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Annual Report
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
The
following discussion of the operating results and financial position of Golden
Queen Mining Co. Ltd. (the "Company") is dated March 31, 2010 and
should be read in conjunction with the audited consolidated financial
statements of the Company for the year ended December 31, 2009 and the notes
thereto.
All
amounts herein are in US$ unless otherwise noted.
Results of
Operations
Following
are the results of operations for the year ended December 31, 2009.
The
Company had no revenue from operations.
The
Company incurred general and administrative expenses of $2,246,953 for the year
ended December 31, 2009 (2008 - $2,817,429).
The
following significant costs were incurred in the general and administrative
expenses during the year:
� $174,196 for advance minimum royalties owing to
landholders (2008 - $735,333 ). The advance minimum royalties owing to
landholders from the end of the three year moratorium period from 2000 to
2003 were brought current in 2008 as more fully described in the section
titled Property Interests Are In Good Standing above;
� $362,050 for the Air Quality and Health Risk
Assessment and for ongoing maintenance of and data recovery from the
meteorological station (2008 - $109,007 ). The increase was primarily due to
the fact that the Planning Department requested that the Air Quality
Assessment and Health Risk Assessment for the Project be redone in February
2009 to provide current information for the SEIR. This study was completed
and delivered to the Planning Department and EKAPCD on July 21, 2009. The
study was prepared by consulting engineers;
� $15,355 for a study to confirm that there are no
desert tortoise found on the property (2008 - $0);
� $35,354 for quarterly water sampling and analysis
(2008 - $37,837);
� $172,114 for detailed engineering for the Phase 1
heap leach pad, for the associated site drainage plan and general support for
the approvals and permitting process (2008 - $428,012 ). The Company is
proceeding with detailed engineering designs of the key facilities for
construction as described in more detail in the section titled Outlook. The foregoing
costs were incurred for this particular design. Design costs may recur if
changes are made to the heap leach pad, however the extent of any recurring
costs is not known at this time;
� $60,194 for traffic studies and
detailed design for the new access road for the Project (2008 - $0 ). The Company's consulting engineers completed two traffic
studies, which were required for the SEIR in 2009;
� $41,869 for
the detailed design of the workshop and warehouse for the Project (2008 - $0
). The Company is proceeding with detailed engineering designs of the key
facilities for construction as described in more detail in the section titled
Outlook. Significant costs were therefore incurred for this particular
design. Design costs are non-recurring;
� $202,883 for
ongoing work on the occurrence of arsenic in groundwater, a review of the use
of cyanide in heap leaching, a study of the occurrence of mercury and capture
of mercury and general support required for the approvals and permitting
process (2008 - $278,914 ). The Company's consulting engineers completed work
on the studies outlined above at a reduced level of activity in 2009 and then
continued to communicate and liaise with the Regional Board leading up to the
regular meeting held on July 14, 2010 at which the Waste Discharge
Requirements and a Monitoring and Reporting Program for the Project were
approved. Accordingly, the Company additional costs were incurred in 2010 to
complete the consulting services;
� $45,024 for
ongoing work done by a registered surveyor on the status of mining claims
(2008 - $70,958);
� $17,953 to
an independent engineer for ongoing site support (2008 - $21,710);
� $15,425 to a
local contractor for ongoing cleanup and weekly safety checks (2008 -
$266,034 ). The major cleanup on site was completed in 2008 and work
continued on a reduced scale in 2009.
