| The accompanying notes are an integral part of these condensed consolidated interim financial statements. |
SILVERCREST MINES INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED PREPARED BY MANAGEMENT)
(Expressed in United States Dollars)
| | | Capital Stock | | | | | | Reserves | | | Accumulated | | | (Deficit)/ | | | Total | |
| | | Number | | | Amount | | | Share-Based | | | Comprehensive | | | Retained Earnings | | | | |
| | | | | | | | | Payments | | | Loss (1) | | | | | | | |
| Balance at December 31, 2012 | | | 105,892,129 | | | $ | 103,246,773 | | | $ | 4,710,841 | | | $ | (1,498,045 | ) | | $ | (2,555,408 | ) | | $ | 103,904,161 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Warrants exercised | | | 510,300 | | | | 987,612 | | | | (182,143 | ) | | | - | | | | - | | | | 805,469 | |
| Stock options exercised | | | 1,575,000 | | | | 2,745,711 | | | | (874,813 | ) | | | - | | | | - | | | | 1,870,898 | |
| Issuance of capital stock | | | 615,776 | | | | 1,250,000 | | | | - | | | | - | | | | - | | | | 1,250,000 | |
| Share issuance costs | | | - | | | | (1,823 | ) | | | - | | | | - | | | | - | | | | (1,823 | ) |
| Share-based compensation | | | - | | | | - | | | | 1,314,537 | | | | - | | | | - | | | | 1,314,537 | |
| Net earnings for the period | | | - | | | | - | | | | - | | | | - | | | | 8,868,354 | | | | 8,868,354 | |
| Currency translation adjustment | | | - | | | | - | | | | - | | | | (2,004,389 | ) | | | - | | | | (2,004,389 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at June 30, 2013 | | | 108,593,205 | | | | 108,228,273 | | | | 4,968,422 | | | | (3,502,434 | ) | | | 6,312,946 | | | | 116,007,207 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock options exercised | | | 325,000 | | | | 448,080 | | | | (140,347 | ) | | | - | | | | - | | | | 307,733 | |
| Share-based compensation | | | - | | | | - | | | | 1,193,356 | | | | - | | | | - | | | | 1,193,356 | |
| Net earnings for the period | | | - | | | | - | | | | - | | | | - | | | | (389,091 | ) | | | (389,091 | ) |
| Currency translation adjustment | | | - | | | | - | | | | - | | | | 14,929 | | | | - | | | | 14,929 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2013 | | | 108,918,205 | | | | 108,676,353 | | | | 6,021,431 | | | | (3,487,505 | ) | | | 5,923,855 | | | | 117,134,134 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock options exercised | | | 955,000 | | | | 750,324 | | | | (249,600 | ) | | | - | | | | - | | | | 500,724 | |
| Issuance of capital stock | | | 8,855,000 | | | | 20,822,001 | | | | - | | | | - | | | | - | | | | 20,822,001 | |
| Share issuance costs | | | - | | | | (1,489,408 | ) | | | - | | | | - | | | | - | | | | (1,489,408 | ) |
| Share-based compensation | | | - | | | | - | | | | 1,106,233 | | | | - | | | | - | | | | 1,106,233 | |
| Net earnings for the period | | | - | | | | - | | | | - | | | | - | | | | 3,782,338 | | | | 3,782,338 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at June 30, 2014 | | | 118,728,205 | | | $ | 128,759,270 | | | $ | 6,878,064 | | | $ | (3,487,505 | ) | | $ | 9,706,193 | | | $ | 141,856,022 | |
1) Prior to January 1, 2014, the functional currency of the Company’s Canadian operations was the Canadian dollar and the functional currency for all the foreign entities was the United States dollar. The functional currency of the Company’s Canadian operations changed on a prospective basis from the Canadian dollar to the United States dollar effective January 1, 2014, as management determined that the currency of the primary economic environment in which the entity operates changed after SilverCrest drew down United States dollar funds from the credit facility (note 9). Exchange differences on the re-translation of the Company’s Canadian entities are now recorded in the statement of operations. The accompanying notes are an integral part of these condensed consolidated interim financial statements. |
1. NATURE OF OPERATIONS
SilverCrest Mines Inc. (“SilverCrest” or the “Company”) is incorporated under the jurisdiction of the Province of British Columbia, Canada pursuant to the British Columbia Business Corporations Act. SilverCrest is a public company whose shares trade on the New York Stock Exchange (“NYSE”) (under the symbol SVLC), on the Toronto Stock Exchange (“TSX”) (under the symbol SVL) and the Frankfurt Stock Exchange (“FSE”) (under the symbol CW5).
The head office and principal address of the Company is 570 Granville Street, Suite 501, Vancouver, BC, Canada, V6C 3P1. The address of the Company’s registered and records office is 19th Floor, 885 West Georgia Street, Vancouver, BC, Canada, V6C 3E8.
These condensed consolidated interim financial statements were authorized for issue by the board of directors of the Company on August 13, 2014.
2. BASIS OF PRESENTATION
Statement of Compliance
These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting (“IAS 34”) as issued by the International Accounting Standards Board (“IASB”). These condensed consolidated interim financial statements should be read in conjunction with SilverCrest’s most recently issued audited consolidated financial statements for the year ended December 31, 2013, which include information necessary or useful to understanding the Company’s business and financial statement presentation. In particular, the Company’s significant accounting policies, use of judgments and estimates were presented in Note 2 of these audited consolidated financial statements, and have been consistently applied in the preparation of these condensed consolidated interim financial statements, except for those policies which have changed as a result of the adoption of new and amended IFRS pronouncements effective January 1, 2014.
Basis of Preparation
These condensed consolidated interim financial statements have been prepared on a historical cost basis, except for certain financial instruments which are measured at fair value.
