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 and had no significant impact on the Company’s condensed consolidated interim financial statements. Refer to note 21 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 cash generating unit (“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 July 2014, the IASB issued the final version of IFRS 9 which replaces 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 permitted.
IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”)
In May 2014, IASB issued IFRS 15 to replace IAS 18 – Revenue, which establishes a new single five-step control-based revenue recognition model for determining the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. IFRS 15 is effective for annual periods beginning on or after January 1, 2017, with early adoption 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, IFRS 15, IAS 16 and IAS 38 will have on its condensed consolidated interim financial statements, or whether to early adopt these new requirements.
5. TAXES RECEIVABLE
| | | September 30, 2014 | | | December 31, 2013 | |
| Value added taxes receivable | | $ | 5,158,316 | | | $ | 6,415,814 | |
| Income taxes receivable | | | 4,615,292 | | | | - | |
| | | $ | 9,773,608 | | | $ | 6,415,814 | |
Value added taxes receivable (“VAT”) are taxes paid in Mexico, and are due to be refunded or deducted from income taxes payable. The Company is advised that delayed VAT refunds are currently pervasive in Mexico. The Company is working with its advisors and the authorities to expedite returns of VAT refunds. The Company believes the balance is fully recoverable and has not provided an allowance.
Income taxes receivable (“ITR”) relates to monthly income tax payments paid in Mexico in 2014 related to the estimated taxes from Santa Elena operations.
6. INVENTORY
| | | September 30, 2014 | | | December 31, 2013 | |
| Supplies | | $ | 1,619,099 | | | $ | 1,000,164 | |
| Finished goods - dore bars | | | 1,640,917 | | | | 2,183,398 | |
| Unprocessed ore in stockpile | | | 136,569 | | | | - | |
| Silver and gold in process | | | - | | | | 9,712,803 | |
Leach pad ore (1) | | | 7,791,729 | | | | - | |
| | | | 11,188,314 | | | | 12,896,365 | |
Less non-current portion (1) | | | (6,557,450 | ) | | | - | |
| | | $ | 4,630,864 | | | $ | 12,896,365 | |
(1) The open pit was closed on April 4, 2014, with the heap leaching process being wound down. 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 is measured based on the lower of cost per ounce of silver and gold and net realizable value and will be expensed as leach pad ore tonnes are processed through the mill. The Company recognizes 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. For the three and nine months ended September 30, 2014, the Company recognized $390,644 (2013 - $Nil), in cost of sales related to leach pad ore tonnes processed through the mill (note 13).
For the three and nine months ended September 30, 2014, inventory of $4,340,741 (2013 - $5,293,749) and $12,074,222 (2013 - $14,710,162), respectively, was expensed in cost of sales, and $2,001,109 (2013 - $297,952) and $3,389,011 (2013 - $1,392,449), of inventory was expensed in depletion, depreciation and amortization. No material was written down to its net realizable value or recorded as an impairment in inventories.
