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Item 2. Management's Discussion and Analysis or Plan of Operations
The
following discussion of the operating results and financial position of Golden
Queen Mining Co. Ltd. (the "Company") is as at November 17, 2010
and should be read in conjunction with the consolidated financial statements
of the Company for the quarter ended September 30, 2010 and the notes
thereto.
The
information in this Management Discussion and Analysis is prepared in
accordance with U.S. generally accepted accounting principles and all amounts
herein are in US$ unless otherwise noted.
The
Soledad Mountain Project
The
Company is proposing to develop a gold-silver, open pit, heap leach operation
on its Soledad Mountain property ("Property"), located just outside
the town of Mojave in Kern County in southern California. Every element of
the Soledad Mountain Project ("Project") has been rethought and reengineered
in the past five years in an effort to find sound technical and
cost-effective solutions that will ensure a viable mining operation at
foreseeable gold and silver prices. The review has been supported and
complimented by a substantial amount of work done by independent engineers
and contractors. This phase of the technical work was completed toward the
end of 2008.
Permitting
Update
A detailed
review of approvals and permits required for the Project is provided in the
Company's latest Form 10-K filing with the SEC. The following is therefore
only a note on the supplemental Environmental Impact Report
("SEIR"), which has been prepared for the Project.
The
Company completed an Application for a revised Surface Mining and Reclamation
Plan in April 2007. The Kern County Planning Department determined that
changes proposed for the Project since the Conditional Use Permits were
issued in 1997 constituted new information that required evaluation of
potential impacts in a Supplemental Environmental Impact Report ("SEIR").
The draft SEIR was finally completed and distributed in January 2010. The
Kern County Planning Commission formally considered the Project at its
regularly scheduled meeting in Bakersfield on April 8. At the meeting, the
Commission, consisting of a panel of three commissioners, unanimously
approved the Project. Two appeals were subsequently filed against the
Commission's decision and the Project was scheduled to be reconsidered before
the Kern County Board of Supervisors on May
25. Both appeals were withdrawn before the day of the meeting and the
decision made by the Planning Commission therefore became final.
The
Lahontan Regional Water Quality Control Board (the "Board")
unanimously approved Waste Discharge Requirements and a Monitoring and Reporting
Program (the "WDRs") for the Soledad Mountain Project on July 14.
The Board recommended adopting an order approving the WDRs, and the order was
subsequently signed by the Executive Officer of the Board and is currently in
effect. The order approving the WDRs is a critical authorization for the
construction and operation of, and establishes the discharge and monitoring
standards for, the heap leach pads, rock stockpiles and other activities that
have the potential to affect surface and ground waters.
The
Company also requires Authority to Construct permits to begin mining and
processing operations on its Property. The Company's consulting engineers are
completing applications for these permits and it is expected that these will
be submitted to Eastern Kern Air Pollution Control District ("EKAPCD) in
early December 2010. ECAPCD can now prepare and issue Authority to Construct
permits as the SEIR has been certified. The Authority to Construct permits are converted to a Permit To Operate after construction
has been completed and subject to inspection by the ECAPCD.
It is
important to note that the Bureau of Land Management (the "BLM")
has confirmed that its Record of Decision approving the Plan of Operations
under NEPA in November 1997 remains valid and that no additional reviews or
approvals are required from the BLM before GQM can proceed with the Project.
Results of
Operations
Following
are the results of operations for the three month period and nine month
period ended September 30, 2010, and the corresponding periods ended September
30, 2009.
The
Company had no revenue from operations.
During the
quarter, the Company incurred general and administrative expenses of $706,455
(2009 - $431,324). For the nine month period ended September 30, 2010 the
Company incurred general and administrative expenses of $22,647,764 (2009 -
$1,622,016).
Costs were
significantly higher for the quarter and nine month period ended September
30, 2010 when compared with the same period in 2009, due to the following
non-recurring costs:
� Legal fees were incurred in support of ongoing
efforts to secure permits for the Project, and
� Consulting engineering fees were
higher due to the significant amount of detailed engineering completed for
Project facilities. The detailed engineering allows contractors to provide
cost estimates for construction of the facilities.
