During the six months ended June 30, 2018, the Company incurred $93,700 (2017- $102,229) in professional fees expense from a key managerial person of CCSA and $12,000 (2017 -$Nil) relating to property rental recorded in silver and gold recovery. Included in accounts payable and accrued liabilities as at June 30, 2018 was $266,089 (December 31, 2017- $254,089) owing to the President of CCSA for professional geological fees and property rental.
During the six months ended June 30, 2018, the Company incurred $34,848 (2017- $31,692) in professional fees expense relating to the accounting services of a key managerial person of CCSA. Included in accounts payable and accrued liabilities as at June 30, 2018, the Company had a payable owing to the director of CCSA of $Nil (December 31, 2017- $15,810).
During the six months ended June 30, 2018, the Company incurred $109,643 (2017- $192,493) in administrative and office expenses relating to the rental of office space and various administrative services and expenses payable to an entity controlled by a director of the Company. During the period ended June 30, 2018, this entity advanced funds to the Company of $856,650 (2017- $1,586,991) for general administrative purposes. The advances accrue interest at 7% per annum compounding on a monthly basis and are unsecured. During the six months ended June 30, 2018, the Company incurred $137,447 (2017 - $101,610) in interest expense on these advances. As at June 30, 2018, the combined balance of payables for services, advances, and interest due to this entity was $4,688,938 (December 31, 2017 - $3,658,431), which is included in accounts payable and accrued liabilities.
The Company has a loan balance to a director of the Company of $1,615,445 (December 31, 2017- $1,731,022). During the six months ended June 30, 2018 the Company made payments of $115,577 (2017 -$98,132) on the loan principle. During the year ended December 31, 2017, this director modified the repayment terms of the loan and subsequently this loan was reclassified to long-term (see note 14). During the six months ended June 30, 2018, the Company incurred interest expense of $70,180 (2017- $65,593) of which $26,051 is included in interest payable at June 30, 2018 (December 31, 2017- $151,024).
The Company has a loan balance to a director of the Company of $994,861 (December 31, 2017- $700,000). During the six months ended June 30, 2018 the Company received advances of $300,000 (2017- $1,000,000) and made payments of $5,139 (2017 -$1,000,000) on the loan principle. During the six months ended June 30, 2018, the Company incurred interest expense of $34,498 (2017- $5,699) of which $21,882 is included in interest payable at June 30, 2018 (December 31, 2017- $2,282).
Included in accounts payable and accrued liabilities as at June 30, 2018, are amounts owing to a key managerial person of the Company for consulting fees of $79,613 (December 31, 2017- $98,549).
Included in accounts payable and accrued liabilities as at June 30, 2018, are amounts owing to a director of the Company for compensation of $84,000 (December 31, 2017– $84,000).
The remuneration awarded to directors and to senior key management, including the Executive Chairman and Chief Executive Officer, the Chief Financial Officer, a Director of the Company, the President of CCSA and a Director of CCSA, is as follows:
The Company's financial instruments consist of cash, accounts receivable, performance bond, accounts payable and accrued liabilities, transaction taxes payable, loan payable, interest payable, and long-term debt.
The Company characterizes inputs used in determining fair value using a hierarchy that prioritizes inputs depending on the degree to which they are observable. The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows:
The carrying value of accounts receivable, accounts payable and accrued liabilities, transaction taxes payable, loan payable, interest payable, and long-term debt approximate their fair value because of the short-term nature of these instruments and because long-term debt approximates a market rate of interest. The Company assessed that there were no indicators of impairment for these financial instruments.
The Company has concentrations of credit risk with respect to its trade receivables, the majority of which are concentrated geographically in Argentina amongst a small number of customers. As at June 30, 2018, the Company had one customer whose trade receivable of $91,772 (December 31, 2017 – $1,144,710) accounted for greater than 10% of the total trade receivables. The Company controls credit risk through monitoring procedures, and by performing credit evaluations of its customers, but generally does not require collateral to secure accounts receivable.
The Company has concentrations in the volume of sales it made to customers. For the period ended June 30, 2017, the Company made sales of $913,454 to one customer which accounted for greater than 10% of the total silver and gold recovery, net of expenses (2017 - $498,529).
