Golden Minerals Co - Quarter Report: 2011 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(MARK ONE)

 

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

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM                  TO                 .

 

COMMISSION FILE NUMBER 1-13627

 

GOLDEN MINERALS COMPANY

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

 

(303) 839-5060

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS:  YES x  NO o

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS SUBMITTED ELECTRONICALLY AND POSTED ON ITS CORPORATE WEB SITE, IF ANY, EVERY INTERACTIVE DATA FILE REQUIRED TO BE SUBMITTED AND POSTED PURSUANT TO RULE 405 OF REGULATION S-T (§232.405 OF THIS CHAPTER) DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO SUBMIT AND POST SUCH FILES).  YES x  NO o

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, A NON-ACCELERATED FILER, OR A SMALLER REPORTING COMPANY:

 

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT):  YES o  NO x

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN CONFIRMED BY A COURT:  YES x NO o

 

AT NOVEMBER 11, 2011, 35,685,035 SHARES OF COMMON STOCK, $0.01 PAR VALUE PER SHARE, WERE ISSUED AND OUTSTANDING.

 

 

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GOLDEN MINERALS COMPANY

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2011

 

INDEX

 

		PAGE
PART I — FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS (Unaudited)	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	28
ITEM 4.	CONTROLS AND PROCEDURES	28
PART II — OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	29
ITEM 1A.	RISK FACTORS	29
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	37
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	38
ITEM 4.	REMOVED AND RESERVED	38
ITEM 5.	OTHER INFORMATION	38
ITEM 6.	EXHIBITS	38
SIGNATURES		39

 

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PART I. FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

GOLDEN MINERALS COMPANY

CONSOLIDATED BALANCE SHEETS

(Expressed in United States dollars)

(Unaudited)

 

		Pro Forma
		September 30,			September 30,			December 31,
		2011 (1)			2011			2010
		(in thousands, except share data)
Assets
Current assets
Cash and cash equivalents		$	85,618		$	54,979		$	120,990
Investments (Note 4)		23			23			601
Inventories (Note 6)		1,523			1,523			—
Value added tax receivable (Note 7)		1,332			1,332			—
Prepaid expenses and other assets (Note 5)		3,166			3,166			1,695
Total current assets		91,662			61,023			123,286
Property, plant and equipment, net (Note 8)		381,876			381,876			10,139
Assets held for sale (Note 8)		—			—			1,795
Long term receivable		643			643			—
Prepaid expenses and other assets (Note 5)		293			293			398
Total assets		$	474,474		$	443,835		$	135,618
Liabilities and Equity
Current liabilities
Accounts payable and other accrued liabilities (Note 9)		$	9,714		$	9,714		$	2,931
Current portion of long term debt (Note 10)		14,957			14,957			—
Other current liabilities (Note 12)		8,543			8,543			67
Total current liabilities		33,214			33,214			2,998
Asset retirement obligation (Note 11)		3,506			3,506			—
Deferred tax liability (Note 14)		83,342			83,342			—
Other long term liabilities (Note 12)		502			502			802
Total liabilities		120,564			120,564			3,800
Commitments and contingencies (Note 18)
Equity (Note 15)
Common stock, $.01 par value, 100,000,000 shares authorized; 31,566,885 and 15,124,567 shares issued and outstanding, respectivly		355			314			152
Additional paid in capital		453,509			422,911			185,051
Accumulated deficit		(99,810		)	(99,810		)	(53,550		)
Accumulated other comprehensive income (loss)		(144		)	(144		)	165
Parent company’s shareholder’s equity		353,910			323,271			131,818
Total liabilities and equity		$	474,474		$	443,835		$	135,618

 

(1)          The pro-forma presentation reflects a private placement of common stock completed in October 2011; see Note 20.

 

The accompanying notes form an integral part of these consolidated financial statements.

 

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GOLDEN MINERALS COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Expressed in United States dollars)

(Unaudited)

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2011			2010			2011			2010
		(in thousands, except share data)
Revenue:
Management service fees (Note 16)		$	—		$	98		$	—		$	11,216
Costs and expenses:
Costs applicable to sale of metals (Note 16)		(965		)	—			(965		)	—
Costs of services (Note 16)		—			(31		)	—			(2,566		)
Exploration expense		(4,639		)	(3,755		)	(12,645		)	(9,893		)
El Quevar project expense		(5,520		)	(4,031		)	(23,276		)	(10,004		)
Administrative expense		(1,836		)	(1,868		)	(6,242		)	(6,295		)
Severance and acquisition related cost (Note 3)		(5,353		)	—			(7,050		)	—
Stock based compensation		(3,260		)	(559		)	(5,328		)	(1,859		)
Reclamation expense		(31		)	—			(126		)	—
Other operating income & (expenses), net		(76		)	76			340			186
Depreciation, depletion and amortization		(717		)	(307		)	(1,580		)	(751		)
Total costs and expenses		(22,397		)	(10,475		)	(56,872		)	(31,182		)
Loss from operations		(22,397		)	(10,377		)	(56,872		)	(19,966		)
Other income and expenses:
Interest and other income		11,099			90			11,240			376
Royalty income		155			80			285			239
Interest expense		(337		)	—			(337		)	—
Loss on foreign currency		(1,432		)	(65		)	(1,646		)	(53		)
Total other income and expenses		9,485			105			9,542			562
Loss from operations before income taxes		(12,912		)	(10,272		)	(47,330		)	(19,404		)
Income taxes		1,168			20			1,070			(1,517		)
Net loss		$	(11,744	)	$	(10,252	)	$	(46,260	)	$	(20,921	)
Other comprehensive loss:
Unrealized gain (loss) on securities		251			(74		)	(309		)	(141		)
Comprehensive gain (loss)		$	(11,493	)	$	(10,326	)	$	(46,569	)	$	(21,062	)
Net loss per common share — basic and diluted
Loss		$	(0.59	)	$	(1.15	)	$	(2.79	)	$	(2.81	)
Weighted average common stock outstanding - basic and diluted (1)		19,989,334			8,919,536			16,605,896			7,455,303

 

(1)          Potentially dilutive shares have not been included because to do so would be anti-dilutive.

