2. Impairment of Long Lived Assets

Velardeña Properties Asset Group

The Velardeña Properties asset group consists of the property, plant, and equipment and working capital related to the Velardeña Properties. Per the guidance of ASC 360, “Property, Plant and Equipment” (“ASC 360”), the Company assesses the recoverability of its long-lived assets, including property, plant and equipment, at least annually, or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Prices for silver and gold decreased approximately 34% and 26% respectively from March 31, 2013 to June 30, 2013. The significant decrease in metals prices and the shutdown of mining and processing at the Velardeña Properties at the end of the second quarter (see Note 1) were events that required an assessment of the recoverability of the Velardeña Properties asset group at June 30, 2013. Per the guidance of ASC 360, recoverability of an asset group is not achieved if the projected undiscounted, pre-tax cash flows related to the asset group are less than its carrying amount. In its analysis of projected cash flows from the Velardeña Properties, the Company determined that the Velardeña Properties asset group was impaired. As a result, at June 30, 2013 the Company wrote the asset group down to its fair value and recorded an impairment charge of $229.4 million related to the property, plant and equipment. In addition, the Company recorded an additional impairment charge of approximately $5.9 related to the Velardeña Properties asset group property, plant and equipment at December 31, 2013 as discussed below.

The Company also recomputed deferred tax assets and liabilities associated with the Velardeña Properties asset group and determined, based on the new carrying value of the Velardeña Properties asset group, that no net deferred tax liabilities exist. Therefore, the net deferred tax liabilities calculated prior to the impairment of approximately $45.0 million were written off and the Company recorded an income tax benefit equal to that amount for the quarter ended June 30, 2013 (see Note 14).

In arriving at a fair value for the Velardeña mineral deposit and exploration properties at June 30, 2013, the Company used a market valuation approach, which the Company deemed reasonable under the circumstances, that considered a combination of: (1) recently published market data reflecting an average in the ground mineral resource value for a representative group of junior silver mining companies primarily located in Mexico and South America, and (2) recent mineral resource acquisition and development cost data provided by a third party mining engineering consultant. From this data the Company inferred an enterprise value for the Velardeña Properties of approximately $0.39 per ounce of estimated equivalent silver ounces contained in the Velardeña Properties deposit. From the derived enterprise value the Company subtracted the fair value assigned to tangible assets and working capital to arrive at a residual value for the mineral and exploration properties. Using this approach, the Company determined that the Velardeña Property and exploration properties had a fair value of approximately $21.2 million at June 30, 2013 resulting in an impairment charge of $215.1 million.

At December 31, 2013 the Company reviewed the remaining carrying value of the Velardeña Properties mineral deposit and determined that the published market data reflecting an average in the ground mineral resource value had decreased in value since the June 30, 2013 analysis. From the published data at December 31, 2013 the Company inferred an enterprise value for the Velardeña Properties of approximately $0.29 per ounce of estimated equivalent silver ounces contained in the Velardeña Properties deposit. From the derived enterprise value the Company subtracted the fair value assigned to tangible assets and working capital to arrive at a residual value for the mineral resource. Using this market valuation approach, the Company determined that the Velardeña mineral resource had a fair value of approximately $15.4 million at December 31, 2013 resulting in an additional impairment charge of approximately $5.9 million.

The tangible assets at the Velardeña Properties were separately analyzed by a third party valuation firm using available market data to determine a fair value based on the net realizable value that could be received in a sale to a third party. The market data was derived by researching the secondary equipment market on sales and/or offers for sale of similar assets. The tangible assets were determined to have a fair value of approximately $9.6 million, resulting in an impairment charge of approximately $14.3 million at June 30, 2013.

The market valuation approach used in the determination of fair value falls within level 3 of the fair value hierarchy per ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”) (see Note 13) and relies upon assumptions related to the condition and location of the Velardeña Properties asset group in comparison to other corroborated observable market data.

The following table details the components of the impairment of the Velardeña Properties Asset Group:

	Net Book Value				Net Book Value				Net Book Value
	Prior to		Jun. 30, 2013		After		Dec. 31, 2013		After
	Impairment at		Impairment		Impairment at		Impairment		Impairment at
	Jun. 30, 2013		Charges		Jun. 30, 2013		Charges		Dec. 31, 2013
	(in thousands)
Mineral properties (1)	$	232,805	$	211,608	$	21,197	$	5,916	$	15,384
Exploration properties	3,472		3,472		—		—		—
Tangible assets (2)	23,928		14,330		9,598		—		8,485
	$	260,205	$	229,410	$	30,795	$	5,916	$	23,869

(1) The December 31, 2013 mineral properties net book value reflects a $0.1 million adjustment recorded during the fourth quarter of 2013 in addition to the impairment charge.

(2) The December 31, 2013 tangible assets net book value reflects depreciation and asset disposals recorded during the third and fourth quarters of 2013.

San Diego Property Asset Group

The Company has a 50% ownership interest in the San Diego exploration property, which is located approximately 10 kilometers from the Velardeña Properties. The property interest was acquired as part of the ECU merger transaction, which occurred on September 2, 2011, and the property was assigned a value of $9.3 million as part of the purchase accounting associated with the transaction. Because of its close proximity to the Velardeña Properties, the San Diego property could become a source of additional ore for the Velardeña Properties if developed in the future. The San Diego property is included in the Velardeña Properties reporting segment but is separate from the Velardeña Properties asset group. Per the guidance of ASC 360, the Company assesses the recoverability of its property, plant and equipment at least annually, or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. As discussed above relating to the impairment of long lived assets associated with the Velardeña Properties asset group, the significant decrease in metals prices and shutdown of mining and processing at the Velardeña Properties were events that required the assessment of the recoverability of the carrying amounts of the San Diego property.

Because the San Diego property is in the exploration stage a market valuation approach was used to determine the fair value for the property. Because of the close proximity and geological similarities of the San Diego property to the Velardeña Properties mineral deposit and exploration properties, and given that both the San Diego property and the Velardeña Properties mineral deposit and exploration properties were originally recorded at fair value at the same time as part of the ECU merger transaction, the Company determined that the impairment of the Velardeña mineral deposit and exploration properties provided a reasonable estimate for the decline in fair value of the San Diego property. As such, at June 30, 2013 the Company determined that the fair value of the San Diego property was $0.8 million, resulting in an impairment charge of $8.5 million, as shown in the table below.

As shown in the table below the Company recorded an additional impairment of approximately $0.2 million at December 31, 2013. As discussed above for the Velardeña Properties asset group, the additional impairment is the result of the published market data reflecting an average in the ground mineral resource value that had decreased in value since the June 30, 2013 analysis.

The market valuation approach used in the determination of fair value falls within level 3 of the fair value hierarchy per ASC 820 (see Note 13) and relies upon assumptions related to the condition and location of the San Diego property in comparison to other corroborated observable market data.

The following table details the components of the impairment of the San Diego Property Asset Group:

	Net Book Value				Net Book Value				Net Book Value
	Prior to		Jun. 30, 2013		After		Dec. 31, 2013		After
	Impairment at		Impairment		Impairment at		Impairment		Impairment at
	Jun. 30, 2013		Charges		Jun. 30, 2013		Charges		Dec. 31, 2013
	(in thousands)
Exploration properties	$	9,260	$	8,428	$	832	$	231	$	601
	$	9,260	$	8,428	$	832	$	231	$	601