U.S. SECURITIES AND EXCHANGE COMMISSION
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, or a smaller reporting company. Large accelerated
filer
¨
Accelerated filer
x
Non-accelerated
filer
¨
Smaller reporting company
¨
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
State the aggregate market value of the voting
and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or
the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed
second fiscal quarter: $100,300,564 as at June 30, 2016.
Indicate the number of shares outstanding
of each of the registrant’s classes of common equity, as of the latest practicable date: 111,148,683 common shares as
at March 14, 2017.
Portions of the registrant's Proxy Statement
for the Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K, which Proxy Statement is
to be filed within 120 days after the end of the registrant's fiscal year ended December 31, 2016. If the definitive Proxy Statement
cannot be filed on or before the 120 day period, the issuer may instead file an amendment to this Form 10-K disclosing the information
with respect to Items 10 through 14.
References to the “Company”, “Golden
Queen”, “we”, “us”, “our” and words of similar meaning refer to Golden Queen Mining
Co. Ltd. The U.S. dollar (“$”) 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, 2016, 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 publically 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 definitions for the terms “proven reserves”, “probable reserves”, “measured
resources”, “indicated resources” and “inferred resources”. U.S. investors are cautioned that while
these terms are recognized and required by Canadian regulations, including National Instrument 43-101
Standards of Disclosure
for Mineral Projects
(“NI 43-101”), the SEC does not recognize them.
Canadian mining disclosure standards, including
NI 43-101, differ significantly from the requirements of the SEC and SEC Guide 7, and reserve and resource information contained
or incorporated by reference in this Form 10-K and in the documents incorporated by reference herein may not be comparable to
similar information disclosed by companies reporting under United States standards. In particular, and without limiting the generality
of the foregoing, the term “resource” does not equate to the term “reserve”. Under United States standards,
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. The SEC’s disclosure
standards normally do not permit the inclusion of information concerning “measured mineral resources”, “indicated
mineral resources” or “inferred mineral resources” or other descriptions of the amount of mineralization in
mineral deposits that do not constitute “reserves” by U.S. standards in documents filed with the SEC. U.S. investors
should also understand that “inferred mineral resources” have a great amount of uncertainty as to their existence
and as to their economic 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, estimated “inferred mineral resources” may not form
the basis of pre-feasibility or feasibility studies. Investors are cautioned not to assume that all or any part of an “inferred
mineral resource” exists or is economically or legally mineable. Disclosure of “contained ounces” in a resource
estimate 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 tonnage and grade without reference to unit measures. The
requirements of NI 43-101 for identification of “reserves” are also not the same as those of the SEC, and reserves
in compliance with NI 43-101 may not qualify as “reserves” under SEC standards.
Accordingly, information contained in this
Form 10-K 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 U.S. federal
securities laws and the rules and regulations thereunder. See
Item 1A. Risk Factors
.
In addition, financial information in this
Form 10-K and the Company’s financial statements is presented in accordance with generally accepted accounting principles
in the United States (“U.S. GAAP”). The Company’s financial statements have been prepared in accordance with
U.S. GAAP.
PART I
Item 1. Business
General Development of Business
The Company is a gold and silver producer,
incorporated in 1985 under the laws of the Province of British Columbia, Canada. The Soledad Mountain Mining Project (the “Project”)
is located south of Mojave in Kern County in southern California.
The Company acquired its initial interest
in the Project in 1985 and has since added to its landholdings and interests in the area. Exploration and evaluation work on the
Project was done, until September 10, 2014, by Golden Queen Mining Co., Inc. (“GQM Inc.”), a California corporation
wholly-owned by the Company. GQM Inc. was converted into a limited liability company, Golden Queen Mining Company, LLC (“GQM
LLC”) on September 10, 2014 in preparation for the formation of a joint venture (the “Joint Venture”) between
a newly formed entity, Golden Queen Mining Holdings, Inc. (“GQM Holdings”), a wholly owned subsidiary of the Company,
and Gauss LLC (“Gauss”). Gauss is an investment entity formed for the purpose of the Joint Venture, and is 70.51%
owned by Leucadia National Corporation and 29.49% owned by members of the Clay family, a controlling shareholder group of the
Company. See
Project Financing - Joint Venture Transaction
below for further details on the Joint Venture. In February
2015, the Company incorporated Golden Queen Mining Canada Ltd. (“GQM Canada”), a wholly-owned British Columbia subsidiary,
to hold the Company’s interest in GQM Holdings.
As a result of the changes made in connection
with the Joint Venture and the incorporation of GQM Canada, the names, place of formation and ownership of the Company’s
subsidiaries and the Project as at March 15, 2017 are as follows:
GQM LLC is managed by a board of managers comprising
an equal number of representatives of each of Gauss and GQM Holdings. The current representatives of GQM Holdings on the board
of managers are Guy Le Bel, Bryan A. Coates and Thomas Clay. The current officer of GQM LLC is Robert C. Walish, Jr. as Chief Executive
Officer.
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 Gauss’ 50% interest
in GQM 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.
Significant Developments in 2016
The Company poured its first gold on March
1, 2016. Commercial production was announced on December 19, 2016. Please refer to
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
for the 2016 operational update.
There are a number of risks associated with
the Project and readers are urged to consider these risks and possible other risks, in order to obtain an understanding of the
Project (see
Item 1A. Risk Factors
below).
Financings
On
January 1, 2016, April 1, 2016 and July 1, 2016 the Company chose to exercise its right to pay quarterly interest on a loan with
Clay shareholders in the principal amount of $37,500,000 in kind by adding interest owed to the principal balance.
In July of 2016, the Company completed
an equity financing for gross proceeds of $12.2 million (C$16.1 million). The proceeds were used primarily to repay a portion of
the loan with Clay shareholders and its accrued interest. On November 18, 2016, the Company repaid a portion of the loan and accrued
interest of $12.2 million. The loan was refinanced for a principal amount of $31.0 million (the “November 2016 Loan”)
with a thirty month term and an annual interest rate of 8%, payable on a quarterly basis commencing first quarter of 2017, a repayment
of $2.5 million on a quarterly basis commencing first quarter of 2018 and repayment of balance at maturity date. The first four
quarterly interest payments under the November 2016 Loan can be added to the loan principal balance rather than paid in cash, at
the Company’s option.
The Company also 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
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.
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 with substantial capabilities and with greater financial and technical resources than ours, we may be unable to effectively
develop and operate the Project or obtain financing on terms we consider acceptable.
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 Project 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 Project, as well as
Item 1A. Risk Factors
for a discussion of the related risks.
Employees
As of March 15, 2017, the Company had 194 employees. The Company engages various part-time consultants
and contractors as needed for administrative services.
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, or we will provide electronic copies
of these filings free of charge upon request. Our website and the information on it is not intended to be, and is not incorporated
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 constitutes
risk factors in respect of, our future financial performance and in respect of an 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. Such
risks are not the only we face and 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
”.
Operational Risks
Mineral resource and reserve estimates
are based on interpretation and assumptions, and the Project may yield lower production of gold and silver under actual operating
conditions than is currently estimated. A material decrease in the quantity or grade of mineral resource or reserves from those
estimates, will affect the economic viability of the Project or the Project’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 you that the estimates are accurate or that mineralized materials from the Project
can be mined or processed profitably.
Assumptions about silver and gold market prices
are subject to great uncertainty as those prices have fluctuated widely in the past. Declines in the market prices of silver and
gold 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 Project 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 Project 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 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 Project.
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 Project. In addition, the Company may from time to time
provide guidance on projected production rates of the Project. 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 silver and gold, 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 mining project such as the project operated by GQM LLC
The financial results of GQM LLC is subject
to risks associated with operating and maintaining mining operations on the Property, including:
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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;
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increases
in the costs of commodities such as fuel and electricity, and other materials and supplies
which would increase Project development and operating costs;
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the
ability to extract sufficient gold and silver from resources and reserves to support
a profitable mining operation on the Property;
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decreases
in gold and silver prices;
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compliance
with approvals and permits for the Project;
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potential
opposition from environmental groups, other non-governmental organizations or local residents
which may delay or prevent development of the Project or affect our future operations;
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difficult
surface conditions, unusual or unexpected geologic formations or failure of open pit
slopes;
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mechanical
or equipment problems, industrial accidents or personal injury resulting in unanticipated
cost and delays;
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environmental
hazards or pollution;
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fire,
flooding, earthquakes, cave-ins or periodic interruptions due to inclement weather; and
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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.
Silver and gold mining involves significant
production and operational risks
Silver and gold 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 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 has set up and plans to set up a provision for our reclamation obligations
on the Project, 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 Project as it will permit GQM LLC to meet its closure and reclamation requirements. 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 Project 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.
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 Project or obtain financing on terms we consider acceptable.
Legal and Regulatory Risks
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:
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mineral
property production and reclamation;
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labor
standards, and occupational health and safety; and
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environmental
standards for waste disposal, treatment and use of toxic substances, land use and environmental
protection.
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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 Project, 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 Project or future activities.
U.S. 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.
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.
