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Section 1: 8-K (FORM 8-K)

hl20180720_8k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

____________________

 

FORM 8-K

 

Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): July 20, 2018

 

HECLA MINING COMPANY
(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware 1-8491 77-0664171
(State or Other Jurisdiction (Commission File Number) (IRS Employer Identification No.)
of Incorporation)    

 

6500 North Mineral Drive, Suite 200

Coeur d'Alene, Idaho 83815-9408

(Address of Principal Executive Offices) (Zip Code)

 

(208) 769-4100

(Registrant's Telephone Number, Including Area Code)

N/A
(Former name or Former Address, if changed Since Last Report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

     Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
     Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12(b))
     Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
     Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company ☐

 

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. ☐

 



 

1

 

 

Item 2.01. Completion of Acquisition or Disposition of Assets

 

On July 20, 2018, Hecla Mining Company (the “Company” or “Hecla”) and our wholly owned subsidiary, 1156291 B.C. Unlimited Liability Company (“B.C. UNLTD.”) completed the acquisition of Klondex Mines Ltd. (“Klondex”) pursuant to the terms of the March 16, 2018 Arrangement Agreement among the parties, as amended (the “Agreement”). Under the terms of the Agreement, Hecla acquired all of the outstanding common shares of Klondex for $153,205,757 and 75,276,176 shares of Hecla common stock (“Purchase Price”). The Agreement, filed as exhibit 2.1 to our Current Report on Form 8-K filed on March 19, 2018, as amended by the First Amendment to Arrangement Agreement dated as of June 4, 2018 (filed as exhibit 2.1 to our Current Report on Form 8-K filed on June 4, 2018) and by the Second Amendment to Arrangement Agreement dated as of July 5, 2018 (filed as Exhibit 2.1 to our Current Report on Form 8-K filed on July 5, 2018), is incorporated herein by reference.

 

The Agreement has been incorporated by reference herein to provide you with information regarding its terms. It is not intended to provide any other factual information about us. Such information can be found elsewhere in other public filings we have made with the Securities and Exchange Commission (“SEC”), which are available without charge at www.sec.gov.

 

The Agreement contains representations and warranties the Company and Klondex made. The assertions embodied in those representations and warranties are qualified by information in a confidential disclosure letter that the Company has exchanged in connection with signing the Agreement. While the Company does not believe that it contains information securities laws require us to publicly disclose other than information that has already been so disclosed, the disclosure letter does contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the Agreement. Accordingly, you should not rely on the representations and warranties as characterizations of the actual state of facts, since they are modified in important part by the disclosure letter. Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the Agreement, which subsequent information may or may not be fully reflected in public disclosures.

 

As reported on a Current Report on Form 8-K filed with the SEC on July 16, 2018, on that date we entered into a Fifth Amended and Restated Credit Agreement (“Credit Agreement”) with The Bank of Nova Scotia, ING Capital LLC, Canadian Imperial Bank of Commerce and JPMorgan Chase Bank, N. A. (the “Lenders”) to replace our prior credit agreement. We borrowed $47,000,000 under the Credit Agreement to partially fund the cash portion of the Purchase Price and for related closing expenses. We funded the remainder of the cash portion of the Purchase Price using cash on hand.  

 

Item 3.02. Unregistered Sales of Equity Securities

 

As previously disclosed in our Current Report on Form 8-K filed on March 19, 2018, pursuant to the terms of the Agreement, part of the purchase price for the outstanding common shares of Klondex was to be paid using shares of Hecla common stock. At closing, we issued 75,276,176 shares of our common stock to Klondex shareholders, pursuant to an exemption from registration under Section 3(a)(10) of the Securities Act of 1933.

 

Item 8.01. Other Events

 

On July 23, 2018, the Company issued a press release announcing the closing of the Klondex acquisition, effective July 20, 2018. A copy of the news release is attached hereto as Exhibit 99.1, and is incorporated by reference herein.

  

2

 

 

Item 9.01. Financial Statements and Exhibits

 

 

(a)

Financial Statements of Businesses Acquired.

 

The unaudited financial statements of Klondex as of March 31, 2018 and for the three months ended March 31, 2018 and March 31, 2017, are filed as Exhibit 99.2 and incorporated in their entirety herein by reference. The audited financial statements of Klondex as of and for the years ended December 31, 2017 and 2016 are filed as Exhibit 99.3 and incorporated in their entirety herein by reference.

 

 

(b)

Pro Forma Financial Information.

 

The unaudited pro forma financial information giving effect to the acquisition of Klondex as of and for the three-month period ended March 31, 2018, and for the year ended December 31, 2017, is furnished as Exhibit 99.4 and incorporated in its entirety herein by reference.

 

 

(d)

Exhibits

 

 

2.1(a)

Arrangement Agreement dated as of March 16, 2018, by and among Hecla Mining Company, its wholly owned subsidiary, 1156291 B.C. Unlimited Liability Company, and Klondex Mines Ltd. filed as exhibit 2.1 to our Current Report on Form 8-K filed on March 19, 2018 (File No. 1-8491), and incorporated herein by reference.

 

 

2.1(b)

First Amendment to Arrangement Agreement dated as of June 4, 2018, by and among Hecla Mining Company, its wholly owned subsidiary, 1156291 B.C. Unlimited Liability Company, and Klondex Mines Ltd. filed as exhibit 2.1 to our Current Report on Form 8-K filed on June 4, 2018 (File No. 1-8491), and incorporated herein by reference.

 

 

2.1(c)

Second Amendment to Arrangement Agreement dated as of July 5, 2018, by and among Hecla Mining Company, its wholly owned subsidiary, 1156291 B.C. Unlimited Liability Company, and Klondex Mines Ltd. filed as exhibit 2.1 to our Current Report on Form 8-K filed on July 5, 2018 (File No. 1-8491), and incorporated herein by reference.

 

 

23.1

Consent of PricewaterhouseCoopers. *

 

 

99.1

News Release dated July 23, 2018. *

 

 

99.2

Unaudited financial statements of Klondex as of March 31, 2018, and for the three months ended March 31, 2018 and March 31, 2017. *

 

 

99.3

Audited financial statements of Klondex as of and for the years ended December 31, 2017 and 2016. *

 

 

99.4

Unaudited pro forma condensed combined financial statements of Hecla giving effect to the acquisition of Klondex as of and for the period ended March 31, 2018, and for the year ended December 31, 2017. *

____________________

 

*     Filed herewith.

 

3

 

 

SIGNATURE

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

HECLA MINING COMPANY

 

 

 

 

 

 

 

 

 

 

By:

/s/ David C. Sienko

 

 

 

David C. Sienko

 

 

 

Vice President and General Counsel

 

 

 

Dated: July 24, 2018

 

 

 

4

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Section 2: EX-23.1 (EXHIBIT 23.1)

ex_118140.htm

Exhibit 23.1

 

 

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-159966, 333-195246, 333-201520, 333-209652, and 333-209751) and Form S-8 (No. 333-169030, 333-176364, 333-195019, 333-209727, and 333-218744) of Hecla Mining Company of our report dated March 14, 2018, relating to the consolidated financial statements of Klondex Mines Ltd., which appears in this Current Report on Form 8-K.

