-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J2D6mU0uWw/4vVmwQNYGJACv9Td7pBYJd+Q6cI/j3YszTyCUKRRkv/qxPYPlud1W qcOQx0cfJJ3BwRET2kK39g== 0000743872-99-000003.txt : 19990323 0000743872-99-000003.hdr.sgml : 19990323 ACCESSION NUMBER: 0000743872-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOMESTAKE MINING CO /DE/ CENTRAL INDEX KEY: 0000743872 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 942934609 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08736 FILM NUMBER: 99569372 BUSINESS ADDRESS: STREET 1: 650 CALIFORNIA ST STREET 2: 9TH FL CITY: SAN FRANCISCO STATE: CA ZIP: 94108-2788 BUSINESS PHONE: 4159818150 MAIL ADDRESS: STREET 1: 650 CALIFORNIA ST CITY: SAN FRANCISCO STATE: CA ZIP: 94108-2788 10-K 1 1998 ANNUAL REPORT 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] 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 1-8736 HOMESTAKE MINING COMPANY (Exact name of registrant as specified in its charter) Delaware 94-2934609 (State of Incorporation) (I.R.S. Employer Identification No.) 650 California Street San Francisco, California 94108-2788 (Address of principal executive office) (Zip Code) (415) 981-8150 http://www.homestake.com (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $1.00 par value New York Stock Exchange, Inc. Rights to Purchase Series A Participating Cumulative Preferred Stock New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: 5 1/2% Convertible Subordinated Notes Due June 23, 2000 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 X No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock* held by non-affiliates of the registrant was approximately $1,624,000,000 as of March 15, 1999. The number of shares of common stock outstanding as of March 15, 1999 was 239,198,876.* *Includes 8,099,210 Homestake Canada Inc. exchangeable shares that may be exchanged at any time for Homestake common stock on a one-to-one basis. Documents Incorporated by Reference: Specified sections of Homestake Mining Company's 1998 Annual Report to Shareholders, as described herein, are incorporated by reference in Parts I and II of this Form 10-K. The definitive Proxy Statement for the 1999 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998, is incorporated by reference in Part III of this Form 10-K. HOMESTAKE MINING COMPANY AND SUBSIDIARIES PART I ITEM - 1 BUSINESS INTRODUCTION Homestake Mining Company ("Homestake" or "the Company") is a Delaware corporation incorporated in 1983 as the parent holding company of Homestake Mining Company of California ("Homestake California"), which has been engaged in the gold mining business since 1877. Homestake California was founded to develop the Homestake mine discovered in the Black Hills of the Dakota Territory in 1876. Homestake is one of the largest North American-based gold mining companies with current annual production of approximately 2.3 million gold equivalent ounces and reserves of approximately 20.8 million gold equivalent ounces at December 31, 1998. Homestake's operations include mineral exploration, extraction, processing and refining. Gold bullion is Homestake's principal product. Ore and concentrates containing gold and silver from the Eskay Creek and Snip mines are sold directly to smelters. Homestake has significant operations in the United States, Canada and Australia. Homestake also has operations in Chile. Homestake is engaged in active exploration projects in the United States, Canada, Australia, Eastern Europe, Argentina, Brazil, Chile and the Andean region of South America. In 1975, Homestake made its initial investment in the Kalgoorlie gold district of Western Australia (known as the Golden Mile) when Homestake Gold of Australia Limited ("HGAL") acquired a 48% interest in the Kalgoorlie Mining Associates ("KMA") partnership. In 1987, Homestake sold 20% of its shares of HGAL to the public. In 1989, HGAL increased its interest in KMA to 50% and acquired a 50% interest in adjacent joint ventures and properties. In late 1995 and early 1996, Homestake acquired the HGAL shares held by the public. In 1989, Homestake joined with two partners in the development of a major sulfur discovery, Main Pass 299, in the Gulf of Mexico. In 1992, Homestake acquired International Corona Corporation, a large Canadian gold producer, subsequently renamed Homestake Canada Inc. ("HCI"). As a result of that transaction, Homestake acquired its 50% interests in the Williams and David Bell mines and also acquired interests in Prime Resources Group Inc. ("Prime") and Stikine Resources Limited ("Stikine"), the owners of the Eskay Creek property. Prime and Stikine were subsequently combined and, through HCI, Homestake owned 50.6% of Prime. In December 1998, Homestake acquired the 49.4% of the Prime shares held by the public and subsequently, Prime was amalgamated with HCI. In April 1998, Homestake acquired Plutonic Resources Limited ("Plutonic"), the third largest Australian gold mining company. As a result of that transaction, Homestake acquired five operating mines in Western Australia and a large number of exploration tenement holdings, principally in Western Australia where some of the most significant gold discoveries in Australia have taken place over the past 20 years. Homestake is now the second largest gold mining company in Australia. 2 SIGNIFICANT 1998 AND 1999 DEVELOPMENTS Effective January 1, 1998, the Ruby Hill mine in Nevada commenced commercial production. The total capital cost of the mine, including the prestripping of the overlying alluvium, was approximately $64.7 million. The operation utilizes conventional open-pit mining methods and heap leaching. High-grade ore is ground in a ball mill, leached and filtered, and then combined with crushed low-grade ore in a rotating agglomeration drum prior to being placed on the leach pad. The mine's feasibility study estimated that the mine would produce an average of 105,000 ounces of gold per year over its six-year life at a total cash cost of approximately $140 per ounce. During 1998, the mine produced 116,500 ounces of gold at a total cash cost of $122 per ounce. Effective January 1, 1998, commercial production commenced at the new Eskay Creek gravity and flotation mill. The total capital cost of the mill was approximately $12 million. The mill produces a flotation concentrate, which is sold to a Canadian smelter, and a gravity concentrate, which is shipped to a Canadian refinery. The mill has improved the profitability of certain Eskay Creek ore that would have otherwise been shipped directly to third-party smelters and allows processing of other lower-grade ore that previously was not economic. Mill recoveries in 1998 were approximately 89% for both gold and silver, net of third-party smelter payables. During 1998, a total of 61,385 tons of ore were milled with an average grade of 1.24 ounces per ton of gold and 36.4 ounces per ton of silver. Net of third-party smelter payables, the mill produced 68,997 ounces of gold and 2 million ounces of silver in 1998. In January 1998, the Company began a major restructuring of underground operations at the Homestake mine in order to reduce operating costs. To most effectively implement the new operating plan, Homestake suspended underground mining while it completed the final details of the plan and readied the underground mine to begin operating on the restructured basis. During the shutdown period, the mill processed ore from the Open Cut at an accelerated rate. Underground crews commenced returning to work on a phased basis at the end of March 1998. The underground work force now is approximately 40% of the size of the underground work force prior to the shutdown. As a result of the temporary suspension and reduced workforce, the Company recorded a pretax charge of $8.9 million. Mining in the Open Cut ceased in September 1998 and the processing of remaining Open Cut stockpiles will be completed during the second quarter of 1999. Milling and other surface operations also are being reduced to accommodate the reduced size of the operations. The new mine plan involves closing parts of the mine and concentrating on substantially fewer production levels in order to reduce continuing infrastructure and other operating costs. The new plan is designed to improve the grade of ore recovered through the increased use of mechanized cut-and-fill mining methods. Following an additional capital investment of approximately $30 million, the new plan contemplates annual gold production of 150,000 to 180,000 ounces of gold at a cash cost of $280 per ounce. The decision to proceed with the capital expenditure program will be made during the first half of 1999. During 1998, the new mill at the Round Mountain mine completed its first full year of operation. The 8,000 ton-per-day mill, which treats higher-grade non-oxide ore, was completed in the fourth quarter of 1997 at a total cost of $62 million (Homestake's share, $16 million). The mill, which processed approximately 2,885,000 tons in 1998, recovers more than 80% of the gold contained in non-oxide ores by employing gravity concentration and cyanide leaching. Following the completion of Homestake's acquisition of Plutonic, Plutonic's office in Sydney was closed and administrative functions were moved to Homestake's office in Perth. 3 Homestake's and Plutonic's principal exploration functions also were consolidated in a single office in Perth. During 1998, mining operations were completed at Plutonic's 80%-owned Mt Morgans mine and 66.7%-owned Peak Hill mine. Processing of lower-grade stockpiles continued at the Mt Morgans mine until November 1998 and is expected to continue at the Peak Hill mine until October 1999. Homestake is continuing active exploration in the vicinity of these properties. On July 1, 1998, a gold royalty became payable to the State of Western Australia at a rate of 1.25% on the realized value of gold produced, increasing to 2.5% on July 1, 2000. Realized value is based on the spot price of gold. During the period July 1, 2000 through June 30, 2005, the royalty rate will be reduced to 1.25% during calendar quarters when the spot gold price is less than A$450 per ounce. On September 15, 1998 Homestake and its 50% joint venture partner, Normandy Mining Limited ("Normandy"), announced a revised operating plan at their jointly-owned Mt Charlotte mine. The mine has experienced a downturn in economic performance and an accelerated level of ground movement. The new plan provides for a restricted level of mining in low-risk areas of the mine. Homestake recorded a pretax charge of $38 million for severance, unrecovered capital and other costs related to the operation, reducing Homestake's carrying value for the Mt Charlotte mine to zero. Due to continuing low gold prices, Homestake used a gold price of $325 per ounce for determining its gold reserves at the end of 1998. On that basis, Homestake does not expect to recover its remaining investment in property, plant and equipment at the Homestake mine. Accordingly, the Company recorded a pretax write-down of approximately $76 million, reducing the carrying value of the mine to zero. In addition, Homestake recorded a provision for estimated environmental and reclamation costs related to historic mining in and around the Homestake mine properties of $35 million. These adjustments will have no impact on the effort to reduce cash production costs at the Homestake mine to $280 per ounce. During 1998, Homestake also reduced the carrying values of other mining properties by approximately $27 million before tax, including approximately $19 million related to Lachlan Resources NL ("Lachlan"), an 81%-owned subsidiary of the Company acquired as part of the Plutonic acquisition. On December 3, 1998 Homestake completed the acquisition of the 49.4% of Prime it did not already own. Under the Plan of Arrangement, Prime shareholders had the option of receiving 0.74 of a Homestake common share or 0.74 of an HCI exchangeable share for each Prime share. Each HCI exchangeable share is exchangeable for one Homestake common share at any time at the option of the holder and has essentially the same voting, dividend (payable in Canadian dollars), and other rights as a Homestake common share. A share of special voting stock was issued to Montreal Trust Company of Canada, in trust for the holders of the HCI exchangeable share, and provides the mechanism for holders of HCI exchangeable shares to receive voting rights in Homestake. In January 1999, Homestake and Normandy announced that they had reached agreement to progressively assume mining operations from the current open-pit mining contractor over the next 12 months. Homestake's share of the total cost of the conversion project, including the mining fleet acquisition, is estimated to be $33.6 million. Once full conversion to owner mining is completed, Homestake expects Super Pit mining costs to be reduced by approximately $26 per ounce. 4 In January 1999, Homestake announced that due to continuing low gold prices and ongoing production shortfalls, the Pinson mine was being placed on care and maintenance. Homestake recorded a charge of approximately $2.6 million at December 31, 1998 to write off its 50% share of the remaining carrying value of the Pinson mine assets and record its share of reclamation and other closure expenses. Both Homestake and its joint-venture partner Barrick Gold Corporation ("Barrick") intend to continue exploration activities within the Pinson minesite and adjoining area. On March 8, 1999, Homestake and Argentina Gold Corp. ("Argentina Gold") announced a definitive agreement for Homestake to acquire the Vancouver-based Argentina Gold for approximately US$200 million in Homestake common stock. Argentina Gold's principal asset is its 60% interest in the Veladero property located in northwest Argentina along the El Indio gold belt. Under the terms of the agreement, Argentina Gold shareholders will receive 0.545 shares of Homestake common stock for each share of Argentina Gold common stock. Homestake will issue a total of approximately 21 million common shares to acquire all of the shares of Argentina Gold. The transaction will be accounted for as a pooling of interests. Homestake and Argentina Gold have agreed to complete the acquisition as a Plan of Arrangement under the Canada Business Corporations Act. Completion of the transaction is subject to approval by the Argentina Gold shareholders, the British Columbia Supreme Court and further due diligence. The transaction is expected to close by April 30, 1999. GLOSSARY OF TERMS See "GLOSSARY AND INFORMATION ON RESERVES" beginning on page 51 for definitions of terms used in the following discussion. GOLD OPERATIONS The following tables present a statistical summary of the Company's gold operations for 1998 and 1997. 5 This Page Intentionally Left Blank. 6
-------------------------------------------------------------------------------------------- GOLD PRODUCTION PRODUCTION COSTS PER OUNCE (1) ---------------------------------------------- -------------------------------------------- Tons Interest Processed Grade Recovery Ounces Operating Other % (millions) (oz/ton) (%) Produced Cash (c) Cash (d) Noncash (e) -------------------------------------------------------- -------------------------------------------- 1998 United States Homestake 100 2.1 0.141 95 277,401 $244 $ 5 $ 46 Ruby Hill 100 1.3 0.098 90 116,500 115 7 119 McLaughlin 100 2.8 0.077 58 128,680 213 6 127 Round Mountain (3) 25 11.6 0.016 71 127,625 207 13 56 Pinson (4) 50 0.9 0.038 83 17,287 436 10 39 Marigold (4) 33 1.1 0.027 96 23,979 214 21 30 Canada Eskay Creek (5,6) 100 0.2 3.195 95 504,780 130 3 36 Williams 50 1.4 0.152 95 195,220 211 6 37 David Bell (7) 50 0.2 0.355 96 91,167 191 9 40 Snip (5) 100 0.2 0.693 92 99,283 205 - 142 Australia Kalgoorlie 50 6.2 0.071 89 390,186 228 1 49 Plutonic 100 3.2 0.089 89 255,456 224 2 66 Darlot 100 0.7 0.111 95 77,502 248 2 32 Lawlers 100 0.6 0.208 96 126,403 179 2 25 Mt Morgans 80 0.8 0.074 82 52,350 211 2 26 Peak Hill 67 0.5 0.052 97 23,803 279 1 27 Other Projects - - - - - - - - Chile Agua de la Falda (8) 51 0.2 0.216 72 24,119 198 - 89 -------------- ------------------------------------------- Total Production 2,531,741 $198 $4 $56 =========================================== Minority Interests (10) (273,452) ------------- Homestake's Share of Gold Production 2,258,289 ============= Eskay Creek - Silver 7 ------------------------------------------------------------------- RESERVES (a) MINERALIZED MATERIAL (b) ------------------------------------ ----------------------------- Contained Interest Tons Grade Ounces Tons Grade % (millions) (oz/ton) (thousands) (millions) (oz/ton) ------------------------------------ ----------------------------- 1998 (continued) United States Homestake 100 11.1 0.216 2,401 12.1 0.259 Ruby Hill 100 5.1 0.109 553 7.3 0.072 McLaughlin 100 10.9 0.057 626 - - Round Mountain (3) 25 89.6 0.018 1,594 27.1 0.015 Pinson (4) 50 - - - 3.1 0.057 Marigold (4) 33 6.4 0.033 213 - - Canada Eskay Creek (5,6) 100 1.6 1.683 2,611 0.5 0.448 Williams 50 15.0 0.148 2,216 4.1 0.118 David Bell (7) 50 2.4 0.303 711 0.3 0.109 Snip (5) 100 0.1 0.662 44 - 0.667 Australia Kalgoorlie 50 85.3 0.067 5,720 120.1 0.075 Plutonic 100 9.3 0.073 677 23.2 0.181 Darlot 100 9.0 0.154 1,393 4.1 0.130 Lawlers 100 1.0 0.117 119 3.7 0.145 Mt Morgans 80 - - - 4.2 0.096 Peak Hill 67 0.4 0.046 19 - - Other Projects - - - - 10.6 0.077 Chile Agua de la Falda (8) 51 0.3 0.185 63 8.5 0.169 ----------- ------------ ------------ Total Production 247.5 18,960 228.9 =========== ============ ============ Minority Interests (10) Homestake's Share of Gold Production ------------------------------------------------------------------ Eskay Creek - Silver 1.6 72.7 112,816 0.5 11.7 ------------------------------------------------------------------ Notes: 1 Homestake reports per ounce production costs in accordance with the "Gold Institute Production Cost Standard." 2 The Ruby Hill mine commenced commercial production effective January 1, 1998. Costs associated with gold produced during 1997 have been excluded from cost per ounce calculations. 3 Recovery relates to the reusable pad at the Round Mountain mine. 4 Recovery relates to ore milled at the Pinson and Marigold mines. 5 The Eskay Creek and Snip mines were owned 100% by Prime Resources Group Inc. ("Prime"). On December 3, 1998 Homestake acquired the 49.4% of Prime which it did not already own and subsequently, Prime was amalgamated with HCI. The ownership interests and production amounts shown are Homestake's consolidated interests without reduction for minority interests. Production amounts include ounces contained in ore and concentrates sold to smelters. Reserves and mineralized material at December 31, 1997 are Homestake's interest after reduction for the 49.4% minority interests in Prime. 6 Gold and silver are accounted for as co-products at Eskay Creek. Silver production is converted into gold equivalent using the ratio of the gold market price to the silver market price. For the years ended December 31, 1998 and 1997, the ratio was 52.6 and 68.2 ounces of silver equals one ounce of gold, respectively. Reserves and mineralized material relate to gold only. Silver reserves and mineralized material are shown at the bottom of the chart. 7 Ounces produced include 11,331 ounces of gold production from the Quarter Claim in both 1998 and 1997. Reserves include a 25% net profits interests in Quarter Claim. 8 Production, reserves, and mineralized material represent Homestake's 51% interest in Agua de la Falda. 9 Includes 14,441 ounces and 507 ounces of gold produced at the Bellevue project in Western Australia and at the El Hueso mine in Chile during 1997, respectively. 10 Represents minority interests' 49.4% share of Prime's production in 1997 and from January to November 1998. (a), (b), (c), (d) and (e) see "Definitions" on pages 9 and 10.
8
-------------------------------------------------------------------------------------------------- GOLD PRODUCTION PRODUCTION COSTS PER OUNCE (1) --------------------------------------------------------------------------------------- Tons Interest Processed Grade Recovery Ounces Operating Other % (millions) (oz/ton) (%) Produced Cash (c) Cash (d) Noncash (e) ------------------------------------------------------------- ------------------------------------ 1997 United States Homestake 100 2.6 0.163 94 397,299 $306 $ 4 $ 47 Ruby Hill (2) 100 0.3 - - 16,629 - - - McLaughlin 100 2.7 0.075 58 118,491 247 7 120 Round Mountain (3) 25 12.1 0.015 75 119,959 210 16 49 Pinson (4) 50 0.6 0.046 86 25,829 334 10 54 Marigold (4) 33 0.9 0.028 95 24,547 239 28 34 Canada Eskay Creek (5,6) 100 0.1 3.661 95 417,303 155 2 35 Williams 50 1.3 0.160 95 201,098 222 7 40 David Bell (7) 50 0.3 0.397 96 101,313 184 10 45 Snip (5) 100 0.2 0.780 92 115,644 213 - 115 Australia Kalgoorlie 50 6.6 0.072 89 425,914 259 - 55 Plutonic 100 3.4 0.094 88 274,608 234 - 70 Darlot 100 0.6 0.114 95 65,153 320 - 29 Lawlers 100 0.5 0.178 96 87,481 260 - 25 Mt Morgans 80 0.8 0.093 88 73,588 374 6 85 Peak Hill 67 0.5 0.069 97 33,104 269 - 151 Other Projects - - - - - - - - Chile Agua de la Falda (8) 51 0.1 0.172 65 16,023 213 - 82 -------------- ------------------------------------ Total Production (9) 2,528,931 $242 $4 $57 ==================================== Minority Interests (10) (263,276) -------------- Homestake's Share of Gold Production 2,265,655 ============== Eskay Creek - Silver 9 --------------------------------------------------------- --------------------------- RESERVES (a) MINERALIZED MATERIAL (b) ---------------------------------------------- --------------------------- Contained Interest Tons Grade Ounces Tons Grade % (millions) (oz/ton) (thousands) (millions) (oz/ton) --------------------------------------------------------- --------------------------- 1997 (continued) United States Homestake 100 13.6 0.205 2,786 18.5 0.170 Ruby Hill (2) 100 7.0 0.098 687 7.2 0.073 McLaughlin 100 13.9 0.061 845 - - Round Mountain (3) 25 100.3 0.018 1,759 35.6 0.016 Pinson (4) 50 0.9 0.073 65 - - Marigold (4) 33 5.1 0.033 168 - - Canada Eskay Creek (5,6) 100 0.8 1.693 1,281 0.2 0.587 Williams 50 16.5 0.150 2,465 4.1 0.119 David Bell (7) 50 2.6 0.312 804 - - Snip (5) 100 0.1 0.678 80 - 0.751 Australia Kalgoorlie 50 89.7 0.066 5,924 102.6 0.071 Plutonic 100 5.2 0.108 567 26.7 0.222 Darlot 100 9.4 0.163 1,556 4.0 0.123 Lawlers 100 1.9 0.134 252 3.8 0.117 Mt Morgans 80 3.8 0.023 91 - - Peak Hill 67 0.5 0.044 24 - - Other Projects - - - - 6.6 0.105 Chile Agua de la Falda (8) 51 0.7 0.167 110 7.7 0.160 ------------- ------------ ------------ Total Production (9) 272.0 19,464 217.0 ============= ============ ============ Minority Interests (10) Homestake's Share of Gold Production --------------------------------------------------------------------------------------- Eskay Creek - Silver 0.8 78.3 59,208 0.2 12.0 --------------------------------------------------------------------------------------- Definitions: a A proven and probable reserve is that part of a mineral deposit which could be extracted or produced economically and legally at the time of the reserve determination. b Mineralized material is gold-bearing material that has been physically delineated by one or more of a number of methods including drilling, underground work, surface trenching and other types of sampling. This material has been found to contain a sufficient amount of mineralization of an average grade of metal or metals to have economic potential that warrants further exploration evaluation. While this material is not currently or may never be classified as reserves, it is reported as mineralized material only if the potential exists for reclassification into the reserves category. This material has established geologic continuity, but cannot be classified in the reserves category until final technical, economic and legal factors have been determined and the project containing the material has been approved for development. c Operating cash costs are costs directly related to the physical activities of producing gold; includes mining, milling, third-party smelting, and in-mine drilling expenditures that are related to production. d Other cash costs are costs that are not directly related to, but may result from, gold production; includes production taxes and royalties. e Noncash costs are costs that typically are accounted for ratably over the life of an operation; includes depreciation, depletion and final reclamation. Noncash costs do not include amortization of additions to property resulting from SFAS 109 deferred tax purchase accounting adjustments, as these additions did not involve any economic resources of the Company.
1,2,3,4,5,6,7,8,9 and 10 see "Notes" on pages 7 and 8. 10 UNITED STATES Homestake conducts operations at the Homestake mine in the Black Hills of South Dakota, at the Ruby Hill mine in north central Nevada, and at the McLaughlin mine in northern California. In addition, Homestake owns a 25% interest in the Round Mountain mine in central Nevada and a 33.3% interest and a 50% interest in the Marigold and Pinson mines, respectively, both located in north central Nevada. The Company's principal exploration office is in Reno, Nevada. Homestake Mine The Homestake gold mine is located in Lawrence County in and near Lead, South Dakota. The mine has been in operation since 1876. Homestake owns 100% of the operation. Paved public roads provide access to the operation. The Homestake mine properties cover approximately 11,700 acres, of which approximately 8,200 acres are owned in fee and the remainder are held as unpatented mining claims. All mining is conducted on owned property. The Homestake mine is comprised of underground mining operations, an ore processing plant, final product refinery, a wastewater treatment plant, and tailings disposal facilities. Open-pit (the "Open Cut") mining was completed in September 1998 and the processing of remaining Open Cut stockpiles will be completed during the second quarter of 1999. The underground mine is serviced by two 5,000-foot vertical shafts from the surface connecting with internal shafts which provide hoisting and services to the 8,000-foot level. Ore from underground is hoisted to the surface, crushed and transported to the nearby processing plant. Stockpiled ore from the Open Cut is crushed and transported more than a mile to the processing plant by an enclosed conveyor. The 7,400 tons-per-day ("TPD") capacity processing plant recovers gold through a combination of gravity, carbon-in-pulp ("CIP") and vat leaching processes. Recycled process water is pumped through a series of carbon columns to recover residual gold in solution. Process tails are used for underground fill or are deposited in a tailings impoundment facility three miles from the plant. As underground mining has progressed into the lower levels of the Homestake mine, the remaining higher-grade ore deposits have become narrower, less continuous and more difficult to mine, resulting in higher costs. In January 1998, the Company began a major restructuring of underground operations at the Homestake mine in order to reduce operating costs. To most effectively implement the new operating plan, Homestake suspended underground mining while it completed the final details of the plan and readied the underground mine to begin operating on the restructured basis. During the shutdown period, the mill processed ore from the Open Cut at an accelerated rate. The new mine plan, which included a workforce reduction of 450 employees, involves closing parts of the mine and concentrating on substantially fewer production levels in order to reduce continuing infrastructure and other operating costs. The new plan is designed to improve the grade of ore recovered through the increased use of mechanized cut-and-fill mining methods. Following an additional capital investment of approximately $30 million, the new plan contemplates annual gold production of 150,000 to 180,000 ounces of gold at a cash cost of $280 per ounce. The decision to proceed with the capital expenditure program will be made during the first half of 1999. During the fourth quarter of 1998, the underground mine produced 39,170 ounces at a total cash cost of $302 per ounce. 11 Planned capital expenditures during 1999 total approximately $12.7 million, including $6.8 million for the purchase of new mobile equipment for the underground mining operations. The remaining capital primarily is for completion of a tailings dam lift and electrical upgrades. The first phase of a major tailings dam lift expansion commenced in 1996. Construction of an interim raise of eleven feet was completed in 1997 at a cost of approximately $11.8 million, and construction of an additional nine-foot lift will be completed in 1999 at a cost of approximately $3 million. The expansion will provide tailings storage capacity sufficient to hold projected mining activity for approximately 5 years. Facilities and equipment at this operation generally are in good operating condition, but the basic mine and major facilities have been in service for many years and are less efficient than mines and facilities developed more recently. Untreated water for use in the mine's facilities is obtained from local watersheds under Homestake mine water rights and potable water is purchased from the Lead-Deadwood Sanitation District. Approximately 84% of electric power consumption is purchased under contract from Black Hills Corporation and the remainder is provided by Homestake-owned hydroelectric facilities. On October 2, 1998, Homestake announced that it would use an assumed price of $325 per ounce for determining its gold reserves at the end of 1998. On that basis Homestake did not expect to recover its remaining investment in property, plant, and equipment at the Homestake mine. Accordingly, the Company recorded a pretax write-down of approximately $76 million, reducing the carrying value of the mine to zero at September 30, 1998. In addition, Homestake recorded a provision for estimated environmental and reclamation costs related to historic mining in and around the Homestake mine properties of $35 million. These adjustments will have no impact on the effort to reduce cash production costs at the Homestake mine to $280 per ounce. Hourly employees at the Homestake mine are represented by the United Steel Workers of America. A new five-year contract was signed in May 1998. During 1998, the mine operated in compliance with its environmental permits, except that in May, the mine had a reportable spill into Whitewood Creek that resulted from a failure in the sand backfill system. As a result of this spill and a spill in 1997, the Company paid a total of $200,000 in fines and penalties in 1998. The Homestake mine is under no regulatory orders of any kind mandating specific environmental expenditures. No royalties are payable on production from the Homestake mine. The state of South Dakota imposes a severance tax of 10% of net profits from the sale of gold produced in the state, plus $4 per ounce of gold sold when the price of gold is $499 per ounce or less, increasing by $1 per ounce for each $100 increment or part thereof in excess of $499 per ounce. Geology The Homestake mine is the largest known iron formation hosted gold deposit. In its 123-year life, the mine has produced in excess of 39 million ounces of gold. The Homestake gold deposit is Proterozoic in age (approximately 1.9 billion years). Mineralization generally is stratabound within the Homestake Formation, which is a quartz-veined, sulfide-rich sedimentary sequence that has been complexly deformed by tight folding, faulting, and shearing. Ten southeast-plunging fold structures, locally called ledges, have produced gold ore over a vertical extent of more than 8,000 feet. 12 Year-end Proven and Probable Ore Reserves
1998 1997 ---------------- --------------- Underground: Tons of ore (000) 10,528 11,900 Ounces of gold per ton 0.224 0.220 Contained ounces of gold (000) 2,360 2,620 Open Cut: Tons of ore (000) 590 1,674 Ounces of gold per ton 0.070 0.099 Contained ounces of gold (000) 41 166 Total: Tons of ore (000) 11,118 13,574 Ounces of gold per ton 0.216 0.205 Contained ounces of gold (000) 2,401 2,786 Operating Data 1998 1997 ---------------- --------------- Production Statistics: Tons of ore mined (000): Underground 495 1,359 Open Cut 691 1,894 Ore grade mined (oz. gold/ton): Underground 0.221 0.195 Open Cut 0.124 0.123 Open Cut stripping ratio (waste:ore) 1.5:1 2.3:1 Tons of ore milled (000) 2,075 2,578 Mill feed ore grade (oz. gold/ton) 0.141 0.163 Mill recovery (%) 95 94 Gold recovered (000 ozs.) 277 397 Cost per Ounce of Gold Produced: Cash operating costs $244 $306 Other cash costs 5 4 Noncash costs 46 47 ---------------- --------------- Total production costs $295 $357
Ruby Hill Mine The Ruby Hill mine is located one mile northwest of Eureka, Nevada. Homestake owns 100% of the operation. Access to the property is by a 1.5-mile gravel road from U.S. Highway 50. The Ruby Hill properties consist of approximately 24,831 acres, of which 23,386 acres are unpatented mining claims and 1,445 acres are privately owned. Exploration activities on the Ruby Hill properties have resulted in the discovery of several mineralized zones. A positive feasibility study on the West Archimedes deposit was completed during 1995, and construction of a mine, heap-leach pad and a milling facility commenced in 13 February 1997 and was completed in December 1997. The total capital cost of the Ruby Hill mine, including the prestripping of the overlying alluvium, was approximately $64.7 million. The operation utilizes conventional open-pit mining methods and heap leaching. High-grade ore is ground in a ball mill, leached and filtered, and then combined with crushed low-grade ore in a rotating agglomeration drum prior to being placed on the leach pad. The feasibility study estimated that the mine would produce an average of 105,000 ounces of gold per year over its six-year life at a total cash cost of approximately $140 per ounce. The mine commenced commercial production effective January 1, 1998 and produced 116,500 ounces in 1998 at a total cash cost of $122 per ounce and a total cost of $241 per ounce. Water is obtained from on-site wells and power is purchased from Mount Wheeler Power Company. During 1998, the mine operated in compliance with all of its environmental permits. A production royalty of 3% of net smelter returns is payable on production over 500,000 ounces of gold. Geology The West Archimedes gold mineralization is hosted primarily within brecciated jasperoid and decalcified limestones of the uppermost Goodwin and Antelope Valley units of the Ordovician Pogonip Group. The micron-size gold is finely disseminated and the ore body is entirely oxidized. Exploration and delineation drilling are continuing on several surface targets within the Ruby Hill claim block. Year-end Proven and Probable Ore Reserves
1998 1997 ---------------- --------------- Tons of ore (000) 5,082 7,028 Ounces of gold per ton 0.109 0.098 Contained ounces of gold (000) 553 687 Operating Data 1998 ---------------- Production Statistics: Tons of ore mined (000) 1,153 Stripping ratio (waste:ore) 7.5:1 Tons of ore leached (000) 1,324 Ore grade leached (oz. gold/ton) 0.098 Recovery (%) 90 Gold recovered (000 ozs.) 117 Cost per Ounce of Gold Produced: Cash operating costs $115 Other cash costs 7 Noncash costs 119 ---------------- Total production costs $241
14 McLaughlin Mine The McLaughlin gold mine is located at the junction of Lake, Napa and Yolo Counties in northern California. The McLaughlin mine commenced operation in 1985 and is 100% owned by Homestake. Access to the property is by paved road. The McLaughlin mine properties cover approximately 16,200 acres. Approximately 15,100 acres are owned and approximately 950 acres are leased. The Company holds seven unpatented mining claims and six millsite claims covering the remaining property. Mining was completed in June 1996 and ore now is sourced exclusively from lower-grade stockpiles, which were built up over the life of the mine. The autoclave and flotation circuits were decommissioned following the completion of processing of high-grade ores. The plant now operates as a direct-cyanidation circuit utilizing cyanide leaching followed by CIP circuits, pressure stripping and electrowinning. Total mill capacity is approximately 8,000 TPD. In 1998, the embankment at the tailings impoundment was raised, increasing the impoundment's capacity to allow for the treatment of all ore remaining in the stockpiles. Facilities are modern and in good operating condition. The majority of process water is recycled from the tailings pond. Additional water is obtained from the Company's reservoir in Yolo County, which has approximately four years of storage capacity. Electric power is purchased under interruptible tariff from Pacific Gas and Electric Company. Gold production, which is expected to continue through approximately 2002, has declined significantly over the last 3 years due to the completion of mining and exhaustion of high-grade ores. Processing costs also have declined significantly due to the shutdown of the higher-cost autoclave and flotation circuits, allowing economic treatment of the lower-grade stockpiled ore. Production at the McLaughlin mine totaled 128,680 ounces in 1998 at a cash cost of $219 per ounce compared to 118,491 ounces at a cash cost of $254 per ounce during 1997. The decrease in cash costs per ounce during 1998 is due to higher grades and cost containment measures. Production is expected to decrease and cash costs per ounce are expected to increase during 1999, as the higher-grade portion of the remaining stockpiles will be consumed by mid-1999. During 1996, Homestake entered into long-term gold hedging contracts to ensure recovery of the remaining investment and to cover remaining reclamation costs. During 1998, the mine operated in compliance with all of its environmental permits. McLaughlin mine royalties are equivalent to approximately 2% of revenues. Year-end Proven and Probable Ore Reserves
1998 1997 ---------------- --------------- Stockpiled: Tons of ore (000) 10,934 13,908 Ounces of gold per ton 0.057 0.061 Contained ounces of gold (000) 626 845 15 Operating Data 1998 1997 ---------------- --------------- Production Statistics: Tons of ore milled (000) 2,839 2,719 Mill feed ore grade (oz. gold/ton) 0.077 0.075 Mill recovery (%) 58 58 Gold recovered (000 ozs.) 129 118 Cost per Ounce of Gold Produced: Cash operating costs $213 $247 Other cash costs 6 7 Noncash costs 127 120 ---------------- ---------------- Total production costs $346 $374
Round Mountain Mine The Round Mountain gold mine is an open-pit mining operation located 60 miles north of Tonopah in Nye County, Nevada. Homestake owns a 25% interest in the mine. Echo Bay Mines Ltd. owns a 50% interest and is the operator. The remaining 25% interest is owned by Case, Pomeroy & Company, Inc. The mine has been in operation since 1977. The Round Mountain property position consists of contiguous patented and unpatented mining claims covering approximately 27,500 acres. Patents have been filed for additional lode claims to cover all the current reserves in the ultimate pit. The issuance of the patents is currently pending government review. The open-pit mining operation employs three 28-yard electric mining shovels, a 22-yard hydraulic mining shovel, and twenty-one 150-ton, thirteen 190-ton and nine 85-ton haul trucks. Gold is recovered through four independent recovery operations. These include crushed ore leaching (reusable pad), run-of-mine ore leaching (dedicated pad), milling of higher-grade nonoxidized ore, and the gravity concentration circuit. Heap leaching on a reusable pad is used to recover gold from oxide ores above a cut-off grade of 0.018 ounce per ton. Ore is crushed to less than 3/4 inches at a rate of up to 30,000 tons per day and conveyed to two parallel 1.5 million square foot asphalt reusable leach pads. This ore is leached for approximately 100 days, rinsed, removed and placed on the dedicated leach pad and releached. In 1998, 18,950 tons of ore per day were processed on the reusable heap leach pad, compared to 26,600 tons per day in 1997. Reusable pad volume varies with ore release, which is determined by the phases of the pit being mined. Lower grade ore (down to a cut-off grade of 0.006 ounce per ton for oxidized ores) and ore removed from the reusable leach pad is transported directly to a dedicated run-of-mine leach pad at a rate which averaged 101,900 tons per day in 1998, compared to 108,000 tons per day in 1997. Ore is placed in 50-foot thick layers for leaching. After completion of an initial leaching cycle of approximately 100 days, additional layers of ore are placed until the heap reaches an ultimate height of 300 feet. The dedicated leach pad is constructed in phases, as capacity is needed. The existing dedicated leach pad covers approximately 16.4 million square feet and has a capacity of approximately 131 million tons. Current mining rates consume nearly three to four million square feet of dedicated leach pad per year. 16 Construction of an 8,000 ton-per-day mill to treat higher-grade nonoxide ore was completed in the fourth quarter of 1997, at a total cost of $62 million (Homestake's share, $16 million). The mill processed approximately 2,885,000 tons in 1998, its first full year of operation. The facility recovers more than 80% of the gold contained in nonoxidized ores by employing gravity concentration and cyanide leaching. Gravity concentration only is applied to very high-grade ore containing coarse gold. A 500 ton-per-day gravity recovery circuit processes ore from several small flat-lying narrow, but very high-grade veins within the Round Mountain ore body. Homestake's share of gravity circuit production is expected to be 7,500 ounces of gold in 1999. Gravity circuit tails are sent to the mill for further cleaning and disposal. Ore and waste rock was mined at a rate of approximately 195,600 tons per day in 1998 compared to 197,000 tons per day in 1997. The slight decrease in ore from the pit was offset by 35 million tons of reusable pad tails, which were hauled to dedicated pads for releaching. Homestake's share of total 1998 gold production from the Round Mountain mine was 127,625 ounces at a total cash cost of $220 per ounce, compared to 119,959 ounces at a total cash cost of $226 in 1997. The higher 1998 production is a result of higher-grade reusable pad offloads placed on the dedicated pad and higher ore grades in the mill. In 1999, the Round Mountain mine is expected to produce slightly less gold compared to 1998 due to the amount of ore available as a result of the mining plan. In 1998, the joint venture partners initiated an expanded exploration program in the vicinity of the mine to add new reserves to the current mine life. Three exploration targets have been given priority. Initial drill results from two targets were encouraging enough to warrant additional follow-up drilling. Permits have been filed to drill a third target. Water is supplied from joint-venture-owned wells on the property and from water reclaimed from tailings dams. Power is purchased under contract from Sierra Pacific Power Company. During 1998, the mine had six spills of leach solutions. None of the contamination escaped from the property. The contaminated soil was removed and placed on the leach pad. Measures have been taken to prevent further spills. Otherwise, during 1998 the mine operated in compliance with all of its environmental permits. All Round Mountain mine production is subject to a royalty determined by a complex formula based on the price of gold. The royalties range from approximately 3.5% of gold revenues at prices of $320 per ounce of gold to approximately 6.4% of gold revenues at prices of $440 per ounce of gold or more. During 1998, the royalties averaged 3.5% of revenues. Homestake has a 25% share of the following amounts: Year-end Proven and Probable Ore Reserves (100% Basis)
1998 1997 ---------------- --------------- Tons of ore (000) 358,597 401,325 Ounces of gold per ton 0.018 0.018 Contained ounces of gold (000) 6,375 7,037 17 Operating Data (100% Basis) 1998 1997 ---------------- --------------- Production Statistics: Tons of ore mined (000) 22,920 32,726 Stripping ratio (waste:ore) 2.1:1 1.2:1 Tons of ore crushed (000) 6,999 9,757 Tons of ore processed (000) 46,510 48,496 Weighted average ore grade placed on the pads (oz. gold/ton) 0.016 0.015 Leach recovery - reusable pads (%) 71 75 Gold recovered (000 ozs.) 511 480 Homestake's Cost per Ounce of Gold Produced: Cash operating costs $207 $210 Other cash costs 13 16 Noncash costs 56 49 ---------------- --------------- Total production costs $276 $275
Pinson Mine The Pinson open-pit gold mine is located in Humboldt County approximately 30 miles northeast of Winnemucca, Nevada. Homestake has a 50% interest in the Pinson Partnership and is the operator of the Pinson mine. Barrick owns the remaining interest. The mine began operation in 1981. In January 1999, due to continuing low gold prices and ongoing production shortfalls, the Pinson mine was placed on care and maintenance. Mining operations ceased and 46 employees were terminated. Ore processing operations will continue for an indefinite period of time with the remaining 18 employees. As a result, Homestake recorded a charge of approximately $2.6 million at December 31, 1998 to write off its 50% share of the remaining carrying value of the Pinson mine assets and record its share of reclamation and other closure expenses. The Pinson properties consist of approximately 36,615 acres of which 11,511 acres are held under leases. The remaining land is comprised of 21,800 acres of unpatented mining claims and 3,303 acres of primarily fee lands. Access to the property is by paved and gravel roads. Total material mined averaged 29,223 TPD in 1998. The mine has both heap-leaching and conventional milling facilities for treatment of ore. The mill has a rated capacity of 1,550 tons per day using both carbon-in-pulp and carbon-in-leach methods. Due to low gold prices, milling of ore was suspended in February 1998. Since that time, all ore has been heap-leached. The facilities are in good condition. Water is supplied from on-site wells and power is purchased from Sierra Pacific Power Company. During 1998, the mine operated in compliance with all of its environmental permits. 18 Production royalties averaging 3.5% of net smelter returns are currently payable on the principal producing areas of the property. Overall, the underlying property ownership is complex, requiring special arrangements with respect to the commingling of ore from various locations. Homestake's share of production from the Pinson mine was 17,287 ounces of gold in 1998 compared to 25,829 ounces in 1997. During 1998, Homestake and Barrick spent a total of $3.6 million to explore for high-grade mineralized zones at depth at Pinson. This exploration program will continue during 1999 at a similar expenditure level. Geology The Pinson deposit includes more than six zones of mineralization largely hosted in carbonate rocks and calcareous siltstones of the Ordovician Comus Formation. Ore bodies consist of disseminations of micron-size gold peripheral to faults in favorable stratigraphy. High-grade stringer zones have been identified and are the subject of continuing investigations. Homestake has a 50% share of the following amounts: Year-end Proven and Probable Ore Reserves (100% Basis)
1998 1997 ---------------- --------------- Tons of ore (000) - 1,783 Ounces of gold per ton - 0.073 Contained ounces of gold (000) - 131 Operating Data (100% Basis) 1998 1997 ---------------- --------------- Production Statistics: Tons of ore mined (000) 1,705 1,263 Stripping ratio (waste:ore) 5.3:1 8.2:1 Tons of ore milled (000) 76 550 Ore grade milled (oz. gold/ton) 0.072 0.076 Mill recovery (%) 83 86 Tons of ore leached (000) 1,628 712 Ore grade leached (oz. gold/ton) 0.037 0.023 Gold recovered (000 ozs.) 35 52 Homestake's Cost per Ounce of Gold Produced: Cash operating costs $436 $334 Other cash costs 10 10 Noncash costs 39 54 ---------------- --------------- Total production costs $485 $398
19 Marigold Mine The Marigold gold mine is located in Humboldt County approximately 40 miles southeast of Winnemucca, Nevada. Homestake owns a 33.3% interest in the Marigold partnership. Rayrock Mines, Inc. owns the remaining interest and is the operator. The mine has operated since 1989. Access to the property is via a five-mile long gravel road. The property consists of approximately 3,920 acres of unpatented mining claims and 14,920 acres held under leases which remain in effect as long as the mine continues production. Mining is conducted by conventional open-pit methods. Ore is processed by heap leaching and milling methods. Mill-grade ore is stockpiled and periodically processed through the mill to maximize gold recovery. Milling operations are intermittent. Mine facilities are in good condition. During 1998, a pipeline was installed to supply water to the Marigold mine at no cost from a nearby pit-dewatering operation. Backup water supply is from on-site wells. Power is purchased from Sierra Pacific Power Company. During 1998, the mine operated in compliance with all its environmental permits. Production royalties are paid to two leaseholders in amounts of 7% of net smelter returns and 3.5% of net profits, respectively. Geology Gold mineralization at the Marigold mine is hosted largely in the Permian Antler Formation and the Ordovician Valmy Formation and is associated with broad bands of silicification and local decalcification. Both stratigraphy and structure control the geometry of the mineralized zones. The ore bodies are sediment-hosted, disseminated deposits of micron-size gold, and are entirely oxidized. Homestake has a 33.3% share of the following amounts: Year-end Proven and Probable Ore Reserves (100% Basis)
1998 1997 ---------------- --------------- Tons of ore (000) 19,120 15,288 Ounces of gold per ton 0.033 0.033 Contained ounces of gold (000) 639 504 20 Operating Data (100% Basis) 1998 1997 ---------------- --------------- Production Statistics: Tons of ore mined (000) 3,191 2,583 Stripping ratio (waste:ore) 2.4:1 3.3:1 Tons of ore milled (000) 368 387 Ore grade milled (oz. gold/ton) 0.086 0.082 Mill recovery (%) 96 95 Tons of ore leached (000) 2,834 2,290 Ore grade leached (oz. gold/ton) 0.019 0.019 Gold recovered (000 ozs.) 72 74 Homestake's Cost per Ounce of Gold Produced: Cash operating costs $214 $239 Other cash costs 21 28 Noncash costs 30 34 ---------------- --------------- Total production costs $265 $301
CANADA Homestake conducts operations at the Eskay Creek and Snip mines in northwestern British Columbia. Homestake also has a 50% interest in the Williams and David Bell mines in the Hemlo Gold Camp in Ontario and a 25% net profits interest in the Quarter Claim adjacent to the David Bell mine. See "SEE SIGNIFICANT 1999 AND 1998 DEVELOPMENTS" beginning on page 3 for information regarding Homestake's acquisition of Prime. Homestake conducts exploration and investigates mineral acquisition and development opportunities throughout Canada. Canadian activities are managed from an office in Vancouver, British Columbia. Eskay Creek Mine Homestake owns 100% of the Eskay Creek gold/silver mine, located in northwestern British Columbia approximately 50 air miles north of Stewart, British Columbia. Access is by 38 miles of privately owned single-lane gravel road. A local company provides road maintenance and snow removal services under contract. The Eskay Creek mine commenced operations in 1995. The Eskay Creek property consists of five mining leases, 12 mineral claims and various other mineral and surface rights comprising approximately 4,630 acres. The leases have remaining terms of approximately 22 to 26 years, subject to renewal rights. The mine is an underground operation accessible through three surface portals. Mining is conducted by a mining contractor using equipment owned by Homestake. The mine utilizes a drift-and-fill mining method with cemented rock backfill. Higher-grade ore is crushed and blended in a facility located at the minesite prior to shipment and sale to third-party smelters for final processing. Some high-grade and lower-grade ore is sent to an on-site gravity and flotation mill for further processing and concentration. Concentrates produced by the mill are sent to third- 21 party smelters and refineries for final processing. Mine waste rock and tailings from the mill are disposed of underwater in a nearby barren lake. The mine and facilities and the equipment are new and in good condition. Eskay Creek personnel work rotations of two-weeks-on and two-weeks-off. In November 1997, Homestake completed construction of the Eskay Creek gravity and flotation mill at a cost of $12 million. Commercial production from the mill commenced January 1, 1998. The mill produces a flotation concentrate, which is sold to a Canadian smelter, and a gravity concentrate, which is shipped to a Canadian refinery. The mill has improved the profitability of certain Eskay Creek ore that would have otherwise been shipped directly to third-party smelters and allows processing of other lower-grade ore that previously was not economic. Mill recoveries in 1998 were approximately 89% for both gold and silver, net of third-party smelter payables. During 1998, a total of 61,385 tons of ore were milled with an average grade of 1.24 ounces per ton of gold and 36.4 ounces per ton of silver. Net of third-party smelter payables, the mill produced 68,997 ounces of gold and 2 million ounces of silver. Two long-term ore sale contracts with smelters in Japan and Quebec provide for combined ore sales of 99,200 tons annually, with options to increase sales to 132,300 tons, subject to mutual agreement with the smelters. Ore and concentrates are trucked by a contractor 164 miles to Stewart for shipment to Japan or 224 miles to Kitwanga, British Columbia for shipment to Quebec. A contract loading facility for ships at Stewart handles ore shipments destined for Japan and a company-owned loading facility is utilized at the railhead in Kitwanga for shipments of ore and concentrate to Quebec. Water is supplied from the Eskay and Argillite Creeks and power is produced on-site by diesel generators. The mine produced approximately 445 tons of ore per day in 1998 and 333 tons of ore per day in 1997. Based on existing reserves and current operating plans, the mine has a projected remaining life of approximately ten years. Following a successful 1998 exploration program, the Eskay Creek mine's proven and probable ore reserves increased by approximately 383,000 ounces of gold and 7.2 million ounces of silver at December 31, 1998 (before considering 1998 production). During 1998, there were three occasions where water effluent permit levels were exceeded. Each incident was reported and corrective action was taken immediately. There was also one ore spill when a trailer overturned on the Eskay road. This incident was reported and cleaned up. No citations have been issued and none are expected. With these exceptions, the mine operated in compliance with all environmental permits in 1998. The mine is subject to a 1% net smelter royalty, with the exception of a small portion of the ore body, which is subject to a 2% net smelter royalty. Production at the Eskay Creek mine, consisting of payable gold and gold equivalent in ore and concentrates sold, increased to 504,780 equivalent ounces of gold during 1998 from 417,303 equivalent ounces in 1997. Cash costs per equivalent ounce, including third-party smelter costs, decreased to $133 during 1998 from $157 per equivalent ounce during 1997. The increase in 1998 production primarily is due to production from the new gravity/flotation mill and the effect of a lower gold/silver equivalency. Cash costs per equivalent ounce declined in 1998 due to the lower-cost production from the mill and the weaker Canadian dollar. 22 There are aboriginal claims relating to areas of British Columbia and other parts of Canada, including a claim by the Tahltan Nation to the area which includes the Eskay Creek mine. The nature and extent and validity of such claims have not been determined. The mine has entered into several service contracts with the Tahltan Nation Development Corporation, and approximately 35% of the employees at the mine are members of the Tahltan Nation. Homestake believes that its relations with aboriginal groups, including the Tahltan Nation, are excellent. Homestake does not believe that aboriginal claims at Eskay Creek will have any material adverse effect. However, future exploration for and development of new mines in Canada could be slowed and could be adversely affected, depending on future legal developments in this area. The extent of any such effect, if any, is not known. (See "RISK FACTORS" beginning on page 61.) Geology The Eskay Creek ore body is a precious metal-enriched volcanogenic massive sulfide deposit that occurs in association with volcanics of the Jurassic-aged (141 to 195 million years) Hazelton Group. Eskay Creek mineralization is generally stratabound and occurs in a contact mudstone and breccia bounded below by a rhyolite flow-dome complex and overlain by volcanic rocks in the west limb of a north-plunging fold. Sphalerite, pyrite, galena and tetrahedrite are the most abundant ore minerals. Native gold occurs as mostly microscopic particles located between sulfide grains, in fractures within sulfide grains, or locked in pyrite. Gold also occurs in volcanic rocks beneath the contact mudstone, along with coarse-grained sphalerite, pyrite and galena in quartz veins or stockworks. Year-end Proven and Probable Ore Reserves (100% Basis)
1998 1997 ----------------- --------------- Tons of ore (000) 1,552 1,495 Ore grade (ozs. gold/ton) 1.683 1.693 Contained ounces of gold (000) 2,611 2,532 Ore grade (ozs. silver/ton) 72.7 78.3 Contained ounces of silver (000) 112,816 117,011 Operating Data (100% Basis) 1998 1997 ---------------- --------------- Production Statistics: Tons of ore shipped (000) 101 121 Direct ore sales grade (ozs. gold/ton) 2.24 2.16 Direct ore sales grade (ozs. silver/ton) 90.7 97.7 Tons milled (000) 61 - Mill grade (ozs. gold/ton) 1.24 - Mill grade (ozs. silver/ton) 36.4 - Mill recovery - gold % 92 - Mill recovery - silver % 95 - Gold production (000 ozs.) 282 245 Silver production (000 ozs.) 11,723 11,766 Total gold equivalent ounces (1) (000 ozs.) 505 417 23 Homestake's Cost per Ounce of Gold Equivalent Produced: Cash operating costs (2) $130 $155 Other cash costs 3 2 Noncash costs 36 35 ---------------- --------------- Total production costs $169 $192 1. Gold and silver are accounted for as co-products at Eskay Creek. Silver production is converted into gold equivalent, using the ratio of the average gold market price to the average silver market price. The ratio was 52.6 ounces and 68.2 ounces of silver equals one ounce of gold equivalent for production calculations for the years ended December 31, 1998 and 1997. 2. For comparison purposes, cash operating costs per ounce include estimated third-party costs incurred by smelter owners and others to produce marketable gold and silver.
