Item 1. Business.
Glossary
Certain terms used in this Form 10-K are described below. Note that Golden Queen Mining Co. Ltd. (the “Company”) uses Canadian Institute of Mining, Metallurgy and Petroleum definitions for the terms “reserves”, “measured resources”, “indicated resources” and “inferred resources”, and U.S. investors are cautioned that while these terms are recognized and required by Canadian regulations, the U.S. Securities and Exchange Commission does not recognize them.
Advance minimum royalty - Payment made before the start of commercial production under a mining lease agreement with landholders.
Ag - The chemical symbol for silver.
Au - The chemical symbol for gold.
Exploration Stage Company - A company engaged in the search for or exploration of mineral deposits, which is not in either the development or production stage.
Development Stage Company - A company engaged in the preparation of a mineral deposit with reserves for production and which is not in the production stage.
Production Stage Company - A company engaged in the exploitation of a mineral deposit with reserves.
Fault or faulting - A fracture in the earth’s crust caused by tectonic forces with displacement along the fracture.
Grade - A term used to assign value to resources and reserves, such as gram per tonne (g/t) or troy ounces per ton (oz/ton). Grades are reported both in Imperial and Metric units in this Form 10-K.
Heap leaching - A process which allows dilute cyanide solutions to percolate through run-of-mine or crushed ore heaped on an impervious pad to dissolve gold and/or silver.
Kriging - A geostatistical method used to assign grades to mineral resource and mineral reserve model blocks.
Mineral deposit - A mineral deposit is a mineralized body, which has been intersected by a sufficient number of drill holes or by underground workings to give an estimate of grade(s) of metal(s) and thus to warrant further exploration or development. A mineral deposit does not qualify as a commercially viable mineral deposit with reserves under standards set by the U.S. Securities and Exchange Commission until a final, comprehensive, economic, technical and legal feasibility study has been completed.
Ore - A natural aggregate of one or more minerals which, at a specified time and place, may be mined and processed and the product(s) sold at a profit or from which some part may be profitably separated.
Mineral Resource - A mineral resource is a concentration or occurrence of natural, solid, inorganic or fossilized organic material in or on the earth’s crust in such form and quantity and of such a grade or quality that it has reasonable prospects for economic exploitation. The location, quantity, grade, geological characteristics and continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge. Mineral resources are sub-divided, in order of increasing geological confidence, into inferred, indicated and measured categories.
Mineral Reserve - A mineral reserve is the economically mineable part of an indicated or measured mineral resource as demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, metallurgy and processing, economic and other relevant factors that demonstrate, at the time of reporting, that economic exploitation can be justified. A mineral reserve includes diluting materials and allowance for losses that may occur when the material is mined. Mineral reserves are sub-divided in order of increasing confidence into probable and proven categories.
Stripping ratio - The quantity of waste rock in tonnes or tons removed to allow the mining of one tonne or ton of ore in an open pit.
Volcanics - Rock composed of clasts or pieces that are of volcanic composition.
General Development of Business
The Company was incorporated under the laws of the Province of British Columbia, Canada in November 1985 and has been exploring its mineral properties (the “Property”) located just south of Mojave in Kern County in southern California since that time.
The Company acquired its initial interest in the Property in 1985 and has since added to its holdings in the area. Work on the Property and on the Soledad Mountain project (the “Project”) is done by Golden Queen Mining Co., Inc., a California corporation and the wholly-owned subsidiary (the “Subsidiary”) of the Company.
The Company explored for gold and silver on the Property and did extensive engineering work on the Project between 1988 and 1999. M3 Engineering and Technology Corporation (“M3”), Tucson, Arizona completed a preliminary feasibility study for the Project in 1998 with gold and silver prices of $350/oz and $5.50/oz respectively. The Company did additional drilling and underground sampling in 1998 and 1999.
The Company had previously reported that it expected to begin producing gold and silver from the Project during the second half of 1998, based on the M3 preliminary feasibility study and once approvals and permits had been secured. Because of relatively low gold and silver prices in the late 1990s and in early 2000 however, the Company
was not able to obtain financing for the Project and the Project was therefore put on hold in late 2000. Employees were laid off and costs were reduced to the minimum required to maintain rights to the Property. The major landholders agreed to a 3-year moratorium on advance minimum royalty and other property payments or until the prices of gold and silver improved. The Company recorded an asset impairment loss of $28,547,592 for the year ended December 31, 2000 and this asset impairment loss reduced the carrying value its Property and other assets to their estimated, net realizable value.
The Project remained on hold in 2011 pending the receipt of outstanding approvals and permits for the Project.
In order to update the prospects for the economic exploitation of the Soledad Mountain mineral deposit, the Company initiated a detailed review of the Project in mid-2002 to identify new approaches that would reduce both the capital cost to the start of production and future operating costs. The review was supported and complimented by a substantial amount of work done by independent engineers and contractors. The review was documented and compiled into an in-house report to assist management in determining the prospects for development of the Project at gold and silver prices prevailing in late-2006. The review indicated reasonable prospects for the development of the Project and this was the basis for work on the Project that has continued to date.
The Company retracted the historical mineral reserve estimates, which were based on the report prepared by M3 in 1998, in 2005 on the basis that they were out of date and not supported by National Instrument NI 43-101 (“NI 43-101”), being the Canadian regulation that governs the disclosure of technical information by natural resource companies.
The Company engaged SRK Consulting (U.S.), Inc. (“SRK”), Lakewood, Colorado in 2005 to prepare a NI 43-101 compliant technical report (the “Technical Report (SRK)”) to validate and confirm the mineral resource estimates in compliance with NI 43-101. SRK released the Technical Report (SRK) on March 6, 2006 and this confirmed the mineral resource estimates (see “Exploration & Mineral Resources” heading below).
The Company engaged Norwest Corporation (“Norwest”), Vancouver in 2007 to prepare a further NI 43-101 compliant technical report (the “Technical Report (Norwest)”) to assess mineral reserves for the Project as part of an independent feasibility study based upon the technical work that had been completed to the end of 2006. The results of the Norwest study were disclosed in a press release on December 14, 2007 (see “Mineral Reserves” heading below), which is available on SEDAR and on the Company’s website at www.goldenqueen.com.
An updated feasibility study and economic analysis was prepared by Norwest with input from independent consulting engineers and management and the results were disclosed in a news release on April 6, 2011.
The Project will produce two different types of materials with overlapping time frames. Open pit mining and heap leaching as presently planned is approximately one year of construction, twelve years of mining, thirteen years of leaching for the production of gold and silver (which overlaps with the twelve years of mining), and a further two years of rinsing and drain-down. The production and sale of aggregate is expected to commence fairly early in the mine life and continue for up to thirty years or until the stockpile of quality waste rock has been exhausted. The Company also plans to process and sell leached and rinsed residues from the heap leach operation for a range of uses to local and regional markets. Reclamation will proceed concurrently where feasible, but is nonetheless expected to require two years following cessation of all mining, and a further three years of post-closure monitoring. Monitoring will continue until the reclamation success criteria are met.
There are a number of risks associated with the Project and readers are urged to consider these risks and possible other risks, in order to obtain an understanding of the Project (see “Item 1A.
Item 1A. Risk Factors.
The following is a brief discussion of distinctive or special characteristics of the Company’s operations and the industry in which it operates, which may have a material impact on, or constitutes risk factors in respect of, the Company’s future financial performance and in respect of an investment in the Company. These risk factors should be read in conjunction with disclosure on business and risks appearing in this Form 10-K and elsewhere.
The Likelihood of Continued Losses from Operations and Ability To Continue As A Going Concern
The Company has had no revenue from operations and has incurred cumulative losses from inception through December 31, 2011 of $66,682,638. Losses are expected to continue until such time as the Company can economically produce and sell gold and silver, aggregate and construction materials from the Project. Continued losses will require that the Company raise additional funds by equity or debt financing, failing which the Company will not be able to continue operations. Management cannot provide assurances that this will occur and this raises doubts about the Company’s ability to continue as a going concern.
The Need for Significant Additional Financing
If a production decision is made, the Company will need significant additional financing to develop the Project into an operating mine and estimates that this could range as high as $90 million plus working capital. The Company expects to finance the construction and to secure the necessary working capital from either additional sales of common shares, from bank or other borrowings or, alternatively, through a merger with an established mining company. However, the Company has no commitment for the underwriting of additional shares or for bank financing and it is not a party to any agreement or arrangement providing for a merger with an established mining company. Whether or not and to what extent project financing can be secured will depend on a number of factors, including gold and silver prices. Gold and silver prices fluctuate widely and are affected by numerous factors beyond the Company's control, such as the strength of the U.S. dollar and foreign currencies, global and regional demand, and global or regional political or economic events. If financing is not obtained, the Company will not be able to develop the Project and would be forced to seek alternatives to its current business plan, including disposing of its interests in the Property.
Passive Foreign Investment Company
The Company may be classified as a passive foreign investment company. U.S. investors should seek independent advice from tax advisors to discuss any tax consequences.