 

The accompanying notes form an integral part of these consolidated financial statements.

 

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GOLDEN MINERALS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in United States dollars)

(Unaudited)

 

		Nine Months Ended
		September 30,
		2011			2010
		(in thousands)
Cash flows from operating activities:
Net cash used in operating activities (Note 17)		$	(46,704	)	$	(16,775	)
Cash flows from investing activities:
Purchase of available for sale investments		—			(6,003		)
Sale of available for sale investments		1,221			6,441
Cash received net of cash paid in ECU merger		5,614			—
Convertible note issued to ECU		(15,713		)	—
Proceeds from sale of assets		404			85
Capitalized costs and acquisitions of property, plant and equipment		(6,230		)	(2,585		)
Net cash used in investing activities		$	(14,704	)	$	(2,062	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issue costs		—			40,535
Payments of long term debt		(554		)	—
Payment of customer advance		(4,049		)	—
Net cash (used in) / provided by financing activities		$	(4,603	)	$	40,535
Net (decrease) / increase in cash and cash equivalents		(66,011		)	21,698
Cash and cash equivalents - beginning of period		120,990			8,570
Cash and cash equivalents - end of period		$	54,979		$	30,268

 

See Note 17 for supplemental cash flow information.

 

The accompanying notes form an integral part of these consolidated financial statements.

 

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GOLDEN MINERALS COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Expressed in United States dollars)

(Unaudited)

 

													Accumulated Other
							Additional						Comprehensive
		Common Stock (1)					Paid-in			Accumulated			income			Noncontrolling			Total
		Shares		Amount			Capital			Deficit			(loss)			Interest			Equity
Balance, December 31, 2009		3,238,615		$	32		$	37,854		$	(20,276	)	$	154		$	794		$	18,558
Purchase of El Quevar noncontrolling interest		400,000		4			771			—			—			(794		)	(19		)
Private placements, net		2,939,790		30			34,592			—			—			—			34,622
Public offerings, net		8,315,484		83			108,753			—			—			—			108,836
Stock compensation accrued		255,750		3			3,278			—			—			—			3,281
Treasury shares acquired and retired		(25,072	)	—			(197		)	—			—			—			(197		)
Unrealized gain on marketable equity securities		—		—			—			—			11			—			11
Net loss		—		—			—			(33,274		)	—			—			(33,274		)
Balance, December 31, 2010		15,124,567		$	152		$	185,051		$	(53,550	)	$	165		$	—		$	131,818
Stock compensation accrued, net		326,166		—			5,328			—			—			—			5,328
Treasury shares acquired and retired		(106,056	)	—			(1,834		)	—			—			—			(1,834		)
Warrants exercised		104,889		1			(1		)	—			—			—			—
Shares issued to ECU shareholders and an ECU officer		16,117,319		161			224,514			—			—			—			224,675
ECU replacement options and warrants		—		—			9,853			—			—			—			9,853
Unrealized loss on marketable equity securities		—		—			—			—			(309		)	—			(309		)
Net loss		—		—			—			(46,260		)	—			—			(46,260		)
Balance, September 30, 2011		31,566,885		$	314		$	422,911		$	(99,810	)	$	(144	)	$	—		$	323,271

 

(1) Additional common stock was issued in a private placement completed in October 2011; see Note 20.

 

The accompanying notes form an integral part of these consolidated financial statements.

 

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GOLDEN MINERALS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in United States dollars)

 

1.              Basis of Preparation of Financial Statements and Nature of Operations

 

Golden Minerals Company (the “Company”), a Delaware corporation, has prepared these unaudited interim consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), so long as such omissions do not render the financial statements misleading.

 

On September 2, 2011, the Company and ECU Silver Mining Inc. (“ECU”) completed a previously announced business combination (the “Transaction”) more fully described in Note 3.  The Company’s consolidated financial statements include the results of the ECU Transaction from September 2, 2011.

 

In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair presentation of the financial results for the periods presented. These interim financial statements should be read in conjunction with the annual financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. Certain prior period amounts have been reclassified to conform to the current period presentation.  Such reclassifications did not affect results of operations.

 

The Company is primarily engaged in the operation and further development of the recently acquired Velardeña mine in Mexico (see Note 3), the advancement of its El Quevar advanced exploration property in Argentina, and the exploration and advancement of its portfolio of exploration properties in South America and Mexico.  The financial statements have been prepared on a going concern basis under which an entity is considered to be able to realize its assets and satisfy its liabilities in the normal course of business.  However, the continuing operations of the Company are dependent upon its ability to secure sufficient funding and to generate future profitable operations.  The underlying value and recoverability of the amounts shown as mineral properties in the consolidated balance sheet are dependent on the ability of the Company to generate positive cash flow from operations and to continue to fund exploration and development activities that would lead to profitable production or proceeds from the disposition of the mineral properties.  There can be no assurance that the Company will be successful in securing additional funding in the future on terms acceptable to the Company or at all.

 

2.              Significant Accounting Policies

 

In conjunction with the Company’s merger with ECU discussed in Note 3, the Company adopted the following accounting policies:

 

a)              Inventories — In process, concentrate and doré inventories are carried at the lower of average cost or net realizable value. Net realizable value represents the estimated future sales price of the product based on spot and futures metals prices through estimated sale and settlement dates, less the estimated costs to complete production and bring the product to sale. Materials and supplies inventories are valued at the lower of average cost or net realizable value. Cost includes applicable taxes and freight. The Company routinely counts and evaluates its material and supplies to determine the existence of any obsolete stock that is subject to impairment (see Note 6).

