SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. ______)
Filed by the Registrantx
Filed by a Party other than the Registrant¨
Check the appropriate box:
| ¨ | Preliminary Proxy Statement | |
| ¨ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | |
| x | Definitive Proxy Statement | |
| ¨ | Definitive Additional Materials | |
| ¨ | Soliciting Material Pursuant to Rule 14a-12 |
GOLDEN QUEEN MINING CO. LTD.
(Name of Registrant as Specified In Its Charter)
Not Applicable
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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| x | No fee required | |
| ¨ | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
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| (2) | Aggregate number of securities to which transaction applies: |
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| ¨ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
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NOTICE OF
ANNUAL GENERAL MEETING
OF SHAREHOLDERS
&
MANAGEMENT
INFORMATION CIRCULAR
GOLDEN QUEEN MINING CO. LTD.
MEETING TO BE HELD ON MAY 8, 2017JUNE 11, 2018
CORPORATE OFFICE
2300 – 1066 West Hastings Street
Vancouver, BC V6E 3X2
Website:www.goldenqueen.com
Chairman’s Letter to Shareholders
Dear Fellow Shareholder,
On behalf of the Board of Directors and management of Golden Queen Mining Co. Ltd., we are pleased to invite you to attend the Company’s 2017 Annual Meeting of Shareholders. The meeting will be held on Monday, May 8, 2017 at the Pan Pacific Hotel, Oceanview Suite 5, 999 Pan Pacific Way, Vancouver, BC.
The attached Management Information Circular contains important information about the meeting, who is eligible to vote, how to vote, the nominated directors, our governance practices, and compensation of the Company’s executives and directors.
Golden Queen celebrated many achievements during 2016 including the inaugural gold pour on March 1st and the declaration of commercial production on December 19th. We will provide a corporate presentation at the meeting, and you will have the opportunity to meet and ask questions of the Board of Directors and members of senior management.
2017 and beyond
We believe that a successful new long-lived open pit gold-silver operation located in the United States has the potential to be a rare and valuable asset in the years ahead. We are focused on making that a reality.
The Board of Directors and management team thank you for your continued confidence in Golden Queen and look forward to seeing you at the meeting.
Sincerely,
Thomas M. Clay
Chairman of the Board & Chief Executive Officer
NOTICE OF ANNUAL GENERAL MEETING OF SHAREHOLDERS
TO BE HELD
AT 10:00 A.M.AM ON MAY 8, 2017JUNE 11, 2018
NOTICE IS HEREBY GIVEN that the 20172018 Annual General Meeting of Shareholders (the “Meeting”) of Golden Queen Mining Co. Ltd. (the “Company”) will be held at 10:00 a.m.AM (Pacific Standard Time) on Monday, May 8, 2017June 11, 2018 at the Pan Pacific Hotel, Oceanview Suite 5, 999 Pan Pacific Way,2300 - 1066 West Hastings Street, Vancouver, BC, V6C 3B5,V6E 3X2, for the following purposes:
| 1. | To receive the financial statements of the Company for its financial year ended December 31, |
| 2. | To set the number of directors at four (4) and to elect directors to serve until the next Annual General Meeting of Shareholders or until their respective successors are elected or appointed; |
| 3. | To |
| 4. | To consider, and, if deemed appropriate, to pass, with or without variation, an ordinary resolution to approve all unallocated entitlements issuable under the Company’s Stock Option Plan; and |
| To transact any other business which may properly come before the Meeting, or any adjournment or postponement thereof. |
The specific details of the matters proposed to be put before the Meeting are set forth in the Management Information Circular accompanying and forming part of this Notice.
The Boardboard of Directorsdirectors has fixed March 29, 2017April 18, 2018 as the record date for determining shareholders entitled to receive notice of, and to vote at, the Meeting or any adjournment or postponement thereof. Only shareholders of record at the close of business on that date will be entitled to receive notice of and to vote at the Meeting.
All shareholders are invited to attend the Meeting in person, but even if you expect to be present at the Meeting, you are requested to mark, sign, date and return the enclosed proxy card as promptly as possible in the envelope provided to ensure your representation.All proxies must be received by our transfer agent not less than 48 hours, excluding Saturdays, Sundays, and holidays,before the time of the Meeting in order to be counted. The address of our transfer agent is as follows: Computershare Trust Company of Canada, Proxy Dept., 100 University Ave., 8th Floor, Toronto, ON, M5J 2Y1. Shareholders of record attending the Meeting may vote in person even if they have previously voted by proxy.
Dated at Vancouver, British Columbia, this 6 25th day of April, 2017.2018.
BY ORDER OF THE BOARD OF DIRECTORS
“Thomas M. Clay”
Thomas M. Clay, Chairman & Chief Executive Officer
Important Notice Regarding the Availability of Proxy Materials for
the Company’s Annual General Meeting of Shareholders on May 8, 2017.June 11, 2018.
The Golden Queen Mining Co. Ltd. Proxy Statement and 20162017 Annual Report to Shareholders
are available online atwww.goldenqueen.com
GOLDEN QUEEN MINING CO. LTD.
2300 – 1066 West Hastings Street
Vancouver, BC V6E 3X2
PROXY STATEMENT
ANNUAL GENERAL MEETING OF SHAREHOLDERS
MAY 8, 2017JUNE 11, 2018
In this Proxy Statement, all references to “$” are references to United States dollars and
all references to “C$” are references to Canadian dollars. As at March 29, 2017, April 18, 2018,
one Canadian dollar
was equal to approximately $0.75$0.7914 in United States dollars.
INFORMATION REGARDING ORGANIZATION AND CONDUCT OF MEETING
The enclosed proxy is solicited by the Board of Directors (the “Board”) of Golden Queen Mining Co. Ltd., a British Columbia corporation (the “Company” or “Golden Queen”), for use at the Annual General Meeting of Shareholders (the “Meeting”) of Golden Queen to be held at 10:00 a.m.AM (Pacific Standard Time) on Monday, May 8, 2017,June 11, 2018, at the Pan Pacific Hotel, Oceanview Suite 5, 999 Pan Pacific Way,2300 - 1066 West Hastings Street, Vancouver, BC, V6C 3B5,V6E 3X2, and at any adjournment or postponement thereof.
In this Proxy Statement, “Registered Shareholders” means shareholders whose names appear on the records of the Company as the registered holders of shares. “Beneficial Shareholders” means shareholders who do not hold shares in their own name, as further explained under “Voting by Beneficial Shareholders” below.
This Proxy Statement and the accompanying proxy card are being mailed to our shareholders on or about April 6, 2017.May 9, 2018. The Company is sending proxy-related materials directly to Registered Shareholders, as well as non-objecting Beneficial Shareholders under Canadian National Instrument 54-101 (“NI 54-101”). Management of the Company does not intend to pay for intermediaries to forward the proxy-related materials to objecting Beneficial Shareholders under NI 54-101. As a result, objecting Beneficial Shareholders will not receive the materials unless the objecting Beneficial Shareholder’s intermediary assumes the cost of delivery.
The cost of solicitation will be paid by the Company. The solicitation will be made primarily by mail. Proxies may also be solicited personally or by telephone by certain of the Company’s directors, officers and regular employees, who will not receive additional compensation therefore. In addition, the Company will reimburse brokerage firms, custodians, nominees and fiduciaries for their expenses in forwarding solicitation materials to non-objecting Beneficial Shareholders. The total cost of proxy solicitation including legal fees and expenses incurred in connection with the preparation of this Proxy Statement, is estimated to be $20,000.00.$10,000.
Our administrative offices are located at 2300 – 1066 West Hastings Street, Vancouver, BC, V6E 3X2.
Appointment of Proxyholder
The persons named as proxyholder in the accompanying Proxy (“Proxy”) or Voting Instruction Form (“VIF”) were designated by the management of the Company (“Management Proxyholder”).A shareholder desiring to appoint some other person (“Alternate Proxyholder”) to represent him or her at the Meeting may do so by inserting such other person's name in the space indicated on the Proxy or VIF, or by completing another proper form of proxy. A person appointed as an Alternate Proxyholder need not be a shareholder of the Company.
Exercise of Discretion by Proxyholder
The proxyholder will vote for or against or withhold from voting the shares, as directed by a shareholder on the proxy, on any ballot that may be called for.In the absence of any such direction, the Management Proxyholder will vote in favour of matters described in the Proxy or VIF. In the absence of any direction as to how to vote the shares, an Alternate Proxyholder has discretion to vote them as he or she chooses.
The enclosed Proxy or VIF confers discretionary authority upon theProxyholder with respect to amendments or variations tomatters identified in the attached Notice of Meeting and other matters which may properlycome before the Meeting. At present, management of the Company knows of no such amendments, variations or other matters.
PROXY VOTING
Registered Shareholders
If you are a Registered Shareholder, you may wish to vote by proxy whether or not you attend the Meeting in person. Registered Shareholders electing to submit a proxy may do so by completing the enclosed Proxy and returning it to the Company’s transfer agent, Computershare Trust Company of Canada (“Computershare”), in accordance with the instructions on the Proxy. You should ensure that the Proxy is received by Computershare at least 48 hours (excluding Saturdays, Sundays and holidays) before the Meeting or the adjournment thereof at which the Proxy is to be used. The chairman of the Meeting may elect to exercise his discretion to accept proxies received after the due date.
Beneficial Shareholders
The following information is of significant importance to Beneficial Shareholders (shareholders who do not hold shares in their own name). Beneficial Shareholders should note that the only proxies that can be recognized and acted upon at the Meeting are those deposited by Registered Shareholders (those whose names appear on the records of the Company as the registered holders of shares).
If shares are listed in an account statement provided to a shareholder by a broker, then in almost all cases those shares will not be registered in the shareholder’s name on the records of the Company. Such shares will more likely be registered under the name of the shareholder's broker or an agent of that broker. In the United States, the vast majority of such shares are registered under the name of Cede & Co. as nominee for The Depository Trust Company (which acts as depositary for many U.S. brokerage firms and custodian banks), and in Canada, under the name of CDS & Co. (the registration name for The Canadian Depository for Securities Limited, which acts as nominee for many Canadian brokerage firms).
If you have consented to disclosure of your ownership information, you will receive a VIF from the Company (through Computershare). If you have declined to disclose your ownership information, you may receive a VIF from your Intermediary if they have assumed the cost of delivering the Proxy Statement and associated meeting materials. Every intermediary has its own mailing procedures and provides its own return instructions to clients. However, most intermediaries now delegate responsibility for obtaining voting instructions from clients to Broadridge Financial Solutions, Inc. (“Broadridge”) in the United States and in Canada.
By returning the VIF in accordance with the instructions noted on it, a Beneficial Shareholder is able to instruct the Registered Shareholder (the intermediary) how to vote on behalf of the Beneficial Shareholder. VIFs, whether provided by the Company or by an intermediary, should be completed and returned in accordance with the specific instructions noted on the VIF. In either case, the purpose of this procedure is to permit Beneficial Shareholders to direct the voting of the shares which they beneficially own.
The VIF will name the same persons as named on the Company’s Proxy to represent you at the Meeting. Although as a Beneficial Shareholder you may not be recognized at the Meeting for the purposes of voting shares registered in the name of your intermediary, you, or a person designated by you (who need not be a shareholder), may attend the Meeting as proxyholder for your intermediary and vote your shares in that capacity. To exercise this right to attend the Meeting or appoint a proxyholder of your own choosing, you should insert the name of the desired representative in the blank space provided in the VIF. Alternatively, you may provide other written instructions requesting that you or your desired representative attend the Meeting as proxyholder for your intermediary. The completed VIF or other written instructions must then be returned in accordance with the instructions on the VIF.
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If you receive a VIF from the Company or Broadridge, you cannot use it to vote shares directly at the Meeting. The VIF must be completed and returned in accordance with its instructions, well in advance of the Meeting in order to have the shares voted.
Revocation of Proxies
In addition to revocation in any other manner permitted by law, a Registered Shareholder who has given a Proxy may revoke it by:
| Executing a Proxy bearing a later date or by executing a valid notice of revocation, either of the foregoing to be executed by the Registered Shareholder or the Registered Shareholder’s authorized attorney in writing, or, if the shareholder is a corporation, under its corporate seal by an officer or attorney duly authorized, and by delivering the Proxy bearing a later date to Computershare at any time up to and including the last business day that precedes the day of the Meeting or, if the Meeting is adjourned, the last business day that precedes any reconvening thereof, or to the chairman of the Meeting on the day of the Meeting or any reconvening thereof, or in any other manner provided by law, or |
| Personally attending the meeting and voting the Registered Shareholders’ shares. |
A revocation of a Proxy will not affect a matter on which a vote is taken before the revocation.
Only Registered Shareholders have the right to revoke a Proxy. Beneficial Shareholders who wish to change their vote must, at least seven (7) days before the Meeting, arrange for their respective intermediaries to revoke the Proxy on their behalf.
VOTING PROCEDURE
A quorum for the transaction of business at the Meeting is one person present at the meeting representing in person or by proxy not less than 10% of the votes eligible to cast at such meeting. Broker non-votes occur when a person holding shares through a bank or brokerage account does not provide instructions as to how his or her shares should be voted and the bank or broker does not exercise discretion to vote those shares on a particular matter. Abstentions and broker non-votes will be included in determining the presence of a quorum at the Meeting. However, an abstention or broker non-vote will not have any effect on the outcome for the election of directors.
Shares for which Proxies are properly executed and returned will be voted at the Meeting in accordance with the directions noted thereon or, in the absence of directions, will be voted “FOR” fixing of the number of directors at four (4), “FOR” the election of each of the nominees to the Board of Directors named on the following page, and “FOR” the resolution to ratify the appointment of PricewaterhouseCoopers LLP as independent auditors of the Company for the fiscal year ending December 31, 2017.2018, and to authorize the directors to fix the auditors’ remuneration, and “FOR” the approval of all unallocated entitlements under the Company’s Stock Option Plan. It is not expected that any matters other than those referred to in this Proxy Statement will be brought before the Meeting. If, however, other matters are properly presented, the persons named as proxies will vote in accordance with their discretion with respect to such matters.
To be effective, each matter which is submitted to a vote of shareholders, other than for the election of directors and the approval of auditors, must be approved by a majority of the votes cast by the shareholders voting in person or by proxy at the Meeting.
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VOTING SECURITIES AND PRINCIPAL HOLDERS OF VOTING SECURITIES
On April 18, 2018 (the “Record Date”) there were 300,101,441 shares of our common stock (the “Common Stock”), issued and outstanding, each share carrying the right to one vote. Only shareholders of record at the close of business on the Record Date will be entitled to vote in person or by proxy at the Meeting or any adjournment thereof.
To the knowledge of the directors and officers of the Company, no person or corporation beneficially owns directly or indirectly, or exercises control or direction over, more than 5% of the outstanding Common Stock as of March 29, 2017,April 18, 2018, except as described below:
| Name and Address | Number of Voting Securities(1) | Nature of Ownership | Percentage of Outstanding Voting Securities | |||||||
| Landon T. Clay | 6,915,221 | (2) | Sole voting and investment control | 6.22 | % | |||||
| Peterborough, NH, USA | 12,317,165 | (3) | Shared voting and investment control | 11.08 | % | |||||
| Thomas M. Clay | 1,806,400 | Sole voting and investment control | 1.63 | % | ||||||
| Peterborough, NH, USA | 10,970,545 | (4) | Shared voting and investment control | 9.87 | % | |||||
| Jonathan Clay | 8,389,986 | (5) | Sole voting and investment control | 7.55 | % | |||||
| Palm Beach, FL, USA | 839,250 | (6) | Shared voting and investment control | 0.76 | % | |||||
| Name and Address | Number of Voting Securities(1) | Nature of Ownership | Percentage of Outstanding Voting Securities | |||||||
| Thomas M. Clay | 125,325,870(2)(3) | Sole voting and investment control | 41.76 | % | ||||||
| Boulder, CO, USA | 7,839,005(4)(5) | Shared voting and investment control | 2.61 | % | ||||||
| Jonathan Clay | 30,724,234(6) | Sole voting and investment control | 10.23 | % | ||||||
| West Palm Beach, FL, USA | 807,250(7) | Shared voting and investment control | 0.27 | % | ||||||
| [1] | The information relating to the above share ownership was obtained by the Company from insider reports and beneficial ownership reports on Schedule 13D filed with the SEC or available at www.sedi.ca, or from the shareholder, and includes direct and indirect holdings. |
| [2] | Includes (i) 6,658,116 shares of common stock (“Common Stock”) of Golden Queen held directly by Mr. Thomas M. Clay; (ii) 118,419,672 shares of Common Stock held by the Estate of Landon |
| [3] | Excludes 457,500 shares of Common Stock that are issuable upon the exercise of outstanding, currently exercisable options of Golden Queen held directly by Mr. Thomas M. Clay. |
| [4] | Includes |
| [5] |
| [6] | Includes (i) 26,855,821shares of Common Stock of Golden Queen held by EHT LLC and Mr. Jonathan Clay is a beneficiary; (ii) 3,683,413 shares of Common Stock held directly by Mr. Jonathan Clay; and (iii) 185,000 shares of Common Stock held by Milledge, LLC. | |
| [7] | Includes (i) 807,250 shares of Common Stock held by Arctic Coast |
Excludes warrants held by Mr. Landon T. Clay, Thomas M. Clay, Jonathan Clay, and Brian James as of March 29, 2017. Mr. Landon T. Clay holds 13,500,000 warrants (2,759,400 warrants held by Clay Family 2009 Irrevocable Trust (“CF 2009 Trust”) and 10,740,600 warrants held by Landon T. Clay 2009 Irrevocable Trust (“LTC 2009 Trust”). Mr. Thomas Clay holds 13,500,000 warrants (2,759,400 warrants held by CF 2009 Trust, and 10,740,600 warrants held by LTC 2009 Trust. Mr. Jonathan Clay holds 3,667,000 warrants (3,667,000 warrants held by EHT, LLC). Mr. Brian James may be deemed to hold 15,651,519 shares of Common Stock, representing approximately 12.6% of the Company’s issued and outstanding on a partially diluted basis which consist of (i) 807,250 shares of Common Stock held by Arctic Coast, (ii) 1,344,269 shares of Common Stock held by the Monadnock, (iii) 2,759,400 shares of Common Stock issuable upon the exercise of warrants held by CF 2009 Trust and (iv) 10,740,600 shares of Common Stock issuable upon the exercise of warrants held by LTC 2009 Trust.
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INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Except as disclosed herein, no Person has any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in matters to be acted upon at the Meeting other than the election of directors and the appointment of auditors and as set out herein. For the purpose of this paragraph, “Person” shall include each person: (a) who has been a director, senior officer or insider of the Company at any time since the commencement of the Company’s last fiscal year; (b) who is a proposed nominee for election as a director of the Company; or (c) who is an associate or affiliate of a person included in subparagraphs (a) or (b).
MATTERS TO BE ACTED UPON AT MEETING
Proposal 1: Election of Directors
The Board proposes to fix the number of directors of the Company at four (4) and that the following four (4) nominees be elected as directors at the Meeting, each of whom will hold office until the expiration of their term or until his or her successor shall have been duly appointed or elected and qualified: Paul M. Blythe, Thomas M. Clay, Bryan A. Coates, and Bernard Guarnera and Paul M. Blythe.Guarnera.
Unless otherwise instructed, it is the intention of the persons named as proxies on the accompanying proxy card to vote shares represented by properly executed proxies for the election of such nominees. Although the Board anticipates that the four (4) nominees will be available to serve as directors of Golden Queen, if any of them should be unwilling or unable to serve, it is intended that the proxies will be voted for the election of such substitute nominee or nominees as may be designated by the Board.
The board of directors recommends a vote “FOR” THE ELECTION OF each nominee.
As part of its ongoing review of corporate governance policies, on March 5, 2014, the Board adopted a policy providing that in an uncontested election of directors, any nominee who receives a greater number of votes “withheld” than votes “for” will tender his or her resignation to the Chairman of the Board promptly following the shareholders’ meeting. The Board will consider the offer of resignation and will make a decision whether or not to accept it. In considering whether or not to accept the resignation, the Board will consider all relevant factors. The Board will be expected to accept the resignation except in situations where the considerations would warrant the applicable director continuing to serve on the Board. The Board will make its final decision and announce it in a press release within 90 days following the shareholders’ meeting. A director who tenders his or her resignation pursuant to this policy will not participate in any meeting of the Board at which the resignation is considered.
The following table sets out the names of the nominees, their positions and offices in the Company, principal occupations, the period of time that they have been directors of the Company, whether or not they are considered independent or non-independent, the number of shares of the Company which each beneficially owns or over which control or direction is exercised, Board/Committee membership and attendance, and other public board of directorships information:
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Name, Present Office, Province/State & Country of Residence | Present Principal Occupation or Employment[1] | Security Holdings[2] | ||||
| ||||||
Director Collingwood, ON, Canada | Mr. Blythehas over 40 years experience in the mining industry including significant international experience in corporate management, project development, open pit and underground operations, mergers and acquisitions, and debt and equity financing. He was the founder and President of Quadra FNX Mining and previously worked for Westmin Resources Limited, Placer Dome Canada Limited, Lac Minerals Limited and BHP Billiton. It is the determination of the Board that Mr. Blythe’s technical expertise as well as his corporate development activities are an asset to the Company. Date first appointed as a Director:March 30, 2017 | Common Shares: 1,580,000 Stock Options: 150,000 | ||||
| Independent | Board/Committee | Attendance at Meetings During 2017 | Other Public Board Directorships | |||
| Yes | Board of Directors Audit Committee Compensation Committee Nominating Committee | 3/3 (100%) 3/3 (100%) nil nil | nil
| |||
| THOMAS M. CLAY | ||||||
Director, Chairman of the Board and Chief Executive Officer
| Mr.
