Item 2. 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 appearing elsewhere in this Quarterly Report on Form 10-Q. 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, but not limited to, those set forth under the heading “Risk Factors and Uncertainties” in our Annual Report on Form 10-K filed with the SEC
on March 1
3
, 201
4, and elsewhere in this Quarterly Report on Form 10-Q.
This discussion and analysis should be read in conjunction with the accompanying unaudited interim consolidated financial statements and related notes. The discussion and analysis of the financial condition and results of operations are based upon the unaudited interim consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis we review our estimates and assumptions. The estimates were based on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations. Critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments are outlined below in “Critical Accounting Policies”.
Cautionary Note Regarding Forward-Looking Statements
In addition, certain statements made in this Quarterly Report on Form 10-Q may constitute “forward-looking statements”. These forward-looking statements involve known or unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Except for historical information, the matters set forth herein, which are forward-looking statements, involve certain risks and uncertainties that could cause actual results to differ. Potential risks and uncertainties include, but are not limited to, unexpected changes in business and economic conditions; significant increases or decreases in gold prices; changes in interest and currency exchange rates; unanticipated grade changes; metallurgy, processing, access, availability of materials, equipment, supplies and water; determination of reserves; results of current and future exploration activities; results of pending and future feasibility studies; joint venture relationships; political or economic instability, either globally or in the countries in which we operate; local and community impacts and issues; timing of receipt of government approvals; accidents and labor disputes; environmental costs and risks; competitive factors, including competition for property acquisitions; and availability of external financing at reasonable rates or at all. Forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continues” or the negative of these terms or other comparable terminology, or which by their nature refer to future events. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Forward-looking statements are made based on management’s beliefs, estimates, and opinions on the date the statements are made, and we undertake no obligation to update such forward-looking statements if these beliefs, estimates, and opinions should change, except as required by law.
Cautionary Note to U.S. Investors Regarding Reserve and Resource Estimates
The mineral estimates in this Quarterly Report on Form 10-Q have been prepared in accordance with the requirements of the securities laws in effect in Canada, which differ from the requirements of United States securities laws. The terms “mineral reserve”, “proven mineral reserve” and “probable mineral reserve” are Canadian mining terms as defined in accordance with Canadian National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) and the Canadian Institute of Mining, Metallurgy and Petroleum (the “CIM”) - CIM Definition Standards on Mineral Resources and Mineral Reserves, adopted by the CIM Council, as amended.
These definitions differ from the definitions in United States Securities and Exchange Commission (“SEC”) Industry Guide 7 under the United States Securities Act of 1933, as amended. Under SEC Industry Guide 7 standards, a “final” or “bankable” feasibility study is required to report reserves, the three-year historical average price is used in any reserve or cash flow analysis to designate reserves and the primary environmental analysis or report must be filed with the appropriate governmental authority.
In addition, the terms “mineral resource”, “measured mineral resource”, “indicated mineral resource” and “inferred mineral resource” are defined in and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7 and are normally not permitted to be used in reports and registration statements filed with the SEC. Investors are cautioned not to assume that any part or all of mineral deposits in these categories will ever be converted into reserves. “Inferred mineral resources” have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineral resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases.
Investors are cautioned not to assume that all or any part of an inferred mineral resource exists or is economically or legally mineable. Disclosure of “contained ounces” in a resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report mineralization that does not constitute “reserves” by SEC Industry Guide 7 standards as in place tonnage and grade without reference to unit measures.
Accordingly, information contained in this Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain descriptions of our mineral deposits that may not be comparable to similar information made public by U.S. companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder.
Historical results of operations and trends that may be inferred from the following discussion and analysis may not necessarily indicate future results from operations. In particular, the current state of the global securities markets may cause significant fluctuations in the price of the Company’s securities and render it difficult or impossible for the Company to raise funds which may be necessary to develop any of its present or future mineral properties.
Disclosure on
Passive Foreign Investment Company
U.S. shareholders of our common shares should be aware that the Company believes it was classified as a PFIC during the taxable year ended December 31, 2013, and based on current business plans and financial projections, management believes there is a significant likelihood that the Company will be a PFIC during the current taxable year. If the Company is a PFIC for any year during a U.S. shareholder’s holding period, then such U.S. shareholder generally will be required to treat any gain realized upon a disposition of common shares, or any so-called “excess distribution” received on their common shares, as ordinary income, and to pay an interest charge on a portion of such gain or distributions, unless the shareholder makes a timely and effective “qualified electing fund” (“QEF Election”) or a “mark-to-market” election with respect to the common shares. A U.S. shareholder who makes a QEF Election generally must report on a current basis its share of the net capital gain and ordinary earnings for any year in which the Company is a PFIC, whether or not the Company distributes any amounts to its shareholders. However, U.S. shareholders should be aware that there can be no assurance that the Company will satisfy record keeping requirements that apply to a QEF Election, or that the Company will supply U.S. shareholders with information that such U.S. shareholders require to report under the QEF Election rules, in event that the
Company is a PFIC and a U.S. shareholder wishes to make a QEF Election.
Thus, U.S. shareholders may not be able to make a QEF Election with respect to their common shares. A U.S. shareholder who makes the mark-to-market election generally must include as ordinary income each year the excess of the fair market value of the common shares over the taxpayer’s basis therein. Each U.S. shareholder should consult his or her own tax advisor regarding the U.S. federal, U.S. state and local, and foreign tax consequences of the PFIC rules and the acquisition, ownership, and disposition of Common Shares.
Overview
Company Overview
We are a development stage company
engaged in the acquisition, exploration, and, development of gold and silver mineral properties in North America. Our mineral properties are currently located in Nevada and Washington. The Tonopah, Gold Rock and Golden Eagle gold properties are exploratory stage projects and have identified gold mineralization. The Spring Valley property has become subject to a joint venture agreement with Barrick Gold Exploration Inc. Our Pan
P
roject is in the development stage and currently under construction, which is expected to allow us to transition from a development stage company to a gold production company, with targeted production in late 2014.
We have completed our technical, engineering, permitting and economic studies on our Pan
P
roject. Construction officially began on January 15, 2014.
Recent Developments
CBA Debt Facilities
On July 18, 2014, our subsidiary MDW Pan LLP, as borrower entered into a credit agreement (the “
Credit Agreement
”) with Commonwealth Bank of Australia (“CBA”), as administrative agent, collateral agent and the initial lender for the purpose of establishing an aggregate
U.S.
