UNITED STATES SECURITIES

AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

For the transition period from              to

 

Commission file number: 001-33894

 

 

MIDWAY GOLD CORP.

(Exact name of registrant as specified in its charter)

 

(720) 979-0900

(Registrant’s Telephone Number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    ☒ Yes  ☐  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   ☒   Yes  ☐  No    

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer   ☐        Accelerated filer  ☒   Non-accelerated filer    ☐   Smaller Reporting Company ☐  

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ☐  Yes  ☒   No

 

Number of Common Shares outstanding at May 1, 2015: 180,223,767

 

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TABLE OF CONTENTS

 

 

 

 

 

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EXPLANATORY NOTE

 

All amounts in this interim report on Form 10-Q are expressed in United States dollars (“US dollars”), unless otherwise indicated.

 

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PART I – FINANCIAL INFORMATION

 

Item 1.                 Financial Statements.

MIDWAY GOLD CORP.

CONSOLIDATED INTERIM BALANCE SHEETS

(unaudited)

 

 

Commitments (Notes 7 and 14)

Subsequent Event  (Notes 1, 8 and 11)

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MIDWAY GOLD CORP.

CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS

(unaudited)

 

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MIDWAY GOLD CORP.

Consolidated INTERIM StatementS of COMPREHENSIVE (Income) Loss

(unaudited)

 

 

 

 

 

 

 

 

 

 

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MIDWAY GOLD CORP.

CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(unaudited)

 

 

Supplemental Disclosures with Respect to Cash Flows (Note 15)

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MIDWAY GOLD CORP.

CONSOLIDATED INTERIM STATEMENT OF STOCKHOLDERS’ EQUITY

(unaudited)

 

 

 

 

 

 

 

 

 

 

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1.  Nature and Continuance of Operations 

 

Midway Gold Corp. was incorporated on May 14, 1996 under the laws of the Province of British Columbia.  Its principal business activities are the acquisition, exploration and development of mineral properties.  Midway Gold Corp. and its subsidiaries are collectively referred to as the “Company”.

 

While the Company achieved first gold production in March 2015, the Company has not yet generated any revenues from operations.  The Company has incurred net operating losses for the three months ended March 31, 2015 of $6.0 million and further operating losses are anticipated in the development of its business.  Since incorporation on May 14, 1996, the Company’s accumulated deficit totals $104.9 million.  The Company’s working capital at March 31, 2015 is a deficit of $29.9 million consisting of current assets of $32.5 million, $2.7 million of which is cash and cash equivalents, less current liabilities of $62.4 million.  The working capital deficit has resulted from the reclassification of $30.5 million of scheduled debt principal payments, net of unamortized deferred financing costs that are due after March 31, 2016 to the current portion of long term debt.  It is required that if an event of non-compliance with debt covenants has occurred as of the balance sheet date and it is not probable that the event of non-compliance can be cured within the subsequent 12 months without an amendment to the current agreement, long-term debt balances be classified as a current liability as of the balance sheet date.  The cash and cash equivalents balance of the MDW Pan LLP (“Pan”) entity is $0.7 million which is to be spent solely on construction and operations of the Pan Mine.  The remaining cash balance of $2.0 million is available for use at the corporate level for non-Pan expenditures, but could also be used to fund capital and operating requirements of the Pan entity.  Terms of the Senior Debt Facility do not currently permit the Company to use cash from the Pan project to fund corporate operations until distributions from the Pan project are made in accordance with the terms of the Senior Debt Facility, which may begin in March of 2016.

 

The Company also has established an aggregate $53.0 million senior secured credit facility consisting of a $43.0 million project financing facility and a $10.0 million cost overrun facility (collectively, the “Senior Debt Facility”) with Commonwealth Bank of Australia (“CBA”) to fund development and construction of the Pan Project (Note 8).  Approximately $5.5 million of the Senior Debt Facility was undrawn as of March 31, 2015.  As a result of Pan project delays and lower gold production forecast, the Company determined that it does not have sufficient funds to complete construction of the Pan Mine and fund operating and reserve accounts and satisfy other requirements under the Senior Debt Facility.  As a result, the Company was not in compliance with certain tests required under the Senior Debt Facility.  On March 13, 2015, the Company entered into a waiver to the Senior Credit Agreement (the “Waiver”) with the lender providing the Company a waiver of certain tests required under the Senior Debt Facility until April 20, 2015.  The Company was unable to comply with the provisions of the Senior Debt Facility that were waived pursuant to the Waiver in the time period specified therein and as a result, the Company is currently not in compliance with the terms of the Senior Debt Facility and has until May 20, 2015 before the non-compliance becomes an event of default.  The lenders may declare all unpaid amounts under the Senior Debt Facility to be immediately payable when an event of default occurs.  Furthermore, the Company does not believe that it will satisfy the conditions precedent to draw the remaining $5.5 million under the cost overrun facility.

 

On April 17, 2015 the Company entered into a subordinated credit agreement (the “Subordinated Credit Agreement”) with Hale Capital Partners, L.P., as administrative agent and collateral agent, and HCP-MID, LLC and INV-MID, LLC, as lenders, in the aggregate amount of $10.5 million (“Subordinated Debt Facility”). On April 17, 2015, the Company received an initial draw of $3.85 million (the “Initial Draw”) from the Subordinated Debt Facility.  The Company paid half ($0.1 million) of the origination fee to the lenders and reimbursed the lenders for $0.15 million in legal fees and expenses from the Initial Draw.  The Subordinated Debt Facility matures on September 30, 2017 (the “Maturity Date”), bears interest at a rate of 13.5% per annum and is subject to a 5% per annum commitment fee on the undrawn commitment through September 30, 2015.  Payment of the Subordinated Debt Facility is due in full on the earlier of the Maturity Date or the discharge date as defined within the Subordinated Credit Agreement.  The Subordinated Debt Facility is secured by subordinated security interests and guarantees by the Company, subordinated to the senior security interest of the lender of the Senior Debt Facility.

 

All future borrowings under the Subordinated Debt Facility are subject to conditions, affirmations and negative covenants as described in the Subordinated Credit Agreement.  There can be no assurance that we will satisfy the conditions to make future draws under the Subordinated Debt Facility.  The proceeds will be used to pay for costs of the Pan Mine and corporate expenditures.  Proceeds from the Subordinated Debt Facility are not adequate to cure noncompliance of the Senior Debt Facility as described above.

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The Company hired an independent engineer to update the geologic model and mineral resource estimate for the Pan Project at a current date, due in part to mine performance being lower than expected.  The updated mineral resource estimate was completed in early May 2015 and will be used to update the mine plan and mineral reserve estimate for the Pan Mine, which is also to be received during Q2 2015.  Upon receipt of the update mineral reserve estimate and its incorporation into the Company’s impairment accounting model,  the Company believes there is a higher risk that there will be an impairment charge to reduce the carrying value of its capitalized mineral property, plant, equipment and development costs for the Pan Mine. Until such time as the Company receives the updated mineral reserve estimate, it is not possible to reasonably estimate an impairment charge, if any that might occur.    The updated mine plan and mineral reserve estimate are expected to be completed in late-June.  The updated mine plan will be the basis for negotiations with CBA to amend the Senior Debt Facility.  There is no assurance that we will be successful in our efforts to amend the Senior Debt Facility or avoid an event of default.  There is also no assurance that we will be able to raise any capital required in connection with that amendment or the capital required for the crushing and agglomeration circuit, leach pad expansion or for any of our other working capital requirements.  If an event of default occurs, CBA could elect to declare all principal amounts outstanding, together with accrued interest, immediately due and payable and seek to enforce their security interest over the Pan Project and other assets, which would negatively impact our operations.

 

The above conditions indicate the existence of a material uncertainty that casts substantial doubt about the Company’s ability to continue as a going concern.  These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Recoverability of amounts capitalized for the Company’s other mineral properties are dependent upon the Company’s ability to raise funds or generate profits to enable funds to be available to complete exploration on the mineral properties, identify economically recoverable reserves and develop the mineral properties into profitable projects, or the receipt of adequate proceeds from the sale of such projects.  The Spring Valley project is subject to a joint venture agreement with Barrick Gold Exploration Inc., who is responsible for carrying the Company to production by funding and arranging financing for the Company’s share of cost of operations and mine exploration, development and construction expenses.  The Company is responsible for funding costs incurred subsequent to commercial production.  Barrick is also responsible for arranging financing for the Company’s share of the cost of operations and mine exploration, development and construction expenses.

 

2.  Significant Accounting Policies and Basis of Presentation

 

The consolidated interim financial statements included herein have been prepared by the Company, without audit, in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) pursuant to Rule 10-01 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such SEC rules and regulations, although the Company believes that the disclosures included are adequate to make the information presented not misleading.  Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.

 

In management’s opinion, the unaudited consolidated interim financial statements contained herein reflect all adjustments, consisting solely of normal recurring items, which are necessary for the fair presentation of our financial position, results of operations, and cash flows on a basis consistent with that of our prior audited consolidated financial statements, except as described below.  The results of operations for interim periods may not be indicative of results to be expected for the full fiscal year.  The Company’s 2014 Annual Report on Form 10-K includes a summary of significant accounting policies and should be read in conjunction with this Quarterly Report on Form 10-Q.

 

In-circuit and finished goods inventories

 

As of March 31, 2015, inventories now include in circuit and finished goods.   In-circuit inventory is material currently in the process of being converted to a saleable product (gold doré).  In-circuit inventory costs include mining and leach pad processing costs and associated amortization and depletion and an attributable portion of plant and overhead costs.  Costs based on the average cost per contained recoverable ounce of gold are removed from leach pad and in-circuit inventory as gold is recovered from the leach pad or converted into gold doré as applicable.

 

Finished goods inventory is gold available for sale and is valued at the lower of average production cost per gold ounce or net realizable value.  The cost of finished goods inventory includes the average cost of in-circuit inventory incurred plus applicable refining costs.

 

Net realizable value for in-circuit and finished goods inventories is computed using period-end market metal prices reduced for any further estimated processing, refining, and selling costs, as applicable.

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Reporting currency

 

The consolidated financial statements are presented in U.S. dollars.  Prior to January 1, 2015, the consolidated financial statements were presented in Canadian dollars.  Comparative figures have been recast to present them in U.S. dollars.  There was no change in the functional currency of the Company or its subsidiaries which continues to be the U.S dollar.

 

Recently Issued Accounting Pronouncements

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”.  The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures.  Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities.  Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures.  This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes.  This accounting standard update is effective for annual periods ending after December 15, 2016, including interim periods within that reporting period.  Early application is permitted.  The Company is currently assessing the impact on the Company’s disclosures and financial statements.

 

In May 2014, the FASB issued Accounting Standards Update ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”.  The amendments in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606 Revenue from Contracts with Customers.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  Early application is not permitted.  The Company does not currently have revenue contracts with customers, but it will begin assessing the impact of such contracts as appropriate.

 

Recently Adopted Accounting Pronouncements

 

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”.  The amendments in ASU 2015-03 are intended to simplify the presentation of debt issuance costs and requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU.  As allowed by ASU 2015-03, the Company has early adopted ASU 2015-03 effective January 1, 2015 which resulted in the reclassification of debt issuance costs of $4.3 million from other long-term assets to being a reduction in the long-term debt balance as of January 1, 2015.  The comparative balance sheet as of December 31, 2014 has been recast to reflect the adoption of ASU 2015-03.