Date first appointed as a Director:January 13, 2009 | Common Shares:
Stock Options:
Warrants: 13,500,000 | ||||
| Independent | Board/Committee Memberships | Meetings During 2017 | Other Public Board Directorships | |||||
| No | Board of Directors | ThromboGenics NV |
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| BRYAN A. COATES | ||||||||||
Director
Saint-Lambert, Quebec, Canada | Mr. Coates currently serves as President of Osisko Gold Royalties since June 2014. Prior to that, he was the Vice President, Finance and Chief Financial Officer of Osisko Mining. He was responsible for all activities related to financing, financial reporting, marketing related to the gold industry, risk management and government relations. Mr. Coates has more than 30 years of progressive experience within the international and Canadian mining industry. Before joining Osisko, he was Chief Financial Officer of Iamgold (2006-2007), Cambior Inc. (2001-2006), and Cia Minera Antamina (1998-2001). He also acts as a Member of the Board of Directors of the Fédération des Chambres de Commerce du Quebec’s,
Date first appointed as a Director:January 28, 2013 | Common Shares: 17,000
Stock Options:
Warrants: 8,500 | ||||||||
| Independent | Board/Committee Memberships | Meetings During 2017 | Other Public Board Directorships | |||||
| Yes | Board of Directors Audit Committee Compensation Committee Nominating Committee |
4/4 (100%)
nil |
Falco Resources Technosub | |||||
BERNARD GUARNERA | ||||||||||
Director
Las Vegas, Nevada, USA | Mr. Guarnera has over 40 years of experience in the global mining industry and is President of Broadlands Mineral Advisory Services Ltd.. Mr. Guarnera was the former Chairman of the Board of Behre Dolbear Group Inc., a mining consulting firm founded in 1991. Mr. Guarnera is a registered professional engineer and a registered professional geologist. He serves as a director of the Colorado Mining Association and Northern Zinc, and is the president of Mining and Metallurgical Society of America. The Board believes that Mr. Guarnera’s technical expertise and his capital market experience make him a valuable member of the Board.
Date first appointed as a Director:May 30, 2013 | Common Shares: 25,000
Stock Options: | ||||||||
| Independent | Board/Committee Memberships | Meetings During 2017 | Other Public Board Directorships | |||||
| Yes | Board of Directors Audit Committee Compensation Committee Nominating Committee |
3/4 (75%)
| ||||||
|
|
|
|
nil nil |
|
| [1] | The information as to principal occupation and business or employment has been furnished by the respective nominees. |
| [2] | Based upon information furnished to Golden Queen either by the directors and executive officers or from the insider reports and beneficial ownership reports filed with the SEC or available at |
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| [3] | Includes (i) 6,658,116 shares of Common Stock of Golden Queen held directly by Mr. Thomas M. Clay; (ii) 118,419,672 shares of Common Stock held by the Estate of Landon Thomas Clay (the “Estate”), for which Mr. Thomas M. Clay is the executor; (iii) 248,082 shares of Common Stock held by LTC Corporation, for which Mr. Thomas M. Clay is President; (iv) 807,250 shares of Common Stock held by Arctic Coast Petroleums, Ltd. (“Arctic Coast”), for which Mr. Thomas M. Clay is a director; and (v) 7,031,755 shares of Common Stock held by the Monadnock Charitable Annuity Lead Trust dated May 31, 1996 (the “Monadnock Trust”), for which East Hill Management Company, LLC (“East Hill”) is the investment manager and Mr. Thomas M. Clay is the sole manager of East Hill. |
| [4] | Includes 457,500 shares of Common Stock that are issuable upon the exercise of outstanding, currently exercisable options of Golden Queen held directly by Mr. Thomas M. Clay. |
| [5] | Includes (i) 10,740,600 shares of Common Stock that are issuable upon the exercise of outstanding, currently exercisable warrants of Golden Queen held by the Landon T. Clay 2009 Irrevocable Trust u/a dated March 6, 2006 (the “LTC Trust”), for which Mr. Thomas M. Clay is a trustee; and (ii) 2,759,400 shares of Common Stock that are issuable upon the exercise of outstanding, currently exercisable warrants of Golden Queen held by the Clay Family 2009 Irrevocable Trust u/a dated April 14, 2009 (the “CF Trust” and, together with the LTC Trust, the “Trusts”), for which Mr. Thomas M. Clay is a trustee and has a residual beneficial interest. |
The Board seeks to ensure that it is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow the Board to satisfy its oversight responsibilities effectively. The Board as a whole is responsible for identifying, screening and/or appointing persons to serve on the Board. In identifying Board candidates, it is the Board’s goals to identify persons whom it believes have appropriate expertise and experience to contribute to the oversight of a company of the Company’s nature while also allowing for other appropriate factors. The Board believes that the process in place to identify candidates and elect directors allows the most qualified candidates to be appointed independently.
The Company believes that each of the persons standing for election to the Board at the Meeting has the experience, qualifications, attributes and skills that, when taken as a whole, will enable the Board to satisfy its oversight responsibilities effectively.
The Board is responsible for overseeing management of the Company and determining the Company’s strategy and for determining whether or not a director is independent. In making this determination, the Board has adopted the definition of “independence” as set forth in NI 58-101 and NP 58-201 with the recommendation that a majority of the Board be considered “independent”. In applying this definition, the Board considers all relationships of the directors of the Company, including business, family and other relationships.
As at the date of this Proxy Statement, there are four (4) directors on the Board, Paul M. Blythe, Thomas M. Clay, Bryan A. Coates, and Bernard Guarnera, and Paul M. Blythe.Guarnera. Of the four (4) directors, Paul M. Blythe, Bryan A. Coates, and Bernard Guarnera and Paul Blythe are considered independent. Thomas M. Clay, Chairman of the Board and Chief Executive Officer, is not considered independent. Following the Meeting, the Board, as proposed by management in this Proxy Statement, will consist of Paul M. Blythe, Thomas M. Clay, Bryan A. Coates, and Bernard Guarnera and Paul M. Blythe.Guarnera.
The Board does not have a policy regarding a Board members’ attendance at annual meetings of shareholders. One directorThree (3) directors attended the Company’s 20162017 annual meeting of shareholders.
Biographical Information Regarding Executive Officers
Thomas M. Clay - Chairman and Chief Executive Officer.Mr. Clay is the Vice President of East Hill Management Co., LLC and Director of the Clay Mathematics Institute and of Thrombogenics N.V. His business education was completed at Harvard College, Oxford University and Harvard Business School. Mr. Clay has served on the Board of Directors since 2009.
Robert C. Walish, Jr. – Chief Operating Officer.Mr. Walish is the President & Chief Executive Officer of Golden Queen Mining LLC and was most recently the General Manager of the SCM Franke Operation of KGHM International, formerly QuadraFNX, located in northern Chile, where he was responsible for mining, processing and administration of a four million pound per month open-pit copper mining, heap-leach and SX-EW operation. Prior to that and over the course of more than 30 years, Mr. Walish worked at mines in Guyana, Arizona, Alaska, South Carolina, Montana and Nevada. He received his Bachelor of Arts degree from the University of Colorado and his Master of Science degree from the University of Wisconsin.
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Guy Le Bel - Chief Financial Officer. Mr. Le Belhas more than 30 years of international mining experience in strategic and financial planning. Until recently, he served as Vice President Evaluations for Capstone Mining Corp. and is a Director of RedQuest Capital Corp.Pembridge Resources, PLC and Westbourne Resources Limited. Previously, Mr. Le Bel was VP, Business Development at Quadra Mining Ltd., and prior to that held business advisory, strategy and planning, business valuation, and financial planning management roles at BHP Billiton Base Metals Ltd., Rio Algom Ltd. and Cambior Inc.
Brenda Dayton – Corporate Secretary. Ms. Dayton has served as Corporate Secretary for several mining companies on the NYSE, TSX and TSX Venture and her expertise includes governance, communications and investor relations. Prior to working inwith public companies, she worked in the financial industry in banking and insurance. She holds a Bachelor of Arts degree from the University of Calgary.
Proposal 2: Ratification of Appointment of Independent Auditors
On March 31, 2016, Golden Queen appointed PricewaterhouseCoopers LLP (“PWC”) as its independent registered public accountant, subject to completion of its standard client acceptance procedures. The appointment of PWC was recommended by Golden Queen’s audit committee after considering proposals from several international public accounting firms, including BDO. As a result of PWC’s appointment, Golden Queen’s engagement of BDO Canada LLP, as its independent registered public accounting firm, was terminated.
Although the appointment of PWC is not required to be submitted to a vote of shareholders, the Board believes it is appropriate as a matter of policy to request that shareholders ratifyapprove the appointment of the independent auditors for the fiscal year ending December 31, 2017.2018, and the authorization of the directors to fix the auditors’ remuneration. The affirmative vote of the holders of a majority of the shares present in person or represented by proxy at the Meeting and entitled to vote is required. In the event a majority of the votes cast at the meeting are not voted in favor of ratification,appointment, the adverse vote will be considered as a direction to the Board to select other independent auditors for the fiscal year ending December 31, 2017.2018.
Section 10(A)(i) of the Exchange Act prohibits the Company’s independent auditors from performing audit services for the Company as well as any services not considered to be “audit services” unless such services are pre-approved by the Audit Committee of the Board, or unless the services meet certainde minimis standards.
Under the Company’s Audit Committee Charter, all non-audit services to be performed by the Company’s independent auditors must be approved in advance by the Audit Committee. All of the 20162017 audit related fees, and tax fees were pre-approved by the Audit Committee.
See External Auditor Service Fees section for more information.
Representatives of PWC are expected to be present at the Meeting, will have the opportunity to make a statement if they desire to do so, and are expected to be available to respond to questions from Shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS GOLDEN QUEEN'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2017.2018, AND THE AUTHORIZATION OF THE DIRECTORS TO FIX THEIR REMUNERATION.
Proposal 3: Approval of UNALLOCATED ENTITLEMENTS UNDER the Company’s Stock Option Plan
The rules of the Toronto Stock Exchange (the “TSX”) provide that every three years after the institution of a security-based compensation arrangement, all unallocated options, rights or other entitlements under such arrangement that does not have a fixed maximum number of securities issuable thereunder, must be approved by a majority of the issuer’s directors and by a majority of the issuer’s shareholders. An “evergreen plan” (being a plan that provides for the replenishment of the number of securities reserved when awards are exercised) does not, by definition, have a fixed maximum number of securities issuable thereunder, and is therefore subject to the requirement that shareholders approve unallocated entitlements every three years. Entitlements are considered to be “allocated” under a plan when they are granted to a participant and entitlements that remain available for grant under a plan are referred to as “unallocated”.
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The Board adopted the 2013 stock option plan (the “Stock Option Plan” or the “Plan”) for the benefit of the Company’s Directors, executives, employees and consultants, and Shareholders approved the Stock Option Plan on May 30, 2013. The Board also adopted a house keeping amendment to the Plan on April 27, 2015 to clarify the procedure for fixing the earlier termination date of stock options. Shareholders approved all unallocated entitlements issuable under the Stock Option Plan on June 3, 2015.
The Stock Option Plan has been established to assist the Company in the recruitment and retention of highly qualified executives, employees and eligible consultants by providing a means to reward performance, to motivate participants to achieve important corporate and personal objectives and, to align the interests of participants with the long-term interests of Shareholders. At the Meeting, Shareholders will be asked to approve all unallocated entitlements under the Stock Option Plan. The Board has approved the unallocated options under the Stock Option Plan.
As at December 31, 2017, the Company had 111,148,680 Common Shares issued and outstanding and a maximum of 7,200,000 Common Shares were available for issuance under the Stock Option Plan as at such date. As at December 31, 2017, there were 1,955,002 options granted and outstanding under the Stock Option Plan (representing 1.76% of the Common Shares), leaving 5,244,998 Common Shares (representing 4.72% of the Common Shares) available for grant of further options. As of December 31, 2017, no stock options had been exercised under the Stock Option Plan since 2014.
Under TSX requirements, the Company must disclose the annual burn rate of the Stock Option Plan for each of the Company’s three most recently completed fiscal years. The annual burn rate of the Stock Option Plan is equal to 1.44% for the year ended December 31, 2017, 0.46% for the year ended December 31, 2016 and 0.57% for the year ended December 31, 2015.
The annual burn rate of the Stock Option Plan is calculated as the number of securities granted under the Stock Option Plan during the applicable fiscal year divided by the weighted average number of securities outstanding for the applicable fiscal year. The weighted average number of securities outstanding during the period is the number of securities outstanding at the beginning of the period, adjusted by the number of securities bought back or issued during the period multiplied by a time-weighting factor. The time-weighting factor is the number of days that the securities are outstanding as a proportion of the total number of days in the period; a reasonable approximation of the weighted average is adequate in many circumstances. The weighted average number of securities outstanding is calculated in accordance with the CPA Canada Handbook, as such may be amended or superseded from time to time.
At the Meeting, Shareholders will be asked to consider, and if thought appropriate, pass the following ordinary resolution approving the unallocated entitlements issuable pursuant to the Stock Option Plan:
RESOLVED THAT all unallocated entitlements under the Plan be approved, the Company have the ability to continue granting options under the Plan until June 11, 2021, which is the date that is three (3) years from the date of this Meeting at which shareholder approval is being sought, and any director of officer of the Company be authorized to do such things and to sign, execute and deliver all documents that such director and officer may, in their discretion, determined to be necessary in order to give full effect to the intent and purpose of this resolution.
The Board has unanimously concluded that the approval of the unallocated entitlements under the Stock Option Plan is in the best interest of the Company and its Shareholders, and recommends that Shareholders voteIN FAVOR of the approval of the unallocated entitlements under the Stock Option Plan. The Company has been advised that the Directors and senior officers of the Company intend to vote all Common Shares held by them in favor of the approval of the unallocated entitlements under the Stock Option Plan.In the absence of a contrary instruction, the person(s) designated by management of the Company in the form of proxy intend to vote FOR the approval of the unallocated entitlements under the Stock Option Plan.
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Summary of the Stock Option Plan
Set out below is a summary of the material terms of the Stock Option Plan.
| i) | the eligible participants under the Plan are directors, officers, employees and consultants of the Company; |
| ii) | the number of common shares reserved for issuance from time to time under the Plan is 7,200,000, which represents approximately 2.4% of the number of the current issued and outstanding shares of the Company; |
| iii) | if any stock option is exercised or expires or otherwise terminates for any reason, the number of common shares in respect of which the stock option is exercised or expired or terminated shall again be available for the purposes of the Plan; |
| iv) | the aggregate number of options awarded within any one (1) year period to insiders under the Plan or any previously established and outstanding stock option plans or grants, cannot exceed 10% of the issued shares of the Company (calculated at the time of award); or the aggregate number of shares reserved at any time for issuance to insiders upon the exercise of options awarded under the Plan or any previously established and outstanding stock option plans or grants, cannot exceed 10% of the issued shares of the Company (calculated at the time of award); |
| v) | the exercise price for securities under the Plan will be determined by the Board of Directors in its sole discretion as of the date of grant, and shall not be less than: |
| (a) | if the Company’s shares are not listed for trading on an exchange at the date of grant, the last price at which the Company’s shares were issued prior to the date of grant; or |
| (b) | if the Company’s shares are listed for trading on an exchange at the date of grant, the volume-weighted average price for the five (5) trading days immediately prior to the date of grant; |
| vi) | the value of a share for stock appreciation rights shall be determined, unless otherwise specified or permitted by applicable regulatory policies, based on the weighted average trading price per share for the five (5) trading days immediately preceding the date the notice is received by the Company on the Exchange; |
| vii) | a stock appreciation right granted pursuant to the Plan shall entitle the option holder to elect to surrender to the Company, unexercised, the option with which it is included, or any portion thereof, and to receive from the Company in exchange therefore that number of shares, disregarding fractions, having an aggregate value equal to the excess of the value of one share over the purchase price per share specified in such option, times the number of shares called for by the option, or portion thereof, which is so surrendered; |
| viii) | the Board of Directors may grant stock options to any director, officer or employee, together with a bonus consisting of a corresponding right to be paid, in cash, an amount equal to the exercise price of such stock options, subject to such provisos and restrictions as the Board may determine, and subject to any applicable approvals, if required. The options granted as part of the bonus shall be included in, and not in addition to, the maximum number of options which may be granted under the Plan from time to time; |
| ix) | all options granted pursuant to the Plan will be subject to such vesting requirements as may be prescribed by the Exchange, if applicable, or as may be imposed by the Board of Directors; |
| x) | the expiry date of an option shall be the date so fixed by the Board of Directors at the time the particular option is awarded, provided that such date shall not be later than the fifth anniversary of the date of grant of the option. If the expiry date of an option falls within a blackout period, then the expiry date of the option will be the date which is ten (10) business days after the expiry date of the blackout period. The ten (10) business day period may not be extended by the Board; |
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| xi) | any options granted pursuant to the Plan will terminate on the date determined by the Board, such date not to exceed one (1) year of the date the option holder ceases to act as a director, officer, or employee of the Company or any of its affiliates, and one year of the date the option holder ceases to act as an employee engaged in investor relations activities, unless such cessation is on account of death. If such cessation is on account of death, the options terminate on the first anniversary of such cessation. If such cessation is on account of cause, or terminated by regulatory sanction or by reason of judicial order, the options terminate immediately. Options that have been cancelled or that have expired without having been exercised shall continue to be issuable under the Plan. The Plan also provides for adjustments to outstanding options in the event of any consolidation, subdivision, conversion or exchange of Company’s shares; |
| xii) | options may not be assigned or transferred; |
| xiii) | subject to subsection xiv) below, the Board may amend the Plan and the terms and conditions of any option thereafter to be granted without shareholder approval, unless shareholder approval is expressly required under any relevant law, rule or regulation, or the policies of the Exchange, including but not limited to the following types of amendments: |
| (a) | an amendment to the purchase price of any option, unless the amendment is a reduction in the purchase price of an option held by an insider; |
| (b) | an amendment to the date upon which an option may expire, unless the amendment extends the expiry of the option held by an insider; |
| (c) | an amendment to the vesting provisions of the Plan and any option granted under the Plan; |
| (d) | an addition to, deletion from or alteration of the Plan or an option that is necessary to comply with the applicable law or the requirements of any regulatory authority or the TSX; |
| (e) | any amendment of a “housekeeping” nature; |
| (f) | any amendment respecting the administration of the Plan; |
| (g) | any other amendment that does not require shareholder approval under the Plan; |
| xiv) | any substantive amendments to the Plan shall be subject to the Company first obtaining the approvals, if required, of: |
| (a) | the shareholders or disinterested shareholders, as the case may be, of the Company at general meetings where required by the rules and policies of the Exchange, or any stock exchange on which the Shares may then be listed for trading; and |
| (b) | the Exchange, or any stock exchange on which the shares may then be listed for trading; |
| xv) | there are no provisions in the Plan for direct financial assistance to be provided by the Company to participants under the Plan to facilitate the purchase of securities under the Plan, although the Plan does permit stock appreciation rights and bonuses to be issued together with options as described above; |
| xvi) | there are no entitlements under the Plan previously granted and subject to approval by security holders; |
| xvii) | any substantive amendments to the Plan shall be subject to the Company first obtaining the approvals, if required, of: |
| (a) | the shareholders or disinterested shareholders, as the case may be, of the Company at general meetings where required by the rules and policies of the Exchange, or any stock exchange on which the Shares may then be listed for trading; and |
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| (b) | the Exchange, or any stock exchange on which the shares may then be listed for trading; |
| xviii) | there are no provisions in the Plan for direct financial assistance to be provided by the Company to participants under the Plan to facilitate the purchase of securities under the Plan, although the Plan does permit stock appreciation rights and bonuses to be issued together with options as described above; and |
| xix) | there are no entitlements under the Plan previously granted and subject to approval by security holders. |
A copy of the Stock Option Plan was filed on SEDAR at www.sedar.com on May 2, 2013 as a schedule to the Company’s Management Information Circular and on EDGAR at www.sec.gov on April 30, 2013 as a schedule to the Company’s Proxy Statement. Shareholders may request additional copies by (i) mail to: 2300 – 1066 West Hastings Street, Vancouver, BC V6E 3X2 or (ii) telephone to: (778) 373-1557.
