UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2017March 31, 2018
¨ TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from _________ to __________________
000-21777
(Commission File Number)
GOLDEN QUEEN MINING CO. LTD.
(Exact name of registrant as specified in its charter)
British Columbia, Canada | Not Applicable | |
(State or other jurisdiction of incorporation) | (IRS Employer Identification) No.) |
2300 – 1066 West Hastings Street
Vancouver, British Columbia
V6E 3X2 Canada
(Address of principal executive offices)
Issuer’s telephone number, including area code:(778) 373-1557
Former name, former address and former fiscal year, if changed since last report:N/A
Check whether the registrant (1) filed all reports required to be filed by sections 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
Check whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large“large accelerated filer", "accelerated filer", "smallerfiler,” “accelerated filer,” “smaller reporting company"company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:Act.
Large accelerated filer¨ | Accelerated | Non-accelerated filer¨ | Smaller reporting companyx | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Check whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act. Yes¨ Nox
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:As of November 14, 2017,at May 9, 2018, the registrant’s outstanding common stock consisted of 111,148,683 shares.300,101,444 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GOLDEN QUEEN MINING CO. LTD.
Condensed Consolidated Interim Balance Sheets
(amounts expressed in thousands of US dollars - Unaudited)
September 30, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 4,683 | $ | 13,301 | $ | 18,230 | $ | 2,937 | ||||||||
Inventories (Note 5) | 11,952 | 10,941 | ||||||||||||||
Prepaid expenses and other current assets | 344 | 611 | 685 | 699 | ||||||||||||
Inventories (Note 4) | 9,928 | 9,028 | ||||||||||||||
Total current assets | 16,979 | 24,853 | 28,843 | 12,664 | ||||||||||||
Property, plant, equipment and mineral interests (Note 6) | 141,194 | 134,550 | ||||||||||||||
Property, plant, equipment and mineral interests (Note 5) | 141,641 | 141,848 | ||||||||||||||
Advance minimum royalties | 304 | 303 | 304 | 304 | ||||||||||||
Total Assets | $ | 158,477 | $ | 159,706 | $ | 170,788 | $ | 154,816 | ||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable and accrued liabilities | $ | 5,960 | $ | 4,265 | $ | 5,894 | $ | 6,984 | ||||||||
Interest payable | 651 | 296 | ||||||||||||||
Current portion of note payable (Note 9 (ii)) | 9,061 | - | ||||||||||||||
Current portion of loan payable (Note 16) | 6,998 | 5,656 | ||||||||||||||
Derivative liability – Related party warrants (Note 10) | 3,129 | 5,458 | ||||||||||||||
Derivative liability – Warrants (Note 10) | 268 | 972 | ||||||||||||||
Credit facility (Note 12 (v)) | - | 3,000 | ||||||||||||||
Current portion of note payable (Note 12 (ii)) | 4,000 | 7,712 | ||||||||||||||
Current portion of loan payable (Note 6) | 7,709 | 7,629 | ||||||||||||||
Derivative liability – Related party warrants (Note 7) | 303 | 441 | ||||||||||||||
Total current liabilities | 26,067 | 16,647 | 17,906 | 25,766 | ||||||||||||
Note payable (Note 9 (ii)) | 20,096 | 26,347 | ||||||||||||||
Loan payable (Note 16) | 9,398 | 9,494 | ||||||||||||||
Note payable (Note 12 (ii)) | 21,942 | 22,387 | ||||||||||||||
Loan payable (Note 6) | 8,150 | 9,614 | ||||||||||||||
Asset retirement obligation (Note 8) | 1,719 | 1,366 | 2,229 | 1,838 | ||||||||||||
Deferred tax liability | 12,922 | 12,922 | 8,197 | 8,197 | ||||||||||||
Total liabilities | 70,202 | 66,776 | 58,424 | 67,802 | ||||||||||||
Temporary Equity | ||||||||||||||||
Redeemable portion of non-controlling interest (Note 9 (iv)) | 25,621 | 26,219 | ||||||||||||||
Redeemable portion of non-controlling interest (Note 12 (iv)) | 22,756 | 24,214 | ||||||||||||||
Shareholders’ Equity | ||||||||||||||||
Common shares, no par value, unlimited shares authorized (2016 - unlimited); 111,148,683 (2016 – 111,048,683) shares issued and outstanding (Note 7) | 71,126 | 71,067 | ||||||||||||||
Common shares, no par value, unlimited shares authorized (2017 - unlimited); 300,101,444 (2017 – 111,148,683) shares issued and outstanding (Note 9) | 95,494 | 71,126 | ||||||||||||||
Additional paid-in capital | 43,785 | 43,652 | 43,898 | 43,853 | ||||||||||||
Deficit accumulated | (90,687 | ) | (87,335 | ) | (93,917 | ) | (88,500 | ) | ||||||||
Total shareholders’ equity attributable to GQM Ltd. | 24,224 | 27,384 | 45,475 | 26,479 | ||||||||||||
Non-controlling interest (Note 9 (iv)) | 38,430 | 39,327 | ||||||||||||||
Non-controlling interest (Note 12 (iv)) | 44,133 | 36,321 | ||||||||||||||
Total Shareholders’ Equity | 62,654 | 66,711 | 89,608 | 62,800 | ||||||||||||
Total Liabilities, Temporary Equity and Shareholders’ Equity | $ | 158,477 | $ | 159,706 | $ | 170,788 | $ | 154,816 |
Ability to Continue as a
Going Concern (Note 2)
Commitments and Contingencies (Note 12)
Subsequent Events (Note 17)13)
Approved by the Directors:
“Thomas M. Clay” | “Bryan A. Coates” | ||
Thomas M. Clay, Director | Bryan A. Coates, Director |
See Accompanying Notes to Condensed Consolidated Interim Financial Statements
2 | |
GOLDEN QUEEN MINING CO. LTD.
Condensed Consolidated Interim Statements of Income (Loss) and Comprehensive Income (Loss)
(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)
Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues | ||||||||||||||||
Metal Sales | $ | 16,496 | $ | 13,451 | $ | 48,182 | $ | 16,915 | ||||||||
Cost of Sales | ||||||||||||||||
Direct mining costs | (15,404 | ) | (9,111 | ) | (40,333 | ) | (12,674 | ) | ||||||||
Depreciation and depletion (Note 6) | (2,931 | ) | (2,232 | ) | (8,429 | ) | (4,081 | ) | ||||||||
Income (loss) from mine operations | (1,839 | ) | 2,108 | (580 | ) | 160 | ||||||||||
General and administrative expenses (Note 14) | (1,171 | ) | (657 | ) | (3,297 | ) | (3,167 | ) | ||||||||
Operating income (loss) | (3,010 | ) | 1,451 | (3,877 | ) | (3,007 | ) | |||||||||
Other income (expenses) | ||||||||||||||||
Gain (loss) on derivative instruments (Note 10) | 1,139 | 3,944 | 3,033 | (1,952 | ) | |||||||||||
Interest expense (Note 9 (iii)) | (1,295 | ) | (1,814 | ) | (3,592 | ) | (4,369 | ) | ||||||||
Interest income | 14 | 33 | 77 | 116 | ||||||||||||
Other expenses | (72 | ) | (23 | ) | (488 | ) | (45 | ) | ||||||||
Total other income (expenses) | (214 | ) | 2,140 | (970 | ) | (6,250 | ) | |||||||||
Net and comprehensive income (loss) for the period | $ | (3,224 | ) | $ | 3,591 | $ | (4,847 | ) | $ | (9,257 | ) | |||||
Less: Net and comprehensive loss (income) attributable to the non-controlling interest for the period (Note 9 (iv)) | 1,335 | (853 | ) | 1,495 | 961 | |||||||||||
Net and comprehensive income (loss) attributable to Golden Queen Mining Co Ltd. for the period | $ | (1,889 | ) | $ | 2,738 | $ | (3,352 | ) | $ | (8,296 | ) | |||||
Income (loss) per share – basic (Note 15) | $ | (0.02 | ) | $ | 0.03 | $ | (0.03 | ) | $ | (0.08 | ) | |||||
Income (loss) per share – diluted (Note 15) | $ | (0.02 | ) | $ | 0.03 | $ | (0.03 | ) | $ | (0.08 | ) | |||||
Weighted average number of common shares outstanding - basic | 111,148,683 | 108,026,944 | 111,137,694 | 102,657,767 | ||||||||||||
Weighted average number of common shares outstanding - diluted | 111,148,683 | 108,402,626 | 111,137,694 | 102,657,767 |
Three Months Ended March 31, | Three Months Ended March 31, | |||||||
2018 | 2017 | |||||||
Revenues | ||||||||
Metal Sales | $ | 9,585 | $ | 14,804 | ||||
Cost of Sales | ||||||||
Direct mining costs | (13,016 | ) | (11,561 | ) | ||||
Depreciation and depletion (Note 5) | (2,976 | ) | (2,756 | ) | ||||
Accretion expense | (42 | ) | (30 | ) | ||||
Income (loss) from mine operations | (6,449 | ) | 457 | |||||
General and administrative expenses (Note 10) | (1,254 | ) | (1,416 | ) | ||||
Operating loss | (7,703 | ) | (959 | ) | ||||
Other income (expenses) | ||||||||
Gain (loss) on derivative instruments (Note 7) | 138 | (481 | ) | |||||
Finance expense (Notes 12 (iii) and 12 (v))) | (1,533 | ) | (1,047 | ) | ||||
Interest income | 35 | 25 | ||||||
Other expenses | - | (354 | ) | |||||
Net and comprehensive loss for the period | $ | (9,063 | ) | (2,816 | ) | |||
Less: Net and comprehensive loss attributable to the non-controlling interest for the period (Note 12 (iv)) | 3,646 | 390 | ||||||
Net and comprehensive loss attributable to Golden Queen Mining Co Ltd. for the period | $ | (5,417 | ) | $ | (2,426 | ) | ||
Loss per share – basic (Note 11) | $ | (0.03 | ) | $ | (0.02 | ) | ||
Loss per share – diluted (Note 11) | $ | (0.03 | ) | $ | (0.02 | ) | ||
Weighted average number of common shares outstanding - basic | 188,829,263 | 111,080,008 | ||||||
Weighted average number of common shares outstanding - diluted | 188,829,263 | 111,080,008 |
See Accompanying Notes to Condensed Consolidated Interim Financial Statements
3 | |
GOLDEN QUEEN MINING CO. LTD.
Condensed Consolidated Interim Statements of Shareholders’ Equity, Non-controlling Interest and Redeemable Portion of Non-Controlling Interest
(amounts expressed in thousands of US dollars, except shares amounts- Unaudited)amounts)
Common shares | Amount | Additional Paid-in Capital | Deficit Accumulated | Total Shareholders’ Equity attributable to GQM Ltd | Non- controlling Interest | Total Shareholders’ Equity | Redeemable Portion of Non- controlling Interest | Common shares | Amount | Additional Paid-in Capital | Deficit Accumulated | Total Shareholders’ Equity attributable to GQM Ltd | Non- controlling Interest | Total Shareholders’ Equity | Redeemable Portion of Non- controlling Interest | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2015 | 99,928,683 | $ | 62,860 | $ | 43,628 | $ | (79,906 | ) | $ | 26,582 | $ | 40,686 | $ | 67,268 | $ | 27,124 | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares, private placement net of share issuance cost (Note 4) | 11,120,000 | 8,207 | - | - | 8,207 | - | 8,207 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2016 | 111,048,683 | $ | 71,067 | $ | 43,652 | $ | (87,335 | ) | $ | 27,384 | $ | 39,327 | $ | 66,711 | $ | 26,220 | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares (Note 9) | 100,000 | 59 | - | - | 59 | - | 59 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | 11 | - | 11 | - | 11 | - | - | - | 34 | - | 34 | - | 34 | - | ||||||||||||||||||||||||||||||||||||||||||||||||
Net loss for the period | - | - | - | (8,296 | ) | (8,296 | ) | (577 | ) | (8,873 | ) | (384 | ) | - | - | - | (2,426 | ) | (2,426 | ) | (234 | ) | (2,660 | ) | (156 | ) | ||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2016 | 111,048,683 | $ | 71,067 | $ | 43,639 | $ | (88,202 | ) | $ | 26,504 | $ | 40,109 | $ | 66,613 | $ | 26,740 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2017 | �� | 111,148,683 | $ | 71,126 | $ | 43,686 | $ | (89,761 | ) | $ | 25,051 | $ | 39,093 | $ | 64,144 | $ | 26,064 | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2016 | 111,048,683 | $ | 71,067 | $ | 43,652 | $ | (87,335 | ) | $ | 27,384 | $ | 39,327 | $ | 66,711 | $ | 26,220 | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares (Note 7) | 100,000 | 59 | - | - | 59 | - | 59 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2017 | 111,148,683 | $ | 71,126 | $ | 43,853 | $ | (88,500 | ) | $ | 26,479 | $ | 36,321 | $ | 62,800 | $ | 24,214 | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares, net of share issue costs (Note 9) | 188,952,761 | 24,368 | - | - | 24,368 | - | 24,368 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital contribution from non-controlling interest | - | - | - | - | - | 10,000 | 10,000 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | 133 | - | 133 | - | 133 | - | - | - | 45 | - | 45 | - | 45 | - | ||||||||||||||||||||||||||||||||||||||||||||||||
Net loss for the period | - | - | - | (3,352 | ) | (3,352 | ) | (897 | ) | (4,249 | ) | (599 | ) | - | - | - | (5,417 | ) | (5,417 | ) | (2,188 | ) | (7,605 | ) | (1,458 | ) | ||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2017 | 111,148,683 | $ | 71,126 | $ | 43,785 | $ | (90,687 | ) | $ | 24,224 | $ | 38,430 | $ | 62,654 | $ | 25,621 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2018 | 300,101,444 | $ | 95,494 | $ | 43,898 | $ | (93,917 | ) | $ | 45,475 | $ | 44,133 | $ | 89,608 | $ | 22,756 |
See Accompanying Notes to Condensed Consolidated Interim Financial Statements
4 | |
GOLDEN QUEEN MINING CO. LTD.
