10-K 1 goro-20131231x10k.htm 10-K 57f3ec50166b428

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to              

Commission File Number: 001-34857

 

GOLD RESOURCE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

Colorado

84-1473173

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

2886 Carriage Manor Point, Colorado Springs, Colorado 80906

(Address of Principal Executive Offices) (Zip Code)

 

 (303) 320-7708

(Registrant’s telephone number including area code) 

 

Securities registered under Section 12(b) of the Exchange Act:

 

 

 

 

Title of each class

 

Name of each exchange on which registered

 

Common Stock, $0.001 par value

NYSE MKT

 

Securities registered under Section 12(g) of the Exchange Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act.     Yes   ¨    No   x   

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes   ¨    No   x   

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   x     No   ¨ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to post such files).     Yes   x     No   ¨ 


 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

Larger accelerated filer

¨

Accelerated filer

x

 

 

 

 

Non-accelerated filer

¨  (Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨ No  x 

The aggregate market value of the common stock of Gold Resource Corporation held by non-affiliates as of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was $315,940,373 based on the closing price of the common stock of $8.71 as reported on the NYSE MKT, LLC.

As of March 31, 2014 there were 54,179,369 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Definitive Proxy Statement to be filed pursuant to Regulation 14A for the registrant’s 2014 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

 

 

 

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TABLE OF CONTENTS

 

 

 

 

 

 

 

 

Page

 

 

PART I 

 

 

 

 

ITEM 1:

BUSINESS

7

ITEM 1A:

RISK FACTORS

9

ITEM 1B:

UNRESOLVED STAFF COMMENTS

17 

ITEM 2:

PROPERTIES

18

ITEM 3:

LEGAL PROCEEDINGS

25

ITEM 4:

MINE SAFETY DISCLOSURES

25

 

 

 

 

PART II

 

 

 

 

ITEM 5:

MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES

26

ITEM 6:

SELECTED FINANCIAL DATA

31

ITEM 7:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

32

ITEM 7A:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

44

ITEM 8:

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

46

ITEM 9:

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

69

ITEM 9A:

CONTROLS AND PROCEDURES

69

ITEM 9B:

OTHER INFORMATION

72

 

 

 

 

PART III

 

 

 

 

ITEM 10:

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

72

ITEM 11:

EXECUTIVE AND DIRECTOR COMPENSATION

72

ITEM 12:

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

72

ITEM 13:

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

72

ITEM 14:

PRINCIPAL ACCOUNTING FEES AND SERVICES

72

 

 

 

 

PART IV

 

 

 

 

ITEM 15:

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

73

SIGNATURES 

75

EXHIBIT INDEX 

76

ADDITIONAL INFORMATION

Descriptions of agreements or other documents contained in this report are intended as summaries and are not necessarily complete. Please refer to the agreements or other documents filed or incorporated herein by reference as exhibits. Please see the exhibit index at the end of this report for a complete list of those exhibits.

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 CAUTIONARY NOTE REGARDING EXPLORATION STAGE STATUS

AND USE OF CERTAIN MINING TERMS

 

We are considered an “exploration stage” company under the U.S. Securities and Exchange Commission (“SEC”) Industry Guide 7, Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations (“Guide 7”), because we do not have reserves as defined under Guide 7.  Reserves are defined in Guide 7 as that part of a mineral deposit which can be economically and legally extracted or produced at the time of the reserve determination.  The establishment of reserves under Guide 7 requires, among other things, certain spacing of exploratory drill holes to establish the required continuity of mineralization and the completion of a detailed cost or feasibility study.  Since we have no reserves as defined in Guide 7, we have not exited the exploration stage and continue to report our financial information as an exploration stage entity as required under relevant accounting principles.  Although for purposes of ASC 915 Development Stage Entities we have exited the development stage and no longer report inception to date results of operations, cash flows and other financial information, we will remain an exploration stage company under Guide 7 until such time as we demonstrate reserves in accordance with the criteria in Guide 7.

Since we have no reserves, we have and will continue to expense all mine construction, mill and other mine facility construction costs, even though these expenditures are expected to have a future economic benefit in excess of one year.  We also expense our reclamation and remediation costs at the time the obligation is incurred.  Companies that have reserves and have exited the exploration stage typically capitalize these costs, and subsequently amortize them on a units-of-production basis as reserves are mined, with the resulting depletion charge allocated to inventory, and then to cost of sales as the inventory is sold.  As a result of these and other differences, our financial statements will not be comparable to the financial statements of mining companies that have established reserves and have exited the exploration stage.

We use certain terms in this report such as “production,” “mining or processing activities,” and “mine construction.”  Production means the estimated quantities of concentrates (tonnage and grade) delivered to stockpiles at our mine or shipped to our customer, which may result in disclosure of contained/payable metals and related metal sales.  Mining or processing activities means the process of extracting mineralized material from the earth and treating that material in our mill, yielding concentrate products containing metals.  Mine construction means work carried out to access areas in the mine containing mineralized material, which principally includes crosscutting, drifting, ramp construction, ventilation shafts and ancillary activities.  We use these terms in our report since we believe they are necessary and helpful for the reader to understand our business and operations.  However, we caution you that we do not have reserves and therefore have not exited the exploration stage as defined in Guide 7, and our use of the terminology described above is not intended to indicate that we have established reserves or have exited the exploration stage for purposes of Guide 7.  Furthermore, since we do not have reserves, we cannot provide any indication or assurance as to how long we will likely continue mining activities at our mine site or whether such activities will be profitable.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report, the words “plan,” “target,” “anticipate,” “believe,” “estimate,” “intend” and “expect” and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements include, without limitation, the statements regarding Gold Resource Corporation’s strategy, future plans for production, future expenses and costs, future liquidity and capital resources, future dividends and estimates of mineralized material. All forward-looking statements in this report are based upon information available to Gold Resource Corporation on the date of filing this report, and the company assumes no obligation to update any such forward-looking statements. Forward looking statements involve a number of risks and uncertainties, and there can be no assurance that such statements will prove to be accurate. Gold Resource Corporation’s actual results could differ materially from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Item 1A. Risk Factors” section of this Form 10-K.

In addition to the specific factors identified under “Item 1A. Risk Factors” in this report, other uncertainties that could affect the accuracy of forward-looking statements include:

·

Decisions of foreign countries and banks within those countries;

·

Unexpected changes in business and economic conditions, including the rate of inflation;

·

Changes in interest rates and currency exchange rates;

·

Timing and amount of production, if any;

·

Technological changes in the mining industry;

·

Our costs;

·

Changes in exploration and overhead costs;

·

Access and availability of materials, equipment, supplies, labor and supervision, power and water;

·

Results of current and future feasibility studies;

·

The level of demand for our products;

·

Changes in our business strategy, plans and goals;

·

Interpretation of drill hole results and the geology, grade and continuity of mineralization;

·

Rock formations, faults and fractures, water flow and possible CO2 gas exhalation or other unanticipated geological situations,

·

Acts of God such as floods, earthquakes and any other natural disasters.

·

The uncertainty of mineralized material estimates and timing of mine construction expenditures; and

·

Commodity price fluctuations.

This list, together with the factors identified under “Item 1A. Risk Factors,” is not exhaustive of the factors that may affect any of our forward-looking statements. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect. These forward-looking statements represent our beliefs, expectations and opinions only as of the date of filing this report. We do not intend to update these forward looking statements except as required by law. We qualify all of our forward-looking statements by these cautionary statements.

 

 

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 PART I

ITEM  1.BUSINESS

History and Organization

We are currently engaged in the exploration for and production of gold and silver in Mexico. We were organized under the laws of the State of Colorado in 1998. We pursue exploration of gold and silver projects, both in and outside of Mexico, that we believe feature low operating costs and have the potential to produce a high return on the capital invested. We hold a 100% interest in six properties in Mexico’s southern State of Oaxaca which we refer to as our Oaxaca Mining Unit. See “Item 2. Properties” for more information about our properties.

We completed our initial public offering (“IPO”) in August 2006. Since that time, we have raised additional capital pursuant to several private placements of our common stock. We used the proceeds of our IPO and additional private placements to conduct exploration activities at the El Aguila property (part of the Oaxaca Mining Unit). Based on our successful exploration efforts, we decided on April 11, 2007 to move forward to construct a mill and a mine at the El Aguila Project. We used the funds from subsequent private placements to build the Project. We began mining and milling operations at the El Aguila Project on July 1, 2010. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information. The El Aguila Project includes approximately 27,104 hectares of mining concessions, an access road from a major highway, haul roads, a mill facility and adjoining buildings, including an assay lab, an open pit and underground mine, tailings pond and other infrastructure. See “Item 2. Properties” for additional information.

Our principal executive offices are located 2886 Carriage Manor Point, Colorado Springs, Colorado 80906, and our telephone number is (303) 320-7708.  We maintain a website at www.goldresourcecorp.com and through a link on our website you can view the periodic filings that we make with the SEC.

Our operations in Mexico are conducted through our wholly-owned Mexican subsidiary, Don David Gold Mexico S.A.de C.V. In November 2013, we divested our interest in Golden Trump Mexico S.A. de C.V.

Please refer to page 24 of this report for a glossary of certain terms used in this report.

Developments During 2013

We completed our third full year of mining operations in 2013. Two mines are located at our El Aguila Project; the El Aguila open pit mine and the La Arista underground mine. Mining at the El Aguila open pit mine was essentially completed in 2010 and we transitioned to processing mineralized material from the La Arista underground mine in March 2011. We produced metal concentrates from the La Arista underground mine with gold and silver as our primary metal products and copper, lead and zinc as by-products.

During 2013, we continued to develop the La Arista underground mine, including reaching Level 17 on the decline ramp by year end. We developed multiple stopes and working faces for mining, predominantly from Level 10 to Level 16 during the year.  Mine infrastructure including water pump stations, ventilation fans and a mine communication system were completed in 2013The mining methods of long-hole stoping and cut-and-fill were utilized. 

We also completed our mill expansion project during 2013, which increased the processing capacity of the flotation circuit of the El Aguila mill facility to a nominal 1,500 tonnes per day.  The expansion included the addition of a second ball mill on the flotation circuit, doubling the amount of flotation cells, a Knelson concentrator and thickener surge tanks. We spent approximately $7.5 million and completed the mill expansion during the fourth quarter of 2013. We expect optimization of the expanded mill to continue into 2014.

In the fourth quarter of 2013, the Mexican federal government enacted a tax reform package that will be effective as of January 1, 2014. There are a number of significant changes in the Mexican tax reform package. The planned corporate income tax rate reductions to 29% in 2014 and 28% thereafter have been repealed and the corporate tax rate will remain at 30%. The tax base for income tax has been amplified considering certain limitations on deductions.  The business flat tax (IETU) has been repealed. A special mining royalty tax of 7.5% will apply to net profits derived by a property concession holder from the sale or transfer of extraction related activities. Net profits for the purpose of this royalty will be determined in a manner similar to the calculation of general taxable income with certain deductions not available, including for investment in fixed assets and interest. In addition, owners of mining concessions will be required to pay an additional extraordinary 0.5% royalty fee on gross revenue derived from the sale of gold, silver and/or platinum. Further, a 10% withholding tax on dividend distributions has been introduced but will not supersede treaty rates.   

 

Production Summary

During 2013, mill production totaled 84,835 ounces of precious metal gold equivalent from the El Aguila Project, which was a 6.2% decrease in mill production from 2012.  We processed an aggregate of 316,270 tonnes of mineralized

7


 

material with an average grade of 3.72 grams per tonne gold and 326 grams per tonne silver. See the table titled “Production and Sales Statistics—El Aguila Project” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for detailed information regarding our production statistics. 

Exploration

Exploration during 2013 continued to focus primarily on the El Aguila Project with infill and step-out drilling at the La Arista vein system. We identified a potential new area of mineralization we refer to as “Switchback” approximately 500 meters northeast of the La Arista deposit, for which drill results showed multiple veins over a 68 meter interval.  We also performed exploration at several of our other properties, including continuing a surface drill program on portions of the Las Margaritas property that focused on previously identified drill targets. Please see the map of our properties on page 18 for more information regarding our exploration properties. To date, we have not established proven or probable reserves as defined in the SEC’s Industry Guide 7 (“Guide 7”) at our El Aguila Project or any of our other properties. See Item 2. Properties” for additional information regarding our exploration activities.

Dividends

We declared an aggregate of $0.43 per share in dividends in 2013. In April 2012, we commenced a physical dividend program pursuant to which our shareholders have the option to convert the cash dividends we pay into physical gold and silver bullion and take delivery of their metal. See, “Item 5. Market For Common Equity, Related Stockholder Matters and Purchase of Equity Securities,” for additional information.  

No Proven or Probable Reserves 

We have not yet demonstrated the existence of proven or probable reserves at our El Aguila Project in Oaxaca, Mexico or any of our other properties. In Guide 7, the SEC defines a “reserve” as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Proven or probable reserves are those reserves for which (a) quantity is computed and (b) the sites for inspection, sampling, and measurement are spaced so closely that the geologic character is defined and size, shape and depth of mineral content can be established (proven) or the sites are farther apart or are otherwise less adequately spaced but high enough to assume continuity between observation points (probable). Reserves cannot be considered proven or probable unless and until they are supported by a feasibility study, indicating that the reserves have had the requisite geologic, technical and economic work performed and are economically and legally extractable.

We have not completed a feasibility study with regard to all or a portion of any of our properties to date. Any mineralized material discovered or produced by us should not be considered proven or probable reserves. As of December 31, 2013, none of our mineralized material met the definition of proven or probable reserves.

An estimate of proven and probable reserves in compliance with Guide 7 is currently in preparation for the La Arista Underground Mine on the El Aguila Project. 

Competitive Business Conditions

The exploration for, and the acquisition of gold and silver properties, are subject to intense competition. Identifying and evaluating potential mining prospects is a costly and time–consuming endeavor. Due to our limited capital and personnel, we are at a competitive disadvantage compared to many other companies with regard to exploration and, if warranted, advancement of mining properties. Our present limited capital means that our ability to compete for properties to be explored and developed is limited. We believe that competition for acquiring mineral prospects will continue to be intense in the future.

Government Regulations and Permits

In connection with mining, milling and exploration activities, we are subject to extensive Mexican federal, state and local laws and regulations governing the protection of the environment, including laws and regulations relating to protection of air and water quality, hazardous waste management and mine reclamation as well as the protection of endangered or threatened species. The department responsible for environmental protection in Mexico is SEMARNAT, which is similar to the United States Environmental Protection Agency. SEMARNAT has broad authority to shut down and/or levy fines against facilities that do not comply with its environmental regulations or standards. Potential areas of environmental consideration for mining companies, including ours, include but are not limited to, acid rock drainage, cyanide containment and handling, contamination of water sources, dust and noise.

