Acquisition of ECU Silver Mining Inc.

9 Months Ended

Sep. 30, 2012

Acquisition of ECU Silver Mining Inc.

Acquisition of ECU Silver Mining Inc.

20.  Acquisition of ECU Silver Mining Inc.

On September 2, 2011, the Company completed the Transaction with ECU. Pursuant to the terms and conditions of an agreement dated June 24, 2011, between the Company and ECU, the businesses of the Company and ECU were combined by way of a court-approved plan of arrangement (the “Arrangement”) pursuant to the provisions of the Business Corporations Act (Québec).

Pursuant to the Arrangement Agreement:

·each ECU common share outstanding immediately prior to the effective time of the Arrangement on September 2, 2011 (the “Effective Time”) was exchanged for the right to receive 0.05 shares of the Company’s common stock (the “Exchange Ratio”) and Cdn$0.000394 in cash, resulting in the issuance of 16,004,111 shares of common stock and payment of approximately Cdn$126,112 in cash;

·each warrant to purchase ECU common shares (an “ECU Warrant”) outstanding immediately prior to the Effective Time issued pursuant to ECU’s February 2009 warrant indenture or ECU’s December 2009 warrant indenture was exchanged at the Exchange Ratio for the right to receive a warrant to purchase shares of the Company’s common stock (a “Replacement Warrant”) on the same terms and conditions as were applicable to such ECU Warrant immediately prior to the Effective Time, resulting in the issuance of warrants to purchase 386,363 shares of the Company’s common stock at an exercise price of Cdn$18.00 per share expiring on December 9, 2011, and warrants to purchase 1,831,929 shares of the Company’s common stock at an exercise price of Cdn$19.00 per share expiring on February 20, 2014; and

·each option to purchase ECU common shares (an “ECU Option”) outstanding immediately prior to the Effective Time granted under the ECU’s stock option plan was exchanged at the Exchange Ratio for an option to purchase shares of the Company’s common stock (a “Replacement Option”) on the same terms and conditions as were applicable to the corresponding ECU Options immediately prior to the Effective Time; resulting in the issuance of options to purchase 653,000 shares of the Company’s common stock at exercise prices ranging Cdn$16.00 and Cdn$60.00 and with expiration dates ranging from September 24, 2011 to October 22, 2014.

The Company incurred approximately $4.7 million of transaction costs for financial advisory, legal, accounting, tax and consulting services as part of the Arrangement. The Company also incurred approximately $2.5 million in severance related payments as part of the termination of ECU’s officers and certain employees following the acquisition of ECU. The transaction and severance payment costs were recognized separately from the purchase price for the Arrangement.

The Company followed the acquisition method of accounting in accordance with ASC 805 “Business Combinations” (“ASC 805”). The following tables summarize the preliminary calculation of the purchase price and the fair values of the assets acquired and liabilities assumed on September 2, 2011 in connection with the Transaction.

Calculation of purchase price ($000’s):

Cash consideration	$	129
Stock consideration (a)	223,097
Replacement options (b)	1,109
Replacement warrants (b)	8,744
Total purchase price	$	233,079

(a)The value of the Company’s common stock was $13.94 per share, the closing price on the NYSE Amex September 2, 2011.

(b)The fair value of Replacement Options and Replacement Warrants was determined using a Black-Scholes pricing model.

Allocation of purchase price ($000’s):

Current assets (c)	$	9,001
Inventories (d)	1,520
Mineral properties (e)	239,200
Asset retirement cost (e)	1,883
Exploration properties (e)	12,732
Plant and equipment (f)	14,059
Goodwill (g)	70,155
Deferred tax asset (h)	8,797
Current liabilities (c)	(26,122		)
Long term debt (c)	(30,752		)
Asset retirement obligation (e)	(1,883		)
Deferred tax liability (h)	(65,511		)
Total purchase price	$	233,079

(c)Monetary assets and liabilities assumed have been recorded at their carrying values, which approximate fair value. Long term debt includes: (1) a term loan payable to two investment funds managed by IIG Capital, LLC in the amount of $15.5 million, and (2) a convertible note (the “Note”) payable to the Company in the amount of $15.2 million. The Note, the funds from which were provided to ECU prior to the consummation of the Arrangement in a separate transaction, is eliminated for financial reporting purposes in consolidation with the Company’s corresponding note receivable.

(d)Inventories consist of salable concentrate, precipitate and doré recorded at net realizable value.

(e)Mineral properties and the asset retirement obligation are recorded at estimated fair market value based on valuations performed with the assistance of an independent appraisal firm and a minerals engineering company. The asset valuations were derived in accordance with the guidance of ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC 820”) using a combination of income, market and cost approach models depending on the asset. In applying the appropriate valuation model or models, the valuation consultants employed a variety of economic factors and market data, including discount rates, income tax rates, projections of future metals prices, and third party market surveys. The mineral properties will be amortized on a units of production basis as minerals are depleted.

(f)Plant and equipment purchased in the Arrangement have been recorded at fair value based on valuations performed with the assistance of an independent appraisal firm in accordance with the guidance of ASC 820. The plant and equipment will be depreciated on a straight line basis over their remaining useful lives.

(g)Goodwill 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 (see Note 9). The goodwill is not deductable for income tax purposes.

(h)The deferred tax asset is related to certain net operating loss carry forwards available in Mexico. The deferred tax liability was calculated by applying the Mexico corporate income tax rate of 28% to the difference between the fair value and the tax basis of the assets acquired and liabilities assumed and it does not reflect fair value. The deferred tax asset and deferred tax liability are netted for presentation on the accompanying balance sheet.

At the time of the acquisition, the Company, with the help of a third party engineering firm, estimated the ARO and ARC to be approximately $3.5 million based on the engineering firm’s experience with mining operations of similar size and scope as that of the Velardeña mines. Shortly after the completion of the acquisition the Company retained the services of another engineering firm to complete a detailed closure plan for the Velardeña mines. That plan was completed during the second quarter 2012 and indicated an ARO and ARC of approximately $1.9 million. The ARO and ARC amounts were adjusted accordingly as set forth in the purchase price allocation table above.