Condensed Consolidated Interim Statements of Cash Flows
(amounts expressed in thousands of US dollars - Unaudited)
Nine Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Operating Activities | ||||||||||||||||
Net loss for the period | $ | (4,847 | ) | $ | (9,257 | ) | ||||||||||
Net loss for the year | $ | (9,063 | ) | $ | (2,816 | ) | ||||||||||
Adjustment to reconcile net loss to cash used in operating activities: | ||||||||||||||||
Depreciation and depletion | 8,429 | 4,081 | 2,976 | 2,756 | ||||||||||||
Amortization of debt discount and interest accrual | 1,250 | 4,071 | 555 | 286 | ||||||||||||
Accretion expense | 93 | 45 | 42 | 30 | ||||||||||||
Change in fair value of derivative liabilities (Note 10) | (3,033 | ) | 1,952 | |||||||||||||
Change in fair value of derivative liabilities (Note 7) | (138 | ) | 481 | |||||||||||||
Stock based compensation | 133 | 11 | 45 | 34 | ||||||||||||
Unrealized foreign exchange | (48 | ) | (273 | ) | (43 | ) | (5 | ) | ||||||||
Non-cash finder fees | 59 | - | ||||||||||||||
Non-cash finder’s fee | - | 59 | ||||||||||||||
Changes in non-cash working capital items: | ||||||||||||||||
Prepaid expenses & other current assets | 267 | 154 | 14 | (88 | ) | |||||||||||
Inventory | (1,011 | ) | (7,326 | ) | (900 | ) | (873 | ) | ||||||||
Accounts payable & accrued liabilities | 2,390 | 3,454 | (1,595 | ) | 2,301 | |||||||||||
Interest payable | 1,915 | (18 | ) | 713 | 626 | |||||||||||
Cash generated from (used in) operating activities | 5,597 | (3,106 | ) | (7,394 | ) | 2,791 | ||||||||||
Investment activities: | ||||||||||||||||
Investing activities: | ||||||||||||||||
Additions to property, plant, equipment and mineral interests | (9,566 | ) | (11,401 | ) | (2,071 | ) | (5,236 | ) | ||||||||
Release (purchase) of reclamation financial assurance deposit | - | 902 | ||||||||||||||
Cash used in investing activities | (9,566 | ) | (10,499 | ) | (2,071 | ) | (5,236 | ) | ||||||||
Financing activity: | ||||||||||||||||
Issuance of common shares and warrants, net of share issue costs (Note 7) | - | 10,909 | ||||||||||||||
Repayments of loan payable (Note 16) | (4,649 | ) | (3,736 | ) | ||||||||||||
Cash used in financing activities | (4,649 | ) | 7,173 | |||||||||||||
Financing activities: | ||||||||||||||||
Issuance of common shares, net of share issue costs (Note 9) | 24,368 | - | ||||||||||||||
Repayment of credit facility | (3,000 | ) | - | |||||||||||||
Repayments of loan payable (Note 6) | (1,898 | ) | (1,405 | ) | ||||||||||||
Repayments of note payable and accrued interest | (4,712 | ) | - | |||||||||||||
Capital contribution from non-controlling interest | 10,000 | - | ||||||||||||||
Cash generated from (used in) financing activities | 24,758 | (1,405 | ) | |||||||||||||
Net change in cash and cash equivalents | (8,618 | ) | (6.432 | ) | 15,293 | (3,850 | ) | |||||||||
Cash and cash equivalents, beginning balance | 13,301 | 37,587 | 2,937 | 13,301 | ||||||||||||
Cash and cash equivalents, ending balance | $ | 4,683 | $ | 31,155 | $ | 18,230 | $ | 9,451 |
Supplementary Disclosures of Cash Flow Information (Note 11)
Three Months Ended March 31, | Three Months Ended March 31, | |||||||
2018 | 2017 | |||||||
Cash paid during the period for: | ||||||||
Interest on loan payable | $ | 235 | $ | 135 | ||||
Non-cash financing and investing activities: | ||||||||
Asset retirement costs charged to mineral property interests | $ | 349 | $ | 87 | ||||
Mining equipment acquired through issuance of debt | $ | 514 | $ | 2,481 | ||||
Mineral property expenditures included in accounts payable | $ | 165 | $ | 1,524 | ||||
Non-cash finders’ fee | $ | - | $ | 59 | ||||
Non-cash amortization of discount and interest expense | $ | 555 | $ | 286 | ||||
Interest payable converted to principal balance | $ | - | $ | 296 |
See Accompanying Notes to Condensed Consolidated Interim Financial Statements
5 | |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 2016
(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)
1. | Nature of Business |
Golden Queen Mining Co. Ltd. (“Golden Queen”, “GQM Ltd.” or 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 owns 50% of Golden Queen Mining Company, LLC (“GQM LLC”), the operator of the Mine. The remaining 50% is owned by Gauss LLC (“Gauss”).
2. |
The unaudited condensed consolidated interim financial statements of Golden Queen Mining Co Ltd. have been prepared using accounting principles generally accepted in the United States (“US GAAP”) applicable to a going concern.
The Company generated $6.0 million in cash from operating activities during the nine months ended September 30, 2017. The Company had a working capital deficit of $9.1 million at September 30, 2017.
The Company is required to pay the following to the Clay Group on the following dates: $5.4 million of accrued interest and principal on January 1, 2018; $3.1 million of interest and principal on April 1, 2018; $3.0 million of interest and principal on July 1, 2018; $3.0 million of interest and principal on and October 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 reviewed the mine plan in light of the nine months ended September 30, 2017 results and has determined it is unlikely it will receive sufficient distributions from GQM LLC during this fiscal year to service its debt in early 2018. This situation raises substantial doubt about the Company’s ability to continue as a going concern. Consequently, discussions with the Clay Group to restructure the reimbursement schedule have 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 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.
TheThese unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP.GAAP”). The accounting policies followed in preparing these condensed consolidated interim financial statements are those used by the Company as set out in the audited consolidated financial statements for the year ended December 31, 2016.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)2017.
Certain information and note disclosures normally included for annual consolidated financial statements prepared in accordance with US GAAP have been omitted. These unaudited condensed consolidated interim financial statements should be read together with the audited consolidated financial statements of the Company for the year ended December 31, 2016.2017.
In the opinion of management,Management, all adjustments considered necessary (including reclassifications and normal recurring adjustments) to present fairly the financial position, results of operations and cash flows as at September 30, 2017March 31, 2018 and for all periods presented, have been included in these unaudited condensed consolidated interim financial statements. The interim results are not necessarily indicative of results for the full year ending December 31, 2017,2018, or future operating periods. For further information, see the Company’s annual consolidated financial statements, including the accounting policies and notes thereto.
The Company consolidates all entities in which it can vote a majority of the outstanding voting stock. In addition, it consolidates entities which meet the definition of a variable interest entity for which it is the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. We consider special allocations of cash flows and preferences, if any, to determine amounts allocable to non-controlling interests. All intercompany transactions and balances are eliminated on consolidation.
These unaudited condensed consolidated interim financial statements include the accounts of Golden Queen, a limited liability Canadian corporation (Province of British Columbia), its wholly-owned subsidiary, GQM Holdings, a US (State of California) corporation, and GQM LLC, a limited liability company in which Golden Queen has a 50% interest, through GQM Canada’s ownership of GQM Holdings. GQM LLC meets the definition of a Variable Interest Entity (“VIE”).Entity. Golden Queen 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 Company is required to pay the following to the Clay Group on the following dates: $1.7 million of interest and principal on April 1, 2017 (paid); $1.7 million of interest and principal on July 1, 2018; $1.7 million of interest and principal on and October 1, 2018, $1.7 million of interest and principal on January 1, 2019, $3.9 million of interest and principal on April 1, 2019 and $21.7 million of interest and principal on May 21, 2019. Management believes the Company will meet its financial obligations for the 12 months period following the date of these financial statements. However, it is currently unlikely the Company can reimburse the final payment on May 21, 2019. 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 reviewed the mine plan in light of the three months ended March 31, 2018 results and has determined it is unlikely it will receive sufficient distributions from GQM LLC during this fiscal year to service its debt in early 2019. This situation raises substantial doubt about the Company’s ability to continue as a going concern. Consequently, later in 2018, discussions with the Clay Group to restructure the reimbursement of the last debt payment will be initiated. While the Company has been successful in re-negotiating the debt repayment terms with the Clay Group in the past, there can be no assurance that will be achieved going forward.
The Company’s access to the net assets 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.
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GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2018 and 2017
(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)
Basis of Presentation and Going Concern (continued) |
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.
3. | Summary of Accounting Policies and Estimates and Judgements |
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and judgements have been made by Management in several areas including the accounting for the joint venture transaction and determination of the temporary and permanent non-controlling interest, the recoverability of mineral properties interests, royalty obligations, inventory valuation, asset retirement obligations, and derivative liability – warrants. Actual results could differ from those estimates.
Recently AdoptedNew Accounting Pronouncements
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
New Accounting Policies
(i) | In May 2014, ASU 2014-09 was issued related to revenue from contracts with customers. The ASU was further amended in August 2015, March 2016, April 2016, and May 2016 by ASU 2015-14, 2016-08, 2016-10 and 2016- 12. The new standard provides a five-step approach to be applied to all contracts with customers and also requires expanded disclosures about revenue recognition. |
In August 2015, the effective date was deferred to reporting periods, including interim periods, beginning after December 31, 2017, and will be applied retrospectively. Early adoption is not permitted.
We are currently assessing the impact of implementation of ASU No. 2014-09, however, management does not believe it will change the point of revenue recognition or amount 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 ourThe Company has completed its assessment of the impact of ASU No. 201-09the new revenue standard on ourthe Company's consolidated financial statements and disclosures. The Company has completed the review of all contracts and determined that the adoption of this guidance will not materially impact amounts and timing of revenue recognition during 2017 and assessrecognition. The Company's revenue arises from contracts with customers in which the additional disclosure requirementsdelivery of doré is the single performance obligation under the guidance.customer contract. Product pricing is determined at the point when contract is created by reference to active and freely traded commodity markets, for example, the London Bullion Market for both gold and silver. The Company enters into the contracts with parties who have an ability and intention to meet its obligations with respect to consideration payment, thus ensuring the collectability of such consideration. These contracts are not modified and contain no variable consideration.
(ii) | In February 2016, FASB issued ASC 842 that requires lessees to recognize lease assets and corresponding lease liabilities on the balance sheet for all leases with terms of more than 12 months. The update, which supersedes existing lease guidance, will continue to classify leases as either finance or operating, with the classification determining the pattern of expense recognition in the income statement. |
The ASU will be effective for annual and interim periods beginning January 1, 2019, with early adoption permitted, and is applicable on a modified retrospective basis with various optional practical expedients. The Company is assessing the impact of this standard.
(iii) | In August 2016, ASC guidance was issued to amend the classification of certain cash receipts and cash payments in the statement of cash flows. The new guidance is effective for the Company’s fiscal year and interim periods beginning after December |
Inventories |
Inventories consist primarily of production from the Company’s operation, in varying stages of the production process and supplies and spare parts, all of which are presented at the lower of cost or net realizable value. For the three months ended March 31, 2018, the Company directly expensed $4.5 million of costs to ensure inventory was recognized at net realizable value. Inventories of the Company are comprised of:
September 30, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||
Stockpile inventory | $ | 50 | $ | 318 | $ | 251 | $ | 201 | ||||||||
In-process inventory | 9,425 | 9,491 | 7,123 | 6,495 | ||||||||||||
Dore inventory | 414 | 76 | 461 | 320 | ||||||||||||
Supplies and spare parts | 2,063 | 1,056 | 2,093 | 2,012 | ||||||||||||
$ | 11,952 | $ | 10,941 | $ | 9,928 | $ | 9,028 |
The amounts above are net of allowances of $804 (2016 - $nil), the provision of which has been recognized within cost of sales.
