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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


ý

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                            to                             

Commission File Number 1-8542


ECHO BAY MINES LTD.
(Exact name of registrant as specified in its charter)

Incorporated under the laws
of Canada

(State or other jurisdiction of
incorporation or organization)
  None
(I.R.S. Employer
Identification No.)

Suite 1210, 10180-101 Street
Edmonton, Alberta

(Address of principal executive offices)

 

T5J 3S4
(Zip Code)

Registrant's telephone number, including area code (780) 496-9002


        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

Title of Class
  Shares Outstanding as of
July 31, 2002

Common Shares
without nominal or par value
  541,268,675



ECHO BAY MINES LTD.

INDEX

        

 

PART I—FINANCIAL INFORMATION
 
ITEM 1.    Condensed Financial Statements (Unaudited)
 
ITEM 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
 
ITEM 3.    Qualitative and Quantitative Disclosures About Market Risk

PART II—OTHER INFORMATION
 
ITEM 1.    Legal Proceedings
 
ITEM 4.    Submission of Matters to a Vote of the Security Holders
 
ITEM 6.    Exhibits and Reports on Form 8-K

SIGNATURE


CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

        "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements herein that are not historical facts are forward-looking statements. They involve risks and uncertainties that could cause actual results to differ materially from targeted results. These risks and uncertainties include, but are not limited to, the possibility that the combination of Kinross Gold Corporation, TVX Gold Inc. and Echo Bay Mines Ltd. (the "Company") may not be completed; future changes in gold prices (including derivatives) and/or production costs which could render projects uneconomic; ability to access financing; availability of hedging opportunities; differences in ore grades, recovery rates and tons mined from those expected; changes in mining and milling/heap leaching rates from currently planned rates; the results of future exploration activities and new exploration opportunities; changes in project parameters as plans continue to be refined; increasingly stringent reclamation requirements imposed by regulatory authorities; and other factors detailed in the Company's filings with the U.S. Securities and Exchange Commission.

        On July 16, 2002, the Company filed with the Securities and Exchange Commission a preliminary proxy statement regarding the proposed business combination transaction referred to in the following information. In addition, the Company will prepare and file with the Commission a definitive proxy statement and other documents regarding the proposed transaction. Investors and security holders are urged to read the definitive proxy statement, when it becomes available, because it will contain important information. The definitive proxy statement will be sent to shareholders of the Company to seek their approval of the proposed transaction. Investors and security holders may obtain a free copy of the definitive proxy statement, when it is available, and other documents filed with the Commission by the Company at the Commission's website at www.sec.gov. The definitive proxy statement, when it is available, and these other documents may also be obtained for free from the Company by directing a request to Lois-Ann L. Brodrick, Vice President and Secretary, 780-496-9002, investor_relations@echobaymines.ca.

Certain Information Concerning Participants

        The names, affiliations and interests of participants in the solicitation of proxies of the Company's shareholders to approve the combination is included in the preliminary proxy statement.


ECHO BAY MINES LTD.
  
PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS (Unaudited)

CONSOLIDATED BALANCE SHEETS

 
  June 30
2002

  December 31
2001

 
(thousands of U.S. dollars)

   
   
 
ASSETS              
Current assets:              
  Cash and cash equivalents   $ 16,612   $ 12,351  
  Short-term investments     2,007     1,910  
  Interest and accounts receivable     5,358     3,645  
  Inventories (note 2)     31,463     29,506  
  Prepaid expenses and other assets     1,889     3,725  
   
 
 
      57,329     51,137  
Plant and equipment (note 3)     114,932     120,969  
Mining properties (note 3)     31,901     32,903  
Long-term investments and other assets (note 4)     52,840     55,795  
   
 
 
    $ 257,002   $ 260,804  
   
 
 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 
Current liabilities:              
  Accounts payable and accrued liabilities   $ 23,039   $ 24,284  
  Income and mining taxes payable     2,574     3,570  
  Debt and other financings (note 5)         17,000  
  Deferred income (note 6)     782     876  
  Reclamation and mine closure liabilities     3,021     3,841  
   
 
 
      29,416     49,571  
Debt and other financings (note 5)         6,714  
Deferred income (note 6)     27,404     47,042  
Reclamation and mine closure liabilities     49,504     49,726  
Deferred income taxes     969     925  

Commitments and contingencies (notes 12 and 13)

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 
  Capital stock (note 7)     1,042,568     713,343  
  Capital securities (note 8)         157,453  
  Deficit     (867,561 )   (734,665 )
  Foreign currency translation     (25,298 )   (29,305 )
   
 
 
      149,709     106,826  
   
 
 
    $ 257,002   $ 260,804  
   
 
 

See accompanying notes to interim consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS

 
  Three months ended
June 30

  Six months ended
June 30

 
 
  2002
  2001
  2002
  2001
 
(thousands of U.S. dollars, except for per share data)

   
   
   
   
 
Revenue   $ 54,578   $ 63,652   $ 109,754   $ 128,113  
   
 
 
 
 
Expenses:                          
  Operating costs     34,320     46,521     69,416     91,144  
  Royalties     2,082     2,383     3,706     3,686  
  Production taxes     295     158     84     271  
  Depreciation and amortization     9,883     11,371     19,723     22,269  
  Reclamation and mine closure     1,224     1,622     2,480     3,265  
  General and administrative     1,578     1,237     2,891     2,840  
  Exploration and development     1,607     1,161     2,169     2,012  
  Loss on retirement of capital securities (note 7)     5,461         5,461      
  Interest and other (note 9)     (385 )   542     (163 )   832  
   
 
 
 
 
      56,065     64,995     105,767     126,319  
   
 
 
 
 
Earnings (loss) before income taxes     (1,487 )   (1,343 )   3,987     1,794  
   
 
 
 
 
Income tax expense (recovery):                          
  Current         (101 )       83  
  Deferred         (839 )       (1,679 )
   
 
 
 
 
          (940 )       (1,596 )
   
 
 
 
 
Net earnings (loss)   $ (1,487 ) $ (403 ) $ 3,987   $ 3,390  
   
 
 
 
 
Net earnings (loss) attributable to common shareholders (note 8)   $ (1,487 ) $ (4,729 ) $ (594 ) $ (5,266 )
   
 
 
 
 
Earnings (loss) per share—basic and diluted   $   $ (0.03 ) $   $ (0.04 )
   
 
 
 
 
Weighted average number of shares outstanding (thousands)—basic and diluted     495,983     140,607     429,782     140,607  
   
 
 
 
 

CONSOLIDATED STATEMENTS OF DEFICIT

 
  Three months ended
June 30

  Six months ended
June 30

 
 
  2002
  2001
  2002
  2001
 
(thousands of U.S. dollars)

   
   
   
   
 
Balance, beginning of period   $ (733,772 ) $ (712,217 ) $ (734,665 ) $ (711,680 )
Net earnings (loss)     (1,487 )   (403 )   3,987     3,390  
Loss on retirement of capital securities, net of nil tax effect (note 7)     (132,302 )       (132,302 )    
Interest on capital securities, net of nil tax effect (note 8)         (4,326 )   (4,581 )   (8,656 )
   
 
 
 
 
Balance, end of period   $ (867,561 ) $ (716,946 ) $ (867,561 ) $ (716,946 )
   
