Attached files
file | filename |
---|---|
EX-23.1 - EXHIBIT 23.1 - CONSENT OF BRIAN MORRIS - KLONDEX MINES LTD | exhibit231-consentofbrianm.htm |
EX-95.1 - EXHIBIT 95.1 - MINE SAFETY DISCLOSURE - KLONDEX MINES LTD | exhibit951-minesafetydiscl.htm |
EX-32.1 - EXHIBIT 32.1 - CERTIFICATION OF PEO AND PFO - KLONDEX MINES LTD | exhibit321-certificationof.htm |
EX-31.2 - EXHIBIT 31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - KLONDEX MINES LTD | exhibit312-certificationof.htm |
EX-31.1 - EXHIBIT 31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - KLONDEX MINES LTD | exhibit311-certificationof.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to
Commission file number: 001-37563
KLONDEX MINES LTD.
(Exact name of registrant as specified in its charter)
British Columbia | 98-1153397 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
6110 Plumas Street Suite A Reno, Nevada | 89519 | |
(Address of principal executive offices) | (Zip Code) |
(775) 284-5757
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
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 ý No o
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 | o | Accelerated filer | ý | |||
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o | |||
Emerging growth company | ý |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
On August 4, 2017, there were 177,579,130 shares of the registrant's common stock with no par value per share, outstanding.
KLONDEX MINES LTD.
FORM 10-Q
For the Quarter Ended June 30, 2017
INDEX
Page | ||||
Cautionary statement regarding forward-looking statements
This Quarterly Report on Form 10-Q contains forward-looking information within the meaning of Canadian securities laws and forward-looking statements within the meaning of the United States securities laws (collectively, "forward-looking statements") and are intended to be covered by the safe harbors provided by such regulations. 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, identified by words or phrases such as “expects”, “is expected”, “anticipates”, “believes”, “plans”, “projects”, “estimates”, “assumes”, “intends”, “strategy”, “goals”, “objectives”, “potential”, “possible” or variations thereof or stating that certain actions, events, conditions or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved, or the negative of any of these terms and similar expressions) are not statements of historical fact and may be forward-looking statements. Our forward-looking statements may include, without limitation, statements with respect to:
• | estimates of future mineral production, mining activities and sales (including graphs or other visual representations of future production forecasts); |
• | estimates of future production costs and other expenses for specific operations and on a consolidated basis; |
• | estimates of future capital expenditures, construction or production activities and other cash needs, for specific operations and on a consolidated basis, and expectations as to the funding or timing thereof; |
• | estimates as to the projected development of certain mineral projects, such as Hollister (as defined herein), including the timing of such development, the costs of such development and other capital costs, financing plans for these deposits and expected production commencement dates; |
• | estimates of mineral reserves and mineral resources, timing of updated studies and statements regarding future exploration; |
• | statements regarding the availability of, and, terms and costs related to, future borrowing and financing; |
• | estimates regarding future exploration expenditures, results and reserves; |
• | estimates regarding potential cost savings, productivity and operating performance; |
• | expectations regarding the start-up time, ramp up time or ability to put a mine into production; |
• | expectations regarding the design, mine life, mill availability, production and costs applicable to sales and exploration potential of our mines and projects; |
• | statements regarding future transactions; and |
• | statements regarding the impacts of changes in the legal and regulatory environment in which we operate. |
Forward-looking statements have been based upon our current business and operating plans, as approved by our Board of Directors; our cash and other funding requirements and timing and sources thereof; results of pre-feasibility and technical reports; mineral resource and reserve estimates; exploration activities; any required permitting processes; and current market conditions and project development plans. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors that could cause actual events or results to differ from those reflected in the forward-looking statements, including, without limitation:
• | the prices of gold, silver, and other metals and commodities; |
• | the cost of operations; |
• | currency fluctuations; |
• | inflation or deflation; |
• | geological and metallurgical assumptions; |
• | risks and uncertainties relating to the interpretation of drill results, the geology, grade and continuity of our mineral deposits; |
• | operating performance of equipment, processes and facilities; including the impact of weather on such operating performance; |
• | timing of receipt of necessary governmental permits or approvals; |
• | domestic and foreign laws or regulations, particularly relating to the environment, mining and processing; |
• | changes in tax laws; |
• | domestic and international economic and political conditions; |
• | our ability to obtain or maintain necessary financing; |
• | other risks and hazards associated with mining operations; |
• | uncertainty of estimates of capital costs, operating costs, production and economic returns; |
• | uncertainty related to inferred mineral resources; |
• | labor relations and our need and/or ability to attract and retain qualified management and technical personnel; and |
i
• | increased regulatory compliance costs relating to the Dodd-Frank Wall Street Reform and Consumer Protection Act |
The foregoing list is not exhaustive of the factors that may affect any of our forward-looking statements. Forward-looking statements are statements about the future and are inherently uncertain, and our actual achievements or other future events or conditions may differ materially from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors, including, without limitation, those referred to in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for fiscal year ended December 31, 2016.
Our forward-looking statements contained in this Quarterly Report on Form 10-Q are based on the beliefs, expectations and opinions of management as of the date of this report. We do not assume any obligation to update forward-looking statements if circumstances or management’s beliefs, expectations or opinions should change, except as required by law. For the reasons set forth above, investors should not place undue reliance on forward-looking statements in this Quarterly Report on Form 10-Q.
Cautionary note to U.S. investors regarding estimates of measured, indicated and inferred resources and proven and probable reserves
As used in this Quarterly Report on Form 10-Q, 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 (CIM)-CIM Definition Standards on Mineral Resources and Mineral Reserves, adopted by the CIM Council, as amended (“CIM Definition Standards”).
These definitions differ from the definitions in the U.S. Securities and Exchange Commission's ("SEC") Industry Guide 7 (“SEC Industry Guide 7”) under the U.S. Securities Exchange Act of 1934 (the "Exchange Act").
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 rules, estimates of inferred mineral resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases. Investors are cautioned not to assume that all or any part of an inferred mineral resource exists or is economically or legally mineable.
Disclosure of “contained ounces” in a resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report in place tonnage and grade without reference to unit measures for mineralization that does not constitute “reserves” by SEC standards. Accordingly, information contained in this 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.
The term “mineralized material” as used in this Quarterly Report on Form 10-Q with respect to extraction activities at Hollister, although permissible under SEC Industry Guide 7, does not indicate “reserves” by SEC Industry Guide 7 standards. On July 13, 2017, we announced initial proven and probable mineral reserves at Hollister determined in accordance with NI 43-101 and SEC Industry Guide 7. Except as previously announced with respect to the Hollister mineral reserves, we cannot be certain that any part of the mineralized material will ever be confirmed or converted into SEC Industry Guide 7 compliant “reserves”. Investors are cautioned not to assume that all or any part of the mineralized material will ever be confirmed or converted into reserves or that mineralized material can be economically or legally extracted. Brian Morris, our Vice President, Exploration and Geological Services (who is a "qualified person" for purposes of NI 43-101), has approved the disclosure of all the scientific and technical information contained in this Quarterly Report on Form 10-Q.
ii
Table of Contents
PART I - FINANCIAL INFORMATION Item 1. Financial Statements |
KLONDEX MINES LTD. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (US dollars in thousands) |
Note | June 30, 2017 | December 31, 2016 | ||||||||
Assets | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 41,548 | $ | 47,636 | ||||||
Inventories | 3 | 28,316 | 21,310 | |||||||
Prepaid expenses and other | 4 | 3,477 | 4,678 | |||||||
Derivative assets | 9 | 810 | 1,247 | |||||||
Total current assets | 74,151 | 74,871 | ||||||||
Mineral properties, plant and equipment, net | 5 | 285,700 | 276,223 | |||||||
Derivative assets | 9 | 402 | 1,545 | |||||||
Restricted cash | 10,055 | 10,055 | ||||||||
Deferred tax assets | 18,696 | 17,284 | ||||||||
Total assets | $ | 389,004 | $ | 379,978 | ||||||
Liabilities | ||||||||||
Current liabilities | ||||||||||
Accounts payable | $ | 26,930 | $ | 23,797 | ||||||
Accrued compensation and benefits | 3,379 | 4,672 | ||||||||
Derivative liabilities | 9 | 582 | 1,721 | |||||||
Debt | 6 | 9,568 | 8,502 | |||||||
Provision for legal settlement | — | 3,000 | ||||||||
Income taxes payable | 4,906 | — | ||||||||
Total current liabilities | 45,365 | 41,692 | ||||||||
Derivative liabilities | 9 | — | 331 | |||||||
Debt | 6 | 17,230 | 21,689 | |||||||
Deferred share units liability | 8 | 1,259 | 812 | |||||||
Asset retirement obligations | 7 | 26,255 | 25,436 | |||||||
Deferred tax liabilities | 12,722 | 11,964 | ||||||||
Total liabilities | 102,831 | 101,924 | ||||||||
Shareholders' Equity | ||||||||||
Unlimited common shares authorized, no par value; 177,511,524 and 175,251,538 issued and outstanding at June 30, 2017 and December 31, 2016, respectively | — | — | ||||||||
Additional paid-in capital | 368,826 | 363,899 | ||||||||
Accumulated deficit | (60,815 | ) | (58,280 | ) | ||||||
Accumulated other comprehensive loss | (21,838 | ) | (27,565 | ) | ||||||
Total shareholders' equity | 286,173 | 278,054 | ||||||||
Total liabilities and shareholders' equity | $ | 389,004 | $ | 379,978 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
1
Table of Contents
KLONDEX MINES LTD. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited) (US dollars in thousands, except per share amounts) |
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||
Note | 2017 | 2016 | 2017 | 2016 | ||||||||||||||
Revenues | $ | 86,792 | $ | 49,993 | $ | 128,502 | $ | 86,434 | ||||||||||
Cost of sales | ||||||||||||||||||
Production costs | 41,698 | 22,576 | 67,927 | 42,907 | ||||||||||||||
Depreciation and depletion | 14,872 | 6,426 | 22,600 | 12,229 | ||||||||||||||
Write-down of production inventories | 3 | 2,235 | — | 5,915 | — | |||||||||||||
27,987 | 20,991 | 32,060 | 31,298 | |||||||||||||||
Other operating expenses | ||||||||||||||||||
General and administrative | 5,727 | 3,180 | 10,215 | 6,598 | ||||||||||||||
Exploration | 1,299 | 3,230 | 1,426 | 4,842 | ||||||||||||||
Development and projects costs | 3,881 | 4,764 | 9,386 | 5,530 | ||||||||||||||
Asset retirement and accretion | 380 | 252 | 761 | 499 | ||||||||||||||
Business acquisition costs | — | 343 | — | 1,052 | ||||||||||||||
Provision for legal settlement | — | 2,250 | — | 2,250 | ||||||||||||||
Loss on equipment disposal | 26 | 4 | 142 | 4 | ||||||||||||||
Income from operations | 16,674 | 6,968 | 10,130 | 10,523 | ||||||||||||||
Other income (expense) | ||||||||||||||||||
(Loss) gain on derivatives, net | 9 | 1,664 | (8,637 | ) | (480 | ) | (14,281 | ) | ||||||||||
Interest (expense), net | 6 | (1,099 | ) | (1,344 | ) | (2,257 | ) | (2,731 | ) | |||||||||
Foreign currency (loss) gain, net | (3,083 | ) | 4 | (4,104 | ) | (2,550 | ) | |||||||||||
Interest income and other (expense), net | 88 | (46 | ) | 105 | 5 | |||||||||||||
Income (loss) before tax | 14,244 | (3,055 | ) | 3,394 | (9,034 | ) | ||||||||||||
Income tax (expense) benefit | 13 | (6,552 | ) | (1,429 | ) | (5,929 | ) | (2,113 | ) | |||||||||
Net income (loss) | $ | 7,692 | $ | (4,484 | ) | $ | (2,535 | ) | $ | (11,147 | ) | |||||||
Net income (loss) per share | ||||||||||||||||||
Basic | 14 | $ | 0.04 | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.08 | ) | ||||||
Diluted | 14 | $ | 0.04 | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.08 | ) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
Table of Contents
KLONDEX MINES LTD. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (US dollars in thousands) |
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income (loss) | $ | 7,692 | $ | (4,484 | ) | $ | (2,535 | ) | $ | (11,147 | ) | |||||
Other comprehensive income (loss), net of tax | ||||||||||||||||
Foreign currency translation adjustments, net of tax (expense) benefit of ($1,517) and $90 for the three months ended June 30, 2017 and 2016, respectively and ($2,012) and ($2,157) for the six months ended June 30, 2017 and 2016, respectively. | 4,317 | (256 | ) | 5,727 | 6,140 | |||||||||||
Comprehensive income (loss) | $ | 12,009 | $ | (4,740 | ) | $ | 3,192 | $ | (5,007 | ) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
Table of Contents
KLONDEX MINES LTD. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (US dollars in thousands) |
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||
Note | 2017 | 2016 | 2017 | 2016 | ||||||||||||||
Operating activities | ||||||||||||||||||
Net income (loss) | $ | 7,692 | $ | (4,484 | ) | $ | (2,535 | ) | $ | (11,147 | ) | |||||||
Significant items not involving cash | ||||||||||||||||||
Depreciation and depletion | 14,872 | 6,473 | 22,762 | 12,222 | ||||||||||||||
Asset retirement and accretion | 380 | 252 | 761 | 499 | ||||||||||||||
Derivative fair value adjustments | (883 | ) | 6,139 | 169 | 10,217 | |||||||||||||
Write-down of production inventories | 3 | 544 | — | 1,990 | — | |||||||||||||
Foreign exchange, net | 3,528 | (2,185 | ) | 4,427 | (29 | ) | ||||||||||||
Deferred tax expense (benefit) | (894 | ) | 521 | (654 | ) | 750 | ||||||||||||
Share-based compensation | 12 | 1,005 | 583 | 1,721 | 1,038 | |||||||||||||
Deliveries under Gold Purchase Agreement(1) | (1,956 | ) | (1,522 | ) | (3,816 | ) | (2,760 | ) | ||||||||||
Loss on equipment disposal | 26 | 4 | 142 | 4 | ||||||||||||||
Deferred share unit expense | 8 | 495 | — | 404 | — | |||||||||||||
Non-cash interest expense | 120 | — | 273 | — | ||||||||||||||
Provision for legal settlement | — | 2,250 | — | 2,250 | ||||||||||||||
24,929 | 8,031 | 25,644 | 13,044 | |||||||||||||||
Changes in non-cash working capital | ||||||||||||||||||
Trade receivables | — | (69 | ) | — | (107 | ) | ||||||||||||
Inventories | 1,956 | (2,613 | ) | (4,458 | ) | (3,438 | ) | |||||||||||
Prepaid expenses and other | 2,381 | 4,988 | 1,233 | (176 | ) | |||||||||||||
Accounts payable | 573 | 5,787 | 2,993 | 8,106 | ||||||||||||||
Accrued compensation and benefits | (1,095 | ) | (695 | ) | (1,314 | ) | (360 | ) | ||||||||||
Provision for legal settlement | (3,000 | ) | — | (3,000 | ) | — | ||||||||||||
Income taxes payable | 4,274 | (4 | ) | 4,907 | (4 | ) | ||||||||||||
Net cash provided by operating activities | 30,018 | 15,425 | 26,005 | 17,065 | ||||||||||||||
Investing activities | ||||||||||||||||||
Expenditures on mineral properties, plant and equipment | (18,008 | ) | (13,766 | ) | (35,016 | ) | (25,695 | ) | ||||||||||
Change in restricted cash, net | — | 2,098 | — | 2,098 | ||||||||||||||
Cash paid for acquisitions | — | — | — | (20,000 | ) | |||||||||||||
Net cash used in investing activities | (18,008 | ) | (11,668 | ) | (35,016 | ) | (43,597 | ) | ||||||||||
Financing activities | ||||||||||||||||||
Cash transactions related to share-based compensation | (3 | ) | 2,167 | 1,525 | 4,307 | |||||||||||||
Cash received from warrant exercises | — | 316 | 1,681 | 462 | ||||||||||||||
Repayment of capital lease obligations | (119 | ) | (127 | ) | (231 | ) | (254 | ) | ||||||||||
Payment of debt issuance costs | (16 | ) | (64 | ) | (233 | ) | (832 | ) | ||||||||||
Net cash (used) provided by financing activities | (138 | ) | 2,292 | 2,742 | 3,683 | |||||||||||||
Effect of foreign exchange on cash balances | 122 | (26 | ) | 181 | 629 | |||||||||||||
Net increase (decrease) in cash | 11,994 | 6,023 | (6,088 | ) | (22,220 | ) | ||||||||||||
Cash, beginning of period | 29,554 | 30,854 | 47,636 | 59,097 | ||||||||||||||
Cash, end of period | $ | 41,548 | $ | 36,877 | $ | 41,548 | $ | 36,877 | ||||||||||
(1) Represents Revenue less Interest Expense attributable to the Gold Purchase Agreement (as defined herein). |
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
Table of Contents
KLONDEX MINES LTD. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (US dollars in thousands, except shares) |
Note | Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Total | ||||||||||||||||
Balance at December 31, 2016 | 175,251,538 | $ | 363,899 | $ | (58,280 | ) | $ | (27,565 | ) | $ | 278,054 | ||||||||||
Share-based compensation expense | 12 | — | 1,721 | — | — | 1,721 | |||||||||||||||
Option exercises | 12 | 969,689 | 1,613 | — | — | 1,613 | |||||||||||||||
Warrant exercises | 11 | 1,140,800 | 1,681 | — | — | 1,681 | |||||||||||||||
Restricted share unit vestings, net of shares withheld to satisfy tax withholding | 149,497 | (88 | ) | — | — | (88 | ) | ||||||||||||||
Net loss | — | — | (2,535 | ) | — | (2,535 | ) | ||||||||||||||
Foreign currency translation adjustments | — | — | — | 5,727 | 5,727 | ||||||||||||||||
Balance at June 30, 2017 | 177,511,524 | $ | 368,826 | $ | (60,815 | ) | $ | (21,838 | ) | $ | 286,173 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
Klondex Mines Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of presentation
The accompanying unaudited Condensed Consolidated Financial Statements of Klondex Mines Ltd. and its wholly-owned subsidiaries (the "Company") have been prepared in accordance with United States generally accepted accounting principles ("GAAP") and applicable rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations of the SEC. Therefore, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited Consolidated Financial Statements and related note disclosures of the Company's Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management, all adjustments and disclosures necessary to fairly present the interim financial information set forth herein have been included. These interim financial statements, with the exception of any recently adopted accounting pronouncements described in Note 2. Recent accounting pronouncements, follow the same significant accounting policies disclosed in the Company's most recent Annual Report on Form 10-K.