 

3. Inventories

 

The following table provides the components of inventories:

 

 

 

As of March 31, 2015 and December 31, 2014, production-related inventories included $5.8 million and $2.4 million, respectively, of capitalized non-cash depreciation and amortization costs.

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4. Prepaid Expenses and Other Assets

 

Prepaid expenses and other assets consisted of the following:

 

 

 

5.  Mineral Property, Plant, Equipment and Development

 

At March 31, 2015, property, plant, equipment and development consisted of the following:

 

 

The construction-in-progress balance relates to Pan Mine assets not yet placed into service.  During the three months ended March 31, 2015, the Company placed $62.4 million of process equipment, mine development, and leach pad and pond assets into service.  Depreciation expense for the three months ended March 31, 2015 and 2014 was $3.6 million and $0.1 million, respectively.

 

During the three months ended March 31, 2015 a water well failed and was subsequently abandoned at the Company’s Pan project resulting in a $1.1 million write-down of process equipment costs.  A replacement well is in process of being completed as of March 31, 2015, with an estimated cost of $1.1 million.  Insurance proceeds of $0.8 million were received during the three months ended March 31, 2015 and additional proceeds of $0.3 million were receivable as of March 31, 2015.  Further proceeds that may be received will be recognized upon final settlement of the insurance claim.

 

6.  Non-Producing Mineral Properties

 

Details on the Company’s mineral properties are found in Note 6 to the audited consolidated financial statements for the year ended December 31, 2014.

 

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Through a series of four royalty agreements and one assignment, the Company acquired claims that currently comprise the Gold Rock property.  The royalty agreements are subject to sliding scale royalties on NSR ranging between 2% and 6% based upon gold price and advanced minimum royalty payments recoverable from commercial production.  During the three months ended March 31, 2015, the Company paid $0.3 million of advanced minimum royalty payments.

 

 

The Company signed an exploration and option to joint venture agreement with Barrick Gold Exploration Inc. (“Barrick”), a wholly owned subsidiary of Barrick Gold Corporation, effective March 9, 2009.  Barrick was granted the exclusive right to explore, develop and earn an interest in the Spring Valley property.  Barrick has completed the expenditure requirement of $38.0 million to earn a 70% interest in the Spring Valley property.  The Company has elected to allow Barrick to earn an additional 5% interest (75% total) by carrying the Company to a production decision and arranging financing for the Company’s share of mine construction expenses with the carrying and financing costs plus interest to be recouped by Barrick, solely from the Company’s share of project cash flows once production has been established.

 

The Company exercised its option to enter into a joint venture with Barrick as of February 23, 2014.  With the formation of the joint venture agreement with Barrick, initial capital accounts were established by terms of the joint venture agreement, and Barrick is the manager of the joint venture.

 

 

Through a series of agreements, amendments and payments the Company acquired a 100% interest in the Tonopah property.  The acquisition is subject to a sliding scale royalty on NSR between 2% and 7% from any commercial production, based on changes in gold prices and an advance minimum royalty, recoverable from commercial production, of $0.3 million per year payable on each August 15th.  The Company entered into an agreement allowing payment of $50,000 of the $0.3 million payment due on August 15, 2014.  The remaining $0.25 million, along with the August 15, 2015 $0.3 million payment, will be paid subsequent to economic completion of the Pan project .  The Company is contractually obligated for both payments and has accrued these unpaid amounts in accrued liabilities.

 

 

The Company purchased a 75% interest in the Golden Eagle, Washington project from Kinross Gold USA Inc. (“Kinross”) in August 2008, at a cost of $1.5 million and purchased a 25% interest in the Golden Eagle project from Hecla Limited at a cost of $0.5 million. Kinross retained a 2% NSR royalty and was granted a first right of refusal to toll mill ore from the Golden Eagle property at their Kettle River Mill.

 

 

The Company entered into an earn-in agreement with Aurion Resources (“Aurion”) in November 2012 for claims. The Company can earn up to a 70% interest in the Pinyon property by incurring exploration expense of $2.0 million over a period of five years and to pay all payments required under an existing mining lease to maintain the claim related to the property.  The Company can also earn an additional 5% (75% total) by arranging mine financing.

 

7.  Reclamation and Remediation

 

A reconciliation of the Company’s asset retirement obligations for the three months ended March 31, 2015.

 

 

Additions, changes in estimates and other during the three months ended March 31, 2015 were primarily related to the continued construction of the Pan mine and the introduction of cyanide to the heap leach pad.  The Company estimates that of the reclamation obligations as of March 31, 2015, approximately 95% of its total reclamation expenditures will occur during the years 2028 – 2039.

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The Company is required to post bonds with the Bureau of Land Management (“BLM”) for reclamation of planned mineral exploration and development programs associated with the Company’s mineral properties located in the United States.  For the Spring Valley property, Barrick is responsible for bonding for the surface disturbance created by the exploration and development programs in which they are funding.

 

At March 31, 2015 and December 31, 2014 the Company had purchased surety contracts for reclamation bonds covering the Company’s exploration projects in the amount of $0.8 million.  The surety contracts were renewed in May 2014 and are in place through May of 2015, at which point the Company can elect to renew the surety contracts or deposit the full cash amount of the reclamation bonds with the BLM.

 

As a part of the permitting process for the Pan Project, the Company is currently required to have a reclamation bond of approximately $15.4 million held with the BLM.  The Company purchased a surety contract for the reclamation bond, which amount requires the Company to deposit $3.7 million into an escrow account as security for abandonment and remediation obligations, which has been recorded in reclamation deposits on the Consolidated Balance Sheet.  The surety contract names the Company and several of its subsidiaries as indemnitors to the surety agreement. The holder of the surety contract may require, at its sole discretion that the Company make additional deposits to the escrow account of up to the $15.4 million reclamation bond amount.  The Company is required to maintain the escrow account until all abandonment and remediation obligations have been completed to the satisfaction of the BLM.  Over the life of the Pan Project, prior to the completion of all abandonment and remediation obligations, the Company has the right to request a refund of a portion or all of the Pan Project reclamation deposit.  Granting of the request is at the surety contract holder’s sole discretion.

 

8. Debt

 

The Company’s debt facilities consisted of the following as of March 31, 2015 and December 31, 2014:

 

 

On July 18, 2014, and as subsequently amended, the Company entered into a $53 million three-year Senior Debt Facility with CBA which has been used to fund continued development and construction of the Pan Project.  The Senior Debt Facility is comprised of two tranches: a project finance facility of $43 million, plus a cost overrun facility of $10 million.  Advances under the project finance facility bear interest at LIBOR plus 3.75% until economic completion, as defined in the Senior Debt Facility agreement, and LIBOR plus 3.50% thereafter.  Advances under the cost overrun facility bear interest at the project finance facility rate plus 2.00%.  

 

The Senior Debt Facility is 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. Upon achieving economic completion and meeting certain other requirements, security will be limited to the assets of MDW Pan LLP and guarantees from the Company and an affiliate.  Pursuant to the Senior Debt Facility, the Company’s ability to receive distributions from MDW Pan LLP for corporate general and administrative expenses, and other non-Pan expenditures is contingent upon generating sufficient cash flow and satisfying certain conditions precedent, including funding a debt service reserve account with $10 million and an operating cash account with $7.5 million, and achieving various economic completion tests relating to, but not limited to, mine production, recoveries, sales, costs and sustainability over a three-month period.  Economic completion must be achieved by September 30, 2015.

 

The Company’s ability to draw on the Senior Debt Facility is contingent upon customary conditions precedent, including, but not limited to, funding any expected cost overruns on the Pan Project.  During the first quarter of 2015, the Company determined that it was not in compliance with certain tests required under the Senior Debt Facility.  On March 13, 2015, the Company entered into the Waiver with the lender waiving certain tests under the Senior Debt Facility until April 20, 2015.  As of April 20, 2015, the Company was not in compliance with the terms of the Senior Debt Facility and has until May 20, 2015 before the non-compliance becomes an event of default.  Upon an event of default, the lenders may declare all unpaid amounts under the Senior Debt Facility to be immediately payable.  The Company has not satisfied the conditions required to draw the remaining $5.5 million available under the cost overrun facility under the Senior Debt Facility (refer to Note 1 for further information regarding the Senior Debt Facility).

 

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As of March 31, 2015, the Company has drawn $43.0 million against the project finance facility and $4.5 million against the cost overrun facility and all amounts have been classified as current liabilities due to the Company’s non-compliance with covenants and its inability to cure such non-compliance without amendments to the Senior Debt Facility.  The Senior Debt Facility requires quarterly loan repayments beginning in June 2015 through the maturity date of March 31, 2017.  Based upon the amount drawn down as of March 31, 2015, scheduled principal payments for the years ended 2015, 2016 and 2017 are $9.2 million, $29.9 million and $8.4 million, respectively.

 

 

On April 17, 2015 the Company entered the Subordinated Credit Agreement with Hale Capital Partners, L.P. (“HCP”), as administrative agent and collateral agent, and HCP-MID, LLC and INV-MID, LLC as lenders (See Note 11), for the purpose of establishing the Subordinated Debt Facility. The Subordinated Debt Facility bears interest at a rate of 13.5% per annum and is subject to the commitment fee of 5% per annum on the undrawn commitment through the September 30, 2105 facility availability period. In the event that any amounts drawn under the Subordinated Debt Facility are repaid on or before September 30, 2015, the amounts repaid are subject to a make-whole payment of 3%.  Any amounts repaid after September 30, 2015 and prior to the maturity date are subject to a make-whole payment of 3%, plus the present value of interest that would have accrued had the amounts repaid been paid on the maturity date.  The Subordinated Debt Facility contains provisions whereby mandatory prepayments are required in certain circumstances.

 

The following table summarizes the components of interest expense:

 

 

 

9.  Loss Per Share

 

Basic loss per common share is computed using the weighted-average number of common shares outstanding during the period.  Diluted loss per common share is calculated using the weighted-average number of common shares outstanding for the period and includes the dilutive effect of preferred shares, stock options and warrants.

 

The two-class method is used to calculate basic and diluted loss per common share since preferred shares are a participating security under ASC 260 Earnings Per Share.  The two-class method is an earnings allocation formula that determines income per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.  Under the two-class method, basic loss per common share is computed by dividing net loss attributable to common shareholders after allocation of income to participating securities by the weighted-average number of common shares outstanding during the year.  Diluted loss per common share is computed using the more dilutive of the two-class method or the if-converted method.  In periods of net loss, no effect is given to participating securities since they do not contractually participate in the losses of the Company.

 

For the three months ended March  31, 2015,  37,837,838 preferred shares that could be converted to shares of common stock were not included in the computation of diluted loss per common share, as the effect of doing so would have been anti-dilutive.

 

For the three months ended March  31, 2015 and March 31, 2014, the effects of the assumed exercise of stock options of 10,297,044 and 3,546,667 shares of common stock, respectively, were excluded from the calculation of diluted net income per share as the effect would be anti-dilutive.

 

10.  Share Capital

 

(a)     The Company is authorized to issue an unlimited number of common shares and preferred shares.

