timing differences based on tax rates in effect when the
timing difference arose. Under US GAAP, income taxes are determined using
the liability method whereby deferred income taxes are provided for
temporary differences using tax rates expected to apply when the
differences reverse (notes 2(d) and 12).
(ii) The income tax expense (recovery) adjustment results from the tax
effects of US GAAP adjustments described in note 17 and the application
of the accounting policy described in note 17(a)(i) for the period prior
to January 1, 2000.
b) Under Canadian GAAP, the Notes (note 14) were accounted for under
a components approach whereby the Notes were presented with both
liability and equity components as explained in note 14. Under US GAAP,
these Notes were treated as long-term debt and all interest amounts (to
the extent not capitalized to development projects) and amortization of
debt issue costs were included in income.
On July 10, 2001, the Company completed the conversion of the Notes into
32,150,118 common shares of the Company valued at $211,761.
As explained above, prior to the conversion, the Notes were accounted for
under a components approach under Canadian GAAP. The effects of the
conversion under Canadian GAAP are described in note 14.
Under US GAAP, these Notes were treated as long-term debt. In accordance
with US GAAP, an extraordinary gain of $34,181 net of income taxes of
$nil, was recorded on this extinguishment of debt. The gain is comprised
of the difference between the carrying value of the Notes and the value
of the common shares issued less related transaction costs and the
write-off of unamortized debt issue costs.
c) Under US GAAP, start-up costs are expensed as incurred. Under
Canadian GAAP, start-up costs are deferred and amortized over the mine
life.
d) Under Canadian GAAP, capital assets are written down to net
recoverable amount when the expected undiscounted future cash flows from
their use are less than the asset carrying amount (note 4). Under US
GAAP, when the expected undiscounted future cash flows show a deficiency,
the asset is written down to fair value. Fair value has been estimated
using discounted expected future cash flows. In 2002 under Canadian GAAP,
the Company wrote down a capital asset which had already been written
down under US GAAP. This resulted in a reduction in the write down
recorded under US GAAP in 2002.
An adjustment to the deferred tax liability resulted from the US GAAP
adjustment.
e) Under US GAAP, the components of changes in non-cash working
capital are to be disclosed. They are as follows:
F-C18
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
2002 2001 2000
---- ---- ----
$ $ $
Accounts receivable.................................... 4,163 (7,065) (4,070)
Inventories............................................ 3,442 8,913 5,034
Accounts payable....................................... (426) (2,368) (3,623)
----- ---- ------
7,179 (520) (2,659)
===== ==== ======
f) Effective January 1, 2001, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" ("the Standards"). These Standards require companies to
record derivatives on the balance sheet as assets or liabilities,
measured at their fair value. If the derivative is designated as a fair
value hedge, the effective portions of the changes in the fair value of
the derivative, and changes in the fair value of the hedged item
attributable to the hedged risk, are recognized in the income statement.
If the derivative is designated as a cash flow hedge, the effective
portion of the changes in fair value of the derivative are recorded in
other comprehensive income ("OCI") and are recognized in the income
statement when the hedged item is recognized. Accordingly, ineffective
portions of changes in the fair value of hedging instruments are
recognized in earnings immediately. Gains or losses arising from hedging
activities, including the ineffective portion, are reported in the same
income statement caption as the hedged item. Gains or losses from
derivative instruments for which hedge accounting is not applied are
reported in other income.
In accordance with the transition provisions of the Standards, the
Company recorded the following after-tax cumulative adjustments on
January 1, 2001 as a result of recording all derivative financial
instruments on the consolidated balance sheet at fair value:
- an increase in OCI of $17.5 million, net of future income
taxes of $nil;
- an increase in assets of $12.5 million; and
- a decrease in liabilities of $5 million.
The Company has entered into the following types of derivative
instruments:
(See note 11 for details on the Company's commodity contracts and
financial instruments).
i) Certain gold put options, lease rate swaps and lead and zinc
forward contracts
Prior to adoption of the Standards, these instruments were accounted for
as cash flow hedges of future metals sales under both US and Canadian
GAAP. On adoption of the Standards, the Company elected not to designate
these contracts as hedges for US accounting purposes with the effect that
the contracts were recognized at their fair value on January 1, 2001,
with an offsetting amount in OCI. Changes in the fair value of these
derivative instruments subsequent to January 1, 2001, have been reflected
in current period earnings under US GAAP.
ii) Written silver call options and certain gold put options
Prior to the adoption of the Standards, these derivative instruments were
recorded at their fair value on the balance sheet with subsequent changes
in fair value reflected in current period earnings. The adoption of the
Standards did not result in any change in the accounting treatment for
these derivative instruments and does not represent a US GAAP difference
as the Company records these instruments at fair value for Canadian
reporting purposes.
iii) Foreign currency contracts
Prior to the adoption of the Standards, these contracts were recorded at
their fair value in the balance sheet with subsequent changes in fair
value reflected in current period earnings. The adoption of the Standards
did not result in any change in the US accounting treatment for the
contracts. Under Canadian GAAP, foreign currency contracts are recorded
when the corresponding hedge-designated period is reached.
The Company estimates that $7.3 million of gains, net of future income
taxes of $nil, will be reclassified from OCI to current period earnings
within the next twelve months.
A reconciliation of changes in OCI attributed to hedging activities is as
follows:
DECEMBER 31,
---------------
2002 2001
------ ------
$ $
Hedging gains, net of future income taxes of $nil, beginning of period................................ 10,985 17,544
Hedging gains at beginning of period reclassified to earnings, net of future income taxes of $nil..... 8,025 6,559
------ ------
Total hedging gains net of future income taxes of $nil................................................ 2,960 10,985
====== ======
g) The minority interests and participation rights adjustment arises
from the minority interests and participation rights impacts of
the US GAAP adjustments described in note 17.
h) The La Coipa, Brasilia and Crixas mines are proportionately
consolidated under Canadian GAAP. These mines would be accounted
for using the equity method under US GAAP. An accommodation is
available under certain conditions pursuant to Item 17(c)(2)(vii)
of SEC Form 20-F which permits the omission of differences in
classification or display that result from using proportionate
consolidation in the reconciliation to
F-C19
US GAAP. The Company has evaluated the criteria and has determined that
the La Coipa, Brasilia and Crixas mines qualify for this accommodation as
these joint ventures are operating entities, the significant financial
and operating policies of which are, by contractual arrangement, jointly
controlled by all parties having an equity interest in these entities.
i) For purposes of this US GAAP reconciliation, the terms "proven and
probable reserves," "exploration," "development," and "production"
have the same meaning under both US and CAN GAAP.
Exploration costs incurred are expensed at the same point in time based
on the same criteria under both US and CAN GAAP. In addition, mining
related costs are only capitalized after proven and probable reserves
have been designated under both US and CAN GAAP.
As a result of the above, the following would be US GAAP information for
the years ended December 31:
INCOME STATEMENT
2002 2001 2000
------- -------- ------
$ $ $
Earnings (loss) in accordance with Canadian GAAP................................ (30,616) (227,928) 12,428
Mining property write-downs (d)................................................. -- (51,185) --
Depletion and depreciation (c)(d)............................................... 4,046 2,830 3,410
Interest expense (b)............................................................ -- (1,107) (2,101)
Income tax expense (recovery) (a)............................................... (602) 3,650 2,092
Minority interests and participation rights (g)................................. (1,722) 2,160 (1,705)
Foreign exchange gain (loss) (f)(iii)........................................... 21 (1,821) 1,800
Non-operating asset write-downs (d)............................................. 9,900 -- --
Other income (f)(i)............................................................. (3,235) 967 --
------- -------- ------
Earnings (loss) in accordance with US GAAP, before extraordinary gain........... (22,208) (272,434) 15,924
Extraordinary gain (net of tax) (b)............................................. -- 34,181 --
------- -------- ------
Earnings (loss) in accordance with US GAAP...................................... (22,208) (238,253) 15,924
======= ======== ======
Earnings (loss) per share under US GAAP, before extraordinary gain.............. (0.54) (14.42) 4.45
Earnings (loss) per share under US GAAP......................................... (0.54) (12.61) 4.45
BALANCE SHEET
2002 2001
------- ------
$ $
Current assets (f)................................................................. 154,758 95,454
Mining property, plant and equipment (b), (c), (d)................................. 198,511 219,997
Deferred charges (f)............................................................... 4,925 6,694
Current liabilities (f)............................................................ 35,906 43,688
Deferred tax liability (a)......................................................... 17,347 17,298
Long-term debt (b)................................................................. -- 58,832
Minority interests and participation rights (g).................................... 120,002 126,211
Contributed surplus (b)............................................................ 1,526 1,526
Deficit............................................................................ (450,702) (428,494)
Other comprehensive income (f)..................................................... 2,959 10,985
STATEMENT OF CASH FLOWS
2002 2001 2000
------- -------- ------
$ $ $
Cash provided from operations................................................... 44,406 45,783 32,557
Cash used for investing activities (b).......................................... 28,042 (27,230) (106,478)
Cash provided from (used for) financing activities (b).......................... 26,196 (51,281) 29,777
Net cash, end of year........................................................... 115,212 16,568 49,296
18. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the
presentation used in the current year.
F-C20
19. SUBSEQUENT EVENTS
A) ACQUISITION AND MERGER
TVX, Echo Bay Mines Ltd. ("Echo Bay") and Kinross Gold Corporation
("Kinross") entered into a combination agreement dated June 10, 2002, as
amended as of July 12, 2002 and November 19, 2002, for the purpose of
combining the ownership of their respective businesses. The combination
was to be effected by way of a plan of arrangement under the Canada
Business Corporations Act ("CBCA").
In a separate transaction, TVX and a subsidiary of TVX entered into two
agreements dated June 10, 2002, each as amended as of November 19, 2002,
with a subsidiary of Newmont Mining Corporation ("Newmont"). Pursuant to
these agreements, TVX acquired Newmont's 50% non-controlling interest in
the TVX Newmont Americas joint ventures (shown as "Minority interests and
participation rights" in the December 31, 2002 TVX balance sheet) for an
aggregate price of $180 million with an effective date of January 31,
2003.
On January 31, 2003, the shareholders of TVX approved the Plan of
Arrangement allowing the combination of the TVX, Echo Bay and Kinross
businesses. Subsequent to this, on January 31, 2003, the Superior Court
of Justice, Ontario approved the Plan of Arrangement.
Upon completion, on January 31, 2003, of the Plan of Arrangement and the
purchase of Newmont's interest in the TVX Newmont Americas joint venture,
and taking into account the Kinross three old for one new share
consolidation approved by Kinross shareholders at the January 28, 2003
Special Meeting of Kinross Shareholders, TVX shareholders received 2.1667
shares of Kinross for each TVX share.
B) GREECE
On January 9, 2003, the Greek Ministry of Development ordered TVX Hellas
to suspend mining beneath the village of Stratoniki. The suspension at
the Stratoni mine took immediate effect and would be released upon the
receipt of new mining permits signed by the five relevant ministries of
the Greek Government. Pursuant to the order, operations were suspended
and did not re-commence once the revised permits were issued on February
18, 2003 as Kinross attempted to negotiate a settlement and possible exit
strategy with the Greek Government.
The Greek Government undertook initiatives to put together a viable
long-term structure for the re-opening of the Stratoni mine.
Representatives of the participants of the new plan will meet in order to
set in motion the legal processes for the completion of the new
structure.
The new structure includes a major Greek mining enterprise, a group of
Greek construction companies and Kinross, as well as local Prefectural
and Municipal Authorities.
As part of the overall agreement, and with Kinross' commitment of $10
million for the support of the new plan, Kinross will retain the mineral
rights at Skouries, with the prospect of conducting a systematic
exploration and evaluation of the deposit.
For the transitional period and until the undertaking of the mines by the
new structure, Kinross has pledged to the Greek Government that it will
maintain the operation of the water treatment plant for the protection of
the environment, thus safeguarding public health and safety in the
region. In the meantime, TVX Hellas, in order to protect its interest,
has filed a petition for suspension of payments.
C) BRASILIA MINE
With respect to the dispute between Rio Tinto Brasil and TVX Newmont
Americas, as more fully described in note 16(d), the freeze date for
litigation was extended to April 22, 2003. On April 28, 2003, a TVX
subsidiary received notification from Rio Tinto Brasil stating that they
preserve their right to litigate in respect of the alleged breach of the
shareholders agreement and alleging that the combination (note 19(a))
breached the shareholders agreement as well.
D) NEW CREDIT FACILITY
In February 2003, Kinross and three of its wholly-owned subsidiaries
("the Borrowers") entered into a new syndicated credit facility. The new
syndicated credit facility has a maturity date of December 31, 2005 and a
total committed amount of $125.0 million. The primary purpose of the
credit facility is to enable the Borrowers to issue letters of credit to
various regulatory agencies to satisfy financial assurance requirements.
The shares of TVX Gold Inc. and 13 wholly owned subsidiaries have been
pledged as collateral for this credit facility.
F-C21
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
The Board of Directors
Echo Bay Mines Ltd.
We have audited the consolidated balance sheets of Echo Bay Mines Ltd. as at
December 31, 2002 and 2001 and the consolidated statements of operations,
deficit and cash flow for each of the years in the three-year period ended
December 31, 2002. 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 in accordance with Canadian and United States generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance 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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as at
December 31, 2002 and 2001 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2002 in
accordance with Canadian generally accepted accounting principles.
/s/ Ernst & Young LLP
Edmonton, Canada
February 7, 2003, except for note 18(c),
as to which the date is March 26, 2003 Chartered Accountants
F-D1
ECHO BAY MINES LTD.
CONSOLIDATED BALANCE SHEETS
December 31
(thousands of U.S. dollars) 2002 2001
---------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 22,967 $ 12,351
Short-term investments 7,183 1,910
Interest and accounts receivable 4,177 3,645
Inventories (note 2) 20,834 29,506
Prepaid expenses and other assets 1,954 3,725
---------------------------------------------------------------------------------------------------------
57,115 51,137
Plant and equipment (note 3) 100,576 120,969
Mining properties (note 3) 29,017 32,903
Long-term investments and other assets (note 4) 36,982 55,795
---------------------------------------------------------------------------------------------------------
$ 223,690 $ 260,804
=========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 24,813 $ 24,284
Income and mining taxes payable 3,793 3,570
Debt and other financings (note 5) -- 17,000
Reclamation and mine closure liabilities (note 8) 4,560 3,841
Deferred income (note 6) -- 876
---------------------------------------------------------------------------------------------------------
33,166 49,571
Debt and other financings (note 5) -- 6,714
Deferred income (note 6) 6,393 47,042
Reclamation and mine closure liabilities (note 8) 46,512 49,726
Deferred income taxes 945 925
Commitments and contingencies (notes 8, 16 and 17)
Shareholders' equity:
Capital stock (note 12), no par value, unlimited number
authorized; issued and outstanding - 541,272,675 shares 1,042,571 713,343
Capital securities (note 7) -- 157,453
Deficit (879,238) (734,665)
Foreign currency translation (26,659) (29,305)
---------------------------------------------------------------------------------------------------------
136,674 106,826
---------------------------------------------------------------------------------------------------------
$ 223,690 $ 260,804
=========================================================================================================
See accompanying notes.
On behalf of the Board: "Brian W. Penny" "Scott A. Caldwell"
Director Director
F-D2
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31
(thousands of U.S. dollars,
except for per share data) 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------
Revenue $ 206,529 $ 237,684 $ 280,976
---------------------------------------------------------------------------------------------------------------------
Expenses:
Operating costs 128,136 175,341 173,435
Royalties (note 17) 7,799 7,597 8,034
Production taxes 1,222 177 2,460
Depreciation and amortization 35,271 42,101 50,664
Reclamation and mine closure 5,066 6,098 10,572
General and administrative 9,141 5,623 5,650
Exploration and development 8,554 3,466 10,336
Interest and other (note 9) 13,420 6,106 3,012
Loss on retirement of capital securities (note 12) 5,461 -- --
---------------------------------------------------------------------------------------------------------------------
214,070 246,509 264,163
---------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (7,541) (8,825) 16,813
Income tax expense (recovery) (note 10) 149 (3,147) (1,748)
---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (7,690) $ (5,678) $ 18,561
---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) attributable to common shareholders (note 7) $ (144,573) $ (22,985) $ 3,164
=====================================================================================================================
Earnings (loss) per share - basic and fully diluted $ (0.34) $ (0.16) $ 0.02
=====================================================================================================================
Weighted average number of shares outstanding (thousands)
- basic and diluted 429,783 140,607 140,607
=====================================================================================================================
CONSOLIDATED STATEMENTS OF DEFICIT
Year ended December 31
(thousands of U.S. dollars) 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ (734,665) $ (711,680) $ (714,844)
Net earnings (loss) (7,690) (5,678) 18,561
Loss on retirement of capital securities, net of nil tax effect (132,302) -- --
(note 7)
Interest on capital securities, net of nil tax effect (note 7) (4,581) (17,307) (15,397)
---------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (879,238) $ (734,665) $ (711,680)
=====================================================================================================================
See accompanying notes.
F-D3
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOW
Year ended December 31
(thousands of U.S. dollars) 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED FROM (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) $ (7,690) $ (5,678) $ 18,561
Add (deduct):
Depreciation 27,572 31,093 32,457
Amortization 7,699 11,008 18,207
Amortization of mining costs 2,328 6,118 4,202
Loss on retirement of capital securities 5,461 -- --
Deferred income included in revenue (note 6) (30,733) (18,609) (24,473)
Deferred income included in operating costs (note 6) -- (2,846) (3,149)
Deferral of gains on restructuring of hedge commitments -- -- 4,287
Deferred income taxes -- (3,358) (2,400)
Net gain on sale of other assets (note 9) (1,242) (700) (432)
Unrealized losses on share investments -- 150 28
Provision for impaired assets (note 9) 7,000 4,384 --
Provision for deferred gains and losses on modified hedge contracts
(note 9) 3,098 -- --
Allowance for bad debts (note 9) 1,509 -- --
Other 245 588 (1,084)
Change in cash invested in operating assets and liabilities:
Interest and accounts receivable (2,035) (648) (85)
Inventories 6,884 8,780 (2,869)
Prepaid expenses and other assets (56) 166 (31)
Accounts payable and accrued liabilities (1,174) 3,304 496
Income and mining taxes payable 266 (2,174) 2,790
-----------------------------------------------------------------------------------------------------------------------------
19,132 31,578 46,505
-----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Mining properties, plant and equipment (12,581) (22,817) (11,589)
Long-term investments and other assets (4,518) (1,879) (524)
Proceeds on sale of plant and equipment 1,872 943 332
Other 1,194 (243) 894
-----------------------------------------------------------------------------------------------------------------------------
(14,033) (23,996) (10,887)
-----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Debt repayments (17,000) (9,500) (36,750)
Debt borrowings -- -- 12,000
Units offering, net of issuance costs (note 12 ) 25,513 -- --
Warrants exercised 4 -- --
Costs of capital securities retirement (3,000) -- --
-----------------------------------------------------------------------------------------------------------------------------
5,517 (9,500) (24,750)
-----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 10,616 (1,918) 10,868
Cash and cash equivalents, beginning of year 12,351 14,269 3,401
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 22,967 $ 12,351 $ 14,269
=============================================================================================================================
See accompanying notes.
F-D4
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands of U.S. dollars, except
amounts per share and per ounce or unless otherwise noted
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Echo Bay Mines Ltd. ("Echo Bay" or the "Company") is engaged in the production
of gold and silver and related activities including exploration, development,
mining and processing. These activities are conducted principally in the United
States and Canada. Gold accounted for 96% and silver 4% of 2002 revenue
respectively. The Company has two operating mines: Round Mountain in Nevada,
United States and Lupin in Nunavut Territory, Canada. The Company's Kettle River
mine in Washington, United States was placed on care and maintenance in October
2002. The Company operated a fourth mine, McCoy/Cove in Nevada, United States,
until March 31, 2002, at which date mining and processing activities were
completed. The Company holds a 100% interest in its Kettle River and Lupin mines
and a 50% interest in its Round Mountain, which it operates, with the remaining
50% interest held by affiliates of Barrick Gold Corporation. The Company's
McCoy/Cove mine was conveyed to a subsidiary of Newmont Mining Corporation
effective February 7, 2003 as described in note 18.
The Company's financial position and operating results are directly affected by
the market price of gold in relation to the Company's production costs. Silver
price fluctuations also affect the Company's financial position and operating
results, although to a lesser extent. Gold and silver prices fluctuate in
response to numerous factors beyond the Company's control.
The consolidated financial statements are prepared on the historical cost basis
in accordance with accounting principles generally accepted in Canada and, in
all material respects, conform with accounting principles generally accepted in
the United States, except as described in note 13. The statements are expressed
in U.S. dollars.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Certain of the comparative figures have been reclassified to conform to the
current year's presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Interests in joint ventures, each of which by contractual
arrangement is jointly controlled by all parties having an equity interest in
the joint venture, are accounted for using the proportionate consolidation
method to consolidate the Company's share of the joint venture's assets,
liabilities, revenues and expenses.
F-D5
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
SHARE INVESTMENTS
Short-term investments, comprised of publicly traded common shares, are recorded
at the lower of cost or quoted market prices, with unrealized losses included in
income. Long-term common share investments are recorded at cost. A provision for
loss is recorded in income if there is a decline in the market value of a
long-term share investment that is other than temporary. If the Company's share
investment represents more than 20% ownership interest and the Company can
exercise significant influence over the investee, the equity method of
accounting is used. The equity method reports the investment at cost adjusted
for the Company's pro rata share of the investee's undistributed earnings or
losses since acquisition.
FOREIGN CURRENCY TRANSLATION
The Company's self-sustaining Canadian operations are translated into U.S.
dollars using the current-rate method, which translates assets and liabilities
at the year-end exchange rate and translates revenue and expenses at average
exchange rates. Exchange differences arising on translation are recorded as a
separate component of shareholders' equity. The change in the balance is
attributable to fluctuations in the exchange rate of U.S. dollars to Canadian
dollars.
REVENUE RECOGNITION
Revenue is recognized when title to delivered gold or silver and the risks and
rewards of ownership pass to the buyer.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are calculated based on the weighted average number of
common shares outstanding during the year. For per share calculations, the
amount of capital securities interest and loss on conversion that is charged
directly to the deficit decreases the earnings, or increases the loss,
attributable to common shareholders. Fully diluted earnings (loss) per share are
the same as basic earnings (loss) per share because the Company's outstanding
options are not dilutive.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
F-D6
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
INVENTORIES
Precious metals and in-process inventories are valued at the lower of cost,
using the "first-in, first-out" method, or net realizable value. Materials and
supplies are valued at the lower of average cost or replacement cost.
PLANT AND EQUIPMENT
Plant and equipment are recorded at cost. Plant and equipment that have useful
lives shorter than the mine life are depreciated using the straight-line method
over each asset's estimated remaining economic life to a current maximum of 4
years.
MINING PROPERTIES - PRODUCING MINES' ACQUISITION AND DEVELOPMENT COSTS
Mining properties are recorded at cost of acquisition. Mine development costs
include expenditures incurred to develop new ore bodies, to define further
resources in existing ore bodies and to expand the capacity of operating mines.
These expenditures are amortized against earnings on the unit-of-production
method based on estimated recoverable ounces of gold. Estimated recoverable
ounces of gold include proven and probable reserves and non-reserve material
when sufficient objective evidence exists to support a conclusion that it is
probable the non-reserve material will be produced.
For the purpose of preparing financial information in accordance with United
States generally accepted accounting principles, only proven and probable
reserves are considered when applying the unit-of-production method. Non-reserve
material was not used in the periods covered by these financial statements when
applying the unit-of-production method under both Canadian and U.S. generally
accepted accounting standards.
F-D7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
DEVELOPMENT PROPERTIES
At properties identified as having the potential to add to the Company's proven
and probable reserves, the direct costs of acquisition and development are
capitalized only if there is sufficient objective evidence to indicate that it
is probable that the property will become an operating mine. Factors considered
in making this assessment include the existence and nature of known resources
and proven and probable reserves, whether the proximity of the property to
existing mines and ore bodies increases the probability of developing an
operating mine, the results of recent drilling on the property and the existence
of feasibility studies or other analyses demonstrating the existence of
commercially recoverable ore. Capitalized costs are evaluated for recoverability
when events or circumstances indicate that investment in the property may be
impaired and are written off if it is determined that the project is not
commercially feasible in the period in which this determination is made. The
assessment of cost recoverability is based on proven and probable reserves on
the property, if any, as well as resources which do not meet the criteria for
classification as a proven or probable reserve. If production commences,
capitalized costs are transferred to "producing mines' acquisition and
development costs" and amortized as described above.
For the purpose of preparing financial information in accordance with United
States generally accepted accounting principles, all costs associated with a
property that has the potential to add to the Company's proven and probable
reserves are expensed until a final feasibility study demonstrating the
existence of proven and probable reserves is completed. No costs have been
capitalized in the periods covered by these financial statements that do not
meet the criteria for capitalization under both Canadian and U.S. generally
accepted accounting standards.
DEFERRED MINING COSTS
Mining costs incurred to remove ore and waste from an open pit and to access new
production areas in an underground mine are capitalized as long-term deferred
costs. These costs are deferred because they relate to gold that will be
produced in future years and they are charged to operating costs in the period
that the related production occurs.
For open pit operations, mining costs are capitalized on an individual mine
basis, using the ratio of total tons of waste and ore to be mined to total gold
ounces to be recovered over the life of the mine. Costs are capitalized in
periods when the ratio of tons mined to gold produced exceeds the expected
average for the mine. Amortization occurs in periods when the ratio is less than
the expected average. This accounting method considers variations in grade and
recovery in addition to waste-to-ore ratios and results in the recognition of
mining costs evenly over the life of the mine as gold is produced.
F-D8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
For underground mining operations, the costs of accessing and developing new
production areas are deferred and expensed as operating costs in the period in
which the related production occurs.
EXPLORATION COSTS
The costs of exploration programs are expensed as incurred.
RECLAMATION AND MINE CLOSURE COSTS
Estimated site restoration and closure costs for each producing mine are charged
against operating earnings on the unit-of-production method based on estimated
recoverable ounces of gold.
INCOME TAXES
The Company uses the liability method of accounting for income taxes whereby
deferred income taxes are based on applying statutory tax rates to the
differences between the carrying amounts of assets and liabilities for
accounting and tax purposes. A valuation adjustment is provided against deferred
income tax assets unless they are considered more likely than not to be
realized.
PROPERTY EVALUATIONS
The Company annually reviews detailed engineering life-of-mine plans for each
mine. Long-lived assets are evaluated for impairment when events or changes in
circumstances indicate that the related carrying amounts may not be recoverable.
Expected future undiscounted cash flows are calculated using estimated
recoverable ounces of gold (considering proven and probable mineral reserves and
mineral resources expected to be converted into mineral reserves), future sales
prices (considering current and historical prices, price trends and related
factors), operating costs, capital expenditures, reclamation and mine closure
costs. Reductions in the carrying amount of long-lived assets, with a
corresponding charge to earnings, are recorded to the extent that the estimated
future cash flows are less than the carrying amount.
The Company's estimates of future cash flows are subject to risks and
uncertainties. It is possible that changes may occur which could affect the
recoverability of the Company's long-lived assets.
For the purpose of preparing financial information in accordance with United
States generally accepted accounting principles, estimated recoverable ounces of
gold include proven and probable reserves. Impairment amounts reported in these
financial statements under Canadian or U.S. generally accepted accounting
standards are not affected by this difference.