In connection with our mill and mining operations at the El Aguila Project, we have and may continue to secure various regulatory permits from federal, state and local agencies. These governmental and regulatory permits generally govern the processes being used to operate, the stipulations concerning air quality and water issues, and the plans and obligations for

8


 

reclamation of the properties at the conclusion of operations. Regulations require that an environmental impact statement, known in Mexico as a Manifiestacion de Impacto Ambiental (“MIA”), be prepared by a third-party contractor for submission to SEMARNAT. We have submitted our MIA to SEMARNAT for their review and it has been approved. Studies required to support the MIA include a detailed analysis of these areas, among others: soil, water, vegetation, wildlife, cultural resources and socio-economic impacts. Although the regulatory process in Mexico has a public review component, proof of local community support for a project is required to gain final MIA approval. We have received the required local community support for the El Aguila area from which we are currently producing.  

We received a federal permit granting permission to begin open pit mining at the El Aguila Project from SEMARNAT in August 2009 and commenced mining operations soon thereafter. In December 2009, we also received a permit allowing us to begin developing our underground mine. We purchased a permitted water well for the mill site at the El Aguila Project. We believe the water provided by this well should be adequate to meet the needs for any mining activity for the foreseeable future, but any extreme seasonal changes may limit our water supply, which could adversely affect our mining operations. 

We have obtained, and plan to obtain at the appropriate time, environmental permits, licenses or approvals required for operations. We are not aware of any material violations of environmental permits, licenses or approvals issued with respect to our operations.

Customers

During the year ended December 31, 2013, 100% of our total sales of metals concentrate were made to Consorcio Minero de Mexico Cormin Mex. S.A. de C.V., a Trafigura Group Company. In the event that our relationship with Trafigura is interrupted for any reason, we believe that we would be able to locate another entity to purchase our metals concentrate and by-product metals. However, any interruption could temporarily disrupt the sale of our principal products and adversely affect our operating results. We periodically review our options of alternative sales outlets to mitigate the concentration of risk with one concentrate buyer in case of any unforeseen disruptions.

Employees 

We currently have nine full-time employees, five of which serve as our executive officers. These individuals devote all of their business time to our affairs. 

During 2013, we divested a wholly-owned Mexican subsidiary that employed our Mexican employees and our El Aguila Project Manager is currently our only Mexican employee. We contract for the services of our approximately 350 former employees with the firm that acquired our subsidiary and also use various independent contractors for constructing our underground mine, surface exploration drilling and trucking.

ITEM 1A.RISK FACTORS

This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operation, contains forward-looking statements that may be materially affected by several risk factors, including those summarized below:

Risks Relating to Our Company

Our existing production is limited to a single mine and any interruptions or stoppages in our mining activities would adversely affect our revenue. We are presently relying on a single mine to provide mineralized material for processing at our mill facility which we sell to fund our operations. Any interruption in our ability to mine this location, such as a labor strike, natural disaster, or loss of permits would negatively impact our ability to collect revenue following such interruption. Additionally, if we are unable to economically develop additional mines, we will eventually deplete the body of mineralized material and will no longer generate revenue sufficient to fund our operations. A decrease in or cessation of our mining operations would adversely affect our financial performance and may eventually cause us to cease operations.

If we are unable to achieve gold and silver production levels anticipated from our El Aguila Project, our financial condition and results of operation will be adversely affected. We have proceeded with the processing of the mineralized material from the La Arista underground mine at the El Aguila Project based on estimates of mineralized material identified in our drilling program and estimates of gold and silver recovery based on test work developed during our scoping study. However, risks related to metallurgy are inherent when working with extractable minerals. Sales of gold and silver that we realize from future mining activity will be less than anticipated if the mined material does not contain the concentration of gold and silver predicted by our geological exploration. This risk may be increased since we have not completed a feasibility study or reserve report with regard to any of our properties. If sales of gold and silver are less than anticipated, we may not be able to recover our investment in our property and our operations may be adversely affected. Our inability to realize

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production based on quarterly or annual projections may also adversely affect the price of our common stock and you may lose all or part of your investment.

We have no proven or probable reserves and our decision to commence production was not based on a study demonstrating economic recovery of any mineral reserves and is therefore inherently risky. Any funds spent by us on exploration or mine construction could be lost. We have not established the presence of any proven or probable mineral reserves, as defined by the SEC, at any of our properties. Under Guide 7, the SEC has defined a “reserve” as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Any mineralized material discovered or produced by us should not be considered proven or probable reserves.

In order to demonstrate the existence of proven or probable reserves, it would be necessary for us to perform additional exploration to demonstrate the existence of sufficient mineralized material with satisfactory continuity and obtain a positive feasibility study or other Guide 7 compliant report which demonstrates with reasonable certainty that the deposit can be economically and legally extracted and produced. We have not completed a feasibility study with regard to all or a portion of any of our properties to date. Since we commenced processing of mineralized material at the El Aguila Project without a feasibility study, there is inherent uncertainty as to whether the mineralized material can be economically produced or if so, for what period of time. The absence of proven or probable reserves makes it more likely that our properties may cease to be profitable and that the money we spend on exploration and mine construction may never be recovered.

Since we have no proven or probable reserves, our investment in mineral properties is not reported as an asset in our financial statements which may cause volatility in our net earnings and have a negative impact on the price of our stock. We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and report substantially all exploration and construction expenditures as expenses until such time, if ever, we are able to establish proven or probable reserves. Since it is uncertain when, if ever, we will establish proven or probable reserves, it is uncertain whether we will ever report these types of future capital expenditures as an asset. Accordingly, our financial statements report fewer assets and greater expenses than would be the case if we had proven or probable reserves, which could produce volatility in our earnings and have a negative impact on our stock price.

Estimates of mineralized material are based on interpretation and assumptions and may yield less mineral production under actual conditions than is currently estimated. When making determinations about whether to advance any of our projects, such as the El Aguila Project, we rely upon estimated calculations as to the mineralized material on our properties. Since we have not conducted a feasibility study demonstrating proven or probable reserves, estimates of mineralized material presented in our press releases and regulatory filings contain less certainty than would be the case if the estimates were made in accordance with the SEC-recognized definition of proven or probable reserves. Until mineralized material is actually mined and processed, it must be considered an estimate only. These estimates are imprecise and depend on geological interpretation and statistical inferences drawn from drilling and sampling analysis, which may prove to be unreliable. We cannot assure you that these mineralized material estimates will be accurate or that this mineralized material can be mined or processed profitably and any decision to move forward with mine construction and mineral processing is inherently risky. Any material changes in estimates of mineralized material will affect the economic viability of placing a property into production and such property’s return on capital. This risk is increased since we have not received a feasibility study on any of our properties. There can be no assurance that minerals recovered in small scale metallurgical tests will be recovered at production scale. These in-place mineralized material estimates will be diluted in the mining process.

 We have identified material weaknesses in our internal controls over financial reporting that, if not properly corrected, could materially adversely affect our operations and result in material misstatements in our financial statements.  As described in “Item 9A. Controls and Procedures,” we have concluded that our internal control over financial reporting was ineffective as of December 31, 2013 because certain material weaknesses existed in our internal control over financial reporting related to the validation of the completeness and accuracy of underlying data used in the determination of significant estimates and accounting transactions and the presentation of income tax expense. We are working to remediate these material weaknesses, however, if we are unable to remediate our material weaknesses in a timely manner, we may be unable to provide holders of our securities with the required financial information in a timely and reliable manner and we may incorrectly report financial information. Additionally, if our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results. These events could have a material adverse effect on our operations, result in sanctions or investigations by regulatory authorities, or loss of investor, supplier and customer confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our stock.

The volatility of the price of gold and silver could adversely affect our future operations and, if warranted, our ability to develop our properties. The profitability of our operations, the value of our properties and our ability to raise funding to conduct continued exploration and mine construction, if warranted, are directly related to the market price of gold, silver and other metals. The price of gold may also have a significant influence on the market price of our common

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stock. Our decision to put a mine into production and to commit the funds necessary for that purpose must be made long before the first revenue from production would be received. A decrease in the prices of gold and silver may prevent our properties from being economically mined or result in the write-off of assets whose value is impaired as a result of lower gold or silver prices. The volatility in gold and silver prices is illustrated by the following table, which sets forth for each of the past five calendar years, the average annual market prices in U.S. dollars per ounce of gold and silver based on the daily London P.M. fix:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mineral

 

2009

 

2010

 

2011

 

2012

 

2013

Gold

$

972.00 

$

1,225.00 

$

1,572.00 

$

1,669.00 

$

1,225.00 

Silver

$

14.67 

$

20.19 

$

35.12 

$

31.15 

$

19.61 

 

 

The price of gold and silver is affected by numerous factors beyond our control, including inflation, fluctuation of the United States dollar and foreign currencies, global and regional demand, the sale of gold and silver by central banks, and the political and economic conditions of major gold and silver producing countries throughout the world and accordingly no amount of planning or technical expertise can fully eliminate these risks. In the event gold prices decline or remain low for prolonged periods of time, we might be unable to develop our properties, which may adversely affect our results of operations, financial performance and cash flows.

We have incurred substantial losses in the past and may not continue to be profitable.  During the fiscal years ended December 31, 2013, 2012 and 2011, we reported net income of $0.1 million, $33.7 million and $58.4 million, respectively. We had an accumulated deficit of approximately $5.8 million as of December 31, 2013. While we were profitable during the past three years, our margins have decreased on a year-over-year basis and, there is no assurance that we will be profitable in the future. Unexpected interruptions in our mining business may cause us to incur losses or the revenue we generate from production may not be sufficient to fund continuing operations including exploration and mine construction costs. Our failure to generate future profits may adversely affect the price of our common stock and you may lose all or part of your investment.

We may require significant additional capital to fund our business plan. We may be required to expend significant funds to determine if mineralized material and or proven or probable mineral reserves exist at any of our non-producing properties, to continue exploration and if warranted, develop our existing properties and to identify and acquire additional properties to diversify our property portfolio. We have spent and may be required to continue to expend significant amounts of capital for drilling, geological and geochemical analysis, assaying and feasibility studies with regard to the results of our exploration. We may not benefit from these investments if we are unable to identify commercially exploitable mineralized material. If we do locate commercially mineable material or decide to put additional properties into production, we may be required to continue to develop the Arista underground mine, upgrade our milling facility at the El Aguila Project or construct new facilities.

Our ability to obtain necessary funding for these purposes, in turn, depends upon a number of factors, including our historical and prospective results of operations, the status of the national and worldwide economy, the price of gold, silver and other valuable metals and the costs associated with extracting them. In general, capital markets worldwide have been adversely affected by substantial losses by financial institutions, in turn caused by investments in asset-backed securities. The mining sector has also been negatively impacted by declining metal prices. We may not be successful in generating or obtaining the required financing, or if we can obtain such financing, such financing may not be on terms that are favorable to us. Failure to obtain such additional financing could result in delay or indefinite postponement of further mining operations or exploration and construction and the possible partial or total loss of our potential interest in our properties.

Revenue from the sale of our metals concentrates may be adversely affected by loss or damage to the concentrate during shipment and storage at our buyer’s facilities.  We rely on third party transportation companies to transport the concentrate to our buyer’s facilities for processing and further refining.  The terms of our sales contract with the buyer require us to rely on assay results from samples of our concentrate that are obtained at the buyer’s warehouse to determine the final sales value for our concentrates.  Once the concentrate leaves our mill facility, we no longer have direct custody and control of these products.  Theft or loss in transit or improper storage, fire, natural disasters, tampering or other unexpected events while at the buyer’s location may lead to the loss of all or a portion of our concentrate products.  Such losses may not be covered by insurance and may lead to a delay or interruption in our revenue and our operating results may be adversely affected.  Tampering, theft or environmental factors may impact the metal content of our concentrates between the time they are sampled at our mill site for provisional price purposes and the time they are sampled at the buyer’s warehouse for final price purposes and significant variances in these measurements may negatively impact our revenue.

Exploration, and if deemed feasible, development of mineral properties is inherently risky and could lead to unproductive properties and/or capital investments. Our long-term success depends on our ability to identify additional

11


 

mineral deposits on the El Aguila Property and any other properties that we may acquire and to develop one or more of those properties into commercially viable mining operations.  Mineral exploration is highly speculative in nature, involves many risks and is frequently non-productive.  These risks include unusual or unexpected geologic formations, and the inability to obtain suitable or adequate machinery, equipment or labor.  The success of gold exploration is determined in part by the following factors:

·

The identification of potential gold mineralization based on surface analysis;

·

Availability of government-granted exploration and construction permits;

·

The quality of our management and our geological and technical expertise; and

·

The capital available for exploration.

 T

 

 

Substantial expenditures are required to establish proven or probable reserves through drilling and analysis, to develop metallurgical processes to extract metal, and to develop the mining and processing facilities and infrastructure at any site chosen for mining.  Whether a mineral deposit will be commercially viable depends on a number of factors, which include, without limitation, the particular attributes of the deposit, such as size, grade and proximity to infrastructure; metal prices, which fluctuate widely; and government regulations, including, without limitation, regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals and environmental protection.  We may invest significant capital and resources in exploration activities and abandon such investments if we are unable to identify commercially exploitable mineral reserves.  The decision to abandon a project may have an adverse effect on the market value of our securities and the ability to raise future financing.

We currently do not enter into forward sales, commodity, derivatives or hedging arrangements with respect to our gold and silver production and, as a result, we are exposed to the impact of any significant decrease in the price of gold or silver. We sell the gold and silver we produce at prevailing market prices. Currently, we do not enter into forward sales, commodity, derivative or hedging arrangements to establish a price in advance for the sale of future gold or silver production, although we may do so in the future. As a result, we may realize the benefit of any short-term increase in the gold or silver price, but we are not protected against decreases in the gold or silver price. If the gold or silver price decreases significantly, our revenues may be materially adversely affected.

Our current property portfolio is limited to a single producing property and our ability to remain profitable over the long term will depend on our ability to expand the known deposits like La Arista and /or identify, explore and develop additional properties. Gold and silver properties are wasting assets. They eventually become depleted or uneconomical to continue mining. The acquisition of gold and silver properties and their exploration, mine construction and mining activities are subject to intense competition. Companies with greater financial resources, larger staff, more experience and more equipment for these types of activities may be in a better position than us to compete for such mineral properties. If we are unable to find, advance, and economically mine new properties, we most likely will not be profitable on a long term basis and the price of our common stock may suffer.

