ITEM 1A: RISK FACTORS
Investors in Golden Minerals should consider carefully, in addition to the other information contained in, or incorporated by reference into, this annual report on Form 10-K, the following risk factors:
We have historically incurred operating losses and operating cash flow deficits and we expect we will continue to incur operating losses through 2013.
We have a history of operating losses and we expect that we will continue to incur operating losses unless and until such time as our Velardeña Operations in Central Mexico, the El Quevar project in Argentina, or another of our exploration properties generates sufficient revenue to fund our continuing operations. Due primarily to the slower ramp-up of production at the Velardeña Operations than we anticipated, we expect our revenue from sales less the cost of sales, or gross margin, to continue to be insufficient to fund our continued development and capital expenditures at the Velardeña Operations and our expenditures for exploration, the El Quevar project and general and administrative costs. As of December 31, 2012, we had approximately $44.6 million in cash and cash equivalents and short terms investments. Based on our current expectations regarding gross margin and expenditures, and in the absence of additional funding as further described in the risk factor below, we expect that our current cash and investment balance would be depleted in the first quarter 2015. This expectation is subject to a number of assumptions. For example, we may not achieve the levels of production that we expect during 2013 and subsequent years, and silver and gold prices may not average $30.00 per ounce and $1,600.00 per ounce, respectively. In addition, we expect our operating expenses, capital expenditures and other expenses will increase as we advance processing improvements or potential expansion of the Velardeña Operations, which we expect would require the commitment of substantial resources. The amounts and timing of expenditures will depend on the progress of our efforts to expand production at the Velardeña Operations, advance our El Quevar project and continue exploration at these and other properties, the results of consultants' analyses and recommendations, the rate at which operating losses are incurred, prices for our saleable metals, costs of materials and supplies, the execution of any joint venture agreements with strategic partners, if any, and our potential future acquisition of additional properties, in addition to other factors, many of which are and will be beyond our control. If our expectations for 2013 and subsequent years prove to be incorrect, and if we are unable to obtain additional funding, we would face substantial operating cash losses and be required to significantly change our operating and expansion plans. There can be no assurance that we will continue to generate revenues or will ever achieve profitability, be able to eliminate operating cash flow deficits, or cease to require additional funding.
In addition to the proceeds we received from our financing activities during September 2012, we would require additional external funding to complete a significant expansion of the Velardeña Operations.
In addition to the proceeds we received from our financing activities during September 2012, we would require substantial funds from external sources in order to complete a significant expansion of the Velardeña Operations. We are testing and evaluating various technologies, including an Albion oxidation process and autoclave process to improve gold recoveries and support a potential expansion of the Velardeña Operations. In addition to these technologies, an expansion could include sulfide plant ball mill upgrades and additional flotation and filtration capacity. We have not yet determined appropriate processing technologies which, together with planned underground drilling, should assist us in evaluating expansion options. We do not have a credit, off-take or other commercial financing arrangements in place that would finance the completion of and expansion of the Velardeña Operations and we believe that securing credit for these projects may be difficult given our limited history and the continuing volatility in global credit markets. In addition, commercial financing arrangements may not be available on favorable terms or on terms that would not further restrict our operating flexibility and
ongoing ability to meet our cash requirements over a reasonable period of time. Access to public financing has been negatively impacted by the volatility in the credit markets, which may affect our ability to obtain equity or debt financing in the future and, if obtained, to do so on favorable terms. We also may not be able to obtain funding by monetizing additional non-core exploration portfolio assets at an acceptable price. We cannot assure you that we will be able to obtain external financing for expansion of the Velardeña Operations on favorable terms or at all.
As a result of our business combination with ECU, we have assumed all historical ECU liabilities, some of which are known or which may become known by Golden.
On September 2, 2011, we completed a business combination with ECU (the "Transaction"), which at that time owned and operated the Velardeña Operations. As a result of the Transaction, we are now subject to the environmental, contractual, tax and other obligations and liabilities of ECU, some of which may be unknown. For example, we received notices from Mexican tax authorities regarding approximately $1.4 million in social security taxes alleged to be due for previous years, which have been paid by us but which we are currently challenging for refund. There can be no assurance that we are aware of all obligations and liabilities related to the historical operations of ECU. These liabilities, and other liabilities related to ECU's operations not currently known to us or that prove to be more significant than we currently anticipate, could negatively impact our business, financial condition and results of operations.
The presentation of historical financial statements of ECU is not comparable to the presentation of financial results from the Velardeña Operations.
Until completion of the Transaction, ECU was a publicly-traded Québec corporation whose financial statements, until December 31, 2010, were prepared in accordance with Canadian GAAP, and in the first half of 2011 were prepared in accordance with IFRS. ECU is now our wholly-owned subsidiary, and its financial statements after September 2, 2011 are and will continue to be consolidated with ours and prepared in accordance with U.S. GAAP. Under Canadian GAAP and IFRS, ECU capitalized exploration and development costs incurred during the development stage, including operating expenses at the Velardeña Operations, and offset those capitalized costs with revenue generated from saleable minerals. Under U.S. GAAP, we are reporting operating expenses at the Velardeña Operations as expenses on the statement of operations and comprehensive income, and revenues generated from our sales are reported as revenues on the statement of operations and comprehensive income. In 2013, this may have the effect of increasing our losses. For example, if ECU had reported in U.S. GAAP on this basis for the fiscal year ended December 31, 2010, its net losses would have increased by approximately $2.5 million. Because of these and other differences, ECU's historical financial results related to the Velardeña Operations are not comparable to the results of those operations as they appear in our consolidated financial statements.
The Velardeña Operations, the El Quevar project and our other properties may not contain mineral reserves.
None of the properties at our Velardeña Operations, the El Quevar project, or any of our other properties have been shown to contain proven or probable mineral reserves. Expenditures made in mining at the Velardeña Operations or the exploration and advancement of our El Quevar project or other properties may not result in positive cash flow or in discoveries of commercially recoverable quantities of ore. Most exploration projects do not result in the discovery of commercially mineable ore deposits, and we cannot assure you that any mineral deposit we identify will qualify as an orebody that can be legally and economically exploited or that any particular level of recovery from discovered mineralization will in fact be realized.
Chlumsky, Armbrust and Meyer completed a technical report on our Velardeña mines, which indicated the presence of mineralized material, and RungePincockMinarco (formerly Pincock
Allen & Holt) completed a technical report on our El Quevar property, which indicated the presence of mineralized material. Mineralized material figures based on estimates made by geologists are inherently imprecise and depend on geological interpretation and statistical inferences drawn from drilling and sampling that may prove to be unreliable or inaccurate. We cannot assure you that these estimates will be accurate or that proven and probable mineral reserves will be identified at the Velardeña Operations, El Quevar or any of our other properties. Even if the presence of reserves is established at a project, the economic viability of the project may not justify exploitation. We have spent significant amounts on the evaluation of El Quevar prior to establishing the economic viability of that project.
Estimates of reserves, mineral deposits and production costs also can be affected by factors such as governmental regulations and requirements, fluctuations in metals prices or costs of essential materials or supplies, environmental factors, unforeseen technical difficulties and unusual or unexpected geological formations. In addition, the grade of ore ultimately mined may differ from that indicated by drilling results, sampling, feasibility studies or technical reports. Short term factors relating to reserves, such as the need for orderly development of ore bodies or the processing of new or different grades, may also have an adverse effect on mining operations and on the results of operations. Silver, gold or other minerals recovered in small scale laboratory tests may not be duplicated in large scale tests under on-site production conditions.
The Velardeña Operations, the El Quevar project and our other properties are subject to foreign environmental laws and regulations which could materially adversely affect our future operations.
We conduct mining activities in Mexico and mineral exploration activities primarily in Argentina and Mexico. These countries have laws and regulations that control the exploration and mining of mineral properties and their effects on the environment, including air and water quality, mine reclamation, waste generation, handling and disposal, the protection of different species of flora and fauna and the preservation of lands. These laws and regulations require us to acquire permits and other authorizations for conducting certain activities. In many countries, there is relatively new comprehensive environmental legislation, and the permitting and authorization process may not be established or predictable. We may not be able to acquire necessary permits or authorizations on a timely basis, if at all. Delays in acquiring any permit or authorization could increase the cost of our projects and could suspend or delay the commencement of production.
Our Velardeña Operations are subject to regulation by SEMARNAT, the environmental protection agency of Mexico. In order to permit new facilities at or expand existing facilities, regulations require that an environmental impact statement, known in Mexico as a Manifestación de Impacto Ambiental, be prepared by a third-party contractor for submission to SEMARNAT. Studies required to support the Manifestación de Impacto Ambiental include a detailed analysis of soil, water, vegetation, wildlife, cultural resources and socio-economic impacts. The Manifestación is then published on SEMARNAT's web page and in its official gazette in a national and local newspaper. The Manifestación is discussed at various open hearings, including hearings in the local communities, at which third parties may voice their views. We would be required to provide proof of local community support of the Manifestación as a condition to final approval.
Environmental legislation in Mexico is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects, and a heightened degree of responsibility for companies and their officers, directors and employees. For example, in January 2011, Article 180 of the Mexican Federal General Law of Ecological Balance and Environmental Protection was amended. Among other things, this amendment extends the term during which an individual or entity having a legitimate interest may contest administrative acts, including environmental authorizations, permits or concessions granted, without the need to demonstrate the actual existence of harm to the environment, natural resources,
flora, fauna or human health, making it sufficient to argue that harm may be caused. Further, the amendment permits the contesting party to challenge a Manifestación de Impacto Ambiental through a variety of administrative or court procedures. As a result of the amendment, more legal actions supported or sponsored by non-governmental groups interested in halting projects may be filed against companies operating in all industrial sectors, including the mining sector. Mexican operations are also subject to the environmental agreements entered into by Mexico, the United States and Canada in connection with the North American Free Trade Agreement. Further, in August 2011, certain amendments to the Civil Federal Procedures Code of Mexico ("CFPC") were published in the Official Daily of the Federation. The amendments establish three categories of collective actions by which 30 or more people claiming injury resulting from, among other things, environmental harm, will be deemed to have a sufficient and legitimate interest in seeking, through a civil procedure, restitution, economic compensation or suspension of the activities from which the alleged injury derived. The amendments to the CFPC will become effective six months after the date of their publication and may result in more litigation by plaintiffs seeking remedies for alleged environmental harms, including suspension of the activities alleged to cause harm. Future changes in environmental regulation in the jurisdictions where the Velardeña Operations are located may adversely affect our operations, make our operations prohibitively expensive, or prohibit them altogether.
Environmental legislation in many other countries, in addition to Mexico, is evolving in a manner that will likely require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. We cannot predict what environmental legislation or regulations will be enacted or adopted in the future or how future laws and regulations will be administered or interpreted. For example, in September 2010, the Argentine National Congress passed legislation which prohibits mining activity in glacial and surrounding areas. Although we do not currently anticipate that this legislation will impact the El Quevar project, the legislation provides an example of the evolving environmental legislation in the areas in which we operate. Compliance with more stringent laws and regulations, as well as potentially more vigorous enforcement policies or regulatory agencies or stricter interpretation of existing laws, may (i) necessitate significant capital outlays, (ii) cause us to delay, terminate or otherwise change our intended activities with respect to one or more projects, or (iii) materially adversely affect our future exploration activities.
The Velardeña Operations and many of our exploration properties are located in historic mining districts where prior owners, including ECU in the case of the Velardeña Operations, may have caused environmental damage that may not be known to us or to the regulators. At the Velardeña Operations and in most other cases, we have not sought complete environmental analyses of our mineral properties. We have not conducted comprehensive reviews of the environmental laws and regulations in every jurisdiction in which we own or control mineral properties. To the extent environmental hazards may exist on the properties in which we currently hold interests, or may hold interests in the future, that are unknown to us at present and that have been caused by us, or previous owners or operators, or that may have occurred naturally, and to the extent we are subject to environmental requirements or liabilities, the cost of compliance with these requirements and satisfaction of these liabilities could have a material adverse effect on our financial condition and results of operations. If we are unable to fully fund the cost of remediation of any environmental condition, we may be required to suspend activities or enter into interim compliance measures pending completion of the required remediation.
Insurance fully covering many environmental risks (including potential liability for pollution or other hazards as a result of disposal of waste products occurring from exploration and production) is not generally available. In addition, U.S. or international legislative or regulatory action to address concerns about climate change and greenhouse gas emissions could negatively impact our operations.
Title to the Velardeña Operations and our other properties may be defective or may be challenged.
Our policy is to seek to confirm the validity of our rights to, title to, or contract rights with respect to, each mineral property in which we have a material interest. However, we cannot guarantee that title to our properties will not be challenged. Title insurance is not available for our mineral properties, and our ability to ensure that we have obtained secure rights to individual mineral properties or mining concessions may be severely constrained. Accordingly, the Velardeña Operations and our other mineral properties may be subject to prior unregistered agreements, transfers or claims, and title may be affected by, among other things, undetected defects. In addition, we may be unable to operate our properties as permitted or to enforce our rights with respect to our properties, and the title to our mineral properties may also be impacted by state action. We have not conducted surveys of all of the exploration properties in which we hold direct or indirect interests and, therefore, the precise area and location of these exploration properties may be in doubt.
In most of the countries in which we operate, failure to comply with applicable laws and regulations relating to mineral right applications and tenure could result in loss, reduction or expropriation of entitlements, or the imposition of additional local or foreign parties as joint venture partners. Any such loss, reduction or imposition of partners could have a material adverse affect on our financial condition, results of operations and prospects.
Under the laws of Mexico, mineral resources belong to the state, and government concessions are required to explore for or exploit mineral reserves. Mineral rights derive from concessions granted, on a discretionary basis, by the Ministry of Economy, pursuant to the Mexican mining law and regulations thereunder. We hold title to the concessions comprising the Velardeña Operations and our other properties in Mexico through these government concessions, but there is no assurance that title to the concessions comprising the Velardeña Operations and other properties will not be challenged or impaired. The Velardeña Operations and other properties may be subject to prior unregistered agreements, interests or native land claims, and title may be affected by undetected defects. There would be valid challenges to the title of any of the claims comprising the Velardeña Operations that, if successful, could impair development and operations with respect to such properties in the future. A defect could result in our losing all or a portion of our right, title, and interest in and to the properties to which the title defect relates.
Our Velardeña Operations mining concessions and our other mining concession in Mexico may be terminated if our obligations to maintain the concessions in good standing are not satisfied, including obligations to explore or exploit the relevant concession, to pay any relevant fees, to comply with all environmental and safety standards, to provide information to the Ministry of Economy and to allow inspections by the Ministry of Economy. In addition to termination, failure to make timely concession maintenance payments and otherwise comply strictly with applicable laws, regulations and local practices relating to mineral right applications and tenure could result in reduction or expropriation of entitlements.
Mining concessions in Mexico give exclusive exploration and exploitation rights to the minerals located in the concessions, but do not include surface rights to the real property, which requires that we negotiate the necessary agreements with surface landowners. Many of our mining properties are subject to the Mexican ejido system requiring us to contract with the local communities surrounding the properties in order to obtain surface rights to land needed in connection with our mining operations or exploration activities. In connection with our Velardeña Operations, we have contracts with two ejidos to secure surface rights with a total annual cost of approximately $20,000 to $40,000. The first contract is a 25-year contract with the Vista Hermosa ejido signed in March 2010, which provides surface rights for the oxide plant, the oxide tailings ponds and the Chicago mine. The second contract is a ten-year contract with the Velardeña ejido, which provides surface rights to certain roads and other infrastructure at the Velardeña Operations through 2021. Our inability to maintain and periodically renew or expand these surface rights on favorable terms or otherwise could have a material adverse effect on our operations and financial condition.