 
 
 
 

See accompanying notes to interim consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOW

 
  Three months ended
June 30

  Six months ended
June 30

 
 
  2002
  2001
  2002
  2001
 
(thousands of U.S. dollars)

   
   
   
   
 
CASH PROVIDED FROM (USED IN):                          
OPERATING ACTIVITIES                          
  Net cash flows provided from operating activities   $ 5,486   $ 2,190   $ 5,249   $ 16,297  
   
 
 
 
 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 
  Mining properties, plant and equipment     (6,544 )   (3,000 )   (8,864 )   (13,357 )
  Long-term investments and other assets     107     3     79     13  
  Proceeds on the sale of plant and equipment     1,516     152     1,692     368  
  Other     691     (207 )   544     (133 )
   
 
 
 
 
      (4,230 )   (3,052 )   (6,549 )   (13,109 )
   
 
 
 
 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 
  Debt repayments     (17,000 )   (3,750 )   (17,000 )   (7,500 )
  Units offering, net of issuance costs (note 7)     25,513         25,513      
  Costs of capital securities retirement (note 7)     (2,952 )       (2,952 )    
   
 
 
 
 
      5,561     (3,750 )   5,561     (7,500 )
   
 
 
 
 
Net increase (decrease) in cash and cash equivalents     6,817     (4,612 )   4,261     (4,312 )
Cash and cash equivalents, beginning of period     9,795     14,569     12,351     14,269  
   
 
 
 
 
Cash and cash equivalents, end of period   $ 16,612   $ 9,957   $ 16,612   $ 9,957  
   
 
 
 
 

See accompanying notes to interim consolidated financial statements.


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002

Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted

1.    GENERAL

        In the opinion of management, the accompanying unaudited consolidated balance sheets, consolidated statements of operations, consolidated statements of deficit and consolidated statements of cash flow contain all adjustments, consisting only of normal recurring accruals, necessary to present fairly in all material respects the consolidated financial position of Echo Bay Mines Ltd. (the "Company") as of June 30, 2002 and December 31, 2001 and the consolidated results of operations and cash flow for the three and six months ended June 30, 2002 and 2001. These financial statements do not include all disclosures required by generally accepted accounting principles for annual financial statements. For further information, refer to the financial statements and related footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 2001. Except as otherwise noted in this report, the accounting policies described in the annual report have been applied in the preparation of these financial statements.

        On June 10, 2002, the Company, Kinross Gold Corporation ("Kinross") and TVX Gold Inc. ("TVX") entered into an agreement providing for the combination of the companies. In addition, TVX has agreed to acquire Newmont Mining Corporation's ("Newmont") interest in the TVX Newmont Americas joint venture. Under the agreement, holders of common shares of the Company (other than Kinross) will receive 0.52 of a common share of Kinross for each common share of the Company. The Company is in the process of obtaining customary regulatory approvals and the combination will be presented to shareholders for their consideration at a special meeting anticipated to be set for the fourth quarter 2002.

        On June 9, 2002, Echo Bay Exploration Inc. and Echo Bay Minerals Company, subsidiaries of the Company, entered into a McCoy/Cove asset purchase agreement with Newmont USA Limited, a subsidiary of Newmont, providing for the sale of the McCoy/Cove complex. The closing of the transaction is subject to, among other conditions, the completion of the Kinross combination. In consideration of the purchase of such assets, Newmont USA has agreed to assume all liabilities and obligations relating to the reclamation or remediation required for the McCoy/Cove complex. The agreement replaces the letter agreement dated February 13, 2002 and results in no cash payment to the Company or any of its affiliates. A gain is expected on the sale of McCoy/Cove. Pending completion of the transaction, the Company will continue to operate McCoy/Cove for its own account.

        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 consists 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. Each warrant entitles the holder to purchase one common share of the Company at a price of $0.90 at any time prior to November 14, 2003.

        On April 3, 2002 the Company issued 361,561,230 common shares in exchange for the entire capital securities debt obligation of $100 million in principal amount plus accrued and unpaid interest (notes 7 and 8).

        Certain of the comparative figures have been restated to conform to the current year's presentation.

2.    INVENTORIES

 
  June 30
2002

  December 31
2001

Precious metals bullion   $ 8,609   $ 12,215
In-process     5,614     5,720
Materials and supplies     17,240     11,571
   
 
    $ 31,463   $ 29,506
   
 

3.    PROPERTY, PLANT AND EQUIPMENT

Plant and equipment

 
  June 30
2002

  December 31
2001

Cost   $ 658,403   $ 655,179
Less accumulated depreciation     543,471     534,210
   
 
    $ 114,932   $ 120,969
   
 

Mining properties

 
  June 30
2002

  December 31
2001

Producing mines' acquisition and development costs   $ 283,185   $ 280,545
Less accumulated amortization     264,651     260,365
   
 
      18,534     20,180
Development properties' acquisition and development costs     13,367     12,723
   
 
    $ 31,901   $ 32,903
   
 

4.    LONG-TERM INVESTMENTS AND OTHER ASSETS

 
  June 30
2002

  December 31
2001

Deferred losses on modification of hedging contracts   $ 26,840   $ 29,305
Deferred mining costs     15,171     15,648
Reclamation and other deposits     10,598     10,485
Premiums paid on gold and silver option contracts     917     1,871
Other     231     357
   
 
      53,757     57,666
Less current portion included in prepaid expenses and other assets     917     1,871
   
 
    $ 52,840   $ 55,795
   
 

5.    DEBT AND OTHER FINANCINGS

 
  June 30
2002

  December 31
2001

Currency loans   $   $ 17,000
Capital securities (note 8)         6,714
   
 
          23,714
Less current portion         17,000
   
 
    $   $ 6,714
   
 

6.    DEFERRED INCOME

 
  June 30
2002

  December 31
2001

Deferred gains on modification of hedging contracts   $ 27,404   $ 47,042
Premiums received on gold and silver option contracts     782     876
   
 
      28,186     47,918
Less current portion     782     876
   
 
    $ 27,404   $ 47,042
   
 

7.    CAPITAL STOCK

 
  Units
  Amount
Common shares          
Balance, December 31, 2001   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
   
 
Balance, June 30, 2002   541,268,375   $ 1,040,290
   
 
Warrants          
Balance, December 31, 2001     $
Units offering, net of issuance costs   39,100,000     2,278
   
 
Balance, June 30, 2002   39,100,000   $ 2,278
   
 

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 new 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 consists 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. Each warrant entitles the holder to purchase one common share of the Company at a price of $0.90 at any time prior to November 14, 2003.

8.    CAPITAL SECURITIES

        On April 3, 2002 the Company issued 361,561,230 common shares in exchange for all of its capital securities (note 7). 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. For purposes of per share calculations, interest on the equity portion decreases the earnings attributable to common shareholders. See note 10 for a discussion of differences in treatment of the capital securities under generally accepted accounting principles in the United States.