$55 million senior secured credit facility consisting of, (i) a
U.S.
$45 million project finance facility (“Project Finance Facility”) and (ii) a
U.S.
$10 million cost overrun facility (the “Overrun Facility” together with the Project Finance Facility is collectively referred to herein as, the “
Loan Facility
”).
The Loan Facility will be secured by substantially all of the assets of the borrower (MDW Pan LLP,
a wholly-owned subsidiary of the Company, and the owner of the
Pan Project
and related assets
) and
all other entities of the consolidated group
.
Our ability to draw on the
Loan Facility
and make future distributions are subject to conditions precedent as set forth in the Credit Agreement. In addition, we are required to maintain certain project and reserve accounts, which may affect our cash flow. There can be no assurances that the conditions precedent to draw on the
Loan Facility
will be met or that the reserve and distribution terms will not adversely affect our cash flows or results of operations.
Preferred Series A Dividend Declared and Paid
On
June 18, 2014
, our Board
of Directors (the “Board”) declared
a
dividend payment to the holders of Series A Preferred Shares with a record date
of
June 27, 2014
,
totaling
$1,499,
632
(U.S.
$
1,405,466
), which
was paid on
July 2
, 201
4
in
common shares,
through the issuance
of 1,322,525
common shares to the holders of the Series A Preferred Shares
, and in cash, through the payment of applicable withholding taxes
.
Bought Deal Financing
On June 6, 2014, we closed on a “bought deal” financing (the “Bought Deal Financing”) pursuant to which we offered and sold 30,121,000 common shares in a registered public offering in the United States and Canada at a price of U.S.$0.83 per share for total gross proceeds of $27,3
40
,470 (
U.S.$25,000,430).
On June 17, 2014, in connection with the Bought Deal Financing, the Company closed on the over-allotment option which resulted in the issuance of an additional 3,012,000 common shares at a price of U.S.$0.83 per share for total gross proceeds of $2,71
3
,047 (U.S.$2,500,043).
Filing of Technical Report for Gold Rock
On May 2
8
, 2014, the Company filed its tech
nical report
entitled NI 43-101 Technical Report Updated Mineral Resource Estimate for Gold Rock
p
roject
,
which detailed a measured, indicated and inferred mineral resource estimate for its open pit, heap leach Gold Rock Project in White Pine County, Nevada
.
Selection of Mining Contractor for Pan Project
On May 19, 2014, the Company selected Ledcor CMI, Inc. (“Ledcor”) as the mining contractor for the Pan Project. During the early years of operation, Ledcor will provide all mining-related services, including manpower and equipment for the Pan Project.
Resignation of Mr. Rick D. Moritz as
Senior Vice President of Operations
May 16, 2014, Mr. Richard D. Moritz resigned from his position as Senior Vice President of Operations of the Company.
Spring Valley 2014 Planned Expenditures
On May, 16, 2014, we announced Barrick’s $13.3 million planned 2014 expenditures related to the Spring Valley Project. The budget includes $8.3 million for project development and $5
.0
million for exploration for a total of $13.3 planned expenditures in 2014.
Spring Valley Advances to Pre-Feasibility Development Stage
On May 1, 2014, we announced Barrick had
advanced the Spring Valley project to the pre-feasibility development stage.
Property Highlights for the
Second
Quarter
of
201
4
and to August 1, 2014
:
|
·
|
|
Pan
P
roject –
A
credit agreement
for U.S.$55 million was executed
on July 18, 2014
with the Commonwealth Bank of Australia for continued construction funding of the project. Significant progress has been made in the construction of the Pan mine, with production expected near the end of 2014.
|
|
·
|
|
Gold Rock project – A new technical report, which significantly increases the estimated resource base, was issued May 28, 2014 entitled “
NI 43-101 Technical Report Updated Mineral Resource Estimate for Gold Rock Project.” A mining plan of operations was submitted to the BLM and is in the draft EIS stage. Gold Rock is scheduled to be the Company's second operating gold mine.
|
|
·
|
|
Spring Valley project – O
n February 24, 2014 we announced that formation of the joint venture at the Spring Valley project with Barrick was completed. Barrick holds a 70% interest in the joint venture, while we hold the remaining 30% interest. We have elected the carry option, which allows Barrick to earn an additional 5% (75% total) interest in the joint venture by carrying us through to production, at which point we would retain a 25% interest in the joint venture
.
|
Activities on our properties in the
second
quarter ended
June
3
0
, 201
4
, and up to
the date of this Quarterly Report on Form 10-Q,
are described in further detail below.
The map below shows the location of our properties located in Nevada, USA.
Pan Project, White Pine County, Nevada
The Pan property is located at the northern end of the Pancake mountain range in western White Pine County, Nevada, approximately 22 miles southeast of Eureka, Nevada, and 50 miles west of Ely, Nevada. Access is via a dirt road running south from US Highway 50. Eureka has a population of about 2,000. Water is readily available from wells on the property. Construction has begun on a power transmission line to extend power to the Pan Mine site.
Highlights
The National Environmental Policy Act (“NEPA”) permitting process was completed with a Record of Decision for the Final Environmental Impact Statement issued on December 20, 2013. We also received confirmation from the U.S. Army Corps of Engineers that no surface waters are present at the project that would fall under the jurisdiction of Sections 401 and 404 of the Federal Clean Water Act. We have received our Water Pollution Control Permit and our Air Quality Operating Permit to Construct the Pan mine. Construction began in January 2014. Jacobs Engineering is the engineering, procurement and construction management contractor for the project.
Significant progress has been made on Pan Project construction. Work on the access road, pregnant pond earthwork and liners, barren pond earthwork, process plant earthwork, and perimeter fence was completed during the three months ended June 30, 2014. Work is in progress on the heap leach pad earthwork and liner, barren pond liner, spillway liner, substation earthwork, north haul road, production water well 2, ADR/refinery rebar and forms and the 69kv transmission line.
Mineral Reserves and Resources
Cautionary Note to U.S. Investors
– In this Quarterly Report on Form 10-Q we use the terms “mineral resource”, “measured mineral resource”, “indicated mineral resource” and “inferred mineral resource”, which are geological and mining terms as defined in accordance with NI 43-101 under the guidelines adopted by CIM, as CIM Standards in Mineral Resources and Reserve Definition and Guidelines. U.S. investors in particular are advised to read carefully the definitions of these terms as well as the “Cautionary Note to U.S. Investors Regarding Reserve and Resource Estimates” above.