We are actively engaged in underground mining activities at our Velardeña Operations and there are significant operational hazards involved, not all of which are fully covered by insurance. To the extent we must pay the costs associated with such risks, our business may be negatively affected.
The operation of underground mines such as our Velardeña Operations, as well as the conduct of our exploration programs, are subject to numerous risks and operational hazards, including, but not limited to, environmental hazards, industrial accidents, encountering unusual or unexpected geological formations, formation pressures, cave-ins, underground fires or floods, power outages, labor disruptions, flooding, seismic activity, rock bursts, accidents relating to historical workings, landslides and periodic interruptions due to inclement or hazardous weather conditions. These occurrences could result in damage to, or destruction of, mineral properties or production facilities, personal injury or death, environmental damage, reduced production and delays in mining, asset write-downs, monetary losses and possible legal liability. Although we maintain insurance against risks inherent in the operation of our business in amounts that we consider reasonable, this insurance contains, as in the case of our Velardeña Operations, exclusions and limitations on coverage, and will not cover all potential risks associated with mining and exploration operations, and related liabilities might exceed policy limits. As a result of any or all of the forgoing, particularly if the facilities are older, we could incur significant liabilities and costs that could adversely affect our results of operation and financial condition.
Our Velardeña Operations are located in Mexico and are subject to various levels of political, economic, legal and other risks with which we have limited or no previous experience.
Our Velardeña Operations are located in Mexico, and, as such, our operations are exposed to various levels of political, economic, legal and other risks and uncertainties, including local acts of violence, including violence from drug cartels; military repression; extreme fluctuations in currency exchange rates; high rates of inflation; labor unrest; the risks of war or civil unrest; expropriation and nationalization; renegotiation or nullification of existing concessions, licenses, permits and contracts; illegal mining; acts of political corruption; changes in taxation policies; restrictions on foreign exchange and repatriation; and changing political conditions, currency controls and 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 the past, Mexico has been subject to political instability, changes and uncertainties, which have resulted in changes to existing governmental regulations affecting mineral exploration and mining activities. Mexico's status as a developing country may make it more difficult for us to obtain any required funding for expansion of the Velardeña Operations or other projects in Mexico in the future.
Our Mexican operations and properties are subject to a variety of governmental regulations governing health and worker safety, employment standards, waste disposal, protection of historic and archaeological sites, mine development, protection of endangered and protected species and other matters. Specifically, our activities related to the Velardeña Operations are subject to regulation by SEMARNAT, the Comision Nacional del Agua, which regulates water rights, and Mexican mining laws. Mexican regulators have broad authority to shut down and levy fines against facilities that do not comply with regulations or standards.
Our Velardeña Operations and mineral exploration activities in Mexico may be adversely affected in varying degrees by changing government regulations relating to the mining industry or shifts in political conditions that increase the costs related to our Mexican operations or the maintenance of our properties. Changes, if any, in mining or investment policies, changes or increases in the legal rights of indigenous populations or in the difficulty or expense of obtaining rights from them that are necessary for our Velardeña Operations, or shifts in political attitude may adversely affect our operations and financial condition. Operations may be affected in varying degrees by government regulations with respect to restrictions on production, price controls, export controls, currency remittance, income and
other taxes, expropriation of property, foreign investment, maintenance of claims, environmental legislation, land use, land claims of local people, water use and mine safety. Expansion of our facilities will also be subject to the need to assure the availability of adequate supplies of water and power, which could be affected by government policy and competing operations in the area. The occurrence of these various factors and uncertainties cannot be accurately predicted and could have an adverse effect on our operations and financial condition.
Future changes in applicable laws and regulations or changes in their enforcement or regulatory interpretation could negatively impact current or planned exploration and development activities at our Velardeña Operations or in respect of any other projects in which we become involved in Mexico. Any failure to comply with applicable laws and regulations, even if inadvertent, could result in the interruption of exploration and development operations or material fines, penalties or other liabilities.
Our employees at the Velardeña Operations in Mexico are represented by collective bargaining units, and we are subject to Mexican regulations regarding labor and employment matters.
Our employees in Mexico are represented by collective bargaining units called Sindicatos. We have two Sindicatos, one for the mines and a second for the plants. Salaries are negotiated annually and labor contracts bi-annually. In addition to the negotiated terms of such agreements, relations between us and our employees may be affected by changes in regulations regarding labor relations that may be introduced by the Mexican authorities. Changes in such legislation or in the relationship between us and our employees may have a material adverse effect on our operations and financial condition.
Our long-term cash flow and profitability at the Velardeña Operations or other properties will be affected by changes in prices of silver, gold and other metals.
Our ability to achieve positive cash flow at the Velardeña Operations, to establish reserves and develop our exploration properties, and to become profitable, as well as our long-term viability, depend, in large part, on the market prices of silver, gold, zinc, lead, copper and other metals. The market prices for these metals are volatile and are affected by numerous factors beyond our control, including:
•global or regional consumption patterns;
•supply of, and demand for, silver, gold, zinc, lead, copper and other metals;
•speculative activities and producer hedging activities;
•expectations for inflation;
•political and economic conditions; and
•supply of, and demand for, consumables required for production of metals.
Future weakness in the global economy could increase volatility in metals prices or depress metals prices, which could in turn reduce the cash flow generated by our Velardeña Operations, or make it uneconomical for us to continue our mining or exploration activities. Volatility or sustained price declines may also adversely affect our ability to build our business.
Results from our Velardeña Operations are subject to exchange control policies, the effects of inflation and currency fluctuations between the U.S. Dollar and the Mexican Peso.
Our revenues are primarily denominated in U.S. dollars. However, operating costs of our Velardeña Operations are denominated principally in Mexican pesos. These costs principally include electricity, labor, maintenance, local contractors and fuel. Accordingly, when inflation in Mexico increases without a corresponding devaluation of the Mexican peso, our financial position, results of
operations and cash flows could be adversely affected. The annual inflation rate in Mexico was 3.6% in 2012, 3.8% in 2011 and 4.4% in 2010. At the same time, the peso has been subject to significant devaluation, which may not have been proportionate to the inflation rate and may not be proportionate to the inflation rate in the future. The value of the peso increased by 7.0% in 2012, decreased by 12.9% in 2011 and increased by 5.5% in 2010. In addition, fluctuations in currency exchange rates may have a significant impact on our financial results. There can be no assurance that the Mexican government will maintain its current policies with regard to the peso or that the peso's value will not fluctuate significantly in the future. We cannot assure you that currency fluctuations, inflation and exchange control policies will not have an adverse impact on our financial condition, results of operations, earnings and cash flows.
If we are unable to obtain all of our required governmental permits or obtain property rights on favorable terms or at all, our operations could be negatively impacted.
The potential expansion of the Velardeña Operations, the continued evaluation of the El Quevar project and other exploration and potential development activities, will require additional permits from various governmental authorities. Our operations are and will continue to be governed by laws and regulations governing prospecting, development, mining, production, exports, taxes, labor standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety, mining royalties and other matters. We may also be required to obtain certain property rights to access or use our properties. Obtaining or renewing licenses and permits, and acquiring property rights, can be complex and time-consuming processes. There can be no assurance that we will be able to acquire all required licenses, permits or property rights on reasonable terms or in a timely manner, or at all, and that such terms will not be adversely changed, that required extensions will be granted, or that the issuance of such licenses, permits or property rights will not be challenged by third parties. Delays in obtaining or a failure to obtain any licenses, permits or property rights or any required extensions; challenges to the issuance of licenses, permits or property rights, whether successful or unsuccessful; changes to the terms of licenses, permits or property rights; or a failure to comply with the terms of any licenses, permits or property rights that have been obtained, could have a material adverse effect on our business by delaying, preventing or making the potential expansion of the Velardeña Operations and other continued operations economically unfeasible. U.S. or international legislative or regulatory action to address concerns about climate change and greenhouse gas emissions could also negatively impact our operations. While we will continue to monitor and assess any new policies, legislation or regulations regarding such matters, we currently believe that the impact of such legislation on our business will not be significant.
We own our interest in the San Diego exploration property in Mexico in a 50-50 joint venture and are therefore unable to control all aspects of exploration and development of this property.
We hold the San Diego exploration property in Mexico in a 50-50 joint venture with Golden Tag Resources Ltd., who has a right to acquire an additional 10% interest by completing expenditures related to further exploration drilling and completing an updated resource assessment at the property. Our interest in the San Diego property is subject to the risks normally associated with the conduct of joint ventures. A disagreement between joint venture partners on how to conduct business efficiently, the inability of joint venture partners to meet their obligations to the joint venture or third parties, or litigation arising between joint venture partners regarding joint venture matters could have a material adverse effect on the viability of our interests held through the joint venture. For example, in 2009, ECU received a notice of arbitration from Golden Tag Resources Ltd. The dispute was settled in September 2010 and resulted in an increase in ECU's mining property costs of approximately $61,000. Additionally, if Golden Tag Resources Ltd. exercises its right to acquire an additional 10% interest, our ability to control exploration and development will be further reduced.
We depend on the services of key executives.
Our business strategy is based on leveraging the experience and skill of our management team. We are dependent on the services of key executives, including Jeffrey Clevenger, David Drips (who manages our Velardeña Operations), Robert Vogels and Warren Rehn. Due to our relatively small size, the loss of any of these persons or our inability to attract and retain additional highly skilled employees may have a material adverse effect on our business and our ability to manage and succeed in our development activities.
The exploration of our mineral properties is highly speculative in nature, involves substantial expenditures and is frequently non-productive.
Mineral exploration is highly speculative in nature and is frequently non-productive. Substantial expenditures are required to:
•establish mineral reserves through drilling and metallurgical and other testing techniques;
•determine metal content and metallurgical recovery processes to extract metal from the ore;
•determine the feasibility of mine development and production; and
•construct, renovate or expand mining and processing facilities.
If we discover ore at a property, it usually takes several years from the initial phases of exploration until production is possible. During this time, the economic feasibility of a project may change because of increased costs, lower metal prices or other factors. As a result of these uncertainties, we may not successfully acquire additional mineral rights, or our exploration programs may not result in proven and probable reserves at all or in sufficient quantities to justify developing the El Quevar project or any of our exploration properties.
The decisions about future development of projects may be based on feasibility studies, which derive estimates of reserves, operating costs and project economic returns. Estimates of economic returns are based, in part, on assumptions about future metal prices and estimates of average cash operating costs based upon, among other things:
•anticipated tonnage, grades and metallurgical characteristics of ore to be mined and processed;
•anticipated recovery rates of silver and other metals from the ore;
•cash operating costs of comparable facilities and equipment; and
•anticipated climatic conditions.
Actual cash operating costs, production and economic returns may differ significantly from those anticipated by our studies and estimates.
Lack of infrastructure could forestall or prevent further exploration and development.
Exploration activities, as well as any development activities, depend on adequate infrastructure. Reliable roads, bridges, power sources and water supply are important factors that affect capital and operating costs and the feasibility and economic viability of a project. Unanticipated or higher than expected costs and unusual or infrequent weather phenomena, or government or other interference in the maintenance or provision of such infrastructure, could adversely affect our operations, financial condition and results of operations.
Our exploration activities are in countries with developing economies and are subject to the risks of political and economic instability associated with these countries.
We currently conduct exploration activities almost exclusively in Latin American countries with developing economies, including Argentina and Mexico. These countries and other emerging markets in which we may conduct operations have from time to time experienced economic or political instability. We may be materially adversely affected by risks associated with conducting exploration activities in countries with developing economies, including:
•political instability and violence;
•war and civil disturbance;
•acts of terrorism or other criminal activity;
•expropriation or nationalization;
•changing fiscal, royalty and tax regimes;
•fluctuations in currency exchange rates;
•high rates of inflation;
•uncertain or changing legal requirements respecting the ownership and maintenance of mineral properties, mines and mining operations, and inconsistent or arbitrary application of such legal requirements;
•underdeveloped industrial and economic infrastructure;
•corruption; and
•unenforceability of contractual rights.
Changes in mining or investment policies or shifts in the prevailing political climate in any of the countries in which we conduct exploration activities could adversely affect our business.
We explore and operate in countries that may be adversely affected by changes in the local government's policies toward or laws governing the mining industry, including for example the recent presidential decree in Argentina regarding the repatriation of export proceeds.
We currently conduct mining operations in Mexico and exploration activities in Mexico and South America. In these regions there exist uncertainties regarding future changes in applicable law related to mining and exploration. For instance, in October 2011, the president of Argentina announced, by way of a presidential decree, that mining companies with operations in Argentina will now have to repatriate all their export proceeds. Under the new decree, all export revenues generated by mining companies will be repatriated into Argentina for local foreign-exchange conversion prior to transfer overseas. This decree overturns a previous exemption for mining companies from Argentina's currency repatriation laws that apply to oil and gas producers in the country. Consequently, if we ultimately produce minerals from the El Quevar project in Argentina, the new repatriation policy may increase foreign exchange transaction costs. In addition to the risk of increased transaction costs, we do not maintain political risk insurance to cover losses that we may incur as a result of nationalization, expropriation or similar events in Argentina or other Latin American countries in which we explore or operate.
We compete against larger and more experienced companies.
The mining industry is intensely competitive. Many large mining companies are primarily producers of precious or base metals and may become interested in the types of deposits on which we are
focused, which include silver and other precious metals deposits or polymetallic deposits containing significant quantities of base metals, including zinc, lead, copper and gold. Many of these companies have greater financial resources, operational experience and technical capabilities than we do. We may encounter increasing competition from other mining companies in our efforts to acquire mineral properties and hire experienced mining professionals. Increased competition in our business could adversely affect our ability to attract necessary capital funding or acquire suitable producing properties or prospects for mineral exploration in the future.
We are dependent on information technology systems, which are subject to certain risks, including cybersecurity risks and data leakage risks.
We are dependent upon information technology systems in the conduct of our operations. Any significant breakdown, invasion, virus, cyber attack, security breach, destruction or interruption of these systems by employees, others with authorized access to our systems, or unauthorized persons could negatively impact our operations. To the extent any invasion, cyber attack or security breach results in disruption to our operations, loss or disclosure of, or damage to, our data or confidential information, our reputation, business, results of operations and financial condition could be materially adversely affected. Our systems and insurance coverage for protecting against cyber security risks may not be sufficient. Although to date we have not experienced any material losses relating to cyber attacks, we may suffer such losses in the future. We may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
Our stockholders may suffer additional dilution to their equity and voting interests as a result of future financing transactions.
We expect to require external financing to support the development and potential expansion of our Velardeña Operations and exploration and developing our exploration properties. Because we do not expect cash from operations or dispositions of non-core assets to be sufficient to provide needed capital in the short term, and because debt financing is difficult to obtain for early stage mining operations, it is likely that we will seek such financing in the equity markets. If we were to engage in an equity financing, the current ownership interest of our stockholders would be diluted.
The existence of a significant number of options and warrants may have a negative effect on the market price of our common stock.
In connection with our recent financing activity in September 2012, we issued a total of 6,863,298 five year warrants to purchase shares of our common stock at an exercise price of $8.42 per share expiring September 2017. Additionally, in connection with our business combination with ECU, we issued warrants and options to purchase shares of our common stock. While certain of those warrants and options have expired, there remain outstanding warrants to purchase 1,831,929 shares of our common stock at exercise prices of $19.00 expiring February 2014, as well as options to purchase approximately 268,500 shares of our common stock at exercise prices ranging from $16.00 to $34.00 and expiring between July 2013 and October 2014. The existence of securities available for exercise and resale is referred to as an "overhang", and, particularly if the options and warrants are "in the money", the anticipation of potential sales could exert downward pressure on the market price of our common stock.