The Company currently maintains a substantial portion of its day-to-day operating cash balances at financial institutions. At
June 30, 2017
, the Company had total cash balances of $147,586 (December 31, 2017- $78,145) at financial institutions, where $Nil (December 31, 2017- $Nil) is in excess of federally insured limits.
All of the Company's operations are in the mineral properties exploration industry with its principal business activity in mineral exploration. The Company conducts its activities primarily in Argentina. All of the Company's long-lived assets are located in Argentina. All of the Company's silver and gold recovery arose from sales made in Argentina.
On October 31, 2011, the Company signed an agreement with the owners of the Piedra Labrada Ranch for the use and lease of facilities on the same premises as the Company's La Josefina facilities. The initial term was for three years beginning November 1, 2011 and ended on October 31, 2014, including annual commitments of $60,000. The Company extended this agreement on April 30, 2015 for three years with an option to renew for a second three-year term.
Silver recovery includes the sales from concentrate sold during the six months ended June 30, 2018 from the Martha Mine project of $913,454 (2017 - $4,255,230) Silver recovery revenues have been reported net of direct operating expenses of $523,459 for the six months ended June 30, 2018 (2017 -$1,106,050). Accounts receivable include $91,772 (December 31, 2017 -$1,144,710) for the sales of concentrate.
The Company has a variable rate line of credit available for $50,000 with interest charged at the lender's Index Rate plus 1.0%, with a floor of 4.25%. As at June 30, 2018 the balance of bank indebtedness was $49,999 (December 31, 2017- $Nil).
Subsequent to June 30, 2018, the Company had sales of silver concentrate of approximately $580,000. Funds from this shipment were used to repay $400,620 of loan payable (Note 14).
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ITEM 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion of the operating results, corporate activities and financial condition of Hunt Mining Corp. (hereinafter referred to as "we", "us", "Hunt Mining", "HMX", or the "Company") and its subsidiaries provides an analysis of the operating and financial results between December 31, 2017 and June 30, 2018 and a comparison of the material changes in our results of operations and financial condition between the three-month period ended June 30, 2017 and the three-month period ended June 30, 2018. This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2017.
This discussion and analysis contain 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, but not limited to, those set forth under the heading "Risk Factors and Uncertainties" in our Annual Report on Form 10-K for the period ended December 31, 2017, and elsewhere in this Quarterly Report on Form 10-Q.
The interim statements have been prepared in accordance with US Generally Accepted Accounting Principles ("US GAAP") as required under U.S. federal securities laws applicable to the Company, and as permitted under applicable Canadian securities laws. The Company is a reporting company under applicable securities laws in Canada and the United States. The reporting currency used in our financial statements is the United States Dollar.
The information contained within this report is current as of May 15, 2018 unless otherwise noted.
Additional information relevant to the Company's activities can be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.
Cautionary Note to U.S. Investors Regarding Reserve and Resource Estimates
The Company uses Canadian Institute of Mining, Metallurgy and Petroleum definitions for the terms "proven reserves", "probable reserves", "measured resources", "indicated resources" and inferred resources. U.S. investors are cautioned that while these terms are recognized and required by Canadian regulations, including National Instrument 43-101 Standards of Disclosure for Mineral Projects ("NI 43-101"), the U.S. Securities and Exchange Commission ("SEC") does not recognize them.
Canadian mining disclosure standards differ from the requirements of the SEC under SEC Industry Guide 7, and reserve and resource information referenced in this Form 10-Q may not be comparable to similar information disclosed by companies reporting under U.S. standards. In particular, and without limiting the generality of the foregoing, the term "resource" does not equate to the term "reserve". Under United States standards, mineralization may not be classified as a "reserve" unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made.
The SEC's disclosure standards normally do not permit the inclusion of information concerning "measured mineral resources" or "indicated mineral resources" or other descriptions of the amount of mineralization in mineral deposits that do not constitute "reserves" by U.S. standards in documents filed with the SEC. Disclosure of "contained ounces" in a resource estimate is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report mineralization that does not constitute "reserves" by SEC standards as tonnage and grade without reference to unit measures. The requirements of NI 43- 101 for identification of "reserves" are also not the same as those of the SEC, and reserves in compliance with NI 43-101 may not qualify as "reserves" under SEC standards.
