Consolidated Financial Statements and 2015
May 1, 2017 Independent Auditor s Report To the Shareholders of Marlin Gold Mining Ltd. We have audited the accompanying consolidated financial statements of Marlin Gold Mining Ltd., which comprise the consolidated statements of financial position as at December 31, 2016 and December 31, 2015 and the consolidated statements of loss and comprehensive loss, consolidated statements of changes in shareholders equity and consolidated statements of cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP PricewaterhouseCoopers Place, 250 Howe Street, Suite 1400, Vancouver, British Columbia, Canada V6C 3S7 T: +1 604 806 7000, F: +1 604 806 7806 PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Marlin Gold Mining Ltd. as at December 31, 2016 and December 31, 2015 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. (signed) PricewaterhouseCoopers LLP Chartered Professional Accountants
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION P a g e 3 As at Notes December 31, 2016 December 31, 2015 ASSETS Cash 1,708,222 2,835,363 Receivable and refundable taxes 6, 7 6,863,230 6,778,050 Inventories 8 49,948,314 6,648,162 Investment in securities 9 9,134,910 2,557,210 Prepaid expenses, and other 622,510 248,964 68,277,186 19,067,749 Mineral property, plant and equipment 11 5,899,577 37,464,369 Resource property costs 12 26,355,941 14,719,801 Other assets 6, 10, 12 (b) 1,640,715 662,046 102,173,419 71,913,965 LIABILITIES Accounts payables and accrued liabilities 10,509,636 7,020,896 Due to related parties 14 732,512 195,559 11,242,148 7,216,455 Deferred tax liability 19 113,613 2,079,000 Loans 16 54,596,868 45,068,751 Provision for reclamation and rehabilitation 15 7,393,826 4,745,001 73,346,455 59,109,207 SHAREHOLDERS' EQUITY Share capital 13 124,234,314 104,462,869 Contributed surplus 13 17,619,203 11,003,696 Accumulated other comprehensive income 19,235,265 15,240,911 Deficit (132,261,818) (117,902,718) 28,826,964 12,804,758 102,173,419 71,913,965 Nature of operations and liquidity (Note 1) Approved on behalf of the Board of Directors: Akiba Leisman Director (Chair of the audit committee) John Pontius Director The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS P a g e 4 For the year ended December 31, 2016 2015 Notes Revenue 28,393,978 22,780,587 Cost of Sales Production costs 17 (10,991,034) (20,238,071) Write down to NRV 8 (8,364,768) (14,393,236) Impairment write-down 8 - (6,007,494) Depreciation, depletion and amortization (11,728,284) (3,462,250) (31,084,086) (44,101,051) Gross loss (2,690,108) (21,320,464) Operating and Administrative Expenses Accounting and legal (626,654) (550,474) Exploration expenses (1,832,799) (1,150,578) General office and rent 14(a) (1,303,168) (1,151,976) Impairment of mineral property - (22,620,352) Management and consulting fees 14(a) (3,412,333) (2,640,449) Salaries, benefits and bonuses 13(c) (d) & 14(a) (458,039) (569,003) Transfer agent fees and regulatory fees (5,584) (62,271) Write-off of resource properties / loss on disposal on disposal of subsidiaries 12(c)&(d) - (853,649) (7,638,577) (29,598,752) Other (expenses) and income Accretion and interest expense 15 & 16 (7,589,876) (5,031,985) Change in fair value of deferred consideration receivable 6 21,833 (2,277) Foreign exchange loss (423,842) (4,577,361) Gain on disposal of securities, net of transaction costs 9(b) 2,199 - Gain in change in fair value of securities 9(b) 8,805 7,199 Interest and other income 102,881 89,298 Write-down in securities 9 - (1,786,201) (7,878,000) (11,301,327) Loss before taxes (18,206,685) (62,220,543) Income tax expense 19 (115,332) (112,256) Deferred tax recovery 11 (b) 3,962,917 1,385,294 Net loss for the year (14,359,100) (60,947,505) Other comprehensive income (loss) for the year: Items subject to reclassification into statement of loss Change in fair value of AFS securities, net of taxes of 660,113 9 6,203,886 (586,654) Reclassification of change in fair value of AFS securities 9 373,321 1,359,534 Reclassification of foreign currency translation upon disposal of subsidiaries 6 - (1,411,767) Cumulative translation adjustment, net of taxes 1,337,400 (2,582,853) 11,414,988 Other comprehensive income (loss) for the year 3,994,354 10,776,101 Comprehensive loss for the year (10,364,746) (50,171,404) Basic and diluted loss from continued operations per share (0.10) (0.62) Weighted average number of shares outstanding 148,391,487 98,953,083 The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS P a g e 5 For the year ended December 31, Notes 2016 2015 Cash provided by (used for): Operating Activities Net loss for the year (14,359,100) (60,947,505) Non-cash items 18 21,853,431 56,051,334 7,494,331 (4,896,171) Changes in non-cash working capital Receivable and refundable taxes (266,562) (5,712,041) Prepaid expenses, and other (376,762) 141,547 Inventories (4,973,625) (10,867,751) Accounts payable and accrued liabilities (3,902,606) 4,187,480 Due to / from related parties 461,383 (14,533) (1,563,841) (17,161,469) Investing Activities Change in refundable taxes - 4,606,121 Interest received 59,059 11,943 Acquisition of Commonwealth, net of cash