Williams Mine The Williams gold mine is located in the Hemlo Gold Camp 217 miles east of Thunder Bay, Ontario, adjacent to the TransCanada Highway. The mine is operated by Williams Operating Corporation ("WOC") with its own personnel. Each of Homestake and Teck Corporation ("Teck") owns a 50% interest in the mine and in WOC. The mine commenced operations in 1985. The property consists of 11 freehold patents and one Crown mining lease covering approximately 380 acres. Homestake and Teck are required to provide funds equally to WOC for all costs incurred to operate the mine. Homestake and Teck have mutual rights of first refusal over each other's interest in the Williams mine and shares of WOC. The Williams mine is an underground operation which is accessible by a 4,300-foot shaft. The mine utilizes the longhole, open-stope mining method with cemented and uncemented rock backfill. In addition, up to 1,400 TPD of lower-grade ore is recovered from a nearby open pit. Waste rock from the open pit is used for backfill in the underground operations. The rated capacity of the mill is 7,000 TPD. During 1998, the mill operated at 7,453 TPD with a gold recovery of 94.7%. The Williams and David Bell mines share a tailings basin facility located approximately two miles from the mill. Cyanidation and the CIP process are used to recover gold. Water from the tailings basin is treated in an effluent treatment plant prior to discharge. Both mines recycle mill make-up water from the tailings pond. The facilities and equipment are modern and in good condition. Fresh water for the property is supplied from Cedar Creek and power is purchased under long-term contract from Ontario Hydro. Propane for heating mine air and surface facilities also is purchased under contract. Ground stability problems were experienced during 1998, but were significantly reduced from the difficulties encountered in 1997. Ground conditions will continue to be a concern, but changes to the mining schedule and design, increased ground support and increased instrumentation have improved the situation. During 1997, under an agreement with Franco Nevada Ltd. ("Franco"), a drift was driven, at Franco's expense, from the Williams property onto Franco's adjacent property to carry out an 24 underground exploration program. The agreement gives WOC a right of first proposal for any mineralization, which Franco may discover during its exploration activity. During 1998, the mine had four minor spills, which were reported, and corrective action was taken immediately. No citations have been issued and none are expected. With these exceptions, during 1998, the mine operated in compliance with all environmental permits. The mining claims are subject to three net smelter royalties totaling a net effective rate of 2.08% and the Crown mining lease is subject to a net smelter royalty of 0.75%. Homestake's share of gold production from the Williams mine amounted to 195,220 ounces at a cash cost of $217 per ounce during 1998 compared to 201,098 ounces at a cash cost of $229 per ounce during 1997. The lower production in 1998 was due to a decline in ore grades, partially offset by increased throughput. The lower cash costs per ounce in 1998 are due primarily to the weaker Canadian dollar. Geology The Hemlo Gold Camp occurs within the east-west striking Heron Bay belt of metamorphosed Archean aged rocks (3.5 billion years). The steeply dipping ore bodies lie along the contact between overlying metasedimentary rocks and underlying volcanic rocks. Gold mineralization is hosted primarily by a fine-grained feldspar porphyry unit and is associated with pyrite, barite and molybdenite. Homestake has a 50% share of the following amounts: Year-end Proven and Probable Ore Reserves (100% Basis)
1998 1997 ---------------- --------------- Tons of ore (000) 29,952 32,926 Ounces of gold per ton 0.148 0.150 Contained ounces of gold (000) 4,431 4,929 Operating Data (100% Basis) 1998 1997 ---------------- --------------- Production Statistics: Tons of ore milled (000) 2,720 2,656 Mill feed ore grade (oz. gold/ton) 0.152 0.160 Mill recovery (%) 95 95 Gold recovered (000 ozs.) 390 402 Homestake's Cost per Ounce of Gold Produced: Cash operating costs $211 $222 Other cash costs 6 7 Noncash costs 37 40 ---------------- --------------- Total production costs $254 $269
25 David Bell Mine The David Bell gold mine is located in the Hemlo Gold Camp. The mine is operated by the Teck-Corona Operating Corporation ("TCOC") with TCOC personnel. Each of Homestake and Teck owns a 50% interest in the mine and in TCOC. The mine commenced operations in 1985. The mine is located on the same ore trend as the Williams mine. The property consists of approximately 640 acres held under two freehold patents. Homestake and Teck are required to provide funds equally to TCOC for all costs incurred to operate the mine. Homestake and Teck have mutual rights of first refusal over each other's interest in the David Bell mine and shares of TCOC. Each of Homestake and Teck has a 50% interest in efforts to explore and develop mineral properties within approximately two miles of the David Bell property. The David Bell mine is an underground operation, which is accessible by a 3,819-foot shaft. Production is from stopes using longhole-mining methods, with cement, tailings, sand and waste rock utilized as backfill. Mill throughput was 1,284 TPD in 1998. Cyanidation, CIP and gravity processes are used to recover gold. The facilities and equipment are modern and in good condition. Beginning in mid-1999, ore from the David Bell mine will be processed in the Williams mine mill and milling operations at the David Bell mine will be discontinued. Detailed engineering has confirmed that closure of the David Bell mill should not result in decreased production from the mines, and should decrease significantly future David Bell costs. Water and power supplies are the same as those at the Williams mine. Treated reclaimed process water is used to service the underground operations. The average width of ore at the David Bell mine is decreasing as mining progresses away from the central core of the ore body. In an effort to optimize ore extraction and to minimize development costs, stoping of narrow-width ore by longitudinal longhole retreat continued during 1998. In addition, an Alimak mining method was successfully tested in two stopes in 1998. This method, which significantly reduces waste development, will be used in the future as ore widths and ore grades dictate. Production in 1998 decreased by 11% compared to 1997 primarily as a result of processing lower-grade ore. The grade of ore mined declined in 1998, approaching the average life-of-mine reserve grade. Production in 1999 is expected to be consistent with the levels achieved in 1998. The hourly work force at David Bell is unionized and the collective bargaining agreement with the United Steel Workers of America expired in October 1998. As of December 31, 1998 a new collective bargaining agreement had not been settled and negotiations with the union were continuing. During 1998, the mine operated in compliance with all of its environmental permits. No citations were issued and none are expected. The property is subject to a 3% net smelter return royalty. Homestake's share of production at the David Bell mine was 79,836 ounces in 1998 at a total cash cost of $200 per ounce, compared to 89,982 ounces in 1997 at a total cash cost of $194 per ounce. The increase in cash costs per ounce in 1998 is due primarily to the lower production, partially offset by the effects of a weaker Canadian dollar. 26 Geology See "Williams Mine - Geology." Homestake has a 50% share of the following amounts: Year-end Proven and Probable Ore Reserves (100% Basis)
1998 1997 ---------------- --------------- Tons of ore (000) 4,448 4,785 Ounces of gold per ton 0.303 0.316 Contained ounces of gold (000) 1,349 1,512 Operating Data (100% Basis) 1998 1997 ---------------- --------------- Production Statistics: Tons of ore milled (000) 469 473 Mill feed ore grade (oz. gold/ton) 0.355 0.397 Mill recovery (%) 96 96 Gold recovered (000 ozs.) 160 180 Homestake's Cost per Ounce of Gold Produced: Cash operating costs $191 $184 Other cash costs 9 10 Noncash costs 40 45 ---------------- --------------- Total production costs $240 $239
Quarter Claim The Quarter Claim constitutes approximately one-fourth of a mining claim, which was originally part of the David Bell property, and was optioned to and subsequently acquired by Battle Mountain Gold Company in 1982. Battle Mountain developed a shaft on the Quarter Claim and reserved hoisting and milling capacity of 500 TPD at its mill to process any ore found on the Quarter Claim. Homestake has a 25% net profits interest in all ore recovered from the Quarter Claim. The net profits interest is based on a deemed production rate, deemed production costs and the market price of gold. Until deemed cumulative production from January 1, 1995 is equal to 95% of the estimated reserves as of January 1, 1995, the deemed production rate is based upon committed throughput of 500 TPD multiplied by (a) the average ore grade of the January 1, 1995 reserves, and (b) a recovery factor. Thereafter, Homestake's interest is reduced to a 20% net profits interest calculated on actual production. Geology See "Williams Mine - Geology." 27 Homestake has a 25% share of the following amounts: Year-end Proven and Probable Ore Reserves (100% Basis)
1998 1997 ---------------- --------------- Tons of ore (000) 565 747 Ounces of gold per ton 0.258 0.258 Contained ounces of gold (000) 146 193 Operating Data (100% Basis) 1998 1997 ---------------- --------------- Production Statistics: Tons of ore milled (000) 183 183 Mill feed ore grade (oz. gold/ton) 0.257 0.257 Mill recovery (%) 96 96 Gold recovered (000 ozs.) 45 45 Homestake's Cost per Ounce of Gold Produced: Cash operating costs $157 $162 Other cash costs 8 10 Noncash costs 2 1 ---------------- --------------- Total production costs $167 $173
Snip Mine The 100%-owned Snip gold mine is located at the junction of Bronson Creek and the Iskut River, 56 air miles north of Stewart in northwestern British Columbia. The mine commenced operations in 1991. The property consists of a mining lease with a remaining term of 20 years, together with four mineral claims covering approximately 4,774 acres. The mine is serviced by aircraft which utilize a 4,500-foot long landing strip at the minesite to transport personnel, mine concentrates, fuel and other supplies. The Snip mine is an underground operation serviced by adits and a haulageway at the mill elevation level. Mining is carried out through a combination of shrinkage, conventional and mechanized cut and fill. Backfill consists of mill tailings and ground waste rock, which is pumped to the mine, and underground waste rock. The mill has a capacity of 500 TPD. Mill tailings not used for backfill are deposited in a tailings facility located adjacent to the mine and reclaimed water is pumped back to the mill. The facilities and equipment are modern and in good condition. Employees work three-weeks-on and three-weeks-off rotations. Approximately 92% of the gold contained in the ore is recovered. A gravity circuit recovers about 36% of the gold and the remaining gold is recovered in flotation concentrates containing approximately ten ounces of gold per ton. The concentrates are sold under a life-of-mine contract to a smelter located in Japan. 28 Water is supplied from Bronson Creek and power is produced on site by diesel generators. Ore reserves at the Snip mine are nearing exhaustion. Based on current milling rates and existing reserves, the mine is expected to cease production in the second quarter of 1999. Reclamation of the property has commenced and final planning for closure is nearing completion. Estimated reclamation and related closure costs of approximately $6 million were fully accrued at December 31, 1998. During 1998, the Snip mine had three environmental incidents. The incidents included a spill of tailings from a tailings line and two diesel fuel spills. The incidents were reported and corrective action was taken immediately. No citations have been issued and none are expected. In addition, an inactive landfill containing hydro-carbon products was uncovered in 1998. Testing has confirmed that no groundwater contamination has occurred and disposal options are being reviewed. With these exceptions, the mine operated in compliance with all environmental permits during 1997. Homestake's share of gold production in 1998 was 99,283 ounces at a cash cost of $205 per ounce compared to 115,644 ounces at a cash cost of $213 per ounce in 1997. The decrease in cash costs per ounce in 1998 is due primarily to the weaker Canadian dollar, partially offset by lower production as the mine nears completion. Geology The main Twin Zone ore body at the Snip mine is a 1.5-foot to 50-foot thick quartz-carbonate-sulfide-filled shear structure within a Triassic sedimentary unit. Gold primarily occurs as finely disseminated grains along pyrite grain boundaries. Other sulfides within the Twin Zone include pyrrhotite, chalcopyrite and sphalerite, with minor arsenopyrite. Year-end Proven and Probable Ore Reserves (100% Basis)
1998 1997 ---------------- --------------- Tons of ore (000) 66 232 Ounces of gold per ton 0.662 0.678 Contained ounces of gold (000) 44 157 Operating Data (100% Basis) 1998 1997 ---------------- --------------- Production Statistics: Tons of ore milled (000) 160 165 Mill feed ore grade (oz. gold/ton) 0.693 0.780 Mill recovery (%) 92 92 Gold recovered (000 ozs.) 99 116 Homestake's Cost per Ounce of Gold Produced: Cash operating costs $205 $213 Noncash costs 142 115 ---------------- --------------- Total production costs $347 $328
29 AUSTRALIA Homestake owns 50% of Australia's largest gold mining operations, the surface and underground operations at Kalgoorlie. Homestake also conducts operations at the Plutonic, Darlot and Lawlers mines and has a 66 2/3% interest in the Peak Hill mine and an 80% interest in the closed Mt Morgans mine. All of these mines are located in Western Australia. Homestake explores for gold throughout Australia, principally in Western Australia. Australian activities are managed from an office in Perth, Western Australia. See "SEE SIGNIFICANT 1998 AND 1999 DEVELOPMENTS" beginning on page 3 for information regarding Homestake's acquisition of Plutonic. On July 1, 1998, a gold royalty became payable to the State of Western Australia at a rate of 1.25% on the realized value of gold produced, increasing to 2.5% on July 1, 2000. Realized value is based on the spot price of gold. During the period July 1, 2000 through June 30, 2005, the royalty rate will be reduced to 1.25% during calendar quarters when the spot gold price is less than A$450 per ounce. Kalgoorlie Operations The Kalgoorlie operations are located adjacent to the town of Kalgoorlie approximately 340 miles northeast of Perth, Western Australia. Homestake owns a 50% interest in the Kalgoorlie operations. Subsidiaries of Normandy Mining Limited ("Normandy") own the other 50% interest. Homestake and Normandy jointly own and control Kalgoorlie Consolidated Gold Mines Pty Ltd ("KCGM"), which manages the operations under the direction of a joint management committee. Homestake acquired its interest in the original KMA joint venture in 1976. Mining operations in the Kalgoorlie region date back to 1893. Access to the operations is by paved road. The Kalgoorlie properties consist of 164 state leases and licenses covering approximately 30,000 acres. The mineral leases were granted for a term of 21 years on conditions covering rental, royalties, expenditure conditions and reporting. They are renewable in the final year. The Kalgoorlie operations are comprised of two mines, the Super Pit open-pit mine and the Mt Charlotte underground gold mine. Ore from both of these operations is treated at the Fimiston mill. Sulfide concentrates produced at the Fimiston mill are roasted and leached at the Gidji roaster, located 12 miles north of the main Kalgoorlie operations. Gold loaded on carbon from the Gidji roaster is sent to the Fimiston mill for final processing. The facilities and equipment at the Kalgoorlie operations are in good condition. The Super Pit mine is located along the "Golden Mile" ore bodies previously mined from underground. Contractors are employed to conduct the open-pit mining operations, ore and concentrate haulage and some specialized services. In January 1999, Homestake and Normandy announced that they had reached agreement to progressively transfer mining operations from the current open-pit mining contractor to KCGM over the next 12 months. Homestake's share of the total cost of the conversion project, including the mining fleet acquisition, is estimated to be $33.6 million. Once full conversion to owner mining is completed, Homestake expects Super Pit mining costs to be reduced by approximately $26 per ounce. In 1998, 71.2 million tons of material containing 10.8 million tons of ore was mined, compared to 75.9 million tons of material containing 10.9 million tons of ore mined in 1997. Homestake's share of Super Pit gold production was 325,349 ounces in 1998 and 344,754 ounces in 1997. The decrease in 1998 production primarily was due to a decrease in throughput as a result of girth gear issues associated with the SAG mill, discussed below. 30 The Mt Charlotte mine uses bulk mining methods and large conventional diesel powered loaders and trucks. The main production level is 3,200 feet below surface. In 1997, a 1.6-mile decline was constructed from surface at the northern end of the Super Pit to access from underground the upper level remnants of the Mt Charlotte orebody and the recently delineated northern orebody. Ore from the Mt Charlotte mine is trucked from the decline to the Fimiston mill. During both 1998 and 1997, 1.9 million tons of ore were recovered from the Mt Charlotte mine. Homestake's share of gold production was 64,837 ounces in 1998 and 81,160 ounces in 1997. The lower 1998 production is a result of lower ore grades and lower throughput. On September 15, 1998, Homestake and Normandy announced that a revised mining plan would be implemented at the Mt Charlotte mine. The decision was reached following an evaluation of economic factors and an accelerated level of ground movement in the mine. Following recent ground movement, a panel of rock mechanics experts concluded that mining could be conducted safely by restricting mining to low-risk areas of the mine. The new mine plan contemplates extraction of approximately 1.5 million tons of ore through September 1999. Performance of the mine will be monitored during this time to determine whether the operation will continue beyond that period. As a result of the new operating plan, approximately 50% of the Mt Charlotte employees have been laid off. Homestake recorded a charge of $26.4 million ($38.4 million pretax) during the third quarter of 1998 for severance, unrecovered capital and other costs. This reduced Homestake's carrying value for the Mt Charlotte mine to zero. As a result of the new mining plan, Homestake's 50% share of reserves at the Mt Charlotte mine were reduced by 297,000 ounces to 175,000 ounces at December 31, 1998 (before considering 1998 production). The Fimiston mill is a 35,000-TPD mill with CIP leaching and refractory sulfide flotation circuits. The mill processed 12.5 million tons of ore in 1998 and 11.2 million tons in 1997. During June 1998, cracks were discovered in the girth gear of the Fimiston SAG mill. Temporary repairs have been made and the SAG mill currently is being limited to 90% of rated power. A temporary replacement gear is expected to be available in February 1999 and a permanent replacement is expected to be available in May 1999. Underwriters of KCGM's property and business interruption insurance policies have acknowledged liability and the extent of recovery is now being determined. Possible claims against the SAG mill construction contractor also are under investigation. Steps which have been taken to mitigate the lower throughput have increased milling costs. The Gidji roaster complex, which comprises two roasters and a CIP circuit, processes all sulfide concentrates produced at the Fimiston mill. The Gidji roaster processed 0.3 million tons of concentrate in both 1998 and 1997. Homestake's share of gold production from the consolidated Kalgoorlie operations was 390,186 ounces in 1998 compared to 425,914 ounces in 1997. Total cash costs per ounce in 1998 were $229 compared to $259 in 1997. The reduction in cash costs is due primarily to a 15% decline in the average value of the Australian dollar compared to the US dollar. Fresh water is supplied under allocation from the state water system and is piped 340 miles from Perth. Remaining process water requirements are satisfied using salt water taken from wells and the underground mine. Power is provided under a power supply agreement with Normandy Power Pty Ltd, a company associated with Normandy. 31 During 1997, there was one instance where monitoring equipment reported that sulfur dioxide levels in the Kalgoorlie area exceeded air quality limits. KCGM reported the reading to the Department of Environmental Protection ("DEP"). The DEP subsequently filed a charge alleging that the Gidgi roaster was the source of the excess and that it was a breach of its license. Following a court hearing in December 1998, the charge was dismissed. During 1997 and 1998 the mine operations were in compliance with all environmental permits. With the exception of the royalty payable to the State of Western Australia there are no royalties currently payable on production from the Kalgoorlie mines. There are a number of native title claims relating to the area of the Kalgoorlie operations, but the validity of those claims has not been determined. See "Risk Factors." Geology The ore deposits mined in the Kalgoorlie Goldfields occur within an intensely mineralized shear zone system in dolerite host rocks, within the Norseman-Wiluna greenstone belt which is part of the Yilgarn Block of Western Australia. The rocks are of Archaen age. The favorable structural, metamorphic and lithologic setting in conjunction with hydrothermal activity controlled gold mineralization. During its history of operations since 1893, in excess of 48 million ounces of gold have been produced from the Kalgoorlie properties at depths of up to 4,000 feet from high-grade lodes and adjacent disseminated mineralization in the Golden Mile Dolerite, and from the large stockwork zones which characterize the Mt Charlotte and Reward (underground) ore bodies. Homestake has a 50% share of the following amounts: Year-end Proven and Probable Ore Reserves (100% Basis)
1998 1997 --------------- ---------------- Tons of ore (000) 170,600 179,346 Ounces of gold per ton 0.067 0.066 Contained ounces of gold (000) 11,440 11,847 Operating Data (100% Basis) 1998 1997 --------------- ---------------- Production Statistics: Super Pit: Tons of ore mined (000) 10,791 10,949 Stripping ratio (waste:ore) 5.6:1 6.0:1 Tons of ore milled (000) 10,697 11,183 Mill feed ore grade (oz. gold/ton) 0.069 0.069 Mill recovery (%) 88 88 Gold recovered (000 ozs.) 651 689 32 Mt Charlotte: Tons of ore mined (000) 1,916 1,919 Tons of ore milled (000) 1,775 1,931 Mill feed ore grade (oz. gold/ton) 0.081 0.091 Mill recovery (%) 91 92 Gold recovered (000 ozs.) 130 163 Combined Production Statistics: Tons of ore mined (000) 12,707 12,763 Tons of ore milled (000) 12,472 13,219 Mill feed ore grade (oz. gold/ton) 0.071 0.072 Mill recovery (%) 89 89 Gold recovered (000 ozs.) 780 852 Homestake's Consolidated Cost per Ounce of Gold Produced: Cash operating costs $228 $259 Other cash costs 1 - Noncash costs 49 55 --------------- ---------------- Total production costs $278 $314
Plutonic Mine The Plutonic mine is located 110 miles northeast of Meekatharra, Western Australia, approximately 8 miles from the Great Northern Highway. Homestake owns 100% of the Plutonic mine. The mine commenced production in August 1990. The Plutonic properties, including the recently purchased adjoining Marymia property, encompass an area of approximately 322,000 acres, consisting of 109 mining leases, three prospecting licenses, eight exploration licenses and three miscellaneous licenses. Homestake also holds the pastoral lease on which the mine is located. The Plutonic mine consists of both open-pit and underground operations. The Main Pit was the predominant ore source from the commencement of operations until its depletion in December 1997. The underground operations are now the primary source of ore. Some open-pit mining continues to be performed by a mining contractor. While the underground operations are being developed, underground ore production is being supplemented with ore from extensive primary ore and laterite stockpiles, which were built up as the Main Pit was mined. Approximately 146 staff employees and 250 contractor personnel working on two-weeks-on and one-week-off rotations operate the mine on a fly-in fly-out basis. Initial underground development commenced early in 1995. Capital expenditures of approximately $13 million and $24 million were incurred during 1998 and 1997, respectively, primarily for underground mine development. The underground mine consists of three main working areas, extending to a depth of 1,400 feet below the surface. The working areas are accessed by two separate declines. Mining methods vary depending on the particular working area and include development and uphole retreat open stoping and flat dip room and pillar mining. All mining is performed by contractors using mechanized trackless systems with technical supervision and control provided by Homestake 33 employees. Most areas do not require back filling. Ore is hauled to the surface by 45-ton trucks. Underground ore production during 1998 and 1997 was approximately 668,000 tons and 550,000 tons, respectively. The Plutonic mine mineralization consists of multiple discrete lodes. Extensive mineralized material has been defined by wide-spaced surface drilling but detailed drilling from underground development openings is required for conversion of the mineralized material to reserves. Underground access to the largest zone of mineralization was achieved by decline in late 1997. The extensive drilling required to define the extent of the lode structure has delayed development in this area, although production now has begun. Definition drilling continues in several areas of the mine to define reserves and facilitate mine planning. Open-pit mining using selective mining techniques is performed by a mining contractor. The contractor uses a 110-ton excavator and a fleet of 95-ton trucks. Oxide ore is derived from the Perch, Salmon and Area 4 pits. Production from a new laterite pit commenced in 1998. The mill and treatment facility, which was upgraded in 1997, has separate oxide and sulfide circuits. The mill has the capacity to treat approximately 2 million tons of primary sulfide ore and 1.3 million tons of oxide ore per year. Both the sulfide and oxide circuits utilize crushing, grinding and cyanidation in CIL leach tanks. The sulfide ore circuit gold recovery ranges from 83% to 96% depending on the ore source and mineralogy, and the oxide ore circuit gold recovery is approximately 96%. All plant and equipment is modern and in good condition. Potable quality process water is sourced from two well fields with most coming from wells located approximately 7.5 miles from the mine. In 1997, an on-site gas-fired power station with a rated station capacity of 19MW was commissioned at a cost of approximately $16 million. Purchased gas is provided via a 12.5-mile lateral line from the Goldfields Gas Transmission pipeline. In 1997, the mine was notified by the DEP of non-compliance under four of its license conditions. All issues were related to inadequate record keeping and monitoring. During 1998, an environmental officer was employed to manage Homestake's Australian environmental compliance programs. All noncompliance issues have been corrected. In August 1998, a tailings water return line failed. The line was repaired and no environmental impact was caused by the leak. Also in August 1998, during inspection of the tailings storage facilities, leakage from the facility was detected along the toe of the structure. A cut-off trench was installed to collect the water and a pump system was installed to return the water to the tailings facility. With these exceptions, during 1997 and 1998 the mine operated in compliance with all environmental permits. With the exception of the royalty payable to the State of Western Australia, the underground operations are not subject to any royalties. However, 16 mining leases to the east of the Main Pit, which contain a relatively small proportion of the mine's overall reserves and mineralized material, are subject to a royalty based on tonnage and grade. During 1998, the Plutonic mine produced 255,456 ounces of gold at a total cash cost of $226 per ounce compared to 274,608 ounces at a total cost of $234 per ounce in 1997. The decrease in production was due to lower grade and throughput. Lode structures in the Northwest extension were flatter and less continuous than expected, making mining more difficult. However, drilling has defined higher-grade lode structures in areas where production began in the third quarter of 1998. The lower cash costs per ounce in 1998 primarily reflect the weaker Australian dollar, partially offset by the lower production. 34 Geology Gold lodes predominantly occur within mafic volcanics in an Archaean sequence of ultramafic volcanics, mafic volcanics and sediments. The sequence in the immediate mine area consists of upper and lower ultramafic volcanic units separated by a dominantly mafic volcanic unit. Gold mineralization occurs within multiple, sub-parallel, northwest striking lodes, which generally dip in a northeast direction. The lodes are hosted mainly by the mafic volcanic unit. Lodes range from three to thirty-five feet thick and display good continuity often for several hundred feet. Gold is associated with sulphides, particularly arsenopyrite and pyrrhotite. Year-end Proven and Probable Ore Reserves
1998 1997 ---------------- --------------- Tons of ore (000) 9,281 5,221 Ounces of gold per ton 0.073 0.108 Contained ounces of gold (000) 677 567 Operating Data 1998 1997 ---------------- -------------- Production Statistics: Tons of ore mined (000) 1,887 3,280 Ore grade mined (oz. gold/ton) 0.113 0.106 Open pit stripping ratio (waste:ore) 3.7:1 5.3:1 Tons of ore milled (000) 3,249 3,395 Mill feed ore grade (oz. gold/ton) 0.089 0.094 Mill recovery (%) 89 88 Gold recovered (000 ozs.) 255 275 Cost per Ounce of Gold Produced: Cash operating costs $224 $234 Other cash costs 2 - Noncash costs 66 70 ---------------- -------------- Total production costs $292 $304
Darlot Mine The Darlot mine is located 70 miles north of Leonora, Western Australia. Homestake's property covers an extensive gold field discovered more than 100 years ago. Modern mining, including development of the Darlot Pit, commenced in 1988. Mining in the Darlot Pit was completed in 1995 and the mine is now an entirely underground operation. Homestake owns 100% of the Darlot mine. The Darlot properties encompass an area of approximately 34,200 acres, consisting of 16 mining leases, 32 prospecting licenses and one exploration license. The Darlot and Centenary orebodies are contained on a mining lease located on a pastoral lease. The mining lease was granted in 1988 for 21 years and is renewable. The Darlot mine consists of the Darlot orebody, where mining is expected to be completed in mid-1999, and the Centenary deposit. The Centenary deposit was discovered in August 1996 when a vertical exploration drillhole intersected the Centenary deposit, a previously undiscovered 35 gold mineralized zone of substantial thickness about three-quarters of a mile from the Darlot deposit. The Darlot mine is a fly-in fly-out operation with about 65 staff employees and 156 contractor personnel working two-weeks-on and one-week-off rotations. Mining of the Darlot orebody is performed by a contractor using mechanized trackless equipment. Access to the Darlot orebody is through a decline from a portal in the Darlot Pit approximately 375 feet below the natural surface. During the second quarter of 1996, the mine successfully completed the transition to a full-scale underground operation. The workings now extend to about 725 feet below the surface with mining being conducted in four different sub-lode systems within the main Darlot structure. Stoping of the Darlot lodes consists of a mixture of room and pillar mining in the thinner sections of the deposit, generally using longhole blastholes, while sub-level open stoping techniques are used in the thicker sections. Backfilling is not required. Access to the Centenary deposit is through an extension of the Darlot decline, which intersects the Centenary deposit approximately 1,100 feet below the surface. A raise bored ventilation shaft recently was commissioned, completing the Centenary ventilation circuit and also providing emergency egress for the mine. Work has started on a second decline for access to and ventilation of the deeper load structures. Sub-level stoping of the thick central section of the Centenary deposit began near the end of the third quarter of 1998. The thinner extremities of the deposit are suitable for sub-level open stoping or room and pillar stoping similar to the methods successfully utilized in the Darlot orebody. The treatment plant consists of a three-stage crushing circuit, primary and secondary ball mills, carbon-in-pulp leaching, adsorption and gold recovery circuits. The crushing plant is owned and operated by a contractor. Both the Darlot and Centenary ores are free milling with recovery rates of approximately 95%. Coarse gold, which represents approximately 30% of total production, is recovered in a gravity circuit. The mill will be upgraded during 1999 to improve the efficiency of processing the higher-grade Centenary ore. Ore capacity is approximately 700,000 tons per annum. The treatment plant is in good condition. Two new generators were commissioned in early 1998, which together with other Homestake-owned facilities provide power to the site. Water is obtained from wells five miles from the treatment plant. During 1998, the mine operated in compliance with all of its environmental permits. With the exception of the royalty payable to the State of Western Australia, the Darlot mine is not subject to any royalties. Production in 1998 of 77,502 ounces at a total cash cost of $250 per ounce compares to production of 65,153 ounces at a total cash cost of $320 per ounce in 1997. The higher production was due to higher throughput and higher-grade ore from the Centenary orebody. The decrease in cash costs per ounce in 1998 primarily is due to the higher production in conjunction with a weaker Australian dollar. Geology Darlot is situated within an Archaean sequence of mostly intrusive and extrusive mafic rocks, and occurs within a corridor of north-northwest trending structures. The Darlot orebody is a shear-hosted, gold-mineralized, quartz vein system about one mile long. The structure is 36 continuous along strike with mineralization open down dip indicating potential for depth extensions. The Centenary orebody is a large, structurally controlled, quartz vein hosted gold deposit. The lode, which extends for more than three-quarters of a mile, varies from 15 feet to more than 160 feet in thickness. The full extent of the lode is not yet known. Year-end Proven and Probable Ore Reserves
1998 1997 ---------------- --------------- Tons of ore (000) 9,022 9,409 Ounces of gold per ton 0.154 0.163 Contained ounces of gold (000) 1,393 1,556 Operating Data 1998 1997 ---------------- --------------- Production Statistics: Tons of ore mined (000) 795 568 Ore grade mined (oz. gold/ton) 0.10 0.11 Tons of ore milled (000) 738 607 Mill feed ore grade (oz. gold/ton) 0.111 0.114 Mill recovery (%) 95 95 Gold recovered (000 ozs.) 78 65 Cost per Ounce of Gold Produced: Cash operating costs $248 $320 Other cash costs 2 - Noncash costs 32 29 ---------------- --------------- Total production costs $282 $349
Lawlers Mine The Lawlers mine is located 75 miles northwest of Leonora, Western Australia. Homestake owns 100% of the 100-year-old mine, which was reopened in 1986. The Lawlers mine properties consists of two groups of contiguous tenements consisting of three exploration licenses, 89 prospecting licenses and 13 mining leases totaling approximately 68,800 acres. Mining leases vary in date of grant and expiry. One mining lease, from which production currently is derived, was granted by the Western Australian Government after January 1, 1994. See "Risk Factors - Risk of Native Title Claims." The Lawlers mine consists of both open-pit and underground mining. The mine is a fly-in fly-out operation with about 70 staff employees and 42 contractor personnel working on two-weeks-on and one-week-off rotations. During 1998, production principally was derived from the New Holland and Fairyland pits where mining is conducted by a contractor operating a 110-ton excavator and a fleet of 95-ton trucks, under the supervision of Homestake personnel. Homestake recently began underground mining in the downward extension of the New Holland South orebody using a contractor. Mining was initially performed using decline on-ore 37 development, and now is performed using room and pillar stoping. Work has begun on a second decline to access the deeper lode structure of the New Holland South zone. In December 1998, a decline was commenced to access the Genesis ore zones. The Lawlers treatment plant is capable of treating between 550,000 and 770,000 tons per annum of oxide, transition and primary ore, depending on the blend. Three-stage crushing is followed by single-stage milling through two parallel ball mills. The grinding circuit includes a gravity circuit to recover coarse gold. Approximately 50% to 60% of the operation's total gold production is recovered in the gravity circuit. The grinding circuit slurry is transferred to a conventional carbon-in-pulp circuit. The treatment plant has an overall recovery rate of approximately 90% to 95%, depending on the ore source. The treatment plant will be upgraded during 1999 to improve the efficiency of processing the higher-grade underground ore. Power is supplied by contract diesel generators. Good quality process water is obtained from wells 10 miles northeast of the plant. In October 1998, Homestake announced the results of a continuing exploration program along the Glasgow Lass Trend, which includes the New Holland, Genesis and Hidden Secret pits. The drilling results verify continuity of mineralization along the Glasgow Lass Trend and indicate the potential for an expansion of reserves and mineralized material in the vicinity of the Lawlers mine. Lawlers has devoted significant efforts to correcting earlier environmental issues, which predated Homestake's acquisition of Plutonic. During 1998, an environmental officer was employed to manage Homestake's Australian environmental compliance program. A previous backlog of waste dump and tailings storage facility reclamation has been brought up to date. A contaminated groundwater plume exists southwest of the tailings dams. As required under the permit, monitoring bores pump the contaminated water back into the tailing facility. Lawlers has had an environmental dust issue, mainly from a small section of the tailings storage facility. A dust management strategy has been developed and actions are being taken to reduce the dust emissions from all major sources at the mine. Except as noted, the Lawlers mine is in compliance with all applicable environmental requirements. With the exception of the royalty payable to the State of Western Australia, the Lawlers mine is not subject to any royalties. Production in 1998 of 126,403 ounces at a total cash cost of $181 per ounce compares to production of 87,481 ounces at a total cash cost of $260 per ounce in 1997. The increase in production in 1998 primarily was due to the high-grade ore sourced from the New Holland pit. The decrease in cash costs per ounce was due to the higher production and the weakening of the Australian dollar. Geology Gold ore is derived from two distinct geological domains, a western sedimentary domain (New Holland) and an eastern mafic/ultramafic volcanic domain (Fairyland). The western area deposits are high-grade ladder quartz veins within sandstone units enclosed in finer grained sediments. Exploration involves deep, close-spaced drilling to locate high-grade, shallow plunging ore shoots within the favorable rock unit. The eastern domain is part of the nickeliferous Agnew-Mt Keith-Yakabindie-Honeymoon Well sequence, which hosts major nickel deposits north of Lawlers. 38 Year-end Proven and Probable Ore Reserves
1998 1997 ---------------- --------------- Tons of ore (000) 1,020 1,897 Ounces of gold per ton 0.117 0.134 Contained ounces of gold (000) 119 252 Operating Data 1998 1997 ---------------- --------------- Production Statistics: Tons of ore mined (000) 788 911 Ore grade mined (oz. gold/ton) 0.131 0.111 Open pit stripping ratio (waste:ore) 7.5:1 6.5:1 Tons of ore milled (000) 630 515 Mill feed ore grade (oz. gold/ton) 0.208 0.178 Mill recovery (%) 96 96 Gold recovered (000 ozs.) 126 87 Cost per Ounce of Gold Produced: Cash operating costs $179 $260 Other cash costs 2 - Noncash costs 25 25 ---------------- --------------- Total production costs $206 $285
Mt Morgans Mine The Mt Morgans mine is located 30 miles west of Laverton, Western Australia. Homestake owns an 80% interest in the Mt Morgans Joint Venture and is the operator of the Mt Morgans mine. Abednego Nickel Limited owns the remaining interest. The Mt Morgans gold field has been operated intermittently since 1896. The Mt Morgans properties consist of six exploration licenses, 117 prospecting licenses and 27 mining leases totaling approximately 113,700 acres. The principal mining leases were all granted prior to January 1, 1994. The Mt Morgans mine completed mining operations in May 1998. The property had been operated on a fly-in fly-out basis with about 27 staff employees and 74 contractor personnel working two-weeks-on and one-week-off rotations. Processing of stockpiles ceased in November 1998. Active exploration continues on the property, and recent exploration results in the Just-In-Case target area continue to be very promising. The treatment plant, which has the capacity to treat 1.1 million tons of ore per year, consists of a primary crusher, open stockpile, SAG mill, pebble crusher and secondary ball mill grinding circuit, and a conventional carbon-in-pulp leach/adsorption section. Gold recoveries at Mt Morgans ranged from 85% to 90%. The plant has been decommissioned and is available for sale. Power is supplied by diesel generators and process water is obtained from wells located five miles from the plant. 39 In 1997, a leak occurred in the wall of the tailings storage facility and an external containment dam was constructed to contain future discharges. The tailings storage facility was decommissioned and tailings now are contained in a depleted open pit. A contaminated groundwater plume from the tailing storage facility exists. Monitoring bores contain the plume and are returning the water to compliance levels by pumping the contaminated water back into the tailings facility. During 1998, a tailings spill discharged beyond the containment dam. A remediation program approved by the DEP has removed all contamination from the spill. Except for the foregoing, the mine operated in compliance with applicable requirements in 1997 and 1998. In 1997, the site was awarded a Golden Gecko Certificate of Merit for Environmental Excellence by the Western Australia Department of Minerals and Energy. The final closure plan is being finalized for approval by regulatory agencies. Homestake's share of production at Mt Morgans was 52,350 ounces in 1998 compared to 73,588 ounces in 1997. Geology Most production has come from lodes in intensely folded Archaean banded iron formation, which are hosted in an Archaean sequence of ultramatic volcanics and sediment. Homestake has an 80% share of the following amounts: Year-end Proven and Probable Ore Reserves (100% Basis)
1998 1997 ---------------- --------------- Tons of ore (000) - 4,754 Ounces of gold per ton - 0.023 Contained ounces of gold (000) - 114 Operating Data (100% Basis) 1998 1997 ---------------- --------------- Production Statistics: Tons of ore mined (000) 187 582 Ore grade mined (oz. gold/ton) 0.139 0.038 Tons of ore milled (000) 1,003 1,039 Mill feed ore grade (oz. gold/ton) 0.074 0.093 Mill recovery (%) 82 88 Gold recovered (000 ozs.) 65 92 Homestake's Cost per Ounce of Gold Produced: Cash operating costs $211 $374 Other cash costs 2 6 Noncash costs 26 85 ---------------- --------------- Total production costs $239 $465
40 Peak Hill Mine The Peak Hill mine is located 80 miles north of Meekatharra, Western Australia. Homestake owns a 66.67% interest in the Peak Hill joint venture. North Limited owns the remaining interest and is the operator of the Peak Hill mine. The Peak Hill gold field is more than 100 years old, but modern operations commenced in 1988. The mine is a fly-in fly-out operation with approximately 22 staff employees and 17 contractor personnel working two-weeks-on and one-week-off rotations. The Peak Hill properties consist of two exploration licenses, 41 prospecting licenses and 18 mining leases totaling approximately 44,200 acres. Homestake manages exploration on the joint venture tenements. Homestake also has extensive non-joint venture exploration interests in the region surrounding the Peak Hill mine. In total, Homestake has thirteen projects in the Peak Hill District, including eight joint ventures, totaling approximately 101 tenements on 137,000 acres. Open-pit mining at the Harmony pit, located six miles west of the plant, was completed in November 1997. Processing of stockpiled ore is expected to continue until October 1999. The plant has a capacity of 660,000 tons of soft oxide ore per year. Hard primary ore is blended or fine crushed to maintain this rate. The plant consists of a SAG/ball mill grinding circuit with a conventional carbon-in-pulp and pressure Zadra elution circuit. The gold recovery has varied from 93% to 98% over the past ten years. Power is generated by diesel generators. Good quality water is obtained from wells seven miles northeast of the plant. A contaminated groundwater plume from the tailing storage facility exists. Contaminated water is collected and pumped back to the tailings facility to improve water quality. With the exception of the foregoing, the operation was in compliance with all environmental requirements during 1998. Homestake's share of production at Peak Hill was 23,803 ounces in 1998 compared to 33,104 ounces in 1997. Geology Gold mineralization occurs as multiple lodes within altered Proterozoic mafic volcanics. Weathering extends to 100 meters beneath a well-developed laterite profile. Homestake has a 66.67% share of the following amounts: Year-end Proven and Probable Ore Reserves (100% Basis)
1998 1997 ---------------- --------------- Tons of ore (000) 605 799 Ounces of gold per ton 0.046 0.044 Contained ounces of gold (000) 28 36 41 Operating Data (100% Basis) 1998 1997 ---------------- --------------- Production Statistics: Tons of ore mined (000) - 396 Ore grade mined (oz. gold/ton) - 0.083 Tons of ore milled (000) 702 732 Mill feed ore grade (oz. gold/ton) 0.052 0.069 Mill recovery (%) 97 97 Gold recovered (000 ozs.) 36 50 Homestake's Cost per Ounce of Gold Produced: Cash operating costs $279 $269 Other cash costs 1 - Noncash costs 27 151 ---------------- --------------- Total production costs $307 $420
Bellevue Operation The Bellevue property is located 110 miles north of Leonora and 75 miles south of Wiluna, Western Australia. The property is 100% owned by Homestake. The area has been mined since 1896. The Bellevue tenements comprise nine mining leases, eight prospecting licenses and two exploration licenses. Four mining leases were granted prior to January 1, 1994. Treatment at Bellevue ceased in August 1996. Ore produced after August 1996 was trucked to the nearby Lawlers plant for treatment. Mining was completed in April 1997 at which time the operation was placed on care and maintenance. The Bellevue property is prospective for both gold and nickel mineralization. Lachlan has acquired the rights to nongold mineralization on 23 of the Bellevue tenements subject to a 25% net profits interest to Homestake. During 1998, an exploration program conducted by Lachlan at the Mt Goode nickel prospect intersected disseminated sulfides assaying 1.05% nickel over 530 feet. At the time of closure in mid-1997, all reclamation was up to date. All open-pit dumps have been contoured and the No. 1 tailings storage facility has been capped. The partially filled No. 2 tailings storage facility has not been capped pending further exploration and a decision on permanent mine closure. The closure plan has been finalized for approval by the regulatory agencies. Meekatharra Operation Operations at Meekatharra's Paddys Flat mining camp ceased in October 1995 after 100 years of intermittent gold production. Historic and recent production totaled nearly two million ounces of gold with a further one million ounces remaining in mineralized material. Although the tenements have been extensively explored, the potential exists for further discoveries of small to medium size shallower deposits and larger deeper deposits amenable to underground mining. Drilling of deeper targets will commence shortly. The infrastructure required to re-establish production at Meekatharra largely is in place. However, the crushing and grinding circuit has been relocated. 42 All access to open pits has been blocked and all rock waste dumps have been reclaimed, which involved contouring and seeding with native vegetation. A closure plan has been finalized for approval by the regulatory agencies. Lachlan Resources NL Homestake holds an 81.2% interest in Lachlan, a publicly traded Australian company. Lachlan has interests in and is exploring a number of base metal properties in Australia. Homestake manages Lachlan's business. CHILE Homestake conducts exploration programs throughout Chile. Homestake's office is in Santiago, Chile. In July 1996, Homestake and Corporacion Nacional del Cobre Chile ("Codelco"), a state-owned mining company in Chile, formed a new company, Agua de la Falda S.A. ("La Falda"), to explore near Homestake's former El Hueso mine in northern Chile. Homestake and Codelco contributed property interests in the area to the new company. In addition, Codelco contributed the existing El Hueso plant, which had been under lease to Homestake. Homestake owns 51% of La Falda and Codelco owns the remaining 49% interest. La Falda holds mining properties covering approximately 8,336 acres. Included within those properties is the new Agua de la Falda mine that was developed to mine the 187,000 ounces of oxide reserves discovered by Homestake on the property. The Agua de la Falda mine, which is operated by La Falda, is located approximately three miles northeast of the former El Hueso mine, in the Maricunga District of Chile about 600 miles north of Santiago at an elevation of approximately 12,500 feet. Access to the property is by 14 miles of dirt road. Construction of facilities and underground mine development at the Agua de la Falda mine commenced in late 1996. Construction was completed ahead of schedule and below budget at a total cost of approximately $6.5 million. Mining commenced in January 1997 and gold production began in April 1997. The operation utilizes room-and-pillar underground mining. The existing El Hueso facility is used to heap leach the Agua de la Falda ore using the Merrill Crowe process to recover the gold from solution. Homestake's 51% share of production in 1998 was 24,119 ounces compared to 16,023 ounces in 1997. Production of 40,000 to 45,000 ounces (100% basis) annually during 1999 and 2000 is expected. Water and power are purchased from Codelco. Exploration drilling conducted in 1997 encountered an additional oxide ore zone, adding to proven and probable reserves 300,000 tons of ore at a grade of 0.18 ounces of gold per ton. This additional ore will be mined through the La Falda mine. No royalties are payable on the production from the current Agua de la Falda reserves. However, any ores, which may be extracted from the northern area of the property are subject to royalty payment of 1.5% of net smelter returns on production of over one million ounces. Drilling and metallurgical testing continues on the much larger Jeronimo deposit, where to date approximately 15 million tons of unoxidized mineralized material (100% basis), at an average grade of 0.160 ounces per ton, have been outlined. Metallugical testwork is underway to develop 43 an economic treatment method. A decline was completed to access the deeper sulfide ore to obtain a large sample of the ore for large scale metallurgical testing. In February 1995, the El Hueso mine closed as reserves were depleted. Reclamation of the El Hueso mine site continued during 1998. There is little flora or fauna present in the Maricunga District, and no water sources are located nearby. Nonetheless, continued environmental monitoring will be carried out for a period of time. Geology The La Falda property is located within the Potrerillos porphyry copper district and comprises Mesozoic marine sediments that have been overlain by Tertiary volcanics and intruded by Tertiary porphyries. Gold mineralization has been mined historically in sediments and volcanics but the Agua de la Falda and Jeronimo deposits are hosted largely by a single, permeable, gently dipping carbonate unit. Homestake has a 51% share of the following amounts: Year-end Proven and Probable Ore Reserves (100% Basis)
1998 1997 ---------------- --------------- Tons of ore (000) 670 1,290 Ounces of gold per ton 0.185 0.167 Contained ounces of gold (000) 124 215 Operating Data (100% Basis) 1998 1997 ---------------- --------------- Production Statistics: Tons of ore leached (000) 309 281 Ore grade (oz. gold/ton) 0.216 0.172 Recovery (%) 72 65 Gold recovered (000 ozs.) 47 31 Homestake's Cost per Ounce of Gold Produced: Cash operating costs $198 $213 Noncash costs 89 82 ---------------- --------------- Total production costs $287 $295
BULGARIA In November 1997, Homestake entered into amended agreements with Navan Resources Plc, an Irish public company ("Navan"), regarding the Chelopech gold-copper mine and related processing facilities and exploration activities in Bulgaria. Under the agreements, Homestake purchased for $12 million a 20% interest in Navan Bulgarian Mining BV, a Netherlands company ("Navan BV") and a subsidiary of Navan. Navan BV owns a 68% interest in Bimak AD, the Bulgarian company that owns the ore processing facilities adjacent to the Chelopech mine and that has the exclusive right to purchase ore from Chelopech EAD, the Bulgarian government-owned 44 company that mines the Chelopech ore under the supervision of Bimak AD. In September 1998, Homestake completed its evaluation of the Chelopech mine and concluded that the project did not warrant Homestake's participation under current economic conditions. As a result, Homestake exercised its right to terminate its participation in Navan BV and the Chelopech mine project. In connection with the termination, Navan BV returned to Homestake approximately $11 million of Homestake's investment that had not been expended prior to termination of Homestake participation. Also in connection with that termination, Homestake loaned to Navan $500,000 and has agreed to lend to Navan up to an additional $1 million for Navan's use in connection with Navan's proposed purchase of a 75% interest in Chelopech EAD and privatization of the Chelopech mine. Homestake has the option to convert the loans into Navan Ordinary Shares. During November 1997, Homestake purchased a 32% interest in Navan's Bulgarian exploration projects for $4 million. The agreement, as amended in October 1998, gives Homestake the right to invest up to an additional $4 million in the exploration program during the period ending November 2002, which would result in Homestake owning a 50% interest in the exploration program. Homestake has the right to terminate its investment obligation at any time and either limit its investment (and percentage participation) to the level in existence at the time of termination or to transfer its interest to Navan. Also in October 1998, Homestake became the operator of the Bulgarian exploration program. SULFUR Homestake owns an undivided 16.7% interest in the Main Pass 299 sulfur deposit, which at December 31, 1998 contained proven recoverable reserves of approximately 63 million long tons of sulfur. Freeport-McMoRan Sulphur LLC ("FMS") owns the remaining 83.3% of the deposit and is the operator under a joint operating agreement. The sulfur deposit is located in the Gulf of Mexico approximately 36 miles east of Venice, Louisiana, in water approximately 210 feet deep. The deposit is approximately 1,500 feet below the sea floor. A royalty of 12.5% of the wellhead value is payable under the terms of the federal sulfur leases. The operating agreement provides that each participant pays its share of capital and operating costs, and has the right to take its share of production in kind in proportion to its undivided interest. The sulfur deposit is being mined using the Frasch process, a method of extraction which injects high-temperature sea water to liquefy the sulfur, which is then pumped to surface. Initial sulfur production commenced in 1992 and full sulfur production levels of 5,500 TPD were reached in December 1993. Sulfur production averaged 3,800 TPD during 1998, down from 5,200 TPD in 1997. The reduction was in part a planned response to a weakening sulfur market. In addition, in late September 1998, all Main Pass 299 drilling and production operations were shut down for three days in response to adverse weather conditions caused by a hurricane. The shutdown caused nine previously producing sulfur wells to require redrilling. As a result, production levels were lower and unit production costs increased during the fourth quarter of 1998 and these conditions are expected to continue in the first half of 1999. Based on current reserve estimates, projected costs and prices, annual production (100% basis) is expected to average two million long tons over a remaining reserve life currently in excess of 30 years. 45 FMS filters, blends, markets and delivers Homestake's share of sulfur production under an agreement having an initial term of ten years from commencement of production in 1992. Homestake can terminate the agreement by giving FMS two years' notice. Homestake's realized sales price for sulfur is a blend of various market prices, including the Tampa market, and is net of a 2.625% marketing fee. During 1998, continuing low sulfur prices, reduced sales volumes and higher operating costs for both sulfur and oil operations resulted in Homestake recording an operating loss of $5.3 million compared to an operating loss of $3.6 million during 1997. In the third quarter of 1997, due to a prolonged period of low sulfur prices and Homestake's current assessment of estimated future cash flows, Homestake wrote off its entire remaining $107.8 million investment in the Main Pass 299 sulfur mine. As a result, Homestake's carrying value of the Main Pass 299 sulfur mine was reduced to zero effective September 30, 1997. During sulfur exploration, oil and gas were discovered overlying the sulfur deposit. In 1990, the participants acquired the oil and gas rights from Chevron USA Inc. The federal oil and gas lease requires a 16.7% royalty payment based on wellhead value. In addition, Chevron retained the right to share in the proceeds of future production should the price or volume realized exceed those which were used by the parties as the basis for determining the purchase price. Oil and gas production, which peaked during 1992, is expected to continue to decline over the next few years. Oil production (100% basis) totaled 2.4 million barrels in 1998 compared to 3.3 million barrels in 1997. Homestake's share of remaining recoverable oil reserves at December 31, 1997 is estimated to be 0.7 million barrels after adjusting for the federal royalty and future production due to Chevron. Due to low oil prices, Homestake wrote down the carrying value of the oil property by $0.7 million at September 30, 1998. The remaining carrying value of Homestake's investment in the Main Pass 299 oil and gas property was $1.1 million at December 31, 1998. Homestake has a 16.7% share of the following amounts: Year-end Proven and Recoverable Reserves (100% Basis)
1998 1997 --------------- ---------------- Tons of sulfur (000) 62,908 64,287 Barrels of oil (000) 5,421 8,738 Production Statistics (100% Basis) 1998 1997 --------------- ---------------- Tons of sulfur (000) 1,378 1,894 Barrels of oil (000) 2,428 3,298 46 Homestake's Per Unit Data 1998 1997 --------------- ---------------- Average Sales Realization: Per ton of sulfur $59 $59 Per barrel of oil 11 18 Production Costs: Sulfur cash operating costs per ton $78 $66 Sulfur noncash costs per ton 1 8 --------------- ---------------- Total production costs $79 $74 Oil cash operating costs per barrel $8 $10 Oil noncash costs per barrel 7 7 --------------- ---------------- Total production costs $15 $17