The results reported in these Condensed Consolidated Financial Statements are not necessarily indicative of the results that may be expected for the entire year or for future years.
All amounts are expressed and presented in thousands of United States dollars (unless otherwise noted) and references to "CDN$" refer to Canadian dollars.
2. Recent accounting pronouncements
Recently adopted
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting." ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an accounting policy election for forfeitures, and classification on the statement of cash flows. ASU No. 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, which for the Company meant the first quarter of the year ending December 31, 2017. The Company has adopted ASU 2016-09, which other than presentation and disclosure changes, did not have a material impact on its financial statements.
Recently issued
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which has been amended several times. The new standard provides a five-step approach to be applied to all contracts with customers and also requires expanded disclosures surrounding revenue recognition. ASU No. 2014-09 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2017, which for the Company means the first quarter of the year ending December 31, 2018. The Company has evaluated the potential impacts of ASU No. 2014-09 and does not expect it will have a material impact on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases." ASU No. 2016-02 requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations resulting from leases. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, which for the Company means the first quarter of the year ending December 31, 2019. The Company is currently evaluating the impact that ASU No. 2016-02 will have on its financial statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments." ASU No. 2016-15 addresses eight specific cash flow issues with the objective of reducing the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which for the Company means the first quarter of the year ending December 31, 2018. The Company is currently evaluating the impact that ASU No. 2016-15 will have on its financial statements.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows - Restricted Cash." ASU No. 2016-18 requires that restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which for the Company means the first quarter of the year ending December 31, 2018. The Company is currently evaluating the impact that ASU No. 2016-18 will have on its financial statements.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations." ASU No. 2017-01 clarifies the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU No. 2017-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December
6
15, 2017, which for the Company means the first quarter of the year ending December 31, 2018. The Company is currently evaluating the impact that ASU No. 2017-01 will have on its financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation." ASU No. 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. ASU No. 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which for the Company means the first quarter of the year ending December 31, 2018. The Company is currently evaluating the impact that ASU No. 2017-09 will have on its financial statements.
3. Inventories
The following table provides the components of Inventories (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Supplies | $ | 8,482 | $ | 5,541 | ||||
Production related inventories: | ||||||||
Stockpiles | 11,049 | 6,604 | ||||||
In-process | 6,381 | 7,316 | ||||||
Doré finished goods | 2,404 | 1,849 | ||||||
$ | 28,316 | $ | 21,310 |
As of June 30, 2017 and December 31, 2016, the Company's stockpiles, in-process, and doré finished goods inventories included approximately $4.4 million and $2.0 million, respectively, of capitalized non-cash depreciation and depletion costs.
The period-end market value of the Company's production-related inventories is determined in part by using the period-end prices (per ounces) of gold and silver and is sensitive to these inputs. Write-downs have resulted solely from the Company's application of its lower of average cost or net realizable value accounting policy and were unrelated to any ounce adjustments or changes to recovery rates. Write-downs for the three and six months ended June 30, 2017 were related to Midas and True North (both as defined herein).
The following table provides information about the Company's write-downs (in thousands, except per ounce amounts):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
Type of previously incurred cost | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Cash production costs | $ | 1,691 | $ | — | $ | 3,925 | $ | — | ||||||||
Allocated depreciation and depletion | 544 | — | 1,990 | — | ||||||||||||
Write-down of production inventories | $ | 2,235 | $ | — | $ | 5,915 | $ | — | ||||||||
Period-end prices used in write-down calculation | ||||||||||||||||
Price per gold ounce | $ | 1,243 | $ | 1,317 | $ | 1,243 | $ | 1,317 | ||||||||
Price per silver ounce | $ | 16.47 | $ | 18.36 | $ | 16.47 | $ | 18.36 |
Further declines from June 30, 2017 metal price levels and/or future production costs greater than the June 30, 2017 carrying value included in Inventories could result in, or contribute to, additional future write-downs of production-related inventories.
7
4. Prepaid expenses and other
The following table provides the components of Prepaid expenses and other (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Prepaid taxes | $ | 283 | $ | 1,390 | ||||
Vendor prepayments | 428 | 315 | ||||||
Prepaid claim maintenance and land holding costs | 718 | 909 | ||||||
Prepaid insurance | 748 | 518 | ||||||
Utilities, rent, and service deposits | 180 | 178 | ||||||
Software maintenance | 137 | 60 | ||||||
Royalties | 170 | 82 | ||||||
Other | 813 | 1,226 | ||||||
$ | 3,477 | $ | 4,678 |
5. Mineral properties, plant and equipment, net
The following table provides the components of Mineral properties, plant and equipment, net (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Mineral properties | $ | 163,601 | $ | 163,012 | ||||
Facilities and equipment | 104,212 | 97,054 | ||||||
Mine development | 81,141 | 54,070 | ||||||
Land | 3,856 | 3,828 | ||||||
Asset retirement cost assets(1) | 3,191 | 2,887 | ||||||
Construction in progress | 18,586 | 16,472 | ||||||
374,587 | 337,323 | |||||||
Less: accumulated depreciation and depletion | (88,887 | ) | (61,100 | ) | ||||
$ | 285,700 | $ | 276,223 | |||||
(1)Asset retirement cost assets relate to changes in asset retirement obligations at sites with proven and probable reserves. |
Facilities and equipment included $2.2 million and $1.5 million at June 30, 2017 and December 31, 2016, respectively, for the gross amount of mobile mine equipment acquired under capital lease obligations. Accumulated depreciation on such mobile mine equipment totaled $0.7 million and $0.5 million at June 30, 2017 and December 31, 2016, respectively.
At June 30, 2017, construction in progress of $18.6 million included $11.1 million related to facilities and equipment, $6.6 million of mine development, $0.6 million of mineral properties, and $0.3 million of other.
8
6. Debt
The following table summarizes the components of Debt (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Debt, current: | ||||||||
Gold Purchase Agreement | $ | 8,918 | $ | 8,023 | ||||
Capital lease obligations | 650 | 479 | ||||||
$ | 9,568 | $ | 8,502 | |||||
Debt, non-current: | ||||||||
Revolver(1) | $ | 11,178 | $ | 11,165 | ||||
Gold Purchase Agreement | 5,230 | 9,935 | ||||||
Capital lease obligations | 822 | 589 | ||||||
$ | 17,230 | $ | 21,689 | |||||
(1) Net of unamortized issuance costs of $0.8 million. |
The following table summarizes the components of Interest (expense), net (in thousands):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Gold Purchase Agreement | $ | 701 | $ | 1,023 | $ | 1,484 | $ | 2,149 | ||||||||
Promissory Note | — | 233 | — | 413 | ||||||||||||
Revolver interest and stand-by fees | 340 | 62 | 674 | 62 | ||||||||||||
Capital lease obligations | 6 | 14 | 15 | 31 | ||||||||||||
Other | 52 | 50 | 84 | 114 | ||||||||||||
Less: capitalized interest | — | (38 | ) | — | (38 | ) | ||||||||||
$ | 1,099 | $ | 1,344 | $ | 2,257 | $ | 2,731 |
Revolver
On March 23, 2016, the Company, as borrower, and Investec Bank PLC ("Investec"), as lender and security agent, entered into a $25.0 million secured revolving facility agreement (the "Revolver"). The Revolver was amended on October 27, 2016 to increase the borrowing capacity by $10.0 million to $35.0 million. During the year ended December 31, 2016, the Company drew $12.0 million from the Revolver to retire the Promissory Note (as defined herein) related to the acquisition of True North (as defined herein). Borrowings under the Revolver bear interest per annum at LIBOR plus Margin plus Risk Premium, as such terms are defined in the Revolver. Margin is determined by the Company's Gearing Ratio (a measure of debt to EBITDA) and ranges from 2.75%-4.00% per annum and the Risk Premium is 0.35% per annum, until the Gold Purchase Agreement balance is less than $10.0 million, at which time the Risk Premium is no longer applicable (as such terms are defined in the Revolver). Revolver borrowings may be utilized by the Company for working capital requirements, general corporate purposes, and capital investments and expenditures.
On March 31, 2017, pursuant to an amendment, the Revolver's maturity date was extended from March 23, 2018 to December 31, 2019, unless otherwise extended by the parties, and the reserves and resources required to be maintained by the Company under the Revolver were amended. The Revolver is secured by all of the Company's assets on a pari passu basis with the Gold Purchase Agreement.
Gold Purchase Agreement
The Company's February 2014 gold purchase agreement with a subsidiary of Franco-Nevada Corporation (the "Gold Purchase Agreement") requires physical gold deliveries to be made at the end of each month, each of which reduces the Gold Purchase Agreement balance and accrued interest. The repayment amortization schedule was established on the transaction date and incorporates then current forward gold prices (ranging from $1,290 to $1,388) and an effective interest rate of approximately 18.3%. Gold deliveries will cease on December 31, 2018 following the delivery of a total of 38,250 gold ounces. The Gold Purchase Agreement is secured by all the Company's assets on a pari passu basis with the Revolver.
During the three and six months ended June 30, 2017 and 2016, the Company delivered 2,000 and 4,000 gold ounces, respectively, for each period under the Gold Purchase Agreement. The Company is required to deliver 2,000 gold ounces per quarter (8,000 gold ounces per year) during fiscal years 2017 and 2018.
9
Capital lease obligations
The Company's capital lease obligations are for the purchase of mobile mine equipment and passenger vehicles, bear interest at approximately 4.0% per annum, and carry 36 or 48-month terms. The Company's capital lease obligations are secured by the underlying assets financed.
Debt covenants
The Company's debt agreements contain certain representations and warranties, restrictions, events of default, and covenants that are customary for agreements of these types. Additionally, the Revolver contains financial covenants which require the Company to maintain a Tangible Net Worth not less than $100.0 million, a Gearing Ratio (a measure of debt to EBITDA) not greater than 4.00:1, a Cash Balance not less than $10.0 million, and a Current Ratio not less than 1.10:1 (as such terms are defined in the Revolver). The Company was in compliance with all debt covenants as of June 30, 2017 and December 31, 2016.
7. Asset retirement obligations
The Company’s asset retirement obligations are related to its mining operations, projects, and exploration activities. The Company's asset retirement obligations are estimated based upon present value techniques of expected cash flows, estimates of inflation, and a credit adjusted risk-free discount rate. The following table provides a summary of changes in the asset retirement obligation (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Balance, beginning of period | $ | 25,436 | $ | 12,387 | ||||
Changes in estimates | — | 2,866 | ||||||
Accretion expense | 761 | 1,122 | ||||||
Additions resulting from Hollister Acquisition - Hollister | — | 4,481 | ||||||
Additions resulting from Hollister Acquisition - Aurora | — | 2,677 | ||||||
Additions resulting from True North Acquisition | — | 1,793 | ||||||
Effect of foreign currency | 58 | 110 | ||||||
Balance, end of period | $ | 26,255 | $ | 25,436 |
As of June 30, 2017, the Company's asset retirement obligations were secured by surety bonds totaling $48.2 million, which were partially collateralized by Restricted cash totaling $10.0 million. During the six months ended June 30, 2017, the amount of restricted cash collateralizing the surety bonds remained unchanged.
The following table provides a listing of the Company's asset retirement obligations by property (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Midas | $ | 12,968 | $ | 12,616 | ||||
Hollister | 6,302 | 6,110 | ||||||
Aurora | 2,826 | 2,741 | ||||||
Fire Creek | 2,375 | 2,303 | ||||||
True North | 1,784 | 1,666 | ||||||
$ | 26,255 | $ | 25,436 |
8. Deferred share units liability
In May 2016, the Board of Directors adopted the Deferred Share Unit Plan (the "DSU Plan") to: (1) assist the Company in the recruitment and retention of qualified non-employee directors and (2) further align the interests of directors with shareholders. The DSU Plan is administered by the Compensation and Governance Committee of the Board of Directors of the Company. Under the DSU Plan, non-employee directors may receive a portion of their annual compensation in the form of Deferred Share Units ("DSUs"). The value of a DSU is determined as the weighted average closing price of the Company's common shares for the five days preceding such valuation date (the "DSU Value"). DSUs are fully vested at the time of grant and are retained until a director is separated or terminated from the Board of Directors of the Company, at which time the number of DSUs credited to such director's account multiplied by the DSU Value is to be paid out in cash. In the event the Company pays cash dividends, additional DSUs are to be credited to each director's account in an amount equal to the cash value that would have been received by the directors had the DSUs been held as common shares of the Company divided by the DSU Value. DSUs have no voting rights.
10
The fair value of DSUs granted each year, together with the change in fair value of all outstanding DSUs, is recorded within General and administrative and totaled $0.5 million and $0.4 million during the three and six months ended June 30, 2017.
The following table provides a summary of the Company's outstanding DSUs:
Six months ended June 30, 2017 | |||
Outstanding at beginning of period | 180,183 | ||
Granted | 180,183 | ||
Redeemed | — | ||
Outstanding at end of period | 360,366 |
9. Derivatives
The following table provides a listing of the Company's derivative instruments (in thousands):
Description | Recorded Within | June 30, 2017 | December 31, 2016 | |||||||
Gold Purchase Agreement embedded derivative | Derivative assets, current | $ | 686 | $ | 1,247 | |||||
Gold Collar | Derivative assets, current | 124 | — | |||||||
Gold Purchase Agreement embedded derivative | Derivative assets, non-current | 402 | 1,545 | |||||||
$ | 1,212 | $ | 2,792 | |||||||
Gold Offering Agreement | Derivative liabilities, current | $ | 582 | $ | 1,721 | |||||
Gold Offering Agreement | Derivative liabilities, non-current | — | 331 | |||||||
$ | 582 | $ | 2,052 |
The following table lists the net amounts recorded for (Loss) gain on derivatives, net (in thousands):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Gold Purchase Agreement embedded derivative | 8 | (1,710 | ) | (1,399 | ) | (5,096 | ) | |||||||||
Gold Offering Agreement | 375 | (664 | ) | 33 | (1,835 | ) | ||||||||||
Forward metal sales(1) | 1,157 | (6,263 | ) | 762 | (7,350 | ) | ||||||||||
Gold Collar | 124 | — | 124 | — | ||||||||||||
$ | 1,664 | $ | (8,637 | ) | $ | (480 | ) | $ | (14,281 | ) | ||||||
(1) Loss (gain) on settlement and revaluation of forward metal sales derivative instruments, which was determined by the difference in the fixed forward price received by the Company and the spot price on the applicable delivery date. See Forward Metal Sales discussed below. |
Gold Purchase Agreement embedded derivative
The Company's Gold Purchase Agreement (as defined and discussed in Note 6. Debt) contains an embedded compound derivative for: 1) the prepayment option, which is at the discretion of the Company, and 2) the forward sales component, which was established on the transaction date and incorporates the then current forward gold prices. In addition to recurring fair value adjustments, gains and losses on the Gold Purchase Agreement's embedded derivative relate to the difference in the forward gold price received by the Company and the spot price of gold on each delivery date. The following table summarizes information about past and future gold deliveries under the Gold Purchase Agreement:
Outstanding Future Deliveries | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
2018 | 2017 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
Gold ounces | 8,000 | 4,000 | 2,000 | 2,000 | 4,000 | 4,000 | |||||||||||||||||
Average forward gold price | $ | 1,369 | $ | 1,340 | $ | 1,328 | $ | 1,306 | $ | 1,325 | $ | 1,304 | |||||||||||
Average gold spot price on delivery date | n/a | n/a | $ | 1,255 | $ | 1,273 | $ | 1,246 | $ | 1,234 |
11
Gold Offering Agreement
In March 2011, the Company entered into a gold offering agreement, as amended in October 2011 (the "Gold Offering Agreement"), which granted the counterparty the right to purchase, on a monthly basis, the refined gold produced from the Fire Creek mine ("Fire Creek") for a five-year period which began in February 2013 and ends in February 2018. When/if the counterparty elects to purchase the refined gold, the purchase price is calculated as the average PM settlement price per gold ounce on the London Bullion Market Association for the 30 trading days immediately preceding the relevant purchase election date. In addition to recurring fair value adjustments, gains and losses on the Gold Offering Agreement relate to: 1) the difference in the gold price paid to the Company from the counterparty and the spot price of gold on the applicable delivery date, and 2) losses incurred by the Company to net cash settle any obligations arising from the Gold Offering Agreement. The following table summarizes information about gold purchased under the Gold Offering Agreement:
Three months ended June 30, | Six months ended June 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||
Gold ounces purchased by counterparty | 34,745 | 10,390 | 56,785 | 29,973 | ||||||||||
Average gold price paid to the Company | $ | 1,251 | $ | 1,247 | 1,221 | 1,151 | ||||||||
Average gold spot price on delivery date | $ | 1,265 | $ | 1,269 | 1,246 | 1,191 |
Forward metal sales
In order to increase the certainty of expected future cash flows, from time to time, the Company enters into fixed forward spot trades for a portion of its projected gold and silver sales. These agreements are considered derivative financial instruments. The following table summarizes information about the Company's forward trades entered into during the respective periods:
Three months ended June 30, | Six months ended June 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||
Gold ounces covered | 42,292 | 69,820 | 90,850 | 97,090 | ||||||||||
Average price per gold ounce | $ | 1,273 | $ | 1,268 | 1,253 | 1,245 | ||||||||
Silver ounces covered | 307,900 | 896,900 | 594,900 | 1,421,516 | ||||||||||
Average price per silver ounce | $ | 17.26 | $ | 17.35 | 17.56 | 16.56 |
Gold Collar
During the second quarter 2017, the Company entered into short-term zero cost gold collars. The collars total 2,500 gold ounces per month through December 31, 2017 at a floor of $1,200 per ounce and a ceiling of $1,360 per ounce. The value of these collars at June 30, 2017 was $0.1 million.
10. Fair value measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities recorded at fair value in the Condensed Consolidated Financial Statements are classified using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurements. The fair value hierarchy has the following levels:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 – Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for the full term of the asset or liability; and
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and are not observable.
