<PAGE>
 
================================================================================
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                FORM 10-K/A-1     

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934

                  For the fiscal year ended December 31, 1996

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

            For the transition period from __________ to __________

                        Commission File Number  1-8542
                                                ------

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


Incorporated under the laws of Canada                                None
-------------------------------------                        -------------------
  (State or other jurisdiction of                            (I.R.S. Employer 
  incorporation or organization)                             Identification No.)

Suite 1000, 6400 S. Fiddlers Green Circle            
          Englewood, CO                                         80111-4957
-----------------------------------------                       ----------
(Address of principal executive offices)                        (Zip Code)


      Registrant's telephone number, including area code:  (303) 714-8600
                                                           --------------

          Securities registered pursuant to Section 12(b) of the Act:

                                                          Name of each exchange 
  Title of each class                                      on which registered
  -------------------                                     ---------------------
Common shares, no par value                              American Stock Exchange

                              ____________________

       Securities registered pursuant to Section 12(g) of the Act:  None
                                                                    ----

     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. [X]

Aggregate market value of the voting securities held by non-affiliates
of the registrant at January 31, 1997.......................... U.S.$897,111,531
                                                                ----------------

Number of common shares outstanding as of January 31, 1997.......... 139,357,131
                                                                     -----------
================================================================================
<PAGE>
 
                               TABLE OF CONTENTS
<TABLE>    
<CAPTION>
                                                                            PAGE
                                                                            ----

                                     PART I
<S>                                                                          <C>
ITEMS 1 AND 2-BUSINESS AND PROPERTIES......................................... 1
   INTRODUCTION............................................................... 1
   OPERATIONS SUMMARY......................................................... 2
    Gold and Silver Production................................................ 2
    Production Costs.......................................................... 2
   RESERVES................................................................... 3
    Change in Proven and Probable Reserves.................................... 4
   OTHER MINERALIZATION....................................................... 4
   CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES
   PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995........................... 6
   MCCOY/COVE................................................................. 7
    Geology and Ore Reserves.................................................. 8
    Mining and Processing..................................................... 8
   ROUND MOUNTAIN............................................................ 10
    Geology and Ore Reserves................................................. 11
    Mining and Processing.................................................... 11
   LUPIN..................................................................... 13
    Geology and Ore Reserves................................................. 14
    Mining and Processing.................................................... 14
    Supplies, Utilities and Transportation................................... 15
    Water Supply and Waste Disposal.......................................... 15
   KETTLE RIVER.............................................................. 16
    Geology and Ore Reserves................................................. 16
    Mining and Processing.................................................... 17
    Lamefoot................................................................. 17
    K-2 Project-Exploration and Development.................................. 17
   CONSTRUCTION PROGRAMS..................................................... 18
    Aquarius................................................................. 18
    Paredones Amarillos...................................................... 19
   DEVELOPMENT PROGRAMS...................................................... 21
    Kingking................................................................. 21
    Santa Elina.............................................................. 22
   EXPLORATION............................................................... 23
   ALASKA-JUNEAU............................................................. 23
   SUNNYSIDE................................................................. 24
   OTHER..................................................................... 24
    Precious Metal Sales and Hedging Activities.............................. 24
    Government Regulation and Environmental Issues........................... 25
    Employees................................................................ 30
    Executive Officers of the Registrant..................................... 31
    Insurance and Mining Risks............................................... 32
    Supplies, Utilities and Transportation................................... 32
    Waste Disposal........................................................... 32
    Royalties................................................................ 33
    History of the Company................................................... 33
   RISK FACTORS.............................................................. 33
    Mining and Processing.................................................... 33
    Uncertainty of Reserve and Other Mineralization Estimates................ 34
    Gold and Silver Price Volatility......................................... 35
    Exploration and Development.............................................. 35
</TABLE>     
                                       i
<PAGE>
 

    Insurance and Mining Risks............................................... 35
    Governmental Regulation.................................................. 36
    Risk of International Operations......................................... 37
    Title to Properties...................................................... 37
    Competition.............................................................. 37
    Exchange Rates........................................................... 37
   GLOSSARY.................................................................. 37
   GOLD PRICES............................................................... 41
   SILVER PRICES............................................................. 42
   EXCHANGE RATES............................................................ 42
   CONVERSION TABLE.......................................................... 42
   MINE PROCESSING........................................................... 42

 ITEM 3-LEGAL PROCEEDINGS.................................................... 45
   ALASKA-JUNEAU............................................................. 45
   SUMMA..................................................................... 45
   OTHER..................................................................... 45

                                    PART II

 ITEM 6-SELECTED FINANCIAL DATA.............................................. 46

 ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS................................ 48
   SUMMARY................................................................... 48
   RESULTS OF OPERATIONS..................................................... 48
   CAPITAL, EXPLORATION AND DEVELOPMENT SPENDING............................. 52
   FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES...................... 52
   COMMITMENTS AND CONTINGENCIES............................................. 53

 ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 55
   INDEX TO FINANCIAL STATEMENTS............................................. 55

                                    PART IV

 SIGNATURES.................................................................. 86

                                      ii
<PAGE>
 
                                     PART I

                     ITEMS 1 AND 2-BUSINESS AND PROPERTIES

INTRODUCTION

In this report, the "company" refers to Echo Bay Mines Ltd. and its subsidiaries
unless the context specifies otherwise. The company's financial statements are
presented in accordance with generally accepted accounting principles in Canada.
In this report, all dollar amounts are expressed in U.S. dollars unless
specified otherwise.

The company is a major North American mining company which in recent years has
broadened its interests to development properties located in Mexico, Brazil and
the Philippines and exploration properties in North America, Central America,
South America, West Africa and the Philippines. The company mines, processes and
explores for gold. The company also produces a significant amount of silver at
its McCoy/Cove mine in Nevada, and certain of its development properties include
copper mineralization. The company's interest in operating properties is set out
below. All are operated by the company.
<TABLE>
<CAPTION>
                                                                                          PERCENTAGE
                                                                                           OWNERSHIP
MINE                       LOCATION                                                         INTEREST
----------------------------------------------------------------------------------------------------
<S>                        <C>                                                            <C>
McCoy/Cove                 Nevada, U.S.A.                                                       100%
Round Mountain             Nevada, U.S.A.                                                        50%
Lupin                      Nunavut Settlement Area of the Northwest Territories, Canada         100%
Kettle River               Washington, U.S.A.                                                   100%
----------------------------------------------------------------------------------------------------
</TABLE>

In January 1997, the company decided to bring two new gold mines into
production, Aquarius in Canada and Paredones Amarillos in Mexico. The company
expects to begin construction on both of these mines in 1997. See "Construction
Programs-Aquarius" and "-Paredones Amarillos."

In 1996, the company produced a total of 768,919 ounces of gold at an average
cash operating cost of $254 per ounce. 1996 silver production was 7,102,348
ounces. In 1996, the company reported a net loss of $176.7 million on revenues
of $337.3 million, after expensing $63.6 million on exploration and development,
a provision of $77.1 million on the company's Alaska-Juneau development property
and a $30.0 million provision for pit wall stabilization at the company's
McCoy/Cove mine. At December 31, 1996, the company had 8.6 million ounces of
gold reserves and 53.9 million ounces of silver reserves.

For 1997, the company expects to produce from 700,000 to 725,000 ounces of gold
and about 7.0 million ounces of silver at an average cash operating cost of $265
to $275 per ounce of gold. For a general identification of risk considerations
involved in the company's business, see "Cautionary `Safe Harbor' Statement
under the United States Private Litigation Reform Act of 1995" and "Risk
Factors."

                                       1
<PAGE>
 
OPERATIONS SUMMARY
Gold and Silver Production
--------------------------
Gold and silver production for the last three years is provided below.
<TABLE>
<CAPTION>
GOLD PRODUCTION (OUNCES)                               1996          1995         1994
----------------------------------------------------------------------------------------
<S>                                                   <C>          <C>           <C>
McCoy/Cove                                            271,731      310,016       359,360
Round Mountain (50%)                                  205,487      172,217       211,752
Lupin                                                 166,791      172,110       180,052
Kettle River                                          124,910      100,419        66,782
----------------------------------------------------------------------------------------
 
Total Gold                                            768,919      754,762       817,946
========================================================================================
Percentage increase (decrease) from prior year           1.9%        (7.7%)        (6.4%)
========================================================================================
 
SILVER PRODUCTION (OUNCES)                             1996          1995         1994
----------------------------------------------------------------------------------------
Total Silver-all from McCoy/Cove                    7,102,348   11,905,806    10,443,151
========================================================================================
Percentage increase (decrease) from prior year         (40.3%)       14.0%        (16.1%)
========================================================================================
</TABLE>

Production Costs
----------------

Effective January 1, 1996, the company adopted the "Gold Institute Production
Cost Standard" for reporting production costs on a per ounce basis. This
standard defines cash operating costs as those costs directly associated with
the mining and milling of gold and silver, adjusted for such items as changes in
in-process inventories. Other cash costs, specifically royalties and production
taxes, are defined as those costs resulting from, but not directly related to,
the production of gold and silver. Non-cash costs are defined as costs accounted
for ratably over the life of an operation, including depreciation, amortization,
and reclamation costs.

Prior period per ounce costs have been restated to conform with the new
standard.

<TABLE>
<CAPTION>
PRODUCTION COSTS PER OUNCE OF GOLD PRODUCED            1996      1995      1994
-------------------------------------------------------------------------------
<S>                                                   <C>       <C>       <C>
Direct mining expense                                 $ 262     $ 231     $ 202
  Deferred stripping and mine development costs          (9)        1         4
  Inventory movements and other                           1        (3)        3
------------------------------------------------------------------------------- 
Cash operating costs                                    254       229       209
  Royalties                                              11         9        10
  Production taxes                                        3         5         7
-------------------------------------------------------------------------------
Total cash costs                                        268       243       226
  Depreciation                                           64        61        56
  Amortization                                           34        36        33
  Reclamation and closure                                 7         6         5
-------------------------------------------------------------------------------
Total production costs                                $ 373     $ 346     $ 320
===============================================================================
Percent increase from prior year                       7.8%      8.1%      1.6%
===============================================================================
 
CASH OPERATING COSTS PER OUNCE OF GOLD                 1996      1995      1994
-------------------------------------------------------------------------------
McCoy/Cove                                            $ 271     $ 217     $ 194
Round Mountain                                          221       195       176
Lupin                                                   299       296       274
Kettle River                                            201       230       253
-------------------------------------------------------------------------------
 
Company consolidated weighted average                 $ 254     $ 229     $ 209
===============================================================================
 
Percentage increase from prior year                   10.9%      9.6%       --%
===============================================================================
</TABLE>

                                       2
<PAGE>
 
RESERVES

The following table presents ore reserves by property. These reserves were
estimated by the company. A description of each mine follows the "Reserves" and
"Other Mineralization" sections. See "Risk Factors" for a discussion of items
which could affect the company's reserve estimates.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Ore Reserves(1)
(thousands, except average grades)
(proven and probable at December 31)
                                                                                    1996           1995            1994
                                 -------------------------------------------------------     ----------      ----------
                                                  Average                      Contained      Contained       Contained
                                                    grade      Contained      ounces(the     ounces(the      ounces(the
                                                  (ounces         ounces       company's      company's       company's
                                  Tons           per ton)         (100%)          share)         share)          share)
                                 --------------------------------------------------------------------------------------
GOLD
----
<S>                               <C>            <C>           <C>            <C>            <C>             <C>
PRODUCING MINES:
 McCoy/Cove                       35,379         0.033          1,183          1,183           1,526          1,870
 Round Mountain                  476,509         0.019          9,050          4,525           5,000          3,900
 Lupin                             1,576         0.281            443            443             685            727
 Kettle River                      1,987         0.186            370            370             330            388
                                                      -----------------------------------------------------------------
Total producing mines                                          11,046          6,521           7,541          6,885
                                                      -----------------------------------------------------------------
DEVELOPMENT PROPERTIES:
 Aquarius                         21,730         0.059          1,277          1,277              --             --
 Paredones Amarillos              39,954         0.032          1,292            775              --             --
 Alaska-Juneau(2)                     --            --             --             --           3,442          3,442
 Kensington(3)                        --            --             --             --              --            973
                                                      -----------------------------------------------------------------
Total development properties                                    2,569          2,052           3,442          4,415
                                                      -----------------------------------------------------------------
Total Gold                                                     13,615          8,573          10,983         11,300
                                                      ================================================================= 
SILVER
------
McCoy/Cove                        35,379          1.52         53,858         53,858          62,913         82,724
                                                      -----------------------------------------------------------------
Total Silver                                                   53,858         53,858          62,913         82,724
                                                      ================================================================= 
</TABLE>

(1) The definitions of proven and probable ore are those used in Canada by
    certain provincial securities regulatory authorities and are set forth in
    National Policy No. 2-A. The definitions are substantially the same as those
    applied in the United States by the Securities and Exchange Commission which
    are based on definitions used by the United States Bureau of Mines and the
    United States Geological Survey. See "Glossary--Ore Reserves".
(2) In 1996, the company decided not to proceed with development of its Alaska-
    Juneau project, wrote off its entire remaining investment in the project of
    $57.1 million and established a reserve of $20.0 million to cover estimated
    reclamation and closure responsibilities. Alaska-Juneau's proven and
    probable reserves of 3.4 million ounces of gold were removed from the
    company's ore reserves as of December 31, 1996. See "Alaska-Juneau."
(3) The company sold its interest in the Kensington development property during
    1995.

The company reports extractable (minable) ore reserves. Reserves do not reflect
recovery losses in the milling or heap leaching processes, but do include
allowance for dilution of ore in the mining process.

Ore reserves at December 31, 1996, 1995 and 1994 were estimated based on a gold
price of $375 per ounce and a silver price of $5.00 per ounce.

                                       3
<PAGE>
 
Change in Proven and Probable Reserves
--------------------------------------
The reconciliation of the change in proven and probable reserves from December
31, 1995 to December 31, 1996 is as follows.
<TABLE>
<CAPTION>
                                                            (millions of ounces)
                                                           Gold            Silver
-------------------------------------------------------------------------------------
<S>                                                        <C>              <C>
Proven and probable reserves at December 31, 1995          11.0             62.9
                                                      -------------------------------
 
  Extensions, discoveries and adjustments
   --  McCoy/Cove                                           0.1              3.9
   --  Round Mountain                                      (0.1)              --
   --  Lupin                                               (0.1)              --
   --  Kettle River                                         0.1               --
 
  Development property additions
   --  Aquarius                                             1.3               --
   --  Paredones Amarillos                                  0.8               --
 
  Production(1)                                            (1.1)           (12.9)
                                                      -------------------------------
 
Change in proven and probable reserves before write                             
  off of Alaska-Juneau                                      1.0             (9.0)
                                                      -------------------------------
 
  Write off of Alaska-Juneau                               (3.4)              --
                                                      -------------------------------
 
Proven and probable reserves at December 31, 1996           8.6             53.9
                                                      ===============================
-------------------------------------------------------------------------------------
</TABLE>

(1) Production represents previously modeled, in-situ ounces mined during 1996;
    this amount does not reflect recovery losses from heap leaching and milling.

For further information on ore reserves for specific mines, see the mines'
descriptions in "Business and Properties."

OTHER MINERALIZATION
The following table presents other mineralization by property. Other
mineralization for producing mines and development properties is generally
estimated by the company. Chapada's other mineralization was based on estimates
prepared by Santa Elina Gold Corporation in December 1994. Kingking's other
mineralization was based on estimates prepared by Benguet Corporation
("Benguet") and included in its March 1994 pre-definitive feasibility study. See
"Development Programs-Santa Elina" and "-Kingking." The company acquired options
on these properties in 1995 and is conducting its own advanced exploration and
updated feasibility studies. The company expects to prepare its own estimates of
ore reserves and other mineralization on completion of this work. The company's
policy is to classify such estimates of mineralized material as other
mineralization until its own estimates have been completed.

                                       4
<PAGE>
 
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------- 
Other Mineralization/(1)/
(thousands, except average grades) (at December 31)
                                                                     1996                        1995                        1994
                              -------------------------------------------     -----------------------     -----------------------
                                                       Tons       Average          Tons       Average          Tons       Average
                                        Tons           (the         grade          (the         grade          (the         grade
                                       (100%      company's       (ounces     company's       (ounces     company's       (ounces
                                      basis)         share)      per ton)        share)      per ton)        share)      per ton)
                              ---------------------------------------------------------------------------------------------------
<S>                                 <C>            <C>           <C>           <C>           <C>           <C>           <C>
GOLD
----
PRODUCING MINES:
McCoy/Cove                             1,473          1,473         0.029         6,767         0.036         4,786         0.015
Round Mountain                       105,915         52,958         0.015        36,340         0.021        19,219         0.022
Lupin (including Ulu)                  3,365          3,365         0.310         3,640         0.300         1,703         0.265
Kettle River                             282            282         0.181         1,097         0.186         1,361         0.193
                              ---------------------------------------------------------------------------------------------------
 
                                     111,035         58,078         0.033        47,844         0.048        27,069         0.045
                              ---------------------------------------------------------------------------------------------------
DEVELOPMENT PROPERTIES/(2)/:
Aquarius                                  --             --            --        23,465         0.055            --            --
Paredones Amarillos                       --             --            --        16,275         0.040            --            --
Alaska-Juneau/(3)/                        --             --            --        30,086         0.052        33,865         0.046
Kensington/(4)/                           --             --            --            --            --         1,594         0.147
                              ---------------------------------------------------------------------------------------------------
 
                                          --             --            --        69,826         0.050        35,459         0.051
                              ---------------------------------------------------------------------------------------------------
DEVELOPMENT PROPERTIES UNDER OPTION/(2)/:
Chapada/(5)/                         113,400         56,700         0.012        56,700         0.012            --            --
Kingking/(6)/                        225,000        168,750         0.017       168,750         0.017            --            --
                              --------------------------------------------------------------------------------------------------- 
 
                                     338,400        225,450         0.016       225,450         0.016
                              ---------------------------------------------------------------------------------------------------
 
Total Gold                           449,435        283,528         0.019       343,120         0.027        62,528         0.048
                              ===================================================================================================
 
SILVER
------
PRODUCING MINES:
McCoy/Cove                             1,473          1,473          1.36         6,767          0.65         4,786          0.50
                              ---------------------------------------------------------------------------------------------------
Total Silver                           1,473          1,473          1.36         6,767          0.65         4,786          0.50
                              ===================================================================================================

                                                       Tons                        Tons                        Tons
                                        Tons           (the        Average         (the        Average         (the       Average
                                       (100%      company's          grade    company's          grade    company's         grade  
                                      basis)         share)            (%)       share)            (%)       share)           (%)
                              ---------------------------------------------------------------------------------------------------
COPPER
------
DEVELOPMENT PROPERTIES UNDER OPTION/(2)/:
Chapada/(5)/                         113,400         56,700          0.43%       56,700          0.43%           --            --
Kingking/(6)/                        225,000        168,750          0.47%      168,750          0.47%           --            --
                              ---------------------------------------------------------------------------------------------------
Total Copper                         338,400        225,450          0.46%      225,450          0.46%           --            --
                              ===================================================================================================
</TABLE>

/(1)/ Other mineralization has not been included in the proven and probable ore
      reserve estimates because even though enough drilling, trenching, and/or
      underground work indicate a sufficient amount and grade to warrant further
      exploration or development expenditures, these resources do not qualify
      under the U.S. Securities and Exchange Commission standards as
      commercially minable ore bodies until further drilling, metallurgical
      work, and other economic and technical feasibility factors based upon such
      work are resolved.
/(2)/ The company's construction and production decision at its development
      properties is dependent on the issuance of appropriate permits and the
      ability of the company to obtain required financing. See "Development
      Programs."
/(3)/ In 1996, the company decided not to proceed with development of its 
      Alaska-Juneau project, wrote off its entire remaining investment in the
      project of $57.1 million and established a reserve of $20.0 million to
      cover estimated reclamation and closure responsibilities. Alaska-Juneau's
      other mineralization of 30.1 million tons at an average grade of 0.052
      ounces of gold per ton was removed from the company's ore reserves as of
      December 31, 1996. See "Alaska-Juneau."

                                       5
<PAGE>
 
(4) The company sold its interest in the Kensington development property during
    1995.
(5) The company owns an option entitling it to acquire a 50% direct interest in
    Chapada from Santa Elina Gold Corporation. In addition, the company owned 7%
    of the common shares of Santa Elina at year end 1995 and 51% of the common
    shares at year end 1996, giving the company indirect Chapada interests of 6%
    and 42% respectively. Until a decision is made on exercising the option, the
    company will continue to show its Chapada interest at 50%. The other
    mineralization was based on a gold price of $400 per ounce and a copper
    price of $1.00 per pound.
(6) The company owns an option to acquire up to a 75% interest in Kingking
    through various foreign subsidiaries and alliances with Filipino associates.
    The other mineralization was based on a gold price of $340 per ounce and a
    copper price of $1.00 per pound.

CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this report
are forward looking statements that involve risks and uncertainties that could
cause actual results to differ materially from targeted or projected results.
Such forward looking statements include statements regarding targets for gold
and silver production, cash operating costs and certain significant expenses,
percentage increases and decreases in production from the company's principal
mines, schedules for completion of detailed feasibility studies and initial
feasibility studies, potential increases in reserves and production, the timing
and scope of future drilling and other exploration activities, expectations
regarding receipt of permits and commencement of mining or production,
anticipated recovery rates and potential acquisitions or increases in property
interests. Factors that could cause actual results to differ materially include,
among others, changes in gold, silver and copper prices, unanticipated grade,
geological, metallurgical, processing, access, transportation of supplies or
other problems, results of current exploration activities, results of pending
and future feasibility studies, changes in project parameters as plans continue
to be refined, political, economic and operational risks of foreign operations,
availability of materials and equipment, the timing of receipt of governmental
permits, force majeure events, the failure of plant, equipment or processes to
operate in accordance with specifications or expectations, accidents, labor
relations, delays in start-up dates, environmental costs and risks, the outcome
of acquisition negotiations and general domestic and international economic and
political conditions, as well as other factors described herein or in the
company's filings with the U.S. Securities and Exchange Commission. Many of
these factors are beyond the company's ability to predict or control. Readers
are cautioned not to put undue reliance on forward-looking statements. See "Risk
Factors" for items which could affect forward-looking statements.

                                       6
<PAGE>
 
MCCOY/COVE
The McCoy/Cove property commenced production in April 1986 as an open pit heap
leaching operation. The McCoy mine and surrounding property, which was purchased
by the company in September 1986, is located in Lander County, Nevada, about 30
miles southwest of the town of Battle Mountain. The Cove deposit, located one
mile northeast of the McCoy deposit, was discovered in early 1987. Open pit
mining of the Cove deposit began in early 1988. A 7,500 ton per day mill,
completed in July 1989, utilizes flotation and agitation leach circuits to
recover gold and silver from sulfide ores not amenable to heap leaching and from
high-grade oxide ore. The mill was expanded to 10,000 tons per day during 1996.
    
The McCoy/Cove property consists of approximately 2,560 unpatented claims
covering approximately 44,989 acres of United States federal land administered
by the Bureau of Land Management of the Department of the Interior. The company
has completed all steps currently required under U.S. law to convert the land to
patented status and has filed applications for patents. The patents have not
been issued to date and are currently under audit. See "Other-Government 
Regulation and Environmental Issues".     

The following table sets forth operating data for the McCoy/Cove operation from
1992 through 1996.
<TABLE>
<CAPTION>
 
                                            1996          1995          1994          1993         1992
----------------------------------------------------------------------------------------------------------
<S>                                      <C>          <C>           <C>           <C>           <C>
Gold produced (ounces)                      271,731       310,016       359,360       395,608      301,512
Silver produced (ounces)                  7,102,348    11,905,806    10,443,151    12,454,338    7,921,496
Mining cost/ton of ore and waste         $     0.72   $      0.67   $      0.68   $      0.74   $     0.72
Heap leaching cost/ton of ore            $     1.68   $      2.32   $      1.09   $      1.29   $     1.31
Milling cost/ton of ore                  $     9.50   $     10.67   $     10.09   $      9.28   $    10.74
Production cost/ounce of gold produced:
  Direct mining expense                  $      286   $       206   $       191   $       187   $      257
  Deferred stripping cost                       (16)           15             6             3          (24)
  Inventory movements and other                   1            (4)         (3  )           --           (3)
                                         ----------   -----------   -----------   -----------   ----------
   Cash operating cost                          271           217           194           190          230
  Royalties                                       5             5             6             5            4
  Production taxes                                4             7             9             7            4
                                         ----------   -----------   -----------   -----------   ----------
   Total cash cost                              280           229           209           202          238
  Depreciation                                   71            53            48            41           53
  Amortization                                   46            46            43            45           47
  Reclamation                                     8             5             5             5            4
                                         ----------   -----------   -----------   -----------   ----------
   Total production costs                $      405   $       333   $       305   $       293   $      342
                                         ----------   -----------   -----------   -----------   ----------
Average gold-to-silver price ratio/(1)/        75:1          74:1          73:1          85:1         87:1
Capital expenditures (millions)          $      7.3   $       8.6   $       5.2   $       6.7   $     24.4
Deferred (applied) mining                
  expenditures (millions)                $      6.0   $      (7.3)  $      (3.0)  $      (1.5)  $      9.5
Heap leached:
  Ore processed (tons/day)                   16,671        11,966        21,682        24,090       24,806
  Days of operation                             364           364           364           371          364
  Total ore processed (000 tons)              6,068         4,355         7,892         8,938        9,029
  Gold grade (ounce/ton)                      0.018         0.018         0.013         0.017        0.014
  Silver grade (ounce/ton)                     0.27          0.49          0.48          0.88         0.60
  Gold recovery rate                             (2)           (2)           (2)           (2)          (2)
  Silver recovery rate                           (2)           (2)           (2)           (2)          (2)
  Gold recovered (ounces)                    66,834        59,910        66,617       100,136       77,550
  Silver recovered (ounces)                 513,227       877,463       940,652     2,406,939    1,130,857
Milled:
  Ore processed (tons/day)                    9,031         7,275         7,307         7,708        6,794
  Days of operation                             364           364           364           371          364
  Total ore processed (000 tons)              3,287         2,648         2,660         2,860        2,473
  Gold grade (ounce/ton)                      0.086         0.113         0.140         0.113        0.110
  Silver grade (ounce/ton)                     3.14          5.27          5.29          4.62         4.55
  Gold recovery rate (%)                       79.5          82.4          80.3          90.0         83.6
  Silver recovery rate (%)                     73.5          78.8          70.1          71.0         65.0
  Gold recovered (ounces)                   204,897       250,106       292,743       295,472      223,962
  Silver recovered (ounces)               6,589,121    11,028,343     9,502,499    10,047,399    6,790,639
----------------------------------------------------------------------------------------------------------
</TABLE>

                                       7
<PAGE>
 
/(1)/ To convert costs per ounce of gold into comparable costs per ounce of co-
      product silver, divide the production cost per ounce of gold by the
      period's average gold-to-silver price ratio.
/(2)/ As dedicated leach pads are used at McCoy/Cove, a gold recovery rate
      cannot be calculated until leaching is complete. The ultimate recovery
      rate for crushed ore is estimated to be about 68% for gold and 35% for
      silver and for run-of-mine ore, 48% for gold and 10% for silver.

Geology and Ore Reserves
------------------------
Gold deposition in the McCoy pit is associated with the intrusion of a Tertiary-
age quartz diorite stock into Mesozoic sedimentary formations including
quartzites, conglomerates, and limestones. Gold occurs in the Skarn Formation
proximal to the intrusion and as a stockwork-type deposit in the highly
fractured sediments.

The Cove deposit is a sediment hosted gold-silver deposit that is spatially
associated with a sequence of argillically altered felsite dikes. Gold and
silver mineralization occurs both as a rind around the altered intrusion and
away from the intrusions along favorable horizons such as permeable beds and
fractured zones. Cove ore is hosted by limestone of the Augusta Mountain
Formation and by conglomerate/sandstone of the Panther Canyon Formation.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                          McCoy/Cove Mine
                                                         Ore Reserves/(1)/
                                                         December 31, 1996
----------------------------------------------------------------------------------------------------------------------------------
                                     Tonnage                      Average grade                             Content(2)
                               (000's short tons)                (ounces per ton)                         (000's ounces)
                               ------------------       ----------------------------------      ----------------------------------
                                                              Gold             Silver                 Gold             Silver
                                                        ----------------  ----------------      ----------------  ----------------
<S>                             <C>                      <C>               <C>                   <C>               <C>
Cove Pit                                   19,895                  0.039              2.21                   767            43,965
West Contact of McCoy Pit                  10,557                  0.020                --                   208                --
Stockpiles                                  4,927                  0.042              2.01                   208             9,893
----------------------------------------------------------------------------------------------------------------------------------
Proven and Probable-1996                   35,379                  0.033              1.52                 1,183            53,858
==================================================================================================================================
 
Proven                                     19,660                  0.036              1.62                   712            31,861
Probable                                   15,719                  0.030              1.40                   471            21,997
----------------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1996             35,379                  0.033              1.52                 1,183            53,858
================================================================================================================================== 
 
Total Proven and Probable-1995             47,221                  0.032              1.33                 1,526            62,913
================================================================================================================================== 
</TABLE>
/(1)/ See "Reserves" as to the estimation of proven and probable ore reserves.
/(2)/ Reserves include allowances for dilution in mining but do not reflect
      losses in the recovery process. Recovery rates for the life-of-mine are
      estimated to be 72% for gold and 61% for silver.

The gold-equivalent cut-off grades are 0.006 ounce per ton for oxides and 0.034
ounce per ton for sulfides.

The prospective waste-to-ore ratio is 2.8:1.

Mining and Processing
---------------------
Ore and waste rock was mined at a rate of 174,000 tons per day in 1996, a slight
increase over the 173,000 tons per day in 1995. All material requires drilling
and blasting prior to excavation. The open pit mining operation employs four 23-
yard hydraulic mining shovels, one 23-yard wheel loader, ten 150-ton and ten
190-ton mechanical haul trucks, and four 250-ton electric haul trucks. Gold
recovery from ore occurs from a 10,000 ton per day mill and from crush and run
of mine heap leaching operations.