 

 

/s/ PricewaterhouseCoopers LLP

Vancouver, British Columbia

Canada

 

 

July 20, 2018

 

 

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Section 3: EX-99.1 (EXHIBIT 99.1)

ex_118225.htm

Exhibit 99.1

 

            

 

NEWS RELEASE

 

HECLA COMPLETES ACQUSITION OF KLONDEX MINES LTD.

 

FOR IMMEDIATE RELEASE

July 23, 2018

 

COEUR D’ALENE, IDAHO and VANCOUVER, BC -- Hecla Mining Company (NYSE:HL) (Hecla) and Klondex Mines Ltd. (NYSE American:KLDX; TSX:KDX) (Klondex) today announced that Hecla’s acquisition of Klondex is complete.

 

“With this acquisition, Hecla now has three high-grade mines in Nevada, one of the best mining districts in the world,” said Phillips S. Baker, Jr., President and CEO. “These assets immediately add production and cash flow, and because they are a good fit with Hecla’s expertise, we believe there is significant opportunity for improvement in the mines’ productivity and consistency.”

 

“We welcome the former Klondex shareholders and employees to Hecla, as we continue to grow into the largest and strongest Company in its long history,” Mr. Baker added.

 

Hecla acquired the outstanding common shares of Klondex for approximately US$153 million and 75 million shares of Hecla common stock extinguishing all rights to acquire Klondex common shares. Klondex shareholders who elected to receive share consideration will receive 0.6272 of a Hecla share in exchange for their Klondex shares. Klondex shareholders who elected to receive combined cash and share consideration or who failed to file an election on a timely basis will receive the combination consideration of US$0.8411 in cash and 0.4136 of a Hecla share in exchange for their Klondex shares. Klondex shareholders who elected to receive cash consideration were subject to proration and will receive US$0.8867 in cash and 0.4020 of a Hecla share in exchange for their Klondex shares. Klondex shareholders will also receive 0.125 of a common share of Havilah Mining Corporation (Havilah), a newly-formed entity that will retain Klondex’s Canadian operations, as part of the consideration received in exchange for each of their Klondex shares.

 

Havilah has been approved to list its common shares on the TSX Venture Exchange, with trading expected to commence at market open on July 25, 2018. Klondex has also received approval to delist its common shares from the Toronto Stock Exchange, expected to occur at the opening of trading on or about July 25, 2018. Klondex shares are expected to be delisted from the NYSE American Stock Exchange prior to the opening of trading on July 23, 2018.

 

As part of the transaction, Hecla subscribed for 3,539,332 common shares of Havilah, on a private placement basis at a price of C$2.61 per share for a gross purchase price of C$9,242,800 (being the Canadian dollar equivalent of US$7 million). The shares of Havilah acquired by Hecla represent 13.46% of the outstanding common shares of Havilah, after giving effect to the subscription. The common shares were acquired for investment purposes by Hecla. Hecla does not have any present intention to acquire ownership of, or control over, additional securities of Havilah. It is the intention of Hecla to evaluate its investment in Havilah on a continuing basis and such holdings may be increased or decreased in the future. For the purposes of Canadian National Instrument 62-103, the address of Hecla is 6500 N. Mineral Drive, Suite 200, Coeur d’Alene, Idaho, 83815, USA.

 

 

 

Hecla Mining Company ● 1-800-432-5291 ● hmc-info@hecla-mining.com 1

 

 

 

 

ABOUT HECLA

 

Founded in 1891, Hecla Mining Company (NYSE:HL) is a leading low-cost U.S. silver producer with operating mines in Alaska, Idaho and Mexico, and is a growing gold producer with operating mines in Quebec and Nevada. The Company also has exploration and pre-development properties in eight world-class silver and gold mining districts in the U.S., Canada, and Mexico.

 

Cautionary Statements Regarding Forward Looking Statements

Statements made or information provided in this news release that are not historical facts are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and "forward-looking information" within the meaning of Canadian securities laws. Words such as “may”, “will”, “should”, “expects”, “intends”, “projects”, “believes”, “estimates”, “targets”, “anticipates” and similar expressions are used to identify these forward-looking statements. Such forward-looking statements or forward-looking information include statements or information regarding estimates of gold production, revenue, and mine life for Fire Creek, Midas and Hollister, as well as statements concerning the combined company’s cash flow and profitability. The material factors or assumptions used to develop such forward-looking statements or forward-looking information include that the Company’s plans for development and production will proceed as expected and will not require revision as a result of risks or uncertainties, whether known, unknown or unanticipated, to which the Company’s operations are subject.

 

Forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those projected, anticipated, expected or implied. These risks and uncertainties include, but are not limited to, metals price volatility, volatility of metals production and costs, litigation, regulatory and environmental risks, operating risks, project development risks, political risks, labor issues, ability to raise financing and exploration risks and results. Refer to the Company's Form 10K and 10-Q reports for a more detailed discussion of factors that may impact expected future results. The Company undertakes no obligation and has no intention of updating forward-looking statements other than as may be required by law.

 

For further information, please contact:

 

Mike Westerlund

Vice President – Investor Relations

800-HECLA91 (800-432-5291)

Investor Relations

Email: hmc-info@hecla-mining.com

Website: www.hecla-mining.com

 

 

 

Hecla Mining Company ● 1-800-432-5291 ● hmc-info@hecla-mining.com 2

 

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Section 4: EX-99.2 (EXHIBIT 99.2)

ex_118141.htm

Exhibit 99.2

 

 

 

INDEX TO FINANCIAL STATEMENTS OF KLONDEX MINES LTD.

 

   

Page

     
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017   2
     

Unaudited Condensed Consolidated Statements Income (Loss) for the three months ended March 31, 2018 and March 31, 2017

  3
     

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2018 and March 31, 2017

  4
     
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and March 31, 2017    5
     
Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the three months Ended March 31, 2018 and March 31, 2017 and the year ended December 31, 2017    6
     
Notes to Unaudited Condensed Consolidated Financial Statements   7

 

 

1

 

 

KLONDEX MINES LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(US dollars in thousands)

 

   

Note

   

March 31,
2018

   

December 31,
2017

 

Assets

                       

Current assets

                       

Cash and cash equivalents

          $ 27,814     $ 23,674  

Inventories

    3       37,739       42,583  

Prepaid expenses and other

    4       4,440       7,580  

Derivative assets

    9       17       17  

Total current assets

            70,010       73,854  

Mineral properties, plant and equipment, net

    5       276,040       289,450  

Restricted cash

            9,504       9,555  

Deferred tax assets

            18,696       18,696  

Total assets

          $ 374,250     $ 391,555  

Liabilities

                       

Current liabilities

                       

Accounts payable

          $ 23,081     $ 28,302  

Accrued compensation and benefits

            3,343       4,296  

Derivative liabilities

    9       735       170  

Debt

    6       873       902  

Income taxes payable

            3,203       2,833  

Total current liabilities

            31,235       36,503  

Debt

    6       35,717       35,405  

Deferred share units liability

    8       847       945  

Asset retirement obligations

    7       21,389       21,108  

Deferred tax liabilities

            17,030       17,565  

Total liabilities

            106,218       111,526  

Shareholders’ Equity

                       

Unlimited common shares authorized, no par value; 179,660,245 and 179,614,947 issued and outstanding at March 31, 2018 and December 31, 2017, respectively

