MK GOLD CO - 10-Q Quarterly Report

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 whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

On May 10, 2004, there were 37,525,649 outstanding shares of the registrant’s common stock.

We have prepared the following unaudited interim consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to these rules and regulations.

You should read the following unaudited interim consolidated financial statements and the accompanying notes together with our Annual Report on Form 10-K for the year ended December 31, 2003. Our 2003 Annual Report contains information that may be helpful in analyzing the financial information contained in this report and in comparing our results of operations for the three months ended March 31, 2004 with the same period in 2003.

Various amounts in this report are quoted in euros and translated into U.S. dollars. All U.S. dollar/euro conversion amounts, except for amounts included in our unaudited interim consolidated financial statements and related disclosures, which are translated in accordance with accounting principles generally accepted in the United States of America, were converted using the currency exchange rate in effect on May 10, 2004, which was approximately 0.8435 euro per U.S. dollar.

The accompanying notes are an integral part of the consolidated financial statements.

The interim financial information included herein is unaudited; however, the information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for the fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods. The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2003, which are included in our Annual Report on Form 10-K for the year ended December 31, 2003 (“2003 10-K”). The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year. The consolidated balance sheet at December 31, 2003 was derived from the audited consolidated financial statements contained in the 2003 10-K and does not include all disclosures required by accounting principles generally accepted in the United States of America for annual consolidated financial statements.

Certain amounts for prior periods have been reclassified to be consistent with the 2004 presentation.

Based upon the Company’s review of new accounting standards released during the quarter ended March 31, 2004, the Company did not identify any standard requiring adoption that would have a significant impact on its consolidated financial statements for the periods reported.

The Emerging Issues Task Force of the Financial Accounting Standards Board (“FASB”) reached consensus in March 2004 that mineral rights should be removed as examples of intangible assets in Statement of Financial Accounting Standards (“SFAS”) Nos. 141 and 142. The FASB ratified the consensus on April 28, 2004. Upon adoption, approximately $47,639 associated with mineral rights relating to the Las Cruces project will be reclassified from intangible assets – mineral rights to mining properties, plant and mine development, net, on the Company’s consolidated balance sheet.

The Company accounts for stock options granted using Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation cost has been recognized for its fixed stock option awards. Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net loss and related per share amounts would have changed to the pro forma amounts indicated below:

The Company, through its wholly owned subsidiary Cobre Las Cruces, S.A., owns the exploration and mineral rights to the Las Cruces project, a development stage copper project in the Pyrite Belt of Spain. The Las Cruces project was acquired by the Company on September 1, 1999 when the Company acquired Cobre Las Cruces, formerly known as Riomin Exploraciones, S.A., from Rio Tinto plc.

Mining at the Las Cruces project will be subject to permitting and obtaining financing, and completion of engineering and construction. Although the Company believes necessary permitting for the project will be obtained, the Company cannot guarantee that such will be the case, and no assurance can be given that the Company will obtain financing for the project. Further, there may be other political and economic circumstances that could prevent the Company from completing development of the project.

The Company owns a 25% undivided interest in the Castle Mountain Venture (“CMV”), which prior to May 2001 operated a gold mine in San Bernardino County, California. During the third quarter of 2001, gold reserves at the mine were exhausted, mining operations ceased, and mine closure and reclamation activities began. Mining closure and reclamation activities continued during the first quarter of 2004. The results for the CMV have been proportionally reflected in the accompanying consolidated financial statements.

Gold production at the Castle Mountain Mine continued during the first quarter of 2004 as residual gold was recovered from the leach pads during the closure and reclamation phase. Residual gold production is expected to continue into mid-2004 as a result of continued leaching. As part of closure

activities at the mine, mining equipment and assets were sold during the three month periods ended March 31, 2004 and 2003, resulting in a gain on disposal of assets of $1 and $2, respectively.

On April 21, 2003, the Company exchanged all of its limited partnership units of Peru Exploration for a total of 4,821,905 common shares of Bear Creek Mining Corporation (“Bear Creek”), a publicly traded Canadian mineral exploration company (TSX Venture Exchange: BCM). The exchange was made in connection with the acquisition by Bear Creek (formerly EVEolution Ventures, Inc.) of all outstanding limited partnership interests of Peru Exploration and all outstanding shares of Peru Exploration’s general partner.

Pursuant to the terms of the exchange, the Company was restricted from publicly selling all but 2% of its shares of Bear Creek for six months following the exchange, at which time an additional 15% of the shares held by the Company was released from such restrictions. For a period of 12 months thereafter, the restrictions lapse with respect to additional increments of the shares every three months, with 91% of the shares released from such restrictions 18 months following the exchange. The restrictions lapse with respect to the remaining 9% of the shares every six months thereafter in 3% increments, with 100% of the shares released from such restrictions 36 months following the exchange. Due to the significant restrictions, the restricted shares were initially valued at less than traded market prices.

The common shares of Bear Creek that can be sold without restriction within 12 months are classified as a current asset and carried at the quoted market price of the Bear Creek common stock. Any unrealized gains and losses on these securities are reflected as a component of other comprehensive income (loss). The remainder of the shares are classified as a long term asset and carried at the amount recorded upon receipt in April 2003, unless there is a decline in market value which is other than temporary.

The Company’s ability to realize the recorded value of its shares of Bear Creek is subject to various risks, including Bear Creek’s performance in the future, volatility in the market price for the shares and the existence of sufficient market liquidity to absorb the Company’s position, all of which are beyond the Company’s control. In addition, the restrictions on the Company’s ability to sell its Bear Creek stock could negatively impact the value it will ultimately receive for the shares. As a result, the amount the Company will realize from this investment is uncertain.

