The fair values of the Company’s amounts due to related parties and accounts payable approximate their carrying values because of the short-term nature of these instruments. Cash, amounts receivable, short- and long-term investments, and warrant liability are recorded at fair value. The carrying amounts of the Company’s term facility, equipment loans, and finance lease obligations are a reasonable approximation of their fair values based on current market rates for similar financial instruments.
The Company’s financial instruments are exposed to certain financial risks, including credit risk, liquidity risk, and market risk.
(a) Credit Risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Company has exposure to credit risk through its cash, short-term investments, and amounts receivable.
The Company manages credit risk, in respect of cash and short-term investments, by maintaining the majority of cash and short-term investments at highly rated financial institutions.
The Company is exposed to a significant concentration of credit risk with respect to its trade accounts receivable balance because all of its concentrate sales are with three (December 31, 2016 – three, January 1, 2016 - three) counterparties (Note 26). However, the Company has not recorded any allowance against its trade receivables because to-date all balances owed have been settled in full when due (typically within 60 days of submission) and because of the nature of the counterparties.
The Company’s maximum exposure to credit risk at the end of any period is equal to the carrying amount of these financial assets as recorded in the consolidated statement of financial position. At December 31, 2017, no amounts were held as collateral.
(b) Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in satisfying financial obligations as they become due. The Company manages its liquidity risk by forecasting cash flows required by its operating, investing, and financing activities. The Company had cash at December 31, 2017, in the amount of $3,419,532 and working capital of $16,402,359 in order to meet short-term business requirements. Accounts payable have contractual maturities of approximately 30 to 90 days, or are due on demand, and are subject to normal trade terms. The current portions of term facility, equipment loans, and finance lease obligations are due within 12 months of the consolidated statement of financial position date. Amounts due to related parties are without stated terms of interest or repayment.
The maturity profiles of the Company’s contractual obligations and commitments as at December 31, 2017 are summarized as follows:
| Total | Less Than 1 Year |
1-5 years |
More Than 5 Years |
|||||||||||||
| Accounts payable and accrued liabilities | $ | 3,511,720 | $ | 3,511,720 | $ | - | $ | - | ||||||||
| Due to related parties | 186,563 | 186,563 | - | - | ||||||||||||
| Minimum rental and lease payments | 566,288 | 300,285 | 251,435 | 14,568 | ||||||||||||
| Term facility | 9,141,679 | 4,396,312 | 4,745,367 | - | ||||||||||||
| Equipment loans | 1,296,044 | 886,145 | 409,899 | - | ||||||||||||
| Finance lease obligations | 2,499,543 | 1,203,882 | 1,295,661 | - | ||||||||||||
| Total | $ | 17,201,837 | $ | 10,484,907 | $ | 6,702,362 | $ | 14,568 | ||||||||
(c) Market Risk
Market risk consists of interest rate risk, foreign currency risk, and price risk. These are discussed further below.
Interest Rate Risk
Interest rate risk consists of two components:
(i) To the extent that payments made or received on the Company’s monetary assets and liabilities are affected by changes in the prevailing market interest rates, the Company is exposed to interest rate cash flow risk.
(ii) To the extent that changes in prevailing market rates differ from the interest rates on the Company’s monetary assets and liabilities, the Company is exposed to interest rate price risk.
In management’s opinion, the Company is not exposed to significant interest rate cash flow risk as the Company’s term facility, equipment loans, and finance lease obligations bear interest at fixed rates.
Foreign Currency Risk
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. The Company is exposed to foreign currency risk to the extent that the following monetary assets and liabilities are denominated in Mexican pesos and Canadian dollars:
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| MXN | C$ | MXN | C$ | |||||||||||||
| Cash | $ | 9,504,034 | $ | 320,751 | $ | 15,997,014 | $ | 270,562 | ||||||||
| Long-term investments | - | 42,368 | - | 35,873 | ||||||||||||
| Reclamation bonds | - | 895,500 | - | 145,500 | ||||||||||||
| Amounts receivable | - | 131,961 | - | 52,779 | ||||||||||||
| Accounts payable and accrued liabilities | (27,482,356 | ) | (603,463 | ) | (21,006,749 | ) | (1,249,038 | ) | ||||||||
| Due to related parties | - | (224,664 | ) | - | (267,726 | ) | ||||||||||
| Equipment loans | - | (781,675 | ) | - | (1,423,042 | ) | ||||||||||
| Finance lease obligations | (750,795 | ) | (1,002,470 | ) | (865,526 | ) | (1,465,333 | ) | ||||||||
| Net exposure | (18,729,117 | ) | (1,221,692 | ) | (5,875,261 | ) | (3,900,425 | ) | ||||||||
| US dollar equivalent | $ | (949,465 | ) | $ | (973,847 | ) | $ | (284,363 | ) | $ | (2,904,910 | ) | ||||
Based on the net US dollar denominated asset and liability exposures as at December 31, 2017, a 10% fluctuation in the US/Mexican and US/Canadian exchange rates would impact the Company’s earnings for the year ended December 31, 2017 by approximately $326,558 (2016 - $350,284, 2015 - $35,342). The Company has not entered into any foreign currency contracts to mitigate this risk.
Price Risk
Price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices, other than those arising from interest rate risk or foreign currency risk.
The Company is exposed to price risk with respect to its accounts receivable, as certain trade accounts receivable are recorded based on provisional terms that are subsequently adjusted according to quoted metal prices at the date of final settlement. Quoted metal prices are affected by numerous factors beyond the Company’s control and are subject to volatility, and the Company does not employ hedging strategies to limit its exposure to price risk. At December 31, 2017, based on outstanding accounts receivable that were subject to pricing adjustments, a 10% change in metals prices would have an impact on net earnings (loss) of approximately $223,625 (2016 - $581,031, 2015 - $376,543).
The Company is exposed to price risk with respect to its long-term investments, as certain of these investments are carried at fair value based on quoted market prices. Changes in market prices result in gains or losses being recognized in net income (loss). At December 31, 2017, a 10% change in market prices would have an impact on net earnings of approximately $3,377 (2016 - $2,672, 2015 – $2,797).
The Company’s profitability and ability to raise capital to fund exploration, evaluation and production activities is subject to risks associated with fluctuations in mineral prices. Management closely monitors commodity prices, individual equity movements, and the stock market to determine the appropriate course of action to be taken by the Company.
(d) Classification of Financial Instruments
IFRS 7 Financial Instruments: Disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value as follows:
Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and
Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The following table sets forth the Company’s financial assets and financial liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as at December 31, 2017:
| Level 1 | Level 2 | Level 3 | ||||||||||
| Financial assets | ||||||||||||
| Cash | $ | 3,419,532 | $ | - | $ | - | ||||||
| Short-term investments | 1,000,000 | - | - | |||||||||
| Amounts receivable | - | 4,634,997 | - | |||||||||
| Long-term investments | 33,773 | - | - | |||||||||
| Financial liabilities | ||||||||||||
| Warrant liability | - | - | (1,161,109 | ) | ||||||||
| $ | 4,453,305 | $ | 4,634,997 | $ | (1,161,109 | ) | ||||||