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AUMN > SEC Filings for AUMN > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for GOLDEN MINERALS CO

Form 10-K for GOLDEN MINERALS CO


28-Feb-2014

Annual Report


ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes beginning on page F-1 in this annual report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may


differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under "Risk Factors" in this annual report on Form 10-K.

Our Company

We were incorporated in Delaware under the Delaware General Corporation Law in March 2009, and are the successor to Apex Silver for purposes of reporting under the Exchange Act. During the year ended December 31, 2013, our only sources of income were revenues from the sale of precipitates and concentrates from our Velardeña Properties, royalty and interest income, and sales of non-core exploration properties. We incurred net operating losses for the years ended December 31, 2013 and 2012.

2013 Highlights

During the first six months of 2013 we focused our efforts primarily on mining and processing improvements at our Velardeña Properties. On June 19, 2013 we suspended mining and processing at the Velardeña Properties primarily due to decreased gold and silver prices in order to conserve the asset. We are continuing to evaluate alternative plans for a restart of our Velardeña Properties. Our objective is to implement a mining and processing plan that at then current prices for silver and gold indicates a sustainable cash margin at the Velardeña Properties. During 2013 we continued efforts to actively solicit a partner to advance our El Quevar project and rationalize our exploration portfolio. We reduced general and administrative expenses in 2013 by 21% over 2012 expenses and we expect this reduced level of spending to continue in 2014. We also are reviewing strategic opportunities, focusing on development or operating properties in North America, including Mexico.

Velardeña Properties

† Payable metals during the first six months of 2013 totaled approximately 393,000 silver equivalent ounces (equivalents calculated at 60:1 silver to gold) and included approximately 252,000 ounces of silver and 2,350 ounces of gold. Payable silver equivalent ounces include only silver and gold. During the first six months of 2013 we also sold approximately 500,000 pounds of payable lead and 706,000 pounds of payable zinc. Our output increased by approximately 25% on a silver equivalent daily basis in the first half of the year compared to the previous year.

† On June 19, 2013 we suspended mining and processing at our Velardeña Properties in Mexico primarily due to decreased gold and silver prices. We placed the mines and processing plants on a care and maintenance program to enable a restart when mining and processing plans and metals prices support a cash positive outlook.

† Prior to the suspension, we completed the San Mateo ramp at the Velardeña Properties, which provides access to the 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 construct and evaluate restart mining plans.

† Since the shutdown, we have continued to evaluate plans for a restart of mining at the Velardeña Properties, with the objective of implementing a plan that at then current prices for silver and gold indicates a sustainable cash margin for mining. We have been mapping and sampling veins underground containing higher grade shoots to verify mine modeling in support of restart planning. We are analyzing the potential of mining from a combination of different veins at our Velardeña Properties based primarily on grades and metallurgy. Additionally, we are reviewing alternative high grade narrow vein mining methods to determine the most beneficial mining method for a potential restart. In these efforts, we are using our own technical personnel as well as independent third party consultants. During the first quarter 2014 we commenced a 5,000 meter underground drill program at the Velardeña mine in order to obtain additional information to assist us in creating our restart plan. We expect to receive the drill results in the second quarter 2014.

† During 2013 we continued to work on treatment options to improve gold recoveries from gold bearing pyrites. 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. Our current efforts are focused on whether different types of pyrites can be separated to enhance gold recoveries.

† 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 plan.


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

† In the first quarter 2013, we acquired the 233 hectare Los Azules property in Chihuahua, Mexico. In the fourth quarter 2013, we began drilling at the Los Azules property as part of a planned 2,000 meter phase one drill program to test down dip targets on the previously mined vein system. We are continuing to rehabilitate an underground access adit as required for our underground drilling program. Based on initial drill results, we are planning in a phase two drill program.

† We have completed rationalization of our portfolio of exploration properties, realizing in 2012 and 2013 exploration property sales totaling approximately $9.0 million. These sales, together with relinquishment of properties no longer of interest, have reduced our portfolio of about 80 properties containing about 730,000 hectares to about 30 properties containing about 150,000 hectares. Since 2011, we have reduced ongoing annual expenditures for the exploration program by approximately 75 percent.

Results of Operations

For the results of operations discussed below, we compare the results of operations for the year ended December 31, 2013 to the results of operations for the year ended December 31, 2012.

Revenue from the sale of metals. We recorded $10.7 million and $26.1 million of revenue for the years ended December 31, 2013 and 2012, respectively, all from the sale of products from our Velardeña Properties in Mexico. The decrease in revenue from the sale of metals during 2013 as compared to 2012 is primarily the result of the suspension of mining and processing at our Velardeña Properties effective June 19, 2013, as discussed above.

