FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
GOLDEN QUEEN MINING CO. LTD.
(Exact name of registrant as specified in its charter)
Province of British Columbia 0-21777 Not Applicable
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
104 South Freya, Suite 211-A
Green Flag Building
Spokane, Washington 99202
(Address of principal executive offices)
Registrant's telephone number, including area code: (509) 535-4022
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, without par value
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
The number of outstanding shares of the issuer's common stock at June 30, 1998
was 34,796,641 shares.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
SAFE HARBOR STATEMENT
PART I Page
Item 1: Consolidated Financial Statements 1
Item 2: Management's Discussion and Analysis
or Plan of Operations 10
Part II
Item 1: Legal Proceedings 14
Item 2: Changes in Securities 14
Item 3: Defaults Upon Senior Securities 14
Item 4: Submission of Matters to a Vote of
Security Holders 14
Item 5: Other Information 14
Item 6: Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT NO. 27 16
(i)
<PAGE>
SAFE HARBOR STATEMENT
This report contains both historical and prospective statements concerning the
Company and its operations. Historical statements are based on events that
have already happened; examples include the reported financial and operating
results, descriptions of pending and completed transactions, and management and
compensation matters. Prospective statements, on the other hand, are based on
events that are reasonably expected to happen in the future; examples include
the timing of projected operations, the likely effect or resolution of known
contingencies or other foreseeable events, and projected operating results.
Prospective statements (which are known as "forward-looking statements" under
the Private Securities Litigation Reform Act of 1995) may or may not prove true
with the passage of time because of future risks and uncertainties. The risks
and uncertainties associated with prospective statements contained in this
report include, among others, the following:
THE LIKELIHOOD OF CONTINUED LOSSES FROM OPERATIONS. The Company has no revenue
from mining operations and has incurred losses from inception through June 30,
1998 of approximately $3,462,000. This trend is expected to continue for at
least the next two years and is expected to reverse only if, as and when gold
is produced from the Soledad Mountain Project.
THE NEED FOR SIGNIFICANT ADDITIONAL FINANCING. The Company needs approximately
$77,600,000 in additional financing to put the Soledad Mountain Project into
production; $66,300,000 of this will be used for capital expenditures and
$11,300,000 will be used as working capital and for start-up expenditures.
Although the Company expects to finance development from additional sales of
common stock, from bank or other borrowings (or, alternatively, through joint
development with another mining company), it has no commitment for bank
financing or for the underwriting of additional stock, and it is not a party to
any agreement or arrangement providing for joint development. Whether and to
what extent financing can be obtained will depend on a number of factors, not
the least of which is the price of gold. Gold prices fluctuate widely and are
affected by numerous factors beyond the Company's control, such as inflation,
the strength of the United States dollar and foreign currencies, global and
regional demand, and the political and economic conditions of major gold
producing countries throughout the world. As of June 30, 1998, world gold
prices were approximately $296 per ounce, a reduction of approximately 12% from
prices a year ago, and a reduction of approximately 25% from prices two years
ago. If gold prices do not strengthen, it may not be economical for the
Company to put the Soledad Mountain Project into production.
RISKS AND CONTINGENCIES ASSOCIATED WITH THE MINING INDUSTRY GENERALLY. 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
and periodic interruptions due to inclement weather. These risks could result
in damage to, or destruction of, mineral properties and 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
exploration and production activities) is not generally available to the
Company or other companies in the mining industry. Were the Company subjected
to environmental liabilities, the payment of such liabilities would reduce the
funds available to the Company. Were the Company unable to fund fully the cost
of remedying an environmental problem, it might be required to suspend
operations or enter into interim compliance measures pending completion of
remedial activities.
(ii)
<PAGE>
PART 1
Item 1. FINANCIAL STATEMENTS
The unaudited consolidated financial statements of the Company for the periods
covered by this report are set forth at pages 2 through 9.
[The balance of this page has been intentionally left blank.]
