10-K 1 d460485d10k.htm FORM 10-K Form 10-K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

 

 

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

 

For the fiscal year ended December 31, 2012

 

OR

 

¨ 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 1-33119

 

LOGO

 

ALLIED NEVADA GOLD CORP.

(Exact name of Registrant as specified in its charter)

 

Delaware   20-5597115

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

9790 Gateway Drive, Suite 200, Reno Nevada 89521

(775) 358-4455

(Address and telephone number of principal executive offices)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.001 Par Value   NYSE MKT LLC

 

Securities registered pursuant to Section 12(g) of the 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  x    No  ¨

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 submit and post such files):    Yes  x    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 the Form 10-K or any amendment to this Form 10-K.  ¨

 

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

 

Large Accelerated Filer  x            Accelerated Filer    ¨            Non-accelerated Filer  ¨            Smaller Reporting Company  ¨

 

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

 

The aggregate market value of voting Common Stock held by non-affiliates as of June 30, 2012, the last business day of the registrant’s most recently completed second fiscal quarter, was $2,330,343,895 based on the last reported sale price of the Common Stock on the NYSE MKT LLC on that date.

 

Number of shares outstanding of the registrant’s Common Stock as of February 22, 2013: 89,738,112

 

 


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Documents Incorporated by Reference

 

To the extent specifically referenced in Part III, portions of the registrant’s definitive Proxy Statement on Schedule 14A to be filed with the Securities and Exchange Commission in connection with the 2013 Annual Meeting of Stockholders are hereby incorporated by reference into this report. See Part III.


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TABLE OF CONTENTS

 

         Page  
 

Cautionary Note Regarding Forward Looking Statements

     i   
  PART I   
Item 1.  

Business

     1   
Item 1A.  

Risk Factors

     7   
Item 1B.  

Unresolved Staff Comments

     20   
Item 2.  

Properties

     20   
Item 3.  

Legal Proceedings

     26   
Item 4.  

Mine Safety Disclosures

     26   
 

Glossary

     27   
  PART II   
Item 5.  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     29   
Item 6.  

Selected Financial Data

     30   
Item 7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operation

     31   
Item 7A.  

Quantitative and Qualitative Disclosures About Market Risk

     46   
Item 8.  

Financial Statements and Supplementary Data

     48   
Item 9.  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     79   
Item 9A.  

Controls and Procedures

     79   
Item 9B.  

Other Information

     79   
  PART III   
Item 10.  

Directors, Executive Officers and Corporate Governance

     80   
Item 11.  

Executive Compensation

     80   
Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     80   
Item 13.  

Certain Relationships and Related Transactions, and Director Independence

     80   
Item 14.  

Principal Accountant Fees and Services

     80   
  PART IV   
Item 15.  

Exhibits and Financial Statement Schedules

     81   
 

Signatures

     82   


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Cautionary Statement Regarding Forward-Looking Statements

 

In addition to historical information, this Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the U.S. Securities and Exchange Commission (the “SEC”), all as may be amended from time to time. All statements, other than statements of historical fact, included herein or incorporated by reference, that address activities, events or developments that we expect or anticipate will or may occur in the future, are forward-looking statements, including but not limited to such things as:

 

   

our future business strategy, plans and goals;

 

   

future gold and silver prices;

 

   

our estimated future capital expenditures, construction, and other cash needs and expectations as to the funding or timing thereof;

 

   

our expansion expectations, including with respect to the Hycroft Mine and Hasbrouck/Three Hills properties;

 

   

our expectations regarding the growth of our business and our estimates of mineral reserves and other mineralized material;

 

   

the economic potential of the sulfide mineralization and milling project at the Hycroft Mine;

 

   

the preliminary economic assessment at the Hasbrouck property;

 

   

the anticipated results of the exploration drilling programs at our properties;

 

   

our production estimates;

 

   

our expectations regarding gold and silver recovery;

 

   

our estimated future sales and cost of sales;

 

   

our anticipated cash flows, cash operating costs and adjusted cash costs1; and

   

the availability, terms and costs related to future borrowing, debt repayment, and equity funding.

 

These statements can be found under Part I—Item 1. Business, Part I—Item 1A. Risk Factors, Part I—Item 2. Properties, Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere throughout this Annual Report on Form 10-K. The words “estimate”, “plan”, “anticipate”, “expect”, “intend”, “believe”, “project”, “target”, “budget”, “may”, “will”, “would”, “could”, “seeks”, or “scheduled to”, or other similar words, or negatives of these terms or other variations of these terms or comparable language or by discussion of strategy or intentions identify forward-looking statements. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefit of the “safe harbor” provisions of such laws. These statements involve known and unknown risks, uncertainties, assumptions and other factors which may cause our actual results, performance or achievements to be materially different from any results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are based on current expectations. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to:

 

   

volatile market prices of gold and silver;

 

   

risks related to the heap leaching process at the Hycroft Mine, including but not limited to gold recovery rates, gold extraction rates, and the grades of ore placed on our leach pads;

 

1  The term “adjusted cash costs” is a non-GAAP financial measure. See the section titled “Non-GAAP Financial Measures” in Part II – Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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uncertainties concerning estimates of mineral reserves and other mineralized materials, and grading;

 

   

cost of compliance with current and future government regulations, including those related to environmental protection, mining, health and safety, corporate governance and public disclosure;

 

   

risks related to our ability to timely process the gold on carbon;

 

   

uncertainties relating to obtaining or retaining approvals and permits from governmental regulatory authorities;

 

   

risks associated with our substantial level of indebtedness;

 

   

our ability to achieve our estimated production rates and stay within our estimated operating costs;

 

   

the commercial success of our exploration and development activities;

 

   

an increase in the cost or timing of new projects;

 

   

our current intention not to use forward-sale arrangements;

 

   

the inherently hazardous nature of mining activities, including operational, geotechnical and environmental risks;

 

   

intense competition within the mining industry;

 

   

uncertainties related to our ability to find and acquire new mineral properties;

   

potential operational and financial effects of current and proposed federal and state regulations related to environmental protection and mining, and the exposure to potential liability created by such regulations;

 

   

availability of equipment or supplies;

 

   

our ability to attract and retain personnel;

 

   

our ability to manage our growth;

 

   

our ability to raise additional capital on favorable terms or at all;

 

   

potential challenges to title in our mineral properties;

 

   

risks associated with the expansion of our operations, including those associated with any future acquisitions or joint ventures; and

 

   

potential conflicts of interests that may arise through some of our directors’ involvement with other natural resources companies.

 

For a more detailed discussion of such risks and other important factors that could cause actual results to differ materially from those in such forward-looking statements, please see the risk factors discussed in Part I—Item 1A. Risk Factors of this Form 10-K and in other filings with the SEC. Although we have attempted to identify important factors that could cause actual results to differ materially from those described in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Form 10-K. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Form 10-K, those results or developments may not be indicative of results or developments in subsequent periods.

 

Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statements that we make in this Form 10-K speak only as of the date of those statements, and we undertake no obligation to update those statements or to publicly announce the results of any

 

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revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

 

Cautionary Note Regarding Mineralized Material

 

Allied Nevada has reported reserve and mineralized material estimates in accordance with SEC Industry Guide 7. In accordance with SEC Industry Guide 7, resources have been reported as “mineralized material”. Canadian investors are cautioned that estimates of mineralized materials may differ from mineral resource estimates prepared in accordance with the standards of the Canadian Institute of Mining, Metallurgy and Petroleum referred to in Canadian National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”). Canadian investors should review the mineral resource estimates prepared in accordance with NI 43-101 contained in the mineral proven and probable ore reserves table.

 

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PART I

 

Item 1. Business

 

We are a U.S.-based gold and silver producer focused on mining, development, and exploration of properties in the state of Nevada and commenced operations on May 10, 2007. In this report, “we”, “us”, “our”, the “Company”, and “Allied Nevada” refer to Allied Nevada Gold Corp. and its subsidiaries. Allied Nevada Gold Corp. was incorporated under the laws of the state of Delaware on September 14, 2006 and, until May 10, 2007, was a wholly owned subsidiary of Vista Gold Corp., a corporation incorporated under the laws of the Yukon Territory, Canada.

 

Our operating mine, the Hycroft Mine, is an open-pit gold and silver heap leach operation located 54 miles west of Winnemucca, Nevada. In 2008, we restarted the mine operations at the Hycroft Mine, which had been placed on a care and maintenance program due to low gold prices since 1998, and are expanding our oxide and sulfide mineralization processing capabilities to provide staged increases of production through 2015, which are intended to increase annual production to approximately 552,000 ounces of gold and over 25.5 million ounces of silver from 2015 to 2024. As of December 31, 2012, we had reported a proven and probable mineral reserve at the Hycroft Mine of 11.9 million ounces of gold and 509.6 million ounces of silver. In 2012, the Hycroft Mine produced 136,930 ounces of gold and 794,097 ounces of silver.

 

In addition to the Hycroft Mine, we have six properties which have reported other mineralized material and approximately 90 other early stage exploration properties. On an ongoing basis, we evaluate our exploration portfolio to determine ways to increase the value of these properties.

 

The Hycroft Mine, all of our mineral properties, and our corporate office are all located in the state of Nevada. Allied Nevada’s corporate headquarters is located at 9790 Gateway Drive, Suite 200, Reno, Nevada 89521.

 

Segment Information

 

Our segments include the Hycroft Mine, Exploration, and Corporate and Other. The Hycroft Mine segment includes the operations, development, and exploration activities of Hycroft and contains 100% of our revenues and production costs. The Exploration segment includes all costs related to the exploration and development of our properties outside of the Hycroft Mine. The Corporate and Other segment includes corporate general and administrative costs of the Company. See Note 19 – Segment Information to our Consolidated Financial Statements for information related to our segments.

 

Principal Products

 

Our principal products are unrefined gold and silver bars (doré) produced from the Hycroft Mine which are sent to refiners before being sold, generally at prevailing spot prices, to precious metals traders or financial institutions. Doré is sent to refiners to produce bullion that meets the required market standard of 99.95% pure gold. Under the terms of our refining agreements, the doré bars are refined for a fee, and our share of the refined gold and the separately-recovered silver are credited to our account or delivered to our buyers.

 

Since commencing commercial operations in 2009, we have grown gold production from approximately 53,189 ounces in 2009 to approximately 136,930 in 2012 and we currently expect to produce approximately 225,000 – 250,000 ounces of gold in 2013. Over the same timeframe, we have grown silver production from approximately 65,753 ounces in 2009 to approximately 794,097 ounces in 2012 and we currently expect to produce 1.5 – 1.8 million ounces of silver in 2013. Through our expansion projects we intend to increase annual production to approximately 552,000 ounces of gold and over 25.5 million ounces of silver from 2015 to 2024.

 

In 2012, revenues from gold and silver made up 90% and 10%, respectively, of our total revenue and as such we consider gold our principal product. We expect gold and silver sales to be our primary source of future revenues. We do not believe we have any dependencies on our significant customers.

 

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Gold Uses

 

Gold has two main categories of use: fabrication and investment. Fabricated gold has a variety of end uses, including jewelry, electronics, dentistry, industrial and decorative uses, medals, medallions and official coins. Gold investors buy gold bullion, official coins and jewelry.

 

Gold Supply

 

The supply of gold consists of a combination of current production from mining and the draw-down of existing stocks of gold held by governments, financial institutions, industrial organizations and private individuals. Based on publically available information, gold demand in 2012 was a record $236.4 billion in value, despite declining tonnage demand of 4% year-over-year to 4,855 tons. In 2012, gold demand by sector was comprised of jewelry (43%), bar and coin (29%), technology (10%), central bank purchases (12%), and ETF investments (6%). Global mine production increased 2% year-over-year and supply from recycled gold decreased 5%. Mine production (3,138 tons) represented approximately 64% of global gold supply in 2012.

 

Gold Prices

 

The price of gold is volatile and is affected by many factors beyond our control, such as the sale or purchase of gold by central banks and financial institutions, inflation or deflation, fluctuation in the value of the US dollar and foreign currencies, global and regional demand and the political and economic conditions of major gold producing countries throughout the world. The following table presents the annual high, low and average afternoon fixing prices for gold over the past ten years, expressed in US dollars per ounce, on the London Bullion Market.

 

Year

  

High

    

Low

    

Average

 

2003

   $ 416       $ 320       $ 363   

2004

     454         375         410   

2005

     536         411         444   

2006

     725         525         604   

2007

     841         608         695   

2008

     1,011         713         872   

2009

     1,213         810         972   

2010

     1,421         1,058         1,225   

2011

     1,895         1,319         1,572   

2012

   $ 1,792       $ 1,540       $ 1,669   

 

On February 22, 2013, the afternoon fixing price for gold on the London Bullion Market was $1,577 per ounce.

 

Employees and Contractors

 

At December 31, 2012, we had approximately 469 employees, of which 439 were employed at the Hycroft Mine where our expansion projects are ongoing. In addition, approximately 273 people were working as contractors in support of Hycroft Mine operations and construction projects.

 

Competition

 

Allied Nevada competes with other mining companies in connection with the acquisition of gold properties. There is competition for the limited number of gold acquisition opportunities, some of which are with companies having substantially greater financial resources than Allied Nevada. As a result, we may have difficulty acquiring attractive gold projects at reasonable prices.

 

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We also compete with other mining companies for skilled employees and from time-to-time certain production inputs have been in short supply. Shortages of production supplies rarely lead to operational issues, but would require us to either substitute with lower quality supplies or to ship these supplies from longer distances. These substitutions and changes would therefore result in minor production inefficiencies and/or additional costs. To date, we have not experienced any material shortages in production inputs of this nature.

 

Government Regulation of Mining-Related Activities

 

Property Interests and Mining Claims

 

Our exploration activities are conducted in the State of Nevada. Mineral interests may be owned in Nevada by (a) the United States, (b) the state itself, or (c) private parties. Where prospective mineral properties are owned by private parties, or by the state, some type of property acquisition agreement is necessary in order for Allied Nevada to explore or develop such property. Generally, these agreements take the form of long-term mineral leases under which we acquire the right to explore and develop the property in exchange for periodic cash payments during the exploration and development phase and a royalty, usually expressed as a percentage of gross production or net profits derived from the leased properties if and when mines on the properties are brought into production. Other forms of acquisition agreements are options to purchase and joint venture agreements. Where prospective mineral properties are held by the United States, mineral rights may be acquired through the location of unpatented mineral claims upon unappropriated federal land. If the statutory requirements for the location of a mining claim are met, the locator obtains a valid possessory right, subject to the paramount title of the United States, to develop and produce minerals from the claim conditioned upon applicable environmental reviews and permitting programs. Federal unpatented mining claims must be maintained through filing notices of intent to maintain the claims with the county and the completion of annual assessment work or, since 1993, payment of federal maintenance fees. The right can be transferred as prescribed under law and, provided that the locator is able to prove the discovery of valuable, locatable minerals on the claims and to meet all other applicable federal and state requirements and procedures pertaining to the location and maintenance of federal unpatented mining claims, the claim locator would have the right to prosecute a patent application to secure fee title to the claim from the federal government. The right to pursue a patent, however, has been subject to a moratorium since October 1993, through federal legislation restricting the U.S. Bureau of Land Management (BLM) from accepting any new mineral patent applications. Additionally, proposed federal legislation has been introduced to amend the federal mining law pursuant to which, if adopted, would, among other changes, remove the right to obtain a patent and replace the claim location process with a leasing program.

 

Mining claims are subject to the same risk of defective title that is common to all real property interests. Additionally, mining claims are self-initiated and self-maintained and therefore, possess some unique vulnerabilities not associated with other types of property interests. It is impossible to ascertain the validity of unpatented mining claims solely from an examination of the public real estate records and, therefore, it can be difficult or impossible to confirm that all of the requisite steps have been followed for location and maintenance of a claim. If the validity of a patented mining claim is challenged by the BLM or the U.S. Forest Service on the grounds that mineralization has not been demonstrated, the claimant has the burden of proving the present economic feasibility of mining minerals located thereon. Such a challenge might be raised when a patent application is submitted, when the government seeks to include the land in an area to be dedicated to another use, or when a party files a permit application or plan of operation to develop the mining claims.

 

Reclamation

 

We are required to mitigate long-term environmental impacts by stabilizing, contouring, re-sloping and re-vegetating various portions of a site after mining and mineral processing operations are completed. These reclamation efforts will be conducted in accordance with detailed plans, which must be reviewed and approved by the appropriate regulatory agencies.

 

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Our principal reclamation liability is at the Hycroft Mine and is fully secured by surface management surety bonds that meet the financial bonding requirements of the BLM. In the fourth quarter of 2012, we received two decisions from the BLM approving the heap leach expansion project and construction of the mill, which increased our total reclamation liability to $59.6 million. At December 31, 2012, our surface management surety bonds totaled $43.5 million and were partially collateralized by restricted cash of $31.8 million. In the first quarter of 2013, to continue operations at the Hycroft Mine and to expand statewide exploration activities, we increased our surety bonds to $59.6 million and collateralized a portion of the increase with restricted cash.

 

Government Regulation

 

Mining operations and exploration activities are subject to various federal, state and local laws and regulations in the United States, which govern prospecting, development, mining, production, exports, taxes, labor standards, occupational health, waste disposal, protection of the environment, mine safety, hazardous substances and other matters. We have obtained or have pending applications for those licenses, permits or other authorizations currently required to conduct our mining, exploration and other programs. We believe that we are in compliance in all material respects with applicable mining, health, safety and environmental statutes and the regulations passed thereunder in Nevada and the United States. We are not aware of any current claims, orders or directions relating to our business with respect to the foregoing laws and regulations.

 

Environmental Regulation

 

Our mining projects are subject to various federal and state laws and regulations governing protection of the environment. These laws and regulations are continually changing and, in general, are becoming more restrictive. It is our policy to conduct business in a way that safeguards public health and the environment. We believe that our operations are, and will be, conducted in material compliance with applicable laws and regulations.

 

Changes to current state or federal laws and regulations in Nevada, where we operate currently, or in jurisdictions where we may operate in the future, could require additional capital expenditures and increased operating and/or reclamation costs. Although we are unable to predict what additional legislation, if any, might be proposed or enacted, additional regulatory requirements could adversely impact the profitability levels of our projects.

 

Our past and future activities in the United States may cause us to be subject to liability under various environmental laws, including the federal and state laws described below. The following sections are intended as a brief overview of certain material laws and regulations to which we are subject, and are not intended to be a comprehensive treatment of the subject matter. See the following risk factors for additional information in Item 1A – Risk Factors:

 

   

Our operations are subject to numerous governmental permits that are difficult to obtain and we may not be able to obtain or renew all of the permits we require, or such permits may not be timely obtained or renewed

 

   

Changes in environmental regulations could adversely affect our cost of operations or result in operational delays.

 

   

Environmental regulations could require us to make significant expenditures or expose us to potential liability.

 

During 2012, 2011 and 2010, there were no material environmental incidents or non-compliance with any applicable environmental regulations on the properties now held by us. We did not incur material capital expenditures for environmental control facilities during 2012, 2011 or 2010, and do not expect to incur any material expenditures in 2013 for such environmental control facilities.

 

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U.S. Federal Laws

 

The Comprehensive Environmental, Response, Compensation, and Liability Act (“CERCLA”), and comparable state statutes, impose strict, joint and several liability on current and former owners and operators of sites and on persons who disposed of or arranged for the disposal of hazardous substances found at such sites. It is not uncommon for the government to file claims requiring cleanup actions, reimbursement for government-incurred cleanup costs, or natural resource damages, or for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances released into the environment. The Federal Resource Conservation and Recovery Act (“RCRA”), and comparable state statutes, govern the generation, treatment, storage and disposal of solid waste and hazardous waste and authorize the imposition of substantial fines and penalties for noncompliance, as well as requirements for corrective actions. CERCLA, RCRA and comparable state statutes can impose liability for clean-up of sites and disposal of substances and the closure of facilities found on exploration, mining and processing sites long after activities on such sites have been completed.

 

The Clean Air Act restricts the emission of air pollutants from many sources, including mining and processing activities. Our mining operations may produce air emissions, including fugitive dust and other air pollutants from stationary equipment, storage facilities and the use of mobile sources such as trucks and heavy construction equipment, which are subject to review, permitting, monitoring and/or control requirements under the Clean Air Act and state air quality laws. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to incur capital costs in order to remain in compliance. In addition, permitting rules may impose limitations on our production levels or result in additional capital expenditures in order to comply with the rules.

 

The National Environmental Policy Act (“NEPA”) requires federal agencies to integrate environmental considerations into their decision-making processes by evaluating the environmental impacts of their proposed actions, including issuance of permits to mining facilities such as the Hycroft Mine, and assessing alternatives to those actions. If a proposed action could significantly affect the environment, the agency must prepare a detailed environmental impact statement known as an EIS. The U.S. Environmental Protection Agency (“EPA”), other federal agencies, and any interested third parties will review and comment on the scoping of the EIS and the adequacy of any findings set forth in the draft and final EIS. This process can cause delays in issuance of required permits or result in changes to a project to mitigate its potential environmental impacts, which can in turn impact the economic feasibility of a proposed project.

 

Under the Federal Land Policy and Management Act of 1976, the Department of the Interior is authorized to regulate the use of federal public lands and to prevent undue and unnecessary degradation of the public lands. The BLM has promulgated regulations concerning use and management of the surface of the federal lands. These regulations generally require plans of operation and reclamation, as well as the posting of financial assurance mechanisms such as reclamation bonds.