� $167,898 for
property purchases (2008 - $133,641 ), consisting of land adjacent to the
Project;
� $20,440 to
the Bureau of Land Management for annual assessment work for 2009 (2008 -
19,800);
� $26,195 for
property taxes for 2009 - 2010 (2008 -2009 - $24,885) ;
� $31,412 for
insurance for 2009-2010 (2008-2009 - $31,431);
� $190,201 for
legal fees incurred for ongoing work on the S EIR (2008 - $10,000 ). During
the fiscal year ended 2009, the Company engaged legal counsel to work with
the Planning Department on the preparation of the SEIR. We expect that
additional legal costs for the SEIR will be incurred in 2010;
� $85,448 for
general corporate legal fees and work on agreements with landholders (2008 -
$77,089);
� $20,051 to
the Planning Department for work on the SEIR (2008 - $200,392 ). The Company
provided advances of $55,000 in February 2008 and $123,800 in September 2008
to the Planning Department for work on the SEIR;
� $90,000 for
preparing promotional material and seeking public support for the Project
(2008 - $56,250);
� C$180,184
for ongoing mine design and drafting support (2008 - C$124,102);
� C$19,798 to
confirm the availability of power for the Project with Southern California
Edison and for the design of a sub-station for the Project (2008
- C$0);
� C$26,787 for
stock exchange and filing fees (2008 - C$18,135);
� C$55,656 for
general corporate legal fees (2008 - $43,452)
� C$108,019 for accounting and audit fees and the
preparation of tax returns (2008 - C$77,808 ), in part due to costs
associated with consultants engaged to provide book-keeping services and to
prepare financial statements;
For the year ended December 31, 2009, the Company has also
recorded a change in fair value of derivative liability of $2,095,300. This
item is a non-cash item and was recorded in accordance with the new
accounting pronouncement of ASC 850-40-15. This guidance requires entities to
evaluate whether an equity-linked financial instrument (or embedded feature)
is indexed to its own stock by assessing the instrument's contingent exercise
provisions and settlement provisions. Instruments not indexed to their own
stock fail to meet the scope exception of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, paragraph 11(a), now included in the FASB Codification at ASC
815-10-15-74(a), and should be classified as a liability and
marked-to-market. ASC 815-40-15 was effective for fiscal years beginning
after December 15, 2008 and thus, upon its adoption on January 1, 2009, was
applied to the Company's outstanding stock options.
Interest income of $10,070 (2008 - $107,956) was
significantly lower by $97,886 as there was less cash on deposit during the
year and interest rate has been significantly lower compared to prior year.
There was no interest expense during the year.
The Company incurred a net loss of $ 4,514,742 (or $0.05
loss per share) for the year as compared to a net loss of $3,996,777 (or
$0.05 per share) for 2008 for a difference in the net loss of $517,965.
The following significant and non-recurring costs were
incurred in 2008 and this therefore contributed to the difference in net loss
between 2009 and 2008:
� Property
purchases of $133,641;
� Costs of $266,034 incurred on a major cleanup program on
site;
� Difference in the advance minimum royalties paid of
$561,137;
� Advances of $178,800 paid to the Planning Department for
work by consulting engineers on the SEIR;
� A amount of $163,000 was paid for a study on the right to
extract groundwater and other issues relating to the availability of water to
support the Project and
� A production water well was drilled at a cost of
$141,000.
Summary of Quarterly Results
Results for the eight most recent quarters are set out
in the table below.
Results for
the Dec. 31,
2009 Sept. 30, 2009 June 30, 2009 March 31, 2009
quarter
ending on:
Item
$
$
$
$
Revenue
Nil
Nil
Nil
Nil
Net loss for the
1,239,360
1,057,149
1,230,829
987,404
quarter
Net loss per share
0.02
0.01
0.01
0.01
Results for
the Dec. 31,
2008 Sept. 30, 2008 June 30, 2008 March 31, 2008
quarter
ending on:
Item
$
$
$
$
Revenue
Nil
Nil
Nil
Nil
Net loss for the
1,223,439
923,380
1,224,663 625,295
quarter
Net loss per share
0.02
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 of stock options or makes end-of-year adjustments.
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Selected Annual Information
Results for the year ending
From
on:
Dec. 31, 2009 Dec. 31, 2008 Dec. 31, 2007 Inception
Item
$
$
$
$
General and administrative
expenses
(2,246,953)
(2,817,429)
(1,907,159) (19,727,800)
Asset impairment loss
(167,898)
(1,270,366)
(246,283) (32,135,592)
Change in fair value of
derivative liabilities
(2,095,300)
-
- (2,095,300)
Adjustment to asset
retirement obligation on
changes in cash flow
estimates
(6,882)
275
(1,485)
223,583
Accretion expense
(7,779)
(17,213)
(11,930)
(55,381)
Sub-total
(4,524,812)
(4,104,733)
(2,166,857) (53,790,490)
Interest expense
-
-
- (913,098)
Interest income
10,070
107,956
160,375
1,599,987
Net loss
(4,514,742)
(3,966,777)
(2,006,482) (53,103,601)
Loss per share
(0.05)
(0.05)
(0.03)
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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. The financial assurance
is reassessed annually and the estimate for reclamation of historical
disturbances on the property is $283,809 for 2010. The financial assurance
will be provided in the fourth quarter of 2010.