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains information regarding the members and nominees of the Board of Directors and the Executive of Golden Queen as of the Record Date:
| Name | Age | Position | Position Held Since | |||||
| Thomas M. Clay | 33 | Director Chairman CEO | January 13, 2009 | |||||
May 30, 2013 | ||||||||
August 10, 2015 | ||||||||
| Bryan A. Coates | 59 | Director | January 28, 2013 | |||||
| Bernard Guarnera | 74 | Director | May 30, 2013 | |||||
| Paul Blythe | ||||||||
Robert C. Walish, Jr. | 65 65 | Director COO | March 30, 2017 August 10, 2015 | |||||
| Guy Le Bel Brenda Dayton | 59 50 | CFO Corporate Secretary | March 16, 2017 | |||||
October 1, 2015 | ||||||||
All of the officers identified above serve at the discretion of the Board and have consented to act as directors of the Company.
RELATIONSHIPS AMONG DIRECTORS OR EXECUTIVE OFFICERS
There are no family relationships among any of the existing directors or executive officers of Golden Queen.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of the Company’s Common Stock as of March 29, 2017April 18, 2018 by:
| (i) | each director of Golden Queen; |
| (ii) | each of the Named Executive Officers of Golden Queen; and |
| (iii) | all directors and executive officers as a group. |
Except as noted below, Golden Queen believes that the beneficial owners of the Common Stock listed below, based on information furnished by such owners, have sole voting and investment power with respect to such shares, except as noted in the footnote below the table.
| Name and Address of Beneficial Owner | Shares Beneficially Owned | Percentage of Shares Beneficially Owned (on a partially diluted basis) | ||||||
| THOMAS M. CLAY,Director, Chairman & Chief Executive Officer Peterborough, NH | 26,484,195 | [1][2] | 21.6 | % | ||||
| BRYAN A. COATES,Director Saint-Lambert, QC | 258,000 | [1][3] | 0.23 | % | ||||
| BERNARD GUARNERA,Director Las Vegas, NV | 257,500 | [1] | 0.23 | % | ||||
| GUY LE BEL,FormerDirector and Chief Financial Officer[4] Repentigny, QC | 632,502 | [1] | 0.57 | % | ||||
| PAUL M. BLYTHE,Director[5] Collingwood, ON | nil | 0.0 | % | |||||
| ROBERT C. WALISH, JR.,Chief Operating Officer Mojave, CA | nil | 0.0 | % | |||||
| ANDRÉE ST-GERMAIN,Chief Financial Officer Vancouver, BC | 393,333 | [1][6] | 0.35 | % | ||||
| BRENDA DAYTON,Corporate Secretary Vancouver, BC | 40,000 | [1] | 0.04 | % | ||||
| All officers and directors (8) persons | 28,065,530 | 23.02 | % | |||||
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| Name and Address of Beneficial Owner | Shares Beneficially Owned | Percentage of Shares Beneficially Owned (on a partially diluted basis) | ||||||
THOMAS M. CLAY,Director, Chairman & Chief Executive Officer Providence, RI | 147,122,375[1][2] | 46.85 | % | |||||
BRYAN A. COATES,Director Saint-Lambert, QC | 408,000[1][3] | 0.12 | % | |||||
BERNARD GUARNERA,Director Las Vegas, NV | 407,500[1] | 0.12 | % | |||||
GUY LE BEL,Former Director and Chief Financial Officer[4] Repentigny, QC | 962,501[1] | 0.29 | % | |||||
PAUL M. BLYTHE,Director[5] Collingwood, ON | 1,730,000[1] | 0.53 | % | |||||
ROBERT C. WALISH, JR.,Chief Operating Officer Mojave, CA | nil | 0.0 | % | |||||
ANDRÉE ST-GERMAIN,Chief Financial Officer[6] Vancouver, BC | nil | 0.0 | % | |||||
BRENDA DAYTON,Corporate Secretary Vancouver, BC | 220,000[1] | 0.07 | % | |||||
| All officers and directors (8) persons | 150,850,376 | 47.98 | % | |||||
| [1] | These amounts include beneficial ownership of securities not currently outstanding but which are reserved for immediate issuance on exercise of options. In particular, these amounts include shares issuable upon exercise of options as follows: |
| [2] | Includes |
| [3] | Includes 8,500 shares issuable upon exercise of warrants. |
| [4] | Guy Le Bel assumed the role of Chief Financial Officer on March 16, 2017, and resigned as director on March 30, 2017. |
| [5] | Paul M. Blythe was appointed as a director of the Company on March 30, 2017. |
| [6] | Andrée St-Germain resigned from the Company on March 16, |
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires Golden Queen’s directors, executive officers and persons who own more than 10% of a registered class of Golden Queen’s securities to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of Golden Queen. Directors, executive officers and greater than 10% shareholders are required by SEC regulation to furnish Golden Queen with copies of all Section 16(a) reports they file.
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To the Company’s knowledge, based solely on a review of Forms 3 and 4, as amended, furnished to it during its most recent fiscal year, and Form 5, as amended, furnished to it with respect to such year, other than as disclosed in this Proxy Statement, the Company believes that during the year ended December 31, 2016,2017, its directors, executive officers and greater than 10% shareholders complied with all Section 16(a) filing requirements of the Securities Exchange Act of 1934.
DIRECTORS COMPENSATION
The following table sets out the compensation provided to the members of the Board during the Company’s year ended December 31, 2016:2017:
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Non- Qualified Deferred Compensation Earnings | All Other Compensation ($) | Total ($) | |||||||||||||||||||||
| Thomas M. Clay | Nil | Nil | Nil | Nil | N/A | Nil | Nil | |||||||||||||||||||||
| Bryan A. Coates | 35,000 | Nil | Nil | Nil | N/A | Nil | 35,000 | |||||||||||||||||||||
| Bernard Guarnera | 35,000 | Nil | Nil | Nil | N/A | Nil | 35,000 | |||||||||||||||||||||
| Guy Le Bel(1) | 35,000 | Nil | Nil | Nil | N/A | Nil | 35,000 | |||||||||||||||||||||
| Paul Blythe | Nil | Nil | Nil | Nil | N/A | Nil | Nil | |||||||||||||||||||||
| Name | Fees ($) | Stock Awards ($) | Option Awards ($)(4) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Non-Qualified Deferred Compensation Earnings | All Other Compensation ($) | Total ($) | |||||||||||||||||||||
| Thomas M. Clay | 100,000 | Nil | 38,250 | Nil | N/A | Nil | 138,250 | |||||||||||||||||||||
| Bryan A. Coates | 35,000 | Nil | 22,950 | Nil | N/A | Nil | 57,950 | |||||||||||||||||||||
| Bernard Guarnera(1) | 35,000 | Nil | 22,950 | Nil | N/A | Nil | 57,950 | |||||||||||||||||||||
| Paul M. Blythe(2) | 26,250 | Nil | 22,950 | Nil | N/A | Nil | 49,200 | |||||||||||||||||||||
| Guy Le Bel(3) | 7,292 | Nil | Nil | Nil | N/A | Nil | 7,292 | |||||||||||||||||||||
| Director fees earned by Bernard Guarnera were paid to Broadlands Mineral Advisory Services Ltd., a company which he controls |
| (2) | Paul M. Blythe joined the Board of Directors on March 30, 2017 |
| (3) | Guy Le Bel resigned from |
| (4) | The fair value on October 20, 2017, the grant date was calculated using the Black-Scholes option pricing model, with the following assumptions – risk-free interest rate of 1.7%; dividend yield of $nil; expected volatility of 79.17%; expected life of 5 years. |
It is currently the policy of the Company to grant options to purchase Common Shares to its directors under the Company’s 2013 Stock Option Plan.
Other than as disclosed in this Proxy Statement and Management Information Circular, there are no other arrangements under which directors of the Company were compensated by the Company during the year ended December 31, 20162017 for their services in their capacity as directors and, without limiting the generality of the foregoing, no additional amounts are payable under any standard arrangements for committee participation or special assignments, except that the Articles of the Company provide that the directors are entitled to be paid reasonable traveling, hotel and other expenses incurred by them in the performance of their duties as directors. The Company’s Articles also provide that if a director is called upon to perform any professional or other services for the Company that, in the opinion of the directors, is outside of the ordinary duties of a director, such director may be paid a remuneration to be fixed by the directors and such remuneration may be either in addition to or in substitution for any other remuneration that such director may be entitled to receive.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the total compensation of Golden Queen’s president and chief executive officer, chief financial officer, and the chief operating officer (the “Named Executive Officers”) during the last three completed fiscal years for services rendered to Golden Queen in all capacities.
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($)[1] | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||
| Thomas M. | 2016 | 100,000 | Nil | Nil | Nil | Nil | Nil | Nil | 100,000 | |||||||||||||||||||||||||
| Clay[3] | 2015 | 33,333 | Nil | Nil | Nil | Nil | Nil | Nil | 33,333 | |||||||||||||||||||||||||
| Chairman & CEO | 2014 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil | |||||||||||||||||||||||||
| Robert C. | 2016 | 174,999 | 51,065 | Nil | Nil | Nil | Nil | Nil | 226,064 | |||||||||||||||||||||||||
| Walish, Jr.[4] | 2015 | 115,984 | 75,000 | Nil | Nil | Nil | Nil | Nil | 190,984 | |||||||||||||||||||||||||
| COO | 2014 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil | |||||||||||||||||||||||||
| Andrée St- | 2016 | 132,125 | 61,075 | Nil | 15,195 | Nil | Nil | Nil | 178,732 | |||||||||||||||||||||||||
| Germain[5] | 2015 | 133,572 | 30,583 | Nil | 15,195 | Nil | Nil | Nil | 179,350 | |||||||||||||||||||||||||
| CFO | 2014 | 135,817 | 167,783 | Nil | 141,181 | Nil | Nil | Nil | 444,781 | |||||||||||||||||||||||||
Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($)[1] | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||||
Thomas M. Clay[2] Chairman & CEO | 2017 2016 | 100,000 33,333 | Nil Nil | Nil Nil | 38,250 Nil | Nil Nil | Nil Nil | Nil Nil | 138,250 33,333 | |||||||||||||||||||||||||||
| 2015 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil | ||||||||||||||||||||||||||||
Robert C. Walish, Jr.[3] COO | 2017 2016 2015 | 175,000 115,984 116,667 | 87,500 75,000 51,065 | Nil Nil Nil | Nil Nil Nil | Nil Nil Nil | Nil Nil Nil | Nil Nil Nil | 262,500 226,065 191,667 | |||||||||||||||||||||||||||
| Guy Le Bel,[4] CFO | 2017 2016 2015 | 126,058 N/A N/A | 19,785 N/A N/A | Nil N/A N/A | 216,851 N/A N/A | Nil N/A N/A | Nil N/A N/A | Nil N/A N/A | 362,694 N/A N/A | |||||||||||||||||||||||||||
Andrée St-Germain[5] Former CFO | 2017 2016 2015 | 37,216 133,572 135,817 | 31,412 30,583 167,783 | Nil Nil Nil | Nil 15,195 141,181 | Nil Nil Nil | Nil Nil Nil | Nil Nil Nil | 68,628 179,350 444,781 |
| [1] | The determination of the value of option awards is based upon the Black-Scholes Option pricing model, details and assumptions of which are set out in the Company’s consolidated financial statements for the fiscal years ended December 31, |
| [2] | Thomas M. Clay was appointed the Chief Executive Officer on August 10, 2015. |
| [3] |
| [4] | Andrée St-Germain was appointed the Chief Financial Officer on September 18, 2013 and resigned on March 16, 2017. |
OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FISCAL YEAR
The Board approves the issuance of stock options to our directors, officers, employees and consultants. Unless otherwise provided by the Board of Directors, all vested options are exercisable for a term of five (5) years from the date of grant. During the fiscal year ended December 31, 2016,2017, there were 200,0001,605,001 options granted to the Named Executive Officers.Company’s directors, officers and employees.
OUTSTANDING EQUITY AWARDS AT THE MOST RECENTLY COMPLETED FISCAL YEAR
The following table sets forth the information concerning all option-based awards outstanding for each of Golden Queen’s Named Executive Officers as of December 31, 2016:2017:
| Name and Principal Position | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards; Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | |||||||||||||
| Thomas M. Clay | 107,500 | Nil | Nil | $ | 0.58 | September 8, 2020 | ||||||||||||
| Chairman & CEO(1) | 100,000 | 100,000 | 100,000 | $ | 0.66 | November 30, 2021 | ||||||||||||
| Andrée St- | 300,000 | Nil | Nil | $ | 1.26 | June 14, 2017 | ||||||||||||
| Germain | 93,333 | Nil | Nil | $ | 0.58 | June 14, 2017 | ||||||||||||
| Former CFO(2) | 100,000 | 100,000 | 100,000 | $ | 0.66 | March 16, 2017(3) | ||||||||||||
Name and Principal Position | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards; Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | |||||||||||||
Thomas M. Clay Chairman & CEO(1) | 107,500 100,000 250,000 | 107,500 100,000 Nil | Nil Nil 250,000 | $0.58 $0.66 $0.29 | September 8, 2020 November 30, 2021 October 20, 2022 | |||||||||||||
Guy Le Bel CFO(2) | 50,000 107,500 75,000 400,002 249,999 | 50,000 107,500 75,000 133,334 Nil | Nil Nil Nil 266,668 249,999 | $1.67 $0.58 $0.66 $0.65 $0.29 | September 4, 2018 September 8,2020 November 30, 2021 March 20, 2022 October 20, 2022 |
| [1] | Thomas M. Clay was appointed as Chief Executive Officer on August 10, 2015. |
| [2] |
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets out information as of the end of the fiscal year ended December 31, 20162017 with respect to compensation plans under which equity securities of the Company are authorized for issuance:
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options. Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuances Under Equity Compensation Plan [Excluding Securities Reflected in Column (a)] (c) | |||||||||
| Equity Compensation | 50,000 | $ | 1.16 | |||||||||
| Plans Approved by | 150,000 | $ | 1.59 | 5,645,000 | ||||||||
| Security Holders | 300,000 | $ | 1.26 | |||||||||
| 570,000 | $ | 0.58 | ||||||||||
| 485,000 | $ | 0.66 | ||||||||||
| Equity Compensation Plans Not Approved by Security Holders | Nil | Nil | Nil | |||||||||
| Total: | 1,555,000 | $ | 0.85 | 5,645,000 | ||||||||
On March 16, 2017, Guy Le Bel was granted 400,002 stock options with an exercise price of $0.65.
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options. Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuances Under Equity Compensation Plan [Excluding Securities Reflected in Column (a)] (c) | |||||||||
| Equity Compensation Plans Approved by Security Holders | 50,000 150,000 430,000 365,000 400,002 1,204,999 | $ $ $ $ $ $ | 1.16 1.59 0.58 0.66 0.65 0.29 | 4,599,999 | ||||||||
| Equity Compensation Plans Not Approved by Security Holders | Nil | Nil | Nil | |||||||||
| Total: | 2,600,001 | $ | 0.54 | 4,599,999 | ||||||||
AGGREGATED STOCK OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
There were no stock options exercised by the Named Executive Officers during the Company’s fiscal year ended December 31, 2016.2017.
TERMINATION OF EMPLOYMENT, CHANGE IN RESPONSIBILITIES AND EMPLOYMENT CONTRACTS
The Company has entered into consulting or employment contracts with each of the Named Executive Officers as follows:
The Company entered into an employment contract on September 18, 2013 with Andrée St-Germain, the former Chief Financial Officeramended and former Corporate Secretary of the Company. Ms. St-Germain was entitled to an annual salary of C$150,000 and a one-time bonus target of C$150,000 to be payable as to 50% after six (6) months and 50% after twelve (12) months, subject to a performance review by the Compensation Committee. This bonus target was paid to Ms. St-Germain in 2014. Thereafter, Ms. St-Germain may be paid bonuses at the sole discretion of the Board. Pursuant to the contract, if Ms. St-Germain is terminated by the Company without cause during the first twelve (12) months of her employment, she will be entitled to six (6) months base salary being C$75,000. If Ms. St-Germain is terminated by the Company without cause after the first twelve (12) months of her employment, she will be entitled to twelve (12) months base salary being C$150,000. In the event that the employment of Ms. St-Germain is terminated by the Company or its successor without cause, or is terminated by Ms. St-Germain for good reason, in either case within six (6) months following a change of control, she will be entitled to receive a lump-sum severance payment equal to twenty-four (24) months base salary, being C$300,000, and two (2) times her annual bonus, being C$300,000. Ms. St-Germain resigned from the Company on March 16, 2017. The Company approved a 90 day post-termination exercise period expiring June 14, 2017 pursuant to which Ms. Germain may exercise her stock options that have vested in the aggregate amount of 393,333 stock options into common shares of the Company.
The Company entered into anrestated employment contract on October 1, 20152017 with Brenda Dayton pursuant to which Ms. Dayton waswho is employed as Corporate Secretary of the Company effectivelyeffective October 1, 2015. Her employment with the Company will continue without fixed term. Her position as officer of the Company will be renewed annually subject to the approval of the Board. Ms. Dayton is entitled to an annual salary of C$110,000, subject to periodic review in accordance with Company practice. Pursuant to the contract, if Ms. Dayton is terminated by the Company without cause or terminated by Ms. Dayton for good reason, within 612 months following a change of control, she will be entitled to receive a lump-sum severance payment equal to her gross annual salary received from the Company in the twelve month period immediately preceding the date of written notice of termination provided by Ms. Dayton or the Company.and two (2) times her annual bonus. Ms. Dayton is also entitled to participate in the Company’s stock option plan.
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The Company entered into an employment contract on March 16, 2017 with Guy Le Bel pursuant to which Mr. Le Bel assumed the role of Chief Financial Officer. Mr. Le Bel is entitled to an annual salary of C$175,000 and a one-time signing bonus of C$25,000. Thereafter, Mr. Le Bel may be paid bonuses at the sole discretion of the Board. Mr. Le Bel also received an initial grant of 400,002 stock options to purchase common shares of the Company for a period of 5 years. The stock options will vest as follows: 133,334 options at 12 months, 133,334 options at 24 months, and 133,334 options at 36 months. Mr. Le Bel is also entitled to participate in the Company’s stock option plan. Pursuant to the contract, if Mr. Le Bel is terminated by the Company without cause during the first six (6) months of his employment, he will be entitled to six (6) months base salary and 50% of the signing bonus. If Mr. Le Bel is terminated by the Company without cause after the first six (6) months of his employment, he will be entitled to twelve (12) months base salary being C$175,000 and 100% of the last annual Target Bonus granted. In the event that the employment of Mr. Le Bel is terminated by the Company or its successor without cause, or is terminated by Mr. Le Bel for good reason, in either case within three (3) months following a change of control, he will be entitled to receive a lump-sum severance payment equal to twenty-four (24) months base salary, being C$350,000, and two (2) times his annual bonus.
REPORT OF CORPORATE GOVERNANCE
The Canadian Securities Administrators have adopted National Instrument 58-101Disclosure of Corporate Governance Practices (“NI 58-101”) and National Policy 58-201Corporate Governance Guidelines(“NP 58-201”) (the “Guidelines”), both of which came into force as of June 30, 2005 and effectively replaced the corporate governance guidelines and disclosure policies of the Exchange. NI 58-101 requires issuers such as the Company to disclose the corporate governance practices that they have adopted, while NP 58-201 provides guidance on corporate governance practices. In this regard, a brief description of the Company’s system of corporate governance, with reference to the items set out in NI 58-101 and NP 58-101 is set forth below.
The Board and management recognize that effective corporate governance is important to the direction and operation of the Company in a manner in which ultimately enhances shareholder value. As a result, the Company has developed and implemented, and continues to develop, implement and refine formal policies and procedures which reflect its ongoing commitment to good corporate governance. The Company believes that the corporate governance practices and procedures described below are appropriate for a company such as the Company.
Board of Directors
NP 58-201 recommends that boards of directors of reporting issuers be composed of a majority of independent directors. With three (3) of the four (4) current directors considered independent, the Board is currently composed of a majority of independent directors. Mr. Clay, in his role as CEO and the Chairman of the Board is not deemed independent. The Board holds regular meetings. Between the scheduled meetings, the Board meets as required. Management also communicates informally with directors on a regular basis, and solicits advice from directors on matters falling within their special knowledge or experience.
Chairman of the Board
Thomas M. Clay, a non-independent director, was appointed Chairman of the Board on May 30, 2013.June 10, 2014. Mr. Clay’s primary roles as Chairman are to chair all meetings of the Board and to manage the affairs of the Board, including ensuring the Board is organized properly, functions effectively and meets its obligations and responsibilities. The Chairman’s responsibilities include, among other things, ensuring effective relations and communications among Board members.
The Company does not have a chairman that is independent or a lead independent director. Given the size of the Board, the Board believes that the presence of three (3) independent directors out of the four (4) directors currently on the Board, each of whom sits on the Board’s committees, is sufficient independent oversight of the Chairman of the Board and Chief Executive Officer. The independent directors work well together in the current Board structure and the Board does not believe that selecting an independent chairman or a lead independent director would add significant benefits to the Board oversight role.
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Director Meetings
The Board meets on a regular basis and holds additional meetings as considered appropriate to deal with the matters arising from developments in the business and affairs of the Company from time to time. During the fiscal year ended December 31, 2016,2017, the Board held five (5)four (4) regular meetings, including an in-person Board meeting held on site. In addition to the business conducted at such meetings, various other matters were discussed by phone and approved by written resolution signed by all members of the Board.