We must secure approvals and permits
The Company must secure approvals and permits for the Project as set out the section Environmental Issues, Approvals & Permits above. The Company has been persistent in its efforts to secure approvals and permits, however, there is no assurance that the final approvals can ultimately be secured and this remains a significant risk.
Our ability to obtain mine financing is likely dependant on the price of gold and silver remaining at current levels, which, given historical fluctuations, can vary significantly
Financing to develop the Project will depend upon current price levels for gold and silver being sustained for the foreseeable future. The current price levels of gold and silver have not been attained since the early 1980s and there is no guarantee that prices will remain at the current high levels. Gold and silver prices historically have fluctuated widely and are affected by numerous factors outside of our control including industrial and retail demand, central bank lending, forward sales of gold by producers and speculators, levels of gold production, short-term changes in supply and demand because of speculative hedging activities, confidence in the global monetary system, expectations of the future rate of inflation, the strength of the U.S. dollar (the currency in which the price of gold is generally quoted), interest rates and global or regional political or economic events.
The agreements with landholders need ongoing monitoring.
The Company monitors the status of agreements with landholders on a regular basis in order to protect the Company’s interests in the Property that it does not own. There can be no assurance that the Company will continue to be able to retain all of its interests in the Property through negotiations with landowners, or that the cost of retaining its interests will not increase significantly as a result of future negotiations. The value of the Project may be significantly reduced if the Company cannot access or mine areas of the Property that are material to the Project, due to its inability to retain its interests in the Property. While each and every property has its own value and unique purpose in the overall mine plan, the feasibility of the Project will depend on the Company’s ability to maintain control of the portions of the Property that are material to the Project. Failure to keep property agreements in good standing may result in a loss of control of the corresponding interest in the Property, which, if material to the Project, would prevent the Company from developing the Project.
We rely extensively on the services of our President, Mr. H. Lutz Klingmann, P.Eng., who has considerable current knowledge of our operations, including the Soledad Mountain Project, and the loss of his services would likely result in delay and cost associated with acquiring and training additional management.
Since 2002, Mr. Lutz Klingmann has been largely responsible for most of the operations of the Company, including work on the Project. The successful development of the Project as currently envisioned by management is dependent to a significant extent on the efforts and abilities of Mr. Klingmann. Investors must be willing to rely to a significant extent on management’s discretion and judgment. We do not maintain key employee insurance on Mr. Klingmann and the loss of his services would likely have an adverse affect on Company operations and plans, until such time as a replacement can be located and brought current on Company plans and operations.
Risks and Contingencies Associated with the Mining Industry Generally
In addition to the risks noted above, the Company is subject to all of the risks inherent in the mining industry, including environmental risks, fluctuating metals prices, industrial accidents, labor disputes, unusual or unexpected geologic formations, cave-ins, flooding, earth quakes and periodic interruptions due to inclement weather. These risks could result in damage to, or destruction of, production facilities, personal injury, environmental damage, delays, monetary losses and legal liability. Although the Company maintains or can be expected to maintain insurance within ranges of coverage consistent with industry practice, no assurance can be given that such insurance will be available at economically feasible 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 the Company or other companies in the mining industry. If subjected to environmental liabilities, the costs incurred would reduce funds available for other purposes.
While we believe we have taken the steps necessary to improve the effectiveness of our internal control over financial reporting, if we are unable to successfully address or prevent material weaknesses in our internal control over financial reporting, our ability to report our financial results on a timely and accurate basis and to comply with disclosure and other requirements may be adversely affected.
Our management identified material weaknesses in internal control over financial reporting as of December 31, 2011 related to the (i) financial statements closing process due to lack of timely review and preparation of financial statements and other reporting documents, inconsistency of foreign exchange rate used in translation and (ii) lack of
segregation of duties in daily cash management and no proper approval on general and administrative and capital expenditures (see “Item 9A. Controls and Procedures”). As a result of these material weaknesses, our management concluded that, as of December 31, 2011, we did not maintain effective disclosure controls and procedures or 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 our annual or interim financial statements will not be prevented or detected on a timely basis.
We can give no assurances that the measures we take to remediate material weaknesses that we identified will be successful, or that any additional material weaknesses will not arise in the future.
Any material weakness or other deficiencies in our disclosure controls and procedures and internal control over financial reporting may affect our ability to report our financial results on a timely and accurate basis and to comply with disclosure obligations or cause our financial statements to contain material misstatements, which could negatively affect the market price and trading liquidity of our common stock or cause investors to lose confidence in our reported financial information.
Most 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.
With the exception of Thomas Clay, our directors namely Edward G. Thompson, Chester Shynkaryk, Gordon C. Gutrath, and H. Lutz Klingmann 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 an original action could be brought successfully in Canada against any of such directors predicated solely upon such civil liabilities.
Because our common shares will likely 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 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 U.S.$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.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.
Item 2. Properties.
Land Ownership and Mining Rights
The Company acquired its initial property interests in 1985 and has since acquired additional properties in the area. The Company holds directly or controls via agreement a total of 33 patented lode mining claims, 134 unpatented lode mining claims, 1 patented millsite, 12 unpatented millsites, 1 unpatented placer claim and upward of 946 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.
A Property location map is shown in Figure 1 below.
Figure 1
The Company holds the properties either directly through a subsidiary, 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 these agreements or is controlled by the Company through ownership of the land in fee or where the Company holds patented and unpatented mining claims or millsites. The mining lease agreements were entered into from 1986 onwards. Refer to the section Property Interest Are In Good Standing below for key information.
Figure 2 below provides a map of the various claim groups that make up the Property.
Figure 2
The fee land surrounding Section 6 is required for the construction of the ancillary facilities required for a mining operation, for the construction of the heap leach pads and for construction of a pad for the aggregate production facilities. The area that will be disturbed by the Project is a 369 hectare-block (912 acres) within the total area of approximately 1,417 hectares (3,500 acres) owned, held or controlled by the Company. The Company also owns six residential properties with buildings north of Silver Queen Road and one residential property west of Mojave Tropico Road.
The Company is continuing with its efforts to purchase additional land that will secure its land position in the area.
Title Review
The Company commissioned a formal title review of the Property by a firm familiar with title matters in California in 1996. This title review was updated in February 1998 and again in March 1999. A further title review was completed by an independent landman in 2004 and no particular title problems were identified.
Quiet Title Judgment
The ownership history is typically complex in historic mining districts and title problems will exist. The Company obtained a Quiet Title Judgment on May 15, 1999 and this resolved a majority of title questions. The effect of the
Judgment was to clear the title to the interests in the patented claims listed in the action and to cure the title defects of record, providing security of title and thus greatly enhancing the value of the Property.
The Company has determined that any remaining title questions would not present a threat to the Project.
Record Of Survey
The California Business & Professions Code includes the Professional Land Surveyors Act, “Article 5. Surveying Practices” and specifically “8762. Records of survey.” Land surveyors must be aware of the requirements set out in Article 5 as these are essential to their surveying practice and govern their responsibilities to their clients and the State. The Company therefore decided to proceed with a Record of Survey and engaged James A. LaPuzza, PLS, MS in November 2009.
A set of fourteen maps based upon survey work done by James A. LaPuzza, PLS, MS on Soledad Mountain between 2007 and 2010, along with supporting information on the history of staking and recording and ownership of mining claims and millsites researched by Sylvia Good, RPL, Landman and legal counsel and staff of Gresham Savage Nolan & Tilden, A Professional Corporation, San Bernardino, California from the early 1990s onwards, was submitted to the Kern County Department of Engineering, Surveying and Permit Services in August 2010. The maps were checked in meticulous detail by County staff over a period of 10 months. There were also numerous exchanges of information between James A. LaPuzza, PLS, MS and staff during this period. County staff gave the maps a “Final Check” in May 2011. The recordable mylars were submitted to County staff in July 2011, formally signed by the County Surveyor and forwarded to the Kern County Assessor - Recorder as a Record of Survey. The Record of Survey was recorded as follows:
Recorded July 20, 2011;
Document No. 211092035 and
Book 0027, Page 66
The basis for the Company’s royalty map is now the Record of Survey and this has superseded all earlier versions of the royalty map.
A copy of this report was sent to all landholders of record on August 1, 2011.
Royalties
The Company is required to make advance, minimum royalty payments under the mining lease agreements. In some instances, the Company will receive a credit for the advance minimum royalty payments on commencement 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 ore grades on 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 produced and sold.
Property Interests Are In Good Standing
The Company had disclosed in its Form 10-K for the fiscal year ended December 31, 2007 that not all property interests were in good standing. The total advance minimum royalty owing to landholders was $714,137. The Company contacted all landholders and paid $666,103 in the second, third and fourth quarters of 2008 with a further $48,034 paid to the remaining rightful landholders in 2009. The Company continues to pay advance minimum royalties to landholders and incurred a total of $245,970 in 2011, of which $13,723 has yet to be paid. The Company believes it is in compliance with the requirements.
