UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

 

For the fiscal year ended December 31, 2018

 

OR

 

 

For the transition period from          to         

 

Commission file number 1-13627

 

GOLDEN MINERALS COMPANY

(Exact Name of Registrant as Specified in its Charter)

 

DELAWARE		26-4413382
(State of Incorporation or Organization)		(I.R.S. Employer Identification No.)
350 Indiana Street, Suite 800
Golden, Colorado		80401
(Address of principal executive offices)		(Zip Code)

 

(303) 839-5060

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐  No ☒

 

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2018 was approximately $17.9 million, based on the closing price of the registrant’s common stock of $0.34 per share on the NYSE American on June 30, 2018. For the purpose of this calculation, the registrant has assumed that its affiliates as of June 30, 2018 included all directors and officers and one shareholder that held approximately 43% of its outstanding common stock. The number of shares of common stock outstanding on February 27, 2019 was 96,399,391.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2019 Annual Meeting of Stockholders are incorporated by reference in Part III of this annual report on Form 10-K.

 

 

 

 

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GOLDEN MINERALS COMPANY

FORM 10-K

YEAR ENDED DECEMBER 31, 2018

 

INDEX

 

 

 

 

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References to “Golden Minerals, the “Company,” “our,” “we,” or “us” mean Golden Minerals Company, its predecessors and consolidated subsidiaries, or any one or more of them, as the context requires. Many of the terms used in our industry are technical in nature. We have included a glossary of some of these terms below.

 

FORWARD-LOOKING STATEMENTS

 

Some information contained in or incorporated by reference into this annual report on Form 10-K may contain forward-looking statements and forward-looking information (collectively, “forward-looking statements”) within the meaning of the United States Private Securities Litigation Reform Act of 1995 and other applicable securities laws. We use the words “anticipate,” “continue,” “likely,” “estimate,” “expect,” “may,” “could,” “will,” “project,” “should,” “believe” and similar expressions (including negative and grammatical variations) to identify forward-looking statements.  These statements include comments relating to our plans, expectations and assumptions concerning the Velardeña oxide plant lease, including the expected term, anticipated revenues, care and maintenance costs, and potential future tailings expansion; the El Quevar project, including assumptions and projections contained in the El Quevar PEA (including life of mine, grade and production expectations); the Santa Maria property, including the assumptions and projections contained in the Santa Maria PEA (including life of mine, grade and production expectations), and other expectations regarding the project, including future drilling plans, timing of initial drill results, expansion potential for the existing deposit and general cost expectations; the Rodeo property, including our general evaluation plans and cost expectations; the Yoquivo project, including future drilling plans and exploration activities; our financial outlook in 2019, including anticipated income and expenditures during the year; expected need for external financing and statements concerning our financial condition, business strategies and business and legal risks. Although we believe the expectations and assumptions reflected in those forward-looking statements are reasonable, we cannot assure you that these expectations and assumptions will prove to be correct. Our actual results could differ materially from those expressed or implied in these forward-looking statements as a result of various factors described in this annual report on Form 10-K, including:

 Lower revenue than anticipated from the oxide plant lease, which could result from delays or problems at the third party's mine or at the oxide plant, permitting problems at the third party's mine or the oxide plant, delays in constructing additional tailings capacity at the oxide plant, earlier than expected termination of the lease or other causes; 

 

 Decreases or insufficient increases in silver and gold prices;

 

 Whether we are able to raise the necessary capital required to continue our business on terms acceptable to us or at all, and the likely negative effect of low silver and gold prices or unfavorable exploration results;  

 

 Unfavorable results from exploration at the Santa Maria, Rodeo, Yoquivo, Navegantes or other exploration properties and whether we will be able to advance these or other exploration properties; 

 

 Risks related to the El Quevar project in Argentina, including unfavorable results from our evaluation activities, the feasibility and economic viability and unexpected costs of maintaining the project, and whether we will be able to find a joint venture partner or secure adequate financing to further advance the project; 

 

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 Variations in the nature, quality and quantity of any mineral deposits that are or may be located at the Velardeña Properties or our exploration properties, changes in interpretations of geological information, and unfavorable results of metallurgical and other tests; 

 

 

 Potential delays in our exploration activities or other activities to advance properties towards mining resulting from environmental consents or permitting delays or problems, accidents, problems with contractors, disputes under agreements related to exploration properties, unanticipated costs and other unexpected events; 

 

 Our ability to retain key management and mining personnel necessary to successfully operate and grow our business;

 

 Economic and political events affecting the market prices for gold, silver, zinc, lead and other minerals that may be found on our exploration properties; 

 

 Political and economic instability in Argentina, Mexico and other countries in which we conduct our business and future actions of any of these governments with respect to nationalization of natural resources or other changes in mining or taxation policies; 

 

 

 The factors set forth under “ Risk Factors ” in Item 1A of this annual report on Form 10-K.

 

Many of these factors are beyond our ability to control or predict. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, such expectations may prove to be materially incorrect due to known and unknown risks and uncertainties. You should not unduly rely on any of our forward-looking statements. These statements speak only as of the date of this annual report on Form 10-K. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect future events or developments. All subsequent written and oral forward-looking statements attributable to us and persons acting on our behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this annual report on Form 10-K.

 

CAUTIONARY STATEMENT REGARDING MINERALIZED MATERIAL

“Mineralized material” as used in this annual report on Form 10-K, although permissible under the United States Securities and Exchange Commission’s (“SEC”) Industry Guide 7, does not indicate “reserves” by SEC standards. We cannot be certain that any deposits at the Velardeña Properties, the El Quevar, Santa Maria or Rodeo properties or any deposits at our other exploration properties, will ever be confirmed or converted into SEC Industry Guide 7 compliant “reserves”. Investors are cautioned not to assume that all or any part of the disclosed mineralized material estimates will ever be confirmed or converted into reserves or that mineralized material can be economically or legally extracted. In addition, in this annual report on Form 10-K we also modify our estimates made in compliance with National Instrument 43-101 to conform to SEC Industry Guide 7 for reporting in the United States. Mineralized material is substantially equivalent to measured and indicated mineral resources (exclusive of reserves) as disclosed for reporting purposes in Canada, except that the SEC only permits issuers to report “mineralized material” in tonnage and average grade without reference to contained ounces.

 

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CONVERSION TABLE

 

In this annual report on Form 10-K, figures are presented in both United States standard and metric measurements. Conversion rates from United States standard measurement systems to metric and metric to United States standard measurement systems are provided in the table below. All currency references in this annual report on Form 10-K are to United States dollars, unless otherwise indicated.

 

	U.S. Unit		Metric Measure		Metric Unit		U.S. Measure
	1 acre		0.4047 hectares		1 hectare		2.47 acres
	1 foot		0.3048 meters		1 meter		3.28 feet
	1 mile		1.609 kilometers		1 kilometer		0.62 miles
	1  ounce (troy)		31.103 grams		1 gram		0.032 ounces (troy)
	1 ton		0.907 tonnes		1 tonne		1.102 tons

 

 

GLOSSARY OF SELECTED MINING TERMS

 

“ Base Metal ” means a classification of non-ferrous metals usually considered to be of low value and higher chemical activity when compared with the precious metals (gold, silver, platinum, etc.). This nonspecific term generally refers to the high-volume, low-value metals copper, lead, tin, and zinc.

 

“ Breccia ” means rock consisting of fragments, more or less angular, in a matrix of finer-grained material or of cementing material.

 

“ Calcareous Clastic ” means sedimentary rock composed of siliciclastic particles usually of conglomerate, sand, or silt-size and cemented by calcium carbonate in the form of calcite.

 

“ Claim ” means a mining interest giving its holder the right to prospect, explore for and exploit minerals within a defined area.

 

“ Concentrates ” means the clean product of ore or metal separated from its containing rock or earth by froth flotation or other methods of mineral separation.

 

“ Concession ” means a grant or lease of a tract of land made by a government or other controlling authority in return for stipulated services or a promise that the land will be used for a specific purpose.

 

“ Core Drill ” means a rotary type of rock drill that cuts a core of rock and is recovered in long cylindrical sections, usually two centimeters or more in diameter.

 

“ Deposit ” means an informal term for an accumulation of minerals.

 

“ Development Stage ” means a project with an established resource, not in production, engaged in the process of additional studies preparing for completion of a feasibility study or for commercial extraction.

 

“ Diorite ” means a grey to dark grey intermediate intrusive igneous rock composed principally of plagioclase feldspar, biotite, hornblende, and/or pyroxene.

 

“ Epithermal Calcite-Quartz ” means deposits, typically occurring in veins, of calcite-quartz from hydrothermal fluids at shallow depths under conditions in the lower ranges of temperature and pressure.

