GENERAL DEVELOPMENT OF THE BUSINESS
Overview
The Company is engaged in the evaluation, acquisition, exploration, development and operation of precious and polymetallic mineral properties in North America, primarily those with the potential for near-term production or exhibiting potential for hosting a major mineralized deposit. The Company is currently operating in two of the world’s leading silver camps: the (“Cosalá Operations”) in Sinaloa, Mexico and the (“Galena Complex”), in Idaho, United States. The Company holds an option to purchase the San Felipe development project in Sonora, Mexico (the “San Felipe property”).
In Sinaloa, Mexico, the Company operates the 100%-owned Cosalá Operations which includes the Nuestra Señora silver-zinc-copper-lead mine (“Nuestra Señora mine” or “Nuestra Señora”), the San Rafael silver-zinc-lead mine (“San Rafael mine” or “San Rafael”) and the Zone 120 silver-copper exploration project. The Company declared commercial production in January 2009 following development of the Nuestra Señora mine and associated commissioning of the Los Braceros processing facility. In December 2017 commercial production was declared at the San Rafael mine and the Nuestra Señora mine was placed on care-and-maintenance.
In April 2010, Scorpio Mining completed the acquisition of all of the outstanding shares of Platte River Gold Inc., through which the Company acquired several advanced polymetallic deposits, including the El Cajón and San Rafael projects. Along with the Nuestra Señora mine and Los Braceros plant these properties now comprise the Cosalá Operations. In March 2017, the Company acquired an option to purchase 100% of the San Felipe property. The option was acquired from a subsidiary of Santacruz Silver Mining Ltd. (“Santacruz”) with the underlying property held by Minera Hochschild Mexico S.A. de C.V. (“Hochschild”).
The primary assets of the Galena Complex, which was added as a result of the merger with U.S. Silver, are the Galena mine and Galena mill, the Coeur mine and Coeur mill, and mineral properties adjacent to those centres of infrastructure. The Galena Complex has a long mining history with combined production of over 230 million ounces of silver and associated by-product metals of copper and lead over a modern production history of more than 50 years. The Galena mine is the second most prolific primary silver mine in United States history.
While silver-copper ore had been exploited for most of Galena’s history, U.S. Silver commenced production of silver-lead ore during the fourth quarter of 2007. Development activities were ramped up significantly in the second half of 2014 as U.S. Silver focused on the exploration and development of multiple areas where silver-lead ores had been identified in historic workings or drill holes in the Galena mine.
The Company recently declared commercial production at the San Rafael mine, as at December 19, 2017. In 2018 additional investment will be directed toward mine development as well as $4 million for exploration to further advance the Zone 120 project and test other high priority regional targets. At the Galena Complex, the Company continues to invest to extend and upgrade the existing mineral resources and reserves and mine infrastructure. For its combined operations, in 2018, the company expects to have silver production of 1.6 – 2.0 million ounces and silver equivalent production of 7.2 – 8.0 million ounces at silver cash costs of negative $5.00 to negative $10.00 per ounce and all-in sustaining costs of negative $1.00 to $4.00 per ounce.
The Company continues to examine opportunities to leverage its operating presence in the regions where it is active. Advances in exploration, mining and processing technologies as well as changing economic conditions are motivating re-evaluation of known occurrences and past producers. The Company operates in a cyclical industry where levels of cash flow have historically been correlated to commodity prices.
The Company’s strategic objective is to expand its silver production through the development of its own projects and consolidation of complimentary projects. The management team is led by Darren Blasutti, its President and Chief Executive Officer. The Company’s current management and Board are comprised of senior mining executives and have extensive experience identifying, acquiring, developing, financing and operating mining projects deposits globally. For further information see “Directors and Officers”.
NYSE American Market Listing and Share Consolidation
The Company listed its common shares on the NYSE American with trading starting on January 19, 2017, under the symbol “USAS”. In order to satisfy one of the listing requirements for the NYSE American, a share price of $2.00 or greater, the Company received shareholder approval to pass a special resolution authorizing an amendment to the Company’s articles. The amendment resulted in one post-consolidation common share for each 12 pre-consolidation common shares resulting in approximately 39,540,384 post-consolidation common shares effective as of December 21, 2016 (the “Share Consolidation”). All information relating to the number of issued and outstanding common shares, options, warrants, deferred share units, restricted share units, and related per share amounts in this AIF have been adjusted retrospectively to reflect the Share Consolidation.
Operations – Three Year History
2015
Exploration drilling focus areas included delineation drilling at the Nuestra Señora mine to investigate new mining areas near existing mine infrastructure and to further define and upgrade existing resources. Drilling at San Rafael was confirmatory infill intended to provide material for metallurgical testing. Prospecting, surface mapping and soil geochemistry continued during the year.
A pre-feasibility study was initiated on the San Rafael project in the first half of 2015. Work focused on evaluating the silver-zinc-lead resource comprising the Main Zone. Key economic parameters of the study were adjusted in Q4 in response to deteriorating market conditions.
The El Cajón development project was placed on care and maintenance in January 2015 in light of prevailing metal prices and a boundary disagreement. The halt in development resulted in a staffing reduction of approximately 90 jobs representing almost 25% of the workforce at the Cosalá Operations over the first quarter of 2016. Prior to suspension, metallurgical performance was confirmed through a milling campaign which processed approximately 7,700 tonnes of development muck.
On June 4, 2015, two mine supervisors were severely injured by a fall of ground at the Nuestra Señora mine. The injured were medevacked and received emergency medical treatment at hospitals in Culiacán, Sinaloa. On June 17, 2015 one of the injured employees passed away from complications after surgery. Americas Silver conducted a thorough investigation of the accident. Several corrective measures have been implemented to prevent a future recurrence of such an unfortunate event. Government authorities investigated the incident and found no fault on the part of the Company. The Secretaria del Trabajo y Prevision Social (STPS) confirmed that any items identified in their inspection have been fully addressed by the Company.
The Galena Complex completed its transition from silver-copper to silver-lead ore production. The Galena mine’s silver-lead resources offer overall higher silver equivalent grades and lower mining costs as these mining areas are typically wider and may allow for a greater contribution from mechanized mining in the future. Production of copper concentrate stopped in October. Minor tonnages of silver-copper ore continue to be extracted but are commingled with silver-lead ore and processed together to produce a single silver-lead flotation concentrate. The Company has the flexibility to recommence production of copper concentrate if warranted by changes in market conditions. Maintenance on the Galena shaft hoist motor impacted production between April and September. Although mine operations continued during this period, ore production was impacted due to hoisting limitations.
2016
In March 2016, the Company released the results of the pre-feasibility study for the San Rafael project. The study described an underground mine delivering average annual production of 1.0 million ounces of silver, 50 million pounds of zinc and 20 million pounds of lead over a 6 year mine life. Construction of the new mine officially started in September 2016 following approval by the Company’s board of directors.
In early April, unusual ground movement was observed at the Nuestra Señora mine. The disturbance was located in the upper levels of the mine near old workings which predate the Company’s involvement with the project. An analysis of the situation showed there was a risk to the structural integrity of the mine portal. A new portal and approximately 120 meters of development was completed to re-establish safe access to the mine and operations resumed in late June. During the suspension of ore production from Nuestra Señora, mill feed consisted of stockpiled material as well as historic dumps and near surface mineralization at the past-producing La Estrella mine at the north end of the Company’s land holdings.
Primary ramp development at San Rafael advanced with approximately 25% complete by year-end. The project received initial deliveries of new mobile equipment and transfer of workers and equipment from the Nuestra Señora mine began. Ongoing review of development plans and savings from the relocation and reuse of existing equipment allowed the initial capital cost estimate to be reduced to $18 million from the original cost of $22 million presented in the prefeasibility study.
Development at the El Cajón project recommenced in Q4 2016. Plans were put in place to have 2017 mill feed supplemented by El Cajón production as the Nuestra Señora mine wound down. A small stockpile had been established by year end.
On December 30, 2016, the Company completed and filed an updated Technical Report on the Galena Complex to disclose Mineral Resource and Mineral Reserve estimates for the operation, as at December 31, 2015.
Management continued to restructure the company-wide workforce in response to evolving business requirements. Layoffs took place at the corporate office, the Galena Complex and the Cosalá Operations in Q1. In addition, the Mexico Country Manager position was eliminated with responsibilities assumed by James Stonehouse, Vice President – Exploration. Daren Dell, previously Senior Vice President Technical Services, assumed the role of Chief Operating Officer following the resignation of Robert Taylor.
2017
In early 2017, production from the Nuestra Señora mine began to slow as preparations were made to transition the Cosalá Operations to other ore sources. Activities continued at the previously-idle El Cajón mine to bring it into limited production beginning in Q1 2017. A total of approximately 110 thousand tonnes were processed between January and September. The El Cajón mine is currently back on care-and-maintenance.
Successful completion of the San Rafael mine project was the Company’s top priority during 2017 and commercial production was declared as of December 19, 2017. Ramp development was slowed during the year by difficult ground conditions at the contact between the overlying volcanic rock and the limestone beneath. However, improvements were found in other areas of the mine design and the Company began stockpiling ore in late August. Construction of the mill modifications was completed and the plant switched to San Rafael ore as the sole feed source in November. The Los Braceros mill averaged approximately 1,400 tonnes per day through the pre-production period with silver, zinc and lead recoveries within 5% of Company expectations consistent with the March 2016 San Rafael Pre-Feasibility Study. Comstruction was completed for approximately $16 million, 32% below the pre-feasibility study estimate.
Exploration drilling resumed in 2017 at the Cosalá Operations property for the first time since 2014. An initial 4,000 meter diamond drill program at the silver-copper Zone 120 deposit adjacent to the San Rafael mine commenced in April, focusing on upgrading the existing resource as well as expanding the footprint of mineralization to the southeast. Following up on the success of step-out drilling, the Company drilled 3,260 meters in seven holes to further test continuity and expand the mineralized footprint. Exploration drilling at the Galena Complex totaled 7,220 meters in the year. Drilling to test extensions of known silver-lead mineralization near existing mine infrastructure accounted for 5,423 meters. Exploration drilling beyond known mineralization totaled 1,797 meters and led to the discovery of the 367 Vein located north of the main workings on the 4900 level.
The Company provided updated mineral resource and reserve estimates for the Cosalá Operations and Galena Complex in September 2017 with an effective date of June 30, 2017.1 Silver inventory contained 28 million ounces of proven and probable reserves, 58 million ounces of measured and indicated resources and 37 million ounces of inferred resources, a decrease of 9%, and increases of 16% and 37%, respectively. The increase in the inferred resource category was primarily a result of exploration success in the first half of 2017. The decrease in reserves was attributable to 18 months of production, the impending closure of Cosalá’s Nuestra Señora mine, and the reclassification of some silver-copper material at Galena. Galena has been primarily producing silver-lead ore since January 2016 and the proven and probable reserves associated with this material increased by 18% or approximately 1.3 million ounces despite production depletion. The increase in measured and indicated resources was attributable to gains at Zone 120 (increased by 5.2 million ounces) and the reinstatement of part of El Cajón (increased by 5.7 million ounces) as a result of a determination made by the Mexican Authorities in respect of a property boundary uncertainty. In May 2017 the Dirección General de Regulación de Minería (DGRM)2 confirmed the location of disputed concession boundaries at the El Cajón project. With this added degree of certainty, the Company was able to include the El Cajón resource in its June 30, 2017 Mineral Resource Estimate update.
1 This update did not include drill results from holes SR399 to SR401 completed in the third quarter at the Company's Zone 120 deposit released previously, nor the associated resources attributable to the Company's option on the San Felipe property.
2 The DGRM is the Mexican government bureau responsible for administering mining concessions.
In March 2017, the Company entered into an option acquisition agreement with a subsidiary of Santacruz Silver Mining Ltd. to acquire an existing option with Minera Hochschild Mexico S.A. de C.V. for the right to acquire a 100% interest in the San Felipe property for total consideration of $15 million in cash, payable in two installments: (i) the purchase of the option for $5 million from Santacruz plus an initial option payment of $2 million paid to Hochschild with cash on hand by the Company in early March; and (ii) a final option payment of $8 million to Hochschild. Initially this final payment was to be made on or before December 15, 2017 but the parties agreed to extend the payments as follows: $500,000 on each of January 1, 2018 and April 1, 2018 respectively; $1,000,000 on July 1, 2018; and balance of $6,000,000 on or before December 31, 2018. The Company expects to make any remaining payments in accordance with the terms of the amended option with cash on hand from its operations. Work on the property during the year included 1,400 meters for drilling of six twin holes, completion of a geotechnical study and remodeling of the deposit. The Company expects to publish an updated mineral resource estimate in the first half of 2018.
The Galena Complex experienced a challenging year. First quarter production was negatively impacted by an earlier than expected mill liner replacement. The associated impact to the mine’s backfill cycle as a secondary result of this replacement affected production through the rest of the quarter. Second quarter metal production fell below expectations due to a shortfall in grade. Operational challenges, including reduced equipment availability and inadequate cemented fill quality, impacted key production areas in the lower levels of the mine. As a result there was a relatively large contribution of lower grade development ore to the mill feed. These issues were addressed over the course of several months with performance nearing expectations in the fourth quarter. Site personnel made progress in advancing their planning practices to improve production flexibility and consistency.
