During the three and six months ended June 30, 2018, the Company recognized $35 and $80 (the three and six months ended June 30, 2017 - $52 and $85) in stock-based compensation relating to employee stock options that were issued and/or had vesting terms.
| 13 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 20172018 and 20162017
(amounts expressed in thousands of US dollars - Unaudited)
| Share Capital (continued) |
Stock options (continued)
These stock options were not exercised, thus expired during the six months ended June 30, 2017. The share-based compensation associated with the unvested stock options was reversed accordingly.
Upon resignation of an employee on June 19, 2017, 20,000 stock options were forfeited as they did not meet the vesting conditions. The share-based compensation associated with the unvested stock options was reversed accordingly.
The fair value of stock options granted as above is calculated using the following weighted average assumptions:
| 2017 | 2016 | |||||||
| Expected life (years) | 5.00 | 5.00 | ||||||
| Interest rate | 1.18 | % | 1.00 | % | ||||
| Volatility | 77.29 | % | 81.27 | % | ||||
| Dividend yield | 0.00 | % | 0.00 | % | ||||
During the three and six months ended June 30, 2017, the Company recognized $0.05 million and $0.09 million (the three and six months ended June 30, 2016 - $0.04 million and $0.07 million) in stock-based compensation relating to employee stock options that were issued and/or had vesting terms.
The following table summarizes information about stock options outstanding and exercisable as at June 30, 2017:2018:
| Expiry Date | Number Outstanding | Number Exercisable | Remaining Contractual Life (years) | Exercise Price | Number Outstanding | Number Exercisable | Remaining Contractual Life (years) | Exercise Price | ||||||||||||||||||||||||
| June 3, 2018 | 50,000 | 50,000 | 0.93 | $ | 1.16 | |||||||||||||||||||||||||||
| September 3, 2018 | 150,000 | 150,000 | 1.18 | $ | 1.59 | 150,000 | 150,000 | 0.18 | $ | 1.59 | ||||||||||||||||||||||
| September 8, 2020 | 430,000 | 430,000 | 3.19 | $ | 0.58 | 430,000 | 430,000 | 2.19 | $ | 0.58 | ||||||||||||||||||||||
| November 30, 2021 | 365,000 | 0 | 4.42 | $ | 0.66 | 365,000 | 121,666 | 3.42 | $ | 0.66 | ||||||||||||||||||||||
| March 20, 2022 | 400,002 | 0 | 4.72 | $ | 0.65 | 400,002 | 133,334 | 3.72 | $ | 0.65 | ||||||||||||||||||||||
| Balance, June 30, 2017 | 1,395,002 | 630,000 | 3.66 | |||||||||||||||||||||||||||||
| October 20, 2022 | 1,129,999 | - | 4.31 | $ | 0.29 | |||||||||||||||||||||||||||
| Balance, June 30, 2018 | 2,475,001 | 835,000 | 3.47 | |||||||||||||||||||||||||||||
As at June 30, 2017,2018, the aggregate intrinsic value of the outstanding exercisable options was $Nil$nil (December 31, 2016 - $0.4 million)2017– $nil).
Warrants
WarrantsAs at June 30, 2018, 24,317,700 warrants were outstanding (December 31, 2017 – 24,317,700).
The following is a summary of commontable summarizes information about share purchase warrants activity:outstanding:
| June 30, 2017 | December 31, 2016 | |||||||
| Balance, beginning of the period | 24,317,700 | 10,000,000 | ||||||
| Issued - financing units | - | 5,560,000 | ||||||
| Issued - financing brokers(1) | - | 757,700 | ||||||
| Issued - debt restructuring(1) | - | 8,000,000 | ||||||
| Balance, end of the period | 24,317,700 | 24,317,700 | ||||||
| Expiry Date | Number Outstanding | Remaining Contractual Life (years) | Exercise Price | |||||||||
| June 8, 2020 | 10,000,000 | 2.19 | $ | 0.7831 | ||||||||
| July 25, 2019(1) | 6,317,700 | 1.32 | C$ | 2.0000 | ||||||||
| November 18, 2021 | 8,000,000 | 3.64 | $ | 0.6650 | ||||||||
| Balance, June 30, 2018 | 24,317,700 | 2.44 | ||||||||||
| (1) | Non-tradable share purchase warrants. |
| 10. | General and Administrative Expenses |
(1) Non-tradable share purchase warrants.General and administrative expenses are incurred to support the administration of the business that are not directly related to production. Significant components of general and administrative expenses are comprised of the following:
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Audit, legal and professional fees | $ | 169 | $ | 108 | $ | 409 | $ | 396 | ||||||||
| Salaries and benefits and director fees | 180 | 140 | 683 | 700 | ||||||||||||
| Regulatory fees and licenses | 46 | 17 | 125 | 70 | ||||||||||||
| Insurance | 144 | 114 | 283 | 247 | ||||||||||||
| Corporate administration | 340 | 333 | 633 | 715 | ||||||||||||
| $ | 879 | $ | 712 | $ | 2,133 | $ | 2,128 | |||||||||
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 20172018 and 20162017
(amounts expressed in thousands of US dollars - Unaudited)
| Loss Per Share |
Warrants (continued)
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) attributable to the shareholders of the Company - numerator for basic and diluted | $ | (632 | ) | $ | 962 | $ | (6,049 | ) | $ | (1,465 | ) | |||||
| Denominator: | ||||||||||||||||
| Weighted average number of common shares outstanding -basic and diluted | 300,101,444 | 111,148,683 | 244,772,735 | 112,360,179 | ||||||||||||
| Income (loss) per share – basic and diluted | $ | (0.00 | ) | $ | 0.01 | $ | (0.02 | ) | $ | (0.01 | ) | |||||
The following table summarizes information about share purchase warrants outstandingWeighted average number of shares for the three and exercisable atsix months ended June 30, 2017:
| Expiry Date | Number Outstanding | Remaining Contractual Life (periods) | Exercise Price | |||||||||
| June 8, 2020 | 10,000,000 | 2.94 | $ | 0.95 | ||||||||
| July 25, 2019 | 5,560,000 | 2.07 | C$ | 2.00 | ||||||||
| July 25, 2019 | 757,700 | 2.07 | C$ | 2.00 | ||||||||
| November 18, 2021 | 8,000,000 | 4.40 | $ | 0.85 | ||||||||
Asset Retirement Obligation
The total asset retirement obligation as of June 30, 2017, was $1.6 million2018 excludes 2,475,001 options (December 31, 2016 - $1.4 million).
The Company estimated its asset retirement obligation based on its requirements to reclaim2017– 2,600,001) and remediate its property based on its activities to date. As at June 30, 2017, the Company estimates the primary cash outflow related to these reclamation activities will commence in 2028. Reclamation provisions are measured at the expected value of future cash flows discounted to their present value using a discount rate based on a credit adjusted risk-free interest rate of 8.7% and an inflation rate of 2.45%.
The following is a summary of asset retirement obligations:
| June 30, 2017 | December 31, 2016 | |||||||
| Balance, beginning of the period | $ | 1,366 | $ | 978 | ||||
| Accretion | 62 | 90 | ||||||
| Changes in cash flow estimates | 173 | 298 | ||||||
| Balance, end of the period | $ | 1,601 | $ | 1,366 | ||||
Reclamation Financial Assurance
The Company is required to provide the Bureau of Land Management, the State Office of Mine Reclamation and Kern County, California with a revised reclamation cost estimate annually. The financial assurance is adjusted once the cost estimate is approved. The Company’s provision for reclamation of the property is estimated each year by an independent consulting engineer. This estimate, once approved by state and county authorities, forms the basis for a cash deposit of reclamation financial assurance. The reclamation assurance provided as at June 30, 2017 is $1.5 million24,317,700 warrants (December 31, 2016 - $1.5 million).
The Company is required to provide the Bureau of Land Management, the State Office of Mine Reclamation and Kern County, California with a revised reclamation cost estimate annually. The financial assurance is adjusted once the cost estimate is approved. The Company’s provision for reclamation of the property is estimated each year by an independent consulting engineer. This estimate, once approved by state and county authorities, forms the basis for a cash deposit of reclamation financial assurance. The reclamation assurance provided as at June 30, 2017 is $1.5 million (December 31, 2016 - $1.5 million).
In addition to the above, the Company is required to obtain and maintain financial assurance for initiating and completing corrective action and remediation of a reasonably foreseeable release from the Mine’s waste management units as required by the Regional Board. The reclamation financial assurance estimate for as of June 30, 2017, is $0.3 million (December 31, 2016 - $0.3 million).
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)– 24,317,700) that were antidilutive.
Asset Retirement Obligation (continued)
During 2016, the Company entered into $3.0 million in surety bond agreements in order to release its reclamation deposits. The Company pays a yearly premium of $0.1 million. Golden Queen Mining Co. Ltd. has provided a corporate guaranty on the surety bonds (See Note 12).
| Related Party Transactions |
Except as noted elsewhere in these unaudited condensed consolidated interim financial statements, related party transactions are disclosed as follows:
| (i) | Compensation of Key Management |
DuringFor the three and six months ended June 30, 2017,2018, the Company paid a total of $0.03 millionrecognized $104 and $0.06 million (the$299 (for the three and six months ended June 30, 2016 - $0.03 million2017– $78 and $0.06 million, respectively), respectively,$278) salaries and fees for Officers and Directors.
As at June 30, 2018, $nil (December 31, 2017– $38) was included in prepaid expenses and other current assets for closing fees paid to the three independent directors of the Company. Additionally, the Company paid $0.02 million (2016 - $Nil)related parties.
As at June 30, 2018, $28 (December 31, 2017–$463 for consulting servicesamended fees and accrued interest payable to Behre Dolbear, a company of which a director of Golden Queen servesrelated parties) was included in the capacity of an executive officer.
accounts payable and accrued liabilities for accrued interest payable to related parties and salaries and fees payable to Officers and Directors.
| (ii) | Note Payable |
On December 31, 2014,November 18, 2016, the Company entered into a loan (the “December 2014 Loan”) with the Clay Group for $12.5 million, due on July 1, 2015 and bore an annual interest rate of 10%. The loan was guaranteed by GQM Holdings, and secured by a pledge of the Company's interests in GQM Canada, GQM Canada’s interest in GQM Holdings and GQM Holdings' 50% interest in GQM LLC.
The Company also incurred a financing fee to secure the loan in the amount of $1.0 million, of which, $0.8 million was paid on December 31, 2014 and the remaining $0.2 million was paid on January 5, 2015.
On June 8, 2015, the Company amended the December 2014 Loan to extend the maturity to December 8, 2016 and increased the principal amount from $12.5 million to $37.5 million (the “June 2015 Loan”). The Company also issued to the lenders 10,000,000 common share purchase warrants exercisable for a period of five years expiring June 8, 2020. The common share purchase warrants have an exercise price of $0.95. All other terms remained the same as the December 2014 Loan. The Company also incurred financing fees to secure the loan in the amount of $1.5 million. The Company agreed to pay the legal fees incurred by the lenders relating to this debt instrument which amounted to $0.04 million. The total legal fees were expensed as the transaction met the definition of a debt extinguishment.
On November 18, 2016, the Company repaid $12.2 million of the June 2015 Loan and accrued interest with cash on hand and the net proceeds of $10.1 million from an equity financing. The Company restructured the remaining debt with a new loan with a principal amount of $31.0 million$31,000 (the “November 2016 Loan”). The new loan has a thirty-month term and, due on May 21, 2019 with an annual interest rate of 8%, payable on a quarterly basis commencing during the first quarter of 2017. Quarterly principal payments of $2.5 million commence during the first quarter of 2018, with a payment of the remaining balance at the maturity date. The first four quarterly interest payments under the November 2016 Loan can be added to the loan principal balance rather than paid in cash, at the Company’s option. The Company exercised this option on January 1, 2017 and on July 1, 2017 (See Note 17).
quarterly. In connection with the November 2016 Loan the Company issued 8,000,000 common share purchase warrants exercisable for a period of five years expiring November 21, 2021. See Note 7.
On November 10, 2017, the Company and the Clay Group agreed to amend the November 2016 Loan by reducing the 2018 quarterly and 2019 Q1 principal payments from $2,500 to $1,000, adding the reduction of such payments pro-rata to the remaining 2019 payments, and increasing the annual interest rate from 8% to 10% effective January 1, 2018 (the “November 2017 Loan”). This amendment was accounted for as a debt modification.
The common share purchase warrants have an exercise price of $0.85. The Company also incurred a financing fee to securefollowing table summarizes activity on the loan in the amount of $0.9 million, all of which was paid on November 18, 2016.notes payable:
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 20172018 and 20162017
(amounts expressed in thousands of US dollars - Unaudited)
| Related Party Transactions (continued) |
| (ii) | Note Payable (continued) |
The table below summarizes the activity on the November 2016 Loan:
| June 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||
| Balance, beginning of the period | $ | 26,347 | $ | 36,053 | $ | 30,099 | $ | 26,347 | ||||||||
| Interest payable transferred to principal balance | 922 | 2,977 | - | 2,212 | ||||||||||||
| Accretion of discount on loans | 740 | 1,996 | 994 | 1,940 | ||||||||||||
| Capitalized financing fee and legal fees | - | (930 | ) | |||||||||||||
| Reduction of debt upon issuance of warrants | - | (3,090 | ) | |||||||||||||
| Capitalized financing and legal fees | - | (400 | ) | |||||||||||||
| Accretion of capitalized financing and legal fees | 130 | - | ||||||||||||||
| Repayment of loans and interest | - | (10,659 | ) | (6,711 | ) | - | ||||||||||
| Balance, end of the period | $ | 28,009 | $ | 26,347 | $ | 24,512 | $ | 30,099 | ||||||||
| Current portion | $ | 5,922 | $ | - | $ | 24,512 | $ | 7,712 | ||||||||
| Non-current portion | $ | 22,087 | $ | 26,347 | $ | - | $ | 22,387 | ||||||||
| (iii) | Amortization of Discounts and Interest Expense |
The following table summarizes the amortization of discounts and interest on loan:
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Accretion of the Nov 2016 Loan discount | $ | 454 | $ | - | �� | $ | 740 | $ | - | |||||||
| Interest expense related to the Nov 2016 Loan | 646 | - | 1,272 | - | ||||||||||||
| Interest expense related to Komatsu financial loans(1) | 150 | 154 | 285 | 320 | ||||||||||||
| Accretion of the June 2015 Loan discount | - | 626 | - | 1,232 | ||||||||||||
| Interest expense related to the June 2015 Loan | - | 1,013 | - | 2,008 | ||||||||||||
| Accretion of discount and interest on loan | $ | 1,250 | $ | 1,793 | $ | 2,297 | $ | 3,560 | ||||||||
The Company’s loans were contracted to fund significant development costs.
