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AUMN > SEC Filings for AUMN > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for GOLDEN MINERALS CO | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for GOLDEN MINERALS CO


9-Nov-2012

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

General

Golden Minerals is a mining company with precious metals mining operations in the State of Durango, Mexico, the El Quevar advanced exploration property in the province of Salta, Argentina, and a diversified portfolio of precious metals and other mineral exploration properties located in or near historical precious metals producing regions of Mexico and South America.

This discussion should be read in conjunction with Management's Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on March 8, 2012.

Overview

During the third quarter 2012 we continued to concentrate on the ramp-up and expansion of existing production at our Velardeña Operations in Mexico and advancement of the evaluation stage El Quevar project in Argentina. An overview of significant achievements during the third quarter 2012 is provided below:

Financing Activity

† On September 19, 2012, the Company completed an underwritten registered offering and concurrent private placement for total net proceeds of $36.9 million. The Company sold 5,497,504 units in the registered offering, priced at $5.75 per unit, with each unit consisting of one share of the Company's common stock and a five year warrant to purchase 0.50 of a share of the Company's common stock at an exercise price of $8.42 per share. The Company sold an additional 1,365,794 units in a concurrent private placement to The Sentient Group ("Sentient"), the Company's largest stockholder, at a price of $5.4625 per unit, the same price paid by the underwriter in the registered offering. Following the completion of the Private Placement and the Offering, Sentient continues to hold approximately 19.9% of the Company's outstanding common stock (excluding restricted common stock held by the Company's employees).

Velardeña Operations

† Production. In the third quarter 2012, the Velardeña Operations had payable production of approximately 1,930 ounces of gold and 118,400 ounces of silver, as compared to approximately 1,500 ounces of gold and 94,400 ounces of silver in the second quarter 2012. In the first three quarters of 2012, payable production was approximately 5,160 ounces of gold and 323,000 ounces of silver. Additionally, the Velardeña Operations had payable production of approximately 260,000 pounds of lead and 340,000 pounds of zinc in the third quarter, as compared to approximately 200,000 pounds of lead and 300,000 pounds of zinc in the second quarter 2012. Payable production was approximately 660,000 pounds of lead and 940,000 pounds of zinc in the first three quarters of 2012. The increase in production during the third quarter 2012 was due to an approximately 10% increase in the number of tonnes processed and increased grades resulting primarily from improved ore control procedures in the mine and some ore production from newly developed and non-exploited stopes.

Production during the first six months was negatively impacted primarily by less than planned mine development primarily due to delays in the arrival of underground mining equipment from Argentina. Equipment from Argentina has now arrived at Velardeña and, together with additional equipment acquired during the second quarter, we now have all mining equipment necessary for our planned production ramp up. Because of the approximately six month delay in mine development, we have continued to mine only in stopes that had been developed and partially mined prior to our September 2011 acquisition of the Velardeña Operations, rather than in newly developed stopes as initially anticipated. This has resulted in lower ore grades provided to the processing plant than planned.

† Ramp-up and other operations matters. The sulfide and oxide plants at the Velardeña Operations are currently operating at a combined capacity of approximately 500 tonnes per day. Mine operations are no longer constrained by the lack of underground mining equipment and we began to open access to new stopes for mining during the third quarter 2012. Due to the acquisition of additional equipment and the arrival of equipment from Argentina, we are increasing mine development activity. We have accessed non-exploited ore zones in the Santa Juana


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mining area in the third quarter 2012 and expect to increase ore extraction in non-exploited vein areas during the fourth quarter 2012. The Santa Juana mining area has the largest number of vein units and the overall grade is slightly higher than the Chicago and San Juanes mining areas. Due to increasing competition for mine labor in Mexico, we have begun to experience shortages of employees in our underground workforce which could negatively impact our mine development and ore and metals production. We are working to address this shortage by soliciting bids from mining contractors, examining alternative bonus structures, increasing our employee recruitment efforts and relocating miners from less productive areas of the mine to more productive areas. With increased mine development, we expect to ramp-up to a steady-state run rate of approximately 850 tonnes per day combined oxide and sulfide plant throughput, the processing capacity of the current plant facilities, in the third quarter 2013.