            -       -  

Additional paid-in capital

            378,435       377,714  

Accumulated deficit

            (89,942

)

    (81,944

)

Accumulated other comprehensive loss

            (20,461

)

    (15,741

)

Total shareholders’ equity

            268,032       280,029  

Total liabilities and shareholders’ equity

          $ 374,250     $ 391,555  

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

2

 

 

KLONDEX MINES LTD.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)

(US dollars in thousands, except per share amounts)

 

           

Three months ended March 31,

 
   

Note

   

2018

   

2017

 

Revenues

          $ 56,771     $ 41,710  

Cost of sales

                       

Production costs

            35,449       26,229  

Depreciation and depletion

            13,103       7,728  

Write-down of production inventories

    3       8,517       3,680  
              (298

)

    4,073  

Other operating expenses

                       

General and administrative

            5,824       4,488  

Exploration

            502       127  

Development and projects costs

            -       5,505  

Asset retirement and accretion

            334       381  

Arrangement agreement costs

            3,616       -  

Loss on equipment disposal

            20       116  

(Loss) income from operations

            (10,594

)

    (6,544

)

Other income (expense)

                       

(Loss) gain on derivatives, net

            (128

)

    (2,144

)

Interest expense, net

            (599

)

    (1,158

)

Foreign currency (loss) gain, net

            3,185       (1,021

)

Interest income and other (expense), net

            6       17  

Income (loss) before tax

            (8,130

)

    (10,850

)

Income tax benefit (expense)

    13       132       623  

Net (loss) income

          $ (7,998

)

  $ (10,227

)

                         

Net (loss) income per share

                       

Basic

    14     $ (0.04

)

  $ (0.06

)

Diluted

    14     $ (0.04

)

  $ (0.06

)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3

 

 

KLONDEX MINES LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(US dollars in thousands)

 

   

Three months ended March 31,

 
   

2018

   

2017

 

Net (loss) income

  $ (7,998

)

  $ (10,227

)

Other comprehensive income (loss), net of tax

               

Foreign currency translation adjustments, net of tax benefit (expense) of $1,658 and ($495) for the three months ended March 31, 2018 and 2017, respectively.

    (4,720

)

    1,410  

Comprehensive income (loss)

  $ (12,718

)

  $ (8,817

)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4

 

 

KLONDEX MINES LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(US dollars in thousands)

 

           

Three months ended March 31,

 
   

Note

   

2018

   

2017

 

Operating activities

                       

Net (loss) income

          $ (7,998

)

  $ (10,227

)

Significant items not involving cash

                       

Depreciation and depletion

            13,103       7,890  

Asset retirement and accretion

            334       381  

Derivative fair value adjustments

            572       1,052  

Write-down of production inventories

    3       1,883       1,446  

Foreign exchange, net

            (2,405

)

    899  

Deferred tax expense (benefit)

            (535

)

    240  

Share-based compensation

    12       713       716  

Deliveries under Gold Purchase Agreement(1)

            -       (1,860

)

Loss on equipment disposal

            20       116  

Deferred share unit expense

    8       (72

)

    (91

)

Non-cash interest expense

            (82

)

    153  
              5,533       715  

Changes in non-cash working capital

                       

Inventories

            4,491       (6,414

)

Prepaid expenses and other

            3,113       (1,148

)

Accounts payable

            (4,556

)

    3,339  

Accrued compensation and benefits

            (941

)

    (219

)

Income taxes payable

            370       633  

Net cash provided by (used in) operating activities

            8,010       (3,094

)

Investing activities

                       

Expenditures on mineral properties, plant and equipment

            (2,810

)

    (17,008

)

Change in accounts payable related to expenditures on mineral properties, plant and equipment

            (461

)

    (919

)

Net cash used in investing activities

            (3,271

)

    (17,927

)

Financing activities

                       

Cash transactions related to share-based compensation

            8       1,528  

Cash received from warrant exercises

            -       1,681  

Repayment of capital lease obligations

            (276

)

    (112

)

Payment of debt issuance costs

            (239

)

    (217

)

Net cash (used in) provided by financing activities

            (507

)

    2,880  

Effect of foreign exchange on cash balances

            (143

)

    59  

Net increase (decrease) in cash, cash equivalents and restricted cash

            4,089       (18,082

)

Cash, cash equivalents and restricted cash, beginning of period

            33,229       57,691  

Cash, cash equivalents and restricted cash, end of period

          $ 37,318     $ 39,609  

 

(1)  Represents Revenue less Interest Expense attributable to the Gold Purchase Agreement (as defined herein).

 

See Note 16. Supplemental cash flow information for additional details.

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5

 

 

KLONDEX MINES LTD.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(US dollars in thousands, except shares)

 

   

Note

   

Common

shares

   

Additional

paid-in

capital

   

Accumulated deficit

   

Accumulated

other comprehensive

loss

   

Total

 

Balance at December 31, 2017

            179,614,947     $ 377,714     $ (81,944

)

  $ (15,741

)

  $ 280,029  

Share-based compensation expense

    12       -       713       -       -       713  

Option exercises

            6,667       14       -       -       14  

Restricted share unit vestings, net of shares withheld to satisfy tax withholding

            38,631       (6

)

    -       -       (6

)

Net loss

            -       -       (7,998

)

    -       (7,998

)

Foreign currency translation adjustments

            -       -       -       (4,720

)

    (4,720

)

Balance at March 31, 2018

            179,660,245     $ 378,435     $ (89,942

)

  $ (20,461

)

  $ 268,032  

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

6

 

 

Klondex Mines Ltd.

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

1. Basis of presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements of Klondex Mines Ltd. and its wholly-owned subsidiaries (the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations of the SEC. Therefore, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited Consolidated Financial Statements and related note disclosures of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, all adjustments and disclosures necessary to fairly present the interim financial information set forth herein have been included. These interim financial statements, with the exception of any recently adopted accounting pronouncements described in Note 2. Recent accounting pronouncements, follow the same significant accounting policies disclosed in the Company’s most recent Annual Report on Form 10-K.

 

The results reported in these Condensed Consolidated Financial Statements are not necessarily indicative of the results that may be expected for the entire year or for future years.

 

All amounts are expressed and presented in thousands of United States dollars (unless otherwise noted) and references to “CDN$” refer to Canadian dollars.

 

2. Recent accounting pronouncements

 

Recently adopted

 

Effective January 1, 2018, the Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers” and the applicable related accounting standard updates that followed (collectively referred to as “Topic 606”). The Company adopted Topic 606 using the modified retrospective method, which required it to apply the new revenue standard to (i) all new revenue contracts entered into after January 1, 2018, and (ii) revenue contracts which were not completed as of January 1, 2018. In accordance with this approach, the consolidated revenues for periods prior to January 1, 2018 were not revised and there was no cumulative effect of the adoption of Topic 606 as of January 1, 2018.