The Company operates primarily in two industry segments, gold sales and copper project. All of the Company’s revenue is derived from gold sales. The Company is not economically dependent on a limited number of customers for the sale of its gold because gold commodity markets are well-developed worldwide. During 1999, the Company acquired the Las Cruces project, which is a copper project in the development stage. All copper project assets relate to the Las Cruces project and are located in Spain.

At March 31, 2004, the Company had outstanding borrowings of $46,000 under its $55,000 credit facility with Leucadia National Corporation (the “Credit Facility”). For the three month periods ended March 31, 2004 and 2003, approximately $437 and $349, respectively, in interest and commitment fees were paid to Leucadia under the Credit Facility. Approximately $430 and $342, respectively, in interest relating to the Las Cruces project was capitalized during these periods. Loans outstanding under the Credit Facility bear interest equal to the prime rate and interest and commitment fees are payable quarterly. The prime rate at March 31, 2004 was 4%. The Credit Facility was amended, effective March 31, 2004, to increase the facility to $55,000.

The provision for income taxes in the first quarter of 2003 represents California state income taxes. The Company recorded no federal tax benefit for its pre-tax loss in the three month periods ended March 31, 2004 and 2003 since the Company determined that it was unlikely it would be able to realize the related tax benefit in the future.

For the three month periods ended March 31, 2004 and 2003, there were no differences in the numerators for the basic and diluted per share computations. The denominators for basic and diluted per share computations were 37,545,649 for the 2004 period and 37,395,649 for the 2003 period, respectively. Options to purchase 1,895,000 and 1,972,500 weighted average shares of common stock outstanding during the quarters ended March 31, 2004 and 2003, respectively, were not included in the computation of diluted per share amounts because they were antidilutive.

As part of a court approved bankruptcy plan of Washington Group International, Inc. (“Washington Group”), the Company, as an unsecured creditor, has received various distributions of common stock and warrants to purchase additional common shares of Washington Group. In the first quarter of 2004, the Company received a distribution of 3,801 common shares and warrants to purchase an additional 6,478 common shares of Washington Group, with a combined market value of $196. These securities were sold immediately upon receipt. In the first quarter of 2003, the Company received a distribution of 3,150 common shares and warrants to purchase an additional 3,578 common shares of Washington Group, with a combined market value of $34. The Company has recorded these amounts as income in the quarters in which they were received.

The following is a summary of accumulated other comprehensive income at March 31, 2004 and December 31, 2003:

No income taxes have been provided on these amounts because of the Company’s net operating loss carryforwards.

This section discusses our consolidated financial condition, liquidity and capital resources and results of operations. You should read this analysis in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2003. This section also contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under “Cautionary Statement for Forward-Looking Information” below.

On September 1, 1999, we acquired the entire share capital and subordinated debt of Riomin Exploraciones, S.A., from Rio Tinto plc. After this acquisition, we changed the name of Riomin Exploraciones, S.A., to Cobre Las Cruces, S.A. Cobre Las Cruces has permits to investigate four contiguous areas in southwestern Spain, one of which contains the Las Cruces copper deposit. Las Cruces is 20 kilometers northwest of Seville, in an area having a well-developed infrastructure that will support the project’s needs for water, power and transportation.

We purchased Cobre Las Cruces from Rio Tinto for $42 million in cash. As part of the purchase consideration, Rio Tinto will be entitled to receive a 1.5% royalty on any copper sales from the Las Cruces project at a price exceeding $0.80 per pound (the average copper price for the period from 1989 to 2003 was $0.96 per pound). We obtained funding for the acquisition of Cobre Las Cruces through borrowings of $20 million under our credit facility with Leucadia, the sale of 18.1 million shares of our common stock to Leucadia for $15.8 million and $6.2 million from our working capital.

Project Feasibility. Bechtel International, Inc., an international engineering and construction company, completed an independent feasibility study for the Las Cruces project in 2001. The feasibility study incorporated results of an environmental impact study completed by FRASA Ingenieros Consultores, a team of national and international environmental engineering experts based in Madrid.

In 2003, a new independent feasibility study was prepared by DMT-Montan Consulting GmbH, Lurgi Metallurgie GmbH, and Outokumpu Technology Group. The new study incorporates the requirements from the Declaration of Environmental Impact, the mining concession and various water permits into the development plan for the Las Cruces project. The new feasibility study has been reviewed by Pincock, Allen & Holt, an independent engineering company. In their report, Pincock, Allen & Holt stated that they did not identify any deficiencies that would preclude the Las Cruces project from meeting the designated production and cost objectives presented in the new feasibility study.

The new feasibility study reflects modifications to the process plant design based on technology studies done by Outokumpu, a world leader in base metal processing technology. These technology studies and recently completed test work demonstrated that improvements to the process plant design were possible that could reduce capital costs. The process will be simplified by using solely atmospheric leaching and eliminating expensive autoclaves for pressure leaching without sacrificing copper recovery.

The new feasibility study includes a new open pit mine plan and ore reserves calculated by DMT-Montan. Minor adjustments were subsequently made to the new ore reserve calculations in

connection with the review by Pincock, Allen & Holt. Including these adjustments, proven and probable ore reserves have increased to 16.0 million metric tons of ore at an average grade of 6.62% copper. The prior feasibility study conducted in 2001 estimated proven and probable ore reserves at 15.8 million metric tons at an average grade of 5.94% copper.

