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NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
 9 Months Ended
Sep. 30, 2012
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
Business Combinations
Business Combinations — The Company accounts for business combinations using the acquisition method of accounting pursuant to Accounting Standards Codification (“ASC”) Topic 805 — Business Combinations.  The acquisition method requires the Company to determine the fair value of all acquired assets, including identifiable intangible assets, and all assumed liabilities.  The total cost of acquisitions is allocated to the underlying identifiable net assets, based on their respective estimated fair values.  Determining the fair value of assets acquired and liabilities assumed requires management’s judgment, and the utilization of independent valuation experts, and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, and asset lives, among other items.  Transaction costs are expensed as incurred and are reported on the acquisition costs line within the consolidated statements of operations and comprehensive loss.
Investments - Equity Method and Joint Ventures
Investments — Equity Method and Joint Ventures - The Company accounts for investments over which the Company exerts significant influence using the equity method of accounting pursuant to ASC Topic 323 — Investments, Equity Method and Joint Ventures.  Under this method, the Company’s share of earnings and losses is included in the consolidated statement of operations and comprehensive loss and the balance of the investment is adjusted by a like amount.  Under the equity method, dividends received from an investee are recorded as decreases in the investment account, not as income.  Where there has been a loss in value that is other than a temporary decline, the carrying value is reduced to its fair value.
IVA taxes receivable

IVA taxes receivable — In Mexico and Argentina, value added taxes (IVA) are assessed on purchases of materials and services and sales of products.  Businesses are generally entitled to recover the taxes they have paid related to purchases of materials and services, either as a refund or as a credit against future taxes payable.  In Argentina, except at the San José Mine, the Company expenses all IVA as their recoverability is uncertain.
Stockpiles, Ore on Leach Pads, In-process Inventory, Precious Metals Inventory and Materials and Supplies

Stockpiles, Ore on Leach Pads, In-process Inventory, Precious Metals Inventory and Materials and Supplies — Stockpiles, ore on leach pads, and in-process inventory are carried at the lower of average cost or net realizable value, if commercial production is achieved. For accounting purposes, the Company has achieved commercial production during the third quarter of 2012 after its initial gold pour in late September.  Net realizable value represents the estimated future sales price of the product based on current and long-term metals prices, less the estimated costs to complete production and bring the product to sale. Write-downs of stockpiles, ore on leach pads, in-process inventory, precious metals inventory and materials and supplies, resulting from net realizable value impairments, are reported as a component of production costs applicable to sales. The current portion of stockpiles, ore on leach pad, in-process inventory and materials and supplies is determined based on the expected amounts to be processed within the next 12 months. Stockpiles, ore on leach pads, in-process inventory and materials and supplies not expected to be processed within the next 12 months, if any, are classified as long-term.

 

Stockpiles represent ore that have been extracted from the mine and is available for further processing. Stockpiles are measured by estimating the number of tonnes added and removed from the stockpile, an estimate of the contained metals (based on assay data) and the estimated metallurgical recovery rates. Costs are allocated to stockpiles based on relative values of material stockpiled and processed using current mining costs incurred up to the point of stockpiling the ore. Material is removed from the stockpile at an average cost per tonne.  Since the Company only achieved commercial production for accounting purposes in September 2012, no value was allocated to stockpiles prior to the month of September 2012.

 

Ore on leach pads is the ore that is placed on pads where it is treated with a chemical solution that dissolves the gold contained in the ore over a period of months.  Costs are attributed to the leach pads based on current mining costs incurred up to the point of placing the ore on the pad.  Costs are removed from the leach pad based on the average cost per estimated recoverable ounce of gold on the leach pad as the gold is recovered.  The estimates of recoverable gold on the leach pads are calculated from the quantities of ore placed on the leach pads, the grade of ore placed on the leach pads and a recovery percentage.  The quantities of recoverable gold placed on the leach pads are reconciled to the quantities of gold actually recovered (metallurgical balancing), by comparing the grades of ore placed on the leach pads to actual ounces recovered.  The nature of the leaching process inherently limits the ability to precisely monitor inventory levels.  As a result, the metallurgical balancing process is constantly monitored and the engineering estimates are refined based on actual results over time.

 

In-process inventories represent materials that are currently in the process of being converted to a saleable product.  The El Gallo Phase 1 conversion process is an Adsorption-Desorption-Recovery (“ADR”) processing plant utilizing carbon columns for recovery.  In-process material is measured based on assays of the material fed into the process and the projected recoveries of the respective plants.  In-process inventories are valued at the average cost of the material fed into the process attributable to the source material coming from the mines, stockpiles and/or leach pads plus the in-process conversion costs incurred to that point in the process.

 

Precious metal inventory include gold bullion that is unsold and held at the refinery and is valued at the lower of average mining cost or net realizable value.
Material and Supplies Inventories
Materials and supplies inventories are comprised of chemicals, reagents and consumable parts used in drilling and other operating activities.  They are valued at the lower of average cost or net realizable value.  Cost includes applicable taxes and freight.
Revenue Recognition

Revenue Recognition — Revenue includes sales value received for the Company’s principal products, gold and silver. Revenue is recognized, net of refining charges and royalties, when title to gold and silver passes to the buyer and when collectability is reasonably assured. Title passes to the buyer based on terms of the sales contract. Revenues from by-product sales are credited to production cost applicable to sales.  Product pricing is determined at the point revenue is recognized by reference to active and freely traded commodity markets, for example, the London Bullion Market for both gold and silver, in an identical form to the product sold.