 

The Company’s current revenue recognition policy is consistent with Topic 606 which requires that revenue from contracts with customers be recognized when the performance condition to transfer a distinct good is satisfied. The recognition of revenue upon completion of the Company’s performance condition is generally satisfied when title transfers to the customer. As a result, the adoption of Topic 606 did not have an impact on the Company’s financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.” ASU No. 2016-15 addresses eight specific cash flow issues with the objective of reducing the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which for the Company meant the first quarter of the year ending December 31, 2018. The Company has adopted ASU 2016-15, which did not have a material impact on its financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows - Restricted Cash.” ASU No. 2016-18 requires that restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. ASU No. 2016-18 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which for the Company meant the first quarter of the year ending December 31, 2018. The Company has adopted ASU 2016-18, which resulted in the inclusion of restricted cash in its beginning-of-period and end-of-period cash and cash equivalents amounts shown on the statements of cash flows. See Note 16. Supplemental cash flow information for additional detail.

 

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations.” ASU No. 2017-01 clarifies the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU No. 2017-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which for the Company meant the first quarter of the year ending December 31, 2018. The Company has adopted ASU 2017-01, which did not have a material impact on its financial statements.

 

7

 

 

In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation.” ASU No. 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. ASU No. 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which for the Company meant the first quarter of the year ending December 31, 2018. The Company has adopted ASU 2017-09, which did not have a material impact on its financial statements.

 

Recently issued

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” ASU No. 2016-02 requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations resulting from leases. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, which for the Company means the first quarter of the year ending December 31, 2019. The Company is currently evaluating the impact that ASU No. 2016-02 will have on its financial statements.

 

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities.” ASU No. 2017-12 provides amendments that aim to simplify the derivative and hedging accounting guidance under Topic 815 and better align the measurement and presentation of qualifying hedging relationships with risk management activities. ASU No. 2017-12 is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, which for the Company means the first quarter of the year ending December 31, 2019. The Company is currently evaluating the impact that ASU No. 2017-12 will have on its financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement- Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU No. 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU No. 2018-02 is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, which for the Company means the first quarter of the year ending December 31, 2019. The Company is currently evaluating the impact that ASU No. 2018-02 will have on its financial statements.

 

3. Inventories

 

The following table provides the components of Inventories (in thousands):

 

   

March 31,
2018

   

December 31,
2017

 

Supplies

  $ 8,966     $ 9,300  

Production related inventories:

               

Stockpiles

    16,501       18,749  

In-process

    9,980       12,516  

Doré finished goods

    2,292       2,018  
    $ 37,739     $ 42,583  

 

As of March 31, 2018, and December 31, 2017, the Company’s stockpiles, in-process, and doré finished goods inventories included approximately $7.0 million and $7.2 million, respectively, of capitalized non-cash depreciation and depletion costs.

 

The period-end market value of the Company’s production-related inventories is determined in part by using the period-end prices (per ounces) of gold and silver and is sensitive to these inputs. Write-downs have resulted solely from the Company’s application of its lower of average cost or net realizable value accounting policy and were unrelated to any ounce adjustments or changes to recovery rates. Write-downs for the three months ended March 31, 2018 were related to Midas, Hollister and True North (as defined herein).

 

The following table provides information about the Company’s write-downs (in thousands, except per ounce amounts):

 

   

Three months ended March 31,

 

Type of previously incurred cost

 

2018

   

2017

 

Cash production costs

  $ 6,634     $ 2,234  

Allocated depreciation and depletion

    1,883       1,446  

Write-down of production inventories

  $ 8,517     $ 3,680  

 

The period-end prices used in the write-down calculation for March 31, 2018 were $1,324 and $16.28 per gold and silver ounce, respectively. Further declines from March 31, 2018 metal price levels and/or future production costs greater than the March 31, 2018 carrying value included in Inventories could result in, or contribute to, additional future write-downs of production-related inventories.

 

8

 

 

4. Prepaid expenses and other

 

The following table provides the components of Prepaid expenses and other (in thousands):

 

   

March 31,
2018

   

December 31,
2017

 

Prepaid taxes

  $ 2,016     $ 3,496  

Vendor prepayments

    1,049       696  

Prepaid claim maintenance and land holding costs

    505       847  

Canadian taxes receivable

    353       1,568  

Prepaid insurance

    134       178  

Other

    383       795  
    $ 4,440     $ 7,580  

 

5. Mineral properties, plant and equipment, net

 

The following table provides the components of Mineral properties, plant and equipment, net (in thousands):

 

   

March 31,
2018

   

December 31,
2017

 

Mineral properties

  $ 170,759     $ 171,422  

Facilities and equipment

    120,971       120,727  

Mine development

    114,843       112,887  

Land

    3,862       3,887  

Construction in progress

    1,528       1,956  
      411,963       410,879  

Less: accumulated depreciation and depletion

    (135,923

)

    (121,429

)

    $ 276,040     $ 289,450  

 

Facilities and equipment included $3.7 million and $3.1 million at March 31, 2018 and December 31, 2017, respectively, for the gross amount of mobile mine equipment acquired under capital lease obligations. Accumulated depreciation on such mobile mine equipment totaled $1.4 million and $1.1 million at March 31, 2018 and December 31, 2017, respectively.

 

At March 31, 2018, construction in progress of $1.5 million was related to facilities and equipment.

 

6. Debt

 

The following table summarizes the components of Debt (in thousands):

 

   

March 31,
2018

   

December 31,
2017

 

Debt, current:

               

Capital lease obligations

  $ 873     $ 902  
    $ 873     $ 902  

Debt, non-current:

               

Revolver(1)

  $ 34,162     $ 34,173  

Capital lease obligations

    1,555       1,232  
    $ 35,717     $ 35,405  

 

(1) Net of unamortized issuance costs of $0.8 million.

 

9

 

 

The following table summarizes the components of Interest expense, net (in thousands):

 

 

   

Three months ended March 31,

 
   

2018

   

2017

 

Gold Purchase Agreement

  $ -     $ 783  

Revolver interest and stand-by fees

    537       334  

Capital lease obligations

    28       9  

Other

    34       32  
    $ 599     $ 1,158  

 

Revolver

 

On March 23, 2016, the Company, as borrower, and Investec Bank PLC (“Investec”), as lender and security agent, entered into a $25.0 million secured revolving facility agreement (the “Revolver”). The Revolver was amended on October 27, 2016 to increase the borrowing capacity by $10.0 million to $35.0 million. During the year ended December 31, 2016, the Company drew $12.0 million from the Revolver to retire the Promissory Note (as defined herein) related to the acquisition of True North (as defined herein). Borrowings under the Revolver bear interest per annum at LIBOR plus margin plus risk premium, as such terms are defined in the Revolver. Margin is determined by the Company’s gearing ratio (a measure of debt to EBITDA) and ranges from 2.75%-4.00% per annum. Revolver borrowings may be utilized by the Company for working capital requirements, general corporate purposes, and capital investments and expenditures.

 

On March 31, 2017, pursuant to an amendment, the Revolver’s maturity date was extended from March 23, 2018 to December 31, 2019, unless otherwise extended by the parties, and the reserves and resources required to be maintained by the Company under the Revolver were amended. The Revolver is secured by all of the Company’s assets.

 

On December 21, 2017, the Revolver was amended to increase the borrowing capacity by $5.0 million to $40.0 million. During the year ended December 31, 2017, the Company drew $23.0 million from the Revolver, of which approximately $10.0 million was utilized to purchase gold in order to completely fulfill the Gold Purchase Agreement.

