Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
x
No
¨
Indicate by check mark if disclosure of
delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
¨
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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”
and “emerging growth company” in Rule 12b-2 of the Exchange Act:
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.
¨
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
Based on the last sale price on the OTCQX
of the registrant’s common shares on June 30, 2017 (the last business day of the Registrant’s most recently completed
second fiscal quarter) of $0.52 per share, the aggregate market value of the voting and non-voting common equity of the Registrant
held by non-affiliates was approximately $37,064,025.60.
As of March 27, 2018, the registrant had 300,101,441 common shares, no par value, outstanding.
To the extent herein specifically referenced
in Part III, portions of the Registrant’s Definitive Proxy Statement on Schedule 14A for the 2018 Annual General Meeting
of Shareholders are incorporated herein. See Part III.
References to the “Company”,
“Golden Queen”, “we”, “us”, “our” and words of similar meaning refer to Golden
Queen Mining Co. Ltd. The amounts herein are in thousand (000’s) US dollar (“$”) is used in this Form 10-K and
quantities are reported in Imperial units with Metric units in brackets.
This annual report on Form 10-K and the
documents incorporated by reference herein constitute contain forward-looking information and “forward-looking statements”
within the meaning section 27A of the Securities Act of 1933 (as amended), section 21E of the Securities Exchange Act of 1934 (as
amended), the United States Private Securities Litigation Reform Act of 1995, releases made by the United States Securities and
Exchange Commission (the “SEC”) and applicable Canadian securities legislation, all as may be amended from time to
time, concerning the business, operations and financial performance and condition of the Company (collectively “forward-looking
statements”). Generally, these forward-looking statements can be identified by the use of words such as “plans”,
“anticipates”, “continues”, “estimates”, “is expected”, “projected”,
“propose”, “believes”, “intends”, “subject to”, “budget”, “scheduled”,
or variations or comparable language of such word and phrases or statements that certain actions, events or results “may”,
“could”, “would”, “should”, “might”, or “will”, “occur”
or “be achieved” or the negative connotation thereof.
Forward-looking statements are necessarily
based upon a number of factors and assumptions that, if untrue, could cause the actual results, performances or achievements of
the Company to be materially different from future results, performances or achievements expressed or implied by such statements.
Although the Company believes its expectations are based upon reasonable assumptions and has attempted to identify important factors
that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there
may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance
that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated
in such statements. Accordingly, readers should not place undue reliance on forward-looking statements included in this Form 10-K
and the documents incorporated by reference herein. References in this Form 10-K are to December 31, 2017, unless another date
is stated, or in the case of documents incorporated herein by reference, are as of the dates of such documents.
In particular, this Form 10-K and the documents
incorporated by reference herein contain forward-looking statements pertaining to the following:
With respect to forward-looking statements
contained in this Form 10-K and the documents incorporated by reference herein, assumptions have been made regarding, among other
things:
Actual results could differ materially
from those anticipated in these forward-looking statements as a result of the risk factors set forth below and elsewhere in this
Form 10-K and in the documents incorporated by reference herein:
Readers are cautioned that the foregoing
lists of factors are not exhaustive. The forward-looking statements contained in this Form 10-K and documents incorporated by reference
herein are expressly qualified by this cautionary statement. Forward-looking statements are provided for the purpose of providing
information about management’s current expectations and plans and allowing investors and others to get a better understanding
of the Company’s operating environment. Except as required under applicable securities laws, the Company does not undertake
or assume any obligation to public ally update or revise any forward-looking statements that are included in this document, whether
as a result of new information, future events or otherwise.
The Company uses Canadian Institute of
Mining, Metallurgy and Petroleum (the “CIM”) definitions for the terms “proven reserves”, “probable
reserves”, “measured resources”, “indicated resources” and “inferred resources”. The
terms “mineral reserve”, “proven mineral reserve” and “probable mineral reserve” are Canadian
mining terms defined in Canadian National Instrument 43-101 –
Standards of Disclosure for Mineral Projects
(“NI 43-101”)
and the CIM –
CIM Definition Standards on Mineral Resources and Mineral Reserves
, adopted by the CIM Council, as
amended (the “CIM Definition Standards”). These definitions differ from the definitions in the United States
Securities and Exchange Commission (“SEC”) Industry Guide 7 (“SEC Industry Guide 7”) under the United
States Securities Act of 1933, as amended (the “Securities Act”). Under SEC Industry Guide 7 standards, a “final”
or “bankable” feasibility study is required to report reserves, the three-year historical average metal price is used
in any reserve or cash flow analysis to designate reserves, and the primary environmental analysis or report must be filed with
the appropriate governmental authority.
In addition, the terms “mineral resource”, “measured mineral resource”, “indicated
mineral resource” and “inferred mineral resource” are defined in and required to be disclosed by NI 43-101;
however, these terms are not defined terms under SEC Industry Guide 7 and are normally not permitted to be used in reports and
registration statements filed with the SEC. Investors are cautioned not to assume that all or any part of a mineral deposit in
these categories will ever be converted into reserves. “Inferred mineral resources” have a great amount of uncertainty
as to their existence, and great uncertainty as to their economic, technical and legal feasibility. It cannot be assumed that
all, or any part, of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates
of inferred mineral resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases. Investors
are cautioned not to assume that all or any part of an inferred mineral resource exists or is economically, technically or legally
mineable. Disclosure of “contained ounces” in a resource is permitted disclosure under Canadian regulations; however,
the SEC normally only permits issuers to report mineralization that does not constitute “reserves” by SEC standards
as in place tonnage and grade without reference to unit measures.
Accordingly, information contained in this report and the documents incorporated by reference herein contain
descriptions of our mineral deposits that may not be comparable to similar information made public by U.S. companies subject
to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations
thereunder.
PART I
Item 1. Business
Overview
The Company has a 50% interest in a gold
and silver mine and was incorporated in 1985 under the laws of the Province of British Columbia, Canada. The Soledad Mountain Mine
(the “Mine”) is located south of Mojave in Kern County in southern California.
The Company acquired its initial interest
in the Mine in 1985 and has since added to its landholdings and interests in the area. Exploration and evaluation work on the Mine
was done by Golden Queen Mining Company, LLC (“GQM LLC”), formerly Golden Queen Mining Co., Inc. (“GQM Inc.”)
a California corporation that was wholly-owned by the Company until September 2014.
Golden Queen accounts for GQM LLC on its
books as a variable interest entity (“VIE”), with Golden Queen considered to be the primary beneficiary. A VIE
is an entity in which the investor, Golden Queen, holds a controlling interest, or in this case, is a primary beneficiary, that
is not based on the majority of the voting rights. As a result, Golden Queen continues to reflect 100% of the financial results
of GQM LLC in its consolidated financial statements, along with a non-controlling interest representing the 50% interest in GQM
LLC held by Gauss LLC.
The registered office of the Company is
located at 1200 - 750 West Pender Street, Vancouver, BC, Canada V6C 2T8 and its executive offices are located at 2300 – 1066
West Hastings Street, Vancouver, BC, Canada, V6E 3X2. The California office of GQM LLC is located at 2818 Silver Queen Road, Mojave,
California, 93501.
Corporate Structure
The following chart depicts the corporate
structure of the Company of each of our material subsidiaries and related holding companies. All ownership is 100% unless otherwise
indicated.
GOLDEN QUEEN MINING CO. LTD
.
Employees
On December 31, 2017, we had three full-time employees. GQM LLC had full-time 212 employees. We also engage
various consultants and contractors with specific skills to assist with various aspects of the Mine.
Financial Information by Segment and
Geographic Area
The Company has a single reportable operating
segment, and all mining operations and assets are located in the United States. See Item 6. Selected Financial Data, Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations and the attached financial statements for all financial
information.
Recent Developments
Commercial production was announced on
December 19, 2016 and 2017 was the first full year of production at the Mine occurred in 2017. Please refer to
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
for the 2017 operational update.
On February 20, 2018, the Company closed a rights offering for gross proceeds of approximately $25,000,
of which, $10,000 was contributed into GQM LLC. In addition, Gauss LLC, the Company’s joint venture partner, also contributed
$10,000 into GQM LLC. The funding contributed into GQM LLC will be available to settle accounts payable, equipment finance obligations
and the credit facility relating to the Soledad Mountain mine in the normal course of business. The rights offering was backstopped
by the Clay Group, which provided certainty of the amount raised, and allowed for shareholder participation. On February 22, 2018,
we closed the rights offering which expired on February 20, 2018. The Company issued the full allotment of 188,952,761 common shares
pursuant to the rights offering for gross proceeds of approximately US$25 million.
Additionally, the Company initiated negotiations
with the Clay Group to restructure the loan repayment schedule and the interest rate on the November 2017 Clay loan.
There are a number of risks associated
with the Mine and readers are urged to consider these risks and possible other risks, in order to obtain an understanding of the
Mine (see
Item 1A. Risk Factors
below).
GOLDEN QUEEN MINING CO. LTD
.
Competitive Conditions
The Company and GQM LLC compete with other
mining companies in the recruitment and retention of qualified managerial and technical employees, for supplies and equipment,
as well as for capital. As a result of this competition in the mining industry, some of which is with large established mining
companies holding substantial capabilities and with greater financial and technical resources than ours, we may be unable to effectively
develop and operate the Mine or obtain financing on terms we consider acceptable.
Government and Environmental Regulation
Our current and planned operations are
subject to state and federal environmental laws and regulations. Those laws and regulations provide strict standards for compliance,
and potentially significant fines and penalties for non-compliance. These laws address emissions, waste discharge requirements,
management of hazardous substances, protection of endangered species and reclamation of lands disturbed by mining. Compliance with
environmental laws and regulations requires significant time and expense, and future changes to these laws and regulations may
cause material changes or delays in the development of our Mine or our future activities on site.
See Environmental Issues, Permits &
Approvals below for a detailed description of the effects of federal, state and local environmental regulations and permitting
on the Company, GQM LLC and the Mine, as well as
Item 1A. Risk Factors
for a discussion of the related risks.
Gold and Silver Price History
The price of gold and silver are volatile
and are affected by numerous factors, all of which are beyond our control, such as the sale or purchase of gold and silver by various
central banks and financial institutions, inflation, recession, fluctuation in the relative values of the US dollar and foreign
currencies, changes in global gold and silver demand and political and economic conditions.
The following table presents the high, low and average afternoon fixed prices in US dollars for an ounce
of gold on the London Market over the past five years:
Year
|
|
High
|
|
|
Low
|
|
|
Average
|
|
2013
|
|
$
|
1,694
|
|
|
$
|
1,192
|
|
|
$
|
1,411
|
|
2014
|
|
|
1,385
|
|
|
|
1,142
|
|
|
|
1,266
|
|
2015
|
|
|
1,296
|
|
|
|
1,049
|
|
|
|
1,160
|
|
2016
|
|
|
1,366
|
|
|
|
1,077
|
|
|
|
1,251
|
|
2017
|
|
|
1,346
|
|
|
|
1,151
|
|
|
|
1,257
|
|
2018 (to March 22, 2018)
|
|
|
1,355
|
|
|
|
1,307
|
|
|
|
1,328
|
|
Data Source:
www.kitco.com
The following table presents the high, low and average afternoon fixed prices in US dollars for an ounce
of silver on the London Market over the past five years:
Year
|
|
High
|
|
|
Low
|
|
|
Average
|
|
2013
|
|
$
|
32.23
|
|
|
$
|
18.61
|
|
|
$
|
23.79
|
|
2014
|
|
|
22.05
|
|
|
|
15.28
|
|
|
|
19.08
|
|
2015
|
|
|
18.23
|
|
|
|
13.71
|
|
|
|
15.68
|
|
2016
|
|
|
20.71
|
|
|
|
13.58
|
|
|
|
17.14
|
|
2017
|
|
|
18.56
|
|
|
|
15.22
|
|
|
|
17.04
|
|
2018 (to March 22, 2018)
|
|
|
17.52
|
|
|
|
16.25
|
|
|
|
16.80
|
|
Data Source:
www.kitco.com
Available Information
We make available, free of charge, our
annual report on Form 10-K, our quarterly reports on Form 10-Q and any amendments to those reports, on our website at
www.goldenqueen.com
.
Our current reports on Form 8-K are available at the SEC’s website at www.sec.gov; otherwise we will provide electronic copies
of these filings free of charge upon request. Information contained on our website is not intended to be included as part of, or
incorporated by reference into this Form 10-K. Additional information and filings related to the Company can be found at
www.sec.gov
and
www.sedar.com
.