A resource estimate for the Pan
P
roject was reported in October 2011 based on results from 2011 drilling. The Measured and indicated resource estimate exceeds one million ounces of gold as summarized in Table 1. The updated resource was prepared by Gustavson Associates, LLC (“Gustavson”).
Table 1: Mineral Resource Estimate, Pan Project, Nevada
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Measured Resource
|
Cutoff (gpt)
|
|
Tonnes
|
|
Grade (gpt)
|
|
Gold ounces
|
0.27
|
|
27,352,000
|
|
0.59
|
|
520,000
|
0.21
|
|
30,857,000
|
|
0.55
|
|
547,000
|
0.14
|
|
36,920,000
|
|
0.49
|
|
579,000
|
0.07
|
|
50,924,000
|
|
0.38
|
|
622,000
|
Indicated Resource
|
Cutoff (gpt)
|
|
Tonnes
|
|
Grade (gpt)
|
|
Gold ounces
|
0.27
|
|
27,126,000
|
|
0.52
|
|
453,000
|
0.21
|
|
32,652,000
|
|
0.47
|
|
495,000
|
0.14
|
|
43,118,000
|
|
0.40
|
|
551,000
|
0.07
|
|
73,925,000
|
|
0.27
|
|
645,000
|
Measured Plus Indicated Resource
|
Cutoff (gpt)
|
|
Tonnes
|
|
Grade (gpt)
|
|
Gold ounces
|
0.27
|
|
54,478,000
|
|
0.56
|
|
974,000
|
0.21
|
|
63,509,000
|
|
0.51
|
|
1,042,000
|
0.14
|
|
80,037,000
|
|
0.44
|
|
1,130,000
|
0.07
|
|
124,849,000
|
|
0.32
|
|
1,268,000
|
Inferred Resource
|
Cutoff (gpt)
|
|
Tonnes
|
|
Grade (gpt)
|
|
Gold ounces
|
0.27
|
|
1,771,000
|
|
0.58
|
|
33,000
|
0.21
|
|
2,229,000
|
|
0.51
|
|
37,000
|
0.14
|
|
3,928,000
|
|
0.36
|
|
45,000
|
0.07
|
|
9,693,000
|
|
0.20
|
|
63,000
|
Note: The tonnage and total ounces of gold were determined from the statistical block model. Average grades were calculated from the tonnage and total ounces and then rounded to the significant digits shown. Calculations based on this table may differ due to the effect of rounding. See “Cautionary Note to U.S. Investors Regarding Reserve and Resource Estimates.”
A Feasibility Study was completed November 15, 2011 showing robust economics for the Pan
P
roject. Mineral reserves were based upon a design pit that maximized revenue based on a $1,200 per ounce three-year trailing average price of gold. Cutoff grades of 0.21 gpt in the South pit and 0.27 gpt in the North & Central pits produced the project’s highest NPV. Reserve estimates are summarized in Table 2.
Table 2: Total Pan Mineral Reserves, November 2011
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Pit
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Cutoff Grade
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Metric Tonnes
|
|
Gold Grade
|
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Ounces Gold
|
Area
|
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(grams/tonne)
|
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(x 1000)
|
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(grams/tonne)
|
|
(x 1000)
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Proven
|
North & Central
|
|
0.27
|
|
13,085
|
|
0.60
|
|
251
|
South
|
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0.21
|
|
12,160
|
|
0.61
|
|
236
|
All Pits
|
|
|
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25,245
|
|
0.60
|
|
487
|
|
|
|
|
|
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|
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Probable
|
North & Central
|
|
0.27
|
|
10,994
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0.50
|
|
178
|
South
|
|
0.21
|
|
12,073
|
|
0.51
|
|
199
|
All Pits
|
|
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|
23,067
|
|
0.51
|
|
377
|
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Proven and Probable
|
North & Central
|
|
0.27
|
|
24,078
|
|
0.55
|
|
429
|
South
|
|
0.21
|
|
24,233
|
|
0.56
|
|
435
|
All Pits
|
|
|
|
48,311
|
|
0.56
|
|
864
|
Note: The tonnage and total ounces of gold were determined from the statistical block model. Average grades were calculated from the tonnage and total ounces and then rounded to the significant digits shown. Calculations based on this table may differ due to the effect of rounding.
The Feasibility Study was prepared to the standards of NI 43-101. The open pit mineral reserves and resources were completed by Gustavson, with Terre Lane and Donald E. Hulse acting as the qualified persons. An updated report “Updated NI 43-101 Technical Report, Feasibility Study for the Pan Project, White Pine County, Nevada” dated November 29, 2012 was filed to clarify responsibilities of the Qualified Persons. This updated report made no changes in the feasibility study numbers.
We believe there is no material difference between the mineral reserves as disclosed in our NI 43-101 Feasibility Study and those disclosable under SEC Industry Guide 7, and therefore no reconciliation is provided. The Pan
P
roject has known reserves under SEC Industry Guide 7 guidelines; therefore, the project is considered to be in the development stage.
Mining and Production
The Pan gold deposit contains near-surface mineralization that can be extracted using open pit mining methods. Results from mineral extraction tests indicate that the ore can be processed by conventional heap leaching methods. Ore from the South Pan pit will be processed ROM, while ore from the North Pan pit will be crushed before being placed on the leach pad.
Pregnant solutions will be treated in an adsorption/desorption recovery (ADR) plant.
We have engaged Ledcor to perform contract mining services at our Pan Mine site for an approximate five year term.
During the three months ended June 30, 2014, w
e made a U.S.$500,000 payment to Ledcor for mobili
zation charges
. This is a change from owner mining, which was the elected method as defined within the 2011 Feasibility Study. Current conditions within the industry have led to an attractive price environment for contract mining and further, contract mining allows us to substantially reduce our capital costs and financing requirements. Ledcor will provide all mining related services, manpower and equipment for the project. They will be responsible for drilling, blasting, loading and hauling ore to the leach pad for processing.
During the three months ended June 30, 2014 and 2013 we incurred expenditures of $6,294 and $441,889, respectively, at the Pan
P
roject. During the three months ended June 30, 2013, the expenditures were primarily for salaries and labor, travel and field office and supplies costs.