Our producing property is subject to a lease in favor of a third party which provides for royalties on production. We lease a portion of our El Aguila property from a third party. The leased portion of the property provides for a net smelter return royalty of 4% where production is sold in the form of gold/silver doré and 5% where production is sold in concentrate form. All of our production to date has been from the leased property and processed and sold as concentrate. The requirement to pay royalties to the owner of the concessions at our El Aguila property, which includes the open pit mine and underground mine, will reduce our profitability from production of gold or other precious metals.

Our profits will be subject to a new royalty tax imposed by the Mexican government beginning in 2014.  The Mexican government recently enacted tax reform legislation which requires mineral producers such as us to pay a royalty tax to the government of 7.5% on net profits from metal concentrate sales and an additional 0.5% royalty fee on gross sales of precious metals of gold, silver and platinum.  This new legislation may significantly and adversely affect our results of operations, including our cash flows, which may in turn affect the amount of capital we have available for typical uses of cash, including but not limited to, reinvestment into our business, funding new projects and paying dividends to our shareholders.   

The facilities and construction of our underground mine and optimization and operation of our mill are subject to all of the risks inherent in construction and operations. These risks include potential delays, cost overruns, shortages of material or labor, construction defects, breakdowns and injuries to persons and property. We expect to engage a combination of American and Mexican subcontractors and material suppliers in connection with the continued mine construction of the El Aguila Project. While we anticipate taking all measures which we deem reasonable and prudent in connection with our facilities and mine construction of the underground mine and the operation of the mill, there is no assurance that the risks described above will not cause delays or cost overruns in connection with such construction or operation. Any delays would

12


 

postpone our anticipated receipt of revenue and adversely affect our operations, which in turn may adversely affect the price of our stock.

Our underground mining operations are subject to unique risks. The exploration for minerals, mine construction and  mining operations from an underground mine involve a high level of risk and are often affected by hazards outside of our control. Some of these risks include, but are not limited to, underground fires or floods, fall-of-ground accidents, seismic activity and unexpected geological formations or conditions including noxious fumes or gases. The occurrence of one or more of these events in connection with our exploration, mine construction, or production activities may result in the death of, or personal injury to, our employees, other personnel or third parties, the loss of mining equipment, damage to or destruction of mineral properties or production facilities, monetary losses, deferral or unanticipated fluctuations in production, environmental damage and potential legal liabilities, all of which may adversely affect our reputation, business, prospects, results of operations and financial position.

Our operations are subject to permitting requirements which could result in the delay, suspension or termination of our operations. Our operations, including our ongoing exploration drilling program and production at the El Aguila Project, require permits from the Mexican government. If we cannot obtain or maintain the necessary permits, or if there is a delay in receiving future permits, our timetable and business plan will be adversely affected.

We have been named as a defendant in securities class action and shareholder lawsuits which could result in substantial damages and may divert management’s time and attention from our business.  We and certain of our officers and directors are named as defendants in a securities class action lawsuit, which is being appealed following its dismissal with prejudice, and also in a shareholder derivative lawsuit, each filed in the U.S. District Court for the District of Colorado and described in more detail in “Item 3. Legal Proceedings.” These lawsuits and any other related lawsuits are subject to inherent uncertainties, and the actual costs to be incurred relating to these lawsuits will depend upon many unknown factors. The outcome of the litigation is necessarily uncertain, and we could be forced to expend significant resources in the defense of these suits, and we may not prevail. Monitoring and defending against legal actions is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities. In addition, we may incur substantial legal fees and costs in connection with the litigation. We are not currently able to estimate the possible cost to us from these matters, and we cannot be certain how long it may take to resolve the litigation or the possible amount of any damages that we may be required to pay. We have not established any reserves for any potential liability relating to these lawsuits. It is possible that we could, in the future, incur judgments or enter into settlements of claims for monetary damages. A decision adverse to our interests on these actions could result in the payment of substantial damages and could have a material adverse effect on our cash flow, results of operations, financial position and stock price.

Our properties are located in Mexico and are subject to changes in political or economic conditions and regulations in that country. All of our existing properties are located in Mexico. The risks with respect to Mexico or other developing countries include, but are not limited to: nationalization of properties, military repression, extreme fluctuations in currency exchange rates, criminal activity, lack of personal safety or ability to safeguard property, labor instability or militancy, mineral title irregularities and high rates of inflation.    In addition, changes in mining or investment policies or shifts in political attitude in Mexico may adversely affect our business. We may be affected in varying degrees by government regulation with respect to restrictions on production, price controls, export controls, income taxes, expropriation of  property, maintenance of claims, environmental legislation, land use, land claims of local people, opposition from non-governmental organizations, water use and mine safety. The effect of these factors cannot be accurately predicted but may adversely impact our operations.  

We do not insure against all of the risks to which we may be subject in our operations. While we currently maintain insurance against general commercial liability claims and the physical assets at our El Aguila Project, we do not maintain insurance to cover all of the potential risks associated with our operations. We might be subject to liability for environmental, pollution or other hazards associated with mineral exploration and mine construction, which risks may not be insured against, which may exceed the limits of our insurance coverage, or which we may elect not to insure against because of premium costs or other reasons. We may also not be insured against interruptions to our operations. Losses from these or other events may cause us to incur significant costs which could materially adversely affect our financial condition and our ability to fund activities on our property. A significant loss could force us to reduce or terminate our operations.

Our ability to develop our property is subject to the rights of the Ejido (local inhabitants) to use the surface for agricultural purposes. Our ability to mine minerals is subject to maintaining satisfactory arrangements with the Ejido for access and surface disturbances. Ejidos are groups of local inhabitants who were granted rights to conduct agricultural activities on the property. We must negotiate and maintain a satisfactory arrangement with these residents in order to disturb or discontinue their rights to farm. While we have successfully negotiated and signed such agreements related to the El Aguila Project, our inability to maintain these agreements or consummate similar agreements for new projects could impair or impede our ability to successfully mine the properties.

13


 

Competition in the mining industry is intense, and we have limited financial and personnel resources with which to compete. Competition in the mining industry for desirable properties, investment capital and personnel is intense. Numerous companies headquartered in the United States, Canada and elsewhere throughout the world compete for properties and personnel on a global basis. We are an insignificant participant in the gold mining industry due to our limited financial and personnel resources. We presently operate with a limited number of personnel and we anticipate that we will compete with other companies in our industry to hire additional qualified personnel which will be required to successfully operate our mine and mill site. We may be unable to attract the necessary investment capital or personnel to fully explore and if warranted, develop our properties and be unable to acquire other desirable properties.

Since most of our expenses are paid in Mexican pesos, and we sell our production in United States dollars, we are subject to adverse changes in currency values that may adversely affect our results of operation. Our operations in the future could be affected by changes in the value of the Mexican peso against the United States dollar. The appreciation of non-U.S. dollar currencies such as the peso against the U.S. dollar increases expenses and the cost of purchasing capital assets in U.S. dollar terms in Mexico, which can adversely impact our operating results and cash flows. Conversely, depreciation of non-U.S. dollar currencies usually decreases operating costs and capital asset purchases in U.S. dollar terms. The value of cash and cash equivalents, and other monetary assets and liabilities, denominated in foreign currencies also fluctuate with changes in currency exchange rates.

Our activities are subject to significant environmental regulations, which could raise the cost of doing business or adversely affect our ability to develop our properties. Our mining operations are subject to environmental regulation by SEMARNAT, the environmental protection agency of Mexico. Regulations governing advancement of new projects or significant changes to existing projects require that an environmental impact statement, known in Mexico as a Manifiestacion de Impacto Ambiental, be prepared by a third party contractor for submission to SEMARNAT. Studies required to support this impact statement include a detailed analysis of many subject areas, including soil, water, vegetation, wildlife, cultural resources and socio-economic impacts. We may also be required to submit proof of local community support for a project to obtain final approval. If an environmental impact statement is adverse or if we cannot obtain community support, our ability to develop our properties could be adversely affected. Significant environmental legislation exists in Mexico, including fines and penalties for spills, release of emissions into the air, seepage and other environmental damage, which fines or penalties could adversely affect our financial condition or results of operation.

Our continuing reclamation obligations at the El Aguila Project and our other properties could require significant additional expenditures.  We are responsible for the reclamation obligations related to disturbances located on all of our properties, including the El Aguila Project. We have reserved a liability on our balance sheet to cover the estimated fair value of our reclamation obligation.  However, there is a risk that any reserve could be inadequate to cover the actual costs of reclamation when carried out.  Continuing reclamation obligations will require a significant amount of capital. There is a risk that we will be unable to fund these additional obligations, and further, that the regulatory authorities may increase reclamation requirements to such a degree that it would not be commercially reasonable to continue exploration activities, which may adversely affect our results of operations, financial performance and cash flows.

The nature of mineral exploration and production activities involves a high degree of risk and the possibility of uninsured losses. Exploration for and the production of minerals is highly speculative and involves greater risk than many other businesses. Many exploration programs do not result in the discovery of mineralization, and any mineralization discovered may not be of sufficient quantity or quality to be profitably mined. Our operations are, and any future mining operations or construction we may conduct will be, subject to all of the operating hazards and risks normally incident to exploring for and mining of mineral properties, such as, but not limited to:

·

Economically insufficient mineralized material;

·

Fluctuation in production costs that make mining uneconomical;

·

Labor disputes;

·

Unanticipated variations in grade and other geologic problems;

·

Environmental hazards;

·

Water conditions;

·

Difficult surface or underground conditions;

·

Industrial accidents;

·

Metallurgic and other processing problems;

·

Mechanical and equipment performance problems;

·

Failure of pit walls, dams, declines, drifts and shafts;

14


 

·

Unusual or unexpected rock formations;

·

Personal injury, fire, flooding, cave-ins and landslides; and

·

Decrease in the value of mineralized material due to lower gold and silver prices.

Any of these risks can materially and adversely affect, among other things, the construction of properties, production quantities and rates, costs and expenditures, potential revenues and targeted production dates. We currently have limited insurance to guard against some of these risks. If we determine that capitalized costs associated with any of our mineral interests are not likely to be recovered, we would incur a write down of our investment in these interests. All of these factors may result in losses in relation to amounts spent which are not recoverable, or result in additional expenses.

We depend upon a limited number of personnel and the loss of any of these individuals could adversely affect our business. Due to the relatively limited number of personnel that we employ and our status as an exploration stage company, we are dependent on a limited number of individuals to run our business.  These individuals include our executive officers, including Jason Reid, Joe Rodriguez, Rick Irvine and Barry Devlin.   If any of these individuals were to die, become disabled or leave our company, we would be forced to identify and retain individuals to replace them.  There is no assurance that we can find suitable individuals to replace them or to add to our employee base if that becomes necessary. We have no life insurance on any individual, and we may be unable to hire a suitable replacement for them on favorable terms, should that become necessary.

In the event of a dispute regarding title to our property or any facet of our operations, it will likely be necessary for us to resolve the dispute in Mexico, where we would be faced with unfamiliar laws and procedures. The resolution of disputes in foreign countries can be costly and time consuming, similar to the situation in the United States. However, in a foreign country, we face the additional burden of understanding unfamiliar laws and procedures. We may not be entitled to a jury trial, as we might be in the United States. Further, to litigate in any foreign country, we would be faced with the necessity of hiring lawyers and other professionals who are familiar with the foreign laws. For these reasons, we may incur unforeseen losses if we are forced to resolve a dispute in Mexico or any other foreign country.

We identified a material weakness in our internal control over financial reporting in a prior period, and if we are unable to achieve and maintain effective internal  control over financial reporting, investors could lose confidence in our financial statements and our company, which could have a material adverse effect on our business and stock price. In order to provide reliable financial reports and operate successfully as a publicly traded company, we must maintain effective control over our financial reporting. In connection with the restatement of certain interim financial statements during 2012, we determined and reported to our external auditors there was an internal control deficiency in our concentrate sales process at March 31, 2012 and June 30, 2012 that did not prevent or detect on a timely basis the potential impact to concentrate sales that resulted from material variances between assays from concentrate samples taken at the mine site, and assays from samples taken at the buyer’s warehouse, prior to final settlement with the buyer. Management concluded that concentrate sales should have been adjusted at the time the material assay differences were known, even though final settlement had not yet occurred. 

 

We have determined that this material weakness was remediated and did not exist as of December 31, 2013. However, we can make no assurances that additional material weaknesses or significant deficiencies may not subsequently arise. If we fail to achieve and maintain effective internal control over financial reporting and disclosure controls and procedures, it could result in additional significant deficiencies or material weaknesses, cause us to fail to meet our periodic reporting obligations, result in material misstatements in our financial statements, restatement of financial statements, sanctions or investigations by regulatory authorities, or loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our stock.

 

 Our directors and officers may be protected from certain types of lawsuits. The laws of the State of Colorado provide that our directors will not be liable to us or our shareholders for monetary damages for all but certain types of conduct as directors of the company. Our Articles of Incorporation permit us to indemnify our directors and officers against all damages incurred in connection with our business to the fullest extent provided or allowed by law. Additionally, we entered into individual indemnification agreements with our current directors and officers and we intend to execute substantially similar agreements with future directors and officers. The exculpation provisions of any of these items may have the effect of preventing shareholders from recovering damages against our directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our directors and officers against claims, including claims arising out of their negligence, poor judgment, or other circumstances.  Pursuant to the terms of the indemnification agreements, we are required to advance funds to our directors and officers prior to the final disposition of any threatened or actual legal proceeding, and including in the event it is ultimately determined that such officer or director is not entitled to indemnification pursuant to the terms of the indemnification agreement, in which case we will depend on reimbursement of advanced expenses from such individual.

15


 

Risks Related to Our Common Stock

Our stock price may be volatile and as a result you could lose all or part of your investment. In addition to other risk factors identified and to volatility associated with equity securities in general, the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock:

·

Changes in the worldwide price for gold and/or silver;

·

Volatility in the equities markets;

·

Disappointing results from our exploration or production efforts;

·

Producing at rates lower than those targeted;

·

Political and regulatory risks;

·

Weather conditions, including unusually heavy rains;

·

Failure to meet our revenue or profit goals or operating budget;

·

Decline in demand for our common stock;

·

Downward revisions in securities analysts’ estimates or changes in general market conditions;

·

Technological innovations by competitors or in competing technologies;

·

Investor perception of our industry or our prospects;

·

Actions by government central banks; and

·

General economic trends.

During the 2013 calendar year the price of our stock has ranged from a low of $4.49 to a high of $15.85. In addition, stock markets in general have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, you may be unable to resell your shares at a desired price.