Item 1A. Risk Factors
The following is a discussion of distinctive
or special characteristics of our operations and the industry in which we operate, which may have a material impact on, or constitute
risk factors in respect of, our future financial performance and investment in the Company. These risk factors should be carefully
considered and read in conjunction with disclosure on business and risks appearing in this Form 10-K. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial may also affect our business. This Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties. Our actual result may differ materially from those anticipated
in the forward-looking statements as a result of a number of factors, including the risks described below. See the above “Cautionary
Note Regarding Forward-Looking Statements”.
Mineral resource and reserve estimates
are based on interpretation and assumptions, and the Mine may yield lower production of gold and silver under actual operating
conditions than current estimates. A material decrease in the quantity or grade of mineral resource or reserves from those estimates,
will affect the economic viability of the Mine or the Mine’s return on capital
Unless otherwise indicated, mineral resource
and reserve figures presented in our filings with securities regulatory authorities, press releases and other public statements
that may be made from time to time, are based upon estimates made by independent consulting geologists and mining engineers.
Estimates can be imprecise and depend upon geological interpretation and statistical inferences drawn from drilling and sampling,
which may prove to be unreliable. We cannot assure that the estimates are accurate or that mineralized materials from the Mine
can be mined or processed profitably.
GOLDEN QUEEN MINING CO. LTD
.
Assumptions about gold and silver market
prices are subject to great uncertainty as those prices have fluctuated widely in the past. Declines in the market prices of gold
and silver may render reserves containing relatively lower grades of ore uneconomic to exploit, and the Company may be required
to reduce reserve estimates, discontinue development or mining at one or more of its properties or write down assets as impaired.
Should GQM LLC encounter mineralization or geologic formations at the Mine different from those predicted, it may adjust its reserve
estimates and alter its mining plans. Either of these alternatives may adversely affect the Company’s actual production and
financial condition, results of operations and cash flow.
As production at the Mine proceeds, mineral
resources and reserves may require adjustments or downward revisions. In addition, the grade of mineralized material ultimately
mined, if any, may differ from that indicated by our feasibility study conducted in 2015 (the “2015 Feasibility Study”).
Gold and silver recovered in small scale tests may not be duplicated on a production scale.
The mineral resource and reserve estimates
contained in this Form 10-K have been determined and valued based on assumed future prices for gold and silver, cut-off grades
and operating costs that may prove to be different than actual prices, grades and costs. Extended declines in prices for gold or
silver may render such estimates uneconomic and result in reduced reported mineralization or adversely affect current determinations
of commercial viability. Any material reductions in estimates of mineralization, or of the ability of GQM LLC to profitably extract
gold and silver, could have a material adverse effect on our share price and the value of the Mine.
The estimates of production rates,
costs and financial results contained in the 2015 Feasibility Study and any current or future guidance of production rates offered
by the Company depend on subjective factors and may not be realized in actual production and such estimates speak only as of their
respective dates
The 2015 Feasibility Study provides estimates
and projections of future production, costs and financial results of the Mine. In addition, the Company may from time to time provide
guidance on projected production rates of the Mine. Any such information is forward-looking and depend on numerous assumptions,
including assumptions about the availability, accessibility, sufficiency and quality of ore, the costs of production, the market
prices of gold and silver, the ability to sustain and increase production levels, the sufficiency of its infrastructure, the performance
of its personnel and equipment, its ability to maintain and obtain mining interests and permits and its compliance with existing
and future laws and regulations. Actual results and experience may differ materially from these assumptions. Any such production
cost, or financial results estimates speak only as of the date on which they are made, and the Company disclaims any intent or
obligation to update such estimates, whether as a result of new information, future events or otherwise.
There are significant financial and
operational risks associated with an operating mine such as the mine operated by GQM LLC
The financial results of GQM LLC are subject
to risks associated with operating and maintaining mining operations on the property of the Mine (the “Property”),
including:
|
·
|
increases in our projected costs due to differences in grade of mineralized material, metallurgical
performance or revisions to mine plans in response to the physical shape and location of mineralized materials as compared to our
2015 Feasibility Study estimates;
|
|
·
|
increases in the costs of commodities such as fuel and electricity, and other materials and supplies
which would increase Mine development and operating costs;
|
|
·
|
the ability to extract sufficient gold and silver from resources and reserves to support a profitable
mining operation on the Property;
|
|
·
|
decreases in gold and silver prices;
|
|
·
|
compliance with approvals and permits for the Mine;
|
|
·
|
potential opposition from environmental groups, other non-governmental organizations or local residents
which may delay or prevent development of the Mine or affect our future operations;
|
|
·
|
difficult surface conditions, unusual or unexpected geologic formations or failure of open pit
slopes;
|
|
·
|
mechanical or equipment problems, industrial accidents or personal injury resulting in unanticipated
cost and delays;
|
|
·
|
environmental hazards or pollution;
|
|
·
|
fire, flooding, earthquakes, cave-ins or periodic interruptions due to inclement weather; and
|
GOLDEN QUEEN MINING CO. LTD
.
Any of these hazards and risks can materially
and adversely affect, among other things, production quantities and rates, costs and expenditures, potential revenues and production
dates. They may also result in damage to, or destruction of, production facilities, environmental damage, monetary losses and legal
liability. The value of our interest in GQM LLC may decrease as a result, which would be expected to reduce the value of our common
shares.
There are operational risks for which
insurance coverage is not available at affordable rates or at all, and the occurrence of any material adverse event for which there
is no insurance coverage may decrease financial performance of GQM LLC, or may impede or prevent ongoing operations
GQM LLC currently maintains insurance within
ranges of coverage consistent with industry practice in relation to some of these risks, but there are certain risks against which
GQM LLC cannot insure, or against which GQM LLC cannot maintain insurance at affordable premiums. Insurance against environmental
risks (including pollution or other hazards resulting from the disposal of waste products generated from production activities)
is not generally available to GQM LLC. If subjected to environmental liabilities, the costs incurred would reduce funds available
for other purposes, and GQM LLC may have to suspend operations or undertake costly interim compliance measures to address environmental
issues. Any such events would be expected to have a significant detrimental impact on the value of our interest in GQM LLC and
our common stock.
Gold and silver mining involves significant
production and operational risks
Gold and silver mining involves significant
production and operational risks, including those related to uncertain mineral exploration success, unexpected geological or mining
conditions, the difficulty of development of new deposits, unfavorable climate conditions, equipment or service failures, unavailability
of or delays in installing and commissioning plants and equipment, import or customs delays and other general operating risks.
Commencement of mining can reveal mineralization
or geologic formations, including higher than expected content of other minerals that can be difficult to separate from gold or
silver, which can result in unexpectedly low recovery rates. Problems may also arise due to the quality or failure of locally obtained
equipment or interruptions to services (such as power, water, fuel or transport or processing capacity) or technical capital expenditure
to achieve expected recoveries. Many of these production and operational risks are beyond the Company’s control. Delays in
commencing successful mining activities at new or expanded mines, disruptions in production and low recovery rates could have adverse
effects on the Company’s financial condition, results of operations and cash flows.
Land reclamation requirements for
our properties may be burdensome and expensive
Reclamation requirements are imposed on
GQM LLC in order to minimize long term effects of land disturbance, and this includes a requirement to re-establish pre-disturbance
land forms.
In order to carry out reclamation obligations
imposed on GQM LLC in connection with development activities, GQM LLC must allocate financial resources that might otherwise be
spent on further exploration and development. GQM LLC plans to set up a provision for our reclamation obligations on the Mine,
as appropriate, but this provision may not be adequate. If GQM LLC is required to carry out unanticipated reclamation work, our
financial position could be adversely affected.
Sale of aggregate
We have not included contributions from
the sale of aggregate in the 2015 Feasibility Study cash flow projections. However, aggregate sales over a period of thirty years
are important for the Mine as they will permit GQM LLC to meet its closure and reclamation requirements. GQM LLC began selling
waste rock in 2017. If no sale of waste rock as aggregate is ever achieved, the initial mine life is expected to be reduced.
The mining industry is intensely competitive
The mining industry is competitive in all
of its phases. We compete with other mining companies in the recruitment and retention of qualified managerial and technical employees.
If we are unable to successfully compete for qualified employees, GQM LLC’s production of minerals from the Mine may be slowed
down or suspended. We also compete with other mining companies for capital. If we are unable to raise sufficient capital, our interest
in GQM LLC may be diluted.
GOLDEN QUEEN MINING CO. LTD
.
As a result of such competition, some of
which is with large established mining companies with substantial capabilities and with greater financial and technical resources
than ours, GQM LLC may be unable to effectively develop the Mine or obtain financing on terms we consider acceptable.
We are subject to significant governmental
regulations, which affect our operations and costs of conducting our business
GQM LLC’s current and future operations
are and will be governed by laws and regulations, including, among others, those relating to:
|
·
|
mineral property production and reclamation;
|
|
·
|
labor standards, and occupational health and safety; and
|
|
·
|
environmental standards for waste disposal, treatment and use of toxic substances, land use and
environmental protection.
|
Companies engaged in production activities
often experience increased costs and delays as a result of the need to comply with applicable laws, regulations, and permits. Failure
to comply with these may result in enforcement actions, orders issued by regulatory or judicial authorities requiring operations
to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment
or costly remedial actions. GQM LLC may be required to compensate those suffering loss or damage by reason of our activities and
may have civil or criminal fines or penalties imposed for violations of such laws, regulations and permits.
Existing and possible future laws, regulations
and permits governing operations and activities of mining companies, or more stringent implementation, could have a material adverse
impact on GQM LLC’s business and cause increases in capital expenditures or require abandonment or delays in development
of the Mine, all of which would be expected to reduce the value of our interest in the GQM LLC.
GQM LLC’s activities are subject
to California state and federal environmental laws and regulations that may increase the costs of doing business and restrict operations
GQM LLC’s current and planned operations
are subject to state and federal environmental laws and regulations. Those laws and regulations provide strict standards for compliance,
and potentially significant fines and penalties for non-compliance. These laws address air emissions, waste discharge requirements,
management of hazardous substances, protection of endangered species and reclamation of lands disturbed by mining. Compliance with
environmental laws and regulations requires significant time and expense, and future changes to these laws and regulations may
cause material changes or delays in the production of minerals from the Mine or future activities.
US Federal Laws: The Comprehensive Environmental,
Response, Compensation, and Liability Act (CERCLA), and comparable state statutes, impose strict, joint and several liabilities
on current and former owners and operators of sites and on persons who disposed of or arranged for the disposal of hazardous substances
found at such sites. It is not uncommon for the government to file claims requiring cleanup actions, demands for reimbursement
for government incurred cleanup costs, or natural resource damages, or for neighbouring landowners and other third parties to file
claims for personal injury and property damage allegedly caused by hazardous substances released into the environment. The Federal
Resource Conservation and Recovery Act (RCRA), and comparable state statutes, govern the disposal of solid waste and hazardous
waste and authorize the imposition of substantial fines and penalties for noncompliance, as well as requirements for corrective
actions. CERCLA, RCRA and comparable state statutes can impose liability for clean-up of sites and disposal of substances found
on exploration, mining and processing sites long after activities on such sites have been completed.
GOLDEN QUEEN MINING CO. LTD
.
The Clean Air Act, as amended, and comparable
state statutes, restrict the emission of air pollutants from many sources, including mining and processing activities. GQM LLC’s
mining operations may produce air emissions, including fugitive dust and other air pollutants from stationary equipment, storage
facilities and the use of mobile sources such as trucks and heavy construction equipment, which are subject to review, monitoring
and/or control requirements under the Clean Air Act and comparable state air quality laws. New facilities may be required to obtain
permits before work can begin, and existing facilities may be required to incur capital costs in order to remain in compliance.
In addition, permitting rules may impose limitations on GQM LLC’s production levels or result in additional capital expenditures
in order to comply with the rules. The Clean Air Act and comparable state statutes provide for civil, criminal and administrative
penalties for unauthorized emissions of pollutants.
The Clean Water Act (CWA), and comparable
state statutes, impose restrictions and controls on the discharge of pollutants into waters of the United States, or to the surface
or ground waters of the state. The CWA regulates storm water runoff from mining facilities and requires a storm water discharge
permit for certain activities. Such a permit requires the regulated facility to monitor and sample storm water run-off from its
operations. The CWA and comparable state statutes provide for civil, criminal and administrative penalties for unauthorized discharges
of pollutants and impose liability on parties responsible for those discharges for the costs of cleaning up any environmental damage
caused by the release and for natural resource damages resulting from the release. Violation of these regulations and/or contamination
of groundwater by mining related activities may result in fines, penalties, and remediation costs, among other sanctions and liabilities
under state laws. In addition, third party claims may be filed by landowners and other parties claiming damages for alternative
water supplies, property damages, and bodily injury.