 

b)             Asset Retirement Obligations - The Company records asset retirement obligations (“ARO”) in accordance with Accounting Standards Codification (“ASC”) 410, “Asset Retirement and Environmental Obligations” (“ASC 410”), which establishes a uniform methodology for accounting for estimated reclamation and abandonment costs. According to ASC 410, the fair value of an ARO is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. An offsetting asset retirement cost (“ARC”) is capitalized as part of the carrying value of the assets with which it is associated, and depreciated over the useful life of the asset (see Note 11).

 

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c)              Revenue Recognition - The Company recognizes a sale at the earliest point that both risk of loss and title transfer to the purchaser which, pursuant to the terms of the Company’s agreement for the sale of doré, occurs when the product is received by the refiner (see Note 16).

 

The Company did not adopt any new accounting standards during the quarter ended September 30, 2011, nor were there any new accounting pronouncements during that period that would have an impact on the Company’s financial position or results of operations.

 

3.              Acquisition of ECU Silver Mining Inc.

 

On September 2, 2011, the Company completed its previously announced business combination with ECU.  Pursuant to the terms and conditions of an agreement dated June 24, 2011, between the Company and ECU (the “Arrangement Agreement”), the businesses of the Company and ECU were combined by way of a court-approved plan of arrangement (the “Arrangement”) pursuant to the provisions of the Business Corporations Act (Québec).

 

Pursuant to the Arrangement Agreement:

 

·                  each ECU common share outstanding immediately prior to the effective time of the Arrangement on September 2, 2011 (the “Effective Time”) was exchanged for the right to receive 0.05 shares of the Company’s common stock (the “Exchange Ratio”) and Cdn$0.000394 in cash, resulting in the issuance of 16,004,111 shares of common stock and payment of approximately Cdn$126,112 in cash;

 

·                  each warrant to purchase ECU common shares (an “ECU Warrant”) outstanding immediately prior to the Effective Time issued pursuant to ECU’s February 2009 warrant indenture or ECU’s December 2009 warrant indenture was exchanged at the Exchange Ratio for the right to receive a warrant to purchase shares of the Company’s common stock (a “Replacement Warrant”) on the same terms and conditions as were applicable to such ECU Warrant immediately prior to the Effective Time, resulting in the issuance of warrants to purchase 386,363 shares of the Company’s common stock at an exercise price of Cdn$18.00 per share expiring on December 9, 2011, and warrants to purchase 1,831,929 shares of the Company’s common stock at an exercise price of Cdn$19.00 per share expiring on February 20, 2014; and

 

·                  each option to purchase ECU common shares (an “ECU Option”) outstanding immediately prior to the Effective Time granted under the ECU’s stock option plan was exchanged at the Exchange Ratio for an option to purchase shares of the Company’s common stock (a “Replacement Option”) on the same terms and conditions as were applicable to the corresponding ECU Options immediately prior to the Effective Time; resulting in the issuance of options to purchase 653,000 shares of the Company’s common stock at exercise prices ranging Cdn$16.00 and Cdn$60.00 and with expiration dates ranging from September 24, 2011 to October 22, 2014.

 

The Company incurred approximately $4.6 million of transaction costs for financial advisory, legal, accounting, tax and consulting services as part of the Arrangement. The Company also incurred approximately $2.5 million in severance related payments as part of the termination of ECU’s officers and certain employees following the acquisition of ECU. The transaction and severance payment costs are included in Severance and acquisition-related costs on the Company’s consolidated statements of operations and comprehensive income and were recognized separately from the purchase price for the Arrangement.

 

The Company followed the acquisition method of accounting in accordance with ASC 805 “Business Combinations” (“ASC 805”). The following tables summarize the preliminary calculation of the purchase price and the fair values of the assets acquired and liabilities assumed on September 2, 2011 in connection with the ECU business combination.  The Company is in the process of finalizing its assessment of fair value of the assets acquired and liabilities assumed.  Accordingly, the fair values of these assets and liabilities are subject to change.

 

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Calculation of purchase price ($000’s):

 

Cash consideration		$	129
Stock consideration (a)		223,097
Replacement options (b)		1,109
Replacement warrants (b)		8,744
Total purchase price		$	233,079

 

(a)          The value of the Company’s common stock is $13.94 per share, the closing price on the NYSE Amex September 2, 2011.

 

(b)         The fair value of Replacement Options and Replacement Warrants was determined using a Black-Scholes pricing model.

 

Preliminary allocation of purchase price ($000’s):

 

Current assets (c)		$	9,001
Mineral properties (d)		337,513
Asset retirement cost (d)		3,506
Exploration properties (d)		12,731
Plant and equipment (e)		13,963
Current liabilities (c)		(26,299		)
Long term debt (c)		(30,752		)
Asset retirement obligation (d)		(3,506		)
Deferred tax liability (f)		(83,078		)
Total purchase price		$	233,079

 

(c)          Monetary assets and liabilities assumed have been recorded at their carrying values, which approximate fair value.  Long term debt includes: (1) a term loan payable to two investment funds managed by IIG Capital, LLC in the amount of $15.5 million, as more fully described in Note 10, and (2) a convertible note (the “Note”) payable to the Company in the amount of $15.2 million.  The Note, the funds from which were provided to ECU prior to the consummation of the Arrangement in a separate transaction, is eliminated for financial reporting purposes in consolidation with the Company’s corresponding note receivable.

 

(d)         Mineral properties and the asset retirement obligation are recorded at estimated fair market value based on valuations performed with the assistance of an independent appraisal firm and a minerals engineering company.  The asset valuations were derived in accordance with the guidance of ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC 820”) using a combination of income, market and cost approach models depending on the asset.  In applying the appropriate valuation model or models, the valuation consultants employed a variety of economic factors and market data, including discount rates, income tax rates, projections of future metals prices, and third party market surveys.  The mineral properties will be amortized on a units of production basis as minerals are depleted.

 

(e)          Plant and equipment purchased in the Arrangement have been recorded at fair value based on valuations performed by an independent appraisal firm in accordance with the guidance of ASC 820.  The plant and equipment will be depreciated on a straight line basis over their remaining useful lives.