1
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(a development stage company)
Consolidated Balance Sheets
(U.S. dollars)
June 30, 1998 December 31, 1997
(unaudited) (audited)
------------------ -----------------
Assets
Current Assets:
Cash and cash equivalents $ 2,425,427 $ 1,127,234
Receivables 15,806 14,798
Prepaid expenses and
other current assets 55,075 77,773
---------- ----------
Total current assets 2,496,308 1,219,805
Property and equipment, net 1,128,114 1,164,651
Mineral properties 23,291,105 22,104,335
Other assets 898,362 892,928
---------- ----------
$ 27,813,889 $ 25,381,719
========== ==========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 47,363 $ 384,388
Accrued liabilities 32,866 69,427
Current maturities of
long-term debt 51,927 45,034
---------- ----------
Total current liabilities 132,156 498,849
Long-term debt, less current
maturities (Note 2a) 828,351 1,857,189
---------- ----------
Total liabilities 960,507 2,356,038
---------- ----------
Commitments and Contingencies
Shareholders' equity
Preferred shares, no par,
3,000,000 shares authorized;
no shares outstanding
Common shares, without par,
1,000,000 shares authorized;
34,796,641 and 25,708,400
shares issued (Note 2) 30,725,064 26,400,594
Deficit accumulated during the
development stage (3,871,682) (3,374,913)
---------- ----------
Total shareholders' equity 26,853,382 23,025,681
---------- ----------
Liabilities and shareholders'
equity $ 27,813,889 $ 25,381,719
========== ==========
2
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(a development stage company)
Consolidated Statements of Loss
(U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
Amounts From
Date of Inception
(November 21,
Three Month Period Ended Six Month Period Ended 1985) through
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1996
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General and
administrative
expense $ 264,904 $ 336,835 $ 488,707 $ 503,956 $ 3,726,507
Interest
expense - 24,014 20,583 47,764 323,485
Interest
income (15,400) (36,200) (24,447) (91,176) (890,171)
Other (income)
expense 4,770 1,923 8,407 2,376 25,086
Write-off of
mineral
properties - - - - 277,251
----------- ----------- ----------- ----------- -------------
Net loss $ (254,274) $ (326,572) $ (493,250) $ (462,920) $ (3,462,158)
=========== =========== =========== =========== =============
Net loss per
share $ (0.01) $ (0.01) $ (0.02) $ (0.02)
=========== =========== =========== ===========
Weighted
average shares
outstanding 32,388,816 22,208,400 29,484,985 22,198,468
=========== =========== =========== ===========
</TABLE>
3
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(a development stage company)
Consolidated Statements of Changes in Shareholders' Equity
(U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
From the Date of Inception During the
(November 21, 1985) Common Shares Development
Through June 30, 1998 Shares Amount Stage Total Equity
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
November 21, 1985
Issuance of common
shares for cash 1,425,001 $ 141,313 $ - $ 141,313
Net loss for the year (15,032) (15,032)
------------------------------------------------------------
Balance, May 31, 1986 1,425,001 141,313 (15,032) 126,281
Issuance of common
shares for cash 550,000 256,971 - 256,971
Issuance of common
shares for mineral
property 25,000 13,742 - 13,742
Net loss for the year - - (58,907) (58,907)
------------------------------------------------------------
Balance, May 31, 1987 2,000,001 412,026 (73,939) 338,087
Issuance of common
shares for cash 1,858,748 1,753,413 - 1,753,413
Net income for the year - - 38,739 38,739
------------------------------------------------------------
Balance, May 31, 1988 3,858,749 2,165,439 (35,200) 2,130,239
Issuance of common
shares for cash 1,328,750 1,814,133 - 1,814,133
Issuance of common
shares for mineral
property 100,000 227,819 - 227,819
Net loss for the year - - (202,160) (202,160)
------------------------------------------------------------
Balance, May 31, 1989 5,287,499 4,207,391 (237,360) 3,970,031
Issuance of common
shares for cash 1,769,767 2,771,815 - 2,771,815
Issuance of common
shares for mineral
property 8,875 14,855 - 14,855
Net loss for the year - - (115,966) (115,966)