12
Financial assets and liabilities are classified in their entirety based upon the lowest level of input that is significant to the fair value measurement. There were no transfers between fair value hierarchy levels during the six months ended June 30, 2017. The following table provides a listing (by level) of the Company's financial assets and liabilities which are measured at fair value on a recurring basis (in thousands):
June 30, 2017 | December 31, 2016 | |||||||||||||||||||||||||
Assets: | Note | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
Gold Purchase Agreement embedded derivative | 9 | $ | — | $ | 1,088 | $ | — | $ | — | $ | 2,792 | $ | — | |||||||||||||
Gold Collar | 9 | — | 124 | — | — | — | — | |||||||||||||||||||
$ | — | $ | 1,212 | $ | — | $ | — | $ | 2,792 | $ | — | |||||||||||||||
Liabilities: | ||||||||||||||||||||||||||
Deferred share units liability | 8 | $ | — | $ | 1,259 | $ | — | $ | — | $ | 812 | $ | — | |||||||||||||
Gold Offering Agreement | 9 | — | — | 582 | — | — | 2,052 | |||||||||||||||||||
$ | — | $ | 1,259 | $ | 582 | $ | — | $ | 812 | $ | 2,052 |
Gold Purchase Agreement embedded derivative - This asset was valued by a third-party consultant (and reviewed by the Company) using observable inputs, including period-end forward gold prices and historic forward gold prices from the Gold Purchase Agreement's February 2014 transaction date and, as such, is classified within Level 2 of the fair value hierarchy.
Gold Collar - The Company's gold collar is valued based on a Black-Scholes model with various observable inputs. These inputs include contractual terms, gold market prices, volatility of gold prices, and risk free interest rates. These derivatives are classified within Level 2 of the valuation hierarchy.
Deferred share units liability - This liability was valued using the number of outstanding DSUs and quoted closing prices of the Company’s common shares, which are traded in active markets, and as such is classified within Level 2 of the fair value hierarchy. The fair value was calculated as the number of DSUs outstanding multiplied by the period end DSU Value.
Gold Offering Agreement - This liability was valued by a third-party consultant (and reviewed by the Company) using a simulation-based pricing model and is classified within level 3 of the fair value hierarchy as it incorporates an estimate of the Company's future gold production from Fire Creek, which is not an observable input, as well as quoted prices from active markets and certain observable inputs, such as, forward gold prices and the volatility of such prices. The Company's 2017 gold production from Fire Creek is estimated to range from 97,000 - 100,000 ounces, the amounts of which were incorporated into the June 30, 2017 valuation.
Items disclosed at fair value - Other than the above, the carrying values of financial assets and liabilities approximate their fair values, other than Debt, which is carried at amortized cost. As of June 30, 2017, the fair value of the Gold Purchase Agreement, including the embedded features, was approximately $14.6 million.
Level 3 information
The following table provides additional detail for the Company's Level 3 financial liability (in thousands):
Gold Offering Agreement liability: | June 30, 2017 | |||
Balance at beginning of the period | $ | 2,052 | ||
Gain from change in fair value | (1,470 | ) | ||
Balance at end of the period | $ | 582 | ||
(Loss) gain on derivative, net: | ||||
Settlement losses | $ | (1,437 | ) | |
Gain from change in fair value | 1,470 | |||
$ | 33 |
11. Share capital
Common shares
13
The authorized share capital of the Company is comprised of an unlimited number of common shares with no par value. Common shares are typically issued in conjunction with corporate financing efforts, the exercise of warrants (discussed below), and pursuant to share-based compensation arrangements (see Note 12. Share-based compensation).
Share Purchase Warrants
The Company has previously issued share purchase warrants in conjunction with its acquisition of Hollister and Midas (both as defined herein) in 2016 and 2014, respectively, and other past debt and equity financing transactions. The following table summarizes activity of the Company's warrant activity:
June 30, 2017 | |||||||
Warrants | Number of Warrants | Weighted Average Exercise Price - CDN$ | |||||
Outstanding, beginning of period | 11,140,800 | $ | 3.86 | ||||
Exercised | (1,140,800 | ) | 1.95 | ||||
Outstanding, end of period | 10,000,000 | $ | 4.08 | ||||
Exercisable, end of period | 10,000,000 | $ | 4.08 |
The following table provides a summary of the Company's outstanding warrants:
June 30, 2017 | |||||||||
Exercise price per share - CDN$ | Number outstanding | Weighted average remaining life (years) | Weighted average exercise price - CDN$ | ||||||
$2.00 - $2.49 | 5,000,000 | 11.62 | 2.15 | ||||||
$6.00 | 5,000,000 | 14.76 | 6.00 | ||||||
10,000,000 | 13.19 | $ | 4.08 |
12. Share-based compensation
The Company has a Share Option and Restricted Share Unit Plan ("New Share Plan") to compensate eligible participants, which can include directors, officers, employees, and service providers to the Company. The New Share Plan is administered by the Board of Directors of the Company and is subject to conditions and restrictions over award terms, grant limits, and grant prices. The New Share Plan was approved at the June 15, 2016 annual and special meeting of shareholders. Subject to certain adjustments, the maximum number of common shares available for grant under the New Share Plan is equal to 8.9% of the common shares then outstanding less the aggregate number of common shares reserved for issuance under all of the Company's other share-based compensation plans. Additionally, the maximum number of common shares available for issuance pursuant to grants under the restricted share unit portion of the New Share Plan is subject to a sub-cap and cannot exceed 4.0% of the total number of common shares outstanding at the time of grant of the applicable award.
The New Share Plan replaced the Company's Share Incentive Plan (the "Legacy SIP"), which permitted the granting of share options and common share awards. Awards outstanding under the Legacy SIP will continue to vest in accordance with their grant terms and reduce the number of shares available for issuance under the New Share Plan (discussed above).
Share-based compensation costs
The following table summarizes the Company's share-based compensation cost by award type (in thousands):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
Share-based compensation cost by award | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Share options | $ | 172 | $ | 388 | $ | 345 | $ | 800 | ||||||||
Restricted share units - time vesting criteria | 662 | 167 | 1,106 | 238 | ||||||||||||
Restricted share units - performance vesting criteria | 164 | — | 256 | — | ||||||||||||
Common share awards | 7 | 28 | 14 | — | ||||||||||||
$ | 1,005 | $ | 583 | $ | 1,721 | $ | 1,038 |
14
The following table summarizes activity of the Company's share-based compensation for restricted share units ("RSUs"), common share awards, and share options:
Six months ended June 30, 2017 | ||||||||||||
Restricted share units - time-based vesting(1) | Restricted share units - performance-based vesting | Common share awards | Share options | |||||||||
Outstanding, beginning of period | 948,038 | 212,243 | 56,665 | 5,233,105 | ||||||||
Granted | 968,339 | (4) | 295,390 | (5) | — | — | ||||||
Forfeited | (90,943 | ) | — | — | (73,333 | ) | ||||||
Vested and issued(2) | (172,319 | ) | — | — | — | |||||||
Exercised(3) | — | — | — | (969,689 | ) | |||||||
Outstanding, end of period | 1,653,115 | 507,633 | 56,665 | 4,190,083 | ||||||||
(1) Includes awards with comparable terms and characteristics of RSUs, even if such awards are not called "RSUs" under the plan they were granted. | ||||||||||||
(2) Not applicable to Share options. | ||||||||||||
(3) Only applicable to Share options. | ||||||||||||
(4) The weighted average grant-date fair value of time-based RSUs granted during the six months ended June 30, 2017 was CDN$4.62. | ||||||||||||
(5) The weighted average grant-date fair value of performance-based RSUs granted during the six months ended June 30, 2017 was CDN$4.60. |
13. Income taxes
Major components of our income tax (expense) benefit for the three and six months ended June 30, 2017 and 2016 are as follows (in thousands):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Current: | ||||||||||||||||
Canada | $ | — | $ | — | $ | — | $ | — | ||||||||
United States | (7,355 | ) | (911 | ) | (6,491 | ) | (1,366 | ) | ||||||||
Total current income tax (expense) benefit | (7,355 | ) | (911 | ) | (6,491 | ) | (1,366 | ) | ||||||||
Deferred: | ||||||||||||||||
Canada | — | — | — | — | ||||||||||||
United States | 803 | (518 | ) | 562 | (747 | ) | ||||||||||
Total deferred income tax (expense) | 803 | (518 | ) | 562 | (747 | ) | ||||||||||
Total income tax (expense) benefit | $ | (6,552 | ) | $ | (1,429 | ) | $ | (5,929 | ) | $ | (2,113 | ) |
15
14. Net (loss) income per share
Basic net income (loss) per share is calculated by dividing net income by the weighted average number of shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution that would occur if outstanding share-based instruments were executed. The following table provides computations of the Company's basic and diluted net income (loss) per share (in thousands, except per share amounts):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income (loss) | $ | 7,692 | $ | (4,484 | ) | $ | (2,535 | ) | $ | (11,147 | ) | |||||
Weighted average common shares: | ||||||||||||||||
Basic | 177,342,382 | 143,003,462 | 176,945,635 | 141,211,937 | ||||||||||||
Effect of: | ||||||||||||||||
Share options | 1,782,174 | — | — | — | ||||||||||||
Warrants | 2,678,981 | — | — | — | ||||||||||||
Restricted share units(1) | 406,418 | — | — | — | ||||||||||||
Diluted | 182,209,955 | 143,003,462 | 176,945,635 | 141,211,937 | ||||||||||||
Net income (loss) per share | ||||||||||||||||
Basic | $ | 0.04 | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.08 | ) | |||||
Diluted | $ | 0.04 | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.08 | ) | |||||
(1) Represents restricted share units with time-based and performance-based vesting criteria. |
For the three and six months ended June 30, 2017, the impact of dilutive share-based instruments was determined using the Company's average share price, which was CDN$4.63 and CDN$5.64, respectively. For the three and six months ended June 30, 2016, the impact of dilutive share-based instruments was determined using the Company's average share price, which was CDN$4.38 and CDN$3.87, respectively.
Diluted net income (loss) per share excludes common share-based instruments in periods where inclusion would be anti-dilutive. For the three months ended June 30, 2017, 1,477,261 warrants and 494,487 restricted share units were excluded from diluted net income (loss) per share as the warrants and restricted share units would be antidilutive. For the six months ended June 30, 2017, had the Company generated net income, the effects from executing 2,678,981 warrants, 2,232,920 share options, and 487,600 restricted share units would have been included in the diluted weighted average common shares calculation. During the three months ended June 30, 2016, had the Company generated net income, the effects from executing 4,287,918 warrants, 3,344,200 share options, and 488,336 common share awards would have been included in the diluted weighted average common shares calculation. During the six months ended June 30, 2016, had the Company generated net income, the effects from executing 3,804,161 warrants, 2,854,064 share options, and 488,336 common share awards would have been included in the diluted weighted average common shares calculation.
15. Segment information
The Company's reportable segments are comprised of operating units which have revenues, earnings or losses, or assets exceeding 10% of the respective consolidated totals, each of which is reviewed by the Company’s Chief Executive Officer to make decisions about resources to be allocated to the segments and to assess their performance. The table below summarizes segment information:
16
Three months ended June 30, 2017 | Fire Creek | Midas | Hollister | Aurora | True North | Corporate and other | Total | ||||||||||||||||||||
Revenues | $ | 59,250 | $ | 19,148 | $ | — | $ | — | $ | 8,394 | $ | — | $ | 86,792 | |||||||||||||
Cost of sales | |||||||||||||||||||||||||||
Production costs | 20,946 | 13,494 | — | — | 7,258 | — | 41,698 | ||||||||||||||||||||
Depreciation and depletion | 7,333 | 5,650 | — | — | 1,889 | — | 14,872 | ||||||||||||||||||||
Write-down of production inventories | — | 419 | — | — | 1,816 | — | 2,235 | ||||||||||||||||||||
30,971 | (415 | ) | — | — | (2,569 | ) | — | 27,987 | |||||||||||||||||||
Other operating expenses | |||||||||||||||||||||||||||
General and administrative | 238 | 205 | 186 | — | 175 | 4,923 | 5,727 | ||||||||||||||||||||
Exploration | 462 | 476 | 361 | — | — | — | 1,299 | ||||||||||||||||||||
Development and projects costs | — | — | 3,226 | 655 | — | — | 3,881 | ||||||||||||||||||||
Asset retirement and accretion | 36 | 176 | 96 | 43 | 29 | — | 380 | ||||||||||||||||||||
Loss on equipment disposal | — | 26 | — | — | — | — | 26 | ||||||||||||||||||||
Income (loss) from operations | $ | 30,235 | $ | (1,298 | ) | $ | (3,869 | ) | $ | (698 | ) | $ | (2,773 | ) | $ | (4,923 | ) | $ | 16,674 | ||||||||
Capital expenditures | $ | 7,680 | $ | 4,716 | $ | 1,323 | $ | 155 | $ | 4,076 | $ | 58 | $ | 18,008 | |||||||||||||
Total assets | $ | 51,195 | $ | 109,725 | $ | 123,972 | $ | 16,169 | $ | 52,922 | $ | 35,021 | $ | 389,004 |
Three months ended June 30, 2016 | Fire Creek | Midas | Hollister | Aurora | True North | Corporate and other | Total | ||||||||||||||||||||
Revenues | $ | 34,330 | $ | 15,663 | $ | — | $ | — | $ | — | $ | — | $ | 49,993 | |||||||||||||
Cost of sales | |||||||||||||||||||||||||||
Production costs | 10,912 | 11,664 | — | — | — | — | 22,576 | ||||||||||||||||||||
Depreciation and depletion | 3,014 | 3,412 | — | — | — | — | 6,426 | ||||||||||||||||||||
20,404 | 587 | — | — | — | — | 20,991 | |||||||||||||||||||||
Other operating expenses | |||||||||||||||||||||||||||
General and administrative | 177 | 177 | — | — | — | 2,826 | 3,180 | ||||||||||||||||||||
Exploration | 2,885 | 345 | — | — | — | — | 3,230 | ||||||||||||||||||||
Development and projects costs | — | — | — | — | 4,764 | — | 4,764 | ||||||||||||||||||||
Asset retirement and accretion | 42 | 179 | — | — | 31 | — | 252 | ||||||||||||||||||||
Business acquisition costs | — | — | 110 | — | 233 | — | 343 | ||||||||||||||||||||
Provision for legal settlement | 2,249 | — | — | — | — | 1 | 2,250 | ||||||||||||||||||||
Loss on equipment disposal | — | — | — | — | — | 4 | 4 | ||||||||||||||||||||
Income (loss) from operations | $ | 15,051 | $ | (114 | ) | $ | (110 | ) | $ | — | $ | (5,028 | ) | $ | (2,831 | ) | $ | 6,968 | |||||||||
Capital expenditures | $ | 5,483 | $ | 7,324 | $ | — | $ | — | $ | 909 | $ | 50 | $ | 13,766 | |||||||||||||
Total assets | $ | 42,751 | $ | 99,729 | $ | — | $ | — | $ | 41,374 | $ | 43,156 | $ | 227,010 |
17
Six months ended June 30, 2017 | Fire Creek | Midas | Hollister | Aurora | True North | Corporate and other | Total | ||||||||||||||||||||
Revenues | $ | 79,701 | $ | 34,937 | $ | — | $ | — | $ | 13,864 | $ | — | $ | 128,502 | |||||||||||||
Cost of sales | |||||||||||||||||||||||||||
Production costs | 27,727 | 26,036 | — | — | 14,164 | — | 67,927 | ||||||||||||||||||||
Depreciation and depletion | 8,990 | 10,186 | — | — | 3,424 | — | 22,600 | ||||||||||||||||||||
Write-down of production inventories | — | 1,370 | — | — | 4,545 | — | 5,915 | ||||||||||||||||||||
42,984 | (2,655 | ) | — | — | (8,269 | ) | — | 32,060 | |||||||||||||||||||
Other operating expenses | |||||||||||||||||||||||||||
General and administrative | 429 | 361 | 186 | — | 428 | 8,811 | 10,215 | ||||||||||||||||||||
Exploration | 589 | 476 | 361 | — | — | — | 1,426 | ||||||||||||||||||||
Development and projects costs | — | — | 8,731 | 655 | — | — | 9,386 | ||||||||||||||||||||
Asset retirement and accretion | 72 | 353 | 192 | 85 | 59 | — | 761 | ||||||||||||||||||||
Loss on equipment disposal | 36 | 106 | — | — | — | — | 142 | ||||||||||||||||||||
Income (loss) from operations | $ | 41,858 | $ | (3,951 | ) | $ | (9,470 | ) | $ | (740 | ) | $ | (8,756 | ) | $ | (8,811 | ) | $ | 10,130 | ||||||||
Capital expenditures | $ | 14,484 | $ | 10,260 | $ | 1,621 | $ | 770 | $ | 7,534 | $ | 347 | $ | 35,016 | |||||||||||||
Total assets | $ | 51,195 | $ | 109,725 | $ | 123,972 | $ | 16,169 | $ | 52,922 | $ | 35,021 | $ | 389,004 |
Six months ended June 30, 2016 | Fire Creek | Midas | Hollister | Aurora | True North | Corporate and other | Total | ||||||||||||||||||||
Revenues | $ | 56,264 | $ | 30,170 | $ | — | $ | — | $ | — | $ | — | $ | 86,434 | |||||||||||||
Cost of sales | |||||||||||||||||||||||||||
Production costs | 19,569 | 23,338 | — | — | — | — | 42,907 | ||||||||||||||||||||
Depreciation and depletion | 4,928 | 7,301 | — | — | — | — | 12,229 | ||||||||||||||||||||
31,767 | (469 | ) | — | — | — | — | 31,298 | ||||||||||||||||||||
Other operating expenses | |||||||||||||||||||||||||||
General and administrative | 338 | 338 | — | — | — | 5,922 | 6,598 | ||||||||||||||||||||
Exploration | 4,388 | 454 | — | — | — | — | 4,842 | ||||||||||||||||||||
Development and projects costs | — | — | — | — | 5,530 | — | 5,530 | ||||||||||||||||||||
Asset retirement and accretion | 83 | 355 | — | — | 61 | — | 499 | ||||||||||||||||||||
Business acquisition costs | — | — | 110 | — | 942 | — | 1,052 | ||||||||||||||||||||
Provision for legal settlement | 2,249 | — | — | — | — | 1 | 2,250 | ||||||||||||||||||||
Loss on equipment disposal | — | — | — | — | — | 4 | 4 | ||||||||||||||||||||
Income (loss) from operations | $ | 24,709 | $ | (1,616 | ) | $ | (110 | ) | $ | — | $ | (6,533 | ) | $ | (5,927 | ) | $ | 10,523 | |||||||||
Capital expenditures | $ | 10,939 | $ | 12,315 | $ | — | $ | — | $ | 2,081 | $ | 360 | $ | 25,695 | |||||||||||||
Total assets | $ | 42,751 | $ | 99,729 | $ | — | $ | — | $ | 41,374 | $ | 43,156 | $ | 227,010 |
16. Supplemental cash flow information
The following table provides a summary of significant supplemental cash flow information:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Cash paid for federal and state income taxes | $ | 638 | $ | 11 | $ | 638 | $ | 1,915 | ||||||||
Cash paid for interest | 1,076 | 1,344 | 2,257 | 2,731 | ||||||||||||
Mineral properties, plant and equipment acquired through Promissory Note | — | — | — | 12,000 | ||||||||||||
Mobile equipment acquired through capital lease obligations | 636 | — | 636 | — |
18
17. Commitments and contingencies
From time to time the Company is involved in legal actions related to our business; however, management does not believe, based on currently available information, that contingencies related to any pending or threatened legal matter will have a material adverse effect on the Company’s financial position, although a contingency could be material to the Company’s results of operations or cash flows for a particular period depending on the results of operations and cash flows for such period. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense costs, diversion of management resources, and other factors.