 

(b)     Share issuances

 

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(c)     Stock options

 

On June 20, 2013, the Company adopted the 2013 Stock and Incentive Plan (the “2013 Plan”) after approval of the 2013 Plan by the Company’s Shareholders at the Annual General and Special Meeting.  The 2013 Plan is designed to replace the 2008 Stock Option Plan (the “Plan”); however, all outstanding option grants as of June 20, 2013 remain under the 2008 Stock Option Plan.  Upon adoption of the 2013 Plan, the 2008 Stock Option Plan ceased to be available for the granting of new stock options.

 

The 2013 Plan permits a fixed aggregate number of common shares to be issuable under all awards under the 2013 Plan of 16,628,914 (“Award Cap”), which was equivalent to 10% of the Company’s common shares plus Series A Preferred Shares as of April 18, 2013. The total number of common shares issuable to insiders at any time and issued to insiders of the Company within any one-year period pursuant to stock options granted under the 2013 Plan, together with any other security based compensation arrangements of the Company, may not exceed 10% of the issued and outstanding common shares and preferred shares.  The number of common shares issuable for Awards made under the 2008 Stock Option Plan is deducted from the Award Cap. The Award Cap represents the maximum number of shares issuable under both plans.

 

The stock-based compensation for options vesting during the three and three months ended March 31, 2015 and 2014 is included in the consolidated statement of operations as follows:

 

 

2008 Stock Option Plan – TSX Stock Exchange

There was no remaining estimated unrecognized compensation cost from unvested options as of March 31, 2015.

 

The weighted-average grant date fair value of unvested options in Canadian dollars is summarized below for the three months ended March 31, 2015 and 2014.

 

The following table summarizes activity for compensatory stock options during the three months ended March 31, 2015:

 

The following table summarizes information about outstanding compensatory stock options as of March 31, 2015:

 

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2013 Stock Option Plan – NYSE MKT Stock Exchange

 

The estimated unrecognized compensation cost from unvested options as of March 31, 2015 was approximately $914,437, which is expected to be recognized over the remaining vesting period of 2.54 years, and the unvested options have a weighted average remaining contractual term of 5.30 years.

 

The weighted-average grant date fair value of unvested options is summarized below for the three months ended March 31, 2015 and 2014.

 

The following table summarizes activity for compensatory stock options during the three months ended March 31, 2015

 

 

The following table summarizes information about outstanding compensatory stock options as of March 31, 2015:

 

 

 

 

 

 

 

11.  Redeemable Preferred Shares

 

In December 2012, the Company issued 37.8 million Series A Preferred Shares at $1.85 per share for gross proceeds of $70.0 million by way of a private placement.  The Series A Preferred Shares are a participating security as defined under ASC 260, in that the security participates in dividends with common stock and has rights to earnings (additional-paid-in-capital in the absence of earnings) that otherwise would have been available to common shareholders.  There is an eight percent (8%) annual dividend, compounding monthly, payable quarterly on the Series A Preferred Shares. At the Company’s option, it may pay the 8% dividend with common shares, net of withholding taxes, in-lieu of cash, based on the closing price of the Company’s common shares as quoted by the NYSE MKT on the trading day immediately prior to the payment date.  The Senior Debt Facility (Note 8) requires that dividend payments, net of withholding taxes, on the Series A Preferred Shares must be paid with common shares until the Company achieves economic completion, as defined in the Senior Credit Agreement.

 

Details of dividends paid or declared during 2015 are as follows:

 

 

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Canadian tax legislation requires a corporate tax to be paid on all cash or in-kind dividends declared and paid by a Canadian entity on taxable preferred shares.  The Company is entitled to a deduction for tax purposes equal to 3.5 times Part VI.1 taxes paid.  Therefore, future Canadian corporate tax savings, if realized, should approximately offset the preferred dividend tax expense. 

 

During the three months ended March 31, 2015 and March 31, 2014, the Company incurred $0.2 million and $0.4 million of Part VI.1 tax expense, respectively. 

 

The holders of each Series A Preferred Share are able to convert the shares into a common share on a one-for-one basis at any time.  After December 13, 2013, the Company can pro-ratably force conversion of the shares into common shares on a one-for-one basis provided that the weighted average price of the common shares exceeds $3.70 on each trading day during 20 consecutive trading days immediately prior to both the delivery of an applicable mandatory conversion notice and the applicable mandatory conversion date.  From December 13, 2017, the Company or each holder of Series A Preferred Shares has the right, exercisable by 30 days' notice in writing, to redeem or to require the Company to redeem at their issue price of $1.85 per share any portion of the Series A Preferred Shares (in aggregate $70.0 million) plus accumulated unpaid dividends for cash.

 

If the outstanding Series A Preferred Shares had been converted as of March 31, 2015, 37.8 million common shares would have been issued and the fair value of those common shares based upon the closing price on the NYSE MKT as of March 31, 2015 of $0.32 would have been $12.1 million.  If the common share price was above $1.85, there would be no change to the number of common shares issued upon conversion.  

 

Holders of the Series A Preferred Shares, have the right to nominate and elect, voting as a separate class, one (1) director to the Company’s Board.  If the size of the Company’s Board is increased beyond seven (7) members, increases will occur in increments of two (2) and the “Preferred Governance Majority” will have the right to designate one (1) of the two additional director nominees for election or appointment as director.  The Preferred Governance Majority has the right to fill any vacancy of the preferred shareholder director position.

 

Subject to shareholder approval, if the Company is unable to redeem any Series A Preferred Shares two (2) years after a demand for redemption, then, subject to a special separate resolution of the holders of common shares and provided it is permitted by the Company’s articles, as amended, the holder of Series A Preferred Shares are to be entitled to (i) as a single class, vote to elect a majority of our Board, and (ii) in the event that our articles do not permit a single class of our shareholders to elect a majority of our Board sell, as may be permitted by applicable law, on our behalf, our assets, in such holder’s discretion, that are sufficient to redeem any Series A Preferred Shares. The proposal of this special separate resolution of the holders of our common shares failed to pass during our 2013 and 2014 Annual General and Special meeting of shareholders.  The Company is required to seek shareholder approval for the proposal of the special resolution at each annual and special meeting of shareholders until the special resolution is passed.

 

Upon liquidation, dissolution or winding-up, the holders of the Series A Preferred Shares are entitled to a liquidation preference equal to 125% of the initial issue price of $1.85 prior and in preference to any distribution to the holders of our common shares.

 

In addition, holders of the Series A Preferred Shares have consent rights over a variety of significant corporate and financing matters, including, but not limited to, the voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Company, the issuance of any common shares or common share equivalents for less than $1.85 per share or any amendment to the Company’s articles in a manner adverse to the holders of Series A Preferred Shares. 

 

Of the 37,837,838 Series A Preferred Shares sold, EREF-MID II, LLC and HCP-MID, LLC purchased a combined 17,837,838 Series A Preferred Shares.  Hale Fund Management, LLC, (“HFM”) is the manager of EREF-MID II, LLC. Hale Capital Partners, LP, (“HCP”) is the sole member of HCP-MID, LLC.  Hale Fund Partners, LLC, (“HFP”) is the general partner of HCP. Hale Capital Management, LP, (“HCM”) is the manager of HCP.  Hale Fund Management, LLC, (“HFM”), is the general partner of HCM and exercises voting and investment power over the Series A Preferred Shares held by HCP-MID, LLC.  Mr. Martin Hale, a member of the Company’s board of directors, is the (i) CEO of HCP, (ii) the sole owner and managing member of HFP and (iii) the sole owner and CEO of HFM. 

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The balance of the Company’s redeemable preferred shares and changes in the carrying amount of the redeemable preferred shares are as follows:

 

 

 

 

 

12. Derivative Instruments

 

The Company uses financial derivative instruments to achieve a more predictable cash flow from operations by reducing its exposure to commodity price and interest rate fluctuations.  The Company has entered into a diesel fuel forward purchase contract and an interest rate swap contract with the following remaining average notional amounts which will be financially settled.

 

 

The interest rate derivative contract swaps a variable LIBOR interest rate equal to the rate the Company pays on the Senior Debt Facility for a fixed rate of 0.81%.  The contract is for a term through March 31, 2017 with the notional amount decreasing over the term such that it matches the expected principal amounts outstanding on the Senior Debt Facility.  Settlement is on a monthly basis through September 2015 and quarterly thereafter.  The Company recognized a $0.1 million loss upon settlement of the interest rate derivative contract during the three months ended March 31, 2015, which is included in interest expense.

 

The diesel fuel forward contract has a $1.9625 fixed price per gallon of diesel through a maturity date of March 31, 2017 with monthly settlements.  The Company recognized a $0.1 million loss upon settlement of the diesel fuel derivative contract during the three months ended March 31, 2015 which has been capitalized into inventory as a mining cost.  The Company does not enter into derivative instruments for speculative or trading purposes. 

 

Derivatives have been accounted for at fair value with changes in fair value recognized in net income (loss).  For the three months ended March 31, 2015, the Company recognized a $0.1 million loss on the diesel fuel derivative contract and a $0.1 million loss on the interest rate derivative contract, which are included in loss on derivative contracts. 

 

In addition to the financial contracts, the Company has entered into a commodity contract for the sale and physical delivery of 29,900,  43,700 and 6,900 ounces of gold in 2015, 2016 and 2017, respectively, at a fixed price of U.S.$1,200 per ounce.  The Company paid $2.6 million to the counter party upon execution of the contract and recognized this amount as a Gold Sales Contract in Other Assets (Note 4).  The contract qualifies for the normal purchase normal sale exception and, therefore, is not subject to mark-to-market accounting.  However, documentation for qualification for the normal purchase normal sale exception was completed subsequent to the execution of the contract, but prior to December 31, 2014 and therefore was subject to a mark-to-market adjustment from the date of the execution of the contract to the documentation date.  For the year ended December 31, 2014, the Company recognized a $0.4 million gain on the gold forward sale contract based upon the difference between the forward gold price for the contract settlement period as of the measurement date and the contract settlement gold price, multiplied by the quantity of gold ounces involved in the contract and discounted at an appropriate discount rate which reflects the credit risk of the counter party.  The carrying value of the gold sales contract will be amortized over the term of the contract on the basis of gold ounces delivered to the counter party.

 

The following table shows the location of all derivative instruments presented on the Consolidated Balance Sheet as of March 31, 2015.

 

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13.  Fair Value Measurements

 

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that a market participant would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

 

 

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Certain financial instruments, including cash and cash equivalents, amounts receivable, current assets, accounts payable, preferred share dividends payable and other short and long term liabilities, are carried at cost, which approximates fair value due to the short-term nature of these instruments.  The Company’s debt carrying value approximates fair value based on market interest rates and credit spread.

 

The table below sets forth the Company’s assets and liabilities that were accounted for at fair value on a recurring basis and the fair value calculation input hierarchy level that the Company determined applies to each asset and liability category:

 

 

The Company utilizes financially-settled forward contracts to manage the exposure to price changes of diesel fuel and fluctuations of the LIBOR interest rate.  These contracts are marked-to-market through net income (loss) each period.  The fair value of each contract represents the difference between the forward diesel fuel prices or forward LIBOR interest rates for the contract settlement period as of the measurement date and the contract settlement diesel fuel price or contract settlement LIBOR interest rate.  The difference is multiplied by the quantity or notional value involved in the contract and discounted at an appropriate discount rate which reflects the credit risk of the Company or the counter party as applicable.

