UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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)  

Securities registered under Section 12(b) of the Exchange Act:  

 

Securities registered under Section 12(g) of the Exchange Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes   ☐   No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes   ☐   No  ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such 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 checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

 

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,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.    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  ☒

 

The aggregate market value of common stock held by non-affiliates as of June 30, 2014,  was U.S.$122.6 million based on the closing price of the common stock of U.S.$0.90 as reported on the NYSE MKT. 

 

As of March 10,  2015, 176,545,337 common shares of Midway Gold Corp. were outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE:

 

Portions of the Registrant’s Definitive Proxy Statement to be filed with the United States Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, for the registrant’s 2015 annual meeting of shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

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ADDITIONAL INFORMATION

 

Descriptions of agreements or other documents contained in this Annual Report on Form 10-K (this "Annual Report") are intended as summaries and are not necessarily complete.  Please refer to the agreements or other documents filed or incorporated herein by reference as exhibits.  Please see the exhibit index at the end of this report for a complete list of those exhibits.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report and the exhibits attached hereto contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements concern our anticipated results and developments in our operations in future periods, planned exploration and development of our properties, plans related to our business and other matters that may occur in the future. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management. These statements include, but are not limited to, comments regarding:

Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates”, “scheduled”, “projects” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors which could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation:

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This list is not exhaustive of the factors that may affect our forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking statements are described further under “Item 1A. Risk Factors” in this Annual Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as required by law.

PRELIMINARY NOTES

Reporting Currency, Financial and Other Information 

Financial information is presented in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S. GAAP”).

 

Information in Part I and II of this Annual Report includes data expressed in various measurement units and contains numerous technical terms used in the gold mining industry. To assist readers in understanding this information, a conversion table and glossary are provided below.

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Exchange Rate Information

The table below sets forth the average rate of exchange for the Canadian dollar for the five most recent calendar years ended December 31.  For purposes of this table, the rate of exchange means the closing exchange rate as reported by the Bank of Canada on its web site at www.bankofcanada.ca.  The table sets forth the number of Canadian dollars required under that formula to buy one United States dollar, rounded to the nearest cent.

 

 

 

Unless otherwise indicated, all amounts in this Annual Report are expressed in Canadian dollars.  The United States dollar is denoted as “U.S.$.”

 

Metric Conversion Table

 

For ease of reference, the following conversion factors are provided:

 

The following abbreviations are used herein:

 

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CAUTIONARY NOTE TO U.S. INVESTORS REGARDING RESOURCE AND RESERVE ESTIMATES

The mineral estimates in this Annual Report 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 the United States Securities and Exchange Commission (“SEC”) Industry Guide 7 under the United States Securities Act of 1933, as amended (the “Securities Act”).  Under SEC Industry Guide 7 standards, a “final” or “bankable” feasibility study is required to report reserves, the three-year historical average price, to the extent possible, is used in any reserve or cash flow analysis to designate reserves and the primary environmental analysis or report must be filed with the appropriate governmental authority.

 

In addition, the terms “mineral resource,” “measured mineral resource,” “indicated mineral resource” and “inferred mineral resource” are defined in and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7 and are normally not permitted to be used in reports and registration statements filed with the SEC.  Investors are cautioned not to assume that all or any part of a mineral deposit 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 securities laws and regulations, 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 Annual Report 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.

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Glossary of Mining Terms

We estimate and report our resources and we will estimate and report our reserves according to the definitions set forth in NI 43-101.  We will modify and reconcile the reserves as appropriate to conform to SEC Industry Guide 7 for reporting in the U.S.  The definitions for each reporting standard are presented below with supplementary explanation and descriptions of the parallels and differences.

 

 

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Additional definitions for terms currently or previously used in the Company’s Annual Reports filed on Form 10-K:

 

 

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PART I

As used in this Annual Report, references to the “Company,” “we,” “our,” or “us” mean Midway Gold Corp., its predecessors and consolidated subsidiaries, or any one or more of them, as the context requires.

Item 1.   Business

History and Organization

Midway Gold Corp. was incorporated under the Company Act (British Columbia) on May 14, 1996, under the name Neary Resources Corporation. On October 8, 1999, we changed our name to Red Emerald Resource Corp. On July 10, 2002, we changed our name to Midway Gold Corp. We became a reporting issuer in the Province of British Columbia upon the issuance of a receipt for a prospectus on May 16, 1997.  Our common shares were listed on the Vancouver Stock Exchange (a predecessor of the TSX Venture Exchange (“TSX-V”)) on May 29, 1997. On July 1, 2001, we became a reporting issuer in the Province of Alberta pursuant to Alberta BOR#51-501.  On December 21, 2007, we filed a Form 8-A with the SEC in connection with the listing of our common shares on the American Stock Exchange (now known as the NYSE MKT) and became a reporting issuer under Section 12(b) of the Securities Exchange Act of 1934, as amended.  On July 16, 2013, we received final approval to move our common shares to the Toronto Stock Exchange (“TSX”) from the TSX-V.  Our common shares are currently listed on the NYSE MKT and TSX under the symbol “MDW.”

 

The name and place of incorporation for our wholly-owned material subsidiaries as of December 31, 2014 is set out below.

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 produce gold and do not currently generate operating earnings. Our Pan project is currently under construction and mining operations commenced in September of 2014 with production anticipated in late March of 2015, which we believe will allow us to 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 has become subject to a joint venture with Barrick Gold Exploration Inc (“Barrick”).

 

We have completed our technical, engineering, permitting and economic studies on our Pan project.  Modification or amendments to permits may be required if business and operational conditions should warrant this in the future.

 

To date, funding to explore and develop our gold properties and to operate the Company has been through equity and debt financings. We expect to continue to raise capital through additional equity and/or debt financings and through the exercise of stock options until we are able to generate sufficient cash flow and earnings through operations to fund our capital requirements.    Although we may generate earnings from operations in the future, we may continue to require additional capital for development, exploration and other general corporate purposes.

 

Our registered office in Canada is located at 1000 – 840 Howe Street, Vancouver, British Colombia V6Z 2M1. Our principal executive and head office in the United States is located at 8310 South Valley Highway, Suite 280, Englewood, Colorado 80112, U.S.A. and our telephone number is (720) 979-0900. 

Available Information

You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Copies of such materials also can be obtained free of charge at the SEC’s website, www.sec.gov, or by mail from the Public Reference Room of the SEC, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room.

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We also make available, free of charge, on or through our Internet website, at www.midwaygold.com our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934.  Our Internet website and the information contained therein or connected thereto are not intended to be, and are not incorporated into this Annual Report.  Additional information about the Company may also be found at www.sedar.com and www.sec.gov. 

Significant Developments in 2014 

Joint Venture Formalized with Barrick

 

On February 24, 2014, we announced the formation of the joint venture regarding the Spring Valley project with Barrick was completed.  At that time Barrick held a 70% interest in the joint venture, while we held the remaining 30% interest.  In July 2014, we exercised our option to become a 25% joint venture partner with Barrick, carrying us through to production free of any additional payments or capital outlays.

 

Q1 Preferred Series A Dividend Declared and Paid

 

On March 25, 2014, our Board of Directors (the “Board”) declared a dividend payment to the holders of Series A Preferred Shares with a record date of March 28, 2014, totaling $1,536,547 (U.S. $1,389,911), which was paid on April 1, 2014 in common shares, through the issuance of 1,121,046 common shares to the holders of the Series A Preferred Shares, and in cash, through the payment of applicable withholding taxes.

 

Spring Valley Advances to Pre-Feasibility Development Stage

 

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

 

Spring Valley 2014 Planned Expenditures

 

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

 

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

 

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

 

Selection of Mining Contractor for Pan project

 

On May 19, 2014, we selected Ledcor CMI, Inc. (“Ledcor”) as the mining contractor for the Pan project.  During the early years of operation, Ledcor will provide all mining-related services, including manpower and equipment for the Pan project at a substantial capital savings to us.  This partnership with Ledcor is expected to eliminate nearly all mine equipment expenditures, thereby reducing initial capital requirements and also allowing us to defer supporting site infrastructure expenditures such as mine equipment maintenance facilities and warehousing.    

 

Filing of Technical Report for Gold Rock

 

On May 28, 2014, the Company filed its NI 43-101 compliant technical report titled “Updated Mineral Resource Estimate for Gold Rock project”, that detailed a measured, indicated and inferred mineral resource estimate for its open pit, heap leach Gold Rock Project in White Pine County, Nevada.  This report was superseded and replaced by an amended report dated January 8, 2015 in order to address inconsistencies between the previously filed report and our press release dated May 28, 2014.

 

Bought Deal Financing

 

On June 6, 2014, we closed a public offering in the United States and Canada on a bought deal basis (“Base Offering”) of 30,121,000 Common Shares (“Base Shares”) at a price of $0.83 per Offered Share (“Offering Price”) for gross proceeds of 27,340,470 (U.S.$25,000,430).  On June 17, 2014, we closed the over-allotment of the Base Offering (“Over-Allotment Offering” and, together with the Base Offering, the “Offering”) and issued an additional 3,012,100 Common Shares (which we refer to, together with the Base Shares, as the “Offered Shares”) at the Offering Price for gross proceeds of $2,713,047 (U.S.$2,500,043).

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Pursuant to our Articles (which we refer to as the “Articles”), we may not issue Common Shares in an equity financing for a per Common Share price of less than U.S.$1.85 without the consent of the holders of the Company's Series A Preferred Shares (which we refer to as the “Series A Preferred Shareholders”).

 

On May 14, 2014, we obtained the consent (which we refer to as the “Consent”) of the Series A Preferred Shareholders with respect to the issuance of the Offered Shares in connection with the Offering. As consideration for obtaining the Consent and to compensate the Series A Preferred Shareholders for the dilution that they suffered as a result of the Offering, we agreed to issue 3,816,143 Common Shares (the “Fee Shares”) to the Series A Preferred Shareholders which represents a consent fee equal to $3,167,399, at a deemed price per Fee Share equal to the Offering Price.

 

Concurrently with the closing of the Base Offering, we issued 3,434,478 Fee Shares to the Series A Preferred Shareholders and concurrently with the closing of the Over-Allotment Offering, we issued 381,669 Fee Shares to the Series A Preferred Shareholders. The Fee Shares were not issued as part of the Offering and have not been registered under the United States Securities Act of 1933, as amended (which we refer to as the “Securities Act”). The issuance of the Fee Shares was exempt from registration under Section 4(a)(2) of the Securities Act. The Series A Preferred Shareholders are institutional “accredited investors” (as defined in Rule 501(a) of Regulation D of the Securities Act).

 

Q2 Preferred Series A Dividend Declared and Paid

 

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

 

Commonwealth Bank of Australia Debt Facility

 

On July 18, 2014, our subsidiary MDW Pan LLP, as borrower entered into a credit agreement (the “Credit Agreement”) with  Commonwealth Bank of Australia (“CBA”), as administrative agent, collateral agent and the initial lender  for the purpose of establishing an aggregate U.S.$55 million senior secured credit facility consisting of, (i) a U.S.$45 million project finance facility (“Project Finance Facility”) and (ii) a U.S.$10 million cost overrun facility (the “Overrun Facility” together with the Project Finance Facility is collectively referred to herein as, the “Debt Facility”).  The Debt Facility (which was reduced to U.S.$53 million in December 2014) 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. The Credit Agreement was subsequently amended to reduce the Project Finance Facility to U.S.$43 million.

 

Appointment of President and CEO

 

On August 5, 2014, Mr. Kenneth Brunk informed our Board of Directors (the “Board”) that he would be retiring as the Chairman of the Board, President and Chief Executive Officer.  On October 15, 2014, the Company announced that William M. Zisch would be joining the Company as President and Chief Executive Officer.  Mr. Zisch succeeded Kenneth Brunk on December 10, 2014.

 

Upgrade in Resource at Spring Valley Project; Election of Carry Option

 

On August 12, 2014, we announced a substantial resource growth at our Spring Valley project based upon an updated mineral resource estimate to include 2011 – 2013 drill results.  In addition, we announced our decision to allow Barrick to earn an additional 5% interest in the joint venture (75% total) by carrying us through to production free of any additional payments or capital outlays.  This press release was clarified by a press release issued on January 23, 2015 as the original press release included statements in relation to the updated resource estimate, which were based on a sensitivity case rather than the base case.  In addition to issuing the press release, we filed an amended technical report entitled “Amended NI 43-101 Technical Report on Resources, Spring Valley Project,” on January 23, 2015 to clarify the statements contained in the August 12, 2014 press release.

 

Non-Executive Chairman Appointed

 

On August 19, 2014, we announced that the Board appointed Mr. Timothy Haddon as our new non-executive chairman on August 18, 2014, replacing Mr. Kenneth Brunk as the Board’s chairman.  Mr. Haddon replaced Dr. Roger Newell on the Board, who retired after five years of service on our Board.

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Mining Begins at Pan project

 

On September 15, 2014, we announced several construction and operational related milestones that had been achieved.  Ledcor CMI, Inc. (“Ledcor”), our contract miner, mobilized to site on July 21, 2014 and commenced pre-stripping and mine development with first ore stacked on the leach pad during September 2014.

 

Q3 Preferred Series A Dividend Declared and Paid

 

On September 19, 2014, the Board declared a dividend payment to the holders of Series A Preferred Shares with a record date of September 26, 2014, totaling $1,591,536 (U.S. $1,421,014), which was paid on October 1, 2014 in common shares, through the issuance of 1,157,154 common shares to the holders of the Series A Preferred Shares, and in cash, through the payment of applicable withholding taxes.

 

New Board Member Appointed

 

Nathaniel Klein informed the Board that he was resigning as a member of the Board and as the Series A Preferred Holder Director (the “Preferred Holder Director”) effective November 4, 2014.  Concurrently with Mr. Klein’s resignation, Trey Anderson was nominated by HCP-MID and appointed, pursuant to the Company’s obligations to the holders of the Company’s Series A Preferred Shares with respect to the nomination and election of the Preferred Holder Director, to serve as the Preferred Holder Director.

 

Q4 Preferred Series A Dividend Declared and Paid

 

On December 16, 2014, the Board declared a dividend payment to the holders of Series A Preferred Shares with a record date of December 26, 2014, totaling $1,648,519 (U.S. $1,421,014), which was paid on January 2, 2015 in common shares, through the issuance of 1,626,269 common shares to the holders of the Series A Preferred Shares, and in cash, through the payment of applicable withholding taxes.

 

Recent Developments

 

Pan Project Update

 

On March 3, 2015, we announced an update on our progress at our Pan project as well as a summary of our current operations and budgeting.  In the update, we announced, among other things, (i) that construction of the Pan project was 93% complete, (ii) that first gold production is expected by the end of March 2015, (iii) that the second production well that had a mechanical malfunction on January 1, 2015 was abandoned and a replacement well was approximately 87% complete and (iv) that construction at the Pan project is ongoing, specifically, the 69 kV power line to the Pan project was 76% complete with line power expected in early May 2015.

 

We also announced that early sampling of ore grades have generally been below modeled grades with tonnage variances being both positive and negative.  In response to the early sampling, we have engaged an independent engineering firm to review modeling, sampling and assaying practices to gain an informed understanding of tonnage and grade variances to date.   Sustained gold production from the heap will provide an additional data point from which to complete an assessment of initial model performance and will provide the first estimate of actual gold recoveries.  Initial sampling may indicate that actual results or production may differ from those modeled or projected during the initial phase of production, and there are risks that the estimated grades may not be achieved as modeled or projected, which may have a material effect on our cash flow projections and our ability to satisfy certain covenants, tests and obligations under the Debt Facility.  Additional mitigating responses to a potential grade variance include, but are not limited to, increasing the rate of production and drilling to potentially expand resources.  Ore that is currently being placed on the pad is economic as it exceeds our cut-off grade and as a part of on-going operations, we are continuously evaluating our cut-off to align with the current operating cost and metal price environment.

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CBA Waiver

 

On March 3, 2015, we announced that we have drawn U.S.$47.5 million of the U.S.$53 million Debt Facility.  As of February 28, 2015, we had cash and cash equivalents of approximately U.S.$5.9 million.  Based on current projections, our auditors have noted material uncertainties that cast substantial doubt about our ability to continue as a going concern in their audit report to our financial statements as at and for the year ended December 31, 2014.  We are required to satisfy certain covenants, tests and obligations related to the Debt Facility, including scheduled Mechanical Completion (as defined in the Credit Agreement), Cost to Complete (as defined in the Credit Agreement), Time to Complete (as defined in the Credit Agreement), Economic Completion (as defined in the Credit Agreement) and other tests and contingencies, in order to continue to draw amounts available under the Debt Facility and to remain in compliance with the terms of the Debt Facility.  We are currently unable to satisfy all covenants, tests and obligations required to continue to draw amounts under the Debt Facility and we will require additional capital to fund construction of the Pan project and comply with all of our obligations under the Debt Facility.    The amount of additional required capital will result from negotiations with the lenders to amend certain terms of the Debt Facility. We cannot provide any assurance that we will be able to amend our Debt Facility to secure more favorable terms, raise additional capital or draw down the remaining balance under the Debt Facility.

 

On March 13, 2015, MDW Pan LLP, as borrower, and CBA, as administrative agent, collateral agent, technical agent and initial lender, and the other lenders named in the Credit Agreement entered into a waiver with respect to certain provisions of the Credit Agreement (the “Waiver”).  The Waiver, among other things, (i) granted MDW Pan LLP a temporary waiver of the covenants set forth in Section 7.01(y) of the Credit Agreement until April 20, 2015, which requires that MDW Pan LLP not, directly or indirectly, to fail the Cost to Complete Test (as defined in the 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 a “going concern” or like qualifications 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 U.S.$200,000 (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 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 Credit Agreement) may have against the Secured Parties arising under or in connection with the Loan Documents (as defined in the Credit Agreement).  The Waiver did not amend the covenants, tests or obligations related to the Debt Facility or our ongoing compliance with its terms, which affect our ability to draw the remaining amounts under the Debt Facility and maintain the Debt Facility in good standing.  The foregoing description is a summary of the material terms of the Waiver and is qualified in its entirety by reference to the text of the Waiver, which is filed as Exhibit 10.25 hereto.

 

Financial Information about Segments

 

Segmented information is contained in Note 20 of the “Notes to the Consolidated Financial Statements” contained in the section titled “Item 8. Financial Statements and Supplementary Data” of this Annual Report and is incorporated herein by reference.

 

Competitive Business Conditions

 

The exploration for, and the acquisition of gold and silver properties, are subject to intense competition.  Due to our limited capital and personnel, we are at a competitive disadvantage compared to many other companies with regard to exploration and development of mining properties.  We believe that competition for acquiring mineral prospects will continue to be intense in the future.

 

The availability of funds for exploration, development and operations is sometimes limited, and we may find it difficult to compete with larger and more well-known companies for capital.  Development of our mining properties could be delayed due to a lack of funding which would have a material adverse effect on our operations and financial position.

 

Seasonality

 

None of our properties are subject to material restrictions on operations due to seasonality.

 

Reclamation

 

We generally are required to mitigate long-term environmental impacts by chemically and physically stabilizing, contouring, placing growth media and re-vegetating various portions of a site after mining and mineral processing operations are completed. These reclamation efforts are conducted in accordance with detailed plans, which must be reviewed and approved by the appropriate regulatory agencies.

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Government Regulation 

 

Mining operations and exploration activities are subject to various federal, state, and local laws and regulations in the United States, which govern prospecting, development, mining, production, exports, taxes, labor standards, occupational health, waste disposal, protection of the environment, mine safety, hazardous substances and other matters. We have obtained or have pending applications for those licenses, permits or other authorizations currently required in conducting our exploration, development and other programs. We believe that we are in compliance in all material respects with applicable mining, health, safety and environmental statutes and the regulations passed thereunder in the United States.  A leak that exceeded our permit limitations was detected in the Barren Pond.  We have reported the occurrence as required by the permit, routed process fluids around the pond, and are now actively working on locating the leak and repairing it.  No interruptions to operations are anticipated.  This leak did not constitute a release to the environment, as the pond is triple lined and the leak was into the leak detection sump, above two of the three lines layers of the system.