9.    INTEREST AND OTHER

 
  Three months ended
June 30

  Six months ended
June 30

 
 
  2002
  2001
  2002
  2001
 
Interest income   $ (58 ) $ (141 ) $ (218 ) $ (499 )
Interest expense     136     616     542     1,411  
Gain on sale of assets     (1,022 )   (84 )   (1,099 )   (285 )
Unrealized loss on share investments         102         102  
Other     559     49     612     103  
   
 
 
 
 
    $ (385 ) $ 542   $ (163 ) $ 832  
   
 
 
 
 

10.  DIFFERENCES BETWEEN CANADIAN AND UNITED STATES 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. These differ in some respects from those in the United States, as described below and in the footnotes to the financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2001.

Capital securities retirement

        In accordance with Canadian GAAP, the loss on the retirement of the capital securities (note 7) was 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. Under U.S. GAAP, the entire loss of $137.8 million would be recorded as an extraordinary item.

        The effects of the GAAP differences on the consolidated statement of operations would have been as follows.

 
  Three months ended
June 30

  Six months ended
June 30

 
 
  2002
  2001
  2002
  2001
 
Net earnings (loss) under Canadian GAAP   $ (1,487 ) $ (403 ) $ 3,987   $ 3,390  
Additional interest expense on capital securities         (4,326 )   (4,581 )   (8,656 )
Amortization of deferred financing on capital securities         (159 )   (158 )   (317 )
Loss on retirement of capital securities     5,461         5,461      
Change in market value of foreign exchange contracts     714     (461 )   671     (1,940 )
Change in market value of option contracts     (1,403 )   217     (1,703 )   (791 )
Modification of derivative contracts realized in net earnings     343         687      
Transition adjustment on adoption of FAS 133                 (3,090 )
Kettle River exploration expense         (797 )       (1,303 )
Kettle River amortization expense         655         1,169  
Unrealized loss on share investments         102         102  
   
 
 
 
 
Net earnings (loss) under U.S. GAAP before extraordinary loss   $ 3,628   $ (5,172 ) $ 4,364   $ (11,436 )
Loss on retirement of capital securities, net of nil tax effect     (137,763 )       (137,763 )    
   
 
 
 
 
Net loss under U.S. GAAP   $ (134,135 ) $ (5,172 ) $ (133,399 ) $ (11,436 )
   
 
 
 
 
Loss per share under U.S. GAAP — basic and diluted                          
  —before extraordinary loss   $ 0.01   $ (0.04 ) $ 0.01   $ (0.08 )
  —extraordinary loss   $ (0.28 ) $   $ (0.32 ) $  
   
 
 
 
 
  —after extraordinary loss   $ (0.27 ) $ (0.04 ) $ (0.31 ) $ (0.08 )
   
 
 
 
 
Weighted average number of shares outstanding (thousands)                          
  —basic     495,983     140,607     429,782     140,607  
  —diluted     499,975     140,607     432,549     140,607  
   
 
 
 
 

        The effects of the GAAP differences on the consolidated balance sheet would have been as follows.

June 30, 2002

  Canadian
GAAP

  Derivative
Contracts

  Other
  U.S.
GAAP

 
Short-term investments   $ 2,007   $   $ 12,392   $ 14,399  
Long-term investments and other assets     52,840     (26,840 )   812     26,812  
Accounts payable and accrued liabilities     23,039     2,300         25,339  
Deferred income     28,186     (28,186 )        
Common shares     1,042,568         36,428     1,078,996  
Deficit     (867,561 )   (4,579 )   (35,438 )   (907,578 )
Foreign currency translation     (25,298 )       25,298      
Accumulated other comprehensive loss         3,625     (13,084 )   (9,459 )
Shareholders' equity     149,709     (954 )   13,204     161,959  
   
 
 
 
 

        The following statement of comprehensive income (loss) would be disclosed in accordance with U.S. GAAP.

 
  Three months ended
June 30

  Six months ended
June 30

 
 
  2002
  2001
  2002
  2001
 
Net earnings (loss) under U.S. GAAP   $ (134,135 ) $ (5,172 ) $ (133,399 ) $ (11,436 )
Other comprehensive income (loss), after a nil income tax effect:                          
  Unrealized gain on share investments arising during period     6,030     67     9,756     356  
  Foreign currency translation adjustments     4,070     2,502     4,007     (915 )
  Transition adjustment on implementation of FAS 133                 39,234  
  Modification of derivative contracts realized in net earnings (loss)     (9,599 )   (5,497 )   (17,860 )   (7,794 )
   
 
 
 
 
Other comprehensive income (loss)     501     (2,928 )   (4,097 )   30,881  
   
 
 
 
 
Comprehensive income (loss)   $ (133,634 ) $ (8,100 ) $ (137,496 ) $ 19,445  
   
 
 
 
 

        Additionally, under U.S. GAAP, the equity section of the balance sheet would present a subtotal for accumulated other comprehensive loss, as follows.

 
  June 30
2002

  December 31
2001

 
Unrealized gain on share investments   $ 12,214   $ 2,458  
Modification of derivative contracts     3,625     21,485  
Foreign currency translation     (25,298 )   (29,305 )
   
 
 
Accumulated other comprehensive loss   $ (9,459 ) $ (5,362 )
   
 
 

Recent accounting pronouncements

        In 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, which is effective for fiscal years beginning after June 15, 2002. The Statement requires obligations associated with the retirement of long-lived assets be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost should be capitalized as part of the related long-lived assets and allocated to expense over the useful life of the asset. The Company will adopt Statement 143 on January 1, 2003. The impact of adoption of Statement 143 on the Company's financial position or results of operations has not yet been determined.

11.  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. In the second quarter of 2002, the Company had three operating mines: Round Mountain in Nevada, USA; Kettle River in Washington, USA; and Lupin in the Nunavut Territory of Canada. All of the Company's mines are 100% owned except for Round Mountain, which is 50% owned. The Company operated a fourth mine, McCoy/Cove in Nevada, USA, until March 31, 2002 at which date mining and processing activities were completed.

        The Company's management generally monitors revenue on a consolidated basis. Information regarding the Company's consolidated revenue is provided below.

 
  Three months ended
June 30

  Six months ended
June 30

 
  2002
  2001
  2002
  2001
Total gold and silver revenues   $ 54,578   $ 63,652   $ 109,754   $ 128,113
Average gold price realized per ounce   $ 375   $ 298   $ 360   $ 304
Average silver price realized per ounce   $ 4.39   $ 4.52   $ 4.36   $ 4.93
   
 
 
 

        In making operating decisions and allocating resources, the Company's management specifically focuses on the production levels and cash operating costs generated by each operating segment, as summarized in the following tables.

