full posting at OTC and Edgar Form 10-Q for RE
Post# of 168
Posted On: 05/12/2014 10:20:28 AM
full posting at OTC and Edgar
Form 10-Q for REVETT MINING COMPANY, INC.
12-May-2014
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion and Analysis ("MD&A"
of the financial results of Revett Mining Company, Inc. ("Revett Mining" or the "Company" for the three month period ended March 31, 2014 should be read in conjunction with the unaudited interim financial statements and notes as at and for the three months ended March 31, 2014 which form part of this report. In addition, this MD&A and related financial statements should be read in conjunction with the 2013 audited consolidated financial statements, the related Management's Discussion and Analysis, and the Form 10-K filed in Canada on SEDAR or on file in the United States with the Securities and Exchange Commission ("SEC" or on EDGAR. These financial statements are expressed in United States dollars, unless otherwise stated, and they are prepared in accordance with United States generally accepted accounting principles ("GAAP".
These unaudited interim consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles used in the United States of America (U.S. GAAP) and are presented in U.S. dollars.
Some of the statements in this MD&A are forward looking statements that are subject to risk factors set out in the cautionary note contained in this MD&A.
Overview and Important Factors Influencing Results for the Three Months Ended March 31, 2014
As at May 12, 2014, the Company owns a 100% interest in Revett Silver Company ("Revett Silver", which in turn owns 100% of Troy Mine Inc., RC Resources Inc., Revett Exploration Inc. and Revett Holdings Inc. Rock Creek is a development stage silver and copper property located in northwest Montana. Troy Mine is an operating silver and copper mine also located in northwest Montana.
We suspended operations at Troy Mine in December 2012 due to unstable ground conditions in portions of the mine. In November 2013, after unsuccessful attempts to find alternative routes to our reserve mining areas and with approval from the Mine Safety and Health Administration ("MSHA", we commenced construction of a new decline from the main service adit to access the North C Beds and the undeveloped I Beds. The initial decline totaling approximately 7,500 feet (including dual drifts, cross-overs, muck bays, etc.) to the North C Beds is forecasted to take approximately ten months which would enable us to return to limited commercial production in the fourth quarter 2014. Continued development to the deeper I Beds will require us to construct an additional 5,900 feet of decline including an accompanying borehole for secondary egress and ventilation. We anticipate this continued development will take an additional six to nine months to complete; following which, we expect to resume full production. The cost of constructing the decline to the North C Beds in order to resume production is estimated to be approximately $5.9 million; the total cost of the decline, including the extension to the undeveloped I Bed area, is currently estimated to be approximately $12 million. Although we took significant steps to improve our liquidity during the first quarter of 2014, we currently do not have enough cash on hand to complete the I-Bed development and are reviewing alternative sources of finance to meet our capital spending requirements.
Overall Performance
As at March 31, 2014 the Company has working capital of $11.8 million. Due to the suspension of mining operations since December of 2012, during the first quarter of 2014 we were unable to generate production revenues, which resulted in a net loss. For the three month period ended March 31, 2014, the Company reported a net loss after taxes of $0.8 million or $0.02 a share compared to a net loss after taxes of $4.1 million or $0.12 per share for the three months ended March 31, 2013.
Results of Operations for the Three Months Ended March 31, 2014 compared to the same period in 2013.
Financial Results:
a) Revenue: Revenue for the first quarter of 2013 reflects the settlement of a few outstanding invoices. There was no invoicing for concentrate sales during the first quarter of 2014 and 2013 due to the suspension of mining activities described above.
b) Troy Mine suspension related costs: The 2013 spending reflects the costs related to repairing and relocating access to the mine along with general costs of maintaining the Troy mine, while the 2014 costs reflect the general cost of maintaining the Mine. All of the spending related to the new access adits was capitalized ($1.9 million). The 2013 spending reflects the efforts to design a plan to resume mining operations and to maintain our staffing levels as we did not layoff any employees until May of 2013. In May, and again, in October of 2013, we reduced our staffing levels from over 200 employees to just over 60 employees at the Troy Mine.
c) Depreciation and depletion: For the first quarter of 2014 and 2013, the depreciation expense is significantly lower than the first quarter of prior years. The majority of the plant and equipment at Troy is depreciated using the units-of-production method and the effect of the suspension of mining operations resulted in no depreciation expense for the Troy Mine.
d) Exploration and development: This expense includes $0.2 million spending for Rock Creek permitting. The spending in 2014 is lower than 2013 ($0.3 million) due to efforts to conserve cash. We did not have any exploration spending during the first quarter of 2014.
e) General and administration costs: The decrease in the corporate administration costs during the first quarter of 2014 and 2013 is a result of efforts to conserve cash due to suspension of mining activities at the Troy Mine.
f) Net loss: The net loss for the first quarter 2014 and 2013 reflects the suspension of mining activities at the Troy Mine.
