Golden Minerals Co - Quarter Report: 2013 June (Form 10-Q)

Table of Contents

 

 

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 JUNE 30, 2013.

 

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 AUGUST 8, 2013, 43,327,833 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 JUNE 30, 2013

 

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	20
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	31
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	31
ITEM 4.	MINE SAFETY DISCLOSURES	31
ITEM 5.	OTHER INFORMATION	31
ITEM 6.	EXHIBITS	31
SIGNATURES		32

 

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PART I. FINANCIAL INFORMATION

 

Item 1.         Financial Statements

 

GOLDEN MINERALS COMPANY

CONSOLIDATED BALANCE SHEETS

(Expressed in United States dollars)

(Unaudited)

 

		June 30,			December 31,
		2013			2012
		(in thousands, except share data)
Assets
Current assets
Cash and cash equivalents		$	29,991		$	44,406
Investments (Note 6)		—			242
Trade receivables		1,312			1,291
Inventories (Note 8)		1,249			3,388
Value added tax receivable (Note 9)		2,748			4,422
Prepaid expenses and other assets (Note 7)		869			1,044
Total current assets		36,169			54,793
Property, plant and equipment, net (Note 10)		40,143			280,905
Assets held for sale		—			575
Goodwill (Note 4)		487			11,666
Prepaid expenses and other assets (Note 7)		97			163
Total assets		$	76,896		$	348,102
Liabilities and Equity
Current liabilities
Accounts payable and other accrued liabilities (Note 11)		$	5,471		$	6,232
Other current liabilities (Note 13)		6,509			7,074
Total current liabilities		11,980			13,306
Asset retirement obligation (Note 12)		2,535			2,259
Deferred tax liability (Note 15)		—			47,072
Other long term liabilities (Note 13)		105			193
Total liabilities		14,620			62,830
Commitments and contingencies (Note 19)
Equity (Note 16)
Common stock, $.01 par value, 100,000,000 shares authorized; 43,268,333 and 43,265,833 shares issued and outstanding, respectively		433			433
Additional paid in capital		494,154			493,175
Accumulated deficit		(432,311		)	(208,246		)
Accumulated other comprehensive loss		—			(90		)
Parent company’s shareholder’s equity		62,276			285,272
Total liabilities and equity		$	76,896		$	348,102

 

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 LOSS

(Expressed in United States dollars)

(Unaudited)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
		(in thousands, except share data)						(in thousands, except share data)
Revenue:
Sale of metals (Note 17)		$	4,467		$	4,938		$	10,297		$	11,321
Costs and expenses:
Costs applicable to sale of metals (exclusive of depreciation shown below) (Note 17)		(8,145		)	(6,603		)	(17,017		)	(14,530		)
Exploration expense		(1,240		)	(1,816		)	(2,764		)	(4,212		)
El Quevar project expense		(586		)	(1,174		)	(1,673		)	(2,589		)
Velardeña project expense		(759		)	(2,142		)	(2,921		)	(5,524		)
Velardeña shutdown costs		(2,329		)	—			(2,329		)	—
Administrative expense		(1,633		)	(1,829		)	(3,530		)	(3,853		)
Stock based compensation		(558		)	(291		)	(979		)	(523		)
Reclamation and accretion expense		(46		)	22			(88		)	(145		)
Impairment of long lived assets		(238,020		)	—			(238,020		)	—
Impairment of goodwill		(11,180		)	—			(11,180		)	—
Other operating income & (expenses), net		630			(122		)	3,828			215
Depreciation, depletion and amortization		(2,529		)	(1,997		)	(5,097		)	(3,843		)
Total costs and expenses		(266,395		)	(15,952		)	(281,770		)	(35,004		)
Loss from operations		(261,928		)	(11,014		)	(271,473		)	(23,683		)
Other income and expenses:
Interest and other income, net		251			1,986			323			2,161
Royalty income		—			219			—			357
Gain (loss) on foreign currency		(1,145		)	(20		)	(410		)	434
Total other income and expenses		(894		)	2,185			(87		)	2,952
Loss from operations before income taxes		(262,822		)	(8,829		)	(271,560		)	(20,731		)
Income tax benefit		45,017			1,189			47,495			2,960
Net loss		$	(217,805	)	$	(7,640	)	$	(224,065	)	$	(17,771	)
Comprehensive loss:
Realized gain (loss) on securities		—			(26		)	90			(59		)
Comprehensive loss		$	(217,805	)	$	(7,666	)	$	(223,975	)	$	(17,830	)
Net loss per common share — basic and diluted
Loss		$	(5.09	)	$	(0.22	)	$	(5.23	)	$	(0.50	)
Weighted average common stock outstanding - basic and diluted (1)		42,821,914			35,487,868			42,812,918			35,480,946