 

On lands owned by the United States, mining rights are governed by the General Mining Law of 1872, as amended (“General Mining Law”), which allows the location of mining claims on certain federal lands upon the discovery of a valuable mineral deposit and compliance with location requirements. The exploration of mining properties and development and operation of mines is governed by both federal and state laws.  Federal laws that govern mining claim location and maintenance and mining operations on federal lands administered by the Bureau of Land Management (“BLM”) are generally administered by the BLM.   Additional federal laws, governing mine safety and health, also apply. State laws also require various permits and approvals before exploration, development or production operations can begin. Among other things, a reclamation plan must typically be prepared and approved, with bonding in the amount of projected reclamation costs. The bond is used to ensure that proper reclamation takes place, and the bond will not be released until that time. Local jurisdictions may also impose permitting requirements (such as conditional use permits or zoning approvals).  For a more detailed discussion of the various government laws and regulation applicable to our operations and potential negative effect of these laws and regulations, see the section heading “Item 1A. Risk Factors” below

Environmental Regulation

Our mineral projects are subject to various federal, state and local laws and regulations governing protection of the environment. These laws are continually changing and are becoming more restrictive. The development, operation, closure, and reclamation of mining projects in the United States requires numerous notifications, permits, authorizations, and public agency decisions. Compliance with environmental and related laws and regulations requires us to obtain permits issued by regulatory agencies, and to file various reports and keep records of our operations, as well as obligations to post reclamation bonds for our projects as work is commenced.   Certain of these permits require periodic renewal or review of their conditions and may be subject to a public review process during which opposition to our proposed operations may be encountered. We are currently operating under various permits for activities connected to mineral exploration, reclamation, and environmental considerations. Our policy is to conduct business in a way that safeguards public health and the environment. We believe that our operations are conducted in material compliance with applicable laws and regulations.

 

Changes to current local, state or federal laws and regulations in the jurisdictions where we operate could require additional capital expenditures and increased operating and/or reclamation costs. Although we are unable to predict what additional legislation, if any, might be proposed or enacted, additional regulatory requirements could impact the economics of our projects.

 

During 2014, there were no material environmental incidents or material non-compliance with any applicable environmental regulations. We anticipate that we will incur capital expenditures for environmental control facilities during 2015 relating to the development of the Pan mine. 

 

Mine Safety and Health Administration Regulations

 

Our operations and exploration properties are subject to regulation by the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”).  MSHA inspects our properties on a regular basis and if it believes a violation has occurred under the Mine Act it may issue citations or orders, none of which have been issued against us. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires us to provide a mine safety disclosure, which we have done in Part I - Item 4 of this Form 10-K.

 

Employees

 

As of December 31, 2014, we had 49 full-time employees, 37 of whom are employed at our Ely, Nevada office or Pan Mine site (the “Pan Mine”).  We use consultants with specific skills to assist with various aspects of our project evaluation, due diligence, corporate governance and our administrative and financial affairs.

 

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Item 1A.  Risk Factors 

 

This Annual Report, including Management's Discussion and Analysis of Financial Condition and Results of Operation, contains forward-looking statements that may be materially affected by several risk factors, including those summarized below:

 

Risks Relating to Our Company

 

Since we have no operating or production history, investors have no basis to evaluate our ability to operate profitably. We were incorporated in 1996 but have had no revenue from operations since our inception. We have no history of producing metals from any of our properties. The majority of our properties are exploration stage properties in various stages of exploration. Our Tonopah, Spring Valley, Golden Eagle, and Gold Rock properties are exploratory stage exploration projects with identified gold mineralization. We now hold a minority interest in our Spring Valley project under the joint venture agreement with Barrick.  Our Pan project is in the development stage. Advancing properties from exploration into the development stage requires significant capital and time, and successful commercial production from a property, if any, will be subject to completing feasibility studies, permitting and construction of the mine, processing plants, roads, and other related work and infrastructure. As a result, we are subject to all of the risks associated with developing and establishing new mining operations and business enterprises, including:

 

The costs, timing and complexities of exploration, development and construction activities may be increased by the location of our properties and competition from other mineral exploration and mining companies. It is common in exploration and development programs to experience unexpected problems and delays during drill programs and, development, construction and mine start-up. Accordingly, our activities may not result in profitable mining operations and we may not succeed in establishing mining operations or profitably producing metals at any of our properties.

 

We have a history of losses, negative operating cash flow and will require additional financing to fund exploration and, if warranted, development.  We have incurred losses since inception, have negative cash flow from operating activities and expect to incur losses in the future. We incurred the following operating losses during each of the following periods:

 

We had an accumulated deficit of $102,580,325 as of December 31, 2014. We expect to continue to incur losses until such time as one of our properties enters into commercial production and generates sufficient revenues to fund continuing operations.    

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Our auditors audit report, contained herein, includes an explanatory paragraph that expresses that material uncertainties exist that cast substantial doubt about our ability to continue as a going concern.  Our auditors audit report for our financial statements as of and for the year ended December 31, 2014, includes an explanatory paragraph that expresses material uncertainties exist which cast substantial doubt about our ability to continue as a going concern.  Our ability to continue as a going concern is contingent upon, among other factors, our ability to obtain financing to fund our capital requirements and working capital requirements.  As at February 28, 2015, we had cash and cash equivalents of approximately U.S.$5.9 million.  Based on current projections for a late March initial pour date, versus our earlier estimate of a mid-March initial pour date, we are projecting a working capital shortfall attributable to this delay of approximately U.S.$5 million.  In addition to this shortfall, additional funding will also be required, to fund various reserve accounts as required under our Debt Facility.   The amount of additional required funding will be determined from negotiations with the lenders to amend certain terms of the Debt Facility. We cannot provide any assurance that we will be able to amend the terms of our Debt Facility on favorable terms, raise additional capital or draw down the remaining balance under the Debt Facility.  Furthermore, there is no assurance that we will be able to resolve the going concern uncertainties.  We may be required to curtail our production plans and we may be required to take additional measures to reduce costs in order to conserve our cash to sustain operations and meet our obligations.

 

Increased costs could affect our financial condition. Mining operations are subject to risks and delays that may be beyond our control.  Our Pan project was delayed due to abnormal weather, flooding and a well failure that delayed our planned initial production date and increased actual costs related to the Pan project. We anticipate that costs at our projects that we may explore, develop or operate, will frequently be subject to variation from one year to the next due to a number of factors, such as changing ore grade, metallurgy and revisions to mine plans, if any, in response to the physical shape and location of the ore body. In addition, costs are affected by the price of commodities such as fuel, cyanide, lime, ammonium nitrate and electricity. Such commodities are at times subject to volatile price movements, including increases that could make production at certain operations less profitable. A material increase in costs at any significant location could have a significant effect on our profitability.

 

Operational problems and start-up issues may disrupt mining operations at our Pan project.  Mine projects, including our Pan project, inherently involve risks and hazards.  The successful development of and production at our Pan project could be prevented, delayed or disrupted by, among other things:

 

The nature of mineral exploration and production activities involves a high degree of risk and the possibility of uninsured losses.  Exploration for and the production of minerals is highly speculative and involves greater risk than many other businesses.  Many exploration programs do not result in the discovery of mineralization, and any mineralization discovered may not be of sufficient quantity or quality to be profitably mined.  Our operations are, and any future development or mining operations we may conduct will be, subject to all of the operating hazards and risks normally incident to exploring for and development of mineral properties, such as, but not limited to:

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Any of these risks can materially and adversely affect, among other things, the development of properties, production quantities and rates, costs and expenditures, potential revenues and production dates.  We currently have limited insurance to guard against some of these risks.  If we determine that capitalized costs associated with any of our mineral interests are not likely to be recovered, we would incur a write-down of our investment in these interests.  All of these factors may result in losses in relation to amounts spent which are not recoverable, or result in additional expenses.

 

We have no history of producing metals from our current mineral properties and limited recent experience with producing mines; there can be no assurance that we will successfully establish mining operations or profitably produce precious metals. We have no history of producing metals from our current mineral properties. We do not produce gold and do not currently generate operating earnings. While we are scheduled to move our Pan project into production in late March, our efforts are subject to all of the risks associated with establishing new mining operations and business enterprises, including:

 

The costs, timing and complexities of mine construction and development may be increased by the remote location of our properties. It is common in new mining operations to experience unexpected problems and delays during construction, development and mine start-up. In addition, our management will need to be expanded. This could result in delays in the commencement of mineral production and increased costs of production. Accordingly, we cannot assure you that our activities will result in profitable mining operations or that we will successfully establish mining operations.

 

There may be delays in construction on our Pan project.  We have experienced delays at the Pan project, which have resulted in increased costs and affected our production timelines and compliance with the terms of our Debt Facility.  .Future delays in construction could result from factors such as availability and performance of engineering and construction contractors, suppliers and consultants; availability and function required equipment and weather and other mine conditions. Any delay in the performance of any one or more of the contractors, suppliers, consultants or other persons on which we depend, or insufficient financing, or lack of availability of required equipment, or delay or failure caused by mine conditions or regulatory compliance, could delay construction at the Pan project. There can be no assurance that the necessary personnel, equipment or supplies will be available.

 

Our mineralization figures are estimates based on interpretation and assumptions and our properties may yield less mineral production under actual conditions than is currently estimated. Unless otherwise indicated, mineralization figures presented in this Annual Report and in our filings with securities regulatory authorities, press releases and other public statements that may be made from time to time are based upon estimates made by independent geologists and mining engineers.  When making determinations about whether to advance any of our projects to development, we must rely upon such estimated calculations as to the mineral reserves and grades of mineralization on our properties.  Until ore is actually mined and processed, mineral reserves and grades of mineralization must be considered as estimates only.

 

Estimates can be imprecise and depend upon geological interpretation and statistical inferences drawn from drilling and sampling analysis, which may prove to be unreliable. We cannot assure you that:

 

Early sampling of ore grades at our Pan project have generally been below modeled grades with tonnage variances being both positive and negative.  In response to the early sampling, we engaged an independent engineering firm to review modeling, sampling and assaying

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practices to gain an informed understanding of tonnage and grade variances to date.   Sustained gold production from the heap will provide an additional data point from which to complete an assessment of initial model performance and will provide the first estimate of actual gold recoveries.  Initial sampling may indicate that actual results or production may differ from those modeled or projected during the initial phase of production, and there are risks that the estimated grades may not be achieved as modeled 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 Debt Facility.  If actual production is significantly lower than modeled, we may be required to adjust our production and operating plans and or amend the terms of the Debt Facility to remain in compliance with its terms.  Additional mitigating responses to a potential grade variance include, but are not limited to, increasing the rate of production and drilling to potentially expand resources.  Ore that is currently being placed on the pad is economic as it exceeds our cut-off grade and as a part of on-going operations, we are continuously evaluating our cut-off to align with the current operating cost and metal price environment.

 

Any material changes in mineral resource estimates and grades of mineralization may affect the economic viability of placing a property into production and a property’s return on capital.    As we have not completed feasibility studies on all of our properties and have not commenced actual production; mineralization resource estimates may require adjustments or downward revisions. In addition, the grade of ore ultimately mined, if any, may differ from that indicated by our feasibility studies and drill results. Minerals recovered in small scale tests may not be duplicated in large scale tests under on-site conditions or in production scale.

 

The resource estimates contained in this Annual Report have been determined and valued based on assumed future prices, cut-off grades and operating costs that may prove to be inaccurate. Extended declines in market prices for gold, silver or other commodities may render portions of our mineralization and resource estimates uneconomic and result in reduced reported mineralization or adversely affect the commercial viability determinations we reach. Any material reductions in estimates of mineralization, or of our ability to extract this mineralization, could have a material adverse effect on our share price and the value of our properties.

 

There are differences in U.S. and Canadian practices for reporting reserves and resources. Our reserve and resource estimates are not directly comparable to those made in filings subject to SEC reporting and disclosure requirements, as we generally report reserves and resources in accordance with Canadian practices. These practices are different from the practices used to report reserve and resource estimates in reports and other materials filed with the SEC. It is Canadian practice to report measured, indicated and inferred mineral resources, which are generally not permitted in disclosure filed with the SEC by United States issuers. In the United States, mineralization may not be classified as a “reserve” unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. United States investors are cautioned not to assume that all or any part of measured or indicated mineral resources will ever be converted into reserves.

 

Further, “inferred mineral resources” have a great amount of uncertainty as to their existence and as to whether they can be mined legally or economically. Disclosure of “contained ounces” is permitted disclosure under Canadian regulations; however, the SEC only permits issuers to report “resources” as in place, tonnage and grade without reference to unit measures.

 

Accordingly, information concerning descriptions of mineralization, reserves and resources contained in this report, or in the documents incorporated herein by reference, may not be comparable to information made public by other United States companies subject to the reporting and disclosure requirements of the SEC.

 

We face industry competition in the recruitment and retention of qualified personnel. We compete with other exploration and producing companies, many of which are better capitalized, have greater financial resources, operational experience and technical capabilities or are further advanced in their development or are significantly larger and have access to greater mineral reserves, for the recruitment and retention of qualified employees and other personnel. If we require and are unsuccessful in recruiting and retaining qualified personnel, we will not be able to grow at the rate we desire, or at all.

 

We cannot assure you that we will have an adequate supply of water to expand operations at any of our properties. Our future operations at our properties may require additional water rights for mining purposes. There is no assurance that the Company will be able to secure the necessary water rights to support planned development and operation.  An inadequate water supply could prevent, delay or disrupt our exploration and development plans

 

We operate our Spring Valley Project through a joint venture with Barrick Gold Exploration Inc., which is subject to the risks normally associated with the conduct of joint ventures.  Our Spring Valley Project is operated through a joint venture with Barrick Gold Exploration Inc. and is subject to the risks normally associated with the conduct of joint ventures. Such risks include: inability to exert control over strategic decisions made in respect of such properties; disagreement with partners on how to develop and operate mines efficiently; inability of partners to meet their obligations to the joint venture or third parties; and litigation between partners regarding joint venture matters. Any failure of such other companies to meet their obligations to the Company or to third parties, or any disputes with respect to the parties’ respective rights and obligations, could have a material adverse effect on the joint ventures or their respective properties, which could have a material adverse effect on the Company’s results of operations and financial condition.

 

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Land reclamation requirements for our properties may require us to post bonds or other surety to guarantee the cost of post-reclamation mining, which add significant costs to our operations and delays in our projects. The Bureau of Land Management requires that mining operations on lands subject to its regulation obtain an approved plan of operations subject to environmental impact evaluation under the National Environmental Policy Act. Any significant modifications to the plan of operations may require the completion of an environmental assessment or Environmental Impact Statement prior to approval. Mining companies must post a bond or other surety to guarantee the cost of post-mining reclamation.  Cash collateral obligations to secure the bonds are typically required and may be increased by the Surety at any point in time up to the face value of the bond.  These requirements could add significant additional cost, adversely affect our financial position and delay any mining project undertaken by us. Our mineral exploration operations are required to be covered by reclamation bonds deemed adequate by regulators to cover these risks. We believe we currently maintain adequate reclamation bonds for our operations.

 

Our exploration activities on our properties may not be commercially successful, which could lead us to abandon our plans to develop our properties and our investments in exploration. Our long-term success depends on our ability to identify mineral deposits on our existing properties and other properties we may acquire, if any, that we can then develop into commercially viable mining operations. Mineral exploration is highly speculative in nature, involves many risks and is frequently non-productive. These risks include unusual or unexpected geologic formations, and the inability to obtain suitable or adequate machinery, equipment or labor. The success of gold, silver and other commodity exploration is determined in part by the following factors:

 

Substantial expenditures are required to establish proven and probable reserves through drilling and analysis, to develop metallurgical processes to extract metal, and to develop the mining and processing facilities and infrastructure at any site chosen for mining. Whether a mineral deposit will be commercially viable depends on a number of factors, which include, without limitation, the particular attributes of the deposit, such as size, grade and proximity to infrastructure; metal prices, which fluctuate widely; and government regulations, including, without limitation, regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals and environmental protection. We may invest significant capital and resources in exploration activities and abandon such investments if we are unable to identify commercially exploitable mineral reserves. The decision to abandon a project may have an adverse effect on the market value of our securities and the ability to raise future financing.

 

We may encounter archaeological issues and claims relating to all of our properties, which may delay our ability to conduct further exploration or developmental activities or could affect our ability to place our properties into commercial production, if warranted.  Our exploration and development activities may be delayed due to the designation of a portion of the Tonopah property as a site of archaeological significance.

 

A cultural inventory of the Tonopah project has identified a prehistoric site associated with a dune field in the Ralston Valley, adjacent to the Tonopah property.  An intensive cultural and geomorphologic inspection was conducted of the project area to determine archaeologically significant areas.  Techniques and methods used during the inventory were sufficient to identify most cultural resources and features in the area.  Should significant surface disturbance be planned at the Tonopah project, a complete archaeological inventory and evaluation would be required, including the possibility of documenting and curating the site.

 

Our Tonopah property is in close proximity to a municipal water supply, which may delay our ability to conduct further exploration or developmental activities or could affect our ability to place the property into commercial production, if warranted. The Tonopah property lies within a basin from which the town of Tonopah obtains its municipal water supply. To date, our exploration activities have not been restricted due to the proximity of the activities to this basin. As our exploration and development activities expand, there is an increased risk that the activities may interfere with the water supply. As part of the mining development work on the Tonopah property, we completed a hydrologic review of the basin and will establish a strategy for preventing exploration and development activities from interfering with the water supply. Any damage to, or contamination of, the water supply caused by our activities could result in us incurring significant liability. We cannot predict the magnitude of such liability or the impact of such liability on our business, prospects or financial condition. We applied for water right permits in the Ralston Basin, which is under protest by the town of Tonopah.  If we were not able to secure dewatering rights for the Tonopah project, the project may be restricted and could affect our ability to place the property into commercial production, if warranted.

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The volatility of the price of gold and silver could adversely affect our future operations and, if warranted, our ability to develop our properties and operate them at a profit. The potential for profitability of our operations, the value of our properties, the market price of our common stock and our ability to raise funding to conduct continued exploration and development, if warranted, are directly related to the market price of gold, silver and other precious metals. Our decision to put a mine into production and to commit the funds necessary for that purpose must be made long before the first revenue from production would be received. A decrease in the price of gold and silver may prevent our property from being economically mined or result in the write-off of assets whose value is impaired as a result of lower gold and silver prices. The price of gold and silver is affected by numerous factors beyond our control, including inflation, fluctuation of the U.S. dollar and foreign currencies, global and regional demand, the sale of gold and silver by central banks, and the political and economic conditions of major gold and silver producing countries throughout the world.

 

The volatility in gold and silver prices is illustrated by the following table, which sets forth, for the periods indicated (calendar year), the average annual market prices in U.S. dollars per ounce of gold and silver, based on the daily London P.M. fix for gold and the daily London fix for silver, as shown in the table below:

 

 

 

The volatility of mineral prices represents a substantial risk, which no amount of planning or technical expertise can fully eliminate. In the event gold prices decline or remain low for prolonged periods of time, we might be unable to develop our properties, which may adversely affect our results of operations, financial performance and cash flows.

 

We do not maintain insurance with respect to certain high-risk activities, which exposes us to significant risk of loss.  Mining operations generally involve a high degree of risk. Hazards such as unusual or unexpected formations or other conditions are often encountered. We may become subject to liability for pollution, cave-ins, pit wall failures, leach pad liner leaks or hazards against which it cannot insure or against which it cannot maintain insurance at commercially reasonable premiums. Any significant claim would have a material adverse effect on our financial position and prospects. We are not currently covered by any form of environmental liability insurance, or political risk insurance, since insurance against such risks (including liability for pollution) may be prohibitively expensive. We may have to suspend operations or take cost interim compliance measures if we are unable to fully fund the cost of remedying an environmental problem, if it occurs.