 

The Clean Water Act (“CWA”), and comparable state statutes, impose restrictions and controls on the discharge of pollutants into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state agency. The CWA regulates storm water run-off at mining facilities and requires a storm water discharge permit for certain activities. Such a permit requires the regulated facility to monitor and sample storm water run-off from its operations. The CWA and regulations implemented thereunder also prohibit discharges of dredged and fill material in wetlands and other waters of the United States unless authorized by an appropriately issued permit. The CWA and comparable state statutes provide for civil, criminal and administrative penalties for unauthorized discharges of pollutants and can impose liability on parties responsible for those discharges for the costs of cleaning up any environmental damage caused by the release and for natural resource damages resulting from the release.

 

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The Safe Drinking Water Act (“SDWA”) and the Underground Injection Control (“UIC”) program promulgated thereunder, regulate the drilling and operation of subsurface injection wells. The EPA directly administers the UIC program in some states and in others the responsibility for the program has been delegated to the state. The program requires that a permit be obtained before drilling a disposal or injection well. Violation of these regulations and/or contamination of groundwater by mining related activities may result in fines, penalties, and remediation costs, among other sanctions and liabilities under the SWDA and state laws. In addition, third party claims may be filed by landowners and other parties claiming damages for alternative water supplies, property damages, and bodily injury.

 

Nevada State Laws

 

At the state level, mining operations in Nevada are regulated by the Nevada Department of Conservation and Natural Resources, Division of Environmental Protection. The Nevada environmental agencies have the authority to implement and enforce many of the federal regulatory programs described above. Nevada state law requires the Hycroft Mine to hold Nevada Water Pollution Control Permits, which dictate operating controls and closure and post-closure requirements directed at protecting surface and ground water. In addition, we are required to hold Nevada Reclamation Permits. These permits mandate concurrent and post-mining reclamation of mines and require the posting of reclamation bonds sufficient to guarantee the cost of mine reclamation. We have set up a provision for our reclamation bond at the Hycroft Mine. If we are required to carry out unanticipated reclamation work in the future, our financial position could be adversely affected or our posted bonds may be insufficient.

 

Other Nevada regulations govern operating and design standards for the construction and operation of any source of air contamination and landfill operations. Any changes to these laws and regulations could have an impact on our financial performance and results of operations by, for example, requiring changes to operating constraints, technical criteria, fees or surety requirements.

 

Mine Safety and Health Administration Regulations

 

We consider health, safety, and environmental stewardship to be a core value of ours and have a mandatory mine safety and health program that includes employee and contractor training, risk management, workplace inspection, emergency response, accident investigation and program auditing. We consider this program to be essential at all levels to ensure that we and our employees conduct ourselves in an environment of exemplary health, safety and environmental governance.

 

Our operations and exploration properties are subject to regulation by the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). MSHA inspects our mines on a regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. Following passage of The Mine Improvement and New Emergency Response Act of 2006, MSHA significantly increased the numbers of citations and orders charged against mining operations. The dollar penalties assessed for citations issued has also generally increased in recent years.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which became effective in July 2010, requires a mine safety disclosure by mining companies required to file periodic reports under the Exchange Act. We have provided the mine safety disclosure required by the Dodd-Frank Act in Part I—Item 4B of this Form 10-K. A list of the citations/orders and proposed assessments for the Hycroft Mine for the year ended December 31, 2012 were taken from the MSHA data retrieval system, which can be found at http://www.msha.gov/drs/drshome.htm.

 

Available Information

 

You may read and copy any materials Allied Nevada files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Copies of such materials also can be obtained free of charge

 

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at the SEC’s website, www.sec.gov, or by mail from the Public Reference Room of the SEC, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Allied Nevada also maintains an internet web site at www.alliednevada.com. Allied Nevada makes available, free of charge, through the Investor Information section of the web site, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and all amendments to those reports, as soon as reasonably practical after such material is electronically filed or furnished with the Securities and Exchange Commission. Allied Nevada’s Corporate Governance Guidelines, the charters of key committees of its Board of Directors and its Code of Ethics are also available on the web site.

 

Item 1A. Risk Factors

 

Any investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information contained in this Form 10-K. The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of those risks actually occur, our business, financial condition and results of operations would suffer. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See also “Cautionary statement regarding forward-looking statements” above.

 

The market prices of gold and silver are volatile. A decline in gold and silver prices could result in decreased revenues, decreased net income or losses and decreased cash flows, and may negatively affect our business.

 

Gold and silver are commodities. Their prices fluctuate and are affected by many factors beyond our control, including interest rates, expectations regarding inflation, speculation, currency values, central bank activities, governmental decisions regarding the disposal of precious metals stockpiles, global and regional demand and production, political and economic conditions and other factors. The prices of gold and silver, as quoted by The London Bullion Market Association on December 31, 2012 and the close of 2011, were $1,664.00 and $1,574.50 per ounce for gold, respectively, and $29.95 and $28.18 per ounce for silver, respectively. The prices of gold and silver may decline in the future. A substantial or extended decline in gold or silver price would adversely impact our revenues, net income and cash flows, particularly in light of our current strategy of not engaging in hedging transactions with respect to gold or silver. In addition, sustained lower gold or silver prices may:

 

   

reduce revenues further through production declines due to cessation of the mining of deposits, or portions of deposits, that have become uneconomic at the then-prevailing gold or silver price;

 

   

reduce or eliminate the profit that we currently expect from ore stockpiles and ore on leach pads;

 

   

halt or delay the development of new projects;

 

   

cause us to recognize an impairment to the carrying values of mineral properties;

 

   

reduce funds available for exploration with the result that depleted reserves may not be replaced; and

 

   

reduce existing reserves by removing ores from reserves that can no longer be economically processed at prevailing prices.

 

The estimation of the ultimate recovery of gold and silver from the Hycroft Mine, although based on standard industry sampling and estimating methods, is subjective. Actual recoveries may vary from our estimations.

 

Our Hycroft Mine utilizes the heap leach process to extract gold and silver from ore. The heap leach process extracts gold and silver by placing ore on an impermeable pad and applying a dilute cyanide solution that dissolves a portion of the contained gold and silver, which are then recovered in metallurgical processes. We use

 

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several integrated steps in the process of extracting gold and silver to estimate the metal content of ore placed on the leach pad. Although we refine our estimates as appropriate at each step in the process, the final amounts are not determined until a third-party smelter converts the doré and determines final ounces of gold and silver available for sale. We then review this end result and reconcile it to the estimates we developed and used throughout the production process. Based on this review, we adjust our estimation procedures when appropriate. Due to the complexity of the estimation process and the number of steps involved, among other things, actual recoveries can vary from estimates, and the amount of the variation could be significant and could have a material adverse impact on our financial condition and results of operations.

 

Each of these factors not only applies to our current and future operations at the Hycroft Mine, but will also apply to our Hasbrouck property and any future development of other properties not yet in production. In the case of mines that we may develop in the future, we will not have the benefit of actual experience in our estimates with respect to those mines, and there is a greater likelihood that actual results will vary from the estimates.

 

Reserve and other mineralized material calculations are estimates only, and are subject to uncertainty due to factors including metal prices, inherent variability of the ore and recoverability of metal in the mining process.

 

The calculation of mineral reserves, other mineralized material and grading are estimates and depend upon geological interpretation and statistical inferences or assumptions drawn from drilling and sampling analysis, which may prove to be unpredictable. There is a degree of uncertainty attributable to the calculation of mineral reserves and corresponding grades. Until mineral reserves and other mineralized materials are actually mined and processed, the quantity of ore and grades must be considered as an estimate only. In addition, the quantity of mineral reserves and other mineralized materials and ore may vary depending on metal prices. Any material change in the quantity of mineral reserves, other mineralized materials, mineralization, grade or stripping ratio may affect the economic viability of our properties. In addition, we can provide no assurance that gold recoveries or other metal recoveries experienced in small-scale laboratory tests will be duplicated in larger scale tests under on-site conditions or during production.

 

We may not achieve our production estimates and our adjusted cash costs for our operations may be higher than our estimates.

 

We prepare estimates of future production and adjusted cash costs for our operations. We develop our estimates based on, among other things, mining experience, reserve and other mineralized material estimates, assumptions regarding ground conditions and physical characteristics of ores (such as hardness and presence or absence of certain metallurgical characteristics) and estimated rates and costs of mining and processing. All of our estimates are subject to numerous uncertainties, many of which are beyond our control. Our actual production may be lower than our production estimates and our actual adjusted cash costs may be higher than our adjusted cash costs estimates. While we believe that our estimates are reasonable, actual results will vary and such variations may be material. These estimates are necessarily speculative in nature, and it may be the case that one or more of the assumptions underlying such projections and estimates may not materialize. Investors in our common stock are cautioned not to place undue reliance on the projections and estimates set forth in this Form 10-K.

 

Our operations are subject to numerous governmental permits that are difficult to obtain and we may not be able to obtain or renew all of the permits we require, or such permits may not be timely obtained or renewed.

 

In the ordinary course of business we are required to obtain and renew governmental permits for our operations, including in connection with our mining and exploration plans at the Hycroft Mine and our exploration plan at our Hasbrouck property. We also need additional governmental permits in order to complete our expansion of the Hycroft Mine operations, including without limitation, permits to operate the milling facility, construct the tailings impoundment and allow mining below the water table. Obtaining or renewing the necessary governmental permits is a complex and time-consuming process involving costly undertakings by us. The duration and success of our efforts to obtain and renew permits are contingent upon many variables not

 

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within our control, including the interpretation of applicable requirements implemented by the permitting authority and intervention by third parties in any required environmental review. We may not be able to obtain or renew permits that are necessary to our operations on a timely basis or at all, and the cost to obtain or renew permits may exceed our estimates. Failure to comply with the terms of our permits may result in injunctions, fines, suspension or revocation of permits and other penalties. We can provide no assurance that we have been, or will at all times, be in full compliance with all of the terms of our permits or that we have all required permits. The costs and delays associated with compliance with these permits and with the permitting process could delay or stop us from executing our Hycroft Mine expansion project, proceeding with the operation or development of a property or increase the costs of development or production and may materially adversely affect our business, results of operations or financial condition.

 

We cannot be certain that our future exploration and development activities will be commercially successful.

 

Substantial expenditures are required to further explore our Hycroft and Hasbrouck properties, to establish reserves and other mineralized materials through drilling and analysis, to develop metallurgical processes to extract metal from the ore and, in the case of new properties or the expansion of our existing projects, to develop the mining and processing facilities and infrastructure at any site chosen for mining. We cannot provide assurance that any reserves or other mineralized materials discovered will be in sufficient quantities to justify commercial operations or that the funds required for development can be obtained on a timely basis. A number of factors, including costs, actual mineralization, consistency and reliability of ore grades and commodity prices, affect successful project development. The efficient operation of processing facilities, the existence of competent operational management, as well as the availability and reliability of appropriately skilled and experienced consultants also can affect successful project development. There can be no assurance that our exploration and development programs, including the advancement of the Hycroft Mine oxide operation, the Hycroft milling feasibility study for the mill expansion project and the Hasbrouck preliminary economic assessment, will result in economically viable mining operations or yield new mineral reserves or other mineralized materials.

 

Our gold and silver production may decline, reducing our revenues and negatively impacting our business.

 

Our future gold and silver production may decline as a result of an exhaustion of reserves and possible closure of mines. It is our business strategy to conduct gold and silver exploratory activities at the Hycroft Mine and the Hasbrouck property. We may also consider from time to time the acquisition of gold and silver mining properties and businesses or reserves that possess minable ore reserves that are capable to become operational in the near future. We can provide no assurance that our gold and silver production in the future will not decline. Accordingly, our revenues from the sale of gold and silver may decline, negatively affecting our results of operations.

 

Cost estimates and timing of new projects are uncertain, which may adversely affect our expected production and profitability.

 

The capital expenditures and time required to develop and explore our properties, including the Hycroft Mine and the Hasbrouck property, are considerable and changes in costs, construction schedules or both, can adversely affect project economics and expected production and profitability. There are a number of factors that can affect costs and construction schedules, including, among others:

 

   

availability of labor, energy, transportation, equipment, and infrastructure;

 

   

changes in input commodity prices and labor costs;

 

   

fluctuations in currency exchange rates;

 

   

availability and terms of financing;

 

   

changes in anticipated tonnage, grade and metallurgical characteristics of the ore to be mined and processed;

 

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recovery rates of gold and other metals from the ore;

 

   

difficulty of estimating construction costs over a period of years;

 

   

delays in completing any environmental review or in obtaining environmental or other government permits;

 

   

weather and severe climate impacts; and

 

   

potential delays related to social and community issues.

 

We currently recover gold and silver from oxide ores at the Hycroft Mine. The Hycroft milling feasibility study on the expansion project primarily relates to the economic potential of recovering metals from the sulfide mineralization at the Hycroft property. Oxide heap leach mining and the processing of sulfide ore is uncertain and, therefore, the costs and timing of the commencement of sulfide operations at the Hycroft Mine could vary greatly from our estimates.

 

Mining development, exploration, and processing operations pose risks and costs that may negatively impact our business.

 

Mining development, exploration, and processing operations involve many hazards and uncertainties, including, among others:

 

   

unusual and unexpected rock formations or water conditions;

 

   

seismic activity;

 

   

metallurgical or other processing problems;

 

   

ground or slope failures;

 

   

industrial accidents;

 

   

environmental contamination or leakage;

 

   

fires;

 

   

flooding and periodic interruptions due to inclement or hazardous weather conditions or other acts of nature;

 

   

organized labor disputes or work slow-downs;

 

   

mechanical equipment failure and facility performance problems; and

 

   

the availability of critical materials, equipment and skilled labor.

 

These occurrences could result in damage to, or destruction of, our properties or production facilities, personal injury or death, environmental damage, delays in mining or processing, increased production costs, asset write downs, monetary losses and legal liability, which could have an adverse effect on our results of operations and financial condition and adversely affect our projected development and production estimates.

 

We may be adversely affected by challenges relating to slope stability.

 

Our open pit mines get deeper as we mine them, presenting certain geotechnical challenges including the possibility of slope failure. If we are required to decrease pit slope angles or provide additional road access to prevent such a failure, our stated reserves could be negatively affected. Further, hydrological conditions relating to pit slopes, renewal of material displaced by slope failures and increased stripping requirements could also negatively affect our stated reserves. We have taken actions in order to maintain slope stability, but we cannot provide any assurances that we will not have to take additional action in the future or that our actions taken to date

 

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will be sufficient. Unexpected failure or additional requirements to prevent slope failure may negatively affect our results of operations and financial condition, as well as have the effect of diminishing our stated ore reserves.

 

There are uncertainties as to title matters in the mining industry. Any defects in such title could cause us to lose our rights in mineral properties and jeopardize our business operations.

 

Our mineral properties consist of private mineral rights, leases covering private lands, leases of patented mining claims and unpatented mining claims. Many of our mining properties in the United States are unpatented mining claims located on lands administered by the U.S. Bureau of Land Management (“BLM”), Nevada State Office to which we have only possessory title. Because title to unpatented mining claims is subject to inherent uncertainties, it is difficult to determine conclusively ownership of such claims. These uncertainties relate to such things as sufficiency of mineral discovery, proper location and posting and marking of boundaries, and possible conflicts with other claims not determinable from descriptions of record. We believe a substantial portion of all mineral exploration, development and mining in the United States now occurs on unpatented mining claims, and this uncertainty is inherent in the mining industry.

 

The present status of our unpatented mining claims located on public lands allows us the right to mine and remove valuable minerals, such as precious and base metals, from the claims conditioned upon applicable environmental reviews and permitting programs. We also are generally allowed to use the surface of the land solely for purposes related to mining and processing the mineral-bearing ores. However, legal ownership of the land remains with the United States. We remain at risk that the mining claims may be forfeited either to the United States or to rival private claimants due to failure to comply with statutory requirements. Prior to 1994, a mining claim locator who was able to prove the discovery of valuable, locatable minerals on a mining claim, and to meet all other applicable federal and state requirements and procedures pertaining to the location and maintenance of federal unpatented mining claims, had the right to prosecute a patent application to secure fee title to the mining claim from the Federal government. The right to pursue a patent, however, has been subject to a moratorium since October 1994, through federal legislation restricting the BLM from accepting any new mineral patent applications. If we do not obtain fee title to our unpatented mining claims, we can provide no assurance that we will be able to obtain compensation in connection with the forfeiture of such claims.

 

There may be challenges to title to the mineral properties in which we hold a material interest. If there are title defects with respect to any properties, we might be required to compensate other persons or perhaps reduce our interest in the affected property. Also, in any such case, the investigation and resolution of title issues would divert our management’s time from ongoing production, exploration and development programs.

 

Legislation has been proposed that could, if enacted, significantly affect the cost of our operations on our unpatented mining claims.

 

Members of the U.S. Congress have repeatedly introduced bills which would supplant or alter the provisions of the Mining Law of 1872. Such bills have proposed, among other things, to either eliminate or greatly limit the right to a mineral patent and to impose a federal royalty on production from unpatented mining claims. Such proposed legislation could change the cost of holding unpatented mining claims and could significantly impact our ability to develop mineralized material on unpatented mining claims. A majority of our mining claims are on unpatented claims. Although we cannot predict what legislated royalties might be, the enactment of these proposed bills could adversely affect the potential for development of our unpatented mining claims and the economics of our existing operating mines on federal unpatented mining claims. Passage of such legislation could adversely affect our financial performance.

 

Changes in environmental regulations could adversely affect our cost of operations or result in operational delays.

 

The regulatory environment in which we operate is evolving in a manner that will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of

 

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proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. New environmental laws and regulations or changes in existing environmental laws and regulations could have a negative effect on exploration activities, operations, production levels and methods of production. We can provide no assurance that future changes in environmental laws and regulations will not adversely affect our current operations or future projects. Any changes to these laws and regulations could have an adverse impact on our financial performance and results of operations by, for example, requiring changes to operating constraints, technical criteria, fees or surety requirements.

 

Our insurance may not cover all of the risks associated with our business.

 

Mining, development, exploration and processing operations involve risks which could interrupt or impair our ability to operate as planned, including:

 

   

environmental contamination;

 

   

metallurgical and other processing problems;

 

   

organized labor disputes or work slow-downs;

 

   

mechanical equipment failure and facility performance problems; and

 

   

availability of critical materials, equipment and skilled labor.

 

We cannot be certain that our insurance will cover all of the risks associated with mining and processing or that we will be able to maintain insurance to cover these risks at economically feasible premiums, which may increase our costs and decrease our profitability. We could also become subject to liability for hazards against which we cannot insure or against which we may elect not to insure, such as business interruption insurance which we have elected not to obtain, because of high premium costs or commercial impracticality. Such events could result in a prolonged interruption in operations that would have a negative effect on our ability to generate revenues, profits and cash flow. Losses from such events may increase costs and decrease profitability.

 

Changes in the cost or supply of energy or commodities used in operations may adversely affect the profitability of our operations and our financial condition.

 

Our mining operations and exploration activities are intensive users of energy. Our principal energy sources are electricity and diesel fuel. We rely upon third parties for our supply of energy resources consumed in our mining and exploration activities. Energy prices can be affected by numerous factors beyond our control, including global and regional supply and demand, political and economic conditions, and applicable regulatory regimes. The prices of various sources of energy may increase significantly from current levels. An increase in energy prices could materially and adversely affect our results of operations and financial condition.

 

Disruptions in the supply of our energy resources could temporarily impair our ability to produce gold and silver or delay our expansion projects. Some of our mining operations and exploration projects are in remote locations requiring the building of power lines and long distance transmission of power. A disruption in the transmission of energy, inadequate energy transmission infrastructure or the termination of any of our energy supply contracts could interrupt our energy supply and adversely affect our operations or expansion projects.

 

Our production costs are also affected by the prices of commodities we consume or use in our operations, such as diesel fuel, lime, sodium cyanide and explosives. The prices of such commodities are influenced by supply and demand trends affecting the mining industry in general and other factors outside our control. Increases in the price for materials consumed in our mining and production activities could materially and adversely affect our results of operations and financial condition.

 

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Environmental regulations could require us to make significant expenditures or expose us to potential liability.

 

To the extent we become subject to environmental liabilities, the payment of such liabilities or the costs that we may incur, including to remedy environmental pollution, would reduce funds otherwise available to us and could have a material adverse effect on our financial condition, results of operations, and liquidity. If we are unable to fully remedy an environmental violation or release of hazardous substances, we might be required to suspend operations or enter into interim compliance measures pending completion of the required remedy or corrective action. The environmental standards that may ultimately be imposed at a mine site can vary and may impact the cost of remediation. Actual remedial costs may exceed the financial accruals that have been made for such remediation. The potential exposure may be significant and could have a material adverse effect on our financial condition and results of operations.

 

Moreover, governmental authorities and private parties may bring lawsuits based upon damage to property or natural resources and injury to persons resulting from the environmental, health and safety impacts of our past and current operations, which could lead to the imposition of substantial fines, remediation costs, penalties, injunctive relief and other civil and criminal sanctions. Substantial costs and liabilities, including those required to restore the environment after the closure of mines, are inherent in our operations. Although we believe that we are in substantial compliance with applicable laws and regulations, we cannot provide any assurance that any such law, regulation, enforcement or private claim will not have a negative effect on our business, financial condition or results of operations.

 

Our exploration and development operations are subject to extensive environmental regulations, which could result in the incurrence of additional costs and operational delays.

 

All phases of our operations are subject to extensive federal and state environmental regulation, including those enacted under the following laws:

 

   

Comprehensive Environmental Response, Compensation, and Liability Act;

 

   

The Resource Conservation and Recovery Act;

 

   

The Clean Air Act;

 

   

The National Environmental Policy Act;

 

   

The Clean Water Act; and

   

The Safe Drinking Water Act.