Royalty commitments
Certain patented and unpatented mining claims at all mine sites are subject to lease and royalty agreements that require payments to holders based on minimum annual payment schedules and/or a percentage of the mineral values produced from, or transported through, the royalty claims. Amounts due pursuant to royalty agreements are not recorded in the Condensed Consolidated Financial Statements until such time when the amounts are actually payable. The primary type of royalty agreement applicable to the mine sites is a net smelter return ("NSR") royalty. Under an NSR royalty, the amount paid by the Company to the royalty holder is generally calculated as the royalty percentage multiplied by the market value of the minerals produced less charges and costs for milling, smelting, refining, and transportation. During the three and six months ended June 30, 2017 and 2016, the Company paid $0.2 million and nil, respectively, all of which were related to minimum and advance royalty payments.
18. Subsequent events
On August 7, 2017 the Company entered into a definitive arrangement to acquire all of the issued and outstanding common shares of Bison Gold Resources Inc. ("Bison") by way of a Plan of Arrangement in exchange for cash or common shares of the Company or a combination of each, at the election of the Company. The consideration payable by the Company under the transaction is approximately $7.3 million (CDN$9.2 million) on a fully-diluted basis. The transaction is expected to close in the fourth quarter of 2017.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion & Analysis of Financial Condition and Results of Operations ("MD&A") contains forward-looking statements (as previously defined) which are subject to numerous risks and uncertainties, as more fully described in the Cautionary statement regarding forward-looking statements section of this Quarterly Report on Form 10-Q. This MD&A provides a discussion and analysis of the financial condition and results of operations of the Company and includes the Company's subsidiaries. This MD&A should be read in conjunction with our other reports filed with the U.S. Securities and Exchange Commission (the "SEC") as well as our interim unaudited Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016. The following discussion has been prepared based on information available to us as of August 9, 2017. All dollar amounts included in this MD&A are expressed in thousands of United States dollars unless otherwise noted. References to CDN$ refer to Canadian dollars. References to "Notes" refer to the notes to Condensed Consolidated Financial Statements.
In this MD&A, we use the non-GAAP performance measures "Cash revenue from operations", "Cash production costs from operations", "Cash margin from operations", "Production cash costs per gold equivalent ounce sold", "All-in sustaining costs per gold ounce sold" and "All-in costs per gold ounce sold", which should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. See the Non-GAAP performance measures section of this MD&A for additional detail.
Introduction and strategy
We are a well–capitalized, junior–tier gold and silver mining company focused on exploration, development, and production in a safe, environmentally responsible, and cost–effective manner. As of June 30, 2017, we had 100% interests in three producing mines: (1) the Fire Creek mine ("Fire Creek") and (2) the Midas mine and ore milling facility ("Midas"), both of which are located in the state of Nevada, USA, and (3) the True North gold mine and mill in Manitoba, Canada ("True North", formerly known as the Rice Lake mine). The Company also has 100% interests in two recently acquired projects: (1) the Hollister mine ("Hollister") and (2) the Aurora mine and ore milling facility ("Aurora", formerly known as Esmeralda), both of which are also located in Nevada, USA. All of our mines are located in safe political jurisdictions.
Prior to February 2014, our only mine was Fire Creek, and since that time, we have experienced growth in our annual gold and silver production, total assets, and workforce largely due to growth at Fire Creek and to the acquisitions of Midas (February 2014), True North (January 2016), and Hollister and Aurora (October 2016).
Gold and silver sales represent 100% of our revenues, and the market prices of gold and silver significantly impact our financial position, operating results, and cash flows. Our primary strategy is to increase shareholder value by responsibly achieving our production, cost, and capital targets while attempting to extend our mine lives through development and exploration programs. We also consider acquisitions or other arrangements in the normal course which strategically fit our future growth objectives. We have an experienced management team, a strong financial position, a low-cost production profile, and high-quality assets located in mining-friendly jurisdictions.
Executive summary
19
Our second quarter 2017 highlights included the following, which are discussed in further detail throughout this MD&A or elsewhere in this Quarterly Report on Form 10-Q:
• | Health, safety, and environmental - We remained committed to our most important core values by operating in an environmentally-responsible manner while protecting the health and safety of our employees and contractors. No lost-time injuries occurred at our properties during the quarter and as of June 30, 2017, we had operated 1,720 days (~4.7 years) at Fire Creek, 996 days (~2.7 years) at Midas, 525 days (~1.4 years) at True North, and 270 days (~0.7 years) at Hollister and Aurora, without a lost-time injury. |
• | Consolidated performance - We mined a total of 53,235 gold equivalent ounces ("GEOs"), in line with management’s expectations. Mined ounces are calculated using tons hauled from underground to surface multiplied by the assays from production sampling. We produced a total of 66,618 GEO's |
• | Nevada performance - At Fire Creek, Midas, and Hollister, the Company mined 89,524 ore tons in the second quarter at an average mined head grade of 0.52 GEOs per ton. The Company's mining activity performed as planned, which resulted in an estimated 46,889 GEOs mined. Production cash costs per gold equivalent ounce sold in Nevada was $554 which is below our updated 2017 expected range of $625 to $650. We anticipate that total annual cash costs per gold equivalent ounce sold in Nevada to be in line with our updated guidance of $625 to $650. |
• | Fire Creek - From Fire Creek, the Company milled 49,060 ore tons in the second quarter at an average milled head grade of 1.01 gold equivalent ounces per ton, producing 45,769 gold equivalent ounces. |
• | Midas - At Midas, the Company milled 43,172 ore tons in the second quarter at an average milled head grade of 0.36 gold equivalent ounces per ton, producing 13,928 gold equivalent ounces. Midas is expected to increase its development activities in the second half of the year, thus producing fewer ore tons at similar or higher grades. |
• | Midas Mill - The Company has added a tails thickener to the Midas mill. The addition of the thickener will extend the life of the mill tailings facilities and reduce future capital expenditures. The mill also converted four leach tanks to CIL ("Carbon in Leach") to be ready to process ore from the Hollister mine. This change will allow the Company to mill ore from Hollister without affecting recovery rates of ore from Fire Creek and Midas. |
• | Hollister mine development - At Hollister, the Company mined 15,162 ore tons in the second quarter at an average mined head grade of 0.47 GEOs per ton for a total of 7,064 GEOs, which were stockpiled at the end of the second quarter. Stockpiled ore is expected to be processed at the Midas mill in the second half of the year. Mining rates and mined head grade are expected to increase in the second half of the year due to higher grades and as we complete development activities and increase cut-and-fill, long-hole mining rates. |
• | True North performance - At True North in Canada, the Company milled 44,484 ore tons in the second quarter from the True North Mine at an average milled head grade of 0.14 gold ounces per ton (4.4 grams per tonne), producing a total of 5,798 gold ounces. The Company also milled 25,191 tons from the True North Tailings at an average milled head grade of 0.05 gold ounces per ton (1.6 grams per ) producing an additional 1,113 gold ounces. |
• | Ounces sold and financial results - We sold 69,511 GEOs, consisting of 62,603 gold ounces and 293,125 silver ounces. Revenue was $86.8 million from average realized selling prices per gold and silver ounce of $1,249 and $17.10, respectively. Net income was $7.7 million (or $0.04 per share - basic). |
• | Cash flows and liquidity - We maintained our strong financial position and liquidity. Our ending cash balance was $41.5 million after $30.0 million of operating cash inflows, $18.0 million used in investing activities, and $0.1 million used in financing activities. Ending working capital was $28.8 million and total liquidity was $51.8 million when including the $23.0 million of Revolver availability. |
• | Spending - Capital, exploration, and development spending totaled $8.1 million at Fire Creek, $5.2 million at Midas, $4.1 million at True North, $4.9 million at Hollister, $0.8 million at Aurora, and $0.1 million at corporate for total capital, exploration and development spending of $23.2 million. As a result of higher than budgeted metal prices and higher than expected production in Nevada, we are increasing our capital expenditure guidance to $63 - $71 million and our district and near mine exploration increasing to $7 to $9 million, the majority of which will be spent at Fire Creek. |
• | Acquisition - On August 7, 2017 the Company entered into a definitive arrangement to acquire all of the issued and outstanding common shares of Bison Gold Resources Inc. ("Bison") by way of a Plan of Arrangement in exchange for cash or common shares of the Company or a combination of each, at the election of the Company. The consideration payable by the Company under the transaction is approximately $7.3 million (CDN$9.2 million) on a fully-diluted basis. The transaction is expected to close in the fourth quarter of 2017. |
2017 full year outlook
The following statements are based on our current expectations for fiscal year 2017 results. The statements are forward-looking and actual results may differ materially.
20
We have updated our 2017 operating guidance. We now expect to produce between 213,000 and 230,000 GEOs during 2017 at an expected production cash cost per GEO sold of $675 to $700. This represents an increase in GEOs sold of approximately 40% from the prior year as we expect to benefit from production at Hollister in Nevada as well as higher production from True North in Canada as ramp-up continues. Fire Creek and Midas’ 2017 production is expected to be in line or slightly higher than the prior year as we benefit from higher than expected mined head grades. At True North in Canada, due to a longer than expected ramp-up in the first half of the year, we now expect our cash cost per gold equivalent ounce sold to be $900 to $950 for the year.
We expect our 2017 capital expenditures to be between $63 - $71 million with an additional $7 - $9 million to be spent on district and near mine exploration. The majority of capital is expected to be spent at Fire Creek as we continue underground expansion in the form of primary access development and advancement of a second portal.
Below are tables summarizing updated key 2017 operating guidance.
Gold Equivalent Ounces Produced(1) | Production Cash Costs per Gold Equivalent Ounce Sold(1) | Capital Expenditures (thousands) | ||||||||||||||||||||||
2017 full year outlook | Low | High | Low | High | Low | High | ||||||||||||||||||
Midas | 45,000 | 50,000 | $ | 800 | $ | 850 | $ | 9,000 | $ | 10,000 | ||||||||||||||
Midas Mill | — | — | — | — | 6,000 | 8,000 | ||||||||||||||||||
Fire Creek | 97,000 | 100,000 | 425 | 450 | 27,000 | 29,000 | ||||||||||||||||||
Hollister | 30,000 | 35,000 | 935 | 960 | 6,000 | 8,000 | ||||||||||||||||||
Nevada Total | 172,000 | 185,000 | 625 | 650 | 48,000 | 55,000 | ||||||||||||||||||
True North(2) | 41,000 | 45,000 | 900 | 950 | 15,000 | 16,000 | ||||||||||||||||||
213,000 | 230,000 | $ | 675 | $ | 700 | $ | 63,000 | $ | 71,000 | |||||||||||||||
Low | High | |||||||||||||||||||||||
Corporate general and administrative (thousands) | $ | 17,000 | $ | 18,000 | ||||||||||||||||||||
Hollister development and project costs (thousands) | $ | 9,000 | $ | 9,000 | ||||||||||||||||||||
All-in sustaining costs(1) | $ | 950 | $ | 1,000 | ||||||||||||||||||||
Regional exploration (thousands) | $ | 7,000 | $ | 9,000 | ||||||||||||||||||||
All-in costs per gold ounce sold(1) | $ | 1,070 | $ | 1,130 | ||||||||||||||||||||
(1) This is a non-GAAP measure; refer to the Non-GAAP Performance Measures section of the MD&A for additional detail. | ||||||||||||||||||||||||
(2) Based on an estimated CDN:US dollar exchange rate of 0.75:1. |
We have not reconciled forward-looking 2017 full year non-GAAP performance measures contained in this Quarterly Report on Form 10-Q to their most directly comparable GAAP measures, as permitted by Item 10(e)(1)(i)(B) of Regulation S-K. Such reconciliations would require unreasonable efforts at this time to estimate and quantify, with a reasonable degree of certainty, various necessary GAAP components, including for example those related to future production costs, realized sales prices and the timing of such sales, timing and amounts of capital expenditures, metal recoveries, and corporate general and administrative amounts and timing, or others that may arise during the year. These components and other factors could materially impact the amount of the future directly comparable GAAP measures, which may differ significantly from their non-GAAP counterparts.
Critical accounting estimates
This MD&A is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation of these statements requires us to make assumptions, estimates, and judgments that affect the amounts of assets, liabilities, revenues, and expenses. For information on our most critical accounting estimates, see the Critical accounting estimates section included in Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016.
21
Results of operations
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
Revenues | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
Gold revenue | ||||||||||||||||||||||||
Fire Creek | $ | 58,753 | $ | 33,958 | $ | 24,795 | $ | 79,004 | $ | 55,360 | $ | 23,644 | ||||||||||||
Midas | 14,380 | 8,592 | 5,788 | 25,240 | 18,760 | 6,480 | ||||||||||||||||||
True North | 8,394 | — | 8,394 | 13,846 | — | 13,846 | ||||||||||||||||||
81,527 | 42,550 | 38,977 | 118,090 | 74,120 | 43,970 | |||||||||||||||||||
Silver revenue | ||||||||||||||||||||||||
Fire Creek | 497 | 372 | 125 | 697 | 904 | (207 | ) | |||||||||||||||||
Midas | 4,768 | 7,071 | (2,303 | ) | 9,697 | 11,410 | (1,713 | ) | ||||||||||||||||
True North | — | — | — | 18 | — | 18 | ||||||||||||||||||
5,265 | 7,443 | (2,178 | ) | 10,412 | 12,314 | (1,902 | ) | |||||||||||||||||
$ | 86,792 | $ | 49,993 | $ | 36,799 | $ | 128,502 | $ | 86,434 | $ | 42,068 |
Revenues increased in the second quarter of 2017 as compared to the second quarter of 2016 due to higher production volume and higher grades from Fire Creek and Midas and the addition of production at True North. These factors also contributed to the increase in revenues in the first six months of 2017 as compared to the same period in 2016. Consolidated ore tons milled during the first half of 2017 and 2016 were 251,810 and 159,949, respectively. See the Mining operations review section of this MD&A for additional discussion on our operating results at each mine.
Gold revenue - The table below summarizes changes in gold revenue, ounces sold, and average realized prices (in thousands, except ounces sold and per ounce amounts):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Total gold revenue (thousands) | $ | 81,527 | $ | 42,550 | $ | 118,090 | $ | 74,120 | ||||||||
Gold ounces sold | 65,293 | 32,499 | 94,852 | 59,463 | ||||||||||||
Average realized price (per ounce) | $ | 1,249 | $ | 1,309 | $ | 1,245 | $ | 1,246 | ||||||||
The change in gold revenue was attributable to: | Change | Change | ||||||||||||||
Increase in ounces sold | $ | 42,895 | $ | 44,064 | ||||||||||||
Change in average realized price | (1,950 | ) | (59 | ) | ||||||||||||
Effect of average realized price change on ounces sold increase | (1,968 | ) | (35 | ) | ||||||||||||
$ | 38,977 | $ | 43,970 |
22
Silver revenue - The table below summarizes changes in silver revenue, ounces sold, and average realized prices (in thousands, except ounces sold and per ounce amounts):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Total silver revenue (thousands) | $ | 5,265 | $ | 7,443 | $ | 10,412 | $ | 12,314 | ||||||||
Silver ounces sold | 307,899 | 408,316 | 594,899 | 733,590 | ||||||||||||
Average realized price (per ounce) | $ | 17.10 | $ | 18.23 | $ | 17.50 | $ | 16.79 | ||||||||
The change in silver revenue was attributable to: | Change | Change | ||||||||||||||
Change in ounces sold | $ | (1,830 | ) | $ | (2,325 | ) | ||||||||||
Change in average realized price | (461 | ) | 521 | |||||||||||||
Effect of average realized price change on ounces sold change | 113 | (98 | ) | |||||||||||||
$ | (2,178 | ) | $ | (1,902 | ) |
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
Cost of sales | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
Production costs | $ | 41,698 | $ | 22,576 | $ | 19,122 | $ | 67,927 | $ | 42,907 | $ | 25,020 | ||||||||||||
Depreciation and depletion | 14,872 | 6,426 | 8,446 | 22,600 | 12,229 | 10,371 | ||||||||||||||||||
Write-down of production inventories | 2,235 | — | 2,235 | 5,915 | — | 5,915 | ||||||||||||||||||
$ | 58,805 | $ | 29,002 | $ | 29,803 | $ | 96,442 | $ | 55,136 | $ | 41,306 | |||||||||||||
Cost of sales by mine | ||||||||||||||||||||||||
Fire Creek | $ | 28,279 | $ | 13,926 | $ | 14,353 | $ | 36,717 | $ | 24,497 | $ | 12,220 | ||||||||||||
Midas | 19,563 | 15,076 | 4,487 | 37,592 | 30,639 | 6,953 | ||||||||||||||||||
True North | 10,963 | — | 10,963 | 22,133 | — | 22,133 | ||||||||||||||||||
$ | 58,805 | $ | 29,002 | $ | 29,803 | $ | 96,442 | $ | 55,136 | $ | 41,306 |
Production costs - Increases in production costs during the three and six months ended June 30, 2017, as compared to the same periods in 2016 were driven by the addition of True North, higher depreciation and depletion expense and higher volumes of ounces sold during the periods. See the Mining operations review section of this MD&A for a discussion of production costs at each mine.
Depreciation and depletion - Depreciation and depletion increased in second quarter and first half of 2017 compared to the corresponding periods in 2016 due primarily to the addition of True North and also due to higher volumes of ounces sold out of Midas and Fire Creek.