We have completed the installation and commissioning of a new flotation circuit at the end of the oxide plant leach circuit. The new flotation circuit is intended to recover gold and silver from material that has been leached in the oxide plant, and it is currently producing a lead/silver concentrate that will be sold with the lead/silver concentrate produced at the sulfide plant. The Company is performing additional test work to determine whether the remaining gold bearing pyrites in the tailings are best recovered using flotation or gravity concentration methods. During the third quarter 2012 we continued to advance the San Mateo ramp, which is expected to connect with the lower Santa Juana workings in the fourth quarter 2013. This connection will provide new access to facilitate ore removal from the lower Santa Juana workings and other veins that are accessed by the San Mateo ramp unit. We also have continued to improve ventilation and ore control procedures in the mine and to optimize the oxide and sulfide plants. We expect to complete a significant expansion of the laboratory at about year-end 2012, which will permit improved plant response to changing metallurgical conditions.

† Expansion plans. We are working on plans for an incremental expansion of the Velardeña Operations to approximately 1,150 tonnes per day. The expansion would include upgrading one of the sulfide plant ball mills and the addition of flotation and filtration capacity at the sulfide plant to increase processing capacity. The expansion would also include the addition of autoclave processing to increase recoveries of payable gold and silver and eliminate the use of third party tolling arrangements on less favorable terms. Our current preliminary estimate of capital costs for this expansion totals approximately $30.0 million, of which approximately $20.0 million would be for installation of autoclave processing. We are proceeding with preliminary design and test work for the autoclave project. Any expansion is dependent on external funding or internally generated sources of cash.

Other Activity

† Exploration. We continue to rationalize our exploration portfolio. We have reviewed and relinquished as being of no further interest approximately 200,000 hectares in Mexico, Argentina and Peru, are negotiating sale or farm-out arrangements affecting approximately another 200,000 hectares, and are consolidating our exploration management and administrative offices and functions. We expect this process to continue for the remainder of 2012 and at the end of the third quarter 2012 our annual rate of exploration cost was reduced to approximately twenty five percent from our annual exploration expenditure rate in 2011.

We are planning a 2,000 meter, ten hole drill program at the Quevar Norte and Sur areas at the El Quevar project in northwestern Argentina, focused on outlining new mineralized zones. We have identified two additional prospects in Mexico on currently held ground, unrelated to the Velardeña Operations or our holdings in Zacatecas, and plan to drill one of these during the fourth quarter 2012.

Results of Operations

For the results of continuing operations discussed below, we compare the results from operations for the three month and nine month periods ended September 30, 2012 to the results from operations for the three month and nine month periods ended September 30, 2011, respectively.

Three Months Ended September 30, 2012

Revenue from the sale of metals. We recorded $7.1 million of revenue for the three months ended September 30, 2012, all from the sale of products produced at our Velardeña Operations in Mexico. We had no operations prior to the acquisition of the Velardeña Operations during September 2011. We shipped doré from the Velardeña mine in late September 2011 that was not received by the refinery until early October. 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. This shipment was accounted for as revenue in the fourth quarter, 2011; consequently, there was no revenue recorded for the three months ended September 30, 2011.


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Costs of metals sold. We recorded $8.6 million of costs of metals sold for the three months ended September 30, 2012, all related to sales from our Velardeña Operations in Mexico. Included in costs of metals sold was a $2.0 million write down of finished goods inventory to its estimated net realizable value. We had no operations prior to the acquisition of the Velardeña Operations during September 2011 and no sales were recorded during the three months ended September 30, 2011. However, included in costs applicable to sales was a write down of the doré inventory of $1.0 million to its estimated net realizable value during the three months ended September 30, 2011.

Exploration. Our exploration expenses, including property holding costs and costs incurred by our local exploration offices, were $1.2 million for the three months ended September 30, 2012, as compared to $4.6 million for the three months ended September 30, 2011. Exploration expenses were incurred primarily on drilling programs, concession payments, and other exploration activities in Mexico, Argentina, and Peru. The decrease in exploration expenses during the third quarter 2012 as compared to the third quarter 2011 is the result of our reduced spending on exploration as we attempt to rationalize and monetize our exploration portfolio.

Velardeña project expense. During the three months ended September 30, 2012 we incurred $0.8 million of expenses related to our Velardeña Operations in Mexico, primarily related to development of the San Mateo drift, other mine development, and engineering work. In addition to amounts expensed during the three months ended September 30, 2012, we incurred capital expenditures of approximately $2.2 million for plant construction, mining and other equipment and had outstanding approximately $0.5 million of advance payments to equipment manufacturers at September 30, 2012. The Velardeña Operations were acquired during September 2011; consequently, there were no Velardeña project expenses recorded for the three months ended September 30, 2011.