Summarized Financial Results by Quarter
2012 2013 2013 2013 2013 2014
4Q 1Q 2Q 3Q 4Q 1Q
Cu Production 1.0 - - - - -
(million lbs)
Ag Production (000's 161 - - - - -
ozs)
Total Sales $7.2 $0.2 $0.0 $(0.1) $0.0 $0.0
(millions)
Cash Flow from $(0.02) $(4.7) $(3.9) $(2.1) $(1.4) $(3.0)
Operations before
changes in working
capital (1)
(millions)
Net Income (loss) $(1.
$(4.1) $(4.1) $(0.6) $(2. $(0.
(millions)
EPS- Basic $(0.05) $(0.12) $(0.12) $(0.02) $(0.05) $(0.02)
EPS- Fully diluted $(0.05) $(0.12) $(0.12) $(0.02) $(0.05) $(0.02)
Cash and Cash $28.3 $21.0 $15.0 $12.1 $8.0 $9.0
Equivalents & Short
term Investments
(millions)
Total Assets ending $108.0 $100.2 $92.7 $91.2 $86.6 $89.8
(millions)
Total liabilities $19.2 $15.1 $11.1 $10.0 $8.1 $8.4
(millions)
Total Equity $88.8 $85.1 $81.7 $81.2 $78.5 $81.4
(millions)
(1) This is a non-GAAP measurement. These amounts reflect the net cash flow from the Troy Mine before capital spending, equipment payments and changes in working capital.
Financing Activities
During the first quarter of 2014, the Company did not enter into any new capital
leases or notes payable. The Company has the following contractual financial
obligations (in thousands of USD):
Current 1 to 3 3 to 5 5 years or
Contractual obligation Total portion years years more
Capital lease and note $ 1,084 $ 1,084 - - -
payable obligations
Long term reclamation Costs 12,743 - - - $ 12,743
Total contractual $ 13,827 $ 1,084 - - $ 12,743
obligations
Revett Silver has also entered into a number of operating leases relating to the production and transportation of the copper concentrate produced at Troy. All such leases expire in 2014 and many may be renewed annually. The obligations in 2014 under the terms of these leases are $0.4 million.
Liquidity and Capital Resources
The Company's liquidity position is directly related to the level of concentrate production, cost of this production and the provisional and final prices received for the copper and silver in the concentrate that is sold. At March 31, 2014, working capital was $11.8 million, including cash and cash equivalents of $9.0 million. At March 31, 2014, concentrate receivable and other receivables was $1.9 million compared to $1.2 million at December 31, 2013. In early April, 2014, we received the final settlement for an insurance claim for a net cash proceeds of $1.9 million.
Delays in recommencing production at Troy could erode our cash and working capital position. We continue to have discussions with interested parties in possibly obtaining capital, however, no assurance can be given that these efforts will prove successful. Given current market conditions, we may experience difficulties in raising sufficient funds to meet our obligations and complete construction of the development decline to gain access to the deeper ore reserves at Troy. Because of our need to conserve cash, nearly all discretionary capital spending and exploration spending has been placed on hold. If we do not obtain additional financing, we may have to consider placing Troy on care and maintenance status.
Off Balance Sheet Arrangements
Royal Gold, Inc. holds a 3% gross smelter royalty on a defined area of production from Troy Mine and a 1% net smelter royalty on production from Rock Creek pursuant to the terms of an amended royalty agreement dated October 13, 2009.
Related Party Transactions
Trafigura AG is the sole purchaser of the silver and copper concentrate we produce at Troy. It is also the beneficial owner of more than five percent of our outstanding common shares, and is therefore a related party. During the three months ended March 31, 2014 and 2013, Trafigura AG paid us $0.0 million and $0.0 million for our concentrate, respectively.
Principal Risks and Uncertainties
The following risk factors and other information in this report contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. If any of the following events or developments described below actually occur, our business, financial condition or operating results could be materially harmed. This could cause the market price of our common stock to decline.
