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MDW > SEC Filings for MDW > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for MIDWAY GOLD CORP

Form 10-Q for MIDWAY GOLD CORP


6-Aug-2014

Quarterly Report


Item 2. 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 appearing elsewhere in this Quarterly Report on Form 10-Q. 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, but not limited to, those set forth under the heading "Risk Factors and Uncertainties" in our Annual Report on Form 10-K filed with the SEC on March 13, 2014, and elsewhere in this Quarterly Report on Form 10-Q.

This discussion and analysis should be read in conjunction with the accompanying unaudited interim consolidated financial statements and related notes. The discussion and analysis of the financial condition and results of operations are based upon the unaudited interim consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis we review our estimates and assumptions. The estimates were based on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations. Critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments are outlined below in "Critical Accounting Policies".

Cautionary Note Regarding Forward-Looking Statements

In addition, certain statements made in this Quarterly Report on Form 10-Q may constitute "forward-looking statements". These forward-looking statements involve known or unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Except for historical information, the matters set forth herein, which are forward-looking statements, involve certain risks and uncertainties that could cause actual results to differ. Potential risks and uncertainties include, but are not limited to, unexpected changes in business and economic conditions; significant increases or decreases in gold prices; changes in interest and currency exchange rates; unanticipated grade changes; metallurgy, processing, access, availability of materials, equipment, supplies and water; determination of reserves; results of current and future exploration activities; results of pending and future feasibility studies; joint venture relationships; political or economic instability, either globally or in the countries in which we operate; local and community impacts and issues; timing of receipt of government approvals; accidents and labor disputes; environmental costs and risks; competitive factors, including competition for property acquisitions; and availability of external financing at reasonable rates or at all. Forward-looking statements can be identified by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continues" or the negative of these terms or other comparable terminology, or which by their nature refer to future events. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Forward-looking statements are made based on management's beliefs, estimates, and opinions on the date the statements are made, and we undertake no obligation to update such forward-looking statements if these beliefs, estimates, and opinions should change, except as required by law.

Cautionary Note to U.S. Investors Regarding Reserve and Resource Estimates

The mineral estimates in this Quarterly Report on Form 10-Q have been prepared in accordance with the requirements of the securities laws in effect in Canada, which differ from the requirements of United States securities laws. The terms "mineral reserve", "proven mineral reserve" and "probable mineral reserve" are Canadian mining terms as defined in accordance with Canadian National Instrument 43-101 - Standards of Disclosure for Mineral Projects ("NI 43-101") and the Canadian Institute of Mining, Metallurgy and Petroleum (the "CIM") - CIM Definition Standards on Mineral Resources and Mineral Reserves, adopted by the CIM Council, as amended.

These definitions differ from the definitions in United States Securities and Exchange Commission ("SEC") Industry Guide 7 under the United States Securities Act of 1933, as amended. Under SEC Industry Guide 7 standards, a "final" or "bankable" feasibility study is required to report reserves, the three-year historical average price is used in any reserve or cash flow analysis to designate reserves and the primary environmental analysis or report must be filed with the appropriate governmental authority.


In addition, the terms "mineral resource", "measured mineral resource", "indicated mineral resource" and "inferred mineral resource" are defined in and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7 and are normally not permitted to be used in reports and registration statements filed with the SEC. Investors are cautioned not to assume that any part or all of mineral deposits in these categories will ever be converted into reserves. "Inferred mineral resources" have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineral resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases.

Investors are cautioned not to assume that all or any part of an inferred mineral resource exists or is economically or legally mineable. Disclosure of "contained ounces" in a resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report mineralization that does not constitute "reserves" by SEC Industry Guide 7 standards as in place tonnage and grade without reference to unit measures.

Accordingly, information contained in this Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain descriptions of our mineral deposits that may not be comparable to similar information made public by U.S. companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder.

Historical results of operations and trends that may be inferred from the following discussion and analysis may not necessarily indicate future results from operations. In particular, the current state of the global securities markets may cause significant fluctuations in the price of the Company's securities and render it difficult or impossible for the Company to raise funds which may be necessary to develop any of its present or future mineral properties.