 

The Company did not have any level 1 or level 3 financial assets or liabilities as of March 31, 2015 or December 31, 2014.

 

 

 

14.  Commitments

 

As of March 31, 2015, the Company had entered into the following operating lease and contractual obligations:

 

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Operating Lease Obligations

 

The Company signed a contract mining agreement with Ledcor CMI, Inc (“Ledcor”) on May 19, 2014 relating to mining activities at the Pan project for a 63 month period which commenced on July 21, 2014.  Under the terms of the contract mining agreement, Ledcor is to provide all required labor, material and equipment (excluding fuel) to complete all necessary drilling, blasting, loading, hauling and related activities for the mining of the Pan project.  Payment by the Company to Ledcor is primarily based on unit prices for bank cubic yards and tons.  The contract mining agreement contains a lease related to mining equipment as well as other non-lease elements.  The lease contained in the contract mining agreement is an operating lease and accounted for as such.  Expected future minimum payments, including both the future minimum lease payments and the other non-lease element payments for the Contract Mining Agreement over the initial 35 months of the agreement, consistent with the break fee term, are included in the table above.  The expected future minimum payments are determined by rates within the contract mining agreement and estimated tons moved and bank cubic yards for drilling and blasting.

 

The Company is required to pay Ledcor a break fee if the contract is terminated for convenience during the first 35 months of the contract.  The break fee at March 31, 2015 is $8.1 million and declines to $nil over the remaining 26 month period.

 

The Company has obligations under operating leases for its corporate offices in Englewood, Colorado until 2020, field offices in Ely, Nevada until 2015 and office equipment until 2018.  In March 2014, the Company entered into a sub-lease for a portion of our Englewood, Colorado office space, which runs through July of 2019.  The average monthly rent received under this sublease agreement is approximately $6,950 per month.  In February 2015, the Company entered into another sub-lease for a portion of our Englewood, Colorado office space, which runs through August 2020.  The monthly rent received under this sublease agreement is $7,772 per month.  Future minimum lease payments for non-cancellable leases with initial lease terms in excess of one year are included in the table above.

 

Contractual Obligations

 

The Company had drawn down $43.0 million against the project finance facility and $4.5 million against the cost overrun facility as of March 31, 2015.  Repayments of principal begin in June of 2015 and are made quarterly through maturity of the Senior Debt Facility on March 31, 2017.  Interest on the Senior Debt Facility is calculated at LIBOR plus 3.5% or 3.75% on the project finance facility and the project finance facility rate plus 2.0  % on the cost overrun facility.

 

The Company has signed unconditional purchase obligation agreements relating to the development of the Pan Project which as of March 31, 2015 committed the Company to $2.7 million of non-cancellable capital expenditures payable during 2015. 

 

Contingencies

 

The Company is subject to litigation, claims and governmental and regulatory proceedings arising in the ordinary course of business. It is the opinion of the Company’s management that current claims and litigation involving the Company are not likely to have a material adverse effect on its consolidated financial position, cash flows or results of operations.

 

15.  Supplemental Disclosure with Respect to Cash Flows

 

Supplemental cash flow information for the three months ended March 31, 2015 and 2014 is as follows:

 

 

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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 16, 2015, 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.

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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, 2014.  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 engaged in the acquisition, exploration, and development of gold and silver mineral properties in North America. Our mineral properties are located in Nevada and Washington.  We do not currently generate operating earnings. Construction of our Pan project is near completion.  Mining operations commenced in September of 2014 and gold production began on March 26, 2015.  The production of gold allowed the transition from an exploration and development stage company to a gold production company.  The Tonopah, Gold Rock and Golden Eagle gold properties are exploratory stage projects and have identified gold mineralization.  The Spring Valley property is subject to a joint venture with Barrick Gold Exploration Inc (“Barrick”).

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Recent Developments

 

Draft Environmental Impact Statement for the Gold Rock Project

 

On February 13, 2015, we announced that the Draft Environmental Impact Statement (“DEIS”) for the Gold Rock project was available for public comment as published by the U.S. Bureau of Land Management (“BLM”) in the federal register.  The DEIS provides an analysis of environmental, social and economic impacts of the proposed mine plan and possible alternatives.  The public comment period ended on March 30, 2015.

 

Barrick Announces Initial Mineral Resource at Spring Valley

 

On February 25, 2015, we announced that Barrick has published an initial mineral resource at Spring Valley.  The initial mineral resource was announced by Barrick on February 18, 2015 as part of its Fourth Quarter 2014 Results.

 

CBA Waiver

 

On March 13, 2015, MDW Pan LLP, as borrower, and Commonwealth Bank of Australia (“CBA”), as administrative agent, collateral agent, technical agent and initial lender, and the other lenders named in the Senior Credit Agreement (the “Senior Credit Agreement”) entered into a waiver with respect to certain provisions of the Senior Credit Agreement (the “Waiver”) in connection with the Company’s Senior Debt Facility.  The Waiver, among other things, (i) granted MDW Pan LLP a temporary waiver until April 20, 2015 of certain covenants set forth in the Senior Credit Agreement which requires that MDW Pan LLP not, directly or indirectly, fail the Cost to Complete Test (as defined in the Senior Credit Agreement) or the Time to Complete Test for more than thirty (30) consecutive days, (ii) allow the financial statements delivered by MDW Pan LLP and Midway Gold Corp. for the fiscal year 2014 to include  “going concern” disclosure and (iii) permit the discretionary diesel hedging currently in effect by MDW Pan LLP to exceed 75% but not exceed 90% of projected diesel consumption in any month.  As consideration for the Waiver, MDW Pan LLP agreed to pay, or cause to be paid to CBA a non-refundable waiver fee equal to $0.2 million (the “Waiver Fee”), due and payable on June 30, 2015.  In addition, MDW Pan LLP agreed to release and forever discharge the Secured Parties (as defined in the Senior Credit Agreement) from any and all claims, counterclaims, demands, damages, debts, suits, liabilities, actions and causes of action of any nature that MDW Pan LLP or any other Loan Party (as defined in the Senior Credit Agreement) may have against the Secured Parties arising under or in connection with the Loan Documents (as defined in the Senior Credit Agreement).  The Waiver did not amend the covenants, tests or obligations related to the Senior Debt Facility or our ongoing compliance with its terms, which affect our ability to draw the remaining amounts under the Senior Debt Facility and maintain the Senior Debt Facility in good standing.  Although we have received the Waiver of certain covenants set forth in the Senior Credit Agreement from the Lender, the Waiver was only effective until April 20, 2015.  Accordingly, we are currently not in compliance with the Senior Credit Agreement and we have until May 20, 2015 before our non-compliance becomes an event of default under the Senior Debt Facility.

 

Q1 Preferred Series A Dividend Declared and Paid

 

On March 26, 2015, the Board of Directors declared a dividend payment to the holders of Series A Preferred Shares with a record date of March 30, 2015, totaling $1.4 million, which was paid on April 1, 2015 in common shares, through the issuance of 3.7 million common shares to the holders of the Series A Preferred Shares, and in cash, through the payment of applicable withholding taxes.

 

Close of Subordinated Debt Facility

 

On April 17, 2015 (the “Closing Date”), we entered into a subordinated credit agreement (the “Subordinated Credit Agreement”) with Hale Capital Partners, L.P. (“HCP”), as administrative agent and collateral agent, and HCP-MID, LLC and INV-MID, LLC, as lenders, in the aggregate amount of $10.5 million (“Subordinated Debt Facility”). On the Closing Date, we received an initial draw of $3.85 million (the “Initial Draw”) from the Subordinated Debt Facility.  We paid $0.1 million of the $0.2 million origination fee to the lenders and reimbursed the lenders for $0.15 million in legal fees and expenses from the Initial Draw.  The Subordinated Debt Facility matures on September 30, 2017 (the “Maturity Date”), bears interest at a rate of 13.5% per annum and is subject to a 5% per annum commitment fee on the undrawn commitment through September 30, 2015.  Payment of the Subordinated Debt Facility is due in full on the earlier of the Maturity Date or the discharge date as defined within the Credit Agreement.  The Subordinated Debt Facility is secured by subordinated security interests and guarantees by the Company, subordinated to the senior security interest of the lender of the Debt Facility.

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HCP-MID, LLC and INV-MID, LLC together hold 25,405,405 of our Series A Preferred Shares.  HCP is the sole member of HCP-MID, LLC.  Hale Fund Partners, LLC, (“HFP”) is the general partner of HCP.  Hale Capital Management, LP, (“HCM”) is the manager of HCP.  Hale Fund Management, LLC, (“HFM”), is the general partner of HCM and exercises voting and investment power over the Series A Preferred Shares held by HCP-MID, LLC.  Mr. Martin Hale, a member of our board of directors, is the (i) CEO of HCP, (ii) the sole owner and managing member of HFP and (iii) the sole owner and CEO of HFM. 

 

All future draws are subject to conditions, affirmations and negative covenants as described in the Subordinated Credit Agreement.  There can be no assurance that we will satisfy the conditions to make future draws under the Subordinated Debt Facility.

 

The foregoing description of the transactions contemplated by the Credit Agreement is qualified in its entirety by the description contained in our Current Report on Form 8-K which was filed on April 21, 2015 and incorporated herein by reference.

 

Updated Mineral Resource Estimate – Pan Project

 

On May 11, 2015, we announced an updated mineral resource estimate for the Pan project. The updated mineral resource for the Pan Project was estimated by an independent engineer to be 35.9 million tonnes grading an average of 0.44 g/t Au classified as measured and indicated mineral resources with an additional 13.9 million tonnes grading an average of 0.31 g/t Au classified as inferred mineral resources.  All of the estimated resources are based on a 0.14 g/t cut-off grade.   

 

Property Highlights for the First Quarter of 2015:

 

 

 

 

Activities on our properties in the first quarter ended March  31, 2015, and up to the date of this Quarterly Report on Form 10-Q, are described in further detail below.

 

Executive Summary 

 

We hired an independent engineer to update the geologic model and mineral resource estimate for the Pan Mine at a current date, due in part to mine performance being lower than expected.  The updated mineral resource estimate was received in May 2015 and will be used to update the mine plan and mineral reserve estimate for the Pan Mine.  The updated mine plan is expected to be completed in late-June 2015 and will be the basis for negotiations with CBA to amend the Senior Debt Facility.  There is no assurance that we will be successful in our efforts to amend the Senior Debt Facility or avoid an event of default.  There is also no assurance that we will be able to raise any capital required in connection with the Senior Debt Facility or any amendment thereto, or raise the capital required for the crushing and agglomeration circuit, leach pad expansion or our other working capital requirements.  If an event of default occurs, CBA could elect to declare all principal amounts outstanding, together with accrued interest, immediately due and payable and seek to enforce their security interest over the Pan Project and other assets, which would negatively impact our operations.

 

The May 2015 updated mineral resource estimate for the Pan Mine assumes agglomeration of South Pan ore, which will require acceleration of capital spending for a crusher in 2015 that was initially scheduled for the North Pan deposit in 2016.  The crushing and agglomeration circuit would be designed to achieve planned recoveries from South Pan ore as permeability characteristics are improved with agglomeration.  The acceleration of capital spending for the crusher would also provide for operational flexibility to mine the North and South Pan pits concurrently.  Blending of material from these two pits is expected to provide another means of improving material permeability as the clay content of North Pan is expected to be lower than what is being experienced at South Pan. 