7 | |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 2016
(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)
Property, Plant, Equipment and Mineral Interests |
Land | Mineral property interest and claims | Mine development | Machinery and equipment | Buildings and infrastructure | Construction in progress | Interest capitalized | Total | |||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||
At December 31, 2016 | $ | 3,893 | $ | 4,241 | $ | 42,033 | $ | 60,201 | $ | 28,604 | $ | 543 | $ | 5,886 | $ | 145,401 | ||||||||||||||||
Additions | 98 | 817 | 354 | 17 | - | 19,597 | - | 20,883 | ||||||||||||||||||||||||
Transfers | - | 222 | 8,625 | 11,239 | - | (20,086 | ) | - | - | |||||||||||||||||||||||
Disposals | (22 | ) | - | (239 | ) | (1,391 | ) | (207 | ) | - | - | (1,859 | ) | |||||||||||||||||||
At December 31, 2017 | $ | 3,969 | $ | 5,280 | $ | 50,773 | $ | 70,066 | $ | 28,397 | $ | 54 | $ | 5,886 | $ | 164,425 | ||||||||||||||||
Additions | 39 | - | 350 | - | - | 2,380 | - | 2,769 | ||||||||||||||||||||||||
Transfers | - | - | - | 1,190 | - | (1,190 | ) | - | - | |||||||||||||||||||||||
Disposals | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
At March 31, 2018 | $ | 4,008 | $ | 5,280 | $ | 51,123 | $ | 71,256 | $ | 28,397 | $ | 1,244 | $ | 5,886 | $ | 167,194 | ||||||||||||||||
Accumulated depreciation and depletion | ||||||||||||||||||||||||||||||||
At December 31, 2016 | $ | - | $ | 67 | $ | 971 | $ | 7,129 | $ | 2,679 | $ | - | $ | 5 | $ | 10,851 | ||||||||||||||||
Additions | - | 261 | 2,444 | 6,489 | 2,358 | - | 466 | 12,018 | ||||||||||||||||||||||||
Disposals | - | - | - | (265 | ) | (27 | ) | - | - | (292 | ) | |||||||||||||||||||||
At December 31, 2017 | $ | - | $ | 328 | $ | 3,415 | $ | 13,353 | $ | 5,010 | $ | - | $ | 471 | $ | 22,577 | ||||||||||||||||
Additions | - | 42 | 407 | 1,847 | 582 | - | 98 | 2,976 | ||||||||||||||||||||||||
Disposals | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
At March 31, 2018 | $ | - | $ | 370 | $ | 3,822 | $ | 15,200 | $ | 5,592 | $ | - | $ | 569 | $ | 25,553 | ||||||||||||||||
Carrying values | ||||||||||||||||||||||||||||||||
At December 31, 2017 | $ | 3,969 | $ | 4,952 | $ | 47,358 | $ | 56,713 | $ | 23,387 | $ | 54 | $ | 5,415 | $ | 141,848 | ||||||||||||||||
At March 31, 2018 | $ | 4,008 | $ | 4,910 | $ | 47,301 | $ | 56,056 | $ | 22,805 | $ | 1,244 | $ | 5,317 | $ | 141,641 |
Property, plant
6. | Loan Payable |
As at March 31, 2018 and December 31, 2017, equipment and mineral interests,financing balances are depreciated and depleted using either the units-of-production or straight-line method over the shorteras follows:
March 31, 2018 | December 31, 2017 | |||||||
Balance, beginning of the year | $ | 17,243 | $ | 15,150 | ||||
Additions | 654 | 10,727 | ||||||
Principal repayments | (1,898 | ) | (6,192 | ) | ||||
Down payments and taxes | (140 | ) | (1,839 | ) | ||||
Settlements | - | (603 | ) | |||||
Balance, end of the year | $ | 15,859 | $ | 17,243 | ||||
Current portion | $ | 7,709 | $ | 7,629 | ||||
Non-current portion | $ | 8,150 | $ | 9,614 |
The terms of the estimated useful lifeequipment financing agreements are as follows:
March 31, 2018 | December 31, 2017 | |||||||
Total acquisition costs | $ | 37,690 | $ | 35,692 | ||||
Interest rates | 0.00% ~ 4.50% | 0.00% ~ 4.50% | ||||||
Monthly payments | $ | 5 ~ 74 | $ | 5 ~ 74 | ||||
Average remaining life (years) | 1.91 | 2.13 |
For the three months ended March 31, 2018, the Company made total down payments of $140 (December 31, 2017– $1,839). The down payments consist of the asset orsales tax on the expected lifeassets and a 10% payment of mine. Assets under construction in progressthe pre-tax purchase price. All of the loan agreements are recorded at costfor a term of four years, except two which are for three years, and re-allocated to its corresponding category when they become available for use.are secured by the underlying asset.
Land | Mineral property interest and claims | Mine development | Machinery and equipment | Buildings and infrastructure | Construction in progress | Interest capitalized | Total | |||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||
At December 31, 2015 | $ | 110 | $ | 4,459 | $ | 84,798 | $ | 28,085 | $ | 8,565 | $ | - | $ | - | $ | 126,017 | ||||||||||||||||
Additions | 3,777 | 9,391 | 542 | 5,674 | 19,384 | |||||||||||||||||||||||||||
Transfers | 6 | (6 | ) | (42,765 | ) | 32,117 | 10,648 | - | - | - | ||||||||||||||||||||||
Disposals | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
At December 31, 2016 | $ | 3,893 | $ | 4,453 | $ | 42,033 | $ | 60,202 | $ | 28,604 | $ | 542 | $ | 5,674 | $ | 145,401 | ||||||||||||||||
Additions | 69 | 547 | 8,511 | 8,051 | - | 8,488 | - | 25,666 | ||||||||||||||||||||||||
Transfers | - | (58 | ) | - | - | (36 | ) | (8,867 | ) | - | (8,961 | ) | ||||||||||||||||||||
Disposals | (23 | ) | - | - | (1,344 | ) | (171 | ) | - | - | (1,538 | ) | ||||||||||||||||||||
At September 30, 2017 | $ | 3,939 | $ | 4,942 | $ | 50,544 | $ | 66,909 | $ | 28,397 | $ | 163 | $ | 5,674 | $ | 160,568 | ||||||||||||||||
Accumulated depreciation and depletion | ||||||||||||||||||||||||||||||||
At December 31, 2015 | $ | - | $ | - | $ | 654 | $ | 1,462 | $ | 350 | $ | - | $ | - | $ | 2,466 | ||||||||||||||||
Additions | - | 72 | 317 | 5,666 | 2,330 | - | - | 8,385 | ||||||||||||||||||||||||
Disposals | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
At December 31, 2016 | $ | - | $ | 72 | $ | 971 | $ | 7,128 | $ | 2,680 | $ | - | $ | - | $ | 10,851 | ||||||||||||||||
Additions | - | 211 | 1,805 | 4,676 | 1,765 | - | 348 | 8,779 | ||||||||||||||||||||||||
Disposals | - | - | - | (256 | ) | (26 | ) | - | - | (282 | ) | |||||||||||||||||||||
At September 30, 2017 | $ | - | $ | 283 | $ | 2,776 | $ | 11,548 | $ | 4,419 | $ | - | $ | 348 | $ | 19,374 | ||||||||||||||||
Carrying values | ||||||||||||||||||||||||||||||||
At December 31, 2016 | $ | 3,893 | $ | 4,381 | $ | 41,062 | $ | 53,074 | $ | 25,924 | $ | 542 | $ | 5,674 | $ | 134,550 | ||||||||||||||||
At September 30, 2017 | $ | 3,939 | $ | 4,659 | $ | 47,768 | $ | 55,361 | $ | 23,978 | $ | 163 | $ | 5,326 | $ | 141,194 |
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GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2018 and 2017
(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)
6. | Loan Payable (continued) |
DuringThe following table outlines the nine months ended September 30, 2017,principal payments to be made for each of the remaining years:
Years | Principal Payments | |||
2019 | $ | 7,709 | ||
2020 | 4,748 | |||
2021 | 2,523 | |||
2022 | 879 | |||
Total | $ | 15,859 |
7. | Derivative Liabilities |
Share Purchase Warrants – Clay loans (Related Party (see Note 12 (ii))
On June 8, 2015, the Company acquired 4 piecesissued 10,000,000 share purchase warrants to the Clay Group (the “June 2015 Warrants”) in connection with the June 2015 Loan. On February 22, 2018, the Company completed a rights offering at a share price lower than the original exercise price of mining equipment (2016 $0.95 of the June 2015 Warrants. As per an anti-dilution provision included in the June 2015 Loan agreement, the exercise price of the June 2015 Warrants was revised to $0.7831 on the rights offering completion date. The expiry date of June 8, 2020 of the June 2015 Warrants remains unchanged.
On November 18, 2016, the Company issued 8,000,000 share purchase warrants to the Clay Group (the “November 2016 Warrants”) in connection with the November 2016 Loan. On February 22, 2018, the Company completed a rights offering at a share price lower than the original exercise price of $0.85 of the November 2016 Warrants. As per an anti-dilution provision included in the November 2016 Loan agreement, the exercise price of the November 2016 Warrants was revised to $0.6650 on the rights offering completion date. The expiry date of November 18, 2021 of the November 2016 Warrants remains unchanged.
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 Clay Group share purchase warrants as at March 31, 2018 is $303 (December 31, 2017– 1) from Komatsu through financing agreements $441). The derivative liabilities were calculated using the binomial and disposedthe Black-Scholes pricing valuation models with the following assumptions:
Warrants related to June 2015 Loan | March 31, 2018 | December 31, 2017 | ||||||
Risk-free interest rate | 1.88 | % | 1.73 | % | ||||
Expected life of derivative liability | 2.19 years | 2.44 years | ||||||
Expected volatility | 69.63 | % | 78.59 | % | ||||
Dividend rate | 0.00 | % | 0.00 | % |
Warrants related to November 2016 Loan | March 31, 2018 | December 31, 2017 | ||||||
Risk-free interest rate | 1.88 | % | 1.73 | % | ||||
Expected life of derivative liability | 3.65 years | 3.89 years | ||||||
Expected volatility | 75.16 | % | 75.69 | % | ||||
Dividend rate | 0.00 | % | 0.00 | % |
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GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2018 and 2017
(amounts expressed in thousands of 2 pieces of mining equipment (2016 – nil). See Note 16 for further details.US dollars, except shares amounts - Unaudited)
7. | Derivative Liabilities (continued) |
Share Purchase Warrants – Clay loans (Related Party) (continued)
The change in the derivative share purchase warrants is as follows:
March 31, 2018 | December 31, 2017 | |||||||
Balance, beginning of the period | $ | 439 | $ | 5,458 | ||||
Change in fair value | (137 | ) | (5,019 | ) | ||||
Balance, end of the period | $ | 302 | $ | 439 |
Share Purchase Warrants
On July 25, 2016, the Company issued a total of 6,317,700 share purchase warrants with an exercise price of C$2.00 and an expiry date of July 25, 2019. As at March 31, 2018, the Company re-measured the share purchase warrants and determined the fair value of the derivative liability to be $1.
8. | Asset Retirement Obligations |
Reclamation Financial Assurance
The Company is required to provide the Bureau of Land Management, the State Office of Mine Reclamation and Kern County with a revised reclamation cost estimate annually. The financial assurance is adjusted once the cost estimate is approved.
This estimate, once approved by state and county authorities, forms the basis of reclamation financial assurance. The reclamation assurance provided as at March 31, 2018 was $1,500 (December 31, 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 pads, the overflow pond, and the solution collection channel. The reclamation financial assurance estimate as at March 31, 2018, is $2,450 (December 31, 2017– $1,869).
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GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2018 and 2017
(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)
8. | Asset Retirement Obligations (continued) |
Reclamation Financial Assurance (continued)
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 Project’s waste management units as required by the Regional Board. The reclamation financial assurance estimate as at March 31, 2018 is $278 (December 31, 2017– $278).
The Company entered into $4,228 (2017–$3,612) in surety bond agreements in order to release its reclamation deposits and posted a portion of the financial assurance due in 2017. The Company pays a yearly premium of $90 (2017– $90). Golden Queen Ltd. has provided a corporate guarantee on the surety bonds.
Asset Retirement Obligation
The total asset retirement obligation as at March 31, 2018, was $2,229 (December 31, 2017– $1,838).
The Company estimated its asset retirement obligations based on its understanding of the requirements to reclaim and remediate its property based on its activities to date. As at March 31, 2018, the Company estimates the cash outflow related to these reclamation activities will be 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 8.34% and an inflation rate of 2.41%.
The following is a summary of asset retirement obligations:
March 31, 2018 | December 31, 2017 | |||||||
Balance, beginning of the period | $ | 1,838 | $ | 1,366 | ||||
Accretion | 42 | 126 | ||||||
Changes in cash flow estimates | 349 | 346 | ||||||
Balance, end of the period | $ | 2,229 | $ | 1,838 |
9. | Share Capital |
The Company’s common shares outstanding are no par value, voting shares with no preferences or rights attached to them.
Common shares – 2016
In July 2016,On January 17, 2017, the Company completedissued 100,000 shares for a financingtotal of $59 as finder fees which were recognized in general and administrative expenses in connection with the declaration of commercial production in December 2016.
On February 22, 2018, the Company closed a rights offering and issued 188,952,761 shares for total gross proceeds of $12.2 million (C$16.1 million) consisting of 11,120,000 units at a price of $1.10 (C$1.45) per unit. Each unit consisted of one common share of the Company and one-half of one common share purchase warrant. Each whole warrant entitles the holder to acquire one additional common share of the Company at a price of C$2.00 per common share until July 25, 2019.The aggregate fair value of the common share purchase warrants at the time of issuance was $2.4 million, which was recorded as a derivative liability and the Company allocated the remaining proceeds of $9.8 million to the common shares (See Note 10).
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
$25,036. The Company also issued 757,700 commonpaid associated fees of $668 which were classified as share purchase warrants to brokers with the same terms as the common share purchase warrants issued with the financing units. The aggregate fair value of the common share purchase warrants issued to the brokers at the time of issuance was $0.3 million which was recorded as a derivative liability (See Note 10).
In addition, the Company incurred cash share issue costs totalling $1.3 million, which consisted of legal fees, commission and other direct financing costs.
Stock options
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 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 (“TSX”) for the five (5) 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 (5) 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”).
11 | P a g e |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2018 and 2017
(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)
9. | Share Capital (continued) |
Stock options (continued)
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. A total of 1,395,002 (December 31, 2016 – 1,555,000) common shares were issuable pursuant to such stock options as at September 30, 2017.
The Company has elected to use the Black-Scholes option pricing model to determine the fair value of stock options granted. The compensation expense is amortized on a straight-line basis over the requisite service period, which approximates the vesting period.