A mining lease agreement with a group of landowners expired in 2004. Negotiations with the group were completed in July 2011 and the agreements were extended to 2041. Under the amended agreements, the Company paid advance minimum royalties of $7,500 per year for eight years for a total amount of $60,000 in August 2011 to bring the advance minimum royalties owing current to March 14, 2012.
A number of lease agreements expired in 2010 and in January 2011. Of these expired lease agreements, one set of lease agreements that together comprises a 50% interest in a claim group, is considered material by the Company. The Company is in the process of negotiating renewed leases with the landholders, maintains a good relationship with the landholders involved and anticipates that it will be able to reach agreements for new leases in 2012.
While the Company is not in default of any current lease, the Company is negotiating renewal terms for leases that are approaching expiry. The Company does not consider any of those leases to be individually material. However leases that are individually not material may become part of a material group of leases if more than one of the leases in the group cannot be renewed.
Leases have expiry dates ranging from 2012 to 2045. Of these, no single lease is considered material with the exception of four leases which expire in September 2014, April 2015, April 2021 and April 2026 respectively. All leases become non-expiring once the mine commences commercial production.
While each and every part of the Property has its own value and unique purpose in the overall mine plan, the feasibility of the Project will depend on the ability of the Company to maintain the rights to access and use of the material portions of the Property. A failure to keep property agreements in good standing may result in a loss of control, which, if material to the Project, would prevent the Company from developing the Project.
Item 3.
Item 3. Legal Proceedings.
To the best of our knowledge, there are no legal actions pending, threatened or contemplated against the Company.
Item 4.
Item 4. Mine Safety Disclosures.
The Company is the operator of the Soledad Mountain project, which includes one mine located in Mojave in Kern County, California. The Company is currently evaluating the development of the mine for production. The Company has no mine safety violations or other regulatory matters to report.
PART II
Item 5.
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.
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:
Exchange rate information (from USD$ to CAD$) as at each of the years ended December 31, 2010 and 2011 is set out in the table below:
As of March 29, 2012, there were 222 registered holders of record of the Company’s common shares and an undetermined number of beneficial holders.
The common shares of the Company are also traded on the Pink Sheets under the trading symbol “GQMNF”. The high and low sales prices of the common stock as traded on the Pink Sheets for the calendar periods indicated are set out in the table below. All prices are reported in U.S. dollars. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. The Pink Sheets has a limited and sporadic trading market and does not constitute an established trading market.
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, 2011 respecting the compensation plans under which shares of the Company’s common stock are authorized to be issued.
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 issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
Equity compensation plans
approved by security
holders
1,800,000
CAD$0.29
5,400,000
Equity compensation plans
not approved by security
holders
Nil
Nil
Nil
Total 1,800,000 -- 5,400,000
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.
December December December December December
31, 2007 31, 2008 31, 2009 31, 2010 31, 2011
Company 333
S&P/TSX Global Gold Index (TITTGD) 136
Purchases of Equity Securities by the Company and Affiliated Purchasers
Neither the Company nor an affiliated purchaser of the Company purchased common shares of the Company in the year ended December 31, 2011.
Item 6.
Item 6. Selected Financial Data.
The following table summarizes certain selected consolidated financial data of the Company and should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.
Results for the five most recent years are set out in the table below.
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
Results for the year ended on: 2008
Item $ $ $ $ $
Revenues 0
Net loss and comprehensive loss -3,230,641 -9,983,926 -4,514,742 -3,996,777 -2,006,482
Basic loss and diluted loss per share -0.03 -0.11 -0.05 -0.05 -0.03
Cash and cash equivalents 7,922,255 6,967,465 2,433,202 3,033,771 2,796,190
Total assets 8,692,866 7,655,343 2,969,865 3,557,416 3,345,937
Stockholders' equity 3,631,916 -3,327,592 -131,888 3,097,436 2,909,788
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
The following discussion of the operating results and financial condition of the Company is as at March 29, 2012 and should be read in conjunction with the audited, consolidated financial statements of the Company for the year ended December 31, 2011 and the notes thereto.
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.
Results of Operation
The following are the results of operation for the year ended December 31, 2011.
The Company had no revenue from operations.
The Company incurred general and administrative expenses of $3,520,776 for the year ended December 31, 2011 (2010 - $3,290,736, 2009 - $2,246,953). Costs were marginally higher by $230,040 for the year ended December 31, 2011 when compared with 2010.
The following significant general and administrative expenses were incurred during the year with a comparison to expenses incurred in 2010 and 2009:
$251,393 (2010 - $84,948, 2009 - $0) for the infill drill program.
$294,946 (2010 - $0, 2009 - $0) for the detailed analysis of data required to construct the geological model and block model for the Project by an independent consulting engineering firm.
$1,046,765 (2010 - $1,365,069, 2009 - $574,979) for ongoing detailed engineering, mine design and drafting support. The detailed engineering allows contractors to provide solid cost estimates for the construction of the facilities and this information was required for the updated feasibility study that was released in April 2011. Ongoing engineering was also required to support the effort to secure outstanding approvals and permits. Costs increased from 2009 to 2010 as more detailed engineering was done. Costs then decreased from 2010 to 2011 as most of the detailed engineering was completed. It is expected that costs will increase again if a production decision is made.
$138,344 (2010 - $68,881, 2009 - $35,354) for ongoing sampling and analysis of groundwater from monitoring and production wells to meet the requirements set in the Waste Discharge Requirements by the
Lahontan Regional Water Quality Control Board. Alternative methods of sampling groundwater were also evaluated in the third quarter of 2011. Costs increased from 2009 to 2010 and again in 2011 as the sampling and analysis effort increased to meet the requirement set in the Waste Discharge Requirements.
$64,882 (2010 - $0, 2009 - $0) for the development of production water well PW-3. This also included a pump test. Production water well PW-3 was drilled and equipped in 2008.
$100,000 (2010 - $0, 2009 - $0) to Southern California Edison for a Method of Service study.
$126,047 (2010 - $190,826, 2009 - $362,050) for analysis of the draft Authority to Construct permits and ongoing monitoring, maintenance and data recovery from the meteorological station on site. Significantly higher costs were incurred in 2009 when the Air Quality and Health Risk Assessment was prepared for the Project and additional engineering support was required for the preparation of the Supplemental EIR.
$332,760 (2010 - $646,043, 2009 - $190,201) for legal fees incurred in support of ongoing efforts to conclude the approvals process for the Project, in negotiations with landholders to extend mining lease agreements and for general corporate legal fees. The Company engaged legal counsel to work with the Kern County Planning Department on preparation of the Supplemental EIR in 2009. Costs increased significantly in 2010 in connection with a number of public hearings held in 2010.
$77,914 (2010 - $180,621, 2009 - $20,051) for fees charged by the regulatory authorities such as the State Water Resources Control Board, Kern County Planning & Community Development Department, Kern County Egineering, Surveying & Permit Services Department and Eastern Kern Air Pollution Control District. Costs increased from 2009 to 2010 as preparations were made for public hearings held in 2010. No further public hearings were held in 2011 and costs incurred in 2011 is an indication of the recurring costs.
$108,988 (2010 - $38,955, 2009 - $15,425) for costs incurred by a contractor for ongoing cleanup on site and maintenance of houses owned by the Company.
$270,114 (2010 - $174,678; 2009 - $108,019) for accounting and audit fees. Accounting and audit fees are generally higher in 2011 as more stringent review requirements have been introduced by the authorities. Accounting and audit fees increased from 2009 to 2010 due in part to costs associated with a restatement and refilling of annual and quarterly reports.
The Company recorded a change in fair value of derivative liability of -$1,213,913 for the year compared to $6,575,406 in 2010. This item is a non-cash item and was recorded in accordance with accounting pronouncement ASC 850-40-15. Refer to Note 10 Derivative Liability of the audited, consolidated financial statements for a detailed analysis of the changes in fair value of the derivative liability.
Interest income of $48,659 (2010 - $31,633) was higher by $17,026 as there was more cash on deposit during the year. There was no interest expense during the year. Interest rates remained low during the year and are projected to remain low for the coming year at least.
The Company incurred a net loss of $ 3,230,641 ($0.03 loss per share) for the year as compared to a net loss of $9,983,926 ($0.11 per share) for 2010 for a difference in net loss of $6,753,285.
Summary of Quarterly Results
Results for the eight most recent quarters are set out in the table below.
Results for the quarter ended on: Dec. 31, 2011 Sept. 30, 2011 June 30, 2011 March 31, 2011
Item $ $ $ $
Revenue Nil Nil Nil Nil
Net loss for the quarter 230,281 -981,654 -1,758,400 -720,868
Net loss per share 0.00 -0.01 -0.02 -0.01
Results for the quarter ended on: Dec. 31, 2010 Sept. 30, 2010 June 30, 2010 March 31, 2010
Item $ $ $ $
Revenue Nil Nil Nil Nil
Net loss for the quarter -4,126,127 -3,125,127 -2,406,367 -326,305
Net loss per share -0.04 -0.03 -0.03
The results of operations can vary from quarter to quarter depending upon the nature, timing and cost of activities undertaken during the quarter and whether or not the Company incurs gains or losses on foreign exchange or grants stock options.