Interest
income of $14,767 (2009 - $7,061) was higher by $7,706 as there was more cash
on deposit. Interest rates remained low during the quarter. There was no
interest expense during the quarter.
The
Company incurred a net loss of $3,125,127 (or $0.03 per share) during the
quarter and $5,668,654 (or $0.06 per share) during the nine month period
ended September 30, 2010, as compared to a net loss of $1,057,149 (or $0.01
per share) during the third quarter of 2009 and $3,275,382 during the nine
month period ended September 30, 2009 (or $0.04 per share).
Summary of Quarterly Results
Results for the eight most
recent quarters are set out in the table below.
Results for the quarter Sept. 30, 2010 June 30, 2010 March 31, 2010 Dec. 31, 2009
ended
on:
Item
$
$
$
$
Revenue
Nil
Nil
Nil
Nil
Net loss for the quarter
3,125,127
2,406,367
326,305
1,239,360
Net loss per share
0.03
0.03
0.00
0.02
Results for the quarter Sept. 30, 2009 June 30, 2009 March 31, 2009 Dec. 31, 2008
ended
on:
Item
$
$
$
$
Revenue
Nil
Nil
Nil
Nil
Net loss for the quarter
1,057,149
1,230,829
987,404
1,223,439
Net loss per share
0.01
0.01
0.01
0.01
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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 grants
stock options or makes adjustments on quarterly or annual financial
statements.
Reclamation Financial Assurance and Asset Retirement Obligation
The
Company provided reclamation financial assurance in the form of an
Irrevocable Payment Bond Certificate with Union Bank of California in the
amount of $286,653 on October 21, 2009 for 2010. The financial assurance is
reassessed annually and the estimate for reclamation of historical
disturbances on the property is $283,809 for 2011.
The asset
retirement obligation accrual is estimated at $189,550 and this is shown as a
liability on the consolidated balance sheet. The actual obligation could
differ materially from these estimates.
Advance
Minimum Royalties
Advance minimum
royalties of $22,167 were paid to landholders in the third quarter of 2010.
A mining
lease agreement with one group of landholders expired in 2004 and the Company
has prepared a new mining lease agreement for discussion with the group of
landholders.
Mining
lease agreements with groups of landholders expired in June and July of 2010
and discussions are under way with these groups of landholders for an
extension of the agreements.
Off-balance
Sheet Arrangements
The
Company has no off-balance sheet arrangements.
Recently
Issued Accounting Standards
(i) In January 2010, the FASB issued ASU No. 2010-06,
Improving Disclosures about Fair Value Measurements, which requires
additional disclosures about the amounts of and reasons for significant
transfers in and out of Level 1 and Level 2 fair value measurements. This
standard also clarifies existing disclosure requirements related to the level
of disaggregation of fair value measurements for each class of assets and
liabilities and disclosures about inputs and valuation techniques used to
measure fair value for both recurring and non-recurring Level 2 and Level 3
measurements. Since this new accounting standard only required additional
disclosure, the adoption of the standard did not impact the Company's
consolidated financial statements. This standard will require additional
disclosure and require the Company to present disaggregated information about
activity in Level 3 fair value measurements on a gross basis, rather than one
net amount.
(ii) In
February 2010, FASB issued Accounting Standards Update ("ASU")
2010-09, "Subsequent Event (Topic 855) Amendments to Certain Recognition
and Disclosure Requirements". ASU 2010-09 removes the requirement for an
SEC filer to disclose a date through which subsequent events have been
evaluated in both issued and revised financial statements. Revised financial
statements include financial statements revised as a result of either
correction of an error or retrospective application of GAAP. All of the
amendments in ASU 2010-09 are effective upon issuance of the final ASU,
except for the use of the issued date for conduit debt obligors. That
amendment is effective for interim or annual periods ending after June 15,
2010. The adoption of this standard did not have a material effect on the
Company's consolidated financial statements.
(iii) In
April 2010, the FASB issued Accounting Standards Update 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 amendments in this update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. 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 cumulative-effect adjustment should be presented
separately. Earlier application is permitted. The Company is currently
evaluating the impact of this update on the financial statements.
(iv) In
June 2009, new guidance relating to the accounting for transfers of financial
assets was issued. The new guidance, which was issued as, Accounting for
Transfers of Financial Assets, has not yet been adopted into Codification.
The new standard eliminates the concept of a "qualifying special-purpose
entity," changes the requirements for derecognizing financial assets,
and requires additional disclosures in order to enhance information reported
to users of financial statements by providing greater transparency about
transfers of financial assets, including securitization transactions, and an
entity's continuing involvement in and exposure to the risks related to
transferred financial assets. The new guidance is effective for fiscal years
beginning after November 15, 2009. The adoption of the standard did not have
impact on the Company's financial statements.
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
For the
three and nine months ended September 30, 2010, $ 32,500 and $102,600 (2009 -
$30,900 and $87,300) was paid to Mr. H. L. Klingmann
for services as President of the Company and $4,300 and $13,000 (2009 - $4,100
and $12,000) was paid to Mr. Chester Shynkaryk for
consulting services to the Company.
The
Company amended a consulting services agreement originally entered into in
2004 with Mr. H. Lutz Klingmann, the President of
the Company, in May of 2010. Under the original agreement, 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 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 September 30, 2010, the milestones had not been
reached and no accrual was made in connection with these arrangements.
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 Gammon Gold Inc. on
June 1, 2010, whereby Gammon Gold 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 consists of one common share, one quarter of one Class A Warrant,
and one quarter of one Class B Warrant. Each Class A Warrant entitles Gammon
Gold 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 entitles Gammon Gold 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 has been recorded as derivative
liability and the Company allocated the remaining proceeds of $5,907,798 to
the common shares.
Subject to
certain conditions, Gammon Gold Inc. was granted the right to participate in
future financings to maintain its equity position in the Company.
Liquidity
and Capital Resources
The
Company held $7,808,244 in cash and cash equivalents on September 30, 2010.
Cash used
in Operating Activities
During the
period ended September 30, 2010, the Company incurred significant expenditures
in legal fees in connection with permit approvals, and for detailed
engineering fees in connection with Project facilities.
Cash from
Financing Activities:
Cash was
received from financing activities during the nine months ended September 30,
2010 and for the comparable period in 2009 as follows:
� $246,600 pursuant to the exercise of options on
750,000 shares @ C$0.35 and 50,000 shares @ $0.26 ($16,252 pursuant to the
exercise of options on 100,000 shares @ C$0.35) and
� $7,634,316
pursuant to a private placement of units to Gammon Gold Inc. ($1,439,368
pursuant to a private placement of 2,337,500 shares to five placees).
Cash used
in Investing Activities:
The
Company did not incur expenditures in investing activities during the three
and nine months ended September 30, 2010 and 2009.
Working Capital
The
Company has no long-term debt.
Management
does not expect that additional cash will be required beyond cash currently
on hand for ongoing work on permits for the Project, for paying advance
minimum royalties, for additional property purchases, for detailed
engineering of facilities for the Project and ongoing work on site, and for
general corporate purposes to the end of 2011. 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
Dec. 31, 88,378,383
2009
Shares issued pursuant to the
exercise of 700,000
stock options
Gammon Gold Inc. private
placement
5,000,000
Shares issued and outstanding on
June 30, 94,078,383
2010
Shares issued pursuant to the
exercise of
50,000
stock options
Shares issued and outstanding on
September 94,128,383
Exercise Price Expiry Date
30, 2010
Gammon Gold Inc. warrants
2,500,000 C1.75 & C2.00 1/12/2011
Director and employee stock
options
1,200,000
C$0.77
20/04/11
Director and employee stock
options
1,950,000 C$0.26 & C1.24
28/01/14 &
18/04/15
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 September 30,
2010
100,478,383
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The company's
authorized share capital is 150,000,000 common shares with no par value.