The Endangered Species Act and comparable
state laws are designed to protect critically imperiled species from extinction as a consequence of development. GQM LLC filed
a response to statements made in a petition filed on January 31, 2014 with the United States Fish and Wildlife Service (USFWS),
which petition sought to list the Mojave Shoulderband snail as a threatened or endangered species (see
Item 3. Legal Proceedings
in this report for additional information). In April 2014, USFWS concluded that there was no imminent threat to the snail
that would cause them to believe an emergency listing was required, but that USFWS may address the petition in the future, subject
to funding. In November 2015, the Company agreed not to disturb certain points on Soledad Mountain where snails or snail shells
have been identified until June 30, 2017. The Company, the USFWS and the CBD have jointly selected a third party environmental
consultant to conduct surveys to better understand the snail’s range and distribution on Soledad Mountain. Surveying has
commenced and is expected to conclude during the first quarter of 2017.
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 Project 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.
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 U.S. 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.
Financial Risks
Our financial statements contain a qualification as to our
ability to continue as a going concern due primarily to the need to repay $5.4 million in accrued interest and debt principal
repayment on January 1, 2018, which is not assured
Until such time as GQM LLC can economically
produce and sell gold and silver from the Project and distribute cash to its members, we will continue to have no cash flow from
our ownership interest in GQM LLC and will continue to incur an operating deficit. As at December 31, 2016, excluding any cash
held by GQM LLC and inclusive of GQM Holdings, we had cash of approximately $2.1 million and current liabilities of approximately
$6.9 million. The Company is required to pay $5.4 million in accrued interest and debt principal repayment on January 1, 2018
from the November 2016 Loan.
The ability of the Company to service its
debt due in early 2018 from distributions from GQM LLC during the fiscal year 2017 is dependent on a number of factors, including
the gold price and the ability of the mine to perform according to the mine plan for 2017. Because of the uncertainty relating
to the above factors, there can be no assurance that sufficient distributions will be generated and paid by GQM LLC to the Company
in order for it to meet its obligations when they fall due. If the distributions are not sufficient, the Company will need to
either raise equity or negotiate with its debt lender a delay in principal and interest repayments.
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 Project, which could impact our stock value and our ability to meet stock exchange listing requirements
We hold a 50% interest in the Project 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 Project,
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 silver and gold and other commodities, which are
volatile and beyond the Company’s control.
Silver and gold are exchange-traded commodities,
and the volatility in gold and silver prices is illustrated by the following table, which sets forth, for the periods indicated
(calendar year), the average annual market prices in U.S. dollars per ounce of gold and silver, based on the daily London P.M.
fix, as shown in the table below:
Mineral
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Gold
|
|
$
|
1,208.63
|
|
|
$
|
1,160.06
|
|
|
$
|
1,265.78
|
|
|
$
|
1,411.23
|
|
|
$
|
1,668.98
|
|
Silver
|
|
$
|
15.33
|
|
|
$
|
15.68
|
|
|
$
|
19.08
|
|
|
$
|
23.79
|
|
|
$
|
31.15
|
|
Silver and gold prices are affected by many
factors including U.S. 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 silver and gold include a strengthening of the U.S. 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.
Because GQM LLC is expected to derive all
of its revenues from sales of silver and gold, 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 silver and gold 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 Project 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.
Investment Risks
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 U.S. 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.
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 Project and developing or acquiring new mining properties. Any strategies to further develop
the Project 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, 2016. 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 U.S.
tax rules to mitigate some of the adverse consequences of holding shares in a PFIC.
Two of our directors are ordinarily
resident 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 Guy Le Bel are residents of Canada. Consequently, it may be difficult for U.S. investors to effect service of process within
the U.S. upon these directors, or to realize in the U.S. upon judgments of U.S. courts predicated upon civil liabilities under
the U.S. securities laws. A judgment of a U.S. court predicated solely upon such civil liabilities would probably be enforceable
in Canada by a Canadian court if the U.S. 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 substantial
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
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 29.49% interest in Gauss, the joint
venture that holds a 50% interest in GQM LLC and half the Project. 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 Project. The interests of the Clay family may be different from the interests of other investors.
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 Project, 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 Project;
|
|
·
|
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 U.S. exchange, there are additional regulations imposed
on U.S. broker-dealers trading in our shares that may make it more difficult for you to buy and resell our shares through a U.S.
broker-dealer.
Because of U.S. 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 U.S. through a U.S. 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.
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 1,328 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 Project 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 Project 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.
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 Project 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 7 residential
properties with buildings north of Silver Queen Road.
GQM LLC continues to review purchases of additional
land in the adjacent area.
Record of Survey and Royalty Map
The Company obtained Records of Survey for
the Project 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 grade of 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.
Property Interests Are In Good Standing
A number of mining lease agreements expired
in 2015 and GQM LLC is in ongoing negotiations with some landholders to extend mining lease agreements. This is not expected to
impact GQM LLC’s operations.
All mining leases contain an “evergreen”
clause that becomes effective once the mine commences production.
Project Background
The Project is located approximately 5 miles
(8 kilometres) south of Mojave in Kern County in southern California. See Figure 1, a Project 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.
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 Project are shown in the table below. The reserves 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)
|
|
|
|
|
|
|
|
In-Situ
Grade
|
|
|
Contained
Metal
|
|
|
|
|
|
|
|
|
|
Gold
|
|
|
Silver
|
|
|
Gold
|
|
|
Silver
|
|
Classification
|
|
Tonnes
|
|
|
Ton
|
|
|
g/t
|
|
|
oz/ton
|
|
|
g/t
|
|
|
oz/ton
|
|
|
oz
|
|
|
oz
|
|
Proven
|
|
|
3,357,000
|
|
|
|
3,701,000
|
|
|
|
0.948
|
|
|
|
0.028
|
|
|
|
14.056
|
|
|
|
0.410
|
|
|
|
102,300
|
|
|
|
1,517,100
|
|
Probable
|
|
|
42,957,000
|
|
|
|
47,352,000
|
|
|
|
0.638
|
|
|
|
0.019
|
|
|
|
10.860
|
|
|
|
0.317
|
|
|
|
881,300
|
|
|
|
14,999,100
|
|
Total & Average
|
|
|
46,314,000
|
|
|
|
51,053,000
|
|
|
|
0.661
|
|
|
|
0.019
|
|
|
|
11.092
|
|
|
|
0.324
|
|
|
|
983,600
|
|
|
|
16,516,200
|
|
Notes:
|
1.
|
The Qualified Person for the 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 a 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.
|
|
5.
|
The effective date of the mineral reserve estimate is February
1, 2015.
|
|
6.
|
Total ore tonnage has been reduced by 2,854,000 tons (average grade 0.016oz/ton) based on
mined tonnages in 2015 and 2016.
|
See
“Cautionary note regarding U.S.
investors”
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
Project are shown in the table below:
2015 Mineral Resource Estimates (100% Basis)
|
|
|
|
|
|
|
|
In-Situ
Grade
|
|
|
Contained
Metal
|
|
|
|
|
|
|
|
|
|
Gold
|
|
|
Silver
|
|
|
Gold
|
|
|
Silver
|
|
Classification
|
|
Tonnes
|
|
|
Ton
|
|
|
g/t
|
|
|
oz/ton
|
|
|
g/t
|
|
|
oz/ton
|
|
|
oz
|
|
|
oz
|
|
Measured
|
|
|
4,298,243
|
|
|
|
4,738,000
|
|
|
|
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
|
|
|
|
1,545,000
|
|
|
|
25,598,000
|
|
Inferred
|
|
|
21,392,329
|
|
|
|
23,581,000
|
|
|
|
0.343
|
|
|
|
0.010
|
|
|
|
7.20
|
|
|
|
0.21
|
|
|
|
245,000
|
|
|
|
4,965,000
|
|
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.
|
|
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 U.S.
investors”
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.
2016 Drilling Program and Exploration
Potential
GQM LLC completed a confirmation drill program
in 2016. The main objective of the confirmation drill program was to enhance GQM LLC's understanding of the East Pit ore
and to gain geotechnical information.
Additional geological targets have been identified
on the Property. These targets are generally peripheral 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 to date has focused
on known fault/vein structures central to the deposit. The volcanic host rocks associated with mineralization on the Property
extend further to the south and west and have not been fully evaluated. The continuity of mineralization at depth remains
untested.
Project Operation
The project 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 2016 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 Project:
|
·
|
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.
|
Revegetation
Sites have been revegetated successfully elsewhere
in the California deserts, and it is expected that revegetation can be completed successfully for the Project as described in
the revegetation plan prepared by independent consulting engineers.
Cleanup on Site
The Company has done extensive cleanup
on site since 2006 at a cost of approximately $550,000 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 Project 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 Project.
Upon review, the USFWS concluded that there
was no imminent threat to the snail that would cause them to believe an emergency listing was required. The USFWS is instead processing
the Petition according to its standard timeline. A public comment period on the petition commenced on April 10, 2015 for a period
of 60 days. On September 9, 2015, the USFWS and the CBD entered into a Stipulated Settlement Agreement that established a 12 Month
Finding date of April 11, 2016.
In November 2015, the Company, the USFWS,
and the CBD entered into a Memorandum of Understanding (the “
November 2015 Memorandum of Understanding
”) under
which the USFWS and the CBD agreed to defer the 12 Month Finding date to June 30, 2017, and the Company agreed not to disturb
until June 30, 2017 certain points on Soledad Mountain where snails or snail shells had been identified. The Company, the USFWS,
and the CBD have jointly selected a third party environmental consultant that will conduct surveys to better understand the snail’s
range and distribution on Soledad Mountain before the USFWS prepares its 12 Month Finding. Surveying has commenced and is anticipated
to conclude during the first quarter of 2017.