 
  Three months ended
June 30

  Six months ended
June 30

Production (ounces)

  2002
  2001
  2002
  2001
Gold                
  Round Mountain (50%)   95,499   97,770   189,070   198,138
  Lupin   24,643   34,756   53,360   72,710
  Kettle River   9,500   16,373   19,987   29,218
  McCoy/Cove     27,385   16,501   49,688
   
 
 
 
Total gold   129,642   176,284   278,918   349,754
   
 
 
 
Silver—all from McCoy/Cove     1,738,056   1,470,094   3,296,585
   
 
 
 
 
  Three months ended
June 30

  Six months ended
June 30

Operating costs

  2002
  2001
  2002
  2001
Round Mountain (50%)   $ 17,731   $ 20,025   $ 33,121   $ 38,260
Lupin     10,392     8,035     18,271     15,854
Kettle River     2,565     4,505     4,571     8,056
McCoy/Cove     3,632     13,956     13,453     28,974
   
 
 
 
Total operating costs per financial statements   $ 34,320   $ 46,521   $ 69,416   $ 91,144
   
 
 
 
 
  Three months ended
June 30

  Six months ended
June 30

Royalties

  2002
  2001
  2002
  2001
Round Mountain (50%)   $ 2,062   $ 2,126   $ 3,594   $ 3,207
Kettle River     14     189     71     359
McCoy/Cove     6     68     41     120
   
 
 
 
Total royalties per financial statements   $ 2,082   $ 2,383   $ 3,706   $ 3,686
   
 
 
 
 
  Three months ended
June 30

  Six months ended
June 30

Depreciation and amortization

  2002
  2001
  2002
  2001
Round Mountain (50%)   $ 5,792   $ 5,620   $ 10,729   $ 10,658
Lupin     1,070     1,328     2,200     2,605
Kettle River     473     784     1,634     1,058
McCoy/Cove     2,153     3,243     4,384     7,064
Depreciation of non-minesite assets     395     396     776     884
   
 
 
 
Total depreciation and amortization per financial statements   $ 9,883   $ 11,371   $ 19,723   $ 22,269
   
 
 
 

12.  HEDGING ACTIVITIES AND COMMITMENTS

Gold commitments

        At June 30, 2002, the Company had commitments to deliver 30,000 ounces of gold in 2002 at a minimum price of $293 per ounce. The Company's option position at June 30, 2002 included 90,000 ounces of gold call options sold in 2002 at an average strike price of $296 per ounce.

Currency position

        At June 30, 2002, the Company had an obligation under foreign currency exchange contracts to purchase C$25.5 million in the remainder of 2002 at an exchange rate of C$1.60 to U.S.$1.00.

        Shown below are the carrying amounts and estimated fair values of the Company's hedging instruments at June 30, 2002 and December 31, 2001.

 
  June 30, 2002
  December 31, 2001
 
 
  Carrying
Amount

  Estimated
Fair Value

  Carrying
Amount

  Estimated
Fair Value

 
Gold forward sales   $   $ (800 ) $   $ 2,000  
Gold options—calls sold     (782 )   (2,300 )   (876 )   (700 )
Foreign currency contracts         800         100  
   
 
 
 
 
          $ (2,300 )       $ 1,400  
         
       
 

        Fair values are estimated based upon market quotations of various input variables. These variables were used in valuation models that estimate the fair market value.

13.  OTHER COMMITMENTS AND CONTINGENCIES

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 U.S. $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 defences 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' defences, 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 & Harman

        On March 29, 2000 Handy & Harman Refining Group, Inc., which operated a facility used by the Company for the refinement of doré bars, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The Company has a claim for gold and silver accounts at this refining facility with an estimated market value of approximately $2.4 million. 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 Company intends to oppose these proceedings vigorously. The success or failure of the liquidating trustee in prosecuting the claims may have an impact on the ultimate distribution of funds to creditors. The outcome of these proceedings is uncertain at this time.

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 totaling approximately $33 million. The Company disagrees with the regulators' position and believes that the subsidiaries qualify under the criteria set out for corporate guarantees and will oppose the regulatory decision. Although the outcome cannot be predicted, the Company and its counsel believe that the Company will prevail.


MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS

For the Three Months and Six Months Ended June 30, 2002
(U.S. dollars)

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

        The Company's profitability is determined in large part by gold prices. Market prices of gold are determined by factors beyond the Company's control. The Company's operations continue to be materially affected by the price of gold, which averaged $271 per ounce in 2001 and $301 per ounce during the first six months of 2002.

        The Company reduces the risk of future gold price declines by hedging a portion of its production. The principal hedging tools used are forward sales contracts and options. Forward sales contracts obligate the Company to sell gold at a specific price on a future date. Call options give the holder the right, but not the obligation, to buy gold on a specific future date at a specific price. These tools reduce the risk associated with gold price declines, but also could limit the Company's participation in increases of gold prices. The Company continually monitors its hedging policy in light of forecasted production, operating and capital expenditures, exploration and development requirements and factors affecting volatility of gold prices such as actual and prospective interest and gold lease rate performance. 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.

        The Company's hedge position as of June 30, 2002 is shown in note 12 to the interim consolidated financial statements. For the remainder of 2002, this position includes forward sales of approximately 30,000 ounces at a minimum forward price of $293 per ounce. The Company has sold call options for 90,000 ounces of gold in 2002 at an average strike price of $296 per ounce. These forward sales contracts and call options represent approximately 3% of current reserves. In addition, the Company has obligations to purchase C$25.5 million for the remainder of 2002 at an exchange rate of C$1.60 to US$1.00.

        On June 10, 2002, the Company, Kinross and TVX entered into an agreement providing for the combination of the companies. In addition, TVX has agreed to acquire Newmont's interest in the TVX Newmont Americas joint venture. Under the agreement, holders of common shares of the Company (other than Kinross) will receive 0.52 of a common share of Kinross for each common share of the Company. The Company is in the process of obtaining customary regulatory approvals and the combination will be presented to shareholders for their consideration at a special meeting anticipated to be set for the fourth quarter 2002.

        On June 9, 2002, Echo Bay Exploration Inc. and Echo Bay Minerals Company, subsidiaries of the Company, entered into a McCoy/Cove asset purchase agreement with Newmont USA Limited, a subsidiary of Newmont, providing for the sale of the McCoy/Cove complex. The closing of the transaction is subject to, among other conditions, the completion of the Kinross combination. In consideration of the purchase of such assets, Newmont USA has agreed to assume all liabilities and obligations relating to the reclamation or remediation required for the McCoy/Cove complex. The agreement replaces the letter agreement dated February 13, 2002 and results in no cash payment to the Company or any of its affiliates. A gain is expected on the sale of McCoy/Cove. Pending completion of the transaction, the Company will continue to operate McCoy/Cove for its own account.

LIQUIDITY AND CAPITAL RESOURCES

        Net cash flow provided by operating activities was $5.2 million for the first six months of 2002 compared $16.3 million for the first six months of 2001. The 2002 results compared to 2001 reflect the decrease in production.

        Net cash used in investing activities was $6.5 million in the first six months of 2002, primarily related to investments in mining properties, plant and equipment.

        Net cash provided from financing activities was $5.6 million in the first six months of 2002 compared to net cash used for scheduled debt repayments of $7.5 million for the first six months of 2001. In May 2002, the Company sold a total of 39,100,000 units; each unit consisting of one common share and one share purchase warrant at a price of $0.70 per unit for net proceeds of $25.5 million. The Company repaid the remaining $17.0 million on its revolving credit facility and incurred $3.0 in transaction costs related to the issuance of common shares in exchange for its capital securities obligation. The Company is now debt free.

        On April 3, 2002 the Company issued 361,561,230 common shares in exchange for the entire capital securities debt obligation of $100 million in principal amount plus accrued and unpaid interest (See notes 7 and 8 to the interim consolidated financial statements).

        At June 30, 2002, the Company had $16.6 million in cash and cash equivalents and $2.0 million in short-term investments recorded at the lower of cost or fair value. The fair value of the short-term investments at June 30, 2002 was $14.4 million.