Write-down of production inventories - Increases in production costs and depletion and depreciation led to write-downs of ending inventory balances at True North and Midas in the three and six months ended June 30, 2017. See Note 3. Inventories to the Notes to Consolidated Financial Statements for additional detail.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
General and administrative | $ | 5,727 | $ | 3,180 | $ | 2,547 | $ | 10,215 | $ | 6,598 | $ | 3,617 |
The increase during the three and six months ended June 30, 2017 as compared to the same periods in 2016 is due to higher compensation and benefit costs from increased staff levels at the corporate office and professional fees, both of which are due to our growth. We also experienced higher legal fees of approximately $0.7 million for litigation during the three and six months ended June 30, 2017.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
Exploration | $ | 1,299 | $ | 3,230 | $ | (1,931 | ) | $ | 1,426 | $ | 4,842 | $ | (3,416 | ) |
23
Exploration was lower in the second quarter and first half of 2017 due to the focus on production and capital drilling. Exploration in the first half of the year was also affected by inclement weather conditions impeding surface exploration activities. Surface exploration activities ramped up in the second quarter of 2017 and will continue into the third and fourth quarters of 2017.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
Development and projects costs | $ | 3,881 | $ | 4,764 | $ | (883 | ) | $ | 9,386 | $ | 5,530 | $ | 3,856 |
Development and project costs during the three and six months ended June 30, 2017 were $3.2 million and $8.7 million, respectively at Hollister. These costs were generally for rehabilitating drifts, and ramps which enable us to physically access the underground stopes and working faces, drilling, engineering, metallurgical, and other related costs to delineate or expand mineralization, all of which occurred in the Main and Gloria zones. From January 1 to May 31, 2017, these costs were expensed as Hollister did not have a reserve. We issued a reserve for the Main and Gloria zones with an effective date of May 31, 2017, and as such, certain costs for these zones incurred beginning June 1, 2017 were capitalized.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
Asset retirement and accretion | $ | 380 | $ | 252 | $ | 128 | $ | 761 | $ | 499 | $ | 262 |
These amounts relate to the accretion expense from existing asset retirement obligations and asset retirement increases at properties where mineralization is not classified as proven and probable reserves. Asset retirement and accretion have increased over the last three years as the number of properties and disturbances at such properties have increased. See Note 7. Asset retirement obligations to the Notes to Consolidated Financial Statements for additional detail.
Three months ended June 30, | Three months ended June 30, | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
Business acquisition costs | $ | — | $ | 343 | $ | (343 | ) | $ | — | $ | 1,052 | $ | (1,052 | ) |
These amounts relate to costs and expenses associated with the acquisitions of True North (January 2016), and Hollister and Aurora (October 2016).
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
(Loss) gain on derivatives, net | $ | 1,664 | $ | (8,637 | ) | $ | 10,301 | $ | (480 | ) | $ | (14,281 | ) | $ | 13,801 |
Amounts recorded for derivatives are attributable to changes in the fair value of derivative instruments and gains or losses on derivative settlements and transactions, both of which are generally impacted by changes in gold and silver prices. See Note 9. Derivatives to the Notes to Consolidated Financial Statements for additional detail.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
Interest (expense), net | $ | (1,099 | ) | $ | (1,344 | ) | $ | 245 | $ | (2,257 | ) | $ | (2,731 | ) | $ | 474 |
The largest component of total interest expense was for the February 2014 gold purchase agreement with a subsidiary of Franco-Nevada Corporation (the "Gold Purchase Agreement"), which represented 64% and 76%, of recorded interest expense during the second quarters of 2017 and 2016, respectively. See Note 6. Debt to the Notes to Consolidated Financial Statements for additional detail.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
Foreign currency (loss) gain, net | $ | (3,083 | ) | $ | 4 | $ | (3,087 | ) | $ | (4,104 | ) | $ | (2,550 | ) | $ | (1,554 | ) |
Amounts recorded for foreign exchange losses primarily relate to unrealized amounts on intercompany loan balances which we expect to settle in the foreseeable future which were partially offset by gains on U.S. dollar debt held in our Canadian companies.
24
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
Income tax (expense) benefit | $ | (6,552 | ) | $ | (1,429 | ) | $ | (5,123 | ) | $ | (5,929 | ) | $ | (2,113 | ) | $ | (3,816 | ) |
See Note 13. Income taxes to the Notes to Consolidated Financial Statements for a reconciliation of taxes.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
Net income (loss) | $ | 7,692 | $ | (4,484 | ) | $ | 12,176 | $ | (2,535 | ) | $ | (11,147 | ) | $ | 8,612 |
For the reasons discussed above and elsewhere in this MD&A, we reported the above amounts for Net income (loss) for the three and six months ended June 30, 2017 and 2016.
Exploration
Hollister - Nevada
Subsequent to quarter end the Company announced an initial mineral reserve estimate at Hollister. Total Hollister proven and probable Mineral Reserve is 116,100 gold equivalent ounces at a grade of 0.582 gold equivalent ounces per ton with 51.5 ounces coming from the Hollister Main zone and another 64.6 ounces coming from the Gloria zone.
The Hollister proven and probable Mineral Reserve estimate does not include any drill results from Hatter Graben. Drilling on the Hatter Graben commenced on June 17, 2017 and will include approximate 20,000 feet of drilling. The objective of this drilling is to infill the widely spaced high grade vein intercepts that were originally drilled in 2008 with the intent to develop an inferred resource on the Hatter Graben vein system.
Hatter Graben is located approximately 2,500 ft. east of the Hollister Main zone. Hatter Graben is a vein system comprised of multiple high grade veins of minable widths and with grades exceeding 1.0 Au opt.
A description of the data verification methods, quality assurance program and quality control measures applied can be found in the technical report titled "Technical Report and Pre-Feasibility Study for the Hollister Underground Mine", dated August 4, 2017 and with an effective date of May 31, 2017.
The table below summarizes the most recent mineral reserve estimate for Hollister:
Category | Tons (k) | Au opt | Au g/t | Ag opt | Ag g/t | AuEq opt | Au Eq g/t | Au koz | Ag koz | AuEq koz | ||||||||||
Proven | 51 | 0.55 | 19.0 | 2.90 | 99.6 | 0.58 | 19.9 | 28.1 | 147.5 | 29.5 | ||||||||||
Probable | 149 | 0.55 | 18.9 | 3.20 | 109.7 | 0.58 | 20.0 | 82.2 | 476.2 | 86.6 | ||||||||||
Total P&P | 200 | 0.55 | 18.9 | 3.13 | 107.2 | 0.58 | 19.9 | 110.3 | 623.7 | 116.1 |
True North - Canada
During the second quarter of 2017, the Company filed a technical report for the True North mine, Located in Bissett, Manitoba, Canada updating the mineral reserve estimate. Total mineral reserve increased 25% to 147,000 gold ounces. The underground mineral reserve is 104,700 gold ounces at a grade of 0.24 ounces per ton (8.3 grams per tonne).
Additional drilling will take place during the second half of 2017. Subsequent to the quarter end the Company shared additional drill results at True North. The Company received assay results for 104 underground drill holes totaling 64,227 ft (19,576 m). These holes targeted the up dip extension of the 710 zone from the 6350 level and the down dip extension of the 710 and 710 footwall lens at the 32 Level. These results further extend the known mineralization up and down dip from the highly prospective 710 zones to approximately 1,500 ft vertically.
The table below summarizes the most recent underground mineral reserve estimate for True North:
Category | Tons (k) | Au opt | Au g/t | Au koz | ||||
Proven | 128 | 0.22 | 7.5 | 27.9 | ||||
Probable | 306 | 0.25 | 8.6 | 76.9 | ||||
Total P&P | 434 | 0.24 | 8.3 | 104.7 |
A description of the data verification methods, quality assurance program and quality control measures applied can be found in the technical report titled “Technical Report for the True North Mine, Bissett, Manitoba, Canada”, dated May 12, 2017 and with an effective date of March 31, 2017.
25
Mining operations review
Actual vs. modeled resource grades
Our average gold and gold equivalent mill head grades, on both a consolidated and individual mine site basis, can vary from the average grades of the mineral reserve estimates for each site. During our mining activities, we may encounter mineralization not included in the mineral reserve estimate that, in the opinion of management, can be processed economically. Often-times, rather than leaving such mineralized ore for future extraction, we mine the area when encountered so as not to potentially sterilize or incur additional costs to re-access and mine the ore at a later date. In other instances, additional design work, rehabilitation, and/or underground development may be required to enable access to mineralization included in the mineral resource estimate. Due to the above, actual mined gold and gold equivalent grades can differ from those which are stated in the current mineral reserve estimate.
Consolidated
The following table provides a summary of consolidated operating results for our producing properties which include our Nevada operations, Fire Creek, Midas, and Hollister (which began mining activities during the end of the first quarter of 2017) and our Canadian asset, True North, which was placed into production during the end of the third quarter of 2016.
26
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||||
Mine operations - consolidated | Nevada Total(1) | True North | Total | Nevada Total(1) | Nevada Total(1) | True North | Total | Nevada Total(1) | |||||||||||||||||||||||||
Ore tons mined | 89,524 | 44,896 | 134,420 | 82,624 | 168,745 | 73,582 | 242,327 | 155,274 | |||||||||||||||||||||||||
Average gold equivalent mined head grade (oz/ton)(2) | 0.52 | 0.14 | 0.40 | 0.53 | 0.6 | 0.14 | 0.46 | 0.48 | |||||||||||||||||||||||||
Gold equivalent mined (oz)(2) | 46,889 | 6,333 | 53,235 | 43,989 | 100,682 | 10,249 | 110,908 | 74,507 | |||||||||||||||||||||||||
Gold mined (oz) | 42,325 | 6,333 | 48,658 | 37,658 | 90,773 | 10,249 | 101,022 | 63,381 | |||||||||||||||||||||||||
Silver mined (oz) | 334,119 | — | 334,119 | 454,594 | 702,864 | — | 702,864 | 829,574 | |||||||||||||||||||||||||
Ore tons milled | 92,232 | 69,675 | 161,907 | 86,194 | 153,199 | 98,611 | 251,810 | 159,949 | |||||||||||||||||||||||||
Average gold equivalent mill head grade (oz/ton)(2) | 0.70 | 0.11 | 0.45 | 0.52 | 0.64 | 0.12 | 0.44 | 0.48 | |||||||||||||||||||||||||
Average gold mill head grade (oz/ton) | 0.65 | 0.11 | 0.42 | 0.44 | 0.58 | 0.12 | 0.40 | 0.41 | |||||||||||||||||||||||||
Average silver mill head grade (oz/ton) | 3.81 | — | (4 | ) | 2.17 | 5.72 | 4.32 | 0.00 | 2.63 | 5.31 | |||||||||||||||||||||||
Average gold recovery rate (%) | 92.3 | % | 92.0 | % | 92.3 | % | 93.7 | % | 92.5 | % | 94.0 | % | 92.7 | % | 93.9 | % | |||||||||||||||||
Average silver recovery rate (%) | 83.5 | % | — | % | (4 | ) | 83.5 | % | 85.9 | % | 83.8 | % | — | % | 83.8 | % | 87.8 | % | |||||||||||||||
Gold equivalent produced (oz)(2) | 59,696 | 6,911 | 66,618 | 41,717 | 90,319 | 10,711 | 101,052 | 71,843 | |||||||||||||||||||||||||
Gold produced (oz) | 55,692 | 6,911 | 62,603 | 35,821 | 82,546 | 10,711 | 93,257 | 61,783 | |||||||||||||||||||||||||
Silver produced (oz) | 293,125 | — | 293,125 | 423,360 | 554,223 | — | 554,223 | 746,482 | |||||||||||||||||||||||||
Gold equivalent sold (oz)(2)(3) | 62,667 | 6,832 | 69,511 | 38,186 | 91,950 | 11,247 | 103,219 | 69,350 | |||||||||||||||||||||||||
Gold sold (oz) | 58,461 | 6,832 | 65,293 | 32,499 | 83,620 | 11,232 | 94,852 | 59,463 | |||||||||||||||||||||||||
Silver sold (oz) | 307,899 | — | 307,899 | 408,316 | 593,899 | 1,000 | 594,899 | 733,590 | |||||||||||||||||||||||||
Revenues and realized prices | |||||||||||||||||||||||||||||||||
Gold revenue (000s) | $ | 73,133 | $ | 8,394 | $ | 81,527 | $ | 42,550 | $ | 104,244 | $ | 13,846 | $ | 118,090 | $ | 74,120 | |||||||||||||||||
Silver revenue (000s) | 5,265 | — | 5,265 | 7,443 | 10,394 | 18 | 10,412 | 12,314 | |||||||||||||||||||||||||
Total revenues (000s) | $ | 78,398 | $ | 8,394 | $ | 86,792 | $ | 49,993 | $ | 114,638 | $ | 13,864 | $ | 128,502 | $ | 86,434 | |||||||||||||||||
Average realized gold price ($/oz) | $ | 1,251 | $ | 1,229 | $ | 1,249 | $ | 1,309 | $ | 1,247 | $ | 1,233 | $ | 1,245 | $ | 1,246 | |||||||||||||||||
Average realized silver price ($/oz) | $ | 17.10 | $ | 18.00 | $ | 17.10 | $ | 18.23 | $ | 17.50 | $ | 18.00 | $ | 17.50 | $ | 16.79 | |||||||||||||||||
Non-GAAP Measures | |||||||||||||||||||||||||||||||||
Production cash costs per GEO sold(2)(3) | $ | 554 | $ | 1,273 | $ | 624 | $ | 591 | $ | 587 | $ | 1,586 | $ | 696 | $ | 619 | |||||||||||||||||
(1) Nevada Total includes Fire Creek and Midas for the full quarters of 2016 and 2017. It also includes Hollister mined tons, grade and ounces for 2017. | |||||||||||||||||||||||||||||||||
(2) Gold equivalent measures are the gold measure plus the silver measure divided by a GEO ratio. GEO ratios are computed by dividing the average realized gold price per ounce by the average realized silver price per ounce received by us in the respective period and match the ratios used to determine the production cash costs per GEO sold. Refer to the Non-GAAP Performance Measures section of this MD&A for additional detail. Mined ounces are calculated using tons hauled to surface multiplied by the assays from production sampling. | |||||||||||||||||||||||||||||||||
(3) This is a non-GAAP measure; refer to the Non-GAAP Performance Measures section of this MD&A for additional detail. | |||||||||||||||||||||||||||||||||
(4) The Company does not track this silver statistic at True North due to silver being immaterial to that operation. |
Nevada operations
The Company's Nevada operations milled a record number of tons during the second quarter of 2017. The Midas mill processed 92,232 tons of ore from Fire Creek and Midas compared to 86,194 tons in the second quarter of 2016. Fire Creek and Midas produced approximately 43% more gold equivalent ounces in the second quarter 2017 compared to the second quarter 2016 due to more tons processed through the mill. The Hollister Mine contributed 7,064 gold equivalent ounces to the total mined ounces during the second quarter. All of these ounces remained in stockpile at Hollister as of June 30, 2017. Stockpiled ore is expected to be processed at the Midas mill in the second half of the year after metallurgical test work is completed.
Canadian operations
The True North mine continues to ramp up towards full production. Mining rates increased in the second quarter of 2017 compared to the first quarter of 2017 with the Company also processing tons from the True North tailings. The Company expects 2017 production and grades to progressively increase throughout the year as waste development activities progress. Due to slower than expected waste
27
development activities in the first half of the year and lower than expected equipment availability, we have increased our full year cash costs per equivalent ounce sold guidance range to $900 - $950.
All in sustaining costs
Total Company all in sustaining costs for the three and six months ended June 30, 2017 was $909 and $1,086 per gold ounce sold respectively. The Company expects to have all in sustaining costs for the year of $950 to $1,000 per gold ounce sold. (This is a non-GAAP measure; refer to the Non-GAAP Performance Measures section of the MD&A for additional detail).