The ongoing review by the USFWS does not affect
the Project’s regulatory approvals or interfere with the Project’s operation. The November 2015 Memorandum of Understanding
caused no material adjustments to the Project’s mine plan. The Company believes that conservation of any snail habitat areas
can be accomplished without material adjustments to the Project’s mine plan and is preparing a conservation plan accordingly.
If the USFWS ultimately finds that the snail is ‘endangered’ or ‘threatened’ and no agreed conservation
plan is established, material adjustments to the Project’s mine plan may be required.
Item 4. Mine Safety Disclosures
Information pertaining to mine safety matters
is reported in accordance with Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act in Exhibit 95.1
attached to this Form 10-K.
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
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
Golden Queen Mining Co. Ltd. (“Golden
Queen”, “GQM Ltd.” or the “Company”) is engaged in the operation of the Soledad Mountain Project
(“the Project”), located in the Mojave Mining District, Kern County, California. The Company originally used its wholly
owned subsidiary, Golden Queen Mining Company, Inc. (“GQM Inc.”), to explore and develop the Project. On September
10, 2014, GQM Inc. was converted to a limited liability company, Golden Queen Minin1g Company, LLC (“GQM LLC”). The
Company entered into a Joint Venture (the “JV”) agreement with Gauss LLC (“Gauss”) through its newly formed,
wholly owned subsidiary, Golden Queen Mining Holdings, Inc. (“GQM Holdings”). The JV was completed on September 15,
2014. Upon completion of the JV, both the Company, through GQM Holdings, and Gauss each owned, and continue to own, 50% of GQM
LLC. In February 2015, the Company incorporated Golden Queen Mining Canada Ltd. (“GQM Canada”), a wholly-owned British
Columbia subsidiary, to hold the Company’s interest in GQM Holdings.
|
2.
|
Ability to Continue as a Going Concern
|
The consolidated financial statements of Golden
Queen Mining Co Ltd. have been prepared using US generally accepted accounting principles applicable to a going concern.
The Company entered the production phase and
began generating revenues from operations during the quarter ended June 30, 2016. The Company had an accumulated deficit of $87.3
million and a working capital surplus of $8.2 million at December 31, 2016. Cash used in operations for the year ended December
31, 2016 was $5.2 million.
Golden Queen Mining Co Ltd expects to have
sufficient cash on hand to meet its corporate general and administrative expenditures and related obligations for the next twelve
months from the date of the approval of these consolidated financial statements. However, the Company is required to pay $5.4 million
in accrued interest and debt principal repayment on January 1, 2018. The Company will need to receive cash distributions from GQM
LLC to service its debt and such distributions are contingent on GQM LLC’s ability to generate positive cash flows. This
situation raises substantial doubt about the Company’s ability to continue as a going concern.
The Company anticipates receiving sufficient
distributions from GQM LLC during the fiscal year 2017 to service its debt in early 2018, however such distributions are dependent
on a number of factors, including the gold price and the ability of the mine to perform according to the mine plan for 2017. Because
of the uncertainty relating to the above factors, there can be no assurance that sufficient distributions will be generated and
paid by GQM LLC to the Company in order for it to meet its obligations when they fall due. If the distributions are not sufficient,
the Company will need to either raise equity or negotiate with its debt lender a delay in principal and interest repayments.
The Company’s access to the net assets
of GQM LLC is determined by the Board of Managers of GQM LLC. The Board of Managers is not controlled by the Company and
therefore there is no guarantee that any access to the net assets of GQM LLC would be provided to the Company in order to continue
as a going concern. The Board of Managers of GQM LLC determine when and if distributions from GQM LLC are made to the holders of
its membership units at their sole discretion. Please refer to Note 19 for non-consolidated balance sheets, statements of income/(loss)
and comprehensive income/(loss) and statements of cash flows for GQM Ltd.
The consolidated financial statements do not
reflect adjustments to the carrying values of the assets and liabilities, the reported revenues and expenses, and the balance sheet
classifications used, that would be necessary if the company were unable to realize its assets and settle its liabilities as a
going concern in the normal course of operations. Such adjustments could be material.
The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
3.
|
Basis of Presentation (continued)
|
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 in 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.
Inventories
Include 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 market
value. Cost includes direct labor, materials, depreciation, depletion and amortization as well as overhead costs relating to mining
activities. Market price is calculated as the current replacement cost of the inventory, as long as the market price does not exceed
net realizable value; also, the market price shall not be less than the net realizable value, less the normal profit margin. Net
realizable value is defined as the estimated selling price, minus estimated costs of completion and disposal. Any write-downs of
inventory to market 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.
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 will be used by the Company to measure metal content during each
stage of the inventory conversion process includes estimated recovery rates based on laboratory testing and assaying. The Company
will periodically review its estimates compared to actual experience and revise its estimates when appropriate.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
4.
|
Significant Accounting Policies, Estimates and Judgements (continued)
|
The assumptions used in determining market
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 minable based on
proven and probable reserves and when appropriate permits are in place. Major mine development expenditures related to mineral
interests, such as building access roads, heap leach pads, processing facilities, and infrastructure development are capitalized
until the property to which they directly relate is placed into production, sold, abandoned or subject to a condition of impairment.
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 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.
Drilling and related costs are classified as
development expenditures and capitalized if all the following criteria are met:
|
•
|
Whether or not 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;
|
|
•
|
Whether or not 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
|
|
•
|
Whether or not 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 others’ 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.
Land
|
Not depreciated
|
Mineral property interests and claims
|
Units-of-production
|
Mine development
|
Units-of-production
|
Machinery and mine equipment
|
10 – 12 years
|
Buildings and structures
|
5 - 12 years
|
Leasehold improvements
|
12 years
|
Vehicles
|
3 – 5 years
|
Computer equipment and software
|
3 years
|
Asset retirements cost
|
Units-of-production
|
Capitalized interest
|
Units-of-production
|
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
4.
|
Significant Accounting Policies, Estimates and Judgements (continued)
|
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
10(iv) - 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.
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 will 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.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
4.
|
Significant Accounting Policies, Estimates and Judgements (continued)
|
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 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.
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 market rates have remained steady for the loans payable during the past four quarters. 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.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
4.
|
Significant Accounting Policies, Estimates and Judgements (continued)
|
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.
We account 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.
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 10(v) for details.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
4.
|
Significant Accounting Policies, Estimates and Judgements (continued)
|
New Accounting Policies
|
(i)
|
Effective December 15 2016, FASB issued Accounting Standards update (“ASU”) 2014-15,
Presentation of Financial Statements – Going Concern (Subtopic 205-40 –Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern. The update essentially requires management of all entities, for annual and interim periods,
to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date the financial statements are issued.
|
If conditions or events raise substantial
doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration
of management’s plans, the entity should disclose information that enables users of the financial statements to understand
all of the following:
|
1.
|
Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern
(before consideration of management’s plans).
|
|
2.
|
Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to
meet its obligations.
|
|
3.
|
Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.
|
If conditions or events raise substantial
doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration
of management’s plans, an entity should include a statement in the footnotes indicating that there is
substantial doubt
about the entity’s ability to continue as a going concern
within one year after the date that the financial statements
are issued (or available to be issued).
Additionally, the entity should
disclose information that enables users of the financial statements to understand all of the following:
|
1.
|
Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
|
|
2.
|
Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to
meet its obligations.
|
|
3.
|
Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s
ability to continue as a going concern.
|
The Company has adopted this standard
in its financial statements as at December 31, 2016. See Note 2.
|
(ii)
|
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 is currently evaluating this guidance and the impact it will have on the consolidated
financial statements and disclosures.
|
(iii)
|
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.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Stockpile inventory
|
|
$
|
318
|
|
|
$
|
1,260
|
|
In-process inventory
|
|
|
9,491
|
|
|
|
83
|
|
Dore inventory
|
|
|
76
|
|
|
|
-
|
|
Supplies and spare parts
|
|
|
1,056
|
|
|
|
593
|
|
|
|
$
|
10,941
|
|
|
$
|
1,936
|
|
|
6.
|
Property, Plant, Equipment and Mineral Interests
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Mineral property interest and claims
|
|
$
|
5,303
|
|
|
$
|
4,568
|
|
Mine development
|
|
|
44,038
|
|
|
|
87,988
|
|
Mine equipment
|
|
|
57,662
|
|
|
|
25,426
|
|
Buildings and infrastructure
|
|
|
28,604
|
|
|
|
5,691
|
|
Other equipment and capitalized interest
|
|
|
10,088
|
|
|
|
7,052
|
|
Accumulated depreciation and depletion
|
|
|
(11,145
|
)
|
|
|
(2,466
|
)
|
|
|
$
|
134,550
|
|
|
$
|
128,259
|
|
As at December 31, 2016, the Company had capitalized
depreciation of $3.6 million (December 31, 2015 - $2.3 million) relating to assets used in the development of the mine. As the
Company entered production on April 1, 2016, the Company began depreciating and depleting assets put into production and on this
date also discontinued capitalizing depreciation.
