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AUMN > SEC Filings for AUMN > Form 10-Q on 7-Nov-2013All 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


7-Nov-2013

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

2013 Highlights

During the first six months of 2013 we focused our efforts primarily on production and operational improvements at our Velardeña Operations. On June 19, 2013 we suspended operations at the Velardeña Operations in order to conserve the asset. We are continuing to evaluate alternative operating plans for a restart of operations. Our objective is to develop and implement an operating plan that at then current prices for silver and gold indicates a sustainable cash margin for operations.

During the nine months of 2013 we have continued efforts to actively solicit a partner to advance our El Quevar project and rationalize our exploration portfolio. We have reduced general and administrative expenses throughout 2013, and expect that as a result 2014 expenses will be approximately 25% lower than 2012 expenses. We also are reviewing acquisition opportunities, focusing on development or operating properties in North America or Mexico.

Velardeña Operations

† Payable production during the first six months of 2013 totaled approximately 396,000 silver equivalent ounces (equivalents calculated at 60:1 silver to gold) and included approximately 252,000 ounces of silver and 2,400 ounces of gold. Payable silver equivalent production includes only silver and gold. We also produced approximately 518,000 pounds of payable lead and 706,000 pounds of payable zinc during the first six months of 2013.

† On June 19, 2013 we suspended operations at our Velardeña Operations in Mexico. Earlier in the year we projected that the Velardeña Operations would achieve operating cash neutrality during the third quarter 2013, assuming gold and silver prices of $1,600 per ounce and $30 per ounce, respectively. Our production increased approximately 25% on a silver equivalent daily basis in the first half of the year compared to the previous year but prices decreased significantly below the $1,600 and $30 per ounce levels, with decreased prices being the principle reason for the suspension of operations. We have placed the mine and processing plants on a care and maintenance program to enable a restart when operating plans and metals prices support a cash positive outlook for the operations. Approximately 420 positions at the Velardena Operations were eliminated at the beginning of July 2013, with an additional approximately 20 positions eliminated in October 2013 following the completion of certain suspension activities primarily related to the idling of plant and mobile equipment. The Company currently plans to retain a core group of approximately 40 employees to facilitate a restart of operations and to maintain and safeguard the longer term value of the asset.

† Since the shutdown, we have continued to develop and evaluate plans for a restart of Velardeña Operations, with the objective of developing and implementing an operating plan that at then current prices for silver and gold indicates a sustainable cash margin for operations. We continue to work on a restart plan that could include a long hole stoping mining method for ore extraction, which would require initial capital costs in the $4 million to $5 million range, exclusive of working capital, and a nine month new stope development period followed by a ramp-up in production. Additionally, we are planning to review alternative high grade narrow vein mining methods to determine the most beneficial mining method for a potential restart.

† We have been mapping and sampling veins underground containing higher grade shoots to verify mine modeling in support of restart planning. Generally, results to date have shown higher grades but narrower widths in the mineralized portions of the veins than previously modeled. Although we have not yet completed the analysis, management believes that the net result to date of this verification process has been to generally decrease the projected grades due to the dilution required to obtain workable mining widths utilizing the modified long hole stoping method.

† Work continued during the third quarter on treatment options to improve gold recoveries from gold-bearing pyrites ore. Testing to date for an autoclave process and roasting technologies has demonstrated significant improvement in recoveries but both of these processes require a larger scale mining project than data currently suggests is feasible. Other enhanced recovery technologies, including fine grinding and leaching, ferric chloride oxidation and leaching and other oxidation processes, have not demonstrated an economic benefit in lab testing thus far.


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† We also are actively searching for oxide feed from outside sources, which could enable us to restart the Velardena oxide plant ahead of and possibly during implementation of an economic restart operating plan.

† During May 2013, we completed the San Mateo ramp at the Velardeña Operations, which provides access to the productive Santa Juana mining area. The completed ramp, which provides more efficient and less costly haulage capacity from the mine, should be helpful to the restart economic analysis. During the suspension period, we are using the ramp to access mining areas to develop and evaluate restart mining plans.

El Quevar

† In early 2013, we completed a 2,400 meter, 16-hole drilling program at the Quevar North and South areas at El Quevar. Results may represent a significant extension of the previously defined Yaxtché deposit and a mineralized zone at Quevar North similar in structural control to the Yaxtché zone. In order to advance El Quevar, the Company is actively soliciting a partner to move the project forward with additional drilling in these areas, drilling in other potential areas and evaluations.