California Laws: At the state level, mining
operations are also regulated by the California Department of Conservation, Office of Mine Reclamation. State law requires mine
operators to hold a permit, which dictates operating controls and closure and post-closure requirements directed at protecting
surface and ground water. In addition, state law requires operators to have an approved mine reclamation plan. Local ordinances
require the operators to hold Conditional Use Permits. These permits mandate concurrent and post-mining reclamation of mines and
require the posting of reclamation financial assurance sufficient to guarantee the cost of closure and reclamation. Any changes
to these laws and regulations could have an adverse impact on our financial performance and results of operations by, for example,
requiring changes to operating constraints, technical criteria, fees or financial assurance requirements.
Regulations and pending legislation
governing issues involving climate change could result in increased operating costs
A number of governments or governmental
bodies have introduced or are contemplating regulatory changes in response to various climate change interest groups and the potential
impact of climate change. Legislation and increased regulation regarding climate change could impose significant costs on GQM LLC
and its suppliers, including costs related to increased energy requirements, capital equipment, environmental monitoring and reporting
and other costs to comply with such regulations. Given the current emotion, political significance and uncertainty around the impact
of climate change and how it should be dealt with, we cannot predict how legislation and regulation will affect our financial condition
and operating performance. Furthermore, even without such regulation, increased awareness and any adverse publicity in the global
marketplace about potential impacts on climate change by GQM LLC or other companies in our industry could harm our reputation.
The potential physical impacts of climate change on our operations are highly uncertain and may include changes in rainfall and
storm patterns and intensities, water shortages and changing temperatures. These impacts may adversely impact the cost, production
and financial performance of our operations.
Title to the Property may be subject
to other claims, which could affect our property rights
There are risks that title to the Property
may be challenged or impugned. The Property is located in California and may be subject to prior unrecorded agreements or transfers
and title may be affected by undetected defects. There may be valid challenges to the title to the Property which, if successful,
could affect development of the Mine and/or operations. This is particularly the case in respect of those portions of the Property
in which GQM LLC holds its interest solely through a lease with landholders, as such interests are substantially based on contract
and have been subject to a number of assignments.
GOLDEN QUEEN MINING CO. LTD
.
GQM LLC holds a number of unpatented mining
claims created and maintained in accordance with the General Mining Law of 1872 (the “General Mining Law”). Unpatented
lode mining claims and millsites are unique property interests and are generally considered to be subject to greater title risk
than other real property interests because the validity of unpatented mining claims is often uncertain. This uncertainty arises,
in part, out of the federal laws and regulations under the General Mining Law. Also, unpatented mining claims may be subject to
possible challenges by third parties or validity contests by the federal government. The validity of an unpatented mining claim
or millsite, in terms of both its location and its maintenance, is dependent on strict compliance with a body of US federal law.
Should the federal government impose a royalty or additional tax burdens on the properties that lie within public lands, the resulting
mining operations could be seriously impacted, depending upon the type and amount of the burden.
Legislation has been proposed in the past that could significantly
affect the mining industry
Members of the United States Congress have
repeatedly introduced bills which would supplant or alter the provisions of the United States General Mining Law. If enacted, such
legislation could change the cost of holding unpatented mining claims and could significantly impact our ability to mine mineralized
material on unpatented mining claims. Such bills have proposed, among other things, to either eliminate or greatly limit the right
to a mineral patent and to impose a federal royalty on production from unpatented mining claims. Although we cannot predict what
legislated royalties might be, the enactment of these proposed bills could adversely affect GQM LLC’s potential to mine mineralized
material on unpatented mining claims. Passage of such legislation could adversely affect our financial performance.
The Company must meet any future
cash contribution requirements if required under the terms of the JV Agreement with Gauss LLC, or face dilution of its ownership
interest in the Mine, which could impact our stock value and our ability to meet stock exchange listing requirements
We hold a 50% interest in the Mine pursuant
to the terms of the JV Agreement. If in the future there are unexpected costs that require additional capital contributions from
us under the terms of the JV Agreement, we will need to raise additional funds in order to maintain our 50% interest in the Mine,
otherwise we will have our interest diluted to below 50% which will likely have an adverse impact on the price of our common shares.
In addition, to the extent our ownership interest of GQM LLC remains our sole business and asset, if we are diluted below 50% ownership
we could fail to meet the listing requirements of the TSX and be delisted from the TSX and unable to list on a suitable alternate
stock exchange. In such an event the market for our securities would be limited to the US over-the-counter market and related quotation
services, being currently the OTCQX in the case of the Company. The anticipated impact of such a delisting will be to reduce venues
for trading in our securities, a reduction in available market information, a reduction in liquidity, a decrease in analyst coverage
of our securities, and a decrease in our ability for us to obtain additional financing to fund our operations.
GQM LLC’s results of operations,
cash flows and operating costs are highly dependent upon the market prices of gold and silver and other commodities, which are
volatile and beyond the Company’s control
Gold and silver prices are affected by
many factors including US dollar strength or weakness, prevailing interest rates and returns on other asset clauses, expectations
regarding inflation, speculation, global currency values, governmental decisions regarding the disposal of precious metal stockpiles,
global and regional demand and production, political and economic conditions and other factors. In addition, Exchange Traded Funds
(“ETFs”), which have substantially facilitated the ability of large and small investors to buy and sell precious metals,
have become significant holders of gold and silver. Factors that are generally understood to contribute to a decline in the prices
of gold and silver include a strengthening of the US dollar, net outflows from gold and silver ETFs, bullion sales by private and
government holders and global economic conditions and/or fiscal policies that negatively impact large consumer markets.
GOLDEN QUEEN MINING CO. LTD
.
Because GQM LLC is expected to derive all
of its revenues from sales of gold and silver, its results of operations and cash flows will fluctuate as the prices of these metals
increase or decrease. A period of significant and sustained lower gold and silver prices would materially and adversely affect
the results of operations and cash flows. Additionally, if market prices for gold and silver decline or remain at relatively low
levels for a sustained period of time, GQM LLC may have to revise its operating plans, including reducing operating costs and capital
expenditures, terminating or suspending mining operations at one or more of its properties and discontinuing certain exploration
and development plans. GQM LLC may be unable to decrease its costs in an amount sufficient to offset reductions in revenues and
may incur losses.
Operating costs at the Mine are also affected
by the price of input commodities, such as fuel, electricity, labour, chemical reagents, explosives, steel and concrete. Prices
for these input commodities are volatile and can fluctuate due to conditions that are difficult to predict, including global competition
for resources, currency fluctuations, consumer or industrial demand and other factors. Continued volatility in the prices of commodities
and other supplies the Company purchases could lead to higher costs, which would adversely affect results of operations and cash
flows.
Holders of common shares may suffer
dilution as a result of any equity financing by us in order to reduce or repay current indebtedness
We require additional capital to repay
our current indebtedness, and we may be required to seek funding, including through the issuance of equity-based securities. We
cannot predict the size or price of any future financing to raise capital, and any issuance of common shares or other instruments
convertible into equity. Any additional issuances of common shares or securities convertible into, or exercisable or exchangeable
for, common shares may ultimately result in dilution to the holders of common shares, dilution in any future earnings per share
and a decrease in the market price of our common shares.
We have been reflecting 100% of the
financial results of GQM LLC in our consolidated financial statements based on certain assumptions of management, which assumptions,
if incorrect, may require us to account for the Joint Venture differently
Our financial statements are prepared on
the basis that GQM LLC meets the requirements for accounting treatment as a variable interest entity with the Company being considered
as the primary beneficiary. As a result, we continue to reflect 100% of the financial results of GQM LLC in our consolidated
financial statements, along with a non-controlling interest held by Gauss LLC representing a 50% interest in GQM LLC. Although
no individual investor holds a controlling financial interest in GQM LLC, GQM LLC is controlled by a related party group.
Accordingly, one member of the group must be identified as the primary beneficiary. As the member of the related party
group most closely associated with GQM LLC, Golden Queen has determined it is the primary beneficiary. Future changes in
the capital or voting structure of GQM LLC could change that outcome. If this is the case, the presentation of the information
in Golden Queen’s financial statements would change, which could be perceived negatively by investors, and could have an
adverse effect on the market price of Golden Queen’s common shares.
There are differences in US and Canadian
practices for reporting mineral resources and reserves
We generally report mineral resources and
reserves in accordance with Canadian practices. These practices differ from the practices used to report resource and reserve estimates
in reports and other materials filed with the SEC.
It is Canadian practice to report measured,
indicated and inferred mineral resources, which are generally not permitted in disclosure filed with the SEC by United States issuers.
In the United States, mineralization may not be classified as a “reserve” unless the determination has been made that
the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. United
States investors are cautioned not to assume that all or any part of measured or indicated mineral resources will ever be converted
into reserves. Further, “inferred mineral resources” have a great amount of uncertainty as to their existence and as
to whether they can be mined legally or economically. Disclosure of “contained ounces” is permitted disclosure under
Canadian regulations, however, the SEC only permits issuers to report “resources” as in place, tonnage and grade without
reference to unit measures.
GOLDEN QUEEN MINING CO. LTD
.
The Company’s future growth
will depend upon its ability to develop new mines, either through exploration at existing properties or by acquisition from other
mining companies
Mines have limited lives based on proven
and probable ore reserves. The Company’s ability to achieve significant additional growth in revenues and cash flows will
depend upon success in further developing the Mine and developing or acquiring new mining properties. Any strategies to further
develop the Mine or acquire new properties are inherently risky, and the Company cannot assure that it will be able to successfully
develop existing or new mining properties or acquire additional properties on favorable economic terms or at all.
Passive foreign investment company
considerations and United States federal income tax consequences for United States investors
We would generally be classified
as a “passive foreign investment company” under the meaning of Section 1297 of the United States Internal Revenue Code
of 1986, as amended (a “PFIC”) if, for a tax year, (a) 75% or more of our gross income for such year is “passive
income” (generally, dividends, interest, rents, royalties, and gains from the disposition of assets producing passive income)
or (b) if at least 50% or more of the value of our assets produce, or are held for the production of, passive income, based on
the quarterly average of the fair market value of such assets. Based on the composition of our income, assets and operations
for the current taxable year, we do not expect to be classified as a PFIC during our tax year ended December 31, 2017. This
is a factual determination, however, that must be made annually after the close of each taxable year. Therefore, there can be no
assurance that we will not be a PFIC for the current taxable year or for any future taxable year.
If we are a PFIC for any taxable year during
which a United States person holds our securities, it would likely result in materially adverse United States federal income tax
consequences for such United States person. The potential consequences include, but are not limited to, re-characterization
of gain from the sale of our securities as ordinary income and the imposition of an interest charge on such gain and on certain
distributions received on our Common Shares. Certain elections may be available under US tax rules to mitigate some
of the adverse consequences of holding shares in a PFIC.
Two of our directors are ordinarily
residing outside of the United States and accordingly it may be difficult to effect service of process on them, or to enforce any
legal judgment against them
Two of our directors namely, Bryan A. Coates
and Paul M. Blythe are residents of Canada. Consequently, it may be difficult for US investors to effect service of process within
the US upon these directors, or to realize in the US upon judgments of US courts predicated upon civil liabilities under the US
securities laws. A judgment of a US court predicated solely upon such civil liabilities would probably be enforceable in Canada
by a Canadian court if the US court in which the judgment was obtained had jurisdiction, as determined by the Canadian court, in
the matter. There is substantial doubt whether or not an original action could be brought successfully in Canada against any of
such directors predicated solely upon such civil liabilities.
Our directors and officers may have
conflicts of interest as a result of their relationships with other companies
Our directors and officers are, or may
in the future be, directors, officers or shareholders of other companies that are similarly engaged in the business of acquiring,
developing and exploiting natural resource properties. Consequently, there is a possibility that our directors and/or officers
may be in a position of conflict in the future.
Members of the Clay family own a
majority interest in Golden Queen and are represented on our board of directors, and thus may exert significant influence on our
corporate affairs and actions, including those submitted to a shareholder vote. Additionally, the Clay family has provided the
Company with a $31 million loan which is secured by the material assets of the Company and any default on the loan could result
in the loss of the Company’s interest in the Mine
Thomas M. Clay, a director and CEO of the Company is a member of the Clay Group. The Clay Group also
controls Auvergne, which holds a 24.54% interest in Gauss LLC, the joint venture that holds a 50% interest in GQM LLC and half
the Mine. For so long as the Clay Group beneficially owns at least 25% of our common shares, at least one of Golden Queen’s
representatives on the board of managers of the Joint Venture will be designated by Auvergne.
Accordingly,
the Clay Group has considerable influence on our corporate affairs and actions, including those submitted to a shareholder vote,
and GQM LLC’s development and operation of the Mine. The interests of the Clay family may be different from the interests
of other investors.
GOLDEN QUEEN MINING CO. LTD
.