Selected Annual Information
Results for the year ended on: Dec. 31, 2011 Dec. 31, 2010 Dec. 31, 2009 From Inception
Item
$ $
$
General and administrative expenses -3,520,776 -3,290,736 -2,246,953 -26,763,158
Asset impairment loss -938,770 -133,436 -167,898 -33,207,798
Adjustment of asset retirement obligation on changes in cash flow estimates - - 223,583
Accretion expense -33,667 -15,981 -7,779 -105,029
Change in fair value of derivative liability 1,213,913 -6,575,406 -2,095,300 -7,456,793
Gain on settlement of debt - - - 136,627
Mineral property interests written off - - - -277,251
Sub-total -3,279,300 -10,015,559 -4,524,812 -67,537,319
Interest expense - - - -913,098
Interest income 48,659 31,633 10,070 1,680,279
Net loss and comprehensive loss -3,230,641 -9,983,926 -4,514,742 -66,770,138
Net loss per share -0.03 -0.11 -0.05
Reclamation Financial Assurance and Asset Retirement Obligation
The Company provided reclamation financial assurance in the form of a Payment Bond Certificate backed by a Certificate Of Deposit with Union Bank of California in the amount of $296,180 effective October 2011. The estimate for reclamation financial assurance is $314,712 for 2012 and this estimate has been submitted to the Engineering, Surveying & Permit Services Department for review and approval.
The asset retirement obligation is estimated at $227,212 and this is shown as a liability on the Consolidated Balance Sheet. The actual obligation could differ materially from these estimates.
Advance Minimum Royalties
The Company continues to pay advance minimum royalties to landholders and incurred $245,970 in 2011.
Off-balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Stock Option Plan
The Company’s current stock option plan (the “Plan”) was adopted by management of the Company in 2008 and approved by shareholders of the Company in 2009. The Plan provides a fixed number of 7,200,000 common shares of the Company that may be issued pursuant to the grant of stock options. The exercise price of stock options granted under the Plan shall be determined by the Company’s Board of Directors, but shall not be less than the volume weighted average trading price of the Company’s shares on the Toronto Stock Exchange 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 stock options will terminate on the earlier of the expiry of the term and (i) 12 months from the date an option holder dies, (ii) 90 days from the date from the date the option holder ceases to act as a director or officer of the Company, or (iii) 60 days from the date the option holder ceases to be employed, or engaged as a consultant, by the Company.
The Company granted 1,950,000 stock options to directors, officers and consultants of the Company pursuant to the Plan on January 28, 2009. The options are exercisable at a price of C$0.26 per share for a period of 5 years from the date of grant. The Company also granted 50,000 stock options to a consultant of the Company pursuant to the Plan on April 19, 2010. The options are exercisable at a price of C$1.24 per share for a period of 5 years from the date of grant.
Transactions with Related Parties
Mr. H. Lutz Klingmann was paid $137,748 (2010 - $141,293, 2009 - $116,776) for services as President of the Company and Mr. Chester Shynkaryk was paid $27,295 (2010 - $17,769; 2009 - $18,620) for consulting services to the Company for the year ended December 31, 2011. Mr. G. Ross McDonald was paid $20,218 (2010 - $Nil; 2009 -$Nil), of which $2,831 is payable, for services as CFO to the Company for the year ended December 31, 2011. No other compensation was paid or given during the year for services rendered by the directors in such capacity and no amounts were payable at year-end under any standard arrangements for committee participation or special assignments.
Four directors of the Company were paid $2,022 (2010 - $1,974; 2009 - $1,752) and one director was paid $2,000 (2010 - $2,000; 2009 - $2,000) in director’s fees for the year ended December 31, 2011.
The Company amended a consulting services agreement originally entered into in 2004 with Mr. H.L. Klingmann, the President of the Company, in May of 2010. Under the original agreement, upon receipt by the Company of a feasibility study and a production decision made by the Company, a bonus of 150,000 common shares would be issued and upon commencement of commercial production on the Property, a bonus of 150,000 common shares would be issued. Pursuant to the amended agreement, an alternative 300,000 bonus shares would be issuable upon a change of control transaction or upon a sale of all or substantially all of the Company’s assets, having a value at or above C$1.00 per share of the Company, with a further 300,000 bonus shares being issuable in the event the change of control transaction or asset sale occurred at a value at or above C$1.50 per share. As at December 31, 2011, the milestones had not been reached and no accrual was made in connection with these arrangements.
There were no other related party transactions during the year ended December 31, 2011.
Fair Value of Financial Instruments
The carrying amount reported in the balance sheets for cash and cash equivalents, receivables, accounts payable and accrued liabilities approximates fair value because of the immediate or short-term maturity of these financial instruments. The Company does not hold any bank or non-bank asset-backed commercial paper. The fair value of the reclamation financial assurance approximates carrying value because the stated interest rate reflects recent market
conditions. It is the opinion of management that the Company is not exposed to significant interest, currency or credit risk arising from the use of these financial instruments.
Private Placement
The Company completed a non-brokered private placement with AuRico Gold Inc. (“AuRico”) (formerly Gammon Gold Inc.) on June 1, 2010, whereby AuRico purchased 5,000,000 units of the Company at a price of C$1.60 per unit for total proceeds of $7,634,316 (C$8,000,000). Each unit consisted of one common share, one quarter of one Class A Warrant, and one quarter of one Class B Warrant. Each Class A Warrant entitled AuRico to purchase a common share at a price of C$1.75 for a period of 18 months from the closing date. Each Class B Warrant entitled AuRico to purchase one common share at a price of C$2.00 for a period of 18 months from the closing date. The aggregate fair value of the Class A and B purchase warrants was $1,726,518 and the amount was recorded as a derivative liability and the Company allocated the remaining proceeds of $5,907,798 to the common shares. AuRico was also granted the right to participate in future financings to maintain its equity position in the Company and this right was subject to certain conditions.
AuRico exercised the warrants before the expiry date of December 1, 2011. The Company filed a registration statement relating to these securities with the U.S. Securities And Exchange Commission and this became effective on December 16, 2011.
Liquidity and Capital Resources
The Company held $7,922,253 in cash and cash equivalents on December 31, 2011.
Cash used in Operating Activities:
Cash was used mainly for the ongoing development of the Project in 2011 with major expenditures in four areas:
Consulting engineering fees remained high due to the significant amount of detailed engineering completed for Project facilities;
Costs were incurred for ongoing sampling and analysis of groundwater from monitoring and production wells to meet the requirements set in the Waste Discharge Requirements by the Lahontan Regional Water Quality Control Board and alternative methods of sampling groundwater were also evaluated in the third quarter;
Legal fees were incurred in support of ongoing efforts to conclude the approvals process for the Project, in negotiations with landholders to extend mining lease agreements and for corporate legal fees and
Consulting fees were incurred to do a very detailed analysis of the geological and block models and to prepare a NI 43-101 compliant Technical Report. It is expected that this report will be completed in the second quarter of 2012.
Cash was used mainly for the ongoing development of the Project in 2010 and 2009 with major expenditures in two key areas:
Consulting engineering fees remained high due to the significant amount of detailed engineering completed for Project facilities and
Legal fees were incurred in support of ongoing efforts to secure approvals and permits process for the Project.
Cash from Financing Activities:
Cash was received from financing activities during the year ended December 31, 2011 as follows:
Proceeds from the exercise of stock options of $972,559 during the year.
AuRico Gold Inc. exercised 2,500,000 warrants for total proceeds of $4,594,237.
The Company received a total of $7,860,707 from financing activities in 2010. An amount of $7,588,551 was received from a private placement of shares, net of share issuance costs, and the remainder was received from the exercise of 850,000 stock options.
The Company received $1,527,731 from the exercise of stock options in 2009.
Cash used in Investing Activities:
The Company purchased fee land for approximately $938,770 (2010 - $310,768, 2009 - $167,800) during the year. Cash used in investing activities will vary from year to year as willing sellers are found and acceptable prices can be negotiated during the year. Further purchases of fee land are being considered to provide room for a possible future expansion of heap leach pads and future expansion of the area required for the construction of facilities for the aggregate production component of the Project.
Working Capital:
As at December 31, 2011, the Company had current assets of $8,088,236 and current liabilities of $281,236 (Working capital of $7,807,000).
Management does not expect that additional cash will be required beyond cash currently on hand for ongoing work on approvals and permits for the Project, for paying advance minimum royalties, for detailed engineering of facilities for the Project, for ongoing work on site, for additional land purchases and for general corporate purposes to the end of 2012. Refer also to Outlook below.
Outstanding Share Data
The number of shares issued and outstanding and the fully diluted share position are set out in the table below.
Golden Queen Mining Co. Ltd.