 

On February 13, 2018, the Revolver was amended to increase the borrowing capacity by $5.0 million from December 31, 2017 borrowing capacity. This increase relates to an inventory draw, subject to certain adjustments, which added to the aggregate amount available to the Company under the Revolver, thereby increasing the borrowing capacity from $40.0 million to $45.0 million. This amendment expired on April 16, 2018. The total borrowing capacity of the Revolver remains at $40.0 million.

 

Capital lease obligations

 

The Company’s capital lease obligations are for the purchase of mobile mine equipment and passenger vehicles, bear interest at approximately 4.0% per annum, and carry 36 or 48-month terms. The Company’s capital lease obligations are secured by the underlying assets financed.

 

Debt covenants

 

The Company’s debt agreements contain certain representations and warranties, restrictions, events of default, and covenants that are customary for agreements of these types. Additionally, the Revolver contains financial covenants which require the Company to maintain a Tangible Net Worth not less than $100.0 million, a Gearing Ratio (a measure of debt to EBITDA) not greater than 4.00:1, a Cash Balance not less than $10.0 million, and a Current Ratio not less than 1.10:1 (as such terms are defined in the Revolver). The Company was in compliance with all debt covenants as of March 31, 2018 and December 31, 2017.

 

10

 

 

7. Asset retirement obligations

 

The Company’s asset retirement obligations are related to its mining operations, projects, and exploration activities. The Company’s asset retirement obligations are estimated based upon present value techniques of expected cash flows, estimates of inflation, and a credit adjusted risk-free discount rate. The following table provides a summary of changes in the asset retirement obligation (in thousands):

 

   

March 31,
2018

   

December 31,
2017

 

Balance, beginning of period

  $ 21,108     $ 25,436  

Changes in estimates

    -       (5,945

)

Accretion expense

    334       1,523  

Effect of foreign currency

    (53

)

    94  

Balance, end of period

  $ 21,389     $ 21,108  

 

As of March 31, 2018, the Company’s asset retirement obligations were secured by surety bonds totaling $49.4 million, which were partially collateralized by Restricted cash totaling $9.5 million.

 

The following table provides a listing of the Company’s asset retirement obligations by property (in thousands):

 

 

   

March 31,
2018

   

December 31,
2017

 

Midas

  $ 8,529     $ 8,401  

Hollister

    6,005       5,905  

Aurora

    3,807       3,752  

Fire Creek

    1,230       1,210  

True North

    1,818       1,840  
    $ 21,389     $ 21,108  

 

8. Deferred share units liability

 

In May 2016, the Board of Directors adopted the Deferred Share Unit Plan (the “DSU Plan”) to: (1) assist the Company in the recruitment and retention of qualified non-employee directors and (2) further align the interests of directors with shareholders. The DSU Plan is administered by the Compensation and Governance Committee of the Board of Directors of the Company. Under the DSU Plan, non-employee directors may receive a portion of their annual compensation in the form of Deferred Share Units (“DSUs”). The value of a DSU is determined as the weighted average closing price of the Company’s common shares on the TSX for the five days preceding such valuation date (the “DSU Value”). DSUs are fully vested at the time of grant and are retained until a director is separated or terminated from the Board of Directors of the Company, at which time the number of DSUs credited to such director’s account multiplied by the DSU Value is to be paid out in cash. In the event the Company pays cash dividends, additional DSUs are to be credited to each director’s account in an amount equal to the cash value that would have been received by the directors had the DSUs been held as common shares of the Company divided by the DSU Value. DSUs have no voting rights.

 

The fair value of DSUs granted each year, together with the change in fair value of all outstanding DSUs, is recorded within General and administrative and totaled $(0.1) million and $(0.1) million during the three months ended March 31, 2018 and 2017, respectively.

 

The following table provides a summary of the Company’s outstanding DSUs:

 

   

Three months

ended March 31,

2018

 

Outstanding at beginning of period

    360,366  

Granted

    -  

Redeemed

    -  

Outstanding at end of period

    360,366  

 

11

 

 

9. Derivatives

 

The following table provides a listing of the Company’s derivative instruments (in thousands):

 

 

Description

 

Recorded Within

 

March 31,
2018

   

December 31,
2017

 

Forward metal sales

 

Derivative assets, current

  $ 17     $ 17  
        $ 17     $ 17  
                     

Gold Offering Agreement

 

Derivative liabilities, current

  $ -     $ 170  

Gold Collar and Forward Priced

 

Derivative liabilities, current

    735       -  
        $ 735     $ 170  

 

The following table lists the net amounts recorded for (Loss) gain on derivatives, net (in thousands):

 

 

   

Three months ended March 31,

 
   

2018

   

2017

 

Gold Purchase Agreement embedded derivative

    -       (1,407

)

Gold Offering Agreement

    32       (342

)

Forward metal sales(1)

    583       (395

)

Gold Collar and Forward Priced

    (743

)

    -  
    $ (128

)

  $ (2,144

)

 

(1) (Loss) gain on settlement and revaluation of forward metal sales derivative instruments, which was determined by the difference in the fixed forward price received by the Company and the spot price on the applicable delivery date. See Forward Metal Sales discussed below.

 

Gold Purchase Agreement embedded derivative

 

The Company’s Gold Purchase Agreement was settled during the year ended December 31, 2017. The Gold Purchase Agreement contained an embedded compound derivative for: 1) the prepayment option, which was at the discretion of the Company, and 2) the forward sales component, which was established on the transaction date and incorporated the then current forward gold prices. In addition to recurring fair value adjustments, gains and losses on the Gold Purchase Agreement’s embedded derivative related to the difference in the forward gold price received by the Company and the spot price of gold on each delivery date. The following table summarizes information about past gold deliveries under the Gold Purchase Agreement:

 

   

Three months ended March 31,

 
   

2018

   

2017

 

Gold ounces

    -       2,000  

Average forward gold price

  $ -     $ 1,322  

Average gold spot price on delivery date

  $ -     $ 1,238  

 

Gold Offering Agreement

 

In March 2011, the Company entered into a gold offering agreement, as amended in October 2011 (the “Gold Offering Agreement”), which granted the counterparty the right to purchase, on a monthly basis, the refined gold produced from the Fire Creek mine (“Fire Creek”) for a five-year period which began in February 2013 and ended in February 2018. When/if the counterparty elected to purchase the refined gold, the purchase price was calculated as the average PM settlement price per gold ounce on the London Bullion Market Association for the 30 trading days immediately preceding the relevant purchase election date. In addition to recurring fair value adjustments, gains and losses on the Gold Offering Agreement related to: 1) the difference in the gold price paid to the Company from the counterparty and the spot price of gold on the applicable delivery date, and 2) losses incurred by the Company to net cash settle any obligations arising from the Gold Offering Agreement. The following table summarizes information about gold purchased under the Gold Offering Agreement:

 

   

Three months ended March 31,

 
   

2018

   

2017

 

Gold ounces purchased by counterparty

    -       22,040  

Average gold price paid to the Company

  $ -     $ 1,206  

Average gold spot price on delivery date

  $ -     $ 1,250  

 

12

 

 

Forward metal sales

 

In order to increase the certainty of expected future cash flows, from time to time, the Company enters into fixed forward spot trades for a portion of its projected gold and silver sales. These agreements are considered derivative financial instruments. The following table summarizes information about the Company’s forward trades entered into during the respective periods:

 

   

Three months ended March 31,

 
   

2018

   

2017

 

Gold ounces covered

    36,073       48,558  

Average price per gold ounce

  $ 1,322     $ 1,236  

Silver ounces covered

    -       287,000  

Average price per silver ounce

  $ -     $ 17.88  

 

Gold Collar & Forward Priced

 

The Company entered into short-term zero cost gold collars. The collars total 30,450 gold ounces from April 1, 2018 through December 31, 2018 with a floor ranging from $1,300 to $1,325 per ounce and a ceiling ranging from $1,340 to $ $1,376 per ounce. Forward priced ounces totaled 36,073 ounces at an average price per ounce of $1,322 per ounce. The value of these collars and forward priced ounces at March 31, 2018 was $(0.7) million.