The mining rate exceeds the capacity of the mill and heap leach operations, and
resulted in the stockpiled ore increasing to 4.9 million tons in 1996 from 2.5
million tons in 1995. The company expects the stockpiled ore to continue to
increase through 1999, when the mining operations will be completed. Processing
of the stockpiled ore will continue through 2001.

                                       8
<PAGE>
 
The company mines at this high rate to minimize the time and expense required to
keep the Cove pit dewatered. Water pumped out of the Cove pit averaged 16,000
gallons per minute at the end of 1996. Water flows are projected to increase in
future years. The company uses infiltration ponds for water pumped from the
mine.

The company purchased four additional 190-ton haul trucks in 1996 for $4
million. The additional trucks were necessary for the mining of the West Contact
of the McCoy pit and to offset the longer haul routes from the Cove pit.

A 10,000 ton per day mill utilizes flotation and agitation leach circuits to
recover gold and silver from high grade oxide ore and sulfide ores not amenable
to heap leaching. The mill was expanded in 1996 from 7,500 tons per day. The
expansion cost $4 million and has resulted in improved recoveries of sulfide ore
by increasing processing time. For a general description of McCoy/Cove's mining
and mill recovery process, see page 43.

The ore mined from the Cove pit was all oxide in the early years of production.
Oxide ore is replaced by sulfide ore at depth. Almost all of the remaining ore
at Cove is sulfide. Overall recovery rates and production levels decline as more
sulfides are processed.

The mill processed less oxide and more sulfide ore in 1996 compared to 1995.
Mill throughput averaged 9,031 tons per day in 1996 compared to 7,275 in 1995.
Gold and silver production decreased from 1995 due to lower grades and
recoveries on the sulfide ore milled.

Heap leach gold production was up from 1995 due to more tons being processed.
The heap leach crusher averaged 10,168 tons per day in 1996 compared to 9,893
tons per day in 1995 with the balance of lower grade heap leach ore being
processed uncrushed, for a total of 16,671 tons per day in 1996 versus 11,966
tons per day in 1995. The increase is due to the higher quantity of ore mined in
1996. Although the 1996 mining rate was similar to the rate in 1995, a greater
percentage of the 1996 material was ore compared to 1995. Heap leach silver
production decreased in 1996 compared to 1995 due to lower grades.

During 1996, the company recorded a $30.0 million provision related to the
estimated costs to remove waste rock from an unstable portion of the Cove pit
wall. The cost estimate underlying the provision is based on a preliminary
evaluation of the total tons to be removed and the associated costs, both of
which will be further refined as the stabilization plan is finalized. This plan
could affect a portion of the McCoy/Cove reserves, if it is determined that the
cost to remove waste rock renders the portion uneconomic.

At Cove, a high grade sulfide ore zone was located nearer the surface than most
of the lower-grade sulfide ore. The company finished mining the high-grade
sulfide zone in 1995. The lower grade of the remaining sulfides, coupled with
lower recovery rates, meant lower production levels in 1996. Production is
expected to continue to decrease over the remaining life of the mine.

In 1997, McCoy/Cove is expected to produce about 15-20% less gold compared to
the 271,731 ounces produced in 1996. Silver production is expected to be about
the same as the 7.1 million ounces produced in 1996. The decrease in gold
production is due to the expected lower grades of gold in 1997. See "Cautionary
`Safe Harbor' Statement under the United States Private Securities Litigation
Reform Act of 1995" and "Risk Factors."

                                       9
<PAGE>
 
ROUND MOUNTAIN
The company owns an undivided 50% interest in and operates the Round Mountain
gold mine, acquired in 1985. Subsidiaries of Homestake Mining Company and Case,
Pomeroy & Company, Inc., each own an undivided 25% interest in the mine. Mining
equipment, crushing facilities, heap-leaching facilities, gold extraction and
recovery facilities, administration and maintenance buildings and other
equipment are included in the joint venture.
    
The mine, located 60 miles north of Tonopah in Nye County, Nevada, consists of
open-pit mining operations on patented and unpatented mining claims covering
approximately 24,968 acres. The company has completed all steps currently
required under U.S. law to convert the minable land to patented status and has
filed application for patents. The patents have not been issued to date and are
currently under audit. See "Other-Government Regulation and Environmental
Issues".    

The following table sets forth operating data for the Round Mountain operation
from 1992 through 1996. The company's share of production is 50% of the ounces
shown.
<TABLE>
<CAPTION>
 
                                             1996         1995        1994       1993       1992
--------------------------------------------------------------------------------------------------
<S>                                       <C>          <C>         <C>         <C>        <C>
Gold produced (ounces)                       410,974     344,434     423,504    374,694    370,585
Mining cost/ton of ore and waste            $   0.69    $   0.61    $   0.53   $   0.60   $   0.62
Heap leaching cost/ton of ore               $   0.80    $   0.65    $   0.66   $   0.91   $   1.54
Production cost/ounce of gold produced:
 Direct mining expense                      $    228    $    218    $    156   $    205   $    204
 Deferred stripping cost                          (2)        (23)          8         (7)         5
 Inventory movements and other                    (5)         --          12          3          4
                                            --------    --------    --------   --------   --------    
  Cash operating cost                            221         195         176        201        213
 Royalties paid                                   32          31          32         26         24
 Production taxes                                  4           4           8          5          3
                                            --------    --------    --------   --------   --------
  Total cash cost                                257         230         216        232        240
 Depreciation                                     51          62          51         67         49
 Amortization                                     18          20          20         20         19
 Reclamation                                       5           5           4          4          3
                                            --------    --------    --------   --------   --------
  Total production costs                    $    331    $    317    $    291   $    323   $    311
                                            --------    --------    --------   --------   --------
Capital expenditures (millions)/(1)/        $   17.5    $   11.7    $    8.7   $    6.6   $   12.4
Deferred (applied) mining  
 expenditures (millions)/(1)/               $    0.4    $    4.0    $ (1.7  )  $    1.3   $ (0.9  )
Heap leached-Reusable Pad:
 Ore processed (tons/day)                     27,737      22,490      18,980     28,329     46,562
 Days of operation                               354         354         355        361        355
 Total ore processed (000 tons)                9,819       7,961       6,738     10,227     16,530
 Grade (ounce/ton)                             0.036       0.034       0.040      0.033      0.036
 Recovery rate (%)                              66.1        70.9        78.7       69.4       58.1
 Gold recovered (ounces)                     231,420     192,052     216,710    256,784    311,701
Heap leached-Dedicated Pad:
 Ore processed (tons/day)                     87,706      66,197      54,161     39,379         --
 Days of operation                               354         354         355        361         --
 Total ore processed (000 tons)               31,048      23,434      19,227     14,216         --
 Grade (ounce/ton)                             0.011       0.012       0.014      0.014         --
 Recovery rate (%)                                (2)         (2)         (2)        (2)        --
 Gold recovered (ounces)                     167,004     138,700     173,544     62,368         --
High Grade Ore processed:/(3)/
 Gold recovered (ounces)                      12,550      12,244      33,052     53,376     52,020
Other:  
 Gold recovered (ounces)                          --       1,438         198      2,166      6,864
--------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ The company's 50% share.
/(2)/ For dedicated leach pads, a gold recovery rate cannot be calculated until
      leaching is complete. The eventual recovery rate is estimated to be
      approximately 50%.
/(3)/ A high-grade occurrence was discovered April 1992. A small gravity plant
      was constructed to recover these ounces.

                                       10
<PAGE>
 
Geology and Ore Reserves
------------------------
Gold mineralization in the Round Mountain deposit is associated with Tertiary
volcanism and Caldera Formation. The deposit is hosted by a thick sequence of
rhyolitic ash-flow tuffs deposited on a Paleozoic and Cretaceous basement.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                        Round Mountain Mine
                                                      Ore Reserves/(1)//(2)/
                                                         December 31, 1996
----------------------------------------------------------------------------------------------------------------------
                                                                                   Average grade      
                                                                     Tonnage             of gold       Gold content(3)
                                                          (000's short tons)     (ounces per ton)       (000's ounces)
----------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                     <C>                   <C>
Round Mountain pit                                                   326,141                0.022                7,337
Offloads and heap leach stockpiles/(4)/                              147,843                0.011                1,612
Mill stockpiles                                                        2,525                0.040                  101
----------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1996/(5)/                                  476,509                0.019                9,050
======================================================================================================================
 
Proven                                                               370,649                0.019                6,863
Probable                                                             105,860                0.021                2,187
----------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1996/(5)/                                  476,509                0.019                9,050
====================================================================================================================== 
 
Total Proven and Probable-1995                                       508,820                0.020               10,000
======================================================================================================================
</TABLE>
/(1)/ The company's share is 50% of the reserves presented.
/(2)/ See "Reserves" as to the estimation of proven and probable ore reserves.
/(3)/ Reserves include allowances for dilution in mining but do not reflect
      losses in the leaching process. The average leach recovery rate for the
      reusable pad in 1996 was 66.1%. The eventual recovery rate for the
      dedicated pad is estimated to be approximately 50%.
/(4)/ The offloads consist of approximately 106 million tons of previously
      crushed, leached and rinsed ore. The heap leach stockpiles consist of
      approximately 42 million tons of previously unprocessed ore. Sampling and
      metallurgical testing conducted in 1994 and 1995 confirmed that this
      material can be profitably processed on the dedicated leach pads.
/(5)/ Total proven and probable reserves include 1,598,000 ounces of gold of
      which 85% is anticipated to be recovered through a milling process. The
      construction of the mill began in 1996 and is expected to be completed in
      the third quarter of 1997.

The cut-off grades are 0.006 ounce of gold per ton for oxides and 0.010 ounce
per ton for non-oxides.

The prospective waste to ore ratio of pit ore is 1.55:1.

Mining and Processing
---------------------
Ore and waste rock was mined at a rate of approximately 164,000 tons per day in
1996 compared to 170,000 tons per day in 1995. The decrease was due to the
reallocation of equipment to the movement of heap leach stockpiles to the
dedicated pads in 1996. All mined material requires drilling and blasting prior
to excavation. The open pit mining operation employs three 28-yard electric
mining shovels, and seventeen 150-ton and eleven 190-ton mechanical haul trucks.

Gold recovery from ore occurs from three independent recovery operations. These
include crushed ore (reusable pad) leaching, run-of-mine ore (dedicated pad)
leaching and gravity concentration. In 1997, a mill also will be used to process
ore as discussed below. Beginning in 1993 the company began processing the
lower-grade ore on the run-of-mine leach pads. Recovery rates for crushed ore
have increased and lower-grade ore and some material previously hauled to the
waste dumps is being leached on the run-of-mine leach pads.

Gravity concentration is applied only to very high grade ore containing coarse
gold. A 500 ton per day gravity recovery plant was constructed in 1992 to
process ore from a small but very high grade vein

                                       11
<PAGE>
 
excavated within the main Round Mountain ore body. The gravity plant is expected
to produce 8,000 ounces in 1997.

During 1996, the joint venture began construction of an 8,000 ton per day mill
to treat higher-grade unoxidized ore. The mill is expected to cost about $68
million (the company's share, $34 million). This facility is expected to recover
up to 85% of the gold contained in unoxidized ores by employing gravity
concentration and cyanide leaching. The mill is expected to be completed in the
third quarter of 1997.

Currently, gold recovery occurs almost entirely from heap leaching. Higher-grade
ore is crushed to less than 3/4 inches at a rate of 28,000 tons per day and
conveyed to two parallel 1.5 million square foot asphalt reusable leach pads.
This ore is leached for approximately 110 days, rinsed, removed and placed on
the dedicated leach pad and releached there. Most of the contained gold is
released on the reusable pad within the first 90 days, but Round Mountain has
determined that sufficient gold values remain to justify additional leaching on
the low-cost dedicated pad over a period of years. For a general description of
Round Mountain's mining and heap-leach recovery process see page 44.

Lower-grade ore (down to a cut-off grade of 0.006 ounce per ton for oxidized
ores and 0.010 ounce per ton for unoxidized 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 88,000 tons per day in 1996. 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.

In 1997, Round Mountain is expected to produce about 5% less gold compared with
the 410,974 ounces (the company's share, 205,487) produced in 1996. See
"Cautionary `Safe Harbor' Statement under the United States Private Securities
Litigation Reform Act of 1995" and "Risk Factors."

                                       12
<PAGE>
 
LUPIN
The Lupin mine is an underground operation located 250 miles northeast of
Yellowknife in the Nunavut Settlement Area of the Northwest Territories of
Canada, 56 miles south of the Arctic Circle. Production began in October 1982.
    
The Lupin mining leases cover 16,699 acres. The principal lease was renewed for
21 years in 1992, and, provided the company has complied with its terms, is
renewable for further 21 year periods subject to any applicable regulations then
in effect. The lease was granted by the Department of Indian Affairs and
Northern Development on behalf of the Crown and is subject to the provisions of
the Territorial Lands Act and the Canada Mining Regulations. The lease is in
good standing. See "Other-Government Regulation and Environmental Issues" for
discussion regarding Inuit ownership interests.     

In 1995, Echo Bay purchased the Ulu property, located approximately 100 miles
north of Lupin, from BHP Minerals for $10 million. A 5% net smelter royalty is
payable to BHP after the recovery of 675,000 ounces of gold. The Ulu property
has about 1.9 million minable tons of other mineralization at average grades of
0.320 ounces of gold per ton. The deposit is open on strike and down dip. In
1996, the company began a two year $19 million exploration program to further
explore and develop the deposit. Ulu ore is expected to be hauled to Lupin for
processing beginning in 1998, dependent on successful permitting and
development.  This will allow the Lupin mill to run at approximately 2,000 tons
per day for at least four years. See "Cautionary `Safe Harbor' Statement under
the United States Private Securities Litigation Reform Act of 1995" and "Risk
Factors."

The table below sets forth operating data for the Lupin mine from 1992 through
1996.

<TABLE>
<CAPTION>
                                                1996             1995             1994             1993             1992
-----------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>              <C>              <C>              <C>              <C>
Gold produced (ounces)                       166,791          172,110          180,052          217,504          214,482
Mining cost/ton of ore                     C$  44.08        C$  44.23        C$  40.45        C$  35.54        C$  34.79
Milling cost/ton of ore                    C$  12.39        C$  12.26        C$  12.03        C$  12.27        C$  13.49
Production cost/ounce of gold  produced:
 Canadian dollars:
  Direct mining expense                    C$    411        C$    423        C$    375        C$    291        C$    288
  Deferred mine development                       (4)             (22)              (4)               5                1
  Inventory movements and other                    1                4                4               13               (3)  
                                            --------         --------         --------         --------         --------
   Cash operating cost                     C$    408        C$    405        C$    375        C$    309        C$    286

 U.S. dollars:    
  Cash operating cost                     US$    299       US$    296       US$    274       US$    240       US$    238
  Royalties                                       --               --               --               --               --
  Production taxes                                --               --               --               --               --
                                            --------         --------         --------         --------         --------
   Total cash cost                               299              296              274              240              238
  Depreciation                                    71               68               64               59               57
  Amortization                                    21               19               16               17               16
  Reclamation                                      8                7                6                7                6
                                            --------         --------         --------         --------         --------
  Total production costs                    $    399         $    390         $    360         $    323         $    317
                                            --------         --------         --------         --------         --------
Capital expenditures (millions US$)         $   15.7         $   14.5         $    8.5         $    4.5         $   12.8
Deferred (applied) mining  
 expenditures (millions US$)                $    0.2         $    2.8         $    0.5         $   (0.9)        $   (0.3)
Milled:
 Ore processed (tons/day)                      2,111            1,986            2,241            2,297            2,043
 Days of operation                               364              364              364              371              364
 Total ore processed (000 tons)                  768              723              816              852              744
 Grade (ounce/ton)                             0.235            0.258            0.238            0.272            0.308
 Recovery rate (%)                              92.5             92.5             92.9             93.7             93.5
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       13
<PAGE>
 
Geology and Ore Reserves
------------------------
Gold at the Lupin deposit occurs in a Z-shaped isoclinally folded iron formation
of Archean age. Gold is associated with pyrrhotite, arsenopyrite and quartz.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                            Lupin Mine
                                                         Ore Reserves/(1)/
                                                         December 31, 1996
----------------------------------------------------------------------------------------------------------------------
                                                                                    Average grade     
                                                                     Tonnage              of gold    Gold content/(2)/  
                                                          (000's short tons)     (ounces per ton)       (000's ounces)
----------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                    <C>                 <C>
Center Zone                                                            1,008                0.292                  294
East Zone                                                                 78                0.337                   26
West Zone                                                                490                0.252                  123
----------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1996                                         1,576                0.281                  443
======================================================================================================================
 
Proven                                                                 1,450                0.280                  406
Probable                                                                 126                0.292                   37
----------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1996                                         1,576                0.281                  443
======================================================================================================================
 
Total Proven and Probable-1995                                         2,445                0.280                  685
======================================================================================================================
</TABLE>
/(1)/ See "Reserves" as to the estimation of proven and probable ore reserves.
/(2)/ Reserves do not reflect losses in the milling process but do include
      allowance for dilution of ore in the mining process. The mining recovery
      factor was estimated at 85%. The average mill recovery rate in 1996 was
      92.5%.

The cut-off grade is 0.161 ounce of gold per ton at the upper levels of the mine
and 0.225 ounce of gold per ton at the lower levels of the mine.

Mining and Processing
---------------------
Access to the Lupin underground mine, removal of ore and waste, and movement of
personnel within the mine, is by a shaft developed to a depth of 3,970 feet and
by a ramp driven to a depth of 4,260 feet.

The ore in the Center and East Zones has been mined by the sub-level, long-hole
open stoping method. Mining of the narrower West Zone has been also by the long-
hole open stoping method, although it has been a more costly zone to mine than
the Center Zone. In 1995, Lupin incorporated "pastefill", which is composed of
mine tailings and cement, into the stoping sequence. During 1997, shrinkage and
mechanical cut and fill mining techniques will be investigated and tested.

After the ore is mined, it is hoisted to the surface for processing and recovery
of gold in a 2,300 ton per day mill where the recovered gold is cast in dore
bars prior to being shipped off site.

The company expects to operate the mill at 2,000 tons per day during 1997,
compared to 2,111 tons per day in 1996. In 1997, Lupin is expected to produce
about the same amount of gold as the 166,791 ounces produced in 1996. See
"Cautionary `Safe Harbor' Statement under the United States Private Securities
Litigation Reform Act of 1995" and "Risk Factors."

The ore grade at Lupin declines with depth, and the deposit becomes more
erratic. The Center Zone of the three-zoned ore body also tends to be narrower.
Additional ground support is required and longer truck haulage distances is a
factor as the depth increases. The company has changed its mining techniques and
backfill process to overcome the challenges of mining at depth. Mechanized cut
and fill mining techniques may afford an opportunity to better utilize equipment
and to improve profitability at depth. All of this causes slower and more costly
mining in the deeper levels of the mine.

                                       14
<PAGE>
 
Supplies, Utilities and Transportation
--------------------------------------
The Lupin mine and mill facilities are in a remote location in the sub-Arctic
region of Canada which requires the company to respond to certain unusual
conditions. At the mine, the company maintains supplies of spare parts and other
materials, including fuel, and standby systems of piping and pumping in excess
of what would be required at less remote locations.

The principal supplies needed for the operation of the Lupin mine are diesel
fuel, chemical reagents (including lime, cyanide and zinc), cement,  grinding
media, drill steel, equipment parts, lubricants, food and explosives. The
largest single item is diesel fuel, which is used principally to generate power.
A diesel-powered generating plant provides power for all the Lupin facilities.
The powerhouse has a primary installed capacity of approximately 18,000
kilowatts which is supplemented by additional standby generators having a
combined capacity of 1,500 kilowatts. Heating for the Lupin facilities is
obtained by utilizing waste heat from these generators augmented by oil-fired
boilers.

All equipment, materials and supplies must be transported to the mine from
Edmonton or Yellowknife. Personnel are transported from these locations and from
Kugluktuk (formerly Coppermine) and Cambridge Bay in the Nunavut Settlement Area
of the Northwest Territories. Each year since 1983, the company has completed a
360-mile ice road commencing 40 miles northeast of Yellowknife and ending at the
Lupin mine as the most economical way of transporting bulk items, including
fuel, to the mine.

In order to operate the winter road, the company is required to obtain certain
permits from the government of the Northwest Territories. To date, the company
has experienced no significant difficulties in obtaining these permits. The
winter road is usable for approximately 12 weeks each year beginning in mid-
January during which time tractor-trailers can transport all of the company's
annual requirements for diesel fuel, chemical reagents and certain other
supplies. There are on-site facilities for the storage of approximately 5.4
million U.S. gallons of diesel fuel, which is in excess of the mine's annual
requirements.

Surface facilities at the Lupin mine include a 6,300-foot compacted gravel
airstrip with an instrument landing and navigation system and runway lighting.
Supplies and personnel that must be brought in by air are transported
principally on a leased Boeing 727, which carries up to 117 passengers, or up to
35,000 pounds of freight, or a combination of both passengers and freight.

Voice and data communications with the Lupin mine are maintained via satellite,
which provides for uninterrupted communications regardless of adverse weather
conditions.

Severe winter conditions, including snow, wind and fog, may at times delay the
operation of aircraft and of vehicles using the winter road. Despite the remote
location and adverse weather conditions, since beginning Arctic operations in
1964, the company has experienced no material operational disruptions or
cessation of its operations, although such disruptions could occur.

Water Supply and Waste Disposal
-------------------------------
Water for mining, milling and domestic use is obtained on site by pumping from
Contwoyto Lake. Tailings from the mill are pumped into a tailings pond or pumped
underground as part of the paste-backfill. In 1996, approximately 38% of
tailings were placed underground as paste-backfill. Water from the tailings pond
is processed through a water treatment plant and monitored for compliance with
Northwest Territories' standards prior to discharge. The company's water
license, which is renewable on application, expires May 31, 2000.

                                       15
<PAGE>
 
KETTLE RIVER
The Kettle River properties are located in Ferry County in the State of
Washington and cover approximately 13,665 acres through patented and unpatented
mining claims and fee lands.

The following table sets forth operating data for the Kettle River operation
from 1992 through 1996.

<TABLE>
<CAPTION>
                                                   1996            1995            1994            1993            1992
-------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>            <C>               <C>            <C>             <C>
Gold produced (ounces) (100%)                     124,910         100,419           66,782          73,431         89,849
Gold produced (ounces) (the  company's            
 share)/(1)/                                      124,910         100,419           66,782          73,431         62,894
Mining cost/ton of ore                           $  21.12       $   22.60         $  11.06        $  16.12       $  21.77
Milling cost/ton of ore                          $  11.96       $   12.76         $  13.54        $  12.80       $  12.66
Production cost/ounce of gold produced:
 Direct mining expense                           $    190       $     237         $    225        $    281       $    296
 Deferred mine development                             --              --               --              --              6
 Inventory movements and other                         11              (7)              28              (6)           (15)
                                                 --------       ---------         --------        --------       --------
    Cash operating cost                               201             230              253             275            287
 Royalties                                             10               8                5              10              1
 Production taxes                                       2               2                2               2              2
                                                 --------       ---------         --------        --------       --------
  Total cash cost                                     213             240              260             287            290
 Depreciation                                          59              74               95              76             79
 Amortization                                          45              45               45              53            156
 Reclamation                                            8               7                6               2              7
                                                 --------       ---------         --------        --------       --------
  Total production costs                         $    325       $     366         $    406        $    418       $    532
                                                 --------       ---------         --------        --------       --------
Capital expenditures (millions) (the            
 company's share)                                $    8.8       $     9.5         $   10.0        $    7.9       $    7.4
Deferred (applied) mining expenditures    
 (millions)                                      $    --        $     --          $    --         $    --        $     --
Milled:
 Ore processed (tons/day)                           1,652           1,504            1,438           1,551          1,805
 Days of operation                                    364             364              364             371            364
 Total ore processed (000 tons)                       601             548              523             575            657
 Grade (ounce/ton)                                  0.240           0.212            0.149           0.146          0.155
 Recovery rate (%)                                   86.5            86.6             85.6            87.7           87.9
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ The Kettle River Joint Venture was terminated on December 24, 1992 upon
      the withdrawal of Crown Resources Corporation (the company's 30% joint
      venture partner). The company has owned 100% of the Kettle River
      operations since that date.

Geology and Ore Reserves
------------------------
Ore reserves at Kettle River exist at the Lamefoot and K-2 deposits. At
Lamefoot, gold occurs near the contact between Permian age siliciclastic and
carbonate rocks and is associated with silicification, magnetite, hematite,
pyrrhotite and pyrite. At K-2, gold is contained in steeply dipping quartz
carbonate veins hosted by Eocene age volcanic rocks.

                                       16
<PAGE>
 
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                           Kettle River
                                                         Ore Reserves/(1)/
                                                         December 31, 1996
----------------------------------------------------------------------------------------------------------------------
                                                                                    Average grade        
                                                              Tonnage (000's              of gold    Gold content/(2)/
                                                                 short tons)     (ounces per ton)       (000's ounces) 
----------------------------------------------------------------------------------------------------------------------
 
<S>                                                                    <C>                  <C>                    <C>
Lamefoot                                                               1,246                0.185                  231
K-2                                                                      741                0.188                  139
----------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1996                                         1,987                0.186                  370
======================================================================================================================
 
Proven                                                                 1,291                0.189                  244
Probable                                                                 696                0.181                  126
----------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1996                                         1,987                0.186                  370
======================================================================================================================
 
Total Proven and Probable-1995                                         1,602                0.206                  330
======================================================================================================================
</TABLE>
/(1)/ See "Reserves" as to the estimation of proven and probable ore reserves.
/(2)/ Reserves do not reflect losses in the milling process but do include
      allowance for dilution in the mining process. The average mill recovery
      rate of gold in 1996 was 86.5%.

Cut-off grades are 0.102 ounce of gold per ton at Lamefoot and 0.140 ounce of
gold per ton at K-2.

Mining and Processing
---------------------
At Kettle River, a series of deposits are mined to feed a central mill. Ore
milled in 1996 came principally from Lamefoot, although some development ore
from K-2 and some stockpiled ore from Overlook was also milled. Lamefoot
commenced production in December 1994 and Overlook operated until October 1995
when it closed, as planned, due to depletion of the minable reserve.

Ore from all sources is trucked to the Kettle River mill where the recovered
gold is cast into dore bars prior to shipping off site.

In 1997, Kettle River is expected to produce about 5-10% more gold compared to
the 124,910 ounces produced in 1996. See "Cautionary `Safe Harbor' Statement
under the United States Private Securities Litigation Reform Act of 1995" and
"Risk Factors."

Lamefoot
--------
Development of the Lamefoot project began during 1992 when the portal was
collared. By December 1994, 17,500 feet of drifting was complete. Lamefoot
achieved full production in June 1995, at a rate of 1,500 tons per day. Longhole
open stoping is utilized as the mining method, with delayed backfill. Zones with
ore widths of 50 feet utilize cemented backfill in primary stopes and
unconsolidated fill in secondary stopes. Zones under 50 feet in width are filled
with unconsolidated fill. Ore is removed from the stopes using remote control
muckers and hauled to the surface using 26-ton haul trucks. Total Lamefoot ore
production in 1996 was 546,317 tons. Ore production for 1997 is expected to be
546,000 tons.

K-2 Project-Exploration and Development
---------------------------------------
In December 1994, surface excavation for building construction and portal
clearing commenced at K-2. The portal was collared in March 1995 and a total of
10,629 feet of development was completed by the end of 1996. Stope development
began in the fourth quarter of 1996 and production commenced in January 1997.
The mining method is similar to Lamefoot, longhole open stoping, but due to the
narrow widths, cemented fill is required in the South zone. Ore production for
1997 is expected to be 192,000 tons.

                                       17
<PAGE>
 
CONSTRUCTION PROGRAMS
Aquarius
--------
The company owns 100% of the Aquarius project which is located in the Macklem
Township 40 kilometers east of Timmins, Ontario, Canada. The City of Timmins is
centrally located in northeastern Ontario on Highway 101 approximately 700
kilometers, by road, northwest of Toronto. All-weather primary highways connect
with Thunder Bay to the west and North Bay, Sudbury and Toronto to the south. A
new one kilometer access road from the highway to the process plant area will be
constructed to the west of the existing access road.

The project site property is on a group of 12 patented claims that grant the
company fee simple title. The patents are part of a larger land package of
leased and staked claims that cover most of the northern portion of the Macklem
Township. Environmental work on the project commenced in May 1995 and the
company expects completion, to the point of obtaining the necessary project
permits, by October 1997.

Aquarius has 1,277,000 ounces of proven and probable gold reserves at December
31, 1996 (21.7 million tons of ore at an average grade of 0.059 ounce per ton)
including 348,000 ounces of proven gold reserves (5.5 million tons of ore at an
average grade of 0.063 ounce per ton) and 929,000 ounces of probable gold
reserves (16.2 million tons of ore at an average grade of 0.057 ounce per ton).
The reserves were based on a cutoff grade of 0.013 ounces per ton. The cutoff
grade was based on a price of $375 per ounce of gold. The gold recovery is
expected to be 95%. The waste-to-ore ratio is expected to be 5.6:1.

The 1996 ore reserves have been estimated by the company and the reserve
estimation methodology was verified by the company's external geological
engineering consultant FSS Canada Consultants Inc.

Aquarius is an Archean lode gold deposit with mineralization in carbonate
altered ultramafic rocks, associated felsic intrusives, and quartz veins in
talc-chlorite schists. Clay overburden 10 to 40 meters thick overlays 30 to 80
meters of glacial till. The "nuggety" style of gold mineralization at Aquarius
is characteristic of this deposit type and leads to difficulty in the prediction
of ore grades. This difficulty is addressed by:  1) extensive drilling, 2)
advanced geostatistical analysis with multiple techniques, 3) cross validation
with production data and independent estimates, and 4) review of the results by
an expert consultant.