No. of
Item Shares
Shares issued and outstanding on December 31, 2010 94,228,383
Shares issued pursuant to the exercise of stock options 1,250,000
AuRico Gold Inc. warrants 2,500,000
Shares issued and outstanding on December 31, 2011 97,978,383 Exercise Price Expiry Date
C$0.26 & 28/01/14 &
Director and consultants stock options 1,800,000 C$1.24 19/04/15
Shares to be issued as a finders fee 100,000 Not Applicable Not Applicable
Bonus shares to H.L. Klingmann 600,000 Not Applicable Not Applicable
Fully diluted on December 31, 2011 100,478,383
The company's authorized share capital is 150,000,000 common shares with no par value.
Outlook
If the remaining approvals and permits are secured for the Project and a production decision is made, the Company will need significant additional financing to develop the Project into an operating mine. This is currently estimated at $105million and this includes working capital. The Company believes that financing for the Project can be secured if gold and silver prices remain at or near $1,457.00/oz and $39.63/oz respectively, the London a.m. fix for precious metals on April 6, 2011 and the prices used for the updated cash flow analyses referred to under Independent Feasibility Study Completed By Norwest Corporation above. Gold and silver prices averaged $1,224.53/oz and $20.19/oz in 2010, $1,563.93 and $36.61 in 2011 and the London pm fix for gold and silver was $1,657.50/oz and $31.79 respectively on March 29, 2012.
The Company is evaluating various financing options for the Project and these may be combined:
a.
An equity financing;
b.
A combination of equity and debt and
c.
A merger with an established mining company.
It is not expected that the Company will hedge any of its gold or silver production.
The ability of the Company to develop a mine on the Property is subject to numerous risks, certain of which are disclosed under Item 1A. Risk Factors above. Readers should evaluate the Company’s prospects in light of these and other risk factors.
Subsequent Event
There are no subsequent events.
Application of Critical Accounting 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:
Mineral Property and Exploration Costs
Exploration costs are expensed as incurred. Development costs are expensed until it has been established that a mineral deposit is commercially mineable and a production decision has been made, at which point the costs subsequently incurred to develop the mine on the property before to the start of mining operations are capitalized.
The Company capitalizes the cost of acquiring mineral property interests, including undeveloped mineral property interests, until the viability of the mineral interest is determined. Capitalized acquisition costs are expensed if it is determined that the mineral property has no future economic value. Mineral property interests are interests in properties that are believed to potentially contain (i) measured, indicated or inferred resources with insufficient drill hole spacing to qualify as proven and probable mineral reserves or (ii) other mine-related or green field exploration potential that cannot be classified as a mineral resource.
Capitalized amounts (including capitalized development costs) are also written down if future cash flows, including potential sales proceeds, related to the mineral property are estimated to be less than the property’s total carrying value. Management reviews the carrying value of each mineral property periodically, and, whenever events or changes in circumstances indicate that the carrying value may not be recoverable makes the necessary adjustments. Reductions in the carrying value of a property would be recorded to the extent that the total carrying value of the mineral property exceeds its estimated fair value. There was a $938,770 asset impairment loss related to property interests recorded for the year ended December 31, 2011 (2010 - $133,436).
Asset Retirement Obligations
The Company’s liability for reclamation of the property is estimated each year by an independent civil engineer. This estimate, once approved by federal, state and county authorities, forms the basis for a cash deposit of reclamation financial assurance. In the absence of a long-term mining permit this estimate is the current obligation of the Company to clean up or reclaim its lands.
As at December 31, 2011, the Company had provided reclamation financial assurance to the Bureau of Land Management, the State and Kern County totaling $296,180 (2010 - $286,653). This deposit earns interest at 0.1% per annum and is not available for working capital purposes.
The asset retirement obligation recorded as a liability on the Consolidated Balance Sheet is $227,212 (2010 -$193,545.
Derivative Liabilities
Our stock options and warrants are denominated in a currency other than our reporting currency and the instruments were required to be accounted for as separate derivative liabilities. These liabilities were required to be measured at fair value. These instruments were adjusted to reflect fair value at each period end. Any increase or decrease in the fair value was recorded in results of operations as change in fair value of derivative liabilities. In determining the appropriate fair value, we used the Black-Scholes pricing model.
Recently Issued Accounting Standards
A summary of Recently Issued Accounting Standards is provided under the Recent Accounting Pronouncements header of the Notes to the Audited Consolidated Financial Statements for the year ended December 31, 2011.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We hold all of our cash in bank deposit accounts with a single major financial institution. Based on the average cash balances during the year ended December 31, 2011, a 1% decrease in interest rates would have reduced the interest income for 2011 to $Nil.
Foreign Currency Exchange Risk
Currency exchange fluctuations may impact the costs of our operations. Specifically, the appreciation of the C$ against the U.S.$ may result in an increase in our Canadian operating costs in U.S. dollar terms. As of December 31, 2011, we maintained the majority of our cash balances in C$.
We currently do not engage in any currency hedging activities.
Commodity Price Risk
Our primary business activity is the development of the open pit, gold and silver, heap leach project on the Property. Decreases in the price of either of these metals from current levels has the potential to negatively impact our ability
to secure the significant additional financing required to develop the Project into an operating mine. Refer also to
Item 1A. Risk Factors above.
The Project is not as yet in production and we do not currently hold any commodity derivative positions.
Item 8.
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
Disclosure controls and procedures. Pursuant to Rule 13a-15(b) under the Exchange Act, GQM’s management has evaluated, under the supervision and with the participation of our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), as of the end of the period covered by this report. This evaluation included consideration of various processes and procedures to ensure that information that is required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Based upon this evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2011, as a result of the material weaknesses described below, our disclosure controls and procedures were not effective. Due to these material weaknesses in preparing our consolidated financial statements for the year ended December 31, 2011, we performed additional procedures to ensure that our consolidated financial statements were fairly presented in all material respects in accordance with U.S. generally accepted accounting principles.
Management’s report on internal control over financial reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act). Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011, using criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Even an effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error and circumvention or overriding of controls and therefore can provide only reasonable assurance with respect to reliable financial reporting. Furthermore, the effectiveness of an internal control system in future periods can change with conditions.
A material weakness is a deficiency, or 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.
During the preparation and audit of our consolidated financial statements for the year ended December 31, 2011, we identified the following material weaknesses existed as of December 31, 2011:
We did not maintain effective controls over the financial statements closing process or the timeliness of review and preparation of financial statements and other reporting documents and inconsistency of foreign exchange rate used in translation.
We did not maintain effective controls over the daily cash management and proper approval over the general and administrative and capital expenditures.
These control weaknesses resulted in re-filing the unaudited consolidated interim financial statements for each of the quarters ended June 30 and September 30, 2011. The annual report for the year ended December 31, 2010 because the Company did not file with the SEC the Definitive Proxy Statement on Schedule 14A deemed incorporated into the Annual Report of the Company on Form 10-K, on or before the deadline for incorporation of such documents into the Company’s Form 10-K. In addition, the material weaknesses also resulted in audit adjustments to the following accounts: mark-to-market expenses (gain) for derivative liabilities and derivative liabilities, accretion expenses and asset retirement obligations.
Accordingly, the Company’s management has determined these control deficiencies constitute material weaknesses.
Our independent registered public accounting firm, BDO Canada LLP, has issued reports on its assessment of our internal control over financial reporting and our consolidated financial statements that are included in Item 8 of this Annual Report on Form 10-K. The reports contain an explanatory paragraph regarding the Company’s ability to continue as a going concern and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011.
Remediation of Material Weaknesses. The Company is evaluating remediation plans to address material weaknesses as may be appropriate for the size of operations and staffing of the Company, and that can be implemented in a cost effective manner.
Changes in Internal Control. There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) during the fiscal year ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, with the exception that a new chief financial officer was appointed in May of 2011.
Item 9B.
Item 9B. Other Information
None.
PART III
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 29, 2012 and is incorporated herein by reference. If the definitive Proxy Statement cannot be filed on or before April 29, 2012, the issuer will instead file an amendment to this Form 10-K disclosing the information with respect to Items 10 through 14.
PART IV
Item 15.
Item 15. Exhibits
SIGNATURES
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.
GOLDEN QUEEN MINING CO. LTD.
/s/ H. Lutz Klingmann
/s/ G. Ross McDonald
By:
By:
H. Lutz Klingmann
G. Ross McDonald
President and Principal Executive Officer
Principal Financial Officer
Date: March 30, 2012
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.
Signature
Title Date
/s/ H. Lutz Klingmann
President, Principal Executive Officer, and Director March 30, 2012
H. Lutz Klingmann
/s/ Edward Thompson
Director March 30, 2012
Edward Thompson
/s/ Chester Shynkaryk
Director March 30, 2012
Chester Shynkaryk
/s/ Gordon Gutrath
Director March 30, 2012
Gordon Gutrath
/s/ Thomas Clay
Director March 30, 2012
Thomas Clay
Golden Queen Mining Co. Ltd.