acquired - (9,795,555) Proceeds on disposal of securities, net of transaction costs 9(b) 1,483,623 - Cash given up on disposal of subsidiaries, including transaction costs - (85,657) Purchase of investment securities (813,000) (100,000) Expenditures on resource property costs (11,913,874) (387,898) Expenditures on mineral property, plant and equipment (17,208,179) (14,412,310) Other assets (859,277) (485,167) (29,251,648) (20,648,523) Financing Activities Common shares issued, net of share issuance costs 20,631,911 21,679,787 Common shares purchased and returned to treasury (907,716) - Loans received 10,097,650 35,163,700 Interest paid on loans - (857,721) Commonwealth Bridge Loan repaid - (2,550,000) Loans repaid - (13,735,900) 29,821,845 39,699,866 Net increase (decrease) in cash (993,644) 1,889,874 Cash - beginning of year 2,835,363 683,951 Foreign exchange (gain) loss on cash (133,497) 261,538 Cash - end of year 1,708,222 2,835,363 Supplemental disclosure with respect to cash flows (Note 18) The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY P a g e 6 Shareholders' Equity Accumulated other Number of Contributed comprehensive shares Amount surplus income / (loss) Deficit Total Balance, December 31, 2014 75,799,003 82,539,082 10,896,076 4,464,810 (56,955,213) 40,944,755 Equity financing 38,839,286 21,750,000 - - - 21,750,000 Shares issued for Sprott loan 100,000 62,000 - - - 62,000 Share issuance costs (70,213) - - - (70,213) RSUs issued and vested 650,000 182,000 107,620 - - 289,620 Other comprehensive income - - - 10,776,101-10,776,101 Net loss - - - - (60,947,505) (60,947,505) Balance, December 31, 2015 115,388,289 104,462,869 11,003,696 15,240,911 (117,902,718) 12,804,758 Equity financing 59,370,680 21,017,204 - - - 21,017,204 Share issuance costs - (385,293) - - - (385,293) Common shares returned to treasury (2,000,000) (907,716) - - - (907,716) RSUs issued and vested 168,750 47,250 (47,250) - - - Share based payments - - 334,018 - - 334,018 Gain on extinghuishment of Wexford Loan - - 6,328,739 - - 6,328,739 Other comprehensive income - - - 3,994,354-3,994,354 Net loss - - - - (14,359,100) (14,359,100) Balance, December 31, 2016 172,927,719 124,234,314 17,619,203 19,235,265 (132,261,818) 28,826,964 The accompanying notes are an integral part of these consolidated financial statements.
P a g e 7 1. NATURE OF OPERATIONS AND LIQUIDITY Marlin Gold Mining Ltd. ( Marlin Gold or the Company ) is a public company listed on the TSX Venture Exchange ( TSX-V ) under the symbol MLN. The Company is incorporated and domiciled in British Columbia, Canada. The address of its registered and head office is 2833 595 Burrard Street, Vancouver, B.C. V7X 1J1. The Company is primarily engaged in the exploration for, development of and production of gold in Mexico, exploration of silver in Arizona and acquiring royalty streaming agreements. On October 30, 2015, the Company completed the sale of its subsidiary Oro Silver Resources Ltd., which owns the fully permitted El Compas Gold-Silver Mining Project in Mexico (refer to Note 6). On May 21, 2015, the Company completed the acquisition of Commonwealth Silver and Gold Mining Inc. ( Commonwealth ) (refer to Note 5). These consolidated financial statements have been prepared by management on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company incurred a net loss of 14,359,100 (2015 60,947,505) for the year ended December 31, 2016. As at December 31, 2016, the Company had an accumulated deficit of 132,261,818 and working capital of 57,035,038. Since September 15, 2016, the Company has been mining the high grade portion of the La Trinidad mine and as a result has been generating positive cash flows from operations. In addition to expected collection of its value added taxes (IVA), management believes that the cash flows being generated from the La Trinidad mine will enable the Company to meet its liabilities and repay the loans advanced by Wexford Spectrum Investors LLC ( WSI ) and Wexford Catalyst Trading Limited ( WCT ) (together the Wexford Funds ) ( Wexford Loans ) (refer to Note 16) as they become due for the next 12 months. These loans and related interest from the controlling shareholder come due January 15, 2018. In the event that the cash flows generated from operations are not sufficient to repay the loans and accrued interest on the maturity date, the Company may need to negotiate further extension of the maturity date or seek other forms of financing. The Company has a controlling shareholder which has provided approximately 126,560,000 of equity financings and loans to date. These consolidated financial statements were approved by the board of directors for issue on April 24, 2017. 2. SIGNIFICANT ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING POLICIES The Company has consistently applied the following accounting policies to all periods presented in these consolidated financial statements. (a) Basis of presentation The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). The consolidated financial statements have been prepared on a going concern basis, under the historical cost convention, as modified by financial assets carried at fair value.
