10-K 1 aumn-20161231x10k.htm 10-K aumn_Current_Folio_10K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the fiscal year ended December 31, 2016

 

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 1-13627

 

GOLDEN MINERALS COMPANY

(Exact Name of Registrant as Specified in its Charter)

 

DELAWARE

    

26-4413382

(State of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

350 Indiana Street, Suite 800

 

 

Golden, Colorado

 

80401

(Address of principal executive offices)

 

(Zip Code)

 

(303) 839-5060

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

    

Name of each exchange on which registered

Common Stock, $0.01 par value

 

NYSE MKT

 

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 ☐  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 ☒

 

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 ☒  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 ☒  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 this 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 a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Non-accelerated filer ☐
(Do not check if a
smaller reporting company)

   

Accelerated filer ☐

Smaller reporting company ☒

 

 

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

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchanges Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒  No ☐

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2016 was approximately $30,003,238, based on the closing price of the registrant’s common stock of $0.65 per share on the NYSE MKT on June 30, 2016. For the purpose of this calculation, the registrant has assumed that its affiliates as of June 30, 2016 included all directors and officers and one shareholder that held approximately 47% of its outstanding common stock. The number of shares of common stock outstanding on February 24, 2017 was 89,658,910.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2017 Annual Meeting of Stockholders are incorporated by reference in Part III of this annual report on Form 10-K.

 

 

 

 


 

 

GOLDEN MINERALS COMPANY

FORM 10-K

YEAR ENDED DECEMBER 31, 2016

 

INDEX

 

 

 

 

 

 

PAGE

PART I 

 

ITEM 1 AND ITEM 2 

BUSINESS AND PROPERTIES

ITEM 1A 

RISK FACTORS

33 

ITEM 1B 

UNRESOLVED STAFF COMMENTS

46 

ITEM 3 

LEGAL PROCEEDINGS

46 

ITEM 4 

MINE SAFETY DISCLOSURES

46 

PART II 

 

ITEM 5 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

47 

ITEM 6 

SELECTED CONSOLIDATED FINANCIAL DATA

48 

ITEM 7 

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

49 

ITEM 8 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

61 

ITEM 9 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

61 

ITEM 9A 

CONTROLS AND PROCEDURES

61 

ITEM 9B 

OTHER INFORMATION

62 

PART III 

 

ITEM 10 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

63 

ITEM 11 

EXECUTIVE COMPENSATION

63 

ITEM 12 

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

63 

ITEM 13 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

63 

ITEM 14 

PRINCIPAL ACCOUNTING FEES AND SERVICES

63 

PART IV 

 

ITEM 15 

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

64 

ITEM 16 

PREPARATION OF STATEMENT OR REPORT

65 

EXHIBITS 

65 

SIGNATURES 

69 

 

 

 

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References to “Golden Minerals, the “Company,” “our,” “we,” or “us” mean Golden Minerals Company, its predecessors and consolidated subsidiaries, or any one or more of them, as the context requires. Many of the terms used in our industry are technical in nature. We have included a glossary of some of these terms below.

 

FORWARD-LOOKING STATEMENTS

 

Some information contained in or incorporated by reference into this annual report on Form 10-K may contain forward-looking statements and forward-looking information (collectively, “forward-looking statements”) within the meaning of the United States Private Securities Litigation Reform Act of 1995 and other applicable securities laws. We use the words “anticipate,” “continue,” “likely,” “estimate,” “expect,” “may,” “could,” “will,” “project,” “should,” “believe” and similar expressions (including negative and grammatical variations) to identify forward-looking statements.  These statements include statements relating to our expectations regarding the oxide plant lease including its duration and revenues, expectations related to our Santa Maria and Rodeo properties in Mexico including planned exploration and other  evaluation work and costs, planned exploration activities and costs related to our other exploration properties, anticipated 2017 income and expenditures, expected need for external financing, costs and expectations related to our El Quevar project, and statements concerning our financial condition, business strategies and business and legal risks. Although we believe the expectations and assumptions reflected in those forward-looking statements are reasonable, we cannot assure you that these expectations and assumptions will prove to be correct. Our actual results could differ materially from those expressed or implied in these forward-looking statements as a result of various factors described in this annual report on Form 10-K, including:

 

Higher than anticipated care and maintenance costs at the Velardeña Properties in Mexico or at El Quevar in Argentina; 

 

Lower revenue than anticipated from the oxide plant lease, which could result from delays or problems at the third party's mine or at the oxide plant, permitting problems at the third party's mine or the oxide plant, delays in constructing additional tailings capacity at the oxide plant, earlier than expected termination of the lease or other causes; 

 

Continued decreases or insufficient increases in silver and gold prices;

 

Whether we are able to raise the necessary capital required to continue our business on terms acceptable to us or at all, and the likely negative effect of continued low silver and gold prices or unfavorable exploration results;  

 

Unfavorable results from exploration at our exploration properties and whether we will be able to advance our Santa Maria and Rodeo properties or other exploration properties; 

 

Risks related to the El Quevar project in Argentina, including whether we will be able to fund further exploration ourselves or find a joint venture partner to advance the project, the feasibility and economic viability and unexpected costs of maintaining the project; 

 

Variations in the nature, quality and quantity of any mineral deposits that are or may be located at the Velardeña Properties or the Company's exploration properties, changes in interpretations of geological information, and unfavorable results of metallurgical and other tests; 

 

·

Whether we will be able to mine and sell minerals successfully or profitably at any of our current properties at current or future silver and gold prices and achieve our objective of becoming a mid-tier mining company; 

 

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Potential delays in our exploration activities or other activities to advance properties towards mining resulting from environmental consents or permitting delays or problems, accidents, problems with contractors, disputes under agreements related to exploration properties, unanticipated costs and other unexpected events; 

 

Our ability to retain key management and mining personnel necessary to successfully operate and grow our business;

 

Economic and political events affecting the market prices for gold, silver, zinc, lead and other minerals that may be found on our exploration properties; 

 

Political and economic instability in Mexico, Argentina, and other countries in which we conduct our business and future actions of any of these governments with respect to nationalization of natural resources or other changes in mining or taxation policies; 

 

·

Volatility in the market price of our common stock; and

 

The factors set forth under “Risk Factors” in Item 1A of this annual report on Form 10-K.

 

Many of these factors are beyond our ability to control or predict. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, such expectations may prove to be materially incorrect due to known and unknown risks and uncertainties. You should not unduly rely on any of our forward-looking statements. These statements speak only as of the date of this annual report on Form 10-K. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect future events or developments. All subsequent written and oral forward-looking statements attributable to us and persons acting on our behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this annual report on Form 10-K.

 

CAUTIONARY STATEMENT REGARDING MINERALIZED MATERIAL

 

“Mineralized material” as used in this annual report on Form 10-K, although permissible under the United States Securities and Exchange Commission’s (“SEC”) Industry Guide 7, does not indicate “reserves” by SEC standards. We cannot be certain that any deposits at the Velardeña Properties, any part of the Yaxtché deposit at the El Quevar project or any deposits at our other exploration properties, will ever be confirmed or converted into SEC Industry Guide 7 compliant “reserves”. Investors are cautioned not to assume that all or any part of the disclosed mineralized material estimates will ever be confirmed or converted into reserves or that mineralized material can be economically or legally extracted.

 

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CONVERSION TABLE

 

In this annual report on Form 10-K, figures are presented in both United States standard and metric measurements. Conversion rates from United States standard measurement systems to metric and metric to United States standard measurement systems are provided in the table below. All currency references in this annual report on Form 10-K are to United States dollars, unless otherwise indicated.

 

 

 

 

 

 

 

 

 

U.S. Unit

    

Metric Measure

    

Metric Unit

    

U.S. Measure

 

1 acre

 

0.4047 hectares

 

1 hectare

 

2.47 acres

 

1 foot

 

0.3048 meters

 

1 meter

 

3.28 feet

 

1 mile

 

1.609 kilometers

 

1 kilometer

 

0.62 miles

 

1 ounce (troy)

 

31.103 grams

 

1 gram

 

0.032 ounces (troy)

 

1 ton

 

0.907 tonnes

 

1 tonne

 

1.102 tons

 

 

 

GLOSSARY OF SELECTED MINING TERMS

 

Base Metal” means a classification of metals usually considered to be of low value and higher chemical activity when compared with the precious metals (gold, silver, platinum, etc.). This nonspecific term generally refers to the high-volume, low-value metals copper, lead, tin, and zinc.

 

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

 

Calcareous Clastic” means sedimentary rock composed of siliciclastic particles usually of conglomerate, sand, or silt-size and cemented by calcium carbonate in the form of calcite.

 

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

 

Concentrates” means the clean product of ore or metal separated from its containing rock or earth by froth flotation or other methods of mineral separation.

 

Concession” means a grant or lease of a tract of land made by a government or other controlling authority in return for stipulated services or a promise that the land will be used for a specific purpose.

 

Core Drill” means a rotary type of rock drill that cuts a core of rock and is recovered in long cylindrical sections, two centimeters or more in diameter.

 

Deposit” means an informal term for an accumulation of minerals.

 

Development Stage” means a project with an established resource, not in production, engaged in the process of additional studies preparing for completion of a feasibility study or for commercial extraction.

 

Diorite” means a grey to dark grey intermediate intrusive igneous rock composed principally of plagioclase feldspar (typically andesine), biotite, hornblende, and/or pyroxene.

 

Doré” means gold and silver bullion that remains in a cupelling furnace after the lead has been oxidized and skimmed off.

 

Epithermal Calcite-Quartz” means deposits, typically occurring in veins, of calcite-quartz from hydrothermal fluids at shallow depths under conditions in the lower ranges of temperature and pressure.

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Euhedral” means a well-developed degree of which mineral grains show external crystal faces (fully crystal-faced).

 

Exploration Stage” means a project that is not yet in either the Development Stage or Production Stage.

 

Feasibility Study” means an engineering study designed to define the technical, economic, and legal viability of a mining project with a high degree of reliability.

 

Flotation” means the separating of finely crushed minerals from one another by causing some to float in a froth and others to remain in suspension in the pulp. Oils and various chemicals are used to activate, make floatable, or depress the minerals.

 

Formation” means a distinct layer of sedimentary rock of similar composition.

 

Fracture System” means a set or group of contemporaneous fractures related by stress.

 

Grade” means the metal content of ore, usually expressed in troy ounces per ton (2,000 pounds) or in grams per ton or metric tonnes which contain 2,204.6 pounds or 1,000 kilograms.

 

Inferred Resource” means the part of a mineral resource for which quantity and grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity. The estimate is based on limited information and sampling gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes.

 

Laramide Orogeny” means a period of mountain building in western North America, which started in the Late Cretaceous age, 70 to 80 million years ago, and ended 35 to 55 million years ago.

 

Mineralization” means the concentration of metals within a body of rock.

 

Mineralized Material” means a mineralized body that has been defined by appropriate drilling and/or underground sampling to establish continuity and support an estimate of tonnage and an average grade of the selected metals.

 

Mining” means the process of extraction and beneficiation of mineral reserves or mineral deposits to produce a marketable metal or mineral product. Exploration continues during the mining process and, in many cases, mineral reserves or mineral deposits are expanded during the life of the mine activities as the exploration potential of the deposit is realized.

 

Monzodiorite” means coarse-grained igneous rock consisting of essential plagioclase feldspar, orthoclase feldspar, hornblende and biotite, with or without pyroxene, with plagioclase being the dominant feldspar making up 6% to 90% of the total feldspar and varying from oligoclase to andesine in composition. The presence of the orthoclase feldspar distinguishes this rock from a diorite.