During the six months ended June 30, 2014 and 2013 we incurred expenditures of $6,294 and $854
,383, respectively, at the Pan P
roject. During the six months ended June 30, 2013, the expenditures were primarily for salaries and labor, travel, transportation and accommodations and field office and supplies.
We currently have a limited scope of exploration activity at the Pan
P
roject with the majority of costs being capitalized as part of the construction of the project.
During the three and six months ended June 30, 2014, we capitalized into property, equipment and mine development $16,8
30
,
669
and $21,1
56
,
217
, respectively, of Pan expenditures (excluding asset retirement obligations), primarily for the construction of the Project, but also ongoing costs for permitting, mitigation, engineering, site characterization, mine planning, and detailed design. For the comparable periods during 2013, we capitalized $1,077,206 and $1,972,657, respectively, of Pan expenditures.
Gold Rock Project, White Pine County, Nevada
The Gold Rock property is located in the eastern Pancake Range in western White Pine County, Nevada. The property is eight miles southeast of our Pan
P
roject. Access is via the Green Springs road from US Highway 50 approximately 65 miles from Ely, Nevada. Water for exploration purposes is available from wells in the region under temporary grant of water rights. It is anticipated that power will be available from the line being extended to serve the nearby Pan Project
.
Gold Rock is scheduled to be our second operating gold mine. A gold resource has been defined on the project and numerous drill targets with potential for expanding that resource have been identified. Additional drilling is planned, but the Pan
P
roject has priority for available funds in the near term.
An updated resource estimate was completed and filed on May 29, 2014, entitled “NI 41-101 Technical Report Updated Mineral Resource Estimate for Gold Rock Project.” The report, by Global Resource Engineering, shows a 65% increase in measured, indicated resources and a 62% increase in inferred resources.
A mining Plan of Operations submitted to the BLM has been declared complete, beginning the EIS process. Scoping meetings for the EIS were held in September, followed by a public comment period. A Draft EIS is currently being developed by the BLM.
During the three months ended June 30, 2014 and 2013 we incurred $629,323 and $313,647, respectively, of expenditures at the Gold Rock project. The majority of these expenses for both periods are related to the ongoing permitting process of the project, represented as “Environmental” costs as well as related salaries and labor costs.
During the six months ended June 30, 2014 and 2013 we incurred $971,093 and $1,665,325, respectively, of expenditures at the Gold Rock project. Similar to the three months ended June 30, the majority of these expenses for both periods are related to the ongoing permitting process of the project, as well as related salaries and labor costs.
Spring Valley Project, Pershing County, Nevada
The Spring Valley property is located in the Spring Valley Mining District, Pershing County, Nevada, approximately 20 miles northeast of the town of Lovelock. The property is accessed via paved and dirt roads east of US Interstate 80. Water for exploration purposes is available from water wells drilled on the property under temporary grant of water rights. Power is accessible from existing power lines; however, capacity is unknown.
On February 24, 2014, we announced that formation of the joint venture for the Spring Valley project with Barrick was completed. Under the formation, Barrick holds a 70% interest in the joint venture, while we hold the remaining 30% interest.
We have elected to allow Barrick to earn an additional 5% (75% total) by carrying us to production and arranging financing for our share of mine construction expenses.
The cost that Barrick incurs from carrying us to production will be recouped by Barrick, plus interest, once production has been established.
During the three months ended June 30, 2014 and 2013, we incurred $32,503 and $2,353 of expenditures on the Spring Valley project, respectively. For the three months ended June 30, 2014, majority of the costs related to engineering and consulting and salaries and labor.
During the six months ended June 30, 2014 and 2013, we incurred $185,635 and $4,914, respectively, of expenditures on the Spring Valley project. For the six months ended June 30, 2014, majority of the costs related to engineering and consulting and salaries and labor.
Tonopah Project, Nye County, Nevada
The Tonopah property is located in Nye County, Nevada, approximately 15 miles northeast of the town of Tonopah, 210 miles northwest of Las Vegas and 236 miles southeast of Reno, Nevada. The property is over the northeastern flank of the San Antonio Mountains and in the Ralston Valley. Water for exploration purposes is available from water wells for a fee from municipal sources.
Power is accessible from existing power lines crossing the property; however, capacity is unknown and may be limited.
There was no new exploration activity on the property during the three or six months ended June 30, 2014.
During the three months ended June 30, 2014 and 2013, we incurred $
5
,
897
and $
741
of expenditures on the
Tonopah
project, respectively. For the three months ended June 30, 2014, majority of the costs related to salaries and labor.
During the six months ended June 30, 2014 and 2013, we incurred $14,993 and $5,870, respectively, of expenditures on the Tonopah project. For the six months ended June 30, 2014, majority of the costs related to salaries and labor while the majority of the costs during the six months ended June 30, 2014 related to engineering and consulting.
Golden Eagle Project, Ferry County, Washington
The Golden Eagle property is located on private land in the Eureka (Republic) mining district in Ferry County, Washington. The property is two miles northwest of the town of Republic, Washington and is accessed by the Knob Hill county road.
There was no new exploration activity on the project during the three or six months ended June 30, 2014.
During the three months ended June 30, 2014
we did not
incur
any costs
on the
Golden Eagle
project
compared to a credit of costs back to us for $(1,263) during the three months ended June 30, 2013
.
During the six months ended June 30, 2014 and 2013, we incurred $13,646 and $10,093, respectively, of expenditures on the Golden Eagle project. Majority of the costs for both periods related to property maintenance and taxes and salaries and labor.
Pinyon Project, White Pine County, Nevada
Pinyon is a disseminated gold target near the Gold Rock and Pan
p
rojects. A portion of the claims were acquired in 2012 as part of an
agreement
with Aurion Resources allowing us to earn-in to a joint venture over a five year period. The Pinyon property is located in White Pine County, Nevada approximately 20 miles southeast of Eureka, Nevada. It is 10 miles north of the Gold Rock project and 6 miles east of the Pan
P
roject. Access is by five miles of dirt road running south-southeast from US Highway 50, at a point about 17 miles southeast of Eureka, Nevada. Water is available from wells that service the Pan and Gold Rock projects. Power is expected to be available from the Pan or Gold Rock projects.
There was no new exploration activity on the project during the three or six months ended June 30, 2014.
No costs were incurred during the three months ended June 30, 2014 or 2013.