P a g e 8 2. SIGNIFICANT ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING POLICIES (cont d) (a) Basis of presentation (cont d) These consolidated financial statements are expressed in Canadian dollars and include the accounts of Marlin Gold Mining Ltd. and its subsidiaries. Subsidiaries are entities over which the Company has control. The Company controls a subsidiary when it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over its subsidiary. The Company s subsidiaries are: Name of subsidiary Referred to as Place of Incorporation Proportion of Ownership Interest Principal Activity Oro Silver Resources Ltd. "Oro Silver" Canada 100% Parent of Minera Oro Silver Disposed on October 30, 2015 Marlin Gold Mining USA Ltd. "Marlin Mining" Canada 100% Parent of Commonwealth (US) Oro Gold de Mexico, S.A. de C.V. Oro Gold de Mexico Mexico 100% Holds mineral interests in Mexico Minera Oro Silver de Mexico, S.A. de C.V. Minera Oro Silver Mexico 100% Holds mineral interests in Mexico Disposed on October 30, 2015 Prestadora de Servicos Zacatecas, S.A. de C.V. Prestadora Mexico 100% Performs payroll functions in Mexico Exploracion y Desarrollo Minero Oro, S.A. de C.V. "EDM" Mexico 100% Inactive company in Mexico Marlin Gold Trading Inc. Marlin Gold Trading Barbados 100% Commodity streaming company Marlin Gold US Corporation "Marlin US" USA 100% Management services company Commonwealth Silver and Gold Mining Corp. "Commonwealth (US)" USA 100% Holds mineral interest in USA Sailfish Royalty Corp. Sailfish British Virgin Islands 100% Royalty / streaming company All inter-company transactions, balances, revenue and expenses are eliminated in full on consolidation. (b) Foreign currency translation The Company s functional and reporting currency is the Canadian dollar. The functional currencies of its subsidiaries are: Oro Silver and Marlin Mining Canadian Dollars; Oro Gold de Mexico, Minera Oro Silver, Marlin Gold Trading, Marlin US, Sailfish and Commonwealth (US) US Dollars; Prestadora and EDM Mexican Pesos. Determination of functional currency involves certain judgments to determine the primary economic environment and the parent entity reconsiders the functional currency of its entities if there is a change in events or conditions which determined the primary economic environment. Transactions in currencies other than the functional currency are recorded at the rates of exchange prevailing on dates of transactions. At the end of each reporting period, monetary assets and liabilities that are denominated in foreign currencies are translated at the rates prevailing at that date.