Exploration Portfolio

† Recently we acquired the 233 hectare Los Azules property in Chihuahua, Mexico under a purchase agreement with Minera Socavato, a private Mexico mining company. The purchase agreement requires a series of option payments over a four year period totaling $2 million, with $0.1 million required during the first year. We are continuing to rehabilitate an underground access tunnel as required for our planned underground drilling program. Although progress on the underground rehabilitation has been slower than expected, we plan to commence in the fourth quarter 2013 a drilling program of approximately 2000 meters to test the down dip continuation of the previously mined veins. Past production at Los Azules was estimated at 500,000 tonnes of 11 grams per tonne gold and 35 grams per tonne silverby Servicio Geologico Mexicano (p. 411 of Monografia Geologico-Minero del Estado de Chihuahua, 2007).

† We have made significant progress with our ongoing strategy to rationalize our portfolio of exploration properties, realizing in 2012 and the first quarter 2013 exploration property sales totaling approximately $9.0 million including approximately $3.5 million for most of our exploration properties in Peru. We also have closed our office in Peru, relinquished properties no longer of interest, and have reduced our portfolio of about 80 properties containing about 730,000 hectares to about 40 properties containing about 320,000 hectares. Since 2011, we have reduced ongoing annual expenditures for the exploration program by approximately 75 percent.

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, 2013 to the results from operations for the three month and nine month periods ended September 30, 2012.

Three Months Ended September 30, 2013

Revenue from the sale of metals. We recorded $0.5 million and $7.1 million of revenue for the three months ended September 30, 2013 and 2012, respectively.
The decrease in revenue from the sale of metals during the 2013 period as compared to the 2012 period is the result of the suspension of operations at our Velardeña Operations effective June 19, 2013. All third quarter 2013 revenue is from the sale of inventories on hand at the time of the suspension of operations. All revenue for all periods is from the sale of products produced at our Velardeña Operations in Mexico.

Costs of metals sold. We recorded $0.5 million and $8.6 million of costs of metals sold for the three months ended September 30, 2013 and 2012, respectively. Included in costs of metals sold for the three month period ended September 30, 2012 was a $1.2 million write down of finished goods inventory to its estimated net realizable value. All of the third quarter 2013 cost of metals sold is related to the sale of inventories on hand at the time of the suspension of operations and sold during the third quarter 2013.


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Exploration. Our exploration expenses, including property holding costs and costs incurred by our local exploration offices, were $1.0 million for the three months ended September 30, 2013, as compared to $1.2 million for the three months ended September 30, 2012. The decrease in exploration expenses during the third quarter 2013 as compared to the third quarter 2012 is primarily the result of reduced property holding, administrative and direct exploration costs resulting from the rationalization of our exploration portfolio in 2012 and 2013. Third quarter 2013 expenses were primarily related to property holding costs and exploration office expense while third quarter 2012 exploration expenses were incurred primarily on drilling programs, concession payments, and other exploration activities in Mexico, Argentina, and Peru.

Velardeña project expense. During the three months ended September 30, 2013 we incurred $0.1 million of project expenses related to our Velardeña Operations in Mexico as compared to $0.8 million for the three months ended September 30, 2012. The costs for the third quarter 2013 were primarily related to metallurgical consulting work in connection with the development of restart alternatives. The costs for the third quarter 2012 were 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.

Velardeña shutdown and care and maintenance costs. During the quarter ended September 30, 2013 we recorded $2.2 million of expense related to shutdown and care and maintenance costs at our Velardeña Operations as the result of the suspension of operations at Velardeña effective June 19, 2013. We had no such charges during the quarter ended September 30, 2012.

El Quevar project expense. During the three months ended September 30, 2013 and 2012 we incurred $0.5 million and $1.0 million, respectively. The 2013 costs were primarily related to holding and maintenance costs while the 2012 costs were primarily related to furthering our evaluation of the Yaxtché deposit at our El Quevar project in Argentina. The reduction in costs for 2013 is primarily the result of placing the El Quevar project in a holding and maintenance state during 2013 while we actively solicit a partner to move the project forward.

Administrative. Administrative expenses were $1.1 million for the three months ended September 30, 2013 compared to $1.9 million for the three months ended September 30, 2012. The reduction in administrative expenses for 2013 as compared to 2012 is primarily the result of a reduction in salaries and benefits at the corporate headquarters.

Other Operating Income & Expense, Net. During the three months ended September 30, 2013, we recorded a nominal operating loss related to the adjustment of a lease payment received for an exploration property in Mexico. 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.

Stock based compensation. During each of the three months ended September 30, 2013 and 2012 we recorded approximately $0.3 million of stock based compensation expense.

Reclamation Expense. During each of the three months ended September 30, 2012 and 2013 we incurred less than $0.1 million of reclamation expense, all related to the accretion of an asset retirement obligation at the Velardeña Operations.

Goodwill Impairment. 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. During the third quarter 2012 we determined that as the result of decreased metals prices and certain changes in assumptions related to the long term operating plan for the Velardeña Operations, the goodwill carrying value was impaired. 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. No impairment charges were recorded during the third quarter 2013.