Production Operations at Troy are currently suspended. We suspended production operations at Troy in December 2012 due to unstable ground conditions in portions of the mine. In November 2013, after unsuccessful attempts to find alternative routes to our reserve mining areas and with approval from the Mine Safety and Health Administration ("MSHA", we commenced construction of a new decline from the main service adit to access the North C Beds and the undeveloped I Beds. The initial decline totaling approximately 7,500 feet (including dual drifts, cross-overs, muck bays, etc.) to the North C Beds will take approximately ten months which should enable us to return to limited commercial production in the fourth quarter 2014. Continued development to the deeper I Beds will require us to construct an additional 5,900 feet of decline including an accompanying borehole for secondary egress and ventilation. We anticipate this continued development will take an additional six to nine months to complete, following which we expect to resume full production. The cost of constructing the decline to the North C Beds in order to resume production is estimated to be approximately $5.9 million; the total cost of the decline, including the extension to the undeveloped I Bed area, is currently estimated to be approximately $12 million. Although we took significant steps to improve our liquidity during the first quarter of 2014, we currently do not have enough cash on hand to complete the I-Bed development and are reviewing alternative sources of finance to meet our capital spending requirements. There is no assurance our financing efforts will be successful under current market conditions. Our business has been materially and adversely affected by the suspension of commercial mining operations at Troy. This will continue until we resume production.
Copper and silver prices fluctuate markedly. Our operations are significantly influenced by the prices of copper and silver. Copper and silver prices fluctuate widely and are affected by numerous factors that are beyond our control, such as the strength of the United States dollar, global and regional industrial demand, and the political and economic conditions of major producing countries throughout the world. During the last four years, annual average copper prices have fluctuated from a low of $2.34 per pound in 2009 to a high of $4.00 per pound in 2011, and world average annual silver prices have fluctuated from a low of $14.38 per ounce in 2009 to a high of $35.11 per ounce in 2011.
There are other formidable risks to mining. We are subject to all of the risks inherent in the mining industry, including industrial accidents, labor disputes, environmental related issues, unusual or unexpected geologic formations, cave-ins, surface subsidence, flooding, power disruptions and periodic interruptions due to inclement weather. These risks could result in damage to or destruction of our mineral properties and production facilities, personal injury, environmental damage, delays, monetary losses and legal liability. In addition, we are subject to competition for new minerals properties, management and skilled miners from other mining companies, many of which have significantly greater resources than we do. We also have no direct control over changes in governmental regulation of mining activities, the speculative nature of mineral exploration and development, operating hazards, fluctuating metal prices and inflation and other economic conditions.
Legal challenges could prevent us from ever developing Rock Creek. Our proposed development of Rock Creek has been challenged by several regional and national conservation groups at various times since the Forest Service issued its initial Record of Decision in 2003 approving our plan of operation. Some of these challenges have alleged violations of a variety of federal and state laws and regulations pertaining to our permitting activities at Rock Creek, including the Endangered Species Act, the National Environmental Policy Act, the 1872 Mining Law, the Federal Land Policy Management Act, the Wilderness Act, the National Forest Management Act, the Clean Water Act, the Clean Air Act, the Forest Service Organic Act of 1897 and the Administrative Procedural Act. Although we have successfully addressed most all of these challenges, we were directed by the Montana Federal District Court in May 2010 to produce a Supplemental EIS ("SEIS" to address NEPA procedural deficiencies identified by the court. We cannot predict with any degree of certainty how possible future challenges will be resolved. Rock Creek is potentially the more significant of our two mining assets. New court challenges to the Supplemental EIS and a revised Record of Decision may delay us from proceeding with our planned development at Rock Creek. If we are successful in completing the SEIS and defending any challenges, we still must comply with a number of requirements and conditions as development progresses, failing which we could be denied the ability to continue with our proposed activities.
Our reclamation liability at Troy Mine could be substantial. Our financial obligations to reclaim, restore and close Troy are presently covered by a $12.9 million surety bond, which includes $6.5 million in a restricted cash account. In late 2012, Montana DEQ and the U.S. Forest Service issued a new EIS and Record of Decision pertaining to the Troy reclamation. We do not presently know whether the revised reclamation plan will increase our bonding costs. Laws governing the closure of mining operations in Montana have become more stringent since Troy Mine was first placed into production. These factors could result in the imposition of a higher performance bond. Our reclamation liability for Troy is not limited by the amount of the performance bond itself; the bond serves only as security for the payment of these obligations. We would necessarily have to pay for any substantial increase in actual costs over and above the maximum allowed under the bond.