F-D9
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
RESERVE RISKS
If the Company were to determine that its reserves and future cash flows should
be calculated at a significantly lower gold price than the $300 per ounce price
used at December 31, 2002, there would likely be a material reduction in the
amount of gold reserves. In addition, if the price realized by the Company for
its gold or silver bullion were to decline substantially below the price at
which mineral reserves were calculated for a sustained period of time, the
Company potentially could experience material write-downs of its investment in
its mining properties. Under certain of such circumstances, the Company might
discontinue the development of a project or mining at one or more of its
properties or might temporarily suspend operations at a producing property and
place that property in a "care and maintenance" mode. Reserves could also be
materially and adversely affected by changes in operating and capital costs and
short-term operating factors such as the need for sequential development of ore
bodies and the processing of new or different ore grades and ore types.
Significant changes in the life-of-mine plans can occur as a result of mining
experience, new ore discoveries, changes in mining methods and rates, process
changes, investments in new equipment and technology, and other factors. Changes
in the significant assumptions underlying future cash flow estimates, including
assumptions regarding precious metals prices, may have a material effect on
future carrying values and operating results.
CAPITALIZATION OF INTEREST
Interest cost is capitalized on construction programs until the facilities are
ready for their intended use.
EMPLOYEE BENEFIT PLANS
Obligations and related costs under defined contribution employee benefit plans
are accrued as the benefits are earned by the employees. The Company does not
have any defined benefit plans.
STOCK-BASED COMPENSATION PLANS
The Company has three stock-based compensation plans, which are described in
note 12. No compensation expense is recognized for these plans when the stock or
stock options are issued to employees. Any consideration paid by employees on
the exercise of stock options is credited to share capital.
F-D10
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
HEDGING ACTIVITIES
The Company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the Company locks in the future value of certain of
these items through hedging transactions. These transactions are accomplished
through the use of derivative financial instruments, the value of which is
derived from movements in the underlying prices or rates.
The gold- and silver-related instruments used in these transactions include
forward sales contracts and options. These forward sales contracts obligate the
Company to sell gold or silver at a specific price on a future date. Call
options give the holder the right, but not the obligation to buy gold or silver
at a specific future date at a specific price. These tools reduce the risk of
gold and silver price declines, but also could limit the Company's participation
in increases of gold and silver prices. The Company engages in forward
currency-exchange contracts to reduce the impact on the Lupin mine's operating
costs caused by fluctuations in the exchange rate of U.S. dollars to Canadian
dollars.
Gains and losses resulting from hedging activities are recognized in earnings on
a basis consistent with the hedged item. When hedged production is sold, revenue
is recognized in amounts implicit in the commodity loan, delivery commitment or
option agreement. Gains or losses on foreign currency are recorded in operating
costs, or capitalized in the cost of assets, when the hedged Canadian dollar
transactions occur. Gains and losses on early termination of hedging contracts
are deferred until the formerly hedged items are recognized in earnings.
Premiums paid or received on gold and silver option contracts purchased or sold
are deferred and recognized in earnings on the option expiration dates. Call
options written after October 24, 2000 are carried at fair value in accordance
with Emerging Issues Committee Abstract 113, "Accounting by Commodity Producers
for Written Call Options."
F-D11
2. INVENTORIES
2002 2001
-------------------------------------------------------------------------------
Precious metals bullion $ 5,239 $ 12,215
In-process 4,332 5,720
Materials and supplies 11,263 11,571
-------------------------------------------------------------------------------
$ 20,834 $ 29,506
===============================================================================
3. PROPERTY, PLANT AND EQUIPMENT
NET BOOK VALUE 2002 2001
--------------------------------------------------------------------------------------------------------------------
Plant and Mining Net Book Net Book
Property and percentage owned Equipment Properties Value Value
--------------------------------------------------------------------------------------------------------------------
Round Mountain (50%) $ 48,868 $ 14,149 $ 63,017 $ 76,001
McCoy/Cove (100%) 7,507 -- 7,507 10,104
Lupin (100%) 13,914 1,925 15,839 22,193
Aquarius (100%) 29,994 12,943 42,937 43,680
Other 293 -- 293 1,894
--------------------------------------------------------------------------------------------------------------------
$ 100,576 $ 29,017 $ 129,593 $ 153,872
====================================================================================================================
PLANT AND EQUIPMENT 2002 2001
--------------------------------------------------------------------------------------------------------------------
Net Book Net Book
Cost Value Cost Value
--------------------------------------------------------------------------------------------------------------------
Land improvements and utility systems $ 69,062 $ 2,047 $ 72,977 $ 3,220
Buildings 157,597 20,496 153,779 25,466
Equipment 391,157 47,029 385,086 53,371
Construction in progress 37,005 31,004 43,337 38,912
--------------------------------------------------------------------------------------------------------------------
$ 654,821 $ 100,576 $ 655,179 $ 120,969
====================================================================================================================
MINING PROPERTIES 2002 2001
--------------------------------------------------------------------------------------------------------------------
Producing mines' acquisition and development costs $ 283,641 $ 280,545
Less accumulated amortization 267,567 260,365
--------------------------------------------------------------------------------------------------------------------
16,074 20,180
Development properties' acquisition and development costs 12,943 12,723
--------------------------------------------------------------------------------------------------------------------
$ 29,017 $ 32,903
====================================================================================================================
During 2002, the Company wrote down the carrying values of the Lupin mine.
During 2001, the Company wrote down the carrying values of the Kettle River mine
(note 9).
F-D13
4. LONG-TERM INVESTMENTS AND OTHER ASSETS
2002 2001
------------------------------------------------------------------------------------------------------
Modification of hedging contracts $ 16,291 $ 29,305
Deferred mining costs 10,362 15,648
Reclamation and other deposits 10,144 10,485
Premiums paid on gold and silver option contracts -- 1,871
Other 185 357
------------------------------------------------------------------------------------------------------
36,982 57,666
Less current portion included in prepaid expenses and other assets -- 1,871
------------------------------------------------------------------------------------------------------
$ 36,982 $ 55,795
======================================================================================================
MODIFICATION OF HEDGING CONTRACTS
Losses on the early termination or other restructuring of gold and silver
hedging contracts are deferred until the formerly hedged items are recognized in
earnings. The remaining deferred losses relate to gold to be produced at the
Lupin mine and are expected to be recognized as follows: $5.2 million in 2003
and $11.1 million in 2004. Refer to note 6 for a discussion of the deferral of
gains on the modification of hedging contracts and note 9 for a discussion on
the provision for deferred losses previously relating to 2005 to 2008.
DEFERRED MINING COSTS
Deferred mining costs include $10.4 million (2001 - $13.8 million) in
respect of deferred stripping at the Round Mountain mine and $nil (2001 - $1.9
million) in respect of underground costs at the Lupin mine. The deferred mining
ratio for the Round Mountain mine in 2002 was 95 tons per ounce recovered (2001
- 112 tons, 2000 - 127 tons). During 2002, the Company wrote off the remaining
deferred mining costs for the Lupin mine (note 9).
PREMIUMS PAID ON GOLD AND SILVER HEDGING CONTRACTS
Premiums paid on gold and silver hedging contracts are deferred and
recognized in earnings on their expiration dates. These deferred premiums were
recognized in 2002. Refer to note 6 for a discussion of the deferral of premiums
received on gold and silver option contracts sold.
5. DEBT AND OTHER FINANCINGS
2002 2001
------------------------------------------------------------------------------
Revolving credit facility $ -- $ 17,000
Capital securities (note 7) -- 6,714
------------------------------------------------------------------------------
-- 23,714
Less current portion -- 17,000
------------------------------------------------------------------------------
$ -- $ 6,714
==============================================================================
CURRENCY LOANS
In May 2002, the Company repaid the remaining $17.0 million on its revolving
credit facility.
OTHER INFORMATION
The Company had $19.2 million in outstanding surety bonds and letters of credit
at December 31, 2002, primarily related to the bonding of future reclamation
obligations. At December 31, 2002, annual fees on the letters of credit range
from 0.5% to 1.25%.
Interest payments were $0.3 million in 2002, $1.8 million in 2001 and $4.3
million in 2000.
F-D13
6. DEFERRED INCOME
2002 2001
-----------------------------------------------------------------------------------------------
Modification of hedging contracts $ 6,393 $ 47,042
Premiums received on gold and silver hedging contracts -- 876
-----------------------------------------------------------------------------------------------
6,393 47,918
Less current portion -- 876
-----------------------------------------------------------------------------------------------
$ 6,393 $ 47,042
===============================================================================================
MODIFICATION OF HEDGING CONTRACTS
Gains on the early termination or other restructuring of gold, silver and
foreign currency hedging contracts are deferred until the formerly hedged items
are recognized in earnings. The remaining deferred gains relate to gold to be
produced at the Lupin mine are expected to be recognized as follows: $2.5
million in 2003 and $3.9 million in 2004. Refer to note 4 for a discussion of
the deferral of losses on the modification of hedging contracts and note 9 for a
discussion on the provision for deferred gains previously relating to 2005 and
2006.
PREMIUMS RECEIVED ON GOLD AND SILVER OPTION CONTRACTS
Premiums received on gold and silver option contracts sold are deferred
and recognized in earnings on the option expiration dates. These deferred
premiums were recognized in 2002. Refer to note 4 for a discussion of the
deferral of premiums paid on gold and silver hedging contracts.
7. CAPITAL SECURITIES
In 1997, the Company issued $100.0 million of 11% capital securities due in
April 2027. The effective interest rate on the capital securities was 11%, or
12% compounded semi-annually during a period of interest deferral.
On April 3, 2002 the Company issued 361,561,230 common shares in exchange for
all of its capital securities (note 12). Prior to the exchange, the present
value of the capital securities' principal amount was classified as debt (note
5) and the present value of the future interest payments plus deferred accrued
interest was classified within a separate component of shareholders' equity.
Interest on the debt portion of the capital securities was classified as
interest expense on the consolidated statement of earnings and interest on the
equity portion of the capital securities was charged directly to deficit on the
consolidated balance sheet. The loss on conversion of the capital securities was
charged proportionately between earnings and deficit (note 12). For purposes of
per share calculations, the equity portions of interest and the loss on
conversion decreases the earnings attributable to common shareholders. See note
13 for a discussion of differences in treatment of the capital securities under
generally accepted accounting principles in the United States.
F-D14
8. RECLAMATION AND MINE CLOSURE LIABILITIES
2002 2001
--------------------------------------------------------------------------------
Round Mountain $ 16,862 $ 13,674
McCoy/Cove 11,186 17,546
Lupin 11,405 9,584
Kettle River 9,251 9,119
Sunnyside 2,368 3,644
--------------------------------------------------------------------------------
51,072 53,567
Less current portion 4,560 3,841
--------------------------------------------------------------------------------
$ 46,512 $ 49,726
================================================================================
At December 31, 2002, the Company's estimate of future reclamation and mine
closure costs is $61.6 million, which it believes will meet current regulatory
requirements. The aggregate obligation accrued to December 31, 2002 was $51.1
million, including accruals of $5.1 million in 2002, $7.4 million in 2001, and
$10.6 million in 2000. Effective February 7, 2003, McCoy/Cove and its associated
reclamation obligation were conveyed to Newmont as described in note 18. Any
unused accrual will be taken into income at that time. Remaining requirements
including $14.5 million at Round Mountain and $3.1 million at Lupin, will be
accrued on the unit-of-production method over the remaining life of each mine.
In addition, the Company has posted bonds, cash deposits and letters of credit
totaling $30.6 million and corporate guarantees totaling $33.3 million as
required by various regulatory agencies. Assumptions used to estimate
reclamation and mine closure costs are based on the work that is required under
currently applicable permits, laws and regulations. These estimates may change
based on future changes in operations, cost of reclamation activities and
regulatory requirements.
9. INTEREST AND OTHER
2002 2001 2000
--------------------------------------------------------------------------------------------------------------------
Interest income $ (441) $ (760) $ (964)
Interest expense 719 2,560 5,194
Gain on sale of plant and equipment (1,242) (700) (251)
Reclamation provision (recovery) 1,424 1,338 (2,048)
Provision for impaired assets 7,000 3,046 --
Provision for deferred gains and losses on modified hedge contracts 3,098 -- --
Allowance for bad debts (note 17) 1,509 -- --
Other 1,353 622 1,081
--------------------------------------------------------------------------------------------------------------------
$ 13,420 $ 6,106 $ 3,012
====================================================================================================================
PROVISION FOR IMPAIRED ASSETS
The recoverability of the Company's carrying values of its operating and
development properties are assessed by comparing carrying values to estimated
future net cash flows from each property when conditions are present indicating
impairment may exist. In 2002, the Company recorded a $7.0 million provision for
impaired assets relating to its Lupin mine including $4.0 million of plant and
equipment and $3.0 million of deferred mining costs due to higher than
anticipated costs resulting from unexpected development challenges and changes
in future expectations of the strength of the Canadian dollar relative to the
United States dollar. In 2001, the Company recorded a $3.1 million provision for
impaired assets and a $1.3 million reclamation provision relating to its Kettle
River mine due to an unexpected decrease in reserves.
PROVISION FOR DEFERRED GAINS AND LOSSES ON MODIFIED HEDGE CONTRACTS
Gains and losses on the early termination or other restructuring of gold hedging
contracts are deferred until the formerly hedged items are recognized in
earnings to the extent that future mine production is available to meet the
original hedge commitments. Should circumstances change such that formerly
hedged anticipated future production is no longer considered likely to occur,
the related deferred gains and losses are recognized in earnings in the period
in which this determination is made. As a result, deferred losses of $4.6
million, $1.9 million, $0.7 million and $0.9 million relating to 2005, 2006,
2007 and 2008 respectively and deferred gains of $3.7 million and $1.3 million
relating to 2005 and 2006 respectively, have been recognized in 2002 with
respect to the Lupin mine.
F-D15
10. INCOME TAX EXPENSE
GEOGRAPHIC COMPONENTS
The geographic components of earnings before income tax expense and income tax
expense were as follows.
2002 2001 2000
--------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes:
Canada $ (30,583) $ 952 $ 637
United States and other 23,042 (9,777) 16,176
--------------------------------------------------------------------------------------------------------------------
$ (7,541) $ (8,825) $ 16,813
====================================================================================================================
Current income tax expense:
Canada $ 149 $ 166 $ 201
United States and other -- 45 451
--------------------------------------------------------------------------------------------------------------------
149 211 652
--------------------------------------------------------------------------------------------------------------------
Deferred income tax expense (recovery):
Canada -- (3,358) (2,400)
United States and other -- -- --
--------------------------------------------------------------------------------------------------------------------
-- (3,358) (2,400)
--------------------------------------------------------------------------------------------------------------------
Income tax expense (recovery) $ 149 $ (3,147) $ (1,748)
====================================================================================================================
EFFECTIVE TAX RATE
The effective tax rate on the Company's earnings differed from the combined
Canadian federal and provincial corporate income tax rates of 41.2% for 2002 and
43.1% for 2001 and 2000 for the following reasons.
2002 2001 2000
--------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes $ (7,541) $ (8,825) $ 16,813
====================================================================================================================
Income tax effect of:
Expected Canadian federal and provincial corporate
income taxes $ (8,679) $ (3,805) $ 7,246
Utilization of net operating loss -- -- (5,760)
Operating loss from which no tax benefit is derived 8,650 3,964 --
Canadian resource allowance and earned depletion 304 (172) 113
Foreign earnings subject to different income tax rates -- 965 (1,326)
Other items (126) (4,099) (2,021)
--------------------------------------------------------------------------------------------------------------------
Income tax expense (recovery) $ 149 $ (3,147) $ (1,748)
====================================================================================================================
Effective tax rate (current and deferred) (2.0%) 35.7% (10.4%)
====================================================================================================================
LOSS CARRYFORWARDS
At December 31, 2002, the Company had U.S. net operating loss carryforwards of
approximately $419 million to apply against future taxable income and $215
million to apply against future alternative minimum taxable income. These loss
carryforwards do not include the provisions for impaired assets, which have not
yet been recognized fully for income tax purposes. The net operating loss
carryforwards expire at various times from 2003 to 2022. Additionally, the
Company has Canadian non-capital loss carryforwards of approximately $89 million
and net capital loss carryforwards of approximately $204 million. The
non-capital loss carryforwards expire at various times from 2003 to 2009. The
net capital loss carryforwards have no expiration date.
F-D16
10. INCOME TAX EXPENSE (cont'd.)
DEFERRED TAX LIABILITIES AND ASSETS
Significant components of the Company's deferred tax liabilities and assets are
as follows.
2002 2001
------------------------------------------------------------------------------------ ------------------------------------
U.S. U.S.
millions of U.S. dollars Canada and other Total Canada and other Total
------------------------------------------------------------------------------------ ------------------------------------
Deferred tax liabilities:
Tax over book depreciation and depletion $ -- $ -- $ -- $ 3.3 $ -- $ 3.3
Other tax liabilities 0.9 -- 0.9 2.7 -- 2.7
------------------------------------------------------------------------------------ ------------------------------------
Total deferred tax liabilities 0.9 -- 0.9 6.0 -- 6.0
------------------------------------------------------------------------------------ ------------------------------------
Deferred tax assets:
Net operating loss and other carryforwards 120.7 148.7 269.4 120.3 147.9 268.2
Book over tax depreciation and depletion 36.0 23.7 59.7 33.0 21.3 54.3
Accrued liabilities 5.7 8.3 14.0 5.1 17.6 22.7
Other tax assets 3.1 4.7 7.8 1.8 4.7 6.5
------------------------------------------------------------------------------------ ------------------------------------
Total deferred tax assets before allowance 165.5 185.4 350.9 160.2 191.5 351.7
Valuation allowance for deferred tax assets (165.5) (185.4) (350.9) (155.1) (191.5) (346.6)
------------------------------------------------------------------------------------ ------------------------------------
Total deferred tax assets -- -- -- 5.1 -- 5.1
------------------------------------------------------------------------------------ ------------------------------------
Net deferred tax liabilities $ 0.9 $ -- $ 0.9 $ 0.9 $ -- $ 0.9
==================================================================================== ====================================
The net increase in the valuation allowance for deferred tax assets was $4.3
million for 2002 and $6.1 million for 2001.
INCOME TAX PAYMENTS
Income tax payments were $0.1 million in 2002, $0.7 million in 2001 and $0.2
million in 2000.
11. PREFERRED SHARES
The Company is authorized to issue an unlimited number of preferred shares,
issuable in series. Each series is to consist of such number of shares and to
have such designation, rights, privileges, restrictions and conditions as may be
determined by the directors. No preferred shares are currently issued.
12. CAPITAL STOCK
Units Amount
-----------------------------------------------------------------------------------------------------------
COMMON SHARES
Balance, December 31, 2001 and 2000 140,607,145 $ 713,343
Issued in exchange for capital securities and accrued interest 361,561,230 303,711
Units offering, net of issuance costs 39,100,000 23,236
Issued upon exercise of warrants 4,300 4
-----------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 541,272,675 $ 1,040,294
===========================================================================================================
WARRANTS
Balance, December 31, 2001 -- $ --
Units offering, net of issuance costs 39,100,000 2,277
Warrants exercised (4,300) --
-----------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 39,095,700 $ 2,277
===========================================================================================================
F-D17
12. CAPITAL STOCK (cont'd.)
CAPITAL SECURITIES RETIREMENT
On April 3, 2002 the Company issued 361,561,230 common shares, representing
approximately 72% of the outstanding common shares after giving effect to such
issuance, in exchange for all of its $100 million aggregate principal amount of
11% junior subordinated debentures due 2027, plus accrued and unpaid interest
thereon (the "capital securities").
Following this issuance of common shares, and as at April 3, 2002, the principal
holders of the Company's common shares and their respective ownership positions
in the Company were Newmont Mining Corporation of Canada Limited ("Newmont
Canada") (48.8%) and Kinross (11.4%). In connection with the completion of the
capital securities exchange, three directors of the Company resigned from the
board of directors. Two of the vacancies created by these resignations were
filled by executive officers of Newmont Canada.
As a result of eliminating the capital securities, the Company recorded an
increase to common shares of $303.7 million, based on their quoted market value
at the date of issue. The quoted market value of the common shares issued
exceeded the book value of the capital securities by $134.8 million. This
difference, along with transaction costs of $3.0 million, were recorded
proportionately between interest expense ($5.5 million) and deficit ($132.3
million) in the second quarter of 2002 based on the debt and equity
classifications of the capital securities.
UNITS OFFERING
In May 2002, the Company sold a total of 39,100,000 units at a price of $0.70
per unit for aggregate gross proceeds of approximately $27.4 million. Each unit
consisted of one common share and one share purchase warrant. The common shares
and the warrants comprising the units separated upon closing and trade
separately on the Toronto Stock Exchange and the American Stock Exchange. As a
consequence of the business combination described in note 18, each warrant,
previously entitling the holder to purchase one common share of the Company, now
entitles the holder to purchase 0.1733 of a post-consolidated Kinross common
share at a price of $0.90, at any time prior to November 14, 2003.
DELISTING OF COMMON SHARES
In connection with the business combination described in note 18, the common
shares of the Company were delisted from the Toronto Stock Exchange on February
5, 2003 and from the American Stock Exchange on January 31, 2003. Consequently,
all of the common shares of the Company are owned by Kinross. The warrants
continue to trade on both these exchanges until November 14, 2003.
DIVIDENDS
The Company has not paid dividends since 1996.
RESTRICTED SHARE GRANT PLAN
Effective February 1997, the Company adopted a restricted share grant plan to
provide incentive to officers of the Company. As at December 31, 2002, the
Company has reserved an aggregate of 750,000 common shares for issuance under
the plan, but no grants are outstanding. In connection with the business
combination described in note 18, no shares will be granted under this plan.
EMPLOYEE SHARE INCENTIVE PLAN AND DIRECTOR EQUITY PLAN
These plans provide for the granting of options to purchase common shares to
officers and employees (under the Employee Share Incentive Plan) and to eligible
directors (under the Director Equity Plan). Outstanding share options under the
plans are exercisable at prices equal to the market value on the date of grant.
The option holder may exercise each share option over a period of 10 years from
the date of grant. Options generally vest in 25% increments on the first,
second, third and fourth year anniversaries following the grant date. Option
prices are denominated in Canadian dollars. No more grants are to be made under
the Director Equity Plan.
F-D18
12. CAPITAL STOCK (cont'd.)
EFFECT OF BUSINESS COMBINATION ON SHARE OPTIONS
In connection with the business combination described in note 18, no more grants
are to be made under the Employee Share Incentive Plan. All outstanding options
vested effective January 31, 2003, with each being converted into 0.1733 of a
Kinross share option. These Kinross share options are exercisable at prices
disclosed below multiplied by 5.7703 giving effect to the conversion ratio,
described in note 18, into common shares of Kinross. All options outstanding
under the Employee Share Incentive Plan expire on January 31, 2004 while options
outstanding under the Director Equity Plan remain outstanding in accordance with
the original terms of the plan. As at January 31, 2003, there were 584,854
Kinross share options outstanding and exercisable at a weighted average price of
$51.60 under the Employee Share Incentive Plan and 39,409 Kinross share options
outstanding and exercisable at a weighted average price of $66.00 under the
Director Equity Plan. Kinross share option prices are denominated in Canadian
dollars.
Changes in the number of options outstanding during the three years ended
December 31, 2002 were as follows.
Employee Share Incentive Plan Director Equity Plan
----------------------------- --------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
--------------------------------------------- ----------------------------------- ----------------------------------
Options outstanding, December 31, 1999 5,493,686 C$ 8.82 240,450 C$ 11.14
2000: Options granted -- -- -- --
Options expired (100,458) 12.88 -- --
Options forfeited (1,021,417) 8.92 (13,000) 5.85
--------------------------------------------- ----------------- ----------------- ---------------- -----------------
Options outstanding, December 31, 2000 4,371,811 C$ 8.71 227,450 C$ 11.44
2001: Options granted -- -- -- --
Options expired (64,655) 8.88 -- --
Options forfeited (666,589) 8.66 -- --
--------------------------------------------- ----------------- ----------------- ---------------- -----------------
Options outstanding, December 31, 2001 3,640,567 C$ 8.72 227,450 C$ 11.44
2002: Options granted -- -- -- --
Options expired (37,100) 5.75 -- --
Options forfeited (133,295) 5.10 -- --
--------------------------------------------- ----------------- ----------------- ---------------- -----------------
Options outstanding, December 31, 2002 3,470,172 C$ 8.89 227,450 C$ 11.44
============================================= ================= ================= ================ =================
The number and weighted average price of shares exercisable under the Employee
Share Incentive Plan are 3,270,047 at C$9.27 at December 31, 2002; 3,076,154 at
C$9.80 at December 31, 2001; and 3,389,484 at C$10.41 at December 31, 2000. The
number and weighted average price of shares exercisable under the Director
Equity Plan are 227,450 at C$11.44 at December 31, 2002; 217,700 at C$11.78 at
December 31, 2001; and 196,575 at C$12.40 at December 31, 2000.
F-D19
12. CAPITAL STOCK (cont'd.)
Options outstanding at December 31, 2002 had the following characteristics.
Weighted Weighted Weighted
Number of Average Exercise Average Number of Average Exercise
Shares Exercise Price of Shares Years Until Shares Price of Shares
Outstanding Price Range Outstanding Expiration Exercisable Exercisable
-------------------- ---------------------- ------------------ --------------- --------------- --------------------
Employee Share Incentive Plan
-----------------------------
1,331,444 C$2.55 - C$3.59 C$ 2.94 6 1,131,319 C$ 3.01
1,391,815 6.75 - 13.75 10.49 4 1,391,815 10.49
746,913 15.75 - 19.63 16.51 2 746,913 16.51
Director Equity Plan
--------------------
143,000 C$3.70 - C$12.50 C$ 8.67 4 143,000 C$ 8.67
84,450 14.63 - 18.25 16.13 2 84,450 16.13
-------------------- ---------------------- ------------------ --------------- --------------- --------------------
13. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
U.S. GAAP FINANCIAL STATEMENTS
The Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in Canada, which differ in some
respects from those in the United States, as described below.
In accordance with Canadian GAAP, the present value of the principal amount of
the capital securities issued in 1997 was classified as debt within gold and
other financings, while the present value of the future interest payments was
classified as a separate component of shareholders' equity (note 7). The
deferred accrued interest was classified within this equity component as the
Company had the option to satisfy the deferred interest by delivering common
shares. The related issuance costs were allocated proportionately to deferred
financing charges and retained earnings based on the debt and equity
classifications. Interest on the capital securities had been allocated
proportionately to interest expense and deficit based on the debt and equity
classifications. Under U.S. GAAP, the face value of the securities would be
classified entirely as debt within gold and other financings; the related
issuance costs would be classified as deferred financing charges within
long-term investments and other assets and would be amortized to interest
expense over the life of the securities; and the interest on the capital
securities would be classified entirely as interest expense. The loss on the
retirement of the capital securities was recorded proportionately between
interest expense and deficit under Canadian GAAP while the entire loss has been
presented as a current period extraordinary item for U.S. GAAP.
In accordance with Canadian GAAP, certain long-term foreign exchange contracts
are considered to be hedges of the cost of goods to be purchased in foreign
currencies in future periods. Gains and losses related to changes in market
values of such contracts are recognized as a component of the cost of goods when
the related hedged purchases occur. In 2001, the Company recognized $2.8 million
in deferred foreign exchange gains. Under U.S. GAAP, foreign exchange contracts
would be carried at market value and changes included in current earnings.
In accordance with Canadian GAAP, the Company's short-term share investments are
carried at the lower of cost or market based on quoted market prices. Under U.S.
GAAP, these investments would have been marked to market, with unrealized gains
or losses excluded from earnings and reported as accumulated other comprehensive
income in shareholders' equity, net of tax.