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“ Euhedral ” means a well-developed degree of which mineral grains show external crystal faces.

 

“ Exploration Stage ” means a project that is not yet in either the Development Stage or Production Stage.

 

“ Feasibility Study ” means an engineering study designed to define the technical, economic, and legal viability of a mining project with a high degree of reliability.

 

“ Flotation ” means the separating of finely crushed minerals from one another by causing some to float in a froth and others to remain in suspension in the pulp. Oils and various chemicals are used to activate, make floatable, or depress the minerals.

 

“ Formation ” means a distinct layer of sedimentary or volcanic rock of similar composition.

 

“ Fracture System ” means a set or group of contemporaneous fractures formed by a stress system.

 

“ Grade ” means the metal content of ore, usually expressed in troy ounces per ton (2,000 pounds) or in grams per metric tonnes, which contain 2,204.6 pounds or 1,000 kilograms.

 

“ Laramide Orogeny ” means a period of mountain building in western North America, which started in the Late Cretaceous age, 70 to 80 million years ago, and ended 35 to 55 million years ago.

 

“ Mineralization ” means the concentration of metals within a body of rock.

 

“ Mineralized Material ” means a mineralized body that has been defined by appropriate drilling and/or underground sampling to establish continuity and support an estimate of tonnage and an average grade of the selected metals.

 

“ Mining ” means the process of extraction and beneficiation of mineral reserves or mineral deposits to produce a marketable metal or mineral product. Exploration continues during the mining process and, in many cases, mineral reserves or mineral deposits are expanded during the life of the mine activities as the exploration potential of the deposit is realized.

 

“ Monzodiorite ” means coarse-grained igneous rock consisting of essential plagioclase feldspar, orthoclase feldspar, hornblende and biotite, with or without pyroxene, with plagioclase being the dominant feldspar making up 6% to 90% of the total feldspar and varying from oligoclase to andesine in composition. The presence of the orthoclase feldspar distinguishes this rock from a diorite.

 

“ National Instrument 43-101 ” or “ NI 43-101 ” means the standards of disclosure for mineral projects prescribed by the Canadian Securities Administrators.

 

“ Net Smelter Return Royalty ” means a defined percentage of the gross revenue from a resource extraction operation, less a proportionate share of transportation, insurance, and processing costs.

 

“ Open Pit ” means a mine working or excavation open to the surface.

 

“ Ore ” means material containing minerals that can be economically extracted.

 

“ Outcrop ” means that part of a geologic formation or structure that appears at the surface of the earth.

 

“ Oxide ” means mineralized rock in which some of the original minerals have been oxidized (i.e., combined with oxygen).

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“ Precious Metal ” means any of several relatively scarce and valuable metals, such as gold, silver, and the platinum-group metals.

 

“ Preliminary Economic Assessment ” or “ PEA ” means a study, other than a pre-Feasibility or Feasibility Study, that includes an economic analysis of the potential viability of mineral resources.

 

“ Probable Mineral Reserves ” means mineral reserves for which quantity and grade and/or quality are computed from information similar to that used for Proven Mineral Reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for Proven Mineral Reserves, is high enough to assume continuity between points of observation.

 

“ Production Stage ” means a project that is actively engaged in the process of extraction and beneficiation of mineral reserves or mineral deposits to produce a marketable metal or mineral product.

 

“ Proven Mineral Reserves ” means mineral reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established.

 

“ Reclamation ” means the process of returning land to another use after mining is completed.

 

“ Recovery ” means that portion of the metal contained in the ore that is successfully extracted by processing, expressed as a percentage.

 

“ Mineral Reserves ” means that part of a mineral deposit that could be economically and legally extracted or produced at the time of mineral reserve determination.

 

“ Sampling ” means selecting a fractional part of a mineral deposit for analysis.

 

“ Sediment ” means solid fragmental material that originates from weathering of rocks and is transported or deposited by air, water, or ice, or that accumulates by other natural agents, such as chemical precipitation from solution or secretion by organisms, and that forms in layers on the earth’s surface at ordinary temperatures in a loose, unconsolidated form.

 

“ Sedimentary ” means formed by the deposition of Sediment.

 

“ Silver Equivalent ” means silver and gold only, with gold converted to silver equivalents at a specified ratio.

 

“ Skarn ” means a coarse-grained metamorphic rock formed by the metamorphism of carbonate rock often containing garnet, pyroxene epodite and wollastonnite.

 

“ Stock ” means discordant igneous intrusion having a surface exposure of less than 40 square miles.

 

“ Sulfide ” means a compound of sulfur and some other metallic element or elements.

 

“ Tailings Pond ” means a low-lying depression used to confine tailings, the prime function of which is to allow enough time for processed minerals to settle out or for cyanide to be destroyed before water is discharged into the local watershed.

 

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“ Tertiary ” means the first period of the Cenozoic Era (after the Cretaceous of the Mesozoic Era and before the Quaternary) thought to have covered the span of time between 2 to 3 million years ago and 65 million years ago.

 

“ Vein ” means a fissure, fault or crack in a rock filled by minerals that have traveled upwards from some deep source.

 

“ Waste ” means rock lacking sufficient grade and/or other characteristics of ore.

 

ITEMS 1 AND 2:  BUSINESS AND PROPERTIE S

 

Overview

 

We are a mining company holding a 100% interest in the El Quevar advanced exploration silver property in the province of Salta, Argentina, a 100% interest in the Velardeña and Chicago precious metals mining properties and associated oxide and sulfide processing plants in the State of Durango, Mexico (the “Velardeña Properties”), and a diversified portfolio of precious metals and other mineral exploration properties located primarily in or near historical precious metals producing regions of Mexico. The El Quevar advanced exploration property and the Velardeña Properties are our only material properties.

 

         We remain focused on evaluation activities at our El Quevar exploration property in Argentina and on evaluating and searching for mining opportunities in North America with near term prospects of mining, including properties within reasonable haulage distances of our Velardeña processing plants.     We are also focused and are continuing our exploration efforts on selected properties in our portfolio of approximately 12 exploration properties located primarily in Mexico. Our management team is comprised of experienced mining professionals with extensive expertise in mineral exploration, mine construction and development, and mine operations. Our principal office is located in Golden, Colorado at 350 Indiana Street, Suite 800, Golden, CO 80401, and our registered office is the Corporation Trust Company, 1209 Orange Street, Wilmington, DE 19801. We also maintain an office at the Velardeña Properties in Mexico and exploration offices in Argentina and Mexico.

 

No Proven or Probable Mineral Reserves/Exploration Stage Company

 

We are considered an exploration stage company under the SEC criteria since we have not demonstrated the existence of proven or probable mineral reserves at any of our properties. In SEC Industry Guide 7, the SEC defines a “reserve” as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Proven or probable mineral reserves are those reserves for which (a) quantity is computed and (b) the sites for inspection, sampling, and measurement are spaced so closely that the geologic character is defined and size, shape and depth of mineral content can be established (proven) or the sites are farther apart or are otherwise less adequately spaced but high enough to assume continuity between observation points (probable). Mineral reserves cannot be considered proven or probable unless and until they are supported by a feasibility study, indicating that the mineral reserves have had the requisite geologic, technical and economic work performed and are economically and legally extractable.

 

Prior to suspending mining and processing at the Velardeña Properties in November 2015, we had revenues from the sale of silver, gold, lead and zinc products from the Velardeña and Chicago mines. We have not completed a feasibility study with regard to all or a portion of any of our properties to date. Any mineralized material discovered or extracted by us should not be considered proven or probable mineral reserves. As of December 31, 2018, none of our mineralized material met the definition of proven or probable mineral reserves. We expect to remain an exploration stage company for the foreseeable future. We will not exit the exploration stage until such time, if ever, that we demonstrate the existence of proven or probable mineral reserves that meet the guidelines under SEC Industry Guide 7.

 

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Company History

 

We were incorporated in Delaware under the Delaware General Corporation Law in March 2009. From March 2009 through September 2011, we focused on the advancement of our El Quevar silver project in Argentina. On September 2, 2011, we completed a business combination transaction with ECU Silver Mining Inc. (“ECU”), resulting in our ownership of the Velardeña and Chicago silver, gold and base metals mines located in the Velardeña mining district in the State of Durango, Mexico as further described below under “— Velardeña Properties ”.

 

Corporate Structure

 

Golden Minerals Company, headquartered in Golden, Colorado, is the operating entity through which we conduct our business.  We have a number of wholly-owned subsidiaries organized throughout the world, including in Mexico, Central America, South America, the Caribbean and Europe. We generally hold our exploration rights and properties through subsidiaries organized in the countries in which our rights and properties are located.