7. 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 | ) |
Direct production costs 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 | | | 516,335 | | | | - | | | | 35,677,028 | | | | 8,506 | | | | 36,201,869 | |
Santa Elena Mine EIP reclass 1 | | | 65,711,812 | | | | - | | | | (65,711,812 | ) | | | - | | | | - | |
Sandstorm contribution 3 | | | - | | | | - | | | | (10,000,000 | ) | | | - | | | | (10,000,000 | ) |
Sales of silver and gold 1 | | | - | | | | - | | | | (8,520,350 | ) | | | - | | | | (8,520,350 | ) |
Direct production costs capitalized 1 | | | - | | | | - | | | | 1,477,358 | | | | - | | | | 1,477,358 | |
| Balance at September 30, 2014 | | $ | 87,623,947 | | | $ | 15,388,416 | | | $ | 26,489,621 | | | $ | 130,248 | | | $ | 129,632,232 | |
| | | | | | | | | | | | | | | | | | | | | |
| 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 | | | 2,954,670 | | | | 1,860,317 | | | | - | | | | 8,429 | | | | 4,823,416 | |
| Balance at September 30, 2014 | | $ | 10,499,313 | | | $ | 11,549,224 | | | $ | - | | | $ | 105,664 | | | $ | 22,154,201 | |
| | | | | | | | | | | | | | | | | | | | | |
| Carrying amounts | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2013 | | $ | 13,851,157 | | | $ | 5,699,509 | | | $ | 73,567,397 | | | $ | 24,507 | | | $ | 93,142,570 | |
| | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2014 | | $ | 77,124,634 | | | $ | 3,839,192 | | | $ | 26,489,621 | | | $ | 24,584 | | | $ | 107,478,031 | |
7. PROPERTY, PLANT AND EQUIPMENT (continued)
(1) Prior to completing the commissioning of Santa Elena’s Expansion in Progress (“EIP”), the Company capitalized proceeds from sales of silver and gold ounces and related expenses attributed to the underground mine, mill and processing facilities. For the nine months ended September 30, 2014, the Company capitalized $3,571,688 related to production from Santa Elena’s underground mine and $4,948,662 from production during the commissioning period from Santa Elena’s new mill and CCD/MC processing facilities. In determining commissioning completion of the mill and CCD/MC processing facilities, management considered the following criteria;
| | · | Achieving greater than 80% of nameplate capacity (3,000 tonne-per-day) over a reasonable period of continuous production. |
| | · | Achieving average startup recovery rates of 82% gold and 65% silver. |
| | · | Dore production from the new mill exceeding budget estimates. |
| | · | All major components of the mill and facilities completed and operating to the satisfaction of management and independent commissioning team. |
| | · | Completion of budgeted capital expenditures. |
| | · | Achieving positive operating cash flows from expanded operations including milling but excluding underground operations. |
All of the above commissioning criteria were met to the satisfaction of management so on August 1, 2014, the Company reclassified the carrying value of $65,711,812 related to the mill and processing facilities from Santa Elena Mine EIP to Santa Elena Mine Equipment, stopped capitalizing sales of silver and gold ounces and related expenses to the carrying value of the asset, and started to record depreciation in the statement of operations.
(2) Based on updated quantities of probable reserves 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, 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 EIP.
(3) In March 2014, in accordance with the terms of the Purchase Agreement (note 9), Sandstorm made an additional $10 million upfront deposit for their share of Santa Elena’s expansion capital costs related to the underground development. The additional $10 million upfront deposit was recorded as a reduction to the carrying value of the Santa Elena EIP asset.
8. 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 | |
| | | Ermitaño | | | La Joya | | | Cruz de Mayo | | | Other | | | Total | |
| Balance at December 31, 2013 | | $ | - | | | $ | 12,568,905 | | | $ | 2,981,200 | | | $ | 125,193 | | | $ | 15,675,298 | |
| Additions | | | | | | | | | | | | | | | | | | | | |
| Acquisition and option payments | | $ | 75,000 | | | $ | 587,500 | | | $ | - | | | $ | - | | | $ | 662,500 | |
| Deferred exploration costs | | | 624,468 | | | | 1,164,079 | | | | 13,972 | | | | 213,368 | | | | 2,015,887 | |
| Subtotal, 2014 additions | | | 699,468 | | | | 1,751,579 | | | | 13,972 | | | | 213,368 | | | | 2,678,387 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance at September 30, 2014 | | $ | 699,468 | | | $ | 14,320,484 | | | $ | 2,995,172 | | | $ | 338,561 | | | $ | 18,353,685 | |
| 2013 | | | | | | | | | | | 2013 | |
| | | La Joya | | | Cruz de Mayo | | | Other | | | Total | |
| Balance at December 31, 2012 | | $ | 8,186,679 | | | $ | 2,872,383 | | | $ | - | | | $ | 11,059,062 | |
| Additions | | | | | | | | | | | | | | | | |
| Acquisition and option payments | | $ | 2,670,000 | | | $ | 50,000 | | | $ | 100,000 | | | $ | 2,820,000 | |
| Deferred exploration costs | | | 1,712,226 | | | | 58,817 | | | | 25,193 | | | | 1,796,236 | |
| Subtotal, 2013 additions | | | 4,382,226 | | | | 108,817 | | | | 125,193 | | | | 4,616,236 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2013 | | $ | 12,568,905 | | | $ | 2,981,200 | | | $ | 125,193 | | | $ | 15,675,298 | |
Ermitaño Property, Sonora, Mexico
In January 2014, SilverCrest signed an option agreement (the “Agreement”) with Evrim Resources Corp. (“Evrim”) whereby SilverCrest can acquire a 100% interest in Evrim’s Ermitaño Property in the State of Sonora, Mexico. The Ermitaño Property consists of two concessions (I and II) totalling 165 square kilometres of mineral tenure contiguous to the Santa Elena Mine. SilverCrest can earn a 100% interest in the Ermitaño Property by paying $75,000 upon signing (paid) and $50,000 each anniversary thereafter, completing a minimum of $500,000 in exploration expenditures in the first year, and delivering a Production Notice within five years specifying mine and construction plans with accompanying permits. Upon delivery of the Production Notice, the annual payments will cease and Evrim will retain a 2% Net Smelter Royalty (“NSR”) on revenues from production of minerals.