The tax effects of the temporary differences
that give rise to the Company's deferred tax assets and liabilities are as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Deferred Tax Assets / (Liabilities):
|
|
|
|
|
|
|
|
|
Net operating and capital losses
|
|
$
|
15,799
|
|
|
$
|
10,944
|
|
Un-deducted interest
|
|
|
779
|
|
|
|
823
|
|
Capitalized Interest Deducted
|
|
|
(1,475
|
)
|
|
|
-
|
|
Reorganization costs
|
|
|
45
|
|
|
|
47
|
|
Foreign exchange (gain) loss
|
|
|
-
|
|
|
|
(127
|
)
|
Financing costs
|
|
|
747
|
|
|
|
444
|
|
Investment in GQM LLC
|
|
|
(14,676
|
)
|
|
|
(12,922
|
)
|
Valuation allowance
|
|
|
(14,140
|
)
|
|
|
(12,255
|
)
|
Other
|
|
|
-
|
|
|
|
124
|
|
Deferred tax liabilities
|
|
$
|
(12,922
|
)
|
|
$
|
(12,922
|
)
|
The annual tax benefit (provision) is different
from the amount provided by applying the statutory federal income tax rate to our pre-tax income (loss). The reason for the differences
are:
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
7.
|
Income Taxes (continued)
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
(Restated)
|
|
Income tax (benefit) provision at Canadian statutory rate
|
|
$
|
(3,108
|
)
|
|
$
|
(1,733
|
)
|
|
$
|
(2,567
|
)
|
Foreign income taxes at other than Canadian statutory rate
|
|
|
(1,398
|
)
|
|
|
(841
|
)
|
|
|
(638
|
)
|
Change in fair value of derivative liability
|
|
|
(483
|
)
|
|
|
(867
|
)
|
|
|
(288
|
)
|
Non-deductible accretion and other
|
|
|
552
|
|
|
|
839
|
|
|
|
80
|
|
Non-deductible stock-based compensation
|
|
|
6
|
|
|
|
41
|
|
|
|
67
|
|
Non-taxable effect on foreign exchange
|
|
|
-
|
|
|
|
407
|
|
|
|
175
|
|
Permanent differences, other
|
|
|
290
|
|
|
|
50
|
|
|
|
1,458
|
|
Non-controlling Interest
|
|
|
922
|
|
|
|
838
|
|
|
|
561
|
|
Prior year True-up
|
|
|
1,334
|
|
|
|
-
|
|
|
|
-
|
|
Change in statutory rate
|
|
|
-
|
|
|
|
-
|
|
|
|
(322
|
)
|
Adjustment due to change in estimates
|
|
|
-
|
|
|
|
1,265
|
|
|
|
-
|
|
Increase (decrease) in valuation allowance
|
|
|
1,885
|
|
|
|
1
|
|
|
|
1,474
|
|
Tax (benefit) provision
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Included in the increase in valuation allowance
is tax-affected $Nil (2015 - $0.2 million, 2014 - $0.7 million) relating to the expiry of losses.
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, 2016 and 2015.
As at December 31, 2016, the Company had net
operating loss carry-forwards available to reduce taxable income in future years as follows:
Country
|
|
Amount
|
|
|
Expiration Dates
|
|
|
|
|
|
|
United States – Federal
|
|
$
|
30,198
|
|
|
2018 - 2036
|
Canada (C$)
|
|
$
|
15,013
|
|
|
2026 - 2036
|
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, 2016 and 2015 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.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
8.
|
Share Capital (continued)
|
Common shares – 2016
In July 2016, the Company completed a financing
for gross proceeds of $12.1 million (C$16.1 million) consisting of 11,120,000 units at a price of $1.10 (C$1.45) per unit. Each
unit consisted of one common share of the Company and one-half of one common share purchase warrant. Each whole warrant entitles
the holder to acquire one additional common share of the Company at a price of C$2.00 per common share until July 25, 2019. The
aggregate fair value of the common share purchase warrants at the time of issuance was $2.3 million, which was recorded as a derivative
liability and the Company allocated the remaining proceeds of $9.8 million to the common shares. (See Note 11).
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 $0.3 million which was recorded
as a derivative liability (See Note 11).
In addition, the Company incurred cash share
issue costs totalling $1.2 million, which consisted of legal fees, commission and other direct financing costs.
Common shares – 2015
In March 2015, the Company issued 150,000 common
shares to the former President of the Company for achieving two of the three milestones outlined in his management agreement. The
common shares had a total fair value of $0.2 million. The fair value was based on the market price on the date of issuance.
Common shares - 2014
In May 2014, 300,000 stock options were
exercised and the Company issued 300,000 common shares at $0.21 per share for proceeds of $0.06 million. The total transferred
to share capital from additional paid-in capital upon exercise of stock options was $0.2 million.
In April 2014, 170,000 stock options were
exercised and the Company issued 170,000 common shares at $0.21 per share for proceeds of $0.04 million. The total transferred
to share capital from additional paid-in capital upon exercise of stock options was $0.09 million.
In February 2014, the Company issued 15,300
common shares for mineral property interests with a total fair value of $0.03 million. The fair value was based on the market price
on the date of issuance.
In February 2014, 60,000 stock options
were exercised and the Company issued 60,000 common shares at $0.21 per share for proceeds of $0.01 million. The total transferred
to share capital from additional paid-in capital upon exercise of stock options was $0.03 million.
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 TSX for the five trading
days immediately prior to the date of the grant. The expiry date of a stock option shall be the date so fixed by the Board subject
to a maximum term of five years. The Plan provides that the expiry date of the vested portion of a stock option will be the earlier
of the date so fixed by the Board at the time the stock option is awarded and the early termination date (the “Early Termination
Date”).
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
8.
|
Share Capital (continued)
|
Stock options (continued)
The Early Termination Date will be the date
the vested portion of a stock option expires following the option holder ceasing to be a director, employee or consultant, as determined
by the Board at the time of grant, or in the absence thereof at any time prior to the time the option holder ceases to be a director,
employee or consultant, in accordance with and subject to the provisions of the Plan. All options granted under the 2013 Plan will
be subject to such vesting requirements as may be prescribed by the TSX, if applicable, or as may be imposed by the Board. A total
of 1,555,000 (December 31, 2015 – 1,070,000) common shares were issuable pursuant to such stock options as at December 31,
2016.
The Company has elected to use the Black-Scholes
option pricing model to determine the fair value of stock options granted. In accordance with the accounting standard for employees,
the compensation expense is amortized on a straight-line basis over the requisite service period, which approximates the vesting
period. Compensation expense for stock options granted to non-employees is amortized over the contract services period or, if none
exists, from the date of grant until the options vest. Compensation associated with unvested options granted to non-employees is
re-measured on each balance sheet date using the Black-Scholes option pricing model.
The following is a summary of stock option
activity during the years ended December 31, 2016, 2015 and 2014:
|
|
Shares
|
|
|
Weighted Average
Exercise Price per
Share
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2013
|
|
|
1,380,000
|
|
|
$
|
0.87
|
|
Options exercised
|
|
|
(530,000
|
)
|
|
$
|
0.21
|
|
Options forfeited
|
|
|
(100,000
|
)
|
|
$
|
1.16
|
|
Options outstanding, December 31, 2014
|
|
|
750,000
|
|
|
$
|
1.29
|
|
Options granted
|
|
|
570,000
|
|
|
$
|
0.58
|
|
Options forfeited
|
|
|
(250,000
|
)
|
|
$
|
1.18
|
|
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
|
|
On November 30, 2016, the Company granted the
aggregate amount of 485,000 options to Company’s directors, officers and employees. The options are exercisable at a price
of $0.66 for a period of five years from the date of grant and 161,667 options vest on November 30, 2017, 161,667 options vest
on November 30, 2018 and 161,668 on November 30, 2019.
During the year ended December 31, 2016, the
Company recognized $0.02 million (2015 - $0.01 million; 2014 - $0.02 million) in stock-based compensation relating to employee
stock options that were issued and/or had vesting terms.
As at December 31, 2016, the aggregate intrinsic
value of the outstanding exercisable options was $0.4 million (2015 - $Nil; 2014 – $Nil).
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
8.
|
Share Capital (continued)
|
Stock options (continued)
The following table summarizes information
about stock options outstanding and exercisable at December 31, 2016:
Expiry
Date
|
|
Number
Outstanding
|
|
|
Number
Exercisable
|
|
|
Remaining
Contractual Life
(Years)
|
|
|
Exercise
Price
|
|
June 3, 2018
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
1.42
|
|
|
$
|
1.16
|
|
September 3, 2018
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
1.67
|
|
|
$
|
1.59
|
|
September 18, 2018
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
1.72
|
|
|
$
|
1.26
|
|
September 8, 2020
|
|
|
570,000
|
|
|
|
523,334
|
|
|
|
3.69
|
|
|
$
|
0.58
|
|
November 30, 2021
|
|
|
485,000
|
|
|
|
0
|
|
|
|
4.92
|
|
|
$
|
0.66
|
|
Balance, December 31, 2016
|
|
|
1,555,000
|
|
|
|
1,023,334
|
|
|
|
3.42
|
|
|
|
|
|
The fair value of stock options granted as
above is calculated using the following weighted average assumptions:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Expected life years
|
|
|
4.92
|
|
|
|
5.00
|
|
|
|
-
|
|
Interest rate
|
|
|
1.00
|
%
|
|
|
0.75
|
%
|
|
|
-
|
|
Volatility
|
|
|
81.27
|
%
|
|
|
76.83
|
%
|
|
|
-
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
-
|
|
Warrants
During the year ended December 31, 2016, the
Company issued 14,317,700 (2015 – 10,000,000) share purchase warrants in connection with the July 2016 financing and in relation
to its debt restructuring. See Notes 10(ii) and 11, for accounting treatment.