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In order to address some of our immediate working capital and funding needs, on April 17, 2015, we entered into the Subordinated Credit Agreement with Hale Capital Partners, L.P., HCP-MID, LLC, and INV-MID, LLC for the purpose of establishing a Subordinated Debt Facility in the aggregate amount of $10.5 million, of which we have drawn $3.85 million to date.  Although we believe the Subordinated Debt Facility is an important first step in addressing our immediate working capital and funding needs, our ability to draw additional amounts under the Subordinated Debt Facility is subject to certain conditions precedent as defined in the Subordinated Credit Agreement.

 

The estimated cost to complete construction of the Pan Mine is $86.2 million, excluding crusher, agglomeration and leach pad expansion capital costs, with $78.6 million spent as of the end of March.  As of the date of this quarterly report we have drawn down $47.5 million of the $53.0 million available to us under the Senior Debt Facility and approximately $3.8 million of the $10.5 million available to us under the Subordinated Debt Facility.  We have not satisfied and do not anticipate that we will satisfy the conditions required to draw the remaining $5.5 million available balance under the Senior Debt Facility.  Our ability to continue to draw amounts under the Subordinated Debt Facility is subject to our ability to satisfy various conditions as defined under the Subordinated Debt Facility.  We will require additional financing, in addition to the undrawn amounts under the Subordinated Debt Facility, to fund construction of the crushing and agglomeration circuit, leach pad expansion and for working capital purposes.  In addition, the Company does not have sufficient funds to comply with the terms and conditions of the Senior Debt Facility, which includes funding of various reserve accounts and making scheduled principal and interest payments.  The amount and timing of additional funding for reserve accounts, principal and interest payments and to satisfy other terms and conditions of the Senior Debt Facility will result from negotiations with CBA to amend the Senior Debt Facility.  There is no assurance that we will be able to raise the financing required to execute our business plan or continue as a going concern. 

 

We completed our first gold pour on March 26, 2015 at the Pan Mine and have continued to pour gold on a weekly basis.  Early sampling of ore grades have generally been below modeled grades.  In response to the early sampling grade variances, we engaged an independent engineering firm to review modeling, sampling and assaying practices to gain an understanding of tonnage and grade variances to date.  On May 11, 2015 we released an updated mineral resource estimate for the Pan project.  The updated mineral resource estimate will be the basis for updating the Pan Mine plan and mineral reserve estimate, which are expected to be completed in late-June 2015. 

 

We entered into the Waiver with CBA to waive certain provision of the Senior Credit Agreement until April 20, 2015.  As of April 20, 2015, we were not in compliance and have until May 20, 2015 to cure this event of non-compliance before it becomes an event of default.  Discussions are underway with CBA to extend the Waiver, and include additional waivers, until June 20, 2015.  We cannot provide any assurance that we will be successful in our efforts to extend the Waiver. 

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

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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 18 miles southeast of Eureka, Nevada, and 58 miles west of Ely, Nevada.  Access is via a seven mile gravel road running south-southeast from US Highway 50, at a point about 17 miles southeast of Eureka, Nevada. Eureka has a population of about 1,400.  Water is available from wells on the property.  Construction of power lines to the property were completed in early May 2015.  Diesel generators are currently being utilized for power at the mine.  Gold production commenced on March 26, 2015.

 

Mining and Production

 

The Pan gold deposit contains near-surface mineralization that is being extracted using open pit mining methods.  Ore is currently being processed by conventional heap leaching methods.  To date, ore from the South Pan pit has been processed run-of-mine (“ROM”), while ore from the North Pan pit will be crushed before being placed on the leach pad.  The updated mineral resource estimate for the Pan project assumes that South Pan ore will require crushing and agglomeration to improve permeability.  Gold bearing solutions are treated in an adsorption/desorption recovery (“ADR”) plant.

 

Mining operations have performed above expectations and Ledcor, our mining contractor, has continued to provide support to the project.  We engaged Ledcor during 2014 to perform contract mining services at our Pan Mine site for an approximate five year term.  This was a change from owner mining, which was the elected method as defined within the 2011 Feasibility Study.  The construction of a crushing and agglomeration circuit, and the leach pad expansion planned for 2015 may result in a reduction or temporary suspension of mining activities in 2015 while these activities are underway.

 

On January 1, 2015, our second water production well had a mechanical malfunction and was subsequently abandoned after attempts to repair the well were unsuccessful.  The cost of the well was written off during the first quarter of 2015.  A replacement well is complete, and was primarily funded by $0.8 million of insurance proceeds received during the quarter.  Construction of the 69kV power line to the Pan project was completed in early May 2015.

 

Although grades from samples of ore mined during 2015 have shown improvement from 2014 mined grades as we mine deeper into the deposit, we engaged an independent engineering firm to review modeling, sampling and assaying practices to gain an informed understanding of tonnage and grade variances to date.  This independent review resulted in an updated mineral resource estimate for the Pan project in May 2015 as presented below in Table 1.

 

During the first three months of 2015 we stacked 1.9 million tons of ore and mined 3.2 million tons of waste.  Approximately 23,304 contained ounces were placed on the leach pad during the first three months of 2015.  Mining operations exceeded planned production levels through the mining of approximately 57,000 tons per day during the first three months of 2015. 

 

Production commenced on March 26, 2015 with the commissioning of the ADR plant and a 100 ounce gold pour with an additional 412 ounces poured at the end of March.  The 512 gold ounces produced during March were subsequently sold in April and represent finished goods inventory as of March 31, 2015.  Approximately 2,614 ounces remained in-process and are reflected as in-circuit inventory as of March 31, 2015.  Production has continued with approximately 3,400 ounces of gold produced during the month of April.  Since commencing leaching operations, we have produced approximately 4,300 ounces of gold, which is below expected production due to operational start-up issues, ore grades generally being below modeled grades, a longer ramp up to steady state operations and lower solution permeability rates due to higher than anticipated clay content in ore mined to date.

 

After more than 40 days of leaching at the Pan Mine, gold production is expanding but is not yet meeting expected production levels.  Gold production is controlled, in part, by Adsorption/Desorption/Recovery (ADR) plant efficiency and heap leach solution application rates.  While ADR plant efficiencies continue to ramp up to design, the current primary constraint on gold production is lower than expected heap leach solution application rates.  Solution application rates are being limited by the run-of-mine (ROM) ore permeability characteristics.  While improved since initial leaching through programs of blasting, ore blending and material stacking, ROM ore permeability characteristics have limited the solution application rate to about one half of the designed levels.  If application rates remain constrained, gold production will continue to be delayed. 

 

To counteract this production shortfall we are amending blasting practices, material blending, pad loading and solution application practices.  We will continue to evaluate all options to enhance the timeliness of gold recovery.  The updated May 2015 mineral resources estimate assumes crushing and agglomerating of South Pan ore to improve permeability.

 

During the three months ended March 31, 2015, we capitalized into property, plant, equipment and development, $11.4 million of Pan expenditures (excluding asset retirement obligations), primarily for the construction of the project.  We also placed $62.4 million of Pan expenditures into service from construction in progress.

 

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Updated Pan Mineral Resource Estimate – May 2015

 

Table 1.  Mineral Resource Statement for the Pan Mine, White Pine County, Nevada, Gustavson Associates, LLC, May 1, 2015(1)

 

 

Note: Open pit optimization was used to determine potentially mineable tonnage. Measured, indicated and inferred mineral classification was determined according to CIM Standards. Mineral resources, which are not mineral reserves, do not have demonstrated economic viability.

(1)The Mineral Resource Estimate was prepared by Gustavson. The 2015 Measured, Indicated and Inferred resource was constrained within a $1,500 Lerchs-Grossman Pit shell. The base case estimate applies a cutoff grade of 0.14 g/t is based on the current operating costs, the 2011 Feasibility Study recoveries, and a $1,200 gold price. A complete description of the modeling method, environmental and other project risks will be disclosed in the full technical report to be filed on SEDAR within 45 days. Gustavson completed the mineral resource estimate, with Zachary Black acting as the Qualified Person.

 

The 2015 mineral resource estimate includes the addition of about 44,000 feet of reverse circulation (RC) drilling and 5 additional diamond drilled core holes in comparison to the 2011 mineral resource estimate. In addition, recent operating experience has improved our understanding of the controls on mineralization. Both the new data and the updated geologic interpretation have been considered in the estimation and classification of mineral resources.  Recent operating experience has also improved our understanding of controls of mineralization in the deposit and has enhanced the updated mineral resource model and methods used in the mine’s ore control system. This data has been utilized in the estimation and classification of mineral resources.

 

The “reasonable prospects for economic extraction” requirement referred to in NI 43-101 was tested by designing a series of conceptual open pit shells using Datamine NPVS software. After review of several scenarios considering different metal prices, Gustavson applied a long-term gold price of $1,500/oz. This price considers the 4-year trailing average gold price of $1,462/oz and a review of recently published resource estimates based on $1,500/oz pit shells.

 

The economic parameters used for this analysis are based upon current operating costs at the Pan Mine scaled to reflect designed production rates, expected process operating costs to include agglomeration for material from South Pan as projected in the 2011 Feasibility Study and upon estimated gold recoveries from metallurgical tests completed to date including agglomeration. Table 2 summarizes the cost and recovery parameters used in the analysis.

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Table 2. Economic Parameters Used for Open Pit Analysis

 

 

 

Note: The $2.00 per ton mining cost based on the existing mining contract compares to the $1.00 per ton self-mining cost used in the feasibility study.

 

Comparison between 2011 and 2015 Resource Estimation:

 

This comparison has excluded the 4,300 ounces of gold produced to date and the approximate 36,000 contained ounces of gold currently under leach at the Pan Mine. A reduction in the Measured and Indicated tonnage and grade has contributed to the overall reduction in reported resource ounces. We anticipate that Inferred ounces may move into the Measured and Indicated categories with additional drilling. Tables 3 and 4 provide a comparison between the 2011 Mineral Resource Estimate and the 2015 Updated Resource Estimate at a 0.14 g/t cutoff and constrained within a single open pit shell at $1,500/oz gold.

 

Table 3. 2015 Pan Resource Estimate with Comparison to 2011(1)

 

 

Note: Calculations based on this table may differ due to the effect of rounding.

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Table 4. Comparison Between 2011 and 2015 Measured and Indicated Resource Estimates (0.14 g/t cutoff)

 

 

The updated Mineral Resource is based on additional RC drilling completed in 2015, as part of an internal investigation into the variance between the production model and the 2011 Feasibility Study.  RC drilling, closely spaced blast hole assays, and in pit geologic mapping indicated that the mineralization was less continuous along the trend than previously interpreted from resource drilling. Additional changes were also required in the treatment of some of the historical analytical information to ensure that the mineralized boundaries were properly delineated.  This resulted in an update to the modeling parameters from prior estimates.