Disclosure on Passive Foreign Investment Company

U.S. shareholders of our common shares should be aware that the Company believes it was classified as a PFIC during the taxable year ended December 31, 2013, and based on current business plans and financial projections, management believes there is a significant likelihood that the Company will be a PFIC during the current taxable year. If the Company is a PFIC for any year during a U.S. shareholder's holding period, then such U.S. shareholder generally will be required to treat any gain realized upon a disposition of common shares, or any so-called "excess distribution" received on their common shares, as ordinary income, and to pay an interest charge on a portion of such gain or distributions, unless the shareholder makes a timely and effective "qualified electing fund" ("QEF Election") or a "mark-to-market" election with respect to the common shares. A U.S. shareholder who makes a QEF Election generally must report on a current basis its share of the net capital gain and ordinary earnings for any year in which the Company is a PFIC, whether or not the Company distributes any amounts to its shareholders. However, U.S. shareholders should be aware that there can be no assurance that the Company will satisfy record keeping requirements that apply to a QEF Election, or that the Company will supply U.S. shareholders with information that such U.S. shareholders require to report under the QEF Election rules, in event that the Company is a PFIC and a U.S. shareholder wishes to make a QEF Election.

Thus, U.S. shareholders may not be able to make a QEF Election with respect to their common shares. A U.S. shareholder who makes the mark-to-market election generally must include as ordinary income each year the excess of the fair market value of the common shares over the taxpayer's basis therein. Each U.S. shareholder should consult his or her own tax advisor regarding the U.S. federal, U.S. state and local, and foreign tax consequences of the PFIC rules and the acquisition, ownership, and disposition of Common Shares.

Overview

Company Overview

We are a development stage company engaged in the acquisition, exploration, and, development of gold and silver mineral properties in North America. Our mineral properties are currently located in Nevada and Washington. The Tonopah, Gold Rock and Golden Eagle gold properties are exploratory stage projects and have identified gold mineralization. The Spring Valley property has become subject to a joint venture agreement with Barrick Gold Exploration Inc. Our Pan Project is in the development stage and currently under construction, which is expected to allow us to transition from a development stage company to a gold production company, with targeted production in late 2014.

We have completed our technical, engineering, permitting and economic studies on our Pan Project. Construction officially began on January 15, 2014.


Recent Developments

CBA Debt Facilities

On July 18, 2014, our subsidiary MDW Pan LLP, as borrower entered into a credit agreement (the "Credit Agreement") with Commonwealth Bank of Australia ("CBA"), as administrative agent, collateral agent and the initial lender for the purpose of establishing an aggregate U.S.$55 million senior secured credit facility consisting of, (i) a U.S.$45 million project finance facility ("Project Finance Facility") and (ii) a U.S.$10 million cost overrun facility (the "Overrun Facility" together with the Project Finance Facility is collectively referred to herein as, the "Loan Facility"). The Loan Facility will be secured by substantially all of the assets of the borrower (MDW Pan LLP, a wholly-owned subsidiary of the Company, and the owner of the Pan Project and related assets) and all other entities of the consolidated group.

Our ability to draw on the Loan Facility and make future distributions are subject to conditions precedent as set forth in the Credit Agreement. In addition, we are required to maintain certain project and reserve accounts, which may affect our cash flow. There can be no assurances that the conditions precedent to draw on the Loan Facility will be met or that the reserve and distribution terms will not adversely affect our cash flows or results of operations.

Preferred Series A Dividend Declared and Paid

On June 18, 2014, our Board of Directors (the "Board") declared a dividend payment to the holders of Series A Preferred Shares with a record date of June 27, 2014, totaling $1,499,632 (U.S. $1,405,466), which was paid on July 2, 2014 in common shares, through the issuance of 1,322,525 common shares to the holders of the Series A Preferred Shares, and in cash, through the payment of applicable withholding taxes.