The following is a summary of common share
purchase warrants activity:
|
|
December 31,2016
|
|
|
December 31,2015
|
|
|
December 31,2014
|
|
Balance, beginning of year
|
|
|
10,000,000
|
|
|
|
-
|
|
|
|
-
|
|
Issued - financing units
|
|
|
5,560,000
|
|
|
|
-
|
|
|
|
-
|
|
Issued - financing brokers
(1)
|
|
|
757,700
|
|
|
|
-
|
|
|
|
-
|
|
Issued - debt restructuring
(1)
|
|
|
8,000,000
|
|
|
|
10,000,000
|
|
|
|
-
|
|
Balance, end of year
|
|
|
24,317,700
|
|
|
|
10,000,000
|
|
|
|
-
|
|
(1)
Non-tradable share purchase
warrants.
The following table summarizes information
about share purchase warrants outstanding and exercisable at December 31, 2016:
Expiry
Date
|
|
Number
Outstanding
|
|
|
Remaining
Contractual Life
(Years)
|
|
|
Exercise
Price
|
|
June 8, 2020
|
|
|
10,000,000
|
|
|
|
3.69
|
|
|
$
|
0.95
|
|
July 25, 2019
|
|
|
5,560,000
|
|
|
|
2.82
|
|
|
C$
|
2.00
|
|
July 25, 2019
|
|
|
757,700
|
|
|
|
2.82
|
|
|
C$
|
2.00
|
|
November 18, 2021
|
|
|
8,000,000
|
|
|
|
4.89
|
|
|
$
|
0.85
|
|
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
9.
|
Asset Retirement Obligations and Financial Reclamation Assurance
|
Reclamation Financial Assurance
The Company is required to provide the Bureau
of Land Management, the State Office of Mine Reclamation and Kern County, California with a revised reclamation cost estimate annually.
The financial assurance is adjusted once the cost estimate is approved. The Company’s provision for reclamation of
the property is estimated each year by an independent consulting engineer. This estimate, once approved by state and county authorities,
forms the basis for a cash deposit of reclamation financial assurance. The reclamation assurance provided as at December 31, 2016
was $1.5 million (December 31, 2015 - $0.6 million).
The Company is also required to provide financial
assurance with the Lahontan Regional Water Quality Control Board (the “Regional Board”) for closure and reclamation
costs related to the lined impoundments, which are defined as the Stage 1 heap leach pad, the overflow pond, and the solution collection
channel. The reclamation financial assurance estimate for as of December 31, 2016, is $1.2 million (December 31, 2015 - $Nil).
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 for as of December 31, 2016, is $0.3 million (December 31, 2015 - $0.3 million).
The Company entered into $3.0 million in surety
bond agreements in order to release its reclamation deposits. The Company pays a yearly premium of $0.1 million. Golden Queen Mining
Co. Ltd. has provided a corporate guaranty on the surety bonds (see Note 13).
Asset Retirement Obligation
The total asset retirement obligation as of
December 31, 2016, was $1.4 million (December 31, 2015 - $1.0 million).
The Company estimated its asset retirement
obligations based on its requirements to reclaim and remediate its property based on its activities to date. As at December 31,
2016, the Company estimates the primary cash outflow related to these reclamation activities will commence in 2028. Reclamation
provisions are measured at the expected value of future cash flows discounted to their present value using a discount rate based
on a credit adjusted risk-free interest rate of 9.2% and an inflation rate of 2.27%.
The following is a summary of asset retirement
obligations:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Balance, beginning of the year
|
|
$
|
978
|
|
|
$
|
624
|
|
Accretion
|
|
|
90
|
|
|
|
-
|
|
Changes in cash flow estimates
|
|
|
298
|
|
|
|
354
|
|
Balance, end of the year
|
|
$
|
1,366
|
|
|
$
|
978
|
|
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed
in thousands of US dollars)
|
10.
|
Related Party Transactions
|
Except as noted elsewhere in these consolidated
financial statements, related party transactions are disclosed as follows:
The Company hired current board member, Thomas
M. Clay, to take over the position of Chief Executive Officer with a yearly salary of $100,000. No consulting agreement or management
agreement has been signed at this time.
On January 1, 2014, the Company
entered into an agreement to secure a $10.0 million loan (the “January 2014 Loan”) provided by members of the Clay
family, who are shareholders of the Company, with twelve-month term and an annual interest rate of 5%, payable on the maturity
date. Because the January 2014 Loan remained outstanding for more than 183 days, an additional 5% charge was applicable. $7.5
million of principal balance of the loan, $0.4 million of accrued interest, and an additional charge of $0.4 million were paid
on December 31, 2014.
The $2.5 million remaining balance
of the loan, accrued interest of $0.1 million and an additional charge of $0.1 million, were paid on January 5, 2015.
On December 31, 2014, the Company
also entered into a new loan (the “December 2014 Loan”) with the same parties for $12.5 million, due on July 1, 2015
and bore an annual interest rate of 10%. The loan was guaranteed by GQM Holdings, and secured by a pledge of the Company's interests
in GQM Canada, GQM Canada’s interest in GQM Holdings and GQM Holdings' 50% interest in GQM LLC.
The Company also incurred a financing
fee to secure the loan in the amount of $1.0 million, of which, $0.8 million was paid on December 31, 2014 and the remaining $0.3
million was paid on January 5, 2015.
On June 8, 2015, the Company
amended the December 2014 Loan to extend the maturity to December 8, 2016 and increased the principal amount from $12.5 million
to $37.5 million (the “June 2015 Loan”). The Company also issued to the lenders 10,000,000 common share purchase warrants
exercisable for a period of five years expiring June 8, 2020. The common share purchase warrants have an exercise price of $0.95.
All other terms remained the same as the December 2014 Loan. The Company also incurred financing fees to secure the loan in the
amount of $1.5 million. The Company agreed to pay the legal fees incurred by the lenders relating to this debt instrument which
amounted to $0.04 million. The total legal fees were expensed as the transaction met the definition of a debt extinguishment.
On November 18, 2016, the Company
repaid $12.2 million of the June 2015 Loan and accrued interest with cash on hand and the net proceeds of $10.1 million from an
equity financing. The Company restructured the remaining debt with a new loan with a principal amount of $31.0 million (the “November
2016 Loan”). The new loan has a thirty-month term and an annual interest rate of 8%, payable on a quarterly basis commencing
during the first quarter of 2017. Quarterly principal payments of $2.5 million commence during the first quarter of 2018, with
a payment of the remaining balance at the maturity date. The first four quarterly interest payments under the November 2016 Loan
can be added to the loan principal balance rather than paid in cash, at the Company’s option.
In connection with the new loan the
Company issued 8,000,000 common share purchase warrants exercisable for a period of five years expiring November 21, 2021. The
common share purchase warrants have an exercise price of $0.85. The Company also incurred a financing fee to secure the loan in
the amount of $0.9 million, all of which was paid on November 18, 2016.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
10.
|
Related Party Transactions (continued)
|
(ii)
|
Notes Payable (continued)
|
The table below summarizes the activity
on the notes payable:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Balance, beginning of the year
|
|
$
|
36,053
|
|
|
$
|
13,881
|
|
|
$
|
-
|
|
Interest payable transferred to principal balance
|
|
|
2,977
|
|
|
|
1,182
|
|
|
|
-
|
|
Accretion of discount on loans
|
|
|
1,996
|
|
|
|
1,374
|
|
|
|
-
|
|
Capitalized financing fee and legal fees
|
|
|
(930
|
)
|
|
|
-
|
|
|
|
(1,119
|
)
|
Reduction of debt upon isssuance of warrants
|
|
|
(3,090
|
)
|
|
|
-
|
|
|
|
-
|
|
Repayment of loans and interest
|
|
|
(10,659
|
)
|
|
|
(2,500
|
)
|
|
|
(7,500
|
)
|
Fair value at inception, notes payable
|
|
|
-
|
|
|
|
33,497
|
|
|
|
22,500
|
|
Unamortized expenses
|
|
|
-
|
|
|
|
967
|
|
|
|
-
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
152
|
|
|
|
-
|
|
Extinguishment of debt
|
|
|
-
|
|
|
|
(12,500
|
)
|
|
|
-
|
|
Balance, end of the year
|
|
$
|
26,347
|
|
|
$
|
36,053
|
|
|
$
|
13,881
|
|
|
(iii)
|
Share Purchase Warrants
|
On June 8, 2015, the Company issued
10,000,000 share purchase warrants to the Clay family in connection with the June 2015 Loan. The share purchase warrants are exercisable
until June 8, 2020 at an exercise price of $0.95. Included in the June 2015 Loan agreement was an anti-dilution provision. If the
Company were to complete a financing at a share price lower than the exercise price of the share purchase warrants, the exercise
price of the share purchase warrants would be adjusted to match the price at which the financing was completed.