 

These environmental regulations require us to obtain various operating permits, approvals and licenses and also impose standards and controls relating to exploration, development and production activities. For instance, we are required to hold a Nevada Reclamation Permit with respect to the Hycroft Mine. This permit mandates concurrent and post-mining reclamation of mines and require the posting of reclamation bonds sufficient to guarantee the cost of mine reclamation. We have set up a provision for our reclamation bond at the Hycroft Mine. Compliance with this and other federal and state regulations could result in delays in beginning or expanding operations, incurring additional costs for investigation or cleanup of hazardous substances, payment of penalties for non-compliance or discharge of pollutants, and post-mining closure, reclamation and bonding, all of which could have an adverse impact on our financial performance and results of operations.

 

Regulations and pending legislation governing issues involving climate change could result in increased operating costs, which could have a material adverse effect on our business.

 

A number of governments or governmental bodies have introduced or are contemplating regulatory changes in response to various climate change interest groups and the potential impact of climate change. Legislation and increased regulation regarding climate change could impose significant costs on us, our venture partners and our suppliers, including costs related to increased energy requirements, capital equipment, environmental monitoring

 

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and reporting and other costs to comply with such regulations. Any adopted future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such regulations. Given the emotion, political significance and uncertainty around the impact of climate change and how it should be dealt with, we cannot predict how legislation and regulation will affect our financial condition, operating performance and ability to compete. Furthermore, even without such regulation, increased awareness and any adverse publicity in the global marketplace about potential impacts on climate change by us or other companies in our industry could harm our reputation.

 

Climate change could have an adverse impact on our cost of operations.

 

The potential physical impacts of climate change on our operations are highly uncertain and would be particular to the geographic circumstances in areas in which we operate. These climate changes may include changes in rainfall and storm patterns and intensities, water shortages, changing sea levels and changing temperatures. These changes in climate could have an impact on the cost of production at our mines and adversely affect the financial performance of our operations.

 

A shortage of equipment and supplies could adversely affect our ability to operate our business.

 

We are dependent on various supplies and equipment to carry out our mining exploration and development operations. The shortage of such supplies, equipment and parts could have a material adverse effect on our ability to carry out our operations and therefore limit or increase the cost of production. Such shortages could also result in increased construction costs and cause delays in expansion projects.

 

Joint ventures and other partnerships may expose us to risks.

 

In the future, we may enter into joint ventures or other partnership arrangements with other parties in relation to the exploration, development and production of certain of the properties in which we have an interest. Joint ventures can often require unanimous approval of the parties to the joint venture or their representatives for certain fundamental decisions such as an increase or reduction of registered capital, merger, division, dissolution, amendments of constituting documents, and the pledge of joint venture assets, which means that each joint venture party may have a veto right with respect to such decisions which could lead to a deadlock in the operations of the joint venture or partnership. Further, we may be unable to exert control over strategic decisions made in respect of such properties, including our existing joint venture at our Maverick Springs property where we are a minority (45%) owner. Any failure of such other companies to meet their obligations to us or to third parties, or any disputes with respect to the parties’ respective rights and obligations, could have a material adverse effect on the joint ventures or their properties and therefore could have a material adverse effect on our results of operations, financial performance, and cash flows.

 

If we lose key personnel or are unable to attract and retain additional personnel, we may be unable to develop our business.

 

Our development in the future will be highly dependent on the efforts of key management employees, specifically, Robert Buchan, our Executive Chairman, Scott Caldwell, our President and Chief Executive Officer, Stephen Jones, our Executive Vice President and Chief Financial Officer, Randy Buffington, our Executive Vice President and Chief Operating Officer, and other key employees that we may hire in the future. Although we have entered into employment agreements with Mr. Caldwell and Mr. Jones, we do not have and currently have no plans to obtain key man insurance with respect to any of our key employees. As well, we will need to recruit and retain other qualified managerial and technical employees to build and maintain our operations. If we are unable to successfully recruit and retain such persons, our development and growth could be significantly curtailed.

 

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Our reliance on third party contractors to conduct a significant portion of our operations and construction projects exposes us to risks.

 

We contract with third party contractors for a significant portion of our operations and construction projects, including the crushing facility, the mill, and other ongoing expansion projects. At December 31, 2012, approximately 273 people were working as contractors in support of our operations. As a result, our operations are subject to a number of risks, some of which are outside our control, including:

 

   

negotiating agreements with contractors on acceptable terms;

 

   

the inability to replace a contractor and its operating equipment in the event that either party terminates the agreement;

 

   

reduced control over those aspects of operations which are the responsibility of the contractor;

 

   

failure of a contractor to perform under its agreement;

 

   

interruption of operations or increased costs in the event that a contractor ceases its business due to insolvency or other unforeseen events;

 

   

failure of a contractor to comply with applicable legal and regulatory requirements, to the extent it is responsible for such compliance; and

 

   

problems of a contractor with managing its workforce, labor unrest or other employment issues.

 

In addition, we may incur liability to third parties as a result of the actions of our contractors. The occurrence of one or more of these risks could decrease our gold and silver production, increase our adjusted cash costs and adversely affect our results of operations and financial position.

 

To the extent that we seek to expand our operations and increase our reserves through acquisitions, we may experience issues in executing acquisitions or integrating acquired operations.

 

From time to time, we may examine opportunities to make selective acquisitions in order to expand our operations and reported reserves. The success of any acquisition would depend on a number of factors, including, but not limited to:

 

   

identifying suitable candidates for acquisition and negotiating acceptable terms for any such acquisition;

 

   

obtaining approval from regulatory authorities and potentially our stockholders;

 

   

maintaining our financial and strategic focus and avoiding distraction of management during the process of integrating the acquired business; and

 

   

implementing our standards, controls, procedures and policies at the acquired business.

 

There can be no assurance that we will be able to conclude any acquisitions successfully, or that any acquisition will achieve the anticipated synergies or other positive results. Any material problems that we encounter in connection with such an acquisition could have a material adverse effect on our business, operating results and financial condition.

 

Some of our directors may have conflicts of interest as a result of their involvement with other natural resource companies.

 

Some of our directors are directors or officers of other natural resource or mining-related companies, or may be involved in related pursuits that could present conflicts of interest with their roles at Allied Nevada. In the event that any such conflict of interest arises, a director who has such a conflict is required to disclose the conflict to our board of directors (and any applicable committees), should abstain from voting on the matter and, in most cases, should leave the meeting while the remaining directors discuss and vote on such matter. In

 

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appropriate cases, we will establish a special committee of independent directors to review a matter in which directors, or management, may have a conflict.

 

Compliance with current and future government regulations may cause us to incur significant costs.

 

Our operations are subject to extensive federal and state legislation governing matters such as mine safety, occupational health, labor standards, prospecting, exploration, production, exports, toxic and hazardous substances, explosives, management of natural resources, price controls, land use, water use, air emissions, waste disposal, environmental review and taxes. Compliance with this and other legislation could require us to make significant financial outlays. The enactment of new legislation or more stringent enforcement of current legislation may increase costs, which could have a negative effect on our financial position, results of operations, and liquidity. We cannot make assurances that we will be able to adapt to these regulatory developments on a timely or cost-effective basis. Violations of these laws, regulations and other regulatory requirements could lead to substantial fines, penalties or other sanctions, including possible shut-downs of the Hycroft Mine or future operations, as applicable.

 

Our ability to find and acquire new mineral properties and our prospects for the future growth of our business are uncertain.

 

Because mines have limited lives based on proven and probable ore reserves, we are continually seeking to replace and expand our ore reserves. Identifying promising mining properties is difficult and speculative. Furthermore, we encounter strong competition from other mining companies in connection with the acquisition of properties producing or capable of producing gold and silver. Many of these companies have greater financial resources than we do. Consequently, we may be unable to replace and expand current ore reserves through the acquisition of new mining properties or interests therein on terms we consider acceptable. As a result, our revenues from the sale of gold and silver may decline, resulting in lower income and reduced growth.

 

We do not currently use forward sale or other significant hedging arrangements to protect against gold and silver prices and commodity prices (other than related to a portion of our diesel costs) and, as a result, our operating results are exposed to the impact of any significant decrease in the price of gold or silver or any significant increase in commodity prices.

 

We do not currently enter into forward sales or other significant hedging arrangements to reduce the risk of exposure to volatility in commodity prices. Accordingly, our future operations are exposed to the impact of any significant decrease in gold or silver prices and any significant increase in commodity prices. If such prices change significantly, we will realize reduced revenues and increased costs. While it is not our current intention to enter into forward sales or other significant hedging arrangements, we are not restricted from entering into such arrangements at a future date.

 

We face intense competition in the mining industry.

 

The mining industry is intensely competitive. As a result of this competition, some of which is with large established mining companies with substantial capabilities and with greater financial and technical resources than ours, we may be unable to acquire additional attractive mining claims or financing on terms we consider acceptable, which may adversely impact our growth and development. This, in turn, may adversely affect our financial condition and results of operations. We also compete with other mining companies in the recruitment and retention of qualified managerial and technical employees. If we are unable to successfully attract and retain qualified employees, our exploration and development programs may be slowed down or suspended.

 

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Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

 

We collect and store sensitive data, including intellectual property, our proprietary business information and personally identifiable information of our employees, on our networks. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations, and damage our reputation, which could adversely affect our business.

 

We may be unable to raise additional capital on favorable terms or at all.

 

The exploration and development of our properties, including the advancement of the Hycroft Mine expansion project and the development of the Hasbrouck property, as well as any acquisitions we may make, will require significant capital investment. Failure to obtain sufficient financing may result in the delay or indefinite postponement of exploration activity, development or production on any of our properties or consummation of any acquisitions. We can provide no assurance that additional financing will be available at all or on terms we consider acceptable.

 

Our substantial indebtedness could adversely affect our financial condition.

 

We have a significant amount of indebtedness. As of December 31, 2012, we had indebtedness of $525.2 million, including CDN $400.0 million aggregate principal of 8.75% Senior Unsecured Notes due 2019 (“Notes”) (which have been swapped to $400.4 million at 8.375% through a currency swap agreement), with an additional $120.0 million of unused commitments under our revolving credit facility. Subject to the limits contained in the credit agreement governing our revolving credit facility, the indenture governing our Notes and our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could intensify. Our high level of debt could:

 

   

make it more difficult for us to satisfy our obligations with respect to our outstanding debt;

 

   

require a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;

 

   

limit our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

   

expose us to the risk of increased interest rates as certain of our borrowings, including borrowings under our revolving credit facility, are at variable rates of interest;

 

   

limit our flexibility in planning for and reacting to changes in the industry in which we compete;

 

   

place us at a disadvantage compared to other, less leveraged competitors; and

 

   

increase our cost of borrowing.

 

Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under our debt, and the price of our common stock.

 

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In addition to the indenture governing our Notes, certain of our capital lease obligations and the credit agreement governing our revolving credit facility contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of nearly all of our debt.

 

We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

 

Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The credit agreement governing our revolving credit facility and the indenture governing our Notes restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.

 

In addition, we conduct a substantial portion of our operations through our subsidiaries, certain of which in the future may not be guarantors of our indebtedness. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors of our indebtedness, our subsidiaries do not have any obligation to pay amounts due on our indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity, and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indenture governing our Notes limits the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

 

Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our obligations.

 

If we cannot make scheduled payments on our debt, we will be in default and holders of our Notes could declare all outstanding principal and interest to be due and payable, the lenders under our revolving credit facility and capital leases could terminate their commitments to loan money, the lenders could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation.

 

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The terms of the indenture governing our Notes and the credit agreement governing our revolving credit facility will restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

 

The indenture governing our Notes and the credit agreement governing our revolving credit facility contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:

 

   

incur additional indebtedness and guarantee indebtedness;

 

   

pay dividends or make other distributions or repurchase or redeem capital stock;

 

   

prepay certain debt;

 

   

issue certain preferred stock or similar equity securities;

 

   

make loans and investments;

 

   

sell assets;

 

   

incur liens;

 

   

enter into transactions with affiliates;

 

   

enter into agreements restricting our subsidiaries’ ability to pay dividends; and

 

   

consolidate, merge or sell all or substantially all of our assets.

 

In addition, the restrictive covenants in the credit agreement governing our revolving credit facility require us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we may be unable to meet them.

 

A breach of the covenants or restrictions under the indenture governing our Notes or under the credit agreement governing our revolving credit facility could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies, including our capital lease obligations. In addition, an event of default under the credit agreement governing our revolving credit facility would permit the lenders under our revolving credit facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our revolving credit facility, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or noteholders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. As a result of these restrictions, we may be:

 

   

limited in how we conduct our business;

 

   

unable to raise additional debt or equity financing to operate during general economic or business downturns; or

 

   

unable to compete effectively or to take advantage of new business opportunities.

 

These restrictions may affect our ability to grow in accordance with our strategy. In addition, our financial results, our substantial indebtedness and our credit ratings could adversely affect the availability and terms of our financing.

 

Our common stock has a limited trading history and the market price of our shares may fluctuate widely.

 

Our common stock began trading in May 2007 and there can be no assurance that an active trading market for our common stock will be sustained in the future. We cannot predict the prices at which our common stock may trade. The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond our control including, but not limited to: fluctuations in the price of gold; announcements

 

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by us or competitors of significant acquisitions or dispositions; changes in earnings estimates or recommendations by research analysts who track our common stock or the shares of other companies in the resource sector; changes in general economic and/or political conditions; the arrival or departure of key personnel; and overall market fluctuations and general economic conditions. Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.

 

Future sales of our common stock in the public or private markets could adversely affect the trading price of our common stock and our ability to raise funds in new stock offerings.

 

Future sales of substantial amounts of our common stock or equity-related securities in the public or private markets, or the perception that such sales could occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. As of December 31, 2012, 89,734,112 shares of our common stock were outstanding. We cannot predict the effect, if any, that future sales of our common stock, or the perception that such sales could occur, will have on the trading price of our common stock.

 

We do not intend to pay dividends for the foreseeable future.

 

We have never declared or paid any dividends on our common stock. We intend to retain all of our earnings for the foreseeable future to finance the operation and expansion of our business, and we do not anticipate paying any cash dividends in the future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases. Our board of directors retains the discretion to change this policy.

 

Anti-takeover provisions in our organizational documents and under Delaware law could make a third party acquisition of the Company difficult.

 

Our amended and restated certificate of incorporation and bylaws contain provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include the ability of our board of directors to designate the terms of and issue new series of preferred stock and the ability of our board of directors to amend the bylaws without stockholder approval. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless certain specific requirements are met as set forth in Section 203. Collectively, these provisions could make a third party acquisition of the Company difficult or could discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

We classify our mineral properties into three categories: “Operating Properties”, “Advanced Exploration Properties”, and “Other Exploration Properties”. Operating Properties are properties in which we operate a producing mine. The Hycroft Mine, as described below, is our Operating Property and makes up the “Hycroft Mine” segment in our Consolidated Financial Statements. Advanced Exploration Properties are properties where we retain a significant controlling interest or joint venture and there has been sufficient drilling and analysis completed to identify and report reserves or other mineralized material. Other Exploration Properties are those for which insufficient drilling and geologic investigations have been completed to define mineralized materials. In our Consolidated Financial Statements, the “Exploration” segment includes all Advanced and Other Exploration Properties.

 

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Operating Property

 

Hycroft Mine

 

The following shows where our Hycroft Mine and Advanced Exploration Properties are located as well as areas of the Hycroft Mine:

 

LOGO    LOGO

 

For a detailed discussion of the Hycroft Mine’s operating and production data, see Part II – Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations – Hycroft Mine.

 

We currently have one Operating Property, the Hycroft Mine which is located 50 miles west of Winnemucca, Nevada. Winnemucca, a city with a population of 7,500, is a commercial community on Interstate 80, 164 miles northeast of Reno. The town is served by a transcontinental railroad and has a municipal airport. Access to the Hycroft Mine from Winnemucca is by State Road No. 49 (Jungo Road), a good-quality, unpaved road, and a short access road to the main entrance of the mine. Well-maintained mine and exploration roads provide access throughout the property. Access is also possible from Imlay, Gerlach, and Lovelock by unpaved roads intersecting Interstate 80 and Nevada State Route 447. The majority of our employees live in the Winnemucca area. The site receives electrical power provided by NV Energy from the northwestern Nevada power grid. The Hycroft Mine currently has water rights, which are adequate to support our current operations and the planned oxide heap leach ore.

 

We hold 27 private parcels and 3,015 unpatented mining claims that constitute our Hycroft Mine Operating Property. The total acreage covered by unpatented claims is approximately 63,947 acres and an additional 1,814 acres within the patented claims. Combining the patented and unpatented claims, total claims cover approximately 65,761 acres. Annually, we stake or purchase additional claims contiguous to or around the existing Hycroft Mine land position. Our Hycroft Mine patented claims occupy private lands and our unpatented claims occupy public lands. The public lands include unpatented mining claims on lands administered by the BLM. These claims are governed by the laws and regulations of the U.S. federal government and the state of Nevada. To maintain the patented claims in good standing, we must pay the annual property tax payments to the county in which the claims are held. To maintain the unpatented claims in good standing, we must file a notice of

 

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intent to maintain the claims within the county and pay the annual mineral claim filing fees to the BLM. A portion of the Hycroft Mine is subject to a mining lease requiring a 4% net profit royalty payable to the owner of certain patented and unpatented mining claims, subject to a maximum of $7.6 million, of which the Company has paid $1.5 million as of December 31, 2012.

 

The Hycroft Mine was formerly known as the Crofoot-Lewis open pit mine, which was a small heap leaching operation that commenced in 1983. The Crofoot-Lewis mine production continued until it was placed on a care and maintenance program in December 1998 due to low gold prices. During this first operating period the mine produced over one million ounces of gold and two and one-half million ounces of silver. Vista acquired the Crofoot-Lewis claims and mine in 1987 and 1988. We acquired the Hycroft Mine in 2007 pursuant to an arrangement agreement where Vista transferred to us its Nevada mining properties. We completed our first year of mining operations in 2009.

 

Exploration and Development

 

Our Hycroft Mine is currently an open pit, run-of-mine and crushed ore heap leach gold mine that also produces silver as a byproduct of the gold recovery process. We are in the process of implementing a two-stage expansion project; the first stage involves increasing the mining and heap leaching rate of oxide and transitional material utilizing larger capacity mining equipment and expanding the processing facilities. In 2013, construction of a crushing facility, which will initially crush leach pad ore, is expected to be completed and is expected to improve our recoveries of gold and silver. The second stage of the expansion project involves constructing a mill and flotation plant to further improve metal recoveries from oxide and transitional ores and allow for processing of sulfide ore. Upon completion of the mill and flotation plant, the crushing facility will crush ore that will be fed through the mill. For a detailed discussion on our expansion, see Part II – Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations – Hycroft Mine – Hycroft Expansion Projects.

 

In 2012, we drilled 265 holes, representing approximately 255,546 feet, with focus on metallurgical drilling at Central, Brimstone, and Vortex, geotechnical drilling at Central and Vortex, and step out drilling at Central and Brimstone. The drilling results have been utilized to update the corresponding engineering models. Of the 2012 total program, 2% of total footage was directed at exploration, 3% at facility design and geotechnical, 10% at production support, 21% at facility condemnation, and 64% were directed at infill, step-out, and metallurgy at the Hycroft Mine.

 

A 115,000 foot development program has been designed for 2013 with a focus on facility condemnation, and core drilling in support of metallurgical and geotechnical studies and the mill expansion. A 13,000 foot exploration program has been designed to test for mineralization outside the current mine plan, including targets located south of Hycroft (Oscar, Chalcedony, Rabbit, and Chance).

 

At December 31, 2012, the book cost of the Hycroft property totaled $3.5 million and its associated plant, equipment, and mine development totaled $533.0 million.

 

Geology

 

The Hycroft Mine is located on the western flank of the Kamma Mountains. The deposit is hosted in a volcanic eruptive breccia and conglomerates associated with the Tertiary Kamma Mountain volcanics. The volcanics are mainly acidic to intermediate tuffs, flows and coarse volcaniclastic rocks. Volcanic rocks have been block-faulted by dominant north-trending structures, which have affected the distribution of alteration and mineralization. The Central Fault and East Fault control the distribution of mineralization and subsequent oxidation. A post-mineral range-front fault separates the orebody from the adjacent Pleistocene Lahontan Lake sediments in the Black Rock Desert.

 

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The known gold mineralization within the Hycroft Mine extends for a distance of three miles in a north-south direction by 1.5 miles in an east-west direction. Mineralization extends to a depth of less than 330 feet in the outcropping to near-outcropping portion of the deposit on the northwest side to over 2,500 feet in the Vortex deposit to the east. The mineralization is oxide from the surface down to a depth of approximately 300 feet and sulfide mineralization occurs at this depth. The transitional mineralization occurs at the boundary region where original sulfide mineralization has been partially oxidized.

 

Mineral Proven and Probable Ore Reserves

 

Our reserve estimates are based on the latest available geological and geotechnical studies and are calculated in accordance with Industry Guide 7 of the Exchange Act. Proven and probable reserves may not be comparable to similar information regarding mineral reserves disclosed in accordance with the guidance of other countries. We conduct ongoing studies of our ore bodies to optimize economic values and to manage risk. We revise our mine plans and estimates of proven and probable mineral reserves as required in accordance with the latest available studies. Our estimates of proven and probable reserves are prepared by and are the responsibility of our employees, and a majority of these estimates are reviewed and verified by independent experts in mining, geology and reserve determination. Estimated proven and probable reserves at December 31, 2012, were determined using long-term average prices of $800 per ounce for gold and $14 per ounce for silver. The London spot metal prices for the past three years averaged approximately $1,488 per ounce for gold and $29 per ounce for silver.

 

Below is a summary of our estimated proven and probable ore reserves as of December 31, 2012.