 

10. Fair value measurements

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities recorded at fair value in the Condensed Consolidated Financial Statements are classified using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurements. The fair value hierarchy has the following levels:

 

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date;

 

Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for the full term of the asset or liability; and

 

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and are not observable.

 

Financial assets and liabilities are classified in their entirety based upon the lowest level of input that is significant to the fair value measurement. There were no transfers between fair value hierarchy levels during the three months ended March 31, 2018. The following table provides a listing (by level) of the Company’s financial assets and liabilities which are measured at fair value on a recurring basis (in thousands):

 

   

March 31, 2018

   

December 31, 2017

 

Assets:

 

Level 1

   

Level 2

   

Level 3

   

Level 1

   

Level 2

   

Level 3

 

Forward metal sales

  $ -     $ 17     $ -     $ -     $ 17     $ -  
    $ -     $ 17     $ -     $ -     $ 17     $ -  
                                                 

Liabilities:

                                               

Deferred share units liability

  $ -     $ 847     $ -     $ -     $ 945     $ -  

Gold Offering Agreement

    -       -       -       -       -       170  

Gold Collar

    -       735       -       -       -       -  
    $ -     $ 1,582     $ -     $ -     $ 945     $ 170  

 

 

13

 

 

Forward metal sales - Forward metal sales are valued using observable inputs, which are forward metal prices. Such instruments are classified within Level 2 of the fair value hierarchy.

 

Gold Collar and Forward Priced - The Company’s gold collar is valued based on a Black-Scholes model with various observable inputs. These inputs include contractual terms, gold market prices, volatility of gold prices, and risk free interest rates. These derivatives are classified within Level 2 of the valuation hierarchy.

 

Deferred share units liability - This liability was valued using the number of outstanding DSUs and quoted closing prices of the Company’s common shares, which are traded in active markets, and as such is classified within Level 2 of the fair value hierarchy. The fair value was calculated as the number of DSUs outstanding multiplied by the period end DSU Value.

 

Gold Offering Agreement - This liability was valued by a third-party consultant (and reviewed by the Company) using a simulation-based pricing model and is classified within level 3 of the fair value hierarchy as it incorporates an estimate of the Company’s future gold production from Fire Creek, which is not an observable input, as well as quoted prices from active markets and certain observable inputs, such as, forward gold prices and the volatility of such prices. The Gold Offering Agreement expired on February 28, 2018.

 

Items disclosed at fair value - Other than the above, the carrying values of financial assets and liabilities approximate their fair values, other than Debt, which is carried at amortized cost.

 

Level 3 information

 

The following table provides additional detail for the Company’s Level 3 financial liability (in thousands):

 

 

Gold Offering Agreement liability:

 

March 31,
2018

 

Balance at beginning of the period

  $ 170  

Gain from change in fair value

    (170

)

Balance at end of the period

  $ -  
         

(Loss) gain on derivative, net:

       

Settlement losses

  $ (138

)

Gain from change in fair value

    170  
    $ 32  

 

11. Share capital

 

Common shares

 

The authorized share capital of the Company is comprised of an unlimited number of common shares with no par value. Common shares are typically issued in conjunction with corporate financing efforts, the exercise of warrants (discussed below), and pursuant to share-based compensation arrangements (see 12. Share-based compensation).

 

Share Purchase Warrants

 

The Company has previously issued share purchase warrants in conjunction with its acquisition of Hollister (as defined herein) in 2016 and other past debt and equity financing transactions. The following table summarizes the Company’s warrant activity:

 

   

March 31, 2018

 

Warrants

 

Number of

Warrants

   

Weighted
Average Exercise

Price - CDN$

 

Outstanding, beginning of period

    10,001,242     $ 4.07  

Exercised

    -       -  

Outstanding, end of period

    10,001,242     $ 4.07  

Exercisable, end of period

    10,001,242     $ 4.07  

 

 

14

 

 

The following table provides a summary of the Company’s outstanding warrants:

 

     

March 31, 2018

 

Exercise price per share - CDN$

   

Number

outstanding

   

Weighted

average

remaining life

(years)

   

Weighted

average exercise

price - CDN$

 
$2.00 - $2.49       5,001,242       10.87       2.15  
$6.00       5,000,000       14.01       6.00  
        10,001,242       12.44     $ 4.07  

 

12. Share-based compensation

 

The Company has a Share Option and Restricted Share Unit Plan (“New Share Plan”) to compensate eligible participants, which can include directors, officers, employees, and service providers to the Company. The New Share Plan is administered by the Board of Directors of the Company and is subject to conditions and restrictions over award terms, grant limits, and grant prices. The New Share Plan was approved at the June 15, 2016 annual and special meeting of shareholders. Subject to certain adjustments, the maximum number of common shares available for grant under the New Share Plan is equal to 8.9% of the common shares then outstanding less the aggregate number of common shares reserved for issuance under all of the Company’s other share-based compensation plans. Additionally, the maximum number of common shares available for issuance pursuant to grants under the restricted share unit portion of the New Share Plan is subject to a sub-cap and cannot exceed 4.0% of the total number of common shares outstanding at the time of grant of the applicable award.

 

The New Share Plan replaced the Company’s Share Incentive Plan (the “Legacy SIP”), which permitted the granting of share options and common share awards. Awards outstanding under the Legacy SIP will continue to vest in accordance with their grant terms and reduce the number of shares available for issuance under the New Share Plan (discussed above).

 

Share-based compensation costs

 

The following table summarizes the Company’s share-based compensation cost by award type (in thousands):

 

   

Three months ended March 31,

 

Share-based compensation cost by award

 

2018

   

2017

 

Share options

  $ 56     $ 173  

Restricted share units - time vesting criteria

    538       444  

Restricted share units - performance vesting criteria

    119       92  

Common share awards

    -       7  
    $ 713     $ 716  

 

The following table summarizes activity of the Company’s share-based compensation for restricted share units (“RSUs”) and share options:

 

   

Three months ended March 31, 2018

 
   

Restricted share

units - time-based vesting(1)

   

Restricted

share units - performance-

based vesting

   

Share options

 

Outstanding, beginning of period

    1,456,481       507,633       4,067,583  

Forfeited

    (110,732

)

    (53,028

)

    (34,445

)

Vested and issued(2)

    (39,830

)

    (6,716

)

    -  

Exercised(3)

    -       -       (6,667

)

Outstanding, end of period

    1,305,919       447,889       4,026,471  

 

(1) Includes awards with comparable terms and characteristics of RSUs, even if such awards are not called “RSUs” under the plan they were granted.