 

National Instrument 43-101” or “NI 43-101” means the standards of disclosure for mineral projects prescribed by the Canadian Securities Administrators.

 

Net Smelter Return Royalty” means a defined percentage of the gross revenue from a resource extraction operation, less a proportionate share of transportation, insurance, and processing costs.

 

Open Pit” means a mine working or excavation open to the surface.

 

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Ore” means material containing minerals that can be economically extracted.

 

Outcrop” means that part of a geologic formation or structure that appears at the surface of the earth.

 

Oxide” means mineralized rock in which some of the original minerals have been oxidized (i.e., combined with oxygen).

 

Precious Metal” means any of several relatively scarce and valuable metals, such as gold, silver, and the platinum-group metals.

 

Preliminary Economic Assessment” or “PEA” means a study, other than a pre-Feasibility or Feasibility Study, that includes an economic analysis of the potential viability of mineral resources.

 

Probable Mineral Reserves” means mineral reserves for which quantity and grade and/or quality are computed from information similar to that used for Proven Mineral 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 Mineral Reserves, is high enough to assume continuity between points of observation.

 

Production Stage” means a project that is actively engaged in the process of extraction and beneficiation of mineral reserves or mineral deposits to produce a marketable metal or mineral product.

 

Proven Mineral Reserves” means mineral 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.

 

Reclamation” means the process of returning land to another use after mining is completed.

 

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

 

Mineral Reserves” means that part of a mineral deposit that could be economically and legally extracted or produced at the time of mineral reserve determination.

 

Sampling” means selecting a fractional part of a mineral deposit for analysis.

 

Sediment” means solid fragmental material that originates from weathering of rocks and is transported or deposited by air, water, or ice, or that accumulates by other natural agents, such as chemical precipitation from solution or secretion by organisms, and that forms in layers on the earth’s surface at ordinary temperatures in a loose, unconsolidated form.

 

Sedimentary” means formed by the deposition of Sediment.

 

Silver Equivalent” means silver and gold only, with gold converted to silver equivalents at a 70 to 1 ratio.

 

Skarn” means a coarse-grained metamorphic rock formed by the contact metamorphism of carbonate rock often containing garnet, pyroxene epodite and wollastonnite.

 

Stock” means discordant igneous intrusion having a surface exposure of less than 40 square miles.

 

Sulfide” means a compound of sulfur and some other element.

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Tailings Pond” means a low-lying depression used to confine tailings, the prime function of which is to allow enough time for heavy metals to settle out or for cyanide to be destroyed before water is discharged into the local watershed.

 

Tertiary” means the first period of the Cenozoic Era (after the Cretaceous of the Mesozoic Era and before the Quaternary) thought to have covered the span of time between 2 to 3 million years ago and 65 million years ago.

 

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

 

Waste” means rock lacking sufficient grade and/or other characteristics of Ore.

 

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PART I

 

ITEMS 1 AND 2:  BUSINESS AND PROPERTIES

 

Overview

 

We are a mining company and we own the Velardeña and Chicago precious metals mining properties and associated oxide and sulfide processing plants in the State of Durango, Mexico (the “Velardeña Properties”), the El Quevar advanced exploration silver property in the province of Salta, Argentina, and a diversified portfolio of precious metals and other mineral exploration properties located primarily in or near historical precious metals producing regions of Mexico. The Velardeña Properties and the El Quevar advanced exploration property are our only material properties. Our management team is comprised of experienced mining professionals with extensive expertise in mineral exploration, development and mine operations. Our principal offices are located in Golden, Colorado at 350 Indiana Street, Suite 800, Golden, CO 80401, and our registered office is the Corporation Trust Company, 1209 Orange Street, Wilmington, DE 19801. We also maintain an office at the Velardeña Properties in Mexico and exploration offices in Argentina and Mexico.

 

       None of our properties are currently in production.  We are primarily focused on evaluating and searching for mining opportunities in North America (including Mexico) with near term prospects of mining, and particularly for properties within reasonable haulage distances of our Velardeña Properties, including our Velardeña oxide and sulfide plants. The Company is also reviewing strategic opportunities, focusing primarily on development or operating properties in North America, including Mexico. The Company is continuing its exploration efforts on selected properties in its portfolio of approximately 10 exploration properties located primarily in Mexico. We continue to hold our El Quevar advanced exploration property in Argentina on care and maintenance until we can fund further exploration ourselves or find a partner to further advance the project. 

 

No Proven or Probable Mineral Reserves/Exploration Stage Company

 

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

 

Prior to suspending mining and processing at the Velardeña Properties in November 2015, we had revenues from the sale of silver, gold, lead and zinc products from the Velardeña and Chicago mines. We have not completed a feasibility study with regard to all or a portion of any of our properties to date. Any mineralized material discovered or extracted by us should not be considered proven or probable mineral reserves. As of December 31, 2016, none of our mineralized material met the definition of proven or probable mineral reserves. We expect to remain an exploration stage company for the foreseeable future, even though we were extracting and processing mineralized material. We will not exit the exploration stage until such time, if ever, that we demonstrate the existence of proven or probable mineral reserves that meet the guidelines under SEC Industry Guide 7.

 

Company History

 

We were incorporated in Delaware under the Delaware General Corporation Law in March 2009. From March 2009 through September 2011, we focused on the advancement of our El Quevar silver project in Argentina. On

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September 2, 2011, we completed a business combination transaction with ECU Silver Mining Inc. (“ECU”) and now own the Velardeña and Chicago silver, gold and base metals mines located in the Velardeña mining district in the State of Durango, Mexico as further described under “—Velardeña Properties”. Since the business combination with ECU, we have focused primarily on the further advancement and improvement of the Velardeña Properties, as well as identifying and establishing other mining opportunities with near term prospects.

 

Corporate Structure

 

Golden Minerals Company, headquartered in Golden, Colorado, is the operating entity through which we conduct our business. Following our September 2, 2011 business combination, ECU became a wholly-owned subsidiary of Golden Minerals, and two of ECU’s wholly-owned Mexican subsidiaries hold the assets and rights associated with the Velardeña Properties. We have a number of other wholly-owned subsidiaries organized throughout the world, including in Mexico, Central America, South America, the Caribbean and Europe. We generally hold our exploration rights and properties through subsidiaries organized in the countries in which our rights and properties are located.

 

Our Competitive Strengths and Business Strategy

 

Our business strategy is to establish Golden Minerals as a mid-tier precious metals mining company focused in Mexico. We also review strategic opportunities from time to time.

 

Velardeña Properties.    Due to continuing net operating losses, we suspended mining and sulfide processing activities at the Velardeña Properties during the first half of November 2015 in order to conserve the future value of the asset. We have placed the mine and sulfide processing plant on care and maintenance to enable a re-start of either the mine or the mill when mining and processing plans and metals prices support a cash positive outlook for the property.

 

In July 2015 we entered into a leasing agreement with Minera Hecla, S.A. de C.V. (“Hecla”), a Mexican corporation and wholly-owned subsidiary of Hecla Mining Company, to lease our Velardeña oxide plant for an initial term of 18 months beginning July 1, 2015. During the third quarter 2016 Hecla exercised its right to extend the initial 18-month term for six additional months until June 30, 2017, as permitted under the original lease agreement. As contemplated by the original agreement, the Company and Hecla also reached an agreement regarding an expansion of the tailings impoundment, at Hecla's cost, to accommodate Hecla's use of tailings capacity in excess of an agreed amount while preserving flexibility for future tailings expansions. The agreed expansion is estimated to cost approximately $1.5 million, and we have obtained the necessary permits for such expansion. The parties agreed that Hecla would either leave unused at the end of the lease term an agreed amount of capacity in the expanded tailings facility, or construct an additional expansion at its cost. In connection with their agreement regarding tailings impoundment expansions, the parties agreed that Hecla has the right to extend the lease for an additional 18 months following June 30, 2017, or until December 31, 2018.

 

Hecla is responsible for ongoing operation and maintenance of the oxide plant. During the year ended December 31, 2016, Hecla processed approximately 136,000 tonnes of material through the oxide plant, resulting in total revenues to us of approximately $6.4 million, comprised of approximately $3.0 million for direct plant charges plus fixed fees and other net reimbursable costs totaling approximately $3.4 million. We incurred costs of approximately $2.0 million related to the services we provide under the lease for a net margin of $4.4 million during 2016.  Hecla reached its intended processing throughput of approximately 400 tonnes per day during 2016 and, at this rate, net cash payments to us, net of reimbursable costs, should total approximately $0.4 million per month, including variable and fixed fees, or nearly $5.0 million annually.

 

El Quevar Project.  We continue to hold our El Quevar property on care and maintenance until we can fund further exploration ourselves or find a partner to fund further exploration.

 

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Exploration Focus.  We are focused on evaluating and searching for mining opportunities in North America (including Mexico) with high precious metal grades and low development costs with near term prospects of mining, and particularly properties within reasonable haulage distances of our Velardeña Properties, which may include the Rodeo property located west of the Velardeña Properties in Durango.

 

During the first two quarters of 2016 we mined approximately 4,500 tonnes of material from the Santa Maria mine as bulk samples with grades of approximately 235 grams per tonne (“gpt”) silver and 0.7 gpt gold. During February 2017, we completed a preliminary economic assessment (“PEA”) on the Santa Maria property. The PEA results reported by the engineering firm of Tetra Tech, Inc (“Tetra Tech”), based on an updated estimate of mineralized material, show a potentially profitable operation based on a 200 tonnes per day mining rate and processing at a local third party mill.  See “—Exploration Properties –Santa Maria” below for additional information regarding the Santa Maria Tetra Tech report. 

 

In June 2016, we began a 2,080 meter core drilling program at the Rodeo property.  The results from the program showed a gold and silver bearing epithermal vein and breccia system with encouraging gold and silver values over an approximate 50 to 70 meter true width. During January 2017, Tetra Tech completed an estimate of mineralized material at the Rodeo deposit, which presents two mineralized material estimates based on two different operating scenarios. See “—Exploration Properties—Rodeo” below for additional information regarding the Rodeo Tetra Tech report.

 

During 2017 we plan to focus our exploration efforts primarily on the Santa Maria mine and exploration on certain other properties, including Rodeo. We expect our expenditures for the exploration program in 2017 to be approximately $1.8 million.

 

Experienced Management Team.  We are led by a team of mining professionals with approximately 60 years of combined experience in exploration, project development, and operations management, primarily in the Americas. Our executive officers have held senior positions at various large mining companies including, among others, Cyprus Amax Minerals Company, INCO Limited, Meridian Gold Company, Barrick Gold Exploration and Noranda Exploration.

 

Velardeña Properties

 

Location, Access and Facilities

 

The Velardeña Properties are comprised of two underground mines and two processing plants within the Velardeña mining district, which is located in the municipality of Cuencamé, in the northeast quadrant of the State of Durango, Mexico, approximately 65 kilometers southwest of the city of Torreón, Coahuila and approximately 140 kilometers northeast of the city of Durango, which is the capital of the State of Durango. The mines are reached by a seven kilometer road from the village of Velardeña which is reached by highway from Torreón and Durango. The Velardeña mining district is situated in a hot, semi-arid region.

 

Of the two underground mines comprising the Velardeña Properties, the Velardeña mine includes five different major vein systems including the Terneras, Roca Negra, San Mateo, Santa Juana and San Juanes systems. During 2015 we mined from the San Mateo, Terneras and Roca Negra vein systems as well as the Santa Juana vein system to augment grades as mining and processing rates ramped up.