A subsidiary of the Company is party, with the United Steel Workers Union, to a collective bargaining agreement that covers all of the hourly employees at the Galena Complex with a term from June 29, 2014 to June 28, 2017. The parties have been in negotiations since June 2017 and in December, the Company issued its “last, best and final offer”.
Current Year – 2018
The Company’s current strategy is focused on delivering a smooth ramp up of the San Rafael mine at the Cosalá Operations while continuing to improve profitability of the Galena Complex. Evaluation work will continue on the San Felipe property in support of a final option exercise decision at the end of the year. Exploration will continue to advance priority targets in the Cosalá District and to expand the silver-lead reserve and resource at Galena.
The San Rafael mine is expected to drive significant earnings and cash flow at current metals prices for the Company’s shareholders starting in Q1 2018 and over the life of the mine. It is projected to provide a substantial reduction in the consolidated cash costs and all-in sustaining costs of the Company. Mine production, mill throughput and metal recoveries are expected to ramp-up to internal targets through the first half of 2018. Capital development is expected to be highest in the first quarter of 2018 as development into the lowest levels of the Main Zone progress and the remainder of the mine’s capital development and equipment purchases are substantially completed. The Company is expected to invest a consolidated $18-19 million in its operating mines in 2018.
The Company is moving forward with a $4 million, 20,000-meter exploration program focused on the Zone 120 deposit and its regional land position. Approximately 14,000 meters of the drilling will be focused on Zone 120 and the corridor between Zone 120 and El Cajón. The drilling is expected to be completed by mid-second quarter 2018 with results to be released late in Q2 2018 for inclusion in the Company’s mid-year resource update. Funding for the program is expected to be provided from internally-generated, operating cash flow from the Company’s San Rafael mine.
Production and other matters relating in the Company’s operations are listed below under “Description of the Business”.
Financing Arrangements – Last 3 years
From time to time, Americas Silver has raised capital by way of private placements, debt financings and the exercise of warrants and stock options. These funds are typically expended on exploration and development of its properties and for general working capital purposes.
The Company has previously entered into three similar secured debt facilities with two lenders and a combined principal amount of approximately C$13.9 million at interest rates in the range of 10% – 12% per annum. As of March 2017, all such debt, including accrued interest, has been repaid in full and these debt facilities are no longer outstanding. In connection with these debt facilities the Company issued warrants to the respective lenders. See “General Description of Capital Structure” in this AIF for further information.
On June 9, 2016 and June 14, 2016, the Company completed private placements of 5,555,555 units and 3,210,416 subscription receipts, respectively, at a price of C$3.60 per unit and per subscription receipt (post Share Consolidation equivalent) for aggregate gross proceeds of approximately C$31.6 million ($24.7 million). On July 20, 2016, the Company received the necessary approvals and completed the exchange of 3,210,416 subscription receipts for units. Each unit from the private placements consisted of one common share and one quarter of one common share purchase warrant where each whole warrant is exercisable for one common share at an exercise price of C$4.68 for a period of five years from June 14, 2016.
On January 29 2017, two Mexican subsidiaries of the Company, Minera Cosalá, S.A. de C.V. (“Minera Cosalá”) and Minera Platte River Gold, S. de R.L. de C.V (“Minera Platte”) entered into a four year, $15 million concentrate pre-payment facility (the “Glencore Pre-Payment Facility”) at an interest rate of U.S. LIBOR plus 5% per annum with Metagri S.A. de C.V., a subsidiary of Glencore PLC (“Glencore”) to be used in part to fund the development of the San Rafael mine and commercial production of its concentrates. In January 2018, the Company began repayment of principal on the Glencore Pre-Payment Facility as an additional tonnage charge on shipments of concentrate, with minimum annual repayment amounts required for 2018, 2019 and 2020. See “Note 10 – Pre-Payment Facility” of the annual consolidated financial statements for the year ended December 31, 2017. The full amount of the Glencore Pre-Payment Facility was drawn in late March 2017. In connection with the Glencore Pre-Payment Facility, the Company has executed a promissory note and guarantee in favour of Glencore and agreed to provide limited asset level security on the San Rafael mine. The Company has also entered into four-year offtake agreements with Glencore for the zinc and lead concentrates produced from San Rafael. Glencore will pay for the concentrates at prevailing market prices for silver, lead and zinc, less treatment and refining charges. See “Risk Factors – Risks Associated with Outstanding Debt”.
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DESCRIPTION OF THE BUSINESS
Summary
The Company is engaged in the evaluation, acquisition, exploration, development and operation of precious metals and polymetallic mineral properties, primarily those already producing or with the potential for near-term production. The geographic focus is in the Western Hemisphere, particularly Canada, the United States and Mexico. Currently, the Company is in production at its Cosalá Operations in Sinaloa, Mexico and Galena Complex in the United States. The Company holds an option to purchase the San Felipe property in Sonora, Mexico.
Principal Product
The Company produces silver-bearing zinc and lead concentrates. The Company believes that because of the availability of alternate processing and commercialization options for its concentrates, it is not dependent on a particular purchaser with regard to the sale of its products.
Production
The Company operates the 100%-owned Cosalá Operations located near the town of Cosalá in the State of Sinaloa, Mexico and the Galena Complex located near the town of Wallace in the State of Idaho, U.S.A.
Ore at the Cosalá Operations is currently produced from the San Rafael mine and treated at the Los Braceros process plant. San Rafael is an underground silver-zinc-lead mine which entered commercial production in December 2017. The Los Braceros process plant, located 9 kilometers east southeast of the San Rafael mine, currently produces silver-bearing zinc and lead concentrates. There are no confirmed plans to expand the facility beyond the 1,600 tonne per day nameplate capacity.
San Rafael is early in its life as a mine. Initial activity focused on gaining access to the southern lobe of the Main Zone. This area will be the primary source of initial production. Capital development is currently directed toward extending ramp access down to the lowest levels of the Main Zone and up to the Upper Zone. Production from the Nuestra Señora mine has stopped although a resource remains at the property.
The Galena Complex produces a silver-lead concentrate. Material mined at the Galena Complex is milled at the Galena mill. The Galena mill has an installed milling capacity of 630 tonnes-per-day but operates below capacity. The 450 tonne-per-day capacity Coeur mill is currently on care-and-maintenance.
The high grade and “narrow vein” nature of the underground Galena Complex requires careful application of selective mining techniques such as overhand cut and fill. As well, the age and expanse of the underground infrastructure demands regular, ongoing maintenance. As such, production and operating costs will display a degree of variability depending on a number of timing and other factors. Existing hoisting and processing infrastructure is capable of handling more material than the mine currently generates. Substantial resources exist outside of the defined reserve, and exploration continues to develop resources and identify new areas of mineralization.
Consolidated silver production for 2017 was approximately 2,060,000 ounces. Silver equivalent production was approximately 4,746,000 ounces. Consolidated cash costs improved by 5% to $9.45 per silver ounce compared to 2016. In addition, zinc and copper production increased 11% and 10% year-over-year, respectively, as a result of strong production from the Cosalá Operations.3
2017 Consolidated Production Highlights | |
| | | 2017 | | | 2016 | | | Change | |
| Processed Ore (tonnes milled) | | | 690,498 | | | | 671,616 | | | | 3 | % |
| Silver Production (ounces) | | | 2,056,017 | | | | 2,389,808 | | | | -14 | % |
| Silver Equivalent Production (ounces) | | | 4,746,387 | | | | 4,579,373 | | | | 4 | % |
| Silver Grade (grams per tonne) | | | 104 | | | | 126 | | | | -18 | % |
| Cost of Sales ($ per silver equiv. ounce)* | | $ | 10.19 | | | $ | 10.08 | | | | 1 | % |
| Cash Costs ($ per silver ounce)* | | $ | 9.37 | | | $ | 10.00 | | | | -6 | % |
| All-in Sustaining Costs ($ per silver ounce)* | | $ | 13.12 | | | $ | 12.71 | | | | 3 | % |
| Zinc Production (pounds) | | | 11,623,138 | | | | 10,488,773 | | | | 11 | % |
| Lead Production (pounds) | | | 25,392,619 | | | | 29,067,673 | | | | -13 | % |
| Copper Production (pounds) | | | 1,167,401 | | | | 1,058,250 | | | | 10 | % |
* Cost of sales per silver equivalent ounce, cash costs per silver ounce, and all-in sustaining costs per silver ounce for 2017 excludes pre-production of 50,490 silver ounces and 435,323 silver equivalent ounces mined from San Rafael during its commissioning period, and excludes pre-production of 245,391 silver ounces and 360,530 silver equivalent ounces mined from El Cajón during its commissioning period. Pre-production revenue and cost of sales from San Rafael and El Cajón are capitalized as an offset to development costs.
The Company produced 2.1 million silver ounces and 4.7 million silver equivalent ounces which are within the 2.0 – 2.5 million silver ounces and slightly below the 5.0 – 5.5 million silver equivalent ounces 2017 guidance estimates. The shortfall to silver equivalent guidance was due to lower than expected tonnage and grade from the Galena Complex as both silver and lead production were below expectations due primarily to short fall in grade and operational challenges affecting production (For further information see “General Development of the Business – Operations – Three Year History 2017”). In addition, silver equivalent production was lower than expected due to the delay in by-product metal production expected from San Rafael mine. The Company’s estimate had assumed a declaration of commercial production at the San Rafael mine early in the fourth quarter of 2017 instead of later in the quarter.
Guidance for 2018 is 1.6 – 2.0 million silver ounces and 7.2 – 8.0 million silver equivalent ounces at cash costs of negative $10.00 to negative $5.00 per silver ounce and all-in sustaining costs of negative $1.00 to 4.00 per silver ounce. The Company assumed $17.00 per ounce silver, $1.35 per pound zinc, $1.05 per pound lead, and an exchange rate of 18.5 Mexican pesos per U.S. dollar for these guidance estimates.
3 Cash cost per ounce and all-in sustaining cost per ounce are non-IFRS financial performance measures with no standardized definition. For further information and detailed reconciliations, please refer to the Company’s Management’s Discussion and Analysis for the year (and quarter) ended December 31, 2017.
Consolidated Results and Guidance |
| | 2017 Actual | 2018 Guidance* |
| Silver Production (ounces) | 2.1M oz. | 1.6 – 2.0M oz. |
| Silver Equivalent Production (ounces) | 4.7M oz. | 7.2 – 8.0M oz. |
| Cost of Sales ($ per silver equiv. ounce) | $10.13/oz. | $7.00 – $8.00/oz. |
| Cash Costs ($ per silver ounce) | $9.45/oz. | $(10.00) – $(5.00)/oz. |
| All-in Sustaining Costs ($ per silver ounce) | $13.29/oz. | $(1.00) – $4.00/oz. |
* The Company assumed $17.00 per ounce silver, $1.35 per pound zinc, $1.05 per pound lead, and an exchange rate of 18.5 Mexican pesos to U.S. dollar for these guidance estimates.
Employees
As at end-January 2018, the Company had the following number of employees:
| | Cosalá Operations | Galena Complex | Corporate | Total |
| Hourly | 231 | 200* | 0 | 431 |
| Salary | 103 | 42 | 10 | 155 |
| TOTAL | 334 | 242 | 10 | 586 |
* The hourly employees at the Galena Complex are covered by a collective bargaining agreement with the United Steel Workers Union. See “Changes to Contracts and Economic Dependence” also see “Risk Factors – Labour Relations, Employee Recruitment, Retention and Pension Funding”.
In addition, the Company, from time to time, employs outside contractors on a fee-for-service basis.
Specialized Skill and Knowledge
Various aspects of the Company’s business require specialized skills and knowledge. Such skills and knowledge include the areas of geology, drilling, metallurgy, engineering, logistical planning and implementation of programs as well as finance and accounting and legal/regulatory compliance. While competitive conditions exist in the industry, the Company has been able to locate and retain employees and consultants with such skills and believes it will continue to be able to do so in the foreseeable future.
Competitive Conditions
Competition in the mineral exploration industry is intense. The Company competes with other mining companies, many of which have significant financial resources and technical facilities for the acquisition and development of, and production from, mineral interests, as well as for the recruitment and retention of qualified employees and consultants. The ability of the Company to acquire viable mineral properties in the future will depend not only on its ability to develop its present properties, but also on its ability to select and acquire suitable producing properties or prospects for development or mineral exploration.
Business Cycles
The mining business is highly cyclical. The marketability of minerals and mineral concentrates is also affected by worldwide economic cycles. The ultimate economic viability of the Company’s projects is related and sensitive to the market price of silver as well the market price of by-products such as zinc, lead and copper. Metal prices fluctuate widely and are affected by numerous factors such as global supply, demand, inflation, exchange rates, interest rates, forward selling by producers, central bank sales and purchases, production, global or regional political, economic or financial situations and other factors beyond the control of the Company.
Changes to Contracts and Economic Dependence
The Company’s cash flow is dependent on delivery of its ore concentrate to market. The Company’s contracts with the concentrate purchasers provide for provisional payments based on periodic deliveries. The Company may sell its concentrate to a metal trader while it is at the smelter in order to help manage its cash flow. The Company has not had any problems collecting payments from concentrate purchasers in a reliable and timely manner and expects no such difficulties in the foreseeable future. However, this cash flow is dependent on continued mine production which can be subject to interruption for various reasons including fluctuations in metal prices and concentrate shipment difficulties. Additionally, unforeseen cessation in smelter provider capabilities could severely impact the Company’s capital resources. Although the Company sells its concentrate to a limited number of customers, it is not economically dependent upon any one customer as there are other markets throughout the world for the Company’s concentrate.