Interest and Other Income, net. We recorded approximately $0.2 million of interest and other income during the three months ended September 30, 2013 primarily related to the reduction of a loss contingency liability. 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.

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. We had no royalty income during the three months ended September 30, 2013.


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Gain/Loss on Foreign Currency. During the three months ended September 30, 2013 we recorded a $0.1 million foreign currency loss compared to a $0.4 million foreign currency gain for the same period in 2012. 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, primarily in Mexico, that are denominated in currencies other than US dollars.

Income Taxes. We recorded an income tax benefit for the three months ended September 30, 2013 of approximately $0.1 million related to the reduction in a withholding tax contingency. In comparison, an income tax benefit of $2.6 million was recorded for the three months ended September 30, 2012 relating primarily to Mexico net operating losses.

Nine Months Ended September 30, 2013

Revenue from the sale of metals. We recorded $10.8 million and $18.4 million of revenue for the nine months ended September 30, 2013 and 2012, respectively. The decrease in revenue from the sale of metals during the 2013 period as compared to the 2012 period is primarily the result of the suspension of operations at our Velardeña Operations effective June 19, 2013. All revenue for both periods is from the sale of products produced at our Velardeña Operations in Mexico.

Costs of metals sold. We recorded $17.5 million and $23.1 million of costs of metals sold for the nine months ended September 30, 2013 and 2012, respectively. Included in costs of metals sold for the nine months ended September 30, 2012 was a $2.1 million write down of finished goods inventory to its estimated net realizable value. Included in the 2013 cost of metals sold is a $0.6 million charge related to workforce reduction severance costs incurred during the first quarter of 2013. The decrease in costs of metals sold during the 2013 period as compared to the 2012 period is primarily the result of the suspension of operations at our Velardeña Operations effective June 19, 2013.

Exploration. Our exploration expenses, including property holding costs and costs incurred by our local exploration offices, were $3.8 million for the nine months ended September 30, 2013, as compared to $5.4 million for the nine months ended September 30, 2012. The 2013 expenses were primarily related to property holding costs and exploration office expense while the 2012 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 first nine months of 2013 as compared to the first nine months of 2012 is primarily the result of reduced property holding, administrative and direct exploration costs resulting from rationalization of our exploration portfolio in 2012 and 2013.

Velardeña project expense. During the nine months ended September 30, 2013 we incurred $3.0 million of project expenses related to our Velardeña Operations in Mexico as compared to $6.3 million for the nine months ended September 30, 2012. The costs for both periods were primarily related to development of the San Mateo ramp, other mine development, and engineering work. The San Mateo ramp was completed during May 2013. In addition to amounts expensed during the nine months ended September 30, 2013 and 2012, we incurred capital expenditures of approximately $1.6 million and $7.4 million, respectively for plant construction, mining and other equipment.

Velardeña shutdown and care and maintenance costs. During the nine months ended September 30, 2013 we recorded a $4.5 million expense related to the severance of 440 positions and other shutdown and care and maintenance costs at our Velardeña Operations as the result of the suspension of operations at Velardeña effective June 19, 2013. We had no such charges during the nine months ended September 30, 2012.

El Quevar project expense. During the nine months ended September 30, 2013 and 2012 we incurred $2.2 million and $3.6 million, respectively. The 2013 costs were primarily related to holding and maintenance costs while the 2012 costs were primarily related to furthering our evaluation of the Yaxtché deposit at our El Quevar project in Argentina. The reduction in costs for 2013 is primarily the result of placing the El Quevar project in a holding and maintenance state during 2013 while we actively solicit a partner to move the project forward.

Administrative. Administrative expenses were $4.6 million for the nine months ended September 30, 2013 compared to $5.8 million for the nine months ended September 30, 2012. The reduction in administrative expenses for 2013 as compared to 2012 is primarily the result of a reduction in salaries and benefits at the corporate headquarters.

Other Operating Income & Expense, Net. During the nine months ended September 30, 2013 we recorded $3.6 million of net other operating income primarily related to the gain on the sale of certain exploration properties in Peru for $3.5 million, the receipt of an $0.3 million option payment for another Peruvian exploration property, and the receipt of approximately $0.3 million for the lease of a mineral property in Mexico, partly offset by the $0.5 million carrying value of the properties sold. 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


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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.

Stock based compensation. During the nine months ended September 30, 2013 we recorded $1.3 million of stock based compensation expense compared to $0.8 million of stock based compensation expense recorded during the nine months ended September 30, 2012. The increase in 2013 costs as compared to 2012 costs is primarily the result of a greater number of outstanding stock grants at September 30, 2013 as compared to September 30, 2012 including restricted stock grants made during the second quarter 2013 to certain officers of the Company in conjunction with a salary reduction approved by the Board.