The Company does not have a policy with regard to Board membersmembers’ attendance at annual meetings of Shareholders.
Board Mandate
The Board is responsible for the overall stewardship of the Company. The Board discharges this responsibility directly and through the delegation of specific responsibilities to committees of the Board. The Board works with management to establish goals and strategies for the Company, to identify principal risks, to select and assess senior management and to review significant operational and financial matters. The Board’s mandate is available on the Company’s website atwww.goldenqueen.com.
Position Descriptions
The Board has developed written position descriptions for the Chairman of the Board, the Directors of the Board, each chair of each board committee, and for the Chief Executive Officer of the Company, which are available on the Company’s website atwww.goldenqueen.com.
Orientation and Continuing Education
The Company provides new directors with an overview of their role as a member of the Board and its Committees, and the nature and operation of the Company’s business and affairs. New directors also have the opportunity to discuss the Company’s affairs with legal counsel and with the Company’s independent auditors. New directors are also provided with opportunities to visit the mine site in Mojave and are invited to have discussions with the Company’s operating personnel. In 2016, all of the directors visited the Soledad Mountain Project and had the opportunity to meet with local stakeholders and tour the project facilities.
The Company does not provide formal continuing education to its Board members, but does encourage them to communicate with management, independent auditors and consultants. Board members are also encouraged to participate in industry-related conferences, meetings and education events to maintain their skills and knowledge necessary to meet their obligations as directors of the Company.
Code of Business Conduct
The Board has adopted a Code of Business Conduct (the “Code”), which is distributed to officers, management and employees of the Company. To ensure and monitor compliance with the Code, the Board has adopted a Whistle-blower Policy. A request for a waiver of any provision of the Code can be made in writing to the Audit Committee, however, such waiver must be approved by the Board. During the recently completed fiscal year, there was no conduct by an officer, by management or an employee that constituted a departure from the Code. The Board has also adopted a Code of Ethics for Senior Financial Officers. The Company’s Code of Business Conduct and Code of Ethics for Senior Financial Officers are available on the Company’s website atwww.goldenqueen.com.
If a director or senior officer has a material interest in a transaction or agreement being considered by the Company, such individual is precluded from voting on the matter and the Board considers such matter without the individual present.
Assessments
Based upon the Company’s size, its current stage of development and the number of individuals on the Board, the Board considers a formal process for assessing the effectiveness and contribution of the Board as a whole, its committees or individual directors to be unnecessary at this time. The Board and its committees meet on numerous occasions during each year, each director having regular opportunity to assess the Board as a whole, its committees, and other directors in relation to assessment of the competencies and skills that the Board as a whole, its committees and directors should possess. The Board will continue to evaluate its own effectiveness and the effectiveness of its committees and individual directors in such manner.
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Board Leadership Structure
The Board does not have an express policy regarding the separation of the roles of the Chairman of the Board and Chief Executive Officer, as the Board believes that it is in the best interests of the Company to make that determination based on the position and direction of the Company and the membership of the Board. The Board has reviewed the Company’s current Board leadership structure. Thomas M. Clay has been the Company’s Chairman of the Board since May 2013 and assumed the role of Chief Executive Officer on August 10, 2015. In light of the composition of the Board, the Company’s size, the nature of the Company’s business, the regulatory framework under which the Company operates, the Company’s shareholder base, the Company’s peer group and other relevant factors, the Board believes that the current leadership structure is appropriate. Mr. Clay brings complimentary attributes to the Company’s business operations and strategic plans.plans and generally are focused on somewhat different aspects of the Company’s operations.
The Company does not have a lead independent director. Given the size of the Board, the Board believes that the presence of three (3) independent directors out of the four (4) directors currently on the Board, each of whom sits on the Board’s committees, is sufficient independent oversight of the Chairman of the Board and Chief Executive Officer. The independent directors work well together in the current Board structure and the Board does not believe that selecting a lead independent director would add significant benefits to the Board oversight role.
Also, the Board does not have a formal policy with respect to the consideration of diversity when assessing directors and director candidates, but considers diversity as part of its overall assessment of the Board’s functions and needs.
Board’s Role in Risk Oversight
The understanding, identification and management of risk are essential elements for the successful management of the Company. Management is charged with the day-to-day management of the risks the Company faces. However, the Board, directly and indirectly through its committees, is actively involved in the oversight of the Company’s risk management policies. The Board is charged with overseeing enterprise risk management, generally, and with reviewing and discussing with management the Company’s major risk exposure (whether financial, operating or otherwise) and the steps management has taken to monitor, control and manage these exposures, including the Company’s risk assessment and risk management guidelines and policies. Additionally, the Compensation Committee oversees the Company’s compensation policies generally, in part to determine whether or not they create risks that are reasonably likely to have a material adverse effect on the Company.
Board Term Limits
The Company has not adopted term limits for the directors on the Board or other mechanisms of board renewal because the Company believes that the imposition of term limits for its directors may lead to the exclusion of potentially valuable members of the Board. While there is a benefit to adding new perspectives to the Board from time to time, there are also benefits to having continuity and directors having in-depth knowledge of the Company’s business. The Company’s Nominating Committee considers, among other factors, skills, experience, and tenure when identifying potential director nominees.
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Gender Diversity
The Company has not adopted a written policy relating to the identification and nomination of women directors and the Company has not adopted a target regarding the representation of women on the Board or in executive officer positions. The Company’s Nominating Committee identifies, evaluates and recommends candidates to become members of the Board with the goal of creating a Board that, as a whole, consists of individuals with various and relevant career experience, industry knowledge and experience, and financial and other specialized experience, while taking diversity into account. The consideration of the level of representation of women on the Board and in executive officer positions is one factor among many that plays a role in the Company’s Nominating Committee’s decision-making process.
As at the date hereof, there are no female directors on the Board or serving as executive officers of the Company.
Board’s Skills Matrix
The following table summarizes the particular areas of expertise for each member of the Board:
Director Name | Business Development | Corporate Governance | Finance | Risk Management | Capital Markets | Mining & Processing | ||||||
| Thomas M. Clay | X | X | X | X | X | |||||||
| Bryan A. Coates | X | X | X | X | X | |||||||
| Bernard Guarnera | X | X | X | X | X | |||||||
| Paul M. Blythe | X | X | X | X | X |
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee, a Compensation Committee, and a Nominating Committee. Each of the Audit Committee, Compensation Committee, and Nominating Committee, is responsible to the full Board of Directors. The functions performed by these committees are summarized below:
Audit Committee. The Audit Committee considers the selection and retention of independent auditors and reviews the scope and results of the audit. In addition, it reviews the adequacy of internal accounting, financial and operating controls and reviews Golden Queen’s financial reporting compliance procedures. As of the Record Date, the members of the Audit Committee are Bryan A. Coates, Guy Le Bel,Paul M. Blythe, and Bernard Guarnera, each of whom is considered independent with the exception of Mr. Le Bel who became non-independent on March 16, 2017 when he assumed the role of the Company’s Chief Financial Officer.independent. Bryan A. Coates is the Chair and the “financial expert” of the Audit Committee. The Board of Directors has adopted a written charter for the Audit Committee. The Audit Committee charter is available on the Company’s website atwww.goldenqueen.com. During the fiscal year ended December 31, 2016,2017, the Audit Committee held four (4) meetings, during which all audit committee members were present. Mr. Le Bel resigned as a director of the Company on March 30, 2017. Subsequent to the Meeting2017 and Mr. Le Bel’s resignation as a director and Audit Committee member, the composition of the Audit Committee will be re-evaluatedwas replaced by the Board of Directors and it is anticipated that Paul M. Blythe will be appointed toon the Audit Committee as Mr. Le Bel’s replacement.Committee.
As part of its oversight of our financial reporting process, the directors have: (1) reviewed and discussed with management our audited financial statements for the year ended December 31, 2016;2017; (2) received a report from PWC, our independent auditors, on the matters required to be discussed by Statement on Auditing Standards No. 61, “Communications with Audit Committees”; (3) received the written disclosures and the letter from the auditors required by Public Company Accounting Oversight Board Rule 3526 regarding the independent accountant’s communications with the audit committee concerning independence, and discussed with the independent accountant the independent accountant’s independence; and (4) considered whether or not the provision of non-audit services by the auditors is compatible with maintaining their independence and has concluded that it is compatible at this time.
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Based on the foregoing review and discussions, the Audit Committee recommended to the Board that the audited financial statements should be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2017, filed with the SEC on March 15, 2017.27, 2018.
Submitted by the Audit Committee.
Bryan A. Coates, Chair
Bernard Guarnera, Member
Guy Le Bel,Paul M. Blythe, Member
Compensation Committee. The Compensation Committee reviews and approves the compensation of Golden Queen’s senior management and officers, reviews and administers Golden Queen’s stock option plan and makes recommendations to the Board of Directors regarding such matters. As of the Record Date, the members of the Compensation Committee are Bernard Guarnera, Bryan A. Coates and Guy Le Bel,Paul M. Blythe, composed entirely of independent directors. The Board of Directors has adopted a written charter for the Compensation Committee. The Compensation Committee charter is available on the Company’s website at www.goldenqueen.com.www.goldenqueen.com. During the fiscal year ended December 31, 2016,2017, the Compensation Committee one (1) meetings.did not hold a meeting.
Subsequent to the Meeting and Mr. Le Bel’s resignation as a director and Compensation Committee member, the composition of the Compensation Committee will be re-evaluated by the Board of Directors and it is anticipated that Paul M. Blythe will be appointed to the Compensation Committee as Mr. Le Bel’s replacement
Nominating Committee. The Nominating Committee assists the Board in providing effective corporate governance. As of the Record Date, the members of the Nominating Committee are Bryan A. Coates, Bernard Guarnera and Guy Le Bel,Paul M. Blythe, composed entirely of independent directors. The Board of Directors has adopted a written charter for the Nominating Committee. The Nominating Committee charter is available on the Company’s website at www.goldenqueen.com.www.goldenqueen.com. The Nominating Committee does not have a policy with regards to the consideration of any director candidate recommend by shareholders of the Company and the Board is of the view that it is appropriate for the Company to not have such a policy at this time. During the fiscal year ended December 31, 2016,2017, the Nominating Committee did not hold a meeting.
Subsequent to the Meeting and Mr. Le Bel’s resignation as a director and Nominating Committee member, the composition of the Nominating Committee will be re-evaluated by the Board of Directors and it is anticipated that Paul M. Blythe will be appointed to the Nominating Committee as Mr. Le Bel’s replacement.
AUDIT COMMITTEE
Pursuant to National Instrument 52-110Audit Committees of the Canadian Securities Administrators, the Company is required to disclose annually in its Information Circular certain information concerning the constitution of its audit committee and its relationship with its independent auditor, as set forth in the following:
The primary function of the audit committee (the “Committee”) is to assist the board of directors in fulfilling its financial oversight responsibilities by reviewing (a) the financial reports and other financial information provided by the Company to regulatory authorities and shareholders; (b) the systems for internal corporate controls which have been established by the Board and management; and (c) overseeing the Company’s financial reporting processes generally. In meeting these responsibilities the Committee monitors the financial reporting process and internal control system; reviews and appraises the work of external auditors and provides an avenue of communication between the external auditors, senior management and the company’s Board. The Committee is also mandated to review all material related party transactions.
The Audit Committee’s Charter
The Company has adopted an Audit Committee Charter, the text of which can be found on the Company’s website atwww.goldenqueen.com.
Composition of the Audit Committee
As of the Record Date, the Committee was comprised of Bryan A. Coates, Bernard Guarnera, and Guy Le Bel.Paul M. Blythe. All of the Audit Committee members are independent with the exception of Mr. Le Bel who became non-independent when he assumed the role as the Company’s Chief Financial Officer as at March 16, 2017. The committee members areand considered to be financially literate in that each Committee member has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can presumably be expected to be raised by the Company’s financial statements. Subsequent to the Meeting and Mr. Le Bel’s resignation as a director and Audit Committee member, the composition of the Audit Committee will be re-evaluated by the Board of Directors and it is anticipated that Paul M. Blythe will be appointed to the Audit Committee as Mr. Le Bel’s replacement.
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Relevant Education and Experience
Bryan A. Coates currently serves as President of Osisko Gold Royalties since June 2014. Prior to that, he was the Vice President, Finance and Chief Financial Officer of Osisko Mining. He was responsible for all activities related to financing, financial reporting, marketing relating to the gold industry, risk management and government relations. Mr. Coates has more than 30 years of progressive experience within the international and Canadian mining industry. Mr. CoateshasCoates has an understanding of the accounting principles used by the Company to prepare its financial statements.
Bernard Guarnera has over 40 years of experience in the global mining industry and is currently President of Broadlands Mineral Advisory Services Ltd. Mr. Guarnera is a Director of the Board of Behre Dolbear Group Inc., a mining consulting firm founded in 1991. Mr. GuarnerahasGuarnera has an understanding of the accounting principles used by the Company to prepare its financial statements.
Guy Le Bel is a merger and acquisitions, and business development consultant to Canadian mining companies and has over 30 years of international experience in strategic and financial planning. He most recently served as Vice President Evaluations for Capstone Mining Corp. and is a Director of RedQuest Capital Corp. Mr. Le Bel has an understanding of the accounting principles used by the Company to prepare its financial statements. Mr. Le Bel became the Chief Financial Officer of Golden Queen as of March 16, 2017 and has resigned as a member of the Audit Committee.
Paul M. Blythe has over 40 years of experience in the mining industry including significant international experience in corporate management, project development, open pit and underground operations, mergers and acquisitions, and debt and equity financing. He was the founder and President of Quadra FNX Mining and previously worked for Westmin Resources Limited, Placer Dome Canada Limited, Lac Minerals Limited and BHP Billiton. Mr. Blythe has an understanding of the accounting principles used by the Company to prepare its financial statements.
Reliance on Certain Exemptions
Since the commencement of the Company’s most recently completed financial year, the Company has not relied on the exemptions contained in sections 2.4, 3.2, 3.3(2), 3.4, 3.5, 3.6, 3.8 or Part 8 of NI 52-110.
Audit Committee Oversight
Since the commencement of the Company’s most recently completed financial year, the Company’s Board has not failed to adopt a recommendation of the Audit Committee to nominate or compensate an external auditor.
Pre-Approval Policies and Procedures
The Audit Committee has not adopted specific policies and procedures for the engagement of non-audit services. Subject to the requirements of NI 52-110, the engagement of non-audit services is considered by the Company’s Board, and where applicable the Audit Committee, on a case-by-case basis.
External Auditor Service Fees
The fees for services provided by PricewaterhouseCoopers LLP to us in the fiscal year ended 20162017 and the fees were services provided by BDO Canada LLP to us in the fiscal year ended 2015 were2016 as follows:
| Fees | 2016(5] | 2015 | 2017 | 2016 | ||||||||||||
| Audit Fees[1] | C$ | 336,818 | C$ | 440,110 | C$ | 369,500 | C$ | 336,818 | ||||||||
| Audit-Related Fees[2] | $ | Nil | C$ | 18,960 | $ | Nil | $ | Nil | ||||||||
| Tax Fees[3] | $ | Nil | C$ | 64,670 | $ | Nil | $ | Nil | ||||||||
| All Other Fees[4] | $ | Nil | $ | Nil | $ | Nil | $ | Nil | ||||||||
| Total | C$ | 336,818 | C$ | 523,740 | C$ | 369,500 | C$ | 336,818 | ||||||||
| [1] | “Audit Fees” include fees necessary to perform the annual audit of the Company’s consolidated financial statements. Audit Fees include fees for review of tax provisions and for accounting consultations on matters reflected in the financial statements. Audit Fees also include audit or other attest services required by legislation or regulation, such as comfort letters, consents, reviews of securities filings and statutory audits. Audit fees also include services related to the review of the Company’s quarterly financial reports. |
[1] “Audit Fees” include fees necessary to perform the annual audit of the Company’s consolidated financial statements. Audit Fees include fees for review of tax provisions and for accounting consultations on matters reflected in the financial statements. Audit Fees also include audit or other attest services required by legislation or regulation, such as comfort letters, consents, reviews of securities filings and statutory audits. Audit fees also include services related to the review of the Company’s quarterly financial reports. The 2016 audit fees include fees related to quarterly reviews of the Company's consolidated financial statements and fees related to the audit of the Company's 50%-owned subsidiary, GQM LLC.
[2] “Audit-Related Fees” include services that are traditionally performed by the auditor. These audit-related services include employee benefit audits, due diligence assistance, accounting consultations on proposed transactions, internal control reviews and audit or attest services not required by legislation or regulation.
[3] “Tax Fees” include fees for all tax services other than those included in “Audit Fees” and “Audit-Related Fees”. This category includes fees for tax compliance, tax planning and tax advice. Tax planning and tax advice includes assistance with tax audits and appeals, tax advice related to mergers and acquisitions, and requests for rulings or technical advice from tax authorities.
[4] “All Other Fees” include all other non-audit services.
| [2] | “Audit-Related Fees” include services that are traditionally performed by the auditor. These audit-related services include employee benefit audits, due diligence assistance, accounting consultations on proposed transactions, internal control reviews and audit or attest services not required by legislation or regulation. |
[5] The final invoice for the Audit fees for the fiscal year 2016 has not yet been received and as such, those fees are not included within the table set out above.
| [3] | “Tax Fees” include fees for all tax services other than those included in “Audit Fees” and “Audit-Related Fees”. This category includes fees for tax compliance, tax planning and tax advice. Tax planning and tax advice includes assistance with tax audits and appeals, tax advice related to mergers and acquisitions, and requests for rulings or technical advice from tax authorities. |
| [4] | “All Other Fees” include all other non-audit services. |
COMPENSATION COMMITTEE
Composition of the Compensation Committee
The members of the Compensation Committee during the year ended December 31, 20162017 were Bernard Guarnera who serves as the Committee’s Chairman, Bryan A. Coates, and Guy Le Bel. Mr. Le Bel resigned as a director a Compensation Committee member on March 30, 2017. Subsequent to the Meeting and Mr. Le Bel’s resignation, the composition of the Compensation Committee will be re-evaluated by the Board of Directors and it is anticipated that Paul M. Blythe will be appointed to the Compensation Committee as Mr. Le Bel’s replacement.Blythe.
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Report on Executive Compensation and Compensation Discussion and Analysis
The Compensation Committee of the Board of Directors is responsible for reviewing and approving the remuneration of the senior management of the Company, including the President and Chief Executive Officer and the Chief Financial Officer.
The guiding philosophy of the Compensation Committee in the determination of executive compensation is ensuring that the Company is able to attract the best possible candidates for management positions, given the high level of competition for competent management in the mining industry, and to align the interests of management with those of the Company’s shareholders.
The Company’s executive compensation policies are designed to recognize and reward individual contribution, performance and level of responsibility and ensure that the compensation levels remain competitive with other precious metals development and mining companies. The key components of total compensation are base salary and incentives.
The Compensation Committee has no formal process for determining appropriate base salary ranges. Currently the Company pays compensation in the form of a base salary to its Chief Executive Officer and its Chief Financial Officer. The base salary to the Chief Executive Officer was based on a proposal from the Chief Financial Officer, which was accepted by the Company after considering his experience and expected responsibility and contribution to the Company. The base salary of the Chief Financial Officer was negotiated based on industry comparablescomparatives and the Chief Financial Officer’s experience.
Stock options are granted to senior management to align the financial interests of management with the interests of shareholders of the Company and to encourage senior management to focus on strategies and results that enhance shareholder value in the longer term. The number of options to purchase Common Shares granted to each individual will depend largely on his level of responsibility and contribution to the Company’s performance.
The Compensation Committee is responsible for considering the appropriateness and effectiveness of the Company’s executive compensation policies, given prevailing circumstances. Although the shareholder vote on executive compensation, which is submitted every three (3) years, is non-binding, the Compensation Committee will review the voting results in connection with the on-going evaluation of the Company’s compensation program.
The Compensation Committee may not delegate any of its authority to other persons.
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee served as an officer or employee of the Company during the fiscal year ended December 31, 2016.2017 (or subsequently). No current member of the Compensation Committee formerly served as an officer of the Company, and none of the current members of the Compensation Committee have entered into a transaction with the Company in which they had a direct or indirect interest that is required to be disclosed pursuant to Item 404 of Regulation S-K.
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Compensation Committee Report
The Compensation Committee hereby reports to the Board that, in connection with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, and this Proxy Statement, we have:
| · | reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of SEC Regulation S-K; and |
| · | based on such review and discussion, we recommend to the Board that the Compensation Discussion and Analysis be included in the Annual Report on Form 10-K for the fiscal year ended December 31, |
Submitted by the Compensation Committee.