In accordance with U.S. GAAP, gold call options sold would not qualify for hedge
accounting and therefore would be marked to market at each period end. As a
result, the Company recorded a loss of $0.8 million in 2001 and a gain of $3.0
million in 2000 under U.S. GAAP.
F-D20
13. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) (cont'd.)
In accordance with Canadian GAAP, capitalized mine development costs include
expenditures incurred to develop new ore bodies, to define further resources in
existing ore bodies and to expand the capacity of operating mines. The Company
capitalized development costs of $2.2 million in 2001 and $1.2 million in 2000
for the extension to the K-2 deposit at the Kettle River mine. Under U.S. GAAP,
development costs are capitalized only when converting mineralized material to
reserves or for further delineation of existing reserves. The development
expenditures resulted in additions to mineralized material but did not add to
mineral reserves. Therefore under U.S. GAAP, the expenditures would be
classified as exploration expense.
The effects on the consolidated statement of earnings of the above differences
would have been as follows.
2002 2001 2000
------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) under Canadian GAAP $ (7,690) $ (5,678) $ 18,561
Additional interest expense on capital securities (4,739) (17,307) (15,397)
Loss on conversion of capital securities 5,461 -- --
Modification of derivative contracts realized in net earnings 814 -- --
Change in market value of foreign exchange contracts 384 426 948
Amortization of deferred financing costs on capital securities -- (634) (633)
Change in market value of option contracts -- (1,291) 2,964
Amortization of deferred foreign exchange gains -- (2,846) (3,149)
Transition adjustment on adoption of FAS 133 -- (3,090) --
Unrealized loss on short-term investments -- 150 28
Kettle River exploration expense -- (2,234) (1,229)
Kettle River amortization expense -- 2,103 163
Provision for impaired Kettle River assets -- 1,305 --
------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) under U.S. GAAP before
extraordinary loss $ (5,770) $ (29,096) $ 2,256
Loss on retirement of capital securities, net of nil tax effect (137,763) -- --
------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) under U.S. GAAP $ (143,533) $ (29,096) $ 2,256
========================================================================================================================
Earnings (loss) per share under U.S. GAAP
- basic and diluted
- before extraordinary loss $ (0.01) $ (0.21) $ 0.02
- extraordinary loss (0.32) -- --
------------------------------------------------------------------------------------------------------------------------
- after extraordinary loss $ (0.33) $ (0.21) $ 0.02
========================================================================================================================
Weighted average number of shares outstanding (thousands)
- basic 429,783 140,607 140,607
-diluted 429,783 140,607 140,607
------------------------------------------------------------------------------------------------------------------------
F-D21
13. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) (cont'd.)
The effects of the GAAP differences on the consolidated balance sheet would have
been as follows.
Canadian Short-term Derivative U.S.
December 31, 2002 GAAP Investments Contracts Other GAAP
-------------------------------------------------------------------------------------------------------------
Short-term investments $ 7,183 $ 17,490 $ -- $ -- $ 24,673
Long-term investments and other
assets 36,982 -- (15,766) -- 21,216
Deferred income 6,393 -- (6,393) -- --
Common shares 1,042,571 -- -- 36,428 1,078,999
Deficit (879,238) 178 (2,224) (36,428) (917,712)
Foreign currency translation (26,659) -- -- 26,659 --
Accumulated other comprehensive loss -- 17,312 (7,149) (26,659) (16,496)
Shareholders' equity (deficit) 136,674 17,490 (9,373) -- 144,791
-------------------------------------------------------------------------------------------------------------
Canadian Capital Derivative U.S.
December 31, 2001 GAAP Securities Contracts Other GAAP
-------------------------------------------------------------------------------------------------------------
Short-term investments $ 1,910 $ -- $ -- $ 2,636 $ 4,546
Long-term investments and other
assets 55,795 158 (29,305) 141 26,789
Accounts payable and accrued
liabilities 24,284 -- 691 -- 24,975
Debt and other financings 23,714 93,286 -- -- 117,000
Deferred income 47,918 -- (47,918) -- --
Accrued interest on capital
securities -- 64,167 -- -- 64,167
Common shares 713,343 -- -- 36,428 749,771
Capital securities 157,453 (157,453) -- -- --
Deficit (734,665) 158 (3,563) (36,109) (774,179)
Foreign currency translation (29,305) -- -- 29,305 --
Accumulated other comprehensive loss -- -- 21,485 (26,847) (5,362)
Shareholders' equity (deficit) 106,826 (157,295) 17,922 2,777 (29,770)
-------------------------------------------------------------------------------------------------------------
The continuity of shareholders' equity (deficit) from December 31, 2001 to
December 31, 2002 under U.S. GAAP would have been as follows.
-------------------------------------------------------------------------------
Balance, beginning of year $ (29,770)
Net loss (143,533)
Common shares issued in exchange for capital securities 303,711
Units offering, net of issuance costs 25,513
Common shares issued upon exercise of warrants 4
Other comprehensive loss (11,134)
-------------------------------------------------------------------------------
Balance, end of year $ 144,791
===============================================================================
F-D22
13. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) (CONT'D.)
The following statement of comprehensive income (loss) would be disclosed in
accordance with U.S. GAAP.
2002 2001 2000
-------------------------------------------------------------------------------------------------------------------
Net earnings (loss) under U.S. GAAP $ (143,533) $ (29,096) $ 2,256
-------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), after a nil income tax effect:
Unrealized gain on share investments arising during period 14,854 1,726 732
Foreign currency translation adjustments 2,646 (4,351) (2,940)
Transition adjustment on adoption of FAS 133 -- 39,234 --
Modification of derivative contracts realized in net income (28,634) (17,749) --
-------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (11,134) 18,860 (2,208)
-------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (154,667) $ (10,236) $ 48
-------------------------------------------------------------------------------------------------------------------
Additionally, under U.S. GAAP, the equity section of the balance sheet would
present a subtotal for accumulated other comprehensive loss, as follows.
2002 2001
--------------------------------------------------------------------------------------
Unrealized gain on share investments $ 17,312 $ 2,458
Modification of derivative contracts (7,149) 21,485
Foreign currency translation (26,659) (29,305)
--------------------------------------------------------------------------------------
Accumulated other comprehensive loss $ (16,496) $ (5,362)
--------------------------------------------------------------------------------------
STOCK-BASED COMPENSATION
Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for
Stock-Based Compensation," gives the option to either follow fair value
accounting or to follow Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25") and related Interpretations. The
Company has determined that it will elect to continue to follow APB No. 25 and
related Interpretations in accounting for its employee and director stock
options in financial information prepared in conformity with U.S. GAAP.
In accordance with Canadian GAAP and U.S. GAAP (under APB No. 25), the Company
does not recognize compensation expense for stock option grants in the earnings
statement, as the market prices of the underlying stock on the grant dates do
not exceed the exercise prices of the options granted.
F-D23
13. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) (CONT'D.)
Had the Company adopted Statement No. 123 for its U.S. GAAP disclosure, the
following net earnings and losses would have been reported.
2002 2001 2000
-------------------------------------------------------- ------------------ ------------------ ------------------
Net earnings (loss) under U.S. GAAP $ (143,533) $ (29,096) $ 2,256
Pro forma stock compensation expense,
after a nil income tax effect (323) (405) (929)
-------------------------------------------------------- ------------------ ------------------ ------------------
Pro forma net earnings (loss) under U.S. GAAP $ (143,856) $ (29,501) $ 1,327
-------------------------------------------------------- ------------------ ------------------ ------------------
Pro forma earnings (loss) per share under U.S. GAAP $ (0.33) $ (0.21) $ 0.01
-------------------------------------------------------- ------------------ ------------------ ------------------
The Company has utilized the Black-Scholes option valuation model to estimate
the fair value of options granted, assuming a weighted average option life of
six years, a risk-free interest rate of 6.25%, a zero dividend yield and a
volatility factor of 60% for 1999 grants. The weighted average fair value of
options granted was estimated at $1.08 per share in 1999. There were no grants
in 2002, 2001 or 2000.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, the Company implemented FASB Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and Statement No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
The Company has designated its gold forward contracts as normal sales as defined
by Statement No. 138 and these contracts are therefore excluded from the scope
of Statement No. 133. Foreign exchange contracts and gold call options have not
been designated as hedges for U.S. GAAP purposes and are recognized at fair
value on the balance sheet with changes in fair value recorded in earnings.
Gains and losses on the early termination or other restructuring of gold, silver
and foreign currency hedging contracts are deferred in accumulated other
comprehensive income until the formerly hedged items are recorded in earnings.
The transition adjustment recorded under U.S. GAAP at January 1, 2001 decreased
assets by $18.3 million, liabilities by $54.4 million and net earnings by $3.1
million, and increased accumulated other comprehensive income by $39.2 million.
F-D24
13. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) (CONT'D.)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"), which addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS 143 amends
SFAS 19, "Financial Accounting and Reporting by Oil and Gas Producing
Companies," and requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, an entity capitalizes the cost by increasing
the carrying amount of the related long-lived assets. Over time, the liability
is accreted to its present value each period, and the capitalized cost is
amortized over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002 with earlier
application encouraged. The Company will adopt SFAS 143 in 2003. The Company has
not yet determined the impact of this Statement on its financial statements.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This pronouncement is effective
for exit or disposal activities that are initiated after December 31, 2002 and
requires these costs to be recognized when the liability is incurred and not at
project initiation. The Company is reviewing the provisions of the Statement,
but has not yet determined the impact of this Statement on its financial
statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51 - Consolidated Financial Statements to those
entities defined as "Variable Interest Entities" (more commonly referred to as
special purpose entities) in which equity investors do not have the
characteristics of a "controlling financial interest" or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately to
all Variable Interest Entities created after January 31, 2003, and by the
beginning of the first interim or annual reporting period commencing after June
15, 2003 for Variable Interest Entities created prior to February 1, 2003. The
Company does not conduct any transactions through variable interest entities and
does not expect FIN 46 to have an impact on its financial statements.
In 2002, the CICA Handbook Sections 3063 - Impairment of Long Lived Assets and
3475 - Disposal of Long Lived Assets and Discontinued Operations were harmonized
with SFAS 144. The standards will require an impairment loss to be recognized
when the carrying amount of an asset held for use exceeds the sum of estimated
undiscounted future net cash flows. The impairment loss would be measured as the
amount by which the carrying amount exceeds the fair value of the asset. An
asset held for sale is to be measured at the lower of carrying cost or fair
value less cost to sell. In addition, this guidance broadens the concept of a
discontinued operation and eliminates the ability to accrue operating losses
expected between the measurement date and the disposal date. Section 3063 is
effective for fiscal years beginning on or after April 1, 2003, and Section 3475
applies to disposal activities initiated by an enterprise's commitment to a plan
on or after May 1, 2003. The sections will be applied prospectively with early
adoption encouraged.
In 2002, the Accounting Standards Board of the CICA issued Accounting Guidelines
No. 13 that increases the documentation, designation and effectiveness criteria
to achieve hedge accounting. The guideline requires the discontinuance of hedge
accounting for hedging relationships established that do not meet the conditions
at the date it is first applied. It does not change the method of accounting for
derivatives in hedging relationships. The new guideline is applicable for fiscal
years commencing July 1, 2003. The Company is evaluating the impact this
standard might have on its results of operations and financial position.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"), which is effective for financial periods
ending after December 15, 2002. FIN 45 defines guarantees to include
indemnifications granted pursuant to contractual arrangements as well as
contingent consideration.
F-D25
13. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) (CONT'D.)
In 2003, the Accounting Standards Board of the CICA issued Accounting Guideline
No. 14 - Disclosure of Guarantee. The guideline requires the disclosure of
guarantees including indemnification pursuant to contractual arrangement. This
guideline is consistent with FIN 45 described above.
OTHER
The estimated fair values of cash and cash equivalents, short-term investments
and currency loans approximate their book values. The fair values were
determined from quoted market prices or estimated using discounted cash flow
analysis. See note 16 for further disclosure regarding estimated fair values of
financial instruments.
14. JOINT VENTURES
Summarized below is the Company's 50% interest in the Round Mountain mine,
accounted for by the proportionate consolidation method.
2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Revenues $ 114,297 $ 105,450 $ 90,633
Expenses:
Operating costs 68,323 72,049 60,231
Royalties 7,618 6,881 5,585
Production taxes 1,653 664 470
Depreciation and amortization 21,579 20,570 18,978
Reclamation and mine closure 3,400 3,361 2,880
Exploration 1,009 663 529
Other (440) (761) (753)
------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 11,155 $ 2,023 $ 2,713
------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Current assets $ 40,371 $ 40,224 $ 33,425
Non-current assets 96,555 96,376 109,211
Current liabilities (15,487) (15,154) (11,244)
Non-current liabilities (19,399) (15,311) (18,023)
------------------------------------------------------------------------------------------------------------------
Equity $ 102,100 $ 106,135 $ 113,369
------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Net cash provided from (used in):
Operating activities $ 15,578 $ 15,146 $ 10,849
Investing activities (8,584) (15,046) (4,664)
Financing activities -- -- --
------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash $ 6,994 $ 100 $ 6,185
------------------------------------------------------------------------------------------------------------------
F-D26
15. SEGMENT INFORMATION
The Company's management regularly evaluates the performance of the Company by
reviewing operating results on a minesite by minesite basis. As such, the
Company considers each producing minesite to be an operating segment. The
Company has two operating mines: Round Mountain in Nevada, United States and
Lupin in Nunavut Territory, Canada. The Company ceased mining operations at its
Kettle River in Washington, United States in October 2002 and at its McCoy/Cove
mine in Nevada, United States at March 31, 2002. The Company recommenced
operations at its Lupin mine in the Nunavut Territory, Canada in April 2000. All
are 100% owned except for Round Mountain, which is 50% owned.
The Company's management generally monitors revenues on a consolidated basis.
Information regarding the Company's consolidated revenues is provided below.
2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Total gold and silver revenues $ 206,529 $ 237,684 $ 280,976
Average gold price realized per ounce $ 361 $ 305 $ 319
Average silver price realized per ounce $ 4.36 $ 4.70 $ 5.28
------------------------------------------------------------------------------------------------------------------
In making operating decisions and allocating resources, the Company's management
specifically focuses on the production levels and operating costs incurred by
each operating segment, as summarized in the following tables.
Gold Production (ounces) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Round Mountain (50%) 377,747 373,475 320,064
Lupin 113,835 139,327 117,729
Kettle River 30,626 50,349 94,086
McCoy/Cove 16,501 94,633 162,784
------------------------------------------------------------------------------------------------------------------
Total gold 538,709 657,784 694,663
------------------------------------------------------------------------------------------------------------------
Silver Production (ounces) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Total silver-all from McCoy/Cove 1,470,094 6,451,425 12,328,297
------------------------------------------------------------------------------------------------------------------
F-D27
15. SEGMENT INFORMATION (CONT'D.)
Operating costs 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Round Mountain (50%) $ 68,323 $ 72,049 $ 60,501
Lupin 37,194 34,722 22,883
Kettle River 9,166 15,555 20,131
McCoy/Cove 13,453 53,015 69,920
------------------------------------------------------------------------------------------------------------------
Total operating costs per financial statements $ 128,136 $ 175,341 $ 173,435
------------------------------------------------------------------------------------------------------------------
Royalties 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Round Mountain (50%) $ 7,618 $ 6,880 $ 5,585
Kettle River 140 504 1,221
McCoy/Cove 41 213 1,228
------------------------------------------------------------------------------------------------------------------
Total royalties per financial statements $ 7,799 $ 7,597 $ 8,034
------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Round Mountain (50%) $ 21,578 $ 20,570 $ 18,978
Lupin 5,112 5,226 4,874
Kettle River 2,508 2,011 2,637
McCoy/Cove 4,519 12,638 21,539
Depreciation of non-minesite assets 1,554 1,656 2,636
------------------------------------------------------------------------------------------------------------------
Total depreciation and amortization per financial $ 35,271 $ 42,101 $ 50,664
statements
------------------------------------------------------------------------------------------------------------------
Total assets 2002 2001
-----------------------------------------------------------------------------------------------
Minesites:
Round Mountain (50%) $ 101,633 $ 110,864
Lupin 24,166 31,199
Kettle River 1,506 5,351
McCoy/Cove 7,832 21,256
Development properties:
Aquarius 43,312 44,048
Non-minesite assets 45,241 48,086
-----------------------------------------------------------------------------------------------
Total assets $ 223,690 $ 260,804
-----------------------------------------------------------------------------------------------
F-D28
15. SEGMENT INFORMATION (CONT'D.)
Capital expenditures 2002 2001 2000
----------------------------------------------------------------------------------------------------------
Round Mountain (50%) $ 8,589 $ 15,033 $ 4,620
Lupin 2,443 2,622 4,642
Kettle River 1,584 4,150 1,402
McCoy/Cove 12 1,002 670
----------------------------------------------------------------------------------------------------------
Deferred (applied) mining expenditures 2002 2001 2000
----------------------------------------------------------------------------------------------------------
Round Mountain (50%) $ (3,419) $ (5,323) $ 411
Lupin 1,091 1,452 449
McCoy/Cove -- (2,247) (5,062)
----------------------------------------------------------------------------------------------------------
Financial information regarding geographic areas is set out below.
2002 2001 2000
----------------------------------------------------------------------------------------------------------
Revenue:
Canada $ 41,420 $ 53,160 $ 44,370
United States 165,109 184,524 236,606
----------------------------------------------------------------------------------------------------------
Total revenue $ 206,529 $ 237,684 $ 280,976
----------------------------------------------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------------------------
Assets:
Canada $ 88,679 $ 108,824
United States 134,686 150,089
Other 325 1,891
----------------------------------------------------------------------------------------
Total assets $ 223,690 $ 260,804
----------------------------------------------------------------------------------------
F-D29
16. HEDGING ACTIVITIES AND COMMITMENTS
The Company periodically reduces the risk of future gold price declines by
hedging a portion of its production. The principal hedging tools used are gold
forward sales contracts and options.
The Company assesses the exposure that may result from a hedging transaction
prior to entering into the commitment, and only enters into transactions which
it believes accurately hedge the underlying risk and could be safely held to
maturity. The Company does not engage in the practice of trading derivative
securities for profit. The Company regularly reviews its unrealized gains and
losses on hedging transactions.
Credit risk is the risk that a counterparty might fail to fulfill its
performance obligations under the terms of a derivative contract. The Company's
credit risk related to all hedging activities is limited to the unrealized gains
on outstanding contracts based on current market prices. The Company minimizes
its credit risk by entering into transactions with large credit-worthy financial
institutions, limiting the amount of its exposure to each counterparty, and
monitoring the financial condition of its counterparties. The counterparties for
the Company's current hedge positions do not require margin deposits. In
addition, the Company deals only in markets it considers highly liquid to allow
for situations where positions may need to be reversed. Gains and losses on the
early termination or other restructuring of gold, silver and foreign currency
hedging contracts are deferred until the formerly hedged items are recognized in
earnings (notes 4 and 6).
Premiums paid or received on gold and silver options contracts purchased or sold
are deferred and recognized in earnings on the option expiration dates (notes 4
and 6).
GOLD COMMITMENTS
As at December 31, 2002, the Company has no outstanding commitments relating to
precious metals.
CURRENCY POSITION
At December 31, 2002, the Company had an obligation under foreign currency
exchange contracts to purchase CDN $45.1 million in 2003 at an exchange rate of
CDN $1.61 to U.S. $1.00.
F-D30
16. HEDGING ACTIVITIES AND COMMITMENTS (CONT'D.)
Shown below are the carrying amounts and estimated fair values of the Company's
outstanding hedging instruments at December 31, 2002 and 2001.
December 31, 2002 December 31, 2001
----------------------------------- ------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------------------------------------------- ------------------------------------
Gold forward sales $ -- $ -- $ -- $ 2,000
Gold options - calls sold -- -- (630) (700)
Foreign currency contracts -- 100 -- 100
------------------------------------------------------------------------------- ------------------------------------
$ 100 $ 1,400
------------------------------------------------------------------------------- ------------------------------------
Fair values are estimated for the contract settlement dates based on market
quotations of various input variables. These variables are used in valuation
models that estimate the fair market value.
The fair value of the Company's hedged position can be affected by market
conditions beyond the Company's control. The effect of a U.S.$ 0.01 change in
the exchange rate for Canadian would be approximately $0.5 million.
Hedging gains and losses represent the difference between spot or market prices
and realized amounts. The hedging gains (losses) recognized in earnings are as
follows.
2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Revenue:
Gold loans and swaps $ -- $ 703 $ 1,289
Gold forward sales 7,119 22,245 25,754
Silver forward sales -- 3,426 3,333
Gold and silver options (995) (402) (506)
Operating costs:
Foreign currency contracts (824) (2,113) (1,179)
------------------------------------------------------------------------------------------------------------------
$ 5,300 $ 23,859 $ 28,691
------------------------------------------------------------------------------------------------------------------
17. OTHER COMMITMENTS AND CONTINGENCIES
ROYALTIES
Round Mountain mine production is subject to a net smelter return royalty
ranging from 3.53% at gold prices of $320 per ounce or less to 6.35% at gold
prices of $440 per ounce or more. Its production is also subject to a gross
revenue royalty of 3.0%, reduced to 1.5% after $75.0 million has been paid. For
the period from the date that the royalty commenced through December 31, 2002,
cumulative royalties of $33.1 million have been paid.
A portion of production from the K-2 area production at Kettle River is subject
to a 5% gross proceeds royalty and a net smelter return royalty ranging from 2%
at gold prices of $300 per ounce or less to 3% at gold prices of $400 per ounce
or more.
OPERATING LEASE COMMITMENTS
The Company's principal lease commitments are for equipment and office premises.
The Company incurred $1.4 million in rental expense in 2002, net of $1.8 million
in rental income related to office subleases. The Company's commitments under
the remaining terms of the leases are approximately $4.7 million, payable as
follows: $1.6 million in 2003, $1.5 million in 2004, $1.0 million in 2005, $0.1
million in 2006, $0.1 million in 2007 and $0.4 million thereafter.
F-D31
17. OTHER COMMITMENTS AND CONTINGENCIES (CONT'D.)
SUMMA
In September 1992, Summa Corporation commenced a lawsuit against two indirect
subsidiaries of the Company, Echo Bay Exploration Inc. and Echo Bay Management
Corporation (together the "Subsidiaries") alleging improper deductions in the
calculation of royalties payable over several years of production at McCoy/Cove
and another mine, which is no longer in operation. The matter was tried in the
Nevada State Court in April 1997, with Summa claiming more than $13 million in
damages, and, in September 1997, judgment was rendered for the Subsidiaries. The
decision was appealed by Summa to the Supreme Court of Nevada, which in April
2000 reversed the decision of the trial court and remanded the case back to the
trial court for "a calculation of the appropriate [royalties] in a manner not
inconsistent with this order." The case was decided by a panel comprised of
three of the seven Justices of the Supreme Court of Nevada and the Subsidiaries
petitioned that panel for a rehearing. The petition was denied by the three
member panel on May 15, 2000 and remanded to the lower court for consideration
of other defenses and arguments put forth by the Subsidiaries. The Subsidiaries
filed a petition for a hearing before the full Supreme Court and on December 22,
2000, the Court recalled its previous decision.
Both the Subsidiaries and their counsel believe that grounds exist to modify or
reverse the decision. The Company has $1.5 million accrued related to this
litigation. If the appellate reversal of the trial decision is maintained and
the trial court, on remand, were to dismiss all of the Subsidiaries' defenses,
the royalty calculation at McCoy/Cove would change and additional royalties
would be payable. Neither the Company, nor counsel to the Subsidiaries believe
it is possible to quantify the precise liability pursuant to a revised royalty
calculation.
HANDY AND HARMAN
On March 29, 2000, Handy & Harman Refining Group, Inc., which operated a
facility used by the Company for the refinement of dore bars, filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. The Company has filed a
claim for gold and silver accounts at this refining facility with an estimated
market value of approximately $2.2 million at the time the shipments were made.
The Company has fully provided for this amount as unrecoverable including a
charge of $1.5 million in 2002. Further, in March 2002, the liquidating trustee
for Handy & Harman commenced a series of adversary proceedings against numerous
creditors, including two Company subsidiaries, alleging that certain creditors
received preferential payments in metal or otherwise. The preferential payment
claims against the Company's subsidiaries approximate $9.0 million. The ultimate
amount recoverable or payable will depend on the success or failure of the
liquidating trustee in prosecuting these claims. The ultimate percentage payout
by the liquidating trustee will also be affected by the success or failure of
the trustee in prosecuting preferential payment claims against all creditors.
The trustee currently projects the ultimate distribution of funds to be 50% to
60% of amounts owed to creditors. Based on this range, the maximum liability to
the Company would be $3.4 million assuming a 50% payout to creditors and no
success in defending any of the preferential payment claims while the maximum
amount recoverable would be $1.3 million assuming a 60% payout to creditors and
success in defending itself against all of the preferential payment claims. The
Company intends to oppose the preferential payment claims vigorously. The
outcome of these proceedings is uncertain at this time. As such, the Company has
not made any provision with respect to the preferential payment claims.
OTHER
In November 2001, two former employees of the Corporation brought a claim
against the Company pursuant to the CLASS PROCEEDINGS ACT (British Columbia) as
a result of the temporary suspension of operations at the Company's Lupin mine
in the spring of 1998 and the layoff of employees at that time. The Company does
not know at this time the amount being claimed by the former employees nor
whether the claim is appropriate for certification as a class action. On August
12, 2002, the Supreme Court of British Columbia decided it had such
jurisdiction. The Company is appealing the decision. No determination has been
made by this Court as to whether this action is suitable for certification as a
class action and no decision has been rendered with respect to the merits of the
action.
SECURITY FOR RECLAMATION
Certain of the Company's subsidiaries have provided corporate guarantees and
other forms of security to regulatory authorities in connection with future
reclamation activities. Early in 2001, regulators in Nevada called upon two of
the Company's subsidiaries to provide other security to replace corporate
guarantees that had been given in respect of the Round Mountain and McCoy/Cove
operations. The McCoy/Cove complex and the associated reclamation obligation was
conveyed to a subsidiary of Newmont on February 7, 2003 as described in note 18.
The regulatory request, relevant to operations at Round Mountain, seeks
replacement security of approximately $16 million to bring the total to
approximately $22 million, the Company's 50% share. The Company disagrees with
the regulators' position and believes that the subsidiary qualifies under the
criteria set out for corporate guarantees and will oppose the regulatory
position. Although the outcome cannot be predicted, the Company and their
counsel believe that the Company will prevail.
F-D32
18. SUBSEQUENT EVENTS
(A) BUSINESS COMBINATION
On June 10, 2002, the Company, Kinross Gold Corporation ("Kinross") and TVX Gold
Inc. ("TVX") announced they had entered into an agreement providing for the
proposed combination of the companies (the "Kinross Combination"). In a
concurrent transaction, TVX agreed to acquire from Newmont Mining Corporation
("Newmont") the interest in the TVX Newmont Americas joint venture that it did
not already own. The combination of the companies was conditional upon the
completion of this purchase. On January 31, 2003 the purchase from Newmont and
the proposed combination were completed. As such, shareholders of Echo Bay
(other than Kinross) received 0.1733 of a Kinross common share for each Echo Bay
common share after giving effect to a one-for-three share consolidation of the
outstanding common shares of Kinross immediately prior to the combination. As a
result, the Company and its subsidiaries are now wholly-owned subsidiaries of
Kinross. Common shares of the Company were delisted from the Toronto and
American Stock Exchanges and outstanding warrants are exercisable for Kinross
common stock as described in note 12.
