S-1/A 1 d203663ds1a.htm AMENDMENT NO.2 TO FORM S-1 Amendment No.2 to Form S-1
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As filed with the Securities and Exchange Commission on September 12, 2011

Registration No. 333-175389

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

SUNSHINE SILVER MINES CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

  1040   27-2654848
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

370 17th Street, Suite 3800

Denver, CO 80202

(303) 784-5350

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Stephen Orr

Executive Chairman and Chief Executive Officer

Sunshine Silver Mines Corporation

370 17th Street, Suite 3800

Denver, CO 80202

(303) 784-5350

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

Richard D. Truesdell, Jr., Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

  

Michael J. Zeidel, Esq.

Riccardo Leofanti, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, NY 10036

(212) 735-3000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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  ¨

  Accelerated filer  ¨

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

  Smaller reporting company  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title Of Each Class

Of Securities To Be Registered

  Proposed Maximum Aggregate
Offering Price(1)(2)
  Amount Of
Registration Fee

Common Stock, par value $0.001 per share

  $250,000,000   $29,025(3)

 

 

(1) Includes offering price of shares of common stock which the underwriters have the right to purchase pursuant to their over-allotment option.
(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(3) Previously paid

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information contained in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 12, 2011

PROSPECTUS

LOGO

            SHARES

SUNSHINE SILVER MINES CORPORATION

COMMON STOCK

 

 

We are selling             shares of common stock to the underwriters in a firm commitment offering.

Prior to this offering, there has been no public market for our common stock. We currently estimate that the initial public offering price will be between $             and $             per share. We intend to apply to list our common stock on the New York Stock Exchange under the symbol “AGS.” We have applied to list our common stock on the Toronto Stock Exchange under the symbol “SM.”

The underwriters have an option to purchase a maximum of             additional shares from us to cover over-allotments. The underwriters can exercise this right at any time within 30 days from the date of this prospectus.

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 13 of this prospectus.

 

     Per Share      Total  

Public Offering Price

   $                    $                

Underwriting Discounts and Commissions

   $                    $                

Proceeds, before expenses, to Sunshine Silver Mines Corporation

   $                    $                

Delivery of the shares of common stock will be made on or about                     , 2011.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

UBS Investment Bank    Morgan Stanley   RBC Capital Markets

The date of this prospectus is                     , 2011.


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SUNSHINE SILVER MINES CORPORATION PRINCIPAL PROJECTS

Sunshine Mine Property

Silver Valley

Idaho, U.S.A.

LOGO

Los Gatos Project

Chihuahua, Mexico

LOGO


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements

     28   

Use of Proceeds

     30   

Dividend Policy

     30   

Capitalization

     31   

Dilution

     32   

Selected Consolidated Financial Data

     34   

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

     36   

Silver Industry Overview

     49   

Business

     54   

Management

     77   

Compensation Discussion and Analysis

     82   

Certain Relationships and Related Party Transactions

     95   

Principal Stockholders

     99   

Description of Capital Stock

     101   

U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock

     104   

Canadian Federal Income Tax Consequences for Non-U.S. Holders

     106   

Shares Eligible for Future Sale

     109   

Underwriting

     111   

Legal Matters

     118   

Experts

     118   

Change in Independent Registered Public Accounting Firm

     118   

Where You Can Find More Information

     119   

Glossary of Technical Terms

     120   

Index to Consolidated Financial Statements

     F-1   

 

 

In this prospectus, “Sunshine Silver,” the “Company,” “we,” “us” and “our” refer to Sunshine Silver Mines Corporation and its subsidiaries. We and the underwriters have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.

MARKET AND INDUSTRY DATA AND FORECASTS

This prospectus includes market and industry data and forecasts that we have developed from independent research reports, publicly available information, various industry publications, other published industry sources or our internal data and estimates. Independent research reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Although we believe that the publications and reports are reliable, neither we nor the underwriters have independently verified the data. Our internal data, estimates and forecasts are based on information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Although we believe that such information is reliable, we have not had such information verified by any independent sources.

 

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CONCURRENT CANADIAN PROSPECTUS OFFERING

On July 8, 2011, we filed a prospectus with the securities regulatory authorities in each province of Canada other than the Province of Québec in connection with our initial public offering in Canada and our application to list our shares of common stock on the Toronto Stock Exchange. As part of the filing process, we were required to prepare and file with Canadian securities regulators a technical report on each of our material properties prepared in accordance with National Instrument 43-101, or NI 43-101, which is an instrument developed by the Canadian Securities Administrators and administered by the provincial securities commissions that governs how issuers in Canada disclose scientific and technical information about their mineral projects to the public. United States reporting requirements for disclosure of mineral properties are governed by Industry Guide 7 promulgated by the U.S. Securities and Exchange Commission, or the SEC. NI 43-101 and Industry Guide 7 standards are substantially different. This prospectus has been prepared in accordance with Industry Guide 7 and not NI 43-101. The NI 43-101 technical reports include the terms “mineral resource,” “measured mineral resource,” “indicated mineral resource,” and “inferred mineral resource,” which are not terms recognized by the SEC for purposes of disclosure regarding mineral properties and, pursuant to the requirements of Industry Guide 7, may not be used in reports or registration statements filed with the SEC. Persons in the United States considering an investment in our common stock are cautioned not to place any reliance on the information regarding our mineral properties presented in our technical reports filed in Canada or the prospectus filed with Canadian securities regulatory authorities and should rely solely on the information presented in this prospectus for purposes of evaluating an investment in us.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before deciding to invest in our common stock. You should read this entire prospectus carefully, including the “Risk Factors” section and the consolidated financial statements and the notes to those statements. As used herein, references to “$” or “dollars” are to United States dollars.

SUNSHINE SILVER MINES CORPORATION

The Company

Sunshine Silver Mines Corporation is a U.S.-based precious metals exploration and development company with the objective of becoming a premier silver producer. The Company is currently focused on the advancement of its two principal projects: (i) the Sunshine Mine in Idaho, one of the highest-grade known remaining primary-silver discoveries worldwide, which is estimated to have produced a total of over 365 million ounces of silver, and (ii) the Los Gatos Project in Chihuahua, Mexico, where the Company holds a 81,703 hectare land position, constituting a new mining region. The Company has completed independent technical studies on both projects, which were prepared in accordance with NI 43-101 and, in the case of the Sunshine Mine, which has mineralized material, the requirements of Industry Guide 7. In total, as of the date of this prospectus, the Company owns or controls a portfolio of 23 exploration properties in the United States and Mexico covering an area of approximately 450,018 hectares.

Principal Projects

LOGO

Sunshine Mine

The Sunshine Mine, acquired by the Company in the first half of 2010, is located within the Coeur d’Alene Mining District in Idaho. It is a past-producing mine, which is estimated to have produced a total of over 365 million ounces of silver from 1904 to 2008. In 1990, the last year the Sunshine Mine operated at full

 

 

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capacity, silver production from the Sunshine Mine was approximately 5.4 million ounces. In 2008, Sterling Mining Company, or Sterling, the prior owner of the Sunshine Mine, ceased production and in early 2009 went into bankruptcy due to, we believe, among other factors, falling silver prices and inadequate capital.

The Sunshine Mine has significant existing on-site infrastructure, including a primary shaft, which is operational and being upgraded and refurbished, and a secondary shaft, which is being refurbished. The Company’s consolidated land position at the Sunshine Mine property currently consists of approximately 2,408 hectares. The property has an abundant water supply, is connected to the electricity grid and is accessible by paved roads.

The underground workings at the Sunshine Mine consist of multiple levels developed off the primary shaft, extending from the surface to a depth of over 1,825 meters. The Company estimates that the Sunshine Mine contains more than 160 kilometers of underground workings.

LOGO

Though a significant historical producing mine, the Company believes that the Sunshine Mine property remains highly prospective. As a result, the Company is undertaking significant exploration and re-development of the property. An independent technical report prepared by Behre Dolbear & Company from July 2011 estimated 1,991,169 tons of mineralized material at an average silver grade of 21.2 ounces per ton at the Sunshine Mine property. Sunshine Silver’s objectives are to: (i) increase the confidence of this mineralized material into the proven and probable reserve categories; (ii) define additional mineralized material through extensive surface and underground exploration; (iii) complete a pre-feasibility study within 24 months from the consummation of the offering to determine the costs to re-commission and operate the Sunshine Mine as a sustainable and efficient silver producer; and (iv) upgrade existing infrastructure and re-establish access to developed portions of the resource. The Sunshine Mine property will require significant time and capital before the property returns to production. The Company anticipates that it will continue to incur operating costs without realizing any revenues at the Sunshine Mine for the foreseeable future. See “Business—The Sunshine Mine Property” beginning on page 59.

 

 

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Los Gatos Project

The Los Gatos Project is located approximately 128 kilometers south of the state capital of Chihuahua City, in Northern Mexico and consists of two identified silver discoveries, the Cerro Los Gatos zone and the Esther zone, and 14 other priority targets with over 100 kilometers of outcropping quartz and calcite veins. The area is characterized by a predominant silver-lead-zinc mineralization.

Prior to Sunshine Silver’s initial acquisition of exploration concession rights in 2006, only very limited historical prospecting and exploration activities had been conducted at the Los Gatos Project. The Company was able to acquire concessions covering approximately 81,703 hectares and, through its exploration, has identified a virgin silver region containing high-grade vein style mineralization throughout its Los Gatos concession package.

In 2008, the Company negotiated surface access rights with local ranch owners and obtained environmental permits for drilling. Environmental baseline data collection began in May 2010 to prepare for the development of future environmental studies required for the Los Gatos Project. The present field camp is located in a community of approximately 200 persons, with electrical and water services, an elementary school and basic health services.

To date, Sunshine Silver’s primary areas of focus have been defining and extending mineralization along the Cerro Los Gatos and Esther zones that currently extend more than 2,500 meters along strike and remain open at depth and to the southeast. Through November 2010, Sunshine Silver had completed 154 drill holes in the Cerro Los Gatos and Esther zones, totaling 69,745 meters. The Los Gatos Project has a known strike distance of over 100 kilometers, of which only 15 kilometers has been explored by drilling. In addition to the Cerro Los Gatos and Esther zones, the Los Gatos Project has 14 other priority targets.

The Company’s objectives at the Los Gatos Project are to: (i) increase the drilling rate by increasing the number of exploration drills from four to seven; (ii) conduct social, environmental and technical work on the property with the objective of completing a pre-feasibility study on the Cerro Los Gatos and Esther zones within 24 months from the consummation of the offering; and (iii) acquire additional prospective mineral and surface rights. The Los Gatos Project will require significant time and capital before the Project is brought into production. The Company anticipates that it will continue to incur operating costs without realizing any revenues at the Los Gatos Project for the foreseeable future. See “Business—The Los Gatos Project” beginning on page 66.

Silver Industry Overview

Silver occurs naturally in its solid metallic state and is commonly associated with deposits of gold, copper, lead and zinc. According to GFMS Limited, or GFMS, 2010 global supply and demand totaled approximately 1.1 billion ounces of silver; approximately 70% of 2010 global supply came from mine production.

Silver has strong supply and demand fundamentals with significant demand rooted in diverse sectors. The demand for silver is driven primarily by three uses: industrial, consumer and investment. According to GFMS, in 2010, industrial, consumer and investment represented 46.1%, 37.0% and 16.8% of silver demand, respectively.

Industrial—Silver has a number of properties that make it an essential component in several industrial applications, including its strength, malleability and ductility, its electrical and thermal conductivity, its sensitivity to and high reflectance of light, and its ability to endure extreme temperature ranges. These properties restrict its substitution in most applications. In addition to traditional industrial uses, such as batteries, bearings, catalysts and electronics, increases in emerging applications for silver are expected to continue to augment industrial demand. Emerging applications include utilizing silver’s reflectivity as a component in solar cells to produce “green” electricity, and utilizing silver’s antimicrobial properties in medical applications and in the prevention of algae build-up in water purification systems.

 

 

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Consumer—Consumer use of silver is primarily for the fabrication of jewelry, silverware and coins, which rely on silver’s lustre, resistance to tarnishing and malleability. For these uses silver is often alloyed to a small proportion of other metals, such as copper, to harden it. Sterling silver, for example, is 92.5% silver and 7.5% copper and has been the standard in many countries for silver jewelry since the 14th century.

Investment—Investment demand for silver has increased significantly in the last 10 years, with the most significant investment demand coming from silver exchange traded funds, or ETFs, and bullion funds. Historically, the price of silver has shown at times a high correlation to the price of gold as a result of investment demand, and has been at times viewed as an attractive hedge against a decrease in the value of the U.S. dollar and inflation, attracting investors during times of uncertainty.

Business Strengths and Competitive Advantages

Attractive Assets in Two of the World’s Premier Silver Regions

Sunshine Silver’s principal assets are located in two of the world’s premier silver regions. The Sunshine Mine property is located in the Coeur d’Alene Mining District in Idaho, which district is estimated to have produced over one billion ounces of silver over the Mine’s 107-year history, and the Los Gatos Project is located in the Mexican Silver Belt, the world’s largest silver producing region in 2010. In addition to being located in premier silver regions, both assets possess characteristics that differentiate them from other silver projects:

Sunshine Mine Property

 

   

A prolific past-producing mine, once one of the largest silver producers in the United States, which is estimated to have produced a total of over 365 million ounces of silver

 

   

One of the highest-grade known remaining primary-silver discoveries worldwide, estimated to contain 1,991,169 tons of mineralized material at an average silver grade of 21.2 ounces per ton

 

   

Consolidated land position of approximately 2,408 hectares

 

   

Significant existing infrastructure, including a primary shaft that is operational and being upgraded and refurbished, and a secondary shaft that is being refurbished and access to roads, power and water

 

   

Strong community support coupled with an experienced and skilled workforce

Los Gatos Project

 

   

Control over an emerging silver region; land position of 81,703 hectares

 

   

The identified Cerro Los Gatos and Esther zones, high-grade mineralization occurrences that currently extend more than 2,500 meters along strike, remain open at depth and to the southeast

 

   

Widespread mineralization beyond the Cerro Los Gatos and Esther zones, with 14 other priority targets

Reduced Operating Risks at Sunshine Mine Given Historical Production

Sunshine Silver believes that the significant historical production at the Sunshine Mine, combined with the recent and planned mine improvements, reduces the risk of the project relative to other silver development projects. However, significant time and capital will be required before the Sunshine Mine returns to production and the Company anticipates that it will continue to incur operating costs without realizing any revenues at the Sunshine Mine for the foreseeable future, including costs related to intensive underground exploration, rehabilitation and refurbishment of mine and processing infrastructure, and further dewatering of underground workings which are currently dewatered to a depth of approximately 1,125 meters.

 

 

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The Sunshine Mine covers 171 hectares of surface rights, and the Company estimates that the Mine contains more than 160 kilometers of underground workings. The underground workings consist of multiple levels developed off the main production shaft, extending from the surface to a depth of over 1,825 meters, or more than 1,000 meters below sea level. The deepest level where Sunshine Silver has currently established mineralized material estimates is at a depth of over 1,645 meters.

Since acquiring the Sunshine Mine, the Company has acquired additional surface rights and improved the existing infrastructure, repaired surface facilities and equipment and completed a number of environmental, health and safety upgrades. The Company has added experienced and highly-trained professionals to lead such improvements.

Significant Exploration Potential for Additional Silver Resources

Sunshine Silver believes it has numerous opportunities to define additional mineral resources through continued exploration of its properties:

 

   

Sunshine Mine: Sunshine Silver has rights to approximately 2,408 hectares of exploration ground at the Sunshine Mine property. The property has numerous well-defined exploration targets, many of which are extensions of past-producing silver veins. In addition, Sunshine Silver has acquired additional surface rights to further consolidate its ownership of this mineralized trend. Despite being a prolific silver producing region, Sunshine Silver believes that the Coeur d’Alene Mining District is still highly under explored.

 

   

Los Gatos Project: Sunshine Silver expects to expand the Cerro Los Gatos and the Esther zones, which remain open to extensions. Sunshine Silver also has identified 14 other priority targets.

 

   

Other opportunities: Sunshine Silver owns 21 other exploration properties in Mexico, which could provide additional opportunities for resource growth.

Politically Stable and Mining-Friendly Jurisdictions

Both Idaho and Mexico are jurisdictions with a long history of successful mineral development and operations. Both are considered desirable jurisdictions in which to conduct mining operations due to stable political, tax and regulatory policies. Based on a survey published in March 2011 by the Fraser Institute, an independent research organization, Idaho and Mexico rank among the top silver mining jurisdictions worldwide in terms of the attractiveness of government policies, access to infrastructure and qualified labor availability.

Attractive Market Dynamics

Investment demand for silver exposure remains strong, driven in part by continued U.S. dollar weakness, ongoing economic uncertainty in Europe and political unrest in the Middle East. Historically, silver has been viewed as an effective hedge against a decrease in the value of the U.S. dollar and inflation, attracting investors during times of uncertainty. In addition, industrial demand for silver continues to increase, driven by new emerging applications for silver such as solar energy, medical applications and water purification, which the Company believes will enhance the strong supply and demand fundamentals of silver.

Despite this strong investment and industrial demand, the universe of primary silver companies is small, which limits investor options for silver exposure. Sunshine Silver represents an opportunity for investors to gain exposure to a primary silver company with two attractive assets.

 

 

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Experienced Management Team and Board

Sunshine Silver has an experienced and growing management team with a track record of successfully identifying and developing mineral discoveries. The Company’s Executive Chairman & Chief Executive Officer, Stephen Orr, has 34 years of experience in the minerals industry principally with Homestake Mining Company, where he ultimately served as President of Homestake Canada Inc.; Barrick Gold Corporation, where he was Managing Director of Australia & Africa operations; OceanaGold Limited, where he served as Chief Executive Officer; and Ventana Gold Corp., where he was President & Chief Executive Officer. The Company’s Chief Financial Officer, Roger Johnson, has 32 years of experience in financial management of the minerals industry with Coopers & Lybrand, as a public accountant; Kennecott Utah Copper Corporation, as Vice President, Controller; Pasminco Zinc, Inc., as Senior Vice President, Finance and Administration; and Newmont Mining Corporation, where he was Vice President, Chief Accounting Officer. The Company’s Chief Operating Officer, John Galassini, has 24 years of experience in the minerals industry with Phelps Dodge Corporation, where he ultimately served as Senior Vice President North America; Freeport McMoRan Copper & Gold, Inc., as Senior Vice President; and Kinross Gold Corporation, where he served as Regional Vice President North America.

The Board will be comprised of senior mining and financial executives who have broad domestic and international experience in mineral exploration, development and mining. The Company’s senior management and Board have in excess of 300 years of combined mining experience. Sunshine Silver believes the specialized skills and knowledge of the management team and the Board will significantly enhance Sunshine Silver’s ability to explore and develop the Sunshine Mine property and the Los Gatos Project and pursue other regional growth opportunities.

Shareholder Sponsorship

The Company and its predecessors were founded by the Electrum Groups of Companies, or Electrum. Electrum is a leading private equity investment firm engaged in mining exploration and development. Led by Dr. Thomas S. Kaplan, a highly-respected natural resources investor, Electrum brings together decades of combined investment and operating experience, proven execution abilities and capabilities, a broad and diverse background and a deep knowledge of the natural resources sector and mining disciplines. By maintaining a disciplined and professional approach to acquisition and value enhancement, Electrum has developed a strong track record and a multi-billion dollar asset base in the natural resource sector. Electrum holds significant stakes in public and private metals and mining companies, including NovaGold Resources Inc., Gabriel Resources Ltd., Taung Gold Limited, Tintina Resources Inc., Niocan Inc. and Sunward Resources Ltd. The Company believes that access to the specialized skills and knowledge within Electrum will significantly enhance Sunshine Silver’s ability to execute its business strategy. When we refer to “Electrum” in this prospectus, we are including, where appropriate, Electrum Silver Holdings LLC, Tigris Financial (International) L.P., Tigris Financial Group Ltd. and CGT Management Ltd., all of which are our stockholders.

In March 2011, Liberty Metals & Mining Holdings, LLC, or Liberty Metals & Mining, purchased 15% of the Company’s common stock. Liberty Metals & Mining, is a wholly-owned subsidiary of Boston-headquartered, Liberty Mutual Group. As of June 30, 2011, Liberty Mutual Group had more than $72 billion of total invested assets. As a subsidiary of Liberty Mutual Group, Liberty Metals & Mining makes investments in the metals and mining sector for Liberty Mutual Group.

Following completion of the offering, Electrum and Liberty Metals & Mining will beneficially own approximately     % and     % of the Company’s outstanding common stock, respectively, assuming the over-allotment option is not exercised by the underwriters.

 

 

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Business Strategy

Sunshine Silver’s business strategy is focused on creating value for stakeholders through the ownership and advancement of its two principal projects, the Sunshine Mine property and the Los Gatos Project, and through the pursuit of similarly attractive silver-focused projects. Sunshine Silver does not expect to enter into production or generate revenue at either the Sunshine Mine or the Los Gatos Project in the near future. The Company believes that the anticipated net proceeds from this offering and its existing cash and cash equivalents will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next              months. However, the Company may elect to seek additional funding prior to that time.

Sunshine Silver plans to:

Continue Exploration and Development at the Sunshine Mine property to Convert Existing Mineralized Material to Reserves and Expand the Resource Base

Sunshine Silver intends to complete a pre-feasibility study at the Sunshine Mine property to determine the costs to re-commission and operate the Sunshine Mine as a sustainable and efficient silver producer. Sunshine Silver expects this study will be completed within 24 months from the completion of this offering. In addition, the Company intends to continue with its surface and underground exploration drilling program to provide sufficient sampling to estimate grade, tonnage and location of additional potentially economic veins and deposits for future production and to upgrade mineralized material to reserves.

Re-Commission the Sunshine Mine to Long-Term Sustainable Production

Sunshine Silver intends to refurbish or replace existing infrastructure at the Sunshine Mine in connection with its modernization and rehabilitation efforts and to review process optimization alternatives. The re-commissioning of the Sunshine Mine will be designed to allow the Company to reach a safe and sustainable production rate utilizing its newly optimized facilities.

Accelerate Exploration at the Los Gatos Region and Advance the Los Gatos Project

The Company plans to accelerate its exploration program at the Los Gatos region through additional drilling with the intent of identifying mineralized material. In the near term, the Company also intends to progress the most advanced exploration sites, the Cerro Los Gatos and Esther zones, through to pre-feasibility study.

Conduct Further Exploration at Sunshine Silver’s Mexican Properties outside the Los Gatos Region and Apply for Additional Exploration Acreage

Sunshine Silver plans to expand its exploration programs at its Mexican properties outside the Los Gatos region and continue to grow its land position. The Company owns or controls a portfolio of 21 other exploration properties in Mexico covering an area of 362,298 hectares, with significant additional hectares under application for mineral concession. There are two projects underway with significant drill results, El Doctor in Oaxaca and Zaragoza in Chihuahua. Additional drilling is planned at both of these projects as well as additional targets through 2012. The Company is planning sufficient drilling in an effort to outline continuous geometry of mineralization at El Doctor and Zaragoza, which could lead to initial estimates of mineralized material.

Identify and Pursue Other Growth Opportunities that Add Value to Stockholders

Given the management and Board’s strong track record in exploration, development and asset integration, the Company may pursue acquisitions and joint ventures that are value accretive to its stockholders through the pursuit of similarly attractive silver-focused projects.

 

 

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Recent Developments

Philip Pyle, Vice President Exploration, who is a Qualified Person as set out in NI 43-101, has supervised the preparation of the technical information that forms the basis of the information contained in this section “—Recent Developments.”

Sunshine Mine Property

At the Sunshine Mine property, drilling from accessible underground workings has resulted in the discovery of a mineralized extension to the Sunshine Mine vein in a previously unexplored area. Results from drill hole ST2568 are as follows:

 

Hole

   From
(meters)
     To
(meters)
     Thickness
(meters)
     Ag (g/t)      Cu (%)      Pb (%)  

ST2568

     156.22         157.10         0.88         1062.2         0.42         0.08   

Additional drilling will now be focused on further delineation of the mineralization encountered in drill hole ST2568. See “Business—Recent Developments—Sunshine Mine Property” for additional results of recent drilling activity at the Sunshine Mine.

Los Gatos Project

Exploration drilling at the Los Gatos Project has recently detected a new trend of mineralization that has been named the Amapola zone. It is located 4.5 kilometers northwest of the Cerro Los Gatos zone. Results indicate a minimum of four separate mineralized quartz veins with high levels of silver at upper levels and silver, lead and zinc at deeper levels. Highlights from the drilling include holes AM22, AM25, AM33 and AM37:

 

Hole

   From
(meters)
     To
(meters)
     Thickness
(meters)
     Ag (g/t)      Pb (%)      Zn (%)  

AM22

     651         651.85         0.85         588.0         13.70         0.70   

AM25

     533         560         27.0         81.8         0.53         1.33   

Included in AM25

     542.5         544.3         1.8         709.0         4.91         11.90   

AM33

     396         400.15         4.15         183.6         0.01         0.17   

AM37

     396         420         24.0         77.3         0.02         0.04   

Continuous mineralization has been identified over a strike length of 600 meters in two of the four known veins and additional drilling is planned to verify the geometry of this mineralization.

See “Business—Recent Developments—Los Gatos Project—Amapola Zone Details” for additional results of recent drilling at the Amapola zone.

In other developments at the Los Gatos Project, a new zone of quartz veining has been identified in the southwestern portion of the Los Gatos claim block. This zone has been named Boca de Leon and has, to date, been detected over a strike length of 900 meters. The zone’s surface outcrops contain similar looking textures and mineralogy to the Cerro Los Gatos quartz vein mineralization. Surface sampling of the vein outcrops has generated values that range from 68 to 411 grams of silver per tonne. The Company expects that the Boca de Leon zone will become a priority area for future exploration drilling.

Corporate Information

Sunshine Silver Mines Corporation is incorporated in Delaware. Sunshine Silver’s principal executive office is located at 370 17th Street, Suite 3800, Denver, Colorado 80202. The Company’s telephone number is (303) 784-5350.

 

 

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THE OFFERING

 

Common stock offered in firm commitment offering

            shares

 

Common stock to be outstanding after this offering

            shares

 

Option to purchase additional shares of common stock

            shares

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $             million, or $             million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses. We intend to allocate $             million of the net proceeds of the offering towards our operations at the Sunshine Mine property, $             million towards our operations at the Los Gatos Project and $             million towards the exploration of our properties in Mexico outside of the Los Gatos Project. The remaining amount of the proceeds will be used for general corporate purposes as further described herein. See “Use of Proceeds” on page 30.

 

Voting rights

Holders of our common stock are entitled to one vote per share.

 

Dividend policy

We have never declared or paid any cash dividends on our capital stock. We do not intend to pay any dividends in the foreseeable future and currently intend to retain all future earnings to finance our business.

 

Directed Share Program

At our request, the underwriters have reserved for sale up to 5% of the common stock being offered by this prospectus for sale at the initial public offering price to our directors, officers, employees, consultants and existing stockholders and other persons having a relationship with us, such as suppliers, or having a relationship with our existing stockholders. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. See “Underwriting—Directed Share Program.”

 

Risk factors

See “Risk Factors” beginning on page 13 for a discussion of factors you should carefully consider before deciding whether to invest in our common stock.

 

Common stock listing

We intend to apply for listing of our common stock on the New York Stock Exchange under the symbol “AGS.” We have applied to list our common stock on the Toronto Stock Exchange under the symbol “SM.”

 

 

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The number of shares of our common stock that will be outstanding after this offering includes 58,810,113 shares of common stock outstanding as of June 30, 2011. Unless otherwise indicated, all information in this prospectus, including the number of shares that will be outstanding after this offering and other share-related information:

 

   

excludes 321,548 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2011 with a weighted average exercise price of $13.55 per share;

 

   

excludes an option to purchase 125,000 shares of common stock to be granted to our Executive Chairman and Chief Executive Officer and an option to purchase 16,000 shares of our common stock to be granted to each of our non-employee directors upon the consummation of this offering at a purchase price equal to the offering price. See “Compensation Discussion and Analysis—Grants of Plan-Based Awards” and “Compensation Discussion and Analysis—Director Compensation;”

 

   

excludes              additional shares of common stock reserved for future issuance under our stock option plans;

 

   

assumes no exercise of the underwriters’ option to purchase from us up to              additional shares to cover over-allotments; and

 

   

assumes a              for              stock split of our common stock to be effected prior to completion of this offering.