Members of the Clay family have also provided
the Company with the November 2016 Loan of $31 million, including approximately $23 million provided by an investment vehicle managed
by Thomas M. Clay. The loan is guaranteed by GQM Holdings and secured by a pledge of the Company’s interest in GQM Canada,
GQM Canada’s interest in GQM Holdings, and GQM Holdings’ 50% interest in GQM LLC. As a result, a default on the loan
could result in the Company losing its interest in the Mine, which would have a material adverse effect on our share price
.
Our share price may be volatile and
as a result you could lose all or part of your investment
In addition to volatility associated with
equity markets in general, the value of your investment could decline due to the impact of any of the following factors upon the
market price of our common shares:
|
·
|
Changes in the price for gold or silver;
|
|
·
|
delays, problems or increased costs in the production of minerals from the Mine;
|
|
·
|
decline in demand for our common stock;
|
|
·
|
downward revisions in securities analysts’ estimates;
|
|
·
|
our ability to refinance or repay our current and future debt;
|
|
·
|
investor perception or our industry or prospects; and
|
|
·
|
general economic trends.
|
Over the past few years, stock markets
have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile. These
fluctuations are often unrelated to operating performance and may adversely affect the market price of our common shares. As
a result, you may be unable to resell your shares at a desired price.
Because our common shares trade at
prices below $5.00 per share, and because we will not be listed on a national US exchange, there are additional regulations imposed
on US broker-dealers trading in our shares that may make it more difficult for you to buy and resell our shares through a US broker-dealer
Because of US rules that apply to shares
with a market price of less than $5.00 per share, known as the “penny stock rules”, investors will find it more difficult
to sell their securities in the US through a US broker dealer. The penny stock rules will probably apply to trades in our shares.
These rules in most cases require a broker-dealer to deliver a standardized risk disclosure document to a potential purchaser of
the securities, along with additional information including current bid and offer quotations, the compensation of the broker-dealer
and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer’s
account, and to make a special written determination that the penny stock is a suitable investment for the purchaser and receive
the purchaser’s written agreement to the transaction.
Item 1B. Unresolved Staff Comments
Not applicable.
GOLDEN QUEEN MINING CO. LTD
.
Item 2. Properties
Land Ownership and Mining Rights
The Company acquired its initial property
interests in 1985 and has since acquired additional properties in the area. GQM LLC holds directly or controls via agreement a
total of 33 patented lode mining claims, 160 unpatented lode mining claims, one patented millsite, 18 unpatented millsites, and
holds directly or controls via agreement approximately 1,392 acres of fee land, which together make up the Property. The Property
is located west of California State Highway 14 and lies largely south of Silver Queen Road covering all of Section 6 and portions
of Sections 5, 7 and 8 in Township 10 North, Range 12 West; portions of Sections 1 and 12 in Township 10 North, Range 13 West;
portions of Section 18 in Township 9 North, Range 12 West, and portions of Section 32 in Township 11 North, Range 12 West, all
from the San Bernardino Baseline and Meridian. Some of the ancillary facilities required for a mining operation will be located
in Section 6, T10N, R12W.
A Mine location map is shown in Figure
1 below:
Figure 1
GQM LLC holds the properties either directly
or under mining lease agreements with a number of individual landholders, two groups of landholders and three incorporated entities.
The land required for the Mine has therefore either been secured under one of the mining lease agreements or is controlled by GQM
LLC through ownership of the land in fee or where GQM LLC owns or holds patented and unpatented mining claims or mill sites directly.
The mining lease agreements were entered into from 1986 onwards. Refer to section
Property Interests Are in Good Standing
below for key information.
GOLDEN QUEEN MINING CO. LTD
.
Fee land surrounding Section 6 is required
for the construction of the ancillary facilities for a mining operation, for the construction of the heap leach pad and for construction
of two pads for storing quality waste rock. The area that will be disturbed by the Mine is a 912-acre block (369 hectare) within
the total area of approximately 1,700 acres (689 hectares) owned, held or controlled by GQM LLC. GQM LLC also owns seven residential
properties with buildings north of Silver Queen Road.
GQM LLC continues to review purchases of additional land in the adjacent area and acquired 19 parcels
of land during 2017 for the amount of $100.
Record of Survey and Royalty Map
The Company obtained Records of Survey
for the Mine on July 20, 2011 and March 31, 2014, which are recorded with Kern County under Document No. 211092035 Book 0027, Page
66, and Document No. 3318, Book 29, Page 30, respectively.
The basis for GQM LLC’s royalty map
is now the Record of Survey and this has superseded all earlier versions of the royalty map.
Royalties
GQM LLC is required to make advance minimum
royalty payments under the mining lease agreements. In some instances, GQM LLC will receive a credit for the advance minimum
royalty payments when mining ore on particular properties after the start of commercial production. Most of the royalties
are of the net smelter return type and are based on a sliding scale, with the percentage amount of the royalty depending upon the
value of the ore mined and processed from the particular property to which the royalty relates. Weighted average royalty
rates will range from a low of 1.0% to a high of 5.0% depending upon the area being mined and gold and silver prices. The
agreements also typically provide for an additional royalty if non-mineral commodities, such as aggregates, are processed and sold.
In 2017, GQM LLC acquired a royalty group for $800. The Company will continue to review proposals to acquire
royalty interests.
Property Interests Are in Good Standing
A few of the mining lease agreements expired
in 2015. The Company was unable to renew some leases with their owners. In all cases, it did not prohibit the extraction of minerals
from the properties. The owners became cotenants and will benefit from the distribution of profits (if any) after the Company recovers
all of its capital expenses related to the development, construction, and operation of the Mine. This is not expected to impact
GQM LLC’s operations. GQM LLC is in ongoing negotiations with some landholders to extend mining lease agreements or purchase
their land holdings.
All mining leases contain an “evergreen”
clause that becomes effective once the mine commences production.
Mine Background
The Mine is located approximately 5 miles
(8 kilometres) south of Mojave in Kern County in southern California. See Figure 1, a Mine location map above.
Geology
The Soledad Mountain mineral deposit is
hosted in a volcanic sequence of porphyritic rhyolite, quartz latites and bedded pyroclastics that occur on a large dome-shaped
feature, called Soledad Mountain, along the margins of a collapsed caldera. Higher-grade precious metals mineralization is associated
with steeply dipping, epithermal veins, which occupy faults and fracture zones that cross cut the rock units and generally trend
northwest. The veins are contained within siliceous envelopes of lower-grade mineralization that forms the bulk of the mineral
resource.
GOLDEN QUEEN MINING CO. LTD
.
The primary rock types that occur on the
Property are porphyritic rhyolite, flow-banded rhyolite, quartz latite, pyroclastics and siliceous vein material. Clay occurs in
variable amounts and the rocks contain upwards of 60% silica as SiO
2
. Porphyritic rhyolite and flow-banded rhyolite
were grouped as a single rock type for the metallurgical test work.
Mineral Reserve Estimates
The proven and probable reserve estimates
based on the 2015 Feasibility Study for the Mine are shown in the table below. The reserve estimates shown have been affected
by mining completed on-site to date as noted in
Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
.
2015 Mineral Reserve Estimates (100%
Basis)
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|
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In-Situ
Grade
|
|
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Contained
Metal
|
|
|
|
|
|
|
|
|
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Gold
|
|
|
Silver
|
|
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Gold
|
|
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Silver
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Classification
|
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Tonnes
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|
|
Ton
|
|
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g/t
|
|
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oz/ton
|
|
|
g/t
|
|
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oz/ton
|
|
|
oz
|
|
|
oz
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Proven
|
|
|
3,357,000
|
|
|
|
3,701,000
|
|
|
|
0.948
|
|
|
|
0.028
|
|
|
|
14.056
|
|
|
|
0.410
|
|
|
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102,300
|
|
|
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1,517,100
|
|
Probable
|
|
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42,957,000
|
|
|
|
47,352,000
|
|
|
|
0.638
|
|
|
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0.019
|
|
|
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10.860
|
|
|
|
0.317
|
|
|
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881,300
|
|
|
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14,999,100
|
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Total & Average
|
|
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46,314,000
|
|
|
|
51,053,000
|
|
|
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0.661
|
|
|
|
0.019
|
|
|
|
11.092
|
|
|
|
0.324
|
|
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983,600
|
|
|
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16,516,200
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Notes:
|
1.
|
The Qualified Person for the 2015 mineral reserve estimates is Sean Ennis, Vice President, Mining,
P.Eng., APEGBC Registered Member who is employed by Norwest Corporation, and is independent from the Company
|
|
2.
|
A gold equivalent cut-off grade of 0.005 oz/ton was used for Quartz Latite and a cut-off grade
of 0.006 oz/ton was used for all other rock types. The cut-off grade was varied to reflect differences in estimated metal recoveries
for the different rock types mined.
|
|
3.
|
Gold equivalent grades were calculated as follows: AuEq(oz/ton) = Au(oz/ton) + Ag(oz/ton)/88,
which reflects a long-term Au:Ag price ratio of 55 and an Au:Ag recovery ratio of 1.6. Gold-equivalent grades were used for open
pit optimizations.
|
|
4.
|
Tonnage and grade measurements are in imperial and metric units. Grades are reported in troy ounces
per short ton and in grams per tonne.
|
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5.
|
The effective date of the mineral reserve estimate is February 1, 2015.
|
|
6.
|
Total ore tonnage has been reduced by 6,617,000 tons (average grade 0.016ozEq/ton) based on mined
tonnages to date.
|
See
“Cautionary note regarding estimates of Measured, Indicated and Inferred Resources and Proven
and Probable Reserves”
on Page 3 of this Report.
The mineral reserves estimates are included
in the measured and indicated mineral resource estimates set out in the table in the section
Mineral Resource Estimates below.
Mineral Resource Estimates
The mineral resource estimates for the
Mine are shown in the table below:
2015 Mineral Resource Estimates (100%
Basis)
|
|
|
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|
|
|
In-Situ
Grade
|
|
|
Contained
Metal
|
|
|
|
|
|
|
|
|
|
Gold
|
|
|
Silver
|
|
|
Gold
|
|
|
Silver
|
|
Classification
|
|
Tonnes
|
|
|
Ton
|
|
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g/t
|
|
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oz/ton
|
|
|
g/t
|
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oz/ton
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|
|
oz
|
|
|
oz
|
|
Measured
|
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4,298,243
|
|
|
|
4,738,000
|
|
|
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0.960
|
|
|
|
0.028
|
|
|
|
13.37
|
|
|
|
0.39
|
|
|
|
130,000
|
|
|
|
1,865,000
|
|
Indicated
|
|
|
79,237,167
|
|
|
|
87,344,000
|
|
|
|
0.549
|
|
|
|
0.016
|
|
|
|
9.26
|
|
|
|
0.27
|
|
|
|
1,415,000
|
|
|
|
23,733,000
|
|
Measured & Indicated
|
|
|
83,535,409
|
|
|
|
92,082,000
|
|
|
|
0.575
|
|
|
|
0.017
|
|
|
|
9.53
|
|
|
|
0.28
|
|
|
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1,545,000
|
|
|
|
25,598,000
|
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Inferred
|
|
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21,392,329
|
|
|
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23,581,000
|
|
|
|
0.343
|
|
|
|
0.010
|
|
|
|
7.20
|
|
|
|
0.21
|
|
|
|
245,000
|
|
|
|
4,965,000
|
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Notes:
|
1.
|
The Qualified Person for the mineral resource estimates is Michael M. Gustin, C.P.G., Senior Geologist
who is employed by Mine Development Associates, and is independent from the Company.
|
|
2.
|
Mineral resources are inclusive of mineral reserves.
|
|
3.
|
Mineral resources that are not mineral reserves do not have demonstrated economic viability.
|
|
4.
|
Mineral resources are reported at a 0.004 oz/ton (0.137 g/t) AuEq cutoff in consideration of potential
open-pit mining and heap-leach processing.
|
GOLDEN QUEEN MINING CO. LTD
.
|
5.
|
Gold equivalent grades were calculated as follows: AuEq(oz/ton) = Au(oz/ton) + Ag(oz/ton)/88,
which reflect a long-term Au:Ag price ratio of 55 and a Au:Ag recovery ratio of 1.6.
|
|
6.
|
Mineral resources are reported as partially diluted.
|
|
7.
|
Rounding as required by reporting guidelines may result in apparent discrepancies between tons,
grade and contained metal content.
|
|
8.
|
Tonnage and grade measurements are in imperial and metric units. Grades are reported in troy ounces
per short ton and in grams per tonne.
|
|
9.
|
The effective date of the mineral resource estimate is December 31, 2014.
|
See
“Cautionary note regarding estimates of Measured, Indicated and Inferred Resources and Proven
and Probable Reserves”
on Page 3 of this Report.