MINERAL EXPLORATION AND DEVELOPMENT Total exploration expenses, including exploration activities in and around Homestake's mines, were $55.3 million in 1998 and $65.2 million in 1997. The 1998 and 1997 expenditures do not include approximately $10 million and $7 million of capitalized development drilling primarily at the Plutonic mine and the Darlot mine's Centenary deposit in Western Australia. Expenses related to in-mine definition drilling at Homestake's operating mines are included in the individual mine operating expenses and cost per ounce calculations. Of the $55.3 million spent on exploration in 1998, approximately 30% was spent in North America, 43% in Australia, 15% in the Andes in South America and 12% in other international areas. In 1999, the projected exploration budget is $43.1 million; 28%, 49% and 18% of which has been allocated to North America, Australia, and the Andes, respectively, with the remaining 5% to be spent in other international regions. Homestake plans to intensify its focus on its biggest and best prospects in 1999. These include several Australian properties recently acquired as part of the Plutonic acquisition, the Eskay Creek mine, and the land positions around the Pinson, Ruby Hill and Agua de la Falda mines. United States Homestake concentrates most of its domestic exploration activities in Nevada and has several major property positions within the northern Nevada gold belts. Specific exploration opportunities are evaluated in other western states and in Alaska on a case-by-case basis. Exploration expenses in the United States totaled $11.5 million in 1998 and $13.9 million in 1997. During 1999, $8.1 million has been budgeted for the United States. At the 50%-owned Pinson property, managed by Homestake, 1998 and 1997 expenditures were $1.6 million and $2.4 million, respectively (Homestake's share), the latter including $0.7 million of in-mine target drilling. A further $1.5 million (Homestake's share) has been budgeted for 1999. Drilling in 1998 included the probing of broad structural and stratigraphic targets along the pediment north of the mine complex and follow-up around several deep, mineralized intercepts drilled under the CX Pit in 1997. The deep drilling has outlined an 47 interweaving system of structurally controlled oxide and sulfide gold zones extending over a strike length of 1,900 feet and a vertical interval of at least 1,500 feet. Gold grades range from 0.2 oz/ton to in excess of 1 oz/ton, and the system is open. Additional step-out drilling is planned in 1999 as well as further testing of pediment targets. The Company spent $2 million in 1998 at the Ruby Hill property, drill testing a total of five target areas. Low-grade gold mineralization was encountered in several holes and follow-up drilling is planned. Four additional targets have been selected for drill testing in 1999 within a planned budget of $1.5 million. Exploration expenditures at the 25%-owned Round Mountain property totaled $0.5 million in 1997 and $0.3 million in 1998 (Homestake's share). Two broad drill targets, that were tested beneath shallow pediment cover north of the mine area, returned some low-grade gold values. A further $0.3 million (Homestake's share) of drilling is planned in 1999. At the 33%-owned Marigold mine property, Homestake's share of exploration expenditures was $0.4 million in 1998 and is expected to be $0.3 million in 1999. In 1998, a significant tonnage of mill-grade mineralization was discovered in the Terry Zone, and 1999 drilling will attempt to expand this new reserve along strike. Exploration at the Homestake mine properties totaled $1.8 million in 1998 and $2.1 million in 1997. A budget of $0.6 million has been approved for 1999. Systematic drilling into untested segments of historic ore zones added potentially mineable resources above the 4850 foot level and further extension and infill drilling is planned for 1999. A near-surface target located 5 miles northwest of the existing open pit was drilled late in 1998 and additional testing will be considered in 1999. Two new properties in Nevada, the Mud Springs project and the Bonita Canyon project, were acquired and reconnaissance drilled in 1998. The Mud Springs project is located on the Battle Mountain/Eureka trend approximately 9 miles north of the Pipeline deposit, and the Bonita Canyon project is located 25 miles northwest of Round Mountain. Gold mineralization was intersected on both projects and further drilling is planned in 1999. Target drilling was completed on the Pioche project in Nevada. Results were disappointing and the project was abandoned. Australia Homestake's exploration efforts in Australia continued at a high level in 1998, following the acquisition of Plutonic and its large assemblage of properties, including many in the prolific Yilgarn province of Western Australia. It is anticipated that 45-55% of the Company's total exploration budget will be allocated to Australia over the next several years. Exploration expenditures in 1998 were $23.3 million compared to 1997 expenditures of $25.6 million. In Western Australia, Homestake is exploring at over 65 project areas, most of which are in Archaean greenstone belts. The ten projects described below currently are the most important. On the 80%-owned Mt Morgans tenements, 1998 exploration expenditures were $2.6 million and are expected to be $2 million in 1999. Systematic drilling on 250 foot centers was completed at the newly discovered Just-In-Case gold deposit, which is contiguous with and part of the adjacent Granny Smith Joint Venture's Wallaby deposit. The Just-In-Case deposit 48 potentially is surface mineable and comprises a series of stacked siliceous gold lodes dipping gently to the south. Several additional targets have been generated in the local area and elsewhere on the tenement block and these will be drill tested in 1999. At the Lawlers mine property, exploration in 1998 totaled $1.9 million and the budget for 1999 has increased to $2.1 million. Along the three-mile long Glasgow Lass trend on the west side of the property, surface and underground drilling in 1998 produced positive results and has increased the amount of mineralized material. Broader reconnaissance drilling along previously untested portions of the trend and on parallel geologic zones intersected ore-grade gold values in several areas. In 1999, drilling will proceed on several programs simultaneously, including infill and extension drilling of identified resource blocks, offset drilling around new exploration intercepts, and first pass testing in a number of target areas. On the east side of the Lawlers property, potential open-pit gold mineralization was intersected at the Leviathan North prospect and a program of extension and infill drilling is planned for 1999. Several other targets on the property remain to be evaluated. Exploration expenditures in the Plutonic mine area totaled $1.9 million in 1998. Targets tested included the mine sequence stratigraphy down dip from the Plutonic West sulfide lode system and several areas of potential oxide mineralization. In December 1998, Homestake purchased the large, adjoining Marymia property for $8.7 million. The Marymia property contains several areas of partially defined mineralization containing 8.6 million tons of mineralized material at a grade of 0.09 ounces per ton and holds excellent potential for additional gold discoveries. Homestake now controls the entire Marymia greenstone belt, which it considers to be a long-term exploration play. The 1999 budget for the combined Plutonic/Marymia properties is $3.9 million. Intensive exploration continues on the Darlot property, especially for additional Centenary-type mineralization. Expenditures totaled $2.2 million in 1998 and were directed at drilling along strike from the mine operations and evaluating favorable host-rock formations in several locations. An area of potentially significant, near-surface oxide mineralization encountered just north of the mine will be followed up in 1999 along with ongoing regional target drilling. The 1999 budget is $2.2 million. Lachlan has acquired the rights to nongold mineralization on 23 of the Bellevue tenements subject to a 25% net profits interest to Homestake. During 1998, an exploration program conducted by Lachlan at the Mt Goode nickel prospect intersected disseminated sulfides assaying 1.01% of nickel over 660 feet. Homestake's share of exploration expenses at the 50%-owned Kalgoorlie operations was $1 million in 1998 and is expected to be approximately $1.4 million (Homestake's share) in 1999. In 1998 surface and underground drilling was carried out on targets west of the Mt Charlotte mine. Surface drilling also was carried out on a number of targets within the Kalgoorlie South Joint Venture. At the Kundip project area, Homestake spent $1.5 million in 1998. In excess of twelve targets have been selected for drill testing in 1999 under an area-wide budget of $1.5 million. In eastern Australia, Homestake controls three major projects; two in Queensland and one in New South Wales. 49 At the Twin Hills, where Homestake is earning an initial 65% interest, the Company spent $0.8 million in 1998 and plans to spend $1.7 million in 1999. The project contains two partially explored centers of epithermal gold mineralization characterized by broad sections of low to medium grade material and associated narrow sections of extremely high grade. The two deposits lie approximately five miles apart along a regional lineament where a series of additional geophysical and geochemical targets recently have been generated. These targets will be drill tested in 1999 along with further extension drilling to expand the existing deposits. In 1998, $1.4 million was spent at the new Agate Creek project, including acquisition costs. The 1999 budget is $0.7 million. Preliminary drilling at the end of 1998 on the Sherwood target encountered extensive gold mineralization including some significant near-surface intersections. Plans for 1999 include offset drilling at the Sherwood target plus the evaluation of other targets on the property. The 54.5%-owned Junction Reefs project is located adjacent to and along geologic trend from Newcrest's large Cadia gold-copper project which came into production in 1998. Exploration expenditures in 1998 were $0.8 million, and $0.6 million of work is planned for 1999. The property contains anomalous gold-copper mineralization spread over several broad areas within which Homestake has been searching for Cadia-type deposits. Three current targets remain to be tested in 1999. Other International Homestake explores in a number of other countries outside the United States and Australia, including Canada, Chile, Argentina, Brazil, Bulgaria and Poland. Exploration expenses were $25.7 million in 1997, and $20.3 million in 1998, and $13.9 million of expenditures are planned in 1999. Homestake's Canadian exploration spending in 1998 and 1997 (including expenditures by Prime) was $5 million and $8.4 million, respectively. The 1999 Canadian budget is $3.9 million. The principal project in Canada is in the Eskay Creek District, where drilling has been ongoing to increase the size of the existing deposits, explore for repetitions in the general mine environment and drill test favorable geologic settings on Homestake's overall land position. Exploration spending was $3.6 million in 1997, $3.5 million in 1998 and is expected to be $2.9 million in 1999. Substantial additions to reserves and mineralized material were made to the 21B and 21C zones in 1998. Although rock sequences similar to those at the mine were confirmed at several more distant sites, no significant mineralization has been encountered to date. The staking of several new claims on open ground down dip from the main 21B deposit will provide additional priority exploration targets for 1999. In the Andes, Homestake explores for gold in northern Chile, northwestern and southern Argentina and selected belts in Peru. During 1998 and 1997, $8.1 million and $7.7 million was spent, respectively, and $7.9 million of expenditures are planned during 1999. Exploration at the 51%-owned Agua de la Falda project in Chile totaled $2.1 million in 1998 and $2 million in 1997 (100% basis). The budget for 1999 is $2.1 million (100% basis). Feasibility work on the Jeronimo sulfide gold deposit resulted in expenditures of $0.6 million and $2.2 million in 1997 and 1998, respectively, and $3.0 million has been budgeted for 1999. During 1998, a small addition was made to the oxide reserves. Preliminary infill drilling at the 50 Upper Jeronimo deposit further defined the resource, supplied additional material for bench scale metallurgical tests and provided the necessary geotechnical control for a 2300 foot long exploratory decline. The decline was driven into the core of the Upper Jeronimo deposit to extract a bulk sample for an on-site, pilot-scale, bio-oxidation heap leach test to be conducted in 1999. Additional broad spaced offset drilling extended the size of the Lower Jeronimo deposit in several directions and the deposit is still open. Further infill and extension drilling at Jeronimo will be considered once the metallurgical testing is completed. The initial exploration program for 1999 will drill test several other targets on the property. In 1998, Homestake acquired all of Western Mining Company's holdings (850,000 acres) in the Jurassic volcanic belts of Chubut, Rio Negro and Santa Cruz provinces of southern Argentina, known as the Patagonia project. During 1998, $0.5 million was spent on land acquisition and preliminary work at the Patagonia project. A further $0.7 million program is planned for 1999 to follow up on known gold occurrences and complete a first pass evaluation of other high-priority areas. In Northern Latin America in 1998, Homestake closed down its activities in Venezuela and French Guiana and disposed of the El Foco and St. Pierre projects. A limited exploration program continued in Brazil. Expenditures in the general region were $2.8 million in 1998 and $8.1 million in 1997, but are expected to decrease to $0.4 million in 1999. The Tapajos grassroots project in northern Brazil generated disappointing results and the focus in 1999 will be the evaluation of advanced opportunities in selected mining districts. In 1998, Homestake significantly increased its involvement in Eastern Europe. Following the November 1997 acquisition of a 32% interest in Navan's Bulgarian exploration projects for $4 million, the Company entered into a joint venture with Carpathian Gold, Ltd. during 1998, to explore the Bomboly property in northeastern Hungary and continued the joint venture with FX Energy, Inc., to investigate the gold potential of southern Poland. During 1998, the Company spent $4.5 million in Eastern Europe compared to $1.4 million (excluding the $4 million Navan purchase) in 1997. The Company has budgeted $1.8 million of expenditures in 1999. No economic gold mineralization was found in the five targets drilled in Bulgaria but three targets are being prepared for drilling in 1999 and a new, high priority property is under negotiation. Twelve holes were drilled in the Bomboly project in Hungary but the gold tenor was of insufficient interest to continue. In Poland, several potential target areas were tested with surface surveys and many historic gold occurrences were investigated. The regional evaluation is planned to continue in 1999. GLOSSARY AND INFORMATION ON RESERVES GLOSSARY The following terms used in the preceding discussion mean: "Cash operating costs" are costs directly related to the physical activities of producing gold, and include mining, processing and other plant costs, deferred mining adjustments, third-party refining and smelting costs, marketing expenses, on-site general and administrative costs, in-mine drilling expenditures that are related to production and other direct costs, but exclude depreciation, depletion and amortization, corporate general and administrative expense, mineral 51 exploration expense, royalties, federal and state income and production taxes, Canadian mining taxes, financing costs and accruals for final reclamation. "Other cash costs" are costs that are not related to, but may result from, gold production activities, and include royalties and federal and state production taxes, but excludes Canadian mining taxes. "Total cash costs" are the sum of cash operating costs and other cash costs. "Noncash costs" are costs that are typically accounted for ratably over the life of an operation and include depreciation, depletion and amortization of capital assets, accruals for the costs of final reclamation and long-term monitoring and care that are usually incurred at the end of mine life, and the amortization of the economic cost of property acquisitions, but exclude amortization of deferred tax purchase adjustments relating to property acquisitions established in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" as these deferred tax purchase adjustments did not involve any economic resources of the Company. "Total production costs" is the sum of cash operating costs, other cash costs and noncash costs. "In-situ deposit" refers to reserves still in the ground. This does not include previously mined stockpiled reserves that are being stored for future processing. "Mineral deposit" and/or "Mineralized material" is gold-bearing material that has been physically delineated by one or more of a number of methods including drilling, underground work, surface trenching and other types of sampling. This material has been found to contain a sufficient amount of mineralization of an average grade of metal or metals to have economic potential that warrants further exploration evaluation. While this material is not currently or may never be classified as reserves, it is reported as mineralized material only if the potential exists for reclassification into the reserves category. This material has established geologic continuity, but cannot be classified in the reserves category until final technical, economic and legal factors have been determined and the project containing the material has been approved for development. Under United States Securities and Exchange Commission standards, a mineral deposit does not qualify as a reserve unless the recoveries from the deposit are expected to be sufficient to recover total cash and noncash costs for the mine and related facilities. "Run-of-mine ore" is mined ore which has not been subjected to any pretreatment, such as washing, sorting or crushing, prior to processing. "Stripping ratio" is the ratio of the number of tons of waste to the number of tons of ore extracted at an open-pit mine. "Tonnage" and "grade" refer, respectively, to the quantity of reserves and mineralized material and the amount of gold (or other products) contained therein and include, in the case of reserves, estimates for mining dilution but not for other processing losses. "Tons" means short tons (2,000 pounds) unless otherwise specified. "Adit" or "Portal" is a tunnel driven into a mountainside providing access to an ore deposit. 52 INFORMATION ON RESERVES Gold The proven and probable gold ore reserves stated in this Report on Form 10-K reflect estimated quantities and grades of gold in in-situ deposits and in stockpiles of mined material that Homestake believes can be recovered and sold at prices sufficient to recover the estimated future cash costs of production and remaining investment. The estimates of cash costs of production are based on current and projected costs. Estimated mining dilution has been factored into the reserve calculations. Homestake used gold prices of $325 and $350 per ounce in calculating reserves at December 31, 1998 and 1997, respectively. Homestake used a price of $325 per ounce of gold in its mine-by-mine evaluation of mining properties at December 31, 1998. Homestake used gold prices of $325 and $350 per ounce in its mine-by-mine evaluation of short-lived and long-lived mining properties, respectively, at December 31, 1997. Silver The proven and probable silver ore reserves have been calculated on the same basis as gold ore reserves, except that silver reserves at December 31, 1998 and 1997 are based on an assumed price of $5.00 per ounce. Sulfur Homestake's proven sulfur reserves represent the quantity of sulfur in the Main Pass 299 deposit for which geological, engineering and marketing data give reasonable assurance of recovery and sale under projected economic and operating conditions. Oil Homestake's proved oil reserves at Main Pass 299 are the estimated quantity of crude oil and condensate which geological and engineering data give reasonable assurance of recovery and sale under projected operating conditions at prices sufficient to cover the estimated future cash costs of production and the remaining investment. The estimate is based on limited reservoir and engineering data. Estimation of Reserves Gold and silver reserves are estimated for each of the properties operated by Homestake based upon factors relevant to each deposit. Gold ore reserves for those properties not operated by Homestake are based on reserve information provided to Homestake by the operator. Homestake has reviewed but has not independently confirmed the information provided by these operators. The sulfur and oil reserves at Main Pass 299 are based on information provided by the operator. Homestake reviewed the initial reserve data with independent consultants. Homestake has reviewed subsequent adjustments to these reserves but has not independently confirmed the reserve adjustments provided by the operator. Other Information Ore reserves are reported as general indicators of the life of mineral deposits. Changes in reserves generally reflect (i) efforts to develop additional reserves; (ii) depletion of existing reserves 53 through production; (iii) actual mining experience; and (iv) price forecasts. Grades of ore actually processed from time to time may be different from stated reserve grades because of geologic variation in different areas mined, mining dilution, losses in processing and other factors. Recovery rates vary with the metallurgical and other characteristics and grade of ore processed. OVERVIEW OF AUSTRALIAN, CANADIAN AND UNITED STATES REGULATION OF MINING RIGHTS Australia The mining of hard rock minerals in Australia is regulated by State or Territory legislation and regulation which is administered by a responsible government department within each jurisdiction. Each State and Territory has its own separate mining regime and there is little uniformity of legislation and regulations on an Australia-wide basis. In all States and Federal Territories, gold, silver and uranium belong to the Crown. As a general rule, the Crown is also vested with ownership of other minerals. Private ownership can, however, occur in all Australian jurisdictions other than in South Australia and the Northern Territory. In general, rights to explore, mine and produce minerals are granted by the State or Territory government where those rights are sought. In general, exploration is authorized by statutory title with some jurisdictions providing for exploration titles with varying rights and fees, according to the amount of samples that may be extracted. Such titles are usually granted for relatively short periods and, in some cases, only upon approval by the relevant government department of a program of work and expenditure or subject to minimum expenditure commitments. Titles which allow mining may be granted, usually with priority given to the holder of the underlying exploration title for that land, upon application to the government department in the jurisdiction where the deposit is located. In respect of most minerals, royalties are payable to the government of the jurisdiction where production occurs. A special regime applies in most jurisdictions in respect of mining on private land. This usually obliges the title holder to pay compensation to the landowner for losses arising from the exercise of rights to enter, explore or mine the land. See "Risks of Native Title Claims - Australia" included in the Risk Factors section included elsewhere in Part I of this Form 10-K. Canada Mining rights in Canada are within the authority of the individual provinces. Although there are some variations among the provinces with regard to specific features, the general requirements are similar. The ownership of and the granting of rights to exploit minerals generally remains with the provincial government. Persons seeking to exploit most minerals (including gold and silver) may stake claims on government property open to exploitation. An initial fee is payable on staking of a mining claim. There are annual minimum work requirements although cash may be paid in lieu of minimum work requirements in most provinces. The development of a mine requires that mining claims be converted to mining leases. Mining leases are granted for a specific term of years (up to 21 years in Ontario and up to 30 years in British Columbia), with the right of renewal. There are generally limited annual rental or royalty 54 payments. There may be overlapping use rights on the same property, such as mining and forestry, in which case the terms on which multiple uses take place will generally be negotiated between the parties and will be specified in the mining lease. In some areas there are mineral rights that are privately owned, the rights having been previously alienated by governmental action. In the case of privately held mineral rights, the owner is free to negotiate terms on which mining may take place. If the surface and minerals are held by different persons, negotiations between the surface and mineral rights holder will be required if the matter is not governed by preexisting agreements. In some jurisdictions disagreements over rights of surface use may be resolved by a government agency having authority to determine use and compensation. See "Risks of Native Title Claims - Canada" included in the Risk Factors section included elsewhere in Part I of this Form 10-K. United States Title to and right to mine hard rock minerals in the United States is governed by the law of each state, except as to public lands of the United States federal government that are open to exploration, which are governed by the Mining Law of 1872, as amended. In general, real property law in the United States is based on the English common law of real property. In general, under the law of each state in the United States, title to minerals and the right to mine is vested in the surface owner, unless separately alienated. The surface owner can transfer all or part of the mineral rights separate from the surface, or can transfer the surface and retain ownership of mineral rights. Mineral rights may be further alienated, may be leased and subleased, and also may be subdivided among more than one owner, including alienation with the disposing party retaining the right to receive royalties or other payments. If the surface and the mineral rights are held by different persons, state laws vary as to priority and other rights as between the parties. Transfer documents by which the surface and mineral rights were separated may govern. In the absence of agreement or provision in title documentation, in some states, mineral right holders have priority of use and occupancy but must compensate the surface holder for injury to the surface estate. In some states, the mineral right holders have priority of use and no compensation obligation. A few states have private condemnation statutes, which permit holders of mineral rights to exercise the power of eminent domain to secure access to minerals and to provide a portion of the surface for use in the conduct of mining. Mineral rights holders have no royalty or payment obligation in respect of minerals to a government entity unless the government entity happens to hold title to or a royalty or payment interest in the mineral rights in the same way as a private owner. However, some states have enacted severance taxes applicable to production of minerals from property within the jurisdiction. Under the United States Mining Law of 1872, United States citizens (including corporations incorporated in the United States) may stake mining claims upon United States federal government property open to exploration ("unpatented mining claims"). An initial fee is payable on staking and annual maintenance fees are also payable. Under current law, persons staking such unpatented mining claims, upon the making and documenting of a discovery of most minerals (including gold and silver) in commercial quantities, are entitled to mine for the mineral 55 without payment of royalties or other fees (other than the annual claim maintenance fee). In addition, the holder of an unpatented mining claim who has made a commercial discovery is entitled to secure title to the mineral and surface estates of the property subject to the mining claim ("patented mining claim") at nominal cost. Only certain federal public lands, principally in the Western United States, are open to exploration. A patented mining claim gives the holder the full fee interest in the property. Holders of unpatented and patented mining claims may sell or lease claims in the same way as fee property. ENVIRONMENTAL MATTERS General Homestake has a policy of conducting extensive environmental audits of its operations in order to minimize the impact of its operations on the environment and to monitor compliance with applicable environmental laws and regulations. A committee of the Homestake Board oversees the establishment and implementation of environmental policy. Environmental audits are conducted on a regular basis with the objective of auditing each operation at least once every three years. Homestake makes capital expenditures to minimize the effects of its operations on the environment. Capital expenditures primarily are for the purchase or development of environmental monitoring equipment and containment of tailings and waste rock. In 1998, these expenditures totaled approximately $3 million compared to $18 million in 1997. Homestake estimates that during 1999 capital expenditures for such purposes will be approximately $4 million and that during the five years ending December 31, 2003, such capital expenditures will be approximately $12 million. Homestake also incurs operating costs to minimize the effects of its operations on the environment, including current reclamation costs, costs for environmental monitoring and studies to identify and quantify environmental impacts, if any, and accruals for remediation and future reclamation expenditures. Such expenses totaled approximately $55 million in 1998, compared with approximately $30 million in 1997. Homestake estimates that environmental and related operating costs in 1999 will be approximately $26 million. The above amounts exclude expenditures related to the Company's discontinued uranium operations. Under applicable law and the terms of permits under which Homestake operates, Homestake is required to reclaim land disturbed by its operations. In the mining industry, most reclamation work takes place after mining and related operations terminate. Homestake has adopted a policy of conducting reclamation concurrently with mining operations where practical. As a result, an increasing amount of reclamation is being conducted simultaneously with mining. At December 31, 1998 and 1997, Homestake had accrued $131 million and $92 million, respectively, for future reclamation and related costs. With respect to nonoperating properties, Homestake believes that it has fully provided for all remediation liabilities and for estimated reclamation and site restoration costs. Homestake's provisions are evaluated regularly and adjusted when necessary. At September 30, 1997 Homestake determined that it was necessary to increase the reclamation accruals at certain of its nonoperating properties including the Santa Fe mine in Nevada, the Nickel Plate mine in Canada and the Grants uranium complex in New Mexico to reflect revised estimates, changed conditions and more stringent future reclamation requirements. Accordingly, a charge of $29.1 million was recorded at that time. At September 30, 1998, Homestake recorded an additional provision for estimated environmental and reclamation costs for historical operations at the Homestake mine in the amount of $35 million. Homestake charges 56 reclamation costs incurred in connection with its exploration activities as expenses in the year in which incurred. For mining operations, Homestake provides for final reclamation on a units-of-production basis over the individual operating mine lives. Homestake's operations are conducted under permits issued by regulatory agencies. Many permits require periodic renewal or review of their conditions. Homestake cannot predict whether it will be able to renew such permits or whether material changes in permit conditions will be imposed. RCRA The United States Environmental Protection Agency ("EPA") has not yet issued final regulations for management of mining wastes under the United States Resource Conservation and Recovery Act ("RCRA"). The ultimate effects and costs of compliance with RCRA cannot be estimated at this time. CERCLA The United States Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") imposes heavy liabilities on any person who is responsible for an actual or threatened release of any substance classified as hazardous, including liability for oversight costs incurred by the EPA. Legislative proposals and congressional hearings for CERCLA reauthorization have occurred in 1994 through 1997. Whitewood Creek Beginning in the nineteenth century, mining companies operating in the Black Hills of South Dakota, including Homestake, placed mine tailings in Whitewood Creek in western South Dakota. Some tailings placed in Whitewood Creek eventually flowed downstream. Placement of mine tailings into Whitewood Creek was authorized by the laws of the United States, the Dakota territory and the State of South Dakota, and Whitewood Creek was later specifically designated by the State of South Dakota as a disposal stream for mine tailings and for the disposal of raw sewage and other municipal waste. Consequently, all mine tailings placed by Homestake in Whitewood Creek were placed there with the consent and encouragement of the State of South Dakota and the United States government and in compliance with applicable laws. In response to changes in legal requirements, Homestake ceased the placement of mine tailings into Whitewood Creek in 1977 and for more than 21 years the Homestake mine has placed, in a tailings storage facility, all mine tailings that are not redeposited in the mine. In 1983, the EPA designated an 18-mile stretch of Whitewood Creek and adjacent land as a superfund site and placed it on the National Priorities List ("NPL") under CERCLA. The EPA asserted that the discharges of tailings by mining companies, including Homestake, contaminated the soil and streambed. During the period from 1982 through 1990, extensive studies of the superfund site were conducted at Homestake's expense to identify any public health and environmental issues related to the site and appropriate remedial action. In August 1990, Homestake signed a consent decree with the EPA in United States of America v. Homestake Mining Company of California, U.S. Dist. Ct., W.D.S.D., Civ. Action No. 90-5101. Under the consent decree, Homestake conducted remedial work at its expense and also reimbursed the EPA for its oversight costs. Remedial fieldwork was completed in 1993. The decree also provided for the three counties in which the property is located to enact institutional controls which would limit the future use of the property included within the area of the superfund site. Institutional controls were 57 adopted in all three counties. In addition, Homestake offered to purchase all properties along Whitewood Creek that were affected by the institutional controls. Approximately $3 million has been spent to date to acquire property along Whitewood Creek and the Company estimates that the total cost for purchasing all of the remaining affected property would be an additional $3 million. These costs are expensed as and when incurred. The consent decree was terminated by the court on January 10, 1996. The Whitewood Creek site was deleted from the NPL on August 13, 1996. In the deletion notice, the EPA stated that "EPA, in consultation with the State of South Dakota, have determined that the Site poses no significant threat to public health or the environment." Whitewood Creek now supports a thriving trout fishery and the adjacent area provides significant wildlife habitat for a number of species, as well as water and grazing for cattle and other farm animals. On September 25, 1997 the State of South Dakota filed an action against Homestake, State of South Dakota v. Homestake Mining Company of California, U.S. Dist. Ct., W.D.S.D., Civ. Action No. 97-5078. In the complaint, the State of South Dakota alleged that Homestake disposed of mine tailings in Whitewood Creek and that such disposal resulted in injuries to natural resources in Whitewood Creek and downstream in the Belle Fourche River, the Cheyenne River and Lake Oahe on the Missouri River (the "NRD Site"). The complaint also alleged that the State of South Dakota incurred assessment costs. The State of South Dakota claims that it is a trustee authorized under CERCLA to bring such action. The complaint also contained a pendent state law claim, alleging that the tailings placed in Whitewood Creek constitute a continuing public nuisance in and around the NRD Site downstream from Whitewood Creek. The complaint asks for abatement of the nuisance, damages in an unascertained amount, costs and interest. In its answer to the state complaint, Homestake denied that there has been any continuing damage to natural resources or nuisance caused by Homestake as a result of the historical placement of tailings in Whitewood Creek. Among other defenses, it is also the position of Homestake that as a result of the State of South Dakota's ownership of Whitewood Creek and designation of Whitewood Creek as an authorized disposal site under state authority, the State of South Dakota was and is the owner and operator of the waste disposal facility and is responsible for all past and future damages and any continuing nuisance resulting therefrom. Homestake has also counterclaimed against the State of South Dakota seeking cost recoupment, contribution and indemnity from the State of South Dakota, in its capacity as an owner and operator of a disposal facility, and for expenses previously incurred and to be incurred in the future with respect to Whitewood Creek and downstream areas. On November 25, 1997, the United States government and the Cheyenne River Sioux Tribe (the "Federal Trustees") filed an action against Homestake, United States of America et al. v. Homestake Mining Company of California, U.S. Dist. Ct, W.D.S.D., Civ. Action No. 97-5100. This action relates to the matters which are the subject of the federal cause of action brought by the State of South Dakota, described above, with respect to the NRD Site. The complaint seeks response costs and damages in unspecified amounts, costs and attorneys fees. In its answer to the complaint by the Federal Trustees, Homestake denied that there has been any continuing damage to natural resources. Among other defenses, it is also the position of Homestake that the United States government approved and authorized deposit of tailings in Whitewood Creek, including designation of Whitewood Creek as a disposal site under federal authority, and is therefore responsible for any past and future damages, and that the matters at issue have been previously litigated and are the subject of a prior final judgment between Homestake and 58 the United States government. Homestake has also counterclaimed against the Federal Trustees seeking cost recoupment, contribution and indemnity. In the opinion of Homestake, there is no basis for the claims by the State of South Dakota or by the federal government and the Cheyenne River Sioux Tribe. Homestake is also of the opinion that it has valid defenses and counterclaims against the State of South Dakota, the United States government and the Cheyenne River Sioux Tribe, as well as potential counterclaims and crossclaims against other governmental entities and agencies, and other persons who participated in ownership and/or operation or otherwise encouraged use of Whitewood Creek as a waste disposal site, who disposed of waste in the NRD Site, or who have owned property or otherwise conducted activity within the NRD Site which may have contributed to any alleged damage. Homestake does not believe that resolution of these matters will have a material adverse effect on its business or financial condition or results of operations. Homestake, the State of South Dakota, the Federal Trustees and the Cheyenne River Sioux Tribe are engaged in settlement discussion with respect to these actions. If settlement is not achieved, Homestake intends to vigorously defend these actions and to seek cost recoupment, contribution and indemnity from the State of South Dakota, federal, state and other government entities and agencies, and other persons who participated in ownership and/or operation or otherwise encouraged use of Whitewood Creek as a waste disposal site, who disposed of waste in Whitewood Creek or its receiving waters, or who have owned property or otherwise conducted activities which may have contributed to any alleged damage in the NRD Site. Grants Tailings Homestake's closed uranium mill site near Grants, New Mexico is listed on the NPL. The EPA asserted that leachate from the tailings contaminated a shallow aquifer used by some of the residents in adjacent residential subdivisions. Homestake paid the cost of extending the municipal water supply to the subdivisions. Homestake also has operated a water injection and collection system since 1976 that has significantly improved the quality of the aquifer. The estimated costs of continued remediation are included in the accrued reclamation liability. Homestake has settled with the EPA concerning its oversight costs for this site. Homestake signed a Consent Decree with the EPA related to the ground water issues and an Administrative Order on Consent ("AOC") for radon studies of the adjacent subdivisions. The radon studies in the subdivisions determined that there was no contamination or impact. The work required by the Consent Decree and AOC has been completed and both have been terminated. Under Nuclear Regulatory Commission ("NRC") regulations, the decommissioning of the uranium mill tailings facilities is in accordance with the provisions of the facility's license. The facility license sets the closure of the two tailings impoundments as 2004 and 2013, subject to extension under certain circumstances. The NRC and EPA signed a Memorandum of Understanding in 1993 which has established the NRC as the oversight and enforcement agency for decommissioning and reclamation of the site. Mill decommissioning was completed in 1994 and final closure of the Grants large tailings site is scheduled for completion in 2003. During 1998, Homestake incurred approximately $3.7 million of reclamation expenditures at the Grants facility and approximately $4 million is planned to be expended during 1999. Title X of the Energy Policy Act of 1992 (the "Energy Policy Act") and subsequent amendments to the Energy Policy Act authorized appropriations of $335 million to cover the Federal Government's share of certain costs of reclamation, decommissioning and remedial action for by-product material (primarily tailings) generated by certain licensees as an incident of uranium 59 sales to the federal government. Reimbursement is subject to compliance with regulations of the Department of Energy ("DOE"), which were issued in 1994. Pursuant to the Energy Policy Act, the DOE is responsible for 51.2% of the past and future costs of reclaiming the Grants site in accordance with NRC license requirements. Through December 31, 1998 Homestake had received $25.6 million from the DOE and the balance sheet at December 31, 1998 includes an additional receivable of $8.2 million for the DOE's share of reclamation expenditures made by Homestake through 1998. Homestake believes that its share of the estimated remaining cost of reclaiming the Grants facility is fully provided in the financial statements at December 31, 1998. In 1983, the State of New Mexico filed claims against Homestake for natural resource damages resulting from the Grants site. The State has taken no action to pursue the claims. Lead Prior to May 1986, Homestake Lead Company of Missouri ("HLCM"), a wholly-owned subsidiary of Homestake, was a joint venturer and partner with subsidiaries of AMAX, Inc. ("AMAX") in the production of lead metal and lead concentrates in Missouri. In May 1986, HLCM acquired AMAX's interest in the Missouri facilities and operations and agreed to assume certain limited liabilities of AMAX in connection with the Missouri facilities. In June 1991, HLCM and AMAX were notified of a potential claim by the Jackson County, Mississippi Port Authority for contamination of soil and water alleged to have resulted from storage and shipment of lead dross at the Port of Pascagoula prior to May 1986. Since that time, a number of other lead producers and former lead producers have also been so notified. The Port of Pascagoula is taking primary responsibility for conducting an investigation of the site, but the Port of Pascagoula also has made claims for reimbursement against customers whose material was stored at and shipped through the site. As a result of subsequent investigations conducted by Homestake and others, Homestake believes that most of the material at the Pascagoula site, as well as the material primarily responsible for any contamination, is lead concentrate. Based on a review of shipping records to date, less than half of the lead concentrate shipped through the Port of Pascagoula was produced and sold for the account of Homestake. The State of Mississippi Department of Environmental Quality is reviewing the investigation efforts and remediation plans that are being developed by the Port Authority. Based on information currently available, Homestake believes the remediation costs should not exceed $1 million. Homestake's position is that the Port Authority is primarily responsible for the cost of remediation as owner of the property and as lessor with the ability to control the activities of the stevedoring company, and also because the Port Authority contributed to the contamination by moving stored material from a storage building and depositing it on the ground. Homestake believes that any future costs it may incur in connection with this matter will not be material. Foreign Operations Except for the instances described above in respect of the individual properties, Homestake believes that its foreign operations comply with applicable laws, regulations and permit conditions and has no knowledge of any significant environmental liability or contingent liability resulting from its foreign operations. Homestake expects that environmental constraints in foreign countries will become increasingly strict. 60 RISK FACTORS The following risk factors should be considered in conjunction with the other information included in "Cautionary Statements." Risks Inherent in Gold Exploration, Development and Production The business of gold exploration, development and production by its nature involves significant risks. Among other things, the business depends on successful location of reserves and skillful management. Gold exploration is highly speculative in nature, involves many risks and frequently is non-productive. Once mineralization is discovered and determined to be economically recoverable, it usually takes a number of years from the initial phase of exploration until production commences, during which time the economic feasibility of production may change. Substantial expenditures are required to establish reserves through drilling, to determine means of production and metallurgical processes to extract the metal from ore and, in the case of new properties, to construct mining and processing facilities. Mining is subject to a variety of risks and hazards, including rock falls and slides, cave-ins, flooding and other weather conditions, and other acts of God. Homestake maintains and intends to continue to maintain, property and liability insurance consistent with industry practice, but such insurance contains exclusions and limitations on coverage. For example, coverage for environmental liability generally is limited and may be totally unavailable. There can be no assurance that insurance will continue to be available at economically acceptable premiums. Production costs also can be affected by unforeseen changes in ore grades and recoveries, permitting requirements, environmental factors, work interruptions, operating circumstances, unexpected changes in the quantity or quality of reserves, unstable or unexpected ground conditions, and technical issues. Substantially all of Homestake's gold production and significant exploration activities take place in the United States, Australia and Canada, all of which historically have experienced relatively low levels of political and economic risk. Homestake also produces gold in Chile and conducts exploration activities in Eastern Europe, Argentina, Brazil, Chile and the Andean region of South America. These regions generally have higher levels of political and economic risk than the United States, Australia and Canada, including greater potential for government instability, uncertainty of laws and legal enforcement and compliance, defects in or uncertainty as to title to mining property, expropriation of property, restrictions on production, export controls, currency non-convertibility, fluctuations in currency exchange rates, inflation and other general economic and political uncertainties. Risks of Gold and Silver Price Fluctuations and Hedging Activities The results of Homestake's operations are affected significantly by the market price of gold and, to a lesser extent, the market price of silver. The markets for gold and silver are worldwide markets. Gold and silver prices are subject to volatile price movements over short periods of time and are influenced by numerous factors over which Homestake has no control, including expectations with respect to the rate of inflation, the relative strength of the United States, Canadian and Australian dollars, interest rates, global or regional political or economic crises, demand for jewelry and industrial products containing gold and silver, speculation, and sales by central banks and other holders and producers of gold and silver in response to these factors. During 1998 and 1999 to date, the price of gold generally has been below $300 per 61 ounce. After increasing to approximately $7.81 per ounce in February 1998, the price of silver has dropped significantly, to as low as $4.69 per ounce during 1998. The following table shows the reported annual high, low, average and end of the period afternoon fixing prices of gold per ounce and silver per ounce in US dollars on the London Bullion Market.
Years Ended December 31, - --------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- - --------------------------------------------------------------------------------------------------- Gold High........................... $313 $367 $416 $397 $398 Low............................ 273 283 367 372 370 Average........................ 294 331 388 384 384 Period End..................... 287 290 369 387 383 Silver High........................... $7.81 $6.27 $5.83 $6.04 $5.75 Low............................ 4.69 4.22 4.71 4.41 4.64 Average........................ 5.54 5.17 5.19 5.19 5.28 Period End..................... 5.01 5.95 4.73 5.11 4.87
The supply of gold and silver includes a combination of new mine production, recycling of industrial products containing gold and silver, and sales from existing stocks of bullion and fabricated gold and silver held by governments, public and private financial institutions, and individuals. In general, hedging enables a gold and silver producer to fix a future price for hedged gold and silver that generally is higher than the then current spot price. However, to the extent that sales of future production are hedged, the ability to realize future increases in prices may be reduced subject to the producer's ability to extend the expiry dates of the hedge contracts. Homestake has adopted a gold and silver hedging policy under which Homestake, in appropriate circumstances, may enter into forward-sales transactions for up to 30% of its gold and silver production in each of the subsequent ten years (five years for silver) at prices in excess of certain targeted prices. Homestake may also use, in appropriate circumstances, combinations of put and call option contracts, which provide an effective price floor for sales. To the extent Homestake has not hedged its production in forward-sales transactions or established price floors, its profitability is fully exposed to fluctuations in the current price of gold and silver in world markets. Homestake's results also are affected to a lesser degree by the market prices for sulfur and for crude oil. Sulfur prices are affected principally by the demand for fertilizer and the availability of by-product sulfur recovered during the refining and processing of oil and natural gas. Crude oil prices are affected principally by supply and demand for gasoline and fuel oil as well as global or regional political or economic crises. 62 Risks Associated with Reserve Realization Gold and silver reserves reported by Homestake reflect estimated quantities and grades of gold and silver in deposits and in stockpiles of mined material that Homestake believes can be mined, processed and sold at prices sufficient to recover the estimated future cash costs of production, remaining investment and anticipated additional capital expenditures. Reserves are estimates based upon drilling results, past experience with mining properties, experience of the person making the reserve estimates and many other factors. Reserve estimation is an interpretive process based upon available data. Further, reserves are valued based on estimates of future costs and future prices. Homestake's gold reserves at December 31, 1998 are based on an assumed price of $325 per ounce. Gold reserves at December 31, 1997 are based on an assumed price of $325 per ounce for short-lived operations, and $350 per ounce for other operations. Silver reserves at December 31, 1998 and 1997 at the Eskay Creek mine are based on an assumed price of $5 per ounce. Actual quality and other characteristics of ore deposits and gold and silver prices will differ from the assumptions used to develop reserves. Such differences may be significant. Sulfur and oil reserve realization is subject to similar risks. In the third quarter of 1997, Homestake wrote off its entire sulfur mine investment in light of the continued depressed world market for sulfur. Risks of Government Regulation of Mining Homestake's mining operations are subject to extensive regulation governing development, production, labor standards, occupational health, waste disposal, use of toxic substances, environmental regulations, mine safety and other matters. Some jurisdictions also require or may in the future require the payment of royalties. Changes in regulations can have material impacts on anticipated levels of production, costs and profitability. It is possible that exploration, or development or operation of a mine, may be delayed or terminated as a result of the inability to obtain all required permits and government approvals on an economic basis, or the imposition of royalty payments or other government regulations. The United States Mining Law of 1872 (the "Mining Law") has been the subject of substantial debate and proposals for change for several years. While changes in the Mining Law may occur, Homestake cannot predict when or if changes will occur, or the extent to which any new legislation will exempt or otherwise "grandfather" existing mining operations, unpatented mining claims on which commercial discoveries have been made or unpatented mining claims for which the patenting process is partially complete. Under current law, persons staking unpatented mining claims on United States federal government property open to exploration (unpatented mining claims), upon the making and documenting of a discovery of most minerals (including gold and silver) in commercial quantities, are entitled to mine the property without payment of royalties and to secure title to the property (patented mining claims) at nominal cost. Under proposals made in recent years to amend the Mining Law, the United States government would be entitled to receive royalties based on either the gross or net value of production from government-owned property. This would have only minimal impact on Homestake's current operations, as substantially all of Homestake's current operations in the United States, other than its operations at Ruby Hill, are conducted on privately held land. It is possible that Homestake may be required to pay royalties on production from the Ruby Hill operation, which would increase the production cost over current estimates, but the amount of the increase, if any, is not predictable. Expansion at Homestake's Round Mountain mine also may occur on government-owned property, as to which royalties 63 similarly might be payable. Should the Mining Law be so amended, it could reduce the amount of future exploration and development activity conducted by Homestake on federal government-owned property in the United States. Risks of Currency Fluctuations Gold and silver are sold throughout the world principally based on the US dollar price, but operating expenses of gold and silver mining companies generally are incurred in local currencies. Homestake's operations principally are based in the United States, Canada and Australia. Homestake engages in currency hedging in Canadian and Australian dollars to protect against significant currency fluctuations relative to the US dollar. Risks of Native Title Claims Australia The decision of the High Court of Australia in 1992 in Mabo and Others v Queensland (No. 2) recognized traditional native title rights to land. That decision and the Racial Discrimination Act raised the possibility that mining and exploration tenements granted by the Crown after October 31, 1975, over areas in which there were existing native title rights might be invalid to the extent of any inconsistency with those native title rights. In 1996, the High Court held in The Wik Peoples v Queensland that the grant of pastoral leases will not necessarily extinguish native title rights. (Many mining leases have been granted over areas of pastoral leasehold.) The Commonwealth and the States of Australia have passed legislation in relation to native title which provides for native title claims to be made. Some of this legislation is subject to amendments currently before Parliament. The legislation provides for a right to negotiate before the grant or renewal of certain tenements (other than renewals of tenements as of right, in accordance with the terms of their original grant) after January 1, 1994. Negotiations must take place between the native title holders or claimants, the grantee party and the government party. The native title legislation also validates mining tenements granted before January 1, 1994 and suspends native title over the mining tenements area. Any compensation for the suspension is payable by the government that granted the tenement. In July 1998, the Native Title Amendment Act was passed by both houses of the Australian Parliament. The legislation came into operation on September 30, 1998, although in some respects it operates retroactively. The Act makes significant changes in the regime governing native title in Australia. Among other things, the new law (i) transfers the determination of native title claims to the Australian Federal Courts; (ii) requires that native title claims be registered in compliance with specified requirements in order to qualify for the right to negotiate; (iii) permits registration of claims to be delegated to State bodies; and (iv) permits States to validate all titles issued between January 1, 1994 and December 23, 1996 on land which was the subject of freehold or leasehold title. Homestake cannot predict the extent to which the new law will impact its operations, but it is generally expected that the new law will facilitate and accelerate resolution of many native title issues and eliminate some uncertainties. There are a number of native title claims relating to the area of Homestake's 50% owned Kalgoorlie operations, but the validity of those claims has not been determined. In any event, all of the mining leases with respect to active mining operations at Kalgoorlie are pre-1994 leases and therefore native title claims will not affect their validity. There also are native title claims 64 relating to areas in which Homestake's other Australian mining operations are conducted, but the validity of these claims also has not been determined. In any event, with the one exception described below, all of the other production mining leases are pre-1994 leases and their validity is not affected by native title claims. One production mining lease was granted between January 1 and March 15, 1995, when Western Australia did not comply with the requirement of negotiation in granting these titles. Although there have been no decisions on the point to date, titles granted during that period may be open to challenge on native title grounds. If such titles are found to be invalid due to native title, the State of Western Australia has indicated that it will facilitate regrants and pay any compensation due to aggrieved native title parties. Some of Homestake's exploration tenements in Australia are subject to multiple native title claims. Should Homestake be successful in its exploration activities in these areas and seek to convert its interests to mining leases, it will be necessary to comply with the right to negotiate provisions of the Native Title Act and any agreement reached as a result of negotiations may include provisions with respect to payment of compensation by Homestake to the native title claimants. If agreement cannot be reached and the matter has to be determined by the National Native Title Tribunal, the National Native Title Tribunal is entitled to include, in its determination as to whether or not the titles may be granted, conditions with respect to compensation of native title claimants. Under certain circumstances the negotiation process and grants of title will be subject to the jurisdiction of State bodies. The requirements for negotiation and the possibility of a requirement to pay compensation may result in delay and increased costs for mining in the affected mining areas. Canada In the Delgamuukw decision in December 1997, the Supreme Court of Canada (the "Supreme Court") affirmed that aboriginal tribal groups continue to have aboriginal rights in lands in British Columbia used or occupied by their ancestors in 1846. Those rights may vary from rights of limited use up to aboriginal title. The decision has created uncertainty regarding property rights in Canada (including mineral and other resource rights), particularly in British Columbia and other areas where treaties were not concluded with aboriginal groups. The Supreme Court stated these principles in broad terms, and did not apply them to any particular lands. The decision also did not address how aboriginal rights or title are to be reconciled with property and tenure rights previously sold or granted by the government. The Supreme Court did confirm that the extent of the aboriginal rights (including whether the rights rise to the level of aboriginal title) will depend on, among other things, the extent of prior aboriginal use and occupation. The Supreme Court also stated that, depending on the nature of the aboriginal rights, consultation with and compensation to (and possibly consent of) aboriginal groups may be required in connection with sales of government-owned land or granting of mining, forestry and other rights to use government-owned land. The Supreme Court indicated that rights of compensation derive from the government's fiduciary obligations to the aboriginal groups. The application of the principles enunciated in the decision will not be possible until subsequent decisions provide clarification, and the application of these principles to any particular land will not be possible until the exact nature of historical aboriginal use and occupancy and the resulting rights in the particular property have been determined. The British Columbia government has initiated a process for the negotiation of treaties to resolve outstanding issues of aboriginal rights and title in British Columbia, under the authority of the B.C. Treaty Commission. To date, 51 aboriginal groups have commenced negotiations under 65 the B.C Treaty Commission process. Some aboriginal groups have withdrawn from negotiations and commenced litigation since Delgamuukw. The position of the provincial government is that it will not negotiate treaties if the claims are being litigated in the courts. No treaties have yet been ratified under this process. On August 4, 1998, the government of British Columbia and the government of Canada initialled a treaty with the Nisga'a Nation negotiated under a separate process. Before it comes into effect the Nisga'a treaty requires ratification by the Nisga'a Nation and legislation by both the federal and the provincial governments. The Nisga'a treaty includes provisions granting fee simple title to an area of Crown land (Treaty title lands), confirmation of non-exclusive aboriginal rights over an extended area, provisions for payment of compensation, and provisions for the establishment of a Nisga'a government. The ratification process has not yet been completed and is the subject of public debate and challenges as to constitutional validity. None of Homestake's operations or exploration properties are located in the area subject to the Nisga'a treaty. It is the policy of the British Columbia government that lands held in fee simple by third parties will not be affected by treaty negotiation and that the province will respect the terms of all legal interests in Crown lands and resources including leases and licenses. However, where there are legal interests in Crown lands which, under a treaty, become Treaty title lands, and where those legal interests have termination dates, subject to extensions or renewals, the province will likely decline to grant further extensions or renewals. The Nisga'a treaty contemplates that future rights and interests within the Treaty title lands will be subject to negotiation with the Nisga'a government and to potential payment of fees, royalties or other charges to the Nisga'a government. Any confirmation by treaty of non-exclusive aboriginal rights on Crown land will mean the continuation of certain limitations and procedural requirements (such as consultation and possibly consent) on the disposition of Crown land and resources. There are aboriginal claims that extend to the areas of British Columbia in which the Eskay Creek and Snip mines are located. These mining operations are conducted under government mining leases which grant the exclusive right to mine. There has not been any determination of the existence of any valid claim of aboriginal rights or title in these areas. Homestake does not expect any interruption of its existing mining operations in British Columbia, and Homestake does not believe that its other Canadian operations will be materially adversely affected by aboriginal claims. However, Homestake expects that future Canadian activities, including exploration and development of new mines, could be slowed and could be adversely affected, depending on future legal developments in this area and the extent of aboriginal rights in any particular property. United States There are no native title issues for Homestake's properties in the United States. CAUTIONARY STATEMENTS This Report contains certain information relating to Homestake that is based on the beliefs of management, as well as assumptions made by and information currently available to management. Any statements made in this Report that are not historical in nature, including statements preceded by the words "anticipate," "believe," "estimate," "expect," "intend," "will" 66 and similar expressions, as they relate to Homestake, are forward-looking statements (as such term is defined in the United States Private Securities Litigation Reform Act of 1995). Estimates of reserves, future production and future cash costs per ounce of gold-equivalent production are also forward-looking statements. The purpose of these cautionary statements is to identify certain important factors and assumptions on which forward-looking statements may be based or which could cause actual results to differ materially from those expressed in forward-looking statements. The important factors and assumptions set forth below should be read in conjunction with "Risk Factors" herein. Reserves Gold and silver reserves reported by Homestake reflect estimated quantities and grades of gold and silver in deposits and in stockpiles of mined material that Homestake believes can be mined, processed and sold at prices sufficient to recover the estimated future cash costs of production, remaining investment, and anticipated additional capital expenditures. Estimates of costs of production are based on current and projected costs taking into account past experience and expectations as to the future. Estimated mining dilution is factored into reserve calculations. Reserves are reported as general indicators of the life of mineral deposits. Reserves should not be interpreted as assurances of mine lives or of the profitability of current or future operations. Reserves are estimated for each property based upon factors relevant to each deposit including drilling results, past experience with the property, experience of the persons making the reserve estimates and many other factors. Reserve estimation is an interpretive process based upon available data, and the actual quality and other characteristics of ore deposits cannot be known until mining has taken place. Changes in reserves over time generally reflect (i) efforts to develop additional reserves, (ii) depletion of existing reserves through production, (iii) actual mining experience, (iv) continued testing and development of additional information and (v) price and cost forecasts. Grades of ore actually processed may be different from the stated reserve grades because of geologic variations in different areas mined, mining dilution, losses in processing and other factors. Recovery rates vary with the metallurgical and other characteristics and grade of ore processed. Actual quality and other characteristics of ore deposits, gold and silver prices, and costs of production will vary from the assumptions used to develop reserve estimates. Such differences may be material. Gold and silver reserve calculations for properties operated by Homestake are prepared by Homestake. Gold and silver reserve calculations for properties not operated by Homestake are based on information provided to Homestake by the operator. Homestake periodically reviews such information but does not independently confirm the information provided by these operators. Homestake's gold reserves at December 31, 1998 and 1997 are based on an assumed price of $325 per ounce and $350 per ounce, respectively. Silver reserves at December 31, 1998 and 1997 are based on an assumed price of $5.00 per ounce. Actual quality and characteristics of ore deposits and gold and silver prices will differ from the assumptions used to develop reserves. Such differences may be significant. Homestake's sulfur reserves represent the quantity of sulfur in the Main Pass 299 deposit for which geological, engineering and marketing data give reasonable assurance of recovery and sale under projected economic and operating conditions at prices sufficient to cover the estimated 67 future cash costs of production, and estimated future capital expenditures. Homestake's proven oil reserves at Main Pass 299 are the estimated quantity of crude oil and condensate which geological and engineering data give reasonable assurance of recovery and sale under projected operating conditions at prices sufficient to cover the estimated future cash costs of production, the remaining investment, and estimated future capital expenditures. The estimates are based on limited reservoir and engineering data. The reserve estimates are based on information provided by the operator. The operator principally relies on oil reserve estimations performed by third-party petroleum engineers. In the third quarter of 1997, Homestake wrote off its entire investment in the sulfur mine in light of the continued depressed market for sulfur. Estimates of Production Estimates of future production and mine life for particular properties are derived from annual mining plans that have been developed based on, among other things, mining experience, reserve estimates, assumptions regarding ground conditions and physical characteristics of ores (such as hardness and presence or absence of certain metallurgical characteristics), and estimated rates and costs of production. Actual production may vary from estimates for a variety of reasons, including risks and hazards of the types discussed above, actual ore mined varying from estimates of grade and metallurgical and other characteristics, mining dilution, strikes and other actions by labor at unionized locations, restrictions imposed by government agencies and other factors. Estimates of production from properties not yet in production or from operations that are to be expanded are based on similar factors (including, in some instances, feasibility reports prepared by company personnel and/or outside consultants) but, as such estimates do not have the benefit of actual experience, there is a greater likelihood that actual results will vary from the estimates. Mineralized Material Mineralized material is gold-bearing material that has been physically delineated by one or more of a number of methods including drilling, underground work, surface trenching and other types of sampling. This material has been found to contain a sufficient amount of mineralization of an average grade of metal or metals to have economic potential that warrants further exploration evaluation. While this material is not currently or may never be classified as reserves, it is reported as mineralized material only if the potential exists for reclassification into the reserves category. This material has established geologic continuity, but cannot be classified in the reserves category until final technical, economic and legal factors have been determined and the project containing the material has been approved for development. Estimates of Operating Costs and Capital Costs; Capital Projects Estimates of cash costs for mining operations are developed based on past experience, reserve and production estimates, anticipated mining and ground conditions, metallurgical recoveries, estimated costs of materials, supplies and utilities, exchange rates and other items. Estimates of amortization of noncash costs are based on total capital costs and reserve estimates and may change at least annually based on actual amounts of unamortized capital and changes in reserve estimates. If the net book value of mining operations exceeds the fair value, usually determined based on the estimated future undiscounted cash flows from that mine, then an impairment loss based on the discounted cash flows would be recognized as an expense in the period in which such evaluation is made. 68 Estimates for reclamation and environmental remediation costs are developed based on existing and expected legal requirements, past reclamation experience, cost estimates provided by company employees and third parties and other factors. Estimates also reflect assumptions with respect to actions of government agencies, including exercise of discretion and the amount of time government agencies may take in completing processes required under applicable laws and regulations. As a result, final costs may vary significantly from estimates. Homestake periodically reevaluates reclamation cost estimates and reclamation reserves to take account of such factors. Estimates of future capital costs are based on a variety of factors and may include past operating experience, estimated levels of future production, estimates by and contract terms with third-party suppliers, expectations as to government and legal requirements, feasibility reports (which may be prepared by company personnel and/or outside consultants) and other factors. Capital cost estimates for new projects under development generally are subject to greater uncertainties than additional capital costs for existing operations. Estimated periods for completion of capital projects are based on many factors, including experience in completing capital projects, and estimates provided by and contract terms with contractors, engineers, suppliers and others involved in design and construction of projects. Estimates also reflect assumptions with respect to factors beyond the control of Homestake, including, but not limited to, the time government agencies may take in processing applications, issuing permits and otherwise completing processes required under applicable laws and regulations. Actual time to completion may vary significantly from estimates. Estimates of exploration costs are based upon many factors such as past exploration costs, estimates of the level and cost of future activities, and assumptions regarding anticipated results on each property. Actual costs may vary during the year as a result of such factors as actual exploration results (which could result in increasing or decreasing expenditures for particular properties), changed conditions, and acquisitions and dispositions of property. Taxes The Canadian statutory tax rate, including federal and provincial income tax and mining tax is approximately 49%. The applicable United States tax rate is 21% (20% alternative minimum tax plus 1% state tax). The Australian statutory rate is 36%. Homestake's operations are conducted in a number of jurisdictions, with differing rates of taxation, but substantially all of Homestake's revenues come from the United States, Canada and Australia. Homestake's reported tax rate varies from the statutory rate because of certain differences between the tax laws and the accounting treatment of income and expenditures. For example, as a result of the acquisition of the minority interests in Prime, there will be an increase in the basis of mining assets for financial reporting purposes that will not be deductible for Canadian tax purposes. The problem is partially mitigated by the FASB 109 deferred tax purchase accounting adjustments established at the time of purchase. In addition, some of Homestake's foreign exploration costs are expensed for accounting purposes but are not yet deductible for tax purposes. Therefore, the tax benefit related to those expenditures cannot be recognized until there is sufficient taxable income generated in the jurisdictions where such expenditures are incurred. Certain Canadian accounting expenses cannot be deducted in calculating the mining tax. 69 Homestake also has limited ability to utilize foreign tax credits in calculating its United States income tax. Homestake's overall effective tax rate is dramatically impacted by the geographic mix of its pretax income and losses. A greater proportion of income in a high tax jurisdiction, like Canada, can cause the consolidated effective tax rate to rise. Homestake's overall effective tax rate also can fluctuate significantly during a period of low gold prices, because the tax rate is affected by the ratio of tax expense to pretax income. Low pretax income or pretax losses can produce unusually high or unusually low effective tax rates (including the possibility of negative rates). This can occur if mining and income tax expense continue to accrue on profitable mines in high tax jurisdictions while losses are incurred in low tax jurisdictions. The tax expense in the high tax jurisdiction is not fully offset by the tax benefit from losses generated in the low tax jurisdictions. As a result, as the income and tax expenses from all jurisdictions are blended into a consolidated total, the overall effective rate is disproportionately impacted. CUSTOMERS Sales to individual customers exceeding 10% of Homestake's 1998 consolidated revenues are stated below. Homestake believes that the loss of any of these customers would not have a material adverse impact on Homestake because of the active worldwide market for gold.