 

We anticipate the development of a mine plan and an updated statement of reserves as part of completing a technical report in accordance with National Instrument 43-101, Standards of Disclosure for Mineral Projects (“NI 43-101”) to be published as required by the Canadian securities regulatory authorities.  This report will be filed on SEDAR within 45 days of this release. Production forecasts and cost estimates will be provided once all alternatives are evaluated. We expect the NI 43-101 technical report will reflect a reduction to our previously reported mineral reserve estimate, which will effect life-of-mine gold production and operations at the Pan mine.  We believe that there is a higher risk of an impairment charge to reduce the carrying value of our capitalized mineral property, plant, equipment and development costs for the Pan Mine, upon receipt of the mineral reserve estimate and its incorporation into our impairment accounting model.

 

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 45 miles from Ely, Nevada.  Water for exploration purposes is available from an existing well 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 anticipated 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 independent engineer, Global Resource Engineering, reviewed all drilling results from 2012 and 2013 to provide a new resource update originally dated May 29, 2014 with an amended report date of January 8, 2015, entitled “Amended NI 43-101 Technical Report Updated Mineral Resource Estimate for the Gold Rock Project, White Pine County, Nevada” (the “Amended Gold Rock Report”). The Amended Gold Rock Report shows a 65% increase in measured, indicated resources and a 62% increase in inferred resources from the “NI 43-101 Technical Report on Resources, Gold Rock Project, White Pine County, Nevada” prepared by Gustavson Associates LLC and dated April 10, 2012 (which report was updated on November 29, 2012 to clarify language regarding capping, density, and cut-off values).  The Amended Gold Rock Report was prepared and filed in order to address inconsistencies between the previously filed report and the Company’s news release dated May 28, 2014.

 

All baseline studies were completed and a Plan of Operations (“PoO”) was developed and submitted to the BLM and has been declared complete.  The Draft Environmental Impact Statement (“DEIS”) was made available for public comment as published by the BLM in the federal register on February 13, 2015.  The DEIS provides an analysis of environmental, social and economic impacts of the proposed mine plan and possible alternatives.  The public comment period ended on March 30, 2015.  Responses to comments received during the public comment period are now being prepared, along with the Final EIS.

 

During the three months ended March  31, 2015 and 2014 we incurred $0.2 million and $0.3 million respectively, of exploration expenditures at the Gold Rock project.  The majority of these expenses for both periods are related to the ongoing permitting process of the project, as well as related salaries and labor costs.

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Spring Valley Project, Pershing County, Nevada

 

The Spring Valley property is located in the Spring Valley Mining District, Pershing County, Nevada, approximately 20 miles northeast of the town of Lovelock.  The property is accessed from Nevada State Highway 50, which extends eastward from US Interstate 80 and is paved to the Rochester turn-off; thereafter it is a dirt road.  Water for exploration purposes is available from water wells drilled on the property under temporary grant of water rights.  A new power line will be required to supply power to the property.  There is an existing 345 kv power line, but additional costs would be required to relocate the line.

 

On February 24, 2014, we announced that formation of the joint venture for the Spring Valley project with Barrick was completed.  Under the formation, Barrick holds a 70% interest in the joint venture, while we hold the remaining 30% interest.  We have elected to allow Barrick to earn an additional 5% (75% total) by carrying us to production and arranging financing for our share of development and operating expenses. The cost that Barrick incurs from carrying us to commercial production will be recouped by Barrick, plus interest, once production has been established. 

 

Tonopah Project, Nye County, Nevada

 

The Tonopah property is located in Nye County, Nevada, approximately 15 miles northeast of the town of Tonopah, 210 miles northwest of Las Vegas and 236 miles southeast of Reno, Nevada.  The property is on the northeastern flank of the San Antonio Mountains and in the Ralston Valley.  Water for exploration purposes is available from water wells for a fee from municipal sources.  Power is accessible from existing power lines crossing the property; however, capacity is unknown and may be limited.

 

There was no new exploration activity on the property during the three months ended March  31, 2015.  

 

Golden Eagle Project, Ferry County, Washington

 

The Golden Eagle property is located on private land in the Eureka (Republic) mining district in Ferry County, Washington.  The property is two miles northwest of the town of Republic, Washington and is accessed by the Knob Hill county road.

 

There was no new exploration activity on the project during the three months ended March 31, 2015.

 

Pinyon Project, White Pine County, Nevada

 

Pinyon is a disseminated gold target near the Gold Rock and Pan projects.  A portion of the claims were acquired in 2012 as part of an agreement with Aurion Resources allowing us to earn-in to a joint venture over a five year period.  The Pinyon property is located in White Pine County, Nevada approximately 20 miles southeast of Eureka, Nevada.  It is 10 miles north of the Gold Rock project and 6 miles east of the Pan Project.  Access is by five miles of dirt road running south-southeast from US Highway 50, at a point about 17 miles southeast of Eureka, Nevada.  Water is available from wells that service the Pan and Gold Rock projects.  Power is expected to be available from the Pan or Gold Rock projects. 

 

There was no new exploration activity on the project during the three March  31, 2015.

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Financial Information

 

 

Three Months Ended March 31, 2015

 

Mine Operating Costs incurred during the three months ended March 31, 2015 of $2.3 million were primarily attributable to start-up processing costs prior to the commencement of gold production from our Pan Mine on March 26th.

 

Exploration expense for the three months ended March  31, 2015  was $0.3 million compared to $0.6 million for the comparable period of 2014.  A reduction in exploration spending on the Gold Rock and Spring Valley properties has driven the change.  We continue to advance the permitting process of the Gold Rock project, but have reduced all other exploration spending as we are currently focused on production from the Pan Mine.  The Spring Valley property is subject to joint venture with Barrick, who is funding all exploration and development activities and carrying us through to a production decision. 

 

Office and Administration expense for the three months ended March  31, 2015 was $1.0 million compared to $0.7 million during the comparable period of 2014.  We have realized increases in overhead costs including insurance, information systems and rent, in both our Englewood and Ely offices, due to our continued growth.

 

Salaries and Benefits expense for the three months ended March  31, 2015 and 2014 was $1.5 million and $1.3 million, respectively.  The $0.2 million increase is primarily attributable to increased employee levels and associated benefit costs due to our continued growth of employees at the Pan Mine operation.

 

Other Expense (Income) for the three months ended March 31, 2015 was a net expense of $0.8 million.    During the first three months of 2015, we recorded a $0.1 million loss on our diesel fuel hedge contract and a $0.1 million loss on our interest rate swap.  In addition, we incurred $0.4 million of interest expense and $0.4 million in compliance fees on our Senior Debt Facility with Commonwealth Bank of Australia.  We recognized a $0.3 million gain on the receipt of insurance proceeds from rain damage at the Pan Mine during 2014 which offsets the losses on derivative contracts and interest expense during the quarter.

 

Income Tax Expense for the three months ended March  31, 2015 was $0.2 million compared to $0.4 million during the comparable period of 2014.  Both amounts are income tax expense relating to the Canadian corporate Part VI.1 dividend tax resulting from our Series A Preferred Share dividends.

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Liquidity and Capital Resources

 

Our development and construction activities at our Pan project have required substantial capital expenditures.  We have made and expect to continue to make substantial capital expenditures in our business and for the development of our other projects.  To date, funding to explore and develop our gold properties and to operate the Company has principally been from equity and debt financings, and from the sale of gold since production began in late March 2015.  Gold production to date has been less than forecasted principally due to low solution permeability.  This has resulted in lower than expected cash flow from operations.  Ore from the South Pan pit will require crushing and agglomeration to improve permeability, which will require an additional capital investment in the project and may result in a reduction or temporary suspension of mining activities.  Our initial capital cost estimates indicate approximately $5 million to $10 million will be required for the crushing circuit, $5 million to $8  million for the agglomeration circuit and approximately $10 to $11 million for expansion of the leach pad in 2015.   We plan to pursue leasing of the equipment components to the extent that option is available.  The amount of additional required funding will depend, in part, on further evaluation of these expected capital outlays, working capital requirements and the results from the updated mine plan that is expected to be finalized in late-June 2015.  The updated mine plan will be the basis for negotiations with CBA to amend the Senior Debt Facility.  There is no assurance that we will be successful in our efforts to amend the Senior Debt Facility, or that we will be able to raise any funding required in connection with that amendment or for any of our other capital or working capital requirements, or avoid an event of default.  If an event of default occurs, CBA could elect to declare all principal amounts outstanding, together with accrued interest, immediately due and payable and seek to enforce their security interest over the Pan Project and other assets.

 

We expect to continue to raise capital through additional equity financings, debt financings and/or the sale of assets until such time as we are able to generate sufficient cash flow from our Pan project to fund all of our operating, capital and debt service requirements.  Although we may generate sufficient cash flow from operations in the future, we may continue to require additional capital for development, exploration and other general corporate purposes.  There is no assurance that we will able to raise the required capital on favorable terms, if at all.

 

As of March 31, 2015, we had a working capital deficit of $29.9 million, consisting of current assets of $32.5 million and current liabilities of $62.4 million.  This represents a decrease of $37.9 million from the working capital balance of $8.0 million as of December 31, 2014.  Our current assets consist primarily of cash of $2.7 million, some of which is deposited in short term, interest bearing accounts and inventories of $28.5 million.  The increase in current liabilities principally results from an increase in accounts payable and accrued liabilities from $8.8 million at December 31, 2014 to $16.4 million at March 31, 2015, and an increase in the current portion of long-term debt from $9.2 million at December 31, 2014 to $47.5 million at March 31, 2015.  The working capital deficit resulted from the reclassification of $30.5 million of scheduled debt principal payments, net of unamortized deferred financing costs that are due after March 31, 2016 to the current portion of long term debt.  If an event of non-compliance with debt covenants has occurred as of the balance sheet date and it is not probable that the event of non-compliance can be cured within the subsequent 12 months without an amendment to the current agreement, long-term debt balances are required to be classified as a current liability as of the balance sheet date.

 

Our scheduled principal repayments for the next 12 months on the Senior Credit Facility total $13.3 million and are due as follows:

 

 

 

The Senior Credit Facility also provides for a cash sweep whereby all or a portion of excess cash flows from the Pan project, as defined, are applied to reduce the outstanding balance on the Senior Debt Facility.  We have purchased surety contracts for reclamation and other bonds totaling approximately $19 million, and have made deposits totaling $3.7 million to an escrow account as security.  The holder of the surety contracts may require, at its sole discretion, that the Company make additional deposits to the escrow up to the bonded amounts.  In the event the holder of the surety contracts were to require additional deposits to the escrow account, there is no assurance that we would be able to obtain the funding required to make those deposits, or that we would avoid an event of default under the surety contracts.

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We incurred an operating loss for the three month period ended March 31, 2015 of $6.0 million and since our incorporation on May 14, 1996.   Our losses have resulted in an accumulated deficit of $105.3 million, and further losses are anticipated in the development of our business.  Our cash on hand as of March 31, 2015 was $2.7 million.  We have also established an aggregate $53.0 million senior secured credit facility consisting of a $43.0 million project financing facility and a $10.0 million cost overrun facility to fund development and construction of the Pan Project.  The full amount of the $43.0 million project finance facility and $4.5 million of the cost overrun facility have been drawn to date.  We have not satisfied and do not anticipate that we will satisfy the conditions required to draw the remaining $5.5 million under the cost overrun facility. During the first quarter of 2015, principally as a result of Pan project delays and expected production being significantly lower than initially forecast, we determined that we would not have sufficient funds to satisfy the cost to complete and time to complete tests, fund various reserve accounts on the required dates and comply with other terms and conditions in the Senior Credit Agreement.  On March 13, 2015, we entered into a Waiver to the Senior Credit Agreement with CBA providing us until April 20, 2015 to cure such non-compliance.  We are currently not in compliance with the Senior Credit Agreement and we have until May 20, 2015 before our non-compliance becomes an event of default under the Senior Debt Facility.  Discussions are underway with CBA to extend the Waiver, and receive additional waivers, until June 20 to provide us with more time to develop the updated mine plan and negotiate an amendment to the Senior Credit Agreement.  We cannot provide any assurance that we will receive an extension of the Waiver.