On November 18, 2016, the Company
issued 8,000,000 share purchase warrants to the Clay family in connection with the November 2016 Loan. The share purchase warrants
are exercisable until November 18, 2021 at an exercise price of $0.85. Included in the November 2016 Loan agreement was an anti-dilution
provision. If the Company were to complete a financing at a share price lower than the exercise price of the share purchase warrants,
the exercise price of the share purchase warrants would be adjusted to match the price at which the financing was completed.
The share purchase warrants meet
the definition of a derivative liability instrument as the exercise price is not a fixed price as described above. Therefore, the
settlement feature does not meet the “fixed-for-fixed” criteria outlined in ASC 815-40-15.
The fair value of the derivative
liabilities related to the share purchase warrants as at December 31, 2016 is $5.5 million (December 31, 2015 - $2.5 million).
The derivative liabilities were calculated using the binomial and the Black-Scholes pricing valuation models with the following
assumptions:
Warrants related to June 2015 Loan
|
|
2016
|
|
|
2015
|
|
Risk-free interest rate
|
|
|
0.84
%.
|
|
|
|
0.73%
|
|
Expected life of derivative liability
|
|
|
3.44 years
|
|
|
|
4.44 years
|
|
Expected volatility
|
|
|
78.79%
|
|
|
|
72.29%
|
|
Dividend rate
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
|
|
|
|
|
|
|
Warrants related to November 2016 Loan
|
|
2016
|
|
|
2015
|
|
Risk-free interest rate
|
|
|
1.11%
|
|
|
|
-
|
|
Expected life of derivative liability
|
|
|
4.89 year
|
|
|
|
-
|
|
Expected volatility
|
|
|
77.21%
|
|
|
|
-
|
|
Dividend rate
|
|
|
0.00%
|
|
|
|
-
|
|
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed
in thousands of US dollars)
|
10.
|
Related Party Transactions (continued)
|
(iii)
|
Share Purchase Warrants (continued)
|
The change in the derivative share
purchase warrants is as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Balance, beginning of the year
|
|
$
|
2,498
|
|
|
$
|
-
|
|
Fair value at inception
|
|
|
3,090
|
|
|
|
4,002
|
|
Change in fair value
|
|
|
(130
|
)
|
|
|
(1,504
|
)
|
Balance, end of the year
|
|
$
|
5,458
|
|
|
$
|
2,498
|
|
|
(iv)
|
Amortization of Discounts and Interest Expense
|
The following table summarizes the
amortization of discounts and interest on loans and convertible debentures:
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Accretion of the June 2015 Loan discount
|
|
$
|
1,785
|
|
|
$
|
1,374
|
|
|
$
|
-
|
|
Interest expense related to the June 2015 Loan
|
|
|
3,599
|
|
|
|
2,151
|
|
|
|
-
|
|
Accretion of the Nov 2016 Loan discount
|
|
|
210
|
|
|
|
-
|
|
|
|
-
|
|
Interest expense related to the Nov 2016 Loan
|
|
|
296
|
|
|
|
-
|
|
|
|
-
|
|
*Interest expense related to Komatsu financial loans
|
|
|
603
|
|
|
|
282
|
|
|
|
3
|
|
Interest expense related to the convertible debentures
|
|
|
-
|
|
|
|
95
|
|
|
|
181
|
|
Amortization of the convertible debentures
|
|
|
-
|
|
|
|
1,853
|
|
|
|
-
|
|
Interest expense related to the January 2014 Loan
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Interest expense related to the December 2014 Loan
|
|
|
-
|
|
|
|
548
|
|
|
|
-
|
|
Interest on Gauss advance
|
|
|
|
|
|
|
|
|
|
|
210
|
|
Accretion of debt discount on the convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
2,511
|
|
Accretion of the december 2014 loan financing fees
|
|
|
-
|
|
|
|
967
|
|
|
|
-
|
|
Accretion of discount and
interest on loan and convertible debentures
|
|
$
|
6,493
|
|
|
$
|
7,270
|
|
|
$
|
3,905
|
|
The Company’s loans were contracted
to fund significant development costs. The Company capitalizes a portion of the interest expense as it related to funds borrowed
to complete development activities at the Project site.
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Accretion of discounts and interest on
loan, advance and convertible debenture*
|
|
$
|
6,493
|
|
|
$
|
7,270
|
|
|
$
|
3,905
|
|
Less: Interest costs capitalized**
|
|
|
(1,005
|
)
|
|
|
(2,763
|
)
|
|
|
(2,412
|
)
|
Interest expense
|
|
$
|
5,488
|
|
|
$
|
4,507
|
|
|
$
|
1,493
|
|
*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.
**Interest capitalization ended on
March 31, 2016 because the mine went into production on April 1, 2016.
|
(v)
|
Joint Venture Transaction
|
On September 15, 2014, the Company
closed the Joint Venture Transaction with Gauss resulting in both parties owning a 50% interest in the Project. Pursuant to the
Joint Venture Transaction, Golden Queen converted its wholly-owned subsidiary GQM Inc., the entity developing the Project, into
a California limited liability company named GQM LLC. On closing of the transaction, Gauss acquired 50% of GQM LLC by investing
$110 million cash in exchange for newly issued membership units of GQM LLC. GQM Holdings, a newly incorporated subsidiary of the
Company, holds the other 50% of GQM LLC.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
10.
|
Related Party Transactions (continued)
|
|
(v)
|
Joint Venture Transaction (continued)
|
Gauss is a funding vehicle owned by entities controlled by
Leucadia National Corporation (NYSE: LUK) (“Leucadia”) and certain members of the Clay family, a shareholder group
which collectively owned approximately 27% of the issued and outstanding shares of Golden Queen (the “Clay Group”)
at the time of the transaction. Gauss is owned 70.51% by Gauss Holdings LLC (“Gauss Holdings”, Leucadia’s investment
entity) and 29.49% by Auvergne LLC (“Auvergne”, the Clay Group’s investment entity). Pursuant to the transaction,
Leucadia was paid a transaction fee of $2.0 million and $0.3 million was paid to Auvergne through GQM LLC in 2014. The Company
has adopted an accounting policy of expensing these transaction costs.
Variable Interest Entity
In accordance with ASC 810-10-30,
the Company has determined that GQM LLC meets the definition of a VIE and that the Company is part of a related party group that,
in its entirety, would meet the definition of a primary beneficiary. Although no individual variable interest holder
individually meets the definition of a primary beneficiary in the absence of the related party group, Golden Queen has determined
it is considered the member of the related party group most closely associated with GQM LLC. As a result, the Company has
consolidated 100% of the accounts of GQM LLC in these consolidated financial statements, while presenting a non-controlling interest
portion representing the 50% interest of Gauss in GQM LLC on its balance sheet. A portion of the non-controlling interest
has been presented as temporary equity on the Company’s balance sheet representing the initial value of the non-controlling
interest that could potentially be redeemable by Gauss in the future.
The Company has presented
Gauss’ ownership in GQM LLC as a non-controlling interest amount on the balance sheet within the equity section. However,
there are terms in the agreement that provides for the exit from the investment in GQM LLC for an initial member whose interest
in GQM LLC becomes less than 20%.
If a member becomes less
than a 20% interest holder, its remaining unit interest will (ultimately) be terminated through one of three events at the non-diluted
member’s option:
|
a.
|
Through conversion to a net smelter royalty (“NSR”);
|
|
b.
|
Through a buy-out (at fair value) by the non-diluted member; or
|
|
c.
|
Through a sale process by which the diluted member’s interest is sold
|
The net assets of GQM LLC
as of December 31, 2016, and December 31, 2015 are as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Assets, GQM LLC
|
|
$
|
151,802
|
|
|
$
|
158,210
|
|
Liabilities, GQM LLC
|
|
|
(20,710
|
)
|
|
|
(22,591
|
)
|
Net assets, GQM LLC
|
|
$
|
131,092
|
|
|
$
|
135,619
|
|
Included in the assets above, is $11.1 million (December 31,
2015 - $31.5 million) in cash held as at December 31, 2016. The cash in GQM LLC is directed specifically to fund capital expenditures
required to continue with production and settle GQM LLC’s obligations. The liabilities of GQM LLC do not have recourse to
the general credit of the primary beneficiary except for two mining drill loans and $3.0 million 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.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
10.
|
Related Party Transactions (continued)
|
|
(v)
|
Joint Venture Transaction (continued)
|
Non-Controlling Interest (continued)
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net and comprehensive loss in GQM LLC
|
|
$
|
(4,526
|
)
|
|
$
|
(3,550
|
)
|
|
$
|
(2,805
|
)
|
Non-controlling interest percentage
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
Net and comprehensive loss attributable to non-controlling interest
|
|
$
|
(2,263
|
)
|
|
$
|
(1,775
|
)
|
|
$
|
(1,403
|
)
|
Net and comprehensive loss attributable to
permanent non-controlling interest
|
|
$
|
(1,359
|
)
|
|
$
|
(1,065
|
)
|
|
$
|
(842
|
)
|
Net and comprehensive
loss attributable to temporary non-controlling interest
|
|
$
|
(904
|
)
|
|
$
|
(710
|
)
|
|
$
|
(561
|
)
|
|
|
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
|
|
Dilution of Interest
in Subsidiary
As a result of the Joint Venture
Transaction, the Company’s interest in GQM LLC was diluted from 100% to 50% and ordinarily, the Company would recognize gain
on dilution with the book value of the investment in GQM LLC increasing as well. However, since the transaction was with a related
party and the Company retained control, the excess has not been recognized in net income but rather has been recorded in equity
as an increase to APIC based on guidance provided in ASC 810-10-55-4D and -4E.