1998 1997 ($ in thousands) Customer A $120,100 B 108,000 $100,000 C 99,200 143,000 D 75,600 -
CREDIT FACILITIES See note 13 "Long-term Debt" to the consolidated financial statements on page 48 of the 1998 Annual Report to Shareholders for details of the Company's credit facilities. Such information is hereby incorporated by reference. 70 EMPLOYEES The number of full-time employees at December 31, 1998 of Homestake and its subsidiaries was:
Homestake mine (1) 377 McLaughlin mine 102 Ruby Hill mine 92 Nickel Plate mine 12 Eskay Creek mine 107 Snip mine 155 Plutonic mine 146 Darlot mine 64 Lawlers mine 54 Agua de la Falda mine (1) 47 United States corporate staff and other 86 Canada exploration and corporate staff 29 Australian exploration and corporate staff 93 United States exploration 24 Uranium 8 Chile exploration and corporate staff 29 ---------------- Total 1,425
The number of full-time employees (excluding contractors' employees) at December 31, 1998 in jointly-owned operations in which Homestake participates was:
Kalgoorlie Consolidated Gold Mines Pty Ltd (1) 379 Williams Operating Corporation 595 Round Mountain mine 662 Teck-Corona Operating Corporation (1) 243 Pinson Mining Company 66 Marigold Mining Company 88 Main Pass 299 177 Mt Morgans mine 1 Peak Hill mine 20 ---------------- Total 2,231 1. Operations where a portion of the employees are represented by a labor union.
Labor relations at all locations are believed to be good. At the Homestake mine, a new five-year labor contract was signed in May 1998. The union contract at the David Bell mine expired in October 1998. Negotiations for a new contract at the David Bell mine are continuing and an application for conciliation is proceeding. 71 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their ages at December 31, 1998, their business experience and principal occupations during the past five years and their business backgrounds are: Jack E. Thompson - Chairman since July 1998, Chief Executive Officer since May 1996 and President since August 1994, age 48. He was Chief Operating Officer from August 1994 until May 1996, and from August 1994 to June 1995, he was also Chairman of Prime. He was Executive Vice President, Canada of the Company and President of Prime from 1992 through August 1994. He also was President of North American Metals Corp. from 1988 until 1993. He is a mining engineer with over 28 years of experience in mining and mine management. Lee A. Graber - Vice President, Corporate Development since 1983, age 51. From 1980 to 1983, he was Manager, Corporate Development and Planning. He has over 28 years of experience in finance and corporate development. Wayne Kirk - Vice President, General Counsel and Secretary since September 1992, age 55. He was a partner in Thelen, Marrin, Johnson & Bridges from 1976 to 1992. He has practiced law for 30 years. Gregory A. Lang - Vice President, Australian Operations since January 1999, age 43. He was Vice President, U.S. and International Operations from August 1998 to December 1998, Vice President, Development from March 1997 to August 1998, Vice President of Homestake International Minerals Limited from June 1996 until March 1997, General Manager, Project Development from January 1996 until June 1996 as well as General Manager of the Ruby Hill project from October 1994 through June 1996, and General Manager of the Nickel Plate mine from 1993 until October 1994. He joined Homestake in 1992 as Resident Manager of the Santa Fe mine, a position he had held with International Corona Corporation since 1988. He is a mining engineer with over 21 years of experience in mining and mine management. Gillyeard J. Leathley - Senior Vice President, Operations since July 1997, age 61. He was Vice President, Operations from May 1995 until July 1997. He joined Homestake in 1992 as Vice President, Canadian Operations. Prior to joining Homestake, he was Senior Vice President, Operations for International Corona Corporation from 1986 to September 1992. He has over 41 years of experience in mining and mine management. Donald W. T. Lewis - Vice President, Evaluations since March 1997, age 41. He was Director, North American Exploration/Evaluations from January 1996 until March 1997. He joined Homestake in 1992 as Director, Project Generation. Prior to joining Homestake he was Exploration Manager - Western Canada for International Corona Corporation from 1989 until 1992. He is a geologist with more than 19 years of professional experience. William F. Lindqvist - Vice President, Exploration since August 1995, age 56. He rejoined Homestake from Newcrest Mining Company, where he was Executive General Manager, Exploration. He was Vice President, Exploration at Homestake from 1990 through 1992. He is a geologist with more than 28 years of professional experience. 72 Stephen A. Orr - Vice President, Investor Relations since August 1998, age 43. He was the Vice President, U.S. Operations from December 1996 to August 1998, General Manager of the Homestake mine from January 1995 until December 1996, and was Operations Manager from 1993 to 1995 and Manager, Mine Engineering from 1992 to 1993. He was a Financial Analyst in the Corporate Finance Department from 1990 to 1992. He has been with Homestake since 1981 and has over 21 years of experience in mining and mine management. David W. Peat - Vice President and Controller since December 1995, age 46. He was Controller of the Company from 1992 through November 1995. Prior to joining Homestake in 1992, he was Vice President, Controller for International Corona Corporation. He is a chartered accountant with over 22 years of accounting and finance experience. Walter T. Segsworth - Vice President, North American Operations since March 1999, age 49. He also is President and Chief Executive Officer of HCI and was Vice President, Canada from April 1998 to March 1999 and was Vice President and Chief Executive Officer of Prime from April 1998 through December 1998. Prior to joining Homestake, he was President, Chief Executive Officer and Director of Westmin Resources Limited in Vancouver until it was acquired in early 1998. Before joining Westmin in 1990 he was employed by Noranda Limited in a number of positions of increasing responsibility. He is a mining engineer with more than 25 years of professional experience. Richard A. Tastula - Vice President, Australia since August 1995, age 55. He has been Managing Director of Homestake Gold of Australia Limited since 1993, and was Director of Operations from 1991 to 1993. For 23 years prior to that time, he held various positions with Western Mining Corporation, Limited. He became Managing Director of Plutonic in April 1998 when Homestake acquired Plutonic. He has over 33 years of experience in mining and mine management. Michael L. Carroll - Treasurer since April 1997, age 45. He has been with Homestake since 1991, originally as Director of Taxes. Prior to joining Homestake, he was Assistant Vice President of Bond International Gold Inc. Before joining Bond, he was Director of Taxes for St. Joe Minerals Corporation. He has over 21 years of accounting, finance and tax experience. No officer is related to any other officer by blood, marriage or adoption. Officers are elected to serve until the next annual meeting of the Board of Directors at which officers are elected or until their successors are chosen. No arrangement or understanding exists between any officer and any other person under which any officer was elected. ITEM 2 - PROPERTIES See Item 1 - Business. ITEM 3 - LEGAL PROCEEDINGS Certain environmental proceedings in which Homestake or its subsidiaries are or may become parties are discussed under the caption "Environmental Matters." 73 In October 1997, HCI and Prime entered into an agreement with Inmet Mining Corporation ("Inmet") to purchase the Troilus mine in Quebec for $110 million plus working capital. In December 1997, HCI and Prime terminated the agreement after determining that, on the basis of due diligence studies, conditions to closing the arrangement would not be satisfied. On February 23, 1998, Inmet filed suit against Prime and HCI in the British Columbia Supreme Court, disputing the termination of the agreement, and alleging that Prime and HCI had breached the agreement. Inmet seeks specific performance or, in the alternative, equitable damages. Homestake believes that the agreement with Inmet was terminated properly and that the action by Inmet is without merit. Homestake intends to defend this action vigorously. Homestake and its subsidiaries are defendants in various legal actions in the ordinary course of business. In the opinion of management, such matters will be resolved without material adverse effect on the Homestake's financial condition, results of operations or cash flow. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 1, 1998 at a Special Meeting of Stockholders, Homestake Mining Company stockholders approved a Restated Certificate of Incorporation. The Restated Certificate increased the number of authorized shares of Homestake Common Stock from 250,000,000 to 450,000,000, increased the number of authorized shares of Series A Preferred Stock from 2,500,000 to 4,500,000, created one share of Special Voting Stock and made certain technical changes, primarily to reflect the existence of the Special Voting Stock. The restated certificate provided Homestake with additional authorized shares which permitted Homestake to acquire the minority interests in Prime. The Special Voting Stock was issued to Montreal Trust Company of Canada, in trust for the holders of the HCI Exchangeable Shares, and provides the mechanism for holders of HCI Exchangeable Shares to receive voting rights in Homestake Mining Company. At the December 1, 1998 Special Meeting, Homestake's stockholders also approved an Outside Directors' Stock Compensation Plan that provides for external directors to receive a portion of their compensation in Homestake common stock. Stockholder votes were as follows: Restated Certificate of Incorporation
Votes For Votes Against Abstentions Non-Votes 118,294,460 16,092,719 819,490 35,556,668 1998 Outside Directors' Stock Compensation Plan Votes For Votes Against Abstentions Non-Votes 163,842,374 4,621,467 2,299,496 -0-
74 PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS a. The common stock of Homestake Mining Company is registered and traded principally on the New York Stock Exchange under the symbol "HM." It is also listed and traded on the Australian Stock Exchange and in Switzerland on the Basel, Geneva and Zurich stock exchanges under the same symbol. HCI Exchangeable Shares are listed and traded in Canada on the Toronto stock exchange under the symbol "HCX". b. The number of holders of common stock of record as of March 15, 1999 was 21,228. The number of holders of HCI Exchangeable Shares of record as of March 15, 1999 was 75. c. Information about the range of sales prices for the common stock and the frequency and amount of dividends declared during the past two years appears in the tables on pages 58 and 59 in the Company's 1998 Annual Report to Shareholders. The tables setting forth sales prices and dividends are hereby incorporated by reference. Information about certain restrictive covenants under the Company's line of credit appears in note 13 entitled "Long-term Debt" on page 48 in the Notes to Consolidated Financial Statements in the Company's 1998 Annual Report to Shareholders. Such information is hereby incorporated by reference. d. Reference is hereby made to the note 17 entitled "Shareholders' Equity" beginning on page 52 in the Notes to Consolidated Financial Statements in the Company's 1998 Annual Report to Shareholders. Such information is hereby incorporated by reference. e. The Registrant did not sell any securities during 1998 that were not registered under the Securities Act of 1933 except as follows: (i) Plutonic Resources Limited Acquisition. Homestake issued 64,355,692 shares of its Common Stock to acquire Plutonic Resources Limited. The shares were issued effective as of April 30, 1998. These shares were issued without registration in reliance upon an exemption under Section 3(a)(10) of the Securities Act after a fairness hearing by the Supreme Court of New South Wales. A proxy statement for Homestake Mining Company was filed with the Commission in respect of a vote by the holders of Common Stock of Homestake Mining Company to approve the transaction. (ii) Acquisition of minority interest in Prime Resources Group Inc. Homestake issued 16,672,304 shares of its Common Stock, and Homestake Canada Inc. issued 11,139,045 of its Exchangeable Shares to acquire the outstanding shares of Prime Resources Group Inc. not already owned by Homestake and its subsidiaries. The shares were issued effective as of December 3, 1998. These shares were issued without registration in reliance upon an exemption under Section 3(a)(10) of the Securities Act after a fairness hearing by the Supreme Court of British Columbia. A proxy statement for Homestake Mining Company was filed with the Commission in respect of a vote by the holders of Common Stock of Homestake Mining Company to authorize additional shares of Capital stock needed to complete the transaction. Each Homestake Canada Inc. 75 Exchangeable Share is exchangeable at any time for one share of Homestake Mining Company Common Stock. The Homestake Mining Company Common Stock issuable on exchange for Homestake Canada Inc. Exchangeable Shares were registered under the Securities Act of 1933. ITEM 6 - SELECTED FINANCIAL DATA A summary of selected consolidated financial data of the Company and its subsidiaries for the five-year periods ended December 31, 1998 appears on page 59 in the Company's 1998 Annual Report to Shareholders. The summary of selected consolidated financial data is hereby incorporated by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations covering the three year periods ended December 31, 1998 appears on pages 28 through 35 in the Company's 1998 Annual Report to Shareholders and is hereby incorporated by reference. ITEM - 7 (a) MARKET RISK DISCLOSURES See notes 2 and 20 to the consolidated financial statements at December 31, 1998 for additional information regarding the Company's precious metals and foreign currency hedging programs and the future adoption of Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities". Such information is hereby incorporated by reference. Gold And Silver Risk Disclosures The results of the Company's operations are affected significantly by the market price of gold. Gold prices are influenced by numerous factors over which the Company has no control, including expectations with respect to the rate of inflation, the relative strength of the United States dollar and certain other currencies, interest rates, global or regional political or economic crises, demand for gold for jewelry and industrial products, and sales by holders and producers of gold in response to these factors. Homestake's current hedging policy provides for the use of forward sales contracts to hedge up to 30% of each of the following ten year's expected annual gold production, and up to 30% of each of the following five year's expected annual silver production, at prices in excess of certain targeted prices. The policy also provides for the use of combinations of put and call option contracts to establish minimum floor prices. 76 At December 31, 1998 the Company had gold forward sales and option contracts outstanding as follows:
Expected Maturity or Transaction Date ---------------------------------------------------------------- Fair There- Total or Value (US$ 1999 2000 2001 2002 2003 after Average millions) (1) ---------- ----------- ---------- --------- --------- ---------- ------------ -------------- US $ denominated contracts: Forward sales contracts: $59.1 Ounces 109,920 85,080 95,000 95,000 75,000 460,000 Average price ($ per oz.) $415 $430 $441 $457 $481 $443 Put options owned: $ 1.2 Ounces 100,000 30,000 130,000 Average price ($ per oz.) $293 $350 $306 Call options written: Ounces 100,000 15,000 115,000 Average price ($ per oz.) $304 $395 $316 Australian $ denominated contracts (2): Forward sales contracts: $ 5.1 Ounces 24,800 24,800 24,800 24,800 50,800 150,000 Average price (US$ per oz.) $322 $322 $322 $322 $322 $322 Put options owned: $ 7.6 Ounces 120,000 120,000 120,000 360,000 Average price (US$ per oz.) $309 $318 $327 $318 (1) Fair values are based on market quotations for similar financial instruments. (2) Expressed in US dollars at an exchange rate of A$ = US$0.6112
At December 31, 1998 the Company had forward sales contracts outstanding for approximately 7.2 million ounces of silver for delivery during 1999 through 2001 at an average price of $6.28 per ounce. The fair value of these contracts at December 31, 1998, based on market quotations for similar financial instruments, was $7.7 million Foreign Currency Risk Disclosures Significant portions of the Company's operations are located in Australia and Canada. The Company's profitability is impacted by fluctuations in those countries' currency exchange rates relative to the United States dollar. Under the Company's foreign currency protection program, the Company has entered into a series of foreign currency option contracts which establish trading ranges within which the United States dollar may be exchanged for Australian and Canadian dollars. 77 At December 31, 1998 the Company had Canadian and Australian foreign currency option contracts outstanding as follows:
Expected Maturity or Transaction Date --------------------------------------------- Fair Total or Value (US$ 1999 2000 2001 Average millions) (1) ------------- ------------- ------------ ------------ ------------- Canadian $ / US $ option contracts: $ (13.6) US $ covered (thousands) $138,000 $89,420 $59,110 $286,530 Average put exchange rate (2) 0.69 0.69 0.66 0.68 Average call exchange rate (3) 0.72 0.72 0.69 0.71 Australian $ / US $ option contracts: $ (10.4) US $ covered (thousands) $92,000 $68,620 $23,000 $183,620 Average put exchange rate (2) 0.66 0.64 0.60 0.64 Average call exchange rate (3) 0.69 0.67 0.63 0.67 (1) Fair values are based on market quotations for similar financial instruments. (2) Assuming exercise at the expiration date, the Company would exchange US dollars for Canadian or Australian dollars at the put exchange rate if the spot exchange rate was below the put exchange rate. (3) Assuming exercise at the expiration date, the Company would exchange US dollars for Canadian or Australian dollars at the call exchange rate if the spot exchange rate was above the call exchange rate.
The Company does not require or place collateral for its foreign currency and precious metals hedging derivatives. However, the Company minimizes its credit risk by dealing with only major international banks and financial institutions. Other Financial Instrument Risk Disclosures The carrying values of the Company's long-term debt and other financial instruments approximated their estimated fair values at December 31, 1998 (see notes 13 and 16 to the consolidated financial statements at December 31, 1998). The Company's $150 million 5.5% convertible subordinated notes mature in June 2000 and the fair value of this debt has been estimated to approximate its carrying value due to the relatively short time until maturity and the provision that the Company can redeem this debt at any time at par value. The fair value of borrowings under the pollution control bonds and the Company's cross-border credit facility have been estimated to approximate their carrying values as these instruments bear interest at prevailing market rates. The Australian dollar-denominated borrowings under the cross-border credit facility are held by the Company's Australian subsidiaries whose functional currency is the Australian dollar. Therefore the reported liability balance, as expressed in the US dollar reporting currency of Homestake, will fluctuate as the Australian to US dollar exchange rate changes. 78 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's 1998 Annual Report to Shareholders includes the Company's consolidated balance sheets as of December 31, 1998 and 1997 and related statements of consolidated operations, consolidated shareholders' equity, consolidated cash flows and consolidated comprehensive income (loss) for each of the three years in the period ended December 31, 1998 and the independent auditors' report thereon, and certain supplementary financial information. The following are hereby incorporated by reference from the Company's 1998 Annual Report to Shareholders at the pages indicated: Statements of Consolidated Operations (page 36) Consolidated Balance Sheets (page 37) Statements of Consolidated Shareholders' Equity (page 38) Statements of Consolidated Cash Flows (page 39) Statements of Consolidated Comprehensive Income (Loss) (page 40) Notes to Consolidated Financial Statements (pages 41 - 56) Report of Independent Auditors (page 57) Quarterly Selected Data (page 58) ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEMS 10, 11, 12 AND 13 In accordance with General Instruction G (3), Items 10, 11, 12 and 13 (with the exception of certain information pertaining to executive officers, which is included in Part I hereof) have been omitted from this report since a definitive proxy statement is being filed with the Securities and Exchange Commission and furnished to shareholders pursuant to Regulation 14A. The information contained in the proxy statement relating to directors, executive compensation, security ownership and certain relationships (other than the performance graph and Compensation Committee report contained therein) is hereby incorporated by reference. 79 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORMS 8-K (a) 1. Financial Statements: Refer to Part II, Item 8. 2. Financial Statement Schedules: Schedules for the years ended December 31, 1998, 1997, and 1996 - II Valuation and Qualifying Accounts Report of Independent Auditors Schedules not listed are omitted because they are not required or because the required information is included elsewhere in this report. 3. Exhibits 3.1 Restated Certificate of Incorporation of Homestake Mining Company (incorporated by reference to Exhibit 3.6 to the Registrant's Form 8-K dated December 10, 1998.) 3.2 Bylaws (as amended through March 5, 1999) of Homestake Mining Company. 3.3 Homestake Canada Inc. Exchangeable Share Provisions (incorporated by reference to Appendix D to the Registrant's Proxy Statement dated as of October 20, 1998). 3.4 Voting, Support and Exchange Trust Agreement in respect of Homestake Canada Inc. Exchangeable Shares (incorporated by reference to Appendix E to the Registrant's Proxy Statement dated as of October 20, 1998). 3.5 Rights Agreement dated October 16, 1987 (incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A dated October 16, 1987). 3.6 Amendment No. 1 dated as of October 15, 1997 to the Rights Agreement dated as of October 16, 1987 (incorporated by reference to Exhibit 4 to the Registrant's Form 8-A/A filed on October 16, 1997). 3.7 Amendment No. 2 dated as of December 3, 1998 to the Rights Agreement dated as of October 16, 1987 (incorporated by reference to Exhibit 6 to the Registrant's Form 8-A/A filed on December 4, 1998). 3.8 Rights Agreement dated as of December 3, 1998, between Homestake Canada Inc., Homestake Mining Company and Montreal Trust Company of Canada as Rights Agent (incorporated by reference to Exhibit 5 to the Registrant's Form 8-A/A filed on December 4, 1998). 80 4.1 Indenture dated as of January 23, 1993 between Homestake Mining Company, Issuer and The Chase Manhattan Bank, N.A., Trustee, with respect to U.S. $150,000,000 principal amount of 5 1/2% Convertible Subordinated Notes due January 23, 2000 (incorporated by reference to Exhibit 4.2 to the Registrant's Form 8-K Report dated as of June 23, 1993). 10.1 Credit Agreement dated as of July 24, 1998 between the Registrant, the Lenders, The Chase Manhattan Bank of Canada as Canadian Administrative Agent for Lenders, Chase Securities Australia Limited, as Australian Administrative Agent for Lenders, Chase Securities Inc., as Arranger, The Chase Manhattan Bank, as Administrative Agent for Lenders, and Deutsche Bank A.G., as Documentation Agent for Lenders (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q dated as of August 13, 1998). 10.2 First Amendment and Waiver to Credit Agreement dated as of September 14, 1998 among the Registrant, the Lenders, Deutsche Bank A.G. as Documentation Agent, The Chase Manhattan Bank of Canada as Canadian Administrative Agent, Chase Securities Australia Limited, as Australian Administrative Agent, Chase Securities Inc., as Arranger, and The Chase Manhattan Bank, as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q dated November 13, 1998). 10.3 Second Amendment, dated as of October 16, 1998, to Credit Agreement among the Registrant, the Lenders, Deutsche Bank A.G., as Documentation Agent, The Chase Manhattan Bank of Canada as Canadian Administrative Agent, Chase Securities Australia Limited, as Australian Administrative Agent, Chase Securities Inc., as Arranger, and The Chase Manhattan Bank, as Administrative Agent (incorporated by reference to Exhibit 10.3 to the Registrant's Form 10-Q dated November 13, 1998). 10.4 Agreement dated July 4, 1995 between Noranda Exploration Company Limited, Teck Corporation and International Corona Resources Limited (a subsidiary of International Corona Corporation, now Homestake Canada Inc. and a subsidiary of Registrant), relating to development of the Quarter Claim mine (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-K Report for the year ended December 31, 1995). * 10.5 Form of Change of Control Severance Plan of Registrant (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-K Report for the year ended December 31, 1995). * 10.6 Deferred Compensation Plan of Homestake Mining Company effective October 1, 1995 (incorporated by reference to Exhibit 10.3 to the Registrant's Form 10-K Report for the year ended December 31, 1995). * 10.7 Amended and Restated Executive Supplemental Retirement Plan of Homestake Mining Company effective August 1, 1995 (and as modified January 23, 1998). * 10.8 Supplemental Retirement Plan of Homestake Mining Company, amended and restated effective as of January 1, 1990 (including November 29, 1990 modification) (incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-K Report for the year ended December 31, 1995). * 10.9 Master Trust under the Homestake Mining Company Deferred Compensation Plans as of December 5, 1995 (incorporated by reference to Exhibit 10.6 to the Registrant's Form 10-K Report for the year ended December 31, 1995). * 10.10 Retirement plan for outside directors of the Registrant dated as of July 21, 1994 (incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K dated March 20, 1995). 81 10.11 Combination Implementation Agreement dated December 22, 1997 between Homestake Mining Company and Plutonic Resources Limited (incorporated by reference to Appendix A to the Registrant's Preliminary Proxy Statement dated January 26, 1998 and as amended March 11, 1998). 10.12 Arrangement Agreement dated as of September 28, 1998 among Prime Resources Group Inc., Homestake Canada Inc., Homestake Canada Holdings Company and Homestake Mining Company (incorporated by reference to Appendix b to the Registrant's Proxy Statement dated as of October 20, 1998). 10.13 Agreement dated October 9, 1991 between the Registrant and Chevron Minerals Ltd. (incorporated by reference to Exhibit 10(b) to the Registrant's Form 10-K for the year ended December 31, 1991). 10.14 Guarantee dated December 18, 1991 between the Registrant and Chevron Minerals Ltd. (incorporated by reference to Exhibit 10(c) to the Registrant's Form 10-K for the year ended December 31, 1991). 10.15 Agreement dated May 4, 1990 for the sale of the Registrant's 42.5% partnership interest in The Doe Run Company (incorporated by reference to Exhibit 28(a) to the Registrant's Form 8-K dated May 18, 1990). 10.16 Purchase and sale agreement dated January 15, 1989 between the Registrant's subsidiary, Homestake Gold of Australia Limited, and North Kalgoorlie Mines Limited (and Group Companies) and Kalgoorlie Lake View Pty. Ltd. (incorporated by reference to Exhibit 10(g) to the Registrant's Form 10-K for the year ended December 31, 1989). 10.17 Agreement Amending Joint Venture Agreement made 19 June 1996 between Homestake Gold of Australia Limited, North Kalgoorlie Mines Pty Ltd. and Kalgoorlie Consolidated Gold Mines Pty Ltd. (incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K for the year ended December 31, 1996). 10.18 Joint Operating Agreement dated May 1, 1988 between Freeport-McMoRan Resources Partners, IMC Fertilizer, Inc. and Felmont Oil Corporation (a subsidiary of Registrant, now named Homestake Sulphur Company) relating to the Main Pass Block 299 sulfur project (incorporated by reference to Exhibit 10.16 to the Registrant's Form 10-K for the year ended December 31, 1992). 10.19 Amendment No. 1 dated July 1, 1993 to Joint Operating Agreement between Freeport McMoRan Resources Partners, IMC Fertilizer, Inc. and Homestake Sulphur Company (incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-K for the year ended December 31, 1993). 10.20 Amendment No. 2 dated November 30, 1993 to Joint Operating Agreement between Freeport McMoRan Resources Partners, IMC Fertilizer, Inc. and Homestake Sulphur Company (incorporated by reference to Exhibit 10.9 to the Registrant's Form 10-K for the year ended December 31, 1993). 10.21 Letter dated June 17, 1996, amending Amendment No. 1 to Joint Operating Agreement between Freeport McMoran Resource Partners, IMC Fertilizer Inc. and Homestake Sulphur Company (incorporated by reference to Exhibit 10.18 to the Registrant's Form 10-K for the year ended December 31, 1996). 10.22 Amended and Restated Project Agreement (David Bell Mine) dated as of April 1, 1986 among Teck Corporation, International Corona Resources Ltd. (a subsidiary of International Corona Corporation, now Homestake Canada Inc. and a subsidiary of Registrant), Teck-Hemlo Inc., Corona-Hemlo Inc. (a subsidiary of International Corona Corporation, now Homestake Canada Inc. and a subsidiary of Registrant) (incorporated by reference to Exhibit 10.17 to the Registrant's Form 10-K for the year ended December 31, 1992). 82 10.23 Amended and Restated Operating Agreement (David Bell Mine) among Teck Corporation, International Corona Resources Ltd. (a subsidiary of International Corona Corporation, now Homestake Canada Inc. and a subsidiary of Registrant), Teck Mining Group Limited, Teck-Corona Operating Corporation, Teck-Hemlo Inc. and Corona-Hemlo Inc. (a subsidiary of International Corona Corporation, now Homestake Canada Inc. and a subsidiary of Registrant) (incorporated by reference to Exhibit 10.18 to the Registrant's Form 10-K for the year ended December 31, 1992). 10.24 Project Agreement (Williams Mine) dated August 11, 1989 among Teck Corporation, Corona Corporation (now Homestake Canada Inc. and a subsidiary of Registrant) and Williams Operating Corporation (incorporated by reference to Exhibit 10.19 to the Registrant's Form 10-K for the year ended December 31, 1992). 10.25 Operating Agreement (Williams Mine) dated August 11, 1989 among Teck Corporation, Corona Corporation (now Homestake Canada Inc. and a subsidiary of Registrant), Teck Mining Group Limited and Williams Operating Corporation (incorporated by reference to Exhibit 10.20 to the Registrant's Form 10-K for the year ended December 31, 1992). 10.26 Shareholders' Agreement dated August 11, 1989 among Corona Corporation (now Homestake Canada Inc. and a subsidiary of Registrant), Teck Corporation and Williams Operating Corporation (incorporated by reference to Exhibit 10.21 to the Registrant's Form 10-K for the year ended December 31, 1992). * 10.27 Share Incentive Plan effective July 1, 1988 of International Corona Corporation (now Homestake Canada Inc. and subsidiary of Registrant), as amended October 22, 1991 (incorporated by reference to Exhibit 10.32 to the Registrant's Form 10-K for the year ended December 31, 1992). 10.28 Shareholder Agreement dated January 1, 1989 among Homestake Mining Company, Case, Pomeroy & Company, Inc. and Hadley Case (incorporated by reference to Exhibit 10(a) to the Registrant's Form 10-K for the year ended December 31, 1988). 10.29 Amendment dated March 27, 1992 to Shareholder Agreement dated January 1, 1989 among Homestake Mining Company, Case, Pomeroy & Company, Inc., and Hadley Case (incorporated by reference to Exhibit 10.14 to the 1992 S-4 Registration Statement). * 10.30 Consulting agreement dated July 24, 1992, between Stuart T. Peeler and the Registrant (incorporated by reference to Exhibit 10.36 to the Registrant's Form 10-K for the year ended December 31, 1992). * 10.31 Consulting agreement dated March 1, 1993 between William A. Humphrey and the Registrant (incorporated by reference to Exhibit 10.27 to the Registrant's Form 10-K for the year ended December 31, 1993). * 10.32 Consulting agreement dated as of May 15, 1996 between Harry M. Conger and the Registrant (incorporated by reference to Exhibit 10.30 to the Registrant's Form 10-K for the year ended December 31, 1996). * 10.33 Long Term Incentive Plan of 1983 of Homestake Mining Company (incorporated by reference to Exhibit 10(g) to the Registrant's Registration Statement on Form S-14 dated May 16, 1984). * 10.34 Employees' Stock Option and Share Rights Plan-1988 (incorporated by reference to Exhibit 10(n) to the Registrant's Form 10-K for the year ended December 31, 1987). 83 * 10.35 1996 Stock Option and Share Rights Agreement ("1996 Plan") (incorporated by reference to Exhibit A to the Registrant's Proxy Statement for the 1996 Annual Meeting of Shareholders). * 10.36 Form of Stock Option Agreement under the 1996 Plan. * 10.37 Form of Performance Based Share Agreement under the 1996 Plan. * 10.38 Form of Bonus Share Agreement under the 1996 Plan. * 10.39 Form of Matching Stock Agreement under the 1996 Plan. * 10.40 1998 Outside Directors' Stock Compensation Plan. 11 Computation of Earnings Per Share. 13 Specified Sections from the Company's 1998 Annual Report to Shareholders 21 Subsidiaries of the Registrant. 23 Consent of PricewaterhouseCoopers LLP, Independent Auditors. 27 Financial Data Schedule. * Compensatory plan or management contract. (b) Reports Filed on Form 8-K Two reports on Form 8-K were filed during the fourth quarter of 1998. The report on Form 8-K dated October 2, 1998 was submitted 1) to report a revised exchange ratio for the Homestake acquisition of the minority interests in Prime; 2) to report a revised mining plan for reduced operations at Mt Charlotte mine; 3) to announce the election of a director and related amendment to the bylaws and, 4) to announce that Homestake would record several nonrecurring charges in the 1998 third quarter. The report on Form 8-K dated December 10, 1998 was submitted 1) to report on the results of a Special Meeting of Stockholders and, 2) to announce the completion of the acquisition of the minority interests in Prime Resources Group Inc. 84 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HOMESTAKE MINING COMPANY Date March 17, 1999 By:/s/ Jack E. Thompson ------------------ --------------------- Jack E. Thompson Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Capacity Date /s/ David W. Peat Vice President and Controller March 17, 1999 - ----------------- (Principal Accounting Officer and David W. Peat Acting Principal Financial Officer) (Signatures continued on following page.) 85
Signature Capacity Date /s/ Jack E. Thompson Chairman, President, Chief March 17, 1999 - -------------------- Executive Officer and Director Jack E. Thompson /s/ Gerhard Ammann Director March 17, 1999 - ------------------ Gerhard Ammann Director March 17, 1999 - ---------------------- M. Norman Anderson /s/ Richard R. Burt Director March 17, 1999 - ------------------- Richard R. Burt /s/ Robert H. Clark, Jr. Director March 17, 1999 - ------------------------ Robert H. Clark, Jr. /s/ G. Robert Durham Director March 17, 1999 - ---------------- G. Robert Durham /s/ Douglas W. Fuerstenau Director March 17, 1999 - ------------------------- Douglas W. Fuerstenau /s/ Paul McClintock Director March 17, 1999 - ------------------- Paul McClintock Director March 17, 1999 - --------------------- John Neerhout, Jr. /s/ Peter J. Neff Director March 17, 1999 - ------------------- Peter J. Neff /s/ Stuart T. Peeler Director March 17, 1999 - -------------------- Stuart T. Peeler /s/ Carol A. Rae Director March 17, 1999 - ------------------- Carol A. Rae /s/ Jeffrey L. Zelms Director March 17, 1999 - -------------------- Jeffrey L. Zelms
86 HOMESTAKE MINING COMPANY AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (In thousands)
- --------------------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E BALANCE AT BALANCE BEGINNING AT END OF DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS PERIOD - ---------------------------------------------------------------------------------------------------------------------------------- DEFERRED TAX ASSET VALUATION ALLOWANCES(1) Year ended December 31, 1998 $ 107,920 $ 105,707 $ 6,452 (2) $ 207,175 Year ended December 31, 1997 $ 100,671 $ 27,042 $ 19,793 (3) $ 107,920 Year ended December 31, 1996 $ 94,167 $ 22,078 $ 15,574 (4) $ 100,671 (1) For further information see Note 6, Income Taxes, in the Notes to the Consolidated Financial Statements. (2) Deductions in 1998 relate to realization of certain deferred tax assets and reduction of foreign tax loss carryovers. (3) Deductions in 1997 relate to a reduction of the Company's foreign tax credit carryover, realization of certain deferred tax assets and utilization of foreign tax loss carryovers. (4) Deductions in 1996 relate to the realization of certain United States deferred tax assets and to utilization of foreign tax loss carryovers.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Homestake Mining Company: Our audits of the consolidated financial statements referred to in our report dated February 1, 1999 of the 1998 Annual Report to Shareholders of Homestake Mining Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP - ----------------------------- PricewaterhouseCoopers LLP San Francisco, California February 1, 1999 EXHIBIT INDEX
Exhibit Method of Filing 3.2 Bylaws (as amended through March 5, 1999) Filed herewith electronically 10.7 Amended and Restated Executive Supplemental Retirement Plan of Homestake Mining Company Effective August 1, 1995 (and as modified January 23, 1998) Filed herewith electronically 10.36 Form of Stock Option Agreement Filed herewith electronically 10.37 Form of Performance Based Share Agreement Filed herewith electronically 10.38 Form of Bonus Share Agreement Filed herewith electronically 10.39 Form of Matching Stock Agreement Filed herewith electronically 10.40 1998 Outside Directors' Stock Compensation Plan Filed herewith electronically 11 Computation of Earnings per Share Filed herewith electronically 13 Specified Sections of the 1998 Annual Report to Shareholders Filed herewith electronically 21 List of Subsidiaries Filed herewith electronically 23 Consent of PricewaterhouseCoopers LLP, Independent Auditors Filed herewith electronically 27 Financial Data Schedule Filed herewith electronically
EX-3.2 2 AMENDED BYLAWS EXHIBIT 3.2 HOMESTAKE MINING COMPANY (A DELAWARE CORPORATION) BYLAWS As amended through March 5, 1999 ARTICLE I MEETING OF STOCKHOLDERS SECTION 1. The annual meeting of the Company shall be held on such day and at such time as the Board of Directors shall determine, for the election of Directors and the transaction of such other business as properly come before such meeting. SECTION 2. Special meetings of the stockholders may be called at any time by the Chairman of the Board, by the President, by the Board of Directors of the Company, by a committee of the Board of Directors which has been duly designated by the Board of Directors and whose powers and authority, as provided in a resolution of the Board of Directors or in the Bylaws of the Company include the power to call such meetings, or by stockholders having not less than seventy-five percent (75%) of the total voting power of all outstanding shares of stock of the Company, but such special meetings may not be called by any other person or persons; provided, however, that if and to the extent that any special meeting of stockholders may be called by any other person or persons specified in any provisions of the Restated Certificate of Incorporation or any amendment thereto, or any certificate filed under Section 151(g) of the General Corporation Law of Delaware (or its successor statute as in effect from time to time hereafter), then such special meeting may also be called by the person or persons in the manner, at the times and for the purposes so specified. SECTION 3. All notices of meetings of stockholders shall be sent or otherwise given in accordance with Section 4 of this Article I not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (2) in the case of the annual meeting, those matters which the Board of Directors, at the time of giving the notice, intends to present for action by the stockholders, and (3) in the case of any meeting at which directors are to be elected, the names of the nominees intended at the time of the mailing of the notice to be presented by management for election. SECTION 4. Notice of any meeting of stockholders shall be given either personally or by mail or other written communication, charges prepaid, addressed to the stockholder at the address of the stockholder appearing on the books of the Company, or given by the stockholder to the Company for the purpose of notice. If no such address appears on the Company's books or is given, notice shall be deemed to have been given if sent to that stockholder by mail or other written communication to the Company's principal executive office, or, if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a stockholder at the address of that stockholder appearing on the books of the Company is returned to the Company by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the stockholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if these shall be available to the stockholder on written demand of the stockholder at the principal executive office of the Company for a period of one year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting may be executed by the Secretary, any Assistant Secretary, or any transfer agent of the Company giving the notice, and if executed shall be filed and maintained in the minute book of the Company. SECTION 5. Every annual meeting and every special meeting of the stockholders shall be held at such place within or without the State of Delaware as may be designated as the place for holding such meeting by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the principal executive office of the Company. SECTION 6. Except as otherwise provided by statute of by the Restated Certificate of Incorporation, the presence in person or by proxy of the holders of a majority in voting power of the shares of capital stock of the Company at the time issued and outstanding and entitled to vote at any meeting shall constitute a quorum for the transaction of business. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority in voting power of the shares required to constitute a quorum. If such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time until a quorum shall by present or represented. At any adjourned meeting at which a quorum shall be present or represented any business which might have been transacted at the meeting which was adjourned may be transacted and with the same effect. If after the adjournment a new record date is fixed for the adjourned meeting or if the adjournment is for more than thirty (30) days, notice of the adjourned meeting shall be given as in the case of an original meeting, but otherwise no further notice of the time and place of the adjourned meeting need be given other than by announcement at the meeting at which such adjournment is taken. SECTION 7. Except as otherwise provided by statute or by the Restated Certificate of Incorporation, every stockholder of record shall be entitled at any meeting of stockholders to one vote on each matter submitted to a vote of the stockholders for every share of stock standing in the name of such person on the books of the Company and qualified to vote. The stockholders' 2 vote shall be by written ballot unless the requirement therefor is dispensed with by the Board of Directors. On any matter other than elections of directors, any stockholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the stockholder fails to specify the number of shares which the stockholder is voting affirmatively, it will be conclusively presumed that the stockholder's approving vote is with respect to all shares that the stockholder is entitled to vote. All matters (other than the election of directors) shall, unless otherwise provided by the Restated Certificate of Incorporation, these By-laws, or the rules and regulations of any stock exchange applicable to the Company or its securities, be decided by the affirmative vote of the holders of a majority in voting power of the shares of stock of the Company which are present in person or by proxy and entitled to vote thereon. SECTION 8. In the event the Board of Directors fixes a day for the determination of stockholders of record entitled to vote as provided in Section 1 of Article XIV of these Bylaws, then only persons in whose names shares entitled to vote stand on the stock records of the Company on such day shall be entitled to vote. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. If no record date is fixed, the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board of Directors may fix a new record date for the adjourned meeting. SECTION 9. At all meetings of the stockholders, stockholders may vote either in person or by one or more agents authorized by a proxy. A proxy which does not state that it is irrevocable shall continue in full force and effect unless (1) revoked before the vote pursuant to that proxy, by a revocation delivered to the Company stating that the proxy is revoked, or by the granting of a subsequent proxy by, or attendance at the meeting and voting by, the person granting the proxy, or (2) written notice of the death or incapacity of the maker of that proxy is received by the Company before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of three (3) years from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware (or its successor statute as in effect from time to time hereafter). 3 SECTION 10. The transaction of business at any meeting of stockholders, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after a meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of minutes of the meeting. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of stockholders. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by law to be included in the notice of meeting but not so included if that objection is expressly made at the meeting. SECTION 11. No action shall be taken by the stockholders except at an annual or special meeting of the stockholders. SECTION 12. At any annual meeting of stockholders, only such business shall be conducted as shall have been brought before the annual meeting (1) by or at the direction of the chairman of the meeting or (2) by any stockholder who is a holder of record at the time of the giving of the notice provided for in this Section 12, who is entitled to vote at the meeting, and who complies with the procedures set forth in this Section 12. For business properly to be brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in proper written form to the Secretary. To be timely, a stockholder's notice must be received at the principal executive offices of the Company not less than 75 days nor more than 180 days prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days earlier or more than 30 days later than such anniversary date, notice by the stockholder to be timely must be so received not earlier than the 180th day prior to such annual meeting and not later than the close of business on the later of the 75th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. To be in proper written form, a stockholder's notice to the Secretary shall set forth in writing as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; and (ii) the name and address, as they appear on the Company's books, of the stockholder proposing such business. The foregoing notice requirements shall also be deemed satisfied by a stockholder if the stockholder has notified the Company of his or her intention to present a proposal at an annual 4 meeting and such stockholder's proposal has been included in a proxy statement that has been prepared by management of the Company to solicit proxies for such annual meeting; provided, however, that if such stockholder does not appear or send a qualified representative to present such proposal at such annual meeting, the Company need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Company. ARTICLE II DIRECTORS SECTION 1. Subject to the limitations prescribed by statute or by the Restated Certificate of Incorporation or these Bylaws as to action to be authorized or approved by the stockholders, all the powers, rights and privileges of the Company shall be exercised by or under the direction of, and the business and affairs of the Company shall be managed under the direction of, its Board of Directors. Directors shall be elected by the stockholders of the Company, and at each election the persons receiving the greatest number of votes, up to the number of directors then to be elected, shall be the persons then elected. The election of directors is subject to any provisions in the Restated Certificate of Incorporation relating thereto, including any provisions for a classified Board. SECTION 2. Except as otherwise provided by statute or by the Restated Certificate of Incorporation, any vacancy in the Board of Directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected and qualified. SECTION 3. All meetings of the Board of Directors shall be held at the principal office of the Company or at any other place within or without the State of Delaware as the Board of Directors may from time to time fix therefor. Any meeting of the Board of Directors, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another, and all such directors shall be deemed to be present in person at the meeting. SECTION 4. A regular meeting of the Board of Directors shall be held, if a quorum be present, in each and every year immediately after the adjournment of the annual meeting of stockholders for the purpose of electing officers and transacting such other business as might be transacted at any regular meeting of the Board. Regular meetings of the Board of Directors, of which no notice shall be required to be given, shall be held in every odd-numbered month in accordance with a schedule established by the Board of Directors from time to time, except that the scheduled date of any meeting may be changed by the Chairman of the Board or the President, in the discretion of either, provided that notice of such change shall be given to all directors personally or by mail, telegram, telecopy or other means of electronic communication 5 or telephone at least one (1) week prior to such scheduled date and at least four (4) days prior to the date upon which such meeting is to be held. SECTION 5. Special meetings of the Board of Directors shall be called by the Secretary at the direction of the Chairman of the Board, the President, or a majority of the directors. Notice of the time and place of any special meeting of the Board of Directors shall be given by serving the same personally or by telegram, telecopy or other means of electronic communication or telephone at least two (2) hours before such meeting. Each member of the Board of Directors shall, by writing filed with the Secretary, designate his post office address, telecopier number, electronic mail address, telephone number or other relevant delivery information to which notices of meetings of the Board of Directors of this Company shall be directed, and in the event of any change therein shall promptly inform the Company thereof. SECTION 6. At all meetings of the Board of Directors a majority of the directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and every act and decision done or made by a majority of the directors present at a regular meeting or a duly called special meeting held at which a quorum is present shall be the act of the Board of Directors, unless a greater number is required by statute or by the Restated Certificate of Incorporation. In the absence of a quorum, a majority of the directors present at any meeting may adjourn the meeting from time to time until and not past the time fixed for the next regular meeting of the Board of Directors. Notice of the time and place of holding an adjourned meeting need not be given to directors absent from the meeting which was adjourned if the time and place of the adjourned meeting are fixed at the meeting which was adjourned. SECTION 7. By resolution of the Board of Directors, a fixed sum may be allowed each director attending a meeting of the Board of Directors. Members of the Executive Committee or other committees may likewise be allowed fixed sums as determined by the Board of Directors. All directors shall be reimbursed for any reasonable expenses which they incur as such for attendance at meetings of the Board of Directors or committees or otherwise. Directors who are not also officers or employees of the Company may receive such compensation for their services as directors as may be fixed or determined by the Board of Directors. Except as provided herein, no director shall be compensated for his services as a director, but any director may serve the Company in any other capacity and receive compensation therefor. SECTION 8. The transaction of business at any meeting of the Board of Directors, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice and consent to holding the meeting or an approval of the minutes thereof, which waiver, consent, or approval shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting before or at its commencement, the lack of notice to that director. Any action required or permitted to be 6 taken by the Board of Directors may be taken without a meeting, if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. SECTION 9. The authorized number of Directors is hereby set at thirteen until such number is changed by a Bylaw or amendment thereof duly adopted by the stockholders in accordance with the Restated Certificate of Incorporation or by the Board of Directors amending this Section Nine. The Board of Directors shall be divided into three classes of directors elected for terms of three years each. Until so changed, Class I shall consist of four directors, Class II shall consist of four directors, and Class III shall consist of five directors. SECTION 10. The Board of Directors may from time to time designate from one to three former directors of this Company as Consultants to the Board of Directors. The term of office of each such Consultant to the Board of Directors shall terminate immediately after the adjournment of each annual meeting of stockholders of the Company, or at such other time as may be determined by the Board of Directors. A Consultant to the Board of Directors may attend meetings of the Board of Directors with the privilege of participating in all discussions, but without the right to vote, and shall be eligible for appointment as Consultant to committees of the Board of Directors, but with no right to vote. Consultants shall not be included in determining the presence of a quorum. Other rights, privileges and duties of Consultants to the Board of Directors and any compensation to be paid to Consultants to the Board of Directors may be provided from time to time by resolution of the Board of Directors. ARTICLE III EXECUTIVE AND OTHER COMMITTEES SECTION 1. The Board of Directors may, by resolution or resolutions passed by a majority of the directors, appoint from their number an Executive Committee of one or more directors, who shall make recommendations to the Board. The Executive Committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors including, without limitation, the power and authority to declare a dividend, to authorize the issuance of stock and to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware (or its successor statute as in effect from time to time hereafter); but shall not have the power or authority to: (a) amend the Restated Certificate of Incorporation (except that a committee may, to the extent authorized in resolutions providing for the issuance of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware (or its successor statute as in effect from time to time hereafter), fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, distribution of assets of the Company, or the conversion into or the exchange of such shares for shares of any other class or classes or any other series of the same of any other class or classes of stock of the Company), (b) adopt an agreement of merger or consolidation under Section 251 or 252 of the General Corporation Law 7 of Delaware (or its successor statute as in effect from time to time hereafter), (c) recommend to the stockholders the sale, lease or exchange of all or substantially all of the Company's property and assets, (d) recommend to the stockholders a dissolution of the Company or a revocation of a dissolution, or (e) amend the Bylaws of the Company. The Board of Directors shall elect a Chairman of the Executive Committee, and in his absence the Chairman of the Board shall act as Chairman of the Executive Committee, ex officio, in his place, and in the absence of the Chairman of the Executive Committee and the Chairman of the Board, the President of the Company shall act as Chairman of the Executive Committee, ex officio, in their places. SECTION 2. A majority of the Executive Committee shall constitute a quorum for the transaction of business at any meeting thereof duly called and held. The Board of Directors shall have the power to provide by resolution for regular meetings of the Executive Committee and to specify the time and place of holding such regular meetings. Special meetings of the Executive Committee may be called at any time by the Chairman of the Board, the President, or by a majority of the members of the Executive Committee and notice of all such special meetings shall be given in the manner provided in Section 5 of Article II. Meetings of the Executive Committee may be held at the principal office of the Company, or, if authorized by resolution of the Board of Directors, such meetings may, by unanimous consent of the members of the committee, be held at any other place. The Board of Directors shall have the power to prescribe rules for the government of the Executive Committee not inconsistent with the provision of these Bylaws. In the absence of any such prescription by the Board of Directors of by the Bylaws, the regular and special meetings and other actions of the Executive Committee shall be governed by the provisions of Article II applicable to meetings and actions of the Board, with such changes in the context of these Bylaws as are necessary to substitute the Executive Committee and its members for the Board of Directors and its members. SECTION 3. The Board of Directors may, by resolution or resolutions passed by a majority of the directors, appoint from their number such other committees consisting of one or more directors as the Board of Directors may deem advisable. The Board may designate one or more directors as alternate members of any committee, who may replace any absent member at the meeting of the committee. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have all the authority of the Board of Directors, except with respect to the matters set forth in (a) through (e) of Section 1 of this Article III and shall be governed in accordance with Section 2 of this Article III. SECTION 4. The Executive and other committees shall keep records of their proceedings and report the same to the Board of Directors whenever so required. 8 ARTICLE IV OFFICERS SECTION 1. The officers of this Company shall be a Chairman of the Board, a President, a Vice President, a Secretary, a Treasurer and a Controller, who shall be elected by and hold office at the pleasure of the Board of Directors. The Board of Directors may also elect such additional officers, if any, as it shall deem expedient, including, without limitation, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents and one or more assistant officers. Only members of the Board of Directors shall be eligible for the office of the Chairman of the Board and the office of President, but no other officer need be a member of the Board of Directors. Any two or more offices may be held by the same person. The compensation of officers shall be fixed and determined by the Board of Directors from time to time. SECTION 2. The Board of Directors, at its first meeting after each annual meeting of stockholders, shall elect a Chairman of the Board, a President, a Vice President, a Secretary, a Treasurer and a Controller and at such time or from time to time may elect or appoint such other officers and agents as it shall deem expedient. SECTION 3. Except as otherwise provided by law, or in these Bylaws, or by resolutions of the Board of Directors, each of such officers shall serve until the date appointed by these Bylaws for the next annual meeting of stockholders and until his successor is elected or appointed and shall have qualified. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. SECTION 4. The Board of Directors, in its discretion, may require any officer, agent or employee of the Company to give security for the faithful performance of his duties in such form and amount and with or without one or more of such sureties as the Board of Directors may determine. SECTION 5. Nothing in this Article IV or elsewhere in these Bylaws shall prevent the Board of Directors from authorizing, or the Company from executing, a contract for the employment of a person as an officer of the Company for a period of more than one year. ARTICLE V CHAIRMAN OF THE BOARD AND PRESIDENT SECTION 1. The Chairman of the Board shall, if present, preside at all meetings of the stockholders and of the Board of Directors, and shall have such other powers and duties as shall be prescribed by the Board of Directors or by law. He shall be a member ex officio of all committees, except the Audit, Compensation and Nominating Committees. 9 SECTION 2. The President shall, if present and in the absence of the Chairman of the Board, preside at all meetings of the stockholders and of the Board of Directors, and shall have such other powers and duties as shall be prescribed by the Board of Directors or by law. He shall be a member ex officio of all committees, except the Audit, Compensation and Nominating Committees. ARTICLE VI POWERS AND DUTIES OF THE CHIEF EXECUTIVE OFFICER AND HEAD OF THE COMPANY Either the Chairman of the Board or the President, as may be determined from time to time by the Board of Directors, shall have the powers and duties of the Chief Executive Officer and head of the Company. Such powers and duties shall include the general control and management of the business and affairs of the Company; the responsibility for seeing that all orders and resolutions of the Board of Directors are carried into effect; the exclusive authority to execute bonds, mortgages and other contracts requiring a seal, under the seal of the Company, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Company; and membership ex officio in all committees, except the Audit, Compensation and Nominating Committees. ARTICLE VII EXECUTIVE VICE PRESIDENTS AND VICE PRESIDENTS SECTION 1. Executive Vice Presidents, if any shall have been elected and be in office, shall have and may exercise the powers and duties of the President in the absence or inability of the latter and such other powers and duties as may be assigned to them by the Board of Directors. SECTION 2. The Vice President or Vice Presidents (including any Senior Vice Presidents) shall have and exercise the powers and duties of the Executive Vice President in the absence or inability of the President and the Executive Vice Presidents and such other powers and duties as may be assigned to them respectively by the Board of Directors. SECTION 3. The Vice President, Finance shall be the Chief Financial Officer of the Company. ARTICLE VIII SECRETARY AND ASSISTANT SECRETARIES SECTION 1. The Secretary shall have custody of the seal of the Company, and when authorized by the Board of Directors, he shall affix the same to any instrument requiring it, and 10 when so affixed it shall be attested by his signature or by the signature of the Treasurer or an Assistant Secretary. He shall attend all meetings of the stockholders and of the Board of Directors and keep the minutes of all proceedings in a book or books to be kept for that purpose at the principal office of the Company or at such other place as the Board of Directors may from time to time determine, and he shall perform like duties for the Executive and other committees when required. He shall attend to the giving and serving of all notices of the Company, and he shall perform such other duties as may be incidental to his office or as may be assigned to him by the Board of Directors, the Chairman of the Board, the President, or the officer under whose supervision he shall be. SECTION 2. It shall be the duty of the Assistant Secretaries, if any shall have been elected and be in office, to aid the Secretary in the discharge of his duties and to perform such other duties as may be assigned to them by the Board of Directors, the Chairman of the Board, the President, the Vice President, Finance, or the Secretary. ARTICLE IX TREASURER AND ASSISTANT TREASURER SECTION 1. The Treasurer shall have the care and custody of the funds and securities of the Company, except as otherwise determined by the Board of Directors, and shall deposit all such funds and securities of the Company in the name and to the credit of the Company in such depositories and places and subject to withdrawal in such manner as these Bylaws or the Board of Directors may determine. Within established lines of authority, he shall be responsible for the administration of the Company's securities portfolio, pension plans, insurance and employee benefit programs, the keeping of the stock certificate book and such other books and records as the Board of Directors may direct. He shall also have charge of a stock book containing the names of the stockholders and their addresses, the number of shares of stock held by them respectively, the name and date of the certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation, and shall have such other powers and perform such other duties as may be conferred upon or assigned to him by the Board of Directors, the Chairman of the Board, the President, the Vice President, Finance, or the officer under whose supervision he shall be. SECTION 2. It shall be the duty of the Assistant Treasurer, if one shall have been elected and be in office, to aid the Treasurer in the discharge of his duties and perform such other duties as may be assigned to him by the Board of Directors, the Chairman of the Board, the President, the Vice President, Finance, or the Treasurer. 11 ARTICLE X CONTROLLER AND ASSISTANT CONTROLLER SECTION 1. The Controller shall keep or cause to be kept adequate and correct accounts of the corporate properties and business transactions in books belonging to the Company, and he shall disburse the funds of the Company as ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, whenever they may require it, an account of all of his transactions and the financial condition of the Company. He shall be responsible for the administration of programs providing for financial management and budgetary controls of the Company, development of accounting policies and procedures, and use of data processing equipment and the preparation, review and filing of all tax and other financial reports and returns, and he shall have such other powers and perform such other duties as may be conferred upon or assigned to him by the Board of Directors, the Chairman of the Board, the President, the Vice President, Finance, or the officer under whose direct supervision he shall be. SECTION 2. It shall be the duty of the Assistant Controller, if one shall have been elected and be in office, to aid the Controller in the discharge of his duties and to perform such other duties as may be assigned to him by the Board of Directors, the Chairman of the Board, the President, the Vice President, Finance, or the Controller. SECTION 3. The Controller shall be the Chief Accounting Officer of the Company. ARTICLE XI GENERAL MANAGER SECTION 1. The Board of Directors may appoint a General Manager who shall not be an officer of the Company unless the Board shall otherwise determine. SECTION 2. Subject to the supervision and direction of the Chairman of the Board or the President, and in accordance with the policies determined by the Board of Directors, the General Manager shall have power and authority to do and transact and supervise and direct such of the usual and ordinary business of the Company as may be designated by the Chairman of the Board or the President. SECTION 3. The Board of Directors may also appoint an Assistant General Manager to aid the General Manager in the performance of his duties and to perform such other duties as may be required of him by the Chairman of the Board or the President. SECTION 4. The Chairman of the Board or the President may, with the approval of the Board of Directors, appoint managers or superintendents for specific operations that are not 12 related to or included in those assigned to the General Manager, with duties and responsibilities as may be designated by the Chairman of the Board or the President. ARTICLE XII REMOVALS, RESIGNATIONS AND VACANCIES OF DIRECTORS AND OFFICERS SECTION 1. No member of the Board of Directors may be removed without cause and except in compliance with the Company's Restated Certificate of Incorporation. SECTION 2. Any director or officer may resign his office at any time, such resignation to be made in writing and to take effect from the time of its receipt by the Company, unless a different time be fixed in the resignation, and in that event, from the time so fixed. The acceptance of a resignation shall not be required to make it effective. SECTION 3. Any officer elected or appointed by the Board of Directors may be removed at any time with or without cause by the Board of Directors. Any other officer or employee of the Company may be removed at any time with or without cause by the Board of Directors or by any committee or superior officer upon whom such power of removal may be conferred by the Bylaws or by the Board of Directors. SECTION 4. If the office of any director becomes vacant for any cause, such vacancy may be filled for the unexpired portion of the term, if any, by a majority of the remaining directors, though less than a quorum, or by a sole remaining director. ARTICLE XIII CERTIFICATES OF STOCK SECTION 1. Form of Certificate. Certificates for shares of stock of the Company shall be in such form and of such design as the Board of Directors shall prescribe and each certificate for shares issued by the Company shall be signed by the Chairman of the Board, or the President or any Executive Vice President or Vice President and the Secretary or an Assistant Secretary. Any or all of the signatures on the certificate may be facsimile. If any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Company with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. The certificates for shares shall be numbered and registered as they are issued. They shall exhibit the number, date of issuance, name of person to whom issued, designation, if any, the class or series of shares represented thereby, the par value of the shares or a statement that such shares are without par value. SECTION 2. Transfer of Shares. Upon surrender to the Secretary or Transfer Agent of the Company of a certificate for shares, duly endorsed or accompanied by proper evidence of 13 succession, assignment or authority to transfer, a new certificate shall be issued to the person entitled thereto and the old certificate canceled and the transaction recorded upon the books of the Company. SECTION 3. Lost Certificates. The Chairman of the Board or the President and the Secretary or the Assistant Secretary may in their discretion direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Company alleged to have been lost or destroyed upon the production by the person claiming the certificate for shares to be lost or destroyed of satisfactory evidence of the loss or destruction of such certificate or certificates and of the claimant's ownership of the shares of stock represented thereby, together with a bond in favor of the Company, with a surety satisfactory to said officers, in the amount of the then current market value of the stock represented by such allegedly lost certificate or certificates, conditioned upon such claimant and surety indemnifying and saving harmless the Company from all and every cost, charge, expense and liability which it may in any manner incur by reason of the issuance of such new certificate or certificates, and further conditioned upon their surrendering to the Company for cancellation such allegedly lost certificate or certificates in the event of their subsequent discovery; or the Chairman of the Board or President or Secretary may refer any such application for the issuance of a new certificate or certificates to the Board of Directors which shall have the power to direct the issuance of a new certificate or certificates upon submission of such proof and upon such guarantee on the part of the applicant as the Board of Directors may deem satisfactory. ARTICLE XIV GENERAL PROVISIONS SECTION 1. Fixing of Record Date or Closing of Transfer Books. The Board of Directors may fix a time in the future as a record date for the determination of the stockholders entitled to notice of and to vote at any meeting or entitled to receive any dividend or distribution or any allotment of rights or to exercise any rights in respect of any other lawful action. The record date so fixed shall not be more than sixty (60) nor less than ten (10) days prior to the date of such meeting and no more than sixty (60) days prior to any other action. When a record date is so fixed, then, subject to the provisions of the General Corporation Law of Delaware, only stockholders of record at that date shall be entitled to notice of and to vote at the meeting or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Company after the record date. SECTION 2. Dividends. Subject to the provisions of the Restated Certificate of Incorporation relating thereto, if any, dividends may be declared by the Board of Directors at any regular or special meeting of the Board of Directors pursuant to law. Dividends may be paid in cash, in property, or in shares of capital stock, subject to any provisions of the Restated Certificate of Incorporation. 14 SECTION 3. Reserves. Before payment of any dividend there may be set aside out of any funds of the Company available for dividends such sum or sums as the Board of Directors from time to time in their absolute discretion think appropriate as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Company, or for such other purposes as the Board of Directors shall think conducive to the interests of the Company, and the Board of Directors may abolish any such reserve in the manner in which it was created. SECTION 4. Annual Report. The Board of Directors shall cause an annual report to be sent to the stockholders not later than one hundred twenty (120) days after the close of each fiscal year of the Company and at least fifteen (15) days prior to the annual meeting of stockholders to be held during the ensuing fiscal year. SECTION 5. Checks, Drafts and Notes. All checks, drafts and demands for money and notes of the Company shall be signed by such individual or individuals as the Board of Directors may from time to time designate. SECTION 6. Representation of Shares of Other Corporations. The chief executive officer or any other officer or officers authorized by the Board of Directors or the President are each authorized to vote represent, and exercise on behalf of the Company all rights incident to any and all shares of any other corporation or corporations standing in the name of the Company. The authority herein granted may be exercised either by any such officer in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officer. SECTION 7. Seal. The seal of the Company shall consist of a circle bearing on its surface the inscription, "Homestake Mining Company Delaware Incorporated November 28, 1983" SECTION 8. Indemnification. (a) Right of Indemnification. To the fullest extent permitted by the General Corporation Law of Delaware, the Company shall indemnify each director and officer and may indemnify each employee or other agent of the Company against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any action, suit or proceeding arising by reason of the fact that any such person is or was a director, officer, employee or other agent of the company or is or was serving at the request of the Company as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust or other enterprise. 15 (b) Advances of Expenses. Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding arising by reason of the fact that such director or officer is or was a director or officer of the Company or was serving at the request of the Company as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust or other enterprise shall be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified by the Company as authorized in this Section 8. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. The Board of Directors may, with the consent of such director, officer, employee or other agent of the Company, authorize the legal counsel of the Company to represent such person, in any action, suit or proceeding, whether or not the Company is a part to such action, suit or proceeding. (c) Procedure for Indemnification. Any indemnification or advance of expenses required hereunder shall be made promptly, and in any event within sixty (60) days after a written request therefor by a director or officer. The right to indemnification or advances as granted by this Section 8 shall be enforceable by a director or officer in any court of competent jurisdiction, if the Company denies such request, in whole or in part, or if no disposition thereof is made within sixty (60) days. The director's or officer's expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such action shall also be indemnified by the Company. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of expenses where the required undertaking, if any, has been received by the Company) that the claimant has not met the standard of conduct required by law, but the failure of the Company (including its Board of Directors, its independent legal counsel and its stockholders) to have made a determination as to whether indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct shall not be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (d) Other Rights. The indemnification and advancement of expenses provided by or granted pursuant to this Section 8 shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under any law (common or statutory), agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. All rights to indemnification under this Section 8 shall be deemed to be a contract between the Company and each director and officer who serves or served in such capacity at any time while this Section 8 is in effect, and any repeal or modification of this Section 8 or relevant provision of the General Corporation Law of Delaware or any other applicable law shall not in any way diminish any rights to indemnification of such 16 director or officer, or the obligations of the Company arising hereunder prior to such modification or repeal. (e) Insurance. The Company may, but shall not be required to, purchase and maintain insurance on behalf of any person who is or was a director or officer of the Company against any liability asserted against such person and incurred by him or on his behalf in such capacity or as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust or other enterprise, for which such person is or was serving at the request of the Company, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under the provisions of this Section 8, all as the Board of Directors may from time to time deem appropriate. (f) Definitions. For purposes of this Section 8: (i) service as a director, officer, employee or other agent of any corporation, partnership, joint venture, trust or other enterprise in which the Company, directly or indirectly, holds an interest shall be deemed to be service at the request of the Company; (ii) "the Company" shall include in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or other agents, so that any person who is or was a director, officer, employee or other agent of such constituent corporation, or is or was serving at the request of such constituent corporation, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provision of this Section 8 with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued; (iii) "other enterprise" shall include without limitation employee benefit plans; "fines" shall include without limitation any excise taxes assessed on a person with respect to an employee benefit plan; and "serving at the request of the Company" shall include without limitation any service as a director, officer, employee or other agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; (iv) the indemnification and advancement of expenses provided by, or granted pursuant to, this Section 8 shall, unless other wise provided when authorized or 17 ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person; (v) "expenses" shall include all direct and indirect costs, charges and attorneys' fees; and (vi) "action, suit or proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and any appeal therefrom. (g) Effect of Advances. Advances of expenses by the Company as required or authorized by this Section 8 shall not be deemed or interpreted as ratifying, approving or condoning any act or omission by any director, officer or employee of the Company in violation of standards of conduct required by law. (h) Savings Clause. If this Section 8 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify each director and officer of the Company as to expenses, judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding to the fullest extent permitted by any applicable portion of this Section 8 that shall not have been invalidated and to the fullest extent permitted by applicable law. ARTICLE XV AMENDMENT OF BYLAWS These Bylaws may be amended or repealed, or new bylaws may be adopted, (a) by the affirmative vote of the holders of a majority in voting power of the shares of capital stock of the Company entitled to vote thereon or (b) by the affirmative vote of the majority of the Board of Directors at any regular or special meeting. Any Bylaw adopted or amended by the stockholders may be amended or repealed by the Board of Directors. 18 EX-10.7 3 AMENDED & RESTATED EXEC. SUPPL. RET. PLAN EXHIBIT 10.7 AMENDED AND RESTATED EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN Homestake Mining Company Effective August 1, 1995 (and as modified January 23, 1998) HOMESTAKE MINING COMPANY AMENDED AND RESTATED EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN 1. The Amended and Restated Executive Supplemental Retirement Plan (the "Plan") for designated key executives of Homestake Mining Company is effective as of August 1, 1995. 2. General Purpose of Plan This Plan is established to provide supplementary Retirement Benefits for key executives designated by the Compensation Committee of the Board of Directors. 3. Definitions (a) "Affiliate" means any affiliated organizations designated by the Compensation Committee to participate in the Plan. (b) "Board" means the Board of Directors of Homestake Mining Company. (c) "Company" means Homestake Mining Company. (d) "Committee" means the Compensation Committee of the Board, as constituted from time to time, or, in the event there is no such Committee of the Board, means the Board. (e) "Compensation" means all regular base salary; performance bonuses paid under the Homestake Mining Company Bonus Plan; plus any pre-tax reductions of such compensation made at the election of the Member under a Section 401 (k), cafeteria, deferred income or similar plans paid by the Company and Affiliates. All other payments to a Member, such as relocation bonuses, tax equalization payments, fees, commissions, directors fees and payments resulting from or relating to the exercise of stock option or appreciation rights are excluded. (f) "Participant" means a key executive of the Company or Affiliate who receives written notification from the Company that he or she has been designated as a participant of the Plan by the Compensation Committee. 2 (g) "Normal Retirement Date" means with respect to a Member the first day of the calendar month coincident with or next following the first date on which the Member has both attained age sixty-two and completed ten or more continuous years of Service. (h) "Reorganization" means any of the following events: (i) the Company is a party to a merger or consolidation under the terms of which less than 75% of the shares in the resulting company are owned by the shareholders of the Company immediately preceding such events; (ii) at least 75% in fair market value of the Company's assets are sold in a single transaction or series of related transactions; or (iii) at least 25% in voting power of the Company's shares for electing directors are acquired by any one person or group as that term is used in Rule 13d-5 under the Securities Exchange Act of 1934. (i) "Retirement Benefit" means the benefits payable under this Plan, calculated in accordance with Section 4. (j) "Homestake Retirement Plan" means the Homestake Retirement Plan, restated as of January 1, 1989, as it has been and may be amended and restated from time to time. (k) "Service" means all periods of employment with the Company and any Affiliate and any other entity designated by the Company. 4. Retirement Benefit (a) Normal Retirement Benefit--At the Normal Retirement Date a Member who retires at such date shall be entitled to receive a monthly Retirement Benefit equal to the amount determined by multiplying: (i) 4-1/3% by (ii) the complete or fractional years of Service (up to a maximum of fifteen years) by (iii) the average monthly Compensation paid to the Member during the period of his thirty-six consecutive months of highest Compensation (or, if employed for less than thirty-six consecutive months, the period of such Member's actual employment); 3 The monthly Retirement Benefit thus calculated shall be reduced by: (iv) commencing on the Member's attainment of age 65, (x) 50% of the primary insurance amount of United States Social Security which the Member would be entitled to receive if he retired and commenced receipt of benefits at that time, and (y) an amount equal to any reduction for Canada Pension Plan, Quebec Pension Plan and any similar foreign employment related social security plan ("foreign plans") benefits which the Member would be entitled to receive if he retired and commenced receipt of benefits at that time, but only to the extent the Homestake Retirement Plan has been amended prior to the Member's attainment or age 65 to provide for such a reduction in respect of foreign plans from benefits payable under the Homestake Retirement Plan, and (v) benefits from time to time received or receivable before giving effect to any spousal or contingent annuitant benefit election under the Homestake Retirement Plan, the Supplemental Retirement Plan or any other of the Company's pension or retirement plans (not including the Savings Plan), and any disability plan or worker's compensation plan. (b) Early Retirement Benefit--A Member who has attained age fifty-five and has completed ten or more continuous years of Service may elect to retire on the first day of any month prior to the Member's Normal Retirement Date, upon written election filed with, and subject to the approval of, the Compensation Committee. The Compensation Committee, at its discretion, may withhold such approval, but in no event beyond age sixty-two. Upon such retirement, the Member shall be entitled to receive a monthly Retirement Benefit determined as provided in clauses (i), (ii) and (iii) of paragraph (a) above, reduced as follows: (i) by four percent of such amount for each year (prorated on a monthly basis for parts of a year) by which such commencement of benefits precedes the Member's Normal Retirement Date; and (ii) there shall then be made the reductions provided in clauses (iv) and (v) of paragraph (a) above. (c) Postponed Retirement Benefit--A Member who retires after the Normal Retirement Date will receive monthly the same dollar amount of Retirement Benefit that would have been payable had the Member's retirement not been postponed, except that such Member's years of Service shall include all years of Service (up to a maximum of fifteen years) prior to such Member's actual retirement. 4 (d) Surviving Spouse Benefit--If a Member with ten or more continuous years of Service dies after age fifty-five, either before or after retirement, the Member's qualifying spouse will receive a Surviving Spouse Benefit for life if the Member did not, at the time of death, have in effect a valid election to receive an optional form of joint and survivor annuity pursuant to Section 5. A "qualifying spouse" is the spouse of a Member at the Member's death who has been lawfully married to the Member throughout the one-year period ending on the earlier of the Member's death or Normal Retirement Date. The Surviving Spouse Benefit shall commence on the first day of the month following the Member's death and terminate with the payment for the month in which the spouse's death occurs. Such benefit amount shall equal one-half of the Retirement Benefit which would have been payable if the Member had been living and had commenced receipt of benefits on the date of death, reduced by one percent of such benefit for each full year in excess of ten that the date of birth of such surviving spouse occurred after that of the deceased Member. (e) For the purposes of paragraphs (a), (b) and (c) of Section 4, the payment of any benefit provided under this Plan will commence on the first day of the month following the month in which retirement occurs. The final payment will be the payment made on the first day of the month in which death occurs. 5. Optional Forms of Benefits Instead of the Retirement Benefit with Surviving Spouse Benefit provided in Section 4, a Member may elect, effective upon the attainment of age fifty-five with ten or more continuous years of Service, to receive an actuarially determined Retirement Benefit to provide an optional surviving spouse or contingent annuitant benefit, which benefits to a spouse or contingent annuitant shall be paid upon the Member's death, whether before or after retirement. The optional surviving spouse or contingent annuitant benefit shall be actuarially adjusted to take into account the amount to be continued as well as the ages of the spouse or contingent annuitant and the Member. The optional forms of benefits are as follows: (a) Surviving Spouse: The Retirement Benefit may be actuarially reduced to provide a benefit to a qualifying surviving spouse equal to: (i) the benefit the Member would have been entitled to receive, or (ii) two-thirds of the benefit the Member would have been entitled to receive. (b) Contingent Annuitant: With the written consent of a spouse, if any, a member may designate a person other than a qualifying spouse to be a contingent annuitant, in which case the Retirement Benefit will be actuarially reduced to provide a benefit to the contingent annuitant equal to: 5 (i) the benefit the Member would have been entitled to receive, or (ii) two-thirds of the benefit the Member would have been entitled to receive, or (iii) one-half of the benefit the Member would have been entitled to receive. Any actuarial reduction in benefits made pursuant to this Section 5 shall be made in accordance with the actuarial assumptions used in computing alternative forms of benefits under the Homestake Retirement Plan at the time that such reduction is made. 6. Benefit Increases It is anticipated that the retirement benefits payable to Member hereunder will exceed those to which Member is entitled pursuant to the Homestake Retirement Plan, the Supplemental Retirement Plan or any other retirement plans from time to time in effect and its employment policies generally and, in the event that Member becomes entitled to retirement benefits under said plans and policies which benefits at any time or from time to time are greater than those herein provided, no additional benefits shall be payable under this Plan. If at any time the Company increases the benefits paid to persons then retired under the Company's retirement plans generally or to then retired senior executives generally, such increases shall be applied pro rata to all of the Retirement Benefits payable to Members hereunder. For purposes of this section 6, any annual adjustment to the Member's retirement benefits under the Homestake Retirement Plan will also apply to Retirement Benefits payable hereunder. 7. Termination of Service A Member who ceases to be employed by the Company for any reason (other than retirement or early retirement under the provisions of Section 4 of this Plan), after attaining age fifty-five and having completed ten or more continuous years of Service shall be entitled, with the approval of the Compensation Committee as provided in Section 4(b), to receive early Retirement Benefits as provided in Section 4(b). With the approval of the Compensation Committee the terminated Member may elect to begin receiving benefits on the Normal Retirement Date, such benefit will be calculated based on the Member's actual years of continuous service and earnings, up to the date of termination. Any Member who ceases to be employed by the Company or Affiliates for any reason before completion of ten continuous years of Service and age fifty-five shall cease to be a Member and shall not be entitled to received any benefits under this Plan except for any benefits to which such Member may become entitled through re-employment. 6 8. Withdrawal Election A Member or his or her Beneficiary, as the case may be, may elect, at any time after he or she commences to receive benefits payments under this Plan, to receive those payments in a lump sum, based on the actuarial equivalent of his or her remaining vested benefits less a 10% penalty (as described below). No election to partially accelerate benefits shall be allowed. The Member shall make this election by giving the Plan Administrator written notice of the election in a form determined from time to time by the Plan Administrator. The penalty shall be equal to 10% of the lump sum actuarial equivalent of the Member's remaining vested benefit. Any actuarial reduction in benefits made pursuant to this Section 8 shall be made in accordance with the actuarial assumptions used in computing lump sum payments under the Homestake Retirement Plan at the time such lump sum payment is made. The Member shall be paid the reduced Benefit Amount within 60 days of his or her election. Once such is paid, the Member's participation in the Plan shall terminate and the Member shall not be eligible to participate in the Plan in the future. 9. Suspension or Termination of Benefits If the Compensation Committee determines that a Member otherwise entitled to benefits under the Plan is engaged actively or proposes to engage actively, directly or indirectly in activities which may be detrimental to the interests of the Company, it shall give such person written notice of the grounds for its determination. The Compensation Committee shall afford such person an opportunity to submit to it within 60 days thereafter a written statement of reasons why such person considered such determination to be incorrect. After considering such written statement and any other information which it determines to be relevant, the Compensation Committee shall have the right to terminate benefits otherwise payable under the Plan or to suspend them for such period as it determines to be appropriate. The Compensation Committee shall advise such person of its action. Any determination by the Compensation Committee to suspend or terminate benefits shall be final and binding upon the Member. 10. Trust The Company may establish one or more grantor Trusts and the Company and Affiliates shall at least annually transfer over to the Trust such assets as the Company and Affiliates determine, in their sole discretion, are necessary to provide for the Company's and Affiliates future liabilities created under the Plan, provided the assets of the Trust shall be considered part of the general assets of the Company and Affiliates subject to the claims of its general creditors. 7 The provisions of the Plan shall govern rights of a Member to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Members and the creditors of the Company and Affiliates to the assets transferred to the Trust. The Company and Affiliates shall at all times remain liable to carry out its obligations under the Plan. The Company's and Affiliate's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust. 11. Administration and Interpretation This Plan is intended to qualify for exemption from Parts II, III and IV of the Employee Retirement Income Security Act of 1974, as amended, as a plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees under Sections 201(2), 301(a)(3) and 401(a)(1) of such Act, and shall be so interpreted. This plan shall be administered by the Compensation Committee. The Committee shall have the discretion and authority to make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Plan and decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit and may, from time to time, consult with counsel who may be counsel to the Company. The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. The Company and Affiliates shall indemnify and hold harmless each member of the Committee against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by that member. To enable the Committee to perform its functions, the Company and Affiliates shall supply full and timely information to the Committee on all matters relating to the compensation of its Members, the date and circumstances of the retirement, disability, death or termination of employment of its Members, and such other pertinent information as the Committee may reasonably require. 8 12. Termination of Plan The Company and Affiliates reserves the right to change or terminate the Plan, or both, at any time. The Company and Affiliates shall promptly notify Members of any change or termination. Any change or termination will not affect benefits vested on the effective date of change or termination, but any benefits or expected benefits not then vested shall be modified or extinguished as the case may be. For this purpose, the Normal Retirement Benefit shall be deemed vested when a Member reaches age sixty-five or both completes ten continuous years of Service and reaches age sixty-two, and the Early Retirement Benefit shall be deemed vested when a Member completes ten continuous years of Service and reaches age fifty-five. 13. Effects of Dissolution, Liquidation or Reorganization (a) Notwithstanding any other provision of the Plan, if the Company is dissolved or liquidated or is a party to a Reorganization and if (i) the Company's successor does not, by operation or law or prior agreement, assume the Company's obligations with respect to the Plan, or (ii) a Member's employment is terminated for any reason or no reason by the Member or by such successor within two years following the occurrence of such dissolution or liquidation, or (iii) a Member's employment is terminated under circumstances described in Section 13(b) within two years following the occurrence of such Reorganization, the benefits of each Member affected thereby under the Plan shall vest fully as if such Member's Service had continued until the Normal Retirement Date (but in no event for more than a total of 15 years of Service) but shall be calculated based on such Member's highest average monthly Compensation over any thirty-six consecutive month period of actual employment prior to the vesting date, or, if employed for less than thirty-six consecutive months at such time, the period of such Member's actual employment. No termination or modification of the Plan shall affect the rights of a Member to then-vested benefits pursuant to the preceding sentence. (b) If a Member's employment is terminated under the following circumstances within two years following the occurrence of a Reorganization, the unvested benefits of such Member under the Plan shall vest fully if: (i) The Member's employment is terminated involuntarily for reasons other than death, disability or discharge for "Good and Sufficient Cause" (as defined below); or (ii) The Member voluntarily chooses to terminate employment for "Good Reason" (as defined below). 9 (c) Benefits so vested pursuant to this Section 13 shall be payable commencing on the later of attainment of age fifty-five or the first day of the month following the vesting event, or at such later time as a Member alone may elect; provided, however, that in computing such benefits the amount computed pursuant to clauses (i), (ii) and (iii) of Section 4(a) hereof, as modified in this Section 13, shall be reduced by 4% for each year (prorated on a monthly basis for parts of a year) by which such commencement of benefits precedes such Member's Normal Retirement Date, and then reduced as provided in clauses (iv) and (v) of Section 4(a). (d) Any Member who is employed by a successor organization shall be entitled to the retirement benefits of such organization without offset of benefits provided under this Plan and to the extent benefits otherwise receivable from such organization are reduced, benefits under this Plan shall be correspondingly increased. (e) As used herein: (i) "Good and Sufficient Cause" means any act of fraud or dishonesty, or conviction of a felony involving moral turpitude or a Member knowingly engaging in acts seriously detrimental to any of the operations of the Company. (ii) Voluntary termination of employment by a Member for "Good Reason" means termination subsequent to a Reorganization resulting from the occurrence of one of the following events without the Member's express written consent: (A) The assignment by the Company to the Member of any duties inconsistent with the Member's positions, duties, responsibilities, and status with the Company immediately prior to the Reorganization, or a reduction in the Member's responsibilities, titles or offices as in effect immediately prior to the Reorganization, or any removal of the Member from or any failure to re-elect the Member to any such positions, except in connection with the involuntary termination of Member's employment for Good and Sufficient Cause, or as a result of the Member's death, disability or retirement, or voluntary termination by the Member for other than Good Reason; (B) A reduction by the Company in the Member's base salary as in effect immediately prior to the Reorganization; (C) The requirement by the Company that the Member be based anywhere other than within a 50-mile radius of the Member's location immediately prior to the Reorganization except for required 10 travel on the Company's business to an extent substantially consistent with the Member's business travel obligations immediately prior to the Reorganization; or (D) The failure by the Company to continue in effect, or a change of the Member's participation or benefits under, any bonus or incentive compensation plan, any employee benefit plan qualified under Section 401(a) of the Internal Revenue Code of 1954, as amended from time to time (the "Code"), any stock ownership, stock purchase, stock option or other equity incentive plan, any life, health, accident, disability or similar plan providing welfare benefits or any plan or program of fringe benefits in which the Member participates immediately prior to the Reorganization, the effect of which would be to materially reduce the Member's benefits under such plans as such existed immediately prior to the Reorganization, or the failure by the Company to provide the Member with the number of paid vacation days to which the Member was entitled in accordance with the Company's general vacation policy in effect immediately prior to the Reorganization. 14. General Provisions Members and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interest or claims in any property or assets of the Company or Affiliate's. With respect to the Plan, any Plan Agreement and the Trust, any and all of the Company's or Affiliate's assets shall be, and shall remain, the general, unpledged unrestricted assets of the Company or Affiliate's, except as provided by the Trust. The Company's or Affiliate's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future. The Company's or Affiliate's liability for the payment of benefits shall be defined only by the Plan. The Company or Affiliate's shall have no obligation to a Member under the Plan except as expressly provided in the Plan. Neither a Member nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable, except that the foregoing shall not apply to any family support obligations set forth in a court order. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Member or any other person, nor be transferable by operation of law in the event of a Member's or any other person's bankruptcy or insolvency. 11 The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between the Company or any Affiliate and the Member. Such employment is an "at will" employment relationship that can be terminated at any time for any reason, with or without cause, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Member the right to be retained in the service of any Company or Affiliate or to interfere with the right of any Company or Affiliate to discipline or discharge the Member at any time. A Member will cooperate with the Company or Affiliate by furnishing any and all information requested by the Company or Affiliate and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as any Company or Affiliate may deem necessary. Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and wherever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. The captions of the articles, sections and paragraphs of this plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. The provisions of this Plan shall be construed and interpreted according to the laws of the State of California. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: Homestake Mining Company Attn: Compensation Committee 650 California Street San Francisco, CA 94108 Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 12 Any notice or filing required or permitted to be given to a Member under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Member. The provisions of this Plan shall bind and inure to the benefit of the Company and Affiliates and their successors and assigns and the Member, the Member's Beneficiaries, and their permitted successors and assigns. The interest in the benefits hereunder of a spouse of a Member who has predeceased the Member shall automatically pass to the Member and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. If a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetency, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Member and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. 15. Distribution in the Event of Taxation If, for any reason, all or any portion of a Member's benefit under this Plan becomes taxable to the Member prior to receipt, a Member may petition the Committee for a distribution of assets sufficient to meet the Participant's tax liability (including additions to tax, penalties and interest). Upon the grant of such a petition, which grant shall not be unreasonably withheld, the Company and Affiliate shall distribute to the Member immediately available funds in an amount equal to the Member's federal, state and local tax liability associated with such taxation (which amount shall not exceed a Participant's accrued benefit under the Plan), which liability shall be measured by using that Member's then current highest federal, state and local marginal tax rate, plus the rates or amounts for the applicable additions to tax, penalties and interest. If the petition is granted, the tax liability distribution shall be made within 90 days of the date when Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under Article 3. 13 16. Claims Procedure If a Member or Beneficiary ("Claimant") believes that he or she is entitled to a benefit or greater benefit as the case may be, under the Plan, the Claimant may submit a signed, written application to the Committee within 90 days of having been denied such benefit. The Claimant will generally be notified of the approval or denial of this application within 90 days of the date that the Committee receives the application. If the claim is denied, the denial will state specific reasons for the denial and the Claimant will have 60 days to file a signed, written request for a review of the denial with the Committee. This request should include the reasons for requesting a review, facts supporting the request and any other relevant comments. The Committee, operating pursuant to its discretionary authority to administer and interpret the Plan and to determine eligibility for benefits under the terms of the Plan, will generally make a final, written determination of the Claimant's eligibility for benefits within 60 days of receipt of the request for review. 17. Arbitration Any controversy between a participant and the Company or Affiliates involving the construction or application of any of the terms, provisions, or conditions of this Plan shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, then in effect, and judgment on the award rendered by the arbitrator(s) may be entered by any court having jurisdiction thereof. The exclusive place of arbitration shall be San Francisco, California. The expenses reasonably incurred by both parties in connection with arbitration, including attorney fees, shall be borne by the Company or Affiliates. IN WITNESS WHEREOF, Homestake Mining Company has adopted this Amended and Restated Executive Supplemental Retirement Plan, effective January 23, 1998. HOMESTAKE MINING COMPANY ___________________________ By: __________________________ Date of Execution Vice President 14 EX-10.36 4 FORM OF STOCK OPTION AGREEMENT EXHIBIT 10.36 Homestake Mining Company _____________, 1999 (Salutation) (First Name) (Last Name) (Company) (Address 1) (Address 2) (City), (State), (Postal Code) Re: Option to Purchase Shares of $1.00 Par Value Common Stock of Homestake Mining Company Dear (Salutation) (LastName): Homestake Mining Company ("Company") hereby grants you an option to purchase (Options) shares of its $1.00 par value common stock at a price of $_____ per share on the following terms: 1. The option is intended to be a non-statutory option that does not satisfy the requirements of Section 422A of the Internal Revenue Code. 2. The option shall expire on the earlier of ___________, 2009 or the occurrence of the first of the following: a. Three months after the termination of your active employment with the company or any affiliate (as hereafter defined) for reason other than retirement, death, disability, or cause. b. Thirty-six months after termination of your active employment with the Company or any affiliate by retirement. c. Thirty-six months after the termination of your active employment with the Company or any affiliate by death or disability. d. Except as provided in paragraph 2.b. and 2.c., six months after termination of your active employment with the Company or any affiliate for any reason other than cause if you should die or become disabled within three months after such termination. e. Immediately upon termination of your active employment with the Company or any affiliate for cause, as determined by the Compensation Committee of the Board of Directors of the Company ("Committee"). For purposes of this agreement, (i) affiliate includes any corporation or other form of enterprise in which the Company has, directly or indirectly, an ownership interest of 50% or more or equivalent power to direct the management and policy of such enterprise by contract or otherwise; (ii) if your employment with the Company or an affiliate terminates and immediately thereafter you become a consultant to the Company or an affiliate, such service may be treated as employment with the Company but only if the Committee in its sole discretion so determines; (iii) any determination by the Committee made in good faith shall be final unless clearly erroneous; and (iv) any determination by the Committee as to a matter reserved to the sole discretion of the Committee shall be final. 3. The option shall become exercisable in installments beginning ________, 2000 and on the same day of each of the next three years, as to 25% of the shares each year. To the extent not previously exercised, such installments shall accumulate and be exercisable, in whole or in part, at any time before expiration of the option. 4. Except as hereafter provided, if for any reason your active employment with the Company or any affiliates terminates before one or more installments become exercisable, the option shall be exercisable only as to any installments which became exercisable before termination and then only to the extent not previously exercised. Notwithstanding the foregoing: a. Upon your death or total and permanent disability occurring while employed, all installments shall be immediately exercisable to the extent not previously exercised; and b. If, within one year after a "Change of Control" (as defined in the Company's Change of Control Severance Plan as amended from time to time), your employment is terminated involuntarily for reasons other than death, disability or discharge for Good and Sufficent Cause (as defined in that Change of Control Severance Plan) or you voluntarily choose to terminate your employment for Good Reason (as defined in the Change of Control Severance Plan as amended from time to time), all installments shall be immediately exercisable to the extend not previously exercised. 5. Except as permitted by the Committee, the option is transferable by you only by will or the laws of descent or distribution. Except as permitted by the Committee, it may be exercised during your lifetime only by you or by your legal representative duly appointed by a court of competent jurisdiction. After your death, it may be exercised only by your executor or administrator or by persons who acquire it directly from you by bequest or inheritance or as permitted by the Committee. 6. If a dividend is declared on common stock of the Company payable in common stock, the unexercised shares shall be increased and the per share option price shall be decreased proportionately to reflect the dividend as the Committee may determine. 7. If any change is made in the common stock through merger, consolidation, reorganization, recapitalization, split-up, combination of shares, exchange of shares, change in corporate structure or otherwise or a stock dividend is payable in stock other than common stock, an appropriate adjustment shall be made for shares not previously exercised as to the number of any kind of securities or rights and the price per share as the Committee may determine. 8. You shall not be a stockholder, nor be entitled to any privileges of stock ownership, under this agreement until shares are actually issued and delivered to you. 9. a. The option may be exercised from time to time in accordance with this agreement by written notice signed and delivered by you or your legal representative (or after your death, by your executor, administrator, heir or legatee, as the case may be), or other permitted transferee to the Secretary of the Company at the Company's principal office. b. The notice shall state the number of shares as to which the option is exercised, the date of exercise and how the exercise price will be paid. The notice shall be accompanied by payment in cash or by delivery of a check, bank draft or money order, or, as more specifically provided in the Plan, by common stock duly endorsed for transfer or a combination thereof for the full exercise price. The fair market value of any common stock so delivered shall be the mean between the high and low sales price of the shares on the composite tape for New York Stock Exchange-listed securities on the day of exercise, or if no sales of shares of common stock shall have been reported on such composite tape on that day, then such amount as the Committee shall determine to be the fair market value on such day. 10. Before delivery of any shares, the Company shall determine the amount of federal and state income tax or other tax withholding required by law and you shall pay the Company such amount, to the extent not previously withheld. 11. a. Upon receipt of notice of exercise by the Company, this agreement shall become a contract for the purchase and sale of the shares specified in the notice and, except as herein provided, neither you nor the Company shall have the right to terminate or rescind the contract. The Company shall tender the shares within a reasonable time. b. If the Committee determines that any law or regulation or requirement of any securities exchange requires the Company to take any action before issuance or delivery of shares or prohibits or delays their issuance or delivery then the date for payment, issuance and delivery, shall be extended for the period necessary to take such action, or during the period of such prohibition or limitation delay. 12. In the event of certain corporate transactions or changes of control, the option may become immediately exercisable in accordance with the terms of the Plan. 13. By exercising the option, you agree that you are acquiring the shares for investment and will not transfer any shares in violation of applicable federal and state securities laws. Any shares delivered under this agreement may bear such legends and may be subject to such restrictions on transfer as the Committee determines to be necessary or appropriate. You agree to execute such agreements as to transfer of such shares as the Committee may deem advisable. You agree that the Company shall not be required to register any shares acquired by you and that you may be required to hold such shares indefinitely in the absence of registration or an exemption from registration under federal and state securities laws. You agree that any shares purchased by you may be issued in the name of you and your spouse if you then or recently lived in a community property state. 14. This agreement incorporates the Plan by reference. In the event of a conflict between the terms of this agreement and the Plan, the Plan, as interpreted and administered by the Committee, shall prevail. 15. The option may be exercised only as to whole shares. No fractional shares will be issued or delivered. Please indicate your acceptance of the foregoing by signing the agreement and returning it to the Company in the enclosed envelope. Very truly yours, HOMESTAKE MINING COMPANY By_______________________________ Jack E. Thompson,Chairman, President & Chief Executive Officer Acceptance and Agreement: The foregoing agreement is hereby accepted by me as of ___________ (date). - ----------------------------------- (Signature ) EX-10.37 5 FORM OF PERFORMANCE BASE SHARE AGR. EXHIBIT 10.37 , 1999 (First Name) (Last Name) Homestake Mining Company 650 California Street San Francisco, CA 94108 Re: Grant of Right to Receive Performance Based Shares Dear (First Name): Effective upon your entering into this agreement, Homestake Mining Company ("Homestake" or "Company") grants you the right to receive (Total Shares) shares of its $1.00 value common stock ("Shares") on the following terms and conditions: 1.This grant is made under the Company's Stock Option and Share Rights Plan - 1996 (the "Plan"). Any capitalized terms used in this agreement that are not defined in this agreement have the meanings given to them in the Plan. 2.Effective upon your entering into this agreement, there also will be established for you in the records of the Company a Dividend Equivalency Account. As of each subsequent record date for dividends on the Company's Common Stock, there will be credited to your Dividend Equivalency Account an amount equal to the amount of dividends (a "Dividend Equivalent") that would have been payable in respect of each unvested Share subject to this agreement had such Share been outstanding on that record date. Such Dividend Equivalents will accumulate without interest. At the time your right to receive any Share under this agreement vests, you will also vest in and be entitled to receive the accumulated Dividend Equivalents that have accrued in your Dividend Equivalency Account in respect of such Share. Under no circumstances will you have any rights in or right to receive any Dividend Equivalent until you vest in the Share in respect of which the Dividend Equivalent was credited. If your right to receive any Shares under this agreement is forfeited, your right to receive related Dividend Equivalents will also be forfeited at the same time. Any subsequent reference in this agreement to Shares will be deemed to refer to the related Dividend Equivalents, and any subsequent reference in this agreement to the vesting in and/or issuance of Shares shall be deemed to refer to the vesting in and/or payment of the related Dividend Equivalents. 3.Your right to receive Shares under this agreement is subject to achieving the Annual Performance Goals set out below and is also subject to compliance with the terms and conditions of this agreement. Shares will not be issued, and you will have no rights of ownership in respect thereof, except and until your rights to the Shares have vested. Except for transfers by will or under laws of descent or distribution, interests in and rights to receive Shares may not be sold, assigned, pledged or otherwise transferred until rights to the Shares have vested and the Shares have been issued. 