------------------------------------------------------------
Balance, May 31, 1990 7,066,141 6,994,061 (353,326) 6,640,735
Net income for the year - - 28,706 28,706
------------------------------------------------------------
Balance, May 31, 1991 7,066,141 6,994,061 (324,620) 6,669,441
Net loss for the year - - (157,931) (157,931)
------------------------------------------------------------
Balance, May 31, 1992 7,066,141 6,994,061 (482,551) 6,511,510
</TABLE>
4
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(a development stage company)
Consolidated Statements of Changes in Shareholders' Equity
(U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
From the Date of Inception During the
(November 21, 1985) Common Shares Development
Through June 30, 1998 Shares Amount Stage Total Equity
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss for the year - - (285,391) (285,391)
------------------------------------------------------------
Balance, May 31, 1993 7,066,141 6,994,061 (767,942) 6,226,119
Issuance of common
shares for cash 5,834,491 1,536,260 - 1,536,620
Share issue costs - - (18,160) (18,160)
Issuance of common
shares for mineral
property 128,493 23,795 - 23,795
Net loss for the year - - (158,193) (158,193)
------------------------------------------------------------
Balance, May 31, 1994 13,029,125 8,554,116 (944,295) 7,609,821
Issuance of common
shares for cash 648,900 182,866 - 182,866
Net loss for the year - - (219,576) (219,576)
------------------------------------------------------------
Balance, May 31, 1995 13,678,025 8,736,982 (1,163,871) 7,573,111
Issuance of common
shares for cash 2,349,160 2,023,268 - 2,023,268
Issuance of common
shares for debt 506,215 662,282 - 662,282
Issuance of 5,500,000
special warrants - 9,453,437 - 9,453,437
Special warrants issue
cost - - (100,726) (100,726)
Net loss for the year - - (426,380) (426,380)
------------------------------------------------------------
Balance, May 31, 1996 16,533,400 20,875,969 (1,690,977) 19,184,992
Issuance of common
shares for cash 18,000 10,060 - 10,060
Issuance of common
shares for special
warrants 5,500,000 - - -
Special warrants issue
cost - - (123,806) (123,806)
Net loss for the period - - (348,948) (348,948)
------------------------------------------------------------
Balance, December 31, 1996 22,051,400 20,886,029 (2,163,731) 18,722,298
</TABLE>
5
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(a development stage company)
Consolidated Statements of Changes in Shareholders' Equity
(U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
From the Date of Inception During the
(November 21, 1985) Common Shares Development
Through June 30, 1998 Shares Amount Stage Total Equity
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common
shares for cash 157,000 157,050 - 157,050
Issuance of 3,500,000
special warrants - 5,287,315 - 5,287,315
Issuance of common
shares for special
warrants 3,500,000 - - -
Options to non-
employee directors - 70,200 - 70,200
Special warrants issue
cost - - (163,313) (163,313)
Net loss for the year - - (1,047,869) (1,047,869)
------------------------------------------------------------
Balance, December 31, 1997 25,708,400 26,400,594 (3,374,913) 23,025,681
Issuance of common
shares for warrants 1,834,300 857,283 - 857,283
Issuance of common
shares through
conversion of debt 2,017,941 1,000,000 - 1,000,000
Share issuance cost - - (3,519) (3,519)
Issuance of common
shares for cash 5,236,000 2,439,753 - 2,439,753
Options and re-priced
options to non-
employee directors - 27,434 - 27,434
Net loss for the period - - (493,250) (493,250)
-------------------------------------------------------------
Balance, June 30, 1998 34,796,641 $30,725,064 $(3,871,682) $26,853,382
========== ========== ========= ==========
-------------------------------------------------------------
</TABLE>
6
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(a development stage company)
Consolidated Statements of Cash Flows
(U.S. dollars)
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Cumulative Amounts
Six Month Six Month From Date of Inception
Period Ended Period Ended (November 21, 1985)
June 30, 1998 June 30, 1997 through June 30, 1998
-------------- -------------- ----------------------
<S> <C> <C> <C>
Operating Activities