See “Description of Capital Stock” beginning on page 101.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

We prepared the summary consolidated financial data using our consolidated financial statements for each of the periods presented. The summary consolidated financial data for each fiscal year in the three-year period ended December 31, 2010 was derived from our audited consolidated financial statements appearing elsewhere in this prospectus.

The summary consolidated financial data for the six months ended June 30, 2010 and as of and for the six months ended June 30, 2011 was derived from our unaudited interim consolidated financial statements appearing elsewhere in this prospectus. In our opinion, such unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position. Results as of and for the six months ended June 30, 2011 are not necessarily indicative of results that may be expected for the entire year.

We were formed on February 2, 2011 when our predecessor, Precious Metals Opportunities LLC, converted to a Delaware corporation. On March 1, 2011, Los Gatos Ltd. merged with and into us. In accordance with U.S. generally accepted accounting principles, or U.S. GAAP, all financial results have been prepared as if the combination of the companies under common control (Precious Metals Opportunities LLC and Los Gatos Ltd.) had occurred prior to the earliest period presented. Accordingly, the financial results have been prepared on the following basis:

 

   

the 2008 and 2009 results of operations are derived solely from the activities of Los Gatos Ltd.;

 

   

the 2010 results of operations reflect the combined activities of Precious Metals Opportunities LLC and Los Gatos Ltd.; and

 

   

the 2011 results of operations reflect the combined activities of Precious Metals Opportunities LLC and Los Gatos Ltd. through February 28, 2011; subsequent to this date, the results of operations reflect the consolidated activities of Sunshine Silver.

As a result of our acquisition of the Sunshine Mine in May 2010, we believe that period-over-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as a good indicator of our future performance.

You should read this financial data in conjunction with our audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     Year ended December 31,     Six months ended June 30,  
     2010     2009     2008         2011             2010      
     (in thousands)  
                       (unaudited)  

Statements of Loss Data:

          

Expenses:

          

Exploration

   $ 14,653      $ 9,771      $ 2,718      $ 8,150      $ 6,938   

Care and maintenance

     2,534        —          —          2,543        404   

General and administrative

     5,490        818        415        7,055        2,742   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     22,677        10,589        3,133        17,748        10,084   

Net other expense

     1,891        597        24        298        755   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax benefit

     (24,568     (11,186     (3,157     (18,046     (10,839

Income tax benefit

     30        —          —          6        14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (24,538   $ (11,186   $ (3,157   $ (18,040   $ (10,825
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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     Year ended December 31,     Six months ended
June 30,
 
     2010     2009     2008     2011     2010  
     (in thousands)  
           (unaudited)   

Cash Flow Data:

          

Net cash used by operating activities

   $ (21,479   $ (10,876   $ (2,866   $ (15,777   $ (7,698

Net cash used by investing activities

   $ (30,856   $ (31   $ (4   $ (1,471   $ (29,193

Net cash provided by financing activities

   $ 54,592      $ 11,885      $ 3,250      $ 166,773      $ 37,924   

 

     June 30, 2011  
     Actual      As Adjusted(1)  
     (in thousands)  
     (unaudited)  

Balance Sheet Data:

     

Cash and cash equivalents

   $ 153,161       $                

Working capital

   $ 152,917       $     

Total assets

   $ 187,629       $     

Total indebtedness

     —           —     

Total shareholders’ equity

   $ 182,736       $     

 

(1) Assumes net proceeds to us from this offering of $             million. Assuming an initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, a $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) as adjusted cash and cash equivalents, working capital, total assets and total shareholders’ equity by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

You should carefully consider the following risk factors that may affect our business, future operating results and financial condition, as well as the other information set forth in this prospectus, before making a decision to invest in our common stock. If any of the following risks actually occurs, our business, financial condition or results of operations would likely be materially adversely affected. In such case, the trading price of our common stock would likely decline, and you may lose all or part of your investment. The risks below are not the only ones we face. Additional risks not currently known to us or that we currently deem immaterial may also adversely affect us.

Risks Related to Our Business

We are an exploration company that has no operating history on which to base an evaluation of our business and prospects and we cannot provide investors with any assurance that we will generate any operating revenues at our mineral properties or ever achieve profitable operations.

We were formed in December 2009 and have not yet generated any operating revenue. The Sunshine Mine has not been a producing mine since 2008, prior to its acquisition by us. We anticipate that we will continue to incur operating costs without realizing any revenues at the Sunshine Mine and the Los Gatos Project for the foreseeable future. We expect to continue to incur losses until such time as one or more of our mineral properties enters into commercial production and generates sufficient revenues to fund our continuing operations. If we are unable to generate significant revenues at the Sunshine Mine or the Los Gatos Project, we will not be able to earn profits or continue operations. We cannot provide investors with any assurance that we will be successful in resuming production at the Sunshine Mine, or that we will ever develop a mine at the Los Gatos Project.

We are dependent on our two principal projects for our future operating revenue, the Sunshine Mine property and the Los Gatos Project, neither of which currently has proven or probable reserves.

The Sunshine Mine property and the Los Gatos Project do not have identified proven and probable mineral reserves. The costs, timing and complexities of upgrading the mineralized material at the Sunshine Mine property to proven and probable reserves may be greater than we anticipate. Mineral exploration and development involves a high degree of risk that even a combination of careful evaluation, experience and knowledge cannot eliminate, and few properties that are explored are ultimately developed into producing mines. There is no assurance that our mineral exploration programs at either the Sunshine Mine property or the Los Gatos Project will establish the presence of any proven or probable mineral reserves. The failure to establish proven or probable reserves would severely restrict our ability to implement our strategies for long-term growth.

Mineralized material calculations at the Sunshine Mine are only estimates and are based principally on historic data.

Our calculation of the mineralized material at the Sunshine Mine is only an estimate and depends on geological interpretation and statistical inferences or assumptions drawn from drilling and sampling analysis, which might prove to be materially inaccurate. There is a degree of uncertainty attributable to the calculation of mineralized material. Until mineralized material is actually mined and processed, the quantity of metal and grades must be considered as estimates only and no assurance can be given that the indicated levels of metals will be produced. In making determinations about whether to advance any of our projects to development, we must rely upon estimated calculations for the mineralized material and grades of mineralization on our properties. Our current estimates at the Sunshine Mine are mainly based on historical drilling and on data compiled by a previous owner of the Sunshine Mine that cannot be completely verified due to water levels in the Mine, lack of access to the historically mined areas and the lack of quality assurance and quality control information on the historic assays.

The estimating of mineralized material is a subjective process that is partially dependent upon the judgment of the persons preparing the estimates. The process relies on the quantity and quality of available data and is based on knowledge, mining experience, statistical analysis of drilling results and industry practices. Valid estimates made at a given time may significantly change when new information becomes available.

 

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Estimated mineralized material may have to be recalculated based on changes in metal prices, further exploration or development activity or actual production experience. This could materially and adversely affect estimates of the volume or grade of mineralization, estimated recovery rates or other important factors that influence mineralized material estimates. The extent to which mineralized material may ultimately be reclassified as mineral reserves is dependent upon the demonstration of their profitable recovery. Any material changes in volume and grades of mineralization will affect the economic viability of placing a property into production and a property’s return on capital. We cannot provide assurance that mineralization can be mined or processed profitably.

Our mineralized material estimates have been determined and valued based on assumed future metal prices, cut-off grades and operating costs that may prove to be inaccurate. Extended declines in the market price for silver may render portions of our mineralization uneconomic and result in reduced reported volume and grades, which in turn could have a material adverse effect on our financial performance, financial position and results of operations.

Historical production at the Sunshine Mine may not be indicative of the potential for future development.

There is currently no commercial production at the Sunshine Mine and, since acquiring ownership, we have never recorded any revenues from commercial production at the Sunshine Mine. You should not rely on the fact that there were historical mining operations at the Sunshine Mine as an indication that we will ever have future successful commercial operations at the Sunshine Mine. In order for us to develop new mining operations at the Sunshine Mine, we will be required to incur substantial operating expenses and capital expenditures to refurbish and/or replace existing infrastructure.

We have not prepared a pre-feasibility study for the Sunshine Mine. We expect to produce a pre-feasibility study for the Sunshine Mine with a portion of the proceeds of the offering. Our evaluations of our business and prospects are subject to change after the study has been conducted, which could materially adversely effect our prospects. Additionally, the actual amount and timing of expenditures at the Sunshine Mine will depend on the progress of drilling, exploration and development, the results of consultants’ analyses and recommendations, the rate at which operating losses are incurred, the formation of any joint ventures with strategic partners, our acquisition of additional mineral properties, the market price of silver and other factors, many of which are beyond our control. Due to any of these or other factors, the capital costs required to take the Sunshine Mine into production may be significantly higher than anticipated.

Land reclamation and mine closure may be burdensome and costly.

Land reclamation and mine closure requirements are generally imposed on mineral exploration companies, such as ours, which require us, among other things, to minimize the effects of land disturbance. Such requirements may include controlling the discharge of potentially dangerous effluents from a site and restoring a site’s landscape to its pre-exploration form. The actual costs of reclamation and mine closure are uncertain and planned expenditures may differ from the actual expenditures required. Therefore, the amount that we are required to spend could be materially higher than current estimates. Any additional amounts required to be spent on reclamation and mine closure may have a material adverse effect on our financial performance, financial position and results of operations and may cause us to alter our operations. In addition, we are required to maintain financial assurances, such as letters of credit, to secure reclamation obligations under certain laws and regulations. The failure to acquire, maintain or renew such financial assurances could subject us to fines and penalties or suspension of our operations. Letters of credit or other forms of financial assurance represent only a portion of the total amount of money that will be spent on reclamation over the life of a mine’s operation. Although we include liabilities for estimated reclamation and mine closure costs in our financial statements, it may be necessary to spend more than what is projected to fund required reclamation and mine closure activities. Additionally, even if we cease exploration at the Sunshine Mine we will be required to expend cash and other resources to satisfy ongoing care and maintenance obligations at the Sunshine Mine, which obligations include controlling ground water, monitoring and sampling permitted facilities and ultimately reclaiming our tailings impoundment.

 

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We do not have sufficient funds to bring the Sunshine Mine into sustained commercial operation or to develop a mine at the Los Gatos Project, and we expect that we will require additional financing in the future.

We are an exploration company and do not currently have sufficient capital for sustained operations. We expect that the proceeds from this offering will be used to fund sufficient technical work to complete a pre-feasibility study at the Sunshine Mine property and to complete a pre-feasibility study on the Cerro Los Gatos and Esther zones at the Los Gatos Project. In addition, we may have sufficient funds to initiate production at the Sunshine Mine. However, we do not expect that the funds raised from this offering will be sufficient to bring the Sunshine Mine into sustained commercial operation or to develop a mine at the Los Gatos Project. We expect that we will require additional funds at a later date to bring the Sunshine Mine into sustained commercial operation and develop a mine at the Los Gatos Project. Our future financing needs may be substantial if we encounter unexpected costs or delays in re-commissioning the Sunshine Mine or developing a mine at the Los Gatos Project.

We expect to raise additional funds through equity, debt or a combination of equity and debt. Access to additional capital may not, however, be available on terms acceptable to us or at all. Failure to obtain sufficient financing may result in the delay or indefinite postponement of exploration, drilling, development or production at the Sunshine Mine or the Los Gatos Project. Furthermore, even if we raise sufficient additional capital, there can be no assurance that we will achieve profitability or positive cash flow. In addition, any future equity offering will further dilute your equity interest in us and any future debt financing will require us to dedicate a portion of our cash flow to payments on indebtedness and will limit our flexibility in planning for or reacting to changes in our business.

If the development of one or more of our mineral projects is found to be economically feasible, we will be subject to all of the risks associated with establishing new mining operations.

If the development of one of our mineral projects is found to be economically feasible, such development will require obtaining permits and financing, and the construction and operation of mines, processing plants and related infrastructure. As a result, we will be subject to all of the risks associated with establishing new mining operations, including:

 

   

the timing and cost, which can be considerable, of the construction of mining and processing facilities and related infrastructure;

 

   

the availability and cost of skilled labor, mining equipment and principal supplies needed for operations, including explosives, fuels, chemical reagents, water, power, equipment parts and lubricants;

 

   

the availability and cost of appropriate smelting and refining arrangements;

 

   

the need to obtain necessary environmental and other governmental approvals and permits and the timing of the receipt of those approvals and permits;

 

   

the availability of funds to finance construction and development activities;

 

   

industrial accidents;

 

   

mine failures, shaft failures or equipment failures;

 

   

natural phenomena such as inclement weather conditions, floods, droughts, rock slides and seismic activity;

 

   

unusual or unexpected geological and metallurgic conditions;

 

   

exchange rate and commodity price fluctuations;

 

   

high rates of inflation;

 

   

potential opposition from non-governmental organizations, environmental groups or local groups, which may delay or prevent development activities; and

 

   

restrictions or regulations imposed by governmental or regulatory authorities.

 

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The costs, timing and complexities of developing our projects may be greater than anticipated. Cost estimates may increase significantly as more detailed engineering work is completed on a project. It is common in mining operations to experience unexpected costs, problems and delays during construction, development and mine start-up. In addition, the cost of producing silver-bearing concentrates that are of acceptable quality to smelters may be significantly higher than expected. We may encounter higher than acceptable contaminants in our concentrates such as arsenic, antimony, mercury, copper, iron, selenium or other contaminants that, when present in high concentrations, can result in penalties or outright rejection of the metals concentrates by the smelters. Silver-bearing concentrates at our Sunshine Mine are known to contain relatively high percentages of arsenic and antimony. Accordingly, we cannot provide assurance that our activities will result in profitable mining operations at our mineral properties.

Our operations involve significant risks and hazards inherent to the mining industry.

Our operations involve the operation of large pieces of drilling and other heavy equipment. Hazards such as fire, explosion, floods, structural collapses, industrial accidents, unusual or unexpected geological conditions, ground control problems, cave-ins, flooding and mechanical equipment failure are inherent risks in our operations. These and other hazards can cause injuries or death to employees, contractors or other persons at our mineral properties, severe damage to and destruction of our property, plant and equipment and mineral properties, and contamination of, or damage to, the environment, and can result in the suspension of our exploration activities and any future development and production activities. Safety measures implemented by us may not be successful in preventing or mitigating future accidents.

In addition, from time to time we may be subject to governmental investigations and claims and litigation filed on behalf of persons who are harmed while at our properties or otherwise in connection with our operations. To the extent that we are subject to personal injury or other claims or lawsuits in the future, it may not be possible to predict the ultimate outcome of these claims and lawsuits due to the nature of personal injury litigation. Similarly, if we are subject to governmental investigations or proceedings, we may incur significant penalties and fines, and enforcement actions against us could result in the closing of certain of our mining operations. If claims and lawsuits or governmental investigations or proceedings are ultimately resolved against us, it could have a material adverse effect on our financial performance, financial position and results of operations. Also, if we mine on property without the appropriate licenses and approvals, we could incur liability or our operations could be suspended.

The mining industry is very competitive.

The mining industry is very competitive. Much of our competition is from larger, established mining companies with greater liquidity, greater access to credit and other financial resources, newer or more efficient equipment, lower cost structures, more effective risk management policies and procedures and/or a greater ability than us to withstand losses. Our competitors may be able to respond more quickly to new laws or regulations or emerging technologies, or devote greater resources to the expansion or efficiency of their operations than we can. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and gain significant market share to our detriment. We may not be able to compete successfully against current and future competitors, and any failure to do so could have a material adverse effect on our business, financial condition or results of operations.

The title to some of our mineral properties may be uncertain or defective, thus risking our investment in such properties.

Certain of our United States mineral rights consist of “patented” and “unpatented” mining claims created and maintained in accordance with the U.S. General Mining Law of 1872. Unpatented mining claims are unique U.S. property interests, and are generally considered to be subject to greater title risk than other real property interests because the validity of unpatented mining claims is often uncertain. This uncertainty arises, in part, out of the complex federal and state laws and regulations that supplement the General Mining Law. Also, unpatented

 

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mining claims and related rights, including rights to use the surface, are subject to possible challenges by third parties or contests by the federal government. The validity of an unpatented mining claim, in terms of both its location and its maintenance, is dependent on strict compliance with a complex body of federal and state statutory and decisional law. In addition, there are few public records that definitively control the issues of validity and ownership of unpatented mining claims.

The Sunshine Mine property is part of a historic mining district that was established prior to 1900. The history of ownership of the properties comprising the Sunshine Mine property is complex and involves numerous individuals and entities. In addition, title to many of the mineralized ore veins at the Sunshine Mine property is based on ownership of the patented claims within which those ore veins have their apex, as under the General Mining Law the owner of a mining claim within which a mineralized vein has its apex owns the so-called “extralateral rights” to that vein as it may extend downward outside the vertical boundaries of the claim. As the vein extends downward, however, its actual location becomes less and less certain. As a result, ownership of these mineralized veins often becomes more a question of geology than of public records. Over the years, because of the age of the district and the existence of extralateral rights that render title to the actual minerals beneath any particular claim more uncertain, our predecessors and adjoining landowners entered into several agreements establishing boundary lines between claims, dividing ownership of portions of claims, agreeing to the sharing of ore produced from mineralized veins within claims, and agreeing to joint exploration and development activities on certain claims. There can be no assurance that our predecessors successfully consolidated the properties at the Sunshine Mine property so that third parties will not make claims to our properties or a share of some portion of any mineral production in the future or that we have identified every agreement establishing our property rights.

With respect to several of the patented mining claims at the Sunshine Mine property, we own the mineral estate but not the surface estate. Although we expect we would continue the development of the Sunshine Mine as an underground mine, which would not require us to make use of the surface of those patented claims where we do not own the surface estate, as we develop our mine plan for the Sunshine Mine and as that plan changes over time, there can be no assurance that we will not need to use the surface of portions of those claims. If that need arises there can be no assurance that the owners of the surface estate of any of those claims will recognize our common law rights or be willing to enter into agreements with us to allow for such surface use.

Additionally, our mineral properties in Mexico may be subject to prior recorded and unrecorded agreements, transfers or claims, and title may be affected by, among other things, undetected defects. A title defect on any of our mineral properties (or any portion thereof) could adversely affect our ability to mine the property and/or process the minerals that we mine.

Title insurance is generally not available for mineral properties and our ability to ensure that we have obtained secure claim to individual mineral properties or mining concessions may be severely constrained. We rely on title information and/or representations and warranties provided by our grantors. Any challenge to our title could result in litigation, insurance claims and potential losses, delay the exploration and development of a property and ultimately result in the loss of some or all of our interest in the property. In addition, if we mine on property without the appropriate title, we could incur liability for such activities.

We do not intend to enter into hedging arrangements with respect to silver and our hedging activities, or our decision not to hedge, with respect to our expenses could expose us to losses.

We do not intend to enter into hedging arrangements with respect to silver. As such, we will not be protected from a decline in the price of silver. This strategy may have a material adverse effect upon our financial performance, financial position and results of operations.

We report our financial statements in U.S. dollars. A portion of our costs and expenses are incurred in Mexican pesos. As a result, any significant and sustained appreciation of the Mexican peso against the U.S. dollar may materially increase our costs and expenses. Additionally, we are, and will be, exposed to the

 

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potentially adverse effects of fluctuations in input costs, such as diesel fuel, and, if we borrow funds at a floating rate, interest rates. We may seek to enter into hedging arrangements to hedge some of our input costs, such as diesel fuel, and our currency exposure with respect to the portion of our costs and expenses incurred in Mexican pesos. In the future we may also seek to enter into interest rate hedge agreements in connection with future indebtedness we may incur that bears interest at a floating rate. We currently, however, have not entered into any such hedging arrangements, or made a decision to do so, and cannot assure you that we will be able to do so on acceptable terms, or at all. Even if we seek and are able to enter into hedging contracts, there is no assurance that such hedging program will be effective, and any hedging program would also prevent us from benefitting fully from applicable input cost or rate decreases. In addition, we may in the future experience losses if a counterparty fails to perform under a hedge arrangement.

Our insurance may not provide adequate coverage.

Our business and operations are subject to a number of risks and hazards including, but not limited to, adverse environmental conditions, industrial accidents, labor disputes, unusual or unexpected geological conditions, ground control problems, cave-ins, changes in the regulatory environment, metallurgical and other processing problems, mechanical equipment failure, facility performance problems, fires and natural phenomena such as inclement weather conditions, floods and earthquakes. These risks could result in damage to, or destruction of, our mineral properties or production facilities, personal injury or death, environmental damage, delays in exploration, mining or processing, increased production costs, asset write downs, monetary losses and legal liability.

Our property and liability insurance may not provide sufficient coverage for losses related to these or other hazards. Insurance against certain risks, including those related to environmental matters or other hazards resulting from exploration and production, is generally not available to us or to other companies within the mining industry. Our current insurance coverage may not continue to be available at economically feasible premiums, or at all. In addition, we do not carry business interruption insurance relating to our properties. Accordingly, delays in returning to any future production could produce near-term severe impact to our business. Any losses from these events may cause us to incur significant costs that could have a material adverse effect on our financial performance, financial position and results of operations.

If we are unable to retain key members of management, our business might be harmed.

Our exploration activities and any future mining and processing activities depend to a significant extent on the continued service and performance of our senior management team, including our Executive Chairman and Chief Executive Officer. We depend on a relatively small number of key officers, and we currently do not, and do not intend to, have key-person insurance for these individuals. Departures by members of our senior management could have a negative impact on our business, as we may not be able to find suitable personnel to replace departing management on a timely basis. The loss of any member of our senior management team could impair our ability to execute our business plan and could therefore have a material adverse effect on our business, results of operations and financial condition. In addition, the international mining industry is very active and we are facing increased competition for personnel in all disciplines and areas of operation. There is no assurance that we will be able to attract and retain personnel to sufficiently staff our development and operating teams.

High metal prices in recent years have encouraged increased mineral exploration, development and construction activity, which has increased demand for, and cost of, exploration, development and construction services and equipment.

High metal prices in recent years have encouraged increases in mineral exploration, development and construction activities, which has resulted in increased demand for, and cost of, exploration, development and construction services and equipment. There has also been a shortage of skilled workers in the mining industry in recent years particularly with respect to experienced mine construction and mine management personnel. As a

 

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result of this shortage, the wages that we are required to pay to our skilled workers have increased. In addition, employee turnover rates in the mining industry have increased as participants in the minerals industry compete for skilled personnel. Increased demand for services and equipment could result in delays if services or equipment cannot be obtained in a timely manner, and may cause scheduling difficulties due to the need to coordinate the availability of services or equipment, any of which could materially increase our project exploration and any future development and/or construction costs.

The price of silver is subject to change and a substantial or extended decline in the price of silver could materially and adversely affect our revenues and the value of our mineral properties.

Our business and financial performance will be significantly affected by fluctuations in the price of silver. The price of silver is volatile, can fluctuate substantially and is affected by numerous factors that are beyond our control. During the last ten years, the price of silver ranged from a low of $4.06 per ounce in November 2001 to a high of $48.44 per ounce in April 2011. While the price of silver has increased significantly in recent years, such price movement is not a predictor of the future price of silver, which may decrease significantly as silver prices are affected by numerous factors beyond our control, including:

 

   

prevailing interest rates and returns on other asset classes;

 

   

expectations regarding inflation, monetary policy and currency values;

 

   

speculation;

 

   

governmental and exchange decisions regarding the disposal of precious metals stockpiles, including the decision by the CME Group, the owner and operator of the futures exchange, to raise silver’s initial margin requirements on futures contracts;

 

   

political and economic conditions;

 

   

available supplies of silver from mine production, inventories and recycled metal;

 

   

sales by holders and producers of silver; and

 

   

demand for products containing silver.

Because we expect to derive the substantial majority of our revenues from sales of silver, our results of operations and cash flows will fluctuate as the price of silver increases or decreases. A sustained period of declining silver prices would materially and adversely affect our financial performance, financial position and results of operations.

We may fail to identify attractive acquisition candidates or joint ventures with strategic partners or may fail to successfully integrate acquired mineral properties or successfully manage joint ventures.

As part of our development strategy, we may acquire additional mineral properties or enter into joint ventures with strategic partners. However, there can be no assurance that we will be able to identify attractive acquisition or joint venture candidates in the future or that we will succeed at effectively managing their integration or operation. In particular, significant and increasing competition exists for mineral acquisition opportunities throughout the world. We face strong competition from other mining companies in connection with the acquisition of properties producing, or capable of producing, metals as well as in entering into joint ventures with other parties. If the expected synergies from such transactions do not materialize or if we fail to integrate them successfully into our existing business or operate them successfully with our joint venture partners, or if there are unexpected liabilities, our results of operations could be adversely affected.

In connection with any future acquisitions or joint ventures, we may incur indebtedness or issue equity securities, resulting in increased interest expense or dilution of the percentage ownership of existing stockholders. Unprofitable acquisitions or joint ventures, or additional indebtedness or issuances of securities in connection with such acquisitions or joint ventures, may adversely affect the price of our common stock and negatively affect our results of operations.

 

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We may be subject to claims and legal proceedings that could materially adversely impact our financial position, financial performance and results of operations.

We may be subject to claims or legal proceedings covering a wide range of matters that arise in the ordinary course of business activities. These matters may result in litigation or unfavorable resolution which could materially adversely impact our financial performance, financial position and results of operations. See “Business—Legal Proceedings.” In addition, the purchase agreements entered into in connection with our 2011 private placements to a series of investors, including Liberty Metals & Mining, contained customary indemnification provisions in favor of the investors.

Risks Related to Government Regulations and International Operations

The U.S. and Mexican governments, as well as state and local governments, extensively regulate mining operations, which imposes significant actual and potential costs on us, and future regulation could increase those costs or limit our ability to produce silver and other metals.

The mining industry is subject to increasingly strict regulation by federal, state and local authorities in the United States and Mexico, including in relation to:

 

   

limitations on land use;

 

   

mine permitting and licensing requirements;

 

   

reclamation and restoration of properties after mining is completed;

 

   

management of materials generated by mining operations; and

 

   

storage, treatment and disposal of wastes and hazardous materials.

The liabilities and requirements associated with the laws and regulations related to these and other matters, including with respect to air emissions, water discharges and other environmental matters, may be costly and time-consuming and may restrict, delay or prevent commencement or continuation of exploration or production operations. We cannot assure you that we have been or will be at all times in compliance with all applicable laws and regulations. Failure to comply with applicable laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of cleanup and site restoration costs and liens, the issuance of injunctions to limit or cease operations, the suspension or revocation of permits or authorizations and other enforcement measures that could have the effect of limiting or preventing production from our operations. We may incur material costs and liabilities resulting from claims for damages to property or injury to persons arising from our operations. If we are pursued for sanctions, costs and liabilities in respect of these matters, our mining operations and, as a result, our financial performance, financial position and results of operations, could be materially and adversely affected. See “Business—Environmental, Health and Safety Measures.”

Any new legislation or administrative regulations or new judicial interpretations or administrative enforcement of existing laws and regulations that would further regulate and tax the mining industry may also require us to change operations significantly or incur increased costs. Such changes could have a material adverse effect on our financial performance, financial position and results of operations.

In addition, the operation of our Sunshine Mine in the United States is subject to regulation by the Federal Mine Safety and Health Administration, or the MSHA, under the Federal Mine Safety and Health Act of 1977 and the Occupational Safety and Health Administration, or the OSHA, under the Occupational Safety and Health Act of 1970. MSHA and OSHA inspect the Sunshine Mine on a regular basis and issue various citations and orders when they believe a violation has occurred under the relevant statute. Subsequent to passage of the Mine Improvement and New Emergency Response Act of 2006, the number of violations cited by the MSHA has significantly increased, as have the dollar penalties associated with those citations.

 

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Our Mexican properties are subject to regulation by the Political Constitution of the Mexican United States, and are subject to various legislation in Mexico, including the Mining Law, the Federal Law of Waters, the Federal Labor Law, the Federal Law of Firearms and Explosives, the General Law on Ecological Balance and Environmental Protection and the Federal Law on Metrology Standards. Our operations at our Mexican properties also require us to obtain local authorizations and, through the Agrarian Law, to comply with the uses and customs of communities located within the properties. Mining, environmental and labor authorities may inspect our Mexican operations on a regular basis and issue various citations and orders when they believe a violation has occurred under the relevant statute.

