MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS | 9 Months Ended |
Sep. 30, 2014 |
MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS | ' |
MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS | ' |
NOTE 3 MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS |
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Mineral Property Interests |
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During the second quarter of 2014, the Company recorded an impairment charge of $120.4 million relating to its Los Azules copper exploration project (“Los Azules Project”). The Company conducts a review of potential triggering events for all its mineral projects on a quarterly basis. When events or changes in circumstances indicate that the related carrying amounts may not be recoverable, the Company carries out a review and evaluation of its long-lived assets for impairment, in accordance with its accounting policy. Such a triggering event was identified in the second quarter of 2014 with respect to the Company’s Los Azules Project. The triggering event identified was a contemporaneous acquisition of a copper project located in Argentina, which shared similarities with the Los Azules Project due to its scale, location, and stage of development. Based on the announcement day value of the similar project, the estimated market value per pound of copper equivalent mineralized material from this transaction was below the carrying value per pound of estimated copper equivalent mineralized material of the Los Azules Project, indicating a potential significant decrease in the market price of the Los Azules Project, in accordance with ASC 360-35-21-a, and therefore a requirement to test the Los Azules Project for recoverability. To assist in performing a recoverability test, the Company engaged a third-party valuation firm who used the observed market value per pound of copper equivalent mineralized material based on this contemporaneous and other comparable transactions to estimate the fair value of the Los Azules Project. The carrying value of the property exceeded its estimated fair value, resulting in an impairment charge of $120.4 million, along with a resulting deferred income tax recovery of $22.5 million, being recorded in the Statement of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2014. |
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Impairments recorded in the second and third quarters of 2013 related to the Company’s exploration properties in Santa Cruz, Argentina, and Nevada, respectively. The impairments related to the Santa Cruz properties were primarily due to an unexpected significant decline in gold and silver market prices, continued inflationary pressures and a new tax on mining reserves in the Province, resulting in a depressed market for exploration properties in Argentina. The impairment related to the Nevada properties were a result of the Company allowing certain claims in the West Battle Mountain Complex to lapse, in an effort to rationalize the Company’s mineral property interests and focus its exploration program on more prospective areas. The impairment charges for the Santa Cruz and Nevada properties were of $27.7 million and $6.3 million, respectively, along with a resulting reduction in deferred tax liability and recovery of deferred income taxes of $2.3 million and $2.2 million, respectively. |
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Impairment charges were recorded on the following mineral property interests for the three and nine months ended September 30, 2014 and 2013. |
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| | | | Three months ended September 30, | | Nine months ended September 30, | |
Name of Property/Complex | | Segment | | 2014 | | 2013 | | 2014 | | 2013 | |
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Telken Tenements | | Argentina | | $ | — | | $ | — | | $ | — | | $ | 13,792 | |
Este Tenements | | Argentina | | — | | — | | — | | 2,784 | |
Piramides Tenements | | Argentina | | — | | — | | — | | 5,079 | |
Tobias Tenements | | Argentina | | — | | — | | — | | 6,074 | |
Los Azules Project | | Argentina | | — | | — | | 120,398 | | — | |
West Battle Mountain Complex | | Nevada | | — | | 6,287 | | — | | 6,287 | |
Total impairments | | | | $ | — | | $ | 6,287 | | $ | 120,398 | | $ | 34,016 | |
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Asset Retirement Obligations |
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The Company is responsible for reclamation of certain past and future disturbances at its properties. The two most significant properties subject to these obligations are the historic Tonkin property in Nevada and the El Gallo 1 mine in Mexico. |
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The current undiscounted estimate of the reclamation costs for existing disturbances on the Tonkin property to the degree required by the U.S. Bureau of Land Management (“BLM”) and the Nevada Department of Environmental Protection (“NDEP”) was $2.7 million as of September 30, 2014. Expenses are expected to be incurred between the years 2014 and 2040. The Company submitted a mine closure plan to the NDEP and BLM for the Tonkin property during the fourth quarter of 2010. As at September 30, 2014, the closure plan has already been approved by the NDEP but is still under review by the BLM pursuant to the National Environmental Policy Act. It is possible that reclamation plan cost estimates and bonding requirements may increase as a result of this review. The Company, however, is unable to meaningfully estimate possible increases at this time. |
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For mineral properties in the United States, the Company maintains required reclamation bonding with various governmental agencies. During the third quarter of 2014, the Company replaced its cash bonding of $4.8 million with surety bonds of the same amounts, as discussed in Note 13, Contingencies. |
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The current undiscounted estimate of the reclamation costs for existing disturbances at the El Gallo 1 mine was $4.6 million as of September 30, 2014. Expenses are expected to be incurred between the years 2015 and 2018. Under Mexican regulations, bonding of projected reclamation costs is not required. |
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A reconciliation of the Company’s asset retirement obligations for the nine months ended September 30, 2014 and for the year ended December 31, 2013 are as follows: |
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| | Nine months ended | | Year Ended | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 | | | | | | | | | |
| | (in thousands) | | | | | | | | | |
Asset retirement obligation liability, beginning balance | | $ | 7,247 | | $ | 6,359 | | | | | | | | | |
Settlements | | (43 | ) | (60 | ) | | | | | | | | |
Accretion of liability | | 309 | | 461 | | | | | | | | | |
Adjustment reflecting updated estimates | | (79 | ) | 487 | | | | | | | | | |
Asset retirement obligation liability, ending balance | | $ | 7,434 | | $ | 7,247 | | | | | | | | | |
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As at September 30, 2014, the current portion of the asset retirement obligation was $1.5 million (December 31, 2013 - $1.4 million). |
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Amortization of Mineral Property Interests and Asset Retirement Costs |
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The definition of proven and probable reserves is set forth in the SEC Industry Guide 7. If proven and probable reserves exist at the Company’s properties, the relevant capitalized mineral property interests and asset retirement costs are to be charged to expense based on the units of production method and upon commencement of production. Since the Company has not completed feasibility or other studies sufficient to characterize the mineralized material at El Gallo 1 as proven or probable reserves under the SEC definition, the amortization of the capitalized mineral property interests and asset retirement costs are charged to expense based on the straight-line method over the estimated useful life of the mine. For the three and nine months ended September 30, 2014, the Company recorded $0.3 million and $1.0 million, respectively, of amortization expense related to El Gallo 1, which is included in Production Costs Applicable to Sales in the Statement of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2014, of which $0.1 million and $0.4 million, respectively, related to the amortization of capitalized asset retirement costs. |
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