Past payments of dividends on our common stock are not indictors of future payments of dividends. In 2012, we instituted a monthly cash dividend payable to holders of our common stock.  As of March 5, 2014, the instituted monthly dividend is $0.01 per share per month, reduced from $0.06 and $0.03 per share on two previous occasions. However, our ability to continue to pay dividends in the future will depend on a number of factors, including cash flow, mine construction requirements and strategies, other acquisition and/or construction projects, spot gold and silver prices and taxation and general market conditions. Further, a portion of our cash flow will likely be retained to finance our operations. Any material change in our operations may affect future dividends which may be modified at the discretion of our Board of Directors. Any decrease in our monthly dividend would likely have an adverse impact on the price of our common stock.

The sale of common stock by certain of our shareholders may depress the price of our common stock due to the limited trading market which exists. Due to a number of factors, the trading volume in our common stock has historically been limited.  The sale of a significant amount of common stock by our principal shareholders, including Hochschild Mining Holdings Limited, may depress the price of our common stock. As a result, your investment in our common stock may be adversely affected.  

A small number of existing shareholders own a significant amount of our common stock, which could limit your ability to influence the outcome of any shareholder vote. Our executive officers and directors beneficially own approximately 7.1% of our common stock and our largest shareholder owns approximately 17.5% of our common stock as of March 31, 2014. Under our Articles of Incorporation and Colorado law, the vote of a majority of the shares outstanding is generally required to approve most shareholder action. As a result, this group may be able to influence the outcome of shareholder votes for the foreseeable future, including votes concerning the election of directors, amendments to our Articles of Incorporation or proposed mergers or other significant corporate transactions. We have no existing agreements or plans for mergers or other corporate transactions that would require a shareholder vote at this time. However, you should be aware that you may have limited ability to influence the outcome of any vote in the future.

We are subject to the Continued Listing Criteria of the NYSE MKT and our failure to satisfy these criteria may result in delisting of our common stock. Our common stock is currently listed on the NYSE MKT. In order to maintain the listing, we must maintain certain share prices, financial and share distribution targets, including maintaining a minimum amount of shareholders’ equity and a minimum number of public shareholders. In addition to objective standards, the NYSE MKT may delist the securities of any issuer if, in its opinion, the issuer’s financial condition and/or operating results appear unsatisfactory; if it appears that the extent of public distribution or the aggregate market value of the security has become so reduced as to make continued listing on the NYSE MKT inadvisable; if the issuer sells or disposes of principal operating assets or ceases to be an operating company; if an issuer fails to comply with the NYSE MKT’s listing requirements; if an

16


 

issuer’s common stock sells at what the NYSE MKT considers a “low selling price” and the issuer fails to correct this via a reverse split of shares after notification by the NYSE MKT; or if any other event occurs or any condition exists which makes continued listing on the NYSE MKT, in its opinion, inadvisable.

If the NYSE MKT delists our common stock, investors may face material adverse consequences, including, but not limited to, a lack of trading market for our securities, reduced liquidity, decreased analyst coverage of our securities, and an inability for us to obtain additional financing to fund our operations.

Issuances of our stock in the future could dilute existing shareholders and adversely affect the market price of our common stock. We have the authority to issue up to 100,000,000 shares of common stock, 5,000,000 shares of preferred stock, and also to issue options and warrants to purchase shares of our common stock without stockholder approval. As of March 31, 2014, there were 54,179,369 shares of common stock outstanding. Future issuances of our securities could be at prices substantially below the price paid for our common stock by our current shareholders. In addition, we can issue blocks of our common stock in amounts up to 20% of the then outstanding shares without further shareholder approval. Because we experience lower trading volume in our common stock than many of our larger peers, the issuance of a significant amount of our common stock may have a disproportionately large impact on our share price compared to larger companies.

 

Our awards of stock options to employees may not have their intended effect. A portion of our total compensation program for our executive officers and key personnel has historically included the award of options to buy our common stock.  If the price of our common stock performs poorly, such performance may adversely affect our ability to retain or attract critical personnel.  In addition, any changes made to our stock option policies, or to any other of our compensation practices, which are made necessary by governmental regulations or competitive pressures could affect our ability to retain and motivate existing personnel and recruit new personnel.

ITEM  1B.  UNRESOLVED STAFF COMMENTS

None.

17


 

ITEM  2.PROPERTIES

We classify our mineral properties into two categories: “Operating Properties” and “Exploration Properties”. Operating Properties are properties on which we operate a producing mine and are what we consider a “material” property in accordance with Guide 7. We currently have an interest in six properties, including one Operating Property and five Exploration Properties, in the southern state of Oaxaca, Mexico. All of the properties are located in what is known as the San Jose structural corridor, which runs north 70 degrees west. Our properties comprise 55 continuous kilometers (34 miles) of this structural corridor, which spans three historic mining districts in Oaxaca.

The map below shows the general location of our six properties: C:\Users\Finance2\AppData\Local\Microsoft\Windows\Temporary Internet Files\Content.Word\GRC Project Oaxaca Loc Feb2014.jpg

 

As described in more detail in “Mining Concessions and Regulations” below we are granted concessions from the Mexican federal government to explore and mine our properties in Mexico.  Certain properties are held by us in fee as the concession holder and other properties we lease from a third party.  We are required to pay concession fees to the Mexican government to maintain our interest in these concessions, and we pay concession fees for all of our mineral properties, including those which are subject to the third-party lease.  The table below details information related to the mining concessions that comprise our six properties in Oaxaca:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Concession Name(s)

 

Size

 

Ownership

 

Acquisition Date

 

2013 Maintenance Fees Paid

 

 

 

(in hectares)

 

 

 

 

 

 

Operating Properties:

El Aguila

El Aguila and Mina El Aire

 

971 

 

Lease, subject to royalty

 

2002

$

11,387 

El Aguila

El Chacal and El Pilon

 

1,445 

 

Concession holder, subject to royalty

 

2010

 

3,988 

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El Aguila

El Pitayo 1, 2, 3 and 4,  El Talaje and San Luis

 

4,775 

 

Concession holder

 

2008

 

13,176 

El Aguila

El Zorrito

 

9,828 

 

Concession holder

 

2009

 

27,122 

El Aguila

El Coyote and La Curva

 

7,245 

 

Concession holder

 

2010

 

9,668 

El Aguila

Zopi

 

750 

 

Concession holder

 

2011

 

1,001 

El Aguila

San Miguel Fracc 1 and San Miguel Fracc 2

 

2,090 

 

Concession holder

 

2013

 

933 

Total :

 

 

27,104 

 

 

 

 

$

67,275 

 

 

 

 

 

 

 

 

 

 

Exploration Properties:

El Rey

El Rey

 

172 

 

Lease, subject to royalty

 

2002

$

1,909 

El Rey

El Virrey, La Reyna

 

728 

 

Concession holder

 

2005

 

8,082 

El Rey

El Marquez  

 

1,874 

 

Concession holder

 

2009

 

5,170 

El Chamizo

El Chamizo

 

26,386 

 

Concession holder

 

2011

 

35,209 

El Chamizo

San Pedro Fracc 2

 

1,860 

 

Concession holder, subject to royalty

 

2013

 

10,325 

Alta Gracia

David 1, David 2 and La Herradura

 

5,175 

 

Concession holder

 

2008

 

14,281 

Las Margaritas

La Tehuana

 

925 

 

Concession holder

 

2002

 

18,071 

El Fuego

San Pedro Fracc 1

 

2,554 

 

Concession holder, subject to royalty

 

2013

 

14,176 

Total:

 

 

39,674 

 

 

 

 

$

107,223 

 

 

 

 

 

 

 

 

 

 

Operating Properties

The El Aguila Project 

Background

The El Aguila Project currently comprises 16 mining concessions aggregating 27,104 hectares as described in the table above.

In 2002, we leased the El Aguila,  El Aire and La Tehuana concessions from a third party. The El Aguila and El Aire concessions are part of the El Aguila Project and the La Tehuana concession comprises the Las Margaritas property. The El Aguila lease agreement is subject to a 4% net smelter return royalty where production is sold in the form of gold/silver doré and 5% for production sold in concentrate form. Subject to meeting minimum exploration requirements, there is no expiration term for the lease. We may terminate it at any time upon written notice to the lessor and the lessor may terminate it if we fail to fulfill any of our obligations, which primarily consists of paying the appropriate royalty to the lessor.

In 2010, we subsequently acquired from a third party, at no additional cost, the El Chacal and El Pilon concessions, which are subject to a 2% royalty, but are not subject to the El Aguila lease agreement.  We filed for and received additional concessions from the Mexican government which are also not part of the concessions leased or acquired from the third party. The mineral concessions making up the El Aguila Project are located within the San Pedro Totolapam Ejido.  

Location and Access

The El Aguila Project is located in the Sierra Madre del Sur mountains of southern Mexico, in the central part of the State of Oaxaca. The property is located along a major paved highway approximately 120 kilometers (75 miles) southeast of Oaxaca City, the state’s capital city. At the village of San Jose de Gracia, the property is approximately four kilometers (2 ½ miles) due northwest from the village. We have constructed gravel and paved road from the village to the mine and mill sites which supports adequate access to the property by all necessary vehicles.

The climate of the El Aguila Project area is dry and warm to very warm with most rainfall occurring in the summer and annual precipitation averaging only 423.7 mm (17 inches). The average yearly temperature is 26.6 degrees centigrade (80°

19


 

F). The area is very rocky with scarce vegetation. Subsistence farming occurs and the main agricultural crop is agave cactus that is cultivated for the production of mezcal.  

Geology and Mineralization

The El Aguila Project is located in the San Jose de Gracia Mining District in Oaxaca. Multiple volcanic domes of various scales, and probably non-vented intrusive domes, dominate the district geology. These volcanogenic features are imposed on a pre-volcanic basement of sedimentary rocks. Gold and silver mineralization in this district is related to the manifestations of this classic volcanogenic system and is considered epithermal in character.

There are no known reserves at El Aguila, within the definition of the SEC Guide 7, and we have proceeded to commercially mine the property absent a feasibility study that would indicate any proven or probable reserves. As discussed in more detail below, we have produced metal concentrates from two locations on the El Aguila property, the open pit mine (“El Aguila open pit”) and the underground mine at the La Arista vein system. The El Aguila open pit mineralization is considered low sulfidation, epithermal mineralization of gold and silver with no base metals. The La Arista vein system is considered intermediate epithermal mineralization of gold, silver, copper, lead, and zinc. The host rock at the La Arista vein system is primarily andesite.

Facilities

We constructed a mill facility and infrastructure at the El Aguila Project for approximately $35 million in 2009 and expanded the mill facility in 2012 and 2013 for $23 million. The mill is flexible in its ability to process several types of mineralization. It has a differential flotation section capable of processing polymetallic mineralized material and producing up to three separate concentrate products for sale, and an agitated leach circuit capable of producing gold and silver doré for sale. The leach circuit has not been operated on a commercial scale to date. The mill expansion completed at the end of 2013 increased the number of flotation cells and added a second ball mill to allow for additional processing capacity. Depending on the specific type and characteristics of the mineralized material the mill, can process sulfide material in its flotation circuit at a nominal 1,500 tonnes of mineralized material per day or 540,000 tonnes per year. The agitated leach circuit can process a nominal 300 tonnes per day.

Power is provided by diesel generators at the site. We obtained water rights from the Mexican government for an amount of water we believe is sufficient to meet our operating requirements and pump it approximately five kilometers to the site from a permitted well located near the Totolapam River.

Additional improvements at the site include installation of a new diesel generation power plant and switch gear, paving a 3 kilometer section of the access road from the major highway, construction of a new surface maintenance garage and fuel station, haul roads from the mine site to the mill, mill facility office space, an assay lab, an exploration office, a tailings impoundment facility and other infrastructure.

In October 2007, we acquired an additional parcel of land for $153,000 which is approximately five hectares in size and adjacent to the community of San Jose de Gracia. We have completed construction of an employee housing facility on this parcel for approximately $1.9 million that includes 10 buildings and houses approximately 50 people.

Exploration Activities

The early history of activity at the El Aguila Project, as known by us, is prospecting and limited mining for gold and silver from the early 1900’s to the mid 1960’s. In 1998, the concessions were leased to Apex Silver Corporation of Denver, Colorado. Apex carried out an exploration program involving geologic mapping, surface sampling and an 11-hole drilling program (1,242 meters, or 4,074 feet). The results did not meet Apex’s expectations so it cancelled its lease on the property in 2002. We leased the property from a third party in October 2002.

In August 2003, we commenced an initial drilling and exploration program. Through 2013, we have drilled a total of 628 core holes (both surface and underground) equaling 177,691 meters (582,976 feet) and 166 reverse circulation holes equaling 14,367 meters (47,136 feet) for a total of 794 holes totaling 192,058 meters (630,112 feet).

Exploration at the El Aguila Project includes drilling the El Aguila open pit mineralization and drilling the El Aire vein system mineralization and the discovery and subsequent detailed drilling of the La Arista vein system. The La Arista vein system is made up of two primary veins, the Baja vein and the Arista vein which are approximately 30 meters apart but also include multiple near parallel veins of varying length. Currently more than 10 veins have been identified with indications of at least 4 more. The drilling of the La Arista vein system has shown mineralized material over 1,000 meters of strike length and more than 500 meters of depth with veins open along strike and depth.

Drilling at El Aguila in 2013 was mainly a continuation of the previous year’s activities of infill and step out drilling from the mine.  In 2013, 158 diamond drill holes (both surface and underground) totaling 51,924 meters (170,354 feet) were completed on the El Aguila Project. 

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Drilling continued to intercept high grade gold and silver mineralization in the La Arista deposit including 4.7 meters of 3.1 grams per tonne gold and 2,658 grams per tonne silver in a vein called “Splay 5.”.  Additional new exploration developments included the discovery of an area we refer to as “Switchback,” one of numerous parallel structures to the La Arista deposit targeted during 2013.  The Switchback is located approximately 500 meters northeast of the La Arista deposit and multiple veins were intercepted over a 68 meter interval.  Within this interval, a strongly mineralized zone measuring 15.5 meters wide averaged 2.95 grams per tonne gold, 86 grams per tonne silver, 0.44% copper, 0.84% lead, 2.09%t zinc and included 2.2 meters of 12.91 grams per tonne gold, 410 grams per tonne silver, 1.20% copper, 2.49% lead and 4.33% zinc.