 

We could incur substantial costs or disruptions to our business if we cannot obtain, renew or maintain the necessary authorizations and permits.  In order to conduct our operations, we must obtain authorizations and permits from governmental authorities.  Delays in obtaining authorizations or permits, failure to obtain an authorization or permit or receipt of an authorization or permit with unreasonable conditions or costs could have a material adverse effect on our ability to develop our gold projects.  The failure to obtain necessary permits could result in an impairment of the carrying value of our projects as the project(s) will not have mineral reserves under SEC Industry Guide 7 or NI 43-101.

 

We are subject to significant governmental regulations, which affect our operations and costs of conducting our business.  Our current and future operations are and will be governed by laws and regulations, including:

 

Companies engaged in exploration activities often experience increased costs and delays in production and other schedules as a result of the need to comply with applicable laws, regulations and permits. Failure to comply with applicable laws, regulations and permits may result in enforcement actions, including the forfeiture of claims, orders issued by regulatory or judicial authorities requiring operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment or costly remedial actions. We may be required to compensate those suffering loss or damage by reason of our mineral exploration activities and may have civil or criminal fines or penalties imposed for violations of such laws, regulations and permits.

 

Existing and possible future laws, regulations and permits governing operations and activities of exploration companies, or more stringent implementation, could have a material adverse impact on our business and cause increases in capital expenditures or require abandonment or delays in exploration.

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Our activities are subject to environmental laws and regulations that may increase our costs of doing business and restrict our operations. All phases of our operations are subject to environmental regulation in the jurisdictions in which we operate. Environmental legislation is evolving in a manner which may require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. These laws address emissions into the air, discharges into water, management of waste, management of hazardous substances, protection of natural resources, antiquities and endangered species and reclamation of lands disturbed by mining operations. Compliance with environmental laws and regulations and future changes in these laws and regulations may require significant capital outlays and may cause material changes or delays in our operations and future activities. It is possible that future changes in these laws or regulations could have a significant adverse impact on our properties or some portion of our business, causing us to re-evaluate those activities at that time.

 

U.S. Federal Laws  The Comprehensive Environmental, Response, Compensation, and Liability Act (CERCLA), and comparable state statutes, impose strict, joint and several liability on current and former owners and operators of sites and on persons who disposed of or arranged for the disposal of hazardous substances found at such sites. It is not uncommon for the government to file claims requiring cleanup actions, demands for reimbursement for government-incurred cleanup costs, or natural resource damages, or for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances released into the environment. The Federal Resource Conservation and Recovery Act (RCRA), and comparable state statutes, govern the disposal of solid waste and hazardous waste and authorize the imposition of substantial fines and penalties for noncompliance, as well as requirements for corrective actions. CERCLA, RCRA and comparable state statutes can impose liability for clean-up of sites and disposal of substances found on exploration, mining and processing sites long after activities on such sites have been completed.

 

The Clean Air Act, as amended, restricts the emission of air pollutants from many sources, including mining and processing activities. Our mining operations may produce air emissions, including fugitive dust and other air pollutants from stationary equipment, storage facilities and the use of mobile sources such as trucks and heavy construction equipment, which are subject to review, monitoring and/or control requirements under the Clean Air Act and state air quality laws. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to incur capital costs in order to remain in compliance. In addition, permitting rules may impose limitations on our production levels or result in additional capital expenditures in order to comply with the rules.

 

The National Environmental Policy Act (“NEPA”) requires federal agencies to integrate environmental considerations into their decision-making processes by evaluating the environmental impacts of their proposed actions, including issuance of permits to mining facilities, and assessing alternatives to those actions. If a proposed action could significantly affect the environment, the agency must prepare a detailed statement known as an EIS. The United States Environmental Protection Agency (“EPA”), other federal agencies, and any interested third parties will review and comment on the scoping of the EIS and the adequacy of and findings set forth in the draft and final EIS. This process can cause delays in issuance of required permits or result in changes to a project to mitigate its potential environmental impacts, which can in turn impact the economic feasibility of a proposed project.

The Clean Water Act (“CWA”), and comparable state statutes, impose restrictions and controls on the discharge of pollutants into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state agency. The CWA regulates storm water mining facilities and requires a storm water discharge permit for certain activities. Such a permit requires the regulated facility to monitor and sample storm water run-off from its operations. The CWA and regulations implemented thereunder also prohibit discharges of dredged and fill material in wetlands and other waters of the United States unless authorized by an appropriately issued permit. The CWA and comparable state statutes provide for civil, criminal and administrative penalties for unauthorized discharges of pollutants and impose liability on parties responsible for those discharges for the costs of cleaning up any environmental damage caused by the release and for natural resource damages resulting from the release.

The Safe Drinking Water Act (“SDWA”) and the Underground Injection Control (“UIC”) program promulgated thereunder, regulate the drilling and operation of subsurface injection wells. The EPA directly administers the UIC program in some states and in others the responsibility for the program has been delegated to the state. The program requires that a permit be obtained before drilling a disposal or injection well. Violation of these regulations and/or contamination of groundwater by mining related activities may result in fines, penalties, and remediation costs, among other sanctions and liabilities under the SWDA and state laws. In addition, third party claims may be filed by landowners and other parties claiming damages for alternative water supplies, property damages, and bodily injury.

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Nevada Laws At the state level, mining operations in Nevada are also regulated by the Nevada Department of Conservation and Natural Resources, Division of Environmental Protection. Nevada state law requires mine operators to hold Nevada Water Pollution Control Permits, which dictate operating controls and closure and post-closure requirements directed at protecting surface and ground water. In addition, operators are required to hold Nevada Reclamation Permits. These permits mandate concurrent and post-mining reclamation of mines and require the posting of reclamation bonds sufficient to guarantee the cost of mine reclamation.  We have set up a provision for our reclamation bond at the Pan Mine.  Compliance with this and other federal and state regulations could result in delays in beginning or expanding operations, incurring additional costs for investigation or cleanup of hazardous substances, payment of penalties for non-compliance or discharge of pollutants, and post-mining closure, reclamation and bonding, all of which could have an adverse impact on our financial performance and results of operations.

 

Other Nevada regulations govern operating and design standards for the construction and operation of any source of air contamination and landfill operations. Any changes to these laws and regulations could have an adverse impact on our financial performance and results of operations by, for example, requiring changes to operating constraints, technical criteria, fees or surety requirements.

 

Our operations are subject to numerous governmental permits that are difficult to obtain and we may not be able to obtain or renew all of the permits we require, or such permits may not be timely obtained or renewed. In the ordinary course of business we are required to obtain and renew governmental permits for our operations, including in connection with our mining and exploration plans at the Pan Mine and our exploration properties. Obtaining or renewing the necessary governmental permits is a complex and time-consuming process involving costly undertakings by us. The duration and success of our efforts to obtain and renew permits are contingent upon many variables not within our control, including the interpretation of applicable requirements implemented by the permitting authority and intervention by third parties in any required environmental review. We may not be able to obtain or renew permits that are necessary to our operations on a timely basis or at all, and the cost to obtain or renew permits may exceed our estimates. Failure to comply with the terms of our permits may result in injunctions, fines, suspension or revocation of permits and other penalties. We can provide no assurance that we have been, or will at all times, be in full compliance with all of the terms of our permits or that we have all required permits. The costs and delays associated with compliance with these permits and with the permitting process could delay or stop us from production at our Pan Mine, proceeding with the operation or development of a property or increase the costs of development or production and may materially adversely affect our business, results of operations or financial condition.

 

Legislation has been proposed that would significantly affect the mining industry. Members of the United States Congress have repeatedly introduced bills which would supplant or alter the provisions of the United States General Mining Law of 1872 (the “General Mining Law”). If enacted, such legislation could change the cost of holding unpatented mining claims and could significantly impact our ability to develop mineralized material on unpatented mining claims. Such bills have proposed, among other things, to either eliminate or greatly limit the right to a mineral patent and to impose a federal royalty on production from unpatented mining claims. Although we cannot predict what legislated royalties might be, the enactment of these proposed bills could adversely affect the potential for development of unpatented mining claims and the economics of existing operating mines on federal unpatented mining claims. Passage of such legislation could adversely affect our financial performance.

 

Proposed expansion of the Duckwater Shoshone Tribe’s Reservation could impact our Gold Rock site and permitting. In 2011, the Duckwater Shoshone Tribe indicated that the tribe is seeking to expand the Duckwater Indian Reservation, Nye County, Nevada, from 3,850 acres to 235,000 acres. The Duckwater Shoshone Tribe’s proposed expansion could impact our ability to operate our Gold Rock site and it may impact the enforceability of our land and water permits granted by the BLM that relate to lands within the Duckwater Shoshone Tribe’s proposed expansion area.

 

Regulations and pending legislation governing issues involving climate change could result in increased operating costs, which could have a material adverse effect on our business. A number of governments or governmental bodies have introduced or are contemplating regulatory changes in response to various climate change interest groups and the potential impact of climate change. Legislation and increased regulation regarding climate change could impose significant costs on us, our venture partners and our suppliers, including increased energy costs, capital equipment, environmental monitoring and reporting and other costs to comply with such regulations. Any adopted future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such limitations. Given the emotion, political significance and uncertainty around the impact of climate change and how it should be dealt with, we cannot predict how legislation and regulation will affect our financial condition, operating performance and ability to compete. Furthermore, even without such regulation, increased awareness and any adverse publicity in the global marketplace about potential impacts on climate change by us or other companies in our industry could harm our reputation. The potential physical impacts of climate change on our operations are highly uncertain, and would be particular to the geographic circumstances in areas in which we operate. These may include changes in rainfall and storm patterns and intensities, water shortages, changing sea levels and changing temperatures. These impacts may adversely impact the cost, production and financial performance of our operations.

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Our Budget/Work Plan Committee requires unanimous approval of all members to approve annual budgets and work plans, which may adversely affect the timing and approval of our annual budgets and work plans.  The mandate of the Budget/Work Plan Committee is to review and approve the annual business and financing plans and capital and operating budgets (and any modifications of, or deviations from, such plans or budgets) of our Company.  The Budget/Work Plan Committee chair is our CEO.  The unanimous vote of all of the members is required for all acts and approvals of the Budget/Work Plan Committee.  In the event that unanimous approval of the Budget/Work Plan Committee is not obtained for any matter with which the Budget/Work Plan Committee is authorized under its charter, the preferred shareholder director and our CEO shall cooperate and work together in good faith to resolve any issues that the Budget/Work Plan Committee has identified as an impediment to their unanimous approval.

 

A delay in obtaining unanimous approval for our budgets and work plans could adversely affect our business, financial condition, operating results, cash flows and our ability to meet our financial obligations.

 

Our business is subject to evolving corporate governance and public disclosure regulations that have increased both our compliance costs and the risk of noncompliance, which could have an adverse effect on our stock price.  We are subject to changing rules and regulations promulgated by a number of governmental and self-regulated organizations, including the SEC, the NYSE MKT, the TSX, applicable Canadian authorities and the Financial Accounting Standards Board. These rules and regulations continue to evolve in scope and complexity and many new requirements have been created in response to laws enacted by Congress, making compliance more difficult and uncertain. For example, on July 21, 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) with increased disclosure obligations for public companies and mining companies in the United States. Our efforts to comply with the Dodd-Frank Act and other new regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

 

Land reclamation requirements for our properties may be burdensome and expensive. Although variable depending on location and the governing authority, land reclamation requirements are generally imposed on mineral exploration companies (as well as companies with mining operations) in order to minimize long term effects of land disturbance.

 

Reclamation may include requirements to:

 

In order to carry out reclamation obligations imposed on us in connection with our potential development activities, we must allocate financial resources that might otherwise be spent on further exploration and development programs. We plan to set up a provision for our reclamation obligations on our properties, as appropriate, but this provision may not be adequate. If we are required to carry out unanticipated reclamation work, our financial position could be adversely affected.

 

We face intense competition in the mining industry.  The mining industry is intensely competitive in all of its phases. As a result of this competition, some of which is with large established mining companies with substantial capabilities and with greater financial and technical resources than ours, we may be unable to acquire additional attractive mining claims or financing on terms we consider acceptable. We also compete with other mining companies in the recruitment and retention of qualified managerial and technical employees. If we are unable to successfully compete for qualified employees, our exploration and development programs may be slowed down or suspended. We compete with other gold companies for capital. If we are unable to raise sufficient capital, our exploration and development programs may be jeopardized or we may not be able to acquire, develop or operate gold projects.

 

We will require significant additional capital to fund our business plan.  We will be required to expend significant funds to determine if additional proven and probable mineral reserves exist at our properties, to continue exploration and if warranted, develop our existing properties and to identify and acquire additional properties to diversify our property portfolio.  We have spent and will be required to continue to expend significant amounts of capital for drilling, geological and geochemical analysis, assaying and feasibility studies with regard to the results of our exploration.  We may not benefit from some of these investments if we are unable to identify commercially exploitable mineralized material.  

 

Our ability to obtain necessary funding for these purposes, in turn, depends upon a number of factors, including the status of the national and worldwide economy and the price of gold and other precious metals.  We may not be successful in obtaining the required financing, or if we can obtain such financing, such financing may not be on terms that are favorable to us.  Failure to obtain such additional financing could result in delay or indefinite postponement of further mining operations or exploration and development and the possible partial or total loss of our potential interest in our properties.

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A shortage of equipment and supplies could adversely affect our ability to operate our business.  We are dependent on various supplies and equipment to carry out our mining exploration and, if warranted, development operations. The shortage of such supplies, equipment and parts could have a material adverse effect on our ability to carry out our operations and therefore limit or increase the cost of production.

 

Our directors and officers may have conflicts of interest as a result of their relationships with other companies. Our directors and officers are also directors, officers or shareholders of other companies that are similarly engaged in the business of acquiring, developing and exploiting natural resource properties. For example, Bradley Blacketor, our Chief Financial Officer, also serves as a director for Kaminak Gold Corporation.  Consequently, there is a possibility that our directors and/or officers may be in a position of conflict in the future.

 

We may experience difficulty attracting and retaining qualified management to meet the needs of our anticipated growth, and the failure to manage our growth effectively could have a material adverse effect on our business and financial condition. We are dependent on a relatively small number of key employees, including our President and Chief Executive Officer and our Chief Financial Officer. The loss of any officer could have an adverse effect on Midway. We have no life insurance on any individual, and we may be unable to hire a suitable replacement for them on favorable terms, should that become necessary.

 

It may be difficult to enforce judgments or bring actions outside the United States against us and certain of our directors.  We are a Canadian corporation and certain of our directors are neither citizens nor residents of the United States. A substantial part of the assets of several of these persons, are located outside the United States. As a result, it may be difficult or impossible for an investor:

 

Title to our properties may be subject to other claims, which could affect our property rights and claims.  There are risks that title to our properties may be challenged or impugned. Most of our properties are located in Nevada and may be subject to prior unrecorded agreements or transfers or native land claims and title may be affected by undetected defects. There may be valid challenges to the title of our properties which, if successful, could impair development and/or operations. This is particularly the case in respect of those portions of our properties in which we hold our interest solely through a lease with the claim holders, as such interest is substantially based on contract and has been subject to a number of assignments (as opposed to a direct interest in the property).

 

Several of the mineral rights to our properties consist of "unpatented" mining claims created and maintained in accordance with the General Mining Law. Unpatented mining claims are unique property interests, and are generally considered to be subject to greater title risk than other real property interests because the validity of unpatented mining claims is often uncertain. This uncertainty arises, in part, out of the complex federal and state laws and regulations under the General Mining Law. Also, unpatented mining claims are always subject to possible challenges by third parties or validity contests by the federal government. The validity of an unpatented mining or mill site claim, in terms of both its location and its maintenance, is dependent on strict compliance with a complex body of U.S. federal and state statutory and decisional law. In addition, there are few public records that definitively determine the issues of validity and ownership of unpatented mining claims. Should the federal government impose a royalty or additional tax burdens on the properties that lie within public lands, the resulting mining operations could be seriously impacted, depending upon the type and amount of the burden.

 

Our properties and operations may be subject to litigation or other claims. From time to time our properties or operations may be subject to disputes which may result in litigation or other legal claims. We may be required to assert or defend against these claims which will divert resources and management time from operations. The costs of these claims or adverse filings may have a material effect on our business and results of operations.

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Risks Related to Our Securities

 

If we are a “passive foreign investment company” for the current taxable year or future tax years, U.S. investors would likely be subject to materially adverse U.S federal income tax consequences.  We generally will be designated as a “passive foreign investment company” under the meaning of Section 1297 of the United States Internal Revenue Code of 1986, as amended (a “PFIC”) if, for a tax year, (a) 75% or more of our gross income for such year is “passive income” (generally, dividends, interest, rents, royalties, and gains from the disposition of assets producing passive income) or (b) if at least 50% or more of the value of our assets produce, or are held for the production of, passive income, based on the quarterly average of the fair market value of such assets.  United States shareholders should be aware that we believe we were classified as a PFIC during our tax year ended December 31, 2014.  Based on current business plans and financial expectations and assuming that production begins at the Pan Mine in 2015, we expect that we should not be a PFIC for the current tax year and for the foreseeable future.  If we are a PFIC for any taxable year during which a United States person holds our securities, it would likely result in materially adverse United States federal income tax consequences for such United States person. The potential consequences include, but are not limited to, re-characterization of gain from the sale of our securities as ordinary income and the imposition of an interest charge on such gain and on certain distributions received on our common shares.  Certain elections may be available under U.S. tax rules to mitigate some of the adverse consequences of holding shares in a PFIC.  

 

Our share price may be volatile and as a result you could lose all or part of your investment.  In addition to volatility associated with equity securities in general, the value of your investment could decline due to the impact of any of the following factors upon the market price of our common share:

 

In the last 12 months, the closing price of our stock on the TSX has ranged from a low of $0.70 to a high of $1.56, and on the NYSE MKT the closing price has ranged from a low of U.S.$0.60 to a high of U.S.$1.39.  In addition, stock markets in general have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile.  These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common shares.  As a result, you may be unable to resell your shares at a desired price.

 

Holders of the Series A Preferred Shares have substantial governance rights. Holders of the Series A Preferred Shares have the right to nominate and elect, voting as a class, one (1) director to our Board.  If the size of our Board is increased beyond seven (7) members, increases will occur in increments of two (2) and the “Preferred Governance Majority” (initially HCP-MID, LLC until the investors have less than 7,567,568 Series A Preferred Shares, then holders of a majority of the Series A Preferred Shares) will have the right to designate one (1) director nominee for election or appointment as director.  The Preferred Governance Majority has the right to fill any vacancy of the preferred shareholder director position. 

 

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 our Company, the issuance of any common shares or common share equivalents for less than $1.85 per share or any amendment to our articles in a manner adverse to the holders of Series A Preferred Shares.  The rights of the Series A Preferred shareholders may hinder our ability to raise capital in the future. 

 

The interests of the holders of the Series A Preferred Shares may not coincide with, or be in best interests of, the holders of the common shares. The governance rights associated with the Series A Preferred Shares could also have the effect of delaying, deterring or preventing corporate actions of the Company that might otherwise be beneficial to the holders of our common shares.

 

Holders of Series A Preferred Shares have substantial rights and ranks senior to our common shares.  Our common shares rank junior as to dividend rights, redemption rights, conversion rights and rights in any liquidation, dissolution or winding-up of the Company to the Series A Preferred Shares.  Upon liquidation, dissolution or winding-up of our Company, the holders of the Series A Preferred Shares are entitled to a liquidation preference equal to 125% of the initial issue price of U.S.$1.85 prior and in preference to any distribution to the holders of our common shares.  The holders of the Series A Preferred Shares are also entitled to an annual 8% dividend, compounded monthly and payable quarterly.  Further, no dividend greater than the in-kind dividends on the Series A Preferred Shares may be paid, declared or set apart for payment in respect of the common shares. The existence of such senior security could have an adverse effect on the value of our common shares.  As of the date of this Annual Report on Form 10-K we have issued a total of 9,139,796 common shares as our quarterly dividend payment to the Holders of the Series A Preferred Shares.