Fire Creek (Nevada Operations)
Fire Creek is 100% owned, fully-permitted, and was acquired by Klondex in 1975. Production began in 2014 under the bulk sample permit. Fire Creek is located in north-central Nevada in Lander County approximately 16 miles south of a major highway (Interstate-80) near other large gold deposits and mines which are owned and operated by major mining companies. Fire Creek is a high-grade, epithermal vein deposit, and the land package covers approximately 18,714 acres (~28.8 square miles). Ore mined from Fire Creek is trucked to Midas for processing in the milling facility. The following table provides a summary of Fire Creek operating results and period-over-period changes.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
Mine Operations - Fire Creek | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
Ore tons mined | 33,929 | 32,126 | 1,803 | 65,659 | 64,133 | 1,526 | ||||||||||||||||||
Average gold equivalent mined head grade (oz/ton)(1) | 0.78 | 0.96 | (0.18 | ) | 0.97 | 0.81 | 0.16 | |||||||||||||||||
Gold equivalent mined (oz)(1) | 26,328 | 30,764 | (4,436 | ) | 63,919 | 51,918 | 12,001 | |||||||||||||||||
Gold mined (oz) | 25,974 | 30,379 | (4,405 | ) | 63,167 | 51,278 | 11,889 | |||||||||||||||||
Silver mined (oz) | 25,823 | 27,745 | (1,922 | ) | 54,081 | 48,734 | 5,347 | |||||||||||||||||
Ore tons milled | 49,060 | 33,968 | 15,092 | 70,719 | 66,710 | 4,009 | ||||||||||||||||||
Average gold equivalent mill head grade (oz/ton)(1) | 1.01 | 0.91 | 0.10 | 1.02 | 0.81 | 0.21 | ||||||||||||||||||
Average gold mill head grade (oz/ton) | 1.00 | 0.90 | 0.10 | 1.01 | 0.80 | 0.21 | ||||||||||||||||||
Average silver mill head grade (oz/ton)(2) | 0.75 | 0.69 | 0.06 | 0.83 | 0.80 | 0.03 | ||||||||||||||||||
Average gold recovery rate (%) | 92.3 | % | 93.7 | % | (1.4 | %) | 92.6 | % | 93.7 | % | (1.1 | %) | ||||||||||||
Average silver recovery rate (%)(2) | 85.5 | % | 85.9 | % | (0.4 | %) | 84.8 | % | 87.4 | % | (2.6 | %) | ||||||||||||
Gold equivalent produced (oz)(1) | 45,769 | 29,080 | 16,689 | 64,968 | 50,634 | 14,334 | ||||||||||||||||||
Gold produced (oz) | 45,341 | 28,800 | 16,541 | 64,322 | 50,019 | 14,303 | ||||||||||||||||||
Silver produced (oz) | 31,316 | 20,148 | 11,168 | 46,425 | 46,841 | (416 | ) | |||||||||||||||||
Gold equivalent sold (oz)(1) | 47,366 | 26,172 | 21,194 | 63,906 | 45,159 | 18,747 | ||||||||||||||||||
Gold sold (oz) | 46,969 | 25,889 | 21,080 | 63,347 | 44,434 | 18,913 | ||||||||||||||||||
Silver sold (oz) | 29,052 | 20,406 | 8,646 | 40,197 | 55,251 | (15,054 | ) | |||||||||||||||||
Revenues and realized prices | ||||||||||||||||||||||||
Gold revenue (000s) | $ | 58,753 | $ | 33,958 | $ | 24,795 | $ | 79,004 | $ | 55,360 | $ | 23,644 | ||||||||||||
Silver revenue (000s) | 497 | 372 | 125 | 697 | 904 | (207 | ) | |||||||||||||||||
Total revenues (000s) | $ | 59,250 | $ | 34,330 | $ | 24,920 | $ | 79,701 | $ | 56,264 | $ | 23,437 | ||||||||||||
Average realized gold price ($/oz) | $ | 1,251 | $ | 1,312 | $ | (61 | ) | $ | 1,247 | $ | 1,246 | $ | 1 | |||||||||||
Average realized silver price ($/oz) | $ | 17.11 | $ | 18.23 | $ | (1.12 | ) | $ | 17.34 | $ | 16.36 | $ | 0.98 | |||||||||||
Non-GAAP Measures | ||||||||||||||||||||||||
Production cash costs per GEO sold(1)(2) | $ | 442 | $ | 417 | $ | 25 | $ | 434 | $ | 433 | $ | 1 | ||||||||||||
(1) Gold equivalent measures are the gold measure plus the silver measure divided by a GEO ratio. GEO ratios are computed by dividing the average realized gold price per ounce by the average realized silver price per ounce received by us in the respective period and match the ratios used to determine the production cash costs per GEO sold. Refer to the Non-GAAP Performance Measures section of this MD&A for additional detail. Mined ounces are calculated using tons hauled to surface multiplied by the assays from production sampling. | ||||||||||||||||||||||||
(2) This is a non-GAAP measure; refer to the Non-GAAP Performance Measures section of this MD&A for additional detail. |
Operations and costs - Gold equivalent ounce production was approximately 57% higher in the second quarter 2017 compared to the second quarter 2016 due primarily to a large stockpile of Fire Creek ore at the end of the first quarter 2017 which was processed through the Midas mill in the second quarter. At Fire Creek, the Company milled 49,060 ore tons in the second quarter at an average milled head grade of 1.01 gold equivalent ounces per ton, producing 45,733 gold equivalent ounces. Year to date, Fire Creek has produced
28
64,966 gold equivalent ounces, approximately 66% of its annual production guidance. In the second half of the year, Fire Creek will increase development activities. This will result in producing fewer ore tons at similar grades.
Spending - During the six months ended June 30, 2017, capital expenditures totaled $15.0 million. For details of capital expenditures refer to the Investing cash flows part of the Financial position, liquidity, and capital resources section of this MD&A.
Midas Mine (Nevada Operations)
Midas is 100% owned, fully-permitted, and was acquired by Klondex in February 2014. Midas is located in north-central Nevada in Elko County approximately 58 miles east of a major highway (Interstate-80) near other large gold deposits and mines which are owned and operated by major mining companies. Midas is a low-sulphidation, epithermal vein deposit, and the land package covers approximately 30,000 acres (~47.0 square miles). The following table provides a summary of Midas operating results and period-over-period changes.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
Mine Operations - Midas | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
Ore tons mined | 40,433 | 50,498 | (10,065 | ) | 80,586 | 91,141 | (10,555 | ) | ||||||||||||||||
Average gold equivalent mined head grade (oz/ton)(1) | 0.33 | 0.26 | 0.07 | 0.34 | 0.25 | 0.09 | ||||||||||||||||||
Gold equivalent mined (oz)(1) | 13,499 | 13,266 | 233 | 27,510 | 22,626 | 4,884 | ||||||||||||||||||
Gold mined (oz) | 9,842 | 7,279 | 2,563 | 19,121 | 12,103 | 7,018 | ||||||||||||||||||
Silver mined (oz) | 267,709 | 426,849 | (159,140 | ) | 596,476 | 780,840 | (184,364 | ) | ||||||||||||||||
Ore tons milled | 43,172 | 52,226 | (9,054 | ) | 82,480 | 93,239 | (10,759 | ) | ||||||||||||||||
Average gold equivalent mill head grade (oz/ton)(1) | 0.36 | 0.27 | 0.09 | 0.38 | 0.25 | 0.13 | ||||||||||||||||||
Average gold mill head grade (oz/ton) | 0.26 | 0.14 | 0.12 | 0.28 | 0.13 | 0.15 | ||||||||||||||||||
Average silver mill head grade (oz/ton)(2) | 7.28 | 8.99 | (1.71 | ) | 7.36 | 8.6 | (1.24 | ) | ||||||||||||||||
Average gold recovery rate (%) | 92.4 | % | 93.7 | % | (1.3 | %) | 92.2 | % | 94.9 | % | (2.7 | %) | ||||||||||||
Average silver recovery rate (%)(2) | 83.3 | % | 85.9 | % | (2.6 | %) | 83.7 | % | 87.9 | % | (4.2 | %) | ||||||||||||
Gold equivalent produced (oz)(1) | 13,928 | 12,676 | 1,252 | 25,366 | 21,193 | 4,173 | ||||||||||||||||||
Gold produced (oz) | 10,351 | 7,021 | 3,330 | 18,224 | 11,764 | 6,460 | ||||||||||||||||||
Silver produced (oz) | 261,809 | 403,212 | (141,403 | ) | 507,798 | 699,641 | (191,843 | ) | ||||||||||||||||
Gold equivalent sold (oz)(1) | 15,301 | 12,051 | 3,250 | 28,061 | 24,171 | 3,890 | ||||||||||||||||||
Gold sold (oz) | 11,492 | 6,610 | 4,882 | 20,273 | 15,029 | 5,244 | ||||||||||||||||||
Silver sold (oz) | 278,847 | 387,910 | (109,063 | ) | 553,702 | 678,339 | (124,637 | ) | ||||||||||||||||
Revenues and realized prices | ||||||||||||||||||||||||
Gold revenue (000s) | $ | 14,380 | $ | 8,592 | $ | 5,788 | $ | 25,240 | $ | 18,760 | $ | 6,480 | ||||||||||||
Silver revenue (000s) | 4,768 | 7,071 | (2,303 | ) | 9,697 | 11,410 | (1,713 | ) | ||||||||||||||||
Total revenues (000s) | $ | 19,148 | $ | 15,663 | $ | 3,485 | $ | 34,937 | $ | 30,170 | $ | 4,767 | ||||||||||||
Average realized gold price ($/oz) | $ | 1,251 | $ | 1,300 | $ | (49 | ) | $ | 1,245 | $ | 1,248 | $ | (3 | ) | ||||||||||
Average realized silver price ($/oz) | $ | 17.10 | $ | 18.23 | $ | (1.13 | ) | $ | 17.51 | $ | 16.82 | $ | 0.69 | |||||||||||
Non-GAAP Measures | ||||||||||||||||||||||||
Production cash costs per GEO sold(1)(2) | $ | 898 | $ | 968 | $ | (70 | ) | $ | 937 | $ | 966 | $ | (29 | ) | ||||||||||
(1) Gold equivalent measures are the gold measure plus the silver measure divided by a GEO ratio. GEO ratios are computed by dividing the average realized gold price per ounce by the average realized silver price per ounce received by us in the respective period and match the ratios used to determine the production cash costs per GEO sold. Refer to the Non-GAAP Performance Measures section of this MD&A for additional detail. Mined ounces are calculated using tons hauled to surface multiplied by the assays from production sampling. | ||||||||||||||||||||||||
(2) This is a non-GAAP measure; refer to the Non-GAAP Performance Measures section of this MD&A for additional detail. |
Operations and costs - Our strategy for Midas in 2017 has been narrower mining widths, lower tons and higher grades. We have been able to achieve this in the first and second quarters of 2017. At Midas, the Company milled 43,172 ore tons in the second quarter at an average milled head grade of 0.36 gold equivalent ounces per ton, producing 13,962 gold equivalent ounces. Year to date, Midas has produced 25,366 gold equivalent ounces, approximately 53% of its annual production guidance. Midas is expected to increase its waste development activities in the second half of the year providing access to ore headings, thus producing fewer ore tons at similar grades.
Spending - During the first six months of 2017, spending was $10.9 million. For details of capital expenditures refer to the Investing cash flows part of the Financial position, liquidity, and capital resources section of this MD&A.
29
Midas Mill (Nevada Operations)
Ore from Fire Creek and Midas are processed at the Midas mill, which has a design capacity of 1,200 tons per day. Run-of-mine ore is crushed to 100% passing 1/2" in a conventional two-stage crushing circuit which utilizes a primary jaw crusher and a secondary cone crusher with the circuit closed by a double deck vibrating screen. Beginning in the second half of 2017 the Company will begin processing ore from Hollister at the Midas mill. In preparation of anticipated Hollister ore, the company converted four of the mill's leach tanks to CIL to allow Hollister ore to be processed. This change will allow the Company to mill ore from Hollister without affecting recovery rates of ore from Fire Creek and Midas.
The Company is also adding a tails thickener to the Midas mill. The addition of the thickener will extend the life of the mill tailings facilities and reduce future capital expenditures.
Hollister (Nevada Operations)
The Hollister mine is a fully-permitted past producing underground and open pit operation, located in north-central Nevada in Elko County. Hollister does not have a milling or processing facilities but is located approximately 17 miles from the Midas mill, which currently has capacity to process additional tons. Hollister is an important asset to us since we believe there are significant synergies and cost savings with our Nevada operations through low transportation costs, reduced per ton milling costs, and shared general and administrative costs. Further, certain of our executives and management previously operated the historical underground operations and exploration programs at Hollister and believe that exploration targets with significant potential exist within the property boundary. We believe Hollister provides us with an opportunity to strategically and responsibly grow our business in Nevada, a mining friendly jurisdiction, while leveraging our technical expertise in narrow-vein underground mining and past experience with the project.
Three months ended June 30, | Six months ended June 30, | ||||
Mine Operations - Hollister | 2017 | 2017 | |||
Tons mined (1) | 15,162 | 22,500 | |||
Average gold equivalent mined head grade (oz/ton)(2) | 0.47 | 0.41 | |||
Gold equivalent mined (oz) | 7,064 | 9,220 | |||
Gold mined (oz) | 6,509 | 8,486 | |||
Silver mined (oz) | 40,587 | 52,307 | |||
(1) All mining activity was conducted under a bulk sample program. | |||||
(2) Gold equivalent measures are the gold measure plus the silver measure divided by a GEO ratio. GEO ratios are computed by dividing the average realized gold price per ounce by the average realized silver price per ounce received by us in the respective period and match the ratios used to determine the production cash costs per GEO sold. Refer to the Non-GAAP Performance Measures section of this MD&A for additional detail. Mined ounces are calculated using tons hauled to surface multiplied by the assays from production sampling. |
Operations and costs - During the second quarter of 2017, we continued to ramp up production at Hollister, commencing our long-hole stoping program in the Gloria zone. This led to higher mining rates and improved gold equivalent mined grades demonstrating an increase in grade of approximately 60% from the first quarter. We expect these grades to continue or improve in the third and fourth quarters of 2017. Ore was stockpiled at Hollister at the end of the second quarter with an estimated 9,220 gold equivalent ounces in stockpile. Stockpiled ore is expected to be processed at the Midas mill in the second half of the year. Mining rates are expected to increase significantly in the second half of the year as we complete development activities and increase cut and fill and long hole mining rates.
In-fill drilling has continued in the Gloria zone and we have issued a mineral resource and reserve estimate on the zone, effective May 31, 2017.
Hollister updates
• | Hollister Main and Gloria zones - Completed drilling on the Main and Gloria zones and announced initial mineral reserve estimate. |
• | Production ramp up - During the second quarter of 2017 the Company completed rehabilitation on the ramp and completed the secondary egress. The Company also tested long-hole stoping with positive results. |
• | Hatter Graben - A historic drilling program was conducted in 2008 by a prior owner which discovered the Hatter Graben vein system, an east-west trending structural zone containing several sub-parallel high grade veins. Results of this program indicate the system is approximately 1,800 ft (~550 m) in strike and approximately 1,200 ft (365 m) vertical extent and open in all directions. Beginning in the second quarter of 2017, we commenced infill surface drilling to close the widely spaced historic drill intercepts with the intent to develop an inferred resource by early first quarter of 2018. |
• | Spending - Following an assessment of site facilities, infrastructure, and underground workings in the first and second quarters of 2017, spending was $5.8 million and $4.5 million, respectively, for capital and development and project costs. For details of |
30
capital expenditures refer to the Investing cash flows part of the Financial position, liquidity, and capital resources section of this MD&A.
• | Community - Klondex has agreed to donate more than 3,200 acres of lands known as the Rock Creek Lands, to the Battle Mountain Band of Western Shoshone Indians of Nevada. |
Aurora updates
Aurora project overview
The Aurora project is a fully-permitted past producing underground and open pit operation, located in west-central Nevada in Mineral County. Aurora has a 350 ton per day milling and processing facility, which we believe may provide us an opportunity to consider toll milling services. Further, certain of our executives and management previously operated Aurora and believe that exploration targets with significant potential exist within the property boundary. We believe Aurora provides us with an opportunity to strategically and responsibly grow our business in Nevada.
During the fourth quarter of 2016 and the first half of 2017, we performed minimal rehab work on the mill. During the second quarter of 2017, we identified an opportunity to process ore contained within the existing tailings facilities at the project. Processing of this material is expected to begin in the third quarter of 2017. We continue to assess the economic feasibility of toll milling services for third parties.
True North (Manitoba, Canada)
True North (formerly Rice Lake), located in Manitoba, Canada, is 100% owned, fully-permitted, and was acquired on January 22, 2016. True North is a past producing underground gold mining operation consisting of three underground deposits with a modern, fully-permitted mill. Under previous ownership, mining took place at True North continuously from 2007 until May 2015, when the operation was placed on care and maintenance. True North was placed into production towards the end of the third quarter of 2016 following the release of an updated mineral reserve and resource estimate.
31
Three months ended June 30, | Six months ended June 30, | |||||||
Mine Operations - True North | 2017 | 2017 | ||||||
Ore tons mined | 44,896 | 73,582 | ||||||
Average gold equivalent mined head grade (oz/ton)(1) | 0.14 | 0.14 | ||||||
Gold equivalent mined (oz)(1) | 6,333 | 10,249 | ||||||
Gold mined (oz) | 6,333 | 10,249 | ||||||
Silver mined (oz) | — | — | ||||||
Ore tons milled | 69,675 | 98,611 | ||||||
Average gold equivalent mill head grade (oz/ton)(1) | 0.11 | 0.12 | ||||||
Average gold mill head grade (oz/ton) | 0.11 | 0.12 | ||||||
Average silver mill head grade (oz/ton)(2)(3) | — | 0.00 | ||||||
Average gold recovery rate (%) | 92.0 | % | 94.0 | % | ||||
Average silver recovery rate (%)(2)(3) | — | % | 0.0 | % | ||||
Gold equivalent produced (oz)(1) | 6,911 | 10,711 | ||||||
Gold produced (oz) | 6,911 | 10,711 | ||||||
Silver produced (oz) | — | — | ||||||
Gold equivalent sold (oz)(1) | 6,832 | 11,247 | ||||||
Gold sold (oz) | 6,832 | 11,232 | ||||||
Silver sold (oz) | — | 1,000 | ||||||
Revenues and realized prices | ||||||||
Gold revenue (000s) | $ | 8,394 | $ | 13,846 | ||||
Silver revenue (000s) | — | 18 | ||||||
Total revenues (000s) | $ | 8,394 | $ | 13,864 | ||||
Average realized gold price ($/oz) | $ | 1,229 | $ | 1,233 | ||||
Average realized silver price ($/oz) | $ | — | $ | 18.00 | ||||
Non-GAAP Measures | ||||||||
Production cash costs per GEO sold(1)(2) | $ | 1,273 | $ | 1,586 | ||||
(1) Gold equivalent measures are the gold measure plus the silver measure divided by a GEO ratio. GEO ratios are computed by dividing the average realized gold price per ounce by the average realized silver price per ounce received by us in the respective period and match the ratios used to determine the production cash costs per GEO sold. Refer to the Non-GAAP Performance Measures section of this MD&A for additional detail. Mined ounces are calculated using tons hauled to surface multiplied by the assays from production sampling. | ||||||||
(2) This is a non-GAAP measure; refer to the Non-GAAP Performance Measures section of this MD&A for additional detail. | ||||||||
(3) The Company does not track this silver statistic at True North due to silver being immaterial to that operation. |
Operations and costs - The mine continues to ramp up towards full production from underground. Benefiting from ore development work in the first quarter, second quarter of 2017 production increased by approximately 53% from the first quarter of 2017. The increase in production led to lower production costs with cash costs per GEO sold decreasing by approximately 38% in the second quarter of 2017 compared to the first quarter of 2017. At True North in Canada, the Company milled 44,484 ore tons in the second quarter of 2017 from the True North Mine at an average milled head grade of 0.14 gold ounces per ton (4.4 grams per tonne), producing a total of 5,798 gold ounces. The Company took advantage of extra milling capacity by processing 25,191 tons from the True North Tailings at an average milled head grade of 0.05 gold ounces per ton (1.6 grams per tonne) producing an additional 1,113 gold ounces. Additional ore tons are expected to come from the Cohiba mine where development work commenced in the second quarter of 2017. The Company retained a contractor to utilize existing development to access ore in the Cohiba ramp and this ore will begin to be processed in the third quarter of 2017.
As we continue to ramp up production, which entails processing tailings ore, we recognized write-downs to production inventories of $4.5 million for the six months ending June 30, 2017 (see Note 3. Inventories to the Notes to Consolidated Financial Statements for additional detail). True North's grades and throughput are expected to significantly increase in the second half of 2017 as it operates at a steady-state capacity in the higher grade zones in the mine.
Spending - For the first six months of 2017, spending was $7.5 million for capital, development and project costs. For details of capital expenditures refer to the Investing cash flows part of the Financial position, liquidity, and capital resources section of this MD&A.