These condensed consolidated interim financial statements include the accounts of SilverCrest and its wholly-owned subsidiaries NorCrest Silver Inc., and SVL Minerals Ltd. (both incorporated under the laws of Canada), and Nusantara de Mexico S.A. de C.V., Santa Elena Oro y Plata S.A. de C.V., Minera de Cerro Santo S.A. de C.V., Magellan Exploracion S.A. de C.V., Minera Metro S.A. de C.V., and SilverCrest de Mexico S.A. de C.V. (all incorporated under the laws of Mexico). All intercompany balances, transactions, income and expenses, and profits or losses have been eliminated on consolidation.
SilverCrest consolidates subsidiaries where the Company has the ability to exercise control. Control is achieved when the Company has the power to govern the financial and operating policies of the entity. Control is normally achieved through ownership, directly or indirectly, of more than 50 percent of the voting power. Control can also be achieved through power over more than half of the voting rights by virtue of an agreement with other investors or through the exercise of de facto control.
| Company | Ownership% | Place of Incorporation | Principal Activity |
| NorCrest Silver Inc. | 100% | Canada | Holding Company |
| SVL Minerals Ltd. | 100% | Canada | Holding Company |
| Nusantara de Mexico S.A. de C.V. | 100% | Mexico | Santa Elena Mine and Mineral Development |
| Santa Elena Oro y Plata S.A. de C.V. | 100% | Mexico | Service Company |
| Minera de Cerro Santo S.A. de C.V. | 100% | Mexico | Service Company |
| Magellan Exploracion S.A. de C.V. | 100% | Mexico | Service Company |
| Minera Metro S.A. de C.V. | 100% | Mexico | Service Company |
| SilverCrest de Mexico S.A. de C.V. | 100% | Mexico | Exploration and Evaluation |
3. CHANGES IN ACCOUNTING POLICIES
The Company has adopted the following new standards, along with any consequential amendments, effective January 1, 2014. These changes were made in accordance with the applicable transitional provisions.
IFRS 8 – Operating Segments:
Amended to require disclosure of the judgments made by management in aggregating operating segments, including a description of the segments which have been aggregated and the economic indicators which have been assessed in determining that the aggregated segments share similar economic characteristics. IFRS 8 was early adopted effective January 1, 2014. Refer to note 20 for disclosure of the Company’s operating segments.
IAS 32 – Financial Instruments: Presentation (“IAS 32”)
The IASB amended IAS 32, “Financial Instruments: Presentation” to clarify certain aspects because of diversity in application of the requirements on offsetting, focused on four main areas:
| | · | the meaning of ‘currently has a legally enforceable right of set-off’; |
| | · | the application of simultaneous realization and settlement; |
| | · | the offsetting of collateral amounts; and |
| | · | the unit of account for applying the offsetting requirements. |
IAS 32 was adopted effective January 1, 2014 and had no significant impact on the Company’s condensed consolidated interim financial statements.
IAS 36 – Impairment of Assets (“IAS 36”)
The amendments to IAS 36 restrict the requirement to disclose the recoverable amount of an asset or CGU to periods in which an impairment loss has been recognized or reversed. The amendments also expand and clarify the disclosure requirements applicable when an asset or CGU’s recoverable amount has been determined on the basis of fair value less cost of disposal. IAS 36 was adopted effective January 1, 2014 and had no significant impact on the Company’s condensed consolidated interim financial statements.
IFRIC 21 – Levies (“IFRIC 21”)
An interpretation of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets (“IAS 37”), on the accounting for levies imposed by governments. IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event (“obligating event”). IFRIC 21 clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. IFRIC 21 was adopted effective January 1, 2014 and had no significant impact on the Company’s condensed consolidated interim financial statements.
4. NEW STANDARDS NOT YET ADOPTED
IFRS 9 – Financial Instruments (“IFRS 9”)
In November 2009, the IASB issued IFRS 9 Financial Instruments as the first step in its project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortized cost and fair value. The basis of classification depends on an entity’s business model and the contractual cash flow of the financial asset. Classification is made at the time the financial asset is initially recognized, namely when the entity becomes a party to the contractual provisions of the instrument.
IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments: Disclosures, including added disclosures about investments in equity instruments measured at fair value in other comprehensive income, and guidance on financial liabilities and derecognition of financial instruments. The amended standard is effective for annual periods beginning on or after January 1, 2018, with earlier adoption still permitted.
IAS 16 – Property, Plant and Equipment (“IAS 16”) and IAS 38 – Intangibles (“IAS 38”)
IAS 16 and IAS 38 were issued in May 2014 and prohibit the use of revenue-based depreciation methods for property, plant and equipment and limit the use of revenue-based amortization for intangible assets. These amendments are effective for annual periods beginning on or after January 1, 2016 and are to be applied prospectively.
The Company has not yet completed the process of assessing the impact that IFRS 9, IAS 16 and IAS 38 will have on its condensed consolidated interim financial statements, or whether to early adopt these new requirements.
5. INVENTORY
| | | June 30, 2014 | | | December 31, 2013 | |
| Supplies | | $ | 1,482,561 | | | $ | 1,000,164 | |
| Finished goods - dore bars | | | 763,708 | | | | 2,183,398 | |
| Unprocessed ore in stockpile | | | 644,250 | | | | - | |
| Silver and gold in process | | | - | | | | 9,712,803 | |
Leach pad ore (1) | | | 8,182,373 | | | | - | |
| | | | 11,072,892 | | | | 12,896,365 | |
Less non-current portion (1) | | | (6,981,988 | ) | | | - | |
| | | $ | 4,090,904 | | | $ | 12,896,365 | |
(1) The open pit was closed on April 4, 2014, with the heap leaching process being wound down with residual leaching during the second quarter of 2014. At June 30, 2014, management reclassified $8,182,373 from silver and gold in process to leach pad ore inventory. The leach pad ore inventory will be expensed as leach pad ore tonnes are processed through the mill. The Company will now recognize a portion of the leach pad ore inventory in cost of sales based on the number of leach pad ore tonnes processed in the period, to the total tonnes remaining on the leach pad.