During the six months ended June 30, 2014 and 2013, we incurred $3,573 and $82,214, respectively, of expenditures on the Pinyon project. For the six months ended June 30, 2013, majority of the costs related to property maintenance and taxes and salaries and labor.
Results of Operations
Three months ended June 30, 2014 compared to the three months ended June 30, 2013
The following table summarizes our results of operation for the three months ended
June 30, 2014
compared to the three months ended
June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
2014
|
|
2013
|
|
Change
|
Expenses
|
|
|
|
|
|
|
|
|
|
Consulting
|
|
$
|
(1,398)
|
|
$
|
95,204
|
|
$
|
(96,602)
|
Depreciation and Accretion
|
|
|
178,196
|
|
|
123,432
|
|
|
54,764
|
Interest and Bank Charges
|
|
|
793
|
|
|
286
|
|
|
507
|
Investor Relations
|
|
|
12,934
|
|
|
5,804
|
|
|
7,130
|
Legal, Audit and Accounting
|
|
|
208,098
|
|
|
1,757,924
|
|
|
(1,549,826)
|
Mineral Exploration Expenditures
|
|
|
705,255
|
|
|
749,737
|
|
|
(44,482)
|
Office and Administration
|
|
|
594,916
|
|
|
390,187
|
|
|
204,729
|
Salaries and Benefits
|
|
|
1,622,595
|
|
|
1,193,817
|
|
|
428,778
|
Transfer Agent and Filing Fees
|
|
|
60,198
|
|
|
63,994
|
|
|
(3,796)
|
Travel
|
|
|
86,434
|
|
|
110,224
|
|
|
(23,790)
|
Operating Loss
|
|
|
3,468,021
|
|
|
4,490,609
|
|
|
(1,022,588)
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
(120,434)
|
|
|
7,325,892
|
|
|
(7,446,326)
|
Income Tax Recovery (Expense)
|
|
|
(328,265)
|
|
|
1,961,822
|
|
|
(2,290,087)
|
Net (Income) Loss
|
|
$
|
3,916,720
|
|
$
|
(4,797,105)
|
|
$
|
8,713,825
|
Significant differences between the periods are as follows:
Consulting expense
during the three months ended
June
3
0
, 2014 decreased $
96,602
to $
(1,398)
from $
95,204
during the three months ended
June
3
0
, 2013. The decrease in consulting expense is due to the consulting agreement with the Company’s former CEO expiring in the second quarter of 2013
which resulted in $16,370 of expense during the three months ended June 30, 2013
.
T
he Company
also
incurred additional consulting expenses in 2013 related to compensation studies
and strategic planning
which were not performed in 2014.
Depreciation and Accretion expense
during the three months ended
June
3
0
, 2014
was $
178,196
compared to $123,432 during
the three months ended
June
3
0
, 2013, an increase of $
54,764
, or
44%
. This was primarily due to
an increase in accretion expense and
a
23
% increase in depreciable assets from the comparable period of 2013. For the three months ended
June
3
0
, 2014, accretion expense was $
34
,
299
compared to $
627
for the three months ended
June
3
0
, 2013
which resulted from the asset retirement obligation on our Pan
P
roject
.
Legal,
A
udit and
A
ccounting
expense
totaled $
208,098
for the three months ended
June
3
0
, 2014, compared to $
1,757,924
in the comparable period, a decrease of $
1,
5
49
,
826
.
The primary reason for the decrease in the three months ended
June
3
0
, 2014
is we
incurred significant legal, tax advisory and accounting fees during the three months ended
June
3
0
, 2013 surrounding the non-recurring restructuring of our subsidiaries. Additionally, in comparison to the three months ended
June
3
0
, 2013,
we
incurred
a decreased level of expenses
related to the investigation of different financing options to meet capital demands as
we
bring the Pan
P
roject into production.
Mineral
E
xploration expense
for the three months ended
June
3
0
, 2014 decreased $
44,482
from the comparable period of 2013. Details of the expenses in each period may be found in the schedule of mineral exploration expenses to the unaudited consolidated interim financial statements. Exploration levels are determined by the success of previous exploration programs on each project and cash available to fund additional programs.
As we are currently focused on bringing the Pan
P
roject into production, the cash expenditures for exploration have been reduced in order to preserve capital for completion of the Pan
P
roject. Additionally,
effective January 1, 2014
, as construction commenced on the Pan
P
roject, administrative Pan related expenses are no longer allocated to exploration and as a result these costs ha
ve been recorded in Office and Administration and Salaries and B
enefits as appropriate.
Office and
A
dministration expense
for the three months ended
June
3
0
, 2014 were $
594,916
compared to $
390,187
during the comparable period of 2013, an increase of $
204,729
or 52%. As
noted above, the majority of this increase is due to the classification of Pan administrative expenses moving from
M
ineral
E
xploration expense to
O
ffice and
A
dministration expense. Also contributing to the increase are increases in overhead costs including insurance, information systems and rent, in both our Englewood and Ely offices, due to our continued growth.
Salaries and Benefits
expense
for the three months ended June 30, 2014 and 2013 was $1,622,595 and $1,1
9
3,817, respectively. The increase of $428,778 is partially attributable to increased employee levels and associated benefit costs due to our continued growth. As discussed above, also contributing to the increase is the change in the classification of the Pan administrative expenses moving from mineral exploration to Salaries and Benefits.
Additionally,
we
paid severances to certain
former
members of upper management as the result of a corporate overhead savings measure
to
preserve capital for the completion of the Pan
P
roject.
Other
I
ncome (
E
xpense)
for the three months ended
June 30, 2014
was
expense
of $
120,434
compared to income of $
7,325,892
during the comparable period of 2013, a net
change
of $
7
,
446
,
326
. As a result of the change in
our
parent Company’s functional currency from the Canadian dollar to the U.S. dollar effective January 1, 2014, there was no gain or loss recorded on the change in the fair value of derivative liability for the three months ended
June
3
0
, 2014.
We
recorded a gain of $
5
,
136
,
594
related to change in the fair value of derivative liability for three months ended
June
3
0
, 2013. Additionally, as a result of this change in functional currency to the U.S. dollar,
we
recorded a foreign exchange loss of only $6
13
during the three months ended
June
3
0
, 2014 compared to a foreign exchange gain of $
2
,
151
,
974
for the corresponding period of 2013. Unrealized foreign exchange gains and losses will now primarily be recorded within accumulated oth
er comprehensive income on the C
onsolidated
B
alance
S
heet.