If inspections in the United States or Mexico result in an alleged violation, we may be subject to fines, penalties or sanctions, our mining operations could be subject to temporary or extended closures, and we may be required to incur capital expenditures to re-commence our operations. Any of these actions could have a material adverse effect on our financial performance, financial position and results of operations.

Our Mexican operations are subject to additional political, economic and other uncertainties not generally associated with domestic operations.

We have a significant exploration project in Mexico, the Los Gatos Project, along with 21 other exploration properties in the country, and we are subject to significant risks inherent in exploration and resource extraction by foreign companies in Mexico. Exploration, development, production and closure activities in Mexico are potentially subject to heightened political, economic, regulatory and social risks that are beyond our control. These risks include:

 

   

the possible unilateral cancellation or forced re-negotiation of contracts;

 

   

unfavorable changes in laws and regulations;

 

   

royalty and tax increases;

 

   

claims by governmental entities or indigenous communities;

 

   

expropriation or nationalization of property;

 

   

political instability;

 

   

uncertainty regarding the enforceability of contractual rights and judgments; and

 

   

other risks arising out of foreign governmental sovereignty over areas in which our mineral properties are located.

Local economic conditions also can adversely affect the security of our operations and the availability of supplies. Higher incidences of criminal activity and violence in the area of some of our properties could adversely affect our ability to operate in an optimal fashion or at all. Recently, we declared a force majeure at our Niko concession, a Mexican property outside the Los Gatos region, due to ongoing gang violence, and we are considering cancelling the concession related to such project.

Additionally, the right to export silver-bearing concentrate and other metals may depend on obtaining certain licenses, which could be delayed or denied at the discretion of the relevant regulatory authorities, or meeting certain quotas. Any of these conditions could lead to lower productivity and higher costs, which would adversely affect our financial performance, financial position and results of operations.

Any of these developments could require us to curtail or terminate operations at our mineral properties in Mexico, incur significant costs to meet newly-imposed environmental or other standards, pay greater royalties or higher prices for labor or services and recognize higher taxes, which could materially and adversely affect our results of operations, cash flows and financial condition.

 

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We are required to obtain, maintain and renew environmental, construction and mining permits, which is often a costly and time-consuming process.

Mining companies, including ours, need many environmental, construction and mining permits, each of which can be time-consuming and costly to obtain, maintain and renew. In connection with our current and future operations, we must obtain and maintain a number of permits that impose strict conditions, requirements and obligations, including those relating to various environmental and health and safety matters. To obtain, maintain and renew certain permits, we have been and may in the future be required to conduct environmental studies, and make associated presentations to governmental authorities, pertaining to the potential impact of our current and future operations upon the environment and to take steps to avoid or mitigate those impacts. Permit terms and conditions can impose restrictions on how we conduct our operations and limit our flexibility in developing our mineral properties. Many of our permits are subject to renewal from time to time, and renewed permits may contain more restrictive conditions than our existing permits, including those governing impacts on the environment. For example, we may be required to upgrade our wastewater treatment system in connection with the renewal of our National Pollutant Discharge Elimination System, or NPDES, permit for the Sunshine Mine. In addition, we may be required to obtain new permits to expand our operations, and the grant of such permits may be subject to an expansive governmental review of our operations. Alternatively, we may not be successful in obtaining such permits, which could prevent us from commencing or expanding operations or otherwise adversely affect our business. Renewal of existing permits or obtaining new permits may be more difficult if we are not able to comply with our existing permits. Applications for permits, permit area expansions and permit renewals can also be subject to challenge by interested parties, which can delay or prevent receipt of needed permits. In addition, the permitting process can vary by jurisdiction in terms of its complexity and likely outcomes. The applicable laws and regulations, and the related judicial interpretations and enforcement policies, change frequently, which can make it difficult for us to obtain and renew permits and to comply with applicable requirements. Accordingly, permits required for our operations may not be issued, maintained or renewed in a timely fashion or at all, may be issued or renewed upon conditions that restrict our ability to conduct our operations economically, or may be subsequently revoked. Any such failure to obtain, maintain or renew permits, or other permitting delays or conditions, including in connection with any environmental impact analyses, could have a material adverse effect on our business, results of operations and financial condition.

In addition, in regards to the Los Gatos Project and other Mexican projects, Mexico has adopted laws and guidelines for environmental permitting that are similar to those in effect in the United States and South American countries. We are currently operating under permits regulating road construction and drilling at our El Doctor, Los Gatos, Mina Grande, Niko, Zacatlan and Zaragoza projects contingent upon paying annual fees and providing annual reports, which cover the work accomplished on the property, to the Mexican government. We are also preparing a larger scale permit at the Los Gatos Project which requires a detailed environmental assessment and impact study for the future possibility of establishing underground access for further exploration. There can be no certainty as to whether, or the terms under which, such permit will be granted. In addition, we will be required to apply for corresponding authorizations prior to any production at each of our Mexican properties and there can be no certainty as to whether, or the terms under which, such authorizations will be granted or renewed. Any failure to obtain authorizations and permits, or other authorization or permitting delays or conditions, could have a material adverse effect on our business, results of operations and financial condition.

We are subject to environmental laws, regulations and permits that may subject us to material costs, liabilities and obligations.

We are subject to environmental laws, regulations and permits in the various jurisdictions in which we operate, including those relating to, among other things, the removal and extraction of natural resources, the emission and discharge of materials into the environment, including greenhouse gas emissions, plant and wildlife protection, remediation of soil and groundwater contamination, reclamation and closure of properties, including tailings and waste impoundments, groundwater quality and availability, and the handling, storage, transport and disposal of wastes and hazardous materials. Pursuant to such requirements we may be subject to inspections or reviews by governmental authorities. Failure to comply with these environmental requirements may expose us to

 

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litigation, fines or other sanctions, including the revocation of permits and suspension of operations. We expect to continue to incur significant capital and other compliance costs related to such requirements. These laws, regulations and permits, and the enforcement and interpretation thereof, change frequently and generally have become more stringent over time.

We could be liable for any environmental contamination at or from our or our predecessors’ currently or formerly owned or operated properties or third-party waste disposal sites, including the Bunker Hill Superfund Site. Certain environmental laws impose joint and several strict liability for releases of hazardous substances at such properties or sites, without regard to fault or the legality of the original conduct. Accordingly, we may be held responsible for more than our share of the contamination or other damages, up to and including the entire amount of such damages. In addition to potentially significant investigation and remediation costs, such matters can give rise to claims from governmental authorities and other third parties, including for orders, inspections, fines or penalties, natural resource damages, personal injury, property damage, toxic torts and other damages.

Our costs, liabilities and obligations relating to environmental matters could have a material adverse effect on our financial performance, financial position and results of operations.

Legislation has previously been proposed that would significantly affect the mining industry.

Periodically, members of the U.S. Congress have introduced bills which would supplant or alter the provisions of the U.S. General Mining Law of 1872, which governs the unpatented claims that we control with respect to the Sunshine Mine. One such amendment has become law and has imposed a moratorium on patenting of mining claims, which reduced the security of title provided by unpatented claims such as those on the Sunshine Mine property. Other bills have proposed, among other things, to make permanent the patent moratorium, to impose a federal royalty on production from unpatented mining claims and to declare certain lands as unsuitable for mining. If additional legislation is enacted, it could substantially increase the cost of holding unpatented mining claims by requiring payment of royalties, and could significantly impair our ability to develop mineral estimates on unpatented mining claims. Although it is impossible to predict at this time what royalties may be imposed in the future, the imposition of such royalties could adversely affect the potential for development of such mining claims. Passage of such legislation could adversely affect our business.

Risks Related to this Offering and our Common Stock

There is no existing market for our common stock and we do not know if one will develop. Even if a market does develop, the stock price in the market may not exceed the offering price.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our Company will lead to the development of an active trading market on the New York Stock Exchange, the Toronto Stock Exchange or otherwise, or how liquid that market may become. An active trading market for our common stock may not develop and even if it does develop, may not continue upon the completion of this offering and the market price of our common stock may decline below the initial public offering price. The initial public offering price for the common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price you pay in this offering.

The market price of our common stock may be volatile, which could result in substantial losses for you.

The initial public offering price for our common stock will be determined through negotiations between us and the representatives of the underwriters. This initial public offering price may vary from the market price of our common stock after this offering. Some of the factors that may cause the market price of our common stock to fluctuate include:

 

   

failure to identify mineral reserves at our properties;

 

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failure to achieve production at our mineral properties;

 

   

actual or anticipated changes in the price of silver and base metal by-products;

 

   

fluctuations in our quarterly and annual financial results or the quarterly and annual financial results of companies perceived to be similar to us;

 

   

changes in market valuations of similar companies;

 

   

success or failure of competitor mining companies;

 

   

changes in our capital structure, such as future issuances of securities or the incurrence of debt;

 

   

sales of large blocks of our common stock;

 

   

announcements by us or our competitors of significant developments, contracts, acquisitions or strategic alliances;

 

   

changes in regulatory requirements and the political climate in the United States, Mexico or both;

 

   

litigation involving our Company, our general industry or both;

 

   

additions or departures of key personnel;

 

   

investors’ general perception of us, including any perception of misuse of sensitive information;

 

   

changes in general economic, industry and market conditions;

 

   

accidents at mining properties, whether owned by us or otherwise;

 

   

natural disasters, terrorist attacks and acts of war; and

 

   

our ability to control our costs.

In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be both costly to defend against and a distraction to management.

Our anti–takeover defense provisions may cause our common stock to trade at market prices lower than it might absent such provisions.

Our Board of Directors has the authority to issue blank check preferred stock. Additionally, our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws that we will adopt prior to the closing of this offering will contain several provisions that will apply after Electrum, or any person which is an express assignee or designee of Electrum, ceases to own in the aggregate more than 50% of our outstanding common stock. These provisions may make it more difficult or expensive for a third party to acquire control of us without the approval of our Board of Directors. These provisions include provisions that set forth advance notice procedures for stockholders’ nominations of directors and proposals of topics for consideration at meetings of stockholders, provisions restricting stockholders from calling a special meeting of stockholders or requiring one to be called, provisions limiting the ability of stockholders to act by written consent, provisions requiring a 66 2/3% stockholder vote to amend our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, a staggered board, and provisions providing for the filling of vacancies on our Board of Directors. Our Amended and Restated Certificate of Incorporation will also provide that Section 203 of the Delaware General Corporation Law, or DGCL, which relates to business combinations with interested stockholders, will not apply to us until such time as Electrum ceases to own more than 50% of our outstanding common stock, after which time we will be governed by those provisions. These provisions may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. In addition, these provisions may cause our common stock to trade at a market price lower than it might absent such provisions.

 

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You will suffer immediate and substantial dilution as a result of this offering.

The initial public offering price per share of our common stock is substantially higher than our net tangible book value per share immediately after this offering. As a result, if you purchase shares in this offering, you will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities. At an offering price of $             per share, which is the midpoint of the offering price range set forth on the front cover of this prospectus, you will incur immediate and substantial dilution of your investment in the amount of $             per share. See “Dilution.”

Future sales of our common stock after the lock-up period has expired, or the perception that such sales may occur, could depress our common stock price.

After this offering, we will have              shares of common stock outstanding. This includes the shares of common stock we are selling in this offering, which may generally be resold in the public market immediately after this offering. We expect that the remaining shares of common stock, representing     % of our total outstanding shares of common stock following this offering, will become available for resale in the public market as set forth under the heading “Shares Eligible for Future Sale.” All of our directors and executive officers, and the holders of substantially all of our common stock, have signed lock-up agreements for a period of 180 days following the date of this prospectus, subject to extension in the case of an earnings release or material news or a material event relating to us. Morgan Stanley & Co. LLC may, in its sole discretion and without notice, release all or any portion of the common stock subject to lock-up agreements. There are no agreements, understandings or intentions, tacit or explicit, to release any of the common stock subject to lock-up agreements prior to the expiration of the lock-up period. As restrictions on resale end, the market price of our common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our common stock or other securities.

In addition, immediately following this offering, we intend to file a registration statement registering under the Securities Act of 1933, or the Securities Act, the shares of common stock reserved for issuance in respect of incentive awards to our directors and certain of our employees. This would result in approximately              shares of common stock underlying options vested as of the date of this prospectus being available for resale into the public markets after the expiration of lock-up agreements to which substantially all of those shares are subject.

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividend on our capital stock. We do not intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to retain all future earnings, if any, to finance our business. The payment of any future dividends, if any, will be determined by our Board of Directors in light of conditions then existing, including our earnings, financial condition and capital requirements, business conditions, corporate law requirements and other factors. See “Dividend Policy.”

Certain non-U.S. investors may be subject to U.S. income tax with respect to gain on dispositions of our common stock if we are or become a U.S. real property holding corporation.

Based on our estimates of the current relative fair market values of our U.S. real property interests and other assets, we believe that we are not currently a U.S. real property holding corporation, or a USRPHC, for U.S. federal income tax purposes. However, both because the determination of the value of our mineral assets is uncertain and requires the use of subjective estimates, and because the relative fair market values of our assets will likely fluctuate over time (based on, for example, the results of the exploration and development of our properties), there can be no assurance that we are not, or will not become, a USRPHC. If we are or have been a USRPHC, certain non-U.S. investors will generally be subject to U.S. federal income tax on gain realized on a sale or other disposition of our common stock. However, for so long as our common stock is regularly traded on

 

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an established securities market (such as the NYSE), a non-U.S. investor will not recognize taxable gain on a sale of our common stock under the rules applicable to USRPHCs unless the investor actually or constructively owns more than 5% of our common stock at any time during the five-year period ending on the date of disposition or, if shorter, its holding period for our common stock. See “U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock—Gain on Disposition of Common Stock.”

Electrum and its affiliates will continue to have substantial control over us after this offering, which could delay or prevent a change of corporate control or result in the entrenchment of management and/or the Board of Directors.

After this offering, Electrum, together with its affiliates and related persons, will beneficially own, in the aggregate, approximately     % of our outstanding common stock (approximately     % if the underwriters’ over-allotment option is exercised in full). As a result, Electrum will have control over the outcome of matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. Also, Electrum will have the ability to control the management and affairs of our Company. Currently, one out of the nine members of our Board of Directors is an affiliate of Electrum. In addition, following this offering, Liberty Metals & Mining will beneficially own, in the aggregate, approximately     % of our outstanding common stock (approximately     % if the underwriters’ over-allotment option is exercised in full) and will have one member on the Board of Directors. Accordingly, this concentration of ownership may harm the market price of our common stock by, among other things:

 

   

delaying, deferring or preventing a change of control, even at a per share price that is in excess of the then-current price of our common stock;

 

   

impeding a merger, consolidation, takeover or other business combination involving us, even at a per share price that is in excess of the then-current price of our common stock; or

 

   

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, even at a per share price that is in excess of the then current price of our common stock.

We will incur increased costs and be required to carry out activities we have not previously undertaken as a result of becoming a public company, specifically as a result of Section 404 of the Sarbanes-Oxley Act of 2002.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, applicable Canadian securities laws and the rules and regulations of the New York Stock Exchange and the Toronto Stock Exchange. Such requirements will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Commencing with our fiscal year ending December 31, 2012, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expense and expend significant management efforts. Prior to this offering, we have never been required to test our internal controls within a specified period and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner, particularly if material weaknesses or significant deficiencies are identified and persist. If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, the market price of our stock could decline and we could be subject to sanctions or investigations by any stock exchange on which our common stock is listed, the SEC, Canadian securities regulators or other regulatory

 

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authorities, which would require additional financial and management resources. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that we will be required to include in our periodic reports filed with the SEC, beginning with our fiscal year ending December 31, 2012, under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures or internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.

Our Amended and Restated Certificate of Incorporation contains a provision renouncing our interest and expectancy in certain corporate opportunities.

Our Amended and Restated Certificate of Incorporation provides for the allocation of certain corporate opportunities between us and Electrum and Liberty Metals & Mining. Under these provisions, neither Electrum or Liberty Metals & Mining, their affiliates and subsidiaries, nor any of their officers, directors, agents, stockholders, members or partners will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. For instance, a director of our Company who is not employed by us and also serves as a director, officer or employee of Electrum or Liberty Metals & Mining or any of their subsidiaries or affiliates may pursue certain acquisition or other opportunities that may be complementary to our business and, as a result, such acquisition or other opportunities may not be available to us. These potential conflicts of interest could have a material adverse effect on our financial performance, financial position and results of operations if attractive corporate opportunities are allocated by Electrum or Liberty Metals & Mining to themselves or their subsidiaries or affiliates instead of to us. The terms of our Amended and Restated Certificate of Incorporation are more fully described in “Description of Capital Stock.”

If securities or industry analysts downgrade recommendations regarding our stock, the price and trading volume of our stock could decline.

The research and reports that securities or industry analysts publish about us or our business may vary widely and may not predict accurate results, but will likely have an affect on the trading price of our common stock. If one or more of the analysts that cover us downgrade recommendations regarding our stock, or if our results of operations do not meet their expectations, our stock price could decline rapidly and such decline could be material.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains “forward-looking statements.” Those statements include, but are not limited to, statements with respect to our expected costs and timing for the further exploration and development of the Sunshine Mine property in Big Creek, Idaho (including the timing for completion of a pre-feasibility study at the Sunshine Mine property) or of the Los Gatos Project in Mexico (including the timing for completion of a pre-feasibility study for the Cerro Los Gatos and Esther zones of the Los Gatos Project) or of our other prospective properties, estimated calculations of mineralized material at the Sunshine Mine property, our quality assurance/quality control protocols for our exploration drilling campaign at the Sunshine Mine property, our business strategy, expected cost savings, our prospects, plans and objectives, industry trends, our requirements for additional capital, government regulation, environmental risks, reclamation and rehabilitation expenses, title disputes or claims, synergies of potential future acquisitions, expected actions of third parties, and limitations of insurance coverage. These statements may be under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Silver Industry Overview,” “Business” and in other sections of this prospectus. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our industry.

All forward-looking statements speak only as of the date on which they are made. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions concerning future events that are difficult to predict. Therefore, actual future events or results may differ materially from these statements. We believe that the factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include the following:

 

   

our status as an exploration company that has no operating history;

 

   

our dependence on our two principal projects for our future operating revenue, neither of which currently has proven or probable reserves;

 

   

our mineralized material calculations at the Sunshine Mine property are only estimates and are based principally on historic data;

 

   

historical production at the Sunshine Mine property may not be indicative of potential future development;

 

   

land reclamation and mine closure may be burdensome and costly;

 

   

we will require additional financing in the future to bring the Sunshine Mine property into sustained commercial production and to develop a mine at the Los Gatos Project;

 

   

exposure to all of the risks associated with establishing new mining operations, if the development of one or more of our mineral projects is found to be economically feasible;

 

   

significant risk and hazards associated with mining operations;

 

   

competition within our industry;

 

   

title to some of our mineral properties may be uncertain or defective;

 

   

our exposure to losses because of our hedging activities or our decision not to hedge;

 

   

our insurance may not provide adequate coverage;

 

   

our inability to retain key members of management;

 

 

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increased demand for, and cost of, exploration, development and construction services and equipment in recent years;

 

   

changes in the price of silver;

 

   

our failure to identify attractive acquisition candidates or joint ventures with strategic partners or inability to successfully integrate acquired mineral properties or successfully manage joint ventures;

 

   

claims and legal proceedings against us;

 

   

extensive regulation by the U.S. and Mexican governments as well as state and local governments;

 

   

our Mexican operations are subject to additional political, economic and other uncertainties not generally associated with domestic operations;

 

   

the requirements that we obtain, maintain and renew environmental, construction and mining permits, which is often a costly and time-consuming process; and

 

   

our exposure to material costs, liabilities and obligations as a result of environmental laws and regulations (including changes thereto) and permits.

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements included in this prospectus. These risks and uncertainties, as well as other risks of which we are not aware or which we currently do not believe to be material, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We caution you not to place undue reliance on these forward-looking statements. We do not undertake any obligation to make any revisions to these forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events, except as required by law.

 

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USE OF PROCEEDS

We will receive net proceeds from this offering of approximately $             million, or approximately $             million if the underwriters exercise their option in full to purchase additional shares, assuming an initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses. A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds from the offering by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We intend to allocate the proceeds as follows:

 

Sunshine Mine property

     

Upgrade existing infrastructure

   $      million             

Surface and underground exploration

   $      million             

Pre-feasibility study

   $      million             

Various consolidation expenses

   $      million             
  

 

 

    

 

 

 

Sunshine Mine property Total

   $      million             

Los Gatos Project

     

Exploratory drilling

   $      million             

Technical expenses, including a pre-feasibility study

   $      million             

Various consolidation expenses

   $      million             
  

 

 

    

 

 

 

Los Gatos Project Total

   $      million             

Other Mexican properties

     

Exploratory drilling

   $      million             

General Corporate Purposes(1)

   $      million             
  

 

 

    

 

 

 

Total

   $      million         100
  

 

 

    

 

 

 

 

  (1) General corporate purposes could include, without limitation, general and administrative expenses, working capital funding, additional exploration expense, upgrades to infrastructure at the Sunshine Mine property and other capital investment at our existing properties or through acquisitions.

Our objectives with respect to the use of proceeds at the Sunshine Mine property are to define additional mineralized material, complete a pre-feasibility study, upgrade existing infrastructure and re-establish access to developed portions of the resource. Our objectives with respect to the Los Gatos Project and additional exploration in Mexico are to double the number of exploration drills from four to eight, complete a pre-feasibility study at the Cerros Los Gatos and Esther zones and acquire additional prospective mineral and surface rights.

While we currently anticipate that we will use the net proceeds of this offering as described above, we may reallocate the net proceeds from time to time depending upon market and other conditions in effect at the time. Pending their application, we intend to invest the net proceeds in short-term, interest-bearing, investment grade securities or short-term deposits or shares of money market mutual funds.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We do not intend to pay any dividends in the foreseeable future and currently intend to retain all future earnings to finance our business. Any determination to pay dividends to holders of our common stock in the future will be at the discretion of our Board of Directors and will depend upon such factors as our earnings levels, capital requirements, requirements under the DGCL and other factors as our Board of Directors deems relevant.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2011

 

   

on an actual basis; and

 

   

on an as adjusted basis to reflect the sale by us of              shares of common stock pursuant to this offering, assuming an initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses.

This table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto appearing elsewhere in this prospectus. Unless otherwise stated, all dollar amounts expressed below are in thousands, except for per share amounts.

 

     June 30, 2011  
     Actual     As Adjusted  

Cash and cash equivalents

   $ 153,161      $                
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common Stock, $0.001 par value per share, 100,000,000 shares authorized, actual;             shares authorized, as adjusted; 58,810,113 shares issued and outstanding, actual;             shares issued and outstanding, as adjusted

   $ 59      $     

Paid-in capital

     240,920     

Accumulated Deficit

     (58,297  

Unrealized gains on investments, net of tax

     54     
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 182,736      $     
  

 

 

   

 

 

 

Total capitalization

   $ 182,736      $     
  

 

 

   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, total stockholders’ equity and total capitalization by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The table above does not include:

 

   

321,548 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2011 with a weighted average exercise price of $13.55 per share;

 

   

an option to purchase 125,000 shares of common stock to be granted to our Executive Chairman and Chief Executive Officer and an option to purchase 16,000 shares of our common stock to be granted to each of our non-employee directors upon the consummation of this offering at a purchase price equal to the offering price. See “Compensation Discussion and Analysis—Grants of Plan-Based Awards’’ and “Compensation Discussion and Analysis—Director Compensation;” and

 

   

             additional shares of common stock reserved for further issuance under our stock option plans.

 

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DILUTION

Our consolidated net tangible book value as of June 30, 2011 was $(            ) or $(            ) per share of common stock. Consolidated net tangible book value per share represents consolidated tangible assets, less consolidated liabilities, divided by the aggregate number of shares of common stock outstanding. After giving effect to the sale by us of the shares of common stock in this offering, at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, our consolidated net tangible book value as of June 30, 2011 would have been $             or $             per share. This represents an immediate increase in consolidated net tangible book value to existing stockholders of $             per share and an immediate dilution to new investors purchasing shares in this offering of $             per share. Dilution per share represents the difference between the price per share to be paid by new investors for the shares of common stock sold in this offering and the consolidated net tangible book value per share immediately after this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price

      $                

Consolidated net tangible book value per share as of June 30, 2011

   $                   

Increase in consolidated net tangible book value per share attributable to new investors

     
  

 

 

    

Consolidated net tangible book value per share after this offering

     

Dilution per share to new investors

      $     
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share (the midpoint of the range set forth on the cover page of this prospectus), would increase (decrease) our pro forma consolidated net tangible book value per share after this offering by $             and the dilution per share to new investors purchasing shares in this offering by $            , in each case assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters’ over-allotment option to purchase common stock is exercised in full, our consolidated net tangible book value per share after giving effect to this offering would be $            , and the dilution per share in net tangible book value to new investors purchasing shares in this offering would be $            .

The following table sets forth, as of June 30, 2011, the number of shares of common stock purchased from the Company, the total consideration paid, or to be paid, to the Company and the average price per share paid, or to be paid, by existing stockholders and by new investors purchasing shares in this offering, at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and offering expenses payable by the Company:

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
 
     Number    Percent     Amount      Percent    

Existing stockholders

               $                             $                

New Investors

            
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100   $           100   $     
  

 

  

 

 

   

 

 

    

 

 

   

If the underwriters’ over-allotment option to purchase common stock is exercised in full, the number of shares of common stock held by existing stockholders would decrease to     % of the total number of shares of common stock outstanding after this offering, and the number of shares of common stock held by new investors would increase to     % of the total number of shares of common stock outstanding after this offering.

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $             per share (the midpoint of the range set forth on the cover page of this prospectus) would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and average price per share paid by all stockholders by $             million, $             million and $            , respectively, in each case assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The foregoing tables exclude 321,548 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2011 with a weighted average exercise price of $13.55 per share and exclude an option to purchase 125,000 shares of common stock to be granted to our Executive Chairman and Chief Executive Officer and an option to purchase 16,000 shares of our common stock to be granted to each of our non-employee directors upon the consummation of this offering at a purchase price equal to the offering price. See “Compensation Discussion and Analysis—Grants of Plan-Based Awards” and “Compensation Discussion and Analysis—Director Compensation.” To the extent these options are exercised, there will be further dilution to new investors.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We prepared the selected consolidated financial data using our consolidated financial statements for each of the periods presented. The selected consolidated financial data for each fiscal year in the three-year period ended December 31, 2010 and the balance sheet data as of December 31, 2009 and 2010 was derived from our audited consolidated financial statements appearing elsewhere in this prospectus.

The selected consolidated financial data for the period from April 24, 2006 (Inception) to June 30, 2011 and for the six months ended June 30, 2010 and as of and for the six months ended June 30, 2011 was derived from our unaudited interim consolidated financial statements appearing elsewhere in this prospectus. In our opinion, such unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position. Results for the six months ended June 30, 2010 and as of and for the six months ended June 30, 2011 are not necessarily indicative of results that may be expected for the entire year.

We were formed on February 2, 2011 when our predecessor, Precious Metals Opportunities LLC, converted to a Delaware corporation. On March 1, 2011, Los Gatos Ltd. merged with and into us. In accordance with U.S. GAAP, all financial results have been prepared as if the combination of the companies under common control (Precious Metals Opportunities LLC and Los Gatos Ltd.) had occurred prior to the earliest period presented. Accordingly, the financial results have been prepared on the following basis:

 

   

the April 24, 2006 (Inception) to December 31, 2006, 2007, 2008 and 2009 results of operations are derived solely from the activities of Los Gatos Ltd.;

 

   

the 2010 results of operations reflect the combined activities of Precious Metals Opportunities LLC and Los Gatos Ltd.; and

 

   

the 2011 results of operations reflect the combined activities of Precious Metals Opportunities LLC and Los Gatos Ltd. through February 28, 2011; subsequent to this date, the results of operations reflect the consolidated activities of Sunshine Silver.

As a result of our acquisition of the Sunshine Mine in May 2010, we believe that period-over-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as a good indicator of our future performance.