        At June 30, 2002, the estimated fair value of the Company's hedge portfolio was a loss of $2.3 million. A change in the gold price of $10 per ounce would result in a change in fair value of the hedge position by approximately $1.0 million assuming no changes in dollar interest rates, gold lease rates or other volatility factors underlying the Company's hedge position. There are no margin requirements related to these hedge contracts.

        The Company expects to incur $11.0 million for capital expenditures in 2002 funded by its operating cash flow, of which $8.9 million in expenditures have been incurred in the first six months of 2002. The Company will rely on its operating cash flow to fund the remainder of its planned 2002 capital expenditures. The Company monitors its discretionary spending in view of the cost structure of its operating mines and the availability of additional credit, and will modify or reduce its discretionary spending where necessary.

        Early in 2000, the American Stock Exchange had advised the Company that its listing eligibility was under review because the Company had fallen below two of the exchange's listing guidelines. On May 28, 2002, the Company received notification from the American Stock Exchange that the Company was in compliance with the American Stock Exchange continued listing guidelines.

        See note 13 to the interim consolidated financial statements.

FINANCIAL REVIEW

Three month results

        The Company reported a net loss of $1.5 million for the second quarter compared with a net loss of $0.4 million in the second quarter of 2001. On a per share basis, the results were break-even for the quarter compared to a net loss of $0.03 in 2001. The loss per share in 2001 included $4.3 million representing the equity portion of the interest on the Company's capital securities. The 2002 results, compared to 2001, reflect 26% lower gold sales volume and 64% lower silver sales volume due to lower production and a one time charge of $5.5 million relating to the exchange of the Company's capital securities for common shares. These factors were partially offset by lower operating costs, depreciation and amortization reflecting the reduction in ounces sold and a 26% higher average realized gold price. Deferred revenue recognized in the second quarter of 2002 was $8.9 million compared to $5.1 million in 2001.

        Gold production decreased 26% to 129,642 ounces in the second quarter of 2002 compared to 176,284 ounces in the second quarter of 2001. The decrease in production resulted from lower grades at Lupin and no production from McCoy/Cove. There was no silver production in the second quarter of 2002 compared to 1.7 million ounces from McCoy/Cove in the second quarter of 2001. Milling was completed at McCoy/Cove in March 2002.

        Cash operating costs were $224 per ounce of gold in the second quarter of 2002, versus $218 in the second quarter of 2001. The increase was primarily a result of lower production. Total production costs were $321 per ounce in the second quarter of 2002, versus $291 per ounce in the second quarter of 2001.

Six month results

        The Company reported net earnings of $4.0 million in the first six months of 2002, compared with net earnings of $3.4 million in the same period of 2001. On a per share basis, after capital securities interest of $4.6 million in 2002 and $8.7 million in 2001, the Company broke even for the first six months of 2002 compared with a loss of $0.04 in the same period of 2001. The 2002 results compared to 2001 reflect 22% lower gold sales volume, 46% lower silver sales volume and a one time charge of $5.5 million relating to the exchange of the Company's capital securities for common shares. These factors were partially offset by lower operating costs, depreciation and amortization reflecting the reduction in ounces sold and an 18% higher average realized gold price. Deferred revenue recognized in the first six months of 2002 was $16.3 million compared to $7.1 million in the same period of 2001.

        Gold production decreased 20% to 278,918 ounces in the first six months of 2002 compared to 349,754 ounces in the first six months of 2001. The lower production resulted from lower grades at all properties and completion of production at McCoy/Cove in March 2002. Silver production from McCoy/Cove was 1.5 million ounces, 55% lower than the 3.3 million ounces produced in 2001.

        Cash operating costs were $219 per ounce of gold in the first six months of 2002, versus $215 in the first six months of 2001. The increase was primarily a result of lower production. Total production costs were $301 per ounce in the first six months of 2002, versus $285 per ounce in the first six months of 2001.

        The Company reports per ounce production cost data in accordance with The Gold Institute Production Cost Standard (the "Standard"). The Gold Institute is an association of suppliers of gold and gold products and includes leading North American gold producers. Adoption of the Standard is voluntary, and the data presented may not be comparable to data presented by other gold producers. Production costs per ounce are derived from amounts included in the unaudited Statements of Operations and include mine site operating costs such as mining, processing, administration, transportation, royalties, production taxes, depreciation, amortization and reclamation costs, but exclude financing, capital, development and exploration costs. These costs are then divided by gold ounces produced to arrive at the total production costs per ounce. The measures are furnished to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. Throughout this report, all references to per ounce production cost data, or cash operating costs, will be in accordance with the Standard.

        The term ounce as used in this Form 10-Q means "troy ounce".

Revenue

        Statistics for gold and silver ounces sold and other revenue data are set out below.

 
  Three months ended
June 30

  Six months ended
June 30

 
Revenue Data

 
  2002
  2001
  2002
  2001
 
Gold                          
  Ounces sold     137,601     185,825     279,030     357,910  
  Average price realized/ounce—revenue basis   $ 375   $ 298   $ 360   $ 304  
  Average price realized/ounce—cash basis(1)   $ 311   $ 273   $ 302   $ 281  
  Average market price/ounce   $ 312   $ 268   $ 301   $ 266  
  Revenue (millions of U.S. $)   $ 51.7   $ 55.4   $ 100.5   $ 108.8  
  Percentage of total revenue     95 %   87 %   92 %   85 %

Silver

 

 

 

 

 

 

 

 

 

 

 

 

 
  Ounces sold     663,305     1,824,329     2,118,181     3,918,144  
  Average price realized/ounce—revenue basis   $ 4.39   $ 4.52   $ 4.36   $ 4.93  
  Average price realized/ounce—cash basis(1)   $ 4.39   $ 4.30   $ 4.36   $ 5.22  
  Average market price/ounce   $ 4.75   $ 4.40   $ 4.63   $ 4.48  
  Revenue (millions of U.S. $)   $ 2.9   $ 8.2   $ 9.2   $ 19.3  
  Percentage of total revenue     5 %   13 %   8 %   15 %
   
 
 
 
 
Total revenue (millions of U.S. dollars)   $ 54.6   $ 63.7   $ 109.8   $ 128.1  
   
 
 
 
 

(1)
Excludes non-cash items affecting gold and silver revenues, such as the recognition of deferred income or deferral of revenue to future periods for hedge accounting purposes.

        The effects of changes in sales prices and volume were as follows.

Revenue Variance Analysis
2002 vs. 2001

  Three months ended
June 30

  Six months ended
June 30

 
(millions of U.S. dollars)

   
   
 
Higher gold prices   $ 10.6   $ 15.8  
Lower silver prices     (0.1 )   (1.2 )
Change in volume     (19.6 )   (32.9 )
   
 
 
Decrease in revenue   $ (9.1 ) $ (18.3 )
   
 
 

Production Costs

        Production cost data per ounce of gold is set out below.