El Quevar project expense. During the three months ended September 30, 2012 we incurred $1.0 million of expenses primarily related to furthering our evaluation of the Yaxtché deposit at our El Quevar project in Argentina. During the three months ended September 30, 2011, we incurred $5.5 million of expenses primarily related to development of the exploration drift, drilling and engineering work on the Yaxtché deposit. The decreases in the third quarter 2012 costs as compared to the third quarter 2011 are primarily the result of the suspension of the drifting and drilling activities at El Quevar during 2012 as we shift our emphases to the development and operation of our Velardeña mines.

Administrative. Administrative expenses were $1.9 million for the three months ended September 30, 2012 compared to $1.8 million for the three months ended September 30, 2011. Administrative expenses for both years are comparable and are primarily related to public company costs and corporate activities in support of our Velardeña Operations, El Quevar project work and our exploration programs.

Severance and acquisition related costs. During the third quarter 2011 we incurred $5.4 million of costs associated with the business combination with ECU, including banker, legal, accounting and other professional fees, as well as severance related costs for several key executives of ECU. The Company incurred no such costs during the third quarter 2012.

Other Operating Income & Expense, Net. During the three months ended September 30, 2012 we recorded $0.3 million of net other operating income primarily related to the gain on the sale of assets. During the third quarter 2011 we recorded $0.1 million of net other operating expense primarily related to losses on the sale of certain operating assets.

Stock based compensation. During the three months ended September 30, 2012 we recorded $0.3 million of stock based compensation expense compared to approximately $3.3 million of stock based compensation expense recorded during the three months ended September 30, 2011. Stock based compensation was significantly higher during the third quarter 2011 compared to the third quarter 2012, due to the accelerated vesting of stock grants in 2011 upon completion of the business combination with ECU, which resulted in a change of control of Golden Minerals.

Reclamation Expense. During the three months ended September 30, 2012 we incurred less than $0.1 million of reclamation expense all related to the accretion of an asset retirement obligation at the Velardeña Operations. During the three months ended September 30, 2011 we incurred only nominal reclamation expense at our Velardeña Operations subsequent to its September 2, 2011 acquisition.

Goodwill Impairment. At September 30, 2012 we recorded a goodwill impairment of $57.2 million, reducing goodwill carrying value from $70.2 million to $12.9 million. We assess the recoverability of our long lived assets, including goodwill, whenever events or changes in circumstances indicate that the carrying value of the assets may be impaired. In the year since the completion of the acquisition of the Velardeña Operations forecasted future gold and silver prices have decreased by approximately 20% and certain assumptions related to the long term operating plan for the Velardeña


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Operations have changed. As a result of these changes we completed an impairment analysis of the goodwill carrying value, which indicated that goodwill was impaired. We recorded no such impairment charges during the three months ended September 30, 2011.

Interest and Other Income. During the three months ended September 30, 2012 we recorded approximately $0.2 million of interest and other income primarily related to a reduction of a loss contingency liability. We recorded $11.1 million of interest and other income during the three months ended September 30, 2011, comprised of approximately $11.3 million of net proceeds received from the settlement of an arbitration claim partially offset by a net $0.1 million loss related to the sale of available for sale investments.

Royalty Income. The Company sold its net smelter return royalty on Excellon's Platosa mine in Mexico to Excellon during the second quarter 2012. During the three months ended September 30, 2012 we recorded a nominal amount of residual royalty income compared to approximately $ 0.2 recorded during the three months ended September 30, 2011. At September 30, 2012 we have no other sources of royalty income.

Gain/Loss on Foreign Currency. During the three months ended September 30, 2012 we recorded $0.4 million of foreign currency gain compared to $1.4 million of foreign currency loss for the same period in 2011. The 2011 loss was primarily related to the convertible note received from ECU and net operating loss carry forwards in Mexico. Foreign currency gains and losses are primarily related to the effect of currency fluctuations of monetary assets net of liabilities held by our foreign subsidiaries that are denominated in currencies other than US dollars. Such foreign currency denominated monetary assets and liabilities have increased with the acquisition of the Velardeña Operations.