ITEM 1B:
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
None.
ITEM 4:
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock began trading on the NYSE MKT under the symbol "AUMN" on March 19, 2010. The following table sets forth the high and low sales prices per share and volume traded on the NYSE MKT from January 1, 2011 through December 31, 2012.
Our common stock is also listed on the Toronto Stock Exchange, also referred to as the "TSX", and trades under the symbol "AUM". The following table sets forth the high and low sales prices per share and volume traded on the TSX from January 1, 2011 through December 31, 2012.
(1)All Canadian share prices were converted to U.S. dollars based on a noon exchange rate of 0.9728, as reported by the Bank of Canada, as of February 26, 2013. On February 26, 2013, the closing sales price for our common stock was Cdn$3.25 per share on the TSX ($3.16, as converted to U.S. dollars).
As of February 21, 2013, we had 203 record holders of our common stock of record based upon the stockholders list provided by our transfer agent, Computershare Trust Company, N.A.
Dividends
We have not declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all future earnings, if any, to fund the operations, development and growth of our business.
ITEM 6:
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for all periods presented has been derived from our audited financial statements for that period. Apex Silver emerged from Chapter 11 reorganization on March 24, 2009, and the Company became the successor to Apex Silver for purposes of reporting under the U.S. federal securities laws. In the table below references to "Successor" refer to the accounts of the Company and its subsidiaries on or after March 25, 2009, the day following emergence from Chapter 11. References to "Predecessor" refer to the accounts of Apex Silver and its subsidiaries prior to March 25, 2009. Our financial statements are reported in U.S. dollars and have been prepared in accordance with generally accepted accounting principles in the United States. The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Form 10-K.
(1)The year ended December 31, 2012 includes a $58.5 million impairment of goodwill charge related to our Velardeña Operations in Mexico and is the result of an approximately 20% decrease in our forecast of future gold and silver prices and certain assumptions related to ore processing throughput rates and other aspects of the long term operating plan. The Predecessor period ended March 24, 2009 includes a $248.2 million gain from extinguishment of debt and a $9.1 million fresh start accounting gain both related to the reorganization and emergence from Chapter 11 bankruptcy. Amounts shown for the year ended December 31, 2008 includes gains and losses related to Apex Silver's open metals derivative positions, including realized cash losses and unrealized mark-to-market gains and losses during the period. The 2008 amount also includes a $63.1 million gain related to the sale of our retained interest in Sumitomo's share of future silver and zinc production from the San Cristóbal mine.
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes beginning on page in this annual report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under "Risk Factors" in this annual report on Form 10-K.
Our Company
We were incorporated in Delaware under the Delaware General Corporation Law in March 2009, and are the successor to Apex Silver for purposes of reporting under the U.S. Exchange Act. During the year ended December 31, 2012, our only sources of income were revenues from various products produced at the Velardeña Operations, royalty and interest income, and sales of non-core exploration properties. We incurred net operating losses for the years ended December 31, 2012, 2011, and 2010. We expect to report increased revenues from the Velardeña Operations during 2013 as a result of increased production rates and improved ore grades.
2012 Highlights
During the year ended December 31, 2012 we focused our efforts primarily on production and operational improvements at our Velardeña Operations, advancing our El Quevar project, continued rationalization of our exploration portfolio and raising additional capital through equity financing. An overview of certain significant 2012 events is provided below:
Velardeña Operations
•Production and Operating Improvements. In 2012 the Velardeña Operations had payable metals production totaling approximately 457,000 ounces of silver and 6,450 ounces of gold for a total of approximately 780,000 silver equivalent ounces. The average quarterly production of silver equivalent ounces at the Velardeña Operations in 2012 was about 60% greater than the approximately 122,000 silver equivalent ounces for silver and gold reported for the second quarter 2011, the final reporting period prior to the Company's acquisition of the Velardeña Operations in September 2011. Additionally, during 2012 the Company produced approximately 1.0 million pounds of payable lead and 1.4 million pounds of payable zinc.
Production increased during the third quarter 2012 principally due to the employment of additional mining equipment, the arrival of the underground mining equipment, increased grades resulting from improved ore control procedures in the mine and some ore production from newly developed and non-exploited stopes. Comparing silver and gold grades in mined material from the fourth quarter 2012 to the first quarter 2012, we improved silver grades by approximately 45%, and gold grades by approximately 5%. We experienced lower gold recoveries in the fourth quarter 2012 due to different metallurgy in some newly developed ore areas. As such, gold production during the fourth quarter 2012 was negatively impacted.
We have completed about 1.5 kilometers of the planned 1.9 kilometers San Mateo ramp, which has permitted us to access the Terneras and San Mateo vein systems at the Velardeña mine. When completed, anticipated in the third quarter 2013, the San Mateo ramp will provide improved access to the lower workings of the Santa Juana vein system, which has the largest number of vein units and slightly higher grade than the Chicago and San Juanes mining areas, where about 50% of our mining was done in 2012.
We also made significant processing improvements in the oxide and sulfide plants in 2012, including installation of a new flotation circuit at the oxide plant, which we are now using ahead of the leach circuit to produce a high grade silver lead concentrate that is sold with the lead concentrates produced at the sulfide plant. We also doubled the capacity of the Merrill Crowe circuit at the oxide plant. We processed an average of approximately 500 tonnes per day through the plants in 2012 and expect to process an average of from 500 to 600 tonnes per day in 2013. We are also testing other technologies, including an Albion oxidation process to improve gold recoveries.
•Updated estimate of mineralized material. During the second quarter 2012, Chlumsky, Armburst and Meyer ("CAM") completed an estimate of mineralized material at the Velardeña Operations. According to the CAM estimate, there are an estimated 2,300,000 tonnes of mineralized material at an average silver grade of approximately 195 grams per tonne and an average gold grade of approximately 3.46 grams per tonne. For further detail regarding mineralized material, see "Cautionary Statement Regarding Mineralized Material" above.
El Quevar
•Advancement. In late 2012 and early 2013, we commenced a 2,400 meter, 16-hole drilling program at the Quevar North and South areas at El Quevar. Results may represent a significant extension of the previously defined Yaxtché deposit and a mineralized zone at Quevar North similar in structural control to the Yaxtché zone.
•Updated estimate of mineralized material. During the second quarter 2012, RungePincockMinarco (formerly Pincock Allen & Holt) completed an updated estimate of mineralized material at the El Quevar project. According to this estimate, there are an estimated 6,024,000 tonnes of mineralized material at an average silver grade of approximately 147.5 grams per tonne. For further detail regarding mineralized material, see "Cautionary Statement Regarding Mineralized Material" above. Exploration Portfolio Rationalization
•We have made significant progress with our ongoing strategy to rationalize our portfolio of exploration properties, realizing in 2012 and the first quarter 2013, exploration property sales totaling approximately $9.0 million. We also have relinquished properties no longer of interest, and have reduced our portfolio of about 80 properties containing about 730,000 hectares to about 40 properties containing about 320,000 hectares. Since 2011, we have reduced ongoing annual expenditures for the exploration program by approximately 75 percent.
Financing Activity
•In the third quarter 2012, we completed an underwritten registered offering of 5,497,504 units and concurrent private placement to The Sentient Group ("Sentient") of 1,365,794 units, for total net proceeds of $36.9 million. Each unit was comprised of one share of the Company's common stock and a five year warrant to purchase 0.50 of a share of the Company's common stock at an exercise price of $8.42 per share. Sentient, the Company's largest stockholder, continues to hold approximately 19.9% of the Company's outstanding common stock.
Results of Operations
For the results of operations discussed below, we compare the results of operations for the year ended December 31, 2012 to the results of operations for the years ended December 31, 2011, and December 31, 2010.
Revenue from the sale of metals. We recorded $26.1 million of revenue for the year ended December 31, 2012, all from the sale of products produced at our Velardeña Operations in Mexico. We had no operations prior to the acquisition of the Velardeña Operations during September 2011; consequently we recorded $1.8 million of revenue for the period ended September through December 31, 2011, and no revenue for the year ended December 31, 2010.
Management Service Fees. Effective June 30, 2010, we terminated the San Cristóbal Management Services Agreement with Sumitomo Corporation. Consequently we recorded no management services fees for the years ended December 31, 2012 and 2011. For the year ended December 31, 2010, we recorded $11.2 million of management service fees comprised of $5.5 million of fees, a $4.3 million early termination payment, and $1.4 million for reimbursed withholding taxes.
Costs of metals sold. We recorded $33.4 million of costs applicable to sales for the year ended December 31, 2012, all from the sale of products produced at our Velardeña Operations in Mexico. We had no operations prior to the acquisition of the Velardeña Operations during September 2011; consequently we recorded $6.1 million of costs applicable to sales for the period September through December 31, 2011, and no costs of metals sold were recorded for the year ended December 31, 2010. Included in costs of metals sold were $2.7 million and $3.8 million of write downs of finished goods inventory to estimated net realizable value for the periods ended December 31, 2012 and 2011, respectively.
Costs of services. As a result of the June 30, 2010 termination of the San Cristóbal Management Services Agreement with Sumitomo Corporation, we recorded no costs of services for the years ended December 31, 2012 and 2011. For the year ended December 31, 2010 we recorded $2.6 million of costs of services comprised of reimbursed direct administrative expenses incurred by us related to the Management Services Agreement.
Exploration Expense. Our exploration expense, including property holding costs and allocated administrative expenses, totaled $7.0 million for the year ended December 31, 2012, as compared to $17.8 and $13.4 million for the years ended December 31, 2011 and 2010, respectively. Exploration expense for all three years was incurred primarily in Mexico, Peru, and Argentina (excluding amounts spent on the Yaxtché deposit at the El Quevar project) and includes property holding costs and costs incurred by our local exploration offices. The decrease in exploration expenses for the year ended December 31, 2012 as compared to the years ended December 31, 2011 and 2010 is the result of our reduced spending on exploration as we attempt to rationalize and monetize our exploration portfolio. Exploration expense during 2011 was higher than 2010 due to increased drilling activity at advanced stage exploration projects, primarily in Mexico and Peru.
Velardeña Project and Development Expense. During the year ended December 31, 2012 we incurred $7.9 million of expenses related to our Velardeña Operations in Mexico, primarily related to development of the San Mateo drift, other mine development, and engineering work. In addition to amounts expensed during the year ended December 31, 2012, we incurred capital expenditures of approximately $9.5 million for plant construction, mining and other equipment and had outstanding approximately $0.1 million of advance payments to equipment manufacturers at December 31, 2012. During the year ended December 31, 2011, following the purchase of the Velardeña Operations during September 2011, we incurred $0.6 million of expenses related to the expansion project at our Velardeña Operations in Mexico, primarily related to development of the San Mateo drift and engineering work. In addition to amounts expensed during 2011, we incurred capital expenditures of approximately $2.7 million for mining and other equipment and had outstanding approximately $1.3 million of advance payments to equipment manufacturers at December 31, 2011. The Velardeña Operations were acquired during September 2011; consequently, there were no Velardeña project expenses recorded for the year ended December 31, 2010.
El Quevar Project Expense. During the year ended December 31, 2012 we incurred $5.1 million of expenses primarily related to furthering our evaluation of the Yaxtché deposit at our El Quevar project in Argentina. During the year ended December 31, 2011, we incurred $27.4 million of expenses related to project work at El Quevar, primarily related to development of the exploration drift, drilling and engineering work. We incurred capital expenditures of approximately $5.6 million for mining and other equipment and had outstanding approximately $0.3 million of advance payments to equipment manufacturers at December 31, 2011. During the year ended December 31, 2010, we incurred $15.8 million of expenses related to project work at El Quevar, primarily related to development of the exploration drift, drilling and engineering work and we also purchased approximately $3.8 million of mining equipment and had outstanding approximately $0.9 million of advance payments to equipment manufacturers at December 31, 2010. The decrease in El Quevar Project Expense during 2012 is the result of a shift in emphasis to the development and operations of our Velardeña Operations in Mexico. For all three years, costs incurred for work performed outside of the Yaxtché deposit are included in "Exploration Expense" discussed above.
Administrative Expense. Administrative expenses totaled $7.1 million for the year ended December 31, 2012 compared to $8.7 and $8.6 million for the years ended December 31, 2011 and 2010, respectively. Administrative expenses, including costs associated with being a public company, are incurred primarily by our corporate activities in support of the Velardeña Operations, El Quevar project work, and our exploration portfolio. The $7.1 million of administrative expenses we incurred during 2012 is comprised of $2.9 million of employee compensation and directors' fees, $1.7 million of professional fees, $0.4 million of travel expenses and $2.1 million of insurance, rents, utilities and other office costs. The $8.7 million of administrative expenses we incurred during 2011 is comprised of $3.1 million of employee compensation, $2.6 million of professional fees, $0.4 million of travel expenses and $2.6 million of insurance, rents, utilities and other office costs. During 2010 we incurred $8.6 million of administrative expenses, which were comprised of $4.2 million of employee compensation, $2.0 million of professional fees, $0.6 million of travel expenses and $1.8 million of insurance, rents, utilities and other office costs.
Severance and acquisition related costs. During the year ended December 31, 2011 we incurred $7.2 million of costs associated with the acquisition of our Velardeña Operations, including banker, legal, accounting and other professional fees, as well as severance related costs for several executives of ECU. We incurred no such costs during 2012 or 2010.
Stock based compensation. During the year ended December 31, 2012 we incurred expense related to stock based compensation in the amount of $2.6 million compared to $5.5 million and $3.2 million for the years ended December 31, 2011 and 2010, respectively. Stock based compensation was higher in 2011 compared to the previous year and the current year due to the accelerated vesting of stock grants at the completion of the acquisition of the Velardeña Operations, which resulted in a change of control of Golden Minerals. Stock based compensation varies from period to period depending on the number and timing of shares granted, the type of grant, the market value of the shares on the date of grant and other variables.
Reclamation Expense. During the year ended December 31, 2012 we incurred $0.2 million of reclamation expense, which included $0.1 million of reclamation costs related to the accretion of an asset retirement obligation at the Velardeña Operations and actual reclamation expenses of $0.1 million incurred at the El Quevar project. During 2012 we completed a revised closure plan for our Velardeña Operations and recorded a reduction of the accretion of the asset retirement obligation of approximately $0.1 million which was netted against the expense for the period. During the year ended December 31, 2011 we incurred $0.2 million of reclamation costs related to activity at El Quevar and the accretion of an asset retirement obligation at the Velardeña Operations. We incurred no reclamation expenses for the year ended December 31, 2010.
(Impairment) reversal of impairment of long lived assets and goodwill. At December 31, 2012 we recorded a goodwill impairment of $58.5 million, reducing goodwill carrying value from $70.2 million to $11.7 million. We assess the recoverability of our long lived assets, including goodwill, whenever events or changes in circumstances indicate that the carrying value of the assets may be impaired. In the year since the completion of the acquisition of the Velardeña Operations forecasted future gold and silver prices have decreased by approximately 20% and certain assumptions related to the long term operating plan for the Velardeña Operations have changed. As a result of these changes we completed an impairment analysis of the goodwill carrying value, which indicated that goodwill was impaired. No impairments were recorded during the year ended December 31, 2011. During the year ended December 31, 2010 we recorded a net write-up in the carrying value of long lived assets of $0.9 million related to a previously recorded impairment charge recorded in 2009 of $1.7 million on our held for sale Paca Pulacayo property. During January 2011 the sale of the Paca Pulacayo property was completed and a gain of $0.4 million was recorded in Other Operating Income, Net. Also, during 2010 we sold an airplane we owned after recording a $0.1 million impairment charge included in the 2010 amount.