We presently do not have the financial resources to complete the construction of the new decline at Troy or to develop Rock Creek. Although we are continuing efforts to procure financing, we presently do not have sufficient funds to complete the construction of a new decline to the North C Bed and deeper I Bed areas at Troy. We also do not have sufficient cash to develop a mine or begin mining operations at Rock Creek should it prove feasible to do so.
The Rock Creek mineral resources are not equivalent to reserves. This report includes information concerning the estimated size of our mineral resource at Rock Creek and supplemental information concerning the extent of the remaining mineral resource at Troy. Although we believe these mineral resources are significant, it does not mean they can be economically mined. A mineral resource is not equivalent to "proven reserves" or "probable reserves" under standards promulgated by the SEC, principally because of the absence of sufficient quantifiable data. We will not be able to determine whether Rock Creek contains a commercially mineable ore body until our evaluation program has been completed and we have obtained a final, economic and technical feasibility study that will include an analysis of the amount of ore that can be economically produced under then-prevailing market conditions. Similarly, we will not be able to determine whether the supplemental mineral resources at Troy can be commercially mined without further exploration and study. Stockholders are cautioned not to assume that mineral resources will ever be converted into proven reserves or probable reserves.
Future accounting changes
There were no new pronouncements issued by the FASB that may materially impact the Company's consolidated financial statements for future periods.
Financial Instruments, Hedging Activities and Other Instruments
The largest market risk the Company is exposed to is changes in the prices of copper and silver will have a significant effect on revenue, cash flow and the value of concentrate receivables or payables because a significant portion of the Company's sales are subject to a future pricing mechanism and changes in metal prices will change both revenue and the value of concentrate receivables or payables. The Company does have a hedging policy which permits the Company to fix the sales price of copper and silver in concentrate to be produced in the future or for which concentrate has been sold and for which final settlement has not occurred.
For financial statement purposes, the Company records at fair value the amount of silver and copper in concentrate sold to its customer for which final prices have not yet been determined. At each month-end, the Company adjusts its revenue to account for expected future prices and the corresponding expected future revenue and cash flow. In order to do this, the Company must make estimates of the future prices expected to prevail when final settlement occurs. The Company uses published forward prices for the period of expected settlement to estimate these expected prices.
As at March 31, 2014, the Company had no contracts outstanding to sell silver or copper
Forward Looking Statements
Cautionary "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995. With the exception of historical matters, the matters discussed in this report are forward- looking statements that involve risk and uncertainties that could cause actual results to differ materially from projections or estimates contained herein. The words "believe", "estimate", "anticipate', "expect", and "project" and similar expressions are included to identify forward-looking statements. Such forward looking-statements include statements regarding future production levels and operating costs at the Troy mine, future levels of capital expenditures at both Troy and Rock Creek, the reserve and resource estimates at both Troy and Rock Creek, the adequacy of the financial resources and funds to cover operating and exploration costs at Troy and the cost of exploration at Rock Creek, the timing of certain litigation activities which have delayed exploration activities at Rock Creek, the adequacy of third party financing to complete certain corporate development activities, and the expectation that the Troy mine will be able to generate positive cash flow in future periods. Factors that could cause actual results to differ materially from these forward looking statements include, among others:
� changes in copper and silver prices;
� the operating performance of the Troy mine;
� geological conditions at the Troy mine;
� the need for copper concentrate by copper smelters and the costs associated with selling such concentrate to the smelters;
� the ability of the Company to complete exploration activities at the Rock Creek project;
� activities of certain environmental groups opposed to the Company's activities in the United States;
� changes in the planned Rock Creek project parameters;
� changes in estimates of the reserves and resources at all the properties owned or controlled by the Company;
� economic and market conditions;
� future financial needs and the Company's ability to secure such financing under reasonable terms and conditions;
� changes in federal or state legislation and regulations governing our operations and projects;
� risks of future unknown lawsuits respecting future planned activities on our projects or past activities by the Company.
As well as other factors described elsewhere in our annual Form 10-K and the various regulatory filings with United States and Canadian and provincial regulatory bodies which are available in Canada at www.sedar.com or in the United States on EDGAR. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Most of these factors are beyond our ability to predict or control. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward looking statements. We disclaim any obligation to update any forward-looking statement made here-in except as required by law. Readers are cautioned not to put undue reliance on forward looking statements.