 

(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)

 

		Six Months Ended
		June 30,
		2013			2012
		(in thousands)
Cash flows from operating activities:
Net cash used in operating activities (Note 18)		$	(16,788	)	$	(22,919	)
Cash flows from investing activities:
Sale of available for sale investments		198			—
Proceeds from sale of assets		3,842			2,494
Capitalized costs and acquisitions of property, plant and equipment		(1,667		)	(5,161		)
Net cash used in investing activities		$	2,373		$	(2,667	)
Cash flows from financing activities:
Net cash (used in) / provided by financing activities		$	—		$	—
Net increase (decrease) in cash and cash equivalents		(14,415		)	(25,586		)
Cash and cash equivalents - beginning of period		44,406			48,649
Cash and cash equivalents - end of period		$	29,991		$	23,063

 

See Note 18 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			Total
		Common Stock					Paid-in			Accumulated			income			Equity
		Shares		Amount			Capital			Deficit			(loss)			(Deficit)
		(in thousands except share data)
Balance, December 31, 2010		15,124,567		$	152		$	185,051		$	(53,550	)	$	165		$	131,818
Stock compensation accrued		331,166		—			5,540			—			—			5,540
Treasury shares acquired and retired		(106,056	)	—			(1,834		)	—			—			(1,834		)
Warrants exercised		104,889		1			(1		)	—			—			—
Shares issued to ECU shareholder’s and officers		16,117,319		161			224,514			—			—			224,675
ECU replacement options and warrants		—		—			9,853			—			—			9,853
Private placements, net		4,118,150		41			30,633			—			—			30,674
Unrealized loss on marketable equity securities, net of tax		—		—			—			—			(287		)	(287		)
Net loss		—		—			—			(62,671		)	—			(62,671		)
Balance, December 31, 2011		35,690,035		$	355		$	453,756		$	(116,221	)	$	(122	)	$	337,768
Stock compensation accrued		712,500		9			2,580			—			—			2,589
Registered offering stock units, net		5,497,504		55			29,378			—			—			29,433
Private placements stock units, net		1,365,794		14			7,461			—			—			7,475
Unrealized gain on marketable equity securities, net of tax		—		—			—			—			32			32
Net loss		—		—			—			(92,025		)	—			(92,025		)
Balance, December 31, 2012		43,265,833		$	433		$	493,175		$	(208,246	)	$	(90	)	$	285,272
Stock compensation accrued		152,000		—			979			—			—			979
Realized gain on marketable equity securities, net of tax		—		—			—			—			90			90
Net loss		—		—			—			(224,065		)	—			(224,065		)
Balance, June 30, 2013		43,417,833		$	433		$	494,154		$	(432,311	)	$	—		$	62,276

 

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.  The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures normally required by GAAP.

 

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, 2012, and filed with the SEC on March 1, 2013.

 

The Company is primarily focused on its efforts to develop new operating plans for its  Velardeña mining operations in Mexico (the “Velardeña Operations”), the advancement of its El Quevar advanced exploration property in Argentina, and the exploration and continuing effort to monetize and rationalize its portfolio of exploration properties in South America and Mexico

 

Effective June 19, 2013 the Company has suspended operations at its Velardena Operations in order to conserve the asset until the Company is able to develop operating plans, which at then current prices for silver and gold indicate a sustainable cash margin for operations.  The Company has placed the mine and processing plants on a care and maintenance program to enable a re-start when operating plans and metals prices support a cash positive outlook for the property.  Approximately 420 positions at the Velardena Operations were eliminated as a result of the suspension. The Company accrued approximately $2.3 million of employee severance and other costs in the second quarter 2013 and expects to incur approximately $3.0 million of one-time costs in the third quarter 2013 for other activities related to the suspension of operations and approximately $2.5 million total in quarterly holding costs in the third and fourth quarters should operations remain suspended. If operations remain suspended after 2013, the Company expects continuing care and maintenance costs of approximately $1.0 million per quarter. The Company currently plans to retain a core group of approximately 50 to 60 employees to facilitate a re-start of operations and to maintain and safeguard the longer term value of the asset.

 

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 and goodwill 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 generating future profitable operations or securing additional funding in the future on terms acceptable to the Company or at all.

 

2.  Liquidity and Capital Resources

 

At June 30, 2013 the Company’s cash balance was $30.0 million and, based on the assumptions described below, we expect to have a cash balance of approximately $16.0 million at December 31, 2013.  During the first quarter of 2013 the Company completed the sale of certain Peruvian exploration properties to a third party for net proceeds of $3.5 million. The Company received other proceeds of $0.5 million related to joint venture option payments on other Mexican and Peruvian exploration properties.  With the cash balance at June 30, 2013 the Company expects to have sufficient funding to continue its long-term business strategy through 2013.