(2) Not applicable to Share options.

(3) Only applicable to Share options.

 

15

 

 

13. Income taxes

 

Major components of our income tax benefit (expense) for the three months ended March 31, 2018 and 2017 are as follows (in thousands):

 

   

Three months ended March 31,

 
   

2018

   

2017

 

Current:

               

Canada

  $ -     $ -  

United States

    294       864  

Total current income tax (expense) benefit

    294       864  

Deferred:

               

Canada

    -       -  

United States

    (162

)

    (241

)

Total deferred income tax (expense)

    (162

)

    (241

)

Total income tax (expense) benefit

  $ 132     $ 623  

 

14. Net (loss) income per share

 

Basic net (loss) income per share is calculated by dividing net income by the weighted average number of shares outstanding for the period. Diluted net (loss) income per share reflects the potential dilution that would occur if outstanding share-based instruments were executed. The following table provides computations of the Company’s basic and diluted net (loss) income per share (in thousands, except per share amounts):

 

   

Three months ended March 31,

 
   

2018

   

2017

 

Net (loss) income

  $ (7,998

)

  $ (10,227

)

Weighted average common shares:

               

Basic

    179,615,936       175,570,592  

Effect of:

               

Share options

    -       -  

Warrants

    -       -  

Common share awards

    -       -  

Restricted share units(1)

    -       -  

Special warrants

    -       -  

Diluted

    179,615,936       175,570,592  

Net (loss) income per share

               

Basic

  $ (0.04

)

  $ (0.06

)

Diluted

  $ (0.04

)

  $ (0.06

)

 

(1) Represents restricted share units with time-based and performance-based vesting criteria.

 

For the three months ended March 31, 2018, the impact of dilutive share-based instruments was determined using the Company’s average share price, which was CDN$2.43. For the three months ended March 31, 2017, the impact of dilutive share-based instruments was determined using the Company’s average share price, which was CDN$6.66.

 

Diluted net (loss) income per share excludes common share-based instruments in periods where inclusion would be anti-dilutive. During the three months ended March 31, 2018, the Company’s basic weighted average common shares and diluted weighted average common shares were the same because the effects of potential execution was anti-dilutive due to the Company’s net loss. Had the Company generated net income during the three months ended March 31, 2018, the effects from executing 568,192 warrants, 330,660 share options, and 316,016 restricted share units would have been included in the weighted average common shares calculation. During the three months ended March 31, 2017, had the Company generated net income, the effects from executing 3,878,026 warrants, 2,595,078 share options, and 546,196 restricted share units would have been included in the diluted weighted average common shares calculation.

 

16

 

 

15. Segment information

 

The Company’s reportable segments are comprised of operating units which have revenues, earnings or losses, or assets exceeding 10% of the respective consolidated totals, each of which is reviewed by the Company’s Chief Executive Officer to make decisions about resources to be allocated to the segments and to assess their performance. The tables below summarize segment information:

 

Three months ended March 31, 2018

 

Fire Creek

   

Midas

   

Hollister

   

Aurora

   

True North

   

Corporate

and other

   

Total

 

Revenues

  $ 20,505     $ 14,038     $ 13,380     $ 1,981     $ 6,867     $ -     $ 56,771  

Cost of sales

                                                       

Production costs

    7,569       10,382       7,323       2,007       8,168       -       35,449  

Depreciation and depletion

    3,486       5,203       1,610       297       2,507       -       13,103  

Write-down of production inventories

    -       1,715       5,342       -       1,460       -       8,517  
      9,450       (3,262

)

    (895

)

    (323

)

    (5,268

)

    -       (298

)

Other operating expenses

                                                       

General and administrative

    238       232       208       49       1,191       3,906       5,824  

Exploration

    41       41       420       -       -       -       502  

Asset retirement and accretion

    20       128       100       55       31       -       334  

Arrangement agreement costs

    -       -       -       -       -       3,616       3,616  

Loss on equipment disposal

    -       20       -       -       -       -       20  

Income (loss) from operations

  $ 9,151     $ (3,683

)

  $ (1,623

)

  $ (427

)

  $ (6,490

)

  $ (7,522

)

  $ (10,594

)

Capital expenditures

  $ 1,265     $ 1,525     $ (19

)

  $ (2

)

  $ 26     $ 15     $ 2,810  

Total assets

  $ 52,128     $ 72,686     $ 126,255     $ 16,548     $ 55,873     $ 50,760     $ 374,250

 

    

17

 

 

 

Three months ended March 31, 2017

 

Fire Creek

   

Midas

   

Hollister

   

Aurora

   

True North

   

Corporate

and other

   

Total

 

Revenues

  $ 20,451     $ 15,789     $ -     $ -     $ 5,470     $ -     $ 41,710  

Cost of sales

                                                       

Production costs

    6,781       12,542       -       -       6,906       -       26,229  

Depreciation and depletion

    1,657       4,536       -       -       1,535       -       7,728  

Write-down of production inventories

    -       951       -       -       2,729       -       3,680  
      12,013       (2,240

)

    -       -       (5,700

)

    -       4,073  

Other operating expenses

                                                       

General and administrative

    191       156       -       -       253       3,888       4,488  

Exploration

    127       -       -       -       -       -       127  

Development and projects costs

    -       -       5,505       -       -       -       5,505  

Asset retirement and accretion

    36       177       96       42       30       -       381  

Loss on equipment disposal

    36       80       -       -       -       -       116  

Income (loss) from operations

  $ 11,623     $ (2,653

)

  $ (5,601

)

  $ (42

)

  $ (5,983

)

  $ (3,888

)

  $ (6,544

)

Capital expenditures

  $ 6,804     $ 5,544     $ 298     $ 615     $ 3,458     $ 289     $ 17,008  

Total assets

  $ 55,664     $ 109,636     $ 116,340     $ 16,199     $ 49,179     $ 28,474     $ 375,492  

 

16. Supplemental cash flow information

 

Condensed Consolidated Statements of Cash Flows (in thousands):

 

   

Three months ended March 31,

 
   

2018

   

2017

 

Cash and cash equivalents

  $ 27,814     $ 29,554  

Restricted cash

    9,504       10,055  

Total cash, cash equivalents and restricted cash(1)

  $ 37,318     $ 39,609  

 

(1) The cash and cash equivalents and restricted cash balances were $23,674 and $9,555, respectively as of December 31, 2017, as shown on the Condensed Consolidated Balance Sheets.

 

Amounts included in restricted cash represent cash deposits which collateralize surety bonds associated with asset retirement obligations. See Note 7. Asset retirement obligations to the Notes to Condensed Consolidated Financial Statements for additional detail.

 

18

 

 

The following table provides a summary of significant supplemental cash flow information (in thousands):

 

   

Three months ended March 31,

 
   

2018

   

2017

 

Cash paid for federal and state income taxes

  $ -     $ -  

Cash paid for interest

    599       1,181  

Mobile equipment acquired through capital lease obligations

    570       -  

Change in accounts payable related to purchase of mineral properties, plant, and equipment

    461       919  

 

17. Commitments and contingencies

 

From time to time the Company is involved in legal actions related to our business; however, management does not believe, based on currently available information, that contingencies related to any pending or threatened legal matter will have a material adverse effect on the Company’s financial position, although a contingency could be material to the Company’s results of operations or cash flows for a particular period depending on the results of operations and cash flows for such period. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense costs, diversion of management resources, and other factors.