Financial position, liquidity, and capital resources
32
General strategy
To maintain sufficient liquid assets and access to capital resources, we regularly perform short and long-term cash flow forecasts using current assumptions of future gold and silver prices, foreign exchange rates, production volumes, and operating and capital costs. Our liquidity and capital resources management strategy entails a disciplined approach by monitoring the timing and amount of any investment in our mines, projects, or exploration properties, while continually remaining in a position which we believe will allow us to respond to changes in our business environment, such as a decrease in metal prices, or other factors beyond our control.
Our capital structure consists of a mixture of debt and shareholders' equity. We regularly review our capital structure and evaluate various financing options and strategies that: (1) may improve our current liquidity and financial condition, (2) are attainable on favorable and reasonable terms, and (3) are permissible under our existing debt arrangements and other obligations. Such financing options may include, but are not limited to, additional or increases in revolving borrowing facilities, equipment financing, term loan facilities, refinancing existing obligations, and/or the issuance of equity securities, warrants, or other instruments.
Risk management contracts
In order to increase the certainty of expected future cash flows, from time to time we may enter into fixed forward spot trades for a portion of our forecast gold and silver sales over the next one to twelve months. During the quarter ended June 30, 2017, the Company entered into a zero cost gold collar for 2,500 gold ounces per month through the end of year at a cap and floor of $1,360 and $1,200 per ounce, respectively (see Note 9. Derivatives for additional detail). Other than the aforementioned, we have not entered into any other significant contracts to hedge or manage market risks arising from changes in metal prices, diesel and propane costs, and currency and interest rates. We will continually and actively monitor applicable markets and quotes and may consider entering into additional hedging agreements and contracts if determined to be advantageous by management and the board of directors, and if such transactions are permissible under our existing debt agreements.
Liquidity and capital resources
As discussed below in the Sources and uses of cash section, at June 30, 2017, our Cash and cash equivalents balance totaled $41.5 million, decreasing $6.1 million from the December 31, 2016 balance of $47.6 million largely due to cash provided by operating activities of $26.0 million and cash provided by financing activities of $2.7 million being more than offset by $35.0 million of capital expenditures on mineral properties, plant, and equipment.
Due to the nature of our operations and the composition of our balance sheet assets, as of June 30, 2017, our current assets, which included Cash and cash equivalents of $41.5 million and Inventories of $28.3 million, represented substantially all of our liquid assets on hand. We have access to additional liquidity under our $35.0 million Revolver, of which $23.0 million was available as of June 30, 2017. As of June 30, 2017, we had working capital of $28.8 million. The following chart provides a summary of our working capital, Revolver availability, and estimated liquidity as of the end of each of the last three years and June 30, 2017 (in thousands):
33
Our working capital decreased $4.4 million (approximately 13%) from December 31, 2016 to June 30, 2017, and our working capital ratio decreased to 1.63. The following table summarizes working capital (in thousands, except working capital ratio):
June 30, 2017 | December 31, 2016 | Change | ||||||||||
Total current assets | $ | 74,151 | $ | 74,871 | $ | (720 | ) | |||||
Total current liabilities | 45,365 | 41,692 | 3,673 | |||||||||
Working capital | $ | 28,786 | $ | 33,179 | $ | (4,393 | ) | |||||
Working capital ratio(1) | 1.63 | 1.80 | ||||||||||
(1) Current assets divided by current liabilities. |
Working capital changes related to the decrease in total current assets were primarily attributable to a $7.0 million increase in inventory as a result of Hollister operations stockpiling ore during its ramp up throughout the first half of the year, offset by a $6.1 million decrease in Cash and cash equivalents (discussed below in the Sources and uses of cash section) and a $1.2 million decrease in prepaid expenses. Working capital changes related to an increase in total current liabilities were primarily attributable to an increase in income taxes payable of $4.9 million.
Included in working capital are Inventories, which include production-related inventories that can provide us with additional cash liquidity in excess of their June 30, 2017 carrying value of $19.8 million due to a cash margin we expect to realize at the time of sale. The following table summarizes the estimated recoverable gold and silver ounces contained in our Inventories and the underlying amount of revenue which may be generated from their sale using June 30, 2017 period-end prices, which would be further reduced for any remaining processing and refining costs:
June 30, 2017 | ||||||||||||
Gold | Silver | Total | ||||||||||
Estimated ounces in Inventories | 19,839 | 125,167 | ||||||||||
Period-end prices | $ | 1,243 | $ | 16.47 | ||||||||
$ | 24,660 | $ | 2,062 | $ | 26,722 |
Our June 30, 2017 working capital, available sources of liquidity, and future operating cash flows will be used, in part, to fund recurring operating and production costs, deliver gold ounces under the Gold Purchase Agreement (8,000 ounces over the next 12 months), make principal and interest payments on debt, and to fund capital expenditures and exploration and development costs at our mines and projects. At current gold and silver price levels, and when using our estimates of future production and costs, we believe our cash flows from operating activities together with our working capital and Revolver, will be sufficient to fund our business for at least the next 12 months. See the Contractual obligations section for additional detail on the timing and amounts of our future cash requirements.
Sources and uses of cash
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||
Net income (loss) | $ | 7,692 | $ | (4,484 | ) | $ | (2,535 | ) | $ | (11,147 | ) | ||||||
Net non-cash adjustments | 17,237 | 12,515 | 28,179 | 24,191 | |||||||||||||
Net change in non-cash working capital | 5,089 | 7,394 | 361 | 4,021 | |||||||||||||
Net cash provided by operating activities | 30,018 | 15,425 | 17,065 | 26,005 | 17,065 | ||||||||||||
Net cash used in investing activities | (18,008 | ) | (11,668 | ) | (35,016 | ) | (43,597 | ) | |||||||||
Net cash (used) provided by financing activities | (138 | ) | 2,292 | 2,742 | 3,683 | ||||||||||||
Effect of foreign exchange on cash balances | 122 | (26 | ) | 181 | 629 | ||||||||||||
Net increase (decrease) in cash | 11,994 | 6,023 | (6,088 | ) | (22,220 | ) | |||||||||||
Cash, beginning of period | 29,554 | 30,854 | 47,636 | 59,097 | |||||||||||||
Cash, end of period | $ | 41,548 | $ | 36,877 | $ | 41,548 | $ | 36,877 |
Operating Cash Flows - Our cash flows from operations are largely impacted by the number of ounces sold, average realized prices, and production costs. As shown in the table below, during the three and six months ended June 30, 2017 and 2016, operating cash flows were positively impacted by higher GEO's sold for the six months ended June 30, 2017.
34
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
Cash revenue from operations(1) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Consolidated gold equivalent ounces sold(1) | 69,511 | 38,186 | 103,219 | 69,350 | ||||||||||||
Less: ounces delivered under Gold Purchase Agreement(2) | (2,000 | ) | (2,000 | ) | (4,000 | ) | (4,000 | ) | ||||||||
67,511 | 36,186 | 99,219 | 65,350 | |||||||||||||
Average realized gold price ($/oz) | $ | 1,249 | $ | 1,309 | $ | 1,245 | $ | 1,246 | ||||||||
$ | 84,321 | $ | 47,367 | $ | 123,528 | $ | 81,426 | |||||||||
Cash production costs from operations(1) | ||||||||||||||||
Production costs | $ | 41,698 | $ | 22,576 | $ | 67,927 | $ | 42,907 | ||||||||
Add: Write-down of production inventories (cash portion) (see Note 3 - Inventories) | 1,691 | — | 3,925 | — | ||||||||||||
$ | 43,389 | $ | 22,576 | $ | 71,852 | $ | 42,907 | |||||||||
Cash margin from operations(1) | $ | 40,932 | 24,791 | 51,676 | 38,519 | |||||||||||
(1) This is a non-GAAP measure; refer to the Non-GAAP Performance Measures section of this MD&A for additional detail. | ||||||||||||||||
(2) Ounces delivered under the Gold Purchase Agreement do not result in cash revenue. |
Investing cash flows - During the three months ended June 30, 2017, net cash used in investing activities increased by $6.3 million as a result of larger capital expenditures as compared to the same period of the prior year. During the six months ended June 30, 2017, net cash used in investing activities decreased by $8.6 million as compared to the first half of 2016, as the True North acquisition resulted in a $20 million cash payment during the first half of 2016. This decrease was offset by higher 2017 capital expenditures. During the first half of 2017 and 2016, we funded capital expenditures for mineral properties, plant and equipment. The following tables summarize our capital expenditures for the three and six months ended June 30, 2017 (in thousands):
Three months ended June 30, 2017 | |||||||||||||||||||||||||||
Capital expenditures | Fire Creek | Midas(1) | Hollister | Aurora | True North | Corporate and other | Total | ||||||||||||||||||||
Mineral properties | $ | 76 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 76 | |||||||||||||
Land | 14 | — | — | — | — | — | 14 | ||||||||||||||||||||
Facilities and equipment | 455 | 2,923 | 105 | 155 | 438 | 58 | 4,134 | ||||||||||||||||||||
Mine development | 7,135 | 1,793 | 1,218 | — | 3,638 | — | 13,784 | ||||||||||||||||||||
$ | 7,680 | $ | 4,716 | $ | 1,323 | $ | 155 | $ | 4,076 | $ | 58 | $ | 18,008 | ||||||||||||||
(1) Midas includes $1.9 million for the milling facility. |
Six months ended June 30, 2017 | |||||||||||||||||||||||||||
Capital expenditures | Fire Creek | Midas(1) | Hollister | Aurora | True North | Corporate and other | Total | ||||||||||||||||||||
Mineral properties | $ | 81 | $ | — | $ | 162 | $ | — | $ | — | $ | — | $ | 243 | |||||||||||||
Land | 14 | — | — | — | — | — | 14 | ||||||||||||||||||||
Facilities and equipment | 1,327 | 6,515 | 241 | 770 | 1,699 | 347 | 10,899 | ||||||||||||||||||||
Mine development | 13,062 | 3,745 | 1,218 | — | 5,835 | — | 23,860 | ||||||||||||||||||||
$ | 14,484 | $ | 10,260 | $ | 1,621 | $ | 770 | $ | 7,534 | $ | 347 | $ | 35,016 | ||||||||||||||
(1) Midas includes $5.0 million for the milling facility. |
Financing Cash Flows - During the three months ended June 30, 2017, $0.1 million net cash used by financing activities was primarily due to debt payments. During the three months ended June 30, 2016, $2.3 million net cash provided by financing activities was the result of option and warrant exercises. During the six months ended June 30, 2017, net cash provided by financing activities decreased by $0.9 million compared to the first half of 2016 as fewer options and warrants were exercised.
35
Foreign Currency Effect on Cash - A portion of our Cash and cash equivalents is held in bank accounts denominated in Canadian dollars. Generally speaking, when the US dollar strengthens against the Canadian dollar, we experience negative foreign currency translation adjustments on our Canadian dollar cash balances (the opposite is true when the Canadian dollar strengthens against the U.S. dollar). Changes in exchange rates resulted in increases to our cash balances of $0.1 million and $0.2 million, respectively, during the three and six months ended June 30, 2017.
Contractual obligations
The following table provides a listing of our significant contractual obligations as of June 30, 2017 (in thousands):
Payments due by period | ||||||||||||||||||||
Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | ||||||||||||||||
Long-term debt obligations | ||||||||||||||||||||
Gold Purchase Agreement(1) | $ | 8,918 | $ | 5,230 | $ | — | $ | — | $ | 14,148 | ||||||||||
Interest on Gold Purchase Agreement(1) | 1,875 | 286 | — | — | 2,161 | |||||||||||||||
Revolver(2) | — | 12,000 | — | — | 12,000 | |||||||||||||||
Interest on Revolver(2) | 523 | 785 | — | — | 1,308 | |||||||||||||||
11,316 | 18,301 | — | — | 29,617 | ||||||||||||||||
Capital lease obligations | ||||||||||||||||||||
Capital lease obligations(3) | 650 | 822 | — | — | 1,472 | |||||||||||||||
Interest on capital lease obligations(3) | 46 | 37 | — | — | 83 | |||||||||||||||
696 | 859 | — | — | 1,555 | ||||||||||||||||
Other long-term liabilities | ||||||||||||||||||||
Asset retirement obligations(4) | — | — | — | 43,212 | 43,212 | |||||||||||||||
Total | $ | 12,012 | $ | 19,160 | $ | — | $ | 43,212 | $ | 74,384 | ||||||||||
(1) The Gold Purchase Agreement requires the physical delivery of gold ounces to satisfy principal and interest due, amounts are based on an amortization schedule established on the transaction date. See Note 6 - Debt for additional detail. | ||||||||||||||||||||
(2) Amounts reflect the repayment of principal drawn and related cash interest on the Revolver through its current maturity date of December 31, 2019. See Note 6 - Debt for additional detail. | ||||||||||||||||||||
(3) Represents cash principal and interest. See Note 6 - Debt for additional detail. | ||||||||||||||||||||
(4) Asset retirement obligations are related to our mining operations, projects, and exploration activities. Classification of such amounts is based on our current estimates of when reclamation work will be performed. Amounts represent undiscounted estimates and are not reflective of inflation or third-party profits which may be incurred if reclamation work is performed externally. See Note 7 - Asset retirement obligations for additional detail. |
As of June 30, 2017, we did not have any material operating lease obligations or firm purchase obligations. In addition to the above, our mines and projects are subject to certain royalty commitments as disclosed in Note 17. Commitments and contingencies.
Debt covenants
Our debt agreements contain certain representations and warranties, restrictions, events of default, and covenants, customary for agreements of these types. Additionally, the Revolver contains financial covenants which require us to maintain a Tangible Net Worth not less than $100.0 million, a Gearing Ratio (a measure of debt to EBITDA) not greater than 4.00:1, a Cash Balance not less than $10.0 million, and a Current Ratio not less than 1.10:1 (as such terms are defined in the Revolver). The Company was in compliance with all debt covenants as of June 30, 2017.
Outstanding share capital
As of August 4, 2017, there were 177,579,130 common shares, 4,180,083 options, 10,000,000 warrants, 1,558,169 RSUs, 507,633 PSUs outstanding, and 193,825,015 common shares outstanding on a fully diluted basis.
Off-Balance Sheet Arrangements
As of June 30, 2017, there were no material off-balance sheet arrangements.
Non-GAAP performance measures
We have included the non-GAAP measures "Cash revenue from operations", "Cash production costs from operations", "Cash margin from operations", "Production cash costs per gold equivalent ounce sold", "All-in sustaining costs per gold ounce sold" and "All-in costs per gold ounce sold" in this MD&A (collectively, the "Non-GAAP Measures"). These Non-GAAP Measures are used internally to assess our operating and economic performance and to provide key performance information to management. We believe that these Non-GAAP Measures, in addition to conventional measures prepared in accordance with GAAP, provide investors with an improved ability to evaluate our performance and ability to generate cash flows required to fund and sustain our business. These Non-GAAP
36
Measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. These Non-GAAP Measures do not have any standardized meaning prescribed under GAAP, and therefore may not be comparable to or consistent with measures used by other issuers or with amounts presented in our financial statements.
Our primary business is gold production and our current and future operations, development, exploration, and life-of-mine plans primarily focus on maximizing returns from such gold production. As a result, our Non-GAAP Measures are calculated and disclosed on a per gold or gold equivalent ounce basis.