The asset retirement obligation accrual is estimated at $177,564
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 is continuing to pay advance minimum royalties
to landholders with a total of $174,196 paid in 2009.
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.
Off-balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Stock Option Plan
The Company prepared a new stock option plan ("New
Plan") to replace its existing stock option plan. The New Plan provides
a fixed number of 7,200,000 common shares of the Company that may be issued
pursuant to the grant of options. The exercise price of all stock options
shall be determined by the Company's Board of Directors, but it shall not be
less than the last price at which the Company's shares were issued prior to
the award date or the closing price on the day immediately preceding the
award date. The expiry date of the option shall be the date so fixed by the
Board, unless the option holder dies or ceases to be employed as a director
or as a consultant prior to the date fixed by the Board.
The Company granted 1,950,000 stock options to directors,
officers and consultants of the Company pursuant to the new 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 new plan and the stock options were
approved by the shareholders of the Company at the 2009 annual general
meeting, which was held on May 21, 2009.
Transactions With Related Parties
Mr. H. Lutz Klingmann was paid $116,776 (2008 - $136,500)
for services as President of the Company and Mr. Chester Shynkaryk was paid
$18,620 (2008 - $17,996) for consulting services to the Company for the year
ended December 31, 2009. No other compensation was paid or given during the
year for services rendered by the directors in such capacity and no
additional amounts were payable at year-end under any standard arrangements
for committee participation or special assignments.
Four directors of the Company were
paid $1,752 (2008 - $ 1,861) and two directors were paid $2,000 (2008
-$2,000) in director fees for the year ended December 31, 2009.
There were no other related party transactions during the
year ended December 31, 2009.
Fair Value of Financial Instruments
The carrying amount reported in the balance sheets for
cash and cash equivalents, receivables, accounts payable and accrued expenses
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.
Liquidity and Capital Resources
The Company concluded a non-brokered private placement of
2,337,500 common shares of the Company at a price of C$0.65 per share for
proceeds of $1,396,646 (C$1,519,375) on July 30, 2009.
The Company held $2,433,202 in cash and cash equivalents
on December 31, 2009.
The Company has no long-term debt.
Management plans to control costs and does not expect that
additional cash will be required (prior to securing production financing)
beyond cash currently on hand for ongoing work on approvals and permits for
the Project, for bringing current the remaining advance minimum royalties
owing to landholders, for additional property purchases, for ongoing work on
site and for general corporate purposes to the end of 2010.
In January 2010 , the Company issued 700,000 common shares
for proceeds of $233,111 (C$245,000) pursuant to the exercise of stock
options.
Outstanding Share Data
The number of shares issued and outstanding and the
fully diluted share position
are set out in the table below.
Item
No. of
Shares
Shares issued and outstanding on
Dec. 31, 2008
85,640,883
Shares issued pursuant to a
private placement
2,337,500
Shares issued pursuant to the
exercise of stock options
400,000
Shares issued and outstanding on
Dec. 31, 2009
88,378,383
Shares issued in January 2010
700,000
89,078,383
Exercise Price Expiry Date
C$0.35 &
9/02/10 &
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
28/01/14
Shares to be issued as a finders
fee
100,000 Not
Applicable
Not Applicable
Bonus shares to be issued to
H.L. Klingmann
300,000
None
None
Fully diluted on March 31, 2010 92,628,383
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The company's authorized share
capital is 100,000,000 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 4.5million tonnes (5.0million 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 an extended period after gold and
silver production from the heap leach operation has ended. The Company has
completed or is proceeding with detailed engineering designs for each of the
key facilities to be constructed. The Company is also securing approvals such
as building permits and other approvals for these facilities. Cost estimates
for construction of the key facilities are being obtained from contractors.
These cost estimates are being incorporated into the feasibility study
update, which is being prepared by Norwest Corporation of Vancouver. The
feasibility study update, once completed, will be considered by management in
connection with making a production decision.
If all 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. 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 March 19,
2010 were $1,105.50/oz and $16.96/oz respectively. The Company is targeting a
project financing in the first quarter of 2011. The ability to finance the
Project will be subject to market conditions at the time of financing.
The following are possible financing options that the
Company will evaluate, and that may be combined:
a. An equity financing;
b. A combination of equity and debt;
c. A silver-stream financing; and
d. A merger with an established mining company.
It is not expected that the Company will hedge any of its
gold or silver production.