(B) DISPOSITION OF MCCOY/COVE
On June 9, 2002, Echo Bay Exploration Inc. and Echo Bay Minerals Company, two
subsidiaries of the Company, entered into an asset purchase agreement with
Newmont USA, a subsidiary of Newmont, providing for the conveyance of the
McCoy/Cove complex in Nevada, U.S.A.. The agreement replaces a letter agreement
dated February 13, 2002 related to the conveyance of the McCoy/Cove complex
which called for a payment to the seller of $6 million and the assumption by
Newmont of all reclamation and closure obligations. Under the February 13, 2002
letter agreement, Newmont had no obligation to complete the transaction. Newmont
indicated it was willing to proceed with the conveyance of the McCoy/Cove
complex only if the Kinross Combination was completed and the cash payment was
eliminated. Accordingly, a new agreement was reached expressly containing these
two conditions. The closing of the transaction was subject to, among other
conditions, the completion of the Kinross Combination. The Kinross Combination
was completed January 31, 2003 and the McCoy/Cove assets were conveyed to
Newmont on February 7, 2003. In consideration, Newmont has agreed to assume all
liabilities and obligations relating to the reclamation or remediation required
for the McCoy/Cove complex.
(C) NEW CREDIT FACILITY
On February 27, 2003, Round Mountain Gold Corporation, a wholly-owned subsidiary
of the Company along with Kinross and two of its wholly-owned subsidiaries ("the
Borrowers"), entered into a new syndicated credit facility. The new syndicated
credit facility has a maturity date of December 31, 2005 and a total committed
amount of $125.0 million. The primary purpose of the credit facility is to
enable the Borrowers to issue letters of credit to various regulatory agencies
to satisfy financial assurance requirements. Shares of Round Mountain Gold
Corporation along with various other assets of Kinross are pledged as collateral
for this facility.
F-D33
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
of Crown Resources Corporation
Wheat Ridge, Colorado
We have audited the consolidated balance sheets of Crown Resources Corporation
and subsidiaries (Crown) as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for each of the three years in the period ended
December 31, 2003. These financial statements are the responsibility of Crown's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Crown as of December 31, 2003 and
2002, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, on January 1,
2002 Crown adopted Statement of Financial Accounting Standards No. 142. Also as
discussed in Note 1 to the consolidated financial statements, on January 1, 2003
Crown adopted Statement of Financial Accounting Standards No. 145.
As discussed in Note 12, the accompanying 2002 and 2001 consolidated financial
statements have been restated.
Deloitte & Touche LLP
/s/ Deloitte & Touche LLP
Denver, Colorado
April 12, 2004
F-E1
CROWN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
(in thousands, except share and per share amounts) 2003 2002
-------- --------
(as restated,
see Note 12)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,365 $ 1,033
Restricted short-term investments 22 48
Marketable equity securities, at fair value 190 170
Receivable from Solitario Resources Corporation 25 73
Prepaid expenses and other 23 30
-------- --------
TOTAL CURRENT ASSETS 2,625 1,354
-------- --------
MINERAL PROPERTIES 8,678 6,612
MINERAL INTERESTS, NET 20,982 19,102
OTHER ASSETS:
Investment in Solitario Resources Corporation 2,004 2,477
Other 157 99
-------- --------
TOTAL OTHER ASSETS 2,161 2,576
-------- --------
$ 34,446 $ 29,644
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 378 $ 250
Accrued liabilities 40 38
Current portion of long-term debt 49 70
Accrued interest payable 76 203
-------- --------
TOTAL CURRENT LIABILITIES 543 561
-------- --------
LONG-TERM LIABILITIES:
Convertible senior notes payable, net of discounts 226 83
Convertible senior notes payable, related party, net of discounts 91 34
Convertible secured notes payable, net of discounts - 847
Convertible subordinated notes payable - 4,000
Long-term note payable 36 73
Asset retirement obligation 21 -
Deferred income taxes 3,285 4,887
-------- --------
TOTAL LONG-TERM LIABILITIES 3,659 9,924
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 2, 3, 5 AND 8)
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; authorized 40,000,000
shares; none outstanding - -
Common stock, $0.01 par value: authorized 100,000,000
shares; issued and outstanding; 22,321,306 and 3,851,162
shares at December 31, 2003 and 2002, respectively 223 39
Additional paid-in capital 57,177 41,178
Treasury stock, 373,191 and 75,086 shares at December 31,
2003 and 2002, respectively (306) (76)
Unearned compensation (2,149) (293)
Accumulated deficit (24,717) (21,728)
Accumulated other comprehensive income 16 39
-------- --------
TOTAL STOCKHOLDERS' EQUITY 30,244 19,159
-------- --------
$ 34,446 $ 29,644
======== ========
See notes to consolidated financial statements
F-E2
CROWN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per Year Ended December 31,
share amounts) 2003 2002 2001
-------- -------- --------
(as restated, (as restated,
see Note 12) see Note 12)
REVENUES AND PROPERTY SALES:
Gain on sale of assets $ - $ 171 $ 214
-------- -------- --------
COSTS, EXPENSES AND OTHER:
Exploration expense 27 58 36
Depreciation and amortization 15 7 11
General and administrative 995 432 828
Variable option compensation expense 3,126 175 -
Interest income (25) (35) (34)
Gain on discharge of convertible debentures - (8,684) -
Equity in loss of Solitario Resources Corporation 571 873 1,512
Gain on debt extinguishment - - (41)
--------
Reorganization costs - 387 -
-------- -------- --------
4,709 (6,787) 2,312
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (4,709) 6,958 (2,098)
Income tax benefit (expense) 1,720 (4,867) -
------- -------- --------
NET INCOME (LOSS) $ (2,989) $ 2,091 $ (2,098)
======== ======== ========
PER SHARE:
BASIC INCOME (LOSS) PER SHARE $ (0.45) $ 0.65 $ (0.72)
======== ======== ========
DILUTED INCOME (LOSS) PER SHARE $ (0.45) $ 0.10 $ (0.72)
======== ======== ========
NUMBER OF SHARES USED IN CALCULATION OF EARNINGS (LOSS) PER SHARE:
BASIC 6,575 3,207 2,911
======== ======== ========
DILUTED 6,575 19,917 2,911
======== ======== ========
See notes to consolidated financial statements.
F-E3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
For December 31, 2003, 2002, and 2001
Accumulated
Common Stock Additional Other
(in thousands, except ------------ Paid-in Treasury Unearned Accumulated Comprehensive
share amounts) Shares Amount Capital Stock Compensation Deficit Income (loss) Total
---------- -------- --------- --------- ------------ --------- ------------- --------
BALANCE JANUARY 1, 2001 (1) 2,910,660 $ 29 $ 35,162 $ - $ - $ (21,721) $ - $13,470
Issuance of warrants - - 379 - - - - 379
Additional paid-in capital arising
from sale of shares by investee - - 5 - - - - 5
Acquisition of Crown shares by
Solitario Resources Corporation (1) - - - (45) - - - (45)
Comprehensive loss: - - - - - - - -
Net loss (1) - - - - - (2,098) - (2,098)
Net unrealized loss on
marketable equity securities
held by investee (1) - - - - - - (81) (81)
---------- -------- --------- --------- ------------ --------- ------------- --------
Comprehensive loss (1) - - - - - - - (2,179)
---------- -------- --------- --------- ------------ --------- ------------- --------
BALANCE, DECEMBER 31, 2001 (1) 2,910,660 29 35,546 (45) - (23,819) (81) 11,630
Issuance of shares for interest 1,007,082 10 400 - - - - 410
Shares cancelled in bankruptcy (66,580) - - - - - - -
Acquisition of Crown shares by
Solitario Resources Corporation (1) - - - (31) - - - (31)
Beneficial conversion feature on
debt issued - - 4,478 - - - - 4,478
Fair value of warrants issued 286 - - - - 286
Intrinsic value of variable plan
options issued - - 468 - (468) - - -
Compensation expense for
variable plan options - - - - 175 - - 175
Comprehensive income:
Net income (1) - - - - - 2,091 - 2,091
Net unrealized gain on
marketable equity securities
net of tax of $(20) (1) - - - - - - 120 120
---------- -------- --------- --------- ------------ --------- ------------- --------
Comprehensive income (1) - - - - - - - 2,211
---------- -------- --------- --------- ------------ --------- ------------- --------
BALANCE, DECEMBER 31, 2002 (1) 3,851,162 39 41,178 (76) (293) (21,728) 39 19,159
Issuance of shares for interest 1,752,886 17 1,501 - - - - 1,518
Issuance on exercise of Warrants 2,024,127 20 688 - - - - 708
Issuance of shares on conversion
of Secured notes 5,697,131 57 1,937 - - - - 1,994
Issuance of shares on conversion
of Subordinated notes 5,333,333 53 3,947 - - - - 4,000
Issuance of shares on conversion
of Subordinated B notes 3,606,667 36 2,669 - - - - 2,705
Issuance of shares on exercise of
Options 56,000 1 80 - - - - 81
Acquisition of Crown shares by
Solitario Resources Corporation - - - (230) - - - (230)
Intrinsic value of variable plan
options issued - - 4,924 - (4,924) - - -
Variable plan option Compensation - - - - 3,068 - - 3,068
Additional paid-in capital arising
from sale of shares by investee 253 - - - - 253
Comprehensive loss:
Net loss - - - - - (2,989) - (2,989)
Net unrealized loss on
marketable equity securities
net of tax of $12 - - - - - - (23) (23)
---------- -------- --------- --------- ------------ --------- ------------- --------
Comprehensive loss - - - - - - - (3,012)
---------- -------- --------- --------- ------------ --------- ------------- --------
BALANCE , DECEMBER 31, 2003 22,321,306 $ 223 $ 57,177 $ (306) $ (2,149) $ (24,717) $ 16 $30,244
========== ======== ========= ========= ============ ========= ============= ========
(1) As restated, see Note 12
See notes to consolidated financial statements.
F-E4
CROWN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------
(in thousands) 2003 2002 2001
-------- -------- --------
(as restated, (as restated,
see note 12) see note 12)
OPERATING ACTIVITIES:
Net income (loss) $(2,989) $ 2,091 $(2,098)
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Depreciation and amortization 15 7 11
Compensation expense for variable options 3,126 175 -
Equity in loss of Solitario Resources Corporation 571 873 1,512
Deferred income taxes (1,720) 4,867 -
Gain on sale of assets - (171) (214)
Gain on discharge of convertible debentures - (8,684) -
Gain on debt extinguishment - - (41)
Changes in operating assets and liabilities:
Prepaid expenses and other 54 (21) 24
Accounts payable and other current liabilities 130 134 43
-------- -------- --------
Net cash used in operating activities (813) (729) (763)
-------- -------- --------
INVESTING ACTIVITIES:
Additions to mineral properties (226) (564) (340)
Additions to mineral interests (942) - (284)
Proceeds from asset sales - - 211
Increase in restricted investments (60) - -
--------
Decrease (increase) in other assets 13 (18) (5)
-------- -------- --------
Net cash used in investing activities (1,215) (582) (418)
-------- -------- --------
FINANCING ACTIVITIES:
Payments on long-term note payable (70) (50) (30)
Proceeds from issuance of Subordinated B Notes 2,705 - -
Proceeds from exercise of warrants 708 - -
Proceeds from exercise of options 23 - -
Payment to redeem Secured notes (6) - -
Proceeds from Senior Notes - 3,284 350
Payment on discharge of convertible debentures - (1,000) -
-------- -------- --------
Net cash provided by financing activities 3,360 2,234 320
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,332 923 (861)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,033 110 971
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,365 $ 1,033 $ 110
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-cash transactions:
Debt converted to shares of common stock $ 8,699 $ - $ -
Securities received for mineral interest transaction - 171 -
Non-cash interest capitalized 2,758 996 615
Issuance of securities on discharge of convertible
debentures:
Secured notes payable - 2,000 -
Subordinated notes payable - 4,000 -
Warrants - 286 -
Cash placed in escrow from secured note financing - - 3,250
Long-term debt assumed in mineral interest
transactions - - 237
Issuance of warrants - - 379
See notes to consolidated financial statements.
F-E5
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Crown Resources Corporation and its subsidiaries ("Crown") engage principally in
the acquisition, exploration and development of mineral interests, which
presently exist in the western United States. Crown indirectly holds properties
in Latin America through Solitario Resources Corporation ("Solitario"), of which
Crown owns 9,633,585 shares of Solitario common stock or 38.7% as of December
31, 2003. Crown's operations constitute a single business segment.
Crown has historically derived its revenues principally from interest income,
the option and sale of property interests and to a lesser extent from payments
on royalty interests and the sale of its share of gold produced from its
properties.
On November 20, 2003 Crown executed a definitive agreement to merge with Kinross
Gold Corporation ("Kinross"), a Canadian corporation, as more fully described in
Note 2 (the "Merger"). The Merger is subject to the approval of Crown's
shareholders and customary closing conditions. Crown currently has no source of
recurring revenue and Crown anticipates any future recurring revenue would only
occur after the successful development of its Buckhorn Mountain Project. The
successful development of the Buckhorn Mountain Project is dependent on several
factors, many of which are beyond the control of Crown. Crown cannot provide any
assurance that the Merger with Kinross will be completed as planned, or that it
will be able to successfully permit and develop the Buckhorn Mountain Project in
the event the Merger is not completed (see Note 3).
Crown currently has limited financial resources and, accordingly is not engaged
directly in any significant exploration or development activity other than at
its Buckhorn Mountain Project. Crown's current objective is to complete the
permitting process for development of the Buckhorn Mountain Project in
conjunction with Kinross (see Note 3). Unless Crown is successful in these
objectives, it is unlikely that Crown will be in a position in the foreseeable
future to pursue additional exploration or development projects. Furthermore, in
the event the Merger with Kinross is not consummated, Crown will need
significant additional financial resources to develop the Buckhorn Mountain
Project and Crown cannot assure you that it will be able to obtain such
financial resources. Crown currently estimates the initial capital cost for the
Buckhorn Mountain Project will require up to $32.6 million. Based upon Crown's
current business plan, Crown estimates its current financial resources are
sufficient to fund its operations through 2005.
CORPORATE REORGANIZATION
On March 8, 2002, Crown filed a voluntary petition for protection under Chapter
11 of the United States Bankruptcy Code (the "Bankruptcy") in the United States
Bankruptcy Court for the District of Colorado (the "Court"). As part of the
Bankruptcy, Crown filed a Plan of Reorganization (the "Plan") and a Disclosure
Statement with the Court on March 25, 2002. On May 30, 2002, the Court confirmed
the Plan, which became effective on June 11, 2002 (the "Effective Date").
Accordingly, Crown was in Bankruptcy a total of 84 days (March 8, 2002 through
May 30, 2002). While the Plan resulted in a change in ownership of greater than
fifty percent, the reorganization value of the assets of Crown immediately
before the Effective Date was greater than the total of all post-petition
liabilities and allowed claims. As a result, Crown did not adopt fresh start
reporting and continues to recognize its historical basis of accounting.
As part of the Plan, Crown restructured its existing $15 million 5.75%
Convertible Subordinated Debentures due August 2001 (the "Debentures"). The
restructuring was completed through an exchange of outstanding Debentures,
including any accrued interest thereon for the following consideration, which
was proportionally distributed to each Debenture holder:
(i) $1,000,000 in cash;
(ii) $2,000,000 in 10% Convertible Secured Notes (the "Secured
Notes") convertible into Crown common shares at $0.35 per share.
The Secured Notes were pari-passu to and had essentially
F-E6
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
the same terms as the Senior Notes (see Note 5), including a 10%
interest rate payable in cash or common stock at Crown's option,
and a maturity date of October 2006. The number of shares of
Crown's common stock that could have been issued in satisfaction
of accrued interest is calculated by dividing the value of the
accrued interest obligation at the stated interest rate by the
conversion price of $0.35 per share. On November 21, 2003 the
Secured Notes were called for redemption, and substantially all
outstanding Secured Notes were converted to common stock as of
December 31, 2003 (see Note 5).
(iii) Warrants, which expire in October 2006 that entitled the holders
the right to purchase, in the aggregate, 5,714,285 shares of
Crown common stock at an exercise price of $0.75 per share; and
(iv) $4,000,000 of convertible unsecured subordinated notes (the
"Subordinated Notes") convertible into Crown common shares at
$0.75 per share. The Subordinated Notes paid interest at 10% in
cash or common stock at Crown's option, and matured on the same
date as the Secured Notes. The number of shares of Crown's
common stock that could have been issued in satisfaction of
accrued interest is calculated by dividing the value of the
accrued interest obligation at the stated interest rate by the
conversion price of $0.75 per share. On November 5, 2003, all
outstanding Subordinated Notes were automatically converted into
common stock.
In order to effect the Plan on the Effective Date, Crown entered into a Custody
and Disbursing Agreement with Wells Fargo Bank, Minnesota N.A. (the "Disbursing
Agent") as well as trust indentures with Deutsche Bank Trust Company, Americas,
as Trustee on the Secured Notes and with Wells Fargo Bank Minnesota, N.A. as
Trustee on the Subordinated Notes. Crown also transferred $1,000,000 to the
Disbursing Agent on the Effective Date. As of December 31, 2003, the Disbursing
Agent had delivered $983,667 in cash, $1,967,333 in Secured Notes, $3,934,666 in
Subordinated Notes (including accrued and paid interest from June 11, 2002) and
Warrants to purchase 5,620,952 shares of Crown common stock to Debenture holders
who had presented $14,755,000 in Debenture certificates. As of March 19, 2004,
$245,000 in Debenture certificates have not been presented. If all of these
Debentures are presented, the disbursing agent will distribute $16,000 in cash,
93,333 shares of Crown common stock from the converted Secured Notes (plus
accrued interest since June 11, 2002), 87,111 shares of Crown common stock from
the converted Subordinated Notes (plus accrued interest since June 11, 2002),
and warrants to acquire 93,333 shares of Crown common stock with an exercise
price of $0.75 per share. The Debenture holders have until June 2007 to present
their certificates, at which time any undistributed cash, stock and warrants
will revert to Crown.
The Plan provided that all other liabilities of Crown would be paid in the
normal course.
As part of the Plan Crown effected a one for five reverse split on the Effective
Date of the currently outstanding common stock, while maintaining the conversion
and exercise prices of the Senior Notes, the Secured Notes, the Subordinated
Notes and the related warrants. Under the Plan, any shareholder holding less
than 500 shares prior to the one for five reverse split and the holder of
Crown's Preferred Stock would receive no distribution. Accordingly, 66,580
shares of common stock and the outstanding Preferred Stock, held by a wholly
owned subsidiary, which had previously been eliminated in consolidation, were
cancelled.
The Plan, which was approved by the shareholders, also included the 2002 Crown
Stock Incentive Plan (the "2002 Plan") as of the Effective Date. Under the 2002
Plan Crown may grant options to purchase up to an aggregate maximum of 5 million
shares to employees, consultants and directors. As part of the Plan, Crown filed
Restated Articles of Incorporation with the Secretary of State of the State of
Washington.
F-E7
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
FINANCIAL REPORTING
The consolidated financial statements include the accounts of Crown and its
wholly and majority-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. Undivided interests in
mineral interests are accounted for by the proportionate consolidation method in
accordance with standard practice in the mining industry.
Crown accounts for its investment in Solitario under the equity method of
accounting. Crown records as treasury stock its proportionate share of
Solitario's recorded cost basis for Solitario's investments in the equity
securities of Crown. Crown's proportionate interest in Solitario's gains and
losses associated with changes in the fair value of Solitario's investment in
Crown warrants and Solitario's investment in Crown common stock are not
recognized in Crown's statement of operations, or as a component of
comprehensive income (loss), respectively. See Notes 4 and 5.
Crown accounts for sales of common stock by Solitario as equity transactions. In
2003 and 2001, Solitario had sales of common stock that resulted in an increase
in Crown's carrying amount of its investment in Solitario of $253,000 and
$5,000, respectively, which Crown recorded as an increase in additional paid-in
capital as disproportionate share on sale of unconsolidated subsidiary stock for
these sales in 2003 and 2001.
USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates and the differences could be material.
CASH EQUIVALENTS
Cash equivalents include investments in highly liquid debt securities with
maturities of three months or less when purchased.
RESTRICTED INVESTMENTS
All amounts classified as short term investments in the consolidated balance
sheets for the years ended December 31, 2003 and 2002 relate to cash bonds under
which Crown has completed its reclamation activities. Crown anticipates these
bonds will be released during the next year. Included in non-current assets at
December 31, 2003 and 2002 are $61,000 and $31,000, respectively of restricted
investments.
MINERAL PROPERTIES AND INTERESTS
On January 1, 2002, Crown adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," which, among other
things, required the reclassification of Crown's land and leasehold costs from
mineral properties to mineral interests (intangible assets). Crown's mineral
interests represent mineral use rights for parcels of land not owned by Crown.
Crown's mineral interests relate to its Buckhorn Mountain Project and the value
of such intangible assets is primarily determined by the nature and amount of
economic minerals believed to be contained, or potentially contained therein. At
January 1, 2002, Crown reclassified $18,474,000 from mineral properties to
mineral interests. Crown amortizes mineral interests over their expected useful
lives or until it has been determined the mineral interest contains proven and
probable reserves. As all of our capitalized costs since January 1, 2002, have
related to the Buckhorn Mountain Project that has proven and probable reserves.
Crown has not recorded any amortization of those costs.
F-E8
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
Land and leasehold acquisition costs and development costs on mineral interests
with proven and probable reserves are capitalized and will be depleted using the
units-of-production method over the estimated life of the reserves. If there are
insufficient reserves to use as a basis for depleting such costs, they are
written off as a mineral property or mineral interest impairment in the period
in which the determination is made. Interest costs are capitalized on mineral
properties and mineral interests in development. Interest is capitalized by
applying a weighted average interest rate, including the effects of any
discounts, to the average capitalized costs during a period, up to a maximum of
total interest costs incurred during the period. Crown capitalized interest
costs of $3,068,000, $996,000 and $1,046,000 for the years ended December 31,
2003, 2002 and 2001, respectively. At December 31, 2003 and 2002 a total of
$13,885,000 and $10,817,000, respectively, of interest costs have been
capitalized as mineral interests and mineral properties at the Buckhorn Mountain
Project.
Crown expenses all exploration costs incurred on its mineral interests, other
than acquisition costs, prior to the establishment of proven and probable
reserves. Development costs incurred on mineral interests with proven and
probable reserves are capitalized as mineral properties. Crown regularly
performs evaluations of its investment in mineral interests to assess the
recoverability and or the residual value of its investments in these assets. All
mineral interests and mineral properties are reviewed for impairment whenever
events or circumstances change which indicate the carrying amount of an asset
may not be recoverable, utilizing established guidelines based upon undiscounted
future net cash flows from the asset or upon the determination that certain
exploration properties do not have sufficient potential for economic
mineralization. There were no mineral interest or mineral property impairments
in 2003, 2002 or 2001.
At December 31, 2003 and 2002, Crown has capitalized costs, net of amortization,
of $29,660,000 and $25,714,000, respectively, related entirely to the Buckhorn
Mountain Project. These costs will be amortized on the units-of-production
method over the life of the proven and probable reserves. The recoverability of
these costs is dependent on, among other things, the successful permitting and
development of the Project.
MARKETABLE EQUITY SECURITIES
Crown's investment in marketable equity securities are classified as
available-for-sale and are carried at fair value. The cost of marketable equity
securities sold is determined by the specific identification method. Changes in
fair value are recorded in accumulated other comprehensive income (loss) within
stockholders' equity, unless a decline in market value is considered other than
temporary, which is recognized as a loss in the statement of operations.
In January 2001, Crown sold its entire holding in its 100% owned-subsidiary,
Judith Gold Corporation (which held certain royalty interests), to Canyon
Resources Corporation ("Canyon") for 200,000 shares of Canyon common stock.
Crown had completely amortized its investment in Judith Gold Corporation as of
December 31, 2000 and recorded a gain on sale of approximately $200,000 during
2001. In June 2001, Crown sold its Canyon stock to Solitario for $200,000.
During the years ended December 31, 2003, 2002, 2001 there were no realized
gains or losses from sales of marketable equity securities and unrealized gains
and (losses) of $(23,000), $120,000 and $(81,000), respectively, were recorded
in accumulated other comprehensive income (loss) in the statement of
stockholders' equity.
LONG-TERM DEBT DISCOUNTS
Long-term debt discounts have been recorded to recognize the fair value of
warrants issued in conjunction with debt issuances, and beneficial conversion
features on convertible debt instruments. The fair value of the warrants and the
intrinsic value of the beneficial conversion features at the time of the debt
issuance are recorded as reductions to the carrying value of the related debt
instruments and increases in additional paid in capital. These debt discounts
are amortized to interest expense using the effective interest method over the
term of the debt. Debt discounts for instruments that are converted or redeemed
prior to their scheduled maturity are charged to interest cost upon the
conversion or redemption. (see Note 5) Debt discounts are included in
determining the interest rate to be used for capitalization of interest costs.
Through December 31, 2003, all debt discounts have been included in capitalized
interest.
F-E9
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related to certain income and expenses recognized in different periods for
financial and income tax reporting purposes. Deferred tax assets and liabilities
represent the future tax consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
Deferred taxes also are recognized for operating losses and tax credits that are
available to offset future taxable income and income taxes, respectively. A
valuation allowance is provided if it is more likely than not that some or all
of the deferred tax assets will not be realized.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income or loss includes changes between the cost basis and the
fair value of marketable equity securities unless a decline in the fair value of
the marketable equity security is deemed permanent. Crown records any gain or
loss in its consolidated statement of operations upon the sale of marketable
equity securities in the period in which the security is sold.
REVERSE STOCK SPLIT
Crown effected a one for five reverse split of its common stock in connection
with the Plan on the Effective Date. All share and per share amounts have been
adjusted to give retroactive effect to the reverse stock split for all periods
presented.
EARNINGS (LOSS) PER SHARE
The calculation of basic and diluted earnings (loss) per share is based on the
weighted average number of common shares outstanding during the years ended
December 31, 2003, 2002, and 2001, net of the weighted average number of
treasury shares. Weighted average shares outstanding are reduced by Crown's
proportionate share of Solitario's holdings of Crown common stock. Stock
options, warrants and convertible debt securities that could potentially dilute
earnings per share but were excluded from the computation of per share amounts
as their inclusion would have been anti-dilutive, were approximately 27,269,000
shares in 2003, 18,800,000 shares in 2002, and 24,100,000 shares in 2001. The
calculation of diluted earnings per share is detailed below:
(in thousands except per share amounts) For the year ended December 31
-------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Net income (loss) $ (2,989) $ 2,091 $ (2,098)
Effect of Dilutive Securities:
Convertible debentures - - -
Options - - -
------------- ------------- -------------
Diluted net income $ (2,989) $ 2,091 $ (2,098)
============= ============= =============
Shares:
Basic weighted average shares
outstanding, net of treasury stock 6,575 3,207 2,911
Effect of Dilutive Securities:
Convertible debentures - 16,631 -
Options - 79 -
------------- ------------- -------------
Diluted weighted average shares
outstanding, net of treasury stock 6,575 19,917 2,911
============= ============= =============
Basic earnings per share $ (0.45) $ 0.65 $ (0.72)
============= ============= =============
Diluted earnings per share $ (0.45) $ 0.10 $ (0.72)
============= ============= =============
F-E10
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
EMPLOYEE STOCK COMPENSATION PLANS
Crown follows Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." ("APB 25"). Under the terms of Crown's stock option plans,
the exercise price of options issued to employees and directors equals the
quoted market price of the stock on the date of grant. As a result of repricing
options under Crown's 1988 Stock Benefit Plan (the "1988 Plan") and Crown's 1991
Stock Incentive Plan (the "1991 Plan") in 1998 and 1999, Crown began to account
for those options grants using variable plan accounting as of July 1, 2000. The
Plan of Reorganization rejected both the 1991 Plan and the 1988 Plan and all
option awards were canceled. The Plan approved Crown's 2002 Stock Incentive Plan
(the "2002 Plan"). In July 2002 Crown's Board of Directors granted options to
purchase 3,375,000 shares of Crown common stock under the 2002 Plan. Of these,
2,600,000 were deemed replacement options for cancelled options awards and Crown
accounts for these options as variable awards. Accordingly Crown accounts for
increases and decreases in the intrinsic value of the 2,600,000 options as
compensation expense in accordance with APB 25.