Cautionary Note Regarding Forward-Looking Statements
Certain statements made in this Quarterly Report on Form 10-Q may constitute "forward-looking statements about the Company and its business. Forward looking statements are statements that are not historical facts and include, but are not limited to, reserve and resource estimates, estimated value of the project, projected investment returns, anticipated mining and processing methods for the project, the estimated economics of the project, anticipated Hunt Mining recoveries, production rates, grades, estimated capital costs, operating cash costs and total production costs, planned additional processing work and environmental permitting. The forward-looking statements in this report are subject to various risks, uncertainties and other factors that could cause the Company's actual results or achievements to differ materially from those expressed in or implied by forward looking statements.
These risks, uncertainties and other factors include, without limitation:
·
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risks related to uncertainty of Hunt Mining property valuation assumptions;
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·
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uncertainties related to raising sufficient financing to fund the project in a timely manner and on acceptable terms;
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·
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changes in planned work resulting from logistical, technical or other factors; the possibility that results of work will not fulfill expectations and realize the perceived potential of the Company's properties;
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·
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uncertainties involved in the estimation of Hunt Mining reserves and resources;
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·
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the possibility that required permits may not be obtained on a timely manner or at all;
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·
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the possibility that capital and operating costs may be higher than currently estimated and may preclude commercial development or render operations uneconomic;
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·
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the possibility that the estimated recovery rates may not be achieved;
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·
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risk of accidents, equipment breakdowns and labor disputes or other unanticipated difficulties or interruptions;
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·
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the possibility of cost overruns or unanticipated expenses in the work program;
|
·
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risks related to projected project economics, recovery rates, estimated NPV and anticipated IRR; and
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·
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other factors identified in the Company's SEC filings and its filings with Canadian securities regulatory authorities.
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Forward-looking statements are based on the beliefs, opinions and expectations of the Company's management at the time they are made, and other than as required by applicable securities laws, the Company does not assume any obligation to update its forward-looking statements if those beliefs, opinions or expectations, or other circumstances, should change.
Hunt Mining Corporation
–
Corporate Overview
Hunt Mining Corp. (the "Company" or "Hunt Mining"), is a mineral exploration and processing company incorporated on January 10, 2006 under the laws of Alberta, Canada and, together with its subsidiaries, is engaged in the exploration of mineral properties in Santa Cruz Province, Argentina.
Effective November 6, 2013, the Company continued from the Province of Alberta to the Province of British Columbia. The Company's registered office is located at 25th Floor, 700 West Georgia Street, Vancouver, B.C. V7Y 1B3. The Company's head office is located at 23800 E Appleway Avenue, Liberty Lake, Washington, 99019 USA.
The consolidated interim financial statements include the accounts of the following subsidiaries after elimination of intercompany transactions and balances:
Corporation
|
Incorporation
|
Percentage
ownership
|
Business Purpose
|
Cerro Cazador S.A. ("CCSA")
|
Argentina
|
100%
|
Holder of Assets and Exploration Company
|
Ganadera Patagonia
(1)
|
Argentina
|
40%
|
Land Holding Company
|
1494716 Alberta Ltd.
|
Alberta
|
100%
|
Nominee Shareholder
|
Hunt Gold USA LLC
|
Washington, USA
|
100%
|
Management Company
|
(1)
The Company has determined that the subsidiary is a variable interest entity because the Company is the primary beneficiary of the land the subsidiary holds, and therefore consolidates the subsidiary in its interim financial statements.
The Company's activities include the exploration of mineral properties in Argentina. On the basis of information to date, the Company has not yet determined whether the exploration properties contain economically recoverable ore reserves. The underlying value of the mineral properties is entirely dependent upon the existence of economically recoverable reserves, the ability of the Company to obtain the necessary financing to complete development and upon future profitable production or a sale of these properties.
Principal Properties Review
Ongoing production at the Martha Project is being undertaken without established mineral resources or reserves and the Company has not established the economic viability of the operations on the Martha Project. As a result, there is increased uncertainty and economic risk of failure associated with these production activities. A NI 43-101 compliant technical report from 2010 does exist for the La Josefina project with measured, indicated and inferred resources. The Ailin vein is part of this resource estimate.