 

On June 19, 2013 the Company suspended operations at its Velardeña Operations in order to conserve the asset until the Company is able to develop operating plans, which at then current prices for silver and gold indicate a sustainable cash margin for operations. (See Note 1).  The Company accrued approximately $2.3 million of severance and other costs related to the suspension in the second quarter of 2013 and expects to incur costs of approximately $3.0 million for additional one-time

 

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suspension related activities and $2.5 million for care and maintenance during the remainder of the year should operations remain suspended.

 

With the cash balance at June 30, 2013 of $30.0 million the Company plans to spend the following additional amounts during the remainder of 2013 pursuant to its long-term business strategy.  These amounts do not include costs related to a potential restart of the Velardena Operations.

 

·                  Approximately $3.0 million on one-time suspension costs, including labor and contractor costs associated with idling the plant and mobile mining equipment, costs for restocking of material and supplies, and other shutdown activities;

 

·                  $2.5 million on care and maintenance costs at the Velardeña Operations;

 

·                  Approximately $1.0 million at the El Quevar project to fund ongoing maintenance activities, property holding costs, and continuing  project evaluation costs;

 

·                  Approximately $2.5 million on other exploration activities and property holding costs related to the Company’s portfolio of exploration properties located primarily in Mexico, as the Company continues strategies to monetize portions of the portfolio; and

 

·                  Approximately $3.0 million on general and administrative costs and $2.0 million on an increase in net working capital primarily related to the payment of accrued severance costs.

 

The actual amount that the Company spends through year-end 2013 and the projected year-end cash balance may vary significantly from the amounts specified above and will depend on a number of factors, including the timing and costs associated with a potential restart of the Velardeña Operations, the results of continued project assessment work at El Quevar and other exploration properties, and whether the Company is able to monetize additional portions of its exploration portfolio.

 

3.              Impairment of Long Lived Assets

 

Velardeña Operations Asset Group

 

The Velardeña Operations asset group consists of the property, plant, and equipment and working capital related to the Velardeña Operations. Per the guidance of ASC 360, “Property, Plant and Equipment” (“ASC 360”) the Company assesses the recoverability of its long-lived assets, including property, plant and equipment, at least annually, or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Prices for silver and gold decreased approximately 34% and 26% respectively from March 31, 2013 to June 30, 2013.  The significant decrease in metals prices and the shutdown of operations at Velardeña at the end of the second quarter (see Note 1) were events that required an assessment of the recoverability of the Velardeña Operations asset group at June 30, 2013. Per the Guidance of ASC 360, recoverability of an asset group is not achieved if the projected undiscounted, pre-tax cash flows related to the asset group are less than its carrying amount. In its analysis of projected cash flows from the Velardeña Operations, the Company determined that the Velardeña Operations asset group was impaired. As a result, at June 30, 2013 the Company wrote the asset group down to its fair value and recorded an impairment charge of $229.6 million related to the property, plant and equipment.  The impairment amounts reduced the carrying value of the Velardeña Operations’ property, plant and equipment from $260.4 million to $30.8 million as shown in the table below.

 

In addition, the Company recomputed deferred tax assets and liabilities associated with the Velardeña asset group and determined, based on the new carrying value of the Velardeña Operations asset group, that no net deferred liabilities exist.  Therefore, the net deferred tax liabilities calculated prior to the impairment of approximately $45.0 million were written off and the Company recorded an income tax benefit equal to that amount for the quarter ended June 30, 2013 (see Note 15).

 

In arriving at a fair value for the Velardeña mineral resource and exploration properties the Company used a market approach, which the Company deems reasonable under the circumstances, that considered a combination of: (1) recently published market data reflecting an average in the ground mineral resource value for a representative group of junior silver mining companies, and (2) recent mineral resource acquisition and development cost data provided by a third party mining engineering consultant. Using this approach, the Company determined that the Velardeña mineral resource and exploration properties had a fair value of approximately $21.2 million. The tangible assets at Velardeña were separately analyzed by a

 

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third party valuation firm using available market data to determine a fair value based on the net realizable value that could be received in a sale to a third party.  The tangible assets were determined to have a fair value of approximately $9.6 million.

 

The market valuation approach used in the determination of fair value falls within level 3 of the fair value hierarchy per ASC 820 and relies upon assumptions related to the condition and location of the Velardeña Operations asset group in comparison to other corroborated observable market data.