Other Operating Income, Net. We recorded other operating income of $2.5 million for the year ended December 31, 2012 compared to $0.7 and $0.3 million for the years ended December 31, 2011 and 2010, respectively. The net amounts for the three years consist primarily of net gains recorded on the sales of certain fixed assets and non strategic exploration properties. The increase in other operating income for 2012 as compared to 2011 and 2010 is the result of our efforts to monetize certain of our non strategic mineral properties primarily in Mexico and Peru. We will continue our efforts to monetize certain of our non strategic mineral properties during 2013.
Depreciation, depletion and amortization. During the year ended December 31, 2012 we incurred depreciation, depletion and amortization expense of $10.0 million compared to $2.8 and $1.1 million for the years ended December 31, 2011 and 2010, respectively. Depreciation, depletion and amortization includes a $0.8 million and a $0.6 million write down of finished goods inventory to estimated net realizable value at December 31, 2012 and 2011, respectively. Depreciation, depletion and amortization expense increased beginning in September 2011 as a result of the acquisition of the Velardeña Operations which resulted in a significant increase in property, plant and equipment.
Interest and Other Income. During the year ended December 31, 2012 we recorded approximately $2.5 million of interest and other income comprised of a $1.8 million gain on the sale of the Platosa net smelter royalty to Excellon, a $0.6 million reduction of a loss contingency liability and $0.1 million of income from tolling agreements at our Velardeña Operations. We recorded interest and other income of $11.6 and $0.2 million for the years ended December 31, 2011 and 2010, respectively. The 2011 amount includes approximately $11.3 million of net proceeds received from the settlement of an arbitration claim partially offset by a net $0.1 million loss related to the sale of available for sale investments. The 2010 amount is primarily related to interest earned on cash and investments.
Royalty Income. During the year ended December 31, 2012 we recorded royalty income of approximately $0.4 million compared to approximately $0.4 million and $0.3 million recorded during the years ended December 31, 2011 and 2010, respectively. The royalty income is all related to Excellon's Platosa mine in Mexico, on which we retained a net smelter return royalty. We sold the net smelter royalty to Excellon during the second quarter 2012. Prior to our sale of the royalty, our royalty income varied from period to period depending on production from the mine. At December 31, 2012 we have no other sources of royalty income.
Interest and Other Expense. During the year ended December 31, 2012, we recorded interest and other expense of $0.3 million comprised of $0.2 million related to interest incurred on a value added tax audit in Mexico and $0.1 million related to losses on investments. During the year ended December 31, 2011, we recorded interest and other expense of $1.3 million which included $0.9 million
of interest expense and $0.3 million of losses on investments. We had no interest and other expense for the year ended December 31, 2010.
Gain (Loss) on Foreign Currency. We recorded $0.5 million of foreign currency gain for the year ended December 31, 2012, compared to losses of $1.5 million and $0.1 million for the years ended December 31, 2011 and 2010. Foreign currency gains and losses are primarily related to the effect of currency fluctuations on monetary assets net of liabilities held by our foreign subsidiaries that are denominated in currencies other than US dollars. Such foreign currency denominated monetary assets and liabilities have increased with the acquisition of the Velardeña Operations. The 2012 gain is primarily related to net operating loss carry forwards in Mexico. The 2011 loss was primarily related to the convertible note received from ECU and net operating loss carry forwards in Mexico.
Gain (Loss) on Extinguishment of Debt. For the year ended December 31, 2011 we recorded $0.5 million for the extinguishment of debt. The amount was associated with an early termination fee related to a debt obligation acquired in the ECU acquisition. The debt obligation was fully repaid by the end of 2011. We had no such gains or losses for 2012 or 2010.
Income Taxes. Our income tax benefit for the years ended December 31, 2012 and 2011 was $8.0 million and $2.1 million, respectively. The amounts are primarily related to an increase in net operating losses and the amortization of the mineral resource at our Velardeña Operations in Mexico. Our income tax provisions of $1.4 million for the year ended December 31, 2010, consisted primarily of withholding taxes either accrued or paid to Bolivia in connection with management services provided to the San Cristóbal mine.
Liquidity and Capital Resources
At December 31, 2012 our aggregate cash and short-term investments totaled $44.6 million and, based on the assumptions described below, we expect to have a cash balance of approximately $24.0 million at December 31, 2013. In February 2013 we completed the sale of certain Peruvian exploration properties to a third party for net proceeds of $3.5 million. We anticipate completing approximately $1.0 million in additional exploration property sales during 2013. We expect to have sufficient funding to continue our long-term business strategy through 2013.
Our cash and short-term investment balance at December 31, 2012 of $44.6 million is $4.0 million lower than the $48.6 million in similar assets held at December 31, 2011 due primarily to $17.4 million in Velardeña Operations capital and development expenditures; $7.4 million in operating losses at the Velardeña Operations; $7.0 million in exploration expenditures; $7.1 million on general and administrative activities; $5.1 million on the El Quevar project; and $2.0 million in additional working capital, primarily related to increased inventories and receivables associated with the Velardeña Operations; nearly completely offset by total net proceeds of $36.9 million from the sale of our shares and warrants through an underwritten registered offering and concurrent private placement and $5.1 million in proceeds from the sale of non strategic property interests and royalty payments.
Assuming metals prices of $30.00 per ounce of silver and $1,600.00 per ounce of gold, we expect to generate in 2013 a negative $1.0 million gross margin at the Velardeña Operations, which we define as revenue from the sale of metals less costs applicable to the sale of metals (exclusive of depreciation and development costs). With the cash and investment balance at December 31, 2012 of $44.6 million, the negative $1.0 million gross margin the Velardeña Operations and the anticipated proceeds of $4.5 million from the sale of certain exploration properties, we plan to spend the following amounts during 2013 pursuant to our long-term business strategy:
1.Approximately $7.5 million on capital, project and development costs related to the continued development of the San Mateo ramp and other mine development and capital expenditures
intended to increase the capacity and productivity of the Velardeña Operations and plant facilities;
2.Approximately $3.5 million at the El Quevar project to fund a small exploration drilling program completed in the first quarter of 2013, maintenance activities, property holding costs, and the continuation of project evaluation costs;
3.Approximately $5.0 million on other exploration activities and property holding costs related to our portfolio of exploration properties located primarily in Mexico as we continue strategies to monetize portions of our exploration portfolio; and
4.Approximately $7.0 million on general and administrative costs and $1.0 million on other working capital.
The actual amount that we spend through year-end 2013 and the projected year-end cash and investment balance may vary significantly from the amounts specified above and will depend on a number of factors, including metals prices, the results of continuing operations and development work at the Velardeña Operations, the results of continued project assessment work at El Quevar and other exploration properties, the success of our efforts to obtain a partner for our El Quevar project, and whether we are able to monetize additional portions of our exploration portfolio. There can be no assurance that the current expenditures planned for the Velardeña Operations will result in the anticipated amounts of silver and gold production. A $2.50 average change in the price of silver during 2013 would result in a $2.0 million change in expected cash flow during the period while a $250.00 average change in the price of gold during 2013 would result in a $1.2 million change in expected cash flow during the period. If our metals production is less than anticipated, or metals prices decline from the levels noted previously, we will likely end the year 2013 with a lower cash and investment balance than the approximately $24.0 million currently expected.
Critical Accounting Policies and Estimates
The selection and application of accounting policies is an important process that has developed as our business activities have evolved and as the accounting rules have changed. Accounting rules generally do not involve a selection among alternatives, but involve an implementation and interpretation of existing rules, and the use of judgment, to the specific set of circumstances existing in our business. Discussed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported.
Mineral Reserves
When and if we determine that a mineral property has proven and probable reserves, subsequent development costs are capitalized to mineral properties. When mineral properties are developed and operations commence, capitalized costs are charged to operations using the units-of-production method over proven and probable reserves. "Mineralized material" as used in this annual report, although permissible under SEC's Guide 7, does not indicate "reserves" by SEC standards, and therefore all development costs incurred by us are expensed when incurred. The Company cannot be certain that any part of the deposits at the Velardeña Operations or the Yaxtché deposit will ever be confirmed or converted into SEC Industry Guide 7 compliant "reserves".
Asset Retirement Obligations
We record asset retirement obligations in accordance with Auditing Standards Codification ("ASC") 410, "Asset Retirement and Environmental Obligations" ("ASC 410"), which establishes a uniform methodology for accounting for estimated reclamation and abandonment costs. According to
ASC 410, the fair value of a liability for an asset retirement obligation ("ARO") is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. An offsetting asset retirement cost is capitalized as part of the carrying value of the assets with which it is associated, and depreciated over the useful life of the asset. During 2012, a third party engineering firm completed a detailed closure plan for our Velardeña Operations which resulted in a reduction to the original ARO estimate, recorded in conjunction with the acquisition of the Velardeña Operations, of approximately $1.7 million (see Note 11 to the accompanying consolidated financial statements).
Deferred Taxes
Our deferred tax liability is primarily related to the acquisition of our Velardeña Operations and was calculated by applying the Mexico corporate income tax rate of 28% to the difference between the fair value and the tax basis of the assets acquired and liabilities assumed. The acquisition of our Velardeña Operations also resulted in the recognition of a deferred tax asset related to certain net operating loss carry forwards available in Mexico. In accordance with ASC 740, "Income Taxes" ("ASC 740"), the Company presents deferred tax assets net of its deferred tax liabilities on a tax jurisdictional basis on its Consolidated Balance Sheets.
Goodwill
Goodwill is all related to the acquisition of our Velardeña Operations and is primarily the result of the requirement to record a deferred tax liability for the difference between the fair value and the tax basis of the assets acquired and liabilities assumed at amounts that do not reflect fair value. We assess the recoverability of our long lived assets, including goodwill, whenever events or changes in circumstances indicate that the carrying value of the assets may be impaired. In the year since the completion of the acquisition of the Velardeña Operations, our forecast of future gold and silver prices has decreased by approximately 20% and certain assumptions related to ore processing throughput rates and other aspects of the long term operating plan for the Velardeña Operations have changed. As a result of these changes, and per the guidance of ASC 350, "Intangibles-Goodwill and Other" ("ASC 350"), the Company completed an impairment analysis of the goodwill carrying value. The analysis indicated that goodwill was impaired by approximately $58.5 million during 2012 (see Note 10 to the accompanying consolidated financial statements). The goodwill is not deductable for income tax purposes.
Business Combinations
We followed the acquisition method of accounting in accordance with ASC 805, "Business Combinations" ("ASC 805"), related to the acquisition of our Velardeña Operations. Mineral properties and the asset retirement obligation were recorded at estimated fair market value based on valuations performed with the assistance of an independent appraisal firm and a minerals engineering company. The asset valuations were derived in accordance with the guidance of ASC Topic 820, "Fair Value Measurements and Disclosures" ("ASC 820"), using a combination of income, market and cost approach models depending on the asset. In applying the appropriate valuation model or models, the valuation consultants employed a variety of economic factors and market data, including discount rates, income tax rates, projections of future metals prices, and third party market surveys.
Table of Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2012:
(1)The operating lease obligations are related primarily to our corporate headquarters office in Golden, Colorado, as well as other office leases associated with our exploration activities. The current corporate headquarters office lease expires in November 2014. Leases for the other offices expire at various times not exceeding four years.
(2)We make annual maintenance payments of approximately $21,000 to the Mexico federal government to maintain the Velardeña Operations concessions and approximately $34,000 to the Argentine federal government to maintain the El Quevar project concessions. These payments include payments for both owned concessions and concessions held under purchase option agreements.
(3)We cannot currently estimate the life of the Velardeña Operations or El Quevar project. This table assumes that no annual maintenance payments will be made more than five years after December 31, 2012. If we continue to operate the Velardeña Operations beyond five years, we expect that we would make annual maintenance payments of approximately $30,000 per year for the life of the Velardeña mine. If we continue to develop a mine at the El Quevar project, we expect that we would make annual maintenance payments of approximately $100,000 per year for the life of the El Quevar mine.
From time to time we enter into lease option agreements related to exploration properties that are of interest to us. These agreements typically contain escalating lease payments required to maintain our exploration rights to the property. Such agreements are not included in the above table because exploration success is historically low and we have the right to terminate the agreements at any time. For example, at the El Quevar project we control the Nevado I concession pursuant to a purchase option agreement with a third-part concession owner. Our remaining payment on the Nevado I option agreement totals $700,000 and has been extended to June 22, 2013.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
ITEM 7A:
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We invest substantially all of our excess cash in U.S. government and debt securities rated "investment grade" or better. The rates received on such investments may fluctuate with changes in economic conditions. Based on the average cash, restricted cash, investments and restricted investment balances outstanding during the year ended December 31, 2012, a 1.0% decrease in interest rates would have resulted in a reduction in interest income for the period of approximately $0.9 million.
Foreign Currency Exchange Risk
Although most of our expenditures are in U.S. dollars, certain purchases of labor, operating supplies and capital assets are denominated in other currencies. As a result, currency exchange fluctuations may impact the costs of our operations. To reduce this risk, we maintain minimum cash balances in foreign currencies and complete most of our purchases in U.S. dollars.
Commodity Price Risk
We are primarily engaged in the operation and further development of properties containing gold, silver, zinc, lead and other minerals. As a result, decreases in the price of any of these metals have the potential to negatively impact our ability to establish reserves and develop and operate our properties. For further detail regarding the effect on our expected cash flow from fluctuations in silver and gold prices, see "Item 7 Management's Discussion and Analysis-Liquidity and Capital Resources" above.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary information filed as part of this Item 8 are listed under Part IV, Item 15, "Exhibits, Financial Statement Schedules" and contained in this annual report on Form 10-K at page.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A:
ITEM 9A: CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The management of Golden Minerals Company has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of December 31, 2012.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2012, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")), were effective and designed to provide reasonable assurance that (i) information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
The management of Golden Minerals, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act, as amended). Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. Based on our assessment, management has concluded that, as of December 31, 2012, our internal control over financial reporting is effective based on these criteria.
The operations of ECU and its subsidiaries, which were acquired on and consolidated by the Company as of September 2, 2011, have been included in management's assessment of internal control over financial reporting at December 31, 2012. Management had excluded the operations of ECU and its subsidiaries from its assessment of internal control over financial reporting at December 31, 2011.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in Item 8, "Financial Statements and Supplementary Data" of this annual report on Form 10-K.
Changes in Internal Control over Financial Reporting
Other than the inclusion of ECU and its subsidiaries in management's assessment of internal control over financial reporting, there have been no changes in the Company's internal control over financial reporting during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B:
ITEM 9B: OTHER INFORMATION
None.
PART III
ITEM 10:
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
For Information regarding our executive officers, see "Items 1 and 2: Business and Properties-Executive Officers of Golden Minerals."
Additional information is incorporated by reference from the information in our proxy statement for the 2013 Annual Meeting of Stockholders, which we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates.
We have adopted a code of ethics that applies to all of our employees, including principal executive officer, principal financial officer, principal accounting officer, and those of our officers performing similar functions. The full text of our code of ethics can be found on the Corporate Governance page on our website. In the event our board approves an amendment to or waiver from any provision of our code of ethics, we will disclose the required information pertaining to such amendment or waiver on our website.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
Incorporated by reference from the information in our proxy statement for the 2013 Annual Meeting of Stockholders, which we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from the information in our proxy statement for the 2013 Annual Meeting of Stockholders, which we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference from the information in our proxy statement for the 2013 Annual Meeting of Stockholders, which we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates.