 

     Ore Tons
(000’s)
     Gold      Silver             Strip 
Ratio
 

Category

      oz/ton      Contained
Ounces
(000’s)
     oz/
ton
     Contained
Ounces
(000’s)
     Waste
Tons
(000’s)
    

Proven reserves

     899,210         0.011         9,749         0.47         423,055         

Probable reserves

     208,868         0.010         2,126         0.41         86,503         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Proven and probable reserves

     1,108,078         0.011         11,875         0.46         509,558         1,271,760         1.15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Advanced Exploration Properties

 

Advanced Exploration Properties are both those properties where we retain a significant controlling interest or joint venture and where there has been sufficient drilling and analysis completed to identify and report reserves or other mineralized material. Allied Nevada currently has six properties on which mineralized material has been identified: Maverick Springs (a 45% joint venture with Silver Standard), Mountain View, Hasbrouck, Three Hills, Wildcat and Pony Creek/Elliot Dome. None of these properties currently have proven or probable reserves as defined by Industry Guide 7 of the Exchange Act. We are currently evaluating these properties to determine how to best advance these projects by increasing the identified mineralized materials, improving the quality of these mineralized materials, conducting engineering studies, or advancing the project to a development decision. The Company completed a preliminary economic assessment for the Hasbrouck-Three Hills properties in 2012.

 

Our 2012 exploration campaign took place at Hasbrouck, Three Hills, and Wildcat and our 2013 exploration campaign will largely be focused on the same properties. Although we have other Advanced Exploration Properties, we have described in further detail the Hasbrouck, Three Hills, and Wildcat properties below. Additional information can be found on any of our Advanced Exploration Properties by visiting our website at www.alliednevada.com.

 

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Hasbrouck

 

The Hasbrouck property is located in southwestern Nevada about 5 miles south-southwest of the town of Tonopah in Esmeralda County, Nevada, adjacent to U.S. Highway 95 and approximately half-way between Reno and Las Vegas and approximately 4.5 miles from Three Hills. The property is accessed from Tonopah by traveling south along US Highway 95, which transects the claim block. The project is accessed by a gravel road off of U.S. Highway 95 that connects to a network of dirt drill roads that traverse Hasbrouck. Nearby power lines traverse the Hasbrouck property.

 

Hasbrouck consists of 28 patented mining claims and 583 unpatented mining claims, which combined cover an area of approximately 12,044 acres within Esmeralda County, Nevada. Seventeen of the patented mining claims and three of the unpatented mining claims are subject to a mineral production royalty of 4% of the net smelter returns (“NSRs”). The remaining eleven patented mining claims and 263 of the unpatented mining claims are subject to a mineral production royalty of 2% of the NSRs. The remaining 317 unpatented mining claims are not subject to a royalty.

 

Exploration

 

The Company commenced drilling activities on Hasbrouck in 2010, and continued drilling until November of 2012, in order to further identify and delineate the gold mineralization previously identified at the property. Exploration activities at Hasbrouck in 2012 included drilling 20,010 feet in 37 reverse circulation drill holes, focused on expanding resources peripheral to the previously identified deposit. We prepared an estimate of mineralized material for Hasbrouck in 2012, which we intend to update in the first half of 2013. Furthermore, we intend to incorporate those results into the greater Hasbrouck and Three Hills property evaluation.

 

Geology

 

Multiple zones of higher grade mineralization are presently defined. The Saddle Zone consists of a structurally and stratigraphically controlled higher grade mineral body, with the highest grade mineralization hosted in hydrothermal breccia bodies. The Crossroads Zone is east of and adjacent to the Saddle Zone, consisting of higher than average grade disseminated mineralization interspersed with higher grade veins. The Franco Zone is adjacent to the east with the Crossroads Zone, and hosts mineralization similar to Crossroads, with higher grade mineralization in veins. Mineralization is continuous between the three zones. These zones are surrounded by lower grade mineralized material.

 

Three Hills

 

The Three Hills deposit is located in southwestern Nevada about 1 mile west of the town of Tonopah in Esmeralda and Nye Counties, Nevada, and about 4.5 miles northwest of the Hasbrouck property described above. Access to the site is via county-maintained gravel roads from the northwest end of town. Since Three Hills is near the town of Tonopah, power lines are close to the property.

 

Three Hills consists of 76 unpatented lode claims and 3 patented claims totaling approximately 1,632 acres. In 2012, we staked 61 unpatented claims and purchased 2 patented claims. All of the unpatented mining claims and the two patented mining claims are subject to a 2% NSR.

 

We completed a preliminary economic assessment for the development of the Three Hills deposit in 2012.

 

Exploration

 

In 2012, we completed 17 reverse circulation drill holes (9,170 feet) at Three Hills, focused on expanding the deposit to the east. We intend to update estimates of mineralized material for the Three Hills deposit in 2013 and incorporate those results into the greater Hasbrouck and Three Hills property evaluation.

 

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Geology

 

Three Hills is located in the Walker Lane structural domain of the Basin and Range physiographic province. It is in an area of structural disruption resulting from a series of orogenic events occurring in Paleozoic, Mesozoic and Cenozoic times. Basin and Range high-angle normal faults control the mineralization at Three Hills, where they cut the Siebert Formation. Gold mineralization occurs in a zone of pervasive silicification in the Siebert Formation and the upper 10 to 30 feet of the underlying Fraction Tuff. The contact between these two units contains consistently higher grades of gold and is more commonly argillized than silicified.

 

Wildcat

 

Wildcat is located about 35 miles northwest of Lovelock and 26 miles south of the Hycroft Mine in Pershing County, Nevada. The property is accessed, from Lovelock, by traveling 15 miles along Nevada State Route 399, a paved road, and then approximately 16 miles along a well-maintained gravel county road through Sage Valley. The east property boundary is approximately 2.5 miles west of the road through Sage Valley, along a gravel road. Four-wheel drive roads traverse the property.

 

The project consists of 345 unpatented mining claims and four patented mining claims for a combined total of approximately 7,193 acres. Thirteen of the claims are subject to an underlying 0.4% NSR, and the remaining 58 claims are subject to an underlying 1% NSR. Additionally, upon commencement of commercial production, we will be required to make a one-time production payment in the amount of $500,000.

 

Exploration

 

We conducted its initial drill exploration of the property during 2012, which included 17,599 ft. of core in 27 holes and 15,400 ft. of reverse circulation rotary in 22 holes, for a total of 32,999 ft. in 49 holes. We intend to provide an update of estimated mineralized material for the Wildcat deposit in 2013.

 

Geology

 

Wildcat lies in the Seven Troughs Range, which is underlain by Triassic and Jurassic sedimentary rocks and has been intruded by Cretaceous granodiorite. Volcanic domes and plugs of rhyolite, quartz latite, trachyte, and andesite have been emplaced by Tertiary volcanism. Post mineral Tertiary flows of pyroclastic debris, and vitrophyres of rhyolite, quartz latite, trachyte, and andesite composition blanket much of the area.

 

Four mineralized zones: Hero/Tag, Main, Northeast, and Knob 32 are located within the central portion of the property and contain the majority of drilling and all of the known mineralized material. These four areas are geologically similar with mineralization straddling the contact between granodiorite and overlying volcanics. Mineralization hosted in the volcanics generally tends to be lower grade disseminated style of mineralization represented by pervasive and intense silicification. The underlying granodiorite also contains low-grade disseminated style of mineralization with areas of higher-grade associated with quartz vein stockwork.

 

Other Exploration Properties

 

In general, Other Exploration Properties consist of those properties for which insufficient drilling and geologic investigations have been completed to define mineralized materials. Other Exploration Properties may include properties that the Company does not have a significant controlling interest. Allied Nevada has approximately 90 Other Exploration Properties.

 

Certain of these exploration properties have been optioned and leased to other exploration companies in return for production royalties averaging approximately 3.0% and, on some of the properties, work commitments. For the properties under lease, the lessee is typically responsible for making the land payments including the

 

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BLM fees and county property tax payments. BLM filing fees and county property tax payments were paid for approximately 11,907 unpatented mining claims held by Allied Nevada.

 

We intend to pursue strategic options for the exploration properties that could include development through exploration programs, joint ventures, royalty agreements, or the sale or release of the mineral property.

 

Allied Nevada maintains eight geothermal leases totaling 27,555 acres from the Department of the Interior Office of Natural Resources (BLM). These geothermal properties are leased annually and were obtained through competitive bidding. These leases occur in proximity to, or in some cases overlap with, existing Allied Nevada mineral holdings.

 

Item 3. Legal Proceedings

 

From time to time, the Company is a party to litigation and proceedings that are considered part of the ordinary course of its business. The Company is not aware of any material current, pending, or threatened litigation.

 

Item 4. Mine Safety Disclosure

 

Allied Nevada considers health, safety and environmental stewardship to be a core value for the Company and received a “Sentinels of Safety” award at Hycroft for 2008 in 2009. Allied Nevada has a mandatory safety and health program including employee training, risk management, workplace inspection, emergency response, accident investigation and program auditing. The Company considers this program to be essential at all levels to ensure that employees and the Company conduct themselves in an environment of exemplary health, safety and environmental governance.

 

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Form 10-K.

 

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GLOSSARY

 

Assay” means to test minerals by chemical or other methods for the purpose of determining the amount of valuable metals contained.

 

Breccia” means rock consisting of fragments, more or less angular, in a matrix of finer-grained material or of cementing material.

 

Claim” means a mining interest giving its holder the right to prospect, explore for and exploit minerals within a defined area.

 

Deposit” is an informal term for an accumulation of mineral ores.

 

Fault” means a fracture in rock along which there has been displacement of the two sides parallel to the fracture.

 

Heap leach” is a gold extraction method that percolates a cyanide solution through ore heaped on an impervious pad or base.

 

“gpm” means gallons per minute.

 

Mineralized material” is a body that contains mineralization which has been delineated by appropriately spaced drilling and/or underground sampling to estimate a sufficient tonnage and average grade of metal(s). Such a deposit does not qualify as a reserve until a comprehensive evaluation based upon unit cost, grade, recoveries, and other material factors conclude legal and economic feasibility.

 

NI 43-101” means “National Instrument 43-101—Standards of Disclosure for Mineral Projects of the Canadian Securities Administrators.”

 

NSR” means net smelter return royalty.

 

“opt” or “oz/ton” means ounces per ton.

 

Ore” means material containing minerals that can be economically extracted. Ore is processed or stockpiled.

 

“Ounce” means a troy ounce.

 

Oxide” means mineralized rock in which some of the original minerals have been oxidized (i.e., combined with oxygen). Oxidation tends to make the ore more porous and permits a more complete permeation of cyanide solutions so that minute particles of gold in the interior of the minerals will be more readily dissolved. Oxide ore is generally processed using a heap leach method.

 

Probable reserves” means reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation.

 

Proven reserves” means reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth, and mineral content of reserves are well-established.

 

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Recovery” means that portion of the metal contained in the ore that is successfully extracted by processing, expressed as a percentage.

 

Reserves” or “ore reserves” mean that part of a mineral deposit, which could be economically and legally extracted or produced at the time of the reserve determination.

 

Stockwork” means a rock mass interpenetrated by small veins of mineralization.

 

Stripping ratio” or “strip ratio” means the ratio of waste tons to ore tons mined in an open pit mine.

 

Sulfide” means a compound of sulfur and a metallic element.

 

Ton” means a short ton (2,000 pounds).

 

“Transitional” means a material that has been incompletely oxidized.

 

Vein” means a fissure, fault or crack in a rock filled by minerals that have traveled upwards from some deep source.

 

Volcaniclastic” means clastic (made up of fragments of preexisting rocks) rock chiefly composed of volcanic material derived by ejection of volcanic material from a volcanic vent.

 

Waste” means rock or other material lacking sufficient grade and/or other characteristics to be processed or stockpiled as ore.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock is listed on the NYSE MKT and the Toronto Stock Exchange (“TSX”) under the symbol “ANV”. Allied Nevada commenced trading on each of these exchanges on May 10, 2007. The following table sets out the reported high and low sale prices as reported by the exchanges.

 

          NYSE MKT ($)      Toronto Stock
Exchange (CDN$)
 
              High              Low              High              Low      

2012

  

1st quarter

     38.62         29.93         38.50         29.71   
  

2nd quarter

     33.91         23.69         33.68         23.96   
  

3rd quarter

     39.93         24.70         39.14         25.01   
  

4th quarter

     41.02         28.00         40.15         28.16   

2011

  

1st quarter

     35.95         23.62         34.93         23.48   
  

2nd quarter

     43.49         28.56         41.28         28.10   
  

3rd quarter

     45.90         33.59         45.54         33.56   
  

4th quarter

     40.95         28.75         40.67         29.46   

 

On February 22, 2013, the last reported sale price of our common stock on the NYSE MKT was $19.43 and on the TSX was CDN $19.79. As of February 22, 2013, there were 89,738,112 shares of our common stock issued and outstanding, and we had 160 registered shareholders of record.

 

We have never paid dividends or repurchased equity and currently have no intention to do so. Our senior notes, line of credit, and certain capital lease agreements, contain provisions that restrict our ability to pay dividends and repurchase or redeem capital stock. For additional information on these restrictions, please see Part II – Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations – Debt Covenants and Note 10 – Debt to our Consolidated Financial Statements.

 

Performance Graph

 

The following graph and table compares the cumulative total shareholder return of Allied Nevada common stock with the cumulative total shareholder return of the S&P 500 and the PHLX Gold/Silver Sector IndexSM, assuming reinvestment of dividends on December 31 of each year indicated. The graph and table assumes $100 invested at the per share closing price on NYSE MKT in Allied Nevada and each of the indices on December 31, 2007.

 

LOGO

 

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     Years Ended December 31,  
     2007      2008      2009      2010      2011      2012  

Allied Nevada Gold Corp

   $ 100.00       $ 81.35       $ 242.44       $ 423.63       $ 486.82       $ 484.41   

S&P 500 Index

     100.00         63.43         79.87         91.74         93.63         108.45   

PHLX Gold and Silver Index

   $ 100.00       $ 71.60       $ 97.07       $ 130.73       $ 104.22       $ 95.55   

 

Sales of Unregistered Securities

 

The Company had no sales of unregistered securities during the years ended December 31, 2012, 2011, and 2010.

 

Equity Compensation Plans

 

The following table summarizes our shareholder approved equity compensation plans:

 

     December 31, 2012  
     (a)      (b)      (c )  

Equity compensation plans
approved by shareholders

   Number of shares to be
issued upon exercise of
outstanding
options, warrants, and
rights (#)
     Weighted average
exercise  price or grant
date fair value of
outstanding options,
warrants, and rights ($)
     Number of shares
remaining available for
future issuance under
equity compensation
plan (excluding securities
referenced in column (a))
 

Allied Nevada 2007 Stock Option Plan

     640,000       $ 4.79         1,843,906 (1) 

Allied Nevada Restricted Share Plan

     849,482         19.59         1,843,906 (1) 

Deferred Share Unit Plan

     34,008         28.30         462,900   

Deferred Phantom Unit Plan

     248,136         18.50         11,597   
  

 

 

       

 

 

 
     1,771,626            2,318,403   
  

 

 

       

 

 

 

 

(1) The Company has reserved an aggregate total of 6,900,000 shares of common stock available for issuance under both the Allied Nevada 2007 Stock Option Plan and the Allied Nevada Restricted Share Plan.

 

Item 6. Selected Financial Data

 

The following table summarizes selected consolidated financial data as of and for each of the five fiscal years ended December 31, 2008 through 2012, and is derived from our audited consolidated financial statements. The data set forth below should be read in conjunction with “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II—Item 8. Financial Statements and Supplementary Data.”

 

Selected Financial Data

U.S. dollars in thousands (except per share amounts)

 

     Years Ended December 31,  

Results of operations

   2012      2011      2010      2009      2008  

Revenue

   $ 214,559       $ 152,029       $ 130,930       $ 43,204       $ —     

Total cost of sales

     109,492         63,029         64,685         28,798         —     

Net income (loss)

     47,727         36,709         34,128         8,451         (79,641

Basic net income (loss) per share

     0.53         0.41         0.41         0.13         (1.49

Diluted net income (loss) per share

     0.52         0.40         0.41         0.13         (1.49

 

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     December 31,  

Financial position

   2012      2011      2010      2009      2008  

Cash and cash equivalents

   $ 347,047       $ 275,002       $ 337,829       $ 91,581       $ 16,511   

Ore on leachpads, current

     93,088         64,230         49,357         34,179         2,737   

Stockpiles and ore on leachpads, non-current

     38,357         11,320         —           —           —     

Plant, equipment, and mine development, net

     515,902         190,694         84,955         45,756         38,121   

Total assets

     1,237,727         657,206         567,352         252,425         112,259   

Debt, current

     28,614         10,306         3,215         1,298         602   

Debt, non-current

     496,578         34,245         11,104         4,700         2,392   

Total liabilities

     617,753         92,084         44,598         29,245         18,653   

Total shareholders’ equity

     619,974         565,122         522,754         223,180         93,606   

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

In Management’s Discussion and Analysis of Financial Condition and Results of Operations, “we”, “us”, “our”, the “Company”, and “Allied Nevada” refer to Allied Nevada Gold Corp. and its subsidiaries. The following discussion, which has been prepared based on information available to us as of February 25, 2013, provides information that management believes is relevant to an assessment and understanding of our consolidated operating results and financial condition. The following discussion should be read in conjunction with our other reports filed with the U.S. Securities and Exchange Commission (the “SEC”). All amounts herein are in U.S. dollars, unless otherwise noted.

 

Our discussion and analysis consists of the following subsections:

 

   

Introduction to the Company which provides a brief discussion about our history, location, operations, and future expansion plans;

 

   

Executive Summary which lists and discusses significant matters related to our performance, operations, expansion projects, financing, and permitting;

 

   

Critical Accounting Estimates which provides a discussion of accounting estimates that we believe are critical in understanding and evaluating our reported financial results because they affect reported amounts and require significant management judgment and assumptions about highly uncertain matters;

 

   

Hycroft Mine which provides a detailed discussion of our operations, expansion projects, and 2013 outlook;

 

   

Results of Operations which provides a discussion and analysis of operating results for the last three years;

 

   

Liquidity and Capital Resources which provides a discussion of our cash flows (last three years), liquidity, available sources of liquidity, capital requirements, and debt covenants; and

 

   

Non-GAAP Financial Measures which includes a description of our non-GAAP financial measure “adjusted cash costs”, the reasons for using such a measure, and a three year reconciliation to total cost of sales.

 

Introduction to the Company

 

We are a U.S.-based gold and silver producer focused on mining, development, and exploration properties in the state of Nevada. Our operating mine, the Hycroft Mine, was restarted in 2008 and is undergoing expansion projects to implement oxide and sulfide mineralization processing capabilities which will provide staged production increases through 2015. Upon completion of the expansion, the Hycroft Mine is projected to produce, on average, 552,000 ounces of gold and 25.5 million ounces of silver per year from 2015 to 2024. At December 31, 2012 we had proven and probable mineral reserves of 11.9 million ounces of gold and 509.6 million ounces of silver.

 

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Our Hycroft Mine is currently an open pit, run-of-mine and crushed ore heap leach gold mine that also produces silver as a byproduct of the gold recovery process. We are in the process of implementing a two-stage expansion project; the first stage involves increasing the mining and heap leaching rate of oxide and transitional material utilizing larger capacity mining equipment and expanding the processing facilities. In 2013, construction of a gyratory crusher, which will initially crush leach pad ore, is expected to be completed and is expected to improve our recoveries of gold and silver. The second stage of the expansion project involves constructing a mill and flotation plant to further improve metal recoveries from oxide and transitional ores and allow for processing of sulfide ore. Upon completion of the mill and flotation plant, the crushing facility will crush ore that will be fed through the mill.

 

In addition to the Hycroft Mine, we own or control leasehold interests in 100% of the Hasbrouck, Three Hills, Mountain View, Wildcat, and the Pony Creek/Elliot Dome Advanced Exploration Properties and have a joint venture with Silver Standard Resources Inc. with respect to the Maverick Springs Advanced Exploration Property. We also have the exploration rights to approximately 90 Other Exploration Properties.

 

Executive Summary

 

Our 2012 highlights included the following, which are discussed in further detail throughout the following sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations:

 

Net income: Our 2012 net income was $47.7 million ($0.53 per share), an increase of 30% over 2011 net income of $36.7 million ($0.41 per share).

 

Ounces sold: Gold ounces sold in 2012 increased 30% to 114,705 ounces, compared to 88,191 ounces sold in 2011. Silver ounces sold in 2012 increased 87% to 696,144 ounces, compared to 372,000 ounces sold in 2011.

 

Hycroft mining: A record number of tons were mined at the Hycroft Mine in 2012. Total tons mined were 60.7 million tons, an increase of 78% from the 26.7 million tons mined in 2011. We achieved an average fourth quarter 2012 mining rate of 210,000 tons per day.

 

Hycroft Mine expansion projects: Construction, engineering and design, and equipment deliveries remain on time and as budgeted. In 2012, we completed the gyratory crusher pit excavation and construction of the Lewis leach pad, commenced construction of the gyratory crushing system, 21,500 gpm Merrill-Crowe plant, and North and South leach pads, and received and commissioned equipment to increase our mining rate.

 

Permitting: In 2012, we received a positive record of decision from the Bureau of Land Management (“BLM”) for the Heap Leach Expansion Environmental Impact Statement and approval from the Nevada Department of Environmental Protection Agency (“NDEP”) to begin construction of the mill.

 

Financing: In May 2012, we issued CDN $400 million of 8.75% senior unsecured notes (swapped to $400.4 million at 8.375% through a cross currency swap agreement), to finance a portion of our ongoing expansion projects. In October 2012, we amended and restated our revolving credit agreement, increasing the availability from $30.0 million to $120.0 million and extending the maturity from May 2014 to April 2016.