6. PROPERTY, PLANT AND EQUIPMENT
| | | Santa Elena Mine | | | | | | Santa Elena Mine | | | Corporate | | | Total | |
| | | Equipment | | | Mining Assets | | | EIP | | | Office | | | | |
| Cost | | | | | | | | | | | | | | | |
| Balance at December 31, 2012 | | $ | 20,644,467 | | | $ | 17,720,006 | | | $ | 16,149,457 | | | $ | 108,817 | | | $ | 54,622,747 | |
| Additions | | | 788,093 | | | | - | | | | 55,667,599 | | | | 12,925 | | | | 56,468,617 | |
Sales of silver and gold 1 | | | - | | | | - | | | | (748,654 | ) | | | - | | | | (748,654 | ) |
Inventory capitalized 1 | | | - | | | | - | | | | 168,995 | | | | - | | | | 168,995 | |
Santa Elena Mine acquisition cost reclass 2 | | | - | | | | (2,330,000 | ) | | | 2,330,000 | | | | - | | | | - | |
| Disposals | | | (36,760 | ) | | | (1,590 | ) | | | - | | | | - | | | | (38,350 | ) |
| Balance at December 31, 2013 | | | 21,395,800 | | | | 15,388,416 | | | | 73,567,397 | | | | 121,742 | | | | 110,473,355 | |
| Additions | | | 177,718 | | | | - | | | | 24,792,737 | | | | 8,506 | | | | 24,978,961 | |
Sandstorm contribution 3 | | | - | | | | - | | | | (10,000,000 | ) | | | - | | | | (10,000,000 | ) |
Sales of silver and gold 1 | | | - | | | | - | | | | (978,031 | ) | | | - | | | | (978,031 | ) |
Inventory capitalized 1 | | | - | | | | - | | | | 415,017 | | | | - | | | | 415,017 | |
| Balance at June 30, 2014 | | $ | 21,573,518 | | | $ | 15,388,416 | | | $ | 87,797,120 | | | $ | 130,248 | | | $ | 124,889,302 | |
| | | | | | | | | | | | | | | | | | | | | |
| Accumulated depreciation and depletion | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2012 | | $ | 5,421,253 | | | $ | 5,668,218 | | | $ | - | | | $ | 87,323 | | | $ | 11,176,794 | |
| Charge for the year | | | 2,158,448 | | | | 4,020,689 | | | | - | | | | 9,912 | | | | 6,189,049 | |
| Disposals | | | (35,058 | ) | | | - | | | | - | | | | - | | | | (35,058 | ) |
| Balance at December 31, 2013 | | | 7,544,643 | | | | 9,688,907 | | | | - | | | | 97,235 | | | | 17,330,785 | |
| Charge for the period | | | 1,096,649 | | | | 1,787,056 | | | | - | | | | 5,237 | | | | 2,888,942 | |
| Balance at June 30, 2014 | | $ | 8,641,292 | | | $ | 11,475,963 | | | $ | - | | | $ | 102,472 | | | $ | 20,219,727 | |
| | | | | | | | | | | | | | | | | | | | | |
| Carrying amounts | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2013 | | $ | 13,851,157 | | | $ | 5,699,509 | | | $ | 73,567,397 | | | $ | 24,507 | | | $ | 93,142,570 | |
| | | | | | | | | | | | | | | | | | | | | |
| At June 30, 2014 | | $ | 12,932,226 | | | $ | 3,912,453 | | | $ | 87,797,120 | | | $ | 27,776 | | | $ | 104,669,575 | |
(1) Prior to completing the commissioning of Santa Elena’s underground mine, the Company capitalizes proceeds from sales of silver and gold ounces and related expenses provided by the underground mine.
(2) Based on updated quantities of probable reserves and resources disclosed in the NI 43-101 Technical Report titled “Santa Elena Expansion Pre-Feasibility Study and Open Pit Reserve Update” (“Technical Report”) filed July 25, 2013, on SEDAR at www.sedar.com Technical Report, SilverCrest allocated the Santa Elena Mine $4 million acquisition cost between open pit mine asset and underground mine asset, which resulted in a reclassification of $2,330,000 from Santa Elena Mine Mining Assets to Santa Elena Mine Expansion in Progress (“EIP”).
(3) In March 2014, in accordance with the terms of the Purchase Agreement (note 8), Sandstorm made an additional $10 million upfront deposit for their share of Santa Elena’s expansion capital costs. The additional $10 million upfront deposit was recorded as a reduction to the carrying value of the Santa Elena EIP asset.
6. PROPERTY, PLANT AND EQUIPMENT (continued)
Capital Commitments
In addition to entering into various operational commitments in the normal course of business, the Company has entered into a number of contractual commitments related to design and acquisition of plant and equipment for the Santa Elena Expansion Project.
At June 30, 2014, the remaining commitments totaled approximately $1,280,000, which are expected to fall due over the next 12 months.
7. EXPLORATION AND EVALUATION ASSETS
Title to mineral properties involves certain inherent risks due to the difficulties of determining the validity of certain claims as well as the potential for problems arising from the frequently ambiguous conveyancing history characteristic of many mineral properties. The Company has investigated title to all of its mineral properties and, to the best of its knowledge, title to all of its properties are in good standing except as otherwise disclosed. However, this should not be considered as a guarantee of title. The mineral properties may be subject to prior claims or agreements, or transfers, and rights of ownership may be affected by undetected defects.