 

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You should read this financial data in conjunction with our audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     Year ended December 31,     Period from
April 24, 2006
(Inception) to
December 31,

2006
    Six months ended
June 30,
    Period from
April  24, 2006
(Inception) to
June 30,

2011
 
     2010     2009     2008     2007       2011     2010    
     (in thousands)  
           (unaudited)  

Statements of Loss Data:

                

Expenses:

                

Exploration

   $ 14,653      $ 9,771      $ 2,718      $ 926      $ 240      $ 8,150      $ 6,938      $ 36,459   

Care and maintenance

     2,534        —          —          —          —          2,543        404        5,077   

General and administrative

     5,490        818        415        112        72        7,055        2,742        13,962   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     22,677        10,589        3,133        1,038        312        17,748        10,084        55,498   

Net other expense

     1,891        597        24        24        2        298        755        2,835   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax benefit

     (24,568     (11,186     (3,157     (1,062     (314     (18,046     (10,839     (58,333

Income tax benefit

     30        —          —          —          —          6        14        36   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (24,538   $ (11,186   $ (3,157   $ (1,062   $ (314   $ (18,040   $ (10,825   $ (58,297
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow Data:

                

Net cash used by operating activities

   $ (21,479   $ (10,876   $ (2,866   $ (1,199   $ (342   $ (15,777   $ (7,698   $ (52,539

Net cash used by investing activities

   $ (30,856   $ (31   $ (4   $ (1     —        $ (1,471   $ (29,193   $ (32,363

Net cash provided by financing activities

   $ 54,592      $ 11,885      $ 3,250      $ 950      $ 613      $ 166,773      $ 37,924      $ 238,063   

 

     December 31,     June  30,
2011
 
     2010      2009     2008     2007     2006    
            (in thousands)        
                                    (unaudited)  

Balance Sheet Data:

             

Cash and cash equivalents

   $ 3,636       $ 1,379      $ 401      $ 21      $ 272      $ 153,161   

Working capital

   $ 4,485       $ 1,689      $ (241   $ (409   $ (314   $ 152,917   

Total assets

   $ 36,076       $ 2,610      $ 709      $ 187      $ 312      $ 187,629   

Related-party debt

   $ 31,000       $ 15,990      $ 4,298      $ 968        —          —     

Total shareholders’ equity (deficit)

   $ 2,663       $ (14,270   $ (4,532   $ (1,376   $ (314   $ 182,736   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs. These forward-looking statements involve risks and uncertainties. You should review “Risk Factors” and “Special Note Regarding Forward-Looking Statements” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by these forward-looking statements. Unless otherwise stated, all dollar amounts expressed below are in thousands, except for share and per share amounts.

Overview

Sunshine Silver Mines Corporation is a U.S.-based precious metals exploration and development company with the objective of becoming a premier silver producer. We are currently focused on the advancement of our two principal projects: (i) the Sunshine Mine property in Idaho, one of the highest-grade known remaining primary-silver discoveries worldwide, which is estimated to have produced a total of over 365 million ounces of silver, and (ii) the Los Gatos Project in Chihuahua, Mexico, where we hold a 81,703 hectare land position, constituting a new mining region. In total, we own or control a portfolio of 23 exploration properties in the United States and Mexico covering an area of approximately 450,018 hectares.

We were formed on February 2, 2011 when our predecessor, Precious Metals Opportunities LLC, converted to a Delaware corporation. On March 1, 2011, Los Gatos Ltd. merged with and into us. Prior to the merger, Los Gatos Ltd. eliminated all of its outstanding related-party debt through the issuance of preferred shares, which were subsequently exchanged for shares of our common stock in connection with the merger. In connection with the merger, outstanding ordinary shares of Los Gatos Ltd. and options to purchase ordinary shares of Los Gatos Ltd. were also converted into shares of our common stock and options to purchase shares of our common stock, respectively. The assets and liabilities of each predecessor company are presented at historical cost as this transaction was reported for accounting purposes as a combination of companies (Los Gatos Ltd. and Precious Metals Opportunities LLC) under common control. In accordance with U.S. GAAP, common control exists between the predecessor Sunshine and Los Gatos entities as both entities were primarily owned by certain trusts under the control of one individual. In accordance with U.S. GAAP, all financial reports have been prepared as if the combination of the companies under common control had occurred prior to the earliest period presented.

Substantially, all of our source of funds to date has been proceeds from financing activities. From March 1, 2011 to June 30, 2011, we received proceeds of $163,733 through private placements of our common stock to investors.

We have not yet generated any operating revenue. We anticipate that we will continue to incur significant operating costs without realizing any revenues at the Sunshine Mine or the Los Gatos Project for the foreseeable future. We believe that the anticipated net proceeds from this offering and our existing cash and cash equivalents will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next      months. However, we may elect to seek additional funding prior to that time. We expect that we will require additional funds at a later date to bring the Sunshine Mine into sustained commercial operation and develop a mine at the Los Gatos Project which, depending upon the circumstances, may be in the form of equity, debt or a combination of equity and debt. There can be no assurance that additional funds will be available to us on acceptable terms or at all.

Principal Projects

Sunshine Mine

The Sunshine Mine is located within the Coeur d’Alene Mining District in Idaho. In May 2010, we acquired from Sterling the majority of the operating facilities and equipment at the Sunshine Mine, including a lease on

 

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the Sunshine Mine that included a purchase option for title to the Sunshine Mine. In July 2010, we closed the purchase option in the lease to obtain title to the Sunshine Mine and acquired the remaining operating facilities and equipment. The total consideration paid in cash was comprised of (i) $23,500 for the net assets acquired and liabilities assumed and (ii) $5,750 for the right, title and interest acquired in connection with the purchase option.

The Sunshine Mine covers 171 hectares of surface rights, and the Company estimates that the Mine contains more than 160 kilometers of underground workings. Our consolidated land position at the Sunshine Mine property consists of approximately 2,408 hectares.

We are undertaking significant exploration and re-development of the Sunshine Mine property. Since acquiring the Sunshine Mine, we have successfully completed or are currently working on the following significant exploration and re-development activities at the Sunshine Mine property:

 

   

acquired additional surface rights;

 

   

repaired surface facilities and equipment, including the Jewell hoists and shaft, and compressed air, water and pumping systems;

 

   

commissioned the ConSil hoist and completed work to enable rehabilitation of the ConSil shaft from the top station downward to the 910 meter level;

 

   

de-watered the Sunshine Mine to just below the 1,130 meter level;

 

   

re-established utility services to the Sunshine Mine ramp, enabling commencement of improvements required for ventilation and re-access to mining blocks;

 

   

made significant progress towards compiling a drill hole database review for areas of immediate exploration and began compiling the entire historical geologic database to create a three dimensional model of the resources; and

 

   

designed a new development plan to re-establish access in the lower mine levels for exploration and development.

Our objectives at the Sunshine Mine property through 2013 are to:

 

   

define additional mineralized material through extensive surface and underground exploration;

 

   

complete a pre-feasibility study to determine the costs to re-commission and operate the Sunshine Mine as a sustainable and efficient silver producer; and

 

   

upgrade existing infrastructure and re-establish access to developed portions of the resource.

The Sunshine Mine property will require significant time and capital before this property returns to production.

Los Gatos Project

The Los Gatos Project is located approximately 128 kilometers south of the state capital of Chihuahua City, in Northern Mexico and consists of two identified silver discoveries, the Cerro Los Gatos and the Esther zones, and 14 other priority targets over 100 kilometers of outcropping quartz and calcite veins. The area is characterized by a predominant silver-lead-zinc mineralization.

Prior to our initial acquisition of exploration concession rights in 2006, only very limited historical prospecting and exploration activities had been conducted at the Los Gatos Project. We were able to acquire concessions covering approximately 81,703 hectares and, through our exploration, we have identified a virgin silver region containing high-grade vein style mineralization throughout our Los Gatos concession package.

In 2008, we negotiated surface access rights with local ranch owners and obtained environmental permits for drilling. Environmental baseline data collection (climate, water, vegetation, air and social) began in May

 

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2010 in anticipation of future development activities at the Los Gatos Project. Geological work continued with detailed surface mapping, sampling and prospecting of new zones. Data on flora, fauna, water, air, climate, security and social impacts are generally collected on a regular basis and we intend to integrate this data into future social, environmental and technical studies for the Los Gatos Project.

To date, our primary areas of focus have been defining and extending mineralization along the Cerro Los Gatos and Esther zones that currently extend more than 2,500 meters along strike and remain open at depth and to the southeast. Through November 2010, we had completed 154 drill holes in the Cerro Los Gatos and Esther zones, totaling 69,745 meters.

Our objectives at the Los Gatos Project through 2013 are to:

 

   

increase the drilling rate by increasing the number of exploration drills from four to seven;

 

   

conduct social, environmental and technical work on the property with the objective of completing a pre-feasibility study on the Cerro Los Gatos and Esther zones; and

 

   

acquire additional prospective mineral and surface rights.

The Los Gatos Project will require significant time and capital before the Project is brought into production.

Achievement of our objectives at the Sunshine Mine property and the Los Gatos Project is subject to a number of risks and uncertainties, a number of which are beyond our control. We cannot assure you that we will successfully achieve our objectives at the Sunshine Mine property or the Los Gatos Project. See “Risk Factors.”

Operating Expenses

Exploration Expenses

We conduct exploration activities on patented and unpatented mining claims in the United States and Mexico. We expect our exploration expenses to increase significantly as we continue to expand our exploration activities at the Sunshine Mine property, the Los Gatos Project and our other exploration properties. As access to the underground platforms at the Sunshine Mine is achieved through re-establishment of a secondary escape shaft, our exploration costs will further increase. Our exploration expenses primarily consist of drilling costs, lease concession payments, and environmental, geological and technical studies, at both the Sunshine Mine property and the Los Gatos Project.

Care and Maintenance Expenses

Our care and maintenance expenses relate to the care and maintenance of the Sunshine Mine, which has been in the care and maintenance stage since our acquisition of the Sunshine Mine in May 2010. Our care and maintenance expenses include facility and surface repair and re-development costs, mineral surface lease payments, utility costs and mine-dewatering costs.

General and Administrative Expenses

Our general and administrative expenses consist of salaries and benefits, stock compensation, professional and consultant fees, insurance and other general administration costs. Our general and administrative expenses are expected to increase significantly as we prepare to operate as a public company. We expect higher costs related to salaries, benefits, stock compensation, legal fees, compliance and corporate governance, accounting and audit expenses, stock exchange listing fees, transfer agent and other stockholder-related fees, directors and officers’ and other insurance fees, and other administrative costs.

In May 2011, we opened a corporate office in Denver, Colorado, moved many advisory and shared-service functions performed in New York to Denver, and began establishing a senior executive team primarily based in Denver. We expect higher costs related to compensation and benefits, rent and occupancy, and other

 

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administrative costs as we continue to add to our senior executive team and hire additional corporate employees. Additionally, we expect to incur higher costs from share-based compensation plans established by our Board of Directors.

Income Taxes

As we have incurred substantial losses from our exploration and re-development activities, we may receive further benefits in the form of deferred tax assets that can reduce our future income tax liabilities, if it is more likely than not the benefit will be realized before expiration. We have not recognized these potential benefits in our financial statements and have fully reserved for such net deferred tax assets, as we believe the benefit of these net deferred tax assets will not be realized before expiration. At December 31, 2010, we recorded a full valuation allowance of $9,639 against these net deferred tax assets. In addition, due to our net losses since inception, we have not paid income taxes to date and therefore there has been no impact on our income tax expense of operating as a Delaware corporation compared to the legal structures of our predecessor entities.

Royalties

We conduct exploration activities on patented and unpatented mining claims at both the Sunshine Mine property and the Los Gatos Project. We are required to make mineral and concession lease payments to various entities to secure the appropriate claims or surface rights. For the fiscal year ended December 31, 2010, we paid $191 for such royalties. Certain of these agreements also have royalty payments that are triggered when we begin producing and selling metal-bearing concentrate. There are currently no instances where we are paying any royalty based upon production and sales. See “Business—The Sunshine Mine Property—Royalties,” “Business—The Los Gatos Project—Location of the Los Gatos Project” and note 6 to our December 31, 2010 audited consolidated financial statements.

Comparability of Periods

As a result of our acquisition of the Sunshine Mine in May 2010, we believe that period-over-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as a good indicator of our future performance. Prior to our acquisition of the Sunshine Mine in May 2010, our operating results were derived solely from the activities of Los Gatos Ltd. and Precious Metals Opportunities LLC. We commenced activities at the Sunshine Mine after our purchase of the Sunshine Mine net assets out of bankruptcy from Sterling in May 2010. This acquisition was accounted for as a business combination and the Company applied purchase accounting to the assets acquired and liabilities assumed.

Results of Operations

The following table presents certain information relating to our operating results for the years ended December 31, 2010, 2009 and 2008, and the six months ended June 30, 2011 and 2010. In accordance with U.S. GAAP, all financial reports have been prepared as if the combination of the companies under common control occurred prior to the earliest period presented. Accordingly, the financial results have been prepared on the following basis:

 

   

the 2008 and 2009 results of operations are derived solely from the activities of Los Gatos Ltd.;

 

   

the 2010 results of operations reflect the combined activities of Precious Metals Opportunities LLC and Los Gatos Ltd.; and

 

   

the 2011 results of operations reflect the combined activities of Precious Metals Opportunities LLC and Los Gatos Ltd. through February 28, 2011; subsequent to this date, the results of operations reflect the consolidated activities of Sunshine Silver.

 

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     Year Ended December 31,     Six Months
Ended
June 30,
 
     2010     2009     2008     2011     2010  
                       (unaudited)  

Statements of Loss Data:

          

Expenses:

          

Exploration

   $ 14,653      $ 9,771      $ 2,718      $ 8,150      $ 6,938   

Care and maintenance

     2,534        —          —          2,453        404   

General and administrative

     5,490        818        415        7,055        2,742   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     22,677        10,589        3,133        17,748        10,084   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (income) expense:

          

Interest expense

     1,887        360        79        198        736   

Interest and other income

     (36     (13     (8     (24     (24

Foreign exchange (gain) loss

     40        250        (47     124        43   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other expense

     1,891        597        24        298        755   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (24,568     (11,186     (3,157     (18,046     (10,839

Income tax benefit

     30        —          —          6        14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss

   $ (24,538   $ (11,186   $ (3,157   $ (18,040   $ (10,825
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial information relating to our segments is a follows:

 

    Six Months Ended June 30, 2011     Six Months Ended June 30, 2010  

Expenses

  U.S.     Mexico     Corporate     Total     U.S.     Mexico     Corporate     Total  
    (unaudited)  

Exploration

  $ 286      $ 7,843      $ 21      $ 8,150      $ —        $ 6,938      $ —        $ 6,938   

Care and maintenance

    2,543        —          —          2,543        404        —          —          404   

General and administrative

    1,790        531        4,734        7,055        2,185        557        —          2,742   

Net other (income) expense

    (26     324        —          298        —          755        —          755   
    Year Ended December 31, 2010     Year Ended December 31, 2009  
    U.S.     Mexico     Corporate     Total     U.S.     Mexico     Corporate     Total  

Exploration

  $ 207      $ 14,446        —        $ 14,653        —        $ 9,771        —        $ 9,771   

Care and maintenance

  $ 2,534        —          —        $ 2,534        —          —          —          —     

General and administrative

  $ 3,936      $ 1,326      $ 228      $ 5,490        —        $ 818        —        $ 818   

Net other (income) expense

  $ (7   $ 1,898        —        $ 1,891        —        $ 597        —        $ 597   
    Year Ended December 31, 2008                          
    U.S.     Mexico     Corporate     Total                          

Exploration

    —        $ 2,718        —        $ 2,718           

General and administrative

    —        $ 415        —        $ 415           

Net other expense

    —        $ 24        —        $ 24           

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

For the six months ended June 30, 2011, we experienced a consolidated net loss of $18,040 compared to a consolidated net loss of $10,825 for the same period in 2010. The $7,215 increase in consolidated net loss is primarily due to increases in exploration, care and maintenance and general and administrative expenses partially offset by a decrease in interest expense. The primary reasons for the fluctuations were as follows:

 

   

Exploration expense increased $1,212 to $8,150 for the six months ended June 30, 2011 compared to $6,938 in the comparable period of 2010. Exploration costs at the Sunshine Mine were $286 and nil for

 

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the six months ended June 30, 2011 and 2010, respectively. Exploration costs for our Mexico operations increased by approximately $905 for the six months ended June 30, 2011 compared to the same period in 2010 due to our expanded drilling at the Los Gatos Project and various other targets.

 

   

Care and maintenance expense increased $2,139 to $2,543 for the six months ended June 30, 2011 compared to $404 for the six months ended June 30, 2010 due to the May 2010 acquisition of the Sunshine Mine, which has been in a care and maintenance stage since that date.

 

   

General and administrative expense increased by $4,313 to $7,055 for the six months ended June 30, 2011 compared to $2,742 in the comparable period of 2010. The increase was primarily due to legal, accounting and consulting costs to execute our merger with Los Gatos Ltd., to raise additional equity financing and to prepare for our initial public offering. In addition, compensation and benefit costs increased due to our acquisition of the Sunshine Mine in May 2010 and our establishment of a corporate office in Denver.

 

   

Other expense decreased $457 primarily due to a reduction in interest expense to $198 for the six months ended June 30, 2011 from $736 for the six months ended June 30, 2010, partially offset by an increase in foreign exchange loss of $81 for the six months ended June 30, 2011 compared to the same period in 2010. The reduction in interest expense is due to the conversion of all of our $31,000 of related-party indebtedness in January 2011 to shareholders’ equity. The increase in foreign exchange loss is due to a higher average exchange rate of the Mexican Peso to the U.S. dollar and our net Mexican Peso monetary liability for the six months ended June 30, 2011 compared to the six months ended June 30, 2010.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

For the year ended December 31, 2010, we experienced a consolidated net loss of $24,538 compared to a consolidated net loss of $11,186 for the year ended December 31, 2009. The $13,352 increase in consolidated net loss is primarily due to increases in exploration, care and maintenance, general and administrative, and interest expense following the May 2010 acquisition of the Sunshine Mine. These increases were partially offset by increases in interest and other income and by reduced foreign exchange losses. The primary reasons for the fluctuations are as follows:

 

   

Exploration expense increased $4,882 to $14,653 in 2010 compared to $9,771 in 2009 primarily due to an increase in the number of exploration drills in operation at the Los Gatos Project in 2010, the expansion of the known mineralization to three veins through the additional drilling of 92 holes at the Los Gatos Project, and the retention of additional employees and consultants required to support the increased exploration at the Los Gatos Project. At the Sunshine Mine, $207 in exploration costs were also incurred in 2010 compared to nil in 2009.

 

   

Care and maintenance expense was $2,534 in 2010 compared to nil in 2009, specifically due to the May 2010 acquisition of the Sunshine Mine, which has been in a care and maintenance stage since that date.

 

   

General and administrative expense increased $4,672 to $5,490 in 2010 compared to $818 in 2009 primarily due to increased activities of $508 in Mexico and $3,936 of general and administrative expense related to the Sunshine Mine. The 2010 costs principally include $2,106 for legal and due diligence costs related to the acquisition of the Sunshine Mine, $814 for consulting and legal costs, $611 related to advisory and shared service costs and expenses charged by Tigris Financial Group Limited, a related-party, and compensation and benefits costs of $170. In addition, $235 of general and administrative costs were incurred at the Sunshine Mine in 2010 primarily related to other administrative costs.

 

   

Interest expense increased $1,527 to $1,887 in 2010 compared to $360 in 2009 primarily due to higher indebtedness levels and associated interest rates. As of December 31, 2010, total indebtedness was $31,000 as compared to $15,990 as of December 31, 2009.

 

   

Foreign exchange losses decreased $210 to $40 in 2010 compared to $250 in 2009 primarily due to the lower average exchange rate of the Mexican Peso to the U.S. dollar in 2010 compared to 2009.

 

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Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

For the year ended December 31, 2009, we experienced a consolidated net loss of $11,186 compared to a consolidated net loss of $3,157 for the year ended December 31, 2008. The $8,029 increase in consolidated net loss is primarily due to increases in exploration, general and administrative and interest expense, and increases in foreign exchange losses. The primary reasons for the fluctuations are as follows:

 

   

Exploration expense increased $7,053 to $9,771 in 2009 compared to $2,718 in 2008. In 2009, we placed additional exploration drills into operation at the Los Gatos Project, resulting in the further drilling of 58 holes. Also during 2009, headcount increased with respect to drilling employees and consultants to accommodate the additional core handling and sampling. In 2008, only one exploration drill was exploring in the Los Gatos region and it only drilled eight holes.

 

   

General and administrative expense increased $403 to $818 in 2009 compared to $415 in 2008 due to additional employees and consultants required to support the increased exploration activities during 2009 and an increase of $225 for advisory costs charged by Tigris Financial (International) L.P., a related-party, under the services agreement.

 

   

Interest expense increased $281 to $360 in 2009 compared to $79 in 2008 due to higher indebtedness and associated interest rates. As of December 31, 2009, total indebtedness was $15,990 as compared to $4,298 as of December 31, 2008.

 

   

Foreign exchange loss increased $297 to $250 in 2009 compared to foreign exchange gain of $47 in 2008 primarily due to the higher average exchange rate of the Mexican Peso to the U.S. dollar in 2009 compared to 2008.

Liquidity and Capital Resources

As of June 30, 2011, we had cash and cash equivalents of $153,161 and working capital of $152,917 compared to cash and cash equivalents of $3,636 and working capital of $4,485 as of December 31, 2010. The significant increase in cash and cash equivalents was primarily due to proceeds from sales of common stock to investors of $163,733, stock option exercise proceeds of $2,056 and proceeds from capital contributions of $1,000, during the six months ended June 30, 2011.

As of June 30, 2011, December 31, 2010 and December 31, 2009, our related-party debt was nil, $31,000, and $15,990, respectively. Subsequent to December 31, 2010, all of the $31,000 of related-party debt was converted into preferred shares of Los Gatos Ltd. Pursuant to our merger with Los Gatos Ltd., all Los Gatos Ltd. ordinary and preferred shares were converted into shares of our common stock. We have no lines of credit or other bank financing arrangements and do not anticipate additional future funding from related parties.

Substantially all of our source of funds to date has been proceeds from financing activities. From inception through June 30, 2011, we have received net proceeds of $238,063 from these financing activities.

We believe that the anticipated net proceeds from this offering and our existing cash and cash equivalents will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next      months. However, we may elect to seek additional funding prior to that time. We expect that we will require additional funds at a later date to bring the Sunshine Mine into sustained commercial operation and develop a mine at the Los Gatos Project, which, depending upon the circumstances, may be in the form of equity, debt or a combination of equity and debt. There can be no assurance that additional funds will be available to us on acceptable terms or at all.

 

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Cash Flows

The following table presents our sources and uses of cash for the periods indicated:

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2010     2009     2008     2011     2010  
                       (unaudited)  

Net cash provided by (used in)

          

Operating activities

   $ (21,479   $ (10,876   $ (2,866   $ (15,777   $ (7,698

Investing activities

     (30,856     (31     (4     (1,471     (29,193

Financing activities

     54,592        11,885        3,250        166,773        37,924   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total change in cash

   $ 2,257      $ 978      $ 380      $ 149,525      $ 1,033   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash used in operating activities was $15,777 and $7,698 for the six months ended June 30, 2011 and 2010, respectively. The increase in cash used in operating activities is primarily due to a net loss of $18,040 for the six months ended June 30, 2011, compared to a net loss of $10,825 for the six months ended June 30, 2010. This increase in net loss was partially offset by increases in accounts payable and other accrued liabilities of $1,351 and a reduction in non-trade receivables of $218. Cash used in operating activities was $21,479, $10,876 and $2,866 for the years ended December 31, 2010, 2009 and 2008, respectively. The increase between 2010, 2009 and 2008 was primarily attributed to increased net losses and changes in working capital.

Cash used in investing activities was $1,471 and $29,193 for the six months ended June 30, 2011 and 2010, respectively. This decrease is primarily due to our purchase of the Sunshine Mine during the six months ended June 30, 2010. Cash used in investing activities was $30,856, $31 and $4 for the years ended December 31, 2010, 2009 and 2008, respectively. The increase from 2008 to 2009 is related to additional property, plant and equipment purchases. The increase in 2009 to 2010 is attributable to our purchase of the Sunshine Mine in 2010 for $29,250 and $1,580 of property, plant and equipment purchases during 2010.

Cash provided by financing activities was $166,773 and $37,924 for the six months ended June 30, 2011 and 2010, respectively. The increase is due to sales of common stock and capital contributions of $165,789 and $1,000, respectively, during the six months ended June 30, 2011 compared to $29,810 of capital contributions and $8,000 related-party debt during the six months ended June 30, 2010. Cash provided by financing activities was $54,592, $11,885 and $3,250 for the years ended December 31, 2010, 2009 and 2008, respectively. These increases were the result of capital contributions of $35,978 and related-party debt funding of $18,500 in 2010, and $11,885 and $3,250 of related-party debt funding in 2009 and 2008, respectively.

Cash dividends are not expected to be paid in the foreseeable future. See “Dividend Policy.”

Contractual Obligations

As of December 31, 2010, we had the following contractual obligations:

 

     Payments due by period  

Contractual Obligations

   Total      Less than 1
year
     1-3 years      4-5 years      More than
5 years
 

Reclamation and remediation obligations

   $ 1,836       $ —         $ —         $ —         $ 1,836   

Advance royalty payments(1)(2)(3)

     21,312         237         1,049         5,164         14,862   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,148       $    237       $ 1,049       $ 5,164       $ 16,698   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Does not contain product and sale royalty payments. See “—Royalties.”

 

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(2) The lease from Metropolitan Mines Corporation relating to certain mining claims at the Sunshine Mine property requires monthly payments of $1 until ore is produced from the Metropolitan property. This obligation has not been included in the table above as the time for commencing production is unknown.
(3) The San Jose de Minas Finder’s Fee Agreement requires an annual payment of 5% of the exploration costs incurred by us on the concession covered by this agreement, limited to a maximum payment of $100. This obligation has not been included in the table above as the amount of future exploration costs is unknown.

Off Balance Sheet Arrangements

Other than the advanced royalty payments included in “—Contractual Obligations” above, we have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.

Critical Accounting Policies

Listed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability or expense that is being reported.

Mineral Properties and Carrying Value of Long-Lived Assets

Mineral property acquisition costs are recorded at cost and are deferred until the viability of the property is determined. Exploration, mineral property evaluation, option payments, related acquisition costs for mineral properties acquired under option agreements, general overhead, administrative and holding costs to maintain a property on a care and maintenance basis are expensed in the period they are incurred. When proven and probable reserves are determined for a property, subsequent development costs on the property are capitalized. If a project were to be put into production, capitalized development costs would be depleted on the units of production basis determined by the proven and probable reserves for that project.

We review and evaluate our long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Asset impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. An impairment loss is measured and recorded based on discounted estimated future cash flows. Future cash flows are estimated based on estimated quantities of recoverable minerals, expected silver and other commodity prices (considering current and historical prices, trends and related factors), production levels, operating costs, capital requirements and reclamation costs, all based on life-of-mine plans. No impairment tests have been required since our acquisition of the Sunshine Mine in 2010.

Existing proven and probable reserves and value beyond proven and probable reserves, including mineralization other than proven and probable reserves and other material that is not part of the measured, indicated or inferred resource base, are included when determining the fair value of mine site reporting units at acquisition and, subsequently, in determining whether the assets are impaired. The term “recoverable minerals” refers to the estimated amount of silver or other commodities that will be obtained after taking into account losses during ore processing and treatment and ultimate sale. Estimates of recoverable minerals from such exploration stage mineral interests are risk-adjusted based on management’s relative confidence in such materials. In estimating future cash flows, assets are grouped at the lowest levels for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups.

 

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Various factors could impact our ability to achieve our forecasted production schedules from proven and probable reserves. Additionally, production, capital and reclamation costs could differ from the assumptions used in the cash flow models used to assess impairment. The ability to achieve the estimated quantities of recoverable minerals from exploration stage mineral interests involves further risks in addition to those factors applicable to mineral interests where proven and probable reserves have been identified, due to the lower level of confidence that the identified mineralized material could ultimately be mined economically. Assets classified as exploration potential have the highest level of risk that the carrying value of the asset can be ultimately realized, due to the still lower level of geological confidence and economic modeling.