4.Your right to receive Shares will vest if and to the extent the Annual Performance Goals described below are achieved: (a) For purposes of this agreement, achievement of an "Annual Performance Goal" means that the closing price of the Company's Common Stock on the New York Stock Exchange (or other principal exchange selected by the board of directors on which the Common Stock is listed if not listed on the New York Stock Exchange) on the Measurement Dates set out below, in relation to the stock closing price on December 31, 1998, cumulatively outperforms the Adjusted Standard and Poor's Gold and Precious Metals Index ("Index") on the Measurement Dates set out below, in relation to the level thereof at December 31, 1998, by the amounts set out under "Annual Performance Goal" in paragraph (c) below. (b) "Final Performance Date" means December 31, 2002. (c) On each "Measurement Date" set out below, if the Company achieves the Annual Performance Goal for that date, your right to receive Shares will vest as to: (i) 25% of the Shares; and (ii) any Shares as to which your right could have but did not vest on any prior Measurement Date because the Annual Performance Goal for that Measurement Date was not achieved. If the Company fails to achieve the Annual Performance Goal for any Measurement Date, your right to receive Shares will not vest on that Measurement Date, but your right to receive those Shares will vest on any subsequent Measurement Date on which the Annual Performance Goal for that subsequent Measurement Date is achieved. The Measurement Dates and the Annual Performance Goals for each are as follows: Measurement Date - Annual Performance Goal - In Relation to HMC Common Stock to 12/31/98 Cumulatively Outperform the Index By ------------------ ----------------------- 12/31/99 5% 12/31/00 10% 12/31/01 15% 12/31/02 20% (d) For purposes of this agreement, "Adjusted Standard and Poor's Gold and Precious Metals Index" means the Standard and Poor's Gold and Precious Metals Index from time to time, notwithstanding that there may be a change in those companies between the date of this agreement and the Final Performance Date, but excluding therefrom the stock of the Company. 5. This agreement will expire immediately after the close of business on the Final Performance Date and any rights in respect of Shares that have not vested on or before the Final Performance Date will be forfeited. Except as otherwise provided in connection with Termination of Employment, no rights in respect of Shares will be forfeited prior to the close of business on the Final Performance Date. 2 6. Except as hereafter provided, all rights to receive Shares under this agreement that have not already vested will expire and be forfeited to the Company if you cease to be an "Employee" (as defined in the Plan) of Homestake or any Affiliate of Homestake prior to any Measurement Date ("Termination of Employment"). If any company or other entity which is your employer ceases to be an Affiliate of Homestake, then you will be deemed to have ceased being an Employee as of the time that company or other entity ceases to be an Affiliate. (a) If your Termination of Employment is because you (i) die, (ii) are Disabled (as defined in the Homestake Retirement Plan), (iii) retire from Homestake or any Affiliated Company on or after your Normal Retirement Date or on your Early Retirement Date (as defined in the Homestake Retirement Plan) other than a Termination of Employment pursuant to clause (b) below, or (iv) retire at a time when you are eligible to receive a "Retirement Benefit" under the Homestake Executive Supplemental Retirement Plan other than a a Termination of Employment pursuant to clause (b) below, you will continue to be treated as an Employee for a period of thirty-six months following the date of such death, disability or retirement or until the Final Performance Date, whichever is earlier. Rights in respect of Shares that do not vest during that period will be forfeited. (b) If your Termination of Employment takes place within one year following a "Change of Control" and is as a result of (i) termination by the Company other than for "Good and Sufficient Cause" or (ii) termination by you for "Good Reason," (all as defined in the Company's Change of Control Severance Plan), then on such termination, your right to receive any Shares that remain unvested under this agreement will vest in the same proportion as equals the proportion of (i) number of months (or part thereof) from the date of grant hereof to the date of your Termination of Employment to (ii) the total number of months (or part thereof) from the date of grant to the Final Performance Date. Following such vesting, any remaining rights hereunder shall thereupon be forfeited. The provisions of this paragraph 6(b) are in addition to any rights that you may have under Article XIII of the Plan. (c) The Committee will have the authority, in its discretion, to extend the term of this agreement to include all or part of any period of time during which you continue as an Employee of any corporation, joint venture, partnership or other entity in which Homestake has, directly or indirectly, at least a 20% ownership or profits interest or during which you act as a consultant to Homestake, any of its Affiliates, or any corporation, joint venture, partnership or other entity in which Homestake has, directly or indirectly, at least a 20% ownership or profits interest. 7. You do does not own any Shares granted under this agreement until your right to receive such Shares have vested and such Shares have actually been issued. Until such Share issuance, you will not be entitled to exercise any voting rights or receive dividends in respect of such Shares. 8. Notwithstanding anything contained herein to the contrary, the Company's obligation to issue or deliver Shares pursuant to this agreement will be subject to all applicable laws, rules and regulations, including stock exchange rules. If any laws, rules or regulations 3 require that the Company take any action before issuance and delivery of Shares, then the date of issuance and delivery will be delayed for the period necessary to take such action. 9. As a condition to the issuance and delivery of any Shares which vest under this agreement, the Company will have the right to require you to remit to the Company, or the Company will have the right to withhold from any amounts payable to you, as compensation or otherwise, amounts sufficient to satisfy all federal, state, provincial and local tax and other withholding requirements. If withholding is required, you will have the opportunity to satisfy the withholding requirement by (i) paying the withholding amounts in cash to the Company, (ii) having the required amount withheld from other monies then due to you, or (iii) having the Company retain a portion of the Shares otherwise then issuable to you in an amount equal in value to the required withholding amounts, with the Company paying the required withholding amounts. If you select the third alternative, you must notify the Company at least seven days before the date the Shares may become issuable to you. 10. This agreement incorporates the Plan by reference. In the event of a conflict between the terms of this agreement and the Plan, the Plan, as interpreted and administered by the Committee, will prevail. Please indicate your agreement with the foregoing by signing one copy of this agreement and returning it to the Company in the enclosed envelope. Very truly yours Homestake Mining Company By _____________________________ Jack E. Thompson, Chairman, President & Chief Executive Officer I agree to the foregoing - --------------------------------- 4 EX-10.38 6 FORM OF BONUS SHARE AGREEMENT EXHIBIT 10.38 HOMESTAKE MINING COMPANY Bonus Stock Program Election Form I have read the Bonus Stock Program Memorandum Dated as of June 29, 1998 (which is deemed incorporated herein by this reference), and I understand the Bonus Stock Program. I have also had the opportunity to ask all questions I may have with regard to the program, and I have received satisfactory answers to all of my questions. I understand that, in electing to participate in the Bonus Stock Program, there is no assurance that cash bonuses will in fact be paid for 1998, and therefore there is no assurance that I will in fact receive a contingent right to receive shares. I understand that the number of shares subject to any contingent share right will have a value (on the date bonuses are approved) equal to 150% of the cash foregone, that the number of shares subject to the contingent share right will be determined on that date, and that the number of shares subject to the contingent share right will not change, regardless of subsequent changes in market value of the shares. I also understand that once I forego any cash, that cash will not be paid to me even if I forfeit all rights to receive the shares subject to the contingent share right. I understand that my right to receive the shares will vest over three years from the date the cash bonus being foregone is approved by the Board of Directors - 50% after one year, 25% after two years and 25% after three years. I also understand that, with certain exceptions described in the Memorandum, I must continue to be an employee of Homestake or its affiliated companies on the vesting dates; otherwise I will forfeit all rights to the unvested shares and related dividend equivalency amounts. Finally, I understand that this election is irrevocable. I hereby elect to forego _____%, subject to a maximum amount of $_______________, of the cash bonus I may be entitled to receive for the year 1998. I elect to receive a contingent right to receive Homestake Mining Company Common Stock in lieu thereof. The terms of that contingent right are described in the Memorandum and in the accompanying Terms and Conditions, which are deemed incorporated in this election form. This election will be effective upon its acceptance by Homestake Mining Company. --------------------------------- Name --------------------------------- Signature --------------------------------- Date ACCEPTED: Homestake Mining Company By ____________________ Terms and Conditions to Homestake Mining Company Bonus Stock Program Election Form 1. These Terms and Conditions are a part of the contract created by the Bonus Stock Program Election Form ("Election Form") when it has been executed by you and accepted by Homestake Mining Company ("Homestake" or the "Company"). 2. The grant of a contingent right to receive Homestake Mining Company Common Stock, $1.00 par value ("Homestake Shares") pursuant to the Bonus Stock Program is made under the pursuant to the Company's Stock Option and Share Rights Plan - 1996 (the "Plan"). Any capitalized terms used herein that are not defined herein have the meanings given to them in the Plan. 3. Effective upon (i) your proper completion, execution and delivery of the Election Form and (ii) its acceptance by Homestake, you will have made the election specified in the Election Form to forego up to 50% of your potential cash bonus for 1998 in exchange for the award of a contingent right to receive Homestake Shares in the future (the "1998 Contingent Right"). You are not assured that there will be a cash bonus for 1998 payable to you, and the making of the election specified in the Election Form does not assure that any cash bonus for 1998 will be payable in fact; you will not receive the 1998 Contingent Right unless the cash bonus foregone by you is approved by the Board of Directors, as provided below. Further, once the election is made, the election is irrevocable, and you will forever give up all rights to receive any foregone cash bonus for 1998 that otherwise would have been payable, even if you forfeit all or any part of your 1998 Contingent Right. The election may not be made as to any part of the cash bonus that has been deferred under the Company's Deferred Compensation Plan. 4. The number of Homestake Shares subject to your 1998 Contingent Right will be that number of Homestake Shares which have a fair market value, on the day your cash bonus for 1998 is approved by the Homestake Board of Directors ("Approval Date"), equal to 150% of the amount of cash bonus for 1998 that is foregone by you. For this purpose, "fair market value" will be the Closing Price of Homestake Shares on the New York Stock Exchange on the Approval Date (or the next preceding trading day if Homestake Shares do not trade on the Approval Date). If Homestake Shares are not listed or otherwise trading on the New York Stock Exchange at or about the Approval Date, the fair market value will be determined by the Committee in its sole discretion. Once the number of Homestake Shares subject to your 1998 Contingent Right is determined, that number of Homestake Shares is fixed and will not vary because of subsequent changes in the market value of Homestake Shares. As a result, you take the market risk of an increase or decrease in the value of the Homestake Shares subject to your 1998 Contingent Right. 5.There also will be established for you in the records of the Company a Dividend Equivalency Account. As of each subsequent record date for dividends on Homestake Shares, there will be credited to your Dividend Equivalency Account an amount equal to the amount of 2 dividends (a "Dividend Equivalent") that would have been payable in respect of each unvested Share subject to your 1998 Contingent Right had such Share been outstanding on that record date. Dividend Equivalents will accumulate without interest. At the time your right to receive any Share subject to your 1998 Contingent Right vests, you will also vest in and be entitled to receive the accumulated Dividend Equivalents that have accrued in your Dividend Equivalency Account in respect of such Share. Under no circumstances will you have any rights in or right to receive any Dividend Equivalent until you vest in the Share in respect of which the Dividend Equivalent is credited. If your right to receive any Shares subject to your 1998 Contingent Right is forfeited, your right to receive related Dividend Equivalents will also be forfeited at the same time. Any subsequent reference in these Terms and Conditions to Shares will be deemed to refer to the related Dividend Equivalents, and any subsequent reference in these Terms and Conditions to the vesting in and/or issuance of Shares also will be deemed to refer to the vesting in and/or payment of the related Dividend Equivalents. 6. Your right to receive Homestake Shares subject to your 1998 Contingent Right will vest over three years. Your right to receive 50% of the Homestake Shares subject to your 1998 Contingent Right will vest on the first anniversary of the Approval Date. Your right to receive an additional 25% will vest on each of the second and third anniversaries of the Approval Date. The right to receive Shares is also contingent on your continuing to be an Employee of Homestake (or an affiliated company) on the vesting date as set out below. Shares will not be issued, and you will have no rights of ownership in respect thereof, except and until your rights to the Homestake Shares have vested. Except for transfers by will or under laws of descent or distribution, interests in and rights to receive Homestake Shares under your 1998 Contingent Right may not be sold, assigned, pledged or otherwise transferred until rights to the Homestake Shares have vested and the Homestake Shares have been issued. 7. (a) Except as hereafter provided, all rights to receive Homestake Shares under your 1998 Contingent Right that have not already vested immediately will expire and be forfeited if you cease to be an "Employee" (as defined in the Plan) of Homestake or any Affiliate of Homestake prior to an anniversary of the Approval Date ("Termination of Employment"). If any company or other entity which is your employer ceases to be an Affiliate of Homestake, then you will be deemed to have ceased being an Employee as of the time that company or other entity ceases to be an Affiliate. (b) If your Termination of Employment is because you (i) die, (ii) are Disabled (as defined in the Homestake Retirement Plan), (iii) retire from Homestake or any Affiliated Company on or after your Normal Retirement Date or on your Early Retirement Date (as defined in the Homestake Retirement Plan), or (iv) retire at a time when you are eligible to receive a "Retirement Benefit" under the Homestake Executive Supplemental Retirement Plan, your right to receive all unvested Homestake Shares subject to your 1998 Contingent Right will immediately vest, and you will be entitled to receive all Homestake Shares subject to the 1998 Contingent Right as of the date of Termination of Employment. 3 (c) If there is a "Corporate Transaction" or a "Change of Control" of Homestake, as defined in the Plan, then under certain circumstances outlined in the Plan, there may be an acceleration of vesting of your right to receive Homestake Shares subject to your 1998 Contingent Right. If that occurs, then you may vest in and be entitled to receive Homestake Shares subject to your 1998 Contingent Right, or cash in lieu thereof under certain circumstances. (d) If your Termination of Employment takes place within one year following a "Change of Control" and is as a result of (i) termination by Homestake other than for "Good and Sufficient Cause" or (ii) termination by you for "Good Reason," (all as defined in Homestake's Change of Control Severance Plan), then on such termination, your right to receive any unvested Homestake Shares subject to your 1998 Contingent Right will immediately vest, and you will be entitled to receive all Homestake Shares subject to your 1998 Contingent Right as of the date of Termination of Employment. (e) The Committee will have the authority, in its discretion, to extend the term of your 1998 Contingent Right to include all or part of any period of time during which you continue as an Employee of any corporation, joint venture, partnership or other entity in which Homestake has, directly or indirectly, at least a 20% ownership or profits interest or during which you act as a consultant to Homestake, any of its Affiliates, or any corporation, joint venture, partnership or other entity in which Homestake has, directly or indirectly , at least a 20% ownership or profits interest. 8. You do not own any Homestake Shares subject to your 1998 Contingent Right until your right to receive such Homestake Shares has vested and such Homestake Shares have actually been issued. Until issuance of the Homestake Shares, you will not be entitled to exercise any voting rights or receive dividends in respect thereof. 9. Notwithstanding anything contained herein to the contrary, Homestake's obligation to issue or deliver Homestake Shares hereunder will be subject to all applicable laws, rules and regulations, including stock exchange rules. If any laws, rules or regulations require that Homestake take any action before issuance and delivery of Homestake Shares subject to your 1998 Contingent Right, then the date of issuance and delivery will be delayed for the period necessary to take such action. 10. As a condition to the issuance and delivery of any Homestake Shares subject to your 1998 Contingent Right, Homestake will have the right to require you to remit to Homestake, or Homestake will have the right to withhold from any amounts payable to you, as compensation or otherwise, amounts sufficient to satisfy all federal, state, provincial and local tax and other withholding requirements. Alternatively, if you give written notice to Homestake at least seven days in advance of any anniversary of the Approval Date, Homestake will retain a portion of the Homestake Shares and Dividend Equivalents otherwise payable to you on that anniversary of Approval Date, in an amount equal in value to the required withholding amounts, which it will use to satisfy such withholding requirements; provided, however, that if 4 Homestake withholds an incorrect amount, that will not relieve you from paying the correct amount, if Homestake underwithholds, nor will it relieve Homestake from reimbursing you, if Homestake overwithholds. 11. These Terms and Conditions incorporate the Plan by reference. In the event of a conflict between these Terms and Conditions and the Plan, the Plan, as interpreted and administered by the Committee, will prevail. 5 EX-10.39 7 FORM OF MATCHING STOCK AGREEMENT EXHIBIT 10.39 TO: _______ FROM: Mary T. Schuba DATE: January ____, 1999 SUBJECT: Matching Stock Award Program - ----------------------------------------------------------------------------- In 1997, Homestake Mining Company established a Matching Stock Award Program to assist key employees in achieving the stock ownership guidelines set by the Board. The Program was established under the Homestake Mining Company Stock Option and Share Rights Plan - 1996 (the "Plan"). Under the Program, you have the right to receive one share of matching stock for each three shares enrolled in the program. You will be permitted to enroll shares in the Program once each calendar year. The right to receive the matching shares will vest on the fifth anniversary of enrollment of the shares to be matched. Once you enroll shares, you must hold the enrolled stock continuously throughout the five year period. If you sell or otherwise transfer the enrolled stock during the five-year holding period, you will completely forfeit the right to receive the corresponding matching stock. Each annual enrollment will be treated as a single enrollment and will not impact any other enrollment, holding period or forfeiture. Once shares have been matched, those shares may not be enrolled in the program a second time. You may enroll shares held of record or held beneficially, including shares held in a 401(k) account or in an IRA, or held in trust for you. You may enroll shares separately owned by you or held jointly or as community property with your spouse. Shares held separately by or for the benefit of your spouse and shares held by or for the benefit of your children are not eligible for enrollment under the Program. If you hold shares jointly with a person other than your spouse, or if you share beneficial ownership of shares with a person other than your spouse, only the portion of stock attributable to you may be enrolled in the Program. At the time shares are enrolled, you must provide the Company with a statement certifying the number of shares that you wish to enroll in the Program. Appropriate documentation of ownership, such as a copy of a current 401(k) statement, an IRA, trust or brokerage statement, or stock certificate must accompany the certification. By electing to enroll in the Program, you are indicating your intent to hold the shares for at least five years. Each year you will be required to provide documentation that you still hold the shares. If you do not continue to retain the enrolled shares, your right to receive the matching shares will be forfeited. Except as hereafter provided, all rights to receive matching shares that have not already vested will expire and be forfeited if you cease to be an "Employee" (as defined in the Plan) of Homestake or any Affiliate of Homestake prior to fifth anniversary of the date on which you enrolled the shares to be matched. If any company or other entity which is your employer ceases to be an Affiliate of Homestake, then you will be deemed to have ceased being an Employee as of the time that company or other entity ceases to be an Affiliate. If you have a termination of employment for any of the following reasons, then on such termination, your right to receive any matching shares that have not vested will vest in the same proportion as equals the proportion of (i) number of months (or part thereof) from the date of enrollment of the shares to be matched to (ii) the fifth anniversary of enrollment. This paragraph applies if (1) you die, (2) you are Disabled (as defined in the Homestake Retirement Plan), (3) you retire from Homestake or any Affiliated Company on or after your Normal Retirement Date or on your Early Retirement Date (as defined in the Homestake Retirement Plan), (4) you retire at a time when you are eligible to receive a "Retirement Benefit" under the Homestake Executive Supplemental Retirement Plan, or (5) your termination of employment takes place within one year following a "Change of Control" and is as a result of (x) termination by Homestake or any Affiliated Company other than for "Good and Sufficient Cause" or (y) termination by you for "Good Reason" (all as defined in the Company's Change of Control Severance Plan). You do not own any matching shares until your right to receive the shares has vested and the shares have actually been issued. Until the matching shares are issued, you will not be entitled to exercise any voting rights or receive dividends in respect of such shares. Notwithstanding anything contained herein to the contrary, the Company's obligation to issue or deliver matching shares will be subject to all applicable laws, rules and regulations, including stock exchange rules. If any laws, rules or regulations require that the Company take any action before issuance and delivery of shares, then the date of issuance and delivery will be delayed for the period necessary to take such action. The Company may be required to withhold income and other taxes payable in respect of matching shares. If withholding is required, you will have the opportunity to satisfy the withholding requirement by (i) paying the withholding amounts in cash to the Company, (ii) having the required amount withheld from other monies then due to you, or (iii) having the Company retain a portion of the matching shares otherwise then payable to you in an amount equal in value to the required withholding amounts, with the Company paying the required withholding amounts. If you select the third alternative, you must notify the Company at least seven days before the date the matching shares become payable to you. In 1997 and 1998, you enrolled ___________ and _________ shares of Homestake Common Stock in this Program. Please provide documentation that you still hold enrolled stock. If you wish to enroll additional stock in this program, please complete the attached certification form, attach the appropriate documentation and return to me by January 30, 1999. HOMESTAKE MINING COMPANY Matching Stock Award Program January 1999 I elect to enroll _______ shares of Homestake common stock in the Matching Stock Award Program ("the Program"). I understand that I will be granted one matching share of Homestake common stock for each three shares I have enrolled in the Program and that I vest in such matching shares in five years provided I maintain continuous ownership of the enrolled shares. I have attached documentation verifying ownership of the enrolled shares. The attached memo from Mary T. Schuba dated January ___, 1999 sets out terms which form a part of this Award. ------------------- Name ---------------- EX-10.40 8 1998 OUTSIDE DIRECTOR'S STOCK COMP. PLAN EXHIBIT 10.40 HOMESTAKE MINING COMPANY 1998 OUTSIDE DIRECTORS' STOCK COMPENSATION PLAN (amended January 22, 1999) The Plan was adopted by the Board on September 24, 1998, and will be submitted for approval by Homestake's stockholders at the next meeting of stockholders held after Board Approval. Contingent upon stockholder approval, the Plan is generally effective as of January 1, 1999, except as specified below in Article 8, relating to initial grants of Share Rights. Capitalized terms used herein shall have the meanings provided in Article 12. ARTICLE 1. SHARE OWNERSHIP POLICY; PLAN PURPOSE. It is hereby declared to be the policy of Homestake that Outside Directors are expected to own Shares equal in value to three times the amount of the Annual Retainer. Outside Directors are expected to achieve that level of ownership within five years from the later of (i) the effective date of the Plan or (ii) the date of election as a Director. The purpose of the Plan is to facilitate compliance with this share ownership policy and to promote the interests of Homestake by attracting and retaining qualified individuals who are neither employees nor officers of Homestake or a subsidiary to serve as directors of Homestake. The Plan is intended to further align the interests of outside directors with the interests of stockholders of Homestake, thereby promoting longterm growth and performance of Homestake. The Plan is intended to supersede Article 7 of the Homestake Mining Company Stock Option and Share Rights Plan 1996 and, on the date the Plan becomes effective, no further grants shall be made to Eligible Directors under that plan. ARTICLE 2. ADMINISTRATION. The Plan shall be administered by the Board. The Board shall administer the Plan in accordance with the Plan and shall have all powers and discretion necessary or appropriate to administer the Plan, including but not limited to, the power to (a) interpret the Plan and (b) make all other decisions relating to the operation of the Plan. The Board may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Board's determinations under the Plan shall be final and binding on all persons. No member of the Board shall be liable for any action or decision made in good faith in connection with the exercise of the Board's duties under the Plan. ARTICLE 3. SHARES AVAILABLE FOR GRANTS. 3.1 Basic Limitation. Shares issued pursuant to the Plan shall be authorized but unissued Shares or treasury Shares. The aggregate number of Shares that may be issued under the Plan shall not exceed 250,000. The limitations of this Section 3.1 shall be subject to adjustment pursuant to Section 3.3. 3.2 Available Shares. If Restricted Shares or Share Rights are forfeited or terminate for any other reason before being exercised, then such Restricted Shares and Shares subject to such Share Rights shall again become available for Awards under the Plan. If cash is paid in lieu of the issuance of Shares, the number of Shares with respect to which such payment is made shall not again be available under the Plan. 3.3 Adjustments. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of Shares, merger, consolidation, rights offering, or any other change in the corporate structure or Shares of Homestake, the Board shall make such adjustment, if any, as it may deem appropriate in the number and kind of Shares authorized by the Plan, and in the number and value of Shares covered by Awards. ARTICLE 4. PARTICIPATION IN THE PLAN. Only Eligible Directors are eligible to participate in the Plan. ARTICLE 5. AGREEMENTS. All Awards shall be evidenced by an Agreement signed by the Eligible Directors and Homestake. Each Award shall be subject to the terms and conditions of the Plan and to such other terms and conditions as may be established by the Board. ARTICLE 6. ANNUAL RETAINER. 6.1 Portion of Annual Retainer Payable in Shares. With respect to each Annual Service Period, each Eligible Director shall receive, in lieu of cash, unrestricted Shares having a Fair Market Value equal to 50% of his or her Annual Retainer. The number of Shares to be issued pursuant to Section 6.1 on each date that a part of the Annual Retainer is payable shall be determined by dividing 50% of the Annual Retainer that would otherwise have been paid in cash on each payment date (but for this Section 6.1) by the Fair Market Value of a Share on that date. The Shares shall be issued as soon as is reasonably possible after the dates on which the cash portion of the Annual Retainer is to be paid. 6.2 Election to Receive Additional Shares. Not later than ten Business Days prior to the first day of an Annual Service Period or, if later, the date on which an individual first becomes an Eligible Director, an Eligible Director may, by filing a written Annual Election with Homestake, direct Homestake to pay to such Eligible Director, in the form of unrestricted Shares, some or all of the cash portion of the Annual Retainer payable to such Eligible Director for the related Annual Service Period. Any Annual Election shall be effective for the entire Annual Service Period to which the Annual Election relates. The number of Shares to be issued pursuant to an Annual Election shall be determined by dividing the amount of the Annual Retainer that would otherwise have been paid in cash on each payment date (but for this Section 6.2) by the Fair Market Value of a Share on that date. Such Shares shall be issued as soon as is reasonably possible after the dates on which that portion of the Annual Retainer would have been paid in 2 cash. If the Annual Retainer is increased during the Annual Service Period, Eligible Directors shall receive such increase in cash and not Shares, regardless of whether an Annual Election has been made. 6.3 Bonus Restricted Shares. Each Eligible Director who has made an Annual Election pursuant to Section 6.2, shall also receive one Restricted Share for each four Shares issued pursuant to Section 6.2. The Restricted Shares shall be subject to the provisions of Article 7. 6.4 Election to Defer. Not later than ten Business Days prior to the first day of an Annual Service Period or, if later, the date on which an individual first becomes an Eligible Director, an Eligible Director may elect to defer, in accordance with the Homestake Deferred Compensation Plan, receipt of Shares to be issued pursuant to Sections 6.1 and 6.2 during the Annual Service Period to which the election relates. To the extent that any Eligible Director elects to defer the receipt of Shares, such number of deferred stock units shall be credited to the Eligible Director's Deferred Compensation Plan account, and such Deferred Compensation Plan account shall be credited with all dividends and distributions payable with respect to the number of Shares equal to that number of deferred stock units. ARTICLE 7. TERMS OF RESTRICTED SHARES. 7.1 Restrictions. The Restricted Shares may not be sold, assigned, transferred, pledged or otherwise encumbered, except as otherwise specifically provided, prior to the lapse of the restrictions. 7.2 Issuance of Shares. Homestake shall issue Restricted Shares awarded hereunder as soon as practicable after the restrictions thereon shall lapse. Prior to the lapse of the restrictions thereon, the Restricted Shares shall not be deemed to be outstanding for any purpose. 7.3 Forfeiture. Restricted Shares shall be forfeited and shall be returned to Homestake and all rights of the Eligible Director to the Restricted Shares shall terminate without any payment of consideration by Homestake if the Eligible Director ceases to be a Director prior to the lapse of the restrictions. 7.4 Lapse of Restrictions. The restrictions shall lapse in accordance with this section. (a) Restrictions shall lapse with respect to the first 50% of the Restricted Shares comprising an Award of Restricted Shares to an Eligible Director on the first anniversary of the Grant Date. (b) Restrictions shall lapse with respect to an additional 25% of such Restricted Shares on the second anniversary of the Grant Date. (c) Restrictions shall lapse with respect to the final 25% of such Restricted Shares on the third anniversary of the Grant Date. 3 (d) In the event that an Eligible Director ceases to be a Director prior to the lapse of restrictions as described above within one year following a Change of Control, or by reason of death, disability, or retirement at mandatory retirement age for Directors, the restrictions on all Restricted Shares (and accrued dividends thereon) awarded to such Eligible Director shall lapse on the date the Eligible Director ceases to be an Director. (e) The Board shall have the authority to accelerate the time at which the restrictions will lapse or to remove any of such restrictions whenever it decides, in its sole discretion, that, by reason of changes in applicable law or other material changes in circumstances arising after the date of the Award, such action is in the best interests of Homestake and equitable to the Eligible Director. 7.5 Voting Rights. Prior to lapse of the restrictions on Restricted Shares, Eligible Directors shall not have any right to vote with respect to those Restricted Shares, unless otherwise provided in the Agreement. 7.6 Dividends. Prior to lapse of the restrictions, dividends and other distributions shall be credited to Restricted Shares, but not paid to Eligible Directors, unless otherwise provided in the Agreement. After lapse of the restrictions, Eligible Directors shall be entitled to receive all dividends and other distributions accrued since the Grant Date with respect to such Restricted Shares, unless otherwise provided in the Agreement. ARTICLE 8. INITIAL GRANTS OF SHARE RIGHTS; ANNUAL GRANTS OF SHARE RIGHTS 8.1 Initial Grant of Share Rights. Effective January 1, 1997, upon first being elected to the Board, each Eligible Director shall be granted Share Rights providing for the issuance of 2,000 Shares. For purposes of Section 8.4, the date of election to the Board shall be the Grant Date for Eligible Directors elected between January 1, 1997 and the effective date of the Plan. 8.2 Annual Grant of Share Rights. Effective January 1, 1999, on the first day of each Annual Service Period, each Eligible Director shall be granted Share Rights providing for the issuance of 1,000 Shares attributable to services performed during the preceding Annual Service Period. Annual Grants to Eligible Directors who were not Eligible Directors for the entire preceding Annual Service Period shall be prorated and rounded to the nearest whole Share based on the number of days actually served as an Eligible Director during such Annual Service Period. 8.3 Forfeiture. Share Rights shall be canceled if the Eligible Director ceases to be a Director before the lapse of the restrictions. 8.4 Lapse of Restrictions. The restrictions imposed on Share Rights shall lapse upon the earlier of: (i) the third anniversary of the Grant Date, (ii) the date the Eligible Director ceases to be a Director within one year following a Change of Control, or (iii) the date the Eligible Director ceases to be a Director by reason of death, disability, or retirement at mandatory retirement age for Directors. 4 8.5 Payment of Share Rights. If the restrictions imposed on an Eligible Director Share Right lapse, the Shares to which such Share Right relates shall be issued to the Eligible Director as soon as reasonably possible after the date the Eligible Director ceases to be a Director. ARTICLE 9. PLAN TERM; AMENDMENT; TERMINATION. 9.1 Plan Term. The Plan shall be effective upon approval at the next meeting of stockholders held after Board Approval. Unless terminated sooner in accordance with Section 9.2, no Award may be granted after the earlier of (i) December 31, 2008, or (ii) the date on which all Shares (or Share Rights in respect thereof) available for issuance under the Plan have been issued or canceled pursuant to the exercise or surrender of Awards under the Plan. 9.2 Amendment or Termination. Except as hereafter provided, the Board may, at any time and for any reason, amend or terminate the Plan. The foregoing notwithstanding, any amendment of the Plan shall be subject to the approval of Homestake's stockholders to the extent required by applicable laws, regulations or rules, or to the extent any such amendment shall (i) increase the maximum number of Shares issuable under the Plan (except in accordance with Section 3.3), (ii) increase the benefits accruing to Eligible Directors, or (iii) modify the eligibility requirements for Awards. No Awards shall be granted under the Plan after the termination of the Plan. The termination of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan. ARTICLE 10. REGULATORY APPROVAL, REGISTRATION, AND INVESTMENT PURPOSE. 10.1 Regulatory Approval. The implementation of the Plan, the issuance of Restricted Shares and the granting of any Share Rights shall be subject to Homestake's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, and the Shares issued pursuant to it. 10.2 Registration. The Plan, the Shares subject thereto, and the Share Rights granted thereunder may, in the discretion of the Board, be registered under the Securities Act and under the securities laws of any state, province or country. Unless the Share Rights or the Shares shall have been registered under the Securities Act, each grant of Share Rights and each grant of Shares shall be for investment and not with a view to resale or distribution of such Shares contrary to any applicable securities laws. As a condition to the issuance of any Shares which are not registered under such Act, the Eligible Director and his or her legal representative, executor, administrator, heir or legatee, as the case may be, receiving such Shares shall deliver to Homestake a writing, in form and substance satisfactory to Homestake and its counsel, implementing such agreement. 5 ARTICLE 11. MISCELLANEOUS. 11.1 No Right to Continue as a Director. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain a Director of Homestake, an Affiliate or any other person. Homestake reserves the right to terminate the service of any Director in accordance with Homestake's Certificate of Incorporation, its Bylaws or applicable law. 11.2 Shareholders' Rights. Except as otherwise provided in an Agreement, an Eligible Director shall have no dividend rights, voting rights or other rights as a shareholder with respect to any Shares covered by an Award prior to the issuance of a stock certificate for such Shares and delivery thereof to such Director. 11.3 Rule 16b3. Homestake intends that, with respect to persons subject to Section 16 of the Exchange Act, this Plan and the issuance of Restricted Shares, Share Rights and Shares issued on account of Share Rights will qualify under Rule 16b3 promulgated thereunder. So long as Homestake has any class of equity securities registered under the Exchange Act, to the extent required to avoid application of Section 16(b) of the Exchange Act to an acquisition of Shares, any equity security, as defined in the Exchange Act or the rules and regulations thereunder, granted pursuant to the Plan, must be held for six months from the Grant Date, and in the case of any derivative security (as defined in the rules and regulations promulgated under Section 16) offered pursuant to the Plan, at least six months must elapse from the date of acquisition of the derivative security to the date of disposition of the derivative security (other than upon exercise or conversion) or its underlying equity security, except in the event of the death or disability of the holder thereof. If any provision of the Plan or an Agreement requires modification to comply with the requirements of Section 16 and the rules thereunder, the Board may waive, amend or modify the Plan or the Agreement accordingly. To the extent that any provision of this Plan or action by the Board fails to comply with the Section 16 rules, it shall be null and void to the extent permitted by law and deemed advisable by the Board. 11.4 Transferability. Restricted Shares and rights to dividends thereon (prior to lapse of restrictions thereon) and Share Rights granted under the Plan shall not be transferable other than by will or the laws of descent or distribution; provided, however, to the extent permitted by Rule 16b3 or any successor rule, an Agreement with respect to Restricted Shares and Share Rights may permit transfers, (i) in connection with an Eligible Director's estate plan, to (a) an Eligible Director's family members, (b) a trust for the benefit of the Eligible Director or the Eligible Director's family members, or (c) other members of the Eligible Director's household, or (ii) pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income Security Act, or the rules thereunder. 11.5 Governing Law. The Plan and all Agreements shall be construed in accordance with and governed by the laws of the State of Delaware. 11.6 Payment of Taxes. Homestake shall have the right to require, prior to the issuance or delivery of any Shares or dividends thereon, payment by an Eligible Director of any taxes required by law with respectto the issuance or delivery of such Shares or dividends. With respect 6 to tax withholding required upon the grant of Shares, upon the lapse of restrictions on Restricted Shares, or upon any other taxable event arising out of or as a result of any grant or Award made hereunder, Eligible Directors may elect to satisfy the withholding requirement, in whole or in part, by tendering previouslyowned Shares or by having Homestake withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction. All elections shall be irrevocable, made in writing, and signed by the Eligible Director. 11.7 Costs. Homestake shall bear all expenses incurred in administering the Plan, including expenses related to the award and issuance of Shares, Restricted Shares and Share Rights. 11.8 Fractional Shares. In all instances, cash shall be paid in lieu of fractional Shares in an amount equal to the Fair Market Value of the fractional Shares on the date the fractional Shares would otherwise be payable. ARTICLE 12. DEFINITIONS. 12.1 General Definitions. The following words and phrases, when used in the Plan, unless otherwise specifically defined or unless the context clearly otherwise requires, shall have the following meanings: "Agreement" means the written agreement setting forth the terms and provisions applicable to each Award granted under the Plan. "Annual Election" means an irrevocable election made in accordance with Section 6.2. "Annual Retainer" means the annual retainer to be paid by Homestake to an Eligible Director with respect to an Annual Service Period, at the rates determined by the Board in advance of such period. "Annual Service Period" means an annual period determined by the Board, which annual period shall be January 1 through December 31 or such other annual period as may be designated from time to time by the Board of Directors. "Award" means any award of Shares, Restricted Shares or Share Rights under the Plan. "Board" means Homestake's Board of Directors, as constituted from time to time. "Change in Control" means the occurrence of any of the following events: (a) Homestake is a party to a merger or combination under the terms of which less than 75% of the shares in the resulting or continuing publiclyheld company are owned by the shareholders of Homestake immediately preceding such event; or 7 (b) At least 75% in fair market value of Homestake's assets are sold; or (c) At least 25% in voting power in election of Directors of Homestake's capital stock is acquired by any one person or group as that term is used in Rule 13d5 under the Exchange Act. "Code" means the Internal Revenue Code of 1986, as amended. "Director" means a member of the Board. "Eligible Director" means a Director who is not an employee of Homestake or any of its subsidiaries or affiliates. Directors emeritus shall not be eligible to participate. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" means the fair market value of Shares, determined by the Board, in its sole discretion. "Grant Date" means, with respect to an Award, the date that the Award is deemed granted under the Plan. Within a reasonable time thereafter, Homestake will execute and deliver an Agreement to the Eligible Director. "Homestake" means Homestake Mining Company, a Delaware corporation. "Plan" means this Homestake Mining Company 1998 Outside Directors' Stock Compensation Plan, as it may be amended from time to time. "Restricted Share" means a Share which is subject to the restrictions set forth in Section 7. "Securities Act" means the Securities Act of 1933, as amended. "Share" means one share of the common stock of Homestake. "Share Right" means the right to acquire a Share for no consideration. 8 12.2 Other Definitions. In addition to the above definitions, certain words and phrases used in the Plan and any Agreement may be defined in other portions of the Plan or in an Agreement. IN WITNESS WHEREOF, HOMESTAKE MINING COMPANY has executed this Plan as of December 1, 1998. HOMESTAKE MINING COMPANY By: Wayne Kirk Wayne Kirk Vice President, General Counsel and Secretary EX-11 9 EARNINGS PER SHARE EXHIBIT 11 HOMESTAKE MINING COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- BASIC: Earnings: Net income (loss) $ (218,325) $ (230,606) $ 45,765 ================= ================= =============== Net income (loss) applicable to basic earnings per share calculation $ (218,325) $ (230,606) $ 45,765 ================= ================= =============== Weighted average number of shares outstanding 213,354 210,537 210,027 ================= ================= =============== Net income (loss) per share - basic $ (1.02) $ (1.10) $ 0.22 ================= ================= =============== DILUTED: Earnings: Net income (loss) $ (218,325) $ (230,606) $ 45,765 Add: Interest relating to 5.5% convertible subordinated notes, net of tax 8,250 6,517 6,517 Amortization of issuance costs relating to 5.5% convertible subordinated notes, net of tax 561 443 443 ----------------- ----------------- --------------- Net income (loss) applicable to diluted earnings per share calculation $ (209,514) $ (223,646) $ 52,725 ================= ================= =============== Weighted average number of shares outstanding: Common shares 213,354 210,537 210,027 Additional average shares outstanding assuming: Conversion of 5.5% convertible subordinated notes 6,505 6,505 6,505 ----------------- ----------------- --------------- 219,859 217,042 216,532 ================= ================= =============== Net income (loss) per share - diluted (a) $ (0.95) $ (1.03) $ 0.24 ================= ================= =============== (a) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 13 of SFAS 128 because it produced an anti-dilutive result.
EX-13 10 SECTIONS FROM 1998 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 Index to Exhibit 13: Selected information from the 1998 Annual Report to Shareholders is incorporated by reference in the Form 10-K and such information is herewith filed electronically as Exhibit 13. Such selected information is listed below. Noted page references correspond to pagination in the 1998 Annual Report to Shareholders. Annual Report Page Management's Discussion and Analysis 28-35 Consolidated Financial Statements 36-40 Notes to Consolidated Financial Statements 41-56 Report of Independent Auditors 57 Management's Responsibility for Financial Reporting 57 Quarterly Selected Data 58 Five-Year Selected Data 59 Common Stock Price Range 59 MANAGEMENT'S DISCUSSION AND ANALYSIS (Unless specifically stated otherwise, the following information relates to amounts included in the consolidated financial statements, without reduction for minority interests. Homestake reports per ounce production costs in accordance with the "Gold Institute Production Cost Standard.") On April 30, 1998 Homestake Mining Company ("Homestake" or the "Company") acquired 100% of Plutonic Resources Limited ("Plutonic"), a publicly-traded Australian gold producer, by issuing 64.4 million Homestake common shares. This business combination was accounted for as a pooling of interests, and accordingly, the Company's consolidated financial statements include Plutonic for all periods. On December 3, 1998 Homestake acquired the 49.4% of Prime Resources Group Inc. ("Prime") it did not already own by issuing 16.7 million Homestake common shares and 11.1 million Homestake Canada Inc. ("HCI") exchangeable shares. Each HCI exchangeable share is exchangeable for one Homestake common share at any time at the option of the holder and has essentially the same voting, dividend (payable in Canadian dollars), and other rights as one Homestake common share. As a result of this transaction, which was accounted for as a purchase, Homestake owns 100% of Prime. RESULTS OF OPERATIONS Homestake recorded a net loss of $218.3 million or $1.02 per share during 1998 compared to a net loss of $230.6 million or $1.10 per share during 1997 and net income of $45.8 million or $0.22 per share during 1996. The 1998 loss includes write-downs and unusual items amounting to $195 million or $0.91 per share compared to write-downs and unusual items amounting to $159.2 million or $0.76 per share in 1997 and net nonrecurring income of $18.3 million or $0.08 per share in 1996. Excluding the effect of the write-downs and unusual items, Homestake incurred a net loss of $23.3 million or $0.11 per share in 1998 compared to a net loss of $71.4 million or $0.34 per share in 1997 and net earnings of $27.5 million or $0.14 per share in 1996. The reduced 1998 loss compared to 1997 was due to significantly lower per ounce cash costs, lower depreciation and exploration expenses and lower income taxes, partially offset by lower gold prices. The 1997 loss compared to net income in 1996 primarily was due to significantly lower gold prices, partially offset by higher gold production and lower per ounce cash costs. A summary of significant write-downs and unusual items in 1998, 1997 and 1996 follows:
Significant Write-downs and Unusual Items (after tax in millions of dollars) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Resource asset write-downs $(120.6) $(60.1) Increase in the estimated accrual for remediation and reclamation expenditures (36.0) (21.5) Plutonic business combination and integration costs (16.7) Homestake mine restructuring charges (5.9) Write-down of Homestake's investment in the Main Pass 299 sulfur mine (84.9) Gain on termination of Santa Fe merger 47.2 Reduction in accrual of prior year income taxes $24.0 Write-downs of noncurrent investments (7.6) (45.7) (8.3) Other (8.2) 5.8 2.6 - ----------------------------------------------------------------------------------------------------------- $(195.0) $(159.2) $18.3 ===========================================================================================================
Gold Operations: The results of the Company's operations are affected significantly by the market price of gold. Gold prices are influenced by numerous factors over which the Company has no control. Homestake's current hedging policy provides for the use of forward sales contracts to hedge up to 30% of each of the following ten year's expected annual gold production, and up to 30% of each of the following five year's expected annual silver production, at prices in excess of certain targeted prices. The policy also provides for the use of combinations of put and call option contracts to establish minimum floor prices. During 1998, 1997 and 1996 the Company delivered or financially settled 358,000, 656,000 and 508,400 ounces of gold at average prices of $359, $421 and $474 per ounce, respectively, under forward sales contracts and delivered in 1998 an additional 900,000 ounces of gold at a price of $325 per ounce under option contracts. During 1998, the Company also closed out and financially settled one million ounces of its Australian dollar-denominated forward gold contracts. The $5 million gain realized on this transaction has been deferred and will be recorded in income as the originally designated production is sold. The Company's hedging activities increased revenues by approximately 28 $47 million, $25 million and $43 million in 1998, 1997 and 1996, respectively. The estimated fair value of the Company's gold and silver hedging position at December 31, 1998 was approximately $81 million. A significant portion of the Company's operations are located in Australia and Canada. The Company's profitability is impacted by fluctuations in these countries' currency exchange rates relative to the United States dollar. Under the Company's foreign currency protection program, the Company has entered into a series of foreign currency option contracts which establish trading ranges within which the United States dollar may be exchanged for Australian and Canadian dollars. The average Canadian/U.S. dollar exchange rate decreased from $0.7331 in 1996 to $0.7224 in 1997 and to $0.6748 in 1998, and the average Australian/U.S. dollar exchange rate decreased from $0.7834 in 1996 to $0.7442 in 1997 and to $0.6297 in 1998. As a result, the Company recorded foreign currency losses of $34.3 million and $28.5 million during 1998 and 1997, respectively, under this program compared to a foreign currency gain of $1.6 million during 1996. At December 31, 1998 the Company had net unrealized losses of $24 million on open contracts under this program. See notes 2 and 20 to the consolidated financial statements for additional information regarding the Company's hedging programs and the future adoption of Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities". Revenues from gold, ore and concentrate sales totaled $782.2 million during 1998 compared to revenues of $863.6 million in 1997 and $921.7 million in 1996. The decrease in revenues in 1998 from 1997 primarily is due to lower gold prices. The decrease in revenues in 1997 from 1996 is due to lower gold prices, partially offset by higher production. During 1998, the Company realized an average price of $312 per gold equivalent ounce compared to $353 per gold equivalent ounce in 1997 and $406 per gold equivalent ounce in 1996. Gold equivalent production totaled 2,531,700 ounces during 1998 compared to 2,528,900 ounces during 1997 and 2,417,900 ounces during 1996.
Consolidated Production Costs per Ounce (per ounce of gold) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Direct mining costs $185 $222 $244 Deferred stripping adjustments 1 5 1 Costs of third-party smelters 12 14 14 Other 1 (4) - ------------------------------------------------------------------------------------------------------------ Cash Operating Costs 198 242 255 Royalties 3 3 4 Production taxes 1 1 2 - ------------------------------------------------------------------------------------------------------------ Total Cash Costs 202 246 261 Depreciation and amortizaton 50 54 57 Reclamation 6 3 5 - ------------------------------------------------------------------------------------------------------------ Total Production Costs $258 $303 $323 ============================================================================================================
Homestake's reported consolidated cash cost per gold equivalent ounce was $202 during 1998 compared to $246 and $261 during 1997 and 1996, respectively. The lower cash cost per ounce in 1998 reflects the effect of the Company's cost containment efforts, weaker Australian and Canadian currencies, the impact of initial production at the low-cost Ruby Hill mine, higher production at the low-cost Eskay Creek mine and a decrease in production at the high-cost Homestake mine. Cash costs per ounce decreased during 1997 compared to 1996 primarily due to a weaker Australian dollar, higher production at the Kalgoorlie, Plutonic and Lawlers operations, higher shipments and higher grades at the Eskay Creek mine and higher production at the Round Mountain mine, partially offset by lower grades at the Williams and David Bell mines. Homestake's total noncash cost per equivalent ounce was $56 during 1998 compared to $57 and $62 per ounce during 1997 and 1996, respectively. The decrease in noncash costs in 1997 from 1996 primarily was due to reserve expansions at the Eskay Creek and Snip mines. In 1999, noncash costs per ounce are expected to remain at current levels as the additional depreciation charges resulting from the acquisition of the Prime minority interests will be offset by reduced depreciation charges following the resource asset write-downs recorded at September 30, 1998.
Reconciliation of Total Cash Costs per Ounce to Financial Statements (millions of dollars, except per ounce amounts) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Production Costs per Financial Statements $537.3 $627.6 $615.5 Costs not included in Homestake's production costs: Costs of third-party smelters (a) 32.4 34.5 33.1 Production costs of consolidated joint ventures (4.6) (3.3) Production costs of equity-accounted investments 1.9 1.9 12.9 Sulfur and oil production costs (24.2) (25.4) (23.2) Reclamation accruals (13.4) (9.0) (11.3) By-product silver revenues (3.1) (2.6) (3.1) Inventory movements and other (13.8) (6.4) 6.8 - ------------------------------------------------------------------------------------------------------------- Production Costs for Per Ounce Calculation $ 512.5 $ 617.3 $630.7 - ------------------------------------------------------------------------------------------------------------- Ounces Produced during the Year (in thousands) 2,532 2,529 (b) 2,418 - ------------------------------------------------------------------------------------------------------------- Total Cash Costs Per Ounce $ 202 $ 246 $ 261 ============================================================================================================= a. Eskay Creek sells ore and concentrates containing gold and silver directly to third-party smelters. For comparison purposes, cash operating costs per ounce include estimated third-party costs incurred by smelters and others to produce marketable gold and silver. b. Includes 16,600 ounces produced at the Ruby Hill mine during 1997, prior to commercial production, which are excluded from the cost per ounce calculation.