 

In order to address some of our immediate working capital and funding needs for our Pan project, on April 17, 2015, we entered into the Subordinated Credit Agreement for the purpose of establishing the Subordinated Debt Facility, in the aggregate amount of $10.5 million.  On April 17, 2015, we received an initial draw of $3.85 million (the “Initial Draw”) from the Subordinated Debt Facility.  We paid $0.1 million of the $0.2 million origination fee to the lenders and reimbursed the lenders for $0.15 million in legal fees and expenses from the Initial Draw.  The Subordinated Debt Facility matures on September 30, 2017 (the “Maturity Date”), bears interest at a rate of 13.5% per annum and is subject to a 5% per annum commitment fee on the undrawn commitment through September 30, 2015.  Payment of the Subordinated Debt Facility is due in full on the earlier of the Maturity Date or the discharge date as defined within the Subordinated Credit Agreement. In the event that any amounts drawn under the Subordinated Debt Facility are repaid on or before September 30, 2015, the amounts repaid are subject to a make-whole payment of 3%.  Any amounts repaid after September 30, 2015 and prior to the maturity date are subject to make-whole payment of 3%, plus the present value of interest that would have accrued had the amounts repaid been paid on the maturity date.  The Subordinated Debt Facility contains provisions whereby mandatory prepayments are required in certain circumstances. The Subordinated Debt Facility is secured by subordinated security interests and guarantees by the Company, subordinated to the senior security interest of the lender of the Senior Debt Facility.  The proceeds will be used to pay for costs of the Pan Project and for general corporate purposes.  There can be no assurance that we will satisfy the conditions to make future draws under the Subordinated Debt Facility.  Proceeds from the Subordinated Debt Facility are not adequate to place us into compliance with the Senior Debt Facility as described above.

 

Our auditors have noted material uncertainties that cast substantial doubt about our ability to continue as a going concern in their audit report on our financial statements as at and for the year ended December 31, 2014.  As of May 4, 2015, we had cash and cash equivalents of approximately $2.9 million.  We anticipate the updated mine plan will provide us with a path towards resolving the operational challenges that we have encountered to date, resolving our non-compliance with the Senior Credit Facility and our going concern qualification.

 

We hired an independent engineer to update the geologic model and mineral resource estimate for the Pan Project at a current date, due in part to mine performance being lower than expected.  The updated mineral resource estimate was completed in early May 2015 and will be used to update the mine plan and mineral reserve estimate for the Pan Mine, which is to be received during late-June.  Upon receipt of the update mineral reserve estimate and its incorporation into our impairment accounting model,  we believe there is a higher risk that there will be an impairment charge to reduce the carrying value of our capitalized mineral property, plant, equipment and development costs for the Pan Mine. Until such time as we receive the updated mineral reserve estimate, it is not possible to reasonably estimate an impairment charge, if any that might occur.

 

Recoverability of amounts capitalized for our other mineral properties are dependent upon our ability to raise funds or generate profits to enable funds to be available to complete exploration on the mineral properties, identify economically recoverable reserves and develop the mineral properties into profitable projects, or the receipt of adequate proceeds from the sale of such projects.  The Spring Valley project is subject to a joint venture agreement with Barrick Gold Exploration Inc., who is responsible for carrying us to production by funding and arranging financing for our share of cost of operations and mine exploration, development and construction expenses.  We are responsible for funding costs incurred subsequent to commercial production.  Barrick is also responsible for arranging financing for our share of the cost of operations and mine exploration, development and construction expenses.

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Sources and Uses of Cash

 

 

Net cash used in operating activities was $11.6 million during the three months ended March 31, 2015 compared to $5.4 million during the three months ended March 31, 2014, an increase of $6.2 million.  This increase is largely related to the capitalization of mining, processing and depreciation expenses into production inventories as well as the timing and amount of payments for operating and exploration expenses out of accounts payable and accrued expenses

 

Net cash used in investing activities for the three months ended March 31, 2015 was $11.1 million compared to $3.4 million during the comparable period of 2014.  We are capitalizing Pan construction, permitting, engineering and other development activities.  Cash used in investing activities during the three months ended March 31, 2015 was $12.3 million related to capital expenditures at our Pan Mine and $0.3 million for mineral property costs.  Further, we received the final insurance proceeds balance of $0.7 relating to the damage the Pan mine site suffered from severe rainstorm floods during 2014 as well as $0.8 million of insurance proceeds relating to the failure of one of our water production wells at the Pan Mine site during January 2015.

 

Net cash provided by financing activities of $10.3 million consisted of cash proceeds from our January 2015 Senior Debt Facility loan draw of $10.6 million.  These cash proceeds were offset by preferred share dividend withholding tax payments of $0.2 million and share issuance costs and deferred financing costs paid of $0.1 million.

 

Contractual Obligations

 

A summary of our contractual obligations as of and subsequent to March  31, 2015 is provided in the following table:

 

 

 

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Off-Balance Sheet Arrangements

 

There are no off balance sheet arrangements.

 

Inflation

 

We do not believe that inflation has had a significant impact on our consolidated results of operations or financial condition.

 

Environmental Compliance

 

Our current and future exploration and development activities, as well as our future mining and processing operations, are subject to various federal, state and local laws and regulations in the countries in which we conduct our activities. These laws and regulations govern the protection of the environment, prospecting, development, production, taxes, labor standards, occupational health, mine safety, toxic substances and other matters. We expect to be able to comply with those laws and do not believe that compliance will have a material adverse effect on our competitive position. We intend to obtain all licenses and permits required by all applicable regulatory agencies in connection with our mining operations and exploration activities. We intend to maintain standards of environmental compliance consistent with regulatory requirements.

 

We have an obligation to reclaim our properties after the surface has been disturbed by exploration or development at the site.  As of March  31, 2015 we have accrued $6.8 million as a long-term liability, compared to $3.6 million as a long term liability, at December 31, 2014, related to reclamation and other closure requirements at our properties.  The significant increase during the three months ended March 31, 2015 is due to the commencement of operations at our Pan mine site.  We have put surety bonding into place in respect of this obligation.  The holder of the surety contract may require, at its sole discretion that we make additional deposits to the escrow account of up to the $15.4 million reclamation bond amount.  We have accrued as a liability the present value of our best estimate of the liabilities as of March 31, 2015; however, it is possible that our obligations may change in the near or long term depending on a number of factors.

 

Critical Accounting Estimates

 

Critical accounting estimates used in the preparation of the financial statements include our estimate of recoverable value on our property, equipment and mine development, the determination of site reclamation and rehabilitation obligations, the value assigned to stock-based compensation expense as well as the determination of the functional currency of the Company. These estimates involve considerable judgment and are, or could be, affected by significant factors that are out of our control.

 

Inventories

 

Inventories include ore on leach pads, finished goods and materials and supplies.  Ore on leach pad is carried at the lower of cost or net realizable value.  Cost includes mining costs (ore and waste) including depletion and depreciation.  Net realizable value is computed using expected metal prices reduced for any further estimated processing, refining, and selling costs.

 

Materials and supplies are valued at the lower of weighted average cost or net realizable value.  Cost includes applicable taxes and freight.

 

Impairment of Long-Lived Assets

 

The Company reviews and evaluates its long-lived assets for impairment whenever events or changes in circumstances that would indicate that the related carrying amounts may not be recoverable.  Mineral properties in the exploration stage are monitored for impairment based on factors such as the Company's continued right to explore the area, exploration results, technical reports, the Company's continued plans to fund exploration and development programs on the property, future asset utilization, business climate and mineral prices.

 

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If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group, including value beyond proven and probable reserves, to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

 

Upon receipt of the update mineral reserve estimate and its incorporation into our impairment accounting model,  we believe there is a higher risk that there will be an impairment charge to reduce the carrying value of its capitalized mineral property, plant, equipment and development costs for the Pan Mine.  Until such time as we receive the updated mineral reserve estimate, it is not possible to reasonably estimate an impairment charge, if any that might occur.    The updated mine plan and mineral reserve estimate are expected to be completed in late-June.

 

Asset Retirement Obligations

 

The Company records the fair value of the estimated liability for closure and removal costs associated with the retirement and removal of any tangible long-lived assets in the period in which the legal obligation is incurred.  These obligations are initially estimated based on discounted cash flows with the related asset retirement cost capitalized as part of the tangible asset to which it relates.  The asset retirement obligations are subsequently accreted to its full value over time through charges to operating income (loss).  The related capitalized asset retirement cost is depreciated over the asset’s respective useful life.

 

Stock Based Compensation

 

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the cost in net income (loss) over the period during which an employee is required to provide services in exchange for such award with a corresponding credit to additional paid in capital.  Estimates of forfeitures of unvested instruments at the grant date are considered in determining the total compensation to be recognized.  Stock-based payments to non-employees are measured at the fair value of services received or equity instruments issued, whichever is more reliable and are periodically re-measured until counter party performance is complete. 

 

Consideration received on the exercise of stock options is recorded as common stock and the related additional paid-in capital is transferred to common stock.

 

Functional Currency

 

The functional currency of the Company is a factor in determining the method used to translate the Company’s financial statements and significantly affects the reported results; therefore, the determination of the functional currency is a critical accounting policy.  The functional currency is the currency of the primary economic environment in which the entity operates – the currency of the environment in which the entity primarily generates and expends cash.  We evaluate the functional currency of our entities when they are established, and evaluate whether the functional currency has changed based on significant changes in economic indicators.  Such indicators include cash flow, sales price, sales market, expenses, financing, and intra-entity transactions and arrangements.  Based upon such factors, we must use judgment to determine the appropriate functional currency.

 

Derivatives

 

Derivatives or embedded derivatives are measured at fair value unless the contracts meet the definition of normal purchase and normal sale and the Company formally designates the contracts as such.  Changes in the fair value of derivatives and embedded derivatives are recognized in net income (loss).  Contracts designated as normal purchase and normal sale are accounted for as executory contracts.

 

Item 3.                 Quantitative and Qualitative Disclosures about Market Risk.

 

During the period covered by this Quarterly Report on Form 10-Q there has not been any material changes in our market risk from the information disclosed in our Annual Report on Form 10-K filed with the SEC on March 16, 2015.

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Item 4.                 Controls and Procedures.

 

Disclosure Controls and Procedures

 

At the end of the period covered by this Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, an evaluation was carried out under the supervision of and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)). Based on that evaluation the CEO and the CFO have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective in ensuring that: (i) information required to be disclosed by us in reports that we file or submit to the SEC under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for accurate and timely decisions regarding required disclosure. 

 

Changes in Internal Control over Financial Reporting 

 

During the period covered by this Quarterly Report on Form 10-Q, the Company included certain internal controls over financial reporting at our Pan Mine in our assessment of our internal controls over financial reporting taking into consideration the production that was realized at our Pan Mine.  Specifically we implemented new controls related to in-circuit and finished goods inventory. 