| 2014 | | | | | | | | | | | 2014 | |
| | | Cruz de Mayo | | | La Joya | | | Other | | | Total | |
| Balance at December 31, 2013 | | $ | 2,981,200 | | | $ | 12,568,905 | | | $ | 125,193 | | | $ | 15,675,298 | |
| Additions | | | | | | | | | | | | | | | | |
| Acquisition and option payments | | $ | - | | | $ | 587,500 | | | $ | 75,000 | | | $ | 662,500 | |
| Deferred exploration costs | | | 11,331 | | | | 851,630 | | | | 616,546 | | | | 1,479,507 | |
| Subtotal, 2014 additions | | | 11,331 | | | | 1,439,130 | | | | 691,546 | | | | 2,142,007 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance at June 30, 2014 | | $ | 2,992,531 | | | $ | 14,008,035 | | | $ | 816,739 | | | $ | 17,817,305 | |
| 2013 | | | | | | | | | | | 2014 | |
| | | Cruz de Mayo | | | La Joya | | | Other | | | Total | |
| Balance at December 31, 2012 | | $ | 2,872,383 | | | $ | 8,186,679 | | | $ | - | | | $ | 11,059,062 | |
| Additions | | | | | | | | | | | | | | | | |
| Acquisition and option payments | | $ | 50,000 | | | $ | 2,670,000 | | | $ | 100,000 | | | $ | 2,820,000 | |
| Deferred exploration costs | | | 58,817 | | | | 1,712,226 | | | | 25,193 | | | | 1,796,236 | |
| Subtotal, 2013 additions | | | 108,817 | | | | 4,382,226 | | | | 125,193 | | | | 4,616,236 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2013 | | $ | 2,981,200 | | | $ | 12,568,905 | | | $ | 125,193 | | | $ | 15,675,298 | |
Cruz de Mayo Project, Mexico
The Company purchased a 100% interest in certain mineral concessions, located in Sonora State, Mexico, in 2004, and on November 19, 2010, finalized an assignment agreement to acquire a 100% interest in the El Guereguito concession in the same state. The Company has the right to acquire the 100% interest in the El Guereguito concession by making staged option payments totaling $1,000,000.
| | El Guereguito | | |
| November 19, 2010 - November 19, 2013 | | | 165,000 | | (total paid) |
| $50,000 on each anniversary date | | | 835,000 | | |
| TOTAL | | $ | 1,000,000 | | |
The Company has the right to make early payment with no additional consideration. There is a 2.5% NSR on revenues from production of minerals which ceases on cumulative payments of $1,000,000.
7. EXPLORATION AND EVALUATION ASSETS (continued)
La Joya Project, Mexico
The La Joya Project, located southeast of Durango City, Durango State, Mexico is comprised of 15 mineral concessions. Nine of the 15 mineral concessions are known as the La Joya West concessions, which the Company acquired on May 24, 2013, pursuant to the Company’s full exercise of an option granted in 2010 by the original vendors of the concessions. Three of the 15 mineral concessions are known as the La Joya East concessions, which the Company still maintains an option to purchase from the original owners. The remaining three contiguous mineral concessions were staked directly by the Company’s wholly-owned subsidiary, SilverCrest de Mexico S.A. de C.V.
Prior to 2013, the Company held an option to acquire a 100% interest in the La Joya West concessions, which option was exercised in full on May 24, 2013 by making staged payments totaling $2,680,000 over a three year period commencing June 2010. The final payment of $2,500,000 was settled on May 24, 2013, by a combination of cash payment ($1,250,000) and the issuance of a total of 615,776 common shares of the Company. In March 2014, the Company released the final payment on the La Joya West concessions upon verification of title registration in Mexico. There is a 2% NSR on revenues from production of minerals.
On November 25, 2010, the Company entered into an option agreement to acquire a 100% interest in the three La Joya East concessions. Under the terms of the original option agreement, the Company may exercise its option to acquire the La Joya East concessions by making staged payments totaling $1,500,000 over a three year period commencing January 2011 (of which $912,500 has been paid). On November 6, 2013, the Company amended the La Joya East option agreement so that the final payment of $1,175,000 may be paid in two equal cash payments in the amount of $587,500 each, with the first payment due May 6, 2014 (paid) and the second and final payment due May 6, 2015. There is a 2% NSR on revenues from production of minerals. Of the final option payments, $750,000 shall be deemed to be advanced royalty payments made on account of the NSR.
8. DEFERRED REVENUE
On May 14, 2009, the Company entered into a purchase agreement with Sandstorm Gold Ltd. (“Purchase Agreement”) under which the Company’s wholly-owned Mexican subsidiary, Nusantara de Mexico S.A. de C.V., agreed to sell 20% of future gold production from the Santa Elena Project to Sandstorm in exchange for an Upfront Deposit of $12,000,000 and 3,500,000 common shares of Sandstorm. The Purchase Agreement also provides for ongoing per-ounce payments by Sandstorm equal to the lesser of $350 and the prevailing spot gold market price upon delivery of gold until a total of 50,000 ounces of gold have been delivered. The per ounce price of $350 is subject to an increase of 1% per annum commencing April 1, 2014.
Under the terms of the Purchase Agreement, the Company could have been required to return a portion of the Upfront Deposit if certain production levels were not achieved. Therefore, the Upfront Deposit and fair value of the shares were treated as deferred revenue. As deliveries of gold are made to Sandstorm, the Company recognizes a portion of the deferred revenue as operating revenue. The amount recognized for fiscal 2014, is based on the proportion of gold ounces sold to Sandstorm in the period, to 50,000 (2013 – 35,794) ounces of gold deliverable to Sandstorm.
In February 2014, the Company received notice of Sandstorm’s election to participate in the Underground Mine Option. In accordance with the terms of the exercise of the option, Sandstorm paid an additional deposit of $10 million to the Company, and will continue to make ongoing per ounce payments of $350 until 50,000 ounces of gold have been delivered to Sandstorm, inclusive of ounces already delivered from open-pit production, at which time the payments will increase to $450 per ounce of gold. The Company recorded the additional $10 million deposit as a reduction to the carrying value of the Santa Elena EIP asset (note 6) as there are no requirements to return any portion of the deposit to Sandstorm.
The Company has granted Sandstorm a charge on the assets of the Company that is subordinate to any existing and future bank debt.