8. EXPLORATION AND EVALUATION ASSETS (continued)
La Joya Project, Durango, 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, for which the Company still maintains an option to purchase from the original owners. The remaining three contiguous mineral concessions were acquired 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.
Cruz de Mayo Project, Sonora, 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.
9. 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 provided 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 delivered 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 upfront 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 7) 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.
9. DEFERRED REVENUE (continued)
During the nine month period ended September 30, 2014, the Company recorded revenue of $2,209,947 (2013 - $3,229,925) from the delivery of 3,942 gold ounces (2013 - 4,453) to Sandstorm. The revenue recorded consisted of $1,388,174 (2013 - $1,558,655) in cash and $821,773 (2013 - $1,671,270) from amortization of deferred revenue. During the nine month period ended September 30, 2014, the Company also recorded $459,948 (2013 - $Nil) to the Santa Elena Mine EIP related to the delivery of 819 gold ounces to Sandstorm. This revenue consisted of $289,183 in cash and $170,765 from amortization of deferred revenue.
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 | | | (734,101 | ) | | | (87,672 | ) | | | (821,773 | ) |
| As at September 30, 2014 | | | 5,216,961 | | | | 623,048 | | | | 5,840,009 | |
| Less current portion | | | (1,415,282 | ) | | | (169,024 | ) | | | (1,584,306 | ) |
| Deferred revenue | | $ | 3,801,679 | | | $ | 454,024 | | | $ | 4,255,703 | |
10. 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.
On July 11, 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 September 30, 2014. During the nine month period ended September 30, 2014, SilverCrest incurred $297,167 (2013 - $Nil) in interest expense under the Facility, of which $214,660 (2013 - $Nil) was capitalized to Santa Elena Mine EIP and $82,507 (2013 - $Nil) was included in “Finance costs” in the statements of operations. During the nine month period ended September 30, 2014, standby fees on the Facility amounted to $138,568 (2013 - $Nil) which in included in Finance costs.
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 nine month period ended September 30, 2014, the Company amortized $128,337, which is included in Finance costs. The unamortized portion, amounting to $305,094, is included in “Deferred finance costs” on the consolidated statement of financial position.
11. 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$2.60 per share.
11. CAPITAL STOCK AND RESERVES (continued)
Stock options
The Company has a rolling stock option plan under which it is authorized to grant stock options to executive officers and directors, employees and consultants, enabling them to acquire up to 10% of the issued and outstanding common stock of the Company. The exercise price of each option equals the market price of the Company's stock as calculated on the date of the grant. The options can be granted for a maximum term of 10 years, and certain options to employees and consultants vest over periods of time, determined by the board of directors. Options granted to investor relations consultants shall vest over a period of at least 1 year. The Company has not granted options for periods exceeding 5 years.
Stock option transactions and the number of stock options outstanding and exercisable are summarized as follows:
| | | Number of | | | Weighted Average | |
| | | Options | | | Exercise Price - CAD$ | |
| 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 | | | (980,000 | ) | | $ | 0.58 | |
| Forfeited | | | (260,000 | ) | | $ | 2.10 | |
| As at September 30, 2014 | | | 7,995,000 | | | $ | 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$ | |
| $ 1.60 | | November 7, 2014 | | 240,000 | | 0.10 | | $ 1.60 | | 240,000 | | $ 1.60 | See subsequent events |
| $ 1.05 | | September 10, 2015 | | 950,000 | | 0.95 | | $ 1.05 | | 950,000 | | $ 1.05 | |
| $ 1.94 | | February 15, 2016 | | 175,000 | | 1.38 | | $ 1.94 | | 175,000 | | $ 1.94 | |
| $ 1.17 | | June 17, 2016 | | 200,000 | | 1.72 | | $ 1.17 | | 200,000 | | $ 1.17 | |
| $ 1.65 | | August 2, 2016 | | 1,450,000 | | 1.84 | | $ 1.65 | | 1,450,000 | | $ 1.65 | |
| $ 1.60 | | November 7, 2016 | | 70,000 | | 2.11 | | $ 1.60 | | 70,000 | | $ 1.60 | |
| $ 2.60 | | December 5, 2017 | | 1,635,000 | | 3.18 | | $ 2.60 | | 1,635,000 | | $ 2.60 | |
| $ 2.60 | | January 31, 2018 | | 350,000 | | 3.34 | | $ 2.60 | | 350,000 | | $ 2.60 | |
| $ 1.68 | | December 13, 2018 | | 2,675,000 | | 4.21 | | $ 1.68 | | 1,337,500 | | $ 1.68 | |
| $ 2.00 | | January 15, 2019 | | 100,000 | | 4.30 | | $ 2.00 | | 50,000 | | $ 2.00 | |
| $ 1.95 | | June 11, 2019 | | 150,000 | | 4.70 | | $ 1.95 | | 37,500 | | $ 1.95 | |
| | | | | 7,995,000 | | 2.89 | | $ 1.83 | | 6,495,000 | | $ 1.85 | |
| | | | | | | | | | | | | | |
Share-based compensation
During the nine month period ended September 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 nine month period ended September 30, 2014, under the fair value method, was $1,340,606 (2013 - $1,625,944).
The following weighted average assumptions were used for the Black-Scholes valuation of stock options.
| | | September 30, 2014 | | | September 30, 2013 | |
| Risk-free interest rate | | | 1.42 | % | | | 1.50 | % |
| Expected dividend yield | | | - | | | | - | |
| Expected stock price volatility | | | 54.62 | % | | | 66.27 | % |
| Expected forfeiture rate | | | 1.4 | % | | | 1.0 | % |
| Expected option lives | | 4.2 years | | | 5 years | |
12. REVENUES
| | | Three months ended | | | Nine months ended | |
| | | September 30, 2014 | | | September 30, 2013 | | | September 30, 2014 | | | September 30, 2013 | |
| Gold revenue - spot prices | | $ | 7,325,644 | | | $ | 8,099,083 | | | $ | 20,318,485 | | | $ | 25,739,473 | |
Gold revenue - Sandstorm (1) | | | 822,425 | | | | 1,091,237 | | | | 2,209,947 | | | | 3,229,925 | |
| Silver revenue | | | 7,395,672 | | | | 4,478,813 | | | | 14,717,924 | | | | 13,057,636 | |
| | | | 15,543,741 | | | | 13,669,133 | | | $ | 37,246,356 | | | $ | 42,027,034 | |
Capitalized to Santa Elena Mine EIP(2) | | | (7,542,319 | ) | | | - | | | | (8,520,350 | ) | | | - | |
| | | $ | 8,001,422 | | | $ | 13,669,133 | | | $ | 28,726,006 | | | $ | 42,027,034 | |
(1) For the three month period ended September 30, 2014, the Company recorded $822,425 (2013 - $1,091,237) from the delivery of 1,463 (2013 – 1,504) gold ounces to Sandstorm, which consisted of $517,344 (2013 - $526,631) in cash and $305,081 (2013 - $564,606) from amortization of deferred revenue.
For the nine month period ended September 30, 2014, the Company recorded $2,209,947 (2013 - $3,229,925) from the delivery of 3,942 (2013 - 4,453) gold ounces to Sandstorm, which consisted of $1,388,174 (2013 - $1,558,655) in cash and $821,773 (2013 - $1,671,270) from amortization of deferred revenue (note 9).
(2) Prior to completing the commissioning of Santa Elena’s EIP, the Company capitalized proceeds from sales of silver and gold ounces and related expenses attributed to the underground mine, mill and processing facilities (note 7).
13. COST OF SALES
| | | Three months ended | | | Nine months ended | |
| | | September 30, 2014 | | | September 30, 2013 | | | September 30, 2014 | | | September 30, 2013 | |
| Mining | | $ | - | | | $ | 1,690,035 | | | $ | 1,311,263 | | | $ | 7,568,928 | |
| Crushing and Processing | | | 4,294,378 | | | | 1,816,690 | | | | 7,025,750 | | | | 5,071,526 | |
| General and administrative | | | 1,388,733 | | | | 950,528 | | | | 3,448,221 | | | | 2,664,562 | |
| Direct production costs | | | 5,683,111 | | | | 4,457,253 | | | | 11,785,234 | | | | 15,305,016 | |
| Amortization of leach pad ore inventory | | | 390,644 | | | | - | | | | 390,644 | | | | - | |
Environmental mining duty (1) | | | 85,000 | | | | - | | | | 190,000 | | | | - | |
Capitalized to Santa Elena Mine EIP (2) | | | (1,062,340 | ) | | | - | | | | (1,477,358 | ) | | | - | |
| Finished goods inventory adjustment | | | (660,700 | ) | | | 836,496 | | | | 1,280,676 | | | | (594,854 | ) |
| | | $ | 4,435,715 | | | $ | 5,293,749 | | | $ | 12,169,196 | | | $ | 14,710,162 | |
| | (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 EIP, the Company capitalized proceeds from sales of silver and gold ounces and related expenses provided by the underground mine, mill and processing facilities (note 7). |
14. GENERAL AND ADMINISTRATIVE
| | | Three months ended | | | Nine months ended | |
| | | September 30, 2014 | | | September 30, 2013 | | | September 30, 2014 | | | September 30, 2013 | |
| Remuneration (note 17) | | $ | 461,564 | | | $ | 465,050 | | | $ | 1,386,353 | | | $ | 1,427,988 | |
| Professional fees (note 17) | | | 197,146 | | | | 158,231 | | | | 516,152 | | | | 490,987 | |
| General exploration | | | 13,814 | | | | 42,332 | | | | 39,542 | | | | 94,381 | |
| Regulatory | | | 25,628 | | | | 28,622 | | | | 297,655 | | | | 193,467 | |
| Shareholder and investor relations | | | 55,388 | | | | 134,012 | | | | 238,527 | | | | 395,881 | |
| Trade shows and travel | | | 148,446 | | | | 116,230 | | | | 540,093 | | | | 503,785 | |
| Other corporate expenses | | | 109,086 | | | | 3,289 | | | | 437,605 | | | | 396,039 | |
| Mexico corporate expenses | | | 287,208 | | | | 177,318 | | | | 726,380 | | | | 563,375 | |
| | | $ | 1,298,280 | | | $ | 1,125,084 | | | $ | 4,182,307 | | | $ | 4,065,903 | |
15. OTHER INCOME
Other income of $539,714 relates to net proceeds received from an insurance claim.
16. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share:
| | | Three months ended | | | Nine months ended | |
| | | September 30, 2014 | | | September 30, 2013 | | | September 30, 2014 | | | September 30, 2013 | |
| Numerator | | | | | | | | | | | | |
| Net earnings for the period | | $ | 241,014 | | | $ | 3,705,318 | | | $ | 4,023,353 | | | $ | 12,573,673 | |
| | | | | | | | | | | | | | | | | |
| Denominator | | | | | | | | | | | | | | | | |
| For basic - weighted average number of common shares outstanding | | | 118,747,227 | | | | 108,775,813 | | | | 116,291,007 | | | | 108,062,918 | |
| Effect of dilutive stock options and warrants | | | 1,573,264 | | | | 1,732,941 | | | | 1,573,264 | | | | 1,732,941 | |
| For diluted - adjusted weighted average number of common shares outstanding | | | 120,320,491 | | | | 110,508,754 | | | | 117,864,271 | | | | 109,795,859 | |
| | | | | | | | | | | | | | | | | |
| Earnings per common share | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.00 | | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.12 | |
| Diluted | | $ | 0.00 | | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.11 | |
17. RELATED PARTY TRANSACTIONS
During the nine month period ended September 30, 2014, the Company completed the following transactions with related parties:
Legal Fees
Legal fees of $102,032 (2013 - $123,231), which were included in professional fees, $131,548 (2013 - $Nil) for share issuance costs, and $nil (2013 - $92,404) in costs associated with the set-up of the Facility were paid or accrued to Koffman Kalef LLP, a law firm in which the Company’s Corporate Secretary is partner. The Company recognized $12,478 (2013 - $20,551) in share-based payments to this partner.
Key Management Compensation
| | | September 30, 2014 | | | September 30, 2013 | |
Salaries and short-term benefits (1) | | $ | 778,312 | | | $ | 684,148 | |
| Directors' fees | | | 108,958 | | | | 98,087 | |
| Share-based payments | | | 827,924 | | | | 863,170 | |
| | | $ | 1,715,194 | | | $ | 1,645,405 | |
| (1) | Total remuneration paid to the President and Chief Operating Officer, the Chief Executive Officer and the Chief Financial Officer of SilverCrest. |
Other transactions
Paid $134,505 (2013 - $144,079) for technical and administrative services and recognized $28,349 (2013 - $35,377) in share-based payments to immediate family members 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 nine month period ended September 30, 2014, the Company incurred $94,351 (2013 - $47,781) on behalf of Goldsource for these services, of which $25,643 (2013 - $34,338) is receivable at September 30, 2014.
18. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
Supplemental disclosure of significant non-cash transactions is provided in the table:
| | | September 30, 2014 | | | September 30, 2013 | |
| Non-cash investing and financing activities | | | | | | |
| Capitalized to property, plant and equipment | | | | | | |
| Accounts payable and accrued liabilities | | $ | 942,816 | | | $ | 1,278,519 | |
| | | | | | | | | |
| Capitalized to exploration and evaluation assets | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 207,049 | | | $ | 1,036,781 | |
19. 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.
20. INCOME TAXES
The composition of the Company’s deferred tax assets and liabilities are as follows:
| | | September 30, 2014 | | | December 31, 2013 | |
| Mexico operations | | | | | | |
| Deferred tax assets: | | | | | | |
| Non-Capital losses | | $ | 406,000 | | | $ | 229,000 | |
| Asset retirement obligations | | | 1,433,000 | | | | 1,376,000 | |
| Deferred tax liabilities: | | | | | | | | |
| Property, plant and equipment | | | (7,167,000 | ) | | | (7,589,000 | ) |
| Exploration and evaluation assets | | | (2,939,000 | ) | | | (2,594,000 | ) |
| Deferred revenue | | | (3,000,000 | ) | | | - | |
| Inventory | | | (337,000 | ) | | | (465,000 | ) |
| Defered tax liabilities, net | | $ | (11,604,000 | ) | | $ | (9,043,000 | ) |
Current income tax recovery (expense) for the three and nine month period ended September 30, 2014 was $3,092,000 (2013 - ($1,153,000)) and $370,000 (2013 – ($3,870,000)), respectively.
The income tax recovery arises primarily from taking tax deductions for mine development and commissioning costs incurred at Santa Elena during the nine month period ended September 30, 2014. These 2014 income tax deductions give rise to significant differences between the financial statement carrying amounts and the respective Mexican tax bases. The deferred tax expenses amounted to $3,278,000 (2013 - $3,092,000) for the three months and $2,561,000 (2013 – $1,998,000) for the nine months ended September 30, 2014.