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Accretion of discounts and interest on loan(1) | $ | 1,250 | $ | 1,793 | $ | 2,297 | $ | 3,560 | ||||||||
| Less: Interest costs capitalized(2) | - | - | - | (1,006 | ) | |||||||||||
| Interest expense | $ | 1,250 | $ | 1,793 | $ | 2,297 | $ | 2,554 | ||||||||
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Accretion of the Nov 2017 Loan discount | $ | 504 | $ | 454 | $ | 994 | $ | 740 | ||||||||
| Accretion of capitalized financing and legal fees | 66 | - | 130 | - | ||||||||||||
| Interest expense related to the Nov 2017 Loan | 695 | 646 | 1,409 | 1,272 | ||||||||||||
| Closing and commitment fees related to the Credit Facility | 10 | - | 40 | - | ||||||||||||
| Interest expense related to Komatsu financial loans(1) | 166 | 150 | 401 | 285 | ||||||||||||
| Accretion of discount and interest on loan | $ | 1,441 | $ | 1,250 | $ | 2,974 | $ | 2,297 | ||||||||
| (1) | Komatsu is not a related party and has only been included in the above table to reconcile the total interest expense incurred for the period … to the amounts capitalized and expensed. |
| (iv) | Joint Venture Transaction |
On September 15, 2014, the Company closed the Joint Venture Transaction with Gauss resulting in both parties owning a 50% interest in the Mine. Pursuant to the Joint Venture Transaction, Golden Queen converted its wholly-owned subsidiary GQM Inc., the entity developing the Mine, into a California limited liability company named GQM LLC. On closing of the transaction, Gauss acquired 50% of GQM LLC by investing $110 million cash in exchange for newly issued membership units of GQM LLC. GQM Holdings, a newly incorporated subsidiary of the Company, holds the other 50% of GQM LLC.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
Gauss is a funding vehicle owned by entities controlled by Leucadia National Corporation (NYSE: LUK) (“Leucadia”) and certain members of the Clay Group, a shareholder group which collectively owned approximately 27% of the issued and outstanding shares of Golden Queen (the “Clay Group”) at the time of the transaction. Gauss is owned 70.51% by Gauss Holdings LLC (“Gauss Holdings”, Leucadia’s investment entity) and 29.49% by Auvergne LLC (“Auvergne”, the Clay Group’s investment entity). Pursuant to the transaction, Leucadia was paid a transaction fee of $2.0 million and $0.3 million was paid to Auvergne through GQM LLC in 2014. The Company expensed these transaction costs.
Variable Interest Entity
In accordance with ASC 810-10-30, the Company has determined that GQM LLC meets the definition of a VIE and that the Company is part of a related party group that, in its entirety, would meet the definition of a primary beneficiary. Although no individual variable interest holder individually meets the definition of a primary beneficiary in the absence of the related party group, Golden Queen has determined it is considered the member of the related party group most closely associated with GQM LLC. As a result, the Company has condensed consolidated interim 100% of the accounts of GQM LLC in these condensed consolidated interim financial statements, while presenting a non-controlling interest portion representing the 50% interest of Gauss in GQM LLC on its balance sheet. A portion of the non-controlling interest has been presented as temporary equity on the Company’s balance sheet representing the initial value of the non-controlling interest that could potentially be redeemable by Gauss in the future.
The Company has presented Gauss’ ownership in GQM LLC as a non-controlling interest amount on the balance sheet within the equity section. However, there are terms in the agreement that provide for the exit from the investment in GQM LLC for an initial member whose interest in GQM LLC becomes less than 20%.
If a member becomes less than a 20% interest holder, its remaining unit interest will (ultimately) be terminated through one of three3 events at the non-diluted member’s option:
| a. | Through conversion to a net smelter royalty (“NSR”); |
| b. | Through a buy-out (at fair value) by the non-diluted member; or |
| c. | Through a sale process by which the diluted member’s interest is |
The net assets of GQM LLC as ofat June 30, 2017,2018 and December 31, 20162017 are as follows:
| June 30, 2017 | December 31, 2016 | |||||||
| Assets, GQM LLC | $ | 152,934 | $ | 151,802 | ||||
| Liabilities, GQM LLC | (22,157 | ) | (20,710 | ) | ||||
| Net assets, GQM LLC | $ | 130,777 | $ | 131,092 | ||||
Included in the assets above, is $5.0 million (December 31, 2016 - $11.1 million) in cash held as at June 30, 2017. The cash in GQM LLC is directed specifically to fund capital expenditures required to continue with production and settle GQM LLC’s obligations. The liabilities of GQM LLC do not have recourse to the general credit of Golden Queen except for 2 mining drill loans and $3.0 million in surety bond agreements.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 20172018 and 20162017
(amounts expressed in thousands of US dollars - Unaudited)
| Related Party Transactions (continued) |
| (iv) | Joint Venture Transaction (continued) |
June 30, 2018 | December 31, 2017 | |||||||
| Assets, GQM LLC | $ | 160,379 | $ | 149,095 | ||||
| Liabilities, GQM LLC | (24,130 | ) | (28,024 | ) | ||||
| Net assets, GQM LLC | $ | 136,249 | $ | 121,071 | ||||
Included in the assets above, is $5,930 (December 31, 2017– $2,606) in cash held by GQM LLC which is directed specifically to fund capital expenditures required to continue with production and to settle GQM LLC’s obligations. The liabilities of GQM LLC do not have recourse to the general credit of Golden Queen except for $2,203 for two mining drill loans and $4,228 in surety bond agreements.
Non-Controlling Interest
The carrying value of the non-controlling interest is adjusted for net income and loss, distributions and contributions pursuant to ASC 810-10 based on the same percentage allocation used to calculate the initial book value of temporary equity.
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net and comprehensive income (loss) in GQM LLC | $ | 462 | $ | (2,919 | ) | $ | (317 | ) | $ | (3,628 | ) | |||||
| Non-controlling interest percentage | 50 | % | 50 | % | 50 | % | 50 | % | ||||||||
| Net and comprehensive loss attributable to non-controlling interest | $ | 230 | $ | (1,459 | ) | $ | (159 | ) | $ | (1,814 | ) | |||||
| Net and comprehensive loss attributable to permanent non-controlling interest | $ | 138 | $ | (876 | ) | $ | (95 | ) | $ | (1,088 | ) | |||||
| Net and comprehensive loss attributable to temporary non-controlling interest | $ | 92 | $ | (584 | ) | $ | (64 | ) | $ | (726 | ) | |||||
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Net and comprehensive income (loss) in GQM LLC | $ | 2,475 | $ | 462 | $ | (4,819 | ) | $ | (317 | ) | ||||||
| Non-controlling interest percentage | 50 | % | 50 | % | 50 | % | 50 | % | ||||||||
| Net and comprehensive income (loss) attributable to non-controlling interest | $ | 1,238 | $ | 230 | $ | (2,410 | ) | $ | (159 | ) | ||||||
| Net and comprehensive income (loss) attributable to permanent non-controlling interest | $ | 743 | $ | 138 | $ | (1,446 | ) | $ | (95 | ) | ||||||
| Net and comprehensive income (loss) attributable to temporary non-controlling interest | $ | 495 | $ | 92 | $ | (964 | ) | $ | (64 | ) | ||||||
| Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||
| Carrying value of non-controlling interest, December 31, 2016 | $ | 39,327 | $ | 26,220 | ||||
| Net and comprehensive loss for the period | (95 | ) | (64 | ) | ||||
| Carrying value of non-controlling interest, June 30, 2017 | $ | 39,232 | $ | 26,156 | ||||
| Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||
| Carrying value of non-controlling interest, December 31, 2017 | $ | 36,321 | $ | 24,214 | ||||
| Capital contribution | 10,000 | - | ||||||
| Net and comprehensive loss for the period | (1,446 | ) | (964 | ) | ||||
| Carrying value of non-controlling interest, June 30, 2018 | $ | 44,875 | $ | 23,250 | ||||
Dilution of Interest in Subsidiary
As a result of the Joint Venture Transaction, the Company’s interest in GQM LLC was diluted from 100% to 50% and ordinarily, the Company would recognize gain on dilution with the book value of the investment in GQM LLC increasing as well. However, since the transaction was with a related party and the Company retained control, the excess has not been recognized in net income but rather has been recorded in equity as an increase to Additional Paid-in Capital (“APIC”) based on guidance provided in ASC 810-10-55-4D and -4E.
The deferred tax liability resulted from the increase in the book value over tax value of the investment in GQM LLC.
Capital Contribution Agreement
Pursuant to the Joint Venture Transaction, GQM Holdings made a single capital contribution to GQM LLC of $12.5 million on June 15, 2015. Gauss funded an amount equal to GQM Holdings’ capital contribution to GQM LLC. Both partners maintain their 50% ownership of the Mine.
| (v) |
On May 23, 2017, GQM LLC entered into a $5,000 one-year revolving credit facility of $5 million withagreement (the “Credit Facility”) in which Gauss Holdings LLC and Auvergne, LLC agreed to extend credit in the form of loans to GQM LLC. The revolving creditCredit Facility commenced on July 1, 2017, bears interest at a rate of 12% per annum and is available until May 23, 2018 and bearssubject to a 12% simple annual interest. GQM LLC paid a closingcommitment fee of $0.1 million which was classified as prepaid expenses and other current assets. $0.02 million of1% per annum. For the closing fee was amortized during three and six months ended June 30, 2018, GQM LLC paid commitment fees of $30 (2017 – $nil). The balance of the Credit Facility was $3,000 as at December 31, 2017. As at June 30, 2017, no amounts had been drawn under this facility.
The Credit Facility expired on May 22, 2018.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 20172018 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
Share Purchase Warrants – Clay loans (Related Party)
On June 8, 2015, the Company issued 10,000,000 share purchase warrants to the Clay Group in connection with the June 2015 Loan. The share purchase warrants are exercisable until June 8, 2020 at an exercise price of $0.95. Included in the June 2015 Loan agreement was an anti-dilution provision. If the Company were to complete a financing at a share price lower than the exercise price of the share purchase warrants, the exercise price of the share purchase warrants would be adjusted to match the price at which the financing was completed.
On November 18, 2016, the Company issued 8,000,000 share purchase warrants to the Clay Group in connection with the November 2016 Loan. The share purchase warrants are exercisable until November 18, 2021 at an exercise price of $0.85. Included in the November 2016 Loan agreement was an anti-dilution provision. If the Company were to complete a financing at a share price lower than the exercise price of the share purchase warrants, the exercise price of the share purchase warrants would be adjusted to match the price at which the financing was completed.
The share purchase warrants meet the definition of a derivative liability instrument as the exercise price is not a fixed price as described above. Therefore, the settlement feature does not meet the “fixed-for-fixed” criteria outlined in ASC 815-40-15.
The fair value of the derivative liabilities related to the share purchase warrants as at June 30, 2017 is $4.0 million (December 31, 2016 - $5.5 million). The derivative liabilities were calculated using the binomial and the Black-Scholes pricing valuation models with the following assumptions:
| Warrants related to June 2015 Loan | June 30, 2017 | December 31, 2016 | ||||||
| Risk-free interest rate | 1.17 | % | 0.84%. | |||||
| Expected life of derivative liability | 2.94 years | 3.44 years | ||||||
| Expected volatility | 76.60 | % | 78.79 | % | ||||
| Dividend rate | 0.00 | % | 0.00 | % | ||||
| Warrants related to November 2016 Loan | June 30, 2017 | December 31, 2016 | ||||||
| Risk-free interest rate | 1.38 | % | 1.11 | % | ||||
| Expected life of derivative liability | 4.40 years | 4.89 years | ||||||
| Expected volatility | 79.58 | % | 77.21 | % | ||||
| Dividend rate | 0.00 | % | 0.00 | % | ||||
The change in the derivative share purchase warrants is as follows:
| June 30, 2017 | December 31, 2016 | |||||||
| Balance, beginning of the period | $ | 5,458 | $ | 2,498 | ||||
| Fair value at inception | - | 3,090 | ||||||
| Change in fair value | (1,452 | ) | (130 | ) | ||||
| Balance, end of the period | $ | 4,006 | $ | 5,458 | ||||
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
Share Purchase Warrants – July 2016 financing
On July 25, 2016, the Company issued a total of 6,317,700 share purchase warrants in connection with the July 2016 financing with an exercise price of C$2.00. In accordance with the guidance in ASC 815-40-15, the share purchase warrants met the criteria of a derivative instrument liability because they were exercisable in a currency other than the functional currency of the Company and thus did not meet the “fixed-for-fixed” criteria of that guidance. As a result, the Company was required to separately account for the share purchase warrants as derivative liabilities recorded at fair value and marked-to-market each period with the changes in the fair value each period charged or credited to income.
As at June 30, 2017, the Company had re-measured the share purchase warrants and determined the fair value of the derivative liability to be $0.5 million (December 31, 2016 - $1.0 million) using the Black-Scholes option pricing model with the following assumptions:
| June 30, 2017 | December 31, 2016 | |||||||
| Risk-free interest rate | 1.09 | % | 0.84 | % | ||||
| Expected life of derivative liability in years | 2.07 years | 2.56 years | ||||||
| Expected volatility | 76.01 | % | 79.40 | % | ||||
| Dividend rate | 0.00 | % | 0.00 | % | ||||
The change in the derivative share purchase warrants is as follows:
| June 30, 2017 | December 31, 2016 | |||||||
| Fair value of warrants issued | $ | 972 | $ | 2,701 | ||||
| Change in fair value of warrants | (442 | ) | (1,729 | ) | ||||
| Balance, end of the period | $ | 530 | $ | 972 | ||||
| Six Months Ended June 30, | Six Months Ended June 30, | |||||||
| 2017 | 2016 | |||||||
| Cash paid during the period for: | ||||||||
| Interest on loan payable | $ | 285 | $ | 323 | ||||
| Non-cash financing and investing activities: | ||||||||
| Common shares issued as part of a management agreement | $ | - | $ | - | ||||
| Asset retirement costs charged to mineral property interests | $ | 173 | $ | 171 | ||||
| Mining equipment acquired through issuance of debt | $ | 2,551 | $ | 295 | ||||
| Mineral property expenditures included in accounts payable | $ | 1,081 | $ | 708 | ||||
| Interest cost capitalized to mineral property interests | $ | - | $ | 839 | ||||
| Inventory expenditures included in accounts payable | $ | - | $ | - | ||||
| Non-cash finder fees | $ | 59 | $ | - | ||||
| Non-cash amortization of discount and interest expense | $ | 740 | $ | 1,232 | ||||
| Interest payable converted to principal balance | $ | 922 | $ | 1,964 | ||||
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| Commitments and Contingencies |
Royalties
The Company has acquired a number of mineral propertiesproperty interests outright. It has acquired exclusive rights to explore, develop and mine other portions of the Mine under various mining lease agreements with landowners. Royalty amountamounts due to each landholder over the life of the Mine variesvary with each property.