During the six month period ended June 30, 2014, the Company recorded revenue of $1,387,522 (2013 - $2,138,689) from the delivery of 2,479 gold ounces (2013 - 2,949) to Sandstorm, which consisted of $870,830 (2013 - $1,032,025) in cash and $516,692 (2013 - $1,106,664) from amortization of deferred revenue. During the six month period ended June 30, 2014, the Company recorded $61,389 (2013 - $Nil) to the Santa Elena Mine EIP related to the delivery of 110 gold ounces to Sandstorm, which consisted of $38,471 in cash and $22,918 from amortization of deferred revenue.
8. DEFERRED REVENUE (continued)
Details of changes in the balance are as follows:
| | | Upfront Deposit | | | Sandstorm Shares | | | Total Deferred Revenue | |
| | | | | | | | | | |
| As at December 31, 2012 | | $ | 7,995,181 | | | $ | 954,843 | | | $ | 8,950,024 | |
| Delivery of gold | | | (2,044,119 | ) | | | (244,123 | ) | | | (2,288,242 | ) |
| As at December 31, 2013 | | | 5,951,062 | | | | 710,720 | | | | 6,661,782 | |
| Less current portion | | | (2,346,749 | ) | | | (280,266 | ) | | | (2,627,015 | ) |
| Deferred revenue | | $ | 3,604,313 | | | $ | 430,454 | | | $ | 4,034,767 | |
| | | | | | | | | | | | | |
| As at December 31, 2013 | | $ | 5,951,062 | | | $ | 710,720 | | | $ | 6,661,782 | |
| Delivery of gold | | | (461,568 | ) | | | (55,124 | ) | | | (516,692 | ) |
| As at June 30, 2014 | | | 5,489,494 | | | | 655,596 | | | | 6,145,090 | |
| Less current portion | | | (1,378,038 | ) | | | (164,576 | ) | | | (1,542,614 | ) |
| Deferred revenue | | $ | 4,111,456 | | | $ | 491,020 | | | $ | 4,602,476 | |
9. CREDIT FACILITY
On July 11, 2013, SilverCrest entered into a three year $40 million secured corporate credit facility (the “Facility”) with The Bank of Nova Scotia (“Scotiabank”). The Facility is principally secured by a pledge of the Company’s equity interests in its material subsidiaries, including Nusantara de Mexico S.A. de C.V., and SilverCrest de Mexico S.A. de C.V., and their assets. SilverCrest drew down $15 million from the Facility in February, 2014 to fund Santa Elena expansion expenditures.
Subsequent to June 30, 2014, the available credit limit of the Facility reduced by $10 million to $30 million. The credit limit will reduce by a further $10 million on July 11, 2015, and then mature on July 11, 2016, subject to a one year extension of these dates by mutual agreement.
Depending on the Company’s total indebtedness to EBITDA ratio, the interest rate margin on the Facility will, at the Company’s election, range from 3.00% to 4.25% over LIBOR, or 2.00% to 3.25% over Scotiabank’s Base Rate in Canada. The Facility is subject to standby fees and interest is currently payable at the rate of 3.23% per annum.
The availability of the Facility is subject to various qualitative and quantitative covenants, including a current ratio, a debt to EBITDA leverage ratio, interest service coverage ratio and a tangible net worth calculation. The Company is in compliance with all such covenants as at June 30, 2014. SilverCrest incurred $176,448 (2013 - $Nil) in interest expense under the Facility which was capitalized to Santa Elena EIP and $108,152 (2013 - $Nil) in standby fees which are included in “Finance Costs” in the statements of operations.
In fiscal 2013, the Company deferred $514,758 of incremental costs associated with the set-up of the Facility. These costs are being amortized over the three year term of the Facility. During the six month period ended June 30, 2014, the Company amortized $85,088, which is included in “Finance costs” in the statement of operations. The unamortized portion, amounting to $348,343, is included in “Deferred finance costs” on the consolidated statement of financial position.
10. CAPITAL STOCK AND RESERVES
Authorized Shares
The Company’s authorized capital stock consists of an unlimited number of common shares and an unlimited number of preferred shares without par value.
On March 13, 2014, the Company completed a prospectus offering for total gross proceeds of CAD$23.0 million ($20.8 million). The Company issued a total of 8,855,000 common shares at a price of CAD$2.60 per share.
Stock options
The Company has a stock option plan under which it is authorized to grant stock options to executive officers and directors, employees and consultants, enabling them to acquire up to 10% of the issued and outstanding common stock of the Company. The exercise price of each option equals the market price of the Company's stock as calculated on the date of the grant. The options can be granted for a maximum term of 10 years, and certain options to employees and consultants vest over periods of time, determined by the board of directors. Options granted to investor relations consultants shall vest over a period of at least 1 year. The company has not granted options for periods exceeding 5 years.