 

We own a 300 tonne per day flotation sulfide mill situated near the town of Velardeña, which accounted for 100% of our revenue from saleable metals during 2015. The mill includes lead, zinc and pyrite flotation circuits in which we can process the sulfide material to make lead, zinc and pyrite concentrates. Most of the silver and gold sold in 2015 was contained in the lead concentrate. During 2015 we processed all our mined material through the sulfide plant.

 

We also own a conventional 550 tonne per day cyanide leach oxide mill with a Merrill-Crowe precipitation circuit and flotation circuit located adjacent to our Chicago mine, which we previously used to process oxide and mixed sulfide/oxide material from the Velardeña Properties. In July 2015, we leased the oxide plant to a third party to process its

11


 

own material through the plant for up to 42 months. The third party began processing material at the plant in December 2015.  We continue to evaluate and search for other oxide and sulfide feed sources, focusing on sources within haulage distance of our sulfide and oxide mills at the Velardeña Properties.

 

Prior to shutdown, we trucked material from the Velardeña mines to the sulfide plant. In January 2012 we completed a tailings pond expansion at the sulfide plant, which is fully permitted and has capacity to treat tailings for approximately four additional years at the average processing rate of 285 tonnes per day.   At the oxide plant, we completed the first stage of a new tailings pond during May 2013. Additional tailings expansion work at the oxide plant is planned for 2017 to accommodate tailings for the third party lessee, at the cost of the third party lessee.

 

Power for all of the mines and plants is provided through substations connected to the national grid. Water is provided for all of the mines by wells located in the valley adjacent to the Velardeña Properties. We hold title to three wells located near the sulfide plant and hold certificates of registration to three wells located near the oxide plant. We are licensed to pump water from all six wells up to a permitted amount. We are currently pumping from the three wells associated with the oxide plant which is more than sufficient for the third party lessee’s processing operations.

 

The following map shows the location of the Velardeña Properties (other than the El Mogote Fraccion concession, which is located southeast of the identified properties).

 

Picture 2

 

12


 

Property History

 

Exploration and mining in the Velardeña district extends back to at least the late 1500s or early 1600s, with large scale mining beginning in 1888 with the Velardeña Mining and Smelter Company. In 1902, the mining properties were acquired by ASARCO, who mined the property until 1926 when the mines were closed. For the next 35 years, the mines were operated from time to time by small companies and local miners. The property was nationalized in 1961, and in 1968 the sulfide processing plant was built by the Mexican government. In 1994, William Resources acquired the concessions comprising the Velardeña Properties. In 1997, ECU Gold (the predecessor to ECU Silver Mining Inc.) purchased from William Resources the subsidiaries that owned the concessions and the oxide processing plant. The sulfide processing plant was acquired in 2004.

 

Title and Ownership Rights

 

We hold the concessions comprising the Velardeña Properties through our wholly-owned Mexican subsidiary Minera William S.A. de C.V. At present, a total of 30 mineral concessions comprise the Velardeña Properties. The Velardeña Properties encompass approximately 895 hectares. The mineral concessions vary in size, and the concessions comprising each mineral property are contiguous within each of the Velardeña and Chicago properties. We are required to pay annual concession holding fees to the Mexican government to maintain our rights to the Velardeña mining concessions. In 2016, we made such payments totaling approximately $74,000 and expect to pay approximately $75,000 in 2017.  We also own the surface rights to 144 hectares that contains the oxide plant, tailings area and access to the Chicago mine, along with surface lands that may be required for potential plant expansions.

 

The Velardeña Properties are subject to the Mexican ejido system requiring us to contract with the local communities, or ejidos, surrounding our properties to obtain surface access rights needed in connection with our mining and exploration activities. We currently have contracts with two ejidos to secure surface rights for our Velardeña Properties with a total annual cost of approximately $25,000. We have a ten-year contract with the Velardeña ejido, which provides surface rights to certain roads and other infrastructure at the Velardeña Properties through 2021, and a 25-year contract with the Vista Hermosa ejido, which provides exploration access and access rights for roads and utilities for our Velardeña Properties until 2038.

13


 

The following Velardeña Properties exploitation concessions are identified below by name and number in the Federal government Public Registry of Mining.

 

 

 

 

 

 

 

Mine/Area

    

Name of Exploitation
Concession

    

Concession
Number

 

Velardeña

 

AMPL. DEL ÁGUILA MEXICANA

 

85580

 

 

 

ÁGUILA MEXICANA

 

168290

 

 

 

LA CUBANA

 

168291

 

 

 

TORNASOL

 

168292

 

 

 

SAN MATEO NUEVO

 

171981

 

 

 

SAN MATEO

 

171982

 

 

 

RECUERDO

 

171983

 

 

 

SAN LUIS

 

171984

 

 

 

LA NUEVA ESPERANZA

 

171985

 

 

 

LA PEQUEÑA

 

171988

 

 

 

BUEN RETIRO

 

172014

 

 

 

UNIFICACIÓN SAN JUAN EVANGELISTA

 

172737

 

 

 

UNIFICACIÓN VIBORILLAS

 

185900

 

 

 

BUENAVENTURA No. 3

 

188507

 

 

 

EL PÁJARO AZÚL

 

188508

 

 

 

BUENAVENTURA 2

 

191305

 

 

 

BUENAVENTURA

 

192126

 

 

 

LOS DOS AMIGOS

 

193481

 

 

 

VIBORILLAS NO. 2

 

211544

 

 

 

KELLY

 

218681

 

 

 

 

 

 

 

Chicago

 

SANTA TERESA

 

171326

 

 

 

SAN JUAN

 

171332

 

 

 

LOS MUERTOS

 

171986

 

 

 

EL GAMBUSINO

 

171987

 

 

 

AMPLIACIÓN SAN JUAN

 

183883

 

 

 

MUÑEQUITA

 

196313

 

 

 

SAN AGUSTÍN

 

210764

 

 

 

EL PISTACHÓN

 

220407

 

 

 

LA CRUZ

 

189474

 

 

 

EL MOGOTE FRACCION I

 

221401

 

 

We hold water concessions in wells that provide water for the Velardeña Properties. In Mexico water concessions are granted by the National Commission of Water (“CNA”). Currently no new water concessions are being granted by the CNA; however, companies can acquire water concessions through purchase or lease from current concession holders. We hold title to three wells located near the sulfide plant and hold certificates of registration to three wells located near the oxide plant. We are licensed to pump water from all six wells up to a permitted amount. We are required to make annual payments to the CNA to maintain our rights to these wells. In 2016 we made such payments totaling approximately $25,000 and expect to pay approximately the same amount in 2017. We are required to pay a fine to the CNA each year if we use

14


 

too much water from a particular well or alternatively if we do not use a minimum amount of water from a particular well. During 2016 we did not incur any over usage or under usage fines.

 

Geology and Mineralization

 

The Velardeña district is located at the easternmost limit of the Sierra Madre Occidental on the boundary between the Sierra Madre Oriental and the Mesa Central sub-provinces. Both of these terrains are underlain by Paleozoic and possibly Precambrian basement rocks.

 

The regional geology is characterized by a thick sequence of limestone and minor calcareous clastic sediments of Cretaceous age, intruded by Tertiary plutons of acidic to intermediate composition. During the Laramide Orogeny, the sediments were folded into symmetrical anticlines and synclines that were modified into a series of asymmetrical overturned folds by a later stage of compression.

 

A series of younger Tertiary stocks have intruded the older Cretaceous limestone over a distance of approximately 15 kilometers along a northeast to southwest trend. The various mineral deposits of the Velardeña mining district occur along the northeast southwest axis and are spatially associated with the intrusions and their related alteration.

 

An important northwest-southeast fracture system is associated with these intrusions and, in many cases, acts as the main focus of mineralization. The Velardeña Properties are underlain by a thick sequence of limestone that corresponds to rocks of the Aurora and Cuesta del Cura formations of Lower Cretaceous age.

 

Several types of Tertiary intrusive rocks are present in the Velardeña district. The largest of these rocks outcrops on the western flank of the Sierra San Lorenzo and underlies a portion of the Velardeña Properties. It is referred to as the Terneras pluton and forms a northeast oriented, slightly elongated body, considered to represent a diorite or monzodiorite that outcrops over a distance of about 2.5 kilometers. The adjacent limestone has been altered by contact metamorphism (exoskarn), and locally the intrusive has been metamorphosed (endoskarn).

 

The following is a description of the individual geological characteristics and mineralization found on each of the properties comprising the Velardeña and Chicago mines.

 

Velardeña Mine

 

The Santa Juana, Terneras, San Juanes and San Mateo vein deposits on the Velardeña property are hosted by Aurora Formation limestone, the Terneras intrusion and related skarn. The limestone is intruded by a series of multiphase diorite or monzodiorite stocks (Terneras intrusion) and dikes of Tertiary age that outcrop over a strike length of approximately 2.5 kilometers.

 

Two main vein systems are present on the Velardeña property. The first is a northwest striking system as found in the Santa Juana deposit, while the second is east-west trending and is present in the Santa Juana, Terneras, San Juanes and San Mateo deposits.

 

In the Santa Juana deposit, two main sets of vein trends are observed. The most significant is a steeply northeast dipping, northwest trending set that has acted as the main conduit for the mineralizing fluids in the Santa Juana deposit. This direction includes both linear and curved northwest vein sets.

 

The Terneras, San Juanes and San Mateo veins all strike east-west and dip steeply north. The most extensive of these is the Terneras vein, which was mined in the past over a strike length of 1,100 meters. All of these veins are observed to have extensive strike lengths and vertical continuity for hundreds of meters. The mineralogy of the east west system is somewhat different in that it contains less arsenic than the northwest Santa Juana veins.

15


 

Mineralization in the deposits located at the Velardeña mine belongs primarily to epithermal calcite quartz veins with associated lead, zinc, silver, gold and copper mineralization, typical of the polymetallic vein deposits of northern Mexico. The veins are usually thin, normally in the 0.2 meter to 0.5 meter range, but consistent along strike and down dip. Coxcomb and rhythmically banded textures are common.

 

Chicago Mine

 

On the Chicago property, the oldest rocks outcropping are Cretaceous limestone of the Aurora Formation which are highly folded. This limestone is locally metamorphosed by the intrusion of the Tertiary dioritic stocks and dykes. The general geology of the Chicago property is very similar to the geology of the Velardeña property. The Chicago veins strike northeast and dip steeply southeast. Chicago ore tends to be higher in lead and zinc than the Santa Juana ore. Vein widths at Chicago are variable and tend to be narrower than at the Santa Juana deposit, especially in the skarn host.

 

2014 Technical Report

 

During the first quarter of 2015, the engineering firm of Tetra Tech completed an estimate of mineralized material at the Velardeña Properties, set forth in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Silver

    

Gold

    

 

    

 

 

 

 

 

 

(Ag)

 

(Au)

 

 

 

 

 

 

 

 

 

Grade

 

Grade

 

Lead

 

 

 

 

 

Tonnes

 

(Grams

 

(Grams

 

(Pb)

 

 

 

 

 

(in

 

per

 

per

 

Grade

 

Zinc (Zn)

 

Mineralized Material

 

thousands)

 

tonne)

 

tonne)

 

%

 

Grade %

 

Mineralized Material at December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Velardeña Mine

 

 

 

 

 

 

 

 

 

 

 

Oxide and mixed

 

572

 

295

 

4.1

 

1.34

 

1.07

 

Sulfide

 

1,032

 

274

 

3.9

 

1.11

 

1.42

 

Chicago Mine

 

 

 

 

 

 

 

 

 

 

 

Oxide and mixed

 

91

 

208

 

3.2

 

3.77

 

2.8

 

Sulfide

 

98

 

165

 

2.8

 

2.97

 

3.49

 

Total Mineralized Material at December 31, 2014

 

1,793

 

272

 

3.8

 

1.42

 

1.49

 


Note: Results may not tie precisely due to rounding.