P a g e 9 2. SIGNIFICANT ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING POLICIES (cont d) (b) Foreign currency translation (cont d) Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at rates prevailing at the date when the fair value was determined. Nonmonetary items that are measured in terms of historical cost in a foreign currency are not retranslated. The financial statements of the subsidiaries with other than Canadian dollar functional currencies are translated into the Canadian dollar presentation currency as follows: Assets and liabilities are translated into the Canadian dollar using exchange rates prevailing at the end of the reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences are recognized in other comprehensive income and accumulated in equity. Generally, foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than a subsidiary s functional currency are recognized in the statement of loss. (c) Cash and cash equivalents Cash and cash equivalents include cash held in bank accounts and highly liquid investments with original maturities of three months or less. (d) Inventories and inventory valuation Inventories are valued at the lower of average cost and net realizable value ( NRV ). Costs incurred in bringing each product to its present location and condition is accounted for as follows: Ore in process inventory consists of stockpiled ore, ore on leach pads, crushed ore, and in-circuit material. Finished metal inventory consists of gold in doré awaiting refinement or bullion. Ore in process and finished metal costs consist of direct production costs including mining, crushing and processing; site administration costs; and allocated indirect costs, including depreciation and amortization of mineral property, plant and equipment. Inventory costs are charged to production costs on the basis of quantity of metal sold. The Company regularly evaluates and refines estimates used in determining the costs charged to production costs and costs absorbed into inventory carrying values based upon actual gold recoveries and operating plans. NRV is the estimated selling price, less the estimated costs of completion and selling expenses. Any write-downs of inventory to NRV are recorded as cost of sales in the
P a g e 10 2. SIGNIFICANT ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING POLICIES (cont d) (d) Inventories and inventory valuation (cont d) statement of loss, except prior to commercial production in which case the amounts are capitalized against mine construction and development costs. If there is a subsequent increase in the value of inventories, the previous write-downs to NRV are reversed to the extent that the related inventory has not been sold. Supplies and spare parts inventory consists of consumables used in operations, such as fuel, chemicals, reagents and spare parts, which are valued at the lower of average cost and NRV and, where appropriate, less a provision for obsolescence. Costs include acquisition, freight and other directly attributable costs. NRV is estimated based on replacement costs. (e) Property, plant and equipment Property, plant and equipment are carried at cost, less accumulated amortization and accumulated impairment losses. Cost comprises the fair value of consideration given to acquire an asset and includes the direct charges associated with bringing the asset to the location and condition necessary for putting it into use along with the future cost of dismantling and removing the asset. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Costs relating to any producing mineral interests are amortized on a unit-of-production basis over the estimated ounces of gold. Costs incurred after the property is placed into production that increase production volume or extend the life of a mine are capitalized. Amortization is calculated over the useful life on a declining balance basis as follows: Building - 10%; Equipment - 20-45%; Producing mineral interest - units-of-produc on, over estimated proven and probable reserves, resources or metric and Vehicles - 30%. (f) Stripping costs As part of its mining operations, the Company incurs stripping costs during both the development and production phase. Stripping costs incurred in the development phase of a mine, before commercial production commences, are capitalized as part of the cost of constructing the mine and subsequently amortized over its useful life using a units-of-production method. Stripping costs incurred during the production phase of a mine are considered production costs and included in the cost of inventory produced during the period in which the stripping costs are incurred, unless the stripping activity provides additional access to the ore to be mined in the future, in which case the stripping costs are capitalized. Stripping costs incurred to prepare the ore body for extraction are capitalized as mine development costs (pre-stripping). Capitalized stripping costs are amortized on a unit-of-production basis over the estimated resource of the component to which they relate. The stripping activity asset is initially measured at cost, which is the accumulation of costs directly incurred to perform the stripping activity that provides additional access to the identified component of ore, plus an allocation of directly attributable overhead costs.
P a g e 11 2. SIGNIFICANT ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING POLICIES (cont d) (f) Stripping costs (cont d) If the costs of the inventory produced and the stripping activity asset are not separately identifiable, a relevant production measure is used to allocate the production stripping costs between the inventory produced and the stripping activity asset. This production measure is calculated for the identified component of the ore body and is used as a benchmark to identify the extent to which the additional activity of creating a future benefit has taken place. The Company uses the expected volume of waste extracted compared with the actual volume for a given volume of ore production of each component. The stripping activity asset is accounted for as an addition to, or an enhancement of, an existing asset, being the mine asset, and is presented as part of property, plant and equipment in the statement of financial position. This forms part of the total investment in the relevant cash generating unit, which is reviewed for impairment if events or changes of circumstances indicate that the carrying value may not be recoverable. Economically recoverable resources are used to determine the expected useful life of the identified component of the ore body. The stripping activity asset is then carried at cost less depreciation and any impairment losses. (g) Resource property costs Resource property acquisition costs are capitalized. These include any cash consideration and advance royalties paid, and the fair market value of shares issued, if any, on the acquisition of the resource property interest. Properties acquired under option agreements, whereby payments are made at the sole discretion of the Company, are recorded in the accounts when the payments are made. Exploration and evaluation expenditures are expensed as incurred. Once the technical feasibility and commercial viability of the extraction of resources from a particular mineral property has been determined, resource property acquisition costs are tested for impairment and then reclassified to mine properties within property, plant and equipment and carried at cost until the properties to which they relate are placed into commercial production, sold, abandoned or determined by management to be impaired in value. At each reporting date, capitalized resource property acquisition costs are assessed for indicators of impairment. Where a potential impairment is indicated, impairment tests are performed for each area of interest, as described in Note 2(i) of these consolidated financial statements. To the extent that resource property acquisition costs are not expected to be recovered, they are charged to net loss. Proceeds from the sale of properties or cash proceeds received from option payments are recorded as a reduction of the related resource property costs.