The deferred tax liability resulted
from the increase in the book value over tax value of the investment in GQM LLC.
Capital Contribution Agreement
Pursuant to the Joint Venture Transaction,
GQM Holdings’ made a single capital contribution to GQM LLC of $12.5 million on June 15, 2015. Gauss funded an amount equal
to GQM Holdings’ capital contribution to GQM LLC. Both partners maintain their 50% ownership of the Project.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
10.
|
Related Party Transactions (continued)
|
|
(v)
|
Joint Venture Transaction (continued)
|
Standby Commitment
In 2014, Golden Queen also entered
into a backstop guarantee agreement with Gauss (the “Backstop Agreement”) whereby, if the Company conducts a rights
offering, Gauss has agreed to purchase, upon the terms set forth in the Backstop Agreement, any common shares which have not been
acquired pursuant to the exercise of rights under the Rights Offering at a purchase price to be determined but not to exceed $1.10
per common share, up to a maximum amount of $45 million in the aggregate. In consideration for entering into the Backstop Agreement,
on closing of the Joint Venture, the Company paid Leucadia and Auvergne a standby guarantee fee of $2.3 million, of which $0.7
million was paid to Auvergne.
The Transaction Agreement and Backstop
Agreement contemplated that the Company would file a registration statement in connection with the rights offering by October
15, 2014. The Company has decided not to proceed with a rights offering, and as a result the standby commitment has expired.
|
11.
|
Derivative Liabilities
|
On July 25, 2016, the Company issued a total
of 6,317,700 share purchase warrants in connection with the July 2016 financing with an exercise price of C$2.00. In accordance
with the guidance in ASC 815-40-15, the share purchase warrants met the criteria of a derivative instrument liability because they
were exercisable in a currency other than the functional currency of the Company and thus did not meet the “fixed-for-fixed”
criteria of that guidance. As a result, the Company was required to separately account for the share purchase warrants as derivative
instrument 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, 2016, the Company had re-measured
the share purchase warrants and determined the fair value of the derivative liability to be $1.0 million using the Black-Scholes
option pricing model with the following assumptions:
|
|
December 31, 2016
|
|
Risk-free interest rate
|
|
|
0.84%
|
|
Expected life of derivative liability in years
|
|
|
2.56 years
|
|
Expected volatility
|
|
|
79.40%
|
|
Dividend rate
|
|
|
0.00%
|
|
As at December 31, 2016, the changes of derivative
liability for share purchase warrants are as follows:
|
|
December 31, 2016
|
|
Fair value of warrants issued
|
|
$
|
2,701
|
|
Change in fair value of warrants
|
|
|
(1,729
|
)
|
Balance, end of the year
|
|
$
|
972
|
|
Please refer to Note 10 (iii) for derivative liability on share
purchase warrants issued to related party.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
12.
|
Supplementary Disclosures of Cash Flow Information
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest on loan payable
|
|
$
|
603
|
|
|
$
|
1,214
|
|
Non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
Asset retirement costs charged to mineral property interests
|
|
$
|
297
|
|
|
$
|
354
|
|
Mining and mobile equipment acquired through issuance of debt
|
|
$
|
1,783
|
|
|
$
|
19,367
|
|
Mineral property expenditures included in accounts payable
|
|
$
|
1,929
|
|
|
$
|
2,858
|
|
Interest cost capitalized to mineral property interests
|
|
$
|
839
|
|
|
$
|
2,763
|
|
Non-cash amortization of discount and interest expense
|
|
$
|
6,571
|
|
|
$
|
4,225
|
|
Interest payable converted to principal balance
|
|
$
|
-
|
|
|
$
|
1,182
|
|
|
13.
|
Commitments and Contingencies
|
Royalties
The Company has acquired a number of mineral
properties outright. It has acquired exclusive rights to explore, develop and mine other portions of the Project under various
mining lease agreements with landowners. Royalty amount due to each landholder over the life of the Project varies with each property.
Finder’s Fee
The Company has agreed to issue 100,000 common
shares as a finder’s fee in connection with certain property acquisitions upon commencement of commercial production of the
Project. On December 19, 2016, the Company declared commercial production and recorded a provision of $0.05 million as finder fee.
Shares were issued on January 17, 2017.
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 project, and cause changes or delays in the Company’s activities.
The Company may, from time to time, be involved
in legal proceedings and claims that arise in the ordinary course of business. The Company believes that any adverse outcome of
existing claims, individually or in the aggregate, would not have a material effect on its financial position, results of operations
or cash flows.
Corporate Guaranties
The Company has provided corporate guaranties
for two of GQM LLC’s mining drill loans (Note 16). The Company has also provided corporate a guaranty for GQM LLC’s
surety bonds (Note 9).
|
14.
|
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
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
14.
|
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, 2016
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share purchase warrants – Related Party (Note 10(iii))
|
|
$
|
5,458
|
|
|
$
|
-
|
|
|
$
|
5,458
|
|
|
$
|
-
|
|
Share purchase warrants – (Note 11)
|
|
|
972
|
|
|
|
-
|
|
|
|
972
|
|
|
|
-
|
|
|
|
$
|
6,430
|
|
|
$
|
-
|
|
|
$
|
6,430
|
|
|
$
|
-
|
|
|
|
December 31, 2015
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share purchase warrants – Related Party (Note 10(iii))
|
|
$
|
2,498
|
|
|
$
|
-
|
|
|
$
|
2,498
|
|
|
$
|
-
|
|
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 FDIC for up to $0.3 million and Canadian Dollar cash deposits held in Canada are insured by the Canada Deposit
Insurance Corporation (“CDIC”) for up to C$0.1 million.
Certain United States and Canadian bank accounts
held by the Company exceed these federally insured limits or are uninsured as they relate to US Dollar deposits held in Canadian
financial institutions. As of December 31, 2016, the Company’s cash balances held in United States and Canadian financial
institutions include $13.3 million, which are not fully insured by the FDIC or CDIC. The Company has not experienced any losses
on such accounts and management believes that using major financial institutions with high credit ratings mitigates the credit
risk in cash.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
14.
|
Financial Instruments (continued)
|
Interest Rate Risk
The Company holds 77% 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, 2016, a 1% decrease in interest rates
would have reduced the interest income for 2016 to a trivial amount.
Foreign Currency Exchange Risk
Certain purchases of corporate overhead expenditures
are denominated in Canadian Dollar. As a result, currency exchange fluctuations may impact the costs of our operations. Specifically,
the appreciation of the Canadian Dollar against the US Dollar may result in an increase in the Canadian operating expenses in US
dollar terms. As of December 31, 2016, the Company maintained the majority of its cash balance in US Dollar. The Company currently
does not engage in any currency hedging activities.
Commodity Price Risk
The Company’s primary business activity
is the development of the open pit, gold and silver, heap leach project on the Project. Decreases in the price of either of these
metals from current levels has the potential to negatively impact the future viability of the Project.
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable
to the shareholders of the Company - numerator for basic and diluted LPS
|
|
$
|
(7,429
|
)
|
|
$
|
(5,461
|
)
|
|
$
|
(8,469
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding -basic and diluted
|
|
|
104,737,396
|
|
|
|
99,893,341
|
|
|
|
99,611,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share – basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.09
|
)
|
Weighted average number of shares for the year
ended December 31, 2016 excludes 1,555,000 options (2015-1,070,000, 2014-750,000) and 24,317,700 warrants (2015 – 10,000,000
2014 – Nil) that were antidilutive.
During the year ended December 31, 2016,
the Company acquired two (2) (2015 –nineteen (19)) pieces of mining equipment from Komatsu and one (1) mining drill with
Atlas Copco (2015 one (1)) through financing agreements. As at December 31, 2016 and December 31, 2015, the finance agreement
balances are as follows:
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
16.
|
Loan Payable (continued)
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Balance, beginning of the year
|
|
$
|
18,373
|
|
|
$
|
913
|
|
Additions
|
|
|
2,047
|
|
|
|
23,156
|
|
Down payments, taxes and principal repayments
|
|
|
(5,270
|
)
|
|
|
(5,696
|
)
|
Balance, end of the year
|
|
$
|
15,150
|
|
|
$
|
18,373
|
|
The terms of the financing agreements are as
follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Total acquisition costs
|
|
$
|
26,309
|
|
|
$
|
24,262
|
|
Interest rates
|
|
|
0.00% - 4.40
|
%
|
|
|
0.00%
- 4.40
|
%
|
Monthly payments
|
|
$
|
4,669 - $33,906
|
|
|
$
|
4,669 - 33,906
|
|
Average remaining life (Years)
|
|
|
2.54
|
|
|
|
3.46
|
|
Short-term portion
|
|
$
|
5,656
|
|
|
$
|
4,943
|
|
Long-term portion
|
|
$
|
9,494
|
|
|
$
|
13,430
|
|
For the year ended December 31, 2016, the Company
made total down payments of $0.3 million (2015 - $3.8 million). The down payments consist of the sales tax on the assets and a
10% payment of the pre-tax purchase price. All of the loan agreements are for a term of four years, except two which are for three
years, and are secured by the underlying asset except for two mining drill loans for which GQM Ltd. has provided a corporate guarantee.
