2.Impairment of Long Lived Assets

Velardeña Properties Asset Groups – 2015 Impairment

The Velardeña Properties consists of two separate asset groups, one involving the oxide plant, which has been leased to a third party, and the other involving the mineral and exploration properties, sulfide plant, and mining and other equipment and working capital related to the mining and processing activities at the Velardeña Properties (the ”Mineral Properties Asset Group”). 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 whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Mining and processing activities generated negative operating margin through September 30, 2015. Ongoing efforts during 2015 to improve the grade of mined material delivered to the sulfide plant for processing by limiting dilution in the stopes did not improve grades to a level sufficient to generate positive operating margins at 2015 metals prices. As a result, the Company suspended mining and processing activities at the Velardeña mine and sulfide plant during November 2015 (see Note 1).

The continued negative operating margin and the suspension of mining and sulfide processing activities at the Velardeña Properties during November 2015 were events that required an assessment of the recoverability of the Mineral Properties Asset Group at September 30, 2015. 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 for the Mineral Properties Asset Group, the Company determined that the Mineral Properties Asset Group was impaired. As a result, at September 30, 2015 the Company recorded impairment charges totaling $13.2 million to arrive at a remaining book value for the Mineral Properties Asset Group of $3.7 million at September 30, 2015, as shown in the table below.

To determine whether the Mineral Properties Asset Group was impaired at September 30, 2015 the Company used a cash flow valuation approach, which the Company deemed reasonable under the circumstances, that considered metals price projections using a greater weighting of current prices. Based on the metals price projections and current operating experience for silver and gold grades, recoveries, and mining and processing costs, total projected net cash flow from mining and processing activities was negative, requiring that each of the individual components of the Mineral Properties Asset Group be written down to fair value.

The Mineral Properties Asset Group includes the mineral and exploration properties associated with the mining and sulfide processing activities at the Velardeña Properties. The discounted cash flow analysis performed by the Company implies a zero value for the mineral and exploration properties from mining and processing activities in the current economic environment, but the Company believes those properties have a residual value that could be realized from a sale to a third party. With assistance from a third-party mining consulting and engineering firm, in reviewing comparable sales of similar properties in the region and considering the location of the Company’s properties to other active mining operations in close proximity to the Company’s properties, the Company concluded that the mineral and exploration properties included in the Mineral Properties Asset Group had a fair value of $1.4 million at September 30, 2015.

The tangible assets included in the Mineral Properties Asset Group, which includes buildings, plant and equipment, were separately analyzed by a third party valuation firm in 2013 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 Mineral Properties Asset Group tangible assets were determined to have a fair value of approximately $6.0 million as of June 30, 2013, and have since been further depreciated, reflecting a current net book value of approximately $3.2 million as of September 30, 2015. The Company believes the current net book value of the Mineral Properties Asset Group tangible assets did not exceed fair value at September 30, 2015. The assets continue to be used or held in condition for use to support future profitable operations from the acquisition, exploration and development of other mineral sources located near the Velardeña Properties.

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


	Net Book Value				Net Book Value
	Prior to		Sept. 30, 2015		After
	Impairment at		Impairment		Impairment at
	Sept. 30, 2015		Charges		Sept. 30, 2015
	(in thousands)
Mineral and exploration properties	$	13,660	$	12,306	$	1,354
Exploration properties		458		458		—
Buildings, plant and equipment		3,236		—		3,236
Asset retirement cost		417		417		—
Other working capital, net		(872)		—		(872)
	$	16,899	$	13,181	$	3,718

Prior to assessing the recoverability of the assets comprising the Mineral Properties Asset Group, the Company also assessed the fair value of its material and supplies inventory at September 30, 2015, which is included in the Mineral Properties Asset Group. Because of the suspension of mining and processing activities at the Velardeña Properties, as noted above, a portion of the material and supplies inventory is expected to be sold at a discount to its pre-shutdown book value or to decline in value prior to its use in future mining and processing activities. As a result, the Company increased its reserve for obsolescence of the materials and supplies inventory and recorded a noncash charge to shut down costs of approximately $0.4 million at September 30, 2015. At December 31, 2015, the Company re-evaluated its material and supplies inventory taking into account consumption and purchases during the quarter and reduced the reserve for obsolescence by approximately $0.1 million.

Because of the close proximity of the asset group involving the oxide plant (the “Oxide Plant Asset Group”) the Company also assessed the recoverability of the Oxide Plant Asset Group at September 30, 2015. The Oxide Plant Asset Group, which has been leased to a third party, consists primarily of the oxide plant facilities with a carrying value at September 30, 2015 of $1.3 million. The projected net cash flows from the lease are in excess of the carrying value of the Oxide Plant Asset Group and the Company therefore determined that the Oxide Plant Asset Group was not impaired.

The market 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 relied upon a review of comparable sales of similar properties in the region and considered the location of the Company's properties to other active mining operations in close proximity to the Company's properties.

The Company evaluated its remaining long lived assets at December 31, 2016 and determined that no further impairment was required.