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RVM > SEC Filings for RVM > Form 10-K on 27-Mar-2014All Recent SEC Filings

Show all filings for REVETT MINING COMPANY, INC.

Form 10-K for REVETT MINING COMPANY, INC.


27-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

Explanatory Note: The following discussion of our financial condition and results of operation should be read in conjunction with our consolidated audited financial statements and notes as at December 31, 2013 and 2012 and the years ended December 31, 2013 and 2012, which are set forth elsewhere in this report and include the accounts of Revett Mining Company (formerly Revett Minerals) and its wholly-owned subsidiary Revett Silver, and the accounts of Revett Silver's wholly owned subsidiaries, Troy Mine, Inc., RC Resources Inc., Revett Exploration, Inc. and Revett Holdings, Inc. These financial statements have been prepared in accordance with United States generally accepted accounting principles.

Overview. Our principal mining properties are Troy and Rock Creek. Troy is an underground silver and copper mine located in northwestern Montana. ASARCO operated the mine from 1981 to 1993, and then placed it on care and maintenance because of low metals prices. We resumed mining operations in late 2004 and commenced commercial production in early 2005. We operated Troy continuously until December 2012, when operations were suspended due to unstable ground conditions in portions of the mine. The details of our current development of an alternative route to the North C Bed area and, eventually, the undeveloped I Bed area, and the resumption of mining operations at Troy, are set forth elsewhere in Parts 1 and 1A of this report.

Rock Creek is a large development-stage silver and copper property located in Sanders County, Montana, approximately five miles northeast of Noxon. We have historically funded our permitting activities at Rock Creek with cash flows from Troy and, to a lesser extent, proceeds received from sales of our common stock. Although not anticipated, the prolonged suspension of commercial production at Troy could have a material and adverse effect on our plans to further evaluate Rock Creek and eventually develop it should it prove economically feasible to do so.


Results of Operations.

Comparison of Years Ended December 31, 2013 and 2012. We suspended underground mining and surface milling operations at Troy in December 2012 because of unstable and unsafe ground conditions and consequently did not mine any ore during 2013. A comparison of our operating results for 2013 and 2012 is therefore not meaningful. The changes in our financial performance over these two periods are summarized below:

Revenue: During 2013 we had one sale of concentrate from inventory. This revenue was offset by the settlement of invoices relating to 2012 sales. During the year ended December 31, 2013, the LME price of copper and silver averaged $3.32 per pound and $23.83 per ounce, respectively. For 2012, the average price of copper was $3.61 per pound and the average price of silver was $31.15 per ounce.

Cost of Sales: Troy suspension-related costs for 2013 were $12.1 million. In May 2013 we laid off approximately 50% of the mine site employees in efforts to conserve cash. The 2013 spending reflects efforts to design a plan to resume mining operations and the construction of an alternative adit to access the mine.

Depreciation and depletion: These non-cash charges were significantly lower in 2013 than in 2012. The majority of the plant and equipment at Troy is depreciated using the units-of-production method. The suspension of mining operations resulted in no depreciation expense for Troy.

Exploration and development: This expense includes $0.1 million for exploration spending around Troy and $1.2 million in spending for Rock Creek. The spending in 2013 is much lower than 2012 ($4.0 million) because of our cash conservation efforts during 2013.

General and administration costs: The decrease in the corporate administration costs during 2013 is a result of the suspension of mining activities at Troy and our resulting efforts to conserve cash. Executive officer's salary and director fees were voluntarily reduced during the second quarter.

Gain on Change in ARO Liability. The gain on change in ARO liability estimate is a result of two factors: an increase in the Troy mine life (from 2020 to 2026), which is itself due to an increase in ore reserves during 2013, and changes to our Troy reclamation requirements in 2012, notably the deletion of the requirement that we build and operate a water treatment plant. We recorded a reduction in our estimated ARO liability, from $5.6 million to $4.6 million, as at December 31, 2013.

The following table compares our key operating statistics for the twelve months ended December 31, 2013 compared to the same periods in 2012:

                                   Years Ended December 31,
             Item                  2013           2012
             Tons milled                          1,194,871
             Tons milled per day   -              3,588
             Copper grade          -              0.38 percent
             Copper recovery       -              82.53 percent
             Copper production     -              7,555,215 pounds
             Copper sold (payable) 736 pounds     7,304,096 pounds
             Silver grade          -              1.08 ounces per ton
             Silver recovery       -              86.08 percent
             Silver production     -              1,112,089 ounces

Silver sold (payable) 110,830 ounces 1,010,752 ounces

Expenses pertaining to Rock Creek totaled $1.2 million during the year ended December 31, 2013 ($2.38 million in 2012), and were comprised of legal fees of approximately $0.2 million; consulting fees of approximately $0.7 million; and public relations and miscellaneous expenditures of approximately $0.3 million, including funding of ongoing grizzly bear mitigation.


Liquidity and Capital Resources.

Our liquidity position is directly related to the level of concentrate production, cost of this production and the provisional and final prices received for the copper and silver in the concentrate that is sold. At December 31, 2013, working capital was $10.6 million, including cash of $8.0 million. During the first quarter of 2014 we sold our available for sale securities for cash proceeds of $0.8 million and settled an outstanding insurance claim for damaged mine equipment and will receive cash proceeds of $2.3 million. In March 2014, we issued 2,307,690 units of common stock and warrants and received cash proceeds of $1.8 million.

Delays in recommencing production at Troy could erode our cash and working capital position. We continue to have discussions with interested parties in possibly obtaining capital, however, no assurance can be given that these efforts will prove successful. Given current market conditions, we may experience difficulties in raising sufficient funds to meet our obligations and complete construction of the development decline to gain access to the deeper ore reserves at Troy. Because of our need to conserve cash, nearly all discretionary capital spending and exploration spending has been placed on hold. If we do not obtain additional financing, we may have to consider placing Troy on care and maintenance status.

Capital spending in 2013 totaled $1.1 million. This spending primary related to the construction of new, 7.500 foot decline from the main haulage route to the North A and C Beds, and, eventually, to the undeveloped I Bed at Troy.

Capital spending in 2012 totaled $9.4 million, of which $2.7 million was financed by capital leases. The primary capital spending was related to Troy. Other acquisitions included a haul truck ($1.3 million), a wheel loader ($0.4 million) and a jumbo drill ($1.0 million).

Financing Activities.

During the year ended December 31, 2013, we issued 49,000 shares of common stock upon the exercise of outstanding stock options, resulting in cash proceeds of $0.03 million, and issued 55,000 shares of common stock upon the exercise of outstanding warrants, resulting in cash proceeds of $0.1 million.

During the year ended December 31, 2012, we issued 20,335 shares of common stock valued at $0.1 million to directors as compensation. We also issued 72,000 shares of common stock upon the exercise of outstanding stock options and 280,836 shares of common stock upon the exercise of outstanding warrants during the year, resulting in cash proceeds of $0.1 million and $0.4 million, respectively.

Off-Balance Sheet Arrangements.

Royal Gold, Inc. holds a 3% gross smelter royalty on a defined area of production from Troy and a 1% net smelter royalty on production from Rock Creek pursuant to the terms of an amended royalty agreement dated October 13, 2009.

We entered into a revolving credit agreement with Societe Generale in December 2011, which was amended in December 2012. Revett Silver is the designated borrower under the facility and Revett Mining Company and its second-tier Troy Mine, Inc., RC Resources Inc., Revett Exploration, Inc. and Revett Holdings, Inc. operating subsidiaries are guarantors. The facility is for $20 million but may be increased to $30 million under specified circumstances. Draws may be in the form of revolving credit loans or letters of credit, and interest is calculated at the London Interbank Offered Rate plus 350 basis points for an initial three year term. The facility is collateralized by first priority liens and security interests in the properties and assets comprising Troy and by Revett Mining Company's pledge of the outstanding common stock of Revett Silver. We paid a commitment fee and transaction costs of $0.9 million in connection with the facility, which has been fully amortized. No funds had been drawn under the facility as of December 31, 2013. The credit facility was suspended in February 2013 pending the resumption of commercial mining operations at Troy.


Tabular Disclosure of Contractual Obligations. The following table sets forth information as of December 31, 2013 concerning our known debt obligations, royalty obligations, capital lease obligations and reclamation obligations.

                                                Payments Due by Period
                                          (expressed in thousands of dollars)
Contractual Obligation    Total      < 1 Year     1 to 3 Years     3 to 5 Years     > 5 Years
Accrued liabilities     $  2,165   $    2,165   $            0   $            0   $         0
Capital lease and note
payable
obligations             $  1,289   $      925   $          364   $            0   $         0
Operating leases        $    354   $      354   $            0   $            0   $         0
Long-term reclamation   $ 12,743   $        0   $            0   $            0   $    12,743
costs
Total contractual       $ 16,551   $    3,444   $          364   $            0   $    12,743
obligations

Our long term debt at December 31, 2013 consisted of capital lease and note payable obligations related to the purchase of equipment used at Troy.

Proposed Transactions. There were no proposed transactions at December 31, 2013 or December 31, 2012.

Principal Risks and Uncertainties. As is described elsewhere in Parts 1 and 1A of this report, we suspended mining operations at Troy in December 2012 due to unstable and unsafe ground conditions and are presently constructing a decline to the North C Beds and undeveloped I Bed mining areas from the main haulage rout. We commenced construction of the decline in November 2013 following receipt MSHA approval. We presently anticipate reaching the North C Bed and returning to limited commercial production in the fourth quarter of 2014. We will thereafter continue development to gain access the I Beds, a process that is expected to take an additional six to nine months and, when completed, should enable us to resume full production. The total cost of the decline development is currently estimated to be approximately $12 million.

As is also described elsewhere in this report, our proposed development of Rock Creek was challenged on environmental grounds by several regional and national environmental advocacy groups. Although we have generally been successful in addressing most of the challenges to our operations, including ESA claims, which were resolved in our favor in November 2011, we cannot predict with any degree of certainty whether future challenges or impediments will arise. Rock Creek is the more significant of our two mining assets; continued court challenges will inevitably delay us from proceeding with our planned development and a successful challenge could prevent us from developing the project at all. If we are successful in defending these challenges, we still must comply with a number of requirements and conditions as development progresses, failing which we could be denied the ability to continue with our proposed activities at Rock Creek. We are also subject to other significant risks. (See the section of this report entitled "Risk Factors")

Critical Accounting Estimates. Our significant accounting policies are presented in the notes to our audited financial statements, which appear elsewhere in this report. As described in these notes, we are required to make estimates and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenue and expenses. Our estimates are based on our experience and our interpretation of economic, political, regulatory and other factors that influence our business prospects. These estimates have a significant effect on the financial statements and actual results may differ significantly from our estimates.

We believe the most critical estimates pertain to future metal prices, our estimates of proven and probable reserves at Troy, the valuation of mineral property, plant and equipment, recoverability of deferred tax assets, and the estimate of the final reclamation and closure obligations at Troy. These estimates required us to make assumptions that were highly uncertain at the time the accounting estimates were made, and changes in them are reasonably likely to occur from time to time. The major critical accounting estimates include but are not limited to the following:


Future Metal Prices. The values of our more significant assets and liabilities are determined principally by prevailing metals prices and estimates. Prevailing metals prices are also a significant determinant in the cost and carrying value of our property, plant and equipment, inventories, future tax assets and liabilities, certain of our accounts receivable and the fair value of hedging contracts. Metal prices have historically been very volatile, with recent prices being near their highs for the last decade; these prices have influenced our property, plant and equipment carrying values and the estimates of our reserves. There is no assurance prices will continue at these levels. Changes in metal prices may result in volatility in the fair value of derivatives and other financial instruments, as well as potential impairment charges on mineral property, plant and equipment and concentrate inventories.

Embedded Financial Derivatives. Some of our assets and liabilities may contain embedded derivatives for which no corresponding market value may be readily determined. This includes the estimates of future copper and silver prices in the pricing mechanism through which we sell our copper concentrate (what we refer to as the open quotational period). We make estimates of the fair value of these instruments using quoted forward metal prices.

Mineral Resources and Reserves, and the Carrying Values of Mineral Properties, Plant, and Equipment. Mineral resources and reserves are estimated by professional geologists and engineers in accordance with recognized industry, professional and regulatory standards. Reserve estimates are based on future metal prices, future operating costs, mill throughput and various technical, geological, engineering, and construction parameters. Changes in any of these factors could cause a significant change in the resources and reserves estimated, which, in turn, could have a material effect on the carrying value of mineral property, plant and equipment.

We have completed a life of mine undiscounted cash flow analysis of Troy based upon our most recent proven and probable ore reserves, expected production rates and costs, and estimated revenues (which are in turn based on estimated metal prices for copper and silver of $3.32 per pound and $24.98 per ounce, respectively, in 2013, and $3.32 per pound and $24.98 per ounce, respectively, for years thereafter until the end of the mine life. The projected undiscounted cash flows to be generated exceeded the carrying costs of Troy, and no write-down was required at December 31, 2013. However, these estimates are based on significant assumptions. While we have analyzed external and internal data in arriving at these assumptions, and while we believe they are reasonable, it is possible future conditions may change and that these changes could result in different assumptions which might result in an impairment of the carrying value of our mineral property, plant and equipment.

We capitalize costs related to the acquisition of property and mineral rights, construction of production facilities and the development of mine infrastructure. Costs of permitting, evaluation and feasibility are capitalized upon completion of an analysis which demonstrates the economic viability of the mineral deposit. Drilling and related costs incurred on sites without an existing mine and on areas outside the boundary of a known mineral deposit that contains proven and probable reserves are accounted for as exploration expenditures and are expensed as incurred. Drilling and related costs incurred to define and delineate a residual minerals deposit that has not previously been classified as a proven or probable reserve at a development stage or production stage mine will only be capitalized when management determines there is sufficient evidence that the expenditure will result in a future economic benefit in the accounting period when the expenditure is made. Diversity of practice exists among participants in the mining industry regarding the accounting treatment of these costs. Some mining companies elect not to capitalize drilling and related costs to convert mineral resources to reserves at their development or productions stage properties, but, instead, treat them as expenses.

Management evaluates whether there is sufficient geologic and economic certainty to convert a mineral deposit into a proven or probable reserve based upon the known geology and metallurgy, existing or planned mining and processing facilities, and existing operating permits and environmental programs. Prior to capitalizing such costs, management must determine whether there is a probable future economic benefit, whether we have or can obtain the economic benefit and control access to it, and whether the transaction or event giving rise to the economic benefit has already occurred. Once commercial production has commenced, these costs are amortized using the units-of-production method based on proven and probable reserves. Production facilities and equipment are stated at cost and are depreciated using the straight-line or units-of-production method at rates sufficient to depreciate the assets over their estimated useful lives, not to exceed the life of the mine to which the assets relate. Vehicles and office equipment are stated at cost and are depreciated using the straight-line method over estimated useful lives of three to six years. Maintenance and repairs are charged to operations as incurred. Betterments of a major nature are capitalized. When assets are retired or sold, the costs and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in the statement of operations. The carrying value of property, plant and equipment is dependent on the rates used for depreciation and depletion, which themselves are estimates.


Concentrate Receivables and Revenue. We sell our silver and copper in concentrate based upon our own assays of metal content, moisture content and the estimated dry weight of the copper-silver concentrate loaded in rail cars. These weight and assay estimates are subject to final confirmation by the receiving smelter and are subject to change. In addition, we record the anticipated revenue to be received from the sale of each concentrate shipment based upon our determination of the weight and assays of each shipment and in accordance with the contract to which the sale relates. Preliminary payments are thus based upon copper and silver prices that are determined prior to the date of the provisional invoice, whereas the final price received is determined by quoted metal prices in agreed periods subsequent to the date of the provisional invoice. Changes in these estimates or in metal prices could result in a significant change to the results from operations.

Reclamation and Remediation Obligations. We have a legal obligation to reclaim our mineral properties and have estimated the cost of these obligations in accordance with current standards of applicable laws and regulations. These estimates are reviewed by third party consultants and government authorities. In arriving at these estimates, we must also estimate the timing and magnitude of future payments for reclamation work, as well as prevailing rates of interest during the remediation period, in order to determine its periodic accretion and the depreciation expense. There were no material changes in our estimates of final reclamation and remediation costs during 2013 other than inflation, however, the end of mine life of Troy was extended in 2013, from 2020 to 2026, which required us to change the depreciation and accretion charges relating to our asset retirement obligation. We cannot predict the effect of a material increase in these estimates on our financial position.

Stock-Based Compensation Expense. We grant stock options to employees, directors and service providers. We use the Black-Scholes option pricing model to estimate a value for these options. This model requires management to make estimates of the expected volatility of our common stock, the expected term of the option to exercise, the expected future forfeiture rate, and future interest rates. Changes in these estimates and the conditions underlying the grants of options could cause a significant change in the stock-based compensation expense charged in any period.

Valuation Allowances for Deferred Income Taxes. We are required to make estimates of the valuation allowances for future income taxes. This requires us to estimate whether we will attain certain levels of future taxable income and thereby avail ourselves, or lose, estimated tax assets. These estimates require us to estimate future metal prices, future operating costs and production levels; which are themselves subject to a high degree of uncertainty.

Financial and Other Instruments. We have in the past and may in the future, engage in hedging activities in order to protect the price of copper and silver that we have produced or will produce in future periods. These hedging activities are limited to less than 50% of our planned production in any one month.

We are required by applicable accounting standards to fair value (i.e., mark to market) the amount of the accounts receivable that has been shipped and provisionally priced, but for which final prices have not yet been determined. At each month end, we then adjust our revenue to account for future prices. In order to do this, we must estimate the future prices that will prevail when the final prices are determined. We use future contract prices in effect as at the end of each month to estimate these prices.

Forward sales with our customer that have not been shipped are designated as normal purchases and sales under applicable accounting standards and are not marked to market. We had no outstanding contracts to sell copper or silver at December 31, 2013.


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