Form 10-Q for REVETT MINING COMPANY, INC.
12-May-2014
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion and Analysis ("MD&A"
of the financial results of Revett Mining Company, Inc. ("Revett Mining" or the "Company" for the three month period ended March 31, 2014 should be read in conjunction with the unaudited interim financial statements and notes as at and for the three months ended March 31, 2014 which form part of this report. In addition, this MD&A and related financial statements should be read in conjunction with the 2013 audited consolidated financial statements, the related Management's Discussion and Analysis, and the Form 10-K filed in Canada on SEDAR or on file in the United States with the Securities and Exchange Commission ("SEC" or on EDGAR. These financial statements are expressed in United States dollars, unless otherwise stated, and they are prepared in accordance with United States generally accepted accounting principles ("GAAP". These unaudited interim consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles used in the United States of America (U.S. GAAP) and are presented in U.S. dollars.
Some of the statements in this MD&A are forward looking statements that are subject to risk factors set out in the cautionary note contained in this MD&A.
Overview and Important Factors Influencing Results for the Three Months Ended March 31, 2014
As at May 12, 2014, the Company owns a 100% interest in Revett Silver Company ("Revett Silver"
, which in turn owns 100% of Troy Mine Inc., RC Resources Inc., Revett Exploration Inc. and Revett Holdings Inc. Rock Creek is a development stage silver and copper property located in northwest Montana. Troy Mine is an operating silver and copper mine also located in northwest Montana. We suspended operations at Troy Mine in December 2012 due to unstable ground conditions in portions of the mine. In November 2013, after unsuccessful attempts to find alternative routes to our reserve mining areas and with approval from the Mine Safety and Health Administration ("MSHA"
, we commenced construction of a new decline from the main service adit to access the North C Beds and the undeveloped I Beds. The initial decline totaling approximately 7,500 feet (including dual drifts, cross-overs, muck bays, etc.) to the North C Beds is forecasted to take approximately ten months which would enable us to return to limited commercial production in the fourth quarter 2014. Continued development to the deeper I Beds will require us to construct an additional 5,900 feet of decline including an accompanying borehole for secondary egress and ventilation. We anticipate this continued development will take an additional six to nine months to complete; following which, we expect to resume full production. The cost of constructing the decline to the North C Beds in order to resume production is estimated to be approximately $5.9 million; the total cost of the decline, including the extension to the undeveloped I Bed area, is currently estimated to be approximately $12 million. Although we took significant steps to improve our liquidity during the first quarter of 2014, we currently do not have enough cash on hand to complete the I-Bed development and are reviewing alternative sources of finance to meet our capital spending requirements. Overall Performance
As at March 31, 2014 the Company has working capital of $11.8 million. Due to the suspension of mining operations since December of 2012, during the first quarter of 2014 we were unable to generate production revenues, which resulted in a net loss. For the three month period ended March 31, 2014, the Company reported a net loss after taxes of $0.8 million or $0.02 a share compared to a net loss after taxes of $4.1 million or $0.12 per share for the three months ended March 31, 2013.
Results of Operations for the Three Months Ended March 31, 2014 compared to the same period in 2013.
Financial Results:
a) Revenue: Revenue for the first quarter of 2013 reflects the settlement of a few outstanding invoices. There was no invoicing for concentrate sales during the first quarter of 2014 and 2013 due to the suspension of mining activities described above.
b) Troy Mine suspension related costs: The 2013 spending reflects the costs related to repairing and relocating access to the mine along with general costs of maintaining the Troy mine, while the 2014 costs reflect the general cost of maintaining the Mine. All of the spending related to the new access adits was capitalized ($1.9 million). The 2013 spending reflects the efforts to design a plan to resume mining operations and to maintain our staffing levels as we did not layoff any employees until May of 2013. In May, and again, in October of 2013, we reduced our staffing levels from over 200 employees to just over 60 employees at the Troy Mine.
c) Depreciation and depletion: For the first quarter of 2014 and 2013, the depreciation expense is significantly lower than the first quarter of prior years. The majority of the plant and equipment at Troy is depreciated using the units-of-production method and the effect of the suspension of mining operations resulted in no depreciation expense for the Troy Mine.
d) Exploration and development: This expense includes $0.2 million spending for Rock Creek permitting. The spending in 2014 is lower than 2013 ($0.3 million) due to efforts to conserve cash. We did not have any exploration spending during the first quarter of 2014.
e) General and administration costs: The decrease in the corporate administration costs during the first quarter of 2014 and 2013 is a result of efforts to conserve cash due to suspension of mining activities at the Troy Mine.
f) Net loss: The net loss for the first quarter 2014 and 2013 reflects the suspension of mining activities at the Troy Mine.