The company will build a frozen earth barrier around the pit perimeter to
prevent groundwater from flowing into the pit from the surrounding water table.
The circumference of the freeze curtain will be 12,000 ft (2.25 miles or 3.66
km). Current plans include 494,000 linear feet of drilling in 1,900 holes spaced
6.3 feet apart. This will allow an adequate distance between the holes to
provide a solid barrier, and it will allow the holes to penetrate the bedrock
which has little water flow. The process is a proven technology used
successfully in construction and underground mining for over 100 years. The
process involves circulating a brine solution, that is cooled with refrigeration
units, through the holes which will remove the heat from surrounding material
and allow it to freeze. The company expects that it will take approximately four
months for this process to entirely freeze the wall to prevent water from
leaking through the glacial overburden.

The first significant stage of mining will be removal of the clay and sand
overburden. The rock mining stage will produce all of the ore to be milled.
Because of the shape of the deposit, the pit will have two separate bottoms with
a ridge of waste rock separating them. Mining will be phased to exploit the more
southerly of the two segments first. This will permit some backfilling of waste
material from the excavation of the northerly segment.

The ore will be crushed in three stages so that approximately 80% of the ore
will be less than 3/8 inch in size. The secondary and tertiary crushers and all
interconnecting screens and conveyors are located indoors to minimize problems
with wet or frozen ore. The mill will contain both gravity and leach circuits.
Two centrifugal separators will process the ore that is amenable to recovery by
gravity separation techniques. A ball mill and a series of six agitated cyanide
leach tanks will process the ore not

                                       18
<PAGE>
 
amenable to recovery by gravity separation techniques. The mill has been
designed to process 8,300 tons per day. Power will be supplied to the project
from Ontario Hydro, the main utility provider in the province of Ontario. There
will be two sources for water supply. Fresh water will come from one or more
wells located near the minesite development. Water also will be reclaimed from
the tailings area.

The average annual production rate is expected to be 166,000 ounces. Average
cash operating costs are expected to be $218 per ounce, depreciation and
amortization is expected to be $94 per ounce and reclamation is expected to be
$4 per ounce for a total production cost of $316 per ounce. See "Cautionary
`Safe Harbor' Statement under the United States Private Securities Litigation
Reform Act of 1995" and "Risk Factors."

During the operating phase of the mine, the company's workforce will consist of
94 people including a general manager overseeing the administration,
safety/security training, process mill and environmental departments. Mining
operations manpower will be supplied by a mining contractor.

Tree clearing and road construction can be started under the permits presently
in hand. The company expects to award detail design and engineering work for the
mill in February 1997; start construction in June 1997 in order to close in the
building before winter; and complete the mill in October 1998. The company
expects to start the freeze wall program in March 1997; receive mining permits
in October 1997; initiate freezing in December 1997; finish freezing and start
pit dewatering in April 1998; start overburden mining in May 1998; and haul the
first ore to the mill in November 1998. The first full year of operation will be
1999. Initial capital is estimated to be $100 million which the company expects
to finance with a new $75 million unsecured corporate credit facility, existing
working capital and cash flow from the company's four existing gold mines.

The company capitalized $6.1 million of Aquarius project expenditures in 1996
and $1.0 million in 1995.  The company expects to capitalize construction costs
of $65 million and mine development costs of $4 million in 1997.  The company
also incurred acquisition costs of $7.8 million in 1995.

Paredones Amarillos
-------------------
The company owns 60% of the Paredones Amarillos project, located in the Mexican
state of Baja California Sur, 65 kilometers southeast of the state capital La
Paz which has a population of 140,000. The remaining 40% of the project is owned
by subsidiaries of Viceroy Resource Corporation ("Viceroy"). The moderate, semi-
arid climate provides an attractive environment for operations. Steep hills with
elevations ranging between 300 meters and 800 meters above sea level
characterize the terrain. The project covers an area of 12,757 hectares held
through 16 mining concessions controlled by the joint venture. Thirteen of the
concessions have been approved for exploration, two for exploitation and one is
pending. All relevant duties, fees and taxes for these concessions have been
paid, as required by law. The concessions provide the legal right to the joint
venture to proceed with mining activities.

The site can be accessed from paved state highways followed by 15 kilometers of
gravel road. The joint venture will upgrade the existing gravel road to provide
safe access to the proposed operation.

The joint venture has routinely received approvals for exploration activities.
The joint venture expects that Mexico's environmental agencies will similarly
approve the proposed mine development. Since Mexico has recently developed a
sophisticated system of environmental regulations, the joint venture has
maintained a continuous dialogue with agency staff to ensure that all regulatory
requirements are identified. The most significant environmental permitting
requirements include: receiving approval of a recently submitted Environmental
Impact Statement; obtaining a Change in Land Use permit; issuance of a
Construction License; and issuance of an Operating License.

Paredones Amarillos has 1,292,000 ounces of proven and probable gold reserves
(the company's share, 775,200 ounces) at December 31, 1996 (40.0 million tons of
ore at an average grade of 0.032 ounce per ton) including 332,000 ounces of
proven gold reserves (9.7 million tons of ore at an average grade of

                                       19
<PAGE>
 
0.034 ounce per ton) and 960,000 ounces of probable gold reserves (30.3 million
tons of ore at an average grade of 0.032 ounce per ton). The reserves were based
on a cutoff grade of 0.015 ounce per ton. The cutoff grade was based on a price
of $375 per ounce of gold. The gold recovery rate is expected to be 91%.

The 1996 ore reserves have been estimated by the joint venture and the reserve
estimation methodology was verified by the joint venture's external geological
engineering consultant H. A. Simons Ltd.

The main ore host to the Paredones Amarillos mineralization is a 10 to 80 meter
thick northeast to east-west striking, 15 to 45 degree southeast dipping
cataclasite and mylonite unit. The cataclasite is a dense, competent rock
composed of approximately 50% crushed quartz and feldspar fragments in a matrix
of sericite and minor chlorite and fine-grained quartz. The cataclasite hosts
approximately 80% of the gold resource, the granodiorite 20%, and the diorite
only a minor fraction.

Ore and waste rock will be open pit mined from 10 meter high benches with an
expected waste-to-ore ratio of 4.15:1 using blasting followed by conventional
open pit methods. Current plans call for three 13.5-yard excavators and a
maximum of thirteen 95-ton rear dump haul trucks to be used. Ore will be
delivered to a primary gyratory crusher. The ore will then be reduced further by
means of a semiautogenous grinding mill and two ball mills. Following the whole-
ore-leach circuit, gold will be recovered using a carbon adsorption-desorption
recovery process. The barren (stripped of gold) solution will be sent to the
acidification, volatilization and recovery process to recover cyanide, which
will be recycled back to the leach cycle. The mill has been designed to process
10,000 tons per day. The tailings impoundment facilities will include the main
embankment, a lined decant pond, the lined impoundment  pond, and a groundwater
monitoring system.

The mine is expected to produce an average of 128,000 ounces of gold per year
(the company's share, 77,000 ounces). Average cash operating costs are expected
to be $223 per ounce, depreciation and amortization is expected to be $108 per
ounce and reclamation is expected to be $7 per ounce for a total production cost
of $338 per ounce. See "Cautionary `Safe Harbor' Statement under the United
States Private Securities Litigation Reform Act of 1995."

The Comision Federal de Electricidad ("CFE") provides diesel-generated
electrical power to Baja California Sur through a grid. The joint venture will
construct a new 18 kilometer transmission line which will connect with the
existing line located to the north of the mine site.

The joint venture has initiated water exploration activities in August 1996
using a local firm. The company has met with the Comision Nacional del Agua
("CNA"), the regulatory body which grants water rights. The state also maintains
significant water rights. No water may be taken from any aquifer without the
appropriate water right, which stipulates the amount of water to be taken and
the particular aquifer from which the water may be drawn. The CNA has provided a
listing of well owners who are being contacted concerning the lease or sale of a
portion of their well rights. Proceeding with construction requires obtaining
sufficient water.

The joint venture expects that all employees will be Mexican nationals except
for the general manager, the operations manager and the mill manager. The number
of employees will range from 250 to 300 during the life of the mine.

The joint venture awarded the detail design and engineering work in February
1997 and expects to start detail engineering and limited procurement in February
1997; start construction in July 1997 and commission the plant in August 1998.
The first full year of operations is expected to be 1999. Initial capital cost
of the Paredones Amarillos project is expected to be $111 million (the company's
share, $67 million). The company expects to finance its share with a $36 million
non-recourse project loan (subject to arrangement of satisfactory terms),
existing working capital and the operating cash flow from the company's four
existing gold mines.

                                       20
<PAGE>
 
The company capitalized $6.6 million of Paredones Amarillos project expenditures
in 1996 and $1.2 million in 1995.  The company expects to capitalize
construction costs of $44 million in 1997.

DEVELOPMENT PROGRAMS
Kingking
--------
During 1995, the company and TVI Pacific Inc. ("TVI") formed alliances with
Filipino corporations to create Kingking Mines Inc. ("KMI"), a corporation under
the laws of the Republic of the Philippines. KMI has signed an option agreement
to acquire a 100% interest in the Kingking project after completion of a
bankable feasibility study and a $67.0 million payment in 1998.  A contingent
payment of up to $18.0 million also would be payable if there were a significant
increase in mineralization at Kingking.

The company and its Philippine affiliates have an initial interest in the option
of 75%, but the agreements provide for the acquisition and disposition of
interests such that the interests of the company and its Philippine affiliates
ultimately could be between 60% and 100% of the Kingking project.

The Kingking deposit is located in southeastern Mindanao Island, about eight
miles from the town of Pantukan on the Gulf of Davao. Based on a prefeasibility
report prepared by Benguet in March 1994, Kingking has about 225 million minable
tons of mineralized material (the company and its Philippine affiliates' 75%
share, 169 million tons) at average grades of 0.017 ounce of gold per ton and
0.47% copper based on a cutoff grade of 0.20% copper. The cutoff grade was based
on prices of $340 per ounce of gold and $1.00 per pound of copper.

The Benguet initial feasibility report contemplates open pit mining at Kingking
followed by processing through a concentrator and solvent
extraction/electrowining copper treatment plant. Alternative processing methods
are being considered by KMI.

In 1995, KMI began an extensive two-year advanced exploration and confirmation
drilling program. By December 31, 1996, KMI had completed 45,400 meters of
drilling. An updated feasibility study is expected to be completed by KMI in the
second quarter of 1997. Drilling within the confines of the mineralized area
outlined by Benguet indicates significantly more tons are being found at similar
or slightly lower grades than those outlined by Benguet's earlier work. Drilling
on step-out targets is continuing to the areas where earlier work indicated
there is material richer in gold and leaner in copper, Casagumayan and Tiogdan,
to identify potential extensions of the main deposit or satellite deposits.
Mapping, sampling and drilling are under way at two other targets, Binutaan and
Diat. The company capitalized $11.2 million of expenditures in 1996 and $2.9
million in 1995 related to the two-year work program. The company expects to
capitalize another $5 million of expenditures in 1997. The company also incurred
acquisition costs of $28.8 million in 1995.

On October 25, 1995, the company purchased a 1 1/2% net smelter return royalty
on the Kingking property from Nationwide Development Corporation for $15.0
million payable as follows: $3.0 million in 1995; $3.3 million in 1996; $2.7
million in 1997; and $6.0 million in 1998. Including the company's royalty, the
Kingking property is subject to a 6 1/2% net smelter return royalty for the
first seven years of production, 4 1/2% for the following eight years, and 5
1/2% thereafter.

As part of its strategic alliance with TVI, the company purchased 14.0 million
common shares of TVI, representing 15.4% of TVI's common shares outstanding for
$13.0 million, of which $1.0 million has been recorded by the company as a
premium for property options.

KMI's construction and production decision is dependent on the successful
completion of additional drilling and metallurgical testing, the completion of a
final feasibility study, the exercise of KMI's purchase option, the issuance of
appropriate permits and the ability of KMI to obtain required financing.

                                       21
<PAGE>
 
Santa Elina
-----------
On July 16, 1996, the company completed a series of transactions with Santa
Elina Gold Corporation ("Santa Elina") and Sercor Ltd. ("Sercor", a private
company that owned 67% of Santa Elina). The transactions enabled the company to
increase its ownership of the outstanding common shares of Santa Elina from 7%
to 50% by issuing 8,830,915 common shares. The company increased its ownership
of Santa Elina to 51% through additional share purchases totaling $7.0 million
($6.0 million in the fourth quarter of 1996 and $1.0 million in the first
quarter of 1997). See note 3 to the company's consolidated financial statements.

Santa Elina has made claims on over 25 million hectares. Most of this land is
located on known gold belts throughout Brazil but has not been extensively
explored. Santa Elina's new management team is prioritizing the exploration
program to maximize the value of the assets. Exploration joint ventures are
being considered with qualified third parties where appropriate.

Chapada Development Property
Santa Elina holds an 83% interest (the company's share, 42.3%) in this large-
tonnage copper and gold deposit in Brazil. The company has an option to purchase
a 50% direct interest in this property from Santa Elina, which, if exercised,
would increase the company's interest in the property to 66.8%. Upon exercise of
the option, the company has agreed to pay Santa Elina $25.00 per ounce of
contained gold and $0.02 per pound of contained copper for the company's 50%
direct interest in the proven and probable reserves, as reported in the final
feasibility study. If the option is exercised and additional reserves are later
mined, the company would pay Santa Elina a net smelter return royalty of 3.5% on
the company's 50% direct interest in the revenue after the initial reserves
identified in the feasibility study are depleted. Until a decision is made on
exercising the option, the company will continue to show its Chapada interest at
50%.

Santa Elina has outlined 113 million minable tons of mineralized material (the
company's 50% share, 56.7 million tons) at average grades of 0.012 troy ounces
of gold per ton and 0.43% copper based on a cutoff grade of 0.30% copper. The
cutoff grade was based on prices of $400 per ounce of gold and $1.00 per pound
of copper.

In 1996, Santa Elina  began a work program to further expand the currently
outlined mineralization. At December 31, 1996, Santa Elina has completed a total
of 37,500 meters of drilling. A detailed feasibility study is expected to be
completed in mid 1997. Among the issues being addressed in the study is the cost
of transporting concentrates 1,000 miles to a deepwater port. Santa Elina spent
$9.3 million on the Chapada property during 1996  (the company's share since the
July 16, 1996 acquisition, $6.1 million) and expects to capitalize another $1
million in 1997 (the company's share, $0.5 million).

The company's construction and production decision is dependent on positive
results from the work program, completion of a final feasibility study, the
issuance of appropriate permits and the ability of the company to obtain
required financing.

Exploration properties
Santa Elina owns 83% (the company's share, 42.3%) of Sao Francisco, a gold
target located near the border between Brazil and Bolivia.  During late 1996 and
early 1997, four drill rigs have been working to better define the
mineralization.  Initial metallurgical testing indicates good gold recoveries
from heap leaching.  This information will be incorporated into an initial
feasibility study that is scheduled for completion in late 1997.

Santa Elina owns 83% (the company's share, 42.3%) of Fazenda Nova, a gold target
located in central Brazil.  Santa Elina has identified six targets at Fazenda
Nova.  During late 1996 and early 1997, five drill rigs have been working at the
site.  In 1997, Santa Elina will prepare an initial feasibility study on
Lavrinha, the first target drilled, and begin drilling at the five other
identified targets.

                                       22
<PAGE>
 
Santa Elina expects to complete a detailed feasibility study on heap leaching at
the Sao Vicente mine in early 1997. Santa Elina also will evaluate a higher
grade underground target in 1997. This property's existing operations were
temporarily suspended in January 1997 and the mine will be reopened only if the
new study shows that the mine can be operated profitably.

Work is also being conducted on a hydropower plant proposed for the Guapore
River as a potential source of low-cost power for several of Santa Elina's gold
projects in Brazil.

The company included $4.4 million of Santa Elina spending in exploration expense
in 1996.

EXPLORATION
The company explores for extensions of known reserves at its mines and
development properties as well as conducting exploration for new gold deposits.
In response to available opportunities, as well as increased difficulty in
obtaining mining permits and proposed U.S. federal royalties on production from
U.S. public lands, the company has expanded its exploration focus outside North
America. In addition to the United States and Canada, the company conducted
exploration in Mexico, Central America, South America, the Philippines and West
Africa in 1996.

In 1996, the company conducted exploration drilling on the Kilgore property in
Idaho and increased its ownership to 100% from 51%. Through its 24% interest in
Etruscan Enterprises Ltd., an initial feasibility study on the Koma Bangou
property in Niger, West Africa, was completed, but the company no longer holds
any interest in the project, as the company sold its interest in Etruscan in the
same transaction that increased its ownership of the Kilgore property.

The company established a strategic alliance and joint venture with Minefinders
Corporation, an exploration company that holds the Dolores project, located in
the State of Chihuahua, Mexico. Drilling activity has been underway since August
1996. Subject to certain conditions, the company is entitled to acquire a 60%
interest in Dolores. The company also owns a 15.0% interest in Minefinders.

The company has a 50% interest in the Youga project in Burkina Faso and the
adjacent Nangodi property located directly across the border in Ghana. The
company's joint venture partner is Ashanti Goldfields Company, who is the
operator.

The company established joint ventures on the Huaco Cucho and the Patacancha
properties in Peru.  In 1996, 2,000 meters of drilling have been completed on
these properties.  The company can earn a 50% interest in each property.

Exploration offices have been established in Mexico, Chile, Brazil, Peru and the
Philippines, in addition to the existing offices in the U.S. and Canada, to
conduct regional activities effectively.

Exploration expense totaled $46.6 million in 1996 compared to $46.5 million in
1995 and $27.1 million in 1994. The budget for exploration expense for 1997 is
currently $31 million, dependent on opportunities, of which approximately 70% is
expected to be spent outside the U.S. and Canada. A similar percentage was spent
outside the U.S. and Canada during 1996 and 1995. The company conducts its own
exploration and participates in farm in/farm out exploration arrangements.

ALASKA-JUNEAU
At December 31, 1996, the company wrote off its entire remaining investment in
the Alaska-Juneau project of $57.1 million, and established a reserve of $20.0
million to cover estimated reclamation and closure responsibilities. Actual
spending related to reclamation and closure costs may differ from the current
estimate of $20.0 million. The provision for future reclamation and closure
costs is reviewed periodically and adjusted as additional information becomes
available. Alaska-Juneau's reserves of 3.4 million ounces and other
mineralization of 30.1 million tons at an average grade of 0.052 ounce of gold

                                       23
<PAGE>
 
per ton were removed from the company's total gold reserves and other
mineralization as of December 31, 1996.

The company's decision to write off its entire remaining investment in the
Alaska-Juneau project resulted from a new feasibility study completed in
December 1996. The study was based on a new mine plan incorporating extensive
geological information from a two-year underground drilling program. The
significantly increased information indicated much less minable material at only
a marginally higher grade. The new mining plan developed from this information
incorporated narrower mining zones than previously planned, a reduced scale of
operations and higher-cost mining methods. The lower reserves and higher
operating costs could not be offset by savings from the newer concept of
submarine tailings disposal. In total, these factors rendered the project
uneconomic as currently designed.

SUNNYSIDE

In 1996, Sunnyside Gold Corporation (SGC), an indirect wholly owned subsidiary
of the company, finalized a consent decree with the state of Colorado that set
standards for the release of all reclamation and water treatment permits and
resolved future enforcement issues regarding groundwater seeps and springs. SGC
estimates that it will take a minimum of seven years for all of the conditions
of the consent decree agreement to be fulfilled by both parties. SGC has $10.0
million accrued at December 31, 1996 for future reclamation costs at the
Sunnyside mine. SGC's provision for future reclamation costs is reviewed
periodically and adjusted as additional information becomes available.

OTHER
Precious Metal Sales and Hedging Activities
-------------------------------------------
The company's dore bars are further refined by third parties before they are
sold as gold or silver bullion. The refined gold and silver is sold to banks or
precious metal dealers.

The company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the company attempts to lock in the future value of
certain of these items through hedging transactions. These transactions are
accomplished through the use of derivative financial instruments, the value of
which is derived from movements in the underlying prices or rates.

The gold- and silver-related instruments used in these transactions include
commodity loans, fixed-forward and spot-deferred contracts, swaps and options.
Sensitivity to changing metal prices is reduced, and future revenues are hedged,
as the company's future production will satisfy these loans and other delivery
commitments.

In 1996, approximately 25% of gold production was delivered against forward
sales and gold loans at an average price of $375 per ounce. This compares with
22% of gold production at an average price of $395 in 1995 and 19% of gold
production at an average price of $370 in 1994. Approximately 45% of silver
production was delivered against forward sales at an average price of $5.85 per
ounce in 1996, compared to 47% at an average price of $5.48 in 1995 and 50% at
an average price of $4.56 in 1994.

The company engages in forward currency-exchange contracts to reduce the impact
on the Lupin mine's operating costs caused by fluctuations in the exchange rate
of U.S. dollars to Canadian dollars. Forward currency transactions more closely
link profitability of Canadian operations to the price of gold in U.S. dollars.

The company also engages in crude oil hedging activities, including forward
purchase agreements and swaps, to reduce the impact of fluctuations in crude oil
prices on its operating costs.

The company used interest rate swap agreements to effectively convert its fixed-
rate preferred stock dividends into floating-rate dividends. The interest rate
swap agreements expired on December 31, 1995.

                                       24
<PAGE>
 
All purchases and sales of derivatives are connected to production of gold or
silver, or to existing financial commitments and are not entered into for
speculative gain.

The company's forward sales positions, gold and silver loan and swap repayment
schedules, option position, currency position and crude oil position at December
31, 1996 are set out in note 15 to the company's consolidated financial
statements. Subsequent to December 31, 1996, the company repurchased its 218,000
ounce gold swap, repurchased all of its 654,000 ounces of gold and 8.5 million
ounces of silver forward sales positions and entered into new gold put and call
option positions as described in note 15 to the company's consolidated financial
statements.
    
Government Regulation and Environmental Issues     
----------------------------------------------
Canada
The mining industry in the Northwest Territories operates under Canadian federal
and territorial legislation governing prospecting, development, production,
environmental protection, exports, income taxes, labor standards, mine safety
and other matters. The company believes its Canadian operations are operating in
substantial compliance with such legislation. The operation of the Lupin mine is
subject to substantial regulation by government authorities, which is in many
instances discretionary.

The company's Lupin operation is presently subject to environmental regulation
primarily by the Federal Department of Indian Affairs and Northern Development
("DIAND") and the Northwest Territories Water Board, which are responsible for
administering the Northwest Territories Water Act (Canada) ("NWTWA"),
legislation that on June 15, 1993, replaced the Northern Inland Waters Act
(Canada) ("NIWA") pursuant to which DIAND previously exercised jurisdiction over
the operation. The company's existing licenses under NIWA were deemed to
continue under the NWTWA.

On January 19, 1995, the Canadian Environmental Assessment Act ("CEAA") came
into force. Any changes or additions to existing operations at Lupin may be
subject to environmental assessment by the federal government under the CEAA
before any permits or licenses are issued under the NWTWA in respect of those
changes or additions to existing operations.

The federal Departments of Fisheries & Oceans and Environment have an
enforcement role in the event of environmental incidents, but presently have no
direct, regulatory role in relation to Lupin.

Lupin is also subject to enforcement by the Northwest Territories Department of
Natural Resources pursuant to the Northwest Territories Environmental Protection
Act ("NWTEPA"). NWTEPA contains requirements to obtain licenses and permits
which may, in the future, affect the Lupin operation, but those requirements are
not presently in force. The company believes it is in substantial compliance
with all relevant territorial environmental legislation.

Pursuant to an agreement (the "Nunavut Agreement") dated May 25, 1993 between
the Inuit of Canada's eastern arctic region and Her Majesty the Queen in right
of Canada, which agreement comes into force on April 1, 1999, the Inuit have
been granted ownership of approximately 360,000 square kilometers of land in an
area referred to as the Nunavut Settlement Area, including ownership of
subsurface rights in approximately 37,500 square kilometers of those lands. The
company's Lupin mine is located in this Nunavut Settlement Area. Existing third
party interests in lands in the Nunavut Settlement Area are protected under the
Nunavut Agreement. Where a third party has been granted a mining lease under the
Canada Mining Regulations in lands comprising the Nunavut Settlement Area, that
interest will continue in accordance with the terms and conditions on which it
was granted, including any rights granted under the legislation which gave rise
to the interest. However, where any successor legislation would have the effect
of diminishing the rights afforded to the federal government, it will not bind
the Inuit without its consent. The Inuit are entitled to receive whatever
compensation is payable by the interest holder for the use or exploitation of
mineral rights. The federal government will continue to administer the third
party interest on behalf of the Inuit, unless the third party and the Inuit
enter into an agreement under which the third party agrees to the administration
of their interest by the Inuit. In the event such an agreement is

                                       25
<PAGE>
 
reached, the applicable legislation will cease to apply to the third party
interest. Existing subsurface interests in such lands will continue to be
administered in accordance with applicable legislation relating to those
interests and are not affected by the Nunavut Agreement.

New third party interests in lands in the Nunavut Settlement Area will now be
granted, in the case of surface rights, by the appropriate regional Inuit
association and, in the case of subsurface rights, by Nunavut Tungavik
Incorporated which will hold subsurface title to Inuit owned lands and who will
be additionally responsible, in consultation with the appropriate regional Inuit
associations, for the administration and management of those subsurface rights.

Also under the Nunavut Agreement the jurisdiction previously exercised by the
Northwest Territories Water Board under the NWTWA will effectively be exercised
by the Nunavut Water Board. Once the Nunavut Water Board is established, the
company will be subject to its jurisdiction and any further approvals or
licenses will have to be obtained from that Board. In the meantime, any changes
or additions to existing operations that may require additional, or amendments
to  existing, licenses would be obtained from the Northwest Territories Water
Board under the NWTWA.

On January 1, 1994, the North American Free Trade Agreement ("NAFTA") between
Canada, the United States and Mexico came into force. The NAFTA amends the
Investment Canada Act and its regulations and guidelines in that the investors
of the United States and Mexico are treated more favorably than all other "non-
Canadian" investors with respect to reviews by Investment Canada. Direct
acquisitions of Canadian businesses by investors from the United States or
Mexico are only subject to review if the acquisitions exceed a certain threshold
which is adjusted annually according to the formula set out in Annex I to the
NAFTA. However, indirect acquisitions of Canadian businesses by investors from
the United States or Mexico are not subject to review.

The Competition Act (Canada) requires parties to certain transactions, if the
parties to and the circumstances of the transaction meet certain size thresholds
as designated in the Act, to provide the Director of Investigation and Research
(the "Director") with detailed information about the transaction and the
parties, and to observe a waiting period prior to closing. Without the
Director's pre-clearance of the transaction by the expiration of the waiting
period, the transaction will not be permitted to be completed. In order to be
notifiable, transactions must meet the basic size threshold, namely, the parties
to the transaction together with their affiliates (defined to include parent,
subsidiary and sister corporations) must have assets in Canada or gross revenues
from sales in, from or into Canada that exceed C$400 million. Assuming the size
threshold is met, additional thresholds based on the type of transaction must be
met before notification is required.

United States
The company's U.S. operations are subject to comprehensive regulation with
respect to operational, environmental, safety and similar matters by federal
agencies including the U.S. Department of the Interior, the U.S. Department of
Agriculture (U.S. Forest Service), the U.S. Environmental Protection Agency
("EPA"), the U.S. Mine Safety and Health Administration ("MSHA") and similar
state and local agencies. Failure to comply with applicable laws, regulations
and permits can result in injunctive actions, damages and civil and criminal
penalties. If the company expands or changes its existing operations or proposes
any new operations, it may be required to obtain additional or amended permits
or authorizations. The company spends substantial time, effort and funds in
planning, constructing and operating its facilities to ensure compliance with
U.S. environmental and other regulatory requirements. Such efforts and
expenditures are common throughout the U.S. mining industry and generally should
not have a material adverse effect on the company's competitive position.

The company believes its U.S. operations are in substantial compliance with
applicable air and water quality laws and regulations and that it has acquired
or applied for all permits required under such laws or requested by the states
in which it is operating.

                                       26
<PAGE>
 
Certain wastes from mining and mineral processing operations are currently
exempt from regulation under the Bevill amendment to the federal Resource
Conservation and Recovery Act ("RCRA"). However, Congress may consider revision
and reauthorization of RCRA, as well as the federal Clean Water Act and
Endangered Species Act, each of which substantially affects mine development and
operations. The effect of any revised or additional regulation on the company's
U.S. operations cannot be determined until the legislative process is completed
and new administrative rules are issued, but they can have a significant impact
upon operations of all mining companies and increase the costs of those
operations.

Legislation to change the general mining laws applicable to operations on
federal lands has been introduced into the 105th Congress, which convened in
January 1997, and additional introductions are expected. The result of such
proposals is speculative.

The most material direct economic impact of potential mining law revision could
be from royalties for production at the McCoy/Cove mine in Nevada, which is on
federal land, and (to a lesser degree) at the 50%-owned Round Mountain mine in
Nevada, 24% of whose reserves are on federal land. However, the company has
completed all of the steps currently required under U.S. law to convert the
McCoy/Cove and Round Mountain land to patented status (and thus likely to be
exempt from any proposed royalty). The company's applications for patents are
being processed, and the company expects the government to complete its
administrative review and issue the patents in accordance with the regulations.

The federal Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA"), commonly called the "Superfund Act," contains stringent
reporting requirements for the release or disposal of hazardous substances, with
substantial fines for noncompliance. In addition, under CERCLA, any party
responsible for the release or threatened release of a hazardous substance into
the environment is liable for all clean-up costs. Responsible parties under
CERCLA include the owner or operator of the site where the release occurs or
anyone who owned or operated the site when a disposal was made, regardless of
culpability. Mining wastes are subject to CERCLA regulation if they contain
hazardous substances, and EPA has included several mining sites on its list of
high-priority sites for clean-up under CERCLA.

The Stibnite property near Yellow Pine, Idaho is the subject of a preliminary
investigation/site assessment ("PI/SA") by the Environmental Protection Agency
that indicates that the site may be eligible for inclusion on the National
Priorities List ("NPL") under CERCLA. During 1985, Copper Range Company, then an
acquired subsidiary of the company, and from November 1985 to December 1989,
Round Mountain Gold Corporation, a subsidiary of the company, owned a 20%
interest in a joint venture that controlled several claims in the Stibnite area.
Copper Range Company, a subsidiary of the company from January 1985 until
November 1985, is on the list of present and former owners or operators of
properties at the Stibnite site. Round Mountain Gold Corporation, because it
owned 20% of the joint venture  between November 1985 and December 1989, also
may have liability for a share of the cleanup costs at the site, if cleanup is
undertaken pursuant to CERCLA. At this time, it is not possible to estimate the
size of the potential cost of cleanup, or to state how much of that liability,
if any, might be the responsibility of Round Mountain Gold Corporation. However,
the current operator is conducting permitted mining operations which include
remediation of the site, and no CERCLA action is presently anticipated.

Various types of dust control, revegetation and similar reclamation-related
measures are generally required for the company's Nevada operations under
specific state air or water quality and mine reclamation rules and permits. The
Bureau of Land Management ("BLM") and Forest Service permits and Plans of
Operations for the company's Nevada operations also contain some reclamation-
related requirements. The Kettle River project is similarly subject to
requirements for reclamation of disturbed surface areas by agreement with the
State of Washington. The company believes its operations are in substantial
compliance with these reclamation requirements.

                                       27
<PAGE>
 
The company believes that all of its U.S. operations are currently being
conducted in substantial compliance with applicable MSHA and similar state
labor, health and safety rules.

Mexico
The mining industry of Mexico operates under the authority of the federal
government, which regulates prospecting, land tenure, safety, environmental
protection, exports, taxation, labor and social legislation and business
transactions.

The company believes that its Mexican ventures are carrying on their business
efforts in substantial compliance with applicable laws and regulations.

Mexican industry is regulated with respect to environmental matters by the
Secretariat for Environment, Natural Resources and Fisheries ("SEMARNAP"). This
agency is the successor to the authority previously held by Secretariat for
Social development ("SEDESOL"). SEMARNAP formulates and issues environmental
laws, regulations and standards, under authority granted December 28, 1994.

Mexican companies are governed generally by the Commercial Law of Mexico and the
Civil Law of Mexico. Mining is also governed by the Mining Law and Regulations
of Mexico. The company's Mexican subsidiaries are organized under the Commercial
Law and registered with the Mexican Public Registry of Commerce in Mexico City.

Mexican environmental laws applicable to discharges of water, control of air
quality and management of hazardous substances will apply to the company's
Mexican operations. In addition, the company is subject to the reclamation
requirements of the Federal environmental laws. The Paredones Amarillos project
is subject to additional reclamation and ecological protection requirements
because part of it is located in the buffer zone for an Ecological Reserve. The
company believes that it is in substantial compliance with all applicable
corporate, environmental, reclamation and social welfare statutes.

Mineral rights in Mexico are the property of the federal government, which
allows private parties to develop minerals under a system of concessions
regulated by the Mining Law and Regulations. Only Mexican nationals or Mexican
corporations may own concessions, and the rights of concessionaires to develop
their minerals are not unlimited but must respect those of surface occupants.
The federal government recognizes the rights of associations of landholders
("ejidos") who, though they do not own individual titles, have rights to
enjoyment of parcels of land arising from membership in a group. The company's
Caopas project has been the subject of lengthy discussions whith an ejido to
clarify the terms and compensation under which the project will be developed.
The company's Paredones Amarillos project has been registered with the Mining
Public Registry, which endorses mineral ownership agreements and acts as the
agency for notice of their existence and legal sufficiency. The company has
expended substantial effort in clarifying its title to the concessions on which
its Mexican projects depend; it believes that its concessions are validly issued
by the federal government and that they give the company full rights allowed
under the Mining Law and regulations.

Philippines
Under the 1987 Philippine Constitution, the State owns all lands of the public
domain which includes minerals and other natural resources. Exploration,
development and utilization of natural resources are under the full control and
supervision of the State which may undertake such activities itself or enter
into co-production, joint venture or production sharing agreements with citizens
of the Philippines or corporations or associations whose share capital is at
least 60% owned by citizens of the Philippines.

In February, 1995 the Philippine Mining Act (the "Mining Act") was enacted and
in 1996 revised rules and regulations were promulgated under the Mining Act. The
Mining Act and such rules and regulations deal comprehensively with the
exploration, development, utilization and processing of all mineral resources.
The Mining Act sets out the extent and method of allowable participation of
foreign investments in the mining industry. The Mining Act also deals with mine
safety and environmental

                                       28
<PAGE>
 
protection. The Department of Environment and Natural Resources is the main
department of the government which regulates mining activities. Various other
agencies such as the Mines and Geosciences Bureau, the Environmental Management
Bureau, the Forest Management Bureau and the National Water Resources Board also
deal with ancillary aspects of the mining industry.

Under the Mining Act, mining operations may be undertaken through a mineral
agreement which is a contract between the Philippine government and a
contractor. There are generally three different types of such agreements,
namely, a mineral production-sharing agreement, a co-production agreement or a
joint venture agreement. Any one of the foregoing agreements gives the
contractor, who must be a qualified person, the exclusive right to conduct
mining operations and to extract all mineral resources in the contract area. A
qualified person is a citizen of the Philippines with capacity to contract or a
corporation, partnership, association, or cooperative organized or authorized to
engage in mining, with technical and financial capability to undertake mineral
resources development, duly registered in accordance with Philippine law and
with at least 60% of its share capital owned by citizens of the Philippines.

The Mining Act mandates compliance by mining firms operating within the
Philippines with all the environmental laws of the Philippines. It requires
contractors to undertake an environmental protection and enhancement program
covering the period of the mineral agreement or permit. The environmental
program is required to be incorporated in the work program which the contractor
or permittee must submit as an accompanying document to the application for a
mineral agreement or permit. The work program is required to include plans
regarding the rehabilitation of mineralized areas. Principally, this involves
compliance with the Philippine Environmental Impact Assessment System which
requires that prior to the operation of any environmentally critical project, an
environmental clearance certificate be secured on the approval of an
environmental impact statement with respect to such project. Any violation of
the terms and conditions of the environmental clearance certificate could result
in the cancellation of that certificate or the payment of a fine.

Brazil
Under Brazil's federal constitution, mineral resources are the property of the
Brazilian Federation and, accordingly, they can only be explored through an
official permit granted by the federal government. Mining activity is regulated
by the Departamento Nacional de Producao Mineral ("DNPM"). In general, few
restrictions exist on foreign investments in the mining industry in Brazil.

Mining claims in Brazil may take the form of applications for prospecting,
exploration permits or mining concessions. An application for prospecting is
filed with the DNPM and is the first step in obtaining an exploration permit.
The exploration permit, once granted, gives the applicant the right to explore
the area covered by the permit. An application for prospecting must be supported
by an exploration plan and must comply with certain other requirements. Provided
the area of interest is not already covered by a pre-existing application or
exploration permit and all requirements are met, the DNPM will normally grant
the permit on a priority of application basis.

Mining concessions may be obtained only by corporations. A corporation normally
has one year from receipt of DNPM approval of its report on the results of its
exploration activities to apply for a mining concession for the intended area.
The application must include a mining plan and an economic feasibility analysis.
A mining concession gives the holder the right to extract and process the
minerals contained in the deposit, in accordance with the plan approved by the
DNPM and to market mine production. The holder of a mining concession has
ownership of the mine production and the mining concession enables the holder to
exploit the mine deposit until it is exhausted, generally with no fixed term.
The holder of a mining concession also is entitled to sell or lease the
concession, subject to government approval, which will normally be granted. Once
a mining concession is granted, a mining company is required to obtain an
operating permit for each mine that it wishes to operate. The operating permit
is renewed annually subject to compliance with environmental matters.

                                       29
<PAGE>
 
The surface of land covered by a DNPM mining concession often is owned by
private third parties. If a mining company is unable to negotiate a voluntary
agreement with the landowner for the use of surface, under Brazilian law,
sufficient land can be condemned to enable the mining company to access the
mineral deposit, subject to payment of compensation to the landowner and always
subject to all otherwise applicable land use and environmental regulations.

Special provisions and restrictions apply whenever mining activity is conducted
on sites located along frontier areas or inside certain specified Indian
protection areas. A frontier area is an area within 150 kilometers of the border
of the Brazilian national territory.

Employees
---------
At December 31, 1996, the company employed 2,281 persons excluding temporary
employees directly involved in short-term programs, broken down as follows.

<TABLE>
<S>                                                                           <C>
McCoy/Cove                                                                      514
Round Mountain, including ancillary services                                    599
Lupin, including aviation, winter road and Ulu                                  556
Kettle River                                                                    219
Exploration and development, including local nationals                          197
Technical and corporate staff                                                   161
Other, including Alaska and Sunnyside                                            35
                                                                              -----
                                                                              2,281
                                                                              =====
</TABLE>

A sufficient supply of qualified workers is available for both Canadian and U.S.
operations, although the continuation of such supply depends upon a number of
factors, including, principally, the demand occasioned by other projects. None
of the company's employees are represented by labor unions. The company believes
it generally has good relations with its employees. The company provides its
employees with a competitive compensation package and comprehensive benefits
program.

                                       30
<PAGE>
 
Executive Officers of the Registrant
------------------------------------
The executive officers of the company are listed below.

<TABLE>
<CAPTION>
                                                 Position with the company and business experience within the
Name                                    Age      last five years
------------------------------------------------------------------------------------------------------------------
 
<S>                                     <C>      <C>
JOHN L. AZLANT                          50       Senior Vice President, Business Development of the company since
                                                 November 1993; prior thereto Senior Vice President and Chief
                                                 Financial Officer of Pegasus Gold Inc.
 
SCOTT A. CALDWELL                       40       Vice President, Operations of the company since January 1997;
                                                 Vice President, Project Development of the company from July
                                                 1996 to January 1997; Vice President, Operations of Compania
                                                 Minera Dona Ines de Collahuasi S.A. (Chile) from August 1995 to
                                                 July 1996; Senior Mines Manager of PT Freeport Indonesia Company
                                                 from June 1989 to June 1995; prior thereto Mines Manager of PT
                                                 Freeport Indonesia Company
 
PETER H. CHEESBROUGH                    45       Senior Vice President, Finance and Chief Financial Officer of
                                                 the company since June 1993, prior thereto Vice President,
                                                 Controller and Principal Accounting Officer of the company
 
RICHARD C. KRAUS                        50       President and Chief Executive Officer of the company since June
                                                 1994; prior thereto President and Chief Operating Officer of the
                                                 company
 
ROBERT L. LECLERC, Q.C.                 52       Chairman of the company since May 1996; Chairman and Chief
                                                 Executive Officer and partner, Milner Fenerty (barristers and
                                                 solicitors) from December 1993 to June 1996; prior thereto
                                                 partner of Milner Fenerty
 
GERALD A. TYWONIUK                      35       Vice President, Controller and Principal Accounting Officer of
                                                 the company since June 1995; Controller and Principal Accounting
                                                 Officer of the company from June 1993 to June 1995; prior
                                                 thereto various mine site and corporate financial positions with
                                                 the company
 
ROBERT D. WUNDER                        47       Senior Vice President, Project Development of the company since
                                                 March 1996; Manager, Strategic Development of BHP Minerals from
                                                 July 1995 to March 1996; Vice President, Operations of a
                                                 subsidiary of BHP Minerals (Chile) from May 1993 to July 1995;
                                                 Executive Vice President, Minerals Marketing of BHP Minerals
                                                 (Japan) from March 1992 to May 1993; prior thereto General
                                                 Manager, Groote Eylandt Mining Company (Australia)
------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       31
<PAGE>
 
Insurance and Mining Risks
--------------------------
The company carries insurance against property damage, including boiler and
machinery insurance, and also comprehensive general liability insurance of a
total of $50 million per occurrence, which is available to all operations. The
company carries special liability policies applicable to aircraft and motor
vehicles. It is also insured against dishonesty and gold and silver bullion
thefts, as well as losses of goods in transit. The property damage and boiler
and machinery insurance policies include coverage for business interruption,
resulting from an insured loss, subject to a five day waiting period and a
maximum indemnification period of one year.

Risks not insured against include mine cave-ins, mine floodings and other
uninsurable underground hazards, and most types of environmental pollution
against which the company cannot insure or against which it has elected not to
insure.
    
The company believes that it has taken adequate precautions to minimize the risk
of environmental pollution. However, with respect to certain mines, there is
some risk that cyanide may escape from leach pads or tailings dams in sufficient
quantities to cause water or surface pollution and there is some risk of
environmental impairment liability under environmental laws. See "Government 
Regulation and Environmental Issues."     

Underground mining is generally subject to certain types of risks and hazards,
including unusual or unexpected formations, pressures, cave-ins, flooding and
other conditions. The company has not experienced any significant cave-ins at
its underground mines. In addition, because mining can be conducted on a number
of different levels at the same time, a cave-in in one area would not
necessarily affect mining in other areas.

Open-pit mining, such as that conducted at certain of the company's mines, is
generally subject to certain types of risks and hazards, primarily unpredictable
pit wall failure. Open pit mining is conducted in phases and a pit wall failure
in one area would not necessarily affect overall pit design or mining in
unaffected areas. See "McCoy/Cove" regarding the company's $30.0 million
provision related to the estimated costs to remove waste rock from an unstable
portion of the Cove pit wall.

Supplies, Utilities and Transportation
--------------------------------------
The principal supplies needed for the operation of the company's mines are
explosives, diesel fuel, chemical reagents (including cyanide, lime, sulfur
dioxide, sodium hydroxide and zinc dust), cement, equipment parts and
lubricants.

Power is supplied to the company's mines by power companies or by diesel
generators. Each mine has access to adequate water.

Each of the U.S. mines has good road access by either paved or gravel roads from
state highways.

See also "Lupin-Supplies, Utilities and Transportation."

Waste Disposal
--------------
    
Heap leaching is done with a weak cyanide solution held within a closed circuit,
which includes the leach pads and surface holding ponds. Leached ore from the
reusable pad at Round Mountain is washed and deposited adjacent to the mine
site. Where dedicated pads are used, the leached ore remains on the pads. Mill
processing may use a cyanide leaching solution, which is contained within the
mills' processing circuits. See "Government Regulation and Environmental
Issues."     

See also "Lupin-Water Supply and Waste Disposal."

                                       32
<PAGE>
 
Royalties
---------
Production from the company's mines is subject to certain royalties. These are
described in note 16 to the company's consolidated financial statements.

History of the Company
----------------------
The company was incorporated in Canada in 1964. Between 1964 and 1982, the
company developed and operated several silver mines near Port Radium in the
Northwest Territories of Canada and produced 35.5 million ounces of silver.
These silver reserves were mined out in 1982.

In 1979, the company optioned the Lupin gold property, located 190 miles east of
Port Radium. Construction of the Lupin mine began in August 1980, and commercial
production commenced in October 1982. During 1982 through 1984, the company
concentrated efforts on developing the Lupin mine.

With earnings generated from Lupin, the company initiated an aggressive
acquisition, exploration and development program.

During 1985 and 1986, the company acquired a 50% interest in the Round Mountain
mine and 100% interests in the McCoy, Borealis, Manhattan, Sunnyside and Illipah
mines. The Cove deposit was discovered adjacent to the McCoy mine in early 1987,
and major expansions at McCoy/Cove and Round Mountain were started in 1988. The
mine expansions were substantially funded by borrowing gold and silver. Gold and
silver financing allowed the company to hedge future production and to obtain
the low interest rates associated with bullion financings.  The Borealis,
Manhattan, Sunnyside and Illipah mines have subsequently been mined out and
closed.

In 1990, the company brought the Kettle River mine in Washington state into
commercial production. In 1992, the company increased its ownership interest to
100% from 70% when the company's 30% partner withdrew from the Kettle River
joint venture.

Beginning in 1993, the company increased exploration activities significantly.
Exploration programs are being funded at all operating properties and also at
many other locations along the major gold belts of North America, Central
America, South America, West Africa and the Philippines. Most of the company's
exploration expenditures were made outside of the United States and Canada.

In 1995, the company added five development properties: Paredones Amarillos in
Mexico, Chapada in Brazil, Kingking in the Philippines, and Aquarius and Ulu in
Canada. The company sold its interest in the Kensington project to its joint
venture partner in 1995.

In 1996, the company continued its high level of exploration and development
activities. Underground development began at Ulu in 1996 and construction is
expected to begin at Aquarius and Paredones Amarillos in 1997. Feasibility
studies and further exploration are in progress at Chapada and Kingking, and
initial feasibility studies are expected to be completed in 1997. The company
wrote off its entire remaining investment in the Alaska-Juneau project in 1996.

During 1996, the company increased its ownership from 7% to 51% of the
outstanding common shares of Santa Elina Gold Corporation ("Santa Elina"). Santa
Elina holds interests in mining properties, principally in Brazil, and also in
Bolivia.

RISK FACTORS
Mining and Processing
---------------------
The company's business operations are subject to risks and hazards inherent in
the mining industry, including but not limited to unanticipated variations in
grade and other geological problems, water conditions, surface or underground
conditions, metallurgical and other processing problems, mechanical equipment
performance problems, the unavailability of materials and equipment, accidents,
labor force and

                                       33
<PAGE>
 
force majeure factors, unanticipated transportation costs and weather
conditions, any of which can materially and adversely affect, among other
things, the development of properties, production quantities and rates, costs
and expenditures and production commencement dates.

The company's processing facilities are dependent on continuous mine feed to
remain in operation. Insofar as the company's mines may not maintain material
stockpiles of ore or material in process, any significant disruption in either
mine feed or processing throughput, whether due to equipment failures, adverse
weather conditions, supply interruptions, labor force disruptions or other
issues, may have an immediate adverse effect on the results of operations of the
company. A significant reduction in mine feed or processing throughput at a
particular mine could cause the unit cost of production to increase to the point
where the company could determine that some or all of the company's reserves
were uneconomic to exploit.

In the case of development projects, including new pits or underground mines at
currently operated properties or expansions of existing mines, although the
company utilizes the operating history of its existing mines to derive estimates
of future operating costs and capital requirements, such estimates may differ
materially from actual operating results. The economic feasibility of any
individual project is based upon, among other things, the interpretation of
geological data obtained from drill holes and other sampling techniques,
feasibility studies (which derive estimates of cash operating costs based upon
anticipated tonnage and grades of ore to be mined and processed), the
configuration of the ore body, expected recovery rates of metals from the ore,
comparable facility and equipment costs, anticipated climatic conditions,
estimates of labor productivity and other factors. Such development projects
also are subject to the successful completion of final feasibility studies,
issuance of necessary permits and receipt of adequate financing. Although the
company's feasibility studies are completed with the company's knowledge of the
operating history of similar ore bodies in the region, the actual operating
results of its development projects may differ materially from those
anticipated, and uncertainties related to operations are even greater in the
case of development projects.

The company periodically reviews mining schedules, production levels and asset
lives in its life-of-mine planning for all of its operating and development
properties. Significant changes in the life-of-mine plans can occur as a result
of mining experience, new ore discoveries, changes in mining methods and rates,
process changes, investments in new equipment and technology, and other factors.
Based on year-end ore reserves and each current life-of-mine plan, the company
reviews its accounting estimates and makes needed adjustments. This complex
process continues for the life of every mine.

As a result of the foregoing risks, among other things, expenditures on any and
all projects, actual production quantities and rates, and cash costs may be
materially and adversely affected and may differ materially from anticipated
expenditures, production quantities and rates, and costs, just as estimated
production dates may be delayed materially, in each case especially to the
extent development projects are involved. Any such events can materially and
adversely affect the company's business, financial condition, results of
operations and cash flows.

Uncertainty of Reserve and Other Mineralization Estimates
---------------------------------------------------------
There are numerous uncertainties inherent in estimating proven and probable
reserves and other mineralization, including many factors beyond the control of
the company. The estimation of reserves and other mineralization involves
subjective judgments about many relevant factors, and the accuracy of any such
estimate is a function of the quality of available data and of engineering and
geological interpretation and judgment. Results of drilling, testing and
production subsequent to the date of an estimate may justify revision of such
estimate. Assumptions about prices are subject to great uncertainty and gold and
silver prices have fluctuated widely in recent years. See "Gold and Silver Price
Volatility."  No assurance can be given that the volume and grade of reserves
mined and processed and recovery rates will not be less than anticipated.
Declines in the market price of gold and related precious metals also may render
reserves or other mineralization containing relatively lower grades of
mineralization uneconomic to exploit. If the price realized by the company for
its gold or silver bullion were to decline substantially below the price at
which ore reserves were calculated for a sustained period of time, the company
potentially could experience

                                       34
<PAGE>
 
reductions in reserves and asset write-downs. Under certain such circumstances,
the company may discontinue the development of a project or mining at one or
more of its properties. Further, changes in operating and capital costs and
other factors, including but not limited to short-term operating factors such as
the need for sequential development of ore bodies and the processing of new or
different ore grades and ore types, may materially and adversely affect
reserves.

Gold and Silver Price Volatility
--------------------------------
The profitability of the company's current operations is directly related and
sensitive to the market price of gold and silver. Gold and silver prices
fluctuate widely and are affected by numerous factors beyond the company's
control, including expectations with respect to the rate of inflation, the
exchange rates of the dollar and other currencies, interest rates, forward
selling by producers, central bank sales and purchases of gold and silver,
production and cost levels in major gold-producing regions such as South Africa
and the former Soviet Union, global or regional political, economic or financial
situations and a number of other factors. See "Gold Prices" and "Silver Prices."

The current demand for, and supply of, gold and silver affect the prices of such
minerals, but not necessarily in the same manner as current demand and supply
affect the prices of other commodities. The potential supply of gold consists of
new mine production plus existing stocks of bullion and fabricated gold held by
governments, financial institutions, industrial organizations and individuals.
Since mine production in any single year constitutes a very small portion of the
total potential supply of gold, normal variations in current production do not
necessarily have a significant effect on the supply of gold or on its price. If
gold or silver prices should decline below the company's cash costs of
production and remain at such levels for any sustained period, the company could
determine that it is not economically feasible to continue commercial production
at any or all of its mines. Although the company has a hedging program in place
to reduce the risk associated with gold and silver price volatility, there is no
assurance that the company's hedging strategies will be successful. See
"Precious Metal Sales and Hedging Activities."

The prices used in estimating the company's ore reserves at December 31, 1996
were $375 per ounce of gold and $5.00 per ounce of silver.  The market prices
were $369 per ounce of gold and $4.87 per ounce of silver at December 31, 1996.
If the company were to determine that its reserves and future cash flows should
be calculated at a significantly lower gold price than that used at December 31,
1996, there would likely be a material reduction in the amount of gold reserves.
Should such reductions occur, material write-downs of the company's investment
in mining properties may be required.

Exploration and Development
---------------------------
Exploration for gold and related precious metals is highly speculative in
nature, involves many risks and frequently is unsuccessful. There can be no
assurance that the company's exploration efforts will result in the discovery of
significant gold or silver mineralization or that any mineralization discovered
will result in an increase of the company's proven or probable reserves. If
proven or probable reserves are developed, it may take a number of years and
substantial expenditures from the initial phases of drilling until production is
possible, during which time the economic feasibility of production may change.
No assurance can be given that the company's exploration programs will result in
the replacement of current production with new reserves or that the company's
development program will be able to extend the life of the company's existing
mines. In the event that new reserves are not developed, the company will not be
able to sustain its current level of gold or silver production beyond the life
of its existing reserves.

Insurance and Mining Risks
--------------------------
The business of gold and silver mining is generally subject to a number of risks
and hazards, including environmental conditions, industrial accidents, labor
disputes, encountering unusual or unexpected geological conditions, ground or
slope failures, cave-ins, changes in the regulatory environment and natural
phenomena such as inclement weather conditions, floods, blizzards and
earthquakes. Such occurrences could result in damage to, or destruction of,
mineral properties or production facilities, personal injury or death,
environmental damage to a joint venture's properties or the properties of
others, delays in mining, monetary losses and possible legal liability. The
company maintains insurance against certain risks that are

                                       35
<PAGE>
 
typical in the gold mining industry and in amounts that the company believes to
be reasonable, but which may not provide adequate coverage in certain unforeseen
circumstances. However, insurance against certain risks (including certain
liabilities for environmental pollution or other hazards as a result of
exploration and production) is not generally available to the company or to
other companies within the industry on acceptable terms. See "Insurance and
Mining Risks."


Governmental Regulation
-----------------------
    
The company's mining operations and exploration activities are subject to
extensive foreign or U.S. federal, state and local laws and regulations
governing exploration, development, production, exports, taxes, labor standards,
waste disposal, protection and remediation of the environment, reclamation,
historic and cultural resources preservation, mine safety and occupational
health, toxic substances and other matters. See "Other-Governmental
Regulation and Environmental Issues." The costs of discovering, evaluating,
planning, designing, developing, constructing, operating and closing the
company's mines and other facilities in compliance with such laws and
regulations is significant. It is possible that the costs and delays associated
with compliance with such laws and regulations could become such that the
company would not proceed with the development or operation of a mine.     

As part of its normal course operating and development activities, the company
has expended significant resources, both financial and managerial, to comply
with governmental regulations and permitting requirements, and anticipates that
it will continue to do so in the future. Moreover, it is possible that future
developments, such as increasingly strict environmental protection laws,
regulations and enforcement policies thereunder, and claims for damages to
property and persons resulting from the company's operations, could result in
substantial costs and liabilities in the future.

The company is required to obtain governmental permits to develop its reserves
and for expansion or advanced exploration activities at its operating properties
and its exploration properties. Obtaining the necessary governmental permits is
a complex and time-consuming process involving numerous foreign or U.S. federal,
state and local agencies. The duration and success of each permitting effort are
contingent upon many variables not within the company's control. In the case of
foreign operations, governmental approvals, licenses and permits are, as a
practical matter, subject to the discretion of the applicable governments or
governmental officials. In the context of environmental protection permitting,
including the approval of reclamation plans, the company must comply with known
standards, existing laws and regulations that may entail greater or lesser costs
and delays depending on the nature of the activity to be permitted and the
interpretation of the laws and regulations implemented by the permitting
authority. The failure to obtain certain permits, or the imposition of extensive
conditions upon certain permits, could have a material adverse effect on the
company's business, operations and prospects.
    
In past sessions of the United States Congress, both the House of
Representatives and Senate have considered legislation that seeks to reform the
General Mining Law of 1872, as amended (the "Mining Law"), which governs the
location and maintenance of unpatented mining claims and related activities on
federal lands. As part of the most recent budget reconciliation process, each of
the Senate and the House of Representatives passed separate legislation that
sought to reform the Mining Law, although such legislation was not enacted into
law. The company anticipates that if Congress were to enact legislation
modifying the Mining Law, such legislation may impose a royalty on production of
minerals from unpatented mining claims, and could contain new requirements for
mined land reclamation and other environmental control measures. The extent to
which any such new legislation would affect existing unpatented mining claims or
mining operations thereon is unclear at this time. Any reform of the Mining Law
based on these initiatives could increase the costs of mining activities on
unpatented mining claims, and as a result could have an adverse effect on the
company and its results of operations. Until such time, if any, as new reform
legislation is enacted, the ultimate effects and costs of compliance on the
company cannot be estimated. See "Other-Governmental Regulation and
Environmental Issues."     

                                       36
<PAGE>
 
Risk of International Operations
--------------------------------
In certain countries in which the company has assets and operations, such assets
and operations are subject to various political, economic and other
uncertainties, including, among other things, the risks of war or civil unrest,
expropriation, nationalization, renegotiation or nullification of existing
concessions, licenses, permits, approvals and contracts, taxation policies,
foreign exchange and repatriation restrictions, changing political conditions,
international monetary fluctuations, currency controls and foreign governmental
regulations that favor or require the awarding of drilling contracts to local
contractors or require foreign contractors to employ citizens of, or purchase
supplies from, a particular jurisdiction. In addition, in the event of a dispute
arising from foreign operations, the company may be subject to the exclusive
jurisdiction of foreign courts or may not be successful in subjecting foreign
persons to the jurisdiction of courts in the United States or Canada. The
company also may be hindered or prevented from enforcing its rights with respect
to a governmental instrumentality because of the doctrine of sovereign immunity.
It is not possible for the company to accurately predict such developments or
changes in law or policy or to what extent any such developments or changes may
have a material adverse effect on the company's operations.

Title to Properties
-------------------
Certain of the company's United States mineral rights consist of unpatented lode
mining claims. Unpatented mining claims may be located on U.S. federal public
lands open to appropriation, and may be either lode claims or placer claims
depending upon the nature of the deposit within the claim. In addition,
unpatented millsite claims, which may be used for processing operations or other
activities ancillary to mining operations, may be located on federal public
lands that are non-mineral in character. Unpatented mining claims and millsites
are unique property interests, and are generally considered to be subject to
greater title risk than other real property interests because the validity of
unpatented mining claims is often uncertain and is always subject to challenges
of third parties or contests by the federal government. The validity of an
unpatented mining claim, in terms of both its location and its maintenance, is
dependent on strict compliance with a complex body of federal and state
statutory and decisional law. In addition, there are few public records that
definitively control the issues of validity and ownership of unpatented mining
claims. The Mining Law includes provisions for obtaining a patent, which is
essentially equivalent to fee title, for an unpatented mining claim upon
compliance with certain statutory requirements (including the discovery of a
valuable mineral deposit).

Competition
-----------
The company encounters strong competition from other mining companies in
connection with the acquisition of properties producing or capable of producing
precious metals. As a result of this competition, some of which is with
companies with greater financial resources than the company, the company may be
unable to acquire attractive mining properties on terms it considers acceptable.
The company also competes with other mining companies for skilled mine workers.
Such competition may result in higher turnover and greater labor costs for the
company. See "Employees."

Exchange Rates
--------------
The profitability of the company's Canadian operations is affected by
fluctuations in the Canadian dollar exchange rate for U.S. dollars. See
"Exchange Rates."

The profitability of the company's Paredones Amarillos project in Mexico will be
affected by fluctuations in the Mexican peso exchange rate for U.S. dollars. The
company used an exchange rate of 7.5 Mexican pesos to one U.S. dollar in its
feasibility study. See "Construction Programs-Paredones Amarillos."

GLOSSARY
The following terms are described to aid in understanding the company's Form 10-
K. Geological terms are not generally included.

ADIT-A tunnel driven horizontally into the side of the mountain or hill to gain
access to mineralization for exploration or mining.

                                       37
<PAGE>
 
ASSAY-A chemical test performed on a sample of ore, mineral or rock to determine
the mineralized content.

CALL OPTION-An option contract that gives the holder the right, but not the
obligation, to buy a specific commodity for a limited time period at a fixed
price.

CONCENTRATE-A metal-rich product from a mineral separation process such as
flotation. The metals are "concentrated" from ore and the remainder is discarded
as neutralized tailings. The contained metals are recovered from the
concentrates either by leaching or by smelting.

CONTANGO-The premium paid over spot prices on a forward contract. The contango
is based on the difference between the cost of leasing gold and current money
interest rates.

DILUTION-The unwanted but unavoidable inclusion of some barren or low-grade rock
along with the ore being mined. This lowers the grade of the mined material.

DORE-An unrefined bar of bullion containing an alloy of gold, silver and
impurities. The company ships dore bars to refiners for further processing, then
sells them to precious metal dealers, mainly banks and their affiliates.

DRIFT-An underground horizontal passage providing access to a mineralized area.

DRILLING
Blasthole Drilling-The drilling of holes in rock to insert with an explosive
charge. The drill holes are usually about 10-25 feet apart. The ensuing
synchronized blast will break up the rock so it can be dug out.

Diamond (or Core) Drilling-Drilling with a hollow diamond-studded bit to cut out
a solid rock core. A column of rock is extracted from inside the drill rod for
geological examination and assay.

In-Fill Drilling-Drilling between widely spaced holes (typically up to 200 feet
apart) to establish or upgrade the ore reserve classification.

Rotary Drilling-Drilling with a bit that breaks the rock into chips. The chips
are continually flushed from the hole (outside the drill pipe) and are collected
in sequence for geological examination and assay.

Reverse-Circulation Drilling-A type of Rotary Drilling that uses a double-walled
drill pipe. Compressed air, water or other drilling medium is forced down the
space between the two pipes to the drill bit, and the drilled chips are flushed
back up to the surface through the center tube of the drill pipe.

Step-Out Drilling-Drilling at widely spaced intervals (typically in increments
of 300 feet) outward from known deposits to test for extensions of
mineralization.

EXERCISE (OR STRIKE) PRICE-The price at which the underlying commodity or
security can be bought, sold, or settled on exercise of the option contract. In
the case of a call option, the exercise price is the price at which the buyer of
the option has the right to purchase the underlying commodity or security. In
the case of a put option, the exercise price is the price at which the buyer of
the option has the right to sell the underlying commodity or security.

EXPLORATION-Exploration can be divided into three basic categories:

Grassroots Exploration-Exploration for ore in an area that has the correct
geologic setting, although no ore may have been found yet in that precise
location.

                                       38
<PAGE>
 
Headframe Exploration-Exploration for a separate ore body "within sight of the
headframe" of an existing mine.

Definition Exploration-Exploration that defines an ore body, or searches for
extensions to it, once it has been discovered.

FEASIBILITY STUDIES-Determinations of the economic feasibility of mining a
deposit, based on progressively greater levels of information.

Initial Feasibility (Level 1)-A preliminary estimate of what the economic
parameters of mining a deposit are likely to be, based on a particular mining
plan, process flow sheet, facility design, infrastructure, and estimated capital
and operating costs. A Level 1 estimate usually describes an installation that
might be built. The deposit is classified as other mineralization.

Detailed/Optimized Feasibility (Level 2)-A refinement and reassessment of the
initial study, based on extensive additional information, detailed engineering,
and optimization work. This provides a level of confidence such that a decision
to build the project can be made. A Level 2 estimate generally describes an
installation that probably will be built, rather than an installation which is
conceptual only. The deposit is now classified as ore reserves.

Definitive Feasibility (Level 3)-Yet a further increase in the level of
engineering and other detailed work. The designs and estimates provided in the
Level 3 estimate are for the installation that will be built with minimal
modifications. The company would not normally proceed to this level of detail
before making a construction decision unless it were to be required for stand-
alone project financing.

FLOTATION-A process for concentrating minerals based on the selective adhesion
of certain minerals to air bubbles in a mixture of water and ground-up ore. When
the right chemicals are added to a frothy water bath of ore that has been ground
to the consistency of talcum powder, the minerals will float to the surface. The
metal-rich flotation concentrate is then skimmed off the surface.

FORWARD CONTRACT-A legal agreement to buy or sell a commodity at a specific
price on a future date.

GOLD LOAN-A low interest cost method of debt financing that also acts to hedge
future selling prices. A gold producer borrows gold bullion from a bank or
dealer and sells it on the spot market, thereby establishing the sales price for
the quantity of gold borrowed. The producer replaces the borrowed gold from its
future production according to an agreed upon schedule. A gold loan allows the
producer to receive the proceeds from the sale of the borrowed gold immediately,
rather than as the metal is produced.

GRADE-The metal content of ore. With precious metals, grade is expressed as troy
ounces per ton of ore.
Cut-off Grade--The minimum grade of ore that can be mined and processed
economically.

HEAP LEACHING-A low-cost leaching process in which ore is placed in a large heap
on an impermeable pad. The solvent, a weak cyanide solution, is dripped or
sprinkled over the heap and collected at the bottom after percolating through
the ore and dissolving the metals. See the illustration in "Mine Processing."

LEACHING-The extraction of a soluble metallic compound from ore by dissolving
the metals in a solvent. See also Heap Leaching.

LEACH CYCLE-The average amount of time that ore is leached.

LEACH PAD-A large, impermeable foundation or pad used as a base for ore during
heap leaching. The pad prevents the leach solution from escaping out of the
circuit.

                                       39
<PAGE>
 
Dedicated Pad-A Leach Pad which is constructed to permanently accommodate one
ore heap. The pad forms the tailings pile when economic recovery has been
reached and the pad neutralized.

Reusable Pad-A pad where ore is loaded and then unloaded at the end of each
Leach Cycle. The pad, made of durable materials, can be reused continually.

MILL-A plant where ore is ground, usually to fine powder, and the metals are
extracted by physical and/or chemical processes. See the illustration in "Mine
Processing."

MINERALIZATION-Mineral-bearing rock. In this report, mineralization generally
refers to the presence of gold and silver established by widely spaced drilling.
It is referred to as "other mineralization" to distinguish it from "proven and
probable reserves."  See Ore Reserves.

ORE BODY-A mineral deposit that can be mined at a profit under existing economic
conditions.

ORE PASS-A vertical or steeply inclined raise used to move ore by gravity to the
mine level where it will be crushed and hoisted to surface.

ORE RESERVES-The tonnage and grade of an economically and legally extractable
ore body. The company's reserves are minable reserves and do not reflect losses
in the recovery process. They include allowance for dilution of ore in the
mining process. Securities regulations in both Canada and the U.S. set strict
requirements for proven and probable ore reserves.

Proven Ore Reserves-"Proven ore" or "measured ore" means that material for which
tonnage is computed from dimensions revealed in outcrops or trenches or
underground workings or drill holes and for which the grade is computed from the
results of adequate sampling, and for which sites for inspection, sampling and
measurement are so spaced and the geological character so well defined that the
size, shape and mineral content are established, and for which the computed
tonnage and grade are judged to be accurate within limits which shall be stated
and for which it shall be stated whether the tonnage and grade of proven ore or
measured ore are "in-situ" or extractable, with dilution factors shown, and
reasons for the use of these dilution factors clearly explained.

Probable Ore Reserves-"Probable ore" or "indicated ore" means that material for
which tonnage and grade are computed partly from specific measurements, samples
or production data, and partly from projection for a reasonable distance on
geological evidence, and for which the sites available for inspection,
measurement and sampling are too widely or otherwise inappropriately spaced to
outline the material completely or to establish its grade throughout.

The Canadian and U.S. regulations are presented in "Reserves."

OTHER MINERALIZATION-See Mineralization.

OUNCE-Throughout this report, the terms "ounce" and "milliounce" are used as
abbreviations for the troy ounce measure of weight. The troy ounce has been used
exclusively as a previous metals measurement, probably since the 16th century.

           One troy ounce  =   1.097 avoirdupois ounces
                           =   31.103 grams
           One milliounce  =   0.001 ounce

PUT OPTION-An option contract that gives the holder the right, but not the
obligation, to sell a specific commodity for a limited time period at a fixed
price.

                                       40
<PAGE>
 
RAMP-An underground tunnel providing access for exploration or the movement of
materials and equipment between mine levels.

RECOVERY RATE-The percentage of metals recovered in a mineral separation
process. Recovery rates vary considerably depending on physical, metallurgical
and economic circumstances.

RESERVES-See Ore Reserves.

RUN-OF-MINE ORE-Uncrushed ore in its natural state just as it is when blasted.

SHAFT-A vertical accessway to a mine. Shafts are used for the movement of
personnel and materials, including ore and nonmineralized rock.

SPOT DEFERRED SALE-Similar to a forward sale except the date of sale may be
deferred many times before the gold is ultimately delivered. The contango will
increase at each deferral or roll forward.

STOPE-An underground working area where ore is mined.

SWAP-Transactions that generally involve the contractual exchange of interest
payment obligations, currency positions, or commodities (or any combination
thereof), on a specified amount of notional principal for a specified period of
time.

TAILINGS-The neutralized material discarded after the economically recoverable
metals have been extracted from the ore by Milling or Heap Leaching.

TON-The short ton is used throughout this report. It is a unit of weight equal
to 2,000 pounds or 907.2 kilograms.

WASTE-TO-ORE RATIO-In an open pit mine, large quantities of nonmineralized rock
often cover up the ore and must be removed. The stripping ratio is the number of
tons of nonmineralized material removed per ton of ore mined.

GOLD PRICES
The following table sets forth annual high, low, average and end of period
afternoon fixing gold prices in U.S. dollars per troy ounce on the London
Bullion Market.

<TABLE> 
<CAPTION> 
                                                                             Year ended December 31,
                                                    -------------------------------------------------------------------------
                                          1997*         1996           1995           1994           1993           1992
                                      -----------   -------------  -------------  -------------  -------------  -------------
<S>                                   <C>           <C>            <C>            <C>            <C>            <C>
High                                        $ 369           $ 415          $ 396          $ 396          $ 406          $ 360
Low                                           346             367            372            370            326            330
Average                                       356             388            384            384            360            344
End of Period                                 346             369            387            383            392            333
</TABLE>

* Through January 31, 1997

                                       41
<PAGE>
 
SILVER PRICES
The following table sets forth annual high, low, average and end of period noon
prices in U.S. dollars per troy ounce as quoted by Handy & Harman.

<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                   --------------------------------------------------------------------
                                        1997*          1996          1995          1994          1993          1992
                                    -------------  ------------  ------------  ------------  ------------  ------------
<S>                                 <C>            <C>           <C>           <C>           <C>           <C>
High                                       $5.03          $5.79         $6.01         $5.76         $5.37         $4.32
Low                                         4.65           4.67          4.36          4.63          3.55          3.63
Average                                     4.76           5.18          5.20          5.29          4.30          3.94
End of Period                               4.83           4.87          5.11          4.87          5.08          3.67
</TABLE>

* Through January 31, 1997

EXCHANGE RATES
The exchange rates of the Canadian dollar to the U.S. dollar at the end of each
period and the high, the low and the average exchange rates for each period,
were as follows (such rates, which are expressed in Canadian dollars, being the
noon buying rates in New York City for cable transfers in U.S. dollars as
certified for customs purposes by the Federal Reserve Bank of New York).

<TABLE>
<CAPTION>
                                                                      Year ended December 31,
                                      ----------------------------------------------------------------------------------------
                         1997*              1996              1995              1994              1993              1992
                   -----------------  ----------------  ----------------  ----------------  ----------------  ----------------
<S>                <C>                <C>               <C>               <C>               <C>               <C>
High                  C$  1.3357         C$  1.3310        C$  1.3285        C$  1.3103        C$  1.2428         C$1.1420
Low                          1.3742             1.3822            1.4238            1.4078            1.3443            1.2885
Average                      1.3494             1.3638            1.3689            1.3699            1.2939            1.2143
End of Period                1.3474             1.3697            1.3655            1.4030            1.3255            1.2714
</TABLE>

* Through January 31, 1997

CONVERSION TABLE
For ease of reference, the following conversion factors are provided.

1 mile                  =          1.6093 kilometers
1 foot                  =          0.305 meter
1 acre                  =          0.4047 hectare
1 U.S. gallon           =          3.785 liters
1 short ton             =          2,000 pounds
                        =          907.2 kilograms
1 troy ounce            =          1.097 avoirdupois ounces
                        =          31.103 grams

The term "ounce" as used in this report means "troy ounce."

MINE PROCESSING

Milling is the traditional method of recovering gold from ore. McCoy/Cove, Lupin
and Kettle River use milling as will Aquarius and Paredones Amarillos. Details
of the process vary from mine to mine, but the principles remain the same. The
mill recovery process at the McCoy/Cove operation, where both oxide ores and
sulfide ores are processed, is illustrated on page 43.

Heap leaching is a low-cost gold recovery process that can only be successfully
applied to certain oxidized, permeable ores. It has a lower recovery rate than
milling but is a less expensive process. Heap leaching is particularly suited to
large, low-grade oxide ore deposits. Both Round Mountain and McCoy/Cove use heap
leaching. Details of the process vary from mine to mine, but the principles
remain the same. To describe how the heap leach process works, the Round
Mountain mine's reusable leach pad process is illustrated on page 44.

                                       42
<PAGE>
 
            GENERAL DESCRIPTION OF MINING AND MILL RECOVERY PROCESS

Milling is the traditional method of recovering gold from ore. Details of the
process vary from mine to mine, but the principles remain the same. (Heap
leaching is another method of recovering gold from certain types of low-grade
ore, described on the next page.)  Here is how the mill recovery process works
at the McCoy/Cove operation, where the company has both oxide ores and sulfide
ores.

   Ore is blasted and trucked from an
   open pit to the mill. Ore is
   gold-bearing rock. After it's
   blasted, it ranges from powder to
   boulders as large as five feet
   across.
 
   A giant jaw crusher reduces all of
   the ore to eight inches or smaller.
 
   Crushed ore is ground to the
   consistency of fine sand in a series
   of three grinding mills. Steel balls
   tumble with the ore and water inside
   huge rotating drums, pulverizing the
   ore and liberating most of the gold
   and silver.
 
After grinding, sulfide ores need two
extra steps that oxide ores don't:
flotation and regrinding.
 
Flotation is a method of concentrating
sulfide ores. The mineral particles
are floated to the surface by a froth
of induced air, where they concentrate
and are skimmed off. The remaining
under-flow, which still contains some
gold and silver, skips the next step.
 
The sand-size concentrated sulfide
particles are reground even finer, to
the size of talcum powder. This frees
the precious metals from the sulfides
trapping them.
 
   Oxide ores, sulfide ore underflows,
   and reground sulfide concentrates
   all go to large leaching tanks,
   where a cyanide solution dissolves
   the gold and silver from the solids
   like hot water leaches tea from tea
   leaves.
 
   After 36 to 96 hours, zinc powder is
   added to the "pregnant" leach
   solution. This precipitates the gold
   and silver from the solution in the
   form of metallic powder. The powder
   is collected on filters and smelted
   into bullion bars. The bars are
   shipped to refineries for further
   processing into the pure metals.
 
   The leftover solids from the leach
   tanks, called tailings, are pumped
   to a treatment plant, where the
   contaminants are neutralized using
   sulfur dioxide (SO2) and air. The
   tailings are then pumped to a lined
   tailings pond. The solids settle to
   the bottom, and the water that
   doesn't evaporate is recirculated
   back to the mill.


                                       43
<PAGE>
 
         GENERAL DESCRIPTION OF MINING AND HEAP-LEACH RECOVERY PROCESS

Heap leaching is a gold recovery process that can only be applied to permeable
ores. It has a lower recovery rate than milling, but lower-grade ores can be
economically heap leached rather than milled because heap leaching costs are
much lower. Here is how Round Mountain's reusable leach pad process works. The
details, but not the principles, vary among individual mines.

Ore is mined and hauled by truck from 
the open pit. Ore is gold-bearing rock.

Crushing reduces the ore to less than 
three-quarters of an inch in size. Lime 
is added to stabilize the cyanide.

After being loaded onto the impermeable 
leach pad, the ore is sprinkled for
approximately 110 days with a weak 
sodium cyanide solution. This penetrates 
the ore, dissolving the almost-microscopic 
bits of gold and silver. The "pregnant"
solution drains to the collection area at 
the lower side of the pad and flows to
a pump. At the end of the leach cycle, 
the leached ore is washed with water and
drained.

The pregnant solution is pumped through 
a series of tanks containing activated
carbon, which removes the gold and 
silver from the cyanide solution. The
"barren" solution is recycled back to 
the leach pads.

The gold and silver are stripped from 
the carbon, forming a highly concentrated
solution. The carbon is regenerated 
and returned to the adsorption circuit.

The precious metals in the concentrated 
solution are electrolytically deposited
on steel wool cathodes in the 
electrowinning cells.

The gold precipitated on the cathodes is 
then placed into an electrorefining
cell, where the gold is plated out in 
the form of foil. The foil is fire-refined
into dore bars containing about half gold 
and half silver, together with minor
amounts of impurities.

The dore bars are shipped to a precious 
metals refinery for final processing
into pure gold and silver.

                                       44
<PAGE>
 
                            ITEM 3-LEGAL PROCEEDINGS

ALASKA-JUNEAU

During 1994, the U.S. Attorney began an investigation of potential Clean Water
Act violations. The investigation is to determine whether the company unlawfully
discharged pollutants from the drainage tunnel without a National Pollution
Discharge Elimination System (NPDES) permit. The outcome of this investigation
is uncertain.
    
See "Business and Properties-Other-Government Regulation and Environmental
Issues."     

SUMMA
See note 16 to the company's consolidated financial statements.

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

                                       45
<PAGE>
 
                                    PART II

                         ITEM 6-SELECTED FINANCIAL DATA

The following table is derived in part from the audited consolidated financial
statements of the company. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in Canada.
In all material respects, they conform with principles generally accepted in the
United States (except as described in footnote 1 to this table and note 12 to
the company's consolidated financial statements). This information should be
read in conjunction with the audited consolidated financial statements and the
notes thereto.

                                       46
<PAGE>
 
<TABLE>    
<CAPTION>
SELECTED FINANCIAL DATA/(1)/
Year ended December 31         
millions of U.S. dollars except
for gold price and per share data               1996           1995         1994         1993           1992
-------------------------------------------------------------------------------------------------------------
EARNINGS STATEMENT DATA
<S>                                           <C>            <C>         <C>           <C>           <C>
Revenue                                       $ 337.3        $ 360.7     $ 377.6       $ 366.5       $ 312.4
Average gold price realized per ounce         $   384        $   388     $   387       $   360       $   357
Earnings (loss) before taxes/(2)/             $(176.1)       $ (44.7)    $  13.0       $   9.7       $ (29.4)
Earnings (loss) before preferred
  share dividends/(2)/                        $(176.7)       $ (41.6)    $  17.3       $  10.2       $ (27.4)
Net earnings (loss)/(2)/                      $(176.7)       $ (50.1)    $   8.0       $   3.6       $ (31.7)
Earnings (loss) per common share/(2)/         $ (1.31)       $ (0.43)    $  0.07       $  0.03       $ (0.30)
Effective tax rate                              (0.4%)          7.2%      (33.3%)        (5.1%)         6.9%
Return on assets                               (20.7%)         (5.7%)       0.9%          0.4%         (3.5%)
Return on invested capital                     (23.8%)         (4.8%)       2.8%          2.1%         (2.9%)
Return on average common
  shareholders' equity                         (32.7%)         (9.1%)       1.6%          0.7%         (6.8%)
Weighted average common
  shares outstanding (millions)                 134.4          116.2       112.5         108.2         105.2
BALANCE SHEET DATA
Working capital (deficiency)                  $ (52.9)       $ 109.6     $ 186.2       $ 148.9       $  31.1
Current ratio                                    0.74           1.84        4.24          2.01          1.42
Total assets                                  $ 832.1        $ 871.2     $ 881.7       $ 990.5       $ 936.6
Gold, silver and currency financings          $ 182.9        $ 152.8     $ 132.7       $ 217.4       $ 220.1
Deferred income taxes                         $   8.4        $   8.1     $   8.4       $  14.6       $  20.0
Common shareholders' equity                   $ 492.3        $ 588.9     $ 509.7       $ 513.7       $ 440.3
Common shares outstanding (millions)            139.4          129.9       112.7         112.2         105.2
Book value per common share                   $  3.53        $  4.53     $  4.52       $  4.58       $  4.19
OTHER DATA
Dividends paid on common shares - total       $  10.1        $   9.0     $   8.5       $   8.1       $   7.9
           - per share                        $0.0750        $0.0750     $0.0750       $0.0750       $0.0750
Dividends paid on convertible preferred
 shares of subsidiary/(3)/ - total            $  --          $   8.5     $  10.1       $  10.1       $   4.3
           - per share                        $  --          $  1.75     $  1.75       $  1.75      $0.75347
Net cash flows provided from operating
 activities                                      29.9           67.3     $  92.2         101.7       $  73.7
Capital and exploration spending              $ 161.7        $ 138.3     $  66.8       $  44.4       $  81.4
-------------------------------------------------------------------------------------------------------------
</TABLE>     
(1) This information should be read in conjunction with the company's audited
    consolidated financial statements and accompanying notes. Contingencies are
    described in note 16 to the company's consolidated financial statements. The
    company's consolidated financial statements are prepared in accordance with
    Canadian generally accepted accounting principles. Had the consolidated
    financial statements been prepared in accordance with accounting principles
    generally accepted in the United States, certain selected financial data
    would be disclosed as follows.

<TABLE>     
<CAPTION> 
                                                1996           1995         1994          1993          1992
-------------------------------------------------------------------------------------------------------------
<S>                                           <C>            <C>         <C>           <C>           <C>
Earnings (loss) before income taxes            $ (173.1)       (39.2)     $  19.2       $  13.9        (28.1)
Net earnings (loss)                            $ (173.7)       (44.6)     $   9.3       $  12.7        (30.4)
Earnings (loss) per common share               $  (1.29)       (0.38)     $  0.08       $  0.12        (0.29)
Total assets                                   $  919.6      $ 881.3      $ 872.6       $ 975.2      $ 917.1
Deferred income taxes                          $   55.0      $   8.1      $   8.4       $   9.7      $  20.0
Common shareholders' equity                    $  533.1      $ 599.0      $ 500.6       $ 503.3      $ 420.8
-------------------------------------------------------------------------------------------------------------
</TABLE>      
    See also note 12 to the company's consolidated financial statements.
(2) At December 31, 1992, the company wrote down its investment in Kettle River
    by $14.9 million ($0.14 per share) and wrote off $3.2 million ($0.03 per
    share) in two exploration properties. In 1996, the company recorded a $30.0
    million ($0.22 per share) provision related to the estimated costs to remove
    waste rock from an unstable portion of the Cove pit wall at the McCoy/Cove
    mine in Nevada and recorded a $77.1 million ($0.57 per share) provision to
    write off the $57.1 million book value of its Alaska-Juneau development
    property in Alaska and to accrue $20.0 million for estimated reclamation and
    closure costs.
(3) All of the outstanding shares of preferred stock of subsidiary were redeemed
    or converted into common shares of the company during 1995.

                                       47
<PAGE>
 
                ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial results of the company's operations
for the years 1994 through 1996 should be read in conjunction with the financial
data and the company's consolidated financial statements, included elsewhere in
this report. The company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in Canada. In all
material respects, they conform with those principles generally accepted in the
United States, except as described in note 12 to the company's consolidated
financial statements, and also with International Accounting Standards.

Material changes in the company's reserves may significantly impact results of
operations and asset carrying values. See the discussion of reserves in
"Business and Properties-Reserves".

The following contains statements that are, by their nature, forward looking and
uncertain. See "Business and Properties-Risk Factors" and "Commitments and
Contingencies" for a discussion of certain factors which should be considered in
evaluating these statements.

SUMMARY
    
The company's net loss in 1996 was $176.7 million. Total production costs in
1996 were $373 per ounce of gold, which includes $254 per ounce cash operating
cost, $98 per ounce depreciation and amortization, $11 per ounce royalties, $7
per ounce reclamation and mine closure, and $3 per ounce production taxes. Total
production costs do not include exploration and development, provisions,
interest and other, general and administrative, income tax expense and preferred
stock dividends. The average price realized in 1996 was $384 per ounce of gold,
including forward sales and loan repayments, which was below the average market
price of $388 per ounce of gold in 1996. Net cash flows provided from operating
activities were $29.9 million in 1996 after cash exploration and development 
expenses of $56.6 million.     

RESULTS OF OPERATIONS
The company had a net loss of $176.7 million ($1.31 per share) in 1996, compared
to a net loss of $50.1 million ($0.43 per share) in 1995 and net earnings of
$8.0 million ($0.07 per share) in 1994 . The 1996 results compared to 1995
reflect the provision for the Alaska-Juneau development property ($77.1
million), the provision for the McCoy/Cove pit wall stabilization ($30.0
million), lower precious metals sales ($20.4 million), increased operating costs
($8.9 million) and lower gold price realized ($3.0 million), partially offset by
the absence of dividends on preferred stock ($8.5 million) and decreased
exploration and development ($6.2 million).  The 1995 results compared to 1994
reflect significantly increased exploration and development expenses ($23.3
million), lower precious metal sales ($13.5 million), increased operating costs
($11.1 million), increased environmental expenses at Sunnyside ($11.7 million)
and lower silver prices realized ($4.5 million).

Revenue derived from the sale of gold and silver bullion is directly affected by
the market prices of gold and silver and the volume of production. The
significant majority of revenues continue to be derived from gold sales. The
price of gold and silver is affected by many factors which are beyond the
company's control. See "Business and Properties-Risk Factors."

                                       48
<PAGE>
 
The gold and silver ounces sold and other revenue data for the last three years
are set out below.

--------------------------------------------------------------------------------
REVENUE DATA
Year ended December 31                         1996         1995          1994
--------------------------------------------------------------------------------
Gold
----
Ounces sold                                   777,512      758,635      823,841
Average price realized per ounce           $      384  $       388  $       387
Average market price per ounce             $      388  $       384  $       384
Revenue (millions of U.S. dollars)         $    298.9  $     294.6  $     318.8
Percentage of total revenue                       89%          82%          84%
 
Silver
------
Ounces sold                                 7,098,417   12,234,835   10,196,356
Average price realized per ounce           $     5.41  $      5.40  $      5.77
Average market price per ounce             $     5.18  $      5.19  $      5.29
Revenue (millions of U.S. dollars)         $     38.4  $      66.1  $      58.8
Percentage of total revenue                       11%          18%          16%
--------------------------------------------------------------------------------
Total Revenue (millions of U.S. dollars)   $    337.3  $     360.7  $     377.6
================================================================================

The effects of changes in sales volume and prices were:

--------------------------------------------------------------------------------
VARIANCES                
thousands of U.S. dollars 
Year ended December 31                         1996         1995          1994
--------------------------------------------------------------------------------
         
Change in volume                           $  (20,412) $   (13,478) $   (24,600)
Higher (lower) prices:
 Gold                                          (3,002)       1,135       22,512
 Silver                                           --        (4,527)      13,153
--------------------------------------------------------------------------------
Increase (decrease) in gold and silver
 revenue from the previous year            $  (23,414) $   (16,870) $    11,065
================================================================================


The increase in gold revenue from 1995 to 1996 was primarily due to higher
production resulting from more tons processed at Round Mountain and higher
production resulting from more tons processed and higher grades at Kettle River,
partially offset by lower production resulting from lower grades and recoveries
at McCoy/Cove, lower production resulting from lower grades at Lupin and lower
prices realized ($384 per ounce in 1996 versus $388 per ounce in 1995). The
decrease in silver revenue was due to lower production resulting from lower
grades. The decrease in gold and silver revenue from 1994 to 1995 was primarily
due to lower production resulting from less tons heap leached and lower grades
milled at McCoy/Cove, lower production resulting from lower grades at Round
Mountain and lower production resulting from less tons processed at Lupin,
partially offset by higher production resulting from higher grades at Kettle
River. Production by mine is set out in "Business and Properties-Operations
Summary."

The company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the company attempts to lock in the future value of
certain of these items through hedging transactions. These transactions are
accomplished through the use of derivative financial instruments, the value of
which is derived from movements in the underlying prices or rates.

The gold- and silver-related instruments used in these transactions include
commodity loans, fixed-forward and spot-deferred contracts, swaps and options.
Sensitivity to changing metal prices is reduced, and future revenues are hedged,
as the company's future production will satisfy these loans and other delivery
commitments. The company engages in forward currency-exchange contracts to
reduce the impact on the Lupin mine's operating costs caused by fluctuations in
the exchange rate of U.S. dollars to

                                       49
<PAGE>
 
Canadian dollars. The company also engages in crude oil hedging activities,
including forward purchase agreements and swaps, to reduce the impact of
fluctuations in crude oil prices on its operating costs. During 1995 and 1994,
the company used interest rate swap agreements to effectively convert its fixed-
rate preferred stock dividends into floating-rate dividends. The interest rate
swap agreements expired on December 31, 1995.

Gains and losses resulting from hedging activities are recognized in earnings on
a basis consistent with the hedged item. When hedged production is sold, revenue
is recognized in amounts implicit in the commodity loan, delivery commitment or
option agreement. Gains or losses on foreign currency and crude oil hedging
activities are recorded in operating costs, or capitalized in the cost of
assets, when the hedged Canadian dollars are purchased and when crude oil
supplies are used in operations. Gains and losses on early termination of
hedging contracts are deferred until the hedged items are recognized in
earnings.

In 1996, approximately 25% of gold production was delivered against forward
sales and gold loans at an average price of $375 per ounce. This compares with
22% of gold production in 1995 at an average price of $395 and 19% of gold
production in 1994 at an average price of $370. Approximately 45% of silver
production was delivered against forward sales at an average price of $5.85 per
ounce in 1996, compared to 46% at an average price of $5.48 in 1995 and 50% at
an average price of $4.56 in 1994.

In the first quarter of 1997 the company repurchased its 218,000 ounce gold swap
hedging its $84.0 million bond obligation and repurchased all of its gold and
silver forward positions which consisted of 654,000 ounces of gold with delivery
dates ranging from 1997 to 2002 and 8.5 million ounces of silver with delivery
dates ranging from 1997 to 1999.  To protect against a decrease in gold prices,
the company purchased 450,000 ounces of gold put options priced at $345 per
ounce and sold 300,000 ounces of gold call options priced at $394 per ounce.
After these subsequent events, the company had gold loan obligations covering
approximately 4% of its expected 1997 gold production.  The company's hedging
activities and commitments at December 31, 1996 are described in note 15 of the
company's consolidated financial statements.

Operating costs include mining and processing costs for gold and silver sold
during the year. The most significant of these costs are labor, consumable
materials, repairs of machinery and equipment, fuel, utilities and environmental
compliance. The cost of transporting personnel and freight to the Lupin mine is
also a significant cost for that operation. Operating costs vary with the
quantity of gold and silver sold and with the cash operating cost per ounce.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF CASH OPERATING
COSTS PER OUNCE TO FINANCIAL STATEMENTS                  
thousands of U.S. dollars, except per ounce amounts                      1996                1995                1994
-----------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                 <C>                 <C>
Operating costs per financial statements                               $221,126            $212,182          $ 201,128
Change in finished goods inventory and other                                 70              (4,188)            (2,268)
Co-product cost of silver produced                                      (25,568)            (35,003)           (27,778)
-----------------------------------------------------------------------------------------------------------------------
Cash operating costs                                                   $195,628            $172,991          $ 171,082
=======================================================================================================================

Gold ounces produced                                                    768,919             754,762            817,946
Cash operating costs per ounce                                         $    254            $    229          $     209
=======================================================================================================================

Percentage increase from prior year                                        10.9%                9.6%                --%
=======================================================================================================================
</TABLE>

In 1996, the average cash operating cost per ounce was $254 compared with $229
in 1995 and $209 in 1994. Cash operating costs per ounce were higher in 1996
reflecting increased mining costs per ounce at McCoy/Cove and Round Mountain.
Cash operating costs by mine are set out in "Business and Properties-Operations
Summary." The company's consolidated cash operating cost target is $265-275 per
ounce of gold produced in 1997. This increase is primarily the result of
declining production and resulting higher costs per ounce at McCoy/Cove, as
previously expected in its life-of-mine plan.

                                       50
<PAGE>
 
The decrease in depreciation and amortization was primarily due to amortization.
Amortization expense varies with the quantity of gold and silver sold and the
mix of production at the four mines. The quantity of the company's proven and
probable reserves and other mineralization also affects amortization expense as
the company's investment is amortized over these ounces. The $3.5 million
decrease in total amortization expense in 1996 reflects lower silver production.
On a per gold ounce basis, amortization was $34 in 1996, compared to $36 in 1995
and $33 in 1994.  On a per gold ounce basis, depreciation was $64 in 1996
compared to $61 in 1995 and $56 in 1994.

Royalties are described in note 16 to the company's consolidated financial
statements. Royalty expense increased in 1996 primarily due to higher production
at Round Mountain and Kettle River, partially offset by lower production at
McCoy/Cove.

Production taxes decreased in 1996 compared to 1995 and 1994 due to the lower
production and higher costs at the Nevada mines.  Less cash flow reduces the net
profit on which the production taxes are calculated.

General and administrative costs have increased in 1996 compared to 1995 and
1994, reflecting increased support for the company's international focus,
permitting, exploration and business development activities.

Exploration was $46.6 million in 1996 compared to $46.5 million in 1995 and
development was $17.0 million in 1996 compared to $23.3 million in 1995. The
decrease in development expense in 1996 was primarily due to the reduction in
activity and personnel at the Alaska-Juneau development property (decreased cash
spending of $2.3 million in 1996 compared to 1995) and lower amortization at
Alaska-Juneau and Kensington properties (decreased amortization of $2.9 million
in 1996 compared to 1995).

The company explores for extensions of known reserves at its mines and
development properties as well as conducting exploration for new gold deposits.
In response to available opportunities, as well as increased difficulty in
obtaining mining permits and proposed U.S. federal royalties on production from
U.S. public lands, the company has expanded its exploration focus outside North
America. In addition to the United States and Canada, the company conducted
exploration in Mexico, Central America, South America, the Philippines and West
Africa in 1996.  1997 exploration expense is budgeted at $31 million, but is
dependent on opportunities.

Interest and other includes net interest expense of $2.1 million in 1996
compared to net interest income of $4.8 million in 1995 and net interest income
of $4.1 million in 1994, reflecting decreased cash on hand and increased
currency financings in 1996. The 1996 amount also includes a $1.5 million
accrual related to Summa royalty litigation offset by a $2.5 million gain on the
sale of the company's investment in Cluff Resources plc and a $1.9 million gain
on the sale of the company's investment in Etruscan Enterprises Ltd.

The provision for Alaska-Juneau development property represents the company's
entire remaining investment in A-J of $57.1 million and a $20.0 million accrual
for estimated reclamation and closure costs.  The provision resulted from a new
feasibility study concluding that the project as currently designed would not be
economically feasible. See "Business and Properties-Alaska-Juneau."

The provision for McCoy/Cove pit wall stabilization represents the estimated
cost to remove waste rock from an unstable portion of the Cove pit wall.  The
estimate of the provision is based on a preliminary evaluation of the tons to be
removed and the associated costs, both of which will be further refined as
McCoy/Cove completes its stabilization plan. See "Business and Properties-
McCoy/Cove."

Income tax recovery (expense) is described in note 8 to the company's
consolidated financial statements.

                                       51

<PAGE>
 
The 1996 net earnings also reflect the absence of dividends on preferred stock
of Echo Bay Finance Corp., compared to dividends of $8.5 million in 1995 and
$9.3 million in 1994.  All of the preferred shares were converted or redeemed
during the third and fourth quarters of 1995.

For 1997, the company expects gold production to be in the range of 700,000 to
725,000 ounces and silver production to be about the same as 1996. The decline
in production is due to lower expected grades and recoveries at McCoy/Cove. The
company's consolidated cash operating cost target is $265-275 per ounce of gold
produced in 1997, primarily the result of the expected declining production and
resulting higher costs at McCoy/Cove. See "Business and Properties-McCoy/Cove,"
"-Cautionary `Safe Harbor' Statement under the United States Private Securities
Litigation Reform Act of 1995" and "-Risk Factors."

CAPITAL, EXPLORATION AND DEVELOPMENT SPENDING
In 1996, the company incurred cash development property expense of $13.2 million
and cash exploration expense of $43.4 million. Approximately 70% of the
exploration expense was incurred outside of the U.S. and Canada. The company
expects to incur $31 million of cash exploration expense in 1997, dependent on
opportunities, with approximately 70% of the expenditure outside of the U.S. and
Canada.

In 1996, the company capitalized $37.7 million in acquisition and development
property costs including $11.2 million at Kingking, $6.1 million at Chapada,
$6.1 million at Aquarius, and $6.6 million at Paredones Amarillos. For 1997, the
company expects to capitalize $5 million at Kingking. On its construction
programs, the company expects to spend $69 million at Aquarius and $44 million
at Paredones Amarillos of the total capital budgets of $100 million and $67
million respectively.

Capital expenditures at the company's operating mines in 1996 were $49.3 million
including $7.3 million at McCoy/Cove which was primarily related to the mill
expansion and additional haul trucks; $17.5 million at Round Mountain which
primarily related to the mill construction; $15.7 million at Lupin, of which
$14.5 million was Ulu development costs; and $8.8 million at Kettle River which
was primarily related to K-2 exploration and development. For 1997, the company
expects a similar level of capital spending including $23 million related to
mill construction at Round Mountain.
    
The company's capital, exploration and development spending has largely been
funded by working capital and by a drawdown of existing cash balances. 
Net cash flows provided from operating activities before cash exploration and
development properties expenses were $86.5 million in 1996.     

The company purchased common shares of exploration-oriented companies that give
the company access to exploration and development prospects along some of the
major gold belts of the world, including properties in South America, West
Africa and the Philippines. The company has invested $8.8 million in these
exploration-oriented companies during 1996 in addition to the $45.4 million
invested during 1995.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
    
Net cash flows provided from operating activities amounted to $29.9
million for 1996 compared to $67.3 million in 1995. The 1996 results
reflect lower silver production levels partially offset by higher gold
production levels ($20.4 million); increased operating costs ($8.9 million);
increased interest expense ($2.1 million expense in 1996 compared to $4.8
million income in 1995); the absence of 1995's conveyance of Canadian
Development Expenses ($4.8 million); and lower gold prices ($3.0 million);
partially offset by a net decrease in cash invested in inventories in 1996 ($1.4
million) compared to a net increase in cash invested in inventories in 1995
($3.6 million), lower cash exploration and development expense ($3.8 million)
and other timing differences.  Most of the exploration and development property
spending represents discretionary investments for the future.     

The company's financing activities provided $77.0 million in 1996. Outflows were
$48.3 million, primarily related to gold loan repayments of $38.2 million and
common share dividends of $10.1 million. 

                                       52
<PAGE>
 
The company had currency borrowings in the amount of $34.7 million, issued $85.8
million of shares in conjunction with the acquisition of Santa Elina, and
received proceeds of $4.8 million on exercise of stock options.

The company had $189.5 million in investing activities during 1996; for mining
properties, plant and equipment ($103.7 million); acquisition of Santa Elina
($97.1 million), partially offset by the receipt of $13.8 million in cash on the
sale of mining properties and other assets including the investment in Cluff
Resources plc ($5.5 million) and the investment of Etruscan Enterprises, Ltd.
($8.3 million).

Most of the company's hedging transactions have no margin requirements. In some
instances however, mainly for longer term forward sales and options, margin
deposits are required when the market value exceeds the contract value by a pre-
determined amount. See note 15 to the company's consolidated financial
statements.

The company has adequate resources and liquidity to pursue additional
acquisition, investment, exploration and development programs:
         
     .  Net cash flows provided from operating activities before cash 
        exploration and development expenses were $86.5 million
        in 1996.     
     .  The company had $103.2 million in cash at December 31, 1996.
     .  The company had $111.5 million in unutilized credit facilities at
        December 31, 1996.
     .  The company expects to secure a new $75 million unsecured corporate
        credit facility to finance a portion of the construction costs at
        Aquarius.
     .  The company expects to secure a $36 million non-recourse project loan to
        finance a portion of the construction costs at Paredones Amarillos.
     .  The company received proceeds of $63.3 million in the first quarter of
        1997 in connection with the repurchase of its 218,000 ounce gold
        commitment which hedged its $84.0 million bond obligation and the
        repurchase of all of its gold and silver forward sales positions,
        consisting of 654,000 ounces of gold and 8.5 million ounces of silver.
         
     .  Beginning in 1997, the company has suspended payment of dividends. This
        will save approximately $21.0 million over the next two years for mine
        development, based on the company's prior practice of paying annual
        dividends totaling $0.075 per share.     
     .  Pursuant to a shelf registration statement filed with the United States
        Securities and Exchange Commission in 1994, the company may offer from
        time to time up to $200 million in aggregate principal amount of debt
        securities, common shares, and/or guarantees of debt securities issued
        by Echo Bay Resources, Inc., a wholly owned subsidiary of the company.
        In connection with the U.S. shelf registration, the company also filed a
        shelf debt prospectus and a shelf equity prospectus with Canadian
        securities regulatory authorities. Under these prospectuses, the company
        could issue up to $125 million of debt securities and up to 10 million
        common shares.

COMMITMENTS AND CONTINGENCIES
The company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the company attempts to lock in the future value of
certain of these items through hedging transactions. These transactions are
accomplished through the use of derivative financial instruments, the value of
which is derived from movements in the underlying prices or rates.

The gold- and silver-related instruments used in these transactions include
commodity loans, fixed-forward and spot-deferred contracts, swaps and options.
Sensitivity to changing metal prices is reduced, and future revenues are hedged,
as the company's future production will satisfy these loans and other delivery
commitments. The company engages in forward currency-exchange contracts to
reduce the impact on the Lupin mine's operating costs caused by fluctuations in
the exchange rate of U.S. dollars to Canadian dollars. The company also engages
in crude oil hedging activities, including forward purchase 

                                       53
<PAGE>
 
agreements and swaps, to reduce the impact of fluctuations in crude oil prices
on its operating costs. During 1995 and 1994, the company used interest rate
swap agreements to effectively convert its fixed-rate preferred stock dividends
into floating-rate dividends. The interest rate swap agreements expired on
December 31, 1995.

Gains and losses resulting from hedging activities are recognized in earnings on
a basis consistent with the hedged item. When hedged production is sold, revenue
is recognized in amounts implicit in the commodity loan, delivery commitment or
option agreement. Gains or losses on foreign currency and crude oil hedging
activities are recorded in operating costs, or capitalized in the cost of
assets, when the hedged Canadian dollars are purchased and when crude oil
supplies are used in operations. Gains and losses on early termination of
hedging contracts are deferred until the hedged items are recognized in
earnings.

The company's forward sales commitments, gold loan and swap commitments and
option positions are described in notes 5 and 15 to the company's consolidated
financial statements.

The company's obligation to purchase Canadian dollars are described in note 15
to the company's consolidated financial statements.

The company's crude oil commitments are described in note 15 to the company's
consolidated statements.

During 1995, the company and TVI Pacific formed alliances with Filipino
corporations to create Kingking Mines Inc. ("KMI"),  a corporation under the
laws of the Republic of the Philippines.  KMI has signed an option agreement to
acquire a 100% interest in the Kingking project after completion of a bankable
feasibility study and a $67.0 million payment in 1998.  A contingent payment of
up to $18.0 million also would be payable if there were a significant increase
in mineralization at Kingking.  The company and its Philippine affiliates have
an initial interest in the option of 75%, but the agreements provided for the
acquisition and disposition of interests such that the interests of the company
and its Philippine affiliates ultimately could be between 60% and 100% of the
Kingking project.

Also during 1995, the company obtained an option to acquire a 50% interest in
the Chapada development property, located in Brazil. Upon exercise of the
option, the company has agreed to pay Santa Elina Gold Corporation $25 per ounce
of gold and $0.02 per pound of copper in the company's share of the proven and
probable reserves as determined by the feasibility study.
    
The company's operations are subject to laws and regulations concerning
protection of the environment. These laws and regulations change periodically
and are generally becoming more restrictive, which may have the effect of
increasing future costs. See "Business and Properties-Other-Government
Regulation and Environmental Issues."     

The company's operations are subject to certain royalty obligations as described
in note 16 to the company's consolidated financial statements.

Lease commitments are described in note 16 to the company's consolidated
financial statements.

The company's provisions for future reclamation and closure costs at the former
Sunnyside mine in Colorado and the Alaska-Juneau development property in Alaska
are reviewed periodically and may be adjusted as additional information becomes
available.

                                       54
<PAGE>
 
               ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         INDEX TO FINANCIAL STATEMENTS
                                                            PAGE
                                                            ----

Management's Responsibility for Financial Reporting........  56
Report of Independent Chartered Accountants................  57
Consolidated Balance Sheet.................................  58
Consolidated Statement Of Earnings.........................  59
Consolidated Statement Of Retained Earnings (Deficit)......  59
Consolidated Statement Of Cash Flow........................  60

                                       55
<PAGE>
 
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

The accompanying financial statements and related data are the responsibility of
management. Management has prepared the statements in accordance with accounting
principles generally accepted in Canada.

The integrity of the financial reporting process is also the responsibility of
management. Management maintains systems of internal controls designed to
provide reasonable assurance that transactions are authorized, assets are
safeguarded, and reliable financial information is produced. Management selects
accounting principles and methods that are appropriate to the company's
circumstances, and makes decisions affecting the measurement of transactions in
which estimates or judgments are required to determine the amounts reported.

The Board of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting. The Board carries out this
responsibility principally through its Audit Committee.

The Audit Committee consists entirely of outside directors. The Committee meets
periodically with management, the internal auditors, and the external auditors
to discuss internal financial controls, auditing matters and financial reporting
issues. The Committee satisfies itself that each party is properly discharging
its responsibilities; reviews the quarterly and annual financial statements and
the external auditors' report; and recommends the appointment of the external
auditors for review by the Board and approval by the shareholders.

The external auditors audit the financial statements annually on behalf of the
shareholders. They also performed certain procedures related to the company's
unaudited interim financial statements and report their findings to the Audit
Committee. The external auditors have free access to the internal auditors,
management and the Audit Committee.



                              /s/ Richard C. Kraus
                              --------------------
                              Richard C. Kraus
                              President and Chief Executive Officer



                              /s/ Peter H. Cheesbrough
                              ------------------------
                              Peter H. Cheesbrough
                              Senior Vice President-Finance and
                              Chief Financial Officer

January 27, 1997

                                       56
<PAGE>
 
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS

The Board of Directors
Echo Bay Mines Ltd.

We have audited the consolidated balance sheet of Echo Bay Mines Ltd. as at
December 31, 1996 and 1995 and the consolidated statements of earnings, retained
earnings (deficit) and cash flow for each of the years in the three-year period
ended December 31, 1996. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the company as at
December 31, 1996 and 1995 and the results of its operations and changes in its
financial position for each of the years in the three-year period ended December
31, 1996 in accordance with accounting principles generally accepted in Canada.



Edmonton, Canada                (signed) Ernst & Young
January 27, 1997                Chartered Accountants

                                       57
<PAGE>
 
                              ECHO BAY MINES LTD.

                           CONSOLIDATED BALANCE SHEET
                                        
                                  December 31

<TABLE>
<CAPTION>
thousands of U.S. dollars                                                   1996                        1995
--------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                         <C>
ASSETS
Current assets:

 Cash and cash equivalents                                               $ 103,196                    $185,843
 Interest and accounts receivable                                            9,739                      14,749
 Inventories (note 1)                                                       33,941                      34,173
 Prepaid expenses and other assets                                           6,573                       5,353
--------------------------------------------------------------------------------------------------------------
                                                                           153,449                     240,118
 
Plant and equipment (note 2)                                               233,984                     255,868
Mining properties (note 2)                                                 405,011                     318,219
Long-term investments and other assets (note 4)                             39,701                      56,956
--------------------------------------------------------------------------------------------------------------
                                                                         $ 832,145                    $871,161
==============================================================================================================
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
 Accounts payable and accrued liabilities                                $  72,421                    $ 61,781
 Income and mining taxes payable                                             3,651                       2,547
 Gold and other financings (note 5)                                        129,445                      41,135
 Deferred income (note 5)                                                      876                      25,053
--------------------------------------------------------------------------------------------------------------
                                                                           206,393                     130,516
 
Gold and other financings (note 5)                                          53,478                     111,679
Deferred income (note 5)                                                     1,581                          --
Other long-term obligations (note 6)                                        69,992                      32,018
Deferred income taxes                                                        8,392                       8,096
 
Commitments and contingencies (notes 15 and 16)
 
Common shareholders' equity:
 Common shares (note 10), no par value, unlimited                       
  number authorized; issued and outstanding -
  139,355,781 shares (129,880,804 shares in 1995)                          709,534                     618,965
 Deficit                                                                  (201,931)                    (15,109)
 Foreign currency translation                                              (15,294)                    (15,004)
 --------------------------------------------------------------------------------------------------------------
                                                                           492,309                     588,852
--------------------------------------------------------------------------------------------------------------
                                                                         $ 832,145                    $871,161
==============================================================================================================
</TABLE>

See accompanying notes.

                                       58
<PAGE>
 
                              ECHO BAY MINES LTD.

                       CONSOLIDATED STATEMENT OF EARNINGS

                             Year ended December 31

<TABLE>
<CAPTION>
thousands of U.S. dollars,except for per share data                        1996                  1995                  1994
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                   <C>                   <C>
Revenue                                                                 $ 337,316              $360,730              $377,600
-----------------------------------------------------------------------------------------------------------------------------
Expenses:
 Operating costs                                                          221,126               212,182               201,128
 Royalties (note 16)                                                        9,625                 8,434                10,039
 Production taxes                                                           2,440                 4,322                 6,528
 Depreciation and amortization                                             86,491                89,403                85,538
 Reclamation and mine closure                                               6,298                 5,005                 4,654
 General and administrative                                                13,577                12,169                10,447
 Exploration and development                                               63,619                69,796                46,539
 Interest and other (note 7)                                                3,090                 4,161                  (271)
 Provision for Alaska-Juneau development property (note 6)                 77,134                    --                    --
 Provision for McCoy/Cove pit wall stabilization (note 6)                  30,000                    --                    --
----------------------------------------------------------------------------------------------------------------------------- 
                                                                          513,400               405,472               364,602
----------------------------------------------------------------------------------------------------------------------------- 
Earnings (loss) before income taxes                                      (176,084)              (44,742)               12,998
Income tax expense (recovery) (note 8)                                        618                (3,206)               (4,323)
-----------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before preferred stock dividends                         (176,702)              (41,536)               17,321
Preferred stock dividends of subsidiary (note 11)                              --                 8,524                 9,298
-----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss)                                                     $(176,702)             $(50,060)             $  8,023
=============================================================================================================================
Earnings (loss) per share                                                  $(1.31)             $(0.43  )                $0.07
=============================================================================================================================
Weighted average number of shares outstanding (thousands)                 134,434               116,233               112,514
=============================================================================================================================
</TABLE>


             CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT)
                                        
                             Year ended December 31


<TABLE>
<CAPTION>
thousands of U.S. dollars                                                   1996                  1995                  1994
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                   <C>                    <C>
Balance, beginning of year                                              $ (15,109)             $ 44,140               $44,560
Net earnings (loss)                                                      (176,702)              (50,060)                8,023
-----------------------------------------------------------------------------------------------------------------------------
                                                                         (191,811)               (5,920)               52,583
-----------------------------------------------------------------------------------------------------------------------------
Dividends on common shares (note 10)                                      (10,120)               (8,978)               (8,443)
Excess of redemption price of preferred shares redeemed                      
 over original proceeds (note 11)                                              --                  (211)                   --
----------------------------------------------------------------------------------------------------------------------------- 
                                                                          (10,120)               (9,189)               (8,443)
----------------------------------------------------------------------------------------------------------------------------- 
Balance, end of year                                                    $(201,931)             $(15,109)              $44,140
=============================================================================================================================
</TABLE>

See accompanying notes.

                                       59
<PAGE>
 
                              ECHO BAY MINES LTD.

                      CONSOLIDATED STATEMENT OF CASH FLOW
                                        
                             Year ended December 31

<TABLE>    
<CAPTION>
thousands of U.S. dollars                                                  1996               1995               1994
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                <C>                 <C>
CASH PROVIDED BY (USED IN):

OPERATING ACTIVITIES
Net earnings (loss)                                                     $(176,702)         $ (50,060)          $  8,023
Add (deduct):
 Depreciation                                                              56,737             56,182             53,682
 Amortization                                                              29,754             33,221             31,856
 Preferred stock dividends of subsidiary (note 11)                             --              8,524              9,298
 Provision for McCoy/Cove pit wall stabilization (note 6)                  30,000                 --                 --
 Provision for Alaska-Juneau development property (note 6)                 77,134                 --                 --
 Non-cash portion of exploration and development expense                    7,035              9,365              8,902
 Deferred income taxes                                                        305               (448)            (5,702)
 Environmental expenses at non-producing properties                            --             12,899                 --
 Gain on sale of assets                                                    (4,469)            (5,506)            (1,282)
 Other                                                                      5,970              2,120              3,366
 Change in cash invested in operating assets and
  liabilities:
 Interest and accounts receivable                                            (184)            (2,667)             1,822
 Inventories                                                                1,368             (3,563)               468
 Prepaid expenses and other assets                                           (361)              (134)            (1,817)
 Accounts payable and accrued liabilities                                   3,245              6,695            (12,182)
 Income and mining taxes payable                                               69                701             (4,207)
-----------------------------------------------------------------------------------------------------------------------
                                                                           29,901             67,329             92,227
-----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Currency borrowings                                                        34,714             28,015                 --
Debt repayments                                                           (38,179)            (9,853)           (84,853)
Preferred stock dividends of subsidiary (note 11)                              --             (8,524)            (9,298)
Common share dividends (note 10)                                          (10,120)            (8,978)            (8,443)
Preferred share conversions and redemptions (note 11)                          --           (136,505)                (2)
Common shares issued on acquisition of Santa Elina, net of                 
 issuance costs (note 3)                                                   85,801                 --                 --
Common share issues, net of issuance costs (note 10)                        4,768            135,904              3,055
-----------------------------------------------------------------------------------------------------------------------
                                                                           76,984                 59            (99,541)
-----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Mining properties, plant and equipment                                   (103,667)           (81,538)           (35,727)
Cost of Santa Elina acquisition (note 3)                                  (97,069)                --                 --
Short-term investments                                                         --                 --            234,441
Long-term investments and other assets                                     (3,499)           (47,557)           (10,719)
Proceeds on sale of mining properties                                          --             32,551                 --
Proceeds on sale of long-term investments                                  13,809             12,104                 --
Other                                                                         894              1,368              1,649
-----------------------------------------------------------------------------------------------------------------------
                                                                         (189,532)           (83,072)           189,644
-----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                      (82,647)           (15,684)           182,330
Cash and cash equivalents, beginning of year                              185,843            201,527             19,197
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                  $ 103,196          $ 185,843           $201,527
=======================================================================================================================
</TABLE>     

See accompanying notes.

                                       60
<PAGE>
 
                             ECHO BAY MINES LTD.

                  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                              December 31, 1996

 
GENERAL
Echo Bay Mines Ltd. mines, processes and explores for gold and silver. Gold
accounted for 89% of 1996 revenue, and silver 11%. The company has four
operating mines: McCoy/Cove in Nevada, U.S.A.; Round Mountain in Nevada, U.S.A.;
Lupin in Northwest Territories, Canada; and Kettle River in Washington, U.S.A.
All are 100% owned except for Round Mountain, which is 50% owned.

The company's financial position and operating results are directly affected by
the market price of gold in relation to the company's production costs. Silver
price fluctuations also affect the company's financial position and operating
results, although to a lesser extent. Gold and silver prices fluctuate in
response to numerous factors beyond the company's control.

The consolidated financial statements are prepared on the historical cost basis
in accordance with accounting principles generally accepted in Canada and, in
all material respects, conform with accounting principles generally accepted in
the United States (except as described in note 12 to the company's consolidated
financial statements) and with International Accounting Standards. The
statements are expressed in U.S. dollars.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

Certain of the comparative figures have been reclassified to conform with the
current year's presentation.
    
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company and
its subsidiaries. Interests in joint ventures, each of which by contractual
arrangement are jointly controlled by all parties having an equity interest in
the joint venture, are accounted for using the proportionate consolidation
method to consolidate the company's share of the joint ventures' assets,
liabilities, revenues and expenses.     

SHARE INVESTMENTS
Common share investments are recorded using the cost method unless the company
owns more than a 20% interest and can exercise significant influence, in which
case the equity method is used. The cost method reports the investment at cost
and the equity method reports the investment at cost adjusted for the company's
pro rata share of the investee's undistributed earnings or losses since
acquisition. A provision for loss would be recorded in income if there were a
decline in market value of a share investment that is other than temporary.

FOREIGN CURRENCY TRANSLATION
The company's self-sustaining Canadian operations are translated into U.S.
dollars using the current-rate method, which translates assets and liabilities
at the year-end exchange rate and translates revenue and expenses at average
exchange rates. Exchange differences arising on translation are recorded as a
separate component of shareholders' equity. The change in the balance is
attributable to fluctuations in the exchange rate of U.S. dollars to Canadian
dollars. The company's foreign operations that are not self-sustaining are
translated into U.S. dollars using the temporal method, which translates
monetary assets and liabilities at the year-end exchange rate, and translates
additions to non-monetary assets and liabilities, revenue and expenses at
average exchange rates. Exchange differences arising on translation are recorded
in current earnings.

                                       61
<PAGE>
 
                             ECHO BAY MINES LTD.

                  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                              December 31, 1996

 
REVENUE RECOGNITION
Revenue is recognized when title to delivered gold or silver passes to the
buyer.

EARNINGS PER SHARE
Earnings per share is calculated based on the weighted average number of common
shares outstanding during the year. Fully diluted earnings per share are the
same as basic earnings per share because the company's outstanding options are
not dilutive.

CASH AND CASH EQUIVALENTS
The company considers to be cash equivalents all highly liquid debt instruments
purchased with a maturity of three months or less.

INVENTORIES
Precious metals inventories are valued at the lower of cost, using the "first-
in, first-out" method, or net realizable value. Materials and supplies are
valued at the lower of average cost or replacement cost.

PLANT AND EQUIPMENT
Plant and equipment are recorded at cost. Depreciation is provided using the
straight-line method over each asset's estimated economic life to a maximum of
20 years.

MINING PROPERTIES
Producing mines' acquisition, exploration and development costs
Mining properties are recorded at cost of acquisition. Mine exploration and
development costs include expenditures incurred to develope new ore bodies, to
define further mineralization in existing ore bodies and to expand the capacity
of operating mines. These expenditures are amortized against earnings on the
unit-of-production method over the expected economic life of each mine.
    
Mining costs
Mining costs are the costs incurred at producing properties to remove ore and
waste from an open pit or underground mine. These costs are deferred when they
relate to gold that will be produced in future years. They are charged to
operating costs in the period in which the production occurs.     

For open pit mining operations, mining costs are deferred when the ratio of tons
mined per ounce of gold recovered exceeds the average ratio estimated for the
life of the mine. These deferred costs are charged to operating costs when the
actual ratio is below the average ratio.

For underground mining operations, these costs include the cost of accessing and
developing new production areas.
    
Development properties
At properties identified as having the potential to add to the Company's proven
and probable reserves, the direct costs of acquisition, exploration and
development are capitalized as they are incurred. Determination as to reserve
potential is based on results of feasibility studies which indicate whether a
property is economically feasible. After drilling has confirmed the shape and
continuity of mineralization, initial feasibility studies are then optimized. If
production commences, these costs are transferred to "producing mines'
acquisition, exploration and development costs" and amortized against earnings
as described above. If a project is determined not to be commercially feasible,
unrecovered costs are expensed in the year in which the determination is
made.    

                                       62
<PAGE>
 
                             ECHO BAY MINES LTD.

                  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                              December 31, 1996

 
Exploration costs
The costs of exploration programs not anticipated to result in additions to the
company's reserves and other mineralization in the current year are expensed as
incurred.

Reclamation and mine closure costs
Estimated site restoration and closure costs for each producing mine are charged
against operating earnings on the unit-of-production method over the expected
economic life of each mine.

REVIEW OF LIFE-OF-MINE PLANS AND CARRYING VALUES
Plant and equipment are depreciated and mining properties are amortized over
their anticipated economic lives. Each year, the company estimates ore reserves
and prepares a comprehensive mining plan for the then-anticipated remaining life
of each property. The prices used in estimating the company's ore reserves at
December 31, 1996 were $375 per ounce of gold and $5.00 per ounce of silver. The
market prices were $369 per ounce of gold and $4.87 per ounce of silver at
December 31, 1996. If the company were to determine that its reserves should be
calculated at significantly lower prices, then ore reserves would likely be
materially reduced.

Significant changes in the life-of-mine plans can occur as a result of mining
experience, new ore discoveries, changes in mining methods and rates, process
changes, investments in new equipment and technology, and other factors. Based
on year-end ore reserves and each current life-of-mine plan, the company reviews
its accounting estimates and makes needed adjustments. This complex process
continues for the life of every mine.

The company reviews the carrying value of each producing mine by comparing the
net book value with the estimated undiscounted future cash flow from the
property. If the net book value exceeds the undiscounted future cash flow, then
the excess is expensed. There has been no excess carrying value to be expensed
in the three years ended December 31, 1996. Changes in the significant
assumptions underlying future cash flow estimates may have a material effect on
future carrying values and operating results.

Once major permits have been approved for a development property but a final
construction decision has not yet been made, the company considers the
uncertainty that the economics of the project may materially change if permits
expire before a final construction decision is made, and records reductions in
the property's book value when appropriate. Permits may not be renewable under
the same terms and conditions as originally granted, and the grant of permits is
often subject to appeal.

CAPITALIZATION OF INTEREST
Interest cost is capitalized on construction programs until the facilities are
ready for their intended use.

HEDGING ACTIVITIES
The company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the company locks in the future value of certain of
these items through hedging transactions. These transactions are accomplished
through the use of derivative financial instruments, the value of which is
derived from movements in the underlying prices or rates.

The gold- and silver-related instruments used in these transactions include
commodity loans, fixed-forward and spot-deferred contracts, swaps and options.
Sensitivity to changing metal prices is reduced,

                                       63
<PAGE>
 
                             ECHO BAY MINES LTD.

                  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                              December 31, 1996

 
and future revenues are hedged, as the company's future production will satisfy
these loans and other delivery commitments. The company engages in forward
currency-exchange contracts to reduce the impact on the Lupin mine's operating
costs caused by fluctuations in the exchange rate of U.S. dollars to Canadian
dollars. The company also engages in crude oil hedging activities, including
forward purchase agreements and swaps, to reduce the impact of fluctuations in
crude oil prices on its operating costs. During 1995 and 1994, the company used
interest rate swap agreements to effectively convert its fixed-rate preferred
stock dividends into floating-rate dividends.

Gains and losses resulting from hedging activities are recognized in earnings on
a basis consistent with the hedged item. When hedged production is sold, revenue
is recognized in amounts implicit in the commodity loan, delivery commitment or
option agreement. Gains or losses on foreign currency and crude oil hedging
activities are recorded in operating costs, or capitalized in the cost of
assets, when the hedged Canadian dollar transactions occur and when crude oil
supplies are used in operations. Gains and losses on early termination of
hedging contracts are deferred until the hedged items are recognized in
earnings.

The carrying values of gold loans are remeasured using the market value of gold
at the reporting date. Differences between these values and the loan proceeds
that were originally received are recorded as deferred income and will be
included in revenue when the production related to the loans is sold.

Under the interest rate swap agreements, the company received fixed-rate
interest and paid interest based on the London Inter-Bank Offered Rate (LIBOR).
The interest rate differential was recognized as an adjustment to dividends on
preferred stock of subsidiary as the differential accrued.

                                       64
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

 
<TABLE>
<CAPTION>
1.  INVENTORIES
                                                                             1996                       1995
-------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                        <C>
Precious metals  --  bullion                                               $ 4,182                    $ 5,944
                 --  in-process                                             11,442                     10,312
Materials and supplies                                                      18,317                     17,917
-------------------------------------------------------------------------------------------------------------
                                                                           $33,941                    $34,173
=============================================================================================================
</TABLE>

2.  PROPERTY, PLANT AND EQUIPMENT
Net book value
<TABLE>
<CAPTION>
                                                                                                  1996               1995
---------------------------------------------------------------------------------------------------------------------------
                                                             Plant             Mining                Net                Net
Property and percentage owned                        and Equipment         Properties         Book Value         Book Value
---------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                   <C>                <C>                <C>
McCoy/Cove (100%)                                         $ 82,311           $ 91,623           $173,934           $205,430
Round Mountain (50%)                                        55,349             52,711            108,060            104,354
Lupin (including Ulu) (100%)                                56,253             58,920            115,173            114,836
Kettle River (100%)                                         25,572             13,673             39,245             43,582
Alaska-Juneau (100%) (note 6)                                   --                 --                 --             61,247
Aquarius (100%)                                                100             14,823             14,923              8,905
Kingking (75% )                                                480             42,097             42,577             31,342
Paredones Amarillos (60%)                                      179              4,998              5,177              1,269
Santa Elina (51%) (note 3)                                   4,886            126,166            131,052                 --
Other                                                        8,854                 --              8,854              3,122
---------------------------------------------------------------------------------------------------------------------------
                                                          $233,984           $405,011           $638,995           $574,087
===========================================================================================================================
</TABLE>

During 1995, the company and TVI Pacific formed alliances with Filipino
corporations to create Kingking Mines Inc. ("KMI"), a corporation under the laws
of the Republic of the Philippines. KMI has signed an option agreement to
acquire a 100% interest in the Kingking project after completion of a bankable
feasibility study and a $67.0 million payment in 1998. A contingent payment of
up to $18.0 million also would be payable if there were a significant increase
in mineralization at Kingking.

The company and its Philippine affiliates have an initial interest in the option
of 75%, but the agreements provide for the acquisition and disposition of
interests such that the interests of the company and its Philippine affiliates
ultimately could be between 60% and 100% of the Kingking project.
<TABLE>
<CAPTION>
Plant and equipment
                                                                                 1996                                  1995
---------------------------------------------------------------------------------------------------------------------------
                                                                                  Net                                   Net
                                                              Cost         Book Value               Cost         Book Value
---------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                <C>                <C>                <C>
Land improvements and utility systems                     $ 65,131           $ 24,047           $ 63,076           $ 26,331
Buildings                                                  161,778             57,410            160,106             68,083
Equipment                                                  392,080            135,740            363,537            142,731
Construction in progress                                    16,787             16,787             18,723             18,723
---------------------------------------------------------------------------------------------------------------------------
                                                          $635,776           $233,984           $605,442           $255,868
===========================================================================================================================
</TABLE>

                                       65
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

 
Mining properties
<TABLE>
<CAPTION>
                                                                                          1996               1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                <C>
Producing mines' acquisition, exploration and development costs                         $388,515           $364,611
Less accumulated amortization                                                            250,616            221,125
-------------------------------------------------------------------------------------------------------------------
                                                                                         137,899            143,486
Development properties' acquisition, exploration and development costs                   188,084            102,204
Deferred mining costs                                                                     79,028             72,529
-------------------------------------------------------------------------------------------------------------------
                                                                                        $405,011           $318,219
===================================================================================================================
</TABLE>


3.  SANTA ELINA ACQUISITION
On July 16, 1996, the company completed a series of transactions with Santa
Elina Gold Corporation ("Santa Elina") and Sercor Ltd. ("Sercor," a private
company that owned 67% of Santa Elina). The transactions enabled the company to
increase its ownership of the outstanding common shares of Santa Elina from 7%
to 50% by issuing 8,830,915 common shares to the shareholders of Santa Elina. As
a result, the company and Sercor each owned 50% of Santa Elina. Santa Elina
holds interests in mining properties, principally in Brazil and also in Bolivia.

The company has accounted for the transactions as the purchase of an additional
43% of Santa Elina. Santa Elina has been consolidated into the company using the
proportionate consolidation method, as the company and Sercor jointly control
Santa Elina. Under the proportionate consolidation method, the company's share
of Santa Elina's assets, liabilities, revenues and expenses are included in the
company's consolidated financial statements. The company's share of Santa
Elina's operating results is included in the company's consolidated results of
operations from the date of acquisition.

The total cost of the transactions was $106.0 million. This consists of $13.1
million to purchase the company's initial 7% interest in Santa Elina, $86.1
million to purchase the additional 43% interest in Santa Elina, the $5.3 million
carrying value of the company's option to acquire a direct 50% interest in the
Chapada property and $1.5 million of transaction costs. The purchase price has
been allocated to the net assets of Santa Elina based on the relative fair
values.

The assigned value of assets and liabilities acquired at July 16, 1996, based on
the consideration given, follows.

<TABLE>
<CAPTION>
        ASSETS
        <S>                                                <C> 
          Cash                                             $    2,025
          Accounts receivable                                     555
          Inventories                                             281
          Plant and equipment                                   4,433
          Mining properties                                   114,457
          Long-term investments                                   989
        -------------------------------------------------------------
                                                              122,740
        -------------------------------------------------------------
        LIABILITIES
          Accounts payable and accrued liabilities              3,256
          Current portion of financings                         6,888
          Other long-term obligations                           6,596
        -------------------------------------------------------------
                                                               16,740
        -------------------------------------------------------------
        Net assets at assigned values                        $106,000
        =============================================================
</TABLE>

                                       66
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

 
Summarized below are the unaudited pro forma operating results of the company,
assuming the Santa Elina purchase had been consummated on January 1, 1995. These
pro forma results are based upon historical results of operations and not
necessarily indicative of results that would have occurred.

<TABLE>
<CAPTION>
                                                 1996                        1995
---------------------------------------------------------------------------------------------
<S>                                            <C>                         <C>
Revenue                                        $337,316                    $360,730
Net loss                                      $(180,045)                   $(58,788)
Net loss per common share                        $(1.29)                     $(0.47)
---------------------------------------------------------------------------------------------
</TABLE>

Since the completion of the above transactions, the company increased its
ownership in Santa Elina to 51% through additional share purchases of $7.0
million ($6.0 million in the fourth quarter of 1996 and $1.0 million in the
first quarter of 1997). The increased ownership does not affect the joint
control of Santa Elina, and proportionate consolidation will continue to be
used.

4.  LONG-TERM INVESTMENTS AND OTHER ASSETS
<TABLE>
<CAPTION>                                                      
                                                                         1996                                              1995
                              -----------------------------------------------     --------------------------------------------------
                               Number of     Percent       Market    Carrying      Number of   Percent       Market    Carrying
                                  Shares    Interest        Value       Value         Shares  Interest        Value       Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>             <C>         <C>         <C>         <C>           <C>         <C>         <C>
Share investments at
 cost:
 TVI Pacific Inc.             14,016,845       15.4%      $12,794     $11,810     11,666,667    15.7%       $18,715     $ 7,579
 Canarc Resources Corp.        3,000,000        9.0         3,724       4,153      3,000,000    10.5          3,055       4,153
 Minefinders Corp.             1,280,000       15.0         2,804       1,998             --      --             --          --
 Rift Resources Ltd.           1,000,000        9.8         1,059       1,465             --      --             --          --
 Cluff Resources plc                  --         --            --          --      3,630,800     4.8          6,033       2,899
 Santa Elina Gold                     
  Corp. (note 3)                      --         --            --          --      9,000,000     6.7          9,889      13,073
 Other share investments                                   13,928       9,913                                 8,157       8,315
------------------------------------------------------------------------------------------------------------------------------------
                                                           34,309      29,339                                45,849      36,019
Equity investment in:                 
 Etruscan Enterprises
 Ltd.                                 --         --            --          --      4,175,275    27.0         12,815       8,877
------------------------------------------------------------------------------------------------------------------------------------
                                                           34,309      29,339                                58,664      44,896
Property options                                                        1,817                                             7,764
Other assets                                                            8,545                                             4,296
                                                                      $39,701                                           $56,956
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Share investments
The company has purchased common shares of exploration-oriented companies that
give the company access to exploration and development prospects along some of
the major gold belts of the world, including properties in Central and South
America, West Africa and the Philippines.

In the first quarter of 1996, the company sold its investment in Cluff Resources
plc for $5.5 million. A gain of $2.5 million was recorded on the sale.

                                       67
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

 
Equity investment
In the fourth quarter of 1996, the company sold its investment in Etruscan
Enterprises Ltd. in exchange for $8.3 million cash and the 49% of the Kilgore
exploration property in Idaho that it did not own. The company recognized a gain
of $1.9 million on this sale.

Property options
In several cases the company paid a premium over the then-market value of the
common shares of exploration-oriented companies to fund exploration programs on
certain properties and for the right to acquire direct interests in these
properties. These amounts are being expensed as the exploration work is
conducted, until development potential is established. The company holds options
to purchase direct interests in these properties at purchase considerations
dependent on the properties' reserves and other mineralization at the time of
option exercise.

5.  GOLD AND OTHER FINANCINGS AND DEFERRED INCOME
<TABLE>
<CAPTION>
                                                            Financings                             Deferred Income
                                                 ---------------------------                 --------------------------
                                                     1996               1995                   1996                1995
-----------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                <C>                      <C>                <C>
Gold swap                                        $ 83,839           $ 83,625                 $   --             $    --
Gold loans                                         33,721             41,134                  2,423              27,216
Currency loan                                      33,846                 --                     --                  --
Debenture payable                                  27,966             28,055                     --                  --
Other                                               3,551                 --                     34              (2,163)
-----------------------------------------------------------------------------------------------------------------------
                                                  182,923            152,814                  2,457              25,053
Less current portion                              129,445             41,135                    876              25,053
-----------------------------------------------------------------------------------------------------------------------
                                                 $ 53,478           $111,679                 $1,581             $    --
=======================================================================================================================
</TABLE>

Gold swaps
Gold swaps refer to currency loans and related, independently arranged, future
gold delivery commitments. Taken together, the loans and commitments create
obligations effectively denominated in gold and represent hedges of future gold
production. In 1990, bonds totaling $84.0 million were swapped for an obligation
to deliver 218,000 ounces of gold in September 1997, equivalent to a selling
price of $385 per ounce. The effective interest rate on the bond and swap
arrangement was 3.54% at December 31, 1996.

Subsequent to December 31, 1996, the company repurchased its 218,000 ounce gold
delivery commitment which hedged the $84.0 million bond obligation described
above (see also note 15). The $84.0 million bond obligation has an effective
interest rate of 10.34% and is expected to be repaid in March 1997.

Gold term loan and currency loan
At December 31, 1996, a 41,562 ounce term loan was outstanding under a gold loan
agreement (60,200 ounces at December 31, 1995). Under an August 1996 amendment,
this term loan will be repaid over five years. All deferred gains related to the
gold loan have been recognized in 1996 on a basis that matched the production
originally designated for delivery. The remaining commitment is priced at
$387.50 per ounce based on the gold price at the date of rescheduling. For
financial statement presentation the outstanding gold loan was remeasured to
$369 per ounce, the gold price at December 31, 1996 ($387 per ounce in 1995).
Unrealized remeasurement gains or losses are included in deferred income. In
August 1996, the company also borrowed an additional $34.7 million in U.S.
dollars to be repaid over five years.

                                       68
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

 
The gold loan agreement contains both term and revolving provisions. At December
31, 1996, the company had no amounts outstanding, and $100.0 million or gold
equivalent available until 2001, under the revolving commitment.

The facility is convertible between gold and dollar borrowings. Interest on gold
borrowings is calculated at the banks' gold rate plus 0.475%, and interest on
dollar borrowings at LIBOR plus 0.475%. At December 31, 1996, the effective
interest rates were 2.90% on the gold loan and 5.85% on the dollar borrowings.

Gold loan related to Swiss franc bonds
At December 31, 1995, the company's net gold delivery commitment related to the
Swiss franc bond and swap arrangement was 118,990 ounces at approximately $374
per ounce, including deferred amounts. In 1996, 69,267 ounces of gold were
delivered and the remaining 49,723 ounce commitment was rescheduled into
quarterly payments of 5,525 ounces beginning in the first quarter of 1997 and
ending in the first quarter of 1999. All deferred gains related to the Swiss
franc transactions have been recognized in earnings in 1996 on a basis that
matched the production originally designated for delivery. The remaining
commitment is priced at $403 per ounce based on the gold price at the date of
rescheduling. The effective rate of interest on the remaining commitment was
2.75% at December 31, 1996.

For financial statement presentation the remaining commitment was remeasured to
$369 per ounce, the gold price at December 31, 1996.

Debenture payable
A subsidiary of the company has issued a debenture in the amount of $28.0
million, bearing interest at the one-month discount rate for bankers'
acceptances plus 0.325%. The interest rate was 3.44% at December 31, 1996. This
debenture is payable in April 1997 and is secured by a letter of credit.

Other information
Certain of the company's financing arrangements require it to maintain specified
ratios of assets to liabilities and cash flow to debt. The company is in
compliance with these ratios and other covenant requirements.

The company had outstanding letters of credit of $58.5 million at December 31,
1996, primarily related to the bonding of future reclamation obligations and to
the debenture issued by a subsidiary of the company. Annual fees on the letters
of credit range from 0.50% to 0.55%.

At December 31, 1996, the company had unutilized credit facilities of $111.5
million, including the $100.0 million or gold equivalent revolving commitment.
Annual commitment fees on the unutilized credit facilities are 0.20%.

Interest payments were $9.0 million in 1996, $4.3 million in 1995 and $7.2
million in 1994.

Future gold and silver delivery commitments are summarized by year in note 15.

                                       69
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996

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

6.  OTHER LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
                                                                            1996                       1995
-------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                        <C>
Accrued reclamation and mine closure                                       $33,263                    $30,868
Provision for Alaska-Juneau development property                            
 reclamation and closure costs                                              20,000                         --
Provision for McCoy/Cove pit wall stabilization                             28,407                         --
Property acquisition costs                                                   1,473                      1,831
Other                                                                        3,912                      2,069
-------------------------------------------------------------------------------------------------------------
                                                                            87,055                     34,768
Less current portion included in accounts payable and                       
 accrued liabilities                                                        17,063                      2,750
------------------------------------------------------------------------------------------------------------- 
                                                                           $69,992                    $32,018
=============================================================================================================
 
</TABLE>
Reclamation and mine closure
At December 31, 1996, the company's future reclamation and mine closure costs
are estimated to be $72.6 million, excluding Alaska-Juneau described below. The
aggregate obligation accrued to December 31, 1996 was $33.3 million, including
accruals of $6.3 million at operating mines in 1996, $5.0 million at operating
mines and $12.9 million at non-producing properties (note 7) in 1995 and $4.7
million at operating mines in 1994. The remaining $39.3 million will be accrued
on the unit-of-production method over the remaining life of each mine. Future
reclamation costs are determined using management's best estimates of the scope
of work to be performed and related costs. These estimates may change based on
future changes in operations, cost of reclamation activities and regulatory
requirements.

At December 31, 1996, the company recorded a provision of $77.1 million on
Alaska-Juneau development property, including its $57.1 million investment and
$20.0 million for estimated reclamation and closure costs. The provision
resulted from a new feasibility study concluding that the project as currently
designed would not be economically feasible (note 16).

Provision for McCoy/Cove pit wall stabilization
In the third quarter of 1996, the company recorded a $30.0 million provision
related to the estimated costs to remove waste rock from an unstable portion of
the Cove pit wall at the McCoy/Cove mine in Nevada. The cost estimate underlying
the provision is based on a preliminary evaluation of the total tons to be
removed and the associated costs, both of which will be further refined as
McCoy/Cove completes its stabilization plan. This plan could affect a portion of
McCoy/Cove ore reserves, if it is determined that the cost to remove waste rock
renders the portion uneconomic. By December 31, 1996, total spending for the pit
wall stabilization was $1.6 million.

7.  INTEREST AND OTHER
<TABLE>
<CAPTION>
                                                                   1996                  1995                  1994
--------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                   <C>                   <C>
Interest income                                                  $(6,131)              $(9,871)             $(10,237)
Interest expense                                                   8,226                 5,028                 6,102
Gain on sale of Cluff Resources investment (note 4)               (2,509)                   --                    --
Gain on sale of Etruscan equity investment (note 4)               (1,874)                   --                    --
Summa litigation accrual (note 16)                                 1,521                    --                    --
Gain on sale of Kensington                                            --                (3,189)                   --
Gain on disposition of Muscocho shares                                --                (2,104)                   --
Environmental expenses at non-producing properties                    --                12,899                    --
Other                                                              3,857                 1,398                 3,864
--------------------------------------------------------------------------------------------------------------------
                                                                 $ 3,090               $ 4,161              $   (271)
====================================================================================================================
</TABLE>

                                       70
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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


Gain on sale of Kensington
In June 1995, the company completed the sale of its 50% interest in the
Kensington development project to its partner, Coeur d'Alene Mines Corp., for
$32.5 million and a scaled royalty on future production. A gain of $3.2 million
was recorded on the sale.

Gain on disposition of Muscocho shares
In June 1995, the company sold its 11,585,110 common shares of Muscocho
Explorations Ltd., representing 24.8% of Muscocho's issued and outstanding
capital, in a private transaction for $2.1 million. A gain of $2.1 million was
recorded on the sale, as the company had written off its investment in Muscocho
in 1990.

Environmental expenses
During 1995, the company increased its provision for future reclamation costs at
non-producing properties by $12.9 million, including $11.7 million related to
the Sunnyside mine in Colorado.

8.   INCOME TAX EXPENSE
Geographic components
The geographic components of earnings before income tax expense and of income
tax expense were as follows.
<TABLE>
<CAPTION>
                                                                         1996                1995                1994
-----------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes:
<S>                                                                   <C>                  <C>                 <C>
 Canada                                                               $ (32,792)           $(41,407)           $(15,183)
 United States and other                                               (143,292)             (3,335)             28,181
-----------------------------------------------------------------------------------------------------------------------
                                                                      $(176,084)           $(44,742)           $ 12,998
=======================================================================================================================
 
Current income tax expense (recovery):
 Canada                                                               $     448            $ (3,891)           $    297
 United States and other                                                   (135)              1,133               1,082
-----------------------------------------------------------------------------------------------------------------------
                                                                            313              (2,758)              1,379
-----------------------------------------------------------------------------------------------------------------------
 
Deferred income tax expense (recovery):
 Canada                                                                     250                (950)             (5,702)
 United States and other                                                     55                 502                  --
----------------------------------------------------------------------------------------------------------------------- 
                                                                            305                (448)             (5,702)
-----------------------------------------------------------------------------------------------------------------------
Income tax expense (recovery)                                         $     618            $ (3,206)           $ (4,323)
=======================================================================================================================
</TABLE>

Deferred income taxes
The payment of certain income taxes is deferred due to the recognition of
amounts for tax purposes in different periods than for accounting purposes. The
principal timing differences and related tax effects were as follows.
<TABLE>
<CAPTION>
                                                                    1996                 1995                  1994
-------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                  <C>                 <C>
Depreciation and amortization                                      $  55                $ 502               $(3,602)
Deferred mining costs                                                 --                   --                (1,532)
Exploration costs                                                     --                   --                (1,437)
Non-deductible reserves                                               --                   --                  (355)
Non-capital losses                                                    --                   --                   169
Other                                                                250                 (950)                1,055
-------------------------------------------------------------------------------------------------------------------
                                                                   $ 305                $(448)              $(5,702)
===================================================================================================================
</TABLE>

                                       71
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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


Effective tax rate
The effective tax rate on the company's earnings differed from the combined
Canadian federal and provincial corporate income tax rate of 43.2% in 1996,
43.2% in 1995 and 42.9% in 1994 for the following reasons.
<TABLE>
<CAPTION>
                                                                      1996                   1995                  1994
-----------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                     <C>                   <C>
Earnings (loss) before income taxes                              $(176,084)              $(44,742)             $ 12,998
=======================================================================================================================
Income tax effect of:
 Expected Canadian federal and provincial                        
  corporate income taxes                                         $ (76,068)              $(19,329)             $  5,576
 Operating loss from which no tax benefit is derived                64,724                 14,845                    --
 Canadian resource allowance and earned depletion                     (406)                (1,539)                 (245)
 Foreign earnings subject to different income tax rates             11,806                  1,815               (11,074)
 Other items                                                           562                  1,002                 1,420 
-----------------------------------------------------------------------------------------------------------------------
Income tax expense (recovery)                                    $     618               $ (3,206)             $ (4,323)
=======================================================================================================================
Effective tax rate (current and deferred)                             (0.4%)                  7.2%                (33.3%)
=======================================================================================================================
</TABLE>

Loss carryforwards
At December 31, 1996, the company had U.S. net operating loss carryforwards of
approximately $254 million to apply against future taxable income and $44
million to apply against future alternative minimum taxable income. These loss
carryforwards do not include provisions for the Alaska-Juneau development
property and for the McCoy/Cove pit wall stabilization costs (note 6), which
have not yet been recognized for income tax purposes. The net operating loss
carryforwards expire during 2001-2011. Additionally, the company has Canadian
non-capital loss carryforwards of approximately $24 million and net capital loss
carryforwards of approximately $7 million. The non-capital loss carryforwards
expire in various amounts from 1998 through 2003. The net capital loss
carryforwards have no expiration date.

In 1995, the company realized $4.8 million from the conveyance of Canadian
Development Expenses of $32.8 million to a third party. The proceeds were
recorded as a recovery of income taxes in 1995 because the expenses represented
unrecorded loss carryforwards for accounting purposes. The arrangement included
the issuance of debentures to the third party (note 5).

Income tax payments (recoveries)
Income tax payments (recoveries) were $0.4 million in 1996, ($3.6) million in
1995 and $4.5 million in 1994.

9.  PREFERRED SHARES

The company is authorized to issue an unlimited number of preferred shares,
issuable in series. Each series is to consist of such number of shares and to
have such designation, rights, privileges, restrictions and conditions as may be
determined by the directors. No preferred shares are currently issued.

                                       72
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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


10.  COMMON SHARES
Changes in the number of common shares outstanding during the three years ended
December 31, 1996, were as follows.
<TABLE>
<CAPTION>
                                                                           Number of Shares                 Amount
------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                       <C>
Balance, December 31, 1993                                                      112,213,496               $480,006
1994:    Exercise of share options                                                  468,009                  3,053
         Conversion of preferred shares of subsidiary                                   298                      2
------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994                                                      112,681,803                483,061
1995:    Exercise of share options                                                  282,306                  1,517
         Conversion of preferred shares of subsidiary (note 11)                  16,916,695                134,387
------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995                                                      129,880,804                618,965
1996:    Exercise of share options                                                  644,062                  4,768
         Shares issued on acquisition of Santa Elina, net of issuance                 
          costs of $0.3 million (note 3)                                          8,830,915                 85,801
------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996                                                      139,355,781               $709,534
==================================================================================================================
</TABLE>

The company has suspended payment of dividends beginning in 1997. This will save
approximately $21.0 million over the next two years for mine development, based
on the company's prior practice of paying dividends totaling $0.075 per share as
was done in 1996, 1995 and 1994. Dividends payable to Canadian residents have
been converted to and paid in Canadian dollars.

Shelf registration
Pursuant to a shelf registration statement filed with the United States
Securities and Exchange Commission in 1994, the company may offer from time to
time up to $200 million in aggregate principal amount of debt securities, common
shares, and/or guarantees of debt securities issued by Echo Bay Resources, Inc.,
a wholly owned subsidiary of the company.

In connection with the U.S. shelf registration, the company also filed a shelf
debt prospectus and a shelf equity prospectus with Canadian securities
regulatory authorities. Under these prospectuses, the company could issue up to
$125 million of debt securities and up to 10 million common shares.

Shareholder rights plan
Under the company's shareholder rights plan, if any person or group were to
announce an intention to acquire, or were to acquire, 20% or more of the
company's common shares without complying with the conditions of a "permitted
bid," then the owners of each share of common stock (other than the acquiring
person or group) would become entitled to exercise a right to buy one additional
common share at 50% of the lowest share price on The Toronto Stock Exchange
during the prior 90 days. The plan expires in 2004, subject to reconfirmation by
shareholders in 1999.

A "permitted bid," which does not trigger the entitlement to acquire shares
under the plan, is one that complies with applicable securities law in all
jurisdictions where at least 5% of the company's common shares are owned; is
made to all shareholders for all outstanding shares; is open for a minimum of 60
days; takes up no shares until at least 66-2/3% of the outstanding shares have
been tendered to the bid, including those owned by the acquiring person or
group; and meets certain other conditions.

                                       73
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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


Employee share incentive plan and director equity plan
These plans provide for the granting of options to officers, key employees, and
eligible directors to purchase common shares. Outstanding share options under
the plans are exercisable at prices equal to the market value on the date of
grant. The option holder may exercise each share option over a period of 10
years from the date of grant. Options generally vest in 25% increments on the
first, second, third and fourth year anniversaries following the grant date.
Option prices are denominated in Canadian dollars.

Changes in the number of options outstanding during the three years ended
December 31, 1996 were as follows.

<TABLE>
<CAPTION>
                                                             Employee Share Incentive Plan          Director Equity Plan  Weighted
                                                             -----------------------------          ------------------------------
                                                               Weighted                              Weighted  
                                                              Number of            Average          Number of            Average
                                                                 Shares     Exercise Price             Shares     Exercise Price
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                <C>                   <C>                <C>
Options outstanding, December 31, 1993                        3,613,414          C$  11.24                 --             C$  --
1994:   Options granted                                         615,618              15.80             55,200              14.63
        Options exercised                                      (468,009)              8.78                 --                 --
        Options forfeited                                       (16,400)             13.80                 --                 --
--------------------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1994                        3,744,623          C$  12.29             55,200          C$  14.63
1995:   Options granted                                         989,400              13.33             65,000              12.50
        Options exercised                                      (317,755)              8.16                 --                 --
        Options forfeited                                      (113,576)             13.06                 --                 --
--------------------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1995                        4,302,692          C$  12.81            120,200          C$  13.48
1996:   Options granted                                       1,065,130              12.26             40,000              18.25
        Options exercised                                      (694,758)             10.86             (2,300)             14.63
        Options forfeited                                      (244,247)             14.42                 --                 --
        Options expired                                         (90,150)             14.88                 --                 --
--------------------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1996                        4,338,667          C$  12.85            157,900          C$  14.67
================================================================================================================================
</TABLE>

The number of shares reserved for future grants at December 31, 1996 are 288,085
under the Employee Share Incentive Plan and 264,800 under the Director Equity
Plan. The number and weighted average price of shares exercisable under the
Employee Share Incentive Plan are 2,282,905 at C$12.70 at December 31, 1996;
2,502,927 at C$11.82 at December 31, 1995; and 2,245,720 at C$11.24 at December
31, 1994.  The number and weighted average price of shares exercisable under the
Director Equity Plan are 41,550 at C$13.79 at December 31, 1996 and 13,800 at
C$14.63 at December 31, 1995.

Options outstanding at December 31, 1996 had the following characteristics.

Employee Share Incentive Plan
-----------------------------
<TABLE>
<CAPTION>
     Number                Exercise         Weighted Avg.    Weighted Average      Number of           Weighted Avg.  
  of Shares                   Price     Exercise Price of         Years Until         Shares      Exercise Price  of 
Outstanding                   Range    Shares Outstanding          Expiration    Exercisable     Shares  Exercisable 
--------------------------------------------------------------------------------------------------------------------
<S>            <C>                              <C>                        <C>      <C>                    <C>
    239,725    C$   5.75 - C$  8.13             C$   5.97                   6        224,925               C$   5.92
    631,072    C$   8.88 - C$  9.75             C$   9.12                   3        631,072               C$   9.12
  2,104,940    C$  10.70 - C $13.38             C$  12.20                   8        576,371               C$  13.07
  1,277,880    C$  15.75 - C$ 18.88             C$  16.46                   8        804,912               C$  16.48
     85,050    C$  19.13 - C$ 25.94             C$  21.40                   5         45,625               C$  23.37
--------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       74
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

 
Director Equity Plan
--------------------

<TABLE>
<CAPTION>
                                                   Weighted                                                 Weighted Avg.
  Number of                 Exercise         Exercise Price               Weighted         Number of       Exercise Price
     Shares                    Price              of Shares          Average Years            Shares            of Shares
Outstanding                    Range            Outstanding       Until Expiration       Exercisable          Exercisable
------------------------------------------------------------------------------------------------------------------------------
<S>             <C>                          <C>                  <C>                    <C>               <C> 
    157,900     C$  12.50  C$  18.25             C$  14.67                       8            41,550            C$  13.79
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

11.  PREFERRED STOCK OF A SUBSIDIARY
There was no preferred stock of a subsidiary outstanding as of December 31,
1996. In July 1992, the company received net proceeds of $136.3 million from the
sale of 5.75 million shares of Series A cumulative preferred stock of a
financing subsidiary, Echo Bay Finance Corp. Quarterly dividends were paid on
the preferred shares totaling $1.75 per share annually. On July 31, 1995, the
preferred stock became redeemable, in whole or in part, at the option of the
subsidiary.

In three separate calls for redemption during 1995, the entire issue of
preferred shares was converted into common shares of the company at 2.985 common
shares for each $25 preferred share or redeemed for cash at $26.225 per
preferred share plus accrued dividends. During 1995, 5,667,437 preferred shares
were converted into 16,916,695 of the company's common shares, and 82,313
preferred shares were redeemed for cash of $2.2 million.

12. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
    PRINCIPLES (GAAP)
U.S. GAAP financial statements
The company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in Canada. These differ in some
respects from those in the United States as described below.

In accordance with Canadian GAAP, certain long-term foreign exchange contracts
are considered to be hedges of the cost of goods to be purchased in foreign
currencies in future periods. Gains and losses related to changes in market
values of such contracts are recognized as a component of the cost of goods when
the related hedged purchases occur. Under U.S. GAAP, changes in market value
would be included in current earnings.

In accordance with Canadian GAAP, certain share investments are carried at cost
as long-term investments (note 4). These investments would be written down and a
loss recognized in earnings only when there is a loss in value that is other
than temporary. Under U.S. GAAP, these investments would be marked to market,
with unrealized gains or losses excluded from earnings and reported as a
separate component of common shareholders' equity, net of tax. The unrealized
gain on share investments carried at cost is $5.0 million after a nil tax effect
as of December 31, 1996 ($9.8 million at December 31, 1995).

In accordance with Canadian GAAP, the company uses the deferral method of
accounting for income taxes. Under U.S. GAAP, the company would use the
liability method of accounting for income taxes.

In accordance with Canadian GAAP, the cost of the Santa Elina acquisition
included the market value of the 8.8 million common shares ($9.75 per share or
$86.1 million) issued by the company on July 16, 1996 (note 3). Under U.S. GAAP,
the cost would be determined based on the market value of the company's common
shares on April 9, 1996, the date of the commitment agreement ($13.875 per share

                                       75
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

     
or $122.5 million). The difference between the methods would increase mining
properties and common shares under U.S. GAAP by $36.4 million. Additionally, in
accordance with Canadian GAAP, the allocation of the purchase price of the Santa
Elina acquisition does not include any adjustment for the effect of deferred
income taxes. U.S. GAAP requires the recognition of deferred tax assets and
liabilities for the tax effects of the differences between the allocated values
and the tax bases of the assets acquired and the liabilities assumed. This would
result in an increased allocation to mining properties of $46.6 million and a
corresponding deferred income tax liability related to the tax effect of the
future amortization resulting from the increased basis. Under U.S. GAAP the
recognition of deferred taxes would increase mining properties and deferred
income taxes by $46.6 million, net of activity after acquisition of $1.1
million.     

In accordance with Canadian GAAP, the company's mining properties are amortized
over proven and probable reserves and other mineralization. Under U.S. GAAP,
only proven and probable reserves would be used as the basis for amortization.
The difference between the two accounting principles is not material to the
results of operations for any of the periods presented. On a cumulative basis
under U.S. GAAP, mining properties and common shareholders' equity would be
$10.6 million lower and deficit would be $10.6 million higher at December 31,
1996 ($11.4 million lower and $11.4 million higher at December 31, 1995).

The effects on the consolidated statement of earnings of the above differences
would have been as follows.
<TABLE>    
<CAPTION>
                                                                    1996                  1995                  1994
--------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                    <C>                     <C>
Net earnings (loss) under Canadian GAAP                   $     (176,702)       $      (50,060)        $       8,023
Change in market value of foreign  exchange                        2,168                 3,605                 4,198
 contracts
Amortization of mining properties                                    832                 1,900                 2,000
Application of liability method for  accounting                       --                    --                (4,900)
 for income taxes
--------------------------------------------------------------------------------------------------------------------
Net earnings (loss) under U.S. GAAP                       $     (173,702)      $       (44,555)        $       9,321
====================================================================================================================
Earnings (loss) per share under U.S. GAAP                 $        (1.29)      $         (0.38)        $        0.08
====================================================================================================================
</TABLE>     
    
The effects on the consolidated balance sheet of the GAAP differences would have
been as follows.    

<TABLE>    
<CAPTION>
                                                           Long-term
                                                             Foreign                          Mining    
                                           Canadian         Exchange          Share       Properties    Santa Elina     U.S.
December 31, 1996                              GAAP        Contracts    Investments     Amortization    Acquisition     GAAP
---------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>             <C>             <C>           <C>               <C>           <C>
Long-term investments and other         
 assets                                 $    39,701     $      9,971          4,970   $           --    $        --   $   54,642
Mining properties                           405,011               --             --          (10,568)        83,074      477,517
Deferred income taxes                         8,392               --             --               --         46,646       55,038
Common shares                               709,534               --             --               --         36,428      745,962
Deficit                                     201,931           (9,971)            --           10,568             --      202,528
Common shareholders' equity                 492,309            9,971          4,970          (10,568)        36,428      533,110
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>     

                                       76
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

 
<TABLE>    
<CAPTION>
                                                            Long-term
                                                              Foreign                            Mining
                                              Canadian       Exchange            Share       Properties            U.S.
December 31, 1995                                 GAAP      Contracts      Investments     Amortization            GAAP
-----------------------------------------------------------------------------------------------------------------------
<S>                                          <C>             <C>              <C>          <C>                 <C>
Long-term investments and other                
 assets                                      $ 56,956        $  7,803          $13,768     $        --         $ 78,527
Mining properties                             318,219              --               --         (11,400)         306,819
Deficit                                        15,109          (7,803)              --          11,400           18,706
Common shareholders' equity                   588,852           7,803           13,768         (11,400)         599,023
=======================================================================================================================
</TABLE>     
    
The rollforward of common shareholders' equity from December 31, 1995 to
December 31, 1996 under U.S. GAAP would have been as follows.     

<TABLE>    
<CAPTION>
                                                                             1996
---------------------------------------------------------------------------------
<S>                                                              <C>
Balance, beginning of year                                              $ 599,023
Net loss                                                                 (173,702)
Dividends on common shares (note 10)                                      (10,120)
Common shares issued                                                      126,997
Unrealized loss on share investments                                       (8,798)
Foreign currency translation                                                 (290)
---------------------------------------------------------------------------------
Balance, end of year                                                    $ 533,110
=================================================================================
</TABLE>     

Under U.S. GAAP, the 1996 common share issuance for the acquisition of Santa
Elina and the 1995 preferred stock conversions to common shares would not have
been shown in the consolidated statement of cash flow as they were non-cash
transactions. Accordingly, common shares issued in acquisition of Santa Elina
and the cost of the Santa Elina acquisition would have been reduced by $86.1
million each for 1996, and preferred share conversions and common share issues
would have been reduced by $134.3 million each for 1995 on the consolidated
statement of cash flow.

Effective January 1, 1996, for the purpose of preparing U.S. GAAP financial
information, the company adopted FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present. Implementation of
Statement No. 121 had no effect on the U.S. GAAP financial information of the
company.

                                       77
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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


U.S. GAAP tax disclosure
Significant components of the company's deferred tax liabilities and assets
under U.S. GAAP disclosure requirements would have been as follows.
<TABLE>
<CAPTION>
                                                                     1996                                              1995
                              --------------------------------------------     ---------------------------------------------
                                                  U.S.  and                                          U.S.  and       
millions of U.S. dollars              Canada          other          Total              Canada           other         Total
--------------------------------------------------------------------------     ---------------------------------------------
<S>                                   <C>           <C>            <C>                  <C>             <C>           <C>
Deferred tax liabilities:
 Tax over book depreciation           
  and depletion                       $ 23.5        $  51.8        $  75.3              $ 17.0          $ 35.2        $ 52.2
 Other tax liabilities                   7.5             --            7.5                 8.0              --           8.0
--------------------------------------------------------------------------     ---------------------------------------------
Total deferred tax liabilities          31.0           51.8           82.8                25.0            35.2          60.2
--------------------------------------------------------------------------     ---------------------------------------------
 
Deferred tax assets:
 Net operating loss and                 
  other carryforwards                   13.1           93.9          107.0                 5.3            87.7          93.0
 Book over tax depreciation             
  and depletion                         22.9             --           22.9                22.6              --          22.6
 Accrued liabilities                     2.7           29.1           31.8                 2.5            11.3          13.8
 Other tax assets                        0.5            7.6            8.1                 1.3             6.9           8.2
--------------------------------------------------------------------------     ---------------------------------------------
Total deferred tax assets               
 before allowance                       39.2          130.6          169.8                31.7           105.9         137.6
Valuation allowance for                
 deferred tax assets                   (16.0)        (126.0)        (142.0)              (14.3)          (71.2)        (85.5)
--------------------------------------------------------------------------     ---------------------------------------------
Total deferred tax assets               23.2            4.6           27.8                17.4            34.7          52.1
--------------------------------------------------------------------------     ---------------------------------------------
 
Net deferred tax liabilities          $  7.8        $  47.2        $  55.0              $  7.6          $  0.5        $  8.1
==========================================================================     =============================================
</TABLE>

The net increase in the valuation allowance for deferred tax assets was $56.5
million for 1996 and $10.0 million for 1995.

Stock-based compensation
The U.S. Financial Accounting Standards Board ("FASB") Statement No. 123,
"Accounting for Stock-Based Compensation," is applicable for fiscal years
beginning after December 15, 1995 and gives the option to either follow fair
value accounting or to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
Interpretations. The company has determined that it will elect to continue to
follow APB No. 25 and related Interpretations in accounting for its employee and
director stock options in financial information prepared in conformity with U.S.
GAAP.


In accordance with Canadian GAAP and U.S. GAAP (under APB No. 25), the company
does not recognize compensation expense for stock option grants in the earnings
statement, as the market prices of the underlying stock on the grant dates do
not exceed the exercise prices of the options granted.

                                       78

<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

 
Had the company adopted statement No. 123 for its U.S. GAAP disclosure, the
following net losses would have been reported.

<TABLE>    
<CAPTION>
 
                                                        1996                   1995
--------------------------------------------------------------------------------------------
<S>                                          <C>                         <C>
Net loss under U.S. GAAP                           $(173,702)              $(44,555)
Pro forma stock compensation expense,  
  after a nil income tax effect                       (2,766)                  (455)
Pro forma net loss under U.S. GAAP                 $(176,468)              $(45,010)
---------------------------------------------------------------------------------------------
Pro forma loss per share under U.S. GAAP           $   (1.31)              $  (0.39)
=============================================================================================
</TABLE>     

The company has utilized the Black-Scholes option valuation model to estimate
the fair value of options granted, assuming a weighted average option life of 6
years, risk-free interest rates ranging from 5.40% to 6.64%, a 1% dividend yield
and a volatility factor of 40%. The weighted average fair value of options
granted is estimated at $4.18 per share in 1996 and $4.37 per share in 1995.

Other
The estimated fair values of financial instruments are set out below and in note
15. The fair values were determined from quoted market prices.
<TABLE>
<CAPTION>
                                                                         1996                                      1995
                                                  ---------------------------               ---------------------------
                                                  Carrying          Estimated               Carrying          Estimated
millions of U.S. dollars                            Amount         Fair Value                 Amount         Fair Value
-----------------------------------------------------------------------------------------------------------------------
<S>                                               <C>         <C>                           <C>         <C>
Cash and cash equivalents                           $103.2             $103.2                 $185.8             $185.8
Long-term investments                               $ 39.7             $ 44.7                 $ 57.0             $ 70.7
Debenture payable and  other currency               
 loans                                              $ 65.4             $ 65.1                 $ 28.1             $ 28.0
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       79
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

 
13.  JOINT VENTURES
Summarized below are company's 50% interest in the Round Mountain mine and, in
1996, 51% interest in Santa Elina (note 3), accounted for by the proportionate
consolidation method.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                    1996                  1995                 1994
--------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                   <C>                   <C>
Revenues                                                        $ 79,865              $ 67,843              $ 79,806
Operating costs                                                  (45,437)              (35,028)              (37,547)
Royalties                                                         (6,482)               (5,266)               (6,833)
Production taxes                                                    (886)                 (686)               (1,735)
Depreciation and amortization                                    (14,178)              (14,488)              (15,050)
Reclamation and mine closure                                        (945)                   --                    --
Exploration                                                       (2,862)                  (24)                  (37)
Other                                                               (391)                 (143)                   87
--------------------------------------------------------------------------------------------------------------------
Earnings before income taxes                                    $  8,684              $ 12,208              $ 18,691
====================================================================================================================
 
Current assets                                                  $ 63,171              $  6,575              $  7,911
Non-current assets                                               237,336               102,847               101,914
Current liabilities                                              (16,515)               (7,870)              (13,789)
Non-current liabilities                                          (18,632)               (7,191)              (17,332)
--------------------------------------------------------------------------------------------------------------------
Equity                                                          $265,360              $ 94,361              $ 78,704
====================================================================================================================
 
Net cash provided (used) by:
 Operating activities                                           $ 16,738              $ 42,853              $ 46,207
 Investing activities                                            (20,944)              (15,415)               (2,661)
 Financing activities                                             (3,339)                   --                    --
--------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash                                 $ (7,545)             $ 27,438              $ 43,546
====================================================================================================================
</TABLE> 

14.  GEOGRAPHIC SEGMENT INFORMATION
Financial information regarding geographic segments is set out below.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                    1996                  1995                  1994
--------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                    <C>                   <C>
Revenue:
 Canada                                                        $  63,859              $ 67,026              $ 69,468
 United States                                                   273,457               293,704               308,132
--------------------------------------------------------------------------------------------------------------------
                                                               $ 337,316              $360,730              $377,600
====================================================================================================================
 
Earnings (loss) before income taxes
 Canada                                                        $ (32,792)             $(41,407)             $(15,183)
 United States                                                  (143,725)               (2,452)               28,181
 Brazil and other                                                    433                  (883)                   --
--------------------------------------------------------------------------------------------------------------------
                                                                (176,084)              (44,742)               12,998
Income tax expense (recovery)                                        618                (3,206)               (4,323)
--------------------------------------------------------------------------------------------------------------------
Earnings (loss) before preferred stock dividends                (176,702)              (41,536)               17,321
Dividends on preferred stock of subsidiary                            --                 8,524                 9,298
--------------------------------------------------------------------------------------------------------------------
Net earnings (loss)                                            $(176,702)             $(50,060)             $  8,023
====================================================================================================================
 
Assets:
 Canada                                                        $ 236,482              $350,329              $140,035
 United States                                                   406,750               488,250               741,628
 Brazil and other                                                188,913                32,582                    --
--------------------------------------------------------------------------------------------------------------------
Total assets                                                   $ 832,145              $871,161              $881,663
====================================================================================================================
</TABLE>

                                       80
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

 
15.  HEDGING ACTIVITIES AND COMMITMENTS
In the first quarter of 1997 the company repurchased its 218,000 ounce gold
commitment which hedged the $84.0 million bond obligation (note 5) and
repurchased all of its gold and silver forward sales positions, which consisted
of 654,000 ounces of gold with delivery dates ranging from 1997 to 2002 and 8.5
million ounces of silver with delivery dates ranging from 1997 to 1999. These
transactions resulted in cash proceeds of $63.3 million which are expected to be
used, together with existing cash, to repay the $84.0 million bond obligation in
March 1997. This $63.3 million has been deferred and will be recognized in
earnings as the formerly hedged gold and silver production is sold. The gain
will be recognized in revenue as follows: $14.1 million in 1997, $14.8 million
in 1998, $27.7 million in 1999 and $6.7 million in 2000 and beyond. To provide
protection against a decrease in gold prices, the company purchased 450,000
ounces of gold put options and sold 300,000 ounces of gold call options for a
net cost of $0.4 million.

This note to the company's consolidated financial statements shows the company's
pro forma hedge and commitments as of December 31, 1996, adjusted to reflect the
first quarter 1997 transactions described above.

Gold and silver commitments
The company's pro forma gold and silver commitments as of December 31, 1996,
adjusted to reflect the first quarter 1997 transactions described above, were as
follows.
<TABLE>
<CAPTION>
 
                                    Gold          Average  
                                   Loans   Price of Loans
                                (ounces)      (per ounce)
---------------------------------------------------------
<S>                               <C>           <C>
1997                              27,569          $   400
1998                              29,756              399
1999                              15,367              393
2000                              12,031              388
2001                               6,563              388
---------------------------------------------------------
                                  91,286          $   396
=========================================================
</TABLE>

The delivery prices on the gold loans stated above represent the prices
established per the gold loan agreements. Gold loans are remeasured at each
balance sheet date, resulting in deferred losses of $2.5 million at December 31,
1996. These losses are netted against deferred income and will be included in
revenue when the production related to the loans is sold. See note 5.

                                       81
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

 
The company's pro forma option position as of December 31, 1996, adjusted to
reflect the first quarter 1997 transactions described above, was as follows.
<TABLE>
<CAPTION>
 
                                                      Put Options Purchased                          Call Options Sold
                                      --------------------------------------    --------------------------------------
                                                               Strike Price                               Strike Price
                                                   Ounces         per Ounce                  Ounces          per Ounce
----------------------------------------------------------------------------------------------------------------------
<S>                                              <C>           <C>                           <C>          <C>
Gold
----
1997                                              300,000              $ 345                150,000              $ 389
1998                                              150,000                345                150,000                398
----------------------------------------------------------------------------------------------------------------------
                                                  450,000              $ 345                300,000              $ 394
======================================================================================================================
Silver
------
1997                                            1,440,000              $5.40              1,440,000              $6.43
----------------------------------------------------------------------------------------------------------------------
                                                1,440,000              $5.40              1,440,000              $6.43
======================================================================================================================
</TABLE>

Currency position
The company's obligations to purchase Canadian dollars as of December 31, 1996
were as follows.

<TABLE>
<CAPTION>                                                                  
-------------------------------------------------------------------------------------------------------------------
                                                                           Canadian                   Exchange Rate
                                                                            Dollars               (C$ to U.S.$1.00)
-------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                        <C>
1997                                                                   $ 26,200,000                            1.49
1998                                                                     25,200,000                            1.52
1999                                                                     25,200,000                            1.56
2000                                                                     25,200,000                            1.59
-------------------------------------------------------------------------------------------------------------------
                                                                       $101,800,000                            1.54
===================================================================================================================
</TABLE>

Crude oil position
The company's swap contracts and forward purchase commitment as of December 31,
1996 were as follows.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                         Barrels of 
                                                                          Crude Oil                       Price per
                                                                          Purchased                          Barrel
-------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                              <C>
1997                                                                        397,000                          $17.95
1998                                                                        390,000                           17.57
1999                                                                         20,000                           17.63
-------------------------------------------------------------------------------------------------------------------
                                                                            807,000                          $17.76
===================================================================================================================
</TABLE>

Other hedging activity information
The company assesses the exposure that may result from a hedging transaction
prior to entering into the commitment, and only enters into transactions which
it believes accurately hedge the underlying risk and could be safely held to
maturity. The company does not actively engage in the practice of trading
derivative securities for profit. The company regularly reviews its unrealized
gains and losses on hedging transactions.

                                       82
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

 
Shown below are the carrying amounts and unrealized gains or losses on the
company's hedging positions at December 31, 1996 and 1995, and pro forma at
December 31, 1996, adjusted to reflect the first quarter 1997 transactions
described above.
<TABLE>
<CAPTION>
 
                                                         At December 31, 1996                Pro forma at December 31, 1996
                                    -----------------------------------------     -----------------------------------------
                                                Carrying           Unrealized                 Carrying           Unrealized     
                                                  Amount          Gain (loss)                   Amount          Gain (loss)
-----------------------------------------------------------------------------     -----------------------------------------
<S>                                        <C>                   <C>                      <C>                  <C>
1996
----
Gold swaps (note 5)                        $      83,800         $      7,100             $        --          $         --
Gold loans (note 5)                               33,700                   --                   33,700                   --
Off-balance sheet instruments:
 Gold forward sales                                   --               50,300                       --                   --
 Silver forward sales                                 --                8,800                       --                   --
 Gold options    - puts                              400                  --                     2,300                   --
                 - calls                              --                  --                    (1,500)                  --
 Silver options  - puts                            1,000                (300)                    1,000                 (300)
                 - calls                          (1,000)               1,000                   (1,000)               1,000
 Foreign currency contracts                           --               10,000                       --               10,000
 Crude oil contracts                                  --                3,000                       --                3,000
-----------------------------------------------------------------------------     -----------------------------------------
                                                                 $     79,900                                  $     13,700
=============================================================================     =========================================
1995
----
Gold swaps (note 5)                        $     101,480         $      3,600
Gold loan (note 5)                                23,279                   --
Off-balance sheet instruments:
 Gold forward sales                                   --               34,900
 Silver forward sales                                 --                6,400
 Gold and silver options  - puts                     924                 (546)      
                          - calls                   (900)               2,000
 Foreign currency contracts                           --                7,800
 Crude oil contracts                                  --                 (300)
-----------------------------------------------------------------------------
                                                                 $     53,500
=============================================================================
</TABLE>

Fair values are estimated for the contract settlement dates based on market
quotations of various input variables. These variables are used in valuation
models that estimate the fair market value.

The credit risk exposure related to all hedging activities is limited to the
unrealized gains on outstanding contracts based on current market prices. To
reduce counterparty credit exposure, the company deals only with large credit-
worthy financial institutions, and limits credit exposure to each. In addition,
to allow for situations where positions may need to be reversed, the company
deals only in markets it considers highly liquid.

Most of the company's hedging transactions have no margin requirements. In some
instances, however, mainly for the longer-term forward sales and options, margin
deposits are required when the market value exceeds the contract value by a
predetermined amount.

The fair value of the company's hedged position can be affected by market
conditions beyond the company's control. The effect of changes in various market
factors on the company's pro forma outstanding hedged position at December 31,
1996, adjusted to reflect the first quarter 1997 transactions described above,
would be as follows.

                                       83
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

 
<TABLE>
<CAPTION>
                                                                                Effect on Market Value  
                                                                                    of Hedged Position
                                                  Amount of Change                (thousands of U.S.$)
------------------------------------------------------------------------------------------------------
<S>                                                <C>                          <C>
Change in:
 Gold prices                                         $ 10.00/ounce                              $2,400
 Silver prices                                        $ 0.25/ounce                                 300
 Canadian dollar                                        U.S.$ 0.01                               1,000
 Crude oil prices                                    $ 1.00/barrel                                 800
 Interest rates (effect on gold and silver                      
  options and gold loans)                                       1%                                 750
------------------------------------------------------------------------------------------------------
</TABLE>

Hedging gains and losses represent the difference between spot or market prices
and realized amounts. Shown below are the hedging gains (losses) recognized in
earnings.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                    1996                  1995                  1994
--------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                    <C>                  <C>
Revenue:
 Gold loans and swaps                                            $(3,943)               $ (612)              $ 3,278
 Gold forward sales                                                1,541                 2,849                (1,278)
 Silver loans and swaps                                               --                    --                 7,539
 Silver forward sales                                              1,910                 1,909                (3,703)
 Gold and silver options                                             534                   394                 1,113
Operating expenses:
 Foreign currency contracts                                        1,459                   839                  (705)
 Crude oil contracts                                               1,120                   326                  (631)
Dividends on preferred stock of subsidiary:
 Interest rate swap                                                   --                  (493)                  764
--------------------------------------------------------------------------------------------------------------------
                                                                 $ 2,621                $5,212               $ 6,377
====================================================================================================================
</TABLE>
16.  OTHER COMMITMENTS AND CONTINGENCIES
Royalties
Round Mountain mine production is subject to a net smelter return royalty
ranging from 3.53% at gold prices of $320 per ounce or less to 6.35% at gold
prices of $440 per ounce or more. Its production is also subject to a gross
revenue royalty of 3%, reduced to 1 1/2% after $75.0 million has been paid. For
the period from inception through December 31, 1996, cumulative royalties of
$16.8 million have been paid on the gross revenue royalty.

McCoy/Cove production is subject to a 2% net smelter return royalty. This
royalty is based on sales less certain deductions.

A portion of production from the Lamefoot area of the Kettle River mine is
subject to a 5% net smelter return royalty. K-2 area production at Kettle River
is subject to a 5% gross proceeds royalty and a net smelter return royalty
ranging from 2% at gold prices of $300 per ounce or less to 3% at gold prices of
$400 per ounce or more.

Operating lease commitments
The company's principal lease commitments are for office premises, aircraft and
equipment. The company's commitments under the remaining terms of the leases are
approximately $23.7 million,
payable as follows: $5.9 million in 1997, $2.8 million in 1998, $2.7 million in
1999, $2.5 million in 2000, $2.5 million in 2001 and $7.3 million thereafter.

                                       84
<PAGE>
 
                             ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1996

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

 
Contingencies
At December 31, 1996, the company accrued $20.0 million for estimated
reclamation and closure costs associated with the Alaska-Juneau development
property. Actual spending related to reclamation and closure costs may differ
from the current estimate of $20.0 million. The provision for future reclamation
and closure costs is reviewed periodically and adjusted as additional
information becomes available.

In 1995, Summa Corporation commenced in Nevada state court a lawsuit against the
company and the predecessor owner of the McCoy/Cove and Manhattan mines,
claiming improper deductions in calculation of royalties payable over several
years of production at McCoy/Cove and the former Manhattan mine. Summa
Corporation filed a motion for summary judgment seeking $10.3 million for
allegedly underpaid royalties plus interest. The court denied Summa's motion.
The case is scheduled for trial in the spring of 1997. The company has accrued
$1.7 million related to the Summa litigation, including $1.5 million in 1996.

                                       85
<PAGE>
 
                                    PART IV
    
               ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
                            AND REPORTS ON FORM 8-K


1.   Exhibits

     23.1 Consent of Ernst & Young.     


                                  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.

                              ECHO BAY MINES LTD.

    
                              By:  /s/ Robert L. Leclerc
                                   ----------------------------------------
                                       Robert L. Leclerc, Q.C., Chairman,
                                       Chief Executive Officer and Director

                              Date:    February 11, 1998     

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 in
the capacity and on the date indicated.

<TABLE>    
<CAPTION>
   Signature                               Title                            Date
   ---------                               -----                            ----                
<S>                               <C>                                    <C>
 
/s/ Robert L. Leclerc             Chairman, Chief                        February 11, 1998
--------------------------------  Executive Officer and Director
    Robert L. Leclerc, Q.C.
                                  Senior Vice President,
/s/ Peter H. Cheesbrough          Finance and Chief Financial
--------------------------------  Officer
    Peter H. Cheesbrough
 
/s/ Tom S. Q. Yip                 Controller and Principal
--------------------------------  Accounting Officer
    Tom S. Q. Yip
 
* JOHN N. ABELL
* LATHAM C. BURNS
* PIERRE CHOQUETTE
* JOHN G. CHRISTY
* PETER CLARKE
* ROBERT L. LECLERC
* JOHN F. MCOUAT
* MONICA E. SLOAN
* R. GEOFFREY P. STYLES           *  A majority of the
                                     Board of Directors
 
* By  /s/ Lois-Ann L. Brodrick                                           February 11, 1998
      --------------------------
      Lois-Ann L. Brodrick, Attorney-in-fact
</TABLE>     

                                       86