 

The Tetra Tech mineralized material estimate assumed a silver price of $25 per troy ounce, a gold price of $1,446 per troy ounce, and a cutoff grade of a net smelter return (“NSR”) of $100 per tonne.

 

The following table shows the commodity prices and metallurgical recoveries used to determine the cutoff grade.

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Sulfide

    

Oxide

    

Mixed

 

 

 

 

 

 

Metallurgical

 

Metallurgical

 

Metallurgical

 

 

 

 

 

 

Recovery

 

Recovery

 

Recovery

 

Metal

 

Metal Prices*

 

%

 

%

 

%

 

Silver

 

$

25 (oz)  

 

89

 

68

 

50

 

Gold

 

$

1,446 (oz)  

 

68

 

71

 

29

 

Lead

 

$

0.96 (lb)  

 

83

 

 —

 

25

 

Zinc

 

$

0.91 (lb)  

 

83

 

 —

 

37

 


* Amounts represent three-year average prices.

16


 

The cutoff grade of $100 NSR per tonne of mineralized material was determined by adding the estimated average costs of mining ($53 per tonne), processing ($27 per tonne) and general and administration ($20 per tonne). The average cost estimates are the same for both the Velardeña and Chicago mines. The NSR value of mineralized material was determined for each type of mineralized material (sulfide, mixed, and oxide) by multiplying a fractional factor that represents an estimated combination of metallurgical recovery, treatment charges, penalties and payment terms by the unit value of each metal and then multiplying by the expected amount of that metal in each block of inventoried material.

 

The following table shows the reduction in mineralized material reported in the Tetra Tech report that resulted from extraction and processing of mineralized material in 2015. As a result of the shutdown of mining and processing in November 2015, there are no results for 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

Silver

    

 

    

 

    

 

    

 

    

 

 

 

 

 

 

Gold

 

 

 

(Ag)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Au)

 

 

 

Grade

 

Contained

 

Lead

 

Contained

 

 

 

Contained

 

 

 

 

 

Grade

 

Contained

 

(Grams

 

Silver (Ag)

 

(Pb)

 

Lead (Pb)

 

Zinc

 

Zinc (Zn)

 

 

 

Tonnes

 

(Grams

 

Gold (Au)

 

per

 

oz.

 

Grade

 

lbs.

 

(Zn)

 

lbs.

 

Mineralized Material

 

(in thousands)

 

per tonne)

 

oz.

 

tonne)

 

(in thousands)

 

%

 

(in thousands)

 

Grade %

 

(in thousands)

 

Mineralized Material at December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Velardeña Mine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oxide and mixed

 

572

 

4.1

 

74,780

 

295

 

5,425

 

1.34

 

16,898

 

1.07

 

13,493

 

Sulfide

 

1,032

 

3.9

 

127,741

 

274

 

9,101

 

1.11

 

25,254

 

1.42

 

32.307

 

Chicago Mine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oxide and mixed

 

91

 

3.2

 

9,362

 

208

 

609

 

3.77

 

7,563

 

2.8

 

5,617

 

Sulfide

 

98

 

2.8

 

8,822

 

165

 

520

 

2.97

 

6,417

 

3.49

 

7,540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Mineralized Material at December 31, 2014

 

1,793

 

3.8

 

220,406

 

272

 

15,655

 

1.42

 

56,132

 

1.49

 

58,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015 Extraction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Velardeña Mine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oxide and mixed

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

Sulfide

 

76

 

2.6

 

6,371

 

156

 

383

 

0.8

 

1,343

 

1.09

 

1,839

 

Chicago Mine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oxide and mixed

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

Sulfide

 

5

 

1.9

 

310

 

117

 

19

 

2

 

220

 

2.82

 

311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Tonnes Extracted in 2015

 

81

 

2.6

 

6,681

 

154

 

401

 

0.87

 

1,564

 

1.2

 

2,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Metal loss adjustments during 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Velardeña Mine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oxide and mixed

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

Sulfide

 

 —

 

 —

 

(3,063)

 

 —

 

(290)

 

 —

 

(522)

 

 —

 

(547)

 

Chicago Mine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oxide and mixed

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 

Sulfide

 

 —

 

 —

 

(140)

 

 —

 

(8)

 

 —

 

(107)

 

 —

 

(74)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Tonnes Extracted in 2015

 

 —

 

 —

 

(3,203)

 

 —

 

(297)

 

 —

 

(629)

 

 —

 

(621)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mineralized Material at December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Velardeña Mine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oxide and mixed

 

572

 

4.1

 

74,780

 

295

 

5,425

 

1.34

 

16,898

 

1.07

 

13,493

 

Sulfide

 

956

 

3.9

 

118,308

 

274

 

8,429

 

1.11

 

23,389

 

1.42

 

29,921

 

Chicago Mine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oxide and mixed

 

91

 

3.2

 

9,362

 

208

 

609

 

3.77

 

7,563

 

2.8

 

5,617

 

Sulfide

 

93

 

2.8

 

8,372

 

165

 

493

 

2.97

 

6,089

 

3.49

 

7,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Mineralized Material at December 31, 2015

 

1,712

 

3.8

 

210,522

 

272

 

14,956

 

1.43

 

53,940

 

1.49

 

56,187

 


Note: Results may not tie precisely due to rounding. Additionally, silver ounces, zinc pounds and leads pounds are rounded to the nearest thousand and gold ounces are rounded to the nearest ounce and tonnes. The variance in rounding different commodities and units is for convenience and does not reflect any differences in the level of accuracy of the calculated mineralized material estimate.

17


 

For further detail regarding mineralized material, see “CAUTIONARY STATEMENT REGARDING MINERALIZED MATERIAL”.

 

Velardeña Properties Activities

 

In 2016 we incurred approximately $2.0 million in expenses related to shut down costs and maintenance at our Velardeña Properties as a result of the suspension of mining and processing activities in November 2015 and expect to incur approximately $0.4 million in quarterly holding costs for as long as mining and processing activities remain suspended.  We retained a core group of employees, most assigned to operate the oxide plant that is leased to a third party and not affected by the shutdown. The retained employees also include an exploration group and an operations and administrative group to continue to advance our plans in Mexico, oversee corporate compliance activities, and to maintain and safeguard the longer term value of the Velardeña assets.

 

In July 2015 we entered into a leasing agreement with a wholly-owned subsidiary of Hecla Mining Company to lease our Velardeña oxide plant for an initial term of 18 months beginning July 1, 2015. During the third quarter 2016 Hecla exercised its right to extend the initial 18-month term for six additional months until June 30, 2017, as permitted under the original lease agreement. As contemplated by the original agreement, the Company and Hecla also reached an agreement regarding an expansion of the tailings impoundment, at Hecla's cost, to accommodate Hecla's use of tailings capacity in excess of an agreed amount while preserving flexibility for future tailings expansions. The agreed expansion is estimated to cost approximately $1.5 million, and we have obtained the necessary permits for such expansion. The parties agreed that Hecla would either leave unused at the end of the lease term an agreed amount of capacity in the expanded tailings facility, or construct an additional expansion at its cost. In connection with their agreement regarding tailings impoundment expansions, the parties agreed that Hecla has the right to extend the lease for an additional 18 months following June 30, 2017, or until December 31, 2018.

 

Hecla is responsible for ongoing operation and maintenance of the oxide plant. During the year ended December 31, 2016, Hecla processed approximately 136,000 tonnes of material through the oxide plant, resulting in total revenues to us of approximately $6.4 million, comprised of approximately $3.0 million for direct plant charges plus fixed fees and other net reimbursable costs totaling approximately $3.4 million. We incurred costs of approximately $2.0 million related to the services we provide under the lease for a net margin of $4.4 million during 2016.  Hecla reached its intended processing throughput of approximately 400 tonnes per day during 2016 and, at this rate, net cash payments to us, net of reimbursable costs, should total approximately $0.4 million per month, including variable and fixed fees, or nearly $5.0 million annually.

 

Mining and Processing

 

There were no mining or processing activities, other than the Hecla lease, at our Velardeña Properties in 2016 as a result of the shutdown of the mining and sulfide processing activities in November 2015. During 2015 the processing facilities generated approximately 465,000 payable silver equivalent ounces, including approximately 327,000 ounces of silver and 1,975 ounces of gold, and sold approximately 494,000 silver equivalent ounces.  Silver equivalent ounces include silver and gold but exclude lead and zinc and are calculated at a ratio of 70 silver ounces to 1 gold ounce. Also, during 2015 the processing facilities generated approximately 1.1 million pounds of payable lead and 1.2 million pounds of payable zinc. Full year 2015 cash costs were $22.16 per payable silver ounce net of by-product credits.  “Cash costs per payable silver ounce, net of by-product credits” is a non-GAAP financial measure defined below in “Item 7 —Non-GAAP Financial Measures”.

 

The following table shows actual silver, gold and silver equivalent payables for 2015 until we suspended mining and sulfide processing in mid-November 2015. As a result of the shutdown of mining and processing in November 2015, there are no results for 2016. 

 

18


 

 

 

 

 

 

 

Payable Metal

 

 

 

2015

 

 

 

 

 

Silver (oz)

 

326,651

 

Gold (oz)

 

1,976

 

Silver equivalent (AgEq)(oz)(3)

 

464,971

 

 


Note: Equivalents calculated at 70:1 silver to gold.

 

19


 

The table below sets forth the mining and processing statistics of our Velardeña Properties for 2015 until we suspended mining and sulfide processing in November 2015. As a result of the shutdown of mining and processing in November 2015, there are no results for 2016.

 

 

 

 

 

 

 

The Year Ended December 31,

 

 

    

2015

 

Tonnes Milled

 

 

 

(includes stockpiles)

 

 

 

Oxide plant

 

 —

 

Sulfide plant

 

80,736

 

 

 

80,736

 

Combined plant grades

 

 

 

(Grams per tonne)

 

 

 

Silver

 

160

 

Gold

 

2.63

 

Combined plant recovery (3)

 

 

 

Silver

 

78.7

%

Gold

 

28.9

%

 

 

 

 

Contained Metals (3)

 

 

 

(includes stockpiles)

 

 

 

Silver ounces

 

351,228

 

Gold ounces

 

2,270

 

Silver equivalent ounces (70:1)

 

510,128

 

Lead - pounds (000)

 

1,238

 

Zinc - pounds (000)

 

1,455

 

 

 

 

 

Payable Metals (3)

 

 

 

(includes stockpiles)

 

 

 

Silver ounces

 

326,651

 

Gold ounces

 

1,976

 

Silver equivalent ounces (70:1)

 

464,971

 

Lead - pounds (000)

 

1,107

 

Zinc - pounds (000)

 

1,216

 

 

 

 

 

Products sold

 

 

 

Doré - kilograms

 

 —

 

Precipitate - kilograms

 

45

 

Lead concentrates - tonnes

 

2,087

 

Zinc concentrates - tonnes

 

1,430

 

Pyrite concentrates - tonnes

 

633

 

Copper concentrates - tonnes

 

 —

 

 

 

 

 

Payable metals in products sold

 

 

 

Silver ounces

 

346,369

 

Gold ounces

 

2,114

 

Silver equivalent ounces (70:1)

 

494,349

 

Lead - pounds (000)

 

1,165

 

Zinc - pounds (000)

 

1,321

 


20


 

Note:   Current payable metals and recoveries include final metal settlements pertaining to sales of previously reported payable metals.

 

The following table shows the recovery rates for silver, gold, lead and zinc at each of our processing facilities for 2015. As a result of the shutdown of mining and processing in November 2015, there are no results for 2016.