Summarized Financial Results by Quarter
2012 2013 2013 2013 2013 2014
4Q 1Q 2Q 3Q 4Q 1Q
Cu Production 1.0 - - - - -
(million lbs)
Ag Production (000's 161 - - - - -
ozs)
Total Sales $7.2 $0.2 $0.0 $(0.1) $0.0 $0.0
(millions)
Cash Flow from $(0.02) $(4.7) $(3.9) $(2.1) $(1.4) $(3.0)
Operations before
changes in working
capital (1)
(millions)
Net Income (loss) $(1.
$(4.1) $(4.1) $(0.6) $(2. $(0. (millions)
EPS- Basic $(0.05) $(0.12) $(0.12) $(0.02) $(0.05) $(0.02)
EPS- Fully diluted $(0.05) $(0.12) $(0.12) $(0.02) $(0.05) $(0.02)
Cash and Cash $28.3 $21.0 $15.0 $12.1 $8.0 $9.0
Equivalents & Short
term Investments
(millions)
Total Assets ending $108.0 $100.2 $92.7 $91.2 $86.6 $89.8
(millions)
Total liabilities $19.2 $15.1 $11.1 $10.0 $8.1 $8.4
(millions)
Total Equity $88.8 $85.1 $81.7 $81.2 $78.5 $81.4
(millions)
(1) This is a non-GAAP measurement. These amounts reflect the net cash flow from the Troy Mine before capital spending, equipment payments and changes in working capital.
Financing Activities
During the first quarter of 2014, the Company did not enter into any new capital
leases or notes payable. The Company has the following contractual financial
obligations (in thousands of USD):
Current 1 to 3 3 to 5 5 years or
Contractual obligation Total portion years years more
Capital lease and note $ 1,084 $ 1,084 - - -
payable obligations
Long term reclamation Costs 12,743 - - - $ 12,743
Total contractual $ 13,827 $ 1,084 - - $ 12,743
obligations
Revett Silver has also entered into a number of operating leases relating to the production and transportation of the copper concentrate produced at Troy. All such leases expire in 2014 and many may be renewed annually. The obligations in 2014 under the terms of these leases are $0.4 million.
Liquidity and Capital Resources
The Company's liquidity position is directly related to the level of concentrate production, cost of this production and the provisional and final prices received for the copper and silver in the concentrate that is sold. At March 31, 2014, working capital was $11.8 million, including cash and cash equivalents of $9.0 million. At March 31, 2014, concentrate receivable and other receivables was $1.9 million compared to $1.2 million at December 31, 2013. In early April, 2014, we received the final settlement for an insurance claim for a net cash proceeds of $1.9 million.
Delays in recommencing production at Troy could erode our cash and working capital position. We continue to have discussions with interested parties in possibly obtaining capital, however, no assurance can be given that these efforts will prove successful. Given current market conditions, we may experience difficulties in raising sufficient funds to meet our obligations and complete construction of the development decline to gain access to the deeper ore reserves at Troy. Because of our need to conserve cash, nearly all discretionary capital spending and exploration spending has been placed on hold. If we do not obtain additional financing, we may have to consider placing Troy on care and maintenance status.
Off Balance Sheet Arrangements
Royal Gold, Inc. holds a 3% gross smelter royalty on a defined area of production from Troy Mine and a 1% net smelter royalty on production from Rock Creek pursuant to the terms of an amended royalty agreement dated October 13, 2009.
Related Party Transactions
Trafigura AG is the sole purchaser of the silver and copper concentrate we produce at Troy. It is also the beneficial owner of more than five percent of our outstanding common shares, and is therefore a related party. During the three months ended March 31, 2014 and 2013, Trafigura AG paid us $0.0 million and $0.0 million for our concentrate, respectively.
Principal Risks and Uncertainties
The following risk factors and other information in this report contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. If any of the following events or developments described below actually occur, our business, financial condition or operating results could be materially harmed. This could cause the market price of our common stock to decline.