A subsidiary of the Company is party, with the United Steel Workers Union, to a collective bargaining agreement that covers all of the hourly employees at the Galena Complex with a term from June 29, 2014 to June 28, 2017. The parties have been in negotiations since June 2017 and in December, the Company issued its “last, best and final offer”. See “Risk Factors – Labour Relations, Employee Recruitment, Retention and Pension Funding”.
Environmental Protection
The Company’s mining, exploration and development activities are subject to various federal, state and municipal laws and regulations relating to the protection of the environment, including requirements for closure and reclamation of mining properties. In all jurisdictions where the Company operates, specific statutory and regulatory requirements and standards must be met throughout the exploration, development and operations stages of a mining property with regard to matters including water quality, air quality, wildlife protection, solid and hazardous waste management and disposal, noise, land use and reclamation. Changes in any applicable governmental regulations to which the Company is subject may adversely affect its operations. Failure to comply with any condition set out in any required permit or with applicable regulatory requirements may result in the Company being unable to continue to carry out its activities. The impact of these requirements cannot accurately be predicted.
Management estimates costs associated with reclamation of mining properties as well as remediation costs for inactive properties. The Company uses assumptions about future costs, including inflation, prices, mineral processing recovery rates, production levels and capital and reclamation costs. Such assumptions are based on the Company’s current mining plan and the best available information for making such estimates. Details and quantification of the Company’s reclamation and closure costs are discussed in the Company’s audited consolidated financial statements (see “Note 12 – Decommissioning Provision”) and the Management’s Discussion and Analysis for the year ended December 31, 2017 (see “Critical Accounting Estimates and Judgements – Decommissioning Provision”). See also “Risk Factors – Government Regulation and Environmental Compliance”.
The Company is focused on strengthening monitoring, controls and disclosure of environmental issues that affect employees and the surrounding communities. Through proactive public engagement, the Company continues to gain a better understanding of the concerns of area-wide citizens and regulators, and continues to work collaboratively to identify the most reasonable and cost-effective measures to address the most pressing concerns.
Foreign Operations
As of the date hereof, substantially all of the Company’s long-term assets, comprising its mineral properties, are located in Mexico and the United States.
Tax Considerations
With current operations in the United States and Mexico, the Company is subject to the tax considerations of those jurisdictions. Certain changes to United States and Mexican tax laws affect the Company. See “Risk Factors – Tax Considerations” and “Note 17 – Income Taxes” of the Company’s audited consolidated financial statements for the year ended December 31, 2017.
On December 22, 2017, the United States government enacted a tax reform with changes to reducing the corporate income tax rate from 35% to 21% and repealing the corporate alternative minimum tax effective January 1, 2018. The Company assessed the impact of the tax reform and recognized a deferred tax asset of $0.6 million as at December 31, 2017 with respect to recoverable alternative minimum tax credits. Impact of the tax reform may differ due to changes in interpretations and assumptions made along with guidance which may subsequently be issued.
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MATERIAL PROJECTS
The following is a summary description of the Company’s material mineral projects, namely the Galena Complex and the Cosalá Operations.
Unless otherwise indicated, the information set forth below regarding the Cosalá Operations are extracts, as updated and conformed to be consistent with other disclosure within this AIF, from the summary section of the technical report (the “San Rafael Technical Report”) – entitled “Technical Report and Preliminary Feasibility Study for the San Rafael property, Sinaloa, Mexico” dated April 29, 2016 and prepared in accordance with NI 43-101 by and under the supervision of Thomas L. Dyer, P.E., Edwin R. Peralta, P.E., Paul Tietz, C.P.G. and Randy Powell, Q.P.M. of Mine Development Associates, Inc., all of whom are Qualified Persons for the purposes of NI 43-101. All scientific and technical information in this section relating to any updates to the Cosalá Operations since the date of the San Rafael Technical Report has been reviewed and approved by current members of Company management, all of whom are Qualified Persons for the purposes of NI 43-101. Defined terms and abbreviations used in this section relating to the Cosalá Operations and not otherwise defined have the meanings attributed to them in the San Rafael Technical Report. The San Rafael Technical Report is available for review on the Company’s profile at www.sedar.com. Reference should be made to the full text of the San Rafael Technical Report which is incorporated herein by reference.
Unless otherwise indicated, the information set forth below regarding the Galena Complex are extracts, as updated and conformed to be consistent with other disclosure within this AIF, from the summary section of the technical report (the “Galena Technical Report”) – entitled “Technical Report, Galena Complex, Shoshone County, Idaho” dated December 23, 2016 and prepared in accordance with NI 43-101 by and under the supervision of Jim Atkinson, P.Geo., Daren Dell, P.Eng, and Dan Hussey, C.P.G., all of whom are Qualified Persons for the purposes of NI 43-101. Defined terms and abbreviations used in this section relating to the Galena Complex and not otherwise defined have the meanings attributed to them in the Galena Technical Report. The Galena Technical Report is available for review on the Company’s profile at www.sedar.com. Reference should be made to the full text of the Galena Technical Report which is incorporated herein by reference.
Summary of Mineral Reserve and Mineral Resource Estimates
Americas Silver’s reserves and resources have been calculated as at June 30, 2017 in accordance with definitions adopted by the Canadian Institute of Mining, Metallurgy and Petroleum and incorporated into NI 43-101. See “Glossary of Technical Terms”.
2017 production details are provided under “Description of the Business – Production” and in the Company’s consolidated financial statements and Management’s Discussion and Analysis for the year ended December 31, 2017.
For further detail regarding the extent to which estimates of Mineral Resources and Reserves may be materially affected by external factors, including metallurgical, environmental, permitting, title and other risks and relevant issues, please refer to “Risk Factors – Mineral Reserves and Resources, Development and Production”.
Proven and Probable Mineral Reserves at June 30, 2017
| | | | Grade | Contained Metal |
| | Tonnes | | Silver | | Copper | | Lead | | Zinc | | Silver | | Copper | | Lead | | Zinc |
| | 000’s | | g/t | | % | | % | | % | | koz | | Mlbs | | Mlbs | | Mlbs |
| Cosalá | | | | | | | | | | | | | | | | | |
| Nuestra Señora | | | | | | | | | | | | | | | | | |
| Proven | 34 | | 79 | | 0.20 | | 0.80 | | 1.43 | | 87 | | 0.2 | | 0.6 | | 1.1 |
| Probable | 228 | | 96 | | 0.27 | | 0.90 | | 1.74 | | 708 | | 1.3 | | 4.5 | | 8.8 |
| Nuestra Señora P&P | 263 | | 94 | | 0.26 | | 0.89 | | 1.70 | | 794 | | 1.5 | | 5.1 | | 9.9 |
| San Rafael | | | | | | | | | | | | | | | | | |
| Proven | 1,585 | | 110 | | | | 1.83 | | 4.15 | | 5,623 | | | | 63.9 | | 145.0 |
| Probable | 2,156 | | 93 | | | | 1.59 | | 4.05 | | 6,476 | | | | 75.7 | | 192.6 |
| San Rafael P&P | 3,741 | | 101 | | | | 1.69 | | 4.09 | | 12,100 | | | | 139.6 | | 337.6 |
| Total Cosalá P&P | 4,004 | | 100 | | 0.02 | | 1.64 | | 3.94 | | 12,894 | | 1.5 | | 144.8 | | 347.5 |
| Galena | | | | | | | | | | | | | | | | | |
| Silver-Copper | | | | | | | | | | | | | | | | | |
| Proven | 162 | | 506 | | 0.44 | | | | | | 2,635 | | 1.6 | | | | |
| Probable | 237 | | 584 | | 0.42 | | | | | | 4,453 | | 2.2 | | | | |
| Silver-Copper P&P | 399 | | 552 | | 0.43 | | | | | | 7,088 | | 3.8 | | | | |
| Silver-Lead | | | | | | | | | | | | | | | | | |
| Proven | 443 | | 268 | | | | 8.35 | | | | 3,817 | | | | 81.5 | | |
| Probable | 512 | | 273 | | | | 8.48 | | | | 4,491 | | | | 95.6 | | |
| Silver-Lead P&P | 954 | | 271 | | | | 8.42 | | | | 8,308 | | | | 177.1 | | |
| Total Galena P&P | 1,354 | | 354 | | 0.13 | | 5.93 | | | | 15,396 | | 3.8 | | 177.1 | | |
| TOTAL P&P | 5,358 | | 164 | | 0.04 | | 2.73 | | 2.94 | | 28,290 | | 5.2 | | 321.9 | | 347.5 |
| 1. | CIM Definition Standards were followed for Mineral Reserve estimates. |
| 2. | Mineral Reserves are estimated at a NSR cut-off value of US$40/tonne at Nuestra Señora, US$54/tonne at San Rafael and US$190/tonne at Galena. The NSR cut-off is calculated using recent operating results for recoveries, off-site concentrate costs, and on-site operating costs. |
| 3. | Mineral Reserves are estimated using metal prices of US$16.00/oz Ag, $2.50/lb Cu, $0.90/lb Pb and $0.90/lb Zn. |
| 4. | A minimum mining width of 4.5 feet was used for estimating Galena Reserves, with a minimum additional dilution of 0.5 feet from both the hanging wall and footwall. A mining recovery of 95% was used to reflect the selective nature of the mining methods used at the operation. A mining recovery of 90% was used for estimating Mineral Reserves at Nuestra Señora and San Rafael to reflect the mining methods used at the operations. |
| 5. | Numbers may not add due to rounding. |
Measured and Indicated Mineral Resources (Exclusive of Mineral Reserves) at June 30, 2017
| | | Grade | Contained Metal |
| | Tonnes | | Silver | | Copper | | Lead | | Zinc | | Silver | | Copper | | Lead | | Zinc |
| | 000’s | | g/t | | % | | % | | % | | koz | | Mlbs | | Mlbs | | Mlbs |
| Cosalá | | | | | | | | | | | | | | | | | |
| Nuestra Señora | | | | | | | | | | | | | | | | | |
| Measured | 257 | | 85 | | 0.16 | | 0.84 | | 1.76 | | 700 | | 0.9 | | 4.8 | | 10.0 |
| Indicated | 1,779 | | 89 | | 0.20 | | 0.81 | | 1.74 | | 5,069 | | 7.7 | | 31.9 | | 68.1 |
| Nuestra Señora M&I | 2,036 | | 88 | | 0.19 | | 0.82 | | 1.74 | | 5,769 | | 8.6 | | 36.7 | | 78.0 |
| San Rafael | | | | | | | | | | | | | | | | | |
| Measured | 1,233 | | 110 | | | | 0.95 | | 2.15 | | 4,345 | | | | 25.7 | | 58.3 |
| Indicated | 1,641 | | 88 | | | | 0.93 | | 2.08 | | 4,628 | | | | 33.5 | | 75.3 |
| San Rafael M&I | 2,874 | | 97 | | | | 0.9 | | 2.11 | | 8,973 | | | | 59.2 | | 133.6 |
| Zone 120 | | | | | | | | | | | | | | | | | |
| Measured | 0 | | | | | | | | | | | | | | | | |
| Indicated | 2,090 | | 187 | | 0.48 | | | | | | 12,569 | | 22.3 | | | | |
| Zone 120 M&I | 2,090 | | 187 | | 0.48 | | | | | | 12,569 | | 22.3 | | | | |
| El Cajón | | | | | | | | | | | | | | | | | |
| Measured | 0 | | | | | | | | | | | | | | | | |
| Indicated | 1,003 | | 177 | | 0.55 | | | | | | 5,719 | | 12.2 | | | | |
| El Cajón M&I | 1,003 | | 177 | | 0.55 | | | | | | 5,719 | | 12.2 | | | | |
| Total Cosalá M&I | 8,003 | | 128 | | 0.24 | | 0.54 | | 1.20 | | 33,030 | | 43.1 | | 95.9 | | 211.6 |
| Galena | | | | | | | | | | | | | | | | | |
| Silver-Copper | | | | | | | | | | | | | | | | | |
| Measured | 220 | | 583 | | 0.70 | | | | | | 4,117 | | 3.4 | | | | |
| Indicated | 502 | | 626 | | 0.61 | | | | | | 10,115 | | 6.7 | | | | |
| Silver-Copper M&I | 722 | | 613 | | 0.63 | | | | | | 14,231 | | 10.1 | | | | |
| Silver-Lead | | | | | | | | | | | | | | | | | |
| Measured | 437 | | 282 | | | | 9.18 | | | | 3,962 | | | | 88.3 | | |
| Indicated | 750 | | 276 | | | | 9.01 | | | | 6,661 | | | | 149.0 | | |
| Silver-Lead M&I | 1,187 | | 278 | | | | 9.07 | | | | 10,623 | | | | 237.3 | | |
| Total Galena M&I | 1,909 | | 405 | | 0.24 | | 5.64 | | | | 24,854 | | 10.1 | | 237.3 | | |
| TOTAL M&I | 9,912 | | 182 | | 0.24 | | 1.52 | | 0.97 | | 57,884 | | 53.1 | | 333.2 | | 211.6 |
| 1. | CIM Definition Standards were followed for Mineral Resource estimates. |
| 2. | Mineral Resources are estimated at a NSR cut-off value of US$34/tonne at San Rafael, US$40/tonne at Zone 120, US$30/tonne at El Cajón and US$190/tonne at Galena. Mineral Resources at Nuestra Señora are estimated at a 90 g/t silver equivalent grade. NSR and silver equivalent cut-offs were calculated using recent or expected operating results for recoveries, off-site concentrate costs, and on-site operating costs. |
| 3. | Mineral Resources are estimated using metal prices of US$18.00/oz Ag, US$3.00/lb Cu, US$1.05/lb Pb and US$1.05/lb Zn. |
| 4. | Numbers may not add due to rounding. |
Inferred Mineral Resources at June 30, 2017
| | | | Grade | Contained Metal |
| | Tonnes | | Silver | | Copper | | Lead | | Zinc | | Silver | | Copper | | Lead | | Zinc |
| | 000’s | | g/t | | % | | % | | % | | koz | | Mlbs | | Mlbs | | Mlbs |
| Cosalá | | | | | | | | | | | | | | | | | |
| Nuestra Señora | 2,009 | | 101 | | 0.26 | | 0.83 | | 1.90 | | 6,539 | | 11.3 | | 37.0 | | 84.3 |
| San Rafael | 461 | | 166 | | | | 2.20 | | 0.39 | | 2,455 | | | | 22.4 | | 4.0 |
| Zone 120 | 1,379 | | 216 | | 0.59 | | | | | | 9,590 | | 17.9 | | | | |
| El Cajón | 278 | | 103 | | 0.18 | | | | | | 923 | | 1.1 | | | | |
| Total Cosalá Inferred | 4,127 | | 147 | | 0.33 | | 0.65 | | 0.97 | | 19,507 | | 30.3 | | 59.4 | | 88.3 |
| Galena | | | | | | | | | | | | | | | | | |
| Inferred Silver-Copper | 316 | | 671 | | 0.74 | | | | | | 6,815 | | 5.1 | | | | |
| Inferred Silver-Lead | 1,351 | | 240 | | | | 9.24 | | | | 10,409 | | | | 275.3 | | |
| Total Galena Inferred | 1,667 | | 321 | | 0.14 | | 7.49 | | | | 17,224 | | 5.1 | | 275.3 | | |
| TOTAL INFERRED | 5,794 | | 197 | | 0.28 | | 2.62 | | 0.69 | | 36,731 | | 35.4 | | 334.7 | | 88.3 |
* Refer to the Notes in the previous table.