 

Exploration: We ramped up the first pass exploration campaign at Wildcat and continued exploration work at Hasbrouck/Three Hills, focusing on identifying and further defining high grade zones.

 

Critical Accounting Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting

 

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principles (“GAAP”) in the United States. The preparation of these statements requires us to make assumptions, estimates, and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. We base our assumptions, estimates, and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our Consolidated Financial Statements are prepared. On a regular basis, we review our accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ, and such differences could be material.

 

We consider an accounting estimate to be critical if it requires significant management judgments and assumptions about matters that are highly uncertain at the time the estimate is made and if changes in the estimate that are reasonably possible could materially impact our financial statements. Although other estimates are used in preparing our financial statements, we believe that the following accounting estimates are the most critical to understanding and evaluating our reported financial results. For information on all of our significant accounting policies, see Note 2 Summary of Significant Accounting Policies to our Consolidated Financial Statements.

 

Ore on Leach Pads and Stockpiles

 

Estimate Required:

 

The recovery of gold at the Hycroft Mine is accomplished through a heap leaching process, the nature of which limits our ability to precisely determine the recoverable gold ounces in ore on leach pads and stockpiles. We estimate the quantity of recoverable gold ounces in stockpiles and ore on leachpads using surveyed volumes of material, ore grades determined through sampling and assaying of blastholes, and estimated recovery rates based on ore type and domain. The quantity of recoverable gold ounces and recovery rates varies based on ore mineralogy, ore grade, and ore particle sizes. The estimated recoverable gold ounces stockpiled or placed on the leach pads and recovery rates are periodically reconciled by comparing the related ore to the actual gold ounces recovered (metallurgical balancing). The ultimate recoverable gold ounces or life of mine recovery rate is unknown until mining operations cease. A change in the recovery rate or the quantity of recoverable gold ounces in our stockpiles or ore on leach pads could materially impact our financial statements.

 

Impact of Change in Estimate:

 

Changes in recovery rate estimates or estimated recoverable gold ounces that do not result in write-downs are accounted for on a prospective basis. If a write-down is required, stockpiles and ore on leach pads would be adjusted to market values before prospectively accounting for the remaining costs and revised estimated recoverable gold ounces. The Company has not incurred any write-downs or significant changes in recovery rates or estimated recoverable gold ounces.

 

At December 31, 2012, if our weighted average recovery rate estimate decreased by 1% or 2%, our estimate of recoverable gold ounces in stockpiles and ore on leach pads would decrease by 1,750 ounces or 3,500 ounces, respectively, neither of which would require a write-down. On a prospective basis, our weighted average cost per ounce would increase by approximately $8 or $15. A 1% or 2% increase in our estimate of recoverable gold ounces in stockpiles and ore on leach pads would increase estimated recoverable ounces by the aforementioned amounts and reduce our weighted average cost per ounce by approximately $7 per ounce or $15 per ounce, respectively.

 

Proven and Probable Ore Reserves

 

Estimate Required:

 

Proven and probable ore reserves are the part of a mineral deposit that can be economically and legally extracted or produced at the time of the reserve determination. Estimated recoverable gold ounces in our proven

 

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and probable reserves at the Hycroft Mine are used in units-of-production amortization calculations and are the basis for future cash flow estimates utilized in impairment calculations. When determining proven and probable reserves, we must make assumptions and estimates of future commodity prices and demand, the mining methods we use and intend to use in the future, and the related costs incurred to develop, mine, and process our reserves. Our estimates of recoverable gold ounces in proven and probable reserves are prepared by and are the responsibility of our employees, a majority of which are reviewed by independent experts in mining, geology and reserve determination. Any change in estimate or assumption used to determine our proven and probable ore reserves could change our estimated recoverable gold ounces in such reserves, which may have a material impact on our financial statements.

 

Impact of Change in Estimate:

 

Our proven and probable ore reserves are periodically updated, usually on an annual basis. Resulting changes in estimates of recoverable gold ounces are used in our units-of-production calculations and impairment calculations on a prospective basis.

 

Estimated recoverable gold ounces used in our units-of-production amortization and impairment calculations are based on proven and probable ore reserves that were determined using gold and silver selling prices of $800 per ounce and $14 per ounce, respectively. If our proven and probable ore reserves were determined using gold and silver selling prices of $600 per ounce and $11 per ounce, respectively, our estimated recoverable gold ounces would decrease, resulting in an approximate increase in amortization of $1.5 million for 2012. The decrease in estimated recoverable gold ounces from decreased metal prices would not have resulted in an impairment write-down to any of our long-lived assets as of December 31, 2012.

 

Hycroft Mine

 

Operations

 

Key operating statistics for the years ended December 31, 2012, 2011, and 2010 are as follows:

 

     Years ended December 31,  
     2012      2011      2010  

Ore mined (000’s tons)

     30,299         16,638         9,923   

Ore mined and stockpiled (000’s tons)

     3,346         —            —      

Waste mined (000’s tons)

     22,088         11,393         16,611   
  

 

 

    

 

 

    

 

 

 
     55,733         28,031         26,534   
  

 

 

    

 

 

    

 

 

 

Excavation and pre-strip mined (000’s tons)

     4,945         5,976         —      
  

 

 

    

 

 

    

 

 

 

Ore grade—gold (oz/ton)

     0.012         0.013         0.020   

Ore grade—silver (oz/ton)

     0.211         0.340         0.246   

Ounces produced—gold

     136,930         104,002         103,721   

Ounces produced—silver

     794,097         479,440         233,974   

Ounces sold—gold

     114,705         88,191         102,483   

Ounces sold—silver

     696,144         372,000         238,242   

Average realized price—gold ($/oz)

   $ 1,681       $ 1,577       $ 1,230   

Average realized price—silver ($/oz)

   $ 31       $ 35       $ 20   

Average spot price—gold ($/oz)

   $ 1,669       $ 1,572       $ 1,225   

Average spot price—silver ($/oz)

   $ 31       $ 35       $ 20   

Total adjusted cash costs1 (thousands)

   $ 73,186       $ 43,062       $ 52,871   

Adjusted cash costs per ounce1

   $ 638       $ 488       $ 516   

 

 

1 The term “adjusted cash costs” is a non-GAAP financial measure. See the section on “Non-GAAP Financial Measures” in this MD&A.

 

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Production tons mined at the Hycroft Mine in 2012 nearly doubled as we received and commissioned additional mining equipment during the year. The excavation and pre-stripping tons mined related to the crushing facility and mill site excavations and pre-stripping in the Bay pit. The average gold and silver grades of ore mined in 2012 were less than 2011 grades, but consistent with the mine plan. Ounces produced and ounces sold did not increase proportionate to the 82% increase in ore mined and placed on the leach pads because 72% of the total ore mined and placed on the leach pads occurred in the second half of 2012. A significant portion of the recoverable gold and silver placed on the leach pads during the second half of 2012 had yet to be recovered as of year-end. Additionally, in 2012 solution stacking occurred throughout the year to increase solution grades while maximizing the efficiency of the Merrill-Crowe plant’s processing capacity. As discussed in the Expansion Projects and 2013 Outlook sections below, we expect our 2013 sales to more than double as a result of increasing the mining rate and commissioning critical production-related projects. For additional discussion on gold and silver ounces sold in 2012, see the following Results of Operations Revenue section.

 

Our adjusted cash costs1 increased 31% in 2012 and were negatively impacted by increased production costs in the first half of 2012, selling costs associated with in-process inventories, and an increase in the average cost per ounce in beginning of the year 2012 inventory compared to 2011. In the first half of 2012, our strip ratio was 1.4:1, increasing our production costs and average cost per ounce sold for 2012. Due to retort capacity and carbon processing limitations we sold 33,200 gold ounces from our in-process carbon and precipitate inventories and incurred $4.7 million in selling costs. Additionally, the average cost per gold ounce on the leach pads in the beginning of 2012 was $825/oz, an increase of $186/oz compared to the beginning of the year of 2011. The aforementioned increases in adjusted cash costs1 were partially offset by the silver ounce to gold ounce ratio increasing to 6.1:1 in 2012 compared to 4.2:1 in 2011. As discussed in the 2013 Outlook section below, we expect our adjusted cash costs1 to be in the range of $565 to $585 per ounce (with silver as a byproduct credit).

 

Expansion Projects

 

We are undergoing expansion projects to implement oxide and sulfide mineralization processing capabilities which will provide staged production increases through 2015. Upon completion of the expansion, the Hycroft Mine is projected to produce, on average, 552,000 ounces of gold and 25.5 million ounces of silver per year from 2015 to 2024. Ongoing expansion projects at Hycroft include 1) increasing the mining rate through larger capacity haul trucks, shovels, and production drills, 2) expanding leach pad operations through increased pad size, additional solution processing capacity, and the addition of a gyratory crusher to enhance the exposure of ore to the leach process, 3) constructing a mill to process transitional and sulfide mineralization, and 4) upgrading infrastructure items to handle the milling demands, including power transmission and distribution and the construction of a railroad spur and an employee housing project.

 

Permitting actions for the expansion projects remains ahead of schedule. In August 2012, we received a positive record of decision from the BLM which approved expanding mining areas at Brimstone, Cut-5, Bay, and Central, the operation of the north and south leach pads, and infrastructure upgrades, including expanding the existing Merrill-Crowe plant and construction of additional Merrill-Crowe plants. In addition, the air quality permit to install the crushing components, as well as operate them when complete, was received. In December 2012, we received the mill construction approval from the NDEP ahead of the expected early 2013 approval date.

 

The capital cost estimate for the expansion project is expected to be $1.24 billion. As of December 31, 2012, we had spent or committed $612.1 million, which was in-line with the feasibility estimate and represents approximately 49% of the total capital estimate. Included in the $612.1 million spent or committed at December 31, 2012, are purchase obligations totaling $341.6 million, a portion of which are expected to be financed through capital leases. We estimate that 2013 capital expenditures at the Hycroft Mine for the expansion projects will total approximately $371.7 million. For additional discussion about the Hycroft Mine expansion

 

1  The term “adjusted cash costs” is a non-GAAP financial measure. See the section on “Non-GAAP Financial Measures” in this MD&A.

 

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spending see the Liquidity and Capital Resources section below. The following sections provide additional detail on the Hycroft expansion projects.

 

Increasing the Mining Rate

 

The mining equipment required for the expansion projects has been arriving at site since late 2010 and will continue to be delivered through 2014. The expansion requires us to increase the annual mining rate to 94 million tons by the end of 2013 and ultimately to more than 190 million tons per year in 2014 and beyond. As of December 31, 2012, a significant portion of the larger mobile mining fleet was in operation. During the year, we received and commissioned 15 320-ton Komatsu haul trucks, two 345-ton Caterpillar haul trucks, one EX5500 hydraulic shovel, four high-capacity production drills, and other support equipment. Major additions to mobile equipment in 2013 are expected to include nine haul trucks, seven production drills and the first two (of three) wire rope shovels, which are expected to become operational in the third quarter and fourth quarter, respectively.

 

Expanding Leach Pad Operations

 

To accommodate the increased mining rate and higher grade oxide ore that will be processed using the mill, our leach pad processing capabilities are being expanded. In 2012, our leaching capacity was increased with the addition of the 3.0 million square foot Lewis leach pad expansion, which brought our total leach pad capacity to 12.0 million square feet. During 2012, we commenced construction on the North and South leach pad expansions and the new 21,500 gallon per minute Merrill-Crowe Processing facility. The gyratory crushing plant excavation was completed in 2012 and construction began on the crusher foundations. Concrete work commenced at the reclaim area, primary crusher foundation, and secondary and tertiary crusher foundations. We expect to begin stacking ore on the new North leach pad by the end of the second quarter of 2013. In addition, the gyratory crushing system and 21,500 gallon per minute Merrill-Crowe facility are expected to be commissioned in the third quarter of 2013.

 

Mill Construction

 

The mill will be used to process the higher grade oxide and transitional ores, and the sulfide ore. We currently expect the mill to have a design capacity allowing for the processing of 130,000 tons of ore per day through a crush-grind-float-leach flowsheet. In 2012 we began excavation of the facility location and construction of the building foundation is expected to begin in 2013. The Company has ordered long-lead time items critical to the construction schedule, which are currently expected to arrive as scheduled. To date, the major long-lead components that have been ordered include SAG mills, ball mills, a regrind mill, flotation cells, and thickeners. We expect to have the detailed engineering of the mill completed in the second half of 2013.

 

Infrastructure Upgrades

 

Our expansion plans require that we upgrade the infrastructure at the Hycroft Mine, including the power transmission and distribution system to handle demands of the mill and electric wire rope shovels and construction of a rail spur. Additionally, we are building a housing development in Winnemucca, NV for our current and future workforce, which we plan to rent and/or sell to our employees.

 

2013 Outlook

 

Gold and silver sales at the Hycroft Mine are expected to increase in 2013 to approximately 225,000 to 250,000 ounces of gold and 1.5 million to 1.8 million ounces of silver. Sales in the first half of the year are expected to be approximately 90,000 to 100,000 ounces of gold, increasing in the second half of the year. We expect to move 94.1 million tons of material, including 46.5 million tons of ore at average grades of 0.012 opt

 

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gold and 0.25 opt silver. With the operation of the two wire rope shovels in the latter half of the year, the mining rate for the first half is expected to average 200,000 tons per day and will increase to average 290,000 tons per day in the second half. The overall strip ratio for 2013 is expected to be 0.6:1. A number of critical projects must be completed to achieve the higher end of the stated guidance range of metal sales. The stated guidance assumes that there will be no material delays in the start-up of the North leach pad, new Merrill-Crowe facility or operation of additional mobile equipment. Adjusted cash costs1 for 2013 are expected to be in the range of $565 to $585 per ounce (with silver as a byproduct credit).

 

Capital expenditures in 2013 are expected to total approximately $399.2 million, of which $130.8 million are expected to be financed with capital leases. Of the $399.2 million in capital expenditures expected in 2013, $27.5 million is for sustaining capital and the remainder is to advance the Hycroft Mine expansion project and includes equipment, infrastructure, engineering, permitting, and support programs. Major additions to mobile equipment in 2013 include nine haul trucks, seven production drills and the first two wire rope shovels, which are expected to become operational in the third quarter and fourth quarter, respectively.

 

We expect to begin stacking ore on the new North leach pad by the end of the second quarter of 2013. In addition, the gyratory crushing system and 21,500 gallon per minute Merrill-Crowe facility are expected to come online in the third quarter of 2013.

 

Company-wide exploration expense is projected to be $7.5 million in 2013 and does not include capitalized drilling. In addition to corporate office expense and annual land holding costs of approximately $3.2 million, we expect exploration spending in 2013 to be directed towards follow-up drilling of the encouraging results encountered in the Three Hills area of the Hasbrouck/Three Hills project and to test Hycroft regional targets identified in the southern region of the Hycroft property claim block.

 

Results of Operations

 

Revenue

 

Gold Revenue

 

The table below summarizes changes in gold revenue, ounces sold, and average realized prices for the following periods:

 

     Years ended December 31,  

Gold revenue

   2012      2011     2010  

Total gold revenue (thousands)

   $ 192,847       $ 139,046      $ 126,088   

Gold ounces sold

     114,705         88,191        102,483   

Average realized price (per ounce)

   $ 1,681       $ 1,577      $ 1,230   
The change in gold revenue is attributable to (thousands):        
     2012 vs. 2011      2011 vs. 2010        

Increase (decrease) in ounces sold

   $ 41,803       $ (17,584  

Increase in average realized price

     9,225         35,492     

Effect of average realized price increase on ounces sold increase (decrease)

     2,773         (4,950  
  

 

 

    

 

 

   
   $ 53,801       $ 12,958     
  

 

 

    

 

 

   

 

1 The term “adjusted cash costs” is a non-GAAP financial measure. See the section on “Non-GAAP Financial Measures” in this MD&A.

 

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Gold revenue increased by approximately 39% in 2012, primarily due an increase of 26,514 ounces sold over that of 2011. In 2012, due to our expanded mine equipment fleet, we mined 30.3 million tons of heap leach ore, nearly doubling the heap leach ore tons mined in 2011. However, the number of gold ounces sold did not proportionally increase as 72% of the ore tons were mined in the second half of 2012 and a significant portion of the related gold had yet to be recovered from the leach pads at year-end. We experienced slower than anticipated leach kinetics from Bay pit material placed on the leach pads in the third and fourth quarter and extremely cold and wet weather conditions in December slowed the recovery of our gold from the leach pads. We were able to maximize the efficiency of the Merrill-Crowe plant’s processing capacity by stacking solution throughout 2012 which is expected to increase future gold production when the second Merrill-Crowe plant becomes operational in the third quarter of 2013. Gold revenue also increased in 2012 due to a 7% increase in the average realized per ounce sales price.

 

Gold revenue increased by approximately 10% in 2011, primarily due to an increase in the average realized price per ounce during the year. Gold ounces sold in 2011 decreased from 2010 primarily due to lower average ore grades mined in 2011.

 

Silver Revenue

 

The table below summarizes changes in silver revenue, ounces sold, and average realized prices for the following periods:

 

     Years ended December 31,  

Silver revenue

   2012      2011      2010  

Total silver revenue (thousands)

   $ 21,712       $ 12,983       $ 4,842   

Silver ounces sold

     696,144         372,000         238,242   

Average realized price (per ounce)

   $ 31       $ 35       $ 20   

 

The change in silver revenue is attributable to (thousands):    2012 vs. 2011     2011 vs. 2010       

Increase in ounces sold

   $ 11,313      $ 2,718      

(Decrease) increase in average realized price

     (1,381     3,473      

Effect of average realized price (decrease) increase on ounces sold increase

     (1,203     1,950      
  

 

 

   

 

 

    
   $ 8,729      $ 8,141      
  

 

 

   

 

 

    

 

Silver revenue increased by approximately 67% in 2012 due to an increase in the number of ounces sold. In 2012, we nearly doubled the amount of production ore tons mined compared to 2011 and utilized additional sodium cyanide to improve silver recoveries. The ratio of silver ounces sold to gold ounces sold was 6.1:1 in 2012, compared to 4.2:1 in 2011.

 

Silver revenue increased by approximately 168% in 2011, as the average silver price increased by $15 ounce and we mined ore with higher silver grades than ore that was mined in 2010. The ratio of silver ounces sold to gold ounces sold was 4.2:1 in 2011, compared to 2.3:1 in 2011.

 

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Total cost of sales

 

Total cost of sales consists of production costs and depreciation and amortization. The table below summarizes changes in total cost of sales for the following periods (in thousands):

 

     Years ended December, 31  

Cost of sales

   2012      2011     2010  

Production costs

   $ 94,898       $ 56,045      $ 57,713   

Depreciation and amortization

     14,594         6,984        6,972   
  

 

 

    

 

 

   

 

 

 

Total cost of sales

   $ 109,492       $ 63,029      $ 64,685   
  

 

 

    

 

 

   

 

 

 
The change in cost of sales was attributable to:    2012 vs. 2011      2011 vs. 2010        

Increase (decrease) in gold ounces sold

   $ 18,949       $ (9,021  

Increase in average cost of sales per ounce

     21,154         8,559     

Effect of average cost per ounce increase on ounces sold increase (decrease)

     6,360         (1,194  
  

 

 

    

 

 

   
   $ 46,463       $ (1,656  
  

 

 

    

 

 

   

 

Due to increases in gold ounces sold and the average cost of sales per ounce, total cost of sales increased significantly during 2012. 23,000 ounces of gold were sold from in-process carbon during 2012 and an additional 10,200 ounces of gold were sold from in-process precipitate due to retort capacity limitations in the Merrill-Crowe plant. We commissioned an on-site carbon strip circuit in the fourth quarter of 2012 which will enable us to process carbon at the Hycroft Mine. Additionally, in January 2013, we completed construction of a second retort in the Merrill-Crowe plant to remedy the capacity limitations. We incurred $4.7 million in additional shipping and processing fees related to the ounces sold from our in-process carbon and precipitate inventories. During the first half of 2012, the strip ratio was 1.4:1 as we progressed through high waste zones, which increased the average cost per ounce of ounces sold. Other factors contributing to increased cost of sales in 2012 were increased plant, equipment, and mine development in service, and decreased gold grades of ore mined. We had in service an additional $146.0 million of plant, equipment, and mine development at December 31, 2012 compared to 2011, resulting in increased depreciation and amortization. Additionally, average gold grades of ore mined during 2012 decreased by approximately 8% to .012 opt from .013 opt in 2011.

 

Total cost of sales decreased $1.7 million in 2011 due to a decrease in the number of gold ounces sold offset by increased costs. Production costs decreased $1.7 million due to a 14,292 ounce decrease in gold ounces sold offset by a 6% increase in mining costs per ton to $1.95 per ton in 2011 compared to $1.84 in 2010. Production costs were also adversely affected by a decrease in the average gold ore grade to .013 opt in 2011 compared to .020 opt in 2010. Depreciation and amortization costs increased due to the acquisition of $90.0 million of depreciable assets in 2011 and an increase in mine development costs of $38.7 million, but were reduced as a result of a 14,292 ounce decrease in gold ounces sold.

 

Exploration, development, and land holding costs

 

Exploration, development, and land holding costs totaled $7.4 million, $28.2 million, and $25.0 million in 2012, 2011, and 2010, respectively. We decreased the 2012 exploration programs at our advanced exploration properties to focus on expansion projects and related capital drilling at Hycroft. In 2012, we incurred $4.4 million in exploration costs for regional targets at Hasbrouck/Three Hills and an initial first pass program at Wildcat, compared to $12.3 million incurred at advanced exploration properties in 2011. Land holding costs and exploration costs for our other properties totaled $1.4 million in 2012 and $2.1 million in 2011.