Net loss $ (493,250) $ (462,920) $ (3,462,158)
Adjustments to reconcile net
loss to cash used in operating
activities:
Write-off of mineral properties - - 277,251
Amortization and depreciation 42,954 30,578 151,826
Loss on disposition of property
and equipment - - 10,949
Options to directors 27,434 - 97,634
Changes in assets and liabilities:
Receivables (1,008) 117,208 (15,806)
Prepaid expenses and other
current assets 22,697 (23,091) (55,076)
Accounts payable and accrued
liabilities (373,586) (13,724) 80,229
------------ ------------ ---------
Cash used in operating activities (774,759) (351,949) (2,915,151)
------------ ------------ ---------
Investment Activities:
Deferred exploration and
development expenditures (992,026) (4,874,591) (18,853,521)
Deposits on mineral properties (5,434) - (898,362)
Purchase of mineral properties (194,744) (355,092) (4,584,624)
Purchase of property and
equipment (6,416) (544,226) (1,299,380)
Proceeds from sale of property
and equipment - - 8,492
------------ ------------ ---------
Cash used in investment
activities (1,198,620) (5,773,909) (25,627,395)
------------ ------------ ---------
Financing Activities:
Borrowing under long-term debt - - 3,766,502
Payment of long-term debt (21,945) (101,614) (1,073,942)
Issuance of common stock for
cash 2,439,753 157,050 13,086,902
Share issuance costs (3,519) (25,308) (409,524)
</TABLE>
7
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(a development stage company)
Consolidated Statements of Cash Flows
(U.S. dollars)
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Cumulative Amounts
Six Month Six Month From Date of Inception
Period Ended Period Ended (November 21, 1985)
June 30, 1998 June 30, 1997 through June 30, 1998
-------------- -------------- ----------------------
<S> <C> <C> <C>
Issuance of special warrants 5,299,189 -
Issuance of common shares for
warrants 857,283 - 15,598,035
Cash provided by (used in)
financing activities 3,271,572 5,329,317 30,967,973
Net change in cash and cash
equivalents 1,298,193 (796,541) 2,425,427
Cash and cash equivalents,
beginning balance 1,127,234 5,436,497 -
Cash and cash equivalents,
ending balance $ 2,425,427 $ 4,639,956 $ 2,425,427
Supplemental disclosures of cash
flow information:
Cash paid during period for:
Interest $ 88,967 $ 93,952 $ 637,686
Income taxes $ - $ - $ -
Non-cash financing and
investing activities:
Exchange of notes for common
shares $ 1,000,000 $ - $ 1,662,282
Exchange of note for future
royalty payments $ - $ - $ 150,000
Shares for mineral property $ - $ - $ 280,211
Mineral property acquired
through the issuance of long-
term debt $ - $ - $ 1,084,833
</TABLE>
8
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
Note 1: Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes thereto included in the
Company's 1997 annual report on Form 10-KSB. In the opinion of management, all
adjustments, consisting only of normal recurring accruals, considered necessary
for a fair presentation have been included. Operating results for the six
month period ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998.
Note 2: Share Capital
a) On January 28, 1998, the conversion price of the Company's debentures in
the principal amount of US $1,000,000 was reduced from C$2.00 ($1.46) per
share to C$0.68 ($0.50) per share. The conversion price reduction was
approved by The Toronto Stock Exchange, and on March 18, 1998 the
convertible debentures were converted to 2,017,941 common shares.
b) On February 19, 1998, the exercise price of the common share purchase
warrants issued by the Company pursuant to a special warrant offering
completed in May 1996 was reduced to C$0.68 ($0.49) per share from C$1.525
($1.07) per share. The exercise price reduction was approved by The
Toronto Stock Exchange. 1,834,300 warrants were exercised at C$0.68
($0.49) for 1,834,300 common shares. The Company received net proceeds of
C$1,216,142 ($857,283).
c) On January 28, 1998, additional stock options to purchase up to 25,000
shares of common stock were granted to each of the Company's five non-
employee directors. The options are exercisable at the price of C$1.00
($0.69) and expire on January 28, 2003. The resulting charge to directors
expense during the three month period ending March 31, 1998 was $10,900.