Production Operations at Troy are currently suspended. We suspended production operations at Troy in December 2012 due to unstable ground conditions in portions of the mine. In November 2013, after unsuccessful attempts to find alternative routes to our reserve mining areas and with approval from the Mine Safety and Health Administration ("MSHA"
, we commenced construction of a new decline from the main service adit to access the North C Beds and the undeveloped I Beds. The initial decline totaling approximately 7,500 feet (including dual drifts, cross-overs, muck bays, etc.) to the North C Beds will take approximately ten months which should enable us to return to limited commercial production in the fourth quarter 2014. Continued development to the deeper I Beds will require us to construct an additional 5,900 feet of decline including an accompanying borehole for secondary egress and ventilation. We anticipate this continued development will take an additional six to nine months to complete, following which we expect to resume full production. The cost of constructing the decline to the North C Beds in order to resume production is estimated to be approximately $5.9 million; the total cost of the decline, including the extension to the undeveloped I Bed area, is currently estimated to be approximately $12 million. Although we took significant steps to improve our liquidity during the first quarter of 2014, we currently do not have enough cash on hand to complete the I-Bed development and are reviewing alternative sources of finance to meet our capital spending requirements. There is no assurance our financing efforts will be successful under current market conditions. Our business has been materially and adversely affected by the suspension of commercial mining operations at Troy. This will continue until we resume production. Copper and silver prices fluctuate markedly. Our operations are significantly influenced by the prices of copper and silver. Copper and silver prices fluctuate widely and are affected by numerous factors that are beyond our control, such as the strength of the United States dollar, global and regional industrial demand, and the political and economic conditions of major producing countries throughout the world. During the last four years, annual average copper prices have fluctuated from a low of $2.34 per pound in 2009 to a high of $4.00 per pound in 2011, and world average annual silver prices have fluctuated from a low of $14.38 per ounce in 2009 to a high of $35.11 per ounce in 2011.
There are other formidable risks to mining. We are subject to all of the risks inherent in the mining industry, including industrial accidents, labor disputes, environmental related issues, unusual or unexpected geologic formations, cave-ins, surface subsidence, flooding, power disruptions and periodic interruptions due to inclement weather. These risks could result in damage to or destruction of our mineral properties and production facilities, personal injury, environmental damage, delays, monetary losses and legal liability. In addition, we are subject to competition for new minerals properties, management and skilled miners from other mining companies, many of which have significantly greater resources than we do. We also have no direct control over changes in governmental regulation of mining activities, the speculative nature of mineral exploration and development, operating hazards, fluctuating metal prices and inflation and other economic conditions.
Legal challenges could prevent us from ever developing Rock Creek. Our proposed development of Rock Creek has been challenged by several regional and national conservation groups at various times since the Forest Service issued its initial Record of Decision in 2003 approving our plan of operation. Some of these challenges have alleged violations of a variety of federal and state laws and regulations pertaining to our permitting activities at Rock Creek, including the Endangered Species Act, the National Environmental Policy Act, the 1872 Mining Law, the Federal Land Policy Management Act, the Wilderness Act, the National Forest Management Act, the Clean Water Act, the Clean Air Act, the Forest Service Organic Act of 1897 and the Administrative Procedural Act. Although we have successfully addressed most all of these challenges, we were directed by the Montana Federal District Court in May 2010 to produce a Supplemental EIS ("SEIS"
to address NEPA procedural deficiencies identified by the court. We cannot predict with any degree of certainty how possible future challenges will be resolved. Rock Creek is potentially the more significant of our two mining assets. New court challenges to the Supplemental EIS and a revised Record of Decision may delay us from proceeding with our planned development at Rock Creek. If we are successful in completing the SEIS and defending any challenges, we still must comply with a number of requirements and conditions as development progresses, failing which we could be denied the ability to continue with our proposed activities. Our reclamation liability at Troy Mine could be substantial. Our financial obligations to reclaim, restore and close Troy are presently covered by a $12.9 million surety bond, which includes $6.5 million in a restricted cash account. In late 2012, Montana DEQ and the U.S. Forest Service issued a new EIS and Record of Decision pertaining to the Troy reclamation. We do not presently know whether the revised reclamation plan will increase our bonding costs. Laws governing the closure of mining operations in Montana have become more stringent since Troy Mine was first placed into production. These factors could result in the imposition of a higher performance bond. Our reclamation liability for Troy is not limited by the amount of the performance bond itself; the bond serves only as security for the payment of these obligations. We would necessarily have to pay for any substantial increase in actual costs over and above the maximum allowed under the bond.