La Josefina Property
The La Josefina Project is situated about 450 km northwest of the city of Rio Gallegos, in the Santa Cruz province of Argentina within a scarcely populated steppe-like region known as Patagonia. The La Josefina property occupies 52,800 hectares and makes up approximately 90% of all meters drilled by the Company.
The La Josefina Project consists of mineral rights composed by an area of 528 square kilometers established in 1994 as a Mineral Reserve held by Fomicruz, an oil and mining company owned by the Santa Cruz provincial government. The La Josefina Project comprises 16 Manifestations of Discovery totaling 52,767 hectares which are partially covered by 399 pertenencias.
Mina Martha Property
Martha is located in the province of Santa Cruz, Argentina, at 48o , 41', 33.94" south latitude and 69o , 42', 00.79" west longitude (degrees, minutes, seconds) at approximately 350 meters elevation. The closest community is the town of Gobernador Gregores, situated approximately 50 road kilometers (km) to the west-southwest of Martha.
The property was purchased in 2016 by Cerro Cazador SA (CCSA), an Argentine subsidiary of the Company, from an Argentine subsidiary of Coeur. The intent to purchase was announced February 10, 2016 and closed May 11, 2016 as disclosed by the Company on its website (www.huntmining.com). See note 8 of the 2017 financial statements for details on the purchase of the Mina Martha property.
The Martha property consists of approximately 7,850 hectares of concessions, various buildings and facilities, surface and underground mining and support equipment, a 480 tonne per day (tpd - maximum) crushing, grinding and flotation plant, tailings facility, various stockpiles and waste dumps, employee living and cafeteria quarters, and miscellaneous physical materials. The Company restored and repaired the physical assets acquired in the purchase during the latter part of 2016 and the first quarter of 2017. The In addition, the Company has access to surface ranch ("estancia") lands surrounding the mine and mill site that are approximately 35,700 hectares in size.
Royal Gold Inc. holds a 2% Net Smelter Return (NSR) royalty on all production from the Martha property; the obligation for which transferred from Coeur to the Company (www.royalgold.com). In addition, the provincial government holds a 3% pit-head royalty from future production
La Valenciana Property
La Valenciana is located on the central-north area of the Santa Cruz Province, Argentina. The project encompasses an area of approximately 29,600 hectares and is contiguous to the Company's La Josefina property to the east. The La Valenciana project is comprised of 11 Manifestations of Discovery covering segments of Estancia Canodon Grande, Estancia Flecha Negra, Estancia Las Vallas, Estancia La Florentina, Estancia La Valenciana and Estancia La Modesta (inactive ranches).
Bajo Pobré Property
The Bajo Pobré property covers 3,190 hectares and is mainly on the Estancia Bajo Pobré. The property is located 90 kilometers south of the town of Las Heras. No exploration activity has taken place on Bajo Pobré Property and no exploration activity is planned for the immediate future.
El Gateado Property
In March 2006, CCSA acquired the right to conduct exploration on the El Gateado property through a claim staking process for a period of at least 1,000 days, commencing after the Government issues a formal claim notice, and retain 100% ownership of any mineral deposit found within. El Gateado is a 10,000-hectare exploration concession filed with the Santa Cruz Provincial mining authority. The El Gateado property is located in the north-central part of Santa Cruz province, contiguous to La Josefina on the east
The Company has not yet received a formal claim notice pertaining to the El Gateado property. Should a mineral deposit be discovered, CCSA has the exclusive option to file for mining rights on the property. The surface rights of the El Gateado claim are held by the following Ranches, Estancia Los Ventisqueros, Estancia La Primavera, Estancia La Virginia and Estancia Piedra Labrada. The El Gateado claims are filed with the government under file #406.776/DPS/06.
The El Gateado project is without known reserves as defined by SEC industry Guide No. 7. No exploration activity has taken place on El Gateado Property and no exploration activity is planned for the immediate future.
Operating results
–
Revenues and Expenses
The Company's results have changed in all areas due to the purchase of the Mina Martha property in 2016. Start-up costs during January, February and a portion of March 2017 to refurbish the buildings, equipment and commission the mill for operations were offset by recording proceeds from the sale of tailing material to Triton during the first quarter of 2017 and recording the first shipment of concentrate from the mill as Cost Recovery which was included as part of the Silver Recovery during the six months ended September 2017. Management determined the mine, mill and other direct costs related to concentrate sales were to be an offset to the Silver Recovery revenues.