P a g e 12 2. SIGNIFICANT ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING POLICIES (cont d) (h) Share capital Common shares are classified as equity. Transaction costs directly attributable to the issue of common shares are recognized as a deduction from equity. Proceeds from unit placements are allocated between shares and warrants issued according to their relative fair value. (i) Impairment At each reporting period, management reviews all assets for indicators of impairment. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent of the impairment, if any. The recoverable amount is the higher of fair value less costs of disposal ( FVLCD ) and value in use ( VIU ). In assessing FVLCD, recent market transactions (where available) are taken into account. If no such transactions can be identified, an appropriate valuation model is used. In assessing VIU, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset/cash generating unit ( CGU ). If the recoverable amount of the asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss is recognized in net loss for that period. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the CGU to which that asset belongs. Past impairments are also considered at each reporting period and where there is an indication that an impairment loss may have decreased, the recoverable amount is calculated as outlined above to determine the extent of the recovery. If the recoverable amount of the asset is more than its carrying amount, the carrying amount of the asset is increased to its recoverable amount and the impairment loss is reversed in the net loss for that period. The increased carrying amount due to reversal may not be more than what the depreciated historical cost would have been if the impairment had not been recognized. (j) Share-based payments The Company grants stock options and restricted share units ("RSUs") to directors, officers, employees and service consultants. Each tranche in an award is considered a separate award with its own vesting period. Changes to the estimated number of awards that will eventually vest are accounted for prospectively. The Company applies the fair-value method of accounting for share-based compensation. The fair value of stock options is calculated using the Black-Scholes option pricing model ( BS model ) with market related inputs as of the date of grant. The fair value of RSUs is the market value of the underlying shares as of the date of grant. Share-based compensation for employees and others providing similar services is determined based on the grant date fair value. Share-based compensation for non-employees is determined based on the fair value of the goods or services received or option granted measured at the date on which the Company obtains such goods or services. When such fair value cannot be estimated reliably, fair value is measured based on the quoted market value of the Company s shares on the date of share issuance.
P a g e 13 2. SIGNIFICANT ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING POLICIES (cont d) (j) Share-based payments (cont d) Share-based compensation expense is recognized over each tranche s vesting period, in net loss or capitalized as appropriate, based on the number of awards expected to vest. The number of stock options expected to vest is adjusted each reporting period. No expense is recognized for stock-based awards that do not ultimately vest. If stock options are ultimately exercised, the applicable amounts of contributed surplus are transferred to share capital. (k) Provision for reclamation and rehabilitation An obligation to incur restoration, rehabilitation and environmental costs arises when the environmental disturbance is caused by the exploration or development of a mineral property interest. Such costs arising from the dismantling, remediation and ongoing treatment and monitoring of a mine and other site preparation work, discounted to their net present value, are provided for and capitalized at the start of each project to the carrying amount of the asset, along with a corresponding liability as soon as the obligation to incur such costs arises. The timing of the actual rehabilitation expenditure is dependent on a number of factors such as the life and nature of the asset, the operation license conditions and, when applicable, the environment in which the mine operates. Discount rates using a pre-tax rate that reflects the time value of money and the risk associated with the liability are used to calculate the net present value. These costs are capitalized and then charged against net loss over the economic life of the related asset, through amortization using either the unit-of-production or the straight line method. The corresponding liability is progressively increased as the effect of discounting unwinds creating a finance expense in net loss. Decommissioning costs are also adjusted at each reporting date for changes in estimates. These may include revised expected cash flows, the timing of the cash flows and discount rate. Those adjustments are accounted for as a change in the corresponding capitalized cost, except where a reduction in costs is greater than the unamortized capitalized cost of the related assets, in which case the capitalized cost is reduced to nil and the remaining adjustment is recognized in net loss. The operations of the Company have been, and may in the future be, affected by changes in environmental regulations, including those for site restoration costs. (l) Loss per share Loss per common share is calculated using the weighted average number of common shares outstanding. Diluted loss per share is not presented as it is anti-dilutive. (m) Revenue recognition Revenue from the sale of metals is recognized when the significant risks and rewards of ownership have passed to the buyer; it is probable that economic benefits associated with the transaction will flow to the Company; the sale price can be measured reliably; the Company has no significant continuing involvement; and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Proceeds from sales of pre-commercial production are recorded as a reduction of property plant and equipment. Revenue is measured at the fair value of the consideration received or receivable.