In December 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123" ("SFAS No. 148"). SFAS No. 148 amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results.
Pro forma information, in accordance with SFAS No. 148, has been computed as if
Crown had accounted for its stock options under the fair value method prescribed
by SFAS No. 123. The fair values of these options were estimated at the date of
grant using a Black-Scholes option pricing model with the following assumptions
for 2003, 2002 and 2001 grants, respectively; risk-free interest rates of 3.09%,
3.85%, and 4.74%; dividend yields of 0%; volatility factors of the expected
market price of Crown's common stock of 89%, 88%, and 69%; and a weighted
average expected life of the options of 3.5 years in 2003, 3.5 years in 2002,
and 4.2 years in 2001. The weighted average fair values of the options granted
are estimated at $0.27, $0.24, and $0.15 per share in 2003, 2002 and 2001,
respectively. Had Crown accounted for its stock options under the fair value
method of SFAS No. 123, the following results would have been reported:
(in thousands except per share amounts) For the year ended December 31
-------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Net income (loss) as reported $ (2,989) $ 2,091 $ (2,098)
Add: Stock-based compensation expense included
in reported net income (loss), net of related tax
effects 2,063 115 -
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (134) (452) (37)
------------- ------------- -------------
Pro forma net income (loss) $ (1,060) $ 1,754 $ (2,061)
============= ============= =============
Basic earnings (loss) per share:
As reported $ (0.45) $ 0.65 $ (0.72)
Pro forma $ (0.16) $ 0.55 $ (0.71)
Diluted earnings (loss) per share:
As reported $ (0.45) $ 0.10 $ (0.72)
Pro forma $ (0.16) $ 0.09 $ (0.71)
Recent accounting pronouncements
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which
clarifies the classification as liabilities for certain financial instruments
including equity shares that are mandatorily redeemable, or a financial
instrument other than equity shares that has an obligation to repurchase the
instrument with equity shares, including a conditional obligation to settle the
financial instrument with equity shares. SFAS No. 150 has been adopted by Crown
and is effective for financial instruments entered into after May 31, 2003. The
adoption of this statement has not had a material effect on Crown's consolidated
financial position or results of operations.
F-E11
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" to amend and clarify financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
The changes in this statement are intended to improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly to achieve more consistent reporting of contracts as either derivative
or hybrid instruments. SFAS No. 149 has been adopted by Crown and will be
applied prospectively for contracts entered into or modified after June 30,
2003. The adoption of this statement has not had a material effect on Crown's
consolidated financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") and in December 2003 issued FIN 46R. FIN
46 requires the consolidation of variable interest entities which have one or
both of the following attributes (1) the equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
financial support from other parties which is provided by other parties that
will absorb some or all of the expected losses of the entity, (2) the equity
investors lack controlling financial interest as evidenced by (i) the ability to
make decisions regarding the entity's activities through voting or similar
rights (ii) the obligation to absorb expected losses, which make it possible for
the entity to finance its activities and (iii) the right to receive expected
residual returns of the entity if they occur, which is the compensation for
absorbing the expected losses. FIN 46 was immediately effective for variable
interest entities formed after January 31, 2003. FIN 46R requires the adoption
of either FIN 46 or FIN 46R in financial statements of public entities that have
interests in structures that are commonly referred to as special purpose
entities for periods ending after December 15, 2003. Application for all other
types of variable interest entities is required in financial statements for
periods ending after March 15, 2004. Crown did not have any investments in or
relationships with variable interest entities at December 31, 2003. The adoption
of FIN 46R is not expected to have a material effect on Crown's consolidated
financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the disclosure
by guarantors of (a) the nature of any guarantee, (b) maximum potential amount
of future payments associated therewith, (c) carrying amounts of liabilities, if
any, related to the guarantor's obligations under the guarantee and (d) the
nature and extent of any recourse or collateral for recovery of any amounts paid
under the guarantee. FIN 45 also requires guarantors to recognize at the
inception of a guarantee within its scope a liability for the fair value of
obligations undertaken in issuing the guarantee, including the obligation to
stand ready to perform over the term of guarantee. Crown has applied the
provisions of FIN 45 for interim and annual periods ending after December 15,
2002 and the effect of adopting this interpretation was not material to its
consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities and generally
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at its fair value in the period in
which the liability is incurred. SFAS No. 146 does not apply to costs associated
with the retirement of long-lived assets covered by SFAS No. 143. Crown has
adopted the provisions of SFAS No. 146 effective for exit or disposal activities
initiated after December 31, 2002. The adoption of this statement has not had a
material effect on Crown's consolidated financial position or results of
operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 eliminates inconsistencies between the accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications. This statement requires that gains and losses from debt
extinguishments should be classified as extraordinary items only if they meet
the criteria of Accounting Principles Board Opinion No. 30. This Statement also
amends existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their meanings under changed
conditions. Crown has adopted SFAS No. 145 as of January 1, 2003. As a result of
the adoption of this Statement, Crown has reclassified a $8,684,000 gain in 2002
on the discharge of its Convertible Debentures from an extraordinary item net of
taxes, to a gain before related tax effects in its 2002 consolidated statement
of operations. The adoption of this Statement has not had any other material
effects on Crown's financial position or results of operations.
F-E12
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
On January 1, 2002, Crown adopted SFAS No. 141 and SFAS No. 142, which among
other things required the reclassification of Crown's capitalizes land and lease
acquisition costs from mineral properties to mineral interest (intangible
assets). The excess of the cost of each mineral interest over its estimated
residual value is amortized over the proven and probable reserves on a units of
production basis. Since January 1, 2002, all of Crown's mineral interests relate
to its Buckhorn Mountain Project, which is in development and will be amortized
over its proven and probable reserves. Accordingly, no amortization has been
recorded on these assets. Beginning January 1, 2002, Crown reclassified
$18,474,000 of these costs from mineral properties to mineral interests.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." Under SFAS No. 143, the fair value of a liability for an asset
retirement obligation covered under the scope of SFAS No. 143 would be
recognized in the period in which the liability is incurred, with an offsetting
increase in the carrying amount of the related long-lived asset. Over time, the
liability would be accreted to its present value, and the capitalized cost would
be depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity would either settle the obligation for its recorded amount
or incur a gain or loss upon settlement. Crown adopted Statement 143 as of
January 1, 2002. The adoption of this Statement has not had a material effect on
Crown's consolidated financial position or results of operations.
Reclassifications
Certain reclassifications have been made to the 2002 and 2001 consolidated
financial statements to conform to the 2003 presentation.
2. MERGER AGREEMENT
On November 20, 2003, Crown executed a definitive agreement entitled
"Acquisition Agreement and Agreement and Plan of Merger" (the "Merger
Agreement") with Kinross Gold Corporation ("Kinross"), a Canadian corporation,
whereby each of the outstanding shares of common stock of Crown will be
exchanged for 0.2911 shares of Kinross common stock at closing (the "Merger").
The Merger is subject to the approval of two thirds of Crown's shareholders and
customary closing conditions. Until the Merger is completed, Crown is required
to operate its business in the ordinary course, and is restricted from engaging
in certain significant business and financing transactions, or changes in
corporate structure.
Crown intends, and the Merger Agreement contemplates, that all or some portion
of the common stock of Solitario held by Crown will be distributed to Crown's
shareholders prior to the effective time of the Merger. Crown has agreed to use
its commercially reasonable efforts to cause Solitario to make all filings and
obtain all regulatory approvals required by the United States and Canadian
securities laws and rules of the Toronto Stock Exchange ("TSX") in connection
with the distribution by Crown of the Solitario common stock to the shareholders
of Crown and to reasonably cooperate in providing all information to Solitario
necessary to complete such filings.
The Merger Agreement further contemplates that the Crown Board of Directors will
take action as permitted under the Crown 2002 Stock Incentive Plan so that all
outstanding stock options to purchase Crown common stock will either be
exercised or terminated prior to the effective time of the Merger. Additionally,
holders of unexercised warrants to purchase shares of Crown common stock will be
allowed to elect to exchange the warrant for 0.2911 shares of Kinross common
stock for each share of Crown common stock that would have been issued on the
exercise of the warrant immediately prior to the effective time of the Merger on
a cashless basis, or absent making this election, the warrant will represent the
right to acquire Kinross common shares in accordance with the terms and
conditions of the warrant as amended pursuant to the Merger Agreement.
The Merger Agreement may be terminated by either party if the transaction has
not been consummated by September 30, 2004 subject to certain conditions, by
mutual written consent, or upon the failure of Crown to obtain the approval of
its shareholders. Both Crown and Kinross may also terminate the Merger Agreement
upon the occurrence of a material breach of the agreement by the other party as
defined in the Merger Agreement. Should Crown fail to complete the Merger as a
result of receiving a superior proposal within six months of the date of the
Merger Agreement, Crown will be obligated to pay Kinross a termination fee of
$2.0 million plus Kinross' documented, reasonable third-party, out-of-pocket
expenses in connection with the Merger Agreement. Crown has
F-E13
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
further agreed to use its commercially reasonable efforts to amend or redeem its
outstanding convertible notes prior to the effective time of the Merger. See
Notes 5 and 10.
3. MINERAL PROPERTIES AND INTERESTS:
BUCKHORN MOUNTAIN PROJECT
The Buckhorn Mountain Project is located on approximately 2,000 acres 24 miles
east of Oroville, Washington. Crown currently owns 100% of the Buckhorn Mountain
Project, which was held in a joint venture with Battle Mountain Gold Corporation
("Battle Mountain") prior to July 2001. During Crown's joint venture with Battle
Mountain, the Buckhorn Mountain Project was known as the Crown Jewel Project.
Battle Mountain merged with Newmont Gold Corporation (both companies referred to
as "Newmont") on January 10, 2001. The Buckhorn Mountain Project has reported
reserves of 991,000 ounces of contained gold in 3,076,000 tons of ore, based on
a December 2003 feasibility study (the "SRK Feasibility Study"). Crown
previously reported reserves of 839,000 ounces based upon a 2000 study by Mine
Reserves Associates, Inc. of Wheat Ridge, Colorado.
The Buckhorn Mountain Project is held by a combination of fee ownership, fee
land for which leases are held with options to purchase, and unpatented mining
claims. The ore deposit lies primarily on unpatented claims owned by Crown.
Royalties on mineral property controlled by Crown payable to third parties vary
from a 2% net smelter return royalty to an 8.33% net profits royalty on certain
unpatented mining claims. The ore body as currently defined is subject only to a
sliding-scale royalty payable to Newmont of 0.5% to 4%, depending on the price
of gold. The Newmont royalty may be purchased in its entirety for $2.0 million
at any time before July 23, 2006.
In July 2001, Crown completed an agreement (the "Termination Agreement") with
Newmont to terminate its joint venture on the Buckhorn Mountain Project, under
which Newmont was entitled to earn a 54% interest in the Buckhorn Mountain
Project by building a 3,000-ton per day milling facility. During 2002 Crown
began seeking regulatory approval and permits to operate a primarily underground
mining operation at the Buckhorn Mountain Project, which Crown believes
significantly reduces the environmental impacts compared to the open-pit mining
plan proposed by Newmont.
On November 11, 2003, Crown entered into a toll milling agreement (the "Toll
Milling Agreement") with Echo Bay Minerals Co. ("Echo Bay Minerals"), a
wholly-owned subsidiary of Kinross, whereby Crown would deliver ore from its
Buckhorn Mountain Project deposit to Echo Bay Minerals' Kettle River mill, which
is located approximately 57 miles from the Buckhorn Mountain Project. Under the
terms of the Toll Milling Agreement, Echo Bay Minerals agreed to process up to
1,500 tons per day of ore (the "Production Ores") at a cost to Crown of $20 per
ton. In addition Crown agreed to pay a one-time capital charge of $5 million to
Echo Bay Minerals on or before the last day of the calendar month following the
first delivery of Production Ores to the Kettle River Mill. The agreement is
subject to Crown obtaining the necessary permits to mine and deliver the
Production Ores, standard toll-milling terms regarding (among other terms)
grade, delivery, commingling and refining, and regulatory approval.
As a result of signing the Toll Milling Agreement with Echo Bay Minerals, Crown
has prepared an amended Buckhorn Mountain Project Plan of Operations to
accommodate this change in operation. Crown is unaware of any legal impediments
to permitting a mining operation as proposed in the Amended Buckhorn Mountain
Project Plan of Operations. Although Crown is not aware of any laws or
regulations which would be violated by the mine design proposed in the SRK
feasibility study, until all permits are received there will continue to be
uncertainty regarding the ability of Crown to obtain the necessary permits to
develop the Buckhorn Mountain Project in a timely manner, if ever. Construction
of the Buckhorn Mountain Project may not begin prior to the successful issuance
of the remaining permits.
On April 16, 1992, we filed a patent application with the United States
Department of the Interior. The Mining Law of 1872 of the United States allows
owners of unpatented mining claims that demonstrate economic viability of
mineralization discovered on such claims to apply for patent of the unpatented
claim. Patenting involves the transfer of surface ownership from the U.S.
Government to the successful patent applicant. Certain opposition groups filed a
protest to our patent application with the Department of Interior. We filed a
response to the protest. The Department of Interior has not set a time frame for
granting the patents or responding to the protest.
F-E14
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
Approval of this patent application will not change the ultimate ownership of
the reserves at the Buckhorn Mountain Project. Currently the mineral rights
under the unpatented claims are subject to meeting certain annual maintenance
work requirements and payment of an annual claim fee. The U.S. Government owns
the surface rights on our unpatented claims. Approval of the patent application
will eliminate the annual maintenance and fee requirement as well as combine
perfected title to us regarding the surface rights on our existing unpatented
claims. If the Department of the Interior does not grant the patents on our
existing unpatented claims, it will not affect our rights to mine on the
unpatented claims nor require us to modify our currently planned mining
operation.
CORD RANCH
In 2002, Crown sold its interest in the Cord Ranch properties to Royal Standard
Minerals, Inc. ("Royal Standard") for one million shares of common stock of
Royal Standard. Crown recorded a gain on sale of $171,000, which equaled the
market value of the shares received on the date of sale, as Crown had no
carrying value for its interest in the Cord Ranch Properties. As of December 31,
2003 and 2002, the shares of Royal Standard common stock are reflected on
Crown's accompanying consolidated balance sheets as marketable equity securities
available for sale.
KINGS CANYON
The Kings Canyon property in Utah consists of 360 acres of unpatented claims.
Crown holds a 100% interest in the property, subject to a 4% net smelter royalty
to third parties. There are no capitalized costs related to the Kings Canyon
property as of December 31, 2003. Crown intends to maintain the property and may
seek a joint venture partner to further evaluate and develop the Kings Canyon
property.
Capitalized costs
Mineral interests and mineral properties costs are comprised of the
following:
As of December 31,
(in thousands) 2003 2002
---- ----
Mineral interests:
Land and leasehold costs $ 21,583 $ 19,703
Less accumulated depreciation, depletion and
amortization (601) (601)
--------- ---------
Land and leasehold costs, net $ 20,982 $ 19,102
========= =========
Mineral properties:
Development costs $ 8,678 $ 6,612
========= =========
All amounts in the table above relate to Crown's Buckhorn Mountain Project,
which contains all of Crown's total proven and probable gold reserves and its
only property in development. Crown had no foreign assets at December 31, 2003
and 2002.
F-E15
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
4. INVESTMENT IN SOLITARIO RESOURCES CORPORATION:
As discussed in Note 1, Crown accounts for its investment in Solitario under the
equity method of accounting. The fair value, based on the quoted market price,
of Crown's 9,633,585 shares of Solitario common stock was approximately
$13,198,000 and $3,973,000 at December 31, 2003 and 2002, respectively.
Condensed financial information of Solitario is as follows:
BALANCE SHEETS As of December 31,
------------------
(in thousands) 2003 2002
---------- ----------
ASSETS
Current assets $ 3,993 $ 1,952
Mineral interests, net 2,760 3,216
Investment in Crown warrant, at fair value 5,591 153
Note receivable from Crown 937 915
Other 7 140
---------- ----------
Total assets $ 13,288 $ 6,376
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 763 $ 99
Deferred income taxes 591 -
Stockholders' equity 11,934 6,277
---------- ----------
Total liabilities and stockholders' equity $ 13,288 $ 6,376
========== ==========
STATEMENTS OF OPERATIONS Year Ended December 31,
----------------------------------------
(in thousands) 2003 2002 2001
---------- ---------- ----------
Unrealized gain (loss) on derivative instruments $ 5,438 $ 105 $ (63)
Other costs and expenses (2,084) (2,184) (3,670)
---------- ---------- ----------
Net income (loss) $ 3,354 $ (2,079) $ (3,733)
========== ========== ==========
The following is a reconciliation of Solitario's reported stockholders' equity
to amounts reported by Crown as its investment in Solitario:
As of December 31,
------------------
(in thousands) 2003 2002
---------- ----------
Solitario stockholders' equity, as reported $ 11,934 $ 6,277
Adjustments:
Less Solitario's book value of Crown securities, recorded as
treasury Stock 793 185
Less Solitario's other comprehensive income, related to gains
on Crown common stock, net of 607,000 of tax in 2003 1,144 31
Less Solitario's unrealized gain on derivative instruments,
related to gain on Crown warrants, net of 669,000 of tax in 2003 4,812 43
---------- ----------
Solitario adjusted stockholder's equity 5,185 6,018
Crown percentage 38.7% 41.2%
---------- ----------
Crown's investment in unconsolidated subsidiary $ 2,004 $ 2,477
========== ==========
The following is a reconciliation of Solitario's reported net income
(loss) to amounts reported by Crown as its equity in loss of Solitario:
For the year ended December 31,
----------------------------------------
(in thousands) 2003 2002 2001
---------- ---------- ----------
Solitario net income (loss) as reported $ 3,354 $ (2,079) $ (3,733)
Adjustments:
Solitario's derivative (gains) and losses recorded in its
statement of operations for its holdings of Crown
warrants, net of $669,000 of tax in 2003 (4,769) (105) 63
Other, net - 63 3
---------- ---------- ----------
Solitario adjusted loss (1,415) (2,121) (3,673)
---------- ---------- ----------
Crown weighted average percentage (1) 40.4% 41.2% 41.2%
---------- ---------- ----------
Crown's equity in loss of unconsolidated subsidiary $ (571) $ (873) $ (1,512)
========== ========== ==========
(1) The weighted average interest of Crown in Solitario's net income or loss
for the year ended December 31, 2003 reflects the dilution of Crown's
ownership interest resulting from Solitario's sale of its common stock
to a third party in November 2003. As discussed below, this transaction
reduced Crown's investment in Solitario to 38.7% as of December 31,
2003.
F-E16
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
For purposes of calculating its investment in Solitario and its equity in
Solitario's earnings and losses, Crown has excluded the amounts reported by
Solitario with respect to its investment in Crown warrants and Crown common
stock.
On November 4, 2003, Solitario completed a private placement to certain Canadian
based funds managed by Sprott Asset Management of Toronto, Ontario of 1,500,000
of Solitario common shares at a price of Cdn $1.20 per share for total proceeds
of Cdn $1,800,000, or approximately $1,310,000 (net). The additional shares
reduced Crown's interest in Solitario to 38.7% at December 31, 2003 from 41.2%
at September 30, 2003. Crown's proportionate interest in this sale, net of
taxes, has been recorded as an increase in Crown's investment in Solitario, and
an increase in additional paid-in capital.
On October 8, 2003, Crown announced that it intends to distribute its holdings
of 9,633,585 shares of Solitario's common stock prior to the completion of the
proposed Merger with Kinross. When Solitario sold shares in a Canadian public
offering in 1994, the Toronto Stock Exchange (the "TSX") required that the
issued and outstanding shares of Solitario held by Crown be held in escrow
pursuant to an escrow agreement (the "Escrow Agreement") to, among other things,
prevent Crown from selling too large a volume of Solitario shares shortly after
the public offering. Over the next three years sixty percent of the shares held
in escrow were released to Crown pursuant to the Escrow Agreement. On December
29, 2003, as required by the TSX, Solitario's disinterested shareholders (which
excluded Solitario's officers, directors and Crown) voted to approve the release
of the remaining 3,140,162 shares of Solitario held in escrow. The shares were
released from escrow on January 15, 2004. This will enable Crown to distribute
substantially all of the 9,633,585 shares of Solitario's common stock to the
shareholders of Crown in anticipation of closing the Merger with Kinross. No
fractional shares will be issued and no cash payments will be made in lieu of
fractional shares. Crown plans to retain any shares not distributed as
fractional shares. Crown estimates the total number of Solitario shares from
undistributed fractional shares will be less than 1,000 shares.
5. LONG-TERM DEBT:
SENIOR NOTES
In October 2001 Crown issued $3,600,000 of 10% convertible secured promissory
notes due in October 2006 (the "Senior Notes"). Crown used $1,000,000 of the
proceeds to pay the cash component due the former Debenture holders described in
Note 1. The remaining proceeds were used by Crown for general corporate
purposes. The Senior Notes are secured by all of the assets of Crown on a
pari-passu basis with the Secured Notes, discussed below. At December 31, 2003,
these assets consist primarily of Crown's interest in the Buckhorn Mountain
Project and its 38.7% investment in Solitario.
The Senior Notes have a five-year term and carry a 10% interest rate, payable
quarterly in cash or Crown common stock at the conversion prices of $0.35 and
$0.2916 per share at the election of Crown. Originally, proceeds of $3,250,000
from the Senior Notes were placed in escrow pending restructuring of the
Debentures (the specific Senior Notes related to the proceeds placed in escrow
are also referred to as "Escrowed Notes"). Solitario invested $650,000 in these
Escrowed Notes. The Escrowed Notes are convertible into Crown common shares at a
conversion price of $0.35 per share, subject to adjustment. In addition, the
Escrowed Note holders have been issued a five-year warrant for every share into
which the Escrowed Notes are convertible. The warrants were exercisable upon
issuance. Each warrant is exercisable into a Crown common share at $0.75 per
share, subject to adjustment. All funds in escrow were released on the Effective
Date. Solitario also invested in a separate Senior Note, (referred to as the
"Solitario Note") for the remaining $350,000 of the Senior Notes. These funds
were made immediately available to Crown for general corporate purposes. The
Solitario Note is convertible into Crown common shares at a conversion price of
$0.2916 per share, subject to adjustment. In addition, Solitario has been issued
a five-year warrant to acquire 1,200,000 shares of Crown common stock at $0.60
per share, subject to adjustment. The terms of the Solitario Note and the
related warrant are otherwise identical to the terms of the Escrowed Notes and
warrants.
On the date of issuance, the warrants described above had an estimated fair
value of $379,000, which was recorded as a discount to the Senior Notes and
credited to additional paid-in capital. This discount is being amortized over
the life of the Senior Notes and charged to capitalized interest cost, using the
effective interest method.
F-E17
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
Under generally accepted accounting principles, any intrinsic value of the
conversion feature (market price of the stock less the effective conversion
price) of the Senior Notes must also be recorded as a discount to the Senior
Notes. At October 19, 2001, there was no intrinsic value associated with the
conversion feature of the Senior Notes and no discount was recorded thereon.
However, when the Bankruptcy Court approved the Plan of Crown on May 30, 2002,
the terms of the Senior Notes were effectively changed, since the conversion
price remained unchanged despite the 1 for 5 reverse split required by the Plan.
Based upon these revised terms, the intrinsic value of the conversion feature of
the Senior Notes as of their issuance date was $3,221,000. Effective May 30,
2002, this amount was recorded as a discount to the Senior Notes and credited to
additional paid-in capital. This conversion feature discount is being amortized
over the remaining life of the Senior Notes as of May 30, 2002 and is being
charged to capitalized interest cost.
A summary of the Senior Notes as of December 31, 2003 is as follows:
Total
Related Other Senior
Party Senior Notes
Notes Notes Payable
----- ----- -------
Face value of Senior Notes $ 1,000,000 $ 2,600,000 $ 3,600,000
Unamortized warrant discount (64,000) (156,000) (220,000)
Unamortized beneficial conversion feature discount (845,000) (2,218,000) (3,063,000)
----------- ----------- -----------
Senior Notes balance $ 91,000 $ 226,000 $ 317,000
=========== =========== ===========
A summary of the Senior Notes as of December 31, 2002 is as follows:
Total
Related Other Senior
Party Senior Notes
Notes Notes Payable
----- ----- -------
Face value of Senior Notes $ 1,000,000 $ 2,600,000 $ 3,600,000
Unamortized warrant discount (86,000) (208,000) (294,000)
Unamortized conversion feature discount (880,000) (2,309,000) (3,189,000)
----------- ----------- -----------
Senior Notes balance $ 34,000 $ 83,000 $ 117,000
=========== =========== ===========
SECURED NOTES
As discussed in Note 1, Crown issued $2,000,000 in 10% convertible Secured Notes
as part of the Corporate Reorganization. The Secured Notes carried a 10%
interest rate payable quarterly in cash or Crown common stock at the election of
Crown. The number of shares of Crown's common stock that could have been issued
in satisfaction of accrued interest is calculated by dividing the value of the
accrued interest obligation at the stated interest rate by the conversion price
of $0.35 per share. The Secured notes mature in October 2006 and are convertible
into Crown common shares at $0.35 per share. The Secured Notes were secured by
all of the Assets of Crown on a pari-passu basis with the Senior Notes. In
addition, the Secured Note holders have been issued a warrant, which expires in
2006 for every share into which the Secured Notes are convertible. The warrants
were exercisable upon issuance. Each warrant is exercisable into a Crown common
share at $0.75 per share, subject to adjustment.
Crown recorded a discount of $1,257,000 to the Secured Notes for the intrinsic
value of the conversion feature on May 30, 2002 and credited additional paid-in
capital for that amount. On the same date, the warrants associated with the
Secured Notes had an estimated value of $286,000, which was also recorded as
consideration for the exchange of the Debentures and credited to paid-in
capital. The beneficial conversion feature was being amortized over the
remaining life of the Secured Notes as of May 30, 2002 and charged to
capitalized interest cost, using the effective interest method.
F-E18
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
On November 21, 2003 the Secured Notes were called for redemption, and all but
$6,000 of outstanding Secured Notes were converted into 5,679,142 shares of
Crown common stock as of December 31, 2003, with the remainder being redeemed
for cash. The remaining unamortized discount of $940,000 was charged to
capitalized interest cost during 2003 upon conversion of the Secured Notes.
A summary of the Secured Notes at December 31, 2002 is as follows:
Face value of Secured Notes $ 2,000,000
Unamortized conversion feature discount (1,153,000)
-----------
Secured Notes balance $ 847,000
===========
SUBORDINATED NOTES
As discussed in Note 1, Crown issued $4,000,000 in 10% convertible Subordinated
Notes as part of the Debenture restructuring. The Subordinated Notes carried a
10% interest rate payable quarterly in cash or Crown common stock at the
conversion price at the election of Crown. The Subordinated Notes mature in
October 2006 and were convertible into Crown common shares at $0.75 per share.