Income Taxes. Our income tax for the three months ended September 30, 2012 was a $2.6 million benefit due to Mexico net operating losses, compared to a $1.2 million benefit recorded during the same period of 2011.

Nine Months Ended September 30, 2012

Revenue from the sale of metals. We recorded $18.4 million of revenue for the nine months ended September 30, 2012, all from the sale of products produced at our Velardeña Operations in Mexico. We had no operations prior to the acquisition of the Velardeña Operations during September 2011. We shipped doré from the Velardeña mine in late September 2011 that was not received by the refinery until early October. 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. This shipment was accounted for as revenue in the fourth quarter, 2011; consequently, there was no revenue recorded for the nine months ended September 30, 2011.

Costs of metals sold. We recorded $23.1 million of costs of metals sold for the nine months ended September 30, 2012, all related to sales from our Velardeña Operations in Mexico. Included in costs of metals sold was a $2.0 million write down of finished goods inventory to its estimated net realizable value. We had no operations prior to the acquisition of the Velardeña Operations during September 2011 and no sales were recorded during the nine months ended September 30, 2011. However, included in costs applicable to sales was a write down of the doré inventory of $1.0 million to its estimated net realizable value at the end of the nine months ended September 30, 2011.

Exploration. Our exploration expenses, including property holding costs and costs incurred by the local exploration offices, were $5.4 million for the nine months ended September 30, 2012, as compared to $12.6 million for the nine months ended September 30, 2011. Exploration expenses were incurred primarily on drilling programs, concession payments, and other exploration activities in Mexico, Argentina, and Peru. The decrease in exploration expenses for the first nine months of 2012 as compared to the first nine months of 2011 is the result of our reduced spending on exploration as we attempt to rationalize and monetize our exploration portfolio.

Velardeña project expense. During the nine months ended September 30, 2012 we incurred $6.3 million of expenses related to our project at our Velardeña Operations in Mexico, primarily related to development of the San Mateo drift, other mine development, and engineering work. In addition to amounts expensed during the nine months ended September 30, 2012, we incurred capital expenditures of approximately $7.4 million for plant construction, mining and other equipment and had outstanding approximately $0.5 million of advance payments to equipment manufacturers at September 30, 2012. The Velardeña Operations were acquired during September 2011; consequently, there were no Velardeña project expenses recorded for the nine months ended September 30, 2011.

El Quevar project expense. During the nine months ended September 30, 2012 we incurred $3.6 million of expenses primarily related to furthering our evaluation of the Yaxtché deposit at our El Quevar project in Argentina. During the nine months ended September 30, 2011, we incurred $23.3 million of expenses primarily related to development of the


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exploration drift, drilling and engineering work on the Yaxtché deposit. The decreases in the first nine months of 2012 costs as compared to the first nine months of 2011 are primarily the result of the suspension of the drifting and drilling activities at El Quevar during 2012 as we shift our emphasis to the development and operation of our Velardeña Operations.

Administrative. Administrative expenses were $5.8 million for the nine months ended September 30, 2012 compared to $6.2 million for the nine months ended September 30, 2011. Administrative expenses for the 2011 period included approximately $1.7 million of banker, legal, accounting and other professional fees related to the planned merger with ECU, no such fees were incurred during the first nine months of 2012. Administrative expenses are primarily related to public company costs and corporate activities in support of our Velardeña Operations, El Quevar project work, and our exploration programs.

Other Operating Income & Expense, Net. During the nine month period ended September 30, 2012 we recorded $0.5 million of net other operating income comprised of approximately $0.7 million of gains on asset sales partially offset by approximately $0.2 million of other operating expense arising from the payment of interest and penalties resulting from a value added tax audit in Mexico related to prior years. During the nine month period ended September 30, 2011 we recorded $0.3 million of net other operating income primarily related to gains on the sale of certain exploration properties.

Stock based compensation. During the nine months ended September 30, 2012 we recorded $0.8 million of stock based compensation expense compared to approximately $5.3 million of stock based compensation expense recorded during the nine months ended September 30, 2011. Stock based compensation was significantly higher during the first nine months of 2011 compared to the first nine months of 2012, primarily due to the accelerated vesting of stock grants during the third quarter 2011 related to the completion of the business combination with ECU, which resulted in a change of control of Golden Minerals.