The capital costs to bring the Las Cruces project into production are estimated at 281 million euros, or approximately $333 million, including working capital, land purchases and contingencies, but excluding bonding requirements, interest during construction and other financing costs. The estimated capital costs reflect an overall reduction in costs as a result of the process plant improvements described above. Based on the new feasibility study, the Las Cruces project has the potential to be a low cost producer. Cash operating costs per pound of copper produced are expected to average 0.33 euro, or $0.39, which would place the project among the lowest cost copper producers. Cash operating costs include charges for mining ore and waste, processing ore through milling and leaching facilities, royalties and other cash costs. Charges for reclamation work done during mining operations are also included in cash costs. Cash operating costs do not include sustaining capital costs over the life of the mine or charges for reclamation work to be performed after production ceases. Based on the new feasibility study, sustaining capital costs are expected to average approximately 1.5 million euros, or $1.8 million, per year, and will be funded by cash provided by operations. Post-production closure and reclamation expenses are estimated at approximately 43 million euros, or $51 million, excluding salvage values and other factors that could partially offset these expenses.

Total development and operating costs for the Las Cruces project could be affected by a number of factors, including the exchange rate of the euro relative to the U.S. dollar. Although the new feasibility study reflects an overall reduction in capital costs, the estimated capital costs in U.S. dollars based on the current exchange rate would be higher than our prior estimates due to a significant decline in the exchange rate of the euro relative to the U.S. dollar. Exchange rates fluctuate, and we cannot predict what exchange rates will be over the course of development and operation of the Las Cruces project. In addition to risks relating to exchange rates, our assumptions and estimates regarding the Las Cruces project are also subject to a number of other risks and uncertainties. Actual results could differ materially from our assumptions and estimates as a result of our need for financing, potential delays in development of the Las Cruces project, the imprecision of estimates, the uncertainty of government subsidies, uncertainties associated with closure guarantees or other requirements that may be imposed by the Spanish government, volatility of copper prices and other factors, including those set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cautionary Statement for Forward Looking Information” and elsewhere in this report.

Subsidies, Permitting and Development Activities. Since acquiring the Las Cruces project, we have applied for a number of subsidies and permits for the project. To date, subsidies totaling 47.5 million euros have been granted, as described below, and several key permits have been issued, including the mining concession, which gives Cobre Las Cruces the right to mine the Las Cruces deposit. However, the subsidies and the mining concession require us to meet certain conditions as more fully described below. Our ability to satisfy these conditions depends on our ability to obtain financing and other factors, and we cannot predict when, if at all, we will be able to satisfy these conditions.

In June and July 2001, we submitted subsidy applications to central and regional governments in Spain. Upon their review of the applications, these governments recommended subsidies of up to 53 million euros, or approximately $63 million, subject to final consideration following European Commission review. Because the recommendation exceeded 50 million euros, it required the approval of the European Commission, which has been obtained. No further review of the subsidies by the European Commission is required.

In May 2003, the Ministry of Economy for Spain granted, and Cobre Las Cruces accepted, a Regional Incentives Subsidy of 36.9 million euros, or approximately $43.7 million, for the development of the Las Cruces project. In March 2004, the Regional Ministry for Employment and Technological Development for Andalusia, Spain, granted, and Cobre Las Cruces accepted, a Special Action Zone subsidy of 10.6 million euros, or approximately $12.6 million, for the development of the Las Cruces project. Receipt of these subsidies is subject to several conditions, including job creation, minimum equity requirements for Cobre Las Cruces, and qualifying capital expenditures of at least 264 million euros, or approximately $313 million, for engineering, plant, land and equipment. In order to receive the subsidies, at least 25% of the qualifying capital expenditures were required to be incurred by March 27, 2004 and the full amount of qualifying capital expenditures must be incurred by March 27, 2006. Since we did not receive all of the necessary permits and financing by the 2004 deadline, we were not in position to incur the requisite capital expenditures on that date, and, accordingly, we did not meet this condition at that time. Although we have requested and expect to receive an extension, we cannot assure you that an extension will be granted, and if no extension is granted, we will lose the subsidies. If an extension is granted and we are able to satisfy the capital expenditure requirements and the other conditions, we will be eligible to receive the subsidies. The amount of required qualifying capital expenditures reflects the portion of our original cost estimates that were subsidizable. If our actual qualifying capital expenditures are lower than this amount, the amount of subsidies we are eligible to receive would be reduced.

The subsidies granted to date represent 47.5 million euros of the 53 million euros of subsidies recommended by the central and regional governments. An additional subsidy from the regional government of Andalusia, if granted, could provide up to 5.3 million euros of additional funds for the development of the project. The regional government is in the final steps of reviewing this application, which was submitted in 2001.

We submitted initial water permit applications in December 2000 to the regional water authority of the Spanish central government. In March 2001, we submitted to the government of Andalusia a mining concession application accompanied by environmental impact and project feasibility studies. We submitted additional water permit applications in April and May 2001, including a permit application for effluent discharge. Three of the four initial water permits have been granted. The remaining initial water permit is in an advanced stage of processing. While we believe that we will receive the remaining water permits, we could encounter difficulties or further delays. Therefore, we cannot assure you that we will receive them on a timely basis or at all.

In May 2002, the Department of Environment of the Regional Government of Andalusia, Spain issued a positive Declaration of Environmental Impact for the Las Cruces project. Receipt of the positive declaration indicates the government’s initial environmental approval of the project.