 

Our Competitive Strengths and Business Strategy

 

Our business strategy is to establish Golden Minerals as a mid-tier precious metals mining company focused in North America and Argentina. We also review strategic opportunities from time to time.

El Quevar Project.   We continue to advance our El Quevar project in Argentina and in September 2018 we completed an updated preliminary economic assessment (the “El Quevar PEA”).  The El Quevar PEA contemplates a six-year underground mining operation using pre-existing and new underground development at a mine production rate of 1,200 tonnes per day using a post-pillar cut-and-fill mining method that will deliver approximately 2.45 million tonnes of diluted sulfide material at an average grade of 409 g/t silver. As contemplated in the PEA, the mined material would be processed using a conventional single product flotation mill that would produce a silver-rich bulk concentrate suitable for sale.  We remain open to finding a partner to contribute to the funding of further exploration and development of the project.

Velardeña Properties.    Due to continuing net operating losses, we suspended mining and sulfide processing activities at the Velardeña Properties during the first half of November 2015 in order to conserve the future value of the asset. We have placed the mine and sulfide processing plant on care and maintenance to enable a re-start of either the mine or the mill when we are able to develop mining and processing plans that at then current prices for silver and gold indicate a sustainable positive operating margin (defined as revenues less costs of sales) or we are able to locate, acquire and develop alternative mineral sources that could be economically mined and transported to the Velardeña Properties for processing.  The Velardeña Properties include a 300 tonne per day flotation sulfide mill, which includes three flotation circuits in which we can process sulfide material to make lead, zinc and pyrite concentrates.  The properties also include a conventional 550 tonne per day cyanide leach oxide mill with a Merrill-Crowe precipitation circuit and flotation circuit located adjacent to our Chicago mine.  In July 2015, we leased the oxide plant to Minera Hecla, S.A. de C.V. (“Hecla”), a Mexican corporation and wholly-owned subsidiary of Hecla Mining Company, to process its own material through the plant.  The lease with Hecla has since been extended through December 31, 2020.  We continue to evaluate and search for other oxide and sulfide feed sources, focusing on sources within haulage distance of our sulfide and oxide mills at the Velardeña Properties.

Exploration Focus. We are focused on evaluating and searching for mining opportunities in North America with high precious metal grades and low development costs with near term prospects of mining, and particularly properties within reasonable haulage distances of our Velardeña processing plants. We are also continuing our exploration efforts on selected properties in our portfolio of approximately 12 exploration properties located primarily in Mexico. During the last two years, we have continued to focus on the Santa Maria mine west of Hildalgo de Parral, Chihuahua, and in October 2018 we completed a second preliminary economic assessment (the “Santa Maria PEA”) on the project. Our Rodeo

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property west of the Velardeña Properties also remains an interesting asset and we have received confirmation of good gold and silver metallurgical recoveries for milled material in initial test work. Additionally, new discoveries of high-grade silver-gold assays at the claims in the Yoquivo District of Chihauhua, Mexico have led us to consider a drill program in 2019. During 2019 we plan to focus our exploration efforts primarily at our El Quevar silver project and on exploration and evaluation activities at Yoquivo, Navegantes and several new properties in Mexico recently acquired through staking. We expect our expenditures for the exploration program in 2019 to be approximately $ 3.3 million,  subject to the availability of sufficient funds.

 

Experienced Management Team.  We are led by a team of mining professionals with approximately 60 years of combined experience in exploration, project development, and operations management, primarily in the Americas. Our executive officers have held senior positions at various large mining companies including, among others, Cyprus Amax Minerals Company, INCO Limited, Meridian Gold Company, Barrick Gold Exploration and Noranda Exploration.

 

El Quevar

 

Location and Access

 

Our El Quevar silver project is located in the San Antonio de los Cobres municipality, Salta Province, in the altiplano region of northwestern Argentina, approximately 300 kilometers by road northwest of the city of Salta, the capital city of the province. The project is also accessible by a 300 kilometer dirt and gravel road from the city of Calama in northern Chile. The small village of Pocitos, located about 20 kilometers to the west of El Quevar, is the nearest settlement. We have established a camp approximately 10 kilometers west of the project to house project workers. A high tension power line is located approximately 40 kilometers from the site, and a high pressure gas line devoted to the mining industry and subsidized by the Salta government is located within four kilometers of the El Quevar camp.

 

The El Quevar project is located near Nevado Peak with altitudes at the concessions ranging from 3,800 to 6,130 meters above sea level. The climate of the area is high mountain desert, with some precipitation in summer (such as snow) and little snow in winter.

 

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The following map shows the location of the El Quevar project.

 

 

Property History

 

Mining activity in and around the El Quevar project dates back at least 80 years. Between 1930 and 1950, there was lead and silver extraction of mineralized materials from small workings in the area, but we have no mining records from that period. The first organized exploration activities on the property occurred during the 1970s, although no data from that period remains. Over the last 30 years, several companies have carried out exploration activity in the area, including BHP Billiton, Industrias Peñoles, Mansfield Minerals and Hochschild Mining Group, consisting primarily of local sampling with some limited drilling programs.

 

Title and Ownership Rights

 

According to Argentine law, mineral resources are subject to regulation in the provinces where the resources are located. Each province has the authority to grant mining exploration permits and mining exploitation concession rights to applicants. The Federal Congress has enacted the National Mining Code and other substantive mining legislation, which is applicable throughout Argentina; however, each province has the authority to regulate the procedural aspects of the National Mining Code and to organize the enforcement authority within its own territory.

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In the province of Salta, where the El Quevar project is located, all mining concessions are granted by a judge in the Salta Mining Court. The El Quevar project is comprised of exploitation concessions. Exploitation concessions are subject to a canon payment fee (maintenance fee) which is paid in advance twice a year (before June 30th and December 31st of each calendar year). Each time a new mining concession is granted, concession holders are exempt from the canon payment fee for a period of three years from the concession grant date. However, this exemption does not apply to the grant of vacant exploitation concessions; only to the grant of new mining concessions.

 

The El Quevar project is currently comprised of 31 mining concessions that we hold directly. In total, the El Quevar project encompasses approximately 57,000 hectares. The area of most of our exploration activities at El Quevar is within the concessions that are owned by Silex Argentina S.A., our wholly-owned subsidiary.

 

We are required to pay a 1% net smelter return royalty on the value of all minerals extracted from the El Quevar II concession and a 1% net smelter return royalty on one-half of the minerals extracted from the Castor concession to the third party from whom we acquired these concessions.  We can purchase one half of the royalty for $1 million in the first two years of production.  The Yaxtché deposit is located primarily on the Castor concession. We may also be required to pay a 3% royalty to the Salta Province based on the net smelter value of minerals extracted from any of our concessions less costs of processing. To maintain all of the El Quevar concessions, we paid canon payment fees to the Argentine government of approximately $111,000 and $57,000 in 2017 and 2018, respectively. In 2019 we expect to pay approximately $60,000. 

 

The following El Quevar mine concessions are identified below by name and file number in the Salta Province Registry of Mines.

 

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Name of Mine Concession		Concession File Number
Quevar II		17114
Quirincolo I		18036
Quirincolo II		18037
Castor		3902
Vince		1578
Armonia		1542
Quespejahuar		12222
Toro I		18332
Quevar Primera		19534
Quevar Novena		20215
Quevar Decimo Tercera		20501
Quevar Tercera		19557
Quevar Vigesimo Tercero		21043
Quevar 10		20219
Quevar Vigesimo Primera		20997
Quevar Vigesimo Septima		22403
Quevar IV		19558
Quevar Vigesimo Cuarto		21044
Quevar 11		20240
Quevar Quinta		19617
Quevar 12		20360
Quevar Decima Quinta		20445
Quevar Sexta		19992
Quevar 19		20706
Quevar Vigesimo Sexta		22087
Quevar Vigesimo Segundo		21042
Quevar Séptima		20319
Quevar Veinteava		20988
Mariana		15190
Arjona II		18080
Quevar Vigesimo Quinto		21054

 

The surface rights at El Quevar are controlled by the Salta Province. There are no private properties within the concession area. To date, no issues involving surface rights have impacted the project. Although we have unrestricted access to our facilities, we have been granted easements to further protect our access rights.

 

Geology and Mineralization

 

The geology of the El Quevar project is characterized by silver-rich veins and disseminations in Tertiary volcanic rocks that are part of an eroded stratovolcano. Silver mineralization at El Quevar is hosted within a broad, generally east-west-trending structural zone and occurs as a series of north-dipping parallel sheeted vein zones, breccias and mineralized faults situated within an envelope of pervasively silicified brecciated volcanic rocks. There are at least three sub-parallel structures that extend for an aggregate length of approximately 6.5 kilometers. Several volcanic domes (small intrusive bodies) have been identified and mineralization is also found in breccias associated with these domes, especially where

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they are intersected by the structures. The silver mineralization at the Yaxtché zone is of epithermal origin. The cross-cutting nature of the mineralization, the assemblage of sulfide and alteration minerals, and the presence of open spaces with euhedral minerals, all point to an origin at shallow to moderate depths (a few hundred meters below surface) from hydrothermal solutions.

