Goodwill

9 Months Ended

Sep. 30, 2012

Goodwill

Goodwill

9.   Goodwill

The carrying value of goodwill, related to the Mexico ECU reporting unit, was $12.9 million at September 30, 2012 and $70.2 million at December 31, 2012. The reduction in the carrying value of goodwill is the result of the Company recording an impairment charge of $57.2 million during the third quarter 2012 which is reflected in operating costs and expenses in the accompanying consolidated statements of operations.

Goodwill is related to the Transaction (see Note 20) and is primarily the result of the requirement to record a deferred tax liability for the difference between the fair value and the tax basis of the assets acquired and liabilities assumed at amounts that do not reflect fair value.  The goodwill is not deductable for income tax purposes.

The Company assesses the recoverability of its long lived assets, including goodwill, whenever events or changes in circumstances indicate that the carrying value of the assets may be impaired. In the year since the completion of the Transaction, the Company’s forecast of future gold and silver prices has decreased by approximately 20% and certain assumptions related to ore processing throughput rates and other aspects of the long term operating plan for the Velardeña Operations have changed. As a result of these changes, and per the guidance of ASC 350, the Company completed an impairment analysis of the goodwill carrying value.  The analysis indicated that goodwill was impaired by the amount indicated above.

The impairment amount was calculated by applying the income approach to determine the fair value of the net assets of the reporting unit per the guidance of ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC 820”).  The Company utilized discounted cash flows and an excess earnings model to determine the fair value of the entity and the implied goodwill. This model falls within level 3 of the fair value hierarchy per ASC 820 (see Note 13) and includes various inputs including the weighted average cost of capital, future metals prices, and assumptions from the Company’s Velardeña Operations operating plan extended over a twenty five year period. The most significant unobservable factors are certain assumptions used in the Velardeña Operations operating plan and include: 1) ore grades consistent with the Company’s current and previously reported estimates of mineralized material, 2) plant throughput consistent with the Company’s plan to ramp up to 1,150 tonnes per day by 2014, and 3) the Company’s projections of operating costs.  The weighted average cost of capital of 21 percent and forecast of future metals prices were obtained from a third party valuation consultant that derived the data from corroborated observable market data.  Metals prices used in the analysis for silver ranged from $35.78 to $21.88 per ounce and for gold from $1,879 to $1,315 per ounce.