In August 2003, the Ministry of Employment and Development of the government of Andalusia granted the mining concession for the project, which gives Cobre Las Cruces the right to mine the Las Cruces deposit, subject to certain government requirements. These requirements include posting an environmental restoration bond and a contingency bond in the amount of 13.8 million euros and 5 million euros, respectively; increasing the share capital of Cobre Las Cruces to 30% of the total investment in the project in accordance with a condition of the Regional Incentive Subsidy granted to Cobre Las Cruces in March 2003; contracting for civil liability insurance coverage; presenting to the Ministry of Employment and Development a geotechnical monitoring plan to ensure the stability of the open pit slopes; engaging an independent environmental control agency; and complying with the terms of the favorable Declaration of Environmental Impact, which was issued to Cobre Las Cruces by the Ministry of Environment of the government of Andalusia in May 2002.

We are required to obtain various licenses and permits in connection with the operation and development of the Las Cruces project. The Andalusian government is currently processing the permits

relating to environmental emissions and discharges, stream diversion, hydraulic public domain utilization, work and activities municipal licenses and authorization for low voltage electricity lines and electric substation. The most significant outstanding license is the water concession. Additionally, pursuant to Law 7/2002 on Town Planning in Andalusia, we are required to submit a “special plan,” which must be approved by the Andalusian government, in connection with certain municipal construction licenses necessary for the development of the Las Cruces project. We have submitted the special plan to the Andalusian government, which is currently reviewing it. We have also entered into an agreement with the three municipalities from which we are required to obtain construction licenses. The agreement, which is subject to the special plan, obligates us to pay an aggregate compensatory fee of 3.5 million euros to the municipalities. The compensatory fee will be used for local projects and is payable in installments of 15% upon approval of the special plan, 15% on the approval of the municipal construction licenses, 35% at the end of the first year of production and 35% at the end of the second year of production.

Although we own the mineral rights to the Las Cruces orebody, we do not currently own the land above the orebody or certain adjacent land that may be necessary to develop and operate the project. In the aggregate, we may need to purchase or lease up to 954 hectares, or approximately 3.7 square miles of land and associated rights-of-way. We will need to purchase or lease approximately 835 hectares of this land in order to complete the final processing of some of our additional water permit applications and bring the mine into production. The additional 119 hectares of land is not necessary to begin production, but may be necessary to accommodate operations in later periods of production. During 2003, we leased approximately 50 hectares of the land necessary to bring the mine into production. In March 2004, we entered into an agreement to purchase an additional 500 hectares of land necessary to bring the mine into production. As a result, approximately 65% of the 835 hectares of land required to bring the mine into production has been secured. Negotiations are underway with other landowners to acquire the remaining 35% of the initial land needed for the project. If negotiations with landowners are unsuccessful, we will initiate proceedings to cause the regional government to expropriate the land. Mineral rights and surface land are separately transferable under Spanish law. Expropriation is commonly used by holders of mineral rights in Spain, in accordance with government laws, to acquire surface land necessary for the extraction of minerals.

This procedure could prove time-consuming and could significantly delay our commencing construction activities. If it becomes necessary for us to expropriate the land, this procedure could significantly delay development of the project.

Environmental Considerations. Since our acquisition of the Las Cruces project, we have focused our efforts primarily on developing the project into a low cost, environmentally responsible copper mine. We have given environmental considerations high priority in project design and development at the Las Cruces project. Waste dumps will be continually contoured and reclaimed to enhance the appearance of the Las Cruces project. The area’s water resources affected by the mine have been carefully studied and plans have been developed to protect these resources. Water Management Consultants, an international hydrological engineering and design company, developed the water management plan, including the extraction system for dewatering the overlying sand aquifer around the mine site. Water will be extracted from the aquifer to prevent it from entering the mine pit. The extracted water will be re-injected into the aquifer away from the mine. Water needed to process the ore will be pumped 15 kilometers from a sewage treatment plant and further treated before use.

Financing. Funding for the development and advancement of the Las Cruces project has principally come from our operating cash flows, cash reserves and credit facility with Leucadia National Corporation. Our current cash resources will not be sufficient to cover all projected expenses necessary

to bring the Las Cruces project into commercial production. We estimate that the total capital costs, before consideration of any subsidies, to bring the Las Cruces project into commercial production are approximately 281 million euros, or approximately $333 million, including working capital, land purchases and contingencies, but excluding interest and other financing costs. As described above under “Project Feasibility,” our estimated capital costs are subject to a number of uncertainties and our actual capital costs could be higher.

We are exploring various financing alternatives for projected costs and expenses associated with the Las Cruces project. In addition, we expect we will need to restructure our credit facility in connection with our financing activities for the project. We will not be able to fund the project solely from debt financing. We will need to raise a significant amount of the funds from equity investors, which may be accomplished through a subscription rights offering to our existing stockholders. We may also seek to raise additional capital from new investors. Although we believe these possibilities are viable options, we cannot assure you that we will actually commence an equity financing or that, if commenced, such efforts will be successful.

We are also considering other sources of financing, including product off-take agreements, which are a type of product sales agreement, supplier financing and equipment leasing. We plan to secure debt financing for a portion of the project’s capital requirements. We expect debt financing to be primarily funded through a syndicated project financing facility using a lead international bank experienced in mining project financing. While we believe that we will be able to obtain financing for the Las Cruces project, we cannot assure you that we will be able to obtain financing on favorable terms or at all. If we are unable to obtain financing when needed, the development of the Las Cruces project could be delayed significantly. Any significant delay could increase the costs of developing the Las Cruces project or prohibit us from completing development of the project.