d) On January 28, 1998, the exercise price of all outstanding options held by
directors and employees of the Company and its subsidiary with an exercise
price of more than C$1.00 ($0.69) per share was reduced to C$1.00 ($0.69)
per share, subject to the approval of the Toronto Stock Exchange and the
Company's shareholders. The Toronto Stock Exchange approved the repricing
of the options, and at the Annual General Meeting of shareholders, held on
June 2, 1998, the shareholders approved the repricing.
e) On May 14, 1998 the Company completed a private placement of 5,236,000
common shares at an issue price of C$0.68 ($0.47) per share for aggregate
net proceeds of C$3,560,480 ($2,439,753). The net proceeds of the private
placement will be used to fund ongoing capital expenditures at the
Company's Soledad Mountain Project and for general corporate purposes.
9
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
RESULTS OF OPERATIONS.
OVERVIEW. During the periods indicated in the discussion which follows, the
Company has been in the exploration stage of its business and therefore has
earned no revenue from its operations. Variations in the level of expenses
between periods have been as a result of the nature, timing and cost of the
activities undertaken in the various periods. Financing of the continued
exploration of the Soledad Mountain Project during such periods has been
obtained through the sale of shares of common stock of the Company in
predominantly offshore transactions and through borrowings.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997.
General and administrative expenses decreased to $265,000 for the three months
ended June 30, 1998, from $337,000 for the three-month period ended June 30,
1997. The decrease in general and administrative expenses is the result of a
reduction in professional fees during the period. This was offset to some
extent by the recognition of compensation cost on repriced stock options issued
to non-employee directors of the Company.
No interest expense was recognized for the three months ended June 30, 1998
compared to interest expense of $24,000 for the three-month period ended June
30, 1997, as a result of the conversion of convertible debentures into common
shares in March 1998. Interest incurred on debt relating to the Company's
investment in the Soledad Mountain Project is capitalized as part of mineral
properties.
Interest income decreased to $15,000 for the three months ended June 30, 1998,
from $36,000 for the three month period ended June 30, 1997, primarily as a
result of a decrease in the average balance of invested funds. As a result of
the foregoing factors, the Company incurred a net loss of $254,000 for the
three months ended June 30, 1998, versus a net loss of $327,000 for the three-
month period ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997.
General and administrative expenses decreased to $489,000 for the six months
ended June 30, 1998, from $504,000 for the six-month period ended June 30,
1997. The decrease in general and administrative expenses is the result of the
recognition of compensation cost on stock options and repriced stock options
issued to non-employee directors of the Company.
Interest expense decreased to $21,000 for the six months ended June 30, 1998,
from $48,000 for the six-month period ended June 30, 1997, as a result of the
conversion of convertible debentures into common shares in March 1998.
Interest income decreased to $24,000 for the six months ended June 30, 1998
from $91,000 for the six-month period ended June 30, 1997, primarily as a
result of a decrease in the average balance of invested funds. As a result of
the foregoing factors, the Company incurred a net loss of $493,000 for the six
months ended June 30, 1998, versus a net loss of $463,000 for the six-month
period ended June 30, 1997.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.
General. The Company acquired the Soledad Mountain Project in 1986.
Since then it has solidified its land position, conducted several drilling and
sampling programs to delineate ore reserves, and taken steps to secure permits
and approvals needed for production activities. The Company previously
reported that it expected to begin producing gold and silver from the project
during the second half of 1998, once permitting was completed. Because of the
downturn in world gold prices during the second half of 1997, however, the
Company has not been able to obtain financing for construction. As a
consequence, production will be delayed until construction financing can be
raised.
The Company has had no reported revenues from operations since inception, and
is in the exploration or development stage. During the period from inception
through June 30, 1998, the Company used $2,915,000 in operating activities,
primarily as the result of cumulative losses of $3,462,000 for the same period.
During the same period, the Company used $25,627,000 in investing activities;
these consisted of $24,337,000 in expenditures related to the Soledad Mountain
Project and fixed asset purchases of $1,299,000. These operating and investing
activities were financed by net borrowings of $2,693,000 under various long-
term debt arrangements, and from the sale of $28,275,000 of equity securities.