ITEM 14:
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated by reference from the information in our proxy statement for the 2013 Annual Meeting of Stockholders, which we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates.
PART IV
ITEM 15:
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)Documents filed as part of this annual report on Form 10-K or incorporated by reference:
(1)Our consolidated financial statements are listed on the "Index to Financial Statements" on Page to this report.
(2)Financial Statement Schedules (omitted because they are either not required, are not applicable, or the required information is disclosed in the notes to the financial statements or related notes).
(3)The following exhibits are filed with this annual report on Form 10-K or incorporated by reference.
EXHIBITS
(1)Incorporated by reference to our Current Report on Form 8-K filed October 12, 2010.
(2)Incorporated by reference to our Current Report on Form 8-K filed March 30, 2009.
(3)Incorporated by reference to our Current Report on Form 8-K filed July 19, 2011.
(4)Incorporated by reference to our Current Report on Form 8-K filed January 13, 2010.
(5)Incorporated by reference to our Current Report on Form 8-K filed September 9, 2011.
(6)Incorporated by reference to our Registration Statement on Form S-8 filed May 8, 2009.
(7)Incorporated by reference to our Quarterly Report on Form 10-Q filed August 10, 2009.
(8)Incorporated by reference to our Current Report on Form 8-K filed October 11, 2011.
(9)Incorporated by reference to our Form S-8 Registration Statement filed September 2, 2011.
(10)Incorporated by reference to our Quarterly Report on Form 10-Q filed May 4, 2010.
(11)Incorporated by reference to our Current Report on Form 8-K filed October 26, 2010.
(12)Incorporated by reference to our Current Report on Form 8-K filed June 30, 2011.
(13)Incorporated by reference to our Current Report on Form 8-K filed September 19, 2012.
*Filed herewith.
**These interactive data files are furnished and deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
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.
Dated: March 1, 2013
GOLDEN MINERALS COMPANY
Registrant
By:
/s/ JEFFREY G. CLEVENGER
Jeffrey G. Clevenger
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
GOLDEN MINERALS COMPANY
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Golden Minerals Company
In our opinion, the accompanying consolidated balance sheets and the related consolidated statement of operations and comprehensive income (loss), statement of changes in equity (deficit) and statement of cash flows present fairly, in all material respects, the financial position of Golden Minerals Company and its subsidiaries at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
March 1, 2013
GOLDEN MINERALS COMPANY
CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars)
The accompanying notes form an integral part of these consolidated financial statements.
GOLDEN MINERALS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Expressed in United States dollars)
The accompanying notes form an integral part of these consolidated financial statements.
GOLDEN MINERALS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
(Expressed in United States dollars)
The accompanying notes form an integral part of these consolidated financial statements.
GOLDEN MINERALS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars)
The accompanying notes form an integral part of these consolidated financial statements.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
1. Operations
Golden Minerals Company (the "Company"), a Delaware corporation, completed a business combination (the "Transaction") on September 2, 2011 with ECU Silver Mining Inc. ("ECU"). The primary asset acquired in the Transaction was the 100% interest in the Velardeña and Chicago precious metals mining operations in Mexico (the "Velardeña Operations") (see Note 24). The Company is primarily engaged in the operation and further development of the Velardeña Operations, the continued advancement of its El Quevar advanced exploration property in Argentina, and the continued rationalization of our portfolio of exploration properties in South America and Mexico.
Upon emergence from Chapter 11 reorganization on March 24, 2009, the Company became the successor to Apex Silver Mines Limited ("ASML") for purposes of reporting under the U.S. federal securities laws. Upon emergence from the Chapter 11 reorganization and as required by U.S. GAAP and per the guidance of Accounting Standards Codification ("ASC") 805, "Business Combinations", ("ASC 805"), and ASC 852, "Reorganizations" ("ASC852"), the Company applied fresh start accounting and adjusted all of the acquired assets and assumed liabilities to their respective fair values based on the Company's reorganization value.
The financial statements have been prepared on a going concern basis under which an entity is considered to be able to realize its assets and satisfy its liabilities in the normal course of business. However, the continuing operations of the Company are dependent upon its ability to secure sufficient funding and to generate future profitable operations. The underlying value and recoverability of the amounts shown as mineral properties in the consolidated balance sheet are dependent on the ability of the Company to generate positive cash flow from operations and to continue to fund exploration and development activities that would lead to profitable production or proceeds from the disposition of the mineral properties. There can be no assurance that the Company will be successful in generating future profitable operations or securing additional funding in the future on terms acceptable to the Company or at all.
2. Liquidity and Capital Resources
At December 31, 2012 the Company's aggregate cash and short-term investments totaled $44.6 million and, based on the assumptions described below, we expect to have a cash balance of approximately $24.0 million at December 31, 2013. In February of 2013 the Company completed the sale of certain Peruvian exploration properties to a third party for net proceeds of $3.5 million. The Company anticipates completing approximately $1.0 million in additional exploration property sales during 2013. The Company expects to have sufficient funding to continue its long-term business strategy through 2013.
Assuming metals prices of $30.00 per ounce of silver and $1,600 per ounce of gold during 2013 the Company expects to generate a negative $1.0 million gross margin at the Velardeña Operations, which the Company defines as revenue from the sale of metals less costs applicable to the sale of metals (exclusive of depreciation and development costs). With the cash and investment balance at December 31, 2012 of $44.6 million, the negative $1.0 million gross margin at the Velardeña Operations, and the anticipated proceeds of $4.5 million from the sale of certain exploration properties,
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
2. Liquidity and Capital Resources (Continued)
the Company plans to spend the following amounts during 2013 pursuant to its long-term business strategy:
1.Approximately $7.5 million on capital, project and development costs related to the continued development of the San Mateo ramp and other mine development and capital expenditures intended to increase the capacity and productivity of the Velardeña Operations and plant facilities;
2.Approximately $3.5 million at the El Quevar project to fund limited exploration completed in the first quarter of 2013, maintenance activities, property holding costs, and the continuation of project evaluation costs;
3.Approximately $5.0 million on other exploration activities and property holding costs related to the Company's portfolio of exploration properties located primarily in Mexico and in Peru and Argentina, as the Company continues strategies to monetize portions of the portfolio;
4.Approximately $7.0 million on general and administrative costs and $1.0 million on other working capital.
The actual amount that the Company spends through year-end 2013 and the projected year-end cash and investment balance may vary significantly from the amounts specified above and will depend on a number of factors, including metals prices, the results of continuing operations and development work at the Velardeña Operations, the results of continued project assessment work at El Quevar and other exploration properties, and whether the Company is able to monetize additional portions of its exploration portfolio. There can be no assurance that the current expenditures planned for the Velardeña Operations will result in the anticipated amounts of silver and gold production. A $2.50 average change in the price of silver during 2013 would result in a $2.0 million change in expected cash flow during the period while a $250.00 average change in the price of gold during 2013 would result in a $1.2 million change in expected cash flow during the period. If the anticipated production does not occur, or metals prices decline from the levels noted previously, the Company would likely end the year 2013 with a lower cash and investment balance than the approximately $24.0 million currently expected.
3. Summary of Significant Accounting Policies
The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of the Company's consolidated financial statements require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves and related future metals prices that are the basis for future cash flow estimates utilized in impairment calculations and units-of-production depreciation, depletion and amortization calculations; environmental reclamation and closure obligations; estimates of recoverable metals in stockpiles; valuation allowances for deferred tax assets and the fair value of financial instruments. The Company based its estimates on historical experience and on various other assumptions that are believed to be reasonable under the
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
3. Summary of Significant Accounting Policies (Continued)
circumstances. Actual results may differ significantly from these estimates under different assumptions or conditions.
The policies adopted, considered by management to be significant, are summarized as follows:
a. Basis of consolidation
All of the Company's consolidated subsidiaries are 100% owned and as such the Company does not recognize a noncontrolling interest in any of its subsidiaries. All intercompany transactions and balances have been eliminated at consolidation.
b. Translation of foreign currencies
Substantially all expenditures and sales are made in U.S. dollars. Accordingly, the Company and its subsidiaries use the U.S. dollar as their functional and reporting currency.
c. Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
d. Investments
Available for Sale-Available for sale securities are recorded at fair value, with unrealized gains or losses recorded as a component of equity, unless the value of the security is considered other than temporarily impaired. Realized gains and losses and non-temporary impairments in value are recorded in the statement of operations.
e. Inventories
Metals inventories at the Velardeña Operations consist of marketable products including doré, concentrates and precipitates. Metals inventory are carried at the lower of average cost or net realizable value. Net realizable value represents the estimated future sales price of the product based on spot and futures metals prices through estimated sale and settlement dates, less the estimated costs to complete production and bring the product to sale. Costs included in metals inventory include direct and indirect costs of mining and processing, including depreciation. At December 31, 2011 and 2012, the Company had written down its metals inventory to net realizable value with excess costs included in cost of sales and depreciation.
Materials and supplies inventories are valued at the lower of average cost or net realizable value. Cost includes applicable taxes and freight. The Company routinely counts and evaluates its material and supplies to determine the existence of any obsolete stock that is subject to impairment.
f. Mining properties, exploration and development costs
The Company expenses general prospecting costs and the costs of acquiring and exploring unevaluated mineral properties. When a mineral property is determined to have proven and probable
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
3. Summary of Significant Accounting Policies (Continued)
reserves, subsequent development costs are capitalized to mineral properties. For acquired mineral properties with proven and probable reserves, the Company capitalizes acquisition costs and subsequent development costs. When mineral properties are developed and operations commence, capitalized costs are charged to operations using the units-of-production method over proven and probable reserves. Upon abandonment or sale of a mineral property, all capitalized costs relating to the specific property are written off in the period abandoned or sold and a gain or loss is recognized in the accompanying Consolidated Statements of Operations and Comprehensive Income.
Mineral properties acquired in the ECU merger were recorded at estimated fair market value based on valuations performed with the assistance of an independent appraisal firm and a minerals engineering company. The mineral properties are amortized on a units of production basis as minerals are produced.
As a requirement of fresh start accounting certain exploration properties were recorded at their fair market value upon emergence from Chapter 11 reorganization. On a quarterly basis the Company evaluates its exploration properties to determine if they meet the Company's minimum requirements for continued evaluation. The rights to the properties that do not meet the minimum requirements are relinquished and the carrying values, if any are written off and reflected in other operating gains and losses, net on the accompanying Consolidated Statements of Operations and Comprehensive Income. Costs of exploration subsequent to the application of fresh start accounting have and will continue to be expensed.
g. Property, plant and equipment and long lived asset impairment
Buildings are depreciated using the straight-line method over the estimated useful lives of 30 to 40 years or the life of the mine whichever is shorter. Mining equipment and machinery excluding the plant are depreciated using the straight-line method over useful lives of three to eight years or the lease period, whichever is shorter. Mineral properties and the plant are depreciated using units of production based on estimated mine reserves. Other furniture and equipment are depreciated using the straight-line method over estimated useful lives of three to five years. Depreciation on plant and equipment used in the construction of an asset is capitalized to the constructed asset.
The Company records a lease as a capital lease if at the lease inception it meets one or more of four criteria in accordance with ASC 840, "Leases" ("ASC 840"). The Company records capital leases as an asset and an obligation at the lesser of an amount equal to the present value at the beginning of the lease term of minimum lease payments during the lease term or the fair value of the leased assets.
Property, plant and equipment are recorded at cost and per the guidance of ASC 360, "Property, Plant and Equipment" ("ASC 360"), the Company assesses the recoverability of its property, plant and equipment; including goodwill, whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. If the sum of estimated future net cash flows on an undiscounted basis is less than the carrying amount of the related asset, impairment is considered to exist. The related impairment loss is measured by comparing estimated future net cash flows on a discounted basis to the carrying amount of the asset.
ASC 350, "Intangibles-Goodwill and Other" ("ASC 350"), requires that an entity assign its goodwill to reporting units and test each reporting unit's goodwill for impairment at least on an annual
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
3. Summary of Significant Accounting Policies (Continued)
basis and between annual tests in certain circumstances. All of the goodwill recorded on the Company's books is related to the Velardeña Operations acquired in the Transaction, which is considered by the Company to be a separate reporting unit (see Note 10).
h. Asset Retirement Obligations
The Company records asset retirement obligations ("ARO") in accordance with ASC 410, "Asset Retirement and Environmental Obligations" ("ASC 410"), which establishes a uniform methodology for accounting for estimated reclamation and abandonment costs. According to ASC 410, the fair value of an ARO is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. An offsetting asset retirement cost ("ARC") is capitalized as part of the carrying value of the assets with which it is associated, and depreciated over the useful life of the asset (see Note 11).
The Company prepares estimates of the timing and amount of expected cash flows when an ARO is incurred. The fair value of the ARO is measured by discounting the expected cash flows using a discount rate that reflects the credit adjusted risk-free rate of interest. The Company records the fair value of an ARO when it is incurred and changes in the fair value of the ARO are recorded as an adjustment to the corresponding ARC. The ARO is adjusted to reflect the passage of time (accretion cost) calculated by applying the discount rate implicit in the initial fair value measurement to the beginning-of-period carrying amount of the ARO. The Company records accretion costs to expense as incurred.
i. Revenue Recognition
Following the guidance of ASC 605, "Revenue Recognition" ("ASC 605"), the Company recognizes "Revenue from the sale of metals" at the earliest point that both risk of loss and title transfer to the purchaser pursuant to the terms of the Company's sales agreements. Prices for doré, concentrate and precipitate sales are fixed according to terms included in the sales agreements, which generally call for final pricing based on average metals prices observed over specific periods that range from 10 days prior to the transfer of title to the month following the month the product is received by the purchaser. Revenue is recorded based on estimated metals contained in the product from assay data and using either actual or projected prices for the pricing period specified in the sales agreement. Upon final settlement revenue may be adjusted for changes in actual contained metals and final metals prices.
The Company recognized service fees and reimbursements for administrative costs and withholding taxes as "Management Service Fees" in the Statement of Operations and Comprehensive Income following the guidance of ASC 605 regarding "income statement characterization of reimbursements received for "out-of-pocket" expenses incurred" and "reporting revenue gross as a principal versus net as an agent". ASC 605 supports recording as gross revenue fees received for the reimbursement of expenses in situations where the recipient is the primary obligor and has certain discretion in the incurrence of the reimbursable expense. The actual costs incurred for the reimbursed direct administrative expenses and withholding taxes are reported as costs of services and income tax expense, respectively in the statement of operations. The Company recognizes service fees during the period that the services are rendered.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
3. Summary of Significant Accounting Policies (Continued)
j. Stock compensation
Stock based compensation costs are recognized per the guidance of ASC 718, "Compensation-Stock Compensation" ("ASC 718"), and using a graded vesting attribution method whereby costs are recognized over the requisite service period for each separately vesting portion of the award (see Note 16). Stock grants are valued at their grant date at fair value which in the case of options requires the use of the Black-Scholes option pricing model.
k. Net income (loss) per Common Stock/Ordinary Share
Basic income (loss) per share is computed by dividing net income (loss) available to holders of the Company's Common Stock by the weighted average number of Common Stock/Ordinary Shares outstanding for the period. Diluted income (loss) per share reflects the potential dilution that would occur if securities or other contracts to issue Common Stock or Ordinary Shares were exercised or converted into Common Stock or Ordinary Shares.