Recoveries can mostly be attributed to the recover of gold and silver. During the six months ended June 30, 2018 the Company sold 79 ounces of gold at an average price of $1,324 and 56,553 ounces of silver at an average price of $16.58 for net proceeds of $913,454 (2017 – 285 ounces at an average price of $1,256.70 and $257,334 ounces of silver at an average price of $17.46). 33 tonnes of gold/silver concentrate were shipped during the 6 months ended June 30, 2018 with average grades of Au 74.01 g/mt and Ag 52,835.22 g/mt. (2016 – 131 tonnes of gold/silver concentrate at grades of 67.82 g/mt Au and 61,103.87 g/mt Ag)
Quarterly Results Summary
Company's quarterly results are shown below in the table below:
Results of Operations for the six months ended June 30, 2018
The working capital unfavorable variance is primarily due to costs related to the start-up of the La Josefina property. As at June 30, 2018, the Company had not made any sales of gold concentrate from this property as significant resources were placed in to the development of the location. Processing the minerals and subsequent sales of concentrate from La Josefina is scheduled July 2018.
Total assets decreased during the first quarter 2018 primarily due to using available funds for the preparation of starting up the La Josefina project. Additionally, depreciation of capital assets contributed to the decrease.
The change in total shareholder equity is due to the operating loss during the first two quarters of 2018.
Variance Analysis for Net Income
There company's plans of shipping gold concentrate from the La Josefina project during quarter 2 2018, were delayed due to difficult winter weather conditions and also to delays in formalizing a final agreement with Fomicruz on exportation. The Company did have inventories of concentrated gold on hand at June 31, 2018 from its second quarter activities which are expected to be loaded and shipped in August 2018.
Exploration expenses decreased because costs related to the La Josefina project were previously expensed as exploration whereas they are currently inventories as part of work in progress and will be expensed to Silver and gold recovery, net of expenses
.
Travel expenses decreased over 2017 because 2017 required more visits than normal to the Martha property for its renovation.
Administrative expenses for the six months ended June 30, 2018 decreased slightly in comparison to the six months ended June 30, 2017 due to normal fluctuations in business activities and timing of expenses.
Payroll increased as a result of the hiring of a controller that took place March 1, 2017.
Interest expense increase for the six months ended June 30, 2018 because of increased debts to related parties and longer periods of debt outstanding than in the second quarter of 2017.
Banking fees decreased from 2017 due to the large transaction fees in Argentina to wire funds related to the restoration of the Martha plant.
The depreciation increase is due to depreciation on the Mina Martha. Amortization on most Mina Martha assets began in April 2017.
Cash flow discussion for the three-month period ended June 30, 2018 compared to June 30, 2017
The cash
outflow
for operating activities prior to items not affecting cash and non-cash items was
$2,068,711
a decrease of
$2,679,768
(June 30, 2017
– increase of $2,751,547
), due primarily to increased focus on preparing the La Josefina location. The net operating cash flow, after non-cash expenses and working capital adjustment was an outflow of
$1,129,337,
a decrease of
$3,256,853
(June 30, 2017 –
increase of $2,127,516
).
The investing cash outflow activities during 2018 were for equipment purchases.
Cash inflow from financing activities of
$1,334,903
during the six-month period ending June 30, 2018 reflect the funds received from loans, net of repayments.
Financial Position
Cash
The Company's cash position increased during the six-month period in 2018 by $69,441 from December 31, 2017 (December 31, 2017 $138,921). The sources of funds were from the cash received from concentrate sales of
$913,
000 the reduction in receivables of $1,065,000 and new funds from loans of $2,395,000 and operating line of credit. The uses of cash during 2018 repayments of loans of $1,060,000, inventory costs $1,416,000, mining costs of
$1,485,
000 and cash paid for capital asset purchases of $162,000 and paying down payables of $180,000.
Accounts receivables
The accounts receivable balance decreased from $2,144,830 in 2017 to $1,079,496 in 2018 as payments from the sale of previous concentrate were received.