The conversion feature of the Subordinated Notes had no intrinsic value on the
issuance date and accordingly, there was no discount recorded thereon. In
October 2003 and November 2003 a total $839,331 of Subordinated Notes were
converted into 1,119,108 shares of common stock prior to the automatic
conversion on November 5, 2003. On November 5, 2003 the remaining $3,160,669 of
Subordinated Notes were automatically converted into 4,214,225 shares of common
stock. The automatic conversions were in accordance with the provisions of the
Subordinated Notes whereby the Subordinated Notes automatically convert into
common stock if the price of the common stock trades above 233% of the
conversion price of $0.75, or $1.75, for twenty consecutive days. The shares
related to the automatic conversion are deemed issued and outstanding as of the
date of the automatic conversion.
SUBORDINATED B NOTES
On February 21, 2003, Crown issued $2,705,000 of 10% Convertible Subordinated
Promissory Notes due 2006, Series B (The "Subordinated B Notes"). The
Subordinated B Notes were convertible into common stock of Crown at $0.75 per
share. There was no beneficial conversion feature for the Subordinated B Note as
the market price was below the conversion price at issuance. The Subordinated B
Notes pay interest at 10% in stock or cash at Crown's option, and mature in
October 2006. Solitario invested $400,000 in the Subordinated B Notes on the
same terms as all other investors. On November 5, 2003, $2,705,000 of
Subordinated B Notes were automatically converted into 3,606,667 shares of
common stock. The automatic conversions were in accordance with the provisions
of the Subordinated B Notes whereby the Subordinated B Notes automatically
convert into common stock if the price of the common stock trades above 233% of
the conversion price of $0.75, or $1.75, for twenty consecutive days. The shares
related to the automatic conversion are deemed issued and outstanding as of the
date of the automatic conversion.
KEYSTONE NOTE
In July 2001, as part of the termination of the joint venture with Newmont,
Crown assumed a note with a face value of $250,000 due February 22, 2002 (the
"Keystone Note"). Crown recorded the Keystone Note at its discounted fair value
of $237,000. On December 18, 2001 Crown amended the terms of the Keystone Note,
by paying the holders of the Keystone Note $30,000 and extending the term of the
Keystone Note for a period of four years, with a payment, including interest, of
$20,000 due in June 2002 and four annual payments, including interest, of
$50,000 beginning in December 2002. As a result of this amendment to the terms
of the Keystone note, Crown recorded a discount of $41,000 to its recorded value
of the Keystone note for the present value of the remaining payments, and other
income of the same amount. This discount is being amortized to capitalized
interest cost over the remaining term of the note. Crown recorded capitalized
interest cost of $13,000 during 2003 and $17,000 during 2002 for amortization of
its discount on the Keystone note. In December 2002, Crown amended the terms of
the Keystone Note to extend payment of $20,000 of the note from December 2002 to
June 2003. The effect of this amendment was not material. At December 31, 2003,
the current portion of the Keystone Note was $49,000.
F-E19
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
INTEREST
Interest costs are capitalized on mineral property and mineral interest in
development. Interest is capitalized by applying a weighted average interest
rate to the average capitalized costs during a period, up to a maximum of total
interest costs incurred during the period. Crown capitalized all of its interest
costs of $3,068,000, $996,000 and $1,046,000 for the years ended December 31,
2003, 2002 and 2001, respectively. At December 31, 2003 and 2002 a total of
$13,885,000 and $10,817,000, respectively, of interest costs have been
capitalized as mineral property at the Buckhorn Mountain Project.
Crown may pay interest on the Senior Notes, the Secured Notes and the
Subordinated Notes in cash or Crown common shares, at its election. Crown
accrues interest at the nominal rate of 10% during the period the notes are
outstanding. For interest paid in Crown common shares, capitalized interest cost
is adjusted on the interest payment date to the market value of the common
shares issued on that date. Accrued interest up to the date of conversion on
notes converted during 2003 of $65,000 has been charged to capitalized interest
cost and credited to additional paid-in capital.
Crown recorded the following amounts to capitalized interest cost related to
long-term debt:
Year ended December 31,
2003 2002 2001
--------------------------------------------- ---------------------------------- ------------------
(in thousands) Subor- Subor- Subor-
Senior Secured dinated dinated Senior Secured dinated Senior
Notes: Notes Notes Notes B Notes Total Notes Notes Notes Total Notes Total
----- ----- ----- ------- ----- ----- ----- ----- ----- ----- -----
Stated interest $ 360 $ 185 $ 339 $ 191 $1,075 $ 359 $ 111 $ 222 $ 692 $ 72 $ 72
Warrant discount
amortization 74 - - - 74 72 - - 72 12 12
Beneficial conversion
feature discount
amortization 125 213 - - 338 32 104 - 136 - -
Unamortized discount
charged to interest
cost upon conversion - 940 - - 940 - - - - - -
Increase (decrease) in
interest cost from
shares issued for
interest 373 200 27 28 628 (98) 10 (64) (152) - -
----- ------ ----- ------- ------ ----- ----- ----- ----- ----- ------
Total $ 932 $1,538 $ 366 $ 219 3,055 $ 365 $ 225 $ 158 748 $ 84 84
===== ====== ===== ======= ===== ===== ===== =====
Convertible debentures - 231 953
Keystone Note 13 17 9
------ ----- ------
Total capitalized
interest Cost $3,068 $ 996 $1,046
====== ===== ======
For the years ended December 31, 2003, 2002 and 2001, interest income of
$25,000, $35,000 and $34,000, respectively, has been recorded as reductions in
net interest expense in Crown's consolidated statements of operations.
Future minimum payments
The following shows the future minimum payments on long-term debt:
(in thousands) 2004 2005 2006 Total
-------- -------- -------- --------
Senior Notes $ - $ - $ 3,600 $ 3,600
Keystone Note 50 50 - 100
-------- -------- -------- --------
Total payments $ 50 $ 50 $ 3,600 $ 3,700
======== ======== ======== ========
F-E20
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
6. INCOME TAXES:
Crown's income tax expense (benefit) from continuing operations consists of the
following:
(in thousands) 2003 2002 2001
-------- -------- --------
Deferred:
U.S. $ (457) $ (55) $ (388)
Foreign - - -
Operating loss and credit carryovers:
U.S. (1,263) 4,922 388
Foreign - - -
-------- -------- --------
Income tax expense (benefit) $ (1,720) $ 4,867 $ -
======== ======== ========
During 2003, income tax expense of $130,000 related to Crown's additional
paid-in capital arising from Solitario's share issuances was charged to
stockholders' equity.
During 2003 and 2002, Crown recognized other comprehensive income (loss) related
to unrealized gains (losses) on marketable equity securities of ($35,000) and
$59,000, respectively. Other comprehensive income has been credited (charged) in
the amounts of $12,000 and ($20,000), respectively, for the income tax benefit
(expense) associated with these gains (losses).
The net deferred tax liabilities in the accompanying December 31, 2003 and 2002
balance sheets include the following components:
(in thousands) 2003 2002
-------- --------
Deferred tax assets:
Net operating loss ("NOL") carryovers $ 2,339 $ 1,076
Investment in Solitario 1,981 1,933
Variable option compensation 1,103 60
Other 71 7
-------- --------
Deferred tax assets 5,494 3,076
-------- --------
Deferred tax liabilities:
Exploration, development and mineral interests costs 8,513 7,500
Depreciation and amortization 266 463
-------- --------
Deferred tax liabilities 8,779 7,963
-------- --------
Net deferred tax liabilities $ 3,285 $ 4,887
======== ========
A reconciliation of expected federal income tax expense (benefit) from
continuing operations at the U.S. statutory rates with the expense (benefit) for
income taxes is as follows:
(in thousands) 2003 2002 2001
-------- -------- --------
Income tax at statutory rates ($1,601) $ 2,357 $ (704)
Section 382 limitation - 5,751 -
Change in valuation allowance - (3,241) 631
Other (119) - 73
-------- -------- --------
Income tax expense/(benefit) $ (1,720) $ 4,867 $ -
======== ======== ========
In connection with the confirmation of the Plan, Crown had a greater than
fifty-percent change of ownership as defined in Section 382 of the Internal
Revenue Code. Pursuant to Section 382, the amount of future taxable income
available to be offset by Crown's carryovers is limited to approximately
$121,000 per year.
At December 31, 2003 Crown had unused NOL carryovers of approximately
$6,880,000, which begin to expire commencing in 2021.
F-E21
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS:
For certain of Crown's financial instruments, including cash and cash
equivalents, and short-term investments, the carrying amounts approximate fair
value due to their short maturities. The estimated fair value at December 31,
2003, based on quoted market prices, of Crown's Senior Notes was $26,514,000.
The estimated fair value at December 31, 2002, based on quoted market prices, of
Crown's Senior, Secured and Subordinated Notes was $4,500,000, $2,500,000 and
$3,400,000, respectively.
8. COMMITMENTS AND CONTINGENCIES:
In acquiring its interests in mineral claims and leases, Crown has entered into
lease agreements, which generally may be canceled at its option. Crown is
required to make work commitments and minimum rental payments in order to
maintain its interests in certain claims and leases. Crown estimates its 2004
mineral property rentals and option payments to be approximately $17,000.
Additionally, Crown has no estimated work commitments for 2004.
Crown has a defined-contribution retirement plan covering all full-time U.S.
employees. The plan provides for Company matching, at the rate of 75%, of
employee savings contributions of up to 9% of compensation, subject to ERISA
limitations. The cost of Company contributions in 2003, 2002 and 2001 was
$38,000, $40,000, and $43,000, respectively.
Crown leases office space under non-cancelable operating leases providing for
minimum annual rent payments of $32,690 in 2004, $32,690 in 2005, and $27,242 in
2006. Rent expense for all leases was $55,000, $70,000, and $73,000, for the
years ended December 31, 2003, 2002 and 2001, respectively.
Effective January 1, 2002, Crown has adopted the provisions of SFAS 143
"Accounting for Asset Retirement Obligations." During 2003, Crown acquired nine
monitoring wells related to its permitting at its Buckhorn Mountain Project.
Under Crown's proposed plan of operations these wells not be reclaimed prior to
the closure of the Buckhorn Mountain Project after mining. Crown recorded
$21,000, the estimated present value of its cost to reclaim these wells as costs
associated with the Buckhorn Mountain Project, and has reflected the related
obligation as "asset retirement obligation" on its 2003 consolidated balance
sheet. Due to the nature of its exploration activities that are currently
reclaimed, and the limited nature of its activities at its Buckhorn Mountain
Project, which have been primarily related to permitting and completion of its
feasibility study, Crown did not have any reclamation liability at December 31,
2002.
9. STOCK OPTION PLANS AND WARRANTS:
The 2002 Crown Stock Incentive Plan (the "2002 Plan") reserved 5,000,000 shares
of Crown common stock for grants under the 2002 Plan. The 2002 Plan provides
that the Board of Directors may: (a) grant incentive stock options, as defined
in Section 422 of the Internal Revenue Code of 1986; (b) grant options other
than incentive stock options ("non-qualified stock options); (c) award stock
bonuses; (d) sell and issue shares pursuant to certain restrictions under the
2002 Plan; and (e) award performance based awards as defined under the 2002
Plan. All options granted expire five years from the date of grant and vest 25
percent on the date of grant, and 25 percent on each anniversary of the date of
grant for the next three years. All options vest upon a change in control of
Crown as defined in the 2002 Plan. As of December 31, 2003, 56,000 options have
been exercised and no options have expired from the 2002 Plan.
F-E22
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
The activity in the 2002 Stock Incentive Plan for the years ended December 31,
2003 and 2002 was as follows:
2003 2002
-------------------------- --------------------------
Weighted Weighted
Number of Average Number of Average
Shares Price Shares Price
------ ----- ------ -----
Outstanding, beginning of year 3,375,000 $0.40 - $ -
Granted 60,000 0.45 3,375,000 0.40
Exercised (56,000) 0.40 - -
Cancelled / forfeited - - - -
Expired - - - -
--------- ---- --------- ----
Outstanding, end of year 3,379,000 $0.40 3,375,000 $0.40
========= ==== ========= ====
Exercisable, end of year 1,681,500 $0.40 843,750 $0.40
========= ==== ========= ====
Crown's 1988 Stock Benefit Plan (the "1988 Plan") and Crown's 1991 Stock
Incentive Plan (the "1991 Plan") had terms and conditions similar to the 2002
Plan, except that members of the Board of Directors could only receive formula
grants under the 1991 Plan. Up to 1,500,000 shares were reserved for grant under
both the 1988 Plan and the 1991 Plan (for a total of 3,000,000 shares). All
options outstanding under the 1988 Plan expired in February 2002. The Plan
rejected both the 1988 Plan and the 1991 Plan and all related option awards were
cancelled. As of December 31, 2002, there are no outstanding options for shares
under the 1988 Plan or the 1991 Plan.
The activity in the 1988 Plan for the year ended December 31, 2002 and 2001 was
as follows:
2002 2001
-------------------------- --------------------------
Weighted Weighted
Number of Average Number of Average
Shares Price Shares Price
------ ----- ------ -----
Outstanding, beginning of year 497,000 $2.18 545,000 $2.14
Granted - - - -
Exercised - - - -
Cancelled / forfeited (497,000) 2.18 - -
Expired - - (48,000) 1.75
--------- ---- --------- ----
Outstanding, end of year - $ - 497,000 $2.18
========= ==== ========= ====
Exercisable, end of year - $ - 497,000 $2.18
========= ==== ========= ====
The activity in the 1991 Plan for the year ended December 31, 2002 and 2001 was
as follows:
2002 2001
-------------------------- --------------------------
Weighted Weighted
Number of Average Number of Average
Shares Price Shares Price
------ ----- ------ -----
Outstanding, beginning of year 1,109,150 $1.25 1,099,875 $1.71
Granted - - 250,850 0.26
Exercised - - - -
Cancelled / forfeited (1,109,150) 1.25 - -
Expired - - (241,575) 2.33
--------- ---- --------- ----
Outstanding, end of year - $ - 1,109,150 $1.25
========= ==== ========= ====
Exercisable, end of year - $ - 911,900 $1.34
========= ==== ========= ====
As a result of the repricing of existing options in 1999 and 1998, (under both
the 1988 and 1991 Option Plans) Crown began to account for the awards as
variable as of July 1, 2000, in accordance with FASB Interpretation No. 44,
("FIN 44") "Accounting for Certain Transactions involving Stock Compensation,
(an interpretation of APB 25)." Accordingly, an increase in the current market
price of Crown common stock above the higher of the option strike price and the
market price of Crown's common stock subsequent to July 1, 2000, multiplied by
vested options outstanding will be recorded as compensation expense in the
period of the price increase. A subsequent reduction in the current market
price, to the extent of previously recorded compensation expense will be
credited as a reduction of compensation expense. In July 2002 Crown's Board of
Directors granted options to purchase 3,375,000 shares under the 2002 Plan. Of
these, options to purchase 2,600,000 shares were deemed replacement options for
cancelled options awards with variable plan accounting. Accordingly, Crown
accounts for increases and decreases in the intrinsic value of the 2,600,000
options as compensation expense in accordance with APB No. 25 and FIN No. 44.
During 2003 and 2002 Crown recorded $3,126,000 and $175,000, respectively, of
compensation expense related to the vested portion of the 2002 option awards.
Additionally, Crown recorded $1,856,000 and $293,000, respectively, of unearned
compensation related to the unvested portion of these options. This amount will
be amortized to compensation expense using the straight-line method over the
remaining vesting term. There was no compensation
F-E23
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
expense recorded during 2001 or 2000 as a result of variable plan accounting as
there was no intrinsic value in the options because the quoted market price of
shares of Crowns common stock was below the exercise price of the options.
The following table summarizes Crown's stock options as of December 31, 2003
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Number Exercise
Price Number Life Price Exercisable Price
----- ------ ---- ----- ----------- -----
$0.40 3,319,000 4.5 $0.40 1,651,500 $0.40
$0.45 60,000 4.0 $0.45 30,000 $0.45
The activity in outstanding warrants for the year ended December 31, 2003, 2002
and 2001 was as follows:
Weighted Weighted Weighted
Warrants Average Warrants Average Warrants Average
Exercisable Exercise Exercisable Exercise Exercisable Exercise
For Shares Price For Shares Price For Shares Price
---------- ----- ---------- ----- ---------- -----
Outstanding, beginning of year 16,200,000 $0.35 10,485,714 $0.35 - $ -
Issued - - 5,714,286 0.75 10,485,714 0.35
Exercised (2,024,127) 0.75 - - - -
Cancelled / forfeited(1) (772,063) 0.75 - - - -
Expired - - - - - -
---------- ----- ---------- ----- ---------- -----
Outstanding, end of year 13,403,810 $0.43 16,200,000 $0.49 10,485,714 $0.35
========== ===== ========== ===== ========== =====
(1) During 2003, holders of warrants for 1,851,425 shares exercised their
warrants on a cashless basis at market prices between $1.50 and 2.50 per
share for 1,079,362 shares of Crown common stock. Holders also exercised
warrants for 944,765 shares for cash at the exercise price of $0.75 per
share.
10. RELATED PARTY TRANSACTIONS
At December 31, 2003 Crown owned 38.7% of Solitario. Crown provides management
and technical services to Solitario under a management and technical services
agreement originally signed in April 1994 and modified in April 1999, December
2000 and July 2002. Under the modified agreement Solitario reimburses Crown for
direct out-of-pocket expenses; payment of 25% of Crown corporate administrative
costs for executive and technical salaries benefits and expenses, 50% of Crown
corporate administrative costs for financial management and reporting salaries,
benefits and expenses and 75% of Crown corporate administrative costs for
investor relations salaries, benefits and expenses. These allocations are based
upon estimated time and expenses spent by Crown management and employees on
Crown activities and Solitario's activities. Management believes these
allocations are reasonable and the allocations are periodically reviewed by
management and approved by independent Board members of both Crown and
Solitario. Management service fees are billed monthly, due on receipt and are
generally paid within thirty days. Management service fees paid by Solitario
were $351,000, for 2003, $499,000 for 2002 and $590,000 for 2001. We anticipate
the management and technical services agreement will be terminated if our
pending Merger with Kinross is completed.
Crown entered into a Voting Agreement dated as of April 15, 2002 among Zoloto
Investor's, LP ("Zoloto") and Solitario, who are each stockholders of Crown (the
"Signing Shareholders"). Pursuant to the Voting Agreement, Solitario and Zoloto
agreed that they will each vote their owned shares during the term of the Voting
Agreement for the election of three designees of Zoloto and one designee of
Solitario (the "Designee Directors") to the Board of Directors of Crown. The
Signing Shareholders agreed that any shares received by either Signing
Shareholder would be subject to the Voting Agreement during its term and any
successor, assignee or transferee of shares from either Signing Shareholder
would be subject to the terms of the Voting Agreement during its term. The
Voting Agreement terminates on June 26, 2006. As of December 31, 2003, the
Signing Shareholders collectively held 1,733,866 shares or approximately 10.1%
of the outstanding shares of Crown.
In October 2001, Solitario invested in two Senior Notes, which totaled
$1,000,000 of the $3,600,000 principal amount of Senior Notes issued. The
proceeds of $350,000 from the first note (the "Solitario Note") were delivered
to Crown. The Solitario Note was convertible into shares of Crown commons stock
at $0.2916 per share. The
F-E24
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
proceeds from the second note from Solitario (the "$650,000 Note"), and the
remaining Senior Notes of $2,600,000, or $3,250,000 in total, were placed in
escrow pending the outcome of Crown's Bankruptcy. The $650,000 Note was
convertible into shares of Crown common stock at $0.35 per share. In March 2002
an additional $200,000 was advanced to Crown out of escrow of which Solitario's
share of the advance was $56,000. Crown's Plan was confirmed on May 30, 2002 and
the remaining balance of the proceeds plus interest was released to Crown on the
Effective Date. The independent Board members of both Crown and Solitario
approved the transaction. The terms of the transaction on the Escrowed Notes
were the same as given to other senior lenders of Crown (the "Senior Lenders")
and, with regard to the terms of the $350,000 Solitario Note, the terms were
negotiated with and approved by the other Senior Lenders.
In June 2001, Solitario acquired 200,000 shares of Canyon Resources Corporation
common stock as an investment from Crown at its fair market value of $200,000 at
that date. The transaction was approved by independent Board members of both
Crown and Solitario.
On February 21, 2003, Solitario invested $400,000 in Crown's Subordinated B
Notes on the same terms and conditions as all other investors. On November 5,
2003 Solitario's Subordinated B Notes were automatically converted into 533,333
shares of Crown common stock, as discussed in Note 5. During 2003 and 2002,
Crown issued to Solitario 249,718 and 182,440 shares of Crown's common stock,
with a fair value of $207,000 and $75,000, respectively, in satisfaction of
Crown's accrued interest obligations to Solitario under the Senior and
Subordinated B Notes. See Note 5.
As of December 31, 2003, Solitario owns 965,491 shares of Crown common stock,
has warrants to acquire 3,057,143 shares of Crown common stock at between $0.60
and $0.75 per share and could also acquire up to 3,057,143 additional shares of
Crown common stock through conversion of its Senior Notes.
F-E25
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
(in thousands, except per share) 2003 (1)
------------------------------------------------------------------------------------------------
March 31, March 31, June 30, June 30, Sept. 30, Sept. 30, Dec. 31,
As As As As As As
previously restated previously restated previously restated
reported reported reported
------------------------------------------------------------------------------------------------
Revenues and property sales (3) $ - $ - $ - $ - $ - $ - $ -
Net loss $ (661) $ (423) $ (690) $ (271) $(1,223) $ (813)(4) $(1,482)(4)
Loss per share:
Basic and diluted $ (0.15) $ (0.10) $ (0.14) $ (0.06) $ (0.22) $ (0.15) $ (0.12)
Weighted shares outstanding:
Basic and diluted 4,303 4,201 4,904 4,769 5,533 5,361 11,886
(in thousands, except per share) 2002 (1)
------------------------------------------------------------------------------------------------
March 31, March 31, June 30, June 30, Sept. 30, Sept. 30, Dec. 31, Dec. 31,
As As As As As As As As
Previously restated Previously restated PREVIOUSLY restated PREVIOUSLY restated
reported reported(2) reported reported
------------------------------------------------------------------------------------------------
Revenues and property sales (3) $ - $ - $ - $ - $ 171 $ 171 $ - $ -
Net income (loss) $ (606) $ (374) $ 6,295 $ 2,905 $ (282) $ (142) $ (472) $ (298)
Income (loss) per share
Basic $ (0.21) $ (0.13) $ 2.16 $ 1.00 $ (0.09) $ (0.04) $ (0.15) $ (0.08)
Diluted $ (0.21) $ (0.13) $ 0.40 $ 0.19 $ (0.09) $ (0.04) $ (0.15) $ (0.08)
Weighted shares outstanding
Basic 2,952 2,947 2,920 2,909 3,243 3,207 3,762 3,693
Diluted 2,952 2,947 15,712 15,702 3,243 3,207 3,762 3,693
(1) The operating results for each of the four quarters in the year ended
December 31, 2002 and each of the three quarters during the nine months
ended September 30, 2003 have been restated as discussed in Note 12.
(2) As adjusted for the reclassification of gain on discharge of convertible
debentures from extraordinary item to costs expenses and other as
required by SFAS No. 145.
(3) As adjusted for the reclassification of interest income to costs,
expenses and other in the statement of operations.
(4) Crown recorded option compensation expense of $848,000 (before tax)
during the third quarter of 2003, compared to $188,500 (before tax) in
the second quarter of 2003, which accounted for the increase in the
third quarter loss and Crown recorded option compensation expense of
$1,616,000 (before tax) during the fourth quarter of 2003 and incurred
significant additional legal and accounting costs during the fourth
quarter of 2003 related to its pending merger with Kinross which
accounted for the increased loss in the quarter compared to the prior
quarter.
12. RESTATEMENT
Subsequent to the issuance of Crown's consolidated financial statements for the
years ended December 31, 2002 and 2001, Crown determined it had not properly (i)
capitalized interest costs related to the development of its Buckhorn Mountain
Project; (ii) adopted the provisions of SFAS No. 142 in relation to the
classification of mineral interests; (iii) accounted for certain costs that had
been capitalized relating to annual land and leasehold payments that should have
been expensed as incurred; (iv) treated discounts associated with warrants and
beneficial conversion features related to outstanding debt as permanent
differences in its tax provision; (v) recorded Crown's interest in Solitario's
ownership of Crown's equity securities as treasury stock; (vi) recorded Crown's
equity interest in certain adjustments made by Solitario required by SFAS No.
142; and (vii) recorded a gain on the restructuring of its Keystone Note as a
discount to be amortized over the remaining life of the Keystone Note when the
note was renegotiated in December 2001, as discussed below.
(i) Crown's Buckhorn Mountain Project has been in development since
Crown acquired the project in 1989. Since August 1991 Crown has been incurring
interest costs on long-term debt, which had not been capitalized as required by
SFAS No. 34, "Capitalization of Interest Cost" ("SFAS No. 34"). SFAS No. 34
requires capitalization of interest costs utilizing a weighted average rate on
outstanding debt and applying that rate to the average outstanding balance of
capitalized costs on projects in development, up to the total interest cost for
the period.
(ii) Effective January 1, 2002, SFAS 142 requires mineral interests
in the form of exploration concessions to be classified as intangible assets and
amortized over their expected useful lives. In its previously issued 2002
financial statements, Crown had classified its mineral interests as mineral
properties.
F-E26
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
(iii) As a result of the withdrawal of Crown's joint venture partner
associated with the Buckhorn Mountain Project in 2001, Crown began to incur
directly certain annual costs associated with its mineral interests. During
2003, Crown reviewed its cost capitalization policies and determined that
certain annual concession fees, taxes and other costs that had been capitalized
during 2002 and 2001 should have been charged to exploration expense as
incurred.
(iv) In connection with recording discounts associated with warrants
and beneficial conversion features related to its Senior and Secured Notes,
Crown recorded a deferred tax liability and reduction to additional paid-in
capital. Subsequently, as these note discounts were being amortized, Crown
recorded a reversal of this deferred tax liability and recognized an income tax
benefit in the period of the amortization. Crown has subsequently determined
that these discounts represented a permanent difference for which deferred taxes
should not have been recognized.
(v) During 2003, Crown determined that it should record as treasury
stock its proportionate share of the value of Solitario's recorded cost basis
for Solitario's investments in the equity securities of Crown.
(vi) Subsequent to the issuance of Solitario's consolidated financial
statements for the year ended December 31, 2002, Solitario determined that it
had not properly adopted the provisions of SFAS No. 142 in relation to the
classification of mineral interests, and that Solitario had capitalized certain
costs that should have been expensed as incurred.
(vii) During 2003, Crown determined that it should have accounted for
the renegotiation of the Keystone Notes (See Note 5) as a debt extinguishment
and recognized a gain it its 2001 statement of operations, to the extent of the
difference between the present value of the Keystone Note payments before and
after the renegotiation.