At December 31, 2012, 2011 and 2010, all potentially dilutive shares were excluded from the computation of diluted earnings per share because to include them would have been anti-dilutive.
l. Comprehensive Income (Loss)
Comprehensive income (loss) is defined as all changes in equity (deficit), exclusive of transactions with stockholders, such as capital investments. Comprehensive income (loss) includes net income (loss) and changes in certain assets and liabilities that are reported directly in equity. For the years ended December 31, 2012, 2011 and 2010 Comprehensive Income (Loss) included the change in the market value of available for sale securities and is reported on the Consolidated Statements of Operations and Comprehensive Income (Loss).
m. Income Taxes
The Company accounts for income taxes in accordance with the provisions of ASC 740, "Income Taxes" ("ASC 740"), on a tax jurisdictional basis. The Company files United States and certain other foreign country income tax returns, and pays taxes reasonably determined to be due. The tax rules and regulations in these countries are highly complex and subject to interpretation. The Company's income tax returns are subject to examination by the relevant taxing authorities and in connection with such examinations, disputes can arise with the taxing authorities over the interpretation or application of certain tax rules within the country involved. In accordance with ASC 740, the Company identifies and evaluates uncertain tax positions, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet.
The Company classifies income tax related interest and penalties as income tax expense.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
3. Summary of Significant Accounting Policies (Continued)
n. Recently Adopted Standards
In June 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income" ("ASU No. 2011-05"), which eliminates the option to present components of other comprehensive income as part of the statement of changes in equity and requires that the components of comprehensive income be presented either in a single continuous statement of net income and comprehensive income or in two separate but consecutive statements. ASU No. 2011-05 requires retrospective application. As the Company has only one component of comprehensive income related to the mark to market of available for sale investments it has presented a single continuous statement of net income and comprehensive income.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Fair Value Measurement and Disclosure Requirements in U.S. GAAP and Financial Reporting Standards (IFRS). This update clarifies existing guidance about how fair value should be applied where it already is required or permitted and provides wording changes that align this standard with IFRS. We adopted this guidance prospectively beginning with our first quarterly filing in 2012 and it did not have any impact on our financial position or results of operations.
o. Recently Issued Pronouncements
In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. The guidance gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If the qualitative assessment supports that it is more likely than not the fair value of the asset exceeds its carrying amount, the company would not be required to perform a quantitative impairment test. If the qualitative assessment does not support the fair value of the asset, then a quantitative assessment is performed. ASU 2012-02 is effective for public entities for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company does not expect the adoption of this new guidance to have a material impact on its financial position or results of operations.
In September 2011, the FASB issued Accounting Standards Update 2011-08, "Testing Goodwill for Impairment" ("ASU 2011-08"), which allows an entity the option of performing a qualitative assessment to determine whether it is necessary to perform the current two-step annual impairment test. If an entity determines, on the basis of qualitative factors, that the fair value of the reporting unit more-likely-than-not exceeds the carrying amount, the two-step impairment test is not required. ASU 2011-08 does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment or amend the requirement to test goodwill for impairment between annual tests if events or circumstances warrant. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company adopted ASU 2011-08 during 2012 and performed qualitative and quantitative assessments in determining that its goodwill was impaired (see Note 10).
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
4. Investments
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Short-term investments include investments with maturities greater than 3 months, but not exceeding 12 months. Long-term investments include investments with maturities greater than 12 months.
The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and re-evaluates those classifications at each balance sheet date. Debt securities are classified as held to maturity when the Company has the intent and ability to hold the securities to maturity. Held to maturity debt securities are stated at amortized cost and include government agency and corporate obligations. Available for sale investments are marked to market at the end of each reporting period with changes in value recorded as a component of other comprehensive income (loss). If declines in value are deemed other than temporary, a charge is made to net income (loss) for the period. The Company invests only in government and corporate securities rated "investment grade" or better.
The following table summarizes the Company's investments at December 31, 2012:
The available for sale common stock at December 31, 2012 consists of 3.0 million shares of a junior mining company received during the third quarter 2012 related to the 2011 sale of the Company's Paca Pulacayo property in Bolivia.
At December 31, 2012 and 2011, the Company held warrants to purchase common stock of a junior mining company which were acquired in a transaction related to the Company's exploration activities. The warrants expired on January 6, 2013 and had a nominal carrying value of less than one thousand dollars at both December 31, 2012 and 2011.
Quoted market prices at December 31, 2012 were used to determine the fair values of the above investments. See Note 14 for further discussion on the fair value measurement techniques used by the Company to value the above investments.
Credit Risk
Credit risk is the risk that a third party might fail to fulfill its performance obligations under the terms of a financial instrument. For cash and equivalents and investments, credit risk represents the carrying amount on the balance sheet. The Company mitigates credit risk for cash and equivalents and investments by placing its funds and investments with high credit-quality financial institutions, limiting
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
4. Investments (Continued)
the amount of exposure to each of the financial institutions, monitoring the financial condition of the financial institutions and investing only in government and corporate securities rated "investment grade" or better.
The Company invests with financial institutions that maintain a net worth of not less than $1 billion and are members in good standing of the Securities Investor Protection Corporation.
5. Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
December 31, 2012
The prepaid contractor fees and vendor advances consist of advance payments made to equipment manufacturers, contractors and suppliers primarily at the Company's Velardeña Operations in Mexico.
In addition, included in non-current assets at December 31, 2012 is approximately $163,000 of prepaid insurance on which amortization will be recognized through 2015.
December 31, 2011
The prepaid contractor fees and vendor advances consist of advance payments made to equipment manufacturers, contractors and suppliers primarily at the Company's Velardeña Operations in Mexico.
The account receivable is related to the sale of our Paca Pulacayo property in Bolivia which settled during July 2012.
In addition, included in non-current assets at December 31, 2011 is approximately $264,000 of prepaid insurance on which amortization will be recognized through 2015.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
6. Inventories
Inventories at the Velardeña Operations were as follows:
At December 31, 2012, the Company had written down its metals inventory to net realizable value including a charge to cost of metals sold of approximately $2.7 million and a charge to depreciation expense of approximately $0.8 million.
At December 31, 2011, the Company had written down its metals inventory to net realizable value including a charge to cost of metals sold of approximately $3.8 million and a charge to depreciation expense of approximately $0.6 million.
7. Value added tax recoverable
The Company has recorded value added tax ("VAT") paid in Mexico and related to the Velardeña Operations as a recoverable asset. Mexico law allows for certain VAT payments to be recovered through ongoing applications for refunds. The Company expects that the current amounts will be recovered within a one year period.
The Company has also paid VAT in Mexico as well as other countries, primarily related to exploration projects, which has been charged to expense as incurred because of the uncertainty of recoverability.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
8. Property, Plant and Equipment and Assets Held for Sale
Property, plant and equipment, net
The components of property, plant, and equipment, net were as follows:
During the second quarter 2012 the Company completed the sale of its 1% net smelter royalty interest in the Platosa property to Excellon Resources Inc. for $2.4 million and recorded a $1.8 million gain on the sale which is reflected in interest and other income on the accompanying Statements of Operations and Comprehensive Income. The remaining royalty property is a property located in Mexico on which the Company has retained net smelter return royalty rights. There has been no royalty production from this property to date.
During the fourth quarter 2012, the Company sold exploration properties in Mexico, Peru and Bolivia for total proceeds of $2.5 million and recorded gains of $2.2 million which is reflected in other operating income on the accompanying Statements of Operations and Comprehensive Income.
The asset retirement cost is all related to the Company's Velardeña Operations in Mexico and was adjusted during the second quarter 2012 based on the completion of a mine closure plan during the period as discussed in detail in Note 11.
Additions to property, plant and equipment during 2012 are primarily related to activity at the Company's Velardeña Operations.
Assets Held for Sale
During the fourth quarter of 2012, the Company obtained approval from its board of directors to sell most of its exploration concessions in Peru. The $0.6 million carrying value of the properties is reflected in assets held for sale in the accompanying consolidated balance sheets at December 31, 2012. The sale of a portion of the exploration concessions was completed during February 2013, as discussed in Note 25.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
9. Accounts Payable and Other Accrued Liabilities
The Company's accounts payable and other accrued liabilities consist of the following:
December 31, 2012
Accounts payable and accruals at December 31, 2012 are primarily related to amounts due to contractors and suppliers in the amounts of $3.0 million, $0.7 million and $0.4 million related to the Company's Velardeña Operations, corporate administrative activities and exploration, respectively.
Accrued employee compensation and benefits at December 31, 2012 consist of $0.1 million of accrued vacation payable and $2.0 million related to withholding taxes and benefits payable, of which $1.7 million is related to activities at the Velardeña Operations.
December 31, 2011
Accounts payable and accruals at December 31, 2011 are primarily related to amounts due to contractors and suppliers in the amounts of $3.0 million, $0.8 million, $0.6 million and $0.8 million related to the Company's Velardeña Operations, El Quevar project, exploration and corporate administrative activities, respectively.
Accrued employee compensation and benefits at December 31, 2011 consist of $0.3 million of accrued vacation payable and $2.6 million related to withholding taxes and benefits payable, of which $2.1 million is related to activities at the Velardeña Operations.
10. Goodwill
The carrying value of goodwill, related to the Mexico ECU reporting unit, was $11.7 million at December 31, 2012 and $70.2 million at December 31, 2011. The reduction in the carrying value of goodwill is the result of the Company recording impairment charges of $57.2 million during the third quarter 2012 and an additional charge of $1.3 million recorded during the fourth quarter 2012, which are reflected in operating costs and expenses in the accompanying consolidated statements of operations and comprehensive income.
Goodwill is related to the acquisition of the Velardeña Operations and is primarily the result of the requirement to record a deferred tax liability for the difference between the fair value and the tax basis of the assets acquired and liabilities assumed at amounts that do not reflect fair value. The goodwill is not deductible for income tax purposes.
The Company assesses the recoverability of its long lived assets, including goodwill, at least annually, or whenever events or changes in circumstances indicate that the carrying value of the assets may be impaired. In the little over a year since the completion of the Transaction, the Company's
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
10. Goodwill (Continued)
forecast of future gold and silver prices has decreased by approximately 20% and certain assumptions related to ore processing throughput rates and other aspects of the long term operating plan for the Velardeña Operations have changed. As a result of these changes, and per the guidance of ASC 350, the Company completed an impairment analysis of the goodwill carrying value. The analysis indicated that goodwill was impaired by the amounts indicated above. The additional $1.3 million impairment recorded during the fourth quarter 2012 was primarily the result of the finalizing of certain operating and pricing assumptions.
The impairment amounts recorded during 2012 were calculated by applying the income approach to determine the fair value of the net assets of the reporting unit per the guidance of ASC Topic 820 "Fair Value Measurements and Disclosures" ("ASC 820"). The Company utilized discounted cash flows and an excess earnings model to determine the fair value of the entity and the implied goodwill. This model falls within level 3 of the fair value hierarchy per ASC 820 (see Note 14) and includes various inputs including the weighted average cost of capital, future metals prices, and assumptions from the Company's Velardeña Operations operating plan extended over a twenty five year period. The most significant unobservable factors are certain assumptions used in the Velardeña Operations operating plan and include: 1) ore grades consistent with the Company's current and previously reported estimates of mineralized material, 2) plant throughput consistent with a plan to ramp up to 1,150 tonnes per day by 2015, and 3) the Company's projections of operating costs. The weighted average cost of capital of 21 percent and forecast of future metals prices were obtained from a third party valuation consultant that derived the data from corroborated observable market data. Metals prices used in the analysis for silver ranged from $34.78 to $23.77 per ounce and for gold from $1,866 to $1,394 per ounce.
11. Asset Retirement and Reclamation Liabilities
The Company recorded an approximately $3.5 million ARO and offsetting asset retirement cost ARC related to the Velardeña Operations upon the acquisition of ECU (see Note 24). The Company with the help of a third party engineering firm, estimated the ARO and ARC based on the engineering firm's experience with mining operations of similar size and scope as that of the Velardeña Operations. Shortly after the completion of the ECU acquisition the Company retained the services of another engineering firm to complete a detailed closure plan for the Velardeña Operations. That plan was completed during the second quarter 2012 and indicated an ARO and ARC of approximately $1.9 million. The ARO and ARC amounts were adjusted accordingly as set forth in changes in estimates, and other in the table below.
The Company will continue to accrue additional estimated ARO amounts based on an asset retirement plan as activities requiring future reclamation and remediation occur. During 2012 the Company recognized approximately $0.2 million of accretion expense and approximately $0.2 million of amortization expense related to the ARC. During 2011, subsequent to the acquisition, the Company recognized approximately $0.1 million of accretion expense during the period and approximately $0.2 million of amortization expense related to the ARC.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
11. Asset Retirement and Reclamation Liabilities (Continued)
The following table summarizes activity in the Velardeña Operations ARO:
Both years include approximately $0.2 million of reclamation liabilities related to activities at our El Quevar project in Argentina.
12. Debt
As part of the Transaction with ECU, the Company acquired a term loan, payable to two investment funds managed by IIG Capital, LLC (the "Term Loan") with an outstanding balance of $15.5 million, which required equal monthly principal payments of approximately $0.6 million through December 31, 2013. Interest was payable quarterly and calculated as the greater of 12.0% or the one-month London Interbank Offered Rate plus 6.0%. The effective rate of interest on the Term Loan was approximately 12.8%, plus an obligation for any income tax withholding relating to the interest. On October 31, 2011, the Company notified the lenders of its intent to repay all amounts outstanding under the Term Loan. The Term Loan was repaid in full on December 5, 2011, thereby terminating the obligations of ECU and its Mexican subsidiaries under the financing arrangement. The repayment totaled approximately $15.0 million, consisting of the remaining principal balance of $14.4 million, an early prepayment fee of $0.5 million, and accrued interest of $0.1 million.
13. Other Liabilities
The Company recorded other current liabilities of $7.1 million at December 31, 2012 and $7.5 million at December 31, 2011. The December 31, 2012 and 2011 amounts include a loss contingency of $4.6 million and $4.9 million, respectively and an unrecognized tax benefit of $2.5 million and $2.6 million, respectively. The amounts are all related to foreign withholding taxes and include estimated interest, penalties and other adjustments that may be required upon settlement of the liability. The loss contingency is expected to be settled over the next four years.
The Company had recorded other long term liabilities of $0.2 million and $0.3 million for the years ended December 31, 2012 and 2011, respectively. Both amounts are related to a deferred leasehold liability which represents the recording of rent expense on a straight-line basis while actual rent payments are escalating over the course of the lease and where certain leasehold improvement costs, reimbursable by the landlord, are being amortized, on a straight-line basis, against rent expense over the life of the lease which expires in November 2014.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
14. Fair Value Measurements
Financial assets and liabilities and nonfinancial assets and liabilities are measured at fair value on a recurring (annual) basis under a framework of a fair value hierarchy which prioritizes the inputs into valuation techniques used to measure fair value into three broad levels. This hierarchy gives the highest priority to quoted prices (unadjusted) in active markets and the lowest priority to unobservable inputs. Further, financial assets and liabilities should be classified by level in their entirety based upon the lowest level of input that was significant to the fair value measurement. The three levels of the fair value hierarchy per ASC 820 are as follows:
Level 1: Unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.
Level 2: Quoted prices in inactive markets for identical assets or liabilities, quoted prices for similar assets or liabilities in active markets, or other observable inputs either directly related to the asset or liability or derived principally from corroborated observable market data.
Level 3: Unobservable inputs due to the fact that there is little or no market activity. This entails using assumptions in models which estimate what market participants would use in pricing the asset or liability.