P a g e 14 2. SIGNIFICANT ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING POLICIES (cont d) (n) Taxes Deferred taxes Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable net loss. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Mining taxes and royalties Mining taxes and royalties are treated and disclosed as current and deferred taxes if they have the characteristics of an income tax. This is considered to be the case when they are imposed under government authority and the amount payable is calculated by reference to taxable income. Obligations arising from royalty arrangements and other types of taxes that do not satisfy these criteria are recognized as current provisions and included in cost of sales. Value added tax ( IVA ) IVA credit refundable is from the Government of Mexico and is currently calculated as 16% of expenditures in Mexico. IVA refunds receivable are reviewed for impairment at each financial reporting date in accordance with the policy for impairment of financial assets. (o) Borrowing costs Borrowing costs are expensed as incurred except where they are directly attributable to the financing of acquisition, construction or development of qualifying assets requiring a substantial period of time to prepare for their intended future use. Interest is capitalized up to the date when substantially all the activities necessary to prepare the asset for its intended use are complete. (p) Financial instruments Financial assets The Company classifies its financial assets in the following categories: Fair value through profit or loss ( FVTPL ), loans and receivables, and available-for-sale ( AFS ). The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of financial assets at recognition.
P a g e 15 2. SIGNIFICANT ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING POLICIES (cont d) (p) Financial instruments (cont d) Financial assets (cont d) (i) (ii) (iii) (iv) Loans and receivables - Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are classified as current assets or non-current assets based on their maturity date. Loans and receivables are carried at amortized cost less any impairment. Loans and receivables are comprised of cash and receivables. AFS - AFS financial assets are non-derivatives that are either designated as available-for-sale or not classified in any of the other financial asset categories. Changes in the fair value of AFS financial assets are recognized as other comprehensive income and classified as a component of equity. AFS assets include investment in securities. FVTPL - Financial assets at FVTPL are initially recognized at fair value with changes in fair value recorded through net loss. Investments in warrants are included in this category. Impairment of financial assets - The Company assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. An evaluation is made as to whether a decline in fair value is significant or prolonged based on indicators such as significant adverse changes in the market, economic or legal environment. Any impairments charges are recognized in net loss. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. (v) Derecognition of financial assets and liabilities: Financial assets are derecognized when the investments mature or are sold, and substantially all the risks and rewards of ownership have been transferred. Any accumulated fair value adjustments recognized in other comprehensive income (loss) are then included in net loss. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired. Gains and losses on derecognition are recognized within other income and finance costs. Financial liabilities The Company classifies its financial liabilities in the following categories: FVTPL, other financial liabilities, and derivative financial liabilities. The Company has no financial liabilities categorized as FVTPL. (i) Other financial liabilities - Other financial liabilities are non-derivatives and are recognized initially at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method. Any difference between the amounts originally received, net of transaction costs, and the redemption value is recognized in net loss over the period to maturity using the effective interest method.
P a g e 16 2. SIGNIFICANT ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING POLICIES (cont d) (p) Financial instruments (cont d) Financial liabilities (cont d) Other financial liabilities are classified as current or non-current based on their maturity date. Financial liabilities include accounts payable, which are non-interest bearing, loans, and due to related parties. (ii) Derivatives - Derivatives are initially recognized at their fair value on the date the derivative contract is entered into and are subsequently re-measured at their fair value at each reporting period with changes in the fair value recognized in net loss. 3. RECENT ACCOUNTING PRONOUNCEMENTS The IASB issued the following new or revised pronouncements that may affect the Company s future financial statements. The Company is currently evaluating the impact on the financial statements. IFRS 9: Financial Instruments ( IFRS 9 ): This standard replaces the current IAS 39: Financial Instruments Recognition and Measurement. The standard introduces new requirements for classifying and measuring financial assets and liabilities. The effective implementation date of IFRS 9 is January 1, 2018. IFRS 15: Revenue from Contracts with Customers ( IFRS 15 ): This standard replaces IAS 11: Construction Contracts, IAS 18: Revenue and IFRIC 13: Customer Loyalty Programmes. This standard outlines a single comprehensive model for entities to account for revenue arising from contracts with customers. The latest date of mandatory implementation of IFRS 15 is January 1, 2018. IFRS 16: Leases ( IFRS 16 ): This standard replaces IAS 17 Leases and its associated interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the asset being leased. For those assets determined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance sheet accounting model that is similar to current finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting remains similar to current accounting practice. The standard is effective for annual periods beginning on or after January 1, 2019, with early application permitted for entities that apply IFRS 15. 4. KEY SOURCES OF ESTIMATION UNCERTAINTY AND CRITICAL ACCOUNTING JUDGEMENT The preparation of these consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