 

Royalty commitments

 

Certain patented and unpatented mining claims at all mine sites are subject to lease and royalty agreements that require payments to holders based on minimum annual payment schedules and/or a percentage of the mineral values produced from, or transported through, the royalty claims. Amounts due pursuant to royalty agreements are not recorded in the Condensed Consolidated Financial Statements until such time when the amounts are actually payable. The primary type of royalty agreement applicable to the mine sites is a net smelter return (“NSR”) royalty. Under an NSR royalty, the amount paid by the Company to the royalty holder is generally calculated as the royalty percentage multiplied by the market value of the minerals produced less charges and costs for milling, smelting, refining, and transportation. During the three months ended March 31, 2018, and 2017, the Company paid nil and nil, respectively, all of which were related to minimum and advance royalty payments.

 

 

(Back To Top)

Section 5: EX-99.3 (EXHIBIT 99.3)

ex_118142.htm

Exhibit 99.3

 

 

 

INDEX TO FINANCIAL STATEMENTS OF KLONDEX MINES LTD.

 

   

Page

Report of Independent Registered Public Accounting Firm

 

2

     

Consolidated Balance Sheets at December 31, 2017 and 2016

 

3

     

Consolidated Statements of (Loss) Income for the Years Ended December 31, 2017, 2016 and 2015

 

4

     

Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2017, 2016 and 2015

 

5

     

Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015

 

6

     

Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015

 

7

     

Notes to Consolidated Financial Statements

 

8

 

 

 

1

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Shareholders and the Board of Directors of Klondex Mines Ltd.

 

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Klondex Mines Ltd. and of its subsidiaries as of December 31, 2017 and December 31, 2016, and the related consolidated statements of income (loss), comprehensive income (loss), cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and December 31, 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ PricewaterhouseCoopers LLP

Chartered Professional Accountants

Vancouver, BC, Canada

 

March 14, 2018

 

We have served as the Company’s auditor since 2014.

 

 

2

 

 

KLONDEX MINES LTD.

CONSOLIDATED BALANCE SHEETS

(US dollars in thousands)

 

 

   

Note

   

December 31,
2017

   

December 31,
2016

 

Assets

                       

Current assets

                       

Cash and cash equivalents

          $ 23,674     $ 47,636  

Inventories

    5       42,583       21,310  

Prepaid expenses and other

    6       7,580       4,678  

Derivative assets

    11       17       1,247  

Total current assets

            73,854       74,871  

Mineral properties, plant and equipment, net

    7       289,450       276,223  

Derivative assets

    11       -       1,545  

Restricted cash

            9,555       10,055  

Deferred tax assets

    15       18,696       17,284  

Total assets

          $ 391,555     $ 379,978  

Liabilities

                       

Current liabilities

                       

Accounts payable

          $ 28,302     $ 23,797  

Accrued compensation and benefits

            4,296       4,672  

Derivative liabilities

    11       170       1,721  

Debt

    8       902       8,502  

Provision for legal settlement

            -       3,000  

Income taxes payable

            2,833       -  

Total current liabilities

            36,503       41,692  

Derivative liabilities

    11       -       331  

Debt

            35,405       21,689  

Deferred share units liability

    10       945       812  

Asset retirement obligations

    9       21,108       25,436  

Deferred tax liabilities

    15       17,565       11,964  

Total liabilities

            111,526       101,924  

Commitments and contingencies

    21                  

Shareholders’ Equity

                       

Unlimited common shares authorized, no par value; 179,614,947 and 175,251,538 issued and outstanding at December 31, 2017 and 2016, respectively

            -       -  

Additional paid-in capital

            377,714       363,899  

Accumulated deficit

            (81,944

)

    (58,280

)

Accumulated other comprehensive loss

            (15,741

)

    (27,565

)

Total shareholders’ equity

            280,029       278,054  

Total liabilities and shareholders’ equity

          $ 391,555     $ 379,978  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3

 

 

KLONDEX MINES LTD.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(US dollars in thousands, except per share amounts)

 

           

Years ended December 31,

 
   

Note

   

2017

   

2016

   

2015

 

Revenues

          $ 240,651     $ 198,175     $ 154,081  

Cost of sales

                               

Production costs

            134,311       106,389       83,318  

Depreciation and depletion

            47,778       28,242       22,452  

Write-down of production inventories

    5       24,766       2,869       1,201  
              33,796       60,675       47,110  

Other operating expenses

                               

General and administrative

            19,401       15,804       12,375  

Exploration

            8,246       12,765       9,813  

Development and projects costs

            11,674       8,953       -  

Asset retirement and accretion

            (1,872

)

    2,653       871  

Business acquisition costs

            -       2,253       328  

Provision for legal settlement

            -       3,000       -  

Loss on equipment disposal

            352       126       352  

(Loss) income from operations

            (4,005

)

    15,121       23,371  

Other income (expense)

                               

(Loss) gain on derivatives, net

    11       (1,182

)

    (7,646

)

    3,367  

Interest expense, net

            (4,117

)

    (5,339

)

    (7,298

)

Foreign currency (loss) gain, net

            (8,601

)

    651       15,059  

Loss on debt extinguishment

    8       (288

)

    (519

)

    (2,103

)

Interest income and other (expense), net

            125       (244

)

    119  

Income (loss) before tax

            (18,068

)

    2,024       32,515  

Income tax benefit (expense)

    15       (5,596

)

    (3,724

)

    11,738  

Net (loss) income

          $ (23,664

)

  $ (1,700

)

  $ 44,253  
                                 

Net (loss) income per share

                               

Basic

    16     $ (0.13

)

  $ (0.01

)

  $ 0.33  

Diluted

    16     $ (0.13

)

  $ (0.01

)

  $ 0.32  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4

 

 

KLONDEX MINES LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(US dollars in thousands)

 

   

Years ended December 31,

 
   

2017

   

2016

   

2015

 

Net (loss) income

  $ (23,664

)

  $ (1,700

)

  $ 44,253  

Other comprehensive income (loss), net of tax

                       

Foreign currency translation adjustments, net of tax (expense) benefit of ($4,154), $523, and $5,129 for the years ended December 31, 2017, 2016, and 2015, respectively.

    11,824       (1,488

)

    (14,598

)

Comprehensive income (loss)

  $ (11,840

)

  $ (3,188

)

  $ 29,655  

 

The accompanying notes are an integral part of the consolidated financial statements.

5

 

 

KLONDEX MINES LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(US dollars in thousands)

 

           

Years ended December 31,

 
   

Note

   

2017

   

2016

   

2015

 

Operating activities

                               

Net (loss) income

          $ (23,664

)

  $ (1,700

)

  $ 44,253  

Significant items not involving cash

                               

Depreciation and depletion

            47,940       28,909       20,350  

Asset retirement and accretion

            (1,872

)

    2,653       871  

Derivative fair value adjustments

            981       2,155       (4,427

)

Write-down of production inventories

    5       6,058       546       185  

Foreign exchange, net

            10,287       (18

)

    (13,617

)

Deferred tax expense (benefit)