Outlook
The
Company plans to put the Project into production as an open pit heap leach
operation and to construct facilities to process ore at a rate of 4,500,000 tonnes (5,000,000 tons) per year and these have been
reduced from the earlier planned mining rates. Projected life of the open pit
heap leach operation has increased from 7 years to 12 years. The Company also
plans to produce and sell aggregate for up to 30 years. These plans are
subject to management making a production decision.
Management
is evaluating financing options with a view to making a production decision
as soon as all permits have been secured.
If 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. Capital costs for mining projects are increasing rapidly and
the Company is currently re-estimating these costs. The Company believes that
financing for the Project can be secured if gold and silver prices remain at
or above $600.00/oz and $12.50/oz respectively and these are the prices used
for the feasibility study base case cash flow projections that were released
on December 14, 2007. Gold and silver prices averaged $972.35/oz and
$14.67/oz in 2009 and closing prices on November 17, 2010 were $1,213.00/oz
and $17.95/oz respectively.
It is not
expected that the Company will hedge any of its gold or silver production.
The
ability of the Company to put the Project into production is subject to
numerous risks, certain of which are disclosed in the Company's latest Form
10-K filing with the SEC and amendments thereto. Readers should evaluate the
Company's prospects in light of these and other risk factors.
Special
Meeting of Shareholders
The
Company held a special meeting of shareholders on September 1, 2010 at which the
Company adopted new corporate Articles and increased its authorized capital
to 150,000,000 common shares.
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 by the Company to implement a mining plan
and develop a mine, at which point the costs subsequently incurred to develop
the mine on the property prior 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.
Exploration stage mineral interests represent interests in properties that
are believed to potentially contain (i) other
mineralized material such as measured, indicated or inferred resources with
insufficient drill hole spacing to qualify as proven and probable mineral
reserves and (ii) other mine-related or green field exploration potential
that are not an immediate part of measured or indicated resources. The
Company's mineral rights are generally enforceable regardless of whether or
not proven and probable reserves have been established. The Company has the
ability and intent to renew mineral rights where the existing term is not
sufficient to recover undeveloped mineral interests.
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. A write-down of $167,898 in mineral property
interests was recorded for the year ended December 31, 2009. There was no
write-down in mineral property interests recorded for the nine months ended
September 30, 2010.
Asset
Retirement Obligations
In
accordance with the Accounting for Asset Retirement Obligations, the fair
value of an asset retirement cost, and corresponding liability, should be
recorded as part of the cost of the related long-lived asset and subsequently
allocated to expense using a systematic and rational method. The Company has
recorded an asset retirement obligation to reflect its legal obligations
related to future abandonment of its mineral property using estimated
expected cash flow associated with the obligation and discounting the amount
using a credit-adjusted, risk-free interest rate. At least annually, the
Company reassesses the obligation to determine whether or not a change in any
estimated obligation is necessary. The asset retirement obligation recorded
as a liability on the Interim Consolidated Balance Sheet is $189,550 as at
September 30, 2010 (2009 - $172,962).
Derivative Liabilities
Our stock
options are denominated in a currency other than our functional 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 in Item 7 of the
Company's latest Form 10-K/A filing with the SEC.
Qualified
Person and Caution With Respect to Forward-looking Statements
Mr. H.
Lutz Klingmann, P.Eng., the president of
the Company, is a qualified person for the purposes of National Instrument
43-101 and has reviewed and approved the technical information in this
report.
This
report contains certain forward-looking statements, which relate to the
intent, belief and current expectations of the Company's management. These
forward-looking statements are based upon numerous assumptions that involve
risks and uncertainties and other factors that may cause actual results to
differ materially from those indicated by such forward-looking statements.
Such factors include among other things the receipt of required approvals and
permits, the costs of and availability of sufficient capital to fund the
projects to be undertaken by the Company, commodity prices and other factors.
Readers are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date the statements were made.
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