Production cash costs per gold equivalent ounce sold
Production cash costs per gold equivalent ounce sold presents our cash costs associated with the production of gold equivalent ounces and, as such, non-cash depreciation and depletion charges are excluded. Production cash costs per gold equivalent ounce sold is calculated on a per gold equivalent ounce sold basis, and includes all direct and indirect operating costs related to the physical activities of producing gold, including mining, processing, third-party refining expenses, on-site administrative and support costs, royalties, and cash portions of net realizable value write-downs on production-related inventories (State of Nevada net proceeds and other such taxes are excluded). We believe that converting the benefits from selling silver ounces into gold ounces is helpful to analysts and investors as it best represents the way we operate, which is to maximize returns from gold production. Gold equivalent ounces are computed using the number of silver ounces required to generate the revenue derived from the sale of one gold ounce, using average realized selling prices (in thousands, except ounces sold and per ounce amounts):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
Consolidated | Nevada Total(1) | True North | Total | Nevada Total(1) | Nevada Total(1) | True North | Total | Nevada Total(1) | ||||||||||||||||||||||||
Average realized price per gold ounce sold | $ | 1,251 | $ | 1,229 | $ | 1,249 | $ | 1,309 | $ | 1,247 | $ | 1,233 | $ | 1,245 | $ | 1,246 | ||||||||||||||||
Average realized price per silver ounce sold | $ | 17.10 | $ | — | $ | 17.10 | $ | 18.23 | $ | 17.50 | $ | 18.00 | $ | 17.50 | $ | 16.79 | ||||||||||||||||
Silver ounces equivalent to revenue from one gold ounce | 73.2 | — | 73.0 | 71.8 | 71.3 | 68.5 | 71.1 | 74.2 | ||||||||||||||||||||||||
Silver ounces sold | 307,899 | — | 307,899 | 408,316 | 593,899 | 1,000 | 594,899 | 733,590 | ||||||||||||||||||||||||
GEOs from silver ounces sold | 4,206 | — | 4,218 | 5,687 | 8,330 | 15 | 8,367 | 9,887 | ||||||||||||||||||||||||
Gold ounces sold | 58,461 | 6,832 | 65,293 | 32,499 | 83,620 | 11,232 | 94,852 | 59,463 | ||||||||||||||||||||||||
Gold equivalent ounces | 62,667 | 6,832 | 69,511 | 38,186 | 91,950 | 11,247 | 103,219 | 69,350 | ||||||||||||||||||||||||
Production costs | $ | 34,440 | $ | 7,258 | $ | 41,698 | $ | 22,576 | $ | 53,763 | $ | 14,164 | $ | 67,927 | $ | 42,907 | ||||||||||||||||
Add: Write-down of production inventories (cash portion) (see Note 3 - Inventories) | 249 | 1,442 | 1,691 | — | 249 | 3,676 | 3,925 | — | ||||||||||||||||||||||||
$ | 34,689 | $ | 8,700 | $ | 43,389 | $ | 22,576 | $ | 54,012 | $ | 17,840 | $ | 71,852 | $ | 42,907 | |||||||||||||||||
Production cash costs per GEO sold | $ | 554 | $ | 1,273 | $ | 624 | $ | 591 | $ | 587 | $ | 1,586 | $ | 696 | $ | 619 | ||||||||||||||||
(1) During the first and second quarters of 2016, production was only from Fire Creek and Midas. Details for Nevada are presented in the following tables. |
The following tables present a reconciliation of Fire Creek and Midas to the "Nevada Total" for the three and six months ended June 30, 2017 and 2016, (in thousands, except ounces sold and per ounce amounts):
37
Three months ended June 30, | Three months ended June 30, | |||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Nevada Total | Fire Creek | Midas | Nevada Total(1) | Fire Creek | Midas | Nevada Total(1) | ||||||||||||||||||
Average realized price per gold ounce sold | $ | 1,251 | $ | 1,251 | $ | 1,251 | $ | 1,312 | $ | 1,300 | $ | 1,309 | ||||||||||||
Average realized price per silver ounce sold | $ | 17.11 | $ | 17.10 | $ | 17.10 | $ | 18.23 | $ | 18.23 | $ | 18.23 | ||||||||||||
Silver ounces equivalent to revenue from one gold ounce | 73.1 | 73.2 | 73.2 | 72.0 | 71.3 | 71.8 | ||||||||||||||||||
Silver ounces sold | 29,052 | 278,847 | 307,899 | 20,406 | 387,910 | 408,316 | ||||||||||||||||||
GEOs from silver ounces sold | 397 | 3,809 | 4,206 | 283 | 5,441 | 5,687 | ||||||||||||||||||
Gold ounces sold | 46,969 | 11,492 | 58,461 | 25,889 | 6,610 | 32,499 | ||||||||||||||||||
Gold equivalent ounces | $ | 47,366 | $ | 15,301 | $ | 62,667 | $ | 26,172 | $ | 12,051 | $ | 38,186 | ||||||||||||
Production costs | $ | 20,946 | $ | 13,494 | $ | 34,440 | $ | 10,912 | $ | 11,664 | $ | 22,576 | ||||||||||||
Add: Write-down of production inventories (cash portion) (see Note 3 - Inventories) | — | 249 | 249 | — | — | — | ||||||||||||||||||
$ | 20,946 | $ | 13,743 | $ | 34,689 | $ | 10,912 | $ | 11,664 | $ | 22,576 | |||||||||||||
Production cash costs per GEO sold | $ | 442 | $ | 898 | $ | 554 | $ | 417 | $ | 968 | $ | 591 |
Six months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Nevada Total | Fire Creek | Midas | Nevada Total(1) | Fire Creek | Midas | Nevada Total(1) | ||||||||||||||||||
Average realized price per gold ounce sold | $ | 1,247 | $ | 1,245 | $ | 1,247 | $ | 1,246 | $ | 1,248 | $ | 1,246 | ||||||||||||
Average realized price per silver ounce sold | $ | 17.34 | $ | 17.51 | $ | 17.50 | $ | 16.36 | $ | 16.82 | $ | 16.79 | ||||||||||||
Silver ounces equivalent to revenue from one gold ounce | 71.9 | 71.1 | 71.3 | 76.2 | 74.2 | 74.2 | ||||||||||||||||||
Silver ounces sold | 40,197 | 553,702 | 593,899 | 55,251 | 678,339 | 733,590 | ||||||||||||||||||
GEOs from silver ounces sold | 559 | 7,788 | 8,330 | 725 | 9,142 | 9,887 | ||||||||||||||||||
Gold ounces sold | 63,347 | 20,273 | 83,620 | 44,434 | 15,029 | 59,463 | ||||||||||||||||||
Gold equivalent ounces | $ | 63,906 | $ | 28,061 | $ | 91,950 | $ | 45,159 | $ | 24,171 | $ | 69,350 | ||||||||||||
Production costs | $ | 27,727 | $ | 26,036 | $ | 53,763 | $ | 19,569 | $ | 23,338 | $ | 42,907 | ||||||||||||
Add: Write-down of production inventories (cash portion) (see Note 3 - Inventories) | — | 249 | 249 | — | — | — | ||||||||||||||||||
$ | 27,727 | $ | 26,285 | $ | 54,012 | $ | 19,569 | $ | 23,338 | $ | 42,907 | |||||||||||||
Production cash costs per GEO sold | $ | 434 | $ | 937 | $ | 587 | $ | 433 | $ | 966 | $ | 619 |
38
All-in sustaining costs per gold ounce sold
All-in sustaining cost ("AISC") amounts are intended to provide additional information only and do not have any standardized meaning prescribed by GAAP and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP.
Our calculation of AISC per gold ounce sold is consistent with the June 2013 guidance released by the World Gold Council, a non-regulatory, non-profit market development organization for the gold industry. AISC per gold ounce sold reflects the varying costs of producing gold over the life-cycle of a mine or project, including costs required to discover and develop new sources of production; therefore, capital amounts related to expansion and growth projects are included.
AISC per gold ounce includes all: (1) direct and indirect operating cash costs related to the physical activities of producing gold, including mining, processing, third-party refining expenses, on-site administrative and support costs, royalties, and cash portions of net realizable value write-downs on production-related inventories (2) general and administrative expenses, (3) asset retirement and accretion expenses, and (4) sustaining capital expenditures, the total of which is reduced for revenues earned from silver sales. Certain cash expenditures, including State of Nevada net proceeds and other related taxes, federal tax payments, and financing costs are excluded.
All-in costs per gold ounce sold
All-in costs per gold ounce sold includes additional costs which reflect the varying costs of producing gold over the life-cycle of a mine or project. We calculate our all-in costs per gold ounce sold by beginning with the AISC total and adding non-sustaining (growth) capital expenditures and exploration and development expenditures.
39
AISC per gold ounce sold and all-in costs per gold ounce sold are presented in the table below (in thousands, except ounces sold and per ounce amounts):
Three months ended June 30, | ||||||||||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||||||||||
Nevada Total(1) | True North | Hollister, Aurora, and Corporate | Total | Nevada Total(1) | True North | Hollister, Aurora, and Corporate | Total | |||||||||||||||||||||||||
Production costs | $ | 34,440 | $ | 7,258 | $ | — | $ | 41,698 | $ | 22,576 | $ | — | $ | — | $ | 22,576 | ||||||||||||||||
Add: Write-down of production inventories (cash portion) | 249 | 1,442 | — | 1,691 | — | — | — | — | ||||||||||||||||||||||||
34,689 | 8,700 | — | 43,389 | 22,576 | — | — | 22,576 | |||||||||||||||||||||||||
Asset retirement cost assets and accretion | 212 | 29 | 139 | 380 | 221 | 31 | — | 252 | ||||||||||||||||||||||||
Sustaining capital expenditures | 11,373 | 3,776 | — | 15,149 | 11,969 | — | 50 | 12,019 | ||||||||||||||||||||||||
General and administrative | 443 | 175 | 5,109 | 5,727 | 354 | — | 2,826 | 3,180 | ||||||||||||||||||||||||
Less: silver revenue | (5,265 | ) | — | — | (5,265 | ) | (7,443 | ) | — | — | (7,443 | ) | ||||||||||||||||||||
All-in sustaining costs | 41,452 | 12,680 | 5,248 | 59,380 | 27,677 | 31 | 2,876 | 30,584 | ||||||||||||||||||||||||
Gold ounces sold | 58,461 | 6,832 | — | 65,293 | 32,499 | — | — | 32,499 | ||||||||||||||||||||||||
All-in sustaining costs per gold ounce sold | $ | 709 | $ | 1,856 | $ | — | $ | 909 | $ | 852 | $ | — | $ | — | $ | 941 | ||||||||||||||||
All-in sustaining costs | 41,452 | 12,680 | 5,248 | 59,380 | 27,677 | 31 | 2,876 | 30,584 | ||||||||||||||||||||||||
Non-sustaining capital expenditures | 1,023 | 300 | 1,536 | 2,859 | 838 | 909 | — | 1,747 | ||||||||||||||||||||||||
Exploration | 938 | — | 361 | 1,299 | 3,230 | — | — | 3,230 | ||||||||||||||||||||||||
Development and projects costs | — | — | 3,881 | 3,881 | — | 4,764 | — | 4,764 | ||||||||||||||||||||||||
All-in costs | $ | 43,413 | $ | 12,980 | $ | 11,026 | $ | 67,419 | $ | 31,745 | $ | 5,704 | $ | 2,876 | $ | 40,325 | ||||||||||||||||
Gold ounces sold | 58,461 | 6,832 | — | 65,293 | 32,499 | — | — | 32,499 | ||||||||||||||||||||||||
All-in costs per gold ounce sold | $ | 743 | $ | 1,900 | $ | — | $ | 1,033 | $ | 977 | $ | — | $ | — | $ | 1,241 | ||||||||||||||||
(2) Nevada Total includes Fire Creek and Midas. |
40
Six months ended June 30, | ||||||||||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||||||||||
Nevada Total(1) | True North | Hollister, Aurora, and Corporate | Total | Nevada Total(1) | True North | Hollister, Aurora, and Corporate | Total | |||||||||||||||||||||||||
Production costs | $ | 53,763 | $ | 14,164 | $ | — | $ | 67,927 | $ | 42,907 | $ | — | $ | — | $ | 42,907 | ||||||||||||||||
Add: Write-down of production inventories (cash portion) | 249 | 3,676 | — | 3,925 | — | — | — | — | ||||||||||||||||||||||||
54,012 | 17,840 | — | 71,852 | 42,907 | — | — | 42,907 | |||||||||||||||||||||||||
Asset retirement cost assets and accretion | 425 | 59 | — | 484 | 438 | 61 | — | 499 | ||||||||||||||||||||||||
Capital expenditures | 23,525 | 7,234 | 156 | 30,915 | 22,301 | — | 360 | 22,661 | ||||||||||||||||||||||||
General and administrative | 790 | 428 | 8,997 | 10,215 | 676 | — | 5,922 | 6,598 | ||||||||||||||||||||||||
Less: silver revenue | (10,394 | ) | (18 | ) | — | (10,412 | ) | (12,314 | ) | — | — | (12,314 | ) | |||||||||||||||||||
All-in sustaining costs | 68,358 | 25,543 | 9,153 | 103,054 | 54,008 | 61 | 6,282 | 60,351 | ||||||||||||||||||||||||
Gold ounces sold | 83,620 | 11,232 | — | 94,852 | 59,463 | — | — | 59,463 | ||||||||||||||||||||||||
All-in sustaining costs per gold ounce sold | $ | 817 | $ | 2,274 | $ | — | $ | 1,086 | $ | 908 | $ | — | $ | — | $ | 1,015 | ||||||||||||||||
All-in sustaining costs | 68,358 | 25,543 | 9,153 | 103,054 | 54,008 | 61 | 6,282 | 60,351 | ||||||||||||||||||||||||
Non-sustaining capital expenditures | 1,219 | 403 | 2,582 | 4,204 | 953 | 2,081 | — | 3,034 | ||||||||||||||||||||||||
Exploration | 1,065 | — | 361 | 1,426 | 4,842 | — | — | 4,842 | ||||||||||||||||||||||||
Development and projects costs | — | — | 9,386 | 9,386 | — | 5,530 | — | 5,530 | ||||||||||||||||||||||||
All-in costs | $ | 70,642 | $ | 25,946 | $ | 21,482 | $ | 118,070 | $ | 59,803 | $ | 7,672 | $ | 6,282 | $ | 73,757 | ||||||||||||||||
Gold ounces sold | 83,620 | 11,232 | — | 94,852 | 59,463 | — | — | 59,463 | ||||||||||||||||||||||||
All-in costs per gold ounce sold | $ | 845 | $ | 2,310 | $ | — | $ | 1,245 | $ | 1,006 | $ | — | $ | — | $ | 1,240 | ||||||||||||||||
(1) Nevada Total includes Fire Creek and Midas. |
For a listing of our total capital expenditures see the Investing cash flows part of the Financial position, liquidity, and capital resources section.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Metal price risk
During the three and six months ended June 30, 2017, 100% of our revenues were from the sale of gold and silver. Our financial results can vary significantly as a result of fluctuations in gold and silver prices. The prices of gold and silver are volatile and are affected by many factors beyond our control, such as interest rates, inflation rates and expectations, 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.
In order to increase the certainty of expected future cash flows, from time to time we may enter into fixed forward spot trades for a portion of our projected gold and silver sales. During the three and six months ended June 30, 2017, we entered into forward trades which covered 42,292 and 90,850 gold ounces, respectively, at average prices of $1,273 and $1,253, respectively. We also entered into forward trades which covered 307,900 and 594,900 silver ounces, respectively, at average prices of $17.26 and $17.56 per ounce, respectively. Outside of such, we have not entered into any other significant forward trades. See Note 9. Derivatives to the Notes to Consolidated Financial Statements for additional detail.
As of June 30, 2017, we had no significant outstanding contracts in place to mitigate the risk of fluctuations in metal prices, and therefore, a substantial or extended decline in gold or silver prices would adversely impact our financial position, operating results, and cash flows.
41
In addition, as discussed in Note 6. Debt to the Notes to Consolidated Financial Statements, our Gold Purchase Agreement repayments are based on forward gold prices that existed at its transaction date (ranging from $1,290 to $1,388). Historically, we have not entered into any financial instruments to manage differences in gold spot prices for physically delivered metal to the counterparty and, therefore, have been affected by changes in spot gold prices relative to the transaction date forward gold prices encompassed in the Gold Purchase Agreement.
With the exception of the above, there have been no material changes in our market risks during the six months ended June 30, 2017, from what was disclosed in Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K for the year ended December 31, 2016.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted by the Company under U.S. and Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified in those rules, including providing reasonable assurance that material information is gathered and reported to senior management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to permit timely decisions regarding public disclosure. Management, including the CEO and CFO, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and15d-15(e) of the Exchange Act and the rules of the Canadian Securities Administrators, as at June 30, 2017. Based on this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were not effective based on the material weakness relating to the calculation and presentation of our deferred tax assets and liabilities arising from the transition of the Company’s financial statements from International Financial Reporting Standards to US generally accepted accounting principles described in more detail under “Changes in Internal Controls” below, and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 under the heading “Internal Control over Financial Reporting”.
Changes in Internal Control over Financial Reporting
As described in our Annual Report on Form 10-K for the year ended December 31, 2016, we did not maintain effective controls over the calculation and presentation of our deferred tax assets and liabilities arising from the transition of the Company’s financial statements from International Financial Reporting Standards to US generally accepted accounting principles. The deferred tax assets and liabilities and associated income tax expense were properly stated in our Annual Report on Form 10-K for the year ended December 31, 2016. Previously filed financial statements were not impacted. During the six months ended June 30, 2017, the Company reviewed its staffing relating to complex accounting issues and has currently engaged additional internal and external personnel with technical accounting expertise, to ensure that accounting personnel with adequate experience, skills and knowledge relating to complex transactions are directly involved in the review and accounting evaluation of our complex transactions. These remediation activities began in the first quarter and are ongoing.
Inherent Limitations on Effectiveness of Controls
Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are involved in legal actions related to our business; however, management does not believe, based on currently available information, that contingencies related to any pending or threatened legal matter will have a material adverse effect on the Company’s financial position, although a contingency could be material to the Company’s results of operations or cash flows for a particular period depending on the results of operations and cash flows for such period. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense costs, diversion of management resources, and other factors. Refer to Note 17. Commitments and contingencies to the Notes to Consolidated Financial Statements for additional detail.
Item 1A. Risk Factors
42
There have been no material changes to our risk factors discussed in Part I - Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities and Use of Proceeds
None.
Item 4. Mine Safety Disclosures
The information concerning mine safety 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 Quarterly Report on Form 10-Q.
Item 5. Other Information
None
Item 6. Exhibits
The information required by this Item is set forth in the Exhibit Index that follows the signature page of this Quarterly Report on Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KLONDEX MINES LTD. | ||||
Registrant | ||||
Date: | August 9, 2017 | By: | /s/ Paul Andre Huet | |
Paul Andre Huet | ||||
Chief Executive Officer | ||||
(Duly Authorized Officer) |
Date: | August 9, 2017 | /s/ Barry Dahl | ||
Barry Dahl | ||||
Chief Financial Officer | ||||
(Principal Financial Officer and Chief Accounting Officer) |
43
EXHIBIT INDEX
Exhibit | Filed with this | Incorporated by Reference | |||||
Number | Exhibit Title | Form 10-Q | Form | File No. | Exhibit | Date Filed | |
2.1#* | Membership Interest Purchase Agreement dated July 25, 2016 | 8-K/A | 001-37563 | 2.1 | July 27, 2017 | ||
2.2#* | Asset Purchase Agreement dated December 16, 2015 | 8-K/A | 001-37563 | 2.2 | July 27, 2017 | ||
10.1# | Secured Revolving Facility Agreement dated March 23, 2016 | 8-K/A | 001-37563 | 10.1 | July 27, 2017 | ||
10.2 | Amendment No. 1 to the Facility Agreement | 8-K/A | 001-37563 | 10.2 | July 27, 2017 | ||
10.3 | Amendment No. 2 to the Facility Agreement | 8-K/A | 001-37563 | 10.3 | July 27, 2017 | ||
10.4# | Amendment No. 3 to the Facility Agreement | 8-K/A | 001-37563 | 10.4 | July 27, 2017 | ||
10.5# | Gold Purchase Agreement dated February 11, 2014 | 8-K/A | 001-37563 | 10.5 | July 27, 2017 | ||
23.1 | Consent of Brian Morris | X | |||||
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) | X | |||||
31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) | X | |||||
32.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350 | X | |||||
95.1 | Mine Safety Disclosure | X | |||||
101.INS | XBRL Instance Document** | X | |||||
101.SCH | XBRL Taxonomy Extension Schema** | X | |||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase** | X | |||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase** | X | |||||
101.LAB | XBRL Taxonomy Extension Label Linkbase** | X | |||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase** | X | |||||
**The following financial information from Klondex Mines Ltd.'s Quarterly Report on Form 10-Q for the three and six months ended June 30, 2017, formatted in XBRL (Extensible Business Reporting Language): Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of (Loss) Income, Condensed Consolidated Statements of Comprehensive (Loss) Income, Condensed Consolidated Statements of Cash Flows, and Condensed Consolidated Statements of Shareholders' Equity. | |||||||
#Confidential Information has been omitted and filed separately with the SEC. Confidential treatment has been granted with respect to this omitted information. | |||||||
* Pursuant to Item 601(b)(2) of Regulation S-K promulgated by the SEC, certain schedules to each of the Membership Interest Purchase Agreement and the Asset Purchase Agreement have been omitted. The registrant hereby agrees to furnish supplementally to the SEC, upon its request, any or all omitted schedules. |
44