10. CAPITAL STOCK AND RESERVES (continued)
Stock option transactions and the number of stock options outstanding and exercisable are summarized as follows:
| | | Number of | | | Weighted Average | |
| | | Options | | | Exercise Price - CAD$ | |
| As at December 31, 2012 | | | 7,800,000 | | | $ | 1.53 | |
| Issued | | | 3,085,000 | | | $ | 1.78 | |
| Exercised | | | (1,900,000 | ) | | $ | 1.15 | |
| As at December 31, 2013 | | | 8,985,000 | | | $ | 1.69 | |
| Issued | | | 250,000 | | | $ | 1.97 | |
| Exercised | | | (955,000 | ) | | $ | 0.58 | |
| As at June 30, 2014 | | | 8,280,000 | | | $ | 1.83 | |
| | | | | Options Outstanding | | | | | | Options Exercisable | | |
| Exercise Price - CAD$ | | Expiry Date | | Number of Shares Issuable on Exercise | | | Weighted Average Remaining Life (Years) | | | Weighted Average Exercise Price - CAD$ | | | Number of Shares Issuable on Exercise | | | Weighted Average Exercise Price - CAD$ | | |
| $ | 0.50 | | July 22, 2014 | | | 25,000 | | | | 0.06 | | | $ | 0.50 | | | | 25,000 | | | $ | 0.50 | | (See Subsequent events) |
| $ | 1.60 | | November 7, 2014 | | | 240,000 | | | | 0.36 | | | $ | 1.60 | | | | 240,000 | | | $ | 1.60 | | |
| $ | 1.05 | | September 10, 2015 | | | 950,000 | | | | 1.20 | | | $ | 1.05 | | | | 950,000 | | | $ | 1.05 | | |
| $ | 1.94 | | February 15, 2016 | | | 175,000 | | | | 1.63 | | | $ | 1.94 | | | | 175,000 | | | $ | 1.94 | | |
| $ | 1.17 | | June 17, 2016 | | | 200,000 | | | | 1.97 | | | $ | 1.17 | | | | 200,000 | | | $ | 1.17 | | |
| $ | 1.65 | | August 2, 2016 | | | 1,450,000 | | | | 2.09 | | | $ | 1.65 | | | | 1,450,000 | | | $ | 1.65 | | |
| $ | 1.60 | | November 7, 2016 | | | 145,000 | | | | 2.36 | | | $ | 1.60 | | | | 145,000 | | | $ | 1.60 | | |
| $ | 2.60 | | December 5, 2017 | | | 1,760,000 | | | | 3.44 | | | $ | 2.60 | | | | 1,760,000 | | | $ | 2.60 | | |
| $ | 2.60 | | January 31, 2018 | | | 350,000 | | | | 3.59 | | | $ | 2.60 | | | | 262,500 | | | $ | 2.60 | | |
| $ | 1.68 | | December 13, 2018 | | | 2,735,000 | | | | 4.46 | | | $ | 1.68 | | | | 1,367,500 | | | $ | 1.68 | | |
| $ | 2.00 | | January 15, 2019 | | | 100,000 | | | | 4.55 | | | $ | 2.00 | | | | 25,000 | | | $ | 2.00 | | |
| $ | 1.95 | | June 11, 2019 | | | 150,000 | | | | 4.95 | | | $ | 1.95 | | | | 37,500 | | | $ | 1.95 | | |
| | | | | | | 8,280,000 | | | | 3.14 | | | | 1.83 | | | | 6,637,500 | | | $ | 1.85 | | |
Share-based compensation
During the six month period ended June 30, 2014, the Company granted 250,000 (2013 - 350,000) incentive stock options with a weighted average fair value per option granted of CAD$0.85 (2013 - CAD$1.44) for a total fair value of $193,507 (2013 - $489,908). The share-based compensation recognized during the six month period ended June 30, 2014, under the fair value method, was $1,106,233 (2013 - $1,314,537).
The following weighted average assumptions were used for the Black-Scholes valuation of stock options.
| | | June 30, 2014 | | | June 30, 2013 | |
| Risk-free interest rate | | | 1.42 | % | | | 1.50 | % |
| Expected dividend yield | | | - | | | | - | |
| Expected stock price volatility | | | 54.62 | % | | | 66.27 | % |
| Expected forfeiture rate | | | 0.9 | % | | | 1.0 | % |
| Expected option lives | | 4.2 years | | | 5 years | |
| | | Three months ended | | Six months ended | |
| | | June 30, 2014 | | | June 30, 2013 | | | June 30, 2014 | | | June 30, 2013 | |
| Gold revenue - spot prices | | $ | 4,917,910 | | | $ | 8,052,770 | | | $ | 12,992,841 | | | $ | 17,640,390 | |
Gold revenue - Sandstorm (1) | | | 533,076 | | | | 1,069,652 | | | | 1,387,522 | | | | 2,138,689 | |
| Silver revenue | | | 3,206,115 | | | | 3,905,836 | | | | 7,322,252 | | | | 8,578,821 | |
| | | | 8,657,101 | | | | 13,028,258 | | | $ | 21,702,615 | | | $ | 28,357,900 | |
Capitalized to Santa Elena Mine EIP(2) | | | (938,044 | ) | | | - | | | | (978,031 | ) | | | - | |
| | | $ | 7,719,057 | | | $ | 13,028,258 | | | $ | 20,724,584 | | | $ | 28,357,900 | |
(1) For the three month period ended June 30, 2014, the Company recorded $533,076 (2013 - $1,069,652) from the delivery of 949 (2013 – 1,475) gold ounces to Sandstorm, which consisted of $335,330 (2013 - $516,179) in cash and $197,746 (2013 - $553,473) from amortization of deferred revenue.
For the six month period ended, the Company recorded 1,387,522 (2013 - $2,138,689) from the delivery of 2,479 (2013 - 2,949) gold ounces to Sandstorm, which consisted of $870,830 (2013 - $1,032,025) in cash and 516,692 (2013 - $1,106,664) from amortization of deferred revenue.
(2) Prior to completing the commissioning of Santa Elena’s underground mine, the Company capitalizes proceeds from sales of silver and gold ounces and related expenses provided by the underground mine (note 6).