Other Recent Developments. On May 1, 2004, we entered into an employment agreement with Fernando Fernandez Torres, who will serve as Managing Director of Cobre Las Cruces and manage development activities for the Las Cruces project. Mr. Fernandez commenced employment on May 1, 2004 and is based in Seville, Spain. Prior to joining Cobre Las Cruces, Mr. Fernandez was Chief Operating Officer of SCR SIBELCO, a major European-based producer of industrial minerals.

Gold Production. Our attributable share of gold production from the Castle Mountain Venture for the three months ended March 31, 2004 decreased 18% to 1,002 ounces, compared to 1,228 ounces for the three months ended March 31, 2003. The decrease in production is due to declining residual gold recovery from the leach pads. Future gold production will continue to decline as residual gold is recovered from the leach pads during the closing and reclamation phase at the mine. Residual gold production is expected to continue into mid-2004.

Revenue. Our revenues come from the sale of gold from the Castle Mountain Mine. Gold production is limited to residual production during reclamation and closure at the mine. Therefore, our revenue will continue to decrease significantly until residual gold production ceases at the mine, which we expect to be in mid-2004. Once this residual gold production ceases, based on our current operations, we will have no revenues until production begins at the Las Cruces project.

Our product sales revenue decreased $0.1 million, or 20%, to $0.3 million for the three month period ended March 31, 2004, compared to $0.4 million for the same period in 2003. The decrease in revenue is due to declining gold production, partially offset by higher realized gold prices. Future product

sales revenue will continue to decline as residual gold production decreases during the reclamation and closure phase at the Castle Mountain Mine.

During the three month period ended March 31, 2004, we sold no ounces of gold under forward sales contracts and 835 ounces of gold on the spot market. During the same period in 2003, we sold no ounces of gold under forward sales contracts and 1,200 ounces of gold on the spot market. We had no ounces of gold sold under forward sales contracts as of March 31, 2004. While we have used forward sales contracts in the past, we expect that our future gold sales from residual production at the Castle Mountain Mine will be made primarily at spot prices.

For the three month period ended March 31, 2004, the average price realized per ounce of gold was $406, compared to $354 per ounce for the same period in 2003. The average spot price for the three month period ended March 31, 2004 was $409 per ounce, compared to $352 per ounce for the same period in 2003.

Gross Profit. We recognized gross profit from product sales of $0.1 million for the three month period ended March 31, 2004, compared to $0.3 million for the same period in 2003. Gross profit decreased primarily due to declining gold production, partially offset by higher realized gold prices. Future gross profit should continue to decline as residual gold production decreases at the Castle Mountain Mine.

Exploration Costs. Exploration costs decreased for the three month period ended March 31, 2004, compared to the same period in 2003. The decrease in expenditures is due to fewer properties being evaluated in 2004. During the first quarter of 2004, we focused our exploration efforts on our exploration programs in Nevada and Spain.

General and Administrative Expenses. General and administrative expenses increased 76% for the three month period ended March 31, 2004 compared to the same period in 2003. The increase in expenses is due primarily to higher audit costs and executive bonus and severance costs.

Project Development Costs. Project development costs for the three month periods ended March 31, 2004 and 2003 represent costs related to the Las Cruces Project which have not been capitalized.

Bankruptcy Recovery. As part of a court approved bankruptcy plan of Washington Group International, Inc., we have received, as an unsecured creditor, various distributions of common stock and warrants to purchase additional common shares of Washington Group. In the first quarter of 2004, we received a distribution of 3,801 common shares and warrants to purchase an additional 6,478 common shares of Washington Group, with a combined market value of $0.2 million. These securities were sold immediately upon receipt. In the first quarter of 2003, we received a distribution of 3,150 common shares and warrants to purchase an additional 3,578 common shares of Washington Group, with a combined market value of $0.03 million. We have recorded these amounts as income in the quarters in which they were received.

Interest Expense. Interest expense for the first quarter of 2004 and 2003 consisted primarily of the cost of the commitment fee on our credit facility, which is based on the amount available under the facility. For the first quarter of 2004 and 2003, we capitalized $0.4 million and $0.3 million, respectively, in interest relating to the Las Cruces project.

Income Tax Provision. The provision for income taxes for the three month period ended March 31, 2003 represents California state income taxes. We recorded no federal tax benefit for our pre-tax loss in the three month periods ended March 31, 2004 and 2003 since we determined that it was unlikely we would be able to realize the related tax benefit in the future.

Our principal sources of funds are our available resources of cash and cash equivalents, equity securities, cash generated from residual gold production at the Castle Mountain Mine and our credit facility. At March 31, 2004, we had cash and cash equivalents of $2.6 million, equity securities of $2.0 million (of which $1.9 million was available for sale within 12 months) and gold bullion of $0.1 million, representing a decrease in cash and cash equivalents, equity securities and gold bullion of $0.3 million from December 31, 2003. At March 31, 2004, we had $9.0 million of available borrowings under our credit facility. We expect that our cash and cash equivalents and available borrowings under our credit facility will be sufficient to cover operating expenses through 2004. However, our cash resources will not be sufficient to cover all projected costs and expenses necessary to commence mining at the Las Cruces project. We estimate that the capital cost will be approximately 281 million euros, or approximately $333 million, to bring the Las Cruces project into production, excluding interest and other financing costs. Land acquisition activities have begun and basic engineering activities are scheduled to begin in the next few weeks. We will require financing in order to complete these activities.