Costs of metals sold. We recorded $17.5 million and $33.4 million of costs applicable to sales for the years ended December 31, 2013 and 2012, respectively, all from the sale of products from our Velardeña Properties in Mexico. The decrease in cost of metals sold during 2013 as compared to 2012 is primarily the result of the suspension of mining and processing at our Velardeña Properties effective June 19, 2013, as discussed above. Included in costs of metals sold for the period ended December 31, 2012 was a $2.7 million write down of finished goods inventory to estimated net realizable value.

Exploration Expense. Our exploration expense, including property holding costs and allocated administrative expenses, totaled $4.6 million for the year ended December 31, 2013, as compared to $7.0 million for the year ended December 31, 2012. Exploration expense for both years was incurred primarily in Mexico, Peru, and Argentina (excluding amounts spent on the Yaxtché deposit at the El Quevar project) and includes property holding costs and costs incurred by our local exploration offices. The decrease in exploration expenses for the year ended December 31, 2013 as compared to the year ended December 31, 2012 is the result of our reduced spending on exploration as we rationalized and monetized our exploration portfolio.

Velardeña Project Expense. During the years ended December 31, 2013 and 2012 we incurred approximately $3.1 million and $7.9 million of expenses, respectively, primarily related to construction of the San Mateo ramp, other mine construction and engineering work at our Velardeña Properties in Mexico. In addition to amounts expensed during the years ended December 31, 2013 and 2012, we incurred capital expenditures of approximately $1.8 million and $9.5 million, respectively for plant construction, mining and other equipment. We suspended mining and processing at our Velardeña Properties effective June 19, 2013, as discussed above.

Velardeña shutdown and care and maintenance costs. During the year ended December 31, 2013 we recorded a $6.4 million expense related to the severance of 440 positions and other shutdown and care and maintenance costs at our Velardeña Properties as the result of the suspension of mining and processing activities at the Velardeña Properties effective June 19, 2013. We had no such charges during the year ended December 31, 2012.


El Quevar Project Expense. During the years ended December 31, 2013 and 2012 we incurred $2.6 million and $5.1 million of expenses, respectively, 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. For both years, costs incurred for work performed outside of the Yaxtché deposit are included in "Exploration Expense" discussed above.

Administrative Expense. Administrative expenses totaled $5.6 million for the year ended December 31, 2013 compared to $7.1 million for the year ended December 31, 2012. Administrative expenses, including costs associated with being a public company, are incurred primarily by our corporate activities in support of the Velardeña Properties, El Quevar project and our exploration portfolio. The $5.6 million of administrative expenses we incurred during 2013 is comprised of $2.2 million of employee compensation and directors' fees, $1.4 million of professional fees and $2.0 million of insurance, rents, travel expenses, utilities and other office costs. The $7.1 million of administrative expenses we incurred during 2012 is comprised of $2.9 million of employee compensation and directors' fees, $1.7 million of professional fees and $2.5 million of insurance, travel expenses, rents, utilities and other office costs.

Stock based compensation. During the year ended December 31, 2013 we incurred expense related to stock based compensation in the amount of $1.6 million compared to $2.6 million for the year ended December 31, 2012. Stock based compensation varies from period to period depending on the number and timing of shares granted, the type of grant, the market value of the shares on the date of grant and other variables.

Reclamation and accretion expense. During the year ended December 31, 2013 we incurred $0.2 million of reclamation expense related to the accretion of an asset retirement obligation at the Velardeña Properties. During the year ended December 31, 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 Properties 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 Properties 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.

Impairment of long lived assets and goodwill. We assess the recoverability of our long lived assets, including goodwill, at least annually or whenever events or changes in circumstances indicate that the carrying value of the assets may be impaired. The significant decrease in metals prices during 2013 and the shutdown of mining and processing at the Velardeña Properties during June 2013 were events that required an assessment of the recoverability of the Velardeña Properties asset group and goodwill. We completed an impairment analysis using a market valuation approach which relies upon assumptions related to the Velardeña Properties asset group in comparison to other corroborated observable market data. At June 30, 2013 we determined that both the long lived assets and the goodwill associated with the Velardeña Properties and the San Diego property were impaired. As a result at June 30, 2013 we recorded a $237.8 million impairment charge related to the long lived assets and an $11.2 million impairment charge related to goodwill. At December 31, 2013 we reviewed the remaining carrying value of the long lived assets and goodwill based on the corroborated observable market data at that date and determined that the long lived assets and goodwill were further impaired. As a result, at December 31, 2013 we recorded an additional $6.1 million impairment charge related to the long lived assets and a $0.5 million impairment charge related to goodwill which reduced the carrying value of the goodwill to zero. During 2012, as the result of decreased gold and silver prices and changes to certain assumptions related to the long term plan for the Velardeña Properties we completed an impairment analysis of the goodwill carrying value, which indicated that goodwill was impaired. As a result of the impairment analysis we recorded goodwill impairments of $58.5 million, reducing the goodwill carrying value from $70.2 million to $11.7 million at December 31, 2012.

Other Operating Income, Net. We recorded other operating income of $3.6 million for the year ended December 31, 2013 compared to $2.5 million for the year ended December 31, 2012. The net amounts for both years consist primarily of net gains recorded on the sales of certain fixed assets and non strategic exploration properties.

Depreciation, depletion and amortization. During the year ended December 31, 2013 we incurred depreciation, depletion and amortization expense of $6.9 million compared to $10.0 million for the year ended December 31, 2012. Depreciation, depletion and amortization includes a $0.8 million write down of finished goods inventory to estimated net realizable value at December 31, 2012. There was no write down of finished goods inventory at December 31, 2013. The decrease in depreciation, depletion and amortization for the year ended December 31, 2013 as compared to the year ended December 31, 2012 is primarily the result of the impairment of long lived assets at the Velardeña Properties during 2013 which resulted in a significant decrease in the carrying value of property, plant and equipment.


Interest and Other Income. During the year ended December 31, 2013 we recorded approximately $0.4 million of interest and other income primarily related to the reduction of a loss contingency liability related to foreign withholding taxes that the government could assert are owed by the Company, acting as withholding agent, on certain interest payments made to a third party. We recorded interest and other income of $2.5 million for the year ended December 31, 2012. The 2012 amount is comprised of a $1.8 million gain on the sale of the Platosa net smelter royalty to Excellon, a $0.6 million reduction of the loss contingency liability discussed above and $0.1 million of income from tolling agreements at our Velardeña Properties.

Royalty Income. During the year ended December 31, 2012 we recorded royalty income of approximately $0.4 million. The royalty income was all related to Excellon's Platosa mine in Mexico, on which we retained a net smelter return royalty. We sold the net smelter return royalty to Excellon during the second quarter 2012. At December 31, 2013 we had no other sources of royalty income and we did not record any royalty income during the year then ended.

Interest and Other Expense. We recorded no interest and other expense during the year ended December 31, 2013. During the year ended December 31, 2012, we recorded interest and other expense of $0.3 million comprised of $0.2 million related to interest incurred on a value added tax audit in Mexico and $0.1 million related to losses on investments.

Gain (Loss) on Foreign Currency. We recorded a $0.6 million foreign currency loss for the year ended December 31, 2013 compared to a $0.5 million foreign currency gain for the year ended December 31, 2012. Foreign currency gains and losses are primarily related to the effect of currency fluctuations on 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 Properties.

Income Taxes. For the year ended December 31, 2013 we recorded an income tax benefit of $49.7 million primarily related to the impairment of long lived assets during the year. Our income tax benefit for the year ended December 31, 2012 was $8.0 million primarily related to an increase in net operating losses and the amortization of the mineral deposit at our Velardeña Properties in Mexico.

Liquidity and Capital Resources

At December 31, 2013 our aggregate cash and short-term investments totaled $19.1 million. 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 December 31, 2013, and the assumptions described below, and excluding costs related to a potential restart of the Velardeña Properties, we expect to have sufficient funding to continue our long term business strategy through 2014, ending 2014 with a cash balance of approximately $5.0 million. Absent a source of cash flow beyond 2014, our cash balance would be depleted by midyear 2015. In addition, a potential restart of the Velardeña Properties during 2014 could require additional funding. We will be required to seek additional funding from equity or debt or from monetization of non-core assets. There can be no assurance that we would be successful in obtaining sufficient funding from any of these actions or sources in the future on terms acceptable to us or at all.

Our cash and short-term investment balance at December 31, 2013 of $19.1 million is $25.5 million lower than the $44.6 million in similar assets held at December 31, 2012 due primarily to $6.9 million in operating losses at the Velardeña Properties; $6.4 million related to Velardeña shutdown and care and maintenance costs; $4.8 million in Velardeña Properties capital and development expenditures; $4.6 million in exploration expenditures; $5.6 million in general and administrative expenses; and $2.6 million spent on the El Quevar project; offset in part by net proceeds of $4.0 million from the sale of non strategic exploration property interests and a decrease in working capital of $1.4 million primarily related to a reduction in inventories and receivables at the Velardeña Properties.

With the cash balance at December 31, 2013 of $19.1 million we plan to spend the following amounts totaling approximately $14.0 million during 2014. These amounts do not include costs related to a potential restart of the Velardeña Properties.

† Approximately $3.5 million on care and maintenance activities at the Velardeña Properties, primarily related to labor and contractor costs;

† Approximately $1.0 million on drilling costs at the Velardeña Properties related to the development of restart plans;


† Approximately $1.0 million at the El Quevar project to fund ongoing maintenance activities and property holding costs;

† Approximately $3.5 million on other exploration activities and property holding costs related to the Company's portfolio of exploration properties located primarily in Mexico; and

† Approximately $5.5 million on general and administrative costs partially offset by $0.5 million in decreased working capital, primarily related to the collection of VAT receivables.