The gold-equivalent relationship is based
on a long-term Au:Ag price ratio of 55 and Ag:Au recovery ratio of 0.625.
Note that mineral resources that are not
mineral reserves do not have demonstrated economic viability.
Exploration Potential
Additional geological targets have been
identified on the Property. These targets are generally peripheral west, east and south and southeast to the currently defined
mineral resource estimates. In the west, additional vein mineralization was identified in the hanging-wall of the Soledad
vein system and the potential for deeper gold-silver mineralization has been postulated based on hydrothermal alteration patterns.
To the east, vein mineralization was identified in the hanging-wall of the Karma/Ajax vein system. Toward the south and southeast,
extensions along the Karma/Ajax and Starlight/Golden Queen vein systems have been identified during an extensive re-logging program
by GQM LLC’s geologic team. Historic drill results indicate widths up to 26 feet with economic gold and silver grades.
Recent exploration work, including the
ongoing 20-hole drill program, has focused on the area laterally extending to the southeast along strike of the Karma, Patience,
and Queen Ester veins and structures. If successful, economic gold and silver mineralization could be added in this area. The continuity
of mineralization at depth remains untested.
Mine Operation
The Mine was built in-line with the feasibility
study cost estimates. Construction was completed in early 2016.
Standard, open pit mining methods are used
to mine ore and waste rock. Mining operations include drilling, blasting, loading, hauling and support equipment. GQM LLC is conducting
the mining. All open pit mining will occur in dry conditions above the water table.
Please refer to
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
for the 2017 operational update.
Closure, Reclamation and Financial Assurance
Closure and reclamation will be completed
in accordance with the requirements set out in the CUPs and an approved Surface Mining and Reclamation Plan and as set out in the
Board Order issued by the Regional Board.
Reclamation will proceed concurrently where
feasible but is nonetheless expected to require two years following ending of mining and all aggregate operations, and a further
three years of post-closure monitoring. Monitoring will continue until the reclamation success criteria are met.
GQM LLC is required to provide the following
financial assurances for the Mine:
|
·
|
To the Bureau of Land Management, State of California and Kern County for general reclamation on
site;
|
|
·
|
To the State Water Resources Control Board for rinsing and closing reclamation of the leached residues
on the heap and “Unforeseen events financial assurance” required by the State Water Resources Control Board to provide
for an unforeseen event that could contaminate surface or groundwater.
|
GOLDEN QUEEN MINING CO. LTD
.
Revegetation
Sites have been revegetated successfully
elsewhere in the California deserts, and it is expected that revegetation can be completed successfully for the Mine as described
in the revegetation plan prepared by independent consulting engineers. GQM LLC operates an ongoing test plot to prepare for closure
revegetation.
Clean up on Site
The Company has done extensive cleanup
on site since 2006 at a cost of approximately $550 and GQM LLC is continuing this effort. This demonstrates that the Company and
GQM LLC are committed to environmental stewardship and good housekeeping in our operations.
Environmental, Safety and Health Policy
GQM LLC has an Environmental, Safety and
Health Policy and a management system to implement the Policy.
The Company prepared a Cyanide Management
Plan for the Mine and became a signatory to the International Cyanide Management Code in 2013. The Code was developed under the
auspices of the United Nations Environment Program and the International Council on Metals and the Environment. The International
Cyanide Management Institute, a non-profit organization, administers the Code. Signatories to the Code commit to follow the Principles
set out in Code and to follow the Standards of Practice. Companies are expected to design, construct, operate and decommission
their facilities consistent with the requirements of the Code and must have their operations audited by an independent third party.
Audit results are made public.
Item 3. Legal Proceedings
To the best of our knowledge, there are
no legal actions pending, threatened or contemplated against the Company or GQM LLC, other than what is noted below.
The Center for Biological Diversity
Petition to List the Mohave Shoulderband Snail as an Endangered Species
On January 31, 2014, the Center for Biological
Diversity (“CBD”) filed an emergency petition (the “Petition”) with the United States Fish and Wildlife
Service (“USFWS”) asking the USFWS to list the Mohave Shoulderband snail as a threatened or endangered species. Citing
a report published more than 80 years ago, the Petition claims that the snail exists in only three places and that most of the
snail habitat occurs on Soledad Mountain, where the Company is developing the Mine.
On December 5, 2017, the US Fish and Wildlife
Service determined that the Mohave Shoulderband snail does not need protection under the Endangered Species Act. The Service’s
review of the best available scientific information, including recent range-wide population surveys, indicates the snail continues
to occupy its likely historic range.
GQM LLC is implementing ongoing conservation measures, including invasive plant control; wildfire suppression; and future plans
for reclamation and restoration of mined areas. These actions will help alleviate impacts to snail habitat. GQM LLC also voluntarily
developed a conservation plan for the snail that focuses on protecting habitat on Soledad Mountain through management of suitable
habitat within four conservation areas where the Mohave Shoulderband snail occurs in order to ensure the long-term persistence
of the snail.
Item 4. Mine Safety Disclosures
Pursuant to Section 1503(a) of the
Dodd-Frank Act, issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine in the United
States are required to disclose specified information about mine health and safety in their periodic reports. These reporting requirements
are based on the safety and health requirements applicable to mines under the Federal Mine Safety and Health Act of 1977 (the “Mine
Act”) which is administered by the US Department of Labor’s Mine Safety and Health Administration (MSHA). Information
pertaining to mine safety matters are contained within Exhibit 95.1 and attached hereto.
GOLDEN QUEEN MINING CO. LTD
.
See Accompanying Summary of Accounting
Policies and Notes to Consolidated Financial Statements
See Accompanying Summary of Accounting
Policies and Notes to Consolidated Financial Statements
See Accompanying Summary of Accounting
Policies and Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
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”).
For the year ended December 31, 2017, the
Company generated cash from operating activities of $3,942. However, as at December 31, 2017, the Company had a working capital
deficit of $13,102. The majority of the accounts payable, the loan payable and the credit facility relate to GQM LLC.
Subsequent to year-end, the Company closed
a rights offering for gross proceeds of approximately $25,000 (see Note 18), of which, $10,000 was contributed into GQM LLC. In
addition, Gauss, the Company’s joint venture partner, also contributed $10,000 into GQM LLC. The funding contributed into
GQM LLC will be available to settle accounts payable, equipment finance obligations (Note 7) and the credit facility (Note 14(v))
relating to the Soledad Mountain mine in the normal course of business.
The Company believes, with the proceeds
raised subsequent to year-end, it will have sufficient cash on hand to meet its obligations for the next twelve months from the
date of the approval of these consolidated financial statements.
Historically, the Company has been required
to obtain funding via debt and equity financings to fund development and operations. Although the Company has been successful
in obtaining debt and raising equity financing in the past, there can be no guarantee that such funding will be available in the
future.
These consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).
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 consolidated 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”). 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.
|
4.
|
Significant Accounting Policies, Estimates and Judgements
|
Cash and Cash Equivalents
For
purposes of balance sheet classification and the statements of cash flows, the Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash equivalents.
The Company places its cash and cash equivalents
with high quality financial institutions. At times, such cash deposits may be in excess of Federal Deposit Insurance Corporation
insurance limits. To date, the Company has not experienced a loss or lack of access to its cash and cash equivalents. However,
no assurance can be provided that access to the Company’s cash and cash equivalents will not be impacted by adverse economic
conditions in the financial markets.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
4.
|
Significant Accounting Policies, Estimates and Judgements (continued)
|
Inventories
Included in inventories
are stockpiled ore, in-process inventory, doré, and operating materials and supplies. The classification of inventory is
determined by the stage at which the ore is in the production process. All inventories are stated at the lower of weighted average
cost or net realizable value. Cost includes direct labor, materials, depreciation, depletion and amortization as well as overhead
costs relating to mining activities. Net realizable value represents the estimated future sales price of the product based on current
and long-term metals prices, less the estimated costs to complete production and bring the product to sale. Any write-downs of
inventory to net realizable value are recorded as cost of sales.
Stockpiled ore inventory represents ore
that has been extracted from the mine and is available for further processing. Costs added to stockpiled ore inventory are valued
based on current mining cost per tonne incurred up to the point of stockpiling the ore and are transferred to the next process
at the weighted average cost per equivalent ounce. Stockpiled ore tonnage is verified by periodic surveys and physical counts.
In process inventory includes ore on heap
leach pad and inventories in the solution and precipitate process. Finished goods inventory includes metals in their final stage
of production prior to sale, including doré.
The heap leach process extracts silver
and gold by placing ore on an impermeable pad and applying a diluted cyanide solution that dissolves a portion of the contained
silver and gold, which are then recovered in metallurgical processes.
Materials and supplies inventories are
valued at the lower of weighted average cost and net realizable value. Costs include acquisition, freight and other directly attributable
costs.
The estimate of the ultimate recovery expected
over time and the quantity of metal that may be extracted relative to the time the leach process occurs requires the use of estimates,
which are inherently inaccurate due to the nature of the leaching process. The quantities of metal contained in the ore are based
upon actual weights and assay analysis. The rate at which the leach process extracts gold and silver from the crushed ore is based
upon metallurgical test column estimates. The assumptions that are used by the Company to measure metal content during each stage
of the inventory conversion process include estimated recovery rates based on laboratory testing and assaying. The Company periodically
reviews its estimates compared to actual experience and revises its estimates when appropriate.
The assumptions used in determining net
realizable value for mineral inventories include estimates of gold and gold equivalents contained in the stockpile ore, heap leach
pad and solution and precipitates, expected recoveries, and judgment used in determining the allocation of depletion, depreciation
and amortization expense, and overhead costs that are directly attributable to inventories. If these estimates or assumptions are
inaccurate, the Company may be required to write down the carrying value of its inventories.
Mineral Interests
Costs related
to the development of our mineral reserves are capitalized when an ore body is determined to be economically mineable based on
proven and probable reserves and when appropriate permits are in place. The capitalized costs are amortized over the useful life
of the ore body following commencement of production or written off if the property is sold or abandoned.
Upon commencement of the production phase,
mining interests are depleted on a units-of-production basis over the estimated remaining economic life of the mine. In applying
the units of production method, depletion is determined using the quantity of material extracted from the mine in the period as
a portion of total quantity of material expected to be extracted in current and future periods based on the total estimated recoverable
ounces in proven and probable reserves.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
4.
|
Significant Accounting Policies, Estimates and Judgements (continued)
|
Drilling and related costs are classified
as development expenditures and capitalized if all the following criteria are met:
|
•
|
the costs are incurred to further define mineralization at and adjacent to existing reserve areas
or intended to assist with mine planning within a reserve area;
|
|
•
|
the drilling costs relate to an ore body that has been determined to be commercially mineable,
and a decision has been made to put the ore body into commercial production; and
|
|
•
|
at the time that the cost is incurred, the expenditure: (a) embodies a probable future benefit
that involves a capacity, singly or in combination, with other assets to contribute directly or indirectly to future net cash inflows,
(b) we can obtain the benefit and control access to it, and (c) the transaction or event giving rise to our right to or control
of the benefit has already occurred.
|
Drilling and related costs not meeting
all of these criteria are charged to operations as incurred.
Property, Plant and Equipment
Are
recorded at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of property, plant and equipment
includes the purchase price or construction cost, any costs directly attributable to bringing the asset to the location and condition
necessary for its intended use, and borrowing costs related to the acquisition or construction of qualifying assets. Assets under
construction are recorded at cost and reallocated to machinery and mine equipment when they become available for use.
Depreciation is calculated using either
the straight-line method or using the units-of-production method over the shorter of the estimated service lives of the respective
assets or the expected life of mine. Depreciation commences when the asset is in the condition and location necessary for it to
operate in the manner intended by management.
Mineral property interests and claims
|
Units-of-production
|
Mine development
|
Units-of-production
|
Machinery and mine equipment
|
7 – 12 years
|
Buildings and structures
|
5 - 12 years
|
Vehicles
|
3 – 5 years
|
Computer equipment and software
|
3 years
|
Asset retirement cost
|
Units-of-production
|
Capitalized interest
|
Units-of-production
|
Capitalization of certain mine construction
costs ceases and expenditures are either variable production costs as a component of inventory or expensed as incurred once production
commences. Depletion of capitalized costs for mining properties and depreciation and amortization of property, plant and equipment
also begins when the production phase commences.
Capitalized Interest
For
significant exploration and development projects, interest is capitalized as part of the historical cost of developing and constructing
assets in accordance with ASC 835-20 ("capitalization of interest"). Interest is capitalized until the asset is available
for use. Capitalized interest is determined by multiplying the Company’s weighted-average borrowing cost on general debt
by the average amount of qualifying costs incurred.