Until May 2001, our revenues came from two sources, contract mining at the Castle Mountain Mine and the sale of gold from the mine. Since the completion of mining activities at the Castle Mountain Mine in May 2001, our only source of revenue has been sales of residual gold recovered from the leach pads during the closure and reclamation phase at the mine. Based on our current operations, expected overhead expenses and exploration costs, we will not have positive cash flow from operations before production of refined copper begins at the Las Cruces project.

Net cash used by operating activities was $1.7 million for the three-month period ended March 31, 2004 compared to $1.5 million for the same period in 2003.

In March 1998, we entered into a $20 million credit facility with Leucadia National Corporation. Through various amendments, the most recent of which was effective March 31, 2004, the credit facility has been amended to increase the facility to $55 million. The credit facility has an expiration date of January 3, 2006. Leucadia may terminate the credit facility on December 15 of any year, provided Leucadia notifies us of the termination prior to September 15 of that year. Leucadia has notified us that it does not intend to terminate the credit facility prior to December 15, 2005. At March 31, 2004, we had outstanding borrowings under the credit facility of $46 million. Loans outstanding under the credit facility bear interest equal to the prime rate and interest and commitment fees are payable quarterly. The prime rate at March 31, 2004 was 4.0%. Interest paid to Leucadia under the credit facility for the three months ended March 31, 2004 and 2003 was approximately $0.4 million and $0.35 million, respectively. A substantial portion of these interest payments relates to financing for the Las Cruces project. Interest related to the Las Cruces project is capitalized and is not reflected as interest expense in our consolidated statements of operations. Instead, capitalized interest is added to mining properties, plant and mine development on our consolidated balance sheets.

financing. We will need to raise a significant amount of the funds from equity investors, which may be accomplished through a subscription rights offering to our existing stockholders. We may also seek to raise additional capital from new investors. Although we believe these possibilities are viable options, we cannot assure you that we will actually commence an equity financing or that, if commenced, such efforts will be successful.

Our sources of funds available to fund new mining projects are limited. We used a significant portion of our existing sources of funds to acquire the Las Cruces project for $42 million in September 1999. Accordingly, our ability to begin new mining projects depends on our ability to obtain additional sources of funds to finance these mining projects. While we believe that we may be able to obtain financing for new mining projects through project financing or otherwise, we cannot assure you that we will be able to obtain financing on favorable terms or at all.

Additions to mining properties, plant and mine development totaled $3.8 million for the three months ended March 31, 2004, compared to $1.2 million for the same period in 2003. For all periods presented, additions to mining properties, plant and mine development consisted of: (1) mine development expenditures; (2) construction expenditures for buildings, machinery, plant and equipment; (3) expenditures for mobile mining service equipment; and (4) capitalized interest. The principal source of funds that we used to fund project development at the Las Cruces project was our credit facility with Leucadia.

Upon completion of production at a mine, we must make expenditures for reclamation and closure of the mine. Effective January 1, 2003, we account for future reclamation and mine closure liabilities in accordance with SFAS No. 143. At March 31, 2004, we had a recorded asset retirement obligation of $1.4 million for these costs, including $1.3 million for the Castle Mountain Mine. We and Quest Capital Corporation, formerly Viceroy Resource Corporation, the owner of the remaining 75% interest in the Castle Mountain Venture, are depositing cash, including all proceeds from the sale of plant and equipment, in a separate fund to cover current and future reclamation costs at the venture properties. At March 31, 2004, our share of this fund was $1.9 million. This fund is classified as restricted cash and investments. During the quarters ended March 31, 2004 and 2003, approximately $873 and $748, respectively, of restricted investments were sold and are now classified as restricted cash. We have not recorded any asset retirement liabilities relating to the Las Cruces project as there has been no disturbance that would require reclamation or remediation. We review the adequacy of our reclamation and mine closure liabilities in light of current laws and regulations and adjust our liabilities as necessary.

For the three month periods ended March 31, 2004 and 2003, accumulated other comprehensive income (loss) includes approximately $(1.4) million and $1.7 million, respectively, resulting from the recognition of unrealized gains and losses from foreign currency translation adjustments. While the recognition of these adjustments results in decreases and increases in total shareholders’ equity, these adjustments had no impact on our consolidated liquidity. These adjustments are required in order to

convert our euro denominated assets into U.S. dollars and, therefore, reflect the change in the value of the euro against the U.S. dollar over these periods. We do not believe these adjustments reflect any decrease or increase in the economic value of our assets, and we are unable to predict whether these unrealized losses and gains from foreign currency translation adjustments will continue in the future. Foreign currency exchange rates can have a significant impact on our consolidated financial statements. See Part I, Item 3, “Quantitative And Qualitative Disclosures About Market Risk—Foreign Currency Exchange Rate Risk” in this report and Note 1 to the consolidated financial statements and “Cautionary Statement for Forward-Looking Information—Currency Fluctuations” in our Annual Report on Form 10-K for the year ended December 31, 2003.

As shown below, at March 31, 2004, our contractual cash obligations totaled approximately $46.6 million.

Based upon our review of new accounting standards released during the first quarter ended March 31, 2004, we did not identify any standard requiring adoption that would have a significant impact on our consolidated financial statements for the periods reported.

The Emerging Issues Task Force of the Financial Accounting Standards Board, or FASB, reached consensus in March 2004 that mineral rights should be removed as examples of intangible assets in Statement of Financial Accounting Standards Nos. 141 and 142. The FASB ratified the consensus on April 28, 2004. Upon adoption, approximately $47,639 associated with mineral rights relating to the Las Cruces project will be reclassified from intangible assets – mineral rights to mining properties, plant and mine development, net, on our consolidated balance sheet.