Income
T
ax
R
ecovery (
E
xpense
)
for the three months ended
June 30, 2014
was
an expense
$
328,265
compared to
a recovery of
$
1,9
61
,
822
during the comparable period of 2013. The primary reason for the
change when comparing
the three months ended
June
3
0
, 2014 to the three months ended
June
3
0
, 2013 is due to an income tax recovery of $
2,285
,
592
recorded during the
June 30, 2013
. The recovery related to
a decrease of the deferred income tax liability that was associated with the acquisition of the Pan and Gold Rock projects.
During the three months ended June 30, 2014 and 2013, we recorded expense relating
to the Canadian corporate Part VI.1 dividend tax resulting from our Ser
ies A Preferred Share dividends of $328,265 and $32
3
,
770
, respectively.
Six months ended June 30, 2014 compared to the six months ended June 30, 2013
The following table summarizes our results of operation for the
six
months ended
June 30, 2014
compared to the
six
months ended
June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
Expenses
|
|
2014
|
|
2013
|
|
Change
|
Consulting
|
|
$
|
58,367
|
|
$
|
313,660
|
|
$
|
(255,293)
|
Depreciation and Accretion
|
|
|
340,197
|
|
|
241,255
|
|
|
98,942
|
Interest and Bank Charges
|
|
|
1,820
|
|
|
1,360
|
|
|
460
|
Investor Relations
|
|
|
54,844
|
|
|
11,357
|
|
|
43,487
|
Legal, Audit and Accounting
|
|
|
583,802
|
|
|
2,730,060
|
|
|
(2,146,258)
|
Mineral Exploration Expenditures
|
|
|
1,323,520
|
|
|
2,568,182
|
|
|
(1,244,662)
|
Office and Administration
|
|
|
1,398,067
|
|
|
631,144
|
|
|
766,923
|
Salaries and Benefits
|
|
|
3,091,083
|
|
|
2,638,043
|
|
|
453,040
|
Transfer Agent and Filing Fees
|
|
|
131,507
|
|
|
102,382
|
|
|
29,125
|
Travel
|
|
|
177,544
|
|
|
181,216
|
|
|
(3,672)
|
Operating Loss
|
|
|
7,160,751
|
|
|
9,418,659
|
|
|
(2,257,908)
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
(119,750)
|
|
|
18,186,868
|
|
|
(18,306,618)
|
Income Tax Recovery (Expense)
|
|
|
(732,867)
|
|
|
1,906,449
|
|
|
(2,639,316)
|
Net (Income) Loss
|
|
$
|
8,013,368
|
|
$
|
(10,674,658)
|
|
$
|
18,688,026
|
Significant differences between the periods are as follows:
Consulting expense
during the
six
months ended
June
3
0
, 2014 decreased $
255,293
to $
5
8
,
367
from $
313
,
660
during the
six
months ended
June
3
0
, 2013. The decrease in consulting expense is due to
a
consulting agreement with
our
former CEO expiring in the second quarter of 2013
which resulted in $65,776 of expense during the six months ended June 30, 2013
. In addition,
we
incurred additional consulting expenses in
the
2013
period
related to compensation stu
dies which were not performed during the comparable period of
2014.
Depreciation and Accretion expense
during the
six
months ended
June
3
0
, 2014 was $
3
40
,
197
compared to $
241
,
255
during the
six
months ended
June
3
0
, 2013, an increase of $
98
,
942
. This was primarily due
an increase in accretion expense and
a
23
% increase in depreciable assets from the comparable period of 2013. For the
six
months ended
June
3
0
, 2014, accretion expense
was $
44
,
878
compared to $
1,038
for the
six
months ended
June
3
0
, 2013
resulting from the asset retirement obligation on our Pan
P
roject
.
Legal,
A
udit and
A
ccounting
expense
totaled $
583
,
802
for the
six
months ended
June 30
, 2014, compared to $
2,730,060
in the comparable period, a decrease of $
2,146
,
258
.
The primary reason for the decrease in the
six
months ended
June
3
0
, 2014 is
we
incurred significant legal, tax advisory and accounting fees during the
six
months ended
June
3
0
, 2013 surrounding the non-recurring restructuring of our subsidiaries. Additionally, in comparison to the
six
months ended
June
3
0
, 2013,
we
incurred
a decreased level of expenses
related to the investigation of different financing options to meet capital demands as
we
bring the Pan
P
roject into production.
Mineral
E
xploration expense
for the
six
months ended
June
3
0
, 2014 decreased $1,2
44
,
662
, or
48
% from the comparable period of 2013. Details of the expenses in each period may be found in the schedule of mineral exploration expenses to the unaudited consolidated interim financial statements. Exploration levels are determined by the success of previous exploration programs on each project and cash available to fund additional programs.
As we are currently focused on bringing the Pan
P
roject into production, the cash expenditures for exploration have been reduced in order to preserve capital for completion of the Pan
P
roject. Additionally,
effective January 1, 2014
, as construction commenced on the Pan
P
roject, administrative Pan related expenses are no longer allocated to exploration and as a result these costs have been recorded in Office and
A
dministration and Salaries and benefits as appropriate.
Office and
A
dministration expense
for the
six
months ended
June
3
0
, 2014
was
$
1,398
,
067
compared to $
631
,
144
during the comparable period of 2013, an increase of $
766
,
923
. As noted above, the majority of this increase is due to the classification of Pan administrative expenses moving from
M
ineral
E
xploration expense to
O
ffice and
A
dministration expense. Also contributing to the increase are increases in overhead costs including insurance, information systems and rent, in both our Englewood and Ely offices, due to our continued growth.
Salaries and Benefits
expense
for the
six
months ended June 30, 2014 increased to $3,091,083 from $2,638,043 for the three months ended June 30, 2013. As noted above, a significant portion of the $45
3
,040 increase is due to the
classification of Pan administrative expenses moving from
M
ineral
E
xploration expense to
Salaries and Benefits expense. Increased employee levels and the related benefit costs also contributed to the increased expenses due to the Company’s continued growth. Additionally,
we
paid severances to certain
former
members of upper management as the result of a corporate overhead savings measure
to
preserve capital for the completion of the Pan
P
roject.