 

The Company entered into a doré sales agreement, whereby the Company has the option to sell approximately 90% of the gold and silver contained in doré bars produced at the El Gallo Complex prior to the completion of refining, which normally takes 15 business days.

 

The Company has a net smelter return (“NSR”) royalty agreement with a third party on all Phase 1 metals production and a portion of future Phase 2 metals production from the El Gallo Complex.  The terms of the royalty agreement stipulate that production up to 30,000 of gold and gold equivalent ounces are subject to a 1% NSR, production between 30,001 to 380,000 of gold and gold equivalent ounces are subject to a 3.5% NSR, and 1% thereafter.  Currently the Company is subject to the 3.5% NSR.  Under the terms of the royalty agreement, the royalty holder has the option to settle the NSR payment in cash or gold and gold equivalent ounces.  The royalty holder has indicated a preference to settle the NSR payment in gold and gold equivalent ounces which would be calculated on the day the refiner credits the Company’s metals account.
Proven and Probable Reserves

Proven and Probable Reserves — The definition of proven and probable reserves is set forth in the SEC Industry Guide 7 (“Guide 7”). Proven reserves are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes, grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geological character is so well defined that size, shape, depth and mineral content of the reserves are well-established. Probable reserves are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observations.

 

As of September 30, 2012, except for the Company’s 49% interest in the San José Mine, none of the Company’s other mineralized properties contain resources that satisfy the definition of proven and probable reserves.
Design, Construction, and Development Costs

Design, Construction, and Development Costs — Certain costs to design and construct mining and processing facilities may be incurred prior to establishing proven and probable reserves.  Prior to commercial production for accounting purposes in September 2012, the Company classified the Phase 1 development of the El Gallo Complex as an exploration stage project since no Guide 7 proven or probable reserves have been established, and accordingly, substantially all costs, including design, engineering, construction, and installation of equipment were expensed as incurred.

 

Certain types of equipment, which have alternative uses or significant salvage value, may be capitalized without proven and probable reserves.  If a project commences commercial production, amortization and depletion of capitalized costs for such equipment would be computed on a unit-of—production basis over the expected reserves of the project based on estimated recoverable ounces.

 

Mine development costs include engineering and metallurgical studies, drilling and other related costs to delineate an ore body, the removal of overburden to initially expose an ore body at open pit surface mines and the building of access ways, shafts, lateral access, drifts, ramps and other infrastructure at underground mines.  Development costs are capitalized when proven and probable reserves exist and the property is a commercially minable property.  Mine development costs incurred either to develop new ore deposits, expand the capacity of operating mines, or to develop mine areas substantially in advance of current production are capitalized.  Costs of start-up activities and costs incurred to maintain current production or to maintain assets on a standby basis are charged to operations as incurred.  Costs of abandoned projects are charged to operations upon abandonment.  All capitalized costs are amortized using the units of production method over the estimated life of the ore body based on recoverable ounces to be mined from proven and probable reserves.

 

As of September 30, 2012, except for the Company’s 49% interest in the San José Mine, development costs are not capitalized at any of the Company’s properties, as no proven and probable reserves exist.
Property and Equipment

Property and Equipment — Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and recorded at cost.  Depreciation is computed using straight-line methods. Office furniture, equipment and light vehicles are being depreciated over the estimated economic lives ranging from 3 to 5 years.  Trailers, heavy vehicles and other site equipment are being depreciated over estimated economic lives from 5 to 15 years. Buildings are being depreciated over an estimated economic life of 20 years.  All mining equipment is depreciated using the units-of-production method based upon estimated proven and probable reserves.
Impairment of Long-Lived Assets
Impairment of Long-Lived Assets — The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable.  Recoverability is measured by comparing the net book value to fair value. When the net book value exceeds fair value, an impairment loss is measured and recorded.  Mineral properties are monitored for impairment based on factors such as the Company’s continued right to explore the area, exploration reports, assays, technical reports, drill results and its continued plans to fund exploration programs on the property.  The Company uses the market approach to estimate the fair value of the properties by using a combination of the observed market value per square mile in the region and an observed market value per ounce of mineralized material.  The Company is unable to estimate undiscounted future net cash flows from its operations due to the absence of proven and probable reserves.  As such, the appropriate evidence to perform estimates of future cash flows is not available and may not be accurate in supporting the Company’s long-lived assets.  For purposes of recognition and measurement of an impairment loss, the Company groups its properties by geological mineral complex, as this represents the lowest level at which the Company allocates its exploration spending independent of other assets and liabilities.  For the recently acquired Santa Cruz exploration properties, the Company has separated its properties into two regions, due to their physical separation, for the purposes of impairment testing. The two regions are Cerro Negro and Other Santa Cruz exploration properties.