 

Exploration, development, and land holding costs increased $3.2 million in 2011 compared to 2010 due to increased exploration and development costs at Hasbrouck offset by increased capital exploration costs at

 

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Hycroft. We increased the 2011 exploration drill program at Hasbrouck to expand the mineralized material and begin defining the high grade zones as a result of positive results from 2010 exploration drilling. Hasbrouck drilling and exploration programs in the 2011 period consisted of approximately 135 drill holes (125,300 feet drilled) at a cost of $12.3 million compared to the 2010 period which consisted of 14 drill holes (7,600 feet drilled) at a cost of $2.1 million, an increase of $10.2 million. Exploration costs at Hycroft during 2011 were $9.8 million compared to $17.3 million in 2010, a decrease of $7.5 million. Development costs totaled $2.9 million in 2011 compared to $2.5 million in the same period of 2010, an increase of $0.4 million. Development costs in 2011 were for engineering and consulting work to convert the sulfide mineralized material to proven and probable reserves and in 2010 development costs were for metallurgical testing and engineering work performed outside of existing proven and probable reserves.

 

Corporate general and administrative

 

Corporate general and administrative costs totaled $16.3 million, $18.6 million, and $17.3 million during 2012, 2011, and 2010, respectively. The decrease in 2012 was attributable to reductions of $2.6 million in share-based compensation for directors and $0.9 million in legal and accounting fees, offset by higher compensation and benefit costs from increased staff levels for the ongoing expansion projects. During 2012, we recorded a final change in fair value adjustment for outstanding DPUs, which resulted in a share-based compensation benefit, when the classification of outstanding DPUs was modified from liability instruments to equity instruments (see Note 13 – Share Based Compensation in the Notes to Consolidated Financial Statements).

 

Corporate general and administrative costs increased $1.3 million in 2011 to $18.6 million compared to $17.3 million for 2010. The increase was largely due to an additional $2.2 million of compensation and benefit costs for employees associated with an approximate 40% increase in staff levels at the corporate office and an additional $1.2 million for legal fees for general corporate purposes, which was offset by a decrease of $2.0 million in share-based compensation costs for directors compared to the same period of 2010. Share-based compensation for directors decreased primarily as fewer DPUs were granted in 2011 compared to 2010.

 

Interest income and expense

 

Interest income was $0.9 million, $0.5 million, and $0.1 million during 2012, 2011, and 2010, respectively. Additional interest income was recorded in 2012 due to increased cash equivalent deposits from the May 2012 senior notes offering.

 

Interest expense was $17.9 million in 2012 and $0.7 million in 2011, increasing $17.2 million primarily due to the May 2012 senior notes offering and entering into additional capital leases for mine equipment throughout the year.

 

Other income, net

 

Other income, net was $0.3 million, $0.4 million, and $0.3 million in 2012, 2011, and 2010, respectively. Other income, net in 2012 and 2011 included unrealized gains to record the change in fair value of shares received in the 2011 mineral property sale (discussed above). Other income, net during 2010 included gains from the recognition of advanced minimum royalties after exploration rights were returned to us by joint venture partners.

 

Income tax (expense) benefit

 

Income tax expense totaled $16.4 million and $6.3 million in 2012 and 2011, respectively, and income tax benefit totaled $7.1 million in 2010. Our 2012 income tax expense primarily consisted of a $22.5 million charge from income taxed at the statutory rate and a $6.9 million depletion deduction. In 2011, our provision for income taxes included a charge of $15.1 million computed at the federal statutory income tax rate, which was offset by a

 

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$7.7 million depletion deduction in excess of tax basis, and a $1.0 million basis adjustment. In 2010, income tax benefit included a charge of $9.5 million computed at the federal statutory income tax rate that was offset by an $11.5 million reduction in our valuation allowance for deferred tax assets, a depletion deduction in excess of tax basis of $3.7 million, and $1.4 million of other deductions.

 

Net income

 

For the reasons described above, we reported net income of $47.7 million, $36.7 million, and $34.1 million for 2012, 2011, and 2010, respectively.

 

Other comprehensive loss, net of tax

 

In 2012, other comprehensive loss, net of tax totaled $5.4 million and included amounts for the change in fair value of our cash flow hedge instruments, settlements of such hedges, and reclassifications into earnings.

 

Liquidity and Capital Resources

 

Cash and cash equivalents and liquidity

 

Our principal sources of liquidity are cash and cash equivalents, as well as the cash flow from our ongoing business, which we believe will allow us to meet our needs for working capital, capital expenditures, debt service, and other liquidity requirements associated with our operations and expansion projects for at least the next 12 months. We have placed substantially all of our cash and cash equivalents in short-term money market instruments with a single, high quality financial institution, thereby ensuring balances remain readily available. Due to the nature of our operations and the composition of our current assets, our cash and cash equivalents and accounts receivable balances represent substantially all of our liquid assets on hand. In addition to our liquid assets on hand, we have access to additional liquidity under our $120.0 million revolving credit facility and capital lease financing arrangements from our equipment vendors, which are discussed in the Available sources of liquidity section below. As of December 31, 2012, following the successful May 2012 issuance of CDN $400.0 million of 8.75% senior unsecured notes (the “Notes”) (swapped to $400.4 million at 8.375%), we had existing cash and cash equivalents of $347.0 million, up from $275.0 million as of December 31, 2011. As discussed below in the Cash used in investing activities section, a large portion of the Notes issuance proceeds were used for expenditures related to our ongoing expansion projects.

 

Our primary future cash requirements will be to fund our expansion of the Hycroft Mine, discussed above in the Hycroft Expansion Projects section, make scheduled semi-annual interest payments on the Notes, and make scheduled principal and interest payments on our capital leases. See the Contractual Obligations section below for additional detail.

 

Available sources of liquidity

 

In addition to our cash and cash equivalents discussed above, the following available sources of liquidity existed at December 31, 2012.

 

Revolving credit facility

 

We amended and restated our May 2011, $30.0 million revolving credit agreement on October 31, 2012, increasing the availability to $120.0 million and extending the maturity from May 2014 to April 2016. The amended and restated agreement provides us additional liquidity over an extended term. As of and for the year ended December 31, 2012, no amounts were borrowed or outstanding under the $120.0 million revolving credit agreement.

 

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Capital lease obligation commitments

 

A majority of our mine equipment has been acquired through capital lease obligations. Such obligations primarily carry 60-month terms, require equal monthly payments, and are secured by the underlying equipment to which they relate. We have arranged through our equipment vendors and a financial institution to finance expenditures for our major mine equipment during our expansion of the Hycroft Mine.

 

Sources and uses of cash for 2012, 2011, and 2010 (in thousands)

 

     Years ended December 31,  
     2012     2011     2010  

Net income

   $ 47,727      $ 36,709      $ 34,128   

Net non-cash adjustments

     37,853        16,618        8,409   

Net change in operating assets and liabilities

     (106,691     (35,906     (18,242
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (21,111     17,421        24,295   

Net cash used in investing activities

     (275,249     (85,263     (37,848

Net cash provided by financing activities

     368,405        5,015        259,801   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 72,045      $ (62,827   $ 246,248   
  

 

 

   

 

 

   

 

 

 

 

Cash (used in) provided by operating activities

 

Our operating cash flows vary with prices realized from metal sales, sales volumes, production costs, working capital changes, and non-cash amounts included in net income.

 

In 2012, we generated $85.6 million of cash from net income and net non-cash adjustments, an increase of $32.3 million from 2011. Our 2012 net income increased by $11.0 million for the reasons discussed above in the Results of Operations. The $106.7 million net change in operating assets and liabilities was due to increases in accounts receivable and production related inventories. At December 31, 2012, accounts receivable from the sale of unprocessed carbon and precipitate totaled $60.5 million, resulting in a use of cash for the same amount as there were no receivables at the end of 2011. During 2012, a 73,421 gold ounce increase in heap leach production inventories resulted in a use of cash of $56.2 million. Our inventory increased due to expanding our heap leach operations in 2012 and because we placed 72% of the total 2012 ore tons on the leach pads in the second half of the year. In 2012, we also began stockpiling sulphide ore for the mill containing 32,074 recoverable ounces of gold, and resulting in an additional $12.9 million use of cash. In 2012, operating asset increases were partially offset by increases in accounts payable, other liabilities, and interest payable on the senior notes, all totaling $25.6 million.

 

During 2011, cash provided by net income increased $2.6 million from 2010 for the reasons discussed above in the Results of Operations. During 2011, an increase in materials and supplies and an approximate 28,700 ounce increase in our production related inventories resulted in an additional $21.9 million use of cash when compared to 2010.

 

Cash used in investing activities

 

The amount of cash used in investing activities significantly increased in 2012 due to the ongoing expansion projects at the Hycroft Mine. During 2012, cash additions to plant, equipment, and mine development included $103.7 million for the mill project, $59.4 million for the crushing facility, $35.3 million for mine development, $30.1 million for leach pad expansions, $9.4 million for an employee housing project, $8.7 million for mine equipment, and $15.6 million for other additions. Significant additions for the mill project included the purchase of

 

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SAG mills, ball mills, a regrind mill, and engineering costs. Significant additions for the crushing facility included the purchase of a gyratory crusher, secondary and tertiary crushers, and excavation costs. Mine development additions were related to reserve verification, condemnation drilling, and environmental and permitting costs for our Environmental Impact Statement. Additionally, during 2012 we increased our restricted cash balances by $13.0 million to collateralize surety bonds related to our expanding operations at the Hycroft Mine.

 

During 2011, we increased our mining rate by utilizing a larger mine equipment fleet and increased our oxide ore processing capabilities through increased leach pad capacity. We also completed pre-stripping activities for the Cut-5 pit, further delineated and developed our ore bodies within proven and probable reserve regions, and performed drilling and assaying for mine planning associated with expansion projects. In 2011, cash additions to plant, equipment, and mine development included $37.3 million for mine development, $16.4 million for mobile mine equipment, $11.6 million for leach pad expansions, $7.9 million for a new truck shop, $1.5 million for power supply improvements, and $6.9 million of other additions. In 2011, we increased our restricted cash balances by $3.8 million to collateralize surety bonds related to our operations at the Hycroft Mine.

 

During 2010, cash additions to plant, equipment, and mine development included $9.9 million for mobile mine equipment, $9.8 million for mine development, $8.9 million for leach pads, $1.3 million for electrical equipment, and $7.1 million for other additions. In 2010, mine development costs were drilling and assaying to delineate and develop ore bodies within existing proven and probable reserve regions costs related to permitting actions at Hycroft.

 

Cash provided by financing activities

 

During 2012, we issued senior notes for gross proceeds of $400.4 million (after the effect of the cross currency and interest rate swap), and paid related debt issuance costs of $13.3 million. An additional $2.0 million of debt issuance costs were paid for the October 2012 amendment of our revolving credit facility and capital lease financing arrangements. Our repayments on capital lease obligations increased to $16.3 million in 2012 as a result of entering into additional leases, primarily for haul trucks and shovels.

 

During 2011, we received $9.5 million in proceeds from a sale-leaseback agreement and made repayments of $5.6 million on our capital lease obligations. Repayments of principal on capital lease obligations increased in 2011 as we entered into twelve additional capital leases for mining equipment during the year.

 

During 2010, we issued 13,500,000 shares of common stock in a public offering for gross proceeds of $272.2 million and paid related share issuance costs $17.9 million. Due to the exercise of stock options we received an additional $7.0 million in proceeds from the issuance of common stock. Our mine equipment acquired through capital lease obligations resulted in principal repayments of $1.6 million.

 

Capital requirements

 

We believe that cash flow from our ongoing business, when combined with our other sources of liquidity, including our existing cash and cash equivalents on hand, the revolving credit facility, and capital lease financing arrangements, will be sufficient over at least the next twelve months to meet operational needs, make capital

 

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expenditures, invest in the business and service debt due. The following table provides our gross contractual obligations as of December 31, 2012 (in thousands):

 

          Payments Due by Period  

Contractual Obligations

  Total     Less than
1 year
    1 – 3
Years
    3 – 5
Years
    More than
5 Years
 

Capital lease obligations (1)

  $ 136,168      $ 34,150      $ 64,496      $ 37,522      $ —     

Senior notes (2)

    615,574        33,534        67,067        67,067        447,906   

Remediation and reclamation obligations (3)

    23,951        331        561        19        23,040   

Property option and claim maintenance obligations (4)

    15,016        646        1,292        1,292        11,786   

Purchase obligations (5)

    136,934        136,934        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 927,643      $ 205,595      $ 133,416      $ 105,900      $ 482,732   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amount represents principal and interest payments.

 

(2) Amount represents principal and interest payments after the effect of the cross currency and interest rate swap. The senior notes mature on June 1, 2019 with semi-annual interest payment due on June 1 and December 1.

 

(3) Mining operations are subject to extensive environmental regulations in the jurisdictions in which they are conducted and we are required, upon cessation of operations, to reclaim and remediate the lands that our operations have disturbed. The estimated undiscounted cash outflows of these remediation and reclamation obligations are reflected here.

 

(4) Includes BLM and county claim fees and a 4% net profits royalty on Crofoot claims at the Hycroft Mine.

 

(5) Purchase obligations are not recorded in the Consolidated Financial Statements. Purchase obligations primarily represent obligations for the purchase of capital items associated with the ongoing expansion projects at Hycroft. The amounts shown above represent certain purchase obligations which we cannot cancel, or which would require payment of penalties if canceled. It is expected that a portion of these purchase obligations will be satisfied through capital lease financing.

 

Debt covenants

 

We were in compliance with all debt covenants related to our senior notes, capital lease obligations, and revolving credit agreement as of December 31, 2012.

 

Senior notes

 

In May 2012, we issued CDN $400.0 million of uncollateralized Notes that pay interest semi-annually at the rate of 8.75% per annum and mature in June 2019. Concurrently with the issuance of the Notes, we entered into a cross currency and interest swap agreement based upon a notional amount of $400.4 million, the gross proceeds to us from the issuance, and a fixed interest rate of 8.375%. The Notes balance on December 31, 2012 was $402.0 million based upon the U.S. dollar to Canadian dollar exchange rate. We are using the net proceeds from the Notes to fund capital expenditures at the Hycroft Mine.

 

The Notes constitute senior unsecured obligations. The Notes are guaranteed by most of our currently wholly owned subsidiaries, including Hycroft Resources & Development Inc., which owns the Hycroft Mine and conducts mining operations. The Notes bear interest at a rate of 8.75% per year, payable June 1 and December 1, commencing on December 1, 2012, and will mature on June 1, 2019 unless earlier redeemed or repurchased.

 

The indenture for the Notes may, among other things, limit our ability and the ability of our subsidiary guarantors to (i) pay dividends, or make certain other restricted payments or investments; (ii) incur additional indebtedness and issue disqualified stock; (iii) create liens on our and their assets; (iv) transfer and sell assets; (v) merge, consolidate or sell all or substantially all of our and their assets; (vi) enter into certain transactions with

 

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affiliates; (vii) create restrictions on dividends or other payments by our subsidiary guarantors and (viii) create guarantees of indebtedness by our subsidiary guarantors. These covenants are subject to a number of important limitations and exceptions that are described in the indenture for the Notes.

 

For a detailed description of our redemption rights with respect to the Notes, see the section entitled “Senior Notes” in Note 10 - Debt to our Consolidated Financial Statements.

 

Upon the occurrence of a change of control triggering event specified in the indenture for the Notes, we must offer to purchase the Notes at a redemption price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase.

 

The indenture for the Notes provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the indenture for the Notes, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency. If an event of default occurs and is continuing, the trustee or holders of at least 25% in principal amount of the outstanding Notes may declare the principal, accrued and unpaid interest, if any, on all the Notes to be due and payable. These events of default are subject to a number of important qualifications, limitations and exceptions that are described in the indenture for the Notes.

 

Revolving credit facility

 

In May 2011, we entered into a three-year $30.0 million revolving credit agreement that matures in May 2014. The Revolving Credit Facility is collateralized by most of our assets and contains various financial covenants related to net worth, interest coverage and leverage ratios, and contains limitations on dividends. In addition, we must satisfy certain affirmative and restrictive covenants.

 

The revolving credit agreement was amended twice in May 2012, to permit us to issue the Notes (discussed above), make distributions for scheduled interest payments, permit us to enter into a cross currency and interest rate swap in connection with the principal amount of the Notes, include debt representing the High Yield Indebtedness (as defined in the credit agreement) in the leverage ratio, reduce the interest coverage ratio, and remove the requirement that we maintain minimum aggregate deposits with the lenders under the credit facility.

 

In October 2012, we amended and restated our revolving credit agreement increasing the availability from $30.0 million to $120.0 million and extended the maturity from May 2014 to April 2016. The amended and restated revolving credit agreement continues to be collateralized by most of our assets and among other things, contains similar covenants related to net worth, interest coverage and leverage ratios, and limitations on dividends. The cross currency and interest rate swap agreement holders were granted the same security as the revolver lenders under the amended and restated revolving credit agreement.

 

Capital lease obligations

 

Certain capital lease obligations contain financial covenants related to net worth, interest coverage and leverage ratios, and contain limitations on dividends.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2012, we had no off-balance sheet arrangements.

 

Non-GAAP Financial Measures

 

Adjusted Cash Costs

 

Adjusted cash costs is a non-GAAP financial measure, calculated on a per ounce of gold sold basis, and includes all direct and indirect operating cash costs related to the physical activities of producing gold, including

 

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mining, processing, third party refining expenses, on-site administrative and support costs, royalties, and mining production taxes, net of by-product revenue earned from silver sales. Adjusted cash costs provides management and investors with a further measure, in addition to conventional measures prepared in accordance with GAAP, to assess the performance of our mining operations and ability to generate cash flows over multiple periods. Non-GAAP financial measures do not have any standardized meaning prescribed by GAAP and, therefore, may not be comparable to similar measures presented by other mining companies. Accordingly, the above 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 GAAP.

 

The table below presents a reconciliation between non-GAAP adjusted cash costs to total cost of sales (GAAP) for the years ended December 31, 2012, 2011, and 2010 (in thousands, except ounces sold):

 

     Years ended December 31,  
     2012     2011     2010  

Total cost of sales

   $ 109,492      $ 63,029      $ 64,685   

Less:

      

Depreciation and amortization

     (14,594     (6,984     (6,972

Silver revenues

     (21,712     (12,983     (4,842
  

 

 

   

 

 

   

 

 

 

Total adjusted cash costs

   $ 73,186      $ 43,062      $ 52,871   

Gold ounces sold

     114,705        88,191        102,483   

Adjusted cash costs per ounce

   $ 638      $ 488      $ 516   

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Metal Price Risk

 

Our principal products are unrefined gold and silver bars (doré) produced from the Hycroft Mine. During 2012, 2011, and 2010, 100% of our revenues were from the sale of gold and silver. Our financial results can vary significantly as a result of fluctuations in the market prices of gold and silver. The price of gold and silver is volatile and is affected by many factors beyond our control, such as the sale or purchase of gold by central banks and financial institutions, inflation or deflation, fluctuation in the value of the US dollar and foreign currencies, global and regional demand and the political and economic conditions of major gold producing countries throughout the world.

 

The Company has not entered into any financial instruments to mitigate the risk of fluctuations in metal prices.

 

Interest Rate Risk

 

Our $120.0 million revolving credit agreement matures in April 2016. As of and for the year ended December 31, 2012, no amounts were borrowed or outstanding under the revolving credit agreement. The interest rate on drawdowns is at an applicable rate plus a base rate or LIBOR, with the applicable rate determined by financial ratios of the Company.

 

The Company has not entered into any financial instruments to mitigate the risk of fluctuations in LIBOR.

 

Cash Flow Hedges

 

We have entered into certain derivative financial instruments classified as cash flow hedges in an effort to mitigate our exposure to select market risks. We have not entered into any market risk sensitive financial instruments for trading purposes.

 

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Foreign Currency Exchange Risk

 

In May 2012, we issued CDN $400.0 million of senior notes, exposing us to foreign currency exchange risk. The Notes are denominated in Canadian dollars, pay interest semi-annually at the rate of 8.75% per annum, and mature in June 2019. To hedge our exposure to foreign currency exchange risk, concurrently with the issuance of the Notes, we entered into a cross currency and interest swap agreement based upon a notional amount of $400.4 million, the gross proceeds to us from the issuance, and a fixed interest rate of 8.375%.

 

We make interest payments ($400.4 million at 8.375%) to the counterparty in exchange for the CDN dollars required to service the Notes (CDN $400.0 million at 8.75%). Upon maturity of the Notes in June 2019, the Company will pay $400.4 million to the counterparty and receive CDN $400.0 million, which will be used to satisfy the face amount of the issuance.

 

Diesel Price Risk

 

Our production costs are affected by the prices of commodities we consume or use in our operations, such as diesel fuel, lime, sodium cyanide and explosives. The prices of such commodities are influenced by supply and demand trends affecting the mining industry in general and other factors outside our control. Our financial results can vary significantly as a result of fluctuations in commodity prices.

 

In May of 2012, we entered into diesel swap agreements to limit our exposure to changes in diesel fuel prices. At December 31, 2012, we had outstanding diesel swap agreements that mature in 2013 for 1.2 million gallons at an average price of $2.60 per gallon. We believe that we have hedged less than 10% of our forecasted diesel consumption in 2013.