Reclamation Expense. During the nine months ended September 30, 2012 we incurred $0.2 million of reclamation expense, which included $0.1 million of reclamation costs related to the accretion of an asset retirement obligation at the Velardeña Operations and actual reclamation expenses of $0.1 million incurred at the El Quevar project. During 2012 we completed a revised closure plan for our Velardeña Operations and recorded a reduction of the accretion of the asset retirement obligation of approximately $0.1 million which was netted against the expense for the period. We incurred no reclamation expenses during the nine months ended September 30, 2011.

Goodwill Impairment. At September 30, 2012 we recorded a goodwill impairment of $57.2 million, reducing goodwill carrying value from $70.2 million to $12.9 million. We assess the recoverability of our long lived assets, including goodwill, whenever events or changes in circumstances indicate that the carrying value of the assets may be impaired. In the year since the completion of the acquisition of the Velardeña Operations forecasted future gold and silver prices have decreased by approximately 20% and certain assumptions related to the long term operating plan for the Velardeña Operations have changed. As a result of these changes we completed an impairment analysis of the goodwill carrying value, which indicated that goodwill was impaired. We recorded no such impairment charges during the nine months ended September 30, 2011.

Interest and Other Income. During the first nine months of 2012 we recorded approximately $2.3 million of interest and other income comprised of a $1.8 million gain on the sale of the Platosa net smelter royalty to Excellon and a $0.5 million reduction of a loss contingency liability. We recorded $11.2 million of interest and other income during the first nine months of 2011, comprised of approximately $11.3 million of net proceeds received from the settlement of an arbitration claim partially offset by a net $0.2 million loss related to the sale of available for sale investments.

Royalty Income. During the nine months ended September 30, 2012 we recorded royalty income of approximately $0.4 million compared to approximately $0.3 recorded during the nine months ended September 30, 2011. The royalty income is all related to Excellon's Platosa mine in Mexico, on which we retained a net smelter return royalty; our royalty income varied from period to period depending on production from the mine. The net smelter return royalty was sold to Excellon during the second quarter 2012. At September 30, 2012 we have no other sources of royalty income.

Gain/Loss on Foreign Currency. During the nine months ended September 30, 2012 we recorded $0.8 million of foreign currency gain compared to $1.6 million foreign currency loss for the same period in 2011. The 2011 loss was primarily related to the convertible note received from ECU and net operating loss carry forwards in Mexico. Foreign currency gains and losses are primarily related to the effect of currency fluctuations of monetary assets net of liabilities held by our foreign subsidiaries that are denominated in currencies other than US dollars. Such foreign currency denominated monetary assets and liabilities have increased with the acquisition of the Velardeña Operations.


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Income Taxes. Our income tax for the nine months ended September 30, 2012 was a $5.6 million benefit due to Mexico net operating losses. Our income tax benefit during the first nine months of 2011 was $1.1 million related primarily to an increase in net operating loss and foreign exchange loss in Mexico and the reversal of the tax effects of other comprehensive income.

Liquidity, Capital Resources and Going Concern

At September 30, 2012 the Company's aggregate cash and short-term investments totaled $54.0 million and, based on the assumptions described below, we expect to have a cash balance of approximately $41.5 million at December 31, 2012. During the quarter ended September 30, 2012 the Company completed an underwritten registered offering and a concurrent private placement of units comprised of one share of the Company's common stock and a five year warrant to acquire half a share of the Company's common stock for net proceeds of $36.9 million (see Footnote 15). As a result, the Company has sufficient funding to continue its long-term business strategy through 2013.

Our cash and short-term investment balance at September 30, 2012 of $54.0 million is higher than the $48.6 million in similar assets held at December 31, 2011 due primarily to the sale of units for net proceeds of $36.9 million and $3.2 million in proceeds from the sale of non strategic property interests and royalty payments; almost fully offset by $13.7 million in Velardeña Operations capital and development expenditures, $4.7 million in operating losses at the Velardeña Operations; $1.5 million in additional working capital, primarily related to increased inventories and receivables associated with the Velardeña Operations; $5.4 million on exploration; $5.8 million on general and administrative activities; and $3.6 million on the El Quevar project.

Assuming metals prices of $30.00 per ounce of silver and $1,500 per ounce of gold during the fourth quarter 2012 we expect to generate a negative gross margin, which the Company defines as revenue from the sale of metals less costs . . .

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