 

 

 

 

 

 

    

2015

 

Oxide plant recovery

 

 

 

Silver

 

—%

 

Gold

 

—%

 

Sulfide plant recovery

 

 

 

Silver

 

78.7%

 

Gold

 

28.9%

 

Lead

 

70.2%

 

Zinc

 

57.2%

 


 

Environmental Matters and Permitting

 

We hold environmental licenses and environmental impact assessments that allow us to run our mines, plants and tailing facilities at our Velardeña Properties. We are required to update our environmental licenses and environmental impact assessments for expansion of or modification to any of the existing two processing plants. The construction of new infrastructure beyond the current plant facilities also would require additional permitting, which could include environmental impact assessments and land use permits. We are currently finalizing obtaining all permits necessary for expansion of the tailings disposal facility at our oxide plant to accommodate additional capacity required for production by the plant lessee.

 

Certain Laws Affecting Mining in Mexico

 

Mexico, officially the United Mexican States, is a federal constitutional republic in North America and bordered by the United States of America, Belize and Guatemala. Mexico is a federal democratic republic with 31 states and one Federal District, which is Mexico City. Each state has its own constitution and its citizens elect a governor, as well as representatives, to their respective state congresses. The President of Mexico is the head of the executive federal government. Executive power is exercised by the President, while legislative power is vested in the two chambers of the Congress of the Union. The three constitutional powers are the Judiciary, the Executive and the Legislature which are independent of each other.

 

Legislation Affecting Mining

 

The Mining Law, originally published in 1992 and amended in 1996, 2005, 2006 and 2014, is the primary legislation governing mining activities in Mexico. Other significant legislation applicable to mining in Mexico includes the regulations to the Mining Law, the Federal Law of Waters, the Federal Labour Law, the Federal Law of Fire Arms and Explosives, the General Law on Ecological Balance and Environmental Protection and regulations, the Federal Law of Duties and the Federal Law on Metrology and Standards.

 

The Concession System

 

Under Mexican law, mineral deposits are property of the Mexican republic, and a mining concession, granted by the executive branch of the federal government, is required for the exploration, exploitation and processing of mineral deposits. Mining concessions may only be granted to Mexican individuals domiciled in Mexico or companies incorporated and validly existing under the laws of Mexico. Mexican companies that have foreign shareholders must register with the

21


 

National Registry of Foreign Investments and renew their registration on an annual basis. Mining concessions grant rights to explore and exploit mineral deposits but do not grant surface rights over the land where the concession is located. Mining concession holders are required to negotiate surface access with the land owner or holder (e.g., agrarian communities) or, should such negotiations prove unsuccessful, file an application with the corresponding administrative authority (Ministry of Economy or Ministry of Agrarian-Territorial-Urban Development) to obtain an easement, temporary occupancy, or expropriation of the land, as the case may be. An application for a concession must be filed with the Mining Agency or Mining Delegation located closest to the area to which the application relates.

 

Mining concessions have a term of 50 years from the date on which title is recorded in the Public Registry of Mining. Holders of mining concessions are required to comply with various obligations, including the payment of certain mining duties based on the number of hectares of the concession and the number of years the concession has been in effect. Failure to pay the mining duties can lead to cancellation of the relevant concession. Holders of mining concessions are also obliged to carry out and prove assessment works in accordance with the terms and conditions set forth in the Mining Law and its regulations. The regulations to the Mining Law establish minimum amounts that must be spent or invested on mining activities. A report must be filed in May of each year regarding the assessment works carried out during the preceding year. The mining authorities may impose a fine on the mining concession holder if one or more proof of assessment work reports is not timely filed.

 

Pursuant to amendments to the federal corporate income tax law, effective January 2014, additional duties are imposed on mining concession holders; see “—Taxes in Mexico”.

 

Environmental Legislation

 

Mining projects in Mexico are subject to Mexican federal, state and municipal environmental laws and regulations for the protection of the environment. The principal legislation applicable to mining projects in Mexico is the federal General Law of Ecological Balance and Environmental Protection, which is enforced by the Federal Bureau of Environmental Protection, commonly known as “PROFEPA”. PROFEPA is the federal entity in charge of carrying out environmental inspections and negotiating compliance agreements. Voluntary environmental audits, coordinated through PROFEPA, are encouraged under the federal General Law of Ecological Balance and Environmental Protection. PROFEPA monitors compliance with environmental legislation and enforces Mexican environmental laws, regulations and official standards. If warranted, PROFEPA may initiate administrative proceedings against companies that violate environmental laws, which proceedings may result in the temporary or permanent closure of non-complying facilities, the revocation of operating licenses and/or other sanctions or fines. According to the Federal Criminal Code, PROFEPA must inform the relevant governmental authorities of any environmental crimes that are committed by a mining company in Mexico.

 

Concession holders under the exploration stage may submit themselves to comply with the Mexican Official Norm: NOM-120-SEMARNAT-1997, which provides, among other things, that mining exploration activities to be carried out within certain areas must be conducted in accordance with the environmental standards set forth in NOM-120-SEMARNAT-1997; otherwise, concession holders are required to file a preventive report or an environmental impact study prior to the commencement of the exploration, exploitation and processing of mineral resources. An environmental impact study is required for exploitation and processing of mineral resources activities.

 

In 2014 Mexico developed an Energy sector applicable to private investment companies whereby new mining concessions are now subject to prior approval from the Ministry of Energy. Current mining concessions forming the Velardeña Properties are not subject to or affected by this approval requirement, but any new mining concessions acquired will be subject to this additional approval.

 

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Taxes in Mexico

 

Mexico has a federal corporate income tax rate of 30%, and there are no state taxes on corporate net income. In determining their corporate income tax, entities are allowed to subtract from gross income various deductions permitted by law, and they are allowed a ten-year carry-forward of net operating losses. Pursuant to amendments to the federal tax laws effective January 1, 2014, a 10% withholding tax is charged on dividends distributed to shareholders, regardless of the tax residence of the recipient, out of after tax profits. However, in the case of nonresident shareholders the limitations and tax rates provided in the treaties to avoid double taxation will prevail. A foreign resident company is subject to income tax if it has a permanent establishment in Mexico. In general, a permanent establishment is a place of business where the activities of an enterprise are totally or partially carried out and includes, among others, offices, branches and mining sites.

 

Mexico has several taxes in addition to income tax that are relevant to most business operations, including (i) the Value Added Tax (“VAT”); (ii) import duties; (iii) various payroll taxes; (iv) statutorily entitled employee profit sharing (“PTU”); and (v) mining duties and royalties. In addition, annual mining concession fees are charged by the government.

 

VAT in Mexico is charged upon alienation of goods, performance of independent services, grant of temporary use or exploitation of goods, or import of goods or services that occur within Mexico’s borders, at a rate of 16%. There is no VAT in the case of export of goods or services or for the sale of gold, jewelry, and gold metalwork with a minimum gold content of 80%, excluding retail sale to the general public. The sale of mining concessions is subject to VAT as concessions are not considered to be land. VAT paid by a business enterprise on its purchases and expenses may usually be credited against its liability for VAT collected from customers on its own sales. In addition, VAT may also be refunded, or overpayments may be used to offset tax liabilities arising from other federal taxes.

 

Import duties apply for goods and services entering the country, unless specifically exempted due to a free trade agreement or registered under specific programs like IMMEX, under which we are currently registered. Payroll taxes are payable in most states including Durango and Coahuila, and social security, housing and pension contributions must be made to the federal government when paying salaries.

 

Employees of Mexico entities are statutorily entitled to a portion of the employer’s pre-tax profits, called PTU. The rate of profit sharing is currently 10% of the employer’s taxable income as defined by the Income Tax law. A taxpayer may reduce its income tax base by an amount equal to the PTU. Certain companies are exempt from paying PTU, which include companies in the extractive industry (principally the mining industry) during the period of exploration.

 

Under the 2014 amendments to the federal corporate income tax law, titleholders of mining concessions are required to pay an annual special duty of 7.5% of their mining related profits, determined by deducting from mining related revenues certain specified types of cash expenditures. Payment of the special duty is due at the end of March each year.

 

Titleholders of mining concessions also are required to pay a 0.5% special mining duty, or royalty, on an annual basis, on revenues obtained from the sale of silver, gold and platinum. Similar to the 7.5% annual special duty, the 0.5% duty is due at the end of March each year.

 

El Quevar

 

Location and Access

 

Our El Quevar silver project is located in the San Antonio de los Cobres municipality, Salta Province, in the altiplano region of northwestern Argentina, approximately 300 kilometers by road northwest of the city of Salta, the capital city of the province. The project is also accessible by a 300 kilometer dirt and gravel road from the city of Calama in northern Chile. The small village of Pocitos, located about 20 kilometers to the west of El Quevar, is the nearest settlement. We have established a camp approximately 10 kilometers west of the project to house project workers. A high tension

23


 

power line is located approximately 40 kilometers from the site, and a high pressure gas line devoted to the mining industry and subsidized by the Salta government is located within four kilometers of the El Quevar camp.

 

The El Quevar project is located near Nevado Peak with altitudes at the concessions ranging from 3,800 to 6,130 meters above sea level. The climate of the area is high mountain desert, with some precipitation in summer (such as snow) and little snow in winter.

 

The following map shows the location of the El Quevar project.

 

Picture 1

 

Property History

 

Mining activity in and around the El Quevar project dates back at least 80 years. Between 1930 and 1950, there was lead and silver extraction of mineralized materials from small workings in the area, but we have no mining records from that period. The first organized exploration activities on the property occurred during the 1970s, although no data from that period remains. Over the last 30 years, several companies have carried out exploration activity in the area, including BHP Billiton, Industrias Peñoles, Mansfield Minerals and Hochschild Mining Group, consisting primarily of local sampling with some limited drilling programs.

 

24


 

Title and Ownership Rights

 

According to Argentine law, mineral resources are subject to regulation in the provinces where the resources are located. Each province has the authority to grant mining exploration permits and mining exploitation concession rights to applicants. The Federal Congress has enacted the National Mining Code and other substantive mining legislation, which is applicable throughout Argentina; however, each province has the authority to regulate the procedural aspects of the National Mining Code and to organize the enforcement authority within its own territory.

 

In the province of Salta, where the El Quevar project is located, all mining concessions are granted by a judge in the Salta Mining Court. The El Quevar project is comprised of exploitation concessions. Exploitation concessions are subject to a canon payment fee (maintenance fee) which is paid in advance twice a year (before June 30th and December 31st of each calendar year). Each time a new mining concession is granted, concession holders are exempt from the canon payment fee for a period of three years from the concession grant date. However, this exemption does not apply to the grant of vacant exploitation concessions; only to the grant of new mining concessions.

 

The El Quevar project is currently comprised of 31 mining concessions we hold directly. In total, the El Quevar project encompasses approximately 57,000 hectares. The area of most of our exploration activities at El Quevar is within the concessions that are owned by Silex Argentina S.A., our wholly-owned subsidiary.

 

We are required to pay a 1% net smelter return royalty on the value of all minerals extracted from the El Quevar II concession and a 1% net smelter return royalty on one-half of the minerals extracted from the Castor concession to the third party from whom we acquired these concessions.  We can purchase one half of the royalty for $1 million in the first two years of production.  The Yaxtché deposit is located primarily on the Castor concession. We are also required to pay a 3% royalty to the Salta Province based on the mine mouth value of minerals extracted from any of our concessions. To maintain all of the El Quevar concessions, we paid canon payment fees to the Argentine government of approximately $40,000 and $112,000 in 2015 and 2016, respectively. In 2017 we expect to pay approximately $115,000.