 

During 2012, we released an estimate of mineralized material at our El Quevar project.  This estimate assumed mining of oxide material from an open pit on the east end of the Yaxtché deposit and sulfide material from both the open pit and an underground mine on the western portion of the Yaxtché deposit.  The estimate was based on results from 270 core drill holes. 

 

In 2017, Amec Foster Wheeler E&C Services, Inc., a Wood Group PLC company (“Wood”) undertook an analysis and re-modeling of the data utilized in the prior mineralized material estimate using updated geologic controls and a modeling method that optimizes grade. This resulted in an updated mineralized material estimate completed in February 2018.  The Wood estimate assumes mining would occur solely underground and would be optimized to maximize potential silver grades.  According to the Wood estimate, sulfide mineralized material in the Yaxtché zone, at a cut-off grade of 250 grams per tonne silver, and using a three-year average silver price of $16.62 per ounce, was 2.6 million tonnes at an average silver grade of 487 grams per tonne.

For further detail regarding mineralized material, see “ CAUTIONARY STATEMENT REGARDING MINERALIZED MATERIAL ”.

 

Exploration and Advancement of El Quevar

 

The Yaxtché deposit is the primary target currently identified at the El Quevar project. In September 2018, we completed the El Quevar PEA, which confirmed the potential for a profitable mining operation at Yaxtché with an estimated 5 million ounces annual silver production. The El Quevar PEA contemplates a six-year underground mining operation using pre-existing and new underground development at a mine production rate of 1,200 tonnes per day using a post-pillar cut-and-fill mining method, delivering 2.45 million tonnes of diluted sulfide mineralized material at an average grade of 409 g/t  silver.  We have completed environmental baseline studies, and a further environmental impact assessment process would be required to support the permits necessary for construction and mining. If the El Quevar project proceeds to development and construction, we would be required to obtain numerous additional permits from national, provincial and municipal authorities in Argentina.

 

We spent approximately $1.3 million and $0.8 million at our El Quevar project on holding and maintenance costs in 2018 and 2017, respectively. The additional spending in 2018 was primarily related to the costs of preparing the technical reports and preparing for exploration drilling. From the inception of our exploration activities in 2004 through December 31, 2018 we have spent approximately $77.9 million on exploration and related activities at El Quevar, including amounts spent by our predecessor, Apex Silver Mines Limited. In 2019 we expect to spend approximately $1.3 million at our El Quevar project to fund ongoing exploration and evaluation activities, care and maintenance and property holding costs.

 

We have evaluated plans for further exploration drilling to increase the size of high grade silver resources near the Yaxtché deposit.  The Yaxtché deposit is open to the west and there are numerous drill intercepts with silver grades of economic interest in the nearby area that represent targets for further expansion.  During 2019, subject to the availability of sufficient funds, we plan to drill about fifteen core holes for a total of 3,000 meters to test extensions of mineralized material at Yaxtché, offsets to existing promising drill intercepts, and new drill targets based on reinterpreted IP (induced polarization) geophysics.

 

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Velardeña Properties

 

Location, Access and Facilities

 

The Velardeña Properties are comprised of two underground mines and two processing plants within the Velardeña mining district, which is located in the municipality of Cuencamé, in the northeast quadrant of the State of Durango, Mexico, approximately 65 kilometers southwest of the city of Torreón, Coahuila and approximately 140 kilometers northeast of the city of Durango, which is the capital of the State of Durango. The mines are reached by a seven kilometer road from the village of Velardeña which is reached by highway from Torreón and Durango. The Velardeña mining district is situated in a hot, semi-arid region.

 

Of the two underground mines comprising the Velardeña Properties, the Velardeña mine includes five different major vein systems including the Terneras, Roca Negra, San Mateo, Santa Juana and San Juanes systems. During 2015 we mined from the San Mateo, Terneras and Roca Negra vein systems as well as the Santa Juana vein system to augment grades as mining and processing rates ramped up.

 

We own a 300 tonne per day flotation sulfide mill situated near the town of Velardeña.  The mill includes three flotation circuits in which we can process sulfide material to make lead, zinc and pyrite concentrates.  We also own a conventional 550 tonne per day cyanide leach oxide mill with a Merrill-Crowe precipitation circuit and flotation circuit located adjacent to our Chicago mine.  In July 2015, we leased the oxide plant to Hecla to process its own material through the plant.  See “- Velardeña Properties Activities” below.  The lease with Hecla has since been extended through December 31, 2020.  We continue to evaluate and search for other oxide and sulfide feed sources, focusing on sources within haulage distance of our sulfide and oxide mills at the Velardeña Properties.

 

Prior to shutting down production at the Velardeña mines in 2015 , we trucked material from the Velardeña mines to the sulfide plant. In January 2012 we completed a tailings pond expansion at the sulfide plant, which is fully permitted and has capacity to treat tailings for approximately four additional years at the average processing rate of 285 tonnes per day.   At the oxide plant, Hecla is required to either leave unused at the end of the lease term an agreed amount of capacity in the tailings facility, or construct an additional expansion at its cost.

 

Power for all of the mines and plants is provided through substations connected to the national grid. Water is provided for all of the mines by wells located in the valley adjacent to the Velardeña Properties. We hold title to three wells located near the sulfide plant and hold certificates of registration to three wells located near the oxide plant. We are licensed to pump water from all six wells up to a permitted amount. We are currently pumping from the three wells associated with the oxide plant which is more than sufficient for Hecla’s processing operations.

 

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The following map shows the location of the Velardeña Properties (other than the El Mogote Fraccion concession, which is located south of the identified properties).

 

 

Property History

 

Exploration and mining in the Velardeña district extends back to at least the late 1500s or early 1600s, with large scale mining beginning in 1888 with the Velardeña Mining and Smelter Company. In 1902, the mining properties were acquired by ASARCO, who mined the property until 1926 when the mines were closed. For the next 35 years, the mines were operated from time to time by small companies and local miners. The property was nationalized in 1961, and in 1968 the sulfide processing plant was built by the Mexican government. In 1994, William Resources acquired the concessions comprising the Velardeña Properties. In 1997, ECU Gold (the predecessor to ECU Silver Mining Inc.) purchased from William Resources the subsidiaries that owned the concessions and the oxide processing plant. The sulfide processing plant was acquired in 2004.

 

Title and Ownership Rights

 

We hold the concessions comprising the Velardeña Properties through our wholly-owned Mexican subsidiary Minera William S.A. de C.V. At present, a total of 30 mineral concessions comprise the Velardeña Properties. The Velardeña Properties encompass approximately 895 hectares. The mineral concessions vary in size, and the concessions comprising each mineral property are contiguous within each of the Velardeña and Chicago properties. We are required to

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pay annual concession holding fees to the Mexican government to maintain our rights to the Velardeña mining concessions. In 2018, we made such payments totaling approximately $78,000 and expect to pay approximately $80,000 in 2019.  We also own the surface rights to 144 hectares that contains the oxide plant, tailings area and access to the Chicago mine, along with surface lands that may be required for potential plant expansions.

 

The Velardeña Properties are subject to the Mexican ejido system requiring us to contract with the local communities, or ejidos, surrounding our properties to obtain surface access rights needed in connection with our mining and exploration activities. We currently have contracts with two ejidos to secure surface rights for our Velardeña Properties with a total annual cost of approximately $35,000. We have a ten-year contract with the Velardeña ejido, which provides surface rights to certain roads and other infrastructure at the Velardeña Properties through 2021, and a 25-year contract with the Vista Hermosa ejido, which provides exploration access and access rights for roads and utilities for our Velardeña Properties until 2038.

 

The following Velardeña Properties exploitation concessions are identified below by name and number in the Federal government Public Registry of Mining.