12. COST OF SALES
| | | Three months ended | | | Six months ended | |
| | | June 30, 2014 | | | June 30, 2013 | | | June 30, 2014 | | | June 30, 2013 | |
| Mining | | $ | 89,834 | | | $ | 2,827,917 | | | $ | 1,311,263 | | | $ | 5,878,893 | |
| Crushing and Processing | | | 924,140 | | | | 1,727,863 | | | | 2,731,373 | | | | 3,254,836 | |
| General and administrative | | | 1,102,019 | | | | 854,720 | | | | 2,059,488 | | | | 1,714,034 | |
| | | | 2,115,993 | | | | 5,410,500 | | | | 6,102,124 | | | | 10,847,763 | |
Environmental mining duty (1) | | | 39,000 | | | | - | | | | 105,000 | | | | - | |
Capitalized to Santa Elena Mine EIP (2) | | | (415,017 | ) | | | - | | | | (415,017 | ) | | | - | |
| Inventory adjustment | | | 1,306,982 | | | | (362,605 | ) | | | 1,941,374 | | | | (1,431,349 | ) |
| | | $ | 3,046,958 | | | $ | 5,047,895 | | | $ | 7,733,481 | | | $ | 9,416,414 | |
| | (1) Effective January 1, 2014, the new Mexican Environmental Mining Duty, based on 0.5% of gross revenues, is included as part of cost of sales. |
| | (2) Prior to completing the commissioning of Santa Elena’s underground mine, the Company capitalizes proceeds from sales of silver and gold ounces and related expenses provided by the underground mine (note 6). |
13. GENERAL AND ADMINISTRATIVE
| | | Three months ended | | | Six months ended | |
| | | June 30, 2014 | | | June 30, 2013 | | | June 30, 2014 | | | June 30, 2013 | |
| Remuneration (note 16) | | $ | 456,503 | | | $ | 503,137 | | | $ | 924,789 | | | $ | 962,937 | |
| Professional fees (note 16) | | | 181,218 | | | | 162,814 | | | | 319,006 | | | | 332,756 | |
| General exploration | | | 11,371 | | | | 27,270 | | | | 25,728 | | | | 52,049 | |
| Regulatory | | | 32,174 | | | | 77,819 | | | | 272,027 | | | | 164,845 | |
| Shareholder and investor relations | | | 90,040 | | | | 139,704 | | | | 183,140 | | | | 261,869 | |
| Trade shows and travel | | | 202,781 | | | | 184,951 | | | | 391,647 | | | | 387,555 | |
| Other corporate expenses | | | 166,432 | | | | 272,307 | | | | 328,519 | | | | 392,751 | |
| Mexico corporate expenses | | | 266,506 | | | | 231,890 | | | | 439,171 | | | | 386,057 | |
| | | $ | 1,407,025 | | | $ | 1,599,892 | | | $ | 2,884,027 | | | $ | 2,940,819 | |
14. OTHER INCOME
Other income of $614,314 relates to net proceeds received from an insurance claim.
15. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per share:
| | | Three months ended | | | Three months ended | |
| | | June 30, 2014 | | | June 30, 2013 | | | June 30, 2014 | | | June 30, 2013 | |
| Numerator | | | | | | | | | | | | |
| Net earnings for the period | | $ | 1,314,350 | | | $ | 2,866,080 | | | $ | 3,782,338 | | | $ | 8,868,353 | |
| | | | | | | | | | | | | | | | | |
| Denominator | | | | | | | | | | | | | | | | |
| For basic - weighted average number of common shares outstanding | | | 118,728,205 | | | | 108,865,828 | | | | 115,042,542 | | | | 107,700,562 | |
| Effect of dilutive stock options and warrants | | | 1,653,379 | | | | 2,001,738 | | | | 1,653,379 | | | | 2,001,738 | |
| For diluted - adjusted weighted average number of common shares outstanding | | | 120,381,584 | | | | 110,867,566 | | | | 116,695,921 | | | | 109,702,300 | |
| | | | | | | | | | | | | | | | | |
| Earnings per common share | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.01 | | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.08 | |
| Diluted | | $ | 0.01 | | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.08 | |
16. RELATED PARTY TRANSACTIONS
The Company entered into the following transactions with related parties:
Legal Fees
Paid or accrued $88,666 (2013 - $117,856) for legal fees, which were included in professional fees, and $131,548 (2013 - $Nil) for share issuance costs to Koffman Kalef LLP, a law firm in which the Company’s Corporate Secretary is partner. The Company recognized $10,513 (2013 - $16,650) in share-based payments to this partner.
Key Management Compensation
| | | June 30, 2014 | | | June 30, 2013 | |
Salaries and short-term benefits (1) | | $ | 426,440 | | | $ | 459,656 | |
| Directors' fees | | | 63,778 | | | | 59,031 | |
| Share-based payments | | | 669,552 | | | | 699,293 | |
| | | $ | 1,159,770 | | | $ | 1,217,980 | |
| (1) | Total remuneration paid to the President, the Chief Executive Officer and the Chief Financial Officer of SilverCrest. |
Other transactions
Paid $89,124 (2013 - $97,887) for technical and administrative services and recognized $23,608 (2013 - $28,681) in share-based payments to close members of the families of individuals who are part of key management personnel.
The Company shares rent, salaries, administrative services and other reimbursable expenses with Goldsource Mines Inc. (“Goldsource”), a company related by common directors and officers. During the six month period ended June 30, 2014, the Company incurred $85,069 (2013 - $48,157) on behalf of Goldsource for these services, of which $51,335 (2013 - $25,539) is receivable at June 30, 2014.
17. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
Supplemental disclosure of significant non-cash transactions is provided in the table:
| | | June 30, 2014 | | | June 30, 2013 | |
| Non-cash investing and financing activities | | | | | | |
| Capitalized to property, plant and equipment | | | | | | |
| Accounts payable and accrued liabilities | | $ | 329,728 | | | $ | 435,068 | |
| | | | | | | | | |
| Capitalized to exploration and evaluation assets | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 23,700 | | | $ | 1,323,344 | |
18. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Financial instruments carrying value and fair value
The Company’s financial instruments consist of cash and cash equivalents, amounts receivable, taxes receivable, accounts payable and accrued liabilities, taxes payable and the credit facility. Fair value is the price that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair values of amounts receivable, accounts payable and accrued liabilities and the credit facility approximate their carrying values due to the short term to maturities of these financial instruments.
The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability (for example, interest rate and yield curves observable at commonly quoted intervals, forward pricing curves used to value currency and commodity contracts and volatility measurements used to value option contracts), or inputs that are derived principally from or corroborated by observable market data or other means. Level 3 inputs are unobservable (supported by little or no market activity). The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.
The Company’s cash and cash equivalents are measured using Level 1 inputs.