Once an asset subject to interest capitalization
is completed and available for use, the associated capitalized interest is expensed through depletion or impairment. See
Note
14(iii) - Amortization of Discount and Interest Expense.
Capitalization of interest ceased as at
March 31, 2016 when production commenced.
Valuation of Long-lived Assets
The
Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related
carrying amounts may not be recoverable. Asset impairment is considered to exist if the total estimated undiscounted pre-tax future
cash flows are less than the carrying amount of the asset. In estimating future cash flows, assets are grouped at the lowest level
for which there is identifiable cash flows that are largely independent of future cash flows from other asset groups. An impairment
loss is measured and recorded based on discounted estimated future cash flows. Future cash flows are calculated based on estimated
quantities of recoverable minerals, expected silver and gold prices (considering current and historical prices, trends and related
factors), production levels, operating costs, capital requirements and reclamation costs, all based on life-of mine plans.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
4.
|
Significant Accounting Policies, Estimates and Judgements (continued)
|
Existing proven and probable reserves are
included when determining the fair value of mine site asset groups at acquisition and, subsequently, in determining whether the
assets are impaired. The term “recoverable minerals” refers to the estimated amount of silver and gold that are expected
to be obtained after taking into account losses during ore processing and treatment.
Gold and silver prices are volatile and
affected by many factors beyond the Company’s control, including prevailing interest rates and returns on other asset classes,
expectations regarding inflation, speculation, currency values, governmental decisions regarding precious metals stockpiles, global
and regional demand and production, political and economic conditions and other factors may affect the key assumptions used in
the Company’s impairment testing. Various factors could impact our ability to achieve forecasted production levels from proven
and probable reserves. Additionally, production, capital and reclamation costs could differ from the assumptions used in the cash
flow models used to assess impairment. Actual results may vary from the Company’s estimates and result in additional impairment
charges.
Foreign Currency Translation
The
Company’s functional and reporting currency, the US dollar, is the primary economic currency in which the Company operates.
Assets and liabilities in foreign currencies are translated into US dollars at the exchange rate on the balance sheet date. Expenses
are translated at exchange rates on the date of the transaction. Where amounts denominated in a foreign currency are converted
into US dollars by remittance or repayment, the realized exchange differences are included in other income.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed as net income (loss) attributed to the Company divided by the weighted average number
of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur
from common shares issuable through stock options, warrants and convertible instruments. Net income attributable to any non-controlling
interest is not included in the calculation of the basic and diluted earnings (loss) per share.
Asset Retirement Obligations
Asset retirement obligations (‘‘AROs’’) arise from the acquisition, development and construction of mining
properties and plant and equipment due to government controls and regulations that protect the environment on the closure and reclamation
of mining properties. The major parts of the carrying amount of AROs relate to tailings and heap leach pad closure and rehabilitation,
demolition of buildings and mine facilities, ongoing water treatment and ongoing care and maintenance of closed mines. The Company
recognizes an ARO at the time the environmental disturbance occurs. When the ARO provision is recognized, the corresponding cost
is capitalized to property, plant, equipment and mineral interests and depreciated over the life of the related assets.
The timing of the actual environmental
remediation expenditures is dependent on a number of factors such as the life and nature of the asset, the operating license conditions
and the environment in which the mine operates. Reclamation provisions are initially measured at the expected value of future cash
flows discounted to their present value using a credit adjusted risk-free interest rate. If the expected present value increases,
the increase gives rise to a new obligation accounted for separately just as the reclamation provision was originally measured
but using current market value assumptions, and the current credit-adjusted risk-free rate. AROs are adjusted each period to reflect
the passage of time (accretion). Upon settlement of an ARO, the Company records a gain or loss if the actual cost differs from
the carrying amount of the ARO. Settlement gains/losses are recorded in the consolidated statements of comprehensive income (loss).
The estimated ARO is updated each period
end to reflect changes in facts and circumstances. The principal factors that can cause the ARO to change are the construction
of new processing facilities, changes in the quantities of material in proven and probable mineral reserves and a corresponding
change in the life-of-mine plan, changing ore characteristics that impact required environmental protection measures and related
costs, changes in water quality that impact the extent of water treatment required and changes in laws and regulations governing
the protection of the environment.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
4.
|
Significant Accounting Policies, Estimates and Judgements (continued)
|
Estimates
The preparation
of financial statements in conformity with 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 expenditures, royalty obligations, inventory valuations,
asset retirement obligations, and derivative liability – warrants. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash, receivables, accounts payable and accrued liabilities and interest
payable approximate fair values because of the immediate or short-term maturity of these financial instruments. The fair value
of the short-term and long-term loans payable approximate their carrying values because the interest rates are based on the market
rates. The fair value of the short and long-term portions of the notes payable approximates their carrying value and have been
estimated based on discounted cash flows using interest rates being offered for similar debt instruments. The carrying amount of
the notes payable are being recorded at amortized cost using the effective interest rate method.
The notes payable were initially recorded
at fair value less financing costs and are measured at each period end at amortized cost. The derivative liability relating to
the share purchase warrants issued by the Company as part of the consideration for the holders of the notes payable is recorded
at fair value using the binomial and the Black-Scholes valuation models at each reporting period.
Revenue Recognition
Revenue
is recognized when title to and other risks and rewards of ownership of gold and silver passes to the buyer and when collectability
is reasonably assured. Title and the risks and rewards of ownership pass to the buyer based on terms of the sales contract. Product
pricing is determined at the point revenue is recognized by reference to active and freely traded commodity markets, for example,
the London Bullion Market for both gold and silver, in an identical form to the product sold.
Income Taxes
The Company
follows the asset and liability method of accounting for income taxes whereby the deferred tax assets and liabilities are recognized
for the future tax consequences of differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. If it is determined that the realization of a future tax benefit is not more likely than not, the
Company establishes a valuation allowance.
Stock-based Compensation
Compensation costs are charged to the consolidated statements of income (loss) and comprehensive income (loss). Compensation costs
for employees are amortized over the period from the grant date to the date the options vest. Compensation expense for non-employees
is recognized immediately for past services and pro-rata for future services over the service provision period.
The Company accounts for stock-based compensation
awards granted to non-employees in accordance with FASB ASC Topic 505-50,
Equity-Based Payments to Non-Employees, or
ASC
505-50. Under ASC 505-50, we determine the fair value of the stock-based compensation awards granted as either the fair value of
the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair
value of equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier
of either (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2)
the date at which the counterparty’s performance is complete.
The Company uses the Black-Scholes option
valuation model to calculate the fair value of stock options at the date of grant. Option pricing models require the input of
highly subjective assumptions, including the expected price volatility. Changes in these assumptions can materially affect the
fair value estimate.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
4.
|
Significant Accounting Policies, Estimates and Judgements (continued)
|
Derivative Financial
Instruments
The Company reviews the terms of its equity instruments and other financing arrangements to determine whether
or not there are embedded derivative instruments that are required to be accounted for separately as a derivative financial instrument.
Also, in connection with the issuance of financing instruments, the Company may issue freestanding options or warrants that may,
depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity. The Company may also issue
options or warrants to non-employees in connection with consulting or other services.
Derivative financial
instruments are measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value
reported as charges or credits to profit or loss. For warrant-based derivative financial instruments, the Company uses the Black-Scholes
option pricing model to estimate fair value of the derivative instruments. For more complex derivative financial instruments, the
Company uses the binomial pricing model to estimate fair value of the derivative instrument.
Derivative instrument
liabilities are classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative
instrument could be required within 12 months of the balance sheet date.
Non-Controlling Interest
The non-controlling interest balance consists of equity in GQM LLC not attributable, directly or indirectly, to Golden Queen.
GQM LLC meets the definition of a Variable Interest Entity (“VIE”). 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 non-controlling interest has been classified into two categories; permanent equity and temporary equity.
Non-controlling interests in temporary
equity represent the estimated portion of non-controlling interest that could potentially be convertible through either a conversion
of the non-controlling interest into a net smelter royalty obligation of GQM LLC or a buy-out of the non-controlling interest at
fair value by the Company. The convertible portion of non-controlling interest recorded in temporary equity is initially
recorded at the carrying value and then adjusted for net income or loss and distributions attributable to the temporary equity.
The non-controlling interest in permanent
equity represents the portion of the non-controlling interest that is not convertible. Please refer to Note 14 (iv) for details.
New Accounting Pronouncements
|
(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.
The Company has completed its
assessment of the impact of the new revenue standard on the Company's financial position and believes the new standard will not
have a material impact. The Company will adopt the standard using the modified retrospective method of adoption. The Company's
revenue arises from contracts with customers in which the sale of doré is the single performance obligation under the customer
contract. Accordingly, revenue will continue to be recognized at a point in time when control of the asset is transferred to the
customer, which is generally consistent with the Company's current accounting policies.
ASU 2014-09 provides presentation
and disclosure requirements which are more detailed than under current GAAP.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
4.
|
Significant Accounting Policies, Estimates and Judgements (continued)
|
|
(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 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts
the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that
interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently
evaluating this guidance and the impact on its financial statements.
|
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. Inventories of the Company are comprised of:
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Stockpile inventory
|
|
$
|
201
|
|
|
$
|
318
|
|
In-process inventory
|
|
|
6,495
|
|
|
|
9,491
|
|
Dore inventory
|
|
|
320
|
|
|
|
76
|
|
Supplies and spare parts
|
|
|
2,012
|
|
|
|
1,056
|
|
|
|
$
|
9,028
|
|
|
$
|
10,941
|
|
During the year ended
December 31, 2017, the Company recognized an allowance against inventory in the amount of $2,909 (2016 - $nil), of which $2,071
(December 31, 2016 - $nil) relates to the inventory balances noted above.
|
6.
|
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, 2015
|
|
$
|
110
|
|
|
$
|
4,459
|
|
|
$
|
84,798
|
|
|
$
|
28,085
|
|
|
$
|
8,565
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
126,017
|
|
Additions
|
|
|
3,777
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,178
|
|
|
|
543
|
|
|
|
5,886
|
|
|
|
19,384
|
|
Transfers
|
|
|
6
|
|
|
|
(218
|
)
|
|
|
(42,765
|
)
|
|
|
32,116
|
|
|
|
10,861
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
and depletion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
654
|
|
|
$
|
1,462
|
|
|
$
|
350
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,466
|
|
Additions
|
|
|
-
|
|
|
|
67
|
|
|
|
317
|
|
|
|
5,667
|
|
|
|
2,329
|
|
|
|
-
|
|
|
|
5
|
|
|
|
8,385
|
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
$
|
3,893
|
|
|
$
|
4,174
|
|
|
$
|
41,062
|
|
|
$
|
53,072
|
|
|
$
|
25,925
|
|
|
$
|
543
|
|
|
$
|
5,881
|
|
|
$
|
134,550
|
|
At December 31, 2017
|
|
$
|
3,969
|
|
|
$
|
4,952
|
|
|
$
|
47,358
|
|
|
$
|
56,713
|
|
|
$
|
23,387
|
|
|
$
|
54
|
|
|
$
|
5,415
|
|
|
$
|
141,848
|
|
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
As at December 31, 2017 and 2016, equipment
financing balances are as follows:
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Balance, beginning of the year
|
|
$
|
15,150
|
|
|
$
|
18,373
|
|
Additions
|
|
|
10,727
|
|
|
|
2,047
|
|
Principal repayments
|
|
|
(6,192
|
)
|
|
|
(5,006
|
)
|
Down payments and taxes
|
|
|
(1,839
|
)
|
|
|
(264
|
)
|
Settlements
|
|
|
(603
|
)
|
|
|
-
|
|
Balance, end of the year
|
|
$
|
17,243
|
|
|
$
|
15,150
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
7,629
|
|
|
$
|
5,656
|
|
Non-current portion
|
|
$
|
9,614
|
|
|
$
|
9,494
|
|
The terms of the financing agreements are
as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Total acquisition costs
|
|
$
|
35,692
|
|
|
$
|
26,309
|
|
Interest rates
|
|
|
0.00% ~ 4.50
|
%
|
|
|
0.00%
~ 4.50
|
%
|
Monthly payments
|
|
$
|
5 ~ 74
|
|
|
$
|
5 ~ 34
|
|
Average remaining life (years)
|
|
|
2.13
|
|
|
|
2.54
|
|
For the year ended December 31, 2017, the
Company made total down payments of $1,839 (December 31, 2016 - $264). The down payment consists of the sales tax on the assets
and a 10% payment of the pre-tax purchase price. All of the loan agreements are for a term of four years, except two which are
for three years, and are secured by the underlying asset.