Bernard Guarnera, Chair
Bryan A. Coates, Member
Guy Le Bel,Paul M. Blythe, Member
PERFORMANCE GRAPH
The performance graph depicts the Company’s cumulative total Shareholder returns over the five (5) most recently completed financial years based on an initial investment of $100 in the Company’s Common Stock, compared to an equal investment in the S&P/TSX Global Gold Index. The Company does not currently issue dividends. The Common Stock performance as set out in the graph does not necessarily indicate future Common Stock price performance.
| December 31, 2012 | December 31, 2013 | December31, 2014 | December 31, 2015 | December 31, 2016 | December 31, 2013 | December 31, 2014 | December 31, 2015 | December 31, 2016 | December 31, 2017 | |||||||||||||||||||||||||||||||
| Company | $ | 79 | $ | 29 | $ | 36 | $ | 25 | $ | 36 | $ | 100 | $ | 124 | $ | 84 | $ | 98 | $ | 25 | ||||||||||||||||||||
| S&P/TSX Global Gold Index (TITTGD) | $ | 84 | $ | 42 | $ | 40 | $ | 36 | $ | 64 | $ | 100 | $ | 93 | $ | 83 | $ | 124 | $ | 125 | ||||||||||||||||||||
*TSX InfoSuite
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Policy regarding transactions with management and others
Pursuant to its written charter, our Audit Committee has the responsibility to review all related party transactions on an ongoing basis.
Transactions with management and others
The following is in addition to disclosure contained elsewhere herein respecting transactions involving management.
On January 1,December 31, 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 partiesClay Group for $12.5 million,$12,500, due on demand 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$12,500 to $37.5 million$37,500 (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$10,659 of the June 2015 Loan and accrued interest with cash on hand and thefrom net proceeds of $10,908 from an equity financing. The Company restructured the remaining debt with a new loan with a principal amount of $31.0 million$31,000 (the “November 2016 Loan”). The Company incurred a financing fee to secure the loan in the amount of $930, which was also paid on November 18, 2016.
The November 2016 Loan hashad a thirty-month term and an annual interest rate of 8%, payable on a quarterly basis commencing duringquarterly. On November 10, 2017, the first quarter of 2017. Quarterly principal payments of $2.5 million commence duringCompany and the first quarter of 2018, with and payment of the remaining balance at the maturity date. The first four quarterly interest payments underClay Group agreed to amend the November 2016 Loan can be addedby reducing the 2018 quarterly and 2019 Q1 principal payments from $2,500 to $1,000, adding the reduction of such payments pro-rata to the loan principal balance rather than paidremaining 2019 payments, and increasing the annual interest rate from 8% to 10% effective January 1, 2018 (the “November 2017 Loan”). On January 1, 2018, $2,212 of interest payments that were deferred in cash,2017 at the Company’s option.
In connection withoption, a principal payment of $2,500 and a $400 amendment fee became due and the November 2016 Loan the Company issued 8,000,000 common share purchase warrants exercisable for a period of five years expiring November 21, 2021. The common share purchase warrants have an exercise price of $0.85. The Company also incurred a financing fee to secure the loan in the amount of $0.9 million, allpayment of which was deferred until after the close of the rights offering and were paid on November 18, 2016.February 28, 2018.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
During the past ten years, none of the persons currently serving as executive officers and/or directors of the Company has been the subject matter of any of the following legal proceedings that are required to be disclosed pursuant to Item 401(f) of Regulation S-K including: (a) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two (2) years prior to that time; (b) any criminal convictions; (c) any order, judgment, or decree permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; (d) any finding by a court or the SEC to have violated a federal or state securities or commodities law, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud; or (e) any sanction or order of any self-regulatory organization or registered entity or equivalent exchange, association or entity. Further, no such legal proceedings are believed to be contemplated by governmental authorities against any director or executive officer.
Other than as disclosed herein, the Company is not aware of any claims, actions, proceedings or investigations pending against the Company, any director, officer or affiliate of the Company, any owner of record or beneficially of more than five percent (5%) of the Common Stock, or any associate of any such director, officer, affiliate of the Company, or security holder that, individually or in the aggregate, are material to the Company. Neither the Company nor its assets and properties is subject to any outstanding judgment, order, writ, injunction or decree that has had or would be reasonably expected to have a material adverse effect on the Company. Furthermore, the Company is not aware of any threatened lawsuits.
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 Biodiversity 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 and the Company is awaiting a formal report of the results.
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.
SHAREHOLDER COMMUNICATIONS
Shareholders who are interested in communicating directly with members of the Board, or the Board as a group, may do so by writing directly to the individual Board member or the Board generally care of the Corporate Secretary, GOLDEN QUEEN MINING CO. LTD.Golden Queen Mining Co. Ltd., Suite 2300 – 1066 West Hastings Street, Vancouver, British Columbia, Canada, V6E 3X2. The Company’s Secretary will forward communications directly to the appropriate Board member. If the correspondence is not addressed to a particular Board member, the communication will be forwarded to a Board member to bring to the attention of the Board. The Company’s Secretary will review all communications prior to forwarding them to the appropriate Board member. The Board has requested that items unrelated to the duties and responsibilities of the Board, such as junk mail and mass mailings, business solicitations, advertisements and other commercial communications, surveys and questionnaires and resumes or other job inquiries, not be forwarded.
SHAREHOLDER PROPOSALS
Pursuant to the rules of the Securities Exchange Act, shareholder proposals intended to be considered for inclusion in the Proxy Statement and proxy card for the 2017 Meeting of Shareholders of the Company, and to be included in the Company’s proxy materials for the proxy materials for the 2017 annual meeting of the Shareholders of the Company, must be received by the Corporate Secretary of Golden Queen by December 1, 2017, and must comply with the requirements of Rule 14a-8 under the Securities Exchange Act of 1934, as amended, and Division 7 of Part 5 of the B.C. Business Corporations Act. After this date, any shareholder nomination or proposal will be considered untimely. The Company reserves the right to reject, rule out of order, or take other appropriate action with respect to any nomination or proposal that does not comply with these and other applicable requirements. If the Company changes the date of next year’s annual meeting by more than thirty days from the date of this year’s meeting, then the deadline is a reasonable time before the Company begins to print and mail its proxy materials.
OTHER BUSINESS
Management is not aware of any matters to come before the Meeting other than those set forth in the Notice of Meeting. If any other matter properly comes before the Meeting, it is the intention of the person named in the proxy to vote the shares represented thereby in accordance with their best judgment on such matter.
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ADDITIONAL INFORMATION
Additional information relating to the Company is available on the Company’s website atwww.goldenqueen.com, on SEDAR atwww.sedar.com and on EDGAR atwww.sec.gov.www.sec.gov.The Company will furnish to Shareholders, free of charge, a hard copy of the Company’s financial statements and management’s discussion and analysis and/or a hard copy of the Company’s Annual Report on Form 10K for the fiscal year ended December 31, 20162017 upon request by (i) mail to: 2300 – 1066 West Hastings Street, Vancouver, BC V6E 3X2 or (ii) telephone to: (778) 373-1557 or (iii) email to:info@goldenqueen.com. Financial information is provided in the Company’s annual financial statements and management’s discussion and analysis for its most recently completed fiscal year.
OTHER MATERIAL FACTS
There are no other material facts to the knowledge of the Board relating to the matters for which this Circular is issued which are not disclosed herein.
CERTIFICATE
The foregoing contains no untrue statement of a material fact and does not omit to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made. The contents and the sending of this Circular have been approved by the Board.
By Order of the board of Directors of
GOLDEN QUEEN MINING CO. LTD.
Thomas M. Clay
Chairman & Chief Executive Officer
Vancouver, British Columbia
April 6,25, 2017
APPENDIX “A”
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
0-21777
(Commission File Number)
GOLDEN QUEEN MINING CO. LTD.
(Name of registrant in its charter)
Issuer’s telephone number:(778) 373-1557
Securities registered under Section 12(b) of the Exchange Act:None
Securities registered under section 12(g) of the Exchange Act:Common shares without par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨ Nox
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¨Nox
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. Yesx 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). Yesx 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 filerx 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¨ Nox
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: $100,300,564 as at June 30, 2016.
Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date: 111,148,683 common shares as at March 14, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K, which Proxy Statement is to be filed within 120 days after the end of the registrant's fiscal year ended December 31, 2016. If the definitive Proxy Statement cannot be filed on or before the 120 day period, the issuer may instead file an amendment to this Form 10-K disclosing the information with respect to Items 10 through 14.
Form 10-K
Table of Contents
References to the “Company”, “Golden Queen”, “we”, “us”, “our” and words of similar meaning refer to Golden Queen Mining Co. Ltd. The U.S. dollar (“$”) is used in this Form 10-K and quantities are reported in Imperial units with Metric units in brackets.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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.
CAUTIONARY NOTE REGARDING U.S. INVESTORS
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 43-101Standards 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. SeeItem 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.
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. SeeProject Financing - Joint Venture Transactionbelow 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 toItem 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 (seeItem 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. SeeItem 6. Selected Financial Data,Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operationsand 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.
SeeEnvironmental 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 asItem 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 atwww.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 atwww.sec.gov andwww.sedar.com.
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:
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:
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 (seeItem 3. Legal Proceedingsin 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:
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.
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, onepatented 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 sectionProperty 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 mininglease 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 SiO2. 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 inItem 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:
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 Estimatesbelow.
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:
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 toItem 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:
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.
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.
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
Market and Trading Price
The common shares of the Company are listed and traded on the Toronto Stock Exchange under the trading symbol “GQM”. The high and low sales prices of the common shares as traded on the Toronto Stock Exchange for the calendar periods indicated are set out in the table below. All prices are reported in Canadian dollars.
| Year ended December 31 | High | Low | ||||||||
| 2016 | Fourth Quarter | $ | 1.16 | $ | 0.70 | |||||
| Third Quarter | $ | 1.90 | $ | 1.11 | ||||||
| Second Quarter | $ | 1.98 | $ | 1.19 | ||||||
| First Quarter | $ | 2.00 | $ | 0.76 | ||||||
| 2015 | Fourth Quarter | $ | 1.07 | $ | 0.67 | |||||
| Third Quarter | $ | 1.12 | $ | 0.65 | ||||||
| Second Quarter | $ | 1.18 | $ | 0.75 | ||||||
| First Quarter | $ | 1.68 | $ | 1.03 | ||||||
Exchange Rates
The following table sets forth, for the periods indicated, certain exchange rates based on the noon buying rate in Canadian dollars. Such rates are the number of Canadian dollars per one (1) U.S. dollar quoted by the Bank of Canada. The high and low exchange rates for each month during the previous six months were as follows:
| High | Low | |||||||
| February 2017 | $ | 0.7690 | $ | 0.7548 | ||||
| January 2017 | $ | 0.7675 | $ | 0.7442 | ||||
| December 2016 | $ | 0.7622 | $ | 0.7377 | ||||
| November 2016 | $ | 0.7498 | $ | 0.7363 | ||||
| October 2016 | $ | 0.7631 | $ | 0.7461 | ||||
| September 2016 | $ | 0.7786 | $ | 0.7548 | ||||
Exchange rate information (from U.S.$ to Canadian $), based on the closing rates, as at each of the years ended December 31, 2015 and 2016 is set out in the table below:
| Year Ended December 31 | ||||||||
| 2015 | 2016 | |||||||
| Rate at end of Period | $ | 1.3840 | $ | 1.3427 | ||||
| Low | $ | 1.1728 | $ | 1.2544 | ||||
| High | $ | 1.3990 | $ | 1.4589 | ||||
As of March 15, 2017, there were 213 registered holders of record of the Company’s common shares and an undetermined number of beneficial holders.
The high and low sales prices of the common stock as traded on the OTCQX for the calendar periods indicated are set out in the table below. All prices are reported in U.S. dollars.
| Year ended December 31 | High | Low | ||||||||
| 2016 | Fourth Quarter | $ | 0.89 | $ | 0.52 | |||||
| Third Quarter | $ | 1.47 | $ | 0.84 | ||||||
| Second Quarter | $ | 1.54 | $ | 0.94 | ||||||
| First Quarter | $ | 1.56 | $ | 0.53 | ||||||
| 2015 | Fourth Quarter | $ | 0.85 | $ | 0.51 | |||||
| Third Quarter | $ | 0.88 | $ | 0.49 | ||||||
| Second Quarter | $ | 0.99 | $ | 0.61 | ||||||
| First Quarter | $ | 1.38 | $ | 0.85 | ||||||
Dividends
The Company has not declared dividends on its common shares since inception.
Securities Authorized for Issuance Under Compensation Plans
The following table sets forth information as at December 31, 2016 respecting the compensation plans under which shares of the Company’s common stock are authorized to be issued.
Plan Category | Number of securities to (a) | Weighted-average | Number of securities | |||||||||
| Equity compensation plans approved by security holders | 1,555,000 | $ | 0.85 | 5,645,000 | ||||||||
| Total | 1,555,000 | $ | 0.85 | 5,645,000 | ||||||||
Performance Graph
The performance graph below shows the Company’s cumulative total return based on an initial investment of $100 in GQM common stock, as compared with the S&P/TSX Global Gold Index. The chart shows performance marks as of the last trading day during each of the last five years ended December 31.
| December 31, 2012 | December 31, 2013 | December 31, 2014 | December 31, 2015 | December 31, 2016 | ||||||||||||||||
| Company | 100 | 37 | 46 | 31 | 36 | |||||||||||||||
| S&P/TSX Global Gold Index (TITTGD) | 100 | 52 | 48 | 43 | 64 | |||||||||||||||
Purchases of Equity Securities by the Company and Affiliated Purchasers
A director of the Company purchased 17,000 common shares of the Company in the year ended December 31, 2016.
Item 6. Selected Financial Data (in thousands of US dollars, except per share)
The following table summarizes certain selected consolidated financial data of the Company and should be read in conjunction withItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation and the consolidated financial statements and notes thereto (for the applicable period) appearing elsewhere in this report.
Results for the five most recent years are set out in the table below.
| Years ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 (Restated) | 2013 | 2012 | ||||||||||||||||
| Revenues | $ | 27,193 | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Net and comprehensive (loss) income | $ | (9,692 | ) | $ | (7,236 | ) | $ | (9,872 | ) | $ | 1,978 | $ | (1,271 | ) | ||||||
| Net and comprehensive loss attributable to Golden Queen Mining Co Ltd. | $ | (7,429 | ) | $ | (5,461 | ) | $ | (8,469 | ) | $ | 1,978 | $ | (1,271 | ) | ||||||
| Basic loss per share | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.09 | ) | $ | 0.02 | $ | (0.01 | ) | ||||||
| Diluted loss per share | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.09 | ) | $ | (0.01 | ) | $ | (0.01 | ) | |||||
| As at December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 (Restated) | 2013 | 2012 | ||||||||||||||||
| Cash | $ | 13,301 | $ | 37,587 | $ | 91,408 | $ | 5,031 | $ | 4,031 | ||||||||||
| Total assets | $ | 159,706 | $ | 169,444 | $ | 129,517 | $ | 15,792 | $ | 6,567 | ||||||||||
| Total long term liabilities | $ | 50,129 | $ | 27,331 | $ | 14,236 | $ | 8,029 | $ | 3,998 | ||||||||||
| Redeemable portion of NCI | $ | 26,219 | $ | 27,124 | $ | 22,834 | $ | - | $ | - | ||||||||||
| Stockholders' equity, attributable to common shareholders | $ | 27,384 | $ | 26,582 | $ | 31,733 | $ | 6,241 | $ | 2,414 | ||||||||||
| Non-controlling interest | $ | 39,327 | $ | 40,686 | $ | 34,250 | $ | - | $ | - | ||||||||||
For more information of the assets and liabilities specific to GQM LLC, the variable interest entity, seeJoint Venture transaction below.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the operating results and financial condition of the Company should be read in conjunction with the audited, consolidated financial statements of the Company for the year ended December 31, 2016 and the notes thereto (the “Consolidated Financial Statements”). Additionally, please note that the operating results and financial conditions described below include the amounts attributable to the non-controlling interest.
The information in this Management Discussion and Analysis of Financial Condition and Results of Operation is prepared in accordance with U.S. generally accepted accounting principles and all amounts herein are in U.S. dollars unless otherwise noted.
Overview and Strategy
The Company is an emerging gold and silver producer utilizing an open pit, heap leach operation on its Soledad Mountain property, located just outside the town of Mojave in Kern County in southern California. The Soledad Mountain Project (the “Project”) utilizes conventional open pit mining methods and the cyanide heap leach and Merrill-Crowe processes to recover gold and silver from crushed, agglomerated ore.
Project plans for 2017 feature an increase in the stripping ratio as well as an increase in the average grade of the ore mined when compared to 2016. Total mining is expected to be in the range of 19-20 million tons of material. Mining is planned for two existing areas, the Northwest Pit and the Main Pit, Phase-1. Mining will also occur in the newly developed East Pit, with ore expected in the late third quarter of 2017.
In the Process area, pad-loading tonnage and average grade are expected to increase. Taking advantage of the good porosity of the heap, flow to the Merrill-Crowe plant will be at capacity. Gold production is anticipated to increase throughout the year.
Approximately $20 million of capital expenditures are planned during 2017. In the mine, a hydraulic front shovel and two additional 100-ton haul trucks are on order. The second phase of the leach pad will also be built and will be put into operation during the year.
Commissioning of the Facilities and Commencement of Production
Commissioning of the crushing-screening plant commenced in the fourth quarter of 2015 as scheduled. Leaching of the agglomerated ore was initiated in early February 2016 and the commissioning of the Merrill-Crowe facility was completed mid-February 2016. The first gold and silver doré was poured, as part of the testing and commissioning process, on March 1, 2016 and commissioning continued until production commenced on April 1, 2016.
In accordance with US GAAP, the Company started recognizing revenues and cost of sales related to the sale of metals in the second quarter of 2016.
2016 Highlights
|
Results of Operations
| Q4 2016 | Q3 2016 | Q2 2016 | Q1 2016 | Total 2016 | ||||||||||||||||||
| Mining(1) | ||||||||||||||||||||||
| Ore mined | k ton | 819 | 808 | 660 | 291 | 2,578 | ||||||||||||||||
| Ore mined | k tonnes | 743 | 733 | 599 | 264 | 2,339 | ||||||||||||||||
| Waste mined | k ton | 2,389 | 1,773 | 1,164 | 956 | 6,282 | ||||||||||||||||
| Waste mined | k tonnes | 2,167 | 1,609 | 1,082 | 841 | 5,699 | ||||||||||||||||
| Total mined | k ton | 3,208 | 2,581 | 1,853 | 1,218 | 8,860 | ||||||||||||||||
| Total mined | k tonnes | 2,910 | 2,342 | 1,681 | 1,105 | 8,038 | ||||||||||||||||
| Strip ratio | waste:ore | 2.9 | 2.2 | 1.8 | 3.3 | 2.4 | ||||||||||||||||
| Processing(1) | ||||||||||||||||||||||
| Ore processed | k ton | 895 | 763 | 646 | 362 | 2,666 | ||||||||||||||||
| Ore processed | k tonnes | 812 | 692 | 586 | 328 | 2,418 | ||||||||||||||||
| Average ore processed gold grade | ozpt | 0.015 | 0.016 | 0.013 | 0.008 | 0.014 | ||||||||||||||||
| Average ore processed gold grade | gpt | 0.498 | 0.536 | 0.460 | 0.274 | 0.467 | ||||||||||||||||
| Average ore processed silver grade | ozpt | 0.298 | 0.362 | 0.404 | 0.292 | 0.332 | ||||||||||||||||
| Average ore process silver grade | gpt | 10.232 | 12.410 | 13.850 | 10.011 | 11.377 | ||||||||||||||||
| Gold loaded on pad | contained oz | 13,078 | 11,928 | 8,636 | 2,982 | 36,624 | ||||||||||||||||
| Silver loaded on pad | contained oz | 266,808 | 276,043 | 261,021 | 82,792 | 886,664 | ||||||||||||||||
| Average ore processing throughput | ton per day | 10,161 | 8,479 | 8,852 | 3,973 | 7,410 | ||||||||||||||||
| Average ore processing throughput | tonne per day | 9,218 | 7,692 | 8,030 | 3,604 | 6,722 | ||||||||||||||||
| Gold produced | oz | 7,779 | 7,975 | 2,830 | 447 | 19,030 | ||||||||||||||||
| Silver produced | oz | 69,606 | 87,849 | 33,335 | 4,002 | 194,792 | ||||||||||||||||
| Financial(1) | ||||||||||||||||||||||
| Revenue | $ | 10,278 | 13,451 | 3,464 | - | 27,193 | ||||||||||||||||
| (Loss) income from mine operations | $ | (2,013 | ) | 2,085 | (1,965 | ) | - | (1,893 | ) | |||||||||||||
| General and administrative expenses | $ | (1,135 | ) | (657 | ) | (989 | ) | (1,527 | ) | (4,308 | ) | |||||||||||
| Total other income (expenses) | $ | 2,714 | 2,162 | (614 | ) | (7,753 | ) | (3,491 | ) | |||||||||||||
| Net and comprehensive (loss) income for the year | $ | (434 | ) | 3,590 | (3,568 | ) | (9,280 | ) | (9,692 | ) | ||||||||||||
| Net and comprehensive (loss) income attributable to Golden Queen Mining Co Ltd. | $ | 868 | 2,737 | (2,109 | ) | (8,925 | ) | (7,429 | ) | |||||||||||||
| Average realized gold price(2) | $/oz | 1,174 | 1,329 | 1,276 | - | 1,250 | ||||||||||||||||
| Average realized silver price(2) | $/oz | 16.60 | 19.22 | 16.78 | - | 17.88 | ||||||||||||||||
| Total cash costs - net of by product credits(2) | $/Auoz | 1,095 | 905 | 1,571 | - | 1,067 | ||||||||||||||||
| All-in sustaining costs - net of by product credits(2) | $/Auoz | 1,482 | 1,045 | 1,884 | - | 1,330 | ||||||||||||||||
Operations in the mine started in early 2015 to supply material for the cover layer of the Phase-1 leach pad. Ore was stockpiled and pad-loading commenced in December of 2015. Leaching started in February of 2016 and the first gold doré was poured in March. Mine and pad-loading production increased during the year. Continuous 24-hour, 7-day per week operations started in June. Leach pad operations were characterized by good porosity and high flow rates. Merrill-Crowe plant performance was in line with expectations for gold and silver precipitation.
| Tons | AuEq opt | |||||||
| Starting Reserves | 51,053,000 | 0.023 | ||||||
| Reserves Mined in 2015 | 279,000 | 0.010 | ||||||
| Reserves Mined in 2016 | 2,575,000 | 0.017 | ||||||
| Reserves at end of December 2016 | 48,199,000 | 0.023 | ||||||
Note: grade is AuEq oz./ton
Financial Results
The following are the results of operations for the year ended December 31, 2016.