We presently do not have the financial resources to complete the construction of the new decline at Troy or to develop Rock Creek. Although we are continuing efforts to procure financing, we presently do not have sufficient funds to complete the construction of a new decline to the North C Bed and deeper I Bed areas at Troy. We also do not have sufficient cash to develop a mine or begin mining operations at Rock Creek should it prove feasible to do so.
The Rock Creek mineral resources are not equivalent to reserves. This report includes information concerning the estimated size of our mineral resource at Rock Creek and supplemental information concerning the extent of the remaining mineral resource at Troy. Although we believe these mineral resources are significant, it does not mean they can be economically mined. A mineral resource is not equivalent to "proven reserves" or "probable reserves" under standards promulgated by the SEC, principally because of the absence of sufficient quantifiable data. We will not be able to determine whether Rock Creek contains a commercially mineable ore body until our evaluation program has been completed and we have obtained a final, economic and technical feasibility study that will include an analysis of the amount of ore that can be economically produced under then-prevailing market conditions. Similarly, we will not be able to determine whether the supplemental mineral resources at Troy can be commercially mined without further exploration and study. Stockholders are cautioned not to assume that mineral resources will ever be converted into proven reserves or probable reserves.
Future accounting changes
There were no new pronouncements issued by the FASB that may materially impact the Company's consolidated financial statements for future periods.
Financial Instruments, Hedging Activities and Other Instruments
The largest market risk the Company is exposed to is changes in the prices of copper and silver will have a significant effect on revenue, cash flow and the value of concentrate receivables or payables because a significant portion of the Company's sales are subject to a future pricing mechanism and changes in metal prices will change both revenue and the value of concentrate receivables or payables. The Company does have a hedging policy which permits the Company to fix the sales price of copper and silver in concentrate to be produced in the future or for which concentrate has been sold and for which final settlement has not occurred.
For financial statement purposes, the Company records at fair value the amount of silver and copper in concentrate sold to its customer for which final prices have not yet been determined. At each month-end, the Company adjusts its revenue to account for expected future prices and the corresponding expected future revenue and cash flow. In order to do this, the Company must make estimates of the future prices expected to prevail when final settlement occurs. The Company uses published forward prices for the period of expected settlement to estimate these expected prices.
As at March 31, 2014, the Company had no contracts outstanding to sell silver or copper
Forward Looking Statements
Cautionary "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995. With the exception of historical matters, the matters discussed in this report are forward- looking statements that involve risk and uncertainties that could cause actual results to differ materially from projections or estimates contained herein. The words "believe", "estimate", "anticipate', "expect", and "project" and similar expressions are included to identify forward-looking statements. Such forward looking-statements include statements regarding future production levels and operating costs at the Troy mine, future levels of capital expenditures at both Troy and Rock Creek, the reserve and resource estimates at both Troy and Rock Creek, the adequacy of the financial resources and funds to cover operating and exploration costs at Troy and the cost of exploration at Rock Creek, the timing of certain litigation activities which have delayed exploration activities at Rock Creek, the adequacy of third party financing to complete certain corporate development activities, and the expectation that the Troy mine will be able to generate positive cash flow in future periods. Factors that could cause actual results to differ materially from these forward looking statements include, among others:
� changes in copper and silver prices;
� the operating performance of the Troy mine;
� geological conditions at the Troy mine;
� the need for copper concentrate by copper smelters and the costs associated with selling such concentrate to the smelters;
� the ability of the Company to complete exploration activities at the Rock Creek project;
� activities of certain environmental groups opposed to the Company's activities in the United States;
� changes in the planned Rock Creek project parameters;
� changes in estimates of the reserves and resources at all the properties owned or controlled by the Company;
� economic and market conditions;
� future financial needs and the Company's ability to secure such financing under reasonable terms and conditions;
� changes in federal or state legislation and regulations governing our operations and projects;
� risks of future unknown lawsuits respecting future planned activities on our projects or past activities by the Company.
As well as other factors described elsewhere in our annual Form 10-K and the various regulatory filings with United States and Canadian and provincial regulatory bodies which are available in Canada at www.sedar.com or in the United States on EDGAR. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Most of these factors are beyond our ability to predict or control. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward looking statements. We disclaim any obligation to update any forward-looking statement made here-in except as required by law. Readers are cautioned not to put undue reliance on forward looking statements.
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