The following table summarizes the Company's financial assets at fair value at December 31, 2012, and 2011 by respective level of the fair value hierarchy:
The Company's cash equivalents, comprised principally of U.S. treasury securities, are classified within Level 1 of the fair value hierarchy.
The Company's short-term available for sale securities are classified within Level 1 of the fair value hierarchy and are comprised of common stock, which has been valued using quoted prices in active markets.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
14. Fair Value Measurements (Continued)
The Company's trade accounts receivable is classified within Level 1 of the fair value hierarchy and is related to the sale of metals at our Velardeña Operations and is valued at published metals prices per the terms of the refining and smelting agreements.
The Company did not have any Level 2 or Level 3 financial assets at December 31, 2012.
The other account receivable at December 31, 2011 was related to the sale of the Paca Pulacayo property in Bolivia to Apogee. Because the receivable was payable in a combination of Apogee shares and cash and was dependent on Apogee's share price and credit risk, the receivable was marked to fair value at the end of each period. The receivable was classified within level 3 as the value was calculated using active market stock prices as well as unobservable inputs of estimated discount rates. The receivable was settled during July 2012.
15. Income Taxes
The Company accounts for income taxes in accordance with the provisions of ASC 740, "Income Taxes" ("ASC 740"), on a tax jurisdictional basis.
The provision for income taxes consists of the following:
Income (loss) from operations before income taxes by country consists of the following:
For the years ended December 31, 2012 and 2011 the Company recorded a $7.7 and a $2.1 million deferred tax benefit, respectively, related primarily to Mexico net operating losses. In 2012 the
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
15. Income Taxes (Continued)
Company recorded current tax benefit of $0.3 million related to the partial removal of an unrecognized tax benefit due to the lapse of the statute of limitations in Mexico. For the year ended December 31, 2010, the Company recognized income tax expense of $1.4 million, consisting primarily of Bolivian withholding tax on management services provided to the San Cristobal operation.
A reconciliation of the provision for income taxes computed at the statutory rate to the provision for income taxes as shown in the consolidated statements of operations and comprehensive income (loss) is summarized below.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
15. Income Taxes (Continued)
The components of the deferred tax assets and deferred tax liabilities are as follows:
In accordance with ASC 740, the Company presents deferred tax assets net of its deferred tax liabilities on a tax jurisdictional basis on its Consolidated Balance Sheets. The net deferred tax liability of $47.1 million and $55.6 million as of December 31, 2012 and December 31, 2011, respectively, consists primarily of a $63.7 million and $65.5 million deferred tax liability related to the basis differences of the properties, plant and equipment of our Velardeña Operations, and a $16.3 million and $10.1 million deferred tax asset related to Mexico net operating losses, respectively.
At December 31, 2012, the Company had net operating loss carryforwards in certain non-U.S. jurisdictions. Of these, $67.3 million is related to the Velardeña Operations in Mexico and expire in future years through 2022. $21.6 million is related to other Mexico exploration activities and also expire in future years through 2022. $24.2 million of net operating losses exist in Luxembourg and Chile that have no expiration date, while $46.2 million exist in other non-U.S. countries, which will expire in future years through 2032.
In the U.S., there are $32.4 million of net operating loss carryforwards, which will expire in future years through 2032. In addition, the Company has loss carryforwards of $0.7 million which would require recognition of a benefit to additional paid in capital if ever realized. A portion of the U.S. net operating loss carryforwards are subject to limitations under Internal Revenue Code Section 382, relating to two change of control events triggered by the Company's public offering of its common stock in March 2010 and by the Company's acquisition of ECU in September 2011.
The valuation allowance offsetting the deferred tax assets of the Company of $60.9 million and $58.1 million at December 31, 2012 and 2011, respectively, relates primarily to the uncertain utilization
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
15. Income Taxes (Continued)
of certain deferred tax assets, primarily net operating loss carryforwards, in various tax jurisdictions. The Company continually assesses both positive and negative evidence to determine whether it is more likely than not that deferred tax assets can be realized prior to their expiration.
The Company, a Delaware corporation, and its subsidiaries file tax returns in the United States and in various foreign jurisdictions. The tax rules and regulations in these countries are highly complex and subject to interpretation. The Company's tax returns are subject to examination by the relevant taxing authorities and in connection with such examinations, disputes can arise with the taxing authorities over the interpretation or application of certain tax rules within the country involved. In accordance with ASC 740, the Company identifies and evaluates uncertain tax positions, and recognizes the impact of uncertain tax positions for which there is less than a more-likely-than-not probability of the position being upheld upon review by the relevant taxing authority. Such positions are deemed to be "unrecognized tax benefits" which require additional disclosure and recognition of a liability within the financial statements. If recognized, none of the unrecognized tax benefits would affect the Company's effective tax rate.
The Company had unrecognized tax benefits of $2.5 million and $2.7 million as of December 31, 2012 and 2011, respectively. As of December 31, 2010, as a result of the lapse of the applicable statute of limitations, the Company reduced an unrecognized tax benefit by $1.4 million, with no consequence to tax expense due to a corresponding increase to the Company's deferred tax asset valuation allowance. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
Tax years as early as 2008 remain open and are subject to examination in the Company's principal tax jurisdictions. Certain of the Company's subsidiaries in Mexico are under examination by the Mexico tax authorities for fiscal years 2010 and 2011. As a result of statute of limitations that will begin to expire within the next 12 months, the Company estimates that it is reasonably possible that the total amount of its net unrecognized tax benefits will decrease by $0.5 million. The total amount of interest and penalties recognized in the statement of operations for 2012 and 2011 is $0.1 million and $0.2 million respectively, and the total interest and penalties recognized in the statement of financial position as of December 31, 2012 and 2011 is $1.3 and $1.1 million, respectively. The Company classifies income tax related interest and penalties as income tax expense.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
16. Equity (Deficit)
Public offerings, private placements and registered offering of the Company's common stock
On September 19, 2012, the Company completed a registered offering (the "Offering") of 5,497,504 shares (the "Shares") of the Company's common stock, par value $0.01 per share, and warrants (the "Warrants") to purchase 2,748,752 shares of the Company's common stock. The Shares and Warrants were sold in units ("Units") at a price of $5.75 per Unit, with each Unit consisting of one Share of the Company's common stock and a Warrant to purchase 0.50 of a share of the Company's common stock. The Warrants become exercisable on March 20, 2013, at an exercise price of $8.42 per share and will expire on September 19, 2017, five years from the date of issuance. The Shares and the Warrants are immediately separable and were issued separately. The underwriter purchased the Units at a price of $5.4625 per Unit, which was net of the underwriting discount of 5 percent. The Company received net proceeds from the Offering of approximately $29.4 million after the underwriter discount of approximately $1.6 million and other costs of approximately $0.6 million.
On September 19, 2012 the Company also completed a private placement with The Sentient Group ("Sentient"), the Company's largest stockholder, pursuant to which Sentient purchased, pursuant to Regulation S under the U.S. Securities Act of 1933, a total of 1,365,794 Units, with each Unit consisting of one share of the Company's common stock and a Warrant to purchase 0.50 of a share of the Company's common stock. The Warrants become exercisable on March 20, 2013, at an exercise price of $8.42 per share and will expire on September 19, 2017, five years from the date of issuance. Each Unit was priced at $5.4625, the same discounted price paid by the underwriter in the Offering. The Company received net proceeds from the private placement of approximately $7.5 million after the discount of approximately $0.4 million. Following the completion of the Private Placement and the Offering, Sentient continues to hold approximately 19.9% of the Company's outstanding common stock (excluding restricted common stock held by the Company's employees). Sentient is an independent private equity firm that manages investments in the global resources industry.
On October 7, 2011, the Company completed a private placement with Sentient of 4,118,150 shares of the Company's common stock at a price of $7.44 per share, resulting in net proceeds to the Company of approximately $30.7 million after costs related to the transaction of less than $0.1 million. As a result of the private placement Sentient continued to hold approximately 19.9% of the Company's outstanding common stock subsequent to the Company's acquisition of ECU (excluding restricted common stock held by the Company's employees). In conjunction with the Private Placement, the Company agreed to register with the Securities and Exchange Commission the common stock purchased by Sentient no later than March 31, 2012 with an effective date for the registration no later than June 30, 2012.
On October 22, 2010, the Company closed a public offering of 4,663,250 shares of its common stock at a price of $18.50 per share, which included 608,250 shares issued to the underwriters upon exercise in full of their over-allotment option. Concurrent with the public offering, Sentient purchased in a private placement pursuant to Regulation S under the Securities Act of 1933 an additional 1,190,031 shares of the Company's common stock at the public offering price of $18.50, maintaining its ownership percentage at 19.9% (excluding restricted common stock held by employees). The aggregate net proceeds to the Company from the public offering and the Sentient private placement was approximately $103.0 million, net of offering costs of approximately $0.8 million, the underwriting
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
16. Equity (Deficit) (Continued)
discount of approximately $4.3 million, and the placement agent commission of approximately $0.2 million.
On March 24, 2010 the Company completed a public offering of 4,000,000 shares of common stock at an offering price of $8.50 per share. The Company sold 3,652,234 shares and a selling stockholder sold 347,766 shares. Concurrent with the public offering, Sentient exercised its existing pre-emptive right in order to maintain its 19.9% equity interest (excluding restricted common stock held by employees) in the Company, purchased in a private placement pursuant to Regulation S under the U.S. Securities Act of 1933 an additional 905,065 shares of common stock at the public offering price of $8.50 per share. The aggregate net proceeds to the Company from the sale of the shares in the public offering and the sale of the shares to Sentient was approximately $35.0 million after deducting underwriting discounts, commissions and expenses.
During January 2010 the Company completed a private placement of 844,694 shares of its common stock to two investment funds managed by Sentient, which included 745,318 shares issued in the initial private placement plus an additional 99,376 shares issued upon exercise of Sentient's contractual pre-emptive right in order to maintain its 19.9% equity interest (excluding restricted common stock held by employees) in the Company following completion of the Hochschild Mining Group's ("Hochschild") transaction discussed below. These shares were sold at a purchase price of Cdn$7.06 per share, resulting in net proceeds to the Company of approximately $5.5 million.
Issuance of Common Stock Related to Merger
On September 2, 2011, per the terms of the Transaction, the Company issued 16,004,111 shares of its common stock to the former shareholders of ECU. The value of the shares was approximately $223.1 million based on the $13.94 closing price of the Company's common stock on September 2, 2011. See Note 24 for a discussion of the allocation of the purchase price of the transaction.
In addition, on September 2, 2011 the Company issued 113,208 shares of its common stock to one of the ECU officers in settlement of a change of control bonus required to be paid by ECU. The value of the shares was approximately $1.6 million based on the $13.94 closing price of the Company's common stock on September 2, 2011.
Replacement Options and Warrants
Per the terms of the Arrangement, the Company has issued to former ECU stock option and warrant holders Replacement Options and Replacement Warrants to purchase shares of the Company's common stock. The Company issued 653,000 Replacement Options with exercise prices ranging between $16.00 and $60.00 and expiration dates ranging between September 24, 2011 and October 22, 2014. In addition the Company has issued 2,218,292 Replacement Warrants. The Replacement Warrants included 386,363 warrants with an exercise price of $18.00 that expired on December 9, 2011, and 1,831,929 warrants with an exercise price of $19.00 expiring on February 20, 2014. The Replacement Options had a fair value of approximately $1.1 million and the Replacement Warrants had a fair value of approximately $8.8 million as determined through the use of a Black-Scholes model. The $9.9 million fair value of the Replacement Options and Replacement Warrants was included in the purchase price as discussed in Note 24.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
16. Equity (Deficit) (Continued)
The fair value of the replacement options was estimated on September 2, 2011, the date of the merger using the Black-Scholes option pricing model and the assumptions noted in the following table.
Issuance of common stock for mineral property interest
During January 2010 the Company acquired Hochschild's 35% interest in Minera El Quevar S.A. in exchange for 400,000 shares of the Company's common stock and a warrant to acquire 300,000 shares of the Company's common stock exercisable for three years at an exercise price of $15.00 per share. In accordance with ASC 810, "Consolidations", the Company has reflected this transaction in equity with charges to common stock and additional paid in capital and the elimination of approximately $0.8 million of noncontrolling interest. No gain or loss was recognized on the transaction. With the completion of this transaction, the Company now owns and controls 100% of the concessions related to the El Quevar project. On April 13, 2011, Hochschild exercised its warrant on a cashless exercise basis as permitted by the terms of the warrant, which resulted in the issuance to Hochschild of 104,889 net shares of the Company's common stock on April 15, 2011.
Equity Incentive Plans
In April 2009, the Company adopted the 2009 Equity Incentive Plan (the "Equity Plan") pursuant to which awards of the Company's common stock may be made to officers, directors, employees, consultants and agents of the Company and its subsidiaries. The Company recognizes stock-based compensation costs using a graded vesting attribution method whereby costs are recognized over the requisite service period for each separately vesting portion of the award.
The merger with ECU on September 2, 2011 (see Note 24) was determined to constitute a change in control pursuant to the terms of the equity plan which resulted in the vesting of all outstanding stock-based compensation grants on that date. The Company recognized stock compensation expense of approximately $1.3 million as a result of the accelerated vesting of the grants.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
16. Equity (Deficit) (Continued)
The following table summarizes the status of the Company's restricted stock grants issued under the Equity Plan at December 31, 2012, 2011 and 2010 and changes during the years then ended:
The restricted stock granted during 2012 includes 24,000 shares granted to a new officer and 6,000 shares granted to a new employee both hired during 2012. The remaining shares were granted to officers and employees during December 2012 as a portion of their annual compensation. One third of the restricted stock grants made during 2012 will vest on each of the first, second and third anniversaries of the grant dates, provided the officer or employee continues to serve the Company at that time. During 2012, restrictions on 21,000 shares were lifted for an officer of the Company as a result of his retirement; restrictions on 18,000 shares were lifted for another officer as the result of his termination and restrictions were lifted on 3,333 shares related to the termination of an employee. The remaining restrictions lifted during 2012 were the result of the first anniversary vesting of grants made to officers and employees during 2011.
As a result of the ECU merger all of the unvested restricted stock grants outstanding at September 2, 2011 vested and the company recognized a $1.1 million charge related to the accelerated vesting. Included in the restricted stock granted during the year ended December 31, 2011 were 215,900 shares granted on September 15, 2011 following completion of the ECU transaction. One third of the stock granted during the year ended December 31, 2011 will vest on each of the first, second and third anniversaries of the grant dates, provided the officer or employee continues to serve the Company at that time.
In conjunction with the lifting of the restrictions during the year ended December 31, 2011, certain officers and employees of the Company relinquished an aggregate of 106,056 shares in lieu of taxes. The shares had an approximate aggregate value of $1.8 million and were recorded as treasury shares which were subsequently canceled.
For the years ended December 31, 2012, 2011 and 2010 the Company recognized approximately $2.4 million, $4.9 million and $2.7 million, respectively, of compensation expense related to the restricted stock grants. The Company expects to recognize additional compensation expense related to these awards of approximately $2.0 million over the next 36 months.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
16. Equity (Deficit) (Continued)
The following table summarizes the status of the Company's stock option grants issued under the Equity Plan at December 31, 2012, 2011 and 2010 and changes during the years then ended:
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model using the assumptions noted in the following table. Expected volatilities are based on the historical volatilities of the Company's shares. The Company uses historical data to estimate option exercises and forfeitures within the Black-Scholes model. The expected term of the options granted represents the period of time that options granted are expected to be outstanding, based on past experience and future estimates and includes data from both the Employees Plan and the Directors Plan. The risk-free rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company currently does not foresee the payment of dividends in the near term.