At June 30, 1998, the Company held $2,425,000 in cash and cash equivalents. As
is discussed below under the heading "Plan of Operations", significant
additional funds will be needed to put the Soledad Mountain Project into
production. These funds are expected to come from additional sales of common
stock and from bank or other borrowings. Alternatively, the Company may decide
to enter into a joint development or other similar arrangement with another
mining company to develop the project. The Company does not have a commitment
for bank financing or for the underwriting of additional shares of its common
stock, and is not a party to any agreement or arrangement providing for the
joint development of the Soledad Mountain Project. Whether and to what extent
additional or alternative financing options are pursued by the Company will
depend on a number of important factors, including the results of further
development activities at the Soledad Mountain Project, management's assessment
of the financial markets, the overall capital requirements for development of
the project, and the price of gold. Gold prices fluctuate widely and are
affected by numerous factors beyond the Company's control, such as inflation,
the strength of the United States dollar and foreign currencies, global and
regional demand, and the political and economic conditions of major gold
producing countries throughout the world. As of June 30, 1998, world gold
prices were approximately $296 per ounce, a reduction of approximately 12% from
prices a year ago, and a reduction of approximately 25% from prices two years
ago.
PLAN OF OPERATIONS.
PROPOSED ACTIVITIES AND ESTIMATED COSTS. The Company has substantially
completed exploration of the Soledad Mountain Project and intends to develop
the project as an open pit gold and silver mine employing a cyanide heap leach
recovery system. Development plans include the construction of infrastructure
and processing facilities, mining by open pit methods, and the processing of
precious metals ores at a rate of up to 5.67 million tonnes (6.25 million tons)
per year for at least nine years. Concurrent heap detoxification will be
employed, followed by reclamation of the project site.
The initial capital costs of bringing the project into production are estimated
to be $77,600,000; these include costs associated with the purchase of all
necessary facilities and equipment, construction costs, start-up costs, working
capital and contingency costs over a projected thirteen-month construction
period.
Based on a feasibility study prepared by M3 Engineering and Technology, the
Company estimates that total average operating costs will be $5.87 per tonne
($5.32 per ton) of ore processed, based on a stripping ratio of 4.1 to 1.
These operating costs consist of mining costs of $3.39 per tonne ($3.07 per
ton), processing costs of $1.78 per tonne ($1.61 per ton) and general and
administrative costs of $0.70 per tonne ($0.64 per ton). The Company also
estimates that average annual production rates of 127,000 ounces of gold and
1,500,000 ounces of silver can be maintained for at least nine years, at an
average cash cost (consisting of operating and royalty costs) of $182 per ounce
of gold, net of silver credits. The Soledad Mountain ore reserve will be
upgraded during the third quarter following the completion of an extensive
11
<PAGE>
underground sampling program carried out during the first half of the year.
Both the size and the grade of the deposit are expected to increase as a result
of this program. An increase in the ore reserve grade of at least 15% is
expected. The ensuing projected positive impact on project economics is
expected to enhance the Company's ability to obtain project financing.
The Company has budgeted $1,950,000 for additional development of the Soledad
Mountain Project in 1998 to delineate additional ore. The program has three
components: a 9,000 meter underground sampling of the major ore-bearing
structures now accessible through 22 kilometers of underground workings;
approximately 12,000 meters of reverse circulation drilling at five locations
on the perimeter of the known proven and probable reserve area; and up to 6,000
meters of core drilling to test several high-priority exploration targets
having the potential to improve overall grade or strip ratios. Adequate
financing was raised in May of this year to complete the underground sampling
portion of the program. Additional financing will be required to complete the
remainder of the program.
The following table summarizes the activities proposed to be undertaken by the
Company during the twelve-month period commencing January 1, 1998, and the
estimated costs of such activities.
Underground sampling $ 300,000
Reverse circulation drilling 1,490,000
Core drilling 160,000
----------
Total $ 1,950,000
==========
These development plans are based on a February 1998 feasibility study prepared
for the Company by M3 Engineering and Technology Corporation, which
incorporates the results of the Company's 1997 drilling program. The study was
commissioned by the Company to obtain project financing and to provide basic
project engineering information. Ore reserve estimates and mine design
features incorporated into the study were prepared by Mine Reserve Associates,
in collaboration with the Company, and basic engineering information was
prepared by Bateman Engineering, Inc. and supplemented by M3 Engineering and
Technology. The total cost of the feasibility study was $1,036,000.