 

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Mine/Area		Name of Exploitation Concession		Concession Number
Velardeña		AMPL. DEL ÁGUILA MEXICANA		85580
		ÁGUILA MEXICANA		168290
		LA CUBANA		168291
		TORNASOL		168292
		SAN MATEO NUEVO		171981
		SAN MATEO		171982
		RECUERDO		171983
		SAN LUIS		171984
		LA NUEVA ESPERANZA		171985
		LA PEQUEÑA		171988
		BUEN RETIRO		172014
		UNIFICACIÓN SAN JUAN EVANGELISTA		172737
		UNIFICACIÓN VIBORILLAS		185900
		BUENAVENTURA No. 3		188507
		EL PÁJARO AZÚL		188508
		BUENAVENTURA 2		191305
		BUENAVENTURA		192126
		LOS DOS AMIGOS		193481
		VIBORILLAS NO. 2		211544
		KELLY		218681
Chicago		SANTA TERESA		171326
		SAN JUAN		171332
		LOS MUERTOS		171986
		EL GAMBUSINO		171987
		AMPLIACIÓN SAN JUAN		183883
		MUÑEQUITA		196313
		SAN AGUSTÍN		210764
		EL PISTACHÓN		220407
		LA CRUZ		189474
		EL MOGOTE FRACCION I		221401

 

We hold water concessions in wells that provide water for the Velardeña Properties. In Mexico water concessions are granted by the National Commission of Water (“CNA”). Currently no new water concessions are being granted by the CNA; however, companies can acquire water concessions through purchase or lease from current concession holders. We hold title to three wells located near the sulfide plant and hold certificates of registration to three wells located near the oxide plant. We are licensed to pump water from all six wells up to a permitted amount. We are required to make annual payments to the CNA to maintain our rights to these wells.  In 2018 we made such payments totaling approximately $25,000 and expect to pay approximately the same amount in 2019. We are required to pay a fine to the CNA each year if we use too much water from a particular well or alternatively if we do not use a minimum amount of water from a particular well. During 2018 we did not incur any over usage or under usage fines.

 

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Geology and Mineralization

 

The Velardeña district is located at the easternmost limit of the Sierra Madre Occidental on the boundary between the Sierra Madre Oriental and the Mesa Central sub-provinces. Both of these terrains are underlain by Paleozoic and possibly Precambrian basement rocks.

 

The regional geology is characterized by a thick sequence of limestone and minor calcareous clastic sediments of Cretaceous age, intruded by Tertiary plutons of acidic to intermediate composition. During the Laramide Orogeny, the sediments were folded into symmetrical anticlines and synclines that were modified into a series of asymmetrical overturned folds by a later stage of compression.

 

A series of younger Tertiary stocks have intruded the older Cretaceous limestone over a distance of approximately 15 kilometers along a northeast to southwest trend. The various mineral deposits of the Velardeña mining district occur along the northeast southwest axis and are spatially associated with the intrusions and their related alteration.

 

An important northwest-southeast fracture system is associated with these intrusions and, in many cases, acts as the main focus of mineralization. The Velardeña Properties are underlain by a thick sequence of limestone that corresponds to rocks of the Aurora and Cuesta del Cura formations of Lower Cretaceous age.

 

Several types of Tertiary intrusive rocks are present in the Velardeña district. The largest of these rocks outcrops on the western flank of the Sierra San Lorenzo and underlies a portion of the Velardeña Properties. It is referred to as the Terneras pluton and forms a northeast oriented, slightly elongated body, considered to represent a diorite or monzodiorite that outcrops over a distance of about 2.5 kilometers. The adjacent limestone has been altered by contact metamorphism (exoskarn), and locally the intrusive has been metamorphosed (endoskarn).

 

The following is a description of the individual geological characteristics and mineralization found on each of the properties comprising the Velardeña and Chicago mines.

 

Velardeña Mine

 

The Santa Juana, Terneras, San Juanes and San Mateo vein deposits on the Velardeña property are hosted by Aurora Formation limestone, the Terneras intrusion and related skarn. The limestone is intruded by a series of multiphase diorite or monzodiorite stocks (Terneras intrusion) and dikes of Tertiary age that outcrop over a strike length of approximately 2.5 kilometers.

 

Two main vein systems are present on the Velardeña property. The first is a northwest striking system as found in the Santa Juana deposit, while the second is east-west trending and is present in the Santa Juana, Terneras, San Juanes and San Mateo deposits.

 

In the Santa Juana deposit, vein trends are steeply northeast dipping and northwest trending.  The Terneras, San Juanes and San Mateo veins all strike east-west and dip steeply north. The most extensive of these is the Terneras vein, which was mined in the past over a strike length of 1,100 meters. All of these veins are observed to have extensive strike lengths and vertical continuity for hundreds of meters. The mineralogy of the east west system is somewhat different in that it contains less arsenic than the northwest Santa Juana veins.

 

Mineralization in the deposits located at the Velardeña mine belongs primarily to epithermal calcite quartz veins with associated lead, zinc, silver, gold and copper mineralization, typical of the polymetallic vein deposits of northern Mexico. The veins are usually thin, normally in the 0.2 meter to 0.5 meter range, but consistent along strike and down dip. Coxcomb and rhythmically banded textures are common.

 

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Chicago Mine

 

On the Chicago property, the oldest rocks outcropping are Cretaceous limestone of the Aurora Formation which are highly folded. This limestone is locally metamorphosed by the intrusion of the Tertiary dioritic stocks and dykes. The general geology of the Chicago property is very similar to the geology of the Velardeña property. The Chicago veins strike northeast and dip steeply southeast. Chicago ore tends to be higher in lead and zinc than the Santa Juana ore. Vein widths at Chicago are variable and tend to be narrower than at the Santa Juana deposit, especially in the skarn host.

 

2014 Technical Report

 

During the first quarter of 2015, the engineering firm of Tetra Tech, Inc. (“Tetra Tech”) completed an estimate of mineralized material at the Velardeña Properties, set forth in the following table:

 

				Silver		Gold
				(Ag)		(Au)
				Grade		Grade		Lead
		Tonnes		(Grams		(Grams		(Pb)
		(in		per		per		Grade		Zinc (Zn)
Mineralized Material		thousands)		tonne)		tonne)		%		Grade %
Mineralized Material at December 31, 2016
Velardeña Mine
Oxide and mixed		572		295		4.1		1.34		1.07
Sulfide		1,032		274		3.9		1.11		1.42
Chicago Mine
Oxide and mixed		91		208		3.2		3.77		2.8
Sulfide		98		165		2.8		2.97		3.49
Total Mineralized Material at December 31, 2016		1,793		272		3.8		1.42		1.49

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Note: Results may not tie precisely due to rounding.

 

The Tetra Tech mineralized material estimate assumed a silver price of $25 per troy ounce, a gold price of $1,446 per troy ounce, and a cutoff grade of a net smelter return (“NSR”) of $100 per tonne.

 

The following table shows the commodity prices and metallurgical recoveries used to determine the cutoff grade.

 

					Sulfide		Oxide		Mixed
					Metallurgical		Metallurgical		Metallurgical
					Recovery		Recovery		Recovery
Metal		Metal Prices*			%		%		%
Silver		$	25 (oz)		89		68		50
Gold		$	1,446 (oz)		68		71		29
Lead		$	0.96 (lb)		83		—		25
Zinc		$	0.91 (lb)		83		—		37

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* Amounts represent three-year average prices.

 

The cutoff grade of $100 NSR per tonne of mineralized material was determined by adding the estimated average costs of mining ($53 per tonne), processing ($27 per tonne) and general and administration ($20 per tonne). The average cost estimates are the same for both the Velardeña and Chicago mines. The NSR value of mineralized material was determined for each type of mineralized material (sulfide, mixed, and oxide) by multiplying a fractional factor that

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represents an estimated combination of metallurgical recovery, treatment charges, penalties and payment terms by the unit value of each metal and then multiplying by the expected amount of that metal in each block of inventoried material.

 

The following table shows the reduction in mineralized material reported in the Tetra Tech report that resulted from extraction and processing of mineralized material in 2015. As a result of the shutdown of mining and processing in November 2015, there are no results for 2016, 2017 or 2018.