Subsequent Event
Four directors exercised a total of 700,000 options on
shares for proceeds of $233,111 (C$245,000) in January 2010.
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 (2008 -
$1,270,366) in mineral property interests was recorded for the year ended
December 31, 2009.
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 Company has
evaluated whether or not there are indicators that suggest the estimated cash
flows underlying the obligation have materially changed. The asset retirement
obligation recorded as a liability on the Consolidated Balance Sheet is
$177,564 (2008 - $162,903) as at December 31, 2009.
Stock-based
Compensation
Management
has made significant assumptions and estimates in determining the fair market
value of stock-based compensation granted to directors, officers, employees
and consultants. These estimates have an effect on the stock-based
compensation expense recognized and the additional paid-in capital and share
capital balances on the Company's Balance Sheet. The value of each option
award is estimated on the date of grant using the Black-Scholes
option-pricing model. For consultants, such amount is revalued on a quarterly
basis. To date, substantially all of our stock option grants have been to
directors and officers of the Company. Increases in the Company's share price
will likely result in increased stock option compensation expense. The
Black-Scholes option-pricing model requires the input of subjective
assumptions, including the expected term of the option award and stock price
volatility. The expected life used for the purposes of the Black-Scholes
calculation is the term of the award. These estimates involve inherent
uncertainties and the application of management judgment.
Recently
Issued Accounting Standards
In January
2010, an accounting standard update on codification, Fair value Measurements
and Disclosures, improving disclosures about fair value measurements was
issued. This update provides amendments that will provide more robust
disclosures about (1) the different classes of assets and liabilities
measured at fair value, (2) the valuation techniques and inputs used, (3) the
activity in Level 3 fair value measurements, and (4) the transfers between
Levels 1, 2, and 3. The standard adds new disclosure and clarifies existing
disclosure requirements. The new standard requires disclosures of the fair
value of financial instruments for interim reporting periods of publicly
traded companies in addition to the annual disclosure required at year-end.
The provisions of the new standard are effective for the interim periods
ending after June 15, 2009. The adoption of this standard did not have a
material effect on the Company's consolidated financial statements.
In June
2008, the Financial Accounting Standards Board ("FASB") issued
Emerging Issues Task Force ("EITF") Issue 07-5 (EITF 07-5),
"Determining Whether an Instrument (or Embedded Feature) is Indexed to
an Entity's Own Stock" which is now included in the FASB Accounting
Standards Codification at ASC 815-40-15. This guidance requires entities to
evaluate whether an equity-linked financial instrument (or embedded feature)
is indexed to its own stock by assessing the instrument's contingent exercise
provisions and settlement provisions. Instruments not indexed to their own
stock fail to meet the scope exception of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, paragraph 11(a), now included in the FASB Codification at ASC
815-10-15-74(a), and should be classified as a liability and
marked-to-market. ASC 815-40-15 was effective for fiscal years beginning
after December 15, 2008 and thus, upon its adoption on January 1, 2009, was
applied to the Company's outstanding stock options and warrants.
In January
2010, an accounting standard update on stock compensation was issued. This
accounting standards update codifies Escrowed Share Arrangements and the
Presumption of Compensation. When evaluating whether presumption of
compensation has been overcome, registrants should consider the substance of
the arrangement, including whether the arrangement was entered into for
purposes unrelated to, and not contingent upon, continued employment. An
escrowed share arrangement in which the shares are automatically forfeited if
employment terminates is compensation. The adoption of this standard is not
expected to have a material effect on the Company's consolidated financial
statements.
In
September 2009, an accounting standard update, "Fair Value Measurement
and Disclosures" was issued. This amendments to Fair Value Measurements
and Disclosures-Overall for the fair value measurement of investments in
certain entities that calculate net asset value per share (or its
equivalent). The amendments in this Update also require disclosures by major
category of investment about the attributes of investments within the scope
of the amendments in this Update. The amendments in this Update are effective
for interim and annual periods ending after December 15, 2009. Early
application is permitted in financial statements for earlier interim and
annual periods that have not been issued. If an entity elects to early adopt
the measurement amendments in this Update, the entity is permitted to defer
the adoption of the disclosure provisions until periods ending after December
15, 2009. The adoption of this standard did not have a material effect on the
Company's consolidated financial statements.
In August
2009, "Fair Value of Measurements and Disclosure - Measuring Liabilities
at Fair Value" was issued. The
new guidance provides clarification . . .
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