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Series A Preferred Shares contain certain redemption rights where the holders thereof may provide redemption notice beginning on December 13, 2017 requiring that we redeem the Series A Preferred Shares within 30 days.  Either we or the holders of our Series A Preferred Shares may provide a redemption notice for the Series A Preferred Shares after December 13, 2017 at a redemption price of U.S.$1.85 per share.  In the event that we are unable to redeem the Series A Preferred Shares within 30 days after a demand for redemption by a holder of the Series A Preferred Shares and we have not completed a liquidation event (excluding a voluntary or involuntary liquidation, dissolution or winding-up of our affairs) prior to the five years from issuance of the Series A Preferred Shares, then we are required to distribute all of the legal available funds to the holders of the Series A Preferred Shares and repay any amounts otherwise due in equal quarterly payments for the period of two (2) years from the date on which redemption is demanded.

 

In addition, if we are unable to redeem any Series A Preferred Shares two (2) years after a demand for redemption, then, subject to a special separate resolution (the “Special Resolution”) of the holders of our common shares and provided it is permitted by our articles, as amended, (i) voting 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, holders of Series A Preferred Shares may 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.  Pursuant to our obligations under a side letter (the “Side Letter”) by and between the Company and the Series A Preferred Holders, we agreed to present a proposal to our shareholders to approve the Special Resolution at our 2013 and subsequent Annual General and Special Meetings of Shareholders.  Under the terms of the Side Letter we will continue to seek shareholder approval for the Special Resolution at each annual and special meeting until the shareholders approve the Special Resolution.    Our shareholders did not approve the Special Resolution at our 2013 or 2014 Annual General and Special Meeting of Shareholders.  Our failure to redeem the Series A Preferred Shares in accordance with the terms of the Series A Preferred Shares rights will have a material adverse effect on the rights of our common shares and our business.

 

We have never paid dividends on our common shares. We have not paid dividends on our common shares to date, and we may not be in a position to pay dividends for the foreseeable future. Our Series A Preferred Shares have a preferential dividend and we may not pay a dividend on our common shares unless, the holders of the Series A Preferred Shares have been paid in full all accrued but unpaid dividends.  Even if the holders of the Series A Preferred Shares have been paid in full all accrued but unpaid dividends, our ability to pay dividends with respect to our common shares will depend on our ability to successfully develop one or more properties and generate earnings from operations. Further, our initial earnings, if any, will likely be retained to finance our operations. Any future dividends on our common shares will depend upon our earnings, our then-existing financial requirements and other factors, and will be at the discretion of our Board of Directors.  Any dividend that could be declared to our common shares cannot be greater than the preferential dividend payable to our Series A Preferred Shares. 

 

We are subject to the continued listing criteria of the NYSE MKT and the TSX and our failure to satisfy these criteria may result in delisting of our common shares.  Our common shares are currently listed on the NYSE MKT and the TSX.  In order to maintain the listing, we must maintain certain share prices, financial, and share distribution targets, including maintaining a minimum amount of shareholders’ equity and a minimum number of public shareholders.    In addition to objective standards, the NYSE MKT and the TSX may delist the securities of any issuer if, in its opinion, the issuer’s financial condition and/or operating results appear unsatisfactory; if it appears that the extent of public distribution or the aggregate market value of the security has become so reduced as to make continued listing on the NYSE MKT or TSX inadvisable; if the issuer sells or disposes of principal operating assets or ceases to be an operating company; if an issuer fails to comply with the listing requirements of the NYSE MKT or TSX; if an issuer’s common shares sell at what the NYSE MKT or the TSX considers a “low selling price” and the issuer fails to correct this via a reverse split of shares after notification by the NYSE MKT or TSX; or if any other event occurs or any condition exists which makes continued listing on the NYSE MKT or TSX, in their opinion, inadvisable.

 

If the NYSE MKT or the TSX delists our common shares, investors may face material adverse consequences, including, but not limited to, a lack of trading market for our securities, reduced liquidity, decreased analyst coverage of our securities, and an inability for us to obtain additional financing to fund our operations.

 

If we issue additional equity in equity financings or through issuance of common shares upon exercise of options or warrants or through issuance of common shares for the payment of our Series A Preferred Share dividends or conversion of convertible securities, the trading price of our securities may be negatively impacted and our current shareholders may suffer dilution. Any future sale of equity capital in financing transactions or through the exercise of warrants or options or the issuance of common shares in payment of our Series A Preferred Share dividends or conversion of convertible securities will result in dilution to existing shareholders, and even the perception that such issuance of equity capital may occur could have a negative impact on the trading price of our securities. We may pursue other alternatives for the financing of further exploration and development through offering an interest in our properties to be earned by another party or parties carrying out further exploration thereof.

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We are required to pay any documentary, stamp, or similar issue or transfer tax upon the conversion of the Series A Preferred Shares into common shares.  Pursuant to our Articles and Notice of Alteration, we are required to pay any documentary, stamp or similar issue or transfer tax upon the conversion of the Series A Preferred Shares into our common shares. Our failure to make such tax payments, when required, would limit our ability to convert the Series A Preferred Shares into common shares which could result in us having to reimburse the holders of the Series A Preferred Shares in cash, for an amount equal to such holder’s total purchase price (including brokerage commissions and other out-of-pocket expenses, if any) of common shares purchased on the open market in lieu of the receipt of common shares upon conversion of the Series A Preferred Shares.  Such cash payments could reduce our working capital which could have a negative impact on the trading price of our securities.

 

We may be required to adjust the Conversion Ratio on the Series A Preferred Shares, which could result in deemed dividends on the Common Shares.  As of the date of this Annual Report, each Series A Preferred Share is convertible into one Common Share.  However, we may be required to adjust this exchange ratio in accordance with our Articles.  Under certain circumstances, an adjustment that reduces the number of Common Shares received upon conversion of the Series A Preferred Shares could result in a deemed dividend on the Common Shares without the receipt of any cash.

 

We may in the future choose to pay dividends on the Series A Preferred Shares in cash or shares of our common stock, in which case holders of the Series A Preferred Shares would be subject to certain United States and Canadian tax rules and regulations regarding such dividends. We may in the future distribute taxable dividends on the Series A Preferred Shares in cash or shares of our common stock at our election. Restrictions from our Debt Facility prohibit payment of dividends on the Series A Preferred Shares to be paid in cash until subsequent to economic completion.  Holders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, our shareholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received.  In addition, any dividends paid or credited (or deemed to be paid or credited) on our common shares owned by a United States’ holders will be subject to Canadian withholding tax at the rate of 25%, generally reduced to 15% by virtue of the Canada – United States Income Tax Convention (the “Convention”).  If the United States holder is a company that beneficially owns at least 10% of our voting stock, the Canadian withholding tax is reduced to 5% by virtue of the Convention.

 

Risks Related to Our Debt

 

We obtained a waiver for noncompliance under the terms of the Credit Agreement and may fail to comply with future terms and/or obligations, under our Debt Facility.  We did not negotiate an amendment to the Credit Agreement to change the covenants, tests or obligations related to the Debt Facility.  We are required to be in compliance with certain covenants, tests and obligations to draw the remaining balance under the Debt Facility and to keep the Debt Facility in good standing.  Any failure to comply with these terms or amend the Credit Agreement may result in an event of default under the Credit Agreement.  In the event we are unable to comply with the terms of the Credit Agreement and/or amend its terms, we may be unable to use cash flow from production for our corporate purposes and/or the lenders may declare an event of default and exercise their legal rights under the Debt Facility.

 

There is no assurance that we will be able to meet the conditions precedent to continue to draw on the Debt Facility and even if we are, if the amounts we are able to draw on will be sufficient for our planned operations. Our ability to borrow funds under the Debt Facility will be subject to additional conditions precedent, including, but not limited to, funding of any expected cost overruns on the Pan project. As of March 16, 2015, we were unable to satisfy all covenants, tests and obligations to draw the remaining U.S.$5.5 million under the Debt Facility. To the extent that we are not able to satisfy these and other ongoing requirements, we may not be able to draw down any undrawn amounts or the full amount under the Debt Facility.  We will be required to raise additional capital to complete construction of the Pan project and fund our working capital requirements.

 

The Debt Facility contains many covenants and restrictions which may negatively impact our operations. The Debt Facility, among other things, limits the Company's ability to incur additional indebtedness, make investments or loans, transfer the Company's assets, or make expenditures relating to property secured under the credit agreement that are inconsistent with the mine plan and operating budget delivered pursuant to the Debt Facility. Further, the Debt Facility requires the Company to maintain specified financial ratios, meet financial condition covenants and make quarterly principal payments beginning in June 2015. Events beyond the Company's control, including changes in general economic and business conditions and lower than expected mineral reserves and resources,  may affect the Company's ability to satisfy these covenants, which could result in a default under the Debt Facility. If an event of default under the Debt Facility occurs, the Company would be unable to draw down on the Debt Facility, or if amounts were drawn down at the time of the default, the lenders could elect to declare all principal amounts outstanding thereunder at such time, together with accrued interest, to be immediately due and payable and to enforce their security interest over the Pan project, which would negatively impact our operations.  The Debt Facility is secured and has collateral on substantially all of the assets of the Company.

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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 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.  As of the date of this Annual Report we have approximately U.S.$5.5 million of the $10 million undrawn under the Overrun Facility.  The amounts remaining under the Debt Facility are insufficient for our planned operations at our Pan project and we will require additional capital to place the Pan project into commercial production and to draw on the undrawn amount.

 

The Debt Facility may limit our ability to receive distributions from our Pan project, if any. Our ability to receive distributions from the Pan project, if any, for corporate general and administrative expenses, and other non-Pan 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 to fund our exploration projects and corporate expenditures.

 

Early ore sampling have generally been below modeled grades, which were used to establish certain tests and criteria under the Debt Facility.  In the event that actual production results fall below our initial models, the lenders may require us to adjust the tests and criteria under the Debt Facility and/or we may be required to adjust our initial production plans or make other operational changes which may have a material effect on our cash flow and our operations.  Early sampling of ore grades at our Pan project have generally been below modeled grades and we have engaged an independent engineering firm to review modeling, sampling and assaying practices to gain an informed understanding of tonnage and grade variances to date.  If the engineer determines that the ore mined from the Pan project will remain below the modeled grades, the lenders may require us to adjust our initial production plans or make other operational changes, which may have a material effect on our cash flow and our operations.

 

Item 1B. Unresolved  Staff  Comments

 

None.

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Item 2. Properties

Nevada Properties

Map of Properties

The map below shows the location of the Company’s properties located in Nevada, USA.  These properties are described in further detail below.

 

MAP OF OUR NEVADA PROPERTIES

 

 

Source: Midway Gold Corp., 2013

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Pan Project

 

The Pan project is a sediment-hosted gold deposit located along the prolific Battle Mountain/Eureka gold trend 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 are approximately 76% complete, and should be operational during Q2 of 2015.  Generators are being utilized for power at the mine prior to completion of the power line.  Gold mineralization occurs in shallow oxide deposits, along a two-mile strike length of a faulted anticline.  Construction of this project is nearly complete and the mine will operate as an open pit, heap leach mining operation.  Production is planned for March of 2015 subject to completion of critical construction items and commissioning of the operating assets.  

 

Title

 

We have controlled the property since April 2007 through direct ownership of unpatented lode mining claims administered by the BLM and through mining leases.  We acquired our interest in a January 7, 2003 mineral lease agreement with Nevada Royalty Corp., Inc (“NRC”), as a result of our acquisition of Pan-Nevada Gold Corporation on April 13, 2007.  On or before January 5th of each year we must pay an advance minimum royalty of the greater of U.S.$60,000 or the US dollar equivalent of 174 ounces of gold valued by the average of the London afternoon fixing price for the third calendar quarter preceding January 1 of the year in which the payment is due.  On January 2, 2014 we paid $245,768 (U.S.$231,072).  On January 2, 2015 we paid $261,602 (U.S.$223,058).  The minimum advance royalties will be creditable against a sliding scale production royalty of between 2.5% and 4%.  We must incur a minimum of U.S.$65,000 a year of work expenditures, including claim maintenance fees, during the term of the mining lease. 

 

We have staked additional claims adjacent to the Pan property, some of which fall within the one mile area of interest of the NRC mining lease and will be subject to the production royalty to NRC. We have staked additional claims around the project, increasing the total land holdings to over 16 square miles.

 

We hold 121 and lease 429 unpatented lode mining claims which constitute our Pan Mine.  The leased unpatented lode mining claims are held with Nevada Royalty Corp. and expire on January 7, 2023.  The total acreage covered by these 550 claims is approximately 10,473 acres.  These claims are governed by the laws and regulations of the U.S. DOI, BLM and White Pine County, Nevada.  To maintain all of the mining claims we must pay annual maintenance fees to the BLM and White Pine County.  We have additional obligations to the lessor of the leased 429 mining claims which include making scheduled advance royalty payments.  The leased portion of the Pan Mine is subject to a sliding scale royalty of 2.5% to 4% gross sales during production.

 

 

Mineral Resources

 

As we begin to operate at the Pan Mine and gain experience through our efforts, we are likely to update the reserve and resource estimates based upon current operating results.  In October 2011, we reported a resource estimate for the Pan project based on results from 2011 drilling received up to the date of the resource estimate. The Measured and Indicated mineral resource estimate exceeded one million ounces of gold. The 1.13 million ounces of gold are contained in 37 million tonnes of 0.49 grams per tonne (gpt) gold in the Measured category and 43 million tonnes of 0.40 gpt gold in the Indicated category using a 0.14 gpt gold cutoff grade. The resource was prepared by Gustavson Associates LLC, a qualified person and an arm’s length party to the Company. The mineral resources are summarized below. “NI 43-101 Updated Mineral Resource Estimate for the Pan Gold Project, White Pine County, Nevada”, dated November 1, 2011, which is available under the Company's profile at www.sedar.com. The report was prepared to the standards of NI 43-101 and was filed on SEDAR on November 2, 2011.

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Resource Estimate, Pan project, Nevada

 

 

 

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

 

On November 15, 2011, we announced completion of a Feasibility Study for the Pan project. Mineral Reserves were based upon a design pit using Lerchs Grossmann generated pit surfaces that maximize revenue based on a U.S.$1,200 per ounce three-year trailing average price of gold. Cutoff grades of 0.21 gpt in the South pit and 0.27 gpt in the North & Central pits produced the project’s highest NPV. “NI 43-101 Technical Report Feasibility Study for the Pan project, White Pine County, Nevada, dated November 15, 2011,” which is available under our profile at www.sedar.com. The Feasibility Study was prepared by Guastavson Associates LLC, to the standards of National Instrument 43-101 and was filed on SEDAR on December 21, 2011. An updated report “Updated NI 43-101 Technical Report, Feasibility Study for the Pan project, White Pine County, Nevada” dated November 29, 2012 was filed to clarify responsibilities of the Qualified Persons. This updated report made no changes to the Feasibility Study numbers.

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Table 2: Total Pan Mineral Reserves, November 2011

 

 

 

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

 

We believe that there is no material difference between the mineral reserves as disclosed above under our NI 43-101 Feasibility Study and those disclosable under SEC Industry Guide 7, and therefore no reconciliation is provided.  Since the Pan project has known reserves under SEC Industry Guide 7 and has received its Record of Decision, the project is considered by us to be in the development stage.  As of December 31, 2014, construction of the Pan Mine is approximately 83% complete.

 

Mining and Production

 

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

 

During the twelve months ended December 31, 2014 and 2013, we capitalized into property, equipment and mine development $74,675,623 and $8,454,762 of Pan expenditures, respectively.   The 2014 costs were primarily related to the construction of the Pan Mine and its operating assets.  There were some additional costs for permitting, mitigation, engineering, site characterization, metallurgy, mine planning, and detailed design.  For a more detailed discussion of the Pan Mine’s production data, see Part II – Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

For the years ended December 31, 2014, 2013 and 2012 we incurred exploration expenditures of $133,387, $2,151,355 and $1,415,189 at the Pan project, respectively.  These expenditures were primarily for salaries and labor, which were 64%, 71% and 62% of mineral exploration expenditures for the years ended December 31, 2014, 2013 and 2012, respectively. 

 

Geology

 

The Pan project is a sediment-hosted gold deposit on the prolific Battle Mountain-Eureka gold trend in Nevada. It is an oxide deposit exposed on the surface. Host rocks are Devonian-Mississippian marine siltstone and limestone of the Pilot Formation and the Devils Gate Formation. Breccias developed along the Pan fault are the primary host of gold mineralization. Argillic alteration and silicification are the dominant alteration types associated with gold. At North Pan, gold mineralization is primarily hosted by silicified breccia in the Pilot Formation. At South Pan, gold occurs primarily in argillic altered breccia in the Devils Gate Formation. Gold occurs as stratabound mineralization outside of the breccias particularly in the Wendy zone adjacent to South Pan.

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Exploration and Development

 

The Pan mineralization was discovered in 1978 and over 860 holes have been drilled by 10 different exploration companies. These include: Amselco, Hecla, Echo Bay, Alta Gold, Pan Nevada Gold, and a number of other junior exploration companies.

 

In November 2011 we announced completion of a Feasibility Study showing strong economics for the Pan project. The Feasibility Study showed net present value of the project to be robust at a range of gold prices, increasing from U.S.$123 million at U.S.$1,200/oz gold to $344M at U.S.$1,900/oz gold. The internal rate of return grows from 32% to 79% using the same range of gold prices. Both use a 5% discount rate and are after tax figures. According to the 2011 Feasibility Study, the capital costs to build the mine are estimated to be U.S.$99M which includes U.S.$8.2M working capital and a U.S.$6.8M contingency. The operating cash cost was projected to be U.S.$585/oz which includes royalties, state taxes, and a 5% contingency. The total production cost including capital was projected to be U.S.$824/oz.  For further information on this project, please see the report entitled “Updated NI 43-101 Technical Report Feasibility Study for the Pan Gold Project, White Pine County, Nevada”, dated November 29, 2012, which is available under our profile at www.sedar.com. The Feasibility study was prepared by Gustavson Associates LLC, to the standards of National Instrument 43-101 and was originally filed on SEDAR on December 21, 2011.

 

A detailed discussion regarding Sampling, Analysis and Security of Samples is included within the Feasibility Study which is available under our profile on SEDAR at www.sedar.com.

 

During 2013, a trial blast provided material for large column tests to evaluate the potential for ROM leaching at South Pan. Test results showed that ROM is a viable option at South Pan.  The NEPA permitting process was completed with a Record of Decision for the Final Environmental Impact Statement issued on Dec 20, 2013. We also received confirmation from the U.S. Army Corps of Engineers that no “waters of the U.S.” are present at the project that would fall under the jurisdiction of Sections 401 and 404 of the Federal Clean Water Act. We received our Water Pollution Control Permit and our Air Quality Operating Permits to Construct.

 

During 2014, we commenced construction with an official groundbreaking ceremony on January 14, 2014 and have worked towards transitioning the Pan Mine from a development property to an operating property.  Ledcor, our contract miner, began production activities during Q3 of 2014 through stacking of ore on the leach pad.  Haul roads were constructed and are currently in use running to the leach pad and waste piles.  Installation of liner in the barren pond and pregnant pond are completed with the remainder of the processing systems to be completed and operating during Q1 of 2015.  To date we have incurred total costs of $90,504,152 (includes all capital spending on construction of the Pan Mine, permitting, drilling and other capitalized development costs) relating to the development of the Pan project.

 

The Pan project has known reserves, as defined under SEC Industry Guide 7, and the proposed program for the property is developmental in nature.  With mining operations commencing during September of 2014 and production expected within the near term of the date of this report, we anticipate to be a production company during Q1 of 2015.

 

Gold Rock Project

 

Gold Rock is a sediment-hosted gold deposit located along the prolific Battle Mountain/Eureka gold trend situated in the eastern Pancake Range in western White Pine County, Nevada, 8 miles southeast from the 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.  The property includes the Easy Junior Mine, which reportedly produced approximately 2.9 million tons at a grade of 0.026 opt for 74,945 ounces of gold by 1994. Additional drilling was completed in 2013 to expand the resource. Surface work was completed to identify additional exploration targets on the property.