The Mineral Resource estimate for the Cosalá Operations is based on block models prepared by independent mineral resource consultants. The Nuestra Señora Mineral Reserve and Resource estimate was prepared by Company personnel under the supervision of James Stonehouse, SME-RG, a Qualified Person for the purpose of NI 43-101. The San Rafael, Zone 120 and El Cajón Mineral Resource estimates were prepared by Paul Tietz, C.P.G. who is an independent consultant and Qualified Person for the purpose of NI 43-101. The San Rafael Mineral Reserve estimate was prepared by Company personnel under the supervision of Shawn Wilson, P.Eng., a Qualified Person for the purpose of NI 43-101.
The Mineral Resource estimate for the Galena Complex was prepared using a combination of block modelling and the accumulation method. The Mineral Resource estimate was prepared by Company personnel under the supervision of Aaron Gross, C.P.G., a Qualified Person for the purpose of NI 43-101. The Mineral Reserve estimate was prepared by Company personnel under the supervision of Shawn Wilson, P.Eng., a Qualified Person for the purpose of NI 43-101.
Varying cut-off grades have been used depending on the mine, methods of extraction and type of ore contained in the reserves. Mineral resource metal grades and material densities have been estimated using industry-standard methods appropriate for each mineral project with support of various commercially available mining software packages. The Company’s normal data verification procedures have been employed in connection with the calculations. Verification procedures include industry standard quality control practices. Sampling, analytical and test data underlying the stated mineral resources and reserves have been verified by employees of the Company under the supervision of Qualified Persons, for purposes of NI 43-101 and/or independent Qualified Persons. Additional details regarding Mineral Reserve and Mineral Resource estimation, classification, reporting parameters, key assumptions and associated risks for each of the Company’s mineral properties are provided in the respective NI 43-101 Technical Reports which are available at www.sedar.com.
Cosalá Operations
The Company has historically addressed disclosure relating to the San Rafael deposit together with the Nuestra Señora and El Cajón deposits as all are within Americas land holdings in the Cosalá mining district. Recent work programs, however, have been focused on the San Rafael area. The Company does not view the El Cajón deposit on its own as material at this time and, as such, references in this report to the El Cajón deposit are provided only for historical completeness. The San Rafael mine will operate independently of the Nuestra Señora mine and will not share infrastructure with Nuestra Señora except as discussed herein. Although a separate and distinct project, the operations of the Nuestra Señora mine provide Americas Silver with insight into processing and mining operations in the district that will be relevant in operating the San Rafael mine and as such certain references to the Nuestra Señora mine have been used in the San Rafael Technical Report for that purpose.
Description, Location, Access, Ownership and Permits
The Cosalá mining district is located in the east-central portion of the state of Sinaloa, Mexico. The town of Cosalá is about 240km by road north of Mazatlán. The Nuestra Señora mine is located 3.5km southeast of the mill and San Rafael is located about 12km north- northeast of the town of Cosalá. The district is accessible from the town of Cosalá via rural paved and dirt roads. All primary access roads can accommodate standard highway vehicles.
At the end of 2017, the Company’s property in the Cosalá mining district, on which the San Rafael mine is located, consists of 67 mineral concessions that cover approximately 19,386ha. The concessions occur in two non-contiguous blocks, and within both blocks are a number of areas of land that the Company does not control. One such concession not controlled by the Company lies immediately adjacent to the southwest boundary of the San Rafael deposit. Other deposits within the Company’s property are El Cajón, which adjoins San Rafael to the southwest, and Nuestra Señora, a dormant mine located approximately 12km to the southeast of San Rafael.
The Company owns the concessions through its wholly owned subsidiaries, Minera Cosalá, S.A. de C.V. and Minera Platte. Although five of the 67 concessions are subject to a 1.25% net smelter return royalty, the San Rafael resources do not extend onto any of these five concessions.
All necessary operating and environmental permits for current operations are in place. The Cosalá Operations are subject to applicable environmental regulation. For further detail for further detail see “Description of the Business – Environmental Protection” and “Risk Factors – Government Regulation and Environmental Compliance”.
History and Exploration
The Cosalá mining district, where polymetallic mineralization occurs as primarily skarn-related deposits, was discovered and locally worked by the Spanish approximately 400 years ago. At the turn of the 19th century, French engineers reportedly developed and worked the Nuestra Señora mine with a 10 stamp mill that produced 800 to 1,000kg of silver per month. In 1949, Asarco Mexicana (“ASARCO”) purchased the Nuestra Señora mine and also mined material from the La Estrella mine, located one kilometer north of San Rafael. In addition, ASARCO did some work at El Cajón, sending the material to the mill at La Estrella. In or about February 1965, ASARCO ceased production and subsequently removed all of the mining equipment. ASARCO let its concessions at Nuestra Señora lapse in 1980.
Following a period of minimal inactivity, Scorpio Mining acquired the right to earn 100% interest in the Nuestra Señora property in 1998 and began an exploration program there in 1999. Since 1999, Scorpio Mining’s exploration at the Nuestra Señora property has included airborne magnetic, electromagnetic, and radiometric surveying; ground magnetic and electromagnetic surveying; geologic mapping; and sampling. Scorpio Mining began underground mine development at Candelaria in 2004 and in the Nuestra Señora Main Zone in 2005. The mill components were moved on-site starting in 2006, and the mill began producing concentrates in 2008.
Since 1965, several small Mexican mining operators have worked the mines in the vicinity of San Rafael and El Cajón. Modern exploration was started by Industrias Peñoles, S.A. de C.V. (“Peñoles”) in the late 1970s into the 1980s and again in 1999. In 1995, Minas de Oro Hemlo, S.A. de C.V. (“Hemlo”) conducted mapping, sampling, and road building, and drilled 15 reverse circulation holes primarily within the San Rafael area exploring for precious metals. In early 2000, Noranda Exploraciones Mexico, S.A. de C.V. (“Noranda”) completed three IP-resistivity lines over the San Rafael zone in the area of the previous Hemlo drilling. Noranda drilled seven core holes at San Rafael totaling 1,348m in 2001.
Platte River Gold Inc. (“PRG”) became interested in the San Rafael-El Cajón-La Verde area in early 2004. On June 1, 2004, PRG, through their Mexican subsidiary, signed a four-year option agreement for 100% of the exploration and mining concessions along with all of the infrastructure and mining equipment used at the La Verde mine and project area, excluding the mill in Cosalá. PRG made the final payment and acquired the property in July 2008. During their tenure, PRG conducted induced polarization, resistivity, and ground magnetic surveying; geological mapping; chip-channel sampling of outcrops and road cuts; and the drilling of 371 holes. They tested 15 different targets, but the focus of their work was on San Rafael and El Cajón.
Scorpio acquired PRG in 2010, thereby adding the San Rafael and El Cajón projects to their previously acquired Nuestra Señora project. On March 16, 2011, Scorpio acquired five mineral concessions from Grupo Industrial Minera Mexico S.A. de C.V. in the Cosalá district immediately adjacent to its existing concessions. From 2010 through July 20, 2012, Scorpio’s exploration in the San Rafael and El Cajón area consisted of mapping and the drilling of 282 core holes totaling 35,296m. The focus of the work was on the San Rafael and El Cajón deposits. Scorpio also drilled four other targets including surface and underground drilling at the historic La Verde mine area. In 2010, Quantec Geoscience Ltd. completed a 48-line-kilometer Titan-24 DC/IP geophysical survey centered over the San Rafael area; results of subsequent drilling to test some of the anomalies were not encouraging.
In May 2015 Scorpio changed its name to Americas Silver Corporation and has commissioned San Rafael mine.
Geology and Mineralization
The Cosalá mining district lies along the western edge of the Sierra Madre Occidental, an extensive Tertiary volcanic province covering approximately 800,000km2. Mineralization within the Cosalá mining district is related to granodioritic or granitic intrusions emplaced between 140 and 45 million years ago into Cretaceous sedimentary rocks that overlie older basement terranes.
The property lies within a sub-circular inlier of Cretaceous limestone approximately 10km in diameter situated in the eastern part of the 139 to 45 Ma-old Sinaloa Batholith. Contact metamorphism of the limestones created re-crystallized limestone, marble, and skarn. Initial skarn development in the area was contemporaneous with emplacement of the batholith; however, there were several pulses of magmatic and hydrothermal activity. Carbonate replacement-style mantos, veins, chimneys, chimney breccias, and mineralized exoskarn and endoskarn occur within limestone and felsic and lesser mafic intrusions. Pyrite, sphalerite, chalcopyrite, galena, and lesser tetrahedrite are the principal sulphide minerals.
In the San Rafael-El Cajón area, Cretaceous limestone, commonly recrystallized and marbleized but only locally skarn-altered, is exposed within windows in Tertiary volcanic rocks. Massive sulfide Main Zone mineralization at San Rafael occurs primarily along the contact of dacite tuff with Cretaceous limestone, with additional mineralization within the dacite in the Upper Zone and within skarn-altered limestone in the Zone 120. The protolith at El Cajón is altered limestone, thought to be of Cretaceous age. San Rafael contains silver, lead, and zinc mineralization with minor gold and copper. The main minerals are pyrite, pyrrhotite, sphalerite, and galena with minor marcasite, chalcopyrite, and magnetite. The El Cajón-type of mineralization, also seen at the nearby Zone 120 deposit, is related to skarn alteration of calcareous sediments and occurs as both mantos and chimneys. It consists of silver-copper-gold mineralization in the form of chalcopyrite and tetrahedrite with minor pyrite, galena, sphalerite, arsenopyrite, chalcocite, jalpaite, native silver, copper, and bismuth.
Mining Method, Processing and Local Resources
San Rafael is an underground project utilizing a cut-and-fill mining method with conventional flotation to produce two concentrates, lead and zinc, with silver by-products.
Reserves have been based on a cut-and-fill mining method. Most of the fill material will be from development. It is not anticipated to use cement with the fill material since no mining against fill will be undertaken. To provide additional ground support pillars will be left in place as required. Cut-and-fill stopes were designed using Measured and Indicated blocks above a US$54 per tonne NSR cutoff. Development designs were created to provide mining access to the different cut-and-fill stopes. The cut-and-fill stopes are based on panel sizes up to 50m long and 16m high.
The Cosalá Operations has established necessary sources of water, power, waste disposal and tailings storage for current and planned operations. The Company has the necessary processing facilities and holds sufficient surface rights to conduct operations. Ore is hauled by third-party contractors from San Rafael to the Los Braceros process plant, a road distance of approximately 15km. The Los Braceros process plant is a conventional flotation mill that produces zinc, lead and copper concentrates. Silver is a payable metal in all three products. Design capacity is 1,600 tonnes per day through parallel primary ball mills feeding a single flotation circuit.
Metallurgical Testing
Metallurgical testing of material from San Rafael was conducted in seven main phases over a period of roughly ten years (2005 – 2015) on a variety of composites. Both bench-top and locked-cycle flotation testing conducted on the San Rafael Main Zone sulfide mineralization has shown this material can be successfully processed using a sequential flotation process to produce separate silver-lead and zinc concentrate products. Lead head grades ranged from 1.22% to 2.09% while zinc head grades ranged from 2.99% to 4.27%.