 

(f)            The deferred tax liability is related to the taxable effect of the stepped-up basis in the mineral properties recorded.  The deferred tax liability was calculated by applying the Mexico corporate income tax rate of 28% to the stepped-up basis in the mineral properties recorded.

 

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The Company’s consolidated financial statements include the results of operations for ECU from the date of acquisition. The following unaudited pro forma information is presented as if the ECU acquisition had been completed as of January 1, 2011 and January 1, 2010.

 

		Nine Months Ended
		September 30,
		2011			2010
Revenue		$	12,977		$	23,674
Net income (loss)		$	(54,602	)	$	(28,901	)

 

The pro forma 2011 earnings exclude non-recurring acquisition and severance related costs that the Company and ECU incurred related to the Transaction.

 

For the period September 2, 2011 through September 30, 2011 the results of operations do not include any revenue from the sale of metals related to ECU (see Note 16).  The net loss before income taxes recorded during that period included a loss of $1.5 million related to ECU activity which excludes $2.5 million of non-recurring acquisition and severance related costs.

 

These pro forma adjustments are based on certain assumptions and currently available information that the Company believes are reasonable.  The pro forma results are not necessarily indicative of what would have been achieved had the ECU acquisition been completed as of January 1, 2011 and January 1, 2010.

 

4.              Investments

 

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Short-term investments include investments with maturities greater than three months, but not exceeding 12 months, or highly liquid investments with maturities greater than 12 months that the Company intends to liquidate during the next 12 months for working capital needs.

 

The Company determines the appropriate classification of its investments in equity securities at the time of purchase and re-evaluates those classifications at each balance sheet date.  Available for sale investments are marked to market at each reporting period with changes in fair value recorded as a component of other comprehensive income (loss). If declines in fair value are deemed other than temporary, a charge is made to net income (loss) for the period.

 

The following tables summarize the Company’s investments at September 30, 2011 and December 31, 2010:

 

September 30, 2011		Cost			Estimated Fair Value			Carrying Value
		(in thousands)
Investments:
Short-term:
Available for sale
Common stock		$	44		$	21		$	21
Warrant to purchase common stock		124			2			2
Total available for sale		168			23			23
Total short term		$	168		$	23		$	23

 

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December 31, 2010		Cost			Estimated Fair Value			Carrying Value
		(in thousands)
Investments:
Short-term:
Available for sale
Common stock		$	217		$	527		$	527
Warrant to purchase common stock		124			74			74
Total available for sale		341			601			601
Total short term		$	341		$	601		$	601

 

See Note 13 for a discussion of the methodologies used to determine the fair value of the common stock and warrants presented in the tables above.  During the third quarter 2011, the Company sold the 5 million shares of Apogee Minerals Limited (“Apogee”) received earlier in the year from the sale of the Company’s Paca Pulacayo property in Bolivia as discussed in Note 8.  The Company sold the 5 million shares of Apogee for net proceeds of approximately $1.0 million and recorded a loss of approximately $0.4 million included in interest and other income on the consolidated statement of operations.

 

Credit Risk

 

Credit risk is the risk that a third party might fail to fulfill its performance obligations under the terms of a financial instrument. For cash and cash equivalents and investments, the Company’s maximum exposure to credit risk represents the carrying amount on the balance sheet. The Company attempts to mitigate credit risk for cash and cash equivalents by placing its funds with high credit-quality financial institutions, limiting the amount of exposure to each financial institution, monitoring the financial condition of the financial institutions and investing only in government and corporate securities rated “investment grade” or better. The Company invests with financial institutions that maintain a net worth of not less than $1.0 billion and are members in good standing of the Securities Investor Protection Corporation.

 

5.   Prepaid expenses and other current assets

 

Prepaid expenses and other current assets consist of the following:

 

		September 30,			December 31,
		2011			2010
		(in thousands)
Prepaid insurance		$	308		$	466
Prepaid contractor fees and vendor advances		1,842			785
Deferred leasehold costs		—			156
Deferred tax asset		460			—
Recoupable deposits and other		556			288
		$	3,166		$	1,695

 

The prepaid contractor fees and vendor advances consist of advance payments made to equipment manufacturers, contractors and suppliers primarily at the Company’s Velardeña mine in Mexico and El Quevar project in Argentina.

 

Included in non-current assets at September 30, 2011 and December 31, 2010 are approximately $0.3 million and $0.4 million, respectively, of prepaid insurance on which amortization will be recognized through 2015.

 

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6.   Inventories

 

Inventories at the Velardeña mine at September 30, 2011 consist of the following:

 

		September 30, 2011
		(in thousands)
Doré inventory		$	1,013
In-process inventory		220
Material and supplies		290
		$	1,523

 

The doré inventory includes a doré shipment made from the Velardeña mine in late September 2011 that had not been received by the refinery at September 30, 2011.  Under the terms of the Company’s agreement for the sale of doré, title does not pass to the purchaser until the doré is received by the refinery. At September 30, 2011 the doré inventory was written down to its estimated net realizable value and a $1.1 million charge was reflected as an inventory write down included in cost of sales and depreciation on the Consolidated Statements of Operations.

 

Material and supplies inventory consist primarily of operating supplies at the Velardeña mine and are carried at the lower of cost or market.

 

7.   Value added tax recoverable

 

The Company has recorded value added tax (“VAT”) paid in Mexico and related to the Velardeña mine as a recoverable asset. Mexico law allows for certain VAT payments to be recovered through ongoing applications for refunds. The Company expects that the current amounts will be recovered within a one year period.

 

The Company has also paid VAT in Mexico as well as other countries, primarily related to exploration projects, which has been charged to expense as incurred because of the uncertainty of recoverability.