Inventory
Inventory increased significantly from December 31, 2017 for two main reasons. The first is that at June 30, 2018 the Company had 1 shipment of silver concentrate and 2 shipments of gold concentrate at the shipping port ready for sale. The second is that significant costs were associated with opening the Ailin vein on the La Josefina property which have been inventoried and will be expensed on a pro-rated basis of ounces extracted over anticipated total ounces.
Property Plant and equipment
Property and equipment consist of machinery and equipment primarily in Argentina. Other than paying down the lease on an excavator purchased in 2017, there was only one purchase in 2018 for $13,559.
Mineral interests
Mineral interests remained the same in 2018 as 2017.
Accounts payable, accrued liabilities, bank indebtedness and accounts payable with related parties
Bank indebtedness balance at December 31, 2017 was zero but during the first six months of 2018, the Company made a draw of $50,000.
Accounts payable, accrued liabilities, and transaction taxes payable dropped considerably in the first quarter of 2018 but then increased during the second quarter because sales of gold concentrate had not yet been achieved as at June 30, 2018.
The company acquired $2,345,000 in new debt in 2018 and subsequently repaid approximately $1,060,096 during the six months ended June 30, 2018.
Capital Stock
There were no changes to capital stock during the second quarter and for the year 2018.
Liquidity and Capital Resources
At June 30, 2018, the Company had a negative working capital of
$6,662,458
as compared to a negative working capital of $5,308,822 at December 31, 2017. The unfavorable change in working capital is directly related to focusing on preparing the La Josefina property for future extraction of minerals and sales of concentrate in 2018. Significant costs were incurred to as a result with little revenue from the Martha property concentrate as focus and resources were focused on la Josefina.
During the first two quarters of 2018, the Mina Martha mill continued processing material from the Martha mine but at much lower levels as limited time and resources of the Company were targeted toward the La Josefina property. The Company plans to continue mining material from both the Mina Martha and the La Josefina mines in 2018.
The Company's current plan of processing of material at from Mina Martha and La Josefina plus exploration discoveries will provide sufficient cash flow to cover operating costs, repay loans in full and cover current liabilities. The Company has not determined any resources or reserves for Mina Martha, La Josefina or La Valenciana as defined in the SEC Industry Guide 7.
Off-balance sheet arrangements
At June 30, 2018, the Company had no material off-balance sheet arrangements such as guarantee contracts, contingent interest in assets transferred to an entity, derivative instruments obligations or any obligations that trigger financing, liquidity, market or credit risk to the Company.
Transactions with related parties
During the six months ended June 30, 2018, the Company incurred $93,700 (2017- $102,229) in professional fees expense from a key managerial person of CCSA and $12,000 (2017 -$Nil) relating to property rental recorded in silver and gold recovery. Included in accounts payable and accrued liabilities as at June 30, 2018 was $266,089 (December 31, 2017- $254,089) owing to the President of CCSA for professional geological fees and property rental.
During the six months ended June 30, 2018, the Company incurred $34,848 (2017- $31,692) in professional fees expense relating to the accounting services of a key managerial person of CCSA. Included in accounts payable and accrued liabilities as at June 30, 2018, the Company had a payable owing to the director of CCSA of $Nil (December 31, 2017- $15,810).
During the six months ended June 30, 2018, the Company incurred $109,643 (2017- $192,493) in administrative and office expenses relating to the rental of office space and various administrative services and expenses payable to an entity controlled by a director of the Company. During the period ended June 30, 2018, this entity advanced funds to the Company of $856,650 (2017- $1,586,991) for general administrative purposes. The advances accrue interest at 7% per annum compounding on a monthly basis and are unsecured. During the six months ended June 30, 2018, the Company incurred $137,447 (2017 - $101,610) in interest expense on these advances. As at June 30, 2018, the combined balance of payables for services, advances, and interest due to this entity was $4,688,938 (December 31, 2017 - $3,658,431), which is included in accounts payable and accrued liabilities.
The Company has a loan balance to a director of the Company of $1,615,445 (December 31, 2017- $1,731,022). During the six months ended June 30, 2018 the Company made payments of $115,577 (2017 -$98,132) on the loan principle. During the year ended December 31, 2017, this director modified the repayment terms of the loan and subsequently this loan was reclassified to long-term (see note 14). During the six months ended June 30, 2018, the Company incurred interest expense of $70,180 (2017- $65,593) of which $26,051 is included in interest payable at June 30, 2018 (December 31, 2017- $151,024).