Compliance with Environmental Regulations
The Company’s exploration and development activities are subject to laws and regulations controlling not only the exploration and mining of mineral properties, but also the effect of such activities on the environment. Compliance with such laws and regulations may necessitate additional capital outlays or affect the economics of a mine, and cause changes or delays in the Company’s activities.
Corporate Guaranties
The Company has provided corporate guaranties for two of GQM LLC’s mining drill loans. The Company has also provided a corporate a guaranty for GQM LLC’s surety bonds.
| Financial Instruments |
Fair Value Measurements
All financial assets and financial liabilities are recorded at fair value on initial recognition. Transaction costs are expensed when they are incurred, unless they are directly attributable to the acquisition of qualifying assets, in which case they are added to the costs of those assets until such time as the assets are substantially ready for their intended use or sale.
The three levels of the fair value hierarchy are as follows:
| Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| Level 2 | Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; |
| Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
| June 30, 2018 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (see Note 7) | $ | 372 | $ | - | $ | 372 | $ | - | ||||||||
| Share purchase warrants – (see Note 7) | 1 | - | 1 | - | ||||||||||||
| $ | 373 | $ | - | $ | 373 | $ | - | |||||||||
| December 31, 2017 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (see Note 7) | $ | 439 | $ | - | $ | 439 | $ | - | ||||||||
| Share purchase warrants – (see Note 7) | 2 | - | 2 | - | ||||||||||||
| $ | 441 | $ | - | $ | 441 | $ | - | |||||||||
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 20172018 and 20162017
(amounts expressed in thousands of US dollars - Unaudited)
| Financial Instruments (continued) |
Fair Value Measurements (continued)
| June 30, 2017 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (Note 10) | $ | 4,006 | $ | - | $ | 4,006 | $ | - | ||||||||
| Share purchase warrants – (Note 10) | 530 | - | 530 | - | ||||||||||||
| $ | 4,536 | $ | - | $ | 4,536 | $ | - | |||||||||
| December 31, 2016 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (Note 10) | $ | 5,458 | $ | - | $ | 5,458 | $ | - | ||||||||
| Share purchase warrants – (Note 10) | 972 | - | 972 | - | ||||||||||||
| $ | 6,430 | $ | - | $ | 6,430 | $ | - | |||||||||
Under fair value accounting, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair value measurement of the financial instruments above use observable inputs in option price models such as the binomial and the Black-Scholes valuation models.
Credit Risk
Credit risk is the risk that the counterparty to a financial instrument will cause a financial loss for the Company by failing to discharge its obligations. To mitigate exposure to credit risk on financial assets the Company has established policies to ensure liquidity of funds and ensure counterparties demonstrate minimum acceptable credit worthiness.
The Company maintains its US Dollar and Canadian Dollar cash in bank accounts with major financial institutions with high credit standings. Cash deposits held in the United States are insured by the Federal Deposit Insurance Corporation (“FDIC”) for up to $0.3 million$250 and Canadian Dollar cash deposits held in Canada are insured by the Canada Deposit Insurance Corporation (“CDIC”) for up to C$0.1 million.100.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
Certain United States and Canadian bank accounts held by the Company exceed these federally insured limits or are uninsured as they relate to US Dollar deposits held in Canadian financial institutions. As ofat June 30, 2017,2018, the Company’s cash balances held in United States and Canadian financial institutions include $6.3 million,$10,537, which are not fully insured by the FDIC or CDIC. The Company has not experienced any losses on such accounts and management believes that using major financial institutions with high credit ratings mitigates the credit risk in cash.
Interest Rate Risk
The Company holds 98%approximately 55% of its cash in bank deposit accounts with a single major financial institution. The interest rates received on these balances may fluctuate with changes in economic conditions. Based on the average cash balances during the three and six months ended June 30, 20172018, a 1% decrease in interest rates would have reduced the interest income for 2017 tothe three and six months ended June 30, 2018, by an immaterial amount.
Foreign Currency Exchange Risk
Certain purchases of corporate overhead items are denominated in Canadian Dollar. As a result, currency exchange fluctuations may impact the costs of our operations. Specifically, the appreciation of the Canadian Dollar against the US Dollar may result in an increase in the Canadian operating expenses in US dollar terms. As ofat June 30, 2017,2018, the Company maintained the majority of its cash balance in US Dollar.Dollars. The Company currently does not engage in any currency hedging activities.
Commodity Price Risk
The Company’s primary business activity is the operation of the open pit, gold and silver, heap leach project on the Mine. Decreases in the price of either of these metals from current levels has the potential to negatively impact the future viability of the Mine.
General and administrative expenses are incurred to support the administration of the business that are not directly related to production. Significant components of general and administrative expenses are comprised of the following:
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Audit, legal and professional fees | $ | 108 | $ | 197 | $ | 396 | $ | 972 | ||||||||
| Salaries and benefits and director fees | 140 | 395 | 700 | 737 | ||||||||||||
| Regulatory fees and licenses | 17 | 60 | 70 | 83 | ||||||||||||
| Insurance | 114 | 116 | 247 | 240 | ||||||||||||
| Corporate administration | 333 | 221 | 715 | 485 | ||||||||||||
| $ | 712 | $ | 989 | $ | 2,128 | $ | 2,517 | |||||||||
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net gain (loss) attributable to the shareholders of the Company - numerator for basic and diluted LPS | $ | 962 | $ | (2,109 | ) | $ | (1,465 | ) | $ | (11,034 | ) | |||||
| Denominator: | ||||||||||||||||
| Weighted average number of common shares outstanding -basic and diluted | 111,113,341 | 99,893,341 | 111,096,766 | 99,893,341 | ||||||||||||
| Income (loss) per share – basic and diluted | $ | 0.01 | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.11 | ) | |||||
Weighted average number of shares for the six months ended June 30, 2017 excludes 1,395,002 options (June 30, 2016 - 1,070,000) and 24,317,700 warrants (June 30, 2016 – 10,000,000) that were antidilutive.
During the six months ended June 30, 2017, the Company sold two (December 31, 2016 –Nil) pieces of equipment with a net book value of $1.0 million in consideration for settlement of two loans by $0.6 million plus $0.1 million in cash. The Company also booked $0.3 million as a loss in disposition of fixed assets.
During the six months ended June 30, 2017, the Company entered into three new loan agreements for a total of $3.8 million for the acquisition of three (December 31, 2016 – two) pieces of mining equipment from Komatsu.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
As at June 30, 2017 and December 31, 2016, the finance agreement balances are as follows:
| June 30, 2017 | December 31, 2016 | |||||||
| Balance, beginning of the period | $ | 15,150 | $ | 18,373 | ||||
| Additions | 3,737 | 2,047 | ||||||
| Down payments and taxes | (700 | ) | (264 | ) | ||||
| Settlements | (485 | ) | - | |||||
| Principal repayments | (2,989 | ) | (5,006 | ) | ||||
| Balance, end of the period | $ | 14,713 | $ | 15,150 | ||||
| Current portion | $ | 6,194 | $ | 5,656 | ||||
| Non-current portion | $ | 8,519 | $ | 9,494 | ||||
For the six months ended June 30, 2017, the Company made total down payments of $0.7 million (2016 - $0.3 million). The down payments consist of the sales tax on the assets and a 10% payment of the pre-tax purchase price. All of the loan agreements are for a term of four years, except two which are for three years, and are secured by the underlying asset except for two mining drill loans for which GQM Ltd. has provided a corporate guarantee. Interest rates range from 0.00% to 4.50% with monthly payments in the range of $0.005 to $0.03 million.
The following table outlines the principal payments to be made for each of the remaining years:
| Years | Principal Payments | |||
| 2017 | $ | 6,194 | ||
| 2018 | 5,899 | |||
| 2019 | 2,024 | |||
| 2020 | 596 | |||
| Total | $ | 14,713 | ||
On July 1, 2017, the Company was to make a quarterly interest payment on the November 2016 loan. In accordance with the terms of the November 2016 loan agreement, the Company chose to exercise its right to add the interest owed on July 1, 2017 to the principal balance. The principal balance of the loan was increased by $0.6 million.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following discussion of the operating results and financial condition of Golden Queen Mining Co. Ltd. (“Golden Queen”, “GQM Ltd.”, “Company”, “we”, “our” or “us”) is as at August 9, 20172018 and should be read in conjunction with the unaudited condensed consolidated interim financial statements of the Company for the three and six months ended June 30, 20172018 and the notes thereto.
The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations is prepared in accordance with US generally accepted accounting principles (“US GAAP”) and allAll amounts herein are presented in thousands of US dollars, except per share amounts, or unless otherwise noted.
Cautionary Note Regarding Forward-looking Statements
This Form 10-Q contains certain forward-looking statements, which relate to the intent, belief and current expectations of the Company’s management, as well as assumptions and parameters used in the feasibility study referenced in this report. These forward-looking statements are based upon numerous assumptions that involve risks and uncertainties and other factors that may cause actual results to differ materially from those indicated by such forward-looking statements. Such factors include among other things the receipt and compliance with the terms of required approvals and permits, results of operations and commodity prices. In addition, projected mining results, including quantity of ore, grade, production rates, operating costs and recovery rates, are subject to numerous risks normally associated with mining activity of the nature described in this report and in the feasibility study, and as a result actual results may differ substantially from projected results. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date the statements were made.
Cautionary Note to US Investors
We advise US investors that the mineral reserve estimates disclosed in this report have been prepared in accordance with Canadian regulations and may not qualify as “reserves” under the SEC Industry Guide 7.Accordingly, information Information concerning mineral resources and reserves set forth herein may not be comparable with information presented by companies using only US standards in their public disclosure.
Mr. Peter A. Herrera, CPGTim Mazanek, SME is a qualified person for the purposes of NI 43-101 and has reviewed and approved the technical information in this Form 10-Q.
The Soledad Mountain Mine
Overview
Golden Queen Mining Co. Ltd. (“Golden Queen”, “GQM Ltd.” or the “Company”)The Company is engaged in the operation of the Soledad Mountain Mine (“the Mine”), located in the Mojave Mining District, Kern County, California. The Company originally used its wholly owned subsidiary, Golden Queen Mining Company, Inc. (“GQM Inc.”), to explore and develop the Mine. On September 10, 2014, GQM Inc. was converted to a limited liability company,owns 50% of Golden Queen Mining Company, LLC (“GQM LLC”)., the operator of the Mine. The Company entered into a Joint Venture (the “JV”) agreement withremaining 50% is owned by Gauss LLC (“Gauss”) through its newly formed, wholly owned subsidiary, Golden Queen Mining Holdings, Inc. (“GQM Holdings”). The JV was completed on September 15, 2014. Upon completion of the JV, both the Company, through GQM Holdings, and Gauss each owned, and continue to own, 50% of GQM LLC. In February 2015, the Company incorporated Golden Queen Mining Canada Ltd. (“GQM Canada”), a wholly-owned British Columbia subsidiary, to hold the Company’s interest in GQM Holdings. The Mine is located just outside the town of Mojave in southern California. The MineCalifornia and utilizes conventional open pit mining methods and the cyanide heap leach and Merrill-Crowe processes to recover gold and silver from crushed, agglomerated ore. The Mine also produces small quantities of aggregate.
Highlights: Second Quarter Highlights
The Mine produced a total of 12,632 ounces of gold and 51,920
| · | Total of 3,900 kt million tons of ore and waste were mined including 1,473 kt of ore; |
| · | Plant processed a total of 943 kt of ore at an average grade of 0.020 oz/t; and |
| · | 9,976 ounces of gold and 99,846 ounces of silver were produced. |
Project Update
Operations during the first half of 2018 have shown continued improvement in gold ounces loaded on the pad. Mining of the East Pit has progressed on schedule. For the quarter, ore mining was 49% higher in the East Pit than contemplated in the mine plan as a result of a lower stripping ratio. In addition, the ore grade was higher by 26%. A significant amount of ore has been stockpiled during the second quarter and the ore quantity contained within the stockpile was over 750K tons at the end of June 2018.
During the second half of 2017, the mine produced and sold more gold than the recoverable ounces placed on the pad during the same period, effectively depleting the leach pad inventory of its gold loaded solution. Consequently, in the first quarter 2018, gold production was significantly reduced. The monthly recoverable gold ounces loaded on the leach pad have steadily increased since September 2017, but the positive impact on production has only begun during the second quarter of 2017. GQM LLC recorded revenue2018.
In the process area, pad-loading tonnage and average grade are increasing compared to the past two quarters. Modifications have been made to the secondary plant during the quarter that have increased both the throughput and the run-time. Gold precipitation has increased, although not steadily, from the low period of $16.9 million during this period. Operating costs were at $13.48 per ton processed, which is lower thanJanuary 2018. In June, there was a dip in ounces precipitated due to the previous quarter, which was $16.08 per ton processed. The reduction in costs ismove to stack the second lift on Pad-2. Leach solutions had to penetrate twice the amount of leach material, delaying gold flow to the Merrill-Crowe Plant. As a result of anhigher grades in the East Pit and the improved utilization rate and increased tonnage fromplant throughput, gold production is anticipated to continue increasing throughout the remainder of this year. Leaching performance is currently matching the feasibility study, with the total apparent gold recovery to June 30, 2018 of 69.1%, which management believes is on track to achieve the life of mine in addition80% gold recovery.
In the second quarter of 2018, the Company continued to develop the East Pit. It is anticipated that the transition to the reduced downtimeEast Pit will provide the majority of ore production for at least the next two years where higher ore tonnage and increased efficiency.grade and lower waste tons are expected. The plan is to increase the delivery of ounces to the heap leach pad by selectively mining higher grade tons as much as practical.
A total of 4.7 million tons19,520 feet of reverse circulation drilling was completed during first quarter. This drill program was designed to increase confidence in the currently modelled ore grades and wastetonnage associated with the Golden Queen vein structure, to improve the Company’s understanding of the Patience vein structure potentially adding ounces to the Company’s reserves and to investigate the Silver Queen vein structure (where historical underground development is illustrated on historic maps but not evidenced in historic extraction reports). The drill results were mined withinanalyzed during the second quarter, including 1.0 million tonsquarter. A new life of ore; tracking in-line withmine plan is anticipated during the budgeted projection. Mining continuesthird quarter.
As well, the Company is in the Northwest pitprocess of permitting additional infrastructure for ongoing operations and Main pit, phase 1. Miningplanned activities that are expected to extend the mine life of waste fromSoledad Mountain beyond the East pitinitial 11 years contemplated in the 2015 Feasibility Study. The process is ongoing in an effortanticipated to prepare the area for ore mining later in 2017.take approximately one to two years.
A total
For the three months ended June 30, 2018, the Company recorded aggregate sales of 1.03 million tons were processed$4 thousand dollars. In 2017, the Company was added to the California AB 3098 list, which allows the Company to sell its aggregate to state and stacked onmunicipal agencies. The Company will not include the leach pad. The quarter’s daily average was 11,273 tons, improving fromsale of aggregate in cash flow projections until such time as a long-term contract for the previous quarter averagesale of 10,200 tons. The phase 2 leach pad was completed and placed in service in late July.products has been secured.
The cash balance as at June 30, 2017 was $6.3 million. Currently there areThere is a total of 202213 employees currently on site.
| 21 |
Results of Operations
The following are the results of operations for the three and six months ended June 30, 2017,2018 and the corresponding periods ended June 30, 2016.2017:
| Three months ended | Six months ended | |||||||||||||||||
| 30-June-18 | 30-June-17 | 30-June-18 | 30-June-17 | |||||||||||||||
| Mining - Key Metrics | ||||||||||||||||||
| Ore mined | k ton | 1,473 | 1,010 | 2,608 | 1,862 | |||||||||||||
| Waste mined: ore mined ratio | ore mined ratio | 1.7:1 | 3.7:1 | 1.9:1 | 3.7:1 | |||||||||||||
| Gold grade placed | oz/ton | 0.020 | 0.016 | 0.019 | 0.017 | |||||||||||||
| Silver grade placed | oz/ton | 0.347 | 0.201 | 0.331 | 0.215 | |||||||||||||
| Gold sold | oz | 9,892 | 12,653 | 16,421 | 23,813 | |||||||||||||
| Silver sold | oz | 96,127 | 53,514 | 149,739 | 115,609 | |||||||||||||
| Apparent cumulative recovery - gold(1) | % | 69.1 | % | 68.0 | % | 69.1 | % | 68.0 | % | |||||||||
| Apparent cumulative recovery - silver(1) | % | 27.7 | % | 25.3 | % | 27.7 | % | 25.3 | % | |||||||||
| Financial(1) | ||||||||||||||||||
| Revenue | $ | 14,485 | 16,882 | 24,070 | 31,686 | |||||||||||||
| Cost of sales, excluding depreciation and depletion (or Direct mining costs) | $ | 8,130 | 13,367 | 21,146 | 24,929 | |||||||||||||
| Depreciation and depletion | $ | 3,364 | 2,742 | 6,340 | 5,498 | |||||||||||||
| Income (loss) from mine operations | $ | 2,991 | 773 | (3,416 | ) | 1,259 | ||||||||||||
| General and administrative expenses | $ | (879 | ) | (712 | ) | (2,133 | ) | (2,128 | ) | |||||||||
| Total other income (expenses) | $ | (1,508 | ) | 1,131 | (2,910 | ) | (755 | ) | ||||||||||
| Net and comprehensive income (loss) | $ | 604 | 1,192 | (8,459 | ) | (1,624 | ) | |||||||||||
| Net and comprehensive income (loss) attributable to Golden Queen Mining Co Ltd. | $ | (632 | ) | 962 | (6,049 | ) | (1,465 | ) | ||||||||||
| Average realized gold price(1) | $/oz sold | 1,302 | 1,262 | 1,313 | 1,246 | |||||||||||||
| Average realized silver price(1) | $/oz sold | 16.62 | 17.10 | 16.65 | 17.37 | |||||||||||||
| Total cash costs - net of by-product credits(1)(2) | $/Au oz produced | 730 | 1,038 | 1,214 | 1,016 | |||||||||||||
| All-in sustaining costs - net of by-product credits(1) | $/Au oz produced | 1,045 | 1,427 | 1,586 | 1,552 | |||||||||||||
| Total cash costs(3) | $/t placed | 16.56 | 13.48 | 17.25 | 14.61 | |||||||||||||
| Off-site costs(1) | $/t placed | 0.63 | 0.71 | 0.62 | 0.77 | |||||||||||||
| Three months ended | Six months ended | |||||||||||||||||
| 30-Jun-17 | 30-Jun-16 | 30-Jun-17 | 30-Jun-16 | |||||||||||||||
| Mining - Key Metrics(1) | ||||||||||||||||||
| Ore mined | k ton | 1,010 | 660 | 1,862 | 951 | |||||||||||||
| Waste mined: ore mined ratio | ore mined ratio | 3.7:1 | 1.8:1 | 3.7:1 | 2.3:1 | |||||||||||||
| Gold grade placed | oz/ton | 0.016 | 0.013 | 0.017 | 0.010 | |||||||||||||
| Silver grade placed | oz/ton | 0.201 | 0.040 | 0.215 | 0.311 | |||||||||||||
| Gold sold | oz | 12,653 | 2,362 | 23,813 | 2,482 | |||||||||||||
| Silver sold | oz | 53,514 | 26,500 | 115,609 | 27,500 | |||||||||||||
| EBITDA margin(2) | % | 19.81 | % | nm | 18.06 | % | nm | |||||||||||
| Off-site costs(2) | $/t placed | 0.71 | 0.19 | 0.77 | 0.17 | |||||||||||||
| Total cash costs | $/t placed | 13.48 | 12.13 | 14.61 | 13.61 | |||||||||||||
| Apparent cumulative recovery - gold(2) | % | 68.0 | % | 37.5 | % | 68.0 | % | 37.5 | % | |||||||||
| Apparent cumulative recovery - silver(2) | % | 25.3 | % | 13.4 | % | 25.3 | % | 13.4 | % | |||||||||
| Financial(1) | ||||||||||||||||||
| Revenue | $ | 16,882 | 3,464 | 31,686 | 3,464 | |||||||||||||
| Income from mine operations | $ | 773 | (1,942 | ) | 1,259 | (1,942 | ) | |||||||||||
| General and administrative expenses | $ | (712 | ) | (989 | ) | (2,128 | ) | (2,517 | ) | |||||||||
| Total other income (expenses) | $ | 1,131 | (637 | ) | (755 | ) | (8,389 | ) | ||||||||||
| Net and comprehensive income (loss) | $ | 1,192 | (3,568 | ) | (1,624 | ) | (12,848 | ) | ||||||||||
| Net and comprehensive income (loss) attributable to Golden Queen Mining Co Ltd. | $ | 962 | (2,109 | ) | (1,465 | ) | (11,034 | ) | ||||||||||
| Average realized gold price(2) | $/oz sold | 1,262 | 1,276 | 1,246 | 1,214 | |||||||||||||
| Average realized silver price(2) | $/oz sold | 17.10 | 17.02 | 17.37 | 16.40 | |||||||||||||
| Total cash costs - net of by product credits(2) | $/Au oz produced | 1,038 | 1,580 | 1,016 | 1,580 | |||||||||||||
| All-in sustaining costs - net of by product credits(2) | $/Au oz produced | 1,427 | 1,921 | 1,552 | 1,921 | |||||||||||||
| (1) | ||
| Total cash costs, all-in sustaining costs, |
| (2) | Total cash costs – net of by-product credits figure incorporates inventory changes and others adjustment, refer to |
| (3) | Total cash costs figure does not incorporate inventory changes and others adjustment. |
The Company placed 1.02 million of ore on the pad in three months ended June 30, 2017 compared to 0.79 million of ore in three months ended March 31, 2017. The cash costs did not increase at the same rate as ore mined, therefore the cash costs per ton decreased. See the Non-GAAP financial performance measures section below.Financial Results
Strip ratio and gold grade for three and six months ended June 30, 2016 were not representative of the life-of-mine averages due to the commencement of production on April 1, 2016 and the limited equipment and crew available during these periods compared with the periods of 2017. Notwithstanding the higher strip ratio inFor the three and six months ended June 30, 2017, contributing to2018, the slightly higher total cost per ton placed, the higher gold ounces produced and sold have contributed to lower costs per ounce of gold produced.
Financial Results
The Company hadgenerated revenues from operations during the three and six months ended June 30, 2017 in the amount of $16.9 million$14,485 from the salessale of 9,892 ounces of gold and 96,127 ounces of silver and $24,070 from the sale of 16,421 ounces of gold and 149,739 ounces of silver, respectively. In comparison, for the same periods of 2017 the Company generated revenues from operations of $16,882 from the sale of 12,653 ounces of gold and 53,514 ounces of silver and $31.7 million$32,686 from the salessale of 23,813 ounces of gold and 115,609 ounces of silver, respectively. silver.
The Company generated revenues of $3.5 milliondecrease in revenue resulted from the sales of 2,362time required for the gold to be processed through the leach pad. There was 18,807 ounces of gold and 26,500 ounces of silver duringwas placed on the three and six months ended June 30, 2016. Production commenced on April 1, 2016 and thereforeleach pad in the Company did not generate any revenues during the first fiscalsecond quarter of 2016.
The Company generated more2018 compared to 16,590 ounces in the second quarter of 2017 and revenues from operations during three months ended June 30, 2017 by selling more ounces of gold and silver. In comparison,placed on the Company generated $14.8 million fromleach pad will not be realized until later this year. As a result of this situation, the sales of 11,406 ounces of gold and 64,581 ounces of silver during three months ended March 31, 2017.Mine recorded a higher cost per ton (less tons mined).
The costs, excluding depreciation and depletion, applicable to sales incurred during the three and six months ended June 30, 20172018 were $13.4 million$8,130 and $24.9 million$21,146 (three and six months ended June 201630, 2017 - $3.6 million)$13,367 and $24,929), respectively. The cost of sales, excluding depreciation and depletion, increased due to higher sales of gold and silver compared toin the current quarter substantially decreased in comparison with the prior quarter (three months ended March 31, 2017 - $11.6 million).due to a lower cost per ounce in the second quarter of 2018. Costs of sales include mining, processing, maintenance and site support costs. Also, included in the costs of sales are refining, transportation costs, royalties and personal property taxes.
Depreciation and depletion expenses during the three and six months ended June 30, 20172018 were $2.7 million$3,364 and $5.5 million$6,340 (three and six months ended June 30, 2016 - $1.8 million)2017 – $2,742 and $5,498), respectively. Production commenced on April 1, 2016The increase in 2018 compared to 2017 was mainly due to the addition of depreciable fixed assets of $19,409 in the third and thereforefourth quarters of 2017 and the Company did not record significant depreciation and depletion until after this date. The depreciation and depletion expenses for three months ended June 30, 2017 were little changed fromaddition of depreciable fixed assets of $4,990 in the prior quarter (three months ended March 31, 2017 - $2.8 million).first two quarters of 2018.
General and administrative expenses decreased by $0.29 million to $0.7 million duringfor the three and six months ended June 30, 2017, when compared to $0.99 million for the same period in 2016 primarily as a result of a decrease in corporate salaries. General2018 were $879 and administrative expenses decreased by $0.4 million to $2.1 million during the$2,133 (three and six months ended June 30, 2017 when- $712 and $2,128), respectively. The increase in 2018 compared to $2.5 million for the same period in 2016 primarily due to2017 was mainly a decrease in legal costsresult of $0.5 million. The decrease in legal costs was offset by increase in corporate expenditures by $0.1 million between two periods. General and administrative expenses for three months ended June 30, 2017 were lower than the prior quarter (three months ended March 31, 2017 – $1.4 million) mainly because of decrease in corporate administration costs and audit,higher legal and professional fees, salaries and benefits, insurance and regulatory fees.
For the three and six months ended June 30, 2017,2018, the Company incurred a total interest expensefinance expenses of $1.3 million$1,441 and $2.3 million (three$2,974 compared to $1,250 and $2,297 for the three and six months ended June 30, 2016 - $1.8 million and $2.6 million, respectively), respectively, related to its various loans.2017. The decreaseincrease in finance expenses was mainly due to the fact the June 2015 Loan was replaced by a new loan in November 2016 with a lower principal and a reductionan increase of 2% in the interest rate on the Clay Loan resulting in additional interest rate. Please referpayable and increased accretion on the Clay Loan.
For the three and six months ended June 30, 2018, the Company recorded a loss of $70 and gain of $68 on derivative instruments compared to Note 9(ii)gains of $2,375 and 9(iii) of the unaudited condensed consolidated interim financial statements. Also, during$1,894 on derivative instruments for the three and six months ended June 30, 2017, there were no interest capitalized to mineral properties, compared to $1.0 million in the same periods of 2016.respectively. The interest expense of $1.0 milliongain for three months ended March 31, 2017 was lower than the interest for the current quarter because of the greater balance of loan due to interest accretion in the prior quarter and interest payable balance transfer to principal balance.
The Company’s derivative liability as at June 30, 2017 and for the six months then ended includes the warrants issued in conjunction with the November 2016 Clay Loan, the June 2015 Loan and the July 2016 Financing. During the three and six months ended June 30, 2017,2018 was smaller due to insignificant downward movement of the Company recorded a decreaseCompany’s share price compared to the same period of 2017. Significant downward movement of the Company’s share price in the derivative liability of $2.4 million and $1.8 million (three and sixthree months ended June 30, 2016 –2017 resulted in a decrease of $1.1 million and an increase of $5.9 million, respectively), respectively. The significant increase during the six months ended June 30, 2016 was due to increase ingain while the Company’s share price. Refer to Note 10price remained relatively consistent during the same period of the unaudited condensed consolidated interim financial statements for a detailed analysis of the changes in fair value of the derivative liability. During the first quarter of 2017, the Company recorded an increase in the derivative liability of $0.5 million due to a slight increase in the Company’s share price.2018 fiscal year.
Summary of Quarterly Results (in thousands of US dollars, except per share)
Results for the eight most recent quarters are set out in the table below:
| Results for the quarter ended on: | Results for the quarter ended: | |||||||||||||||||||||||||||||||
| 30-Jun-17 | 31-Mar-17 | 31-Dec-16 | 30-Sep-16 | 30-Jun-18 | 31-Mar-18 | 31-Dec-17 | 30-Sep-17 | |||||||||||||||||||||||||
| Revenue | $ | 16,882 | $ | 14,804 | $ | 10,278 | $ | 13,451 | $ | 14,485 | $ | 9,585 | $ | 13,939 | $ | 16,496 | ||||||||||||||||
| Net and comprehensive income (loss) | $ | 1,192 | $ | (2,816 | ) | $ | (434 | ) | $ | 3,590 | $ | 602 | $ | (9,063 | ) | $ | (1,327 | ) | $ | (3,224 | ) | |||||||||||
| Net and comprehensive income (loss) attributable to Golden Queen Mining Co Ltd. | $ | 962 | $ | (2,426 | ) | $ | 868 | 2,738 | ||||||||||||||||||||||||
| Net and comprehensive income (loss) attributable to GQM Ltd. | $ | (632 | ) | $ | (5,417 | ) | $ | 2,188 | (1,889 | ) | ||||||||||||||||||||||
| Basic net income (loss) per share | $ | 0.01 | $ | (0.02 | ) | $ | 0.01 | $ | 0.03 | $ | 0.00 | $ | (0.03 | ) | $ | 0.02 | $ | 0.01 | ||||||||||||||
| Diluted net income (loss) per share | $ | 0.01 | $ | (0.02 | ) | $ | 0.01 | $ | 0.03 | $ | 0.00 | $ | (0.03 | ) | $ | 0.02 | $ | 0.01 | ||||||||||||||
| Results for the quarter ended on: | Results for the quarter ended: | |||||||||||||||||||||||||||||||
| 30-Jun-16 | 31-Mar-16 | 31-Dec-15 | 30-Sep-15 | 30-Jun-17 | 31-Mar-17 | 31-Dec-16 | 30-Sep-16 | |||||||||||||||||||||||||
| Revenue | $ | 3,464 | $ | Nil | $ | Nil | $ | Nil | $ | 16,882 | $ | 14,804 | $ | 10,278 | $ | 13,451 | ||||||||||||||||
| Net and comprehensive loss | (3,568 | ) | $ | (9,280 | ) | $ | (1,217 | ) | $ | (2,203 | ) | |||||||||||||||||||||
| Net and comprehensive loss attributable to Golden Queen Mining Co Ltd. | $ | (2,109 | ) | (8,926 | ) | (722 | ) | (1,924 | ) | |||||||||||||||||||||||
| Basic net loss per share | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.01 | ) | $ | (0.02 | ) | ||||||||||||||||||||
| Diluted net loss per share | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.01 | ) | $ | (0.02 | ) | ||||||||||||||||||||
| Net and comprehensive income (loss) | $ | 1,192 | $ | (2,816 | ) | $ | (434 | ) | $ | 3,591 | ||||||||||||||||||||||
| Net and comprehensive income (loss) attributable to GQM Ltd. | $ | 962 | $ | (2,426 | ) | 868 | 2,738 | |||||||||||||||||||||||||
| Basic net income (loss) per share | $ | 0.01 | $ | (0.02 | ) | $ | 0.01 | $ | 0.03 | |||||||||||||||||||||||
| Diluted net income (loss) per share | $ | 0.01 | $ | (0.02 | ) | $ | 0.01 | $ | 0.03 | |||||||||||||||||||||||
During the second quarter of 2017three months ended June 30, 2018, net and comprehensive income was $1.2 million compared to$602 mainly as a result of income generated from operations of $2,112.
During the three months ended March 31, 2018, net and comprehensive loss was $9,063 mainly as a result of $2.8 million in the quarter ended March 31, 2017. This change is primarilyloss from mine operations of $6,449 due to higher direct mining costs as a result of developing the movement inEast Pit and lower revenues due to lower production as a result of less available gold ounces on the value of the Company’s derivative liability (discussed above).
For fiscal 2016, although the Company generated revenues starting in the second quarter of 2016, the main reasons for the significant fluctuations in net (loss) income between quarterly periods are the fluctuations in the Company’s derivative liability and interest expense.
leach pad.
In general, the results of operations can vary from quarter to quarter depending upon the nature, timing and cost of activities undertaken, during the quarter, whether or not the Company incurs gains or losses on foreign exchange or grants stock options, and the movements in its derivative liability.
Please refer to theResults of Operations section above for the results of operations for the three and six months ended June 30, 2017.
Reclamation Financial Assurance and Asset Retirement Obligation
Reclamation Financial Assurance
The Company is required to provide the Bureau of Land Management, the State Office of Mine Reclamation and Kern County California with a revised reclamation cost estimate on an annual basis. An independent consulting engineer provides this estimate. annually. The financial assurance is adjusted once the cost estimate is approved.
This cost estimate, once approved by state and county authorities, forms the basis for a surety bond forof reclamation financial assurance. The reclamation assurance provided as at June 30, 2017 is $1.5 million2018 was $1,749 (December 31, 2016 - $1.5 million)2017– $1,465).
The Company is also required to provide financial assurance with the Lahontan Regional Water Quality Control Board (the “Regional Board”) for closure and reclamation costs related to the lined impoundments, which are defined as the Stage 1 and Stage 2 heap leach pad,pads, the overflow pond, and the solution collection channel. The reclamation financial assurance estimate for as ofat June 30, 20172018 is $1.9 million$2,450 (December 31, 2016 - $1.2 million)2017– $1,869).
In addition to the above, the Company is required to obtain and maintain financial assurance for initiating and completing corrective action and remediation of a reasonably foreseeable release from the Mine’sProject’s waste management units as required by the Regional Board. The reclamation financial assurance estimate for as ofat June 30, 2017,2018 is $0.3 million$278 (December 31, 2016 - $0.3 million)2017– $278).
The Company entered into $3.0 million$4,921 (2017–$3,612) in surety bond agreements in order to release its reclamation deposits. The Company pays a yearly premium of $0.1 million.$101 (2017– $90). Golden Queen Ltd. has provided a corporate guarantyguarantee on the surety bonds (see Note 12 to the of the unaudited condensed consolidated interim financial statements).bonds.
Asset Retirement Obligation
The total asset retirement obligation as ofat June 30, 2017,2018, was $1.6 million$2,413 (December 31, 2016 - $1.4 million)2017– $1,838).
The Company estimated its asset retirement obligationobligations based on its understanding of the requirements to reclaim and remediate its property based on its activities to date. As at June 30, 2017,2018, the Company estimates the primary cash outflow related to these reclamation activities will commencebe incurred in 2028. Reclamation provisions are measured at the expected value of future cash flows discounted to their present value using a discount rate based on a credit adjusted risk-free interest rate of 8.7%8.34% and an inflation rate of 2.45%2.41%.
Property Rent Payments and Production Royalty ExpensesThe following is a summary of asset retirement obligations:
June 30, 2018 | December 31, 2017 | |||||||
| Balance, beginning of the period | $ | 1,838 | $ | 1,366 | ||||
| Accretion | 83 | 126 | ||||||
| Changes in cash flow estimates | 492 | 346 | ||||||
| Balance, end of the period | $ | 2,413 | $ | 1,838 | ||||
The Company has acquired a number of mineral properties outright and has acquired exclusive rights to explore, develop and mine other portions of the Mine under various mining lease agreements with landowners. As a result, the Company is required to make property rent payments related to its mining lease agreements with landholders, in the form of advance minimum royalties or production royalties. The total property rent and production royalty expenses for the three and six months ended June 30, 2017 were $0.4 million and $0.7 million, respectively (the three and six months ended June 30, 2016 - $Nil million and $0.01 million, respectively). There are multiple third party landholders and the royalty amount due to each landholder over the life of the Mine varies with each property.
Off-balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Stock Option Plan
The Company’s current stock option plan (the “Plan”) was adopted by the Company in 2013 and approved by shareholders of the Company in 2013. The Company also adopted a house keeping amendment to the plan on April 27, 2015 to clarify the procedure for fixing the early termination date of stock options. The Plan provides a fixed number of 7,200,000 common shares of the Company that may be issued pursuant to the grant of stock options. The exercise price of stock options granted under the Plan shall be determined by the Company’s board of directors (the “Board”), but shall not be less than the volume-weighted, average trading price of the Company’s shares on the Toronto Stock Exchange (the “TSX”) for the five trading days immediately prior to the date of the grant. The expiry date of a stock option shall be the date so fixed by the Board subject to a maximum term of five years. The Plan provides that the expiry date of the vested portion of a stock option will be the earlier of the date so fixed by the Board at the time the stock option is awarded and the early termination date (the “Early Termination Date”). The Early Termination Date will be the date the vested portion of a stock option expires following the option holder ceasing to be a director, employee or consultant, as determined by the Board at the time of grant, or in the absence thereof at any time prior to the time the option holder ceases to be a director, employee or consultant, in accordance with and subject to the provisions of the Plan. All options granted under the 2013 Plan will be subject to such vesting requirements as may be prescribed by the TSX, if applicable, or as may be imposed by the Board.
There is a total of 1,395,002 options outstanding of which 630,000 options are currently exercisable (December 31, 2016 – 1,555,000 outstanding of which 1,023,334 are exercisable) common shares were issuable pursuant to such stock options as at June 30, 2017.
Transactions with Related Parties
Except as noted elsewhere in this Form 10-Q, related party transactions are disclosed as follows:
| (i) | Compensation of Key Management |
DuringFor the three and six months ended June 30, 2017,2018, the Company paid a total of $0.03 millionrecognized $104 and $0.06 million (the$299 (for the three and six months ended June 30, 2016 - $0.03 million2017– $78 and $0.06 million, respectively), respectively,$278) salaries and fees for Officers and Directors.
As at June 30, 2018, $nil (December 31, 2017– $38) was included in prepaid expenses and other current assets for closing fees paid to the three independent directors of the Company. Additionally, the Company paid $0.02 million (2016 - $Nil)related parties.
As at June 30, 2018, $28 (December 31, 2017–$463) for consulting servicesamended fees and accrued interest payable to Behre Dolbear, a company of which a director of Golden Queen servesrelated parties was included in the capacity of an executive officer.
accounts payable and accrued liabilities for accrued interest payable to related parties and salaries and fees payable to Officers and Directors.
| (ii) | Note Payable |
On December 31, 2014,November 18, 2016, the Company entered into a loan (the “December 2014 Loan”) with the Clay Group for $12.5 million, due on July 1, 2015 and bore an annual interest rate of 10%. The December 2014 Loan was guaranteed by GQM Holdings, and secured by a pledge of the Company's interests in GQM Canada, GQM Canada’s interest in GQM Holdings and GQM Holdings' 50% interest in GQM LLC. The Company also incurred a financing fee to secure the loan in the amount of $1.0 million, of which, $0.8 million was paid on December 31, 2014 and the remaining $0.2 million was paid on January 5, 2015.
On June 8, 2015, the Company amended the December 2014 Loan to extend the maturity to December 8, 2016 and increased the principal amount from $12.5 million to $37.5 million (the “June 2015 Loan”). The Company also issued to the lenders 10,000,000 common share purchase warrants exercisable for a period of five years expiring June 8, 2020. The common share purchase warrants have an exercise price of $0.95. All other terms remained the same as the December 2014 Loan. The Company also incurred financing fees to secure the loan in the amount of $1.5 million. The Company agreed to pay the legal fees incurred by the lenders relating to this debt instrument in the amount of $0.04 million. The total legal fees were expensed as the transaction met the definition of a debt extinguishment.
On November 18, 2016, the Company repaid $12.2 million of the June 2015 Loan and accrued interest with cash on hand and the net proceeds of $10.1 million from an equity financing. The Company restructured the remaining debt with a new loan with a principal amount of $31.0 million$31,000 (the “November 2016 Clay Loan”). The new loan has a thirty-month term, due on May 21, 2019 and an annual interest rate of 8%, payable on a quarterly basis commencing during the first quarter of 2017. Quarterly principal payments of $2.5 million commence during the first quarter of 2018, with a payment of the remaining balance at the maturity date. The first four quarterly interest payments under the November 2016 Clay Loan can be added to the loan principal balance rather than paid in cash, at the Company’s option. The Company exercised this option on January 1, 2017 and April 1, 2017 and transferred $0.3 million and $0.6 million of interest to the principal, respectively.
quarterly. In connection with the November 2016 Clay Loan the Company issued 8,000,000 common share purchase warrants exercisable for a period of five years expiring November 21, 2021. The common share purchase warrants have an exercise price of $0.85. The Company also incurred a financing fee to secure the loanAs per an anti-dilution provision included in the amount of $0.9 million, all of which was paid on November 18, 2016.
The table below summarizes the activity on the note payable:
| June 30, 2017 | December 31, 2016 | |||||||
| Balance, beginning of the period | $ | 26,347 | $ | 36,053 | ||||
| Interest payable transferred to principal balance | 922 | 2,977 | ||||||
| Accretion of discount on loans | 740 | 1,996 | ||||||
| Capitalized financing fee and legal fees | - | (930 | ) | |||||
| Reduction of debt upon issuance of warrants | - | (3,090 | ) | |||||
| Repayment of loans and interest | - | (10,659 | ) | |||||
| Balance, end of the period | $ | 28,009 | $ | 26,347 | ||||
| Current portion | $ | 5,922 | $ | - | ||||
| Non-current portion | $ | 22,087 | $ | 26,347 | ||||
Share Purchase Warrants – Clay loans
On June 8, 2015, the Company issued 10,000,000 share purchase warrants to the Clay Group in connection with the June 2015 Loan. The share purchase warrants are exercisable until June 8, 2020 at an exercise price of $0.95. Included in the June 20152016 Loan agreement, was an anti-dilution provision. If the Company were to complete a financing at a share price lower than the exercise price of the share purchase warrants,November 2016 Warrants was revised to $0.6650 on the exercise pricerights offering completion date. The expiry date of November 18, 2021 of the share purchase warrants would be adjusted to match the price at which the financing was completed.
November 2016 Warrants remains unchanged.
On November 18, 2016,10, 2017, the Company issued 8,000,000 share purchase warrants toand the Clay Group in connection withentered into a letter agreement (the “Letter Agreement”) pursuant to which they agreed to amend the November 2016 Loan by reducing the 2018 quarterly and 2019 Q1 principal payments from $2,500 to $1,000, adding the reduction of such payments pro-rata to the remaining 2019 payments, and increasing the annual interest rate from 8% to 10% effective January 1, 2018 (the “November 2017 Loan”). On February 22, 2018, the Company and the Clay Loan. The share purchase warrants are exercisable until November 18, 2021 at an exercise priceGroup entered into definitive agreements to amend the terms of $0.85. Included in the November 2016 Clay Loan and the registration rights agreement in accordance with the Letter Agreement. This amendment was an anti-dilution provision. If the Company were to completeaccounted for as a financing at a share price lower than the exercise price of the share purchase warrants, the exercise price of the share purchase warrants would be adjusted to match the price at which the financing was completed.
debt modification.
The share purchase warrants meetfollowing table summarizes activity on the definition of a derivative liability instrument as the exercise price is not a fixed price as described above. Therefore, the settlement feature does not meet the “fixed-for-fixed” criteria outlined in ASC 815-40-15.notes payable:
The fair value of the derivative liabilities related to the share purchase warrants at June 30, 2017 is $4.0 million (December 31, 2016 - $5.5 million). The derivative liabilities are calculated using the binomial and the Black-Scholes pricing valuation models with the following assumptions:
| Warrants related to June 2015 Loan | June 30, 2017 | December 31, 2016 | ||||||
| Risk-free interest rate | 1.17 | % | 0.84%. | |||||
| Expected life of derivative liability | 2.94 years | 3.44 years | ||||||
| Expected volatility | 76.60 | % | 78.79 | % | ||||
| Dividend rate | 0.00 | % | 0.00 | % | ||||
| Warrants related to November 2016 Loan | June 30, 2017 | December 31, 2016 | ||||||
| Risk-free interest rate | 1.38 | % | 1.11 | % | ||||
| Expected life of derivative liability | 4.40 years | 4.89 years | ||||||
| Expected volatility | 79.58 | % | 77.21 | % | ||||
| Dividend rate | 0.00 | % | 0.00 | % | ||||
The change in the derivative share purchase warrants is as follows:
| June 30, 2017 | December 31, 2016 | |||||||
| Balance, beginning of the period | $ | 5,458 | $ | 2,498 | ||||
| Fair value at inception | - | 3,090 | ||||||
| Change in fair value | (1,452 | ) | (130 | ) | ||||
| Balance, end of the period | $ | 4,006 | $ | 5,458 | ||||
June 30, 2018 | December 31, 2017 | |||||||
| Balance, beginning of the period | $ | 30,099 | $ | 26,347 | ||||
| Interest payable transferred to principal balance | - | 2,212 | ||||||
| Accretion of discount on loans | 994 | 1,940 | ||||||
| Capitalized financing and legal fees | - | (400 | ) | |||||
| Accretion of capitalized financing and legal fees | 130 | - | ||||||
| Repayment of loans and interest | (6,711 | ) | - | |||||
| Balance, end of the period | $ | 24,512 | $ | 30,099 | ||||
| Current portion | $ | 24,512 | $ | 7,712 | ||||
| Non-current portion | $ | - | $ | 22,387 | ||||
| (iii) | Amortization of Discounts and Interest Expense |
The following table summarizes the amortization of discounts and interest on loan:
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Accretion of the Nov 2016 Loan discount | $ | 454 | $ | - | $ | 740 | $ | - | ||||||||
| Interest expense related to the Nov 2016 Loan | 646 | - | 1,272 | - | ||||||||||||
| Interest expense related to Komatsu financial loans(1) | 150 | 154 | 285 | 320 | ||||||||||||
| Accretion of the June 2015 Loan discount | - | 626 | - | 1,232 | ||||||||||||
| Interest expense related to the June 2015 Loan | - | 1,013 | - | 2,008 | ||||||||||||
| Accretion of discount and interest on loan | $ | 1,250 | $ | 1,793 | $ | 2,297 | $ | 3,560 | ||||||||
The Company’s loans were contracted to fund significant development costs at the Mine. The Company capitalizes a portion of the interest expense as it related to funds borrowed to complete development activities at the site.
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Accretion of discounts and interest on loan(1) | $ | 1,250 | $ | 1,793 | $ | 2,297 | $ | 3,560 | ||||||||
| Less: Interest costs capitalized(2) | - | - | - | (1,006 | ) | |||||||||||
| Interest expense | $ | 1,250 | $ | 1,793 | $ | 2,297 | $ | 2,554 | ||||||||
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Accretion of the Nov 2017 Loan discount | $ | 504 | $ | 454 | $ | 994 | $ | 740 | ||||||||
| Accretion of capitalized financing and legal fees | 66 | - | 130 | - | ||||||||||||
| Interest expense related to the Nov 2017 Loan | 695 | 646 | 1,409 | 1,272 | ||||||||||||
| Closing and commitment fees related to the Credit Facility | 10 | - | 40 | - | ||||||||||||
| Interest expense related to Komatsu financial loans(1) | 166 | 150 | 401 | 285 | ||||||||||||
| Accretion of discount and interest on loan | $ | 1,441 | $ | 1,250 | $ | 2,974 | $ | 2,297 | ||||||||
| (1) | Komatsu is not a related party and has only been included in the above table to reconcile the total interest expense incurred for the period to the amounts capitalized and expensed. |
| (iv) | Joint Venture Transaction |
The Company completed the Joint Venture Transaction with Gauss in September 2014 resulting in both parties owning a 50% interest in the Mine. Pursuant to the Joint Venture Transaction, Golden Queen converted its wholly-owned subsidiary GQM Inc., the entity developing the Mine, into a California limited liability company named GQM LLC. Upon closing, Gauss acquired 50% of GQM LLC by investing $110 million cash in exchange for newly issued membership units of GQM LLC. GQM Holdings, a newly incorporated subsidiary of the Company, holds the other 50% of GQM LLC.
Gauss is a funding vehicle owned by entities controlled by Leucadia and the Clay Group. Gauss is owned 70.51% by Gauss Holdings and 29.49% by Auvergne, the Clay Group’s investment entity. Pursuant to the transaction, Leucadia was paid a transaction fee of $2.0 million and $0.3 million was paid to Auvergne through GQM LLC in 2014. The Company has adopted an accounting policy of expensing these transaction costs.
Variable Interest Entity
In accordance with ASC 810-10-30, the Company has determined thatpresented Gauss’ ownership in GQM LLC meets the definition of a Variable Interest Entity (“VIE”) and that the Company is part of a related party group that, in its entirety, would meet the definition of a primary beneficiary. Although no individual variable interest holder individually meets the definition of a primary beneficiary in the absence of the related party group, Golden Queen has determined it is considered the member of the related party group most closely associated with GQM LLC. As a result, the Company has condensed consolidated interim 100% of the accounts of GQM LLC in these condensed consolidated interim financial statements, while presentingas a non-controlling interest portion representingamount on the 50% interest of Gaussbalance sheet within the equity section. However, there are terms in the agreement that provide for the exit from the investment in GQM LLC onfor an initial member whose interest in GQM LLC becomes less than 20%.
If a member becomes less than a 20% interest holder, its balance sheet. A portionremaining interest will (ultimately) be terminated through one of three events at the non-controlling interest is presented as temporary equity on the Company’s balance sheet representing the initial value of the non-controlling interest that could potentially be redeemable by Gauss in the future.non-diluted member’s option:
| a. | Through conversion to a net smelter royalty (“NSR”); |
| b. | Through a buy-out (at fair value) by the non-diluted member; or |
| c. | Through a sale process by which the diluted member’s interest is sold. |
The net assets of GQM LLC as ofat June 30, 2017,2018 and December 31, 20162017 are as follows:
June 30, 2018 | December 31, 2017 | |||||||
| Assets, GQM LLC | $ | 160,379 | $ | 149,095 | ||||
| Liabilities, GQM LLC | (24,130 | ) | (28,024 | ) | ||||
| Net assets, GQM LLC | $ | 136,249 | $ | 121,071 | ||||
| June 30, 2017 | December 31, 2016 | |||||||
| Assets, GQM LLC | $ | 152,934 | $ | 151,802 | ||||
| Liabilities, GQM LLC | (22,157 | ) | (20,710 | ) | ||||
| Net assets, GQM LLC | $ | 130,777 | $ | 131,092 | ||||
Included in the assets above, is $5.0 million$5,930 (December 31, 2016 - $11.1 million)2017– $2,606) in cash held as at June 30, 2017. The cash inby GQM LLC which is directed specifically to fund capital expenditures required to continue with production and to settle GQM LLC’s obligations. The liabilities of GQM LLC do not have recourse to the general credit of the primary beneficiaryGolden Queen except for $2,203 for two mining drill loans and $3.0 million$4,921 in surety bond agreements.
Non-Controlling Interest
The carrying value of the non-controlling interest is adjusted for net income and loss, distributions and contributions pursuant to ASC 810-10 based on the same percentage allocation used to calculate the initial book value of temporary equity.
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Net and comprehensive income (loss) in GQM LLC | $ | 2,475 | $ | 462 | $ | (4,819 | ) | $ | (317 | ) | ||||||
| Non-controlling interest percentage | 50 | % | 50 | % | 50 | % | 50 | % | ||||||||
| Net and comprehensive income (loss) attributable to non-controlling interest | $ | 1,238 | $ | 230 | $ | (2,410 | ) | $ | (159 | ) | ||||||
| Net and comprehensive income (loss) attributable to permanent non-controlling interest | $ | 743 | $ | 138 | $ | (1,446 | ) | $ | (95 | ) | ||||||
| Net and comprehensive income (loss) attributable to temporary non-controlling interest | $ | 495 | $ | 92 | $ | (964 | ) | $ | (64 | ) | ||||||
| Six Months Ended June 30, | Six Months Ended June 30, | |||||||
| 2017 | 2016 | |||||||
| Net and comprehensive income (loss) in GQM LLC | $ | (317 | ) | $ | (3,628 | ) | ||
| Non-controlling interest percentage | 50 | % | 50 | % | ||||
| Net and comprehensive loss attributable to non-controlling interest | $ | (159 | ) | $ | (1,814 | ) | ||
| Net and comprehensive loss attributable to permanent non-controlling interest | $ | (95 | ) | $ | (1,088 | ) | ||
| Net and comprehensive loss attributable to temporary non-controlling interest | $ | (64 | ) | $ | (726 | ) | ||
| Permanent Non-Controlling Interest | Temporary Non-Controlling Interest | |||||||
| Carrying value of non-controlling interest, December 31, 2016 | $ | 39,327 | $ | 26,220 | ||||
| Net and comprehensive loss for the period | (95 | ) | (64 | ) | ||||
| Carrying value of non-controlling interest, June 30, 2017 | $ | 39,232 | $ | 26,156 | ||||
| Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||
| Carrying value of non-controlling interest, December 31, 2017 | $ | 36,321 | $ | 24,214 | ||||
| Capital contribution | 10,000 | - | ||||||
| Net and comprehensive loss for the period | (1,446 | ) | (964 | ) | ||||
| Carrying value of non-controlling interest, June 30, 2018 | $ | 44,875 | $ | 23,250 | ||||
| Credit Facility |
Revolving credit
On May 23, 2017, GQM LLC entered into a $5,000 one-year revolving credit facility of $5 million withagreement (the “Credit Facility”) in which Gauss Holdings LLC and Auvergne, LLC agreed to extend credit in the form of loans to GQM LLC. The revolving creditCredit Facility commenced on July 1, 2017, bears interest at a rate of 12% per annum and is available until May 23, 2018 and bearssubject to a 12% simple annual interest. GQM LLC paid a closingcommitment fee of $0.1 million which was classified as prepaid expenses and other current assets. $0.02 million of1% per annum. For the closing fee was amortized during three and six months ended June 30, 2017. As2018, GQM LLC paid commitment fees of $30 (2017 – $nil). The Credit Facility expired on May 22, 2018. The balance of the Credit Facility was $3,000 as at June 30,December 31, 2017, and August 9, 2017 (“the reporting date”), no amounts had been drawn under this facility.
balance was repaid during the first quarter of 2018.
Fair Value of Financial Instruments
Fair Value Measurements
The three levels of the fair value hierarchy are as follows:
| Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| Level 2 | Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; |
| Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
| June 30, 2018 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (see Note 7) | $ | 372 | $ | - | $ | 372 | $ | - | ||||||||
| Share purchase warrants – (see Note 7) | 1 | - | 1 | - | ||||||||||||
| $ | 373 | $ | - | $ | 373 | $ | - | |||||||||
| June 30, 2017 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (Note 10) | $ | 4,006 | $ | - | $ | 4,006 | $ | - | ||||||||
| Share purchase warrants – (Note 10) | 530 | - | 530 | - | ||||||||||||
| $ | 4,536 | $ | - | $ | 4,536 | $ | - | |||||||||
| December 31, 2016 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (Note 10) | $ | 5,458 | $ | - | $ | 5,458 | $ | - | ||||||||
| Share purchase warrants – (Note 10) | 972 | - | 972 | - | ||||||||||||
| $ | 6,430 | $ | - | $ | 6,430 | $ | - | |||||||||
| December 31, 2017 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (see Note 7) | $ | 439 | $ | - | $ | 439 | $ | - | ||||||||
| Share purchase warrants – (see Note 7) | 2 | - | 2 | - | ||||||||||||
| $ | 441 | $ | - | $ | 441 | $ | - | |||||||||
Under fair value accounting, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair value measurement of the financial instruments above uses observable inputs in option price models such as the binomial and the Black-Scholes valuation models.
Please refer also to the note on fair value of derivative liability underResults of operations above for more information.
Select Non-Consolidated Figures
The Company has a 50% interest in GQM LLC, which meets the definition of a VIE.Variable Interest Entity (“VIE”). The Company consolidates entities which meet the definition of a VIE for which it is the primary beneficiary. The Company has determined it is the member of the related party group that is most closely associated with GQM LLC and, as a result, is the primary beneficiary who consolidates GQM LLC.
The following table shows figures attributable to the Company only as at June 30, 2018:
| GQM LLC 100% | GQM LLC 50% Attributable to GQM Ltd. | GQM Ltd. on a Non- Consolidated Basis * | GQM Ltd. Attributable | |||||||||||||
| (1) | (2) | (1) + (2) | ||||||||||||||
| Cash | $ | 5,930 | $ | 2,965 | $ | 4,608 | $ | 7,573 | ||||||||
| Short Term Debt | $ | 8,096 | $ | 4,048 | $ | 24,512 | $ | 28,560 | ||||||||
| Long Term Debt | $ | 8,306 | $ | 4,153 | $ | 0 | $ | 4,153 | ||||||||
| Working Capital/(Deficit) | $ | 18,376 | $ | 9,188 | $ | (20,074 | ) | $ | (10,886 | ) | ||||||
* includes GQM Holdings
The following table shows figures attributable to the Company only as offor the six months ended June 30, 2017 and for six months then ended:2018:
| GQM LLC 100% | GQM LLC 50% Attributable to GQM Ltd. | GQM Ltd. on a Non- Consolidated Basis * | GQM Ltd. Attributable | |||||||||||||
| (1) | (2) | (1) + (2) | ||||||||||||||
| Revenue | $ | 24,070 | $ | 12,035 | $ | - | $ | 12,035 | ||||||||
| Cost of sales including depreciation and depletion | $ | (27,280 | ) | $ | (13,640 | ) | $ | (205 | ) | $ | (13,845 | ) | ||||
| Accretion expense | $ | (84 | ) | $ | (42 | ) | $ | - | $ | (42 | ) | |||||
| G&A Expenses | $ | (1,132 | ) | $ | (566 | ) | $ | (922 | ) | $ | (1,488 | ) | ||||
| Share based payments | $ | - | $ | - | $ | (80 | ) | $ | (80 | ) | ||||||
| Decrease in fair value of derivative liability | $ | - | $ | - | $ | 68 | $ | 68 | ||||||||
| Finance Expense | $ | (441 | ) | $ | (221 | ) | $ | (2,533 | ) | $ | (2,754 | ) | ||||
| Interest Income | $ | 40 | $ | 20 | $ | 32 | $ | 52 | ||||||||
| Other | $ | 8 | $ | 4 | $ | - | $ | 4 | ||||||||
| Net Loss | $ | (4,819 | ) | $ | (2,410 | ) | $ | (3,640 | ) | $ | (6,049 | ) | ||||
| GQM LLC 100% | GQM LLC 50% Attributable to LTD | LTD on a Non-Consolidated Basis * | LTD Attributable | |||||||||||||
| (1) | (2) | (1) + (2) | ||||||||||||||
| Cash | $ | 4,992 | $ | 2,496 | $ | 1,292 | $ | 3,789 | ||||||||
| Short Term Debt | $ | 6,194 | $ | 3,097 | $ | 5,922 | $ | 9,019 | ||||||||
| Long Term Debt | $ | 8,519 | $ | 4,260 | $ | 22,087 | $ | 26,347 | ||||||||
| Working Capital / (Deficit) | $ | 5,873 | $ | 2,937 | $ | (9,771 | ) | $ | (6,835 | ) | ||||||
| GQM LLC 100% | GQM LLC 50% Attributable to LTD | LTD on a Non-Consolidated Basis * | LTD Attributable | |||||||||||||
| (1) | (2) | (1) + (2) | ||||||||||||||
| Revenue | $ | 31,686 | $ | 15,843 | $ | 0 | $ | 15,843 | ||||||||
| Cost of sales including depreciation and depletion | $ | (30,207 | ) | $ | (15,103 | ) | $ | (221 | ) | $ | (15,324 | ) | ||||
| Accretion expense | $ | (63 | ) | $ | (31 | ) | $ | 0 | $ | (31 | ) | |||||
| G&A Expenses | $ | (1,151 | ) | $ | (575 | ) | $ | (899 | ) | $ | (1,474 | ) | ||||
| Share based payments | $ | 0 | $ | 0 | $ | (84 | ) | $ | (84 | ) | ||||||
| Foreign exchange gain (loss) | $ | 0 | $ | 0 | $ | 7 | $ | 8 | ||||||||
| (Increase) / Decrease in fair value of derivative liability | $ | 0 | $ | 0 | $ | 1,894 | $ | 1,894 | ||||||||
| Interest Expense | $ | (286 | ) | $ | (143 | ) | $ | (2,011 | ) | $ | (2,154 | ) | ||||
| Interest Income | $ | 56 | $ | 28 | $ | 7 | $ | 35 | ||||||||
| Others | $ | (353 | ) | $ | (176 | ) | $ | 0 | $ | (176 | ) | |||||
| Net Loss | $ | (317 | ) | $ | (158 | ) | $ | (1,306 | ) | $ | (1,464 | ) | ||||
* Includesincludes GQM Holdings
Liquidity and Capital Resources
The Company has generated $58.9 million$113,384 in revenues from operations since inception and as at June 30, 20172018, had an accumulated deficit of $88.8 million$94,549 and a working capital deficit of $3.9 million. Cash generated from operations for the three and six month periods ended June 30, 2017 was $2.8 million and $5.5 million respectively.$9,792.
On November 18, 2016, the Company repaid $12.2 million of the June 2015 Loan and accrued interest with cash on hand and the net proceeds of $10.1 millionCash from an equity financing. The Company restructured the remaining debt with the November 2016 Clay Loan with a principal amount of $31.0 million. The November 2016 Clay Loan has a 30-month term and an annual interest rate of 8%, payable on a quarterly basis commencing first quarter of 2017, a repayment of $2.5 million on a quarterly basis commencing first quarter of 2018 and repayment of balance at maturity date. The first four quarterly interest payments on the November 2016 Clay Loan can be added to the loan principal balance rather than paid in cash, at the Company’s option. The Company exercised this option on January 1, 2017 and April 1, 2017, and transferred $0.3 million and $0.6 million interest to the principal, respectively.operating activities:
The Company is required to pay $3.2 and $8.4 million of accrued interest and debt principal, in total, on the three following dates: January 1, 2018, April 1, 2018 and July 1, 2018. The Company will need to receive cash distributions from GQM LLC to service its debt and such distributions are contingent on GQM LLC’s ability to generate positive cash flows. The Company revised the mine plan in light ofFor the six months ended June 30, 2017 results and has determined it is unlikely it will receive sufficient distributions from GQM LLC during this fiscal year2018, $10,708 of cash was used in operating activities compared to service its debt in early 2018. This situation raises substantial doubt about the Company’s ability to continue as a going concern. Consequently, discussion with the Clay Group to restructure the reimbursement schedule has been initiated. While the Company has been successful in re-negotiating the debt reimbursement schedule with the Clay Group on previous occasions, there can be no assurance that will be achieved going forward.
The Company’s access to the net assets$5,450 of GQM LLC is determined by the Board of Managers of GQM LLC. The Board of Managers is not controlled by the Company and therefore there is no guarantee that any access to the net assets of GQM LLC would be provided to the Company in order to continue as a going concern. The Board of Managers of GQM LLC determine when and if distributions from GQM LLC are made to the holders of its membership units at their sole discretion.
The unaudited condensed consolidated interim financial statements do not reflect adjustments to the carrying values of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used, that would be necessary if the company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.
Cashcash generated from (used in) operating activities:
Cash generated by operating activities was $5.5 million (used in the six months ended June 30, 2016 - $7.1 million) for the six months ended June 30, 2017. The increaseincreased use of cash in cash utilized in operating activities is2018 was primarily due to the increase in revenues since the Company startedincreased direct mining costs and reduced revenue arising from lower production in the second quarter of 2016, improvements in working capital and operating cost.2018 compared to 2017.
Cash used in investing activities:
Cash used in investing activities totaled $9.5 million duringactivities:
For the six months ended June 30, 2017 (the2018, $2,394 of cash was used in investing activities compared to $9,479 of cash used in investing activities for the six months ended June 30, 2016 - $9.4 million). Construction of the second stage of the leach pad commenced in the first quarter of 2017. The significant developmentconstruction costs related to the heap leach pad incurred during the six months ended June 30, 2017 were $8.6 million and included$8,600. Since the solution collection piping and drain cover placement, drain cover crushing, subgrade and liner. Theheap leach pad was completed in 2017, no significant development costs were incurred duringin the six months ended June 30, 2016 included the completion of the crushing-screening plant facilities, the conveying and stacking system, the Merrill-Crowe plant and the water and power supply.2018.
Cash from financing activities:
Cash used in financing activities totaled $3.0 million duringFor the six months ended June 30, 2017 (the six months ended June 30, 2016 –2018, $20,703 of cash was generated from financing activities compared to $2,988 of cash used of $2.5 million). The mainin financing activities of the Company duringfor the six months ended June 30, 2017 included:2017.
Working capital:
The following table shows working capital as at June 30, 2018:
GQM LLC | GQM Ltd. on a Non- Consolidated Basis * | GQM Ltd. on a Consolidated Basis ** | ||||||||||
| Current assets | $ | 23,691 | $ | 4,747 | $ | 28,438 | ||||||
| Current liabilities | (13,348 | ) | (24,821 | ) | (38,231 | ) | ||||||
| Working capital/(deficit) | $ | 10,343 | $ | (20,074 | ) | $ | (9,793 | ) | ||||
Working capital:
| LTD on a Non-Consolidated Basis * | LTD on a Consolidated Basis ** | |||||||
| Current Assets | $ | 1,371 | $ | 19,264 | ||||
| Current Liabilities | $ | (11,143 | ) | $ | (23,163 | ) | ||
| Working Capital / (Deficit) | $ | (9,771 | ) | $ | (3,899 | ) | ||
* Includes GQM Holdings ** Includes GQM Holdings and GQM LLC | ||||||||
| includes GQM Holdings and GQM LLC |
Golden Queen and GQM Holdings
As at June 30, 2017,2018, Golden Queen and GQM Holdings had current assets of $1.4 million$4,747 (December 31, 2016 - $2.3 million)2017 – $502) and current liabilities of $11.1 million$24,821 (December 31, 2016 - $6.9 million) or2017 – $9,194) for a working capital deficit of $9.8 million$20,074 (December 31, 20162017 – $4.6 million). The decrease in current assets from December 31, 2016 is the resultworking capital deficit of general corporate expenditures such as corporate salary expenses, legal fees, audit fees, financing fees and interest expenses. The increase in current liabilities is the result of the principal payments of the November 2016 Clay Loan now being included in our current liabilities.
Golden Queen will use its cash for general corporate expenditures such as accounting fees, legal fees and corporate salary expenses. Interest expenses on the November 2016 Clay Loan due during 2017 may be added to the loan principal balance rather than paid in cash, at the Company’s option.$8,692).
GQM LLC
As at June 30, 2017,2018, GQM LLC had current assets of $17.9 million$23,691 (December 31, 2016 - $22.7 million)2017 – $12,162) and current liabilities of $12.0 million$13,348 (December 31, 2016 - $9.9 million) or a working capital surplus of $5.9 million (December 31, 20162017 – $12.8 million). The decrease in current assets from December 31, 2016 is resulting from the cash spent on project-related expenditures and working capital. The increase in current liabilities is due to an increase in accounts payable and an increase of the short-term portion of the mobile equipment loans.
GQM LLC will use its cash on hand for sustaining capital expenditures and$16,572) for working capital needs.of $10,343 (December 31, 2017 – working capital deficit of $4,410).
Outstanding SharesShare Data
The number of shares issued and outstanding and the fully diluted share position are set out in the table below:
| Item | No. of Shares | |||||
| Shares issued and outstanding on December 31, 2016 | 111,048,683 | |||||
| Shares issued as the result of a purchase agreement | 100,000 | |||||
| Shares issued pursuant to the exercise of stock options | Nil | |||||
| Shares issued and outstanding on June 30, 2017 | 111,148,683 | Exercise Price | Expiry Date | |||
| Shares to be issued on exercise of directors and employees stock options | 1,395,002 | $0.58 to $1.59 | From 06/03/18 to 03/16/22 | |||
| Shares to be issued on exercise of warrants | 24,317,700 | $0.95 | 06/08/20 | |||
| Fully diluted June 30, 2017 | 136,861,385 | |||||
| The company has an unlimited authorized share capital |
| Item | No. of Shares | |||||||
| Shares issued and outstanding as at December 31, 2017 | 111,148,683 | |||||||
| Shares issued as the result of a rights offering | 188,952,761 | |||||||
| Shares issued and outstanding as at June 30, 2018 | 300,101,444 | Exercise Price | Expiry Date | |||||
| Shares to be issued on exercise of directors and employees stock options | 2,475,001 | $0.29 to $1.59 | From 09/03/18 to 10/20/22 | |||||
| Shares to be issued on exercise of warrants | 24,317,700 | $0.665 to $0.95 and CAD $2.00 | From 06/08/20 to 11/18/21 | |||||
| Fully diluted August 9, 2018 | 326,894,145 | |||||||
The Company has unlimited authorized share capital.
Subsequent Events
On July 1, 2017, the Company was scheduled to make a quarterly interest payment on the November 2016 Clay Loan. In accordance with the terms of the November 2016 Clay Loan agreement, the Company chose to exercise its right to add the interest owed on July 1, 2017 to the principal balance; thereby increasing the principal balance of the loan by $0.6 million.
Non-GAAPNon-US GAAP Financial Performance Measures
Non-GAAPNon-US GAAP financial measures are intended to provide additional information only and do not have any standard meaning prescribed by generally accepted accounting principles. These measures should not be considered in isolation or as a substitute for performance measures prepared in accordance with US GAAP.
Total Cash Costs
Total cash costs are derived from amounts included in the statement of operations and include direct mining costs and site general and administrative costs. The direct mining costs shown on the table below include mine site operating costs such as mining, processing, smelting, refining, third party transportation costs, advanced minimum royalties and production costs less silver metals revenues. Management has determined that silver metals revenues when compared with gold metals revenues, are immaterial and therefore are considered a by-product of the production of gold.
The table below shows a reconciliation of total cash costs per gold ounce and cash costs per gold ounce on a by-product basis (expressed in thousands of US dollars except ounce and per ounce amounts):basis:
| Three Months Ended | ||||||||||||
| June 30, 2017 | March 31, 2017 | December 31, 2016 | ||||||||||
| Total cash costs | ||||||||||||
| Mining | $ | 6,583 | $ | 5,624 | $ | 4,933 | ||||||
| Processing | 4,797 | 4,379 | 4,243 | |||||||||
| Indirect mining cost | 1,795 | 1,880 | 1,901 | |||||||||
| Inventory changes and others | 192 | (322 | ) | (2,181 | ) | |||||||
| Cost of sales | 13,367 | 11,561 | 8,896 | |||||||||
| Site general and administrative | 658 | 838 | 776 | |||||||||
| Cash costs before by-product credits | 14,025 | 12,399 | 9,672 | |||||||||
| Divided by gold produced (oz) | 12,632 | 11,406 | 7,779 | |||||||||
| Cash costs per ounce of gold produced ($/oz) | 1,110 | 1,087 | 1,243 | |||||||||
| Less: By-product silver credits per ounce ($/oz) | (72 | ) | (98 | ) | (148 | ) | ||||||
| Total cash cost per ounce of gold produced on a by-product basis ($/oz) | $ | 1,038 | $ | 989 | $ | 1,096 | ||||||
| Ore placed (tons) | 1,026,332 | 791,232 | 894,754 | |||||||||
| Total Cash Costs ($/t placed) | 13.48 | 16.08 | 13.25 | |||||||||
| Crusher mechanical availability (%) | 81 | % | 63 | % | 70 | % | ||||||
| Apparent cumulative recovery(1) - gold (%) | 68.0 | % | 64.2 | % | 59.7 | % | ||||||
| Apparent cumulative recovery(1) - silver (%) | 25.3 | % | 25.3 | % | 24.0 | % | ||||||
| Three Months Ended | ||||||||||||
| June 30, 2018 | March 31, 2018 | December 31, 2017 | ||||||||||
| Total cash costs | ||||||||||||
| Mining | $ | 8,087 | $ | 7,376 | $ | 7,174 | ||||||
| Processing | 4,707 | 4,488 | 4,346 | |||||||||
| Indirect mining cost | 2,029 | 1,972 | 2,308 | |||||||||
| Inventory changes and others | (6,735 | ) | (820 | ) | 1,970 | |||||||
| Cost of sales | 8,088 | 13,016 | 15,798 | |||||||||
| Site general and administrative | 792 | 732 | 897 | |||||||||
| Cash costs before by-product credits | 8,880 | 13,748 | 16,695 | |||||||||
| Divided by gold produced (oz) | 9,976 | 6,579 | 9,886 | |||||||||
| Cash costs per ounce of gold produced ($/oz) | 890 | 2,090 | 1,689 | |||||||||
| Less: By-product silver credits per ounce ($/oz) | (160 | ) | (136 | ) | (123 | ) | ||||||
| Total cash cost per ounce of gold produced on a by-product basis ($/oz) | $ | 730 | $ | 1,954 | $ | 1,566 | ||||||
| Ore placed (tons) | 943,148 | 806,450 | 837,779 | |||||||||
| Total Cash Costs ($/t placed) | 16.56 | 18.06 | 17.52 | |||||||||
| Crusher mechanical availability (%) | 73 | % | 65 | % | 69 | % | ||||||
| Apparent cumulative recovery(1) - gold (%) | 69.1 | % | 71.5 | % | 75.5 | % | ||||||
| Apparent cumulative recovery(1) - silver (%) | 27.7 | % | 27.1 | % | 27.4 | % | ||||||
| (1) | Note: Apparent cumulative recovery is the ratio of metal produced since beginning of leaching over total estimated metal contained in ore loaded to pad since beginning of operation. |
The increase in inventory during the second quarter was caused by the significant increase in the volume of mined ore stockpile and the increased number of gold ounces currently under leach. Historically, the inventory’s net realizable value was below its cost which resulted in inventory write-downs. In the three months ended June 30, 2018, the Company did not record any write-down as inventory’s net realizable value exceeded its cost.
All-in Sustaining Costs
Golden Queen defines all-in sustaining costs as the sum of direct mining costs (as defined under total cash costs), site and corporate general and administrative costs, share based payments, reclamation liability accretion and capital expenditures that are sustaining in nature. Adoption of the standard is voluntary and the cost measures presented may not be comparable to other similarly titled measures of other companies. Other companies may calculate these measures differently.
The table below shows a reconciliation of cash costs per gold ounce on a by-product basis and all-in sustaining costs per ounce (expressed in thousands of US dollars except ounce and per ounce amounts):ounce:
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||
| June 30, 2017 | March 31, 2017 | December 31, 2016 | June 30, 2018 | March 31, 2018 | December 31, 2017 | |||||||||||||||||||
| All-in sustaining costs | ||||||||||||||||||||||||
| Cash costs before by-product credits | $ | 14,025 | $ | 12,399 | $ | 9,672 | $ | 8,880 | $ | 13,748 | $ | 16,695 | ||||||||||||
| Silver by-product | (915 | ) | (1,092 | ) | (1,150 | ) | (1,598 | ) | (895 | ) | (1,221 | ) | ||||||||||||
| Total cash cost after by-product | 13,110 | 11,307 | 8,522 | 7,282 | 12,853 | 15,474 | ||||||||||||||||||
| Corporate general and administrative expenses | 54 | 578 | 311 | 87 | 522 | 549 | ||||||||||||||||||
| Share based payments | 51 | 34 | 17 | 35 | 45 | 68 | ||||||||||||||||||
| Accretion expense | 32 | 31 | 23 | 42 | 42 | 32 | ||||||||||||||||||
| Sustaining capital | 4,781 | 7,288 | 2,648 | 2,974 | 2,412 | 3,303 | ||||||||||||||||||
| All-in sustaining costs | 18,028 | 19,237 | 11,521 | 10,420 | 15,874 | 19,426 | ||||||||||||||||||
| Divided by gold produced (oz) | 12,632 | 11,406 | 7,779 | 9,976 | 6,579 | 9,886 | ||||||||||||||||||
| All-in sustaining costs per gold ounce on a by-product basis | $ | 1,427 | $ | 1,724 | $ | 1,481 | $ | 1,045 | $ | 2,413 | $ | 1,965 | ||||||||||||
The following table reconciles the above non-US GAAP measures to the most directly comparable US GAAP measures:
| Three Months Ended | ||||||||||||
| June 30, 2018 | March 31, 2018 | December 31, 2017 | ||||||||||
| Cost of goods sold | $ | 11,494 | $ | 16,034 | $ | 19,450 | ||||||
| Less: depreciation and depletion | (3,364 | ) | (2,976 | ) | (3,526 | ) | ||||||
| Less: accretion expense | (42 | ) | (42 | ) | (126 | ) | ||||||
| Direct mining costs | 8,088 | 13,016 | 15,798 | |||||||||
| Add: site general and administrative expenses | 792 | 732 | 897 | |||||||||
| Cash costs before by-product credits | $ | 8,880 | $ | 13,748 | $ | 16,695 | ||||||
Summary of Significant Accounting Policies and Estimates
Full disclosure of the Company’s significant accounting policies and estimates in accordance with US GAAP can be found in notes of its audited consolidated financial statements as at December 31, 2016.
Recently Adopted Accounting Pronouncements
New Accounting Policies
In August 2015, the effective date was deferred to reporting periods, including interim periods, beginning afteryear ended December 31, 2017 and will be applied retrospectively. Early adoption is not permitted.
We are currently assessing the impact of implementation of ASU No. 201-09, however, management does not believe it will change the point of revenue recognition or amounts of revenue recognized compared to how we recognize revenue under our current policies. Our revenues involve a relatively limited number of types of contracts and customers. In addition, our revenue contracts do not involve multiple types of performance obligations. Revenues from doré are recognized, and the transaction price is known, at the time the metals sold are delivered to the customer. We will finalize our assessment of the impact of ASU No. 201-09 on our revenue recognition during 2017 and assess the additional disclosure requirements under the guidance.
The ASU will be effective for annual andunaudited condensed consolidated interim periods beginning January 1, 2019, with early adoption permitted, and are applicable on a modified retrospective basis with various optional practical expedients. The Company is assessing the impact of this standard.
Other Legal Matters
The Center for Biodiversity Petition to List the Mohave Shoulderband Snail as an Endangered Species
As a result of a petition filed by the Center for Biological Diversity (“CBD”) to list the Mohave Shoulderband snail as an endangered species under the Endangered Species Act, the United States Fish and Wildlife Service (“USFWS”) is required to issue a 12-Month Finding on the species by November 30, 2017. The Company, the USFWS, and the CBD have jointly surveyedfinancial statements for the presence of the snail on and around Soledad Mountain. The Company believes that conservation of the snail can be accomplished without material adjustments to the Mine plan, but if the USFWS ultimately finds that the snail is ‘endangered’ or ‘threatened’ and no agreed conservation plan is established, material adjustments to the Mine plan may be required.three months ended March 31, 2018.
Additional Information
Further information on Golden Queen Mining Co. Ltd. is available on the SEDAR web sitewebsite atwww.sedar.com and on the Company’s web site atwww.goldenqueen.com.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Credit RiskNot applicable.
Credit risk is the risk that the counterparty to a financial instrument will cause a financial loss for the Company by failing to discharge its obligations. To mitigate exposure to credit risk on financial assets the Company has established policies to ensure liquidity of funds and ensure counterparties demonstrate minimum acceptable credit worthiness.
The Company maintains its US Dollar and Canadian Dollar cash in bank accounts with major financial institutions with high credit standings. Cash deposits held in the United States are insured by the Federal Deposit Insurance Corporation (“FDIC”) for up to $250,000 and Canadian Dollar cash deposits held in Canada are insured by the Canada Deposit Insurance Corporation (“CDIC”) for up to C$100,000.
Certain United States and Canadian bank accounts held by the Company exceed these federally insured limits or are uninsured as they relate to US Dollar deposits held in Canadian financial institutions. As of June 30, 2017, the Company’s cash balances held in United States and Canadian financial institutions include $9.5 million, which are not fully insured by the FDIC or CDIC. The Company has not experienced any losses on such accounts and management believes that using major financial institutions with high credit ratings mitigates the credit risk in cash.
Interest Rate Risk
The interest rates received on these balances may fluctuate with changes in economic conditions. Based on the average cash balances during the three and six months ended June 30, 2017, a 1% decrease in interest rates would have reduced the interest income a trivial amount.
Foreign Currency Exchange Risk
Certain purchases of labour are denominated in Canadian dollars. As a result, currency exchange fluctuations may impact the costs of our operations. Specifically, the appreciation of the Canadian dollar against the US dollar may result in an increase in the Canadian operating expenses in US dollar terms. As of June 30, 2017, the Company maintained the majority of its cash balance in US currency.
Commodity Price Risk
The Company’s primary business activity is the development of the open pit, gold and silver, heap leach project on the Property. Decreases in the price of either of these metals from current levels have the potential to negatively impact the future viability of the Mine. A 10% change in the gold spot price would have a trivial impact on the change in the fair value of the derivative contracts held by the Company. The Company may enter into hedging contracts from time to time to protect the cash flows from commodity price volatility.
Item 4. Controls and Procedures.
Disclosure controls and procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report.
The Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the applicable Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s report on internal control over financial reporting
Changes in internalInternal Control
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) during the three and six monthsquarter ended June 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than the Company is in the process of implementinghas implemented a remediation plan to addressand has addressed the deficiencydeficiencies previously noted in the areas of personnel and controls including the engagement ofand has engaged an external consultant to assist in the documentation and review of its internal controls.
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Fraud analysisAnalysis
The Company is committed to preventing fraud and corruption and is developing an anti-fraud culture. To achieve this goal, the Company has committed to the following:
| 1. | Developing and maintaining effective controls to prevent fraud; |
| 2. | Ensuring that if fraud occurs a vigorous and prompt investigation takes place; |
| 3. | Taking appropriate disciplinary and legal actions; |
| 4. | Reviewing systems and procedures to prevent similar frauds; |
| 5. | Investigating whether there has been a failure in supervision and take appropriate disciplinary action if supervisory failures occurred; and |
| 6. | Recording and reporting all discovered cases of fraud. |
The following policies have been developed to support the Company’s goals:
| · | Insider Trading Policy |
| · | Managing Confidential Information Policy |
| · | Whistleblower Policy |
| · | Anti-corruption Policy |
All policies can be viewed in full on the Company’s website atwww.goldenqueen.com
For the three and six months ended June 30, 20172018 and the year ended December 31, 2016,2017, there were no reported instances of fraud.
Part II – Other Information
Item 1. Legal Proceedings
See “The Center for Biodiversity PetitionFromtime to Listtime, we are a party to routine litigation and proceedings that are considered part of the Mojave Shoulderband Snail as an Endangered Species” and “Other Legal Matters” contained in Item 2. Management’s Discussion and Analysisordinary course of Financial Condition and Resultsour business. We are not aware of Operations of this Form 10-Q.any material current, pending, or threatened litigation with respect to the Company.
Item 1A. Risk Factors2. Unregistered Sales of Equity Securities and Use of Proceeds
Golden Queen and its future business, operations and financial condition are subject to various risks and uncertainties due to the nature of its business and the present stage of development of the Mine. Certain of these risks and uncertainties are under the heading “Risk Factors” under Golden Queen’s Form 10-K dated March 15, 2017 which is available on SEDAR atwww.sedar.com, EDGAR atwww.sec.gov and on our website atwww.goldenqueen.com.Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
GQM LLC is the operator of the Mine,Project, which is located in Mojave in Kern County, California. The mine safety disclosures required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K are included in Exhibit 95.1 of this Quarterly Report. There was one lost-time accidentwere no reportable incidents at GQM LLC during the sixthree months ended June 30, 2017.2018.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 9, 20172018
| GOLDEN QUEEN MINING CO. LTD. | |||
| (Registrant) | |||
| By: | /s/ Thomas M. Clay | ||
| Thomas M. Clay | |||
| Principal Executive Officer | |||
| By: | |||
| Guy Le Bel | |||
| Principal Financial Officer | |||
| 34 |