As a result, the accompanying consolidated financial statements for the years
ended December 31, 2002 and 2001 have been restated from the amounts previously
reported. A summary of the significant effects of the restatement is as follows:
BALANCE SHEET INFORMATION
As of December 31, 2002
--------------------------------
(in thousands) As previously
reported As restated
--------------- ---------------
ASSETS:
Mineral properties $ 14,980 $ 6,612
Mineral interests, net - 19,102
Equity in Solitario Resources Corporation 2,800 2,477
-------- --------
TOTAL ASSETS $ 19,233 $ 29,644
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deferred income taxes $ 2,975 $ 4,887
Stockholders' equity:
Additional paid-in capital 39,541 41,178
Treasury stock - (76)
Accumulated deficit (28,709) (21,728)
Accumulated other comprehensive income 59 39
-------- --------
TOTAL STOCKHOLDERS' EQUITY $ 10,637 $ 19,159
======== ========
F-E27
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 (AS RESTATED),
AND 2001 (AS RESTATED)
STATEMENT OF OPERATIONS INFORMATION
Year ended December 31, 2002 Year ended December 31, 2001
---------------------------- ----------------------------
As previously As previously
(in thousands except per share amounts) reported As restated reported As restated
-------- ----------- -------- -----------
Costs and expenses:
Exploration expense $ 4 $ 58 $ 5 $ 36
Interest expense 980 - 1,046 -
Equity in loss of Solitario Resources Corporation 662 873 1,506 1,512
Gain on debt extinguishment - - - (41)
Income (loss) before income tax 6,243 6,958 (3,148) (2,098)
Income tax (expense) benefit (1,308) (4,867) - -
Net income 4,935 2,091 (3,148) (2,098)
Earnings (loss) per common share:
Basic $ 1.52 $ 0.65 $ (1.08) $ (0.72)
Diluted $ 0.26 $ 0.10 $ (1.08) $ (0.72)
As discussed in (i) above, the consolidated financial statements were restated
for capitalized interest commencing in 1991. This resulted in an adjustment to
accumulated deficit at January 1, 2001 of $8,775,000.
F-E28
CROWN RESOURCES CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and March 31, December 31,
per share amounts) 2004 2003
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,554 $ 2,365
Restricted short-term investments 23 22
Marketable equity securities available for sale, at fair value 290 190
Receivable from Solitario Resources Corporation 53 25
Prepaid expenses and other 53 23
-------- --------
TOTAL CURRENT ASSETS 1,973 2,625
MINERAL PROPERTIES 8,820 8,678
MINERAL INTERESTS, NET 21,101 20,982
OTHER ASSETS:
Investment in Solitario Resources Corporation 1,963 2,004
Other 152 157
-------- --------
TOTAL OTHER ASSETS 2,115 2,161
-------- --------
$ 34,009 $ 34,446
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 79 $ 378
Accrued liabilities 16 40
Current portion of long-term debt 49 49
Accrued interest payable 76 76
-------- --------
TOTAL CURRENT LIABILITIES 220 543
-------- --------
LONG-TERM LIABILITIES:
Convertible senior notes payable, net of discounts 280 226
Convertible senior notes payable, related party, net of discounts 112 91
Long-term note payable 39 36
Asset retirement obligation 21 21
Deferred income taxes 3,186 3,285
-------- --------
TOTAL LONG-TERM LIABILITIES 3,638 3,659
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value: authorized 40,000,000 shares,
none outstanding - -
Common stock, $0.01 par value; authorized 100,000,000 shares,
issued and outstanding, 22,424,806 and 22,321,306 at March 31,
2004 and December 31, 2003, respectively 224 223
Additional paid-in capital 56,650 57,177
Treasury stock, 362,832 and 373,191 shares at March 31, 2004 and
December 31, 2003, respectively (298) (306)
Unearned compensation (1,420) (2,149)
Accumulated deficit (25,074) (24,717)
Accumulated other comprehensive income 69 16
-------- --------
TOTAL STOCKHOLDERS' EQUITY 30,151 30,244
-------- --------
$ 34,009 $ 34,446
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-E29
CROWN RESOURCES CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts) Three months ended
March 31,
--------------------------------
2004 2003
(as restated,
see Note 8)
COSTS, EXPENSES AND OTHER:
Exploration expense 4 -
Depreciation and amortization 3 3
General and administrative 283 133
Variable option compensation expense 55 416
Interest income (5) (5)
Equity in loss of Solitario Resources Corporation 202 100
Other - (7)
------- -------
LOSS BEFORE INCOME TAXES (542) (640)
Income tax benefit 185 217
------- -------
NET LOSS $ (357) $ (423)
======= =======
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.02) $ (0.10)
======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES BASIC AND DILUTED 21,989 4,303
======= =======
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-E30
CROWN RESOURCES CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Three months ended March 31,
----------------------------------
2004 2003
---- ----
OPERATING ACTIVITIES: (as restated,
see Note 8)
Net loss $ (357) $ (423)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 3 3
Equity in loss of Solitario Resources Corporation 202 100
Variable option compensation expense 55 416
Deferred income taxes (185) (217)
Changes in operating assets and liabilities:
Prepaid expenses and other (58) 4
Accounts payable and other current liabilities (323) (257)
------- -------
Net cash used in operating activities (663) (374)
------- -------
INVESTING ACTIVITIES:
Additions to mineral properties (119) (265)
Additions to mineral interests (64) -
Decrease (increase) in other assets - 30
------- -------
Net cash used in investing activities (183) (235)
------- -------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 35
Proceeds from issuance of Subordinated B notes - 2,705
------- -------
Net cash provided by financing activities 35 2,705
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (811) 2,096
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,365 1,033
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,554 $ 3,129
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-cash transactions:
Non-cash interest capitalized $ 78 $ 412
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-E31
CROWN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The accompanying condensed consolidated financial statements of CROWN
RESOURCES CORPORATION AND ITS SUBSIDIARIES ("CROWN") for the three months ended
March 31, 2004 and 2003 are unaudited, but in the opinion of management, include
all adjustments, consisting only of normal recurring items, necessary for a fair
presentation. Interim results are not necessarily indicative of results that may
be achieved in the future.
These financial statements should be read in conjunction with the
financial statements and notes thereto which are included in Crown's Annual
Report on Form 10-K for the year ended December 31, 2003. The accounting
policies set forth in those annual financial statements are the same as the
accounting policies utilized in the preparation of these financial statements,
except as modified for appropriate interim financial statement presentation.
BUSINESS
CROWN RESOURCES CORPORATION AND ITS SUBSIDIARIES ("CROWN") engage
principally in the acquisition, exploration and development of mineral
interests, which presently exist in the western United States. Crown indirectly
holds properties in Latin America through Solitario Resources Corporation
("Solitario"), of which Crown owns 9,633,585 shares of Solitario common stock or
37.6% as of March 31, 2004. Crown's operations constitute a single business
segment.
Crown has historically derived its revenues principally from interest
income and the option and sale of property interests.
On November 20, 2003 Crown executed a definitive agreement to merge with
Kinross Gold Corporation ("Kinross"), a Canadian corporation, as more fully
described in Note 2 (the "Merger"). The Merger is subject to the approval of
Crown's shareholders and customary closing conditions. Crown currently has no
source of recurring revenue and Crown anticipates any future recurring revenue
would only occur after the successful development of its Buckhorn Mountain
Project. The successful development of the Buckhorn Mountain Project is
dependent on several factors, many of which are beyond the control of Crown.
Crown cannot provide any assurance that the Merger with Kinross will be
completed as planned, or that it will be able to successfully permit and develop
the Buckhorn Mountain Project in the event the Merger is not completed. Crown
intends to distribute substantially all of the 9,6,33,585 shares of Solitario's
common stock it owns to the shareholders of Crown in anticipation of the Merger
with Kinross.
Crown currently has limited financial resources and, accordingly is not
engaged directly in any significant exploration or development activity other
than at its Buckhorn Mountain Project. Crown's current objective is to complete
the permitting process for development of the Buckhorn Mountain Project in
conjunction with Kinross. Unless Crown is successful in these objectives, it is
unlikely that Crown will be in a position in the foreseeable future to pursue
additional exploration or development projects. Furthermore, in the event the
Merger with Kinross is not consummated, Crown will need significant additional
financial resources to develop the Buckhorn Mountain Project and Crown cannot
provide assurance that it will be able to obtain such financial resources. Crown
currently estimates the initial capital cost for the Buckhorn Mountain Project
will require up to $32.6 million. Based upon Crown's current business plan,
Crown estimates its current financial resources are sufficient to fund its
operations through 2005.
F-E32
ACCOUNTING FOR STOCK BASED COMPENSATION
Crown accounts for certain awards under the Crown Resources Corporation
2002 Stock Incentive Plan (the "2002 Plan") as variable in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25"). Under the terms of the 2002 Plan, the exercise price of
options issued to employees and directors equals the market price of the stock
on the date of grant. Crown previously had a 1988 Stock Benefit Plan (the "1988
Plan") and a 1991 Stock Incentive Plan (the "1991 Plan"). As a result of
repricing options under Crown's 1988 Plan and the 1991 Plan in 1998 and 1999,
Crown began to account for those option grants using variable plan accounting as
of July 2000. The Plan of Reorganization (the "Plan") filed in connection with
Crown's bankruptcy in 2002 (see Note 2 below) rejected both the 1991 Plan and
the 1988 Plan and all option awards were canceled. The Plan approved Crown's
2002 Stock Incentive Plan (the "2002 Plan"). In July 2002 Crown's Board of
Directors granted 3,375,000 options under the 2002 Plan. Of these, 2,600,000
were deemed replacement options for cancelled options awards with variable plan
accounting. Accordingly, Crown accounts for increases and decreases in the
intrinsic value of the 2,600,000 options as compensation expense in accordance
FASB interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation (an interpretation of APB Opinion No. 25)." During the first
quarter of 2004, Crown recorded $55,000 of compensation expense related to the
intrinsic value of these options awards. During the first quarter of 2003, Crown
recorded $416,000 of compensation expense related to the intrinsic value of
option awards. As of March 31, 2004 and December 31, 2003, Crown had recorded
$1,420,000 and $2,149,000, respectively, of unearned compensation expense
related to the intrinsic value of these variable plan accounting options.
Crown computes pro forma information as if Crown had accounted for its
stock options under the fair value method of SFAS No. 148 and SFAS No. 123.
There were no options awards granted, modified or settled during the first
quarter of 2004 or 2003. The following pro forma information is provided for the
fair values of options outstanding during these periods.
For the three months
ended March 31,
----------------------------
(in thousands, except per share amounts) 2004 2003
---- ----
(as restated,
see Note 8)
Net loss as reported $ (357) $ (423)
Add: Stock-based compensation expense included in reported
net loss, net of related tax effects 36 275
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (32) (32)
------- -------
Pro forma net loss $ (353) $ (180)
======= =======
Basic and diluted net loss per share:
As reported $ (0.02) $ (0.10)
Pro forma $ (0.02) $ (0.04)
NET LOSS PER COMMON SHARE
The loss per share is presented in accordance with the provisions of
SFAS No. 128, Earnings Per Share ("EPS"). Basic EPS is calculated by dividing
the income or loss available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Basic and diluted
EPS were the same for the three months ended March 31, 2004 and 2003 because the
Company had losses from operations and therefore, the effect of all potential
common stocks was anti-dilutive.
Stock options, warrants outstanding and their equivalents are included
in diluted EPS computations through the "treasury stock method" unless they are
antidilutive. Convertible securities are included in diluted EPS computations
through the "if converted" method unless they are antidilutive. Common share
equivalents are excluded from the computations in loss periods, as their effect
would be antidilutive. As of March 31,2004 Crown had notes convertible into
10,485,714 common shares and warrants which could be exercised for 13,380,953
common shares and stock options which could be exercised for 3,292,500 shares or
a total of 27,159,167 equivalent dilutive securities that have been excluded
from the weighted-average number of common shares outstanding for the diluted
net loss per share computations, as they are antidilutive. The calculation of
basic and diluted earnings per share is presented below:
F-E33
For the three months ended March 31,
--------------------------------------
(in thousands except per share amounts) 2004 2003
---- ----
(as restated,
see Note 8)
Net loss $ (357) $ (423)
======= =======
Shares:
Weighted average shares outstanding
outstanding basic and diluted, net
of treasury stock 21,989 4,303
======= =======
Basic and diluted net loss per common
Share $ (0.02) $ (0.10)
======= =======
RECENT ACCOUNTING PRONOUNCEMENTS
The Emerging Issues Task Force ("EITF") formed a committee ("Committee")
to evaluate certain mining industry accounting issues, including issues arising
from the application of SFAS No. 141, "Business Combinations" ("SFAS No. 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") to
issues that included whether mineral interests conveyed by leases represent
tangible or intangible assets and the amortization of such assets. In March
2004, the EITF reached a consensus in EITF Issue No. 04-2 "Whether Mineral
Rights Are Tangible or Intangible Assets" ("EITF No. 04-2"), subject to
ratification by the Financial Accounting Standards Board ("FASB"), that mineral
interests conveyed by leases should be considered tangible assets. On March 31,
2004, the FASB ratified the consensus of the EITF that mineral interests
conveyed by leases should be considered tangible assets subject to the
finalization of a FASB Staff Position ("FSP") in this regard. On April 30, 2004,
the FASB issued a FSP amending SFAS No. 141 and SFAS No. 142 to provide that
certain mineral use rights are considered tangible assets and that mineral use
rights should be accounted for based on their substance. The FSP is effective
for the first reporting period beginning after April 29, 2004, with early
adoption permitted. Crown will reclassify all of its mineral interests conveyed
by leases from Mineral interests, net to Mineral Property, net in our balance
sheets and cease amortizing exploration stage mineral interests prior to the
commencement of production upon adoption of EITF 04-2.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") and in December 2003
issued FIN 46R. FIN 46 requires the consolidation of variable interest entities
which have one or both of the following attributes (1) the equity investment at
risk is not sufficient to permit the entity to finance its activities without
additional financial support from other parties which is provided by other
parties that will absorb some or all of the expected losses of the entity, (2)
the equity investors lack controlling financial interest as evidenced by (i) the
ability to make decisions regarding the entity's activities through voting or
similar rights (ii) the obligation to absorb expected losses, which make it
possible for the entity to finance its activities and (iii) the right to receive
expected residual returns of the entity if they occur, which is the compensation
for absorbing the expected losses. FIN 46 was immediately effective for variable
interest entities formed after January 31, 2003. FIN 46R requires the adoption
of either FIN 46 or FIN 46R in financial statements of public entities that have
interests in structures that are commonly referred to as special purpose
entities for periods ending after December 15, 2003. Application for all other
types of variable interest entities is required in financial statements for
periods ending after March 15, 2004. The adoption of FIN 46 and FIN 46R did not
have an effect on Crown's financial position or results of operations.
In April 2004, the EITF issued EITF Issue No. 04-3 "Mining Assets:
Impairment and Business Combinations" ("EITF No. 04-3") which evaluated certain
issues related to values in mining properties beyond proven and probable
reserves (VBPP) and the effects of anticipated fluctuations in the future market
price of minerals. The EITF reached a consensus that fair value of mining
properties generally includes both VBPP and the effects of anticipated
fluctuations in the future market price of minerals and that entities should
generally include both in determining the fair value allocated to mining assets
in a purchase price allocation and in the cash flow analysis (both discounted
and undiscounted) used for determining whether a mining asset is impaired. The
consensus reached by the EITF should be applied prospectively in the periods
after March 31, 2004, but early application is permitted in periods for which
financial statements have not been issued. Crown does not expect that the
adoption of EITF No. 04-3 will have a material impact on its financial position,
results of operations, or cash flows.
F-E34
2. MERGER AGREEMENT
On November 20, 2003, Crown executed the Merger Agreement with Kinross
whereby each of the outstanding shares of common stock of Crown will be
exchanged for 0.2911 shares of Kinross common stock at closing (the "Merger").
The Merger is subject to the approval of two thirds of Crown's shareholders and
customary closing conditions. Until the Merger is completed, Crown is required
to operate its business in the ordinary course, and is restricted from engaging
in certain significant business and financing transactions, or changes in
corporate structure.
Crown intends, and the Merger Agreement contemplates, that all or some
portion of the common stock of Solitario held by Crown will be distributed to
Crown's shareholders prior to the effective time of the Merger. Crown has agreed
to use its commercially reasonable efforts to cause Solitario to make all
filings and obtain all regulatory approvals required by the United States and
Canadian securities laws and rules of the Toronto Stock Exchange ("TSX") in
connection with the distribution by Crown of the Solitario common stock to the
shareholders of Crown and to reasonably cooperate in providing all information
to Solitario necessary to complete such filings.
The Merger Agreement further contemplates that the Crown Board of
Directors will take action as permitted under the Crown 2002 Stock Incentive
Plan so that all outstanding stock options to purchase Crown common stock will
either be exercised or terminated prior to the effective time of the Merger.
Additionally, holders of unexercised warrants to purchase shares of Crown common
stock will be allowed to elect to exchange the warrant for 0.2911 shares of
Kinross common stock for each share of Crown common stock that would have been
issued on the exercise of the warrant immediately prior to the effective time of
the Merger on a cashless basis, or absent making this election, the warrant will
represent the right to acquire Kinross common shares in accordance with the
terms and conditions of the warrant as amended pursuant to the Merger Agreement.
The Merger Agreement may be terminated by either party if the
transaction has not been consummated by September 30, 2004 subject to certain
conditions, by mutual written consent, or upon the failure of Crown to obtain
the approval of its shareholders. Both Crown and Kinross may also terminate the
Merger Agreement upon the occurrence of a material breach of the agreement by
the other party as defined in the Merger Agreement. Should Crown fail to
complete the Merger as a result of receiving a superior proposal within six
months of the date of the Merger Agreement, Crown will be obligated to pay
Kinross a termination fee of $2.0 million plus Kinross' documented, reasonable
third-party, out-of-pocket expenses in connection with the Merger Agreement.
Crown has further agreed to use its commercially reasonable efforts to amend or
redeem its outstanding convertible notes prior to the effective date of the
Merger.
3. CORPORATE REORGANIZATION
On March 8, 2002, Crown filed a voluntary petition for protection under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy") in the United
States Bankruptcy Court for the District of Colorado (the "Court"). As part of
the Bankruptcy Crown filed a Plan of Reorganization (the "Plan") and a
Disclosure Statement with the Court on March 25, 2002. On May 30, 2002, the
Court confirmed the Plan, which became effective on June 11, 2002 (the
"Effective Date"). As part of the Plan, Crown restructured its existing $15
million 5.75% Convertible Subordinated Debentures due August 2001 (the
"Debentures").
The restructuring was completed through an exchange of outstanding
Debentures, including any accrued interest thereon for the following
consideration: (i) issuance of $1,000,000 in cash, (ii) $2,000,000 in 10%
Convertible Secured Notes (the "Secured Notes") convertible into Crown common
shares at $0.35 per share, (iii) $4,000,000 of convertible unsecured
subordinated notes (the "Subordinated Notes") convertible into shares of Crown
common stock at $0.75 per share, and (iv) warrants, which expire in October 2006
that entitle the holders the right to purchase, in the aggregate, 5,714,285
shares of Crown common stock at an exercise price of $0.75 per share. The
interest on the Secured and Subordinated Notes was payable in cash or shares of
Crown common stock at the conversion price at Crown's election. In November
2003, all Subordinated Notes were automatically converted into shares of Crown
common stock. In December 2003, substantially all Secured Notes were converted
into shares of Crown common stock. See Note 4.
In order to effect the Plan on the Effective Date, Crown entered into a
Custody and Disbursing Agreement with Wells Fargo Bank, Minnesota N.A. (the
"Disbursing Agent") as well as trust indentures with Deutsche Bank Trust
Company, Americas, as Trustee on the Secured Notes and with Wells Fargo Bank
Minnesota, N.A. as Trustee on the Subordinated Notes. As of May 12, 2004,
$245,000 in Debenture certificates have not been presented. If all
F-E35
of these Debentures are presented, the disbursing agent will distribute $16,000
in cash, 93,333 shares of Crown common stock from the converted Secured Notes
(plus accrued interest since June 11, 2002), 87,111 shares of Crown common stock
from the converted Subordinated Notes (plus accrued interest since June 11,
2002), and warrants to acquire 93,333 shares of Crown common stock with an
exercise price of $0.75 per share. The Debenture holders have until June 2007 to
present their certificates, at which time any undistributed cash, stock and
warrants will revert to Crown.
4. LONG TERM DEBT
SENIOR NOTES
In October 2001 Crown issued $3,600,000 of 10% convertible secured
promissory notes due in October 2006 (the "Senior Notes"). The Senior Notes are
secured by all of the assets of Crown on a PARI-PASSU basis with the Secured
Notes. The assets consist primarily of Crown's interest in the Buckhorn Mountain
Project and its wholly-owned subsidiary, Crown Resource Corp. of Colorado, whose
assets consist primarily of a 37.6% equity interest in Solitario Resources
Corporation ("Solitario").
The Senior Notes have a five-year term and carry a 10% interest rate,
payable quarterly in cash or Crown common stock at the conversion prices of
$0.35 and $0.2916 per share at the election of Crown. Originally, proceeds of
$3,250,000 from the Senior Notes were placed in escrow pending restructuring of
the Debentures (the specific Senior Notes related to the proceeds placed in
escrow are also referred to as "Escrowed Notes"). Solitario invested $650,000 in
these Escrowed Notes. The Escrowed Notes are convertible into Crown common
shares at a conversion price of $0.35 per share, subject to adjustment. In
addition, the Escrowed Note holders have been issued a five-year warrant for
every share into which the Escrowed Notes are convertible, which warrant will be
exercisable into a Crown common share at $0.75 per share, subject to adjustment.
Solitario also invested in a separate Senior Note, (referred to as the
"Solitario Note") for the remaining $350,000 of the Senior Notes. These funds
were made immediately available to Crown for general corporate purposes. The
Solitario Note is convertible into Crown common shares at a conversion price of
$0.2916 per share, subject to adjustment. In addition, Solitario has been issued
a five-year warrant to acquire 1,200,000 shares of Crown common stock at $0.60
per share, subject to adjustment. The terms of the Solitario Note and the
related warrant are otherwise identical to the terms of the Escrowed Notes and
warrants.
On the date of issuance, the warrants described above had an estimated
value of $379,000, which was recorded as a discount to the Senior Notes and
credited to additional paid-in capital. This warrant discount is being amortized
over the life of the Senior Notes and charged as capitalized interest costs,
using the effective interest method
Under generally accepted accounting principles, any intrinsic value of
the conversion feature (market price of the stock less the effective conversion
price) of the Senior Notes, commonly known as a beneficial conversion feature,
must also be recorded as a discount to the Senior Notes. On the date of
issuance, there was no intrinsic value associated with the conversion feature of
the Senior Notes and no discount was recorded thereon. However, when the
Bankruptcy Court approved the Plan of Crown on May 30, 2002, the terms of the
Senior Notes were effectively changed, since the conversion price remained
unchanged despite a 1 for 5 reverse split of Crown's common stock as required by
the Plan. Based upon these revised terms, the intrinsic value of the conversion
feature of the Senior Notes as of their issuance date was $3,221,000. Effective
May 30, 2002, this amount has been recorded as a discount to the Senior Notes
and credited to additional paid-in capital. This conversion feature discount is
being amortized over the remaining life of the Senior Notes and charged as
capitalized interest cost.
A summary of the Senior Notes at March 31, 2004 is as follows:
2004
-------------------------------------------------
Total
Related Other Senior
Party Senior Notes
Notes Notes Payable
----- ----- -------
Face amount of Senior Notes $ 1,000,000 $ 2,600,000 $3,600,000
Unamortized warrant discount (58,000) (142,000) (200,000)
Unamortized conversion feature discount (830,000) (2,178,000) (3,008,000)
----------- ----------- ----------
Senior Notes balance $ 112,000 $ 280,000 $ 392,000
=========== =========== ==========
F-E36
A summary of the Senior Notes at December 31, 2003 is as follows:
2003
-------------------------------------------------
Total
Related Other Senior
Party Senior Notes
Notes Notes Payable
----- ----- -------
Face amount of Senior Notes $ 1,000,000 $ 2,600,000 $ 3,600,000
Unamortized warrant discount (64,000) (156,000) (220,000)
Unamortized conversion feature discount (845,000) (2,218,000) (3,063,000)
----------- ----------- -----------
Senior Notes balance $ 91,000 $ 226,000 $ 317,000
=========== =========== ===========
SECURED NOTES
As discussed above in Note 3, Crown issued $2,000,000 in 10% convertible
Secured Notes as part of the corporate reorganization. The Secured Notes carried
a 10% interest rate payable quarterly in cash or Crown common stock at the
conversion price at the election of Crown. The Secured Notes were convertible
into Crown common shares at $0.35 per share. The Secured Notes were secured by
all of the assets of Crown on a PARI-PASSU basis with the Senior Notes. Crown
recorded a discount to the Secured Notes for the intrinsic value of the
conversion feature on May 30, 2002 of $1,257,000 and credited additional paid-in
capital for that amount. This conversion feature discount was being amortized
over the remaining life of the Secured Notes as of May 30, 2002 and charged as
capitalized interest cost.
On November 21, 2003 the Secured Notes were called for redemption, and
all but $6,000 of outstanding Secured Notes were converted into 5,679,142 shares
of Crown common stock as of December 31, 2003, with the remainder being redeemed
for cash. The remaining unamortized discount of $940,000 was charged to
capitalized interest cost during 2003 upon conversion of the Secured Notes.
SUBORDINATED NOTES
As discussed above in Note 3, Crown issued $4,000,000 in 10% convertible
Subordinated Notes as part of the corporate reorganization. The Subordinated
Notes carried a 10% interest rate payable quarterly in cash or Crown common
stock at the conversion price at election of Crown. The Subordinated Notes were
convertible into Crown common shares at $0.75 per share.
F-E37
In October 2003 and November 2003 a total $839,331 of Subordinated Notes
was converted into 1,119,108 shares of common stock prior to the automatic
conversion on November 5, 2003. On November 5, 2003 the remaining $3,160,669 of
Subordinated Notes were automatically converted into 4,214,225 shares of common
stock. The automatic conversions were in accordance with the provisions of the
Subordinated Notes whereby the Subordinated Notes automatically convert into
common stock if the price of the common stock trades above 233% of the
conversion price of $0.75, or $1.75, for twenty consecutive days. The shares
related to the automatic conversion are deemed issued and outstanding as of the
date of the automatic conversion.
SUBORDINATED B NOTES
On February 21, 2003, Crown issued $2,705,000 of 10% Convertible
Subordinated Promissory Notes due 2006, Series B (The "Subordinated B Notes").
The Subordinated B Notes were convertible into common stock of Crown at $0.75
per share. There was no beneficial conversion feature for the Subordinated B
Note as the market price was below the conversion price at issuance. The
Subordinated B Notes paid interest at 10% in stock or cash at Crown's option,
and mature in October 2006. Solitario invested $400,000 in the Subordinated B
Notes on the same terms as all other investors.
On November 5, 2003, $2,705,000 of Subordinated B Notes were
automatically converted into 3,606,667 shares of common stock. The automatic
conversions were in accordance with the provisions of the Subordinated B Notes
whereby the Subordinated B Notes automatically convert into common stock if the
price of the common stock trades above 233% of the conversion price of $0.75, or
$1.75, for twenty consecutive days. The shares related to the automatic
conversion are deemed issued and outstanding as of the date of the automatic
conversion.
KEYSTONE NOTE
In July 2001, as part of the termination of its joint venture on the
Buckhorn Mountain Project with Newmont Mining Corporation, Crown assumed a note
with a face value of $250,000 due February 22, 2002 (the "Keystone Note"). Crown
recorded the Keystone Note at its discounted fair value of $237,000. On December
18, 2001 Crown amended the terms of the Keystone Note, by paying the holders of
the Keystone Note $30,000 and extending the term of the Keystone Note for a
period of four years, with a payment, including interest, of $20,000 due in June
2002 and four annual payments, including interest, of $50,000 beginning in
December 2002. As a result of this amendment to the terms of the Keystone Note,
Crown recorded a discount of $41,000 to its recorded value of the Keystone note
for the present value of the remaining payments, and other income of the same
amount. This discount is being amortized to capitalized interest cost over the
remaining term of the note. Crown recorded capitalized interest cost of $3,000
during the first three months of 2004 and 2003 which represented amortization of
its discount on the Keystone note. At March 31, 2004 and December 31, 2003, the
current portion of the Keystone Note was $49,000.