Bought Deal Financing

On June 6, 2014, we closed on a "bought deal" financing (the "Bought Deal Financing") pursuant to which we offered and sold 30,121,000 common shares in a registered public offering in the United States and Canada at a price of U.S.$0.83 per share for total gross proceeds of $27,340,470 (U.S.$25,000,430).

On June 17, 2014, in connection with the Bought Deal Financing, the Company closed on the over-allotment option which resulted in the issuance of an additional 3,012,000 common shares at a price of U.S.$0.83 per share for total gross proceeds of $2,713,047 (U.S.$2,500,043).

Filing of Technical Report for Gold Rock

On May 28, 2014, the Company filed its technical report entitled NI 43-101 Technical Report Updated Mineral Resource Estimate for Gold Rock project , which detailed a measured, indicated and inferred mineral resource estimate for its open pit, heap leach Gold Rock Project in White Pine County, Nevada.

Selection of Mining Contractor for Pan Project

On May 19, 2014, the Company selected Ledcor CMI, Inc. ("Ledcor") as the mining contractor for the Pan Project. During the early years of operation, Ledcor will provide all mining-related services, including manpower and equipment for the Pan Project.

Resignation of Mr. Rick D. Moritz as Senior Vice President of Operations

May 16, 2014, Mr. Richard D. Moritz resigned from his position as Senior Vice President of Operations of the Company.

Spring Valley 2014 Planned Expenditures

On May, 16, 2014, we announced Barrick's $13.3 million planned 2014 expenditures related to the Spring Valley Project. The budget includes $8.3 million for project development and $5.0 million for exploration for a total of $13.3 planned expenditures in 2014.

Spring Valley Advances to Pre-Feasibility Development Stage

On May 1, 2014, we announced Barrick had advanced the Spring Valley project to the pre-feasibility development stage.


Property Highlights for the Second Quarter of 2014 and to August 1, 2014:

Pan Project - A credit agreement for U.S.$55 million was executed on July 18, 2014 with the Commonwealth Bank of Australia for continued construction funding of the project. Significant progress has been made in the construction of the Pan mine, with production expected near the end of 2014.

Gold Rock project - A new technical report, which significantly increases the estimated resource base, was issued May 28, 2014 entitled "NI 43-101 Technical Report Updated Mineral Resource Estimate for Gold Rock Project." A mining plan of operations was submitted to the BLM and is in the draft EIS stage. Gold Rock is scheduled to be the Company's second operating gold mine.

Spring Valley project - On February 24, 2014 we announced that formation of the joint venture at the Spring Valley project with Barrick was completed. Barrick holds a 70% interest in the joint venture, while we hold the remaining 30% interest. We have elected the carry option, which allows Barrick to earn an additional 5% (75% total) interest in the joint venture by carrying us through to production, at which point we would retain a 25% interest in the joint venture.

Activities on our properties in the second quarter ended June 30, 2014, and up to the date of this Quarterly Report on Form 10-Q, are described in further detail below.


The map below shows the location of our properties located in Nevada, USA.

[[Image Removed: Picture 2]]


Pan Project, White Pine County, Nevada

The Pan property is located at the northern end of the Pancake mountain range in western White Pine County, Nevada, approximately 22 miles southeast of Eureka, Nevada, and 50 miles west of Ely, Nevada. Access is via a dirt road running south from US Highway 50. Eureka has a population of about 2,000. Water is readily available from wells on the property. Construction has begun on a power transmission line to extend power to the Pan Mine site.

Highlights

The National Environmental Policy Act ("NEPA") permitting process was completed with a Record of Decision for the Final Environmental Impact Statement issued on December 20, 2013. We also received confirmation from the U.S. Army Corps of Engineers that no surface waters are present at the project that would fall under the jurisdiction of Sections 401 and 404 of the Federal Clean Water Act. We have received our Water Pollution Control Permit and our Air Quality Operating Permit to Construct the Pan mine. Construction began in January 2014. Jacobs Engineering is the engineering, procurement and construction management contractor for the project. Significant progress has been made on Pan Project construction. Work on the access road, pregnant pond earthwork and liners, barren pond earthwork, process plant earthwork, and perimeter fence was completed during the three months ended June 30, 2014. Work is in progress on the heap leach pad earthwork and liner, barren pond liner, spillway liner, substation earthwork, north haul road, production water well 2, ADR/refinery rebar and forms and the 69kv transmission line.