The Company had revenue from operations for the year ended December 31, 2016 in the amount of $27.2 million from the sales of 18,837 ounces of gold and 193,202 ounces of silver. The Company did not have revenues in 2015 as production only started during the second quarter of 2016.
The Company incurred $21.6 million in costs of sales, excluding depreciation and depletion. The Company did not have cost of sales in 2015 as production only started during the second quarter of 2016. Costs of sales include mining, processing, maintenance and site support costs. Also, included in the costs of sales are refining and transportation costs, royalties and personal property taxes.
The Company recorded an attributable net and comprehensive loss of $7.4 million ($0.07 loss per basic share) during the year ended December 31, 2016 as compared to an attributable net and comprehensive loss of $5.5 million ($0.05 loss per basic share) during the year ended December 31, 2015. Loss from operations during the year ended December 31, 2016 was mainly related to $27.2 million in revenues net of $21.6 million in cost of sales, a $7.5 million expense in depletion, depreciation and amortization, $4.3 million in general and administrative expenses and $5.5 million in interest expense.
The Company incurred general and administrative expenses of $4.3 million during the year ended December 31, 2016 (2015 – $4.6 million 2014 - $5.0 million). This represents a $0.3 million decrease when compared with 2015.
The following significant general and administrative expenses were incurred during the year with a comparison to expenses in 2015 and 2014:
The Company experienced a net foreign exchange gain of $0.2 million for the year ended December 31, 2016, as compared to a net foreign exchange gain of $0.8 million for the year ending 2015. The net foreign exchange gain is made up by realized and unrealized gains and losses related to the Company’s expenditures and the Canadian balances of cash and accounts payable denominated in Canadian dollars while the Company’s functional currency is the US dollar. The exchange rate, stated in Canadian dollars per one US dollar, moved from $1.38 as of December 31, 2015, to $1.34 on December 31, 2016.
For the year ended December 31, 2016, the Company incurred a total interest expense of $5.5 million related to its various loans as compared to a total interest expense of $4.5 million for the year ending 2015. The increase was mainly due to the amortization of the discounts and the interest payable related to the June 2015 Loan and the November 2016 Loan. Please refer to theTransaction with Related Parties section for a complete breakdown of the interest expenses as there was a portion of the interest capitalized to mineral property interests.
The amount of the Company’s derivative liability includes the warrants issued in conjunction with the June 2015 Loan, the July 2016 equity financing and the November 2016 Loan. The Company recorded a decrease in the derivative liability of $1.8 million as a result of a decrease in the Company’s share price during the year ended 2016 as compared to a decrease of $3.3 million for fiscal 2015. These derivative liability changes are a non-cash item and were recorded in accordance with accounting pronouncement ASC 850-40-15. Refer to Notes 10 (iii) and 11 of the audited consolidated annual financial statements for a detailed analysis of the changes in fair value of the derivative liability.
Summary of Quarterly Results (in thousands of US dollars, except per share)
Results for the eight most recent quarters are set out in the table below:
| Results for the quarter ended on: | ||||||||||||||||
| 31-Dec-16 | 30-Sep-16 | 30-Jun-16 | 31-Mar-16 | |||||||||||||
| Revenue | $ | 10,278 | $ | 13,451 | $ | 3,464 | $ | Nil | ||||||||
| Net and comprehensive (loss) income | $ | (434 | ) | $ | 3,590 | $ | (3,568 | ) | $ | (9,280 | ) | |||||
| Net and comprehensive income (loss) attributable to Golden Queen Mining Co Ltd. | $ | 868 | 2,738 | (2,109 | ) | (8,926 | ) | |||||||||
| Basic net income (loss) per share | $ | 0.01 | $ | 0.03 | $ | (0.02 | ) | $ | (0.09 | ) | ||||||
| Diluted net income (loss) per share | $ | 0.01 | $ | 0.03 | $ | (0.02 | ) | $ | (0.09 | ) | ||||||
| Results for the quarter ended on: | ||||||||||||||||
| 31-Dec-15 | 30-Sep-15 | 30-Jun-15 | 31-Mar-15 | |||||||||||||
| Revenue | $ | Nil | $ | Nil | $ | Nil | $ | Nil | ||||||||
| Net and comprehensive (loss) | (1,217 | ) | $ | (2,203 | ) | $ | (2,092 | ) | $ | (1,723 | ) | |||||
| Net and comprehensive loss attributable to Golden Queen Mining Co Ltd. | $ | (722 | ) | (1,924 | ) | (1,379 | ) | (1,436 | ) | |||||||
| Basic net (loss) per share | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
| Diluted net (loss) per share | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
Although the Company generated revenues starting in the second quarter of 2016, for the quarters illustrated in the above table, the main reasons for the significant fluctuations in net (loss) income between periods are the fluctuations in the Company’s derivative liabilities from warrants and interest expense. The Company’s derivative liabilities are a function of the Company’s stock price as compared to the instruments’ strike price and the exchange rate between the Canadian dollar and the US dollar. As the stock price rises, the derivative liabilities increase resulting in the Company recognizing losses. When the stock price decreases, the Company recognizes gains.
For fiscal 2015, the Company experienced a loss related to its derivative liabilities in the amount of $0.1 million (2014 – Loss of $5.7 million) in the first quarter whereas it recorded a gain of $2.6 million (2014 – Gain of $1.6 million) during the second quarter. The second quarter gain was however off-set by higher interest expense and a one-time financing fee of $1.5 million paid in connection with the June 2015 Loan. In the third quarter of 2015, the Company experienced a loss of $0.6 million (2014 – Gain of $2.8 million) related to the derivative liabilities. Adding to the losses for the three months ended September 30, 2015 were the interest expense and amortization of the discount on the June 2015 Loan and the convertible debenture and the interest expense related to the Komatsu loans. In the fourth quarter of 2015, the Company experienced a gain of $1.5 million (2014 – Gain of $2.3 million) related to the derivative liabilities. This gain was partially off-set by interest expense and amortization of the discount on the June 2015 Loan and the interest expense related to the Komatsu loans.
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 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.
Reclamation Financial Assurance and Asset Retirement Obligation
Reclamation Financial Assurance
The Company is required to provide the Bureau of Land Management, the State Office of Mine Reclamation and Kern County 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 and posted a portion of the financial assurance due in 2016. 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 of audited consolidated annual financial statements for further details.
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 the requirements to reclaim and remediate its property based on its activities to date. As at December 31, 2016, the Company estimates the cash outflow related to these reclamation activities will commence to be incurred in 2028. Reclamation provisions are measured at the expected value of future cash flows discounted to their present value using a discount rate based on a credit adjusted risk-free interest rate of 9.2% and an inflation rate of 2.27%.
Commitments and Contractual Obligations
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 (Refer to Note 16 of the audited consolidated annual financial statements). The Company has also provided corporate a guaranty for GQM LLC’s surety bonds (Refer to Note 9 of the audited consolidated annual financial statements).
Contractual Obligations
GQM LLC’s contractual obligations as of December 31, 2016, are shown in the table below:
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Committed Sustaining Capital | $ | 5,818 | $ | 5,818 | $ | - | $ | - | $ | - | ||||||||||
| Debt obligations (mostly mobile mining equipment financing) | $ | 15,150 | $ | 5,656 | $ | 9,418 | $ | 76 | $ | - | ||||||||||
| Asset retirement obligations (Undiscounted) | $ | 2,950 | $ | - | $ | - | $ | - | $ | 2,950 | ||||||||||
| Total | $ | 23,918 | $ | 11,474 | $ | 9,418 | $ | 76 | $ | 2,950 | ||||||||||
GQM LTD’s contractual obligations as of December 31, 2016, are shown in the table below:
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Interest payable - Nov 2016 Clay Loan | $ | 5,368 | $ | 2,177 | $ | 3,191 | $ | - | $ | - | ||||||||||
| 2016 November Clay Loan (Face value) | $ | 31,000 | $ | - | $ | 31,000 | $ | - | $ | - | ||||||||||
| Total | $ | 36,368 | $ | 2,177 | $ | 34,191 | $ | - | $ | - | ||||||||||
Interest expenses on the November 2016 Clay loan that are due during 2017 can be added to the loan principal balance rather than paid in cash, at the Company’s option.
Off-balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
| 29 |
APPENDIX “A”
FORM 10-K
Stock Option Plan
SAM SAMPLE123 SAMPLES STREETSAMPLETOWN SS X9X X9XCANADAGQMQGOLDEN QUEEN MINING CO. LTD.Security ClassCOMMONHolder Account Number
C9999999999 INDForm of Proxy - Annual General Meeting to be held on June 11, 2018This Form of Proxyis solicited by and on behalf of Management.Notes to proxy1.Every holder has the right to appoint some other person or company of theirchoice, who need not be a holder, to attend and act on their behalf at the meeting or anyadjournment or postponement thereof. If you wish toappoint a person or company other than the persons whose names are printed herein, please insert the name of yourchosen proxyholder in thespace provided (see reverse).2. If the securities are registered in the name of more than one owner (for example, joint ownership, trustees, executors,etc.), then all those registered should sign this proxy. If you are votingon behalf of a corporation or another individual you must sign thisproxy with signing capacity stated, and you may be required to provide documentation evidencing your power to sign thisproxy.3. This proxyshould be signed in the exact manner as the name(s) appear(s) on the proxy.4. If this proxy is not dated, it will be deemed to bear the date onwhich it is mailed by Management to the holder.5.The Company’s current stock option plan (the “Plan”) was adoptedsecurities represented by this proxy will be voted as directed by the Companyholder, however, if sucha direction is not made in 2013 and approvedrespect of any matter, this proxy will be voted asrecommended by shareholdersManagement.6. The securities represented by thisproxy will be voted in favour or withheld from voting or voted against each of the Companymatters described herein, as applicable, in 2013. The Company also adopted a house keeping amendment toaccordance with theinstructionsof the planholder, on April 27, 2015 to clarify the procedure for fixing the earlier termination date of stock options. The Plan provides a fixed number of 7,200,000 common shares of the Companyany ballot that may be issued pursuantcalled for and, if the holder has specified a choice with respect to the grant of stock options. The exercise price of stock options granted under the Plan shallany matter to 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 sharesacted on, the Toronto Stock Exchange (the “TSX”) for the five trading days immediately prior to the date of the grant. The expiry date of a stock option shall be the date so fixed by the Board subject to a maximum term of five years. The Plan provides that the expiry date of the vested portion of a stock optionthesecurities will be voted accordingly.7. This proxy confers discretionary authority in respect of amendments or variations to matters identified in theNotice of Meeting or other matters that may properly come before the earlier of the date so fixed by the Board at the time the stock option is awarded and the early termination date (the “Early Termination Date”). The Early Termination Date will be the date the vested portion of a stock option expires following the option holder ceasing to be a director, employeemeeting orany adjournment or consultant, as determined by the Board at the time of grant, or in the absence thereof at any time prior to the time the option holder ceases to be a director, employee or consultant, in accordance with and subject to the provisions of the Plan. All options granted under the 2013 Plan will be subject to such vesting requirements as may be prescribed by the TSX, if applicable, or as may be imposed by the Board.
The Company granted 50,000 stock options to a consultant of the Company on April 19, 2010. The options were exercisable at a price of $1.22 per share for a period of 5 years from the date of grant. The options expired unexercised on April 19, 2015.
On June 3, 2013, the Company granted 300,000 options to an officer of the Company. The options are exercisable at a price of $1.16 for a period of five years from the date of grant and vest over a period of 18 months with 100,000 vesting in 6, 12 and 18 months respectively. During the fourth quarter of 2014, the officer resigned and as a result, 100,000 unvested stock options were forfeited. The remaining 200,000 options expired unexercised on November 11, 2015. The Company also granted 50,000 stock options to a consultant of the Company on June 3, 2013. The options are exercisable at a price of $1.16 for a period of five years from the date of grant and vest immediately.
On September 18, 2013, the Company granted 300,000 options to Ms. Andrée St-Germain, the Company’s Chief Financial Officer. The options are exercisable at a price of $1.26 for a period of five years from the date of grant and vest over a period of 12 months with 100,000 vesting on the date of grant, 100,000 vesting in 6 and 12 months respectively. The Company also granted 150,000 stock options to the Company’s independent directors on September 4, 2013. The options are exercisable at a price of $1.59 for a period of five years from the date of grant and vest immediately.
The Company granted the aggregate amount of 430,000 options on September 8, 2015 to the Company’s directors. The options are exercisable at a price of $0.58 for a period of five years from the date of grant and vest immediately. At the same time, the Company granted 140,000 options to Ms. Andrée St-Germain at an exercise price of $0.58. The amount of 46,666 options vest immediately, 46,667 options vest 12 months from the grant date, and a further 46,667 options vest 24 months from the grant date. The Company recorded stock-based compensation of $0.2 million during the year ended December 31, 2015 related to the issuance of the stock options.
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. The Company recorded stock-based compensation of $0.02 million during the year ended December 31, 2016 related to the issuance of the stock options.
A total of 1,555,000 (1,023,334 exercisable) (December 31, 2015 – 1,070,000 outstanding and 976,667 exercisable) common shares were issuable pursuant to such stock options as at December 31, 2016.
Transactions with Related Parties
Management Agreement
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.
Notes Payable
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 demand 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 and 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.
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 | ||||||
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% | - | ||||||
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 | ||||
Amortization of Discounts and Interest Expense
The following table summarizes the amortization of discounts and interest on loans and convertible debentures:
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, | December 31, | 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 | Year Ended | Year Ended | ||||||||||
| December 31, | December 31, | 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 as the mine went into production on April 1, 2016.
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.
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 $2,000,000 and $275,000 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:
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 in two situations: two mining drill loans and $3.0 million in surety bond agreements (Refer to Note 9 and Note 16 of the audited consolidated annual financial statements).
Non-Controlling Interest
The carrying value of the non-controlling interest is adjusted for net income and loss, distributions and contributions pursuant to ASC 810-10 based on the same percentage allocation used to calculate the initial book value of temporary equity
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, | December 31, | 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- | Temporary Non- | |||||||
| Controlling Interest | 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.
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 $2.5 million, of which $0.7 million was paid to Auvergne.
Fair Value of Financial Instruments
All financial assets and financial liabilities are recorded at fair value on initial recognition. Transaction costs are expensed when they are incurred, unless they are directly attributable to the acquisition of qualifying assets, in which case they are added to the costs of those assets until such time as the assets are substantially ready for their intended use or sale.
The three levels of the fair value hierarchy are as follows:
| December 31, 2016 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party | $ | 5,458 | $ | - | $ | 5,458 | $ | - | ||||||||
| Share purchase warrants | 972 | - | 972 | - | ||||||||||||
| $ | 6,430 | $ | - | $ | 6,430 | $ | - | |||||||||
| December 31, 2015 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party | $ | 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.
Please refer also to the note on fair value of derivative liability underResults of Operations above for more information.
Select Non-Consolidated Figures
The Company has 50% interest in GQM LLC, which, meets the definition of a Variable Interest Entity (“VIE”). The Company consolidates entities which meet the definition of a VIE for which it is the primary beneficiary. The Company, has determined it is the member of the related party group that is most closely associated with GQM LLC and, as a result, is the primary beneficiary who consolidates GQM LLC.
The following table shows figures attributable to the Company only as of December 31, 2016:
| GQM LLC 100% | GQM LLC 50% Attributable to LTD | LTD on a Non- Consolidated Basis * | LTD Attributable | |||||||||||||
| (1) | (2) | (1) + (2) | ||||||||||||||
| Cash | $ | 11,138 | $ | 5,569 | $ | 2,162 | $ | 7,731 | ||||||||
| Short Term Debt | $ | 5,656 | $ | 2,828 | $ | 0 | $ | 2,828 | ||||||||
| Long Term Debt | $ | 9,494 | $ | 4,747 | $ | 26,347 | $ | 31,094 | ||||||||
| Working Capital / (Deficit) | $ | 12,773 | $ | 6,386 | $ | (4,567 | ) | $ | 1,819 | |||||||
* Includes GQM Holdings
Figures shown for the year ended December 31, 2016:
| GQM LLC 100% | GQM LLC 50% Attributable to LTD | LTD on a Non- Consolidated Basis * | LTD Attributable | |||||||||||||
| (1) | (2) | (1) + (2) | ||||||||||||||
| Revenue | $ | 27,193 | $ | 13,596 | $ | 0 | $ | 13,596 | ||||||||
| Cost of sales including depreciation and depletion | $ | (28,650 | ) | $ | (14,325 | ) | $ | (294 | ) | $ | (14,619 | ) | ||||
| Accretion expense | $ | (143 | ) | $ | (71 | ) | $ | 0 | $ | (71 | ) | |||||
| G&A Expenses | $ | (2,591 | ) | $ | (1,295 | ) | $ | (1,901 | ) | $ | (3,197 | ) | ||||
| Share based payments | $ | 0 | $ | 0 | $ | (24 | ) | $ | (24 | ) | ||||||
| Foreign exchange gain (loss) | $ | 0 | $ | 0 | $ | 208 | $ | 209 | ||||||||
| (Increase) / Decrease in fair value of derivative liability | $ | (18 | ) | $ | (9 | ) | $ | 1,859 | $ | 1,850 | ||||||
| Interest Expense | $ | (430 | ) | $ | (215 | ) | $ | 5,058 | ) | $ | (5,273 | ) | ||||
| Interest Income | $ | 113 | $ | 57 | $ | 44 | $ | 100 | ||||||||
| Others | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
| Net Loss | $ | (4,526 | ) | $ | (2,263 | ) | $ | (5,166 | ) | $ | (7,429 | ) | ||||
* Includes GQM Holdings
As the Company has 50% interest in GQM LLC.
Liquidity and Capital Resources
The Company has generated $27.2 million in revenues from operations since inception and as at December 31, 2016 had an accumulated deficit of $87.3 million and a working capital surplus of $8.2 million. Cash used in operations for the year ended December 31, 2016 was $5.2 million.
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 new loan has 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. Interest expenses on the November 2016 Loan can be added to the loan principal balance rather than paid in cash, at the Company’s option.
The Company 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 filing its 2016 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. 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. 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 and GQM Holdings (100%-owned by the Company) held $2.1 million in cash on December 31, 2016 as compared to $6.1 million on December 31, 2015. The decrease in cash is due to general corporate expenditures, $12.2 million partial repayment of the June 2015 Loan, including $5.8 million of accrued interest and $0.9 million transaction fees, as part of the debt restructuring in November 18, 2016, partly off-set by the net proceeds from the July 2016 financing of $10.1 million. It is expected that the cash held by the Company will fund the Company’s corporate expenses until 2018.
The Company’s access to the net assets of GQM LLC is determined by the Board of Managers of GQM LLC. The Board of Managers is not controlled by the Company and therefore there is no guarantee that any access to the net assets of GQM LLC would be provided to the Company in order to continue as a going concern. The Board of Managers of GQM LLC determine when and if distributions from GQM LLC are made to the holders of its membership units at their sole discretion.
The Company’s 50%-owned subsidiary, GQM LLC, held $11.1 million in cash as of December 31, 2016, as compared to $31.5 million on December 31, 2015. The decrease in cash is the result of cash is the result of cash spent in project related expenditures and working capital, partially offset by revenues from operations.
The audited consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessarypostponement thereof.8. This proxy should the Company be unable to continue as a going concern. Such adjustments could be material.
Cash used in Operating Activities:
Cash used to fund operating activities, including general and administrative expenses such as legal fees, accounting, taxation and auditing fees, insurance expenses, corporate expenses, office expenses and corporate salary was $5.2 million (2015 - $8.2 million) for the year ended December 31, 2016. The decrease in cash used in operating activities in 2016 is mostly due to the operation costs incurred off-set by revenue generated since the Company started production in the second quarter of 2016.