Other activities at El Aguila during 2013 included surface structural mapping, alteration mapping and geochemical sampling. An airborne magnetic and radiometric geophysical survey was also completed over a large area of the El Aguila Project.  The results from these activities have generated various exploration targets that are marked for future drilling.

In 2014, we anticipate spending approximately $4.7 million for exploration at El Aguila, consisting of approximately $2.9 million for surface drilling and $1.8 million for underground drilling. We anticipate that all exploration activities will be funded from working capital.

Operating Activities

We commenced mining and milling operations at the El Aguila Project July 1, 2010. Mineral production during 2010 consisted of processing mineralized material from the El Aguila open pit located approximately 0.5 kilometers from the mill. Mining of the open pit was essentially completed in 2010. Approximately one-half of the open pit material was processed and one-half remains in stockpiles. 

During 2010, we began developing an underground mine to access two veins we named the La Arista and Baja veins, which we refer to as the “La Arista vein system.” The underground mine is approximately two kilometers from the mill. We have constructed a primary decline ramp that reached Level 17, approximately 300 meters vertically below the portal, at December 31, 2013.

During 2013, we continued underground mining of the La Arista mineralized material at our El Aguila Project. In 2013, a record 8,640 meters of tunnel construction was completed in the mine. This included 3,824 meters of capital mine infrastructure construction that increased the prepared mineralized material to 718,000 tonnes. With the added geological knowledge gained from two years of continuous operation at La Arista, mining operations began to produce from many additional veins in the system. By the end of 2013, mining was taking place between levels 4 and 16 adding flexibility to the operations. Infrastructure improvements in the mine during 2013 included upgrades to water pumping, power and ventilation services. Additional mobile haulage and drilling equipment was also added to the mine equipment fleet. 

In 2013, we processed underground mineralized material through the mill at an average of 920 tonnes of mineralized material per day and totaled 316,270 tonnes for the year, with an average grade of 3.7 grams per tonne gold and 326 grams per tonne silver. All of our processing is taking place using the mill’s flotation circuit, as we have not yet utilized the mill’s agitated leach circuit. We anticipate we would use the agitated leach circuit if ever we are able to mine sufficient material from the El Rey or any other property with potential oxide material.  

Please see the table titled “Production and Sales Statistics—El Aguila Project” in Item 7. Management’s Discussion and Analysis for additional details concerning our mineral production statistics for 2013 and 2012.

Exploration Properties

We currently hold an interest in five additional properties in Oaxaca, which we classify as exploration properties. We do not currently consider any of these properties to be a “material” property for purposes of Guide 7 and none of these properties has any known reserves. We anticipate all exploration activities at these properties will be funded through our working capital.

The El Rey Property

The El Rey property consists of concessions on the far north east end of our 55 kilometer mineralized corridor in the state of Oaxaca known as El Rey,  El Virrey,  La Reyna and El Marquez. We acquired the El Rey concession from a third party and it is subject to a 2% net smelter return royalty payable to him on a portion of the claims. We obtained the remaining concessions by staking claims and filing for concessions with the Mexican government.

The El Rey property is approximately 64.4 kilometers (40 miles) by road from the El Aguila Project. There is no plant or equipment on the El Rey property. If exploration is successful, any mining would probably require an underground mine where mineralized material could be trucked to the mill site at the El Aguila Project for processing. Limited drilling at El Rey has encountered gold and silver mineralization up to one meter of 132.5 grams per tonne gold (4.25 ounces per tonne) and 1.5

21


 

meters of 958 grams per tonne silver. The mineralized material has been located within 100 meters from the surface. To date, we have drilled 48 core holes for a total of 5,278 meters (17,316 feet) at the El Rey property. Early in 2012, we completed a small amount of work to finish refurbishing and extending an existing shaft on the property to permit underground exploratory drilling.  We ceased work at El Rey during 2012 following a request to obtain additional approvals from local community agencies. We continue to work with the local agencies and anticipate resolving the matter, but we have no assurance we will be able to resume our exploration activities in the near term.  If the matter is resolved, we will conduct follow-up drilling and exploration based on the drilling done in 2008.  We do not anticipate any significant exploration activities at El Rey in 2014, however, we plan to conduct the acceptable minimum amount of work required to maintain the claims.  

The Las Margaritas Property

The Las Margaritas property is made up of the La Tehuana concession. We leased this concession in October 2002 from a third party along with two of the concessions comprising the El Aguila property and the terms of this agreement are discussed under “The El Aguila Project” above. It is comprised of approximately 925 hectares located along our 55 kilometer mineralized trend and adjacent to the El Aguila Project. 

In 2013, we conducted limited surface diamond drilling focusing on previously identified targets.  In 2013, nine surface diamond drill holes totaling 3,033 meters (9,951 feet) were completed on the Las Margaritas property.  Economically significant gold and silver were encountered and we plan to conduct follow-up drilling in 2014.  Drilling will test various structural and mineralized exploration targets and we have budgeted approximately $750,000 at Las Margaritas for this purpose.

The Alta Gracia Property 

In August 2009, we acquired claims adjacent to the Las Margaritas property in the Alta Gracia Mining District by filing concessions known as the David 1, the David 2 and La Herradura,  totaling 5,175 hectares. 

Previous drill results from Alta Gracia were assessed during 2013. Detailed mapping and sampling followed by additional surface drilling is planned for 2014.  Drill results will be evaluated to assess the resource potential of Alta Gracia to determine if mining is warranted.  We will also conduct additional metallurgical test work to determine the amenability of the mineralized material at our El Aguila processing facility.

We have budgeted approximately $500,000 for exploration at Alta Gracia in 2014. 

The El Chamizo Property

In June 2011, we staked mineral claims between the El Rey property and Alta Gracia property along trend and acquired an exploration concession from the Mexican government of approximately 26,386 hectares (101 square miles) referred to as El Chamizo.  In March 2013, we acquired a property known as Cerro Colorado (comprised of the San Pedro Fracc. 2 concession) from Almaden Minerals, Ltd. consisting of approximately 1,860 hectares.  The Cerro Colorado property is surrounded by our El Chamizo concession and we include it as part of the El Chamizo property.  Any future production from the Cerro Colorado concession is subject to a 2% net smelter return royalty in favor of Almaden. 

Because of the close proximity of El Chamizo to Alta Gracia, exploration activity began on this property during late 2011 and to date has been limited to geochemical sampling and drilling of eight shallow core holes for a total of 1,327 meters (4,353 feet).  No significant work was conducted at El Chamizo during 2012 and 2013.  In 2014, exploration on the property will include additional surface geological mapping and geochemical sampling of several new prospective targets identified on the El Chamizo property.  We have budgeted approximately $150,000 for regional exploration at El Chamizo and along the same mineralized trend and geologic structural corridor as our other properties in Mexico.

El Fuego Property

In March 2013, the Company acquired the El Fuego property (comprised of the San Pedro Fracc. 1 concession) from Almaden Minerals Ltd. subject to a 2% net smelter return royalty. The El Fuego property consists of approximately 2,554 hectares and is located south of our Alta Gracia and El Chamizo properties.  In 2013, El Fuego was included in the property-wide airborne geophysical survey.  A preliminary investigation was also conducted on the El Fuego property during 2013. In 2014, geologic mapping and surface sampling is planned on El Fuego. This work will allow us to meet the acceptable minimum amount of work required to maintain the claims.    

Mining Concessions and Regulations 

Mineral rights in Mexico belong to the Mexican federal government and are administered pursuant to Article 27 of the Mexican Constitution. All of our mining concessions are exploitation concessions, which may be granted or transferred to

22


 

Mexican citizens and corporations. Our leases or concessions are held by our Mexican subsidiaries. Exploitation concessions have a term of 50 years and can be renewed for another 50 years. Concessions grant us the right to explore and exploit all minerals found in the ground. Maintenance of concessions requires the semi-annual payment of mining duties (due in January and July) and the performance of assessment work, on a calendar year basis, with assessment work reports required to be filed in the month of May for the preceding calendar year. The amount of mining duties and annual assessment are set by regulation and may increase over the life of the concession and include periodic adjustments for inflation. Mining concessions are registered at the Public Registry of Mining in Mexico City and in regional offices in Mexico.

Mexican mining law does not require payment of finder’s fees or royalties to the government, except for a discovery premium in connection with national mineral reserves, concessions and claims or allotments contracted directly from the Mexican Geological Survey. None of the claims held by any of our subsidiaries are under such a discovery premium regime.

Ejido Lands and Surface Right Acquisitions 

Surface lands at our Oaxaca mining properties are Ejido lands (agrarian cooperative lands granted by the federal government to groups of Campesinos pursuant to Article 27 of the Mexican Constitution of 1917). Prior to January 1, 1994, Ejidos could not transfer Ejido lands into private ownership. Amendments to Article 27 of the Mexican Constitution in 1994 now allow individual property ownership within Ejidos and allow Ejidos to enter into commercial ventures with individuals or entities, including foreign corporations. We have an agreement with the local San Pedro Totolapam Ejido allowing exploration and exploitation of mineralization at the El Aguila Project and our surrounding properties.

Mexican law recognizes mining as a land use generally superior to agricultural. However, the law also recognizes the rights of the Ejidos to compensation in the event mining activity interrupts or discontinues their use of the agricultural lands. Compensation is typically made in the form of a cash payment to the holder of the agricultural rights. The amount of such compensation is generally related to the perceived value of the agricultural rights as negotiated in the first instance between the Ejidos and the owner of the mineral rights. If the parties are unable to reach agreement on the amount of the compensation, the decision will be referred to the government.

We have established surface rights agreements with the San Pedro Totolapam Ejido and the individuals impacted by our proposed operations which allow disturbance of the surface where necessary for our exploration activities and mining operations.

Office Facilities

We maintain offices in Oaxaca and in Colorado.  We constructed an administrative office building adjacent to the mill site as part of the facilities at the El Aguila Project. We also lease office space in Oaxaca City, Oaxaca consisting of approximately 3,000 square feet.  The lease commenced in 2012 for ten years at approximately $6,000 per month.  In 2010, we purchased a building in Colorado Springs, Colorado, containing approximately 4,500 square feet, which serves as our executive and administrative headquarters. We also established a small satellite office in Denver, Colorado in 2012 consisting of approximately 2,500 square feet, which we leased for three years at approximately $5,000 per month.

 

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Glossary

The following terms used in this report shall have the following meanings:

 

 

 

 

 

Adit:

A more or less horizontal drive (walk-in mine) into a hill that is usually driven for the purpose of intersecting or mining an mineralized deposit. An adit may also be driven into a hill to intersect or connect a shaft for the purpose of dewatering. Adits were commonly driven on a slight incline to enable loaded mine trucks to have the advantage of a downhill run out, while the empty (lighter) truck was pushed uphill back into the hill. The incline also allows water to drain out of the adit. An adit only becomes a tunnel if it comes out again on the hill somewhere, like a train tunnel.

 

 

Andesite:

An extrusive igneous, volcanic rock, of intermediate composition, with aphanitic to porphyritic texture characteristic of subduction zones, such as the western margin of South America.

 

 

Doré:

Unrefined gold and silver bars usually containing more than 90% precious metal.

 

 

Epithermal:

Used to describe gold deposits found on or just below the surface close to vents or volcanoes, formed at low temperature and pressure.

 

 

Gram:

A metric unit of weight and mass, equal to 1/1000th of a kilogram. One gram equals .035 ounces. One ounce equals 31.103 grams.

 

 

Hectare:

Another metric unit of measurement, for surface area. One hectare equals 1/200th of a square kilometer, 10,000 square meters, or 2.47 acres. A hectare is approximately the size of a soccer field.

 

 

Kilometer:

Another metric unit of measurement, for distance. The prefix “kilo” means 1000, so one kilometer equals 1,000 meters, one kilometer equals 3,280.84 feet, which equals 1,093.6 yards, which equals 0.6214 miles.

 

 

Manto:

A mineralogy term meaning a layer or stratum.

 

 

Mineralized Material:

Minerals or any mass of host rock in which minerals of potential commercial value occur.

 

 

Net Smelter Return Royalty:

A share of the net revenue generated from the sale of metal produced by the mine.

 

 

Mineral Deposit:

Rocks that contain economic amounts of minerals in them and that are expected to be profitably mined.

 

 

Portal:

The entrance to the mine at the surface.

 

 

Silicified:

Is combined or impregnated with silicon or silica.

 

 

Tonne:

A metric ton. One tonne equals 1000 kgIt is approximately equal to 2,204.62 pounds.

 

 

Volcanogenic:

Of volcanic origin.

 

 

Volcanic domes:

These are mounds that form when viscous lava is erupted slowly and piles up over the vent, rather than moving away as lava flow. The sides of most domes are very steep and typically are mantled with unstable rock debris formed during or shortly after dome emplacement. Most domes are composed of silica-rich lava which may contain enough pressurized gas to cause explosions during dome extrusion.

 

24


 

 

 

 

 

 

 

 

Conversion Table

 

 

Metric System

Imperial System

 

 

1 metre (m)

3.2808 feet (ft)

 

 

1 kilometer (km)

0.6214 mile (mi)

 

 

1 square kilometer (km2)

0.3861 square mile (mi2)

 

 

1 square kilometer (km2)

100 hectares (has)

 

 

1 hectare (ha)

2.471 acres (ac)

 

 

1 gram (g)

0.0322 troy ounce (oz)

 

 

1 kilogram (kg)

2.2046 pounds (lbs)

 

 

1 tonne (t)

1.1023 tons (t)

 

 

1 gram/tonne (g/t)

0.0292 ounce/ton (oz/t)

 

ITEM  3.LEGAL PROCEEDINGS

A securities class action lawsuit subsequently captioned In re Gold Resource Corp. Securities Litigation, No.1:12-cv-02832 was filed in U.S. District Court for the District of Colorado naming us and certain of our current and former officers and directors as defendants on October 25, 2012.   The complaint alleged violations of federal securities laws by us and certain of its officers and directors. On July 15, 2013, the federal district court granted our motion to dismiss the lawsuit with prejudice.  The plaintiff has appealed the District Court’s decision to the United States Court of Appeals for the Tenth Circuit.

   

On February 8, 2013, a shareholder’s derivative lawsuit entitled City of Bristol Pension Fund v. Reid et al., No. 1:13-CV-00348 was filed in the U.S. District Court for the District of Colorado naming us as a nominal defendant, and naming seven of our current and former officers and directors as defendants. The lawsuit alleges breach of fiduciary duty, gross mismanagement and unjust enrichment and seeks to recover, for the Company’s benefit, unspecified damages purportedly sustained by us in connection with the alleged misconduct identified in the class action lawsuit discussed above and an award of attorney’s fees and costs. The action was stayed pending resolution of our motion to dismiss in the securities class action lawsuit and the stay has been extended pending the appeal. There has been no discovery as the case is in its initial stages and accordingly, we are not in a position to assess the likelihood or estimate the potential range of loss associated with this matter; however, pursuant to our articles of incorporation, we are obligated to indemnify our officers and directors with respect to this litigation and we will bear the cost associated with defense of these claims.