 

Title

 

We have controlled the property since April 13, 2007 through direct ownership of unpatented lode and placer mining claims administered by the BLM and through mining leases.  We acquired our interest in the March 20, 2006 mineral lease agreement with NRC as a result of our acquisition of Pan-Nevada Gold Corporation on April 13, 2007.  On or before January 5 of each year we must pay an advance minimum royalty of the greater of U.S.$60,000 or the US dollar equivalent of 108.05 ounces of gold valued by the average of the London afternoon fixing price for the third calendar quarter preceding January 1 of the year in which the payment is due.  On January 2, 2014 we paid $152,616 (U.S.$143,490) and on January 2, 2015 we paid $162,449 (U.S.$138,514) in respect of our obligations under this agreement.  The minimum advance royalties will be creditable against a sliding scale Net Smelter Return (“NSR”) production royalty of between 2.5% and 4%.  We must incur a minimum of U.S.$75,000 annual work expenditures, including claim maintenance fees, during the term of the mining lease. 

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We have entered into or acquired four additional agreements for claims adjacent to and contiguous with the NRC claims:

 

Over the years we have staked additional claims outright adjacent to and contiguous with the Gold Rock property, which are outside of any area of interest.

 

We hold 549 unpatented lode claims and 8 mill-site claims.  Additionally, we lease 444 unpatented lode and 2 placer claims.  These 1,003 claims constitute our Gold Rock property which covers an approximate area of 19,188 acres.  The leased unpatented and placer claims are held with Anchor Minerals (expire 1/15/2017), Brian Peart (expire 1/14/2023), Nevada Royalty Corp (expire 3/20/2016) and Jerry Pankow (placer claims, expire 2/13/2023).  These claims are governed by the laws and regulations of the U.S. DOI, BLM and White Pine County, Nevada.  To maintain all of the mining claims we must pay annual maintenance fees to the BLM and White Pine County, Nevada.  We have additional obligations to the lessors of the leased 446 mining claims which include making scheduled advance royalty payments.  The leased portions of the Gold Rock Mine are subject to production royalties.  These various royalties consist of 3% Net Smelter Returns, 2%-5% Net Smelter Returns, 2%-6% Net Smelter Returns, 3.5% gross revenues, or 2.5%-4% gross sales.

 

Geology

 

Gold Rock is a sediment-hosted gold system in highly prospective host rocks within a 20 square mile land position along the Battle Mountain-Eureka gold trend. Gold was mined at the Easy Junior pit from siltstone and limestone of the Joanna and Chainman Formations. Additional gold anomalies occur in the Pilot and Devils Gate Formations, the same host rocks as found at the nearby Pan project. These potential host rocks are exposed along 6 miles of strike length and may have been repeated by east verging thrust faulting. Exposures in the Easy Junior pit show mineralization associated with the crest of a tight anticline cut by a high angle reverse fault. Gold is associated with silicification and argillic alteration of the host rocks along the structure. Historic drill data and geologic mapping suggests additional folds and thrust faulting around and along strike of the pit.

 

Exploration

 

The Easy Junior Mine, in the center of the Gold Rock property, reportedly produced 2.9 million tons of 0.026 opt gold (74,945 ounces gold contained) during operations by Alta Gold and the Alta Bay joint venture (Alta Gold-Echo Bay). The mine was shut down in 1994. A historic database of 794 holes containing 269,446 feet of drilling was acquired in 2008. Analysis of this drill data by us outlined a gold zone in the walls of the pit and along a strike extending south into the Decker Flat area. The gold zone is defined by 300 holes and extends for 9,200 feet along the strike of the Easy Junior anticline. This zone appears to be oxide, above the water table, and open in all directions.

 

Our exploration work has included drilling, data compilation and surface exploration.  Data compilation has included historic drill hole data, rock and soil geochemical data, geologic mapping, and geophysical surveys generated by previous exploration companies. We have generated new geology and alteration mapping and additional rock and soil sampling. A gravity survey was conducted over the property position.

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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.

 

The resource includes results from 785 drill holes and extends for over 8,000 feet north and south from the historic Easy Junior open pit gold mine.  The mineral resource estimate, summarized in the table below, can be found in the Amended Gold Rock Report under our profile on SEDAR at www.sedar.com.

 

A detailed discussion regarding Sampling, Analysis and Security of Samples is included within the Amended Gold Rock Report which is available under our profile on SEDAR at www.sedar.com.

 

 

 

* - Inferred mineral resources are estimated pursuant to Canadian industry standards. See “Cautionary Note to U.S. Investors Regarding Reserve and Resource Estimates” above. 

 

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.  Exploration permit approval has been received for an expanded drill plan that will allow both in-fill and step-out drilling.

 

During the years ended December 31, 2014, 2013 and 2012, we incurred exploration expenditures of $1,861,905, $2,616,384 and $3,815,606, respectively.  During 2012 and 2013, these costs primarily related to reverse circulation and diamond drilling as well as ongoing permitting efforts and salaries and labor associated with these activities.  During 2014, the costs were primarily ongoing permitting efforts and the associated salaries of those efforts.

 

While the Gold Rock project has defined resources, insufficient information is available to support reserves, as defined under SEC Industry Guide 7. Additional exploration work is planned for the property to support a reserve estimate. 

 

Spring Valley Project

 

Spring Valley is a diatreme/porphyry hosted gold system covered by gravel. Gold has been intercepted over an area 5,200 feet long by 3,500 feet wide that extended to a depth of 1,400 feet, suggesting the presence of a large mineral system. The Spring Valley project is under an exploration and option to joint venture agreement with Barrick Gold Exploration Inc.  Barrick funded 100% of the costs to earn an interest in this project.  Barrick has completed the expenditure requirement of $38 million to earn a 70% interest in the Spring Valley project.

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Location, Means of Access and State of Property

 

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.

 

Agreement with Barrick Gold

 

On March 9, 2009, we, through our wholly-owned subsidiary Midway Gold US Inc. (“MGUS”), executed an Exploration, Development and Mine Operating Agreement, effective March 9, 2009 (the “EDM Agreement”), with Barrick, a wholly-owned subsidiary of Barrick Gold Corporation, regarding the exploration, development and possible joint venture of our Spring Valley Project.

 

Exploration Period

 

Under the terms of the EDM Agreement, MGUS granted to Barrick the exclusive right to explore and develop the Spring Valley Project. During this exploration period, Barrick had the exclusive right to earn a 60% interest in the Spring Valley Project by spending U.S.$30.0 million on the property over a five-year period ending December 31, 2013. During this five-year period Barrick had the sole right to determine the nature, scope, extent and method of all operations in relation to the property, without having to consult or gain our approval. Barrick was required to provide us with certain information and reports and access to the Spring Valley Project to conduct inspections of operations during this period.

 

After vesting at 60%, Barrick increased its interest by 10% (to 70% total) by spending an additional U.S.$8.0 million.    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 mine development capital expenses. The cost that Barrick incurs from carrying us to commercial production will be recouped by Barrick, plus interest from project cash flows once production has been established. 

 

To date, Barrick has conducted and reported funding exploration totaling U.S.$55.5 million.  In 2014 and 2013, Barrick reported spending of U.S.$17.5 million and U.S.$11.0 million, respectively.

 

Joint Venture

 

We exercised our option to enter into a joint venture with Barrick as of February 23, 2014.  With the formation of the joint venture with Barrick, initial capital accounts will be established in accordance with Barrick’s earned interest in the Spring Valley Project and Barrick will be the manager of the joint venture.  During 2014, we conveyed a 70% interest in the property to Barrick subject to the terms of the Joint Venture and elected to allow Barrick to carry us to production and arrange financing for our share of development costs.  At which point, we will convey an additional 5% interest in the property to Barrick and retain a 25% minority interest.

 

The EDM Agreement also provides for the adjustment of a party’s participating interest in the joint venture upon default in making agreed-upon contributions to adopted programs and budgets or upon contributing less to a program and budget than a percentage equal to the party’s participating interest.

 

Under the EDM Agreement, a party’s whose recalculated participating interest is reduced below 10% shall be deemed to have withdrawn from the joint venture and shall relinquish its entire participating interest. Such relinquished participating interest shall be deemed to have accrued automatically to the other party. The reduced party shall have the right to receive 10% of net proceeds, if any, to a maximum amount of 75% percent of the reduced party’s equity account balance as of the effective date of the withdrawal. Upon receipt of such amount, the reduced party shall thereafter have no further right, title, or interest in the Spring Valley Project or under the EDM Agreement.  If our interest becomes less than 10%, we shall be deemed to have reserved a NSR Royalty of 2%.

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Title

 

We have held the property since 2003 through direct ownership of unpatented lode mining claims administered by the BLM and through mining leases. In 2014 we conveyed a 70% interest, under the terms of the Joint Venture to the Joint Venture.  Unpatented mining claims are kept active through payment of a maintenance fee due to the BLM and each county the claims are located in on August 31st of each year. Certain areas of the Spring Valley project are subject to NSR royalties ranging from 1% to 7% on different claim groups within the project package.

 

The Spring Valley property is constituted of 601 unpatented lode claims, 41 placer claims, and parcels of private property.  The total acreage covered by mining claims is approximately 10,304 acres and private property is approximately 2,002 acres.  All combined, Spring Valley covers approximately 12,306 acres.  The mining claims are governed by the laws and regulations of the U.S. Department of the Interior, Bureau of Land Management and Pershing County, Nevada.  To maintain all of the mining claims the joint venture must pay annual maintenance fees to the BLM and Pershing County, Nevada.  Additionally, there are scheduled advance royalty and option payments to the owners of certain mining claims and private property.  Portions of the Spring Valley property are subject to a production royalty of 2%, 3%, or a sliding scale of 2% to 7% Net Smelter Returns..

 

In 2014, Barrick, on behalf of our Company, paid the following lease payments or fulfilled work commitments to maintain certain mineral leases and options for the Spring Valley project: 

 

Over the years, we have staked additional claims and purchased rights to additional claims outright within and adjacent to the Spring Valley property. 

 

Geology

 

The Spring Valley gold deposit is hosted in Permo-Triassic Koipato Group rocks made up of rhyolite flows, breccias, and volcaniclastic sediments. These volcanics were intruded by fine grained feldspar porphyry. Hydrothermal alteration includes quartz-sericite + pyrite alteration associated with gold, argillic alteration in hydrothermal breccias, and lesser secondary potassium feldspar, iron carbonate, and hematite-quartz alteration.  Gold mineralization occurs in sheeted quartz veins, hydrothermal breccias, and open fractures. The gold is distributed along the top of the intrusion, and in overlying volcanic rocks, commonly at stratigraphic contacts, fracture zones, and in the remains of a diatreme breccia. Gold is found as grains of free gold up to 3 mm across, and has been observed along the edges of sulfide grains, indicating gold deposition is later than the sulfides.  Relatively coarse gold is common and can be observed as free gold liberated by drilling.

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Exploration

 

During 2014, Barrick reported drilling of 98,828 feet in 13 reverse circulation holes and 73 core holes.  One reverse circulation drill rig and two core drill rigs were used during 2014.  The 2014 drilling program emphasized in-pit infill drilling to convert inferred resources to an indicated resource status.  Further, prefeasibility study and work for the plan of operations submittal began in April 2014 with scheduled completion in 2016.

 

During 2013, Barrick reported drilling of 39,357 feet in 24 reverse circulation holes and, 29,003 feet in 26 core holes.  The 2013 drilling program was completed with two reverse circulation rigs and two core rigs. Barrick also reported continuing work on hydrology, biological baseline, initial site engineering, pit slope geotechnical, and initiated additional metallurgical testing.

 

During the years ended December 31, 2014, 2013 and 2012, we incurred exploration expenditures of $249,604, $105,328 and $141,909, respectively.  The work performed during 2014 was primarily related to engineering consultants for the resource estimate announced in September 2014.  During 2013, the costs were similar in nature to 2014 expenditures.

 

A technical report entitled “Amended NI 43-101 Technical Report on Resources, Spring Valley Project, Pershing County, Nevada” originally date of September 9, 2014 and with an amended report dated December 19, 2014 (“Amended Spring Valley Report”) was prepared by an independent engineer, Gustavson Associates, LLC of Lakewood, Colorado (“Gustavson”) to update the report entitled “NI 43-101 Technical Report on Resources, Spring Valley Project, Pershing County, Nevada”, dated May 24, 2011 prepared by Gustavson.  The Amended Spring Valley Report was prepared and filed in order to provide clarification about statements contained in our August 12, 2014 press release.  The Technical Report was prepared in accordance with NI 43-101 standards and detailed a measured, indicated and inferred mineral resource estimate for the Spring Valley Project in Pershing County, Nevada.  The Technical Report is independent of and distinct from any parallel resource estimates or scoping studies carried out by the Spring Valley Joint Venture as operated by Barrick.  The mineral resource estimate, summarized in the table below, can be found under our profile on SEDAR at www.sedar.com.

 

A detailed discussion regarding Sample Preparation, Analysis and Security of Samples is included within the Amended Spring Valley Report which can be found under our profile on www.sedar.com.

 

 

 

 

* - Inferred mineral resources are estimated pursuant to Canadian industry standards. See “Cautionary Note to U.S. Investors Regarding Reserve and Resource Estimates” above. 

 

Tonopah Project

 

Tonopah is a high-grade epithermal quartz-gold vein system, on the Round Mountain – Goldfield gold trend.  A core drilling program was conducted at Tonopah during 2012 to define the true width and continuity of gold grade in veins and wall rock. A total of 13,000 feet was drilled in 26 holes to test areas of the Discovery, 121, Dauntless, and 63-77 areas. No drilling has been performed during 2013 or 2014.

 

Location and Means of Access

 

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.  The property is over the northeastern flank of the San Antonio Mountains and in the Ralston Valley. Water for exploration purposes is available from water wells drilled on the property under a temporary grant of water rights.  Power is accessible from existing power lines crossing the property, however capacity is unknown and may be limited.

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Title

 

We have controlled the property since 2001.  Through a series of agreements, amendments and payments we acquired a 100% interest in the Tonopah property subject to a sliding scale on an NSR royalty from any commercial production of between 2% to 7%, based on changes in gold prices, and we must pay an advance minimum royalty, recoverable from commercial production, of U.S.$300,000 per year, payable on August 15. 

 

In addition, the surface rights to 560 acres in Section 32 are held by the Town of Tonopah. The remaining 80 acres of surface rights in Section 32 are held as two 40-acre parcels by two owners. We hold federal mineral rights for the entirety of Section 32 in unpatented claims.

 

We hold 444 unpatented lode claims which constitute our Tonopah property.  The claims encompass an area of approximately 8,769 acres.  These claims are governed by the laws and regulations of the U.S. Department of the Interior, Bureau of Land Management and Nye County, Nevada.  To maintain all of the mining claims we must pay annual maintenance fees to the BLM and Nye County, Nevada. We have additional obligations in the form of annual option payments.  A portion of the Tonopah property is subject to a royalty on a sliding scale of 2% to 7% Net Smelter Returns.

 

Geology

 

The Tonopah project is located at the intersection of the Round Mountain/Goldfield gold trend and the Walker Lane. It is a low-sulfidation epithermal gold system with near-vertical quartz-adularia-gold veins. Host rocks are Ordovician black argillite of the Palmetto Formation and unconformably overlying Tertiary rhyolitic volcanics. Bonanza gold veins occur in a series of en echelon clusters along a 1.5 mile northwest-trending band of mineralization.

 

Exploration

 

Veins in the Discovery zone were discovered by Kennecott Utah Copper in 1992. Prior to this the property was explored by Houston Oil and Minerals, Coeur d’Alene Mines, and Rio Algom. Tombstone Exploration and Golconda Resources explored the property after Kennecott Utah Copper.

 

In 2011, an initial resource estimate was completed on select veins of the Discovery and Dauntless zones. In April, 2011 a NI 43-101 compliant resource estimate was completed by Gustavson Associates, LLC to evaluate a limited number of vein-like structures primarily in the Discovery Zone. Mineralization was modeled using Indicator Kriging to analyze zones of potential high grade mineralization. This indicator model was calibrated by comparison with veins modeled on cross sections, and appears to have identified higher grade areas with continuous gold mineralization that could possibly be mined by underground methods.

 

Tonopah Project Initial Inferred Mineral Underground Resource*

 

 

* - Inferred mineral resources are estimated pursuant to Canadian industry standards. See “Cautionary Note to U.S. Investors Regarding Reserve and Resource Estimates” above.

 

The report was prepared by William J. Crowl, Donald E. Hulse, Donald J. Baker, and Terre A. Lane, under the supervision of Gustavson who are “independent” and "qualified persons" as defined under NI 43-101.  For further information on this project including a detailed discussion regarding Sampling and Analysis and Security of Analysis, please see the report entitled "NI 43-101 Technical Report on the Midway Project, Nye County, Nevada" dated effective April 1, 2011, which is available under our profile at www.sedar.com.

 

Following the resource estimate, core drilling was conducted at Tonopah to define the true width and continuity of gold grade in veins and wall rock. A total of 13,000 feet was drilled in 26 holes to test areas of the Discovery, 121, Dauntless, and 63-77 areas. Initial assay results indicated some high grade intercepts including 1.3 feet of 9.768 ounces per ton (opt) gold and 5 feet of 2.287 opt gold within a zone of 150 feet of 0.224 opt gold in drill hole MW11-09c as well as lower grade intercepts including 145 feet of 0.033 opt gold in MW11-06c. See our press release dated December 8, 2011 for full results.

 

In 2012, modeling of the veins was continued based on the 2011 drill results.

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No drilling was done in 2013 or 2014 as the Company focused its efforts at the Pan and Gold Rock projects.

 

For the years ended December 31, 2014, 2013 and 2012, we incurred exploration expenditures of $112,273, $84,814 and $232,880.  The costs for all three years were primarily for land holding fees and salary expense.

 

The Tonopah project is without known reserves, as defined under SEC Industry Guide 7, and future work on the property is exploratory in nature.

 

Other Nevada Properties

 

Our Pinyon project is an exploration project that we do not consider to be a  material property at this time.  We abandoned the Thunder Mountain property in fiscal year 2013.  These projects are without known reserves, as defined under SEC Industry Guide 7. 

 

Pinyon 

 

Pinyon is a disseminated gold target near the Gold Rock and Pan projects. Exposed mineralization is hosted in similar rock types with similar alteration as seen at Pan and Gold Rock. A portion of the claims were acquired in 2012 as part of an Exploration, Development and Mine Operating Agreement with Aurion Resources, which is subject to a Joint Venture agreement. Additional claims were staked in the surrounding area. 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 5 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 supply the Pan project.  Power is expected to be available from the Pan project. 

 

We entered into an earn-in agreement with Aurion Resources (“Aurion”) in November 2012 for claims. We can earn up to a 70% interest in the Pinyon property through the earn-in agreement and can also earn an additional 5% (75% total) by arranging mine financing.  In fulfillment of obligations under the earn-in agreement, on January 2, 2014 we paid $73,202 (U.S.$68,824) and on  December 31, 2014, we paid $99,306  (U.S.$85,601) related to 2015 obligations.

 

Washington Property

 

The map below shows the location of our property located in Washington, USA.  This property is described in further detail below.

 

Golden Eagle Project

 

Golden Eagle is a volcanic hosted, epithermal gold system with disseminated gold in quartz veins and extensive breccia bodies. Previous operators defined a large area of gold mineralization on the property.  Metallurgical issues related to processing sulfide mineralization and permitting continue to be assessed.

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Location and Means of Access

 

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. Power is available at the nearby (< 1 mile) Knob Hill Mine. Water availability has not yet been determined.

 

Title

 

On August 1, 2008, we issued 600,000 common shares at U.S.$2.50 per common share for proceeds of U.S.$1,500,000 by way of a private placement to Kinross Gold USA Inc. (“Kinross”) and concurrently purchased a 75% interest in the Golden Eagle project from Kinross at a cost of U.S.$1,500,000 ($1,537,950).  We then purchased a 25% interest in the Golden Eagle project from Hecla Limited at a cost of U.S.$483,333 ($500,200). Kinross retained a 2% net smelter returns royalty and was granted a first right of refusal to toll mill ore from the Golden Eagle property at their Kettle River Mill.  We completed the acquisition of the Golden Eagle property through a wholly-owned subsidiary created to hold the property. 