 

8.   Property, Plant and Equipment and Assets Held for Sale

 

Property, plant and equipment

 

The components of property, plant and equipment are as follows:

 

		September 30,			December 31,
		2011			2010
		(in thousands)
Mineral properties		$	337,513		$	—
Exploration properties		16,548			3,918
Royalty properties		1,208			1,208
Buildings		5,205			1,498
Mining equipment and machinery		19,414			3,882
Other furniture and equipment		1,295			798
Asset retirement cost		3,506			—
		384,689			11,304
Less: Accumulated depreciation		(2,813		)	(1,165		)
		381,876			10,139

 

Of the increase in property, plant and equipment for the nine months ended September 30, 2011, approximately $367.7 million is related to the acquisition of ECU as discussed in Note 3. Mineral properties related to the Velardeña mine will be amortized on a units of production basis as minerals are depleted. The ARC is also all related to the Velardeña mine and will be amortized as discussed in Note 11. The remaining approximately $5.7 million of additions to property, plant and equipment, net of disposals, are primarily related to activity at the Company’s El Quevar project in Argentina.

 

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Assets Held for Sale

 

During 2009, the Company obtained approval from its board of directors to sell its Paca Pulacayo property in Bolivia. At December 31, 2010 the $1.8 million carrying value of the property was reflected in assets held for sale in the accompanying consolidated balance sheets.

 

On January 28, 2011 the Company completed the sale to Apogee of a Bolivian subsidiary, which holds a 100% interest in the Paca Pulacayo property, for 5,000,000 Apogee common shares and an additional 3,000,000 common shares and $500,000 cash payment to be issued and paid 18 months following the closing.  The Company recorded a $0.4 million gain and an account receivable of approximately $0.8 million at the date of the sale.  The gain is reflected in other operating income, net on the accompanying statements of operations for the period ended September 30, 2011.  During the period since the sale the Company has recorded an impairment of approximately $0.2 million related to the account receivable as a result of the decline in Apogee’s share price.  Prior to the realization of the account receivable, the Company may record additional future impairment as the result of changes in the price of Apogee shares.  During the third quarter 2011, the Company sold the 5,000,000 shares of Apogee received in January 2011 for net proceeds of approximately $1.0 million and recorded a loss of approximately $0.4 million which is included in interest and other income on the consolidated statement of operations.

 

9.   Accounts Payable and Other Accrued Liabilities

 

The Company’s accounts payable and other accrued liabilities consist of the following:

 

		September 30,			December 31,
		2011			2010
		(in thousands)
Accounts payable and accruals		$	4,839		$	2,450
Accrued employee compensation and benefits		4,875			481
		$	9,714		$	2,931

 

Accounts payable and accruals at September 30, 2011 are primarily related to amounts due to contractors and suppliers in the amounts of $2.4 million, $1.1 million, $0.4 million and $0.9 million related to the Company’s Velardeña mine, El Quevar project, exploration and corporate administrative activities, respectively. Accounts payable and accruals at December 31, 2010 are primarily related to amounts due to contractors and suppliers in the amounts of $1.7 million, $0.4 million and $0.3 million related to the El Quevar project, exploration and corporate administrative activities, respectively.

 

Accrued employee compensation and benefits at September 30, 2011 consist of $0.3 million of accrued vacation payable, $0.8 million of bonuses payable, $0.9 million related to severance amounts payable related to the ECU acquisition and $2.9 million related to withholding taxes and benefits payable, of which $2.3 million is related to activities at the Velardeña mine. Accrued employee compensation and benefits at December 31, 2010 consist of $0.1 million of accrued vacation payable and $0.4 million related to withholding taxes and benefits payable.

 

10.   Debt

 

The Company’s debt, all of which is debt of ECU and its subsidiaries, now subsidiaries of the Company, is as follows:

 

		September 30, 2011
		Current
		(in thousands)
Term loan		$	14,926
Facilities loan		31
		$	14,957

 

The term loan, payable to two investment funds managed by IIG Capital, LLC (the “Term Loan”), requires equal monthly principal payments of approximately $0.6 million through December 31, 2013.  Interest payable to the lenders under the Term Loan is payable quarterly and is calculated as the greater of 12.0% or the one-month London Interbank Offered Rate plus 6.0%.  The effective rate of interest on the Term Loan is currently 12.8%, plus an obligation for any Mexican income tax withholding. The Term Loan is secured by a first mortgage covering certain of the current mining

 

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properties of the Company’s Mexican subsidiaries in the Velardeña district, as well as the current and future facilities constructed thereon.  Prior to the Arrangement, ECU may have been in violation of certain covenants related to the proper administration of withholding taxes under the Term Loan, although no notice of default has been received by ECU or the Company from the lenders.  As more fully described in Note 20, on October 31, 2011, the Company notified the lenders of its intent to prepay all amounts outstanding under the Term Loan.  Prepayment of the Term Loan will require payment of a cancelation fee totaling approximately $0.5 million.  The Company expects the prepayment to occur in November 2011.  As a result, the Company has classified all amounts due under the Term Loan as short term in the Consolidated Balance Sheet as of September 30, 2011.

 

On July 13, 2011, the Company and ECU completed a private placement pursuant to which the Company purchased from ECU Cdn$15.0 million principal amount (approximately US$15.7 million) of 0.0% convertible senior unsecured notes (the “Notes”).  The private placement was intended to provide ECU with interim financing for its operations pending consummation of the Transaction.  On the Effective Date, due to the appreciation of the U.S. dollar, the value of the Notes was approximately $15.2 million.  The Company has recognized a foreign exchange loss of approximately $0.5 million due to its acquisition of ECU, the obligor of the Notes, as a result of the Arrangement.  The Notes do not appear as an obligation of the Company following the Arrangement due to their elimination in consolidation with ECU.

 

The Facilities loan, related to the leasehold improvements at ECU’s office in Toronto, carries interest at 10% and is repayable over a 5 year term in monthly payments of principal and interest of $1,698 and matures February 2013.

 

11.   Asset Retirement Obligations

 

In conjunction with the Arrangement (see Note 3) the Company recorded approximately $3.5 million for an ARO and ARC related to the Velardeña mine.  The Company will continue to accrue additional estimated ARO amounts based on an asset retirement plan as activities requiring future reclamation and remediation occur.