The Company has a loan balance to a director of the Company of $994,861 (December 31, 2017- $700,000). During the six months ended June 30, 2018 the Company received advances of $300,000 (2017- $1,000,000) and made payments of $5,139 (2017 -$1,000,000) on the loan principle. During the six months ended June 30, 2018, the Company incurred interest expense of $34,498 (2017- $5,699) of which $21,882 is included in interest payable at June 30, 2018 (December 31, 2017- $2,282).
Included in accounts payable and accrued liabilities as at June 30, 2018, are amounts owing to a key managerial person of the Company for consulting fees of $79,613 (December 31, 2017- $98,549).
Included in accounts payable and accrued liabilities as at June 30, 2018, are amounts owing to a director of the Company for compensation of $84,000 (December 31, 2017– $84,000).
Remuneration of directors and key management of the Company
The remuneration awarded to directors and to senior key management, including the Executive Chairman and Chief Executive Officer, the Chief Financial Officer, a Director of the Company, the President of CCSA and a Director of CCSA, is as follows:
Proposed Transactions
There are no proposed transactions outstanding other than as disclosed.
Recently issued Accounting Pronouncements
Restricted Cash
In November 2016, ASU No. 2016-18 was issued related to the inclusion of restricted cash in the statement of cash flows. This new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017 and early adoption is permitted. The adoption of this guidance will result in the inclusion of the restricted cash balances within the overall cash balance and removal of the changes in restricted cash activities, which are currently recognized in other financing activities, on the Statements of Consolidated Cash Flows. Furthermore, an additional reconciliation will be required to reconcile Cash and cash equivalents and restricted cash reported within the Consolidated Balance Sheets to sum to the total shown in the Statements of Consolidated Cash Flows. The adoption of this ASU had no material impact on the Company's consolidated financial statements.
Intra-Entity Transfers
In October 2016, ASU No. 2016-16 was issued related to the intra-entity transfers of assets other than inventory. This new guidance requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017 and early adoption is permitted. The adoption of this ASU had no material impact on the Company's consolidated financial statements.
Statement of Cash Flows
In August 2016, ASU No. 2016-15 was issued related to the statement of cash flows. This new guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017 and early adoption is permitted. The adoption of this ASU had no material impact on the Company's consolidated financial statements.
Leases
In February 2016, ASU No. 2016-02 was issued related to leases. The new guidance modifies the classification criteria and requires lessees to recognize the assets and liabilities arising from most leases on the balance sheet. This update is effective in fiscal years, including interim periods, beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the updated guidance.
Investments
In January 2016, ASU No. 2016-01 was issued related to financial instruments. The new guidance requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. This new guidance also updates certain disclosure requirements for these investments. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017 and early adoption is not permitted. The adoption of this ASU had no material impact on the Company's consolidated financial statements.
Revenue recognition
In May 2014, ASU No. 2014-09 was issued related to revenue from contracts with customers. This ASU was further amended in August 2015, March 2016, April 2016, May 2016 and December 2016 by ASU No. 2015-14, No. 2016-08, No. 2016-10, No. 2016-12 and No. 2016-20, respectively. The new standard provides a five-step approach to be applied to all contracts with customers and also requires expanded disclosures about revenue recognition. In August 2015, the effective date was deferred to reporting periods, including interim periods, beginning after December 15, 2017 and will be applied retrospectively. Early adoption is not permitted. The adoption of this ASU had no material impact on the Company's consolidated financial statements.
Critical Accounting Estimates
(a) Significant judgments
Preparation of the consolidated financial statements requires management to make judgments in applying the Company's accounting policies. Judgments that have the most significant effect on the amounts recognized in these consolidated financial statements relate to functional currency; income taxes; provisions and reclamation and closure cost obligations. These judgments have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
Functional Currency
Management determines the functional currency for each entity. This requires that management assess the primary economic environment in which each of these entities operates. Management's determination of functional currencies affects how the Company translates foreign currency balances and transactions. Determination includes an assessment of various indicators. In determining the functional currency of the Company's operations in Canada (Canadian dollar) and Argentina (U.S. dollar), management considered the indicators of ASC 830.