Reclamation Obligations

Reclamation costs are allocated to expense over the life of the related assets and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. Reclamation obligations are based on when the spending for an existing environmental disturbance will occur. We review, on at least an annual basis, the reclamation obligation at the Sunshine Mine site in accordance with guidance for accounting for asset retirement obligations.

Accounting for reclamation obligations requires management to make estimates unique to the Sunshine Mine of the future costs we will incur to complete the reclamation work required to comply with existing laws and regulations. Actual costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation work required. Any such increases in future costs could materially impact the amounts charged to earnings for reclamation.

Income and Mining Taxes

We recognize the expected future tax benefit from deferred tax assets when the tax benefit is considered to be more likely than not of being realized. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows and the application of existing tax laws in the United States and Mexico. Refer above to “—Mineral Properties and Carrying Value of Long-Lived Assets” for a discussion of the factors that could cause future cash flows to differ from estimates. To the extent that future cash flows and taxable income differ significantly from estimates, our ability to realize deferred tax assets recorded at the balance sheet date could be impacted. Additionally, future changes in tax laws in the jurisdictions in which we operate could limit our ability to obtain the future tax benefits represented by our deferred tax assets recorded at the reporting date.

Our properties involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and Mexico tax audits. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues, if any, in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. We adjust these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If an estimate of tax liabilities proves to be greater than the ultimate assessment, a tax benefit would result. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

Stock-Based Compensation

Our stock based compensation includes both stock options granted to employees and stock sold to or given to related parties (including their employees) and vendors.

 

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The following table sets forth information for our option grants from January 1, 2010 through June 30, 2011:

 

Grant Date

   Options
Granted
     Exercise Price      Fair Value
Per Share
 

2010

     —           —           —     

2011(1)(2)(3)

     163,600         13.83 - 27.65         13.83   

 

(1) We granted 38,600 options on March 9, 2011 with an exercise price of $13.83.
(2) We granted 125,000 options on May 4, 2011 with an exercise price of $27.65.
(3) We granted 100,000 and 150,000 options on July 18, 2011 and August 8, 2011, respectively, with an exercise price of $27.65.

In addition, on June 30, 2010, Los Gatos Ltd. issued 174,949 ordinary shares (valued at $0.20 per share) for an aggregate of $2 to an employee of a related entity.

Significant Factors, Assumptions and Methodologies used in Determining Fair Value of Options

Stock-based compensation expense for options is based on the estimated fair value for each award on the grant date. We calculate the grant date fair value based on an option pricing model using estimated amounts for risk-free interest rate, dividend yield, estimated volatility of our common stock, the expected life of the awards and the fair value of the underlying common stock. In addition to the assumptions used to calculate the fair value of the options, we are required to estimate the expected forfeiture rate of the option awards, and only recognize stock-based compensation expense for those option awards expected to vest. We recognize stock-based compensation expense as a component of either exploration or general and administrative expense on a straight-line basis over the requisite service period of the award.

We calculated the fair value of options granted during the six months ended June 30, 2011 using the following assumptions:

 

     March 9,  2011
Grant
    May 4,  2011
Grant
 
     (unaudited)  

Risk-free interest rate

     2.46     2.28

Dividend Yield

     —          —     

Estimated volatility

     87.23     90.06

Expected option life

     6 years        6 years   

Fair value of common stock

   $ 13.83      $ 13.83   

The risk-free interest rate assumption was based on the U.S. treasury constant maturity yield at the date of the grant over the expected life of the option. No dividends are expected to be paid. We calculated the estimated volatility based on the historical volatility of a group of peer companies’ common stock over the expected option life. The peer information was used because we were not publicly traded at the time of the grant, and therefore did not have the market trading history required to calculate a meaningful volatility factor. The computation of expected option life was determined based on a reasonable expectation of the option life prior to the option being exercised or forfeited.

We estimated a forfeiture rate of zero based upon our expectation of forfeiture for these grants.

[We are still evaluating the fair value of the common stock underlying the July and August option grants of 100,000 and 150,000 options, respectively.] We intended that the exercise price for the options granted in May, July and August 2011 would be well in excess of the underlying value of our common stock as the options are intended to be incentive in nature.

 

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As of June 30, 2011, there were approximately $1,398 of unrecognized stock-based compensation expense related to non-vested stock option awards that we expect to recognize over a weighted average vesting period of 2.6 years.

Assuming an initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, the intrinsic value of stock options outstanding at June 30, 2011, after giving effect to the 125,000 options to be granted to our Executive Chairman and Chief Executive Officer and the 16,000 options to be granted to each of our non-employee directors upon the consummation of this offering, was $            , of which $             related to options that were vested and $             related to options that were unvested. See “Compensation Discussion and Analysis—Grants of Plan-Based Awards” and “Compensation Discussion and Analysis—Director Compensation.”

Common Stock Valuation

We estimated the fair value of our common stock in March and May 2011 based on a market value approach of our common stock. During March 2011, an unrelated party purchased 15% of our common stock for $13.83 per share. Subsequent to this purchase through June 30, 2011, investors purchased approximately 6% of our common stock for $13.83. Accordingly, based on this market data, a fair value of $13.83 per share of common stock was used in valuing the options granted in March and May 2011.

Los Gatos Ltd. Ordinary Share Valuation

Stock based compensation for stock sold to or given to related parties (including their employees) and vendors has been recorded at the fair value of the shares in excess of the price paid for the stock. For the 174,949 ordinary shares sold in 2010, the fair value of the ordinary shares was determined by our Board of Directors with the assistance of management. We utilized the guidance set forth by the American Institute of Certified Public Accountants, or the AICPA, in the AICPA Technical Practice Aid when establishing the fair value of the ordinary shares at the purchase date.

The 2010 ordinary share valuation (which also required valuing the outstanding Los Gatos Ltd. preferred shares) was based on an enterprise value and option pricing model. As an active market for our Los Gatos Ltd. shares did not exist, our analysis was based on estimates of the enterprise value discussed below attributable to the ordinary shares of Los Gatos Ltd. From guidance in the AICPA Technical Practice Aid, we selected an option pricing model that treated Los Gatos Ltd.’s ordinary and preferred shares as call options on the enterprise value, with the exercise price based on the liquidation preference of the preferred shares. Given the liquidation preference of the preferred shareholders, in some cases a majority of the enterprise value was attributed to the preferred shares in the option pricing model. We calculated an estimate of share price volatility based on a sample of comparable company volatilities since Los Gatos Ltd. shares were not actively traded. Additionally, our option pricing model included discount factors of 35% and 20% for lack of marketability and control by a single shareholder, respectively. Based on the assumptions used and the model described above, a value of $0.20 per share was allocated to the ordinary shares granted to an employee of a related entity on June 30, 2010. To estimate the enterprise value, we used the following information:

 

   

No offers to sell or solicitations to purchase any portion of Los Gatos Ltd.’s assets or shares occurred from the period January 1, 2010 to June 30, 2010.

 

   

A valuation of the assets (exploration properties) held by Los Gatos Ltd. by reference to comparable sales of exploration property and the likelihood of exploration success at our Los Gatos Ltd. properties. Our valuation compiled information on transactions recently completed by companies listed on various stock exchanges and having precious-metals exploration properties in similar geographic areas and political jurisdictions; specifically Mexico. From the review of numerous transactions, a number of appropriate transactions were selected for analysis to establish a range of values for the subject properties as of June 30, 2010. The likelihood of success was determined based upon the activities performed on the various exploration concessions held by Los Gatos Ltd.

 

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We obtained information on several underground silver-dominated, vein resources/deposits in Mexico that were either in production or the infrastructure was in construction. We estimated a value per silver equivalent ounce for each resource/deposit, where possible.

In addition, we considered the following subsequent events in support of our valuation:

 

   

A proposed transaction (with an unrelated party that was never consummated) to acquire a portion of Los Gatos Ltd.

 

   

The discussions and negotiations with Liberty Metals and Mining, an unrelated party, that ultimately purchased 15% of Sunshine Silver Mines Corporation in March 2011.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see note 2(o) to the December 31, 2010 consolidated financial statements.

Quantitative and Qualitative Disclosures About Market Risk

Commodity Price Risk

We intend to engage in the production of silver and concentrates containing silver, lead, zinc and antimony at the Sunshine Mine and the Los Gatos Project. Accordingly, we expect the principal source of future revenue to be the sale of silver, and to a lesser extent, lead and zinc. A significant and sustained decrease in the price of these metals from current levels could have a material and negative impact on our business, financial condition and results of operations.

Foreign Currency Risk

Although most of our expenditures are in U.S. dollars, certain purchases of labor, operating supplies and capital assets are denominated in other currencies, primarily the Mexican Peso. As a result, currency exchange fluctuations may impact the costs of our operations. To reduce this risk, we maintain limited cash balances in foreign currencies and transact most of our purchases in U.S. dollars.

Concentration of Risk

We have placed nearly all of our cash investments with a single, high-quality financial institution. All cash equivalents are invested in high-quality, short-term money market instruments, including government securities, bankers’ acceptances, bank notes, certificates of deposit, commercial paper and repurchase agreements of domestic and foreign issuers. At no time have we had funds invested in asset-backed commercial paper. We have not experienced any losses on our cash investments.

 

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SILVER INDUSTRY OVERVIEW

The Silver Market

Silver is one of the eight precious, or noble, metals; the others are gold and the six platinum-group metals. Silver occurs naturally in its solid metallic state and is commonly associated with deposits of gold, copper, lead and zinc.

As an industrial and monetary asset, silver has a dual personality that differentiates it from other precious metals. On the one hand, silver has a number of distinctive physical and chemical properties that makes it an essential component in several industrial applications, including its strength, malleability and ductility, its electrical and thermal conductivity, its sensitivity to and high reflectance of light, and its ability to endure extreme temperature ranges. These properties restrict its substitution in most applications.

On the other hand, silver has been used as a medium of exchange since earliest recorded history. From the time of the Roman Empire until the 19th century, most nations were on a silver standard with silver coins forming the main circulating currency. While silver is no longer widely used as circulating currency, the metal is still widely sought by investors for its store of value attributes. In particular, silver is viewed as an attractive hedge against a decrease in the value of the U.S. dollar and inflation during times of economic uncertainty.

Silver Demand

Silver has strong supply and demand fundamentals with significant demand rooted in diverse sectors. The demand for silver is driven primarily by three uses: industrial, consumer and investment. According to GFMS, in 2010, industrial, consumer and investment represented 46.1%, 37.0% and 16.8% of silver demand, respectively.

Industrial and consumer demand for silver, which is in the form of manufactured end-products, increased across all major end uses in 2010, with the exception of photography and silverware, primarily due to strong gross domestic product gains in emerging markets and the industrialized world’s improving economic outlook. According to GFMS, total global demand for these two uses grew by 12.8% in 2010, to a 10 year high of 878.8 million ounces. This increase was led by the industrial demand category, which, according to GFMS, rose by 20.7% to 487.4 million ounces in 2010.

With rapid population and income growth, surging demand for consumer electronics and a burgeoning housing market, China is the largest global silver marketplace fueling industrial and consumer demand for silver. According to GFMS, silver industrial and consumer demand in China is estimated to have risen from 50.8 million ounces in 2001 to 127.2 million ounces in 2010, an increase of 150.4%.

 

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The graph below denotes global silver demand from 2001 to 2010:

Global Silver Demand

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Source: GFMS, World Survey 2011

Industrial Demand

Traditional industrial applications of silver include batteries, bearings, brazing and soldering, catalysts and electronics. In addition to traditional industrial uses, increases in emerging applications for silver are expected to continue to augment industrial demand. Emerging applications include utilizing silver’s reflectivity as a component in solar cells to produce “green” electricity and utilizing silver’s antimicrobial properties in medical applications and in the prevention of algae build-up in water purification systems.

According to GFMS, between 2009 and 2010, industrial demand for silver rose by 20.7%, to 487.4 million ounces. A major source of the increase in industrial demand for silver in 2010 was the electrical and electronics sector. Silver’s electrical and thermal conductive properties make it ideal for multiple high performance electronics and high voltage circuits, connectors and other electrical components, which are all integral parts of electronics. Such uses include switches, contacts, fuses, superconductors and printed circuit boards, which are contained in computers, mobile phones and other smart technologies. According to GFMS, silver demand from the electrical and electronics sector reached 242.9 million ounces in 2010, the highest level on record, up 30.9% from 2009.

Accelerated growth in the solar panel market also contributed to the rise in silver industrial demand in 2010. Silver is used both as a conductor in solar cells and as a reflector in mirrors used to concentrate solar energy. Demand for silver from the solar panel industry surged in 2010, up 70% over 2009 levels, to approximately 50 million ounces according to GFMS.

 

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Consumer Demand

Consumer use of silver is primarily for the fabrication of jewelry, silverware and coins, which rely on silver’s lustre, resistance to tarnishing and malleability. According to GFMS, the jewelry sector accounted for 15.8% of total demand for silver in 2010, followed by coins and medals with 9.6% of total demand and silverware with 4.8% of total demand. For these uses silver is often alloyed to a small proportion of other metals, such as copper, to harden it. Sterling silver, for example, is 92.5% silver and 7.5% copper and has been the standard in many countries for silver jewelry since the 14th century.

Historically, photographic uses represented silver’s second largest source of demand, after industrial applications. However, photographic off-take has been on a steady decline since 2001, driven by the move from silver halide to digital technology, especially in the area of consumer film. In 2010, photographic uses accounted for 6.9% of total silver demand, according to GFMS.

According to GFMS, between 2009 and 2010, consumer demand for silver rose by 4.2%, to 391.3 million ounces. A major source of the increase in consumer demand for silver in 2010 was the increase in demand for silver coins and medals. The fabrication of coins and medals has increased gradually for much of the past decade, but growth has accelerated since the onset of the financial crisis in 2008. According to GFMS, silver demand for coins and medals in 2010 increased 28.2% from 2009, to 101.3 million ounces.

Investment Demand

Silver has been a store of monetary value for over 4,000 years. Historically, the price of silver has shown at times a high correlation to the price of gold as a result of investment demand, and has been at times viewed as an attractive hedge against a decrease in the value of the U.S. dollar and inflation, attracting investors during times of uncertainty.

Investment demand for silver has increased significantly in the past 10 years, with the most significant investment demand coming from investment products such as bullion funds and silver ETFs. In 2010, net investment in silver rose to 178.0 million ounces, representing 16.8% of silver demand, up 47.5% from 2009 levels, according to GFMS. Macro-developments such as concerns regarding the sovereign debt crisis in Europe, political problems worldwide, high unemployment in developed countries and rising inflation in developing countries were all factors that attracted investors to silver in 2010.

Silver Supply

Silver supply comes from two principal sources, namely mine production and scrap supply. In 2010, according to GFMS, mine production comprised 69.6% of total silver supply while scrap silver constituted 20.3% of total silver supply.

According to GFMS, only 30.4% of mined silver is produced at mining operations where silver is the primary metal mined. The remaining 69.6% of silver mined is extracted in zinc, copper and gold mines. As a result, silver supply is relatively inelastic and tends to lag demand during periods of strong growth. According to GFMS, silver mine production grew 2.5% in 2010 versus total demand growth of 14.6%.

 

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Mexico was the world’s largest silver mining country in 2010 (128.6 million ounces), followed by Peru (116.1 million ounces), China (99.2 million ounces), Australia (59.9 million ounces) and Chile (41.0 million ounces). The graph below illustrates the world’s leading primary silver mines in 2010, based on their production:

World’s Leading Primary Silver Mines, 2010

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Source: GFMS, World Survey 2011

Markets and Outlook

Over the last twenty five years, the price of silver, which proved relatively volatile in that timeframe, increased 571.6%. The price of silver averaged approximately $4.71 per ounce from 2000 through the end of 2003. Beginning in 2004, the price of silver began to appreciate, reaching a high of $48.44 per ounce in 2011.

Rising silver prices have boosted investor interest in the metal and led to a significant increase in silver’s investor base. The silver market expanded significantly in both volume and value in 2010, as prices increased over 83% between January 1, 2010 and December 31, 2010. Trading volumes at futures and options exchanges increased significantly and the dollar value of silver flows among market participants nearly doubled from 2009 levels. According to GFMS, a steep rally in the price of silver in 2010 was also assisted by the increase in industrial and consumer demand for silver in 2010.

 

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A chart indicating silver prices between January 1, 1986 and September 7, 2011 is set out below. As of September 7, 2011, the price of silver was $41.58 per ounce.

Historical Silver Price

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Source: Bloomberg

The following chart shows the comparative return of an investment in silver versus certain other investments.

Comparative Returns to September 7, 2011

 

      1 Year     5 Year     10 Year     20 Year     25 Year  

Silver

     110.2     231.2     892.4     974.5     660.9

Gold

     44.8     194.7     565.4     422.2     332.7

Oil

     51.7     77.2     321.6     479.2     654.5

S&P 500

     9.8     (7.4 %)      10.4     208.0     378.5

FTSE

     (1.7 %)      (9.2 %)      4.9     99.4     215.7

Nikkei

     (5.0 %)      (45.3 %)      (16.7 %)      (61.4 %)      (53.3 %) 

MSCI World Index

     4.4     (12.6 %)      20.8     132.6     226.3

$/EUR

     11.2     10.7     55.3     —          —     

13 Week T-Bill

     0.1     1.5     1.9     3.3     4.0

10 Year Bond

     3.0     3.7     4.0     5.1     5.8

30 Year Bond

     4.2     4.4     4.7     5.6     6.2

Notes: T-bills and T-bonds are average rates of return

Source: Bloomberg

In the short- to mid-term, GFMS believes that the economic backdrop for investment in silver will remain supportive as monetary policy is unlikely to significantly tighten in 2011 with ongoing economic, inflation and sovereign debt concerns. This is expected to encourage investment demand for silver and enhance industrial and consumer demand.

 

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BUSINESS

The Company

Sunshine Silver Mines Corporation is a U.S.-based precious metals exploration and development company with the objective of becoming a premier silver producer. The Company is currently focused on the advancement of its two principal projects: (i) the Sunshine Mine in Idaho, one of the highest-grade known remaining primary-silver discoveries worldwide, which is estimated to have produced a total of over 365 million ounces of silver, and (ii) the Los Gatos Project in Chihuahua, Mexico, where the Company holds a 81,703 hectare land position, constituting a new mining region. The Company has completed independent technical studies on both projects, which were prepared in accordance with NI 43-101 and, in the case of the Sunshine Mine, which has mineralized material, the requirements of Industry Guide 7. In total, as of the date of this prospectus, the Company owns or controls a portfolio of 23 exploration properties in the United States and Mexico covering an area of approximately 450,018 hectares.

Charts of the Company’s corporate structure before and after this offering are set forth below.

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* Immaterial corporate subsidiaries excluded. The after offering corporate structure chart assumes no exercise of the over-allotment option. See “Principal Stockholders.”

Principal Projects

The Sunshine Mine, acquired by the Company in the first half of 2010, is located within the Coeur d’Alene Mining District in Idaho. It is a past-producing mine, which is estimated to have produced a total of over 365 million ounces of silver from 1904 to 2008. In 1990, the last year the Sunshine Mine operated at full capacity, silver production from the Sunshine Mine was approximately 5.4 million ounces. In 2008, Sterling, the prior owner of the Sunshine Mine, ceased production and in early 2009 went into bankruptcy due to, we believe, among other factors, falling silver prices and inadequate capital.

 

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The Sunshine Mine has significant existing on-site infrastructure, including a primary shaft, which is operational and being upgraded and refurbished, and a secondary shaft, which is being refurbished. The Company’s consolidated land position at the Sunshine Mine property currently consists of approximately 2,408 hectares. The property has an abundant water supply, is connected to the electricity grid and is accessible by paved roads.

The Los Gatos Project is located approximately 128 kilometers south of the state capital of Chihuahua City, in Northern Mexico and consists of two identified silver discoveries, the Cerro Los Gatos zone and the Esther zone, and 14 other priority targets with over 100 kilometers of outcropping quartz and calcite veins. The area is characterized by a predominant silver-lead-zinc mineralization.

Business Strengths and Competitive Advantages

Attractive Assets in Two of the World’s Premier Silver Regions

Sunshine Silver’s principal assets are located in two of the world’s premier silver regions. The Sunshine Mine property is located in the Coeur d’Alene Mining District in Idaho, which district is estimated to have produced over one billion ounces of silver over the Mine’s 107-year history, and the Los Gatos Project is located in the Mexican Silver Belt, the world’s largest silver producing region in 2010. In addition to being located in premier silver regions, both assets possess characteristics that differentiate them from other silver projects:

Sunshine Mine Property

 

   

A prolific past-producing mine, once one of the largest silver producers in the United States, which is estimated to have produced a total of over 365 million ounces of silver

 

   

One of the highest-grade known remaining primary-silver discoveries worldwide, estimated to contain 1,991,169 tons of mineralized material at an average silver grade of 21.2 ounces per ton

 

   

Consolidated land position of approximately 2,408 hectares

 

   

Significant existing infrastructure, including a primary shaft that is operational and being upgraded and refurbished, and a secondary shaft that is being refurbished and access to roads, power and water

 

   

Strong community support coupled with an experienced and skilled workforce

Los Gatos Project

 

   

Control over an emerging silver region; land position of 81,703 hectares

 

   

The identified Cerro Los Gatos and Esther zones, high-grade mineralization occurrences that currently extend more than 2,500 meters along strike, remain open at depth and to the southeast

 

   

Widespread mineralization beyond the Cerro Los Gatos and Esther zones, with 14 other priority targets

Reduced Operating Risks at Sunshine Mine Given Historical Production

Sunshine Silver believes that the significant historical production at the Sunshine Mine, combined with the recent and planned mine improvements, reduces the risk of the project relative to other silver development projects. However, significant time and capital will be required before the Sunshine Mine returns to production and the Company anticipates that it will continue to incur operating costs without realizing any revenues at the Sunshine Mine for the foreseeable future, including costs related to intensive underground exploration, rehabilitation and refurbishment of mine and processing infrastructure, and further dewatering of underground workings which are currently dewatered to a depth of approximately 1,125 meters.

The Sunshine Mine covers 171 hectares of surface rights, and the Company estimates that the Mine contains more than 160 kilometers of underground workings. The underground workings consist of multiple levels developed off the main production shaft, extending from the surface to a depth of over 1,825 meters, or more than 1,000 meters below sea level. The deepest level where Sunshine Silver has currently established mineralized material estimates is at a depth of over 1,645 meters.

 

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Since acquiring the Sunshine Mine, the Company has acquired additional surface rights and improved the existing infrastructure, repaired surface facilities and equipment and completed a number of environmental, health and safety upgrades. The Company has added experienced and highly-trained professionals to lead such improvements.

Significant Exploration Potential for Additional Silver Resources

Sunshine Silver believes it has numerous opportunities to define additional mineral resources through continued exploration of its properties:

 

   

Sunshine Mine: Sunshine Silver has rights to approximately 2,408 hectares of exploration ground at the Sunshine Mine property. The property has numerous well-defined exploration targets, many of which are extensions of past-producing silver veins. In addition, Sunshine Silver has acquired additional surface rights to further consolidate its ownership of this mineralized trend. Despite being a prolific silver producing region, Sunshine Silver believes that the Coeur d’Alene Mining District is still highly under explored.

 

   

Los Gatos Project: Sunshine Silver expects to expand the Cerro Los Gatos and the Esther zones, which remain open to extensions. Sunshine Silver also has identified 14 other priority targets.

 

   

Other opportunities: Sunshine Silver owns 21 other exploration properties in Mexico, which could provide additional opportunities for resource growth.

Politically Stable and Mining-Friendly Jurisdictions

Both Idaho and Mexico are jurisdictions with a long history of successful mineral development and operations. Both are considered desirable jurisdictions in which to conduct mining operations due to stable political, tax and regulatory policies. Based on a survey published in March 2011 by the Fraser Institute, an independent research organization, Idaho and Mexico rank among the top silver mining jurisdictions worldwide in terms of the attractiveness of government policies, access to infrastructure and qualified labor availability.

Attractive Market Dynamics

Investment demand for silver exposure remains strong, driven in part by continued U.S. dollar weakness, ongoing economic uncertainty in Europe and political unrest in the Middle East. Historically, silver has been viewed as an effective hedge against a decrease in the value of the U.S. dollar and inflation, attracting investors during times of uncertainty. In addition, industrial demand for silver continues to increase, driven by new emerging applications for silver such as solar energy, medical applications and water purification, which the Company believes will enhance the strong supply and demand fundamentals of silver.

Despite this strong investment and industrial demand, the universe of primary silver companies is small, which limits investor options for silver exposure. Sunshine Silver represents an opportunity for investors to gain exposure to a primary silver company with two attractive assets.

Experienced Management Team and Board

Sunshine Silver has an experienced and growing management team with a track record of successfully identifying and developing mineral discoveries. The Company’s Executive Chairman & Chief Executive Officer, Stephen Orr, has 34 years of experience in the minerals industry principally with Homestake Mining Company, where he ultimately served as President of Homestake Canada Inc.; Barrick Gold Corporation, where he was Managing Director of Australia & Africa operations; OceanaGold Limited, where he served as Chief Executive Officer; and Ventana Gold Corp., where he was President & Chief Executive Officer. The Company’s Chief Financial Officer, Roger Johnson, has 32 years of experience in financial management of the minerals industry with Coopers & Lybrand, as a public accountant; Kennecott Utah Copper Corporation, as Vice President,

 

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Controller; Pasminco Zinc, Inc., as Senior Vice President, Finance and Administration; and Newmont Mining Corporation, where he was Vice President, Chief Accounting Officer. The Company’s Chief Operating Officer, John Galassini, has 24 years of experience in the minerals industry with Phelps Dodge Corporation, where he ultimately served as Senior Vice President North America; Freeport McMoRan Copper & Gold, Inc., as Senior Vice President; and Kinross Gold Corporation, where he served as Regional Vice President North America.

The Board will be comprised of senior mining and financial executives who have broad domestic and international experience in mineral exploration, development and mining. The Company’s senior management and Board have in excess of 300 years of combined mining experience. Sunshine Silver believes the specialized skills and knowledge of the management team and the Board will significantly enhance Sunshine Silver’s ability to explore and develop the Sunshine Mine property and the Los Gatos Project and pursue other regional growth opportunities.

Shareholder Sponsorship

The Company and its predecessors were founded by Electrum. Electrum is a leading private equity investment firm engaged in mining exploration and development. Led by Dr. Thomas S. Kaplan, a highly-respected natural resources investor, Electrum brings together decades of combined investment and operating experience, proven execution abilities and capabilities, a broad and diverse background and a deep knowledge of the natural resources sector and mining disciplines. By maintaining a disciplined and professional approach to acquisition and value enhancement, Electrum has developed a strong track record and a multi-billion dollar asset base in the natural resource sector. Electrum holds significant stakes in public and private metals and mining companies, including NovaGold Resources Inc., Gabriel Resources Ltd., Taung Gold Limited, Tintina Resources Inc., Niocan Inc. and Sunward Resources Ltd. The Company believes that access to the specialized skills and knowledge within Electrum will significantly enhance Sunshine Silver’s ability to execute its business strategy.

Los Gatos Ltd. was founded by Electrum in April 2006. Prior to the merger of Los Gatos Ltd. with and into the Company in March 2011, Electrum principally funded the activities of Los Gatos Ltd. In addition, pursuant to a services agreement effective January 1, 2008, Tigris Financial (International) L.P. provided services consisting primarily of business and financial advice with respect to the strategic business development and corporate finance activities of Los Gatos Ltd. and its subsidiaries. This agreement was terminated on August 1, 2011. Precious Metals Opportunities LLC, our predecessor, was founded by Electrum in December 2009. Prior to the merger of Los Gatos Ltd. with and into the Company in March 2011, Electrum funded the activities of the Company. Prior to Mr. Orr and Mr. Johnson joining us in 2011, Electrum employees served as our officers and directors and were responsible for the management of all aspects of our business, including the acquisition of the Sunshine Mine and our financing activities in March through June 2011. In addition, pursuant to a services agreement, effective May 11, 2010, between Silver Opportunity Partners LLC and Tigris Financial Group, Ltd. (which has been assigned by Silver Opportunity Partners LLC to the Company), and a services agreement, effective March 1, 2011, between the Company and Tigris Financial Group, Ltd. (which was terminated on August 1, 2011), Tigris Financial Group, Ltd. has provided services to the Company and its subsidiaries, including: general business; investment, management and/or financial advice; internal bookkeeping services; general administrative services; network and communications services; supervision of outside service providers; and other services as requested from time to time. William Natbony, Chairman of Tigris Financial Group, Ltd., serves as a member of our Board of Directors.