The following is a summary of stock option activity during the ninethree months ended September 30, 2017 and 2016:March 31, 2018:
Shares | Weighted Average Exercise Price per Share | |||||||
Options outstanding, December 31, 2015 | 1,070,000 | $ | 0.94 | |||||
Options granted | 485,000 | $ | 0.66 | |||||
Options outstanding, December 31, 2016 | 1,555,000 | $ | 0.85 | |||||
Options granted | 400,002 | $ | 0.65 | |||||
Options forfeited | (166,667 | ) | $ | 0.64 | ||||
Options expired | (393,333 | ) | $ | 1.10 | ||||
Options outstanding, September 30, 2017 | 1,395,002 | $ | 0.75 |
On March 20, 2017, the Company granted 400,002 options to the Company’s Chief Financial Officer (“CFO”) which are exercisable at a price of $0.65 for a period of five years from the date of grant. 133,334 options vest on March 20, 2018, 133,334 options vest on March 20, 2019 and 133,334 options on March 20, 2020.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
Stock options (continued)
Shares | Weighted Average Exercise Price per Share | |||||||
Options outstanding, December 31, 2016 | 1,555,000 | $ | 0.85 | |||||
Options granted | 1,605,001 | $ | 0.38 | |||||
Options forfeited | (166,667 | ) | $ | 0.64 | ||||
Options expired | (393,333 | ) | $ | 1.13 | ||||
Options outstanding, December 31, 2017 and March 31, 2018 | 2,600,001 | $ | 0.54 |
On March 14, 2017, the former CFO of the Company resigned. 146,667 stock options were forfeited on this date as they did not meet the vesting conditions. Accordingly, the share-based compensation associated with the unvested stock options was reversed. The expiry date of 393,333 stock options that had vested was modified to June 14, 2017 pursuant to the terms of the employment agreement.
These stock options were not exercised, thus expired during the nine monthsyear ended September 30,December 31, 2017.
On March 20, 2017, the Company granted 400,002 options to the Company’s Chief Financial Officer (“CFO”) which are exercisable at a price of $0.65 for a period of five years from the date of grant. 133,334 options vest on March 20, 2018, 133,334 options vest on March 20, 2019 and 133,334 options on March 20, 2020.
The fair value of stock options granted as above was calculated using the following weighted average assumptions:
2017 | 2016 | |||||||
Expected life (years) | 5.00 | 4.92 | ||||||
Interest rate | 1.18 | % | 1.00 | % | ||||
Volatility | 77.29 | % | 81.27 | % | ||||
Dividend yield | 0.00 | % | 0.00 | % |
2017 | ||||
Expected life (years) | 5.00 | |||
Interest rate | 1.18% ~ 1.70 | % | ||
Volatility | 77.29% ~ 79.17 | % | ||
Dividend yield | 0.00 | % |
During the three and nine months ended September 30, 2017,March 31, 2018, the Company recognized $0.05 million and $0.1 million (three and nine months ended September 30, 2016 - $0.01 million)$45 (2017– $34) 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 at September 30, 2017:
Expiry Date | Number Outstanding | Number Exercisable | Remaining Contractual Life (years) | Weighted Average Exercise Price | ||||||||||||
June 3, 2018 | 50,000 | 50,000 | 0.67 | $ | 1.16 | |||||||||||
September 3, 2018 | 150,000 | 150,000 | 0.93 | $ | 1.59 | |||||||||||
September 8, 2020 | 430,000 | 430,000 | 2.94 | $ | 0.58 | |||||||||||
November 30, 2021 | 365,000 | - | 4.17 | $ | 0.66 | |||||||||||
March 20, 2022 | 400,002 | - | 4.47 | $ | 0.65 | |||||||||||
Balance, September 30, 2017 | 1,395,002 | 630,000 | 3.40 | $ | 0.75 |
As at September 30, 2017, the aggregate intrinsic value of the outstanding exercisable options was $nil (December, 31, 2016 - $0.4 million).
Warrants
The following is a summary of common share purchase warrants activity:
September 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 |
12 | |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 2016
(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)
Share Capital (continued) |
WarrantsStock options (continued)
The following table summarizes information about stock options outstanding and exercisable as at March 31, 2018:
Expiry Date | Number Outstanding | Number Exercisable | Remaining Contractual Life (years) | Weighted Average Exercise Price | ||||||||||||
June 3, 2018 | 50,000 | 50,000 | 0.18 | $ | 1.16 | |||||||||||
September 3, 2018 | 150,000 | 150,000 | 0.43 | $ | 1.59 | |||||||||||
September 8, 2020 | 430,000 | 430,000 | 2.44 | $ | 0.58 | |||||||||||
November 30, 2021 | 365,000 | 121,666 | 3.67 | $ | 0.66 | |||||||||||
March 20, 2022 | 400,002 | 133,334 | 3.97 | $ | 0.65 | |||||||||||
October 20, 2022 | 1,204,999 | - | 4.56 | $ | 0.29 | |||||||||||
Balance, March 31, 2018 | 2,600,001 | 885,000 | 3.67 | $ | 0.54 |
As at March 31, 2018, the aggregate intrinsic value of the outstanding exercisable options was $nil (December, 31, 2017– $nil).
Warrants
As at March 31, 2018, 24,317,700 warrants were outstanding (December 31, 2017 – 24,317,700).
The following table summarizes information about share purchase warrants outstanding and exercisable at September 30, 2017:outstanding:
Expiry Date | Number Outstanding | Remaining Contractual Life (years) | Exercise Price | |||||||||
June 8, 2020(1) | 10,000,000 | 2.19 | $ | 0.7831 | ||||||||
July 25, 2019 | 6,317,700 | 1.32 | C$ | 2.0000 | ||||||||
November 18, 2021(1) | 8,000,000 | 3.64 | $ | 0.6650 | ||||||||
Balance, March 31, 2018 | 24,317,700 | 2.44 |
(1) | Non-tradable share purchase warrants. |
Expiry Date | Number Outstanding | Remaining Contractual Life (periods) | Exercise Price | |||||||||
June 8, 2020 | 10,000,000 | 2.69 | $ | 0.95 | ||||||||
July 25, 2019 | 6,317,700 | 1.82 | C$ | 2.00 | ||||||||
November 18, 2021 | 8,000,000 | 4.15 | $ | 0.85 |
Asset Retirement ObligationGeneral 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 March 31, | Three Months Ended March 31, | |||||||
2018 | 2017 | |||||||
Audit, legal and professional fees | $ | 240 | $ | 288 | ||||
Salaries and benefits and director fees | 503 | 560 | ||||||
Regulatory fees and licenses | 79 | 53 | ||||||
Insurance | 139 | 133 | ||||||
Corporate administration | 293 | 382 | ||||||
$ | 1,254 | $ | 1,416 |
The total asset retirement obligation as of September 30, 2017, was $1.7 million (December 31, 2016 - $1.4 million).
The Company estimated its asset retirement obligation based on its requirements to reclaim and remediate its property based on its activities to date. As at September 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:
September 30, 2017 | December 31, 2016 | |||||||
Balance, beginning of the period | $ | 1,366 | $ | 978 | ||||
Accretion | 92 | 90 | ||||||
Changes in cash flow estimates | 261 | 298 | ||||||
Balance, end of the period | $ | 1,719 | $ | 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 September 30, 2017 is $1.5 million (December 31, 2016 - $1.5 million).
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 heap leach pad, the overflow pond, and the solution collection channel. The reclamation financial assurance estimate as of September 30, 2017 is $1.2 million (December 31, 2016 - $1.2 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 as of September 30, 2017, is $0.3 million (December 31, 2016 - $0.3 million).
13 | |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 2016
(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)
Asset Retirement Obligation (continued)
Three Months Ended March 31, | Three Months Ended March 31, | |||||||
2018 | 2017 | |||||||
Numerator: | ||||||||
Net loss attributable to the shareholders of the Company - numerator for basic and diluted loss per share | $ | (6,050 | ) | $ | (2,426 | ) | ||
Denominator: | ||||||||
Weighted average number of common shares outstanding - basic and diluted | 188,829,263 | 111,080,008 | ||||||
Loss per share – basic and diluted | $ | (0.03 | ) | $ | (0.02 | ) |
During 2016,Weighted average number of shares for the Company entered into $3.0 million in surety bond agreements to maintain the necessary financial assurance as required by the relevant regulatory bodies, as described in the paragraphs above,three months ended March 31, 2018 excludes 2,600,001 options (December 31, 2017– 2,600,001) and 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).24,317,700 warrants (December 31, 2017 – 24,317,700) that were antidilutive.
Related Party Transactions |
Except as noted elsewhere in these condensed consolidated interim financial statements, related party transactions are disclosed as follows:
(i) | Compensation of Key Management |
DuringFor the three and nine months ended September 30, 2017,March 31, 2018, the Company paid a total of $0.03 million and $0.09 million (three and ninerecognized $195 (for the three months ended September 30, 2016 - $0.02 millionMarch 31, 2017– $218) salaries and $0.08 million respectively), respectively,fees for Officers and Directors.
As at March 31, 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 March 31,2018, $835 (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. 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”).
On December 31, 2014, the Company entered into a loan (the “December 2014 Loan”) with the Clay Group for $12.5 million, due on July 1, 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”). On November 18, 2016, the Company repaid $12.2 million of the June 2015 Loan and accrued interest with cash on hand and 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 November 2016 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. Under terms of the November 2016 loan, at the Company’s option, the payment of the first three quarterly interest payments due have been deferred to January 1, 2018. On November 10, 2017, the Company amended the terms of the November 2016 Loan (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. The common share purchase warrants have an exercise price of $0.85. The
On November 10, 2017, the Company also incurredand 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 financing fee to secure the loan in the amount of $0.9 million, all of which was paid on November 18, 2016.debt modification.
14 | |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 2016
(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)
Related Party Transactions (continued) |
(ii) | Note Payable (continued) |
The following table below summarizes the activity on the November 2016 Loan:notes payable:
September 30, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||
Balance, beginning of the period | $ | 26,347 | $ | 36,053 | $ | 30,099 | $ | 26,347 | ||||||||
Interest payable transferred to principal balance | 1,560 | 2,977 | - | 2,212 | ||||||||||||
Accretion of discount on loans | 1,250 | 1,996 | 490 | 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 | 65 | - | ||||||||||||||
Repayment of loans and interest | - | (10,659 | ) | (4,712 | ) | - | ||||||||||
Balance, end of the period | $ | 29,157 | $ | 26,347 | $ | 25,942 | $ | 30,099 | ||||||||
Current portion | $ | 9,061 | $ | - | $ | 4,000 | $ | 7,712 | ||||||||
Non-current portion | $ | 20,096 | $ | 26,347 | $ | 21,942 | $ | 22,387 |
(iii) | Amortization of Discounts and Interest Expense |
The following table summarizes the amortization of discounts and interest on loan:
Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Accretion of the November 2016 Loan discount | $ | 510 | $ | - | $ | 1,250 | $ | - | ||||||||
Interest expense related to the November 2016 Loan | 642 | - | 1,914 | - | ||||||||||||
Interest expense related to Komatsu financial loans(1) | 143 | 144 | 428 | 464 | ||||||||||||
Accretion of the June 2015 Loan discount | - | 621 | - | 1,853 | ||||||||||||
Interest expense related to the June 2015 Loan | - | 1,050 | - | 3,057 | ||||||||||||
Accretion of discount and interest on loan | $ | 1,295 | $ | 1,815 | $ | 3,592 | $ | 5,374 |
Three Months Ended March 31, | Three Months Ended March 31, | |||||||
2018 | 2017 | |||||||
Accretion of the November 2017 Loan discount | $ | 490 | $ | 286 | ||||
Accretion of capitalized financing and legal fees | 65 | - | ||||||
Interest expense related to the November 2017 Loan | 713 | 626 | ||||||
Closing and commitment fees related to the Credit Facility | 30 | - | ||||||
Interest expense related to Komatsu financial loans(1) | 235 | 135 | ||||||
Accretion of discount and interest on loan | $ | 1,533 | $ | 1,047 |
(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. |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
(iv) | Joint Venture Transaction |
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 3 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 sold. |
The net assets of GQM LLC as of September 30, 2017,at March 31, 2018 and December 31, 20162017 are as follows:
March 31, 2018 | December 31, 2017 | |||||||
Assets, GQM LLC | $ | 156,998 | $ | 149,095 | ||||
Liabilities, GQM LLC | (23,221 | ) | (28,024 | ) | ||||
Net assets, GQM LLC | $ | 133,777 | $ | 121,071 |
September 30, 2017 | December 31, 2016 | |||||||
Assets, GQM LLC | $ | 152,193 | $ | 151,802 | ||||
Liabilities, GQM LLC | (24,092 | ) | (20,710 | ) | ||||
Net assets, GQM LLC | $ | 128,101 | $ | 131,092 |
15 | P a g e |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2018 and 2017
(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)
12. | Related Party Transactions (continued) |
(iv) | Joint Venture Transaction (continued) |
Included in the assets above, is $3.8 million$9,622 (December 31, 2016 - $11.1 million)2017– $2,606) in cash held as at September 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 Golden Queen except for $2.2 million$2,203 for 2two mining drill loans and $3.0 million$4,228 in surety bond agreements.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
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 September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | |||||||||||||||||||
Net and comprehensive income (loss) in GQM LLC | $ | (2,674 | ) | $ | 1,706 | $ | (2,991 | ) | $ | (1,922 | ) | |||||||||||||
Net and comprehensive loss in GQM LLC | $ | (7,294 | ) | $ | (779 | ) | ||||||||||||||||||
Non-controlling interest percentage | 50 | % | 50 | % | 50 | % | 50 | % | 50 | % | 50 | % | ||||||||||||
Net and comprehensive loss attributable to non-controlling interest | $ | (1,335 | ) | $ | 853 | $ | (1,495 | ) | $ | (961 | ) | $ | (3,646 | ) | $ | (390 | ) | |||||||
Net and comprehensive loss attributable to permanent non-controlling interest | $ | (801 | ) | $ | 512 | $ | (897 | ) | $ | (577 | ) | $ | (2,188 | ) | $ | (234 | ) | |||||||
Net and comprehensive loss attributable to temporary non-controlling interest | $ | (534 | ) | $ | 341 | $ | (598 | ) | $ | (384 | ) | $ | (1,458 | ) | $ | (156 | ) |
Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||
Carrying value of non-controlling interest, December 31, 2016 | $ | 39,327 | $ | 26,219 | ||||
Net and comprehensive loss for the period | (897 | ) | (598 | ) | ||||
Carrying value of non-controlling interest, September 30, 2017 | $ | 38,430 | $ | 25,621 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
Permanent Non-Controlling Interest | Temporary Non-Controlling Interest | |||||||
Carrying value of non-controlling interest, December 31, 2016 | $ | 39,326 | $ | 26,219 | ||||
Net and comprehensive loss for the year | (3,005 | ) | (2,005 | ) | ||||
Carrying value of non-controlling interest, December 31, 2017 | $ | 36,321 | $ | 24,214 | ||||
Capital contribution | 10,000 | - | ||||||
Net and comprehensive loss for the period | (2,188 | ) | (1,458 | ) | ||||
Carrying value of non-controlling interest, March 31, 2018 | $ | 44,133 | $ | 22,756 |
(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,subject to a commitment fee of 1% per annum. For the three months ended March 31, 2018, and bears a 12% simple annual interest. GQM LLC paid a closing feecommitment fees of $0.1 million which was classified as prepaid expenses and other current assets. $0.02 million and $0.04 million of the closing fee was amortized during the three and nine months ended September 30, 2017, respectively.$30 (2017 – $nil). As at September 30,March 31, 2018, GQM LLC has drawn $nil (December 31, 2017 no amounts had been drawn under this facility.– $3,000) from the Credit Facility.