 

The following table details the components of the impairment of the Velardeña Asset Group:

 

		Net Book Value						Net Book Value
		Prior to						After
		Impairment at			Impairment			Impairment at
		June 30, 2013			Charges			June 30, 2013
		(in thousands)
Mineral properties		$	232,805		$	211,609		$	21,196
Exploration properties		3,472			3,472			—
Tangible assets		24,110			14,512			9,598
		260,387			229,593			30,794

 

San Diego Property Asset Group

 

The Company has a 50 percent ownership interest in the San Diego exploration property, which is located approximately 10 kilometers from the Velardeña Operations.  The property interest was acquired as part of the ECU merger transaction, which occurred on September 2, 2011, and the property was assigned a value of $9.3 million as part of the purchase accounting associated with the transaction.  Because of its close proximity to the Velardeña Operations, the San Diego property could become a source of additional ore for the Velardeña Operations if developed in the future. The San Diego property is included in the Velardeña Operations reporting segment but is separate from the Velardeña Operations asset group.  Per the guidance of ASC 360, the Company assesses the recoverability of its property, plant and equipment at least annually, or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.  As discussed in Note 3, relating to the impairment of long lived assets related to the Velardeña Operations asset group, the significant decrease in metals prices and shutdown of operations at Velardeña are events requiring the assessment of the recoverability of the carrying amounts of the San Diego property.

 

Because the San Diego property is in the exploration stage of development a market valuation approach was used to determine the fair value for the property. Because of the close proximity and geological similarities of the San Diego property to the Velardeña Operations mineral resource and exploration properties, and given that both the San Diego property and the Velardeña Operations mineral resource and exploration properties were originally recorded at fair value at the same time as part of the ECU merger transaction,  the Company determined that the impairment of the Velardeña mineral resource and exploration properties provided a reasonable estimate for the decline in fair value of the San Diego property.  As such, the Company determined that the fair value of the San Diego property was $0.8 million, resulting in an impairment charge of $8.5 million, as shown in the table below.

 

The market valuation approach used in the determination of fair value falls within level 3 of the fair value hierarchy per ASC 820 and relies upon assumptions related to the condition and location of the San Diego property in comparison to other corroborated observable market data.

 

The following table details the components of the impairment of the San Diego Property Asset Group:

 

		Net Book Value				Net Book Value
		Prior to				After
		Impairment at		Impairment		Impairment at
		June 30, 2013		Charges		June 30, 2013
		(in thousands)
Exploration properties		9,260		8,428		832
		9,260		8,428		832

 

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4.              Impairment of Goodwill

 

Goodwill is all related to the acquisition of the Velardeña Operations as part of the ECU merger transaction and is primarily the result of the requirement to record a deferred tax liability for the difference between the fair value and the tax basis of both the assets acquired and liabilities assumed.  Per the guidance of ASC 350, “Intangible — Goodwill and Other” (“ASC 350”), the Company assesses the recoverability of its goodwill at least annually, or whenever events or changes in circumstances indicate that the carrying value of the goodwill may be impaired.  As discussed in Note 3, relating to the impairment of long lived assets related to the Velardeña Operations asset group, the significant decrease in metals prices and shutdown of operations at Velardeña are events that have also required an assessment of whether goodwill has been impaired.  In performing our analysis of any potential goodwill impairment pursuant to ASC 350, a minimal fair value was determined to exist for Mexican tax net operating losses (“NOLs”).  Tax accounting rules do not permit the recording of a tax asset related to the NOLs in situations where utilization is not assured, therefore, the $0.5 million fair value for the NOLs was assigned to goodwill. The Company completed a similar impairment analysis at December 31, 2012 and reduced the balance of goodwill to $11.7 million at that time.  The current analysis indicates that goodwill is further impaired.  Therefore, the Company has recorded an additional $11.2 million impairment charge in the current period and further reduced the carrying value of goodwill from $11.7 million to $0.5 million.

 

The Company used an analysis of discounted after-tax cash flows to calculate the implied goodwill of the Velardeña Operations asset group following the guidance of ASC Topic 805 “Business Combinations” (“ASC 805”). Several operating and shutdown scenarios were combined to arrive at a single projection of cash flows using a weighted average approach, which assigned probabilities to the occurrence of each individual scenario.  The cash flow analysis used in the impairment assessment for goodwill related to the Velardeña Operations falls within level 3 of the fair value hierarchy per ASC 820 (see Note 14) and includes various inputs including the weighted average cost of capital of 21.0%, projected future metals prices, and assumptions from the Company’s Velardeña Operations operating plans. The most significant unobservable factors are certain assumptions used in the Velardeña Operations operating plans and include: 1) ore grades consistent with the Company’s current and previously reported estimates of mineralized material, 2) plant throughput consistent with projected operating plans under the various operating scenarios, 3) the Company’s projections of operating costs, and 4) the weighting of operating scenarios.  The weighted average cost of capital and forecast of future metals prices were obtained from a third party valuation consultant that derived the data from corroborated observable market data. Metals prices used in the cash flow analysis for silver ranged from $23.80 to $18.06 per ounce and for gold ranged from $1,440 to $1,296 per ounce.