 

In the year ended December 31, 2009, we staked additional claims and purchased two additional blocks of land at a cost of $177,393 to expand our Golden Eagle land property package. 

 

Our land position encompasses a gross area of approximately 339.3 acres containing federal lode mining claims and patented lode mining claim and fee properties.

 

The Golden Eagle property consists of three unpatented lode claims and parcels of private property.  Mining claims and private property together cover approximately 338 acres.  The mining claims are governed by the laws and regulations of the U.S. Department of the Interior, BLM and Ferry County, Washington.  To maintain all of the mining claims we must pay annual maintenance fees to the BLM and Ferry County, Washington.  Portions of the Golden Eagle property are subject to a production royalty of 2% or 2.75% Net Smelter Returns.

 

Mineral Resources

 

On June 25, 2009, we announced an indicated mineral resource estimate of 31,400,000 tons at a grade of 0.055 opt containing 1,744,000 ounces of gold based on drilling by previous operators.  There is an additional inferred mineral resource estimate of 5,100,000 tons at a grade of 0.038 opt containing 192,000 ounces of gold. Both estimates are reported at a cutoff grade of 0.02 opt gold and constrained within a Lerchs-Grossman pit shell using a $750 per ounce gold price and 85% gold recovery.  The estimated metal content does not include consideration of any other mining, mineral processing, or metallurgical recoveries. The most likely cut-off grade for this deposit is not known at this time and must be confirmed by the appropriate economic studies. Mineral reserves have not been estimated.  For further information on this project including a detailed discussion of Sampling and Analysis as well as Security of Samples, please see the report entitled "Golden Eagle Project, Washington State, USA, Technical Report", prepared by Snowden Mining Industry Consultants, an independent company, dated effective July, 2009, which is available under our profile at www.sedar.com.  See “Cautionary Note to U.S. Investors Regarding Reserve and Resource Estimates” above.

 

Geology

 

The Golden Eagle project is a volcanic hosted, epithermal gold system with gold in quartz veins and disseminated in extensive breccia bodies. The host rocks are andesite flows and volcaniclastics of the Eocene age Sanpoil Formation along the western margin of the Republic Graben. Gold occurs primarily in silicified and argillized hydrothermal breccia that is 2,500 feet long and 1,000 feet wide. The gold zone trends roughly east-west. It is exposed at the surface at the historic Mountain Lion mine to the west and plunges to the northeast. Locally the breccia is cut by quartz veins carrying higher grades of gold. Gold and silver mineralization is often found in solid solution with sulfide minerals and is considered refractory. Historical underground mining extracted gold and silver rich quartz veins adjacent to and beneath Golden Eagle.

 

Exploration

 

Exploration was conducted on the property from 1940 to 2000 by Knob Hill Mining, Day Mines Inc., Hecla Mining Company, Santa Fe Pacific Gold Corporation, and Echo Bay Mines Ltd. Hecla and Santa Fe Pacific Gold Corporation defined a large gold resource on the property and conducted pre-feasibility studies including numerous metallurgical tests. After Santa Fe Pacific Gold Corporation was acquired by Newmont Mining Company, the property was traded to Echo Bay Mines Ltd. during a time of low gold prices. Kinross acquired Echo Bay and focused their efforts elsewhere.

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In 2008, we acquired the Golden Eagle project and began compiling and reviewing the historic database of 835 drill holes containing 165,775 feet most of which was core drilling. Many of the older shallow holes could not be verified, leaving 126,591 feet in 164 holes that could be verified for use in creating a new resource model. Dr Thom Seal was contracted to review the numerous metallurgical reports and summarize the results for us. Our geologists mapped the historic pits and sampled pit walls and dumps.

 

In 2011, we commissioned a preliminary economic assessment to evaluate the economics of different mining options at current higher gold prices. Issues related to processing sulfide mineralization and permitting continue to be assessed. 

 

No work has been performed on the project since 2011 as the focus of our efforts has been the Pan and Gold Rock projects. 

 

The Golden Eagle project is without known reserves, as defined under SEC Industry Guide 7, and furture work for the property is exploratory in nature.

 

Office Facilities

 

We  currently lease approximately 12,000 square feet.    Monthly rent payments under this lease, including parking and operating expenses, average approximately U.S.$23,000 per month for fiscal years 2015 through 2020 when the lease expires. We entered into a sub-lease for 3,627 square feet of our office space, which runs through July of 2019.  The average monthly rent received under the sublease agreement is approximately U.S$6,900 per month.  We executed a second sub-lease in February of 2015 for approximately 4,300 square feet of our office space, which runs through August of 2020.  The average monthly rent received under the sublease agreement is approximately U.S$7,800 per month.  We believe the remaining space is adequate for our needs for the foreseeable future and that substitute space would be readily available, if needed.

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Item 3. 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.

 

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 4. Mine Safety Disclosures

 

Pursuant to Section 1503(a) of the recently enacted Dodd-Frank Act, issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine in the United States are required to disclose in their periodic reports filed with the SEC information regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities under the regulation of the Federal Mine Safety and Health Administration (‘‘MSHA’’) under the Federal Mine Safety and Health Act of 1977 (the ‘‘Mine Act’’).  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 95.1 to this Form 10-K.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 

Price Range of Common Shares

 

Our common shares are listed on the TSX and the NYSE MKT under the symbol MDW.  We are authorized to issue an unlimited number of Common Shares, without par value.  The following table sets out the reported high and low sale prices on the TSX and on the NYSE MKT for the periods indicated as reported by the exchanges.

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As of March 10, 2015, the closing price of our stock on the NYSE was U.S.$0.47 and $0.59 on the TSX.  As of March 10, 2015, there were 176,545,337 common shares issued and outstanding and we had 90 registered shareholders of record.  The following table sets out the closing market price range of our common shares on the TSX and NYSE MKT for the periods indicated.

 

Dividend Policy

 

We have not declared or paid cash dividends on our common shares since our inception and we expect for the foreseeable future to retain any earnings from operations for use in expanding and developing our business. Future dividend decisions will consider our then current business results, cash requirements and financial condition.

 

Our Series A Preferred Shares hold an eight percent (8%) annual dividend, compounding monthly, payable quarterly. At our option, we may pay the 8% dividend with common shares, in-lieu of cash, based on the closing price of our common shares as quoted by the NYSE MKT on the trading day immediately prior to the payment date.  However, pursuant to our obligations under the Debt Facility we are unable to pay the Series A Preferred Share dividend in cash until we reach economic completion.

 

 

Purchases of Equity Securities by the Company and Affiliated Purchasers

 

Neither we nor any “affiliated purchaser,” as defined in SEC Rule 10b-18(a)(3), purchased any of our equity securities during the quarter ended December 31, 2014. 

 

Equity Compensation Plan Information

 

Our 2013 Stock and Incentive Plan (the “2013 Stock and Incentive Plan” or the “Plan”) was approved by the Board of Directors on April 18, 2013 and Shareholders on June 20, 2013 at the Company’s Annual General and Special Meeting of Shareholders.  The Plan was designed to replace the 2008 Stock Option 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.

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The following summary information is presented for the Stock Option Plan as of December 31, 2014.  

 

 

 

Stock Option Plan Information

 

The following is a summary of important 2013 Stock and Incentive Plan provisions.  It is not a comprehensive discussion of all of the terms and conditions of the Plan.  The information provided below may be modified or altered by some provisions in the Plan.  Readers are advised to review the full text of the Plan to fully understand all terms and conditions of the Plan.   

 

Purpose

 

The purpose of the 2013 Stock and Incentive Plan is to promote the interests of the Company and its shareholders by aiding the Company in attracting and retaining employees, officers, consultants, advisors and non‑employee Directors capable of assuring the future success of the Company.  Further, the purpose of the 2013 Stock and Incentive Plan is to offer such persons incentives to put forth maximum efforts for the success of the Company’s business and to compensate such persons through various stock‑based arrangements and provide them with opportunities for stock ownership in the Company, thereby aligning the interests of such persons with the Company’s shareholders.

 

Eligibility

 

The 2013 Stock and Incentive Plan is available to any employee, officer, non-employee director, consultant, independent contractor or advisor providing services to our Company that is designated to receive an award under the 2013 Stock and Incentive Plan as determined by the Compensation Committee in its sole discretion.  No award and no right under any such award may be transferred by a recipient other than by will or by the laws of descent and distribution, other than fully vested and unrestricted common shares issued pursuant to any award. 

 

Number of Shares Reserved for Issuance Under the 2013 Stock and Incentive Plan

 

The Board of Directors fixed the aggregate number of our common shares issuable under all awards (“Award” or “Awards”) under the 2013 Stock and Incentive Plan at 16,628,914 (“Award Cap”), which was equivalent to 10% of our common shares plus Series A Preferred Shares and was equivalent to 12.9% of the Company’s common shares outstanding 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 Stock and Incentive 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. 

 

Limitation on the Issuance in Light of the Rights of the Series A Preferred Shareholders

 

No common shares may be issued without written consent or affirmative vote of HCP-MID, LLC pursuant to any award granted under the 2013 Stock and Incentive Plan for consideration that is less than the conversion price applicable to the Series A Preferred Shares, being U.S.$1.85 per share, if such issuance would violate Part 26 of our Articles.

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Administration

 

The 2013 Stock and Incentive Plan shall be administered by the Compensation Committee.  Subject to the express provisions of the 2013 Stock and Incentive Plan and to applicable law, the Compensation Committee has the full power and authority to:  (i) designate participants (the “Participants”) in the 2013 Stock and Incentive Plan; (ii) determine the type or types of awards to be granted to each Participant under the 2013 Stock and Incentive Plan; (iii) determine the number of common shares to be covered by each Award; (iv) determine the terms and conditions of any Award or Award Agreement, including any terms relating to the forfeiture of any Award and the forfeiture, recapture or disgorgement of any cash, common shares or other amounts payable with respect to any Award; (v) amend the terms and conditions of any Award or Award Agreement; (vi) accelerate the exercisability of any Award or the lapse of any restrictions relating to any Award, (vii) determine whether, to what extent and under what circumstances Awards may be exercised in cash, common shares, other securities, other Awards or other property, or canceled, forfeited or suspended; (viii) determine whether, to what extent and under what circumstances cash, shares, other securities, other Awards, other property and other amounts payable with respect to an Award under the 2013 Stock and Incentive Plan shall be deferred either automatically or at the election of the holder thereof or the Compensation Committee; (ix)  interpret and administer the 2013 Stock and Incentive Plan and any instrument or agreement, including an Award Agreement, relating to the 2013 Stock and Incentive Plan; (x) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the 2013 Stock and Incentive Plan; (xi) make any other determination and take any other action that the Compensation Committee deems necessary or desirable for the administration of the 2013 Stock and Incentive Plan; and (xii) adopt such modifications, rules, procedures and sub-plans as may be necessary or desirable to comply with provisions of the laws of non‑U.S. jurisdictions in which the Company or an affiliate may operate.

 

Stock Options

 

Stock Options granted under the 2013 Stock and Incentive Plan may be either “incentive stock options” or non-qualified stock options.  The exercise price of a stock option granted under the 2013 Stock and Incentive Plan will be determined by the Compensation Committee at the time the option is granted, but the exercise price may not be less than 100% of the fair market value of our common shares on the date of grant of such option.  The fair market value is the closing price of one common share on the trading day immediately preceding the date of grant on the NYSE MKT Stock Exchange. The Compensation Committee may designate an exercise price below the fair market value on an option grant date if the option is granted in substitution for a stock option previously granted by an entity that is acquired or merged with our Company or an affiliate of our Company. In addition, stock options are subject to the following restrictions: (i) a promissory note is not permitted as payment for a stock option; (ii) the maximum term for stock options is 10 years from the date of grant; and (iii) unless otherwise fixed, stock options expire 3 months after the person to which they have been granted is terminated (12 months if due to death) and 3 trading days after a period during which trading in the common shares was prohibited or restricted.

 

Stock Appreciation Rights

 

The 2013 Stock and Incentive Plan provides that the Compensation Committee may, from time to time and in its sole discretion, grant awards of stock appreciation rights.  A stock appreciation right granted under the 2013 Stock and Incentive Plan shall confer on the holder thereof a right to receive upon exercise thereof the excess of (i) the fair market value of a common share on the date of exercise over (ii) the grant price of the stock appreciation right as specified by the Compensation Committee, which price shall not be less than 100% of the fair market value of one common share on the date of the grant of the stock appreciation right.

 

Restricted Stock and Restricted Stock Units

 

The Compensation Committee is authorized to grant an Award of Restricted Stock and Restricted Stock Units to participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the 2013 Stock and Incentive Plan as the Compensation Committee shall determine:

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Amendments

 

The Board may from time to time amend, suspend or terminate the 2013 Stock and Incentive Plan, and the Compensation Committee may amend the terms of any previously granted Award, provided that no amendment to the terms of any previously granted Award may, except as expressly provided in the 2013 Stock and Incentive Plan, or with the written consent of the participant or holder thereof, adversely alter or impair the terms or conditions of the Award previously granted to a participant under the 2013 Stock and Incentive Plan.  Any amendment to the 2013 Stock and Incentive Plan, or to the terms of any Award previously granted, is subject to compliance with all applicable laws, rules, regulations and policies of any applicable governmental entity or securities exchange, including receipt of any required approval from the governmental entity or stock exchange.  For greater certainty and without limiting the foregoing, the Board may amend, suspend, terminate or discontinue the 2013 Stock and Incentive Plan, and the Compensation Committee may amend or alter any previously granted Award, as applicable, without obtaining the approval of our Shareholders in order to:

 

Certain amendments under the 2013 Stock and Incentive Plan may not be made without Shareholder approval, and these include:   (i) amendments that require shareholder approval under the rules or regulations of the SEC, the NYSE MKT LLC, the Toronto Stock Exchange, or any other securities exchange or regulatory authority that is applicable to the Company; (ii) amendments that increase the number of shares authorized under the 2013 Stock and Incentive Plan as specified in Section 4(d) of the 2013 Stock and Incentive Plan; (iii) amendments that modify the limitations contained in Section 4(d) of the 2013 Stock and Incentive Plan; (iv) amendments that permit repricing of options or stock appreciation rights, which is currently prohibited by Section 6(f)(vii) of the 2013 Stock and Incentive Plan; (v) amendments that permit the award of options or stock appreciation rights at a price less than 100% of the fair market value of a Share on the date of grant of such Option or Stock Appreciation Right, contrary to the provisions of 6(a)(i) and Section 6(b) of the 2013 Stock and Incentive Plan; or (vi) amendments that cause our Company to be unable to grant incentive stock options under the 2013 Stock and Incentive Plan, or would cause Section 162(m) to become unavailable with respect to the 2013 Stock and Incentive Plan.

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Performance Awards

 

The Compensation Committee is authorized to grant performance awards that are intended to be “qualified performance‑based compensation” within the meaning of Section 162(m) of the United States Internal Revenue Code of 1986, as amended (“Section 162(m)”).  A performance award (“Performance Award”) granted under the 2013 Stock and Incentive Plan (i) may be denominated or payable in cash, shares (including, without limitation, Restricted Stock and Restricted Stock Units), other securities, other Awards or other property and (ii) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of one or more objective performance goals during such performance periods as the Compensation Committee shall establish.  Subject to the terms of the 2013 Stock and Incentive Plan, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted, the amount of any payment or transfer to be made pursuant to any Performance Award and any other terms and conditions of any Performance Award shall be determined by the Compensation Committee.  Performance Awards shall be conditioned solely on the achievement of one or more objective performance goals established by the Compensation Committee within the time prescribed by Section 162(m), and shall otherwise comply with the requirements of Section 162(m).

 

Stock Performance Graph

 

The performance graph below shows our cumulative total return based on an initial investment of $100 in our common shares, as compared with the S&P/TSX Composite Index and the S&P/TSX Global Gold Index.  The chart shows performance marks as of the last trading day during each of the last five years.  This performance chart assumes: 

(1) $100 was invested on December 31, 2009 in our common shares, the S&P/TSX Composite Index and the S&P/TSX Global Gold Index; and

(2) Dividends are reinvested. 

 

 

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Exchange Controls

 

We are not aware of any governmental laws, decrees or regulations in Canada that restrict the export or import of capital, including foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-resident holders of the securities of Midway Gold, other than Canadian withholding tax. See ‘‘Taxation’’ below.

 

Taxation

 

Dividends paid or credited or deemed under the Income Tax Act (Canada) to be paid or credited by us on our common shares to a shareholder that is not resident in Canada for purposes of the Income Tax Act (Canada) will generally be subject to Canadian withholding tax at the rate of 25% of the gross amount of the dividend, subject to any reduction in the rate of withholding to which the shareholder is entitled under any applicable income tax convention between Canada and the country in which such shareholder is resident.  For example, where such shareholder is a resident of the United States, is fully entitled to the benefits under the Canada-United States Income Tax Convention (1980) and is the beneficial owner of the dividends, the applicable rate of Canadian withholding tax is generally reduced to 15% (or 5% in circumstances where such shareholder is a company that is the beneficial owner of at least 10% of the voting stock of the Company).

 

Sales of Unregistered Securities

 

All unregistered sales of equity securities during the period covered by this Annual Report on Form 10-K were previously disclosed in our Current Reports on Form 8-K and our Quarterly Reports on Form 10-Q.

 

Transfer Agent

 

We have appointed Computershare Investment Services Inc. as the transfer agent for our common shares. The principal office of Computershare is located at 3rd Floor, 510 Burrard Street, Vancouver, B.C. V6C 3B9 and its telephone number is 1 604 661-9415.

Item 6. Selected Financial Data

The following selected financial data sets forth our summary historical financial data as of and for the years ended December 31, 2014, 2013, 2012, 2011  and 2010. This information was derived from our audited financial statements for each period.  Our selected historical financial data is qualified in its entirety by, and should be read in conjunction with, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the notes thereto included elsewhere in this report. For additional information relating to our operations, see “Item 1. Business” and “Item 2. Properties.”

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See the consolidated financial statements attached hereto under Item 8 for additional information.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In Management’s Discussion and Analysis of Financial Condition and Results of Operations, “we”, “us”, “our”, the “Company”, and “Midway” refer to Midway Gold Corp. and its subsidiaries. The following discussion provides information that we believe is relevant to an assessment and understanding of our consolidated operating results and financial condition. The following discussion should be read in conjunction with our other reports filed with the U.S. Securities and Exchange Commission (the “SEC”).

 

Except for the historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties.  We caution you not to put undue reliance on any forward-looking statements.  Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the risks described in “Risk Factors” and elsewhere in this annual report.  See “Cautionary Note Regarding Forward-Looking Statements” above.  Our discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements for the three years ended December 31, 2014, and related notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), included in this report and with the understanding that our actual future results may be materially different from what we currently expect.

 

Company Overview

 

We are engaged in the acquisition, exploration, and, if warranted, development of gold and silver mineral properties, primarily in Nevada. Our mineral properties are located in Nevada and Washington. Our vision is to develop a portfolio of simple, manageable, financeable gold projects.  The Tonopah, Spring Valley, Gold Rock and Golden Eagle gold properties are exploratory stage projects with identified gold mineralization. The Pinyon project is an earlier stage gold and silver exploration project.

 

Our Pan project is an open-pit heap leach mine and is in the development and construction stage nearing the production stage.  Construction began on the project in January of 2014 with stacking of ore commencing in September of 2014.  We mined 1.4 million tons of ore during 2014 which resulted in an estimated 12,370 contained ounces of gold placed on the leach pad.  Our initial gold production is expected to occur in late March of 2015.  

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Executive Summary

 

Development of the Pan Mine during 2014 has progressed slower than anticipated at the onset of construction due to several challenging issues.  Financing of construction was the first major delay as we strived to obtain financing that would be advantageous to us and to our shareholders.  On July 18, 2014, we entered into the Debt Facility with Commonwealth Bank of Australia (“CBA”) which we have used to fund continued development and construction of the Pan project.  Equity financing was necessary during June of 2014 to reach agreed upon milestones as part of our Debt Facility.