 

The Company prepares estimates of the timing and amount of expected cash flows when an ARO is incurred. The fair value of the ARO is measured by discounting the expected cash flows using a discount rate that reflects the credit-adjusted risk-free rate of interest. The Company records the fair value of an ARO when it is incurred and changes in the fair value of the ARO are recorded as an adjustment to the corresponding asset carrying amounts. The ARO is adjusted to reflect the passage of time (accretion cost) calculated by applying the discount rate implicit in the initial fair value measurement to the beginning-of-period carrying amount of the ARO. The Company records accretion costs to expense as incurred.  No amounts were accreted during the period and the Company recognized less than $0.1 million of amortization expense related to the ARC.

 

12.   Other Liabilities

 

The Company had recorded other current liabilities of $8.5 million and $0.1 million at September 30, 2011 and December 31, 2010, respectively.  The liability at September 30, 2011 includes a loss contingency of $4.6 million and an unrecognized tax benefit of $2.8 million (see Note 14), both relating to withholding taxes and including estimated interest, penalties and other adjustments that may be required upon settlement of the liability.  The liability at September 30, 2011 also includes $0.3 million of interest payable related to the Term Loan (see Note 10) and other miscellaneous liabilities of $0.8 million.

 

The Company had recorded other long term liabilities of $0.5 million at September 30, 2011 and $0.8 million at December 31, 2010.  Long term liabilities include $0.3 million of deferred leasehold liability related to the Company’s corporate headquarters office space at the end of both periods. The deferred leasehold liability represents the recording of rent expense on a straight-line basis while actual rent payments are escalating over the term of the lease and where certain leasehold improvement costs, reimbursable by the landlord, are being amortized on a straight-line basis against rent expense over the life of the lease which expires in November 2014.  In addition, the balances at both periods include $0.2 million of reclamation liabilities related to activities at the El Quevar project in Argentina.

 

13.   Fair Value Measurements

 

Effective January 1, 2008, the Company adopted ASC 820, “Fair Value Disclosure and Measurements” (“ASC 820”), for the financial assets and liabilities and nonfinancial assets and liabilities which are measured at fair value on a recurring (annual) basis.  ASC 820 establishes a framework for measuring fair value in the form of a fair value hierarchy which prioritizes the inputs into valuation techniques used to measure fair value into three broad levels.  This hierarchy gives the highest priority to quoted prices (unadjusted) in active markets and the lowest priority to unobservable inputs.  Further,

 

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financial assets and liabilities should be classified by level in their entirety based upon the lowest level of input that was significant to the fair value measurement.  The three levels of the fair value hierarchy per ASC 820 are as follows:

 

Level 1:  Unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

 

Level 2:  Quoted prices in inactive markets for identical assets or liabilities, quoted prices for similar assets or liabilities in active markets, or other observable inputs either directly related to the asset or liability or derived principally from corroborated observable market data.

 

Level 3:  Unobservable inputs due to the fact that there is little or no market activity. This entails using assumptions in models which estimate what market participants would use in pricing the asset or liability.

 

The following table summarizes the Company’s financial assets at fair value at September 30, 2011, by respective level of the fair value hierarchy:

 

		Level 1			Level 2			Level 3			Total
		(in thousands)
Assets:
Cash equivalents		$	54,979		$	—		$	—		$	54,979
Short-term available for sale securities		21			—			—			21
Warrant to purchase common stock		—			2			—			2
Long term account receivable		—			—			643			643
		$	55,000		$	2		$	643		$	55,645

 

The Company’s cash equivalents, comprised principally of U.S. treasury securities, are classified within Level 1 of the fair value hierarchy.

 

The Company’s short-term available for sale securities are classified within Level 1 of the fair value hierarchy and are comprised of common stock, which have been valued using quoted prices in active markets.

 

The Company’s warrant to purchase common stock is classified within Level 2 of the fair value hierarchy. The fair value of the warrant to purchase common stock was determined using a Black-Scholes model with inputs based on quoted market price, historic volatilities, risk free interest rates and the life of the warrant.

 

The Company’s long term receivable is classified within Level 3 of the fair value hierarchy.  The long term receivable is related to the sale of a subsidiary to Apogee as discussed in Note 8, and is comprised of cash and common shares.  The receivable is due and payable in July 2012 and is subject to a number of risks including market risk, performance risk and certain exchange related restrictions on the stock component.  In addition to certain observable inputs including quoted market price, historic volatilities, risk free interest rates, the Company also used estimated discount rates to reflect the credit risks associated with the receivable.

 

14.   Income Taxes

 

The Company accounts for income taxes in accordance with the provisions of ASC 740, “Income Taxes” (“ASC 740”), on a tax jurisdictional basis.  Based on the limited history of the Company, an estimated annual effective tax rate is not used to report the year-to-date results.  For the nine months ended September 30, 2011, the Company recorded a $1.1 million deferred tax benefit related primarily to Mexico net operating losses and unrealized exchange losses.  For the nine months ended September 30, 2010, the Company recognized income tax of $1.5 million, consisting primarily of withholding tax on management services provided in Bolivia.

 

In accordance with ASC 740, the Company presents deferred tax assets net of its deferred tax liabilities on a tax jurisdictional basis on its Consolidated Balance Sheets.  The Company has a net long-term deferred tax liability of $83.3 million as of September 30, 2011, consisting primarily of a $93.0 million long-term deferred tax liability related to the basis differences of its recently acquired mineral properties in Mexico, and a $9.7 million deferred tax asset related to Mexico net operating losses. The Company also reported a $0.5 million short-term deferred tax asset related to unrealized exchange losses as shown in Note 5.  The Company had a net deferred tax liability of $0.2 million as of September 30, 2010 related to the basis differences of certain other mineral properties.