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 September 30, 2017 is $3.1 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 | September 30, 2017 | December 31, 2016 | ||||||
Risk-free interest rate | 1.58 | % | 0.84 | % | ||||
Expected life of derivative liability | 2.69 years | 3.44 years | ||||||
Expected volatility | 76.50 | % | 78.79 | % | ||||
Dividend rate | 0.00 | % | 0.00 | % |
Warrants related to November 2016 Loan | September 30, 2017 | December 31, 2016 | ||||||
Risk-free interest rate | 1.58 | % | 1.11 | % | ||||
Expected life of derivative liability | 4.15 years | 4.89 years | ||||||
Expected volatility | 75.21 | % | 77.21 | % | ||||
Dividend rate | 0.00 | % | 0.00 | % |
The change in the derivative share purchase warrants is as follows:
September 30, 2017 | December 31, 2016 | |||||||
Balance, beginning of the period | $ | 5,458 | $ | 2,498 | ||||
Fair value at inception | - | 3,090 | ||||||
Change in fair value | (2,329 | ) | (130 | ) | ||||
Balance, end of the period | $ | 3,129 | $ | 5,458 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 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 and expiry date of July 25, 2019. 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 September 30, 2017, the Company had re-measured the share purchase warrants and determined the fair value of the derivative liability to be $0.3 million (December 31, 2016 - $1.0 million) using the Black-Scholes option pricing model with the following assumptions:
September 30, 2017 | December 31, 2016 | |||||||
Risk-free interest rate | 1.52 | % | 0.84 | % | ||||
Expected life of derivative liability in years | 1.82 years | 2.56 years | ||||||
Expected volatility | 74.89 | % | 79.40 | % | ||||
Dividend rate | 0.00 | % | 0.00 | % |
The change in the derivative share purchase warrants is as follows:
September 30, 2017 | December 31, 2016 | |||||||
Fair value of warrants issued | $ | 972 | $ | 2,701 | ||||
Change in fair value of warrants | (704 | ) | (1,729 | ) | ||||
Balance, end of the period | $ | 268 | $ | 972 |
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||
2017 | 2016 | |||||||
Cash paid during the period for: | ||||||||
Interest on loan payable | $ | 428 | $ | 468 | ||||
Non-cash financing and investing activities: | ||||||||
Asset retirement costs charged to mineral property interests | $ | 260 | $ | 245 | ||||
Mining equipment acquired through issuance of debt | $ | 5,895 | $ | 295 | ||||
Mineral property expenditures included in accounts payable | $ | 1,081 | $ | 318 | ||||
Interest cost capitalized to mineral property interests | $ | - | $ | 839 | ||||
Non-cash finder fess | $ | 59 | $ | - | ||||
Non-cash amortization of discount and interest expense | $ | 1,250 | $ | 1,853 | ||||
Interest payable converted to principal balance | $ | 1,560 | $ | 2,977 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 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.
16 | P a g e |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2018 and 2017
(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)
13. | Commitments and Contingencies (continued) |
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 2two of GQM LLC’s mining drill loans. The Company has also provided a corporate 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). |
March 31, 2018 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Share purchase warrants – Related Party (see Note 8) | $ | 302 | $ | - | $ | 302 | $ | - | ||||||||
Share purchase warrants – (see Note 8) | 1 | - | 1 | - | ||||||||||||
$ | 303 | $ | - | $ | 303 | $ | - |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
Fair Value Measurements (continued)
September 30, 2017 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Share purchase warrants – Related Party (Note 10) | $ | 3,129 | $ | - | $ | 3,129 | $ | - | ||||||||
Share purchase warrants – (Note 10) | 268 | - | 268 | - | ||||||||||||
$ | 3,397 | $ | - | $ | 3,397 | $ | - |
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 8) | $ | 439 | $ | - | $ | 439 | $ | - | ||||||||
Share purchase warrants – (see Note 8) | 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 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.
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GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2018 and 2017
(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)
14. | Financial Instruments (continued) |
Credit Risk (continued)
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.
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 September 30, 2017,at March 31, 2018, the Company’s cash balances held in United States and Canadian financial institutions include $4.7 million,$17,880, 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 ninethree months ended September 30, 2017March 31, 2018, a 1% decrease in interest rates would have reduced the interest income for 2017the three months ended March 31, 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 of September 30, 2017,at March 31, 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.
18 | |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
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 September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Audit, legal and professional fees | $ | 165 | $ | 125 | $ | 561 | $ | 1,097 | ||||||||
Salaries and benefits and director fees | 431 | 437 | 1,131 | 1,176 | ||||||||||||
Regulatory fees and licenses | 15 | (15 | ) | 85 | 68 | |||||||||||
Insurance | 122 | 116 | 369 | 356 | ||||||||||||
Corporate administration | 438 | (6 | ) | 1,151 | 470 | |||||||||||
$ | 1,171 | $ | 657 | $ | 3,297 | $ | 3,167 |
Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Numerator: | ||||||||||||||||
Net gain (loss) attributable to the shareholders of the Company - numerator for basic and diluted LPS | $ | (1,889 | ) | $ | 2,738 | $ | (3,352 | ) | $ | (8,296 | ) | |||||
Denominator: | ||||||||||||||||
Weighted average number of common shares outstanding -basic and diluted | 111,148,683 | 108,026,944 | 111,137,694 | 102,657,767 | ||||||||||||
Loss per share – basic and diluted | $ | (0.02 | ) | $ | 0.03 | $ | (0.03 | ) | $ | (0.08 | ) |
Weighted average number of shares for the nine months ended September 30, 2017 excludes 1,395,002 options (September 30, 2016 - 1,070,000) and 24,317,700 warrants (September 30, 2016 – 10,000,000) that were antidilutive.
During the nine months ended September 30, 2016, the Company sold 2 (December 31, 2016 – nil) pieces of equipment with a net book value of $1.0 million in consideration for settlement of 2 loans by $0.6 million plus $0.1 million in cash. The Company also recorded $0.3 million as a loss in disposition of fixed assets.
During the nine months ended September 30, 2017, the Company entered into 4 new loan agreements for a total of $7.6 million for the acquisition of 4 (December 31, 2016 – 2) pieces of mining equipment from Komatsu.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
As at September 30, 2017 and December 31, 2016, the finance agreement balances are as follows:
September 30, 2017 | December 31, 2016 | |||||||
Balance, beginning of the period | $ | 15,150 | $ | 18,373 | ||||
Additions | 7,646 | 2,047 | ||||||
Down payments and taxes | (1,338 | ) | (264 | ) | ||||
Settlements | (414 | ) | - | |||||
Principal repayments | (4,648 | ) | (5,006 | ) | ||||
Balance, end of the period | $ | 16,396 | $ | 15,150 | ||||
Current portion | $ | 6,998 | $ | 5,656 | ||||
Non-current portion | $ | 9,398 | $ | 9,494 |
For the nine months ended September 30, 2017, the Company made total down payments of $1.3 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 4 years, except 2 which are for 3 years, and are secured by the underlying asset except for 2 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 | $ | 6,998 | ||
2018 | 6,146 | |||
2019 | 2,060 | |||
2020 | 1,191 | |||
Total | $ | 16,395 |
On October 20, 2017, the Company granted 1,204,999 options to certain directors and employees of Golden Queen. The options are exercisable at a price of $0.29 for a period of five years from the date of grant. 401,666 options vest on October 20, 2018; 401,666 options vest on October 20, 2019; and 401,667 options vest on October 20, 2020.
On November 10, 2017, the Company and the Clay Group agreed to amend the November 2016 Loan by reducing the quarterly principal payments that commence the first quarter of 2018 from $2.5 million to $1.0 million and increasing the annual interest rate from 8% to 10% effective January 1, 2018. As well, all interest payments in 2017 that were deferred at the Company’s option along with a $2.5 million principal payment and a $0.40 amendment fee are payable on January 1, 2018. At the Company’s option, interest and principal payments due on January 1, 2018 can be delayed until February 15, 2018 to accommodate delays in the Offering process.
On November 13, 2017, the Company filed a preliminary prospectus with the securities regulatory authorities in each of the provinces and territories of Canada in connection with qualifying an offering of the Company (the “Offering"), in connection with a marketed offering of common shares in the capital of the Company for aggregate gross proceeds of $25 million. Closing of the Offering is subject to receipt of applicable regulatory approvals including approval of the Toronto Stock Exchange. The net proceeds of the Offering will be used to reduce the corporate debt, purchase additional equipment for the mine and general corporate and working capital purposes.
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 November 14, 2017May 9, 2018 and should be read in conjunction with the unaudited condensed consolidated interim financial statements of the Company for the three and nine months ended September 30, 2017March 31, 2018 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”). All 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 thatthat 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.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 owns 50% of Golden Queen Mining Company, LLC (“GQM LLC”), the operator of the Mine. The remaining 50% is owned by Gauss LLC (“Gauss”). The Mine is located just outside the town of Mojave in southern California 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 aggregate.
Highlights: First Quarter Highlights
· | Total of |
· | Plant processed a total of |
· |
Project Update
TheIn the fourth quarter of 2017, management accelerated the development of the East Pit to access production of sufficient higher-grade ore. In the first quarter of 2018, almost all of the Mine’s production was sourced from the East Pit. Mining results from the East Pit have shown significant positive reconciliation for both tons and grade with the mine acquired a new shovelplan. Operations during the first quarter of 2018 showed continued improvement in late August as planned at a capital costgold ounces loaded on the pad. Mining of $3.9 million. The performancethe East Pit progressed on schedule.
19 | P a g e |
In the second half of this unit is expected to enhance mining productivity over2017, the life of mine. In addition,plant extracted more gold from the leach pad phase 2than the net recoverable ounces loaded due to the low grade of the ore loaded during this period, as shown in the figure below. In the first quarter of 2018, the Mine has experienced a lack of available ounces translating to doré as the gold loaded solution circulating on the pad was completedpurged of its gold content during the fourth quarter at a capital cost of $8.4 million, and ore leaching has commenced2017. The monthly recoverable gold ounces loaded on leach pad have steadily increased since September 2017, but the first lift. impact on production will be from the second quarter of 2018 onward.
Leaching performance is matching the feasibility study - total apparent gold recovery to September 30, 2017March 31, 2018 is 73%71.5%, which Management believes is on track to achieve the life of mine 80% gold recovery sometime in 2018.recovery.
As a resultIn the first quarter of 2018, the lower tonnage and grade in the North-West and Main (Phase 1) Pits, the ore grade was loweredCompany continues to a value near cut-off in an effort to operate the pad-loading operations at capacity. However, periodic shortfalls in ore supplied to the crusher have been experienced, despite the lower target grade.
Management is acceleratingdevelop the East Pit development to access higher-grade ore tons as soon as possible to make up forPit. It is anticipated that the shortfall in ore supplied and the lower than expected gold ore grades from the North-West and Main (Phase 1) Pits. During the period of development of the East Pit, it is expected that gold production will be lower than plan. The transition to the East Pit will provide the majority of anticipated ore production for at least the next three years. two years where higher ore tonnage and grade and lower waste tons are expected. The plan is to increase delivery of ounces to the heap leach pad by selectively mining higher grade tons as much as practical.
In anticipationthe process area, pad-loading tonnage and average grade are expected to increase compared to the fourth quarter of 2017. Taking advantage of the developmentgood porosity of the heap, flow to the Merrill-Crowe plant is expected to be at capacity. As a result of higher grades in the East Pit an additional two trucks were recently purchased and are expectedthe improved plant throughput, gold production is anticipated to be in service before year-end. There are an additional three trucks planned for purchase early nextincrease throughout the year.
The mine has generated positive operating cash flow year-to-date,A drilling program commenced in January 2018 and this is expectednow complete. A total of 19,520 feet of reverse circulation drilling was completed over 21 holes. This drill program was designed to resume once ore mining has been established within the defined ore-zone developed by the East Pit. In the meantime, preliminary estimates indicate that mining operations at Soledad Mountain will require between $15m and $20m of capitalincrease confidence in the near termcurrently modelled ore grades and tonnage associated with the Golden Queen vein structure, to execute this plan. This amount would likely needimprove 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 will be funded equally betweenanalyzed during the second quarter of the year.
As well, the Company and its 50% joint venture partner.
For the nine months ended September 30, 2017, the Company recorded aggregate sales of $0.01 million. The Company was recently added to the California AB 3098 list, which allows the Company to sell its aggregates to state and municipal agencies. The Company will not include the sale of aggregateis in cash flow projections until such time as a long-term contract for the sale of products has been secured.
During the third quarter, the Company initiated the process to supportof permitting of additional infrastructure for ongoing operations and planned activities that are expected to extend the mine life of Soledad Mountain beyond the initial 11 years contemplated in the 2015 Feasibility Study. The process is anticipated to take approximately 21 to 32 years.