29 United States United States gold production of 691,500 ounces at a cash cost of $221 per ounce during 1998 compares to production of 702,800 ounces at a cash cost of $286 per ounce during 1997 and 732,100 ounces at a cash cost of $283 per ounce during 1996. The slight decrease in production and significant decrease in costs during 1998 primarily reflects lower production at the Homestake mine in South Dakota and initial production from the new Ruby Hill mine in Nevada. In January 1998, the Company began a major restructuring of underground operations at the Homestake mine to reduce operating costs. The new mine plan, which involved a workforce reduction of 450 employees, is designed to improve the grade of ore recovered through the increased use of mechanized cut-and-fill mining methods. Following an additional capital investment of approximately $30 million, the new plan contemplates annual gold production from the underground operations of 150,000 to 180,000 ounces of gold at a cash cost of $280 per ounce. The decision to proceed with the capital expenditure program will be made during the first half of 1999. Homestake mine production decreased to 277,400 ounces at a cash cost of $249 per ounce in 1998 from 397,300 ounces at a cash cost of $310 per ounce during 1997 and 407,300 ounces at a cash cost of $304 during 1996. The lower production and decrease in cash costs during 1998 reflects a decrease in the production levels in the higher-cost, higher-grade underground operations and an increase in the rate of processing the lower-cost, lower-grade Open Cut ore. Mining at the Open Cut was completed in September 1998 and the processing of remaining stockpiled ore will be completed during the second quarter of 1999. The Ruby Hill mine, which commenced commercial production effective January 1, 1998, produced 116,500 ounces of gold in 1998 at a cash cost of $122 per ounce. Production from the mine exceeded expectations in 1998 due to higher ore grades. Production at the McLaughlin mine in northern California totaled 128,700 ounces in 1998 compared to 118,500 ounces during 1997 and 185,500 ounces during 1996. In June 1996, mining operations were completed and the autoclaves were shut down as the orebody was depleted. Through 2002, lower-grade stockpiled ore will be processed through a conventional carbon-in-pulp circuit. Cash costs during 1998 were $219 per ounce compared to $254 per ounce during 1997 and $250 per ounce in 1996. The decrease in cash costs per ounce during 1998 is due to higher grades and cost containment measures. Production is expected to decrease and cash costs per ounce are expected to increase during 1999, as the higher-grade portion of the remaining stockpiles will be consumed by mid-1999. Canada Canadian gold production of 890,400 equivalent ounces at a cash cost of $166 per ounce during 1998 compares to production of 835,400 equivalent ounces at a cash cost of $186 per ounce during 1997 and 858,900 equivalent ounces at a cash cost of $200 per ounce during 1996. The increase in production and decrease in costs during 1998 primarily reflects higher production at the Eskay Creek mine in British Columbia and a weaker Canadian dollar, partially offset by lower production at the Hemlo mining camp in Ontario and at the Snip mine in British Columbia. Production at the Eskay Creek mine, consisting of payable gold and silver in ore and concentrates sold, increased to 504,800 equivalent ounces of gold during 1998 from 417,300 and 372,300 equivalent ounces in 1997 and 1996, respectively. Cash costs per equivalent ounce, including third-party smelter costs, decreased to $133 during 1998 from $157 per equivalent ounce during 1997 and $170 per equivalent ounce during 1996. The increase in 1998 production primarily is due to the new gravity/flotation mill commissioned in December 1997, which produced concentrates containing 107,300 equivalent ounces of gold, and the effect of a lower gold/silver equivalency. Eskay Creek silver production is converted to gold equivalent production using the ratio of the gold market price to the silver market price. During 1998, the Company converted silver to gold using an equivalency factor of 52.6 ounces of silver equals one ounce of gold production compared to equivalency factors of 68.2 ounces and 74.9 ounces of silver equals one ounce of gold production in 1997 and 1996, respectively. Cash costs per equivalent ounce declined in 1998 due to the lower-cost production from the mill and the weaker Canadian dollar. The lower 1997 costs per ounce compared to 1996 primarily were a result of increased ore sales, higher gold grades, productivity improvements, and a decrease in the gold/silver equivalency ratio, partially offset by lower silver grades. The Company's share of gold production from the Williams mine in the Hemlo mining camp amounted to 195,200 ounces at a cash cost of $217 per ounce during 1998 compared to 201,100 ounces at a cash cost of $229 per ounce during 1997 and 205,500 ounces at a cash cost of $222 per ounce during 1996. The production decreases in 1998 and 1997 were due to declines in ore grades, partially offset by increased throughput. The Company's share of production at the David Bell mine, also in the Hemlo mining camp, amounted to 79,800 ounces at a cash cost of $200 per ounce during 1998 compared to production of 90,000 ounces at a cash cost of $194 per ounce during 1997 and 97,700 ounces at a cash cost of $172 per ounce during 1996. The decline in production in 1998 is due to lower ore grades as the grade of ore mined more closely approximates the remaining average reserve grade. The decrease in production during 1997 from 1996 was due to lower ore grades, partially offset by higher throughput. Operation of the David Bell mill is expected to be discontinued 30 in the third quarter of 1999 and ore from both the Williams and David Bell mines will be processed at the lower-cost Williams mill. Production from the Snip mine decreased to 99,300 ounces at a cash cost of $205 per ounce during 1998 from 115,600 ounces at a cash cost of $213 per ounce during 1997 and 101,800 ounces at a cash cost of $190 per ounce during 1996. Production in 1998 decreased primarily due to lower grade. Production increased in 1997 compared to 1996 due to Homestake's April 1996 purchase of an additional 60% interest in the mine, partially offset by a decrease in total tonnage milled. This operation is expected to complete mining of the existing ore reserves and commence decommissioning and final reclamation in the second quarter of 1999. Australia Western Australian gold production of 925,700 ounces at a cash cost of $224 per ounce during 1998 compares to production of 974,300 ounces at a cash cost of $269 per ounce during 1997 and 818,600 ounces at a cash cost of $305 per ounce during 1996. The decrease in production during 1998 primarily reflects lower production at the Kalgoorlie and Plutonic operations, partially offset by higher production at the Lawlers and Darlot mines. The increase in production during 1997 from 1996 primarily reflects higher production at the Kalgoorlie, Plutonic and Lawlers operations. The decreases in cash costs per ounce during 1998 and 1997 primarily are due to the weaker Australian dollar and productivity improvements. Homestake's share of production from the Kalgoorlie operations totaled 390,200 ounces at a cash cost of $229 per ounce during 1998 compared to 425,900 ounces at a cash cost of $259 per ounce during 1997 and 368,800 ounces at a cash cost of $291 per ounce during 1996. The decrease in production in 1998 primarily is due to lower Fimiston mill throughput and a decrease in production at the Mt Charlotte mine. The increase in production during 1997 from 1996 reflects higher mill throughput, ore grades and recoveries. The decrease in cash costs in 1998 primarily reflects the weaker Australian dollar. The decrease in cash costs in 1997 from 1996 reflects higher production, the installation of a recycle crusher at the Fimiston mill, and a weakening of the Australian dollar. In June 1998, structural cracks were detected in the SAG mill ring gear of the Fimiston mill. Temporary repairs were made and operation of the SAG mill currently is being limited to 90% of rated power in order to minimize stress on the gear. A temporary replacement gear was fabricated and will be available for use as an emergency spare. A permanent replacement is expected to be available in May 1999. The underwriters of Homestake's property and business interruption insurance policies have acknowledged liability and the extent of the ultimate recovery is now being determined. Homestake recorded a reduction of $0.6 million in 1998 operating costs for its share of insurance proceeds pertaining to business interruption coverage related to 1998 operations. Further business interruption insurance proceeds related to 1999 operations are expected and will be offset against 1999 operating costs. In January 1999, Homestake and its 50% joint venture partner Normandy Mining Ltd. ("Normandy") announced that they had reached agreement with the current open-pit mining contractor to progressively transfer mining operations to Kalgoorlie Consolidated Gold Mines Pty Ltd over the next 12 months. Homestake's share of the total cost of the conversion project including the mining fleet acquisition is estimated to be $33.6 million. Once full conversion to owner mining is completed, Homestake expects Super Pit cash costs to be reduced by approximately $26 per ounce. During 1998, Homestake and Normandy announced a revised operating plan at the Mt Charlotte mine. The mine has experienced a downturn in economic performance and an increased level of ground movement. The new plan provides for a restricted level of mining activity in low-risk areas of the mine until approximately the fourth quarter of 1999. Performance of the mine will be monitored to determine whether the operation will continue beyond that period. Production at the Plutonic mine totaled 255,500 ounces in 1998 compared to 274,600 ounces in 1997 and 183,700 ounces in 1996. The decrease in production in 1998 from 1997 primarily is due to lower ore grades and lower mill throughput as the mine changes from an open pit to an underground mining operation. The increase in 1997 production primarily is due to an increase in throughput following an expansion of the mill in late 1996. During 1998, ore sourced from the underground operations provided 41% of total production compared to 26% in 1997 and 22% in 1996. Cash costs of $226 per ounce in 1998 compare to $234 per ounce in 1997 and $276 per ounce during 1996. Cash costs in 1998 decreased due to the weakening of the Australian dollar. In Australian dollars, cash costs per ounce increased by 5% in 1998 due to the lower production. Production at the Darlot mine increased to 77,500 ounces in 1998 compared to 65,200 ounces in 1997 and 62,800 ounces in 1996. The increase in production in 1998 was due to higher throughput and initial mining in the new higher-grade Centenary underground orebody. Cash costs of $250 per ounce in 1998 compare to $320 per ounce in 1997 and $345 per ounce during 1996. The lower cash costs per ounce primarily are due to the higher production and the weakening of the Australian dollar. Production from the higher-grade Centenary orebody is expected to increase through 1999 while in-fill drilling and ore block development continues. Production at the Lawlers mine increased to 126,400 ounces in 1998 from 87,500 and 50,600 ounces during 1997 and 1996, respectively. The increase in production in 1998 was due to higher grades and increased throughput, primarily from the New Holland and Fairyland deposits. Production increased in 1997 from 1996 primarily due to 31 higher-grade ore sourced from the New Holland pit. The weaker Australian dollar and higher production in conjunction with successful cost reduction efforts reduced cash costs to $181 per ounce in 1998 from $260 per ounce in 1997 and $417 per ounce in 1996. Open-pit mining was completed in October 1998. All production in 1999 is expected to be from the underground operations. During 1998, mining operations were completed at the 80%-owned Mt Morgans mine and at the 66.7%-owned Peak Hill mine. Processing of lower-grade stockpiles continued at the Mt Morgans mine until November 1998 and is expected to continue at the Peak Hill mine until October 1999. During 1998, the Company's share of production at the Mt Morgans mine decreased to 52,400 ounces at a cash cost of $213 per ounce, and the Company's share of production at the Peak Hill mine decreased to 23,800 ounces at a cash cost of $280 per ounce. Homestake is continuing active exploration in the vicinity of these properties. Main Pass 299: The Company has a 16.7% undivided interest in the Main Pass 299 sulfur mine and oil recovery operations in the Gulf of Mexico. During 1998, lower sales prices, reduced sales volumes and higher operating costs for both sulfur and oil operations resulted in Homestake recording a Main Pass 299 operating loss of $5.3 million compared to an operating loss of $3.6 million during 1997 and an operating profit of $1.3 million in 1996. In late September 1998, all Main Pass 299 drilling and production operations were shut down for three days in response to adverse weather conditions caused by a hurricane. The shutdown caused nine previously producing sulfur wells to require redrilling. As a result, production levels were lower and unit production costs increased during the fourth quarter of 1998 and are expected to continue to be higher in the first half of 1999. During 1997, due to a prolonged period of low sulfur prices and Homestake's assessment of estimated future cash flows from sulfur operations, the Company recorded a write-down of $107.8 million in its investment in Main Pass 299. As a result of this write-down, the Company's carrying value of the Main Pass 299 sulfur property, plant and equipment was reduced to zero at September 30, 1997. Other income (loss) of $(24.7) million in 1998 compares to $63.6 million in 1997 and $25.6 million in 1996. Other income in 1998 and 1997 includes foreign currency exchange losses of $40 million and $34.1 million, respectively, reflecting significant weakening of both the Canadian and Australian currencies in relation to the United States dollar. Other income in 1998 also includes gains on sales of investments of $5.3 million. Other income in 1997 also includes a gain of $62.9 million related to the fee received on termination of the merger with Santa Fe Pacific Gold Corporation ("Santa Fe"), income of $10.4 million related to an agreement to sell a right to cancel the Company's option to acquire shares of Great Central Mines Limited ("Great Central"), and a gain of $13.5 million from the sale of the George Lake and Back River joint venture interests. Other income in 1996 includes a gain of $7.9 million on the sale of an investment in Eagle Mining Corporation NL ("Eagle Mining"), income of $4.7 million on the execution of the agreement to cancel the Company's option to acquire shares of Great Central, and $8.9 million of foreign exchange losses, primarily on Canadian dollar denominated advances to HCI. Depreciation, depletion and amortization of $139.4 million during 1998 compares to $162.8 million during 1997 and $151.9 million during 1996. Depreciation expense decreased in 1998 from 1997 following the asset write-downs recorded in 1997 and 1998. The increase in depreciation in 1997 from 1996 reflects higher production, partially offset by reserve expansions at the Eskay Creek and Snip mines. Exploration expense of $55.3 million in 1998 compares to $65.2 million in 1997 and $67.4 million in 1996. During 1998, the Company continued to concentrate its exploration efforts in and around its existing operations. Significant expenditures were made in Western Australia around the operations acquired as part of the Plutonic acquisition and resulted in the discovery of additional reserves and mineralized zones at the Lawlers mine. In addition, mineralized zones have been identified at the Just-In-Case prospect near the Mt Morgans mine and at the Mt Goode nickel prospect owned by Lachlan Resources NL ("Lachlan"), an 81%-owned subsidiary of the Company acquired as part of the Plutonic acquisition. Significant expenditures also were made at the Eskay Creek and Ruby Hill mines, the Pinson mine in Nevada and at the Jeronimo project in Chile. The Company currently plans to spend approximately $45 million on exploration activities during 1999. Resource asset write-downs: During 1998, due to the continuing low-gold price environment, the Company reviewed the carrying values of its gold mining operations using a $325 per ounce gold price. As a result of this review, the Company determined that impairment existed and that write-downs were required to reduce the carrying values of several of its assets or operations. Based on estimated future cash flows, the Company did not expect to recover its remaining investments in property, plant and equipment at the Homestake and Mt Charlotte mines. Accordingly, the Company recorded write-downs of $76.1 million and $38.4 million reducing the remaining carrying values of property, plant and equipment at the Homestake and Mt Charlotte mines, respectively, to zero. The Company also recorded write-downs of $26.9 million related to other mineral properties, including $19.4 million related to mineral properties owned by Lachlan. In 1997, the Company reviewed the carrying values of its gold mining operations using a $350 per ounce gold price at its long-lived operations and $325 per ounce gold 32 price at its short-lived operations. As a result of that review, the Company determined that impairment existed and that write-downs were required to reduce the carrying values of several of its assets or operations with short remaining lives, including the Mt Morgans and Peak Hill mines, the Pinson mine, the Homestake mine's Open Cut, low-grade stockpiled ore and exploration properties at certain locations in Western Australia and redundant mining equipment at the Kalgoorlie operations. Environmental: During 1998, the Company recorded a provision for estimated additional remediation and related reclamation costs at the Homestake mine of $35 million. The recognition of this liability was caused by the findings of an environmental audit and changes in the operation's mining plans. The Company's estimates of its remediation and reclamation obligations are based on currently available facts, existing technology and presently enacted laws and regulations. The Company regularly reviews these obligations. However, it is reasonably possible that as reclamation plans and associated cost estimates change, the Company's remediation and reclamation liability could change significantly. Income and mining taxes: Homestake's income and mining tax rate was 5.7% during 1998 compared to 7.9% and 27.4% during 1997 and 1996, respectively. The geographic mix of pretax income and losses dramatically impacts the overall effective tax rate. During 1998, the Company had pretax income of $38.1 million in Canada, and pretax losses of $163.4 million and $94.9 million in the United States and Australia, respectively. In addition, the Company had pretax losses of $8 million in foreign jurisdictions other than Canada and Australia ("Other Foreign"). Homestake incurred a tax expense of $15.8 million on Canadian income, and a tax benefit of $28.9 million on Australian losses resulting in a net consolidated tax benefit of $13.1 million. In 1998, no tax benefit was recognized on losses incurred in the United States and Other Foreign jurisdictions due to the uncertainty of their realization. The Canadian statutory tax rate, including federal and provincial income tax and mining tax is approximately 49.2%. The Company's effective Canadian tax rate in 1998 was 41.7%, primarily reflecting the realization of a reduction in prior years' income tax accruals for certain contingencies that were favorably resolved. The Company's effective Australian tax rate was 30.5% in 1998 versus the statutory rate of 36% due to nondeductible expenses, which reduced the loss for tax purposes. The statutory tax rate in the United States is 35%. However, when the Company does pay tax, it is generally subject to the 20% Alternative Minimum Tax. The effective U.S. tax rate was zero in 1998 reflecting the increase in valuation allowances discussed below. In addition, no tax benefit was recorded for Other Foreign losses, due to the uncertainty of their realization. At December 31, 1998 and 1997 the Company had valuation allowances related to its deferred tax assets of $207.2 million and $107.9 million, respectively. Based on current projections of taxable income in United States and Other Foreign jurisdictions, Homestake does not expect to realize a benefit from these tax assets. In addition, there currently is not a strategy that would result in the realization of the Australian deferred tax assets. While circumstances could occur which would permit the Company to realize these benefits in the future, the Company's current projections indicate that it is more likely than not that these deferred tax assets will not be realized. Minority interests: Income allocable to minority interests in consolidated subsidiaries amounted to $3.2 million in 1998 compared to $4 million in 1997 and $13.3 million in 1996. The decrease in income allocable to minority interests in 1998 from 1997 primarily is attributable to the minority interests' share of the Lachlan mineral property write-downs. The decrease in income allocable to minority interests in 1997 from 1996 is due to reduced earnings from the Eskay Creek and Snip mines, and increases in exploration expenditures incurred by Lachlan and the Company's 51%-owned subsidiary, Agua de la Falda S.A. LIQUIDITY AND CAPITAL RESOURCES During 1998, Homestake's cash and equivalents and short-term investment balances increased by $34.1 million to $299.4 million. Net cash provided by operations in 1998 amounted to $119.9 million compared to $160 million and $182.2 million in 1997 and 1996, respectively. The decrease in cash provided by operations during 1998 primarily is due to lower gold prices and the inclusion in 1997 of the $65 million fee received on termination of the merger with Santa Fe. In July 1998, the Company entered into a new United States/Canadian/Australian cross-border credit facility providing a total availability of $430 million. The new facility replaced the Company's $275 million cross-border credit facility and Plutonic's A$400 million syndicated credit facility. The new facility is available through July 14, 2003 and provides for borrowings in United States, Canadian, or Australian dollars, or gold, or a combination of these. At December 31, 1998 Australian dollar-denominated borrowings of $142.4 million (A$233 million) were outstanding. Under the new facility, the Company pays a commitment fee on the unused portion of this facility ranging from 0.15% to 0.35% per annum, depending upon rating agencies' ratings for the Company's senior debt. The new credit agreement requires, amongst other provisions, a minimum consolidated net worth, as defined in the agreement 33 (primarily shareholders' equity plus the amount of all noncash write-downs made after December 31, 1997), of $500 million. Interest on the Australian dollar borrowings under the new facility is payable quarterly based on the Australian Bank Bill Swap Rate plus a margin of up to 1.125%. At December 31, 1998 this interest rate was 5.95%. The Company has $150 million of 5.5% convertible subordinated notes outstanding which mature on June 23, 2000. Interest on the notes is payable semiannually in June and December. The notes are convertible into the Company's common shares at a rate of $23.06 per common share and are redeemable by the Company in whole at any time. The Company expects to refinance these notes prior to their maturity. In July 1997, Lawrence County, South Dakota issued $30 million of South Dakota Solid Waste Disposal Revenue Bonds ("Waste Disposal Bonds") and $18 million of South Dakota Pollution Control Refunding Revenue Bonds, both of which are due in 2032. The Company is responsible for funding principal and interest payments on these bonds. Due to a reduction in the size of the Homestake mine tailings project, the Company has notified the trustee that it will redeem $10 million of the Waste Disposal Bonds in March 1999 out of the funds held in trust. See note 13 to the Consolidated Financial Statements for further information on the Company's long-term debt. The acquisition of the Prime minority interests was accounted for as a purchase. Based upon the total purchase price of $321.8 million (including $4 million of capitalized direct acquisition costs), the excess of the purchase price paid over the net book value of the minority interests acquired was $224 million of which $174 million ($259.6 million including an increase related to deferred taxes) was allocated to the Eskay Creek mine's ore reserves and $50 million ($74.6 million including an increase related to deferred taxes) was allocated to the Eskay Creek exploration properties. In February 1997, Homestake completed the sale of its interests in the George Lake and Back River joint ventures in Canada to Kit Resources Corporation ("Kit") for $9.3 million in cash and 3.6 million shares of Kit common stock. As a result of this transaction, the Company recorded a pretax gain of $13.5 million. In November 1997, Homestake purchased a 20% interest in Navan Bulgarian Mining BV ("Navan BV"), a wholly-owned subsidiary of Navan Resources plc, for $12 million. In September 1998, Homestake completed its evaluation of Navan BV's Chelopech project and concluded that the project did not warrant Homestake's participation and therefore terminated its participation in Navan BV. Navan BV returned approximately $11 million of Homestake's investment. In 1996, the Company paid $51.4 million to purchase the disproportionate sharing arrangement covering gold production from a portion of the Super Pit and now shares equally with Normandy in all gold produced at the Kalgoorlie operations. In 1996, Lachlan acquired 90.7% of Archaean Gold NL ("Archaean") for $36.8 million. In 1997, Lachlan acquired the remaining interest in Archaean. This acquisition, which was accounted for as a purchase, was funded by a $33.2 million (A$50.9 million) loan from the Company to Lachlan. In May 1998, Lachlan repaid this loan by issuing additional shares to the Company, which increased the Company's interest in Lachlan from 62.1% to 81.2%. In 1995, the Company provided Edensor Nominees Pty, Ltd. ("Edensor") with a loan facility for up to $37 million (A$50 million) and was granted an option to acquire 19.9% of the issued capital of Great Central in consideration for this loan. In 1996, the Company sold a right to cancel this option. The Company received $4.7 million in 1996 and $10.4 million in 1997 in respect to the cancellation of the Company's option. Borrowings by Edensor under the loan facility were repaid to the Company in 1997 and the loan facility was cancelled. During the fourth quarter of 1995 and the first quarter of 1996, Homestake acquired the 18.5% of HGAL it did not already own. The total purchase price was $164.9 million, including $141.7 million for 8.5 million newly issued shares of the Company, $19.5 million in cash and $3.7 million of transaction expenses. In October 1995, the Company acquired most of Dominion Mining Limited's ("Dominion") gold assets. As part of its agreement with Dominion, the Company offered Dominion shareholders the opportunity to subscribe for shares of the Company instead of receiving a return of Dominion capital. As a result, 2.3 million shares of the Company were issued to Dominion shareholders in January 1996 for consideration of $32.1 million. Capital expenditures of $73.3 million in 1998 include $11.2 million and $8 million at the Plutonic and Darlot mines, respectively, primarily for underground development work, $6 million at the Round Mountain mine for construction of new shops and other facilities, $12.7 million at the Homestake mine for underground operations, $7.3 million at the Kalgoorlie operations primarily to increase the flotation capacity at the Fimiston mill and complete a decline from surface and a ventilation raise at the Mt Charlotte mine. The remaining expenditures primarily were for replacement capital to maintain existing production capacity. In addition to sustaining capital, planned capital expenditures of approximately $124 million during 1999 include $46 million at the Super Pit primarily to purchase equipment for owner mining and to upgrade the Fimiston mill flotation circuit, $20 million, $16 million and $9 million at the Darlot, Plutonic, and Lawlers mines, respectively, primarily for underground development, and $11 million at the Homestake mine related to the restructuring of the underground operations. 34 During 1997, Homestake reduced its dividend rate to semiannual payments of $0.05 each. The Company paid cash income and mining taxes (net of tax refunds) of $22.6 million in 1998 compared to $66.2 million and $15.9 million in 1997 and 1996, respectively. The 1998 net payments include $9 million of net refunds for 1997 and earlier years and $31.6 million of Canadian estimated payments for the 1998 tax year. The decrease in net cash tax payments is due to refunds of prior years' tax payments in the United States. In addition, Canadian cash tax payments were lower in 1998 compared to 1997 due to the timing of estimated tax payments. Year 2000 Compliance The Company has completed a review of its computer-based information systems and has developed a plan to ensure that all of these systems will be Year 2000 compliant. With the exception of certain of the financial systems the Company acquired as part of the recent acquisition of Plutonic, Year 2000 compliant upgrades for the Company's core financial systems have been installed and tested. The non-compliant Plutonic financial systems and all other Company information systems hardware and software will be brought into compliance by mid-1999. The Company currently is in the process of identifying all microprocessor-controlled devices, including process-monitoring systems, in use at its operating locations to determine whether they are Year 2000 compliant. The identification phase is due to be completed by April 1999. The Company will upgrade systems and/or develop contingency plans based on this review. In addition, the Company is monitoring similar Year 2000 related activities at its joint venture operations where it is not the operator. A Year 2000 related microprocessor problem that is not identified or remedied at an operating location potentially could result in a production disruption at that location. The Company's total expenditures for the above Year 2000 activities are expected to be approximately $1.5 million and should not adversely impact other information system initiatives. Year 2000 expenditures during 1998 were approximately $0.8 million. The Company currently is surveying all major suppliers and customers to assess their Year 2000 compliance and, where practical, will make specific contingency plans based on the results of this survey. The greatest risk to the Company in this regard would be interruption in the supply of power, fuel and/or water to certain of its operating locations. A disruption in the supply of any of these utilities could significantly hamper or curtail production at an operating location until service is restored. A disruption in the supply of other services or supplies at an operating location potentially could result in a production disruption at that location. The Company's principal customers are major financial institutions. Because of government mandated Year 2000 compliance programs in that industry, the Company expects that their core financial operating systems will be Year 2000 compliant, and that there will be no significant disruption in the Company's ability to sell its gold production. Homestake will develop contingency plans if and when determined necessary based on its compliance efforts. The foregoing Year 2000 disclosures are based on Homestake's current expectations, estimates and projections. Because of uncertainties, the actual effects of the Year 2000 issues on Homestake may be different from the Company's current assessment. Factors, many of which are outside the control of the Company, that could affect Homestake's ability to be Year 2000 compliant by the end of 1999 include the failure of customers, suppliers, governmental entities and others to achieve compliance, and Homestake's inability or failure to identify all critical Year 2000 issues or to develop appropriate contingency plans for all Year 2000 issues that ultimately may arise. Cautionary Statement Under the Private Securities Litigation Reform Act This report contains forward-looking statements that are based on management's expectations and assumptions. They include statements preceded by the words "believe," "estimate," "expect," "intend," "will," and similar expressions, and estimates of reserves, future production and mine life, costs per ounce, reclamation and remediation costs, dates of construction completion, costs of capital projects and commencement of operations, exploration costs and taxes. Actual results may differ materially from expectations. Among the important factors that could cause actual results to differ materially are the following. Reserve estimation is an interpretive process based on drilling results and past experience as well as estimates of ore characteristics and mining dilution, prices, costs of mining and processing, capital expenditures and many other factors. Actual quality and characteristics of ore deposits cannot be known until ore is actually mined. Reserves change over time to reflect actual experience. Grades of ore processed at any time also may vary from reserve estimates due to geologic variations within areas mined. Production and mine lives may vary from estimates for particular properties and for the Company as a whole because of changes in reserves, variation in ore mined from estimated grade and metallurgical characteristics, unexpected ground conditions, mining dilution, labor actions, and government restrictions. Cash costs may vary due to changes from reserve and production estimates, unexpected mining conditions, and changes in estimated costs of equipment, supplies, utilities, labor costs and exchange rates. Noncash costs estimates, based on total capital costs and reserve estimates, change based on actual amounts of unamortized capital, changes in estimates of final reclamation, and changes in reserves. Reclamation and remediation cost estimates are based on existing and expected legal requirements, past experience, cost estimates by the Company and others, and expectations regarding government action and time for government agencies to act, all of which change over time and require periodic reevaluation. Capital cost estimates are based on operating experience, expected production, estimates by and contract terms with third-party suppliers, expected legal requirements, feasibility reports by Company personnel and others, and other factors. Factors involved in estimated time for completion of projects include the Company's experience in completing capital projects, estimates by and contract terms with contractors, engineers, suppliers and others involved in design and construction of projects, and estimated time for the government to process applications, issue permits and take other actions. Changes in any factor may cause costs and time for completion to vary significantly from estimates. There is a greater likelihood of variation for properties and facilities not yet in production due to lack of actual experience. Exploration cost estimates are based on past experience, estimated levels of future activity and assumptions regarding results on a particular property and change based on actual exploration results (increasing or decreasing expenditures), changed conditions and property acquisitions and dispositions. Tax estimates reflect expectations regarding geographic sources of income, locations of expenditures and expected tax rates in each jurisdiction, and change as the mix of income, expenditures and tax rates change. 35 Homestake Mining Company and Subsidiaries Statements of Consolidated Operations (In thousands, except per share amounts)
For the years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Revenues Gold and ore sales $ 782,159 $ 863,628 $ 921,685 Sulfur and oil sales 20,975 26,821 30,749 Interest income 19,383 17,320 20,392 Other income (loss) (note 4) (24,740) 63,646 25,620 - --------------------------------------------------------------------------------------------------------------------------- 797,777 971,415 998,446 - --------------------------------------------------------------------------------------------------------------------------- Costs and Expenses Production costs 537,291 627,639 615,491 Depreciation, depletion and amortization 139,371 162,781 151,852 Administrative and general expense 46,214 48,905 48,664 Exploration expense 55,345 65,238 67,363 Interest expense 20,884 20,756 19,140 Business combination and integration costs (note 3) 19,077 Write-downs and other unusual charges (note 5) 203,657 285,315 8,983 Other expense 4,165 6,836 5,592 - --------------------------------------------------------------------------------------------------------------------------- 1,026,004 1,217,470 917,085 - --------------------------------------------------------------------------------------------------------------------------- Income (Loss) Before Taxes and Minority Interests (228,227) (246,055) 81,361 Income and Mining Taxes (note 6) 13,087 19,458 (22,328) Minority Interests (3,185) (4,009) (13,268) - --------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ (218,325) $ (230,606) $ 45,765 =========================================================================================================================== Net Income (Loss) Per Share (Basic and Diluted) $ (1.02) $ (1.10) $ 0.22 =========================================================================================================================== Average Shares Used in the Computation 213,354 210,537 210,027 ===========================================================================================================================
The accompanying notes are an integral part of these financial statements. 36 Homestake Mining Company and Subsidiaries Consolidated Balance Sheets (In thousands, except per share amount)
December 31, 1998 and 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash and equivalents $ 145,069 $ 124,083 Short-term investments 154,346 141,221 Receivables (note 7) 45,891 43,529 Inventories (note 8) 78,906 103,925 Deferred income and mining taxes (note 6) 22,792 19,372 Other 5,102 13,154 - --------------------------------------------------------------------------------------------------------------------------- Total current assets 452,106 445,284 Property, Plant and Equipment - Net (note 9) 1,100,864 1,021,147 Investments and Other Assets Noncurrent investments (note 10) 12,945 41,094 Other assets (note 11) 81,616 102,009 - --------------------------------------------------------------------------------------------------------------------------- Total investments and other assets 94,561 143,103 - --------------------------------------------------------------------------------------------------------------------------- Total Assets $1,647,531 $1,609,534 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 42,580 $ 59,930 Accrued liabilities (note 12) 101,988 68,641 Income and other taxes payable 3,151 277 - --------------------------------------------------------------------------------------------------------------------------- Total current liabilities 147,719 128,848 Long-term Liabilities Long-term debt (note 13) 357,410 374,593 Other long-term obligations (note 14) 168,178 152,610 - --------------------------------------------------------------------------------------------------------------------------- Total long-term liabilities 525,588 527,203 Deferred Income and Mining Taxes (note 6) 230,567 161,862 Minority Interests in Consolidated Subsidiaries 7,825 108,116 Shareholders' Equity (note 17) Capital stock, $1 par value per preferred and common share: Authorized - Preferred: 10,000 shares; no shares outstanding - Common: 1998 - 450,000; 1997 - 250,000 Outstanding - HCI exchangeable shares: 1998 - 11,139 - Common: 1998 - 228,012; 1997 - 210,696 228,012 210,696 Additional paid-in capital 904,567 601,916 Deficit (337,332) (97,553) Accumulated other comprehensive loss (59,415) (31,554) - --------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 735,832 683,505 - --------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $1,647,531 $1,609,534 ===========================================================================================================================
Commitments and Contingencies - see notes 19 and 20. The accompanying notes are an integral part of these financial statements. 37 Homestake Mining Company and Subsidiaries Statements of Consolidated Shareholders' Equity (In thousands)
Accumulated Other Comprehensive Income --------------------------- Additional Retained Accumulated Unrealized For the years ended Common Paid-in Earnings Translation Securities December 31, 1998, 1997 and 1996 Stock Capital (Deficit) Adjustments Gains(Losses) Total - ----------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1995 $ 201,883 $ 472,889 $162,350 $ 12,819 $ (1,301) $848,640 Comprehensive income: Net income 45,765 45,765 Other comprehensive income (loss) 45,445 (7,082) 38,363 Dividends paid (43,278) (43,278) Exercise of stock options 299 2,726 3,025 Stock issued for purchase of assets of Dominion (note 3) 2,273 29,815 32,088 Stock issued for purchase of HGAL minority interests (note 3) 5,976 93,370 99,346 Other (12) (112) (124) - ---------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1996 210,419 598,688 164,837 58,264 (8,383) 1,023,825 Comprehensive income: Net loss (230,606) (230,606) Other comprehensive income (loss) (91,645) 10,210 (81,435) Dividends paid (31,784) (31,784) Exercise of stock options 277 1,012 1,289 Other 2,216 2,216 - ---------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1997 210,696 601,916 (97,553) (33,381) 1,827 683,505 Comprehensive income: Net loss (218,325) (218,325) Other comprehensive income (loss) (31,798) 3,937 (27,861) Dividends paid (21,454) (21,454) Stock issued to employee savings plan 148 1,416 1,564 Stock issued for acquisition of Plutonic options and partly-paid shares (note 3) 503 (503) - Stock issued for purchase of Prime minority interests (note 3): Homestake common shares 16,672 173,843 190,515 HCI exchangeable shares 127,285 127,285 Other (7) 610 603 - ---------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1998 $ 228,012 $ 904,567 $ (337,332) $ (65,179) $ 5,764 $735,832 ============================================================================================================================
The accompanying notes are an integral part of these financial statements. 38 Homestake Mining Company and Subsidiaries Statements of Consolidated Cash Flows (In thousands)
For the years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Cash Flows From Operations Net income (loss) $ (218,325) $ (230,606) $ 45,765 Reconciliation to net cash provided by operations: Depreciation, depletion and amortization 139,371 162,781 151,852 Write-downs and other unusual charges (note 5) 194,778 285,315 8,983 Foreign currency exchange losses on intercompany debt (note 4) 5,671 5,657 8,943 Gains on asset disposals (3,651) (16,926) (12,305) Deferred income and mining taxes (note 6) (39,436) (56,318) (19,620) Minority interests 3,185 4,009 13,268 Reclamation - net 1,404 2,970 (20) Other items - net (12,477) 11,345 (2,498) Effect of changes in operating working capital items: Receivables (6,890) (372) 12,337 Inventories 43,815 2,932 (44,947) Accounts payable (15,912) 9,582 4,808 Accrued liabilities and taxes payable 26,756 (18,720) 24,183 Other 1,634 (1,625) (8,572) - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operations 119,923 160,024 182,177 - ---------------------------------------------------------------------------------------------------------------------- Investment Activities Increase in short-term investments (19,307) (11,063) (63,742) Proceeds from asset sales 15,566 33,494 49,221 Additions to property, plant and equipment (73,323) (204,629) (169,950) Decrease (increase) in restricted cash 2,429 (15,990) Investments in mining companies 11,088 (22,950) (65,006) Receipt from (advance to) Edensor 37,210 (6,599) Purchase of interest in Snip mine (note 3) (39,279) Other (2,430) (3,171) - ---------------------------------------------------------------------------------------------------------------------- Net cash used in investment activities (63,547) (186,358) (298,526) - ---------------------------------------------------------------------------------------------------------------------- Financing Activities Borrowings 97,676 126,457 56,775 Debt repayments (105,236) (49,629) (9,788) Dividends paid on common shares - Homestake (21,454) (31,784) (43,278) - Prime minority interests (1,040) (2,151) (2,205) Common shares issued 1,289 35,113 Other 1,795 4,234 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (28,259) 48,416 36,617 - ---------------------------------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash and Equivalents (7,131) (2,656) 2,541 - ---------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Equivalents 20,986 19,426 (77,191) Cash and Equivalents, January 1 124,083 104,657 181,848 - ---------------------------------------------------------------------------------------------------------------------- Cash and Equivalents, December 31 $ 145,069 $ 124,083 $ 104,657 ======================================================================================================================
The accompanying notes are an integral part of these financial statements. 39 Homestake Mining Company and Subsidiaries Statements of Consolidated Comprehensive Income (Loss) (In thousands)
For the years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ (218,325) $ (230,606) $ 45,765 - ------------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss) Changes in unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period 1,213 (32,128) (15,161) Less: Reclassification adjustments for gains and losses included in net income (loss) (1,620) (43,403) (8,211) - ------------------------------------------------------------------------------------------------------------------------------- 2,833 11,275 (6,950) Income taxes 1,104 (1,065) (132) - ------------------------------------------------------------------------------------------------------------------------------- 3,937 10,210 (7,082) Foreign currency translation adjustments (before and after tax) (31,798) (91,645) 45,445 - ------------------------------------------------------------------------------------------------------------------------------ Other Comprehensive Income (Loss) (27,861) (81,435) 38,363 - ------------------------------------------------------------------------------------------------------------------------------ Comprehensive Income (Loss) $ (246,186) $ (312,041) $ 84,128 - ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 40 Notes to Consolidated Financial Statements (Unless otherwise noted, all tabular amounts are in thousands) Note 1: Nature of Operations Homestake Mining Company ("Homestake" or the "Company") is engaged in gold mining and related activities including exploration, extraction, processing, refining and reclamation. Gold bullion, the Company's principal product, is produced and sold in the United States, Canada, Australia and Chile. Ore and concentrates containing gold and silver from the Eskay Creek and Snip mines in Canada are sold directly to smelters. Note 2: Significant Accounting Policies Basis of presentation: The consolidated financial statements include Homestake and its majority-owned subsidiaries, and their undivided interests in joint ventures after elimination of intercompany amounts. Undivided interests in gold mining operations (the Round Mountain, Pinson and Marigold mines in Nevada; Homestake Gold of Australia Limited's ("HGAL") interest in the Kalgoorlie operations in Western Australia; Plutonic Resources Limited's ("Plutonic") interests in the Mt Morgans and Peak Hill mines in Western Australia; and Homestake Canada Inc.'s ("HCI") interests in the Williams and David Bell mines in Canada) and in the sulfur and oil recovery operations at Main Pass 299 in the Gulf of Mexico are reported using pro rata consolidation whereby the Company reports its proportionate share of assets, liabilities, income and expenses. Use of estimates: The preparation of financial statements in conformity with United States generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. Cash and equivalents include all highly-liquid investments with a maturity of three months or less at the date of purchase. The Company minimizes its credit risk by investing its cash and equivalents with major international banks and financial institutions located principally in the United States, Canada and Australia. The Company believes that no concentration of credit risk exists with respect to investment of its cash and equivalents. Short-term investments principally consist of highly-liquid United States and foreign government and corporate securities with original maturities in excess of three months. The Company classifies all short-term investments as available-for-sale securities. Unrealized gains and losses on these investments are recorded in accumulated other comprehensive income as a separate component of shareholders' equity, except that declines in market value judged to be other than temporary are recognized in determining net income. Inventories, which include finished products, ore in process, stockpiled ore, ore in transit, and supplies, are stated at the lower of cost or net realizable value. The cost of gold produced by certain United States operations is determined principally by the last-in, first-out method. The cost of other inventories is determined primarily by averaging methods. Exploration costs are expensed as incurred. All costs related to property acquisitions are capitalized. Development costs: Following completion of a favorable feasibility study, development costs incurred to place new mines into production and to complete major development projects at operating mines are capitalized. Ongoing costs to maintain production are expensed as incurred. Depreciation, depletion and amortization of mining properties, mine development costs and major plant facilities is computed principally by the units-of-production method based on estimated quantities of ore which can be recovered economically in the future from known mineral deposits. Such estimates are based on current and projected costs and prices. Other equipment and plant facilities are depreciated using straight-line or accelerated methods principally over estimated useful lives of three to ten years. Property evaluations: Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If deemed impaired, an impairment loss is measured and recorded based on the fair value of the asset, which generally will be computed using discounted cash flows. Estimated future net cash flows from each mine are calculated using estimates of production, future sales prices (considering historical and current prices, price trends and related factors), production costs, capital and reclamation costs. (See note 5.) The Company's estimates of future cash flows are subject to risks and uncertainties. Therefore, it is possible that changes could occur which may affect the recoverability of the Company's investments in mineral properties and other assets. 41 Undeveloped properties upon which the Company has not performed sufficient exploration work to determine whether significant mineralization exists are carried at original acquisition cost. If it is determined that significant mineralization does not exist, the property would be written down to estimated net realizable value at the time of such determination. Reclamation and remediation: Reclamation costs (undiscounted) and related liabilities, which are based on the Company's interpretation of current environmental and regulatory requirements, are accrued and expensed principally by the units-of-production method based on estimated quantities of ore which can be recovered economically in the future from known mineral deposits. Remediation liabilities, including estimated governmental oversight costs, are expensed upon determination that a liability has been incurred and where a minimum cost or reasonable estimate of the cost can be determined. (See notes 5 and 19.) Amounts to be received from the Federal Government for its 51.2% share of the cost of future reclamation activities at the Grants, New Mexico uranium facility are offset against the remaining estimated Grants reclamation liabilities and are recorded in the period that such expenditures are made. Based on current environmental regulations and known reclamation requirements, the Company has included its best estimates of these obligations in its reclamation accruals. The Company updates these estimates regularly, however, the Company's estimates of its ultimate reclamation liabilities could change significantly as a result of changes in regulations or cost estimates. Investments and other assets: Investments in mining securities that have readily determinable fair values and assets held in trust to fund employee benefits are classified as available-for-sale investments. Unrealized gains and losses on these investments are recorded in accumulated other comprehensive income as a separate component of shareholders' equity, except that declines in market value judged to be other than temporary are recognized in determining net income. Realized gains and losses on these investments are included in determining net income. Product sales are recognized when title passes at the shipment or delivery point. Derivative financial instruments: The Company uses derivative financial instruments as part of an overall risk-management strategy. These instruments are used as a means of hedging exposure to precious metals prices and foreign currency exchange rates. The Company does not hold or issue derivative financial instruments for trading purposes. The Company's accounting for derivative financial instruments is in accordance with the concepts established in Statement of Financial Accounting Standards ("SFAS") No. 80, "Accounting for Futures Contracts," SFAS No. 52, "Foreign Currency Translation," American Institute of Certified Public Accountants Statement of Positions 86-2, "Accounting for Options," and various Emerging Issues Task Force ("EITF") pronouncements. The Company uses forward sales contracts and combinations of put and call options to hedge its exposure to precious metals prices. The underlying hedged production is designated at the inception of the hedge. Deferral accounting is applied only if the derivatives continue to reduce the price risk associated with the underlying hedged production. Contracted prices on forward sales contracts and options are recognized in product sales as the designated production is delivered or sold. In the event of early settlement of hedge contracts, gains and losses are deferred and recognized in income at the originally designated delivery date. The Company uses combinations of put and call options to hedge its exposure to foreign currency exchange rates. Currently, these options do not qualify for deferral accounting and, accordingly, are marked to market at each balance sheet date. Realized and unrealized gains and losses on these options are recognized in other income. In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires that all derivatives be recognized as assets or liabilities and be measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivatives and whether they qualify for hedge accounting as either a fair value hedge or a cash flow hedge. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows of the hedging instruments and the hedged items. SFAS 133 is effective for fiscal years beginning after June 15, 1999 but earlier adoption is permitted. The Company believes that under SFAS 133, changes in unrealized gains and losses on Homestake's foreign currency contracts will qualify for hedge accounting and accordingly will be recorded in other comprehensive income. However, there are many complexities to this new standard and the Company currently is evaluating the impact that SFAS 133 will have on reported operating results and financial position and has not yet determined whether it will adopt SFAS 133 earlier than January 1, 2000. Income taxes: The Company follows the liability method of accounting for income taxes whereby deferred income taxes are recognized for the tax consequences of temporary differences by applying statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of certain assets and liabilities. Changes in deferred tax assets and liabilities include the impact of any tax rate changes enacted during the year. Mining taxes represent Canadian provincial taxes levied on mining operations. 42 Foreign currency: Substantially all assets and liabilities of foreign subsidiaries are translated at exchange rates in effect at the end of each period. Revenues and expenses are translated at the average exchange rate for the period. Accumulated currency translation adjustments are included in accumulated other comprehensive income as a separate component of shareholders' equity. Foreign currency transaction gains and losses are included in the determination of net income. Pension plans and other postretirement benefits: Pension costs related to United States employees are determined using the projected unit credit actuarial method. The Company's funding policy for defined benefit pension plans is to fund the plans annually to the extent allowed by the applicable regulations. In addition, the Company provides medical and life insurance benefits for certain retired employees and accrues the cost of such benefits over the period in which active employees become eligible for the benefits. The costs of the postretirement medical and life insurance benefits are paid at the time such benefits are provided. Net income or loss per share is computed by dividing net income or loss by the weighted average number of common shares outstanding, including the HCI exchangeable shares (see notes 3 and 17). The Company's basic and diluted net income or loss per share are the same since the exercise of stock options and the conversion of the 5.5% convertible subordinated notes would produce anti-dilutive results. Preparation of financial statements: Certain 1997 and 1996 amounts have been reclassified to conform to the current year's presentation. All dollar amounts are expressed in United States dollars unless otherwise indicated. Note 3: Acquisitions and Divestitures Plutonic Resources Limited: On April 30, 1998 Homestake completed the acquisition of Plutonic, a publicly-traded Australian gold producer, by an exchange of common stock for common stock. Homestake issued 64.4 million common shares to acquire Plutonic, including 63.9 million shares in exchange for all of the Plutonic fully-paid ordinary shares outstanding based on an exchange ratio of 0.34 Homestake common shares for each Plutonic fully-paid ordinary share, and 0.5 million Homestake common shares for the Plutonic partly-paid shares and options outstanding. The business combination with Plutonic was accounted for as a pooling of interests and accordingly, Homestake's consolidated financial statements include Plutonic for all periods. Combined and separate results for Homestake and Plutonic for the three months ended March 31, 1998 and for the years ended December 31, 1997 and 1996 are as follows:
Homestake Plutonic Historical Historical(a) Adjustments(b) Combined ---------------------------------------------------------------------- Three months ended March 31, 1998: Revenues $ 174,343 $ 43,624 $ (1,750) $ 216,217 Net loss (4,611) (76) (1,899) (6,586) Shareholders' equity at March 31 522,925 184,379 (37,291) 670,013 Year ended December 31, 1997: Revenues 723,834 248,519 (938) 971,415 Net loss (168,879) (33,998) (27,729) (230,606) Shareholders' equity at December 31 531,750 186,577 (34,822) 683,505 Year ended December 31, 1996: Revenues 766,936 238,065 (6,555) 998,446 Net income (loss) 30,281 18,984 (3,500) 45,765 Shareholders' equity at December 31 768,552 268,168 (12,895) 1,023,825 a) The Plutonic historical results of operations have been adjusted to reflect i) presentation of Plutonic's results of operations in accordance with United States generally accepted accounting principles and the format and classifications utilized by Homestake, and ii) translation into U.S. dollars using the average exchange rate for each period. Shareholders' equity has been translated into U.S. dollars using the end-of-period exchange rates. b) In combining the historical results of Homestake and Plutonic, certain adjustments were made to conform Plutonic's accounting policies to Homestake's accounting policies. The effect of these adjustments on combined net income (loss) is as follows: Three months ended Year ended December 31, March 31, 1998 1997 1996 --------------------------------------------------------- Revenue recognition $ (1,293) $ 377 $ (3,318) Reclamation expense (474) (1,215) (1,430) Depreciation, depletion and amortization (1,141) (6,958) Income taxes 1,009 (19,933) 1,248 -------------------------------------------------------- $ (1,899) $ (27,729) $ (3,500) =========================================================
Business combination and integration costs of $19.1 million were incurred including transaction costs related to the merger of $12.4 million and post-combination severance, lease termination, and other costs of $6.7 million. Prime Resources Group Inc. On December 3, 1998 Homestake acquired the 49.4% of Prime Resources Group Inc. ("Prime") it did not already own. Prime shareholders (other than Homestake) received 0.74 of a Homestake common share or 0.74 of an HCI exchangeable share for each share of Prime. Each HCI exchangeable share is 43 exchangeable for one Homestake common share at any time at the option of the holder and has essentially the same voting, dividend (payable in Canadian dollars) and other rights as one Homestake common share. Homestake issued 16.7 million Homestake shares and 11.1 million HCI exchangeable shares valued in total at $317.8 million. The acquisition of the Prime minority interests was accounted for as a purchase. Based upon the total purchase price of $321.8 million (including $4 million of capitalized direct acquisition costs), the excess of the purchase price paid over the net book value of the minority interests acquired was $224 million of which $174 million ($259.6 million including an increase related to deferred taxes in accordance with SFAS 109) was allocated to the Eskay Creek mine's ore reserves and $50 million ($74.6 million including an increase related to deferred taxes in accordance with SFAS 109) was allocated to the Eskay Creek exploration properties. On a pro forma basis, assuming that the acquisition of the Prime minority interests occurred on January 1, 1998, revenues, net loss and net loss per share for the year ended December 31, 1998 have been estimated at $797.6 million, $227.2 million and $0.95 per share, respectively, and, assuming that the acquisition of the Prime minority interests occurred on January 1, 1997, revenues, net loss and net loss per share for the year ended December 31, 1997 have been estimated at $971.2 million, $236.9 million and $0.99 per share, respectively. This pro forma information includes adjustments which are based on certain assumptions that the Company believes are reasonable in the circumstances. The pro forma information is unaudited and does not purport to represent what the results of operations actually would have been had the acquisition of the Prime minority interests occurred at the beginning of each year presented or to project the results of operations for any future date or period. Homestake Gold of Australia Limited: During the fourth quarter of 1995 and the first quarter of 1996, Homestake acquired the 18.5% of HGAL it did not already own. The total purchase price was $164.9 million, including $141.7 million for 8.5 million newly issued shares of the Company, $19.5 million in cash and $3.7 million of transaction expenses. The acquisition of the HGAL minority interests was accounted for as a purchase. Mt Morgans Mine: In October 1995, the Company acquired most of Dominion Mining Limited's ("Dominion") gold assets, including an 80% interest in the Mt Morgans mine. The net purchase price after working capital adjustments was $39.1 million. As part of its agreement with Dominion, the Company offered Dominion shareholders the opportunity to subscribe for shares of the Company instead of receiving a return of Dominion capital. As a result, 2.3 million shares of the Company were issued to Dominion shareholders on January 29, 1996 for consideration of $32.1 million. Snip Mine: In April 1996, Prime purchased Cominco Ltd.'s 60% interest in the Snip mine in British Columbia, Canada for $39.3 million in cash. As a result of this purchase, Prime became the sole owner of the Snip mine. Archaean Gold NL: In July 1996, Lachlan Resources NL ("Lachlan"), acquired 90.7% of Archaean Gold NL ("Archaean") for $36.8 million. In April 1997, Lachlan acquired the remaining interest in Archaean. This acquisition, which was accounted for as a purchase, was funded by a $33.2 million (A$50.9 million) loan from the Company to Lachlan. In May 1998, Lachlan repaid this loan by issuing additional shares to the Company which increased the Company's interest in Lachlan from 62.1% to 81.2%. George Lake and Back River Joint Ventures: In February 1997, Homestake sold its interests in the George Lake and Back River joint ventures in Canada to Kit Resources Corporation ("Kit") for $9.3 million in cash and 3.6 million shares of Kit common stock. As a result of this transaction, the Company recorded a pretax gain of $13.5 million in the first quarter of 1997, which was included in other income. Note 4: Other Income (Loss)
1998 1997 1996 ----------------------------------------------------------- Gains on asset disposals $ 3,651 $ 16,926 $ 12,305 Foreign currency contract gains (losses) (34,332) (28,453) 1,632 Foreign currency exchange losses on intercompany advances (5,671) (5,657) (8,943) Gain on sale of Great Central option 10,419 4,699 Gain on termination of Santa Fe merger 62,925 Other 11,612 7,486 15,927 ----------------------------------------------------------- $ (24,740) $ 63,646 $ 25,620 ===========================================================
In March 1997, Santa Fe Pacific Gold Corporation terminated its merger agreement with Homestake and paid Homestake a $65 million termination fee. As a result, in 1997 the Company recorded a pretax gain of $62.9 million ($47.2 million after tax), net of merger related expenses of $2.1 million incurred in 1997. Other expense for the year ended December 31, 1996 included $3.4 million of expenses related to this proposed merger. 44 Note 5: Write-downs and Other Unusual Charges
1998 1997 1996 ------------------------------------------------- Reduction in the carrying values of resource assets (a) $ 141,425 $ 84,655 Increase in the estimated accrual for remediation and reclamation expenditures (b) 36,000 29,156 Homestake mine restructuring charges (c) 8,879 Write-down of Homestake's investment in the Main Pass 299 sulfur mine (d) 107,761 Write-downs of noncurrent investments (e) 8,213 47,932 $8,983 Other 9,140 15,811 ------------------------------------------------ $ 203,657 $ 285,315 $8,983 ================================================= a) During 1998, due to the continuing low-gold price environment, the Company reviewed the carrying values of its gold mining operations using a $325 per ounce gold price. As a result of this review, the Company determined that impairment write-downs were required to reduce the carrying values of several of its assets or operations as follows: i. Based on estimated future cash flows, the Company does not expect to recover its remaining investment in property, plant and equipment at the Homestake mine in South Dakota. The total amount of the write-down was $76.1 million, thereby reducing the carrying value of the mine to zero. ii. Based on estimated future cash flows, the Company recorded a write-down of property at the Mt Charlotte mine in Western Australia of $34.5 million and recorded severance and other charges of $3.9 million. iii. Based on its evaluations of the recoverability of the carrying values of other mineral properties, the Company also recorded write-downs of $26.9 million, including $22.3 million related to mineral properties acquired as part of the acquisition of Plutonic. In 1997, the Company reviewed the carrying values of its gold mining operations using a $350 per ounce gold price at its long-lived operations and $325 per ounce gold price at its short-lived operations. As a result of this review, the Company determined that impairment write-downs were required to reduce the carrying values of several of its assets or operations with short remaining lives, including the Mt Morgans and Peak Hill mines, the Pinson mine, the Homestake mine's Open Cut, low-grade stockpiled ore and exploration properties at certain locations in Western Australia and redundant mining equipment at the Kalgoorlie operations. b) In 1998, following an environmental audit at the Homestake mine and a change in that operation's mining plans, the Company recorded a provision for estimated additional remediation and related reclamation costs of $35 million. In addition, a $1 million increase in the provision for reclamation at closed operations was recorded in 1998. In 1997, as a result of a review of the Company's reclamation liabilities, the Company determined that it was necessary to increase reclamation accruals for certain of its nonoperating properties including the Santa Fe mine in Nevada, the Nickel Plate mine in Canada and the Grants uranium complex in New Mexico to reflect revised estimates, changed conditions and more stringent future reclamation requirements. c) In January 1998, the Company commenced a restructuring of underground operations at the Homestake mine, including a significant reduction in that mine's workforce. As a result of the restructuring, the Company recorded severance and other costs of $8.9 million, net of pension and other postretirement curtailment and settlement gains of $9.3 million. d) Homestake owns a 16.7% undivided interest in the Main Pass 299 sulfur mine. Due to a prolonged period of low sulfur prices and Homestake's assessment of estimated future cash flows from the Main Pass 299 sulfur mine, in 1997 the Company wrote-off its remaining investment in the Main Pass 299 sulfur property, plant and equipment. e) During 1998 and 1997, the Company recorded in income the reductions in the carrying values of certain marketable securities and other investments that it deemed to be other than temporary.