 

								Silver
				Gold				(Ag)
				(Au)				Grade		Contained		Lead		Contained				Contained
				Grade		Contained		(Grams		Silver (Ag)		(Pb)		Lead (Pb)		Zinc		Zinc (Zn)
		Tonnes		(Grams		Gold (Au)		per		oz.		Grade		lbs.		(Zn)		lbs.
Mineralized Material		(in thousands)		per tonne)		oz.		tonne)		(in thousands)		%		(in thousands)		Grade %		(in thousands)
Mineralized Material at December 31, 2017
Velardeña Mine
Oxide and mixed		572		4.1		74,780		295		5,425		1.34		16,898		1.07		13,493
Sulfide		1,032		3.9		127,741		274		9,101		1.11		25,254		1.42		32.307
Chicago Mine
Oxide and mixed		91		3.2		9,362		208		609		3.77		7,563		2.8		5,617
Sulfide		98		2.8		8,822		165		520		2.97		6,417		3.49		7,540
Total Mineralized Material at December 31, 2017		1,793		3.8		220,406		272		15,655		1.42		56,132		1.49		58,958
2018 Extraction
Velardeña Mine
Oxide and mixed		—		—		—		—		—		—		—		—		—
Sulfide		76		2.6		6,371		156		383		0.8		1,343		1.09		1,839
Chicago Mine
Oxide and mixed		—		—		—		—		—		—		—		—		—
Sulfide		5		1.9		310		117		19		2		220		2.82		311
Total Tonnes Extracted in 2018		81		2.6		6,681		154		401		0.87		1,564		1.2		2,150
Metal loss adjustments during 2018
Velardeña Mine
Oxide and mixed		—		—		—		—		—		—		—		—		—
Sulfide		—		—		(3,063)		—		(290)		—		(522)		—		(547)
Chicago Mine
Oxide and mixed		—		—		—		—		—		—		—		—		—
Sulfide		—		—		(140)		—		(8)		—		(107)		—		(74)
Total Tonnes Extracted in 2018		—		—		(3,203)		—		(297)		—		(629)		—		(621)
Mineralized Material at December 31, 2018
Velardeña Mine
Oxide and mixed		572		4.1		74,780		295		5,425		1.34		16,898		1.07		13,493
Sulfide		956		3.9		118,308		274		8,429		1.11		23,389		1.42		29,921
Chicago Mine
Oxide and mixed		91		3.2		9,362		208		609		3.77		7,563		2.8		5,617
Sulfide		93		2.8		8,372		165		493		2.97		6,089		3.49		7,155
Total Mineralized Material at December 31, 2018		1,712		3.8		210,522		272		14,956		1.43		53,940		1.49		56,187

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Note: Results may not tie precisely due to rounding. Additionally, silver ounces, zinc pounds and leads pounds are rounded to the nearest thousand and gold ounces are rounded to the nearest ounce and tonnes. The variance in rounding different commodities and units is for convenience and does not reflect any differences in the level of accuracy of the calculated mineralized material estimate.

 

For further detail regarding mineralized material, see “ CAUTIONARY STATEMENT REGARDING MINERALIZED MATERIAL ”.

 

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Velardeña Properties Activities

 

In 2018 we incurred approximately $1.9 million in expenses related to shut down costs and maintenance at our Velardeña Properties as a result of the suspension of mining and processing activities in November 2015.  We retained a core group of employees, most assigned to operate the oxide plant that is leased to a third party and not affected by the shutdown. The retained employees also include an exploration group and an operations and administrative group to continue to advance our plans in Mexico, oversee corporate compliance activities, and to maintain and safeguard the longer term value of the Velardeña assets.

In July 2015 we entered into a leasing agreement with Hecla to lease our Velardeña oxide plant for an initial term of 18 months beginning July 1, 2015. The lease agreement contained several lease extension options, and in the third quarter 2016, the lease was extended through June 2017. The 2016 extension included an agreement under which Hecla would construct, at its cost, certain tailings expansion facilities to accommodate Hecla's increased use of tailings capacity in excess of an agreed amount, while preserving flexibility for future tailings expansions. The tailings expansion has since been completed. The parties agreed that Hecla would either leave unused at the end of the lease term an agreed amount of capacity in the expanded tailings facility, or construct an additional expansion at its cost. In connection with their agreement regarding tailings impoundment expansions, the parties agreed that Hecla had the right to extend the lease for an additional 18 months following June 30, 2017, or until December 31, 2018. On March 24, 2017, Hecla exercised its right to extend the lease until December 31, 2018.

 

On August 2, 2017, we granted Hecla an option to extend the oxide plant lease for an additional period of up to two years ending no later than December 31, 2020 (the “Extension Period”).  In October 2018, Hecla exercised its option and extended the lease to December 31, 2020.  All of the fixed fees and throughput related charges remain the same as under the original lease.  Similar volume limitations apply to any required future tailings expansions, which Hecla will fund, leaving unused at the end of the lease term an agreed amount of capacity in the expanded tailings facility. Hecla has the right to terminate the lease during the Extension Period for any reason with 120 days’ notice.  Hecla will also have a one-time right of first refusal to continue to lease the plant following a termination notice through December 31, 2020 if we decide to use the oxide plant for its our own purposes before December 31, 2020.

Hecla is responsible for ongoing operation and maintenance of the oxide plant. During the year ended December 31, 2018, Hecla processed approximately 142,000 tonnes of material through the oxide plant, resulting in total revenues to us of approximately $7.2 million, comprised of approximately $4.9 million for direct plant charges and fixed fees and approximately $2.3 million for other net reimbursable costs related to the services we provide under the lease.  The $2.3 million of reimbursable costs are also reported as plant lease costs, resulting in net operating margin of approximately $4.9 million for the year ended December 31, 2018. We expect Hecla to continue to process material near the intended approximately 400 tonnes per day rate during 2019, which would generate cash payments to us, net of reimbursable costs, of approximately $4.6 million during 2019. However, because Hecla has the right to terminate the lease on 120 days’ notice, there is no assurance that these amounts will be received.

 

Mining and Processing

 

Aside from some minor test mining and crushing activities, there were no mining or processing activities, other than the Hecla lease, at our Velardeña Properties in 2017 or 2018 as a result of the shutdown of the mining and sulfide processing activities in November 2015. We expect to incur approximately $0.4 million in quarterly holding costs for as long as mining and processing activities remain suspended.

 

Environmental Matters and Permitting

 

We hold environmental licenses and environmental impact assessments that allow us to run our mines, plants and tailing facilities at our Velardeña Properties. We are required to update our environmental licenses and environmental impact assessments for expansion of or modification to any of the existing two processing plants. The construction of new

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infrastructure beyond the current plant facilities also would require additional permitting, which could include environmental impact assessments and land use permits.

 

Certain Laws Affecting Mining in Mexico

 

Mexico, officially the United Mexican States, is a federal constitutional republic in North America and bordered by the United States of America, Belize and Guatemala. Mexico is a federal democratic republic with 31 states and Mexico City. Each state has its own constitution and its citizens elect a governor, as well as representatives, to their respective state congresses. The President of Mexico is the head of the executive federal government. Executive power is exercised by the President, while legislative power is vested in the two chambers of the Congress of the Union. The three constitutional powers are the Judiciary, the Executive and the Legislature which are independent of each other.

 

Legislation Affecting Mining

 

The Mining Law, originally published in 1992 and amended in 1996, 2005, 2006 and 2014, is the primary legislation governing mining activities in Mexico. Other significant legislation applicable to mining in Mexico includes the regulations to the Mining Law, the Federal Law of Waters, the Federal Labour Law, the Federal Law of Fire Arms and Explosives, the General Law on Ecological Balance and Environmental Protection and regulations, the Federal Law of Duties and the Federal Law on Metrology and Standards.

 

The Concession System

 

Under Mexican law, mineral deposits are property of the Mexican republic, and a mining concession, granted by the executive branch of the federal government, is required for the exploration, exploitation and processing of mineral deposits. Mining concessions may only be granted to Mexican individuals domiciled in Mexico or companies incorporated and validly existing under the laws of Mexico. Mexican companies that have foreign shareholders must register with the National Registry of Foreign Investments and renew their registration on an annual basis. Mining concessions grant rights to explore and exploit mineral deposits but do not grant surface rights over the land where the concession is located. Mining concession holders are required to negotiate surface access with the land owner or holder (e.g., agrarian communities) or, should such negotiations prove unsuccessful, file an application with the corresponding administrative authority (Ministry of Economy or Ministry of Agrarian-Territorial-Urban Development) to obtain an easement, temporary occupancy, or expropriation of the land, as the case may be. An application for a concession must be filed with the Mining Agency or Mining Delegation located closest to the area to which the application relates.

 

Mining concessions have a term of 50 years from the date on which title is recorded in the Public Registry of Mining. Holders of mining concessions are required to comply with various obligations, including the payment of certain mining duties based on the number of hectares of the concession and the number of years the concession has been in effect. Failure to pay the mining duties can lead to cancellation of the relevant concession. Holders of mining concessions are also obliged to carry out and prove assessment works in accordance with the terms and conditions set forth in the Mining Law and its regulations. The regulations to the Mining Law establish minimum amounts that must be spent or invested on mining activities. A report must be filed in May of each year regarding the assessment works carried out during the preceding year. The mining authorities may impose a fine on the mining concession holder if one or more proof of assessment work reports is not timely filed.

 

Pursuant to amendments to the federal corporate income tax law, effective January 2014, additional duties are imposed on mining concession holders; see “— Taxes in Mexico ”.