The test work confirmed a conventional process approach would serve adequately with crushing and grinding followed by lead rougher floatation, in turn followed by zinc flotation. It was confirmed that a primary grind of 80% passing 100 to 110μm would be suitable for commercial operation and data was obtained on reagent dosage.
Given the above particle size target, the anticipated lead and zinc recoveries are expected to exceed 75% and 83%, respectively, with total silver recovery of approximately 45% to 50%.
Capital and Operating Costs
Americas Silver has extensive experience with underground mining and processing at the nearby Nuestra Señora mine and Cosalá (Los Braceros) process plant. Costs have been estimated using a combination of real world experience at Nuestra Señora and the Los Braceros plant and first principle costing. Note that the cost for cut-and-fill mining is based on performance at Nuestra Señora, and reflects the use of development waste fill without addition of cement.
Operating and capital costs estimates are shown in the following two tables.
| San Rafael | US$/t |
| Operating Costs | Processed |
| Mining | 21.15 |
| Processing | 13.67 |
| Technical Services | 1.80 |
| G&A | 6.07 |
| Total Operating Cost | 42.69 |
| San Rafael | Initial | Sustaining | Total |
| Capital Costs | K USD | K USD | K USD |
| Mine Development | 6,072 | 20,704 | 26,776 |
| Mine Infrastructure | 7,855 | 14,678 | 22,533 |
| Process Infrastructure | 2,011 | 1,777 | 3,788 |
| Other | 340 | 1,883 | 2,223 |
| 10% Contingency | 1,021 | 370 | 1,391 |
| Working | 4,154 | (4,154) | - |
| Total Capital Cost | 21,452 | 35,259 | 56,711 |
Please see “General Development of the Business – Operations – Three Year History 2017” for the Company’s updates on the San Rafael project.
Galena Complex
The Galena Complex consists of the operating Galena mine with two shafts (Galena and #3), the Galena processing plant, the idle Coeur mine with one shaft (Coeur), the Coeur processing plant (currently on care and maintenance), and the Caladay exploration property with one shaft. The Galena mine has operated since 1885, and between 1953 and 2016 the Galena Complex has yielded approximately 230 million ounces of silver along with associated amounts of lead and copper. Galena produces a nominal 550 ton per day (“stpd”) of ore. The flotation processing plant located at Galena has a capacity of 700 tpd. It is configured to produce a single flotation concentrate (either silver-lead or silver-copper concentrates).
Property Description and Location
The Galena Complex is located in the Coeur d’Alene Mining District in Shoshone County, Idaho, a prolific silver producing district since the mid-1800s, located two miles west of the town of Wallace. Spokane, Washington is about 75 miles to the west and Missoula, Montana is about 110 miles to the east. The property is about 1 mile south of Interstate Highway I-90.
The property covers 8,915 acres, over an area about 9 miles long east to west, and 2 miles wide north to south. The Galena Shaft is located near the center of the property and lies at 47ø28’39” N latitude and 115ø58’01” W longitude, with a collar elevation of 3,042 feet above sea level.
Land Tenure and Ownership
The Company’s land position at the Galena Complex has changed since the previous Technical Report due to the sale of part of holdings on the western end of the property. The property is a combination of patented, unpatented and fee lands that are owned or leased by the Company’s subsidiaries. The total area covered by all the land owned, controlled or leased by the Company is 8,915 acres. All properties are in good standing with respect to title and current taxes. Net smelter return royalty agreements exist on some leased properties, but no production has been realized from any of the leased claims, and none is contemplated in the life of mine plan (“LOMP”). All necessary operating and environmental permits are current. All production, reserves and resources are on patented mining claims owned by the Company. See also “Risk Factors – Mining Property and Title Risks” and “Risk Factors – Surface Rights and Access”.
Physiography, Accessibility, Climate, Local Resources and Infrastructure
The Coeur d’Alene District lies in the Bitterroot Mountains, a part of the Northern Rocky Mountains. The Galena area is one of high relief and rugged terrain, with many slopes at angles of 30% or greater. Valley flats are restricted to the main stream and the lower reaches of some major tributaries; in only a few places do the flats exceed half a mile in width. Ridge crests range in altitude from 6,000 to 7,000 feet. Thus the maximum relief between valley floors and adjacent ridge crests and peaks ranges from 3,000 to 4,000 feet. The climate of the Coeur d’Alene District is strongly seasonal with warm summers and hard winters. Mining and exploration activities take place year round.
The Company’s land position lies along and immediately south of the main freeway through the area, Interstate Highway I-90. All the centers of population and Americas Silver’s property are accessible by main highways, hard surfaced roads or well-graded gravel roads. Personnel are sourced from nearby towns and cities.
The Company has established necessary sources of water, power, waste disposal and tailings storage for current and planned operations. The Company has the necessary processing facilities and holds sufficient surface rights to conduct its operations.
Existing Infrastructure
The Company has established necessary sources of water, power, waste disposal and tailings storage for current and planned operations. The Company has the necessary processing facilities and holds sufficient surface rights to conduct operations. The surface and underground infrastructure at the Galena Complex include the following:
| • | Galena processing facility |
| • | Galena and #3 shafts equipped for hoisting |
| • | Coeur processing facility |
| • | Coeur shaft equipped for hoisting |
| • | Caladay shaft for ventilation only |
| • | A tailings storage facility located near the town of Osburn |
| • | Shops, offices, warehouse facilities and a mine dry |
| • | Inter-connected level development connecting the 4 shafts |
History
The Galena Complex is situated in the center of the Coeur d’Alene Mining District of North Idaho. Placer gold was first discovered in the district in 1858. By 1860, the gold-rush prospectors had also discovered the silver-lead veins in the district.
Prior to Americas Silver, companies owning all or part of the Galena Complex properties at various times since 1887 have included Killbuck Mining, Galena Mining, Callahan Mines, Federal Mining and Smelting, Vulcan, ASARCO, Day Mines, Coeur d’Alene Mines, U.S. Silver, and U.S. Silver and Gold Inc.
Since 1953, the Galena and Coeur Mines have yielded approximately 230 million ounces of silver, 159 million pounds of copper and 69 million pounds of lead from 11.8 million tons of combined silver-copper and silver-lead ore. More than 80% of the total silver has come from the Galena mine.
The Galena mine has a long history dating back to 1887, but the modern history and mining commenced in 1947 under the management of ASARCO. From 1953 to 2013 the Galena mine primarily mined silver-copper ore with minor production of silver-lead ore. Beginning in 2014, silver-lead ore became the predominant ore type.
Total production from the Galena mine from 1953 to the end of 2015 was approximately 189.5 million ounces of silver from 9.3 million tons of ore. Average grade of the silver-copper ore was 21.3 opt Ag and 0.72% Cu. Average grade of the silver-lead ore was 5.1 opt Ag and 6.0% Pb. This excludes production from the Coeur mine, which is now part of the Galena Complex.
The Coeur mine shaft was collared in 1963 by Coeur d’Alene Mines. The mine produced continuously from 1976 through 1991, and again from 1996 through 1997. The total production from the Coeur mine sent to the process plants was approximately 40.5 million ounces of silver from 2.5 million tons of ore. Average ore grades were 16.5 opt Ag and 0.67% Cu.
The Coeur mine was put on care and maintenance from 1997 to 2007, when work was begun to rehabilitate the Coeur mine 3400 Level and later the Coeur shaft. The Coeur mill was re-started in September 2007 to process silver-lead ore from the Galena mine. By early 2008 silver-lead ore was trammed from the Galena mine 3700 Level to the Coeur Shaft (Coeur 3400 Level) and was hoisted up the Coeur shaft for processing at the Coeur mill. During 2012, the Coeur mine was rehabilitated for mining, which started in September 2012 but underground work ceased in 2014.
The Caladay property began in the mid-1960s as a joint venture involving Callahan Mining, ASARCO, and Day Mines (hence the name “Caladay”). The joint venture sank a 5,100 foot shaft during the early 1980s on the east end of the Coeur d’Alene Silver Belt, just east of the Galena property. From the 4900 Level of the Caladay shaft an exploration drift was developed east and west. The western drift intersects the Galena mine’s 4900 Level.
The joint venture was purchased by Coeur d’Alene Mines Corp in the 1980s. The Caladay shaft and workings are currently used as ventilation exhaust for the Galena workings.
After the 1980s no exploration was undertaken on the Caladay property until 2012, when U.S. Silver and Gold Inc. drilled several thousand feet and defined Mineral Resources as discussed in section 14 of the Galena Technical Report.
Geology and Mineralization
The Galena Complex and most other deposits of the Coeur d’Alene Mining District are hosted by metamorphosed Precambrian sedimentary rocks which are part of the Belt Supergroup. The strata are composed primarily of fine-grained quartz and clay (the clay now metamorphosed to fine-grained white mica, or sericite). Three major rock types are generally recognized; vitreous quartzite, which is primarily metamorphosed fine-grained quartz sand, siltite-argillite, which is silt-sized quartz grains that are completely separated from each other by a large proportion of sericite, and sericitic quartzite which contains intermediate proportions of quartz and sericite.
Mineralization at the Galena Complex occurs in steeply dipping fissure filling veins, and in wide disseminated zones, all occurring near four major fracture systems and three major faults. The veins generally strike east-west and northeast-southwest, and range in thickness from a few inches to over fifteen feet.
The vein mineralization is of two distinct types: silver-copper mineralization containing tetrahedrite and lesser chalcopyrite as the principal economic minerals; and silver-lead mineralization dominated by argentiferous galena. Gangues in both types are mainly siderite, with varying amounts of pyrite and quartz. The silver-lead mineralization occurs both as well-defined, steeply-dipping, relatively narrow veins, and as wider zones of disseminated and stringer mineralization. The latter type occurs predominately in the eastern part of the property, in the Caladay Zone, on and adjacent to the former Caladay property.
Mining Methods
The current mining methods used at the Galena Complex are conventional cut and fill and mechanized cut and fill. Conventional cut and fill is done using the overhand method, utilizing hydraulically placed tailings (“sand fill”) as backfill, typically without the addition of cement. Mechanized cut and fill is done using both overhand and underhand methods. In the case of the overhand method, sand fill is used as backfill, typically without the addition of cement. For the underhand method, cement is typically added to the sand fill in order to provide the required strength to work underneath the placed backfill. Ore is hauled to either the Galena or #3 shafts via tracked locomotives and rail cars. Ore is loaded into the rail cars directly via ore chutes in stopes, pneumatic cavos, or in mechanized stoping areas, by diesel scooptrams/Load Haul Dump equipment. Waste associated with primary and secondary development is typically kept underground and placed as fill in old headings and open stopes. As needed, it can be hauled to the shaft, skipped to surface and placed on the existing surface waste rock storage facility. Ore is currently skipped to surface from several levels of the mine using either the #3 or Galena hoists. The Coeur mine and shaft is currently on care and maintenance. The Coeur shaft is used for ventilation purposes and provides an alternative means of egress.
Mineral Processing
The Galena Complex consists of two processing plants, Galena and Coeur. The Coeur plant has been on care and maintenance since April 2016. The Galena processing plant follows a conventional flowsheet:
| • | Tailings Pumping for Sand Fill |
| • | Tailings Pumping for Osburn Tailings Storage Facility |
Overall recoveries achieved in 2015 production at the Galena processing plant were approximately 95% for silver, 90% for lead and 96% for copper while processing ore from both the silver- lead and silver-copper zones. Although only a silver-lead concentrate is currently produced, the LOMP does include future mining from the silver-copper veins, at which time a silver- copper concentrate will be produced again.
Project Infrastructure
The Galena Complex has produced for 130 years with only minor interruption. There are four shafts on the property of which the Galena, #3 and Coeur are equipped for hoisting. The #3 shaft currently serves as the main production hoist while the Galena shaft serves as the primary personnel, equipment and supply hoist.
Surface facilities other than the processing plants at both the Galena and Coeur Mines include compressor houses, mine dry, mine and administrative offices, warehouses, timber framing yard, parking areas, hoist houses and headframes, a core storage facility, electrical power lines and substations for both mines and a modern telecommunications system.
Primary utilities for the Galena Complex include fixed installations for main and auxiliary ventilation, water pumping systems, electrical distribution and a clean water supply. In addition, there are mine and surface water treatment circuits.
The tailings storage facility, known as the Osburn Tailings Impoundment, is located adjacent to the town of Osburn, approximately 2 miles from the Galena processing plant.
Markets
The principal commodities at the Galena Complex are freely traded, at prices that are widely known, so that prospects for sale of any production are virtually assured, subject to achieving product specifications.
As per industry norms for silver-lead and silver-copper concentrates, penalty charges are incurred for various deleterious elements when above specified levels. There are no known “hard caps” currently in place with any of the existing off-take agreements that would result in the concentrates not being readily saleable.
Permitting
The Company has all material permits required to operate the mines, processing plants and tailing storage facility comprising the Galena Complex as currently contemplated.
Capital and Operating Cost Estimates
Capital cost estimates for the Galena Complex are based on stated reserves. The sustaining capital costs total $36 million over a 7 year mine life, including mine development, mine/plant infrastructure, equipment costs, plant costs and tailings management.
In addition to sustaining capital costs, reclamation and closure costs are estimated at $2.84 million. This estimate covers reclamation and closure of the Osburn Tailings Impoundment, re-sloping and vegetation of the waste dumps and other surface disturbances and ongoing site monitoring.