25


 

The following El Quevar mine concessions are identified below by name and file number in the Salta Province Registry of Mines.

 

 

 

 

 

Name of Mine Concession

    

Concession
File Number

 

Quevar II

 

17114

 

Quirincolo I

 

18036

 

Quirincolo II

 

18037

 

Castor

 

3902

 

Vince

 

1578

 

Armonia

 

1542

 

Quespejahuar

 

12222

 

Toro I

 

18332

 

Quevar Primera

 

19534

 

Quevar Novena

 

20215

 

Quevar Decimo Tercera

 

20501

 

Quevar Tercera

 

19557

 

Quevar Vigesimo Tercero

 

21043

 

Quevar 10

 

20219

 

Quevar Vigesimo Primera

 

20997

 

Quevar Vigesimo Septima

 

22403

 

Quevar IV

 

19558

 

Quevar Vigesimo Cuarto

 

21044

 

Quevar 11

 

20240

 

Quevar Quinta

 

19617

 

Quevar 12

 

20360

 

Quevar Decima Quinta

 

20445

 

Quevar Sexta

 

19992

 

Quevar 19

 

20706

 

Quevar Vigesimo Sexta

 

22087

 

Quevar Vigesimo Segundo

 

21042

 

Quevar Séptima

 

20319

 

Quevar Veinteava

 

20988

 

MARIANA CANTERA

 

15190

 

Arjona

 

18080

 

Quevar Vigesimo Quinto

 

21054

 

 

The surface rights at El Quevar are controlled by the Salta Province. There are no private properties within the concession area. To date, no issues involving surface rights have impacted the project. Although we have unrestricted access to our facilities, we have been granted easements to further protect our access rights.

 

Geology and Mineralization

 

The geology of the El Quevar project is characterized by silver-rich veins and disseminations in Tertiary volcanic rocks that are part of an eroded stratovolcano. Silver mineralization at El Quevar is hosted within a broad, generally east-west-trending structural zone and occurs as a series of north-dipping parallel sheeted vein zones, breccias and mineralized

26


 

faults situated within an envelope of pervasively silicified brecciated volcanic rocks. There are at least three sub-parallel structures that extend for an aggregate length of approximately 6.5 kilometers. Several volcanic domes (small intrusive bodies) have been identified and mineralization is also found in breccias associated with these domes, especially where they are intersected by the structures. The silver mineralization at the Yaxtché zone is of epithermal origin. The cross-cutting nature of the mineralization, the assemblage of sulfide and alteration minerals, and the presence of open spaces with euhedral minerals, all point to an origin at shallow to moderate depths (a few hundred meters below surface) from hydrothermal solutions.

 

2012 Technical Report

 

During 2012 RungePincockMinarco (“RPM”) completed an updated estimate of mineralized material at our El Quevar project. This SEC Industry Guide 7 estimate assumed mining of oxide material from an open pit on the east end of the Yaxtché deposit and sulfide material from both the open pit and an underground mine on the western portion of the Yaxtché deposit. According to the RPM estimate, based on results from 270 core drill holes, mineralized material in the Yaxtché zone, at a cut-off grade of 26 grams per tonne silver for the open pit and 100 grams per tonne silver for underground material, and using a three-year average silver price of $24.41 per ounce, was as follows:

 

 

 

 

 

Tonnes

    

Average silver

 

(000s)

 

grade (grams/tonne)

 

6,024

 

147.5

 

 

The RPM estimate includes a smaller tonnage of mineralized material in the possible open pit at a higher likely grade as compared to the technical report prepared by RPM pursuant to Canadian National Instrument 43-101 (“43-101”). In the RPM report pursuant to 43-101, RPM used inferred resources beneficially to the possible operation in the optimization of a resource level open pit. When preparing its mineralized material estimate under Industry Guide 7, RPM did not use the inferred resources calculated pursuant to 43-101 to beneficially optimize the pit. As such, optimization without the benefit of inferred material yielded a smaller tonnage of mineralized material in the possible open pit at a higher likely grade as compared to the RPM report pursuant to 43-101.

 

For further detail regarding mineralized material, see “CAUTIONARY STATEMENT REGARDING MINERALIZED MATERIAL”.

 

Exploration and Advancement of El Quevar

 

The Yaxtché deposit is the primary target currently identified at the El Quevar project. We believe that the El Quevar deposit may be amenable to bulk mining, which could include an open pit on the eastern and central areas of the Yaxtché deposit and bulk underground mining in the western area. Our work indicates that the Yaxtché deposit is at least 2 kilometers in strike length and is continuous laterally and to depths of more than 300 meters below surface in the main area. More recent results also support a possible eastward extension of the Yaxtché deposit and recognize an emerging new mineralized trend five kilometers north of the Yaxtché deposit. We continue to hold our El Quevar property on care and maintenance until we can fund further exploration ourselves or find a partner to fund further exploration. We have completed environmental baseline studies, and a further environmental impact assessment process would be required to support the permits necessary for construction and mining. If the El Quevar project proceeds to development and construction, we would be required to obtain numerous additional permits from national, provincial and municipal authorities in Argentina.

 

We spent approximately $1.1 million and $0.5 million at our El Quevar project on holding and maintenance costs in 2015 and 2016, respectively. From the inception of our exploration activities in 2004 through December 31, 2016 we have spent approximately $75.8 million on exploration and related activities at El Quevar. In 2017 we expect to spend approximately $0.5 million at our El Quevar project on maintenance and holding costs. 

 

27


 

Exploration Properties

 

In addition to El Quevar, we currently control a portfolio of approximately 10 exploration properties located primarily in certain traditional precious metals producing regions of Mexico. We do not consider any of our exploration properties to be material, including those noted below.

 

In 2017 we plan to focus our exploration efforts primarily on the Santa Maria mine located in the Parral District in Chihuahua State and the Rodeo property located west of the Velardeña Properties in Durango.  During 2017 we expect our expenditures for the exploration program to total approximately $1.8 million, with approximately $0.3 million in property holding costs in Mexico and approximately $0.5 million in administrative and general reconnaissance costs in Mexico.

 

Santa Maria

 

In August 2014, we entered into an option agreement giving us the right to acquire for $1.2 million the Santa Maria mine, a privately held property comprised of a single mining claim of 18 hectares west of Hildalgo de Parral, Chihuahua State, Mexico. During the first two quarters of 2016 we mined approximately 4,500 tonnes of material as a bulk sample with grades of approximately 235 gpt silver and 0.7 gpt gold. This material was substantially lower in grade than material mined in 2015 from the same vein. We processed the bulk sample through a toll milling facility, generating approximately 100 tonnes of concentrates containing approximately 22,000 ounces of silver and 44 ounces of gold.  The concentrates were sold to a third party for approximately $300,000 during the first two quarters of 2016 consisting of approximately 21,000 payable ounces of silver and 40 payable ounces of gold, which offset exploration costs. The average grade of 7,500 tons mined and processed in bulk samples since 2015 is 338 gpt silver and 0.7 gpt gold.

 

The option agreement requires an additional approximately $0.9 million to be paid to acquire 100% of the Santa Maria property.  Minimum payments of $0.1 million are due every six months in April and October and the minimum payments for 2017 have already been paid to the property owner.  Until the total due under the option agreement has been paid, the property owners have the right to 50% of any net profits from mining activities at the property, after reimbursement of all costs incurred by the Company since April 2015, to the extent that such net profit payments exceed the minimum payments.

 

In February 2017 a PEA was completed on our behalf by Tetra Tech based on an updated estimate of mineralized material. The PEA presents a base case assessment of developing Santa Maria’s mineral deposit.  The PEA contemplates a 38-month underground mining operation at a mining rate of 200 tonnes per day using a combination of cut and fill and other mining techniques, and custom milling at a local third-party flotation mill.  Based on the assumptions in the PEA, we believe there may be potential to develop a small mining operation at Santa Maria.

 

In 2017 we plan to continue work related to optimizing mining plans for the project and obtaining permits for the potential mining operation as considered in the current PEA.  Permit applications have been submitted and are pending comment and acceptance.  We are also developing plans for additional exploration work to potentially expand the deposit.  However, no development decision has been made with respect to the project.

 

Rodeo

We acquired the Rodeo and Rodeo 2 claims comprising 1,866 hectares 80 kilometers west of the Velardeña Properties in Durango, Mexico where previous exploration by other companies has identified a gold-bearing epithermal system exposed at the surface. In June 2016 we began a 2,080 meter core drilling program at the Rodeo property at a cost of approximately $0.4 million. The results from the program show a gold and silver bearing epithermal vein and breccia system with encouraging gold and silver values over an approximate 50 to 70 meter true width.  The system is exposed at the top of a northwesterly striking ridge and dips steeply to the northeast over about one kilometer of strike length.

28


 

During January 2017, Tetra Tech completed an estimate of mineralized material at the Rodeo deposit based on two different operating scenarios.  The first operating scenario reflects a smaller amount of higher grade material and estimated mineralized material of 0.4 million tonnes containing 3.3 gpt gold and 11 gpt silver. We believe this material, as currently identified, could provide additional mined material for our Velardeña oxide mill following the completion of the Hecla lease, currently set to expire no later than December 31, 2018. This scenario provides a potentially shorter time to processing with lower capital costs since we already own the mill, located within trucking distance of the Rodeo property.  The second operating scenario reflects a larger amount of lower grade material and estimated mineralized material of 3.6 million tonnes containing 0.8 gpt gold and 12 gpt silver.  The second mineralized material estimate envisions a standalone heap leach operation, depending on leachability of the material and development and operating costs.

 

In 2017 we plan to continue work related to metallurgical studies, economic evaluation and potential resource expansion.

 

Celaya Farm-out

 

In August 2016, our wholly owned Mexican subsidiary entered into an earn-in agreement with a 100% owned Mexican subsidiary of Electrum Global Holdings, L.P., a privately owned company (together “Electrum”), related to our Celaya exploration property in Mexico. We received an upfront payment of $0.2 million and Electrum has agreed to incur exploration expenditures totaling at least $0.5 million within the first year of the agreement, reduced by certain costs Electrum previously incurred on the property since December 2015 in its ongoing surface exploration program.  Electrum, at its option, can elect to acquire an undivided 60% interest in a joint venture company to be formed to hold the Celaya project after incurring exploration expenditures totaling $2.5 million during the first three years of the agreement. Electrum would serve as manager of the joint venture. If we elect not to contribute to additional exploration or development expenditures after the initial earn-in period, Electrum, at its option, would have the right to earn an additional 20% interest in the Celaya project, for a total interest of 80%, by incurring an additional $2.5 million of exploration or development expenditures over a second three-year period. Following the second earn-in period we would have the right to maintain our 20% interest or our interest ultimately could be converted into a 10% net profits interest.

 

The 6,200-hectare silver and gold Celaya project contains a strongly developed alteration system on the main Mexico silver belt trend, located 10 kilometers east of Plata Latina’s Naranjillo silver and gold discovery and 45 kilometers southeast of and on trend with the historic Guanajuato District. We have conducted mapping and sampling activities at Celaya since 2012.  We completed a 2,000 meter, three-hole drilling program in 2015 that identified epithermal gold and silver mineralization beneath a portion of the widespread clay-silica alteration on the claims comprising the project.

 

Electrum Global Holdings’ Mexican subsidiary, Minera Adularia, has conducted extensive geologic mapping and sampling on the Celaya property.  New targets have been identified and exploration drilling to test these targets began in January 2017.