 

Environmental Legislation

 

Mining projects in Mexico are subject to Mexican federal, state and municipal environmental laws and regulations for the protection of the environment. The principal legislation applicable to mining projects in Mexico is the federal

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General Law of Ecological Balance and Environmental Protection, which is enforced by the Federal Bureau of Environmental Protection, commonly known as “PROFEPA”. PROFEPA is the federal entity in charge of carrying out environmental inspections and negotiating compliance agreements. Voluntary environmental audits, coordinated through PROFEPA, are encouraged under the federal General Law of Ecological Balance and Environmental Protection. PROFEPA monitors compliance with environmental legislation and enforces Mexican environmental laws, regulations and official standards. If warranted, PROFEPA may initiate administrative proceedings against companies that violate environmental laws, which proceedings may result in the temporary or permanent closure of non-complying facilities, the revocation of operating licenses and/or other sanctions or fines. According to the Federal Criminal Code, PROFEPA must inform the relevant governmental authorities of any environmental crimes that are committed by a mining company in Mexico.

 

Concession holders under the exploration stage may submit themselves to comply with the Mexican Official Norm: NOM-120-SEMARNAT-1997, which provides, among other things, that mining exploration activities to be carried out within certain areas must be conducted in accordance with the environmental standards set forth in NOM-120-SEMARNAT-1997; otherwise, concession holders are required to file a preventive report or an environmental impact study prior to the commencement of the exploration, exploitation and processing of mineral resources. An environmental impact study is required for exploitation and processing of mineral resources activities.

 

In 2014 Mexico developed an energy policy applicable to private investment companies whereby new mining concessions are now subject to prior approval from the Ministry of Energy. Current mining concessions forming the Velardeña Properties are not subject to or affected by this approval requirement, but any new mining concessions acquired will be subject to this additional approval.

 

Taxes in Mexico

 

Mexico has a federal corporate income tax rate of 30%, and there are no state taxes on corporate net income. In determining their corporate income tax, entities are allowed to subtract from gross income various deductions permitted by law, and they are allowed a ten-year carry-forward of net operating losses. Pursuant to amendments to the federal tax laws effective January 1, 2014, a 10% withholding tax is charged on dividends distributed to shareholders, regardless of the tax residence of the recipient, out of after tax profits. However, in the case of nonresident shareholders the limitations and tax rates provided in the treaties to avoid double taxation will prevail. A foreign resident company is subject to income tax if it has a permanent establishment in Mexico. In general, a permanent establishment is a place of business where the activities of an enterprise are totally or partially carried out and includes, among others, offices, branches and mining sites.

 

Under the 2014 amendments to the federal corporate income tax law, titleholders of mining concessions are required to pay an annual special duty of 7.5% of their mining related profits. Titleholders of mining concessions also are required to pay a 0.5% special mining duty, or royalty, on an annual basis, on revenues obtained from the sale of silver, gold and platinum. Both the 7.5% annual special duty and the 0.5% duty are due at the end of March each year. The special duty of 7.5% is generally applicable to earnings before income tax, depreciation, depletion, amortization, and interest.  In calculating the special duty of 7.5%, there are no deductions related to depreciable costs from operational fixed assets, but exploration and prospecting depreciable costs are deductible when incurred.  Both duties are tax deductible for income tax purposes.

 

Mexico has several taxes in addition to income tax that are relevant to most business operations, including (i) the Value Added Tax (“VAT”); (ii) import duties; (iii) various payroll taxes; and (iv) statutorily entitled employee profit sharing (“PTU”).  In addition, annual mining concession fees are charged by the government.

 

VAT in Mexico is charged upon alienation of goods, performance of independent services, grant of temporary use or exploitation of goods, or import of goods or services that occur within Mexico’s borders, at a rate of 16%. There is no VAT in the case of export of goods or services or for the sale of gold, jewelry, and gold metalwork with a minimum gold content of 80%, excluding retail sale to the general public. The sale of mining concessions is subject to VAT as

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concessions are not considered to be land. VAT paid by a business enterprise on its purchases and expenses may usually be credited against its liability for VAT collected from customers on its own sales.  This creditable VAT may also be directly refunded, but under new regulations beginning in January 2019, the creditable VAT can no longer offset other Mexican federal taxes.

 

Import duties apply for goods and services entering the country, unless specifically exempted due to a free trade agreement or registered under specific programs like IMMEX, under which we are currently registered. Payroll taxes are payable in most states including Durango and Coahuila, and social security, housing and pension contributions must be made to the federal government when paying salaries.

 

Employees of Mexico entities are statutorily entitled to a portion of the employer’s pre-tax profits, called PTU. The rate of profit sharing is currently 10% of the employer’s taxable income as defined by the Income Tax law. A taxpayer may reduce its income tax base by an amount equal to the PTU. Certain companies are exempt from paying PTU, which include companies in the extractive industry (principally the mining industry) during the period of exploration.

 

Exploration Properties

 

In addition to El Quevar, we currently control a portfolio of approximately 12 exploration properties located primarily in certain traditional precious metals producing regions of Mexico. We do not consider any of our exploration properties to be individually material, including those noted below.

 

In 2019 we plan to focus our exploration efforts primarily on exploration and evaluation activities at El Quevar, Yoquivo, Navegantes and other properties, primarily in North America. During 2019 we expect our expenditures for the exploration program to total approximately $2.0 million, with approximately $0.3 million in property holding costs in Mexico and approximately $0.5 million in administrative and general reconnaissance costs in Mexico.

 

In August 2014, we entered into an option agreement giving us the right to acquire for $1.2 million the Santa Maria mine, a privately held property comprised of a single mining claim of 18 hectares west of Hildalgo de Parral, Chihuahua State, Mexico. Since 2015, we have completed test mining and processing of approximately 7,100 dry tonnes from the Santa Maria mine, with average grades of 338 gpt silver and 0.8 gpt gold. In March 2017, a preliminary economic assessment (PEA) was completed on our behalf by the engineering firm Tetra Tech, prepared pursuant to Canadian National Instrument 43-101, based on an updated estimate of mineralized material.  The PEA presented a base case assessment of developing Santa Maria’s mineral deposit.  In September 2018, Tetra Tech completed a second PEA for the Santa Maria project that incorporates data accumulated since March 2017, including an additional 77 hectares of mineral tenure acquired in August 2017 that covers the on-strike and downdip extensions of the Santa Maria vein systems. The new PEA also incorporates information from a 22-hole, 4,800-meter drilling program begun in August 2017 and completed in April 2018.  Including the latest drill program, we have drilled 9,900 meters in 59 holes since acquiring the property.  Surface mapping and sampling has also identified additional high-grade veins on the adjacent eastern extension of the Santa Maria property and new veins to the north located outside of the mineralized material area as defined in the March 2017 PEA.

The September 2018 PEA shows improvement in projected cash flow, metal production and profitability compared to the previous study. The PEA estimates a 4.2-year underground mining operation using pre-existing and new underground development at an average mine production rate of 218 tonnes per day, using a combination of cut-and-fill and sublevel stoping. It is currently envisioned that both mixed and sulfide materials will undergo toll-milling at a local third-party facility with sulfide flotation circuits. Oxide material will be cyanide leached at the same toll-milling facility. In the PEA, Santa Maria is estimated to deliver 150,000 tonnes of diluted sulfide material to the mill at an average grade of 378 g/t silver equivalent (“AgEq”, calculated by combining Ag and Au values where one g/t of Au equals 74 g/t of Ag),

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116,000 tonnes of diluted oxide material at an average grade of 428 g/t AgEq and 42,000 tonnes of diluted mixed material at an average grade of 278 g/t tonne AgEq. 

We have the right to acquire 100% of the Santa Maria property under two separate option agreements representing the total concessions that comprise the property for additional payments of $1.0 million, payable through April 2022. The first option agreement, covering concessions we acquired in August 2014, requires an additional approximately $0.4 million be paid to acquire a 100% interest in the concessions related to that option by continuing to make minimum payments of $0.2 million in 2019 and, $0.2 million in 2020.  In addition, until the total due under the first option agreement has been paid, the property owners have the right to 50% of any net profits from mining activities from the concessions related to the option, after reimbursement of all costs incurred by us since April 2015, to the extent that such net profit payments exceed the minimum payments.  The second option agreement, covering concessions acquired in August 2017, requires an additional $0.6 million be paid to acquire a 100% interest in the concessions related to that option by making additional payments of $0.2 million in each of the years 2019 through 2021.

 

We acquired the Rodeo and Rodeo 2 claims comprising 1,866 hectares 80 kilometers west of the Velardeña Properties in Durango, Mexico where previous exploration by other companies has identified a gold-bearing epithermal system exposed at the surface. During 2016, we completed a 2,080 meter core drilling program at the Rodeo property at a cost of approximately $0.4 million. The results from the program show a gold and silver bearing epithermal vein and breccia system with encouraging gold and silver values over an approximate 50 to 70 meter true width.  The system is exposed at the top of a northwesterly striking ridge and dips steeply to the northeast over about one kilometer of strike length.