The actual amount that we spend through year-end 2014 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 Properties, and the results of continued project assessment work at our other exploration properties. If we are able to restart mining at the Velardeña Properties on a profitable basis, it is unlikely that those activities will generate sufficient revenue to fund all of our continuing business activities as currently conducted. We will be required to seek additional funding from equity or debt or from monetization of non-core assets. Therefore, whether or not we recommence mining at the Velardeña Properties, we expect to require additional funding in 2014 or 2015 for general and administrative costs and other working capital needs to fund our continuing business activities.

Critical Accounting Policies and Estimates

The selection and application of accounting policies is an important process that has developed as our business activities have evolved and as the accounting rules have changed. Accounting rules generally do not involve a selection among alternatives, but involve an implementation and interpretation of existing rules, and the use of judgment, to the specific set of circumstances existing in our business. Discussed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported.

Mineral Reserves

When and if we determine that a mineral property has proven and probable reserves, subsequent development costs are capitalized to mineral properties. When mineral properties are developed and operations commence, capitalized costs are charged to operations using the units-of-production method over proven and probable reserves. "Mineralized material" as used in this annual report, although permissible under SEC's Industry Guide 7, does not indicate "reserves" by SEC standards, and therefore all development costs incurred by us are expensed when incurred. The Company cannot be certain that any part of the deposits at the Velardeña Properties or the Yaxtché deposit at the El Quevar project will ever be confirmed or converted into SEC Industry Guide 7 compliant "reserves".

Asset Retirement Obligations

We record asset retirement obligations in accordance with Auditing Standards Codification ("ASC") 410, "Asset Retirement and Environmental Obligations" ("ASC 410"), which establishes a uniform methodology for accounting for estimated reclamation and abandonment costs. According to ASC 410, the fair value of a liability for an asset retirement obligation ("ARO") is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. An offsetting asset retirement cost is capitalized as part of the carrying value of the assets with which it is associated, and depreciated over the useful life of the asset. During 2012, a third party engineering firm completed a detailed closure plan for our Velardeña Properties which resulted in a reduction to the original ARO estimate, recorded in conjunction with the acquisition of the Velardeña Properties, of approximately $1.7 million (see Note 11 to the accompanying consolidated financial statements).

Long Lived Assets and Goodwill

We assess the recoverability of our long lived assets, including goodwill, at least annually or whenever events or changes in circumstances indicate that the carrying value of the assets may be impaired. The significant decrease in metals prices during 2013 and the shutdown of mining and processing at the Velardeña Properties during June 2013 were events that required an assessment of the recoverability of the Velardeña Properties asset group and goodwill. We completed an impairment analysis using a market valuation approach which relies upon assumptions related to the Velardeña Properties asset group in comparison to other corroborated observable market data. At June 30, 2013 we determined that both the long lived assets and the goodwill associated with the Velardeña Properties and the San Diego property were impaired. As a result at June 30, 2013 we recorded a $237.8 million impairment charge related to the long lived assets and an $11.2 million impairment charge related to goodwill. At December 31, 2013 we reviewed the remaining carrying value of the long lived assets and goodwill based on the corroborated observable market data at that date and determined that the long lived assets and goodwill were further impaired. As a result, at December 31, 2013 we recorded an additional $6.1 million impairment


charge related to the long lived assets and a $0.5 million impairment charge related to goodwill which reduced the carrying value of the goodwill to zero. During 2012, as the result of decreased gold and silver prices and changes to certain assumptions related to the long term plan for the Velardeña Properties we completed an impairment analysis of the goodwill carrying value, which indicated that goodwill was impaired. As a result of the impairment analysis we recorded goodwill impairments of $58.5 million, reducing the goodwill carrying value from $70.2 million to $11.7 million at December 31, 2012.

Deferred Taxes

In accordance with ASC 740, "Income Taxes", the Company presents deferred tax assets net of its deferred tax liabilities on a tax jurisdictional basis on its Consolidated Balance Sheets. The net deferred tax liability as of December 31, 2013 was zero, while the net deferred tax liability as of December 31, 2012 was $47.1 million. Our income tax benefit of $49.7 million for the year ended December 31, 2013 was due primarily to the deferred tax benefit of $47.2 million, primarily related to the long lived assets impairment of the Velardeña Properties. The impairment of long lived assets required the removal of the deferred tax liability existing at the time of impairment. The deferred tax liability existed as a result of the acquisition of our Velardeña Properties and was calculated taking the difference between the fair value and the tax basis of the assets acquired and liabilities assumed multiplied by the Mexico income tax rate.


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