 

Derivative Instrument Fair Values

 

The fair value of the Company’s derivative instruments designated as cash flow hedges at December 31, 2012 was as follows (in thousands):

 

     December 31, 2012  
     Other assets,
current
     Other assets,
non-current
     Other liabilities,
non-current
 

Cross currency swap

   $ 1,391       $ —         $ 9,324   

Diesel swaps

     435         —           —     
  

 

 

    

 

 

    

 

 

 
   $ 1,826       $  —         $ 9,324   
  

 

 

    

 

 

    

 

 

 

 

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Item 8. Financial Statements and Supplementary Data

 

INDEX TO FINANCIAL STATEMENTS

 

     Page  

Consolidated Financial Statements:

  

Report of Independent Registered Public Accounting Firm

     49   

Management’s Report on Internal Control over Financial Reporting

     50   

Consolidated Balance Sheets at December 31, 2012 and 2011

     51   

Consolidated Statements of Income and Comprehensive Income for the Years Ended December  31, 2012, 2011, and 2010

     52   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011, and 2010

     53   

Consolidated Statements of Shareholders’ Equity for the Years Ended December  31, 2012, 2011, and 2010

     54   

Notes to Consolidated Financial Statements

     55   

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders

Allied Nevada Gold Corp.

Reno, Nevada

 

We have audited the accompanying consolidated balance sheets of Allied Nevada Gold Corp. and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. We also have audited the Company’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for these financial statements, maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting, based on our audits.

 

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that 1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; 2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and 3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Allied Nevada Gold Corp. and subsidiaries as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

/s/ EKS&H LLLP

 

February 25, 2013

Denver, Colorado

 

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Management’s Report on Internal Control over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. In making the assessment, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control-Integrated Framework.” Based on that assessment, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2012, the Company’s internal control over financial reporting was effective based on such criteria.

 

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2012 has been audited by EKS&H LLLP, an independent registered public accounting firm, as stated in their report, which is included herein.

 

  /s/ Scott A. Caldwell

      /s/ Stephen M. Jones

  Scott A. Caldwell

      Stephen M. Jones

  President and Chief Executive Officer

      Executive Vice President and Chief Financial Officer

  February 25, 2013

     

 

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ALLIED NEVADA GOLD CORP.

 

CONSOLIDATED BALANCE SHEETS

(US dollars in thousands, except share amounts)

 

     December 31,  
     2012     2011  

Assets:

    

Cash and cash equivalents

   $ 347,047      $ 275,002   

Accounts receivable—Note 2

     60,479        —      

Inventories—Note 3

     55,818        28,305   

Ore on leachpads, current—Note 4

     93,088        64,230   

Prepaids and other—Note 5

     12,084        6,687   

Deferred tax assets, current—Note 6

     —           1,795   
  

 

 

   

 

 

 

Current assets

     568,516        376,019   

Restricted cash—Note 11

     31,837        18,798   

Stockpiles and ore on leachpads, non-current—Note 4

     38,357        11,320   

Other assets, non-current—Note 5

     38,499        2,196   

Plant, equipment, and mine development, net—Note 7

     515,902        190,694   

Mineral properties, net—Note 8

     44,616        44,706   

Deferred tax assets, non-current—Note 6

     —           13,473   
  

 

 

   

 

 

 

Total assets

   $ 1,237,727      $ 657,206   
  

 

 

   

 

 

 

Liabilities:

    

Accounts payable

   $ 60,292      $ 26,314   

Interest payable

     2,756        —      

Other liabilities, current—Note 9

     9,762        3,166   

Debt, current—Note 10

     28,614        10,306   

Asset retirement obligation, current—Note 11

     331        339   

Deferred tax liabilities, current—Note 6

     76        —      
  

 

 

   

 

 

 

Current liabilities

     101,831        40,125   

Other liabilities, non-current—Note 9

     10,223        9,327   

Debt, non-current—Note 10

     496,578        34,245   

Asset retirement obligation, non-current—Note 11

     8,726        8,387   

Deferred tax liabilities, non-current—Note 6

     395        —      
  

 

 

   

 

 

 

Total liabilities

     617,753        92,084   
  

 

 

   

 

 

 

Commitments and Contingencies—Note 22

    

Shareholders’ Equity:

    

Common stock, $0.001 par value—Note 12 Shares authorized: 200,000,000 Shares issued and outstanding: 2012—89,734,112 and 2011—89,646,988

     90        90   

Additional paid-in-capital

     601,553        589,012   

Accumulated other comprehensive loss—Note 14

     (5,416     —      

Retained earnings (accumulated deficit)

     23,747        (23,980
  

 

 

   

 

 

 

Total shareholders’ equity

     619,974        565,122   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,237,727      $ 657,206   
  

 

 

   

 

 

 

 

The accompanying notes are an integral part of these statements.

 

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ALLIED NEVADA GOLD CORP.

 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(US dollars in thousands, except per share amounts)

 

     Years Ended December 31,  
     2012     2011     2010  

Revenue - Note 16

   $ 214,559      $ 152,029      $ 130,930   

Operating expenses:

      

Production costs

     94,898        56,045        57,713   

Depreciation and amortization

     14,594        6,984        6,972   
  

 

 

   

 

 

   

 

 

 

Total cost of sales

     109,492        63,029        64,685   
  

 

 

   

 

 

   

 

 

 

Exploration, development, and land holding costs

     7,367        28,174        24,969   

Accretion—Note 11

     564        450        442   

Corporate general and administrative

     16,269        18,593        17,299   
  

 

 

   

 

 

   

 

 

 

Income from operations

     80,867        41,783        23,535   
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest income

     899        473        145   

Interest expense—Note 10

     (17,908     (712     —     

Foreign exchange gain, net

     —          4        3,067   

Gain on sale of mineral property

     —          1,097        —     

Other income, net

     292        413        269   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     64,150        43,058        27,016   

Income tax (expense) benefit—Note 6

     (16,423     (6,349     7,112   
  

 

 

   

 

 

   

 

 

 

Net income

     47,727        36,709        34,128   
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax—Note 14

      

Change in fair value of effective portion of cash flow hedge instruments, net of tax

     (5,940     —          —     

Settlements of cash flow hedges, net of tax

     2,297        —          —     

Reclassifications into earnings, net of tax

     (1,773     —          —     
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax—Note 14

     (5,416     —          —     
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 42,311      $ 36,709      $ 34,128   
  

 

 

   

 

 

   

 

 

 

Income per share:

      

Basic—Note 17

   $ 0.53      $ 0.41      $ 0.41   

Diluted—Note 17

   $ 0.52      $ 0.40      $ 0.41   

 

The accompanying notes are an integral part of these statements.

 

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ALLIED NEVADA GOLD CORP.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(US dollars in thousands)

 

     Years Ended December 31,  
     2012     2011     2010  

Cash flows from operating activities:

      

Net income

   $ 47,727      $ 36,709      $ 34,128   

Adjustments to reconcile net income for the period to net cash (used in) provided by operating activities:

      

Depreciation and amortization

     14,594        6,984        6,972   

Accretion

     564        450        442   

Stock-based compensation

     4,339        6,562        8,375   

Deferred taxes

     18,656        4,116        (7,111

Gain on sale of mineral property

     —           (1,097     —      

Other non-cash items

     (300     (397     (269

Changes in operating assets and liabilities:

      

Accounts receivable

     (60,479     —           —      

Inventories

     (23,849     (16,843     (3,035

Stockpiles and ore on leach pads

     (45,235     (22,074     (14,008

Prepaids and other

     (2,228     1,194        (3,493

Accounts payable

     16,285        1,310        2,490   

Interest payable

     2,756        —           —      

Asset retirement obligation

     (540     (775     (470

Other liabilities

     6,599        1,282        274   
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (21,111     17,421        24,295   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Additions to plant, equipment, and mine development

     (262,216     (81,554     (37,025

Additions to mineral properties

     (130     (114     —     

Increases in restricted cash

     (13,039     (3,778     (954

Proceeds from other investing activities

     136        183        131   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (275,249     (85,263     (37,848
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Proceeds from issuance of common stock

     464        815        279,240   

Payments of share issuance costs

     —           —           (17,886

Proceeds from debt issuance

     400,400        —           —      

Payments of debt issuance costs

     (15,340     (476     —      

Proceeds from sale-leaseback agreement

     —           9,471        —      

Repayments of principal on capital lease obligations

     (16,323     (5,591     (1,553

Excess tax (expense) benefit from stock-based awards

     (796     796        —      
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     368,405        5,015        259,801   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     72,045        (62,827     246,248   

Cash and cash equivalents, beginning of year

     275,002        337,829        91,581   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ 347,047      $ 275,002      $ 337,829   
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow disclosures:

      

Cash paid for interest

   $ 21,367      $ 1,167      $ 440   

Cash paid for income taxes

     3,950        —           800   

Non-cash financing and investing activities

      

Mining equipment acquired by capital lease

     84,877        35,823        9,873   

Plant and equipment additions through accounts payable increase

     27,740        10,047        —      

Accounts payable reduction through capital lease

     10,047        —           —      

Additional paid in capital increase from award modification and settlement of outstanding DPU liability

     7,453        —           —      

Mineral properties increase from deferred tax adjustment

     —           5,611        —      

 

The accompanying notes are an integral part of these statements.

 

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ALLIED NEVADA GOLD CORP.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(US dollars in thousands, except share amounts)

 

    Common Stock     Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Loss
    Retained
Earnings
(Accumulated
Deficit)
    Total
Shareholders’
Equity
 
    Shares     Amount          

Balances at December 31, 2009

    73,837,267      $ 74      $ 317,923      $ —        $ (94,817   $ 223,180   

Shares issued under stock option plans

    1,471,623        1        7,042        —          —          7,043   

Shares issued in public offering

    13,500,000        14        272,183        —          —          272,197   

Share issuance costs

    —          —          (17,886     —          —          (17,886

Stock-based compensation and RSU plan share issuances

    150,099        —          4,092        —          —          4,092   

Net income

    —            —          —          34,128        34,128   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2010

    88,958,989        89        583,354        —          (60,689     522,754   

Shares issued under stock option plans

    177,541        —          815        —          —          815   

Stock-based compensation and RSU plan share issuances

    510,458        1        4,047        —          —          4,048   

Utilization of excess tax benefits

    —          —          796        —          —          796   

Net income

    —          —          —          —          36,709        36,709   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2011

    89,646,988        90        589,012        —          (23,980     565,122   

Shares issued under stock option plans

    92,442        —          464        —          —          464   

Stock-based compensation and RSU Plan share issuances

    231,323        1        4,632        —          —          4,633   

Stock-based compensation and DSU Plan share issuances

    3,092        —          787        —          —          787   

Correction of reporting of issuance by RSU stock plan administrator

    (280,000     (1     1        —          —          —     

Modification of the DPU Plan—Note 13

    —          —          7,453        —          —          7,453   

Shares issued under DPU Plan

    40,267        —          —          —          —          —     

Change to previous utilization of excess tax benefits

    —          —          (796     —          —          (796

Other comprehensive loss—Note 14

    —          —          —          (5,416     —          (5,416

Net income

    —          —          —          —          47,727        47,727   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2012

    89,734,112      $ 90      $ 601,553      $ (5,416   $ 23,747      $ 619,974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The accompanying notes are an integral part of these statements.

 

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1. Nature of Operations and Basis of Presentation

 

Allied Nevada Gold Corp. and its subsidiaries (collectively, “Allied Nevada” or the “Company”) is a U.S. based gold and silver producer focused on mining, development, and exploration properties in the State of Nevada. Allied Nevada’s operating property, the Hycroft Mine, and its advanced exploration and other exploration properties are all located in the State of Nevada.

 

The Consolidated Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States. The results of operations are not necessarily indicative of the operating results of future years. References to “$” refers to United States currency and “CDN $” to Canadian currency.

 

2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of the Company’s Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves that are the basis for future cash flow estimates utilized in impairment calculations and units of production amortization calculations; estimates of recoverable gold and silver in stockpiles and ore on leach pads and in-process inventories; the classification of current and non-current stockpiles and ore leach pads inventories; net realizable value of stockpiles and ore on leach pads and in-process inventories; environmental, reclamation and closure obligations; estimates of fair value for asset impairments; and estimates of fair value for financial instruments, including derivative instruments. The Company bases its estimates on various assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.

 

Principles of Consolidation

 

The Consolidated Financial Statements include the accounts of Allied Nevada Gold Corp. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

 

Reclassifications

 

Certain reclassifications have been made to the prior period Consolidated Financial Statements to conform to the current period presentation. The Company reclassified its asset retirement cost asset from Other assets, non-current to Mineral properties, net and reclassified Mine development to Plant, equipment and mine development, net in the Consolidated Balance Sheet as of December 31, 2011. These reclassifications had no effect on previously reported total assets, cash flows, or net income.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of all cash balances and highly liquid investments with an original maturity of three months or less. Cash and cash equivalents are invested in highly liquid money market funds with high quality financial institutions. The Company has not experienced any losses on cash balances exceeding federally insured limits and believes that no significant risk of loss exists with respect to its cash and cash equivalents. Restricted cash is excluded from cash and cash equivalents and is listed separately on the consolidated balance sheet.

 

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Table of Contents

Accounts Receivable

 

Accounts receivable consist primarily of amounts due from a single customer for gold and silver sales. The Company has evaluated this customer’s credit risk and financial condition and determined that no allowance for doubtful accounts is necessary. The entire accounts receivable balance is expected to be collected during the next 12 months.

 

Stockpiles, Ore on Leach Pads, and Inventories

 

The Company’s production related inventories include: ore on leach pads; stockpiles; in-process inventories; and precious metals inventory. Production related inventories are carried at the lower of average cost or market. Cost includes mining (ore and waste), processing, and refining costs incurred during production stages, including mine site overhead and depreciation and amortization relating to mining and processing operations. Market is the estimated selling price reduced for any further mining, processing, refining, and selling costs.

 

The recovery of gold at the Hycroft Mine is accomplished through a heap leaching process, the nature of which limits the Company’s ability to precisely determine the recoverable gold ounces in stockpiles and ore on leach pads. The Company estimates the quantity of recoverable gold ounces in stockpiles and ore on leachpads using surveyed volumes of material, ore grades determined through sampling and assaying of blastholes, and estimated recovery percentages based on ore type and domain. The estimated recoverable gold ounces stockpiled or placed on the leach pads is periodically reconciled by comparing the related ore to the actual gold ounces recovered (metallurgical balancing). Changes in recovery rate estimates from metallurgical balancing that do not result in write-downs are accounted for on a prospective basis. If a write-down is required, production related inventories would be adjusted to market values before prospectively accounting for the remaining costs and revised estimated recoverable ounces. The Company has not incurred any write-downs of production related inventories.

 

Stockpiles

 

Stockpiles represent ore that has been extracted from the mine and is available for further processing. Costs are transferred from stockpiles to other production related inventories at an average cost per estimated recoverable ounce of gold.

 

Ore on leach pads

 

Ore on leach pads represents ore that is being treated with a chemical solution to dissolve the contained gold. Costs are transferred from ore on leach pads at an average cost per estimated recoverable ounce of gold to in-process inventories as the gold-bearing materials are further processed.

 

In-process Inventories

 

In-process inventories represent gold-bearing concentrated materials that are in the process of being converted to a saleable product using a Merrill-Crowe or carbon in column processing method. Costs are transferred from in-process inventories at an average cost per ounce of gold to precious metals inventory as gold ounces are recovered.

 

Precious Metals Inventory

 

Precious metals inventory consist primarily of doré containing both gold and silver. Costs of precious metals inventory are recognized in total costs of sales as ounces are sold.

 

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Materials and Supplies

 

Materials and supplies are valued at the lower of average cost or net realizable value. Cost includes applicable taxes and freight.

 

Plant, Equipment, and Mine Development

 

Plant and Equipment

 

Expenditures for new facilities or equipment and expenditures that extend the useful lives or expand the production capacity of existing facilities or equipment are capitalized and recorded at cost. Such costs are depreciated using the straight-line or units-of-production methods at rates sufficient to depreciate such costs over the estimated productive lives of such assets or estimated proven and probable reserves as gold ounces are recovered.

 

Mine Development

 

Mine development costs include the cost of engineering and metallurgical studies, drilling and assaying costs to delineate an ore body, environmental costs, the building of infrastructure, and the removal of overburden to initially expose an ore body at an open pit mine within a mining complex. Additionally, interest is capitalized to mine development until such assets are ready for their intended use. Any of the above costs incurred before mineralization is classified as proven and probable reserves are expensed.

 

Drilling, engineering, metallurgical, and other related costs are capitalized for an ore body where proven and probable reserves exist and the activities are directed at obtaining additional information on the ore body, converting non-reserve mineralization to proven and probable reserves, infrastructure planning, or supporting the environmental impact statement. All other drilling costs are expensed as incurred. Drilling costs incurred during the production phase for operational ore control are allocated to inventory costs to be included as a component of cost of sales.

 

The cost of removing overburden and waste materials to access proven and probable reserves prior to the production phase of a mine are referred to as “pre-production stripping costs” and are capitalized during the development of an open pit mine. Where multiple open pit mines exist at a mining complex using common processing facilities, pre-production stripping costs are capitalized at each pit determined to be a separate and distinct mining area or operation. The Company’s definition of a mine and accounting treatment of pre-production stripping costs may differ from that of other companies in the mining industry. The production phase of an open pit mine commences when the Company has extracted (produced) more than a de-minimus amount of saleable gold. Mining costs incurred in production phase pits are included as a component of Stockpiles and Ore on leach pads to be recognized in Production costs in the same period as the revenue from the sale of inventory.

 

Mine development costs are amortized using the units-of-production method based upon estimated recoverable ounces in proven and probable reserves. To the extent such capitalized costs benefit an entire ore body, they are amortized over the estimated life of that ore body. Capitalized costs that benefit specific ore blocks or areas are amortized over the estimated life of that specific ore block or area. Recoverable ounces are determined by the Company based upon its proven and probable reserves and estimated metal recoveries associated with those reserves.

 

Mineral Properties

 

Mineral properties are tangible assets recorded at cost for royalty interests and land and mineral rights to explore and extract minerals from properties. Once a property is in the production phase, mineral property costs are amortized using the units-of-production method based upon estimated recoverable gold ounces from proven

 

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and probable reserves at such properties. Currently, the Company is amortizing mineral property costs associated with its only operating property, the Hycroft Mine. Costs to maintain mineral properties are expensed in the period they are incurred.

 

Although the Company has taken steps to verify title to mineral properties in which it has an interest, these procedures do not guarantee the Company’s title. Such properties may be subject to prior undetected agreements or transfers and title may be affected by such defects.

 

Impairment of Long-lived Assets

 

The Company reviews and evaluates its long-lived assets for impairment annually, and at interim periods if events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment is determined to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets. An impairment loss is measured and recorded based on the excess carrying value of the impaired asset over fair value. Future cash flows are estimated based on quantities of recoverable minerals, expected gold and other commodity prices (considering current and historical prices, price trends and related factors), production levels and operating costs of production and capital costs, all based on life-of-mine plans. The term “recoverable minerals” refers to the estimated amount of gold or other commodities that will be obtained after taking into account losses during ore processing and treatment. Estimates of recoverable minerals from mineral properties are risk adjusted based on management’s relative confidence in such materials. In estimating future cash flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups. The Company’s estimates of future cash flows are based on numerous assumptions and it is possible that actual future cash flows will be significantly different than the estimates, as actual future quantities of recoverable minerals, gold and other commodity prices, production levels and operating costs of production and capital costs are each subject to significant risks and uncertainties. The Company had no impairments during the years ended December 31, 2012, 2011, or 2010.

 

Asset Retirement Obligations

 

Asset retirement obligations, consisting primarily of mine reclamation and closure costs at the Company’s Hycroft Mine, are recognized in the period incurred and recorded as liabilities at fair value. Such obligations, which are initially estimated based on discounted cash flow estimates, are accreted to full value over time through charges to Accretion expense. Asset retirement cost assets are depreciated on a units-of-production method over the related long-lived asset’s useful life. Asset retirement obligations are periodically adjusted to reflect changes in the estimated present value resulting from revisions to the estimated timing or amount of reclamation and closure costs. The Company reviews and evaluates its asset retirement obligations annually or more frequently at interim periods if deemed necessary.

 

Derivative Instruments

 

The Company has swap agreements in place to hedge against changes in foreign exchange and interest rates and diesel prices. The fair value of the Company’s derivative instruments are reflected as assets or liabilities on the balance sheets. The effective portion of changes in the fair value of the derivative instruments are deferred in Accumulated other comprehensive loss and are reclassified to income when the hedged transaction affects earnings. The ineffective portion of the change in fair value of the derivative instrument is recorded in Other income (expense), net. The Company has not experienced any ineffectiveness in its hedging instruments. Transactions related to the Company’s derivative instruments accounted for as hedges are classified in the same category as the item hedged in the statement of cash flows. The Company does not hold derivative instruments for trading purposes.

 

The Company assesses the retrospective and prospective effectiveness of its derivative instruments on a quarterly basis to determine whether the hedging instruments have been highly effective in offsetting changes in

 

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fair value of the hedged items. The Company also assesses on a quarterly basis whether the hedging instruments are expected to be highly effective in the future. If a hedging instrument is not expected to be highly effective, the Company will stop hedge accounting prospectively. In those instances, the gains or losses remain in Accumulated other comprehensive loss until the hedged item affects earnings.

 

Revenue Recognition

 

The Company recognizes revenue on gold and silver sales when persuasive evidence of an arrangement exists, the price is fixed or determinable, the title or risk of loss has been transferred to the customer, and collectability is reasonably assured.

 

For the years ended December 31, 2012, 2011, and 2010, approximately 90%, 92%, and 96%, respectively, of the Company’s sales were attributable to gold. A significant and sustained decrease in the price of gold and/or silver from current levels could have a material and negative impact on the Company’s business, financial condition, and results of operations.