Note 6: Income Taxes The provision for income and mining taxes consists of the following:
1998 1997 1996 ------------------------------------------------------------- Current Income taxes Federal $(11,248) $ 1,023 $ (1,999) State (84) Canadian 22,576 26,048 28,367 Other 421 (8) 616 ------------------------------------------------------------- 11,665 27,063 26,984 Canadian mining taxes 14,684 9,797 14,964 ------------------------------------------------------------- Total current taxes 26,349 36,860 41,948 ------------------------------------------------------------- Deferred Income taxes Federal 9,964 (29,203) (3,879) State 947 2,026 (1,300) Canadian (19,286) (7,039) (14,588) Australian (28,947) (22,282) (2,024) ------------------------------------------------------------- (37,322) (56,498) (21,791) Canadian mining taxes (2,114) 180 2,171 ------------------------------------------------------------- Total deferred taxes (39,436) (56,318) (19,620) ------------------------------------------------------------- Total income and mining taxes $(13,087) $(19,458) $ 22,328 =============================================================
45 The provision for income taxes is based on pretax income (loss) before minority interests as follows:
1998 1997 1996 --------------------------------------------------------------- United States $(163,374) $ (167,570) $(14,003) Canada 38,058 50,592 95,548 Australia (94,903) (115,323) 7,840 Other foreign (8,008) (13,754) (8,024) --------------------------------------------------------------- $(228,227) $ (246,055) $ 81,361 ===============================================================
Deferred tax liabilities and assets as of December 31, 1998 and 1997 relate to the following:
December 31, 1998 1997 ----------------------- Deferred Tax Liabilities Depreciation and other resource property differences United States $ 18,598 Canada - Federal $ 78,647 29,906 Canada - Provincial 114,754 61,509 Australia 62,473 112,356 ----------------------- 255,874 222,369 Other 47,176 31,697 ----------------------- Gross deferred tax liabilities 303,050 254,066 ----------------------- Deferred Tax Assets Tax loss carry-forwards United States 15,364 Australia 27,614 52,868 Chile 25,230 23,943 Other 2,943 2,512 ----------------------- 71,151 79,323 Reclamation costs United States 30,050 16,827 Other 13,832 13,393 ----------------------- 43,882 30,220 Employee benefit costs 28,234 28,716 Alternative minimum tax credit carry-forwards 31,677 10,200 Depreciation, land and other resource property 61,855 18,750 Inventory 12,804 23,149 Foreign tax credit carry-forwards 12,007 5,857 Unrealized foreign exchange losses 15,305 9,157 Write-downs of noncurrent investments 11,567 9,619 Other 13,968 4,505 ----------------------- Gross deferred tax assets 302,450 219,496 Deferred tax asset valuation allowances (207,175) (107,920) ----------------------- Net deferred tax assets 95,275 111,576 ----------------------- Net deferred tax liability $ 207,775 $ 142,490 ======================= Net deferred tax liability consists of Current deferred tax assets $(22,792) $ (19,372) Long-term deferred tax liability 230,567 161,862 ----------------------- Net deferred tax liability $207,775 $ 142,490 =======================
The classification of deferred tax assets and liabilities as current or long term is based on the related asset or liability creating the deferred tax. Deferred taxes not related to a specific asset or liability are classified based on the estimated period of reversal. The $207.2 million deferred tax valuation allowance at December 31, 1998 represents the portion of the Company's consolidated deferred tax assets which, based on projections at December 31, 1998, the Company does not believe realization is "more likely than not." The deferred tax valuation allowance consists of United States, South America, Australia and Canada unrealized deferred tax assets of $150.6 million, $28.2 million, $27.7 million, and $0.7 million, respectively. The 1998 net increase in the valuation allowance for United States deferred tax assets of $94.1 million is comprised of the following increases: $51.1 million for future tax deductions, $5.4 million for the 1998 net operating loss, $10 million for the 1997 net operating loss, $21.5 million for alternative minimum tax credits, and $6.1 million for foreign tax credits. Valuation allowances increased for South America, Australia and Canada by $1 million, $3.8 million and $0.4 million, respectively. The Company has United States foreign tax credit carry-forwards of approximately $12 million, which are due to expire at various times through the year 2003. In addition, the Company has a U.S. net operating loss carry-forward of approximately $43.9 million which may be used to offset future regular taxable income. These loss carry-forwards will expire in the years 2017 and 2018. Major items causing the Company's income tax provision to differ from the federal statutory rate of 35% were as follows:
1998 1997 1996 ---------------------------------------------- Income tax expense (benefit) based on statutory rate $ (79,879) $(86,120) $ 28,476 Percentage depletion (1,806) (900) (7,611) Earnings in foreign jurisdictions at different rates (2,143) 273 (2,009) Reduction of prior year accruals (15,953) (24,048) Other nondeductible losses 7,934 37,770 2,875 Change in valuation allowance 61,700 13,800 3,141 Other - net 4,490 5,742 4,369 ---------------------------------------------- Total income taxes (25,657) (29,435) 5,193 Canadian mining taxes 12,570 9,977 17,135 ---------------------------------------------- Total income and mining taxes $ (13,087) $(19,458) $ 22,328 ==============================================
46 Note 7: Receivables
December 31, 1998 1997 ------------------------------------------ Trade accounts $ 29,548 $ 24,612 U.S. Government receivable (see note 19) 4,500 5,500 Interest and other 11,843 13,417 ------------------------------------------ $ 45,891 $ 43,529 ==========================================
Note 8: Inventories
December 31, 1998 1997 ---------------------------------------------- Finished products $ 13,312 $ 33,019 Ore and in-process 39,465 37,811 Supplies 26,129 33,095 ---------------------------------------------- $ 78,906 $103,925 ==============================================
Note 9: Property, Plant and Equipment
December 31, 1998 1997 ------------------------------------------ Mining properties and development costs $ 1,434,503 $ 1,108,192 Plant and equipment 1,081,680 1,091,814 Construction and mine development in progress 7,534 22,459 ------------------------------------------ 2,523,717 2,222,465 Accumulated depreciation, depletion and amortization (1,422,853) (1,201,318) ------------------------------------------ $ 1,100,864 $ 1,021,147 ==========================================
Note 10: Noncurrent Investments
December 31, 1998 1997 ---------------------------------------- Navan Resources plc $ 3,891 $ 6,685 Navan Bulgarian Mining BV 12,000 Other investments 9,054 22,409 ---------------------------------------- $ 12,945 $ 41,094 ========================================
In 1995, Homestake acquired a 10% interest in Navan Resources plc ("Navan"), an Irish public company with diverse mineral interests in Europe. In November 1997, Homestake purchased a 20% interest in Navan Bulgarian Mining BV ("Navan BV"), a wholly-owned subsidiary of Navan, for $12 million. Navan BV owns 68% of Bimak AD, a Bulgarian company that owns and operates the surface facilities at the Chelopech copper-gold mine near Sofia, Bulgaria. In September 1998, Homestake completed its evaluation of the Chelopech mine and concluded that the project did not warrant Homestake's participation under current economic conditions. As a result Navan BV returned to Homestake approximately $11 million of Homestake's investment that had not been expended prior to termination of Homestake's participation. Note 11: Other Assets
December 31, 1998 1997 --------------------------------------- Assets held in trust (see note 15) $ 44,756 $ 38,975 Restricted cash (see note 13) 13,561 15,990 Ore stockpiles 9,807 32,125 U.S. Government receivable (see note 19) 3,681 5,362 Other 9,811 9,557 --------------------------------------- $ 81,616 $ 102,009 =======================================
Note 12: Accrued Liabilities
December 31, 1998 1997 --------------------------------------- Accrued payroll and other compensation $ 31,587 $ 23,898 Accrued reclamation and closure costs 23,206 11,818 Unrealized loss on foreign currency exchange contracts 24,003 20,416 Other 23,192 12,509 --------------------------------------- $101,988 $ 68,641 =======================================
47 Note 13: Long-term Debt
December 31, 1998 1997 --------------------------------------- Convertible subordinated notes (due 2000) $150,000 $ 150,000 Pollution control bonds Lawrence County, South Dakota (due 2032) 48,000 48,000 State of California (due 2004) 17,000 17,000 Cross-border credit facility (due 2003) 142,410 48,855 Plutonic syndicated credit facility 110,738 --------------------------------------- $357,410 $ 374,593 =======================================
Convertible subordinated notes: The Company's 5.5% convertible subordinated notes, which mature on June 23, 2000, are convertible into common shares at a price of $23.06 per common share and are redeemable by the Company in whole at any time. Interest on the notes is payable semiannually in June and December. Issuance costs of $3.9 million were capitalized and are being amortized over the life of the notes. Pollution control bonds: In July 1997, Lawrence County, South Dakota issued $30 million of South Dakota Solid Waste Disposal Revenue Bonds ("Waste Disposal Bonds") and $17 million of South Dakota Pollution Control Refunding Revenue Bonds ("Pollution Control Bonds"), both of which are due in 2032. The Company is responsible for funding principal and interest payments on these bonds. Proceeds from the Waste Disposal Bonds are being used for construction of a new tailings dam lift and other qualifying expenditures at the Homestake mine. Qualifying expenditures of $17 million had been incurred through December 31, 1998. The remaining $13.6 million, which is held in a trustee account, is included in other assets at December 31, 1998. Homestake has reduced the projected size of the tailings dam project and accordingly notified holders of the Waste Disposal Bonds in January 1999 that it would redeem within 60 days $10 million of bonds from the funds held in the trustee account. The Company pays interest monthly on the pollution control bonds based on variable short-term, tax-exempt obligation rates. Interest rates at December 31, 1998 and 1997 were 4.8% and 4.6%, respectively. No principal payments are required until cancellation, redemption or maturity. Cross-border credit facility: In July 1998, the Company entered into a new United States/Canadian/Australian cross-border credit facility providing a total availability of $430 million. The new facility replaced the Company's $275 million cross-border credit facility and Plutonic's A$400 million syndicated credit facility, both of which were cancelled. Borrowings under the prior credit facilities were repaid using the new facility. The new facility is available through July 14, 2003 and provides for borrowings in United States, Canadian, or Australian dollars, or gold, or a combination of these. At December 31, 1998 borrowings under the Australian dollar credit facility of $142.4 million (A$233 million) were outstanding. Under the new facility, the Company pays a commitment fee on the unused portion of this facility ranging from 0.15% to 0.35% per annum, depending upon rating agencies' ratings for the Company's senior debt. The new credit agreement requires, amongst other provisions, a minimum consolidated net worth, as defined in the agreement (primarily shareholders' equity plus the amount of all noncash write-downs made after December 31, 1997), of $500 million. Interest on the Australian dollar borrowings under the new facility is payable quarterly based on the Australian Bank Bill Swap Rate plus a margin of up to 1.125%. At December 31, 1998 this interest rate was 5.95%. Note 14: Other Long-term Obligations
December 31, 1998 1997 --------------------------------------------- Accrued reclamation and closure costs $ 107,370 $ 80,428 Accrued pension and other postretirement benefit obligations (see note 15) 50,569 60,942 Other 10,239 11,240 --------------------------------------------- $ 168,178 $ 152,610 =============================================
While the ultimate amount of reclamation and site restoration costs to be incurred in the future is uncertain, the Company has estimated that the aggregate amount of these costs for operating properties, plus previously accrued reclamation and remediation liabilities for nonoperating properties, will be approximately $220 million. This figure includes approximately $7 million of reclamation costs at the Grants uranium facility which will be funded by the United States Federal Government. At December 31, 1998 the Company had accrued $130.6 million for estimated ultimate reclamation and site restoration costs and remediation liabilities (see notes 12 and 19). 48 Note 15: Employee Benefit Plans Pension and other postretirement benefit plans: The Company has pension plans covering substantially all United States employees. Pension plans covering salaried and other nonunion employees provide benefits based on years of service and the employee's highest compensation during any 60 consecutive months prior to retirement. Pension plans covering union employees provide defined benefits for each year of service. The Company also has other postretirement plans which provide medical and life insurance benefits for certain retired employees, primarily retirees of the Homestake mine. The following table provides a reconciliation of benefit obligations, plan assets and the funded status of the plans:
Other Postretirement Pension Benefits Benefits ------------------------------ ------------------------------ 1998 1997 1998 1997 ------------------------------ ------------------------------ Change in benefit obligations Benefit obligation, January 1 $237,351 $229,906 $ 37,000 $ 37,000 Service cost 4,215 4,308 188 610 Interest cost 16,969 15,958 2,406 2,939 Plan amendments and special terminations 6,222 (6,450) Actuarial (gains) losses 22,859 7,272 (1,646) Benefits paid (23,696) (12,821) (2,373) (1,903) Curtailments (7,246) (3,293) -------------- -------------- -------------- ------------- Benefit obligation, December 31 $256,674 $237,351 $ 34,750 $ 37,000 ============== ============== ============== ============= Change in plan assets Fair value of plan assets, January 1 $257,147 $224,064 Actual return on plan assets 24,816 43,955 Company contributions 1,104 1,037 $ 2,373 $ 1,903 Benefits paid (23,696) (11,909) (2,373) (1,903) -------------- -------------- -------------- ------------- Fair value of plan assets, December 31 $259,371 $257,147 $ - $ - ============== ============== ============== ============= Plan assets in excess of (less than) projected benefit obligations $ 2,697 $ 19,796 $(34,750) $(37,000) Unrecognized net actuarial (gains) losses (24,927) (47,626) 2,488 (4,995) Unrecognized prior service cost 8,527 7,622 (5,914) 557 Unrecognized net transition asset (1,567) (2,445) -------------- -------------- -------------- ------------- Accrued pension and postretirement benefit obligations $(15,270) $(22,653) $(38,176) $(41,438) ============== ============== ============== =============
The liabilities for pension and postretirement benefits recognized in the consolidated balance sheets consist of the following:
Other Postretirement Pension Benefits Benefits --------------------------- ------------------------- 1998 1997 1998 1997 --------------------------- ------------------------- Prepaid benefit cost $ (8,709) $ (677) Accrued benefit liability 23,979 23,330 $ 38,176 $ 41,438 ------------- ------------ ------------ ------------ 15,270 22,653 38,176 41,438 Additional minimum liability (offset by an intangible asset included in other assets) 523 251 ------------- ------------ ------------ ------------ Accrued pension and postretirement benefit obligations 15,793 22,904 38,176 41,438 Less current portion 1,200 1,200 2,200 2,200 ------------- ------------ ------------ ------------ Long-term accrued pension and post- retirement benefit obligations (see note 14) $ 14,593 $ 21,704 $ 35,976 $ 39,238 ============= ============ ============ ============
The weighted-average actuarial assumptions as of December 31 were as follows:
Other Postretirement Pension Benefits Benefits ------------------------------- ------------------------------ 1998 1997 1996 1998 1997 1996 ------------------------------- ------------------------------ Discount rate 6.5% 7.0% 7.0% 6.5% 7.0% 7.0% Expected return on plan assets 8.5% 8.5% 8.5% Rate of compensation increase 5.0% 5.0% 5.0%
The Company has assumed a health care cost trend rate of 8.5% for 1999, decreasing ratability to 5.0% in 2006 and thereafter. 49 Net periodic pension and other postretirement benefit costs include the following components:
Pension Benefits ---------------------------------------------------- 1998 1997 1996 ---------------------------------------------------- Service cost $ 4,215 $ 4,308 $ 4,519 Interest cost 16,969 15,958 15,319 Expected return on assets (21,346) (18,596) (16,562) Amortization of: Transition asset (370) (370) (370) Prior service costs 1,005 1,534 1,534 Actuarial gains (898) (467) ---------------------------------------------------- Net periodic benefit cost (425) 2,834 3,973 Additional charges (credits): Special termination charges 3,922 Curtailment credits (7,246) (1,868) Settlement credits (2,531) ---------------------------------------------------- Total net benefit cost (credit) $ (6,280) $ 2,834 $ 2,105 ====================================================
Other Postretirement Benefits ---------------------------------------------------- 1998 1997 1996 ---------------------------------------------------- Service cost $ 188 $ 568 $ 456 Interest cost 2,406 2,631 2,573 Amortization of: Prior service costs (850) 60 60 Actuarial (gains) losses 60 (660) ---------------------------------------------------- Net periodic benefit cost 1,804 2,599 3,089 Additional charges (credits): Special termination charges 600 Curtailment credits (3,293) --------------------------------------------------- Total net benefit cost (credit) $ (889) $ 2,599 $ 3,089 ====================================================
The projected benefit obligation and accumulated benefit obligation for pension plans with accumulated benefit obligations in excess of plan assets were $32.4 million and $24.1 million, respectively, at December 31, 1998 and $27.2 million and $20 million, respectively, at December 31, 1997. These amounts pertain to a nonqualified supplemental pension plan covering certain employees and a nonqualified pension plan covering directors of the Company. These plans are unfunded. The Company has established a grantor trust, consisting of money market funds, mutual funds and corporate-owned life insurance policies, to provide funding for the benefits payable under these nonqualified plans and certain other deferred compensation plans. The grantor trust, which is included in other assets, amounted to $44.8 million and $39 million at December 31, 1998 and 1997, respectively. Health care benefits are contributory and were restricted to employees at the Homestake mine whose combined years of age and years of service exceeded 65 as of January 1, 1999. The assumed health care cost trend rate has a significant effect on the amounts reported. A one percentage point change in the assumed health care cost trend rate would have had the following effects on 1998 service and interest costs and the accumulated postretirement benefit obligation at December 31, 1998:
One percentage point change Increase Decrease Effect on service and interest components of net periodic cost $ 145 $ (135) Effect on accumulated postretirement benefit obligation $1,912 $(1,806)
Certain of the Company's foreign operations participate in pension plans. The Company's share of contributions to these plans was $2.5 million in 1998, $2.3 million in 1997, and $2.1 million in 1996. Stock option and share rights plan: The Company's 1996 Stock Option and Share Rights Plan ("1996 Plan") provides for grants of up to 6 million common shares. At December 31, 1998 and 1997, 3 million and 5 million shares, respectively, were available for future grants. At December 31, 1998, stock options and share rights for 2.6 million shares were outstanding under the 1996 Plan and stock options for 2.1 million shares were outstanding under prior plans. 50 The exercise price of each stock option granted under these plans is equal to or greater than the market price of the Company's stock on the date of grant and an option's maximum term is ten years. Options usually vest over a four-year period. A summary of the status of the Company's stock options as of December 31, 1998, 1997 and 1996 and changes during the years ending on those dates is presented below:
1998 1997 1996 ----------------------------------------------------------------------------- Number Average Number Average Number Average of Price Per of Price Per of Price Per Shares Share Shares Share Shares Share ----------------------------------------------------------------------------- Balance at January 1 4,321 3,738 3,053 Granted 1,588 $ 9.50 794 $15.11 1,435 $19.32 Exercised (63) 13.99 (743) 6.24 Plutonic options retired (see note 3) (1,033) 15.52 Expired (435) 23.38 (148) 22.04 (7) 16.43 --------- --------- --------- Balance at December 31 4,441 4,321 3,738 ========= ========= ========= Options exercisable at December 31 2,136 2,248 1,933 Fair value of options granted during the year $ 3.03 $ 4.95 $4.35
The fair value of each stock option is estimated on the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions: an expected life of 1.2, 1.7 and 1.8 years from the vesting date (with incremental vesting over four years) for 1998, 1997 and 1996, respectively, expected volatility of 31%, 30.9% and 31.7% for 1998, 1997 and 1996, respectively, a dividend yield of 1% in each year, and a risk-free interest rate of 5.7%, 6.6% and 5.4% in 1998, 1997 and 1996, respectively. The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------------------------- ------------------------------------ Range of Weighted-Average Weighted-Average Weighted-Average Exercise Prices Number Remaining Exercise Price Number Exercise Price Per Share Outstanding Contractual Life Per Share Exercisable Per Share ------------------ --------------- --------------------- ------------------ ------------- ------------------ $ 9.37 to $9.37 1,421 9.2 years $ 9.37 9.55 to 15.23 1,352 6.4 years 13.96 718 $13.45 15.78 to 19.13 1,191 5.3 years 17.14 947 16.92 19.70 to 39.79 477 3.1 years 23.70 471 23.75 -------------- ------------- 4,441 2,136 ============== =============
At December 31, 1998 there were 0.3 million share rights (1997:0.2 million) outstanding under the 1996 plan. Share rights are converted into common stock when certain performance measurement or vesting criteria are met. During 1998, 91,000 shares valued at $0.8 million were converted into common stock. The Company elected to use the pro forma disclosure provisions of SFAS 123, "Accounting for Stock-Based Compensation," and has applied Accounting Principles Board Opinion 25 and related interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized for the Company's stock options. The compensation cost for share rights is being recognized based on the fair value of the Company's stock over the period that the performance measurement and vesting criteria are estimated to be met. Had compensation expense for the Company's stock options been determined based on the fair value of options at the grant dates as calculated in accordance with SFAS 123, the Company's net income and earnings per share for the years ended December 31, 1998, 1997 and 1996 would have been as follows:
1998 1997 1996 ------------------------------- ------------------------------- ------------------------------- Loss Loss Earnings Net Loss Per Share Net Loss Per Share Net Income Per Share ------------------------------- ------------------------------- ------------------------------- As reported $ (218,325) $ (1.02) $(230,606) $ (1.10) $ 45,765 $ 0.22 Pro forma (221,637) (1.04) (233,317) (1.11) 43,637 0.21
51 Other plans: Substantially all full-time United States employees of the Company are eligible to participate in the Company's defined contribution savings plans. The Company's matching contribution was approximately $1.9 million in 1998, $2.6 million in 1997 and $2.2 million in 1996. Note 16: Fair Value of Financial Instruments At December 31, 1998 and 1997 the carrying values of the Company's cash and equivalents, short-term investments, noncurrent investments, long-term debt and foreign currency options approximated their estimated fair values. Note 17: Shareholders' Equity On December 1, 1998 at a Special Meeting of Stockholders, Homestake Mining Company stockholders approved a restated Certificate of Incorporation. The restated certificate has increased the number of authorized shares of Homestake common stock from 250 million to 450 million, increased the number of authorized shares of Series A preferred stock from 2.5 million to 4.5 million, created one share of special voting stock and made certain technical changes, primarily to reflect the existence of the special voting stock. HCI exchangeable shares: In connection with the 1998 acquisition of the minority interests in Prime (see note 3), HCI issued 11.1 million HCI exchangeable shares. Each HCI exchangeable share is exchangeable for one Homestake common share at any time at the option of the holder and has essentially the same voting, dividend (payable in Canadian dollars), and other rights as one Homestake common share. The share of special voting stock, which was issued to the transfer agent in trust for the holders of the HCI exchangeable shares, provides the mechanism for holders of the HCI exchangeable shares to receive their voting rights. At December 31, 1998 the Company had reserved 11.1 million shares of common stock for issuance on exchange of the HCI exchangeable shares outstanding at that date. Stock rights: Each share of common stock includes and trades with a right which will become exercisable on a date designated by the Board of Directors following the commencement of, or announcement of an intent to commence, a tender offer by any person, entity or group for 15% or more of the Company's common stock and the HCI exchangeable shares, considered as a single class. When so exercisable, each right initially entitles the owner to purchase from the Company one one-hundredth of a share of Series A Participating Preferred Stock, par value $1 per share, at a price of $75 per share (the "Purchase Price"). Each one one-hundredth of a share of Series A Preferred Stock is equivalent to one Homestake common share with respect to voting and is entitled, on a quarterly basis, to the greater of a ten cent cash dividend or the dividend payable on one Homestake common share. In addition, if any person, entity or group (an "Acquiring Person") acquires 15% or more of the Company's common stock and the HCI exchangeable shares, considered as a single class, each right (whether or not previously exercisable) thereafter entitles the owner (other than an Acquiring Person or its affiliates and associates) to purchase for the Purchase Price the number of one one-hundredth of a share of Series A Preferred Stock equal to the Purchase Price divided by one-half of the market price of the Company's common stock. In lieu of the rights holder exercising such right, the Board of Directors has the option to issue, in exchange for each right, one-half of the number of shares of preferred stock (or common stock having a value equal to the Purchase Price) that would be issuable on exercise of the right. If the Board of Directors has not exchanged shares for the rights and the Company engages in a business combination with an Acquiring Person (or affiliate or associate thereof), the holder of rights will be entitled to purchase for the Purchase Price (i) common stock of the surviving company or its publicly-held affiliate having a market value equal to twice the Purchase Price, or (ii) common stock of the surviving company having a book value equal to twice the Purchase Price if the surviving company and its affiliates are not publicly held. The numbers of shares and the Purchase Price are subject to adjustment for stock dividends, stock splits and other changes in capitalization. The rights expire on October 15, 2007. Each HCI exchangeable share trades with an HCI right issued under the HCI rights agreement. The HCI rights entitle the holders to acquire additional HCI exchangeable shares at the same price and in the same amounts and circumstances in which holders of Company rights are entitled to acquire Company common stock. 52 Note 18: Additional Cash Flow Information Cash paid for interest and for income and mining taxes is as follows:
1998 1997 1996 -------------------------------------------------------- Interest, net of amount capitalized $20,236 $ 19,506 $ 18,785 Income and mining taxes, net of refunds 22,620 66,227 15,896
Certain investing and financing activities of the Company affected its financial position but did not affect its cash flows. See note 3 for discussions of the noncash acquisitions of the interests in Prime, Plutonic, HGAL and the Mt Morgans mine. Note 19: Contingencies Environmental Contingencies The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") imposes heavy liabilities on persons who discharge hazardous substances. The Environmental Protection Agency ("EPA") publishes a National Priorities List ("NPL") of known or threatened releases of such substances. Grants: Homestake's former uranium millsite near Grants, New Mexico is listed on the NPL. The total future cost for reclamation, remediation, monitoring and maintaining compliance at the Grants site is estimated to be $14 million. Pursuant to the Energy Policy Act of 1992, the United States Department of Energy ("DOE") is responsible for 51.2% of past and future costs of reclaiming the Grants site in accordance with Nuclear Regulatory Commission license requirements. Through December 31, 1998, Homestake had received $25.6 million from the DOE and the accompanying balance sheet at December 31, 1998 includes an additional receivable of $8.2 million (see notes 7 and 11) for the DOE's share of reclamation expenditures made by Homestake through 1998. Homestake believes that its share of the estimated remaining cost of reclaiming the Grants facility is fully provided in the financial statements at December 31, 1998. In 1983, the State of New Mexico made a claim against Homestake for unspecified natural resource damages resulting from the Grants tailings. New Mexico has taken no action to enforce its claim. Whitewood Creek: Deposits of tailings along an 18-mile stretch of Whitewood Creek formerly constituted a site on the NPL. Whitewood Creek was a site where mining companies operating in the Black Hills of South Dakota, including Homestake, placed mine tailings beginning in the nineteenth century. Some tailings placed in Whitewood Creek eventually flowed into the Belle Fourche River, the Cheyenne River and Lake Oahe. Homestake ceased the placement of mine tailings into Whitewood Creek in 1977 and for more than 21 years the Homestake mine has impounded all mine tailings that are not redeposited in the mine. The site was deleted from the NPL in 1996. In September 1997, the State of South Dakota filed an action against Homestake, alleging that Homestake's disposal of mine tailings in Whitewood Creek resulted in injuries to natural resources in Whitewood Creek, the Belle Fourche River, the Cheyenne River and Lake Oahe. The complaint also contained a pendent state law claim, alleging that the tailings constitute a continuing public nuisance. The complaint asks for abatement of the nuisance, damages in an unascertained amount, litigation costs and interest. In November 1997, the United States government and the Cheyenne River Sioux Tribe (the "Federal Trustees") filed a similar action alleging injuries to natural resources and seeking response costs, damages in unspecified amounts, litigation costs and attorneys fees. In its answers, Homestake denies that there has been any continuing damage to natural resources or nuisance as a result of the placement of tailings in Whitewood Creek. Homestake has also counterclaimed against the State of South Dakota and the Federal Trustees seeking cost recoupment, contribution and indemnity. Homestake, the State of South Dakota and the Federal Trustees are engaged in settlement discussions with respect to these actions. If settlement is not achieved, Homestake intends to vigorously defend these actions and to seek cost recoupment, contribution and indemnity from the State of South Dakota and the Federal Trustees for past and future expenditures. Homestake also expects to seek recovery, contribution and indemnity from other government entities and other persons who participated in ownership and/or operation of Whitewood Creek as a waste disposal site or who disposed of waste in the NRD Site. Other Contingencies In addition to the above, the Company is party to legal actions and administrative proceedings and is subject to claims arising in the ordinary course of business. The Company believes the disposition of these matters will not have a material adverse effect on its financial position or results of operations. 53 Note 20: Foreign Currency, Gold and Other Commitments Foreign Currency Contracts Under the Company's foreign currency protection program, the Company has entered into a series of foreign currency option contracts which established trading ranges within which the United States dollar may be exchanged for foreign currencies by setting minimum and maximum exchange rates. Net unrealized losses on contracts outstanding at December 31, 1998 and 1997 were $24 million and $20.4 million, respectively. Other income for the years ended December 31, 1998, 1997 and 1996 includes income (losses) of $(34.3) million, $(28.5) million, and $1.6 million, respectively, related to this program. At December 31, 1998 the Company had foreign currency contracts outstanding as follows:
Amount Covered Rates to U.S. Dollars -------------------------------------- Expiration Currency (U.S. Dollars) Put Options Call Options Dates - ----------------------------------------------------------------------------------- Canadian $138,000 0.69 0.72 1999 Canadian 89,420 0.69 0.72 2000 Canadian 59,110 0.66 0.69 2001 Australian 92,000 0.66 0.69 1999 Australian 68,620 0.64 0.67 2000 Australian 23,000 0.60 0.63 2001 ------------- $470,150 =============
In addition to amounts related to the foreign currency option contracts, the Company recorded mark-to-market foreign currency losses on intercompany debt of $5.7 million in 1998, $5.7 million in 1997, and $8.9 million in 1996 which also were included in other income. These foreign currency exchange losses are related to the Company's Canadian and Australian dollar denominated advances to its foreign subsidiaries. Gold and Silver Contracts Homestake's current hedging policy provides for the use of forward sales contracts to hedge up to 30% of each of the following ten year's expected annual gold production, and up to 30% of each of the following five year's expected annual silver production, at prices in excess of certain targeted prices. The policy also provides for the use of combinations of put and call option contracts to establish minimum floor prices. During 1998, 1997 and 1996, the Company delivered or financially settled 358,000, 656,000 and 508,400 ounces of its gold production into forward gold contracts at average prices of $359, $421 and $474 per ounce, respectively, and delivered 900,000 ounces of gold at a price of $325 per ounce under options contracts. During 1998, the Company also closed out and financially settled one million ounces of its Australian dollar-denominated forward gold contracts. The gain of $5 million realized on this transaction has been deferred and will be recorded in income as the originally designated production is sold. At December 31, 1998 the Company had committed 610,000 ounces of its future gold production for sale through the year 2005 under forward sales contracts as follows:
US $ Denominated Australian $ Denominated -------------------------------------------- --------------------------------------------- Average Price Average Price Year (ounces) (US$ per ounce) (ounces) (US$ per ounce)* - ---------------------------------------------------------------------------------------------------------------- 1999 109,920 $415 2000 85,080 430 24,800 $322 2001 95,000 441 24,800 322 2002 95,000 457 24,800 322 2003 75,000 481 24,800 322 2004 24,800 322 2005 26,000 322 ------------------ ------------------ 460,000 150,000 ================== ================== * Exchange rate of A$ = US$ 0.6112
At December 31, 1998 the Company was a party to the following gold option contracts.
Put Options Owned Call Options Written --------------------------------- ------------------------------------ Currency Average Price Average Price Exercisable Denomination (ounces) (US$ per ounce)* (ounces) (US$ per ounce) During - ------------------------------------------------------------------------------------------------------------- United States 100,000 $293 100,000 $304 1999 United States 30,000 350 15,000 395 2000 Australian 120,000 309 1999 Australian 120,000 318 2000 Australian 120,000 327 2001 ------------- ------------- 490,000 115,000 ============= ============= * Exchange rate of A$ = US$ 0.6112
At December 31, 1998 the Company also had forward sales contracts outstanding for approximately 7.2 million ounces of silver for delivery during 1999 through 2001 at an average price of $6.28 per ounce. The Company does not require or place collateral for its foreign currency and gold hedging derivatives. However, the Company minimizes its credit risk by dealing with only major international banks and financial institutions. The Company has entered into various commitments during the ordinary course of its business, which include commitments to perform assessment work and other obligations necessary to maintain or protect its interests in mining properties, financing and other obligations to joint ventures and partners under venture and partnership agreements, and commitments under federal and state environmental health and safety permits. 54 Note 21: Segment Information In 1998, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." The Company primarily is engaged in gold mining and related activities. Gold operations are managed and internally reported based on the following geographic areas: United States, Australia and Canada. The Company also has gold operations in Chile, other foreign exploration activities and a sulfur operation in the Gulf of Mexico which are included in "Corporate and All Other". Within each geographic segment, operations are managed on a mine-by-mine basis. However, due to each mine having similar characteristics, the Company has adopted the aggregation approach available under SFAS 131. REPORTABLE SEGMENTS
Corporate United and All Reconciling States Australia Canada Other Items Total -------------------------------------------------------------------------------- 1998 Revenues $253,082 $ 292,808 $ 219,671 $ 37,887 $ (5,671)(a) $797,777 Depreciation expense 43,512 44,126 44,563 7,170 139,371 Operating earnings (loss) 41,423 27,544 61,572 (3,753) (5,671)(a) 121,115 Exploration expense 11,512 23,316 4,983 15,534 55,345 Write-downs and unusual items 123,641 65,736 3,835 10,445 203,657 Capital expenditures 23,412 40,095 8,925 891 73,323 Property, plant and equipment 129,671 426,710 533,013 11,470 1,100,864 Total assets 169,678 540,323 683,828 587,427 (333,725)(a) 1,647,531 Production (equivalent ounces of gold) 691,472 925,700 890,450 24,119 2,531,741 1997 Revenues $246,401 $ 368,368 $ 261,167 $ 100,860(b) $ (5,381)(a) $971,415 Depreciation expense 36,541 76,107 41,639 8,494 162,781 Operating earnings (loss) 10,608 27,059 87,922 60,787 (5,381)(a) 180,995 Exploration expense 13,902 25,623 8,406 17,307 65,238 Write-downs and unusual items 38,872 92,603 19,536 134,304(c) 285,315 Capital expenditures 89,664 88,878 19,983 6,104 204,629 Property, plant and equipment 227,988 523,447 259,343 10,369 1,021,147 Total assets 281,089 658,690 427,388 293,476 (51,109)(a) 1,609,534 Production (equivalent ounces of gold) 702,754 974,289 835,358 16,530 2,528,931 1996 Revenues $291,900 $ 378,751 $ 304,530 $ 35,489 $(12,224)(a) $998,446 Depreciation expense 35,707 62,992 45,894 7,259 151,852 Operating earnings (loss) 53,427 66,526 122,737 637 (12,224)(a) 231,103 Exploration expense 11,861 29,844 9,751 15,907 67,363 Write-downs and unusual items 8,983 8,983 Capital expenditures 37,351 121,627 5,964 5,008 169,950 Property, plant and equipment 191,078 670,663 295,307 118,991 1,276,039 Total assets 215,392 909,195 494,083 453,384 (132,724)(a) 1,939,330 Production (equivalent ounces of gold) 732,107 818,627 858,922 8,274 2,417,930 a) Primarily intercompany financing. b) Includes Santa Fe merger termination fee of $62.9 million. c) Includes write-down of Homestake's investment in the Main Pass 299 sulfur mine of $107.8 million.
Sales to individual customers exceeding 10% of the Company's 1998 consolidated revenues were as follows:
1998 1997 1996 ------------------------------------------------------- Customer A $ 120,100 B 108,000 $ 100,000 $ 129,000 C 99,200 143,000 117,000 D 75,600 77,000
Because of the active worldwide market for gold, Homestake believes that the loss of any of these customers would not have a material adverse impact on the Company. 55 Note 22: Homestake Canada Inc. Homestake owns all of HCI's common shares outstanding. At December 31, 1998, HCI had 11.1 million HCI exchangeable shares outstanding all of which were held by the public (see notes 3 and 17). Summarized financial information for HCI is as follows:
December 31, 1998 1997 ---------------------------------------------- Current assets $ 149,102 $ 160,966 Noncurrent assets 524,588 260,278 ------------------ -------------------- Total assets $ 673,690 $ 421,244 ================== ==================== Notes payable to the Company $ 144,002 $ 23,459 Other current liabilities 40,837 27,768 Long-term liabilities 15,882 24,893 Deferred income and mining taxes 193,074 101,090 Minority interests 96,877 Redeemable preferred stock held by the Company 36,167 49,929 Shareholders' equity 243,728 97,228 ------------------ -------------------- Total liabilities and shareholders' equity $ 673,690 $ 421,244 ================== ====================
Year ended December 31, ------------------------------------------------------------ 1998 1997 1996 ------------------------------------------------------------ Total revenues $ 218,978 $ 261,167 $ 317,821 Costs and expenses 180,920 210,575 206,731 ----------------- ------------------ ----------------- Income before taxes and minority interests $ 38,058 $ 50,592 $ 111,090 ================= ================== ================= Net income $ 13,213 $ 9,953 $ 63,705 ================= ================== =================
56 REPORT OF INDEPENDENT AUDITORS The Shareholders and Board of Directors of Homestake Mining Company: In our opinion, the accompanying consolidated balance sheets and the related statements of consolidated operations, shareholders' equity, comprehensive income (loss) and of cash flows present fairly, in all material respects, the financial position of Homestake Mining Company and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP - --------------------------------- PricewaterhouseCoopers LLP San Francisco, California February 1, 1999 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying consolidated financial statements of Homestake Mining Company and Subsidiaries are prepared by the Company's management in conformity with generally accepted accounting principles. Management is responsible for the fairness of the financial statements, which include estimates based on judgments. The Company maintains accounting and other control systems which management believes provide reasonable assurance that financial records are reliable for the purpose of preparing financial statements and that assets are properly safeguarded and accounted for. Underlying the concept of reasonable assurance is the premise that the cost of controls should not be disproportionate to the benefits expected to be derived from such controls. The Company's internal control structure is reviewed by its internal auditors and to the extent necessary by the external auditors in connection with their independent audit of the Company's consolidated financial statements. The external auditors conduct an independent audit of the consolidated financial statements in accordance with generally accepted auditing standards in order to express their opinion on these financial statements. These standards require that the external auditors plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. The Audit Committee of the Board of Directors, composed entirely of outside directors, meets periodically with management, internal auditors and the external auditors to discuss the annual audit, internal control, internal auditing and financial reporting matters. The external auditors and the internal auditors have direct access to the Audit Committee. /s/ Jack E. Thompson - -------------------- Jack E. Thompson Chairman, President and Chief Executive Officer /s/ David W. Peat - ----------------- David W. Peat Vice President and Controller (Chief Accounting Officer) February 1, 1999 57 Quarterly Selected Data (In thousands, except per share amounts)
First Second Third Fourth Quarter Quarter Quarter Quarter Year ------------------------------------------------------------------------------------------------- 1998: Revenues $216,217 $195,285 $ 183,429 $ 202,846 $ 797,777 Net income (loss) (6,586)(1) (30,931)(2) (182,226)(3) 1,418 (4) (218,325)(1-4) Per common share: Net income (loss)(9) $ (0.03)(1) $ (0.15)(2) $ (0.86)(3) $ 0.01 (4) $ (1.02)(1-4) Dividends paid (10) 0.05 0.05 0.10 1997: Revenues $317,338 $226,060 $ 217,737 $ 210,280 $ 971,415 Net income (loss) 48,256 (5) (64,857)(6) (155,561)(7) (58,444)(8) (230,606)(5-8) Per common share: Net income (loss) (9) $ 0.23 (5) $ (0.31)(6) $ (0.74)(7) $ (0.28)(8) $ (1.10)(5-8) Dividends paid (10) 0.05 0.05 0.05 0.15 1. Includes business combination and integration costs of $2.7 million ($2.8 million pretax) or $0.01 per share and charges of $5.9 million ($8.9 million pretax) or $0.03 per share related to the restructuring of the Homestake mine. 2. Includes business combination and integration costs of $15 million ($17.9 million pretax) or $0.07 per share and reductions in the carrying values of resource assets of $2.6 million ($2.9 million pretax) or $0.02 per share. 3. Includes write-downs and unusual charges of $165.9 million ($187.9 million pretax) or $0.78 per share including (i) reductions of $115.4 million ($135.9 million pretax) in the carrying values of resource assets, (ii) an increase of $35 million ($35 million pretax) in estimated accruals for remediation and reclamation expenditures, (iii) write-downs of $7.3 million ($7.9 million pretax) of noncurrent investments, and (iv) other charges of $8.2 million ($9.1 million pretax). 4. Includes a reduction in business combination and integration costs of $1 million ($1.6 million pretax) and write-downs and unusual charges of $3.9 million ($3.9 million pretax) or $0.01 per share including (i) reductions of $2.6 million ($2.6 million pretax) in the carrying values of resource assets, (ii) an increase of $1 million ($1 million pretax) in estimated accruals for reclamation expenditures, and (iii) write-downs of $0.3 million ($0.3 million pretax) in noncurrent investments. 5. Includes a gain of $47.2 million ($62.9 million pretax) or $0.22 per share on the fee received upon termination of Homestake's merger agreement with Santa Fe Pacific Gold Corporation and a gain of $8.1 million ($13.5 million pretax) or $0.04 per share on the sale of the George Lake and Back River joint venture interests in the Northwest Territories of Canada. 6. Includes write-downs and unusual charges of $50 million ($65.1 million pretax) or $0.24 per share including (i) a reduction of $31.9 million ($45 million pretax) in the carrying value of resource assets, (ii) write-downs of $14.5 million ($14.5 million pretax) of certain mining investments, and (iii) other charges of $3.6 million ($5.6 million pretax). 7. Includes write-downs and unusual charges of $145.1 million ($183.6 million pretax) or $0.69 per share including (i) a write-down of $84.9 million ($107.8 million pretax) in Homestake's investment in the Main Pass 299 sulfur mine, (ii) a reduction of $18.2 million ($24.3 million pretax) in the carrying values of resource assets, (iii) an increase of $21.5 million ($29.1 million pretax) in the estimated accrual for future reclamation expenditures, (iv) write-downs of $14.7 million ($16.5 million pretax) of certain mining investments, and (v) other charges of $5.8 million ($5.9 million pretax) primarily related to foreign exchange losses on intercompany redeemable preferred stock. 8. Includes write-downs and unusual charges of $29.8 million ($36.6 million pretax) or $0.14 per share including (i) a reduction of $10 million ($15.4 million pretax) in the carrying values of resource assets, (ii) write-downs of $16.4 million ($16.9 million pretax) of certain mining investments, and (iii) other charges of $3.3 million ($4.3 million pretax) primarily losses on an intercompany gold loan. 9. Basic and diluted earnings per share. 10. Homestake only.
58 Five-Year Selected Data (1) (In thousands, except per share amounts)
1998 1997 1996 1995 1994 ---------------------------------------------------------------------------------- Revenues $ 797,777 $ 971,415 $ 998,446 $ 949,251 $ 829,935 Net income (loss) (218,325)(2) (230,606)(3) 45,765(4) 49,942 93,631(5) Net income (loss) per share (6) (1.02)(2) (1.10)(3) 0.22(4) 0.25 0.47(5) Total assets 1,647,531 1,609,534 1,939,330 1,673,390 1,460,968 Long-term debt 357,410 374,593 254,668 274,292 188,085 Other long-term obligations 168,178 152,610 123,475 127,558 111,065 Deferred income and mining taxes 230,567 161,862 218,379 202,607 147,278 Minority interests 7,825 108,116 103,960 100,380 94,140 Shareholders' equity 735,832 683,505 1,023,825 848,640 799,376 Dividends per share (7) 0.10 0.15 0.20 0.20 0.175 1. Five-year selected financial data reflects the 1998 combination of Homestake and Plutonic on a pooling-of-interests basis, accordingly all periods include the results of Plutonic. 2. Includes business combination and integration costs of $16.7 million ($19.1 million pretax) or $0.08 per share and write-downs and other unusual charges of $178.3 million ($203.6 million pretax) or $0.83 per share including (i) a reduction in the carrying values of resource assets of $120.6 million ($141.4 million pretax), (ii) an increase in the estimated accrual for remediation and reclamation expenditures of $36 million ($36 million pretax), (iii) Homestake mine restructuring charges of $5.9 million ($8.9 million pretax), (iv) write-downs of investments of $7.6 million ($8.2 million pretax), and (v) other charges of $8.2 million ($9.1 million pretax). 3. Includes a gain of $47.2 million ($62.9 million pretax) or $0.22 per share on the fee received upon termination of Homestake's merger agreement with Santa Fe Pacific Gold Corporation, a gain of $10.4 million ($10.4 million pretax) or $0.05 per share with respect to the cancellation of an option to acquire Great Central Mines Limited, and a gain of $8.1 million ($13.5 million pretax) or $0.04 per share on the sale of the George Lake and Back River joint venture interests in the Northwest Territories of Canada, and write-downs and unusual charges of $224.9 million ($285.3 million pretax) or $1.07 per share including (i) a write-down of $84.9 million ($107.8 million pretax) in Homestake's investment in the Main Pass 299 sulfur mine, (ii) a reduction of $60.1 million ($84.7 million pretax) in the carrying values of resource assets, (iii) write-downs of $45.7 million ($47.9 million pretax) of certain investments, (iv) an increase of $21.5 million ($29.1 million pretax) in the accrual for estimated future reclamation expenditures, and (v) other charges of $12.7 million ($15.8 million pretax) consisting primarily of foreign exchange losses on intercompany redeemable preferred stock and losses on an intercompany gold loan. 4. Includes income of $24 million or $0.11 per share from a reduction in the Company's accrual for prior year income taxes, a gain of $7.9 million ($7.9 million pretax) or $0.04 per share from the sale of the investment in Eagle Mining Corporation NL, a foreign currency exchange loss on intercompany advances of $7.4 million ($8.9 million pretax) or $0.04 per share primarily related to the Company's Canadian-dollar denominated advances to HCI, write-downs of $8.3 million ($9 million pretax) or $0.04 per share in the carrying values of investments in mining company securities, and proceeds of $4.9 million ($5.5 million pretax) or $0.02 per share from a litigation recovery. 5. Includes a gain of $12.6 million ($15.7 million pretax) or $0.06 per share on the sale of the Company's interest in the Dee mine and a gain of $11.2 million ($11.2 million pretax) or $0.06 per share on dilution of the Company's interest in Prime. 6. Basic and diluted earnings per share. 7. Homestake only.
Common Stock Price Range (Prices as quoted on the New York Stock Exchange)
First Second Third Fourth Quarter Quarter Quarter Quarter Year ------------------------------------------------------------------------------------- 1998: High $11.19 $13.13 $12.69 $15.00 $15.00 Low 7.69 9.31 8.69 8.38 7.69 1997: High $16.63 $15.25 $15.38 $15.56 $16.63 Low 13.13 12.75 12.31 8.31 8.31
59 EX-21 11 LIST OF SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT - ------------------------------------------------------------------------------ Homestake Mining Company, a Delaware Corporation and its Subsidiaries Interest of Homestake Mining Company is 100% unless otherwise noted ( ) Denotes state, province or country of incorporation - ------------------------------------------------------------------------------ Homestake Mining Company (Delaware) Homestake Mining Company of California (California) Denay Creek Gold Mining Company (California) Gold Ore Inc. (South Dakota) HMC Finance Pty Ltd (Northern Territory, Australia) Homestake Canada Holdings Company (Nova Scotia) Homestake Canada Inc. (Ontario) 588982 Ontario Inc. (Ontario) E & B Explorations Inc. (Delaware) Galveston Resources (Nevada), Inc. (Nevada) PRG Project Development Corp. (British Columbia) Teck-Corona Operating Corporation (Ontario) - 50% Williams Operating Corporation (Ontario) - 50% Homestake de Argentina, S.A. (Buenos Aires) Homestake do Brasil, S.A. (Brazil) Homestake Forest Products Company (California) Homestake Gold of Australia Limited (South Australia) Homestake Australia Limited (South Australia) Homestake Superannuation Fund Pty Ltd (Queensland) Kalgoorlie Consolidated Gold Mines Pty Ltd (Western Australia) -50% KCGM Engineering Services Pty Ltd (Western Australia)-50% Homestake International Minerals Limited (California) Homestake Lead Company of Missouri (California) Homestake Nevada Corporation (California) Homestake-Santa Fe Mine Inc. (Nevada) Homestake Sulphur Company (Delaware) Kaczawa Sp. z.o.o. (Poland) La Jara Mesa Mining Company (New Mexico) Minera Homestake Chile S.A. (Chile) Agua de la Falda, S.A. (Chile) - 51% Minera Patagonia S.R.L. (Argentina) Minera Rio Guarampin, S.A. (Venezuela) Minera Rio Marwani, S.A. (Venezuela) Skora Sp. z.o.o. (Poland) Whitewood Development Corporation (California) Plutonic Resources Limited (New South Wales) Forsayth NL (Western Australia) Bellevue Gold Projects Pty Ltd (New South Wales) Blacksmith Holdings Pty Ltd (Western Australia) Canaustra Holdings Pty Ltd (Western Australia) Forsayth (Gibson) Ltd (Western Australia) Forsayth Group Management Pty Limited (Western Australia) Forsayth Mining Services Ltd (Western Australia) Forsayth (New Zealand) Limited (Western Australia) Forsayth Securities Ltd (Western Australia) Forsayth Tenements Ltd (Western Australia) Patshore Pty Limited (New South Wales) Whim Creek Consolidated NL (Western Australia) Austwhim Resources NL (Western Australia) Red Rock Mining Corporation Ltd (New South Wales) Grants Patch Mining Limited (Queensland) Publishing Investments Company Pty Ltd (Western Australia) Sundowner Minerals NL (New South Wales) Lachlan Resources NL (New South Wales) - (81.2%) Lachlan Pacific NL (New Zealand) - (73.1%) Quotidian No. 101 Pty Ltd (New South Wales) (81.2%) Archaean Gold NL (Western Australia) (81.2%) Plutonic Administration Services Pty Ltd (New South Wales) Plutonic Finance Pty Ltd (New South Wales) Plutonic Gold Pty Ltd (New South Wales) Plutonic Minerals USA Inc. (Nevada) Plutonic Mining Services Pty Ltd (New South Wales) Plutonic Operations Limited (New South Wales) Plutonic (Baxter) Pty Ltd (South Australia) Rubyset Pty Limited (New South Wales) Plutonic Superannuation Pty Ltd (New South Wales) EX-23 12 CONSENT OF AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following Registration Statements of Homestake Mining Company: Post-Effective Amendment No. 3 to No. 2-90905 on Form S-8 (originally filed on Form S-3); No. 33-26049 on Form S-8; No. 2-66538 on Form S-8; Post-Effective Amendment No. 1 to No. 33-48526 on Form S-8 (originally files on Form S-4); No. 333-17357 on Form S-8; No. 333-17359 on Form S-8; No. 333-24711 on Form S-3; and No. 333-66311 on Form S-3 of our report dated February 1, 1998, appearing on Form 10-K of Homestake Mining Company for the year ended December 31, 1998. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP San Francisco, California March 16, 1999 EX-27 13
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet at December 31, 1998 and the related Statement of Consolidated Operations for the year ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1998 DEC-31-1998 145,069 154,346 45,891 0 78,906 452,106 2,523,717 1,422,853 1,647,531 147,719 357,410 0 0 228,012 507,820 1,647,531 803,134 797,777 676,662 722,876 282,244 0 20,884 (228,227) (13,087) (218,325) 0 0 0 (218,325) (1.02) (1.02) Includes Production costs and Depreciation, depletion and amortization from the Statement of Consolidated Operations. Includes Production costs, Depreciation, depletion and amortization and Administrative and general expense from the Statement of Consolidated Operations. Includes Exploration expense, Write-downs and other unusual charges, Business combination and integration costs and Other expense from the Statement of Consolidated Operations.
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