INTEREST
Interest costs are capitalized on mineral property and mineral interest
in development. Interest is capitalized by applying a weighted average interest
rate to the average capitalized costs during a period, up to a maximum of total
interest costs incurred during the period. Crown capitalized all of its interest
costs of $412,000 and $168,000 for the three months ended March 31, 2004 and
2003, respectively. At March 31, 2004 and December 31, 2003 a total of
$14,297,000 and $13,885,000, respectively, of interest costs have been
capitalized as mineral property at the Buckhorn Mountain Project.
Crown may pay interest on the Senior Notes in cash or Crown common
shares, at its election, and prior to their conversion, could pay interest on
the Secured Notes, the Subordinated Notes and the Subordinated B Notes in cash
or Crown common shares, at its election. Crown accrues interest at the nominal
rate of 10% during the period the notes are outstanding. For interest paid in
Crown common shares, capitalized interest cost is adjusted on the interest
payment date to the market value of the common shares issued on that date.
F-E38
Crown recorded the following amounts to capitalized interest cost
related to long-term debt:
Three months ended March 31,
-----------------------------------------------------------------------------------------
2004 2003
---------------------------- ------------------------------------------------------------
(in thousands) Subor- Subor-
Senior Keystone Senior Secured dinated dinated Keystone
Notes: Notes Note Total Notes Notes Notes B Notes Note Total
----- ---- ----- ----- ----- ----- ------- ---- -----
Stated interest $ 90 $ - $ 90 $ 89 $ 49 $ 99 $ 28 $ - $ 265
Warrant discount amortization 19 - 19 18 - - - - 18
Beneficial conversion feature
discount amortization 56 3 59 21 49 - - 3 73
Increase (decrease) in
interest cost from shares
issued for interest - - - 54 29 (27) - - 56
---- ----- ----- ---- ---- ----- ----- ------ -----
Total capitalized interest cost $165 $ 3 $ 168 $182 $127 $ 72 $ 28 $ 3 $ 412
==== ===== ===== ==== ==== ===== ===== ====== =====
For the quarters ended March 31, 2004 and 2003, interest income of
$5,000 has been recorded in Crown's consolidated statements of operations.
FUTURE MINIMUM PAYMENTS
The following presents the future minimum payments on long-term debt:
(in thousands) 2004 2005 2006 TOTAL
------- ------- ------ ------
Senior Notes $ - $ - $3,600 $3,600
Keystone Note 50 50 - 100
------- ------- ------ ------
Total payments $ 50 $ 50 $3,600 $3,700
======= ======= ====== ======
5. INVESTMENT IN SOLITARIO RESOURCES CORPORATION:
Crown accounts for its investment in Solitario under the equity method
of accounting. The fair value, based on the quoted market price, of Crown's
9,633,585 shares of Solitario common stock was approximately $13,410,000 and
$13,198,000 at March 31, 2004 and December 31, 2003, respectively. Condensed
financial information of Solitario is as follows:
BALANCE SHEETS
As of As of
March 31, December 31,
(in thousands) 2004 2003
---- ----
ASSETS
Current assets $ 3,879 $ 3,993
Mineral interests, net 2,707 2,760
Investment in Crown warrant, at fair value 4,796 5,591
Note receivable from Crown 943 937
Other 6 7
------- -------
Total assets $12,331 $13,288
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 620 $ 763
Deferred income taxes 163 591
Stockholders' equity 11,548 11,934
------- -------
Total liabilities and stockholders' equity $12,331 $13,288
======= =======
F-E39
STATEMENTS OF OPERATIONS Three months ended
March 31,
-------------------------
(in thousands) 2004 2003
---- ----
Unrealized (loss) gain on derivative instruments $ (795) $ 612
Other costs and expenses (529) (242)
Deferred tax benefit 378 -
------ ------
Net (loss) income $ (946) $ 370
====== ======
The following is a reconciliation of Solitario's reported stockholders'
equity to amounts reported by Crown as its investment in Solitario:
As of As of
March 31, December 31,
(in thousands) 2004 2003
---- ----
Solitario stockholders' equity, as reported $11,548 $11,934
Adjustments:
Less Solitario's book value of Crown securities, recorded as treasury
stock 793 793
Less Solitario's other comprehensive income, related to gains on
Crown common stock, net of $491 and $607 of tax at March
31, 2004 and December 31, 2003, respectively 1,008 1,144
Less Solitario's unrealized gain on derivative instruments, related to
gain on Crown warrants, net of $162 and $669 of tax at
March 31, 2004 and December 31, 2003, respectively 4,524 4,812
------- -------
Solitario adjusted stockholder's equity 5,223 5,185
Crown percentage ownership 37.6% 38.7%
------- -------
Crown's investment in unconsolidated subsidiary $ 1,963 $ 2,004
======= =======
The following is a reconciliation of Solitario's reported net loss to
amounts reported by Crown as its equity in loss of Solitario:
Three months ended
(in thousands) March 31,
--------------------------
2004 2003
---- ----
Solitario net (loss) income as reported $ (946) $ 370
Adjustments:
Solitario's derivative losses (gains) recorded in its statement of
operations for its holdings of Crown warrants, net of $378 of
tax in 2004 417 (612)
Solitario adjusted loss (529) (242)
------- -------
Crown weighted average percentage (1) 38.1% 41.2%
------- -------
Crown's equity in loss of unconsolidated subsidiary $ (202) $ (100)
======= =======
(1) The weighted average interest of Crown in Solitario's net loss for the
three months ended March 31, 2004 reflects the dilution of Crown's
ownership interest resulting from Solitario's sale of its common stock
upon the exercise of options. These transactions reduced Crown's
investment in Solitario from 38.7% as of December 31, 2003 to 37.6% as
of March 31, 2004.
For purposes of calculating its investment in Solitario and its equity
in Solitario's earnings and losses, Crown has excluded the amounts reported by
Solitario with respect to its investment in Crown warrants and Crown common
stock.
During the three months ended March 31, 2004, holders of Solitario
options exercised options for a total of 709,000 Solitario common shares. The
additional shares reduced Crown's percentage ownership of Solitario to 37.6% at
March 31, 2004 from 38.7% at December 31, 2003. Crown's proportionate interest
in this issuance of Solitario shares , net of taxes, has been recorded as an
increase in Crown's investment in Solitario, and an increase in additional
paid-in capital.
On October 8, 2003 Crown announced that it intends to distribute its
holdings of 9,633,585 shares of Solitario's common stock prior to the completion
of the proposed Merger with Kinross. When Solitario sold shares
F-E40
in a Canadian public offering in 1994, the Toronto Stock Exchange (the "TSX")
required that the issued and outstanding shares of Solitario held by Crown be
held in escrow pursuant to an escrow agreement (the "Escrow Agreement") to,
among other things, prevent Crown from selling too large a volume of Solitario
shares shortly after the public offering. Over the next three years sixty
percent of the shares held in escrow were released to Crown pursuant to the
Escrow Agreement. On December 29, 2003, as required by the TSX, Solitario's
disinterested shareholders (which excluded Solitario's officers, directors and
Crown) voted to approve the release of the remaining 3,140,162 shares of
Solitario held in escrow. The shares were released from escrow on January 15,
2004. The release enables Crown to distribute substantially all of the 9,633,585
shares of Solitario's common stock to the shareholders of Crown in anticipation
of closing the Merger with Kinross. No fractional shares will be issued, however
Crown will make cash payments in lieu of fractional shares based upon the market
price of Solitario shares on the record date of the distribution. Crown plans to
retain any shares not distributed as fractional shares. Crown estimates the
total number of Solitario shares from undistributed fractional shares will be
less than 1,000 shares.
6. COMPREHENSIVE INCOME
The following represents comprehensive income (loss) and its components:
Three months ended
March 31,
-----------------------
(in thousands) 2004 2003
----- -----
Net loss as reported $(357) $(423)
Net unrealized gain (loss) on marketable equity securities, net
of tax expense (benefit) of $27,000 and $(17,000) in 2004
and 2003, respectively 53 (32)
----- -----
Comprehensive income (loss) $(304) $(455)
===== =====
7. RELATED PARTY TRANSACTIONS
At March 31, 2004 Crown owned 37.6% of Solitario. Crown provides
management and technical services to Solitario under a management and technical
services agreement originally signed in April 1994 and modified in April 1999,
December 2000 and July 2002. Under the modified agreement Solitario is billed by
Crown for services at 25% of Crown's corporate administrative costs for
executive and technical salaries, benefits and expenses, 50% of Crown's
corporate administrative costs for financial management and reporting salaries,
benefits, expenses and 75% of Crown's corporate administrative costs for
investor relations salaries, benefits and expenses. In addition, Solitario
reimburses Crown for direct out-of-pocket expenses. These allocations are based
upon the estimated time and expenses spent by Crown management and employees on
both Crown activities and Solitario's activities. Management believes these
allocations are reasonable and the allocations are periodically reviewed by
management and approved by independent Board members of both Crown and
Solitario. Management service fees are billed monthly, due on receipt and are
generally paid within thirty days. Management service fees paid by Solitario
were $89,000 and $97,000 for the three months ended March 31, 2004 and 2003,
respectively.
In October 2001, Solitario invested in two 10% convertible secured
promissory notes ("Senior Notes") totaling $1,000,000 of the $3,600,000 Senior
Notes issued by Crown. The proceeds from the first Senior Note (the "Solitario
Note") of $350,000 were delivered to Crown. The proceeds from the second Senior
Note of $650,000 were placed in escrow pending the outcome of Crown's voluntary
petition for bankruptcy, filed in United States Bankruptcy Court, which was
filed on March 8, 2002 (the "Bankruptcy"). In March 2002 an additional $200,000
was advanced to Crown out of escrow of which Solitario's share of the advance
was $56,000. The plan of reorganization was confirmed on May 30, 2002 and the
remaining balance of the proceeds plus interest was released to Crown on the
effective date of the Bankruptcy, June 11, 2002. The independent Board members
of Crown and Solitario approved the transaction. The terms of the transaction on
the second Solitario Note were the same as given to other senior lenders of
Crown (the "Senior Lenders") and, with regard to the terms of the $350,000
Solitario Note, the terms were negotiated with and approved by the other Senior
Lenders. During the first quarter of 2004, Solitario was paid $25,000 in cash as
interest income under the Senior Notes and during the first quarter of 2003
Solitario was paid 77,063 Crown shares as interest income under the Senior
Notes.
As part of the investment in the Senior Notes, Solitario also received
two warrants. The first warrant gives Solitario the right to purchase 1,857,143
shares of Crown for $0.75 through October 2006. The second warrant gives
Solitario the right to purchase 1,200,000 shares of Crown at $0.60 through
October 2006. The fair value of
F-E41
the warrants at the time of issuance, $110,000, was recorded as a discount to
the Senior Notes. This discount is being amortized over the life of the Senior
Notes as additional interest income. The fair value of the warrants, based upon
a quoted bid price, was $4,796,000 and $5,091,000 at March 31, 2004 and December
31, 2003, respectively. Solitario recognizes any increase or decrease in the
fair value of the warrants as an unrealized gain or loss on derivative
instruments in the statement of operations. Solitario recorded a loss on
derivative instruments related to a decrease in the value of the warrants of
$795,000 during the first quarter of 2004 and a gain on derivative instruments
related to an increase in the value of the warrants of $612,000 during the first
quarter of 2003.
Solitario entered into a Voting Agreement dated as of April 15, 2002
among Zoloto Investors, LP ("Zoloto") and Crown. Zoloto and Solitario are both
shareholders of Crown (the "Signing Shareholders"). Pursuant to the Voting
Agreement, Zoloto and Solitario agreed that each will vote their Crown shares
during the term of the Voting Agreement for the election of three designees of
Zoloto and one designee of Solitario (the "Designee Directors") to the Board of
Directors of Crown. The Signing Shareholders agreed that any shares received by
either Signing Shareholder would be subject to the Voting Agreement during its
term and any successor, assignee or transferee of shares from either Signing
Shareholder would be subject to the terms of the Voting Agreement during its
term. The Voting Agreement terminates June 25, 2006. As of March 31, 2004, the
Signing Shareholders collectively held 1,733,866 shares or approximately 7.7% of
the outstanding shares of Crown. As of March 31, 2004, Solitario owned 965,491
shares of Crown common stock, from automatic conversion of its Subordinated B
Notes and received as interest on its Senior and Subordinated B Notes, Solitario
has warrants to acquire 3,057,143 shares of Crown common stock at between $0.60
and $0.75 per share and could also acquire up to 3,057,143 additional shares of
Crown common stock through conversion of the Senior Notes.
On February 21, 2003, Solitario invested $400,000 in Crown's 10%
convertible subordinated promissory notes due 2006 Series B (the "Subordinated B
Notes"). The Subordinated B Notes were convertible into common stock of Crown at
$0.75 per share. The Subordinated B Notes paid interest at 10% in stock or cash
at Crown's option, and would have matured on October 19, 2006, the same date as
Crown's Senior Notes. Solitario's investment was on the same terms as all other
investors. On November 5, 2003, Solitario's Subordinated B Notes were
automatically converted into 533,333 shares of Crown common stock.
As of March 31, 2004 Solitario owns 965,491 shares of Crown common
stock. The directors and executive officers of Crown and their affiliates,
including Solitario, owned 2,012,458 shares of Crown common stock, which
represents approximately 9% of the outstanding shares of Crown common stock at
March 31, 2004. Solitario has entered into a stockholder and voting agreement
with Kinross, along with several Crown directors, Crown executive officers and
entities affiliated with these directors and officers (collectively the
"Signatories"), pursuant to which the Signatories agreed, among other things, to
convert any Senior Notes held by them to common shares prior to the record date
for the special meeting, to vote, or cause to be voted, all of the shares of
Crown common stock owned by them, as set forth in the stockholder and voting
agreement, as well as all shares of Crown common stock acquired by them, as set
forth in the stockholder and voting agreement, in favor of the approval of the
plan of merger, and against the acquisition of Crown by any person other than
Kinross. As of March 31, 2004, 2,012,458 shares of Crown common stock were
subject to the stockholder and voting agreement, representing approximately 9%
of the outstanding shares of Crown common stock entitled to vote at the Crown
special meeting. Additionally, the Signatories agreed to convert $3,000,000 of
Senior Notes into 8,771,429 Crown shares and hold options to acquire 1,917,500
of Crown shares, which could be exercised prior to the record date for the
shareholders' meeting, for a total of 12,701,387 shares, which would represent
36.5% of the then outstanding shares.
F-E42
8. RESTATEMENT
Subsequent to the issuance of Crown's unaudited condensed consolidated
financial statements for the quarter ended March 31, 2003, Crown determined it
had not properly (i) capitalized interest costs related to the development of
its Buckhorn Mountain Project; (ii) recorded Crown's equity interest in certain
adjustments made by Solitario required by SFAS No. 142; and (iii) recorded a
gain on the restructuring of its Keystone Note as a discount to be amortized
over the remaining life of the Keystone Note when the note was renegotiated in
December 2001, as discussed below.
(i) Crown's Buckhorn Mountain Project has been in development since
Crown acquired the project in 1989. Since August 1991 Crown has been incurring
interest costs on long-term debt, which had not been capitalized as required by
Statement of Financial Accounting Standards No. 34, "Capitalization of Interest
Cost" ("SFAS No. 34"). SFAS No. 34 requires capitalization of interest costs
utilizing a weighted average rate on outstanding debt and applying that rate to
the average outstanding balance of capitalized costs on projects in development,
up to the total interest cost for the period.
(ii) Subsequent to the issuance of Solitario's unaudited consolidated
financial statements for the quarter ended March 31, 2003, Solitario determined
that it had not properly adopted the provisions of SFAS No. 142 in relation to
the classification of assets as intangible mineral interests, and had not
recorded the related amortization of those intangible assets and that Solitario
had capitalized certain costs that should have been expensed as incurred.
(iii) During 2003, Crown determined that it should have accounted for
the renegotiation of the Keystone Note as a debt extinguishment and recognized a
gain it its 2001 statement of operations, to the extent of the difference
between the present value of the Keystone Note payments before and after the
renegotiation and amortize that discount to interest cost over the remaining
term of the note.
As a result, the accompanying condensed consolidated financial
statements for the three months ended March 31, 2003 have been restated from the
amounts previously reported. A summary of the significant effects of the
restatement is as follows:
STATEMENT OF OPERATIONS INFORMATION
Three months ended
March 31, 2003
---------------------------------
(in thousands except per share amounts) As previously
reported As restated
-------- -----------
Costs and expenses:
Interest expense $ 409 $ -
Equity in loss of Solitario Resources Corporation 52 100
Loss before income tax (1,001) (640)
Income tax benefit 340 217
Net loss (661) (423)
Basic and diluted loss per share $ (0.15) $ (0.10)
F-E43
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
--------------------------------------------------------------------------------
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
--------------------------------------------------------------------------------
Under the Business Corporations Act (Ontario), a corporation may
indemnify a director or officer, a former director or officer or a person who
acts or acted at the corporation's request as a director or officer of another
corporation of which the corporation is or was a shareholder or creditor, and
his or her heirs and legal representatives, against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a judgment,
reasonably incurred by him or her in respect of any civil, criminal or
administrative action or proceeding to which he or she is made a party by reason
of being or having been a director or officer of the corporation or such other
corporation, if: (1) he or she acted honestly and in good faith with a view to
the best interests of the corporation; and (2) in the case of a criminal or
administrative action or proceeding that is enforced by a monetary penalty, he
or she had reasonable grounds to believe that his or her conduct was lawful. Any
such person is entitled to such indemnity from the corporation if he or she was
substantially successful on the merits in his or her defense of the action or
proceeding and fulfilled the conditions set out in (1) and (2) above. A
corporation may, with the approval of a court, also indemnify any such person in
respect of an action by or on behalf of the corporation or such other
corporation to procure a judgment in its favor, to which such person is made a
party by reason of being or having been a director or officer of the corporation
or such other corporation, if he or she fulfills the conditions set out in (1)
and (2) above. Kinross' bylaws require Kinross to indemnify the persons
permitted to be indemnified by the provisions of the Business Corporations Act
(Ontario) summarized above and every other person who properly incurred any
liability on behalf of Kinross or acted at Kinross' request.
Insofar as indemnification for liabilities arising under the Securities
Act of 1993 may be permitted to directors, officers, and controlling persons
pursuant to the foregoing provisions, Kinross has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
contrary to public policy as expressed in the Securities Act and, therefore, is
unenforceable. (See "ITEM 22. UNDERTAKINGS.")
--------------------------------------------------------------------------------
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
--------------------------------------------------------------------------------
(a) Copies of the following documents are included as exhibits to
this Registration Statement, pursuant to Item 601 of Regulation S-K.
SEC
EXHIBIT NO. REFERENCE
NO. TITLE OF DOCUMENT LOCATION
------------ ------------ ----------------------------------------------------- ----------------------------
ITEM 2 PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION, OR SUCCESSION
----------------------------------------------------------------------------------------------------------------------
2.1 (2) Acquisition Agreement and Plan of Merger, dated as Previously Filed
of November 20, 2003, as amended April 7, 2004,
among Kinross, Crown Merger, and Crown (included as
Appendix A to the Proxy Statement/Prospectus
included as part of this registration statement)
ITEM 3 ARTICLES OF INCORPORATION, BYLAWS
----------------------------------------------------------------------------------------------------------------------
3.1 (3) Articles of Amalgamation dated December 31, 2000
(incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form 8-A filed on January
31, 2001 by Kinross (File No. 001-13382))
II-1
3.2 (3) Articles of Amendment dated January 31, 2003 Previously Filed
3.3 (3) Bylaws (incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form 8-A filed on
January 31, 2001 by Kinross (File No. 001-13382))
ITEM 4 INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS, INCLUDING INDENTURES
----------------------------------------------------------------------------------------------------------------------
4.1 (4) Specimen certificate for Kinross common shares
(incorporated by reference to Exhibit 3 to the
Registration Statement on Form 8-A12B filed on
January 29, 2003 by Kinross (File No. 001-13382))
4.2 (4) Warrant Indenture by and between Kinross and
Computershare Trust Company of Canada dated as of
December 5, 2002 (incorporated by reference to
Exhibit 4.32 to the Registration Statement on Form
F-10 filed on January 23, 2003 by Kinross (File No.
333-102660))
ITEM 5 OPINION RE: LEGALITY
----------------------------------------------------------------------------------------------------------------------
5.1 (5) Opinion of Cassels Brock & Blackwell LLP, regarding This Filing
legality of common stock
ITEM 8 OPINION RE: TAX MATTERS
----------------------------------------------------------------------------------------------------------------------
8.1 (8) Opinion of Parr Waddoups Brown Gee & Loveless, A This Filing
Professional Corporation, regarding certain United
States federal income tax matters
8.2 (8) Opinion of Cassels, Brock & Blackwell LLP, This Filing
regarding certain Canadian federal tax matters
(included in Exhibit 5.1)
ITEM 10 MATERIAL CONTRACTS
----------------------------------------------------------------------------------------------------------------------
10.1 (10) Credit Agreement, dated as of February 1, 2003, Previously Filed
among Kinross, Kinross Gold U.S.A., Inc., Fairbanks
Gold Mining, Inc. and Round Mountain Gold
Corporation, as borrowers, The Bank of Nova Scotia,
as co-lead arranger and administrative agent,
Societe Generale, as co-lead arranger and
syndication agent, and the several lenders from
time to time parties thereto
10.2 (10) Form of Indemnity Agreement for officers and Previously Filed
directors
10.3 (10) Form of Severance Agreement between Kinross and Previously Filed
each of Robert M. Buchan and Scott A. Caldwell
dated May 1,2000
10.4 (10) Form of Severance Agreement between Kinross and Previously Filed
each of Brian W. Penny, John W. Ivany, Jerry W.
Danni, Christopher T. Hill, Gordon A. McCreary,
Shelley M. Riley, Allan D. Schoening, Ronald W.
Stewart, and Alan Edwards
10.5 (10) Kinross Gold Corporation Share Incentive Plan, May
4, 1995, as amended as of May 8, 1996, further
amended as of May 1, 1997, May 28, 1998, May 1,
2000 and July 28, 2000 (incorporated by reference
to Exhibit 4.3 to the Registration Statement on
Form S-8 filed on September 29, 2000 by Kinross
(File No. 333-12662))
II-2
10.6 (10) Kinross Gold Corporation Restricted Share Plan
(incorporated by reference to Exhibit 99.1 to the
Registration Statement on Form S-8 filed on
July 19, 2001 by Kinross (File No. 333-13744))
10.7 (10) Combination Agreement, dated June 10, 2002 among
Kinross, TVX and Echo Bay (incorporated by
reference to Exhibit A to the Definitive Proxy
Statement on Schedule 14A filed on December 24,
2002 by Echo Bay (File No. 001-08542))
10.8 (10) Amending Agreement to Combination Agreement, dated
July 12, 2002 among Kinross, TVX and Echo Bay
(incorporated by reference to Exhibit A to the
Definitive Proxy Statement on Schedule 14A filed on
December 24, 2002 by Echo Bay (File No. 001-08542))
10.9 (10) Amending Agreement to Combination Agreement, dated
November 19, 2002 among Kinross, TVX and Echo Bay
(incorporated by reference to Exhibit A to the
Definitive Proxy Statement on Schedule 14A filed on
December 24, 2002 by Echo Bay (File No. 001-08542))
10.10 (10) Kinross Gold Corporation Deferred Share Unit Plan, Previously Filed
dated September 30, 2003
ITEM 21 SUBSIDIARIES OF THE REGISTRANT
----------------------------------------------------------------------------------------------------------------------
21.1 (21) Subsidiaries of Kinross Previously Filed
ITEM 23 CONSENT OF EXPERTS AND COUNSEL
----------------------------------------------------------------------------------------------------------------------
23.1 (23) Consent of Cassels Brock & Blackwell LLP (included This Filing
in Exhibit 5.1)
23.2 (23) Consent of Parr Waddoups Brown Gee & Loveless, A This Filing
Professional Corporation(included in Exhibit 8.1)
23.3 (23) Consent of Deloitte & Touche LLP, independent This Filing
chartered accountants for Kinross
23.4 (23) Consent of Deloitte & Touche LLP, independent This Filing
chartered accountants for Crown
23.5 (23) Consent of PriceWaterhouseCoopers LLP, independent This Filing
chartered accountants for TVX
23.6 (23) Consent of Ernst & Young LLP, independent chartered This Filing
accountants for Echo Bay
23.7 (23) Consent of Rod Cooper to being named as a qualified Previously Filed
person
23.8 (23) Consent of A. Still to being named as a qualified Previously Filed
person
23.9 (23) Consent of A. Cheatle to being named as a qualified Previously Filed
person
23.10 (23) Consent of M. Sharrat to being named as a qualified Previously Filed
person
23.11 (23) Consent of J. Ochoa to being named as a qualified Previously Filed
person
II-3
23.12 (23) Consent of W. Yamaoka to being named as a qualified Previously Filed
person
23.13 (23) Consent of Mike Michaud to being named as an expert Previously Filed
23.14 (23) Consent of Steffen Robertson and Kirsten to being Previously Filed
named as an expert
ITEM 24 POWER OF ATTORNEY
----------------------------------------------------------------------------------------------------------------------
24.1 (24) Power of Attorney (contained in the signature pages Previously Filed
of this registration statement on Form F-4)
ITEM 99 ADDITIONAL EXHIBITS
----------------------------------------------------------------------------------------------------------------------
99.1 (99) Form of Proxy Card of Crown This Filing
99.2 (99) Stockholder and Voting Agreement, dated as of Previously Filed
November 20, 2003, among Kinross, Zoloto,
Solitario, Christopher E. Herald, Mark E. Jones,
III, Brian Labadie, James R. Maronick, and Steven
A. Webster
99.3 (99) Toll Milling Agreement, dated as of November 11, Previously Filed
2003, between Echo Bay Minerals and Crown
99.4 (99) Distribution Agreement, dated as of November 20, Previously Filed
2003, among Solitario, Crown, and Kinross
(b) All financial statement schedules are omitted because they are not applicable or because the
required information is contained in the Consolidated Financial Statements or the Notes thereto.
--------------------------------------------------------------------------------
ITEM 22. UNDERTAKINGS
--------------------------------------------------------------------------------
The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
--------------------------------------------------------------------------------
SIGNATURES
--------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Amendment No. 3 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Toronto, Province of Ontario, Canada, on the 30th day of June, 2004.
KINROSS GOLD CORPORATION
(Registrant)
By: /s/ Lars-Eric Johansson
---------------------------------------------
Lars-Eric Johansson, Chief Financial Officer
and Vice President Finance
By: /s/ Scott W. Loveless
---------------------------------------------
Scott W. Loveless, Authorized Representative
in the United States
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Robert M. Buchan
(Chief Executive Officer and President) and Director
Lars-Eric Johansson, Chief Financial Officer and
Vice President Finance
(Principal Financial and Accounting Officer)
John A. Brough, Director
Scott A. Caldwell, Director
Arthur H. Ditto, Director
By: /s/ Robert M. Buchan
Richard S. Hallisey, Director -----------------------------
Robert M. Buchan, Attorney-in-Fact
John M.H. Huxley, Director Dated: June 30th, 2004
John A. Keyes, Director
George F. Michals, Director
Cameron A. Mingay, Director
John E. Oliver, Director
II-6