Cash used in Investing Activities:
Cash used in investing activities totaled $11.8 million during the year ended December 31, 2016 (2015 - $69.3 million). The decrease is due to the decreased level of construction activity on site during the year as the Project construction was finalized in early 2016. Main investing activities during 2016 are $5.5 million in construction expenditures, $2.2 million in mining equipment and $2.2 in other property, plant and equipment.
Cash (used in) provided by Financing Activities:
Cash used in financing activities totalled $7.3 million during the year ended December 31, 2016 (2015 - proceeds of $23.7 million). See below a description of the main financing activities used by the Company during the year ended December 31, 2016:
Please seeTransactions with Related Parties above for more information of the Company’s 2016, 2015 and 2014 loans.
During the 2016 and 2015 fiscal years, no stock options were exercised.
Financing activities during the year ended December 31, 2015 include the June 2015 Loan incremental proceeds of $25 million and Gauss LLC’s $12.5 million capital contribution to GQM LLC. As described below, the $2.5 million remaining balance of the January 2014 Loan and financing fees of $0.3 million on the December 2014 Loan were paid during the first quarter of 2015. The Company also paid financing fees of $1.5 millionberead in conjunction with the accompanying documentation provided by Management.Proxies submitted must be received by 10:00 AM, PacificTime on June 2015 Loan and retired its convertible debentures7, 2018.VOTE USING THE TELEPHONE OR INTERNET 24 HOURS A DAY 7 DAYS A WEEK!To Vote Using the Telephone•Call the number listed BELOW from a touch tonetelephone.1-866-732-VOTE (8683) Toll FreeTo Vote Using the Internet•Go to thefollowing web site:www.investorvote.com• Smartphone?Scan the QR code to vote now.If you vote by telephone or the Internet, DO NOT mailback this proxy.Voting by mailmay be the only method for securities held in the name of a corporation or securities being voted on July 26, 2015 for $7.7 million.behalf ofanother individual.Voting by mail or by Internetare the only methods by which a holder may appoint a person as proxyholder other than theManagement nominees named on the reverse of this proxy. Instead ofmailing this proxy, you may choose one of the two voting methods outlinedabove to vote this proxy.To vote by telephone or the Internet, you will need to provide your CONTROL NUMBER listed below.CONTROLNUMBER 23456 78901 23456-------Fold-------FoldGQMQ_PRX_273362/000001/000001/i*S000001Q01*000001
The Company issued two convertible debentures for net proceeds of C$10.0 million ($9.7 million) on July 26, 2013.
On January 1, 2014,
C9999999999 *C9999999999**C9999999999* INDSAM SAMPLE-------Fold-------FoldC01Appointment of ProxyholderI/We being holder(s) of GoldenQueen Mining Co. Ltd. hereby appoint:Thomas M. Clay, Chairman and CEO of the Company, entered intoor failing him, BrendaDayton, CorporateSecretaryfor the $10.0 million January 2014 Loan. The January Loan had a twelve-month term and an annual interest rate of 5%, payable onCompany, or failing her, EdwardMayerhofer, solicitor for the maturity date. The Company, repaid $7.5 millionOR Print the name of the loanperson you areappointingif this person is someoneother than the Chairman of theMeeting.as my/our proxyholder with full power of substitution and to attend,act and to vote for and on December 31, 2014. The remaining balancebehalf of the loan, $2.5 million was repaid on January 5, 2015. Financing feesshareholder in accordance with the following direction (or if no directions have beengiven, as theproxyholder sees fit) and all other matters that may properly come before the Annual General Meeting of $0.3 million on the December 2014 Loan were also paid.
On December 31, 2014, the Company entered into the December 2014 Loan for an amountshareholders of $12.5 million. The December Loan matured on July 1, 2015 and bore an annual interest rate of 10% payable at the end of each Quarter.
On June 8, 2015, the Company amended the December 2014 Loan to extend the maturity to December 8, 2016 and increasing the principal amount from $12.5 million to $37.5 million. The Company also issued 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 a financing fee to secure the loan in the amount of $1.5 million, all of which was paid on June 8, 2015. 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.
During the 2014 fiscal year, options were exercised by former directors as follows:
Working Capital:
| LTD on a Non- | LTD on a | |||||||
| Consolidated | Consolidated | |||||||
| Basis * | Basis ** | |||||||
| Current Assets | $ | 2,324 | $ | 24,853 | ||||
| Current Liabilities | $ | (6,891 | ) | $ | (16,647 | ) | ||
| Working Capital / (Deficit) | $ | (4,567 | ) | $ | 8,206 | |||
* Includes GQM Holdings
** Includes GQM Holdings and GQM LLC
Golden Queen Mining Co. LtdCo.Ltd. to be held at #2300 -1066 West Hastings Street, Vancouver, British Columbia, on June 11, 2018 at 10:00 AM, Pacific Time and Golden Queen Holdings
As at December 31, 2016, Golden Queen Mining Co. Ltd and Golden Queen Holdings, had current assetsanyadjournment or postponement thereof.VOTING RECOMMENDATIONS ARE INDICATED BY HIGHLIGHTED TEXT OVER THE BOXES.1.Number of $2.3 million (December 31, 2015 - $6.2 million) and current liabilities of $6.9 million (December 31, 2015 - $37.1 million) or working capital deficit of $4.6 million (December 31, 2015 – working capital deficit of $30.9 million). The decrease in current assets from December 31, 2015 isDirectorsTo set the result of general corporate expenditures such as corporate salary expenses, legal fees, audit fees, financing fees and interest expenses. The decrease in current liabilities is the result of the loan refinancing which occurred in the last quarter of 2016. The new loan is now included in the Company’s long term liabilities as no principal payments are payable in the 12 months following December 31, 2016.
Golden Queen Mining Co. Ltd will use its cash for general corporate expenditures such as accounting fees, legal fees and corporate salary expenses. Interest expenses on the November 2016 Loan due during 2017 can be added to the loan principal balance rather than paid in cash, at the Company’s option.
GQM LLC
As at December 31, 2016, GQM LLC had current assets of $22.7 million (December 31, 2015 - $33.9 million) and current liabilities of $9.9 million (December 31, 2015 - $8.2 million) or working capital surplus of $12.8 million (December 31, 2015 – $25.7 million).
The decrease in current assets from December 31, 2015 is the result of cash spent on project-related expenditures and working capital, partially off-set by the inventory build-up. The slight increase in current liabilities is the result of an increase of accounts payable and an increase of the short-term portion of the mobile equipment loans.
GQM LLC will use its cash on hand for sustaining capital expenditures and for working capital needs.
Outstanding Share Data
At a special meeting of the holders of common shares of the Company held on December 17, 2013, the shareholders approved a special resolution to change the authorized share capital of the Company from 150,000,000 common shares to an unlimited number of common shares, all without par value, and no preferred shares.
On December 23, 2013, the BoardDirectors at four (4).For Against2.Election of Directors01. Thomas M. ClayFor Withhold02.Bryan A. CoatesFor Withhold03. Bernard GuarneraFor Withhold04. Paul M. Blythe3.Appointment of the Company passed a resolution to convert the exercise prices of granted stock options to U.S. dollars, being the functional currencyAuditorsAppointment ofPricewaterhouseCoopers LLP as Auditors of the Company for the purposesfiscal year ending December 31, 2018 and authorizing theDirectors to fix theirremuneration.For Withhold4.Approval of financial reporting, in order to avoid recording a derivative liabilityUnallocated Entitlements under the Stock Option PlanTo approve all unallocated entitlements issuableunder the Company’s 2013 stock option plan, as more particularly described in the Company’saccompanyingproxy statement and information circular.ForAgainstAuthorized Signature(s) - This section must be completed for yourinstructions to be executed.I/We authorize you to act inaccordance with my/our instructions set out above. I/We herebyrevoke any proxy previously given with respect to the Meeting.If no votinginstructions areindicated above, this Proxy will be voted as recommended by Management.Signature(s) DateInterim Financial Statements-Mark this box if you wouldlike to receive Interim Financial Statements andaccompanying Management’s Discussion and Analysis bymail.AnnualFinancial Statements- Mark this box if you wouldlike to receive the Annual Financial Statements andaccompanying Management’sDiscussion and Analysis bymail.If you are not mailing back your proxy, you may register online to receive the above financial statements.report(s)by mail at www.computershare.com/mailinglist.G Q M Q 2 7 3 3 6 2 1 P D I Z A R 1 9 9 9 9 9
The number of shares issued and outstanding and the fully diluted share position are set out in the table below:
| Item | No. of Shares | |||||||
| Shares issued and outstanding on December 31, 2015 | 99,928,683 | |||||||
| Shares issued pursuant to the exercise of stock options | Nil | |||||||
| Shares Issued in Connection with July 2016 Financing | 11,120,000 | |||||||
| Shares issued and outstanding on December 31, 2016 | 111,048,683 | Exercise Price | Expiry Date | |||||
| Shares to be issued on exercise of directors and employees stock options | 1,555,000 | $0.58 to $1.59 | 06/03/18 to 11/30/21 | |||||
| Shares to be issued on exercise of warrants in conjunction with June 2015 Clay loan | 10,000,000 | $0.95 | 6/8/2020 | |||||
| Shares to be issued as a finder’s fee (due upon commercial production)1 | 100,000 | Not Applicable | Not Applicable | |||||
| Shares to be issued on exercise of warrants in conjunction with July 2016 financing | 5,560,000 | C$2.00 | 7/25/2019 | |||||
| Shares to be issued on exercise of warrants in conjunction with July 2016 financing broker warrants (non-tradable) | 757,700 | C$2.00 | 7/25/2019 | |||||
| Shares to be issued on exercise of warrants in conjunction with Nov 2016 Clay loan | 8,000,000 | $0.85 | 11/18/2021 | |||||
| Fully diluted on December 31, 2016 | 137,021,383 | |||||||
| Fully diluted on March 15, 2017 | 137,021,383 | |||||||
The company has an unlimited authorized share capital
1) Shares issued in January 2017 as commercial production was declared in December 2016.
Subsequent Events
Subsequent to December 31, 2016, GQM LLC acquired a crawler dozer valued at $0.6 million and two rigid haul trucks valued at $1.5 million each.
On January 1, 2017,
SAM SAMPLE123 SAMPLES STREETSAMPLETOWN SS X9X X9XAUSTRALIAGQMQGOLDEN QUEEN MINING CO. LTD.Security ClassCOMMONHolder Account NumberC9999999999 INDForm of Proxy - Annual General Meeting to be held on June 11, 2018This Form of Proxyis solicited by and on behalf of Management.Notes to proxy1.Every holder has 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 balanceappoint some other person or company of the November 2016 loan. The principal balance of the loan was accordingly increased by $0.3 million.
Non-GAAP Financial Performance Measures
Non-GAAP financial measures are intended to provide additional information only and do not have any standard meaning prescribed by generally accepted accounting principles. These measures shouldtheirchoice, who need not be considereda holder, to attend and act on their behalf at the meeting or anyadjournment or postponement thereof. If you wish toappoint a person or company other than the persons whose names are printed herein, please insert the name of yourchosen proxyholder in isolation or as a substitute for performance measures prepared in accordance with GAAP.
Total cash coststhespace provided (see reverse).2. If the securities are common financial performance measuresregistered in the gold mining industry but with no standard meaning under US GAAP. Management believes that, in addition to conventional measures prepared in accordance with US GAAP, certain investors usename of more than one owner (for example, joint ownership, trustees, executors,etc.), then all those registered should sign this information to evaluate our performance and ability to generate cash flow. Accordingly, it is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with US GAAP. The measure, along with sales, is considered to be a key indicatorproxy. If you are votingon behalf of a Company’s ability to generate earningscorporation or another individual you must sign thisproxy with signing capacity stated, and cash flow from its mining operations. Total cash cost figures are calculated in accordance with a standard developed by The Gold Institute, which was a worldwide association of suppliers of gold and gold products and included leading North American gold producers. The Gold Institute ceased operations in 2002, but the standard is the accepted standard of reporting cash cost of production in North America. Adoption of the standard is voluntary and the cost measures presented may not be comparable to other similarly titled measures of other companies. Other companies may calculate these measures differently. Total cash costs are derived from amounts included in the statement of operations and include direct mining costs and site general and administrative costs. The direct mining costs shown on the table below include mine site operating costs such as mining, processing, smelting, refining, third party transportation costs, advanced minimum royalties and production costs less silver metals revenues. Management has determined that silver metals revenues when compared with gold metals revenues, are immaterial and therefore are considered a by-product of the production of gold.
The table below shows a reconciliation of total cash costs per gold ounce and cash costs per gold ounce on a by-product basis:
| Q4 2016 | Q3 2016 | Q2 2016 | April 1 to Dec 31, 2016 | |||||||||||||
| Total Cash Costs | ||||||||||||||||
| Cost of Sales - Direct mining costs | $ | 8,895,464 | $ | 9,110,596 | $ | 3,563,009 | $ | 21,569,069 | ||||||||
| Indirect mining cost | 753,647 | 652,537 | 597,791 | 2,003,976 | ||||||||||||
| Cash costs before by product credits | 9,649,111 | 9,763,133 | 4,160,800 | 23,573,045 | ||||||||||||
| Divided by gold sold (oz) | 7,760 | 8,715 | 2,362 | 18,837 | ||||||||||||
| Cash costs per ounce of gold sold ($/oz) | 1,243 | 1,120 | 1,762 | 1,251 | ||||||||||||
| Less: By-product silver credits per ounce ($/oz) | (148 | ) | (215 | ) | (191 | ) | (184 | ) | ||||||||
| Total cash cost per ounce of gold sold on a by-product basis ($/oz) | $ | 1,095 | $ | 905 | $ | 1,571 | $ | 1,067 | ||||||||
In September 2013, the World Gold Council, a non-regulatory association of the world’s leading gold mining companies established to promote the use of gold to industry, consumers and investors, provided guidance for the calculation of the measure “All-in sustaining costs”, which has no standard meaning under US GAAP. These standards became effective January 1, 2014. Management believes that the all-in sustaining costs measure provides additional insight into the costs of producing gold by capturing all of the expenditures required for the discovery, development and sustaining of gold production and allows the Company to assess its ability to support capital expenditures to sustain future production from the generation of operating cash flows. Management believes that, in addition to conventional measures prepared in accordance with US GAAP, certain investors use this information to evaluate our performance and ability to generate cash flow. Accordingly, it is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with US GAAP.
Golden Queen defines all-in sustaining costs as the sum of direct mining costs (as defined under total cash costs), corporate general and administrative costs, share based payments, reclamation liability accretion and capital expenditures that are sustaining in nature. Adoption of the standard is voluntary and the cost measures presented may not be comparable to other similarly titled measures of other companies. Other companies may calculate these measures differently.
| Q4 2016 | Q3 2016 | Q2 2016 | April 1 to Dec 31, 2016 | |||||||||||||
| All-in sustaining costs | ||||||||||||||||
| Cost of sales - direct mining cost | $ | 8,895,464 | $ | 9,110,596 | $ | 3,563,009 | $ | 21,569,069 | ||||||||
| Indirect mining cost | 753,647 | 652,537 | 597,791 | $ | 2,003,976 | |||||||||||
| Silver by-product | (1,149,926 | ) | (1,872,388 | ) | (450,925 | ) | (3,473,238 | ) | ||||||||
| Total cash cost after by-product | 8,499,185 | 7,890,746 | 3,709,875 | $ | 20,099,806 | |||||||||||
| Corporate general and administrative expenses | 310,724 | 274,439 | 383,977 | 969,139 | ||||||||||||
| Share based payments | 17,106 | 3,799 | 3,799 | 24,704 | ||||||||||||
| Accretion expense | 22,529 | 22,529 | 22,529 | 67,587 | ||||||||||||
| Sustaining capital | 2,648,174 | 915,434 | 330,479 | 3,894,087 | ||||||||||||
| All-in sustaining costs | 11,497,718 | 9,106,947 | 4,450,659 | 25,055,324 | ||||||||||||
| Divided by gold sold (oz) | 7,760 | 8,715 | 2,362 | 18,837 | ||||||||||||
| All-in sustaining costs per gold ounce on a by-product basis | $ | 1,482 | $ | 1,045 | $ | 1,884 | $ | 1,330 | ||||||||
Summary of Significant Accounting Policies and Estimates
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States. Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates which have been made using careful judgment.
The financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below:
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.
Inventory
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.
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 Companyyou may be required to write downprovide documentation evidencing your power to sign thisproxy.3. This proxyshould be signed in the carrying value of its inventories, which would reduceexact manner as the Company’s earnings and working capital.
Mineral Interests
Costs relatedname(s) appear(s) on the proxy.4. If this proxy is not dated, it will be deemed to bear the date onwhich it is mailed by Management to the developmentholder.5.The securities represented by this proxy will be voted as directed by the holder, however, if sucha direction is not made in respect of our mineral reserves are capitalized when an ore body is determined toany matter, this proxy will be economically minable based on proven and probable reserves and when appropriate permits arevoted asrecommended by Management.6. The securities represented by thisproxy will be voted in place. Major mine development expenditures related to mineral interest, 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, abandonedfavour or subject to a condition of impairment. The capitalized costs are amortized over the useful lifewithheld from voting or voted against each of the ore body following commencement of production, or written off if the property is sold or abandoned.
Upon commencement of commercial production, 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 expected to be extracted from the mine in the periodmatters described herein, as a portion of total quantity of material to be extracted in current and future periods based on reserves and resources considered to be highly probable to be economically extracted over the life of mine.
Drilling and related costs are classified as development expenditures and capitalized if all the following criteria are met:
Drilling and related costs not meeting all of these criteria are charged to operations as incurred.
Property, Plant, Equipment
Are recorded at the lower of cost or net realizable value 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 it becomes 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.
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 assetsapplicable, in accordance with ASC 835-20 ("capitalizationtheinstructionsof the holder, on any ballot that may be called for and, if the holder has specified a choice with respect to any matter to be acted on, thesecurities will be voted accordingly.7. This proxy confers discretionary authority in respect of interest"). Interest is capitalized untilamendments or variations to matters identified in theNotice of Meeting or other matters that may properly come before the asset is availablemeeting orany adjournment or postponement thereof.8. This proxy should beread in conjunction with the accompanying documentation provided by Management.Proxies submitted must be received by 10:00 AM, PacificTime on June 7, 2018.VOTE USING THE TELEPHONE OR INTERNET 24 HOURS A DAY 7 DAYS A WEEK!To Vote Using the Telephone•Call the number listed BELOW from a touch tonetelephone.312-588-4290 Direct DialTo Vote Using the Internet•Go to the followingwebsite:www.investorvote.com• Smartphone?Scan the QR code to vote now.If you vote by telephone or the Internet, DO NOT mail backthis proxy.Voting by mailmay be the only method for use. Capitalized interest is determinedsecurities held in the name of a corporation or securities being voted on behalf of anotherindividual.Voting by multiplyingmail or by Internetare the Company’s weighted-average borrowing costonly methods by which a holder may appoint a person as proxyholder other than theManagement nominees named on general debtthe reverse of this proxy. Instead ofmailing this proxy, you may choose one of the two voting methods outlinedabove to vote this proxy.To vote by telephone or the average amount of qualifying costs incurred.Internet, you will need to provide your CONTROL NUMBER listed below.CONTROLNUMBER 23456 78901 23456-------Fold-------FoldGQMQ_PRX_273362/000002/000002/i*S000002Q01*000002
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 of the audited consolidated annual financial statements.
Capitalization of interest ceased as at March 31, 2016 upon production has commenced.
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.
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 models 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) of the audited consolidated annual financial statements for complete details of how the transaction has been accounted for.
New Accounting Policies
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:
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 issubstantial doubt about the entity’s ability to continue as a going concernwithin 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:
The Company has adopted this standard in its financial statements as at December 31, 2016. Refer to Note 2 of the audited consolidated annual financial statements.
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.
The ASC 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 impactC9999999999 *C9999999999**C9999999999* INDSAM SAMPLE-------Fold-------FoldC01Appointment of this standard.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Credit Risk
Credit risk is the risk that the counterparty to a financial instrument will cause a financial loss for the Company by failing to discharge its obligations. To mitigate exposure to credit risk on financial assets the Company has established policies to ensure liquidity of funds and ensure counterparties demonstrate minimum acceptable credit worthiness.
The Company maintains its US Dollar and Canadian Dollar cash in bank accounts with major financial institutions with high credit standings. Cash deposits held in the United States are insured by the 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, and 2015, the Company’s cash balances held in United States and Canadian financial institutions include $13.3 million and $37.6 million respectively, which are not fully insured by the FDIC or CDIC. The Company has not experienced any losses on such accounts and management believes that using major financial institutions with high credit ratings mitigates the credit risk in cash.
Interest Rate Risk
The Company holds 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 thefuture viability of the Project.
Refer also toItem 1A. Risk Factorsabove.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements of the Company and the notes thereto are attached to this report following the signature page and Certifications.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
During the year ending December 2016, the Board of Directors approved change the Company’s auditor to PriceWaterhouseCoopers Inc. located in Vancouver, BC.