P a g e 17 4. KEY SOURCES OF ESTIMATION UNCERTAINTY AND CRITICAL ACCOUNTING JUDGEMENT (cont d) Estimates and underlying assumptions are reviewed at each period end. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Outlined below are some of the areas which require management to make significant estimates and assumptions in determining carrying values. Estimated recoverable resources, ore in process and production costs Recoverable ounces are estimates of the amount of ore that can be economically and legally extracted from the Company s mining properties. The Company estimates its recoverable ounces based on information compiled by appropriately qualified persons relating to the geological data on the size, depth and shape of the ore body, and requires complex geological judgments to interpret the data. The estimation of recoverable ounces is based upon factors such as estimates of foreign exchange rates, commodity prices, future capital requirements, metallurgical recoveries, and production costs along with geological assumptions and judgments made in estimating the size, and grade of the ore body. Changes in the recoverable ounces may impact the carrying value of inventories, operating costs of future periods, mining interests, mine restoration provisions, recognition of deferred tax assets, and depreciation and amortization charges. The Company does not have proven and probable reserves and monitors the recovery of gold ounces from the leach pad on an ongoing basis and may refine its estimate based on these results. Assumptions used in inventory valuation include tonnes mined, grams of gold per tonne, recovery rate based on the type of ore placed on the leach pad, assays of ore tonnes, solutions and gold on carbon, among others. Deferred income taxes The determination of income tax expense and deferred income tax involves judgment and estimates as to the future taxable earnings, expected timing of reversals of deferred tax assets and liabilities, and interpretation of laws in the countries in which the Company operates. The Company is subject to assessments by tax authorities who may interpret the tax law differently. Changes in these estimates may materially affect the final amount of deferred income taxes or the timing of tax payments. Impairment of non-current assets At each reporting date, the Company reviews its non-current assets to determine whether there are any indications of impairment. Calculating the estimated recoverable amount for the non-current asset impairment tests requires management to make estimates and assumptions with respect to estimated recoverable resources, estimated future commodity prices, the expected future operating and capital costs and discount rates. Changes in any of the assumptions or estimates used in determining the recoverable amount could impact the impairment analysis. Reclamation and remediation provisions Reclamation and remediation provisions represent the present value of estimated future costs for the reclamation of the Company s mines and properties. These estimates include assumptions as to the cost of services, timing of the reclamation work to be performed, inflation rates, exchange rates and interest rates. The actual cost to reclaim a mine may vary from the estimated amounts because there are uncertainties in factors used to estimate the cost and potential changes in regulations or laws governing the reclamation of a mine.
P a g e 18 4. KEY SOURCES OF ESTIMATION UNCERTAINTY AND CRITICAL ACCOUNTING JUDGEMENT (cont d) Reclamation and remediation provisions (cont d) Management periodically reviews the reclamation requirements and adjusts the liability as new information becomes available and will assess the impact of new regulations and laws as they are enacted. Impairment of securities At each reporting date, management conducts a review of the investment in securities to determine whether there are any indications of impairment. This determination requires significant judgment. In making this judgment, management evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its carrying value; and the financial health of and business outlook for the investee, including factors such as industry and sector performance, and operational and financing cash flow. If the declines in fair value below carrying value are considered significant or prolonged, the Company will recognize a loss, being the transfer of the accumulated fair value adjustments recognized in other comprehensive income on the impaired AFS financial asset to net loss. Critical judgement Impairment of mineral property plant and equipment and resource property costs Critical judgement was applied on the assessment of impairment indicators for the Company s mineral property plant and equipment and resource property costs. In 2015, management determined there were impairment indicators at the La Trinidad mine. The recoverable amount of the La Trinidad mine was determined as FVLCD using a discounted cash flow model, which resulted in an impairment loss of 22,620,352. In 2015, the recoverable amount of the El Compas resource property was determined based on management s best estimate of the fair value of the common shares to be received upon disposal, which resulted in an impairment of 1,400,000. In 2015, management also recorded a write-down of 383,561 relating to the El Rosario resource property. Refer to Notes 11 and 12. Stripping costs Significant judgement is required to identify and define the components of the La Trinidad mine, and also to determine the expected volumes (e.g., in tonnes) of waste to be stripped and ore to be mined in each of these components. Management has determined that the La Trinidad consists of one component. Judgement is also required to identify a suitable production measure to be used to allocate production stripping costs between inventory and any stripping activity asset(s). The Company considers that the ratio of the expected volume (e.g., in tonnes) of waste to be stripped for an expected volume (e.g., in tonnes) of ore to be mined over the estimated resource, is the most suitable production measure. Furthermore, judgements and estimates are also used to apply the units-of-production method in determining the depreciable lives of the stripping activity asset(s).
P a g e 19 5. ACQUISTION OF COMMONWEALTH SILVER AND GOLD MINING INC. ( COMMONWEALTH ) On May 21, 2015, the Company completed the acquisition of all the issued and outstanding common shares of Commonwealth, a privately held entity, by way of a statutory plan of arrangement under the Canada Business Corporations Act (the Commonwealth Arrangement ). The total cash consideration paid to the Commonwealth shareholders was 7,396,292. As part of the consideration, the Company also advanced 1,516,000 to settle liabilities. As part of the transaction, the Company assumed the 2,550,000 bridge loan that was provided to Commonwealth by the Wexford Funds ( the Commonwealth Bridge Loan ). As part of the Commonwealth Arrangement, the Company agreed to advance funds to Commonwealth to pay a break away fee of 400,000 to a third party. This transaction has been accounted for as an acquisition of assets and liabilities as Commonwealth did not constitute a business, as defined in IFRS 3. Other than a small working capital amount and the loan assumed the remainder of the value for this transaction was assigned to resource properties. The allocation of the purchase price of 9,855,885 to the assets acquired and liabilities assumed is based upon estimated fair values at the date of acquisition as set out below: Working capital 64,565 Fixed assets 10,987 Resource properties 12,330,333 Commonwealth Bridge Loan (2,550,000) Net assets acquired 9,855,885 The Commonwealth Bridge Loan had an interest rate of 15% until March 15, 2015 and thereafter 18%, compounded daily, until repaid. The Commonwealth Bridge Loan was repayable on or before August 11, 2015. On June 8, 2015, the Company repaid the Commonwealth Bridge Loan and interest of 116,628. Interest of 24,863 was recorded in net loss for the year ended December 31, 2015 and the remaining balance of 91,765 was included as part of the accrued liabilities acquired in the Commonwealth acquisition. Following the Commonwealth Arrangement, the Company changed the name of Commonwealth to Marlin Gold Mining USA Ltd. 6. DISPOSAL OF SUBSIDIARIES On October 30, 2015, the Company closed the transaction whereby Canarc Resource Corp. ( Canarc ) acquired 100% of the El Compas Gold-Silver Mining Project ( El Compas ) in Zacatecas, Mexico (the Canarc Transaction ). (Refer to Note 12). Canarc issued the Company a total of 19,000,000 Canarc common shares in exchange for a 100% interest in El Compas and on each of the first three anniversaries of the closing date, Canarc will advance 55 troy ounces of gold (or the US dollar equivalent) to the Company ( Deferred Consideration Receivable ). The Company will receive a 1.5% net smelter return ( NSR ) on all Non-Altiplano claims that currently have no royalty associated with them.
P a g e 20 6. DISPOSAL OF SUBSIDIARIES On May 30, 2016, Canarc completed the sale of El Compas to Endeavour Silver Corp ( Endeavour ). Endeavour will now assume Canarc s obligation to pay an aggregate of 165 troy ounces of gold from production to the Company and the 1.5% NSR. The fair value of the 19,000,000 common shares received is 1,330,000 based on Canarc s share price on the date the Canarc Transaction was completed. The Deferred Consideration Receivable was fair valued at 244,851 using the gold spot selling price as at October 30, 2015. Net consideration 1,489,194 Carrying value of Oro Silver Group (3,318,849) Reclassification of cumulative translation adjustment from AOCI upon disposal of subsidiaries 1,411,767 Loss on disposal of the Oro Silver Group recorded in loss for the year ended December 31, 2015 417,888 As at December 31, 2016, the fair value of the Deferred Consideration Receivable is 171,196 (December 31, 2015-242,574) and is disclosed in the consolidated statement of financial position as follows: December 31, 2016 December 31, 2015 Current receivable, disclosed as Receivable (Note 7) 85,598 80,858 Non-current receivable, disclosed as Other assets 85,598 161,716 Total 171,196 242,574 Changes in the fair value of the Deferred Consideration Receivable are recognized in profit or loss. On October 28, 2016, the Company received 93,211 (US69,644), the cash equivalent of 55 troy ounces of gold, of the Deferred Consideration Receivable and recorded a gain of 12,353., a gain in the change in the fair value of the Deferred Consideration Receivable of 9,480 (2015 - Nil) was recognized in profit and loss. 7. RECEIVABLE AND REFUNDABLE TAXES December 31, 2016 December 31, 2015 Value added taxes (IVA) 6,611,120 6,667,113 Current portion of Deferred Consideration Receivable (Note 6) 85,598 80,858 Other 166,512 30,079 6,863,230 6,778,050 IVA credit refundable is from the Government of Mexico and is currently calculated as 16% of expenditures in Mexico. Subsequent to December 31, 2016, the Company received IVA of approximately 2,053,000.