 
  Three months ended
June 30

  Six months ended
June 30

 
Production Costs per
Ounce of Gold Produced

 
  2002
  2001
  2002
  2001
 
Direct mining expense   $ 231   $ 209   $ 220   $ 208  
  Deferred stripping and mine development costs     5     9     3     11  
  Inventory movements and other     (12 )       (4 )   (4 )
   
 
 
 
 
Cash operating costs     224     218     219     215  
  Royalties     16     12     12     9  
  Production taxes     2     1         1  
   
 
 
 
 
Total cash costs     242     231     231     225  
  Depreciation     54     38     48     38  
  Amortization     16     14     14     14  
  Reclamation and mine closure     9     8     8     8  
   
 
 
 
 
Total production costs   $ 321   $ 291   $ 301   $ 285  
   
 
 
 
 

Expenses

        Operating costs per ounce vary with the quantity of gold and silver sold and with the cost of operations. Cash operating costs were $224 per ounce of gold in the second quarter of 2002 and $218 in the second quarter of 2001. See "Operations Review."

 
  Three months ended
June 30

  Six months ended
June 30

 
Reconciliation of Cash Operating
Costs per Ounce to Financial Statements

 
  2002
  2001
  2001
  2002
 
(thousands of U.S. dollars,
except per ounce amounts)

   
   
   
   
 
Operating costs per financial statements   $ 34,320   $ 46,521   $ 69,416   $ 91,144  
Change in finished goods inventory and other     (5,399 )   (1,434 )   (2,224 )   (2,365 )
Co-product cost of silver produced         (6,657 )   (6,027 )   (13,582 )
   
 
 
 
 
Cash operating costs   $ 28,921   $ 38,430   $ 61,165   $ 75,197  
   
 
 
 
 
Gold ounces produced     129,462     176,284     278,918     349,754  
   
 
 
 
 
Cash operating costs per ounce   $ 224   $ 218   $ 219   $ 215  
   
 
 
 
 

Reserve estimates

        Mineral reserves at December 31, 2001 were estimated based on a price of $300 per ounce of gold and $4.25 per ounce of silver. The market price for gold has for more than four years traded, on average, below the level used in estimating reserves at December 31, 2001. If the market price for gold were to continue at such levels and the Company determined that its reserves should be estimated at a significantly lower gold price than that used at December 31, 2001, there would be a reduction in the amount of gold reserves. The Company estimates that if reserves at December 31, 2001 were based on $275 per ounce of gold, reserves would decrease by approximately 13% at Round Mountain, 5% at Kettle River and 2% at the Aquarius development property. There would be no impact on reserves at Lupin and McCoy/Cove. The estimates are based on the extrapolation of information developed in the reserve calculation, but without the same degree of analysis required for reserve estimation. Should any significant reductions in reserves occur, material write-downs of the Company's investment in mining properties and/or increased amortization, reclamation and closure charges may be required.

OPERATIONS REVIEW

        Operating data by mine is set out below.

 
  Three months ended
June 30

  Six months ended
June 30

Operating Data by Mine

  2002
  2001
  2002
  2001
Gold production (ounces)                
  (a) Round Mountain (50%)   95,499   97,770   189,070   198,138
  (b) Lupin   24,643   34,756   53,360   72,710
  (c) Kettle River   9,500   16,373   19,987   29,218
  (d) McCoy/Cove     27,385   16,501   49,688
   
 
 
 
Total gold   129,642   176,284   278,918   349,754
   
 
 
 
Silver production (ounces)                
  (d) McCoy/Cove     1,738,056   1,470,094   3,296,585
   
 
 
 
Total silver     1,738,056   1,470,094   3,296,585
   
 
 
 

        Gold production decreased 26% to 129,642 ounces in the second quarter of 2002 compared to 176,284 ounces in the second quarter of 2001. The decrease in production resulted from lower grades at Lupin and no production from McCoy/Cove. There was no silver production in the second quarter of 2002 compared to 1.7 million ounces from McCoy/Cove in the second quarter of 2001. Milling was completed at McCoy/Cove in March 2002. For the full year 2002, the Company's production targets are 530,000 gold ounces and 1.7 million silver ounces.

 
  Three months ended
June 30

  Six months ended
June 30

Operating Data by Mine

  2002
  2001
  2002
  2001
Cash operating costs (per ounce of gold)                        
  (a) Round Mountain   $ 176   $ 194   $ 181   $ 190
  (b) Lupin     384     230     330     223
  (c) Kettle River     282     274     270     260
  (d) McCoy/Cove         234     225     245
   
 
 
 
Company average   $ 224   $ 218   $ 219   $ 215
   
 
 
 

        Cash operating costs were $224 per ounce of gold in the second quarter of 2002, versus $218 in the second quarter of 2001. The increase was primarily a result of lower production. The Company has targeted consolidated cash operating costs of $225 per ounce of gold produced for the full year 2002.

(a)
Round Mountain, Nevada (50% owned)

 
  Three months ended
June 30

  Six months ended
June 30

OPERATING DATA

  2002
  2001
  2002
  2001
Gold produced (ounces) (the Company's 50% share):                        
  Heap leached—reusable pad     35,701     30,572     73,713     57,822
  Heap leached—dedicated pad     40,747     58,118     79,683     98,805
  Milled     19,051     9,080     35,674     41,511
   
 
 
 
  Total     95,499     97,770     189,070     198,138
Mining cost/ton of ore and waste   $ 0.79   $ 0.88   $ 0.79   $ 0.86
Heap leaching cost/ton of ore   $ 0.80   $ 0.81   $ 0.78   $ 0.75
Milling cost/ton of ore   $ 3.13   $ 3.18   $ 3.06   $ 3.09
Production cost per ounce of gold produced:                        
  Direct mining expense   $ 176   $ 173   $ 174   $ 169
  Deferred stripping cost     12     20     13     21
  Inventory movements and other     (12 )   1     (6 )  
   
 
 
 
    Cash operating cost     176     194     181     190
  Royalties     22     22     19     16
  Production taxes     3     1     3     1
   
 
 
 
    Total cash cost     201     217     203     207
  Depreciation     43     40     43     38
  Amortization     15     15     15     15
  Reclamation and mine closure     9     9     9     9
   
 
 
 
    Total production costs   $ 268   $ 281   $ 270   $ 269
   
 
 
 
Heap leached—reusable pad:                        
  Ore processed (tons/day)     31,130     26,844     31,282     27,303
  Total ore processed (000 tons)     2,833     2,443     5,693     4,969
  Grade (ounce/ton)     0.047     0.031     0.046     0.034
  Recovery rate (%)     61.5     72.9     63.6     78.0
Heap leached—dedicated pad:                        
  Ore processed (tons/day)     139,692     128,231     139,736     137,819
  Total ore processed (000 tons)     12,712     11,669     25,432     25,083
  Grade (ounce/ton)     0.012     0.011     0.011     0.011
  Recovery rate(1)                        
Milled:                        
  Ore processed (tons/day)     9,768     10,097     9,775     9,989
  Total ore processed (000 tons)     889     919     1,779     1,818
  Grade (ounce/ton)     0.055     0.040     0.050     0.064
  Recovery rate (%)     86.3     80.5     85.0     84.0
   
 
 
 

(1)
Recovery rates on dedicated pads can only be estimated, as actual recoveries will not be known until leaching is complete. At the Round Mountain mine, the gold recovery rate on the dedicated heap leach pad is estimated at 50%.