Item 9A. Controls and Procedures
Disclosure controls and procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. As described below, material weaknesses were identified in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. As a result of these material weaknesses, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the applicable Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s report on internal control over financial reporting
The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company areProxyholderI/We being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Furthermore, an assessment that internal control over financial reporting was effective for any completed period does not mean that internal control over financial reporting will be assessed as effective for any future period as processes and procedures may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate, among other reasons.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Management conducted an assessment of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). As a result of this assessment, management identified material weaknesses in the design and operating effectiveness of internal controls relating to the accuracy and valuation of inventory and the aggregation of deficiencies in the areas of journal entry review, user access and segregation of duties. The internal controls over these items and the related entity level controls were not sufficiently designed to address the risks of potential misstatement. The material weakness related to the aggregation of deficiencies in the areas of journal entry review, user access and segregation of duties could have resulted in a material misstatement in the annual consolidated financial statements for the year ended December 31, 2016. The material weakness related to inventory could have resulted in a material misstatement related to the overstatement of inventory and the understatement of cost of goods sold for the period in the annual consolidated financial statements for the year ended December 31, 2016. These misstatements were corrected prior to the issuance of the consolidated financial statements and therefore, there were no misstatements in the Company’s current or prior period consolidated financial statements.
In response to the material weaknesses described above and to improve the Company’s internal control over financial reporting, management has established a remediation plan. The plan includes the following: (i) the implementation of new controls or updating the design of existing controls relating to journal entry review, user access rights and ensuring sufficient segregation of duties; (ii) the implementation of a more robust production inventory tracking model which will be included as part of quarter end processes in 2017; and (iii) ensuring the net realizable value calculation for production inventory is appropriately reviewed on a quarterly basis.
As a result of the material weaknesses identified above, management has concluded that, as of December 31, 2016, our company’s internal control over financial reporting was not effective. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, has been audited by our independent registered chartered professional accountants, PricewaterhouseCoopers LLP, who also audited our consolidated financial statements for the year ended December 31, 2016. PricewaterhouseCoopers LLP has expressed an adverse opinion on the effectiveness of our internal control over financial reporting as of December 31, 2016. Their report is included in this annual report on Form 10-K.
Changes in Internal Control.
Other than the material weakness described above, during the quarter ended December 31, 2016, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
Information with respect to Items 10 through 14 is set forth in the definitive Proxy Statement to be filed with the Securities and Exchange Commission on or before April 30, 2017 and is incorporated herein by reference. If the definitive Proxy Statement cannot be filed on or before April 30, 2017, the issuer will instead file an amendment to this Form 10-K disclosing the information with respect to Items 10 through 14.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 15, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Golden Queen Mining Co. Ltd.
Audited Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Golden QueenMining Co. Ltd.
We have audited the accompanying consolidated balance sheetholder(s) of Golden Queen Mining Co. Ltd. hereby appoint:Thomas M. Clay, Chairman and its subsidiaries asCEO of December 31, 2016 and the related consolidated statements of loss and comprehensive loss, shareholders’ equity, non-controlling interest and redeemable portion of non-controlling interest and cash flowsCompany, or failing him, BrendaDayton, Corporate Secretary for the year ended December 31, 2016.We also have audited Golden Queen Mining Co. Ltd.’s and its subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued byompany, r ailing her, EdwardMayerhofer, solicitor for the Committee of Sponsoring OrganizationsCompany,OR Print the name of the Treadway Commission (COSO). Managementperson you areappointing if this person is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting,omeoneother than the Chairman of theMeeting.as my/our proxyholder with full power of substitution and for its assessmentto attend, act and to ote or and on behalf of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the company’s internal control over financial reporting based on our integrated audit.
We conducted our auditshareholder in accordance with the standardsfollowing direction (or if no directions have beengiven, as the proxyholder ees fit) and all other matters that may properly come before the Annual General Meeting of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial positionshareholders of Golden Queen Mining Co. Ltd. and its subsidiaries as of December 31, 2016 and the results of their operations and their cash flows for the year ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Golden Queen Mining Co. Ltd. and its subsidiaries did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO because material weaknesses in internal control over financial reporting existed as of that date. The material weaknesses related to (i) the design and operating effectiveness of internal controls over the accuracy and valuation of inventory; and (ii) the aggregation of deficiencies in the areas of journal entry review, user access and segregation of duties. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2016 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company will need to receive cash distributions from Golden QueenMining Company LLC in ordero. td. to be able to service its debt in early 2018 and such distributions are contingent on Golden QueenMining Company LLC’s ability to generate positive cash flows. This situation raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard to this matter is also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
signed “PricewaterhouseCoopers LLP”
Chartered Professional Accountants
held at #2300 -1066 West Hastings Street, Vancouver, British Columbia,
March 15, 2017 on June 11, 2018 at 10:00 AM, Pacific Time and t ny adjournment or postponement thereof.VOTING RECOMMENDATIONS ARE INDICATED BY HIGHLIGHTED TEXT OVER THE OXES.
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ReportNumber of Independent Registered Public Accounting Firm
DirectorsTo set the Shareholders and Board of Directors
Golden Queen Mining Co. Ltd.
We have audited the accompanying consolidated balance sheet of Golden Queen Mining Co. Ltd. as of December 31, 2015 and the related consolidated statements of loss and comprehensive loss, shareholders’ equity, non-controlling interest and redeemable portion of non-controlling interest, and cash flows for the years ended December 31, 2015 and 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Golden Queen Mining Co. Ltd. at December 31, 2015, and the results of its operations and its cash flows for each of the years ended December 31, 2015 and 2014, in conformity with accounting principles generally accepted in the United States of America.
The previously filed 2015 consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the previously filed 2015 consolidated financial statements, the Company as of December 31, 2015 on a non-consolidated basis did not have sufficient funds to repay a $37,500,000 loan due in December 2016. This condition raised substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the previously filed 2015 consolidated financial statements. The consolidated 2015 financial statements did not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 15 to the previously filed 2015 financial statements, which is not presented herein, the consolidated financial statements as of December 31, 2014 and for the year then ended have been restated to correct a misstatement in the accounting for deferred income taxes.
(signed) BDO CANADA LLP
Chartered Professional Accountants
Vancouver, Canada
March 30, 2016
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
GOLDEN QUEEN MINING CO. LTD.
Consolidated Balance Sheets
(amounts expressed in thousands of US dollars)
| December 31, 2016 | December 31, 2015 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 13,301 | $ | 37,587 | ||||
| Receivables | 34 | 24 | ||||||
| Inventories (Note 5) | 10,941 | 1,936 | ||||||
| Prepaid expenses and other current assets | 577 | 432 | ||||||
| Total current assets | 24,853 | 39,979 | ||||||
| Property, plant, equipment and mineral interests (Note 6) | 134,550 | 128,259 | ||||||
| Advance minimun royalties | 303 | 304 | ||||||
| Reclamation financial assurance deposit (Note 9) | - | 902 | ||||||
| Total Assets | $ | 159,706 | $ | 169,444 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 4,265 | $ | 3,258 | ||||
| Interest payable (Note 10(iv)) | 296 | 970 | ||||||
| Note payable (Note 10(ii)) | - | 36,053 | ||||||
| Current portion of loan payable (Note 16) | 5,656 | 4,943 | ||||||
| Derivative liability – Related party warrants (Note 10(iii)) | 5,458 | 2,498 | ||||||
| Derivative liability – Warrants (Note 11) | 972 | - | ||||||
| Total current liabilities | 16,647 | 47,722 | ||||||
| Note payable (Note 10(ii)) | 26,347 | - | ||||||
| Loan payable (Note 16) | 9,494 | 13,430 | ||||||
| Asset retirement obligations (Note 9) | 1,366 | 978 | ||||||
| Deferred tax liability (Note 7) | 12,922 | 12,922 | ||||||
| Total liabilities | 66,776 | 75,052 | ||||||
| Temporary Equity | ||||||||
| Redeemable portion of non-controlling interest (Note 10(v)) | 26,219 | 27,124 | ||||||
| Shareholders’ Equity | ||||||||
| Common shares, no par value, unlimited shares authorized (2015 - unlimited); 111,048,683 (2015 – 99,928,683) shares issued and outstanding (Note 8) | 71,067 | 62,860 | ||||||
| Additional paid-in capital | 43,652 | 43,628 | ||||||
| Deficit accumulated | (87,335 | ) | (79,906 | ) | ||||
| Total shareholders’ equity attributable to GQM Ltd. | 27,384 | 26,582 | ||||||
| Non-controlling interest (Note 10(v)) | 39,327 | 40,686 | ||||||
| Total Shareholders’ Equity | 66,711 | 67,268 | ||||||
| Total Liabilities, Temporary Equity and Shareholders’ Equity | $ | 159,706 | $ | 169,444 | ||||
Ability to Continue as a Going Concern (Note 2)
Commitments and Contingencies (Note 13)
Subsequent Events (Note 18)
Approved by the Directors:
See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements
GOLDEN QUEEN MINING CO. LTD.
Consolidated Statements of Loss and Comprehensive Loss
(amounts expressed in thousands of US dollars, except shares amounts)
| Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | ||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Revenues | ||||||||||||
| Metal Sales | $ | 27,193 | $ | - | $ | - | ||||||
| Cost of Sales | ||||||||||||
| Direct mining costs | (21,569 | ) | - | - | ||||||||
| Depreciation and depletion (Note 6) | (7,517 | ) | - | - | ||||||||
| Loss from mine operations | (1,893 | ) | - | - | ||||||||
| General and administrative expenses | (4,308 | ) | (4,616 | ) | (4,985 | ) | ||||||
| Operating loss | (6,201 | ) | (4,616 | ) | (4,985 | ) | ||||||
| Other (expenses) income | ||||||||||||
| Gain on derivative instruments (Notes 10(iii) and 11) | 1,840 | 3,334 | 1,004 | |||||||||
| Interest expense (Note 10(iv)) | (5,488 | ) | (4,507 | ) | (1,493 | ) | ||||||
| Interest income | 157 | 205 | 127 | |||||||||
| Loss on extinguishment of debt | - | (152 | ) | - | ||||||||
| Closing fee | - | (1,500 | ) | - | ||||||||
| Joint-venture transaction fee | - | - | (2,275 | ) | ||||||||
| Commitment fee | - | - | (2,250 | ) | ||||||||
| Total other (expenses) | (3,491 | ) | (2,620 | ) | (4,887 | ) | ||||||
| Net and comprehensive loss for the year | $ | (9,692 | ) | $ | (7,236 | ) | $ | (9,872 | ) | |||
| Less: Net and comprehensive loss attributable to the non-controlling interest for the year (Note 10(v)) | 2,263 | 1,775 | 1,403 | |||||||||
| Net and comprehensive loss attributable to Golden Queen Mining Co Ltd. for the year | $ | (7,429 | ) | $ | (5,461 | ) | $ | (8,469 | ) | |||
| Loss per share – basic (Note 15) | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.09 | ) | |||
| Loss per share – diluted (Note 15) | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.09 | ) | |||
| Weighted average number of common shares outstanding -basic | 104,737,396 | 99,893,341 | 99,611,278 | |||||||||
| Weighted average number of common shares outstanding - diluted | 104,737,396 | 99,893,341 | 99,611,278 | |||||||||
See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements
GOLDEN QUEEN MINING CO. LTD.
Consolidated Statements of Shareholders’ Equity, Non-controlling Interest and Redeemable Portion of Non-controlling Interest
(amounts expressed in thousands of US dollars, except shares amounts)
| Common shares | Amount | Additional Paid- in Capital | Deficit Accumulated | Total Shareholders’ Equity attributable to GQM Ltd | Non- controlling Interest | Total Shareholders’ Equity | Redeemable Portion of Non- controlling Interest | |||||||||||||||||||||||||
| Balance, December 31, 2013 | 99,233,383 | $ | 62,290 | $ | 9,928 | $ | (65,976 | ) | $ | 6,242 | $ | - | $ | 6,242 | $ | - | ||||||||||||||||
| Issuance of common shares for mineral property interests | 15,300 | 24 | - | - | 24 | 24 | - | |||||||||||||||||||||||||
| Stock options exercised | 530,000 | 395 | (284 | ) | - | 111 | 111 | - | ||||||||||||||||||||||||
| Stock-based compensation | - | - | 234 | - | 234 | 234 | - | |||||||||||||||||||||||||
| Dilution of ownership interest in subsidiary to non-controlling interest | - | - | 46,513 | - | 46,513 | 38,092 | 84,605 | 25,395 | ||||||||||||||||||||||||
| Deferred tax liability related to the dilution gain | - | - | (12,922 | ) | - | (12,922 | ) | - | (12,922 | ) | - | |||||||||||||||||||||
| Distributions to noncontrolling interest | - | - | - | - | - | (3,000 | ) | (3,000 | ) | (2,000 | ) | |||||||||||||||||||||
| Net loss for the year | 99,778,683 | - | - | (8,469 | ) | (8,469 | ) | (841 | ) | (9,310 | ) | (561 | ) | |||||||||||||||||||
| Balance, December 31, 2014 (Restated ) | 99,778,683 | $ | 62,709 | $ | 43,469 | $ | (74,445 | ) | $ | 31,733 | $ | 34,251 | $ | 65,984 | $ | 22,834 | ||||||||||||||||
| Issuance of common shares as part of management agreement (Note 8) | 150,000 | 151 | - | - | 151 | - | 151 | - | ||||||||||||||||||||||||
| Stock-based compensation | - | - | 159 | - | 159 | 159 | ||||||||||||||||||||||||||
| Capital contribution from non-controlling interest (Note 10(v)) | - | - | - | - | 7,500 | 7,500 | 5,000 | |||||||||||||||||||||||||
| Net loss for the year | - | - | - | (5,461 | ) | (5,461 | ) | (1,065 | ) | (6,526 | ) | (710 | ) | |||||||||||||||||||
| Balance, December 31, 2015 | 99,928,683 | 62,860 | 43,628 | (79,906 | ) | 26,582 | 40,686 | 67,268 | $ | 27,124 | ||||||||||||||||||||||
| Issuance of common shares, public placement net of share issuance cost (Note 8) | 11,120,000 | 8,207 | - | - | 8,207 | - | 8,207 | |||||||||||||||||||||||||
| Stock-based compensation | - | - | 24 | 24 | - | 24 | ||||||||||||||||||||||||||
| Net loss for the year | - | - | - | (7,429 | ) | (7,429 | ) | (1,359 | ) | (8,788 | ) | (904 | ) | |||||||||||||||||||
| Balance, December 31, 2016 | 111,048,683 | $ | 71,067 | $ | 43,652 | $ | (87,335 | ) | $ | 27,384 | $ | 39,327 | $ | 66,711 | $ | 26,220 | ||||||||||||||||
See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements
GOLDEN QUEEN MINING CO. LTD.
Consolidated Statements of Cash Flows
(amounts expressed in thousands of US dollars)
| Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | ||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Operating Activities | ||||||||||||
| Net loss for the year | $ | (9,692 | ) | $ | (7,236 | ) | $ | (9,872 | ) | |||
| Adjustment to reconcile net loss to cash used in operating activities: | ||||||||||||
| Donated land | - | - | 34 | |||||||||
| Depreciation and depletion | 7,427 | 29 | 35 | |||||||||
| Amortization of debt discount and interest accrual | 5,732 | 4,225 | 1,490 | |||||||||
| Accretion expense | 91 | - | - | |||||||||
| Change in fair value of derivative liabilities (Note 11) | (1,857 | ) | (3,334 | ) | (1,004 | ) | ||||||
| Stock based compensation | 24 | 159 | 234 | |||||||||
| Unrealized foreign exchange | (208 | ) | (840 | ) | (505 | ) | ||||||
| Loss on extinguishment of debt | - | 152 | - | |||||||||
| Non-cash consulting expense | - | 151 | - | |||||||||
| Closing fee related to long-term debt | - | 1,500 | - | |||||||||
| Changes in non-cash working capital items: | ||||||||||||
| Receivables | (10 | ) | 28 | (38 | ) | |||||||
| Prepaid expenses & other current assets | (145 | ) | (318 | ) | (52 | ) | ||||||
| Inventory | (9,005 | ) | (1,935 | ) | - | |||||||
| Accounts payable & accrued liabilities | 3,140 | 189 | (329 | ) | ||||||||
| Interest payable | (674 | ) | (951 | ) | (1,146 | ) | ||||||
| Cash used in operating activities | (5,177 | ) | (8,181 | ) | (11,153 | ) | ||||||
| Investment activities: | ||||||||||||
| Additions to property, plant, equipment and mineral interests | (12,726 | ) | (68,957 | ) | (21,624 | ) | ||||||
| Release (purchase) of reclamation financial assurance deposit | 902 | (349 | ) | (75 | ) | |||||||
| Cash used in investing activities | (11,824 | ) | (69,306 | ) | (21,699 | ) | ||||||
| Financing activities: | ||||||||||||
| Issuance of common shares and warrants, net of share issue costs (Note 8) | 10,908 | - | - | |||||||||
| Repayments of loan payable (Komatsu) | (5,006 | ) | (1,907 | ) | (13 | ) | ||||||
| Repayments of note payable and accrued interest (Note 10(ii)) | (12,257 | ) | - | - | ||||||||
| Transaction fee on note payable ((Note 10(ii)) | (930 | ) | - | - | ||||||||
| Investment in Golden Queen Mining Company LLC by non-controlling interest | - | 12,500 | 110,000 | |||||||||
| Distribution to non-controlling interest | - | - | (5,000 | ) | ||||||||
| Borrowing under long-term debt | - | 25,000 | 32,500 | |||||||||
| Repayment of short term debt | - | (2,500 | ) | (17,500 | ) | |||||||
| Repayment of convertible debentures | - | (7,675 | ) | - | ||||||||
| Financing fees related to short-term debt | - | (1,500 | ) | (869 | ) | |||||||
| 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 | (7,285 | ) | 23,667 | 119,229 | ||||||||
| Net change in cash and cash equivalents | (24,286 | ) | (53,820 | ) | 86,377 | |||||||
| Cash and cash equivalents, beginning balance | 37,587 | 91,408 | 5,031 | |||||||||
| Cash and cash equivalents, ending balance | $ | 13,301 | $ | 37,587 | $ | 91,408 | ||||||
Supplementary Disclosures of Cash Flow Information (Note 12)
See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements
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)
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.
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 abilityDirectors at four (4).For Against2.Election of the mine to perform according to the mine plan for 2017. BecauseDirectors01. homas M. ClayFor Withhold02. Bryan A. CoatesFor Withhold03. Bernard GuarneraFor Withhold04. Paul M. Blythe3.ppointment 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 assetsAuditorsAppointment 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 continuePricewaterhouseCoopers LLP 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)
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.
Cash and Cash EquivalentsFor 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)
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:
Drilling and related costs not meeting all of these criteria are charged to operations as incurred.
Property, Plant and EquipmentAre 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.
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)
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. SeeNote 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)
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 RecognitionRevenue 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)
Income TaxesThe 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)
New Accounting Policies
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:
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 issubstantial doubt about the entity’s ability to continue as a going concernwithin 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:
The Company has adopted this standard in its financial statements as at December 31, 2016. See Note 2.
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.
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 | |||||
| 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)
| 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)
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 PresidentAuditors of the Company for achieving twothe fiscal year nding December 31, 2018 and authorizing theDirectors to fix their remuneration.For Withhold4.Approval of nallocated Entitlements under 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 onStock Option PlanTo approve all unallocated entitlements issuable under 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 current2013 stock option plan, (the “Plan”) was adopted byas more particularly described in 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 mayaccompanyingproxy statement andinformation circular.For AgainstAuthorized Signature(s) - This section must 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 TSXcompleted 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)
Stock options (continued)
The Early Termination Date will be the date the vested portion of a stock option expires following the option holder ceasingyourinstructions 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 priorexecuted.I/We authorize you to the time the option holder ceases to be a director, employee or consultant,act in accordance with and subjectmy/our instructions set out above. I/Weherebyrevoke any proxy previously given with respect to the provisions of the Plan. All options granted under the 2013 PlanMeeting.If no voting instructions areindicated above, thisProxy will be subjectvoted as recommended by Management.Signature(s) DateInterim Financial Statements- Mark this box if you wouldlike to such vesting requirements asreceive Interim Financial Statements andaccompanying Management’s Discussion and Analysis bymail.Annual Financial Statements-Mark this box if you wouldlike to receive the Annual Financial Statements andaccompanying Management’s Discussion and Analysis bymail.If you arenot mailing back your proxy, you 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 pursuantregister online 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)
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)
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 toreceive 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 requiredreport(s) 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). mail at www.computershare.com/mailinglist.G Q M Q 2 7 3 3 6 2 1 P D I Z A R 1 9 9 9 9 9
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)
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)
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 | ||||||
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)
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 | ||||
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.
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)
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:
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)
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)
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.
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:
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)
| 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 | ||||
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).
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)
Fair Value Measurements (continued)
The three levels of the fair value hierarchy are as follows:
| 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)
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)
| 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)
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.
| 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)
| 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)
| 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 | ||||||