(An Exploration Stage Company)
Consolidated Financial Statements
December 31, 2011
(US Dollars)
Tel: 604 688 5421
Fax: 604 688
www.bdo.ca
BDO Canada LLP
600 Cathedral Place
925 West Georgia Street
Vancouver BC V6C 3L2 Canada
Report of Independent Registered Public Accounting Firm
To the Shareholders
Golden Queen Mining Co. Ltd.
(An exploration stage company)
We have audited Golden Queen Mining Co. Ltd.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Golden Queen Mining Co. Ltd’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, appearing in its Annual Report under Item 9A, “Controls and Procedures”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit 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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.
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. Material weaknesses in internal control over financial reporting related to (i) Financial Statement Close Process due to lack of timely review and preparation of the financial statements and other reporting documents and inconsistency of foreign exchange rate used in translation and (ii) lack of segregation of duties in daily cash management and no proper approval of capital expenditures and general and administrative spending have been identified and described in management’s assessment. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2011 consolidated financial statements, and this report does not affect our report dated March 28, 2012 on those financial statements.
In our opinion, Golden Queen Mining Co. Ltd. did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria. We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.
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 ofindependent firms.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Golden Queen Mining Co. Ltd. as of December 31, 2011 and 2010 and the related consolidated statements of loss and comprehensive loss, stockholders’ equity (capital deficit), and cash flows for each of the three years in the period ended December 31, 2011. We have also audited the statements of loss and comprehensive loss, changes in shareholders’ equity (capital deficit), and cash flows for the period from inception (November 21, 1985) through December 31, 2011, except that we did not audit these financial statements for the period from inception (November 21, 1985) through May 31, 1996; those statements were audited by other auditors whose report dated July 12, 1996, expressed an unqualified opinion on those statements. Our opinion, insofar as it relates to the amounts for the period from inception (November 21, 1985) through May 31, 1996, is based solely on the report of the other auditors. Our report dated March 28, 2012, expressed an unqualified opinion with an explanatory paragraph disclosing substantial doubt about the Company's ability to continue as a going concern.
(signed) “BDO Canada LLP”
Chartered Accountants
Vancouver, Canada
March 28, 2012
Tel: 604 688 5421
Fax: 604 688 5132
www.bdo.ca
BDO Canada LLP
600 Cathedral Place
West Georgia Street
Vancouver BC V6C 3L2 Canada
Report of Independent Registered Public Accounting Firm
To the Shareholders
Golden Queen Mining Co. Ltd.
(An exploration stage company)
We have audited the accompanying consolidated balance sheets of Golden Queen Mining Co. Ltd. as of December 31, 2011 and 2010 and the related consolidated statements of loss and comprehensive loss, stockholders’ equity (capital deficit), and cash flows for each of the three years in the period ended December 31, 2011. We have also audited the statements of loss and comprehensive loss, changes in shareholders’ equity (capital deficit), and cash flows for the period from inception (November 21, 1985) through December 31, 2011, except that we did not audit these financial statements for the period from inception (November 21, 1985) through May 31, 1996; those statements were audited by other auditors whose report dated July 12, 1996, expressed an unqualified opinion on those statements. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. Our opinion, insofar as it relates to the amounts for the period from inception (November 21, 1985) through May 31, 1996, is based solely on the report of the other auditors.
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 also 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, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011 and for the period from inception (November 1, 1985) through December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred recurring operating losses and had a deficit accumulated during the exploration stage as of December 31, 2011. These conditions raise 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. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Golden Queen Mining Co. Ltd. and the Subsidiary’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 28, 2012 expressed an adverse opinion on the Company’s internal control over financial reporting.
(signed) “BDO Canada LLP”
Chartered Accountants
Vancouver, Canada
March 28, 2012
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 ofindependent firms.
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Consolidated Balance Sheets
(US dollars)
Basis of Presentation and Ability to Continue as a Going Concern (Note 1) Commitments and Contingencies (Notes 3, 5 and 7)
Approved by the Directors:
“H. Lutz Klingmann”
“Chester Shynkaryk”
H. Lutz Klingmann, Director
Chester Shynkaryk, Director
See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Consolidated Statements of Loss and Comprehensive Loss
(US dollars)
See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Consolidated Statements of Shareholders’ Equity (Capital Deficit)
(US dollars)
See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Consolidated Statements of Shareholders’ Equity (Capital Deficit)
(US dollars)
See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Consolidated Statements of Shareholders’ Equity (Capital Deficit)
(US dollars)
See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Consolidated Statements of Shareholders’ Equity Capital Deficit)
(US dollars)
See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Consolidated Statements of Cash Flows
(US dollars)
See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Consolidated Statements of Cash Flows (Continued)
(US dollars)
Supplementary Disclosures of Cash Flow Information (Note 9)
See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
Nature of Business Golden Queen Mining Co. Ltd. (“Golden Queen” or the “Company”) is engaged in acquiring and maintaining gold and silver mining properties for exploration, future development and production. The Company was formed on November 21, 1985. Since its inception, the Company has been in the exploration stage. Planned activities involve bringing to production a precious metals mine located in the Mojave Mining District, Kern County, California.
Principles of Consolidation These consolidated financial statements include the accounts of Golden Queen, a British Columbia corporation, and its wholly-owned subsidiary, Golden Queen Mining Co., Inc. (the “Subsidiary”), a US (State of California) corporation and, until its dissolution on August 27, 2007, the Karma Wegmann Corporation (see Note 3).
Generally Accepted Accounting Principles (“GAAP”) The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
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. At times, such investments may be in excess of FDIC insurance limits. To date, the Company has not experienced a loss or lack of access to its invested cash and cash equivalents. However, no assurance can be provided that access to the Company’s invested cash and cash equivalents will not be impacted by adverse economic conditions in the financial markets.
Property and Equipment Property and equipment are stated at the lower of cost or net realizable value less accumulated depreciation. Depreciation is provided by the straight-line method over the estimated service lives of the respective assets, which range from 3 to 30 years, as follows:
Mineral Properties Mineral properties includes the cost of advance minimum royalty payments, the cost of capitalized mineral property leases and mineral property acquisition costs. Expenditures for exploration and development on specific mineral properties with no proven reserves are expensed as incurred. Mineral property costs will be amortized against future revenues or charged to operations at the time the related mineral property is determined to have an impairment in value.
Carrying Value of Mineral Property Interests The cost of acquiring mineral property interests is capitalized. Capitalized acquisition costs are expensed in the period in which it is determined that the mineral property has no future economic value. Capitalized amounts may be written down if future cash flows, including potential sales proceeds related to the property, are estimated to be less than the carrying value of the property. The Company reviews the carrying value of mineral property interests periodically and whenever events or changes in circumstances indicate that the carrying value may not be recoverable, reductions in the carrying value of each property would be recorded to the extent the carrying value of the investment exceeds the property’s estimated fair value.
Exploration and Development Expenditures Exploration and development expenditures are expensed as incurred. Once a mineral reserve has been established, all future development costs will be capitalized and charged to operations on a unit-of-production method based on estimated recoverable reserves.
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
Valuation of Long-lived Assets Accounting standards require recognition of impairment of long-lived assets in the event the carrying value of such assets may not be recoverable. It requires that those long-lived assets to be disposed of by sale are to be measured at the lower of carrying amount or fair value less cost of sale whether reported in continuing operations or in discontinued operations. In accordance with the provisions of the accounting standard, the Company reviews the carrying value of its mineral properties on a regular basis. Estimated undiscounted future cash flow from the mineral properties is compared with the current carrying value in order to determine if an impairment exists. Reductions to the carrying value, if necessary, are recorded to the extent the net book value of the property exceeds the estimate of future discounted cash flow or liquidation value.
Foreign Currency Translation The Company’s functional and reporting currency, the US dollar is the primary economic currency. Assets and liabilities in foreign currencies are generally translated into US dollars at the exchange rates on the balance sheet date. Revenues and 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. The exchange rates prevailing at December 31, 2011, 2010 and 2009 were $1.02, $0.99 and $1.05 stated in Canadian dollars per one US dollar, respectively. The average rates of exchange during the years ended December 31, 2011, 2010 and 2009 were $0.99, $1.02 and $1.14, stated in Canadian dollars per one US dollar, respectively.
Loss Per Share The Company computes and discloses loss per share in accordance with ASC 260, “Earnings per Share”, which requires dual presentation of basic loss per share and diluted loss per share on the face of all income statements presented for all entities with complex capital structures. Basic loss per share is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur from common shares issuable through stock options and warrants. Since the Company’s stock options and warrants are anti-dilutive for all periods presented, there is no difference between basic and diluted loss per share as presented. A total of 1,800,000 (2010 - 5,550,000, 2009 - 3,850,000) common shares were issuable pursuant to such stock options at December 31, 2011.