For the three months ended March 31, 2018, the Company recorded aggregate sales of $6. In 2017, the Company was added to the California AB 3098 list, which allows the Company to sell its aggregate to state and municipal agencies. The Company will not include the sale of aggregate in cash balanceflow projections until such time as at September 30, 2017 was $4.7 million. a long-term contract for the sale of products has been secured.
There is a total of 199218 employees currently on site.
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Results of Operations
The following are the results of operations for the three and nine months ended September 30, 2017,March 31, 2018 and the corresponding periods ended September 30, 2016.2017:
Three months ended | Nine months ended | |||||||||||||||||
30-Sep-17 | 30-Sep-16 | 30-Sep-17 | 30-Sep-16 | |||||||||||||||
Mining - Key Metrics (1) | ||||||||||||||||||
Ore mined | k ton | 928 | 808 | 2,790 | 1,759 | |||||||||||||
Waste mined: ore mined ratio | ore mined ratio | 4.3:1 | 2.2:1 | 3.9:1 | 2.2:1 | |||||||||||||
Gold grade placed | oz/ton | 0.013 | 0.015 | 0.016 | 0.013 | |||||||||||||
Silver grade placed | oz/ton | 0.180 | 0.362 | 0.203 | 0.349 | |||||||||||||
Gold sold | oz | 12,255 | 8,715 | 36,068 | 11,197 | |||||||||||||
Silver sold | oz | 47,977 | 97,430 | 163,856 | 124,930 | |||||||||||||
Apparent cumulative recovery - gold (2) | % | 73.0 | % | 53.1 | % | 73.0 | % | 53.1 | % | |||||||||
Apparent cumulative recovery - silver (2) | % | 25.8 | % | 21.9 | % | 25.8 | % | 21.9 | % | |||||||||
Financial (1) | ||||||||||||||||||
Revenue | $ | 16,496 | 13,451 | 48,182 | 16,915 | |||||||||||||
Income (loss) from mine operations | $ | (1,839 | ) | 2,108 | (580 | ) | 160 | |||||||||||
General and administrative expenses | $ | (1,171 | ) | (657 | ) | (3,297 | ) | (3,167 | ) | |||||||||
Total other income (expenses) | $ | (214 | ) | 2,140 | (970 | ) | (6,250 | ) | ||||||||||
Net and comprehensive income (loss) | $ | (3,224 | ) | 3,591 | (4,847 | ) | (9,257 | ) | ||||||||||
Net and comprehensive income (loss) attributable to Golden Queen Mining Co Ltd. | $ | (1,889 | ) | 2,738 | (3,352 | ) | (8,296 | ) | ||||||||||
Average realized gold price (2) | $/oz sold | 1,280 | 1,329 | 1,257 | 1,303 | |||||||||||||
Average realized silver price (2) | $/oz sold | 16.89 | 19.22 | 17.23 | 18.60 | |||||||||||||
Total cash costs - net of by-product credits (2) | $/Au oz produced | 1,177 | 1,086 | 1,074 | 1,948 | |||||||||||||
All-in sustaining costs - net of by-product credits (2) | $/Au oz produced | 1,502 | 1,200 | 1,517 | 2,102 | |||||||||||||
Total cash costs | $/t placed | 16.99 | 13.80 | 15.40 | 13.69 | |||||||||||||
Off-site costs (2) | $/t placed | 0.78 | 0.67 | 0.77 | 0.38 |
Three months ended: | ||||||||||
March 31, | March 31, | |||||||||
2018 | 2017 | |||||||||
Mining - Key Metrics | ||||||||||
Ore mined | k ton | 1,135 | 852 | |||||||
Waste mined: ore mined ratio | ore mined ratio | 2.3:1 | 3.8:1 | |||||||
Gold grade placed | oz/ton | 0.019 | 0.019 | |||||||
Silver grade placed | oz/ton | 0.313 | 0.232 | |||||||
Gold sold | oz | 6,529 | 11,160 | |||||||
Silver sold | oz | 53,612 | 62,095 | |||||||
Apparent cumulative recovery - gold(1) | % | 71.5 | % | 63.3 | % | |||||
Apparent cumulative recovery - silver(1) | % | 27.1 | % | 25.3 | % | |||||
Financial(1) | ||||||||||
Revenue | $ | 9,585 | 14,804 | |||||||
Income (loss) from mine operations | $ | (6,449 | ) | 457 | ||||||
General and administrative expenses | $ | (1,254 | ) | (1,416 | ) | |||||
Total other expenses | $ | (1,360 | ) | (1,857 | ) | |||||
Net and comprehensive loss | $ | (9,063 | ) | (2,816 | ) | |||||
Net and comprehensive loss attributable to GQM Ltd. | $ | (5,417 | ) | (2,426 | ) | |||||
Average realized gold price(1) | $/oz sold | 1,330 | 1,228 | |||||||
Average realized silver price(1) | $/oz sold | 16.70 | 17.59 | |||||||
Total cash costs - net of by-product credits(1) | $/Au oz produced | 2,090 | 1,019 | |||||||
All-in sustaining costs - net of by-product credits(1) | $/Au oz produced | 2,413 | 1,663 | |||||||
Total cash costs(1) | $/t placed | 18.06 | 16.08 | |||||||
Off-site costs(1) | $/t placed | 0.61 | 0.84 |
(1) |
The strip ratio and gold grade for the three and nine months ended September 30, 2016 were not representative of the life-of-mine estimated averages due to the commencement of production on April 1, 2016 and the limited equipment and crew available during these periods. Notwithstanding the strip ratio and gold grade for the three and nine months ended September 30, 2016, the higher strip ratio as a result of mining more waste than ore for the three and nine months ended September 30, 2017 compared to the same periods in 2016, contributed to the higher total cost per ton placed.
Financial Results
TheFor the three months ended March 31, 2018, the Company generated revenues from operations of $16.5 million$9,585 from the sale of 12,2556,529 ounces of gold and 47,97753,612 ounces of silver for the three months ended September 30, 2017 and $48.2 millioncompared to revenues of $14,804 from the sale of 36,06811,160 ounces of gold and 163,58662,095 ounces of silver during the nine months ended September 30, 2017. comparable period in 2017, a decrease in revenue of $5,219.
The Company generated revenuesdecrease in revenue is mainly due to a lack of $13.5 million fromavailable ounces translating to doré on the sale of 8,715leach pad. Although 15,094 ounces of gold and 97,430was placed on the leach pad in the first quarter of 2018 compared to 14,178 ounces in the first quarter of silver for the three months ended September 30, 2016 and $16.9 million2017, revenues from the sale of 11,197 ounces of gold placed on the leach pad will not be realized until later in the year. Because of this situation, the Mine recorded a higher cost per ton (less tons mined) and 124,930 ounces of silver during the nine months ended September 30, 2016. Production commenced on April 1, 2016 and therefore the Company did not generate any revenues during the first fiscal quarter of 2016.
The Company generated $0.39 million less revenue during the three months ended September 30, 2017 compared to the three months ended June 30, 2017, mostly as a result of fewer ounces of gold and silver sold. Although the average realized gold pricehigher cost per ounce was $18 higher for the three months ended September 30, 2017 compared to the three months ended June 30, 2017 ($1,280 vs. $1,262 respectively), 398 fewer(less ounces of gold were sold in the current quarter compared to the previous quarter (12,255 ounces of gold sold vs. 12,653 ounces of gold sold respectively). The average realized silver price per ounce was slightly lower for the three months ended September 30, 2017 compared to the three months ended June 30, 2017 and 5,537 fewer ounces of silver were sold in the current quarter compared to the previous quarter (47,977 ounces of silver sold vs. 53,514 ounces of silver sold respectively)produced).
The costs, excluding depreciation and depletion, applicable to sales incurred during the three and nine months ended September 30, 2017March 31, 2018 were $15.4 million and $40.3$14.6 million (three and nine months ended September 30, 2016March 31, 2017 - $9.1 million and $12.7$11.6 million), respectively.. The cost of sales, excluding depreciation and depletion, increased mainly as a result of higher mining costs due to mining more waste and less ore compared toin the current quarter were relatively consistent with the prior quarter (three months ended June 30,December 31, 2017 - $13.4$15.9 million) and recording anincreased compared to respective quarter in prior year due to expensing $4.5 million of costs to ensure inventory allowance of $0.80 million in the current quarter.was recognized at net realizable value. Costs of sales include mining, processing, maintenance and site support costs. Also, included in the costs of sales are refining, transportation costs, royalties and property taxes.
21 | P a g e |
Depreciation and depletion expenses during the three and nine months ended September 30, 2017March 31, 2018 were $2.9 million and $8.4 million (three and nine months ended September 30, 2016 - $2.2 million and $4.1 million), respectively. Production commenced on April 1, 2016 and therefore the Company did not record significant depreciation and depletion until after this date. The depreciation and depletion expenses for three months ended September 30, 2017 increased slightly$2,976 compared to $2,756 for the previous quarter (three months ended June 30,same period in 2017, - $2.7 million) as a resultan increase of recording more expense$220. The increase in 2018 compared to 2017 was mainly due to a changethe addition of depreciable fixed assets of $19,409 in Management’s estimate of the useful lives of certain pieces of equipment being reduced from ten to seven years.third and fourth quarters in 2017.
General and administrative expenses increased by $0.5 million to $1.2 million duringfor the three months ended September 30, 2017March 31, 2018 were $1,254 compared to $0.7 million$1,416 for the same periodthree months ended March 31, 2017, a decrease of $162. The decrease in 2016 primarily as2018 compared to 2017 was mainly a result of a decrease in foreign exchange gains as the Canadian dollar has strengthened against the US dollar. General and administrative expenses increased slightly by $0.1 million to $3.3 million during the nine months ended September 30, 2017 compared to $3.2 million for the same period in 2016.corporate administration costs.
For the three and nine months ended September 30, 2017,March 31, 2018, the Company incurred total interest expensefinance expenses of $1.3 million and $3.6 million (three and nine$1,533 compared to $1,047 for the three months ended September 30, 2016 - $1.8 million and $4.4 million, respectively, relatedMarch 31, 2017, an increase of $486. The increase in finance expenses was mainly due to its various loans. The decrease resulted from 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 refer to Note 9(ii)of $87 payable, and 9(iii)increased accretion of $269 recorded on the unaudited condensed consolidated interim financial statements. Also, during the nine months ended September 30, 2017 there was no interest capitalized to mineral properties, compared to $1.0 million in the same periods of 2016.Clay Loan.
The Company’s derivative liability as at September 30, 2017 and for the nine months then ended includes the warrants issued in conjunction with the November 2016 Clay Loan, the June 2015 Loan and the July 2016 Financing. DuringFor the three and nine months ended September 30, 2017,March 31, 2018, the Company recorded a decrease ingain on derivative instruments of $138 compared to a loss on derivative instruments of $481 for the derivative liability of $1.1 million and $3.0 million (three and ninethree months ended September 30, 2016 – a decrease of $3.9 million and an increase of $2.0 million, respectively).March 31, 2017. The significant decrease during the nine months ended September 30, 2017gain in 2018 was due to a decrease in the Company’s share price whereas the significant increase for the comparable periodloss in 20162017 was due to an increase in the Company’s share price. Refer to Note 10 of the unaudited condensed consolidated interim financial statements for a detailed analysis of the changes in fair value of the derivative liability.
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 (in $000 other than per share amounts):below:
Results for the quarter ended on: | Results for the quarter ended: | |||||||||||||||||||||||||||||||
30-Sep-17 | 30-Jun-17 | 31-Mar-17 | 31-Dec-16 | 31-Mar-18 | 31-Dec-17 | 30-Sep-17 | 30-Jun-17 | |||||||||||||||||||||||||
Revenue | $ | 16,496 | $ | 16,882 | $ | 14,804 | $ | 10,278 | $ | 9,585 | $ | 13,939 | $ | 16,496 | $ | 16,882 | ||||||||||||||||
Net and comprehensive income (loss) | $ | (3,224 | ) | $ | 1,192 | $ | (2,816 | ) | $ | (434 | ) | $ | (9,063 | ) | $ | (1,327 | ) | $ | (3,224 | ) | $ | 1,192 | ||||||||||
Net and comprehensive income (loss) attributable to Golden Queen Mining Co Ltd. | $ | (1,889 | ) | $ | 962 | $ | (2,426 | ) | 868 | |||||||||||||||||||||||
Net and comprehensive income (loss) attributable to GQM Ltd. | $ | (5,417 | ) | $ | 2,188 | $ | (1,889 | ) | 962 | |||||||||||||||||||||||
Basic net income (loss) per share | $ | (0.02 | ) | $ | 0.01 | $ | (0.02 | ) | $ | 0.01 | $ | (0.03 | ) | $ | 0.02 | $ | (0.02 | ) | $ | 0.01 | ||||||||||||
Diluted net income (loss) per share | $ | (0.02 | ) | $ | 0.01 | $ | (0.02 | ) | $ | 0.01 | $ | (0.03 | ) | $ | 0.02 | $ | (0.02 | ) | $ | 0.01 | ||||||||||||
Results for the quarter ended on: | ||||||||||||||||||||||||||||||||
30-Sep-16 | 30-Jun-16 | 31-Mar-16 | 31-Dec-15 | |||||||||||||||||||||||||||||
Revenue | $ | 13,451 | $ | 3,464 | $ | Nil | $ | Nil | ||||||||||||||||||||||||
Net and comprehensive income (loss) | $ | 3,591 | $ | (3,568 | ) | $ | (9,280 | ) | $ | (1,217 | ) | |||||||||||||||||||||
Net and comprehensive income loss attributable to Golden Queen Mining Co Ltd. | $ | 2,738 | $ | (2,109 | ) | (8,926 | ) | (722 | ) | |||||||||||||||||||||||
Basic net loss per share | $ | 0.03 | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.01 | ) | |||||||||||||||||||||
Diluted net loss per share | $ | 0.03 | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.01 | ) |
Results for the quarter ended: | ||||||||||||||||
31-Mar-17 | 31-Dec-16 | 30-Sep-16 | 30-Jun-16 | |||||||||||||
Revenue | $ | 14,804 | $ | 10,278 | $ | 13,451 | $ | 3,464 | ||||||||
Net and comprehensive income (loss) | $ | (2,816 | ) | $ | (434 | ) | $ | 3,591 | $ | (3,568 | ) | |||||
Net and comprehensive income (loss) attributable to GQM Ltd. | $ | (2,426 | ) | $ | 868 | 2,738 | (2,109 | ) | ||||||||
Basic net income (loss) per share | $ | (0.02 | ) | $ | 0.01 | $ | 0.03 | $ | (0.02 | ) | ||||||
Diluted net income (loss) per share | $ | (0.02 | ) | $ | 0.01 | $ | 0.03 | $ | (0.02 | ) |
During the three months ended September 30, 2017,March 31, 2018, net and comprehensive loss was $3.2 million compared to net and comprehensive income$9,063 mainly as a result of $1.2 million during the three months ended June 30, 2017. This change is primarily due to the movement in the value of the Company’s derivative liability (discussed above) and the loss from mine operations of $1.8 million during$6,449 due to higher direct mining costs as a result of developing the three months ended September 30, 2017 comparedEast Pit and lower revenues due to income from mine operationslower production as a result of $0.8 million duringless available gold ounces on the three months ended June 30, 2017.leach pad.