The following table outlines the principal
payments to be made for each of the remaining years:
Years
|
|
Principal Payments
|
|
2018
|
|
$
|
7,629
|
|
2019
|
|
|
5,782
|
|
2020
|
|
|
2,374
|
|
2021
|
|
|
1,458
|
|
Total
|
|
$
|
17,243
|
|
|
8.
|
Derivative Liabilities
|
Share Purchase Warrants – Clay loans
(Related Party)
On June 8, 2015, the Company issued 10,000,000
share purchase warrants to the Clay Group (the “June 2015 Warrants”) in connection with the June 2015 Loan (see Note
14 (ii)). 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. On February 20, 2018, the Company completed a rights offering at a share price lower
than the exercise price of the June 2015 Warrants. As per the anti-dilution provision, the exercise price of the June 2015 Warrants
will be adjusted according to a formula (see Note 18).
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 (see Note 14 (ii)). 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. On February 20, 2018, the Company completed a rights
offering at a share price lower than the exercise price of the November 2016 Warrants. As per the anti-dilution provision, the
exercise price of the November 2016 Warrants will be adjusted according to a formula (see Note 18).
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
8.
|
Derivative Liabilities (continued)
|
Share Purchase Warrants – Clay loans
(Related Party) (continued)
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 December 31, 2017 is $439 (December 31, 2016 - $5,458). 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
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Risk-free interest rate
|
|
|
1.73
|
%
|
|
|
0.84%.
|
|
Expected life of derivative liability
|
|
|
2.44 years
|
|
|
|
3.44 years
|
|
Expected volatility
|
|
|
78.59
|
%
|
|
|
78.79
|
%
|
Dividend rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Warrants related to November
2016 Loan
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Risk-free interest rate
|
|
|
1.73
|
%
|
|
|
1.11
|
%
|
Expected life of derivative liability
|
|
|
3.89 years
|
|
|
|
4.89 years
|
|
Expected volatility
|
|
|
75.69
|
%
|
|
|
77.21
|
%
|
Dividend rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The change in the derivative share purchase
warrants is as follows:
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Balance, beginning of the period
|
|
$
|
5,458
|
|
|
$
|
2,498
|
|
Fair value at inception
|
|
|
-
|
|
|
|
3,090
|
|
Change in fair value
|
|
|
(5,019
|
)
|
|
|
(130
|
)
|
Balance, end of the period
|
|
$
|
439
|
|
|
$
|
5,458
|
|
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 December 31, 2017, the Company had
re-measured the share purchase warrants and determined the fair value of the derivative liability to be $2 (December 31, 2016 -
$972) using the Black-Scholes option pricing model with the following assumptions:
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Risk-free interest rate
|
|
|
1.68
|
%
|
|
|
0.84
|
%
|
Expected life of derivative liability in years
|
|
|
1.56 years
|
|
|
|
2.56 years
|
|
Expected volatility
|
|
|
66.89
|
%
|
|
|
79.40
|
%
|
Dividend rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
8.
|
Derivative Liabilities (continued)
|
The change in the derivative share purchase
warrants is as follows:
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Fair value of warrants issued
|
|
$
|
972
|
|
|
$
|
2,701
|
|
Change in fair value of warrants
|
|
|
(970
|
)
|
|
|
(1,729
|
)
|
Balance, end of the period
|
|
$
|
2
|
|
|
$
|
972
|
|
|
9.
|
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 December 31, 2017
was $1,465 (December 31, 2016 - $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 December 31, 2017, is $1,869 (December 31, 2016
- $1,211).
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 December 31, 2017 is $278 (December 31, 2016 - $278).
The Company entered into $3,612 (2016 -
$2,954) 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 (2016 - $61). Golden Queen Ltd. has provided a corporate guarantee on the
surety bonds.
Asset Retirement Obligation
The total asset retirement obligation as
at December 31, 2017, was $1,838 (December 31, 2016 - $1,366).
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 December 31, 2017, 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 8.7% and an inflation rate of 2.5%.
The following is a summary of asset retirement
obligations:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Balance, beginning of the period
|
|
$
|
1,366
|
|
|
$
|
978
|
|
Accretion
|
|
|
126
|
|
|
|
90
|
|
Changes in cash flow estimates
|
|
|
346
|
|
|
|
298
|
|
Balance, end of the period
|
|
$
|
1,838
|
|
|
$
|
1,366
|
|
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
The tax effects of the temporary differences
that give rise to the Company's deferred tax assets and liabilities are as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Deferred Tax Assets (Liabilities)
|
|
|
|
|
|
|
|
|
Net operating and capital losses
|
|
$
|
16,942
|
|
|
$
|
15,799
|
|
Un-deducted interest
|
|
|
2,109
|
|
|
|
779
|
|
Capitalized interest deducted
|
|
|
(1,409
|
)
|
|
|
(1,475
|
)
|
Unrealized FX gain
|
|
|
(657
|
)
|
|
|
-
|
|
Discount on Clay loan
|
|
|
(840
|
)
|
|
|
|
|
Other
|
|
|
157
|
|
|
|
45
|
|
Financing costs
|
|
|
435
|
|
|
|
747
|
|
Investment in GQM LLC
|
|
|
(11,692
|
)
|
|
|
(14,676
|
)
|
Valuation allowance
|
|
|
(13,241
|
)
|
|
|
(14,140
|
)
|
Deferred tax liabilities
|
|
$
|
(8,196
|
)
|
|
$
|
(12,921
|
)
|
The annual tax benefit is different from
the amount provided by applying the statutory federal income tax rate to the Company’s pre-tax loss. The reason for the
differences are:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Income tax benefit at Canadian statutory rate
|
|
$
|
(2,834
|
)
|
|
$
|
(3,108
|
)
|
Foreign income taxes at other than Canadian statutory rate
|
|
|
(1,921
|
)
|
|
|
(1,398
|
)
|
Re-measurement due to the Tax Cuts and Jobs Act
|
|
|
(3,739
|
)
|
|
|
-
|
|
Change in fair value of derivative liability
|
|
|
(1,557
|
)
|
|
|
(483
|
)
|
Non-deductible accretion and other
|
|
|
(113
|
)
|
|
|
558
|
|
Expiration of tax loss carryforwards
|
|
|
2,105
|
|
|
|
290
|
|
Non-controlling interest
|
|
|
2,197
|
|
|
|
922
|
|
Permanent differences, other
|
|
|
58
|
|
|
|
290
|
|
Prior year true-up, net
|
|
|
1,977
|
|
|
|
1,334
|
|
Increase (decrease) in valuation allowance
|
|
|
(898
|
)
|
|
|
1,885
|
|
Tax benefit
|
|
$
|
(4,725
|
)
|
|
$
|
-
|
|
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
The Tax Cuts and Jobs Act (“TCJA”)
was enacted on December 22, 2017, which significantly changed U.S. income tax law, including a reduction of the Federal corporate
income tax rate from 35% to 21%. The $4,725 income tax recovery recognized in 2017 includes a net benefit of $3,739 related to
the re-measurement of the deferred income tax liability which resulted from the 2014 JV transaction. Further guidance on the implementation
and application of the TCJA will be forthcoming in regulations and other pronouncements to be issued by the U.S. Department of
Treasury and/or guidance from the state of California. Such regulations, other pronouncements, or guidance may require changes
to the estimated net benefit recorded, and any such change will be accounted for in the period in which the regulations, other
pronouncements, or guidance are enacted or released by the relevant taxing authorities.
On December 22, 2017, the SEC staff issued
Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the TCJA.
SAB 118 provides a measurement period that should not extend beyond one year from the TJCA enactment date for companies to complete
the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those
aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain
income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate
in the financial statements.
The Company evaluates its valuation allowance
requirements based on projected future operations. When circumstances change and this causes a change in management’s judgment
about the recoverability of deferred tax assets, the impact of the change on the valuation allowance is reflected in current income
or loss. As management of the Company does not currently believe that the Company will receive the benefit of this asset, a valuation
allowance equal to certain net deferred tax assets has been established at both December 31, 2017 and 2016.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
10.
|
Income Taxes (continued)
|
As at December 31, 2017, the Company had
net operating loss carry-forwards available to reduce taxable income in future years as follows:
Country
|
|
Amount
|
|
|
Expiration dates
|
|
Unites States – Federal
|
|
$
|
41,738
|
|
|
|
2018 - 2037
|
|
Canada (C$)
|
|
$
|
19,829
|
|
|
|
2026 - 2037
|
|
These consolidated financial statements
do not reflect the potential effect on future income taxes of the application of these losses.
The Company has evaluated its tax positions
for the years ended December 31, 2017 and 2016 and determined that it has no uncertain tax positions requiring financial statement
recognition.
Under current federal and state income
tax laws and regulations, GQM LLC, a multi-member limited liability company (“LLC”) is treated as a partnership for
income tax reporting purposes and is generally not subject to income taxes. Additionally, at the LLC level no provision has been
made for federal, state, or local income taxes on the results of operations generated by partnership activities; as such taxes
are the responsibility of its Members.
The Company’s common shares outstanding
are no par value, voting shares with no preferences or rights attached to them.
Common shares
In July 2016, the Company completed a financing
for gross proceeds of $12,193 (C$16,124) 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 $2,377, which was recorded as a derivative liability and
the Company allocated the remaining proceeds of $9,816 to the common shares (See Note 8).
The Company also issued 757,700 common
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 $324 which was recorded
as a derivative liability (See Note 8). In addition, the Company incurred cash share issue costs totalling $1,285, which consisted
of legal fees, commission and other direct financing costs.
On January 17, 2017, the Company issued
100,000 shares for a total of $59 as finder fees which were recognized in general and administrative expenses in connection with
the declaration of commercial production in December 2016.
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”).
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
11.
|
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.
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 years ended December 31, 2017 and 2016:
|
|
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
|
|
|
1,605,001
|
|
|
$
|
0.38
|
|
Options forfeited
|
|
|
(166,667
|
)
|
|
$
|
0.64
|
|
Options expired
|
|
|
(393,333
|
)
|
|
$
|
1.13
|
|
Options outstanding, December 31, 2017
|
|
|
2,600,001
|
|
|
$
|
0.54
|
|
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.
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 year ended December 31, 2017.
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.
The fair value of stock options granted
as above was calculated using the following weighted average assumptions:
|
|
|
2017
|
|
|
|
2016
|
|
Expected life (years)
|
|
|
5.00
|
|
|
|
5.00
|
|
Interest rate
|
|
|
1.18% ~ 1.70
|
%
|
|
|
1.00
|
%
|
Volatility
|
|
|
77.29% ~ 79.17
|
%
|
|
|
81.27
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
During the year December 31,
2017, the Company recognized $201 (2016 - $24) in stock-based compensation relating to employee stock options that were issued
and/or had vesting terms.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
11.
|
Share Capital (continued)
|
Stock options (continued)
The following table summarizes information
about stock options outstanding and exercisable as at December 31, 2017:
Expiry Date
|
|
Number
Outstanding
|
|
|
Number
Exercisable
|
|
|
Remaining
Contractual
Life
(years)
|
|
|
Weighted
Average
Exercise Price
|
|
June 3, 2018
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
0.42
|
|
|
$
|
1.16
|
|
September 3, 2018
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
0.68
|
|
|
$
|
1.59
|
|
September 8, 2020
|
|
|
430,000
|
|
|
|
430,000
|
|
|
|
2.69
|
|
|
$
|
0.58
|
|
November 30, 2021
|
|
|
365,000
|
|
|
|
121,666
|
|
|
|
3.92
|
|
|
$
|
0.66
|
|
March 20, 2022
|
|
|
400,002
|
|
|
|
-
|
|
|
|
4.22
|
|
|
$
|
0.65
|
|
October 20, 2022
|
|
|
1,204,999
|
|
|
|
-
|
|
|
|
4.81
|
|
|
|
0.29
|
|
Balance, December 31, 2017
|
|
|
2,600,001
|
|
|
|
751,666
|
|
|
|
3.92
|
|
|
$
|
0.54
|
|
As at December 31, 2017, the aggregate
intrinsic value of the outstanding exercisable options was $nil (December, 31, 2016 - $651).
