NOTE 5 MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS

At June 30, 2013, the Company held mineral rights in Argentina, mineral concession rights in Mexico, including the El Gallo Complex, and mineral interests in Nevada. The El Gallo 1 mine recommenced gold and silver production in September 2012. For accounting purposes, the mine achieved commercial production in September 2012. For the year ended December 31, 2012, a total of 6,949 gold equivalent ounces were produced at El Gallo. For operational purposes, commercial production was effective as of January 1, 2013. For the three and six months ended June 30, 2013, a total of 8,561 and 15,342 gold equivalent ounces were produced at El Gallo, respectively.

In May 2013, the Company entered into a sale agreement for certain mining claims in the Limo Complex, Nevada, for a sales price of $0.8 million. The claims had a carrying value of $7.2 million. As the carrying value exceeded the proceeds from the sales agreement, the Company recorded a loss on disposal of $6.4 million. The Limo Complex is part of the “Nevada” segment as shown in Note 10. At as June 30, 2013, the proceeds from the sale of these claims had not yet been collected, and are included as a receivable in other current assets on the Company’s balance sheets. The proceeds were subsequently collected on July 17, 2013.

During the second quarter of 2013, the Province of Santa Cruz, Argentina, passed amendments to the Provincial Tax Code and Provincial Tax Law, which imposes a new tax on mining real estate property in the Province. The tax will amount to 1% of the value of the economically viable reserves of mining projects. Although there are a number of uncertainties surrounding the scope, calculation and enforcement of the tax and the mining industry is waiting for publication of regulations detailing these matters, it is expected that the law will be onerous and may limit future exploration activities in the province. Based on this development, along with a significant decline in gold and silver market prices during the second quarter of 2013 and continued inflationary pressures resulting in a depressed market for exploration companies in Argentina, the Company concluded that there were indicators that the carrying value of the mineral property interests located in the Santa Cruz Province may not be recoverable. The Company engaged a third party valuator to test the recoverability and determine the fair value of these properties. The valuator used a market approach to estimate the fair value of the properties by using the observed market value per acre in the region. Refer to Note 11, Fair Value Accounting, for further details on the valuation technique used in the determination of the fair value of these assets.

Based on this approach, it was determined that the carrying values of these mineral property interests exceeded their fair value, and as result, an impairment was recorded on the following mineral property interests for the quarter ended June 30, 2013:

		Three Months Ended June 30,				Six Months Ended June 30,
Name of Property/Complex	Segment	2013		2012		2013		2012
Telken Tenements	Argentina	$	13,792	$	—	$	13,792	$	—
Este Tenements	Argentina	2,784		—		2,784		—
Piramides Tenements	Argentina	5,079		—		5,079		—
Tobias Tenements	Argentina	6,074		—		6,074		—
Property, plant and equipment	Argentina	—		179		—		179
Total impairment		$	27,729	$	179	$	27,729	$	179

The corresponding deferred income tax for the properties which were sold or impaired in the second quarter of 2013 was $4.8 million. This $4.8 million was recorded as a reduction to deferred income tax liability and a recovery of deferred income taxes on the statement of operations and comprehensive loss.

The Company is responsible for reclamation of certain past and future disturbances at its properties. The two most significant properties subject to these obligations are the historic Tonkin property in Nevada and the El Gallo 1 portion of the El Gallo Complex in Mexico. The current undiscounted estimate of the reclamation costs for existing disturbances on the Tonkin property as required by the U.S. Bureau of Land Management (“BLM”) and the Nevada Department of Environmental Protection (“NDEP”) is $3.8 million. The Company submitted a mine closure plan to the NDEP and BLM for the Tonkin property during the fourth quarter of 2010. Based on the Company’s estimate, the change in its bonding requirements was insignificant. As at June 30, 2013, the closure plan has already been approved by the NDEP but is still under review by the BLM. It is possible that reclamation plan cost estimates and bonding requirements may increase as a result of its review. The Company, however, is unable to meaningfully estimate possible increases at this time. The costs of undiscounted projected reclamation of El Gallo 1 are currently estimated at $4.6 million.

For mineral properties in the United States, the Company maintains required reclamation bonding with various governmental agencies, and at June 30, 2013 and December 31, 2012, had cash bonding in place of $5.2 million. Under Mexican regulations, surety bonding of projected reclamation costs is not required.

Changes in the Company’s asset retirement obligations for the six months ended June 30, 2013 and year ended December 31, 2012 are as follows (in thousands):

	Six Months Ended			Year Ended
	June 30, 2013			December 31, 2012
Asset retirement obligation liability - opening balance	$	6,359		$	6,253
Settlements	(45		)	(47		)
Accretion of liability	234			447
Adjustment reflecting updated estimates	—			(294		)
Asset retirement obligation liability - ending balance	$	6,548		$	6,359

Reclamation expenditures are expected to be incurred between 2013 and 2040. As at June 30, 2013, the current portion of the asset retirement obligation was $1.3 million (December 31, 2012 - $0.1 million).

If proven and probable reserves exist at the Company’s properties, and upon commencement of production, the relevant capitalized asset retirement costs and mineral property interests will be charged to expense based on the units of production method. As previously discussed, Phase 1 of the El Gallo Complex began production in September 2012. However, since Phase 1 of the El Gallo Complex does not contain mineralized material that satisfy the definition of proven and probable reserves under the SEC Industry Guide 7, the amortization of the capitalized asset retirement costs and mineral property interests will be charged to expense based on the straight line method over the estimated useful life of the mine. For the three and six months ended June 30, 2013, the Company recorded $0.3 million and $1.0 million of amortization expense related to Phase 1 of the El Gallo Complex, respectively, which was reported in production cost applicable to sales on the unaudited statement of operations and comprehensive loss.