The following table outlines the principal
payments to be made for each of the remaining years:
Year
|
|
Principal Payments
|
|
2017
|
|
|
5,656
|
|
2018
|
|
|
5,796
|
|
2019
|
|
|
3,621
|
|
2020
|
|
|
77
|
|
Total
|
|
$
|
15,150
|
|
Certain comparative figures have been reclassified
to conform to the financial statement presentation adopted for the current year. The reclassification has no impact on the net
loss, deficit accumulated or the cash flows as previously reported.
Subsequent to December 31, 2016, GQM LLC acquired
a crawler dozer valued at $0.6 million and two haul trucks valued at $1.5 million each.
On January 1, 2017, the Company was to make
the quarterly interest payment on the November 2016 loan. In accordance with the terms of the November 2016 loan agreement, the
Company chose to exercise its right to add the interest owed on January 1, 2017 to the principal balance of the November 2016 loan.
The principal balance of the loan was accordingly increased by $0.3 million.
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
19.
|
GQM Ltd. Non-Consolidated Information
|
The following condensed unconsolidated financial
information represents the financial information of GQM Ltd. The information is presented in accordance with the requirements of
Rule 12-04 under the SEC’s Regulation S-X. Investments in the Company’s subsidiaries are accounted for under the equity
method. In addition, disclosure requirements of Rule 12-04 of Regulation S-X regarding material contingencies, long-term obligations,
and guarantees are the same as those included in Note 10(ii), Note 13 and Note 16. The Company has no material contingencies.
|
(i)
|
Non-Consolidated Balance Sheets
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,963
|
|
|
$
|
5,003
|
|
Receivables
|
|
|
112
|
|
|
|
55
|
|
Prepaid expenses and other current assets
|
|
|
49
|
|
|
|
44
|
|
Total current assets
|
|
|
2,124
|
|
|
|
5,102
|
|
Capitalized interest
|
|
|
5,675
|
|
|
|
5,130
|
|
Investment in subsidiaries
|
|
|
23,208
|
|
|
|
28,162
|
|
Due from subsidiaries
|
|
|
29,616
|
|
|
|
27,777
|
|
Total Assets
|
|
$
|
60,623
|
|
|
$
|
66,171
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
165
|
|
|
$
|
68
|
|
Interest payable
|
|
|
296
|
|
|
|
970
|
|
Notes payable
|
|
|
-
|
|
|
|
36,053
|
|
Derivative liability – Related party warrants
|
|
|
5,458
|
|
|
|
2,498
|
|
Derivative liability – Warrants
|
|
|
972
|
|
|
|
-
|
|
Total current liabilities
|
|
|
6,891
|
|
|
|
39,589
|
|
Notes payable
|
|
|
26,347
|
|
|
|
-
|
|
Total liabilities
|
|
|
33,238
|
|
|
|
39,589
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Common shares, no par value, unlimited shares authorized (2015 - unlimited); 111,048,683 (2015 – 99,928,683) shares issued and outstanding
|
|
|
71,067
|
|
|
|
62,860
|
|
Additional paid-in capital
|
|
|
43,653
|
|
|
|
43,628
|
|
Deficit accumulated
|
|
|
(87,335
|
)
|
|
|
(79,906
|
)
|
Total Shareholders’ Equity
|
|
|
27,385
|
|
|
|
26,582
|
|
Total Liabilities, Temporary Equity and Shareholders’ Equity
|
|
$
|
60,623
|
|
|
$
|
66,171
|
|
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
19.
|
GQM Ltd. Non-Consolidated Information - Continued
|
|
(ii)
|
Non-Consolidated Statements of Comprehensive Income (Loss)
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
General and administrative expenses
|
|
$
|
(1,998
|
)
|
|
|
(597
|
)
|
|
|
(2,999
|
)
|
Gain on derivative instruments
|
|
|
1,859
|
|
|
|
3,335
|
|
|
|
1,004
|
|
Total (expenses) gains
|
|
|
(139
|
)
|
|
|
2,738
|
|
|
|
(1,995
|
)
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(5,058
|
)
|
|
|
(4,225
|
)
|
|
|
(1,325
|
)
|
Interest income
|
|
|
2,722
|
|
|
|
2,177
|
|
|
|
1,459
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
(152
|
)
|
|
|
-
|
|
Financing fee
|
|
|
-
|
|
|
|
(1,500
|
)
|
|
|
-
|
|
Commitment fee
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,250
|
)
|
Total other (expenses)
|
|
|
(2,336
|
)
|
|
|
(3,700
|
)
|
|
|
(2,116
|
)
|
Net (loss) before equity in
earnings (losses) of subsidiaries
|
|
|
(2,475
|
)
|
|
|
(962
|
)
|
|
|
(4,111
|
)
|
Equity in (losses) of subsidiaries
|
|
|
(4,954
|
)
|
|
|
(4,499
|
)
|
|
|
(4,358
|
)
|
Net and
comprehensive loss attributable to Golden Queen Mining Co Ltd. for the year
|
|
$
|
(7,429
|
)
|
|
$
|
(5,461
|
)
|
|
$
|
(8,469
|
)
|
GOLDEN QUEEN MINING CO. LTD.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
(amounts expressed in thousands of US dollars)
|
19.
|
GQM Ltd. Non-Consolidated Information - Continued
|
|
(iii)
|
Non-Consolidated Statements of Cash Flows
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
$
|
(7,429
|
)
|
|
$
|
(5,461
|
)
|
|
$
|
(8,469
|
)
|
Adjustments to reconcile net income (loss) to cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of subsidiaries
|
|
|
4,954
|
|
|
|
4,499
|
|
|
|
4,358
|
|
Depreciation
|
|
|
294
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of debt discount and interest accrual
|
|
|
5,732
|
|
|
|
4,225
|
|
|
|
1,535
|
|
Change in fair value of derivative liabilities
|
|
|
(1,858
|
)
|
|
|
(3,334
|
)
|
|
|
(1,004
|
)
|
Stock-based compensation
|
|
|
24
|
|
|
|
159
|
|
|
|
235
|
|
Non-cash consulting expense
|
|
|
-
|
|
|
|
151
|
|
|
|
-
|
|
Financing fee related to long-term debt
|
|
|
-
|
|
|
|
1,500
|
|
|
|
-
|
|
Transaction fee on note payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
152
|
|
|
|
-
|
|
Unrealized foreign exchange
|
|
|
(208
|
)
|
|
|
(840
|
)
|
|
|
(505
|
)
|
Due from Subsidiaries
|
|
|
(2,682
|
)
|
|
|
-
|
|
|
|
-
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(57
|
)
|
|
|
75
|
|
|
|
(116
|
)
|
Prepaid expenses and other current assets
|
|
|
(5
|
)
|
|
|
13
|
|
|
|
(27
|
)
|
Accounts payable and accrued liabilities
|
|
|
305
|
|
|
|
(108
|
)
|
|
|
(177
|
)
|
Interest payable
|
|
|
(674
|
)
|
|
|
(951
|
)
|
|
|
(1,146
|
)
|
Cash (used in) generated on operating activities
|
|
|
(1,604
|
)
|
|
|
80
|
|
|
|
(5,316
|
)
|
Investment activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances to subsidiaries
|
|
|
-
|
|
|
|
(15,236
|
)
|
|
|
(10,790
|
)
|
Cash used in investing activities
|
|
|
-
|
|
|
|
(15,236
|
)
|
|
|
(10,790
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest received from subsidiaries
|
|
|
843
|
|
|
|
2,110
|
|
|
|
1,853
|
|
Issuance of common shares and warrants, net of share issue costs
|
|
|
10,908
|
|
|
|
-
|
|
|
|
-
|
|
Repayments of note payable and accrued interest
|
|
|
(12,257
|
)
|
|
|
-
|
|
|
|
-
|
|
Transaction fee on note payable
|
|
|
(930
|
)
|
|
|
-
|
|
|
|
-
|
|
Borrowing under long-term debt
|
|
|
-
|
|
|
|
25,000
|
|
|
|
32,500
|
|
Repayment of short-term debt
|
|
|
-
|
|
|
|
(2,500
|
)
|
|
|
(17,500
|
)
|
Financing fees related to short-term debt
|
|
|
-
|
|
|
|
(1,500
|
)
|
|
|
(869
|
)
|
Repayment of convertible debentures
|
|
|
-
|
|
|
|
(7,675
|
)
|
|
|
-
|
|
Financing fees related to short-term debt capitalized to the loan
|
|
|
-
|
|
|
|
(250
|
)
|
|
|
-
|
|
Issuance of common shares upon exercise of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
111
|
|
Cash (used in) provided by financing activities
|
|
|
(1,436
|
)
|
|
|
15,185
|
|
|
|
16,095
|
|
Net change in cash
|
|
|
(3,040
|
)
|
|
|
29
|
|
|
|
(11
|
)
|
Cash, Beginning balance
|
|
|
5,003
|
|
|
|
4,974
|
|
|
|
4,985
|
|
Cash, Ending balance
|
|
$
|
1,963
|
|
|
$
|
5,003
|
|
|
$
|
4,974
|
|