 

The Company, a Delaware corporation, and its subsidiaries file tax returns in the United States and in various foreign jurisdictions.  The tax rules and regulations in these countries are highly complex and subject to interpretation. The

 

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Company’s income tax returns are subject to examination by the relevant taxing authorities and in connection with such examinations, disputes can arise over the interpretation or application of certain tax rules within the country involved.  In accordance with ASC 740, the Company identifies and evaluates uncertain tax positions, and recognizes the impact of uncertain tax positions for which there is less than a more-likely-than-not probability of the position being upheld upon review by the relevant taxing authority.  The Company had an unrecognized tax benefit of $2.8 million as of September 30, 2011, which is included in Other Current Liabilities (see Note 12), and the Company had $1.4 million of unrecognized tax benefits as of September 30, 2010.    As a result of the lapse of the applicable statute of limitations, the Company reduced unrecognized tax benefits by $1.4 million in the fourth quarter of 2010.

 

15.   Equity

 

Issuance of Common Stock Related to Merger

 

On September 2, 2011, per the terms of the Arrangement, the Company issued 16,004,111 shares of its common stock to the former shareholders of ECU.  The value of the shares was approximately $223.1 million based on the $13.94 closing price of the Company’s common stock on September 2, 2011.  See Note 3 for a discussion of the allocation of the purchase price of the transaction.

 

In addition, on September 2, 2011 the Company issued 113,208 shares of its common stock to one of the ECU officers in settlement of a change of control bonus required to be paid by ECU. The value of the shares was approximately $1.6 million based on the $13.94 closing price of the Company’s common stock on September 2, 2011.

 

Replacement Options and Warrants

 

Per the terms of the Arrangement, the Company has issued to former ECU stock option and warrant holders Replacement Options and Replacement Warrants to purchase shares of the Company’s common stock. The Company issued 653,000 Replacement Options with exercise prices ranging between $16.00 and $60.00 and expiration dates ranging between September 24, 2011 and October 22, 2014.  In addition the Company has issued 2,218,292 Replacement Warrants.  The Replacement Warrants include 386,363 warrants with an exercise price of $18.00 expiring on December 9, 2011, and 1,831,929 warrants with an exercise price of $19.00 expiring on February 20, 2014.  The Replacement Options had a fair value of approximately $1.1 million and the Replacement Warrants had a fair value of approximately $8.8 million as determined through the use of a Black-Scholes model.  The $9.9 million fair value of the Replacement Options and Replacement Warrants was included in the purchase price as discussed in Note 3.

 

Equity Incentive Plans

 

In April 2009, the Company adopted the 2009 Equity Incentive Plan (the “Equity Plan”) pursuant to which awards of the Company’s common stock may be made to officers, directors, employees, consultants and agents of the Company and its subsidiaries.  The Company recognizes stock-based compensation costs using a graded vesting attribution method whereby costs are recognized over the requisite service period for each separately vesting portion of the award.

 

The merger with ECU on September 2, 2011 (see Note 3) was determined to constitute a change in control pursuant to the terms of the equity plan which resulted in the vesting of all outstanding stock-based compensation grants on that date. The Company recognized stock compensation expense of approximately $1.3 million as a result of the accelerated vesting of the grants.

 

The following table summarizes the status of the Company’s restricted stock grants issued under the Equity Plan at September 30, 2011 and changes during the nine months then ended:

 

Restricted Stock Grants		Number of Shares		Weighted Average Grant Date Fair Value Per Share
Outstanding at December 31, 2010		461,650		$	13.45
Granted during the period		218,000		11.66
Restrictions lifted during the period		(454,916	)	13.52
Forfeited during the period		(6,734	)	9.08
Outstanding at September 30, 2011		218,000		$	11.66

 

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The restricted stock shown as granted during the period in the table above consisted of 215,900 shares granted on September 15, 2011 following completion of the ECU transaction and 2,100 shares granted to a new employee.  One third of the stock granted will vest on each of the first, second and third anniversaries of the grant date, provided the officer or employee continues to serve the Company at that time.

 

In conjunction with the lifting of the restrictions during the period, certain officers and employees of the Company relinquished an aggregate of 106,056 shares in lieu of taxes.  The shares had an approximate aggregate value of $1.8 million and were recorded as treasury shares which were subsequently canceled.

 

For the three months and nine months ended September 30, 2011 the Company recognized approximately $2.9 million and $4.7 million, respectively, of compensation expense related to the restricted stock grants, including approximately $1.1 million for both periods related to the accelerated vesting discussed above.  The Company expects to recognize additional compensation expense related to these awards of approximately $1.2 million over the next 36 months.

 

The following table summarizes the status of the Company’s stock option grants issued under the Equity Plan at September 30, 2011 and changes during the nine months then ended:

 

Equity Plan Options		Number of Shares		Weighted Average Exercise Price Per Share
Outstanding at December 31, 2010		136,810		$	8.01
Granted during period		—		—
Forfeited or expired during period		—		—
Exercised during period		—		—
Outstanding at September 30, 2011		136,810		8.01
Exercisable at end of period		136,800		8.01
Granted and vested		136,800		8.01

 

For the three months and nine months ended September 30, 2011 the Company recognized approximately $0.1 million and $0.3 million, respectively of compensation expense related to the option grants, including approximately $0.1 million for both periods related to the accelerated vesting discussed above.  As a result of the accelerated vesting the awards have been fully expensed at September 30, 2011.

 

Also, pursuant to the Equity Plan, the Company’s board of directors adopted the Non-Employee Director’s Deferred Compensation and Equity Award Plan (the “Deferred Compensation Plan”).  Pursuant to the Deferred Compensation Plan the non-employee directors receive a portion of their compensation in the form of Restricted Stock Units (“RSUs”) issued under the Equity Plan. The RSUs vest on the first anniversary of the grant and each vested RSU entitles the director to receive one unrestricted share of common stock upon the termination of the director’s board service.