Asset Retirement Obligations The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The obligation is measured initially at fair value using present value methodology, and the resulting costs capitalized into the carrying amount of the related asset. In subsequent periods, the liability will be adjusted for any changes in the amount or timing of the underlying future cash flows. Capitalized asset retirement costs are amortized on the same basis as the related asset and the discount accretion of the liability is included in determining the results of operations.
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 have been made by management in several areas including the recoverability of mineral properties, reclamation reserves and valuation of stock options. Actual results could differ from those estimates.
Fair Value of Financial Instruments The carrying amounts reported in the balance sheets for cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate fair values because of the immediate or short-term maturity of these financial instruments. The fair value of the reclamation financial assurance approximates the carrying value because the stated interest rates reflect recent market conditions or because the rates are variable in nature.
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
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 the future tax benefit is not more likely than not, the Company establishes a valuation allowance.
Stock Option Plan In 2009, the Company’s Board of Directors adopted a second stock option plan referred to as the 2008 stock option plan (the “2008 Plan”). Pursuant to the 2008 Plan, a further 7,200,000 shares were reserved for the issuance on exercise of options granted under the new plan. The exercise price of stock options granted under the 2008 Plan is determined by the Board, but shall not be less than the volume weighted average price for the five trading days immediately prior to the award date. All options granted under the 2008 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. All stock options granted under the 2008 Plan and outstanding as at December 31, 2011 expire at a date determined by the Company’s Board of Directors, not exceeding five years from the date of grant.
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 income. For warrant-based derivative financial instruments, the Company uses the Black-Scholes option pricing model to estimate fair value of the derivative instruments. To the extent that the initial fair values of the freestanding and/or bifurcated derivative instrument liabilities exceed the total proceeds received, an immediate charge to income is recognized, in order to initially record the derivative instrument liabilities at their fair value.
The classification of derivative instruments, including whether or not such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. If reclassification is required, the fair value of the derivative instrument, as of the determination date, is reclassified. Any previous charges or credits to income for changes in the fair value of the derivative instrument are not reversed. 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.
Recent Accounting Pronouncements
(i) In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05. Entities will not be required to comply with the presentation requirements in ASU No. 2011-05 that this ASU is deferring. For this reason, the transition guidance in paragraph 220-10- 65-2 is consistent with that for Update 2011-05. The amendment is effective for interim and annual periods commencing December 15, 2011. Early adoption is permitted. The adoption of the standard did not have any impact on the Company’s consolidated financial statements.
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
Recent Accounting Pronouncements - Continued
(ii) The FASB has issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends the FASB Accounting Standards CodificationTM (Codification) to allow an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. The amendment is effective for interim and annual periods commencing December 15, 2011. Early adoption is permitted. The adoption of the standard did not have any impact on the Company’s consolidated financial statements.
(iii) The FASB has issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (IASB) (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value”. The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with US GAAP and IFRS. The amendments to the Codification in this ASU are to be applied prospectively. The amendments are effective for interim and annual periods commencing December 15, 2011. Early application is not permitted. The adoption of the standard did not have any impact on the Company’s consolidated financial statements.
(iv) In April 2010, the FASB issued ASU 2010-13, Compensation - Stock Compensation (Topic 718). The objective of this update is to address the classification of an employee share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. It provides guidance on the classification of a share-based payment award as either equity or a liability. A share-based payment award that contains a condition that is not a market, performance or service condition is required to be classified as a liability. The amendment in this update is effective for the Company’s interim period and annual periods beginning on January 1, 2011. The amendments in this update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The adoption of the standard did not have any impact on the Company’s consolidated financial statements.
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
1. Basis of Presentation and Ability to Continue as a Going Concern
The Company has had no revenues from operations since inception and as at December 31, 2011 has a deficit of $66,682,638 (2010 - $63,451,997) accumulated during the exploration stage. Management plans to control current costs and does not anticipate requiring additional financing to fund Company activities over the next twelve months.
The Company released the results of a feasibility study in a news release on April 6, 2011. The Company has not as yet made a production decision. The Company is evaluating various financing options for the construction of the operating facility at Soledad and these may include:
a. An equity financing;
b. A combination of equity and debt; and
c. A merger with an established mining company.
The ability of the Company to obtain financing for its ongoing activities and thus maintain solvency, or to fund construction of the operating facility at Soledad, is dependent on equity market conditions, the market for precious metals, the willingness of other parties to lend the Company money or the ability to find a merger partner. While the Company has been successful at certain of these efforts in the past, there can be no assurance that future efforts will be successful. This raises substantial doubt about the Company’s ability to continue as a going concern.
These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
2. Property and Equipment
Property and equipment consists of:
3. Mineral Properties
The Company formerly capitalized amounts that were paid to acquire mineral property interests and for professional services rendered in the exploration, drilling, sampling, engineering and other related technical, managerial and professional services toward the evaluation and development of its Property. The Company’s investment in mineral properties in the amount of $32,155,725 (2010 - $30,951,041) was fully provided for by the year ended December 31, 2011.
In July 2006, the Company acquired through the purchase of the Karma Wegmann Corporation a tract of land contiguous to the Property, in consideration of $875,000 paid to the vendors. The mineral properties owned by Karma Wegmann Corporation were transferred to the Company and management determined that a write-down of $875,000 was necessary in 2006. The Karma Wegmann Corporation was wound-up on August 27, 2007.
The Company is required to pay a royalty of 1% of gross smelter returns to the original owners of the Karma Wegmann Corporation for a period of up to 60 years, not to exceed $60,000,000, upon commencement of commercial production from the Property formerly owned by Karma Wegmann Corporation. As of December 31, 2011, the Company has not incurred any royalty as the Property has not been in production.
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
4. Income Taxes
The tax effects of the temporary differences that give rise to the Company's deferred tax assets and liabilities are as follows:
The provision for income taxes differ from the amount established using the statutory income tax rate as follows:
The Company’s deferred tax assets include approximately $8,000 (2010 - $10,000) related to deductions for share issue costs in excess of amounts deducted for financial reporting purposes. If and when the valuation allowance related to these amounts is reversed, the Company will recognize this benefit as an adjustment to share capital as opposed to income tax expense in the consolidated statements of loss.
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. As management of the Company does not currently believe that it is more likely than not that the Company will receive the benefit of this asset, a valuation allowance equal to the deferred tax assets has been established at both December 31, 2011 and 2010.
As at December 31, 2011, the Company had net operating loss carry-forwards available to reduce taxable income in future years as follows:
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
4. Income Taxes - Continued
These consolidated financial statements do not reflect the potential effect on future income taxes of the application of these losses.
The FASB’s guidance for “Accounting for Uncertainty in Income Taxes” clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has evaluated its tax positions for the years ended December 31, 2011 and 2010 and determined that it has no uncertain tax positions requiring financial statement recognition.
Because of the Company’s recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a 100% valuation allowance against its net deferred tax assets due to the uncertainty surrounding the realization of such assets.
5. Share capital
Common shares - 2011
In January 2011, 100,000 stock options were exercised and the Company issued 100,000 common shares at C$0.77 per share for proceeds of $77,426 (C$77,000).
In March 2011, 50,000 stock options were exercised and the Company issued 50,000 common shares at C$0.77 per share for proceeds of $39,390 (C$38,500).
In April 2011, 1,050,000 stock options were exercised and the Company issued 1,050,000 common shares at C$0.77 per share for proceeds of $842,463 (C$808,500).
In August 2011, 50,000 stock options were exercised and the Company issued 50,000 common shares at C$0.26 per share for proceeds of $13,280 (C$13,000).
In November 2011, 2,500,000 warrants were exercised and the Company issued 1,250,000 common shares at C$1.75 per share and 1,250,000 common shares at C$2.00 per share for total proceeds of $4,594,237 (C$4,687,500).
Common shares - 2010
In January 2010, 700,000 stock options were exercised and the Company issued 700,000 common shares at C$0.35 per share for proceeds of $234,113 (C$245,000).
In April 2010, the Company granted 50,000 stock options to consultants, which are exercisable at C$1.24 per share and expire on April 18, 2015.
On June 1, 2010, the Company issued 5,000,000 units at C$1.60 per unit for gross proceeds of $7,634,316 (C$8,000,000) and incurred professional fees of $45,765 as share issuance costs. Each unit consisted of one common share, one-quarter of one Class A purchase warrant and one-quarter of one Class B purchase warrant. Each whole Class A warrant is exercisable to acquire one additional common share of the Company at a price of C$1.75. Each Class B warrant is exercisable to acquire one additional common share of the Company at a price of C$2.00. Both Class A and Class B warrants expire December 1, 2011. The aggregate fair value of the Class A and Class B purchase warrants was $1,726,518, which was recorded in derivative liability and the Company allocated the remaining proceeds of $5,907,798 to the common shares. The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions:
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
5. Share capital - Continued
Common shares - 2010 - Continued
In September 2010, 50,000 stock options were exercised and the Company issued 50,000 common shares at C$0.26 per share for proceeds of $12,487 (C$13,000).