 

No other changes were made in our internal controls over financial reporting during the quarter ended March 31, 2015 that have materially affected our internal control over financial reporting, or are reasonably likely to materially affect, our internal control over financial reporting

 

PART II - OTHER INFORMATION

 

Item 1.                 Legal Proceedings.

 

On January 21, 2014, the Confederated Tribes of the Goshute Reservation (the “Goshute” or the “Tribe”) filed an Appeal and Petition for Stay of BLM’s Final Environmental Impact Statement and Record of Decision involving Approval of the Pan Mine Project Plan of Operations and Approval of Issuance of Right-of-Way Grant with the United States Department of Interior Office of Hearings and Appeals, Interior Board of Land Appeals (the “Administrative Proceeding”).  Although the BLM provided notice to the Goshute early in the federal review process for the Draft EIS, the Tribe did not participate in the consultation process with BLM (though two other Tribal governments did) but instead filed comments on the Draft EIS.  BLM responded to the Goshute comments in the Final EIS and the Tribe did not provide further comments on the Final EIS or the Record of Decision.  The Interior Board of Land Appeals was required to grant or deny a petition for stay pending appeal no later than March 7, 2014.  A decision for which a stay is not granted becomes effective immediately after the Appeals Board issues a denial or fails to act on the petition within 45 days.  Accordingly, the petition was deemed denied on March 7, 2014 and the BLM’s decisions are effective.  In response to the Petition, BLM noted that the Goshute “fails to describe with any specificity how the BLM violated any applicable federal statutes” and that the Goshute allegations are “wholly unsupported and insufficient to satisfy” their burden.  On February 14, 2014, our motion to intervene was granted.  The Goshute filed their Statement of Reasons in support of their appeal on February 21, 2014 and the Company filed its answer to Goshute’s Statement of Reasons on March 20, 2014 setting forth in detail why the Goshute appeal should be summarily dismissed and the BLM’s approvals affirmed.  On April 17, 2014, BLM timely filed its Response to Goshute’s Statement of Reasons (“SOR”) explaining why the Goshute failed to meet their burden of establishing any error in BLM’s decision and, therefore, BLM’s decision should be affirmed.

 

After the Goshute’s Petition for Stay was deemed denied because the IBLA did not issue a stay within 45 days of the filing of the Goshute petition, on August 19, 2014, the IBLA documented its reasons for denying the Goshute’s Petition for Stay through a formal written order agreeing with the assessment of both BLM and Midway that while the Tribe asserted irreparable harm, it disclosed “no instances where BLM failed to identify, assess, and mitigate impacts to the environment.”  The IBLA further found, based on preliminary review that the “FEIS thoroughly analyzes the likely environmental impacts” and that the request for stay must fail “given the suite of mitigating strategies identified by BLM and lack of a claim of specific harm by the Tribe.”  The IBLA further found that (i) the Tribe failed to show a likelihood of success on the merits having failed to articulate specific error in the ROD or the FEIS; and, (ii) that the ROD and the FEIS are “well documented and reasonable” with nothing to persuade the IBLA that “either is materially in error” furnishing another basis for denying the stay.  No further briefing is anticipated prior to the IBLA’s determination of the appeal on the merits.

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We are not aware of any material pending or threatened litigation or of any proceedings known to be contemplated by governmental authorities which are, or would be, likely to have a material adverse effect upon us or our operations, taken as a whole.  There are no material proceedings pursuant to which any of our directors, officers or affiliates or any owner of record or beneficial owner of more than 5% of our securities or any associate of any such director, officer or security holder is a party adverse to us or has a material interest adverse to us.

 

Item 1A.              Risk Factors.

 

We are not in compliance with the terms of the Senior Credit Agreement.

 

We are not in compliance with certain provisions under the Senior Credit Agreement.  Although we have received the Waiver of certain covenants set forth in the Senior Credit Agreement from the Lender, the Waiver was only effective until April 20, 2015. Accordingly, we are currently in non-compliance with the Senior Credit Agreement and we cannot guarantee that the Lender will allow us to maintain the Senior Debt Facility in good standing.  We have until May 20, 2015 to cure the event of non-compliance before it becomes an event of default.  We will likely only be able to remedy our non-compliance with the Senior Debt Facility by negotiating an amendment, which is dependent upon the results from the updated mine plan and mineral reserve estimate for the Pan project and is expected to be available in late-June 2015.

 

We cannot assure you that we will be able to continue to draw down amounts under the Subordinated Debt Facility.

 

Our ability to borrow funds under the Subordinated Debt Facility will be subject to conditions precedent, including, but not limited to, maintaining specified financial ratios, providing certifications, funding of any expected cost overruns on the Pan Project, compliance with negative covenants, meeting financial condition covenants and making quarterly principal payments on the Senior Debt Facility beginning in June of 2015. As of April 20, 2015, we were unable to satisfy all covenants, tests and obligations to draw under the Senior Debt Facility or the Subordinated Debt Facility.

 

In the event of a default under the Senior Debt Facility or the Subordinated Debt Facility, there is a significant risk of losing our ability to draw down on the Subordinated Debt Facility and of losing our Pan Project and other assets.

 

Events beyond our control, including changes in general economic and business conditions, lower than expected production at our Pan Project, or material changes in our mineral reserves and resources, may affect our ability to satisfy covenants under our debt facilities, which could result in a default under the Senior Debt Facility or Subordinated Debt Facility. Even if the covenants waived were remedied by May 20, 2015 or extended beyond this date, if further or other events of default under the Senior Debt Facility or Subordinated Debt Facility occurs, we would be unable to draw undrawn amounts under the Subordinated Debt Facility and the lenders could elect to declare all principal amounts outstanding, together with accrued interest, to be immediately due and payable and to enforce their security interest over the Pan Project and other assets, which would negatively impact our operations and your investment. We may be required to explore additional financing alternatives, a sale of assets or other corporate transactions to continue as a going concern.

 

The Senior Debt Facility and Subordinated Debt Facility contain many covenants and restrictions which may negatively impact our operations.

 

The Senior Debt Facility and Subordinated Debt Facility, among other things, limit the our ability to incur additional indebtedness, make investments or loans, transfer assets, or make expenditures relating to property secured under the credit agreements that are inconsistent with the mine plan and operating budget delivered pursuant to the Senior Debt Facility and Subordinated Debt Facility. Compliance with these covenants and restrictions contained in the Senior Debt Facility and Subordinated Debt Facility may negatively impact our operations by prohibiting us from taking actions that would benefit our plan of operations.

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Our development operations at our Pan Project require substantial capital expenditures. The amounts we may be able to draw down under the Subordinated Debt Facility, if any, are insufficient to fund all of the planned development operations at our Pan Project.

 

Our development operations at our Pan Project require substantial capital expenditures. We make and expect to continue to make substantial capital expenditures in our business for the development of our other projects. To the extent we meet all of the conditions precedent to draw down the full amount under the Subordinated Debt Facility, the amounts available to us under the Subordinated Debt Facility, may be insufficient to fund all of the planned development operations at our Pan Project. As of the date of this Form 10-Q we have drawn down approximately $47.5 million of the $53 million available to us under the Senior Debt Facility and approximately $3.8 million of the $10.5 million available to us under the Subordinated Debt Facility.  We do not satisfy the conditions required to draw the remaining $5.5 million available under the Senior Debt Facility, and do not anticipate that we will satisfy those conditions.  The amounts remaining under the Subordinated Debt Facility are insufficient for our planned operations at our Pan Project and we anticipate that we will require additional capital to place the Pan Project into full commercial production. We will need to raise additional capital in the future to satisfy our obligations under the Senior Debt Facility and Subordinated Debt Facility and ongoing capital and working capital requirements.  The ongoing capital requirements include, but are not limited to, the addition of a crusher and agglomeration circuit to process South Pan ores, and additional leach pad construction planned for 2015.

 

The Senior Debt Facility and the Subordinated Debt Facility limit our ability to receive distributions from our Pan Project, if any.

 

Our ability to receive project distributions from the Pan Project, if any, for corporate general and administrative expenses, and other non-Pan Project expenditures is contingent upon satisfying certain conditions precedent and achieving various economic completion tests relating to, but not limited to, mine production, recoveries, sales, costs and sustainability over a three-month period. Economic completion must be achieved by September 30, 2015. There can be no assurance that we will ever achieve economic completion.  To the extent that we are unable to meet these conditions precedent, we will be unable to receive distributions from the Pan Project.

 

Ore grade projections used to establish certain criteria under the Senior Debt Facility and Subordinated Debt Facility may not reflect actual ore grades from the Pan Project.

 

Sampling of ore mined to date at our Pan Project have generally been below the modelled grades which were used to establish certain tests and criteria under the Senior Debt Facility and the Subordinated Debt Facility.  The updated mineral resource estimate for the Pan Project reflects a significant reduction to the previously reported mineral resource estimate, which is expected to have a significant impact on our updated mineral reserve estimate. There are further risks that the estimated recovery rates and grades in the updated resource estimate may not be achieved as modelled or projected, which may have a material effect on our cash flow projections and our ability to satisfy scheduling, tests, covenants and other obligations under our Senior Debt Facility and our Subordinated Debt Facility. We will be required to negotiate amendments to our Senior Debt Facility and Subordinated Debt Facility when the updated mine plan and mineral reserve estimate have been completed.  There is no assurance that we will be able to amend the Senior or the Subordinated Facility.

 

The permeability of solution applied to the leach pad may be adversely impacted by the existence of clays and other materials impacting porosity of the ore on leach pad.

 

Lower than expected permeability of solution applied to ore on leach pad has resulted in lower than expected gold production, principally due to higher than anticipated clay content in ore mined to date.  As a result, we are not achieving our planned production levels which is adversely impacting our cash flows and our ability to fund our capital, operating, debt service and other cash requirements.  Improving permeability of solution will require us to crush and agglomerate the material and may delay or suspend mining operations and will require additional capital.

 

Item 2.                Unregistered Sale of Equity Securities and Use of Proceeds.

 

Subsequent to the period covered by this Quarterly Report on Form 10-Q, on April 1, 2015, we issued 3,678,430 common shares to holders of our Series A Preferred Shares, in lieu of making a cash dividend payment.  The common shares were deemed “restricted securities” as defined in Rule 144(a)(3) of the United States Securities Act of 1933, as amended (the “Act”) and were issued pursuant to exemptions from registration available under Section 4(a)(2) and Section 3(a)(9) of the Act.

Item 3.                 Defaults Upon Senior Securities.

None.

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Item 4.                 Mine Safety Disclosures.

 

We consider health, safety and environmental stewardship to be a core value for our Company and we strive for excellent performance.  We have a mandatory safety and health program including employee training, risk management, workplace inspection, emergency response, accident investigation and program auditing.  We consider this program to be essential at all levels to ensure that employees and the Company conduct themselves in an environment of exemplary health, safety and environmental governance.

 

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Quarterly Report on Form 10-Q.

 

Item 5.                 Other Information. 

 

None.

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Item 6.                 Exhibits.

Documents filed as part of this Quarterly Report on Form 10-Q or incorporated by reference:

 

* filed herewith

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SIGNATURES

Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

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