As a result of the ECU merger discussed above all of the outstanding stock option grants vested on September 2, 2011 and the Company recognized a $0.1 million charge related to the accelerated vesting. For the years ended December 31, 2011 and 2010 the Company recognized approximately $0.3 million and $.4 million, respectively, of compensation expense related to the stock option grants. As a result of the accelerated vesting the awards have been fully expensed at December 31, 2011.
Also, pursuant to the Equity Plan, the Company's board of directors adopted the Non-Employee Director's Deferred Compensation and Equity Award Plan (the "Deferred Compensation Plan"). Pursuant to the Deferred Compensation Plan the non-employee directors receive a portion of their
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
16. Equity (Deficit) (Continued)
compensation in the form of Restricted Stock Units ("RSUs") issued under the Equity Plan. The RSUs vest on the first anniversary of the grant and each vested RSU entitles the director to receive one unrestricted share of common stock upon the termination of the director's board service.
The following table summarizes the status of the RSU grants issued under the Deferred Compensation Plan at December 31, 2012, 2011 and 2010 and changes during the years then ended:
As a result of the ECU merger all of the unvested RSU grants outstanding at September 2, 2011 vested and the company recognized a $0.1 million charge related to the accelerated vesting.
For the years ended December 31, 2012, 2011 and 2010 the Company recognized approximately $0.2 million, $0.3 million and $0.2 million, respectively, of compensation expense related to the RSU grants. The Company expects to recognize additional compensation expense related to the RSU grants of approximately $0.1 million over the next 5 months.
17. Revenue and Related Costs
Sale of metals and costs of sales
The Company produces marketable products including doré, concentrates and precipitates at its Velardeña Operations. During the year ended December 31, 2012 the Company sold marketable products to five customers. Under the terms of the Company's agreements with one doré and precipitate customer, title does not pass to the purchaser until the product is received by the refinery, at which point revenue is recognized. For the Company's other customers, title generally passes when a provisional payment is made, which occurs generally after the product is shipped and customary sales documents are completed. Costs related to the sale of metals products include direct and indirect costs incurred to mine, process and market the products. At December 31, 2012 and 2011, the Company had written down its metals inventory to net realizable value including charges to the cost of metals sold of approximately $2.7 million and $3.8 million, respectively and charges to depreciation expense of approximately $0.8 million and $0.6 million, respectively.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
17. Revenue and Related Costs (Continued)
Management service fees
The Company was party to a Management Agreement with Sumitomo under which it provided certain management services with respect to the San Cristóbal mine. The Management Agreement terminated effective June 30, 2010 as discussed below. The Management Agreement provided for an annual fee of $11.4 million which included approximately $5.4 million that constituted reimbursement for direct administrative expenses the Company incurred on behalf of the San Cristóbal mine. Under the terms of the Management Agreement, the Company received the fee and any reimbursements net of any Bolivian withholding taxes. The fee and reimbursements for administrative costs and Bolivian withholding taxes are reported as Revenue from Services in the statement of operations following the guidance of ASC 605, "Revenue Recognition" regarding "income statement characterization of reimbursements received for out-of-pocket expenses incurred" and "reporting revenue gross as a principal versus net as an agent". ASC 605 supports recording as gross revenue fees received for the reimbursement of expenses in situations where the recipient is the primary obligor and has certain discretion in the incurrence of the reimbursable expense. The actual costs incurred for the reimbursed direct administrative expenses are reported as costs of services in the statement of operations. Reimbursed Bolivian withholding taxes are reported as income taxes in the statement of operations. Prior to entering into the Management Agreement, ASML received a management fee of $450,000 per month from San Cristóbal to cover certain costs incurred directly by ASML.
For the first six months of 2010, through the June 30, 2010 termination of the agreement, the Company recorded $6.2 million as revenue related to the Management Agreement, comprised of $5.4 million of fees and $0.8 million for reimbursed withholding taxes. The Company also recorded corresponding charges of $2.5 million to cost of services and $0.8 million to income taxes for the actual administrative costs and withholding taxes reimbursable under the Management Agreement.
The Company and Sumitomo agreed to terminate the Management Agreement effective June 30, 2010, six months earlier than provided by the terms of the agreement. As a result of the termination the Company received a $4.3 million termination fee comprised of $2.8 million in lieu of the performance of services by the Company for the final two quarters of 2010 and waiver of Sumitomo's 6-month notice requirement, $1.0 million for a termination payment (as provided in the Management Agreement) and approximately $0.5 million for a performance bonus for the first two quarters of 2010. The termination fee proceeds were partially offset by the return of prepaid administration fees for services not performed through June 30, 2010 of approximately $1.1 million resulting in a net payment from Sumitomo of $3.2 million received on June 30, 2010. As a result of the termination the Company recognized additional revenue of $4.9 million, comprised of the $4.3 million of termination fees as discussed above and $0.6 million for reimbursed withholding taxes.
Subsequent to the termination of the agreement the Company recorded approximately $0.1 million of additional revenue and minimal amounts to cost of services and income taxes related to certain final services completed under the agreement.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
18. Cash Flow Information
The following table reconciles net income (loss) for the period to cash from operations:
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
18. Cash Flow Information (Continued)
The following table details supplemental non-cash transactions:
19. Commitments and Contingencies
Leases and Purchase Commitments-The Company has non-cancelable operating lease commitments as follows:
The Company is required to make mining patent lease payments to the Argentinean government to maintain its rights to the El Quevar mining concessions. The Company has made such payments totaling approximately $28,000, $27,000 and $36,000 for the years ended December 31, 2012, 2011 and 2010, respectively.
The Company is required to make annual lease payments to the Mexican government to maintain its rights to the Velardeña mining concessions. During the years ended December 31, 2012 and 2011 the Company made such payments totaling approximately $23,000 and $24,000, respectively. The payments include payments made related to adjacent exploration concessions on which there is on current mining.
The company has office leases for its corporate headquarters in Golden, Colorado, as well as for its Velardeña Operations in Mexico, El Quevar project in Argentina, and regional exploration centers in Mexico and Argentina. The lease for the corporate headquarters office space expires in November 2014. Payments associated with this lease were recorded to rent expense by the Company in the amounts of $305,000, $294,000 and $265,000 for the years ended December 31, 2012, 2011 and 2010, respectively.
The purchase option agreement is a required payment to a current El Quevar concession owner in order to retain title to the property. The Company has the right to terminate the payment and release the concession at any time.
Payments associated with other exploration concessions the Company owns are not included because the Company has not completed exploration work on these concessions. Exploration success is historically low and the Company has the right to terminate the payments and release the concessions at any time.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
19. Commitments and Contingencies (Continued)
Contingencies-ECU may have committed errors in prior years in the withholding and payment of certain Mexican payroll related taxes related to certain of its Mexican subsidiaries. The Company believes it is unlikely that it will be assessed any amounts for these taxes prior to the statute of limitations expiring for the years in question but has estimated that the contingent liability would not be greater than $1.1 million.
20. Royalty Income
During 2004 the Company sold the mineral rights on a portion of its Platosa property in Mexico to Excellon Resources Inc. ("Excellon") and retained a 5% net smelter return ("NSR") royalty interest that decreases to a 2% NSR after the Company had received $4.0 million of royalty payments. Excellon has been mining on the royalty section of the property and producing and selling silver, zinc and lead since 2006. During the fourth quarter of 2009 the Company sold its remaining interest in the Platosa property to Excellon for $2.0 million in cash and retained a 1% NSR royalty. During the second quarter 2012 the Company sold its remaining 1% NSR royalty interest to Excellon for $2.4 million and recorded a $1.8 million gain on the sale which is reflected in interest and other income on the accompanying statements of operations. Prior to the sale of the NSR royalty interest, the Company earned NSR royalties from Excellon of $0.4 million, $0.4 million and $0.3 million during the years ended December 31, 2012, 2011 and 2010, respectively.
21. Foreign Currency
The Company conducts operations primarily in South America and Mexico and gains and losses on foreign currency translation are related to those activities. The Company's functional currency is the U.S. dollar but certain transactions are conducted in the local currencies resulting in foreign currency transaction gains or losses.
22. Segment Information
The Company's sole activity is the mining, development and exploration of mineral properties containing precious metals. The Company's reportable segments are based upon the Company's revenue producing activities and cash consuming activities. The Company reports two segments, one for its producing Velardeña Operations in Mexico and the other comprised of non-producing activities including exploration, development and general and administrative activities. Intercompany revenue and expense amounts have been eliminated within each segment in order to report on the basis that
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
22. Segment Information (Continued)
management uses internally for evaluating segment performance. The financial information relating to the Company's segments is as follows:
Goodwill is all related to the ECU merger and is therefore all related to the Velardeña Operations segment (see Note 10).
All of the revenue reported for 2012 and 2011 was from the Company's Velardeña Operations in Mexico. The 2012 revenue was attributable to sales of precipitates, concentrates and doré bars to five customers under varying agreements. The 2011 revenue was attributable to the sale of gold and silver doré bars to a single customer pursuant to a purchase contract.
Prior to the September 2, 2011 acquisition of the Velardeña Operations the Company operated under a single segment.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
23. Quarterly Results of Operations (Unaudited)
The following table summarizes the Company's quarterly results of operations for the years ended December 31, 2012, 2011 and 2010:
The net loss for the third quarter 2012 includes a goodwill impairment charge of $58.5 million (see Note 10).
Net sales and gross profit for the four quarters of 2012 and for the fourth quarter of 2011 are all related to metals sales from the Velardeña Operations (see Note 17).
24. Acquisition of ECU Silver Mining Inc.
On September 2, 2011, the Company completed the Transaction with ECU. Pursuant to the terms and conditions of an agreement dated June 24, 2011, between the Company and ECU, the businesses of the Company and ECU were combined by way of a court-approved plan of arrangement (the "Arrangement") pursuant to the provisions of the Business Corporations Act (Québec).
Pursuant to the Arrangement Agreement:
•each ECU common share outstanding immediately prior to the effective time of the Arrangement on September 2, 2011 (the "Effective Time") was exchanged for the right to receive 0.05 shares of the Company's common stock (the "Exchange Ratio") and Cdn$0.000394 in cash, resulting in the issuance of 16,004,111 shares of common stock and payment of approximately Cdn$126,112 in cash;
•each warrant to purchase ECU common shares (an "ECU Warrant") outstanding immediately prior to the Effective Time issued pursuant to ECU's February 2009 warrant indenture or ECU's December 2009 warrant indenture was exchanged at the Exchange Ratio for the right to receive a warrant to purchase shares of the Company's common stock (a "Replacement Warrant") on the same terms and conditions as were applicable to such ECU Warrant immediately prior to the Effective Time, resulting in the issuance of warrants to purchase 386,363 shares of the Company's common stock at an exercise price of Cdn$18.00 per share expiring on December 9,
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
24. Acquisition of ECU Silver Mining Inc. (Continued)
2011, and warrants to purchase 1,831,929 shares of the Company's common stock at an exercise price of Cdn$19.00 per share expiring on February 20, 2014; and
•each option to purchase ECU common shares (an "ECU Option") outstanding immediately prior to the Effective Time granted under the ECU's stock option plan was exchanged at the Exchange Ratio for an option to purchase shares of the Company's common stock (a "Replacement Option") on the same terms and conditions as were applicable to the corresponding ECU Options immediately prior to the Effective Time; resulting in the issuance of options to purchase 653,000 shares of the Company's common stock at exercise prices ranging Cdn$16.00 and Cdn$60.00 and with expiration dates ranging from September 24, 2011 to October 22, 2014.
The Company incurred approximately $4.7 million of transaction costs for financial advisory, legal, accounting, tax and consulting services as part of the Arrangement. The Company also incurred approximately $2.5 million in severance related payments as part of the termination of ECU's officers and certain employees following the acquisition of ECU. The transaction and severance payment costs were recognized separately from the purchase price for the Arrangement.
The Company followed the acquisition method of accounting in accordance with ASC 805. The following tables summarize the calculation of the purchase price and the fair values of the assets acquired and liabilities assumed on September 2, 2011 in connection with the Transaction.
Calculation of purchase price ($000's):
(a)The value of the Company's common stock was $13.94 per share, the closing price on the NYSE MKT September 2, 2011.
(b)The fair value of Replacement Options and Replacement Warrants was determined using a Black-Scholes pricing model.
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
24. Acquisition of ECU Silver Mining Inc. (Continued)
Allocation of purchase price ($000's):
(c)Monetary assets and liabilities assumed have been recorded at their carrying values, which approximate fair value. Long term debt includes: (1) a term loan payable to two investment funds managed by IIG Capital, LLC in the amount of $15.5 million, and (2) a convertible note (the "Note") payable to the Company in the amount of $15.2 million. The Note, the funds from which were provided to ECU prior to the consummation of the Arrangement in a separate transaction, is eliminated for financial reporting purposes in consolidation with the Company's corresponding note receivable.
(d)Inventories consist of salable concentrate, precipitate and doré recorded at net realizable value.
(e)Mineral properties and the asset retirement obligation are recorded at estimated fair market value based on valuations performed with the assistance of an independent appraisal firm and a minerals engineering company. The asset valuations were derived in accordance with the guidance of ASC 820 using a combination of income, market and cost approach models depending on the asset. In applying the appropriate valuation model or models, the valuation consultants employed a variety of economic factors and market data, including discount rates, income tax rates, projections of future metals prices, and third party market surveys. The mineral properties will be amortized on a units of production basis as minerals are depleted.
(f)Plant and equipment purchased in the Arrangement have been recorded at fair value based on valuations performed with the assistance of an independent appraisal firm in accordance with the guidance of ASC 820. The plant and equipment will be depreciated on a straight line basis over their remaining useful lives.
(g)Goodwill is primarily the result of the requirement to record a deferred tax liability for the difference between the fair value and the tax basis of the assets acquired and
GOLDEN MINERALS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in United States dollars)
24. Acquisition of ECU Silver Mining Inc. (Continued)
liabilities assumed at amounts that do not reflect fair value (see Note 9). The goodwill is not deductible for income tax purposes.
(h)The deferred tax asset is related to certain net operating loss carry forwards available in Mexico. The deferred tax liability was calculated by applying the Mexico corporate income tax rate of 28% to the difference between the fair value and the tax basis of the assets acquired and liabilities assumed and it does not reflect fair value. The deferred tax asset and deferred tax liability are netted for presentation on the accompanying balance sheet.
At the time of the acquisition, the Company, with the help of a third party engineering firm, estimated the ARO and ARC to be approximately $3.5 million based on the engineering firm's experience with mining operations of similar size and scope as that of the Velardeña Operations. Shortly after the completion of the acquisition the Company retained the services of another engineering firm to complete a detailed closure plan for the Velardeña Operations. That plan was completed during the second quarter 2012 and indicated an ARO and ARC of approximately $1.9 million. The ARO and ARC amounts were adjusted accordingly as set forth in the purchase price allocation table above.
25. Subsequent Event
During February 2013, the Company entered into an agreement to sell most of its exploration concessions in Peru to Compañía de Minas Buenaventura S.A.A. ("Buenaventura") for $4.3 million, and has completed transactions for approximately $3.5 million of that amount. The sale of the remaining $0.8 million in exploration concessions to Buenaventura was conditioned on the receipt of third party consents by February 18, 2013. Although the consents were not received by February 28, 2013 and this date has not been extended, the Company is continuing discussions regarding the third party consents as of the filing date of this Form 10-K with both Buenaventura and the third parties. The Company has closed its exploration office in Peru.