During January 2017, Tetra Tech completed an estimate of mineralized material at the Rodeo deposit, prepared pursuant to Canadian National Instrument 43-101, based on two different operating scenarios.  The first operating scenario reflects a smaller amount of higher grade material and estimated mineralized material of 0.4 million tonnes containing 3.3 gpt gold and 11 gpt silver. This scenario provides a potentially shorter time to processing with lower capital costs since we already own the mill, located within trucking distance of the Rodeo property.  The second operating scenario reflects a larger amount of lower grade material and estimated mineralized material of 3.6 million tonnes containing 0.8 gpt gold and 12 gpt silver.  The second mineralized material estimate envisions a standalone heap leach operation, depending on leachability of the material and development and operating costs. We believe this material, as currently identified, could provide additional mined material for our   Velardeña oxide mill following the completion of the Hecla lease, currently set to expire December 31, 2020.

In initial test work conducted in 2017, we received confirmation of good gold and silver metallurgical recoveries for milled material in initial test work. Bottle roll cyanide leach testing of the high-grade samples resulted in gold extractions of 80 to 86 percent. Silver extractions ranged from 72 to 76 percent for all tests. Test work also indicates that the material is not suitable for gold and silver recovery by heap leaching. 

 

Due to the extension of the lease period for the oxide mill, plans to advance the Rodeo project have been delayed until early 2020.

 

Yoquivo

 

In October 2017 we acquired the right to purchase claims covering the Yoquivo District, Ocampo Municipality, Chihuahua, Mexico through an option agreement.  The Yoquivo District is a past producing, bonanza grade epithermal vein gold and silver district located 35 kilometers southeast of the Ocampo Mining District.  We have the right to purchase six claims totaling 1,906 hectares for payment of $0.5 million over four years plus outstanding claim taxes totaling approximately $0.1 million.  No cash payments to the owner are due until the second anniversary of the agreement.  The owner retains a 2% net smelter return royalty capped at $2.0 million.

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In October 2018 we announced high-grade silver-gold assays from the Yoquivo project. Multiple silver-gold bearing epithermal veins were mapped and sampled, with the two most important veins being the San Francisco and Pertenencia veins. A new vein, the La Nina vein, was discovered in the northwest of the property where it splits off from the main San Francisco vein. We are focusing exploration efforts on the Pertenencia vein, which appears to be more silver-rich compared to the San Francisco vein. Sampling of the Pertenencia vein is still in progress as is surface work in preparation for identifying the best drill targets. We expect to begin a drill program in 2019 to test the most promising portions of the veins.  A permit for drilling has been obtained.

 

Navegantes

 

In November 2018, we acquired the Navegantes project in southern Chihuahua state, Mexico. Recent surface and underground sampling have returned high-grade silver values from a series of epithermal silver-base metal veins outcropping on the property. The project consists of six concessions totaling 521 hectares and is located approximately 60km northwest of the San Francisco del Oro-Santa Barbara District where our Santa Maria project is located.

 

Farm-outs, Royalties and Other Dispositions

 

Exploration properties that we choose not to advance are evaluated for joint venture, sale of all or a partial interest and royalty potential. We currently have minority ownership interests and/or royalties in or have disposed of the following properties that were once part of our exploration portfolio:

 

 

 

Executive Officers of Golden Minerals

 

Name		Age		Position
Warren M. Rehn		64		President and Chief Executive Officer
Robert P. Vogels		61		Senior Vice President and Chief Financial Officer

 

Warren M. Rehn.  Mr. Rehn was appointed President of our company in May 2015 and appointed Chief Executive Officer and director in September 2015. Mr. Rehn previously served as Senior Vice President, Exploration and Chief Geologist since December 2012 and served as Vice President, Exploration and Chief Geologist since February 2012. From

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2007 until February 2012, Mr. Rehn held various positions at Barrick Gold Exploration, Inc., serving most recently as Chief Exploration Geologist for the Bald Mountain and Ruby Hill mining units. From 2005 until 2007, Mr. Rehn was a consulting geologist for Gerson Lehman Group, which provides consulting services to various industries, including geology and mining. Mr. Rehn served as a Consulting Senior Geologist at Placer Dome Exploration, Inc. in 2004 and as an independent consulting geologist throughout the Americas from 1994 until 2003. He served as a Senior Geologist at Noranda Exploration, Inc. from 1988 until 1994. Mr. Rehn holds an M.S. in Geology from the Colorado School of Mines and a B.S. in Geological Engineering from the University of Idaho.

 

Robert P. Vogels.  Mr. Vogels was named Senior Vice President and Chief Financial Officer in March 2009. Mr. Vogels served as Controller of Apex Silver from January 2005 to March 2009 and was named Vice President in January 2006. Prior to joining Apex Silver, Mr. Vogels served as corporate controller for Meridian Gold Company from January 2004 until December 2004. He served as the controller of INCO Limited’s Goro project in New Caledonia from October 2002 to January 2004. Prior to joining INCO, Mr. Vogels worked from 1985 through October 2002 for Cyprus Amax Minerals Company, which was acquired in 1999 by Phelps Dodge Corp. During that time, he served in several capacities, including as the controller for its El Abra copper mine in Chile from 1997 until March 2002. Mr. Vogels began his career in public accounting as a CPA. He holds a B.Sc. in accounting and an MBA degree from Colorado State University.

 

Board of Directors of Golden Minerals

 

Name		Age		Occupation
Jeffrey G. Clevenger (2)		69		Chairman
Warren M. Rehn		64		President and Chief Executive Officer, Company
W. Durand Eppler (1),(3)		65		Managing Director, Capstone Headwaters MB
Kevin R. Morano (2),(3)		65		Managing Principal, KEM Capital LLC
Terry M. Palmer (1),(3)		74		Retired Certified Public Accountant
Andrew N. Pullar		46		Managing Partner and Director, Sentient Equity Partners
David H. Watkins (1),(2)		74		Director, Commander Resources Ltd., Euro Resources S.A.

 

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Committee Membership

 

Metals Market Overview

 

We are an emerging precious metals exploration company with silver and gold mining properties in Mexico and a large advanced exploration silver project in Argentina. Descriptions of the markets for these metals are provided below.

 

Silver Market

 

Silver has traditionally served as a medium of exchange, much like gold. Silver’s strength, malleability, ductility, thermal and electrical conductivity, sensitivity to light and ability to endure extreme changes in temperature combine to make it a widely used industrial metal. While silver continues to be used as a form of investment and a financial asset, the principal uses of silver are industrial, primarily in electrical and electronic components, photography, jewelry, silverware, batteries, computer chips, electrical contacts, and high technology printing. Silver’s anti-bacterial properties also make it valuable for use in medicine and in water purification. Additionally, the use of silver in the photovoltaic and solar panel industries is growing rapidly, and new uses of silver are being developed in connection with the use of superconductive wire and radio frequency identification devices.

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Most silver product is obtained from mining in which silver is not the principal or primary product. The Silver Institute, an international silver industry association, noted that for 2014 only around 31% of output came from so-called primary silver mines, where silver is the main source of revenue.

 

The following table sets forth for the periods indicated on the London Fix high and low silver fixes in U.S. dollars per troy ounce. On February 26, 2019, the closing price of silver was $15.83 per troy ounce.

		Silver
Year		High			Low
2011		$	48.70		$	26.16
2012		$	37.23		$	26.67
2013		$	32.23		$	18.61
2014		$	22.05		$	15.28
2015		$	18.23		$	13.71
2016		$	20.71		$	13.58
2017		$	18.56		$	15.22
2018		$	17.52		$	14.13
2019*		$	16.08		$	15.26

 

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* Through February 26, 2019.

 

Gold Market

 

Gold has two main categories of use: fabrication and investment. Fabricated gold has a variety of end uses, including jewelry, electronics, dentistry, industrial and decorative uses, medals, medallions and official coins. Gold investors buy gold bullion, official coins and jewelry. The supply of gold consists of a combination of production from mining and the draw-down of existing stocks of gold held by governments, financial institutions, industrial organizations and private individuals.

 

The following table sets forth for the periods indicated on the London Fix PM high and low gold fixes in U.S. dollars per troy ounce. On February 26, 2019, the closing price of gold was $1,325 per troy ounce.

		Gold
Year		High			Low
2011		$	1,895		$	1,319
2012		$	1,792		$	1,540
2013		$	1,694		$	1,192
2014		$	1,385		$	1,142
2015		$	1,296		$	1,049
2016		$	1,366		$	1,077
2017		$	1,346		$	1,151
2018		$	1,355		$	1,178
2019*		$	1,344		$	1,280

 

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*     Through February 26, 2019.