  

ITEM 4. MINE SAFETY DISCLOSURES 

Not applicable.

 

 

 

25


 

 PART II

ITEM 5.MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock trades on the NYSE MKT LLC stock exchange, which we refer to as the NYSE MKT, under the symbol “GORO”.  The table below sets forth the high and low sales prices for our common stock on the NYSE MKT for the last two fiscal years on a quarterly basis

 

 

 

 

 

 

Year Ending

 

High

 

Low

 

 

 

 

 

December 31, 2013

 

 

 

 

First Quarter

$

15.85

$

12.26

Second Quarter

 

13.20

 

7.92

Third Quarter

 

9.43

 

6.31

Fourth Quarter

 

6.54

 

4.49

 

 

 

 

 

December 31, 2012

 

 

 

 

First Quarter

$

27.74

$

21.65

Second Quarter

 

28.37

 

21.03

Third Quarter

 

26.96

 

16.54

Fourth Quarter

 

21.98

 

12.13

 

On March 31, 2014, the high and low sales prices of our common stock on the NYSE MKT stock exchange were $5.10 and $4.72, respectively, and we had approximately 200 record holders and 20,000 beneficial holders of our common stock. 

Securities authorized for issuance under equity compensation plans

The following table provides information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our equity compensation plans as of December 31, 2013.

 

 

 

 

 

 

 

Plan Category

Number of Securities to be issued upon exercise of outstanding options, warrants and rights (a)

 

Weighted-average Exercise price of Outstanding options, warrants and rights (b)

 

Number of securities Remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)

 

 

 

 

 

 

Equity compensation plans approved by security holders:

5,615,000

$

9.66

 

1,535,000

Equity compensation plans not approved by security holders:

 -

 

 -

 

 -

Total

5,615,000

$

9.66

 

1,535,000

 

 

 

 Purchases of Equity Securities by the Company and Affiliated Purchasers

In September 2011, our Board of Directors authorized a share repurchase program to purchase up to $20.0 million of our common stock with no pre-established end date.  The table below sets forth the repurchase activity during the past two years; 2013 is omitted from the table as we had no repurchases of our common stock during the period:

26


 

 

 

 

 

 

 

 

 

 

 

Issuer Purchases of Equity Securities

Registered Pursuant to Section 12 of the Exchange Act

Period

 

Total Number of Shares Purchased

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)

 

Maximum Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs

 

 

 

 

 

 

 

 

(in thousands)

January 1-March 31, 2012

 

 -

$

 -

 

 -

$

18,046 

April 1-June 30, 2012

 

 -

 

 -

 

 -

 

18,046 

July 1-September 30, 2012

 

82,740 

 

18.07 

 

82,740 

 

16,551 

October 1-December 31, 2012

 

149,407 

 

16.30 

 

149,407 

 

14,116 

Total 2012

 

232,147 

$

16.93 

 

232,147 

$

14,116 

 

 

 

 

 

 

 

 

 

 

(1)

The total number of shares purchased as part of publicly announced plans or programs includes shares purchased under the Board’s authorizations described above.

 

Performance Graph

The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference in such filing.

The following graph compares the performance of Gold Resource Corporation common stock with the performance of the NYSE MKT Composite Index and the S&P TSX Global Gold Fund, assuming reinvestment of dividends on December 31 of each year indicated. The graph assumes $100 invested at the per share closing price in Gold Resource Corporation and each of the indices on December 31, 2008.

27


 

Picture 2

Transfer Agent

Computershare Investor Services, Inc. is the transfer agent for our common stock. The principal office of Computershare is located at 350 Indiana Street, Suite 750, Golden, CO 80401 and its telephone number is (303) 262-0600.

Dividend Policy

Since commencing mining operations at our El Aguila Project, one of management’s primary goals is to make cash dividend distributions to shareholders. As described in more detail below in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we use Cash Flow from Mine Site Operations as a metric to determine whether to declare and pay dividends to shareholders.  Our long-term goal was to distribute approximately one-third of Cash Flow from Mine Site Operations back to shareholders. Beginning July 2010, we declared a special dividend every month until August 2011 when we instituted a regular monthly dividend policy of $0.05 per share at that time. In April 2012, we increased the monthly dividend to $0.06 per share, and decreased it to $0.03 per share in April 2013. In December 2013 we lowered the per share dividend to $0.01 per share due to a decrease in Cash Flow from Mine Site Operations from lower gold and silver prices, the new Mexican tax reform legislation imposed on precious and non-precious metal producers and corresponding increase in our need for working capital. Special and regular dividends should not be considered a prediction or guarantee of future dividends. Our instituted dividend may be modified or discontinued at any time at the discretion of our Board of Directors, depending on variables such as, but not limited to, operating cash flow, mine construction requirements and strategies, other construction projects, spot gold and silver prices, taxation and general market conditions. At the present time, we are not a party to any agreement that would limit our ability to pay dividends. All dividends have been declared and charged against additional paid in capital. 

The table below sets forth the frequency and amounts of cash dividends declared on our common stock for the fiscal years ended December 31, 2012 and 2013, respectively:

 

 

 

 

 

28


 

Date Declared

 

Per Share Amount

2012

 

 

January 26, 2012

$

0.05 

February 24, 2012

 

0.05 

March 27, 2012

 

0.05 

April 30, 2012

 

0.06 

May 29, 2012

 

0.06 

June 28, 2012

 

0.06 

July 24, 2012

 

0.06 

August 28, 2012

 

0.06 

September 27, 2012

 

0.06 

October 31, 2012

 

0.06 

November 27, 2012

 

0.06 

December 31, 2012

 

0.06 

Total  2012:

$

0.69 

2013

 

 

January 30, 2013

$

0.06 

February 26, 2013

 

0.06 

March 27, 2013

 

0.06 

April 29, 2013

 

0.03 

May 28, 2013

 

0.03 

June 27, 2013

 

0.03 

July 30, 2013

 

0.03 

August 27, 2013

 

0.03 

September 26, 2013

 

0.03 

October 29, 2013

 

0.03 

November 27, 2013

 

0.03 

December 26, 2013

 

0.01 

Total 2013:

$

0.43 

 

Physical Dividend Program 

 

In April 2012, we launched a physical dividend program pursuant to which our shareholders have the option to convert the cash dividends we pay into physical gold and silver bullion. As part of our overall strategy to diversify our treasury and to facilitate this program, we purchase gold and silver bullion.  In order for a shareholder to convert their cash dividend into physical gold and/or silver, the shareholder must opt-in to the physical dividend program and request the conversion of their cash dividend, or portion thereof, into physical gold and/or silver. For those shareholders who elect to convert their cash dividend into gold and/or silver bullion, the gold and silver will be delivered in the form of gold/silver one ounce bullion rounds. No action is required by any shareholder who elects not to participate in the physical metals program. For those shareholders who wish to convert any portion of their cash dividend into gold and/or silver bullion, the process is summarized as follows:

 

·

Shareholders must register and hold their Gold Resource Corporation common shares in their name directly with our transfer agent, Computershare Investor Services, and not through a brokerage house or other intermediary held in “street name”. This is a requirement so that we can locate and validate the shareholder’s position in our common stock.

 

·

Shareholders must set up an individual account with Gold Bullion International (“GBI”), 1325 Avenue of the Americas, 7th Floor, Suite 0703-2, New York, NY 10019. GBI facilitates the cash to gold and silver conversion.

 

29


 

·

Shareholders then direct their cash dividend check issued by Computershare to be electronically sent to that shareholder’s GBI account for the option to have it, or any portion thereof that denominates into a one ounce gold or silver bullion round. The election to convert all or any portion of the shareholder’s cash dividend into bullion is governed by an agreement between the shareholder and GBI.

 

·

Shareholders with accounts at GBI who wish to change their current gold, silver or cash allocations for their cash dividend must do so by midnight EDT on the date preceding the monthly dividend record date. (We issue a press release with details of each dividend declaration, and the dividend record and payment dates.)

 

·

On the dividend record date, the number of bullion ounces to be converted and distributed to the shareholder’s individual account on the dividend payment date is calculated as the dollar value of that portion of the cash dividend the shareholder elected to convert to bullion, divided by the London Bullion Market PM gold fix on the record date or the London Bullion Market silver fix on the record date.

 

Only whole ounces of gold and silver bullion are credited to a shareholder’s individual account on the dividend payment date. The cash value attributable to fractional ounces will remain in the shareholder’s individual account as cash until such time as future dividends provide the shareholder with sufficient cash to convert to whole ounces of gold or silver based on the London PM gold fix and silver fix on a future dividend record date, and based on the shareholder’s self-directed gold, silver or cash allocations in effect at that time. The shareholder may also choose to move their cash out of their GBI account. Shareholders cannot move cash into their GBI account for conversion into gold and silver. Only the shareholder’s cash dividend sent from Computershare is eligible for conversion.

 

 We encourage shareholders who have questions concerning the physical dividend program to contact our investor relations department at (303) 320-7708.

30


 

ITEM  6.SELECTED FINANCIAL DATA

The following selected financial data sets forth our summary historical financial data as of and for the years ended December 31, 2013, 2012, 2011, 2010, and 2009. This information was derived from our audited consolidated financial statements for each period. Our selected historical financial data is qualified in its entirety by, and should be read in conjunction with, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the notes thereto included elsewhere in this report. For additional information relating to our operations, see “Item 1. Business” and “Item 2. Properties.”

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Data

 

Year Ended December 31,

(in thousands, except share and per share amounts)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Sales of metals concentrate, net

$

125,784 

$

131,794 

$

105,163 

$

14,754 

$

 -

Mine gross profit

 

58,258 

 

87,773 

 

80,521 

 

7,971 

 

 -

Operating income (loss)

 

10,330 

 

49,704 

 

45,674 

 

(22,839)

 

(34,184)

Other (expense) income

 

(1,355)

 

(2,736)

 

2,414 

 

(235)

 

55 

Income (loss) before income taxes

 

8,975 

 

46,968 

 

48,088 

 

(23,074)

 

(34,129)

Provision for income taxes (benefit)

 

8,890 

 

13,297 

 

(12,037)

 

 -

 

 -

Net income (loss) before extraordinary item

 

85 

 

33,671 

 

60,125 

 

(23,074)

 

(34,129)

Extraordinary item

 

 -

 

 -

 

(1,756)

 

 -

 

 -

Net income (loss)

$

85 

$

33,671 

$

58,369 

$

(23,074)

$

(34,129)

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

Before extraordinary item

$

0.00 

$

0.64 

$

1.13 

$

(0.46)

$

(0.78)

Extraordinary item

 

 -

 

 -

 

(0.03)

 

 -

 

 -

Net income (loss)

$

0.00 

$

0.64 

$

1.10 

$

(0.46)

$

(0.78)

Diluted:

 

 

 

 

 

 

 

 

 

 

Before extraordinary item

$

0.00 

$

0.60 

$

1.06 

$

(0.46)

$

(0.78)

Extraordinary item

 

 -

 

 -

 

(0.03)

 

 -

 

 -

Net income (loss)

$

0.00 

$

0.60 

$

1.03 

$

(0.46)

$

(0.78)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

Basic

 

53,255,259 

 

52,846,163 

 

52,979,481 

 

50,042,471 

 

43,764,703 

Diluted

 

55,299,475 

 

56,315,885 

 

56,414,654 

 

50,042,471 

 

43,764,703 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data

 

As of December 31,

(in thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

14,973 

$

35,780 

$

51,960 

$

47,582 

$

6,752 

Total current assets

 

45,049 

 

58,984 

 

85,108 

 

57,687 

 

20,701 

Land and mineral rights

 

227 

 

227 

 

227 

 

227 

 

227 

Property and equipment, net

 

18,127 

 

14,050 

 

10,318 

 

4,849 

 

1,726 

Deferred tax asset

 

27,663 

 

31,559 

 

19,517 

 

 -

 

 -

Total assets

 

91,969 

 

105,629 

 

115,170 

 

62,797 

 

22,665 

Current liabilities

 

11,418 

 

13,025 

 

25,761 

 

6,456 

 

725 

Long-term obligations

 

2,887 

 

2,790 

 

2,281 

 

2,495 

 

1,992 

Shareholders’ equity

 

75,277 

 

89,814 

 

87,128 

 

53,846 

 

19,948 

 

 

 

 

 

 

 

 

 

 

 

See the consolidated financial statements attached hereto under Item 8 for additional information.

 

 

31


 

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for the historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. Our actual future results or actions may differ materially from these forward-looking statements for many reasons, including the risks described in “Risk Factors” and elsewhere in this annual report. Our discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes included in this report and with the understanding that our actual future results may be materially different from what we currently expect. 

Introduction

The following discussion summarizes our results of operations for three fiscal years ended December 31, 2013, 2012 and 2011 and our financial condition at December 31, 2013 and 2012, with a particular emphasis on the year ended December 31, 2013.

The discussion also presents certain Non-GAAP financial measures that are important to management in its evaluation of our operating results and which are used by management to compare our performance with what we perceive to be peer group mining companies, and are relied on as part of management’s decision-making process. Management believes these measures may also be important to investors in evaluating our performance. For a detailed description of each of the Non-GAAP financial measures, please see the discussion under “Non-GAAP Measures.

Please see our Cautionary Note Regarding Exploration Stage Status and Use of Certain Mining Terms at the beginning of this report for a detailed description of our status as an exploration stage company and for more information regarding our use of certain terminology herein.

Overview

Business

We are an exploration stage mining company, in accordance with applicable guidelines of the SEC, which pursues gold and silver projects that are expected to have low operating costs and high returns on capital.  We are presently focused on mineral production from mineralized material at the El Aguila Project in Oaxaca, Mexico. The mineralized material from the El Aguila open pit mine was processed into a metal concentrate containing the primary product of gold, with silver as a by-product. Operations at the El Aguila open pit mine ceased in February 2011 with the start-up of mine operations at the La Arista underground mine in March 2011. Our La Arista underground mine produces metal concentrates from mineralized material containing our primary metal products of gold and silver, and by-products of copper, lead and zinc.  