Mineral Reserves and Resources

Cautionary Note to U.S. Investors - In this Quarterly Report on Form 10-Q we use the terms "mineral resource", "measured mineral resource", "indicated mineral resource" and "inferred mineral resource", which are geological and mining terms as defined in accordance with NI 43-101 under the guidelines adopted by CIM, as CIM Standards in Mineral Resources and Reserve Definition and Guidelines. U.S. investors in particular are advised to read carefully the definitions of these terms as well as the "Cautionary Note to U.S. Investors Regarding Reserve and Resource Estimates" above.

A resource estimate for the Pan Project was reported in October 2011 based on results from 2011 drilling. The Measured and indicated resource estimate exceeds one million ounces of gold as summarized in Table 1. The updated resource was prepared by Gustavson Associates, LLC ("Gustavson").

Table 1: Mineral Resource Estimate, Pan Project, Nevada

Measured Resource

Cutoff (gpt)     Tonnes      Grade (gpt)   Gold ounces
    0.27       27,352,000       0.59         520,000
    0.21       30,857,000       0.55         547,000
    0.14       36,920,000       0.49         579,000
    0.07       50,924,000       0.38         622,000
                  Indicated Resource
Cutoff (gpt)     Tonnes      Grade (gpt)   Gold ounces
    0.27       27,126,000       0.52         453,000
    0.21       32,652,000       0.47         495,000
    0.14       43,118,000       0.40         551,000
    0.07       73,925,000       0.27         645,000
           Measured Plus Indicated Resource
Cutoff (gpt)     Tonnes      Grade (gpt)   Gold ounces
    0.27       54,478,000       0.56         974,000
    0.21       63,509,000       0.51        1,042,000
    0.14       80,037,000       0.44        1,130,000
    0.07       124,849,000      0.32        1,268,000
                  Inferred Resource
Cutoff (gpt)     Tonnes      Grade (gpt)   Gold ounces
    0.27        1,771,000       0.58         33,000
    0.21        2,229,000       0.51         37,000
    0.14        3,928,000       0.36         45,000
    0.07        9,693,000       0.20         63,000


Note: The tonnage and total ounces of gold were determined from the statistical block model. Average grades were calculated from the tonnage and total ounces and then rounded to the significant digits shown. Calculations based on this table may differ due to the effect of rounding. See "Cautionary Note to U.S. Investors Regarding Reserve and Resource Estimates."

A Feasibility Study was completed November 15, 2011 showing robust economics for the Pan Project. Mineral reserves were based upon a design pit that maximized revenue based on a $1,200 per ounce three-year trailing average price of gold. Cutoff grades of 0.21 gpt in the South pit and 0.27 gpt in the North & Central pits produced the project's highest NPV. Reserve estimates are summarized in Table 2.

Table 2: Total Pan Mineral Reserves, November 2011

      Pit         Cutoff Grade    Metric Tonnes    Gold Grade     Ounces Gold
     Area         (grams/tonne)     (x 1000)      (grams/tonne)    (x 1000)

                                            Proven
North & Central       0.27           13,085           0.60            251
     South            0.21           12,160           0.61            236
   All Pits                          25,245           0.60            487

                                           Probable
North & Central       0.27           10,994           0.50            178
     South            0.21           12,073           0.51            199
   All Pits                          23,067           0.51            377

                                      Proven and Probable
North & Central       0.27           24,078           0.55            429
     South            0.21           24,233           0.56            435
   All Pits                          48,311           0.56            864

Note: The tonnage and total ounces of gold were determined from the statistical block model. Average grades were calculated from the tonnage and total ounces and then rounded to the significant digits shown. Calculations based on this table may differ due to the effect of rounding.

The Feasibility Study was prepared to the standards of NI 43-101. The open pit mineral reserves and resources were completed by Gustavson, with Terre Lane and Donald E. Hulse acting as the qualified persons. An updated report "Updated NI 43-101 Technical Report, Feasibility Study for the Pan Project, White Pine County, Nevada" dated November 29, 2012 was filed to clarify responsibilities of the Qualified Persons. This updated report made no changes in the feasibility study numbers.

We believe there is no material difference between the mineral reserves as disclosed in our NI 43-101 Feasibility Study and those disclosable under SEC Industry Guide 7, and therefore no reconciliation is provided. The Pan Project has known reserves under SEC Industry Guide 7 guidelines; therefore, the project is considered to be in the development stage.

Mining and Production

The Pan gold deposit contains near-surface mineralization that can be extracted using open pit mining methods. Results from mineral extraction tests indicate that the ore can be processed by conventional heap leaching methods. Ore from the South Pan pit will be processed ROM, while ore from the North Pan pit will be crushed before being placed on the leach pad. Pregnant solutions will be treated in an adsorption/desorption recovery (ADR) plant.

We have engaged Ledcor to perform contract mining services at our Pan Mine site for an approximate five year term. During the three months ended June 30, 2014, we made a U.S.$500,000 payment to Ledcor for mobilization charges. This is a change from owner mining, which was the elected method as defined within the 2011 Feasibility Study. Current conditions within the industry have led to an attractive price environment for contract mining and further, contract mining allows us to substantially reduce our capital costs and financing requirements. Ledcor will provide all mining related services, manpower and equipment for the project. They will be responsible for drilling, blasting, loading and hauling ore to the leach pad for processing.


During the three months ended June 30, 2014 and 2013 we incurred expenditures of $6,294 and $441,889, respectively, at the Pan Project. During the three months ended June 30, 2013, the expenditures were primarily for salaries and labor, travel and field office and supplies costs.

During the six months ended June 30, 2014 and 2013 we incurred expenditures of $6,294 and $854,383, respectively, at the Pan Project. During the six months ended June 30, 2013, the expenditures were primarily for salaries and labor, travel, transportation and accommodations and field office and supplies.

We currently have a limited scope of exploration activity at the Pan Project with the majority of costs being capitalized as part of the construction of the project.

During the three and six months ended June 30, 2014, we capitalized into property, equipment and mine development $16,830,669 and $21,156,217, respectively, of Pan expenditures (excluding asset retirement obligations), primarily for the construction of the Project, but also ongoing costs for permitting, mitigation, engineering, site characterization, mine planning, and detailed design. For the comparable periods during 2013, we capitalized $1,077,206 and $1,972,657, respectively, of Pan expenditures.

Gold Rock Project, White Pine County, Nevada

The Gold Rock property is located in the eastern Pancake Range in western White Pine County, Nevada. The property is eight miles southeast of our Pan Project. Access is via the Green Springs road from US Highway 50 approximately 65 miles from Ely, Nevada. Water for exploration purposes is available from wells in the region under temporary grant of water rights. It is anticipated that power will be available from the line being extended to serve the nearby Pan Project.

Gold Rock is scheduled to be our second operating gold mine. A gold resource has been defined on the project and numerous drill targets with potential for expanding that resource have been identified. Additional drilling is planned, but the Pan Project has priority for available funds in the near term.

An updated resource estimate was completed and filed on May 29, 2014, entitled "NI 41-101 Technical Report Updated Mineral Resource Estimate for Gold Rock Project." The report, by Global Resource Engineering, shows a 65% increase in measured, indicated resources and a 62% increase in inferred resources.

A mining Plan of Operations submitted to the BLM has been declared complete, beginning the EIS process. Scoping meetings for the EIS were held in September, followed by a public comment period. A Draft EIS is currently being developed by the BLM.

During the three months ended June 30, 2014 and 2013 we incurred $629,323 and $313,647, respectively, of expenditures at the Gold Rock project. The majority of these expenses for both periods are related to the ongoing permitting process . . .

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