Surety bonds and letters of credit totaling $2.7 million, of which our share is $0.8 million, have been provided as required by various governmental agencies for environmental protection, including our share of reclamation bonds of $0.6 million relating to the Castle Mountain Mine and $0.2 million relating to the American Girl Mine, at which reclamation was completed in 2000. If closure and reclamation

obligations under these agreements are not met, the agencies could draw on these bonds and letters of credit to fund expenditures for reclamation and closure requirements.

In October 1998, our board of directors authorized the repurchase of up to 2 million shares. As of May 10, 2004, we had repurchased 173,700 shares under the repurchase program. We have not repurchased any shares since 1999. The repurchase program was terminated on March 26, 2004.

Certain information set forth in this report contains “forward-looking statements” within the meaning of federal securities laws. These forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, exploration efforts, financing needs, plans or intentions relating to acquisitions by us and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. Additional forward-looking statements may be made by us from time to time. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of us, are also expressly qualified by these cautionary statements.

Our forward-looking statements are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties. However, we cannot assure you that management’s expectations, beliefs and projections will result or be achieved or accomplished. Our forward-looking statements apply only as of the date made. Except as required by law, we undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

There are a number of risks and uncertainties that could cause actual results to differ materially from those set forth in, contemplated by or underlying the forward-looking statements contained in this report. These risks include, but are not limited to, dependence on a single mining project, our need for financing, potential delays in development of the Las Cruces project, imprecision of estimates, uncertainty of government subsidies, volatility of copper prices, currency fluctuations, international political instability, our significant indebtedness, risks associated with mining activities, risks of development in foreign countries, environmental and other laws and regulations, competition, our reliance upon key executives and risks related to our majority shareholder and lender. Each of these risks and certain other uncertainties are discussed in more detail in our Annual Report on Form 10-K for the year ended December 31, 2003. There may also be other factors, including those discussed elsewhere in this report, that may cause our actual results to differ materially from the forward-looking statements. Any forward-looking statements made by or on our behalf should be considered in light of these factors.

See note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2003 for additional information regarding forward sales activities.

Our future profitability and long-term viability will depend, in large part, on the market price of copper. Market prices for copper are volatile and are affected by numerous factors beyond our control, including expectations regarding inflation, global and regional demand, speculative activities, political and economic conditions, and production costs in major copper producing regions. The aggregate effect of these factors on copper prices is impossible for us to predict. A decrease in copper prices could adversely affect our ability to finance the development of the Las Cruces project, which would have a material adverse affect on our results of operations and financial condition. A $0.01 decrease in the price per pound of copper could reduce annual cash flows from the Las Cruces project by up to $1 million.

From time to time, we may seek to mitigate the risk of fluctuations in copper prices through periodic forward sales. Forward sales transactions result in a reduction in possible revenue if the contract price is less than the market price at the time of settlement. Additional risks associated with forward sales activities could result if we are unable to meet the delivery requirements of forward sales contracts or to extend delivery dates if necessary. The relative risks and benefits of engaging in forward sales activities depend on prevailing market conditions.

The results of our operations from residual gold production at the Castle Mountain Mine are affected significantly by the market price of gold. Gold prices are influenced by numerous factors over which we have no control, including expectations with respect to the rate of inflation, the relative strength of the U.S. dollar and other currencies, interest rates, global or regional political or economic crises, demand for gold for jewelry and industrial products and sales by holders and producers of gold in response to these factors. A 10% decrease in the price of gold could reduce our expected 2004 product sales revenue by up to $0.1 million.

In the past we have entered into option contracts and forward sales contracts to establish a minimum selling price on some of the ounces of gold that we produce. We do not enter into option or sales contracts for the purpose of speculative trading. Our current policy provides for the use of forward sales contracts for up to 80% of the remaining residual production at the Castle Mountain Mine. However, we expect to sell the remaining production primarily at spot prices at various times. At March 31, 2004 and 2003, we had no ounces of gold sold under forward sales contracts.

Most of our activities are located in Spain. We also conduct exploration activities in other countries from time to time. Our future profitability could be affected by fluctuations in foreign currencies relative to the U.S. dollar. A 10% increase in the value of the euro relative to the U.S. dollar could increase our estimate of the cost to develop the Las Cruces project by $33 million. We have not entered into any foreign currency contracts or other derivatives to establish a foreign currency protection program.

At March 31, 2004, we had borrowed $46 million under our credit facility with Leucadia National Corporation. The credit facility carries a variable interest rate equal to the prime rate. At March 31, 2004, the prime rate was 4%. A 1% increase in the prime rate would increase our annual interest expense by approximately $0.46 million. We have not undertaken any hedging activities with respect to the credit facility.

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of March 31, 2004. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2004.

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our fiscal quarter ended March 31, 2004, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

(b) During the quarter ended March 31, 2004, we filed reports on Form 8-K dated February 4, 2004 and March 5, 2004, each of which sets forth information under Item 5, “Other Events and Regulation FD Disclosure,” and Item 7, “Financial Statements and Exhibits.”

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

MK GOLD COMPANY

/s/ John C. Farmer

John C. Farmer

Chief Financial Officer and Secretary

(Authorized Signatory and

Principal Financial and Accounting Officer)


Delaware		82-0487047
(State or other jurisdiction of		(I. R. S. Employer
incorporation or organization)		Identification No.)