 

5.              Significant Accounting Policies

 

New accounting pronouncements

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-11 “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”), which requires an unrecognized tax benefit to be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward that the entity intends to use and is available for settlement at the reporting date. ASU 2013-11 will be effective for the Company in the first quarter of 2014. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

 

In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income”.  The purpose of this accounting standard update is to improve the reporting of reclassifications out of accumulated other comprehensive income and is effective for public entities prospectively for reporting periods beginning after December 15, 2012.  Substantially all of the information that this update requires already is required to be disclosed elsewhere in the financial statements under GAAP. However, the new requirement regarding presenting information about amounts reclassified out of accumulated other comprehensive income and their corresponding effect on net income will present, in one place, information about significant amounts reclassified and, in some cases, cross-references to related footnote disclosures.  The Company had only immaterial amounts classified out of accumulated other comprehensive income at December 31, 2012 and March 31, 2013.  The adoption of this standard did not have an impact on the Company’s financial position or results of operations and is not expected to have an impact in the future.

 

6.              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

 

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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:

 

December 31, 2012		Cost			Estimated Fair Value			Carrying Value
Investments:
Short-term:
Warrant to purchase common stock		$	124		$	—		$	—
Available for sale common stock		$	207		$	242		$	242
Total available for sale		331			242			242
Total short term		$	331		$	242		$	242

 

The Company did not hold any investments at June 30, 2013.  The available for sale common stock at December 31, 2012 consisted of 3.0 million shares of a junior mining company received during the third quarter 2012 related to the 2011 sale of the Company’s Paca Pulacayo property in Bolivia. During the first quarter 2013 all of the shares were sold for net proceeds of approximately $0.2 million resulting in a nominal loss recorded to interest and other expense.

 

At December 31, 2012 the Company held warrants to purchase common stock of a junior mining company which were acquired in a transaction related to the Company’s exploration activities.  At December 31, 2012 the warrants had a nominal carrying value of less than one thousand dollars.  The warrants expired on January 6, 2013 and the Company recorded a realized loss of approximately $0.1 million to interest and other expense.

 

Quoted market prices at December 31, 2012 were used to determine the fair values of the above investments.  See Note 14 for further discussion on the fair value measurement techniques used by the Company to value the above investments.

 

7.   Prepaid expenses and other current assets

 

Prepaid expenses and other current assets consist of the following:

 

		June 30,			December 31,
		2013			2012
		(in thousands)
Prepaid insurance		$	574		$	611
Prepaid contractor fees and vendor advances		132			148
Recoupable deposits and other		163			285
		$	869		$	1,044

 

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

 

Included in non-current assets at June 30, 2013 and December 31, 2012 were approximately $0.1 million and $0.2 million, respectively, of prepaid insurance on which amortization will be recognized through 2015.

 

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8.   Inventories

 

Inventories at the Velardeña Operations at March 31, 2013 and December 31, 2012 consist of the following:

 

		June 30,			December 31,
		2013			2012
		(in thousands)			(in thousands)
Metals inventory		$	631		$	2,076
In-process inventory		—			228
Material and supplies		618			1,084
		$	1,249		$	3,388

 

At June 30, 2013 the Company wrote down its metals inventory to net realizable value including a charge to cost of metals sold of approximately $1.6 million and a charge to depreciation expense of approximately $0.3 million.

 

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

 

9.   Value added tax recoverable

 

The Company has recorded value added tax (“VAT”) paid in Mexico and related to the Velardeña Operations as a recoverable asset. Mexican tax 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.

 

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

 

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

 

		June 30,			December 31,
		2013			2012
		(in thousands)
Mineral properties		$	27,591		$	239,200
Exploration properties		3,724			15,685
Royalty properties		200			200
Buildings		2,349			4,808
Mining equipment and machinery		19,695			29,185
Other furniture and equipment		1,164			2,204
Asset retirement cost		2,087			1,883
		56,810			293,165
Less: Accumulated depreciation and amortization		(16,667		)	(12,260		)
		40,143			280,905

 

At June 30, 2013 the Company reduced the carrying value of the Velardeña Operations property, plant and equipment by $229.6 million and the carrying value of the San Diego mineral property by $8.5 million and recorded a $238.0 million impairment charge on the accompanying consolidated statement of operations (see Note 3).  The table below sets forth the detail of the impairment charges recorded to the Velardeña Operations property, plant and equipment and the San Diego mineral property:

 

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		Gross Value			Impairment Charges						Gross Value
		Prior to			Velardeña						After
		Impairment at			Operations			San Diego			Impairment at
		June 30, 2013			Asset Group			Asset Group			June 30, 2013
		(in thousands)
Mineral properties		$	239,200		$	211,609		$	—		$	27,591
Exploration properties		15,624			3,472			8,428			3,724
Royalty properties		200			—			—			200
Buildings		5,385			3,036			—			2,349
Mining equipment and machinery.		30,271			10,576			—			19,695
Other furniture and equipment		2,064			900			—			1,164
Asset retirement cost		2,087			—			—			2,087
		294,831			229,593			8,428			56,810

 

The carrying value after the impairment at June 30, 2013 represents the fair value of the assets as discussed in Note 3.

 

The asset retirement cost is all related to the Company’s Velardeña Operations.

 

Assets Held for Sale

 

During the fourth quarter of 2012, the Company obtained approval from its board of directors to sell most of its exploration concessions in Peru. The $0.6 million carrying value of the properties was reflected in assets held for sale in the accompanying consolidated balance sheets at December 31, 2012.  During February 2013, the Company entered into an agreement to sell the exploration concessions in Peru to Compañía de Minas Buenaventura S.A.A. (“Buenaventura”) for $4.3 million. The Company has completed transactions for approximately $3.5 million of that amount.  The sale of the remaining $0.8 million in exploration concessions to Buenaventura was conditioned on the receipt of third party consents by February 28, 2013.  Although the consents were not received by February 28, 2013 and this date has not been extended, the Company continues to work to obtain the consent of an additional third party representing $0.6 million of concession sales.  The recorded gain on the sale of the properties to Buenaventura of $2.9 million, included in Other Operating Income in the Statement of Operations, does not include the $0.8 million conditional amounts.

 

11.   Accounts Payable and Other Accrued Liabilities

 

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

 

		June 30,			December 31,
		2013			2012
		(in thousands)
Accounts payable and accruals		$	2,056		$	4,098
Accrued employee compensation and benefits		3,415			2,134
		$	5,471		$	6,232

 

June 30, 2013

 

Accounts payable and accruals at June 30, 2013 are primarily related to amounts due to contractors and suppliers in the amounts of $1.7 million, $0.3 million and $0.1 million related to the Company’s Velardeña Operations, corporate administrative activities and exploration, respectively.

 

Accrued employee compensation and benefits at June 30, 2013 consist of $0.3 million of accrued vacation payable, $2.0 million of accrued severance payments and $1.1 million related to withholding taxes and benefits payable, of which $2.2 million, including the severance accrual, is related to the Velardeña Operations.

 

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December 31, 2012

 

Accounts payable and accruals at December 31, 2012 are primarily related to amounts due to contractors and suppliers in the amounts of $3.0 million, $0.7 million and $0.4 million related to the Company’s Velardeña Operations, corporate administrative activities and exploration, respectively.

 

Accrued employee compensation and benefits at December 31, 2012 consist of $0.1 million of accrued vacation payable and $2.0 million related to withholding taxes and benefits payable, of which $1.7 million is related to activities at the Velardeña Operations.

 

12.   Asset Retirement and Reclamation Liabilities

 

The Company recorded an approximately $3.5 million asset retirement obligation (“ARO”) and offsetting asset retirement cost (“ARC”) at the time of the acquisition of the Velardeña Operations in September 2011.  The Company with the help of a third party engineering firm estimated the ARO and ARC based on the engineering firm’s experience with mining operations of similar size and scope as that of the Velardeña Operations. Shortly after the completion of the 2011 acquisition, the Company retained the services of another engineering firm to complete a detailed closure plan for the Velardeña Operations.  That plan was completed during the second quarter 2012 and indicated an ARO and ARC of approximately $1.9 million.  The ARO and ARC amounts were adjusted accordingly as set forth in changes in estimates, and other in the table below. At this time the Company does not anticipate that the suspension of operations at the Velardeña Operations will have an impact on the timing or scope of the detailed closure plan.

 

  The Company will continue to accrue additional estimated ARO amounts based on an asset retirement plan as activities requiring future reclamation and remediation occur.  During the first six months of 2013 the Company recognized approximately $0.1 million of accretion expense during the period and approximately $0.1 million of amortization expense related to the ARC.

 

The following table summarizes activity in the Velardeña Operations ARO:

 

		June 30,			December 31,
		2013			2012
		(in thousands)			(in thousands)
Beginning balance		$	2,080		$	3,577
ARO arising in the period		203			—
Changes in estimates, and other		—			(1,656		)
Liabilities settled		—			—
Accretion expense		88			159
Ending balance		$	2,371		$	2,080

 

The increase in ARO recorded during the six months ended June 30, 2013 relates to a change in assumption related to inflation factors used in the determination of future cash flows.  The corresponding increase in ARO was discounted using the Company’s current credit-adjusted risk-free interest rate.

 

Asset retirement and reclamation liabilities for both periods include approximately $0.2 million of reclamation liabilities related to activities at the El Quevar project in Argentina.

 

13.   Other Liabilities

 

The Company recorded other current liabilities of approximately$6.5 million and $7.1 million at June 30, 2013 and December 31, 2012, respectively.  The June 30, 2013 and December 31, 2012 amounts include a loss contingency of $4.2 million and $4.6 million, respectively and an unrecognized tax benefit of $2.2 million and $2.5 million, respectively.  The amounts are all related to foreign withholding taxes and include estimated interest, penalties and other adjustments that may be required upon settlement of the liability.  The foreign withholding tax statute of limitations related to the loss contingency will expire through 2017.

 

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The Company has recorded other long term liabilities of approximately $0.1 million and $0.2 million at June 30, 2013 and December 31, 2012, respectively, related to a deferred leasehold liability which represents the recording of rent expense on a straight-line basis while actual rent payments are escalating over the course 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.

 

14.   Fair Value Measurements

 

Effective January 1, 2008, the Company adopted ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC 820”) for 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, 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 June 30, 2013, by respective level of the fair value hierarchy:

 

		Level 1			Level 2			Level 3			Total
		(in thousands)
Assets:
Cash equivalents		$	29,991		$	—		$	—		$	29,991
Trade accounts receivable		1,312			—						1,312
		$	31,303		$	—		$	—		$	31,303

 

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 trade accounts receivable is classified within Level 1 of the fair value hierarchy and is related to the sale of metals at our Velardeña Operations and is valued at published metals prices per the terms of the refining and smelting agreements.

 

The Company did not have any Level 2 or Level 3 financial assets at June 30, 2013.

 

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.

 

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15.   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.  For the quarter ended June 30, 2013, the Company recorded an income tax benefit of $45.0 million related primarily to the impairment of long lived assets of the Velardeña Operations, resulting in an elimination of the net deferred tax liability in existence at that time.  For the quarter ended June 30, 2012, the Company recorded a $1.2 million income tax benefit related primarily to Mexico net operating losses.  Based on the limited history that the Company has with its Velardeña operations, an estimated effective tax rate is not used to report the year-to-date results.

 

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.  As a result of the impairment of long lived assets of our Velardeña Operations as of June 30, 2013, the net deferred tax liabilities presented in previous periods no longer exist, thus necessitating the recognition of an income tax benefit described above.  All net deferred tax assets of the Company are subject to a full valuation allowance as of June 30, 2013, as there is no assurance of utilization of these assets in the future.  Thus, there are no deferred tax liabilities or deferred tax assets reported on the Consolidated Balance Sheet as of June 30, 2013.  The net deferred tax liabilities of $47.1 million as of December 31, 2012 consist primarily of $63.7 million deferred tax liabilities, related to the basis differences of the long lived assets of our Velardeña Operations, and $16.3 million deferred tax assets related to Mexico net operating losses.

 

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 Company’s income tax returns are subject to examination by the relevant taxing authorities and in connection with such examinations, disputes can arise with the taxing authorities 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.  Such positions are deemed to be “unrecognized tax benefits” which require additional disclosure and recognition of a liability within the financial statements.  The Company had unrecognized tax benefits of $2.2 million and $2.5 million as of June 30, 2013 and December 31, 2012, respectively.

 

16.   Equity (Deficit)

 

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 following table summarizes the status of the Company’s restricted stock grants issued under the Equity Plan at June 30, 2013 and changes during the six months then ended:

 

Restricted Stock Grants		Number of Shares		Weighted Average Grant Date Fair Value Per Share
Outstanding at December 31, 2012		823,500		$	5.67
Granted during the period		152,000		1.77
Restrictions lifted during the period		(20,400	)	7.27
Forfeited during the period		—		—
Outstanding at June 30, 2013		955,100		$	5.02

 

In connection with performance and reductions in force, the Company’s Compensation Committee and Board of Directors approved a 10% annual salary reduction effective June 1, 2013 for certain officers of the Company. In conjunction with the salary reduction, expected to be in effect for one year, the Compensation Committee approved a grant of an aggregate of 149,500 restricted shares to the officers effective June 1, 2013. The stock will vest in one year from the grant date. In addition, 2,500 shares of restricted stock were granted to a new employee hired during the period.  One third of the restricted stock granted to the employee vests on each of the first, second and third anniversaries of the grant dates, provided the employee continues to serve the Company at that time.  Restrictions were lifted on 8,000 shares during the period on the first anniversary of a grant made to an officer hired during 2012 and restrictions were lifted on 12,400 shares related to an employee’s retirement.

 

For the six months ended June 30, 2013 the Company recognized approximately $0.8 million of compensation expense related to outstanding restricted stock grants.  The Company expects to recognize additional compensation expense related to these awards of approximately $1.5 million over the next 33 months.

 

The following table summarizes the status of the Company’s stock option grants issued under the Equity Plan at June 30, 2013 and changes during the six months then ended:

 

Equity Plan Options		Number of Shares		Weighted Average Exercise Price Per Share
Outstanding at December 31, 2012		118,810		$	8.01
Granted during period		—		—
Forfeited or expired during period		—		—
Exercised during period		—		—
Outstanding at June 30, 2013		118,810		8.01
Exercisable at end of period		118,810		8.01
Granted and vested		118,810		8.01

 

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

 

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under the Equity Plan. The RSUs vest on the first anniversary of the grant date 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 June 30, 2013 and changes during the six months then ended:

 

Restricted Stock Units		Number of Underlying Shares		Weighted Average Grant Date Fair Value Per Share
Outstanding at December 31, 2012		143,995		$	7.21
Granted during the period		370,368		1.62
Restrictions lifted during the period		—		—
Forfeited during the period		—		—
Outstanding at June 30, 2013		514,363		$	3.18

 

The RSUs granted during the period are a portion of the annual compensation paid to the directors.

 

For the six months ended June 30, 2013 the Company recognized approximately $0.2 million of compensation expense related to the RSU grants.  The Company expects to recognize additional compensation expense related to these awards of approximately $0.5 million over the next 11 months.

 

17.   Sale of Metals and Related Costs

 

The Company produces marketable products including concentrates and precipitates at its Velardeña Operations.  During the six months ended June 30, 2013 the Company sold marketable products to five customers.  Under the terms of the Company’s agreements with one precipitate customer, title does not pass to the purchaser until the product is received by the refinery, at which point revenue is recognized. For the Company’s other customers, title generally passes when a provisional payment is made, which occurs after the product is shipped and customary sales documents are completed.  Costs related to the sale of metals products include direct and indirect costs incurred to mine, process and market the products.  At June 30, 2013 and 2012 the Company wrote down its metals inventory to net realizable value including a charge to the cost of metals sold of approximately $1.6 million and $2.1 million, respectively, and a charge to depreciation expense of approximately $0.3 million and $0.7 million, respectively.  Also included in cost of metals sold at June 30, 2013 is a $0.6 million charge related to workforce reduction severance costs incurred during the first quarter 2013.

 

The Company suspended operations at its Velardeña mine effective June 19, 2013 (see Note 1).

 

18.   Supplemental Cash Flow Information

 

The following table reconciles net loss for the period to cash used in operations:

 

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		Six Months Ended
		June 30,
		2013			2012
		(in thousands)
Cash flows from operating activities:
Net loss		$	(224,065	)	$	(17,771	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization and depreciation		5,097			3,843
Accretion of asset retirement obligation		78			35
Foreign currency loss on loss contingency		(260		)	(118		)
Foreign currency (gain) loss on deferred tax liability		423			(189		)
Impairment of goodwill		11,180			—
Impairment (reversal of impairment) of accounts receivable		—			35
Impairment of long lived assets		238,020			—
Asset write off		60			425
Write off of loss contingency		(299		)	—
Realized loss on marketable securities		133			—
Fair value of stock/warrants received for mineral rights		—			(101		)
Gain on sale of assets, net		(3,236		)	(1,860		)
Income tax provision		(47,495		)	(2,960		)
Stock compensation		979			523
Changes in operating assets and liabilities:
Increase (decrease) in trade accounts receivable		(21		)	(1,812		)
Decrease in prepaid expenses and other assets		241			278
Decrease (increase) in inventories		1,564			(149		)
Decrease (increase) in value added tax recoverable, net		1,674			(1,409		)
Decrease in reclamation liability		(6		)	—
Increase (decrease) in accounts payable and accrued liabilities		(767		)	(1,641		)
Decrease in deferred leasehold payments		(88		)	(48		)
Net cash used in operating activities		$	(16,788	)	$	(22,919	)

 

19.   Commitments and Contingencies

 

The Company may have committed errors in prior years in the withholding and payment of certain foreign payroll and value added taxes related to certain of its foreign 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 be in the range of $0.0 to $1.7 million.

 

20.   Segment Information

 

The Company’s activities are 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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