Other
I
ncome (
E
xpense)
for the
six
months ended
June 30, 2014
was
an expense
of $
119,750
compared to income of $
1
8
,
186
,
868
during the comparable period of 2013, a net
change
of $1
8
,
306
,
618
. As a result of the change in
our
parent Company’s functional currency from the Canadian dollar to the U.S. dollar effective January 1, 2014, there was no gain or loss recorded on the change in the fair value of derivative liability for the
six
months ended
June
3
0
, 2014. The Company recorded a gain of $
14
,
585
,
564
related to
the
change in the fair value of derivative liability for
the six
months ended
June
3
0
, 2013. Additionally, as a result of this change in functional currency to the U.S. dollar,
we
recorded a foreign exchange loss of only $
4
,
269
during the
six
months ended
June
3
0
, 2014 compared to a foreign exchange gain of $
3
,
522
,
316
for the corresponding period of 2013. Unrealized foreign exchange gains and losses will now primarily be recorded within accumulated other comprehensive income on the consolidated balance sheet.
Income
T
ax
R
ecovery (
E
xpense
)
for the
six
months ended
June
3
0
, 2014
was
an expense of
$
732
,
867
compared to
a recovery
of
$
1,906,4
4
9
during the comparable period of 2013. The primary reason for
the change when comparing
the
six
months ended
June
3
0
, 2014 to the
six
months ended
June
3
0
, 2013 is due to an income tax recovery of $
2,655,494
recorded during the
six
month
period
ended
June
3
0
, 2013
. The recovery related to
a decrease of the deferred income tax liability that was associated with the acquisition of the Pan and Gold Rock projects.
During the six months ended June 30, 2014 and 2013, we recorded expense relating
to the Canadian corporate Part VI.1 dividend tax resulting from our Ser
ies A Preferred Share dividends of $732,867 and $752,191, respectively.
Liquidity and Capital Resources
As of
June
3
0
, 2014, we had working capital
of $
41,490,380
, consisting
of current assets
of $46,391,620 and
current liabilities of
$
4,901,240
. This
represents a decrease
of $
4,570,341
from
the working capital balance
of $46,060,721 as
of December 31, 2013. Consistent with our plans, our working capital balance fluctuates as we use cash to fund our exploration, development activities and other operating expenses.
We have not generated any revenues from operations. These
unaudited
consolidated
interim
financial statements have been prepared on a going concern basis which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business in the foreseeable future.
We have incurred operating losses for the
six month
periods ended
June
3
0
, 2014 and 2013 of $
7,160,751
and $
9
,
418
,
659
, respectively, and since our inception on May 14, 1996 to
June
3
0
, 2014 our losses have resulted in an accumulated deficit of $
92,003,813
; further losses are anticipated in the development of our business. Our cash on hand and working capital as of
June
3
0
, 2014 was $4
5
,
881
,
898
and $
41,490,380
, respectively
.
We have also established an aggregate
U.S.
$55,000,000 senior secured credit facility consisting of a
U.S.
$45,000,000 project financing facility and a
U.S.
$10,000,000 cost overrun facility that is available to fund development and construction of the Pan Project.
Recoverability of amounts capitalized for our mineral properties, other than the Pan
and Spring Valley
Project
s
, are dependent upon our ability to raise funds or generate profits to enable funds to be available to complete exploration on the mineral properties, identify economically recoverable reserves and develop the mineral properties into profitable projects, or the receipt of adequate proceeds from the sale of such projects.
Recoverability of amounts capitalized for the Pan Project is dependent on our ability to complete development of the project and operate it profitability, or the receipt of adequate proceeds from any sale of the project.
The Spring Valley Project is subject to a joint venture agreement with Barrick Gold Corporation, who is responsible for carrying our share of costs incurred to production and arranging financing for our share of the cost of operations and mine exploration, development and construction expenses.
Our most significant expenditures for the remainder of 2014 are expected to be costs associated with the development of our Pan
P
roject and further exploration of our other properties. We also continue to incur operating expenses for salaries and benefits (exclusive of non-cash stock-based compensation), professional fees, community relations, investor relations, travel and other overhead expenses at our Colorado executive offices and Ely, Nevada locations.
Net cash used in operating activities was $
9,965,913
during the
six
months ended
June
3
0
, 2014 compared to $
4,931,516
during the
six
months ended
June
3
0
, 2013, an increase of $
5,034,397
. This increase is largely related to a foreign exchange loss of $
4
,
269
during the
six
months ended
June
3
0
, 2014 compared to a foreign exchange gain of $
3
,
522
,
316
during the comparable period of 2013. In addition, the timing of payments
for operating and exploration expenses
out of accounts payable and accrued expenses has led to a substantial increase period over period.
Net cash used in investing activities for the
six
months ended
June
3
0
, 2014 was $
23,340,304
compared to $
2,758,813
during the comparable period of 2013. Although most of our exploration
and development
stage expenditures are recorded as an expense rather than an investment, we capitalize the acquisition cost of land and mineral rights and certain equipment that has alternative future uses or significant salvage value, including furniture, and electronics, and the cost of these capitalized assets is reflected in our investing activities. We are also capitalizing Pan construction, permitting, engineering and other development activities. Cash used in investing activities during the
six
months ended
June
3
0
, 2014 consisted primarily of construction costs on the Pan
P
roject, and property and equipment additions of $
21
,
0
93
,
241
and $
617
,
913
for the acquisition of mineral properties.
An additional $1,629,150 was spent towards a reclamation deposit on the surety bond purchased for the reclamation and remediation obligations of our Pan
P
roject.
Net cash
provided
by
financing activities of $
26,635,754
consisted of
cash proceeds from equity offerings of $27,539,599 and cash proceeds of $400,501 from the exercise of stock options during the period. These cash proceeds were offset by preferred share dividend withholding tax payments of $466,192 and deferred financing costs paid of $8
38
,
154
.