The M3 Engineering and Technology study modifies and supersedes an earlier
feasibility study completed in January 1997 by Pincock, Allen & Holt of
Lakewood, Colorado, based on the Company's estimate of ore reserves prior to
the 1997 drilling program and a different throughput design. The Pincock study
included initial designs of the crushing plant, ore heap, solution handling
systems, haul roads and associated surface infrastructure at the Soledad
Mountain Project, and was prepared at a cost of $2,000,000.
The work program for 1998 has consisted of intense geological examination and
interpretation within the 22 kilometers of now-accessible underground workings
comprising the Soledad Mountain Project area. As a result of this work, areas
likely to host high-grade mineralization were identified and a sampling program
was implemented to provide definition of the high-grade zones. As a result,
considerable additional high-grade vein material is being added to the ore
reserve, and the overall ore reserve grade is expected to increase
significantly. This larger, higher-grade reserve is expected to facilitate
development of the Soledad Mountain Project and result in significantly
improved project economics.
The Company is currently evaluating the production and sale of aggregates from
the Soledad Mountain Project. The Company believes waste rock and leached ore
have several construction-related applications, and that the project's
proximity to major north-south and east-west railroad lines enhances the
potential of such a business. Neither the feasibility studies referred to
above not any other revenue and cost figures contained in this report take such
business into account.
PERMITTING.
All permitting requirements for the Soledad Mountain Project were completed in
late 1997. Pending the improvement of world gold prices and the procurement of
project financing, the Company can commence
12
<PAGE>
construction of surface infrastructure and processing facilities, and,
following that, can begin commercial production of gold and silver from the
project.
[The balance of this page has been intentionally left blank.]
13
<PAGE>
PART II
Item 1. LEGAL PROCEEDINGS.
Neither the Company nor its subsidiary, Golden Queen Mining Company, Inc., is a
party to, nor are they threatened by, any material legal proceeding as of the
date of this report.
Item 2. CHANGES IN SECURITIES.
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual General Meeting of Shareholders held on June 2, 1998, the
shareholders approved the repricing of the exercise price of all outstanding
options held by directors and employees of the Company and its subsidiary with
an exercise price of more than C$1.00 ($0.69) per share to C$1.00 ($0.69) per
share.
Item 5. OTHER INFORMATION.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS. A financial data schedule is filed as exhibit no. 27 to this report.
No other exhibits are filed as part of this report.
FORM 8-K REPORTS. The Company filed no reports on Form 8-K during the second
quarter of 1998.
14
<PAGE>
SIGNATURES
In accordance with section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Golden Queen Mining Co. Ltd.
By: /s/ Bernard F. Goodson
---------------------------------------
its Vice President of
Administration and Controller
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of the Company for the six month period ended June 30, 1998
and should be read in conjunction with, and is qualified in its entirety by,
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,425,427
<SECURITIES> 0
<RECEIVABLES> 15,806
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,496,308<F1>
<PP&E> 24,419,219<F2>
<DEPRECIATION> 179,656
<TOTAL-ASSETS> 27,813,889
<CURRENT-LIABILITIES> 132,156
<BONDS> 0
0
0
<COMMON> 30,725,064
<OTHER-SE> (3,871,682)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 27,813,889
<SALES> 0
<TOTAL-REVENUES> 24,447<F4>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 497,114<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,583
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (493,250)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
<FN>
<F1>Includes prepaid expenses and other current assets of $55,075.
<F2>Consists of properties and equipment, net of depreciation of $1,128,114;
mineral properties of $23,291,105; and other long-term assets of $898,362.
<F3>Consists of $3,871,682 of deficit accumulated during the development stage.
<F4>Consists of interest income of $24,447.
<F5>Consists of general and administrative expenses of $488,707 and other
expenses of $8,407.
</FN>
</TABLE>