	Three Months Ended March 31,
	2004			2003
REVENUE:
Product sales	$	339		$	425

Total revenue		339			425

OPERATING EXPENSES:
Product sales		187			111
Accretion expense		15			19

Total operating expenses		202			130

GROSS PROFIT		137			295
Exploration costs		(77	)		(120	)
General and administrative expenses		(775	)		(441	)
Project development		(62	)		(98	)
Gain on disposal of assets		1			2

LOSS FROM OPERATIONS		(776	)		(362	)
Bankruptcy recovery		196			34
Investment income and dividends		15			16
Interest expense		(7	)		(7	)

Loss before income taxes		(572	)		(319	)
Income tax provision		—			(23	)

Net loss	$	(572	)	$	(342	)

Basic and diluted loss per share	$	(0.02	)	$	(0.01	)


	March 31, 2004		December 31, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,597	$	2,634
Restricted cash		806		874
Equity securities		1,861		2,167
Gold bullion held for sale		106		96
Receivables		521		344
Inventories		—		37
Other		65		68

Total current assets		5,956		6,220

Mining properties, plant and mine development, net		36,375		34,185
Intangible assets – mineral rights		47,639		48,404
Equity securities		97		97
Restricted investment securities		—		873
Restricted cash		1,129		379

TOTAL ASSETS	$	91,196	$	90,158


	March 31, 2004			December 31, 2003
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	750		$	1,732
Current portion of asset retirement obligation		806			874
Other accrued liabilities		374			467

Total current liabilities		1,930			3,073

Line of credit – Leucadia National Corporation		46,000			41,500
Asset retirement obligation		605			597
Deferred income tax liability		3,967			3,967

Total liabilities		52,502			49,137

STOCKHOLDERS’ EQUITY:
Common stock, par value $0.01; 80,000,000 shares authorized, 37,545,000 shares issued and 37,525,649 shares outstanding		375			375
Capital in excess of par value		83,023			83,023
Accumulated deficit		(53,358	)		(52,786	)
Treasury stock at cost, 19,851 shares		(19	)		(19	)
Accumulated other comprehensive income		8,673			10,428

Total stockholders’ equity		38,694			41,021

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	91,196		$	90,158


	Three Months Ended March 31,
	2004			2003
OPERATING ACTIVITIES:
Net loss	$	(572	)	$	(342	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation, depletion and amortization		7			5
Accretion expense		15			19
Bankruptcy recovery		(196	)		(34	)
Gain on disposal of assets		(1	)		(2	)
Changes in operating assets and liabilities:
Gold bullion held for sale		(10	)		(55	)
Receivables		(177	)		(27	)
Inventories		37			21
Other current assets		3			38
Restricted cash		(682	)		(847	)
Accounts payable and other accrued liabilities		(75	)		(253	)
Asset retirement obligation		(75	)		(30	)

Net cash used by operating activities		(1,726	)		(1,507	)

INVESTING ACTIVITIES:
Additions to properties, plant and mine development		(3,836	)		(1,161	)
Proceeds from disposal of assets		1			2
Proceeds from sale of investment securities		196			—
Proceeds from sale of restricted investment securities		873			748
Purchase of investment securities		—			(18	)

Net cash used by investing activities		(2,766	)		(429	)

FINANCING ACTIVITIES:
Net borrowings under line of credit– Leucadia National Corporation		4,500			1,500

Net cash provided by financing activities		4,500			1,500

EFFECT OF EXCHANGE RATES ON CASH		(45	)		2

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(37	)		(434	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		2,634			1,426

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	2,597		$	992

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid, net of amounts capitalized	$	7		$	7
Income taxes paid, net	$	—		$	20


	Common Stock $0.01 Par Value		Capital in Excess of Par Value		Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
January 1, 2003	$	374	$	82,869	$	(52,987	)	$	(19	)	$	1,187		$	31,424

Net loss						(342	)								(342	)
Other comprehensive income:
Net change in unrealized gain on investments												33			33
Net change in unrealized foreign exchange gain												1,736			1,736

Comprehensive income															1,427

March 31, 2003	$	374	$	82,869	$	(53,329	)	$	(19	)	$	2,956		$	32,851

January 1, 2004	$	375	$	83,023	$	(52,786	)	$	(19	)	$	10,428		$	41,021

Net loss						(572	)								(572	)
Other comprehensive loss:
Net change in unrealized gain (loss) on investments												(306	)		(306	)
Net change in unrealized foreign exchange gain												(1,449	)		(1,449	)

Comprehensive loss															(2,327	)

March 31, 2004	$	375	$	83,023	$	(53,358	)	$	(19	)	$	8,673		$	38,694


	March 31, 2004			December 31, 2003
Net unrealized gain (loss) on investments	$	(11	)	$	295
Net unrealized foreign exchange gain		8,684			10,133

	$	8,673		$	10,428


	Payments Due by Period (in millions)
	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 years
Operating leases	$	0.60	$	0.22	$	0.20	$	0.18	$	—
Line of credit ⁽¹⁾		46.00		—		46.00		—		—

Total contractual cash obligations	$	46.60	$	0.22	$	46.20	$	0.18	$	—


3.1		Certificate of Amendment of Certificate of Incorporation of the Company.

10.1		Amendment No. 10 to Credit Agreement, Dated as of March 31, 2004, between MK Gold Company and Leucadia National Corporation.

10.2		Purchase Agreement dated January 30, 2004 between Cobre Las Cruces, S.A. and Seroncillo, S.L.

10.3		Senior Executive Employment Contract between Cobre Las Cruces, S.A. and Fernando Fernandez Torres.

31.1		Rule 13a-14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Rule 13a-14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Section 1350 Certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Section 1350 Certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.