 

As we continued into construction of the Pan Mine, unforeseen circumstances arose which further delayed our progress.  A significant rain storm during the third quarter of 2014 damaged several of our assets, leading to an insurance claim to repair, replace and get us back to where we were prior to the storm.  Through December 31, 2014 we have received U.S.$2.5 million of insurance proceeds with additional insurance proceeds anticipated to be received during March of 2015 totaling $0.8 million.

 

Two further sources of delay continued to push our anticipated first production into the first quarter of 2015.  In early 2015, a mechanical malfunction in one of our two production water wells extended the time required to fill our operating ponds to the level necessary to initiate irrigation of ore on the leach pad.  The original well has been abandoned and a replacement well is approximately 80% complete. Drilling of a third production well is expected to begin in April 2015 and will mitigate the risk of a well failure in the future.  The failure of the water well has led to a second insurance claim, with initial proceeds of U.S.$0.8 million received during the first quarter of 2015.  A second source of delay is related to the issuance of building and occupancy permits at the state and county level.  It has been an ongoing challenge for our team to accurately predict and control the time required for issuance of these final operating permits.

 

We anticipate the total capital expenditures for construction of the Pan Mine to be approximately U.S.$83.7 million.  As of December 31, 2014, we have spent approximately U.S.$69.5 million towards the total capital expenditures.  As of the date of this Annual Report, we have approximately U.S.$5.5 million undrawn under the Overrun Facility.  To draw the remaining U.S.$5.5 million, we must satisfy certain conditions precedent of our Debt Facility.  At present, we do not satisfy the conditions precedent of our Debt Facility and must therefore contribute additional funds to Pan and meet other conditions in order to satisfy the conditions precedent, avoid an event of default of our Debt Facility and draw the remaining U.S.$5.5 million available under the Overrun Facility. 

 

On March 13, 2015, MDW Pan LLP, as borrower, and CBA, as administrative agent, collateral agent, technical agent and initial lender, and the other lenders named in the Credit Agreement entered into the Waiver to the Credit Agreement.  The purpose of the Waiver was to, among other things, (i) grant MDW Pan LLP’s request for a temporary waiver of the covenants set forth in Section 7.01(y) of the Credit Agreement until April 20, 2015, which requires that MDW Pan LLP not, directly or indirectly, fail to satisfy the Cost Complete Test (as defined in the 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 a “going concern” or like qualifications relating to MDW Pan LLP’s failure to satisfy the Cost to Complete Test or Time to Complete Test and other matters disclosed to CBA 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 U.S.$200,000.  The Waiver Fee shall become 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 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 Credit Agreement) may have against the Secured Parties arising under or in connection with the Loan Documents (as defined in the Credit Agreement.  The Waiver did not amend the covenants, tests or obligations related to the Debt Facility or our ongoing compliance with the terms, which affect our ability to draw the remaining amounts under the Debt Facility and maintain the Debt Facility in good standing.  The foregoing description is a summary of the material terms of the Waiver and is qualified in its entirety by reference to the text of the Waiver, which is filed as Exhibit 10.25 hereto.

 

Pan Mine

 

Operations

 

 

Ledcor, our contract miner, began stacking ore on the leach pad during September of 2014.  Through December 31, 2014, 1.4 million tons of ore and 2.8 million tons of waste has been mined.  Total mine production reached our desired capacity by the end of 2014 and is currently exceeding planned production levels of 55,000 tons per day.  Commissioning of our ADR plant, installation of ADR plant instrumentation and equipment and leaching with cyanide during Q1 2015 will allow us to commence production.    

 

As of December 31, 2014, we had approximately 2.0 million square feet of leach pad area has been constructed, capable of holding approximately 8 million tons of ore.  During 2015, approximately 2.2 million square feet of additional heap leach pad area will be constructed capable of holding an additional 12 million tons of ore.  This planned expansion will ensure we have enough leach pad capacity available to us through the 2016 construction season when the third expansion is planned to occur. 

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The grade from samples of ore mined to date have generally been below modeled grades.  Although we have seen improvement in mined grades as we mine deeper into the deposit, we have engaged an independent mining engineering form to review modeling, sampling and assaying practices to gain a better understanding of grade and tonnage variances to date.  Sustained gold production from the heap will provide an additional data point from which to complete our assessment of initial model performance.

 

Results of Operations for the Year Ended December 31, 2014 Compared to December 31, 2013

 

The following table summarizes our results of operations for the fiscal years ended December 31, 2014 and December 31, 2013:

 

 

Net Income (Loss) for the years ended December 31, 2014 and 2013 were $(18,589,880) and $8,905,931, respectively.

 

Other Operating Costs incurred during the year ended December 31, 2014 of $667,491 were primarily attributable to start-up processing costs and depreciation expense which will be allocated to finished goods inventory, when the mine is in production, and therefore could not be allocated to ore on leach pad inventory.  Once gold begins to leach off of the pad, the processing costs will be allocated to finished goods inventory and flow through to Cost of Sales.  Depreciation expense related to the Pan Mine during the year ended December 31, 2014 was $2,818,004 with $2,719,898 allocated to ore on leach pads inventory during 2014.  The expense of $2,818,004 consisted primarily of depletion incurred on the Pan mineral property, leach pad, and mine development assets which were placed into service during the fourth quarter of 2014.

 

Write-down of Inventories during the year ended December 31, 2014 were $472,619.  We began stacking ore on the leach pad in September of 2014, placing an estimated 12,370 contained ounces on the leach pad.  Using expected gold prices, reduced by estimated further processing, shipping and royalty costs, we wrote down ore on leach pads inventory by $472,619.

 

Accretion expense increased by $161,660 from the year ended December 31, 2013 primarily due to an increase in the asset retirement obligation of the Pan Mine.  During the year ended December 31, 2014, we incurred $3,913,023 of additional asset retirement obligations at the Pan Mine through the construction and build-out of the mine, which amounts have been added to the cost of the Pan Mine. 

 

Mineral Exploration Expenditures for the year ended December 31, 2014 and 2013 were $2,890,171 and $5,337,923, respectively. Included in mineral exploration expenditures are non-cash stock based compensation of $35,224 and $186,534 for the years ended December 31, 2014 and 2013, respectively.    The details of the exploration expenses by property in each year may be found in the schedule of mineral exploration expenditures, of the audited consolidated annual financial statements, but are summarized below: 

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Exploration levels are determined by the success of previous exploration programs on each project and by available cash to fund additional programs.  As discussed earlier, Barrick has been funding the Spring Valley project since the beginning of 2009 and the expenses reported by us are related to activities not funded by Barrick.

 

As we are currently focused on bringing the Pan project into production, the cash expenditures for exploration have been reduced in order to preserve capital for completion of the Pan project.  Additionally, effective January 1, 2014, as construction commenced on the Pan project, administrative Pan related expenses are no longer allocated to exploration and as a result these costs have been recorded in Office and Administration and Salaries and benefits as appropriate.

 

Legal, Audit and Accounting fees totaled $1,261,711 for the year ended December 31, 2014, a decrease of $2,313,323 from the period ended December 31, 2013.    Legal expenses during the twelve months ended December 31, 2014 decreased from the twelve months ended December 31, 2013 as we incurred significant legal, tax advisory and accounting fees during the twelve months ended December 31, 2013 surrounding the non-recurring restructuring of our subsidiaries.  Additionally, in 2014, we incurred a decreased level of costs related to the investigation of different financing options to meet capital demands as we bring the Pan project into production.

 

Office and Administration expenses for the year ended December 31, 2014 were $2,929,576 compared to $1,184,217 during the comparable period of 2013, an increase of $1,745,359. This increase is a result of additional overhead costs, including increased rent expense for the Englewood, Colorado office, increased insurance policy premiums and increased information technology costs tied to our increased headcount and the need to expand capacities and capabilities of our internal network.  In addition, expenses of our Ely, Nevada office were no longer allocated to Mineral Exploration Expense during 2014 that were allocated during 2013.  As the Pan Mine commenced construction in January of 2014, those costs were no longer exploration related charges and have been included in office and administration in 2014.

 

Salaries and Benefits for the year ended December 31, 2014 were $6,987,736 inclusive of $938,051 of non-cash stock based compensation, compared to $5,453,707 and $920,197 respectively, during the comparable period of 2013.    As mentioned previously, a significant portion of the increase is due to the classification of Pan administrative expenses moving from Mineral Exploration expense to Salaries and Benefits expense.  Increased employee levels and the related benefit costs also contributed to the increased expenses due to the Company’s continued growth.  Severance payments were made to certain former members of upper management as the result of a corporate overhead savings measure to preserve capital for the completion of the Pan project.  At December 31, 2014, we had 49 employees compared to 38 employees at December 31, 2013.

 

Other Income (Expenses) for the year ended December 31, 2014 was an expense of $76,932 compared to an income of $24,441,172 during the comparable period of 2013.  The change is primarily the result of gains on the change in fair value of derivative liabilities and foreign exchange fluctuations recognized during the year ended December 31, 2013.  We recorded a gain on derivative contracts of $20,306,621 and a foreign exchange gain of $4,065,291 during 2013.  During the year ended December 31, 2014, we recorded a gain on derivative contracts of $113,254 associated with the market to market adjustments on our interest rate swap, diesel fuel hedge and gold forward sale contracts.  In addition, we recorded interest income of only $30,499 during 2014 compared to $151,337 during 2013.

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Foreign Currency Translation 

 

Effective January 1, 2014, the functional currency of the Company’s parent company changed from the Canadian dollar to the United States dollar (“U.S. dollar”) based upon significant changes in economic facts and circumstances, which included the receipt of the Record of Decision for the Pan project in December 2013, the commencement of construction at the Pan project in 2014, and recent and anticipated financings in U.S. dollars. These changes in economic facts and circumstances have resulted in the U.S. dollar being the currency of the primary economic environment in which the entity operates.  The change in the functional currency of the Company’s parent company has been applied prospectively with differences attributable to current-rate translation of non-monetary assets and liabilities at the date of change being reported through other comprehensive income.  The reporting currency remains the Canadian dollar.

 

As a result of the change in our parent Company’s functional currency from the Canadian dollar to the U.S. dollar effective January 1, 2014, there was no gain or loss recorded on the change in the fair value of the preferred share derivative liability for the twelve months ended December 31, 2014 as the liability balance was reclassified to additional paid-in capital as of January 1, 2014.

 

The financial statements of our U.S. functional currency operations are translated from their functional currency, the United States dollar, to the reporting currency, the Canadian dollar, using the current rate method. Assets and liabilities are translated using the current rate in effect at the balance sheet date and revenues and expenses are translated at the average rate for the period. Adjustments resulting from the translation, if any, are included in accumulated other comprehensive income in stockholders’ equity.  The foreign exchange rate of U.S.$1.00 to CAD as of December 31, 2014 was 1.1601 (December 31, 2013 – 1.0636) and the average exchange rate was 1.1045 (2013 – 1.0298 , 2012 – 0.9996 ).

 

 

Income Tax Recovery (Expense) for the year ended December 31, 2014 was an expense of $1,696,540 compared to a recovery of $1,844,859 for the year ended December 31, 2013.  The primary reason for the change when comparing 2014 to 2013 is a deferred income tax recovery of $3,285,785 recorded during the twelve month period ended December 31, 2013.  The recovery related to a decrease of the deferred income tax liability that was associated with the acquisition of the Pan and Gold Rock projects.  During the twelve months ended December 31, 2014 and 2013, we recorded expense relating to the Canadian corporate Part VI.1 dividend tax resulting from our Series A Preferred Share dividends of $1,696,540 and $1,440,926, respectively.

 

As of December 31, 2014 we had a deferred tax asset of $37,174,422, with the full amount not considered to be realizable and therefore management has recognized a valuation allowance of $29,219,184.  The net deferred tax asset of $7,955,238 is offset by a deferred tax liability of $7,955,238 associated with basis temporary differences associated primarily with mineral properties.

 

Results of operations for the year ended December 31, 2013 compared to December 31, 2012

 

The following table summarizes our results of operations for the fiscal years ended December 31, 2013 and December 31, 2012:

 

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Net income (loss) for the years ended December 31, 2013 and 2012 were $8,905,931 and $(15,274,622), respectively.

 

Consulting expense increased $108,201 or 29% from $373,763 for the year ended December 31, 2012 to $481,964 for the year ended December 31, 2013.  We incurred additional consulting expenses related to strategic planning and records management as we continue to expand and grow into an operationally based entity.

 

Depreciation expense during the year ended December 31, 2013 was $530,790 compared to $400,131 for the year ended December 31, 2012, an increase of $130,790. This was primarily due to a 39% increase in depreciable assets from December 31, 2012.

 

Legal, Audit and Accounting fees totaled $3,575,034 for the year ended December 31, 2013, an increase of $2,241,015 or 168% from the period ended December 31, 2012.  We incurred increased legal and auditing fees during the twelve months ended December 31, 2013. The increase in legal expenses related to matters involved with our advancement from a development stage company to a  gold production company including general legal issues, land claims and other corporate matters. We also incurred significant legal and accounting fees involved in a non-recurring restructuring of our subsidiaries. We continued to utilize financial consultants during the year ended December 31, 2013 to meet the demands related to SEC and SEDAR filing requirements and the investigation of different financing options to meet our capital demands as we bring the Pan project into production.

 

Mineral Exploration Expenditures for the year ended December 31, 2013 and 2012 were $5,337,923 and $7,182,579, respectively. Included in mineral exploration expenditures are non-cash stock based compensation of $186,534 and $175,498 for the years ended December 31, 2013 and 2012, respectively.    The details of the exploration expenses by property in each year may be found in the schedule of mineral exploration expenditures, of the audited consolidated annual financial statements, but are summarized below:

 

 

Exploration levels are determined by the success of previous exploration programs on each project and in part by available cash to fund additional programs.  As discussed earlier, Barrick has been funding the Spring Valley project since the beginning of 2009 and the expenses reported by us are related to activities not funded by Barrick.

 

Beginning on January 1, 2012, we began to capitalize permitting, engineering and other development activities as part of our plans to advance the Pan project to production. For the years ended December 31, 2013 and 2012 we capitalized development costs of $8,454,762 and $6,057,111, respectively.

 

Office and Administration expenses for the year ended December 31, 2013 were $1,184,217 compared to $790,044 during the comparable period of 2012, an increase of $394,173 or 50%. This increase is primarily a result of additional overhead costs, primarily the increase in office facilities, related to our increase in employees as discussed further below.

 

Salaries and Benefits for the year ended December 31, 2013 were $5,453,707 inclusive of $920,197 of non-cash stock based compensation, compared to $4,017,167 and $1,358,661 respectively, during the comparable period of 2012.  The decrease in non-cash stock based compensation is due to the timing of the vesting of the stock options previously granted.  The cash component of salaries and benefits increased due to higher employee levels at December 31, 2013 as well as regular pay raises, and recruitment and relocation fees for certain of the new employees added.  At December 31, 2013, we had 38 employees compared to 26 employees at December 31, 2012.

 

Transfer Agent and Filing Fees were $430,930 and $183,616 for the years ended December 31, 2013 and 2012, respectively.  The $247,314 increase is attributable to the increased filing fees resulting from our common stock graduating from being listed on the TSX.V to the TSX as well as increased filing fees with the NYSE.

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Other Income (Expenses) for the year ended December 31, 2013 was an income of $24,441,172 compared to a loss of $1,382,963 during the comparable period of 2012, a net change of $25,824,135.  The increase is primarily the result of further gains on the change in fair value of derivative liabilities and foreign exchange fluctuations.  During the year ended December 31, 2013, we recorded a gain on the change in the fair value of derivative liabilities of $20,306,621 ($1,166,381 warrant liability and $19,140,415 derivative preferred share liability, net of $175 of share issuance costs) and a foreign exchange gain of $4,065,291, compared to a loss on the change in the fair value of derivative liabilities of $1,414,242 ($1,449,625 warrant liability gain and $2,863,867 derivative preferred share liability loss) and a foreign exchange gain of $504,075 for the same period of 2012.  In addition, we recorded interest income of $151,337 during 2013 compared to $32,103 during 2012, which was due to an increase of $20,586,117 in our average cash balance year over year.

 

Effective January 1, 2012, we changed the functional currency for our U.S. operations to the United States dollar and retained the Canadian dollar as our reporting currency.  The Canadian operations retained the Canadian dollar as their functional currency.

 

The financial statements of our U.S. operations are translated from their functional currency, the United States dollar, to the reporting currency, the Canadian dollar, using the current rate method. Assets and liabilities are translated using the current rate in effect at the balance sheet date and revenues and expenses are translated at the average rate for the period. Adjustments resulting from the translation, if any, are included in accumulated other comprehensive income (loss) in stockholders’ equity.  The foreign exchange rate of U.S.$1 to CAD as of December 31, 2013 was 1.0636 (December 31, 2012 – 0.9949).

 

US GAAP requires the value of share purchase warrants issued with an exercise price denominated in a currency other than the Company’s Canadian dollar functional currency to be considered as a liability and this liability is stated at fair value for each reporting period with changes in the liability being recorded through earnings.  The share purchase warrants included in the public offering of units that closed in July 2012, had an exercise price of U.S.$1.85.  The Company recorded a fair value of $2,616,006 to warrant liability on July 6, 2012, calculated using the Black-Scholes option pricing model with the following assumptions: expected life of 18 months; volatility of 76%; no dividend yield; and a risk free interest rate of 0.29% and an exchange rate of 1.0186. On December 31, 2013, the fair value of the warrant liability was adjusted to $0, calculated using the following assumptions: expected life of 0.20 months; volatility of 62%; no dividend yield; a risk free interest rate of 0.12% and an exchange rate of 1.0636.  During the year ended December 31, 2013 and 2012, we recorded income of $1,166,381 and $1,449,625, respectively, related to the change in the fair value of the warrant liability which has been reported in Other Income on the Consolidated Statement of Operations.  All outstanding warrants expired unexercised on January 6, 2014.

 

Due to the mandatory and voluntary conversion features, we recorded a derivative liability to account for the conversion features of the Series A Preferred Shares.  We engaged an independent third party valuation company to perform a valuation of the associated liability based upon the terms of the agreement.  The valuation report noted that the fair value of the embedded derivative liability as of the issuance of the shares on December 13, 2012 was $24,695,846, calculated using a volatility of 51.0%, a credit spread of 20.0%, common stock closing price of U.S.$1.29, risk-free rate of 0.826% and an exchange rate of 0.9848.  We recorded share issuance costs associated with the Series A Preferred Shares of $640,844, $229,578 of which were allocated proportionately to the derivative liability. Pursuant to derivative accounting guidance under ASC 815, the derivative liability is to be re-measured at each reporting period with changes in the liability being recorded through earnings.  The fair value of the embedded derivative liability as of December 31, 2013 and 2012 and its related underlying assumptions are as follows:

 

 

During the years ended December 31, 2013 and 2012, we recorded income of $19,140,415, net of $175 of share issuance costs and an expense of $2,863,867, inclusive of $229,578 of share issuance costs, respectively, related to the change in fair value of the preferred derivative liability, due primarily to the increase in our share price as of December 31, 2013 as compared to December 31, 2012, which has been reported in Other Income on the Consolidated Statement of Operations.

 

Income Tax Recovery for the year ended December 31, 2013 increased by $1,002,455, or 119%, from the same period of 2012.  The increase is primarily related to the elimination of our December 31, 2012 deferred tax liability of $3,172,512 offset by a Canadian corporate Part VI.1 current tax payable.  As of December 31, 2013 we had a deferred tax asset of $25,159,964, with the full amount not considered to be realizable and therefore management has assessed a valuation allowance of $17,495,599.  The net deferred tax asset of $7,664,365 is offset by a deferred tax liability of $7,664,365 associated with basis differentials on mineral properties.

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Financial Condition and Liquidity

 

As of December 31, 2014, we had working capital of $9,221,853, consisting of current assets of $33,324,920 and current liabilities of $24,103,067.   This represents a decrease of $36,838,868 from the working capital balance of $46,060,721 as of December 31, 2013.  Our current assets consist primarily of cash of $17,398,152, some of which is deposited in short term, interest bearing accounts and inventories of $14,682,609. Consistent with our plans, we continued to consume working capital to fund Pan development, our exploration activities, and other operating expenses.