Income Taxes and value-added taxes receivable
Significant judgment is required in determining the provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain and subject to judgment. The Company recognizes liabilities and contingencies for anticipated tax audit issues based on the Company's current understanding of the tax law in the various jurisdictions in which it operates. For matters where it is probable that an adjustment will be made, the Company records its best estimate of the tax liability including the related interest and penalties in the current tax provision. Management believes they have adequately provided for the probable outcome of these matters; however, the final outcome may result in a materially different outcome than the amount included in the tax liabilities.
The Company has receivables due from the Argentinean government for value-added taxes. Significant estimates and judgments are involved in the assessment of recoverability of these receivables. Changes in management's impairment assumptions may result in an additional impairment provision, or a reduction to any previously recorded impairment provision, with the impact recorded in profit and loss.
Provisions
Management makes judgments as to whether an obligation exists and whether an outflow of resources embodying economic benefits of a liability of uncertain timing or amount is probable, not probable or remote. Management considers all available information relevant to each specific matter.
Reclamation and closure costs obligations
The Argentine mining regulations require that mine property be restored in accordance with specified standards and an approved reclamation plan. Significant reclamation activities include reclaiming refuse and slurry ponds, reclaiming the pit and support acreage at surface mines, and sealing portals at deep mines. The Company accrues for the cost of final mine closure reclamation over the estimated useful mining life of the property. At each period, the Company reviews the entire reclamation liability and makes necessary adjustments for revisions to cost estimates to reflect current experience.
The Company has adopted ASC 410, Asset Retirement and Environmental Obligations, which requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost is capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset.
Title to Mineral Property Interests
Although the Company has taken steps to verify title to mineral properties in which it has an interest, these procedures do not guarantee the Company's title. Such properties may be subject to prior agreements or transfers and title may be affected by undetected defects.
(b) Estimation uncertainty
The preparation of the consolidated financial statements in conformity with US GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 Company also makes estimates and assumptions concerning the future. The determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience and current and expected economic conditions. Actual results could differ from those estimates.
The more significant areas requiring the use of management estimates and assumptions relate to title to mineral property interests; share-based payments, asset retirement obligations and inventories. These estimates have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
The Company is also exposed to legal risk. The outcome of currently pending and future proceedings cannot be predicted with certainty. Thus, an adverse decision in a lawsuit could result in additional costs that are not covered, either wholly or partly, under insurance policies and that could significantly influence the business and results of operations.
Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
Share-based Payment Transactions
The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions is done by application of the Black-Scholes option-pricing model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the Black-Scholes option-pricing model, including the expected life of the stock option, forfeiture rate, and volatility based on historical share prices and dividend yield and making assumptions about them.
Legal Proceedings
In the normal course of business, legal proceedings and other claims brought against the Company expose us to potential losses. Given the nature of these events, in most cases the amounts involved are not reasonably estimable due to uncertainty about the final outcome. In estimating the final outcome of litigation, management makes assumptions about factors including experience with similar matters, past history, precedents, relevant financial, scientific and other evidence, and facts specific to the matter. This determines whether management requires a provision or disclosure in the consolidated financial statements.
Asset retirement obligation
Upon retirement of the Company's mineral properties, retirement costs will be incurred by the Company. Estimates of these costs are subject to uncertainty associated with the method, timing and extent of future decommissioning activities. The liability, the related asset and the expense are affected by estimates with respect to the costs and timing of retiring the assets.
Inventories
Net realizable value tests are performed at each reporting date and represent the estimated future sales price of the product the Company expects to realize when the product is processed and sold, less estimated costs to complete production and bring the product to sale. Where the time value of money is material, these future prices and costs to complete are discounted.
Stockpiles are measured by estimating the number of tones added and removed from the stockpile, the number of contained ore ounces is based on assay data, and the estimated recovery percentage is based on the expected processing method.
Stockpile tonnages are verified by periodic surveys.
Silver and gold recovery
From time to time, some of the Company's sales of concentrate are made under provisional pricing arrangements where the final sale prices are determined by quoted market prices in a period subsequent to the date of sale. In these circumstances, sales are recorded at period end based on latest information about prices and quantities available to management for the expected date of final settlement.