Operating costs in the LOMP are based on recent operating history and average approximately $29 million per year. The table below shows the unit operating costs.
| Galena Complex | US$/ton |
| Operating Costs | Processed |
| Mining | 80.00 |
| Processing | 12.00 |
| Exploration | 2.00 |
| G&A | 53.00 |
| Total Operating Cost | 147.00 |
Please see “General Development of the Business – Operations – Three Year History 2017” for the Company’s updates on the Galena Complex
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RISK FACTORS
The business of the Company is subject to a substantial number of risks and uncertainties. In addition to considering the information disclosed in the financial statements and in the other publicly filed documentation regarding the Company available at www.sedar.com, the reader should carefully consider the following information. Any of these risk elements could have material adverse effects on the business of the Company. See “Note 19 – Financial Risk Management” of the Company’s audited consolidated financial statements for the year ended December 31, 2017.
Risks Associated with Market Fluctuations in Commodity Prices
The majority of the Company’s revenue is derived from the sale of silver, zinc, lead and copper contained in concentrates. Fluctuations in the prices of these commodities represent one of the most significant factors affecting the Company’s results of operations and profitability. If the Company experiences low silver, zinc, lead and copper prices, it may result in decreased revenues and decreased net income, or losses, and may negatively affect the Company’s business.
The market price for silver, zinc, lead and copper continues to be volatile and is influenced by a number of factors, including, among others, levels of supply and demand, global or regional consumptive patterns, sales by government holders, metal stock levels maintained by producers and others, increased production due to new mine developments, improved mining and production methods, speculative trading activities, inventory carrying costs, availability and costs of metal substitutes, international economic and political conditions, interest rates and the relative exchange rate of the U.S. dollar with other major currencies. The aggregate effect of such factors (all of which are beyond the control of the Company) is impossible to predict with any degree of accuracy, and as such, the Company can provide no assurances that it can effectively manage such factors. In addition, the price of silver, for example, has on occasion been subject to very rapid short-term changes due to speculative activities. Fluctuations in silver and other commodity prices may materially adversely affect the Company’s financial performance or results of operations. The world market price of commodities has fluctuated during the last several years. Declining market prices for silver and other metals could have a material adverse effect on the Company’s results of operations and profitability. If the market price of silver and other commodities falls significantly from its current levels, the operation of the Company’s properties may be rendered uneconomic and such operation and exploitation may be suspended or delayed.
In particular, if applicable commodity prices are depressed for a sustained period and net losses accumulate, the Company may be forced to suspend some or all of its mining until the price increases, and record asset impairment write-downs. Any lost revenues, continued or increased net losses, or asset impairment write-downs would adversely affect the Company’s results of operations.
The Company is Dependent on the Success of the San Rafael project at its Cosalá Operations and the Galena Complex which are both exposed to Operational Risks
The principal mineral projects of the Company are the San Rafael project at its Cosalá Operations and the Galena Complex. The Company is primarily dependent upon the success of these properties as sources of future revenue and profits. Commercial production and operations at San Rafael will require the commitment of resources for operating expenses and capital expenditures, which may increase subsequently as needed, and for consultants, personnel and equipment associated primarily with commercial production. In addition, the Company’s other mining operations, exploration and development will require the commitment of additional resources for operating expenses and capital expenditures, which may increase subsequently as needed, and for consultants, personnel and equipment associated with advancing exploration, development and commercial production. The amounts and timing of expenditures will depend on, among other things, the results of commercial production, the progress of ongoing exploration and development, the results of consultants’ analysis and recommendations and other factors, many of which are beyond the Company’s control.
Substantial risks are associated with mining and milling operations. The Company’s commercial operations are subject to all the usual hazards and risks normally encountered in the exploration, development and production of silver, zinc, lead and copper, including, among other things: unusual and unexpected geologic formations, inclement weather conditions, seismic activity, rock bursts, cave-ins, flooding and other conditions involved in the drilling and removal of material, any of which could result in damage to, or destruction of, mines and other producing facilities, catastrophic damage to property or loss of life, labour disruptions, equipment failure or failure of retaining dams around tailings disposal areas which may result in environmental pollution and legal liability. The Company will take appropriate precautions as are applicable to similar mining operations and in accordance with general industry standards to help mitigate such risks. However, the Company can provide no assurances that its precautions will actually succeed in mitigating, or even reducing the scope of potential exposure to, such operational risks.
Substantial efforts and compliance with regulatory requirements are required to establish mineral reserves through drilling and analysis, to develop metallurgical processes to extract metal and, in the case of development properties, to develop and construct the mining and processing facilities and infrastructure at any site chosen for mining. Shareholders cannot be assured that any reserves or mineralized material acquired or discovered will be in sufficient quantities to justify commercial operations.
There can be no certainty that the Company’s exploration, development and production activities will be commercially successful.
Mineral Reserves and Resources, Development and Production
The estimation of ore reserves is imprecise and depends upon a number of subjective factors. Estimated ore reserves or production guidance may not be realized in actual production. The Company’s operating results may be negatively affected by inaccurate estimates. Reserve estimates are a function of geological and engineering analyses that require the Company to make assumptions about production costs and the market price of silver and other metals. Reserve estimation is based on available data, which may be incomplete, and subject to engineering and geological interpretation, judgment and experience. Market price fluctuations of metals, as well as increased production costs or reduced recovery rates may render ore reserves containing relatively lower grades of mineralization uneconomic and may ultimately result in a restatement of reserves. Moreover, short-term operating factors relating to the ore reserves, such as the need for orderly development of the ore bodies and the processing of new or different ore grades may cause a mining operation to be unprofitable in any particular accounting period. Should the Company encounter mineralization or geologic formations at any of its mines different from those predicted, adjustments of reserve estimates might occur, which could alter mining plans. Either of these alternatives may adversely affect the Company’s actual production and operating results.
The mineral reserve and resource estimates contained or incorporated are only estimates and no assurance can be given that any particular level of recovery of minerals will be realized or that an identified reserve or resource will qualify as a commercially mineable (or viable) deposit which can be legally and economically exploited. The Company relies on laboratory-based recovery models and historical performance of its processing plant to project estimated ultimate recoveries by ore type at optimal grind sizes. Actual recoveries in a commercial mining operation may exceed or fall short of projected laboratory test results. In addition, the grade of mineralization ultimately mined may differ from the one indicated by the drilling results and the difference may be material. There can be no assurance that minerals recovered in small scale laboratory tests will be duplicated in large scale tests under on-site conditions or in production scale operations and there can be no assurance that historical performance of the process plant will continue in the future. Material changes, inaccuracies or reductions in proven and probable reserves or resource estimates, grades, waste-to-ore ratios or recovery rates could have a materially adverse impact on the Company’s future operations, cash flows, earnings, results of operations, financial condition and the economic viability of projects. The estimated proven and probable reserves and resources described herein should not be interpreted as assurances of mine life or of the profitability of future operations.
The Company has engaged internal and expert independent technical consultants to advise it on, among other things, mineral resources and reserves, geotechnical, metallurgy and project engineering. The Company believes that these experts are competent and that they have carried out their work in accordance with all internationally recognized industry standards. If, however, the work conducted by, and the mineral resource and reserve estimates of these experts are ultimately found to be incorrect or inadequate in any material respect, such events could materially and adversely affect the Company’s future operations, cash flows, earnings, results of operations, financial condition and the economic viability of its projects.
The Company’s ability to sustain or increase present production levels depends in part on successful exploration and development of new ore bodies and/or expansion of existing mining operations. Forecasts of future production are estimates based on interpretation and assumptions and actual production may be less than estimated. Mineral exploration involves many risks and is frequently unproductive. If mineralization is discovered, it may take a number of years until production is possible, during which time the economic viability of the project may change. Substantial expenditures are required to establish ore reserves, extract metals from ores and, in the case of new properties, to construct mining and processing facilities and infrastructure at any site chosen for mining. The economic feasibility of any development project is based upon, among other things, estimates of the size and grade of ore reserves, proximity to infrastructures and other resources (such as water and power), metallurgical recoveries, production rates and capital and operating costs of such development projects, and metals prices. Development projects are also subject to the completion of positive technical and economic studies, issuance of necessary permits and receipt of adequate financing, which may be difficult to obtain on terms reasonably acceptable to the Company.
The Company’s future silver, zinc, lead and copper production may decline as a result of an exhaustion of reserves and possible closure of work areas. It is the Company’s business strategy to conduct silver exploration activities at the Company’s existing mining operations as well as at new exploration projects, and to acquire other mining properties and businesses or reserves that possess mineable ore reserves and are expected to become operational in the near future. However, the Company can provide no assurance that its future production will not decline. Accordingly, the Company’s revenues from the sale of concentrates may decline, which may have a material adverse effect on its results of operations.
Global Financial and Economic Conditions
The re-emergence of a global financial crisis or recession or reduced economic activity in the United States, China, India and other industrialized or developing countries, or disruption of key sectors of the economy such as oil and gas, may have a significant effect on the Company’s results of operations or may limit its ability to raise capital through credit and equity markets. The prices of the metals that the Company produces are affected by a number of factors, and it is unknown how these factors may be impacted by a global financial event or developments impacting major industrial or developing countries. Additionally, global economic conditions may cause a long-term decrease in asset values. If such global volatility and market uncertainty were to continue, the Company’s operations and financial condition could be adversely impacted.
Government Regulation and Environmental Compliance
The Company is subject to significant governmental regulations, and costs and delays related to such regulations may have a material adverse effect on the Company’s business.
The Company’s mining activities are subject to extensive federal, state, local and foreign laws and regulations governing environmental protection, natural resources, prospecting, development, production, post-closure reclamation, taxes, labour standards and occupational health and safety laws and regulations including mine safety, toxic substances and other matters related to the Company’s business. The costs associated with compliance with such laws and regulations could be substantial. Possible future laws and regulations, or more restrictive interpretations of current laws and regulations by governmental authorities could cause additional expense, capital expenditures, restrictions on or suspensions of the Company’s operations and delays in the development of the Company’s properties. Moreover, governmental authorities and private parties may bring lawsuits based upon damage to property and injury to persons resulting from the environmental, health and safety impacts of the Company’s past and current operations, which could lead to the imposition of substantial fines, penalties and other civil and criminal sanctions. Substantial costs and liabilities, including for restoring the environment after the closure of mines, are inherent in the Company’s operations. The Company is often required to post surety bonds or cash collateral to secure its reclamation obligations and may be unable to obtain the required surety bonds or may not have the resources to provide cash collateral, and the bonds or collateral may not fully cover the cost of reclamation and any such shortfall could have a material adverse impact on its financial condition. Although the Company believes it is in substantial compliance with applicable laws and regulations, the Company can give no assurance that any such law, regulation, enforcement or private claim will not have a material adverse effect on the Company’s business, financial condition or results of operations.
In the United States, some of the Company’s mining wastes are currently exempt to a limited extent from the extensive set of federal Environmental Protection Agency (the “EPA”) regulations governing hazardous waste under the Resource Conservation and Recovery Act (the “RCRA”). If the exemption is altered and these wastes are designated as hazardous under the RCRA, the Company would be required to expend additional amounts on the handling of such wastes and may be required to make significant expenditures to construct or modify facilities for managing these wastes. In addition, releases of hazardous substances from a mining facility causing contamination in or damage to the environment may result in liability under the Comprehensive Environmental Response, Compensation and Liability Act (the “CERCLA”). Under the CERCLA, the Company may be jointly and severally liable for contamination at or originating from its facilities. Liability under the CERCLA may require the Company to undertake extensive remedial clean-up action or to pay for the government’s clean-up efforts. It can also lead to liability to state and tribal governments for natural resource damages. Additional regulations or requirements are also imposed upon the Company’s operations in Idaho under the federal Clean Water Act (the “CWA”). Airborne emissions are subject to controls under air pollution statutes implementing the Clean Air Act in Idaho. Compliance with the CERCLA, the CWA and state environmental laws could entail significant costs, which could have a material adverse effect on the Company’s operations.
The Company’s mining operations are subject to regulations promulgated by government agencies from time to time. Specifically, the Company’s activities at the Galena Complex are subject to regulation by the U.S. Department of Labor’s Mine Safety and Health Administration and related regulations under applicable legislation and the Company’s activities at the Cosalá Operations projects are subject to regulation by SEMARNAT (defined below), the environmental protection agency of Mexico. Such regulations can result in citations and orders which can entail significant costs or production interruptions and have an adverse impact on the Company’s operations and profitability. SEMARNAT regulations require that an environmental impact statement, known in Mexico as MIA, be prepared by a third-party contractor for submittal to SEMARNAT. Studies required to support the MIA include a detailed analysis of the following areas: soil, water, vegetation, wildlife, cultural resources and socio-economic impacts. The Company must also provide proof of local community support for a project to gain final approval of the MIA.
In the context of environmental permits, including the approval of reclamation plans, the Company must comply with standards and regulations, which involve significant costs and can entail significant delays. Such costs and delays could have an adverse impact on the Company’s operations.
In the ordinary course of business, the Company is required to obtain or renew governmental permits for the operation and expansion of existing mining operations or for the development, construction and commencement of new mining operations. Obtaining or renewing the necessary governmental permits is a complex and time-consuming process involving numerous jurisdictions, which often involves public hearings and costly undertakings. The duration and success of the Company’s efforts to obtain or renew permits are contingent upon many variables not within its control including the interpretation of applicable requirements implemented by the permitting authority. The Company’s ability to obtain, maintain and renew permits and approvals and to successfully develop and operate mines may be adversely affected by real or perceived impacts associated with the Company’s activities or those of other mining companies that affect the environment, human health and safety. Interested parties including governmental agencies and non-governmental organizations or civic groups may seek to prevent issuance of permits and intervene in the process or pursue extensive appeal rights. Past or ongoing violations of laws or regulations involving obtaining or complying with permits could provide a basis to revoke existing permits, deny the issuance of additional permits, or commence a regulatory enforcement action, each of which could have a material adverse impact on the Company’s operations or financial condition. The Company may not be able to obtain or renew permits that are necessary to its operations, or the cost to obtain or renew permits may exceed what the Company believes it can recover from the property once in production. Any unexpected delays or costs associated with the permitting process could delay the development or impede the operation of a mine, which could have a material adverse effect on the Company’s operations and profitability.
Legislative and regulatory measures to address climate change and greenhouse gas emissions are in various phases of consideration. If adopted, such measures could increase the Company’s cost of environmental compliance and also delay or otherwise negatively affect efforts to obtain permits and other regulatory approvals with regard to existing and new facilities. Proposed measures could also result in increased cost of fuel and other consumables used at the Company’s operations. Climate change legislation or regulation may affect the Company’s customers and the market for the metals it produces with effects on prices that are not possible to predict. Adoption of these or similar new environmental regulations or more stringent application of existing regulations may materially increase the Company’s costs, threaten certain operating activities and constrain its expansion opportunities.
Mining Property and Title Risks
Third parties may dispute the Company’s mining claims, which could result in losses affecting the Company’s business. The validity of unpatented mining claims, which constitute a significant portion of the Company’s property holdings in Idaho, is often uncertain and may be contested. Although the Company has attempted to acquire satisfactory title to undeveloped properties, the Company, in accordance with mining industry practice, does not generally obtain title opinions until a decision is made to develop a property. As a result, some titles, particularly titles to undeveloped properties, may be defective. Defective title to any of the Company’s mining claims could result in litigation, insurance claims, and potential losses affecting the Company’s business.
The validity of mining or exploration titles or claims, which constitute most of the Company’s property holdings, can be uncertain and may be contested. No assurance can be given that applicable governments will not revoke or significantly alter the conditions of the applicable exploration and mining titles or claims and that such exploration and mining titles or claims, will not be challenged or impugned by third parties. The Company has not conducted surveys of all the claims in which it holds direct or indirect interests and therefore, the precise area and location of such claims may be in doubt. The Company’s properties may be subject to prior unregistered liens, agreements or transfers, native land claims or undetected title defects.
Surface Rights and Access
The Company has reached various agreements for surface rights and access with certain local groups, including ejidos, for mining exploitation activities, including open pit mining, in the project area of Cosalá Norte. In addition, the Company currently has formal agreements for surface access with all ejidos on whose land its exploration activities are being performed. These agreements are valid for several years and are regularly reviewed in terms of the appropriate level of compensation for the level of work being carried out. The Nuestra Señora process facility is located on land previously purchased by the Company and is not exposed to disruptions by third party ownership claims.
For future activities, the Company will need to negotiate with ejido and non-ejido members, as a group and individually, to reach agreements for additional access and surface rights. Negotiations with ejidos can become time-consuming if demands for compensation become unreasonable. There can be no guarantee that the Company will be able to negotiate satisfactory agreements with any such existing members for such access and surface rights, and therefore it may be unable to carry out planned mining activities. In addition, in circumstances where access is denied, or no agreement can be reached, the Company may need to rely on the assistance of local officials or the courts in such jurisdiction, the outcomes of which cannot be predicted with any certainty. The inability of the Company to secure surface access or purchase required surface rights could materially and adversely affect the timing, cost or overall ability of the Company to develop any mineral deposits it may locate.
Labour Relations, Employee Recruitment, Retention and Pension Funding
The Company may experience labour disputes, work stoppages or other disruptions in production that could adversely affect its operations. The Company is dependent on its workforce at its material producing properties and mills. The Company endeavours to maintain good relations with its workforce in order to minimize the possibility of strikes, lock-outs and other stoppages at the site. Relations between the Company and its employees may be impacted by changes in labour relations which may be introduced by, among other things, employee groups, competing labour unions, and the relevant governmental authorities in whose jurisdictions the Company carries on business. Many of the Company’s employees at its operations are represented by a labour union under a collective labour agreement. The Company may not be able to satisfactorily renegotiate the collective labour agreement when it expires. In addition, the existing labour agreement may not prevent a strike or work stoppage at the Company’s facilities in the future, and any such work stoppage could have a material adverse effect on its earnings. A subsidiary of the Company is party, with the United Steel Workers Union, to a collective bargaining agreement that covers all of the hourly employees at the Galena Complex with a term from June 29, 2014 to June 28, 2017. The parties have been in negotiations since June 2017 and in December, the Company issued its “last, best and final offer”. A failure to come to an agreement could impact the operations at the Galena Complex if there was a labour action that results in an interruption of operations.
The Company also hires its employees or consultants in Mexico to assist it in conducting its operations in accordance with Mexican laws. The Company also purchases certain supplies and retains the services of various companies in Mexico to meet its business plans. It may be difficult to find or hire qualified people in the mining industry who are situated in Mexico or to obtain all the necessary services or expertise in Mexico or to conduct operations on its projects at reasonable rates. If qualified people and services or expertise cannot be obtained in Mexico, the Company may need to seek and obtain those services from people located outside Mexico, which will require work permits and compliance with applicable laws and could result in delays and higher costs to the Company to conduct its operations in Mexico. Recruiting and retaining qualified personnel is critical to the Company’s success. The number of persons skilled in acquisition, exploration and development of mining properties is limited and competition for such persons is intense. As the Company’s business activity grows, the Company will require additional key executive, financial, operational, administrative and mining personnel. Although the Company believes that it will be successful in attracting, training and retaining qualified personnel, there can be no assurance of such success. If the Company is not successful in attracting and training qualified personnel, the efficiency of its operations could be affected, which could have a material adverse effect on the Company’s results of operations and profitability. The Company strongly depends on the business and technical expertise of its small group of management and key personnel. There is little possibility that this dependence will decrease in the near term. Key man life insurance is not in place on management and key personnel. If the services of the Company’s management and key personnel were lost, it could have a material adverse effect on future operations.
The volatility in the equity markets over the last several years and other financial impacts have affected the Company’s costs and liquidity through increased requirements to fund the Company’s defined benefit pension plans for its employees. There can be no assurance that financial markets will sufficiently recover in the future with the effect of causing a corresponding reduction in the Company’s future pension funding requirements. Furthermore, there can be no assurance that unforeseen changes in pensioner longevity, government regulation or other financial market uncertainties will not cause pension funding requirements to differ from the requirements projected by professional actuaries. The Company intends to continue to fund its pension plan for hourly and salary employees of the Company pursuant to all relevant regulatory requirements.
Some of the Company’s Material Properties are Located in Mexico and are Subject to Changes in Political and Economic Conditions and Regulations in that Country
In the past, Mexico has been subject to political instability, changes and uncertainties, which may cause changes to existing governmental regulations affecting mineral exploration and mining activities. The Company’s operations and properties are subject to a variety of governmental regulations including, among others: regulations promulgated by the Mexican Department of Economy – Dirección General de Minas, Mexico’s Secretary of Environment and Natural Resources (“SEMARNAT”); the Mexican Mining Law; and the regulations of the Comisión Nacional del Aqua with respect to water rights. Mexican regulators have broad authority to shut down and/or levy fines against facilities that do not comply with regulations or standards. The Company’s mineral exploration and mining activities in Mexico may be adversely affected in varying degrees by changing government regulations relating to the mining industry or shifts in political conditions that increase the costs related to the Company’s activities or maintenance of its properties. Operations may also be affected in varying degrees by government regulations with respect to restrictions on production, price controls, export controls, income taxes, and expropriation of property, environmental legislation and mine safety. Mexico’s status as a developing country may make it more difficult for the Company to obtain any required financing for its projects. The Mexican Government is conducting a highly publicized crackdown on the drug cartels, resulting in a loss of lives. The operation has been unaffected by the conflict and is unlikely to be in the future. However, if the government’s actions lead to civil unrest, the situation could change.
The Company is uncertain if all necessary permits will be maintained on acceptable terms or in a timely manner. Future changes in applicable laws and regulations or changes in their enforcement or regulatory interpretation could negatively impact current or planned exploration and development activities on its Cosalá District properties, or in any other projects that the Company becomes involved with. Any failure to comply with applicable laws and regulations or failure to obtain or maintain permits, even if inadvertent, could result in the interruption of exploration and development operations or material fines, penalties or other liabilities.
Community and Social
The Company’s relationship with the communities where it operates is critical to ensuring the future success of project development and future operations. Globally, there is an increasing level of public concern relating to the perceived effect of mining activities on the environment and on communities impacted by such activities. There is no assurance that the Company will be able to appropriately manage community relations in a manner that will allow the Company to proceed with its plans to develop and operate its properties.
Certain non-governmental organizations, some of which oppose globalization and resource development, are often vocal critics of the mining industry and its practices. Actions by such organizations could adversely affect the Company’s reputation and financial condition and may impact its relationship with the communities in which it operates. These actions can relate not only to current activities but also historic mining activities by prior owners and could have a material, adverse effect on the Company. They may also file complaints with regulators and others. Such complaints, regardless of whether they have any substance or basis in fact or law, may have the effect of undermining the confidence of the public or a regulator and may adversely affect the Company.
Substantially all of the Company’s Assets are Located Outside of Canada and this could have an Impact on Enforcement of Civil Liabilities Obtained in Canadian or U.S. Courts
It may be difficult or impossible to enforce judgements obtained in Canadian or U.S. courts predicated upon the civil liability provisions of the securities laws of certain provinces of Canada or the United States against the portion of the Company’s management and assets located outside of Canada and/or the United States.
The Company is Subject to Currency Fluctuations that may Adversely Affect the Financial Position of the Company
One of the Company’s primary operations is located in Mexico and many of its expenditures and obligations are denominated in Mexican pesos. The Company maintains its principal office and raises its equity financings in Canada, maintains cash accounts in both U.S. dollars and Canadian dollars and has monetary assets and liabilities in Canadian dollars and Mexican pesos. As such, the Company’s results of operations are subject to foreign currency fluctuation risks and such fluctuations may adversely affect the financial position and results of the Company. The Company may, from time to time, employ derivative financial instruments to manage exposure to fluctuations in foreign currency exchange rates.
Financing Risks
Should financing be sought in the future, there can be no assurances that the Company will be able to obtain adequate funding or that the terms of such financing will be favourable. In the event that cash flow from operations is insufficient, failure to obtain additional financing could result in delay or indefinite postponement of further exploration and development of its projects and the possible loss of such properties. The Company has a limited history of earnings, has never paid a dividend, and does not anticipate paying dividends in the near future.
Risks Associated with Outstanding Debt
The Company’s ability to make scheduled payments of interest and principal on its outstanding indebtedness or refinance its debt obligations depends on its financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond its control. There can be no assurance that the Company will generate sufficient cash flow from operating activities to make its scheduled repayments of principal, interest, and any applicable premiums.
The Company may be forced to pursue strategic alternatives such as reduce or delay capital expenditures, sell assets or operations, see additional capital or restructure or refinance its indebtedness. No assurances can be made that the Company would be able to take any of these actions, that these actions would be successful, or that these actions would be permitted under the terms of existing or future debt agreements.
If the Company cannot make scheduled payments on its debt, or comply with its covenants, it will be in default of such indebtedness and, as a result (i) holders of such debt could declare all outstanding principal and interest to be due and payable, (ii) the lenders under the credit facilities could terminate their commitments to lend the Company money, and (iii) the holders of the Company’s secured debt could realize upon the security to the borrowings.
The Company May Engage in Hedging Activities
From time to time, the Company may use certain derivative products to hedge or manage the risks associated with changes in the of prices zinc, lead, copper and the Mexican Peso. The use of derivative instruments involves certain inherent risks including, among other things: (i) credit risk – the risk of an unexpected loss arising if a counterparty with which the Company has entered into transactions fails to meet its contractual obligations; (ii) market liquidity risk – the risk that the Company has entered into a derivative position that cannot be closed out quickly, by either liquidating such derivative instrument or by establishing an offsetting position; (iii) unrealized mark-to-market risk – the risk that, in respect of certain derivative products, an adverse change in market prices for commodities, currencies or interest rates will result in the Company incurring an unrealized mark-to-market loss in respect of such derivative products.
There is no assurance that any hedging program or transactions which may be adopted or utilized by the Company designed to reduce the risk associated with changes price will be successful. Although hedging may protect the Company from an adverse price change, it may also prevent the Company from benefiting fully from a positive price change.
The Company May Require Significant Capital Expenditures
Substantial expenditures will be required to maintain, develop and to continue with exploration at the Company properties. In order to explore and develop these projects and properties, the Company may be required to expend significant amounts for, among other things, geological, geochemical and geophysical analysis, drilling, assaying, and, if warranted, mining and infrastructure feasibility studies.
The Company may not benefit from any of these investments if it is unable to identify commercially exploitable mineralized material. If successful in identifying reserves, it will require significant additional capital to construct facilities necessary to extract recoverable metal from those reserves.
The ability of the Company to achieve sufficient cash flows from internal sources and obtain necessary funding depends upon a number of factors, including the state of the worldwide economy and the price of silver, zinc, lead and copper. The Company may not be successful in achieving sufficient cash flows from internal sources and obtaining the required financing for these or other purposes on terms that are favourable to it or at all, in which case its ability to continue operating may be adversely affected. Failure to achieve sufficient cash flows and obtain such additional financing could result in delay or indefinite postponement of further exploration or potential development.
Risks Associated with the Company’s Business Objectives
The Company’s strategy to create shareholder value through the acquisition, exploration, advancement and development of its mineral properties will be subject to substantive risk. While the Company may seek to acquire additional mineral properties that are consistent with its business objectives, there can be no assurance that the Company will be able to identify suitable additional mineral properties or, if it does identify suitable properties, that it will have sufficient financial resources to acquire such properties or that such properties will be available on terms acceptable to the Company or at all. Any partnership or joint venture agreements with respect to mineral properties that the Company enters into will be subject to the typical risks associated with such agreements, including disagreement on how to develop, operate or finance a property and contractual and legal remedies of the Company’s partners in the event of such disagreement.
Competition in the Mining Industry
Competition in the mining sector is intense. Mines have limited lives and as a result, the Company may in the future seek to replace and expand its reserves through the acquisition of new properties. In addition, there is a limited supply of desirable mineral lands available in areas where the Company would consider conducting exploration and/or production activities. Because the Company faces strong competition for new properties from other mining companies, some of which have greater financial resources than it does, the Company may be unable to acquire attractive new mining properties on terms that it considers acceptable. Competition in the mining business for limited sources of capital could adversely affect the Company’s ability to acquire and develop suitable mines, developmental projects, producing companies, or properties having significant exploration potential. As a result, there can be no assurance that the Company’s acquisition and exploration plans will yield new mineral reserves to replace or expand current mineral reserves.
Concentrate Sales Risks
The Company currently sells its concentrates under offtake contracts with a limited number of counterparties. Based on past practice, and the quality of its concentrates, the Company expects to be able to renew these contracts or find alternative purchasers for its concentrates, however there can be no assurance that the existing contracts will be renewed or replaced on reasonable terms.
The Company frequently sells its concentrates on the basis of receiving a sales advance when the concentrates are delivered, with the advance based on market prices of metals at the time of the advance. Final settlement of the sale is then made later, based on prevailing metals prices at that time. In an environment of volatile metal prices, this can lead to negative cash adjustments, with amounts owing to the purchaser, and such amounts could potentially be substantial. In volatile metal markets, the Company may elect to fix the price of a concentrate sale at the time of initial delivery.
Certain Risks Related to the Ownership of the Company’s Common Shares
In recent years, the securities markets in the United States and Canada have experienced a high level of price and volume volatility, and the market price of securities of many companies, including mineral resource and mining companies and particularly those considered development stage companies, have experienced wide fluctuations in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. There can be no assurance that continual severe fluctuations in price will not occur.
The Company’s Common Shares are currently listed on the TSX and the NYSE American. There can be no assurance that an active market for the Common Shares will be sustained.
Additionally, the exercise of stock options and warrants already issued by the Company and the issuance of additional equity securities or convertible debt securities in the future could result in dilution in the equity interests of holders of Common Shares.
Absolute Assurance on Financial Statements
The Company prepares its financial statements in accordance with accounting policies and methods prescribed by International Financial Reporting Standards. In the preparation of financial statements, management may need to rely upon assumptions, make estimates or use their best judgment in determining the financial condition of the Company. In order to have a reasonable level of assurance that financial transactions are properly authorized, assets are safeguarded against unauthorized or improper use and transactions are properly recorded and reported, the Company has implemented and continues to analyze its internal control systems for financial reporting. Although the Company believes that its financial reports and financial statements are prepared with reasonable safeguards to ensure reliability, the Company cannot provide absolute assurance in that regard.
Conflicts of Interest
Certain of the Company’s directors and officers also serve as directors and/or officers of other companies involved in natural resource exploration and development, and consequently there exists the possibility for such directors and officers to have interests that conflict with the Company’s interests. Situations may arise in connection with potential investments where the other interests of the Company’s directors conflict with its interests. As such, conflicts of interest may arise that may influence these persons in evaluating possible acquisitions or in generally acting on the Company’s behalf, as they may pursue opportunities that would then be unavailable to the Company. In the event that the Company’s directors are subject to conflicts of interest, there may be a material adverse effect on its business.
Uninsured or Uninsurable Risks
In the course of exploration, development and production of mineral properties, several risks and, in particular, unexpected or unusual geological or operating conditions, may occur. It is not always possible to fully insure against such risks, and the Company may decide not to take out insurance against such risks as a result of high premiums or other reasons. Should such liabilities arise they could reduce or eliminate any future profitability and result in an increase in costs and a decline in value of the Common Shares.
As of the date of this AIF, the Company is not insured against environmental risks. Insurance against environmental risks (including potential liability for pollution or other hazards as a result of the disposal of waste products occurring from exploration and production) has not been generally available to companies within the industry. Without such insurance, and if the Company becomes subject to environmental liabilities, the payment of such liabilities would reduce or eliminate its available funds or could exceed the funds the Company has to pay such liabilities and result in bankruptcy. Should the Company be unable to fund fully the remedial cost of an environmental problem, it might be required to enter into interim compliance measures pending completion of the required remedy.
Tax Considerations
Mexico
Corporate profits in Mexico are taxed only by the Federal Government. Previously, there were two federal taxes in Mexico that applied to the Company’s operations in Mexico: corporate income tax and a Flat Rate Business Tax (“IETU”). Mexican corporate income tax was calculated based on gross revenue less deductions for all refining and smelting charges, direct operating costs, all head office general and administrative costs, and depreciation deductions as applicable at a corporate income tax rate in Mexico of 30%. The IETU was a cash-based minimum tax that applies in addition to the corporate income tax. The tax was applicable to the taxpayer’s net income from the (i) sale of goods; (ii) performance of independent services; and (iii) lease of goods at the rate of 16.5% during 2008, 17% during 2009, 17.5% during 2010, 2011 and 2013.
In late 2013, a new income Tax Law was enacted in Mexico (“Mexican Tax Reform”) which became effective January 1, 2014. Key provisions of the Mexican Tax Reform that may affect the Company consist of:
| · | New 7.5% mining royalty. This royalty is deductible for tax purposes and is calculated as 7.5% of a royalty base which is computed as taxable revenues (except interest and inflationary adjustments), less allowable deductions for income tax purposes (except interest, inflationary adjustment, depreciation and mining fees), less prospecting and exploration expenses for the year; |
| · | New environmental duty of 0.5% of gross income arising from the sale of gold and silver; |
| · | Corporate income tax rate to remain at 30%, eliminating the scheduled reduction to 29% in 2014 and to 28% in 2015; |
| · | Elimination of the IETU; |
| · | Elimination of the option for depreciation of capital assets on an accelerated basis; |
| · | Elimination of 100% deduction on exploration expenses for locating and quantifying new deposits in pre-operating periods. These exploration costs will be amortized on a straight-line basis over 10 years; and |
| · | Reduction of deductibility for various employee fringe benefits; and imposes a 10% withholding tax on dividends distributed to resident individuals or foreign residents (including foreign corporations). According to the Mexico-Canada tax treaty, this dividend withholding tax rate may be reduced to 5%. |
The Company has reviewed the 2014 Tax Reform and is challenging the constitutionality of the 7.5% mining royalty, the 0.5% environmental duty, and other aspects of the Reform. The Company currently believes it is in compliance with the new legislation and there is no guarantee it will be successful in its challenges against the Mexican Government.
United States
On December 22, 2017, U.S. tax legislation commonly known as the Tax Cuts and Jobs Act (TCJA) was signed into law, significantly reforming the U.S. Internal Revenue Code. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, puts into effect the migration from a “worldwide” system of taxation to a territorial system and modifies or repeals many business deductions and credits. The Company continues to examine the impact the TCJA may have on its business. The Company has evaluated the effect of the TCJA on its projection of minimal cash taxes or to its net operating losses. The estimated impact of the TCJA is based on the Company’s current knowledge and assumptions and recognized impacts could be materially different from current estimates based on the actual results and its further analysis of the new law. The impact of the TCJA on holders of common shares is uncertain and could be adverse. The Company encourages its shareholders to consult with their own legal and tax advisors with respect to such legislation and the potential tax consequences of investing in common shares.
While the TCJA legislation reduces the federal corporate income tax rate from 35% to 21%, it also introduces “base erosion” rules that may effectively limit the tax deductibility of certain payments made by U.S. entities to non-U.S. affiliates and include additional limitations on deductions attributable to interest expense. The impact of the tax reform may differ due to changes in interpretations and assumptions made along with guidance which may subsequently be issued. At this time, it is not possible to predict the full effect of this legislation on the Company’s business and operations.
The Company believes that, pursuant to Section 7874 of the United States Internal Revenue Code of 1986, even though U.S. Silver is organized as an Ontario corporation, U.S. Silver will be treated as a U.S. domestic corporation for U.S. federal income tax purposes. As a result, U.S. Silver will be subject to U.S. federal income tax in the same manner as a corporation organized in the U.S. The Company believes that U.S. Silver likely is a United States real property holding corporation, or "USRPHC", as defined for United States federal income tax purposes. If U.S. Silver were classified as a USRPHC, any gain recognized by the Company from the sale or other disposition, including a redemption, of U.S. Silver common shares would be subject to U.S. federal income taxation and the Company would be required to file a United States federal income tax return. In such circumstances, the purchaser of such common shares would be required to withhold from the purchase price paid to the Company an amount equal to 15% of the purchase price and remit such amount to the U.S. Internal Revenue Service. In addition, since, as noted above, U.S. Silver is classified as a U.S. domestic corporation, the gross amount of dividends paid by U.S. Silver to the Company will be subject to U.S. withholding tax at the current rate of 5% under the Canada-United States Convention with Respect to Taxes on Income and on Capital. The Company will only be eligible for foreign tax credits under the Canadian Income Tax Act to the extent it has qualifying income from a source in the U.S. in the year any U.S. tax or withholding tax is paid by or on behalf of the Company in respect of a gain on the sale or other disposition of the U.S. Silver common shares or a dividend paid on such shares. Any gain recognized by the Company from the sale or other disposition, including a redemption, of the common shares of U.S. Silver and dividends received on such shares by the Company will likely not be treated as income sourced in the United States for Canadian income tax purposes.
The Company’s Information Technology Systems May Be Vulnerable to Disruption Which Could Place its Systems at Risk from Data Loss, Operational Failure, or Compromise of Confidential Information
The Company rely on various information technology systems, and on third party developers and contractors, in connection with operations, including production, equipment operation and financial support systems. While the Company regularly obtains and develops solutions to monitor the security of its systems, it remains vulnerable to disruption, damage or failure from a variety of sources, including errors by employees or contractors, computer viruses, cyber-attacks including phishing, ransomware, and similar malware, misappropriation of data by outside parties, and various other threats. Techniques used to obtain unauthorized access to or sabotage systems are under continuous and rapid evolution, which may deter efforts to detect disruption of data and systems in advance. Breaches and unauthorized access carry the potential to cause losses of production, operational delays, equipment failure that could cause other risks to be realized, inaccurate recordkeeping, or disclosure of confidential information, any of which could result in financial losses and regulatory or legal exposure, and could have a material adverse effect on the Company’s cash flows, financial condition or results of operations.
Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, receivables, accounts payable and accrued liabilities, other payables, derivative assets and liabilities, and other financial instruments may be held from time to time. These financial instruments are exposed to numerous risks, including, among others, liquidity risk, currency risk, interest rate risk, counterparty risk and credit risk. Many of these risks are outside the Company’s control. There is no assurance that the Company will realize the carrying value of any of its financial instruments.
Accessibility and Reliability of Existing Local Infrastructure
The Company’s mining, processing, development and exploration activities depend, to some degree, on adequate infrastructure. Reliable roads, bridges, power sources and water supply are important considerations, which affect capital and operating costs. The lack of availability on acceptable terms or the delay in the availability of any one or more of these items could prevent or delay exploitation or development of the Company’s projects. If adequate infrastructure is not available in a timely manner, the exploitation or development of the Company’s projects may not be commenced or completed on a timely basis, if at all. In addition, the resulting operations may not achieve the anticipated production volume, or the construction costs and ongoing operating costs associated with the exploitation and/or development of the Company’s advanced projects will be higher than anticipated. Unusual or infrequent weather phenomena, sabotage, government or other interference in the maintenance or provision of such infrastructure could adversely affect the Company’s operations and profitability.
Risks and Uncertainties Related to the Repatriation of Funds from Foreign Subsidiaries
The Company expects to generate cash flow and profits at its foreign subsidiaries, and may need to repatriate funds from those subsidiaries to fulfill its business plans, in particular in relation to ongoing expenditures at its exploration and development assets. The Company may not be able to repatriate funds, or may incur tax payments or other costs when doing so, as a result of a change in applicable law or tax requirements at local subsidiary levels or at the parent level, which costs could be substantial.
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DIVIDENDS
The Company has not, since its incorporation, paid any dividends on any of its Common Shares and it is not contemplated that any dividends will be declared on the Common Shares in the immediate or foreseeable future. The directors of the Company will determine any future dividend policy on the basis of earnings, the Company’s financial position and other relevant factors.
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