In general, the results of operations can vary from quarter to quarter depending upon the nature, timing and cost of activities undertaken, 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 nine months ended September 30, 2017.
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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 September 30, 2017 is $1.5 millionMarch 31, 2018 was $1,500 (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 as of September 30, 2017at March 31, 2018, is $1.2 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 as of September 30, 2017,at March 31, 2018 is $0.3 million$278 (December 31, 2016 - $0.3 million)2017– $278).
During 2016, theThe Company entered into $3.0 million$4,228 (2017–$3,612) in surety bond agreements to maintain the necessary financial assurance as required by the relevant regulatory bodies, as described in the paragraphs above, and in order to release its reclamation deposits.deposits and posted a portion of the financial assurance due in 2017. The Company pays a yearly premium of $0.1 million. Golden Queen Mining Co.$90 (2016– $90). GQM Ltd. has provided a corporate guarantyguarantee on the surety bonds (see Note 12 of the unaudited condensed consolidated financial statements).bonds.
Asset Retirement Obligation
The total asset retirement obligation as of September 30, 2017,at March 31, 2018, was $1.7 million$2,229 (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 September 30, 2017,March 31, 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%.
The following is a summary of asset retirement obligations:
March 31, 2018 | December 31, 2017 | |||||||
Balance, beginning of the period | $ | 1,838 | $ | 1,366 | ||||
Accretion | 42 | 126 | ||||||
Changes in cash flow estimates | 349 | 346 | ||||||
Balance, end of the period | $ | 2,229 | $ | 1,838 |
Off-balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
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 nine months ended September 30, 2017,March 31, 2018, the Company paid a total of $0.03 million and $0.09 million (therecognized$195 (for the three and nine months ended September 30, 2016 - $0.03 millionMarch 31, 2017– $218) salaries and $0.09 million, respectively), respectively,fees for Officers and Directors.
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As at March 31, 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.related parties.
As at March 31,2018, $835 (December 31, 2017–$463 for amended fees and accrued interest payable to related parties) was included in 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 November 18, 2016, the Company entered into a loan with the Clay Group for $31,000 (the “November 2016 Loan”), due on May 21, 2019 and an annual interest rate of 8%, payable 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. The common share purchase warrants have an exercise price of $0.85.
On November 10, 2017, the Company and the Clay Group entered 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 Group entered into definitive agreements to amend the terms of the November 2016 Loan and the registration rights agreement in accordance with the Letter Agreement.
The following table summarizes activity on the notes payable:
March 31, 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 | 490 | 1,940 | ||||||
Capitalized financing and legal fees | - | (400 | ) | |||||
Accretion of capitalized financing and legal fees | 65 | - | ||||||
Repayment of loans and interest | (4,712 | ) | - | |||||
Balance, end of the period | $ | 25,942 | $ | 30,099 | ||||
Current portion | $ | 4,000 | $ | 7,712 | ||||
Non-current portion | $ | 21,942 | $ | 22,387 |
(iii) | Amortization of Discounts and Interest Expense |
The following table summarizes the amortization of discounts and interest on loan ($000):loan:
Three Months Ended Sep 30, | Three Months Ended Sep 30, | Nine Months Ended Sep 30, | Nine Months Ended Sep 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Accretion of the Nov 2016 Loan discount | $ | 510 | $ | - | $ | 1,250 | $ | - | ||||||||
Interest expense related to the Nov 2016 Loan | 642 | - | 1,914 | - | ||||||||||||
Interest expense related to Komatsu financial loans(1) | 143 | 144 | 428 | 464 | ||||||||||||
Accretion of the June 2015 Loan discount | - | 621 | - | 1,853 | ||||||||||||
Interest expense related to the June 2015 Loan | - | 1,050 | - | 3,057 | ||||||||||||
Accretion of discount and interest on loan | $ | 1,295 | $ | 1,815 | $ | 3,592 | $ | 5,374 |
Three Months Ended March 31, | Three Months Ended March 31, | |||||||
2018 | 2017 | |||||||
Accretion of the November 2017 Loan discount | $ | 490 | $ | 286 | ||||
Accretion of capitalized financing and legal fees | 65 | - | ||||||
Interest expense related to the November 2017 Loan | 713 | 626 | ||||||
Closing and commitment fees related to the Credit Facility | 30 | - | ||||||
Interest expense related to Komatsu financial loans(1) | 235 | 135 | ||||||
Accretion of discount and interest on loan | $ | 1,533 | $ | 1,047 |
(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.
Three Months Ended Sep 30, | Three Months Ended Sep 30, | Nine Months Ended Sep 30, | Nine Months Ended Sep 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Accretion of discounts and interest on loan(1) | $ | 1,295 | $ | 1,815 | $ | 3,592 | $ | 5,374 | ||||||||
Less: Interest costs capitalized(2) | - | - | - | (1,005 | ) | |||||||||||
Interest expense | $ | 1,295 | $ | 1,815 | $ | 3,592 | $ | 4,369 |
24 | |
(iv) | Joint Venture |
The net assets of GQM LLC as of September 30, 2017,at March 31, 2018 and December 31, 20162017 are as follows:
September 30, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||
Assets, GQM LLC | $ | 152,193 | $ | 151,802 | $ | 156,998 | $ | 149,095 | ||||||||
Liabilities, GQM LLC | (24,092 | ) | (20,710 | ) | (23,221 | ) | (28,024 | ) | ||||||||
Net assets, GQM LLC | $ | 128,101 | $ | 131,092 | $ | 133,777 | $ | 121,071 |
Included in the assets above, is $3.8 million$9,622 (December 31, 2016 - $11.1 million)2017– $2,606) in cash held as at September 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$2,203 for two mining drill loans and $3.0 million$4,228 in surety bond agreements.
(v) | 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,subject to a commitment fee of 1% per annum. For the three months ended March 31, 2018, and bears a 12% simple annual interest. GQM LLC paid a closing feecommitment fees of $0.1 million which was classified as prepaid expenses and other current assets. $0.02 million of the closing fee was amortized during the nine months ended September 30, 2017.$30 (2017 – $nil). As at September 30,March 31, 2018, GQM LLC has drawn $nil (December 31, 2017 and November 9, 2017, no amounts had been drawn under this facility.– $3,000) from the Credit Facility.
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; |
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). |
September 30, 2017 ($000) | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Share purchase warrants – Related Party (Note 10) | $ | 3,129 | $ | - | $ | 3,129 | $ | - | ||||||||
Share purchase warrants – (Note 10) | 268 | - | 268 | - | ||||||||||||
$ | 3,397 | $ | - | $ | 3,397 | $ | - |
March 31, 2018 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Share purchase warrants – Related Party (see Note 8) | $ | 302 | $ | - | $ | 302 | $ | - | ||||||||
Share purchase warrants – (see Note 8) | 1 | - | 1 | - | ||||||||||||
$ | 303 | $ | - | $ | 303 | $ | - |
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 8) | $ | 439 | $ | - | $ | 439 | $ | - | ||||||||
Share purchase warrants – (see Note 8) | 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.
25 | P a g e |
Select Non-Consolidated Figures
The Company has a 50% interest in GQM LLC, which meets the definition of a 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 of September 30, 2017 and for nine months then ended ($000):at March 31, 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 | $ | 9,622 | $ | 4,811 | $ | 8,608 | $ | 13,419 | ||||||||
Short Term Debt | $ | 7,709 | $ | 3,855 | $ | 4,000 | $ | 7,855 | ||||||||
Long Term Debt | $ | 8,150 | $ | 4,075 | $ | 21,942 | $ | 26,017 | ||||||||
Working Capital | $ | 7,341 | $ | 3,671 | $ | 3,596 | $ | 7,267 |
* includes GQM Holdings
The following table shows figures attributable to the Company only for the three months ended March 31, 2018:
GQM LLC 100% | GQM LLC 50% Attributable to LTD | LTD on a Non-Consolidated Basis * | LTD Attributable | |||||||||||||
(1) | (2) | (1) + (2) | ||||||||||||||
Cash | $ | 3,755 | $ | 1,878 | $ | 928 | $ | 2,806 | ||||||||
Short Term Debt | $ | 7,024 | $ | 3,512 | $ | 9,061 | $ | 12,573 | ||||||||
Long Term Debt | $ | 9,372 | $ | 4,686 | $ | 20,096 | $ | 24,782 | ||||||||
Working Capital / (Deficit) | $ | (9,114 | ) | $ | (4,557 | ) | $ | (12,133 | ) | $ | (16,690 | ) |
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 | $ | 9,585 | $ | 4,793 | $ | - | $ | 4,793 | ||||||||
Cost of sales including depreciation and depletion | $ | (15,894 | ) | $ | (7,947 | ) | $ | (98 | ) | $ | (8,045 | ) | ||||
Accretion expense | $ | (42 | ) | $ | (21 | ) | $ | - | $ | (21 | ) | |||||
G&A Expenses | $ | (703 | ) | $ | (352 | ) | $ | (505 | ) | $ | (857 | ) | ||||
Share based payments | $ | - | $ | - | $ | (45 | ) | $ | (45 | ) | ||||||
Decrease in fair value of derivative liability | $ | - | $ | - | $ | 138 | $ | 138 | ||||||||
Interest Expense | $ | (265 | ) | $ | (133 | ) | $ | (1,269 | ) | $ | (1,387 | ) | ||||
Interest Income | $ | 25 | $ | 13 | $ | 9 | $ | 22 | ||||||||
Net Loss | $ | (7,294 | ) | $ | (3,647 | ) | $ | (1,770 | ) | $ | (5,417 | ) |
GQM LLC 100% | GQM LLC 50% Attributable to LTD | LTD on a Non-Consolidated Basis * | LTD Attributable | |||||||||||||
(1) | (2) | (1) + (2) | ||||||||||||||
Revenue | $ | 48,182 | $ | 24,091 | $ | - | $ | 24,091 | ||||||||
Cost of sales including depreciation and depletion | $ | (48,431 | ) | $ | (24,216 | ) | $ | (331 | ) | $ | (24,547 | ) | ||||
Accretion expense | $ | (94 | ) | $ | (47 | ) | $ | - | $ | (47 | ) | |||||
G&A Expenses | $ | (1,896 | ) | $ | (948 | ) | $ | (1,316 | ) | $ | (2,264 | ) | ||||
Share based payments | $ | - | $ | - | $ | (133 | ) | $ | (133 | ) | ||||||
Foreign exchange gain (loss) | $ | - | $ | - | $ | 48 | $ | 48 | ||||||||
(Increase) / Decrease in fair value of derivative liability | $ | - | $ | - | $ | 3,033 | $ | 3,033 | ||||||||
Interest Expense | $ | (428 | ) | $ | (214 | ) | $ | (3,164 | ) | $ | (3,378 | ) | ||||
Interest Income | $ | 70 | $ | 35 | $ | 7 | $ | 42 | ||||||||
Others | $ | (394 | ) | $ | (197 | ) | $ | - | $ | (197 | ) | |||||
Net Loss | $ | (2,991 | ) | $ | (1,496 | ) | $ | (1,856 | ) | $ | (3,352 | ) |
* includes GQM Holdings
Liquidity and Capital Resources
The Company has generated $75.4 million$98,899 in revenues from operations since inception and as at September 30, 2017March 31, 2018, had an accumulated deficit of $90.7 million$93,917 and a working capital deficit of $9.1 million. The Company used $1.2 million in operations for the three months ended September 30, 2017 and generated $4.3 million in operations for the nine months ended September 30, 2017.
$10,937. On December 31, 2014,February 20, 2018, the Company entered intosuccessfully closed a loan (the “December 2014 Loan”) with the Clay Grouprights offering for $12.5 million, due on July 1, 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”). On November 18, 2016, the Company repaid $12.2 million of the June 2015 Loan and accrued interest with cash on hand and net proceeds of $10.1 million from an equity financing.$24,368. The Company restructuredissued the remainingfull allotment of 188,952,761 common shares pursuant to the terms of the Offering. Partial proceeds were used to reduce the corporate debt, with a new loan with a principal amountfund the Company’s 50% portion of $31.0 million (the “November 2016 Loan”). The November 2016 Loan has a thirty-month termcosts required for the purchase of additional equipment for the Mine and an annual interest rate of 8%, payable on a quarterly basis commencing duringto repay the first quarter of 2017.Credit Facility.
26 | |
As per terms of the November 2016 Loan, the Company is required to pay the following to the Clay Group on the following dates: $5.4 million of accrued interest and principal on January 1, 2018; $3.1 million of interest and principal on April 1, 2018; $3.0 million of interest and principal on July 1, 2018; $3.0 million of interest and principal on and October 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 reviewed the mine plan in light of the nine months ended September 30, 2017 results and has determined it is unlikely it will receive sufficient distributions from GQM LLC during this fiscal year to service its debt in early 2018. This situation raises substantial doubt about the Company’s ability to continue as a going concern. Consequently, discussions with the Clay Group to restructure the reimbursement schedule have 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 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.
Cash from operating activities:
Cash generated byFor the three months ended March 31, 2018, $7,394 of cash was used in operating activities was $6.0 millioncompared to $2,791 of cash generated from operating activities for the ninethree months ended September 30, 2017 (usedMarch 31, 2017. The increased use of cash in the nine months ended September 30, 2016 - $3.1 million). The increase in cash generated by operating activities is2018 was primarily due to increased direct mining costs and reduced revenue in 2018 compared to 2017.
In the increase in revenues sincefirst quarter of 2018, the Company startedwas still developing the East Pit resulting in higher costs in 2018 compared to 2017. As well, gold production in the second quarter of 2016, improvements2018 has been lower compared to 2017 resulting in working capital and operating cost.lower revenues.
Cash used in investing activities:
CashFor the three months ended March 31, 2018, $2,071 of cash was used in investing activities totaled $10.0 million duringcompared to $5,236 of cash used in investing activities for the ninethree months ended September 30,March 31, 2017. The major use of cash in 2017 (nine months ended September 30, 2016 – $10.5 million). Constructionwas the start of the second stageconstruction of the leach pad commenced in the first quarter of 2017 andphase 2; it was completed in September.the third quarter of 2017.
Cash from financing activities:
CashFor the three months ended March 31, 2018, $24,758 of cash was generated from financing activities compared to $1,405 of cash used in financing activities totaled $4.6 million duringfor the ninethree months ended September 30, 2017 (nine months ended September 30, 2016 – cash generated of $7.2 million).March 31, 2017. The main financing activities of the Company during in 2018 was the nine months ended September 30, 2017 were relatedclosing of a rights offering partial proceeds from which was used to loans payable on miningreduce the corporate debt, fund the Company’s 50% portion of costs required for the purchase of additional equipment for the Mine and machinery.to repay the Credit Facility and a capital contribution of $10,000 from the non-controlling interest.
Working capital:
The following table shows working capital ($000):as at March 31, 2018:
LTD on a Non-Consolidated Basis * | LTD on a Consolidated Basis ** | |||||||
Current Assets | $ | 959 | $ | 16,979 | ||||
Current Liabilities | $ | (13,092 | ) | $ | (26,093 | ) | ||
Working Capital / (Deficit) | $ | (12,133 | ) | $ | (9,114 | ) | ||
* Includes GQM Holdings ** Includes GQM Holdings and GQM LLC |
GQM LLC | GQM Ltd. on a Non-Consolidated Basis * | GQM Ltd. on a Consolidated Basis ** | ||||||||||
Current assets | $ | 20,183 | $ | 8,660 | $ | 28,843 | ||||||
Current liabilities | (12,842 | ) | (5,064 | ) | (17,906 | ) | ||||||
Working capital | $ | 7,341 | $ | 3,596 | $ | 10,937 |
* | includes GQM Holdings |
** | includes GQM Holdings and GQM LLC |
Golden Queen and GQM Holdings
As at September 30, 2017,March 31, 2018, Golden Queen and GQM Holdings had current assets of $1.0 million$8,660 (December 31, 2016 - $2.3 million)2017 – $502) and current liabilities of $13.1 million$5,064 (December 31, 2016 - $6.9 million)2017 – $9,194) for aworking capital of $3,596 (December 31, 2017 – working capital deficit of $12.1 million (December 31, 2016 – $4.6 million)$8,692). The decreaseincrease in current assets from December 31, 20162017 is the mainly a result of general corporate expenditures such as corporate salary expenses, legal fees, audit fees, and interest expenses.increase in cash from funds received from the rights offering. The increasedecrease in current liabilities is thea result of thepaying off principal payments of the November 2016 Clay Loan due within 12 months now being included in current liabilities.
Golden Queen will use its cash for general corporate expenditures such as accounting fees, legal fees and corporate salary expenses. Interest expensesaccrued interest payable on the November 20162017 Clay Loan due during 2017 have been added tofrom the loan principal balance rather than paid in cash, atproceeds of the Company’s option.rights offering.
GQM LLC
As at September 30, 2017,March 31, 2018, GQM LLC had current assets of $16.0 million$20,183 (December 31, 2016 - $22.7 million)2017 – $12,162) and current liabilities of $13.0 million$12,842 (December 31, 2016 - $9.9 million)2017 – $16,572) for a working capital surplus of $3.0 million$7,341 (December 31, 20162017 – $12.8 million)working capital deficit of $4,410). The decreaseincrease in current assets from December 31, 20162017 is a result of cash spent on project-related expenditurescapital contributions of $10,000 received from each of its Members, Golden Queen and working capital.Gauss. The increasedecrease in current liabilities is due to an increase in accounts payable and an increase ofpaying off the short-term portion ofCredit Facility from the mobile equipment loans.capital contribution proceeds.
27 | P a g e |
GQM LLC will use its cash on hand for sustaining capital expenditures and for working capital needs.
Outstanding Share 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 | 111,148,683 | |||||||
Shares issued as the result of a | 188,952,761 | |||||||
Shares issued and outstanding | 300,101,444 | Exercise Price | Expiry Date | |||||
Shares to be issued on exercise of directors and employees stock options | 2,600,001 | $0.29 to $1.59 | From 06/03/18 to 10/20/22 | |||||
Shares to be issued on exercise of warrants | 24,317,700 | $0.85 to $0.95 and CAD $2.00 | From 06/08/20 to 11/18/21 | |||||
Fully diluted | 327,019,145 | |||||||
The Company has an unlimited authorized share capital
Subsequent Events
On October 20, 2017, the Company granted 1,204,999 options to certain directors and employees of Golden Queen. The options are exercisable at a price of $0.29 for a period of five years from the date of grant. 401,666 options vest on October 20, 2018; 401,666 options vest on October 20, 2019; and 401,667 options vest on October 20, 2020.
On November 10, 2017, the Company and the Clay Group agreed to amend the November 2016 Loan by reducing the quarterly principal payments that commence the first quarter of 2018 from $2.5 million to $1.0 million and increasing the annual interest rate from 8% to 10% effective January 1, 2018. As well, all interest payments in 2017 that were deferred at the Company’s option along with a $2.5 million principal payment and a $0.40 amendment fee are payable on January 1, 2018. At the Company’s option, interest and principal payments due on January 1, 2018 can be delayed until February 15, 2018 to accommodate delays in the Offering process.
On November 13, 2017, the Company filed a preliminary prospectus with the securities regulatory authorities in each of the provinces of British Columbia, Alberta and Ontario, Canada and the United Sates except for the states of Arizona, Arkansas, California, Minnesota and Wisconsin in connection with qualifying an offering of the Company (the “Offering"), in connection with a marketed offering of common shares in the capital of the Company for aggregate gross proceeds of $25.0 million. Closing of the Offering is subject to receipt of applicable regulatory approvals including approval of the Toronto Stock Exchange. The net proceeds of the Offering will be used to reduce the corporate debt, purchase additional equipment for the mine and general corporate and working capital purposes.
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 | ||||||||||||||||||||||||
Three Months Ended | March 31, | December 31, | ||||||||||||||||||||||
September 30, 2017 | June 30, 2017 | March 31, 2017 | December 31, 2016 | 2018 | 2017 | |||||||||||||||||||
Total Cash Costs | ||||||||||||||||||||||||
Mining | $ | 7,178 | $ | 6,583 | $ | 5,624 | $ | 4,933 | $ | 7,376 | $ | 7,174 | ||||||||||||
Processing | 5,055 | 4,797 | 4,379 | 4,243 | 4,488 | 4,346 | ||||||||||||||||||
Indirect mining cost | 2,189 | 1,795 | 1,880 | 1,901 | 1,972 | 2,308 | ||||||||||||||||||
Inventory changes and others | 982 | 192 | (322 | ) | (2,181 | ) | (820 | ) | 1,970 | |||||||||||||||
Direct mining costs | 15,404 | 13,367 | 11,561 | 8,896 | 13,016 | 15,798 | ||||||||||||||||||
Site general and administrative | 830 | 658 | 838 | 776 | ||||||||||||||||||||
Site general and administrative expenses | 732 | 897 | ||||||||||||||||||||||
Cash costs before by-product credits | 16,234 | 14,025 | 12,399 | 9,672 | 13,748 | 16,695 | ||||||||||||||||||
Divided by gold produced (oz) | 12,275 | 12,632 | 11,406 | 7,779 | 6,579 | 9,886 | ||||||||||||||||||
Cash costs per ounce of gold produced ($/oz) | 1,323 | 1,110 | 1,087 | 1,243 | 2,090 | 1,689 | ||||||||||||||||||
Less: By-product silver credits per ounce ($/oz) | (66 | ) | (72 | ) | (98 | ) | (148 | ) | (136 | ) | (123 | ) | ||||||||||||
Total cash cost per ounce of gold produced on a by-product basis ($/oz) | $ | 1,257 | $ | 1,038 | $ | 989 | $ | 1,096 | $ | 1,954 | $ | 1,566 | ||||||||||||
Ore placed (tons) | 897,549 | 1,026,332 | 791,232 | 894,754 | 806,450 | 837,779 | ||||||||||||||||||
Total Cash Costs ($/t placed) | 16.99 | 13.48 | 16.08 | 13.25 | ||||||||||||||||||||
Total cash costs ($/t placed) | 18.06 | 17.52 | ||||||||||||||||||||||
Crusher mechanical availability (%) | 74 | % | 81 | % | 63 | % | 70 | % | 65 | % | 69 | % | ||||||||||||
Apparent cumulative recovery(1) – gold | 73.0 | % | 68.0 | % | 64.2 | % | 59.7 | % | 71.5 | % | 75.5 | % | ||||||||||||
Apparent cumulative recovery (1) – silver | 25.8 | % | 25.3 | % | 25.3 | % | 24.0 | % | ||||||||||||||||
Apparent cumulative recovery(1) - silver | 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.
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 | March 31, | December 31, | ||||||||||||||||||||||
September 30, 2017 | June 30, 2017 | March 31, 2017 | December 31, 2016 | 2018 | 2017 | |||||||||||||||||||
All-in sustaining costs | ||||||||||||||||||||||||
Cash costs before by-product credits | $ | 16,234 | $ | 14,025 | $ | 12,399 | $ | 9,672 | ||||||||||||||||
Cash costs before by-product credits* | $ | 13,748 | $ | 16,695 | ||||||||||||||||||||
Silver by-product | (810 | ) | (915 | ) | (1,092 | ) | (1,150 | ) | (895 | ) | (1,221 | ) | ||||||||||||
Total cash cost after by-product | 15,424 | 13,110 | 11,307 | 8,522 | 12,853 | 15,474 | ||||||||||||||||||
Corporate general and administrative expenses | 341 | 54 | 578 | 311 | 522 | 549 | ||||||||||||||||||
Share based payments | 48 | 51 | 34 | 17 | ||||||||||||||||||||
Stock based compensation | 45 | 68 | ||||||||||||||||||||||
Accretion expense | 93 | 32 | 31 | 23 | 42 | 32 | ||||||||||||||||||
Sustaining capital | 3,990 | 4,781 | 7,288 | 2,648 | 2,412 | 3,303 | ||||||||||||||||||
All-in sustaining costs | 19,896 | 18,028 | 19,238 | 11,521 | 15,874 | 19,426 | ||||||||||||||||||
Divided by gold produced (oz) | 12,275 | 12,632 | 11,406 | 7,779 | 6,579 | 9,886 | ||||||||||||||||||
All-in sustaining costs per gold ounce on a by-product basis | $ | 1,621 | $ | 1,427 | $ | 1,687 | $ | 1,481 | $ | 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 | ||||||||
March 31, | December 31, | |||||||
2018 | 2017 | |||||||
Cost of goods sold | 16,034 | 19,450 | ||||||
Less: depreciation and depletion | $ | (2,976 | ) | $ | (3,526 | ) | ||
Less: accretion expense | (42 | ) | (126 | ) | ||||
Direct mining costs | 13,016 | 15,798 | ||||||
Add: site general and administrative expenses | 732 | 897 | ||||||
Cash costs before by-product credits | $ | 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 atfor the year ended December 31, 2016.
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 surveyed 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.
Additional Information
Further information on Golden Queen Mining Co. Ltd. is available on the SEDAR web site atwww.sedar.com and on the Company’s web site atwww.goldenqueen.com.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 $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 September 30, 2017, the Company’s cash balances held in United States and Canadian financial institutions include $4.7 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.
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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 September 30, 2017, a 1% decrease in interest rates would have reduced the interest income by 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 September 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 Internal 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 quarter ended September 30, 2017March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than the Company has implemented a remediation plan and has addressed the deficiency previously noted in the areas of personnel and controls and has engaged an external consultant to assist in the documentation and review of its internal controls.
Fraud Analysis
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 nine months ended September 30, 2017March 31, 2018 and the year ended December 31, 2016,2017, there were no reported instances of fraud.
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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.
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 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 were nowas one lost-time accidentsaccident at GQM LLC during the three months ended September 30, 2017.March 31, 2018.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
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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: November 14, 2017
May 10, 2018
GOLDEN QUEEN MINING CO. LTD. | ||||
(Registrant) | ||||
By: | /s/ Thomas M. Clay | |||
Thomas M. Clay | ||||
Principal Executive Officer | ||||
By: | | /s/ Guy Le Bel | ||
Guy Le Bel | ||||
Principal Financial Officer |
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