        The Company has a 50% ownership interest in, and is the operator of, the Round Mountain mine in Nevada. The Company's share of mine production was 95,499 ounces for the second quarter compared with 97,770 ounces for the second quarter in 2001. Cash operating costs for the second quarter were $176 per ounce, compared to $194 per ounce for the second quarter in the previous year reflecting lower spending during the current quarter. Round Mountain's production target for 2002 is being increased to 730,000 ounces (the Company's share: 365,000 ounces). Cash operating costs are forecast to be $195 per ounce for the year.

        During the quarter, four additional 240-ton haul trucks were purchased to replace older and higher cost 150-ton units. In addition, work continued on the Gold Hill property located just four miles north of the current mining and processing facilities. The second quarter program was focused on shallow mineralization to assess the economics of a small starter pit. Gold Hill displays Round Mountain style mineralization over an area that presently measures approximately 2,000 by 4,000 feet. The extent of the mineralization has not been fully defined.

(b)
Lupin, Nunavut, Canada (100% owned)

 
  Three months ended
June 30

  Six months ended
June 30

 
OPERATING DATA

 
  2002
  2001
  2002
  2001
 
Gold produced (ounces)     24,643     34,756     53,360     72,710  
Mining cost/ton of ore   C$ 64.53   C$ 48.14   C$ 57.96   C$ 46.47  
Milling cost/ton of ore   C$ 13.88   C$ 13.54   C$ 14.10   C$ 13.97  
Production cost per ounce of gold produced:                          
  Canadian dollars:                          
    Direct mining expense   C$ 666   C$ 400   C$ 583   C$ 389  
    Deferred mine development cost     (43 )   (18 )   (51 )   (15 )
    Inventory movements and other     3     2     1     1  
   
 
 
 
 
      Cash operating cost   C$ 626   C$ 384   C$ 533   C$ 375  
  U.S. dollars:                          
    Cash operating costs   US$ 384   US$ 230   US$ 330   US$ 223  
    Royalties                  
    Production taxes                  
   
 
 
 
 
      Total cash cost     384     230     330     223  
    Depreciation     46     30     40     29  
    Amortization     6     7     6     7  
    Reclamation and mine closure     15     14     15     14  
   
 
 
 
 
      Total production costs   US$ 451   US$ 281   US$ 391   US$ 273  
   
 
 
 
 
Milled:                          
  Ore processed (tons/day)     1,623     1,818     1,640     1,834  
  Total ore processed (000 tons)     148     165     298     334  
  Grade (ounce/ton)     0.181     0.226     0.193     0.234  
  Recovery rate (%)     92.2     92.9     92.5     93.2  
   
 
 
 
 

        Gold production for the quarter was 24,643 ounces compared with 34,756 ounces in the second quarter of 2001 reflecting 20% lower grades and 11% fewer tons milled. During the quarter there were a limited number of production areas and lower grades were encountered in all areas. Over the last two years, an emphasis on cash conservation limited development, thereby reducing the flexibility to offset areas of low grade ore. Cash operating costs for the quarter were $384 per ounce compared with $230 per ounce for the same period in 2001 (after a $19 per ounce credit for Canadian dollar hedging). The significant increase in cash operating costs is directly attributable to the lower production as well as increased spending for underground equipment. Spending is now focused on increased development activities and additional production drilling.

        While the Company believes that significant progress is now being made, the production shortfall encountered during the first six months of this year will not be replaced. Therefore, the annual production target has been reduced by 20,000 to 120,000 ounces and cash operating costs per ounce are now forecast at $295 per ounce compared to a planned target of $250 per ounce.

(c)
Kettle River, Washington (100% owned)

 
  Three months ended
June 30

  Six months ended
June 30

OPERATING DATA

  2002
  2001
  2002
  2001
Gold produced (ounces)     9,500     16,373     19,987     29,218
Mining cost/ton of ore   $ 22.70   $ 23.37   $ 22.31   $ 23.58
Milling cost/ton of ore   $ 10.52   $ 10.15   $ 10.81   $ 10.91
Production cost per ounce of gold produced:                        
  Direct mining expense   $ 270   $ 192   $ 259   $ 201
  Deferred mine development cost                
  Inventory movements and other     12     82     11     59
   
 
 
 
    Cash operating cost     282     274     270     260
  Royalties     1     12     4     12
  Production taxes     2     1     2     1
   
 
 
 
    Total cash cost     285     287     276     273
  Depreciation         7         7
  Amortization     50     40     50     40
  Reclamation and mine closure         15         15
   
 
 
 
    Total production costs   $ 335   $ 349   $ 326   $ 335
   
 
 
 
Milled:                        
  Ore processed (tons/day)     727     1,303     733     1,102
  Total ore processed (000 tons)     66     119     133     201
  Grade (ounce/ton)     0.174     0.167     0.179     0.176
  Recovery rate (%)     82.8     82.7     83.6     82.7
   
 
 
 

        Gold production for the second quarter was 9,500 ounces, down from 16,373 ounces in the second quarter of 2001, reflecting the lower tonnage available from the K-2 mine and ore stockpiles. With the lower production, cash operating costs per ounce for the quarter were $282 per ounce compared with $274 per ounce for the same period in 2001. The higher costs per ounce resulted only from the lower production as actual spending was 40% less than in 2001. Kettle River production for 2002 is now expected to be 30,000 ounces with cash operating costs forecast to be $290 per ounce.

        Results from exploration at the Emanuel Creek property, located adjacent to the Kettle River production area, continue to be encouraging. Drill results from surface holes have indicated a mineralized zone, although dimensions and limits have not yet been determined. An underground development program is underway to allow access for drilling from a location near existing workings. Completion of the exploration component of this program, comprising 25 holes or more, is anticipated prior to the end of the year.

(d)
McCoy/Cove, Nevada (100% owned)

 
  Three months ended
June 30

  Six months ended
June 30

 
OPERATING DATA

 
  2002
  2001
  2002
  2001
 
Gold produced (ounces):                          
  Milled         19,746     9,906     37,724  
  Heap leached         7,639     6,595     11,964  
   
 
 
 
 
  Total gold         27,385     16,501     49,688  
Silver produced (ounces):                          
  Milled         1,636,147     1,410,594     3,131,456  
  Heap leached         101,909     59,500     165,129  
   
 
 
 
 
  Total silver         1,738,056     1,470,904     3,296,585  
Milling cost/ton of ore   $   $ 7.29   $ 10.49   $ 6.84  
Production cost per ounce of gold produced:                          
  Direct mining expense   $   $ 245   $ 216   $ 250  
  Deferred stripping cost         (10 )       (2 )
  Inventory movements and other         (1 )   9     (3 )
   
 
 
 
 
    Cash operating cost         234     225     245  
  Royalties         1     1     1  
  Production taxes             (12 )    
   
 
 
 
 
    Total cash cost         235     214     246  
  Depreciation         44     51     47  
  Amortization         8         8  
  Reclamation and mine closure                  
   
 
 
 
 
    Total production costs   $   $ 287   $ 265   $ 301  
   
 
 
 
 
Average gold-to-silver price ratio(1)         61.1:1     64.6:1     59.4:1  
Milled:                          
  Ore processed (tons/day)         11,209     6,451     11,523  
  Total ore processed (000 tons)         1,020     587     2,097  
  Gold grade (ounce/ton)         0.043     0.034     0.043  
  Silver grade (ounce/ton)         2.69     3.46     2.63  
  Gold recovery rate (%)         45.7     43.3     45.1  
  Silver recovery rate (%)         66.1     64.0     65.5  
   
 
 
 
 

(1)
To convert costs per ounce of gold into comparable costs per ounce of co-product silver, divide the production cost per ounce of gold by the period's average gold-to-silver price ratio.