 

Income Taxes

 

Considerable judgment is required in determining the Company’s provision for income taxes and evaluating its uncertain tax positions. The Company accounts for income taxes using the liability method, recognizing certain temporary differences between the financial reporting basis of the Company’s liabilities and assets and the related income tax basis for such liabilities and assets. This method generates either a net deferred income tax liability or asset for the Company, as measured by the statutory tax rates in effect. The Company derives its deferred income tax provision or benefit by recording the change in either the net deferred income tax liability or asset balance for the year.

 

The Company’s deferred income tax assets include certain future tax benefits. The Company records a valuation allowance against any portion of those deferred income tax assets when it believes, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized. Evidence evaluated includes past operating results, forecasted earnings, estimated future taxable income, and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates used to manage the underlying business.

 

As necessary, the Company also provides reserves against the benefits of uncertain tax positions taken on its tax filings. The necessity for and amount of a reserve is established by determining, based on the weight of available evidence, the amount of benefit which is more likely than not to be sustained upon audit for each uncertain tax position. The difference, if any, between the full benefit recorded on the tax return and the amount more likely than not to be sustained is recorded as a liability.

 

Stock-Based Compensation

 

Stock-based compensation costs are measured at fair value and charged to expense over the requisite service period. The fair value of awards made under the Company’s stock-based compensation plans is determined using the stock price on the date of grant. The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods through the final vesting date. Awards classified as liabilities are remeasured at the end of each reporting period with changes in fair value charged to expense.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) is comprised of net income and the effective portion of changes in fair value of derivative instruments that qualify as cash flow hedges.

 

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Income Per Share

 

Basic income per share amounts are calculated by using the weighted-average number of common shares outstanding during the year. Diluted income per share amounts reflect the potential dilution that could occur if securities or other contracts that may require the issuance of common shares in the future were converted unless their inclusion would be anti-dilutive.

 

New Accounting Pronouncements

 

Recently Adopted

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 indefinitely defers certain provisions of ASU 2011-05 relating to the presentation of reclassification adjustments out of accumulated other comprehensive income by component. This pronouncement was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The January 1, 2012 adoption of this guidance had no effect on the Company’s consolidated financial position, results of operations, or cash flows.

 

Recently Issued

 

In February 2013, FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 improves the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report their corresponding effect(s) on net income. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of this guidance is not anticipated to have an effect on the Company’s consolidated financial position, results of operations, or cash flows.

 

In January 2013, FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU 2013-01 states the intended scope of disclosures required by ASU No. 2011-11 “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” apply to derivatives and hedging transactions. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after January 1, 2013. The adoption of this guidance is not anticipated to have an effect on the Company’s consolidated financial position, results of operations, or cash flows.

 

3. Inventories

 

The following table provides the components of inventories and the estimated recoverable gold ounces therein (in thousands, except ounces):

 

     December 31, 2012      December 31, 2011  
     Amount      Gold ounces      Amount      Gold ounces  

Materials and supplies

   $ 11,637          $ 9,094      

In-process

     42,479         46,754         12,317         16,450   

Carbon in-process

     1,281         1,474         6,797         9,880   

Precious metals

     421         463         97         130   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 55,818         48,691       $ 28,305         26,460   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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4. Stockpiles and Ore On Leach Pads

 

The following table summarizes stockpiles and ore on leach pads and the estimated recoverable gold ounces therein (in thousands, except ounces):

 

     December 31, 2012      December 31, 2011  
     Amount      Gold ounces      Amount      Gold ounces  

Current:

           

Ore on leach pads

   $ 93,088         114,252       $ 64,230         77,880   

Non-current:

           

Ore on leach pads

   $ 23,272         28,563       $ 11,320         13,745   

Stockpiles

     15,085         32,074         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 38,357         60,637       $ 11,320         13,745   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

5. Prepaids and Other Assets

 

The following table provides the components of prepaids and other assets (in thousands):

 

     December 31,  
     2012      2011  

Prepaids and other

     

Prepaids

   $ 6,185       $ 3,755   

Federal income taxes receivable

     3,150         —     

State claim fee receivable

     —           1,262   

Deposits

     661         838   

Derivative instruments—Note 14

     1,826         —     

Other

     262         832   
  

 

 

    

 

 

 
   $ 12,084       $ 6,687   
  

 

 

    

 

 

 

Other assets, non-current

     

Debt issuance costs, net

   $ 13,947       $ —     

Advance payments for plant and equipment

     22,135         —     

Marketable equity securities

     1,774         1,484   

Reclamation policy premium, net

     593         712   

Other

     50         —     
  

 

 

    

 

 

 
   $ 38,499       $ 2,196   
  

 

 

    

 

 

 

 

6. Income Taxes

 

The Company’s income (loss) before income taxes was attributable solely to domestic operations in the United States. The components of the Company’s provision (benefit) for income taxes are as follows (in thousands):

 

     December 31,  
     2012     2011      2010  

Current:

       

Federal

   $ (2,233   $ 2,233       $ —     

Deferred:

       

Federal

     18,920        4,116         4,354   

Change in valuation allowance

     (264     —            (11,466
  

 

 

   

 

 

    

 

 

 

Total provision (benefit) for income taxes

   $ 16,423      $ 6,349       $ (7,112
  

 

 

   

 

 

    

 

 

 

 

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The following table provides a reconciliation of income taxes computed at the United States Federal statutory tax rate of 35% to income tax provision (benefit) (in thousands):

 

     Years ended December 31,  
     2012     2011     2010  
     Amount     % of Pretax
Income
    Amount     % of Pretax
Income
    Amount     % of Pretax
Income
 

Income taxed at statutory rates

   $ 22,452        35.00   $ 15,071        35.00   $ 9,456        35.00

Percentage depletion

     (6,933     (10.82 %)      (7,688     (17.85 %)      (3,672     (13.59 %) 

Basis adjustment

     —          —          (1,077     (2.50 %)      —          —     

Change in valuation allowance

     (264     (0.41 %)      —          —          (11,466     (42.44 %) 

Other

     1,168        1.83     43        0.10     (1,430     (5.29 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax provision (benefit)

   $ 16,423        25.60   $ 6,349        14.75   $ (7,112     (26.33 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

 

     December 31,  
     2012     2011  

Current deferred tax assets (liabilities)

    

Net operating loss

   $ 15,837      $ —     

Inventories

     (15,728     1,092   

Other liabilities

     837        734   

Diesel and currency swaps

     (1,022     —     

Valuation allowance

     —          (31
  

 

 

   

 

 

 

Net current deferred tax assets (liabilities)

   $ (76   $ 1,795   
  

 

 

   

 

 

 

Non-current deferred tax assets (liabilities)

    

Plant, equipment, and mine development

   $ (13,964   $ 3,111   

Stock-based compensation

     6,461        6,104   

Asset retirement obligation

     3,170        3,054   

Currency swap

     3,938        —     

Credits and other

     —          1,437   

Valuation allowance

     —          (233
  

 

 

   

 

 

 

Net non-current deferred tax assets (liabilities)

   $ (395   $ 13,473   
  

 

 

   

 

 

 

Total net deferred tax assets (liabilities)

   $ (471   $ 15,268   
  

 

 

   

 

 

 

 

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, available taxes in carryback periods, projected future taxable income projections and tax planning strategies in making this assessment.

 

The Company had net operating loss carryovers as of December 31, 2012 of $89.4 million for federal income tax purposes and $44.1 million for financial statement purposes. The difference of $45.3 million relates to excess tax deductions over deductions reported for financial statement purposes related to stock compensation. The benefit of the excess tax deductions will not be recognized for financial statement purposes until the related deductions reduce income taxes payable. As of the period ended December 31, 2012, no excess tax benefits had been recognized for financial statement purposes. The net operating loss carryovers may be carried back two years and forward twenty years from the year the net operating loss was generated and expire in varying amounts from 2019 to 2032.

 

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During preparation of its 2011 tax return in the third quarter of 2012, using knowledge gained from operating results during the first eight months of 2012, the Company made a bonus depreciation election on certain eligible equipment, resulting in an income tax loss on its 2011 tax return. This election resulted in cash tax savings in 2011 and 2012. However, because of the election, the Company’s percentage depletion deduction on its 2011 return was limited by a tax-effected amount of approximately $3.0 million, which is reported on a prospective basis through the 2012 percentage depletion line in the rate reconciliation table above. The effect of this election is reflected above in the changes between certain deferred tax items reported in 2012 compared to those reported in 2011. The net operating loss asset increased from 2011 primarily because of the income tax loss reported on the 2011 tax return. The deferred tax item related to plant, equipment, and mine development shifted from an asset to a liability because tax depreciation deductions on equipment were accelerated into 2011. Finally, no alternative minimum tax (“AMT”) credit was generated on the 2011 tax return since no AMT was paid.

 

The change in the deferred tax balance related to Inventories is the result of the 2012 adoption of the uniform capitalization principles (“UNICAP”) as required by Internal Revenue Code (“IRC”) section 263A. For the first time in 2012, the Company entered into derivative transactions giving rise to the deferred tax balances related to diesel and currency swaps. In addition to deferred income tax expense, the change in deferred taxes was impacted by a $2.9 million tax benefit included in accumulated other comprehensive loss related to the Company’s derivative instruments.

 

The Company does not believe it has taken any uncertain tax positions and, as such, has not accrued any interest or penalties related to income tax liabilities at December 31, 2012. With limited exception, the Company is no longer subject to U.S. federal income tax audits by taxing authorities for tax years 2008 and prior.

 

7. Plant, Equipment, and Mine Development, Net

 

The following table provides the components of plant, equipment, and mine development, net (in thousands):

 

     Depreciable life
or method
   December 31,  
        2012     2011  

Mine equipment

   3 - 10 years    $ 200,446      $ 114,239   

Mine development

   Units-of-production      96,406        60,666   

Leach pads

   Units-of-production      38,700        20,622   

Buildings and leasehold improvements

   3 - 10 years      19,798        16,612   

Furniture, fixtures, and office equipment

   2 - 3 years      3,769        1,476   

Vehicles

   3 - 5 years      2,332        1,835   

Construction in progress and other

        225,127        16,105   
     

 

 

   

 

 

 
        586,578        231,555   

Less: accumulated depreciation and amortization

        (70,676     (40,861
     

 

 

   

 

 

 
      $ 515,902      $ 190,694   
     

 

 

   

 

 

 

 

Mine equipment included $147.9 million and $54.4 million at December 31, 2012 and 2011, respectively, for the gross amount of assets acquired under capital lease. Accumulated depreciation on such assets totaled $19.0 million and $7.0 million at December 31, 2012 and 2011, respectively.

 

Construction in progress at December 31, 2012 consisted of $104.3 million related to the mill expansion, $60.8 million for the gyratory, tertiary, and secondary crushers, $20.4 million for mine equipment, $18.3 million for leachpad construction, $14.4 million for buildings and an employee housing project, and $6.9 million for other capital items.

 

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8. Mineral Properties, Net

 

The following table summarizes changes in the Company’s mineral properties (in thousands):

 

     Years ended
December 31,
 
     2012     2011  

Balance, beginning of year

   $ 44,706      $ 36,984   

Property additions/purchases

     130        5,725   

Amortization of royalty rights

     (205     (183

Asset retirement cost asset increase

     307        2,286   

Amortization of asset retirement cost asset

     (322     (106
  

 

 

   

 

 

 

Balance, end of year

   $ 44,616      $ 44,706   
  

 

 

   

 

 

 

 

As of December 31, 2012, royalty rights of $3.5 million and an asset retirement cost asset of $4.4 million were amortized using the units-of-production method based upon proven and probable reserves at the Company’s only operating property, the Hycroft Mine.

 

9. Other Liabilities

 

The following table summarizes the components of other liabilities, current and non-current (in thousands):

 

     December 31,  
     2012      2011  

Other liabilities, current

     

Accrued compensation

   $ 4,282       $ 2,435   

Federal income taxes payable

     —           637   

Refining and processing fees

     4,503         —     

Other

     977         94   
  

 

 

    

 

 

 
   $ 9,762       $ 3,166   
  

 

 

    

 

 

 

Other liabilities, non-current

     

Deferred phantom unit plan - Note 13

   $ —         $ 8,535   

Derivative instruments - Note 14

     9,324         —     

Advanced royalties

     790         686   

Other

     109         106   
  

 

 

    

 

 

 
   $ 10,223       $ 9,327   
  

 

 

    

 

 

 

 

10. Debt

 

The following table summarizes the components of debt (in thousands):

 

     December 31,  
     2012      2011  

Debt, current:

     

Capital lease obligations

   $ 28,614       $ 10,306   

Debt, non-current:

     

Capital lease obligations

   $ 94,538       $ 34,245   

8.75% Senior Notes due June 2019 (1)

     402,040         —     
  

 

 

    

 

 

 
   $ 496,578       $ 34,245   
  

 

 

    

 

 

 

 

(1) Effective interest rate of 8.375% after cross currency swap.

 

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Senior Notes

 

In May 2012, the Company issued CDN $400.0 million of uncollateralized senior notes (the “Notes”). The Notes are guaranteed by most of the Company’s wholly-owned subsidiaries, including Hycroft Resources & Development Inc., which owns the Hycroft Mine and conducts mining operations. The Notes are denominated in Canadian dollars, pay interest semi-annually at the rate of 8.75% per annum, and mature in June 2019. Concurrently with the issuance of the Notes, the Company entered into a cross currency swap agreement based upon a notional amount of $400.4 million, the gross proceeds to the Company from the issuance, thereby fixing the interest rate of 8.375% as described in Note 14. The Notes balance was $402.0 million based upon the U.S. dollar to Canadian dollar exchange rate on December 31, 2012. The Company incurred debt issuance costs of $13.3 million attributable to the May 2012 Notes offering, consisting primarily of fees of underwriters, accountants, and legal counsel. Debt issuance costs are included in Other assets, non-current and are amortized over the term of the related debt using the effective interest method.

 

The Company may redeem up to 35% of the Notes outstanding prior to June 2015 at a redemption price of 108.75% of the Notes redeemed plus accrued interest with the net cash proceeds of an equity offering. Prior to June 2016, the Company may redeem all or part of the Notes at a redemption price equal to the greater of i) the Canada Yield Price as defined in the indenture governing the Notes or ii) 101% of the principal amount plus accrued interest. On or after June 2016, the Company may redeem all of the Notes at a redemption price ranging from 104.375% to 100% depending upon the year redeemed plus accrued interest.

 

Revolving Credit Agreement

 

The Company amended and restated its May 2011 revolving credit agreement in October 2012, increasing the availability from $30.0 million to $120.0 million and extending the maturity from May 2014 to April 2016. The credit agreement is collateralized by substantially all of the Company’s assets. The interest rate on drawdowns is at an applicable rate plus a base rate or LIBOR, with the applicable rate determined by financial ratios of the Company. During the years ended December 31, 2012 and 2011, no amounts were borrowed under the revolving credit agreement.

 

Included in Other assets, non-current are $2.0 million of debt issuance costs related to establishing the revolving credit agreement, which are being amortized over the term of the agreement using the effective interest method.

 

Capital Leases

 

The following is a summary of the future minimum capital lease obligation payments, including interest, as of December 31, 2012 (in thousands):

 

Fiscal Year

   Minimum Lease
Payments
 

2013

   $ 34,150   

2014

     33,021   

2015

     31,475   

2016

     26,054   

2017

     11,468   

Less: interest

     (13,016
  

 

 

 

Net minimum capital lease payments

     123,152   

Less: current portion

     (28,614
  

 

 

 

Non-current portion

   $ 94,538   
  

 

 

 

 

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The Company’s capital lease obligations are for the purchase of mining equipment, bear interest at rates between 4%—7% per annum, and primarily carry 60-month terms. During the year ended December 31, 2011, pursuant to a master lease agreement, the Company completed a sale-leaseback agreement for a shovel that provided the Company $9.5 million in cash proceeds.

 

Debt Covenants

 

The Company’s Notes contain provisions that among other things restrict or limit the ability of the Company to redeem the Notes, incur or guarantee additional debt, pay dividends, and consolidate, merge or sell all or substantially all of the Company’s assets. The Company’s revolving credit agreement and certain capital lease obligations contain financial covenants related to net worth and interest coverage and leverage ratios, as well as certain affirmative and restrictive covenants. The Company was in compliance with all debt covenants as of December 31, 2012.

 

Interest Expense

 

The following table summarizes the components of interest expense (in thousands):

 

     Years ended December 31,  
     2012     2011     2010  

Capital lease obligations

   $ 3,957      $ 1,434      $ 441   

8.75% Senior Notes due June 2019 (1)

     20,166        —          —     

Revolving credit facility standby fees

     443        183        —     

Amortization of debt issuance costs

     1,294        99        —     

Capitalized interest

     (7,952     (1,004     (441
  

 

 

   

 

 

   

 

 

 
   $ 17,908      $ 712      $ —     
  

 

 

   

 

 

   

 

 

 

 

(1) Effective interest rate of 8.375% after cross currency swap.

 

11. Asset Retirement Obligation

 

The Company’s mining and exploration activities are subject to various federal and state laws and regulations governing the protection of the environment. Asset retirement obligations and future reclamation expenditures may increase or decrease significantly in the future as a result of changes in regulations, mine plans, estimates, or other factors. The Company’s asset retirement obligation (“ARO”) primarily relates to our operating property, the Hycroft Mine.

 

Changes to the Company’s ARO are summarized below (in thousands):

 

     Years ended December 31,  
     2012     2011  

Balance, beginning of year

   $ 8,726      $ 6,766   

Accretion

     564        450   

Reclamation expenditures

     (540     (775

Additions and changes in estimates

     307        2,285   
  

 

 

   

 

 

 

Balance, end of year

     9,057        8,726   

Less: current portion

     (331     (339
  

 

 

   

 

 

 

Non-current portion

   $ 8,726      $ 8,387   
  

 

 

   

 

 

 

 

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Additions and changes in estimates during the years ended December 31, 2012 and 2011 were attributable to increases in disturbances and estimated future reclamation expenditures associated with our ongoing expansion projects at the Hycroft Mine. At December 31, 2012, the Company’s ARO was fully secured by surety bonds totaling $43.5 million, which were partially collateralized with restricted cash totaling $31.8 million.

 

12. Shareholders’ Equity

 

Common Stock

 

Allied Nevada has 200,000,000 authorized shares of $0.001 par value common stock, of which 89,734,112 shares and 89,646,988 shares were issued and outstanding at December 31, 2012 and 2011, respectively.

 

Preferred Stock

 

The authorized share capital of Allied Nevada includes 10,000,000 shares of undesignated preferred stock with a par value of $0.001 per share. The Company has not issued any shares of preferred stock.

 

13. Share-Based Compensation

 

The Company has share-based compensation plans to attract, retain, and motivate employees and non-employee directors while directly linking incentives to increases in shareholder value. Common shares authorized for issuance under the Deferred Phantom Unit Plan (the “DPU Plan”) and the Deferred Share Unit Plan (the “DSU Plan”) are 300,000 shares and 500,000 shares, respectively. The Company’s 2007 Stock Option Plan and the Restricted Share Unit Plan (the “RSU Plan”) authorize the issuance of up to 6,900,000 common shares in the aggregate under both plans.

 

The following table summarizes the Company’s share-based compensation cost (benefit) and unrecognized share-based compensation cost by plan (in thousands):

 

     Years ended December 31,  

Share-based compensation cost (benefit)

   2012     2011      2010  

Restricted Share Unit

   $ 4,632      $ 4,004       $ 2,527   

Deferred Phantom Unit

     (1,080     2,515         4,283   

Deferred Share Unit

     787        —           —     

2007 Stock Option

     —          43         1,565   
  

 

 

   

 

 

    

 

 

 
   $ 4,339      $ 6,562       $ 8,375   
  

 

 

   

 

 

    

 

 

 

Capitalized as part of an asset cost

   $ 342      $ 487       $ 384   
  

 

 

   

 

 

    

 

 

 

 

     December 31,  

Unrecognized share-based compensation cost

   2012      2011      2010  

Restricted Share Unit

   $ 10,703       $ 7,224       $ 7,066   

Deferred Share Unit

     262         —           —     

2007 Stock Option

     —           —           45   
  

 

 

    

 

 

    

 

 

 
   $ 10,965       $ 7,224       $ 7,111   
  

 

 

    

 

 

    

 

 

 

 

Restricted Share Unit Plan

 

The RSU Plan was adopted by the Company in July 2007, primarily to compensate employees of the Company. RSUs granted without performance based vesting criteria typically vest in equal one-third installments over three years and RSUs granted with performance based vesting criteria also typically vest over three years

 

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with the achievement of certain financial and operating results of the Company, which are established annually by the Compensation Committee of the Board of Directors. Upon vesting, one share of Allied Nevada common stock is automatically issued for no additional consideration, except in the case of Canadian residents, where an election may be made to defer the issuance date.

 

The following table summarizes activity of the Company’s RSU Plan:

 

     Years ended December 31,  
     2012      2011      2010  
     Number of
RSUs
    Weighted
Average
Grant-Date
Fair Value
     Number of
RSUs
    Weighted
Average
Grant-Date
Fair Value
     Number of
RSUs
    Weighted
Average
Grant-Date
Fair Value
 

Outstanding, beginning of year

     568,787      $ 18.59         957,901      $ 10.42         827,500      $ 6.64   

Correction of reporting issuance by plan adminstrator

     280,000        4.35         —          —           —          —     

Granted

     293,289        33.22         245,962        30.19         389,400        16.83   

Vested/issued

     (231,323     14.72         (510,458     6.99         (150,099     7.28   

Canceled/forfeited

     (61,271     24.33         (124,618     26.18         (108,900     8.90   
  

 

 

      

 

 

      

 

 

   

Outstanding, end of year

     849,482        19.59         568,787        18.59         957,901        10.42