 

We have not generated any revenues from operations.  We have incurred net operating losses for the years ended December 31, 2014, 2013 and 2012 of $16,816,408, $17,380,100, and $14,734,063, respectively, and since inception on May 14, 1996 to December 31, 2014 resulting in an accumulated deficit of $102,580,325; further losses are anticipated in the development of our business.  We have established an aggregate U.S.$53,000,000 senior secured credit facility consisting of a U.S.$43,000,000 project financing facility and a U.S.$10,000,000 cost overrun facility to fund development and construction of the Pan project.  Approximately U.S.$16,100,000 of the credit facility was undrawn as of December 31, 2014.  In January 2015, we drew down an additional U.S.$10,600,000, leaving approximately U.S.$5,500,000 undrawn under the cost overrun facility.  As of December 31, 2014, we were in compliance with the terms of the Debt Facility.  Subsequent to December 31, 2014, principally as a result of Pan project delays, we determined that we do not have sufficient funds to complete construction of the Pan Mine and fund operations and reserve requirements under the Debt Facility. As a result, we were not in compliance with certain tests required under the Debt Facility.  On March 13, 2015, we entered into a Waiver to the Credit Agreement with the lender providing the Company until May 20, 2015 to cure such non-compliance before it becomes an event of default.  If we fail to cure an event of non-compliance before it becomes an event of default, the lenders may declare all unpaid amounts under the Debt Facility to be immediately payable when an event of default occurs. Furthermore, we cannot draw the remaining U.S.$5,500,000 under the cost overrun facility until after such time as we contribute additional funds to the Pan project and satisfy other conditions as required under the Debt Facility.  In the event that sufficient financing is not secured in a timely manner, we will default under the Debt Facility.  As of February 28, 2015, we had cash and cash equivalents of approximately U.S.$5,900,000.  The amount of additional required funding will result from negotiations with the lenders to amend certain terms of the Debt Facility. Negotiations with other parties to obtain the funding required to complete construction of the Pan Mine and fund operations and reserve requirements under the Debt Facility, and avoid an event of default, including negotiations with the lenders to amend certain terms of the Debt Facility, are ongoing. We cannot provide any assurance that we will be able to amend our Debt Facility to secure more favorable terms, raise additional capital or draw down the remaining balance under the Debt Facility.

 

Recoverability of amounts capitalized for the Pan project is dependent on our ability to raise additional funds to complete development of the project and operate it profitability, or the receipt of adequate proceeds from any sale of the project.  The Spring Valley Project is subject to a joint venture agreement with Barrick Gold Corporation, who is responsible for carrying our share of costs incurred to production and arranging financing for our share of the cost of operations and mine exploration, development and construction expenses.  The cost that Barrick incurs from carrying us to production will be recouped by Barrick, plus interest, once production has been established.

 

Recoverability of amounts capitalized for our mineral properties, other than the Pan and Spring Valley Projects, 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.

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Sources and Uses of Cash

 

 

Net cash used in operating activities was $25,240,675 and  $10,682,150 for the years ended December 31, 2014 and 2013, respectively.  The increase is primarily attributable to the build-up of our ore inventory on the leach pad at December 31, 2014 and 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 year ended December 31, 2014 was $74,814,199 compared to $10,737,267 for the year ended December 31, 2013.  We are capitalizing Pan construction, permitting, engineering and other development activity costs.  Cash used in investing activities during the twelve months ended December 31, 2014 consisted primarily of construction costs on the Pan project and property and equipment additions of $74,324,461.  An additional $2,438,754 was spent towards a reclamation deposit on the surety bond purchased for the reclamation and remediation obligations of our Pan project.  Further, the Pan Mine site suffered flood damage from severe thunderstorms and all work to repair the damaged areas has been completed.  We received $2,764,050 (U.S.$2,500,000) of insurance proceeds towards these damages with the remaining amount expected to be received during the first quarter of 2015.

 

Net cash provided by financing activities for the year ended December 31, 2014 was $63,466,699,  consisting of $42,516,693 of proceeds from the issuance of debt, cash proceeds from equity offerings of $27,864,324 and cash proceeds of $1,455,001 from the exercise of stock options during the period.  These cash proceeds were offset by preferred share dividend withholding tax payments of $946,415, deferred financing costs paid of $4,492,792 and a payment of $2,930,112 to the counterparty of our gold forward sales contract to allow us to fix the gold price at U.S.$1,200 per ounce.  During 2013, cash used by financing activities consisted primarily of preferred share dividend payments of $2,150,302.

 

Off-Balance Sheet Arrangements

 

There are no off balance sheet arrangements.

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Contractual Obligations

 

A summary of our contractual obligations as of December 31, 2014 is provided in the following table: 

 

 

 

 

 

Related Party Transactions

 

On August 18, 2014, Dr. Roger Newell retired from our Board of Directors.  In connection with Dr. Newell’s retirement, we entered into an advisory agreement (“Advisory Agreement”) dated August 18, 2014 with Dr. Newell.  Pursuant to the Advisory Agreement, for a period of one year from the effective date of the Advisory Agreement, Dr. Newell agreed to provide us with advisory services including, but not limited to, technical or commercial advice regarding mining properties and assistance at the request and direction of our management, provide general advice regarding prevailing commercial practices and industry trends and assist in special projects as may be reasonably assigned by our management. 

 

Pursuant to the Advisory Agreement, we agreed to compensate Dr. Newell U.S.$4,166.67 per month and shall reimburse Dr. Newell for reasonable and necessary registration fees, membership fees, travel, transportation and lodging expenses and other expenses up to a maximum amount of U.S.$20,000.00 per year.  During the year ended December 31, 2014, we paid Dr. Newell $24,169 under the agreement.

 

On August 18, 2014, the Company approved Indemnification Agreements for the Company’s directors and officers. The Indemnification Agreements provide, among other things, that each of the Company’s directors and officers shall be indemnified to the fullest extent permitted by applicable law against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by each of the Company’s directors and officers in connection with any proceeding by reason of his or her relationship with the Company.  In addition, the Indemnification Agreements provide for the advancement of expenses incurred by each of the Company’s directors and officers in connection with any proceeding covered by the Indemnification Agreements, subject to the conditions set forth therein and to the extent such advancement is not prohibited by law. The Indemnification Agreements also set out the procedures for determining entitlement to indemnification, the requirements relating to notice and defense of claims for which indemnification is sought, the procedures for enforcement of indemnification rights and the limitations on and exclusions from indemnification, and the minimum levels of directors’ and officers’ liability insurance to be maintained by the Company.

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On May 14, 2014, the Company obtained the consent of the Series A Preferred Shareholders with respect to the issuance of Common Shares in connection with the June 6, 2014 Offering.  Pursuant to the rights granted to the Series A Preferred Shareholders, the Company agreed to seek the consent of the Preferred Governance Majority of the Series A Preferred Shareholders in the event the Company offers Common Shares at a price less than US$1.85 per Common Share.  As consideration for obtaining the consent of the Series A Preferred Shareholders and to compensate the Series A Preferred Shareholders for the dilution that they will suffer as a result of the June 6, 2014 Offering and the over-allotment to the June 6, 2014 Offering, the Company agreed to issue 3,816,143 Common Shares to the Series A Preferred Shareholders in an aggregate amount equal to $3,461,206 (U.S.$3,167,398), at a deemed price equal to the June 6, 2014 Offering price of U.S.$0.83 per share.  The Consent Fee was negotiated at arm’s length by the members of a special committee of the Company’s independent directors (the “Special Committee”).  The Fee Shares were issued pro rata to the Series A Preferred Shareholders based on their percentage holdings of Series A Preferred Shares.  The Special Committee, after considering the advice of its financial and legal advisors, unanimously recommended to the Company’s board of directors the payment of the Consent Fee and the issuance of the Fee Shares.  Messrs. Martin Hale and Nathaniel Klein were not members of the Special Committee.

 

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 methods at the site. As of December 31, 2014, we have accrued $4,138,310 (of which $10,110 is included in current liabilities) related to reclamation and other closure requirements at our properties, compared to $61,236 at December 31, 2013.  The long term portion of surface disturbance asset retirement obligations are accrued within other long term liabilities as of December 31, 2014 and 2013; these obligations totaled $4,128,200 and $61,236, respectively. These liabilities are covered by surety bonds.  We have accrued as liabilities what management believes is the present value of our best estimate of the liabilities as of December 31, 2014; however, it is possible that our obligations may change in the near or long term depending on a number of factors.

 

As a part of the permitting process of the Pan project, we are required to have a reclamation bond of approximately U.S.$15.4 million held with the BLM prior to the commencement of construction.  We purchased a surety contract for the reclamation bond, which requires us to deposit U.S.$3.7 million in installments into an escrow account as security for abandonment and remediation obligations. As of December 31, 2014, we have paid the U.S.$3.7 million deposit, which has been recorded in reclamation deposits on the consolidated balance sheet.  We could be required to post additional collateral up to the reclamation bond amount of U.S.$15.4 million if the surety increases our collateral requirements. 

 

Critical Accounting Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States. The preparation of these statements requires us to make assumptions, estimates, and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. We base our assumptions, estimates, and judgments on historical experience, current trends and other factors that we believe to be relevant at the time our Consolidated Financial Statements are prepared. On a regular basis, we review our accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could (will) differ, and such differences could be material.

 

We consider an accounting estimate to be critical if it requires significant management judgments and assumptions about matters that are highly uncertain at the time the estimate is made and if changes in the estimate that are reasonably possible could materially impact our financial statements. For information on all of our significant accounting policies, see Note 2 - Significant Accounting Policies to our Notes to Consolidated Financial Statements.

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Inventories

 

As of December 31, 2014, inventories include ore on leach pads 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.

 

Proven and Probable Reserves

 

The definition of proven and probable reserves is set forth in SEC Industry Guide 7.  Proven reserves are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.  Probable reserves are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced.  The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.  In addition, reserves cannot be considered proven and probable until they are supported by a feasibility study, indicating that the reserves have had the requisite geologic, technical and economic work performed and are economically and legally extractable at the time of the reserve determination.

 

Mineral Acquisition Costs

 

The costs of acquiring land and mineral rights are considered tangible assets.  Significant acquisition payments are capitalized.  General, administrative and holding costs to maintain an exploration property are expensed as incurred.  If a mineable ore body is discovered, such costs are amortized when production begins using the units-of-production method.  If no mineable ore body is discovered or such rights are otherwise determined to have diminished value, such costs are expensed in the period in which the determination is made.

 

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.

 

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.

 

Property, Equipment and Mine Development

 

All items of property, equipment and mine development are carried at cost less accumulated depreciation.  Normal maintenance and repairs are charged to operations while expenditures for major maintenance and betterments are capitalized.  Gains or losses on disposition are recognized in operations.

 

When a project is determined to contain proven or probable reserves, costs incurred in anticipation of production are capitalized.  Interest costs, if any, incurred during the development and construction phase, are capitalized until the assets are ready for their intended use.  When a project commences production, amortization and depletion of capitalized costs commences and is computed on a unit-of–production basis over the expected proven and probable reserves of the project based on estimated recoverable gold equivalent ounces.  Depreciation of related capitalized equipment will be computed on a straight-line basis over the estimated economic life.

 

Beginning on January 1, 2012, the Company began to capitalize into construction in progress and other; permitting, engineering and costs associated with other development activities related to the Pan project as part of the Company’s plans to advance the Pan project to production.  Such costs are capitalized as construction in progress until development and construction is complete.

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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.

 

Income Taxes  

 

The Company uses the asset and liability method of accounting for income taxes. Under this method, Deferred income tax assets and liabilities are determined based on differences between the financial statement carrying values of existing assets and liabilities and their respective income tax bases (temporary differences), and losses carried forward.  Deferred income tax assets and liabilities are measured using the enacted tax rates which will be in effect when the temporary differences are likely to reverse.  The effect on deferred income tax assets and liabilities of a change in tax rates is included in operations in the period in which the change is enacted.  The amount of deferred income tax assets recognized is limited to the amount of the benefit that is more likely than not to be realized.   The Company records tax related penalties and interest in tax expense.

 

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.

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Recent Accounting Pronouncements

 

We evaluate the pronouncements of various authoritative accounting organizations, primarily the Financial Accounting Standards Board (“FASB”), the SEC, and the Emerging Issues Task Force (“EITF”), to determine the impact of new pronouncements on US GAAP and the impact on the Company.

 

Recently Adopted Accounting Standards

 

In June 2014, the FASB issued ASU 2014-10, “Development Stage Entities (Topic 915)”.  The amendments in ASU 2014-10 remove all incremental financial reporting requirements from U.S. GAAP for development stage entities, including the removal of Topic 915, Development Stage Entities, from the FASB Accounting Standards Codification.  In addition, the ASU: (a) adds an example disclosure in Topic 275, Risks and Uncertainties, to illustrate one way that an entity that has not begun planned principal operations could provide information about the risks and uncertainties related to the company’s current activities; and (b) removes an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable interest entity.  As allowed by ASU 2014-10, the Company has early adopted ASU 2014-10 and impacts of its adoption have been reflected throughout the Company’s consolidated financial statements, with the significant effect being the elimination of disclosures of certain cumulative amounts incurred during the period from inception to the period end reporting date.

 

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The guidance requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or tax credit carryforward, unless such tax loss or credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes resulting from the disallowance of a tax position. In the event that the tax position is disallowed or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit shall be presented in the financial statements as a liability and shall not be combined with deferred tax assets.  The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

In March 2013, the FASB issued ASU 2013-05, “Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”, an amendment to FASB Accounting Standards Codification ("ASC") Topic 830, “Foreign Currency Matters” ("FASB ASC Topic 830"). The update clarifies that complete or substantially complete liquidation of a foreign entity is required to release the cumulative translation adjustment ("CTA") for transactions occurring within a foreign entity. However, transactions impacting investments in a foreign entity may result in a full or partial release of CTA even though complete or substantially complete liquidation of the foreign entity has not occurred. Furthermore, for transactions involving step acquisitions, the CTA associated with the previous equity-method investment will be fully released when control is obtained and consolidation occurs. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, “Other Comprehensive Income (Topic 220)”. The objective of this update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this update seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts.  The adoption of this ASU did not have a material impact on the consolidated financial statements.

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Recently Issued Accounting Standards Updates

 

In August 2014, the FASB issued 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 Financial Accounting Standards Board (“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.

Item 7A.  Quantitative and Qualitative  Disclosure  About  Market  Risk

We are engaged in the acquisition, exploration, and, if warranted, development of gold mineral properties in North America.  The value of our properties is related to the price of gold, and changes in the price of gold could affect our ability to generate revenue from our portfolio of gold projects.

 

Metal Price

The price of gold and silver is volatile and is affected by many factors beyond our control, such as interest rates, expectations regarding inflation, speculation, currency values, central bank activities, governmental decisions regarding the disposal of precious metals stockpiles, global and regional demand and production, political and economic conditions and other factors.

 

We have entered into a gold forward sales contract to mitigate the risk of gold price fluctuations.  We have agreed to sell 80,500 gold ounces at a spot price of U.S.$1,200 per ounce from May 2015 through March 2017.  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.  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.

 

Interest Rates

Borrowings under our U.S.$53.0 million Credit Facility bear interest per annum at LIBOR plus a credit margin of either 350 or 375 basis points on the Project Finance Facility and the Project Finance Facility rate plus 200 basis points on the Overrun Facility.  We have entered into an interest rate derivative contract to mitigate the risk of fluctuations in LIBOR, which swaps the variable LIBOR rate that we pay on the Credit Facility with a fixed rate of 0.81% for 75% of the borrowings outstanding. 

 

Fuel Price

A significant cost of our mining operations is the purchase of diesel fuel for the use in Ledcor’s mining fleet and our own machinery and vehicles.  In order to mitigate the risk of substantial or extended increases of diesel fuel prices we have entered into a diesel fuel forward contract on 75% of our estimated diesel fuel consumption at a fixed price of U.S.$1.9625 per gallon through March 31, 2017.

Item 8.  Financial Statements and Supplementary Data

The following Consolidated Financial Statements of Midway Gold Corp., and Reports of Independent Registered Public Accounting Firm are filed as part of this Item 8 and are included in this Annual Report filed on Form 10-K.

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

There have been no changes in our accountants during the last two fiscal years, and we have not had any disagreements with our existing accountants during that time.

 

Item 9A.  Controls and Procedures

 

(i) Evaluation of Disclosure Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures.  As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and Rule 15d-15(e)) of the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2014 at the reasonable assurance level.

 

Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, our Chief Executive Officer and Chief Financial Officer have provided certain certifications to the Commission. These certifications accompanied this Annual Report on Form 10-K when filed with the SEC, but are not set forth herein.

 

Notwithstanding the foregoing, in January, 2015, we implemented new disclosure controls and procedures in relation to our technical disclosures under Canadian National Instrument 43-101. Prior to the year ended December 31, 2014 the Company became aware of inconsistencies in relation to the issuance of press releases and the filing of technical reports for each of its Gold Rock and Spring Valley properties.  It was determined that these inconsistencies occurred as a result of a weakness in the Company’s disclosure controls and procedures.  In order to ensure these circumstances do not reoccur, the Company has implemented new disclosure controls and procedures in relation to technical disclosure under 43-101.  These new disclosure controls and procedures require that an internal qualified person or, if unavailable, an independent qualified person, and at least one external qualified person associated with the applicable report, will provide written confirmations to the Company's chief executive officer and chief financial officer prior to the filing of the press release or technical report, as applicable. We implemented these disclosures to comply with Canadian law and we do not believe our implementation of such disclosure controls and procedures have a bearing on the effectiveness of our disclosure controls and procedures under The Sarbanes-Oxley Act of 2002.

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(ii) Internal Control over Financial Reporting

 

(a) Management’s annual report on internal control over financial reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and Rule 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States (GAAP). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal controls over financial reporting can only provide reasonable assurance of achieving their control objectives.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2014 was conducted. In making this assessment, management used the criteria set forth by the 2013 framework of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control–Integrated Framework. Based on our assessment we believe that, as of December 31, 2014, the Company’s internal control over financial reporting is effective based on those criteria.

 

(b) Attestation report of the registered public accounting firm.

 

The attestation report of KPMG LLP, the Company’s independent registered public accounting firm, on the Company’s internal control over financial reporting is set forth in this Annual Report on Form 10-K on Page F-3 and F-4 and is incorporated herein by reference.

 

(c) Changes in internal control over financial reporting.

 

During the Company’s fourth quarter ended December 31, 2014, 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 increased operations at our Pan Mine.  Specifically we implemented new controls related to heap leach inventory and made changes to our purchasing process at Pan.  No other changes were made in our internal controls over financial reporting during the quarter ended December 31, 2014 that have materially affected our internal control over financial reporting, or are reasonably likely to materially affect our internal control over financial reporting.

Item 9B.  Other Information

None

 

PART III

Item 10.  Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated by reference from the information contained in our Proxy Statement for the 2015 Annual Meeting of Shareholders (“2015 Proxy Statement”) to be filed within 120 days after the end of our fiscal year ended December 31, 2014.  

 

We have a code of ethics that applies to all of our employees, officers and directors. The code of ethics is available on our website at www.midwaygold.com and we will post any amendments to, or waivers, from, the code of ethics on that website.

Item 11.  Executive Compensation

The information required by this item is incorporated by reference from the information contained in our 2015 Proxy Statement.

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Item 12.  Security Ownership of Certain Beneficial Owners and Management Related Stockholder Matters

The information required by this item is incorporated by reference from the information contained in our 2015 Proxy Statement.

Item 13.  Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated by reference from the information contained in our 2015 Proxy Statement.

Item 14.  Principal Accounting Fees and Services

The information required by this item is incorporated by reference from the information contained in our 2015 Proxy Statement.

 

PART IV

Item 15.  Exhibits, Financial Statement Schedules

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

 

(1)The consolidated financial statements are listed on the “Index to Financial Statements”.

 

(2)Financial Statement Schedules (omitted because they are either not required, are not applicable, or the required information is disclosed in the Notes to the Consolidated Financial Statements or related notes).

 

(3)Reference is made to the Exhibit Index that follows the signature pages on this report.

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.