        At McCoy/Cove in Nevada, gold production was completed on March 31, 2002 and the property is now in full reclamation mode.

        On June 9, 2002, Echo Bay Exploration Inc. and Echo Bay Minerals Company, subsidiaries of the Company, entered into a new McCoy/Cove asset purchase agreement with Newmont USA Limited, a subsidiary of Newmont, providing for the sale of the McCoy/Cove complex. The closing of the transaction is subject to, among other conditions, the completion of the Kinross combination. In consideration of the purchase of such assets, Newmont USA has agreed to assume all liabilities and obligations relating to the reclamation or remediation required for the McCoy/Cove complex. The agreement replaces the letter agreement dated February 13, 2002 and results in no cash payment to the Company or any of its affiliates. A gain is expected on the sale of McCoy/Cove. Pending completion of the transaction, the Company will continue to operate McCoy/Cove for its own account.

RECENT DEVELOPMENTS

Capital securities

        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.

        Following this issuance of common shares, and as at April 3, 2002, the new principal holders of the Company's common shares and their respective ownership positions in the Company were 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. Under U.S. GAAP, the entire loss of $137.8 million would be recorded as an extraordinary item.

Combination agreement

        On June 10, 2002, the Company, Kinross and TVX entered into an agreement providing for the combination of the companies. In addition, TVX has agreed to acquire Newmont's interest in the TVX Newmont Americas joint venture. Under the agreement, holders of common shares of the Company (other than Kinross) will receive 0.52 of a common share of Kinross for each common share of the Company. The Company is in the process of obtaining customary regulatory approvals and the combination will be presented to shareholders for their consideration at a special meeting anticipated to be set for the fourth quarter 2002.

Completion of financing

        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 consists 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. Each warrant entitles the holder to purchase one common share of the Company at a price of $0.90 at any time prior to November 14, 2003.

Sale of McCoy/Cove complex

        On June 9, 2002, Echo Bay Exploration Inc. and Echo Bay Minerals Company, subsidiaries of the Company, entered into a McCoy/Cove asset purchase agreement with Newmont USA Limited, a subsidiary of Newmont, providing for the sale of the McCoy/Cove complex. The closing of the transaction is subject to, among other conditions the completion of the Kinross combination. In consideration of the purchase of such assets, Newmont USA has agreed to assume all liabilities and obligations relating to the reclamation or remediation required for the McCoy/Cove complex. The agreement replaces the letter agreement dated February 13, 2002 and results in no cash payment to the Company or any of its affiliates. A gain is expected on the sale of McCoy/Cove. Pending completion of the transaction, the Company will continue to operate McCoy/Cove for its own account.

Exploration and development programs

        The Company is engaged in exploration activity at its Round Mountain and Kettle River mines. At Round Mountain, work continued on the Gold Hill property located just four miles north of the current mining and processing facilities. The second quarter program was focused on shallow mineralization to assess the economics of a small starter pit. Gold Hill displays Round Mountain style mineralization over an area that presently measures approximately 2,000 by 4,000 feet. The extent of the mineralization has not been fully defined.

        At the Company's Kettle River operation, results from exploration at the Emanuel Creek property, located adjacent to the Kettle River production area, continue to be encouraging. Drill results from surface holes have indicated a mineralized zone, although dimensions and limits have not yet been determined. An underground development program is underway to allow access for drilling from a location near existing workings. Completion of the exploration component of this program, comprising 25 holes or more, is anticipated prior to the end of the year.

        For the second quarter of 2002, the Company spent $1.5 million on exploration activities. Exploration costs are expensed as incurred.

        The Company continues to defer a construction decision on the 100% owned Aquarius gold development project in Ontario, Canada. Development holding costs are expensed as incurred and $0.1 million such costs were expensed during the second quarter of 2002.

American Stock Exchange

        Early in 2000, the American Stock Exchange had advised the Company that its listing eligibility was under review because the Company had fallen below two of the exchange's listing guidelines. On May 28, 2002 the Company received notification from the American Stock Exchange that the Company was in compliance with the American Stock Exchange continued listing guidelines.

Other

        See note 13 to the interim consolidated financial statements.


ITEM 3.    QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

        The estimated fair values of the Company's gold commitments decreased by approximately $4.4 million from December 31, 2001 to June 30, 2002, primarily due to the increase in the gold price from $277 to $301 per ounce. Information about market risks are discussed under Item 7A of the registrant's Annual Report on Form 10-K for 2001.


PART II—OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

Summa

        See note 13 to the interim consolidated financial statements.

Handy & Harman

        See note 13 to the interim consolidated financial statements.

Other

        In November, 2001, two former employees of the Company 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 early in 1998 and the layoff of employees at that time. At this time, the Company does not know the amount being claimed by the former employees nor whether the claim is appropriate for certification as a class action. Additional information is required in order for the Company's legal counsel to complete its analysis and assessment of this claim.

        The Company is also engaged in routine litigation incidental to its business.


ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS

        The Company's Annual General Meeting was held June 6, 2002.

(1)
Election of Directors

Nominee
  Votes For
  Votes Against
or Withheld

John Norman Abell   414,267,454   2,661,193
Ron Binns   414,268,454   2,660,193
Peter Clarke   414,267,454   2,661,193
David Harquail   414,268,454   2,660,193
Robert Leigh Leclerc, Q.C.   414,267,454   2,661,193
John Frederick McOuat   414,268,454   2,660,193
(2)
Appointment of Ernst & Young LLP as Auditors of the Company.

 
  Votes For
  Votes Against
or Withheld

Appointment of Ernst & Young LLP   417,032,451   389,960


ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

Reports on Form 8-K   Filed on April 5, 2002 related to the closing of the capital securities exchange transaction.

 

 

Filed on May 10, 2002 related to the pricing of the public offering of units.

 

 

Filed on June 10, 2002 related to the proposed combination between Echo Bay Mines Ltd., Kinross Gold Corporation and TVX Gold Inc.

 

 

Filed on June 11, 2002 related to the combination agreement between Echo Bay Mines Ltd., Kinross Gold Corporation and TVX Gold Inc.

 

 

Filed on July 8, 2002 related to the proposed purchase and sale of the McCoy/Cove mining complex, between subsidiaries of Echo Bay Mines Ltd. and a subsidiary of Newmont Mining Corporation.


SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    ECHO BAY MINES LTD.
(Registrant)

Date: August 2, 2002

 

By:

/s/ David A. Ottewell
Controller and Principal
Accounting Officer
        

CERTIFICATION

        The foregoing report containing financial statements for the periods ended June 30, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

Date: August 2, 2002

/s/   Robert L. Leclerc
Chairman and
Chief Executive Officer
/s/   Tom S.Q. Yip
Vice President and
Chief Financial Officer



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ECHO BAY MINES LTD. INDEX
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
PART I—FINANCIAL INFORMATION
PART II—OTHER INFORMATION
SIGNATURE