The mill located at our El Aguila Project produced a total of 84,835 precious metal gold equivalent ounces for the year ended December 31, 2013, which was within our stated 2013 targeted mill production range of 80,000 to 100,000 precious metal gold equivalent ounces.  During the same period we sold 82,935 precious metal gold equivalent ounces. Precious metal gold equivalent is determined by taking the gold ounces produced or sold, plus silver ounces produced or sold converted to precious metal gold equivalent ounces using the gold to silver average ratio for the period. The gold and silver average prices used to determine the gold to silver average price ratio are the actual metal prices realized from sales of our gold and silver. (Please see the section titled “Non-GAAP Measures” below for additional information concerning the cash cost per ounce measure.) 

For the year ended December 31, 2013, we recorded revenues of $125.8 million, mine gross profit of $58.3 million and net income of $0.1 million.  In 2013, dividends distributed to shareholders totaled $0.48 per share or $25.5 million.

In late 2013, we completed our mill expansion project, which increased our nominal processing capacity of the El Aquila mill’s flotation circuit to 1,500 tonnes per day through the mill.  The mill expansion included the installation of a second ball mill and more flotation cells.  We anticipate optimization of the expanded mill to continue into 2014 as our focus turns to the continued advancement of the La Arista underground mine targeting increased tonnages to feed the expanded mill. Utilization of the expanded mill capacity is contingent on our ability to mine sufficient additional material from our mine. We spent approximately $7.5 million during 2013on the mill expansion project.

Our annual mill precious metal production in 2013 decreased 6.2% over the prior year due to several factors impacting our operations.  We experienced a total of 22 days downtime in the mill facility, 10 days attributed to the construction of our mill expansion and a further 12 days for normal preventative maintenance.  Underground mine operational challenges include mine advancements of infrastructure, dewatering of the mine, management of carbon dioxide gas, limiting dilution of mineralized material while mining and variable grades of the mineralized material depending on the location of the deposit being mined at any point in time. Our mining team takes a proactive approach to mitigating these challenges as we improve

32


 

and optimize our mining techniques. In addition to operational challenges, we experienced significant volatility and declining metals prices during 2013 which unfavorably impacted the ratio which we use to calculate gold equivalent ounces.

Exploration Stage Company

We are considered an exploration stage company under the SEC criteria since we have not demonstrated the existence of proven or probable reserves at our El Aguila Project in Oaxaca, Mexico or any of our other properties. Accordingly, as required under SEC guidelines (see Note 1 to the Consolidated Financial Statements), substantially all of our investment in mining properties to date, including construction of the mill, mine facilities and mine construction expenditures, have been expensed as incurred and therefore do not appear as assets on our balance sheet. Certain expenditures, such as expenses for rolling stock or other general purpose equipment may be capitalized subject to our evaluation of the possible impairment of the asset.

Our characterization as an exploration stage company has resulted in the classification of our facilities and mine construction expenditures as operating expenses rather than capital expenditures, and may cause us to report lower net income or higher net losses than if we had capitalized the expenditures. In addition, our production costs do not reflect a corresponding depreciation or amortization expense for our facilities and mine construction costs since they are expensed as incurred rather than capitalized and our inventory does not include an allocable share of depreciation and depletion expense as it would had we capitalized our construction costs. Although the majority of our facilities and mine construction expenditures for the El Aguila Project were completed from 2008 through 2010, we incurred significant construction expenses related to our mill expansion project in 2013 and we expect underground mine construction and capital improvements will continue in 2014 and subsequent years. We expect to remain as an exploration stage company until such time, if ever, that we demonstrate the existence of proven or probable reserves that meet the SEC guidelines. Likewise, unless mineralized material is classified as proven or probable reserves, substantially all expenditures for facilities and mine construction will continue to be expensed as incurred.  

Exploration Activities

 

El Aguila Project:  During 2013, our exploration activities at El Aguila continued to emphasize mine construction at the La Arista vein system.  We continued to focus primarily on infill and step-out drilling to define the mineralization and to assist in mining of the mineralized material at the La Arista underground mine.  Drilling principally targeted extensions of the La Arista deposit vein system.  Surface drilling was also conducted during condemnation drilling for the Phase Three proposed tailings impoundment facility, and on the Santiago Vein and the Salina Blanca prospect, located northwest and southwest of the La Arista mine, respectively.  Underground drilling was also conducted on new veins discovered in the Switchback vein area located 500 meters to the northeast of the La Arista mine.  Economically significant gold, silver and base metal values were encountered and further drilling is planned in 2014.  The results from these activities have also generated additional exploration targets that are marked for future drilling.   

 

Las Margaritas property:  Limited surface diamond drilling was conducted at Las Margaritas during 2013.  Results of previous exploration drilling at the Las Margaritas property are being evaluated along with structural geology, alteration, geochemical studies and geophysical surveys completed on the property.  Follow-up drilling is being planned for Las Margaritas in 2014.

El Fuego property: We acquired the property in 2013 and it is located along the same mineralized trend and geologic structural corridor as our other properties in Mexico.  During 2013, preliminary investigations were conducted on the El Fuego property.  Discussions have commenced with the local communities at El Fuego to obtain surface access to conduct further investigations of this property.

Exploration activities that are classified as exploration expenses in the consolidated statements of operations include, but are not limited to, drilling on other areas of the El Aguila property to test new geologic targets and exploration work on our other properties. In 2014, we anticipate spending approximately $4.7 million for exploration activities consisting of approximately $2.9 million for surface drilling and $1.8 million for underground drilling. We anticipate that all exploration activities will be funded from working capital.

 

Other Events

During 2013, the Board of Directors decreased the instituted monthly dividend payment from $0.06 per share to $0.03 per share in April and then to $0.01 per share in December.  The decrease in the dividends were in response to a decrease in Cash Flow from Mine Site Operations from lower gold and silver prices, and the new Mexican tax reform legislation imposed on precious and non-precious metal producers. Our long-term dividend goal is to distribute approximately one-third of our Cash Flow from Mine Site Operations (see  “Non-GAAP Measures) as dividends to shareholders.  In 2013, 2012 and 2011, we distributed approximately 40.4%, 39.5% and 29.8% of Cash Flow from Mine Site Operations, respectively, in

33


 

shareholder dividends. The newly enacted Mexican tax is expected to negatively impact our long term dividend goal of one-third Cash Flow from Mine Site Operations, depending on the full financial impact of the new law. Our instituted dividend may be modified or discontinued at any time at the discretion of our Board of Directors. 

In the fourth quarter of 2013, the Mexican federal government enacted a tax reform package that will apply effective January 1, 2014. There are a number of significant changes in the Mexican tax reform package. The planned corporate income tax rate reductions to 29% in 2014 and 28% thereafter have been repealed and the corporate tax rate will remain at 30%. The tax base for income tax has been amplified considering certain limitations on deductions. The business flat tax (IETU) has been repealed. A special mining royalty of 7.5% tax will apply to net profits derived by a property concession holder from the sale or transfer of extraction related activities. Net profits for the purpose of this royalty tax will be determined in a manner similar to the calculation of general taxable income with certain deductions not available including for investment in fixed assets and interest. In addition, owners of precious metal mining concessions will be required to pay a 0.5% royalty fee on gross revenue derived from the sale of gold, silver and/or platinum. As a result of the newly enacted Mexican tax reform legislation, we anticipate that our royalty tax/fee liability in 2014 could fall in between the range of $4.0 million to $5.0 million, which is exclusive of the royalty payment made to our concession leaseholder. Further, a 10% withholding tax on dividend distributions has been introduced but will not supersede treaty rates.      

Results of Operations—Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Sales of metals concentrate, net

During the year ended December 31, 2013,  sales of concentrates totaled  $125.8 million, net of treatment charges, compared to sales of $131.8 million during the same period of 2012, a decrease of $6.0 million or 4.6%. Although precious metal gold equivalent ounces sold for 2013 increased to 82,935 ounces, or 14.6%, when compared to 72,399 ounces sold in 2012, the principal reason for the decrease in sales was due to lower realized gold and silver prices during 2013. Gold prices realized for 2013 decreased by 17.2% to $1,388 per ounce from $1,676 per ounce for 2012, with average silver prices decreasing by 22.6% to $24 per ounce for 2013 from $31 per ounce in 2012. The increase in precious metal gold equivalent ounces sold in 2013 was due in part to the excess concentrate inventory that had accumulated at the end of 2012 as well as an increase in the number of tonnes of mineralized material that was processed through the mill, although the average grades for all metals mined were lower for 2013.  Aggregate by-product revenues from copper, lead and zinc for 2013 were comparable to 2012.  Revenue generated from the sale of base metals contained in our concentrates is considered a by-product of our gold and silver production.  (See Production and Sales Statistics -La Arista Underground Mine”  table below for additional information regarding our mineral production statistics for the three months and years ended December 31, 2013 and 2012).

Although revenue from copper, lead and zinc represented approximately 20.3% of net sales for the year ended December 31, 2013, and approximately 20.5% of net sales for the year ended December 31, 2012, we believe that the identification of gold and silver as our primary products, and presented as a precious metal gold equivalent, is appropriate due to the following:

·

Precious metals account for the majority of our net sales and are expected to do so in the foreseeable future;

·

We primarily target gold projects, with a secondary emphasis on silver, and believe that our exploration projects in Mexico are principally gold targets;

·

We do not target or pursue copper, lead, zinc or any other base metal projects;

·

We have historically presented the Company as a precious metal producer on a gold equivalent basis, with the precious metal gold equivalent content at the El Aguila Project being the basis for building the mine and putting the project into production; and

·

We believe that consistency in disclosure (precious metal gold equivalent production) is important to investors regardless of the relationships of metal prices and production from year to year.

 

We periodically review our revenues to ensure that our reporting of primary products and by-products is appropriate. Because we consider copper, lead and zinc to be by-products of our precious metal gold equivalent production, the value of these metal s is applied as a reduction to total cash costs in our calculation of total cash cost, after by-product credits, per precious metal gold equivalent ounce sold, including royalties. (see “Non GAAP Measures”).

Production

For the year ended December 31, 2013, mill production totaled 84,835 precious metal gold equivalent ounces, compared to 90,432 precious metal gold equivalent ounces for 2012. The decrease in the precious metal gold equivalent ounces was primarily due to a higher gold to silver average ratio applied as a result of a drop in our actual metal prices

34


 

realized from sales of our gold and silver. For the year ended December 31, 2013, we sold 31,563 ounces gold and 3,047,076 ounces silver from the La Arista underground mine for at gross sales value of approximately $43.8 million and $73.1 million, respectively. This compares to 26,675 ounces gold and 2,446,232 ounces silver sold during 2012 from the La Arista underground mine for gross sales value of $44.7 million and $75.8 million, respectively.  See  “Production and Sales Statistics-La Arista Underground Mine”  table below for additional information regarding our mineral production statistics. 

We continue to focus on mining and construction activities at the La Arista underground mine. Our production rate at La Arista is directly a result of mine construction and the establishment of sufficient stopes and working faces. Record mine construction has increased for prepared mineralized material by 45% as compared to 2012.  A drift to access the mineralized zone referred to as Splay 5 was completed at the end of the second quarter of 2013.  We began mining of mineralized material from this vein in the fourth quarter of 2013.  We are currently mining the wider veins using the long-hole open stoping method, and the narrower veins using the cut and fill method. 

The El Aguila mill expansion is expected to increase the mill’s nominal flotation circuit processing capacity to 1,500 tonnes per day.  Commissioning of the expanded mill took place at the end of 2013.  Although the mill is expected to have the capacity to process 1,500 tonnes of mineralized material per day, achieving this processing rate is also dependent on our ability to progress the La Arista underground mine to a point that we can extract mineralized material from the mine at a minimum average rate of 1,500 tonnes per day.  Although we are targeting a mining processing rate for mineralized material of 1,500 tonnes per day in the future, we expect a ramp up towards that capacity and there is no assurance that this mining rate can be achieved or sustained over the long-term.

Our 2014 mine plan anticipates that we will be mining areas of the deposit that contain higher levels of base metals along with the primary production of gold and silver, as compared to 2013 levels. We are targeting a mill production range of 85,000 to 100,000 ounces of precious metal gold equivalent in 2014, assuming a 63:1 silver to gold ratioBelow are certain key operating statistics for our La Arista underground mine for 2013 and 2012. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production and Sales Statistics - La Arista Underground Mine

 

 

Three months ended December 31,

 

Year ended December 31,

 

 

2013

 

2012

 

2013

 

2012

Production Summary

 

 

 

 

 

 

 

 

Milled:

 

 

 

 

 

 

 

 

Tonnes Milled

 

83,330 

 

71,541 

 

316,720 

 

282,120 

Tonnes Milled per Day

 

906 

 

778 

 

866 

 

773 

Grade:

 

 

 

 

 

 

 

 

Average Gold Grade (g/t)

 

3.67 

 

4.63 

 

3.72 

 

4.30 

Average Silver Grade (g/t)

 

292 

 

314 

 

326 

 

355 

Average Copper Grade (%)

 

0.35 

 

0.46 

 

0.38 

 

0.45 

Average Lead Grade (%)

 

1.60 

 

1.99 

 

1.24 

 

1.70 

Average Zinc Grade (%)

 

3.61 

 

4.78 

 

2.95 

 

3.98 

Recoveries:

 

 

 

 

 

 

 

 

Average Gold Recovery (%)

 

91 

 

89 

 

90 

 

88 

Average Silver Recovery (%)

 

91 

 

94 

 

91 

 

93 

Average Copper Recovery (%)

 

76 

 

85 

 

78 

 

78 

Average Lead Recovery (%)

 

72 

 

73 

 

70 

 

70 

Average Zinc Recovery (%)

 

84 

 

82 

 

80 

 

81 

Mill production (before payable metal deductions)(1)

 

 

 

 

 

 

 

 

Gold (ozs.)

 

8,966 

 

9,528 

 

33,942 

 

34,417 

Silver (ozs.)

 

711,496 

 

675,607 

 

3,032,841 

 

2,996,743 

Copper (tonnes)

 

224 

 

277 

 

926 

 

986 

Lead (tonnes)

 

956 

 

1,037 

 

2,742 

 

3,374 

Zinc (tonnes)

 

2,520 

 

2,809 

 

7,452 

 

9,115 

Payable metal sold

 

 

 

 

 

 

 

 

Gold (ozs.)

 

7,629 

 

5,774 

 

31,563 

 

26,675 

Silver (ozs.)

 

686,421 

 

417,932 

 

3,047,076 

 

2,446,232 

Copper (tonnes)

 

214 

 

162 

 

941 

 

769 

Lead (tonnes)

 

908 

 

953 

 

2,632 

 

3,187 

Zinc (tonnes)

 

2,129 

 

2,218 

 

6,596 

 

7,222 

Average metal prices realized (2)

 

 

 

 

 

 

 

 

Gold (oz.)