In October 2010, 100,000 stock options were exercised and the Company issued 100,000 common shares at C$0.26 per share for proceeds of $25,565 (C$26,000).
In connection with the guidance of ASC 815-40-15, as the options and warrants are exercisable in a currency other than the functional currency of the Company they do not meet the “fixed-for-fixed” criteria of the guidance. As a result, the Company was required to separately account for the Class A and Class B warrants issued in connection with the private placement noted above as a derivative instrument liability.
Common shares - 2009
In July 2009, the company issued 2,337,500 common shares at C$0.65 per share for proceeds of $1,396,648 (C$1,519,375).
During the three-month period from September to December 2009, 400,000 stock options were exercised and the Company issued 400,000 common shares at C$0.35 per share for proceeds of $131,085 (C$140,000).
Stock options
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 remeasured on each balance sheet date using the Black-Scholes option pricing model.
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
5. Share capital - Continued
Stock options continued
The following is a summary of stock option activity during the years ended December 31, 2011 and 2010:
The stock-based compensation expense recognized on the grant date was $Nil (2010 - $46,275; 2009 - $357,989). Subsequent to the grant date, such options are revalued to fair value at each period-end (Note 10). The fair value of stock options granted as above is calculated using the following weighted average assumptions:
As at December 31, 2011, the aggregate intrinsic value of the outstanding exercisable options was approximately $4,500,000 (2010 - $7,124,000; 2009 - $1,922,000). The total intrinsic value of 1,250,000 options exercised during 2011 was approximately $2,837,000 (2010 -$438,000; 2009 - $232,000).
There is no unamortized compensation expense as at December 31, 2011, 2010, and 2009, as all the outstanding options vested at the grant date.
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
5. Share capital - Continued
Stock options - Continued
The following table summarizes information about stock options outstanding and exercisable at December 31, 2011:
Warrants
The following is a summary of warrants activity during the years ended December 31, 2011 and 2010:
As at December 31, 2011, the aggregate intrinsic value of the outstanding warrants was approximately $Nil (2010 - $2,325,000; 2009 - $Nil). The total intrinsic value of 2,500,000 warrants that were exercised during 2011 was approximately $1,635,000 (2010 - $Nil; 2009 - $Nil).
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
6. Asset Retirement Obligations
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 (see Note 3).
As at December 31, 2011, the Company had provided reclamation financial assurance to the Bureau of Land Management, the State and Kern County totaling $296,180 (2010 - $286,653). This deposit earns interest at 0.1% per annum and is not available for working capital purposes.
The Company’s liability for reclamation of the property is estimated each year by an independent civil engineer. This estimate, once approved by state and county authorities, forms the basis for a cash deposit of reclamation financial assurance. In the absence of a long-term mining permit this estimate is the current obligation of the Company to clean up or reclaim its lands.
The Company estimated its asset retirement obligations based on its understanding of the requirements to reclaim and clean-up its Property. The Company estimated that total payments of approximately $415,000 over three years commencing in 2017 would be required to complete the reclamation obligations. In determining the estimated initial present value of the obligation, a discount factor of 9.0% (the credit-adjusted risk-free rate), and an inflation rate of 3.0% were used. The asset portion of the retirement obligations was written off in 2004. The following is a summary of asset retirement obligations:
7. Commitments and Contingencies
The Company has acquired a number of mineral properties outright and has acquired exclusive rights to explore, develop and mine the Property under various agreements with landowners.
The Company is required to make advance minimum royalty payments related to its mineral properties. The total advance minimum royalty in 2011 was $245,970 of which $13,723 remains unpaid (2010 - $185,276 of which $17,108 was unpaid, 2009 - $174,137) and the total advance minimum royalty owing for 2012 is expected to be approximately $188,000.
A mining lease agreement with a group of landowners expired in 2004. Negotiations with the group were completed and the agreements extended to 2041. Under the amended agreements, the Company paid advance minimum royalties of $7,500 per year for eight years for a total amount of $60,000 in August 2011 to bring the advance minimum royalties owing current to March 14, 2012.
The Company has agreed to issue 100,000 common shares as a finder’s fee upon commencement of commercial production on the Property in connection with certain property acquisitions. As of December 31, 2011, commercial production has not commenced and no shares have been issued.
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
7. Commitments and Contingencies - Continued
In 2004, the Company entered into an agreement with the President of the Company to issue 300,000 bonus shares upon completion of certain milestones. Upon receipt by the Company of a bankable feasibility study and the decision to place the Property into commercial production, a bonus of 150,000 common shares would be issued. Upon commencement of commercial production on the Property, a bonus of 150,000 common shares would be issued. In May 2010, the Company entered into an amendment to the agreement whereby the 300,000 bonus shares would alternatively be issuable upon a change of control transaction, or upon a sale of all or substantially all of the Company’s assets, having a value at or above C$1.00 per share of the Company, with a further 300,000 bonus shares being issuable in the event the change of control transaction or asset sale occurred at a value at or above C$1.50 per share. This agreement is for a term of three years and shall automatically renew for two years. As at December 31, 2011, none of the milestones had been reached and no accrual was made in connection with these arrangements.
8. Related Party Transactions
Except as noted elsewhere in these consolidated financial statements, related party transactions are disclosed as follows:
For the year ended December 31, 2011, the Company paid $137,748 (2010 - $141,293, 2009 - $116,776) to Mr. H. L. Klingmann for services as President of the Company, paid $27,295 (2010 - $17,769, 2009 - $18,620) to Mr. Chester Shynkaryk for his consulting services to the Company, paid $20,218 (2010 - $Nil, 2009 - $Nil), of which $2,831 is payable (2010 - $Nil, 2009 - $Nil), to Mr. Ross McDonald for his services as CFO.
For the year ended December 31, 2011, the Company paid $2,022 (2010 - $1,974, 2009 - $1,752) to each of the four directors and $2,000 (2010 - $2,000, 2009 - $2,000) to a director as director’s fees.
All of the above transactions and balances are in the normal course of operations and are measured at the exchange amount.
9. Supplementary Disclosures of Cash Flow Information
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
10. Derivative Liability
As at January 1, 2009, the date on which the guidance of ASC 815-40-15 became effective for the Company, the Company’s stock options and 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 stock options and 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.
During the year ended December 31, 2011, a total of 1,250,000 stock options treated as derivative liabilities were exercised. Upon exercise of these options, the portion of the derivative liability that pertained to these options was remeasured and recorded at its fair value of $2,993,685, subsequent to which it was reclassified to additional paid-in capital. The Company measured the fair value of the derivative liability pertaining to the options exercised using the Black-Scholes pricing model with the following range of assumptions: expected volatility - 43.70% - 78.82%, expected life - 0.01 - 2.47 years, risk-free discount rate - 1.04% - 1.88%, dividend yield - 0.00% .
During the year ended December 31, 2010, a total of 850,000 stock options treated as derivative liabilities were exercised. Upon exercise of these options, the portion of the derivative liability that pertained to these options was remeasured and recorded at its fair value of $654,033. The Company measured the fair value of the derivative liability pertaining to the options exercised using the Black-Scholes pricing model with the following range of assumptions: expected volatility - 33% - 116%, expected life - 0.01 - 3.30 years, risk-free discount rate - 1.17% - 1.52%, dividend yield - 0.00% .
During the year ended December 31, 2009, a total of 400,000 stock options treated as a derivative liability were exercised. Upon exercise of these options, the portion of the derivative liability that pertained to these options was re-measured and recorded at its fair value of $156,834, subsequent to which it was reclassified to additional paid-in capital. The Company measured the fair value of the derivative liability pertaining to the options exercised using the Black-Scholes pricing model with the following range of assumptions: expected volatility - 100.45% - 108.23%, expected life - 0.28 - 0.44 years, risk-free discount rate - 1.23% - 1.52%, dividend yield - 0.00% .
As of December 31, 2011 and 2010, the Company had re-measured the remaining outstanding options and determined the fair value of the derivative liability to be $4,552,502 and $7,324,429, respectively, using the Black-Scholes option pricing model with the following assumptions:
GOLDEN QUEEN MINING CO. LTD.
(an exploration stage company)
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
(US dollars)
10. Derivative Liability - Continued
During the year ended December 31, 2011, a total of 2,500,000 warrants treated as derivative liabilities were exercised. Upon exercise of these warrants the portion of the derivative liability that pertained to these warrants was re-measured and recorded at its fair value of $1,629,668, subsequent to which it was reclassified to additional paid-in capital. The Company measured the fair value of the derivative liability that pertained to the warrants using the Black-Scholes pricing model with the following range of assumptions: expected volatility - 167.710%, expected life - 0.003 years, risk-free discount rate - 1.01%, dividend yield - 0.00% .
As of December 31, 2011 and 2010, the Company re-measured outstanding warrants and determined the fair value of the derivative liability to be $Nil (2010 - $3,065,339, 2009 - $Nil) using the Black-Scholes option pricing model with the following assumptions:
As of December 31, 2011 and 2010, the changes of derivative liability for options and warrants are as follows: