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

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

                  For the fiscal year ended December 31, 1998

[ ]   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            80111-4957
             Englewood, CO                           ----------
         --------------------                        (Zip Code)
 (Address of principal executive offices)

      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 February 19, 1999.......................  U.S.$264,341,433
                                                               ----------------

Number of common shares outstanding as of February 19, 1999..       140,607,145
                                                               ----------------
================================================================================
<PAGE>

                               TABLE OF CONTENTS
<TABLE> 
<CAPTION> 
                                                                                                          PAGE
                                                                                                          ----
                          PART I                                                                        
<S>                                                                                                       <C>
ITEMS 1 AND 2-BUSINESS AND PROPERTIES.....................................................................    1
   INTRODUCTION...........................................................................................    1
   OPERATIONS SUMMARY.....................................................................................    1
    Gold and Silver Production............................................................................    1
    Production Costs......................................................................................    2
    Revenue...............................................................................................    3
   RESERVES...............................................................................................    4
    Change in Proven and Probable Reserves................................................................    5
   OTHER MINERALIZATION...................................................................................    6
   CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE
   SECURITIES LITIGATION REFORM ACT OF 1995...............................................................    7
   ROUND MOUNTAIN.........................................................................................    8
    Geology and Ore Reserves..............................................................................    9
    Mining and Processing.................................................................................   10
   MCCOY/COVE.............................................................................................   12
    Geology and Ore Reserves..............................................................................   14
    Mining and Processing.................................................................................   14
   KETTLE RIVER...........................................................................................   16
    Geology and Ore Reserves..............................................................................   17
    Mining and Processing.................................................................................   17
   LUPIN..................................................................................................   19
    Geology and Ore Reserves..............................................................................   20
    Mining and Processing.................................................................................   21
    Supplies, Utilities and Transportation................................................................   21
    Water Supply and Waste Disposal.......................................................................   22
   DEVELOPMENT PROGRAMS...................................................................................   23
    Aquarius..............................................................................................   23
    Paredones Amarillos...................................................................................   24
   OTHER PROJECTS.........................................................................................   26
    Kuranakh..............................................................................................   26
    Kingking..............................................................................................   26
    Santa Elina...........................................................................................   27
   EXPLORATION............................................................................................   27
   ALASKA-JUNEAU..........................................................................................   27
   SUNNYSIDE..............................................................................................   28
   OTHER..................................................................................................   28
    Precious Metal Sales and Hedging Activities...........................................................   28
    Governmental and Environmental Regulation.............................................................   29
    Employees.............................................................................................   33
    Executive Officers of the Registrant..................................................................   34
    Mining Risks and Insurance............................................................................   35
    Supplies, Utilities and Transportation................................................................   35
    Waste Disposal........................................................................................   35
    Royalties.............................................................................................   35
    History of the Company................................................................................   36
   RISK FACTORS...........................................................................................   37
    Recent Losses.........................................................................................   37
</TABLE> 
                                       i
<PAGE>
 
<TABLE> 
<S>                                                                                                          <C>  
    Liquidity and Capital Resources.......................................................................   37
    Gold and Silver Prices................................................................................   38
    Estimation of Asset Carrying Values...................................................................   38
    Uncertainty of Reserve and Other Mineralization Estimates.............................................   39
    Mining and Processing.................................................................................   39
    Mine Development Risks................................................................................   40
    Exploration Risks.....................................................................................   40
    Mining Risks and Insurance............................................................................   41
    Governmental Regulation...............................................................................   41
    Risk of International Operations......................................................................   42
    Title to Properties...................................................................................   42
    Inflation and Currency Risks..........................................................................   43
    Year 2000 Risks.......................................................................................   43
   GLOSSARY...............................................................................................   44
   GOLD PRICES............................................................................................   48
   SILVER PRICES..........................................................................................   48
   EXCHANGE RATES.........................................................................................   48
   CONVERSION TABLE.......................................................................................   48
   MINE PROCESSING........................................................................................   49

ITEM 3-LEGAL PROCEEDINGS..................................................................................   52
   ALASKA-JUNEAU..........................................................................................   52
   OTHER..................................................................................................   52

ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................   52

                                    PART II

ITEM 5-MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS..........................   53
   MARKET INFORMATION.....................................................................................   53
   DIVIDENDS..............................................................................................   53
   CERTAIN TAX MATTERS....................................................................................   54
    United States Federal Income Tax Considerations.......................................................   54
    Canadian Federal Income Tax Considerations............................................................   55

ITEM 6-SELECTED FINANCIAL DATA............................................................................   56

ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............   58
   SUMMARY................................................................................................   58
   RESULTS OF OPERATIONS..................................................................................   58
    Revenue...............................................................................................   58
    Gold and Silver Hedging...............................................................................   59
    Operating Costs.......................................................................................   59
    Royalties.............................................................................................   59
    Production Taxes......................................................................................   59
    Depreciation and Amortization.........................................................................   60
    Reclamation and Mine Closure..........................................................................   60
    General and Administrative............................................................................   60
    Exploration and Development...........................................................................   60
    Interest and Other....................................................................................   60
</TABLE> 
                                      ii
<PAGE>
 
<TABLE> 
<S>                                                                                                          <C>  
    Provision for Impaired Assets and Other Charges.......................................................   61
    Income Tax Expense....................................................................................   61
   LIQUIDITY AND CAPITAL RESOURCES........................................................................   61
   COMMITMENTS AND CONTINGENCIES..........................................................................   62
   IMPACT OF YEAR 2000....................................................................................   63

ITEM 7A-QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK........................................   64

ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................   66
   INDEX TO FINANCIAL STATEMENTS..........................................................................   66

QUARTERLY FINANCIAL HIGHLIGHTS............................................................................   99

ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............   99

                                   PART III

ITEM 10-DIRECTORS OF THE REGISTRANT.......................................................................   99

ITEM 11-EXECUTIVE COMPENSATION............................................................................   99

ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................   99

ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................   99

                                    PART IV

ITEM 14-EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
   REPORTS ON FORM 8-K....................................................................................  100

SIGNATURES................................................................................................  103
</TABLE> 
                                      iii
<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 mines, processes and explores for gold.  The Company also produces a
significant amount of silver at its McCoy/Cove mine in Nevada.  In 1998, the
Company had three operating mines: Round Mountain in Nevada, USA; McCoy/Cove in
Nevada, USA; and Kettle River in Washington, USA.  All are 100% owned except for
Round Mountain, which is 50% owned.

The Company's operations in 1998 were, and will continue to be, materially
affected by the price of gold, which declined from $369 per ounce at year end
1996 to $290 per ounce at year end 1997, and averaged $294 per ounce in 1998. In
1997, in view of the drop in the gold price, the Company deferred final
construction decisions on its two planned gold mines, Aquarius in Canada and
Paredones Amarillos in Mexico. See "Development Programs-Aquarius" and "-
Paredones Amarillos." In January 1998, the Company temporarily suspended
operations at its 100% owned Lupin mine in the Nunavut Settlement Area of the
Northwest Territories, Canada. See "Lupin."

The Company's exploration efforts focus on projects principally located in North
America where the Company already has an extensive gold mining infrastructure.

In 1998, the Company produced a total of 536,438 ounces of gold at an average
cash operating cost of $208 per ounce.  1998 silver production was 9,412,823
ounces.  In 1998, the Company reported a net loss of $20.1 million on revenues
of $232.2 million.  At December 31, 1998, the Company had 6.8 million ounces of
gold reserves and 38.8 million ounces of silver reserves.

In 1999, the Company expects to produce from 455,000 to 475,000 ounces of gold
at an average cash operating cost of $235 to $245 per ounce and between 7 and 8
million ounces of silver.  For a general identification of risk factors involved
in the Company's business, see "Cautionary 'Safe Harbor' Statement under the
United States Private Litigation Reform Act of 1995" and "Risk Factors."

OPERATIONS SUMMARY
Gold and Silver Production
--------------------------
Gold and silver production for the last three years is provided below.

<TABLE>
<CAPTION>
GOLD PRODUCTION (OUNCES)                                                   1998                1997                1996
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                 <C>                 <C>
Round Mountain (50%)                                                    255,252             238,840             205,487
McCoy/Cove                                                              167,494             187,034             271,731
Kettle River                                                            113,692             129,866             124,910
Lupin                                                                        --             165,335             166,791
-----------------------------------------------------------------------------------------------------------------------
Total gold                                                              536,438             721,075             768,919
=======================================================================================================================
Percentage increase (decrease) from prior year                            (25.6%)              (6.2%)               1.9%
=======================================================================================================================

<CAPTION>  
SILVER PRODUCTION (OUNCES)                                                 1998                1997                1996
----------------------------------------------------------------------------------------------------------------------- 
                                                                      <C>                <C>                  <C> 
Total silver-all from McCoy/Cove                                      9,412,823          11,021,708           7,102,348
-----------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease) from prior year                            (14.6%)              55.2%              (40.3%)
=======================================================================================================================
</TABLE>

                                       1
<PAGE>
 
Production Costs
----------------

<TABLE>
<CAPTION>
PRODUCTION COSTS PER OUNCE OF GOLD PRODUCED                                1998                1997                1996
------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                 <C>                    <C>
  Direct mining expense                                                $    209             $   251               $ 262
  Deferred stripping and mine development costs                              (1)                 (3)                 (9)
  Inventory movements and other                                              --                   1                   1
----------------------------------------------------------------------------------------------------------------------- 
Cash operating costs                                                        208                 249                 254
  Royalties                                                                  11                   9                  11
  Production taxes                                                            2                   1                   3
-----------------------------------------------------------------------------------------------------------------------
Total cash costs                                                            221                 259                 268
  Depreciation                                                               62                  58                  64
  Amortization                                                               25                  32                  34
  Reclamation and mine closure                                                9                  10                   7
----------------------------------------------------------------------------------------------------------------------- 
Total production costs                                                 $    317             $   359               $ 373
=======================================================================================================================
Percentage increase (decrease) from prior year                            (11.7%)              (3.8%)               7.8%
=======================================================================================================================

<CAPTION>
CASH OPERATING COSTS PER OUNCE OF GOLD PRODUCED                            1998                1997                1996
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                  <C>                   <C>
Round Mountain                                                         $    198             $   207               $ 221
McCoy/Cove                                                                  203                 271                 271
Kettle River                                                                244                 227                 201
Lupin                                                                        --                 284                 299
-----------------------------------------------------------------------------------------------------------------------
Company consolidated weighted average                                  $    208             $   249               $ 254
=======================================================================================================================
Percentage increase (decrease) from prior year                            (16.5%)              (2.0%)              10.9%
=======================================================================================================================
</TABLE>

In 1998, the average cash operating cost per ounce was $208 compared with $249
in 1997 and $254 in 1996.  Cash operating costs per ounce were lower in 1998
reflecting the third quarter 1997 write-down of  deferred mining balances
(mining costs incurred in prior periods ratably charged to future production
ounces), lower reagent consumption and manpower reductions at McCoy/Cove, lower
costs due to higher production and due to the 1997 change in mine plan at Round
Mountain, and the absence in 1998 of higher cost Lupin production.  These
decreases were partially offset by higher costs associated with a full year's
mill production at Round Mountain and increased costs at Kettle River due to
lower production.  Cash operating costs per ounce were lower in 1997 compared
with 1996 due to increased dedicated pad tonnage and reusable pad recovery at
Round Mountain and reduced maintenance and administrative costs and increased
operating efficiencies at Lupin; partially offset by lower mill grades at Kettle
River.  The Company's consolidated cash operating cost target is $235 to $245
per ounce of gold produced in 1999.

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.
The reconciliation of cash operating costs per ounce to the financial statements
for the last three years is provided below.

RECONCILIATION OF CASH OPERATING
COSTS PER OUNCE TO FINANCIAL STATEMENTS

<TABLE> 
<CAPTION> 
Thousands of U.S. dollars, except per ounce amounts                        1998                1997                1996
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                 <C>                 <C>
Operating costs per financial statements                               $148,769            $213,120            $221,126
Change in finished goods inventory and other                             (1,704)             10,956                  70
Co-product cost of silver produced                                      (35,486)            (44,528)            (25,568)
----------------------------------------------------------------------------------------------------------------------- 
Cash operating costs                                                   $111,579            $179,548            $195,628
=======================================================================================================================
Gold ounces produced                                                    536,438             721,075             768,919
=======================================================================================================================
Cash operating costs per ounce                                         $    208            $    249            $    254
=======================================================================================================================
</TABLE>

                                       2
<PAGE>
 
Revenue
-------
The gold and silver ounces sold and other revenue data for the last three years
are set out below.

REVENUE DATA

<TABLE> 
<CAPTION> 
Year ended December 31                                             1998                     1997                     1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                     <C>                       <C>
Gold
----
Ounces sold                                                     553,130                  698,337                  777,512
Average price realized per ounce - revenue basis             $      333              $       362               $      384
Average price realized per ounce - cash basis/(1)/           $      340              $       345               $      390
Average market price per ounce                               $      294              $       332               $      388
Revenue (millions of U.S. dollars)                           $    183.9              $     252.6               $    298.9
Percentage of total revenue                                          79%                      83%                      89%
 
Silver
------
Ounces sold                                                   8,198,867               10,037,753                7,098,417
Average price realized per ounce - revenue basis             $     5.88              $      5.26               $     5.41
Average price realized per ounce - cash basis/(1)/           $     5.36              $      4.99               $     5.39
Average market price per ounce                               $     5.54              $      4.87               $     5.18
Revenue (millions of U.S. dollars)                           $     48.3              $      52.8               $     38.4
Percentage of total revenue                                          21%                      17%                      11%
-------------------------------------------------------------------------------------------------------------------------
Total revenue (millions of U.S. dollars)                     $    232.2              $     305.4               $    337.3
=========================================================================================================================
</TABLE>

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

The effects of changes in sales volume and prices were:

REVENUE VARIANCES

<TABLE> 
<CAPTION> 
Thousands of U.S. dollars
Year ended December 31                                            1998                    1997                    1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                     <C>                     <C>
Decrease in volume                                            $(62,291)               $(14,501)               $(20,412)
Lower gold prices                                              (16,040)                (15,880)                 (3,002)
Higher (lower) silver prices                                     5,083                  (1,506)                     --
----------------------------------------------------------------------------------------------------------------------
Decrease in total revenue from the previous  year             $(73,248)               $(31,887)               $(23,414)
======================================================================================================================
</TABLE>

The decrease in gold revenue from 1997 to 1998 was due to decreased gold sales
volume reflecting the absence of production from Lupin and decreased mill grades
at McCoy/Cove and Kettle River in 1998, and lower gold prices realized ($333 per
ounce in 1998 compared to $362 per ounce in 1997).  The decrease in silver
revenues from 1997 to 1998 was due to decreased production reflecting lower mill
grades, partially offset by higher silver prices realized ($5.88 per ounce in
1998 versus $5.26 per ounce in 1997).  The decrease in gold revenue from 1996 to
1997 was primarily due to lower gold prices realized ($362 per ounce in 1997
compared to $384 per ounce in 1996) and lower gold ounces produced at McCoy/Cove
resulting from lower mill grades and recoveries, partially offset by increased
gold production at Round Mountain resulting from more tons processed.  The
increase in silver revenues from 1996 to 1997 was due to increased production
reflecting higher mill grades, partially offset by lower silver prices realized
($5.26 per ounce in 1997 versus $5.41 per ounce in 1996).

                                       3
<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)

                                                                            1998          1997          1996
                                ------------------------------------------------   -----------   -----------
                                              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)
                                ----------------------------------------------------------------------------
<S>                             <C>           <C>       <C>          <C>           <C>           <C>
GOLD
----
MINES:
       Round Mountain           358,597         0.018       6,375          3,188         3,519         4,525
       McCoy/Cove                21,684         0.032         699            699           915         1,183
       Kettle River               1,171         0.202         237            237           339           370
       Lupin/(2)/                 2,018         0.269         543            543           543           443
                                                      ------------------------------------------------------
                                             
Total mines                                                 7,854          4,667         5,316         6,521
                                                      ======================================================
                                             
DEVELOPMENT PROPERTIES:                      
       Aquarius                  19,159         0.066       1,263          1,263         1,274         1,277
       Paredones Amarillos       44,717         0.032       1,448            869           889           775
                                                      ------------------------------------------------------
                                             
Total development properties                                2,711          2,132         2,163         2,052
                                                      ------------------------------------------------------
                                             
Total gold                                                 10,565          6,799         7,479         8,573
                                                      ======================================================
                                             
SILVER                                       
------
McCoy/Cove                       21,684         1.790      38,809         38,809        46,525        53,858
                                                      ------------------------------------------------------
Total silver                                               38,809         38,809        46,525        53,858
                                                      ======================================================
</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 January 1998, the Company temporarily suspended operations at the Lupin
      mine.  See "Lupin."

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 were estimated based on a gold price of $325 per ounce at December
31, 1998 ($350 per ounce at December 31, 1997 and $375 per ounce at December 31,
1996) and a silver price of $5.75 per ounce at December 31, 1998 ($5.00 per
ounce at December 31, 1997 and 1996.)  The market price for gold is currently
below the level used in estimating reserves at December 31, 1998.  If the market
price for gold continues at its current level and the Company determines that
its reserves should be estimated at a significantly lower gold price than that
used at December 31, 1998,  there would be a reduction in the amount of gold
reserves.  For example, the Company estimates that, based on extrapolation of
information developed in reserve calculation, but without the same degree of
analysis as required for reserve estimation, if the Company's reserves at
December 31, 1998 were based on a price of $300 per ounce of gold, reserves at
the operating properties would decrease approximately 12% and reserves at the

                                       4
<PAGE>
 
development properties would decrease approximately 17%.  If the Company's
reserves at December 31, 1998 were estimated at $350 per ounce of gold, reserves
at the operating properties would increase approximately 4% and reserves at
development properties would increase approximately 2%.  Should any significant
reductions in reserves occur, material write-downs of the Company's investment
in mining properties and/or increased amortization charges may be required. 

Change in Proven and Probable Reserves
--------------------------------------
The reconciliation of the change in proven and probable reserves from December
31, 1997 to December 31, 1998 is as follows.

<TABLE>
<CAPTION>
                                                                                 (millions of ounces)
                                                                               Gold               Silver
-------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                <C>
Proven and probable reserves at December 31, 1997                               7.5                 46.5
      Extensions, discoveries and adjustments                                                    
       --  McCoy/Cove                                                           0.1                  6.7
       Production /(1)/                                                        (0.8)               (14.7)
       Change in gold and silver price assumptions                               --                  0.3
-------------------------------------------------------------------------------------------------------------
Proven and probable reserves at December 31, 1998                               6.8                 38.8
=============================================================================================================
</TABLE>

/(1)/ Production represents previously modeled, in-situ ounces mined during
      1998;  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."

                                       5
<PAGE>
 
OTHER MINERALIZATION
The following table presents other mineralization by property.  Other
mineralization for producing mines and development properties is generally
estimated by the Company.

<TABLE>
<CAPTION>
 
Other Mineralization/(1)/
(thousands, except average grades) (at December 31)

                                                           1998                       1997                  1996
                               --------------------------------   ------------------------   -------------------
                                              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                      
----                      
MINES:                    
Round Mountain                 108,285      54,143        0.015      71,132          0.016      52,958     0.015
McCoy/Cove                         425         425        0.146         635          0.025       1,473     0.029
Kettle River                       188         188        0.223         149          0.174         282     0.181
Lupin (including Ulu)/(2)/       2,194       2,194        0.358       2,194          0.358       3,365     0.310
                                                        
                               ---------------------------------------------------------------------------------
                                                        
                               111,092      56,950        0.030      74,110          0.027      58,078     0.033
                               --------------------------------------------------------------------------------- 
DEVELOPMENT  AND OTHER                                  
 PROPERTIES/(3)/:                                       
Aquarius                           785         785        0.064         826          0.062          --        --
Paredones Amarillos                342         205        0.020         399          0.018          --        --
Chapada/(4)/                        --          --           --          --             --      56,700     0.012
Kingking/(5)/                       --          --           --          --             --     168,750     0.017
                               ---------------------------------------------------------------------------------
                                                        
                                 1,127         990        0.055       1,225          0.048     225,450     0.016
                               ---------------------------------------------------------------------------------
                                                        
Total gold                     112,219      57,940        0.030      75,335          0.027     283,528     0.019
                               =================================================================================
                                                        
SILVER                                                  
------                                                  
MINES:                                                  
McCoy/Cove                         425         425        6.151         635          0.986       1,473     1.358
                               --------------------------------------------------------------------------------- 
Total silver                       425         425        6.151         635          0.986       1,473     1.358
                               =================================================================================

<CAPTION> 
                                              Tons                     Tons                       Tons
                                 Tons         (the      Average        (the        Average        (the   Average
                                 (100%   Company's        grade   Company's          grade   Company's     grade
                                basis)      share)          (%)      share)            (%)      share)       (%)
                               ---------------------------------------------------------------------------------
<S>                            <C>       <C>            <C>       <C>              <C>       <C>         <C> 
COPPER
------
OTHER PROPERTIES /(3)/:
Chapada/(4)/                        --          --           --          --             --      56,700      0.43%
Kingking/(5)/                       --          --           --          --             --     168,750      0.47%
                               ---------------------------------------------------------------------------------
Total copper                        --          --           --          --             --     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)/ In January 1998, the Company temporarily suspended operations at the Lupin
      mine.  See "Lupin."

/(3)/ The Company's construction and production decisions 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."
 
                                       6
<PAGE>
 
/(4)/ In 1996, the Company owned an option entitling it to acquire a 50% direct
      interest in the Chapada property from Santa Elina Mines Corporation. The
      Company elected not to exercise this option in 1997. The Company owned 51%
      of the common shares of Santa Elina at year end 1996 and 58% of the common
      shares at year end 1997. The Company had indirect Chapada interests of 42%
      in 1996 and 48% in 1997. In 1997, the Company wrote off its entire
      investment in Santa Elina of $143.6 million. The Company's share of
      Chapada's other mineralization of 56.7 million tons at average grades of
      0.012 ounces of gold per ton and 0.43% copper was removed from the
      Company's estimates of other mineralization as of December 31, 1997. See
      "Other Projects."

/(5)/ In 1997, the Company decided not to proceed with development of its
      Kingking project and wrote off its entire investment in the project of
      $50.0 million. The Company's share of Kingking's other mineralization of
      168.8 million tons at average grades of 0.017 ounces of gold per ton and
      0.47% copper was removed from the Company's estimates of other
      mineralization as of December 31, 1997. See "Other Projects."

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 grades and recovery rates, the ability to secure financing, and
potential acquisitions or increases in property interests. Factors that could
cause actual results to differ materially include, among others, changes in gold
and silver 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, impacts of the year 2000 problem and its
effect on critical third party suppliers to the Company's operations, the
ability of the Company to complete remediation plans to its information
technology and operating systems to address the year 2000 issue, 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.

                                       7
<PAGE>
 
ROUND MOUNTAIN

The Company owns an undivided 50% interest in and operates the Round Mountain
gold mine, acquired in 1985.  Subsidiaries of Case, Pomeroy & Company, Inc. and
Homestake Mining Company each own an undivided 25% interest in the mine.  Mining
equipment, crushing facilities, heap leaching facilities, milling 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 contiguous patented and unpatented mining claims
covering approximately 27,500 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 in the process of government review.  See "Other-Government
Regulation and Environmental Issues."

The following table sets forth operating data for the Round Mountain operation
from 1994 through 1998.  The Company's share of production is 50% of the ounces
shown.

<TABLE>
<CAPTION>
                                            1998       1997       1996        1995        1994
------------------------------------------------------------------------------------------------
<S>                                       <C>        <C>        <C>         <C>         <C>
Gold produced (ounces)                     510,504    477,680    410,974     344,434     423,504
Mining cost/ton of ore and waste          $   0.66   $   0.65   $   0.69    $   0.61    $   0.53
Heap leaching cost/ton of ore             $   0.74   $   0.61   $   0.80    $   0.65    $   0.66
Milling cost/ton of ore                   $   3.36   $   4.38         --          --          --
Production cost/ounce of gold produced:
   Direct mining expense                  $    209   $    208   $    228    $    218    $    156
   Deferred stripping cost                      (7)         2         (2)        (23)          8
   Inventory movements and other                (4)        (3)        (5)         --          12         
                                          --------   --------   --------    --------    --------
        Cash operating cost                    198        207        221         195         176 
   Royalties paid                               20         22         32          31          32
   Production taxes                              3          4          4           4           8
                                          --------   --------   --------    --------    --------
       Total cash cost                         221        233        257         230         216
   Depreciation                                 46         39         51          62          51
   Amortization                                 18         18         18          20          20
   Reclamation and mine closure                  7          7          5           5           4
                                          --------   --------   --------    --------    --------
       Total production costs             $    292   $    297   $    331    $    317    $    291
                                          --------   --------   --------    --------    --------
Capital expenditures (millions)/(1)/      $   12.6   $   30.7   $   17.5    $   11.7    $    8.7
Deferred (applied) mining
 expenditures (millions)/(1)/             $    1.7   $   (0.4)  $    0.4    $    4.0    $   (1.7)    
Heap leached-reusable pad:
   Ore processed (tons/day)                 18,953     26,608     27,737      22,490      18,980
   Days of operation                           361        359        354         354         355
   Total ore processed (000 tons)            6,842      9,552      9,819       7,961       6,738
   Grade (ounce/ton)                         0.036      0.036      0.036       0.034       0.040
   Recovery rate (%)                          70.6       74.9       66.1        70.9        78.7
   Gold recovered (ounces)                 182,378    268,518    231,420     192,052     216,710
Heap leached-dedicated pad:
   Ore processed (tons/day)                101,892    107,716     87,706      66,197      54,161
   Days of operation                           361        359        354         354         355
   Total ore processed (000 tons)           36,783     38,670     31,048      23,434      19,227
   Grade (ounce/ton)                         0.010      0.010      0.011       0.012       0.014
   Recovery rate (%)                         /(2)/      /(2)/      /(2)/       /(2)/       /(2)/
   Gold recovered (ounces)                 221,396    195,558    167,004     138,700     173,544
</TABLE>

                                       8
<PAGE>
 
<TABLE>
<CAPTION>
                                               1998             1997             1996             1995             1994
-----------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>             <C>              <C>              <C>
Milled: /(3)/
   Ore processed (tons/day)                     7,993            n.m.               --               --               --      
   Days of operation                              361              63               --               --               --      
   Total ore processed (000 tons)               2,885             274               --               --               --      
   Gold grade (ounce/ton)                       0.045           0.041               --               --               --      
   Gold recovery rate (%)                        77.9            60.0               --               --               --      
   Gold recovered (ounces)                     97,686           6,410               --               --               --      
High grade ore processed:/(4)/                                                                                               
   Gold recovered (ounces)                      9,044           7,194           12,550           12,244           33,052      
Other:                                                                                                                        
       Gold recovered (ounces)                     --              --               --            1,438              198      
-----------------------------------------------------------------------------------------------------------------------------
</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)/   Construction of an 8,000 ton per day mill to treat higher-grade non-
        oxidized ore was completed in the fourth quarter of 1997.

/(4)/   A high grade occurrence was discovered April 1992. A small gravity plant
        was constructed to recover these ounces.

n.m.    Not meaningful.

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, 1998
------------------------------------------------------------------------------------------------------------------------------------
                                                                                  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                                               232,372              0.021                  4,893      
Offloads and heap leach stockpiles/(4)/                          123,407              0.011                  1,367      
Mill stockpiles                                                    2,818              0.041                    115      
------------------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1998                                   358,597              0.018                  6,375       
------------------------------------------------------------------------------------------------------------------------------------

Proven                                                           280,075              0.018                  4,938       
Probable                                                          78,522              0.018                  1,437       
------------------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1998                                   358,597              0.018                  6,375        
------------------------------------------------------------------------------------------------------------------------------------
 
Total Proven and Probable-1997                                   401,325              0.018                  7,037       
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

/(1)/ The Company's share is 50% of the reserves presented.

/(2)/ See "Reserves" for a discussion of 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 1998 was 71%. The eventual average recovery rate for the
      dedicated pad is estimated to be approximately 50%. The mill recovery rate
      was 78% in 1998.

                                       9
<PAGE>
 
/(4)/ The offloads consist of approximately 81 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.

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 0.85:1.

Mining and Processing
---------------------

Ore and waste rock was mined at a rate of 195,629 tons per day in 1998 compared
to 197,178 tons per day in 1997. All mined material requires drilling and
blasting prior to excavation. The open pit mining operation employs three 28-
cubic yard electric mining shovels, one 22-cubic yard hydraulic mining shovel,
and seventeen 150-ton, thirteen 190-ton and nine 85-ton mechanical haul trucks.

Gold recovery from ore occurs from four independent recovery operations.  These
include crushed ore (reusable pad) leaching, run-of-mine ore (dedicated pad)
leaching, gravity concentration, and the milling of higher grade non-oxidized
ore.  Beginning in 1993 the Company began processing the lower grade ore on the
run-of-mine leach pads.

Heap leaching on the reusable pad is used to recover gold above a cut-off grade
of 0.018 ounce per ton.  Ore is crushed to less than 3/4 inches at a rate of
30,000 tons per day and conveyed to two parallel 1.5 million square foot asphalt
reusable leach pads.  This ore is leached for approximately 100 days, rinsed,
removed and placed on the dedicated leach pad and releached.  Most of the
contained gold is released from the reusable pad within the 100 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.  Heap leach
production from the reusable pad was 182,378 in 1998 compared to 268,518 in 1997
due to decreased tonnages.  In 1998, 18,953 tons of ore per day were processed
on the reusable heap leach pad, compared to 26,608 tons per day in 1997.  For a
general description of Round Mountain's mining and heap-leach recovery process
see page 51.

Lower grade oxidized ore (down to a cut-off grade of 0.006 ounce per ton) and
ore removed from the reusable leach pad is transported directly to a dedicated
run-of-mine leach pad at a rate which averaged 101,892 tons per day in 1998,
compared to 107,716 tons per day in 1997.  Ore is placed in 50 foot thick layers
for leaching. After completion of an initial leaching cycle of approximately 100
days, additional layers of ore are placed until the heap reaches an ultimate
height of 300 feet.  The dedicated leach pad is constructed in phases as
capacity is needed.   The existing dedicated leach pad covers approximately 16.4
million square feet and has a capacity of approximately 131 million tons.
Current mining rates consume approximately 3 to 4 million square feet of
dedicated leach pad per year.

Gravity concentration is applied only to very high grade ore containing coarse
gold.  A 500 ton per day gravity recovery circuit was constructed in 1992 to
process ore from a small but very high grade vein excavated within the main
Round Mountain ore body.  The gravity plant is expected to produce approximately
25,000 ounces in 1999.

In 1997, the joint venture partners implemented a new, optimized pit design
which eliminates the mining of lower-grade, higher-cost non-oxidized material.
While the new pit design is expected to result in increased cash flows over the
life of the mine, it reduced Round Mountain's gold reserves by 1.2 million
ounces of gold (the Company's share, 0.6 million ounces).  Under the revised
plan, mining is expected to be complete in another eight years (assuming no new
gold discoveries) plus four years of stockpile processing.

                                      10
<PAGE>
 
Construction of an 8,000 ton per day mill to treat higher-grade non-oxidized ore
was completed in 1997, at a total cost of $64 million (the Company's share, $32
million).  The mill processed approximately 2.9 million tons in 1998, its first
full year of operations.  The facility recovers up to 75 to 85% of the gold
contained in non-oxidized ores by employing gravity concentration and cyanide
leaching.

In 1999, Round Mountain is expected to produce about 5% to 10% less gold than
1998's production of 510,504 ounces (the Company's share, 255,252 ounces)
reflecting expected lower ore tons in 1999 due to higher waste removal. See
"Cautionary 'Safe Harbor' Statement under the United States Private Securities
Litigation Reform Act of 1995" and "Risk Factors."


                                      11
<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.  In 1996, the mill was expanded to 10,000 tons per day.

The McCoy/Cove property consists of approximately 2,246 unpatented claims
covering approximately 40,000 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 in the process of government review.  See
"Other-Government Regulation and Environmental Issues."

During 1996, the Company recorded a $30.0 million provision related to the
estimated costs to remove waste rock from a portion of the Cove pit wall that
had collapsed. The cost estimate underlying the provision is based on an
evaluation of the total tons to be removed and the associated cost per ton. In
March 1998, the Company hedged the reserves affected by the collapsed portion of
the Cove pit wall by selling forward 270,000 ounces of gold at an average price
of $319 per ounce and 19.0 million ounces of silver at an average price of $6.01
per ounce, with delivery dates from 1998 to 2001. Based on this hedge position,
the Company proceeded with the pit wall remediation in the second half of 1998.
By December 31, 1998, total spending for the pit wall remediation was $14.8
million. The remediation is expected to be completed by mid-1999.

In 1997, as a result of the lower gold prices, the Company recorded a $47.0
million provision for impaired assets related to McCoy/Cove.  The need for and
the amount of the provision were determined by comparing asset carrying values
to estimated future net cash flows from existing reserves.

In January 1998, in response to the continued low gold prices, the Company
decided to scale back operations at McCoy/Cove.  As a result, the McCoy/Cove
work force was reduced by approximately 20%.  Mining activities were refocused
on the higher-margin mill ounces from the Cove pit.  Mining was discontinued in
the smaller, higher-cost McCoy pit.  Based on a reengineered pit design, mining
resumed in the McCoy pit in  the second quarter of 1998 at a lower cost.

The following table sets forth operating data for the McCoy/Cove operation from
1994 through 1998.

<TABLE>
<CAPTION>
                                             1998          1997         1996          1995          1994 
----------------------------------------------------------------------------------------------------------
<S>                                      <C>          <C>           <C>          <C>           <C>
Gold produced (ounces)                      167,494       187,034      271,731       310,016       359,360
Silver produced (ounces)                  9,412,823    11,021,708    7,102,348    11,905,806    10,443,151
Mining cost/ton of ore and waste         $     0.71   $      0.74   $     0.72   $      0.67   $      0.68
Heap leaching cost/ton of ore            $     1.74   $      1.70   $     1.68   $      2.32   $      1.09
Milling cost/ton of ore                  $     6.09   $      8.82   $     9.50   $     10.67   $     10.09
Production cost/ounce of gold           
  Direct mining expense                  $      200   $       276   $      286   $       206   $       191
  Deferred stripping cost                        (1)          (10)         (16)           15             6
  Inventory movements and other                   4             5            1            (4)           (3)    
                                         ----------   -----------   ----------   -----------   -----------
    Cash operating cost                         203           271          271           217           194
  Royalties                                       3             3            5             5             6
  Production taxes                                2            (1)           4             7             9
                                         ----------   -----------   ----------   -----------   -----------
    Total cash cost                             208           273          280           229           209
  Depreciation                                   52            66           71            53            48
  Amortization                                   37            44           46            46            43
  Reclamation and mine closure                    9            10            8             5             5
                                         ----------   -----------   ----------   -----------   -----------
    Total production cost                $      306   $       393   $      405   $       333   $       305
                                         ----------   -----------   ----------   -----------   -----------
</TABLE> 

                                      12
<PAGE>
 
<TABLE> 
                                               1998          1997         1996          1995          1994
----------------------------------------------------------------------------------------------------------
<S>                                      <C>          <C>           <C>          <C>           <C> 
Average gold-to-silver price ratio/(1)/        54:1          67:1         75:1          74:1          73:1
Capital expenditures (millions)          $      1.3   $       2.2   $      7.3   $       8.6   $       5.2
Deferred (applied) mining
  expenditures (millions)                $      0.5   $       3.7   $      6.0   $      (7.3)  $      (3.0)
Heap leached:
  Ore processed (tons/day)                   11,296        17,840       16,671        11,966        21,682
  Days of operation                             364           364          364           364           364
  Total ore processed (000 tons)              4,112         6,494        6,068         4,355         7,892
  Gold grade (ounce/ton)                      0.021         0.018        0.018         0.018         0.013
  Silver grade (ounce/ton)                     0.26          0.29         0.27          0.49          0.48
  Gold recovery rate                          /(2)/         /(2)/        /(2)/         /(2)/         /(2)/
  Silver recovery rate                        /(2)/         /(2)/        /(2)/         /(2)/         /(2)/
  Gold recovered (ounces)                    53,096        55,129       66,834        59,910        66,617
  Silver recovered (ounces)                 398,006       396,928      513,227       877,463       940,652
Milled:
  Ore processed (tons/day)                   11,829         9,315        9,031         7,275         7,307
  Days of operation                             364           364          364           364           364
  Total ore processed (000 tons)              4,306         3,391        3,287         2,648         2,660
  Gold grade (ounce/ton)                      0.046         0.061        0.086         0.113         0.140
  Silver grade (ounce/ton)                     2.95          4.54         3.14          5.27          5.29
  Gold recovery rate (%)                       57.8          64.3         79.5          82.4          80.3
  Silver recovery rate (%)                     69.8          69.7         73.5          78.8          70.1
  Gold recovered (ounces)                   114,398       131,905      204,897       250,106       292,743
  Silver recovered (ounces)               9,014,817    10,624,780    6,589,121    11,028,343     9,502,499
----------------------------------------------------------------------------------------------------------
</TABLE>

/(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.

                                      13
<PAGE>
 
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, 1998
-----------------------------------------------------------------------------------------------------------------------------------
                                         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                                14,045                  0.034              1.957                483           27,481 
West Contact of McCoy Pit                2,121                  0.031                 --                 66               -- 
Stockpiles                               5,518                  0.027              2.053                150           11,328 
----------------------------------------------------------------------------------------------------------------------------------- 
Proven and Probable-1998                21,684                  0.032              1.790                699           38,809   
----------------------------------------------------------------------------------------------------------------------------------- 
 
Proven                                  12,683                  0.032              1.958                411           24,837        
Probable                                 9,001                  0.032              1.552                288           13,972        
----------------------------------------------------------------------------------------------------------------------------------- 
Total Proven and Probable-1998          21,684                  0.032              1.790                699           38,809        
-----------------------------------------------------------------------------------------------------------------------------------
 
Total Proven and Probable-1997          24,737                  0.037              1.881                915           46,525 
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

/(1)/  See "Reserves" for a discussion of 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 69% for gold and 67% for silver.
     
The gold-equivalent cut-off grades are 0.008 ounce per ton for oxides and 0.100
ounce per ton for high- grade sulfides and 0.038 ounce per ton for low-grade
sulfides.

The prospective waste-to-ore ratio is 2.1:1.

Mining and Processing
---------------------

Ore and waste rock was mined at a rate of 120,677 tons per day in 1998, compared
to 148,348 tons per day in 1997. In 1998, 12.9 million tons were mined as part
of the Cove pit wall remediation. Mining during 1998 was from deeper levels of
the Cove pit resulting in lower production levels compared to 1997. All material
requires drilling and blasting prior to excavation. The open pit mining
operation employs four 23-cubic yard hydraulic mining shovels, one 23-cubic yard
wheel loader, nine 150-ton and ten 190-ton mechanical 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.

Stockpiled ore increased slightly from 4.7 million tons in 1997 to 5.5 million
tons in 1998. The Company expects the stockpiled ore to fluctuate as a function
of the mine plan. Mining operations are expected to run through 2000, with the
processing of the stockpiled ore continuing through 2002.

                                      14
<PAGE>
 
The Company mines at a high rate to minimize the time and expense required to
keep the Cove pit dewatered.  Water pumped out of the Cove pit averaged 17,400
gallons per minute at the end of 1998.  Water flows are projected to increase in
future years.  The Company uses infiltration ponds for water pumped from the
mine.

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 which
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 50.

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.  In the second half of 1997, McCoy/Cove began processing
carbonaceous ore that had in past years been mined from the Cove pit and
stockpiled.

The mill processed more sulfide and less carbonaceous ore in 1998 compared to
1997. Mill throughput averaged 11,829 tons per day in 1998 compared to 9,315 in
1997.  Gold and silver production decreased compared to 1997 due to lower mill
grades and recoveries, partially offset by higher throughput.

Heap leach gold production was slightly lower compared to 1997 due to fewer tons
processed partially offset by higher grade.  The heap leach crusher averaged
11,296 tons per day in 1998 compared to 11,444 tons per day in 1997.  In 1997,
additional lower-grade heap leach ore was processed uncrushed, for a total of
17,840 tons per day in 1997.  No such run-of-mine ore was processed in 1998.

The Company finished mining the high grade sulfide zone at Cove in 1995.  The
lower grade of the remaining sulfides, coupled with lower recovery rates, meant
lower production from sulfides during 1998 and 1997.

In 1999, McCoy/Cove is expected to produce about 20% to 30% less gold compared
to the 167,494 ounces produced in 1998.  Silver production is expected to
decrease about 15% to 25% from the 9.4 million ounces produced in 1998.  The
expected decrease in gold and silver production in 1999 is due to planned lower
grades and recovery rates.  See "Cautionary 'Safe Harbor' Statement under the
United States Private Securities Litigation Reform Act of 1995" and "Risk
Factors."

                                      15
<PAGE>
 
KETTLE RIVER

The Kettle River properties are located in Ferry County in the State of
Washington and cover approximately 8,100 acres through patented and unpatented
mining claims and fee lands.

In 1997, as a result of the lower gold prices, the Company recorded a $15.0
million provision for impaired assets related to Kettle River.  The need for and
the amount of the provision were determined by comparing asset carrying values
to estimated future net cash flows from existing reserves.

The following table sets forth operating data for the Kettle River operation
from 1994 through 1998.

<TABLE>
<CAPTION>
                                                       1998              1997             1996             1995             1994  
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>               <C>              <C>              <C>
Gold produced (ounces)                                113,692          129,866           124,910          100,419          66,782 
Mining cost/ton of ore                               $  21.65         $  21.53          $  21.12         $  22.60         $ 11.06 
Milling cost/ton of ore                              $  10.71         $  10.58          $  11.96         $  12.76         $ 13.54 
Production cost/ounce of gold produced:                                                                                           
   Direct mining expense                             $    238         $    231          $    190         $    237         $   225 
   Deferred mine development                               --               --                --               --              -- 
   Inventory movements and other                            6               (4)               11               (7)             28 
                                                     --------         --------          --------         --------         ------- 
     Cash operating cost                                  244              227               201              230             253 
   Royalties                                               12               14                10                8               5 
   Production taxes                                         1                2                 2                2               2 
                                                     --------         --------          --------         --------         ------- 
     Total cash cost                                      257              243               213              240             260 
   Depreciation                                            77               54                59               74              95 
   Amortization                                             5               36                45               45              45 
   Reclamation and mine closure                            12               12                 8                7               6 
                                                     --------         --------          --------         --------         ------- 
     Total production cost                           $    351         $    345          $    325         $    366         $   406 
                                                     --------         --------          --------         --------         ------- 
Capital expenditures (millions)                      $    1.5         $    3.8          $    8.8         $    9.5         $  10.0 
Deferred (applied) mining                                                                                                         
  expenditures (millions)                            $     --         $     --          $     --         $     --         $    -- 
Milled:                                                                                                                           
  Ore processed (tons/day)                              2,017            2,118             1,652            1,504           1,438 
  Days of operation                                       364              364               364              364             364 
  Total ore processed (000 tons)                          734              771               601              548             523 
  Grade (ounce/ton)                                     0.187            0.197             0.240            0.212           0.149 
  Recovery rate (%)                                      82.8             85.4              86.5             86.6            85.6 
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

                                      16
<PAGE>
 
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.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------ 
                                                       Kettle River
                                                    Ore Reserves/(1)/
                                                    December 31, 1998
------------------------------------------------------------------------------------------------------------------------ 
                                                                                  Average grade
                                                                    Tonnage             of gold    Gold content/(2)/
                                                          (000's short tons)   (ounces per ton)       (000's ounces)
------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>                 <C>
Lamefoot                                                                 646              0.196                  126
K-2                                                                      525              0.211                  111
------------------------------------------------------------------------------------------------------------------------ 
Total Proven and Probable-1998                                         1,171              0.202                  237
------------------------------------------------------------------------------------------------------------------------
 
Proven                                                                   832              0.205                  171
Probable                                                                 339              0.195                   66
------------------------------------------------------------------------------------------------------------------------ 
Total Proven and Probable-1998                                         1,171              0.202                  237
------------------------------------------------------------------------------------------------------------------------
 
Total Proven and Probable-1997                                         1,734              0.196                  339
------------------------------------------------------------------------------------------------------------------------
</TABLE>

/(1)/  See "Reserves" for a discussion of 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 1998 was 83%.

Cut-off grades are 0.120 ounce of gold per ton at Lamefoot and 0.131 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. In 1998,
approximately 63% of ore milled came from Lamefoot.  Production commenced at K-
2, the sixth deposit developed at Kettle River, in January 1997.  In 1998,
approximately 37% of ore milled came from K-2.

Development of the Lamefoot project began during 1992 when the portal was
collared. By December 1994, 17,500 feet of drifting was complete.  Lamefoot
commenced production in December 1994.  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 1998 was
435,163 tons compared to 548,889 in 1997 due to longer underground ore hauls
related to deeper mining activity at Lamefoot.  Ore production for 1999 is
expected to be approximately 375,000 tons.

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.  Total K-2 ore
production in 1998 was 243,867 tons.  Ore production for 1999 is expected to be
approximately 250,000 tons.

Mining operations are expected to continue through at least the year 2000 at
Kettle River, depending upon the success of the Company's exploration
activities.

                                      17
<PAGE>
 
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.  The mill processed
approximately 2,000 tons of ore per day in 1998, compared to 2,100 tons per day
in 1997.  Production decreased in 1998 compared to 1997 due to decreased
tonnages at the Lamefoot mine and lower mill grades.

In 1999, Kettle River is expected to produce about 10% to 20% less than the
113,692 ounces of gold produced in 1998. See "Cautionary 'Safe Harbor' Statement
under the United States Private Securities Litigation Reform Act of 1995" and
"Risk Factors."

                                      18
<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, the Company purchased the Ulu property, located approximately 100 miles
north of Lupin.  The property is subject to a 5% net smelter royalty after the
recovery of 675,000 ounces of gold.  The Ulu property has approximately 1.5
million minable tons of other mineralization at an average grade of 0.374 ounce
of gold per ton.  The deposit is open on strike and down dip.  In the third
quarter of 1997, the Company deferred further development of Ulu in light of the
downturn in gold prices.

In 1997, as a result of the lower gold prices, the Company recorded a $65.0
million provision for impaired assets related to the Lupin and Ulu properties.
The need for and the amount of the provision were determined by comparing asset
carrying values to estimated future net cash flows from existing reserves.

In January 1998, the Company temporarily suspended operations at the Lupin mine
until the gold price improves.  By the end of the first quarter of 1998,
preparation of the mine and facilities to continue in a care and maintenance
mode was complete.  Annual care and maintenance costs are estimated to be
approximately $3.2 million.  As a result of the suspension of operations, Lupin
terminated approximately 500 employees.  A small group of maintenance and
security personnel remain employed to monitor the mine and facilities during the
period of suspension.

The Company has completed an initial study reviewing the feasibility of re-
commencing operations at Lupin.  The study encompassed a review of mining
methodology, operational practices and organizational structure with a view to
reducing costs while maintaining the high level of safety achieved over the
first fifteen years of operations.  Under the proposed new mine plan, the
installation of an internal hoisting system would enhance the economics of
mining at levels lower than the current crushing and hoisting system will allow.
Additionally, under the new plan, mining and processing rates would be reduced
to 1,800 tons per day from the previous level of 2,100 tons per day, resulting
in planned average production of 150,000 ounces per year compared to 165,335
ounces achieved in 1997.  Revised work schedules, coupled with a streamlining of
the organizational structure, would reduce labor costs.  The study estimates
that under the proposed plan cash costs over the life of the mine would average
between $245 to $255 per ounce of gold compared to $284 per ounce of gold for
the full year 1997.  Work will continue to address other areas for optimization.
Recommissioning of the Lupin mine will only be undertaken when the Company can
secure a satisfactory cash margin over the cash operating costs.

See "Cautionary 'Safe Harbor' Statement under the United States Private
Securities Litigation Reform Act of 1995" and "Risk Factors."

                                      19
<PAGE>
 
The table below sets forth operating data for the Lupin mine from 1994 through
1998.

<TABLE>
<CAPTION>
                                                1998            1997             1996             1995             1994
----------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>       <C>              <C>              <C>              <C>
Gold produced (ounces)                            --         165,335          166,791          172,110          180,052
Mining cost/ton of ore                            --       C$  46.09        C$  44.08        C$  44.23        C$  40.45
Milling cost/ton of ore                           --       C$  11.77        C$  12.39        C$  12.26        C$  12.03
Production cost/ounce of gold  produced:                 
  Canadian dollars:                                      
       Direct mining expense                      --       C$    381        C$    411        C$    423        C$    375
       Deferred mine development                  --              13               (4)             (22)              (4)
       Inventory movements and other              --              (1)               1                4                4
                                                  --        --------         --------         --------         --------
       Cash operating cost                                 C$    393        C$    408        C$    405        C$    375
                                                            --------         --------         --------         -------- 
  U.S. dollars:                                          
       Cash operating cost                        --      US$    284       US$    299       US$    296       US$    274
       Royalties                                  --              --               --               --               --
       Production taxes                           --              --               --               --               --
                                                            --------         --------         --------         --------
       Total cash cost                            --             284              299              296              274
       Depreciation                               --              71               71               68               64
       Amortization                               --              24               21               19               16
       Reclamation and mine closure               --              14                8                7                6
                                                            --------         --------         --------         -------- 
       Total production cost                      --      US$    393       US$    399       US$    390       US$    360
                                                            --------         --------         --------         -------- 
Capital expenditures (millions US$)               --        $   12.3         $   15.7         $   14.5         $    8.5
Deferred (applied) mining                                                      
  expenditures (millions US$)                     --        $   (1.8)        $    0.2         $    2.8         $    0.5
Milled:                                                  
  Ore processed (tons/day)                        --           2,167            2,111            1,986            2,241
  Days of operation                               --             364              364              364              364
  Total ore processed (000 tons)                  --             789              768              723              816
  Grade (ounce/ton)                               --           0.226            0.235            0.258            0.238
  Recovery rate (%)                               --            92.6             92.5             92.5             92.9
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

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, 1998
------------------------------------------------------------------------------------------------------------------------ 
                                                                                    Average grade
                                                                     Tonnage              of gold    Gold content/(2)/
                                                          (000's short tons)     (ounces per ton)       (000's ounces)
------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                    <C>                 <C>
Center Zone                                                              743                0.282                  210
East Zone                                                                202                0.221                   45
West Zone                                                                894                0.265                  236
McPherson Zone                                                           179                0.289                   52
------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1998                                         2,018                0.269                  543
------------------------------------------------------------------------------------------------------------------------
 
Proven                                                                 1,454                0.275                  400
Probable                                                                 564                0.254                  143
------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1998                                         2,018                0.269                  543
------------------------------------------------------------------------------------------------------------------------
 
Total Proven and Probable-1997                                         2,018                0.269                  543
------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      20
<PAGE>
 
/(1)/  See "Reserves" for a discussion of 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 1997 was
       93%.

The cut-off grade used in the reserve calculation is 0.150 ounce of gold per ton
at the upper levels of the mine and 0.204 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 4,430 feet.

The ore in the Center, West and East Zones has been mined by the sub-level,
long-hole open stoping method.  In 1995, Lupin incorporated "pastefill", which
is composed of mine tailings and cement, into the stoping sequence.

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 mill processed 2,167 tons per day in
1997.

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 are a
factor as the depth increases. All of this causes slower and more costly mining
in the deeper levels of the mine. The Company has changed its mining techniques
and backfill process to address 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.

During 1997, a study was completed which determined that an internal winze was
feasible to access ore below the current depth of the ramp.  The winze will
allow the hoisting of ore from the deeper areas of the mine, replacing the
costly trucking methodology historically used.

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 difficult weather and
other conditions.  At the mine, the Company maintains supplies of spare parts
and other materials, including fuel, 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.  During the 1998 winter road season, a small amount
of fuel was delivered to Lupin along with other supplies which Lupin committed
to purchase prior to the suspension of operations.  The cost of the fuel and
other supplies amounted to approximately $1.5 million.  Costs of operating the
winter road during the suspension of operations will have minimal financial
impact on the Company, as there will be cost 

                                      21
<PAGE>
 
recovery through third party user fees. The timing of the decision to resume
operations at Lupin will be dependent on the availability of the winter road, as
well as the market price of gold.

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 114 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 weather
conditions.  Satellite communications will be continued during the suspension of
operations.

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 1997, approximately 32% 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.

                                      22
<PAGE>
 
DEVELOPMENT PROGRAMS
Aquarius
--------
In 1997, the Company deferred a final construction decision on the Aquarius
project.

The Company owns 100% of the Aquarius project which is located in 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.
The project site is located two kilometers south of Highway 101.

The project site 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 Macklem Township.
Environmental work on the project commenced in May 1995 and the Company expects
completion and approval of the Comphrensive Study Review (CSR) by the end of the
third quarter of 1999.  This will allow the Company to proceed with full project
permitting.

Aquarius has 1,263,000 ounces of proven and probable gold reserves at December
31, 1998 (19.2 million tons of ore at an average grade of 0.066 ounces 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 $325 per ounce of gold.  The gold recovery is
expected to be 95%.

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:  i) extensive drilling, ii)
advanced geostatistical analysis with multiple techniques, iii) cross validation
with production data and independent estimates, and iv) review of the results by
an expert consultant.

In 1998, the Company completed the frozen earth system around the pit perimeter
to prevent groundwater from flowing into the pit from the surrounding water
table.  The circumference of the freeze system is 12,000 ft (2.25 miles,
equivalent to 3.66 km).  The system includes over 600,000 linear feet of
drilling in more than 2,200 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 has been 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 Company does
not plan to operate the frozen earth system during the period of project
deferral.  All facilities and equipment are on a scheduled care and maintenance
program designed to fully preserve all assets.

The first planned 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.
Due to 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
northerly of the two segments first.

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 

                                      23
<PAGE>
 
amenable to recovery by gravity separation techniques. The mill has been
designed to process 8,300 tons per day.

Electrical 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 will also be reclaimed from the tailings area.

Based on the current mine plan, 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 total site workforce is expected to
consist of approximately 215 people.

Powerline and substation construction was completed in 1997.  Tree clearing and
road construction were started, but completion was deferred.  The remainder of
the engineering, procurement, and construction activities are currently deferred
until the gold price improves.

During 1998, the Company capitalized $0.7 million related to the completion of
the freeze barrier construction and expensed $0.5 million in holding costs
related to Aquarius.  The Company capitalized $39.9 million of Aquarius project
expenditures in 1997 and $6.1 million in 1996. The Company incurred acquisition
costs of $7.8 million in 1995.  As of December 31, 1998, the additional
investment required to start-up the Aquarius project is expected to be
approximately $60 million.  The Company expects to expense development holding
costs of approximately $0.8 million related to the Aquarius project in 1999.

Paredones Amarillos
-------------------
In 1997, the Company deferred a final construction decision on the Paredones
Amarillos project. During the period of deferred construction, the Company
continues to look for opportunities to optimize the Paredones Amarillos project.

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.  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 10 kilometers of
gravel road that the joint venture will upgrade to provide safe access to the
proposed operation, and 7 kilometers of new gravel road to be constructed over a
current jeep trail.

The joint venture has routinely received approvals for exploration activities,
and 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 an ongoing
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 

                                      24
<PAGE>
 
License; and issuance of an Operating License. In 1997, the Company received
approval for the Environmental Impact Statement and obtained a Change in Land
Use permit.

Paredones Amarillos has 1,448,000 ounces of proven and probable gold reserves
(the Company's share, 869,000 ounces) at December 31, 1998 (44.7 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
$325 per ounce of gold. The gold recovery rate is expected to be 91%.

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 4.4:1 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 11,000 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.

Based on the current mine plan, 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.  A new power line under
construction from La Paz to Cabo San Lucas is anticipated to supply power to the
site.  The joint venture will construct a new 18 kilometer transmission line
which will connect with the new line to the north of the mine site.

Water rights for the project, totaling 1.8 million cubic meters annually, have
been purchased or are under option agreements.  Adequate water supplies for the
life of the mine are available.

The joint venture expects that a majority of employees at the mine will be
Mexican nationals.  The number of employees will range from 250 to 300 during
the life of the mine.

Detail engineering and limited procurement began in February 1997, these
activities were suspended at the end of 1997 and are estimated to be 40%
complete.

The Company capitalized $8.0 million of Paredones Amarillos project expenditures
in 1997 and $6.6 million in 1996.  During 1998, the Company capitalized $0.5
million and expensed $0.4 million in holding costs related to Paredones
Amarillos.  As of December 31, 1998, the additional investment required to
start-up the Paredones Amarillos project is expected to be approximately $59
million (the Company's share).  The Company expects to expense its share of
development holding costs of approximately $0.3 million in 1999.

                                      25
<PAGE>
 
OTHER PROJECTS

Kuranakh
--------
The Company owns 50% of Kuranakh Gold Mining Company ("KGMC") which owns the
Kuranakh project located in the Aldan district of the Sakha Republic in the
eastern part of Russia near the town of Nizhny Kuranakh.  The remaining 50% of
the KMGC is owned by two Russian companies, OAO Aldanzoloto (30%) and OAO
Sakhazoloto (20%).

The town of Aldan, located approximately 28 kilometers southeast of the
property, is connected to the rest of Russia by a recently completed spur of the
Trans-Siberia Railway and by an all-weather road north to Yakutsk, the
administrative center of the Sakha Republic, and south to the Russian highway
system.

Gold mining was initiated in Aldan in 1921 and remains an important part of the
local economy.  Lode gold mineralization was discovered at Kuranakh in the late
1950's and large scale open-pit mining has occurred since 1965.

The mineralization in the Kuranakh property is quartz adularia, low temperature,
sediment hosted, epithermal deposits, comparable in many respects with the
sediment hosted gold deposits that occur in the Great Basin of the Western
United States.  The deposits are confined to the contact between Cambrian
limestone and overlying Jurassic clastics and the original sulfides are almost
completely oxidized.  The deposits have been subject to complete weathering with
only rarely preserved sulfides.  A karst surface appears to have developed at
the clastic limestone contract before mineralization.  Gold mining over the last
40 years has concentrated on the higher grade ores, leaving large quantities of
lower grade material.

Currently, KGMC is negotiating with the government of the Russian Federation to
define the terms of a production sharing agreement (PSA).  It is critical that
this PSA provide the Kuranakh project with a favorable fixed life-of-project tax
structure and gold sales agreement which will enable KGMC to advance the
project.  Successful conclusion of these negotiations is expected in 1999, after
which the Company expects to commission a feasibility study to finalize project
capital and operating parameters, and to support project financing.  The Company
pending completion of the PSA and the feasibility study has established no
reserves.

Over the past four years, KGMC has spent $14 million on the project, $11 million
of which has been funded by the Company, mainly to confirm mineralization,
establish the viability of heap leaching, initiate baseline studies and to
advance PSA negotiations.

Mining is expected to be by conventional open pit methods from numerous open
pits and stockpiles; processing will incorporate primary crushing followed by
coarse/fine separation with separate recovery treatment for each of the separate
ore streams.

Kingking
--------
The Company held an option to purchase a controlling interest in a gold and
copper project called "Kingking", in the Philippines. The Company's option
interest in the Kingking project required the delivery to Benguet Corporation,
the optionor, of a bankable feasibility study by October 25, 1997, or the
remittance of option delay payments of $750,000 per month for the first six
months and $1.0 million per month for the subsequent six months. The terms of
the Kingking option agreement, which included a $67.0 million option exercise
price to be paid in 1998, plus a contingent payment of up to $18.0 million based
upon the extent of the defined mineralization, rendered the project uneconomic.
The Company elected not to exercise its option. Following a $50.0 million write-
down recorded in 1997, the carrying values of Kingking's assets are nil (see
note 8 to the consolidated financial statements). The Company's share of
Kingking's other mineralization of 168.7 million tons at average grades of 0.017
ounces of gold per ton and 0.47% copper was removed from the Company's estimates
of other mineralization as of December 31, 1997.

                                      26
<PAGE>
 
In the second quarter of 1998, the Company issued 1,237,114 common shares to
Nationwide Development Corporation ("Nadecor"), which held an ownership interest
in the Kingking project unrelated to that of Benguet Corporation. The share
issuance settled any obligations of the Company owed to Nadecor.

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.  In 1996 and 1997, the Company
increased its ownership of Santa Elina to 58%.  See note 4 to the Company's
consolidated financial statements.

In 1997, the Company wrote off its entire investment in Santa Elina of $143.6
million (see note 8 to the consolidated financial statements).  The Company's
share of Santa Elina's other mineralization of 56.7 million tons at average
grades of 0.012 ounces of gold per ton and 0.43% copper was removed from the
Company's estimates of other mineralization as of December 31, 1997.

In April 1998, the Company sold its investment in Santa Elina, comprised of 58%
of Santa Elina's common shares and the shareholder loans made by the Company to
Santa Elina.  As a result of the sale, the Company received $6.3 million in
cash, net of selling costs, and a 48.1% interest in the Chapada  property in
Brazil, to which the Company has assigned no book value.  The purchase agreement
calls for the Chapada property to be marketed and sold by Santa Elina at the
earliest opportunity.

EXPLORATION

The Company explores for extensions of known reserves at its mines and
development properties in addition to conducting exploration for new gold
deposits.  The Company's exploration program concentrated on those projects
believed to represent the most promising near-term prospects in its portfolio.
In particular, exploration efforts are focused on projects located where the
Company already has, or plans an extensive gold mining infrastructure,
principally those prospects in North America.

In 1998, efforts at Round Mountain focused on identification and exploration in
the areas surrounding the minesite.  Three targets were drilled to better
understand the underlying geological structures.  At McCoy/Cove, target
satellites to the Cove and McCoy pits were tested by geochemical surveys and by
drilling.  During the year, further exploration at Kettle River added 22,000
ounces to reserves and the Company continues to evaluate opportunities within
the region for extending the life of the project.  Limited drilling was
completed at Lupin aimed at better understanding the McPherson Zone, discovered
in 1997.

In 1998, the Company used joint ventures to advance a number of exploration
projects, such as the Odgen property located near the Aquarius project, the
Kilgore property in Idaho and the Youga/Nangodi property in Burkina Faso, West
Africa.  In 1999, other than West Africa, no exploration activity is planned
outside of North America.

ALASKA-JUNEAU

In 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.  In July 1997, the
Company entered into an agreement which transferred certain responsibilities for
the Alaska-Juneau project closure to a third party environmental firm.  The
third party's performance under the contract is supported by corporate
guarantees and surety bonds.  Total actual spending related to reclamation and
closure costs to date is $17.9 million.  The provision for future reclamation
and closure costs is reviewed periodically and adjusted as additional
information becomes available.

                                      27
<PAGE>
 
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 an additional five years for all of the
conditions of the consent decree agreement to be fulfilled by both parties.  SGC
has $6.8 million accrued at December 31, 1998 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 and floating forward contracts, 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 1998, the Company delivered approximately 96% of gold production against
forward sales, put options and gold loans at an average commitment price of $341
per ounce.  This compares with 33% of gold production at an average price of
$397 in 1997 and 25% of gold production at an average price of $375 in 1996.
Approximately 50% of silver production was delivered against forward sales at an
average cash price of $5.44 per ounce in 1998.  This compares to 7% at an
average price of $5.32 in 1997 and 45% at an average price of $5.85 in 1996.
Deliveries in 1997 and 1998 reflect the impact of the January 1997 repurchase of
the Company's outstanding gold and silver forward sales contracts and the
replacement of these contracts with put options.  The Company did not rebuild
its forward portfolio until the third and fourth quarters of 1997.

In 1999, the Company has protected itself against price declines by hedging over
90% of its planned 1999 gold production at a minimum average price of $349 per
ounce, along with 5.2 million ounces of silver at $5.76 per ounce.  In addition,
the Company has hedged approximately 266,000 ounces of gold in 2000 at $339 per
ounce and 7.5 million ounces of silver at a minimum average price of $6.00 per
ounce.

In March 1998, related to McCoy/Cove production, the Company sold forward
270,000 ounces of gold at an average price of $319 per ounce and 19.0 million
ounces of silver at an average price of $6.01 per ounce, with delivery dates
from 1998 to 2001.  Based on this hedge position, the Company proceeded with the
pit wall remediation in the second half of 1998.

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.

                                      28
<PAGE>
 
In 1997, the Company swapped a portion of its 11% interest obligation for the
capital securities for a gold delivery commitment.  The swap reduced the
Company's effective interest rate to a fixed rate of 4.24% plus the floating
gold lease rate.  The Company restructured the gold swap agreement in the first
quarter of 1998 into gold forward sales with delivery dates in 1998, 1999 and
2000.  See note 16 to the consolidated financial statements.

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

The Company's forward sales positions, gold loan and swap repayment schedules,
option position, currency position and crude oil position at December 31, 1998
are set out in note 16 to the Company's consolidated financial statements.

Governmental and Environmental Regulation
-----------------------------------------
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 applicable law.  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 Waters Act (Canada) ("NWTWA") 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
Resources, Wildlife and Economic Development 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.  The Company believes it is in substantial compliance with all
relevant territorial environmental law.

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 


                                      29
<PAGE>
 
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 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 is now effectively exercised
by the Nunavut Water Board.  The Company is subject to the jurisdiction of the
Nunavut Water Board and any further approvals or licenses will have to be
obtained from that Board.

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.  Certain
additional thresholds based on the type of transaction must also 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 (Bureau of Land
Management), 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 in accordance with the National
Environmental Policy Act (NEPA).  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.

                                      30
<PAGE>
 
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.

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.

New laws and regulations, amendments to existing laws and regulations, or more
stringent enforcement of existing laws and regulations, could have a material
adverse impact on the Company's results of operations and financial condition,
although the results of such actions are speculative. During the 1998
legislative session, legislation was considered in the United States Congress
which proposed a number of modifications to the General Mining Law of 1872,
which has traditionally governed the location and maintenance of unpatented
mining claims and related activities on federal land. Among these modifications
were proposals which would have (i) imposed a royalty on production from
unpatented mining claims, (ii) increased the cost of holding and maintaining
such claims, and (iii) imposed more specific reclamation requirements and
standards for operations on such claims. None of these proposed modifications
was enacted into law. The same or similar proposals may be considered by
Congress in 1999 as well. In addition, the Bureau of Land Management is
currently working on proposed administrative revisions to federal regulations
which govern surface activities (including reclamation) on unpatented mining
claims. The potential impact on the Company as a result of such congressional or
administrative action is difficult to predict. See "Risk Factors-Governmental
Regulation."

The most material direct economic impact of potential mining law revision could
be from the imposition of royalties on production at the McCoy/Cove mine in
Nevada, which is from unpatented lode mining claims on federal land, and (to a
lesser degree) at the 50%-owned Round Mountain mine in Nevada, 19% of whose
reserves are unpatented lode mining claims 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 claims to patented status.  The
Company's applications for patents are being processed, and the Company expects
the government to complete its administrative review in accordance with the
regulations, although the Company can not predict with certainty whether those
patents will be issued or the time frame for such issuance.  See "Risk Factors -
Government 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 


                                      31
<PAGE>
 
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, in early 1997 a voluntary Administrative
Order on Consent was entered into between the State of Idaho Division of
Environmental Quality and the three principal companies involved in the site
pursuant to which remediation studies are being conducted, and the current
operator is conducting permitted mining operations which include remediation of
the site. No CERCLA cost recovery action against Round Mountain Gold Corporation
or the Company 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.

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 Mexican mining industry operates under the authority of the federal
government, which regulates the location of mining concessions, prospecting,
safety, environmental protection, exports, taxation, labor and social
legislation and business transactions.  Land tenure is governed by laws issued
by each state in Mexico, although federal rules allow mining companies to obtain
surface rights through easements, temporary occupation orders or expropriations.

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

Mexican industry is mainly 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 upon its creation on
December 28, 1994 and the specific provisions of the General Law of Ecological
Balance and Environmental Protection of January 28, 1988.

Mexican companies are governed generally by the federal General Law of
Commercial Companies (federal statute) and the Civil Codes of the various States
of the country.  Mining is also governed by the federal Mining Law and its
Regulations.  The Company's Mexican subsidiaries are organized under the General
Law of Commercial Companies and registered with the Mexican Public Registry of
Commerce and the Mining Public Registry 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 Area.
Minera Paredones Amarillos, S.A. de C.V., a wholly owned subsidiary of the
Company, is engaged in negotiations with SEMARNAP and the State Environmental
Agency of Baja California Sur in order to arrange the schedule and method for
compliance of the special conditions to which the Paredones project is subject
because of its location.  

                                      32
<PAGE>
 
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 Article 27 of the Mexican Federal Constitution, the Mining Law and
its 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 community 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 with an ejido to clarify the terms and
compensation under which the project will be developed.  The Company's projects
and the relevant mining concessions have 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 its Regulations.

Employees
---------
At December 31, 1998, the Company employed 1,268 persons excluding temporary
employees directly involved in short-term programs, broken down as follows.

<TABLE>
<S>                                                                <C>
McCoy/Cove                                                           352
Round Mountain, including ancillary services                         646
Lupin                                                                 40
Kettle River                                                         169
Exploration and development                                           14
Technical and corporate staff                                         38
Other, including Alaska and Sunnyside                                  9
                                                                   -----
                                                                   1,268
                                                                   =====
</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.

                                      33
<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>
LOIS-ANN L. BRODRICK                      55         Vice President and Corporate Secretary of the Company since
                                                     March 1998; Corporate Secretary of the Company from May 1996 to
                                                     March 1998; prior thereto Assistant Corporate Secretary of the
                                                     Company
                                               
PETER H. CHEESBROUGH                      47         Senior Vice President, Finance and Chief Financial Officer of  
                                                     the Company                                                    
                                                                                                                    
DONALD C. EWIGLEBEN                       45         Vice President, Environmental and Public Affairs of the Company
                                                     since August 1994; Vice President, Environmental and           
                                                     Governmental Affairs of Amax Gold Inc. from June 1992 to       
                                                     February 1994                                                  
                                                                                                                    
ROBERT L. LECLERC, Q.C.                   54         Chairman and Chief Executive Officer of the Company since April
                                                     1997; Chairman of the Company from May 1996 to April 1997; prior
                                                     thereto Chairman and Chief Executive Officer and partner, Milner
                                                     Fenerty (barristers and solicitors)                            
                                                                                                                    
JERRY L.J. MCCRANK                        48         Vice President, Operations of the Company since March 1998;    
                                                     prior thereto various senior operations positions with the     
                                                     Company                                                        
                                                                                                                    
TOM S.Q. YIP                              41         Vice President, Controller and Principal Accounting Officer of 
                                                     the Company since March 1998; Controller and Principal         
                                                     Accounting Officer of the Company from September 1997 to March 
                                                     1998; prior thereto various corporate financial positions with 
                                                     the Company                                                     
 ---------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      34
<PAGE>
 
Mining Risks and Insurance
--------------------------
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 1996 $30.0 million
provision related to the estimated costs to remove waste rock from a portion of
the Cove pit wall that had collapsed.

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."

Royalties
---------
Production from the Company's mines is subject to certain royalties.  These are
described in note 17 to

                                      35
<PAGE>
 
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 1985, the Company acquired a 100% interest in the Alaska-Juneau project near
Juneau, Alaska.  In 1987, the Company entered into a joint venture related to
the Kensington project near Juneau, Alaska, in which the Company held a 50%
interest.

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 were funded at all operating properties and also at many
other locations along the major gold belts of North America, Central America,
South America and West Africa.  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, underground development began at Ulu and the Company wrote off its
entire remaining investment in the Alaska-Juneau project.

During 1996 and 1997, the Company increased its ownership from 7% to 58% of the
outstanding common shares of Santa Elina Mines Corporation ("Santa Elina"),
which holds interests in mining properties, principally in Brazil, and also in
Bolivia.

In 1997, in response to the declining gold prices, in the fourth quarter of
1997, the Company deferred final construction decisions on the Aquarius and
Paredones Amarillos development properties and deferred further development of
the Ulu deposit and the Company narrowed the focus of its exploration program
principally to projects in North America where the Company already has extensive
gold mining infrastructure.

                                      36
<PAGE>
 
During 1997, the Company recorded $346.0 million in provisions for impaired
assets and recorded $16.7 million for related severance costs as described in
note 8 to the Company's consolidated financial statements.

In January 1998, the Company temporarily suspended operations at the Lupin mine.
 
RISK FACTORS

Recent Losses
-------------
The Company incurred net losses of $20.1 million in 1998, $420.5 million in
1997, and $176.7 million in 1996. The loss in 1998 reflects reduced operating
costs and decreased exploration and development expense compared to 1997,
partially offset by lower revenues resulting from lower gold and silver volumes
and decreased average gold price realized. The loss in 1997 reflects a $362.7
million provision for impaired assets and other charges, including provisions
related to the Kingking project ($50.0 million); Santa Elina ($143.6 million);
the Lupin ($65.0 million), McCoy/Cove ($47.0 million) and Kettle River ($15.0
million) operating properties; $25.4 million to write down certain share
investments to market value and to provide for estimated legal and closure
costs; and $16.7 million related to severance costs. The loss in 1996 included a
$77.1 million write-down and reclamation and closure provision for the Alaska-
Juneau development property and a $30.0 million provision for the McCoy/Cove pit
wall remediation. The Company incurred exploration and development expenses of
$12.0 million in 1998, $34.9 million in 1997, and $63.6 million in 1996. The
Company expects that it will continue to incur losses in the near future due to
declining production as both McCoy/Cove and Kettle River near the end of their
mine lives, absent any new discoveries. Return to profitability will depend on,
among other things, a significant increase in the price of gold over current
prices, the ability to bring into commercial production the projects that have
been the subject of the Company's exploration and development programs and the
profitability of production at existing and new mines. See "Liquidity," "Gold
and Silver Prices," "Uncertainty of Reserve and Other Mineralization Estimates"
and "Estimation of Asset Carrying Values" for additional disclosure with respect
to factors which may affect the carrying values of the Company's assets, and the
Company's results of operations and financial condition generally.

Liquidity and Capital Resources
-------------------------------
The cash operating costs at the Company's three operating mines averaged $208
per ounce in 1998 and are expected to increase to between $235 and $245 per
ounce in 1999.  Total production costs were $317 per ounce in 1998.  In the
current low gold price environment, the Company's cost structure has significant
implications for the Company's liquidity and flexibility to invest funds in
exploration and development.  While the Company continues to generate cash flow
from operations at current gold prices, before taking into account cash
exploration and development expenses, the amount of cash flow available for
acquisitions, investments, exploration and development is very limited.  As a
result, the Company is carefully monitoring its discretionary spending, though
it intends to continue to conduct exploration and development activities
consistent with a more focused program.

The Company's existing credit facilities provide some additional liquidity. The
Company currently has $18.0 million outstanding, and up to $32.0 million or gold
equivalent, subject to covenant limitations, available until 2001, under its
revolving credit facility. The Company currently has no restrictions on the
borrowing capacity of this line based on the trailing 90-day average spot price
of $294 per ounce of gold. A depressed gold price can limit the Company's
ability to borrow under the revolving credit facility, which is measured at the
end of each quarter. Continuation of gold prices at depressed levels could have
the effect of reducing or eliminating the Company's borrowing capacity under
this facility. The Company believes it is currently in compliance with the
covenants under the credit facility. The Company took certain actions in 1998 to
improve cash flows, such as reductions in new project and exploration
expenditures and increased hedging activities. These actions continue in 1999.
While management believes existing loan facilities and other capital resources
are adequate for 1999, the Company may be required to seek additional external
financing and to further reduce discretionary spending. There can be no
assurance that the Company would be successful in attracting external financing
on terms and conditions favorable to it.


                                      37
<PAGE>
 
Certain regulatory agencies may require security to be provided for some or all
of the cost to restore land disturbed during operations. The Company has
provided letters of credit, surety bonds and corporate guarantees as security
for these future reclamation costs. Future reclamation costs are determined
using management's best estimates of the scope of work to be performed and the
related costs. See note 7 to the consolidated financial statements. These
estimates may change based on future changes in operations, costs, reclamation
activities and regulatory requirements. See "Governmental and Environmental
Regulation." The Company is currently in compliance with all reclamation bonding
requirements. In the event that the Company is unable to secure the necessary
letters of credit or surety bonds or to provide the necessary corporate
guarantees to secure reclamation obligations, the Company could be in violation
of its operating permits which could have a significant impact on the Company's
ability to continue operating at the specific location. Future reclamation
obligations are expected to be funded from operating cash flows.

Gold and Silver Prices
----------------------
The profitability of the Company's current operations is directly related and
sensitive to the market price of gold and silver.  Gold prices are currently and
have been at depressed levels since the beginning of 1997. Gold and silver
prices fluctuate widely and are affected by numerous factors beyond the
Company's control, including global supply and demand, expectations with respect
to the rate of inflation, the exchange rates of the dollar to other currencies,
interest rates, forward selling by producers, central bank sales and purchases,
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.

The current demand for, and supply of, gold and silver affect the prices of such
metals, 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.  In January 1998, the Company
temporarily suspended operations at the Lupin mine.  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 "Other-Precious Metal Sales and Hedging Activities."
Furthermore, should the Company experience a prolonged period of depressed gold
prices and prepare its reserve calculations and/or life-of-mine plans at
significantly lower prices than those used at year-end 1998, the Company could
experience additional material write-downs of its investment in mining
properties.  See "Uncertainty of Reserve and Other Mineralization Estimates" and
"Estimation of Asset Carrying Value."

Estimation of Asset Carrying Values
-----------------------------------
The Company periodically undertakes a detailed review of the life-of-mine plans
for its operating properties and an evaluation of the Company's portfolio of
development projects, exploration projects and other assets.  The recoverability
of the Company's carrying values of its operating and development properties are
assessed by comparing carrying values to estimated future net cash flows from
each property.  In 1998, for purposes of estimating future cash flows, price
assumptions of $325 per ounce of gold and $5.00 per ounce of silver were used,
except for 1999, for which prices of $290 per ounce of gold and $5.00 per ounce
of silver were used.  For other assets, carrying values were compared to
estimated net realizable values based on market comparables or quoted market
prices.  Utilizing these price assumptions, no asset impairments were evident.
In 1997, a similar analysis was performed using price assumptions of $350 per
ounce of gold and $5.00 per ounce of silver, except for 1998, for which price
assumptions were $300 per ounce of gold and $5.00 per ounce of silver.  As a
result of those 

                                      38
<PAGE>
 
assumptions, the Company recorded a $346.0 million provision for impaired assets
in 1997. See note 8 to the consolidated financial statements for further detail
of the components of these provisions.

The Company intends to assess the carrying values of its assets on an ongoing
basis as required by generally accepted accounting principles.  Factors which
may affect carrying values include, but are not limited to, gold and silver
prices, capital cost estimates, mining, processing and other operating costs,
grade and metallurgical characteristics of ore, mine design and timing of
production.  There can be no assurance that, particularly in the event of a
prolonged period of depressed gold prices, the Company will not be required to
take additional material write-downs of its operating and development
properties.

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 and are currently at
depressed levels.  See "Gold and Silver Prices."  No assurance can be given that
the volume and grade of reserves mined and processed and recovery rates will be
as 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.  The prices used in
estimating the Company's ore reserves at December 31, 1998 were $325 per ounce
of gold and $5.75 per ounce of silver.  The market prices were $286 per ounce of
gold and $4.87 per ounce of silver at December 31, 1998.  The market price of
gold is below the price at which the Company estimates its reserves.  If the
Company were to determine that its reserves and future cash flows should be
estimated at a significantly lower gold price than that used at December 31,
1998, there would likely be a reduction in the amount of gold reserves.  For
example, the Company estimates that, based on extrapolation of information
developed in reserve estimation, but without the same degree of analysis as
required for reserve estimation, if the Company's reserves at December 31, 1998
were based on a price of $300 per ounce of gold, reserves at the operating
properties would decrease approximately 12% and reserves at development
properties would decrease approximately 17%.  Under certain such circumstances,
the Company may discontinue the development of a project or mining at one or
more of its properties.  The Company recently deferred final construction
decisions on two planned gold mines (Aquarius and Paredones Amarillos) and
deferred further development of the Ulu satellite deposit.  Additionally, in
January 1998, the Company temporarily suspended operations at the Lupin mine.
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.

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 disruptions, 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 

                                      39
<PAGE>
 
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.

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, precious metals
price assumptions, and other factors.  Based on this analysis, the Company
reviews its accounting estimates and in the event of an impairment, may be
required to write-down the carrying value of a mine or mines.  This complex
process continues for the life of every mine.  See "Estimation of Asset Carrying
Values."

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.

Mine Development Risks
----------------------
The Company's ability to maintain, or increase, its annual production of gold
and silver will be dependent in significant part on its ability to bring new
mines into production, including the Aquarius project in Canada and the
Paredones Amarillos project in Mexico, and to expand existing mines.  Recently
the Company deferred final construction decisions on Aquarius and Paredones
Amarillos and deferred further development of the Ulu satellite deposit in
Canada.  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 at new mines
or at expansions of existing mines.  The economic feasibility analysis with
respect to 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),
precious metals price assumptions, 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, royalty or
other ownership burdens and other factors.  In addition, many of the risks
identified below under "Exploration Risks" are also applicable to the Company's
development projects.  Such development projects are also 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.

Exploration Risks
-----------------
Since mines have limited lives based on proven and probable reserves, the
Company continually seeks to replace and expand its reserves.  Moreover, two of
the Company's mines, McCoy/Cove and Kettle River have entered a period of
declining production as the existing ore reserves are depleted, which has led to
significant emphasis on the Company's exploration program.  Mineral exploration,
at both newly acquired properties and existing mining operations, is highly
speculative in nature, involves many risks and frequently does not result in the
discovery of minable reserves.  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.  For example, a new
feasibility study completed in December 1996 on the Alaska-Juneau project
concluded that the project was uneconomic as designed, and the Company recorded
a $77.1 million provision in connection with the decision not to proceed.
Similarly, the feasibility study on the 

                                      40
<PAGE>
 
Kingking project completed in the third quarter of 1997 indicated that the
project was uneconomic with the option agreement in place and the Company
recorded a $50.0 million provision to write off its entire investment in the
project. 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 any mine's current level of gold or silver
production beyond the life of its existing reserve estimates.

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.
In addition, there are a number of uncertainties inherent in any program
relating to the location of economic ore reserves, the development of
appropriate metallurgical processes, the receipt of necessary governmental
permits and the construction of mining and processing facilities.  Accordingly,
there can be no assurance that the Company's acquisition and exploration
programs will yield new reserves to replace and expand current reserves.

Mining Risks and Insurance
--------------------------
The business of gold and silver mining is generally subject to a number of risks
and hazards, including environmental conditions, industrial accidents, labor
disputes, 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 the
Company'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 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 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.  In 1996, the
Company recorded a $30.0 million provision related to estimated costs to remove
waste rock from a portion of the pit wall at McCoy/Cove that had collapsed. See
"Other-Insurance and Mining Risks."

Governmental Regulation
-----------------------
The Company's mining operations and exploration activities are subject to
extensive Canadian, U.S. or other foreign federal, state, provincial,
territorial 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 are 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 of 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 regulatory 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 

                                      41
<PAGE>
 
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.

Risk of International Operations
--------------------------------
Many of the mineral rights and interests of the Company are subject to
governmental approvals, licenses, agreements (such as the Kuranakh PSA) and
permits.  Such approvals, licenses, agreements and permits are, as a practical
matter, subject to the discretion of the applicable governments or governmental
officials.  No assurance can be given that the Company will be successful in
obtaining any or all of the various approvals, licenses, agreements, and permits
it seeks, that it will obtain them in a timely fashion, or on terms favorable to
it, or that it will be able to maintain them in full force and effect without
modification or revocation.

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 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, including at the Round
Mountain and McCoy/Cove properties, 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 unpatented
mining claims on federal lands, which constitute the bulk of the Company's
property holding at the McCoy/Cove mine in Nevada and which constitute 19% of
the reserves at the Company's 50% owned Round Mountain mine in Nevada, is often
uncertain and may be contested (by the federal government) or challenged (by
third parties) and subject to title defects.  Unpatented mining claims may only
be located on U.S. federal public lands open to appropriation, and are generally
considered to be subject to greater title risk than other real property
interest.  The validity of an unpatented mining claims, in terms of its location
and 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.  While the Company has obtained various reports,
opinions and certificates of title with respect to certain of the unpatented
mining claims it owns or to which it has rights in accordance with what the

                                      42
<PAGE>
 
Company believes is industry practice, there can be no assurance that the title
to any of its claims may not be defective.

Inflation and Currency Risks
----------------------------
The Company directly or indirectly holds mining interests in several countries,
including Mexico, Brazil, Russia, Burkina Faso, Ghana, and Chile, which
historically have had unstable currencies as a result of inflation, currency
controls or other reasons.  Although the production resulting from such mining
interests is generally sold in U.S. dollars, the Company is vulnerable to the
effects of inflation in its operations in certain countries, and profitability
levels may be eroded by unfavorable exchange rates.  None of the countries in
which the Company holds mineral interests currently restricts the repatriation
of profits, other than through the requirement to register such distributions.
While recent years have seen a generally positive trend toward lowering
inflation and stabilizing exchange rates in these countries, there is no
assurance that governments will continue with current economic policies or that
inflation will be lower than it has been historically.  See "Exchange Rates."

Year 2000 Risks
---------------
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed.  The effects of the Year 2000 issue may be
experienced before, on, or after January 1, 2000, and, if not addressed, the
impact on operations and financial reporting may range from minor errors to
significant systems failure which could affect the Company's ability to conduct
normal business operations.  Similar to other companies, the year 2000 problem
affects information technology (IT) and non-IT systems commonly referred to as
embedded micro-processors in operating equipment.  See "Management's Discussion
and Analysis of Financial Condition and Operating Results - Impact of Year
2000."  The expected cost and date of completion of the Year 2000 project are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party compliance and other factors.  However, there can be no
guarantee that these estimates will be achieved and actual results could differ
from those anticipated.  Due to this uncertainty and the uncertainty related to
the efforts of suppliers and other third parties, it is not possible to
determine whether the effects of the Year 2000 issue will have a material effect
on the operating results of the Company.

                                      43
<PAGE>
 
GLOSSARY
The following terms are described to aid in understanding the Company's Form 10-
K and other periodic filings.  Geological terms are generally not included.

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

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 on a specific future date 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 the refined gold and silver 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

                                      44
<PAGE>
 
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.

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 rate 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."

                                      45
<PAGE>
 
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.

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."

                                      46
<PAGE>
 
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 precious 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 on a specific future date at a fixed
price.

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.

                                      47
<PAGE>
 
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,
                                                     -----------------------------------------------------------------
                                            1999*         1998          1997          1996          1995          1994
                                       ---------     ---------     ---------     ---------     ---------     ---------
<S>                                    <C>           <C>           <C>           <C>           <C>           <C>
High                                       $ 291         $ 313         $ 367         $ 415         $ 396         $ 396
Low                                          284           273           283           367           372           370
Average                                      287           294           332           388           384           384
End of Period                                286           286           293           369           387           383
</TABLE>

* Through February 19, 1999

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,
                                                     ------------------------------------------------------------------
                                           1999*          1998          1997          1996          1995          1994
                                       ---------     ---------     ---------     ---------     ---------     ---------
<S>                                    <C>           <C>           <C>           <C>           <C>           <C>
High                                       $5.71         $7.31         $6.13         $5.79         $6.01         $5.76
Low                                         4.92          4.72          4.18          4.67          4.36          4.63
Average                                     5.32          5.54          4.87          5.18          5.20          5.29
End of Period                               5.59          4.87          6.13          4.87          5.11          4.87
</TABLE>

* Through February 19, 1999

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,
                                       --------------------------------------------------------------------
                            1999*           1998          1997          1996          1995             1994
                         ----------    ---------     ---------     ---------    ----------        ---------
<S>                     <C>            <C>           <C>           <C>           <C>              <C> 
High                     C$  1.4870    C$ 1.4075     C$ 1.3353     C$ 1.3310     C$ 1.3285        C$ 1.3103
Low                          1.5298       1.5765        1.4358        1.3822        1.4238           1.4078
Average                      1.5092       1.4823        1.3838        1.3638        1.3689           1.3699
End of Period                1.4903       1.5512        1.4352        1.3697        1.3655           1.4030
</TABLE>

* Through February 19, 1999

CONVERSION TABLE
For ease of reference, the following conversion factors are provided.  The term
"ounce" as used in this report means "troy ounce."

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

                                      48
                       
<PAGE>
 
MINE PROCESSING
Milling is the traditional method of recovering gold from ore.  All of the
Company's producing mines including Lupin use milling.  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 50.

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 51.

                                      49
<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 (SO\\2\\) 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.

                                      50
<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 100 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.
      
                                      51
<PAGE>
 
                           ITEM 3-LEGAL PROCEEDINGS

ALASKA-JUNEAU
During 1994, the U.S. Attorney began an investigation of potential Clean Water
Act violations at the Alaska-Juneau property.  The investigation was to
determine whether the Company unlawfully discharged pollutants from the drainage
tunnel without a National Pollution Discharge Elimination System (NPDES) permit.
On September 2, 1997, the U.S. Attorney sent a letter stating that "...the
United States will not proceed with a criminal prosecution for Federal Clean
Water Act violations at this time."  While this does not foreclose possible
criminal changes at a later date if the Department of Justice finds new
information warranting prosecution, as a practical matter, this ends the threat
of a criminal action.  A civil action could be taken by the EPA.

See "Business and Properties-Other-Government Regulation and Environmental
Issues."

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


          ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth
quarter of 1998.

                                      52
<PAGE>
 
                                    PART II

ITEM 5-MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS

MARKET INFORMATION

The Company's common shares were first sold to the public at $2.36 per share in
April 1983 after giving effect to the six-for-five share split in 1983 and the
two-for-one share split in 1987.  The Company's current stock exchange listings,
together with the date of listing, are set out below.

     Canada-Toronto (April 1983)
     United States-American (October 1983)
     France-Paris (March 1985)
     Belgium-Brussels (October 1985)
     Switzerland-Zurich (April 1987)
     Germany-Frankfurt (November 1988)

The following table sets forth for the period from January 1, 1997 through
January 31, 1999 the high and low reported prices and trading volume of the
common shares on The Toronto Stock Exchange and the American Stock Exchange.

<TABLE>
<CAPTION>
                                        The Toronto Stock Exchange                       American Stock Exchange
                                        --------------------------                       ------------------------
                                     High           Low          Volume            High           Low          Volume
                                      (Canadian Dollars)     (shares in               (U.S. Dollars)       (shares in
                                                             thousands)                                    thousands)
---------------------------------------------------------------------------------------------------------------------
<S>                                 <C>             <C>      <C>                   <C>            <C>      <C>
1997
----
First Quarter                       10.80           8.10          9,264            7.94           6.00         36,001
Second Quarter                       9.40           7.35          8,533            6.88           5.31         25,854
Third Quarter                        8.15           6.55          5,402            5.94           4.75         21,262
Fourth Quarter                       8.10           2.85         12,375            5.88           2.00         44,273
1998
----
First Quarter                        3.70           2.20          9,716            2.63           1.25         40,234
Second Quarter                       5.60           3.15          5,622            3.88           2.19         20,497
Third Quarter                        4.05           2.40          5,221            2.69           1.56         19,041
October                              4.30           3.22          1,082            2.81           2.06          4,950
November                             3.80           3.00          1,735            2.94           2.06          5,546
December                             3.35           2.65            581            2.19           1.69          4,366
1999
----
January                              3.18           2.50            859            2.19           1.63          3,244
---------------------------------------------------------------------------------------------------------------------
</TABLE>

On February 19, 1999, the closing price of the common shares on The Toronto
Stock Exchange and on the American Stock Exchange was C$2.65 and U.S. $1.88,
respectively.

On February 19, 1999, the Company had 140,607,145 common shares outstanding held
by approximately 66,000 registered and nominee shareholders.

DIVIDENDS
The Company suspended payment of dividends beginning in 1997.  Historically,
dividends payable to Canadian residents have been converted to and paid in
Canadian dollars.

The declaration and payment of future dividends is dependent upon the Company's
capital requirements,

                                      53
<PAGE>
 
earnings and economic outlook.  Additionally, in 1998, the Company exercised its
right to defer its April and October interest payment to holders of the capital
securities.  During the deferral period, the Company is prohibited from paying
dividends.

See "Certain Tax Matters-Canadian Federal Income Tax Considerations" for
information with respect to Canadian withholding tax applicable to non-Canadian
shareholders.

CERTAIN TAX MATTERS
The following paragraphs summarize certain United States and Canadian federal
income tax considerations in connection with the receipt of dividends paid on
common shares of the Company and certain United States and Canadian federal
income tax considerations in connection with a disposition of common shares.
These tax considerations are stated in brief and general terms and are based on
United States and Canadian law currently in effect.  There are other potentially
significant United States and Canadian federal income tax considerations and
state, provincial or local income tax considerations with respect to ownership
and disposition of the common shares which are not discussed herein.  The tax
considerations relative to ownership and disposition of the common shares may
vary from taxpayer to taxpayer depending on the taxpayer's particular status.
Accordingly, prospective purchasers should consult with their tax advisors
regarding tax considerations which may apply to their particular situation.

United States Federal Income Tax Considerations
-----------------------------------------------
Dividends on common shares paid to U.S. citizens or corporations (including any
Canadian federal income tax withheld) will be generally subject to U.S. federal
ordinary income taxation to the extent that a shareholder received a
distribution out of the shareholder's ratable share of the Company's current or
accumulated earnings and profits (e.g., a taxable dividend distribution).  To
the extent that the amount of the dividend distribution exceeds the
shareholder's ratable share, such excess would not be taxable but would reduce
the shareholder's basis in the Company's common stock.  To the extent that the
distribution exceeds the shareholder's adjusted basis in the shares (i.e. cost
less all non-taxable dividend distributions), the excess would be taxable as a
gain as if the shareholder had sold or exchanged the shares.  In this case,
holding periods for capital gain purposes would be the same as the holding
period for such stock from which that dividend would be attributed.  Such
dividends will not be eligible for the deduction for dividends received by
corporations (unless such corporation owns by vote and value at least 10% of the
stock of the Company, in which case a portion of such dividend may be eligible
for such deduction).

U.S. corporations, U.S. citizens and U.S. residents will generally be entitled,
subject to certain limitations, to a credit against their U.S. federal income
tax for Canadian federal income taxes withheld from such dividends.  Taxpayers
may claim a deduction for such taxes if they do not elect to claim such tax
credit.  No deduction for foreign taxes may be claimed by an individual taxpayer
who does not itemize deductions.  Because the application of the foreign tax
credit depends upon the particular circumstances of each shareholder,
shareholders are urged to consult their own tax advisors in this regard.

The Company believes that it is not a "passive foreign investment company" (a
"PFIC"), a "foreign personal holding company" (a "FPHC"), or a "controlled
foreign corporation" (a "CFC"), for United States Federal income tax purposes,
and the Company does not expect to become a PFIC, a FPHC or a CFC.  If the
Company were, or were to become, a PFIC, a FPHC, or a CFC, some or all United
States shareholders would be required to include in their taxable income certain
undistributed amounts of the Company's income, or, in certain circumstances, to
pay an interest charge together with tax calculated at maximum rates on certain
"excess distributions," including gains on the sale of stock.

                                      54
<PAGE>
 
Any United States person who owns 5% or more in value of the stock of the
Company may be required to file IRS Form 5471 with respect to the Company and
its non-United States subsidiaries to report certain acquisitions or
dispositions of stock of the Company.  Annual filings of Form 5471 would be
required from any United States person owning 50% or more of the stock of the
Company or, if the Company were a FPHC or a CFC, from certain United States
persons owning 10% or more of the stock of the Company.

Canadian Federal Income Tax Considerations
------------------------------------------
Dividends paid on common shares held by non-residents of Canada will generally
be subject to Canadian withholding tax.  This withholding tax is levied at the
basic rate of 25%, although this rate may be reduced by the terms of any
applicable tax treaty.  The Canada-U.S. tax treaty provides that the withholding
rate on dividends paid to U.S. residents on common shares is 5%, if such
dividends were paid to a shareholder which is a company and which owns at least
10% of voting stock of the Company, or 15% in all other cases.  Generally, a
non-resident of Canada who holds common shares as capital property will not be
subject to Canadian federal income tax on capital gains realized on the
disposition of his or her common shares provided that during the five years
preceding the disposition the non-resident, together with non-arm's-length
persons, has not at any time owned 25% or more of the issued shares of any class
of the Company.

                                      55
<PAGE>
 
                        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 13 to
the Company's consolidated financial statements).  This information should be
read in conjunction with the audited consolidated financial statements and the
notes thereto.

<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA/(1)/
Year ended December 31
millions of U.S. dollars except
for gold price and per share data                                   1998         1997         1996         1995       1994
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>          <C>          <C>          <C>       <C> 
STATEMENT OF OPERATIONS DATA
Revenue                                                            $ 232.2      $ 305.4      $ 337.3      $ 360.7   $  377.6
Average gold price realized per ounce                              $   333      $   362      $   384      $   388   $    387
Earnings (loss) before taxes/(2)/                                  $ (19.8)     $(418.7)     $(176.1)     $ (44.7)  $   13.0
Effective tax rate                                                    (1.8%)       (0.4%)       (0.4%)        7.2%     (33.3%)
Earnings (loss) before preferred share dividends/(2) (4)/          $ (20.1)     $(420.5)     $(176.7)     $ (41.6)  $   17.3
Net earnings (loss)/(2)/                                           $ (20.1)     $(420.5)     $(176.7)     $ (50.1)  $    8.0
Net earnings (loss) attributable to common shareholders/(2)(3)     $ (32.6)     $(426.2)     $(176.7)     $ (50.1)  $    8.0
Earnings (loss) per common share/(2)/                              $ (0.23)     $ (3.06)     $ (1.31)     $ (0.43)  $   0.07
Weighted average common shares outstanding (millions)                140.1        139.4        134.4        116.2      112.5
BALANCE SHEET DATA
Working capital (deficiency)                                       $ (13.9)     $ (28.7)     $ (52.9)     $ 109.6   $  186.2
Current ratio                                                         0.81         0.73         0.74         1.84       4.24
Total assets                                                       $ 368.1      $ 432.8      $ 832.1      $ 871.2   $  881.7
Gold, silver and currency financings                               $  52.8      $  66.5      $ 182.9      $ 152.8   $  132.7
Deferred income taxes                                              $   7.5      $   7.9      $   8.4      $   8.1   $    8.4
Common shareholders' equity                                        $ 133.8      $ 153.7      $ 492.3      $ 588.9   $  509.7
Common shares outstanding (millions)                                 140.6        139.4        139.4        129.9      112.7
OTHER DATA
Dividends paid on common shares - total                            $    --      $    --      $  10.1      $   9.0   $    8.5
                                - per share                        $    --      $    --      $0.0750      $0.0750   $ 0.0750
Dividends paid on convertible preferred                                            
   shares of subsidiary/ (4)/  - total                             $    --      $    --      $    --      $   8.5   $   10.1
                               - per share                         $    --      $    --      $    --      $  1.75   $   1.75
Net cash flows provided from (used in) operating activities        $  14.1      $  (9.2)     $  29.9      $  67.3   $   92.2
   activities
Capital and exploration spending                                   $  24.1      $ 151.1      $ 161.7      $ 138.3   $   66.8
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

/(1)/ This information should be read in conjunction with the Company's audited
      consolidated financial statements and accompanying notes. Contingencies
      are described in notes 16 and 17 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. See also note 13 to
      the Company's consolidated financial statements.

<TABLE>
<CAPTION>
                                                 1998            1997            1996            1995          1994  
      ---------------------------------------------------------------------------------------------------------------
      <S>                                       <C>            <C>             <C>              <C>           <C>    
      Earnings (loss) before income taxes       $ (39.5)       $ (505.8)       $ (173.1)        $ (39.2)      $ 19.2 
      Net earnings (loss)                       $ (39.9)       $ (460.6)       $ (173.7)        $ (44.6)      $  9.3 
      Earnings (loss) per common share          $ (0.28)       $  (3.30)       $  (1.29)        $ (0.38)      $ 0.08 
      Total assets                              $ 358.6        $  423.9        $  919.6         $ 881.3       $872.6 
      Deferred income taxes                     $   7.5        $    7.9        $   55.0         $   8.1       $  8.4 
      Common shareholders' equity               $  12.6        $   55.9        $  533.1         $ 599.0       $500.6 
      --------------------------------------------------------------------------------------------------------------- 
</TABLE>

/(2)/ In 1997, the Company recorded a $362.7 million provision for impaired
      assets and other charges ($2.60 per share). In 1996, the Company recorded
      a $30.0 million ($0.22 per share) provision related to the estimated costs
      to remove waste 

                                      56
<PAGE>
 
      rock from a portion of the Cove pit wall that had collapsed 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)/ After interest expense on the equity portion of the capital securities,
      issued in March 1997. See note 6 to the consolidated financial statements.

/(4)/ All of the outstanding shares of preferred stock of subsidiary were
      redeemed or converted into common shares of the Company during 1995.

                                      57
<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 1996 through 1998 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 13 to the Company's consolidated
financial statements.

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 "Cautionary 'Safe Harbor' Statement under the United States
Private Litigation Reform Act of 1995", "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 had a net loss of $20.1 million ($0.23 per share) in 1998, compared
with $420.5 million ($3.06 per share) in 1997 and $176.7 million ($1.31 per
share) in 1996.

The 1998 results reflect reduced operating costs and decreased exploration and
development spending compared to 1997, partially offset by lower revenues
resulting from lower gold and silver volumes and decreased average gold price
realized.  The 1997 results reflect $346.0 million in provisions for asset
impairment (see note 8 to the consolidated financial statements) and $16.7
million of severance expense related to the downsizing, as well as lower gold
and silver prices realized and lower volume of gold sold when compared to 1996.

The average gold price realized by the Company in 1998 was $333 per ounce,
including forward sales, put options, gold loan repayments and the impact of
deferred revenue related to the restructuring of hedge positions.  This was
above the average market price of $294 per ounce in 1998, but lower than the
$362 per ounce average price realized in 1997.  To help protect against any
potential further decline in the gold price, the Company has hedged over 90% of
its estimated 1999 gold production at a minimum average price of $349 per ounce.

Production targets for 1999 are 455,000 to 475,000 ounces of gold and 7 to 8
million ounces of silver.

In 1998, net cash flows provided by operating activities were $14.1 million
after cash exploration and development expenses of $12.0 million.

The Company's sharply reduced exploration and development programs, in response
to market conditions, may be expected to limit the discovery and development of
new reserves.  Over the long term, this could have adverse implications since
McCoy/Cove and Kettle River are nearing the ends of their mine lives.

RESULTS OF OPERATIONS
Revenue
-------
Revenue declined to $232.2 million in 1998 from $305.4 million in 1997
principally due to decreased gold and silver sales volume ($62.3 million)
reflecting declining grades at McCoy/Cove and Kettle River and the absence of
production at Lupin due to the temporary suspension of operations in January
1998.  Revenue was also impacted by lower gold prices realized in 1998 compared
to 1997 ($16.0 million).  In 

                                      58
<PAGE>
 
1997, revenue declined to $305.4 million from $337.3 million in 1996, reflecting
lower gold prices realized and lower production at McCoy/Cove and Lupin related
to declining ore grades.

Gold and Silver Hedging
-----------------------
The Company's profitability is determined in large part by gold and silver
prices.  Market prices of gold and silver are determined by factors beyond the
Company's control.  The Company reduces the risk of future price declines by
hedging a portion of its production.  The principal hedging tools used are gold
and silver loans, forward sale contracts, spot-deferred contracts, swaps and
options.  The Company's hedging activities and commitments are described in
detail in note 16 to the consolidated financial statements.

In 1998, the Company delivered approximately 96% of gold production against
forward sales, put options and gold loans at an average commitment price of $341
per ounce.  This compares with 33% of gold production at an average price of
$397 in 1997 and 25% of gold at an average price of $375 in 1996.  Approximately
50% of silver production was delivered against forward sales at an average cash
price of $5.44 per ounce in 1998.  This compares to 7% at an average price of
$5.32 in 1997 and 45% at an average price of $5.85 in 1996.  Deliveries in 1997
reflect the impact of the January 1997 repurchase of the Company's outstanding
gold and silver forward sales contracts and replacement of these contracts with
put options.  The Company did not rebuild its forward portfolio until the third
and fourth quarters of 1997.

In 1999, the Company has protected itself against price declines by hedging over
90% of its planned 1999 gold production at a minimum average price of $349 per
ounce, along with 5.2 million ounces of silver at $5.76 per ounce.

Operating Costs
---------------
Consolidated cash operating costs were $208 per ounce of gold produced in 1998,
$249 in 1997 and $254 in 1996.  The 1998 decrease results from the impact of
third quarter 1997 write-down deferred mining balances, lower reagent usage and
manpower reductions at McCoy/Cove, lower stripping costs at Round Mountain
associated with the change in the mine plan instituted in 1997 and the absence
of higher-cost production from Lupin in 1998.  These reductions in cost per
ounce were partially offset by lower mill grades at McCoy/Cove and Kettle River.
The 1997 decrease reflected a series of cost-reduction initiatives, along with
increased dedicated pad tonnage and higher reusable pad recoveries at Round
Mountain.  The 1996 increase was principally due to the planned mining of lower-
grade ores.  Cash operating costs per ounce vary with the number of tons and
grade of ore processed.  They generally reflect mining and processing costs,
most significantly labor, consumable materials, repairs of machinery and
equipment, fuel, utilities and environmental compliance.

The Company's cash operating cost target for 1999 is $235 to $245 per ounce of
gold produced, reflecting the anticipated lower production levels.

Royalties
---------
Royalties decreased to $7.5 million in 1998 and $8.3 million in 1997 from $9.6
million in 1996 primarily due to lower precious metals prices.  The Company's
target for 1999 is $7 to $8 million, reflecting similar levels of royalty
bearing production.  Details of the Company's royalties are provided in note 17
to the consolidated financial statements.

Production Taxes
----------------
Production taxes increased in 1998 compared to 1997 due to timing differences.
Production taxes decreased in 1997 compared to 1996, reflecting lower precious
metals prices and lower gold production 

                                      59
<PAGE>
 
at McCoy/Cove. Less cash flow reduces the net profit on which the production
taxes are calculated. Production taxes are expected to be about the same in 1999
as 1998.

Depreciation and Amortization
-----------------------------
Depreciation and amortization decreased to $63.3 million from $79.3 million in
1997.  Amortization varies with the quantity of gold and silver sold and the mix
of production from the various mines.  The quantities of the Company's proven
and probable reserves and other mineralization also affect amortization expense,
as the Company's investment is amortized over these ounces.  Amortization
expense of $17.5 million in 1998 and $27.4 million in 1997 compared to $29.8 in
1996 reflect the impact of the third quarter 1997 write-down of ore body
carrying values at Kettle River.  1998 depreciation was further decreased by the
absence of Lupin production in 1998.  Depreciation expense was $45.8 million in
1998, $51.9 million in 1997, and $56.7 million in 1996.  The decreases in
depreciation expense in 1998 and 1997 from 1996 reflect the fact that as
McCoy/Cove approaches the end of its useful life, major groups of its assets are
fully depreciated and not being replaced.  1998 depreciation expense was also
impacted by reduced depreciation of Lupin assets during the temporary suspension
of operations.

On a per-ounce basis, depreciation and amortization expense was $87 in 1998, $90
in 1997 and $98 in 1996.  The depreciation portion alone was $62 in 1998, $58 in
1997 and $64 in 1996.  The amortization portion was $25 in 1998, $32 in 1997 and
$34 in 1996.

For 1999, the Company expects depreciation and amortization expense to be in the
range of $55 to $60 million, down from $63.3 million in 1998.

Reclamation and Mine Closure
----------------------------
Reclamation and mine closure expense decreased in 1998 compared to 1997
primarily due to the absence of production at the Lupin mine, and increased from
1996 to 1997, reflecting increased accruals for reclamation and closure
activities (see note 7 to the consolidated financial statements).  For 1999, the
Company expects this expense to be in the range of $5 to $6 million.

General and Administrative
--------------------------
General and administrative costs were sharply reduced in 1998 and 1997,
reflecting the downsizings and cost reduction initiatives undertaken in response
to depressed gold prices.  These costs had risen in 1996, mostly due to
increased permitting, exploration and business development activities.  For
1999, the Company expects general and administrative costs to be in the range of
$7 to $8 million.

Exploration and Development
---------------------------
Exploration and development expense was $12.0 million in 1998, down from $34.9
million in 1997, in response to depressed gold prices.  Exploration and
development expenses in 1996 reflected the Company's stepped-up efforts to
locate and develop potential new gold deposits in response to the maturation of
the McCoy/Cove and Kettle River mines.

For 1999, the Company expects its exploration and development expenditures to
total $10 to $12  million, similar to 1998.  This budgeted amount will be
reviewed if gold prices improve.

Interest and Other
------------------
Interest and other expenses are described in note 9 to the consolidated
financial statements.  The net interest expense portion was $5.2 million in
1998, $2.6 million in 1997, and $2.1 million in 1996.   In 1998, the other
portion includes the net gains on the sale of various assets of $7.9 million,
partially offset by an unrealized loss of $3.0 million due to market declines in
the Company's share investment portfolio.

                                      60
<PAGE>
 
Provision for Impaired Assets and Other Charges
-----------------------------------------------
Provision for impaired assets and other charges of $362.7 million in 1997
consisted of $346.0 million in provisions for impaired assets and $16.7 million
for severance costs.  The $346.0 provision included $50.0 million to write off
the Kingking project in the Philippines; $143.6 million to write off the
Company's investment in Santa Elina;  $127.0 million to reduce the carrying
values of Lupin ($65.0 million), McCoy/Cove ($47.0 million) and Kettle River
($15.0 million); and $25.4 million to write down certain share investments and
other assets to market value and to provide for estimated legal and closure
expenses.

The $107.1 million charge in 1996 consisted of $77.1 million to write off the
Company's entire investment in the Alaska-Juneau project, including a $20.0
million reserve to cover estimated reclamation and closure responsibilities, and
a $30.0 million provision for McCoy/Cove pit wall remediation.

See note 8 to the consolidated financial statements.

Income Tax Expense
------------------
Income tax expense is described in note 10 to the consolidated financial
statements.

LIQUIDITY AND CAPITAL RESOURCES
In December 1997, the price of gold fell as low as $281 per ounce, its lowest
level in 18 years.  In 1998, the market price of gold averaged $294 per ounce.
The Company needs a significantly higher gold price before it will resume
operations at the Lupin mine, proceed with construction of the Aquarius or the
Paredones Amarillos mines, expand its exploration activities, or pursue new
acquisitions or investments.

Net cash flows provided from operating activities were $14.1 million in 1998,
compared with net cash flows used in operating activities of $9.2 million in
1997, and net cash flows provided from operating activities of $29.9 million in
1996.  The 1998 results reflect decreased cash operating costs and decreased
exploration and development spending, partially offset by lower gold and silver
revenues.

Net cash used in investing activities in 1998 totaled $4.3 million.  Included
was $27.0 million invested in mining properties, plant and equipment.  This was
partly offset by proceeds from the first quarter 1998 repurchase of a portion of
the Company's gold forward position ($8.7 million), proceeds on the sale of the
Company's investment in Santa Elina ($6.3 million), proceeds on the sale of
mining properties, plant and equipment ($5.0 million) and proceeds on the sale
of certain share investments ($3.0 million.)

Cash used in financing activities was $18.8 million in 1998, primarily related
to debt repayments.

The Company currently has $18.0 million outstanding, and up to $32.0 million or
gold equivalent, subject to covenant limitations, available until 2001, under
its revolving credit facility. The Company currently has no restrictions on the
borrowing capacity of this line based on the trailing 90-day average spot price
of $294 per ounce of gold. A depressed gold price can limit the Company's
ability to borrow under the revolving credit facility, which is measured at the
end of each quarter. Continuation of gold prices at depressed levels could have
the effect of reducing or eliminating the Company's borrowing capacity under
this facility. The Company believes it is currently in compliance with the
covenants under the credit facility. The Company took certain actions in 1998 to
improve cash flows, such as reductions in new project and exploration
expenditures and increased hedging activities. The Company is continuing with 
these efforts in 1999.

At year-end 1998, the Company had $8.0 million in cash and cash equivalents and
$3.3 million in short-term investments.

                                      61
<PAGE>
 
At December 31, 1998, the Company's current debt was $11.7 million and its long-
term debt was $41.1 million.

In March 1997, the Company issued $100.0 million of 11% capital securities due
2027 (note 6 to the consolidated financial statements). The Company has the
right to defer interest payments on the capital securities for up to 10
consecutive semi-annual periods. During a period of interest deferral, interest
accrues at a rate of 12% per annum, compounded semi-annually. The Company, at
its option, may satisfy its deferred interest obligation by delivering common
shares to a trustee for sale, the proceeds of which would be remitted to the
holders of the securities in payment of the deferred interest. The present value
of the capital securities' principal amount, $4.7 million, has been classified
as debt within gold and other financings (note 5). The present value of the
future interest payments of $95.3 million, accrued interest related to the April
1999 interest payment plus deferred interest accrued at December 31, 1998 of
$12.7 million has been classified within a separate component of shareholders'
equity as the Company has the unrestricted ability to settle the future interest
payments by issuing its own common shares to the trustee for sale. The Company
has exercised its right to defer both its April 1998 and October 1998 interest
payments to holders of the capital securities.

The Company expects to spend $12 million for capital expenditures in 1999. The
Company will rely on its operating cash flow and credit facilities to fund its
planned 1999 capital expenditures. The Company will continue to monitor its
discretionary spending in view of the current low gold price environment and the
cost structure of its operating mines.

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 and floating forward contracts, 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
agreements and swaps, to reduce the impact of fluctuations in crude oil prices
on its operating costs. In 1997, the Company swapped a portion of its 11%
interest obligation for the capital securities for a gold delivery commitment,
reducing its effective interest rate. In the first quarter of 1998, the Company
restructured the gold swap agreement. The restructuring resulted in the
conversion of the swap ounces to forward sales commitments. See note 16 to the
consolidated financial statements.

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 note 16 to the Company's consolidated
financial statements.

                                      62
<PAGE>

The Company's obligation to purchase Canadian dollars are described in note 16
to the Company's consolidated financial statements.

The Company's crude oil commitments are described in note 16 to the Company's
consolidated statements.

See "Qualitative and Quantitative Disclosures about Market Risk."

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 17 to the Company's consolidated financial statements.

Lease commitments are described in note 17 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.

Other commitments and contingencies are discussed in notes 16 and 17 to the
consolidated financial statements.

IMPACT OF YEAR 2000

The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. The effects of the Year 2000 issue may be
experienced before, on, or after January 1, 2000, and, if not addressed, the
impact on operations and financial reporting may range from minor errors such as
slower transaction processing and slower financial reporting to significant
systems failure which could affect the Company's ability to conduct normal
business operations, which may result in the interruption of metal production.

The Company is assessing the Year 2000 issue and is in the process of modifying
or upgrading portions of its software to address the issue. The estimated cost
of this remediation is estimated to be less than $1 million and is being
expensed as incurred. To date, the Company has completed a substantial portion
of the planned modifications to information technology, and expects this work to
be concluded by the end of the first quarter of 1999. The Company is also
performing modifications to embedded computer systems within operating
equipment. The Company plans to complete modifications to critical operating
systems such as the crusher, mill and truck dispatch systems by the end of the
second quarter 1999. Contingency plans have and continue to be developed for
other equipment, such as the rolling back of clocks for date-sensitive
equipment. Additionally, critical third party suppliers of reagents, power, fuel
and other mine site supplies have been contacted to inquire about uninterrupted
delivery of major operating parts and materials. The Company intends to have
fully stocked inventories of critical supplies at the end of 1999. A prolonged
delay in the delivery of key supplies such as electrical power, fuel and
reagents could result in the interruption of metal production.

Although the Company expects its systems to be year 2000 compliant before
December 31, 1999, it cannot predict the outcome or success of the year 2000
compliance programs of its suppliers. The Company also cannot predict whether it
will find additional problems that would result in unplanned upgrades of
applications after December 31, 1999.

The expected cost and date of completion of the Year 2000 project are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources,
third party compliance and other factors. However, there can be no guarantee
that these estimates will be achieved, and actual results could differ from
those anticipated. It is not possible to be certain that all aspects of the Year
2000 issue affecting the Company, including those related to the efforts of
suppliers, or other third parties, will be fully resolved.

                                      63
<PAGE>
 
               ITEM 7A-QUALITATIVE AND QUANTITATIVE DISCLOSURES
                               ABOUT MARKET RISK

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 and floating forward contracts, 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
agreements and swaps, to reduce the impact of fluctuations in crude oil prices
on its operating costs. In 1997, the Company swapped a portion of its capital
security interest obligation for a gold delivery commitment, effectively
reducing its interest obligation.

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.

                                      64
<PAGE>
 
The following table provides information as of December 31, 1998 about the
Company's derivative financial instruments and other financial instruments that
are sensitive to changes in commodity prices and interest rates.

<TABLE>
<CAPTION>
                                                       Expected Year of Maturity                      
                                    -------------------------------------------------------------    
(Amounts in millions of U.S.                                                                         Fair Value
dollars, except amounts per                                                                There-   of Financial
ounce or unless otherwise noted)          1999       2000      2001      2002      2003     after    Instruments
----------------------------------------------------------------------------------------------------------------
<S>                                   <C>        <C>        <C>       <C>       <C>        <C>      <C>
Assets:
   Short-term investments             $    3.3         --        --        --        --        --          $ 3.3
Liabilities:
   Currency loans                     $    7.8   $   10.7   $  22.5        --        --        --          $41.0
   Gold loans                                                                                              $ 6.9
       Ounces                           15,367      8,658        --        --        --        --
       Price per ounce                $    393   $    388        --        --        --        --
   Capital securities /(1)/                                                                                $ 4.9
       Principal                                                                           $100.0
       Fixed interest rate /(2)/            11%        11%       11%       11%       11%       11%
Derivative financial instruments:
   Gold forward sales                                                                                      $25.4
       Ounces                          255,509    257,925    90,000        --        --        --
       Price per ounce                $    374   $    341   $   321        --        --        --
   Silver forward sales                                                                                    $12.9
       Ounces (000's)                    5,185      6,500     6,500        --        --        --
       Price per ounce                $   5.82   $   6.00   $  6.00        --        --        --
   Gold put options purchased                                                                              $ 0.4
       Ounces                          158,400         --    50,000    50,000    50,000        --
       Price per ounce                $    304         --   $   310   $   310   $   310        --
   Gold call options sold                                                                                  $  --
       Ounces                           25,000         --        --        --        --        --
       Price per ounce                $    300         --        --        --        --        --
   Silver put options purchased                                                                            $(0.4)
       Ounces (000's)                       --      1,000     1,000        --        --        --
       Price per ounce                      --   $   6.00   $  6.00        --        --        --
   Silver call options sold                                                                                $(0.5)
       Ounces (000's)                    2,210         --        --        --        --        --
       Price per ounce                $   5.67         --        --        --        --        --
   Silver put options sold                                                                                 $(5.9)
       Ounces (000's)                    2,000      7,500     7,500        --        --        --
       Price per ounce                $   4.75   $   4.75   $  4.75        --        --        --
   Silver call options purchased                                                                           $ 1.1
       Ounces (000's)                    3,000      6,500     6,500        --        --        --
       Price per ounce                $   9.00   $   9.00   $  9.00        --        --        --
   Foreign currency contracts                                                                              $(6.8)
       Canadian dollars (000's)         49,000     24,000        --        --        --        --
       Exchange rate (C$ toUS$1.00)       1.36       1.34        --        --        --        --
   Crude oil contracts                                                                                     $(0.1)
       Barrrels                         20,000         --        --        --        --        --
       Price per barrel               $  17.63         --        --        --        --        --
----------------------------------------------------------------------------------------------------------------
</TABLE>
                                                                                
/(1)/ At December 31, 1998, the present value of the $100.0 million principal
      payment in 2027 is $4.9 million. At December 31, 1998, the fair value of
      the entire capital securities obligation, including the interest
      component, is $52.0 million.

/(2)/ During a period of interest deferral, the interest rate on the capital
      securities is 12%, compounded semi-annually.

                                      65
<PAGE>
 
              ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Management's Responsibility For Financial Reporting......................     67
Report Of Independent Chartered Accountants..............................     68
Consolidated Balance Sheet...............................................     69
Consolidated Statement Of Operations.....................................     70
Consolidated Statement Of Deficit........................................     70
Consolidated Statement Of Cash Flow......................................     71
Notes To Consolidated Financial Statements...............................     72
</TABLE>

                                      66
<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 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 management and the Audit
Committee.

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


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

January 25, 1999  

                                      67
<PAGE>
 
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS

The Board of Directors
Echo Bay Mines Ltd.

We have audited the consolidated balance sheets of Echo Bay Mines Ltd. as at
December 31, 1998 and 1997 and the consolidated statements of operations,
deficit and cash flow for each of the years in the three-year period ended
December 31, 1998. 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, 1998 and 1997 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998 in
accordance with accounting principles generally accepted in Canada.

Edmonton, Canada                         (signed) Ernst & Young LLP
January 25, 1999                         Chartered Accountants

                                      68
<PAGE>
 
                              ECHO BAY MINES LTD.

                          CONSOLIDATED BALANCE SHEET

                                  December 31

<TABLE>
<CAPTION>
thousands of U.S. dollars                                                     1998                1997
--------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                 <C>
ASSETS                                                                                  
Current assets:                                                                         
      Cash and cash equivalents                                          $   7,987           $  16,953
      Short-term investments                                                 3,336              10,325
      Interest and accounts receivable                                       3,585               5,927
      Inventories (note 2)                                                  37,929              41,168
      Prepaid expenses and other assets                                      6,635               5,068
--------------------------------------------------------------------------------------------------------
                                                                            59,472              79,441
                                                                                        
Plant and equipment (note 3)                                               196,670             238,948
Mining properties (note 3)                                                  95,738             107,820
Long-term investments and other assets                                      16,196               6,558
--------------------------------------------------------------------------------------------------------
                                                                         $ 368,076           $ 432,767
--------------------------------------------------------------------------------------------------------
                                                                                        
LIABILITIES AND SHAREHOLDERS' EQUITY                                                    
Current liabilities:                                                                    
      Accounts payable and accrued liabilities                           $  45,336           $  82,371
      Income and mining taxes payable                                        2,941               3,494
      Gold and other financings (note 5)                                    11,652              14,779
      Deferred income (note 5)                                              13,455               7,461
-------------------------------------------------------------------------------------------------------- 
                                                                            73,384             108,105
                                                                                        
Gold and other financings (note 5)                                          41,119              51,745
Deferred income (note 5)                                                    52,588              54,708
Other long-term obligations (note 7)                                        59,718              56,607
Deferred income taxes                                                        7,513               7,941
                                                                                        
Commitments and contingencies (notes 16 and 17)                                         
                                                                                        
Common shareholders' equity:                                                            
      Common shares (note 12), no par value, unlimited                                  
       number authorized; issued and outstanding -                                
       140,607,145 shares (139,370,031 shares in 1997)                     713,343             709,593
      Capital securities (note 6)                                          110,862              95,753
      Deficit                                                             (663,875)           (631,320)
      Foreign currency translation                                         (26,576)            (20,365)
-------------------------------------------------------------------------------------------------------- 
                                                                           133,754             153,661
-------------------------------------------------------------------------------------------------------- 
                                                                         $ 368,076           $ 432,767
--------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes.

                                      69
<PAGE>
 
                              ECHO BAY MINES LTD.

                     CONSOLIDATED STATEMENT OF OPERATIONS

                            Year ended December 31

<TABLE>
<CAPTION>
thousands of U.S. dollars,
except for per share data                                                   1998            1997            1996         
------------------------------------------------------------------------------------------------------------------       
<S>                                                                   <C>             <C>             <C>                
Revenue                                                                $ 232,181      $  305,429      $  337,316         
------------------------------------------------------------------------------------------------------------------       
Expenses:                                                                                                                
 Operating costs                                                         148,769         213,120         221,126         
 Royalties (note 17)                                                       7,547           8,304           9,625         
 Production taxes                                                          1,618             865           2,440         
 Depreciation and amortization                                            63,286          79,316          86,491         
 Reclamation and mine closure                                              6,295           8,819           6,298         
 General and administrative                                                8,027          10,948          13,577         
 Exploration and development                                              12,010          34,927          63,619         
 Interest and other (note 9)                                               4,398           5,191           3,090         
 Provision for impaired assets and other charges (note 8)                     --         362,665         107,134         
------------------------------------------------------------------------------------------------------------------       
                                                                         251,950         724,155         513,400         
------------------------------------------------------------------------------------------------------------------        
Loss before income taxes                                                 (19,769)       (418,726)       (176,084)        
Income tax expense (note 10)                                                 354           1,782             618         
------------------------------------------------------------------------------------------------------------------        
Net loss                                                               $ (20,123)     $ (420,508)     $ (176,702)        
------------------------------------------------------------------------------------------------------------------        
                                                                                                                         
Net loss attributable to common shareholders (note 6)                  $ (32,555)     $ (426,222)     $ (176,702)        
------------------------------------------------------------------------------------------------------------------        
                                                                                                                         
Loss per share                                                         $   (0.23)     $    (3.06)     $    (1.31)        
------------------------------------------------------------------------------------------------------------------        
                                                                                                                         
Weighted average number of shares outstanding (thousands)                140,084         139,367         134,434         
------------------------------------------------------------------------------------------------------------------        
</TABLE>
        
                       CONSOLIDATED STATEMENT OF DEFICIT

                            Year ended December 31

<TABLE> 
<CAPTION>
thousands of U.S. dollars                                                   1998            1997            1996
------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>             <C>                <C>    
Balance, beginning of year                                           $  (631,320)     $ (201,931)     $  (15,109)
Net loss                                                                 (20,123)       (420,508)       (176,702)
Dividends on common shares (note 12)                                          --              --         (10,120)
Interest on capital securities, net of nil tax effect (note 6)           (12,432)         (5,714)             --
Issue costs related to capital securities (note 6)                            --          (3,167)             --
------------------------------------------------------------------------------------------------------------------
Balance, end of year                                                 $  (663,875)     $ (631,320)     $ (201,931)
------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes.

                                      70
<PAGE>
 
                              ECHO BAY MINES LTD.

                      CONSOLIDATED STATEMENT OF CASH FLOW

                             Year ended December 31

<TABLE>
<CAPTION>
thousands of U.S. dollars                                                                   1998           1997           1996 
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>           <C>            <C> 
CASH PROVIDED FROM (USED IN):
OPERATING ACTIVITIES
Net loss                                                                               $ (20,123)    $ (420,508)    $ (176,702)    
Add (deduct):
  Depreciation                                                                            45,792         51,887         56,737
  Amortization                                                                            17,494         27,429         29,754
  Non-cash portion of provision for impaired assets and other charges (note 8)                --        355,782        107,134
  Unrealized losses on share investments                                                   3,013          6,643             --
  Deferred (income) loss included in revenue (note 16)                                    (5,381)       (14,079)         4,244
  Deferral of gains on restructuring of hedge commitments (note 16)                        5,236             --             --
  Non-cash portion of exploration and development expense                                     --            436          7,035
  Net gain on sale of assets (note 9)                                                     (7,942)        (8,847)        (4,469)
  Other                                                                                      (90)           784          2,031
Change in cash invested in operating assets and liabilities:
  Interest and accounts receivable                                                         1,898          2,178           (184)
  Inventories                                                                              3,743         (5,753)         1,368
  Prepaid expenses and other assets                                                       (2,309)         2,812           (361)
  Accounts payable and accrued liabilities                                               (26,748)        (8,824)         3,245
  Income and mining taxes payable                                                           (512)           856             69
------------------------------------------------------------------------------------------------------------------------------ 
                                                                                          14,071         (9,204)        29,901      
------------------------------------------------------------------------------------------------------------------------------ 
INVESTING ACTIVITIES
Mining properties, plant and equipment                                                   (26,971)      (112,001)      (103,667)
Investment in Santa Elina (note 4)                                                            --             --        (11,268)
Proceeds on repurchase of Company's
  - gold and silver forward sales (note 16)                                                8,673         54,963             --
  - gold swap (note 16)                                                                       --          8,107             --
  - foreign exchange contracts (note 16)                                                      --          5,995             --
Proceeds on sale of short-term investments                                                 3,018          3,089             --
Long-term investments and other assets                                                      (534)       (21,626)        (3,499)
Proceeds on sale of investment in Santa Elina (note 4)                                     6,252             --             --
Proceeds on sale of plant and equipment                                                    3,763          1,920            801
Proceeds on sale of mining properties                                                      1,195             --             --
Proceeds on sale of long-term investments                                                     --          7,894         13,809
Other                                                                                        342         (1,362)            93
------------------------------------------------------------------------------------------------------------------------------
                                                                                          (4,262)       (53,021)      (103,731) 
------------------------------------------------------------------------------------------------------------------------------ 
FINANCING ACTIVITIES
Currency borrowings                                                                           --         15,538         34,714
Debt repayments                                                                          (18,327)      (131,749)       (38,179)
Capital securities issued, net of issuance costs (note 6)                                     --         96,700             --
Equity portion of interest on capital securities (note 6)                                     --         (4,270)            --
Common share dividends (note 12)                                                              --             --        (10,120)
Common share issues, net of issuance costs (note 12)                                          --             59          4,768
Other                                                                                       (448)          (296)            --
------------------------------------------------------------------------------------------------------------------------------
                                                                                         (18,775)       (24,018)        (8,817) 
------------------------------------------------------------------------------------------------------------------------------ 
Net decrease in cash and cash equivalents                                                 (8,966)       (86,243)       (82,647)
Cash and cash equivalents, beginning of year                                              16,953        103,196        185,843
------------------------------------------------------------------------------------------------------------------------------ 
Cash and cash equivalents, end of year                                                 $   7,987     $   16,953     $  103,196
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes.

                                      71
<PAGE>

                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General
Echo Bay Mines Ltd. mines, processes and explores for gold and silver. Gold
accounted for 79% of 1998 revenue and silver 21%.  In 1998, the Company had
three operating mines: Round Mountain in Nevada, USA; McCoy/Cove in Nevada, USA;
and Kettle River in Washington, USA.  All are 100% owned except for Round
Mountain, which is 50% owned.  In January 1998, the Company temporarily
suspended operations at its Lupin mine in the Northwest Territories, Canada.

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

The consolidated financial statements are prepared on the historical cost basis
in accordance with accounting principles generally accepted in Canada and, in
all material respects, conform with accounting principles generally accepted in
the United States, except as described in note 13.  The statements are expressed
in U.S. dollars.

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

Certain of the comparative figures have been reclassified to conform 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 is jointly controlled by all parties having an equity interest in
the joint venture, are accounted for using the proportionate consolidation
method to consolidate the Company's share of the joint ventures' assets,
liabilities, revenues and expenses.

Share investments
Short-term investments, comprised of publicly traded common shares, are recorded
at the lower of cost or quoted market prices, with unrealized losses included in
income.  Long-term common share investments are recorded at cost.  A provision
for loss is recorded in income if there were a decline in the market value of a
long-term share investment that was other than temporary.  If the Company's
share investment represents more than a 20% ownership interest and the Company
can exercise significant influence over the investee,  the equity method of
accounting is used.  The equity method reports the investment at cost, adjusted
for the Company's pro rata share of the investee's undistributed earnings or
losses since acquisition.

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

                                      72
<PAGE>

                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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

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.

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

Earnings (loss)  per share
Earnings (loss) per share is calculated based on the weighted average number of
common shares outstanding during the year.  For per share calculations, the
amount of capital securities interest that is charged directly to the deficit
decreases the earnings, or increases the loss, attributable to common
shareholders.  Fully diluted earnings (loss) per share is the same as basic
earnings (loss) per share because the Company's outstanding options and
restrictive share grants 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 develop 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 properties - 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.  These deferred costs are
charged to operating costs in the period in which the related 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.

                                      73
<PAGE>

                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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

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.

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, 1998 were $325 per ounce of gold and $5.75 per ounce of silver.
Based on year-end ore reserves and the current life-of-mine plan for each of the
Company's properties, 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 mine by comparing the net book
value with the estimated undiscounted future cash flow from the property.  For
purposes of this analysis, the net book value of each mine is reduced by
deferred hedging gains pertaining to future production from that mine as well as
reclamation and mine closure accruals.  If the net book value exceeds the
undiscounted future cash flow, then  a corresponding impairment write-down is
recorded.

Reserve risks
If the Company were to determine that its reserves and future cash flows should
be calculated at a significantly lower gold price than the $325 per ounce price
used at December 31, 1998, there would likely be a material reduction in the
amount of gold reserves.  In addition, if the price realized by the Company for
its gold or silver bullion were to decline substantially below the price at
which ore reserves were calculated for a sustained period of time, the Company
potentially could experience material write-downs of its investment in its
mining properties (note 8).  Under certain of such circumstances, the Company
might discontinue the development of a project or mining at one or more of its
properties or might temporarily suspend operations at a producing property and
place that property in a "care and maintenance" mode.  Reserves could also be
materially and adversely affected by changes in operating and capital costs and
other factors, including but not limited to, short-term operating factors such
as the
                                      74
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


need for sequential development of ore bodies and the processing of new or
different ore grades and ore types.

Significant changes in the life-of-mine plans can occur as a result of mining
experience, new ore discoveries, changes in mining methods and rates, process
changes, investments in new equipment and technology, and other factors.
Changes in the significant assumptions underlying future cash flow estimates,
including assumptions regarding precious metals prices, may have a material
effect on future carrying values and operating results.

Capitalization of interest
Interest cost is capitalized on construction programs until the facilities are
ready for their intended use.

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 and floating forward contracts, 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 agreements and swaps, to reduce the impact of fluctuations in crude oil
prices on its operating costs.  In 1997, the Company swapped a portion of its
capital security interest obligation for a gold delivery commitment, effectively
reducing its interest obligation.

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 delivered.

                                      75
<PAGE>

                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


2. INVENTORIES

<TABLE>
<CAPTION>
                                                       1998            1997 
--------------------------------------------------------------------------------
<S>                                               <C>                <C>
Precious metals  --  bullion                      $    14,704        $14,882  
                 --  in-process                         8,568          9,792  
Materials and supplies                                 14,657         16,494  
--------------------------------------------------------------------------------
                                                  $    37,929        $41,168  
--------------------------------------------------------------------------------
</TABLE>

3. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
Net book value                                                                          1998               1997
----------------------------------------------------------------------------------------------------------------------
                                                Plant and           Mining            Net Book           Net Book
Property and percentage owned                   Equipment         Properties            Value              Value
----------------------------------------------------------------------------------------------------------------------
<S>                                             <C>               <C>                 <C>               <C>
Round Mountain (50%)                            $ 73,881           $48,106            $121,987          $124,604        
McCoy/Cove (100%)                                 43,095            22,135              65,230            94,011        
Lupin (100%)                                      30,873                --              30,873            40,430        
Kettle River (100%)                                7,013             1,430               8,443            16,313        
Aquarius (100%)                                   36,394            13,087              49,481            52,784        
Paredones Amarillos (60%)                          2,452            10,980              13,432            11,020        
Other                                              2,962                --               2,962             7,606        
------------------------------------------------------------------------------------------------------------------- 
                                                $196,670           $95,738            $292,408          $346,768        
----------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Plant and equipment                                                  1998                                  1997
----------------------------------------------------------------------------------------------------------------------
                                                                   Net Book                              Net Book
                                                  Cost               Value              Cost               Value
----------------------------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>                 <C>               <C>
Land improvements and utility systems            $ 77,151          $ 13,950            $ 79,619           $ 16,382     
Buildings                                         149,442            46,343             145,808             51,308     
Equipment                                         386,161            95,598             393,494            118,117     
Construction in progress                           40,779            40,779              53,141             53,141     
------------------------------------------------------------------------------------------------------------------- 
                                                 $ 653,533         $196,670            $672,062           $238,948     
----------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Mining properties                                                                     1998              1997
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>               <C>
Producing mines' acquisition, exploration and development costs                      $270,585          $266,081      
Less accumulated amortization                                                         216,810           198,912      
-------------------------------------------------------------------------------------------------------------------
                                                                                       53,775            67,169     
Development properties' acquisition, exploration and development costs                 24,067            24,787     
Deferred mining costs                                                                  17,896            15,864     
------------------------------------------------------------------------------------------------------------------- 
                                                                                     $ 95,738          $107,820     
------------------------------------------------------------------------------------------------------------------- 
</TABLE>

4.  SANTA ELINA ACQUISITION
In 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) that increased the Company's 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, which held mining interests in
Brazil and Bolivia.

The Company accounted for the transactions, which had a total cost of $106.0
million, as the purchase of 

                                      76
<PAGE>

                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


an additional 43% of Santa Elina. The purchase price was allocated to the net
assets of Santa Elina based on the relative fair values, with the majority
allocated to mining properties. During 1997 and 1996, the Company increased its
ownership in Santa Elina to 58%. Santa Elina was accounted for using the
proportionate consolidation method, as the Company and Sercor jointly controlled
Santa Elina.

In 1997, the Company recorded $143.6 million in provisions for impaired assets
related to its investment in Santa Elina which effectively eliminated the
carrying value of the investment (note 8).  In April 1998, the Company sold its
investment in Santa Elina, receiving $6.3 million in cash, net of selling costs,
and a 48.1% interest in the Chapada exploration property in Brazil, to which the
Company has assigned no book value.  The purchase agreement calls for the
Chapada property to be marketed and sold at the earliest opportunity.

5. GOLD AND OTHER FINANCINGS AND DEFERRED INCOME

<TABLE>
<CAPTION>
                                                     Financings                            Deferred Income
                                        ------------------------------------   --------------------------------------
                                                  1998               1997                  1998               1997
----------------------------------------------------------------------------   --------------------------------------
<S>                                     <C>                        <C>         <C>                          <C>
Gold loans                                      $ 6,867            $18,637               $ 3,478            $ 6,481   
Currency loans                                   41,035             43,640                    --                 --   
Capital securities (note 6)                       4,869              4,247                    --                 --   
Repurchase of gold and silver forward                                                                                 
  contracts and gold swap (note 16)                  --                 --                52,283             48,991   
Repurchase of forward currency                                                                                        
  exchange contracts (note 16)                       --                 --                 5,995              5,995   
Deferred gain on restructuring of                                                                                     
 capital securities swap (note 16)                   --                 --                 4,287                 --   
Other                                                --                 --                    --                702   
----------------------------------------------------------------------------   --------------------------------------
                                                 52,771             66,524                66,043             62,169   
Less current portion                             11,652             14,779                13,455              7,461   
----------------------------------------------------------------------------   --------------------------------------
                                                $41,119            $51,745               $52,588            $54,708   
----------------------------------------------------------------------------   --------------------------------------
</TABLE>

Gold term loan and currency loans
The Company has a term and revolving facility with a syndicate of commercial
banks under which the Company can borrow either gold or dollars.  The facility
is convertible between gold and dollar borrowings.  Interest on gold borrowings
is calculated at the banks' gold rate plus 1.25%, and interest on dollar
borrowings at LIBOR plus 1.25%.  At December 31, 1998, the effective interest
rates were 3.07% on the gold term loan and 6.53% on the currency term loan.

At December 31, 1998, an 18,502 ounce term loan was outstanding under the
facility (36,094 ounces at December 31, 1997).  The gold loan was restructured
in 1996, resulting in a restructured gold loan price of $388 per ounce.  For
financial statement presentation the gold loan was remeasured to $286 per ounce,
the gold price at December 31, 1998 ($293 per ounce at December 31, 1997).
Unrealized remeasurement gains or losses are included in deferred income.  The
Company also has outstanding a $26.0 million currency borrowing under the
facility.  The facility requires that the aggregate gold and currency commitment
be repaid quarterly at a specified principal amount in dollars and/or the
equivalent number of ounces valued at the original gold loan price of $349 per
ounce.  Both the gold and currency loans were originally scheduled to be repaid
in quarterly installments through the second quarter of 2001.  In the third and
fourth quarters of 1998, the Company opted to accelerate its repayment of gold
ounces and

                                      77
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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

decelerate its repayment of the currency loan from the original repayment
schedule. The difference between the restructured gold loan price of $388 per
ounce and the spot price on the repayment date for these accelerated ounces will
be deferred and recognized in earnings in accordance with the original repayment
schedule.

At December 31, 1998, the Company had $15.0 million outstanding, and up to $45.0
million or gold equivalent, subject to covenant limitations, available until
2001, under the revolving credit facility. Of this $45.0 million, $43.6 million
was actually available for borrowing in view of the current gold price. A
depressed gold price limits the Company's ability to borrow under the revolving
credit facility, which is measured at the end of each quarter. Continuation of
gold prices at depressed levels could have the effect of reducing or eliminating
the Company's borrowing capacity under this facility. At December 31, 1998, the
effective interest rate on the revolving loan was 6.50%. Annual commitment fees
on the unutilized credit facility are 0.5%.

Subsequent to December 31, 1998, the Company and its lenders amended the
facility, resulting in an increase to the interest spread on gold and currency
borrowings by 50 basis points. Additionally, borrowings under the revolving
credit facility were reduced to a limit of $50.0 million from $60.0 million.

Gold loan
At December 31, 1998, a 5,523 ounce gold loan (27,623 ounces at December 31,
1997) was outstanding, which the Company will repay in the first quarter of
1999. The gold loan is priced at $403 per ounce. For financial statement
presentation the gold loan was remeasured to $286 per ounce, the gold price at
December 31, 1998 ($293 per ounce at December 31, 1997). Unrealized
remeasurement gains or losses are included in deferred income. The effective
rate of interest on the gold loan was 2.40% at December 31, 1998.

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 $30.2 million in outstanding letters of credit at December 31,
1998, primarily related to the bonding of future reclamation obligations. At
December 31, 1998, annual fees on the letters of credit range from 0.55% to
1.25%.

Interest payments were $7.2 million in 1998, $9.4 million in 1997 and $9.0
million in 1996.

Future gold and silver delivery commitments are summarized by year in note 16.

6.   CAPITAL SECURITIES
On March 27, 1997, the Company issued $100.0 million of 11% capital securities
due in April 2027. The effective interest rate on the capital securities is 11%,
or 12% compounded semi-annually during a period of interest deferral.

                                      78
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


The Company has the right to defer interest payments on the capital securities
for a period not to exceed 10 consecutive semi-annual periods. During a period
of interest deferral, interest accrues at a rate of 12% per annum, compounded
semi-annually, on the full principal amount and deferred interest. The Company,
at its option, may satisfy its deferred interest obligation by delivering common
shares to the indenture trustee for the capital securities. The trustee would
sell the Company's shares and remit the proceeds to the holders of the
securities in payment of the deferred interest obligation. The Company has
exercised its right to defer its April 1998 and October 1998 interest payments
to holders of the capital securities.

The present value of the capital securities' principal amount, $4.7 million, has
been classified as debt within gold and other financings (note 5). The present
value of the future interest payments of $95.3 million plus deferred accrued
interest at December 31, 1998 of $12.7 million has been classified within a
separate component of shareholders' equity as the Company has the unrestricted
ability to settle the future interest payments by issuing its own common shares
to the trustee for sale. Interest on the debt portion of the capital securities
has been classified as interest expense on the consolidated statement of
earnings, and interest on the equity portion of the capital securities has been
charged directly to deficit on the consolidated balance sheet. For purposes of
per share calculations, the equity portion increases the loss attributable to
common shareholders. See note 13 for a discussion of differences in treatment of
the capital securities under generally accepted accounting principles in the
United States.

7. OTHER LONG-TERM OBLIGATIONS

<TABLE>
<CAPTION>
                                                                                        1998         1997
----------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>          <C>
Accrued reclamation and mine closure                                                 $42,891      $40,969           
Provision for Alaska-Juneau development property reclamation and closure costs         2,096        2,510           
Provision for McCoy/Cove pit wall remediation                                         15,183       24,387           
Other                                                                                 14,291        7,115            
---------------------------------------------------------------------------------------------------------- 
                                                                                      74,461       74,981
Less current portion included in accounts payable and accrued liabilities             14,743       18,374
---------------------------------------------------------------------------------------------------------- 
                                                                                     $59,718      $56,607
----------------------------------------------------------------------------------------------------------
</TABLE>

Reclamation and mine closure

At December 31, 1998, the Company's future reclamation and mine closure costs
are estimated to be $81.8 million, excluding Alaska-Juneau described below. The
aggregate obligation accrued to December 31, 1998 was $42.9 million, including
accruals of $6.3 million in 1998, $8.8 million in 1997, and $6.3 million in
1996. The remaining $38.9 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.

In 1996, the Company recorded a provision of $77.1 million related to the 
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. In 1997, the Company entered into
an agreement that transferred certain responsibilities for the Alaska-Juneau
project closure to a third party environmental firm. The third party's
performance under the contract is supported by a corporate guarantee and surety

                                      79
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


bonds. By December 31, 1998, total spending for Alaska-Juneau's reclamation and
closure was $17.9 million.

Provision for McCoy/Cove pit wall remediation

In 1996, the Company recorded a $30.0 million provision related to the estimated
costs to remove waste rock from a portion of the Cove pit wall that had
collapsed at the McCoy/Cove mine in Nevada. Remediation work that would permit
mining in the affected portion of the Cove pit began in 1997. At December 31,
1998, total spending for the pit wall remediation was $14.8 million. The current
portion of the provision balance, $9.1 million, was classified within accounts
payable and accrued liabilities at December 31, 1998.

8. PROVISION FOR IMPAIRED ASSETS AND OTHER CHARGES

<TABLE>
<CAPTION>
                                                                 1998            1997          1996   
------------------------------------------------------------------------------------------------------
<S>                                                        <C>             <C>           <C>          
Provision for impaired assets                              $       --      $346,029      $       --   
Severance expense                                                  --        16,636              --   
Provision for Alaska-Juneau development property (note 7)          --            --          77,134   
Provision for McCoy/Cove pit wall remediation  (note 7)            --            --          30,000   
------------------------------------------------------------------------------------------------------
                                                           $       --      $362,665      $  107,134   
------------------------------------------------------------------------------------------------------
</TABLE>

Provision for impaired assets

The recoverability of the Company's carrying values of its operating and
development properties are assessed by comparing carrying values to estimated
future net cash flows from each property. For purposes of estimating future cash
flows at December 31, 1998, price assumptions of $325 per ounce of gold and
$5.00 per ounce of silver were used, except for 1999, for which prices of $290
per ounce of gold and $5.00 per ounce of silver were used. For other assets,
carrying values are compared to estimated net realizable values based on market
comparables or quoted market prices.

In 1997, a similar analysis was performed using price assumptions of $350 per
ounce of gold and $5.00 per ounce of silver, except for 1998, for which prices
of $300 per ounce of gold and $5.00 per ounce of silver were used. The Company
recorded a $346.0 million provision for impaired assets in 1997, as follows.

<TABLE>
<CAPTION>
                                          Acquisition
                            Deferred      and develop-     Plant and          Other         Legal and         Total
                             mining        ment costs      equipment      assets (net)    closure costs        1997
---------------------------------------------------------------------------------------------------------------------
<S>                         <C>           <C>              <C>            <C>             <C>             <C>
Operating properties:
   McCoy/Cove               $ 47,000      $        --      $      --      $        --     $          --   $  47,000
   Lupin                      17,198           43,435          4,367               --                --      65,000    
   Kettle River                   --           11,220          3,780               --                --      15,000    
---------------------------------------------------------------------------------------------------------------------
                              64,198           54,655          8,147               --                --     127,000    
--------------------------------------------------------------------------------------------------------------------- 
Other properties:                                                                                                         
  Kingking                        --           46,183            314            3,467                --      49,964    
  Santa Elina                     --          138,878          5,873           (1,133)               --     143,618    
---------------------------------------------------------------------------------------------------------------------
                                  --          185,061          6,187            2,334                --     193,582    
--------------------------------------------------------------------------------------------------------------------- 
Share investments                 --               --             --           15,641                --      15,641    
Other                             --               --             --            2,116             7,690       9,806    
---------------------------------------------------------------------------------------------------------------------
                            $ 64,198      $   239,716      $  14,334      $    20,091     $       7,690   $ 346,029     
---------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      80
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


In 1997, the Company elected not to exercise its option interest in the Kingking
project and wrote down its carrying value to nil. In the second quarter of 1998,
the Company issued 1,237,114 common shares at $3.03 per share to Nationwide
Development Corporation ("Nadecor"), which held an ownership interest in the
Kingking project. The share issuance settled any obligations of the Company owed
to Nadecor.

In 1997, the Company wrote off its $143.6 million investment in Santa Elina,
which included a copper/gold project, a number of small gold exploration
properties, a significant land position and a hydro-power project in the
feasibility stage (note 4).

9.  INTEREST AND OTHER

<TABLE>
<CAPTION>
                                                           1998            1997         1996
----------------------------------------------------------------------------------------------
<S>                                                     <C>             <C>          <C>
Interest income                                         $  (328)        $(2,517)     $(6,131)
Interest expense                                          5,559           5,686        8,226
Interest capitalized                                         --            (523)          --
Unrealized loss on share investments                      3,013           6,643           --
Gain on sale of investment in Santa Elina (note 4)       (6,252)             --           --
(Gain) loss on sale of other share investments              962            (466)      (4,383)
(Gain) loss on sale of plant and equipment               (1,457)         (2,293)         172
Gain on sale of interests in mining properties           (1,195)         (3,877)          --
Other                                                     4,096           2,538        5,206
----------------------------------------------------------------------------------------------
                                                        $ 4,398         $ 5,191      $ 3,090
----------------------------------------------------------------------------------------------
</TABLE>

10. INCOME TAX EXPENSE

Geographic components
The geographic components of earnings before income tax expense and of income
tax expense were as follows.

<TABLE>
<CAPTION>
                                                  1998             1997              1996
-------------------------------------------------------------------------------------------
<S>                                           <C>             <C>               <C> 
Income (loss) before income taxes:                                         
  Canada                                      $(23,471)       $(131,289)        $ (32,792)
  United States and other                        3,702         (287,437)         (143,292)
-------------------------------------------------------------------------------------------
                                              $(19,769)       $(418,726)        $(176,084)
-------------------------------------------------------------------------------------------
Current income tax expense (recovery):                                     
  Canada                                      $    354        $     559         $     448
  United States and other                           --            1,559              (135)
-------------------------------------------------------------------------------------------
                                                   354            2,118               313
-------------------------------------------------------------------------------------------
Deferred income tax expense (recovery):                                    
  Canada                                            --               --               250
  United States and other                           --             (336)               55
-------------------------------------------------------------------------------------------
                                                    --             (336)              305
-------------------------------------------------------------------------------------------
Income tax expense                            $    354        $   1,782         $     618
-------------------------------------------------------------------------------------------
</TABLE>

Effective tax rate
The effective tax rate on the Company's earnings differed from the combined
Canadian federal and

                                      81
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


provincial corporate income tax rate of 43.2% for the following reasons.

<TABLE>
<CAPTION>
                                                                                1998                 1997                 1996
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                 <C>                  <C>
Loss before income taxes                                                    $(19,769)           $(418,726)           $(176,084)
------------------------------------------------------------------------------------------------------------------------------
Income tax effect of:
 Expected Canadian federal and provincial corporate income taxes            $ (8,540)           $(180,890)           $ (76,068)
 Operating loss from which no tax benefit is derived                          12,720              161,385               64,724
 Canadian resource allowance and earned depletion                             (2,349)              (2,081)                (406)
 Foreign losses subject to different income tax rates                         (1,687)              23,978               11,806
 Other items                                                                     210                 (610)                 562
------------------------------------------------------------------------------------------------------------------------------ 
Income tax expense                                                          $    354            $   1,782            $     618
------------------------------------------------------------------------------------------------------------------------------
Effective tax rate (current and deferred)                                       (1.8%)               (0.4%)               (0.4%)
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Loss carryforwards
At December 31, 1998, the Company had U.S. net operating loss carryforwards of
approximately $403 million to apply against future taxable income and $198
million to apply against future alternative minimum taxable income. These loss
carryforwards do not include the provision for impaired assets (note 8) or the
provision for the McCoy/Cove pit wall remediation costs (note 7), which have not
yet been recognized fully for income tax purposes. The net operating loss
carryforwards expire at various times from 2001 to 2018. Additionally, the
Company has Canadian non-capital loss carryforwards of approximately $65 million
and net capital loss carryforwards of approximately $23 million. The non-capital
loss carryforwards expire in 2005. The net capital loss carryforwards have no
expiration date.

Income tax payments
Income tax payments were $1.6 million in 1998, $0.2 million in 1997 and $0.4
million in 1996.

11. PREFERRED SHARES

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

12. COMMON SHARES

Changes in the number of common shares outstanding during the three years ended
December 31, 1998 were as follows.

<TABLE>
<CAPTION>
                                                                                  Number of
                                                                                     Shares            Amount
---------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                   <C>
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 4)                                         8,830,915            85,801
---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996                                                      139,355,781           709,534
1997:    Exercise of share options                                                   14,250                59
---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997                                                      139,370,031           709,593
1998:    Issuance of shares to Nationwide Development Corporation (note 8)        1,237,114             3,750
---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998                                                      140,607,145          $713,343
---------------------------------------------------------------------------------------------------------------
</TABLE>

                                      82
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


Dividends
The Company has not paid dividends since 1996 and is prohibited from paying
common share dividends during a period of interest deferral related to the
capital securities (note 6).

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.

Restricted share grant plan
Effective February 1997, the Company adopted a restricted share grant plan to
provide incentive to officers of the Company. An aggregate of 750,000 common
shares of the Company have been reserved for issuance under the plan. The
Company granted 400,000 shares under the plan in November 1998, none of which
had vested at December 31, 1998. The vesting of the shares is at the discretion
of the Compensation Committee of the Board of Directors.

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.

                                      83
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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



Changes in the number of options outstanding during the three years ended
December 31, 1998 were as follows.

<TABLE>
<CAPTION>
                                                 Employee Share Incentive Plan               Director Equity Plan
                                                 -----------------------------        ---------------------------
                                                                      Weighted                           Weighted
                                                     Number of         Average          Number of         Average
                                                        Shares  Exercise Price             Shares  Exercise Price
-------------------------------------------------------------------------------------------------------------------
<S>                                              <C>            <C>                   <C>          <C>
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 expired                                (90,150)          14.88                 --              -- 
        Options forfeited                             (244,247)          14.42                 --              -- 
-------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1996               4,338,667       C$  12.85            157,900       C$  14.67         
1997:   Options granted                              1,414,060            8.00             52,000            8.00 
        Options exercised                              (14,250)           5.75                 --              -- 
        Options expired                                (13,760)           9.75                 --              -- 
        Options forfeited                             (732,598)          12.25            (14,950)          14.91 
-------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1997               4,992,119       C$  11.60            194,950       C$  12.87         
1998:   Options granted                                857,906            3.59             45,500            3.70 
        Options expired                                (78,700)           9.75                 --              -- 
        Options forfeited                             (794,005)          10.35                 --              -- 
------------------------------------------------------------------------------------------------------------------- 
Options outstanding, December 31, 1998                4,977,320      C$  10.44            240,450       C$  11.14        
-------------------------------------------------------------------------------------------------------------------
</TABLE>

The number of shares reserved for future grants at December 31, 1998 are
4,635,182 under the Employee Share Incentive Plan and 182,250 under the Director
Equity Plan. The number and weighted average price of shares exercisable under
the Employee Share Incentive Plan are 3,352,269 at C$12.29 at December 31, 1998;
2,746,121 at C$12.78 at December 31, 1997; and 2,282,905 at C$12.70 at December
31, 1996. The number and weighted average price of shares exercisable under the
Director Equity Plan are 123,825 at C$13.69 at December 31, 1998; 74,800 at
C$14.22 at December 31, 1997; and 41,550 at C$13.79 at December 31, 1996.

Options outstanding at December 31, 1998 had the following characteristics.

<TABLE>
<CAPTION>
                                                         Weighted        Weighted                                Weighted
         Number of                               Average Exercise         Average         Number of      Average Exercise 
            Shares                 Exercise       Price of Shares     Years Until            Shares       Price of Shares 
       Outstanding              Price Range           Outstanding      Expiration       Exercisable           Exercisable 
----------------------------------------------------------------------------------------------------------------------------- 
 <S>                            <C>              <C>                  <C>               <C>              <C> 
 Employee Share Incentive Plan                                                                      
 -----------------------------                                                                      
        1,028,356   C$   3.59 -   C$   5.75              C$  3.95               9           170,450              C$  5.75    
          861,192        6.75 -        8.13                  7.93               8           484,072                  7.88   
          990,478        8.88 -       10.70                  9.86               5           764,470                  9.62   
        1,461,944       12.88 -       16.25                 14.03               5         1,312,149                 14.11   
          635,350       16.50 -       21.50                 17.02               5           621,128                 16.96    
 Director Equity Plan                                                                               
 --------------------                                                                                 
           97,500   C$   3.70 -   C$  8.00               C$  5.99               9            13,000              C$  8.00
          142,950       12.50 -      18.25                  14.64               6           110,825                 14.36  
----------------------------------------------------------------------------------------------------------------------------- 
</TABLE>

                                      84
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


13.  DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)

U.S. GAAP financial statements

The Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in Canada. 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, the Company's short-term share investments are
carried at the lower of cost or market based on quoted market prices. Prior to
1997, these share investments were carried at cost as long-term investments in
accordance with Canadian GAAP and would have been written down through earnings
only if there were a loss in value that was other than temporary. Under U.S.
GAAP, these investments would have been marked to market, with unrealized gains
or losses excluded from earnings and reported as a separate component of common
shareholders' equity, net of tax.

In accordance with Canadian GAAP, the severance costs associated with the
temporary suspension of operations at Lupin were recognized on the commitment
date (generally defined as the date the severance plan is established and
approved by management) which occurred in 1997. Conditions for recognizing
involuntary termination benefits under U.S. GAAP include similar criteria as
Canadian GAAP. Additionally, however, the benefit arrangement must also be
communicated to employees. As the Lupin severance activities were not
communicated to employees prior to December 31, 1997, under U.S. GAAP the
related costs would be recognized in 1998.

In accordance with Canadian GAAP, the present value of the principal amount of
the capital securities issued in 1997 is classified as debt within gold and
other financings, while the present value of the future interest payments is
classified as a separate component of shareholders' equity (note 6). The
deferred accrued interest is classified within this equity component as the
Company has the option to satisfy the deferred interest by delivering common
shares. The related issuance costs were allocated proportionately to deferred
financing charges and retained earnings based on the debt and equity
classifications. Interest on the capital securities has been allocated
proportionately to interest expense and deficit based on the debt and equity
classifications. Under U.S. GAAP, the face value of the securities would be
classified entirely as debt within gold and other financings; the related
issuance costs would be classified as deferred financing charges within long-
term investments and other assets and would be amortized to interest expense
over the life of the securities; and the interest on the capital securities
would be classified entirely as interest expense.

In accordance with Canadian GAAP, certain of 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.

                                      85
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


The Company previously disclosed a difference of $36.4 million between Canadian
and U.S. GAAP regarding the cost of the 1996 Santa Elina acquisition, which
under U.S. GAAP would have increased mining properties and common shares by
$36.4 million. Additionally, the Company disclosed a difference between Canadian
and U.S. GAAP regarding Santa Elina resulting from differences between the
allocated values and the tax bases of assets acquired and liabilities assumed.
Under U.S. GAAP, 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. The valuation difference of $36.4 million and the deferred tax
difference of $46.6 million have been eliminated following the write-off of the
Santa Elina assets in 1997 (note 8). Due to the increased basis in Santa Elina
under U.S. GAAP, the 1997 write-off under U.S. GAAP would exceed the write-off
of $143.6 million recognized under Canadian GAAP by $36.4 million, comprised of
the original valuation difference ($36.4 million) and the deferred tax
difference ($46.6 million), offset by the recognition of a deferred tax benefit
($46.6 million).

In accordance with Canadian GAAP, in 1996 the Company accounted for its
investment in the Kingking project using a proportionate consolidation method.
Under U.S. GAAP, the investment would have been accounted for under a full
consolidation, with an offsetting minority interest.  No material difference
existed between the two methodologies in 1996.

The effects on the consolidated statement of earnings of the above differences
would have been as follows.

<TABLE>
<CAPTION>
                                                                      1998                 1997                 1996
------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                 <C>                  <C>
Net loss under Canadian GAAP                                      $(20,123)           $(420,508)           $(176,702)
Change in market value of foreign exchange contracts                (2,640)              (8,110)               2,168
Unrealized loss on share investments                                   912                6,643                   --
Recognition of severance expense                                    (4,980)               4,980                   --
Additional interest expense on capital securities                  (12,432)              (5,714)                  --
Amortization of deferred financing costs on capital                   
 securities                                                           (633)                (475)                  --
Amortization of mining properties                                       --                 (958)                 832
Write-off of Santa Elina properties, net of income tax             
 benefit of $46.6 million (note 8)                                      --              (36,428)                  --
------------------------------------------------------------------------------------------------------------------------
Net loss under U.S. GAAP                                          $(39,896)           $(460,570)           $(173,702)
------------------------------------------------------------------------------------------------------------------------
Loss per share under U.S. GAAP                                    $  (0.28)           $   (3.30)           $   (1.29)
------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      86
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


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

<TABLE>
<CAPTION>
                                                                        Mining
                                             Foreign                  Properties   Santa Elina
                                  Canadian   Exchange      Share        Amorti-    Acquisition/    Capital      U.S.
December 31, 1998                   GAAP    Contracts   Investments     zation      Write-off    Securities     GAAP
----------------------------------------------------------------------------------------------------------------------
<S>                               <C>       <C>         <C>           <C>          <C>           <C>          <C>
Short-term investments            $  3,336    $    --       $     1     $     --        $    --   $      --   $  3,337
Long-term investments and
 other assets                       16,196         --            --           --             --       2,059     18,255
Mining properties                   95,738         --            --      (11,526)            --          --     84,212
Accounts payable and accrued
 liabilities                        45,336         --            --           --             --       3,000     48,336
Gold and other financings           52,771         --            --           --             --      95,131    147,902
Deferred income                     66,043     (5,995)           --           --             --          --     60,048
Other long-term obligations         59,718      6,774            --           --             --      12,731     79,223
Common shares                      713,343         --            --           --         36,428          --    749,771
Capital securities                 110,862         --            --           --             --    (110,862)        --
Deficit                            663,875        779        (7,555)      11,526         36,428      (2,059)   702,994
Foreign currency translation        26,576         --             7           --             --          --     26,583
Net unrealized loss on  share
 investments                            --         --         7,547           --             --          --      7,547
Common shareholders' equity        133,754       (779)            1      (11,526)            --    (108,803)    12,647
----------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                               Mining
                                    Foreign                  Properties   Santa Elina
                         Canadian   Exchange      Share        Amorti-    Acquisition/    Capital    Severance     U.S.
December 31, 1997          GAAP    Contracts   Investments     zation      Write-off    Securities     Costs       GAAP
-------------------------------------------------------------------------------------------------------------------------
<S>                      <C>       <C>         <C>           <C>          <C>           <C>          <C>         <C>
Long-term investments
 and other assets        $  6,558    $    --       $    --     $     --        $    --    $  2,692     $    --   $  9,250
Mining properties         107,820         --            --      (11,526)            --          --          --     96,294
Accounts payable and
 accrued liabilities       82,371         --            --           --             --          --      (4,980)    77,391
Gold and other
 financings                66,524         --            --           --             --      95,753          --    162,277
Deferred income            62,169     (5,995)           --           --             --          --          --     56,174
Other long-term
 obligations               56,607      4,134            --           --             --          --          --     60,741
Common shares             709,593         --            --           --         36,428          --          --    746,021
Capital securities         95,753         --            --           --             --     (95,753)         --         --
Deficit                   631,320     (1,861)       (6,643)      11,526         36,428      (2,692)     (4,980)   663,098
Net unrealized loss on
 share investments             --         --         6,643           --             --          --                  6,643
Common shareholders'
 equity                   153,661      1,861            --      (11,526)            --     (93,061)      4,980     55,915
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      87
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


The continuity of shareholders' equity from December 31, 1997 to December 31,
1998 under U.S. GAAP would have been as follows.

<TABLE>
<CAPTION>
                                                                           1998
-------------------------------------------------------------------------------
<S>                                                                   <C>
Balance, beginning of year                                             $ 55,915
Net loss                                                                (39,896)
Common shares issued                                                      3,750
Foreign currency translation                                             (6,218)
Change in unrealized gain (loss) on share investments                      (904)
-------------------------------------------------------------------------------
Balance, end of year                                                   $ 12,647
-------------------------------------------------------------------------------
</TABLE>

Effective January 1, 1998, for purposes of preparing U.S. GAAP financial
information, the Company adopted U.S. Financial Accounting Standards Board
("FASB") Statement No. 130, "Reporting Comprehensive Income," which requires the
reporting of all changes in equity during a period from non-owner sources as
part of a full set of financial statements.  These changes would include foreign
currency translation adjustments and activity related to unrealized gains or
losses included as a separate component of common shareholders' equity under
U.S. GAAP.

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

<TABLE>
<CAPTION>
                                                                             1998               1997               1996
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>               <C>                <C>
Net loss under U.S. GAAP                                                 $(39,896)         $(460,570)         $(173,702)
-----------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), after a nil income tax
 effect:
 Unrealized gain/loss on share investments:
        Net unrealized holding loss arising during the period                (904)           (11,613)            (4,860)
        Reclassification adjustment for net (gain) loss
         recognized in earnings                                               962             15,175             (4,383)
-----------------------------------------------------------------------------------------------------------------------
        Net unrealized income (loss)                                           58              3,562             (9,243)
        Foreign currency translation adjustments                           (6,218)            (5,071)              (290)
-----------------------------------------------------------------------------------------------------------------------
Other comprehensive loss                                                   (6,160)            (1,509)            (9,533)
-----------------------------------------------------------------------------------------------------------------------
Comprehensive loss                                                       $(46,056)         $(462,079)         $(183,235)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

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

<TABLE>
<CAPTION>
                                                                 1998                1997
-----------------------------------------------------------------------------------------
<S>                                                          <C>                 <C>
Foreign currency translation                                 $(26,583)           $(20,365)
Net unrealized loss on share investments                       (7,547)             (6,643)
-----------------------------------------------------------------------------------------
Accumulated other comprehensive loss                         $(34,130)           $(27,008)
-----------------------------------------------------------------------------------------
</TABLE>

                                      88
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

    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>
                                                                     1998                             1997
-------------------------------------------------------------------------    -----------------------------
                                                         U.S.                             U.S.
millions of U.S. dollars                     Canada   and other     Total     Canada   and other     Total
-------------------------------------------------------------------------    -----------------------------
<S>                                          <C>      <C>         <C>         <C>      <C>         <C>
Deferred tax liabilities:
 Tax over book depreciation and depletion    $ 11.1   $      --   $  11.1     $  7.3     $   9.8   $  17.1
 Other tax liabilities                          5.1         3.3       8.4        7.0         4.1      11.1
-------------------------------------------------------------------------    -----------------------------
Total deferred tax liabilities                 16.2         3.3      19.5       14.3        13.9      28.2
-------------------------------------------------------------------------    -----------------------------
Deferred tax assets:
 Net operating loss and other carryforwards    38.1       142.8     180.9       12.0       134.9     146.9
 Book over tax depreciation and depletion      32.9        10.8      43.7       37.5          --      37.5
 Accrued liabilities                            3.9        27.5      31.4        7.0        35.4      42.4
 Other tax assets                              19.1         4.7      23.8       24.8         5.2      30.0
-------------------------------------------------------------------------    -----------------------------
Total deferred tax assets before allowance     94.0       185.8     279.8       81.3       175.5     256.8
Valuation allowance for deferred tax assets   (83.2)     (184.6)   (267.8)     (73.3)     (163.2)   (236.5)
-------------------------------------------------------------------------    -----------------------------
Total deferred tax assets                      10.8         1.2      12.0        8.0        12.3      20.3
-------------------------------------------------------------------------    -----------------------------
Net deferred tax liabilities                 $  5.4     $   2.1   $   7.5     $  6.3     $   1.6   $   7.9
-------------------------------------------------------------------------    -----------------------------
</TABLE>

The net increase in the valuation allowance for deferred tax assets was $31.3
million for 1998 and $94.5 million for 1997.

Stock-based compensation

FASB Statement No. 123, "Accounting for Stock-Based Compensation," gives the
option to either follow fair value accounting or to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25")
and related Interpretations.  The Company has determined that it will elect to
continue to follow APB No. 25 and related Interpretations in accounting for its
employee and director stock options in financial information prepared in
conformity with U.S. GAAP.

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

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

<TABLE>
<CAPTION>
                                                               1998                  1997                 1996
--------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>                   <C>
Net loss under U.S. GAAP                                   $(39,896)            $(460,570)           $(173,702)
Pro forma stock compensation expense,
 after a nil income tax effect                               (1,654)               (2,126)              (2,766)
--------------------------------------------------------------------------------------------------------------
Pro forma net loss under U.S. GAAP                         $(41,550)            $(462,696)           $(176,468)
--------------------------------------------------------------------------------------------------------------
Pro forma loss per share under U.S. GAAP                   $  (0.30)            $   (3.32)           $   (1.31)
--------------------------------------------------------------------------------------------------------------
</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 4.87% 

                                      89
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


to 6.64%, dividend yields ranging from nil to 1% and volatility factor of 50%
for 1998 grants and 40% for 1997, 1996 and 1995 grants. The weighted average
fair value of options granted is estimated at $1.27 per share in 1998, $3.98 per
share in 1997 and $4.18 per share in 1996.

Other
The estimated fair values of financial instruments are set out below and in note
16.  The fair values were determined from quoted market prices or estimated
using discounted cash flow analysis.

<TABLE>
<CAPTION>
                                                                      1998                                     1997
                                       --------------------------------------   --------------------------------------
                                             Carrying            Estimated             Carrying           Estimated
millions of U.S. dollars                       Amount           Fair Value               Amount          Fair Value
-----------------------------------------------------------------------------   --------------------------------------
<S>                                      <C>                    <C>              <C>                <C>
Cash and cash equivalents                       $ 8.0                $ 8.0                $17.0               $17.0
Short-term investments                            3.3                  3.3                 10.3                10.3
Long-term investments and other assets           16.2                 16.2                  6.6                 6.6
Currency loans                                   41.0                 41.0                 43.6                43.6
Capital securities                                4.9                  4.9                  4.2                 4.2
-----------------------------------------------------------------------------   --------------------------------------
</TABLE>

In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal quarters of fiscal
years beginning after June 15, 1999.  The impact of the new standard on the
Company's financial information prepared under U.S. GAAP has not yet been
determined.

Effective January 1, 1996, for the purpose of preparing U.S. GAAP financial
information, the Company adopted U.S. Financial Accounting Standards Board
("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.  There were no material differences between Canadian and
U.S. GAAP related to the provisions for asset impairment recorded in 1997 (note
8).

14.  JOINT VENTURES

Summarized below are the Company's 50% interest in the Round Mountain mine in
1998, 1997 and 1996, and 58% interest in Santa Elina in 1997 and 51% interest in
Santa Elina in 1996 (note 4), accounted for by the proportionate consolidation
method.  In 1997, the Company wrote off its entire investment in Santa Elina of
$143.6 million (note 8).

<TABLE>
<CAPTION>
                                                              1998                 1997                  1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                  <C>                   <C>
Revenues                                                  $ 87,748            $  79,864              $ 79,865
Expenses:
 Operating costs                                            51,359               48,413                45,437
 Royalties                                                   5,078                5,250                 6,482
 Production taxes                                              654                  942                   886
 Depreciation and amortization                              16,274               13,548                14,178
 Reclamation and mine closure                                1,787                1,673                   945
 Exploration                                                   613                8,615                 2,862
 Provision for impaired assets                                  --              142,056                    --
 Other                                                       3,281                2,693                   391
-------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes                       $  8,702            $(143,326)             $  8,684
-------------------------------------------------------------------------------------------------------------------
</TABLE> 

                                      90
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


<TABLE> 
<CAPTION> 
                                                                    1998                 1997                  1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                 <C>                    <C>
Current assets                                                  $ 69,461            $  62,781              $ 63,171
Non-current assets                                               120,956              123,435               237,336
Current liabilities                                               (9,370)             (11,031)              (16,515)
Non-current liabilities                                          (19,965)             (29,214)              (18,632)
-------------------------------------------------------------------------------------------------------------------
Equity                                                          $161,082            $ 145,971              $265,360
-------------------------------------------------------------------------------------------------------------------

Net cash provided from (used in):
  Operating activities                                          $ 16,286            $   7,910              $ 16,738
  Investing activities                                           (12,438)             (28,383)              (20,944)
  Financing activities                                                --               15,811                (3,339)
-------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash                                 $  3,848            $  (4,662)             $ (7,545)
--------------------------------------------------------------------------------------------------------------------
</TABLE>

15.  SEGMENT INFORMATION
The Company's management regularly evaluates the performance of the Company by
reviewing operating results on a minesite by minesite basis.  As such, the
Company considers each producing minesite to be an operating segment.  In 1998,
the Company had three operating mines: Round Mountain in Nevada, USA; McCoy/Cove
in Nevada, USA; and Kettle River in Washington, USA.  All are 100% owned except
for Round Mountain, which is 50% owned.  In January 1998, the Company
temporarily suspended operations at its Lupin mine in the Northwest Territories,
Canada.

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


<TABLE>
<CAPTION>
Gold Production (ounces)                                            1998                 1997                 1996
------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                 <C>                   <C>
Round Mountain (50%)                                             255,252              238,840              205,487
McCoy/Cove                                                       167,494              187,034              271,731
Kettle River                                                     113,692              129,866              124,910
Lupin                                                                 --              165,335              166,791
------------------------------------------------------------------------------------------------------------------
Total gold                                                       536,438              721,075              768,919
------------------------------------------------------------------------------------------------------------------
 
Silver Production (ounces)                                          1998                 1997                 1996
------------------------------------------------------------------------------------------------------------------
Total silver-all from McCoy/Cove                               9,412,823           11,021,708            7,102,348
------------------------------------------------------------------------------------------------------------------

Cash Operating Costs per Ounce of Gold Produced                     1998                 1997                 1996
------------------------------------------------------------------------------------------------------------------
Round Mountain                                                     $ 198                $ 207                $ 221
McCoy/Cove                                                           203                  271                  271
Kettle River                                                         244                  227                  201
Lupin                                                                 --                  284                  299
------------------------------------------------------------------------------------------------------------------
Company consolidated weighted average                              $ 208                $ 249                $ 254
------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      91
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


<TABLE>
<CAPTION>
Reconciliation of Cash Operating
Costs per Ounce to Financial Statements                           1998                1997                1996
--------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                 <C>                 <C> 
Operating costs by minesite:
  Round Mountain                                              $ 51,502            $ 48,549            $ 45,580
  McCoy/Cove                                                    66,606              89,577              99,802
  Kettle River                                                  29,016              27,665              25,260
  Lupin                                                          1,645              47,329              50,484
--------------------------------------------------------------------------------------------------------------
Total operating costs per financial statements                 148,769             213,120             221,126
Change in finished goods inventories and other                  (1,704)             10,956                  70
Co-product cost of silver produced                             (35,486)            (44,528)            (25,568)
--------------------------------------------------------------------------------------------------------------
Cash operating costs                                          $111,579            $179,548            $195,628
--------------------------------------------------------------------------------------------------------------
Gold ounces produced                                           536,438             721,075             768,919
--------------------------------------------------------------------------------------------------------------
Cash operating costs per ounce                                $    208            $    249            $    254
--------------------------------------------------------------------------------------------------------------
</TABLE>

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

<TABLE>
<CAPTION>
                                                                  1998               1997               1996
------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                <C>                <C>
Total gold and silver revenues                                $232,181           $305,429           $337,316
Average gold price realized per ounce                         $    333           $    362           $    384
Average silver price realized per ounce                       $   5.88           $   5.26           $   5.41
------------------------------------------------------------------------------------------------------------
</TABLE>

Depreciation and amortization by minesite is as follows.

<TABLE>
<CAPTION>
                                                                  1998               1997               1996
------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                <C>                <C>
  Round Mountain                                               $16,274            $13,548            $14,178
  McCoy/Cove                                                    29,034             36,126             43,198
  Kettle River                                                   9,315             11,438             13,045
  Lupin                                                          6,233             15,885             15,085
Depreciation of non-minesite assets                              2,430              2,319                985
------------------------------------------------------------------------------------------------------------
Total depreciation and amortization per financial
 statements                                                    $63,286            $79,316            $86,491
------------------------------------------------------------------------------------------------------------
</TABLE>

Total assets by minesite are as follows.

<TABLE>
<CAPTION>
                                                                  1998               1997
-----------------------------------------------------------------------------------------
<S>                                                           <C>                <C>
Minesites:
  Round Mountain                                              $135,302           $133,540
  McCoy/Cove                                                    84,119            110,130
  Kettle River                                                  14,928             23,751
  Lupin                                                         38,010             52,187
Development properties:
  Aquarius                                                      49,527             54,112
  Paredones Amarillos                                           16,451             17,111
Non-minesite assets                                             29,739             41,936
-----------------------------------------------------------------------------------------
Total assets                                                  $368,076           $432,767
-----------------------------------------------------------------------------------------
</TABLE>

                                      92
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


Capital expenditures by minesite are as follows.

<TABLE>
<CAPTION>
                                                                  1998               1997                1996
-------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                <C>                <C>
Round Mountain                                                   $12.6              $30.7               $17.5
McCoy/Cove                                                         1.3                2.2                 7.3
Kettle River                                                       1.5                3.8                 8.8
Lupin                                                               --               12.3                15.7
-------------------------------------------------------------------------------------------------------------
</TABLE>

Financial information regarding geographic areas is set out below

<TABLE>
<CAPTION>
                                                                  1998               1997               1996
------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                <C>                <C>
Revenue:
  Canada                                                      $ 11,360           $ 68,959           $ 63,859
  United States                                                220,821            236,470            273,457
------------------------------------------------------------------------------------------------------------
Total revenue                                                 $232,181           $305,429           $337,316
------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                  1998               1997               1996
------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                <C>                <C>
Assets:
  Canada                                                      $ 92,457           $125,346           $236,482
  United States                                                267,843            296,962            406,750
  Other                                                          7,776             10,459            188,913
------------------------------------------------------------------------------------------------------------
Total assets                                                  $368,076           $432,767           $832,145
------------------------------------------------------------------------------------------------------------
</TABLE>

16.  HEDGING ACTIVITIES AND COMMITMENTS
In the third quarter of 1998, relating to outstanding gold and currency
borrowings under a gold loan agreement, the Company opted to accelerate its
repayment of gold ounces and decelerate its repayment of the currency loan from
the original repayment schedule (note 5).  The difference between the
restructured gold loan price and the spot price on the repayment date for these
accelerated ounces will be deferred and recognized in earnings in accordance
with the original repayment schedule.

In the first quarter of 1998, the Company received proceeds of $8.7 million on
the repurchase of a portion of its outstanding gold forward sales.  The
repurchased forward sales include 50,000 ounces of gold scheduled for delivery
in each of the five years 1998 to 2002 at forward prices of $395 per ounce in
1998 and 1999 and $374 per ounce in years 2000 to 2002, for a total of 250,000
ounces of gold.  Additionally, related to the repurchase, the Company eliminated
contingent forward sales of up to an additional 75,000 ounces of gold at $400
per ounce in each of the three years 2000 to 2002.  These forward sales had been
contingent upon the spot gold price reaching various levels above $400 per
ounce.  This gain has been deferred and will be recognized in earnings as the
formerly hedged production is sold.  The deferred gain is scheduled to be
recognized in revenue as follows:  $1.8 million in 1999, $1.7 million in 2000,
$1.7 million in 2001, and $1.7 million in 2002.

In the first quarter of 1998, the Company entered into gold forward sales
contracts of 270,000 ounces at an average price of $319 per ounce and silver
forward sales contracts of 19.0 million ounces at an average price of $6.01 per
ounce.  These hedge positions are designed to ensure the economic viability of

                                      93
<PAGE>
 
                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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



the ore located beneath the portion of the Cove pit wall that had collapsed. The
remediation of the Cove pit wall resumed in the second quarter of 1998 (note 7).

In January 1998, the Company temporarily suspended operations at the Lupin mine.
Deferred revenue amounts related to the 1997 repurchase of Lupin gold forwards
that were originally scheduled for 1998 and 1999 recognition will continue to be
deferred and will be matched to production in years subsequent to 1999.

In 1997, the Company repurchased its 218,000 ounce gold commitment that hedged
an $84.0 million bond obligation.  The Company also 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 $63.1 million, which the Company used, together with existing
cash, to repay the $84.0 million bond obligation 1997.  This gain has been
deferred and will be recognized in earnings as the formerly hedged gold and
silver production is sold.  The remaining deferred gain is currently expected to
be recognized in revenue as follows:  $9.1 million in 1999, $33.0 million in
2000, $1.9 million in 2001, and $1.4 million in 2002.

In 1997, the Company repurchased a portion of its outstanding foreign currency
exchange contracts.  The contracts repurchased consisted of a total commitment
of C$75.6 million at an average C$ to US$1.00 exchange rate of 1.55, with
purchase dates ranging from 1998 to 2000.  The transactions resulted in cash
proceeds of $6.0 million, which have been deferred and will be recognized as a
reduction to operating costs when the hedged Canadian dollar transactions occur.

In 1997, the Company swapped a portion of its capital security interest
obligation for a commitment to deliver 291,358 ounces of gold in 2002 at a price
of $343 per ounce of gold (note 5).  During the first quarter of 1998, the
Company restructured the gold swap agreement.  The restructuring resulted in a
conversion of the swap ounces to forward sales commitments, as follows:  57,925
ounces at $379 per ounce in 1998, 175,509 ounces at $379 per ounce in 1999, and
57,925 ounces at $379 per ounce in 2000.  Gains realized on the conversion, in
the form of forward prices contracted in excess of market, will be deferred and
recognized in 2002, when the formerly hedged production is sold.  Revenue will
be deferred related to the restructuring as follows:  $4.3 million in 1998,
$13.0 million in 1999, $4.3 million in 2000.  The total deferral of $21.6
million will be recognized in revenue in 2002.

                                      94
<PAGE>

                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


Gold and silver commitments
The Company's gold and silver commitments at December 31, 1998 were as follows.

<TABLE>
<CAPTION>
                                          Forward               Price of                                   Average
                                       Sales/(1)/     Forward Sales/(1)/         Gold Loans         Price of Loans
                                         (ounces)            (per ounce)           (ounces)            (per ounce)
---------------------------------------------------------------------------------------------------------------------
<S>                                    <C>            <C>                        <C>                <C> 
Gold
----
1999                                      255,509                 $  374             15,367                 $  393
2000                                      257,925                    341              8,658                    388
2001                                       90,000                    321                 --                     --
---------------------------------------------------------------------------------------------------------------------
                                          603,434                 $  352             24,025                 $  391
---------------------------------------------------------------------------------------------------------------------
Silver
------
1999                                    5,185,000                 $ 5.82
2000                                    6,500,000                   6.00
2001                                    6,500,000                   6.00
---------------------------------------------------------------------------
                                       18,185,000                 $ 5.95
---------------------------------------------------------------------------
</TABLE>

/(1)/  The Company has contingent forward sales of up to 60,000 ounces of gold
       at $360 per ounce in each quarter from the first quarter of 2001 through
       the second quarter of 2008. The number of ounces in this contingent
       forward sale will be determined based on the spot price of gold two days
       before the end of the previous quarter and the quantity of gold delivered
       in the previous quarter. These contingent obligations have not been
       included above.

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 gains of $2.5 million at December 31,
1998.  Remeasurement gains or losses are recorded in deferred income and are
included in revenue when the production related to the loans is delivered (note
5).

The Company's option position at December 31, 1998 was as follows.

<TABLE>
<CAPTION>
          Put Options Purchased /(1)/             Put Options Sold       Call Options Purchased          Call Options Sold
        --------------------------------------------------------------------------------------------------------------------
                         Strike Price                 Strike Price                 Strike Price               Strike Price
             Ounces       per Ounce       Ounces       per Ounce       Ounces       per Ounce       Ounces       per Ounce
----------------------------------------------------------------------------------------------------------------------------
<S>     <C>              <C>              <C>         <C>              <C>         <C>              <C>       <C>
Gold
----
1999        158,400         $   304           --         $    --           --        $     --       25,000         $   300
2001         50,000             310           --              --           --              --           --              --
2002         50,000             310           --              --           --              --           --              --
2003         50,000             310           --              --           --              --           --              --
----------------------------------------------------------------------------------------------------------------------------
            308,400         $   307           --         $    --           --        $     --       25,000         $   300
----------------------------------------------------------------------------------------------------------------------------
Silver
------
1999             --         $    --    2,000,000         $  4.75    3,000,000        $   9.00    2,210,000         $  5.67
2000      1,000,000            6.00    7,500,000            4.75    6,500,000            9.00           --              --
2001      1,000,000            6.00    7,500,000            4.75    6,500,000            9.00           --              --
----------------------------------------------------------------------------------------------------------------------------
          2,000,000         $  6.00   17,000,000         $  4.75   16,000,000        $   9.00    2,210,000         $  5.67
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

/(1)/  The 50,000 of gold put options with a strike price of $310 per ounce in
       years 2001 to 2003 are contingent, and the Company will forfeit these
       options if the 60,000 ounces of contingent gold forward sales at $360 per
       ounce are required to be 

                                      95
<PAGE>

                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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



       delivered against in each of those years. The contingent options were
       included in the gold forward table above to reflect the minimum price the
       Company will receive on these ounces.

Currency position
The Company's obligations to purchase Canadian dollars at December 31, 1998 were
as follows.

<TABLE>
<CAPTION>
                     Canadian                 Exchange Rate
                      Dollars             (C$ to U.S.$1.00)
---------------------------------------------------------------- 
<S>              <C>                      <C>
1999             $ 49,000,000                          1.36
2000               24,000,000                          1.34
---------------------------------------------------------------- 
                 $ 73,000,000                          1.35
----------------------------------------------------------------
</TABLE>

Crude oil position
At December 31, 1998, the Company has a forward purchase commitment to purchase
20,000 barrels of crude oil at $17.63 per barrel in 1999.

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.

Shown below are the carrying amounts and unrealized gains or losses on the
Company's hedging positions at December 31, 1998 and 1997.

<TABLE>
<CAPTION>
                                                   At December 31, 1998                        At December 31, 1997
                                        ---------------------------------------     ---------------------------------------
                                               Carrying              Fair                  Carrying              Fair
                                                 Amount             Value                    Amount             Value
-------------------------------------------------------------------------------     ---------------------------------------
<S>                                       <C>                 <C>                   <C>                     <C>
Gold loans (note 5)                            $  6,900          $     --                  $ 18,600         $     --
Gold swap on capital securities (note 6)             --                --                        --            19,700
Off-balance sheet instruments:                                                                     
   Gold forward sales                                --            25,400                        --            10,900
   Silver forward sales                              --            12,900                        --            (6,000)
   Gold options    -- puts purchased              1,600               400                     2,800            11,300
                   -- calls sold                     --                --                      (700)              700
   Silver options  -- puts purchased              2,500              (400)                       --                --
                   -- calls sold                 (3,400)             (500)                   (1,700)           (2,500)
                   -- puts sold                 (10,100)           (5,900)                       --                --
                   -- calls purchased            10,100             1,100                        --                --
   Foreign currency contracts                        --            (6,800)                       --            (4,100)
   Crude oil contracts                               --              (100)                       --               500
-------------------------------------------------------------------------------     --------------------------------------- 
                                                                 $ 26,100                                   $  30,500
-------------------------------------------------------------------------------     --------------------------------------- 
</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.

                                      96
<PAGE>

                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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


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 outstanding hedged position at December 31, 1998
would be as follows.

<TABLE>
<CAPTION>
                                                                                                     Effect on    
                                                                               Amount of          Market Value of
                                                                                Change            Hedged Position
--------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                    <C>              
Change in:                                                                                                       
   Gold prices                                                             $ 10.00/ounce                  $ 6,500
   Silver prices                                                           $  0.25/ounce                  $ 3,800
   Canadian dollar                                                            U.S.$ 0.01                  $   700 
   Interest rates (effect on gold and silver options and gold loans)                  1%                  $ 3,800
--------------------------------------------------------------------------------------------------------------------
</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>
                                                                    1998                  1997                 1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                    <C>                 <C> 
Revenue:
   Gold loans and swaps                                          $ 3,096                $1,891              $(3,943)
   Gold forward sales                                              7,179                 1,001                1,541
   Silver forward sales                                            3,118                   508                1,910
   Gold and silver options                                        11,122                 3,131                  534
Operating costs:
   Foreign currency contracts                                     (2,805)                1,317                1,459
   Crude oil contracts                                              (636)                1,343                1,120
Interest expense:
   Gold swap on capital securities (note 6)                           --                   156                   --
-------------------------------------------------------------------------------------------------------------------
                                                                 $21,074                $9,347              $ 2,621
-------------------------------------------------------------------------------------------------------------------
</TABLE>

17.   OTHER COMMITMENTS AND CONTINGENCIES
Royalties
Round Mountain mine production is subject to a net smelter return royalty
ranging from 3.53% at gold prices of $320 per ounce or less to 6.35% at gold
prices of $440 per ounce or more.  Its production is also subject to a gross
revenue royalty of 3.0%, reduced to 1.5% after $75.0 million has been paid.  For
the period from inception through December 31, 1998, cumulative royalties of
$21.5 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

                                      97
<PAGE>

                              ECHO BAY MINES LTD.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

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



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 and equipment.
The Company incurred $2.1 million in rental expense in 1998, net of $1.0 million
in rental income related to office subleases. The Company's commitments under
the remaining terms of the leases are approximately $15.7 million, payable as
follows: $4.9 million in 1999, $3.0 million in 2000, $2.0 million in 2001, $1.9
million in 2002, $1.5 million in 2003 and $2.4 million thereafter.

Year 2000 Issue
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year.  Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed.  The effects of the Year 2000 issue may be
experienced before, on, or after January 1, 2000, and, if not addressed, the
impact on operations and financial reporting may range from minor errors to
significant systems failure which could affect the Company's ability to conduct
normal business operations.  The Company is assessing the Year 2000 issue and is
in the process of modifying or upgrading portions of its software to address the
issue.  It is not possible to be certain that all aspects of the Year 2000 issue
affecting the Company, including those related to the efforts of suppliers or
other third parties, will be fully resolved.

                                      98
<PAGE>
 
                        QUARTERLY FINANCIAL HIGHLIGHTS
                                  (Unaudited)
               (millions of U.S. dollars except per share data)

<TABLE>
<CAPTION>
                                                                       Net Earnings          Loss per
                                                         Revenue             (Loss)             Share
---------------------------------------------------------------------------------------------------------
<S>                                                      <C>           <C>                   <C>      
1998                                                                                                     
First quarter                                             $ 52.9            $  (7.6)           $(0.07)    
Second quarter                                              65.3                2.1             (0.01)   
Third quarter                                               55.6               (6.0)            (0.06)   
Fourth quarter                                              58.4               (8.6)            (0.09)   
---------------------------------------------------------------------------------------------------------
Total                                                     $232.2            $ (20.1)           $(0.23)    
---------------------------------------------------------------------------------------------------------
 
1997
First quarter                                             $ 73.8            $ (16.8)           $(0.12)            
Second quarter                                              75.8              (20.7)            (0.17)            
Third quarter                                               74.5             (327.5)            (2.36)            
Fourth quarter                                              81.3              (55.5)            (0.41)            
--------------------------------------------------------------------------------------------------------- 
Total                                                     $305.4            $(420.5)           $(3.06)             
--------------------------------------------------------------------------------------------------------- 
</TABLE>

In 1997, these losses include provisions for impaired assets of $309.8 million
($2.22 per share) in the third quarter and $36.2 million ($0.26 per share) in
the fourth quarter, and $11.2 million ($0.08 per share) for severance costs in
the fourth quarter.  See note 8 to the consolidated financial statements.

           ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 
                      ACCOUNTING AND FINANCIAL DISCLOSURE

None.

                                   PART III

                      ITEM 10-DIRECTORS OF THE REGISTRANT

The information about the directors of the Company required by this item is
located in the Echo Bay Mines Ltd. proxy statement to be filed within 120 days
after the end of the fiscal year. Information about the executive officers of
the Company required by this item appears in Part I of this Annual Report on
Form 10-K.

                        ITEM 11-EXECUTIVE COMPENSATION

The information required by this item appears in the Echo Bay Mines Ltd. proxy
statement to be filed within 120 days after the end of the fiscal year.

           ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 
                                AND MANAGEMENT

The information required by this item appears in the Echo Bay Mines Ltd. proxy
statement to be filed within 120 days after the end of the fiscal year.

            ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item appears in the Echo Bay Mines Ltd. proxy
statement to be filed within 120 days after the end of the fiscal year.

                                      99
<PAGE>
 
                                    PART IV

               ITEM 14-EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 
                            AND REPORTS ON FORM 8-K

(a)  The following documents are filed as part of this report:

1.   Financial Statements included in Part II, Item 8 Echo Bay Mines Ltd.

<TABLE> 
<CAPTION> 
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Management's Responsibility For Financial Reporting........................   67
Report Of Independent Chartered Accountants................................   68
Consolidated Balance Sheet.................................................   69
Consolidated Statement Of Operations.......................................   70
Consolidated Statement Of Deficit..........................................   70
Consolidated Statement Of Cash Flow........................................   71
Notes To Consolidated Financial Statements.................................   72
</TABLE>

2.   Financial Statement Schedules included in Part IV
     All schedules are omitted because they are not applicable or the required
     information is shown in the financial statements or notes thereto.

3.   Exhibits required to be filed by Item 601 of Regulation S-K
     Exhibits 10.7, 21, 23.1, 24 and 27 are filed herewith. All other exhibits
     are incorporated by reference as indicated below.

     Exhibit
       No.          Exhibit Description
      -----         -------------------

       2.1     Share Subscription and Purchase Agreement among Sercor, Ltd.,
               Echo Bay Mines Ltd. and Kendall Gold Corporation (incorporated by
               reference to Exhibit 2.1 of the report on Form 8-K of file no. 1-
               8542 filed on April 24, 1996).

       2.2     Merger Agreement between Santa Elina Gold Corporation and Kendall
               Gold Corporation (incorporated by reference to Exhibit 2.2 of the
               report on Form 8-K of file no. 1-8542 filed on April 24, 1996).

       3.1     Restated Articles of Incorporation of the Registrant
               (incorporated herein by reference to Exhibit 3(a) of Registration
               Statement No. 2-84687).

       3.2     By-Laws of the Registrant (incorporated herein by reference to
               Exhibit 3(b) of Registration Statement No. 2-84687).

       4.1     Shareholder rights plan, dated September 2, 1994 (incorporated
               herein by reference to the report on Form 8-K of file No. 1-8542
               which was made effective on October 14, 1994).

       4.2     Shelf registration statement, as amended, dated February 12, 1998
               (incorporated herein by reference to Registration Statement 333-
               35857 and amendments thereto).

                                      100
<PAGE>
 
       4.3     Indenture and First Supplemental Indenture between Echo Bay Mines
               Ltd. and Bankers Trust Company and Global Security for 11%
               Capital Securities dated March 27, 1997 (incorporated herein by
               reference to the report on Form 8-K of file No. 1-8542 which was
               made effective on March 31, 1997).

      10.1     Employee Share Incentive Plan (incorporated herein by reference
               to Exhibit 10(n) of Registration Statement No. 2-84687).

      10.2     Amendment dated February 18, 1986, to the Employee Share
               Incentive Plan described in 10.1 above (incorporated herein by
               reference to Exhibit 10.29 of the report on Form 10-K of file No.
               1-8542 for the year ended December 31, 1986).

      10.3     Director Equity Plan and amendment to Employee Share Incentive
               Plan (incorporated herein by reference to Registration Statement
               on Form S-8, file No. 33-91696).

      10.4     Employment Agreement dated May 10, 1996 with Robert L. Leclerc
               (incorporated herein by reference to exhibit 10.6 of the report
               on Form 10-K of file No. 1-8542 for the year ended December 31,
               1996).

      10.5     Employee Share Incentive Plan and Restricted Share Grant Plan
               (incorporated herein by reference to Registration Statement on
               Form S-8, file No. 333-31835).

      10.6     Registration Statement dated May 14, 1998 (incorporated herein by
               reference to Registration Statement on Form S-3, file No. 333-
               52613 and amendments thereto).

      10.7     Second Amended and Restated Gold Bullion Loan Agreement dated as 
               of February 11, 1999.

      21       Subsidiaries of the Registrant.

      23.1     Consent of Ernst & Young LLP.

      24       Power of Attorney.

      27       Financial Data Schedule.

                                      101
<PAGE>
 
(b)  Reports on Form 8-K

     Filed on January 6, 1998 related to the temporary suspension of operations
     at the Lupin mine, reduction of operations at the McCoy/Cove mine and
     further actions taken to reduce costs.

     Filed on February 20, 1998 related to press release dated February 17,
     1998, regarding 1997 results.

     Filed on March 23, 1998 related to the deferral of interest on the capital
     securities and the resignation of Scott A. Caldwell.

     Filed on September 22, 1998, related to the deferral of the October 1998
     interest payment on the capital securities.

     Filed on November 5, 1998, regarding the Second Supplemental Indenture
     dated September 15, 1998 related to the capital securities.

                                      102
<PAGE>
 
                                  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 24, 1999

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 Executive           February 24, 1999
-------------------------------------------                            
Robert L. Leclerc, Q. C.                           Officer and Director
                                                                                 
/s/ Peter H. Cheesbrough                           Senior Vice President, Finance
-------------------------------------------                                      
Peter H. Cheesbrough                               and Chief Financial Officer
                                                 
                                                 
/s/ Tom S. Q. Yip                                  Vice President, Controller and 
-------------------------------------------                                 
Tom S. Q. Yip                                      Principal Accounting Officer
 
* 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 24, 1999
     --------------------------------------
     Lois-Ann L. Brodrick, Attorney-in-fact
</TABLE>

                                      103
<PAGE>
 
Exhibits 10.7, 21, 23.1, 24 and 27 are filed herewith. All other exhibits are
incorporated by reference as indicated below.


Exhibit No.    Exhibit Description                                     
-----------    -------------------                                     
2.1            Share Subscription and Purchase Agreement among Sercor, 
               Ltd.,Echo Bay Mines Ltd. and Kendall Gold Corporation 
               (incorporated byreference to Exhibit 2.1 of the report 
               on Form 8-K of file no. 1-8542 filed on April 24, 1996).

2.2            Merger Agreement between Santa Elina Gold Corporation 
               and Kendall Gold Corporation (incorporated by reference
               to Exhibit 2.2 of the report on Form 8-K of file no. 
               1-8542 filed on April 24, 1996).

3.1            Restated Articles of Incorporation of the Registrant
               (incorporated herein by reference to Exhibit 3(a) of 
               Registration Statement No. 2-84687).

3.2            By-Laws of the Registrant (incorporated herein by 
               reference to Exhibit 3(b) of Registration Statement 
               No. 2-84687).

4.1            Shareholder rights plan, dated September 2, 1994 
               (incorporated herein by reference to the report on Form 
               8-K of file No. 1-8542 which was made effective on 
               October 14, 1994).

4.2            Shelf registration statement, as amended, dated February
               12, 1998 (incorporated herein by reference to 
               Registration Statement 333-35857 and amendments thereto).

4.3            Indenture and First Supplemental Indenture between Echo
               Bay Mines Ltd. and Bankers Trust Company and Global 
               Security for 11% Capital Securities dated March 27, 1997 
               (incorporated herein by reference to the report on Form 
               8-K of file No. 1-8542 which was made effective on March 
               31, 1997).

10.1           Employee Share Incentive Plan (incorporated herein by 
               reference to Exhibit 10(n) of Registration Statement 
               No. 2-84687).

10.2           Amendment dated February 18, 1986, to the Employee Share
               Incentive Plan described in 10.1 above (incorporated 
               herein by reference to Exhibit 10.29 of the report on 
               Form 10-K of file No. 1-8542 for the year ended December 
               31, 1986).

10.3           Director Equity Plan and amendment to Employee Share 
               Incentive Plan (incorporated herein by reference to 
               Registration Statement on Form S-8, file No. 33-91696).

10.4           Employment Agreement dated May 10, 1996 with Robert L. 
               Leclerc (incorporated herein by reference to exhibit 
               10.6 of the report on Form 10-K of file No. 1-8542 for 
               the year ended December 31, 1996).

10.5           Employee Share Incentive Plan and Restricted Share Grant
               Plan (incorporated herein by reference to Registration 
               Statement on Form S-8, file No. 333-31835).

10.6           Registration Statement dated May 14, 1998 (incorporated 
               herein by reference to Registration Statement on Form 
               S-3, file No. 333-52613 and amendments thereto).

10.7           Second Amended and Restated Gold Bullion Loan Agreement dated as 
               of February 11, 1999.

21             Subsidiaries of the Registrant.                              

23.1           Consent of Ernst & Young LLP.                                

24             Power of Attorney.                                           

27             Financial Data Schedule.                                     

                                       i