In March 2011, Liberty Metals & Mining purchased 15% of the Company’s common stock. Liberty Metals & Mining is a wholly-owned subsidiary of Boston-headquartered, Liberty Mutual Group. As of June 30, 2011, Liberty Mutual Group had more than $72 billion of total invested assets. As a subsidiary of Liberty Mutual Group, Liberty Metals & Mining makes investments in the metals and mining sector for Liberty Mutual Group.

Prior to Liberty Metals & Mining’s purchase of the Company’s common stock, the Company had no business relationship with Liberty Metals & Mining. Diana Walters, President and Chief Executive Officer of Liberty Metals & Mining, serves as a member of our Board of Directors.

 

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Following completion of the offering, Electrum and Liberty Metals & Mining will beneficially own approximately     % and     % of the Company’s outstanding common stock, respectively, assuming the over-allotment option is not exercised by the underwriters, and both Electrum and Liberty Metals & Mining will continue to have a presence on the Board.

Business Strategy

Sunshine Silver’s business strategy is focused on creating value for stakeholders through the ownership and advancement of its two principal projects, the Sunshine Mine property and the Los Gatos Project, and through the pursuit of similarly attractive silver-focused projects. Sunshine Silver does not expect to enter into production or generate revenue at either the Sunshine Mine or the Los Gatos Project in the near future. The Company believes that the anticipated net proceeds from this offering and its existing cash and cash equivalents will provide adequate funds for ongoing operations, planned capital expenditures and working capital requires for at least the next             months. However, we may elect to seek added funding prior to that time.

Sunshine Silver plans to:

Continue Exploration and Development at the Sunshine Mine property to Convert Existing Mineralized Material to Reserves and Expand the Resource Base

Sunshine Silver intends to complete a pre-feasibility study at the Sunshine Mine property to determine the costs to re-commission and operate the Sunshine Mine as a sustainable and efficient silver producer. Sunshine Silver expects this study will be completed within 24 months from the completion of this offering. In addition, the Company intends to continue with its surface and underground exploration drilling program to provide sufficient sampling to estimate grade, tonnage and location of additional potentially economic veins and deposits for future production and to upgrade mineralized material to reserves.

Re-Commission the Sunshine Mine to Long-Term Sustainable Production

Sunshine Silver intends to refurbish or replace existing infrastructure at the Sunshine Mine in connection with its modernization and rehabilitation efforts and to review process optimization alternatives. The re-commissioning of the Sunshine Mine will be designed to allow the Company to reach a safe and sustainable production rate utilizing its newly optimized facilities.

Accelerate Exploration at the Los Gatos Region and Advance the Los Gatos Project

The Company plans to accelerate its exploration program at the Los Gatos region through additional drilling with the intent of identifying mineralized material. In the near term, the Company also intends to progress the most advanced exploration sites, the Cerro Los Gatos and Esther zones, through to pre-feasibility study.

Conduct Further Exploration at Sunshine Silver’s Mexican Properties outside the Los Gatos Region and Apply for Additional Exploration Acreage

Sunshine Silver plans to expand its exploration programs at its Mexican properties outside the Los Gatos region and continue to grow its land position. The Company owns or controls a portfolio of 21 other exploration properties in Mexico covering an area of 362,298 hectares, with significant additional hectares under application for mineral concession. There are two projects underway with significant drill results, El Doctor in Oaxaca and Zaragoza in Chihuahua. Additional drilling is planned at both of these projects as well as additional targets through 2012. The Company is planning sufficient drilling in an effort to outline continuous geometry of mineralization at El Doctor and Zaragoza, which could lead to initial estimates of mineralized material.

 

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Identify and Pursue Other Growth Opportunities that Add Value to Stockholders

Given the management and Board’s strong track record in exploration, development and asset integration, the Company may pursue acquisitions and joint ventures that are value accretive to its stockholders through the pursuit of similarly attractive silver-focused projects.

The Sunshine Mine Property

The technical information appearing below concerning the Sunshine Mine property, including estimates of mineralized material, was derived from the reports of Behre Dolbear & Company, independent mining consultants.

Location of the Sunshine Mine Property

The Sunshine Mine property is located within the Coeur d’Alene Mining District in Northern Idaho. Most of the district’s production has come from within a 24.1 kilometer-long band from the Bunker Hill mine to the Galena mine. The Sunshine Mine is approximately in the center of the Bunker Hill and Galena Mine belt. The Sunshine Mine property includes both owned and leased properties containing 200 patented mining claims and 200 unpatented mining claims, for a mineral rights position of approximately 2,408 hectares and 171 hectares of surface rights.

The Sunshine Mine property is approximately 71 kilometers east of Coeur d’Alene along U.S. Interstate 90. The Jewell Shaft, the mine’s main shaft, is located in the Big Creek Valley at Latitude 47°, 30’, 6” North, Longitude 116°, 4’, 10” West, near the base of a steep hill that lies to the east. The Mine’s infrastructure is located in proximity to the Jewell shaft. Access to the Sunshine Mine property from Coeur d’Alene is by I-90 east to the Big Creek turnoff and then south on about 4.0 kilometers of secondary paved road to the Mine site. The nearest town is Kellogg, Idaho, which is about 7.2 kilometers from the Mine.

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Ownership and Properties

In May 2010, the Company acquired from Sterling, through Sterling’s bankruptcy proceedings, the majority of the operating facilities and equipment at the Sunshine Mine, including a lease on the Sunshine Mine that included a purchase option for title to the Mine. In July 2010, the Company closed the purchase option in the lease to obtain title to the Sunshine Mine and acquired the remaining operating facilities and equipment.

The Sunshine Mine property also includes the Metropolitan, Chester, Bismark and Mineral Mountain properties that are leased by the Company.

The following table sets out the various property rights that comprise the Sunshine Mine property:

 

Property

  

Owner

   Patent Claims      Unpatented Claims      Hectares  

Sunshine

  

Sunshine Silver

     165         118         1,746   

Metropolitan

  

Metropolitan Mines Corporation

     2         70         413   

CAMP Project

   Sunshine Silver (below 274 meters below sea level)      20         12         163   

Chester

   Chester Mining Company      6         0         43   

Bismark

   Chester Mining Company      3         0         25   

Mineral Mountain

   Mineral Mountain Mining and Milling Company      4         0         18   

Total

        200         200         2,408   

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Sunshine and CAMP Project

The Company owns 185 patented and 130 unpatented mining claims covering 1,909 hectares at the Sunshine Mine property, including the CAMP Project claims below 274 meters below sea level. This property includes the Sunshine Mine and mill, the Jewell shaft, surface facilities, a tailings impoundment area and

 

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extensive underground workings, including shafts, levels, raises and ramp systems, extending to a depth of over 1,825 meters. The property also includes the ConSil mine and mill and related buildings and equipment. Except in this paragraph and where the context otherwise requires, when describing the Sunshine Mine property in this prospectus, we include the leases set forth below.

Metropolitan

The Metropolitan property consists of 2 patented and 70 unpatented mining claims covering 413 hectares. These claims lay immediately to the south of the primary workings of the Sunshine Mine and immediately to the west of the ConSil mine. At depth the claims intersect several veins that were historically mined from the Sunshine Mine.

Other Sunshine Properties

In addition to the Sunshine, CAMP Project and Metropolitan properties, the Company leases other claims representing 13 patented claims covering 86 hectares.

Royalties

Many parts of the Sunshine Mine property are subject to royalties that are payable to parties from whom mineral rights are leased or to others who have a right to royalties on certain areas of the property. Certain of these agreements have royalty payments that are triggered when the Company begins producing and selling metal-bearing concentrate. These royalties are based on proceeds paid by smelters less certain costs, including costs incurred to transport the concentrates to the smelters, or NSR, for ore produced in the property area subject to the royalties. All royalty payment amounts below are in thousands of dollars.

Sunshine Mine

The Company is required to pay between a 0% (at a silver price below $6 per ounce) and 7% (at a silver price of $10 per ounce or higher) NSR royalty under a settlement agreement with the U.S. government and the Coeur d’Alene Indian tribe. All funds from the royalty must be used to pay for the remediation, restoration and other actions to address certain environmental damage to the Coeur d’Alene River and other natural resources located in the Idaho Silver Valley. The area subject to the royalty covers substantially all of the Sunshine Mine property, owned or leased by the Company, and extends outward within a one mile boundary of the property as set forth in the settlement agreement, which includes the leases set forth above under “—Ownership and Properties.”

Metropolitan Mines Corporation Mining Claims

The Company’s lease with Metropolitan Mines Corporation requires the Company to pay advanced royalties of $12.0 annually until such time as ore is produced from the Metropolitan property. Upon ore production, Metropolitan Mines Corporation is to be paid either 16% or 50% of the net proceeds from the sale of materials produced from the ore processed from these claims, depending upon the location of production.

Chester Mining Company Mining Claims

The Company’s lease with Chester Mining Company, or CMC, requires the Company to pay an advance royalty of $7.2 annually until such time as an NSR royalty of 4% or royalty of 20% of net profits on ore processed is payable. The net profit royalty is in lieu of and not in addition to the advance royalty and the NSR royalty. The lease also provides CMC with the option to acquire a 20% working interest in all ores, concentrates, metals or other mineral substances produced from the property. CMC may exercise this option by releasing the Company from its obligation to pay the 20% net profits royalty and by tendering an amount of cash equal to 20% of the then-current working capital fund. The initial lease team ends in 2029 and is renewable for an additional 25 years.

 

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Mineral Mountain Mining Claims

The Company’s lease with Mineral Mountain Mining and Milling Company, or Mineral Mountain, requires the Company to pay a royalty of $3.6 annually or a royalty of 3% of net profits, if net profits from the ore processed from these claims exceeds such amount. The lease also provides Mineral Mountain with the option to acquire a 3% working interest in all ores, concentrates, metals or other mineral substances produced from the property. Mineral Mountain may exercise this option by releasing the Company from its obligation to pay the 3% net profits royalty and by tendering an amount of cash equal to 3% of the then-current working capital fund. The initial lease term ends in 2029 and is renewable for an additional 25 years.

Infrastructure, Climate and Topography

The Sunshine Mine property has a mild, northern-U.S. climate with snow, rain and fog in the winter. The Sunshine Mine property is tied into the regional power grid, water is abundant from Big Creek, and there are sufficient sources of manpower. Adequate waste disposal areas are present at both the Jewell and the Silver Summit shaft areas. A tailings pond is located on the property. The Company expects that the capacity of the tailings pond as currently configured will be sufficient for approximately ten years after commercial production resumes and that additional capacity may be added thereafter by increasing the height of the pond dam. Ore processing facilities are located on site and will be refurbished or replaced. The topography is typical of northern Idaho’s countryside, hilly to mountainous and forested. The primary shaft is located above the base of a very steep mountain, while the hoist room and other infrastructure facilities are located on a relatively level area of property at the mountain base. The Company is still evaluating potential smelting locations, related transportation and smelting contract terms for the Company’s future production.

Geological Setting

The Coeur d’Alene Mining District is hosted by the rocks of the Pre-Cambrian Belt super group. These sedimentary rocks were deposited approximately 1.6 billion years ago. At various times these rocks were faulted, leached, altered and re-mineralized. The Belt super group has been divided into the Prichard group, Ravalli group, Middle Carbonate group and Missoula group. Within the District, rocks of the Prichard, Ravalli, Missoula and Middle Carbonate groups can be found. The formations comprising the Ravalli group are, listed from oldest to youngest, the Burke, Revett, and Saint Regis Formations. The District has a history of intense faulting and folding of these rock formations. Two major east-west fault zones, the Osburn and Placer Creek faults, cut through the District.

Ore deposits in the District are localized in the 182.9 meter thick St. Regis Formation and the underlying upper members of the 914.4 meter thick Revett Formation. Four major west-northwest trending faults cut the Sunshine Mine property area, and some have been mapped for several kilometers. The faults dip steeply to the south. The main vein systems at the Sunshine Mine property include the Sunshine, Chester, Copper, Yankee Girl and West Chance veins. Mineralized silver veins are present within a zone approximately 3,810 meters long by 1,524 meters wide and over a vertical distance of 1,890 meters from the surface at 1,036.3 meters above sea level to 853.4 meters below. The mineralization is open at depth below the 1,707 meter Mine level.

The Crescent mine is immediately adjacent to the west and the Silver Summit mine is immediately adjacent to the east of the Sunshine Mine. Many of the productive vein structures and faults in those adjacent mines pass directly across the Company’s mineral rights position.

History of the Sunshine Mine Property

The Sunshine Mine, one of the highest-grade known remaining primary silver discoveries worldwide, is estimated to have produced a total of over 365 million ounces of silver. In 1884, the Blake brothers staked the Yankee Lode mining claim, and various contiguous holdings were consolidated to become the Sunshine Mining Company in 1920. In 1921, operations continued and grew at the Sunshine Mine until it was at full production by

 

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the end of 1988. In 1992, Sunshine Mining Company merged into Sunshine Precious Metals, Inc., or SPMI. From 1991-2001, there was limited production at the Sunshine Mine primarily as a result of several factors, including a drop in the price of silver and the lack of regular and consistent exploration and development activities. The Mine eventually ceased production in the first quarter of 2001 and Sunshine Mining and Refining Company, or SMRC, the parent of SPMI, declared Chapter 11 bankruptcy. Sterling acquired control of the Sunshine Mine in 2003 through a lease with SPMI, which included an option to purchase the Mine. Beginning in August 2003, and followed by the initial drilling in the fall of 2004, Sterling began an exploration program, and the process of rehabilitation of the underground areas of the Mine began in 2004. The Sunshine Mine returned to production under Sterling for a short period in late 2007. In 2008, Sterling ceased production and in early 2009 went into bankruptcy, due to, we believe, among other factors, falling silver prices ($10.79 per ounce as of December 31, 2008) and inadequate capital. At that time, SNS Silver Corporation took over care and maintenance of the Mine under contract with SPMI. In May 2010, the Company acquired, through Sterling’s bankruptcy proceedings, the majority of the operating facilities and equipment at the Sunshine Mine, including the lease on the Sunshine Mine from SPMI that included a purchase option for title to the Mine. In July 2010, the Company closed the purchase option in the lease to obtain title to the Sunshine Mine and acquired the remaining operating facilities and equipment.

Exploration

The Sunshine Mine is without known reserves and the proposed program is exploratory in nature. It is estimated that there are approximately 5,000 underground drill holes on the Sunshine Mine property. Approximately two thirds of the footage drilled was for exploration, both for long-term and short-term mine planning and development. The longest underground hole is approximately 914 meters. Long underground exploration holes are required to locate structures and veins because most development, except in the West Chance deposit, has been on the veins and thus drilling platforms for shorter holes at appropriate angles to the targets have not been available.

The Company is undertaking significant exploration and re-development of the Sunshine Mine property that will require significant time and capital before the property returns to production. Since acquiring the Sunshine Mine, the Company has successfully completed or is currently working on the following significant re-development activities at the Sunshine Mine property:

 

   

acquired additional surface rights;

 

   

repaired surface facilities and equipment, including the Jewell hoists and shaft, and compressed air, water and pumping systems;

 

   

commissioned the ConSil hoist and completed work to enable rehabilitation of the ConSil shaft from the top station downward to the 910 meter level;

 

   

de-watered the Sunshine Mine to just below the 1,130 meter level;

 

   

re-established utility services to the Sunshine Mine ramp, enabling commencement of improvements required for ventilation and re-access to mining blocks;

 

   

made significant progress towards compiling a drill hole database review for areas of immediate exploration and began compiling the entire historical geologic database to create a three dimensional model of the resources; and

 

   

designed a new development plan to re-establish access in the lower Mine levels for exploration and development.

Historic exploration at the Sunshine Mine property was focused on progressive delineation of mineralization at depth leaving potential near-surface targets unexplored. However, long-known but previously unexplored target areas now are planned to be explored, through new drilling and new drill stations. The Company has identified important and prospective targets and multiple areas of exploration are planned to be tested for all accessible underground levels. The Company has also planned an extensive multi-year underground exploration program, focusing on eight primary veins. Total depth to be drilled under this program is estimated to be about

 

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110,000 meters. The first phase of the planned 2011 exploration program will be concentrated on three of the eight areas of focus, the Yankee Girl Vein, the Sunshine Vein and the Chester Vein/Fault, and require about 10,000 meters of underground diamond drilling.

The Company’s objectives at the Sunshine Mine property through 2013 are to:

 

   

define additional mineralized material through extensive surface and underground exploration;

 

   

complete a pre-feasibility study to determine the costs to re-commission and operate the Sunshine Mine as a sustainable and efficient silver producer; and

 

   

upgrade existing infrastructure and re-establish access to developed portions of the resource.

The Sunshine Mine has on-site infrastructure already in place, including a primary shaft, which is operational and in the process of being refurbished, and a secondary shaft, which is being refurbished. There is currently no production at the Sunshine Mine.

Sunshine Mine Mineralogy

Over 30 veins have been named and mined at the Sunshine Mine property. The principal vein systems in the property include the Sunshine, Chester, Copper, Yankee Girl and West Chance veins. The Sunshine Vein and Chester Vein are each estimated to have produced over 100 million ounces of silver to date. Major veins strike east-west and typically dip 60º-70º to the south. Locally, dips range from 45º to 90º. Vein strike lengths are up to 610 plus meters, with down dip lengths two to three times that of the strike length. Major veins are located between the regional and property-wide faults at an angle of about 25º to the boundary faults. Veins vary in width from a few inches to over nine meters, but are generally between one to 1.5 meters thick. Typically, the Sunshine Mine mineralized material consists principally of tetrahedrite, the high silver-content copper antimony sulfide. Tetrahedrite occurs as very fine grains in fracture filings, veinlets or discontinuous blebs in the vein-filled faults. This silver-bearing tetrahedrite is more properly called freibergite and contains 3% to 30% silver substituting for the copper in the crystal structure. Gangue minerals are predominantly siderite with lesser amounts of quartz. Galena is present in the West Chance Vein, the Silver Syndicate Vein and the Chester Hook Vein. Other metallic minerals seen in the gangue are pyrite, arsenopyrite, and, rarely, boulangerite, bournonite, pyrargyrite and magnetite.

Sampling and Analysis

Existing records and information from predecessor owners/operators of the Sunshine Mine show that the samplings, sample locations and descriptions, and sample handling were done in accordance with accepted industry standards. The reported method was that a geologist took one-to-five pound chip samples of the vein at the bottom, middle and top of the face as development on the vein proceeded. On the sample ticket, the location was recorded, the sample was described, and a sketch of the vein and face was made for most samples. The sample ticket was placed in a bag, and the geologist delivered the sample to the sample preparation facility. That sample data is available in the filed sample ticket books and in the electronic database beginning in 1995 and for some select samples prior to that year.

The drifts on the veins were generally sampled at five to six foot intervals. Both raises and stopes were sampled at regular intervals that vary based on data requirements at any given time. As needed, the paper data has been digitized and entered into an electronic database. Most of the drilling data from 1972 forward and about half of the data prior to 1972 has been entered into the database. Locations and analyses from the underground face samples beginning in 1995 have been entered into the electronic database. Data from the face samples prior to 1995 has been digitized and entered into the database, as needed. Historic underground sampling assay results were plotted on paper and canvassed-back paper maps. A nearly complete set of historic sampling maps have been stored in the Sunshine Mine archives and vaults. The maps are quite detailed and document the results of extensive drift and stope sampling.

 

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Core and underground samples were delivered to the sample preparation facility on-site by the geologist who logged the core or took the sample. The samples were crushed and ground and delivered to the laboratory for analyses. Predecessor employees did all of the sample preparation, analyses and posting of results on-site. This chain of custody maintained the sample integrity.

Sample preparation protocol used by the predecessor owner/operators of the Sunshine Mine has been reviewed and deemed to meet industry standards, and the likelihood of biased analytical results at the Sunshine Mine is not significant.

Historic assaying was undertaken at the in-house predecessor assay laboratory. Assaying of silver was by fire assay and in the future will be by fire assay with an atomic absorption, or AA, finished by the American Analytical Services laboratory. Details of the historic predecessor analytical protocol are not available. There is no quality assurance or quality control data from the predecessor laboratory to verify the precision and accuracy of the results, and the quality of the results may have varied over time. The Company does not believe that the lack of such data is a significant reason to question the analytical results for the following reasons: (i) nothing in the history of the Mine exists to cause doubt about the analytical results; (ii) the large number of analyses, over more than 50 years, makes any errors over a short period of time or on relatively few samples insignificant as regards the whole database; and (iii) as reported by the predecessor, the lack of questions by the smelter and refinery of the analyses of concentrates from the Sunshine Mine indicates that the predecessor laboratory produced quality analyses.

Historically, the predecessor employees did all of the sample preparation, analyses and posting of results on-site. This chain of custody maintained the sample integrity. For the up-coming exploration drilling campaign, it is expected that core samples will be collected by trained personnel and transported to a secure area at an assay lab for analysis. The assay lab is expected to perform internal lab checks that include laboratory duplicate assays for fire and AA assays and additional assays for base metals at the core storage facility, with the coarse rejects and sample pulps stored in a secure location in the core storage building for future use. All samples that remain on site, prior to delivery to the laboratory (onsite or offsite), are intended to be kept in a secure location not accessible by anyone other than approved personnel. On a random basis, it is expected that approximately every thirtieth sample pulp will be re-analyzed to determine reproducibility by a secondary certified laboratory.

Sunshine Mine Mineralized Material Estimate

All blocks in this estimate have been delineated by appropriately spaced underground sampling and/or drilling. Grade and tonnage has been estimated using classic industry-accepted methods for narrow vein deposits that are typical in the Coeur d’Alene Mining District. The Company refers to this method as the “McKinstry” method. It was developed by H.E. McKinstry early in the 20th century.

The ton and grade estimates in a block are based primarily on chip sampling vein widths and analyses from development and production headings. The vein widths are diluted to the planned mining width with wall rock at a zero grade to account for mining dilution and mining losses. Drill core assays were used to extend or limit a block.

To be classed as mineralized material, at least one lineal dimension of a mineralized vein had to be exposed by mine workings and adequately sampled. Mining history at the Sunshine Mine has shown that the vertical (down-dip) dimension of the mineralized shoots is generally twice the horizontal dimension. Conservatively, the down-dip or up-dip projection from the exposed vein was generally limited to half the horizontal dimension in the absence of conflicting drill-hole information. A tonnage factor of 10 cubic feet per ton is used to convert volumes to tonnage except for the West Chance Vein where a tonnage factor of 9.4 cubic feet per ton is used. The current West Chance “Legacy Blocks” were defined using the McKinstry method with more drill intercepts than are available elsewhere.

 

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The table below summarizes the mineralized material at the Sunshine Mine property as of April 1, 2011 using a cutoff grade of 10 ounces per ton (opt). The mineralized material in the table below contains the expected mining dilution and mining losses and does not reflect in-situ grades.

 

Sunshine Mine Mineralized Material at a cutoff of 10 opt —April 1, 2011

(includes expected mining dilution and losses)

 

Category

   Tons      Average
Grade
(ounces
per ton)
 

Total

     1,991,169         21.20   

The Los Gatos Project

The technical information appearing below concerning the Los Gatos Project was derived from the report of Behre Dolbear & Company, independent mining consultants.

Location of the Los Gatos Project

The Los Gatos Project, an exploration stage property, covers approximately 81,703 hectares in the south-central part of the State of Chihuahua in Northern México within the municipality of Satevó. The Project is located approximately 128 kilometers south of the state capital of Chihuahua City, approximately 88 kilometers northwest of the Parral Mining District and immediately northwest of and surrounding the town of San José del Sitio, within the municipality of Satevó.

San José del Sitio is accessible by an improved gravel road from the turnoff of Federal Highway 24 at the 81 kilometer marker between the cities of Chihuahua and Hidalgo de Parral. The access road can be traveled by any motorized vehicle and has regular bus and supply services to the surrounding communities. The Project area is accessible by a large network of dirt and gravel roads that are used by local owners to access grazing areas for cattle and local ranches. Northern areas of the Project are also accessible from several gravel roads connecting with Mexican Federal Highway 24 between the 60 kilometer to 81 kilometer markers. In more remote areas, the rolling topography permits easy access by foot into areas where roads do not exist.

The Los Gatos Project is made up of a series of claim titles for 81,703 hectares and a series of concession applications for a total surface area of approximately 83,452 hectares. The titled mining concessions are summarized below:

 

Los Gatos Project—Titled Mining Concessions
    

Concession Name

   Title Number      Date
Granted
   Hectares     

Concessionaire

1

   Los Gatos      231498       3/4/08      19,712       La Cuesta International

2

   Los Gatos 2      228950       2/22/07      10,720       Minera Plata Real

3

   Los Gatos 3      231076       1/16/08      27       Minera Plata Real

4

   Mezcalera      228249       10/17/06      4,992       Minera Plata Real

5

   Mezcalera 2 Fracción I      228929       2/21/07      39       Minera Plata Real

6

   Mezcalera 2 Fracción II      228930       2/21/07      26       Minera Plata Real

7

   Mezcalera 2 Fracción III      228931       2/21/07      29       Minera Plata Real

8

   Paula Adorada      223392       12/9/04      40       Grupo Minero Factor

9

   Gavilana      237137       11/19/10      10       Minera Plata Real

10

   Etna      237167       11/19/10      45,996       Minera Plata Real

11

   San Luis      236908       10/5/10      16       Minera Plata Real

12

   La Gavilana Fracción I      237461       12/21/10      44       Minera Plata Real

13

   Los Estados Fracción I      237694       4/25/11      8       Minera Plata Real

14

   Los Estados Fracción II      237695       4/25/11      44       Minera Plata Real

Total

           81,703      

 

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These concessions are held by a wholly owned Mexican subsidiary of the Company, Minera Plata Real, S. de R. L. de C.V., or MPR. The concessions have a period of validity that ranges between 2054 and 2058. MPR holds the rights to the concessions of Los Gatos and Paula Adorada through exploration agreements with purchase options. These agreements have been duly recorded in the Méxican Public Registry of Mines. Details of these exploration agreements are provided below. All royalty payments below are in thousands of dollars.

Los Gatos Concession: MPR may purchase the Los Gatos concession (Title Number 231498) from La Cuesta International S. A. de C.V., or La Cuesta International, for a total of $15,000, which is payable through advance royalties of $20 every six months and a 2% NSR on production from the Los Gatos concession and 0.5% NSR from the lands within a one kilometer boundary of the Los Gatos concession. Once the total payment of royalties reaches $10,000, the 2% NSR on production will decrease to 0.5%. Once the total payment of royalties reaches $15,000, the concession ownership will transfer to MPR with no further payment obligation to La Cuesta International.

Paula Adorada Concession: MPR may purchase the Paula Adorada concession from Grupo Factor for $500, according to a payment schedule. Once the final payment is made in 2013, the concession will be transferred to MPR with no further ongoing payment obligations to Grupo Factor.

MPR has also filed the following mining concession applications that have not yet been titled by the México Direccion de Minas (the Department of Mines), or DGM:

 

Mining Concession Applications Filed  

Application Name

   File Number      Hectares  

Los Gatos 4

     38,770         53,500   

Los Estados

     39,246         241   

Veranos

     39,506         15,164   

Atenas

     39,507         14,547   

Total

        83,452   

In addition, there are several small concessions within the Los Gatos Project area that have been cancelled and not yet liberated by the DGM, which the Company intends to apply for once liberated. The Company has also arranged for permission to enter and perform exploration activities in a number of private land properties in the Project area.

Infrastructure, Climate and Topography

The Company’s present field camp is located in San José del Sitio, a community of approximately 200 persons, with electrical and water services, an elementary school and basic health services. Water resources in the region are mostly related to the Conchos River Basin, which includes the San Pedro, San Francisco de Borja and Satevó River Sub-Basins. Locally, there is significant groundwater in the area, with shallow groundwater recorded from most exploration drilling conducted by the Company. San José del Sitio is served by a 13.8-KV line, providing sufficient capacity for domestic needs but not enough for industrial needs. Larger-capacity electrical lines service the nearby city of Valle de Zaragoza, 45 kilometers to the southeast of the project area, where the 113-MW Santiago (Valle de Zaragoza) electrical sub-station is located.