$

1,236 

$

1,691 

$

1,388 

$

1,676 

35


 

Silver (oz.)

$

20 

$

36 

$

24 

$

31 

Copper ( tonne)

$

7,109 

$

7,942 

$

7,341 

$

8,033 

Lead (tonne)

$

2,086 

$

2,256 

$

2,188 

$

2,110 

Zinc ( tonne)

$

1,894 

$

1,952 

$

1,943 

$

1,967 

Precious metal gold equivalent ounces produced (mill production) (1)(3)(4)

 

 

 

 

 

 

 

 

Gold Ounces

 

8,966 

 

9,528 

 

33,942 

 

34,417 

Gold Equivalent Ounces from Silver

 

11,721 

 

14,254 

 

50,893 

 

56,015 

Total Precious Metal Gold Equivalent Ounces

 

20,687 

 

23,782 

 

84,835 

 

90,432 

Precious metal gold equivalent ounces sold (3)(4)(5)

 

 

 

 

 

 

 

 

Gold Ounces

 

7,629 

 

5,774 

 

31,563 

 

26,675 

Gold Equivalent Ounces from Silver

 

11,308 

 

8,818 

 

51,372 

 

45,724 

Total Precious Metal Gold Equivalent Ounces

 

18,937 

 

14,592 

 

82,935 

 

72,399 

Total cash cost (before by-product credits) per precious metal gold equivalent ounce sold (including royalties) (3)

$

1,077 

$

1,073 

$

933 

$

790 

Total cash costs, after by-product credits, per precious metal gold equivalent ounce sold (including royalties) (3)

$

684 

$

551 

$

626 

$

419 

 

(1)

Mill production represents metal contained in concentrates produced at the mill, which is before payable metal deductions are levied by the buyer of our concentrates. Payable metal deduction quantities are defined in our contracts with the buyer of our concentrates and represent an estimate of metal contained in the concentrates produced at our mill, for which the buyer cannot recover through the smelting process. There are inherent limitations and differences in the sampling method and assaying of estimated metal contained in concentrates that are shipped, and those contained metal estimates derived from sampling methods and assaying throughout the mill production process.  The Company monitors these differences to ensure that precious metal mill production quantities are materially correct. In addition, mill production quantities for year ended 2012 do not reflect any deduction for 583 gold ounces and 45,432 silver ounces, respectively, (approximately 1,400 gold equivalent ounces) resulting from a settlement agreement with the buyer of our concentrates.

(2)

Average metal prices realized vary from the market metal prices due to out of period settlement adjustments from our provisional invoices when they are settled. Our average metal prices realized will therefore differ from the market average metal prices in most cases.

(3)

A reconciliation of this Non-GAAP measure to total mine cost of sales, the most comparable U.S. GAAP measure, can be found below in “Non-GAAP Measures.    

(4)

Precious metal gold equivalent mill production for the fourth quarter of 2013 of 20,687 ounces differs from gold equivalent ounces sold for the same period of 18,937 due principally to buyer (smelter) concentrate processing deductions of approximately 2,244 gold equivalent ounces and an increase in gold equivalent ounces contained in ending inventory of approximately 494 ounces.

(5)

Precious metal gold equivalent mill production for the year ended December 31, 2013 of 84,835 ounces differs from gold equivalent ounces sold for the same period of 82,935 principally due to buyer (smelter) concentrate processing deductions of approximately 8,997 gold equivalent ounces and an increase in gold equivalent ounces contained in ending inventory of approximately 7,097 ounces.

 

 

Mine gross profit. For the year ended December 31, 2013, mine gross profit totaled $58.3 million compared to $87.8 million for the year ended December 31, 2012. The decrease in mine gross profit principally resulted from lower realized metal prices and higher operating costs in 2013.  Our costs, including labor, increased in 2013 as we expanded our mill-processing capacity but have not yet benefited from the anticipated expanded production. We are also mining deeper mineralized zones in the mine. We also incurred cost increases in average personnel prior to two manpower reductions in the fourth quarter of 2013, and cost increases for on-site contractors, repairs and maintenance, security, safety costs, fuel, materials and supplies.  These factors contributed to a decrease in our gross profit percentage from 66.6% for the year ended December 31, 2012 to 46.3% for the year ended December 31, 2013. 

Net income. For the year ended December 31, 2013, net income was $0.1 million, or $0.00 per basic share, as compared to $33.7 million or $0.64 per basic share, for the comparable period of 2012. The decrease in net income for the year ended December 31, 2013 of $33.6 million, as compared to 2012, was principally attributable to a decrease in metal prices, and higher production, general and administrative, exploration, and facilities and mine construction expenses. In the second half of 2013, we focused on various cost reduction measures, targeting to increase operational efficiencies and decrease costs in 2014. 

Costs and expenses. Total costs and expenses during the year ended December 31, 2013 were $47.9 million compared to $38.1 million during the comparable period of 2012, an increase of $9.8 million, or 25.7%. The increase in cost and expenses, as discussed in more detail below, resulted from an increase in exploration, general administrative, and facilities and mine construction expenses. We expect increased throughput targeted in 2014 resulting from the expanded mill capacity during 2013 to lower cost per tonne averages. 

General and administrative expenses. General and administrative expenses for the year ended December 31, 2013 were $16.3 million, compared to $13.5 million for the same period of 2012.  The $2.8 million increase in 2013 principally resulted from an increase in compensation, insurance, computer IT support, investor relations and legal expenses.

36


 

Exploration expenses. Property exploration expenses totaled $9.5 million for the year ended December 31, 2013, compared to $8.0 million during the same period of 2012. The $1.5 million increase in exploration expenses principally resulted from an expanded drilling program, including on our Las Margaritas property during the first quarter of 2013 and from an aerial geophysical survey over our Oaxaca property trend. Exploration costs associated with definition and delineation drilling of the La Arista vein system were reflected in facilities and mine construction expenses.

Facilities and mine construction expenses.  Facilities and mine construction expenses during the year ended December 31, 2013 increased to $22.2 million from $16.6 million during 2012.  The $5.6 million increase in facilities and mine construction expenses was principally due to our mill expansion project that commenced in early 2013.   In addition to mine construction expenses, facilities and mine construction expense also includes drilling definition and delineation of the La Arista vein system.  

Other (expense) income. For the year ended December 31, 2013, we recorded other expense of $1.4 million, compared to other expense of $2.7 million during the same period of 2012.  The $1.3 million decrease in other expense when compared to 2012 resulted from a decrease in foreign currency losses of $2.5 million and increase in other income of $0.6 million, which was partially offset by an increase in impairment of gold and silver bullion of $1.8 million.  

Provision  for income taxes. For the year ended December 31, 2013, income tax expense of $8.9 million as compared to an income tax expense of $13.3 million for the year ended December 31, 2012. As of December 31, 2013, there were no remaining valuation allowances on the Company’s deferred tax assets. See Note 7 to the Consolidated Financial Statements for additional information. 

Results of Operations – Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

During the year ended December 31, 2012, we sold 26,675 ounces of gold at an average realized price of $1,676 per ounce for $44.7 million of gross revenue, and 2,446,232 ounces of silver at an average realized price of $31 per ounce for approximately $75.8 million of gross revenue, compared to 19,617 ounces of gold at an average realized price of $1,596 per ounce for $31.3 million of gross revenues, and 2,077,792 ounces of silver at an average realized price of $35 per ounce for approximately $72.7 million of gross revenue for 2011.  Mine gross profit for the year ended December 31, 2012 was $87.8 million compared to $80.5 million in the comparable period of 2011, an increase of $7.3 million or 9.1%.

For the year ended December 31, 2012, we reported a net income of $33.7 million, or $0.64 per basic share, compared to a net income of $58.4 million, or $1.10 per basic share, for the year ended December 31, 2011.  The $26.4 million decrease in net income in 2012 was principally attributable to a $12.0 million income tax benefit in 2011 resulting from a reduction to the income tax valuation allowance, as compared to $13.3 million of income tax expense in 2012.  

Total costs and expenses for the year ended December 31, 2012 were $38.1 million compared to $34.9 million in the comparable period of 2011, an increase of $3.2 million or 9.2%. The increase in costs and expenses was primarily due to our operations transitioning to underground mine construction activities and an increase in stock-based compensation.

 Exploration expense for the year ended December 31, 2012 of $8.0 million was generally consistent with our level of exploration activity in 2011 of $4.9 million. The $3.1 million increase in exploration expenses results from higher expenditures in 2012 to evaluate and drill new exploration targets on the El Aguila and Alta Gracia properties, and to evaluate other prospects near our La Arista underground mine.

Facilities and mine construction expenses of $16.6 million for the year ended December 31, 2012 decreased by  $4.4 million or 21.0% when compared to 2011 expenses of $21.0 million. The higher cost in 2011 was primarily due to the completion of the second phase of the tailings dam, and expansion of the flotation cells in the mill’s flotation circuit during 2011.

General and administrative expenses increased $4.6 million or 51.7% to $13.5 million for the year ended December 31, 2012 as compared to $8.9 million for the comparable period in 2011. The increase was attributable to increases in professional fees, salaries and benefits and stock-based compensation.

For the years ended December 31, 2012 and 2011, we recorded a currency translation adjustment gain of $2.8 million and a currency translation adjustment loss of $3.2 million, respectively, resulting from the translation of our subsidiary’s Mexican peso denominated functional currency financial statements into the US dollar reporting currency. 

37


 

Non-GAAP Measures

Reconciliation of Non-GAAP Measures to Total Mine Cost of Sale

Throughout this report, we have provided information prepared or calculated according to U.S. GAAP, as well as referenced some non-U.S. GAAP (“non-GAAP”) performance measures. Because the non-GAAP performance measures do not have any standardized meaning prescribed by U.S. GAAP, they may not be comparable to similar measures presented by other companies. Accordingly, these measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with U.S. GAAP.

We have reconciled total cash cost, before by-product credits and total cash cost, after by-product credits to total mine cost of sales which is a reported U.S. GAAP measure. Total cash cost, before by-product credits, includes all direct and indirect operating cash costs related directly to our production of metals which includes mining, milling and other plant facility costs, smelter treatment and refining charges, royalties, and general and administrative costs. 

We use total cash cost, after by-product credits per precious metal gold equivalent ounce sold (including royalties) as one indicator for comparative monitoring of our mining operations from period to period and believe that investors also find this information helpful when evaluating our performance.  By-product credits include revenues earned from all metals other than the primary precious metals sold.  Management also uses this measurement for the comparative monitoring of performance of our mining operations period-to-period from a cash flow perspective.  Total cash cost, after by-product credits, per precious gold equivalent ounce sold is a measure developed by the Gold Institute Standard in an effort to provide a uniform standard for comparison purposes. However, there can be no assurance that our reporting of this Non-GAAP measure is similar to that reported by other mining companies.

The following tables present a reconciliation between the non-GAAP measures of total cash cost, before by-product credits and total cash cost, after by-product credits to the GAAP measure of total mine cost of sales and depreciation, reclamation and remediation and stock-based compensation for our operations at the El Aguila project for the three and twelve months ended December 31, 2013 and 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Cash Costs after By-Product Credits (Non-GAAP)

 

 

 

 

 

 

 

 

 

 

  

Three months ended December 31,

  

Year ended December 31,

 

 

2013

 

2012

 

2013

 

2012

 

  

(In thousands, except ounces sold and cost per precious metal gold equivalent ounce sold)

  

(In thousands, except ounces sold and cost per precious metal gold equivalent ounce sold)

Total cash cost (before by-product credits) (1)

$

20,387 

$

15,652 

$

77,407 

$

57,145 

By-product credits (2)

  

(7,445)

 

(7,609)

  

(25,485)

 

(26,837)

Total cash cost (after by-product credits)

  

12,942 

 

8,043 

  

51,922 

 

30,308 

Divided by precious metal gold equivalent ounces sold (3)

  

18,937 

 

14,592 

  

82,935 

 

72,399 

Total cash cost (before by-product credits) per precious metal gold equivalent ounce sold (including royalties)

 

1,077 

 

1,073 

 

933 

 

790 

By-product credits per precious metal gold equivalent ounces sold (2)

 

(393)

 

(522)

 

(307)

 

(371)

Total cash costs, after by-product credits, per precious metal gold equivalent ounce sold (including royalties)

$

684 

$

551 

$

626 

$

419 

 

 

 

 

 

 

 

 

 

(1)

Includes all direct and indirect operating cash costs related directly to our production of metals including mining, milling and other plant facility costs, smelter treatment and refining charges, royalties, and general and administrative costs.

(2)

See table below for a summary of our by-product revenue and by-product credit precious metal equivalent ounces sold.

(3)

Gold ounces sold, plus gold equivalent ounces of silver ounces sold converted to gold ounces using our realized gold price per ounce to silver price per ounce ratio, at the La Arista underground mine.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to GAAP:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38


 

 

  

Three months ended December 31,

  

Year ended December 31,

 

 

2013

 

2012

 

2013

 

2012

 

  

(In thousands)

  

(In thousands)

Total cash costs (after by-product credits)

$

12,942 

$

8,043 

$

51,922 

$

30,308 

Treatment and refining charges

  

(3,801)

 

(3,978)

  

(14,765)

 

(16,680)

By-product credits

  

7,445 

 

7,609 

  

25,485 

 

26,837 

Depreciation and amortization

  

582 

 

425 

  

2,392 

 

1,366 

Reclamation and remediation

  

28 

 

333 

  

112 

 

453 

Stock-based compensation

 

510 

 

(1,250)

 

2,380 

 

1,737 

Total mine cost of sales

$

17,706 

$

11,182 

$

67,526 

$

44,021 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary of By-Product Revenue and By-Product Credit Precious Metal Gold Equivalent Ounces Sold

 

 

 

 

 

 

 

 

 

 

  

Three months ended December 31,

  

Year ended December 31,

 

 

2013

 

2012

 

2013

 

2012

 

  

(In thousands)

  

(In thousands)

By-product credits by dollar value:

  

 

 

 

 

 

 

 

Copper sales

$

1,519 

$

1,325 

$

6,909 

$

6,197 

Lead sales

  

1,894 

 

2,052 

  

5,759 

 

6,594 

Zinc sales

  

4,032 

 

4,232 

  

12,817 

 

14,046 

Total sales from by-products

$

7,445 

$

7,609 

$

25,485 

$

26,837 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three months ended December 31,

  

Year ended December 31,

 

 

2013

 

2012

 

2013

 

2012