 

Farm-outs, Royalties and Other Dispositions

 

Exploration properties that we choose not to advance are evaluated for joint venture, sale of all or a partial interest and royalty potential. We currently have minority ownership interests and/or royalties in or have disposed of the following properties that were once part of our exploration portfolio:

 

·

Zacatecas. On April 28, 2016, we entered into an option agreement under which Santa Cruz Silver Mining Ltd. (“Santa Cruz”) may acquire our interest in certain nonstrategic mineral claims located in the Zacatecas Mining District, Zacatecas, Mexico (the “Zacatecas Properties”) for a series of payments totaling $1.5 million.  Santa Cruz paid the Company $0.2 million on signing the agreement and an additional $0.2 million in October 2016. In order to maintain its option and acquire the Zacatecas Properties, Santa Cruz is required to pay additional amounts of $0.3 million, $0.3 million and $0.5 million due 12, 18 and 24 months after

29


 

signing, respectively.  Santa Cruz has the right to terminate the option agreement at any time, and the agreement will terminate if Santa Cruz fails to make a payment when due.

 

·

San Luis del Cordero. We commenced a $0.6 million exploration drilling program in the first quarter 2016 at the Santa Rosa vein in the San Luis del Cordero project in Durango State, Mexico.  The 20 hole, 4,600 meter drilling program was completed in June 2016, and we received drill results from that program in July.  Based on our evaluation of those July results, we concluded that further work on this project was not likely to meet our near-term objectives and we terminated the farm-in arrangement for the property in August 2016.

 

·

San Diego Exploration Property. On August 2, 2016, we sold our remaining 50% interest in the San Diego property in Mexico to Golden Tag Resources, Ltd (“Golden Tag”), which held the other 50% interest in the property, for approximately $379,000 in cash and 2,500,000 common shares of Golden Tag. Pursuant to the sales agreement, Golden Tag will be required to pay us a 2.0% net smelter return royalty in respect to the San Diego property. We now hold 7,500,000 common shares of Golden Tag, representing approximately 10% of its outstanding common shares.

 

·

Sale of Mining Equipment. On August 8, 2016, we sold certain mining equipment to Minera Indé, an indirect subsidiary of The Sentient Group (Sentient”), a related party, for $687,000. The equipment sold was excess equipment held at our Velardeña Properties that we did not expect to use. We received $69,000 or 10% of the sales price at the closing of the sale, with the remaining $618,000 plus interest on the unpaid balance at an annual rate of 10% to be due in February 2017. We expect to amend the original equipment sale in February 2017 to include the sale of an additional piece of excess equipment for $185,000.   Upon execution of the amendment we expect to receive an additional payment of $100,000, and the remaining principal and interest balance as of February 2017 of $737,000, plus additional interest on the unpaid balance at an annual rate of 10%, would be due in August 2017. 

 

·

Zacatecas Royalty (Mexico)With respect to certain concessions in a portion of our Zacatecas project in Mexico sold to a subsidiary of Capstone Mining Corp. in 2009, we are entitled to a net smelter return of 1.5% on the first one million tonnes of production, and a 3% net smelter return on production in excess of one million tonnes.  The net smelter return on production in excess of one million tonnes escalates by 0.5% for each $0.50 increment in copper price above $3.00 per pound of copper. There is currently no production on these concessions.

 

·

Fortuna Royalty (Peru). We are entitled to a net smelter return of 2.5% from a mining claim in Peru we sold to Compañia Minera Fortuna in August 2012. There is currently no production related to this claim. 

 

 

Executive Officers of Golden Minerals

 

 

 

 

 

 

Name

    

Age

    

Position

Warren M. Rehn

 

62

 

President and Chief Executive Officer

Robert P. Vogels

 

59

 

Senior Vice President and Chief Financial Officer

 

Warren M. Rehn.  Mr. Rehn was appointed President of our company in May 2015 and appointed Chief Executive Officer and director in September 2015. Mr. Rehn previously served as Senior Vice President, Exploration and Chief Geologist since December 2012 and served as Vice President, Exploration and Chief Geologist since February 2012. From 2006 until February 2012, Mr. Rehn held various positions at Barrick Gold Exploration, Inc., serving most recently as Chief Exploration Geologist for the Bald Mountain and Ruby Hill mining units. From 2005 until 2007, Mr. Rehn was a consulting geologist for Gerson Lehman Group, which provides consulting services to various industries, including geology and mining. Mr. Rehn served as a Consulting Senior Geologist at Placer Dome Exploration, Inc. in 2004 and as

30


 

an independent consulting geologist throughout the Americas from 1994 until 2003. He served as a Senior Geologist at Noranda Exploration, Inc. from 1988 until 1994. Mr. Rehn holds an M.S. in Geology from the Colorado School of Mines and a B.S. in Geological Engineering from the University of Idaho.

 

Robert P. Vogels.  Mr. Vogels was named Senior Vice President and Chief Financial Officer in March 2009. Mr. Vogels served as Controller of Apex Silver from January 2005 to March 2009 and was named Vice President in January 2006. Prior to joining Apex Silver, Mr. Vogels served as corporate controller for Meridian Gold Company from January 2004 until December 2004. He served as the controller of INCO Limited’s Goro project in New Caledonia from October 2002 to January 2004. Prior to joining INCO, Mr. Vogels worked from 1985 through October 2002 for Cyprus Amax Minerals Company, which was acquired in 1999 by Phelps Dodge Corp. During that time, he served in several capacities, including as the controller for its El Abra copper mine in Chile from 1997 until March 2002. Mr. Vogels began his career in public accounting as a CPA. He holds a B.Sc. in accounting and an MBA degree from Colorado State University.

 

Board of Directors of Golden Minerals

 

 

 

 

 

 

Name

 

Age

 

Occupation

Jeffrey G. Clevenger

 

67

 

Chairman

Warren M. Rehn

 

62

 

President and Chief Executive Officer, Company

W. Durand Eppler (1),(3)

 

63

 

Managing Director, Headwaters MB

Ian Masterton-Hume (2)

 

66

 

Corporate Director and Member, Sentient Business Council

Kevin R. Morano (2),(3)

 

63

 

Managing Principal, KEM Capital LLC

Terry M. Palmer (1),(3)

 

72

 

Retired Certified Public Accountant

Andrew N. Pullar

 

45

 

Chief Executive Officer and Director, The Sentient Group

David H. Watkins (1),(2)

 

72

 

Director, Commander Resources Ltd. Euro Resources S.A.

 


Committee Membership

(1)

Audit

(2)

Compensation

(3)

Corporate Governance and Nominating

 

Metals Market Overview

 

We are an emerging precious metals exploration company with silver and gold mining properties in Mexico and a large silver advanced exploration project in Argentina. Descriptions of the markets for these metals are provided below.

 

Silver Market

 

Silver has traditionally served as a medium of exchange, much like gold. Silver’s strength, malleability, ductility, thermal and electrical conductivity, sensitivity to light and ability to endure extreme changes in temperature combine to make it a widely used industrial metal. While silver continues to be used as a form of investment and a financial asset, the principal uses of silver are industrial, primarily in electrical and electronic components, photography, jewelry, silverware, batteries, computer chips, electrical contacts, and high technology printing. Silver’s anti-bacterial properties also make it valuable for use in medicine and in water purification. Additionally, the use of silver in the photovoltaic and solar panel industries is growing rapidly, and new uses of silver are being developed in connection with the use of superconductive wire and radio frequency identification devices.

 

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Most silver product is obtained from mining in which silver is not the principal or primary product. The Silver Institute, an international silver industry association, noted that for 2014 only around 31% of output came from so-called primary silver mines, where silver is the main source of revenue.

 

The following table sets forth for the periods indicated on the London Fix high and low silver fixes in U.S. dollars per troy ounce. On February 24, 2017, the closing price of silver was $18.27 per troy ounce.

 

 

 

 

 

 

 

 

 

 

 

Silver

 

Year

    

High

    

Low

 

2010

 

$

30.70

 

$

15.14

 

2011

 

$

48.70

 

$

26.16

 

2012

 

$

37.23

 

$

26.67

 

2013

 

$

32.23

 

$

18.61

 

2014

 

$

22.05

 

$

15.28

 

2015

 

$

18.23

 

$

13.71

 

2016

 

$

20.71

 

$

13.58

 

2017*

 

$

18.27

 

$

15.95

 


*     Through February 24, 2017.

 

Gold Market

 

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. The supply of gold consists of a combination of production from mining and the draw-down of existing stocks of gold held by governments, financial institutions, industrial organizations and private individuals.

 

The following table sets forth for the periods indicated on the London Fix PM high and low gold fixes in U.S. dollars per troy ounce. On February 24, 2017, the closing price of gold was $1,254 per troy ounce.

 

 

 

 

 

 

 

 

 

 

 

Gold

 

Year

    

High

    

Low

 

2010

 

$

1,420

 

$

1,058

 

2011

 

$

1,895

 

$

1,319

 

2012

 

$

1,792

 

$

1,540

 

2013

 

$

1,694

 

$

1,192

 

2014

 

$

1,385

 

$

1,142

 

2015

 

$

1,296

 

$

1,049

 

2016

 

$

1,366

 

$

1,077

 

2017*

 

$

1,254

 

$

1,146

 


*     Through February 24, 2017.

 

Employees

 

We currently have approximately 160 employees, including six in Golden, approximately 130 in Torreón, Mexico or at the Velardeña Properties (including approximately 70 assigned to the oxide plant which is leased to a third party), three in Argentina in connection with the El Quevar project, and approximately 21 in various foreign exploration offices.

 

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Competition

 

There is aggressive competition within the mining industry for the acquisition of a limited number of mineral resource opportunities, and many of the mining companies with which we compete have greater financial and technical resources than we do. Accordingly, these competitors may be able to spend greater amounts on acquisitions of mineral properties of merit, as well as on exploration and advancement of their mineral properties. We also compete with other mining companies for the acquisition and retention of skilled mining engineers, mine and processing plant operators and mechanics, geologists, geophysicists and other experienced technical personnel. Our competitive position depends upon our ability to successfully and economically advance new and existing silver and gold properties. Failure to achieve and maintain a competitive position could adversely impact our ability to obtain the financing necessary for us to advance our mineral properties.

 

Available Information

 

We make available, free of charge through our website at www.goldenminerals.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Information on our website is not incorporated into this annual report on Form 10-K and is not a part of this report.  Additionally, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

 

ITEM 1A:  RISK FACTORS

 

Investors in Golden Minerals should consider carefully, in addition to the other information contained in, or incorporated by reference into, this annual report on Form 10-K, the following risk factors:

 

We have historically incurred operating losses and operating cash flow deficits and we expect to incur operating losses and operating cash flow deficits through 2017; our potential profitability in the foreseeable future would depend on our ability to identify, acquire and mine properties to generate sufficient revenues to fund our continuing activities.

        We have a history of operating losses and we expect that we will continue to incur operating losses unless and until such time as our Velardeña Properties, our El Quevar project, or another of our exploration properties, which may include the Santa Maria Mine or the Rodeo property, generates sufficient revenue to fund our continuing business activities. Although we have leased the oxide plant at the Velardeña Properties to a subsidiary of Hecla Mining Company, the cash that we expect will be generated from that lease will be insufficient to fund all of our continuing business activities as currently conducted. In addition, the oxide plant lease may terminate sooner or produce less revenue than we anticipate. There is no assurance that we will develop additional sources of revenue.

        In addition, the potential profitability of mining and processing at any of our properties would be based on a number of assumptions. For example, profitability would depend on metal prices, costs of materials and supplies, costs at the mines and processing plants and the amounts and timing of expenditures, including expenditures to maintain our Velardeña Properties, our El Quevar project and to continue exploration at other exploration properties, and potential strategic acquisitions or other transactions, in addition to other factors, many of which are and will be beyond our control. We cannot be certain we will be able to generate sufficient revenue from any source to achieve profitability and eliminate operating cash flow deficits, or to cease to require additional funding.

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We may require additional external financing to fund our continuing business activities in the future.

As of December 31, 2016, we had approximately $2.6 million in cash and cash equivalents. With anticipated costs during 2017, including costs related to shut down and care and maintenance costs at the Velardeña Properties, exploration expenditures, property holding costs at the El Quevar project, and general and administrative expenses, offset by anticipated revenue from the lease of the oxide plant and the sale of non-strategic exploration properties, we expect our current cash and cash equivalent balance to be depleted to approximately $1.5 million by the end of 2017. Even with the anticipated revenue from the Velardeña oxide lease and potential sale of non-strategic exploration properties throughout 2017, our cash balance in 2017 might not be sufficient to provide adequate cash reserves in the event of variations from anticipated care and maintenance costs at the Velardeña Properties and costs for continued exploration, project assessment, and development at our other exploration properties, including Santa Maria and Rodeo, requiring us to seek additional funding from equity or debt or from monetization of non-core assets.

        Other than our ATM Program (discussed in more detail below) for which the amount of funds raised thereby is uncertain, we do not have a credit, off-take or other commercial financing arrangement in place that would finance our general and administrative costs and other working capital needs to fund our continuing business activities in the future, and we believe that securing credit for these purposes may be difficult given our limited history and the continuing volatility in global credit and commodity markets. In addition, commercial financing arrangements may not be available on favorable terms or on terms that would not further restrict our flexibility and ongoing ability to meet our cash requirements over a reasonable period of time. Access to public financing has been negatively impacted by the volatility in the credit markets and metals prices, which may affect our ability to obtain equity or debt financing in the future and, if obtained, to do so on favorable terms. We also may not be able to obtain funding by monetizing additional non-core exploration or other assets at an acceptable price. We cannot assure you that we will be able to obtain financing to fund our general and administrative costs and other working capital needs to fund our continuing business activities in the future on favorable terms or at all.

Hecla may terminate the oxide plant lease.

In July 2015 we entered into a leasing agreement with a wholly-owned subsidiary of Hecla Mining Company to lease our Velardeña oxide plant for an initial term of 18 months beginning July 1, 2015. During the third quarter 2016 Hecla exercised its right to extend the initial 18-month lease for six additional months until June 30, 2017 and has the right to extend the lease for an additional 18 months following June 30, 2017, or until December 31, 2018.  Hecla is responsible for ongoing operation and maintenance of the oxide plant and during the year ended December 31, 2016, Hecla’s mining and processing activities resulted in a net margin of $4.4 million for the Company.  Although we intend the oxide plant lease to extend through December 2018, the lease may terminate sooner than we anticipate if Hecla experiences mining problems or delays at its nearby mine, if there are disputes between Hecla and us, or for other reasons. Moreover, the lease payment from Hecla is based, in part, on the amount of ore processed at the plant, and we have no control over their production.  There is also no assurance that Hecla will exercise its right to extend the lease for an additional 18 months through December 31, 2018.

The issuance of a significant number of shares of common stock upon the conversion of approximately $5.1 million of the principal and accrued interest under the Sentient Note resulted in Sentient’s ownership increasing from approximately 27% to approximately 46% of the Company’s outstanding common stock which resulted in greater control of the Company.

        On October 27, 2015, the Company borrowed $5.0 million from Sentient, the Company's largest stockholder pursuant to the terms of a Senior Secured Convertible Note (the "Sentient Note") and a related loan agreement, with principal and accrued interest due on October 27, 2016. On February 11, 2016, Sentient converted approximately $3.9 million of principal and $0.1 million of accrued interest (representing the total amount of accrued interest at the

34


 

conversion date) pursuant to the Sentient Note into 23,355,000 shares of the Company's common stock at an exercise price of approximately $0.172 per share, reflecting 90% of the 15-day volume weighted average price ("VWAP") immediately preceding the conversion date (the "February Conversion"). On June 10, 2016, Sentient converted the remaining approximately $1.1 million of principal and approximately $34,000 of accrued interest (representing the total amount of accrued interest at the conversion date) pursuant to the Sentient Note into 4,011,740 shares of the Company's common stock at an exercise price of approximately $0.289 per share, equal to 90% of the 15-day VWAP immediately preceding the loan's original issue date (the "June Conversion" and together with the February Conversion, the "Conversions").

        As a result of the Conversions, Sentient's ownership increased from approximately 27% to approximately 46% of the Company's outstanding common stock. With this increased ownership, Sentient could exert significant control over the Company, including over the election of directors, changes in the size or the composition of the board of directors, and mergers and other business combinations involving the Company. Through greater control of the board of directors and increased voting power, including the potential to prevent a quorum at stockholders meetings, Sentient could control certain decisions, including decisions regarding qualification and appointment of officers, operations of the business including acquisition or disposition of our assets or purchases and sales of mining or exploration properties, dividend policy, and access to capital (including borrowing from third-party lenders and the issuance of equity or debt securities).Sentient’s large share ownership will also make it difficult, if not impossible, for the Company to enter into a change of control transaction that may otherwise be beneficial for the Company’s other shareholders.

If we commence mining in Mexico, we will likely enter into a collective bargaining agreement with a union that, together with labor and employment regulations, could adversely affect our mining activities and financial condition.

        As was the case at our Velardeña Properties, mine employees in Mexico are typically represented by a union, and our relationship with our employees was, and we expect in the future will be, governed by collective bargaining agreements. Any collective bargaining agreement that we enter into with a union is likely to restrict our mining flexibility in and impose additional costs on our mining activities. In addition, relations between us and our employees in Mexico may be affected by changes in regulations or labor union requirements regarding labor relations that may be introduced by the Mexican authorities or by labor unions. Changes in legislation or in the relationship between us and our employees may have a material adverse effect on our mining activities and financial condition.

We may not mine the Velardeña Properties again.

 

In mid-November 2015, we shut down the mines and sulfide processing plant at our Velardeña Properties and placed them on care and maintenance.  Commencing mining again is subject to numerous risks and uncertainties, including:

 

whether we are able to create mine plans or gold recovery improvements that can achieve sustainable cash positive results at current and future metals prices;

 

unexpected events, including difficulties in maintaining the properties on a care and maintenance basis, potential sabotage or damage to the assets related to the suspension of mining, and variations in ore grade and relative amounts, grades and metallurgical characteristics of oxide and sulfide ores;

 

continued decreases or insufficient increases in gold and silver prices to permit us to achieve sustainable cash positive results;

 

actual holding and care and maintenance costs resulting from the shutdown exceeding current estimates or including unanticipated costs;

 

loss of and inability to adequately replace skilled mining and management personnel;

 

35


 

strikes or other labor problems; and

 

our ability to obtain additional funding for general and administrative costs and other working capital needs to fund our continuing business activities as currently conducted and possibly for a potential restart of our Velardeña Properties.

 

Based on these risks and uncertainties, there can be no assurance that we will restart mining activities at the Velardeña Properties.

 

Our ability to successfully conduct mining and processing activities resulting in long-term cash flow and profitability will be affected by changes in prices of silver, gold and other metals.

 

Our ability to successfully conduct mining and processing activities in Mexico, Argentina or other countries, to establish reserves and advance our exploration properties, and to become profitable in the future, as well as our long-term viability, depend, in large part, on the market prices of silver, gold, zinc,  copper and other metals. The market prices for these metals are volatile and are affected by numerous factors beyond our control, including:

 

global or regional consumption patterns;

 

supply of, and demand for, silver, gold, zinc, lead, copper and other metals;

 

speculative activities and hedging activities;

 

expectations for inflation;

 

political and economic conditions; and

 

supply of, and demand for, consumables required for extraction and processing of metals.

 

The declines in silver and gold prices in 2013, 2014 and 2015 have had a significant impact on our mining activities, resulting in shutdowns in 2013 and 2015 of mining at our Velardeña Properties, and negatively affect mining opportunities at our other properties. Additionally, future weakness in the global economy could increase volatility in metals prices or depress metals prices, which could also affect our mining and processing plans at our Velardeña Properties or make it uneconomic for us to engage in mining or exploration activities. Volatility or sustained price declines may also adversely affect our ability to build or continue our business.

 

If products are processed from our Velardeña Properties or other mines in the future, they could contain higher than expected contaminants, thereby negatively impacting our financial condition.

 

In 2015 we processed mined material to make gold and silver bearing lead, zinc and pyrite concentrates. Concentrate treatment charges paid to smelters and refineries include penalties for certain elements, including arsenic and antimony that exceed contract limits. In the future, if we process material from our Velardeña Properties or other mines, any such concentrates could include higher than expected contaminants, which would result in higher treatment expenses and penalty charges that could increase our costs and negatively impact our business, financial condition and results of operations. This could occur due to unexpected variations in the occurrence of these elements in the material mined, problems that occur during blending of material from various locations in the mine prior to processing and other unanticipated events.

 

36


 

The Velardeña Properties, the El Quevar project and our other properties may not contain mineral reserves.

 

We are considered an exploration stage company under SEC Industry Guide 7, and none of the properties at our Velardeña Properties, the El Quevar project, or any of our other properties have been shown to contain proven or probable mineral reserves. Expenditures made in mining at the Velardeña Properties or the exploration and advancement of our El Quevar project or other properties may not result in positive cash flow or in discoveries of commercially recoverable quantities of ore. Most exploration projects do not result in the discovery of commercially mineable ore deposits, and we cannot assure you that any mineral deposit we identify will qualify as an orebody that can be legally and economically exploited or that any particular level of recovery from discovered mineralization will in fact be realized.

 

Tetra Tech completed a technical report on our Velardeña Properties, which indicated the presence of mineralized material, and RungePincockMinarco completed a technical report on our El Quevar property, which indicated the presence of mineralized material. Mineralized material figures based on estimates made by geologists are inherently imprecise and depend on geological interpretation and statistical inferences drawn from drilling and sampling that may prove to be unreliable or inaccurate. We cannot assure you that these estimates are accurate or that proven and probable mineral reserves will be identified at the Velardeña Properties, El Quevar or any of our other properties. Even if the presence of reserves is established at a project, the economic viability of the project may not justify exploitation. We have spent significant amounts on the evaluation of El Quevar prior to establishing the economic viability of that project.

 

Estimates of reserves, mineral deposits and mining costs also can be affected by factors such as governmental regulations and requirements, fluctuations in metals prices or costs of essential materials or supplies, environmental factors, unforeseen technical difficulties and unusual or unexpected geological formations. In addition, the grades of ore or material ultimately mined may differ from that indicated by drilling results, sampling, feasibility studies or technical reports. Short-term factors relating to reserves, such as the need for orderly development of ore bodies or the processing of new or different grades, may also have an adverse effect on mining and on the results of operations. Silver, gold or other minerals recovered in small-scale laboratory tests may not be duplicated in large-scale tests under on-site processing conditions.

 

The Velardeña Properties, the El Quevar project and our other properties are subject to foreign environmental laws and regulations which could materially adversely affect our business.

 

We have conducted mining activities in Mexico and conduct mineral exploration activities primarily in Mexico. Mexico and Argentina, where our El Quevar project is located, have laws and regulations that control the exploration and mining of mineral properties and their effects on the environment, including air and water quality, mine reclamation, waste generation, handling and disposal, the protection of different species of flora and fauna and the preservation of lands. These laws and regulations require us to acquire permits and other authorizations for conducting certain activities. In many countries, there is relatively new comprehensive environmental legislation, and the permitting and authorization process may not be established or predictable. We may not be able to