The Project area is located in the Sierras y Llanuras del Norte Physiographic Province near the boundaries between the Gran Meseta y Cañones and the Sierras y Llanuras Tarahumara Sub Provinces. The general geography of the Los Gatos area is characterized by low to middle rolling volcanic hills with local escarpments and flat valley floors. Altitudes vary with between 1,550 masl at the base of the Santo Toribio Creek and 1,780 masl at the top of the Los Gatos Hill, one of the highest peaks of the Project area. Vegetation is characterized by a semi-desert landscape, with typical low brush vegetation in the slopes, including lechuguilla, sotol, yucca, sage, bear grass and other types of indigenous grasses. Larger brush and trees are common along the main watercourses, with the presence of oak, cypress, poplar, huizache and mesquite, among others.

 

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The climate in the area is not expected to interfere with exploration and mining activities at the Project, with the exception of short-lived storms producing floods and damage to access roads.

There are a limited number of qualified workers on site, however, technical workers (miners, electricians, mechanics, computer skilled, etc.) can be found in the area and at Parral, 88 kilometers southeast, including heavy equipment and specialized operators. Primary and secondary-level technical schools are available in Valle de Zaragoza, and all levels of schooling are available in Parral and/or Chihuahua, each 2.5 hours away.

The Company is still evaluating potential smelting locations, related transportation and smelting contract terms for the Company’s future production.

Geological Setting

The Los Gatos Project is located in the transition zone between the Sierra Madre Occidental volcanic province of western Mexico and the Mesozoic Chihuahua basin to the east. It is also located in the general union of the Sierra Madre Occidental, Chihuahua, and Parral tectonostratigraphic terranes.

The area is largely characterized by a thick sequence of Tertiary volcanic rocks that are generally dissected by a strong north-northwest bearing fault system that divides the area into the plateau and barranca sections and are subdivided in two major units, the Lower Volcanic Group and Upper Volcanic Group, host to several well known gold-silver producing mining districts in Mexico, such as Concheño, Batopilas, San Dimas-Tayoltita and Ocampo, one of the largest epithermal precious metal metallogenic provinces. The dominant rocks of the Los Gatos Project are a sedimentary sequence that occur to the southwest of the Cerro Los Gatos discovery.

History of the Los Gatos Project

The Los Gatos Project has been the subject of very limited historical prospecting and mineral exploration, including the development of shallow workings and preliminary exploration activities by Consejo de Recursos Minerales (now SGM) at the Esther, Gavilana (Paula) and San Luis zones with references to the occurrence of silver, lead, and zinc. As a result, the Los Gatos Project will require significant time and capital before the Project is brought into production. The Company’s surface work has not uncovered any evidence of past modern prospecting activities in the area although VVC Exploration has commenced an active exploration program on the southern site of the Los Gatos concession block. Other active projects in the area of southern Chihuahua are the joint venture at San Juan Cordero between Valley High Ventures and Levon Resources and the La Cigarra project of International Northair Mines. The Los Gatos Project was initially recognized by reconnaissance activities by La Cuesta International, a Mexican mine exploration company, in 2005.

Exploration

The Los Gatos Project is without known reserves and the Project is exploratory in nature. The Los Gatos Project consists of two identified silver discoveries, the Cerro Los Gatos and the Esther zones, and 14 other priority targets with over 100 kilometers of outcropping quartz and calcite veins.

In 2007, MPR initiated its first phase of exploration in the Los Gatos Project area with a program of surface mapping and rock sampling covering approximately 60% of the original Los Gatos concession within the core of the claim block. This work, conducted through a local Mexico-based consulting group, Grupo Azta, identified in excess of 100 kilometers of strike length of quartz and calcite veins, many of which contained lead, zinc and silver mineralization. Of the 1,217 rock samples taken from surface outcrops of vein and wall rocks, 200 samples contained values in excess of 10 grams of silver per tonne.

From June 2008 to October 2008, environmental permits for drilling and road construction were obtained. In addition, during this period, proposed drill areas were re-mapped and re-sampled, surface access rights were

 

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negotiated with local ranches, and drill access roads were constructed. In January 2009 and September 2009, corresponding notices of activity were submitted to the Federal Environmental Agency to cover the development of access roads and drill sites to drill 50 holes, along with a request to increase the number of drill holes to 250.

MPR began drilling in the Los Gatos Project in October 2008 using a hydracore rig. Drilling from this rig was conducted from October 2008 to May 2009. In June 2009, the hyrdacore drill rig was replaced with a Major 5000, a larger capacity rig. Two additional Major 5000 rigs were brought in during July 2009 to September 2009. The first significant identification of silver occurred in the Cerro Los Gatos zone in April 2009, in which 73.6 grams of silver per tonne was found over four meters from 152 meter to 156 meter depth. This was followed by significant intercepts in two other drill holes, which contained 34 meters of 414 grams of silver per tonne, 2.0% lead and 4.85% zinc. At this point in the drilling program, the geometry and the preferred level for mineral deposition was identified, and a series of holes was drilled that indicated a continuous mineralized body of apparent ore grade with lead, zinc and silver mineralization over a strike length in excess of 2.5 kilometers, a dip extent in excess of 200 meters, and an average thickness of 6.2 meters within the Cerro Los Gatos zone.

Also in early 2009, drilling in the Esther zone commenced with one rig moving back and forth between the Cerro Los Gatos and Esther zones. At the Esther zone, significant mineralization was identified in one hole in which 79.8 grams of silver per tonne was found over 14 meters from 102 meter to 116 meter depth. This was followed with significant offsets in two other holes, proving an average thickness of more than 3.4 meters and a minimum down dip extent of 200 meters.

Drill sites are selected based on surface vein outcrops and geometric projections in the subsurface, as well as geochemical, geophysical and geological targets. Access to surface parcels has been negotiated with the individual ranch owners in exchange for improvements to roads and water supplies. In addition, two ranch parcels have been purchased in the Cerro Los Gatos and Amapola areas that will facilitate further development work. For a discussion of Amapola, see “—Recent Developments.” Drilling is conducted using a wire line rig with diamond core capabilities. All of the Company’s drilling at the Los Gatos Project is conducted by third parties.

Detailed soil geochemistry programs have been conducted over the Esther zone and the area between the Cerro Los Gatos and Esther zones. Results of the sampling identified new veins in the Esther zone and revealed four separate structures between the Esther and Cerro Los Gatos zones.

Detailed topographic mapping has been created using Photosat, a Canadian contractor. The topography was created at one meter, five meter, 10 meter and 50 meter contours from Geoeye satellite coverage captured exclusively for the survey. Survey control points were established on the surface, with coordinates by total station in order to guarantee the accuracy of the survey.

A detailed 3D Induced Polarization survey was conducted during July 2010 using SJ Geophysics, a contractor from Canada. Lines were initially spaced at 100 meters with stations every 25 meters, and later tightened to 50 meters by 25 meters. The results of the geophysical surveys show correlations between measured electrical properties of the rocks in the subsurface and known zones of mineralization on both the Cerro Los Gatos and Esther zones.

Environmental baseline data collection began in May 2010 for the development of future environmental studies required for the Project. Data on flora, fauna, water, air, climate, security and social impacts are generally collected on a routine basis for integration into future environmental studies required for the Project.

Due to the success of the exploration activities at the Los Gatos Project, the Company operated on average three drill rigs during 2010 and expanded the known mineralization to three veins through an additional 90 drill holes. The Company expects to continue its surface and core sample exploration activities at Los Gatos throughout 2011.

 

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The Company’s objectives at the Los Gatos Project through 2013 are to:

 

   

increase the drilling rate by increasing the number of exploration drills from four to seven;

 

   

conduct social, environmental and technical work on the property with the objective of completing a pre-feasibility study on the Cerro Los Gatos and Ester zones; and

 

   

acquire additional prospective mineral and surface rights.

Los Gatos Project Mineralogy

The Los Gatos Project hosts a series of quartz, quartz-calcite and calcite veins in at least eight separate vein systems that are exposed along a strike length of approximately 12 kilometers and an outcrop belt width of approximately five kilometers. Vein width is generally in the order of one meter, but local wide zones up to eight meters in outcrop and true vein widths in excess of 30 meters have been identified by diamond drilling. Structurally, the veins form two sets, with north and northwest strikes and mostly steep dips.

Mineralization at the Los Gatos Project is characterized by silver, lead, zinc and copper sulphides and their oxides, along with fluorite, manganese, barite and traces of gold associated with quartz and calcite veins. The veins vary in orientation from west-northwest to northwest to north-northwest to north-northeast. Study of the veins in hand specimen and thin section suggests that they are epithermal in origin and are likely of intermediate sulfidation composition, showing vein textures and gangue mineralogy that indicate a relatively high-level hydrothermal system in the boiling environment. Breccia with clasts of vein quartz indicates a protracted hydrothermal system during multiple faulting events, a positive sign for economic epithermal veins. It has been interpreted that ore shoots may extend relatively far down dip, possibly to at least 230 meters.

Sampling and Analysis

The Company has carried out sampling campaigns that have included surface, limited underground, and core samples. As of November 8, 2010, during the first stages of exploration, approximately 1,215 surface samples were taken and 15,537 core samples were taken from 154 drill holes for a total of 68,772 meters. Sampling intervals were, in most cases, two meters, with local variations depending on vein geology, to a minimum of 0.8 meters where structures were found. Detailed sampling was carried out with intervals directed by geological criteria. Pulp samples are delivered to ALS Chemex laboratory in Vancouver, Canada for analysis.

The Company believes that core sampling is representative of mineralized intersections, with minor variation due to irregularities in mineralization.

The Company has established a sampling protocol followed through the drilling campaign that in summary includes: supervision by Company personnel, with the verification of core handling, recovery, core accommodation and depth recording by the contractor; and core collection, measurement, core recovery, photographing, specific gravity analysis, geotechnical information analysis and sampling interval selection by Company geologists.

Detailed logging of the sample intervals is conducted once the core samples are sawed, with detailed descriptions and estimations of mineralogy and mineral content, hydrothermal alteration, veining and fracturing. Assay intervals are divided in two equal parts by diamond saw, with most sampling conducted on two meter intervals, except for specific vein intervals. Vein intervals are selected for more detailed sampling, with a minimum of 0.8 meters per interval in the sample, and a maximum of two meters.

Samples are collected in standard plastic sample bags and tagged with a unique sample number recorded for each interval. Samples are grouped by drill hole and transported by pickup truck to the ALS Chemex laboratory sample receiving location in Chihuahua City, Mexico. From the time the core samples leave the drill site to the time the samples are delivered to ALS Chemex, they are escorted and under the supervision of personnel from the Company.

 

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ALS Chemex has developed and implemented at each of its locations a Quality Management System designed to ensure the production of consistently reliable data. As a result, the lab has received, including its sample preparation section in Guadalajara, the ISO 9001:2000 Quality Management System registration from QMI-SAI Global. The ALS Laboratory Vancouver branch has also been accredited as conforming to applicable Canadian regulatory requirements.

Other Mexican Properties

The Company owns or controls a portfolio of 21 other exploration properties in Mexico covering an area of 362,298 hectares, with significant additional hectares under application for mineral concession. There are two projects underway with significant drill results, El Doctor in Oaxaca and Zaragoza in Chihuahua. Additional drilling is planned at both of these projects as well as additional targets through 2012. The Company is planning sufficient drilling in an effort to outline continuous geometry of mineralization at El Doctor and Zaragoza, which could lead to initial estimates of mineralized material. All these properties are without known reserves and are exploratory in nature.

Recent Developments

Philip Pyle, Vice President Exploration, who is a Qualified Person as set out in NI 43-101, has supervised the preparation of the technical information that forms the basis of the information contained in this section “—Recent Developments.”

Sunshine Mine Property

At the Sunshine Mine property, drilling from accessible underground workings has resulted in the discovery of a mineralized extension to the Sunshine Mine vein in a previously unexplored area. Results from drill hole ST2568 are as follows:

 

Hole

   From
(meters)
     To
(meters)
     Thickness
(meters)
     Ag (g/t)      Cu (%)      Pb (%)  

ST2568

     156.22         157.10         0.88         1062.2         0.42         0.08   

Additional drilling will now be focused on further delineation of the mineralization encountered in drill hole ST2568.

Listed below are the results of all recent drilling at the Sunshine Mine property:

 

Hole

   From
(meters)
     To
(meters)
     Thickness
(meters)
     Ag (g/t)      Cu (%)      Pb (%)  

ST2560

     152.38         152.44         0.06         2019.4         1.70         31.50   

ST2561

     133.87         133.94         0.07         822.8         0.32         8.87   

ST2564

     139.57         139.94         0.37         67.9         0.073         1.40   

ST2568

     156.22         157.10         0.88         1062.2         0.42         0.08   

Drill holes ST2562, ST2563, ST2565, ST2566, and ST2567 did not contain significant mineralization.

 

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Los Gatos Project

Exploration drilling at the Los Gatos Project has recently detected a new trend of mineralization that has been named the Amapola zone. It is located 4.5 kilometers northwest of the Cerro Los Gatos zone. Results indicate a minimum of four separate mineralized quartz veins with high levels of silver at upper levels and silver, lead and zinc at deeper levels. Highlights from the drilling include holes AM22, AM25, AM33 and AM37:

 

Hole

   From
(meters)
     To
(meters)
     Thickness
(meters)
     Ag (g/t)      Pb (%)      Zn (%)  

AM22

     651         651.85         0.85         588.0         13.70         0.70   

AM25

     533         560         27.0         81.8         0.53         1.33   

Included in AM25

     542.5         544.3         1.8         709.0         4.91         11.90   

AM33

     396         400.15         4.15         183.6         0.01         0.17   

AM37

     396         420         24.0         77.3         0.02         0.04   

Continuous mineralization has been identified over a strike length of 600 meters in two of the four known veins and additional drilling is planned to verify the geometry of this mineralization.

In other developments at the Los Gatos Project, a new zone of quartz veining has been identified in the southwestern portion of the Los Gatos claim block. This zone has been named Boca de Leon and has, to date, been detected over a strike length of 900 meters. The zone’s surface outcrops contain similar looking textures and mineralogy to the Cerro Los Gatos quartz vein mineralization. Surface sampling of the vein outcrops has generated values that range from 68 to 411 grams of silver per tonne. The Company expects that the Boca de Leon zone will become a priority area for future exploration drilling.

 

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Amapola Zone Details

Listed below are the results of all of the drilling at the Amapola zone from which the highlights above were extracted.

 

Hole

     From
(meters)
       To
(meters)
       Thickness
(meters)
       Ag (g/t)        Pb (%)        Zn (%)  

AM01

       270           272           2.0           36.5           0.00           0.00   

AM02

       266           274           8.0           87.3           0.02           0.03   

AM03

       272           286           14.0           117.1           0.07           0.02   

AM03

       354           358           4.0           63.7           0.01           0.01   

AM03

       396           400           4.0           30.2           0.00           0.01   

AM04

       408.3           414.4           6.1           407.0           0.18           0.58   

AM07

       564           570           6           21.1           0.05           0.04   

AM09

       528.7           530.1           1.4           547.0           0.58           3.49   

AM11

       52           60           8.0           18.0           0.00           0.02   

AM11

       407.4           416           8.6           28.7           0.06           0.13   

AM12

       478           487.7           9.7           77.0           0.05           0.07   

AM13

       42           44           2           100.0           0.01           0.06   

AM13

       253.55           254.45           0.9           37.8           0.03           0.01   

AM14

       406.6           417.25           10.65           49.1           0.02           0.04   

AM15

       224           228           4           66.2           0.00           0.01   

AM16

       232           232.9           0.9           59.0           0.04           0.02   

AM18

       70.5           72.85           2.35           33.1           0.00           0.01   

AM19

       464           464.8           0.8           50.6           0.34           0.17   

AM19

       469.2           470           0.8           50.6           0.47           0.52   

AM19

       510           512           2           41.3           0.04           0.56   

AM19

       522           528.8           6.8           256.5           0.62           0.40   

AM22

       651           651.85           0.85           588.0           13.70           0.70   

AM25

       533           560           27.0           81.8           0.53           1.33   

Included in AM25

       542.5           544.3           1.8           709.0           4.91           11.90   

AM28

       396.85           398           1.15           58.7           4.50           9.48   

AM28

       594.5           595.3           0.8           54.3           0.27           0.25   

AM28

       625.75           626.65           0.9           44.2           4.47           0.63   

AM28

       784           785.2           1.2           279.0           0.61           0.26   

AM30

       244           246           2.0           43.7           0.00           0.01   

AM30

       728.3           729.7           1.4           34.4           0.20           0.33   

AM31

       577           578.55           1.55           45.5           0.07           0.02   

AM31

       579.5           581           1.5           37.6           0.04           0.00   

AM33

       216           218           2.0           46.2           0.01           0.07   

AM33

       396           400.15           4.15           183.6           0.01           0.17   

AM33

       663.45           664.46           1.01           230.0           0.32           0.81   

AM35

       129           130           1.0           84.5           0.01           0.02   

AM35

       308           324           16.0           79.8           0.02           0.03   

AM35

       559           560           1.0           57.3           0.00           0.00   

AM36

       248           252           4.0           40.0           0.01           0.02   

AM37

       396           420           24.0           77.3           0.02           0.04   

AM37

       424           428           4.0           33.5           0.00           0.03   

AM37

       432           436           4.0           34.5           0.00           0.03   

AM37

       456           464           8.0           45.0           0.02           0.03   

AM38

       344           348           4.0           37.4           0.03           0.06   

AM38

       488           491.75           3.75           68.2           0.05           0.20   

AM38

       493.35           498.2           4.85           43.2           0.04           0.13   

AM38

       507           508           1.0           217.0           0.32           0.03   

 

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Drilling of AM05, AM06, AM08, AM10, AM17, AM20, AM21, AM23, AM24, AM26, AM27, AM29, AM32 and AM34 did not show significant mineralization.

Sampling and analysis of the Amapola zone materials continue to be performed in the manner as described above under “—The Los Gatos Project—Sampling and Analysis.”

Competition

There is aggressive competition within the silver industry. The Company competes in efforts to obtain financing to explore and develop its projects with other silver companies such as Coeur d’Alene Mines Corporation and Hecla Mining Company, as well as other mineral miners including Stillwater Mining Company and Kinross Gold Corporation, some of whom currently have greater resources than the Company does. In the future, the Company may compete with such companies to acquire additional properties.

In addition, the Company also encounters competition for the hiring of key personnel. The mining industry is currently facing a shortage of experienced mining professionals, particularly with respect to experienced mine construction and mine management personnel. This competition affects the Company’s operations at the Sunshine Mine property and the Los Gatos Project. Larger regional companies such as Coeur d’Alene Mines Corporation, Hecla Mining Company, Stillwater Mining Company and Kinross Gold Corporation in the Pacific Northwest can offer better employment terms as compared to smaller companies such as the Company.

The Company also competes for mine service companies, in particular drilling companies. Potential suppliers may choose to provide better terms and scheduling to larger companies in the industry due to the scale and scope of their operations.

Environmental, Health and Safety Matters

The Company is subject to stringent and complex environmental laws, regulations and permits in the various jurisdictions in which it operates. These requirements are a significant consideration for the Company as its operations involve, or may in the future involve, among other things, the removal, extraction and processing of natural resources, emission and discharge of materials into the environment, remediation of soil and groundwater contamination, reclamation and closure of waste impoundments and other properties, and handling, storage, transport and disposal of wastes and hazardous materials. Compliance with these laws, regulations and permits can require substantial capital or operating costs or otherwise delay, limit or prohibit the Company’s development or future operation of its properties. These laws, regulations and permits, and the enforcement and interpretation thereof, change frequently and generally have become more stringent over time. If the Company violates these environmental requirements it may be subject to litigation, fines or other sanctions, including the revocation of permits and suspension of operations. Pursuant to such requirements the Company also may be subject to inspections or reviews by governmental authorities.

Permits and Approvals

Numerous environmental permits and approvals are required for the Company’s current and future operations. Many of these permits are subject to renewal from time to time and can impose strict conditions, requirements or obligations on, or otherwise delay or prohibit, certain activities.

In particular, the Company is subject to permitting requirements in connection with water discharges at the Sunshine Mine. The Company operates under a National Pollutant Discharge Elimination System, or NPDES, permit that expired in 1996 but has been administratively extended. The Company applied to the U.S. Environmental Protection Agency for a renewal of its NPDES permit in July 2007 and is awaiting a response. The NPDES permit covers, among other matters, the waste streams from mining and ore concentrating operations at the Sunshine Mine and drainage water from discontinued mining operations. Beginning in the 1990s, the predecessor began allowing the lower mined-out levels of the mine to flood, which resulted in elevated iron and manganese concentrations in the mine water. In the future, more stringent limits could be

 

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imposed under the NPDES permit, whether as part of the permit renewal process or otherwise. The Company believes that it will incur significant costs to upgrade the existing wastewater treatment facility to meet more stringent permit limits, including those relating to total dissolved solids.

To obtain, maintain and renew its environmental permits, the Company may be required to conduct environmental studies and collect and present to governmental authorities data pertaining to the potential impact that its current or future operations may have upon the environment. For example, in order to commence underground exploration activities at the Los Gatos Project, the Company will need to submit an environmental analysis to the applicable governmental authorities. In May 2010, the Company began collection of the environmental baseline data for the Los Gatos Project. The Company expects that data collected on flora, fauna, water, air, climate, security and social impacts will be integrated into future environmental studies required for the Project.

The Company will require additional permits and approvals to conduct future exploration, development and processing activities, including at both the Sunshine Mine property and the Los Gatos Project. Any failure to obtain, maintain or renew required permits, or other permitting delays or conditions, may delay, limit or prohibit its current or future operations.

Hazardous Substances and Waste Management

The Company could be liable for environmental contamination at or from its or its predecessors’ currently or formerly owned or operated properties or third-party waste disposal sites. Certain environmental laws impose joint and several strict liability for releases of hazardous substances at such properties or sites, without regard to fault or the legality of the original conduct. In addition to potentially significant investigation and remediation costs, such matters can give rise to claims from governmental authorities and other third parties for fines or penalties, natural resource damages, personal injury and property damage.

In connection with the Sunshine Mine, the Company is involved in the Bunker Hill Superfund Site. Pursuant to a 2001 Consent Decree that resolved certain liabilities arising under the U.S. Comprehensive Environmental Response, Compensation and Liability Act relating to the Bunker Hill site, the Company is required to pay to the U.S. government and the Coeur d’Alene Indian tribe between a 0% (at a silver price below $6 per ounce) and 7% (at a silver price of $10 per ounce or higher) NSR royalty. This Consent Decree did not resolve all liabilities associated with the Bunker Hill site, including any liability for contamination at or migrating from the Company’s owned, leased or operated properties, which are located within the Bunker Hill Superfund Site. As a result, the Company may incur additional costs, liabilities or obligations in connection with the Bunker Hill site.

The tailings pond at the Sunshine Mine currently receives mine water and process water discharges from the Company’s operations, as well as similar discharges from the nearby Crescent Mine. The Company expects that the capacity of the tailings pond as currently configured will be sufficient for approximately ten years after commercial production resumes and that additional capacity may be added thereafter by increasing the height of the pond dam.

The Company is required to maintain financial assurances for certain future closure obligations, including with respect to the tailings pond at the Sunshine Mine. As of June 30, 2011, the Company has recorded an asset retirement obligation of approximately $772,000 reflecting the estimated present value of future closure obligations.

Mine Health and Safety Laws

The Federal Mine Safety and Health Act of 1977 and the Occupational Safety and Health Act of 1970 impose stringent safety and health standards on all aspects of mining operations at the Sunshine Mine property. Also, Idaho has state programs for mine safety and health regulation and enforcement. In addition, the Company’s Mexican properties are subject to regulation by the Political Constitution of the Mexican United States, and are subject to various legislation in Mexico, including the Mining Law, the Federal Law of Waters, the Federal Labor Law, the Federal Law of Firearms and Explosives, the General Law on Ecological Balance and

 

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Environmental Protection and the Federal Law on Metrology Standards. Mining, environmental and labor authorities may inspect the Company’s operations on a regular basis and issue various citations and orders when they believe a violation has occurred under the relevant statute. Regulations and the results of inspections, whether in the United States or Mexico, may have a significant effect on the Company’s operating costs.

Legislative and regulatory bodies at the federal and state levels, including MSHA and OSHA, have recently promulgated or proposed various new statutes, regulations and policies relating to mine safety and mine emergency issues. Although some new laws, regulations and policies are in place, these legislative and regulatory efforts are still ongoing. At this time, it is not possible to predict the full effect that the new or proposed statutes, regulations and policies will have on the Company’s operating costs, but it may increase its costs and those of its competitors.

Other Environmental Laws

The Company is required to comply with numerous other foreign, federal, state and local environmental laws, regulations and permits in addition to those previously discussed. These additional requirements include, for example, the U.S. Emergency Planning and Community Right-to-Know Act and Resource Conservation and Recovery Act and various permits regulating road construction and drilling at the Company’s Los Gatos, El Doctor, Mina Grande, Niko, Zacatlan and Zaragoza zones.

Facilities and Employees

As discussed above, the Company owns and leases land at the Sunshine Mine property, the Los Gatos Project and the Company’s other exploration properties in Mexico. The Company also leases its executive office space at 370 17th Street, Suite 3800, Denver, Colorado, which lease expires April 30, 2012, subject to a renewal option.

As of June 30, 2011, the Company had 45 full-time employees in the United States and 95 full-time employees in Mexico. The Company also has a management agreement, which will continue following the offering, with Tigris Financial Group Ltd., one of the Company’s stockholders, and several consultants providing additional management, accounting and financial services. See “Certain Relationships and Related Party Transactions.” The Company believes that its employee relations are good, and plans to continue to hire employees as its operations expand. The Company expects the number of employees to increase following the offering as it increases its exploration efforts and prepares to operate as a public company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operating Expenses—Exploration Expenses” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operating Expenses—General and Administrative Expenses.”

Legal Proceedings

From time to time, the Company may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although the Company cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and legal advice and may be adjusted from time to time according to developments.

Stonehill Capital Management LLC and Highwood Partners, LP, debtor-in-possession, or DIP, lenders to SPMI, a prior owner of the Sunshine Mine, asserted a mortgage claim in the District Court, Shoshone County, Idaho, on September 23, 2010 regarding much of the property at the Sunshine Mine that the Company acquired from SPMI in June 2010. The DIP financing loan was made in connection with SPMI’s bankruptcy in 2000, in the amount of $5 million, but the DIP lenders are also claiming right to accrued interest, at a default rate of 25%, and penalties, in an alleged aggregate amount of $71.2 million. The Company is currently engaged in discovery and no motions are scheduled for hearing. The Company intends to defend vigorously against the claim and does not believe that this matter is likely to have a material adverse effect on its operations or financial condition. Litigation is inherently unpredictable, however, and while the Company believes it has valid defenses in this matter, there can be no assurance as to the ultimate outcome of this action.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth information regarding the executive officers, directors and director nominees of Sunshine Silver, as of the date of this prospectus:

 

Name

   Age     

Position

Stephen Orr

     56       Executive Chairman and Chief Executive Officer

Roger Johnson

     54       Chief Financial Officer

John Galassini

     47      

Chief Operating Officer

Philip Pyle

     55       Vice President Exploration

Jeffrey Reeser

     44      

General Counsel

John Ellis

     76       Director

Marc Faber

     65       Director

Wayne Kirk

     68       Director

William Natbony

     60       Director

Michael S. Parrett

     59       Director

David Peat

     59       Director

Robert A. Quartermain

     56       Director

Diana Walters

     48       Director

Biographical Information

Stephen Orr has served as our Executive Chairman since May 2011 and Chief Executive Officer since June 2011. Mr. Orr has 34 years of experience in the mining industry, including international commercial experience at both executive and operational levels. Most recently, Mr. Orr was President, Director and Chief Executive Officer at Ventana Gold Corp., a Vancouver-based mineral exploration and development company. Prior to joining Ventana Gold Corp. in September 2009, Mr. Orr was a Director and Chief Executive Officer of OceanaGold Limited, a position he held for five years, where under his leadership OceanaGold built and commissioned two new mines in New Zealand and increased production by 90%. Prior to that time, Mr. Orr was Vice President of North American Operations, then Managing Director of Australia and Africa operations, for Barrick Gold Corporation. Before joining Barrick, he spent 20 years with Homestake Mining Company in a number of increasingly senior positions, including President and Chief Executive Officer for Homestake Canada Inc. Since June 2010, Mr. Orr has been a Director of GoldQuest Mining Corp. Mr. Orr’s more than 30 years of experience in the international mining industry at both executive and operational levels renders him qualified to be one of our Directors. Mr. Orr is a resident of Denver, Colorado.

Roger Johnson was appointed Chief Financial Officer in March 2011. Mr. Johnson previously served in a number of senior roles for Newmont Mining Corporation from 2003-2011, most recently as Vice President and Chief Accounting Officer from 2008-2011. Mr. Johnson also served as Senior Vice President, Finance and Administration at Pasminco Zinc, Inc. in 2002 and 2003. He also served in a number of senior roles, including as Vice President, Controller, for Kennecott Utah Copper Corporation, a major business unit of Rio Tinto plc, from 1989-2002. Prior to joining Rio Tinto, Mr. Johnson practiced public accounting for ten years with Coopers & Lybrand (now PricewaterhouseCoopers LLP). Mr. Johnson is a Certified Public Accountant. He has two degrees from the University of Utah, a Masters of Professional Accountancy and a B.S. in Accounting. Mr. Johnson is a resident of Denver, Colorado.

John Galassini was appointed Chief Operation Officer in August 2011. Mr. Galassini served as Regional Vice President, North American Operations for Kinross Gold Corporation from 2009 to 2011. In this role, he was responsible for all of the company’s exploration and mining operations in North America. Prior to joining Kinross Gold Corporation, Mr. Galassini had a 22-year career with Phelps Dodge (now Freeport McMoRan). He

 

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held various positions of increasing responsibility, including assignments with Phelps Dodge in Arizona, New Mexico and Chile. In 2006 he was named Senior Vice-President, North America, and in 2007 was appointed Senior Vice-President, Americas. Mr. Galassini serves on the Board of Directors for the National Mining Association, and is a member of the Society for Mining, Metallurgy, and Exploration, or SME. He is past chairman of the Morenci Section of SME, and in 2006 he was named Distinguished Alumnus at the College of Engineering at New Mexico State University. Mr. Galassini received his Bachelor of Science degree in chemical engineering from New Mexico State University. Mr. Galassini is a resident of Denver, Colorado.

Philip Pyle was appointed Vice President Exploration in June 2011. Mr. Pyle has served as Vice President – Exploration for Los Gatos Ltd. since June 2008. Mr. Pyle previously served in the role of Exploration Manager for Linear Gold Corp. (now Brigus Gold Corp.) from September 2003 to June 2008. Mr. Pyle served as Exploration manager for MIM Exploration Pty Ltd. from June 1997 to September 2003. Mr. Pyle served as Exploration Manager for BHP Minerals International Exploration Inc. from 1985 to 1997. He also served as a geologist for AMAX Exploration Inc. from 1979 to 1985. Mr. Pyle is a resident of Houston, Texas.

Jeffrey Reeser was appointed General Counsel in July 2011. Mr. Reeser previously served as Vice President and Corporate Secretary of Newmont Mining Corporation between 2007-2011. Prior to joining Newmont, Mr. Reeser was legal director at Sun Microsystems, a Fortune 500 technology company, where he was lead counsel responsible for establishing and managing legal support for the company’s global joint ventures and technical services organizations. Prior to this, Mr. Reeser practiced law for seven years as a partner and associate at the law firms of Baker & Hostetler, LLP, and Parcel, Mauro, Hultin & Spaanstra, P.C., where he focused on mining law and corporate matters for various regional and multinational natural resources companies. He holds two degrees from the University of Colorado, a J.D. from the School of Law and a B.S. (with honors) in business finance. Mr Reeser is a resident of Denver, Colorado.

John Ellis has served as a member of our Board of Directors since September 2011. Mr. Ellis is a professional engineer registered in British Columbia. He has worked in senior management positions in the mining industry for the past 45 years, including the past 11 years as a consultant. He was a Director of the Mining Association of Manitoba, the Mining Association of Canada and the National Mining Association. He has served as Director of Anglogold North America Inc., Hudson Bay Mining and Smelting Company, Inc., Inspiration Resources Corp., Cashman Equipment Co., Queenstake Resources, Ltd., Lunden L.C., Mexivada Mining Corp., Canadian Potash Corp. and Royal Coal Corp. Mr. Ellis was Chairman and CEO of Anglogold North America Inc., Independence Mining Company, Inc., Hudson Bay Mining and Smelting Co., Limited and was Senior Vice-President of Inspiration Resources Corp., Inspiration Copper Co. and Inspiration Coal Inc. He was also Vice-President of Operations for CVRD-Inco PTI Indonesia and Managing Director CVRD-Inco for Voisey’s Bay Nickel Company. For the past 11 years he has consulted for AngloGold Ashanti Limited, CVRD-Inco, Queenstake Resources, Ltd., BHP Billiton Ltd., Century Aluminum Company, NovaGold Resources Inc. and a number of other companies. Mr. Ellis graduated from Haileybury School of Mines and from Montana University of Science and Technology with a degree in Metallurgy. Mr. Ellis’ academic training in the field of metallurgy, plus his many years of experience in the mining industry, in both technical and managerial positions, render him qualified to serve as one of our Directors. Mr. Ellis is a resident of Spring Creek, Nevada.

Marc Faber has served as a member of our Board of Directors since September 2011. Dr. Faber has over 35 years of experience in the finance industry and is the Managing Director of Marc Faber Ltd., an investment advisory and fund management firm. He is an advisor to a number of private investment funds and serves as a Director of Ivanhoe Mines Ltd., Sprott Inc. and NovaGold Resources Inc. Dr. Faber publishes a widely read monthly investment newsletter entitled The Gloom, Boom & Doom Report and is the author of several books including Tomorrow’s Gold—Asia’s Age of Discovery. A renowned commentator on global market trends and developments, he is also a regular contributor to several leading financial publications around the world, including Barron’s, where he is a member of the Barron’s Roundtable. Dr. Faber received his Ph.D. in Economics magna cum laude from the University of Zurich. Through his many years of experience in the finance and investment management industry, Dr. Faber provides our Board of Directors with financial analysis, risk

 

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management and strategic expertise, which render him qualified to serve as one of our Directors. Mr. Faber is a resident of Chiangmai, Thailand.

Wayne Kirk has served as a member of our Board of Directors since September 2011. Mr. Kirk currently holds directorships and is the Chairman of the Nominating and Corporate Governance Committees at each of Anooraq Resources Corporation, Gabriel Resources Ltd., Great Basin Gold Ltd., Northern Dynasty Minerals Ltd. and Taseko Mines Ltd. He is also Chairman of the Corporate Governance and Nominating Committee and Compensation Committee of Electrum Ltd. Mr. Kirk spent 26 years specializing in corporate and business law, including mergers and acquisitions, securities law and mining, with the firm of Thelen, Marrin Johnson & Bridges in San Francisco, California. From 1992-2001, he was Vice President, General Counsel and Corporate Secretary for Homestake Mining Company, which was acquired by Barrick Gold Corporation in December 2001. From 2002 until his retirement in 2004, Mr. Kirk was Special Counsel at Thelen Reid & Priest LLP, where he specialized in corporate and business law, including public company corporate governance. Mr. Kirk holds a B.A. in Economics from the University of California-Berkeley and an LL.B. from Harvard Law School. Mr. Kirk’s legal training and experience as a seasoned corporate and business lawyer, as well as his expertise in public company corporate governance, render him qualified to serve as one of our Directors. Mr. Kirk is a resident of Orcas, Washington.

William Natbony has served as a member of our Board of Directors since June 2011. Mr. Natbony is Chairman of Tigris Financial Group Ltd. Prior to joining Tigris in May 2007, Mr. Natbony was a senior partner at the international law firm of Katten Muchin Rosenman LLP. Mr. Natbony serves on the Advisory Board of the Mount Sinai Department of Medicine and is a member of the Strategic Planning Committee of the University of Miami Miller School of Medicine Transplantation Center. Mr. Natbony is also a member of the Board of Directors of Panthera Corp. and The Orianne Society, charities that are leaders in their areas of conservation and environmental preservation. Mr. Natbony received a B.A., cum laude, from Queens College of the City University of New York, a J.D. from NYU School of Law and an LL.M. (in Taxation) from NYU School of Law. He was a Research fellow at Yale Law School and Professor at New York Law School. Mr. Natbony brings to our Board of Directors his eclectic mix of experience as a chairman of a financial services company, a senior partner of an international law firm and a board member of numerous organizations in both private and public sectors, which renders him qualified to be one of our Directors. Mr. Natbony is a resident of Old Westbury, New York.

Michael S. Parrett has served as a member of our Board of Directors since September 2011. Mr. Parrett has served as a member of the Board of Directors of Pengrowth Corporation since 2004 and of Stillwater Mining Company since 2009. In June 2011, he was appointed Chairman of Mongolia Minerals Corporation, a private corporation. He was on the Board of Directors of Gabriel Resources Ltd. from 2003-2010 and was Chairman from December 2005 through 2010. From 2003 until 2008, Mr. Parrett was a Director and Trustee of Fording Canadian Coal Trust. During 2002-2003 and the first quarter of 2004, Mr. Parrett served as a financial consultant to Stillwater Mining Company. From 1990-2001 he was, at various times, Chief Financial Officer, President of Rio Algom Mining Corp. and Chief Executive of BHP Billiton Base Metals. From 1983-1989 Mr. Parrett performed various financial functions, including Controller, Chief Financial Officer, Treasurer, Controller Marketing and Director Internal Audit at Falconbridge Limited. Mr. Parrett is a chartered accountant and received his B.A. from York University. Mr. Parrett’s accounting background, plus his past executive roles in and his services on the boards of various mining companies, render him qualified to serve as one of our Directors. Mr. Parrett is a resident of Aurora, Ontario, Canada.

David Peat has served as a member of our Board of Directors since September 2011. Mr. Peat has over 25 years of experience in financial leadership in support of mining corporations. Since 2006, he has been a Director and Chairman of the Audit Committee of Brigus Gold Corp. He has also been a Director and Chairman of the Audit Committee of Gabriel Resources Ltd., since 2010. Mr. Peat was Acting Chief Financial Officer of Gabriel Resources Ltd. from December 10, 2010 through March 9, 2011. Mr. Peat was Vice President and Chief Financial Officer of Frontera Copper Corporation from 2006-2009, Vice President and Global Controller of Newmont Mining Corporation from 2002-2004, and Vice President of Finance and Chief Financial Officer of

 

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Homestake Mining Company from 1999-2002. Mr. Peat started his career with Price Waterhouse in Toronto and he has been a member of the Institute of Chartered Accountants of Ontario since 1978. He received his B.Com., Honors in Business Administration from the University of Windsor in 1976 and a B.A., Economics from the University of Western Ontario in 1975. Mr. Peat’s academic training in business and economics and his extensive experience in corporate finance and accounting render him qualified to serve as one of our Directors. Mr. Peat is a resident of Fernandina Beach, Florida.

Robert A. Quartermain has served as a member of our Board of Directors since September 2011. Dr. Quartermain is the President and Chief Executive Officer of Pretium Resources Inc., a gold development company with projects in Northern British Columbia. He served as the President and Chief Executive Officer of Silver Standard Resources Inc. from January 1985 to January 2010. Over this period, Silver Standard grew from a small exploration company to a major silver company with a market capitalization of over $2 billion, one producing mine, five advanced exploration and development properties and a pipeline of early stage exploration properties. Dr. Quartermain has over 35 years of experience in the resource industry and holds a B.Sc. degree in geology from the University of New Brunswick, an M.Sc. degree in mineral exploration from Queen’s University and was awarded a honorary D.Sc. degree from the University of New Brunswick in May 2009. Dr. Quartermain’s current and past experiences as chief executive officers of small and large companies in the mining industry render him qualified to serve as one of our Directors. Dr. Quartermain is a resident of Vancouver, British Columbia, Canada.

Diana Walters has served as a member of our Board of Directors since June 2011, and was designated by Liberty Metals & Mining and elected to our Board of Directors based on a stockholders agreement which will terminate immediately prior to the closing of this offering. Ms. Walters is the President and Chief Executive Officer of Liberty Metals & Mining and has over 20 years of experience in management positions with energy and mining companies. Liberty Metals & Mining is a wholly-owned subsidiary of Liberty Mutual Group, and makes investments in the metals and mining sector. Before joining Liberty Mutual Group, Ms. Walters was a Managing Partner of Eland Partners, LLC, a natural resources advisory firm from 2007-2010. Prior to that, Ms. Walters was Managing Director for the Global Investment Banking Resources and Energy Group of HSBC Securities (USA) Inc. in New York from 2004-2007. From 1987-2007, Ms. Walters held various management positions in financial institutions in New York and Texas where her major emphasis was corporate finance origination and execution for international and independent energy and mining companies. Ms. Walters currently serves as an independent Director of Allana Potash Corp. Ms. Walters graduated from the University of Texas at Austin with a B.A. in Plan II and an M.A. in Energy and Mineral Resources. Ms. Walters’ academic training in energy and mineral resources, her many years of experience in management positions with energy and mining companies and her prior leadership roles in various financial institutions render her qualified to serve as one of our Directors. Ms. Walters is a resident of North Salem, New York.

Board Composition

Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws provide that our Board of Directors shall consist of not less than three directors and not more than              directors, and the number of directors may be changed only by resolution adopted by the affirmative vote of a majority of the entire Board of Directors (which number shall be subject to increase or decrease by Electrum until it ceases to own more than 50% of our outstanding common stock). Upon the conclusion of this offering, we will have nine directors: Stephen Orr, John Ellis, Marc Faber, Wayne Kirk, William Natbony, Michael S. Parrett, David Peat, Robert A. Quartermain and Diana Walters.

Initially, our Board of Directors will consist of a single class of directors each serving one year terms. Once Electrum no longer beneficially owns more than 50% of our outstanding shares of common stock, our Board of Directors will be divided into three classes of directors, with each class as nearly equal in number as possible, serving staggered three year terms (other than directors that may be elected by holders of our preferred shares, if any). Following this offering, Electrum will hold     % of our outstanding shares of common stock and have control over the outcome of director elections, including the right to fill vacancies on our Board of Directors.

 

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We have determined that each of             ,             ,             ,             ,             ,              and              will be an independent director within the meaning of the applicable rules of the SEC and NYSE and that each of             ,              and              is also an independent director under Rule 10A-3 under the Exchange Act for the purpose of Audit Committee membership. In addition, our board has determined that              is a financial expert within the meaning of the applicable rules of the SEC and NYSE.

Board Committees

The Executive Committee will consist of Stephen Orr (chair), William Natbony and Diana Walters. The Executive Committee will operate pursuant to a charter approved by the Board of Directors. The Executive Committee has and may exercise all of the powers and authority of the Board of Directors, subject to such limitations as the Board of Directors and/or applicable law may from time to time impose.

The Audit Committee will consist of David Peat (chair), Wayne Kirk and Michael Parrett, and will be comprised entirely of independent directors. The Audit Committee will operate pursuant to a charter approved by the Board of Directors. The Audit Committee will approve the engagement of our independent public auditor and the scope of the audit to be undertaken by such auditor. In connection with our Annual Report on Form 10-K, the Audit Committee shall also review with management and the independent auditor the financial information to be included therein. In addition, the Audit Committee will review all proposed related person transactions for the purpose of recommending to the disinterested members of the Board of Directors that the transaction should be ratified and approved. See “Certain Relationships and Related Party Transactions.”

The Compensation and Nominating Committee will consist of Wayne Kirk (chair), Marc Faber and Robert Quartermain, and will be comprised entirely of independent directors. The Compensation and Nominating Committee will operate pursuant to a charter approved by the Board of Directors. The Compensation and Nominating Committee will determine and approve the level of compensation for the Chief Executive Officer and Chairman. The Compensation and Nominating Committee will also recommend and advise the Board of Directors with respect to the compensation of directors and other executive officers. The Compensation and Nominating Committee will make recommendations to the Board of Directors regarding the establishment and terms of our employee equity-based incentive plans and will administer such plans. The Compensation and Nominating Committee will identify and nominate members for election to the Board of Directors and develop and recommend to the Board of Directors corporate governance principles applicable to us. The Compensation and Nominating Committee will also oversee the annual evaluation of the Board of Directors’ performance.

The Technical Committee will consist of John Ellis (chair), Michael Parrett and Stephen Orr. The Technical Committee will operate pursuant to a charter approved by the Board of Directors. The Technical Committee will be responsible for the review of environmental, health and safety performance of the Company, and mineralized material, resource and reserve reporting.

The Finance Committee will consist of William Natbony (chair), Marc Faber and Diana Walters. The Finance Committee will operate pursuant to a charter approved by the Board of Directors. The Finance Committee will be responsible for assisting the Board of Directors in its oversight of the major investments and financial risk management programs, policies and processes of the Company.

Code of Business Conduct and Ethics

Prior to the closing of this offering, our Board of Directors will adopt a code of business conduct and ethics applicable to our employees, directors and officers, in accordance with applicable U.S. federal securities laws and the corporate governance rules of the NYSE. Any waiver of this code to an employee may be granted only by the Chief Executive Officer, Chief Financial Officer or General Counsel. Only the Board of Directors or a designated committee of the Board of Directors may provide waivers involving any of our directors or executive officers. All waivers granted to our directors and executive officers will be promptly disclosed as required by applicable U.S. federal securities laws and the corporate governance rules of the NYSE.

 

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COMPENSATION DISCUSSION AND ANALYSIS

We were formed on February 2, 2011 when our predecessor, Precious Metals Opportunities LLC, converted to a Delaware corporation. On March 1, 2011, Los Gatos Ltd. merged with and into us. Prior to March 1, 2011, our predecessor companies were managed under advisory services arrangements with our principal stockholders and we did not have employees or executive officers.

Currently, our management consists of our Executive Chairman, who is also our Chief Executive Officer, our Chief Financial Officer, our Chief Operating Officer, our Vice President Exploration, and our General Counsel. In this prospectus, we refer to these individuals as our Named Executive Officers or NEOs. All of our NEOs were hired in 2011 and did not receive any compensation for services to us prior to 2011. We are in the process of hiring additional key executives to complete our management team.

We discuss the employment agreements we have entered into with our NEOs below. Each of these agreements resulted from arm’s length negotiation with the respective executive. We believed that these employment packages were necessary in order to induce these individuals to leave their prior employment, enter into employment with us and strive to make our business plan a success.

We intend to form a Compensation and Nominating Committee in connection with this offering. We expect that the Compensation and Nominating Committee will continue the basic elements of compensation that are reflected in the executive employment contracts discussed below: base salary, annual incentive compensation and equity-based long-term incentive awards such as stock options. As we engage additional executives, we expect that the Compensation and Nominating Committee will further refine its objectives and philosophy with regard to executive compensation, with the goal of attracting and retaining skilled executives to implement our business plan.

Employment Agreements with Named Executive Officers

Employment Agreement with Mr. Orr

We entered into an employment agreement with Mr. Orr, dated as of May 3, 2011. He commenced employment as our Executive Chairman effective as of May 4, 2011 and has been our Chief Executive Officer since June 2011.

Base Salary. Mr. Orr receives an annual base salary of $500,000, which will be subject to review on an annual basis and may be adjusted in accordance with the procedures set forth by the Compensation and Nominating Committee.

Stock Options. Upon commencement of his employment with us, Mr. Orr was granted an option to purchase 125,000 shares of our common stock. Upon the consummation of this offering, Mr. Orr will be granted an option to purchase an additional 125,000 shares of our common stock.

Benefits and Perquisites. Mr. Orr will be entitled to participate in the various employee benefits plans that are, from time to time, made generally available to our employees.

Confidentiality and Non-Solicitation. Mr. Orr has agreed to maintain the confidentiality of our information and not to use or allow or help another to use or access such information at any time during or after his employment with us. Mr. Orr has also agreed not to solicit any of our employees, consultants or service providers during his employment and for one year after termination of his employment.

Termination and Change in Control. Payments and benefits to which Mr. Orr will be entitled upon termination of his employment, whether or not in connection with a change in control, are discussed below in the footnotes to the table under “—Potential Payments Upon Termination or Change in Control.”

 

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Employment Agreement with Mr. Johnson

We entered into an employment agreement with Mr. Johnson, dated as of February 28, 2011, and he commenced employment as our Chief Financial Officer effective as of March 9, 2011.

Base Salary. Mr. Johnson receives an annual base salary of $330,000, which will be subject to review on an annual basis and may be adjusted in accordance with the procedures set forth by the Compensation and Nominating Committee.

One-Time Bonus. Upon commencement of his employment with us, Mr. Johnson received a one-time bonus of $600,000 as compensation for forgoing his stock options from his prior employer.

Annual Bonus. Mr. Johnson will be eligible to participate in a bonus plan pursuant to which he will be entitled to receive an annual target bonus equal to 67% of his base salary upon achievement by him and the Company of certain targets determined by the Compensation and Nominating Committee. The amount of target bonus may range from 33% of base salary to 100% of base salary in any given year as determined by the Compensation and Nominating Committee, and the amount of annual bonus actually paid (if any) will depend on the actual performance of the Company and Mr. Johnson as determined by the Compensation and Nominating Committee.

Stock Options. Upon commencement of his employment with us, Mr. Johnson was granted an initial option to purchase 35,000 shares of our common stock and a regular option to purchase 3,600 shares of our common stock. If Mr. Johnson is still employed by us on February 1, 2012, he will be granted an option to purchase an additional 3,600 shares of our common stock on February 1, 2012. If Mr. Johnson is still employed by us on February 1, 2013, he will be granted an option to purchase an additional 3,600 shares of our common stock on February 1, 2013.

Benefits and Perquisites. Mr. Johnson will be entitled to participate in the various employee benefits plans that are, from time to time, made generally available to our employees.

Confidentiality and Non-Solicitation. Mr. Johnson has agreed to maintain the confidentiality of our information and not to use or allow or help another to use or access such information at any time during or after his employment with us. Mr. Johnson has also agreed not to solicit any of our employees, consultants or service providers during his employment and for one year after termination of his employment.

Termination and Change in Control. Payments and benefits to which Mr. Johnson will be entitled upon termination of his employment, whether or not in connection with a change in control, are discussed below in the footnotes to the table under “—Potential Payments Upon Termination or Change in Control.”

Employment Agreement with Mr. Galassini

We entered into an employment agreement with Mr. Galassini, dated as of July 7, 2011, and he commenced employment as our Chief Operating Officer effective as of August 8, 2011.

Base Salary. Mr. Galassini receives an annual base salary of $350,000, which will be subject to review on an annual basis and may be adjusted in accordance with the procedures set forth by the Compensation and Nominating Committee.

Annual Bonus. Mr. Galassini will be eligible to participate in a bonus plan pursuant to which, at the end of 2011, he will be entitled to receive an annual target bonus in the amount of 50% of his base salary and up to 100% of his base salary upon achievement by him and the Company of certain targets determined by the Compensation and Nominating Committee. The amount of annual bonus actually paid (if any) will depend on the actual performance of the Company and Mr. Galassini as determined by the Compensation and Nominating Committee.

 

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Stock Options. Upon commencement of his employment with us, Mr. Galassini was granted an option to purchase 150,000 shares of our common stock.

Benefits and Perquisites. Mr. Galassini will be entitled to participate in the various employee benefits plans that are, from time to time, made generally available to our employees.

Confidentiality and Non-Solicitation. Mr. Galassini has agreed to maintain the confidentiality of our information and not to use or allow or help another to use or access such information at any time during or after his employment with us. Mr. Galassini has also agreed not to solicit any of our employees, consultants or service providers during his employment and for one year after termination of his employment.

Termination and Change in Control. Payments and benefits to which Mr. Galassini will be entitled upon termination of his employment, whether or not in connection with a change in control, are discussed below in the footnotes to the table under “—Potential Payments Upon Termination or Change in Control.”

Employment Agreement with Mr. Pyle

We entered into an employment agreement with Mr. Pyle, dated as of June 1, 2011, and he commenced employment as our Vice President Exploration effective as of June 1, 2011.

Base Salary. Mr. Pyle receives an annual base salary of $200,000, which will be subject to review on an annual basis and may be adjusted in accordance with the procedures set forth by the Compensation and Nominating Committee.

Annual Bonus. Mr. Pyle will be eligible to participate in a bonus plan pursuant to which, at the end of 2011, he will be entitled to receive an annual target bonus in the amount of 50% of his base salary and up to 100% of his base salary upon achievement by him and the Company of certain targets determined by the Compensation and Nominating Committee. The amount of annual bonus actually paid (if any) will depend on the actual performance of the Company and Mr. Pyle as determined by the Compensation and Nominating Committee.

Benefits and Perquisites. Mr. Pyle will be entitled to participate in the various employee benefits plans that are, from time to time, made generally available to our employees.

Confidentiality and Non-Solicitation. Mr. Pyle has agreed to maintain the confidentiality of our information and not to use or allow or help another to use or access such information at any time during or after his employment with us. Mr. Pyle has also agreed not to solicit any of our employees, consultants or service providers during his employment and for one year after termination of his employment.

Termination and Change in Control. Payments and benefits to which Mr. Pyle will be entitled upon termination of his employment, whether or not in connection with a change in control, are discussed below in the footnotes to the table under “—Potential Payments Upon Termination or Change in Control.”

Amendment to Employment Agreement. On September 6, 2011, we amended Mr. Pyle’s employment agreement to increase his annual base salary to $250,000. This change was retroactive to August 1, 2011. All other terms and conditions of Mr. Pyle’s employment agreement remain unaffected.

Employment Agreement with Mr. Reeser

We entered into an employment agreement with Mr. Reeser, dated as of June 20, 2011, and he commenced employment as our General Counsel effective as of July 18, 2011.

Base Salary. Mr. Reeser receives an annual base salary of $300,000, which will be subject to review on an annual basis and may be adjusted in accordance with the procedures set forth by the Compensation and Nominating Committee.

 

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Annual Bonus. Mr. Reeser will be eligible to participate in a bonus plan pursuant to which, at the end of 2011, he will be entitled to receive an annual target bonus in the amount of 50% of his base salary and up to 100% of his base salary upon achievement by him and the Company of certain targets determined by the Compensation and Nominating Committee. The amount of annual bonus actually paid (if any) will depend on the actual performance of the Company and Mr. Reeser as determined by the Compensation and Nominating Committee.

Stock Options. Upon commencement of his employment with us, Mr. Reeser was granted an option to purchase 100,000 shares of our common stock.

Benefits and Perquisites. Mr. Reeser will be entitled to participate in the various employee benefits plans that are, from time to time, made generally available to our employees.

Confidentiality and Non-Solicitation. Mr. Reeser has agreed to maintain the confidentiality of our information and not to use or allow or help another to use or access such information at any time during or after his employment with us. Mr. Reeser has also agreed not to solicit any of our employees, consultants or service providers during his employment and for one year after termination of his employment.

Termination and Change in Control. Payments and benefits to which Mr. Reeser will be entitled upon termination of his employment, whether or not in connection with a change in control, are discussed below in the footnotes to the table under “— Potential Payments Upon Termination or Change in Control.”

Note: Because the NEOs received no compensation for services to us prior to 2011, the following tables summarize the NEOs’ compensation for 2011.

Summary Compensation Table

The table below summarizes the total compensation paid to or earned (or will be paid to or earned) by each NEO in 2011.

2011 Summary Compensation Table

 

Name and Principal Position(a)

  Year(b)     Salary
($) (c)(1)
    Bonus
($) (d)
    Option
Awards
($) (f)(2)
    Non-Equity
Incentive Plan
Compensation
($) (g)
    All Other
Compensation
($) (i)
    Total
($) (j)
 

Stephen Orr

Executive Chairman and Chief Executive Officer

    2011        332,877        —          1,122,500        —          —          1,455,377   

Roger P. Johnson

Chief Financial Officer

    2011        270,600        600,000 (3)      392,176        181,302 (4)      13,200 (5)      1,457,278   

John Galassini

             

Chief Operating Officer

    2011        140,000