Contractual Obligations
A summary of our contractual obligations as of and subsequent to June 30, 2014 is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2014
|
|
2015 - 2016
|
|
2017 - 2018
|
|
Thereafter
|
|
Total
|
Pan Construction Commitments
(1)
|
|
$
|
15,393,619
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
15,393,619
|
Contract Mining Commitments
(2)
|
|
|
10,362,704
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,362,704
|
Reclamation Bonding
(3)
|
|
|
794,488
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
794,488
|
Office and Office Equipment Leases
(4)
|
|
|
130,887
|
|
|
445,848
|
|
|
417,678
|
|
|
374,802
|
|
|
1,369,215
|
Financing Obligations
(5)
|
|
|
10,000
|
|
|
62,500
|
|
|
5,000
|
|
|
-
|
|
|
77,500
|
Consulting Arrangements
(6)
|
|
|
1,921
|
|
|
5,548
|
|
|
2,561
|
|
|
-
|
|
|
10,030
|
Total
|
|
$
|
26,693,619
|
|
$
|
513,896
|
|
$
|
425,239
|
|
$
|
374,802
|
|
$
|
28,007,556
|
|
(1)
|
|
We have entered into cancellable and non-cancellable agreements for capital expenditures relating to the development and construction of the Pan Project payable during 2014. No agreements have been entered into which extend into 2015 or beyond.
|
|
(2)
|
|
We signed the notice to proceed with Ledcor on July 21, 2014, triggering the start of the 63 month term of the contract. We will be paying Ledcor operational costs in the normal course of business,
however
a contract break fee exists if the contract is terminated out of convenience during the first 35 months of the contract. The break fee begins at $10,362,704 (U.S.$9,712,000) and declines over the 35 mont
h period
.
|
|
(3)
|
|
As a part of the permitting process of the Pan
P
roject, we are required to have a reclamation bond of approximately U
.
S
.
$15 million held with the BLM prior to the commencement of construction. We purchased a surety contract for the reclamation bond, which requires us to deposit
U
.
S
.
$3.7 million in installments into an escrow account as security for abandonment and remediation obligations. As of June 30, 2014, we have paid US$3.0 million of the U
.
S
.
$3.7 million deposit, which has been recorded in reclamation deposits on the consolidated balance sheet and we
intend to remit the remaining U.S.$0.7 million during 2014.
|
|
(4)
|
|
We have obligations under operating leases for our corporate offices in Englewood, Colorado until 2020, field offices in Ely, Nevada until 2015 and office equipment until 201
8
.
|
|
(5)
|
|
In connection with the
U.S.
$55 million Commonwealth Bank of Australia Project Finance Facility, there is certain agency fees payable over the course of the 36 month term.
|
|
(6)
|
|
We have cancellable consulting agreements which extend to 2018.
|
Off-Balance Sheet A
rrangements
There are no off balance sheet arrangements.
Inflation
We do not believe that inflation has had a significant impact on our consolidated results of operations or financial condition.
Environmental Compliance
Our current and future exploration and development activities, as well as our future mining and processing operations, are subject to various federal, state and local laws and regulations in the countries in which we conduct our activities. These laws and regulations govern the protection of the environment, prospecting, development, production, taxes, labor standards, occupational health, mine safety, toxic substances and other matters. We expect to be able to comply with those laws and do not believe that compliance will have a material adverse effect on our competitive position. We intend to obtain all licenses and permits required by all applicable regulatory agencies in connection with our mining operations and exploration activities. We intend to maintain standards of environmental compliance consistent with regulatory requirements.
We have an obligation to reclaim our properties after the surface has been disturbed by exploration
, development and construction
at the site.
As of
June
3
0
, 201
4
, we have
accrued $
9,299
as a current
liability included in
A
ccounts
P
ayable and
A
ccrued
L
iabilities
and $
2,205,410
as
a long-term liability,
compared
to $
9,299
and $51,967
as current
and long term liabilities, respectively,
at December 31, 201
3
,
related to reclamation and other closure requirements at our properties.
The significant increase during the six months ended June 30, 2014 is due to the commencement of construction at our Pan mine site, where construction on several of the mine site areas has begun or is nearing completion.
We have put
surety bonding into place
in respect of this obligation
.
We have accrued as a liability the present value of our best estimate of the liabilities as of
June
3
0
, 201
4
; however, it is possible that our obligations may change in the near or long term depending on a number of factors.
Critical
A
ccounting
P
olicies
Critical accounting estimates used in the preparation of the financial statements include our estimate of recoverable value on our property, equipment
and mine development
,
the determination of
site reclamation and rehabilitation
obligations
as well as the value assigned to stock-based compensation expense. These estimates involve considerable judgment and are, or could be, affected by significant factors that are out of our control.
The factors affecting stock-based compensation include estimates of when stock options might be exercised
,
stock price volatility
and expected forfeitures
. The timing
of which options are exercised
is out of our control and will depend, among other things, upon a variety of factors including the market value of
our
shares and financial objectives of the holders of the options. We used historical data to determine volatility in accordance with Black-Scholes modeling
;
however
,
the future volatility is inherently uncertain and the model has its limitations. While these estimates can have a material impact on the stock-based compensation expense and hence results of operations, there is no impact on our financial condition.
Our
impairment assessment
of
mineral properties and
equipment is based on market conditions for minerals, underlying mineral resources associated with the assets and future costs that may be required for ultimate realization through mining operations or by sale.
We
are
in an industry that is exposed to a number of risks and uncertainties, including exploration risk, development risk, commodity price risk, operating risk, ownership and political risk, funding and currency risk, as well as environmental risk. Bearing these risks in mind,
we
ha
ve
assumed recent world commodity prices will be achievable. We have considered the mineral resource reports by independent engineers on the
Pan, Gold Rock, Spring Valley, Tonopah and Golden Eagle
projects in considering the recoverability of the carrying costs of the mineral properties.
All of these assumptions are potentially subject to change
and most are
out of our control; however
,
changes to the assumptions
are not determinable. Accordingly, there is always the potential for a material adjustment to the value assigned to
mineral properties
and equipment.
We
ha
ve
an obligation to reclaim
our
properties after the surface has been disturbed by exploration
, development and construction
methods at the site. As a result
we
ha
ve
recorded a liability for the fair value of the reclamation costs
we
expect to incur.
We
estimate applicable inflation and credit-adjusted risk-free rates as well as expected reclamation time frames. To the extent that the estimated reclamation costs change, such changes will impact future reclamation expense recorded.
The functional currency of the Company is a factor in determining the method used to translate the Company’s financial statements and significantly affects the reported results; therefore, the determination of the functional currency is a critical accounting policy. The functional currency is the currency of the primary economic environment in which the entity operates – the currency of the environment in which the entity primarily generates and expends cash. We evaluate the functional currency of our entities when they are established, and evaluate whether the functional currency has changed based on significant changes in economic indicators. Such indicators include cash flow, sales price, sales market, expenses, financing, and intra-entity transactions and arrangements. Based upon such factors, we must use judgment to determine the appropriate functional currency.