21. SEGMENTED INFORMATION
The Company has three reportable segments, those being the mine operations at Santa Elena, Mexico; mine exploration and evaluation projects at Ermitaño, La Joya, Cruz de Mayo and other exploration projects, Mexico; and Corporate. The Company has identified these reporting segments based on the internal reports reviewed and used by the President, it chief operating decision maker, in allocating resources and assessing performance. For reporting purposes, mine exploration and evaluation projects have been aggregated into a single reportable segment where they have similar characteristics. 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 | | | | |
| September 30, 2014 | | Santa Elena | | | Other Projects | | Corporate | | | Total | |
| Revenue | | $ | 28,638,334 | | | $ | - | | | $ | 87,672 | | | $ | 28,726,006 | |
| Cost of sales | | | (12,169,196 | ) | | | - | | | | - | | | | (12,169,196 | ) |
| Depletion, depreciation and amortization | | | (5,008,664 | ) | | | - | | | | (8,429 | ) | | | (5,017,093 | ) |
| Mine operating earnings | | | 11,460,474 | | | | - | | | | 79,243 | | | | 11,539,717 | |
| Other net expenses | | | (953,677 | ) | | | - | | | | (4,371,687 | ) | | | (5,325,364 | ) |
| Current income tax recover | | | 370,000 | | | | - | | | | - | | | | 370,000 | |
| Deferred tax rexpense | | | (2,561,000 | ) | | | - | | | | - | | | | (2,561,000 | ) |
| Net earnings (loss) for the period | | $ | 8,315,797 | | | $ | - | | | $ | (4,292,444 | ) | | $ | 4,023,353 | |
| | | | | | | | | | | | | | | | | |
| Asset Information | | | | | | | | | | | | | | | | |
| Property, Plant and Equipment | | $ | 107,453,447 | | | $ | - | | | $ | 24,584 | | | $ | 107,478,031 | |
| Exploration and evaluation assets | | $ | - | | | $ | 18,353,685 | | | $ | - | | | $ | 18,353,685 | |
| | | | | | | | | | | | | | | | | |
| September 30, 2013 | | Santa Elena | | | Other Projects | | Corporate | | | Total | |
| Revenue | | $ | 41,848,733 | | | $ | - | | | $ | 178,301 | | | $ | 42,027,034 | |
| Cost of sales | | | (14,710,162 | ) | | | - | | | | - | | | | (14,710,162 | ) |
| Depletion, depreciation and amortization | | | (4,508,249 | ) | | | - | | | | (7,399 | ) | | | (4,515,648 | ) |
| Mine operating earnings | | | 22,630,322 | | | | - | | | | 170,902 | | | | 22,801,224 | |
| Other net expenses | | | (563,375 | ) | | | - | | | | (3,796,176 | ) | | | (4,359,551 | ) |
| Current income tax expense | | | (3,870,000 | ) | | | - | | | | - | | | | (3,870,000 | ) |
| Deferred tax expense | | | (1,998,000 | ) | | | - | | | | - | | | | (1,998,000 | ) |
| Net earnings (loss) for the period | | $ | 16,198,947 | | | $ | - | | | $ | (3,625,274 | ) | | $ | 12,573,673 | |
| | | | | | | | | | | | | |
| Asset Information | | | | | | | | | | | | |
| Property, Plant and Equipment | | $ | 79,178,409 | | | $ | - | | | $ | 27,020 | | | $ | 79,205,429 | |
| Exploration and evaluation assets | | $ | - | | | $ | 15,218,082 | | | $ | - | | | $ | 15,218,082 | |
22. SUBSEQUENT EVENTS
Subsequent to September 30, 2014, 50,000 incentive stock options priced between CAD$1.60 and CAD$2.60 per share were forfeited and 240,000 incentive stock options priced at CAD$1.60 per share were granted a one year extension with an expiry date now of November 7, 2015.