19. INCOME TAXES
The composition of the Company’s deferred tax assets and liabilities are as follows:
| | | June 30, 2014 | | | December 31, 2013 | |
| Mexico operations | | | | | | |
| Deferred tax assets: | | | | | | |
| Non-Capital losses | | $ | 334,000 | | | $ | 229,000 | |
| Asset retirement obligations | | | 1,414,000 | | | | 1,376,000 | |
| Deferred tax liabilities: | | | | | | | | |
| Property, plant and equipment | | | (4,071,000 | ) | | | (7,589,000 | ) |
| Exploration and evaluation assets | | | (2,730,000 | ) | | | (2,594,000 | ) |
| Deferred revenue | | | (3,000,000 | ) | | | - | |
| Inventory | | | (273,000 | ) | | | (465,000 | ) |
| Defered tax liabilities, net | | $ | (8,326,000 | ) | | $ | (9,043,000 | ) |
20. SEGMENTED INFORMATION
The Company has three reportable segments, those being the mine operations at Santa Elena, Mexico; mine exploration and evaluation projects at La Joya, Cruz de Mayo and other exploration projects, Mexico; and Corporate. The Corporate segment is responsible for the evaluation and acquisition of new mineral properties, management of cash and cash equivalents, regulatory reporting and general corporate activities conducted in Canada and Mexico.
Geographic segmented information is presented as follows:
| | | Mexico | | | Mexico | | | Canada | | | | |
| June 30, 2014 | | Santa Elena | | | Other Projects | | Corporate | | | Total | |
| Revenue | | $ | 20,669,460 | | | $ | - | | | $ | 55,124 | | | $ | 20,724,584 | |
| Cost of sales | | | (7,733,481 | ) | | | - | | | | - | | | | (7,733,481 | ) |
| Depletion, depreciation and amortization | | | (3,294,066 | ) | | | - | | | | (5,237 | ) | | | (3,299,303 | ) |
| Mine operating earnings | | | 9,641,913 | | | | - | | | | 49,887 | | | | 9,691,800 | |
| Other net expenses | | | (587,580 | ) | | | - | | | | (3,316,882 | ) | | | (3,904,462 | ) |
| Current income tax expense | | | (2,722,000 | ) | | | - | | | | - | | | | (2,722,000 | ) |
| Deferred tax recovery | | | 717,000 | | | | - | | | | - | | | | 717,000 | |
| Net earnings (loss) for the period | | $ | 7,049,333 | | | $ | - | | | $ | (3,266,995 | ) | | $ | 3,782,338 | |
| | | | | | | | | | | | | | | | | |
| Asset Information | | | | | | | | | | | | | | | | |
| Property, Plant and Equipment | | $ | 104,641,799 | | | $ | - | | | $ | 27,776 | | | $ | 104,669,575 | |
| Exploration and evaluation assets | | $ | - | | | $ | 17,817,305 | | | $ | - | | | $ | 17,817,305 | |
| | | | | | | | | | | | | | | | | |
| June 30, 2013 | | Santa Elena | | | Other Projects | | Corporate | | | Total | |
| Revenue | | $ | 28,239,834 | | | $ | - | | | $ | 118,066 | | | $ | 28,357,900 | |
| Cost of sales | | | (9,416,414 | ) | | | - | | | | - | | | | (9,416,414 | ) |
| Depletion, depreciation and amortization | | | (3,059,423 | ) | | | - | | | | (5,300 | ) | | | (3,064,723 | ) |
| Mine operating earnings | | | 15,763,997 | | | | - | | | | 112,766 | | | | 15,876,763 | |
| Other net expenses | | | (386,057 | ) | | | - | | | | (2,570,353 | ) | | | (2,956,410 | ) |
| Current income tax expense | | | (2,717,000 | ) | | | - | | | | - | | | | (2,717,000 | ) |
| Deferred tax expense | | | (1,335,000 | ) | | | - | | | | - | | | | (1,335,000 | ) |
| Net earnings (loss) for the period | | $ | 11,325,940 | | | $ | - | | | $ | (2,457,587 | ) | | $ | 8,868,353 | |
| | | | | | | | | | | | | | | | | |
| Asset Information | | | | | | | | | | | | | | | | |
| Property, Plant and Equipment | | $ | 66,075,337 | | | $ | - | | | $ | 21,809 | | | $ | 66,097,146 | |
| Exploration and evaluation assets | | $ | - | | | $ | 14,550,972 | | | $ | - | | | $ | 14,550,972 | |
21. CONTINGENCIES
In December 2012, the Mexican government amended the Federal labour law regarding subcontracting arrangements to prevent using service companies to mitigate labour and tax obligations. The Company currently operates in Mexico using these subcontracting arrangements, as is the common practice. The amendments also provided clarification on certain regulatory requirements associated with an employer’s obligation to compensate employees with appropriate statutory profit sharing within Mexico. The Company continues to review these amendments, but currently believes it is probable that these amended labour laws will not result in additional profit sharing entitlements for its Mexican employees at June 30, 2014, other than what has been presently paid and recorded.
22. SUBSEQUENT EVENTS
| · | SilverCrest announced that the new mill and processing facility at Santa Elena had been successfully commissioned as of August 1, 2014. |
In determining commissioning completion management considered the following criteria;
| | o | Achieving greater than 80% of nameplate capacity (3,000 tonne-per-day) over a reasonable period of continuous production. |
| | o | Achieving average startup recovery rates of 82% gold and 65% silver. Average mine life recovery rates are projected at 92% gold and 67.5% silver. |
| | o | Dore production from the new mill exceeding budget estimates |
| | o | All major components of the mill and facilities completed and operating to the satisfaction of management and independent commissioning team. |
| | o | Completion of budgeted capital expenditures. |
| | o | Achieving positive operating cash flows from expanded operations including milling. |
| · | 25,000 incentive stock options priced at CAD$0.50 per share were exercised for cash proceeds of $11,634. |