 

The following table summarizes the status of the RSU grants issued under the Deferred Compensation Plan at September 30, 2011 and changes during the nine months then ended:

 

Restricted Stock Units		Number of Underlying Shares		Weighted Average Grant Date Fair Value Per Share
Outstanding at December 31, 2010		46,555		$	9.62
Granted during the period		17,226		16.79
Restrictions lifted during the period		—		—
Forfeited during the period		—		—
Outstanding at September 30, 2011		63,781		$	11.57

 

For the three months and nine months ended September 30, 2011 the Company recognized approximately $0.2 million and $0.3 million, respectively of compensation expense related to the RSU grants, including approximately $0.1 million for both periods related to the accelerated vesting discussed above.  As a result of the accelerated vesting the awards have been fully expensed at September 30, 2011.

 

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Exercise of warrants

 

As previously disclosed, during January 2010 the Company acquired Hochschild Mining Group’s (“Hochschild”) 35% interest in Minera El Quevar S.A. in exchange for 400,000 shares of its common stock and a Common Stock Purchase Warrant (the “Warrant’) to acquire 300,000 shares of its common stock exercisable for three years at an exercise price of $15.00 per share.  On April 13, 2011, Hochschild exercised the Warrant on a cashless exercise basis as permitted by the terms of the Warrant, which resulted in the issuance to Hochschild of 104,889 net shares of the Company’s common stock on April 15, 2011.

 

16.   Revenue, Management Service Fees and Related Costs

 

Sale of metals

 

The Company did not sell any metal from the Velardeña mine between the September 2, 2011 acquisition date and September 30, 2011.  Under the terms of the Company’s agreement for the sale of doré, title does not pass to the purchaser until the doré is received by the refinery. At September 30, 2011 the doré inventory was written down to its estimated net realizable value and a $1.1 million charge was recorded and reflected as an inventory write down included in cost of sales and depreciation on the Consolidated Statements of Operations (see Note 6).

 

Management service fees

 

The Company was party to a Management Services Agreement with Sumitomo Corporation under which it provided certain management services with respect to the San Cristóbal mine in Bolivia.  For the nine months ended September 30, 2010 the Company recorded $6.2 million as revenue related to the Management Services Agreement, comprised of $5.4 million of fees and $0.8 million for reimbursed withholding taxes. The Company also recorded corresponding charges of $2.5 million to cost of services and $0.8 million to income taxes for the actual administrative costs and withholding taxes reimbursable under the Management Agreement.

 

The Company and Sumitomo agreed to terminate the Management Agreement effective June 30, 2010, six months earlier than provided by the terms of the agreement.  As a result of the termination the Company received a $4.3 million termination fee comprised of $2.8 million in lieu of the performance of services by the Company for the final two quarters of 2010 and waiver of Sumitomo’s 6-month notice requirement, $1.0 million for a termination payment (as provided in the Management Agreement) and approximately $0.5 million for a performance bonus for the first two quarters of 2010.  The termination fee proceeds were partially offset by the return of prepaid administration fees for services not performed through June 30, 2010 of approximately $1.1 million resulting in a net payment from Sumitomo of $3.2 million received on June 30, 2010. As a result of the termination we recognized additional revenue of $4.9 million for the nine months ended September 30, 2010 comprised of the $4.3 million of termination fees as discussed above and $0.6 million for reimbursed withholding taxes.

 

For the quarter ended September 30, 2010 the Company recorded approximately $0.1 million of additional revenue and minimal amounts to cost of services and income taxes related to certain final services completed under the agreement.

 

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17.   Supplemental Cash Flow Information

 

The following table reconciles net income (loss) for the period to cash from operations:

 

		Nine Months Ended
		September 30,
		2011			2010
		(in thousands)
Cash flows from operating activities:
Net loss		$	(46,260	)	$	(20,921	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization and depreciation		1,580			751
Impairment of accounts receivable		151			—
(Gain) loss on sale of marketable securities		215			(131		)
Fair value of stock/warrants received for mineral rights		—			(423		)
Gain on sale of assets, net		(389		)	(64		)
Income tax provision		(1,070		)	91
Foreign exchange loss on convertable note		472			—
Stock compensation		5,328			1,859
Changes in operating assets and liabilities:
Decrease in trade accounts receivable		—			1,460
(Increase) decrease in prepaid expenses and other assets		346			552
Increase in inventories		(328		)	—
Increase in value added tax recoverable, net		(199		)	—
Increase in accrued interest payable		(60		)	—
Increase in accounts payable and accrued Liabilities		(5,327		)	250
Decrease in deferred leasehold payments		(98		)	(41		)
Decrease (increase) in taxes payable, net		769			(26		)
Other increase		—			65
Treasury shares acquired and retired		(1,834		)	(197		)
Net cash used in operating activities		$	(46,704	)	$	(16,775	)

 

The following table sets forth supplemental cash flow information and non-cash transactions:

 

		Nine Months Ended
		September 30,
		2011			2010
		(in thousands)
Supplemental disclosure of non-cash transactions:
Mineral rights acquired with common stock and warrants		$	—		$	794
Stock issued to acquire ECU		223,097			—
FMV of replacement options and warrants		9,853
Stock issued to ECU officer as partial severance payment		1,578			—
		$	234,528		$	794

 

18.   Commitments and Contingencies

 

ECU may have committed errors in prior years in the withholding and payment of certain Mexican payroll related taxes related to certain of its Mexican subsidiaries.  The Company believes it is unlikely that it will be assessed any amounts for these taxes prior to the statute of limitations expiring for the years in question but has estimated that the contingent liability would not be greater than $1.1 million.

 

19.   Segment Information

 

The Company’s sole activity is the exploration, development and mining of mineral properties containing precious metals.  The Company’s reportable segments are based upon the Company’s revenue producing activities and cash consuming activities. The Company reports two segments, one for its producing Velardeña mine in Mexico and the other comprised of non-producing activities including exploration, development and general and administrative activities.   Intercompany revenue and expense amounts have been eliminated within each segment in order to report on the basis that management uses internally for evaluating segment performance. The financial information relating to the Company’s segments is as follows:

 

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