Reclamation Expense. During the nine months ended September 30, 2013 we incurred approximately $0.1 million of reclamation expense related to the accretion of an asset retirement obligation at the Velardeña Operations. 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. The 2012 reclamation expense was partially offset by an adjustment reducing accretion expense by approximately $0.1 million as the result of a revised closure plan completed for our Velardeña Operations during the second quarter of 2012.

Impairment of long lived assets and goodwill. We assess the recoverability of our property, plant and equipment and goodwill at least annually, or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The significant decrease in metals prices in the second quarter 2013 and the shutdown of operations at Velardeña at the end of the second quarter were events that required an assessment of the recoverability of the Velardeña Operations asset group and goodwill. We completed an impairment analysis at June 30, 2013 and determined that both the long lived assets and the goodwill associated with the Velardeña Operations and the San Diego property were impaired. As a result we recorded a $237.8 million impairment charge related to the long lived assets and an $11.2 million impairment charge related to goodwill. During the third quarter 2012 we determined that as the result of decreased metals prices and certain changes in assumptions related to the long term operating plan for the Velardeña Operations, the goodwill carrying value was impaired. 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.

Interest and Other Income, net. We recorded approximately $0.5 million of interest and other income during the first nine months of 2013 primarily related to the reduction of a loss contingency liability. 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.

Royalty Income. During the first nine months of 2012 we recorded royalty income of approximately $0.4 million related to Excellon's Platosa mine in Mexico, on which we retained a net smelter return royalty. We sold our net smelter return royalty on the Platosa mine to Excellon during the second quarter 2012. For the nine months ended September 30, 2013 we had no royalty income.

Gain/Loss on Foreign Currency. During the nine months ended September 30, 2013 we recorded a $0.5 million foreign currency loss compared to $0.8 million foreign currency gain for the same period in 2012, primarily related to the effect of currency fluctuations of monetary assets net of liabilities held by our foreign subsidiaries, primarily in Mexico, that are denominated in currencies other than US dollars.

Income Taxes. We recorded an income tax benefit for the nine months ended September 30, 2013 of $47.6 million related primarily to the impairment of long lived assets of the Velardeña Operations and Mexico net operating losses. In comparison, an income tax benefit of $5.6 million was recorded for the nine months ended September 30, 2012 relating primarily to Mexico net operating losses.

Liquidity, Capital Resources and Going Concern

At September 30, 2013 our cash balance was $23.8 million and, based on the assumptions described below, we expect to have a cash balance of approximately $18.0 million at December 31, 2013. During the first quarter of 2013 we completed the sale of certain Peruvian exploration properties to a third party for net proceeds of $3.5 million. We 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 September 30, 2013 the Company expects to have sufficient funding to continue its long-term business strategy over the next 12 months.


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Our cash and short-term investment balance at September 30, 2013 of $23.8 million is $20.8 million lower than the $44.6 million in similar assets held at December 31, 2012 due primarily to $6.7 million in operating losses at the Velardeña Operations; $4.9 million in Velardeña Operations capital and development expenditures; $4.6 million in suspension related activities at the Velardeña Operations, including care and maintenance costs; $3.4 million in exploration expenditures; $4.6 million on general and administrative activities; and $2.2 million on the El Quevar project; offset by net proceeds of $4.0 million from the sale of non strategic exploration property interests and a decrease in working capital of $1.6 million primarily related to a reduction in inventories and receivables at the Velardeña Operations.

On June 19, 2013 we suspended operations at our Velardeña Operations in order to conserve the asset until we are able to develop operating plans that, at then current prices for silver and gold, indicate a sustainable cash margin for operations (See Note 1). We incurred a total of approximately $4.5 million on costs related to the suspension during the second and third quarters of 2013, including costs for severance, the idling of plant and equipment, and ongoing care and maintenance. We expect to incur an additional $1.5 million on care and maintenance and other suspension related activities during the fourth quarter of 2013. If the Velardeña Operations remain suspended after 2013, we expect that continuing care and maintenance costs will be approximately $0.5 million per quarter.

With the cash balance at September 30, 2013 of $23.8 million we plan to spend the following additional amounts during the remainder of 2013. These amounts do not include costs related to a potential restart of the Velardena Operations.

† Approximately $1.5 million on remaining suspension costs and care and maintenance activities at the Velardeña Operations, primarily related to labor and contractor costs;

† Approximately $0.5 million at the El Quevar project to fund ongoing maintenance activities, property holding costs, and continuing project evaluation costs;

† Approximately $1.0 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 $1.5 million on general and administrative costs and an additional $1.0 million primarily related to the pre-payment of insurance premiums and a further reduction of accrued liabilities relating to suspension activities at the Velardeña Operations.

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