Warrants
The following is a summary of common share
purchase warrants activity:
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Balance, beginning of the year
|
|
|
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 year
|
|
|
24,317,700
|
|
|
|
24,317,700
|
|
|
(1)
|
Non-tradable share purchase warrants.
|
The following table summarizes information
about share purchase warrants outstanding and exercisable:
Expiry Date
|
|
Number
Outstanding
|
|
|
Remaining
Contractual
Life
(years)
|
|
|
Exercise
Price
|
|
June 8, 2020
|
|
|
10,000,000
|
|
|
|
2.44
|
|
|
$
|
0.95
|
|
July 25, 2019
|
|
|
6,317,700
|
|
|
|
1.56
|
|
|
$
|
2.00
|
|
November 18, 2021
|
|
|
8,000,000
|
|
|
|
3.88
|
|
|
$
|
0.85
|
|
Balance, December 31, 2017
|
|
|
24,317,700
|
|
|
|
2.69
|
|
|
|
|
|
|
12.
|
General and Administrative Expenses
|
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:
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Audit, legal and professional fees
|
|
$
|
1,029
|
|
|
$
|
1,357
|
|
Salaries and benefits and director fees
|
|
|
2,094
|
|
|
|
1,538
|
|
Regulatory fees and licenses
|
|
|
114
|
|
|
|
135
|
|
Insurance
|
|
|
514
|
|
|
|
480
|
|
Corporate administration
|
|
|
1,484
|
|
|
|
798
|
|
|
|
$
|
5,235
|
|
|
$
|
4,308
|
|
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss attributable to the shareholders of the Company - numerator for basic and diluted loss per share
|
|
$
|
(1,165
|
)
|
|
$
|
(7,429
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding -basic and diluted
|
|
|
111,140,464
|
|
|
|
104,737,396
|
|
|
|
|
|
|
|
|
|
|
Loss per share – basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.07
|
)
|
Weighted average number of shares for the
year ended December 31, 2017 excludes 2,600,001 options (December 31, 2016 - 1,555,000) and 24,317,700 warrants (December 31, 2016
– 24,317,700) that were antidilutive.
|
14.
|
Related Party Transactions
|
Except as noted elsewhere in these consolidated
financial statements, related party transactions are disclosed as follows:
|
(i)
|
Compensation of Key Management Personnel, Transactions with Related Parties and Related Party
Balances
|
For the year ended December 31,
2017, the Company recognized $653 (2016 – $653) salaries and fees for Officers and Directors.
For the year ended December 31,
2017, transactions with related parties included amendment, closing, commitment and director fees and interest expense totalling
$2,766 (2016 – $4,011).
As at December 31, 2017, $38
(December 31, 2016 - $nil) was included in prepaid expenses and other current assets for closing fees paid to related parties.
As at December 31, 2017, $463
(December 31, 2016 - $nil) was included in accounts payable and accrued liabilities for amendment fees and accrued interest payable
to related parties.
On December 31, 2014, the Company
entered into a loan (the “December 2014 Loan”) with the Clay Group for $12,500, 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 $12,500
to $37,500 (the “June 2015 Loan”).
On November 18, 2016, the Company
repaid $10,659 of the June 2015 Loan and accrued interest from net proceeds of $10,908 from an equity financing. The Company restructured
the remaining debt with a new loan with a principal amount of $31,000 (the “November 2016 Loan”). The Company incurred
a financing fee to secure the loan in the amount of $930, which was also paid on November 18, 2016.
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.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
14.
|
Related Party Transactions (continued)
|
The November 2016 Loan had a
thirty-month term and an annual interest rate of 8%, payable quarterly. On November 10, 2017, the Company and the Clay Group agreed
to amend the November 2016 Loan by reducing the 2018 quarterly and 2019 Q1 principal payments from $2,500 to $1,000, adding the
reduction of such payments pro-rata to the remaining 2019 payments, and increasing the annual interest rate from 8% to 10% effective
January 1, 2018 (the “November 2017 Loan”). On January 1, 2018, $2,212 of interest payments that were deferred in 2017
at the Company’s option, a principal payment of $2,500 and a $400 amendment fee became due, the payment of which was deferred
until after the close of the rights offering and was paid on February 28, 2018 (see Note 18).
The following table summarizes
activity on the notes payable:
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Balance, beginning of the period
|
|
$
|
26,347
|
|
|
$
|
36,053
|
|
Interest payable transferred to principal balance
|
|
|
2,212
|
|
|
|
2,977
|
|
Accretion of discount on loans
|
|
|
1,940
|
|
|
|
1,996
|
|
Capitalized financing fee and legal fees
|
|
|
(400
|
)
|
|
|
(930
|
)
|
Reduction of debt upon issuance of warrants
|
|
|
-
|
|
|
|
(3,090
|
)
|
Repayment of loans and interest
|
|
|
-
|
|
|
|
(10,659
|
)
|
Balance, end of the period
|
|
$
|
30,099
|
|
|
$
|
26,347
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
7,712
|
|
|
$
|
-
|
|
Non-current portion
|
|
$
|
22,387
|
|
|
$
|
26,347
|
|
|
(ii)
|
Amortization of Discounts and Interest Expense
|
The following table summarizes
the amortization of discounts and interest on loan:
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accretion of the June 2015 Loan discount
|
|
$
|
-
|
|
|
$
|
1,785
|
|
Interest expense related to the June 2015 Loan
|
|
|
-
|
|
|
|
3,599
|
|
Accretion of the November 2017 Loan discount
|
|
|
1,940
|
|
|
|
210
|
|
Interest expense related to the November 2017 Loan
|
|
|
2,580
|
|
|
|
296
|
|
Closing and commitment fees related to the Credit Facility
|
|
|
90
|
|
|
|
-
|
|
Interest expense related to Komatsu financial loans
(1)
|
|
|
607
|
|
|
|
603
|
|
Accretion of discount and interest on loan
|
|
$
|
5,217
|
|
|
$
|
6,493
|
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accretion of discount and interest on loan
(1)
|
|
$
|
5,217
|
|
|
$
|
6,493
|
|
Less: Interest costs capitalized
(2)
|
|
|
-
|
|
|
|
(1,005
|
)
|
Interest expense
|
|
$
|
5,217
|
|
|
$
|
5,488
|
|
|
(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.
|
|
(2)
|
The Mine went into production on April 1, 2016. As a result, interest capitalization ended on March
31, 2016.
|
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
14.
|
Related Party Transactions (continued)
|
|
(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 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 at December 31, 2017 and 2016 are as follows:
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Assets, GQM LLC
|
|
$
|
149,095
|
|
|
$
|
151,802
|
|
Liabilities, GQM LLC
|
|
|
(28,024
|
)
|
|
|
(20,710
|
)
|
Net assets, GQM LLC
|
|
$
|
121,071
|
|
|
$
|
131,092
|
|
Included in the assets above,
is $2,606 (December 31, 2016 - $11,138) in cash held by GQM LLC which is directed specifically to fund capital expenditures required
to continue with production and to settle GQM LLC’s obligations. The liabilities of GQM LLC do not have recourse to the general
credit of Golden Queen except for $2,203 for two mining drill loans and $2,297 in surety bond agreements.
Non-Controlling Interest
The carrying value of the
non-controlling interest is adjusted for net income and loss, distributions and contributions pursuant to ASC 810-10 based on the
same percentage allocation used to calculate the initial book value of temporary equity.
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net and comprehensive loss in GQM LLC
|
|
$
|
(10,022
|
)
|
|
$
|
(4,526
|
)
|
Non-controlling interest percentage
|
|
|
50
|
%
|
|
|
50
|
%
|
Net and comprehensive loss attributable to non-controlling interest
|
|
$
|
(5,010
|
)
|
|
$
|
(2,263
|
)
|
Net and comprehensive loss attributable to permanent non-controlling interest
|
|
$
|
(3,006
|
)
|
|
$
|
(1,358
|
)
|
Net and comprehensive loss attributable to temporary non-controlling interest
|
|
$
|
(2,004
|
)
|
|
$
|
(905
|
)
|
|
|
Permanent
Non-Controlling
Interest
|
|
|
Temporary
Non-Controlling
Interest
|
|
Carrying value of non-controlling interest, December 31, 2015
|
|
$
|
40,686
|
|
|
$
|
27,124
|
|
Net and comprehensive loss for the year
|
|
|
(1,359
|
)
|
|
|
(904
|
)
|
Carrying value of non-controlling interest, December 31, 2016
|
|
$
|
39,327
|
|
|
$
|
26,220
|
|
Net and comprehensive loss for the year
|
|
|
(3,006
|
)
|
|
|
(2,006
|
)
|
Carrying value of non-controlling interest, December 31, 2017
|
|
$
|
36,321
|
|
|
$
|
24,214
|
|
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
14.
|
Related Party Transactions (continued)
|
On May 23, 2017, GQM LLC entered
into a $5,000 one-year revolving credit agreement (the “Credit Facility”) in which Gauss Holdings LLC and Auvergne,
LLC agreed to extend credit in the form of loans to GQM LLC. The Credit Facility commenced on July 1, 2017, bears interest at a
rate of 12% per annum and is subject to a commitment fee of 1% per annum. For the year ended December 31, 2017, GQM LLC paid a
fee of $100 on closing which was classified as prepaid expenses and other current assets of which $62 was expensed and accrued
commitment fees of $28. As at December 31, 2017, GQM LLC has drawn $3,000 from the Credit Facility (see Note 18).
|
15.
|
Supplementary Disclosures of Cash Flow Information
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest on loan payable
|
|
$
|
607
|
|
|
$
|
603
|
|
Non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
Asset retirement costs charged to mineral property interests
|
|
$
|
346
|
|
|
$
|
297
|
|
Mining equipment acquired through issuance of debt
|
|
$
|
8,285
|
|
|
$
|
1,783
|
|
Mineral property expenditures included in accounts payable
|
|
$
|
117
|
|
|
$
|
1,929
|
|
Interest cost capitalized to mineral property interests
|
|
$
|
-
|
|
|
$
|
839
|
|
Non-cash amortization of discount and interest expense
|
|
$
|
1,540
|
|
|
$
|
6,571
|
|
Interest payable converted to principal balance
|
|
$
|
2,212
|
|
|
$
|
-
|
|
|
16.
|
Commitments and Contingencies
|
Royalties
The Company has acquired a number of mineral
property 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 amounts due to each landholder over the life of the Mine vary with each property.
Compliance with Environmental Regulations
The Company’s exploration and development
activities are subject to laws and regulations controlling not only the exploration and mining of mineral properties, but also
the effect of such activities on the environment. Compliance with such laws and regulations may necessitate additional capital
outlays or affect the economics of a mine, and cause changes or delays in the Company’s activities.
Corporate Guaranties
The Company has provided corporate guaranties
for two of GQM LLC’s mining drill loans. The Company has also provided a corporate guaranty for GQM LLC’s surety bonds.
|
17.
|
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.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
17.
|
Financial Instruments (continued)
|
Fair Value Measurements (continued)
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).
|
|
|
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
|
|
|
$
|
-
|
|
|
|
December 31, 2016
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share purchase warrants – Related Party (see Note 8)
|
|
$
|
5,458
|
|
|
$
|
-
|
|
|
$
|
5,458
|
|
|
$
|
-
|
|
Share purchase warrants – (see Note 8)
|
|
|
972
|
|
|
|
-
|
|
|
|
972
|
|
|
|
-
|
|
|
|
$
|
6,430
|
|
|
$
|
-
|
|
|
$
|
6,430
|
|
|
$
|
-
|
|
Under fair value accounting, assets and
liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The fair value measurement of the financial instruments above use observable inputs in option price models such as the binomial
and the Black-Scholes valuation models.
Credit Risk
Credit risk is the risk that the counterparty
to a financial instrument will cause a financial loss for the Company by failing to discharge its obligations. To mitigate exposure
to credit risk on financial assets the Company has established policies to ensure liquidity of funds and ensure counterparties
demonstrate minimum acceptable credit worthiness.
The Company maintains its US Dollar and
Canadian Dollar cash in bank accounts with major financial institutions with high credit standings. Cash deposits held in the United
States are insured by the Federal Deposit Insurance Corporation (“FDIC”) for up to $250 and Canadian Dollar cash deposits
held in Canada are insured by the Canada Deposit Insurance Corporation (“CDIC”) for up to C$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 at December 31, 2017, the Company’s cash balances held in United States and Canadian
financial institutions include $2,587, 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% 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 year ended December 31, 2017 a 1% decrease in interest rates
would have reduced the interest income for 2017 by an immaterial amount.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017
and 2016
(amounts expressed in thousands of US
dollars, except share amounts)
|
17.
|
Financial Instruments (continued)
|
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 at December 31, 2017, the Company maintained the majority of its cash balance in US Dollars. The Company currently
does not engage in any currency hedging activities.
On February 20, 2018, the Company successfully
closed a rights offering (the “Offering”) for gross proceeds of approximately $25,000. The Company issued the full
allotment of 188,952,761 common shares pursuant to the terms of the Offering. The net proceeds of the Offering will be used to
reduce the corporate debt, fund the Company’s 50% portion of costs required for the purchase of additional equipment for
the Mine and repayment of the Credit Facility, and general corporate and working capital purposes.
Since the Company completed the Offering
at a share price lower than the exercise price of the June 2015 Warrants and the November 2016 Warrants, (collectively the “Clay
Group Warrants”) (see Note 8), the exercise price of the Clay Group Warrants will be adjusted according to a formula.